    International Trade: Persistent Weaknesses in the In-Bond Cargo
    System Impede Customs and Border Protection's Ability to Address
    Revenue, Trade, and Security Concerns (17-APR-07, GAO-07-561).

    The U.S. Customs and Border Protection (CBP) must strive to
    balance its competing goals of facilitating trade, providing port
    security, and collecting trade revenues. CBP's in-bond system,
    which allows goods to transit the United States without formally
    entering U.S. commerce, must also balance these goals. In
    response to concerns that previously identified weaknesses in the
    in-bond system have not been remedied, GAO examined (1) the
    purpose of the in-bond system and the extent of its use (2) CBP
    efforts to ensure that revenues are collected and trade concerns
    are minimized, and (3) CBP efforts to ensure that
    security-related inspections are properly targeted. GAO examined
    audit reports and agency documents, interviewed officials at CBP
    headquarters and at 10 CBP port offices. GAO also discussed the
    in-bond system with trade groups impacted by the in-bond system.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-561
        ACCNO:   A68307
      TITLE:     International Trade: Persistent Weaknesses in the In-Bond
    Cargo System Impede Customs and Border Protection's Ability to
    Address Revenue, Trade, and Security Concerns
         DATE:   04/17/2007
      SUBJECT:   Data collection
    	     Homeland security
    	     Import regulation
    	     Importing
    	     Inspection
    	     Internal controls
    	     International trade
    	     Monitoring
    	     Port security
    	     Program evaluation
    	     Risk assessment
    	     Risk management
    	     Trade regulation
    	     Customs Service Automated In-Bond System

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    GAO-07-561

         * [1]Results in Brief
         * [2]Background
         * [3]The In-Bond System Facilitates the Flow of Trade, but CBP Do

              * [4]The In-Bond System Facilitates the Flow of Goods
              * [5]The In-Bond System Provides Several Advantages to the Trade
              * [6]CBP Reports Extensive Use of the In-Bond System but Has Not

         * [7]In-Bond System Management Weaknesses Impede CBP's Ability to

              * [8]CBP Does Not Collect Adequate Data or Analyze Existing Data

                   * [9]Data Collection Limitations Impede CBP's Assessment of
                     Poten
                   * [10]CBP Also Cannot Accurately Assess Potential Trade
                     Violations

              * [11]Numerous Open In-Bond Records Reflect Lack of Control of In-

                   * [12]Number of Open In-Bond Records Is Substantial, but CBP
                     Lacks
                   * [13]CBP Has Not Consistently Reconciled Open In-Bond Records
                   * [14]Regulations Provide Trade Flexibility but Complicate
                     CBP's M
                   * [15]Administrative Errors Contribute to High Number of Open
                     In-B
                   * [16]CBP Recently Issued Directives to Address Open In-Bond
                     Recor

              * [17]CBP Has Not Consistently Performed Its Compliance Measuremen

         * [18]Limited Information Collected on In-Bond Cargo Impedes CBP E

              * [19]Automated Targeting System Is Part of the CBP Multilayered S
              * [20]CBP Uses Manifest Information for All Cargo, Including In-Bo
              * [21]In-Bond Cargo Transits the United States without an Updated

         * [22]Conclusions
         * [23]Recommendations
         * [24]Agency Comments and GAO Response
         * [25]GAO Comments
         * [26]GAO Contact
         * [27]Staff Acknowledgments
         * [28]GAO's Mission
         * [29]Obtaining Copies of GAO Reports and Testimony

              * [30]Order by Mail or Phone

         * [31]To Report Fraud, Waste, and Abuse in Federal Programs
         * [32]Congressional Relations
         * [33]Public Affairs

    Report to the Committee on Finance, U.S. Senate

    United States Government Accountability Office

    GAO

    April 2007

    INTERNATIONAL TRADE

    Persistent Weaknesses in the In-Bond Cargo System Impede Customs and
    Border Protection's Ability to Address Revenue, Trade, and Security
    Concerns

    GAO-07-561

    Contents

    Letter 1

    Results in Brief 2
    Background 5
    The In-Bond System Facilitates the Flow of Trade, but CBP Does Not Know
    the Extent of Its Use 7
    In-Bond System Management Weaknesses Impede CBP's Ability to Ensure Proper
    Collection of Trade Revenues and Address Trade Concerns 17
    Limited Information Collected on In-Bond Cargo Impedes CBP Efforts to
    Manage Security Risks 26
    Conclusions 30
    Recommendations 31
    Agency Comments and GAO Response 33
    Appendix I Objectives, Scope, and Methodology 37
    Appendix II Comments from the Department of Homeland Security 39
    GAO Comments 43
    Appendix III GAO Contact and Staff Acknowledgments 44

    Table

    Table 1: Comparison of Data Requirements for Entry Summary and In-Bond
    Forms 18

    Figures

    Figure 1: Process for IT, T&E, and IE In-Bond Movements 9
    Figure 2: Value of All U.S. Imports by Fiscal Year, 1998 to 2006 12
    Figure 3: Number and Percent of In-Bond Transactions by Type, October 2004
    through March 2005 15
    Figure 4: Number of In-Bond Transactions by Type for Selected Ports in
    Fiscal Year 2005 16
    Figure 5: CBP Estimate of Percentage of In-Bond Records Remaining Open for
    Fiscal Year 2005 22
    Figure 6: Change in ATS Target Score after Obtaining Entry Information for
    Selected Ports 29

    Abbreviations

    ACE Automated Commercial Environment
    ACS Automated Commercial System
    AMS Automated Manifest System
    ATS Automated Targeting System
    CBP Customs and Border Protection
    DHS Department of Homeland Security
    FDA Food and Drug Administration
    FTZ Foreign Trade Zone
    HTS Harmonized Trade Schedule
    ICE Immigration and Customs Enforcement
    IE Immediate Exportation
    IT Immediate Transportation
    OFO Office of Field Operations
    OIT Office of Information Technology
    T&E Transportation and Exportation

    This is a work of the U.S. government and is not subject to copyright
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    separately.

    United States Government Accountability Office
    Washington, DC 20548

    April 17, 2007

    The Honorable Max Baucus
    Chairman
    The Honorable Charles E. Grassley
    Ranking Member
    Committee on Finance
    United State Senate

    With the recent growth in global trade and U.S. imports, U.S. Customs and
    Border Protection (CBP) faces an increasingly heavy workload at the
    nation's ports. CBP has responsibilities related to facilitating trade,
    providing port security, and collecting trade-related revenues, which
    totaled about $28.5 billion in fiscal year 2006. To facilitate trade, the
    U.S. customs system allows imported cargo intended for either U.S. or
    foreign markets to move from one U.S. port to another without being
    assessed U.S. duties or quotas and without officially entering U.S.
    commerce. This cargo referred to as an in-bond shipment--requires a
    responsible party to be covered by a CBP-approved bond and agree to comply
    with applicable regulations. Some CBP port officials have estimated that
    in-bond shipments represent from 30 percent to 60 percent of goods
    received at their ports. Over the past years, reports from GAO and other
    audit agencies have noted various internal control weaknesses in the CBP
    in-bond shipment system. These weaknesses have sometimes allowed goods to
    be improperly diverted and sold in U.S. markets, thus avoiding duties and
    quotas and possibly also posing security risks. For example, according to
    an Immigration and Customs Enforcement (ICE) report, from September 1999
    through December 2002, more than 7,500 in-bond shipments of wearing
    apparel were diverted from Los Angeles to customers throughout the United
    States, with an estimated loss of revenue to the United States of more
    than $100 million. With the recent growth in global trade and U.S.
    imports, U.S. Customs and Border Protection (CBP) faces an increasingly
    heavy workload at the nation's ports. CBP has responsibilities related to
    facilitating trade, providing port security, and collecting trade-related
    revenues, which totaled about $28.5 billion in fiscal year 2006. To
    facilitate trade, the U.S. customs system allows imported cargo intended
    for either U.S. or foreign markets to move from one U.S. port to another
    without being assessed U.S. duties or quotas and without officially
    entering U.S. commerce. This cargo referred to as an in-bond
    shipment--requires a responsible party to be covered by a CBP-approved
    bond and agree to comply with applicable regulations. Some CBP port
    officials have estimated that in-bond shipments represent from 30 percent
    to 60 percent of goods received at their ports. Over the past years,
    reports from GAO and other audit agencies have noted various internal
    control weaknesses in the CBP in-bond shipment system. These weaknesses
    have sometimes allowed goods to be improperly diverted and sold in U.S.
    markets, thus avoiding duties and quotas and possibly also posing security
    risks. For example, according to an Immigration and Customs Enforcement
    (ICE) report, from September 1999 through December 2002, more than 7,500
    in-bond shipments of wearing apparel were diverted from Los Angeles to
    customers throughout the United States, with an estimated loss of revenue
    to the United States of more than $100 million.

    At your request, we addressed these issues (1) What is the in-bond system
    and to what extent is it used? (2) How has CBP managed the system to
    ensure that revenues are collected and trade concerns are minimized? and
    (3) How has CBP managed the system to ensure that security-related
    inspections are properly targeted? At your request, we addressed these
    issues (1) What is the in-bond system and to what extent is it used? (2)
    How has CBP managed the system to ensure that revenues are collected and
    trade concerns are minimized? and (3) How has CBP managed the system to
    ensure that security-related inspections are properly targeted?

    To meet these objectives, we reviewed project documentation and
    interviewed knowledgeable officials from CBP headquarters and selected
    port locations. We interviewed officials and examined documents at the To
    meet these objectives, we reviewed project documentation and interviewed
    knowledgeable officials from CBP headquarters and selected port locations.
    We interviewed officials and examined documents at the six field
    operations offices processing the greatest numbers of in-bond transactions
    in 2005 (excluding in-bond transactions initiated by large couriers such
    as DHL, FedEx, and UPS). Major ports within those field operations offices
    include Buffalo, New York; Los Angeles and Long Beach, California; Laredo,
    Texas; Miami, Florida; New York, New York; Newark, New Jersey; and Blaine
    and Seattle, Washington. We also visited the Port of Dallas, Texas, which
    was identified by the Los Angeles CBP field office as a major inland
    destination port for in-bond goods. We examined CBP's treatment of in-bond
    shipments in each of these ports and where possible we obtained data
    showing the number of in-bond documents processed. To identify previously
    identified in-bond internal control weaknesses, we reviewed GAO, Inspector
    General, and other audit reports on the in-bond program. We discussed the
    views of CBP headquarters and port management personnel regarding any
    revenue, security, or other risks associated with processing in-bond cargo
    and with the actions taken to address these risks. We conducted our work
    in accordance with generally accepted government auditing standards. A
    detailed description of our scope and methodology is included in appendix
    I of this report.

