Civil Fines and Penalties Debt: Review of U.S. Customs Service's Management and Collection Processes (05/31/2002, GAO-02-655}

-------------------------Indexing Terms-------------------------
REPORTNUM:   GAO-02-655
    TITLE:   Civil Fines and Penalties Debt: Review of U.S. Customs Service's Management and Collection Processes
     DATE:   05/31/2002



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United States General Accounting Office: 
GAO: 

Report to the Ranking Minority Member, Permanent Subcommittee on
Investigations, Committee on Governmental Affairs, U.S. Senate. 

May 2002: 

Civil Fines And Penalties Debt: 

Review of U.S. Customs Serviceï¿½s Management and Collection Processes: 

GAO-02-655: 

Contents: 

Letter: 

Results in Brief: 

Scope and Methodology: 

Background: 

Brokerï¿½s Bankruptcy Is the Primary Reason for the Increase in 
Uncollected Customs CFP Debt: 

Opportunities Exist for Strengthening Customsï¿½ CFP Debt Collection 
Policies and Procedures: 

OMBï¿½s and Treasuryï¿½s Roles in the Oversight and Monitoring of CFP Debt: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Comments from the Department of the Treasuryï¿½s U.S. Customs 
Service: 

Appendix II: Comments from the Department of the Treasuryï¿½s Financial 
Management Service: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Abbreviations: 

ACE: Automated Commercial Environment: 

ACS: Automated Commercial System: 

CFPP: civil fines and penalties: 

FDA: Food and Drug Administration: 

FP&F: Fines, Penalties, and Forfeitures: 

OMB: Office of Management and Budget: 

SEACATS: Seized Asset and Case Tracking System: 

[End of section] 

United States General Accounting Office: 
Washington, D.C. 20548: 

May 31, 2002: 

The Honorable Susan M. Collins: 
Ranking Minority Member: 
Permanent Subcommittee on Investigations: 
Committee on Governmental Affairs: 
United States Senate: 

Dear Senator Collins: 

This report responds to your request that we review selected federal
agenciesï¿½ management and collection practices related to civil fines and
penalties (CFP) debt.[Footnote 1] As agreed to with your office, this 
work focused on the debt collection processes and procedures used by 
the Department of the Treasuryï¿½s U.S. Customs Service, the Department 
of the Interiorï¿½s Office of Surface Mining, and the Department of 
Health and Human Servicesï¿½ Centers for Medicare and Medicaid Services. 
[Footnote 2] 

This report provides the results of our review of Customsï¿½ management of
and practices for collecting CFP debt. According to Customsï¿½ records, 
its gross CFP debt more than tripled from the start of fiscal year 1997 
to the end of fiscal year 2000, rising from about $218.1 million as of 
October 1, 1996, to about $773.6 million as of September 30, 2000. 
During the same period, Customs annually reserved from 75 to 87 percent 
of its reported CFP receivables in an allowance for uncollectible 
accounts. 

As also agreed, our objectives were to determine (1) the primary reasons
for the growth in Customsï¿½ reported uncollected CFP debt, (2) whether
Customsï¿½ processes to collect CFP debt needed to be strengthened, and 
(3) what role, if any, the Office of Management and Budget (OMB) and
Treasury play in overseeing Customsï¿½ collection of CFP debt. We provided
separate reports on our work on the Office of Surface Mining and the
Centers for Medicare and Medicaid Services.[Footnote 3] 

Results in Brief: 

The primary reason for the growth in Customsï¿½ reported uncollected CFP 
debt from fiscal year 1997 through fiscal year 2000 was the bankruptcy 
of a Customs broker in fiscal year 2000. According to Customs 
officials, the broker, who would have been responsible for preparing 
and submitting importersï¿½ import-related paperwork, handled the vast 
majority of business on the U.S.ï¿½Canadian border. The brokerï¿½s 
bankruptcy resulted in Customs assessing 422 claims for about $566 
million and recording CFP receivables totaling about $484 million 
during fiscal years 1999 and 2000. The remaining $82 million of 
assessed amounts was eliminated through the CFP mitigation process and 
accordingly these amounts were not recorded as receivables. As of 
September 30, 2000, almost all of the recorded balance of these 
receivables remained outstanding. Customsï¿½ records indicated that it 
had closed 129 of the 422 claims and collected the total receivable 
amount of $19,792 on these 129 closed claims. Customsï¿½ records indicated
that no collections were expected for about $481 million of the recorded
receivables outstanding as of September 30, 2000.[Footnote 4] These 
outstanding receivables and the corresponding amounts reserved for 
losses represented about 66 percent of Customsï¿½ total reported gross CFP
receivables and about 72 percent of Customsï¿½ allowance for uncollectible
CFP accounts, respectively. 

We found that Customs can strengthen some of its CFP debt collection
policies and procedures both by enhancing them and better adhering to
them. The enhancements relate to (1) using promissory notes to collect
certain CFP debts, (2) obtaining evidence that CFP claims related to
carnets, which are international documents for merchandise that is
temporarily imported and duty-free, are received by the designated
association that issues carnets and guarantees any Customs claims
associated with covered carnet merchandise, (3) monitoring the
sufficiency of bond coverage for CFP debts,[Footnote 5] and (4) 
obtaining evidence of debtorsï¿½ inability to pay CFP debts. Better 
adherence to certain CFP debt collection policies and procedures 
relates to (1) requesting waivers of the statute of limitations, (2) 
issuing penalty and payment notices to importers after opening a case, 
(3) responding to petitions for relief from violators, and (4) issuing 
notices of redelivery to importers of unsafe goods. 

Customs provides OMB and Treasuryï¿½s Financial Management Service with
information from Customs that is helpful in performing their oversight
roles. OMB stated that it had broad oversight responsibility for 
monitoring and evaluating governmentwide debt collection activities, 
but that it is the specific responsibility of each agency to monitor, 
manage, and collect CFP debt and the responsibility of the agencyï¿½s 
office of inspector general to provide oversight through audits of the 
agencyï¿½s debt collection activities. In addition, the Financial 
Management Service officials stated that they rely on agencies to 
determine what debt should be referred to the Financial Management 
Service for collection and offset as required by the Debt Collection 
Improvement Act of 1996, and Customs does refer certain delinquent CFP 
debts to the Financial Management Service. 

Our recommendations are designed to enable Customs to strengthen its
CFP debt collection policies and procedures through enhancements and
better adherence to existing requirements. One of our recommendations
calls for monitoring the sufficiency of surety bond coverage, a concern 
we originally raised in our 1993 report on Customsï¿½ management of its
receivables.[Footnote 6] In commenting on a draft of the report, 
Customs and the Financial Management Service agreed with our 
recommendations and Customs provided, and we evaluated, general and 
technical comments that related to specific detailed information about 
its CFP debt collection process. Where appropriate, we modified the 
reportï¿½s language to reflect Customsï¿½ comments. OMB stated that it had 
no comments. 

Scope and Methodology: 

To accomplish our objectives, we reviewed Customsï¿½ accountability
reports, including its audited financial statements, for fiscal years 
1997 through 2000, and analyzed its CFP receivables and the related 
allowance for uncollectible accounts, as well as other financial 
information for the 4-year period. We also obtained an understanding of 
Customsï¿½ CFP debt collection policies and procedures and of applicable 
federal rules and regulations. 

We nonstatistically selected 17 CFP claims from a list of fines and 
penalty receivables outstanding as of September 30, 1999, at the San 
Francisco Fines, Penalties, and Forfeitures (FP&F) Office. Our purpose 
in selecting these claims was to perform a walk-through to confirm our 
understanding of Customsï¿½ processes for managing and collecting CFP 
debt. We selected the 17 claims on the basis of several factors, 
including high dollar value and unpaid CFP receivable balances as of 
September 30, 1999. 

From Customsï¿½ Seized Asset and Case Tracking System (SEACATS), we
obtained a list of all: 

* 7,184 Customs CFP claims still outstanding (open) as of September 30,
2000, and; 

* 82,273 and 95,441 CFP claims during fiscal years 1999 and 2000,
respectively, for which cases were canceled or the collection activity
was terminated because amounts were paid in full or written off
(closed). 

These 184,898 claims had a total value of approximately $7 billion. We
sorted the population of CFP claims into four groups: 

Group 1 included 2,469 CFP claims for which Customs stopped collection
activities during fiscal years 1999 and 2000 and wrote off the 
receivable amounts totaling approximately $41 million. In addition, we 
included in group 1 the 173 CFP claims, totaling approximately $28 
million, that were written off during fiscal year 1998, since this was 
the largest amount written off from fiscal year 1997 through fiscal 
year 2000. From these 2,642 CFP claims, we selected all claims 
involving write-offs of receivable amounts greater than $1 million. The 
receivable total for the 8 selected claims in this group equaled about 
$47 million, or just over two-thirds of the $68 million written off 
during the 3-year period. We used these 8 claims to test various 
attributes of Customsï¿½ processes for collecting CFP claims at each of 
the applicable FP&F offices. 

Group 2 consisted of 32,675 CFP claims for which Customs represented
that collection actions were not necessary or appropriate and had not 
been performed. According to Customsï¿½ records, these claims, totaling 
about $4 billion, or 57 percent of the total dollar value of the entire 
population, involved cases in which (1) Customs decided that the 
alleged violation did not occur, (2) there was insufficient probable 
cause to support an alleged violation, (3) substantial mitigating 
factors caused Customs to decide to remit (forgive) the penalty in full 
without payment of any mitigated amount,[Footnote 7] or (4) system 
input errors occurred, typically resulting in cancellation of the 
original case and its replacement with a new case. We statistically 
selected 36 claims from group 2 to confirm that Customs had not 
performed any collection actions for the reasons noted above. We did
not include any of the claims from this group in our population to be
selected for testing, since no collection actions were taken and the 
claims were therefore outside the scope of our audit. 

Group 3 consisted of 2,052 CFP claims involving various violation codes
for which amounts were partially collected or the claims were closed
without payment. These claims totaled about $36 million, or less than 1
percent of the total dollar value of the entire population. We did not 
review the claims in this group because their average dollar amount was 
about $18,000 and their total dollar amount was deemed immaterial. 

Group 4 consisted of the remaining 147,702 CFP claims, with a total
receivable amount of approximately $3 billion, for which Customs
performed collection activities, made collections, and either closed the
claims as paid in full or the unpaid amounts were still outstanding as 
of September 30, 2000. We sorted the population of CFP claims in this 
group into and performed certain steps for the following five strata: 

* Stratum 1 consisted of individual claims with a receivable amount
greater than $2.5 million. The receivable total for the 33 claims in 
this stratum was about $2 billion, or 68 percent of the receivable 
total for the entire 147,702 claims in group 4. Because of their high 
dollar value, we reviewed all 33 claims. We used these 33 claims to 
test various attributes of Customsï¿½ processes for collecting CFP claims 
at each of the applicable FP&F offices. 

