Financial Management: Control Weaknesses Limited Customs' Ability to
Ensure That Duties Were Properly Assessed (Chapter Report, 03/07/94,
GAO/AIMD-94-38).

GAO found significant weaknesses in the U.S. Customs Service's ability
to ensure the assessment of duties, taxes, and fees on foreign goods
imported into the United States. As a result, GAO cannot guarantee that
the $20 billion in revenue collections that Customs reported for fiscal
year 1992 represents all the money that should have been collected that
year. Further, controls over duties for items later exported or
destroyed were not adequate to prevent duplicate or excessive refunds.
Such refunds totaled nearly half a billion dollars during fiscal year
1992. In addition, Customs did not have a reliable way of measuring
overall compliance with trade laws to determine if it was maximizing the
use of its inspection and enforcement resources. GAO recommends that
Customs (1) adopt a strategy for inspecting cargo from both high and
low-risk carriers to ensure that all cargo is accurately and completely
identified on manifests and entry documents and (2) require its district
offices to keep perpetual inventory records of goods held in bonded
warehouses and foreign trade zones that they oversee. GAO also suggests
ways for Customs to improve its automated systems so that Customs can
more effectively monitor the accuracy of entry documents, monitor
activity related to goods held in warehouses and foreign trade zones,
and validate drawback claims.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-38
     TITLE:  Financial Management: Control Weaknesses Limited Customs' 
             Ability to Ensure That Duties Were Properly Assessed
      DATE:  03/07/94
   SUBJECT:  Customs administration
             Law enforcement
             Import regulation
             Government collections
             Collection procedures
             Financial management systems
             Tariffs
             Internal controls
             Federal agency accounting systems
             Inspection
IDENTIFIER:  Customs Service Automated Commercial System
             Customs Service Automated Manifest System
             Customs Service Cargo Selectivity System
             Customs Service Automated In-Bond System
             
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Cover
================================================================ COVER


Report to the Commissioner
U.S.  Customs Service

March 1994

FINANCIAL MANAGEMENT - CONTROL
WEAKNESSES LIMITED CUSTOMS'
ABILITY TO ENSURE THAT DUTIES WERE
PROPERLY ASSESSED

GAO/AIMD-94-38

Customs' Revenue at Risk


Abbreviations
=============================================================== ABBREV

  ACS - Automated Commercial System
  AMS - Automated Manifest System
  CFO - chief financial officer
  CSS - Cargo Selectivity System
  FTZ - foreign trade zone
  IG - Inspector General
  LQV - landed quantity verification

Letter
=============================================================== LETTER


B-255669

March 7, 1994

The Honorable George J.  Weise
Commissioner
U.S.  Customs Service

Dear Mr.  Weise: 

This report presents the results of our review of controls over
revenue at the U.S.  Customs Service.  We conducted this review as
part of our financial statement audit of Customs pursuant to the
Chief Financial Officers Act of 1990 (Public Law 101-576). 

This report contains recommendations to you.  The head of a federal
agency is required by 31 U.S.C.  720 to submit a written statement on
actions taken on these recommendations to the Senate Committee on
Governmental Affairs and the House Committee on Government Operations
not later than 60 days after the date of the report.  A written
statement also must be sent to the House and Senate Committees on
Appropriations with the agency's first request for appropriations
made more than 60 days after the date of the report. 

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Governmental Affairs; the
House Committee on Government Operations; the House Committee on Ways
and Means; the Subcommittee on Commerce, Consumer, and Monetary
Affairs, House Committee on Government Operations; and the
Subcommittee on Oversight, House Committee on Ways and Means.  We are
also sending copies to the Secretary of the Treasury, the Director of
the Office of Management and Budget, and other interested parties. 
Copies will be made available to others upon request. 

Please call me at (202) 512-9510 if you or your staff have any
questions concerning the report.  Other major contributors are listed
in appendix III. 

Sincerely yours,





Gregory M.  Holloway
Director, Civil Audits


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

As the second largest revenue collector for the federal government,
the U.S.  Customs Service reported collections of about $20 billion
during fiscal year 1992.  This report describes the internal control
weaknesses that GAO identified regarding Customs' ability to properly
assess duties, taxes, and fees related to foreign goods imported into
the United States. 

Customs is 1 of 10 federal agencies that was required to prepare
financial statements and have them audited by June 30, 1993, as a
pilot project under the Chief Financial Officers Act of 1990 (Public
Law 101-576).  As authorized by the act, GAO elected to perform this
audit for the fiscal year ending September 30, 1992.  GAO's review of
Customs' revenue processes was an integral part of this audit. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Customs, as part of the Department of the Treasury, collects duties
and taxes on imported goods and enforces trade laws primarily through
its 44 district offices and 294 ports of entry across the country. 
About 90 percent of Customs revenue is generated from duties on
imported goods.  The remainder is generated primarily from excise
taxes, user fees, and fines and penalties. 

Customs assesses duties based primarily on entry documents submitted
by importers and their brokers.  These documents include entry
summaries that list the goods being imported and supporting
documentation, such as shipping manifests and invoices supporting the
declared value of the goods.  Most of these documents are due to
Customs within 10 days after Customs has released the imported goods
into U.S.  commerce.  In some cases, importers may transfer goods
from their port of entry to another port or hold them in warehouses
and foreign trade zones (FTZs).  In these cases, duties are not
assessed until merchandise is actually entered into U.S.  commerce. 
Foreign trade zones are geographic areas within the U.S.  where
merchants may bring domestic and foreign merchandise for storage,
exhibition, manufacturing, or other processing. 

Customs may physically inspect imported goods at any time before they
are released.  Until the early 1980s, Customs' policy was to
physically inspect a portion of all shipments.  However, due to the
increasing volume of imports, Customs modified its policy to limit
its inspections primarily to shipments that, based on its experience,
presented a high risk of trade violations. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

GAO identified significant weaknesses in Customs' ability to
reasonably ensure that all duties and related revenues to which the
U.S.  government was entitled were assessed.  Cargo inspections did
not ensure that entry documents completely identified all goods
imported, and goods that were transferred among ports or held in
warehouses and foreign trade zones were not adequately monitored to
ensure that all duties were promptly assessed when these goods were
ultimately released into U.S.  commerce.  Because of these
weaknesses, GAO cannot give assurance that the $20.2 billion in
revenue collections that Customs reported for fiscal year 1992
represented all revenues which should have been collected for that
year.  Further, controls over refunds of duties for items
subsequently exported or destroyed were not adequate to prevent
duplicate or excessive refunds, primarily because Customs did not
have a practical means of maintaining the data needed to ensure that
such refunds, which totaled about half a billion dollars during
fiscal year 1992, were appropriate. 

In addition, Customs did not have a reliable means of measuring
overall compliance with trade laws in order to determine if it was
maximizing the use of its inspection and enforcement resources.  Most
inspections were targeted at imports that Customs had determined,
based on past experience, presented a high risk of violations. 
Customs also randomly selected some shipments for inspection. 
However, because these inspections were not performed consistently,
they could not be used to estimate overall compliance.  Consistently
inspecting random samples would have allowed Customs to periodically
assess the effectiveness of the criteria it used to target
inspections and of other enforcement activities.  In mid-1993,
Customs began implementing a new inspection program intended to
provide this capability.  Top Customs officials see this as the
beginning of a fundamental shift toward a more methodical and
comprehensive approach to measuring and improving compliance with
trade laws.  GAO plans to assess these efforts as part of its audit
of Customs' fiscal year 1993 financial statements. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      WEAKNESSES OVER IMPORT
      VERIFICATION CREATED
      OPPORTUNITIES FOR LOST
      REVENUE
-------------------------------------------------------- Chapter 0:4.1

Customs' internal controls did not provide reasonable assurance that
all goods imported into the United States were properly identified
and that the related duties were assessed.  GAO found that most of
Customs' examinations were limited to items reported by carriers and
importers on manifests and entry documents and, therefore, would not
have been likely to discover items that were omitted from these
documents.  Inspectors rarely (1) observed cargo being unloaded to
determine that all shipping containers were listed on manifests and
entry documents or (2) verified the quantities of goods inside
containers.  In addition, Customs could not effectively verify that
quantities identified on some manifests were completely identified on
entry documents primarily because these manifests were submitted on
paper, rather than electronically, and thus could not be compared by
a computer to entry documents. 


      CUSTOMS COULD NOT MEASURE
      OVERALL COMPLIANCE WITH
      TRADE LAWS
-------------------------------------------------------- Chapter 0:4.2

Shipments that were inspected were selected primarily because
Customs' experience indicated that they presented a high risk of
violations.  For example, importers with records of previous
violations or first-time importers were more likely to have their
shipments inspected.  However, Customs did not conduct random
inspections that could be used to estimate overall compliance and
determine if the criteria used to target its inspections, the
judgments of its inspectors, or its inspection techniques were
effective in ensuring compliance with trade laws.  As a result,
Customs did not have a sufficient basis for managing its resources. 
Although some cargo was randomly selected for inspection, weaknesses
in Customs' inspection process rendered the results unreliable for
estimating overall compliance.  GAO found that inspectors were
allowed so much latitude in deciding when to perform randomly
selected inspections and how many types of items in a particular
shipment to inspect that the sample was invalidated.  Also, GAO could
not reliably assess the scope and quality of these inspections
because Customs did not require inspectors to completely document
them.  For example, Customs did not have records showing the number
of items actually inspected; only violations were required to be
described. 

In a September 1992 report on Customs' trade enforcement activities,
GAO recommended that Customs reassess its trade enforcement strategy
and develop means to better identify and prioritize areas of
noncompliance.  One of GAO's specific recommendations was that
Customs test compliance with the laws it enforces using accepted
statistical techniques.  In response, in mid-1993, Customs began a
new program of more carefully controlled random inspections designed
to provide more reliable data on compliance with trade laws. 