    Results in Brief

    The in-bond system is designed to facilitate the flow of trade throughout
    the United States; however, CBP does not know the extent of use of the
    in-bond system because it collects little information on in-bond shipments
    and performs limited analysis of data that are collected. The system
    allows cargo to be transported from the arrival port, without appraisement
    of the cargo or payment of duties, to another U.S. port for official
    entry^1 into U.S. commerce or for exportation. The trade community
    believes the flexibilities provided by the in-bond system are needed to
    facilitate trade, particularly allowing it to avoid congestion and delays
    at U.S. seaports whose infrastructure has not kept up with the dramatic
    growth in trade. For example, CBP reported that import values increased
    from $881 billion in fiscal year 1998 to an estimated $1.82 trillion in
    fiscal year 2006. The in-bond system is estimated to be widely used;
    according to CBP records between October 2004 and March 2005, over 6.5
    million in-bond transactions were initiated nationwide. However, CBP
    cannot assess the extent of the program because it does not collect
    accurate information on the value and volume of in-bond cargo, and its
    analysis of existing data is limited to the number of in-bond
    transactions. For example, CBP officials at the Port of Los Angeles
    estimated that 40 to 60 percent of all imports arriving at the port in
    2005 were transported in-bond, but they were unable to provide reliable
    data to confirm this estimate.

    ^1The term "official entry" is used throughout this report to refer to the
    CBP process where importers or shipping agents are required to provide
    accurate appraisement and description of goods, as well as other detailed
    entry information for goods intended for consumption in the United Stated.
    Through this process CBP also assesses appropriate duties and taxes on
    imported goods that will enter the U.S. Commerce.

    Despite numerous program reviews and audits that identified problems in
    CBP's management of the in-bond system, weaknesses persist and continue to
    impede CBP's ability to ensure proper collection of trade revenue and
    management of trade risks. The major weakness is that CBP does not
    adequately monitor and track in-bond goods; in particular, it does not
    consistently reconcile the in-bond documents issued at the arrival port
    with documents at the destination port, to ensure that the cargo is either
    officially entered, with appropriate duties or quotas applied, or is in
    fact exported. For example, one of the ports with the highest amount of
    in-bond traffic reported that up to 77 percent of their in-bond cargo
    shipments remained unreconciled, or "open." Several factors contribute to
    CBP's inability to monitor these shipments. One is that CBP does not
    collect appropriate data or analyze available data to adequately manage
    the in-bond system and identify risks associated with revenue loss and
    trade violations. As a result, the agency has not been able to implement
    compliance measurements to assess revenue gaps and the effectiveness of
    trade compliance controls. A second factor is that the in-bond regulations
    provide unusual flexibility for the trade community, but create challenges
    for CBP. The regulations currently allow bonded carriers from 15 to 60
    days,^2 depending on the mode of shipment, to reach their final
    destination and allow them to change a shipment's final destination
    without notifying CBP. Also, administrative errors by both shipping agents
    and CBP staff contribute to the high numbers of open in-bond records.
    Finally, CBP continues to inconsistently perform in-bond compliance exams,
    with some ports not performing these exams at all and other ports only
    recently beginning to perform them. Results from these compliance exams,
    when consistently performed, can aid port and CBP management in
    identifying system weaknesses.

    The limited information available on in-bond cargo impedes CBP efforts to
    manage associated security risks and ensure proper targeting of
    inspections. CBP uses information from the manifest as an input in
    developing an initial screening score to establish inspection priorities.
    However, information from the manifest may lack detail and reduce the
    quality of targeting. Carriers of goods officially entering commerce are
    required to present more detailed information on entry documents. As a
    result, in-bond goods transit the United States after the initial
    targeting based on less detailed information than goods that have been
    officially entered with required information. In addition, scarce
    inspection resources are misdirected to in-bond goods that a security
    score based on better information might have shown did not warrant
    inspection. Recent CBP data for four large ports showed that security
    screening scores for cargo increased 23 percent of the time and decreased
    47 percent of the time after information from entry documents had been
    considered.

    ^2The carrier has 60 days by vessel, 30 days by land, and 15 days by air
    to deliver the in-bond cargo to the port of destination or exportation.
    (19 C.F.R. 18.2 and 19 C.F.R. 122.118.)

    In this report, we are making recommendations in three general areas.
    First, to improve the level of detail in information available on in-bond
    cargo, we are making several recommendations to allow CBP to make better
    management decisions regarding trade, revenue, and security concerns.
    Second, to improve monitoring of in-bond cargo, we are recommending that
    CBP assess the systemic problems associated with identifying open in-bond
    transactions, take steps to resolve these problems, and improve the
    agency's ability to track and close open in-bond transactions. Third, to
    make the in-bond compliance measurement program a more effective
    monitoring tool, we are recommending that CBP ensure that compliance
    measurement exams are consistently conducted to inform CBP management of
    needed corrective actions.

    We provided a draft of this report to DHS for review by CBP and ICE, and
    DHS agreed with most of our recommendations in all three areas. In the
    area of improving in-bond information, DHS agreed with three of our five
    recommendations. DHS disagreed with one recommendation, stating that it
    would change the nature of in-bond transactions and increase costs. DHS
    was also concerned that another recommendation called for improved
    information in a system that would not enhance CBPs' antiterrorism
    efforts. We modified our recommendations in these areas to address DHS
    concerns. In the area of improving CBP monitoring of open in-bond
    transactions, DHS agreed with three of our five recommendations. DHS
    stated that CBP had met the intent of our recommendation to ensure that
    bondholders close in-bond documents within required time frames. We
    modified this recommendation to emphasize that a more systematic
    enforcement strategy is needed. DHS also disagreed with our recommendation
    that CBP should prioritize their efforts to close open in-bonds based on
    risk. Given limited CBP resources and the high number of open in-bond
    transactions, we maintained our recommendation regarding the need for
    prioritization. In the area of improving CBP's compliance measurement
    program, DHS agreed with our recommendations. CBP also provided technical
    comments, which we have incorporated in this report as appropriate.

    Background

    Provisions for the in-bond-type movements of cargo date back to the 1800s,
    although current authority for in-bond movements is contained in the
    Tariff Act of 1930, as amended.^3 Under the current system, merchandise
    arriving from foreign countries can be authorized to move in-bond, without
    appraisement of the merchandise or payment of duties, from a port of
    arrival to any other U.S. port to be officially entered into U.S. commerce
    or exported. Several parties can be involved in an in-bond transaction,
    including the importer and shipping agents such as carriers and customs
    brokers.

    In-bond goods must be transported by a carrier covered by a CBP-approved
    bond that allows goods that have not yet entered U.S. commerce to move
    through the United States. Such carriers can move goods by ship, truck,
    rail, plane, or any combination of these. The bond is a contract given to
    ensure performance of obligations imposed by law or regulation and
    guarantees payment to CBP if these obligations are not performed. The
    three parties involved in a CBP bond are (1) the principal, which can be
    an importer, broker, carrier, or other business entity; (2) a surety
    authorized by the Department of the Treasury to write CBP bonds, normally
    an insurance company; and (3) CBP, which would be the beneficiary of the
    bond if conditions are not met. If CBP finds that the bonded party has
    violated laws or regulations in moving the in-bond goods, it can take
    action to recover against the bond.

    CBP is the unified border agency within the Department of Homeland
    Security (DHS) charged with the mission of preventing terrorists and
    terrorist weapons from entering the United States, while also facilitating
    the flow of legitimate trade and travel. This agency, with its more than
    40,000 employees covering 308 ports of entry, is responsible for the
    in-bond process and controls and protects the nation's borders. CBP's
    Office of Field Operations (OFO) is the primary CBP component responsible
    for enforcing customs, immigration, and agriculture laws and regulations
    at U.S. borders, including in-bond regulations. OFO maintains programs at
    20 field operation offices, 308 ports of entry, and 14 preclearance
    stations in Canada and the Caribbean. Port directors oversee points of
    entry in their operational areas, where virtually all conveyances,
    passengers, and goods legally enter and exit the United States.

    ^3Sections 552 and 553 of the Tarriff Act of 1930, as amended (19 U.S.C.
    1552 and 1553).

    To carry out its trade-related obligations, CBP relies on information
    systems and management processes to help its staff track, control, and
    process all commercial goods imported into the United States. The agency
    is in the midst of modernizing its current trade processing system, the
    Automated Commercial System (ACS). CBP is currently replacing ACS with the
    Automated Commercial Environment (ACE) system in 11 increments, referred
    to as "releases," to be completed in approximately 8 1/2 years. When the
    system is fully operational, it is expected to provide an improved
    technology foundation for CBP border security and trade activities. We
    have periodically reported on the development of the ACE system. Most
    recently, we reported that CBP faces long-standing management challenges
    and new risks associated with the development of ACE.^4

    Since the 1990s, a number of audits and program reviews completed by GAO,
    the Department of the Treasury Inspector General, independent public
    accounting firms, and others have identified weaknesses in the in-bond
    system. Among weaknesses identified were problems in monitoring and
    tracking in-bond records and in targeting and inspecting in-bond
    shipments, and inconsistent performance of the in-bond system's compliance
    measurement program.^5 A 2001 Department of the Treasury Inspector General
    audit of the U.S. Customs Service's^6 financial statements for fiscal
    years 1999 and 2000 found that its inability to close open in-bond records
    because of administrative errors and lack of appropriate system checks
    impeded its ability to ensure that goods moving in-bond were not
    substituted or diverted into U.S. commerce without proper assessment. The
    Financial Statement audits for fiscal years 2002 to 2006 by an independent
    public accounting firm cited CBP's lack of a reliable process for
    monitoring in-bond shipments and inconsistent performance of its
    compliance measurement program, known as Tinman.

    ^4GAO, Information Technology: Customs Has Made Progress on Automated
    Commercial Environment System, but It Faces Long-Standing Management
    Challenges and New Risks, [34]GAO-06-580 (Washington, D.C.: May 31, 2006).

