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Challenges in Addressing Illegal Textile Transshipment' which was 
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Report to Congressional Committees: 

January 2004: 

INTERNATIONAL TRADE: 

U.S. Customs and Border Protection Faces Challenges in Addressing 
Illegal Textile Transshipment: 

[Hyperlink, http: //www.gao.gov/cgi-bin/getrpt?GAO-04-345] GAO-04-345: 

GAO Highlights: 

Highlights of GAO-04-345, a report to the Chairmen and Ranking 
Minority Members, Committee on Finance, U.S. Senate, and Committee on 
Ways and Means, House of Representatives 

Why GAO Did This Study: 

U.S. policymakers and industry groups are concerned that some foreign 
textile and apparel imports are entering the United States 
fraudulently and displacing U.S. textile and apparel industry workers. 
Congress mandated GAO to assess U.S. Customs and Border Protections 
(CBP) system for monitoring and enforcing textile transshipment and 
make recommendations for improvements, as needed. Therefore, GAO 
reviewed (1) how CBP identifies potential illegal textile 
transshipment, (2) how well CBPs textile review process works to 
prevent illegal textile transship-ment, and (3) how effectively CBP 
uses its in-bond system to monitor foreign textiles transiting the 
United States.

What GAO Found: 

To identify potential illegal textile transshipments, CBP uses a 
targeting process that relies on analyzing available trade data to 
focus limited inspection and enforcement resources on the most high-
risk activity. In 2002, CBP targeted about 2,500 textile shipments out 
of more than 3 million processed, or less than 0.01 percent. 

Given resource constraints at CBP ports, CBPs textile review process 
for preventing illegal textile transshipment increasingly depends on 
information from foreign factory visits that CBP conducts, based on 
the targeting results. However, CBPs foreign factory visit reports 
are not always finalized and provided to ports, other agencies, or the 
foreign governments for timely follow-up. Further, after the global 
textile quotas end in 2005, CBP will lose its authority to conduct 
foreign factory visits in former quota countries. U.S. overseas 
Attach offices and cooperative efforts by foreign governments can 
supplement information provided to the ports.

Under CBPs in-bond system, foreign textiles and apparel can travel 
through the United States before formally entering U.S. commerce or 
being exported to a foreign country. However, weak internal controls 
in this system enable cargo to be illegally diverted from its supposed 
destination, thus circumventing quota restrictions and payment of 
duties. Moreover, CBPs penalties do not deter in-bond diversion. Bond 
amounts can be set considerably lower than the value of the cargo, and 
violators may not view the low payments as a deterrent against 
diverting their cargo.

What GAO Recommends: 

GAO is making several recommendations to the Commissioner of CBP to 
improve the information available for textile transshipment reviews, 
to encourage continued cooperation by foreign governments, to improve 
CBPs monitoring of in-bond cargo, and to strengthen the deterrence 
value of in-bond enforcement provisions.

The Department of Homeland Security agreed with GAOs findings and 
recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-345.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Loren Yager at (202) 
512-4347 or YagerL@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

CBP Uses a Targeting Process to Identify Potential Textile 
Transshipment: 

CBP Has Adapted Textile Review Activities to Changing Environment but 
Faces Further Challenges: 

Weak Internal Controls Hinder Effectiveness of CBP's In-bond System: 

CBP Has Experienced Serious Challenges in Enforcing Textile 
Transshipment: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: U.S. Textile and Apparel Trade, Production, and 
Employment: 

Imports of Textile and Apparel: 

Top U.S. Ports: 

Textile and Apparel Products Affected by Quotas: 

Future Barriers to Trade in Textile and Apparel: 

Appendix III: Comments from the Department of Homeland Security: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Tables: 

Table 1: U.S. Trade Partners Visited by Textile Production Verification 
Teams, 2000-2003: 

Table 2: Total number of In-bond Cases and Assessed Amount for 
Liquidated Damages, 2001-2003: 

Table 3: CBP Port-Level Exclusions, Penalties, and Seizures of Textiles, 
2000-2002 (Dollars in millions): 

Figures: 

Figure 1: U.S. Textile and Apparel Domestic Production, Employment, 
Imports, and Exports, 1993-2002: 

Figure 2: CBP's Process for Targeting Textile Transshipment: 

Figure 3: CBP's Monitoring of U.S.-Vietnam Trade Indicates Role and 
Limitations of Targeting: 

Figure 4: An Overview of CBP's Textile Monitoring and Enforcement 
Process, with Results for 2002: 

Figure 5: TPVT Officials Verifying Production in El Salvador Textile 
Factories, in July 2003: 

Figure 6: Main Hong Kong-China Commercial Control Point at Lok Ma Chau, 
August 2003: 

Figure 7: Total In-bond Entries for 11 Major U.S. Ports, January 2002-
May 2003: 

Figure 8: Example of In-bond Diversion of Goods Supposedly Going to 
Mexico: 

Figure 9: Weaknesses in the In-bond Process: 

Figure 10: Major Components of Textile and Apparel Imports, 1993-2002: 

Figure 11: Share of U.S. Textile and Apparel Imports by Trade Partner, 
2002: 

Figure 12: Share of U.S. Textile and Apparel Imports by Service Port, 
2002: 

Figure 13: Employment in Major Sectors of the Textile and Apparel 
Industry, 1993-2002: 

Figure 14: U.S. Production (Shipments) in Textile and Apparel Sectors, 
1997-2001: 

Abbreviations: 

ACE: Automated Commercial Environment: 

ACS: Automated Commercial System: 

AGOA: African Growth and Opportunity Act: 

ATC: Agreement on Textiles and Clothing: 

ATPDEA: Andean Trade Promotion and Drug Eradication Act: 

BICE: Bureau of Immigration and Customs Enforcement, Department of 
Homeland Security: 

CAFS: Customs Automated Form Entry System: 

CBP: U.S. Customs and Border Protection: 

CBTPA: Caribbean Basin Trade Partnership Act: 

CITA: Committee for the Implementation of Textile Agreements: 

FTA: Free Trade Agreements: 

FTAA: Free Trade Area of the Americas: 

I.E.: Immediate Exportation: 

I.T.: Immediate Transportation: 

NAFTA: North American Free Trade Agreement: 

STC: Strategic Trade Center: 

T&E: Transportation and Exportation: 

TPVT: Textile Production Verification Team: 

USTR: Office of the U.S. Trade Representative: 

WTO: World Trade Center: 

Letter 
January 23, 2004: 

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max S. Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

The Honorable William M. Thomas: 
Chairman: 
The Honorable Charles B. Rangel: 
Ranking Minority Member: 
Committee on Ways and Means: 
House of Representatives: 

With overall U.S. imports of textile and apparel products running about 
$81 billion in 2002, or about 7 percent of all U.S. imports, U.S. 
policymakers and industry groups have been concerned that some foreign 
textile and apparel imports are entering the United States fraudulently 
and displacing U.S. textile and apparel industry workers. Illegal 
textile transshipment is one form of such illegal import activity and 
occurs when false country-of-origin information is provided for 
imported goods in order to evade U.S. textile quotas and customs 
duties.[Footnote 1] U.S. Customs and Border Protection (CBP)[Footnote 
2] does not have a reliable estimate of the overall amount of illegal 
textile transshipment that occurs annually, but restrictive U.S. quotas 
and relatively high tariffs on certain textile and apparel products 
create incentives to foreign suppliers and importers to avoid these 
trade restrictions.[Footnote 3]

Congress included a mandate in the Trade Act of 2002 (P.L. 107-210, 
Aug. 6, 2002) directing that we assess CBP's system for monitoring and 
enforcing textile transshipment[Footnote 4] and make recommendations 
for improvements, as needed. As discussed with representatives of the 
Senate Committee on Finance and the House Committee on Ways and Means, 
we have focused on answering the following questions: 

* How does CBP identify potential textile transshipment?

* How well does CBP's textile review process work to prevent illegal 
textile transshipment?

* How effectively does CBP monitor foreign textiles transiting the 
United States in its in-bond system before entering U.S. commerce or 
being exported? and: 

* What challenges, if any, has CBP experienced in using penalties and 
other means to deter illegal textile transshipment?

To answer these questions, we conducted fieldwork at seven ports of 
entry (New York/Newark, New York; Los Angeles/Long Beach, California; 
Laredo, Texas; Columbus and Cleveland, Ohio; and Seattle and Blaine, 
Washington) to review how CBP reviews textile shipments at the major 
land, sea, and inland ports. Together, these ports represent CBP 
service ports that processed 55 percent of textiles and apparel 
imported into the United States in 2002. We also reviewed CBP's data 
analysis at its Strategic Trade Center in New York, observed a Textile 
Production Verification Team conduct foreign factory visits in El 
Salvador, and discussed CBP's efforts to coordinate textile enforcement 
activities with the customs authorities in El Salvador, Hong Kong, 
Macau, Mexico, and Canada. We conducted a survey of 29 CBP ports, 
including the 11 largest ports that process textiles and apparel 
imports. (See app. I for details about our scope and methodology.): 

Results in Brief: 

To identify potential illegal textile transshipments to the United 
States, CBP targets countries, manufacturers, shipments, and importers 
that it determines to be at a higher risk for textile transshipment. 
CBP uses a targeting process that relies heavily on analyzing available 
trade data and other information to focus limited review and 
enforcement resources on the most suspect activity. First, CBP 
identifies the countries in which trade flows and other information 
indicate a large potential for transshipment. Second, CBP focuses on 
selected manufacturers in those high-risk countries for overseas 
factory visits, known as Textile Production Verification Teams. The 
teams attempt to verify that factories are able to produce the 
shipments they have claimed or to discover evidence of transshipment, 
such as counterfeit documents. If evidence of transshipment is found, 
CBP uses this information to target shipments to the United States for 
review and potential exclusions, seizures, or penalties. In 2002, CBP 
targeted and selected for review about 2,500 textile and apparel 
shipments out of more than 3 million such shipments it processed that 
year. CBP also targets importers based on high-risk activity, and 
conducts internal control audits that include verifying whether the 
importers have controls against transshipment. However, resource 
constraints limit the number of foreign factories and shipments that 
CBP can target and review annually to a small share of textile and 
apparel trade.

CBP's textile review process for preventing illegal textile 
transshipment has adapted to the changing security environment, but CBP 
faces challenges in its monitoring and enforcement activities. The 
textile review process includes analysis of entry documents, inspection 
of shipments, and verification of foreign production. CBP ports 
increasingly depend on information received from targeting the most 
high-risk shipments, the results of CBP's Textile Production 
Verification Team foreign factory visits, and other intelligence to do 
so, given the decreasing level of resources available at the ports for 
illegal textile transshipment enforcement. However, CBP's Textile 
Production Verification Team reports are not always finalized and 
provided to CBP ports, other agencies, or the foreign governments for 
follow-up in a timely manner. With the expiration of the World Trade 
Organization's textile quota regime in 2005, CBP will lose its 
authority to conduct foreign factory visits in former quota countries. 
Additionally, supplementing the enforcement information provided to the 
ports will be important because textile transshipment will remain a 
concern due to tariff differentials resulting from free trade 
agreements and trade preference programs. Information from overseas 
Customs Attach offices, now used on a limited basis, and cooperative 
efforts by foreign governments can provide important information for 
port inspections.

CBP has not effectively monitored movements of textiles in its in-bond 
system, due to weak internal controls that enable cargo to be illegally 
diverted from the supposed destination. The in-bond system allows 
cargo, including foreign textiles, to be transported from the original 
U.S. port of arrival (such as Los Angeles) to another U.S. port (such 
as Cleveland) for formal entry into U.S. commerce or for export to a 
foreign country. The effect of illegal diversion is that quota 
restrictions have been circumvented and payment of duties avoided. For 
example, a 2003 CBP investigation of in-bond diversion of foreign 
textiles found that the U.S. importer was filing false CBP documents 
reflecting export into Mexico when, in fact, the textile shipments were 
turned around before reaching the border and diverted into the U.S. 
market. Internal control weaknesses include: 

* lack of an automated system to track in-bond shipments,

* inconsistencies across ports in targeting and inspecting in-bond 
shipments,

* in-bond regulations that allow importers to change in-bond shipments' 
final destinations without notifying CBP and allow extensive time 
intervals for in-bond shipments to reach their final destination, and: 

* inadequate verification that in-bond shipments destined for Mexico 
are actually exported.

Although we reported on the in-bond system in 1994 and 1997 and made 
recommendations to CBP, not all have been implemented. Since we began 
our recent review, CBP has implemented some new measures and has made 
some improvements to the in-bond system. However, internal control 
problems remain.

CBP has experienced serious challenges in deterring illegal textile 
transshipment due to a lengthy and complex investigative process and 
competing priorities. CBP has extensive authority to enforce textile 
transshipment violations--from seizing the textiles, to penalizing or 
prosecuting the violator, to totally excluding the textiles from 
entering U.S. commerce. However, CBP relies on exclusions because, 
among other reasons, they require less evidence than seizures and 
eliminate the need to penalize or prosecute the violator. Furthermore, 
enforcing violations under the in-bond system presents challenges due 
to CBP's weak internal controls and mitigation guidelines that can 
allow reduction of liquidated damages to a fraction of the total 
amount. CBP also employs other means to deter illegal transshipment by 
informing the U.S. importer community of violations. Additionally, CBP 
and the interagency Committee for the Implementation of Textile 
Agreements[Footnote 5] maintain various lists of foreign violators, in 
part to help deter transshipment by the importer community. CBP also 
regularly meets with the textile trade community to keep it informed of 
the latest enforcement information.

In this report, we are making recommendations to improve information 
available for textile reviews at the ports, to encourage continued 
cooperation by foreign governments, and to strengthen CBP's monitoring 
of in-bond goods.

We received written comments on a draft of our report from the 
Department of Homeland Security, which agreed with our recommendations. 
(See app. III.): 

Background: 

The United States, like the European Union and Canada, maintains annual 
quotas on textile and apparel imports from various supplier countries. 
When a country's quota fills up on a certain category of merchandise, 
that country's exporters may try to find ways to transship its 
merchandise through another country whose quota is not yet filled or 
that does not have a quota. Transshipment may also occur because 
obtaining quota can be very expensive and the exporters want to avoid 
this expense. The actual illegal act of transshipment takes place when 
false information is provided regarding the country-of-origin to make 
it appear that the merchandise was made in the transited country. The 
effects of the illegal act of transshipment are felt in both the 
transited country (potentially displacing its manufactured exports) and 
the United States, increasing competition for the U.S. textile and 
apparel industry.