* Stratum 2 consisted of all claims relating to a Customs broker that
went out of business during fiscal year 1999. This brokerï¿½s bankruptcy
resulted in 422 CFP claims with an original assessed amount of almost
$566 million, of which about $484 million was recorded as CFP 
receivables. The September 30, 2000, receivables balance for these
claims was about $484 million, or 16 percent of the dollar value of all
147,702 claims in group 4. We discussed the brokerï¿½s bankruptcy with
Customs officials and limited our procedures to reviewing related
documents to determine whether Customs took appropriate steps, in
accordance with its policies and procedures, to assess and resolve CFP
claims resulting from the event. 

* Stratum 3 consisted of all claims identified in SEACATS as involving a
late paperwork violation for failure to file a timely entry summary, 
[Footnote 8] which, in accordance with Customsï¿½ policies, typically 
results in the payment of a minimal amount. The 50,806 claims in this 
stratum totaled about $10.6 million, or 0.4 percent of the dollar value 
of the 147,702 claims in group 4. During our walk-through at the San 
Francisco FP&F Office, we reviewed 3 claims that involved late 
paperwork violations and determined that the amount ultimately subject 
to collection by Customs might be as little as $100 per claim. As 
agreed with your staff, we performed no further review of this stratum. 

* Stratum 4 consisted of all claims with an assessed amount less than or
equal to $5,000. The 73,741 claims in this stratum totaled about $47.5
million, or 1.6 percent of the dollar value of the 147,702 claims in 
group 4. As agreed with your staff, we did not review the claims in 
this stratum because the dollar amounts of individual claims were low 
and the total dollar amount of all 73,741 claims was deemed immaterial. 

* Stratum 5 consisted of the remaining 22,700 CFP claims, some open
and some closed, that were not included in one of the first four strata.
These claims totaled about $406 million, or 14 percent of the dollar 
value of the 147,702 claims in group 4. We sorted these claims by FP&F 
office and selected the four offices that managed the highest number of 
CFP claims during fiscal years 1999 and 2000.[Footnote 9] From the 
7,747 claims for the four selected offices, we drew a random stratified 
sample of 179 claims, which totaled about $5.7 million, or 1.4 percent 
of this stratumï¿½s dollar value and 0.2 percent of the dollar value of 
the 147,702 claims in group 4. We used these 179 claims to test various 
attributes of Customsï¿½ processes for collecting CFP claims at the four 
selected FP&F offices. 

We nonstatistically selected an additional 20 CFP claims that Customs
labeled as fraud violations (fraud claims)[Footnote 10] at the four 
selected FP&F offices. The cases were selected from the ï¿½FP&F Case 
Listing Logs for FY 2000ï¿½ and the ï¿½1592/592 Cases Active During 2000ï¿½ 
reports that were open as of September 30, 2000. The 20 claims were 
selected to further evaluate issues related to alleged fraud violations 
that we found when we tested the sample of CFP claims at the four FP&F 
offices. We selected the additional claims on the basis of such factors 
as assessed amounts, receivable amounts, loss of revenue,[Footnote 11] 
and expired statute of limitations. 

We performed detailed reviews of case files for all the CFP claims that 
we selected. We did not independently verify the completeness or 
accuracy of the data in the claims population or test information 
security controls over the systems used to compile the data because 
such verification was not necessary for the purposes of this request. 

We interviewed Customs representatives to obtain explanations for any
significant trends and instances of noncompliance with Customsï¿½ CFP debt
collection policies and procedures, as well as about areas where
enhancements could strengthen Customsï¿½ processes. We also interviewed
OMB and Financial Management Service officials to determine what roles, 
if any, OMB and the Financial Management Service play in overseeing and
monitoring the governmentï¿½s collection of CFP debt. 

We performed our work at Customsï¿½ FP&F offices at five locations; 
[Footnote 12] the National Finance Center in Indianapolis, Indiana; and 
the Office of Regulations and Rulings in Washington, D.C., from 
September 2000 through March 2002. We conducted our work in accordance 
with generally accepted government auditing standards. We provided the 
Commissioners of Customs and the Financial Management Service and the 
Deputy Director of OMBï¿½s Office of Federal Financial Management with a 
draft of our report for review and comment. We received general and 
technical comments from Customs. These comments are discussed in the 
ï¿½Agency Comments and Our Evaluationï¿½ section and appendix I of this 
report and are incorporated in the report as applicable. Customsï¿½ and 
the Financial Management Serviceï¿½s letters are reprinted in appendixes 
I and II, respectively. We did not reprint Customsï¿½ technical comments. 
OMB stated that it had no comments. 

Background Customs, a bureau of the Treasury, provides the nation with 
its second-largest source of revenue. Customs assesses duties, taxes, 
and fees on goods brought into the United States from foreign 
countries. During fiscal year 2000, Customs reported $22.9 billion in 
collections of duties, taxes, and fees. Part of Customsï¿½ collections 
consists of CFP, which are assessed when Customs determines that an 
importer violated trade and importation laws and regulations that 
Customs is responsible for enforcing. 

Fines and liquidated damages[Footnote 13] arise from importer/brokersï¿½ 
violations of Customsï¿½ bond agreements or trade laws and regulations 
(e.g., late filing or nonfiling of entry summaries). Penalties arise 
from violations of the federal laws and regulations governing the 
import and export of goods (e.g., commercial fraud, gross negligence, 
negligence, and customs broker and recordkeeping penalties). These laws 
and regulations contain guidelines for establishing the amount of fines 
and penalties to be assessed. Customs regulations establish guidelines 
and criteria for negotiation or mitigation to a lower fine or penalty 
amount to settle the case. Also, Customs regulations allow the violator 
and/or surety[Footnote 14] a period in which to file petitions 
challenging the fine or penalty amount assessed. 

Initial assessments are typically at the maximum amount provided for by
law and vary according to type of violation. For example, the CFP-
assessed amount for a violation under Commercial Fraud, Gross 
Negligence, and Negligence Penalties (19 U.S.C. 1592) ranges from a 
minimum of two times the loss of revenue for negligence to an amount 
not to exceed the domestic value of merchandise for fraud. 

For fiscal year 2000, Customs reported about $119 million in CFP debt
collections and approximately $25.4 million of CFP debts that were 
written off. As of September 30, 2000, Customs reported about 7,180 
outstanding CFP debts that represented about $773.6 million in gross 
receivables. Customs reduced this gross amount by about $36.4 million 
to adjust for validity and designated $675.7 million as uncollectible, 
resulting in a net receivable balance of about $61.5 million. 

In 1993, we reported that Customs did not effectively manage its 
collection process to prevent or minimize delinquent receivables. 
[Footnote 15] Factors that increased the likelihood of delinquent 
receivables included delays in finalizing amounts owed, poor monitoring 
of bond coverage, and delayed processing of protested bills. We also 
reported on the disparity between Customsï¿½ gross receivables and the 
amounts expected to be collected. We noted during this review that 
Customsï¿½ assessment and mitigation processes continued to be primarily 
responsible for the significant reductions in the recorded CFP 
receivable amounts compared to the amounts it expected to be collected. 

For the 4-year period covering fiscal years 1997 through 2000, Customs
reported the following CFP receivables activity: 

* $9.3 billion of recorded CFP assessments, 

* $8.4 billion of recorded adjustments to reduce the originally recorded
CFP assessments to reflect the postmitigation amounts that Customs
collected or intended to collect, 

* $257.0 million of CFP receivables balances that were collected, and, 

* $74.5 million of CFP receivables that were written off from balances 
that had typically been adjusted downward to the postmitigation amounts
that Customs intended to collect. 

The initially assessed amount for a CFP claim should not be viewed as 
the actual postmitigation CFP receivable amount that Customs is likely 
to pursue for collection from importers. Certain Customsï¿½ processes and
practices typically result in significant reductions to initially 
assessed CFP amounts before or after a receivable is recorded. Customs 
records a CFP receivable once it determines that it has a legal right 
to the claim, which may or may not be the initial assessed amount of 
the CFP. 

Once a CFP claim is closed by either (1) payment, (2) termination of
collection activity and write-off of a postmitigated CFP amount, or (3)
cancellation of the debt, Customs records an adjustment to its CFP 
receivables that is equal to the difference between the original amount
recorded as a receivable and the postmitigation amount that Customs
intends to collect. Customsï¿½ processes that often result in significant
reductions to the initially assessed amounts or subsequently recorded
receivables are Option 1, mitigation through a petition for relief or 
an offer in compromise, or cancellation of the CFP debt. 

Option 1. When Customs knows all the facts concerning an alleged
violation at the time of the initial review and the harm to the 
government is readily quantifiable and understood, an Option 1 
resolution may be possible. Option 1 can be described as a ï¿½parking 
ticketï¿½ approach. It involves payment of a preset amount, which 
eliminates the mitigation process and allows quick claim settlement. 
Specifically, Customsï¿½ penalty notice to a violator includes (1) a CFP 
amount assessed in accordance with a Customs-related statute or 
regulation for the particular violation, which the violator is given an 
opportunity to petition for mitigation, and (2) a lesser, or Option 1, 
amount that the violator can accept in settlement of the case. The most 
common types of claims that can be resolved through Option 1 are those 
related to filing late paperwork (late filing of an entry summary, 
invoice, or other entry document). An Option 1 resolution generally 
results in a significant reduction of the amount initially assessed. 

Petition for Relief. A person who receives a notice of violation from
Customs has 60 days to file a petition for relief or pay the amount 
initially assessed. Customs is not to establish a receivable until the 
petition period expires or until it reaches agreement on the amount of 
the CFP claim with a violator that has filed a petition.[Footnote 16] 
Customs may also accept a petition after the petition period expires. 

Petitioners may be granted mitigation for a number of reasons, including
contributory Customs error, extraordinary cooperation with the 
investigation, immediate remedial actions, inexperience in importing, 
and prior good record. Mitigation of initial assessments may be 
substantial. For example, we reviewed a CFP claim involving delivery of 
restricted merchandise without Customs approval for which the violator 
was assessed $500,000. The violator filed a petition that explained 
that a clerical error had been made on the entry form. Based on the 
facts of the case and the additional information in the petition, 
Customs granted mitigation and reduced the amount of the claim to $250. 
In turn, Customs recorded a receivable amount of $250 and subsequently 
collected that amount. 

Offer in Compromise. An alleged violator may make an offer in 
compromise to settle a CFP claim at any time after the violation. 
Customs has specific authority under 19 U.S.C. 1617 and 19 CFR 161.5 to
compromise claims, and Customs bases its decisions on whether to 
compromise claims on many factors, including, but not limited to, the
following: (1) risk that the government may not recover a significant
portion of the assessed amount if the claim is litigated and (2) the 
alleged violatorï¿½s financial inability to pay the initially assessed 
amount or the amount established through the petition for relief. The 
compromises generally result in significant reductions of the amounts 
initially assessed. 

