For two decades, Hawaiʻi’s Deposit Beverage Container program has been run as an “honor system,” reliant on unverified self-reported data and plagued by alleged fraud, State Auditor Leslie Kondo told a state Senate committee during an informational meeting Thursday.

Established by the state Legislature in 2002 and administered by the state Department of Health’s Office of Solid Waste Management, the deposit beverage program places a 5-cent deposit on most beverage containers. Distributors pay the deposits to the state and the funds are reimbursed to consumers when they return the containers to certified redemption centers.

There are a half-dozen recycling centers on Maui as well as facilities on Lānaʻi and Molokaʻi.

The beverage recycling program’s aim has been to reduce litter and encourage recycling statewide. According to the department, the program has helped residents recycle more than 10 billion containers since its inception.

The State Auditor reviews the beverage recycling program every two years and has continuously noted problems with the “honor system,” accountability and fraud.

“Our prior reviews have repeatedly raised concerns that DOH’s reliance on self-reported information from beverage distributors and redemption centers increases the risk of fraud,” the current audit says. “Specifically, we have pointed out that distributors and redemption centers have financial incentive to under- or over-report the amounts that the former must pay into the Special Fund and the latter may claim for reimbursement from the Special Fund.” 

The auditor found that the Health Department has not taken corrective action, despite repeated biennial audit findings of deficiencies.

“We repeatedly discovered that DOH had done nothing to address the recurring findings and had not implemented any of the recommendations to address those findings,” it says. “We found that the program viewed these biennial audits as a replacement for internal controls, expecting the auditor to perform the program’s job of reviewing records and conducting ‘secret shopper’ activities to identify errors in the amounts received from distributors or claimed by redemption centers.”

Now, as the state moves to tighten compliance, a Maui business owner is cautioning that new rules mandating third-party audits of beverage distributors will only punish honest companies.

Garrett Marrero, chief executive officer and co-founder of Maui Brewing Company, testified Thursday before the Senate Committee on Health and Human Services that the program “does not work.”

Marrero criticized the state’s recent move to mandate expensive third-party audits for distributors — a measure intended to address the long-standing problem of unverified data and non-compliance. 

Under Act 12, enacted in 2022, beverage distributors must develop and submit an internal control process for Health Department approval, and they are required to obtain independent audits in odd-numbered years.

Marrero estimated the cost of the audit to his business at $15,000 to $20,000 per location (multiplied by Maui Brewing’s two locations on Maui and two on Oʻahu, $60,000 to $80,000) while his smallest location pays only $48 in annual fees to the program.

“I think this was just an unintended consequence of the legislation, not an intentional hurting of small businessmen,” Marrero said, arguing that the true fraud risk lies with the redemption centers, not the distributors and wholesalers.

Citing one instance of alleged fraud, Marrero said he thought it was a “lack of education and guidance from the department, as opposed to actual criminal fraud,” noting that the business involved is a publicly traded company.

“I would find it very difficult to believe that they’re engaged in some method to defraud the state of Hawaiʻi,” he said.

Act 12 was intended to resolve chronic problems with data integrity in the state’s deposit beverage container program. The law addressed State Auditor recommendations to compel the Health Department to develop and implement robust procedures to verify the accuracy and completeness of data reported by beverage distributors and redemption centers.

The key requirements of the Act are:

• Risk-based audits: The Health Department is required to create a risk-based process to select distributor and redemption center reports for periodic audits, using data analytics and considering factors like transaction amounts and prior findings to target unusual activity.

• Enhanced reporting: Distributors are required to submit detailed monthly or semi-annual distribution reports and supporting records.

The informational briefing, chaired by Sen. Joy San Buenaventura and attended by Sen. Kurt Fevella, focused on the Office of the State Auditor’s latest review of the program for the fiscal year ended June 30, 2024.

Audit finds ongoing fraud and lack of controls

Kondo presented findings consistent across multiple audits since the program’s 2002 inception, stating the deposit beverage container program is “a program in name only” with “very little structure” and “no internal controls.”

Latest audit findings included:

Self-reported data: The Health Department still cannot verify if distributors are paying what they owe, and it reimburses redemption centers based solely on the centers’ own, unverified numbers.

Fraud examples: Kondo detailed a 2016 “secret shopper” exercise by a certified public accounting firm that found what appeared to be fraud at a redemption center in Honolulu. On one visit, the center’s reimbursement request to the Health Department was for an additional $52.48 beyond what was paid to the consumer for 12 bottles. The department referred the matter to the Department of the Attorney General, which took no further action because there were “only two instances.”

Growing fund balance: Kondo reported that between fiscal 2024 and fiscal 2025 the program’s special fund increased by more than $12 million. The program’s special fund as of June 30, 2024, had a fund balance of $77,860,170. The special fund reported total revenues of $33.57 million and total expenditures of $23.03 million.

Fevella, whose wife previously worked at a redemption center, called the program a “failure” and noted that a lack of computerized tracking allows fraud to persist.

“People have been getting rich over the taxpayers’ money,” he said.

San Buenaventura called the Health Department’s lack of staff and reliance on self-reported data “unacceptable” given the sizable special fund that could be used to hire personnel.

Health officials promise improvements, face skepticism

“The Department of Health has faced longstanding challenges in its implementation of the deposit beverage container program,” said Kathleen Ho, deputy director for Environmental Health. “I want to assure you that we are committed to addressing these challenges.”

The director’s office meets twice a month to try to get the program “back on track,” she said. “We are committed to administering the program responsibly and achieving the statutory objectives and to increase recycling.”

Lane Otsu, Solid Waste Management coordinator, said: “We’re working to implement the auditors’ recommendations. We’ve gotten started on much of the actions, and feel that we are making progress and are continuing to move forward.”

The department’s plans for immediate improvement include:

Audits and controls: Finalizing a request for proposals for a contractor to perform risk-based audits on both distributors and redemption centers and to improve the department’s financial control processes.

Compliance: Issuing enforcement letters to the approximately 100 distributors who have failed to submit required internal control process documents.

Technology: Developing an electronic reporting system for distributors and redemption centers to reduce manual data entry and increase reporting accuracy.

Staffing: Advancing a reorganization plan for the Solid and Hazardous Waste Branch to increase program staff, now with nine dedicated employees, despite the auditor’s long-standing recommendation that the program use its large special fund to hire personnel.

Kondo acknowledged the department’s plans, but noted that his office will perform another mandatory audit in two years. He pointed out that his office has been doing “management work” for years because the program lacked structure.

The committee gave the Health Department leeway until the next audit, but San Buenaventura said that after two decades of poor performance with the program, the Legislature will look for improvement in the next audit review.

Otherwise, “the Legislature needs to seriously look at whether or not there’s better recycling programs,” she said.