These U.S. quotas, embodied in approximately 45 bilateral textile 
agreements, are scheduled for elimination on January 1, 2005, in 
accordance with the 1995 World Trade Organization (WTO) Agreement on 
Textiles and Clothing. However, U.S. quotas will remain for 
approximately five countries that are not members of the WTO and for 
specific product categories when trade complaint actions, resulting in 
reinstated quotas, are approved. Incentives to engage in transshipment 
will also continue due to the differing tariff levels resulting from 
the various bilateral or multilateral free trade agreements and 
preference programs that the United States has signed with some 
countries.[Footnote 6] U.S. tariffs on certain types of sensitive 
textile and apparel products range up to 33 percent,[Footnote 7] but 
such tariffs can fall to zero for imports from trade agreement 
countries. As with quotas, manufacturers from countries facing higher 
U.S. tariffs may find ways to transship their merchandise to countries 
benefiting from lower or no U.S. tariffs, illegally indicate the 
merchandise's country-of-origin, and enter the merchandise into the 
U.S. market.

Imports Nearly Double over Past Decade, While Production and Employment 
Decline: 

Over the past decade, U.S. imports of textile and apparel products have 
grown significantly, while domestic production and employment have 
declined. For example, textile and apparel imports in 2002 were about 
$81 billion, nearly double their value in 1993.[Footnote 8] The largest 
suppliers to the U.S. market in 2002 were China (15 percent), Mexico 
(12 percent), and Central America and the Caribbean (as a group, 12 
percent). See appendix II for more information on textile and apparel 
trade, production, and employment.

While imports have grown over the decade, domestic production and 
employment have declined. Figure 1 shows U.S. domestic production, 
imports, exports, and employment in the U.S. textile and apparel 
sector. From 1993 through 2001 (latest year available), textile and 
apparel production (as measured by shipments to the U.S. market or for 
export) declined by 11 percent, and employment fell by 38 percent. 
However, the United States still maintains significant production (over 
$130 billion) and employment (about 850,000 jobs) in the textile and 
apparel sector.

Figure 1: U.S. Textile and Apparel Domestic Production, Employment, 
Imports, and Exports, 1993-2002: 

[See PDF for image]

Note: Data on production (shipments) was not available for 2002. 
Production, import and export values are in current dollars, not 
adjusted for inflation. Producer price changes in the domestic textile 
products and apparel sector were low over this period.

[End of figure]

U.S. Government Roles in Monitoring Textile Transshipment: 

CBP has responsibility for ensuring that all goods entering the United 
States do so legally. It is responsible for enforcing quotas and tariff 
preferences under trade agreements, laws, and the directives of the 
interagency Committee for the Implementation of Textile Agreements 
(CITA) involving the import of textiles and wearing apparel. CBP has 
established a Textile Working Group under its high-level Trade Strategy 
Board that prepares an annual strategy for textiles and apparel. This 
annual strategy establishes national priorities and an action plan to 
carry out its goals. Within the framework of this overall strategy, CBP 
administers quotas for textiles, processes textile and apparel imports 
at U.S. ports, conducts Textile Production Verification Team (TPVT) 
visits to foreign countries, provides technical input for trade 
agreement negotiations, and monitors existing trade agreements. In 
addition to staff at CBP's headquarters, officials at 20 Field 
Operations Offices[Footnote 9] and more than 300 CBP ports of entry 
oversee the entry of all goods entering the United States. CBP has a 
specific unit, the Strategic Trade Center (STC) in New York City, 
assigned to analyze textile trade data and other information sources 
for the targeting process.

In addition to CBP, the departments of Commerce, Justice, State, and 
Treasury, and the Office of the U.S. Trade Representative (USTR) also 
play a role in transshipment issues. Further, as an interagency 
committee, CITA determines when market-disrupting factors exist, 
supervises the implementation of textile trade agreements, coordinates 
U.S. administration efforts to combat illegal textile and apparel 
transshipment, and administers the phase-out of textile and apparel 
quotas on WTO countries required under the 1995 Agreement on Textiles 
and Clothing.

CBP Uses a Targeting Process to Identify Potential Textile 
Transshipment: 

CBP's process for identifying potential illegal textile transshipments 
depends on targeting suspicious activity by analyzing available data 
and intelligence. Due to increased trade volumes and shifted 
priorities, CBP seeks to focus its limited enforcement resources on the 
most suspect activity. CBP targets countries, manufacturers, shipments, 
and importers that it determines to be at a higher risk for textile 
transshipment. First, CBP identifies the countries in which trade flows 
and other information indicate a high potential for transshipment. CBP 
then targets selected manufacturers in those high-risk countries for 
overseas factory visits. Information from the factory visits is then 
used to target shipments to the United States for review and potential 
exclusions or penalties. Finally, CBP also targets importers based on 
high-risk activity and conducts internal control audits that include 
verifying that controls against transshipment exist. However, CBP 
selects only a small share of foreign factories and shipments for 
review due to limited resources.

Targeting Is Essential, Due to High Trade Volumes and Shifting 
Priorities for Resources: 

In response to a rapidly growing volume of trade at the border and 
limited resources for enforcement, CBP relies on a targeting process to 
identify shipments that have a high risk of being transshipped. 
According to CBP officials, trade growth and expanding law enforcement 
efforts have nearly overwhelmed its staff and resources. In addition, 
CBP's modernization of its processes and technology, as called for in 
the Customs Modernization and Informed Compliance Act of 1993, 
recognizes that the nearly 25 million entries (shipments) CBP processes 
annually cannot all be inspected.[Footnote 10] Furthermore, since the 
terrorist attacks of September 11, 2001, CBP has shifted resources to 
security concerns as its priority mission. Inspection and some other 
port-level staff have been diverted from detecting commercial 
violations to ensuring security. In addition, during higher alert 
levels (such as code orange and above), additional staff is also 
refocused to assist in port and national security.

CBP Targets Risky Countries, Manufacturers, Shipments, and Importers: 

CBP's process of targeting high-risk activity begins by identifying the 
countries that supply textile imports that pose the greatest risk of 
illegal textile transshipment.[Footnote 11] Applying a risk-management 
approach, CBP targets shipments for review based on trade data, such as 
sudden surges of products restricted by quotas from nonquota countries, 
production data, results of past factory and port inspections, 
suspicious patterns of behavior, and tips from the private sector. CBP 
then reviews the targeted shipments for evidence of transshipment, 
while expediting the processing of nontargeted shipments. From its 
country-level review, CBP targets 16 countries per year on average, and 
actually visits 11 of them on average. For the countries CBP selects, 
it targets on average about 45 high-risk manufacturing plants to visit. 
These visits seek to find evidence of transshipment or to verify that 
the factories are in compliance with U.S. trade laws and regulations 
regarding the origin of the goods exported to the United States. If 
problems are found, CBP uses that information to target shipments 
(entries) entering the United States for possible detention and 
exclusion. CBP targeted 2,482 shipments in 2002. CBP has begun to 
target high-risk importers' shipments for review while also conducting 
internal audits of selected importers. Figure 2 shows the general 
process CBP uses to target suspicious activity.

Figure 2: CBP's Process for Targeting Textile Transshipment: 

[See PDF for image]

[End of figure]

CBP Targets about 16 Countries Annually: 

Before the beginning of each fiscal year, CBP analyzes trade and 
production data, as well as other available intelligence, to assess the 
relative risk of each major U.S. trade partner for engaging in illegal 
textile transshipment. CBP generally identifies 16 countries a year on 
average as being at high risk for transshipment or other trade 
agreement violations and updates its assessment at least once during 
the fiscal year. The risk level (high, moderate, or low) is based 
largely on the volume of trade in sensitive textile categories, such as 
certain types of knit apparel and fabric, and the likelihood of 
transshipment through that country. For example, as of November 1, 
2003, quotas on men and women's knit shirts and blouses were 
approximately 80 percent or more filled for China, India, and 
Indonesia. This situation creates an incentive for producers in those 
countries concerned that the quotas will close before the end of the 
year to transship their goods. CBP may increase its monitoring of trade 
in these products through neighboring countries. The likelihood of 
transshipment is a qualitative judgment that CBP makes based on 
available intelligence.

Countries with high production capabilities and subject to restrictive 
quotas and tariffs, such as China, India, and Pakistan, are considered 
potential source countries. These countries could produce and export to 
the United States far more textile and apparel products than U.S. 
quotas allow. Countries that have relatively open access to the U.S. 
market, either through relatively generous quotas (Hong Kong and Macau) 
or trade preferences programs (Central America and the Caribbean, and 
sub-Saharan Africa) are considered potential transit points for textile 
transshipment.[Footnote 12] CBP focuses its efforts on targeting and 
reviewing goods from these transit countries rather than source 
countries because any evidence that goods were actually produced 
elsewhere, such as closed factories or factories without the necessary 
machinery to produce such shipments, would be found in the transit 
country.

After selecting the high-risk countries, CBP then selects a subset of 
these countries to visit during the year to conduct TPVT factory 
visits. During the past 4 years, CBP conducted 42 TPVT visits to 22 
countries. Cambodia, Hong Kong, Macau, and Taiwan in Asia, and El 
Salvador in Latin America received three or more visits between 2000 
and 2003. Table 1 shows the U.S. trade partners that CBP visited on a 
TPVT trip in those years, along with their share of U.S. imports of 
textile and apparel products in 2002.[Footnote 13] For some U.S. trade 
partners, their share of overall textile and apparel trade may be 
relatively low, but for certain products they are significant 
suppliers. For example, although Thailand is the tenth largest supplier 
overall, it is the fifth largest supplier of cotton bed 
sheets.[Footnote 14]

Table 1: U.S. Trade Partners Visited by Textile Production Verification 
Teams, 2000-2003: 

Partner: All Countries; 
Number of TPVT visits, 2000-2003: 42; 
Rank in U.S. textile and apparel imports, 2002: [Empty]; 
U.S. imports 2002 (million US$): $80,864; 
Share of U.S. imports 2002: 100%.

Partner: Hong Kong; 
Number of TPVT visits, 2000-2003: 6; 
Rank in U.S. textile and apparel imports, 2002: 3; 
U.S. imports 2002 (million US$): 4,099; 
Share of U.S. imports 2002: 5.

Partner: Macau; 
Number of TPVT visits, 2000-2003: 4; 
Rank in U.S. textile and apparel imports, 2002: 20; 
U.S. imports 2002 (million US$): 1,149; 
Share of U.S. imports 2002: 1.

Partner: Taiwan; 
Number of TPVT visits, 2000-2003: 3; 
Rank in U.S. textile and apparel imports, 2002: 8; 
U.S. imports 2002 (million US$): 2,483; 
Share of U.S. imports 2002: 3.

Partner: El Salvador; 
Number of TPVT visits, 2000-2003: 3; 
Rank in U.S. textile and apparel imports, 2002: 16; 
U.S. imports 2002 (million US$): 1,713; 
Share of U.S. imports 2002: 2.

Partner: Cambodia (Kampuchea); 
Number of TPVT visits, 2000-2003: 3; 
Rank in U.S. textile and apparel imports, 2002: 21; 
U.S. imports 2002 (million US$): 1,062; 
Share of U.S. imports 2002: 1.

Partner: Honduras; 
Number of TPVT visits, 2000-2003: 2; 
Rank in U.S. textile and apparel imports, 2002: 7; 
U.S. imports 2002 (million US$): 2,513; 
Share of U.S. imports 2002: 3.

Partner: Thailand; 
Number of TPVT visits, 2000-2003: 2; 
Rank in U.S. textile and apparel imports, 2002: 10; 
U.S. imports 2002 (million US$): 2,322; 
Share of U.S. imports 2002: 3.

Partner: Guatemala; 
Number of TPVT visits, 2000-2003: 2; 
Rank in U.S. textile and apparel imports, 2002: 18; 
U.S. imports 2002 (million US$): 1,676; 
Share of U.S. imports 2002: 2.

Partner: Vietnam; 
Number of TPVT visits, 2000-2003: 2; 
Rank in U.S. textile and apparel imports, 2002: 22; 
U.S. imports 2002 (million US$): 960; 
Share of U.S. imports 2002: 1.

Partner: Nicaragua; 
Number of TPVT visits, 2000-2003: 2; 
Rank in U.S. textile and apparel imports, 2002: 31; 
U.S. imports 2002 (million US$): 434; 
Share of U.S. imports 2002: 1.

Partner: Lesotho; 
Number of TPVT visits, 2000-2003: 2; 
Rank in U.S. textile and apparel imports, 2002: 38; 
U.S. imports 2002 (million US$): 321; 
Share of U.S. imports 2002: [A].

Partner: Korea; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 6; 
U.S. imports 2002 (million US$): 3,275; 
Share of U.S. imports 2002: 4.

Partner: Dominican Republic; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 12; 
U.S. imports 2002 (million US$): 2,252; 
Share of U.S. imports 2002: 3.

Partner: Philippines; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 13; 
U.S. imports 2002 (million US$): 2,066; 
Share of U.S. imports 2002: 3.

Partner: Bangladesh; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 15; 
U.S. imports 2002 (million US$): 2,017; 
Share of U.S. imports 2002: 2.

Partner: Sri Lanka (Ceylon); 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 19; 
U.S. imports 2002 (million US$): 1,553; 
Share of U.S. imports 2002: 2.

Partner: Mauritius; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 44; 
U.S. imports 2002 (million US$): 255; 
Share of U.S. imports 2002: [A].

Partner: Republic of South Africa; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 46; 
U.S. imports 2002 (million US$): 220; 
Share of U.S. imports 2002: [A].

Partner: Kenya; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 54; 
U.S. imports 2002 (million US$): 126; 
Share of U.S. imports 2002: [A].

Partner: Madagascar; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 62; 
U.S. imports 2002 (million US$): 90; 
Share of U.S. imports 2002: [A].

Partner: Swaziland; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 63; 
U.S. imports 2002 (million US$): 89; 
Share of U.S. imports 2002: [A].