      WEAK CONTROLS OVER GOODS IN
      BONDED WAREHOUSES AND
      FOREIGN TRADE ZONES
-------------------------------------------------------- Chapter 0:4.3

Customs did not adequately monitor goods that had been imported but
for which duties had not yet been assessed.  This increased the risk
that importers could enter goods into commerce without paying the
related duties or without paying duties promptly.  Systems designed
to automatically monitor the movement and disposition of goods from
one U.S.  port of entry to another were of limited effectiveness
because Customs personnel did not consistently maintain arrival and
departure data.  In addition, they did not always investigate overdue
shipments to determine what had happened to the related goods.  For
goods held in warehouses, Customs did not (1) maintain accurate and
up-to-date information on inventory levels and (2) periodically
perform required on-site inspections of these facilities.  Of the 14
district offices GAO reviewed, 7 did not maintain records that
allowed them to readily determine the amount of goods in warehouse
inventories at any given time.  Further, GAO identified errors in the
records that were maintained. 

Oversight of foreign trade zones was even more lax.  Customs did not
require district offices to maintain inventory data on merchandise
held in foreign trade zones, nor inspect these facilities.  Customs
relied almost exclusively on periodic audits, referred to as
regulatory audits, to enforce FTZ compliance with its regulations. 
However, in fiscal year 1992, Customs performed such audits at less
than 4 percent of these facilities.  As a result, Customs had no
record of merchandise moving through the facility and could not
ensure that all merchandise placed in the facility was properly
withdrawn with appropriate duties, taxes, and fees reported and paid. 


      CONTROLS OVER REFUNDS OF
      DUTIES WERE WEAK
-------------------------------------------------------- Chapter 0:4.4

GAO identified serious control weaknesses in Customs' duty refund
practices.  Customs refunds 99 percent of duties paid when the
related imported merchandise is subsequently exported or destroyed. 
Customs reported that it made almost half a billion dollars in such
refunds, referred to as drawbacks, during fiscal year 1992.  However,
GAO found that procedures were inadequate to prevent excessive or
duplicate payments or detect fraudulent claims.  Specifically,
Customs did not (1) compare the amount of drawback paid with the
related import entry summary document to determine that the claim was
valid and accurate, (2) ensure that only authorized claimants
received accelerated drawback payments, and (3) ensure that required
bonds, which guaranteed Customs' recovery of excessive refunds, were
adequate. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO recommends that Customs

  implement a strategy for inspecting cargo from both high- and
     low-risk carriers to help ensure that all cargo delivered is
     accurately and completely identified on manifests and entry
     documents and

  require district offices to maintain perpetual inventory records of
     goods held in bonded warehouses and FTZs that they are
     responsible for overseeing. 

GAO also makes a number of recommendations for improvements to
Customs' automated systems so that Customs can more effectively
verify the accuracy of entry documents, monitor activity related to
goods held in warehouses and foreign trade zones, and validate
drawback claims. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

Customs agreed with most of GAO's recommendations and cited several
compliance measurement and systems development efforts to address
them.  The most significant of these efforts are

  a series of tests to determine whether carriers, brokers, and
     importers are completely and accurately reporting imported goods
     so that duties can be properly assessed and other aspects of the
     trade laws can be enforced, and

  development of a new automated drawback claim system capable of
     linking drawback claims and entries and monitoring compliance
     with various other aspects of the drawback claim process. 

GAO believes that Customs' compliance measurement tests are a good
first step in measuring compliance in these areas and is assessing
the methodology that Customs is using in performing the tests as part
of its audit of Customs' fiscal year 1993 financial statements. 
However, the tests' ultimate value will depend on the subsequent
actions Customs takes to alter its inspection programs to increase
compliance rates in the future.  In addition, Customs is only in the
early stages of developing an automated drawback system that is not
likely to be implemented until sometime during fiscal year 1995, at
the earliest. 

Customs expressed concern with the recommendation that district
offices maintain perpetual inventory records of goods held in bonded
warehouses and FTZs.  Customs stated that it believes improved
monitoring of warehouse and FTZ inventories is desirable, but that
other critical system improvement priorities preclude devoting
resources to developing an inventory system.  GAO recognizes that
Customs must prioritize its improvement projects.  However, Customs
has not performed an overall risk assessment of these operations but
has identified some of its warehouses as high risk.  GAO believes
that maintaining current records on goods held in warehouses and FTZs
is essential if Customs is to monitor these goods and ensure that
related duties are properly paid. 

Customs' comments are discussed and evaluated in chapters 2, 3, and 4
and are included in appendix II. 


INTRODUCTION
============================================================ Chapter 1

This report discusses the effectiveness of the U.S.  Custom Service's
processes and systems for assessing, collecting, and accounting for
revenue from duties and taxes on imported merchandise and related
fees and penalties.  As the second largest revenue collector for the
federal government, Customs reported revenue collections of about $20
billion for fiscal year 1992. 

Our review of Customs' revenue processes and systems is an integral
part of our audit of Customs' fiscal year 1992 financial statements. 
Customs is 1 of 10 federal agencies required to prepare financial
statements and have them audited by June 30, 1993, as a pilot project
under the Chief Financial Officers (CFO) Act of 1990 (Public Law
101-576).  The CFO Act establishes a blueprint for effective
financial management reform that includes a strong financial
management leadership structure, the requirement for a long-range
financial management improvement plan, audited financial statements,
development of performance and cost data, and integrated financial
management systems.  As authorized by the act, we elected to perform
the financial statement audit of Customs for the fiscal year ending
September 30, 1992.  This is one of several reports resulting from
that audit.  Previously issued reports are listed in appendix I. 


   BACKGROUND
---------------------------------------------------------- Chapter 1:1

Customs, as part of the Department of the Treasury, is responsible
for collecting duties and taxes on imports and administering and
enforcing trade and importation laws.  Customs carries out its
operations through its headquarters, in Washington, D.C., and its 7
regions, 44 districts, and 294 ports of entry across the country. 
Over 90 percent of Customs' revenue is collected at the port and
district level.  Customs' reported revenue collections have increased
from about $8 billion in fiscal year 1980 to about $20 billion in
fiscal year 1992. 

About 90 percent of Customs' revenue is generated from duties that
Customs assesses and collects on merchandise imported into the United
States.  The remainder is generated primarily from

  excise taxes on wine, distilled liquor, and tobacco;

  user fees associated with services provided by Customs, the U.S. 
     Army Corps of Engineers, and the U.S.  Department of
     Agriculture; and

  fines and penalties imposed on importers for violating laws and
     regulations that Customs is responsible for enforcing. 


   OVERVIEW OF THE IMPORT PROCESS
---------------------------------------------------------- Chapter 1:2

Customs is responsible for monitoring the importing of, and assessing
and collecting duties on, foreign goods arriving in the 50 states,
the District of Columbia, and Puerto Rico, which are referred to
collectively as Customs territory.  Goods arrive at domestic
seaports, airports, and land borders on carriers such as ships,
airplanes, trains, and trucks.  Until the early 1980s, Customs'
policy was to physically inspect a portion of all shipments. 
However, due to the increasing volume of imports, Customs modified
its policy to limit its inspections to high-risk shipments.  As a
result, most shipments are not inspected at all, and usually only a
segment of others are inspected. 

Customs monitors the entry, inspection, and release of imported goods
and the payment of related duties primarily through its Automated
Commercial System (ACS).  ACS includes several modules that allow
carriers and importers to electronically submit manifests and entry
documents and facilitate Customs' matching and monitoring of this
information. 

Customs' process for reviewing manifests and entry documents,
performing physical inspections, and assessing duties varies
depending on whether the importer immediately enters imported
merchandise into U.S.  commerce, transports it to another port of
entry, or transfers it to a bonded warehouse or foreign trade zone. 
In all cases, carrier operators and importers must submit to Customs
manifests and required entry documents, which list the merchandise
being imported, prior to or upon arrival at a port of entry. 
However, duties are not paid until merchandise is actually entered
into U.S.  commerce. 

To immediately enter imported merchandise into U.S.  commerce, an
importer or its agent files with Customs an "entry/immediate
delivery" form, along with a commercial invoice, which provides
supporting information on the goods' description and value, and
evidence that a surety bond exists, guaranteeing that duties will be
paid.  Customs may review these documents and may choose to
physically inspect the related goods before approving their release. 
Within 10 working days of release of the goods, the importer or
broker is required to file with Customs an "entry summary" form,
which provides line-item descriptions of the type, quantity, and
value of the imported merchandise; the duty category; and the
estimated duties and fees payable.  Generally, a payment for the
estimated amounts due duties, taxes, and fees owed is to accompany
the entry summary.  Subsequently, Customs may review this
documentation and make a final determination of the amounts owed. 
Such reviews may result in a bill to the importer for additional
amounts or a refund for overpayments. 

An importer may choose to store imported goods in a bonded warehouse
or transfer them to a foreign trade zone before releasing them into
U.S.  commerce and paying the related duties.  Bonded warehouses are
facilities, regulated by Customs, that may be operated by independent
warehousing firms or by importers.  According to Customs records,
1,273 bonded warehouses were in operation nationwide as of September
30, 1992, and the duties on merchandise withdrawn from them accounted
for about 1.7 percent of the $18.3 billion in duties which Customs
collected during fiscal year 1992.  Foreign trade zones are
geographic areas designated in accordance with the Foreign Trade Zone
Act, in which merchants may bring domestic or foreign merchandise for
storage, exhibition, manipulation, manufacturing, assembly, or other
processing.  There are two basic types of foreign trade zones: 
general purpose zones, used primarily for warehousing and
distribution, and special purpose or subzones, which are often large
assembly complexes located in a zone user's private facilities.  As a
member of the Foreign Trade Zone Board, Customs shares responsibility
for establishing, monitoring, and controlling foreign trade zones
with the Secretaries of Commerce, the Treasury, and the Army. 
According to the most recent information available, in fiscal year
1991, 179 foreign trade zones were in operation, and they received
merchandise valued at about $84 billion, including $18 billion in
foreign merchandise.  Subzones accounted for about 90 percent of this
merchandise. 

