Senate Homeland Security & Governmental Affairs Committee Issues Report on Activities During 114th Congress (Part 7 of 8)

WASHINGTON, April 2 -- The Senate Homeland Security and Governmental Affairs Committee issued a report (S.Rpt. 115-12) on the activities during 114th Congress. The report was advanced by Sen. Ron Johnson, R-Wis., on March 28.

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Chairman: Robert Portman

Ranking Minority Member: Claire McCaskill

The following is the Activities Report of the Permanent Subcommittee on Investigations for the 114th Congress.

I. HISTORICAL BACKGROUND

A. Subcommittee Jurisdiction

The Permanent Subcommittee on Investigations was originally authorized by Senate Resolution 189 on January 28, 1948. At its creation in 1948, the Subcommittee was part of the Committee on Expenditures in the Executive Departments. The Subcommittee's records and broad investigative jurisdiction over government operations and national security issues, however, actually antedate its creation, since it was given custody of the jurisdiction of the former Special Committee to Investigate the National Defense Program (the so-called "War Investigating Committee" or "Truman Committee"), chaired by Senator Harry S. Truman during the Second World War and charged with exposing waste, fraud, and abuse in the war effort and war profiteering. Today, the Subcommittee is part of the Committee on Homeland Security and Governmental Affairs.1

1In 1952, the parent committee's name was changed to the Committee on Government Operations. It was changed again in early 1977, to the Committee on Governmental Affairs, and again in 2005, to the Committee on Homeland Security and Governmental Affairs, its present title.

The Subcommittee has had ten chairmen: Senators Homer Ferguson of Michigan (1948), Clyde R. Hoey of North Carolina (1949-1952), Joseph R. McCarthy of Wisconsin (1953-1954), John L. McClellan of Arkansas (1955-1972), Henry M. Jackson of Washington (1973-1978), Sam Nunn of Georgia (1979-1980 and 1987-1994), William V. Roth of Delaware (1981-1986 and 1995-1996), Susan M. Collins of Maine (1997-2001); Norm Coleman of Minnesota (2003-2007); and Carl Levin of Michigan (2001-2002 and 2007-2014); and Robert J. Portman of Ohio (2015- present).

Until 1957, the Subcommittee's jurisdiction focused principally on waste, inefficiency, impropriety, and illegality in government operations. Its jurisdiction then expanded over time, today encompassing investigations within the broad ambit of the parent committee's responsibility for matters relating to the efficiency and economy of operations of all branches of the government, including matters related to: (a) waste, fraud, abuse, malfeasance, and unethical practices in government contracting and operations; (b) organized criminal activities affecting interstate or international commerce; (c) criminal activity affecting the national health, welfare, or safety, including investment fraud, commodity and securities fraud, computer fraud, and offshore abuses; (d) criminality or improper practices in labor-management relations; (e) the effectiveness of present national security methods, staffing and procedures, and U.S. relationships with international organizations concerned with national security; (f) energy shortages, energy pricing, management of government-owned or controlled energy supplies; and relationships with oil producing and consuming countries; and (g) the operations and management of Federal regulatory policies and programs. While retaining the status of a subcommittee of a standing committee, the Subcommittee has long exercised its authority on an independent basis, selecting its own staff, issuing its own subpoenas, and determining its own investigatory agenda.

The Subcommittee acquired its sweeping jurisdiction in several successive stages. In 1957--based on information developed by the Subcommittee--the Senate passed a Resolution establishing a Select Committee on Improper Activities in the Labor or Management Field. Chaired by Senator McClellan, who also chaired the Subcommittee at that time, the Select Committee was composed of eight Senators--four of whom were drawn from the Subcommittee on Investigations and four from the Committee on Labor and Public Welfare. The Select Committee operated for 3 years, sharing office space, personnel, and other facilities with the Permanent Subcommittee. Upon its expiration in early 1960, the Select Committee's jurisdiction and files were transferred to the Subcommittee on Investigations, greatly enlarging the latter body's investigative authority in the labor-management area.

The Subcommittee's jurisdiction expanded further during the 1960s and 1970s. In 1961, for example, it received authority to make inquiries into matters pertaining to organized crime and, in 1963, held the famous Valachi hearings examining the inner workings of the Italian Mafia. In 1967, following a summer of riots and other civil disturbances, the Senate approved a Resolution directing the Subcommittee to investigate the causes of this disorder and to recommend corrective action. In January 1973, the Subcommittee acquired its national security mandate when it merged with the National Security Subcommittee. With this merger, the Subcommittee's jurisdiction was broadened to include inquiries concerning the adequacy of national security staffing and procedures, relations with international organizations, technology transfer issues, and related matters. In 1974, in reaction to the gasoline shortages precipitated by the Arab-Israeli war of October 1973, the Subcommittee acquired jurisdiction to investigate the control and management of energy resources and supplies as well as energy pricing issues.

In 1997, the full Committee on Governmental Affairs was charged by the Senate to conduct a special examination into illegal or improper activities in connection with Federal election campaigns during the 1996 election cycle. The Permanent Subcommittee provided substantial resources and assistance to this investigation, contributing to a greater public understanding of what happened, to subsequent criminal and civil legal actions taken against wrongdoers, and to enactment of campaign finance reforms in 2001.

In 1998, the Subcommittee marked the fiftieth anniversary of the Truman Committee's conversion into a permanent subcommittee of the U.S. Senate.2 Since then, the Subcommittee has developed particular expertise in complex financial matters, examining the collapse of Enron Corporation in 2001, the key causes of the 2008 financial crisis, structured finance abuses, financial fraud, unfair credit practices, money laundering, commodity speculation, and a wide range of offshore and tax haven abuses. It has also focused on issues involving health care fraud, foreign corruption, and waste, fraud and abuse in government programs. In the half- century of its existence, the Subcommittee's many successful investigations have made clear to the Senate the importance of retaining a standing investigatory body devoted to keeping government not only efficient and effective, but also honest and accountable.