An example of an offer in compromise that reduced an initial CFP 
assessment is a case in which Customs claimed gross negligence. Customs
alleged that an importer made false statements and omitted costs such as
development costs and royalty payments associated with video game
cartridges. Customs issued a penalty notice to the alleged violator in 
the amount of $90,376 (four times the lost revenue of $22,594). The 
importer made an offer in compromise, proposing the payment of the lost 
revenue and a penalty of $2,295 in monthly installments with interest 
at 8 percent per annum. After Customsï¿½ Regulatory Audit Division 
concluded that the importer might not be able to pay the full amount of 
CFP assessed, Customs accepted an offer in compromise of $28,543, which 
included interest of $3,654. 

Cancellation of a CFP Debt. After an initiating officer (discoverer of 
the alleged violation) makes a CFP assessment and the claim is 
forwarded to an FP&F office, the FP&F officer or other deciding 
official can decide to cancel a CFP debt and close the claim without 
attempting to collect any amount. The majority of cases closed without 
collection (canceled) in accordance with law and Customs guidance are 
closed for one of the following reasons: 

* The penalty case is remitted in full without payment. The FP&F officer
determines that a violation occurred, but the presence of substantial
mitigating factors causes the officer to remit the penalty in full. The
discretion to remit in full is provided in Customsï¿½ mitigation 
guidelines and is based on a finding that a violation resulted from 
circumstances beyond the control of the violator or that the violator 
is without culpability. 

* The automated record is canceled when there is an error in the input 
of a case into SEACATS that cannot be corrected by the case initiator. 
The canceled SEACATS record is usually replaced with a new case. 

* The case is closed because there was no violation. The FP&F officer or
other deciding official determines that the alleged violation did not 
occur or there was insufficient probable cause to support an alleged
violation. According to a Customs official, such determinations occur
because the receivables are recorded by the initiating officer who is
responsible for sending notices to alleged violators before the cases 
are forwarded to the FP&F offices for review. After a notice is sent 
and a case is forwarded to an FP&F office, the deciding official 
determines whether the alleged violation occurred or can be 
sufficiently supported. In addition, the Customs official stated that 
when case initiators are determining whether a violation occurred, they 
often do not have the benefit of additional documentation and 
information presented with petitions for relief. Moreover, additional 
documentation is often only obtained through the course of discovery if 
a case goes to litigation. 

Brokerï¿½s Bankruptcy Is the Primary Reason for the Increase in 
Uncollected Customs CFP Debt: 

Customsï¿½ gross CFP receivables increased by about $556 million from the
beginning of fiscal year 1997 to the end of fiscal year 2000. According 
to Customs officials, claims resulting from the bankruptcy of a Customs
broker,[Footnote 17] who handled a significant amount of import 
business on the U.S.-Canadian border, were primarily responsible for 
the increase in CFP receivables during the 4-year period. Such claims 
represented about 87 percent of the increase. Customs identified 422 
CFP claims against importers associated with this broker and, in most 
cases, recorded the initial CFP assessments as CFP receivables. At the 
time of the bankruptcy in June 1999, Customs had not received entry 
filing summaries, payments of estimated duties, or both from numerous 
importers who had previously relied on the broker to handle such 
activities on their behalf. 

According to Customs officials, the bankruptcy of this broker was a 
unique situation for Customs, but it provides a clear illustration of 
the significant adjustments that can result from Customsï¿½ assessment 
and mitigation processes. During fiscal years 1999 and 2000, Customs 
assessed numerous importers a total of about $566 million of CFP 
relating to the bankruptcy of the broker and recorded CFP receivables 
totaling about $484 million for these 422 claims. Customs records 
indicated that the remaining $82 million of assessed amounts was 
mitigated and thus these amounts were not recorded as CFP receivables. 
Postmitigated CFP amounts were nominal, consistent with Customsï¿½ 
guidance. As of September 30, 2000, almost all of these receivables 
remained uncollected, and about $481 million had been recorded in a 
reserve account as amounts deemed uncollectible. The uncollected CFP 
receivables arising from the bankruptcy represented about 66 percent of 
Customsï¿½ total reported gross CFP receivables and about 72 percent of 
Customsï¿½ allowance for uncollectible CFP accounts as of that date. As 
of June 2001, Customs reported that 237 of the 422 CFP claims had been 
closed and that the outstanding related receivable balance was about 
$268.3 million. 

According to Customs officials, in examining the available entry records
for each of the 422 alleged violations that resulted from the broker 
going out of business, Customs initially assessed each claim at the 
value of the affected merchandise or, in the case of restricted 
merchandise,[Footnote 18] up to three times the value of the 
merchandise when the value of the merchandise was known. If the value 
of the relevant merchandise was not known, Customs assessed each claim 
at $2.5 million, the amount of the bond posted by the broker.[Footnote 
19] According to a Customs official, Customsï¿½ assessment process and 
the Option 1 and mitigation processes generally resulted in Customs 
collecting considerably less than the CFP amounts initially assessed 
for the claims related to the bankruptcy of the broker. 

As discussed earlier, Customsï¿½ guidance includes a range of mitigation
amounts for each type of violation, as well as the authority to modify 
the assessed amount based on the particular facts and circumstances of 
any case. Customs based its mitigated CFP amounts for these claims on 
the CFP amounts suggested in its guidance for the late filing of an 
entry summary-ï¿½$100 to $200-ï¿½and gave consideration to the fact that 
the late paperwork resulting from the broker going out of business was 
out of the importersï¿½ control. 

As of September 30, 2000, Customsï¿½ records showed collections of $19,792
on 129 of the 422 CFP claims associated with the bankrupt broker. 
According to a Customs official, 5 of the 129 CFP claims totaling about
$6,500 involved carnet violations[Footnote 20] in which the merchandise 
was not destroyed or exported. The assessments for these claims were 
collected in full.[Footnote 21] The other 124 CFP claims, which totaled 
about $67 million in assessed amounts, were mitigated, and the total 
remaining CFP receivable amount of about $13,200 was collected. The 
$19,792 collected on these 129 claims was relatively small because 
postmitigated CFP amounts were nominal, consistent with Customsï¿½ 
guidance. At the end of fiscal year 2000, 293 claims remained open, of 
which the entire CFP receivable amount, net of the $2.5 million surety 
bond amount, was reserved in the allowance for uncollectible accounts. 

As of June 30, 2001, Customsï¿½ records showed that 185 of the 422 CFP
claims still remained open, meaning that from October 1, 2000, through
June 30, 2001, Customs closed 108 CFP claims. 

Forty-seven of the 108 CFP claims were closed without collections 
because of errors. Customs attributed these errors to the broker going 
out of business and the unique efforts required by Customs to identify 
and assess CFP for all of the entries resulting from this bankruptcy. 
These closed CFP claims, representing a total assessed value of about 
$80.3 million, were canceled without any collections for the following 
reasons: 

* Eighteen claims, valued at about $7.8 million, were subsequently 
deemed invalid because no violation occurred. Customs subsequently
found entry summaries that were not entered into its Automated
Commercial System (ACS)[Footnote 22] timely. 

* Twenty-nine claims, valued at about $72.5 million, were subsequently
deemed invalid and not violations because they were duplicates of
already existing claims. 

Five of the 108 closed CFP claims, valued at $12.5 million, were 
reissued under new case numbers for fiscal year 2001 because the type 
of violation was incorrectly identified when the CFP was initially 
assessed. For each of the 5 cases, Customs closed the initial CFP claim 
and established a new claim that reflected the correct type of 
violation. 

The remaining 56 of the 108 CFP claims were closed for the following
reasons after collections were made by Customs: 

* Fifty of the 56 CFP debts were reclassified from violations for not 
filing entry summaries to violations for filing late entry summaries, 
once the importer subsequently filed the entry summary. In addition, 
according to a Customs official, the debts involved duty-free 
merchandise and each claim was subsequently reduced to a nominal amount 
in accordance with Customsï¿½ mitigation guidance. Each claim was closed
after the violator paid a postmitigation amount of $50, resulting in a 
total amount collected of $2,500. Before mitigation, the total assessed
amount on these 50 CFP debts was $125 million. 

* Six of the 56 CFP debts, initially assessed at a total of about 
$128,000, reflected a receivable amount of $700 of which a total of 
$450 was collected. 

Opportunities Exist for Strengthening Customsï¿½ CFP Debt Collection 
Policies and Procedures: 

Customs can strengthen its CFP debt collection and might improve its
collection efforts by enhancing and better adhering to existing 
policies and procedures. 

Enhancing CFP Debt Collection Policies and Procedures: 

We found several CFP policies and procedures that can be strengthened
through enhancements. These enhancements represent good management
practices and could enable Customs to collect more CFP amounts. The
needed enhancements relate to (1) using promissory notes to collect CFP
debt when the debtor has significant assets, (2) obtaining evidence that
CFP claims related to carnets were received by the guaranteeing
association, (3) determining the adequacy of surety bond coverage for 
CFP debts, and (4) obtaining evidence of CFP debtorsï¿½ inability to pay 
CFP debt. 

Using Promissory Notes to Collect CFP Debts When the Debtor Has 
Significant Assets: 

A debtor may indicate to Customs that it is financially unable to pay a 
CFP debt in a lump sum. Customsï¿½ policy in cases where the debtor is 
unable to pay the full amount is to use a promissory note to collect 
the debt. However, the policy does not require that debtor assets 
secure the promissory note. Obtaining secured promissory notes in 
certain situations, such as when the debtor has significant assets, is 
a good business practice and increases the likelihood of collecting the 
amounts promised by the debtor because Customs would have a claim 
against the secured assets in the event of debtor default. 

We reviewed three CFP claims (one high-dollar claim and two 
nonstatistically selected alleged fraud claims) in which unsecured
promissory notes were used. In one of these alleged fraud claims, 
Customs accepted a $140,000 unsecured promissory note from a debtor 
even though Customsï¿½ Regulatory Audit Division determined that 
sufficient assets were available to cover the debt when the note was 
executed. At the time of our review, the note was in default and the 
debtor had paid only about $43,000 of the $140,000 owed. If Customs had 
obtained a secured promissory note, it would have been in a better 
position to collect the remaining unpaid CFP amount. 

Obtaining Evidence That CFP Claims Related to Carnets Were Received: 

Customs has 1 year from the expiration date of a carnet to issue a CFP
claim. Approved associations issue carnets, which are valid for 1 year, 
and guarantee any Customs claims associated with the merchandise 
covered. Customs has designated the U.S. Council for International 
Business as the issuing and guaranteeing association in the United 
States for carnets. If the 1-year period covered by a carnet expires 
and the covered merchandise has not been exported or destroyed, a CFP 
claim arises. Establishing a CFP claim is time critical because, under 
Customs guidance, Customs may not make a CFP claim against the council 
more than 1 year after the expiration of a carnet.[Footnote 23] For 
properly established claims, the council must pay the claim unless it 
furnishes Customs with proof within 6 months of the date of the claim 
period that the merchandise was returned, exported, or destroyed. 