Partner: Botswana; 
Number of TPVT visits, 2000-2003: 1; 
Rank in U.S. textile and apparel imports, 2002: 108; 
U.S. imports 2002 (million US$): 6; 
Share of U.S. imports 2002: [A]. 

Sources: U.S. Department of Commerce official trade statistics and CBP.

[A] Indicates less than 1 percent of total U.S. imports of textile and 
apparel products. Imports are general imports measured at the entered 
Customs value.

[End of table]

The number of countries CBP visits each year has varied, but from 1996 
through 2003 CBP visited 11 countries per year on average. Although the 
overall size of trade is an important factor in targeting countries, 
CBP also looks at a range of information in making its determination. 
For example, several relatively small suppliers, such as Nicaragua, 
Swaziland, and Botswana, were visited because they receive special 
preferences as developing countries. Also, Vietnam, which only 
accounted for about 1 percent of U.S. imports in 2002, was selected 
partly due to trade anomalies occurring during a period when Vietnam's 
quota-free access to the U.S. market made it a potential transit 
country.[Footnote 15] Figure 3 describes the case of Vietnam as an 
example of the role and limitations of the targeting process. However, 
Canada and Mexico are both top U.S. trade partners and designated as 
high-risk countries, but CBP has not made any TPVT visits. Under the 
NAFTA, producers in these countries are subject to visits to verify 
NAFTA eligibility. However, these visits do not focus on transshipment 
specifically and although CBP has sought to send a TPVT visit to 
Canada, it has not yet been successful in persuading the Canadian 
government.

Figure 3: CBP's Monitoring of U.S.-Vietnam Trade Indicates Role and 
Limitations of Targeting: 

[See PDF for image]

[End of figure]

CBP Visits About 45 Manufacturers Per Country: 

CBP targets about 45 factories on average per country visit, although 
this number varies depending on the characteristics of each country. 
For example, the proximity of factories to one another and the length 
of trip (1 to 2 weeks) will affect the number of factories that can be 
visited. The importance of the trade partner in U.S. textile and 
apparel trade will affect the length of the trip and number of 
factories targeted. On the November 2003 Hong Kong TPVT trip, for 
example, CBP visited over 200 factories. Before undertaking a TPVT 
visit in a foreign country, CBP conducts a special targeting session to 
identify the manufacturers in that country that it suspects may be 
involved in textile transshipment. Similar to its targeting of 
countries, CBP import and trade specialists consider the recent trade 
flows, available intelligence, experience from past factory visits, and 
reviews of merchandise at U.S. ports in order to narrow down from the 
total list of factories in the country to a list of the highest-risk 
factories that they will target for a visit.[Footnote 16] The process 
involves collaboration between the STC trade specialists, the port-
level import specialists that will travel to the factories, and 
headquarters staff.

During the past 4 years, CBP found that about half the manufacturers 
that it targeted as high risk were actually found by TPVT visits to 
have serious problems. These problems included actual evidence of 
transshipment, evidence that indicated a high risk of potential 
transshipment, permanently closed factories, and factories that refused 
admission to CBP officials. Each of these problems is considered a 
sufficient reason to review and detain shipments from these factories 
as they reach U.S. ports. In addition, some factories were found to 
warrant additional monitoring by the STC. They were listed as low risk 
and their shipments were not targeted for review when they reached U.S. 
ports.

Although the share of targeted factories found to have problems is 
relatively high, the factories that CBP targeted were those that 
generally had some indication of risk, based on intelligence or trade 
data analysis. Also, the targeted manufacturers that were visited 
(about 1,700) during the 4-year period generally make up a small share 
of the total number of manufacturers in each country. However, for 
smaller trade partners, such as those that receive trade preferences 
under the Caribbean Basin Trade Partnership Act (CBTPA) or African 
Growth and Opportunity Act (AGOA), CBP can visit a sizable share of the 
factories within the country because their overall number of factories 
is smaller. For El Salvador and Nicaragua, CBP has visited about 10 
percent of the factories, and for Swaziland and Botswana, CBP has 
visited about 22 and 28 percent of the factories, respectively.

Due to the small share of factories that CBP can actually visit, the 
STC says it is developing evaluation tools to improve CBP's process of 
targeting foreign manufacturers for TPVT visits. Currently, the STC 
tracks the number and results of the TPVT visits in order to assess 
whether the targeted factories were actually found to have problems by 
the TPVT visits. CBP says it is developing a database to keep track of 
the specific criteria it used to target manufacturers for TPVT visits. 
It plans to use the results of the TPVT visits to identify which 
criteria were most useful in its targeting process.

CBP Identified More Than 2,400 Shipments in 2002: 

In 2002, CBP identified 2,482 high-risk shipments (entries) for greater 
scrutiny or review--less than one-tenth of 1 percent of the more than 3 
million textile and apparel entries that year. CBP actually reviewed 77 
percent of the shipments that were identified.[Footnote 17] Of the 
shipments reviewed, about 24 percent resulted in exclusions from U.S. 
commerce, 2 percent in penalties, and 1 percent in seizures. To choose 
shipments for review, CBP headquarters uses information collected from 
TPVT factory visits as well as other intelligence information to create 
criteria for its targeting system. When shipments match these criteria, 
they are flagged at the ports for a review.[Footnote 18] For instance, 
when a TPVT visit finds that a foreign factory has been permanently 
closed, CBP will place this information in its automated system to be 
used as criteria for targeting any shipments destined for entry into 
the United States that claimed to have been produced in that factory. 
In addition, other information such as prior shipment reviews or 
intelligence information concerning possible illegal activity by 
manufacturers, importers, or other parties can be entered as criteria 
to stop shipments. Criteria can be entered nationally for all ports, or 
individual ports can add criteria locally that only affect shipments to 
their own port.

CBP Identifies High-Risk Importers for Review and Audit: 

CBP has recently begun to increase targeting of U.S. importers of 
textile and apparel products who demonstrate patterns of suspicious 
behavior. For example, CBP identified more than 40 importers in the 
past year who have a pattern of sourcing from foreign manufacturers 
involved in transshipment. According to CBP officials, they can pursue 
penalties against these companies, because this pattern of behavior may 
violate reasonable care provisions[Footnote 19] of U.S. trade laws. CBP 
also uses this information and other intelligence it collects to target 
for review shipments that these importers receive. In addition to this 
targeting, CBP's Regulatory Audit division has traditionally conducted 
internal control audits of importers, and it uses a separate targeting 
process to identify the importers that it will audit. One component of 
its audits focuses on whether the importer has and applies internal 
controls for transshipment. The STC has also provided information about 
the companies it targets to Regulatory Audit for its own investigations 
or audits.

Number of Targets Identified Is Limited by CBP Resource Constraints: 

Although CBP's textile transshipment strategy relies on targeting, 
resource constraints limit both the number of targets that CBP 
generates and the type of targeting analysis that CBP can conduct. 
First, the number of foreign factories and shipments targeted is 
limited by the ability of CBP to conduct the reviews.[Footnote 20] As 
previously discussed, CBP is able to visit only a small share of the 
foreign factories exporting textile and apparel products to the United 
States. The results of these visits then provide key information for 
targeting shipments for review as they arrive at U.S. ports. Similarly, 
CBP targets only a small share of textile and apparel shipments to U.S. 
ports for review. CBP officials with whom we met said CBP limits the 
number of shipments it targets for port reviews because port staff are 
unable to effectively examine a significantly larger number of 
shipments.[Footnote 21]

In addition to resource constraints due to security (previously 
discussed), reviewing shipments for textile transshipment is labor 
intensive and involves more than a simple visual inspection of the 
merchandise. Unlike cases involving narcotics in which physical 
inspections alone can lead to discovery of the drugs, physical 
inspections of textile or apparel products rarely provide sufficient 
evidence of transshipment. Port staff generally needs to scrutinize 
detailed production documentation, which is time consuming, to 
determine a product's origin and assess the likelihood of 
transshipment.[Footnote 22]

Second, staff constraints restrict the extent to which CBP can utilize 
and develop its targeting process. As of December 2, 2003, the STC had 
25 percent of its staff positions unfilled (3 out of 12 positions), 
while its responsibilities are growing as trade agreements are 
increasing. For each new trade agreement, STC staff monitor trade and 
investment patterns to detect whether anomalies are developing that 
should be targeted. Consequently, CBP officials said that resource 
constraints have meant that several types of analysis that the STC 
planned on conducting have either been delayed or not conducted at all. 
These included analyses of high-risk countries, improvements to 
existing targeting processes, and studies of alternative targeting 
techniques. Despite these resource limitations, CBP and the STC, in 
particular, have made regular improvements to the targeting process. 
For example, CBP's targeting of countries and manufacturers for TPVT 
visits has become more systematic, relying on trade data and other 
intelligence to select factories for visits.

CBP Has Adapted Textile Review Activities to Changing Environment but 
Faces Further Challenges: 

CBP has consolidated textile functions at headquarters and has adapted 
textile review activities at the ports to changing resource levels. In 
response to national security priorities, CBP inspectors at the ports 
are being shifted to higher-priority duties, leaving import specialists 
at the ports to play the critical role in making decisions on excluding 
or seizing illegal textile shipments. CBP now relies on TPVT visits as 
an essential part of its targeting process, but CBP has not always 
finalized these TPVT results and provided them to CBP ports, CITA, and 
the foreign governments for follow-up in a timely manner. With the 
expiration of the WTO global textile quota regime in 2005, CBP will 
lose its authority to conduct TPVTs in the former quota countries, and 
supplementing the enforcement information provided to the ports will be 
important. Information from overseas Customs Attach offices and 
cooperative efforts with foreign governments can provide additional 
important information for port inspections.

CBP Has Consolidated Its Textile Activities Amid National Security 
Priorities: 

CBP has moved most textile functions into a single headquarters 
division to foster a coordinated agency approach to monitoring textile 
imports and enforcing textile import laws, but it must still depend on 
its port staff to identify and catch illegal textile transshipments. As 
CBP inspectors are shifted to higher-priority functions, such as 
antiterrorism and drug interdiction efforts, import specialists at the 
ports are playing an increasingly central role in scrutinizing the 
growing volume of textile imports. They review the entry paperwork for 
all textile imports covered by quotas or needing visas[Footnote 23] in 
order to exclude shipments that are inadmissible or to seize those that 
are illegal, according to port officials. However, resource constraints 
at the ports have forced them to depend increasingly on STC targeting, 
results of TPVTs, and information from headquarters to identify suspect 
shipments and enforce textile laws.

CBP Has Centralized Textile Transshipment Activities, but Ports Still 
Key: 

In 2001, CBP consolidated oversight of most of its textile operations 
into one headquarters division in the Office of Field Operations, 
creating the Textile Enforcement and Operations Division. One important 
exception to that consolidation was the Textile Clearinghouse in the 
New York STC, which remained in the Office of Strategic Trade. The 
Textile Enforcement and Operations Division is responsible for 
monitoring and administering textile quotas; providing technical input 
to textile negotiations; overseeing implementation of textile import 
policies at the ports; and for planning, reporting, and following up on 
TPVT visits. It uses the results of targeting by the STC, the findings 
of the TPVTs, and input from the ports to oversee the daily 
implementation of textile policy at the ports. It also works with CITA, 
the domestic textile industry, the importing community, and the Bureau 
of Immigration and Customs Enforcement (BICE).

Notwithstanding this, the critical point in identifying and preventing 
illegally transshipped textiles from entering the United States is at 
the ports. There are more than 300 CBP ports across the country--
including seaports, such as Los Angeles/Long Beach, California; land 
border crossings for truck and rail cargo such as Laredo, Texas; and 
airports handling air cargo such as JFK Airport in New York, New York. 
The top 10 of 42 CBP service ports that processed textile imports 
accounted for about 75 percent by value of all shipments in 2002, 
according to the official trade statistics of the Commerce Department. 
The key staff resources for textile enforcement at the ports are the 
inspectors and the import specialists.

Figure 4 provides an overview of CBP's textile monitoring and 
enforcement process, including targeting, port inspections, and penalty 
investigations. The figure also provides data for the results obtained 
at each stage of the process in 2002. CBP processed about 3 million 
entries in that year, with 2,482 entries triggering targeting criteria, 
of which 981 entries were detained, 455 excluded, and 24 seized.

Figure 4: An Overview of CBP's Textile Monitoring and Enforcement 
Process, with Results for 2002: 

[See PDF for image]

[A] Data was not available on the number of criminal investigations and 
cases specifically involving textile transshipment.

[End of figure]

As national security and counternarcotics concerns have become CBP's 
top priorities, CBP inspectors' roles have shifted away from textile 
and other commercial inspection. The result is that, even at the larger 
ports, fewer CBP inspectors are knowledgeable about a specific 
commodity, such as textiles. These inspectors now have less time and 
expertise to inspect textile shipments. For example, at all but one of 
the ports we visited, inspectors were mainly pulling sample garments 
from shipments for import specialists to examine rather than acting as 
an additional, knowledgeable source on textiles who could do a first 
level of review.

As a result, the import specialists have become more critical in 
preventing textile transshipment. About 900 import specialists work at 
the ports, of which approximately 255 are assigned to work on textiles, 
according to a senior CBP official.[Footnote 24] These specialists have 
always been central to determining whether illegal textile 
transshipment has occurred, because visual inspection is usually not 
sufficient. While physical clues such as cut or resewn labels can 
provide an indicator that a garment should be further examined, in many 
cases nothing about the garment itself indicates that a problem exists. 
To establish textile transshipment, import specialists must request 
production documents from the importer (who, in turn, requests them 
from the manufacturer) and review them to see if they support the 
claimed country of origin. This is a highly complex, technical, and 
labor-intensive process.[Footnote 25]

Import specialists (or at some ports, entry specialists or inspectors) 
review the basic entry paperwork for all textile shipments arriving at 
the ports that are covered by quotas or need visas.[Footnote 26] They 
will place a hold on a textile shipment: 

1. if there are "national criteria," that is, if headquarters has 
entered an alert in the Automated Commercial System (ACS), CBP's 
computer system for imports, based on targeting, TPVT findings, and 
other risk factors, to detain all shipments from that manufacturer or 
to that importer and request production documents;

2. if there are "local criteria," that is, the port has entered an ACS 
alert based on concerns particular to that port;

3. if the port has conducted its own targeting on shipments arriving at 
the port and found questionable entries;

4. if there are abnormalities in the paperwork that warrant further 
review; or: 

5. if there is other information that may be provided by domestic 
industry, the Office of Textiles and Apparel at the Commerce 
Department, CITA, foreign governments, or informants.

