Customs Service Modernization: Impact of New Trade Compliance Strategy
Needs to Be Assessed (Letter Report, 12/15/1999, GAO/GGD-00-23).

Pursuant to a congressional request, GAO provided information on the
Custom Service's Modernization efforts, focusing on: (1) the status of
Customs' implementation of the informed compliance strategy; and (2)
whether trade compliance under the new program had improved.

GAO noted that: (1) compliance data suggest the key initiatives and
actions that make up Customs' informed compliance strategy have not yet
produced the benefits that were expected; (2) among the reasons for
these results may be that Customs has not implemented three of the key
initiatives and actions to the extent or at the pace that it had
expected; (3) two of the five are fully operational; (4) three have been
implemented but have not yet reached many of the intended importers; (5)
in responding to noncompliant importers, Customs has had limited success
in increasing compliance; (6) its efforts to raise compliance rates in
selected industries led to an initial increase in the rates, followed by
a decrease, and ended with the fiscal year 1998 compliance rates falling
below Customs' goal; (7) Customs cited the lack of sufficient staff
resources as a major reason for shortfalls in implementing the
compliance assessment and account management programs to the extent or
at the pace intended; (8) Customs also noted that as it implemented the
compliance measurement system and introduced new analytical tools, staff
have become more astute at finding noncompliance; (9) although Customs
has monitored and evaluated certain aspects of the key initiatives and
actions, it has not evaluated, nor does it have a plan to evaluate, the
impact on compliance of the overall informed compliance strategy; (10)
however, such an evaluation seems appropriate to address the concerns
raised by GAO's analysis of the impact of the compliance assessment
initiative on the compliance rates for 59 importers; (11) the overall
improvement in these importers' compliance rates after compliance
assessment was less than Customs expected; and (12) the limited extent
or pace of implementation of some aspects of the strategy and GAO's
findings concerning compliance rates for the 59 importers raise
fundamental questions about informed compliance strategy.

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

 REPORTNUM:  GGD-00-23
     TITLE:  Customs Service Modernization: Impact of New Trade
	     Compliance Strategy Needs to Be Assessed
      DATE:  12/15/1999
   SUBJECT:  Customs administration
	     Program evaluation
	     Trade policies
	     Import regulation
	     Government information dissemination
	     Statistical methods
	     Noncompliance
	     Performance measures
IDENTIFIER:  Customs Service Automated Commercial System
	     Customs Electronic Bulletin Board
	     Customs Multi-port Approach to Raise Compliance by the
	     Year 2000
	     Customs Company Enforced Compliance Process
	     Customs Trade Compliance Analytical Review

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United States General Accounting Office
GAO

Report to the Chairman, Subcommittee on Trade,

Committee on Ways and Means, House of

Representatives

December 1999

GAO/GGD-00-23

CUSTOMS SERVICE MODERNIZATION
Impact of New Trade Compliance Strategy

Needs to Be Assessed

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Contents
Page 421GAO/GGD-00-23 New Trade Compliance Strategy
Letter                                                                      1
                                                                             
Appendix I                                                                 44
Scope and Methodology
                                                                             
Appendix II                                                                48
FY96 and FY98 Compliance
Measurement Exams and
Compliance Rates for 59
Importers With
Compliance Assessments
by 9/30/97
                                                                             
Appendix III                                                               50
Number of Import
Specialists and Port
Accounts by Port
                                                                             
Appendix IV                                                                52
Comments From the
Department of the
Treasury
                                                                             
Appendix V                                                                 56
GAO Contacts and Staff
Acknowledgments
                                                                             
Tables                     Table 1: Compliance Assessments                 18
                           Completed as of March 31, 1999, by
                           Primary Focus Industry
                           Table 2:  Changes to Compliance Rates           22
                           From FY 1996 to FY 1998 for 59
                           Importers With Compliance Assessments
                           Completed by September 30, 1997
                           Table 3: Number of National and Port            26
                           Accounts by Fiscal Year
                           Table 4:  Number of Accounts and Steps          27
                           in Account Management Cycle as of
                           March 31, 1999
                           Table 5:  MARC 2000 Targeted PFIs'              33
                           Compliance Rates for Fiscal Years
                           1996 Through 1998
                           Table 6: Compliance Rates for                   34
                           Confirmed Risk Importers
                                                                             
Figures                    Figure 1: Compliance Rates Have                 13
                           Remained Static Between Fiscal Years
                           1995 and 1998
                           Figure 2: Projected Net Revenue                 15
                           Underpayments Have Increased
                                                                             

Abbreviations

ACE       Automated Commercial Environment
ACS       Automated Commercial System
CAM       Controlled Assessment Methodology
CEBB      Customs Electronic Bulletin Board
CECP      Company Enforced Compliance Process
MARC 2000 Multi-port Approach to Raise Compliance
by the Year 2000
NASC      National Account Service Center
PFI       Primary Focus Industry
TCAR      Trade Compliance Analytical Review

B-280470

Page 16GAO/GGD-00-23 New Trade Compliance Strategy
     B-280470

     December 15, 1999

The Honorable Philip M. Crane
Chairman, Subcommittee on Trade
Committee on Ways and Means
House of Representatives
 
Dear Mr. Chairman:

To speed the processing of imports and improve
compliance with trade laws, Congress enacted Title
VI of the North American Free Trade Agreement
Implementation Act on December 8, 1993.1 The
Customs Service refers to this legislation as the
Customs Modernization and Informed Compliance Act
or Mod Act. The Mod Act fundamentally altered the
relationship between importers and Customs by
shifting from Customs to the importer the legal
responsibility for declaring the value,
classification, and rate of duty applicable to
merchandise being imported into the United States.
Customs is responsible for determining the final
classification and value of the merchandise. The
Mod Act also gave Customs and importers a shared
responsibility for ensuring compliance with trade
laws. To implement these new responsibilities,
Customs developed an informed compliance strategy.

You asked us to (1) assess the status of Customs'
implementation of the informed compliance strategy
and (2) determine whether trade compliance under
the new program had improved. We addressed these
two objectives for five key initiatives and
actions under the informed compliance strategy:

ï¿½    information programs: basic, and targeted to
specific imported commodities;

ï¿½    compliance measurement: a process of physical
inspections of merchandise and/or entry
documentation to determine the rate of compliance;
ï¿½    compliance assessment: a mechanism by which
Customs evaluates a company's internal control
systems to ensure that they promote the filing of
import paperwork that is in compliance with laws
and regulations;
ï¿½    account management: Customs' approach to
managing its work through accounts (importing
companies) rather than individual import
transactions; and
ï¿½    Customs' responses to noncompliance by
importers.
We performed our work at Customs headquarters in
Washington, D.C., and at two ports of entry-Los
Angeles/Long Beach, CA; and Seattle, WA. We also
interviewed selected importers to obtain their
views about Customs' efforts in implementing the
informed compliance strategy. Appendix I more
fully describes the methodology we followed in
reviewing each of the key initiatives and actions.
We performed our work between June 1998 and
September 1999 in accordance with generally
accepted government auditing standards.

Results in Brief
Compliance data suggest that the key initiatives
and actions that make up Customs' informed
compliance strategy have not yet produced the
benefits that were expected. Trade compliance
rates have remained static at about 81 percent,
short of Customs' 90-percent goal. In addition,
revenue collection rates have decreased from 99.37
percent in fiscal year 1995 to 98.35 percent in
fiscal year 1998. This resulted in projected net
revenue underpayments increasing from $135 million
in fiscal year 1995 to $343 million in fiscal year
1998.

Among the reasons for these results may be that
Customs has not implemented three of the key
initiatives and actions to the extent or at the
pace that it had expected. Two of the
five-information programs and compliance
measurement-are fully operational. However,
compliance assessment, account management, and
Customs' responses to noncompliant importers have
been implemented but have not yet reached many of
the intended importers.

In compliance assessment, Customs expected to
complete assessments for 2,100 importers in 8 to
10 years at a rate of about 210 to 263 annually;
however, it completed only 209 assessments from
October 1, 1995, through March 31, 1999. In
account management, Customs identified 7,405
importers as potential candidates for its account
management program. From fiscal year 1995 through
fiscal year 1999, Customs had assigned account
managers to 604 importers. Customs has not
determined the specific level of resources
necessary to assign account managers to the pool
of candidate importers; but believes that with
current resources, it will not be able to assign
account managers to all candidates in the pool.

In responding to noncompliant importers, Customs
has had limited success in increasing compliance.
Its efforts to raise compliance rates in selected
industries led to an initial increase in the
rates, followed by a decrease, and ended with the
fiscal year 1998 compliance rates falling below
Customs' goal. Its efforts to deal with about 45
importers that have the most serious ongoing
compliance problems have included a variety of
actions but have not included penalty enforcement
actions, such as seizures or fines. Few of these
importers have improved their compliance rates
enough to meet Customs' 90-percent goal.

Customs cited the lack of sufficient staff
resources as a major reason for shortfalls in
implementing the compliance assessment and account
management programs to the extent or at the pace
intended. Customs also noted that as it
implemented the compliance measurement system and
introduced new analytical tools, staff have become
more astute at finding noncompliance.

Although Customs has monitored and evaluated
certain aspects of the key initiatives and
actions, it has not evaluated, nor does it have a
plan to evaluate, the impact on compliance of the
overall informed compliance strategy. However,
such an evaluation seems appropriate to address
the concerns raised by our analysis of the impact
of the compliance assessment initiative on the
compliance rates for 59 importers. The overall
improvement in these importers' compliance rates
after compliance assessment was less than Customs
expected. The limited extent or pace of
implementation of some aspects of the strategy and
our findings concerning compliance rates for the
59 importers raise fundamental questions about the
informed compliance strategy. We make a
recommendation to Customs to address these
questions.

Background
Customs' mission is to (1) ensure that merchandise
and persons entering and exiting the United States
do so in compliance with U.S. laws and regulations
and (2) collect revenue from international trade.
Customs collected $22.1 billion in revenue at more
than 300 ports of entry in fiscal year 1998.
Customs performs its mission with a workforce of
nearly 20,000 personnel at its headquarters, 20
Customs Management Centers, 20 investigative
offices, 5 Strategic Trade Centers, and 301 ports
of entry around the country.

Customs established a two-step procedure to
process merchandise imported into the United
States. During the first step, known as cargo
release, Customs assumes direct control of the
merchandise and uses an inspection process to
verify that the cargo meets import requirements
and is properly and accurately documented. When
Customs determines that these requirements have
been met, the cargo is released. During the second
step, referred to as entry summary, Customs
selects for review some of the detailed paperwork
that has been submitted by the importer. Customs
subsequently liquidates the importation (completes
the transaction) after determining that the
appropriate import duty has been paid.

Although cargo release and entry summary are
Customs' major programs for ensuring compliance
with trade laws, its commercial fraud, fines,
penalties, and forfeitures program is its major
weapon against violators of these laws. Customs
also assesses liquidated damages2 when an importer
does not comply with regulations. Civil monetary
penalties, on the other hand, are assessed for
violations, such as misclassification, knowingly
falsifying the country of origin, and other
fraudulent acts. Customs usually takes seizure
actions when merchandise is illegal or not
admissible to the United States.

Although Customs agents, inspectors, and import
specialists assess penalties and make seizures, it
is the Fines, Penalties, and Forfeitures offices
that are responsible for administrative processing
and tracking of all liquidated damages, penalty,
and seizure cases. Customs has been performing
these activities for many years, long before the
Mod Act, and continues to perform them in addition
to its informed compliance efforts.

For over 15 years, Customs has used its Automated
Commercial System (ACS) to store and process
import information and to manage import-related
activities, such as collecting revenue and
capturing trade statistics.3 ACS allows Customs to
identify, track, and control imported merchandise
during cargo release and entry summary liquidation
processing. It also allows Customs to retrieve
import information whenever needed.

The Customs Modernization and Informed Compliance
Act
In the late 1980s, Customs recognized the need to
overhaul, streamline, and update its automated
data processing capabilities and reorient its
business processes.4 Customs also realized that it
needed to work with the trade community and
Congress to forge legislation for meaningful
change. After several attempts, compromise
legislation acceptable to Customs, Congress, and
the trade community was developed. This
legislation, the Customs Modernization and
Informed Compliance Act or Mod Act, which allowed
Customs to automate its processes incrementally
and allowed Customs to be flexible and innovative
in redesigning its business processes, became law
on December 8, 1993, as Title VI of the North
American Free Trade Agreement Implementation Act.