    ^5Two separate GAO reports completed in 1994 found that Customs could not
    readily determine the disposition of in-bond shipments. GAO, Financial
    Management: Control Weaknesses Limited Customs' Ability to Ensure That
    Duties Were Properly Assessed, [35]GAO/AIMD-94-38 , (Washington, D.C.:
    Mar. 7, 1994) and GAO, Financial Audit: Examination of Customs' Fiscal
    Year 1993 Financial Statements [36]GAO/AIMD-94-119 , (Washington, D.C.:
    June 15, 1994).

    ^6On March 1, 2003, the U.S. Customs Service was transferred to the new
    Department of Homeland Security and became part of U.S. Customs and Border
    Protection (CBP).

    The recently enacted Security and Accountability for Every Port Act of
    2006 (SAFE Port Act) contains several provisions related to securing the
    international cargo supply chain against potential terrorist acts. Some
    provisions relate to the movement of in-bond cargo. Title IV requires that
    CBP submit a report to several congressional committees by June 30, 2007,
    including an assessment of whether ports of arrival should require
    additional information for in-bond cargo, a plan for tracking in-bond
    cargo in the ACE system, and an assessment of how to ensure reconciliation
    of in-bond cargo between arrival port and destination port. The report
    must also contain an assessment of the feasibility of reducing transit
    time while traveling in-bond, an assessment of the resources needed to
    complete the reconciliation of in-bond entries, and an evaluation of the
    criteria for targeting and examining in-bond cargo.

    The In-Bond System Facilitates the Flow of Trade, but CBP Does Not Know the
    Extent of Its Use

    The in-bond system facilitates the flow of trade by allowing importers and
    shipping agents to choose the ports at which their cargo is officially
    entered into U.S. commerce and duties are paid or quotas are assessed. The
    in-bond system also covers cargo that is not intended for official entry
    into U.S. commerce--that is, cargo that arrives at U.S. ports, transits
    the United States for exporting to another country (such as goods arriving
    at Los Angeles and moving to Texas ports for exporting to Mexico). U.S.
    importers and shipping agents may elect to use the in-bond system for
    several reasons, and the in-bond system has become an integral part of the
    trade process for some industries. CBP information on the number of
    in-bond transactions indicates that the in-bond system is widely used.
    However, CBP collects limited detailed information on the in-bond system
    and has done minimal analysis of the extent and patterns of its use.

    The In-Bond System Facilitates the Flow of Goods

    The in-bond system facilitates the flow of trade by allowing cargo to be
    transported from the arrival port, without payment of duties, to another
    U.S. port for official entry into U.S. commerce or for exportation. There
    are three types of in-bond movements that importers and shipping agents
    can use (see fig. 1). One type of in-bond movement, known as "Immediate
    Transportation" (IT), allows merchandise arriving at a U.S. port to be
    transported to another U.S. port where it is entered into commerce.
    Alternatively, IT in-bond shipments can be admitted to a bonded warehouse
    or Foreign Trade Zone (FTZ).^7 A second type of in-bond movement, known as
    "Transportation and Exportation" (T&E), covers merchandise "in transit"
    through the United States; such merchandise arrives at a U.S. port and is
    allowed to be transported through the United States and exported from
    another U.S. port without the payment of duties. A third type of in-bond
    movement relates to cargo arrivals that are unloaded at the U.S. port, but
    are to be immediately exported from that same port without payment of
    duties. This is known as "Immediate Exportation" (IE).

    ^7For merchandise that is admitted into a bonded warehouse or FTZ, duties
    and taxes are deferred until the goods are withdrawn for consumption.
    Goods may also be withdrawn from a bonded warehouse for export, thereby
    avoiding the payment of U.S. duties and taxes. Goods admitted to an FTZ
    may be further processed and incorporated into new products, such as
    automobiles or refined petroleum products.

    Figure 1: Process for IT, T&E, and IE In-Bond Movements

    The in-bond system is governed by a system of statutes, regulations and
    procedures that provide importers and shipping agents considerable
    flexibility. CBP regulations allow importers and shipping agents the
    ability to initiate and close in-bond transactions, to extend
    transportation time frames, and to make revisions in their destinations.
    Some of the features that complicate administration of the in-bond system
    include the following:

               o Documentation for in-bond transactions may be provided
               electronically or on paper by using the in-bond form (CBP Form
               7512).

                            o For electronic in-bond transactions, shipping
                            agents initiate and submit the form electronically to
                            CBP prior to arrival through the Automated Manifest
                            System (AMS) and close the in-bond transaction once
                            the cargo is officially entered or exported.

                            o For paper in-bond transactions, in-bond form is
                            received at CBP at the time the in-bond shipment
                            arrives at the port; CBP staff must enter the
                            information manually and are responsible for closing
                            the in-bond transaction once it is entered or
                            exported.

               o The in-bond system allows extended periods for transportation
               and reporting of cargo movements.

                            o Once the in-bond shipment leaves the arrival port,
                            the carrier has from 15 to 60 days, depending on the
                            mode of shipment, to transport the merchandise to the
                            destination port.

                            o The carrier then has 2 working days from physical
                            arrival at the destination port to report the
                            arrival.

                            o The carrier then has 15 days from the time of
                            arrival at the destination port to officially enter
                            cargo (if movement was an IT) or export (if a T&E).

               o Carriers are allowed to change the destination port while in
               transit without notifying CBP, with some limited exceptions.

               o At the destination port, liability for the shipment may be
               transferred to another carrier with the filing of a subsequent
               in-bond (IT, T&E, or IE), allowing shipments to continue to move
               without making official entry.

    		   The In-Bond System Provides Several Advantages to the Trade Community

               The in-bond system allows the trade community to avoid congestion
               and delays at U.S. seaports whose infrastructure has not kept up
               with the dramatic growth in trade volume. In-bond facilitates
               trade by allowing importers and shipping agents the flexibility to
               move cargo more efficiently. Trade community representatives who
               we interviewed indicated the in-bond system allows importers to
               overcome insufficient infrastructure and resources at CBP ports
               dealing with large volumes of cargo. Some CBP officials noted that
               if all cargo had to be entered at the time of arrival, some busier
               ports would probably not have space and personnel to accommodate
               the volume. For example, CBP reports that the value of all U.S.
               imports has risen from $881 billion in fiscal year 1998 to an
               estimated $1.82 trillion in fiscal year 2006 (see fig. 2). These
               import amounts do not include in-bond shipments received at U.S.
               ports that are exported to other countries. According to CBP,
               about 1.2 million in-bond transactions were initiated in the Port
               of Los Angeles alone in fiscal year 2005. CBP staff estimate that
               this accounts for 30 to 60 percent of all imports moving through
               the port; however, CBP was unable to provide reliable data to
               confirm this.

               Figure 2: Value of All U.S. Imports by Fiscal Year, 1998 to 2006

               The in-bond system allows importers and shipping agents
               considerable flexibility in moving goods. A customs broker
               provided an example of a case in which his company was dealing
               with imported shrimp that needed to be examined by the Food and
               Drug Administration (FDA) in a timely manner before entering into
               U.S. commerce. The broker said that the shrimp was coming into New
               York, but both FDA and CBP had significant delays in inspecting
               cargo there. The broker's company transported the shrimp in-bond
               to a nearby inland port where FDA and CBP could process it more
               quickly. The shrimp was then sent back to market in New York. In
               addition, members of the American Trucking Association explained
               that the in-bond system allows them to move cargo faster and
               provides the flexibility to choose the most convenient port to
               deliver goods. For example, the members are able to move mixed
               loads rapidly through the border by avoiding the lengthy
               inspections that could be required for a variety of goods, and
               then deal with Customs arrival requirements at the destination
               port.

               The in-bond system has become an integral part of the trade
               process for some industries. Trade community representatives
               stated that larger importers use the in-bond system because they
               prefer to ship merchandise to central distribution warehouses to
               more conveniently enter the shipments, rather than dealing with
               multiple ports of arrival. Industries such as express consignment
               couriers also rely on the in-bond program for the expeditious
               movement of shipments as an integral part of the services they
               offer. The in-bond system also allows importers to delay payment
               of trade duties. Using the in-bond system, importers do not pay
               applicable import duties until the merchandise officially enters
               U.S. commerce--which can be delayed from 15 to 60 days after it
               arrives at the initial U.S. port and an additional 15 days at the
               destination port.

               The in-bond system is also fundamental to FTZ operation, in which
               foreign and domestic merchandise is considered to be outside of
               Customs' territory.^8 The FTZ program was created in the 1930s to
               facilitate international trade and increase the global
               competitiveness of U.S.-based companies. There are currently 256
               FTZs, and they are found in every state. Businesses using FTZs
               depend on the in-bond system to import certain types of
               merchandise into the zones without going through formal Customs
               entry procedures or paying import duties. Goods may either be
               exported directly from FTZs or may enter U.S. commerce at which
               point appropriate duties are assessed.

    		   CBP Reports Extensive Use of the In-Bond System but Has Not Done
    		   Analysis of Its Use

               CBP has some data that indicate that the in-bond system is widely
               used, but it has not organized or analyzed its data to provide
               detailed information on the extent or patterns of use of the
               system. CBP's data are limited to the number of in-bond
               transactions initiated and information contained on the in-bond
               form. While the form captures some shipment manifest information
               such as foreign port of lading, final foreign destination, port
               codes, and vessel information, it does not require appraisal value
               of in-bond cargo.^9 We requested that CBP provide data on the
               value and quantity of cargo transported in-bond, but CBP could not
               provide reliable data. CBP did not have existing reports on
               in-bond shipments, the extent of the program or patterns of
               in-bond shipments. Any data we requested on the in-bond system had
               to be compiled specifically for us, in some cases by using
               estimates. A description of data limitations and the impact on
               managing the in-bond system is provided in the next section of
               this report.

    ^8Among the activities permitted in an FTZ are assembly or manufacturing
    of merchandise, as well as storing, packaging, and processing of cargo.

    ^9While there is a value field on the in-bond form (CBP Form 7512), the
    value provided is most often what CBP describes as a "shipper's valuation"
    for insurance purposes and not the actual value of goods.