In most cases, shipments with national criteria will automatically be 
detained, a sample pulled from the shipment, and production 
verification documents requested. For shipments held due to local 
criteria, port targeting, abnormalities, or other information, the 
import specialist may request that the CBP inspectors pull a sample 
from the shipment, which must be done within 5 days. The import 
specialist examines the sample garments and determines whether 
shipments being held can be released or require further review. If 
further review is warranted, they detain the shipment and send the 
importer a detention letter, in which they ask the importer to provide 
the production verification documentation for an in-depth review. CBP 
must receive and review the documents within 30 days, or the shipment 
is automatically excluded.

Based on the in-depth review of the documentation, the import 
specialist decides whether to release the goods into commerce, exclude 
them if found to be inadmissible, or seize them if found to be illegal. 
Goods are inadmissible and are denied entry when the importer has not 
provided sufficient information to substantiate the claimed country of 
origin or if documents required for entry have not been provided. Goods 
may be seized when the import specialist has evidence that the law has 
been broken; this requires a higher level of evidence than exclusion.

Port Staff Review "National Criteria" Shipments but Have Less Time for 
Local Monitoring: 

In the post-September 11, 2001, environment, the ports have become more 
likely to rely on national criteria. At all of the ports we visited, 
CBP officials said that, in response to national criteria in ACS for 
textile shipments, they will detain all such shipments and request 
production documents. However, only a few large ports that handle a 
high level of textile imports, such as Los Angeles/Long Beach and New 
York/Newark, have been able to do much proactive local targeting. At 
most of the other ports, officials said that they do as much local 
criteria or targeting as they can but rarely get the spare time to do 
very much. CBP data support these statements. While national criteria 
accounted for about 75 percent of inspections in 2002, local criteria 
and self-initiated reviews accounted for 25 percent. Further, local 
criteria and self-initiated reviews had declined by half, from 2000 to 
2002; and most of the local criteria in 2002 were generated by the 
ports in Los Angeles and New York.

According to a senior CBP official, headquarters directs the input of 
national criteria to improve communications to the ports and foster 
greater uniformity of response and action by all affected ports. 
National criteria are continually tracked, analyzed, and adjusted as 
appropriate. One reason is that smaller ports have fewer import 
specialists; and in some cases, no import specialists are dedicated to 
specific commodities. In some ports, the import specialist is 
responsible for the entire range of products that can enter the 
country.

TPVTs Are Critical to Enforcement, but Follow-up Reporting Is Not 
Always Timely: 

TPVTs are a critical enforcement tool, and the conduct and reporting of 
TPVT visits have been made more uniform and rigorous in recent years. 
However, while the TPVT reports are an important part of the targeting 
process, they are not always provided in a timely manner to CBP ports, 
CITA, and the foreign governments.

TPVT Process Triggers Port Textile Reviews: 

TPVTs are critical to enforcement because the ports increasingly depend 
on the national criteria that headquarters supplies to trigger 
enforcement. These national criteria primarily result from STC 
targeting and the findings of the TPVTs conducted in high-risk 
countries. Additionally, CBP may receive enforcement information 
provided by a foreign government or other sources.

The TPVT process has two main objectives: (1) to verify that the 
production capacity of the factory matches the level and kind of 
shipments that have been sent to the United States and (2) to verify 
production of the specific shipments for which they have brought copies 
of the entry documents submitted to CBP. If a factory is closed, 
refuses entry, or the team finds evidence of transshipment, the team 
immediately notifies headquarters so that national criteria can be 
entered into ACS. Any further shipments from the closed factories will 
be excluded. Shipments from factories refusing entry or found to be 
transshipping will be detained, and importers will be asked for 
production verification documents. If a factory is deemed to be at high 
risk for transshipment, but no clear evidence has been found, CBP has 
generally waited until the TPVT report is approved before entering the 
criteria.[Footnote 27] Figure 5 shows a TPVT team verifying production 
in El Salvador textile factories.

Figure 5: TPVT Officials Verifying Production in El Salvador Textile 
Factories, in July 2003: 

[See PDF for image]

[End of figure]

TPVT report drafting and approval involves several steps. First, the 
import specialists on the team write the initial draft of their TPVT 
results report while in country. When the team members return to their 
home ports, the team leader completes the report and forwards it to 
headquarters, where it is reviewed, revised, and finally approved by 
CBP management. Once the TPVT report is approved, the remaining 
national criteria for the high-risk factories are entered into ACS.

TPVT Follow-Up Is Not Always Timely: 

CBP's standard operating procedures for TPVTs, dated September 21, 
2001, state that the TPVT team leader should finalize the reports 
within 21 calendar days after completing the trip and get headquarters 
approval within 2 weeks afterwards, or 5 weeks total. However, when we 
examined the approval timeline for TPVT reports during the past 4 
years, we found that, in practice, report approvals have averaged 2.3 
months, or almost twice as long as the procedural requirement. For 
example, the El Salvador TPVT we observed was conducted from July 21 
through August 1, 2003, but headquarters did not approve the TPVT 
report until October 20, 2003.

More importantly, during such interim periods, although national 
criteria have been identified for high-risk factories, they are 
generally not entered into ACS until the report is approved within 
CBP.[Footnote 28] The result is that questionable shipments for which 
criteria are intended can continue to enter commerce for another 2.3 
months on average. From 2000 to 2003, an average of 37 percent of TPVT-
generated criteria were for high-risk factories. This means that import 
specialists at the ports may not see more than a third of the criteria 
for about 2.3 months after the TPVT visits. At that time, if 
examination of these high-risk factories' production documents show 
transshipment of textiles during the interim period, the import 
specialists will not be able to exclude these shipments, because they 
will have already entered commerce. Instead, import specialists will 
have to ask for redelivery by the importer to the port. At that point, 
most garments will likely have been sold. Although, according to CBP, 
it can charge the importer liquidated damages[Footnote 29] for failure 
to redeliver, additional transshipped garments will have entered 
commerce nevertheless.

CITA Uses TPVTs to Generate Information Exchange with Foreign 
Governments: 

The TPVT reports are also sent to CITA and trigger another set of 
actions in the textile enforcement process. If the TPVT cannot verify 
the correct country of origin in all shipments being investigated, then 
CITA will ask the foreign government to investigate, which also 
provides it with an opportunity to respond before CITA takes an 
enforcement action. CITA's goal is to get foreign governments to 
monitor and control their own plants--essentially to self police. 
According to a CITA official, if the government does not provide a 
satisfactory response, CITA is then obligated to direct CBP to exclude 
the illegal textiles.[Footnote 30]

When CBP provides CITA with information that the TPVT (1) was refused 
entry to the factory, (2) found evidence of textile transshipment, or 
(3) found the factory was unable to produce records to verify 
production, CITA will send a letter to the foreign government 
requesting that it investigate whether transshipment has occurred and 
report back to CITA.[Footnote 31] The foreign government has 30 days to 
respond; if there is no response, CITA can also direct CBP to block 
entry of that factory's goods, generally for 2 years. In such cases, 
CBP ports do not even have to review production documents first; the 
goods will be denied entry. Notice of this prohibition is published in 
the Federal Register to inform U.S. importers.

When CITA sends a letter to the foreign government, CITA officials said 
that most governments respond with an investigation of the 
manufacturer. Sometimes governments penalize the factory with a 
suspended export license, or they report back that the factory has 
closed. As long as they are taking steps to prevent further 
transshipment, CITA is satisfied, according to CITA officials.

CITA officials stated that TPVT reports are essential to CITA's efforts 
to address illegal transshipment and that CBP has made progress in 
providing CITA, through the TPVT reports, with useful information to 
identify suspect factories and to determine the nature and extent of 
illegal transshipment. However, CITA officials continue to seek 
improvement in these reports, in particular for the reports to contain 
factual, verifiable information with definitive conclusions regarding 
whether a visited factory is involved in illegal transshipment and for 
this information to be provided clearly and concisely. While CITA 
officials acknowledged that it may be extremely difficult to CBP to 
find a "smoking gun" necessary to make this type of conclusion, CITA 
officials believe that increased clarity and more definitive 
conclusions are possible. Also, delay in receiving the reports hamper 
prompt action by CITA, and CBP in many instances does not advise CITA 
of follow-up action it has taken against factories that the CBP found 
to be unable to verify production or otherwise suspect.

A CITA official estimated that about one-half to three-quarters of 
TPVTs result in CITA letters. He estimated that CITA sent about six to 
seven letters between October 2002 and October 2003.[Footnote 32] 
Overall, CBP's TPVTs and TPVT reports are more geared toward providing 
CBP with national criteria, as recognized by a CBP official. However, 
CITA officials said that they need more detailed evidence to better 
support CITA enforcement actions.

Information from Attach Offices, Cooperation of Foreign Governments 
Crucial: 

CBP faces further challenges to which it must adapt with the expiration 
of the Agreement on Textiles and Clothing--the global textile quota 
regime--on January 1, 2005. The end of the quota regime will mean that 
the United States will also lose its authority under that agreement to 
conduct TPVTs in former quota countries, unless customs cooperation 
provisions with the foreign governments are renewed. CBP has other 
means by which it can supplement the enforcement information it 
receives from targeting and TPVTs, including placing import specialists 
in overseas Customs Attach offices in high-risk countries and 
obtaining greater foreign government cooperation.

End of Global Quota Regime Could Affect CBP's Cooperation with Foreign 
Governments: 

Finding means of supplementing the enforcement information provided to 
CBP ports will be critical once the global textile quota regime, 
embodied in the WTO Agreement on Textiles and Clothing, expires on 
January 1, 2005. The numerous U.S. bilateral quota agreements with WTO-
member textile exporting countries were all subsumed in the global 
regime. The textile enforcement provisions in these agreements provided 
the authority for CBP to conduct TPVTs. All of these provisions will 
expire together with the global textile quota regime. CBP will have 
continued authority to conduct TPVTs in countries with free trade 
agreements and preference agreements (such as the Caribbean Basin Trade 
Preference Act), as well as in non-WTO countries whose bilateral quota 
agreements will not expire (such as Vietnam).

However, certain incentives for transshipment will continue to exist. 
For example, special provisions that apply to imports of Chinese 
textiles have recently been invoked under the safeguard provision of 
China's Accession Agreement to the WTO to limit growth of imports of 
certain textile categories.[Footnote 33] The safeguard provision allows 
individual categories of textiles to remain under quota for up to an 
additional 12 months, if the domestic industry petitions CITA for 
relief and CITA affirms the petition. The petition must establish that 
imports of Chinese origin textiles and apparel products are threatening 
to impede the orderly development of trade in these products, due to 
market disruption.[Footnote 34]

The U.S. government currently maintains a Memorandum of Understanding 
with Hong Kong under which customs cooperation has been conducted. 
Given the possibility of additional safeguard quotas being imposed on 
Chinese textiles after the global quota regime expires, it will be 
critical that U.S.-Hong Kong customs cooperation continues. However, 
the United States does not have such memorandums of understanding with 
other high-risk countries in the region, such as Taiwan, Macau, and 
Bangladesh. CBP will no longer have the authority to conduct TPVTs in 
these high-risk countries unless customs cooperation agreements are 
renewed.

CBP Has Other Possible Means to Supplement Its Enforcement Information: 

CBP has sought to supplement the enforcement information it receives by 
placing some import specialists in overseas Customs Attach offices in 
high-risk countries and by obtaining greater foreign government 
cooperation. CBP started sending import specialists to its overseas 
Customs Attach offices in 2000. The reason for this effort was that 
most staff in the Customs Attach offices were special agents who were 
criminal investigators and had no trade background. Import specialists 
were to provide this missing trade experience. CBP identified the 
countries that would most benefit from having an import specialist in 
the Attach office, and by November 2003, six import specialists were 
assigned to Canada, Hong Kong, Japan, Mexico, Singapore, and South 
Africa.

A CBP official said that the import specialists are assisting with 
providing information. They have been able to help in following up on 
TPVT findings. They also have been useful in uncovering counterfeit 
visa cases in which fake company names and addresses are given in 
import documents. If more import specialists were in Customs Attach 
offices in high-risk countries to assist with textile monitoring and 
enforcement, additional benefits would result, according to the CBP 
official. In between TPVT visits, they would be able to assist the 
targeting effort with activities such as checking to see whether a 
particular factory really exists or has the level of capacity claimed. 
They could also verify factory addresses and licensing. Finally, they 
would be able to facilitate cooperation and coordination with the 
foreign government on textile transshipment issues, including 
conducting training on transshipment prevention.

Another means by which CBP can also supplement the enforcement 
information it receives is by encouraging foreign government 
cooperation and self-policing. A good example of such an arrangement is 
CBP's present relationship with Hong Kong customs authorities. The Hong 
Kong Trade and Industry Department has established an extensive system 
for regulating Hong Kong's textile industry, which it enforces together 
with the Customs and Excise Department. Hong Kong officials work 
closely with the U.S. Customs Attach Office in Hong Kong and CBP's 
Textile Enforcement and Operations Division at headquarters. Hong Kong 
also provides self-policing assistance to CBP. Hong Kong officials 
conduct follow-up investigations on findings by the TPVTs, called Joint 
Factory Observation Visits in Hong Kong, which have resulted in 
numerous cancelled or suspended export licenses. Hong Kong officials 
have also actively prosecuted and convicted individuals violating Hong 
Kong's textile transshipment laws.[Footnote 35] As it is a matter of 
public record, CBP gets the names of those companies that have been 
convicted of violations. Macau and Taiwan also provide CBP with such 
information. CBP creates national criteria for these manufacturers, and 
the ports would detain any future shipments for production verification 
documentation. Figure 6 shows the high volume of commercial traffic 
coming into Hong Kong from Shenzhen, China, at the Lok Ma Chau Control 
Point.