The Mod Act introduced two new concepts: informed
compliance and shared responsibility. These
concepts were premised on the theory that in order
to maximize voluntary compliance with Customs laws
and regulations, the trade community needed to be
fully and completely informed of its legal
obligations. In addition, Customs was to
effectively communicate its requirements to the
trade community, and the people and businesses
subject to those requirements were to conduct
their regulated activities in conformance with
U.S. laws and regulations. The trade community was
to use reasonable care in meeting its
responsibilities. According to Customs, there is a
general consensus that a "black and white"
definition of reasonable care is impossible
because the concept of acting with reasonable care
depends upon individual circumstances. In lieu of
a definition, Customs has issued a checklist of
measures for importers to use as guidance in
meeting the reasonable care requirements.

Customs' Implementation of the Mod Act
Most import activity is attributable to a
relatively small group of importers. In fiscal
year 1998, Customs processed shipments with a
total value of about $897 billion for more than
443,000 commercial importers. Only 1,000 of these
importers, or less than 1 percent, accounted for
about 60 percent of import value-a total of $538
billion. These percentages have remained fairly
constant for several years, at least since fiscal
year 1996. Customs determined that these top 1,000
importers are in a position to have a significant
impact on trade compliance rates and introduced a
"big player focus" towards trade compliance.

In addition to big players, Customs directed its
trade compliance efforts toward primary focus
industries (PFIs). Customs selected industries as
PFIs if they were considered vital to U.S.
national interest on the basis of a number of
factors, including strategic importance,
international trade agreements, health and safety,
and economic concerns. For fiscal year 1998,
Customs selected the following PFIs for trade
compliance attention:

ï¿½    Agricultural Products,

ï¿½    Automotive,
ï¿½    Communications,
ï¿½    Critical Components (Bearings and Fasteners),
ï¿½    Footwear,
ï¿½    Production Equipment,
ï¿½    Steel, and
ï¿½    Textiles and Wearing Apparel.
In addition to focusing on big players and PFIs,
Customs developed and implemented several key
initiatives and actions as part of its informed
compliance strategy, including (1) information
programs, (2) compliance measurement, (3)
compliance assessment, (4) account management, and
(5) responses to noncompliance. The remainder of
this report will discuss these five initiatives
and actions, Customs' implementation of them, and
their results.

Customs Provided Informed Compliance Information
to Importers
Providing information to importers to inform them
about trade laws, regulations, and Customs
policies and procedures is not new; it has been
going on for years. However, under its informed
compliance strategy, developed as a result of the
Mod Act, Customs enhanced its basic information
program and developed a new targeted information
program to provide the importing community with
relevant information concerning its
responsibilities and rights under Customs laws and
regulations.

Through these two programs, Customs provided
importers with extensive information using the
Internet, an electronic bulletin board, seminars,
and informed compliance publications on such
topics as value, classification, reasonable care,
and recordkeeping requirements. Ports of entry
around the country also provided informed
compliance information to their local importing
communities. Limited feedback that we obtained
from several major importers indicated overall
satisfaction with Customs' informed compliance
information efforts.

Basic Information Program
According to the Commissioner of Customs' May 1996
memorandum for trade community members on informed
compliance strategy, the basic information program
was intended for all parties involved in
importing. Using the program, Customs would

ï¿½    continue to issue rulings on the proper
classification of imported merchandise;

ï¿½    give the trade community an opportunity to
comment on draft regulatory documents by posting
the documents on the Customs Electronic Bulletin
Board (CEBB);
ï¿½    establish an educational outreach program to
educate the trade community on Mod Act
responsibilities;
ï¿½    establish a Customs Web server for
dissemination of Customs information via the
Internet;
ï¿½    increase the knowledge of Customs staff
through internal and external Customs seminars;
and
ï¿½    consider making information, such as Customs
Bulletins, notices, and directives, available via
CD-ROM.
In accordance with its informed compliance
strategy, we found that in calendar year 1998,
Customs had issued over 13,000 rulings, posted 7
draft regulatory documents to the CEBB for public
comment, and developed 13 informed compliance
publications. In addition, in fiscal year 1998,
Customs conducted over 130 internal and external
educational seminars.

Customs established its Web site on the Internet
in August 1996, recording 1.5 million visits to
the site in its initial year. Customs chose not to
pursue distribution of such information as Customs
Bulletins, notices, directives, and other informed
compliance materials by CD-ROM because the
information became accessible once the Web site
was established.

The CEBB was established in January 1991 to
provide importers access to current, relevant
Customs operations and trade information. Enhanced
for informed compliance purposes, news releases,
rulings, and about 25 other subject areas can be
accessed through the CEBB. Almost all information
on the CEBB can also be accessed through the
Customs Web site.

In March 1999, we accessed CEBB files through the
Web site and found that one subject area, Mod Act
Information, contained 70 information files,
including draft and final regulations, Customs'
informed compliance strategy, and numerous
informed compliance publications. These files
included, for example, informed compliance
publications that discussed reasonable care and
recordkeeping requirements. According to Customs,
the CEBB will eventually be phased out and all
data integrated into the Web site.

The Customs Web site contains an extensive array
of information, including regulations and rulings,
merchandise tariff classification and entry
procedures, marking requirements, and informed
compliance strategy and publications. Web page
selections include such topics as "About U.S.
Customs" and "Importing and Exporting." As of
April 1999, over 10.6 million visits to Customs'
Web site had been recorded since it was
established in August 1996.

As part of its efforts to educate the importing
community on its responsibilities, Customs
developed an informed compliance publication
series. The publication series entitled "What
Every Member of the Trade Community Should Know
About:***" addressed trade issues, such as
merchandise classification, customs value, and
reasonable care. Thirty-four trade topics have
been covered in this series since its inception in
1996. Customs received positive feedback from the
trade community about this series and its
applicability toward understanding informed
compliance responsibilities.

Targeted Information Program
According to the Commissioner's May 1996
memorandum, the targeted information program was
designed to provide information and assistance to
the importers beyond that provided through the
basic program. The targeted information program
was primarily aimed at industries and certain
trade segments that required special efforts to
deal with compliance issues. The targeted
information programs used a variety of
communication methods, including

ï¿½    development and distribution of industry-
and/or commodity-specific publications,

ï¿½    seminars and industry association sponsored
meetings,
ï¿½    importer visits, and
ï¿½    videotapes.
Customs has produced a number of commodity- and
industry-specific publications under its "What
Every Member of the Trade Community Should Know
About:***" series. In fiscal year 1998, such
publications as Ribbons & Trimmings, Footwear, and
Lamps, Lighting and Candle Holders were issued as
guides to help with classification of these
commodities.

Customs also produced newsletters and other
publications for specific industries. One
newsletter entitled Production Equipment Trade
Educator focused on classification and valuation
of production equipment. Another was The Auto
Book: A Practical Guide to Classification of
Vehicles, Parts and Accessories under the
Harmonized Tariff Schedule, geared, of course, to
the auto industry.

In addition, Customs officials made 69
presentations to the trade community across the
country on specific topics, such as bearings,
production equipment, and wood products.
Presentations were made at industry association
meetings, ports of entry, and trade conferences.
Customs did not request formal feedback from the
trade community as a means of assessing
satisfaction with the information presented at its
seminars. However, Customs officials told us that
they had received letters from the trade community
that were complimentary of the presentations and
the usefulness of the information provided.

Furthermore, Customs officials visited many
importers to discuss new programs and initiatives
and to provide instructions on how to properly
classify imported merchandise. Customs did not
compile information on the number of visits made
to importers. Customs also issued three videos on
topics considered of high interest to the trade
community: Account Management, Informed
Compliance, and Textile Rules of Origin.

Ports of Entry Informed Compliance Activities
According to the Commissioner's May 1996
memorandum, ports of entry were also to develop
and implement informed compliance activities to
ensure that the local trade community was informed
of trade laws and regulations and Customs policies
and procedures.

We visited two ports of entry, Seattle, WA; and
Los Angeles, CA, to gain an understanding of local
informed compliance activities. The Seattle port
of entry

ï¿½    published a trade newsletter,

ï¿½    held monthly meetings to discuss issues of
concern to the importing community,
ï¿½    held port-sponsored seminars and workshops
several times a year,
ï¿½    held open house events and tours to meet and
greet trade representatives, and
ï¿½    visited importers to promote informed
compliance activities.
The Port of Los Angeles (Los Angeles Airport and
the Los Angeles/Long Beach Seaport)

ï¿½    issued public bulletins to notify the trade
community of activities and administrative
changes,

ï¿½    held monthly and quarterly meetings with
importing trade associations,
ï¿½    held port-sponsored seminars, and
ï¿½    held open house events that included a tour
of the airport Customs facility.
Customs officials told us that although specific
documentation was not compiled, ports of entry
across the country have been involved in informed
compliance activities. The officials stated that
some ports, however, were more proactive than
others and had organized numerous activities;
others had few activities.

Selected Importers Generally Satisfied With
Customs' Informed Compliance Information Programs
As part of our review, we asked for the views of
nine importers5 regarding the basic and targeted
information programs. We asked the importers a
series of questions, including whether (1) they
used the Customs Web site, (2) Customs seminars
they attended were informative, and (3) they felt
that Customs was doing a good job providing
information to assist them to voluntarily comply
with Customs laws and regulations.

All nine importers we interviewed responded that
they thought the Web site was very useful as well
as a great source of information. The importers
said that they checked the Web site frequently for
relevant, current information. Some importers also
commented, however, that although the Web site
provides importers greater access to Customs
information, there is a great deal of information
to sort through to find what may be relevant to a
company. Many importers also stated that Customs'
presentations at various seminars were generally
informative. A few of the importers suggested that
Customs act more quickly in holding seminars, once
new changes or new programs were introduced.
Several of the importers we interviewed commented
that the publications were informative and
provided a good source of basic level information.
Overall, importers we interviewed said Customs'
efforts to provide the trade community with
adequate and timely information were generally
sufficient, and its efforts to keep the trade
community informed had improved since the Mod Act.

Compliance Measurement Results Indicate That Trade
Compliance and Revenue Collection Goals Have Not
Been Met
In response to Mod Act requirements, Customs began
in fiscal year 1995 to measure and report to
Congress on the importing community's level of
compliance with trade laws and regulations. In
fiscal year 1996, Customs established goals to
attain overall trade compliance rates of 90
percent and PFI compliance rates of 95 percent by
fiscal year 1999. Overall trade compliance rates,
however, have remained static at about 81 percent
from fiscal year 1995 through fiscal year 1998.
PFI rates have also remained static at nearly 84
percent from fiscal year 1996 through fiscal year
1998. Customs recently extended both goals out to
fiscal year 2004.

Customs also established a goal to collect at
least 99 percent of revenue due, which was last
achieved in fiscal year 1996. Projected revenue
collection rates have decreased from 99.37 percent
in fiscal year 1995 to 98.35 percent in fiscal
year 1998. This amounts to projected net revenue
underpayments increasing from $135 million in
fiscal year 1995 to $343 million in fiscal year
1998.

Description of Compliance Measurement
Customs describes compliance measurement as a
process of physical inspections of merchandise
and/or Customs entry summary6 documentation
reviews to determine the compliance rate of
transactions. Compliance measurement is a
statistically valid method7 of determining
compliance by means of examinations that are based
on Harmonized Tariff Schedule8 classifications.
Compliance measurement results enable Customs to
assess the performance of major industries,
including PFIs, major importers, and its own
performance concerning revenue collection and
enforcement of trade laws. According to Customs,
compliance measurement also provides the basis for
working with importers in improving their
compliance and in developing and implementing
Customs' strategies to improve compliance.

Customs Modifications to the Compliance
Measurement Program
In response to Mod Act requirements, Customs
established the compliance measurement program on
April 7, 1994. During fiscal year 1994, Customs
trained port personnel responsible for conducting
cargo inspections and document reviews and
measured the compliance of 15 industries in
preparation for overall program implementation. In
fiscal year 1995, Customs conducted the first
national compliance measurement of imports across
the entire spectrum of the Harmonized Tariff
Schedule to establish a compliance baseline for
use in comparisons with future measurement and
projections.