2This anniversary also marked the first date upon which internal Subcommittee records generally began to become available to the public. Unlike most standing committees of the Senate whose previously unpublished records open after a period of 20 years has elapsed, the Permanent Subcommittee on Investigations, as an investigatory body, may close its records for 50 years to protect personal privacy and the integrity of the investigatory process. With this 50th anniversary, the Subcommittee's earliest records, housed in the Center for Legislative Archives at the National Archives and Records Administration, began to open seriatim. The records of the predecessor committee--the Truman Committee--were opened by Senator Nunn in 1980.

B. Subcommittee Investigations

Armed with its broad jurisdictional mandate, the Subcommittee has conducted investigations into a wide variety of topics of public concern, ranging from financial misconduct, to commodities speculation, predatory lending, and tax evasion. Over the years, the Subcommittee has also conducted investigations into criminal wrongdoing, including money laundering, the narcotics trade, child pornography, labor racketeering, and organized crime activities. In addition, the Subcommittee has investigated a wide range of allegations of waste, fraud, and abuse in government programs and consumer protection issues, addressing problems ranging from unfair credit card practices to health care fraud. In the 114th Congress, the Subcommittee held six hearings and issued eight reports on a wide range of issues, including the impact of the U.S. corporate tax code on cross-border mergers acquisitions, online sex trafficking, the federal government's efforts to protect unaccompanied migrant children from human trafficking, consumer protection in the cable and satellite television industry, terrorist networks' use of the Internet and social media to radicalize and recruit, the U.S. State Department's oversight of a grantee involved in political activities in Israel; and anti-abuse efforts of Medicare and private health insurance systems to combat the opioid epidemic.

(1) Historical Highlights

The Subcommittee's investigatory record as a permanent Senate body began under the Chairmanship of Republican Senator Homer Ferguson and his Chief Counsel (and future Attorney General and Secretary of State) William P. Rogers, as the Subcommittee inherited the Truman Committee's role in investigating fraud and waste in U.S. Government operations. This investigative work became particularly colorful under the chairmanship of Senator Clyde Hoey, a North Carolina Democrat who took the chair from Senator Ferguson after the 1948 elections. The last U.S. Senator to wear a long frock coat and wing-tipped collar, Mr. Hoey was a distinguished southern gentleman of the old school. Under his leadership, the Subcommittee won national attention for its investigation of the so-called "five percenters," notorious Washington lobbyists who charged their clients five percent of the profits from any Federal contracts they obtained on the client's behalf. Given the Subcommittee's jurisdictional inheritance from the Truman Committee, it is perhaps ironic that the "five percenters" investigation raised allegations of bribery and influence-peddling that reached right into the White House and implicated members of President Truman's staff. In any event, the fledgling Subcommittee was off to a rapid start.

What began as colorful soon became contentious. When Republicans returned to the Majority in the Senate in 1953, Wisconsin's junior Senator, Joseph R. McCarthy, became the Subcommittee's Chairman. Two years earlier, as Ranking Minority Member, Senator McCarthy had arranged for another Republican Senator, Margaret Chase Smith of Maine, to be removed from the Subcommittee. Senator Smith's offense, in Senator McCarthy's eyes, was her issuance of a "Declaration of Conscience" repudiating those who made unfounded charges and used character assassination against their political opponents. Although Senator Smith had carefully declined to name any specific offender, her remarks were universally recognized as criticism of Senator McCarthy's accusations that communists had infiltrated the State Department and other government agencies. Senator McCarthy retaliated by engineering Senator Smith's removal, replacing her with the newly-elected Senator from California, Richard Nixon.

Upon becoming Subcommittee Chairman, Senator McCarthy staged a series of highly publicized anti-communist investigations, culminating in an inquiry into communism within the U.S. Army, which became known as the Army-McCarthy hearings. During the latter portion of those hearings, in which the parent Committee examined the Wisconsin Senator's attacks on the Army, Senator McCarthy recused himself, leaving South Dakota Senator Karl Mundt to serve as Acting Chairman of the Subcommittee. Gavel-to-gavel television coverage of the hearings helped turn the tide against Senator McCarthy by raising public concern about his treatment of witnesses and cavalier use of evidence. In December 1954, the Senate censured Senator McCarthy for unbecoming conduct. In the following year, the Subcommittee adopted new rules of procedure that better protected the rights of witnesses. The Subcommittee also strengthened the rules ensuring the right of both parties on the Subcommittee to appoint staff, initiate and approve investigations, and review all information in the Subcommittee's possession.

In 1955, Senator John McClellan of Arkansas began 18 years of service as Chairman of the Permanent Subcommittee on Investigations. Senator McClellan appointed a young Robert F. Kennedy as the Subcommittee's Chief Counsel. That same year, Members of the Subcommittee were joined by Members of the Senate Labor and Public Welfare Committee on a special committee to investigate labor racketeering. Chaired by Senator McClellan and staffed by Robert Kennedy and other Subcommittee staff members, this special committee directed much of its attention to criminal influence over the Teamsters Union, most famously calling Teamsters' leaders Dave Beck and Jimmy Hoffa to testify. The televised hearings of the special committee also introduced Senators Barry Goldwater and John F. Kennedy to the nation, as well as leading to passage of the Landrum- Griffin Labor Act.

After the special committee completed its work, the Permanent Subcommittee on Investigations continued to investigate organized crime. In 1962, the Subcommittee held hearings during which Joseph Valachi outlined the activities of La Cosa Nostra, or the Mafia. Former Subcommittee staffer Robert Kennedy--who had by then become Attorney General in his brother's Administration--used this information to prosecute prominent mob leaders and their accomplices. The Subcommittee's investigations also led to passage of major legislation against organized crime, most notably the Racketeer Influenced and Corrupt Organizations (RICO) provisions of the Crime Control Act of 1970. Under Chairman McClellan, the Subcommittee also investigated fraud in the purchase of military uniforms, corruption in the Department of Agriculture's grain storage program, securities fraud, and civil disorders and acts of terrorism. In addition, from 1962 to 1970, the Subcommittee conducted an extensive probe of political interference in the awarding of government contracts for the Pentagon's ill-fated TFX ("tactical fighter, experimental") aircraft. In 1968, the Subcommittee also examined charges of corruption in U.S. servicemen's clubs in Vietnam and elsewhere around the world.