Figure 6: Main Hong Kong-China Commercial Control Point at Lok Ma Chau, 
August 2003: 

[See PDF for image]

[End of figure]

However, it is not clear whether many other high-risk countries have 
the capacity to self-police. In some countries, customs authorities may 
be constrained by domestic laws that either limit their authority or do 
not extend sufficient authority to adequately enforce textile 
transshipment provisions in their bilateral agreements with the United 
States. For example, government officials in El Salvador said that they 
do not have the same authority that U.S. CBP has in requesting 
production documentation from Salvadoran factories, because such 
authority is not provided in their customs laws. Such lack of authority 
was also an issue that USTR addressed when it negotiated the U.S.-
Singapore Free Trade Agreement (FTA), finalized in 2003. CBP, which is 
a technical advisor to such negotiations, encouraged the addition of a 
provision to require the government of Singapore to enact domestic 
legislation that provided the authority needed to fully enforce the 
agreement's textile transshipment provisions.

The United States is currently negotiating numerous new FTAs. As with 
the Singapore FTA negotiations, USTR may be able to include such 
provisions in new FTAs, providing an opportunity for the United States 
to buttress textile transshipment enforcement provisions and enhance 
the ability of foreign governments to conduct more effective self-
policing. Such provisions have generally been included in the FTAs 
negotiated since NAFTA, according to a senior CBP official.

Weak Internal Controls Hinder Effectiveness of CBP's In-bond System: 

CBP uses its in-bond system to monitor cargo, including foreign 
textiles, transiting the U.S. commerce or being exported to a foreign 
country. However, weak internal controls in this system enable cargo to 
be illegally diverted from the supposed destination, thus circumventing 
U.S. quota restrictions and duties. At most of the ports we visited, 
CBP inspectors we spoke with cited in-bond cargo as a high-risk 
category of shipment because it is the least inspected and in-bond 
shipments have been growing. They also noted that CBP's current in-bond 
procedures allow too much reliance on importer self-compliance and that 
little actual monitoring of cargo using this system takes place. Lack 
of automation for tracking in-bond cargo, inconsistencies in targeting 
and examining cargo, in-bond practices that allow shipments' 
destinations to be changed without notifying CBP and extensive time 
intervals to reach their final destination, and inadequate verification 
of exports to Mexico hinder the tracking of these shipments. Although 
CBP has undertaken initiatives to tighten monitoring, limitations 
continue to exist. These limitations pose a threat not only to textile 
transshipments but also to other areas related to national security. 
Without attention to this problem, enforcement of national security, 
compliance with international agreements, and proper revenue collection 
cannot be ensured.

In-bond System Designed to Expedite Flow of Commerce: 

To expedite the flow of commerce into the United States, Congress 
established in-bond movements to allow cargo to be transported from the 
port of arrival to another U.S. port for entry into U.S. commerce or 
for export to a foreign country.[Footnote 36] Cargo can be transported 
in several ways using the in-bond system. When a vessel arrives with 
containers, an importer may elect to use the in-bond system to postpone 
payment of taxes and duties while moving the goods from the original 
port of arrival to another port. By doing this, the importer delays 
paying duties until the goods are closer to their ultimate destination-
-for example, goods arriving by ship in Los Angeles may transit the 
country and ultimately be inspected and have duties levied in Chicago. 
Or goods may pass through the United States on their way to another 
destination, such as goods that are transported from Los Angeles to 
Mexico or from Canada to Mexico.

There are three types of in-bond movements: 

* Immediate transportation (I.T.). This is merchandise that is moved 
from one U.S. port to another for entry into U.S. commerce.

* Transportation and exportation (T&E). This is merchandise "in 
transit" through the United States. Export to another country is 
intended at the U.S. destination port.

* Immediate exportation (I.E.). This is merchandise exported from the 
port at which it arrives in.

Once the shipment leaves the port of arrival, the bonded 
carrier[Footnote 37] has 30 days to move the merchandise to the U.S. 
destination port. Upon arrival at the destination port, the carrier has 
48 hours to report arrival of merchandise. The merchandise must then be 
declared for entry or exported within 15 days of arrival (see fig. 4).

Use of the In-Bond System Growing Rapidly: 

Based on responses from our survey of 11 of 13 major area ports, the 
use of the in-bond system as a method of transporting goods across the 
country nearly doubled from January 2002 through May 2003. For our 
study, we surveyed the 13 ports across the country that process the 
largest amount of textiles and apparel and asked them about in-bond 
operations at their port. Figure 7 shows the increase in in-bond 
shipments processed in the past 17 months at 11 of these 
ports.[Footnote 38] From January 2002 through May 2003, in-bond entries 
increased 69 percent. A recent study on crime and security at U.S. 
seaports estimated that approximately 50 percent of all goods entering 
the United States use the in-bond system and projects that this figure 
will increase.[Footnote 39]

Figure 7: Total In-bond Entries for 11 Major U.S. Ports, January 2002-
May 2003: 

[See PDF for image]

Note: This graph represents growth for 11 major U.S. ports and may not 
be representative of overall in-bond growth across all CBP ports.

[End of figure]

Based on our survey, the top three U.S. ports that were the most 
frequent reported destinations for in-bond shipments from October 2002 
to May 2003 were Miami, New York, and Los Angeles. In-bond entries 
comprised a significant portion of the total entries for these ports, 
with 58.2 percent of total entries in Miami, 60 percent in New York, 
and 45.9 percent in Los Angeles. For goods arriving at the Los Angeles-
Long Beach seaport, the top three intended in-bond destination ports 
for fiscal year 2002 were Chicago, New York, and Dallas-Fort Worth, 
Texas.

In-bond System May Facilitate Textile Transshipment: 

Many officials at the ports we surveyed expressed concern in their 
responses over the growth of in-bond shipments and their lack of 
additional resources to examine and track these shipments. In addition, 
some port officials we spoke with also expressed concern that the in-
bond system is increasingly being used for diverting goods that are 
quota restricted (such as textiles) or that have high duty rates.

One example of how illegal in-bond diversion occurs is when textile 
shipments arrive by vessel at Los Angeles and are transported by truck 
to a port such as Laredo, Texas, where the carrier (trucking company) 
may declare immediate exportation to Mexico (see fig. 5). However, 
instead of exporting the goods to Mexico, they are shipped to another 
U.S. location for sale. This can occur because CBP relies heavily on 
importer compliance, and it requires only that carriers drop off 
paperwork showing exportation, without actually requiring physical 
inspection of the cargo.[Footnote 40]

Figure 8: Example of In-bond Diversion of Goods Supposedly Going to 
Mexico: 

[See PDF for image]

[End of figure]

CBP and BICE presently have ongoing investigations to address the 
problem of illegal diversion of in-bond merchandise. For example, a 
2003 in-bond diversion investigation found that 5,000 containers of 
apparel were illegally imported, thus avoiding quota restrictions and 
payment of $63 million in duties. Between May 2003 and October 7, 2003, 
the ports of Long Beach and El Paso made 120 seizures with cases 
involving a textile in-bond diversion smuggling scheme. The total 
domestic value for these goods was more than $33 million. Table 2 shows 
the number of in-bond cases and the penalty amounts assessed by CBP for 
the past 3 fiscal years. Total penalty amounts assessed were more than 
$350 million.

Table 2: Total number of In-bond Cases and Assessed Amount for 
Liquidated Damages, 2001-2003: 

Fiscal year: 2001; Total number of in-bond cases: 3,466; Total assessed 
amounts for liquidated damages: $93,696,618.

Fiscal year: 2002; Total number of in-bond cases: 2,677; Total assessed 
amounts for liquidated damages: 151,292,457.

Fiscal year: 2003; Total number of in-bond cases: 3,717; Total assessed 
amounts for liquidated damages: 64,226,161.

Source: U.S. Customs and Border Protection.

Note: An insured party must pay "liquidated damages"--or a monetary 
fine-to CBP if the insured party has breached the terms of the bond.

[End of table]

In-bond System Lacks Automation and Critical Information to Properly 
Monitor Cargo Movement: 

At present, CBP lacks a fully automated system that can track the 
movement of in-bond transfers from one port to another. Much shipment 
information must be entered manually--a time-consuming task when 
thousands of in-bond shipments must be processed every day--and as a 
result, recorded information about in-bond shipments is minimal and 
records are often not up to date. In addition, in-bond arrival and 
departure information recording is not always timely; and according to 
our survey results, insufficient cargo information, along with a lack 
of communication between U.S. ports about in-bond shipments, makes it 
difficult for ports of destination to monitor cargo and know the number 
of in-bond shipments to expect. CBP has begun to automate its in-bond 
system but concerns remain.

Under Current CBP Procedures, In-bond Shipments Transit with Minimal 
Information Provided to CBP: 

By definition, an in-bond movement is entry for transportation without 
appraisement. CBP collects significantly less information on in-bond 
shipments than regular entries that are appraised. While CBP has the 
ability to collect additional information for textile products, our 
survey results show that very little information is collected by CBP 
for in-bond shipments in general.

To process an in-bond shipment, all in-bond paper transactions require 
a Customs Form 7512, Transportation and Entry form. This form is filled 
out by brokers and submitted to the port of arrival. According to many 
in-bond personnel responding to our survey, the information that is 
provided on this form to allow the shipment to travel in-bond is often 
minimal, capturing some, but not all, shipment manifest information, 
shipment data, and carrier data. They also responded that the 
information on the Customs Form 7512 is often vague, with not enough 
descriptions of the commodities shipped. The form also lacks any 
invoice or visa information--information that is critical for shipment 
targeting. This lack of information causes difficulty in tracking. 
Without this information, CBP is unable to effectively track in-bond 
shipments.[Footnote 41]

In-bond shipments of textiles or textile products have specific 
description requirements. CBP regulations require that these shipments 
be described in such detail as to allow the port director to estimate 
any duties or taxes due. In addition, the port director may require 
evidence of the approximate correctness of value and quantity or other 
pertinent information.[Footnote 42] However, our survey results show 
that such additional information has not been obtained in practice.

CBP's Recording of Arrival and Departure In-bond Information Is Not 
Always Timely: 

In-bond data are not entered in a timely, accurate manner, according to 
some port in-bond personnel we spoke with, as well as some survey 
respondents. Currently, CBP accounts for goods that initially arrive at 
one CBP port (port of arrival) but are shipped immediately to the port 
of entry (port of destination) through an in-bond module in CBP's 
ACS.[Footnote 43] For automated entry forms submitted on electronic 
manifests, departure data can be entered in ACS automatically showing 
that an in-bond transfer is planned from the port of arrival. For 
nonautomated entries (paper), CBP officials are supposed to input 
departure data manually at the port of arrival to establish 
accountability for the merchandise. When the goods arrive at the port 
of destination, personnel are to input data indicating that the goods 
have arrived, at which time accountability is transferred from the port 
of arrival to the port of destination.

However, at three of the seven ports we visited, officials stated that 
the departure and arrival information was not consistently maintained, 
because personnel did not input data promptly. As the volume of 
shipments transiting via in-bond has increased, the workload for ports 
across the country to enter this information has created a backlog, 
often resulting in entries that are never entered into the system. More 
than half of the 29 ports we surveyed reported that between 50 and 100 
percent of their in-bond entries were paper entries. At two of the 
largest ports processing the highest volume of in-bond entries, 
officials reported that more than 75 percent of the entries received 
were paper entries requiring that staff manually enter information. CBP 
personnel at two major ports told us that in-bond data are often not 
entered into the system at the port of arrival, because CBP lacks the 
personnel to enter in-bond information for every shipment.

Communication between Ports Regarding In-bond Arrival/Departure Data Is 
Minimal: 

Results from our survey showed that 80 percent of the ports did not 
track in-bond shipments once they left the port of arrival. A CBP 
official at the Port of Laredo, Texas, a major port of destination, 
said that they have no way of knowing the number of shipments intended 
to arrive at their port. Without proper communication between them, 
ports are unable to determine the location of a shipment traveling in-
bond until it reaches its destination. As a result, personnel at the 
port of destination were unable to anticipate a shipment's arrival and 
thereby identify and report any delayed arrivals, because a record of 
departure had never been set up. However, some ports such as Laredo, 
Texas are beginning to communicate with other ports more frequently to 
anticipate and track in-bond shipments.

Finally, although CBP has computer-generated reports available to 
identify in-bond shipments that were not reported and closed within the 
required 30 days, 70 percent of ports we surveyed report that they have 
never used these reports. They said they do not do so because (1) they 
either did not consider the report to be reliable or (2) they had never 
heard of these reports. Tracking overdue shipments is a critical 
internal control, because it alerts CBP to shipments that never made it 
to their stated destinations. Without consistent examination of overdue 
shipments, CBP cannot account for in-bond shipments that failed to meet 
the time requirements for delivery.

We reported these limitations in 1994 and 1997, and we made several 
recommendations to CBP on improving the monitoring of in-bond 
shipments.[Footnote 44] In 1998, CBP initiated the TINMAN Compliance 
Measurement Program to address some of the weaknesses noted in our 1997 
report, including the ability to generate reports to follow-up on 
overdue shipments. In 2001, the Treasury Department's Inspector General 
conducted a financial management audit and found that although TINMAN 
resolved some of the weaknesses found in prior audits, CBP was still 
unable to ensure that goods moving in-bond were not diverted into U.S. 
commerce, thereby evading quotas and proper payment of duties. Results 
from our survey show that this compliance program is not consistently 
implemented across ports.

CBP Is Making Progress in Automating Its In-bond System; However, 
Concerns Remain: 

In March 2003, CBP launched an initiative to automate the in-bond 
system with a pilot program called the Customs Automated Form Entry 
System (CAF's), currently being tested at six U.S. ports.[Footnote 45] 
CAF's is an interim step toward full automation. It is intended to 
allow more detailed shipment data to be entered into the system 
electronically, thus reducing the amount of time personnel must spend 
entering shipment data. The CAF's program is currently voluntary, and, 
so far, about 8 to 10 percent of the brokers at the pilot ports are 
participating. However, according to a 2003 CBP Action Plan, all land 
border truck ports will be required to use the automated in-bond system 
by midyear 2004. Nevertheless, no time frame yet exists for deploying 
CAF's at other locations.