               Using the number of in-bond transactions reported by CBP for the
               6-month period of October 2004 to March 2005, we found that the
               system is widely used, and IT in-bond transactions are the most
               common type. CBP records show that during this period a total of
               about 6.5 million in-bond transactions were initiated nationwide.
               IT movements accounted for about 4.5 million, T&E movements
               accounted for about 1.4 million, and IE movements accounted for
               about 0.6 million (see fig. 3). CBP data also showed that the
               in-bond system is widely used by couriers such as UPS and FedEx.
               Couriers accounted for almost half of all in-bond transactions
               initiated during this period. However, CBP is unable to calculate
               what share of U.S. imports is transported in-bond because the
               number of in-bond transactions alone reveals limited information.
               A "transaction" can be an entire shipping container or a single
               package. For example, the Port of Seattle recorded an increase of
               30 percent in in-bond transactions between 2004 and 2005; however,
               staff explained that the value and volume of cargo moving in-bond
               did not change significantly. Port officials said that the
               increase in the number of transactions related to a change in
               procedures--couriers were required to change from filing a single
               in-bond form for an entire truck to filing one for each package in
               the truck moving in-bond.

               Figure 3: Number and Percent of In-Bond Transactions by Type,
               October 2004 through March 2005

               According to CBP, the four field offices that process the largest
               numbers of in-bond movements are Los Angeles, New York, Miami, and
               Seattle. As part of our audit work, we visited and requested data
               from ports in these field offices with the highest numbers of
               in-bond transactions, as well as other ports with high numbers of
               in-bond transactions. Staff in all the ports we visited indicated
               having great difficulties in providing data on the in-bond system
               because of limitations with its Automated Commercial System (ACS).
               We requested data on the number of in-bond transactions for the
               past 5 years; however most ports were not able to provide data for
               all 5 years. The most recent time period that the majority of
               ports were able to provide information was for fiscal year 2005.
               The information provided by some of these ports is summarized in
               figure 4. According to this information, the Los Angeles/Long
               Beach has the largest number of in-bond transactions, and IT was
               the most prevalent type of in-bond transaction used.

               Figure 4: Number of In-Bond Transactions by Type for Selected
               Ports in Fiscal Year 2005

               Note: The Port of Miami was unable to provide reliable data for
               fiscal year 2005. The Port of Dallas was unable to provide T&E and
               IE data.

               To assess the extent to which the in-bond system is used, we
               requested data on total imports from entry summary forms, since
               these forms provide complete information on imports and indicate
               if the in-bond system was used. This information would allow us to
               determine what percentage of all cargo intended for U.S. commerce
               is transported in-bond and make an accurate assessment of the
               extent of the in-bond system. CBP attempted to compile these data
               but was unable to provide this information.

               CBP does not include information on the extent that the in-bond
               system is used in its annual Performance and Accountability Report
               or Import Trade Trends. Without proper systems in place to inform
               management about in-bond transactions, CBP is unable to properly
               evaluate the risks associated with in-bond transactions and make
               decisions about how to best manage the system.

    		   In-Bond System Management Weaknesses Impede CBP's Ability to Ensure
    		   Proper Collection of Trade Revenues and Address Trade Concerns

               Weaknesses in CBP's management of the in-bond system continue to
               impede CBP's ability to ensure proper collection of trade revenue
               and minimize trade risks. CBP does not collect adequate data or
               analyze existing data needed to effectively manage the system. As
               a result, CBP is not able to identify risks in the system
               associated with potential revenue losses or trade violations, and
               thus it cannot implement compliance measures targeted at reducing
               these risks. CBP is unable to ensure that in-bond shipments in
               fact enter U.S. commerce, with appropriate duties paid, due to
               management weaknesses related to tracking in-bond shipments and
               reconciling paperwork. CBP conducts in-bond reviews and audits to
               assist in identifying system weaknesses, but these continue to be
               inconsistently performed.

    		   CBP Does Not Collect Adequate Data or Analyze Existing Data to
    		   Make Risk Management Decisions

               CBP does not collect appropriate data to adequately manage the
               in-bond system. While the official entry summary form (CBP Form
               7501)^10 requires accurate information on description, value, and
               quantity of cargo, the in-bond form (CBP Form 7512) allows
               estimates to be provided. The entry summary form requires the use
               of Harmonized Tariff Schedule (HTS)^11 numbers to collect correct
               data on description, value, and quantity of trade imported for
               consumption in the United States. However, the data available to
               CBP for in-bond cargo are limited to the number of in-bond
               transactions initiated and the information contained on the
               in-bond form. CBP staff explained that while there is a value
               field on the in-bond form, the value provided is most often what
               it is described as a "shipper's valuation" for insurance purposes
               and not the actual value of goods. CBP instructions for the
               in-bond form indicate that for IT movements, merchandise should be
               described in sufficient detail to enable the port director to
               estimate the duties and taxes, however, importers and shipping
               agents do not usually provide this level of information. Further,
               CBP officials noted that the in-bond form is often filled out by
               shipping agents who provide imprecise estimates of value and
               quantity and vague cargo descriptions. CBP at the headquarters
               level provides limited specific guidance to the ports regarding
               how to assess value and volume of in-bond traffic and any
               associated risks. Table 1 compares the data required for certain
               items in the official entry summary and in-bond forms.

    ^10The official entry summary (CBP Form 7501) is used to complete the
    entry for consumption and determine and collect duties and taxes on goods
    imported into and intended for consumption in the Unites States.

    ^11The HTS of the United States is the primary resource used by CBP for
    determining tariff classification for goods imported into the United
    States. HTS classifies a good by assigning a 10 digit tariff
    classification number, based on such things as its name and use, providing
    CBP detailed information to identify items entering the United States. The
    HTS is based on the international Harmonized Commodity Coding and
    Classification System (Harmonized System) six-digit code, which has been
    establish by the World Customs Organization and is used as the base for
    the tariff schedule for most countries.

               Table 1: Comparison of Data Requirements for Entry Summary and
               In-Bond Forms

                           Information required on
                           entry summary form      Information required on
    Type of information (7501)                  in-bond form (7512)
    Description         Detailed cargo          General description of goods
                           descriptions using      (HTS numbers not required)
                           10-digit HTS numbers
    Value               Accurate dollar amount  Estimated value allowed
                           required for assessment
                           of duties
    Quantity            Net quantity in         Quantity in terms of the
                           specified HTS units     smallest external packaging
                                                   unit, such as containers,
                                                   boxes, etc. (HTS units not
                                                   required)

               Source: GAO analysis of CBP information.

               CBP has also not used existing data it collects on in-bond to
               identify risks in the system associated with potential revenue
               loss or trade violations. Port officials indicated the lack of
               data entered into the system limits the information that can be
               used for tracking in-bond cargo. For example, officials at a major
               port told us that often for transactions filed in hard copy, only
               about half of the more than 20 data elements in the form are
               entered into the ACS, due to the large quantity of in-bond
               shipments and relatively few officers to review them. In addition,
               CBP officials said that company names and numbers may not be
               accurately entered into the ACS, further complicating risk
               management decisions. Staff in CBP's Office of Information
               Technology (OIT) explained that they are not generally required to
               provide management, at the port or national level, with existing
               data on the extent of the in-bond system and patterns of trade
               among in-bond ports. According to staff, if any information is
               requested by management about in-bond transactions, it is handled
               on an ad hoc basis. In addition, according to OIT staff, ACS is
               inefficient in creating records that allow analysis of the extent
               to which the in-bond system is used, of trade flows, and diversion
               risks. Creating any type of report on the in-bond system is
               laborious and time consuming. OIT staff indicated that the ACE
               system under development to replace ACS should provide better
               information to aid in managing the in-bond system.

    		     Data Collection Limitations Impede CBP's Assessment of Potential
    			 Revenue Losses

               Lack of accurate information on the value of in-bond cargo
               prevents CBP from accurately determining the extent of any lost
               revenue. CBP staff explained that regulations do not require the
               appraisement of in-bond cargo; such appraisal and collection of
               duties occurs when the cargo is entered at the destination port.
               CBP officials noted that they do not require importers and
               shipping agents to provide accurate value information on the
               in-bond form because it is not required under legislation or
               current CBP in-bond regulations. Further, CBP does not collect and
               report data showing the trade patterns for in-bond use. If CBP
               knew which ports receive the most in-bond cargo from the major
               U.S. ports it could better prioritize its oversight of the system.
               However, CBP does not consider information on main receiving ports
               in managing the system. In addition to allowing CBP to determine
               potential loss of revenue, obtaining accurate information on
               value, specific category of merchandise, and trade patterns could
               help CBP focus efforts on monitoring in-bond cargo with high
               revenue.

    		     CBP Also Cannot Accurately Assess Potential Trade Violations

               CBP's data management weaknesses impede its ability to target
               in-bond cargo for trade violations at the arrival port. Currently,
               CBP uses the Stratified Compliance Exam and the Cargo Selectivity
               System for trade compliance purposes, such as identifying
               intellectual property rights violations and revenue collection.
               The Stratified Compliance Examination randomly selects cargo
               making official entry into the United States for physical
               inspection, while the Cargo Selectivity System uses criteria to
               evaluate information from an entry summary and then selects cargo
               for inspection. Both systems use entry information for cargo
               entering into U.S commerce at the arrival port to initiate the
               exams. Because in-bond cargo does not make official entry at the
               arriving port, the Stratified Compliance Examination is not
               applied to in-bond cargo being exported and is not initiated for
               in-bond goods entering at other U.S. ports until official entry
               occurs. Without proper targeting of in-bond shipments at the
               arrival port, cargo transiting to another U.S. port for official
               entry or exportation may be diverted and stay in the United
               States, contraband or goods violating intellectual property rights
               laws could be smuggled, duties may be unpaid, or quotas could be
               violated. In fiscal year 2006 about 30 percent of seizure value
               for intellectual property rights violations were associated with
               shipments that had moved through the in-bond system. Examples of
               some past diversions that involved use of the in-bond system
               include:

               o From September 1999 through December 2002, more than 7,500
               shipments of wearing apparel shipped to Los Angeles from China and
               Hong Kong were smuggled into the United States. The in-bond
               documents were filed in Los Angeles for export to Mexico via
               Laredo, Texas. However, the goods were diverted from Los Angeles
               to customers throughout the United States. The declared foreign
               value of shipments was in excess of $600 million, and estimated
               loss of revenue to U.S. Customs was more than $100 million.
               o In 2006, CBP seized 77 containers of counterfeit athletic shoes
               and designer clothing with an estimated domestic value of nearly
               $70 million. These containers entered the Los Angeles seaport, and
               in-bond documents were filed for eventual export to Mexico. The
               goods moved in-bond through California and Arizona before being
               seized by ICE agents.