In 1973, Senator Henry "Scoop" Jackson, a Democrat from Washington, replaced Senator McClellan as the Subcommittee's Chairman. During his tenure, recalled Chief Clerk Ruth Young Watt--who served in this position from the Subcommittee's founding until her retirement in 1979--Ranking Minority Member Charles Percy, an Illinois Republican, became more active on the Subcommittee than Chairman Jackson, who was often distracted by his Chairmanship of the Interior Committee and his active role on the Armed Services Committee.3 Senator Percy also worked closely with Georgia Democrat Sam Nunn, a Subcommittee member who subsequently succeeded Senator Jackson as Subcommittee Chairman in 1979. As Chairman, Senator Nunn continued the Subcommittee's investigations into the role of organized crime in labor-management relations and also investigated pension fraud.

3It had not been uncommon in the Subcommittee's history for the Chairman and Ranking Minority Member to work together closely despite partisan differences, but Senator Percy was unusually active while in the Minority--a role that included his chairing an investigation of the hearing aid industry.

Regular reversals of political fortunes in the Senate during the 1980s and 1990s saw Senator Nunn trade the chairmanship three times with Delaware Republican William Roth. Senator Nunn served from 1979 to 1980 and again from 1987 to 1995, while Senator Roth served from 1981 to 1986, and again from 1995 to 1996. These 15 years saw a strengthening of the Subcommittee's bipartisan tradition in which investigations were initiated by either the Majority or Minority and fully supported by the entire Subcommittee. For his part, Senator Roth led a wide range of investigations into commodity investment fraud, offshore banking schemes, money laundering, and child pornography. Senator Nunn led inquiries into Federal drug policy, the global spread of chemical and biological weapons, abuses in Federal student aid programs, computer security, airline safety, and health care fraud. Senator Nunn also appointed the Subcommittee's first female counsel, Eleanore Hill, who served as Chief Counsel to the Minority from 1982 to 1986 and then as Chief Counsel from 1987 to 1995.

Strong bipartisan traditions continued in the 105th Congress when, in January 1997, Republican Senator Susan Collins of Maine became the first woman to chair the Permanent Subcommittee on Investigations. Senator John Glenn of Ohio became the Ranking Minority Member, while also serving as Ranking Minority Member of the full Committee. Two years later, in the 106th Congress, after Senator Glenn's retirement, Michigan Democrat Carl Levin succeeded him as the Subcommittee's Ranking Minority Member. During Senator Collins' chairmanship, the Subcommittee conducted investigations into issues affecting Americans in their day-to-day lives, including mortgage fraud, deceptive mailings and sweepstakes promotions, phony credentials obtained through the Internet, day trading of securities, and securities fraud on the Internet. Senator Levin initiated an investigation into money laundering. At his request, in 1999, the Subcommittee held hearings on money laundering issues affecting private banking services provided to wealthy individuals, and, in 2001, on how major U.S. banks providing correspondent accounts to offshore banks were being used to advance money laundering and other criminal schemes.

During the 107th Congress, both Senator Collins and Senator Levin chaired the Subcommittee. Senator Collins was chairman until June 2001, when the Senate Majority party changed hands; at that point, Senator Levin assumed the chairmanship and Senator Collins, in turn, became the Ranking Minority Member. In her first six months chairing the Subcommittee at the start of the 107th Congress, Senator Collins held hearings examining issues related to cross border fraud, the improper operation of tissue banks, and Federal programs designed to fight diabetes. When Senator Levin assumed the chairmanship, as his first major effort, the Subcommittee initiated an 18-month bipartisan investigation into the Enron Corporation, which had collapsed into bankruptcy. As part of that investigation, the Subcommittee reviewed over 2 million pages of documents, conducted more than 100 interviews, held four hearings, and issued three bipartisan reports focusing on the role played by Enron's Board of Directors, Enron's use of tax shelters and structured financial instruments, and how major U.S. financial institutions contributed to Enron's accounting deceptions, corporate abuses, and ultimate collapse. The Subcommittee's investigative work contributed to passage of the Sarbanes-Oxley Act which enacted accounting and corporate reforms in July 2002. In addition, Senator Levin continued the money laundering investigation initiated while he was the Ranking Minority Member, and the Subcommittee's work contributed to enactment of major reforms strengthening U.S. anti-money laundering laws in the 2001 Patriot Act. Also during the 107th Congress, the Subcommittee opened new investigations into offshore tax abuses, border security, and abusive practices related to the pricing of gasoline and other fuels.

In January 2003, at the start of the 108th Congress, after the Senate Majority party again changed hands, Senator Collins was elevated to Chairman of the full Committee on Governmental Affairs, and Republican Senator Norm Coleman of Minnesota became Chairman of the Subcommittee. Over the next two years, Senator Coleman held hearings on topics of national and global concern including illegal file sharing on peer-to-peer networks, abusive practices in the credit counseling industry, the dangers of purchasing pharmaceuticals over the Internet, SARS preparedness, border security, and how Saddam Hussein abused the United Nations Oil for Food Program. At the request of Senator Levin, then Ranking Minority Member, the Subcommittee also examined how some U.S. accounting firms, banks, investment firms, and tax lawyers were designing, promoting, and implementing abusive tax shelters across the country; and how some U.S. financial institutions were failing to comply with anti-money laundering controls mandated by the Patriot Act, using as a case history Riggs Bank accounts involving Augusto Pinochet, the former President of Chile, and Equatorial Guinea, an oil-rich country in Africa.