Although CAF's will improve automation of the in-bond system, it will 
not resolve the tracking of in-bonds until full automation occurs. When 
we spoke to CBP headquarters officials about this continuing weakness, 
they stated that they had not made additional improvements to the in-
bond program, because those improvements will be made when their new 
Automated Commercial Environment (ACE) computer system is rolled out. 
CBP stated that it does not have a time frame for deploying the system 
to fully automate in-bonds because development is still under way but 
it estimated this might be accomplished within 3 years. Without a 
definite time frame, it is not clear if the automation of in-bonds will 
actually be implemented.

In-bond Shipments Are Not Consistently Targeted and Examined Before 
Leaving the Arrival Port: 

Although all incoming cargo is targeted for national security purposes, 
once the paperwork is filled out for a shipment to travel in-bond, CBP 
does not generally perform any additional targeting for these 
shipments. CBP instead focuses on targeting shipments making an 
official entry into U.S. commerce. The New York STC also does not 
analyze information from in-bond shipments in order to perform 
additional targeting. Conducting additional targeting for in-bond is 
also critical because in-bond shipments that are not identified as 
high-risk shipments by Container Security Initiative may go through CBP 
undetected and without inspection. Recognizing the need for targeting 
in-bond shipments, some ports we surveyed responded that they have 
begun to target in-bond shipments. However, targeting is not 
consistently performed because ports do not have the staff to conduct 
targeting or exams. Port management officials we spoke with at two 
major ports stated that since the September 11 attacks, resources have 
shifted to other antiterrorism areas. In addition, because brokers for 
in-bond shipments at the port of arrival provide very little 
information regarding shipments, targeting of in-bond shipments is 
difficult to conduct (See fig. 9 for illustration of in-bond shipment 
process and points of concern).

Figure 9: Weaknesses in the In-bond Process: 

[See PDF for image]

[End of figure]

CBP officials at most of the ports we visited cited resource 
constraints as a top reason for not inspecting in-bond shipments. For 
example, CBP officials at the Los Angeles/Long Beach, California, port-
-one of the busiest, with the highest volume of in-bond entries--told 
us that the current understaffing does not allow examination for many 
in-bond shipments. Moreover, results from our survey showed that more 
than 80 percent of the 13 area ports we surveyed do not have full-time 
staff dedicated to inspecting in-bond shipments. Some ports responded 
that if they had more staff dedicated to in-bond shipments, they would 
have a greater ability to inspect in-bond shipments. In addition, seven 
of the eight largest ports that responded to our survey stated that 
inspectors dedicate less than 10 percent of their time to in-bond 
inspections. For example, CBP officials at the port of New York/Newark 
said that they estimated that less than 2 percent of in-bond entries 
are actually inspected.

Nature of In-bond Regulations May Make It Difficult to Monitor In-bond 
Shipments: 

According to several CBP in-bond personnel we spoke with at two ports, 
certain provisions in the in-bond regulations make it more difficult to 
track in-bond shipments. These regulations pertain to (1) whether 
importers can change a shipment's final destination without notifying 
CBP and (2) the time allowed for in-bond shipments to reach their final 
destination.

Under the regulations, an in-bond shipment can be diverted to any 
Customs port without prior notification to CBP, except where diversions 
are specifically prohibited or restricted. For example, an importer 
with a shipment arriving in Los Angeles may declare that it will travel 
in-bond to Cleveland, Ohio. However, after filing the paperwork, the 
importer may then elect to change the final destination to New York, 
without filing new paperwork or informing CBP. The information provided 
to CBP at the port of arrival will still state Cleveland as a final 
destination. CBP has no way of knowing where the shipment is going 
until and if it shows up at another port.

For in-bond shipments of textiles or textile products, a change in 
destination requires approval of CBP's director at the port of 
origin.[Footnote 46] However, officials at three ports that handle high 
volumes of textile in-bond shipments said that they were either unaware 
of the regulation or that it was too difficult to enforce due to the 
high volume of shipments they processed.

Another problem CBP in-bond personnel mentioned in monitoring in-bond 
movements is the extensive time allowed to carriers to transport 
merchandise across the country. The Tariff Act of 1930 established the 
in-bond system and CBP regulations set time limits at 30 days for the 
delivery of merchandise at the port of destination for entry or for 
exportation.[Footnote 47] Port officials stated that this time limit is 
excessive and may contribute to the diversion of cargo by giving 
carriers too much time to move merchandise to different locations. 
Tracking would be easier if a carrier had a more restricted time period 
during which brokers or carriers would have to close out the in-bond, 
such as 10 to 20 days, depending on the distance between the port of 
arrival and the final port of destination, according to these CBP 
officials.

Mexico's in-bond system works differently than the U.S. system. In 
fact, when we spoke with Mexican Customs officials at the port of Nuevo 
Laredo in Mexico regarding illegal textile transshipment, they said 
that their in-bond system could track the movement of goods more easily 
because (1) importers were not allowed to change the final destination 
and (2) carriers are given a certain time limit to deliver merchandise, 
depending on the distance between the port of arrival and the port of 
destination.

Shipments Declaring Exportation to Mexico Lack Sufficient Monitoring to 
Ensure Actual Exportation: 

Several BICE investigations have uncovered in-bond fraud concerning 
textile shipments that were allegedly exported to Mexico but instead 
entered into U.S. commerce to circumvent quota and duty payment. To 
cope with this problem, BICE officials in Laredo, Texas, initiated an 
effort to improve the verification of exports to Mexico by requiring 
that for shipments processed for immediate exportation, brokers had to 
submit a Mexican document known as a "pedimento," as proof that 
shipments were exported to Mexico. However, these documents are easily 
falsified and can be sold to willing buyers for submission to CBP, 
according to Laredo CBP officials. When we spoke with Mexican Customs 
officials at the Nuevo Laredo, Mexico, port, they acknowledged that 
reproducing false government pedimentos is easy to do and that it is 
not a reliable method for verifying exportations. The broker community 
in Laredo, Texas, also expressed serious concerns with fraudulent 
activity by some Mexican government officials. They suspected that 
pedimentos were being sold by some Mexican Customs officials to 
facilitate the diversion of goods into the United States. In fact, in 
August 2003, the port director of Nuevo Laredo, Mexico, was indicted 
for selling false Mexican government documents for $12,000 each.

Moreover, many ports along the U.S.-Mexican border do not have export 
lots where trucks with shipments bound for Mexico can be physically 
examined to ensure that the shipments are actually exported to Mexico 
instead of entering the U.S. commerce.[Footnote 48] Although export 
lots were opened at one time, they have been closed at many ports as a 
result of resource constraints. When export lots were open, inspectors 
were able to verify exportation because carriers were required to 
physically present the truck with the shipments for inspection.

Since our review began, CBP has opened an export lot in Laredo, Texas, 
and has required that all shipments declared for export to Mexico be 
presented and inspected at the export lot. However, not all ports along 
the border have export lots, and Laredo in-bond personnel have noticed 
that as a result many trucks were now choosing to clear their goods 
through those ports without export lots. CBP officials we interviewed 
in Laredo, along with the members of the Laredo broker community, have 
raised this concern and have noted the need to reopen export lots as a 
way to minimize fraud.

As of October 20, 2003, a CBP directive mandated that all merchandise 
to be exported should be presented for export certification. 
Certification is not to take place until the merchandise is physically 
located where export is reasonably assured. According to a senior CBP 
official, as a result of this directive, ports with export facilities 
have reopened them or provided a reasonable alternative such as 
reporting to the import facility. He also stated that CBP has developed 
plans to verify that at least a representative sample of reported 
exports are actually reported. However, officials we spoke with at two 
ports are not sure whether they will have the resources to verify every 
in-bond export. A senior CBP official confirmed this problem, saying 
that verification of exports might not occur during periods of staffing 
constraints.

CBP Has Experienced Serious Challenges in Enforcing Textile 
Transshipment: 

CBP has broad enforcement authority regarding illegal textile 
transshipment, but it has experienced challenges in implementing 
enforcement actions. These challenges include a complex and lengthy 
investigative process, as well as competing priorities. As a result of 
these challenges, CBP generally has relied on excluding transshipped 
textiles from entry into the United States, rather than seizing 
merchandise or assessing penalties. In addition, addressing in-bond 
violations presents special challenges due to weaknesses in CBP's 
internal controls and in the nature of the penalty structure. CBP also 
employs other means to deter illegal transshipment, such as informing 
the importer community of violations of textile transshipment laws and 
by making available lists of foreign violators.

CBP Has Extensive Authority to Address Textile Transshipment 
Violations: 

CBP has broad authority to act when violations of textile transshipment 
occur. Depending on the circumstances, CBP may pursue the following 
enforcement actions: 

* Exclusion of the textile shipment. CBP can exclude textiles from 
entry if the importer has not been able to prove country of origin. 
Before admitting goods into the United States, CBP may ask for 
production records, review them, and then make a determination on 
origin. The importer must be able to prove the textiles' country of 
origin. If CBP cannot clear the goods within 30 days, the textiles are 
automatically excluded. CBP may also deny entry of textiles if 
production documents reveal that the textiles were produced at a 
factory identified in the Federal Register by the Committee for the 
Implementation of Textile Agreements, as discussed below.

* Seizure of the textile shipment. CBP can seize the textiles, if it 
has evidence that violations of a law have occurred. By law,[Footnote 
49] seizure is mandatory if textiles are stolen, smuggled, or 
clandestinely imported. In other instances, CBP can exercise discretion 
in deciding whether seizure is the most appropriate enforcement action. 
When seizure is invoked, CBP takes physical possession of the 
merchandise. In order for textiles to be seized, there must be specific 
statutory authority that allows for the seizure.

* Imposition of penalties. CBP has several administrative penalties 
available, based on the nature of the violation. CBP may levy 
administrative penalties locally at the port level without conducting 
an investigation. Alternatively, CBP may refer a suspected violation 
for an investigation by BICE. The outcome of the BICE investigation may 
be a referral to (1) CBP for an administrative penalty or (2) a 
referral to the U.S. Attorney for possible criminal prosecution of the 
importer and its principal officers and the imposition of criminal 
monetary penalties. Thus, some monetary penalties result from 
investigations performed by BICE, while others simply result from 
activity within a port. In addition to civil administrative penalties, 
CBP may also assess liquidated damages claims against bonded cartmen 
(carriers) implicated in violations involving cargo transported in-
bond. CBP's Office of Fines, Penalties and Forfeitures is responsible 
for assessing certain penalty actions for transshipment violations and 
is responsible for adjudicating penalties, liquidated damages claims 
and seizures occurring at the ports, up to a set jurisdictional amount.

* Pursuit of judicial criminal or civil prosecutions. CBP may refer 
unpaid civil administrative penalty or liquidated damages cases to the 
Department of Justice for the institution of collection proceedings 
either in federal district court or in the Court of International 
Trade. Additionally BICE investigates potential violations to establish 
the evidence needed for criminal prosecution of the violations. When 
BICE deems sufficient evidence can be established, cases may be 
referred to the appropriate U.S. Attorney's Office for criminal 
prosecution.

CBP Relies Primarily on Exclusions Due to Lengthy and Complex 
Investigative Processes: 

CBP has increasingly relied on exclusions rather than seizures or 
penalties for textile transshipment enforcement for two primary 
reasons. First, it is easier to exclude transshipped goods than to 
seize them because exclusions require less evidence. Second, although 
excluded textile shipments may incur penalties, often CBP does not 
assess penalties against importers of excluded merchandise because it 
is impossible to attach specific culpability to the importer. According 
to CBP officials, absent the evidence to conclude the importer failed 
to exercise reasonable care, it would be difficult to sustain a penalty 
against an importer of excluded merchandise. CBP also avoids the 
lengthy and complex process associated with criminal and civil 
prosecutions and penalties by excluding the shipments.

CBP Relies on Exclusions for Enforcement: 

In enforcing textile transshipment violations, CBP has relied more on 
exclusions than on seizures or penalties. Textiles may be excluded if 
the importer is unable to prove country of origin, whereas seizures may 
occur when false country of origin documents are presented to evade 
quota or visa restrictions--a situation requiring a higher standard of 
evidence. Exclusions usually have an immediate effect, although if the 
importer chooses to protest the decision to exclude, the importer can 
appeal CBP's decision to the Court of International Trade. Import 
specialists in Long Beach/Los Angeles said that when an exclusion 
determination is made, they are ready to go to court if needed. The 
importer can ship to another country, abandon, or destroy the excluded 
textiles.

CBP may elect not to levy penalties on excluded goods where culpability 
of the importer cannot be established, and generally issues penalties 
against the importer only if the importer is implicated or the 
transshipped textiles entered the commerce of the United States. 
However, a senior CBP official said that the exclusion of textiles is 
considered a better deterrent than penalties because the importer 
cannot receive the goods and, therefore, cannot get them into U.S. 
stores that are waiting for them--often for seasonal shopping. Also, 
the complexity and length of investigations and litigation are no 
longer of concern, since the goods are simply excluded from entering 
the United States. Table 3 presents port-level data on selected 
enforcement actions in 2000 to 2002.

Table 3: CBP Port-Level Exclusions, Penalties, and Seizures of 
Textiles, 2000-2002 (Dollars in millions): 

Seizures; 
2000: Number: 43; 
2000: Value: $2.10; 
2001: Number: 14; 
2001: Value: $0.31; 
2002: Number: 24; 
2002: Value: $0.79.

Penalties; 
2000: Number: 54; 
2000: Value: 4.4; 
2001: Number: 19; 
2001: Value: 0.13; 
2002: Number: 45; 
2002: Value: 0.37.

Exclusions; 
2000: Number: 402; 
2000: Value: 20.2; 
2001: Number: 308; 
2001: Value: 22.2; 
2002: Number: 455; 
2002: Value: 20.0. 

Source: CBP's Strategic Trade Center.

Note: CBP was not able to provide data on prosecutions.

[End of table]

Investigative Processes for Seizures and Penalties Are Complex and 
Lengthy: 

The investigative phase for textile transshipment cases can be a 
complex and lengthy effort, resulting in few criminal penalties. 
Investigators often must follow convoluted paper trails for the 
movement of goods and money, obtain accounting records--sometimes 
having to get Internal Revenue Service records (which can be a 6 to 9 
month process). They also may have to subpoena banks, interview brokers 
and shippers, get foreign government cooperation, and pursue new leads 
as they arise. A BICE official noted that it is often difficult to 
pursue textile transshipment criminal cases because, unlike with some 
crimes, there is no "smoking gun" at the port. For example, when drugs 
are found, the drugs themselves are evidence of the violation. With 
textile transshipment, an illegal T-shirt will look no different than a 
legal one. The basis for the violation is established by proving that a 
false country of origin was knowingly claimed and that the importer 
intended to commit fraud, committed negligence, or gross negligence.