               While CBP performs a security screen for all arriving cargo, it
               does not have a formal targeting system to identify trade concerns
               specific to in-bond cargo. However, in some instances, CBP port
               officers do take steps to target in-bond shipments on an ad-hoc
               basis. In most of the ports we visited, port officials said that
               for in-bond shipments filed using the paper in-bond form, cargo is
               often selected by CBP officers at the time documentation is
               presented to the port office. CBP officers inputting the in-bond
               data from the paper forms into the system may select cargo for
               inspection based on experience and available information. Cargo
               moving in-bond for which the in-bond form was filed electronically
               is not screened by CBP officers for these types of additional
               inspections, because approval of these transactions is automated
               and officers do not regularly access this information.

    		   Numerous Open In-Bond Records Reflect Lack of Control of In-Bond
    		   Movements

               CBP often cannot ensure that cargo officially entered U.S.
               commerce, or was exported, because many in-bond transaction
               records remain open with uncertain disposition. An open in-bond
               record occurs when a paper or electronic transaction has been
               initiated at the arrival port for an in-bond shipment but the
               record has not been completed, or closed, because CBP has not
               recorded the shipment's official entry at the destination port. An
               open in-bond transaction record that is never closed represents an
               internal control weakness in that there is no control in place to
               ensure that open items are closed or to determine whether
               potential revenue losses or trade violations have occurred. As
               previous audit reports have noted, the number of open in-bond
               records is substantial, however, CBP does not have accurate
               measures of the number of open records. Several factors contribute
               to the high number of open in-bond records. CBP does not appear to
               have placed a priority on reducing the number of open in-bond
               records, in that it has not consistently reconciled open records.
               In addition, CBP's in-bond regulations that were intended to
               provide flexibility to business result in it being more difficult
               to track in-bond transaction. Finally, administrative errors by
               both CBP and the trade industry add to the numbers of open in-bond
               records. CBP has recently issued directives to address some of
               these issues, but it is too early to judge their effectiveness.

    		     Number of Open In-Bond Records Is Substantial, but CBP Lack
    			 Accurate Data

               Previous audit reports have noted that the high number of open
               in-bond records impedes CBP efforts to track in-bond shipments and
               ensure that they have properly entered U.S. commerce. An open
               in-bond record indicates a risk that cargo could have been
               diverted without paying applicable duties or in violation of trade
               regulations or quotas. Without data on the value and volume of
               in-bond cargo, and information on the number of in-bond records
               that remain open, CBP is not able to account for them or set a
               high priority on tracking open in-bonds with high duties. We
               reported this problem in 1994, 1997, and 2004 and made
               recommendations to CBP for improving the monitoring of in-bond
               shipments. However, in our current review, we found large numbers
               of open in-bond records at all the ports we visited, and CBP
               admits that there are many open in-bond records nationwide.

               Of the 10 ports we visited, only 6 were able to provide fiscal
               year 2005 data on the number of open in-bond records in their
               systems. As figure 5 shows, for the six ports that provided data,
               the percentage of open in-bond transactions for fiscal year 2005,
               ran as high as 77 percent at one location. The other four ports,
               including Los Angeles--the port with the largest estimated number
               of in-bond transactions--were unable to provide reliable data on
               the number of open in-bond records. Without consistent evaluation
               and reliable data on overdue shipments, CBP cannot account for
               in-bond shipments that failed to meet time requirements and trade
               regulations. CBP attributed some of the open in-bond records to
               systemic problems that do not show in-bonds as closed even after
               they have been completed.

               Figure 5: CBP Estimate of Percentage of In-Bond Records Remaining
               Open for Fiscal Year 2005

    		     CBP Has Not Consistently Reconciled Open In-Bond Records

               Ports that we visited have not consistently performed several CBP
               designated reviews intended to resolve open in-bond records. For
               example, CBP reports such as the Monthly List of In-Bond Shipments
               Delivered Late for Export (MO2), along with the Monthly List of
               In-Bond Shipments Delivered Late (MO6) and the Monthly List of
               In-Bond Shipments Overdue (MO7), are designed to notify ports of
               in-bond shipments that are delivered late for exportation, are
               delivered late, or are overdue for delivery.^12 We found most of
               the ports we visited had not regularly conducted these reviews
               since CBP increased emphasis on security after September 11, 2001.
               Since issuance of a June 2006 CBP headquarters directive requiring
               ports to track exportation in-bond transactions in a timely
               manner, most ports we visited had reinstituted this type of
               review. Officials at ports we visited stated that these reviews
               were very time consuming and labor intensive.

    		   ^12The MO reports provide the ports with data on paperless and
    conventional in-bond movements that are overdue (MO7), delivered late
    (MO6), or delivered late for export (MO2). In-bond movements that are
    considered overdue will appear on the MO7 report if they have not arrived
    at the destination port within 90 days of departure. In-bond movements
    that have not been exported by the expiration of the lay order period in
    the destination port will appear on the MO2 report and should receive
    priority, according to the OFO Guide for In-bond Cargo handbook.

               CBP officials observed that there are many systemic problems with
               the existing data system (ACS) used to generate these monthly
               lists of in-bond transactions needing reconciliation. Officials
               noted that some in-bond transactions appearing as open on these
               reports have already been closed. Port officials also noted the
               difficult and time-consuming nature of working with the ACS
               system. For example, staff in the Seattle Field Office explained
               that because of limitations with the system, it took 50 working
               hours to extract the data we had requested on the number of
               in-bond transactions at their port. Furthermore, some of the data
               was incomplete and contained other limitations.

               According to CBP officials, the ACS was originally designed in
               1984 and has been increasingly difficult and expensive to operate,
               maintain, and enhance due to its antiquated hardware and software
               and limited processing capacity. CBP is in the process of
               replacing ACS with the ACE system in 11 increments, referred to as
               "releases," with a scheduled completion in approximately 8 1/2
               years. The first three releases are deployed and operating, and
               the fourth release is currently being deployed. Other releases are
               in various states of definition and deployment. CBP headquarters
               officials stated that they were aware of problems in ACS, but they
               cited restrictions placed on funding for changes to the legacy ACS
               as impeding changes to the system.

    		     Regulations Provide Trade Flexibility but Complicate CBP's
    			 Monitoring of In-Bond Movements

               CBP's in-bond regulations provide considerable flexibility for the
               importer and shipping agents, but such flexibility complicates
               CBP's monitoring of in-bond movements. Some CBP regulations
               governing in-bond movements make it difficult for CBP officers at
               the ports to track in-bond shipments and ensure their proper
               disposition. For example, under the regulations an importer or
               shipping agent can initiate an in-bond shipment by ground
               transport to one U.S. port and then decide to initiate another
               in-bond transaction to transport that same cargo to another U.S.
               port, allowing an additional 30 days to transport cargo. When the
               cargo finally reaches its ultimate destination and the most recent
               in-bond transaction is closed, all previous in-bond transactions
               associated with that cargo remain open. In other cases, the
               regulations allow an importer or shipping agent to transport cargo
               in-bond to a U.S. border port, place it in a warehouse, and obtain
               a second in-bond transaction for exportation once a buyer is
               located abroad. Depending on the mode of transport, regulations
               currently allow bonded carriers from 15 to 60 days to reach their
               final destination and allow them, with some exceptions, to change
               a shipment's final destination without notifying CBP. Port
               officials stated that this makes it impossible to know whether an
               in-bond shipment arrived at its declared destination until a
               record appears later on an unresolved in-bond report. For an
               in-bond shipment moving, for example, from Los Angeles to Laredo
               intended for export to Mexico, the importer or shipping agent may
               at the last minute change the port used for export; the CBP staff
               at the new destination port would not know that they should expect
               such shipments and thus would not be able to whether ensure the
               shipments actually exited the United States.

    		     Administrative Errors Contribute to High Number of Open In-Bond Records

               Administrative errors by shipping agents and by CBP staff
               contribute to the high numbers of open in-bonds. According to CBP
               officials, most open in-bond records remain unresolved because of
               administrative or procedural errors. CBP officials said that
               carriers have high staff turnover and do not provide personnel
               with adequate training in in-bond procedures. For example, the
               in-bond system depends on importer and shipping agents personnel
               to file the correct paperwork. For in-bond transactions filed
               electronically, the system allows carriers and brokers to
               initiate, process, and close in-bond transactions without CBP
               involvement, and CBP officials told us that many of these
               individuals do not follow the proper steps to close in-bond
               transactions. For in-bond transactions that are filed in paper
               format, CBP officers are responsible for closing them at the
               destination port (where the cargo makes official entry). According
               to CBP, personnel sometimes make administrative errors and do not
               properly close the in-bond transactions or may not process the
               documents at all.

    		     CBP Recently Issued Directives to Address Open In-Bond Records,
    			 but It Is Too Early to Determine Their Effectiveness

               To address some of the issues surrounding open in-bond
               transactions, in March 2006, CBP issued several directives to the
               field describing systemic changes made to the in-bond section in
               ACS. The first of these changes requires second-leg in-bond
               records^13 to reference the first leg of the in-bond movement so
               that when the second in-bond transactions is closed, the first
               in-bond transactions will be closed as well. The second change
               requires the bill-of-lading field on the in-bond form to be filled
               in to facilitate the tracking of in-bond shipments and ensure that
               the bill of lading and in-bond transactions are posted and closed
               out. Furthermore, in June 2006, CBP issued a directive requiring
               ports to track in-bond transactions in a timely manner by
               monitoring records that appear on the system's monthly in-bond
               status reports.

    ^13Cargo for which a second in-bond is issued after it reaches the port
    where it is expected to enter U.S. commerce or be exported.

               CBP Has Not Consistently Performed Its Compliance Measurement
    		   Program Reviews and Has Not Used Its Results to Manage the Program

               CBP instituted a compliance measurement program in 1998 known as
               Tinman^14 to help track in-bond movements, protect revenues, and
               perform risk assessments. However, ports do not consistently
               perform the reviews required under the program and CBP
               headquarters does not collect national data describing the results
               of these reviews. Due to the inconsistent performance of the
               physical inspections and post-audits called for by this system, as
               well as the limited collection and use of the data these reviews
               provide, CBP is unable to fully determine compliance within the
               in-bond system and therefore potential trade and revenue risks
               associated with the system.