Customs began to focus compliance measurement
efforts on PFIs during fiscal year 1996 to
determine compliance rates for specific industries
importing automobiles, bearings, and textiles,
among other commodities and merchandise; and to
direct informed compliance efforts, such as
seminars, toward targeted industries experiencing
low trade compliance. During fiscal year 1997,
Customs linked compliance assessment results with
compliance measurement results to improve its
capability to measure and identify noncompliance.
This improvement was designed to allow Customs to
perform a minimum number of inspections on
compliant importers and an increased number of
inspections on noncompliant importers.

In its fiscal year 1998 Trade Compliance
Measurement Report, Customs introduced the concept
of significance into the compliance measurement
process. Customs applied criteria to violations
discovered during compliance measurement
examinations and document reviews to differentiate
between discrepancies, such as clerical errors,
and more egregious or willful violations,
including narcotics smuggling and intellectual
property rights infringement. Measuring a
violation's significance allows Customs to focus
its resources on the most significant trade
violations.

Compliance Rates Remain Static
Since Customs started measuring and reporting
compliance, overall and PFI compliance rates have
remained static from fiscal year 1995 through
fiscal year 1998 (see fig. 1). Customs officials
attributed the static compliance rates, in part,
to Customs' increasing ability to detect
noncompliance by conducting more thorough and
uniform cargo examinations and document reviews
and using sophisticated analytical tools. Customs
officials explained that the more familiar
inspectors and import specialists became with
cargo inspected for compliance measurement, the
more likely they were to detect discrepancies.
Customs also credited the use of sophisticated
analytical tools to analyze compliance measurement
data, develop importer compliance profiles, and
identify potential trends of noncompliance.
According to Customs officials, these analytical
tools greatly enhanced Customs' ability to detect
and react to trends indicating potential
noncompliance that may otherwise have remained
undetected.

Figure 1: Compliance Rates Have Remained Static
Between Fiscal Years 1995 and 1998

Sources: U.S. Customs Service Commercial
Compliance Measurement Report, fiscal year 1995
and U.S. Customs Service Trade Compliance
Measurement Report, fiscal years 1996-1998.

The conclusions of a Customs analysis of the
auto/truck parts industry, however, may provide
another explanation for static compliance rates.
The analysis indicated that importers too small to
justify the level of attention Customs affords
large importers-for example, providing account
managers or compliance assessments-had the lowest
aggregate compliance rate and generated a
disproportionate share of compliance discrepancies
within the industry. The analysis concluded that
unless the aggregate compliance rate for small
companies improves dramatically, auto/truck parts
industry compliance may never rise above 89
percent even if the compliance rate for large
companies rises to 95 percent. It also concluded
that Customs must pursue the challenge of raising
small company compliance within the auto/truck
parts industry.

In addition, Customs acknowledged, in its fiscal
years 1997 and 1998 Accountability Reports, that
its goal of achieving 90 percent overall
compliance and 95 percent for PFIs by 1999 as
originally planned, and later adjusted to the year
2000, was overly optimistic. According to its
Fiscal Year 2000 President's Budget Justification
Materials, Customs anticipates achieving both
goals by fiscal year 2004 but acknowledged that
further adjustments may be needed as more
experience is gained. Customs officials stated
that these goals are also dependent on budgetary
resources and automation funding.

Applying Significance Criteria Changes Compliance
Rate
Customs reported an overall compliance rate and a
significance compliance rate in its 1998 Trade
Compliance Measurement Report. The 89 percent
significance compliance rate was higher than the
81 percent overall compliance rate. Customs stated
that for compliance measurement, a discrepancy is
indicated whenever any of the diverse trade laws,
regulations, and agreements are violated. This is,
in effect, a "letter-of-the-law" definition of
discrepancy that has been used since the beginning
of compliance measurement.

In an attempt to increase the relevance of
compliance measurement, however, Customs
established a task force in 1997 to review the
discrepancy definitions and apply a standard for
significance. The task force identified criteria
to distinguish major discrepancies involving
illegal narcotics, intellectual property rights,
and forced labor violations, among others, which
Customs always considers significant, from
nonmajor discrepancies such as clerical errors.
Customs applied its standard for significance to
the compliance measurement process to identify and
address major compliance problems before
considering less important or inconsequential
issues.

Customs officials told us that they intend to
continue compiling and reporting both overall and
significance compliance rates and would not limit
their compliance measurement program to one or the
other. The officials did, however, expect to have
an internal dialogue about the significance
discrepancy definition applied to compliance rates
and its place and use in compliance measurement.

Projected Revenue Collection Rates Have Decreased,
and Projected Net Revenue Underpayments Have
Increased
Although compliance rates have remained static
from fiscal years 1995 to 1998, projected revenue
collection rates have decreased for the same
period, from 99.37 percent in fiscal year 1995 to
98.35 percent in fiscal year 1998. This decrease
amounted to projected net revenue underpayments
increasing from $135 million in fiscal year 1995
to $343 million in fiscal year 1998 (see fig. 2).

Figure 2: Projected Net Revenue Underpayments Have
Increased

Sources: U.S. Customs Service 1996 Annual Report
and U.S. Customs Service Accountability Report,
fiscal year 1998.

The projected revenue collection rates decreased
and the projected net revenue underpayments
increased while total gross revenue collections
dropped from $23.1 billion to $22.1 billion during
this time period. In its fiscal year 1997
Accountability Report, Customs attributes the
increase in projected net revenue underpayments to
refinements in accumulating and projecting revenue
data. Customs officials said that they were trying
to reverse the situation but did not provide
information about any steps that they were taking.

Compliance Assessments Behind Schedule and Impact
Not Yet Evaluated
A compliance assessment is a review of an
importing company's Customs systems and
procedures, including internal controls, to ensure
that the imports are in compliance with U.S. laws
and regulations. The goal is to ensure maximum
compliance.

In fiscal year 1997, Customs estimated that it
would take 8 to 10 years to complete compliance
assessments at the top 2,100 importers based on
the value of imports. However, because Customs
completed only 209 compliance assessments from
fiscal year 1996 through March 31, 1999, it
appears unlikely that Customs will be able to
achieve that goal. To expedite the lengthy
compliance assessment process, Customs implemented
a revised approach in July 1999, but it is too
early to determine the impact of the revisions on
Customs' ability to meet its goal.

Customs began conducting follow-up reviews at
importers who had received compliance assessments
in fiscal year 1998. The reviews were intended to
determine whether importers had taken corrective
action to improve their internal controls over
imports and had improved compliance. However,
Customs has not yet developed a methodology for
evaluating the overall impact of compliance
assessments on importer compliance with U.S. laws
and regulations.

Our analysis of 59 importers that had compliance
assessments completed by the end of fiscal year
1997 raised some concerns about the impact of
compliance assessments on overall compliance
rates. In many cases, the compliance rates for the
59 individual importers were based on few
examinations and were therefore not statistically
valid, but they serve as indicators that
compliance assessments may not be maximizing
compliance at many importers that have received
them. This analysis showed that from fiscal year
1996 to fiscal year 1998, compliance worsened for
20, improved for 27, and stayed the same for 4.
Eight importers already were in full compliance,
and they stayed that way.

Overview of Compliance Assessment Process
For many years, Customs has conducted regulatory
audits of importer records to verify compliance
with U.S. laws and regulations. In October 1995,
Customs implemented a different kind of
audit-compliance assessments. The primary focus of
regulatory audits is to identify lost revenue and
the primary focus of compliance assessments is to
work with importers to ensure that their imports
comply with U.S. laws and regulations. The
Regulatory Audit Division is responsible for
performing compliance assessments with assistance
from import specialists, account managers (if
assigned), and other staff, as needed.

Compliance assessments include evaluating an
importer's operating practices and internal
controls supporting its Customs-related
activities. Assessments also include statistical
sampling of entry transactions from the importer's
previous fiscal year. Each assessment involves a
minimum review of compliance in five trade areas
(classification, value, quantity, special duty
provisions, and recordkeeping).9 The findings of
compliance assessments are to be used to determine
the frequency of future compliance measurement
examinations. Companies are categorized as low,
moderate, or high risk on the basis of compliance
assessment results. According to Customs, poor
compliance would mean higher risk and therefore
more examinations.

When a compliance assessment indicates the need
for corrective action to ensure compliance, the
importer is to be asked to prepare and implement a
Compliance Improvement Plan. These plans are to
outline the specific deficiencies that the
importer needs to correct, how the operating
practices and internal controls will be changed,
and the time frame for taking corrective action.
According to Customs, follow-up reviews are
conducted to (1) verify that corrective action was
completed and compliance improved and (2)
determine whether the risk category can be changed
and the number of examinations reduced.

Customs Behind Schedule for Completing Compliance
Assessments
Customs targeted the top 1,000 importers on the
basis of the value of imports and the top 250
importers by value in each of the 8 PFIs to
receive compliance assessments; about 2,100
importers altogether. As of March 31, 1999,
Customs had completed 209 compliance assessments
(see table 1), and another 164 had been initiated.

Table 1: Compliance Assessments Completed as of
March 31, 1999, by Primary Focus Industry
Industry                                Number of
                                       compliance
                                      assessments
                                        completed
PFI                                              
Agriculture                                     6
Automotive                                     41
Critical components (bearings and              16
fasteners)
Communications                                 36
Footwear                                       13
Production equipment                           19
Steel                                          14
Textiles and wearing apparel                   47
Non-PFI                                        17
Totals                                        209
Source: GAO analysis of data provided by Customs'
Regulatory Audit Division.

In fiscal year 1997 Customs estimated that it
would take 8 to 10 years to complete the 2,100
compliance assessments with the existing staff and
a completion rate of about 210 to 263 compliance
assessments annually. However, Customs has not
been able to complete nearly that number of
assessments annually; 15 were completed in fiscal
year 1996, 61 were completed in fiscal year 1997,
and 92 were completed in fiscal year 1998.

In both the fiscal year 1999 and 2000 budget
submissions, Customs requested 100 additional
auditors to perform compliance assessments.
According to the narrative justifying these
requests, 250 additional auditors over the current
400 were needed to put compliance assessments on a
periodic cycle that will allow them to conduct
assessments at targeted importers once every 5
years. Customs requested 100 new auditors because
that is the optimum number that Customs believes
it can train and assimilate into the program at
one time. The Treasury Department approved the
fiscal year 1999 budget request for 100 additional
auditors, but the Office of Management and Budget
did not. The Treasury Department did not approve
the fiscal year 2000 budget request. Customs was
planning to include 100 additional auditors to
perform compliance assessments in the fiscal year
2001 budget request.

Compliance Assessments Have Been Lengthy and Time
Consuming
The Director of the Regulatory Audit Division told
us that action has been taken to expedite the
compliance assessment process because these
assessments have been lengthy and time consuming.
For the 168 compliance assessments completed by
September 30,1998, the median number of days
elapsed was 428, and the median number of staff
hours expended was 1,698.10 The Director told us
that the staff hours were understated, however,
because they include only Regulatory Audit staff
hours. Total compliance assessment hours are
unknown because Customs does not track hours spent
by staff in other offices, such as Strategic Trade
Center staff, who prepare importer profiles prior
to the assessments, and import specialists.

Customs had implemented three initiatives to
expedite the compliance assessment process:
establishing standards and guidelines for the
length of compliance assessments, reducing the
number of entries reviewed during an assessment,
and establishing an importer-assisted assessment
methodology designed to perform assessments more
rapidly. According to the Regulatory Audit
Division Director, the preliminary results of
these initiatives suggest the potential to shorten
the compliance assessment process, but further
experience is needed to know just how much impact
they will have.

Calendar Day and Staff Hour Standards Established
In November 1997, the Regulatory Audit Division
established a 9-month (270-day) target for
completing compliance assessments from the
entrance conference with the importer through
completion of a compliance assessment report.
Fourteen of 18 compliance assessments started
since the new policy was issued and completed by
March 31,1999, were completed in less than 270
days. The median number of calendar days elapsed
for the 14 assessments was 220. The median number
of days elapsed for the other four assessments was
291 days.

The Regulatory Audit Division also developed staff
hour guidelines for performing compliance
assessments. The guidelines state that staff hours
expended should vary depending on the scope of the
compliance assessment, whether a compliance
improvement plan is needed, and other factors. The
Regulatory Audit Division Director told us that he
uses 1,500 hours as a general rule of thumb for
planning staff resource utilization. Using 1,500
hours as the criterion for the number of staff
hours expended, we found that 16 of 18 compliance
assessments initiated and completed since the new
policy was issued required less than 1,500 hours;
and the median number of staff hours expended was
1,024 hours. The other two assessments took 1,668
and 2,883 staff hours to complete, respectively.