During our review, we found that Customs does not always obtain
documentary evidence that the council received CFP claims related to
carnets within the 1-year period. As stated in Standards for Internal
Control in the Federal Government, all transactions and other 
significant events need to be clearly documented, and documentation 
should be readily available.[Footnote 24] For the eight CFP claims we 
reviewed involving carnets, we found that Customs did not maintain the 
necessary documentation. Customs had records indicating that the CFP 
claims were issued within the required 1-year period. However, Customs 
could not prove that the council received the CFP claims within the 
required 1-year period and did not have evidence that it contacted the 
council as a followup to the issuance of the CFP claim within the 1-
year period. The contact helps ensure that CFP claims were received by 
the council or enable Customs to provide a copy of the claim before the 
1-year period expires. An FP&F paralegal asserted that Customs made 
frequent telephone contacts with the council to verify receipt of 
notices of carnet expirations but did not document the contacts. 

Subsequent to discussing the 8 carnet claims that were from one FP&F
office, Customs stated that a total of approximately 300 carnet-related 
CFP claims issued by that office from 1996 through 2000, totaling about 
$1.8 million, were still outstanding. Customs stated that the council 
alleged it did not receive violation notices for these claims within 
the 1-year period and therefore has declined to pay the claims. Customs 
also stated that since it could not prove that the council received the 
notices within the required 1-year time frame, collections would be 
minimal on these claims. 

Customs officials instituted a process in fiscal year 2000 requiring 
that notices of carnet violations be sent by registered mail so that 
Customs would have proof of the councilï¿½s receipt of the notices. In 
February 2002, Customs stated that the outstanding CFP claims involving 
carnet violations were canceled without payment. Without documentation 
to prove that the council received these claims, Customs determined 
there was a reasonable likelihood that the port office did not issue 
them timely. Customs also stated that its Office of Regulations and 
Rulings has drafted claim issuance and mitigation guidelines for carnet 
violations. On April 19, 2002, Treasury Directive 02-20, setting forth 
claim issuance and mitigation guidelines for carnet violations, was 
published in the Federal Register.[Footnote 25] 

Determining the Adequacy of Surety Bond Coverage for CFP Debts: 

Customs did not have adequate surety bond amounts to cover all CFP
entries we reviewed. Customs regulations require that importers maintain
bonds as insurance against losses to Customs from unpaid duties, taxes,
charges, and CFP amounts for liquidated damages claims and certain
penalty claims associated with violations of the international carrier 
bonds. Single-entry bonds cover merchandise listed on a single-entry 
summary and are attached to entry summaries filed with Customs. 
Continuous bonds cover multiple entries for a specified period and are 
generally maintained on file at the port of entry. 

Out of 83 statistically selected open CFP claims, we found six 
continuous entry bonds involving liquidated damages that were not 
adequate to protect Customs from losses resulting from unpaid duties, 
taxes, charges, and CFP amounts. Based on our analysis of the selected 
open CFP claims, we estimate that about 7.2 percent of the 615 open CFP 
claims managed by the four selected FP&F offices did not have 
sufficient amounts to cover duties and CFP.[Footnote 26] 

Specifically, we found that 2 of the statistically selected CFP claims
involved insufficient continuous-entry bond amounts to cover in total
about $101,000 out of about $201,000 of assessed antidumping fees and
charges. At the time of our review, both of the claims had been 
referred to Customsï¿½ Office of Chief Counsel to determine potential for 
litigation. We also found four instances in which the importerï¿½s 
continuous-entry bond was sufficient to cover the claim we reviewed but 
was not sufficient to cover other Customsï¿½ claims against that 
importer. For the four instances, the bond insufficiencies included 
about $668,000 out of about $768,000 of fees and duties and about 
$686,000 out of about $1.2 million of CFP. At the time of our review, 
the claims for one of the instances had been referred to Customsï¿½ 
Assistant Chief Counsel; one of the instances had been resolved in 
favor of the importer; one of the instances had been referred to the
Department of Justice for litigation since the surety stated that the 
related continuous bond had already been exhausted on another claim; 
and one of the instances had been settled against the bond. In the 
instance that the claims were settled, Customs did not collect about 
$200,000 of the CFP that was in excess of the bond coverage. 

Customs implemented new procedures for use with the dedicated bond
liability module of the ACS to address the recommendations that we
previously reported.[Footnote 27] However, Customs officials stated 
that additional changes to ACS were postponed so that the changes can 
be incorporated into the new tracking system, the Automated Commercial 
Environment (ACE), which will replace ACS. These officials said that 
Customs is proceeding with the requirements development task for ACE as 
part of the agencyï¿½s automated systems modernization project. Upon 
completion of this task, Customs will know more about the wide range of 
business requirements that the new system must address, which will 
include surety bond tracking capability. Until the task is completed, 
however, Customs cannot determine when the development and 
implementation of the ACE system will be completed and lacks a reliable 
way to determine on a real-time basis whether coverage on continuous 
bonds is sufficient for a given entry. As a result, Customsï¿½ system 
capability problems will continue to undermine FP&F officesï¿½ ability to 
track the sufficiency of bonds and Customs officialsï¿½ ability to 
administer Customs laws. 

Customs officials stated that the bond information in the various 
systems that process entries and penalties is not real time, does not 
aggregate potential debts against bonds, and does not show reductions 
in the bond amounts to reflect actual amounts paid. Specifically, an 
FP&F official stated the following: 

* Customsï¿½ bond sufficiency report compares the current bond amount
with 10 percent of the importerï¿½s dutiable imports for the prior year.
Since only prior-year detail is used, this historical comparison does 
not take into consideration the potential debt for entries such as 
temporary importation bonds[Footnote 28] or for increased import 
activity in the current year. 

* Customsï¿½ ACS does not provide adequate information to determine 
whether the current single- or continuous-entry bond is sufficient to
cover a current entry, without significant research of the system. The
system does not show the potential duties, fees, and CFP of an entry
against a bond amount or actual payouts against that bond. 

* Customsï¿½ SEACATS provides a notice if an individual entryï¿½s total 
duties, fees, and CFP exceed a bond amount, but it does not accumulate
information on the duties, fees, and CFP from other entries at a
particular port that have already been applied to the current bond. It 
is also unlikely that Customs staff at one port would be aware of other
duties, fees, and CFP charged against the bond if an importer enters
merchandise at other ports that are also covered by that bond, since
SEACATS does not accumulate this information. 

* Customsï¿½ monthly bond liability report provides information that is
necessary to alert importers of the need to increase their current 
bonds. However, Customs is still susceptible to surety bond amounts 
that are insufficient to cover duties and CFP on entries made prior to 
when an importer actually increases a bond amount. 

Obtaining Evidence of CFP Debtorsï¿½ Inability to Pay CFP Debt: 

During the period of our review, Customs regulations required debtors 
who claimed they were unable to pay CFP debts to present documentary
evidence to support their claims.[Footnote 29] Examples of documentary 
evidence that were to be provided by the debtor included copies of 
income tax returns, current financial statements, and independent audit 
reports. However, Customs was not required to obtain and review 
independent audit reports, which include audited financial statements, 
to determine whether a debtor was not able to pay CFP debt. 

We reviewed six CFP claims (two high-dollar claims and four
nonstatistically selected fraud claims) in which the debtorï¿½s 
representation of inability to pay was a factor in Customsï¿½ petition or 
offer-in-compromise process, consistent with Customs policy. For five 
of these CFP claims (two high-dollar claims and three fraud claims), 
each of which involved fraud or counterfeiting, Customs obtained tax 
returns and/or current financial statements from the debtors. Customs 
records indicated that through mitigation and the use of offers in 
compromise, the originally assessed CFP amounts totaling about $28.7 
million were reduced to a total CFP receivable amount of about $1.5 
million, of which only about $108,000 had been collected through March 
2002. We asked for, but Customs could not provide, documentation of the 
debtorï¿½s inability to pay the sixth CFP claim. 

Customs was not required to obtain and review independent audit reports,
such as audited financial statements, as part of the documentary 
evidence it used to determine these debtorsï¿½ inability to pay. However, 
in June 2000, Customs regulations were revised, requiring that both 
income tax returns for the past 3 years and recent audited financial 
statements be provided by parties claiming they were unable to pay CFP 
debts.[Footnote 30] 

Better Adherence to Certain CFP Debt Collection Policies and 
Procedures: 

In addition to the enhancements to its collection capacity discussed 
above, Customs needs to adhere more closely to certain of its existing 
policies and procedures. We found instances in which Customs did not 
always follow its policies and procedures related to (1) requesting 
waivers of the statute of limitations for CFP debts, (2) issuing 
Notices of Penalty or Liquidated Damages Incurred and Demand for 
Payment (penalty and payment notices), (3) responding to violators that 
filed petitions for relief, and (4) issuing notices of redelivery. 

Requests for Waivers of the Statute of Limitations for CFP Debts: 

Customs does not always timely request waivers of the statute of
limitations[Footnote 31] for CFP debts to enable it to have sufficient 
time to continue collection actions. In order to obtain a waiver, which 
extends the statute of limitations by the amount of time agreed to in 
the waiver, Customs guidance requires the appropriate FP&F office to 
request a waiver of the statute of limitations from the violator when 
less than 2 years remain before the expiration of the statute of 
limitations.[Footnote 32] In instances in which Customs determines that 
a waiver is necessary, its policy is to request that the violator agree 
to a 2-year waiver of the statute of limitations. If a waiver is not 
obtained, Customs is to refer the CFP debt to the Department of Justice 
no later than 6 months before the expiration date of the statute of
limitations to allow Justice sufficient time to file the CFP claim with 
the Court of International Trade.[Footnote 33] 

We identified two claims (one high-dollar claim and one nonstatistically
selected fraud claim) for which Customs requested waivers for some of 
the entries only shortly before the statute of limitations was to 
expire for those entries.[Footnote 34] An alleged violator and two of 
the three sureties for a second alleged violator did not agree to the 
waivers, and the statute of limitations subsequently expired on various 
entries. In one case, Customs originally stated that it attempted to 
obtain waivers of the statute of limitations from three sureties after 
the dissolution of the importer and the completion of its 
investigation, which was 4 years later. Only one surety granted a 
waiver, and the statute of limitations expired without any collections 
from the other two sureties. In the other case, Customs stated that it 
had filed a complaint with the Court of International Trade to prevent 
the expiration of the statute of limitations. However, the complaint 
applied to only 53 of 104 entries, since the statute of limitations had 
expired on the other 51 entries prior to Customsï¿½ filing the complaint. 

These cases illustrate the risks of not timely attempting to avoid 
expiration of the statute of limitations. For these cases, Customs was 
unable to collect original duties that totaled about $74,000 and CFP 
that totaled about $136,000. In contrast, it was able to collect about 
$97,000 of unpaid duties for entries on which the statute of 
limitations had not expired or for which waivers had been obtained. 

In a third case that we identified during our walk-through, we found a 
CFP claim involving, among other factors, a failure to request a timely 
waiver of the statute of limitations. The statute of limitations for 
the entries filed in the first 3 of the 7 years under this CFP claim 
had expired. In this nonstatistically selected CFP fraud case, Customs 
assessed $21 million of CFP against an importer for allegedly using 
false invoices to undervalue entries. While engaged in settlement talks 
with Customs, the importer made distributions totaling about $6 million 
to its two principal stakeholders. Before the expiration of the statute 
of limitations for the remaining 4 years of entries, Customs was 
granted a waiver and subsequently accepted an offer in compromise to 
settle the CFP claim for $700,000, consisting of $688,025 to cover the 
amount of the duties owed to Customs and $11,975 of the $21 million 
assessed CFP. Other factors that contributed to Customsï¿½ acceptance of 
this offer in compromise were its determination that (1) the 
corporation was unable to pay the CFP debt after $6 million was 
distributed to stockholders and (2) Customs might not be able to hold 
the principals personally liable for the debt. 