               While conducting our port visits, we found that some ports just
               recently began conducting physical examinations and completing
               post-audits required under Tinman because they previously did not
               have the resources available to support these duties after
               September 11, 2001. Tinman was designed to improve the tracking
               and monitoring of in-bond cargo by initiating compliance
               examinations of cargo and post-audits. Every week, ports are
               supposed to query the system to determine if a Tinman exam has
               been designated. After a port has been notified of an exam or
               audit, the mechanics of the examination are left to the discretion
               of the port.^15 The Department of the Treasury Inspector General
               and its' independent auditor noted in their fiscal year 2002
               financial audit that Tinman inspections and post-audits had been
               suspended in fiscal year 2002 to allocate resources to other
               mission objectives. Although we found the ports making efforts to
               complete the Tinman exams during our audit work, the fact that the
               ports were not completing these physical inspections and audits
               suggests that CBP has not been able to effectively measure revenue
               gaps or the effectiveness of controls over trade compliance to the
               in-bond process.

    ^14Originally, the Tinman module in ACS was designed in response to a 1994
    GAO report, where we found that the U.S. Customs Service did not have a
    reliable means of monitoring the movement of in-bond shipments from one
    port to another because the data were not properly maintained. GAO,
    Financial Management: Control Weaknesses Limited Customs' Ability to
    Ensure That Duties Were Properly Assessed ( [44]GAO/AIMD-94-38 , Mar. 7,
    1994).

    ^15Headquarters staff assign the Tinman exams and post-audits on a weekly
    basis. They determine the ports where the exam is to be conducted, the
    in-bond type, and whether the tasking is a destination or origin exam. In
    the case of post-audits, the specific in-bond number that is to be
    reviewed will also be provided. After the Tinman exams are assigned, it is
    at the discretion of the ports to determine the mechanics of the exam
    (e.g., which bond is to be reviewed, which station, etc.).

               Moreover, no policies or procedures exist at the headquarters
               level to monitor or use the results of the Tinman inspections and
               audits to improve the management of the system. For example, we
               made repeated requests to CBP to obtain national data on the
               number of Tinman inspections and post-audits that were generated,
               completed, and that resulted in some sort of negative findings
               over the past 5 years, but we were provided little information on
               the results of these audits and no summary conclusions. We were
               also told that, at the headquarters level, reports generated from
               Tinman are not routinely produced and that there is no overall
               report that management could use to evaluate trade compliance and
               determine overall risks to the in-bond system. Therefore, CBP
               management would have to rely on a review of port-by-port results,
               and it would be difficult and labor intensive to determine if the
               results of the audits or inspections showed an overall compliance
               issue.

    		   Limited Information Collected on In-Bond Cargo Impedes CBP Efforts
    		   to Manage Security Risks

               CBP does not collect detailed information on in-bond cargo that
               could aid in identifying cargo posing a security risk and promote
               effective use of inspection resources. CBP uses the Automated
               Targeting System (ATS) as one mechanism within its multilayered
               security strategy for monitoring cargo arriving at U.S. ports.
               Manifest information for all cargo arriving at U.S. ports,
               including in-bond cargo, is part of the ATS security score. For
               regular cargo, the ATS score is updated with more detailed
               information as the cargo makes official entry at the arrival port,
               but ATS scores are not updated for T&E in-bond cargo and are not
               updated for IT in-bond goods until official entry occurs. As a
               result, in-bond goods transit the United States without having the
               most accurate ATS security score, posing a potential security
               risk, and potentially misdirecting scarce inspection resources to
               goods that otherwise would not warrant inspection.

    		   Automated Targeting System Is Part of the CBP Multilayered
    		   Security Strategy for Cargo Arriving at U.S. Ports

               CBP has developed a multilayered security strategy to manage the
               risk associated with the movement of cargo, including in-bond
               cargo. The ATS is a key component of this multilayered security
               strategy.^16 ATS is a complex model of weighted rules CBP officers
               use to help decide which cargo to inspect. CBP uses ATS to review
               documentation for arriving shipments and assign a risk score for
               each shipment arriving in the United States. CBP officers located
               at the ports then use these ATS scores to help decide on the need
               for and extent of cargo inspections. We have previously reported
               on improvements needed in ATS targeting of cargo inspections.^17

               The CBP risk management strategy includes taking steps such as
               using ATS to limit potential security risks without unduly
               interfering with the flow of commerce. The Congress and the
               President have endorsed risk management, which involves a strategy
               of helping policymakers make decisions about assessing risks,
               allocating resources, and taking actions under conditions of
               uncertainty. The CBP Fiscal Year 2006 Performance and
               Accountability Report states its priority mission in part as
               "preventing terrorists and terrorist weapons from entering the
               United States, while also facilitating the flow of legitimate
               trade and travel." CBP uses ATS as part of its risk management
               strategy of identifying cargo warranting inspection based on risk
               and maintains that it would be impossible to inspect all arriving
               cargo without disrupting the flow of commerce.

    		   CBP Uses Manifest Information for All Cargo, Including In-Bond
    		   Cargo, to Aid in ATS Scoring and in Prioritizing Inspections

               CBP uses information it receives on all cargo arriving at U.S.
               ports, including in-bond cargo, as input for ATS scoring to aid in
               identifying security risks and setting inspection priorities.
               Although the requirements vary by mode of transportation (sea,
               air, rail, and truck), federal law generally requires carriers to
               submit manifest information prior to goods arriving at U.S. ports.
               For example, CBP generally requires ocean carriers to submit
               manifest information to CBP 24 hours before cargo shipped in
               containers is loaded on a ship at a foreign port.^18 CBP requires
               air carriers to submit manifest information at departure or 4
               hours before arrival at a U.S. airport. These cargo manifests are
               prepared by the carrier and are composed of bills of lading, which
               include a description of the shipment. ATS analyzes the electronic
               data related to individual shipments and ranks them in order of
               risk to develop an ATS score for each shipment. CBP officers
               located at the ports then use ATS scores to help them make
               inspection decisions.

    ^16Other features of CBP's multilayer security strategy include a
    compliance measurement program that supplements ATS by randomly selecting
    shipments to be inspected to determine whether the shipment complies with
    supply chain security and trade laws; the Container Security Initiative
    (CSI) whereby CBP places staff at foreign ports to work with foreign
    counterparts to inspect high-risk cargo before it is shipped to the United
    States; and the Customs-Trade Partnership Against Terrorism (C-TPAT),
    which is a cooperative program between CBP and members of the
    international trade community in which private companies agree to take
    action to improve the security of their supply chains.

    ^17GAO, Homeland Security: Summary of Challenges Faced in Targeting
    Oceangoing Cargo Containers for Inspection, [45]GAO-04-557T (Washington,
    D.C.: Mar. 31, 2004).

               CBP adjusts the ATS score assigned to arriving cargo when it
               receives the more detailed information for cargo making official
               entry at the arrival port. For example, CBP would have an ATS
               score for sea cargo arriving in Los Angeles based on the ship's
               manifest information but would adjust the ATS score when more
               detailed information is included on the entry documents. CBP
               generally requires importers and shipping agents to provide entry
               documentation for items arriving in the United States within 15
               calendar days of arrival so that it is not warehoused at the port
               indefinitely. This entry information often provides more detailed
               information on contents than does the manifest information. For
               in-bond cargo, such adjustments are made at the destination port,
               or are not made at all for cargo that is intended to be exported.

               Entry information sometimes changes the ATS security score from
               that based on manifest information. CBP provided data for four
               major ports^19 comparing the ATS score given cargo based on the
               bill of lading to the ATS score given after goods made official
               entry (see fig. 6). This data show that for the four ports, the
               ATS score based on the bill-of-lading information stayed the same
               an average of 30 percent of the time after being updated with
               entry information. However, for the four ports, ATS scores
               increased an average of 23 percent of the time and decreased in an
               average of 47 percent of the time. A higher ATS score can result
               in higher priority being given to cargo for inspection than
               otherwise would be given based solely on the bill-of-lading
               information. A lower ATS score can result in cargo being given a
               lower priority for inspection and potentially shift inspection
               resources to cargo deemed a higher security risk.

    ^18Cargo manifest transmission requirements are located in regulations
    promulgated under Section 343 of the Trade Act of 2002, Pub. L. No.
    107-210, as amended by section 108 of the Maritime Transportation Security
    Act of 2002, Pub. L. No. 107-295. Cargo manifests are prepared by the
    carrier and are composed of bills of lading for each shipment loaded on a
    vessel to describe the contents of the shipments. Bills of lading are
    documents issued by a carrier describing the goods, the details of the
    intended voyage, and the conditions of transportation. Under 19 C.F.R. S
    4.7(b)(4), ocean carriers carrying bulk and break bulk cargo are not
    required to submit a manifest 24 hours before the cargo is loaded at a
    foreign port, provided, in the case of break bulk cargo, that they receive
    an exemption from CBP. Rather, these ocean carriers must present their
    manifests 24 hours prior to arrival in the United States if they use CBP's
    Automated Manifest System (AMS), a system designed to control imported
    merchandise from the time the carrier's cargo manifest is submitted to CBP
    until the cargo is properly entered and released by CBP. If a carrier does
    not use AMS, the carrier must submit the manifest to CBP upon arrival.

    ^19The four major ports included in the CBP analysis were Los Angeles,
    Long Beach, Newark, and New York.

               Figure 6: Change in ATS Target Score after Obtaining Entry
               Information for Selected Ports

    		   In-Bond Cargo Transits the United States without an Updated ATS Score

               In-bond cargo transits the United States without an updated ATS
               inspection priority score because it does not make official entry
               at the arrival port, and in-bond documents do not contain detailed
               data similar to entry documents used to update the ATS score. CBP
               officers with security responsibilities at several of the ports we
               visited observed that the lack of entry information for in-bond
               cargo meant that they did not have additional information for ATS
               scoring that would help them assess the need for inspection.
               Although in-bond cargo is given an ATS score based on manifest
               information, this score is not generally updated prior to the
               movement of these goods within the United States. For example, the
               ATS scores for IT in-bond transactions, which represent about 70
               percent of all in-bond documents, are not updated until the cargo
               makes official entry at another U.S. port. T&E in-bond cargo,
               which represents about 22 percent of in-bond documents, does not
               make official entry, so additional entry data are not available to
               update an ATS score. The in-bond form, required for in-bond
               movement, does not have the same level of detail contained in
               entry documents, and data from the form is not used to update ATS
               scores. As a result, in-bond goods transit the United States
               without having the most accurate ATS security score, posing a
               potential security risk, and potentially misdirecting scarce
               inspection resources to goods that otherwise would not warrant
               inspection.