Reduced Number of Entries to be Reviewed
In July 1999, the Regulatory Audit Division
reduced the maximum sample size of entries to be
reviewed from 220 to 100 for most trade areas.
Prior to adopting the reduced sample size, Customs
tested using the smaller sample size at five
importers but did not perform a detailed analysis
of the impact on staff hours and calendar days.
Customs prepared a brief summary, however, which
indicated that smaller samples provided sufficient
coverage, reduced workload for both Customs and
the importer, and reduced the time needed to
perform compliance assessments.

Importers Allowed to Assist in Performing
Compliance Assessments
A process called Controlled Assessment Methodology
(CAM) was developed to allow importers to
voluntarily perform much of the compliance
assessment with verification by Customs auditors.
CAM has the same test and sampling parameters as a
standard compliance assessment, except that the
importer is to provide staff to assist in the
assessment. Customs prepares a written work plan
that includes applicable audit steps and time
frames for the importer to perform. When the work
is completed, Customs verifies its accuracy.

The Regulatory Audit Division expects that some
importers will be willing to choose this option
for several reasons, including (1) a less
intrusive compliance assessment process; (2)
improved importer understanding of their own
operations; and (3) elimination of duplicate
effort, which frequently occurs when importers
self-assess their efforts in advance of the
Customs assessment without Customs guidance.

As of April 19, 1999, compliance assessments had
been completed at 13 importers that elected to
participate in CAM. According to the Regulatory
Audit Division Director, early experience with CAM
suggests that it does expedite the completion of
compliance assessments, and its impact on Customs
staff resources and length of compliance
assessments will need to be monitored.

Follow-up Reviews to Determine Compliance
Assessment Benefits Are Being Scheduled
The objective of a follow-up review is to
determine if corrective actions noted in the
importer's compliance improvement plan were
implemented and whether they were effective in
correcting deficiencies. The Regulatory Audit
Division Director stated that follow-up reviews
are the critical final step of the compliance
assessment process and should demonstrate whether
compliance assessments are improving importer
operating practices, internal controls, and
compliance rates.

In fiscal year 1998 Customs developed guidance for
performing follow-up reviews and performed a
limited number. Customs performed seven follow-up
reviews in fiscal year 1998, including reviews of
three importers originally categorized as high
risk and four categorized as moderate risk. The
reviews resulted in six importers being
recategorized to low risk and one recategorized
from moderate risk to high risk. For the importer
recategorized from moderate to high risk, Customs
found that, among other things, the importer had
not fully implemented corrective actions and did
not correctly value imported merchandise.

Follow-up reviews were included in the annual
audit planning process for the first time for
fiscal year 1999. As of July 19, 1999, Customs
estimated that it would start and/or complete at
least 41 follow-up reviews by the end of fiscal
year 1999.

Overall Impact of Compliance Assessments Not Yet
Evaluated
Improved compliance and increased revenue
collection were identified by the Regulatory Audit
Division as performance measures for the
compliance assessment initiative. However, the
Director told us that although these performance
measures are important, because of other work
priorities and limited staffing, the impact of
compliance assessments on improving importer
compliance with U.S. import laws and regulations
and increasing revenue collections had not been
determined as of the end of our fieldwork in July
1999.

Our Analysis Raises Concerns About Impact of
Compliance Assessments on Importer Compliance
In the absence of a Customs evaluation of the
impact that compliance assessments have on
importers' compliance with U.S. laws and
regulations, we analyzed compliance rates for all
59 importers11 that had compliance assessments
completed by September 30, 1997, and had received
compliance measurement exams in both fiscal year
1996 and fiscal year 1998.

Although the number of compliance measurement
examinations that these importers received (see
app. II) was usually not sufficient to calculate
statistically valid compliance rates,12 the
compliance rates serve as an indicator about
whether or not overall compliance has improved.
Our analysis of all 59 importers showed that
compliance rates worsened for 20, improved for 27,
and stayed the same for 4. Eight importers already
were in full compliance (100 percent compliance)
in fiscal year 1996 and stayed that way.

Table 2:  Changes to Compliance Rates From FY 1996
to FY 1998 for 59 Importers With Compliance
Assessments Completed by September 30, 1997
Changea                                     Total
Down                                     20 of 59
Up                                       27 of 59
Stayed the same                           4 of 59
Full compliance                           8 of 59
Total                                          59
a The number of exams that make up the underlying
data for this table was in most cases not
sufficient to calculate statistically valid
compliance rates. Where increase or decrease was
less than 1 percent, we considered the compliance
rate to have remained the same.
Source: GAO analysis of data provided by Customs'
Analytical Development Division.

The Regulatory Audit Division Director agreed that
this analysis, although not based on statistically
valid compliance rates, does have some usefulness
for evaluating compliance. He further indicated
that the Regulatory Audit Division had been giving
priority to other activities, such as revising the
compliance assessment process, and that he plans
to begin focusing on developing a methodology to
measure the impact of compliance assessments. A
compliance rate analysis similar to the one we
performed would be one piece of this methodology,
according to the Director.

Most Selected Importers Cited Benefits From
Compliance Assessment
We interviewed nine importers13 to obtain their
views regarding the advantages and disadvantages
of the compliance assessment process and to
determine whether they had any suggestions for
improvement. Eight of the nine importers felt that
their import operations benefited as a result of
the compliance assessment. Seven importers
indicated that the compliance assessment provided
an independent review of import operations that
identified both strengths and weaknesses in the
internal controls, as well as recommendations on
how to correct the weaknesses. Two importers
indicated that after the compliance assessment,
they had more confidence in the quality of their
systems.

In addition, two importers indicated that they had
used their systems, after making any corrections
on the basis of the compliance assessment, as the
model for import operations at other company
divisions or locations. Three other importers said
they made organizational changes or increased
staffing on the basis of the compliance assessment
to better ensure future compliance. One importer
felt it had not received any benefits from the
compliance assessment. The importer felt that way
because it was already highly compliant, as
evidenced by the low-risk rating it received from
the compliance assessment.

Six importers interviewed commented on the length
of the assessment; the resultant cost to their
operations; and the amount of staff resources
dedicated to preparing for, and providing
information to, the auditors. Two importers felt
that the compliance assessment process should be
more standardized because of differences in the
process identified from discussions with other
importers about their compliance assessments.
Three importers indicated that Customs should
demonstrate more commitment to working with them,
and one importer commented that Customs should be
less adversarial during the compliance assessment.
It should be noted, however, that assessments
performed on companies we interviewed had been
completed early in the program when Customs was
still designing and refining the basic compliance
assessment process. The assessments were also
completed before Customs began to revise and
expedite the compliance assessment process, as
previously discussed.

The Account Management Program Is Encountering
Staffing Difficulties, and its Impact on Importer
Compliance Is Unknown
Account Management is Customs' approach to
managing its work through
accounts-importers-rather than by individual
merchandise transactions at the ports of entry.
According to Customs, an account manager is to
maintain a liaison with the account, provide
information under the principle of informed
compliance, help ensure uniform treatment of an
account's merchandise at all ports, and help the
company identify and resolve any areas of
noncompliance.

In fiscal year 1997 Customs identified 7,405 major
importers as candidates for the account management
program. Customs hopes to eventually assign
managers to all 7,405 importers depending on
availability of staff resources. However, Customs
had not developed a plan or time frame for
assigning account managers to the importers and
had not determined the level of staff resources
that would be necessary to manage the accounts.
Customs had assigned account managers to 604
importers from fiscal year 1995 through fiscal
year 1999. On the basis of current progress and
staffing, it will be several years before all
candidate accounts are assigned managers.
Moreover, Customs may not have enough staff
resources to assign account managers to all
candidate importers.

Customs also had not evaluated whether its
investment in the account management program has
had any positive impact on improving importers'
compliance rates. Customs had identified several
performance measures for the account management
program, including increased compliance,
uniformity, and customer satisfaction, but was
just beginning to develop the methodology for
collecting data as of July 1999.

Overview of Account Management
Account management is Customs' approach to viewing
an importer (an account) in the aggregate rather
than by each merchandise entry transaction. It
includes analysis of an account's compliance
nationwide, coordination of all Customs activities
involving the account, and identification and
resolution of compliance problems. Account
management also provides a point of contact within
Customs to assist the account. The National
Account Service Center (NASC) at Customs
headquarters is responsible for managing both the
national and port account programs.14

National account managers are devoted full-time to
account management and are assigned by NASC to the
largest importers. The national account program
was prototyped with eight accounts from February
1996 through February 1997 and implemented
nationwide in May 1997. As of September 30, 1999,
25 national account managers were assigned an
average of 6.2 accounts each, with a range of 2 to
9 accounts each.

For port account team members, account management
is a collateral function. Port account teams are
led by import specialists15 and may include
additional import specialists, cargo inspectors,
and other personnel. Port accounts are selected by
the ports in coordination with NASC and must be
approved by NASC. The port account program was
prototyped at 12 ports with 12 accounts from
February 1997 through August 1997. It was
implemented in the prototype ports in October 1997
and in 31 other ports in February 1998. The port
account program is conducted at 43 ports
designated as "service ports," which have a full
range of cargo-processing functions. The size and
composition of port account teams vary on the
basis of account size and staff availability,
according to the NASC Director. Most teams include
a minimum of two import specialists. The team
assigned to an importer is to be from one of the
top five ports through which the importer enters
merchandise on the basis of import value.

The account management cycle consists of six
steps:

1.   selecting an importer and assigning an
  account manager;
  
2.   contacting the account;
3.   developing a profile of the account's import
activities and history;
4.   evaluating the account's internal controls
identified in an internal controls questionnaire
completed by the importer, preparing an account
action plan, and obtaining Customs and account
approval of the action plan;
5.   monitoring implementation of the account
action plan; and
6.   maintaining the account after the action plan
items are completed.
Maintaining an account (step 6) includes
monitoring compliance rates, coordinating
outreach/improvement activities, and identifying
additional areas for improvement. At this step,
the amount of time required by Customs to manage
the account is expected to decrease; and the full
benefit of account management is expected to be
realized because the importer would have adequate
internal controls and a high compliance rate,
according to the NASC Director.

Customs identified the top 378 importers by value
of imports as possible candidates to be assigned
national account managers. These companies
represented 50 percent of the value of imports as
of September 30, 1996. The next group of 7,027
companies (ranked 379 to 7,405) were identified as
possible candidates to become port accounts
because they each imported over $10 million
annually. These companies represented the next 32
percent of the value of imports. Within these two
groups, Customs prioritizes individual importers
for possible assignment of an account manager or
team, using a risk score that is based on import
value, compliance rate, number of line items,16 its
ranking in the top 250 companies within a PFI, and
having at least 50 percent of imports in a PFI.
Although NASC selects importers to be assigned
national account managers, the ports select
importers in coordination with NASC, and these
selections must be approved by NASC.

Customs Has Not Developed a Plan for Assigning
Account Managers to Additional Accounts
NASC has not developed a plan for assigning
account managers to all 7,405 candidate accounts,
according to the NASC Director. The Director also
told us that the specific level of staff resources
necessary to manage all potential candidate
accounts had not been determined, but with current
resources Customs will not be able to assign
account managers to all candidates in the pool. In
lieu of an assignment plan, NASC was gradually
assigning additional accounts to the national
account managers and ports on the basis of their
ability to take on additional accounts and on the
progress of existing accounts. Customs had
established an interim goal of having 600 accounts
assigned by the end of fiscal year 1999-200
national and 400 port accounts. As of September
30, 1999, Customs had assigned 156 national and
448 port accounts for a total of 604 accounts (see
table 3).

Table 3: Number of National and Port Accounts by
Fiscal Year
Type of      FY 95     FY 96      FY 97      FY 98     FY 99  Total as of
account                                                      September 30,
                                                                     1999
National         3        10         89         40        14          156
Port             0         0         12        237       199          448
Totals           3        10        101        277       213          604
Source: GAO analysis of data provided by Customs'
National Account Service Center.