During the 109th Congress, Senator Coleman held additional hearings on abuses associated with the United Nation's Oil for Food Program, and initiated a series of hearings on Federal contractors who were paid with taxpayer dollars but failed to meet their own tax obligations, resulting in billions of dollars in unpaid taxes. He also held hearings on border security issues, securing the global supply chain, Federal travel abuses, abusive tax refund loans, and unfair energy pricing. At Senator Levin's request, the Subcommittee held hearings on offshore tax abuses responsible for $100 billion in unpaid taxes each year, and on U.S. vulnerabilities caused by states forming 2 million companies each year with hidden owners.

During the 110th Congress, in January 2007, after the Senate majority shifted, Senator Levin once again became Subcommittee Chairman, while Senator Coleman became the Ranking Minority Member. Senator Levin chaired the Subcommittee for the next seven years. He focused the Subcommittee on investigations into complex financial and tax matters, including unfair credit card practices, executive stock option abuses, excessive speculation in the natural gas and crude oil markets, and offshore tax abuses involving tax haven banks and non-U.S. persons dodging payment of U.S. taxes on U.S. stock dividends. The Subcommittee's work contributed to enactment of two landmark bills, the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) which reformed credit card practices, and the Foreign Account Tax Compliance Act (FATCA) which tackled the problem of hidden offshore bank accounts used by U.S. persons to dodge U.S. taxes. At the request of Senator Coleman, the Subcommittee also conducted bipartisan investigations into Medicare and Medicaid health care providers who cheat on their taxes, fraudulent Medicare claims involving deceased doctors or inappropriate diagnosis codes, U.S. dirty bomb vulnerabilities, Federal payroll tax abuses, abusive practices involving transit benefits, and problems involving the United Nations Development Program.

(2) More Recent Investigations

During the 111th Congress, Senator Levin continued as Subcommittee Chairman, while Senator Tom Coburn joined the Subcommittee as its Ranking Minority Member. Under their leadership, the Subcommittee dedicated much of its resources to a bipartisan investigation into key causes of the 2008 financial crisis, looking in particular at the role of high risk home loans, regulatory failures, inflated credit ratings, and high-risk, conflicts-ridden financial products designed and sold by investment banks. The Subcommittee held four hearings and released thousands of documents. The Subcommittee's work contributed to passage of another landmark financial reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In addition, the Subcommittee held hearings on excessive speculation in the wheat market, tax haven banks that helped U.S. clients evade U.S. taxes, how to keep foreign corruption out of the United States, and Social Security disability fraud.

During the 112th Congress, Senator Levin and Senator Coburn continued in their respective roles as Chairman and Ranking Minority Member of the Subcommittee. In a series of bipartisan investigations, the Subcommittee examined how a global banking giant, HSBC, exposed the U.S. financial system to an array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering controls; how two U.S. multinational corporations engaged in offshore tax abuses, including how Microsoft shifted profits offshore to dodge U.S. taxes, and Hewlett Packard secretly brought offshore funds back home without paying taxes by utilizing abusive short term loan schemes; and how excessive commodity speculation by mutual funds and others were taking place without Dodd-Frank safeguards such as position limits being put into effect. At the request of Senator Coburn, the Subcommittee also conducted bipartisan investigations into problems with Social Security disability determinations that, due to poor procedures, perfunctory hearings, and poor quality decisions, resulted in over 1 in 5 disability cases containing errors or inadequate justifications; how DHS state and local intelligence fusion centers failed to yield significant, useful information to support Federal counterterrorism efforts; and how certain Federal contractors that received taxpayer dollars through stimulus funding nevertheless failed to pay their Federal taxes.

During the 113th Congress, Senator Levin continued as Chairman, while Senator John McCain joined the Subcommittee as its Ranking Minority Member. They continued to strengthen the Subcommittee's strong bipartisan traditions, conducting all investigations in a bipartisan manner. During the 113th Congress, the Subcommittee held eight hearings and released ten reports on a variety of investigations. The investigations examined high risk credit derivatives trades at JPMorgan; hidden offshore accounts opened for U.S. clients by Credit Suisse in Switzerland; corporate tax avoidance in case studies involving Apple, Caterpillar, and a structured financial product known as basket options; online advertising abuses; conflicts of interest affecting the stock market and high speed trading; IRS processing of 501(c)(4) applications; defense acquisition reforms; and bank involvement with physical commodities. At the end of the 113th Congress, Senator Levin retired from the Senate.

During the 114th Congress, Senator Rob Portman became Subcommittee Chairman with Senator Claire McCaskill serving as Ranking Minority Member. Under the Chairman and Ranking Member's leadership, the Subcommittee held six hearings and issued eight reports addressing range of public policy concerns. Investigations examined the impact of the U.S. corporate tax code on cross-border mergers acquisitions; online sex trafficking; the federal government's efforts to protect unaccompanied migrant children from human trafficking; consumer protection in the cable and satellite television industry; terrorist networks' use of the Internet and social media to radicalize and recruit; the U.S. State Department's oversight of a grantee involved in political activities in Israel; and anti-abuse efforts of Medicare and private health insurance systems to combat the opioid epidemic. The Subcommittee also initiated the first successful civil contempt proceedings to enforce a Senate subpoena in twenty years. The Subcommittee's long-term investigation of online sex trafficking culminated in a final report and hearing on January 10, 2017, at the start of the 115th Congress.

II. SUBCOMMITTEE HEARINGS DURING THE 114TH CONGRESS

A. Impact of the U.S. Tax Code on the Market for Corporate Control and Jobs (July 30, 2015)

The Subcommittee's first hearing and staff report in the 114th Congress examined the impact of the U.S. corporate tax code on foreign acquisitions of U.S. businesses and the ability of U.S. businesses to expand by acquisition. The hearing featured two panels of witnesses. The first panel was comprised of Jim Koch, founder and chairman of Boston Beer Company; David Pyott, Chairman of the Board and Chief Executive Officer of Allergan, Inc. from 1998 to 2015; and Walter Gavin of Emerson, Vice Chairman (October 2009 to February 2013) and Chief Financial Officer (1993-2010). The second panel of witnesses included Howard Schiller of Valeant Pharmaceuticals International, Inc, Chief Financial Officer (December 2011 to June 2015) and member of the Board of Directors (September 2012 to present); and Joshua Kobza, Chief Financial Officer at Restaurant Brands International.