    		   Conclusions

               In managing the in-bond system, CBP must strive to balance its
               goals of facilitating the efficient movement of cargo, ensuring
               effective revenue collection, and providing a secure trade
               environment. The in-bond system's overall objective is to
               facilitate global and domestic trade. However, the in-bond system
               poses risk to CBP's other goals of revenue collection and trade
               security. CBP will be less able to fulfill its revenue collecting
               responsibilities if in-bond goods are diverted and make illegal
               entry without the payment of applicable taxes or trade tariffs.
               CBP may also be less able to fulfill its trade-security
               responsibilities because the information collected for in-bond
               movements across the United States is less detailed than that
               collected for goods entering at their arrival port.

               We found that CBP's ability to assess and manage the risks of the
               in-bond cargo system is impaired by both (1) the limited
               information it collects on in-bond cargo and (2) the limited
               analysis it performs on available information. With the tremendous
               volume of trade coming through U.S. ports, CBP needs detailed
               information and accurate monitoring systems to set priorities for
               targeting and tracking cargo shipments that have security or
               revenue interest. However, CBP does not currently collect detailed
               information on the value or type of in-bond cargo being
               transported through U.S. ports; the in-bond form asks only for a
               general description. As a result, CBP does not have the
               information needed to set priorities for targeting and tracking
               cargo moving within the in-bond program, so as to concentrate on
               cargo of highest security, law enforcement, or revenue impact.

               CBP has also failed to perform even the most basic analyses of
               available information. CBP was not able to tell us, for example,
               the extent of the system's use, what products are shipped in-bond,
               or what shipments are expected for entry (and thus expected
               revenue collection from applicable trade duties) at inland ports.
               Despite prior audit recommendations, important management
               weaknesses persist in CBP's tracking of in-bond cargo, with the
               result that CBP still does not know whether in-bond cargo
               shipments of greatest security or revenue interest are in fact
               entered into U.S. commerce or exported as required. In particular,
               CBP continues to have high numbers of open in-bond transactions
               with uncertain disposition.

               CBP is currently addressing the requirements of the SAFE Port Act,
               which focuses on many of the same issues discussed in this report.
               CBP must submit a report to the Congress by June 30, 2007. In
               addition, CBP is in the midst of a multiyear development of its
               new ACE system, which it expects to have improved capability to
               track in-bond documents. However, the system is not expected to be
               fully implemented before 4 to 5 years. CBP has also recently
               issued administrative directives to improve in-bond document
               tracking. However, these directives address only some of the
               in-bond system weaknesses. Therefore, we believe several
               additional changes are needed in a timely manner to resolve
               persistent weaknesses in the in-bond system, consistent with the
               SAFE Port Act.

    		   Recommendations

               To improve management of the in-bond program through better
               informed decisions affecting trade, revenue collection, and
               security goals, we recommend that the Secretary of Homeland
               Security, acting through the CBP Commissioner, take the following
               actions:

    		                           1. With respect to collecting more detailed
                            information on in-bond cargo,

                                         o For all in-bond goods to be eligible
                                         for a consumption entry into the United
                                         States, require additional information
                                         on the in-bond form (CBP Form 7512) at
                                         the time of arrival. This information
                                         should include data elements that
                                         provide a more precise description of
                                         the cargo and that further identify the
                                         entities involved in the movement of
                                         these goods. As part of this effort, CBP
                                         should--6 months after implementation of
                                         new data requirements--report to
                                         Congress whether the enhanced data
                                         obtained are adequate to address
                                         security and trade concerns for in-bond
                                         transactions or whether current CBP
                                         authority should be adjusted.

                                         o For all goods to be exported, revise
                                         the in-bond form (CBP Form 7512) to
                                         include the six-digit code from the
                                         Harmonized Commodity Coding and
                                         Classification System (Harmonized
                                         System).

                                         o Use information collected in the
                                         revised in-bond form to ensure that the
                                         new ACE system can generate reports
                                         useful to CBP management in making
                                         prioritized, risk-based management
                                         decisions related to revenue and
                                         security risks.

                                         o Use information from the revised
                                         in-bond form as input to the Cargo
                                         Selectivity process at the arrival port
                                         instead of limiting this process to
                                         cargo that has made entry for
                                         consumption, to ensure that in-bond
                                         shipments are adequately tracked between
                                         the arrival and destination ports.

                                         o Use information from the revised
                                         in-bond form to update ATS security
                                         scores for in-bond movements at the
                                         arrival port instead of delaying this
                                         process until after cargo has been
                                         transported through the United States to
                                         the destination port.

                            2. With respect to improving monitoring of cargo
                            moving within the in-bond system,

                                         o Conduct an analysis of the extent of
                                         use of the in-bond system and the
                                         patterns of shipments within the system.

                                         o Assess the systemic problems causing
                                         open in-bond transactions and impeding
                                         their identification. Make adjustments
                                         to ACE and provide appropriate tools to
                                         eliminate these problems and improve the
                                         capacity of CBP officers, importers, and
                                         shipping agents to track and close open
                                         in-bond transactions.

                                         o Revise in-bond regulations to reduce
                                         the time allowed for transporting cargo
                                         and to limit the ability of carriers to
                                         change the final destination for cargo
                                         without CBP knowledge.

                                         o Develop a more systematic enforcement
                                         strategy to increase bondholder
                                         compliance in closing out open in-bond
                                         transactions within required time
                                         frames.

                                         o Prioritize closing in-bond records for
                                         shipments with high potential risks of
                                         security, law enforcement, and revenue
                                         loss, using updated information from the
                                         in-bond form.

                            3. To make the in-bond compliance measurement program
                            a more effective tool for monitoring compliance with
                            in-bond regulations,

                                         o Ensure that the current compliance
                                         measurement program (Tinman) or any
                                         updated commercial compliance tool is
                                         consistently conducted by the ports so
                                         as to inform CBP national and port
                                         management of needed corrective actions.

    		   Agency Comments and GAO Response

               We provided a draft of this report to DHS for review by CBP and
               ICE. We received official written comments from DHS, which are
               printed in appendix II. We made 11 recommendations to improve the
               management of the in-bond system in three general areas (1)
               improving the level of information available on in-bond cargo, (2)
               improving monitoring of in-bond cargo, and (3) improving the
               efficiency of in-bond compliance measurement programs. DHS agreed
               with seven of our recommendations, disagreed with three, and
               stated that one has already been implemented. DHS also provided
               technical comments, which we have incorporated in this report as
               appropriate.

               Regarding the first area of recommendations--for improving the
               level of information available on in-bond cargo--DHS agreed with
               three of our recommendations and disagreed with two. DHS agreed
               with our recommendation to revise the in-bond form to contain more
               information, with respect to goods that are to be exported. DHS
               also agreed with the recommendation that CBP ensure that the new
               ACE system can generate reports useful to CBP in making
               prioritized, risk-based management decisions related to revenue
               and security risks. Additionally, DHS agreed with the
               recommendation that it use information from the revised in-bond
               form to update ATS security scores for in-bond movements at the
               port of arrival instead of delaying this process until after the
               cargo has been transported through the United States to the
               destination port.

               However, DHS disagreed with our recommendation to require the
               10-digit HTS number for in-bond cargo to be eligible for import
               into the United States. DHS stated that this would lead to a major
               legal problem and represent a revolutionary change in the in the
               way in-bond business is done. DHS stated that requiring
               the10-digit HTS number would require Customs Brokers to file
               in-bond entries and bar carriers from doing so. DHS stated that
               cost to the owner of the goods would rise because of the mandated
               added party to the filing. We remain concerned that in-bond cargo
               routinely transits the United States without a detailed
               description of the cargo and the entities involved in the movement
               of these goods. Therefore, we have revised our recommendation to
               call for additional information to be collected for all in-bond
               goods to be eligible for a consumption entry into the United
               States, in lieu of the 10-digit HTS number. This information
               should include data elements that provide a more precise
               description of the cargo and that further identify the entities
               involved in the movement of these goods. In addition, we recommend
               that--6 months after the implementation of these new data
               requirements--CBP report to Congress whether the enhanced data
               obtained are adequate to address security and trade concerns for
               in-bond transactions or whether its current authority should be
               adjusted.

               DHS also disagreed with our recommendation that revised in-bond
               information should be used in CBPs' Stratified Compliance
               Examination and Cargo Selectivity processes. DHS stated that these
               exams apply only to cargo for which official entry has been made.
               We revised this recommendation to focus on using the additional
               information in CBP's Cargo Selectivity process. CBP's current
               inability to track in-bond shipments and the examples of notable
               trade and revenue violations including in-bond cargo provide
               strong evidence of the need to identify potential trade and
               revenue risks for in-bond cargo. The revised recommendation
               indicates that CBP should use information from the amended in-bond
               form as input to the Cargo Selectivity process at the arrival port
               instead of limiting this process to cargo that has made entry for
               consumption.

               Regarding the second area of recommendations--for improving the
               monitoring of in-bond cargo--DHS agreed with three of our
               recommendations, stated that one has already been implemented, and
               disagreed with one. DHS agreed to conduct an analysis of the
               extent of the in-bond system and patterns of shipment within the
               system. DHS also agreed that a systematic assessment of problems
               causing open in-bond transactions should be used to improve ACE
               and assist CBP officers and the trade in closing in-bond
               transactions. DHS agreed with our recommendation and is planning
               to revise in-bond regulations to reduce the time allowed for
               transporting cargo and to limit carriers' ability to change the
               final destination for in-bond cargo.

               Regarding our recommendation to develop requirements, including
               penalties to ensure that bondholders close in-bond documents, DHS
               responded that these requirements already exist. We note, however,
               that the high number of open in-bond transactions indicates a
               persistent problem. We modified the wording of this recommendation
               to emphasize that CBP should develop a more systematic enforcement
               strategy in order to increase bondholder compliance in closing out
               open in-bond transactions within required time frames.

               DHS disagreed with our recommendation to prioritize their
               activities related to closing open in-bond transactions with
               potentially high security, law enforcement, and revenue risks. DHS
               stated that they already employ risk-based targeting for all
               shipments, including in-bond cargo. However, we did not observe
               CBP efforts to prioritize closing open in-bond transactions based
               on risk. Open in-bond transactions appear on CBP reports without
               any designation of the importance of individual records. With
               limited resources available, we believe that CBP should prioritize
               its monitoring of open in-bond transactions to those that pose the
               most significant risks to revenue collection and other trade
               risks, and so we have not modified our recommendation.

               With respect to the third area of recommendations--for improving
               CBP's compliance measurement program--DHS agreed with our
               recommendation to ensure that the program is consistently
               conducted by the ports. DHS stated that CBP management will issue
               updated guidance to the field emphasizing the importance of
               conducting these audits in a timely manner and accurately
               reporting their findings.