In general, Customs paralegals cited both a lack of a tracking system 
and human error for the poor tracking of the statute of limitationsï¿½ 
expiration dates. Even though a tracking system for statute of 
limitations expiration dates could improve Customsï¿½ ability to track 
expiration dates, our review found that monthly reports from SEACATS 
currently provide sufficient statute of limitations information to 
paralegals at each office for tracking expiration dates. 

During our review of the eight high-dollar CFP claims that were written 
off during fiscal years 1998 through 2000, we found four cases in which 
the expiration of the statute of limitations and Customsï¿½ decision to 
terminate collection activity were the primary reasons for the write-
off of these CFP debts. Customs wrote off about $27 million for these 
four CFP cases, which represented about 39 percent of the CFP amounts 
written off during the 3-year period. Even though we identified lengthy 
collection efforts-ï¿½investigations, petition processes, and information 
gathering and review prior to decisions on petitions by Customsï¿½ Office 
of Regulations and Rulings or Office of General Counsel, or decisions 
on whether to refer them to Justice-ï¿½that took several years, Customs 
ultimately deemed the debts uncollectible and legally without merit. 
The reasons for these determinations were the violators either (1) 
filed for bankruptcy after being assessed by Customs or (2) went out of 
business after being assessed by Customs. 

We also noted an instance where the approaching expiration of the 
statute of limitations was a contributing factor in Customs accepting a 
lower mitigation amount for the CFP claim. Specifically, in one case we
reviewed, Customs accepted an offer in compromise for $25,000 in April
2000, after the statute of limitations had expired for 252 of 257 
entries relating to a CFP claim. These entries involved fraud 
violations where the importer allegedly undervalued the entries in an 
effort to avoid paying duties. Customs issued the penalty notice on 
April 6, 2000, at the value of the merchandise, which was about $20.1 
million. The investigation relating to this claim occurred from 1995 
through 1998, but the proceedings did not commence until March 2000. 
The offer in compromise was accepted because Customs could not 
determine the actual unpaid duties since its files did not include the 
amount of lost revenue relating to all of the entries. 

Issuance of Penalty and Payment Notices: 

Customs did not always issue penalty and payment notices to importers
within 10 days of opening a case file in its tracking system, in 
accordance with Customs guidance. Customs guidance states that a 
penalty and payment notice be issued to importers within 10 days of 
when Customs opens a case in SEACATS. We found that Customs did not 
comply with this requirement for 16 (2 open and 14 closed CFP claims) 
of the 179 statistically selected CFP claims we reviewed. For example, 
a penalty and payment notice for 1 of these claims in the Los Angeles 
FP&F Office was 192 days late. Twelve of the cases were identified at 
the New Orleans FP&F Office, and 2 were identified at the Los Angeles 
FP&F Office. 

Based on our evaluation of the open and closed CFP claims, we estimate
that 2.4 percent of open and 14.5 percent of closed CFP claims managed 
by the four selected FP&F offices did not have penalty and payment 
notices issued within the 10-day period.[Footnote 35] Customs 
paralegals responsible for managing these CFP claims generally 
attributed the delays to limited staff resources. Such delays may have 
resulted in reduced collections of CFP at the four selected FP&F 
offices. 

Issuance of Responses to Violators That Filed Petitions for Relief: 

Customs did not consistently respond timely to violators that filed 
petitions for relief. After receiving a notice from Customs, the 
alleged violator has 60 days to file a petition for relief and Customs 
has 90 days after receipt of the petition to respond. We found that 100 
(40 open and 60 closed CFP claims) of the 179 statistically selected 
CFP debts involved petitions. For 25 of these 100 claims, Customs did 
not comply with the 90-day requirement. For example, 1 claim in the 
John F. Kennedy Airport FP&F Office was 364 days late. Twelve instances 
of noncompliance were identified at the New Orleans FP&F Office, and 11 
instances at the Los Angeles FP&F Office. 

Based on our evaluation of the 40 open and the 60 closed CFP claims that
had petitions, we estimate that for 22.3 percent of open and 26.6 
percent of closed CFP claims managed by the four selected FP&F offices, 
Customs did not respond to the petitions within the 90-day period. 
[Footnote 36] Customs paralegals responsible for managing these CFP 
claims generally attributed the delays to limited staff resources. Such 
delays may have resulted in reduced CFP collections at the four 
selected FP&F offices. 

Issuance of Notices of Redelivery: 

The timing of Customsï¿½ issuance of Notices of Redelivery, which are 
sent to importers when the Department of Health and Human Servicesï¿½ 
Food and Drug Administration (FDA) deems goods unsafe for importation, 
raised legal issues that affected settlement determinations. The Food, 
Drug, and Cosmetic Act[Footnote 37] authorizes the Secretary of Health 
and Human Services to refuse admission of food, drugs, devices, and 
cosmetics for a number of reasons, including that the items were packed 
under unsanitary conditions or that the articles are adulterated or 
misbranded. When FDA makes a determination to refuse admission of 
goods, it issues a Notice of Refusal of Admission to the importer. 
While awaiting an admission decision from FDA, Customs may authorize 
delivery of the article to the owner or consignee upon the execution of 
a bond sufficient to pay liquidated damages in the event of default. 
[Footnote 38] 

Customs regulations establish conditions for importation and entry
bonds.[Footnote 39] One of the conditions is that the importer must 
timely redeliver released merchandise on demand to Customs after 
receiving a redelivery notice. Customs must issue the redelivery notice 
no later than 30 days after the date of release of the merchandise or 
30 days after the end of the conditional release period, whichever is 
later.[Footnote 40] Failure to redeliver could result in the importerï¿½s 
having to pay liquidated damages under the bond. 

Disputes over when Customs has to issue redelivery notices for articles
subject to FDA approval have affected Customsï¿½ collection of 
assessments. For example, in United States v. Likas International, Inc. 
and Washington International Insurance Company,[Footnote 41] a surety 
denied liability under a bond because Customs issued the redelivery 
notice more than 30 days after FDA issued a refusal notice. The 
government asserted that it had 120 days to issue the redelivery notice 
because the importer retained custody of the article for 90 days after 
the FDA refusal notice, which ended a conditional release period, and 
then Customs had an additional 30 days to issue a redelivery notice. 
During the Likas proceedings, another significant issue arose: Has 
Customs defined a conditional release period for the FDA context? The 
government essentially argued that the conditional release period 
automatically began when Customs delivered articles subject to FDA 
approval to the importer. The surety argued that Customs had never by 
regulation defined a conditional release period in the FDA context. The 
surety further argued that Customsï¿½ assertion of a conditional release 
period amounted to an indefinite period because the period would run 
from delivery of the goods until 90 days after FDA issued its notice, 
whenever that occurred.[Footnote 42] 

As a result of the issues raised in Likas, Customs and the Department of
Justice in the summer of 1999 settled the Likas case with a number of
sureties. As part of the Likas settlement, Customs agreed to implement a
nationwide policy for issuing a redelivery notice following FDAï¿½s 
issuance of a refusal notice. The policy provides that Customs must 
issue a redelivery notice no later than 30 days after FDA issues a 
refusal notice. In return, the affected sureties agreed to settle all 
outstanding claims for liquidated damages in which the Customs 
redelivery notice was issued more than 30 days but less than 120 days 
after issuance of the FDA refusal notice and all cases where Customsï¿½ 
redelivery notice was issued more than 30 days after the release of the 
merchandise. The sureties agreed to pay 30 percent of the value of the 
merchandise or the amount of the bond, whichever was less. 

We reviewed eight CFP claims with redelivery notices issued before 
fiscal year 1999 (one statistically selected and seven nonstatistically 
selected at Customsï¿½ Los Angeles and San Francisco ports, respectively) 
and found that the redelivery notices were issued after 30 days but 
within 120 days of the issuance of the refusal notices. The total 
assessed amount of these claims was about $686,000, and the total 
amount collected was about $138,000. 

The discussion above indicates how a lack of certainty and clarity
concerning a conditional release period may affect the enforcement of
importation and entry bonds. Customs has advised us that it has prepared
a Notice of Proposed Rulemaking to amend its regulations to provide a
specific conditional release period in all cases involving products 
regulated under the Food, Drug, and Cosmetic Act. The Notice of Proposed
Rulemaking is currently awaiting departmental approval prior to its
publication in the Federal Register. 

OMBï¿½s and Treasuryï¿½s Roles in the Oversight and Monitoring of CFP Debt: 

OMB and Treasuryï¿½s Financial Management Service are provided 
information useful in performing their debt oversight roles through
Customsï¿½ reporting of CFP receivables and referral of CFP debt to the
Financial Management Service for collection. Beginning with financial
statements for fiscal year 1997, Customs has disclosed CFP receivable
information in the notes to its audited financial statements, which are
submitted annually to OMB. In addition, in accordance with the
requirements of the Debt Collection Improvement Act of 1996, Customs
annually reports receivable information, which includes CFP receivable
information, to the Financial Management Service as part of the Report 
on Receivables Due from the Public. 

In discussions, OMB officials emphasized that their oversight 
responsibility is broad and consists of monitoring and evaluating 
governmentwide credit management, debt collection activities, and 
federal agency performance. OMB also stated that it is the specific 
responsibility of agency chief financial officers and program managers 
to manage and be accountable for the debt collection of their agencyï¿½s 
credit portfolios, including debt collection, in accordance with 
applicable federal debt statutes, regulations, and guidance. OMB 
further added that it is the role of each agency to specifically 
monitor and collect its civil penalty debt regardless of dollar 
magnitude and that it is the responsibility of each agencyï¿½s office of
inspector general to provide oversight through audit of the agencyï¿½s 
debt collection activities. 

The Debt Collection Improvement Act of 1996 requires that federal
agencies transfer eligible nontax debt or claims[Footnote 43] 
delinquent more than 180 days to Treasury for collection action. 
Treasury officials stated that they rely on agencies to determine what 
debt should be referred to the Financial Management Service for 
collection and offset as required by the Debt Collection Improvement 
Act of 1996. A Customs representative stated that certain CFP debts are 
referred to the Treasury Offset Program for collection via the Tax 
Refund Offset Program. 

Conclusions: 

The growth in Customsï¿½ uncollected CFP debt resulted primarily from
assessments to importers that were caused by a broker going out of
business. However, a substantial portion of Customsï¿½ recorded CFP
receivables will continue to be deemed uncollectible and eventually
reduced, since it represents amounts that are required to be assessed in
accordance with Customsï¿½ guidance rather than the smaller portion that 
is typically pursued for collection from importers after mitigation or
settlement of a claim. Even though Customsï¿½ assessment process will
continue to result in significant adjustments, there are several areas 
where Customsï¿½ CFP debt collection policies and procedures can be 
strengthened and its collection efforts might improve through 
enhancements or increased adherence. These areas include Customsï¿½ 
ability to track the sufficiency of surety bond coverage, a concern we 
originally raised in 1993, which will not be addressed until Customs 
completes the implementation of the new ACE system. 