Customs is also responsible for refunding duties and taxes paid on
imported merchandise that is subsequently exported or destroyed. 
Customs refers to such refunds as "drawbacks." Some drawbacks are
made on an accelerated basis, before Customs has verified that such
refunds are warranted.  In these cases, Customs requires the importer
to have a surety bond which is sufficient to ensure that Customs can
recover the drawback if the related documentation does not support it
and the claimant cannot repay the amount due.  According to Customs'
accounting records, during fiscal year 1992, it paid approximately
$496 million for over 53,000 drawback claims. 

The direct responsibility for inspecting and monitoring imported
merchandise and ensuring that proper duties are assessed is shared by
Customs' Office of Inspection and Control, Office of Commercial
Operations, and Office of Enforcement.  Although these components
have similar goals, the Office of Inspection and Control is primarily
responsible for cargo inspections, the Office of Commercial
Operations is responsible for ensuring that imported goods have been
properly classified and valued, and the Office of Enforcement focuses
on investigations of suspected violations.  In addition, Customs'
Chief Financial Officer is responsible for providing advice and
guidance on financial management to the Commissioner and for
formulating and executing implementation of accounting, budgeting,
and financial control systems. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

As part of our audit of Customs' fiscal year 1992 financial
statements, we evaluated Customs' processes and systems for
assessing, collecting, and accounting for revenue on imported
merchandise.  Our specific objectives were to evaluate the
effectiveness of Customs controls for ensuring that

  all dutiable merchandise that entered the United States commerce
     was identified and duties, taxes, and user fees were assessed;

  merchandise held in bonded warehouses and foreign trade zones was
     adequately monitored; and

  only valid drawback claims were paid, only authorized claimants
     received accelerated payments, and bond coverage was sufficient
     to ensure that Customs would recover any inappropriate
     drawbacks. 

To assess Customs' controls for ensuring that all dutiable
merchandise that entered U.S.  commerce was identified and duties,
taxes, and user fees were assessed, we reviewed Customs policies and
procedures for identifying and assessing duties and fees owed on
imported merchandise.  To confirm our understanding of these policies
and procedures, we interviewed officials and reviewed documentation
related to these processes for 74 ports of entry and 38 district
offices, which were located throughout all seven of Customs regions. 
We also observed controls in operation at several of these ports.  As
part of this effort, we judgmentally selected both electronically and
manually submitted bills of lading from eight manifests, which we
reviewed to determine if items listed had been released, if duties
had been assessed, and that remaining items were properly accounted
for.  In some cases, this involved visiting the facilities where
unreleased items were stored to verify their existence.  The eight
manifests we reviewed were selected at four ports of entry:  the
Newark and Los Angeles seaports, John F.  Kennedy Airport in New
York, and Los Angeles International Airport.  We also observed the
manifest process and inquired about related operations at the Miami,
Florida, seaport and airport; Houston, Texas, seaport; and the
Laredo, Texas, and Otay Mesa, California, land borders. 

To assess the effectiveness of Customs' oversight of bonded warehouse
and foreign trade zone operations, we made inquiries, observations,
and inspections at 16 bonded warehouses in 14 districts and 6
regions, and 10 foreign trade zones in 5 regions.  Specifically, we
reviewed the operators' activities related to recordkeeping,
inventory controls, and reporting of selected receipt and withdrawal
of transactions to Customs.  Also, we inquired about and reviewed
district records regarding the level and results of Customs
inspections performed during 1992. 

To determine the validity and correctness of reported drawback
payments for fiscal year 1992, we reviewed supporting documentation
for two random samples of claims:  110 accelerated drawback claims
valued at $20.9 million and 24 nonaccelerated drawback claims valued
at $0.6 million.  Our samples were selected from Customs refund and
drawback payment files within ACS, which accounted for all of the
$496 million in drawback payments reported by Customs for fiscal year
1992.  Specifically, we examined pertinent files to determine whether
the drawback payment amounts in our sample cases were based on proper
calculations and supported by valid import entry information, and
whether the claimants had surety bonds.  These files generally
included agreements between the drawback claimant and Customs which
specified the products exported and the percentage of imported raw
materials contained in those exports, drawback claim forms,
calculations of payment amounts, and other pertinent information. 

In addition to ports of entry and district offices, we discussed
Customs procedures with officials at Customs' National Finance Center
in Indianapolis, Indiana, and headquarters in Washington, D.C.  Our
work was performed from January 1992 through September 1993 in
accordance with generally accepted government auditing standards. 

Customs provided written comments on a draft of this report.  These
comments are summarized and evaluated at the end of chapters 2, 3,
and 4 and are reprinted in appendix II. 


CUSTOMS COULD NOT REASONABLY
ENSURE THAT DUTIABLE MERCHANDISE
WAS IDENTIFIED AND ASSESSED
============================================================ Chapter 2

Due to weaknesses in Customs' ability to reasonably ensure that all
dutiable imports were identified and related duties assessed, we
cannot give assurance that the $20.2 billion in revenue collections
that Customs reported represents all revenues which should have been
collected for fiscal year 1992.  We identified two significant
weaknesses in Customs' cargo inspection practices that increased the
risk that imported goods will not be completely and accurately
declared.  First, most of Customs' examinations were limited to items
reported by carriers and importers on manifests and entry documents
and, therefore, would not be likely to discover any items that had
been omitted from these documents.  Second, random inspections of
imported goods were not performed in a consistent and disciplined
manner.  Therefore, they could not be used to estimate overall
compliance with trade laws or measure the effectiveness of new
enforcement techniques.  Since only a small percentage of shipments
is examined, it is important that these efforts be as effective as
possible in both identifying and deterring trade law violations. 

In addition, Customs' ability to account for the movement and
disposition of imported goods and to ensure that all appropriate
duties were assessed was diminished because (1) some imports were
reported on paper manifests that could not be readily matched to
entry documents, (2) electronically submitted manifests did not
contain description codes that could be matched by the computer to
entry documents, and (3) data needed to monitor goods transferred
from one port of entry to another were not up-to-date and complete. 


   PHYSICAL INSPECTIONS DID NOT
   ENSURE THAT IMPORTS WERE
   COMPLETELY AND ACCURATELY
   REPORTED
---------------------------------------------------------- Chapter 2:1

None of Customs' programs were designed to reasonably verify that
cargo actually delivered at U.S.  ports of entry was completely and
accurately identified on manifests.  Although inspectors could elect
to board any carrier upon arrival and review various entry documents,
Customs officials at one port of entry that we visited told us that
this review was generally limited to ensuring that the manifest was
written in English and that all pages were present.  Verifying the
completeness and accuracy of manifests is important because virtually
all subsequent inspections and document reviews are based on the
assumption that the manifest is complete and accurate.  For example,
Customs' Automated Manifest System uses manifests submitted by the
carrier as a means of verifying information on entry documents, and
entry documents are subsequently used as the primary basis for
selecting items to be inspected and for determining if duties have
been correctly assessed. 

One type of Customs inspection involved matching the cargo containers
on board and their identification numbers with the related manifests
to ensure that all containers were identified on the manifest. 
However, these inspections, referred to as landed quantity
verifications (LQVs), were of limited value in verifying that all
goods were identified because (1) they were narrowly focused on
searching for illegal goods, such as drugs, on high-risk carriers and
(2) Customs did not have formal, agencywide procedures delineating
steps to follow when conducting LQVs. 

A Customs headquarters official responsible for inspection operations
said that developing LQV guidance was left to the discretion of local
officials at the district and port level.  Generally, Customs
officials stated that, for carriers selected for LQVs, Contraband
Enforcement Teams inspected the cargo to search for the specific
reason it was identified as high risk.  For example, if a carrier had
a history of illegal shipments, the team would inspect the cargo for
drugs, including opening some containers to determine whether such
contraband was on board.  However, according to Customs officials,
although the teams generally verified that all containers were listed
on the manifest, they typically did not verify that the nature and
quantity of the goods enclosed within the containers were accurately
reported on the manifest.  For example, as part of an LQV that we
observed at the seaport in Newark, New Jersey, the contraband
inspection team matched each container's identification number to the
manifest as it was unloaded and opened some containers to determine
if they contained any illegal imports.  However, the team did not
verify that the container contents had been correctly identified on
the manifest. 

Regardless of the type of inspection performed, when containers were
opened, Customs' policies did not require that the quantity of goods
be physically verified.  Customs officials at two ports of entry
stated that such verifications were generally not made.  Our
observations verified this.  Of the several inspections that we
observed at one seaport and one airport, none involved counting, or
even estimating, the quantity of items in the container being
inspected. 

In addition to its focus on high-risk shipments, Customs could
provide greater assurance that cargo was completely and accurately
identified on manifests by randomly selecting carriers to examine,
randomly selecting containers to open, and matching the quantity and
description of goods to the manifest.  Random sampling is an
efficient way to increase the likelihood that the items examined are
representative of the entire universe of items imported and allows
conclusions to be made about the entire population from which the
sample was drawn.  In addition, knowing that their cargo may be
inspected under a random selection process would be likely to deter
carriers from misreporting cargo. 


   RANDOM INSPECTIONS WERE NOT
   CONSISTENTLY PERFORMED
---------------------------------------------------------- Chapter 2:2

Most Customs inspections were narrowly targeted on searching for
illegal or misidentified goods in shipments that had been either (1)
identified as high risk by Customs' Cargo Selectivity System (CSS) or
(2) suspected of violations by inspectors at ports of entry.  CSS
automatically reviewed information from the entry forms, compared it
to risk criteria in the CSS database, and specified which shipments
were to be inspected and the extent of the inspection.  Risk
criteria, which included factors such as country of origin,
first-time importers, and importers with records of previous
violations, were updated periodically based on the results of recent
inspections.  At any time, inspectors could examine cargo that they
suspected might involve a violation regardless of whether it had been
selected by CSS for inspection.  In this way, Customs attempted to
use its experience and its inspectors' expertise to focus its limited
resources on the shipments with the highest risk of violating trade
laws. 