Factors Hampering Development of Additional
Accounts
The NASC Director cited five factors that hampered
the establishment of additional national and port
accounts. These factors were:

ï¿½    the time required to manage the existing
accounts, many of which had not reached
maintenance;

ï¿½    the need to revise an internal control
evaluation questionnaire given to accounts;
ï¿½    difficulty persuading importers to sign an
account action plan;
ï¿½    delayed implementation of the ACE system to
manage import activities; and
ï¿½    the part-time status of port account
management teams, whose members have other duties
to perform.
Customs' ability to assign account managers to
additional importers was limited, in part, because
many of the existing accounts were not yet in
maintenance and still required a substantial
amount of time to manage, according to the NASC
Director. The Director expects the staff resources
needed to manage accounts to be less in the
maintenance step than earlier in the account
management cycle. As shown in table 4, as of March
31, 1999, 46 accounts had reached maintenance,
including 21 national accounts and 25 port
accounts.

Table 4:  Number of Accounts and Steps in Account
Management Cycle as of March 31, 1999
Step in account management cycle             National        Port     Total
                                             accounts    accounts  accounts
Step 1: Account selected/ manager                   2          42        44
assigned
Step 2: Account contacted                          11          44        55
Step 3: Account profile completed                  85         114       199
Step 4: Internal controls                          14          18        32
evaluated/action plan prepared and
approved
Step 5: Monitoring action plan items               20          57        77
Step 6: Maintenance                                21          25        46
Unknown a                                           4           6        10
Total number of accounts 3/31/99                 157b         306       463
a The status of 10 accounts was not available for
various reasons, including referral to the Office
of Investigations and company ownership change.
b One national account was subsequently reassigned
to the port account management program prior to
the end of fiscal year 1999.
Source: GAO analysis of data provided by Customs'
National Account Service Center.

In February 1999, Customs established a working
group to redesign the internal control evaluation
questionnaire so it could be used for both
compliance assessments and internal control
evaluations of accounts. This effort was intended
to facilitate timely completion of the internal
control questionnaire by accounts and to clarify
that importers would not be asked to complete two
slightly different questionnaires, as had been the
practice in the past. At the time of our review,
no target date had been established for
implementing the new questionnaire.

The NASC Director told us that several account
managers had experienced significant difficulties
and delays in persuading company officials to
approve and sign the account action plan. Many
importers reportedly believed that the signature
made the action plan a contractual agreement,
which led to delays while the importers and their
attorneys reviewed the plan. Starting in February
1999, NASC made signature by an account official
optional, which was intended to eliminate the
importers' concern about a contractual agreement
and reduce delays.

Delay in developing the ACE system to manage
import activities has made preparing account
profiles and monitoring accounts more difficult
and time-consuming, according to the NASC
Director. Under the present computer system, data
on imports are captured by port and are not
readily available on a nationwide basis. National
data on a particular importer are not available
without identifying all ports used by the importer
and manually combining the data for these ports.
Under ACE, nationwide data are to be available on
a real-time basis on all importers for use by
account managers and other Customs personnel to
monitor-for example, national compliance rates for
individual importers.

Progress of port accounts was also hampered
because account team members are part-time and
have competing duties, according to the NASC
Director. In responding to a survey at the end of
the port account prototype, 9 of the 12 port
account teams indicated that their other work
suffered due to their having to manage the port
accounts. In November 1998, NASC identified 12
"problem ports" where it considered progress with
the port account program to be slow, and it
imposed a temporary freeze on establishing
additional accounts at those ports. According to
the NASC Director, NASC staff visited many of
these ports to encourage them to devote additional
staff hours to port account management, take on
additional port accounts, and/or do a better job
reporting on port account activities. Customs
officials anticipate that as the port account
management program matures, port account managers
will view it as a better way of doing their jobs
because it will allow them to look at their work
in the aggregate, not transaction by transaction.
In addition, the officials believed that port
account management will also assist port account
managers in focusing their efforts in the areas
determined to be noncompliant.

National Account Manager Staffing
The national account program was implemented in
fiscal year 1997, with 25 full-time national
account managers. Customs originally hoped to
increase the number of national account managers
to 100 in order to manage 1,000 accounts (about 10
accounts per account manager). Because Customs was
not able to obtain funding to increase the number
of national account managers, it reduced the
number of potential national accounts from 1,000
to 378.

Customs' first two attempts to obtain funding to
increase the number of national account managers
were unsuccessful. Customs requested 80 additional
national account managers in its fiscal year 1999
budget submission. The request was reduced to 50
by the Treasury Department and ultimately
disapproved by the Office of Management and
Budget. For fiscal year 2000, Customs requested 50
additional national account managers, but the
Treasury Department did not approve the increase.
Customs again planned to request 50 additional
national account managers in its fiscal year 2001
budget submission.

Whether Customs Has Sufficient Staff to Assign
Managers to Many Port Accounts Is Uncertain
On the basis of current staffing, it is uncertain
whether Customs has enough import specialists to
assign to port account teams to manage many of the
7,027 candidate port accounts. As of December 31,
1998, Customs had a total of 1,002 import
specialists based at the ports in the port account
program. Dividing 7,027 candidate accounts by
1,002 import specialists means that each import
specialist would need to serve on about 7 teams.
Because a team normally has at least 2 import
specialists, each import specialist would need to
serve on about 14 teams, in addition to performing
other duties. This is in sharp contrast to full-
time national account managers, who were assigned
an average of 6.2 accounts.

In addition, Customs had no system for
establishing accounts at the various ports.
According to the NASC Director, the ports were
initially allowed to request accounts without NASC
guidance on how many accounts a port should be
able to manage on the basis of staffing, workload,
or any other criteria. Since January 1999, only
ports where the number of import specialists was
greater than the number of accounts were allowed
to assign additional port accounts. The total
number of accounts at these ports was limited to
one account per import specialist.

To determine whether a difference existed in the
ratio of import specialists to port accounts at
the various ports, and whether the difference had
decreased since the new policy limiting assignment
of additional port accounts, we compared the
average number of import specialists per account
as of both December 31, 1998, and September 30,
1999. As of December 31, 1998, we found that the
average ranged widely: for example, Blaine, WA,
had 16 import specialists and 1 port account;
Charleston, SC, had 13 import specialists and 12
port accounts. Appendix III shows the number of
import specialists, the number of accounts, and
the average number of import specialists per
account at each port.

From January through September 30, 1999, 190
additional accounts were assigned to 36 ports.
These assignments were consistent with the new
policy in most of the ports, and the difference
was reduced as shown in appendix III.

Impact of Account Management on Importer
Compliance Is Unknown
NASC identified increased compliance, uniformity
of entry summary reviews among import specialists
and/or among ports, and customer satisfaction as
account management performance measures in the
August 1998 Account Management Standard Operating
Procedures. However, as of July 1999, NASC was
just beginning to develop the methodology for
collecting data. According to the NASC Director,
the delay was due to lack of staff resources and
to staff turnover.

To assess the impact on importer compliance with
U.S. laws and regulations, NASC had planned to
analyze the compliance rate of accounts within the
account management program from year to year. NASC
was working with the Analytical Development
Division to develop a methodology for measuring
account compliance, according to the NASC
Director. No target date had been established for
completing this methodology or for its
implementation as of July 1999.

NASC was in the process of developing a method to
ensure the uniform treatment of merchandise
imported by port accounts by sampling entry
summary reviews for port accounts. Transactions
from selected port accounts throughout the country
would be reviewed to ensure that all ports were
treating merchandise uniformly no matter through
which port it entered. According to the NASC
Director, the methodology was to be developed by
October 1999 and implemented in January 2000.

To obtain feedback on customer satisfaction, the
NASC Director told us that he had begun meeting
individually with importer officials. NASC had
originally considered an annual customer
satisfaction survey but decided to conduct
interviews instead.

Most Selected Importers Cited Benefits From
Account Management
We interviewed nine importers17 to obtain their
views on the advantages and disadvantages of
account management and to determine whether they
had any suggestions for improvement. All nine
importers indicated that they liked the account
management concept, viewed it as a clear indicator
of Customs' commitment to work with the trade
community, and had benefited from having an
account manager. Specifically, the account manager
served as a conduit of information about new
Customs regulations and programs and about the
results of Customs' cargo examinations. Six
importers had asked their account managers to
resolve problems at a particular port or ports
regarding the entry of merchandise, and they
generally felt that the account managers had been
fully responsive.

None of the importers interviewed cited any
disadvantages to being assigned an account
manager, and all importers indicated that if given
a choice they would opt to continue to participate
in the program. Six importers had suggestions for
improving the account management process. Four
importers felt that they would benefit more from
account management if their account managers were
based closer to them. In one case the importer
reported that it had requested and had been
assigned an account manager based in the same
city. One importer indicated that to better ensure
uniform treatment by the various ports, account
managers should be given authority to resolve
disputes about entry classification, value, and
other issues. One importer felt that it would have
been more beneficial if the account manager had
been assigned during or immediately after the
compliance assessment to work on corrective
actions, instead of 5 months after the compliance
assessment was completed.

Mixed Results From Two Customs Actions Designed to
Address Noncompliance
Customs, according to its Trade Compliance Risk
Management Process publication, may use informed
or enforced compliance to ensure that importers
comply with U.S. trade laws and regulations. We
analyzed two of six Customs actions designed to
address noncompliance within the informed and
enforced compliance framework-the Multi-port
Approach to Raise Compliance by the year 2000
(MARC 2000) and the Company Enforced Compliance
Process (CECP)-and found that Customs' efforts to
raise overall compliance rates for importers in
selected industries had mixed results.

Description of the Trade Compliance Risk
Management Process
Customs' trade compliance process has for years
consisted of activities ranging from
preimportation analysis through cargo arrival,
examination, release, revenue collection,
investigation, fines, penalties and forfeitures,
and archival of trade data. Though these
activities continue to the current day, the 1993
Mod Act led Customs to change the focus of its
trade compliance process from a transaction-by-
transaction based system to an account, or
company/importer, based process.

As part of its effort to make Mod Act-induced
changes, Customs established a Risk Management
Process to best allocate available resources to
trade priorities. Customs concentrated on
identifying industries and/or importers that
represented the greatest risk of noncompliance and
on taking the appropriate action to remedy the
situation.

According to Trade Compliance Risk Management
Process, Customs' risk management process consists
of four key steps: (1) collecting data and
information, (2) analyzing and assessing risk, (3)
prescribing and taking action, and (4) tracking
and reporting results. Customs relies on
established programs, such as compliance
measurement, compliance assessment, and account
management, to collect data and information
necessary to identify noncompliant industries and
importers. After detecting and identifying the
sources of noncompliance and analyzing and
assessing the risk of continued trade violations,
Customs decides what informed or enforced action
is warranted and what resources are needed to
address the problems. Over the last few years,
Customs has developed a variety of tools,
including MARC 2000 and CECP, to maximize trade
compliance through an approach of both informed
and enforced compliance.

Unclear Results From MARC 2000 Informed Compliance
Action
Customs, in fiscal year 1997, initiated the MARC
2000 project to raise compliance of targeted
industries within the trade community. MARC 2000
evolved from a 9-month pilot program in fiscal
year 1996, consisting of 12 ports working
independently to raise the compliance of locally
selected imports. After the pilot program, MARC
2000 involved multiple ports with common
compliance issues that joined together to
formulate and implement a national plan designed
to raise compliance within four industries,
including bearings, gloves, production equipment,
and automobiles. Customs also initiated plans to
include four other industries-lighting fixtures,
plastics, headgear, and express consignment
facilities-in MARC 2000. The informed compliance
aspect of MARC 2000 included outreach efforts,
such as seminars, importer counseling,
presentations at association meetings, and
publication dissemination to the targeted
industries.

In its fiscal year 1998 MARC 2000 Annual Report,
Customs reported mixed results that did not
clearly indicate success or failure. Fiscal year
1998 compliance rates for bearings and certain
components of production equipment increased over
fiscal year 1996 baseline compliance rates.
Compliance rates for gloves and automobiles,
however, fell below fiscal year 1996 baseline
rates. Fiscal year 1998 compliance rates for these
industries were all below the prior year's (fiscal
year 1997) compliance rates (see table 5).