Recommendations for Executive Action: 

We are making several recommendations to the Commissioner of the U.S.
Customs Service to strengthen Customsï¿½ CFP debt collection policies and
procedures, improve the collection of CFP debt, and decrease the amount
of CFP receivables that are reduced or written off. 

We recommend that the Commissioner of the U.S. Customs Service direct
the Assistant Commissioner, Office of Finance, to develop and implement
detailed CFP debt collection policies and procedures to obtain secured
promissory notes from CFP debtors when evidence shows that they have
significant assets to secure their CFP debts. 

We recommend that the Commissioner of the U.S. Customs Service direct
the Assistant Commissioner, Office of Regulations and Rulings, to
expeditiously establish conditional release periods for products 
regulated under the Food, Drug and Cosmetic Act. 

We recommend that the Commissioner of the U.S. Customs Service direct
the Assistant Commissioner, Office of Information and Technology, to 
help ensure that the development and implementation of Customsï¿½ new ACE
system addresses bond sufficiency concerns cited in this report and in 
our 1993 report. 

We recommend that the Commissioner of the U.S. Customs Service direct
the Assistant Commissioner, Office of Field Operations, to reinforce and
monitor the four selected Fines, Penalties, and Forfeitures officesï¿½
compliance with certain existing CFP debt collection policies and
procedures, where applicable, to help ensure that: 

* statute of limitations waivers are requested when less than 2 years
remain before the expiration date and waivers are obtained before the
statute of limitations expires to allow adequate time for actions to be
taken against violators by Customs, the Department of Justice, and the
Court of International Trade; 

* Notices of Penalty or Liquidated Damages Incurred and Demand for
Payment are issued to importers within 10 days of Customsï¿½ opening a
case in the CFP tracking system; and; 

* responses to petitions for relief are made to violators within 90 
days of Customsï¿½ receipt of a petition from a violator. 

Agency Comments and Our Evaluation: 

In commenting on a draft of our report, Customs and the Financial
Management Service agreed with our recommendations. Customs described 
actions being taken to address each recommendation. We have removed our 
recommendation for Customs to finalize its claim issuance and 
mitigation guidelines for carnet violations since these were published
in the Federal Register on April 19, 2002. 

Customs also provided general comments, which are reprinted in appendix
I and followed by our evaluative comments. Customs provided a number of 
technical comments that are incorporated in the report as appropriate.
OMB stated that it had no comments. 

As agreed with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after its 
issuance date. At that time, we will send copies to the Chairman of your
subcommittee and to the Chairman and Ranking Minority Member of the
Senate Committee on Governmental Affairs. We will also provide copies to
the Secretary of the Treasury, the Commissioner of the U.S. Customs
Service, and the Director of the Office of Management and Budget. We 
will also make copies available to others upon request. In addition, 
the report will be available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

If you have any questions about this report, please contact me at (202) 
512-3406. The GAO contact and staff acknowledgments are listed in 
appendix III. 

Sincerely yours, 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

Appendix I: Comments from the Department of the Treasuryï¿½s U.S. Customs 
Service: 

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix. 

U.S. Customs Service: 
Memorandum: 

Date: May 15, 2002: 

File: AUD-1-OP MD: 

Memorandum For Gary T. Engel: 
General Accounting Office: 

From: Director, Office of Planning: 

Subject: Draft Audit Report on the United States Customs Service's 
Civil Fines and Penalties Debt: 

Thank you for providing us with a copy of your draft report entitled 
"Civil Fines and Penalties Debt: Review of U.S. Customs Service's 
Management and Collection Processes" and the opportunity to discuss the 
issues in this report. 

While the actions Customs has taken and will take in response to the 
recommendations will further strengthen the management and collection 
process, we believe the draft report does not fully explain important 
facts regarding fines and penalties procedures. Attached are comments 
specific to the recommendations, as well as general and technical 
comments that relate to statements that need to be clarified prior to 
finalization of this report. 

If you have any questions regarding these comments, please contact Ms. 
Michele Donahue at (202) 927-0957. 

Signed by: 
William F. Riley: 

Attachments: 

Responses to Audit Recommendations: 
GAO Draft Report on Customs Civil Fines and Penalties Debt: 

Recommendation 1: We recommend that the Commissioner of the U.S.
Customs Service direct the Assistant Commissioner, Office of Field 
Operations, to develop and implement detailed CFP debt collection 
policies and procedures to: 

* Obtain secured promissory notes from CFP debtors when evidence shows 
they have sufficient assets to secure the CFP debt and; 

* Finalize the formal claim issuance and mitigation guidelines for 
carnet violations. 

Response: Concur. Customs will revise the current promissory note 
directive relating to the evaluation of a debtors assets. If the debtor 
has significant assets, Customs will request that the debtor obtain a 
secured promissory note to secure the debt. 

The mitigation guidelines for carnet violations were published in the 
Federal Register on Friday, April 19, 2002, under T.D. 02-20 with an 
immediate effective date. [See comment 1] 

Recommendation 2: We recommend that the Commissioner of the U.S. 
Customs Service direct the Assistant Commissioner, Office of 
Regulations and Rulings to proceed expeditiously with addressing the 
establishment of conditional release periods for products regulated 
under the Food, Drug and Cosmetic Act. 

Response: Concur. The Notice of Proposed Rulemaking on the FDA 
conditional release period has been signed by the Commissioner and is 
at Treasury awaiting Department approval prior to publication in the 
Federal Register. 

Recommendation 3: We recommend that the Commissioner of the U.S. 
Customs Service direct the Assistant Commissioner, Office of 
Information and Technology, to help ensure that the development and 
implementation of Customs new ACE system addresses bond sufficiency 
concerns cited in this report and in our 1993 report. 

Response: Concur. Specific functional requirements for establishing 
bond requirements and sufficiency are addressed within the ACE systems 
requirements documents. 

Recommendation 4: We recommend that the Commissioner of the U.S.
Customs Service direct the Assistant Commissioner, Office of Field 
Operations, to reinforce and monitor the four selected Fines, 
Penalties, and Forfeitures Offices' compliance with certain existing 
CFP debt collection policies and procedures, where applicable, to help 
ensure that: 

* Statute of limitations waivers are requested no later than 2 years 
before the expiration date and waivers are obtained before the statute 
of limitations expires to allow adequate time for actions to be taken 
against violators by Customs, the Department of Justice, and the Court 
of International Trade; 

* Notices of Penalty or Liquidated Damages Incurred and Demand for 
Payment are issued within 10 days of Customs' opening a case in the CFP 
tracking system, and; 

* Responses to petitions for relief are made to violators within 90 
days of Customs receipt of a petition from the violator. 

Response: Concur. Customs views strict compliance with established 
procedures for protecting potential revenue as critical to achieving 
its mission as both a law enforcement and revenue agency. Customs 
performs scheduled and unscheduled field office oversight visits to 
measure field compliance. Customs has already taken positive steps to 
employ oversight tools including the Self-Inspection Program and the 
monthly Management Accountability Reports. Customs will continue to 
develop new tools to improve its oversight of field office operations. 

It is Customs policy to request a waiver of the statute of limitations 
in any CFP case (Penalty or Liquidated Damages) that is within two 
years of the date by which the statute of limitations may be raised as 
a defense. Adherence to this policy is monitored monthly at the 
Headquarters level by way of the Management Accountability Reports, 
which were created to monitor field activity in several mission-
critical areas. 

The timeliness of enforcement actions is considered an extremely 
important management issue as Customs attempts to balance achieving the 
effective performance of its law enforcement mission with its desire to 
provide due process to persons who transact Customs business and become 
the subjects of enforcement actions. 

It is Customs policy to issue Notices of Penalty or Liquidated Damages 
Incurred (Customs Form 5955A) in CFP cases within 10 days of the 
creation of the automated case record in the Seized Asset and Case 
Tracking System (SEACATS), unless the violation requires additional 
investigation or verification, or requires the issuance of a pre-
penalty notice. Additionally, it is Customs policy to attempt to issue 
petition decision letters within 90 days of the receipt of a petition, 
when the facts of the case do not require the referral of the petition 
to another Customs office or outside technical expert for comment or 
investigation. Customs will ensure that its field office oversight 
plans include elements to measure compliance with policies for the 
timely initiation and disposition of CFP cases. 

General Comments: 
GAO Draft Report on Customs Civil Fines and Penalties Debt: 

Customs suggests this important information on liquidated damages be 
included in the Background section (page 11) of the report. 

Liquidated damages are limited to the amount of coverage of the bonds 
against which they are assessed. Liquidated damages are not revenue; 
rather, they are a mechanism to assure compliance with pertinent 
Customs law, regulation and instruction. Specifically, liquidated 
damages represent compensation to Customs for loss due to a failure to 
comply with Customs law, regulation or instruction. To be effective, 
liquidated damages must involve greater expense to the importer and 
surety than would noncompliance. Hence, liquidated damages claims often 
begin as large amounts and are lowered when compliance is achieved. In 
order to assure uniform, reasonable and equitable decisions concerning 
cancellation of claims for liquidated damages, Customs is required by 
statute to publish guidelines for the cancellation (i.e., mitigation) 
of liquidated damages. 19 U.S.C. 1623(c). [See comment 2] 

The above language is necessary because the report treats liquidated 
damages as if they have the same significance as revenue, when they do 
not. 

Customs believes the draft report does not include important, pertinent 
facts regarding case specific comments related to the following 
sections contained within the finding titled: Better Adherence to 
Certain CFP Debt Collection Policies and Procedures. 

Customs concurs with the general finding that the selected Customs 
field offices did not always comply with established policies and 
procedures for (1) requesting waivers of the statute of limitations for 
CFP debts, (2) issuing Notices of Penalty or Liquidated Damages 
Incurred and Demand for Payment, (3) responding to violators who filed 
petitions for relief, and (4) issuing notices of redelivery. However, 
Customs does not concur with all of the case specific findings 
contained in this section, and contends that the draft final report 
fails to give adequate consideration to previous comments and 
information provided to the auditors relative to specific cases 
referenced in the report. 