However, Customs had no way to determine if the criteria used to
target its inspections, the judgments of its inspectors, or its
inspection techniques were effective in ensuring compliance with
trade laws.  This was because it did not conduct random inspections
in a way that would allow them to be used to estimate overall
compliance and determine the impact of changes in its inspection
strategy. 

Although CSS randomly selected some cargo for inspection, weaknesses
in Customs' random inspection process rendered the results unreliable
for estimating overall compliance and for adjusting CSS criteria.  We
found that inspectors were allowed so much latitude in deciding
whether to perform randomly selected inspections and in determining
how many types of items in a particular shipment to inspect that they
invalidated the randomness of the sample.  For example, Customs
officials at two ports of entry told us that cargo associated with
each line item of the selected entry was to be physically inspected. 
However, one inspector also told us that inspectors generally used
their own judgment in deciding how many line items on an entry to
inspect and how many items within a line item to inspect.  An
inspector at another location told us that random inspections were
usually given a low priority and sometimes not performed because
targeted inspections resulted in the identification of more
violations and, therefore, were viewed as more productive.  Also, a
headquarters official responsible for cargo release policies said
that he did not know how many random examinations were actually
performed, but that examinations performed were probably less than
the number selected because inspectors sometimes did not perform a
selected inspection. 

Also, we could not reliably assess the scope and quality of these
inspections because Customs did not require inspectors to completely
document them.  For example, Customs did not have records showing the
number of items actually inspected; only violations were required to
be described.  For these reasons, the results of the random
inspections could not be used to reliably measure compliance with
trade laws and regulations. 

As we reported in September 1992,\1 random inspections could provide
Customs a means of reliably estimating compliance with trade laws and
periodically remeasuring compliance to assess the effectiveness of
enforcement techniques.  In that report, we recommended that Customs
reassess its trade enforcement activities and develop means to better
identify and prioritize areas of noncompliance.  One of our specific
recommendations was that Customs test compliance with the laws it
enforces using accepted statistical techniques.  In response, in
mid-1993, Customs began a new program of more carefully controlled
random inspections designed to provide more reliable data on
compliance with trade laws.  According to senior Customs officials,
Customs plans to use the results of these reviews to better target
areas of noncompliance and measure the effectiveness of its
enforcement efforts in increasing compliance.  These officials said
that they see this as the beginning of a fundamental shift toward a
more methodical and comprehensive approach to measuring and improving
compliance with trade laws.  We plan to assess these efforts as part
of our audit of Customs' fiscal year 1993 financial statements. 


--------------------
\1 Customs Service:  Trade Enforcement Activities Impaired by
Management Problems (GAO/GGD-92-123, September 24, 1992). 


   CONTROLS OVER THE MOVEMENT AND
   DISPOSITION OF IMPORTS WERE
   WEAK
---------------------------------------------------------- Chapter 2:3

Several modules within Customs' Automated Commercial System (ACS) are
intended to provide Customs a means of accounting for imported goods
from the time they arrive at a port of entry until they are either
entered into commerce, exported, or otherwise disposed of.  These
include the (1) Automated Manifest System (AMS), which maintains
manifest information that is electronically submitted by carriers,
(2) Automated Broker Interface, which provides a communications link
for the electronic transmission of entry data on imported merchandise
between importers, brokers, and carriers and ACS, and (3) automated
In-Bond System, which provides a means of accounting for merchandise
that is transported from one port to another in the United States. 

However, we identified several deficiencies in AMS and the In-Bond
System that diminished Customs' ability to monitor the disposition of
goods and ensure that all appropriate duties were assessed. 
Specifically, Customs could not

  effectively verify data on entry documents with information on
     manifests because (1) some manifests were filed manually and
     could not be matched by a computer to other documents and (2)
     electronic manifests were not required to describe goods using
     standard descriptors that could be automatically compared by
     computerized systems or

  monitor the departure and arrival of goods being transferred to
     another port because data in the in-bond system were not entered
     promptly. 


      CUSTOMS' ABILITY TO COMPARE
      DATA ON MANIFESTS AND ENTRY
      DOCUMENTS WAS LIMITED
-------------------------------------------------------- Chapter 2:3.1

One of the ways that Customs attempts to ensure that all appropriate
duties are paid is by comparing data on manifests with information on
entry documents and other documents, such as invoices, to monitor the
movement and ultimate disposition of goods.  In 1985, Customs
implemented AMS to provide (1) advance notice of goods that were
arriving and (2) a means of accounting for the movement of imported
goods from the time a carrier's cargo manifest is electronically
transmitted to Customs until the goods are released into U.S. 
commerce, transported to another port, or entered into a bonded
warehouse or foreign trade zone.  However, some imported goods were
reported on manually filed manifests that could not be
cost-effectively compared to entry document data on a routine basis. 
As a result, Customs had no means of routinely ensuring that entry
documents completely and accurately identified the goods listed on
the manifest and that all appropriate duties were paid.  Customs only
control over the accuracy of manually submitted manifests were manual
reviews of a sample of manifests, which generally occurred weeks or
months after the goods had left the port of entry. 

Customs port officials could not provide us with reliable estimates
of the percentage of carriers filing manifest information
electronically or the number of bills of lading that were filed
manually.  However, the headquarters officials we spoke with said
that well over half of the sea bills of lading were filed
electronically while a substantially lesser number of air bills were
filed electronically.  Customs encourages use of AMS and plans to
expand its availability to more carriers, including rail and truck
carriers, for whom it was not available. 

Carriers participating in AMS electronically transmit to Customs data
from bills of lading, which create manifest inventory files in AMS. 
These data may be transmitted before the carrier arrives at the port
of entry or upon arrival.  Once the inventory records are created,
Customs monitors the status of the goods by updating the records with
entry and release information for each shipment.  For example, when
the importers or brokers transmit entry data to Customs for release
of a specific shipment, this information is matched to the related
manifest data and approved for release.  When the time allowed for
movement of goods has elapsed (5 to 30 days depending on the entry
location), AMS identifies manifested goods that have not been
reported as released and provides this information to the appropriate
carrier for investigation. 

These procedures provide Customs some ability to electronically
account for quantities of goods released or disposed of.  However,
Customs written procedures did not require carriers to include
description codes that could be matched by a computer to provide
greater assurance that the goods released were the same goods that
were identified on the manifest.  For example, AMS could not compare
the description of goods reported on the bills of lading with that
reported on the various entry release forms because, although a field
for this information was available, importers, brokers, and carriers
were not required to enter this information using a standard
descriptor that could be automatically matched among various
documents.  Therefore, Customs could not be sure that the goods
reported on the manifest were the same goods released and, as a
result, that the proper duty was assessed. 

Customs uses codes, referred to as harmonized tariff codes, that
could be used as descriptors.  Each code represents a very specific
type of goods, such as plastic-coated wire, and can be used to
determine the rate of duty charged on that particular type of item. 
Importers are required to show the appropriate harmonized tariff code
for each line item of goods identified on their entry documents. 
However, such codes were not required on manifests.  Requiring such
codes on manifests would be one way of providing descriptors that
could be electronically matched by AMS. 


      GOODS TRANSPORTED "IN BOND"
      ARE NOT ADEQUATELY
      CONTROLLED
-------------------------------------------------------- Chapter 2:3.2

Customs did not have a reliable means of monitoring the movement of
unreleased shipments, referred to as in-bond transfers, from one port
of entry to another because data on departures were not properly
maintained.  As a result, Customs could not ensure that appropriate
duties were assessed on these goods when they were finally released
into U.S.  commerce.  An importer may transfer goods from the
original port of entry to another port to delay paying duties until
the goods are closer to their ultimate destination -- for example,
goods arriving by ship in New York that are ultimately bound for
Chicago.  Or goods may pass through the United States on their way to
another destination, such as goods being transported from Canada to
Mexico. 

Customs accounts for goods that initially arrive at one port of entry
(port of origin) but are shipped immediately to another port of entry
(port of destination) through the in-bond module of ACS.  Departure
data are entered automatically for goods reported on electronic
manifests showing that an in-bond transfer is planned from the port
of origin.  For other shipments, Customs officials are to input
departure data manually at the port of origin to establish
accountability for the merchandise.  When the goods arrive at the
port of destination, personnel there are to input data indicating
that the goods have arrived, at which time accountability is
transferred from the port of origin to the port of destination. 

However, at two Customs locations we visited, officials stated that
departure and arrival information was not consistently maintained
because personnel at their location and at other locations did not
input data promptly.  As a result, in some cases, personnel at the
port of destination were unable to anticipate a shipment's arrival,
and identify and report any delayed arrivals, because a record of
departure had never been set up.  In other cases, the port of
destination did not promptly record arrival of the goods and the port
of origin had to spend time investigating the goods' whereabouts. 

We reviewed recent operational reports entitled "Listing of In-Bond
Shipments Overdue" at four locations and found that all showed
shipments that presumably were overdue and undelivered.  However, an
official at one location told us that personnel there did not follow
up on the overdue shipments identified in the report because they did
not consider the report to be reliable. 

Similar findings were reported by the Department of the Treasury
Inspector General (IG) regarding fiscal year 1991 in-bond
transactions.\2 The IG's report stated that "the in-bond program
provides little assurance that significant revenue loss or
transportation of contraband is not occurring." One reason cited was
that ports were not effectively using Customs' automated systems to
monitor the movement of in-bond shipments.  In response to the IG's
report, the Commissioner stated that Customs was planning to
eliminate the current in-bond system and implement new procedures for
monitoring in-bond transfers during early fiscal year 1994. 
According to Customs officials, the new system will contain more
detailed and up-to-date data, relying more on electronic submissions
by brokers and importers and less on processing of paper documents. 
If implemented properly, we believe that the new system may provide
better control over in-bond transfers.  However, because the new
system was not operational at the close of our review, we could not
assess its effectiveness. 