B. Human Trafficking Investigation (November 19, 2015)

The Subcommittee's second hearing concerned the Subcommittee's human trafficking investigation. The Subcommittee's bipartisan investigation examined how sex traffickers increasingly use the Internet to advance their trade and evade detection. The hearing also laid the necessary foundation for contempt proceedings against Backpage.com's CEO after the company refused to comply with the Subcommittee's subpoena. The hearing featured two panels of witnesses. The first panel was composed of Yiota Souras, Senior Vice President and General Counsel for the National Center for Missing and Exploited Children; and Darwin Roberts, Deputy Attorney General of the Washington State Attorney General's Office. Carl Ferrer, Chief Executive Officer at Backpage.com, LLC, refused to appear despite being under subpoena. The Subcommittee initiated a civil contempt proceeding that remains under litigation.

C. Adequacy of the Department of Health and Human Services' Efforts to Protect Unaccompanied Children From Human Trafficking (January 28, 2016)

The Subcommittee's third hearing and report examined the deficiencies in the procedures used by the Department of Health and Human Services (HHS) Department of Office of Refugee Resettlement (ORR) to safely place unaccompanied alien children (UACs) with sponsors in the United States. The hearing featured two panels of witnesses. The first panel consisted of Mark Greenberg, Acting Assistant Secretary, Administration for Children and Families, U.S. Department of Health and Human Services; and Robert Carey, Director of the Office of Refugee Resettlement, U.S. Department of Health and Human Services. The second panel included testimony from Tiffany Nelms, Associate Director of Children's Services, U.S. Committee for Refugees and Immigrants; Jennifer Justice, Deputy Director of the Office of Families and Children, Ohio Department of Job and Family Services; and Kimberly Haynes, Director for Children's Services, Lutheran Immigration and Refugee Service.

In response to the investigation, ORR changed a number of policies related to the safety of UACs. Under the new policy, certain criminal history and substantiated child welfare findings will automatically disqualify individuals from serving as Category 2 and Category 3 sponsors. All non-sponsor adult household members and adult care givers identified in a sponsor care plan will undergo a public records check and a sex offender registry check and ORR no longer requires the potential sponsor or household member to authorize the release of information prior to ORR performing either a public records check or a sex offender registry check. ORR began allowing for discretionary home studies in cases where a home study is not otherwise required by the Trafficking Victims Protection Act. ORR also made procedural changes, including more frequent, regular meetings with stakeholders.

D. Review of the Affordable Care Act Health Insurance CO-OP Program (March 10, 2016)

The Subcommittee's fourth hearing of the 114th Congress examined the Consumer Operated and Oriented Plan (CO-OP) loan program established by the Patient Protection and Affordable Care Act and the mismanagement, taxpayer waste, and losses related to the failed CO-OPs. The hearing featured two panels of witnesses. The first panel consisted of Andy Slavitt, Acting Administrator, Centers for Medicare and Medicaid Services; and Kevin Counihan, Marketplace Chief Executive Office and Deputy Administrator, Centers for Medicare and Medicaid Services. The second panel heard testimony from Dr. Scott Harrington, Alan B. Miller Professor, Chair, Health Care Management Department, The Wharton School, University of Pennsylvania.

E. Customer Service and Billing Practices in the Cable and Satellite Television Industry (June 23, 2016)

The Subcommittee's fifth hearing of the 114th Congress examined the billing and customer service practices in the cable and satellite television industry. Representatives from Comcast, Time Warner Cable, Charter Communications, DirecTV, and Dish testified on matters related to customer service issues. Combined, these five companies provide programming to more than 70 percent of pay-TV subscribers and reach more than half of all American households. The hearing featured a panel of witnesses including Tom Karinshak, Senior Vice President of Customer Service, Comcast; John Keib, Former Executive Vice President and Chief Operating Officer, Residential Services, Time Warner Cable; Kathleen "Kip" Mayo, Executive Vice President, Customer Operations, Charter Communications; Rasesh Patel, Senior Vice President, Product Management, AT&T; Entertainment Group (DirecTV); and Kathleen Schneider, Senior Vice President, Operations, Dish Network.

As a result of this investigation, both Time Warner Cable and Charter have taken steps to address these issues. Each month, Time Warner Cable performs an audit comparing its billing records with service records. Going forward, the company will provide an automatic one-month credit to anyone who is identified in the audit as having been overcharged. Time Warner Cable will not, however, investigate when it began overcharging customers unless customers bring specific concerns to the company's attention, nor will it provide a full refund dating back to when the overcharge began. Similarly, Charter will provide customers with a one-year credit for any equipment overcharges. Charter has also implemented systemic controls that it says will prevent equipment overcharges in the future.

As a result of the investigation's focus on customer service practices, cable and satellite providers acknowledged the need to improve their customer service, and provided information to the Subcommittee regarding their efforts to identify and address customer pain points and improve the customer experience. After meeting with the Subcommittee, Comcast stressed to its retention agents that its policy allowed them to stop trying to "save" the customer if the customer refused or became upset by a retention agent's request to ask the customer questions about their decision to disconnect.

