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

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protection in the United States. It may be reproduced and distributed in
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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 [email protected]. 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

           Loren Yager, (202) 512-4128, or [email protected]
		   
		   Staff Acknowledgments

           In addition to the individual named above, Virginia Hughes,
           Assistant Director; Francisco Enriquez; Timothy Fairbanks; and
           Jessica Kaczmarek; made significant contributions to this report.
           Ernie Jackson, Karen Deans, Etana Finkler, and Stan Kostyla also
           provided assistance.
		   
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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
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