--------------------
\2 U.S.  Customs Service Transportation In-Bond Program (U.S. 
Department of Treasury Inspector General) September 22, 1993. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:4

Customs' internal controls did not provide reasonable assurance that
all imported goods that enter Customs territory were properly
identified and the related duty assessed.  Physical inspection
procedures did not ensure that all imported goods were accurately
identified on related manifests, which provide the basis for most
subsequent inspections and document reviews.  Also, random
inspections could not be relied on to measure compliance with trade
laws, because they were not performed in a consistent and disciplined
manner.  In addition, systems designed to automatically monitor the
movement and disposition of goods were of limited effectiveness
because some manifests were submitted manually rather than
electronically and important data on goods being transferred were not
entered promptly.  During fiscal year 1993, Customs began efforts to
improve the value of its random inspections and provide better
control over in-bond transfers.  However, at the close of our review,
it was too early to comment on their effectiveness. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:5

We recommend that the Commissioner of Customs direct the Assistant
Commissioner for Inspection and Control to develop and implement, in
conjunction with Customs' Chief Financial Officer, a strategy for
inspecting cargo from both high- and low-risk carriers to help
provide reasonable assurance that all cargo delivered is accurately
and completely identified on manifests and entry documents.  Carriers
undergoing such inspections should be randomly selected to ensure
that they are representative of all carriers. 

In addition, we recommend that the Commissioner

  obtain reliable data on carriers' use of the Automated Manifest
     System as a percentage of all manifest submissions so that
     expanded use of the system can be more accurately monitored;

  consider requiring all documents, including manifests, to identify
     goods in a uniform manner, such as through the use of harmonized
     tariff codes; and

  monitor implementation of the new procedures for accounting for
     in-bond transfers to ensure that they address the weaknesses
     that have been identified.  In conjunction with this effort,
     provide personnel involved in maintaining data on in-bond
     transfers with clear and detailed guidance and adequate training
     on complying with the new procedures. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:6

In commenting on a draft of our report, Customs agreed with our
recommendations and cited various improvement efforts that are
intended to address them.  Regarding our recommendation that Customs
develop an inspection strategy that helps provide reasonable
assurance that all cargo delivered is accurately and completely
identified on manifest and entry documents, Customs said that it is
currently preparing for agencywide compliance measurement tests that
will address these concerns.  Customs said that it has completed
compliance measurement tests of imported goods in five industries at
selected ports and that these tests have identified some revenue
shortfalls.  In addition, Customs said that tests to measure the
accuracy and completeness of bill of lading data began in November
1993 and that it would begin a landed quantity verification
initiative for manifest compliance during early 1994. 

We believe that such tests are a good first step in measuring
compliance in these areas, and we are assessing the methodology that
Customs is using in performing the tests as part of our audit of
Customs' fiscal year 1993 financial statements.  However, the tests'
ultimate value will depend on the subsequent actions Customs takes to
alter its inspection programs to increase compliance rates in the
future. 

Regarding our recommendation that Customs obtain reliable data on the
percentage of manifests that are submitted electronically versus
manually, Customs stated that it already has data on automated
manifest submissions and that it plans to test the validity of
reports developed by field personnel on manual submissions and alert
these personnel to the necessity of capturing accurate data in this
area.  During our review, field personnel told us that reports on
manually submitted manifests, referred to as CF-16 reports, were not
reliable.  We believe that by testing these reports, as planned,
Customs headquarters officials can help ensure that they have
accurate information on both automated and manual manifest
submissions that will allow them to monitor the extent to which
carriers are using the Automated Manifest System. 

Regarding the use of uniform descriptors to identify goods entering
Customs territory, Customs responded that it plans to study
implementation of such a requirement.  Customs stated that the
recently enacted Customs Modernization Act (title VI of the North
American Free Trade Implementation Act, Public Law 103-182) has
provided the statutory framework that would make studying the
feasibility of such a requirement possible.  This law, signed in
December 1993, contains provisions that affect a wide array of
Customs' operations.  At the time of this report's publication, we
had not fully assessed the impact of the law's requirements. 
However, Customs is in the process of modernizing its automated
systems, and we believe that, as part of that effort, it would be
appropriate to assess the benefits and feasibility of using uniform
descriptors. 

In addition, Customs stated that it has provided written guidance and
training related to implementation of its newly developed in-bond
system and that it will monitor the new system to ensure that it
addresses the identified weaknesses related to such transfers.  We
have not assessed the new system, which Customs began implementing in
October 1993.  Therefore, we cannot comment on its effectiveness or
on whether Customs personnel are properly using the new system. 


OVERSIGHT OF BONDED WAREHOUSES AND
FOREIGN TRADE ZONES WAS WEAK
============================================================ Chapter 3

Customs did not effectively oversee bonded warehouse and foreign
trade zone (FTZ) operations.  Such oversight by Customs is critical
to ensure that these facilities comply with Customs regulations and,
as with in-bond transfers, to ensure that duties are paid if and when
goods are finally entered into U.S.  commerce. 

Most importantly, district offices did not always (1) maintain
accurate and up-to-date information on inventory levels and (2)
periodically perform on-site inspections of these facilities.  Of the
14 district offices we reviewed, 7 did not maintain records that
allowed them to readily determine the amount of goods in warehouse
inventories at any given time.  Further, 12 districts did not perform
inspections as frequently as required by Customs policies, and 6 did
not document them in a way that would facilitate follow-up actions. 

Oversight of FTZs was even more lax.  District offices did not
maintain inventory data on merchandise in FTZs, nor inspect these
facilities.  Customs relied almost exclusively on periodic audits,
referred to as regulatory audits, to enforce FTZ compliance with its
regulations.  However, in fiscal year 1992, less than 4 percent of
these facilities were inspected. 


   CUSTOMS DID NOT MAINTAIN
   ACCURATE INFORMATION ON
   MERCHANDISE STORED AT BONDED
   WAREHOUSES
---------------------------------------------------------- Chapter 3:1

We identified significant weaknesses in Customs' ability to maintain
accurate records of goods stored in bonded warehouses.  Without
accurate records, Customs cannot ensure that warehouse operators
comply with requirements that they

  promptly alert Customs when all merchandise in an entry has been
     withdrawn so that Customs staff can review related transactions
     to ensure that the proper revenue has been assessed,

  remove all merchandise within 5 years after it enters a warehouse,
     as required by Customs regulations, and

  provide correct inventory records to Customs staff who count
     inventory during warehouse inspections. 

The risk that goods may be released without proper assessment of
duties is especially great when the facility operator also owns the
merchandise, as is the case at some warehouses.  Generally,
independent parties are considered to be less likely to engage in
improper transactions than are related parties. 

Customs had no standard procedures or system for monitoring the
inventory levels at bonded warehouses to ensure that duties were paid
as soon as goods were released.  ACS maintained data on goods
initially placed in warehouses, but the system was not designed to
maintain inventory balances when goods were gradually withdrawn from
the warehouse.  The files we reviewed showed that importers often
withdrew warehoused items on a piecemeal basis. 

All of the district offices we visited maintained files of paper
entry and withdrawal documents.  However, most of these files did not
provide reliable, up-to-date, and readily accessible information on
items remaining in warehouses because withdrawal documents were not
filed with, or even near, related entry documents.  Only four of the
districts we visited routinely filed withdrawal documents, which had
been submitted by importers for approval, with the related entry
documents so that Customs could readily determine how much of the
goods from a given entry remained in the warehouse. 

Two of Customs' seven regions had adopted automated inventory control
systems for monitoring inventory levels on a continuing basis. 
Records that are updated in this manner on an ongoing basis are
generally referred to as perpetual inventory records.  However, the
regional systems had not been continuously and consistently used and,
therefore, their information was not reliable.  One of the main
reasons for this was that the regions' inventory control systems were
not integrated with ACS and, therefore, required duplicate input of
entry information, once into the regional system and again into ACS. 
Three of the districts we reviewed had used one of these regional
systems.  However, one had stopped using the system because of the
added data entry workload and another had not kept the records
current.  Officials at this second district office had assigned a
team to resolve a backlog of several hundred records and bring the
regional system up-to-date.  The third district had continued to use
the system. 

Our review of Customs and warehouse inventory records confirmed that
discrepancies existed, in part because Customs did not maintain its
records on a current basis and promptly resolve errors.  Customs
requires warehouse operators to maintain complete receipt and
withdrawal documents for each entry and to submit these documents to
Customs within 10 working days after all goods associated with an
entry have been released from the warehouse.  However, one of
Customs' regional automated systems showed 100 entries that were not
in the warehouse operator's records.  According to warehouse
officials, the goods had been withdrawn and the related paperwork
forwarded to Customs as much as 2 years earlier.  In following up on
a sample of 18 of these entries, we found that Customs had received
and recorded receipt of final documents for 5 of them in ACS but had
not removed them from the inventory system.  An additional 11 had not
been recorded in ACS although Customs had received the related final
paperwork.  According to a Customs clerk, the agency was aware that
the other two entries were closed, but had not yet removed them from
their inventory records. 

At another district with automated records, the warehouse we visited
held goods associated with 14 entries, but Customs records indicated
that goods for 6 of the entries were stored in another warehouse. 
Also, Customs records showed that the warehouse still held goods on
two other entries, while warehouse officials told us that they had
all been released several months earlier. 

We found similar errors in manual records.  For example, one district
office's entry files showed that goods from 118 entries remained at
one warehouse.  However, the warehouse operator's records showed that
merchandise from only 74 entries was in inventory or had been
withdrawn so recently that Customs may not have had time to process
the transactions.  We discussed the remaining 44 entries with Customs
personnel and found that goods from 27 had been stored in the
warehouse but had been completely withdrawn and 17 others had never
been stored in the warehouse.  Of the 17,

  3 had been released into the United States immediately,

  11 had been stored in different warehouses,

  2 had been seized by Customs before reaching the warehouse, and

  1 was still at the port of entry awaiting transfer to the
     warehouse. 