F. ISIS Online: Countering Terrorist Radicalization & Recruitment on the Internet & Social Media (July 6, 2016)

The sixth Subcommittee hearing of the 114th Congress examined the threat posed by terrorist propaganda and U.S. government efforts to counter it, with a particular focus on the Islamic State of Iraq and Syria's (ISIS) and other terrorist networks' use of online communications to radicalize and recruit within the United States. The hearing featured two panels of witnesses. The first panel consisted of Michael Steinbach, Executive Assistant Director, National Security Branch, Federal Bureau of Investigation; George Selim, Director, Office of Community Partnerships, U.S. Department of Homeland Security and Director, Interagency Task Force on Countering Violent Extremism; and Meagen LaGraffe, Chief of Staff to the Coordinator and Special Envoy, Global Engagement Center, U.S. Department of State. The second panel heard testimony from Peter Bergen, Vice President, New America Foundation; and Alberto Fernandez, Vice President, The Middle East Media Research Institute.

III. LEGISLATIVE ACTIVITIES DURING THE 114TH CONGRESS

The Permanent Subcommittee on Investigations does not have legislative authority, but because its investigations play an important role in bringing issues to the attention of Congress and the public, the Subcommittee's work contributes to the development of legislative initiatives. The Subcommittee's activity during the 114th Congress was no exception, with Subcommittee hearings and Members playing prominent roles in several legislative initiatives.

A. Directing the Senate Legal Counsel to bring a civil action to enforce a subpoena of the Permanent Subcommittee on Investigations (S. Res. 377)

On March 17, 2016, Senators Rob Portman and Claire McCaskill introduced Senate Resolution 377 to hold Backpage.com in civil contempt of Congress. Senators Portman and McCaskill issued a subpoena to Backpage.com for documents about the company's business practices, particularly how it screens advertisements for warning signs of sex trafficking. Because Backpage refused to comply with that subpoena, Senators Portman and McCaskill introduced a Senate resolution to hold the company in civil contempt and force Backpage to turn over withheld documents. The Resolution passed the Senate unanimously by a vote of 96-0, marking the first time in more than twenty years that the Senate has had to enforce a subpoena in court. More broadly, the Subcommittee is developing a factual record that may form the basis for legislative reforms designed to combat online sex trafficking, including potential reforms of the Communications Decency Act.

B. A bill to enhance whistleblower protection for contractor and grantee employees (S. 795)

In March 2015, Senator Claire McCaskill introduced S. 795, a bill that would extend existing whistleblower protections for federal contractors to all non-intelligence-community federal government grantees, subgrantees, and subcontractors, and make permanent these protections. The bill also prohibits contractors from being reimbursed for legal fees accrued in their defense against retaliation claims by whistleblowers. The bill passed with unanimous consent of the Senate on June 23, 2016 before moving to the House of Representatives. On December 5, 2016, the House of Representatives approved S. 795, and on December 14, 2016, President Obama signed the bill into law.

IV. REPORTS, PRINTS, AND STUDIES

In connection with its investigations, the Subcommittee often issues lengthy and detailed reports. During the 114th Congress, the Subcommittee released eight such reports, listed below.

A. Impact on the U.S. Tax Code on the Market for Corporate Control and Jobs, July 30, 2015 (Report Prepared by the Majority Staff of the Permanent Subcommittee on Investigations and released in conjunction with the Subcommittee's hearing on July 30, 2015)

In July 2015, the majority staff of the Subcommittee released its first report of the 114th Congress. This 133-page report examined the effect of the U.S. tax code on the market for corporate control of American companies.

The report detailed how the United States has the highest corporate tax rate in the industrialized world, and (alone among its peers) has retained a worldwide system that taxes American companies for the privilege of repatriating their overseas earnings. Meanwhile, most other nations with advanced economies have adopted competitive tax rates and territorial- type tax systems. As a result, U.S. firms too often have a significant incentive to relocate their headquarters overseas. Corporate inversions may be the most dramatic manifestation of that incentive, but the far greater part of the story concerns other more common forms of cross-border mergers and acquisitions.

Through a detailed review of several important cross-border transactions, the Subcommittee's investigation found that the increase in after-tax profits created by escaping the U.S. tax net can (i) contribute significantly to foreign corporations' ability to acquire American firms; and (ii) create powerful incentives for American firms that merge with foreign corporations to locate their new combined headquarters abroad. Both phenomena can lead to a significant loss of American jobs, business headquarters, and tax revenues. First, the Subcommittee examined three major acquisitions of U.S. companies by Valeant Pharmaceuticals, a successful, serial acquirer headquartered in Quebec. Since merging with a Canadian firm and relocating to Canada, Valeant has achieved a single-digit cash effective tax rate. Its longtime Chief Financial Officer said that rate has "turbocharged" Valeant's expansion by acquisition,1 making it the sixth largest OECD- based foreign acquirer of U.S. companies in terms of deal price, according to third-party data compiled by the Joint Committee on Taxation. When evaluating an acquisition, Valeant considers many factors but focuses on two key deal targets: the projected internal rate of return it can expect, and the "payback" period of the acquisition-the time it will take Valeant to recover its investment. As a guideline, Valeant generally seeks deals projected to achieve a 20 percent internal rate of return and a payback period of six years or less.

1Subcommittee Interview of Howard Schiller, Corporate Dir., Valeant Pharm. Inc. (July 24, 2015). Schiller elaborated: "I think the clear answer is that what really distinguishes Valeant is its ability to create value [through its business model]. . . . But its tax rate has augmented its growth. There is no question that we would not be in the same place we are in today if we had a higher tax rate. We have been able to plow that [after-tax profit] back in at very high rate of return."

To understand the role of tax considerations in Valeant's deals, PSI reviewed Valeant's recent multibillion-dollar acquisitions of three U.S. companies: Medicis, Bausch & Lomb, and Salix. Valeant's primary valuation of target companies was based on an assumed U.S. tax rate of 36 percent-close to the U.S. target companies' actual or projected rates. In each transaction the Subcommittee reviewed, however, Valeant performed a pre-acquisition tax analysis to determine the lower tax rate that could be achieved by integrating its U.S. target into Valeant's corporate group headquartered in Canada. Applying that new, lower tax rate to the U.S. company's future cash flow, Valeant evaluated the deal along the two key guidelines mentioned above-whether it could meet (or approximate) its targeted 20 percent return and six-year payback period. In each case, Valeant's ability to hit or approximate those targets depended to a large extent on its ability to lower the target company's tax rate. In other words, tax savings helped justify the price that Valeant was able to pay while hitting its ambitious financial goals. Valeant's projected post-acquisition tax savings for Bausch & Lomb alone exceeded $3.6 billion over ten years, and its projected tax savings for Salix exceeded $560 million over five years. And although Valeant did not project specific tax savings for Medicis, we estimate the potential savings at approximately $680 million over ten years.