Requests for Waivers of the Statute of Limitations for CFP debts: 

This section of the draft audit report misstates Customs policy 
regarding when the responsible Customs official is required to request 
statute of limitations waivers. [See comment 3] It is the policy of the 
Customs Service to request a statute of limitations waiver when there 
is less than two years remaining before the expiration of the statute 
of limitations; however, the report states, "Customs guidance requires 
the appropriate FP&F office to request a waiver of the statute of 
limitations from the violator no later than 2 years before the 
expiration date." Additionally, the draft audit report fails to 
acknowledge the fact that Customs cannot compel a party to execute a 
statute of limitations waiver, and that the failure to obtain the 
waivers in the cited cases was due to the refusal of the parties from 
whom they were requested to execute the waivers. According to Customs 
previous responses relative to the cited cases, the Customs field 
offices requested or obtained statute of limitations waivers in each 
cited case; however, in some cases the parties either refused to 
execute the initial waivers or refused to grant extensions of the 
original waivers when requested by Customs. [See comment 4] 

With regard to the eight high-dollar CFP claims that were written off 
during fiscal years 1998-2000, Customs notes the draft audit report 
fails to mention that three of the eight cases were penalties related 
to seizures of foreign-owned conveyances used to smuggle narcotics that 
were seized, forfeited and sold. [See comment 4] The large penalties 
assessed in accordance with 19 U.S.C. 1584 were written off only after 
Customs pursued its normal administrative penalty process and Customs 
determined, after the cited parties failed to pay the assessed 
penalties, that it would be unable to enforce the penalties against two 
non-resident companies and one incarcerated individual whose sole 
source of income was the forfeited conveyance. [See comment 5] 
Additionally, the draft audit report fails to mention that in two write 
off cases where the statute of limitations expired and Customs decided 
to terminate collection action, the principal violators filed for 
Chapter 7 bankruptcy prior to write off, and the bankruptcy filing 
substantially affected the write off decision. In one write off case, 
the claim was written off only after the Department of Justice 
communicated to Customs its inability to enforce a default judgment 
rendered in favor of Customs by the Court of International Trade.
Customs objects to the inclusion of the second of two case examples 
included to illustrate the following finding from page 33 of the draft 
audit report: "We also noted instances where the approaching expiration 
of the statute of limitations was a contributing factor in Customs' 
acceptance of lower mitigation amounts for CFP claims. [See comment 6] 
For the case in question the draft audit report states, "About 2 months 
before the expiration of the statute of limitations for the remaining 4 
years of entries, Customs accepted an offer in compromise..." 

Customs records indicate that the statement is incorrect because the 
offer in compromise was accepted immediately following the receipt and 
acceptance of a valid statute of limitations waiver. The statute of 
limitations was not in jeopardy when the offer was accepted and was not 
a factor that contributed to the acceptance of the offer in compromise. 
Customs notes that the above information was provided previously in 
response to preliminary findings relative to the subject case. [See 
comment 6] 

Issuance of Penalty and Payment Notices: 

Customs disagrees with the number of cases listed as representative of 
the following finding from page 35 of the draft audit report: "Customs 
did not always issue penalty and payment notices to importers within 10 
days after it opened a case file in its tracking system." [See comment 
7] Additionally, Customs disagrees with the statement, "a penalty and 
payment notice for one of these claims in the Los Angeles FP&F office 
was 450 days late." [See comment 8] 

Customs records indicate that if adequate consideration were given to 
previous comments provided to the auditors relative to preliminary 
findings, the number of cases involving late issuance of penalty 
notices should be further reduced. According to Customs SEACATS 
records, two of the 17 cited cases resulted in the issuance of the 
penalty notices on the same day the case record was input in SEACATS. 
One of the cited open cases involved a penalty issued under the 
authority of 19 U.S.C. 1526(f), which provides for the assessment of 
penalties against persons involved in the importation of merchandise 
bearing counterfeit trademarks. The penalty issuance policy does not 
apply to 19 U.S.C. 1526(f) penalties because Customs procedures 
published under Treasury Decision 99-76 require the forfeiture of the 
infringing merchandise as a predicate to issuing a penalty notice. [See 
comment 7] 

According to Customs records, none of the 3 identified Los Angeles 
cases involved a penalty notice that was 450 days late, and Customs 
believes the auditors inadvertently referred to a case exempt from the 
10 day issuance requirements when stating a notice was 450 days late. 
[See comment 8] 

Issuance of Responses to Violators that Filed Petitions for Relief: 

Customs does not totally concur with the finding that states, "Customs 
did not consistently respond to violators that filed petitions for 
relief." Although Customs concedes that in many of the cited cases it 
did not achieve its goal of responding to each petition within 90 days 
of the petition receipt, Customs believes the finding tends to mislead 
the reader into concluding that Customs sometimes fails to respond at 
all to petitions. Customs believes the implied non-responses were 
inadvertent and would prefer that the finding be re-stated to state, 
"Customs did not consistently respond to petitions within 90 days of 
receipt." [See comment 9] 

Customs responds to all petitions for relief and it is Customs policy 
to respond to petitions within 90 days of their receipt, unless the 
petition must be referred to another office for comment or 
investigation prior to issuance of a decision. Customs notes that 
delays in petition response times in the New Orleans FP&F office in 
1998 and 1999 are directly attributable to reduced staffing levels and 
increases in cases during those time periods. [See comment 10] 

According to Customs records, in 3 of the 29 cited cases the FP&F 
office referred the petitions to other Customs offices for 
comments/actions. The policy regarding responding to petitions within 
90 days does not apply to cases where the petition must be referred to 
other offices for comments/actions. Regarding the Los Angeles case 
alleged to be 404 days late, Customs records reflect that the subject 
case involved an FDA refusal of admission. Petitions in FDA cases must 
be referred to FDA for a recommendation; therefore, the 90 day petition 
response period did not apply and the response should not be considered 
late. For one of the cited cases, Customs records indicate Customs 
responded to the petition in 72 days. None of the 4 cases referenced 
above belong in the cited universe of 29 cases. [See comment 10] 

Customs disagrees with the statement, "Such delays increased the 
likelihood of the expiration of the statute of limitations and may have 
resulted in reduced CFP collections at the four selected FP&F offices." 
According to Customs calculations, the average petition response time 
for the 25 applicable cases was 165 days (less than 6 months) from the 
date of receipt of the petitions. The average petition response time 
clearly indicates that the statute of limitations was never in jeopardy 
for any of the cited cases as a direct result of delays in responding 
to petitions. Additionally, there is no evidence to support the 
conclusion that delays in petition response times "may have resulted in 
reduced CFP collections at the four selected FP&F offices" because 
petition decisions routinely result in standardized mitigations that 
would be unaffected by the insignificant average delays noted above. 
Since mitigation is available in almost all cases and the mitigated 
amounts follow standard mitigation guidelines, there is no basis upon 
which to conclude that modest delays in rendering petition decisions 
adversely affect the collected amounts. Customs contends the conclusion 
is erroneous and should be stricken from the draft report. [See comment 
11] 

Issuance of Notices of Redelivery: 

Customs concurs with the finding, "The timing of Customs' issuance of 
Notices of Redelivery (redelivery notices), which are sent to importers 
when the Department of Health and Human Services' Food and Drug 
Administration (FDA) deems goods unsafe for importation, raised legal 
issues that affected settlement determinations." However, Customs notes 
that the litigation referenced as the basis of the finding, United 
States v. Likas International, Inc. and Washington International 
Insurance Company, occurred after many of the audit sample cases were 
already initiated. Therefore, any changes in practice or policy 
necessitated by the litigation could not have been implemented prior to 
the initiation of some of the sample cases. The legal issues related to 
FDA refusals of admission have resulted in the preparation of a notice 
of proposed rulemaking by Customs, which proposes to establish a 
conditional release period for FDA importations in the Customs 
Regulations. The notice of proposed rulemaking has been forwarded to 
Treasury for approval prior to publication in the Federal Register. 
[See comment 12] 

The following are GAOï¿½s comments on the U.S. Customs Serviceï¿½s letter
dated May 15, 2002. 

GAO Comments: 

1. See ï¿½Agency Comments and Our Evaluationï¿½ section. 

2. We have inserted a footnote in the report to explain liquidated 
damages. However, our report does not focus on revenue, but rather on 
Customsï¿½ collection of CFP receivables in accordance with its policies 
and procedures. 

3. We have revised the report to clarify Customsï¿½ policy regarding when 
to request a waiver. 

4. We fully considered the previous comments provided. We revised the
discussion of the two CFP claims to focus on the issue of timeliness for
requesting waivers of the statute of limitations. We augmented our
discussion in the report related to the two cases for which Customs did
not timely request waivers of the statute of limitations and lost
opportunities for further collections. 

5. Our discussion regarding eight high-dollar CFP claims that were
written off during fiscal years 1998 through 2000 focused on four cases
in which the expiration of the statute of limitations and Customsï¿½
decision to terminate collection activity were the primary reasons for
the write-off of the CFP debts. We did not discuss the three cases that
involved penalties related to seizures of foreign-owned conveyances
used to smuggle narcotics that were seized, forfeited, and sold. For the
four cases discussed in this report, the expiration of the statute of
limitations was one of Customsï¿½ cited reasons for deeming the debts
uncollectible and legally without merit, which led to writing off the
debts. Even though we cited Customsï¿½ reason for these determinations
as the violators either subsequently filing for bankruptcy or going out 
of business, we also identified lengthy collection efforts where 
Customsï¿½ investigations, petition process, and information gathering 
and review prior to decisions on the petitions or referral took several 
years. 

6. We agree that the expiration of the statute of limitations was not in
jeopardy as it related to the entries for the last 4 of the 7 years for 
this case. However, our report focused on the expiration of the statute 
of limitations on the entries filed in the first 3 of the 7 years under 
the CFP claim. We also believe it was important to note that Customs 
only collected $11,975 of the $21 million CFP assessment when it 
accepted the offer in compromise and that $6 million was distributed to 
two principal stockholders during Customsï¿½ collection efforts on this 
CFP claim. We moved this case from the section that discusses instances
where the approaching expiration of the statute of limitations was a
contributing factor in Customsï¿½ acceptance of lower mitigation amounts 
for CFP claims to the section that discusses instances in which the 
statute of limitations expired. 

7. We reviewed and considered the information that Customs provided to
us regarding our preliminary findings. For the two cases for which
Customs asserts the penalty notices were issued on the same day as the
case records were input into SEACATS, we were not provided adequate
documentation to support the assertion. 

8. We have revised the report to reduce the number of exceptions from 17
to 16. Since penalty notices should not be issued for cases involving
penalties related to the seizure of counterfeit trademark infringing
merchandise, we removed this case from the reported exceptions. It 
should be noted that during our fieldwork and subsequent follow-up
after our exit meeting, we had several discussions and were provided
additional explanations and documentation on this issue. However, until 
Customsï¿½ written response to the draft report, Customs had not 
indicated that the Los Angeles case that was reported 456 days late
should not have been included. 

9. As our report states, we found that in 25 of 100 claims involving
petitions, Customs did not comply with its requirement to respond 
within 90 days of receipt of the petition. We estimated that for 22.3
percent of open and 26.6 percent of closed CFP claims managed by the
four selected FP&F offices, Customs did not respond to the petitions
within the 90-day period. We do not believe such results demonstrate
only inadvertent noncompliance with the 90-day requirement. However, we 
have revised the report to clarify that Customs did not consistently 
respond to petitions within 90 days of receipt. 