Table 5:  MARC 2000 Targeted PFIs' Compliance
Rates for Fiscal Years 1996 Through 1998
Primary focus industry                      Compliance rates (percentages)
                                                1996        1997       1998
Bearings                                           77          86         82
Knitted Gloves                                     85          96         81
Non-knitted Gloves                                 80          81         74
Presses (production equipment)                     64          74         69
Molds (production equipment)                       56          79         75
Automobiles                                        91          97         87
Source: GAO analysis of data provided by Customs'
Office of Strategic Trade.

Furthermore, fiscal year 1998 compliance rates for
these industries were all below Customs' 95
percent compliance goal for PFIs.

Customs' fiscal year 1998 MARC 2000 Annual Report
indicated that it would continue the program in
fiscal year 1999 with some modifications. For
example, Customs was to expand the focus in
production equipment from presses and molds to
welding equipment. Additionally, only those ports
with an auto industry compliance rate below 90
percent were to continue conducting the automobile
action. The remaining ports were to monitor auto
industry compliance through continued compliance
measurement. Finally, Customs was to address the
possibility of requiring noncompliant bearings
importers to pay duties, fees, and taxes prior to
cargo release. The report stressed that enforced
compliance actions were to occur when appropriate.

Unclear Results from CECP Enforcement Actions
According to Trade Compliance Risk Management
Process, Customs determines whether to use
informed or enforced compliance by taking into
account the nature, scope, and impact of
noncompliance. There are times when the informed
compliance approach is not appropriate. After
ongoing informed compliance efforts have failed,
if voluntary compliance has not been achieved and
repetitive compliance problems continue, Customs
may take enforced compliance actions against
violators. Examples of enforced compliance actions
include initiating an investigation when criminal
activity is suspected; seizing illegal cargo;
making arrests when warranted; issuing penalties
prescribed by regulation; requiring the payment of
duties, fees, and taxes before cargo is released;
and conducting additional compliance examinations.
According to Customs, enforcement actions such as
seizure and investigation are reserved for those
instances of egregious violations; fraud; or
ongoing, repetitive violations that could not be
resolved through informed compliance.

Customs began CECP in March 1998 to identify,
target, and take action against individual
importers with the most serious ongoing compliance
problems. Under CECP, Customs monitors compliance
measurement rates for major importers and develops
in-depth reviews for those companies whose
compliance measurement rates are below 90 percent
in order to determine what should be done to
address the continued noncompliance. Customs
designates importers with continuously low
compliance that have not made progress in existing
compliance programs as "confirmed risk." Customs
begins enforced compliance action against
importers designated as confirmed risk.

Customs initially identified 32 companies with
compliance rates below 90 percent and designated 4
of the 32 with stagnating or deteriorating
compliance rates as confirmed risk on the basis of
their fiscal year 1997 compliance rates. Customs
provided the companies written notification
indicating their confirmed risk status and
subjected them to increased compliance measurement
examinations for up to 7 months. Three of the
importers ended fiscal year 1998 with compliance
rates slightly above the fiscal year 1997 rates.
The fourth importer's fiscal year 1998 compliance
rate dropped nearly 13 percent below its fiscal
year 1997 rate. A preliminary review of the first
two quarters of fiscal year 1999 compliance
measurement data, however, indicated that the
fourth importer's compliance rate reached 100
percent. The other three importers' compliance
rates remained below 90 percent (see table 6).
According to Customs, no other enforcement action
had been taken against the confirmed risk
importers because the companies were making
progress. In September 1999, Customs recommended
that the confirmed risk designation be dropped
from three of the four companies. Customs will
make its final decision and inform the companies
of their new status in December 1999.

Table 6: Compliance Rates for Confirmed Risk
Importers
Importer                                   Compliance rates (percentages)
                                             FY 97        FY 98   Mid-FY 99
A                                                61           68          68
B                                                83           85          86
C                                                64           69          87
D                                                87           74         100
Source: GAO analysis of data provided by Customs'
Office of Strategic Trade.

By the end of fiscal year 1998, Customs, using
CECP, identified 128 importers, including the 32
initially identified, with compliance rates below
90 percent for at least 1 fiscal year. Customs
then determined which were the largest importers
most likely to have a significant impact on
industry compliance rates once they became
compliant. After making its determination, Customs
provided a list of 43 importers to Strategic Trade
Centers, Customs Management Centers, assistant
port directors, account managers, and members of
the Strategic Planning Board responsible for
recommending an enforced compliance action, among
others, for review and feedback. Customs also
generated and circulated a Trade Compliance
Analytical Review (TCAR) containing compliance
rates, compliance assessment results, descriptions
of violations, and a recommended level of
compliance measurement examinations for each of
the 43 selected importers.

Customs' Strategic Planning Board, consisting of
representatives from the Office of Strategic
Trade, Office of Field Operations, Office of
Investigations, and others, met on March 11, 1999,
to determine and recommend compliance actions for
the 43 importers. The Strategic Planning Board
recommended a variety of actions, including
increased compliance measurement examinations,
referrals to ports for action, and continued
monitoring through compliance examinations. The
Strategic Planning Board did not recommend
imposing any penalty enforcement actions, such as
seizures or fines.

According to Customs, the Strategic Planning Board
makes subjective determinations, without specific
criteria, when determining the course of action to
improve importer compliance. The Strategic
Planning Board relies on feedback provided by
account managers, port account team leaders, and
assistant port directors; analytical information
contained in the TCAR reports; and discussions
about importer progress towards improved
compliance when deciding what enforcement actions,
if any, to recommend.

According to Customs, the Strategic Planning Board
had not recommended enforcement actions such as
seizures or fines against noncompliant importers
identified through CECP because their trade
violations were not significant enough to warrant
such responses. Significant and willful violations
such as narcotics smuggling and fraud have, of
course, always been and will continue to be
enforced in the traditional fines, penalties, and
forfeitures environment outside of CECP.

Customs Evaluation Efforts
Under the Results Act,18 executive agencies are to
develop strategic plans in which they, among other
things, define their missions, establish results-
oriented goals, and identify strategies they plan
to use to achieve those goals. In addition,
agencies are to submit annual performance plans
covering the program activities set out in the
agencies' budgets (a practice that began with
plans for fiscal year 1999). These plans are to
describe the results the agencies expect to
achieve with the requested resources and indicate
the progress the agency expects to make during the
year in achieving its strategic goals.

Earlier this year, we testified19 that the
strategic plan developed by the Customs Service
addressed the six requirements of the Results Act.
The plan's goals and objectives covered Customs'
major functions-processing cargo and passengers
entering and cargo leaving the United States. The
plan discussed the strategies by which Customs
hopes to achieve its goals. The strategic plan
discussed, in very general terms, how it related
to annual performance plans. It also contained a
listing of program evaluations used to prepare the
plan and provided a schedule of evaluations to be
conducted in each of the functional areas.

In addition to the required elements, we testified
that Customs' plan discussed the management
challenges it was facing in carrying out its core
functions, including information and technology,
finance, and management of human capital. We
concluded that the plan did not, however,
adequately recognize several issues that could
affect the reliability of Customs' performance
data, such as needed improvements in financial
management and internal control systems.

Along these lines, Customs' fiscal year 2000
budget justification states that Customs needs to
reassess a number of the performance goals. The
justification also states that Customs will
continue to refine its compliance measurement
program in order to improve voluntary compliance.

The justification also states that although
Customs did not meet 12 of its 17 performance
goals, it does not plan to change its basic
approach to improving compliance, concluding that
the performance goals that were established were
too ambitious for the resources available. The
justification does not, however, contain any plans
for Customs to evaluate its approach to improving
compliance, including the initiatives and actions
that implement the informed compliance strategy:
information programs, compliance measurement,
compliance assessment, account management, and
responses to noncompliance by importers. Customs
will not be able to set realistic goals without
the results of evaluations.

Conclusions
The Mod Act represented a significant change in
how Customs relates to the importing trade
community. For over 200 years, Customs and the
importing trade community had an enforced
compliance relationship based on transaction-by-
transaction scrutiny for compliance with trade
laws. With passage of the Mod Act, Customs began
to focus on informed compliance by importers,
rather than the enforced compliance emphasis of
the past. Although Customs has implemented five
key initiatives and actions that constitute its
informed compliance strategy, three of them are
lagging in terms of the level of activity
originally expected. Compliance rates, used to
measure the effectiveness of these initiatives and
actions, are showing no measurable improvement.

Although Customs has monitored and evaluated
certain aspects of the initiatives and actions, it
has not evaluated, nor does it have a plan to
evaluate, the impact on compliance of the overall
informed compliance strategy. A properly designed
and implemented evaluation would enable Customs to
determine whether the overall informed compliance
strategy is working and determine what
contributions the initiatives or actions are
making. This seems especially important since
Customs may not be able to reach its goals in
terms of coverage for the compliance assessment
and account management initiatives. Given that
both initiatives may stay far smaller than
originally envisioned, it is important to
determine what effect they are likely to have on
compliance rates with the importer coverage they
can reasonably achieve.

Under the Results Act, agencies are to assess
their performance against their goals and
determine, for goals not achieved, whether the
goals were too high, resources too scarce, or
agency efforts too ill-managed. Customs has
adjusted its compliance goals to reflect a 4-year
delay because, according to Customs, the
established goals were too ambitious for the
resources available. An evaluation of the informed
compliance initiatives and actions could provide
Customs with the information it needs to maximize
the use of the resources available for this
program by enhancing what works and reducing or
eliminating what does not. It could also provide
the information needed for Customs to establish
reasonable goals for the program.

Recommendation
We recommend that the Commissioner of Customs
develop and implement an evaluation of the
effectiveness of its informed compliance strategy.

Agency Comments and Our Evaluation
We requested comments on a draft of this report
from the Secretary of the Treasury. In a letter
dated November 11, 1999, the Customs Service's
Director of the Office of Planning provided us
with comments on the draft, which we have
reprinted in appendix IV. Customs' primary focus
concerned the report's recommendation, which
Customs felt should be clarified to focus on the
five compliance programs targeted by the report,
and not on the entire broad piece of legislation
that is the Mod Act. If the phrase "and the
specific initiatives and actions it developed to
implement the Mod Act." were omitted from the
draft recommendation, Customs believed it would be
able to better target its response to the issues
raised in the report. We agree with Customs and
omitted the phrase from the recommendation to
ensure Customs' focus on evaluating its informed
compliance strategy and not other parts of the Mod
Act.

Customs also believed that the report should
recognize that its informed compliance efforts
have been continually evaluated and refined, but
our report conveys the opposite impression.
Customs also stated that many monitoring and
evaluation efforts are under way, and major
component areas of informed compliance will
continue to be analyzed and assessed. It said
enhancements to programs and processes will also
be implemented as appropriate. We stated that
"While Customs has monitored and evaluated certain
aspects of the initiatives and actions, it has not
evaluated nor does it have a plan to evaluate the
impact on compliance of the overall informed
compliance strategy." We agree with and support
Customs' ongoing monitoring, evaluation, and
enhancement efforts of its many programs,
including those related to informed compliance
activities. However, we continue to believe that
an evaluation, under the Results Act umbrella, of
the initiatives and actions that implement the
informed compliance strategy is necessary for
Customs to be able to set realistic performance
goals for improving importers' compliance rates.
Moreover, this evaluation could identify the
contribution of each initiative and action toward
achieving the overall goal of the informed
compliance strategy and improving importers'
compliance rates.

In addition, Customs stated that the report gives
the impression that as the compliance rates have
not risen to the levels anticipated, there is
something inherently wrong with the informed
compliance approach. Customs also stated that it
believes there is a value to informed compliance
above and beyond raising compliance, as comments
from several importers that we interviewed
indicated. We have not concluded that there is
something inherently wrong with the informed
compliance strategy and did not intend to give
that impression. We stated in our conclusions
section on page 37 that compliance rates, used to
measure the effectiveness of informed compliance
initiatives and actions, are showing no measurable
improvement and that a properly designed and
implemented evaluation could determine whether the
overall informed compliance strategy is working
and what contributions the initiatives or actions
are making. If, after such an evaluation, Customs
determines that one or more of the initiatives are
not making substantial contributions to the
overall goal of raising importers' compliance
rates, then either part or all of the informed
compliance strategy should be reexamined at that
time. In addition, we included comments from the
major importers to show that there was indeed
value to the informed compliance program,
notwithstanding our concerns about the lack of
progress in producing the benefits expected from
the program.