It is important to note that none of these acquisitions were "tax-motivated" in the sense that Valeant was aiming to reduce its own tax liabilities. Instead, they illustrate that foreign acquirers that hail from more favorable tax jurisdictions are able to create value simply by restructuring the affairs of the U.S. target companies to improve their tax profile. In Valeant's case, those tax savings significantly enhanced the deal along the key metrics that Valeant uses to decide whether to undertake an acquisition.

Second, the Subcommittee examined a major transaction that can be thought of as a "merger of equals": Burger King's $11.4 billion merger with the anadian restaurant business Tim Hortons. The Subcommittee's review showed that Burger King had clear business reasons to team up with Tim Hortons. But when deciding where to locate the headquarters of the combined firm, tax considerations flatly ruled out the United States from the outset. Burger King calculated that pulling Tim Hortons into the worldwide U.S. tax net, rather than relocating to Canada, would destroy up to $5.5 billion in value over just five years. Far better, executives concluded, to put the new company in a country that would allow it to reinvest overseas earnings back in the United States and Canada without incurring new taxes.

Finally, the Subcommittee conducted a limited review of the tax and employment consequences of InBev's 2008 acquisition of Anheuser Busch. Through that deal, InBev was able to integrate a U.S. company with a pre-acquisition worldwide effective tax rate of approximately 39 percent into a worldwide corporate group with an effective tax rate of 19 percent. It is clear from the record that a significant number of U.S. jobs were lost following that acquisition. From 2007 to 2015, the number of U.S.-based employees of AB InBev declined by about 30 percent, while the number of employees based in Leuven, Belgium and the State of Sao Paulo, Brazil rose by 34 percent. In particular, the company's U.S. headcount was reduced from 18,345 in 2007 to 12,938 in 2015. That 30 percent reduction is significantly higher than the 10 percent to 15 percent decrease that Anheuser-Busch announced before the merger as part of its restructuring plan.

B. Recommendation to Enforce a Subpoena Issued to the CEO of Backpage.com LLC, November 19, 2015 (Report Prepared by the Majority and Minority Staffs of the Permanent Subcommittee on Investigations and released in conjunction with the Subcommittee's hearing on November 19, 2015)

Backpage.com and its Chief Executive Officer, Carl Ferrer, failed to comply with a subpoena issued by the Subcommittee. This report, released on November 19, 2015, detailed the Subcommittee's investigation and recommended enforcement of that subpoena. Backpage.com claims to be a market-leader in combatting human trafficking online. The company touts its "moderation" practices-the process of reviewing advertisements to screen them for evidence of violations of its terms of use and possible illegality. To better understand these procedures, their efficacy, and their costs, the Subcommittee served a subpoena on Backpage requiring the production of documents concerning Backpage's moderation and ad-review procedures, basic financial information, and other topics. Backpage refused to comply with the subpoena. Undeterred by Backpage's noncompliance with its process, the Subcommittee pursued its fact-finding through other means. In this report, we detailed our preliminary findings. In our view, they only underscored the importance of the issues the Subcommittee is probing and the need for enforcement of the subpoena.

First, the Subcommittee found substantial evidence that Backpage edits the content of some ads, including by deleting words and images, before publication. The record indicates that in some cases, these deletions likely served to remove evidence of the illegality of the underlying transaction. Specifically, as part of its moderation process, it appears that Backpage will delete particular words or images from an advertisement before posting it to the web, if those words or images violate its terms of service. The Subcommittee attempted to take the testimony of two Backpage employees in charge of its moderation practices, but they refused to testify on the grounds that it might incriminate them. The Subcommittee, however, obtained evidence demonstrating that, from 2010 to 2012, when Backpage outsourced its moderation work to India, it did delete certain images, words, or phrases from "adult" advertisements. The Subcommittee's subpoena sought information regarding whether Backpage's current practices have the purpose or effect of removing images or text that could alert law enforcement to the nature and extent of the transaction being offered.

Second, the Subcommittee had additional concerns about the steps Backpage takes to ensure that it can be helpful when called upon to cooperate with law enforcement investigations of potential human trafficking. Backpage, for example, does not retain the metadata associated with images posted to its site, which would be helpful to law enforcement in identifying victims of human trafficking. In addition, the record is unclear about what steps Backpage takes to "hash" images-that is, to assign them a unique identifier. Backpage claims that it does hash images, but at least one credible report disputes that.

Third, the Subcommittee attempted to learn more about Backpage's corporate structure and finances. Earlier in 2015, Backpage's corporate group was assessed by an independent appraiser at a fair market value of between $618.4 million and $625.8 million. More striking, the company's EBITDA margin (a common measurement of a company's operating profitability) was a staggering 82.4 percent in 2014. If true, that suggests Backpage has the resources for additional action against human trafficking on its website, but perhaps lacks the financial incentives to reject an increased number of ads, thereby reducing its revenue from advertisements.

Finally, the Subcommittee learned that, at least in one case, Backpage customers were able to evade limits placed on its access to credit card networks by a major financial institution. That institution attempted to block its card holders from completing transactions with Backpage.com, out of concern that the site was potentially facilitating human trafficking. Despite this block, Backpage modified its merchant code, allowing cardholders to continue completing transactions.

The Subcommittee's long-term investigation of online sex trafficking resulted in a major report issued on January 9, 2017, and a Subcommittee hearing held that same day.

