The Federal Emergency Management Agency gets new disaster relief payments wrong just 0.3 percent of the time and it has recovered $3 million from people it suspects of receiving improper disaster relief payments.

It has sent out notices to 35,000 households so far and will send the remaining few notices next month, FEMA deputy administrator Richard Serino told the Senate Homeland Security and Governmental Affairs Subcommittee on Disaster Recovery and Intergovernmental Affairs at a hearing Thursday focusing on FEMA’s fraud controls.

The amount collected represents a small percentage of the $643 million that FEMA suspects it wrongly paid out since Hurricane Katrina in 2005. The agency says one in six payments that it made at that time might have been to the wrong person, in the wrong amount or for the wrong thing.

But the attempts to recoup the money are raising the ire of the subcommittee chairman, who accuses the agency of making a mistake then asking a family to fix it. Sen. Mark Pryor (D-Ark.) said an Arkansas couple applied for FEMA aid after their home was damaged in floods. After they received it, he said, they turned down other offers of financial help.

“Three years later they got a notice in the mail from FEMA: ‘Oh, by the way, we fouled up. We should never have given you money in the first place so now you have X number of days to give us $27,000 back,'” Pryor said. “To me, that’s money that never should have gone out the door in the first place.”

Pryor said the couple was ineligible for funds because of a technicality in the local law.

“FEMA’s people working the floods should’ve known that and they should’ve known when they deal with local people who have a loss what benefits they might be eligible for and not. So, to me, that’s a breakdown in internal communication from one side of FEMA to the other,” he said.

The IRS is charging the family $10,000 in debt collection fees and interest on top of the original aid. That led Pryor to hold Treasury Department nominations as a negotiating tactic. He lifted two of the seven Friday, after Secretary Tim Geithner agreed to stop collection efforts and expedite a review of the case. Pryor said he would hold the rest of the nominations until the matter is settled.

After Hurricane Katrina, FEMA’s rush to give money to victims resulted in numerous errors, assistant inspector general in the Department of Homeland Security’s office of emergency management oversight Matt Jadacki said.

“A lot of controls were either circumvented or dropped after Hurricane Katrina. Things that they would normally do-checking social security numbers, for example, was dropped,” he said. “They felt there was a need to get the money out quickly to individuals.”

Under law, FEMA must try to recoup all the money it mistakenly gave away.

“As you’re well aware, it’s something by law we’re required to do,” Serino told the senators, adding that 500 people had successfully appealed their debts.

But another witness suggested that lawmakers may want to revisit that law.

“These kinds of events, I think, do a great deal to break down public trust in government generally and to destroy reputation of organization,” said Maurice McTigue, vice president of George Mason University’s Mercatus Center. “This is going to be bad if you’ve got 35,000-40,000 people subjected to this process over the next whatever period of time. Finding a way forward would be a good way of dealing with that.”

Before coming to the United States, McTigue served in New Zealand’s government. There, he said, aid recipients had to sign contracts with government agents.

“That was full and final. Unless there was malfeasance, fraud or outright lies, it couldn’t be opened again. If the government made a mistake, it had to live with that,” he said.

Going forward, Serino said, FEMA would not have to launch such a broad effort to recoup money because it had solid fraud controls in place. FEMA agents confirm individuals’ identity and visit their homes to assess damage before awarding any money, he said.

During Hurricane Katrina, some aid recipients had listed cemeteries as their residence. Others got duplicate payments.

But FEMA can do more to prevent financial mistakes. Jadacki noted that the agency was training contractors to spot fraud, but its frontline staff still lacked the formal fraud awareness training mandated by law.

“There are certain red flags out there and they should be trained to identify those and turn them over,” he said. “There’s also fraud in debris removal and fraud in public assistance programs too. It’s great that FEMA is starting on contractors but I think in all aspects of disaster assistance, there’s fraud.”

He said FEMA’s fraud prevention and investigation branch and contracting program need more dedicated and trained staff.

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