10. While Customsï¿½ records indicated that it did not respond to 
petitions by importers until after 90 days for all 29 cases, Customs 
stated it had an informal process to extend the 90-day period for the 
number of days the petitions were outside of the FP&F office. In its 
response to a draft of this report, Customs informed us that the 
Commissioner formalized this process on January 21, 2002, in Customsï¿½ 
Seized Asset Management and Enforcement Procedures Handbook. Customs
subsequently provided us the four case numbers and documentation to
support (1) the number of days the cases were out of the FP&F offices
and (2) that Customs responded within the 90-day period, in accordance 
with its informal process that was finalized in January 2002. The four 
cases included the Los Angeles case that involved an FDA refusal of 
admission. As a result, we revised the report to reflect that Customs 
did not respond to petitions by importers until after 90 days for 25 
cases. 

11. We have modified the report to focus on the effect on the reduction 
in CFP collections that may have resulted from delays in responding to
violators that filed petitions for relief. As industry statistics show, 
the likelihood of recovering amounts owed decreases dramatically as the
age of the delinquency increases. 

12. We clearly stated that Customs did not consistently issue redelivery
notices to importers and that each of the selected cases reviewed 
occurred prior to when Customs established its new guidance in fiscal
year 1999. We also pointed out that Customs is currently addressing the
one outstanding legal issue that resulted from the lawsuits and 
settlement. In fact, our recommendation only addresses the need for
Customs to expeditiously establish a conditional release period. 

[End of section] 

Appendix II: Comments from the Department of the Treasuryï¿½s Financial 
Management Service: 

Department Of The Treasury: 
Commissioner: 
Financial Management Service: 
Washington, D.C. 20227: 

May 10, 2002: 

Mr. Gary T. Engel: 
Director, Financial Management and Assurance: 
United States General Accounting Office: 
441 G. Street, NW Room 5079: 
Washington, DC 20548: 

Dear Mr. Engel: 

This letter is in response to your request for comments on the draft 
General Accounting Office (GAO) report, Civil Fines and Penalties (CFP) 
Debt: Review of US. Customs Service's Management and Collection 
Processes (GAO-02-655). 

We have reviewed the draft and agree with the GAO recommendations to 
the Commissioner of the U.S. Customs Service to strengthen Customs' CFP 
debt collection policies and procedures and improve the collection of 
CFP debt, along with decreasing the amount of CFP receivables that are 
reduced or written off. 

The Financial Management Service will continue to actively work within 
the scope of the Debt Collection Improvement Act of 1996 to assist the 
U.S. Customs Service in ensuring that all eligible debts are referred 
in a timely manner for offset and cross-servicing. 

We appreciate the opportunity to provide comments on this report. If 
you or your staff have any questions, please contact Dean Balamaci on 
(202) 874-6660. 

Sincerely, 

Signed by: 

Richard L. Gregg: 

cc: Donald V. Hammond: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Steven R. Haughton, (202) 512-5999: 

Acknowledgments: 

Mario Artesiano, Rathi Bose, Sharon Byrd, Richard Cambosos, Perry 
Datwyler, Mickie Gray, David Grindstaff, Marshall Hamlett, Fred Jimenez,
Eric John, Laurie King, Victoria Lin, Jon Ling, John Lord, Mel Mench,
Suzanne Murphy, and Maria Stortz made key contributions to this report. 

[End of section] 

Footnotes: 

[1] This work was part of a broad review that also looked at the 
management and collection of criminal fines and penalties at the 
Department of Justice and the U.S. courts. See U.S. General Accounting 
Office, Criminal Debt: Oversight and Actions Needed to Address 
Deficiencies in Collection Processes, [hyperlink, 
http://www.gao.gov/products/GAO-01-664] (Washington, D.C.: July 16, 
2001). 

[2] The Centers for Medicare and Medicaid Services was formerly the 
Health Care Financing Administration. 

[3] U.S. General Accounting Office, Civil Fines and Penalties Debt: 
Review of CMSï¿½ Management and Collection Processes, [hyperlink, 
http://www.gao.gov/products/GAO-02-116] (Washington, D.C.: Dec. 31, 
2001), and Civil Fines and Penalties Debt: Review of OSMï¿½s Management 
and Collection Processes, [hyperlink, 
http://www.gao.gov/products/GAO-02-211] (Washington, D.C.: Dec. 31, 
2001). 

[4] Accounting records reflect anticipated losses on accounts 
receivable as allowances for uncollectible accounts, reserves for 
losses, or similar terminology. 

[5] The sufficiency of surety bond coverage is an outstanding issue 
that has existed since, and was noted in, our 1993 report on Customsï¿½ 
management of its receivables. U.S. General Accounting Office, 
Financial Management: Customs Did Not Adequately Account For or Control 
Its Accounts Receivable, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-94-5] (Washington, D.C.: Nov. 8, 
1993). 

[6] [hyperlink, http://www.gao.gov/products/GAO/AIMD-94-5]. 

[7] According to a Customs official, decisions to remit the penalty in 
full without payment of any mitigated amount are usually based on a 
finding that the violations resulted from circumstances beyond the 
control of the violator and the violator is found to be without 
culpability (blame). 

[8] An entry summary is the documentation that enables Customs to (1) 
assess duties, (2) collect statistics on imported merchandise, and (3) 
determine whether other legal and regulatory requirements are met. 

[9] The four selected FP&F offices were in New Orleans, Louisiana; New 
York, New York (John F. Kennedy Airport); Los Angeles, California; and 
Seattle, Washington. 

[10] These are commonly referred to as 1592/592 violations, which are 
Commercial Fraud and Negligence Penalties (Title 19, United States 
Code, Section 1592). 

[11] Lost revenue consists of lawful duties, taxes, and fees not paid 
to the government. 

[12] The five FP&F offices were in New Orleans, Louisiana; New York, 
New York (John F. Kennedy Airport); San Francisco, California; Los 
Angeles, California; and Seattle, Washington. 

[13] Customs bonds provide security as liquidated damages of amounts 
deemed necessary for the protection of revenue or to assure compliance 
with pertinent laws, regulations, and instructions. See generally, 19 
U.S.C. ï¿½ 1623(a) and 19 C.F.R. ï¿½ 113.1 and 113.62. 

[14] A surety is a company or individual that issues a bond to the 
importer/broker covering the merchandise brought into U.S. commerce. 
Should the importer/broker fail to pay amounts to Customs, the surety 
would be responsible up to the amount of the bond in accordance with 
Customs regulations. 

[15] [hyperlink, http://www.gao.gov/products/GAO/AIMD-94-5]. 

[16] In accordance with Statement of Federal Accounting Standards No. 
7, Accounting for Revenue and Other Financing Sources and Concepts for 
Reconciling Budgetary and Financial Accounting, a receivable is not 
recognized on the basis of payment due dates but rather on the 
completion of the assessment process, under which assessments are 
enforceable claims for which a specific amount due has been determined. 

[17] Brokers are agents for importers and exporters, and are 
responsible for preparing, filing, and storing Customs documentation 
(entry summaries and duties). 

[18] Restricted merchandise is merchandise with restrictions imposed by 
textile quota agreements, the Consumer Product Safety Commission, 
Foreign Assets Control, Environmental Protection Agency, Food and Drug 
Administration, etc. 

[19] Customs policy requires that importers and brokers maintain bonds 
as insurance against losses to Customs from unpaid duties, taxes, fees, 
and other assessments, which include claims for liquidated damages. 

[20] A violation occurs at the expiration of a carnet if temporarily 
imported merchandise is not destroyed or exported. 

[21] In accordance with Customs regulations and international 
convention, the liquidated damages on carnet merchandise not exported 
or destroyed are 110 percent of duties. 

[22] ACS was developed to automate information on Customsï¿½ program 
operations and is used to account for revenue collected and accounts 
receivable information. 

[23] Customs Directive 3280-011A, February 3, 2000: ATA (Admission 
Temporaireï¿½Temporary Admission) Carnets ï¿½ Proof of Exportation, 
Liquidated Damages, and Regularization Fees (section II.F of Customs 
Regulations on Carnets [part 114, section 10.39]). 

[24] U.S. General Accounting Office, Standards for Internal Control in 
the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: Nov. 
1999). 

[25] 67 Fed. Reg. 19485. 

[26] We are 95 percent confident that the actual proportions of CFP 
claims with insufficient surety bond amounts to cover unpaid duties, 
taxes, charges, and CFP at the four selected FP&F offices were from 2.7 
percent to 15.1 percent for continuous-entry bonds. 

[27] [hyperlink, http://www.gao.gov/products/GAO/AIMD-94-5]. 

[28] A temporary importation bond, such as a carnet, covers import of 
merchandise into the United States for a set period. 

[29] Appendix B, (H)(1)(b) of Part 171 of Code of Federal Regulations 
Title 19. 

[30] 19 C.F.R. Part 171, App. B (G)(6). 

[31] The statute of limitations expires 5 years after the date of the 
alleged violation, except for fraud cases, for which it expires 5 years 
after the date of discovery of the alleged fraud (19 U.S.C. ï¿½ 1621). 

[32] 19 C.F.R. Part 171.64 and 19 C.F.R. Part 171, App. B (E)(1)(d). 

[33] The Court of International Trade is the body within the federal 
judiciary that deals with cases involving international trade and 
customs duties. 

[34] A single claim may contain numerous entries, and the statute of 
limitations expiration date for each entry depends on the date the 
alleged violation occurred. Therefore, one claim may be subject to 
multiple statute of limitations expiration dates. As a result, the 
statute of limitations for some entries within a claim may have 
expired, while for other entries it has not. 

[35] We are 95 percent confident that the actual proportions of CFP 
claims with untimely issuance of penalty and payment notices at the 
four selected FP&F offices were from 0.29 percent to 8.4 percent and 
from 8.2 percent to 23.3 percent for open and closed CFP claims, 
respectively. 

[36] We are 95 percent confident that the actual proportions of CFP 
claims with untimely responses to violatorsï¿½ petitions for relief at 
the Customs ports of the four selected FP&F offices were from 10.8 
percent to 38.5 percent and from 16.1 percent to 39.7 percent for open 
and closed CFP claims, respectively. 

[37] 21 U.S.C. ï¿½ 381(a). If FDA refuses admission of an article, the 
Secretary of the Treasury is required to cause the destruction of the 
article unless it is exported within 90 days of the date of the refusal 
or such additional time as permitted by regulations prescribed by the
Secretary of the Treasury. 

[38] 21 U.S.C. ï¿½ 381(b). 

[39] 19 C.F.R. ï¿½ 113.62. 

[40] 19 C.F.R. ï¿½ 113.62(d). 

[41] Court No. 96-04-01065 (United States Court of International 
Trade). 

[42] This was similar to one of the main issues in United States v. 
Soï¿½s USA Company, Inc., and Washington International Insurance Company, 
No. 97-05-00922 (Aug. 26, 1999), 1999 WL 765408 (U.S. Court of 
International Trade). The court held that the goods were not 
conditionally released because Customs had not provided a definite 
conditional release period for the goods by regulation or other notice. 

[43] Claims include debts owed to the United States or debts being 
collected by the United States on behalf of others. 

[End of section] 

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