We also found that the warehouse operator's records included five
entries that were not recorded in Customs' inventory for that
warehouse because Customs records erroneously showed they were stored
at other warehouses. 


   CUSTOMS DID NOT EFFECTIVELY
   INSPECT AND AUDIT WAREHOUSES
---------------------------------------------------------- Chapter 3:2

For many years, Customs assigned officers to bonded warehouses to
supervise the receipt and release of goods.  However, the agency
halted this supervision at warehouses in 1982 to reduce costs and
replaced it with a program of periodic warehouse inspections--which
Customs refers to as spot checks--and audits.  Although Customs has
recognized that these inspections and audits are vital controls over
bonded warehouse operations, the agency did not adequately carry out
these reviews during fiscal year 1992 or document the extent and
results of the reviews.  District offices did not conduct all
required spot checks and many that were completed were poorly
documented.  Also, few audits, which are more in-depth than spot
checks, were performed during fiscal year 1992. 

Without an effective inspection program and reliable records on
warehouse inventory, Customs is dependent on the honesty of warehouse
operators to obtain Customs' approval before releasing merchandise. 
This increases the risk that payment of related duties will be
inappropriately delayed. 


      SPOT CHECKS WERE NOT
      PERFORMED AS FREQUENTLY AS
      REQUIRED
-------------------------------------------------------- Chapter 3:2.1

At 12 of the 14 districts we visited, we identified several
warehouses that were not spot checked as often as required by Customs
directive.  A Customs headquarters directive requires that district
inspectors conduct surprise spot checks, which usually last from a
few hours to 2 days, at each warehouse no less than once a year. 
Primary requirements in the directive are to

  annually assess and document the degree of risk associated with
     each warehouse;

  establish a schedule of spot checks, based on risk assessments;

  conduct a spot check of each warehouse once a year for low-risk
     warehouses, twice a year for medium-risk, and three times a year
     for high-risk; and

  maintain a file for each warehouse that includes risk assessments,
     spot check reports, audit reports, liquidated damage (fee)
     notices, and related information. 

Based on our review of district office records and discussions with
district office officials, spot checks generally are to involve (1)
walking through the warehouse to observe general conditions and (2)
selecting a sample of entries from warehouse files, determining that
related documentation was complete, determining the quantity of goods
that should be in the warehouse at the time of the spot checks, and
counting the goods to determine if their quantity and description
matched information on the supporting documents. 

Of the 16 warehouses we tested in detail, district records showed
that Customs did not inspect 2 at all in fiscal year 1992.  Another 2
were not inspected often enough:  1 assessed at medium risk was
inspected once, and 1 at high risk was inspected twice.  In our more
general review of 14 district spot check programs, we identified 1
office which performed spot checks at only 12 of the 93 bonded
warehouses under its control.  Another inspected 13 of 24, and one
failed to inspect any of 8 warehouses located near one of the ports
in its jurisdiction. 

Officials generally told us that spot checks were not performed
because priority was given to other work.  However, at least two
warehouses were not inspected because district officials did not
realize that oversight of the facilities had recently been
transferred to Customs.  These were warehouses that stored only
alcohol and had been overseen by the Bureau of Alcohol, Tobacco, and
Firearms from 1986 to 1991. 


      DOCUMENTATION OF SPOT CHECKS
      DID NOT ALWAYS SHOW WORK
      PERFORMED OR RESULTS
-------------------------------------------------------- Chapter 3:2.2

Even when spot checks were completed, team members did not always
sufficiently document valuable information, such as what specific
controls or requirements were reviewed, what inventory was physically
counted, whether verbal warnings were given to warehouse proprietors,
or who performed the inspection.  Such documentation is needed to
help ensure that

  recurring violations are identified and related fines and penalties
     assessed,

  supervisory review is adequate,

  continuity is maintained for the review process as team members
     change, and

  inspections results are available for use in subsequent spot checks
     or the annual risk assessment. 

The Customs directive on warehouse inspections includes an example of
an optional spot check worksheet, but provides no guidance on using
it.  Worksheets at one district which used these worksheets often
included vague notations that did not provide a clear description of
the work performed.  For example, one worksheet identified inventory
counted as "various" and several showed letters to designate what
general aspect of warehouse operations had been inspected, such as
"B" to indicate "warehouse conditions" had been reviewed. 

Nine of the 14 district offices we visited did not use the worksheet
in the directive.  Some of these developed detailed worksheets that
required inspectors to annotate findings for each of numerous
possible violations and record information on merchandise which was
counted.  However, others prepared little documentation.  For
example, at two districts, spot check teams used only inventory count
sheets to document their inspection, providing no information on
other areas reviewed. 


      HEADQUARTERS OVERSIGHT OF
      SPOT CHECKS WAS LIMITED
-------------------------------------------------------- Chapter 3:2.3

Customs headquarters staff did not monitor the warehouse inspection
program.  In 1991, headquarters rescinded requirements for quarterly
reports from district offices on spot check activity and advised
district directors to "properly monitor local activity." Other
headquarters information on warehouses was also limited.  In late
1992, headquarters staff had not updated listings of bonded
warehouses since September 1990 and referred us to regional offices
for current lists of warehouses.  Regional office lists showed 1,273
active warehouses, compared to 1,419 on the headquarters list.  Even
the regional lists included some inaccuracies; in selecting
warehouses to visit we found one warehouse which had closed in 1983
and another in 1988. 


      DETAILED AUDITS COVERED FEW
      WAREHOUSES
-------------------------------------------------------- Chapter 3:2.4

In addition to spot checks, the agency's Office of Regulatory Audit
performed more detailed audits of warehouses.  These audits, which
generally took from 1 to 2 weeks but sometimes as long as a month to
complete, included systematic reviews of warehouse inventory and
financial records and of merchandise on hand.  However, the office
issued reports on only 36 of the 1,273 warehouses that, according to
regional office records, were in operation in fiscal year 1992. 


   SIMILAR WEAKNESSES EXISTED IN
   OVERSIGHT OF FOREIGN TRADE
   ZONES
---------------------------------------------------------- Chapter 3:3

Customs exercised less control over FTZs than over bonded warehouses. 
Prior to placing merchandise in FTZs, importers are required to
submit documents for approval to Customs.  Unlike warehouse
transactions, however, Customs recorded no information in ACS on
merchandise in FTZs.  Moreover, after providing approval, only 1 of
10 district offices we visited monitored this merchandise, and none
kept perpetual inventory records.  Also, Customs did not reconcile
information on FTZ entry documents with documents filed on
merchandise being removed from FTZs.  As a result, Customs had no
record of merchandise moving through the facility and could not
ensure that all merchandise placed in the facility was properly
withdrawn with appropriate duties, taxes, and fees reported and paid. 

As with bonded warehouses, this risk is especially great when the FTZ
operator also owns the merchandise, as is the case at most subzone
FTZs, which are usually manufacturing facilities.  For example, at a
subzone that installed accessories in imported automobiles, we
observed thousands of autos held in multiple car lots that were under
the control of the subzone operator.  During the time of our visit,
Customs had no controls over these lots that would prevent or detect
either entry or removal of autos that the owner did not report to the
agency. 

As at bonded warehouses, Customs has removed its inspectors that were
once physically located at FTZs, but in fiscal year 1992 did not have
a program of mandatory spot checks and audits.  Nevertheless, for
that year, district offices reported that inspectors performed 288
spot checks of general purpose zones.  However, no spot checks or
audits were performed at subzones, which the FTZ Board reported held
about 90 percent of the dollar value of goods held in FTZs. 
According to headquarters officials, spot checks of many FTZs,
especially manufacturing subzones, are not effective due to the
complexity of FTZ operations. 

Customs' Office of Regulatory Audit conducts more comprehensive
detailed audits, each of which can last from a week to several
months.  However, such audits were performed for only 7 of the 179
FTZs in operation in fiscal year 1992 and just 42 from 1988 to 1991. 
According to the Customs manager of FTZ audits, audit work is
primarily directed toward recently activated zones or zones which
have not been audited for several years.  In addition, the Office of
Regulatory Audit began conducting surveys at FTZs in 1990.  Surveys
are shorter than audits and are used to more quickly assess overall
zone operations and determine the need for a broader audit.  However,
these are also conducted infrequently. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

Customs had not taken steps to sufficiently minimize the risk of loss
from goods stored in bonded warehouses and FTZs.  Because Customs'
oversight was minimal, warehouse and FTZ operators could dispose of,
alter, or replace the goods held in their facilities without
detection by Customs, thereby avoiding or delaying payment of amounts
due to Customs.  Even if Customs suspected such illegal activities,
it might have had difficulty proving it because its records of
entries and withdrawals were not reliable. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:5

We recommend that the Commissioner direct the Assistant Commissioner
for Inspection and Control, in conjunction with the Chief Financial
Officer, to

  require district offices to maintain perpetual inventory records of
     goods held in bonded warehouses and FTZs that they are
     responsible for overseeing and

  enhance ACS so that the district offices could use this system to
     maintain perpetual records of merchandise quantities at each
     warehouse and FTZ. 

In addition, we recommend that the Commissioner direct the Assistant
Commissioner for Inspection and Control and the Assistant
Commissioner for Commercial Operations, as appropriate, to

  emphasize to district offices the importance of spot checks of
     bonded warehouses and monitor this activity to ensure that
     districts comply with headquarters directives,

  require district offices to periodically spot check all FTZs that
     have not been audited or surveyed for over a year, and

  provide more detailed guidance on the use of spot check worksheets
     so that they will capture complete information on these
     inspections. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:6

In commenting on a draft of our report, Customs agreed with our
recommendations regarding periodic inspections of warehouses and FTZs
and needed improvements in related guidance and agreed to implement
them.  However, Customs expressed concern with our recommendations
that district offices maintain perpetual inventory records of goods
held in bonded warehouses and FTZs and that ACS be enhanced to
provide this capability.  Customs stated that it believes improved
monitoring of warehouse and FTZ inventories is desirable, but that
other critical system improvement priorities preclude devoting
resources to developing an inventory system.  In this regard, Customs
said that its resources should be applied in a manner that is
proportionate to the relative risk and significance of the bonded
warehouse and FTZ operations.  Customs said that it does plan to
expand its compliance measurement program to this area and to
reinforce existing control mechanisms, such as spot checks. 