Customs also raised concerns about the correlation
we make between the compliance assessment and its
impact on compliance as indicated by an analysis
of 59 importers (see p. 21). Customs believes that
it is premature to draw any conclusions regarding
the link between compliance assessments and
compliance measurement because the programs
measure different areas of compliance. Customs
also believes that our conclusion that compliance
assessments may not have improved compliance based
on a drop in fiscal year 1998 compliance rates is
premature and not sufficiently supported. Customs
does not feel that sufficient analysis has been
done to lead to that conclusion and requests that
the analysis of compliance rates of 59 importers,
many of which are not statistically valid, be
removed from the report as the support for drawing
the conclusion.

In addition to the written comments from Customs
on the results of our analysis of 59 importers and
the impact on compliance from their compliance
assessments, we had several discussions with
Customs officials on this issue. Specifically, as
further clarification on this issue, the officials
believed that (1) because most of the compliance
rates in our analysis are not statistically valid,
we should reconsider using them as a basis for
indicating the impact of compliance assessments;
(2) it is premature to draw any conclusions
regarding the link between compliance assessments
and compliance measurement; and (3) compliance
determined under a cargo examination (compliance
measurement) is not identical to compliance as a
result of a compliance assessment. The officials
pointed out that, for example, the compliance
assessment may conclude that an importer is not
compliant because of unreported value in its
merchandise. This is determined through an
examination of the importer's books and records.
On the other hand, the officials noted that
compliance measurement examinations may determine
that an importer is not compliant because of
inaccurate marking of merchandise. This would be
determined by physical inspection of the
merchandise, which could not be determined during
a compliance assessment.

As noted on page 21 of the report, although most
of the compliance rates in our analysis are not
statistically valid, they continue to provide an
indicator about whether or not overall compliance
improved at importers that had received compliance
assessments. In addition, the Regulatory Audit
Division Director agreed that our analysis,
although not based on statistically valid
compliance rates, does have some usefulness for
evaluating compliance. As we also noted on page 16
of the report, compliance assessment is a review
to ensure that a company's imports are in
compliance with U.S. laws and regulations, the
goal being to ensure maximum compliance. Although
a compliance assessment involves reviewing a
company's books and records, it also involves
statistical sampling of entry transactions,
including a minimum review of compliance in five
trade areas, including classification, value, and
quantity. This procedure appears to establish the
link between compliance assessment and compliance
measurement, since compliance assessment findings
are used to determine the frequency of future
compliance measurement examinations. It also
appears that compliance measurement results could
and should be used to analyze the impact of
compliance assessments. As our limited analysis
showed on page 21, compliance measurement rates
serve as an indicator of whether or not overall
compliance has improved.

We have also included in the final report
technical comments and suggestions from Customs as
appropriate.

As arranged with your office, unless you publicly
announce the contents of this report earlier, we
plan no further distribution until 10 days after
its issue date. At that time, we will send copies
of this report to the Honorable Sander M. Levin,
Ranking Minority Member of your Subcommittee; the
Honorable Raymond Kelly, Commissioner of Customs;
and Mr. Robert Trotter, Customs' Assistant
Commissioner for Strategic Trade.

The major contributors to this report are
acknowledged in appendix V. If you or your staff
have any questions on this report, please call
Darryl Dutton on (213) 830-1000 or me on (202) 512-
8777.

Sincerely yours,

Laurie E. Ekstrand
Director, Administration
 of Justice Issues
 
_______________________________
1Public Law 103-182.
2Liquidated damages are monetary assessments made
for breach of one or more conditions in bonds
posted with Customs to ensure protection of the
revenue or to guarantee compliance with laws and
regulations administered by Customs.
3Customs is in the process of developing a
replacement for ACS, called the Automated
Commercial Environment (ACE).
4We will not be discussing the automation aspects
of the Mod Act in this report. ACE is addressed in
our report entitled Customs Service Modernization:
Serious Management and Technical Weaknesses Must
Be Corrected (GAO/AIMD-99-41, Feb. 26, 1999).
Customs' core business processes are trade
compliance (imports), passenger processing, and
outbound (exports).
5Appendix I provides information on how the nine
importers interviewed by GAO were selected.
6Merchandise arriving at a U.S. port must be
"entered" with Customs unless specifically
exempted. "Entry" refers to the required
documentation filed with Customs to secure the
release of imported cargo from Customs' custody.
7We performed a limited review of Customs'
statistical sampling methodologies used in fiscal
years 1995 through 1998. From our discussions with
Customs statisticians and an analysis of the
sampling methodologies, we are satisfied that the
methodologies are reasonable, and the estimates of
compliance rates based on the methodologies appear
statistically valid as reported.
8The Harmonized Tariff Schedule is a 97-chapter
catalogue of 1,200 4-digit tariff numbers designed
to enable importers, customs brokers, customs
officers, and other interested persons to
determine the classification of and rates of duty
applicable to imported articles.
9Transactions are checked to ensure that
merchandise was appropriately classified by type
using the U.S. harmonized tariff system; and the
entered value includes the purchase price, packing
costs, and other costs as defined by Customs.
Quantity is checked to ensure that the quantity
entered agrees with the amount in the importer's
inventory or receiving records. Special duty
provisions include checking compliance with trade
agreements, such as the North American Free Trade
Agreement when the annual import value is less
than $10 million. Recordkeeping is tested to make
sure the importer maintains and can produce
records in accordance with U.S. laws and
regulations.
10Calculation of median calendar days and staff
hours was based on 167 compliance assessments
because we excluded 1 assessment that was
suspended and later restarted.
11One additional importer that had received a
compliance assessment by September 30, 1997, was
not included in our analysis because Customs
erroneously provided data on another importer with
a similar name.
12A compliance rate is statistically valid only
when the number of items sampled is large enough
to provide an estimate that, with a high level of
confidence, approximates the results from
reviewing all items with a specified level of
precision. According to a Customs official, a
minimum of 30 compliance measurement exams would
be needed to calculate a statistically valid
compliance rate that would be representative of
all imports for an importer.
13Appendix I provides information on how the nine
importers interviewed by GAO were selected.
14NASC was renamed the Commercial Compliance
Division in July 1999 after we completed our
fieldwork.
15Import specialists are responsible for various
duties, including reviewing the entry summary
paperwork associated with import transactions,
preparing binding rulings, and participating on
compliance assessment teams.
16Customs uses the number of line items as an
indicator of import activity rather than the
number of entries because an entry of imported
merchandise may consist of one or more different
commodities, each of which must be listed
separately as its own line item.
17Appendix I provides information on how the nine
importers interviewed by GAO were selected.
18Government Performance and Results Act of 1993,
P.L. 103-62.
19U.S. Customs Service: Enforcement Oversight
Issues (GAO/T-GGD-99-99, May 18, 1999).

Appendix I
Scope and Methodology
Page 47GAO/GGD-00-23 New Trade Compliance Strategy
To review the status of Customs' implementation of
the informed compliance strategy developed in
response to the Mod Act and to determine the
extent to which trade compliance under the new
program had improved, we concentrated on five key
initiatives. For overall program information, we
interviewed key Customs officials from the Office
of Strategic Trade and Office of Regulations and
Rulings. We obtained background material on the
Mod Act from these two offices and from the Office
of Field Operations and Office of the Chief
Counsel. We also obtained and reviewed the
background and legislative history of the Mod Act.

We obtained numerous documents from the key
Customs offices mentioned above, including: The
Customs Modernization Act Guidebook; The Trade
Compliance Road Map; the U.S. Customs Service
Strategic Plan, fiscal years 97-02; U.S. Customs
Service Accountability Report, fiscal years
1995-1998; Trade Compliance Measurement Report,
fiscal years 1995-1998; Trade Compliance and
Enforcement Plan, fiscal years 1995-1998; and
Trade Compliance Risk Management Process.

In addition to these background and planning
documents, we obtained more specific documents and
conducted additional interviews concerning each of
the five initiatives as discussed below.

Basic and Targeted Information
To examine Customs' information programs portion
of its informed compliance strategy, we began by
reviewing the May 20, 1996, Commissioner's
Informed Compliance Strategy. This document
describes the basic and targeted information
programs and their components. Using this document
as a guide, we analyzed the information that
Customs disseminated by various methods, including
the Internet and CEBB. We also obtained lists of
headquarters-sponsored seminars and other informed
compliance outreach activities.

To obtain information on informed compliance
outreach efforts at the Ports of Seattle and Los
Angeles/Long Beach, we interviewed key officials
and obtained selected documents. The documents
included Seattle Trade Talk newsletter and Port of
Los Angeles Public Bulletins. We also obtained
lists of seminars and other local outreach
efforts. We selected Seattle for review because
Customs officials told us that it had been
involved in numerous pilot projects concerning
implementation of the informed compliance
strategy. We selected Los Angeles/Long Beach
because of its proximity to the Long Beach
Strategic Trade Center, where much of our
fieldwork was conducted, and because it is a major
port, through which a large volume of imported
merchandise enters the United States.

Compliance Measurement
To identify the impact that the informed
compliance program has had on levels of importer
compliance, we obtained and analyzed the Trade
Compliance Measurement Reports for fiscal years
1995 to 1998. We interviewed key Customs
headquarters officials responsible for the
compliance measurement program and discussed
program results with them.

Because compliance measurement is a process based
on physical inspections of merchandise and/or
entry summary documentation reviews to determine
compliance rates, we assessed the reliability of
the data used to make the compliance rate
determinations. We interviewed officials from
Customs' Office of Information Technology, which
manages ACS, Customs' primary data collection and
import processing system. The officials explained
and documented how the data are entered into the
system and the uses of the data. We did not verify
or validate the data through any data testing, but
we did discuss the reliability of the data with
Office of Information Technology officials. The
officials explained the logic and the different
edit checks used to scrutinize the data from the
time they are initially entered into the system by
importers or brokers, to the time they enter the
statistical programs that select merchandise or
entry summaries for examination. We assessed these
data systems as sufficiently reliable for use in
this report.

In order to evaluate the statistical sampling
methods that Customs used to generate compliance
rates, we interviewed statisticians in the Office
of Strategic Trade, and we reviewed descriptions
of the statistical sampling methodology provided
in Customs publications and internal memoranda.
Our interviews and examinations of the written
materials gave us an understanding of the sampling
design and variance estimation procedures used in
the sampling plan. However, our review did not
include an examination of Customs' computer
software to determine whether the software
executed the same procedures that were described
to us. We assessed Customs' statistical sampling
methodology as being reasonable and adequate for
the purpose of generating compliance rates.

Compliance Assessment
To determine the status of Customs' compliance
assessment initiative, we interviewed headquarters
officials from the Regulatory Audit Division, the
organization that conducts the compliance
assessments. We discussed the initiative's goals
and the timeliness of the assessment process. We
reviewed pertinent policy and procedure documents,
including criteria for selecting importers to
receive compliance assessments. We also analyzed
data concerning the amount of time it took to
complete each assessment, and the number of
compliance assessments completed by March 31,
1999.

To measure the impact of compliance assessments on
importers' compliance rates, we analyzed data on
importer compliance rates for fiscal years 1996
and 1998. These data were for 59 importers on
which compliance assessments had been completed by
the end of fiscal year 1997 and that had received
compliance measurement exams in both years. We
obtained and compared compliance rate data for
fiscal year 1996, the first year that company-
specific compliance data were available; and for
fiscal year 1998, the year after all 59 compliance
assessments were completed. We analyzed these data
to determine whether compliance rates had gone up,
gone down, or stayed the same for importers that
had received compliance assessments.

Account Management
To determine the status of the account management
initiative, we interviewed headquarters officials,
including the Director of the National Account
Service Center and national and port account
coordinators. We inquired about the goals of the
initiative, its progress, and whether any factors
were hampering progress. We also interviewed a
national account manager and six port account team
leaders at the Los Angeles International Airport
and the Los Angeles/Long Beach Seaport. We
selected these facilities because of their
proximity to the Long Beach Strategic Trade
Center, where much of our fieldwork was conducted,
and because they are major ports through which
large volumes of merchandise enter the United
States.

We also reviewed pertinent policies and
procedures, including criteria by which Customs
selects importers to be assigned account managers.
We collected and analyzed data on the number of
national and port accounts as of September 30,
1999; the fiscal year each account was first
assigned an account manager; and the progress of
each selected importer through the account
management process as of March 31, 1999.