Although CBP does not keep records on the length of time for 
disposition of cases, import specialists and inspectors voiced concern 
that investigations can be lengthy. For example, a senior CBP official 
noted that in 1989, there were 83 illegal entries. Although some civil 
cases went to the Court of International Trade in 1990, the first 
decisions were made in 1993, and the last were not decided until 1995, 
1997, and 1999. Two of the larger civil cases against multinational 
corporations took 7 and 10 years to pursue at the Court of 
International Trade. Accordingly, CBP has a process in place to 
determine whether to accept offers to settle civil cases out of court, 
which includes evaluating the litigation risk and the resources CBP 
would have to devote to a trial.

One factor relating to the length of the case is that, if BICE 
initiates a criminal investigation, any action relating to that case is 
held in abeyance pending possible criminal prosecution of the case. If 
sufficient evidence exists to justify a criminal prosecution, the case 
then goes to the U.S. Attorney's Office. This move delays related civil 
proceedings. BICE officials in Los Angeles/Long Beach noted that U.S. 
attorneys are short on resources, since they are also working on drug-
smuggling and money-laundering investigations; and in the past 10 years 
in that district, fewer than 10 cases have been sent to the U.S. 
Attorney's Office and prosecuted. They noted, though, that the U.S. 
attorneys had not rejected any textile transshipment cases that BICE 
had brought to them. Neither CBP nor the Justice Department could 
provide exact figures on the numbers of prosecutions of illegal textile 
transshipments, but CBP officials noted that the figures were low.

In addition, investigating a case may entail allowing the suspect 
textile transshipments to continue for a while, to obtain sufficient 
evidence. However, investigators can be pulled off a particular textile 
investigation for a higher priority; and then the textile case sits, 
with CBP sometimes never getting back to it, according to a senior CBP 
official.

When CBP pursues a case, the monetary amounts of the penalties may get 
reduced, according to CBP staff, in line with CBP's mitigation 
guidelines. CBP data are not available to summarize the penalty amounts 
assessed and the final mitigated penalty amounts. But in one example, 
CBP discovered that a company transshipped $600,000 worth of blue jeans 
to evade quota and visa restrictions. Company officials pled guilty 
and, in the end, paid CBP civil penalties totaling only $53,000. CBP 
officials in the field expressed concern that substantial penalty 
reductions may be a disincentive to pursuing penalties or 
investigations.

CBP's Enforcement of In-bond Violations Presents Challenges: 

CBP has experienced two basic challenges in deterring in-bond 
diversions through enforcement actions. First, the previously discussed 
weaknesses in the system make it difficult for CBP to track in-bond 
movements and catch the violators. Second, when CBP discovers a breach 
of a bond by a bonded cartman (carrier), the total liability associated 
with the bond breach is limited to the value of the bond, rather than 
the value of the merchandise. Additionally, it is difficult for CBP to 
enforce payment of unpaid penalties and liquidated damages because the 
Department of Justice does not have sufficient resources available to 
prosecute all the referrals for collections actions.

Because in-bond shipments are not tracked, CBP cannot account for all 
the in-bond shipments that fail to fulfill the requirements of timely 
cargo delivery. According to a senior BICE official involved in in-bond 
investigations, when an investigation is initiated, BICE must 
physically track the cargo to prove a violation has occurred. This is 
difficult because the cargo is often not at the port but at a 
warehouse, and CBP's surveillance must be constant in order to 
establish that the cargo was not exported.

When CBP does find in-bond diversion occurring, it typically seeks 
liquidated damages[Footnote 50] for breach of the bond. When CBP 
demands payment of liquidated damages, the claim cannot exceed the 
amount of the bond. Several CBP and BICE officials stated that the bond 
amounts set by CBP regulations are low, compared with the value of the 
merchandise.[Footnote 51] The original bond amount for textile entries 
relates to the total value of shipments. However, according to BICE 
officials, convention has allowed bonds for bonded cartmen (carrier) to 
be generally set at $25,000-$50,000 a year--a minimal amount that, as 
one BICE investigator put it, is the "cost of doing business."[Footnote 
52] For example, if a textile shipment with a domestic value of $1 
million is illegally diverted, liquidated damages can be set at three 
times the value of the merchandise. However, if the bond is set at 
$50,000, the demand for payment of liquidated damages cannot go above 
this bond amount. Furthermore, violators may request mitigation of the 
$50,000 fine so that the resulting mitigation may only be as little as 
$500.[Footnote 53] Bond amounts are usually set every calendar year 
and, if the liquidated damages claims in one year exceed that year's 
bond amount, the next year's bond cannot be used to pay the liquidated 
damages incurred the previous year.[Footnote 54]

In 1989, CBP recognized the problem in which the amount of delinquent 
liquidated damages claims against a bonded carrier exceeded the amount 
of the bond. CBP then issued a directive that required district 
directors to periodically review bond sufficiency.[Footnote 55] CBP 
again issued directives in 1991 and 1993 to provide guidelines for the 
determination of bond sufficiency.[Footnote 56] However, CBP and BICE 
officials we spoke with stated that inadequate bond amounts continue to 
make liquidated damages for in-bond diversion a weak deterrent.

CBP Also Uses Informed Compliance and Outreach to the Community as 
Deterrence Methods: 

CBP also employs methods to deter illegal transshipment by informing 
the importer community of violators of illegal textile transshipment. 
CBP officials view the publication of violators as a means to deter 
transshipment. CBP and CITA maintain various lists of foreign 
violators, in part, for this purpose. In addition, under the Customs 
Modernization Act,[Footnote 57] CBP is obligated to use informed 
compliance and outreach with the trade community. CBP regularly meets 
with the trade community to keep it informed of the latest enforcement 
information and to help encourage reasonable care on its part. CBP is 
looking increasingly at patterns of company conduct to establish lack 
of reasonable care. It currently is investigating or monitoring 40 U.S. 
importers it suspects may have violated the reasonable care standard.

CBP Maintains Lists to Serve as Deterrence: 

CBP maintains three lists associated with illegal transshipment 
violations: the "592A list," the "592B list," and the "administrative 
list.": 

* The 592A list is published every 6 months in the Federal Register and 
includes foreign manufacturers who have been issued a penalty claim 
under section 592A of the Tariff Act of 1930.

* The 592B list enumerates foreign companies to which attempts were 
made to issue prepenalty notices, but were returned "undeliverable" and 
therefore could not be included on the 592A list.

* The administrative list identifies companies that have been convicted 
or assessed penalties in foreign countries, primarily Hong Kong, Macau, 
and Taiwan. CBP decided that because these companies had due process in 
their countries and were determined by that country's law to have 
illegally transshipped textiles (false country of origin), CBP could 
legally make this information public, according to a senior CBP 
official. This list is updated as necessary. Between 1997 and October 
2003, the names of 488 companies from Hong Kong, 7 from Taiwan, and 34 
from Macau have been published in the administrative list.

CITA Maintains an Exclusion List and May Issue Chargebacks: 

CITA has a policy in place whereby a letter is sent to the government 
of an offending country requiring it to address what is being done to 
enforce anti-transshipment policies. If the government does not 
respond, the company is placed on an "exclusion" list; and goods from 
that company may not be shipped to the United States. This exclusion 
could run anywhere from 6 months to 5 years, but the standard period is 
2 years. In 1996, CITA issued a new policy stating that all goods could 
be banned if a TPVT visit was not allowed in that factory. After the 
policy was issued, Hong Kong began allowing the United States to 
observe enforcement efforts in factories, although it does not allow 
CBP access to companies' books and records. Extensive enforcement 
efforts led to 500 convictions in Hong Kong courts for origin fraud 
from 1997 to October 2003.

When CITA has evidence of textile transshipment from CBP's TPVTs or 
other sources, it may also apply chargebacks if it has evidence of the 
actual country of origin and the goods have entered the commerce of the 
United States. Chargebacks occur when goods were not charged against 
quotas as they should have been. CITA then will go ahead and "charge 
those goods back" against the appropriate levels for an appropriate 
country. For example, if textiles have been transshipped through 
Vietnam, but their actual country of origin was found to be China, 
China's quota will be reduced by the appropriate amount. CITA also has 
the authority to "triple charge" goods. Although CITA has the authority 
to issue chargebacks, over the last decade it has only issued 
chargebacks against China and Pakistan. The last chargebacks were 
issued in 2001 for a sum of $35 million. From 1994 to 2001, chargebacks 
totaled $139 million. Chargebacks require a higher burden of proof 
because they require that the actual country of origin be established.

CBP Conducts Outreach with the Textile Trade Community: 

When the Customs Modernization Act became effective on December 8, 
1993, CBP, then known as Customs, was given the responsibility of 
providing the public with improved information concerning the trade 
community's rights and responsibilities. In order to do so, Customs 
created initiatives aimed at achieving informed compliance, that is, to 
help ensure that the importers are meeting their responsibilities under 
the law and to help deter illegal transshipment. Accordingly, Customs 
issued a series of publications and videos on new or revised Customs 
requirements, regulations, or procedures. CBP also has the 
responsibility to inform importers of their duty to act in accordance 
with its reasonable care standard. To that end, CBP provides guidance 
to help importers avoid doing business with a company that may be 
violating CBP laws. For example, CBP suggests the U.S. importer ask its 
supplier questions regarding the origin of the textiles, the labeling, 
and the production documentation, among others. CBP is currently 
investigating 40 importers for potential violations of the reasonable 
care standard. In a continuing effort to deter transshipment and meet 
its own responsibilities, CBP officials regularly meet with members of 
the trade industry to share information about the latest developments 
regarding textile transshipment.

Conclusions: 

Despite increasing trade volumes and heightened national security 
priorities, CBP has maintained a focus on textile transshipment by 
consolidating its various textile enforcement activities and by using 
its expertise to target its review process at the most suspect 
shipments. The actual number of textile and apparel shipments CBP 
reviews at the ports is low (less than 0.01 percent), and in 2002 about 
24 percent of these reviews resulted in exclusions, 2 percent in 
penalties, and 1 percent in seizures. CBP's overall efforts at 
deterrence are aimed more at excluding problem shipments from U.S. 
commerce and emphasizing importer compliance responsibilities rather 
than at pursuing enforcement actions in the courts, due to the 
complexity and length of the investigative process and past experiences 
with ultimate imposition of minimal penalties. The low likelihood of 
review and minimal penalties limit the system's deterrent effect and 
make high-quality intelligence and targeting essential to focusing 
limited resources on the highest risk overseas factories and shipments. 
Although textile import quotas on WTO members will be eliminated on 
January 1, 2005, with the expiration of the Agreement on Textiles and 
Clothing, the roles of the STC and the port import specialists will 
continue to be important, because incentives will continue to exist to 
illegally transship merchandise through countries benefiting from trade 
preferences and free trade agreements. In addition, quotas will remain 
on Vietnam until its WTO accession, and quotas may be placed into 
effect on certain imports from China under the safeguard provision of 
China's WTO Accession Agreement.

Because transshipment will remain a concern beyond this coming year, 
CBP will still face challenges in implementing its monitoring system. 
First, CBP has been slow to follow up on some of the findings from the 
TPVT factory visits, which are one of the key sources of information 
used in decisions on what textile shipments to review. CBP has not 
fully made the results of these trips known and acted quickly by 
entering all national criteria at an earlier stage rather than waiting 
until CBP approves the TPVT report. CBP has the authority to review any 
shipments presented for import. The result of waiting for TPVT report 
approval may mean that some suspect shipments are not reviewed or 
inspected at the ports. Second, CBP faces challenges in ensuring that 
additional import specialists are placed in Customs Attach Offices 
overseas to assist with textile monitoring and enforcement activities. 
CBP would be able to further facilitate cooperation on textile issues, 
follow up on TPVT findings, and supplement the enforcement information 
it needs to trigger port textile reviews if it placed more import 
specialists in Customs Attach Offices in high-risk countries.

In addition, we found weaknesses in CBP's current monitoring of in-bond 
cargo transiting the United States, and CBP has only in the last year 
begun to intensively address the issue of in-bond textile and apparel 
shipments being diverted into U.S. commerce. CBP's current in-bond 
procedures may facilitate textile transshipment by allowing loosely 
controlled interstate movement of imported cargo upon which no quota or 
duty has been assessed. Internal control weaknesses have meant that CBP 
places an unacceptably high level of reliance on the integrity of 
bonded carriers and importers. Without an automated system and detailed 
and up-to-date information on in-bond shipments, CBP cannot properly 
track the movement of in-bond cargo. In addition, limited port 
targeting and inspections of in-bond shipments constitute a major 
vulnerability in monitoring possible textile transshipments and other 
areas of national security. CBP's regulations regarding delivery time 
and shipment destination also hinder proper monitoring. Unless these 
concerns are addressed, proper revenue collection, compliance with 
trade agreements, and enforcement of national security measures cannot 
be ensured. While CBP has taken some preliminary steps, much remains to 
be done before the in-bond system has an acceptable level of internal 
controls.

Moreover, CBP's system for assessing liquidated damages does not 
provide a strong deterrent against in-bond diversion. With bond amounts 
set considerably lower than the value of the merchandise and mitigation 
of liquidated damages down to a fraction of the shipment value, 
violators may see paying the bond as a cost of doing business and may 
not perceive it as a deterrent against the diversion of goods. CBP has 
the authority to review bond sufficiency and can change the bond 
amounts to provide an effective deterrent against the illegal diversion 
of goods.

Recommendations for Executive Action: 

To improve information available for textile transshipment reviews at 
CBP ports and to encourage continued cooperation by foreign 
governments, we recommend that the Commissioner of U.S. Customs and 
Border Protection take the following two actions: 

* Improve TPVT follow-up by immediately entering all criteria resulting 
from overseas factory visits into ACS to trigger port reviews.