We realize that Customs must prioritize its system improvement
projects, and we agree that risk must be considered.  However,
Customs has not done an analysis regarding the overall risk of
warehouse and FTZ operations although it has already identified some
of its warehouses as high risk.  We believe that maintaining current
records on goods held in warehouses and FTZs is essential if Customs
is to monitor these goods and ensure that duties are promptly paid
when goods are withdrawn.  As stated in the report, Customs generally
maintains data on entries into and withdrawals from warehouses and
FTZs, but does not maintain these data in a perpetual inventory
format.  Current perpetual inventory records would provide Customs
personnel with a useful means of monitoring warehouse inventories and
would be essential for conducting efficient spot checks of these
facilities.  For these reasons, we believe that instituting an
automated means of inventory monitoring would significantly improve
Customs' ability to oversee these operations. 


CONTROLS OVER DRAWBACK PAYMENTS
WERE WEAK
============================================================ Chapter 4

Customs did not have internal controls in place to detect and prevent
duplicate and excessive drawback payments, nor to ensure that
accelerated payments were made only to approved claimants and that
such claimants had purchased sufficient bond amounts to cover their
drawback claims.  Drawbacks are refunds of duties and taxes paid on
imports when the imported goods are subsequently exported, in total
or in part, or destroyed.  The exporter or its designee can file a
drawback claim for refund of up to 99 percent of the original duties
paid related to the portion of the goods exported or destroyed.  The
remaining duty of 1 percent is retained by Customs.  During fiscal
year 1992, Customs made payments of approximately $496 million on
over 53,000 drawback claims.  Although Customs recognizes that
weaknesses exist in the drawback program, planned corrective actions
have been delayed. 


   DRAWBACK CLAIMS WERE NOT
   ADEQUATELY VERIFIED
---------------------------------------------------------- Chapter 4:1

Customs has not developed detailed guidance on how drawback claims
are to be reviewed and verified before they are finalized, a process
Customs refers to as liquidation.  We reviewed a representative
sample of 65 liquidated claims and found that Customs did not
adequately verify the accuracy and validity of 14.  In addition, we
could not determine if 20 others had been adequately reviewed because
Customs had deleted the claims from its automated records, including
the information that showed which entry summaries had been requested
for review by liquidators. 

We determined that to ensure that only valid claims are paid, at a
minimum, the review should verify that

  the claim can be correlated to the related entry summaries for
     which the duties were originally paid,

  the goods for which the drawback is being made were actually
     exported or destroyed, and

  total claims filed against a particular entry summary do not exceed
     99 percent of the original duty paid. 

Customs could not provide these assurances because of deficiencies in
its automated systems and its manual procedures. 


      AUTOMATED SYSTEM DID NOT
      SUPPORT LIQUIDATION PROCESS
-------------------------------------------------------- Chapter 4:1.1

Customs' systems did not (1) have the capability to electronically
compare key information on drawback claims to the original entries
that were being refunded or (2) maintain a cumulative record of the
quantity of goods exported and the dollar amount of drawback payments
made against an entry summary.  Although ACS had a drawback module,
it was primarily used to maintain a list of drawback claims filed
with Customs and as an automated device to locate and request entry
summaries from the locations where they were filed.  Some drawback
information, mainly payment-related information, could also be
entered into ACS' entry summary module.  However, the two modules
were not designed to automatically match drawbacks with the related
information on entry summaries. 

Even if Customs' automated systems could match this information, this
capability would have been of limited benefit because it would have
been too time-consuming to manually enter the critical data elements
for the thousands of drawback claims filed.  As currently designed,
ACS is not capable of accepting electronically submitted drawback
claims, so Customs' personnel would have had to manually enter the
information needed to link claims with the original duties paid.  In
one case, a drawback claim we examined covered 957 different entry
summaries. 

In addition, the drawback module did not maintain drawback claim
records long enough to provide liquidators with information on all of
the entries for which a drawback claim had been filed.  Drawback
claims can be filed up to 8 years after the related entry summaries
are submitted.  However, a Customs official told us that the
archiving procedures within ACS deleted the drawback claim record
from the drawback module within 3 to 4 months after a claim was
liquidated, thereby eliminating from Customs records any trail of
import entries that were linked to drawback claims. 

Customs officials we spoke with recognized that ACS did not link
drawback claims to the associated import entries.  However, planned
improvements to the drawback module had been delayed.  A Customs
planning document, dated May 1, 1991, stated that improvements in the
drawback module, including an update link to entry records, were
anticipated for late 1991.  However, as of late October 1993, these
improvements had not been made and, according to a Customs official
responsible for the module, were postponed due to pending legislation
that could affect Customs' system modernization plans. 


      INADEQUATE MANUAL CONTROLS
-------------------------------------------------------- Chapter 4:1.2

In an effort to compensate for these limitations, Customs had
implemented manual procedures to verify the validity of drawback
claims.  However, Customs still risked making duplicate and excessive
payments, because only a small judgmentally selected sample of entry
summaries was reviewed and many were inadequately documented.  Of the
65 liquidated claims in our random sample of 134 drawbacks claimed
during fiscal year 1992, 31 did not have any notations on the entry
summaries to show that a drawback claim had been filed against them. 

Customs had not developed any agencywide written procedures for these
reviews.  However, based on our review of drawback claims and
discussions with staff responsible for processing such claims, we
determined that liquidators generally selected a judgmental sample of
the entry summaries from the total summaries listed on the drawback
claim for review and sometimes made handwritten notations on the
original copy of the entry summaries to indicate that a drawback had
been paid against the entry. 

In general, the sample selected on drawbacks with multiple entries
was not representative of the entire drawback claim.  For example, in
one instance a drawback claim for $851,891 was filed to claim a
refund against 720 separate entry summaries.  To determine the
validity of the claim, Customs judgmentally selected 5 of the 720
entry summaries for review.  In another example, Customs selected 5
entries for review of a drawback claim of $24,705.  Those 5 entries
represented $261 of the amount claimed. 

The entry summary numbers selected for review were entered into the
drawback module, but no indication of the drawback payment was made
on the corresponding entry summary in the ACS entry summary master
file nor in the drawback module.  Also, neither module had any
indication of the quantity of the imported goods which were exported
as part of the drawback claim. 


      REPRESENTATIVE SAMPLES ARE
      ESSENTIAL FOR ASSESSING THE
      VALIDITY OF DRAWBACK CLAIMS
-------------------------------------------------------- Chapter 4:1.3

Until Customs develops a means of automatically verifying drawback
claims, it could provide better coverage by manually reviewing a
representative sample of entries related to each claim.  Use of an
appropriate sampling methodology is critical due to the large number
of entry summaries that can be associated with drawback claims.  In
our random sample of 134 drawbacks, 113 of the claims had multiple
entries associated with each claim, ranging from 2 to 957 entries. 

To be representative, the sample must be chosen in a way that all
items in the population have an opportunity to be selected. 
Generally, the most efficient way to achieve a representative sample
is to use statistical sampling techniques, which allow conclusions to
be made about the entire population from which the sample was drawn,
while minimizing the number of items which must be tested. 

Assurance about the validity of drawback claims could also be
achieved by selecting related entries for review in a nonstatistical
manner.  However, this would require reviewing a significant dollar
amount of the entry summaries filed against any given claim to ensure
that the portion not reviewed, if invalid, would be an acceptably low
level of risk.  A sample selected in a nonstatistical manner would
not allow conclusions to be drawn about the entire population but
only the portion reviewed. 


   LACK OF CONTROLS OVER
   ACCELERATED PAYMENTS
---------------------------------------------------------- Chapter 4:2

About 80 percent of drawbacks are paid before Customs has reviewed
the basis for the claim.  These accelerated drawbacks are only to be
paid to claimants who, based on Customs' experience, have
consistently complied with Customs requirements.  However, we found
that Customs had not implemented the controls necessary to ensure
that only reliable claimants were provided this privilege and that
related bonds were sufficient to insure Customs against any losses
resulting from accelerated payments. 


      INFORMATION NEEDED TO
      MONITOR DRAWBACK PROGRAM WAS
      NOT AVAILABLE
-------------------------------------------------------- Chapter 4:2.1

Prior to 1991, Customs had no established uniform policies and
procedures for approving, denying, or revoking accelerated payment
privileges.  Consequently, regional offices used different means for
responding to claimant requests for accelerated payment.  For
instance, in one location, a regional official said that claimants
were verbally authorized for accelerated drawback payments and no
written approval was maintained in Customs records.  Another location
only verified that the claimant had asked for the accelerated payment
and that a sufficient bond was on file to cover drawback claims. 

In February 1991, Customs established uniform national procedures for
approving, denying, and revoking accelerated payment authorization,
and required regional offices to document the basis for their
decision to authorize accelerated payments.  Customs regulations
state that eligibility for accelerated payment is confined to
claimants not delinquent or otherwise remiss in transactions with
Customs.  The regulations also provide for the denial of accelerated
payments to claimants who repeatedly file claims in excess of the
amount to which they are entitled.  Although regional offices are to
approve claimants' initial requests for accelerated payments, they
are to (1) review, on an annual basis, whether claimants are
complying with Customs' conditions for accelerated payment, (2)
document decisions to authorize or deny the privilege to a claimant,
and (3) review claimants for whom accelerated payment was authorized
prior to the issuance of the directive to determine if they are still
eligible. 