Responses to Noncompliance
To examine Customs' actions to address
noncompliance, we analyzed two of six options
available within informed and enforced compliance
that are described in Customs' Trade Compliance
and Risk Management Process-MARC 2000 and CECP. We
selected these two programs because they were
fully implemented, and the amount of data
available for analysis was more concise than for
the other options. Time constraints also
influenced our selection.

We reviewed the fiscal year 1998 MARC 2000 Annual
Report and discussed the results with Office of
Strategic Trade headquarters officials. We also
analyzed MARC 2000 data provided by the Los
Angeles Strategic Trade Center and the South
Pacific, Mid-America, Gulf, and South Atlantic
Customs Management Centers. We also reviewed Trade
Compliance Analytical Reviews and Strategic
Planning Board minutes, and we analyzed CECP data
provided by the Office of Strategic Trade.

Views of Selected Importers
To determine the views of importers toward
Customs' basic and targeted information,
compliance assessment, and account management
initiatives, we interviewed nine importers. These
importers were judgmentally selected from the
population of 30 importers that had (1) a
compliance assessment completed by the end of
fiscal year 1997 and (2) an account manager
assigned by March 10, 1998.1 We used the cut-off
dates to allow sufficient time for the importers
to take corrective action, if indicated, after
completion of the compliance assessment and for
the importers to have at least 1 year of
experience with their account managers. We
contacted 15 of the 30 importers to request an
interview; 9 of the 15 agreed to our interview
under conditions of anonymity, to which we agreed.

We performed our work between June 1998 and
September 1999 in accordance with generally
accepted government auditing standards. We
requested comments on a draft of this report from
the Secretary of the Treasury. The Customs
Service's Director of the Office of Planning
provided written comments that are discussed at
the end of the letter and are reprinted in
appendix IV.

_______________________________
1According to the original data provided by
Customs, 30 importers met these criteria. Customs
later provided revised data that indicated a total
of 33 importers met these criteria.

Appendix II
FY96 and FY98 Compliance Measurement Exams and
Compliance Rates for 59 Importers With Compliance
Assessments by 9/30/97
Page 49GAO/GGD-00-23 New Trade Compliance Strategy

Import Repor    FY  FY 1996    FY  FY 1998 Increase or Down   Up Staye    Full
er         t  1996 Complian  1998 Complian   decrease             d complian
number  date Strati  ce rate Strati  ce rate compliance           the      ce
              fied           fied            rates FY          same
             exams          exams            1996 and
                                              FY 1998
Low risk                                                                    
1      9/3/9     3   66.67%     4  100.00%     33.33%        X             
           7
2      6/2/9     3   66.67%     3  100.00%     33.33%        X             
           7
3      7/28/    46   78.26%     1  100.00%     21.74%        X             
          97
4      9/30/     5  100.00%     5  100.00%      0.00%                     X
          97
5      3/6/9    37   89.19%    13   92.31%      3.12%        X             
           7
6      4/18/    29   89.66%    13   84.62%     -5.04%   X                  
          97
8      5/16/     4   75.00%    10   90.00%     15.00%        X             
          97
9      1/31/    24   83.33%    12   91.67%      8.33%        X             
          97
10     9/2/9    18   72.22%     5   60.00%    -12.22%   X                  
           7
11     9/27/     1  100.00%     1  100.00%      0.00%                     X
          96
12     9/27/    14  100.00%    17  100.00%      0.00%                     X
          96
13     4/18/    85   92.94%    16   93.75%      0.81%            Xa        
          97
15     9/20/   201   88.06%    46   80.61%     -7.45%   X                  
          96
17     9/30/    14   85.71%    10   80.00%     -5.71%   X                  
          97
18     5/16/    64   84.38%    17   88.24%      3.86%        X             
          97
24     9/4/9     7  100.00%     1  100.00%      0.00%                     X
           7
25     9/29/    40   85.00%    24   91.67%      6.67%        X             
          97
26     12/20   117   88.03%    17  100.00%     11.97%        X             
         /96
29     11/14    26   96.16%    21   80.96%    -15.20%   X                  
         /96
32     9/30/    25   88.00%     6   66.67%    -21.33%   X                  
          97
33     9/30/    43   90.70%     2  100.00%      9.30%        X             
          97
34     9/30/    52   80.77%    15   80.00%     -0.77%            Xa        
          96
36     9/26/     7   71.43%     8   75.00%      3.57%        X             
          97
37     5/21/   194   91.75%    10   80.00%    -11.75%   X                  
          97
38     7/31/     9  100.00%     7   85.71%    -14.29%   X                  
          97
39     9/24/   102   90.20%    20   80.00%    -10.20%   X                  
          97
40     9/22/    76   93.42%    22   95.45%      2.03%        X             
          97
42     7/19/    23   78.26%     8   87.50%      9.24%        X             
          96
43     9/27/     5   80.00%    12   91.67%     11.67%        X             
          96
44     3/5/9     6  100.00%     8   87.50%    -12.50%   X                  
           7
45     11/6/    11   81.82%     5  100.00%     18.18%        X             
          96
51     5/8/9    24   79.17%     6   83.34%      4.17%        X             
           7
53     12/20    52   86.54%    11  100.00%     13.46%        X             
         /96
Subtotal low    33                                         10   17    2       4
risk
Medium risk                                                                 
54     8/28/    14   78.57%     7   85.71%      7.14%        X             
          96
56     11/25     5   75.00%     5   80.00%      5.00%        X             
         /96
57     11/25     2   50.00%     3  100.00%     50.00%        X             
         /96
58     3/6/9    15  100.00%    10   70.00%    -30.00%   X                  
           7
59     9/12/     8   87.50%     6   50.00%    -37.50%   X                  
          97
60     8/13/     7   57.14%    10   70.00%     12.86%        X             
          97
61     12/5/     4   75.00%     2  100.00%     25.00%        X             
          96
63     6/30/    57   85.96%    30   73.33%    -12.63%   X                  
          97
66     3/7/9     4  100.00%    10   80.00%    -20.00%   X                  
           7
(Medium risk                                                               
continued)
68     9/3/9    17   94.12%     9  100.00%      5.88%         X             
           6
69     8/26/     8  100.00%     8   87.50%    -12.50%   X                  
          96
70     7/12/    21   95.24%     9   77.78%    -17.46%   X                  
          96
71     7/19/     3  100.00%     1  100.00%      0.00%                      X
          96
73     8/13/     9  100.00%     3  100.00%      0.00%                      X
          96
Subtotal        14                                          6    6    0       2
medium risk
High risk                                                                   
74     3/7/9     3   66.67%    18   66.67%      0.00%             X        
           7
75     2/249     1    0.00%    10   90.00%                   X             
           7
76     9/29/    10   80.00%    32   90.63%     10.63%        X             
          97
78     8/12/     4   50.00%    34   91.18%     41.18%        X             
          97
79     9/8/9     1  100.00%    12   83.33%    -16.67%   X                  
           7
80     11/1/   108   81.48%   183   80.88%      0.60%            Xa        
          96
81     12/23     2  100.00%     1  100.00%      0.00%                     X
         /96
82     3/5/9     4  100.00%     5  100.00%      0.00%                     X
           7
83     9/12/    14  100.00%    27   92.59%     -7.41%   X                  
          97
84     9/5/9    13  100.00%    24   95.83%     -4.17%   X                  
           7
86     9/18/     2   50.00%    25   96.00%     46.00%        X             
          97
87     8/29/    12   91.67%    55   89.10%     -2.57%   X                  
          97
Subtotal        12                                          4    4    2       2
high risk
Grand total     59                                         20   27    4       8
of
all risk
aDifference between the FY 1996 and FY 1998
compliance rates. A positive number in difference
column indicates an increase from FY 1996 to FY
1998. A negative number in difference column
indicates a decrease from FY 1996 to FY 1998.
Where increase or decrease was less than 1
percent, we considered the compliance rate to have
remained the same.
Source: GAO analysis of data provided by Customs'
Analytical Development Division.

Appendix III
Number of Import Specialists and Port Accounts by
Port
Page 51GAO/GGD-00-23 New Trade Compliance Strategy

Port name          No. of  No. of Average no.    No. of  No. of Average no.
(prototype         import    port   of import      port    port   of import
ports*)          speciali accounts specialists  accounts accounts specialists
                      sts 12/31/98    per port  assigned 9/30/99    per port
                 12/31/98             account Jan. thru             account
                                     12/31/98   9/30/99             9/30/99
1. Anchorage            4       1         4.0         0       1         4.0
2. Atlanta *           13       6         2.2         4      10         1.3
3. Baltimore           15       2         7.5         2       4         3.8
4. Blaine              16       1        16.0         3       4         4.0
5. Boston              26       6         4.3         3       9         2.9
6. Buffalo*            45      18         2.5         2      20         2.3
7. Champlain           22       3         7.3         5       8         2.8
8. Charleston*         13      12         1.1         1      13         1.0
9. Charlotte            8       2         4.0         1       3         2.7
10. Chicago            37       3        12.3        11      14         2.6
11. Cleveland          29       3         9.7         7      10         2.9
12. Dallas/Fort        14       1        14.0         9      10         1.4
Worth
13. Denver              3       2         1.5         2       4          .8
14. Detroit            45       0                    13      13         3.5
15. Dulles              5       2         2.5         0       2         2.5
16. El Paso            21       2        10.5         5       7         3.0
17. Honolulu            7       1         7.0         1       2         3.5
18. Houston            16       4         4.0        18      22          .7
19. JFK Airport*      125      20         6.3        28      48         2.6
20. Laredo             12       1        12.0         0       1        12.0
          Pharr         9       1         9.0         1       2         4.5
21. LA Seaport*        92      25         3.7        14      39         2.4
22. LAX*               41      15         2.7         4      19         2.2
23. Miami*             32       7         4.6         2       9         3.6
24. Milwaukee           2       1         2.0         1       2         1.0
25. Minneapolis         6       1         6.0         4       5         1.2
26. Mobile              3       0                     8       8          .4
27. New Orleans        24       2        12.0         6       8         3.0
28. Nogales            13       1        13.0         4       5         2.6
                        4       1         4.0         0       1         4.0
Phoenix
29. Norfolk             8       3         2.7         3       6         1.3
30. NY/Newark*         98      36         2.7         1      37         2.6
31. Pembina             8       2         4.0         1       3         2.7
32.                    20       6         3.3         0       6         3.3
Philadelphia*
33. Portland, ME        6       2         3.0         0       2         3.0
34. Portland, OR        8       3         2.7         1       4         2.0
35. Providence          2       1         2.0         0       1         2.0
36. San                21       5         4.2         3       8         2.6
Diego/Otay Mesa*
37. San                56      27         2.1        14      41         1.4
Franciso*
38. San Juan           14       4         3.5         0       4         3.5
39. Savannah            6       2         3.0         2       4         1.5
40. Seattle*           27      17         1.6         2      19         1.4
41. St. Albans         12       4         3.0         0       4         3.0
                                                                           
                                                                           
                                                                           
42. St. Louis           4       1         4.0         2       3         1.3
43. Tampa               5       0                     2       2         2.5
                        5       1         5.0         0       1         5.0
Jacksonville
Totals              1,002     258         3.9       190     448         2.2
Source:  GAO analysis of data provided by Customs'
National Account Service Center.

Appendix IV
Comments From the Department of the Treasury
Page 55GAO/GGD-00-23 New Trade Compliance Strategy

Now on p. 10.
Now on p. 10.
Now on p. 8.
Now on p. 6.
Now on p. 37.
Now on p. 37.
Now on p. 3.
Now on p. 11.

Now on p. 11.
Now on p. 4.
Now on p. 26.
Now on p. 2.
Now on p. 22.
Now on p. 21.
Now on p. 6.
Now on p. 4.

Now on p. 36.
Now on p. 24.
Now on p. 24.
Now on p. 14.
Now on p. 14.

Appendix V
GAO Contacts and Staff Acknowledgments
Page 56GAO/GGD-00-23 New Trade Compliance Strategy
GAO Contacts
Laurie Ekstrand, (202) 512-8777
Darryl Dutton, (213) 830-1000

Acknowledgments
     In addition to the persons named above, James
Bancroft, Gretchen Bornhop, Carla Brown, Michael
Kassack, Sidney Schwartz, Barry Seltser, Michele
Tong, and Bonita Vines made key contributions to
this report.

*** End of Document ***