C. Protecting Unaccompanied Alien Children from Trafficking and Other Abuses: The Role of the Office of Refugee Resettlement, January 28, 2016 (Report Prepared by the Majority and Minority Staffs of the Permanent Subcommittee on Investigations and released in conjunction with the Subcommittee's hearing on January 28, 2016)

In January 2016, the Subcommittee released a 56-page bipartisan staff report examining deficiencies in the procedures used by the Department of Health and Human Services (HHS) to safely place unaccompanied alien children with sponsors in the United States.

The report detailed how each year, tens of thousands of children enter the United States, unaccompanied by their parents or relatives. If taken into U.S. custody, those children are designated "unaccompanied alien children" or "UACs." Congress has tasked HHS with finding appropriate homes in which to place UACs temporarily, pending the resolution of immigration proceedings. The agency within HHS that performs that function is the Office of Refugee Resettlement (ORR). Through procedures described in this report, HHS attempts to place each UAC with a suitable adult sponsor-someone who can care for them and ensure their appearance at their immigration hearings. In carrying out this responsibility, federal law requires HHS to ensure that UACs are protected from human trafficking and other forms of abuse.

Over a period of four months in 2014, however, HHS allegedly placed a number of UACs in the hands of a ring of human traffickers who forced them to work on egg farms in and around Marion, Ohio, leading to a federal criminal indictment. According to the indictment, the minor victims were forced to work six or seven days a week, twelve hours per day. The traffickers repeatedly threatened the victims and their families with physical harm, and even death, if they did not work or surrender their entire paychecks. The indictment alleges that the defendants "used a combination of threats, humiliation, deprivation, financial coercion, debt manipulation, and monitoring to create a climate of fear and helplessness that would compel [the victims'] compliance."

Those tragic events prompted the Subcommittee to launch an investigation of HHS's process for screening potential UAC sponsors and other measures to protect UACs from trafficking. The Subcommittee's initial review of the Marion case files revealed information that suggests these terrible crimes were likely preventable. Specifically, the files reveal that, from June through September 2014, HHS placed a number of UACs with alleged distant relatives or family friends-including one of the defendants in the criminal case-without taking sufficient steps to ensure that the placements would be safe. HHS failed to run background checks on the adults in the sponsors' households as well as secondary caregivers; failed to visit any of the sponsors' homes; and failed to realize that a group of sponsors was accumulating multiple unrelated children. In August 2014, HHS permitted a sponsor to block a child-welfare case worker from visiting with one of the victims, even after the case worker discovered the child was not living at the address on file with HHS.

Based on its investigation, the Subcommittee concluded that HHS's policies and procedures are inadequate to protect the children in the agency's care. The Subcommittee's investigation focused on what HHS calls Category 3 sponsors-those who have no close relation to the child, and therefore resemble foster-care providers or similar temporary custodial arrangements. Serious deficiencies found by the Subcommittee include:

HHS's process for verifying the alleged relationship between a UAC and an individual other than a parent, guardian, or close family member is unreliable and vulnerable to abuse. In general, HHS accepts the alleged relationship between a Category 3 sponsor and a UAC (e.g., "neighbor from home country") if a person claiming to be the child's family member corroborates it. In a number of cases, however, parents who consented to the placement of their children with certain sponsors were also complicit in the children's smuggling. In the Marion cases, for example, several victims' family members attested to the asserted relationship, but there was a reason: The human traffickers held the deeds to some of the families' homes as collateral for the child's journey to the United States. The sooner the child was released from HHS custody, the sooner he or she could begin working to repay the debt. Other cases revealed that parents have deceived HHS by claiming that a relationship existed between the sponsor and the UAC when it did not.

HHS is unable to detect when a sponsor or group of related sponsors is seeking custody of multiple unrelated children. The agency could not detect that sponsors in the Marion cases were collecting multiple, unrelated children-a warning sign of a potential trafficking ring that warrants, at a minimum, additional scrutiny.

HHS has failed to conduct adequate background checks. Throughout the time period examined by the Subcommittee, HHS did not conduct background checks on all relevant adults. HHS's longstanding policy was to conduct background checks only on the sponsor, and not on any other adult listed as living in the sponsor's home or on the person designated as the "backup" sponsor. And if that check turned up a criminal history, HHS policy was that no criminal conviction could disqualify a sponsor, no matter how serious. Effective January 25, 2016, HHS has strengthened its background check policies.

HHS does not adequately conduct home studies. Home studies are universally performed in foster care placements, but HHS commonly places children with sponsors without ever meeting that sponsor in person or setting eyes on the home in which the child will be placed. The agency performed home studies in less than 4.3 percent of cases from 2013 through 2015. No home studies were conducted in the Marion cases.

After a child's release to a sponsor, HHS allows sponsors to refuse post-release services offered to the child- and even to bar contact between the child and an HHS care provider attempting to provide those services. That policy caused HHS to miss a potential opportunity to uncover the crime perpetrated in the Marion cases when one of the victim's sponsors refused to permit access to the child.

Many UACs fail to appear at immigration proceedings. Ensuring the UAC's appearance at immigration proceedings is a principal task of a UAC's sponsor, and failure to appear at an immigration hearing can have significant adverse consequences for an alien child. Based on Department of Justice data, 40 percent of completed UAC immigration cases over an eighteen-month period resulted in an in absentia removal order based on the UAC's failure to appear.

These deficiencies in HHS's policies expose UACs to an unacceptable risk of trafficking and other forms of abuse at the hands of their government-approved sponsors. Beyond the Marion case files, the Subcommittee identified and reviewed thirteen other cases involving post-placement trafficking of UACs and fifteen additional cases with serious trafficking indicators. The Subcommittee was unable to say, however, with any certainty how many more UACs placed by HHS have been victims of trafficking or other abuses, in part because HHS maintains no regularized means of tracking such cases.

Continues with Part 8 of 8

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; editor@targetednews.com; http://www.targetednews.com