However, we found that Customs was not complying with these
requirements because key information was not being maintained. 
Consequently, Customs was vulnerable to making unauthorized and
potentially unrecoverable accelerated payments to claimants who
should have had their privilege revoked.  Specifically,

  regional office records often did not include documentation to
     support Customs' authorization of the accelerated payment
     privilege to specific claimants, and

  verification procedures were too limited to verify that accelerated
     drawback claims were covered by sufficient bond amounts to
     ensure repayment if the accelerated drawback claim was
     subsequently determined to be invalid. 

In our random sample of 134 drawback claims, 110 were accelerated
payments.  Our review found that for 52 of the 110 accelerated
drawback claims, Customs lacked written approvals or documentation
authorizing the claimant to receive accelerated payments.  For
example, Customs made accelerated payments totaling over $2.4 million
on four drawback claims filed by a single claimant, but had no record
of this claimant being approved for accelerated payment of drawback
as required by the 1991 directive.  According to the liquidator for
this claim, the claimant had been receiving accelerated payments
before Customs adopted the 1991 directive, and a local decision was
made that claimants already receiving accelerated payments at the
time the directive was adopted would not be required to go through
the approval process.  In another location, a Customs official stated
that his location did not have enough resources to review existing
accelerated payment claimants as required by the directive to verify
that claimants still met Customs' requirements for such payments. 

Customs officials said that they did not maintain information in ACS
on claimants approved to receive accelerated payment of drawback
claims.  According to Customs policy, approval or denial of a
claimant's right to use accelerated payment by one region determines
the claimant's eligibility for accelerated payment in all Customs
regions, yet a national database did not exist to maintain this
information.  Customs planned to include a drawback claimant record
data base in the new drawback module.  However, as discussed in the
previous section, updates to the drawback module, originally
anticipated for late 1991, have not been given a high priority in the
ACS redesign plan. 


      CONTROLS TO DETERMINE BOND
      SUFFICIENCY WERE INEFFECTIVE
-------------------------------------------------------- Chapter 4:2.2

Bonds posted to cover accelerated payments are to serve as insurance
if the claim is subsequently adjusted down or denied during
liquidation.  However, controls did not ensure that these bonds were
sufficient. 

Customs regional officials were responsible for the sufficiency of
continuous bonds posted by claimants to cover accelerated drawback
claims.  Customs allowed claimants to file either a single
transaction bond or a continuous bond to cover accelerated payment of
drawbacks.  A single transaction bond covers one drawback claim and
is equal to the amount of accelerated payment to be received.  A
continuous bond is fixed in an amount sufficient to cover the maximum
amount of accelerated payment to be outstanding (unliquidated) at any
time during an annual period and may cover numerous drawback claims. 
In addition, Customs allowed claimants using continuous bonds to post
or file a dual purpose bond which covers both import activities
(duties, fees, and taxes) and drawbacks. 

In an effort to ensure compliance with Customs' requirements for
continuous bonds, liquidators attempted to monitor drawback bonds,
but lacked a servicewide automated system to assist them.  We found
that liquidators used either a manual ledger or a local automated
schedule to monitor the amount of accelerated payments paid against a
continuous bond; however, they did not compare the bond amount to the
total of all unliquidated accelerated drawbacks filed by the same
claimant in all regions, and some liquidators did not include import
activities when determining the sufficiency of dual purpose bonds
filed for drawbacks.  Customs officials told us that they did not
review every accelerated payment that was filed locally or in other
regions due to the volume of accelerated claims that are processed. 
As a result of these ineffective and inefficient controls,
liquidators did not have the critical information needed to determine
if continuous bonds were sufficient. 

Of the 110 accelerated drawbacks reviewed in our sample, we found 2
claimants who, at one time during fiscal year 1992, had exceeded
their bond coverage.  Manual controls were hampered in cases where a
claimant filed drawback claims at multiple Customs offices or used a
dual purpose bond to cover drawback claims.  These same limitations
affected our audit procedures, so that our testing of individual
payment transactions may not have identified all occurrences of bond
insufficiency.  For example, one of the claimants we identified as
having insufficient bond coverage filed drawback claims in two
separate Customs offices.  At one point in fiscal year 1992, this
claimant had outstanding drawback payments which exceeded its bond
coverage by $1,063,425.  In addition, because this claimant had a
dual purpose bond, covering both its import and drawback activities,
the claimant's import entries were vulnerable to potential
unrecoverable duties, taxes, and fees during the period that the bond
was insufficient. 

To illustrate the risks of insufficient bond coverage, our sample of
outstanding accounts receivable\1 as of June 30, 1992, identified 81
individual cases related to drawback claims totaling $16,021,474. 
Twenty-two of these cases totaling approximately $3.4 million were
related to one claimant whose debts were unsecured by a bond.  In
addition, during fiscal year 1992, Customs continued to pay
accelerated drawbacks, totaling $492,920 to the same claimant. 

Customs officials agreed that liquidators have a difficult task in
ensuring bond sufficiency given the lack of systems support.  The
lack of automated or effective manual controls increased the risk
that liquidators authorized accelerated payments in excess of the
bond amount.  Although ACS has a bond liability module, Customs
officials said that it was not designed to compare drawback
transactions with continuous bond amounts, and thus could not be used
by liquidators to ensure that accelerated drawbacks authorized for
payment were adequately covered. 


--------------------
\1 This sample was part of our comprehensive review of Customs'
accounts receivable for fiscal year 1992.  For further details, see
Financial Management:  Customs Did Not Adequately Account For or
Control Its Accounts Receivable (GAO/AIMD-94-5, November 8, 1993). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:3

Despite the substantial risk of error and loss in Customs drawback
program, Customs has not moved beyond the planning stage in
implementing meaningful controls.  Customs personnel responsible for
reviewing drawback claims did not have the information they needed to
ensure that drawback payments, including accelerated payments, were
appropriate.  They relied on manual, paper-intensive, procedures to
verify a judgmentally selected sample of claims, and had virtually no
reliable means of determining which claimants were entitled to
accelerated claim payments.  Until Customs institutes systems that
can automatically compare drawback claims with the duties originally
paid, it will not have a cost-effective way to monitor the program. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 4:4

We recommend that the Commissioner direct the Assistant Commissioner
for Commercial Operations, in conjunction with the Chief Financial
Officer, to: 

  develop a means of automatically entering information needed to
     verify drawback claims into ACS so that liquidators can use the
     system to automatically verify drawback claims;

  until this capability is developed and implemented, require that
     liquidators use representative sampling procedures for reviewing
     drawbacks that relate to multiple entry summaries;

  enhance ACS so that historical information on drawback claimants
     such as accelerated claim privileges, excessive claims
     previously filed, overdue receivables, and regulatory audit
     results are available to liquidators in a national database;

  require that liquidators review this database to ensure that
     special privileges such as accelerated drawback payments are
     granted only to claimants who have consistently complied with
     Customs claim filing requirements; and

  enhance the bond liability module to monitor the sufficiency of
     bonds posted for drawback transactions, including the ability to
     alert liquidators when coverage is exceeded. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:5

In commenting on a draft of our report, Customs agreed with all of
our recommendations related to controls over drawback claim
processing and said that it would address most of them as it
institutes new regulations and systems provided for by the Customs
Modernization Act.  Although it seems reasonable to design new
controls as part of these efforts, Customs is only in the early
stages of developing a new automated drawback system and does not
expect the new system to be implemented until fiscal year 1995, at
the earliest.  In the interim, Customs says that it plans to instruct
its field offices to use representative sampling when reviewing entry
summaries related to drawback claims, as we recommended.  However,
Customs plans to issue these instructions as part of revisions to the
drawback portion of Customs regulations, and Customs did not specify
in its response when this new directive would be issued.  Because
this new guidance will provide a critical control, Customs should
consider issuing these instructions immediately in a memorandum to
district and regional offices.  Also, although examining
representative samples of entries will provide greater assurance that
claims are valid, it is important that Customs move quickly in
developing the new system so that all drawback claims can be readily
linked to their related entries and, thus, verified. 

Regarding bond sufficiency, Customs stated that its new automated
processes will improve its ability to monitor drawback bonds on a
national basis.  However, to improve bond management further, a task
force has been formed to review the centralization of all bond filing
and storage.  We believe that this is a step in the right direction,
in part because bond sufficiency is a broad issue that affects many
aspects of Customs' revenue operations. 


REPORTS RESULTING FROM GAO'S AUDIT
OF CUSTOMS' FISCAL YEAR 1992
FINANCIAL STATEMENTS
=========================================================== Appendix I

Financial Audit:  Examination of Customs' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-3, June 30, 1993)

Financial Management:  Customs Lacks Adequate Accountability Over Its
Property and Weapons (GAO/AIMD-94-1, October 18, 1993)

Financial Management:  Customs' Self-Assessment of Its Internal
Controls and Accounting Systems Is Inadequate (GAO/AIMD-94-8, October
27, 1993)

Financial Management:  Customs Did Not Adequately Account for or
Control Its Accounts Receivable (GAO/AIMD-94-5, November 8, 1993)

Financial Management:  Customs' Accountability for Seized Property
and Special Operation Advances Was Weak (GAO/AIMD-94-6, November 22,
1993)

Financial Management:  Customs' Accounting for Budgetary Resources
Was Inadequate (GAO/AIMD-94-23, December 14, 1993)




(See figure in printed edition.)Appendix II
COMMENTS FROM THE U.S.  CUSTOMS
SERVICE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Gary T.  Engel, Senior Assistant Director
Jean H.  Boltz, Assistant Director
Deborah A.  Taylor, Senior Audit Manager
Maria Cruz, Auditor-in-Charge
Margaret Sherry, Auditor

LOS ANGELES REGIONAL OFFICE

Eric D.  Johns, Site Senior
Ted Hu, Auditor

FAR EAST OFFICE

Evelyn Logue, Site Senior
Karen L.  Strauss, Auditor

SEATTLE REGIONAL OFFICE

Carla J.  Revell, Issue Area Manager
Susan T.  Chin, Site Senior
Christopher M.  Jones, Auditor