               In our recommendations, we attempted to find a balance between the
               commercial interests of the various parties involved in
               international trade and the CBP requirements for information and
               structure in order to ensure that security goals, as well as
               revenue and law enforcement goals, are achieved. One of the
               persistent challenges of the in-bond program is that the unusual
               flexibility that the program provides to the trade community--the
               limited information required, the time periods and lax
               notification requirements for shipments transiting the United
               States, and the ability to use multiple in-bond transactions for a
               single shipment--all exacerbate the challenges for CBP in
               performing its security and trade enforcement duties.

               As the report details, persistent weaknesses in the in-bond system
               existed long before customs functions shifted to DHS and now
               create new challenges for DHS in ensuring security of shipments
               entering the United States. While DHS disagrees with three of our
               recommendations, we believe that the evidence of weakness in the
               system overwhelmingly demonstrates that a coherent set of
               modifications is needed.

               As agreed with your office, unless you publicly announce the
               contents of this report earlier, we plan no further distribution
               until 30 days from the report date. At that time, we will send
               copies of this report to interested congressional committees as
               well as the Secretary of Homeland Security. We will also make
               copies of this report available to others upon request. In
               addition, the report will be available at no charge on the GAO Web
               site at http://www.gao.gov.

               If you or your staff have any questions about this report, please
               contact me at (202) 512-4347 or yagerl@gao.gov. Contact points for
               our Office of Congressional Relations and Public Affairs may be
               found on the last page of this report. GAO staff who made major
               contributions to this report are listed in appendix III.

               Loren Yager, Director
    		   International Affairs and Trade

    		   Appendix I: Objectives, Scope, and Methodology

               To determine how the in-bond program addresses its trade, revenue,
               and cargo security functions, we examined relevant documents and
               conducted interviews to answer the following questions: (1) What
               is the in-bond system and to what extent is it used? (2) How has
               Customs Border Protection (CBP) managed the system to ensure that
               revenues are collected and trade concerns are minimized? and (3)
               How has CBP managed the system to ensure that security-related
               inspections are properly targeted?

               To obtain an understanding of the CBP in-bond system and assess
               the extent of its use, we analyzed laws, regulations, and relevant
               CBP policies, procedures, and related documents. We interviewed
               officials and examined documents at CBP headquarters and at six
               district port offices, including Buffalo, New York; Los
               Angeles/Long Beach, California; Laredo, Texas; Miami, Florida; New
               York, New York /Newark, New Jersey; and Seattle, Washington. Our
               work at the Seattle port district office included work at its
               Blaine, Washington, border port. We also visited the Port of
               Dallas, Texas, which is a major inland destination port for
               in-bond goods. We also discussed industry views of the in-bond
               program with the National Brokers and Forwarders Association of
               America, Association of American Railroads, American Trucking
               Association, and National Association of Foreign Trade Zones. The
               six CBP district offices we visited processed the greatest numbers
               of noncourier in-bond transactions from October 2004 to March
               2005. We used data from this period because CBP officials stated
               that they had recently assembled data for this period and that
               would pose a substantial work load for them to obtain more recent
               2006 data.

               To determine how CBP has managed the system to address revenue and
               trade concerns, we examined in-bond guidance, policies,
               procedures, and practices at CBP headquarters and at the ports
               visited. To identify previously identified weaknesses in CBP's
               management of trade and revenue concerns related to the in-bond
               program, we examined audit reports by GAO, DHS Inspector General
               and public accounting firms. We noted internal control weaknesses
               in the in-bond program identified in previous audit reports and
               discussed these weaknesses with CBP headquarters and port
               officials. We discussed views of CBP headquarters and port
               management personnel regarding any trade related and revenue risks
               associated with processing in-bond cargo and discussed actions
               taken to address these risks. We reviewed our previous work that
               assessed CBP's data reliability and internal controls. We found
               some inconsistencies between various data sets we received and
               reported these inconsistencies to CBP. These inconsistencies,
               however, did not indicate major discrepancies in the data, and for
               purposes of reporting on general in-bond issues, we found CBP's
               data sufficiently reliable.

               To determine how CBP has managed the system to ensure that
               security-related inspections are properly targeted, we examined
               CBP procedures for targeting security inspections of in-bond cargo
               and discussed these practices at CBP headquarters and at the ports
               visited. To assess the impact of not having entry information for
               in-bond cargo, we obtained data showing the impact of this
               information on the ATS security score assigned. We discussed views
               of CBP headquarters and port management personnel on
               security-related concerns associated with in-bond processing.

               We conducted our work from January 2006 through February 2007 in
               accordance with generally accepted government auditing standards.

    		   Appendix II: Comments from the Department of Homeland Security

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

    See comment 1.

    See comment 2.

    See comment 4.

    See comment 3.

    GAO Comments

               The following are GAO's comments on the Department of Homeland
               Security letter dated April 2, 2007.

                            1. We remain concerned that in-bond cargo routinely
                            transits the United States without detailed
                            descriptive information and may pose trade, revenue
                            and security risks. However, in recognition of the
                            legal concerns raised by DHS, we revised our
                            recommendation to obtain additional information on
                            in-bond cargo without requiring the 10 digit HTS
                            number. In addition, we recommended that CBP--after 6
                            months of the implementation of new data
                            requirements--report to Congress whether the enhance
                            data obtained are adequate to address security and
                            trade concerns or whether their current authority
                            needs to be adjusted.
                            2. We revised this recommendation to focus on using
                            the additional information in CBPs' Cargo Selectivity
                            process. Since the Stratified Compliance Examination
                            represents a randomly generated trade compliance exam
                            at cargo entry, CBP can develop similar information
                            for in-bond cargo when it implements our
                            recommendation to improve it's Tinman compliance
                            measurement program. The revised recommendation
                            indicates that CBP should use information from the
                            amended in-bond form as input to the Cargo
                            Selectivity process at the arrival port instead of
                            limiting this process to cargo that has made entry
                            for consumption.
                            3. We modified the wording of this recommendation to
                            state that CBP should develop a more systematic
                            enforcement strategy in order to increase bondholder
                            compliance in closing out open in-bond transactions.
                            Although CBP has authority to issue penalties to
                            bondholders for failure to close in-bond
                            transactions, we noted a high number of open in-bond
                            transactions at many CBP ports. CBP should consider
                            strengthening its regulations to clearly communicate
                            to bondholders their responsibility to close open
                            in-bond transactions and increase enforcement of
                            requirements to reduce the number of open in-bond
                            transactions.
                            4. We did not observe CBP efforts to prioritize
                            closing open in-bond transactions based on the
                            potential risk. Open in-bond records appear on CBP
                            reports without any designation of the importance of
                            individual records. With limited resources available,
                            CBP should place a high priority on monitoring and
                            closing open in-bonds transactions that pose the most
                            significant risks.

    		   Appendix III: GAO Contact and Staff Acknowledgments

               GAO Contact

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    Highlights of [47]GAO-07-561 , a report to the Committee on Finance, U.S.
    Senate

    April 2007

    INTERNATIONAL TRADE

    Persistent Weaknesses in the In-Bond Cargo System Impede Customs and
    Border Protection's Ability to Address Revenue, Trade, and Security
    Concerns

    The U.S. Customs and Border Protection (CBP) must strive to balance its
    competing goals of facilitating trade, providing port security, and
    collecting trade revenues. CBP's in-bond system, which allows goods to
    transit the United States without formally entering U.S. commerce, must
    also balance these goals. In response to concerns that previously
    identified weaknesses in the in-bond system have not been remedied, GAO
    examined (1) the purpose of the in-bond system and the extent of its use
    (2) CBP efforts to ensure that revenues are collected and trade concerns
    are minimized, and (3) CBP efforts to ensure that security-related
    inspections are properly targeted. GAO examined audit reports and agency
    documents, interviewed officials at CBP headquarters and at 10 CBP port
    offices. GAO also discussed the in-bond system with trade groups impacted
    by the in-bond system.

    [48]What GAO Recommends

    GAO is recommending that the Commissioner of CBP take action in three
    areas (1) collect and use improved information on in-bond shipments to
    enable better informed decisions, (2) assess the systemic problems
    associated with identifying open in-bonds and take steps to resolve these
    problems, and (3) ensure that the compliance measurement system is
    performed to improve CBP's in-bond management. DHS agreed with most of our
    recommendations in these three areas.

    The in-bond system is designed to facilitate the flow of trade; however,
    CBP does not know the extent of the in-bond system's use as a result of
    lax oversight. The system allows cargo to be transported from the arrival
    port, without appraisal or payment of duties, to another U.S. port for
    official entry into U.S. commerce or for exportation. Although the in-bond
    system is estimated to be widely used, CBP cannot assess the extent of
    program use because it collects little information on in-bond shipments
    and performs limited analysis of data that it does collect.

    Despite numerous program reviews and audits that identified problems in
    CBP's management of the in-bond system, weaknesses persist and continue to
    impede CBP's ability to ensure proper collection of trade revenue and
    management of trade risks. The major weakness is that CBP does not
    adequately monitor and track in-bond goods. In particular, it does not
    consistently reconcile in-bond documents issued at the arrival port with
    documents at the destination port to ensure that the cargo is either
    officially entered with appropriate duties or quotas applied, or is in
    fact exported. CBP records show that many in-bond cargo shipments remained
    unreconciled, or "open," with one port reporting that 77 percent of its
    in-bond transactions were open. Also, in-bond regulations provide unusual
    flexibility for the trade community, but create challenges for CBP in
    tracking movements. Finally, some CBP ports do not consistently perform
    in-bond compliance reviews which could identify weaknesses and possible
    solutions.

    The limited information available on in-bond cargo also impedes CBP
    efforts to manage security risks and ensure proper targeting of
    inspections. In-bond goods transit the United States with a security score
    based on manifest information and do not use more accurate and detailed
    entry type information to re-score until and unless the cargo enters U.S.
    commerce. As a result, some higher risk cargo may not be identified for
    inspection, and scarce inspection resources may be used for some lower
    risk cargo.

    Port Estimates of Percentage of In-Bond Records Remaining Open in FY 2005

    References

    Visible links
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-06-580
      35. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-94-38
      36. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-94-119
      44. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-94-38
      45. http://www.gao.gov/cgi-bin/getrpt?GAO-04-557T
      47. http://www.gao.gov/cgi-bin/getrpt?GAO-07-561
    *** End of document. ***