State audit alleges cheating in redemption payments in Hawaii recycling program

The state still has not made changes in its HI-5 redemption and recycling program to protect against fraud, and spot checks of recycling companies turned up two cases where records were allegedly altered so the state would reimburse substantially more to a recycler than was paid out to the public, according to a new report by the Hawaii State Auditor.

The new audit released this morning concluded that “the Department of Health (DOH) still has not addressed fundamental weaknesses of the program, which previous audits identified more than a decade ago.”

The state’s Deposit Beverage Container Program is fundamentally flawed because it is entirely dependent on beverage distributors and redemption centers to self-report how many containers they import into Hawaii, and how many they collect for recycling, according to the report.

“As a result, moneys paid into the program’s special fund and moneys paid out of it are based on unverified numbers — opportunities for fraud and error are legion,” the report found.

To probe deeper into those problems, the auditor hired the certified public accounting firm KMH LLP, which redeemed beverage containers at 10 redemption centers locations throughout the state.

That included two visits to the same Reynolds Recycling location on Oahu. The firm redeemed glass bottles for 61 cents from the redemption center on one visit, and on the second visit redeemed plastic bottles for $3.95.

“In both instances, the redemption center’s cash receipt logs appear altered to reflect payment of $69.31 and $14.99, respectively,’ the audit found. “The redemption center was reimbursed those amounts.”

Bruce Iverson, director of marketing and development for Reynolds, said in an interview this morning he had not yet seen the audit, but said he believes there may be a police investigation into the allegations that redemption amounts were changed on the paperwork cited by the auditor.

“It’s not normally something that we do see, because we do check,” Iverson said. The amounts that are paid out and the corresponding weights of the materials that are cashed in are cross-checked and “have to match up,” he said.

Iverson said the transactions that the auditor is questioning came to light at Reynolds “very recently.”

“In this case I don’t know if I can comment on it because, if I’m not mistaken, the numbers that you just mentioned actually are on probably an ongoing police action,” Iverson said.

Iverson said the Reynolds “buyer in question” who was allegedly involved still works at the company, but no longer works as a buyer. Buyers are employees who interact with the public, collect recyclables and make payments for customers, he said.

The audit report noted that the auditors requested that the Health Department obtain the Reynolds redemption centers’ cash receipt logs, but “those logs are not normally verified by DOH, so while the dollar amounts of the apparent fraud are relatively small, the means and opportunity for fraud are ever-present.”

“Essentially, the Deposit Beverage Container Program is an honor system, said Auditor Les Kondo in a written statement. “There are no incentives or controls for distributors and redemption centers to report accurate numbers. In fact, inherent to this system is a financial incentive to misreport.”

The audit concluded that “the department should consider program modifications that shift accountability and oversight responsibilities to the distributors and redemption centers. For far too long, the Deposit Beverage Program has relied on an honor system based on trust and high hopes. We prefer verification.”

“Fraud is a serious and real risk for this program,” said Bruce Anderson, director of the Department of Health, in a written reply to the audit. The Attorney General Office’s criminal investigation division is investigating the alleged theft by Reynolds, he said.

Anderson said the Health Department concurs with the overall findings of the audit and must increase enforcement of redemption reporting.