* Assign import specialists to Customs Attach Offices in high-risk 
textile transshipment countries to assist with textile monitoring and 
enforcement activities, including conducting follow-up to TPVTs.

To improve its monitoring of in-bond cargo and ensure compliance with 
U.S. laws and enforcement of national security, we also recommend that 
the Commissioner of U.S. Customs and Border Protection take the 
following four steps: 

* Place priority on timely implementation of a fully automated system, 
including more information to properly track the movement of in-bond 
cargo from the U.S. port of arrival to its final port of destination.

* Increase port targeting and inspection of in-bond shipments.

* Routinely investigate overdue shipments and, pending implementation 
of an improved automated system, require personnel at ports of entry to 
maintain accurate and up-to-date data on in-bond shipments.

* Assess and revise as appropriate CBP regulations governing (1) the 
time intervals allowed for in-bond shipments to reach their final 
destinations, taking into consideration the distance between the port 
of arrival and the final port of destination and (2) whether importers 
or carriers can change the destination port without notifying CBP.

Finally, to strengthen the deterrence value of in-bond enforcement 
provisions, we recommend that the Commissioner of U.S. Customs and 
Border Protection review the sufficiency of the amount of the bond for 
deterring illegal diversion of goods.

Agency Comments: 

The Department of Homeland Security provided written comments on a 
draft of this report, which is reproduced in appendix III. The 
Department agreed with our recommendations and stated that it would 
take the appropriate steps needed to implement the recommendations. In 
its letter, the department listed its key planned corrective actions 
for each of our recommendations. In addition, we received technical 
comments from the Departments of Homeland Security, Commerce, and the 
Office of the U.S. Trade Representative, which we incorporated in this 
report as appropriate.

We are sending copies of this report to appropriate congressional 
Committees and the Secretaries of Homeland Security, Commerce, and 
State and the Office of the U.S. Trade Representative. We will also 
make copies available to others upon request. In addition, this report 
will be available at no charge on the GAO Web site at [Hyperlink, 
http: //www.gao.gov] http: //www.gao.gov.

If you or your staff have any questions about this report, please 
contact me on (202) 512-4128. Additional contacts and staff 
acknowledgments are listed in appendix IV.

Signed by: 

Loren Yager: 
Director, International Affairs and Trade: 

[End of section]

Appendixes: 

[End of section]

Appendix I: Objectives, Scope, and Methodology: 

In a legislative mandate in the Trade Act of 2002 (P.L. 107-210, Aug. 
6, 2002), Congress directed GAO to review U.S. Customs and Border 
Protection's (CBP)[Footnote 58] system for monitoring and enforcing 
textile transshipment and make recommendations for improvements, as 
needed, to the Chairman and the Ranking Minority Member of the Senate 
Committee on Finance and the Chairman and the Ranking Minority Member 
of the House Committee on Ways and Means. As discussed with Committee 
representatives, we have focused on answering the following questions: 
(1) how CBP identifies potential textile transshipment, (2) how well 
CBP's textile review process works to prevent illegal textile 
transshipment, (3) how effectively CBP monitors foreign textiles 
transiting the United States in its in-bond system before entering U.S. 
commerce or being exported, and (4) what challenges CBP experienced in 
using penalties and other means to deter illegal textile transshipment.

To examine how CBP identifies potential textile transshipment, we 
reviewed and analyzed internal planning documents and trade studies 
from the Office of Strategic Trade's Strategic Trade Center (STC) in 
New York City, which conducts analysis and targeting of textile 
transshipment. We also analyzed CBP foreign factory and cargo shipment 
reports and summaries from the STC; the Office of Field Operations' 
Textile Enforcement and Operations Division at CBP's headquarters; and 
some ports of entry, from 2000 to 2003. We collected and analyzed data 
from 2000 to 2003 on the targeting process from CBP's internal database 
and documents and reviewed how CBP collected the data. We examined the 
data for their reliability and appropriateness for our purposes. We 
found the data to be sufficiently reliable to represent CBP's targeting 
activity. In addition, we also collected official U.S. international 
trade statistics from the Census Bureau for 1993 to 2002, textile and 
apparel production statistics from the Census Bureau (Annual Survey of 
Manufacturers) for 1993 to 2001, and employment statistics from the 
Bureau of Labor Statistics (Current Employment Survey) for 1993 to 
2002. We defined "textile and apparel goods for international trade," 
based on the definition in the World Trade Organization's (WTO) 
Agreement on Textiles and Clothing (Annex), as well as additional 
textile and apparel goods not covered by the agreement but identified 
as textile and apparel goods by the Department of Commerce's Office of 
Textiles and Apparel on the Department of Commerce's Web site. We 
reviewed these statistics for their reliability and appropriateness for 
our purposes and found them sufficiently reliable to represent the 
trends and magnitude of trade, production, and employment in the 
textile and apparel sector. We also observed a targeting session at the 
STC in preparation for a foreign factory visit to El Salvador. In 
addition, we interviewed CBP officials in the Office of Strategic 
Trade's STC and Regulatory Audit Division, the Office of Field 
Operations, and in seven ports of entry (New York/Newark, New York; Los 
Angeles/Long Beach, California; Laredo, Texas; Columbus and Cleveland, 
Ohio; and Seattle and Blaine, Washington) about their targeting 
activities and roles. Together, these ports represent CBP service ports 
that processed 55 percent of textiles and apparel imported into the 
United States in 2002. However, we recognize that activities among 
individual ports of entry within CBP service port areas may vary from 
ports that we visited. To gain additional perspectives on CBP's 
targeting operations, we interviewed officials of the Department of 
Commerce and the Office of the U.S. Trade Representative (USTR), as 
well as former Customs officials and private sector business 
associations.

To examine CBP's textile review process to prevent illegal textile 
transshipment, we reviewed internal planning documents, directives, and 
reports of the Office of Field Operations' Textile Enforcement and 
Operations Division, the Office of International Affairs, and the 
Office of Strategic Trade's STC and Regulatory Audit Division covering 
the years 1999 to 2003. We visited seven ports of entry and observed 
operations. To review CBP's foreign factory visits, we observed a 
Textile Production Verification Team (TPVT) visit in El Salvador. To 
report on CBP's overall textile review activity, we collected data on 
TPVT visits and port-level textile review activity from 1996 to 2003 
from CBP's internal database and documents. We reviewed how CBP 
collected the data and examined the data for their reliability and 
appropriateness for our purposes. We found the data to be sufficiently 
reliable to represent CBP's foreign factory inspections and port-level 
activity. We interviewed CBP officials in the Office of Field 
Operations, the Office of International Affairs, the Office of 
Strategic Trade, and the seven ports of entry we visited. We also 
interviewed officials of the Department of Commerce, including the 
Committee for the Implementation of Textile Agreements (CITA) and the 
Office of Textiles and Apparel; USTR; and the Department of State; as 
well as former Customs officials and private sector business 
associations. In addition, we interviewed customs and trade officials 
in Hong Kong and Macao, as well as a Mexican embassy trade official in 
Washington, D.C., and Mexican port officials in Nuevo Laredo, Mexico. 
We communicated with Canadian officials through an exchange of written 
questions and answers.

To review how CBP uses its in-bond system to monitor foreign textiles 
transiting the United States before entering U.S. commerce or being 
exported, we observed in-bond operations at six of the ports of entry 
we visited: Newark, New Jersey/New York, New York; Long Beach/Los 
Angeles, California; Cleveland and Columbus, Ohio; Laredo, Texas; and 
Blaine, Washington. We reviewed documents on CBP's in-bond operations 
from the Office of Field Operations' Cargo Verification Division, as 
well as documents on in-bond penalties from the Office of Field 
Operations' Fines, Penalties, and Forfeitures Branch. We conducted 
interviews on the in-bond system with CBP officials in the Cargo 
Verification Division; the Fines, Penalties, and Forfeitures Branch; 
and the Textile Enforcement and Operations Division at headquarters; 
and at the ports of entry and Bureau of Immigration and Customs 
Enforcement (BICE) headquarters and Field Offices.

In addition, we conducted a survey of in-bond activities at 11 major 
U.S. area ports that process the highest levels of textile and apparel 
imports and 2 smaller area ports that also process textile and apparel 
imports. For each area port, we also requested that the survey be 
distributed to two additional subports that also processed textile and 
apparel imports. We asked ports to respond to the survey, based on in-
bond activities from October 2001 to May 2003. We received responses 
from all 13 area ports and 29 subports we surveyed. We selected ports 
for our survey, based on four criteria: (1) ports with the highest 
value of textile and apparel imports; (2) geographic distribution that 
included coastal, in-land, northern, and southern border ports; (3) 
ports with the highest value of textile and apparel imports by trade 
preference program (such as the African Growth and Opportunity Act and 
the Caribbean Basin Trade Partnership Act); and (4) ports of various 
sizes, allowing us to include smaller ports that also process textile 
and apparel imports. We found the data to be sufficiently reliable to 
review how the in-bond system monitors foreign textiles transiting the 
United States. Not all ports were able to provide data for the entire 
time period requested; therefore, we were not able to use some of the 
data for the missing time period. In addition, although we received a 
100-percent response rate, the in-bond data we received from the 13 
area ports and 29 subports are not representative of in-bond operations 
at all Customs ports. Copies of the survey are available from GAO.

To examine the challenges CBP experienced in using penalties and other 
means to deter illegal textile transshipment, we reviewed internal 
planning documents, memorandums, and reports, dating from 1999 to 2003, 
from former Office of Investigations officials now in the BICE, as well 
as from CBP's Offices of Chief Counsel; Field Operations (including the 
Textile Enforcement and Operations Division and the Fines, Penalties, 
and Forfeitures Division); Strategic Trade, (including the STC and 
Regulatory Audit Division); and Regulations and Rulings. We also 
reviewed CBP's enforcement authorities in the relevant statutes and 
federal regulations, as well as reviewing informed compliance 
publications and other information on CBP's and BICE's Web sites. We 
collected data on CBP's enforcement and penalty actions for the years 
2000 to 2002, from CBP's internal databases and documents. We reviewed 
how CBP collected the data and examined the data for their reliability 
and appropriateness for our purposes. We found the data to be 
sufficiently reliable to represent CBP's enforcement and penalty 
actions. We interviewed officials in BICE and in CBP's Offices of Chief 
Counsel; Field Operations (including the Textile Enforcement and 
Operations Division and the Fines, Penalties, and Forfeitures 
Division); Strategic Trade (including the STC and Regulatory Audit 
Division); and Regulations and Rulings, as well as at the seven ports 
of entry we visited, and associated BICE Field Offices. We also 
interviewed officials of the Department of Commerce, including CITA and 
OTEXA; as well as former Customs officials and private sector business 
associations.

We performed our work from September 2002 through December 2003 in 
accordance with generally accepted government auditing standards.

[End of section]

Appendix II: U.S. Textile and Apparel Trade, Production, and 
Employment: 

U.S. textile and apparel imports have grown considerably over the past 
decade and have been comprised largely of apparel products. In 2002, 
China surpassed Mexico as the largest foreign supplier of textile and 
apparel to the U.S. market, followed by Caribbean Basin countries that 
benefit from preferential access.[Footnote 59] New York and Los Angeles 
are the service ports that receive the largest share (by value) of 
textile and apparel imports, with Miami, Florida, and Laredo, Texas, 
important service ports districts for imports from Latin America. The 
United States is in the process of gradually phasing out textile and 
apparel quotas under a 1995 World Trade Organization (WTO) agreement, 
but a significant number of quotas are still to be eliminated at the 
end of the agreement's phase-out period on January 1, 2005. Elimination 
of these quotas is likely to affect trade patterns as more efficient 
producers acquire greater market share. Tariffs and other potential 
barriers, however, such as antidumping and safeguard measures, still 
exist and could still affect trade patterns and create an incentive for 
illegal textile transshipment. Also, as quotas are removed, a more 
competitive market may place increasing pressure on the U.S. textile 
and apparel industry. Industry production and employment in the United 
States has generally been declining in recent years, with employment in 
the apparel sector contracting the most.[Footnote 60]

Imports of Textile and Apparel: 

U.S. imports of textile and apparel products have nearly doubled during 
the past decade (1993 to 2002), rising from about $43 billion to nearly 
$81 billion.[Footnote 61] Because overall imports have also nearly 
doubled during the decade, textile and apparel products have maintained 
about a 7 percent share of total U.S. imports throughout this period. 
As figure 10 shows, the majority of U.S. textile and apparel imports 
are apparel products (about 73 percent in 2002). The remaining imports 
consist of yarn (10 percent), uncategorized textile and apparel 
products (9 percent), made-up and miscellaneous textile products (7 
percent), and fabric (2 percent).[Footnote 62]

Figure 10: Major Components of Textile and Apparel Imports, 1993-2002: 

[See PDF for image]

Note: Uncategorized imports of textile and apparel are those products 
not listed under the U.S. quota category system. These products may 
still fall into one of the four other categories, such as yarn or 
fabric.

[End of figure]

The major foreign suppliers of textile and apparel to the U.S. market 
are China, Mexico, and the Caribbean Basin countries. However, as 
figure 11 shows, no major supplier had more than a 15 percent share of 
overall textile and apparel imports in 2002. Also, after the top 10 
suppliers, remaining suppliers still provided more than a third of 
imports. These smaller suppliers include Africa Growth and Opportunity 
Act (AGOA) countries, which supplied $1.1 billion (about 1.4 percent) 
of imports, and Andean Trade Promotion and Drug Eradication Act 
(ATPDEA) countries, which supplied $790 million (about 1 percent) of 
imports.[Footnote 63]

Figure 11: Share of U.S. Textile and Apparel Imports by Trade Partner, 
2002: 

[See PDF for image]

Note: Caribbean Basin Trade Partnership Act (CBTPA) beneficiary 
countries include Antigua and Barbuda, Aruba, Bahamas, Barbados, 
Belize, British Virgin Islands, Costa Rica, Dominica, Dominican 
Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, 
Jamaica, Montserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts 
and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Trinidad 
and Tobago. However, not all beneficiary countries are eligible for 
textile and apparel benefits. According to CBP, Barbados, Belize, Costa 
Rica, Dominican Republic, El Salvador, Guatemala, Guyana, Haiti, 
Honduras, Jamaica, Nicaragua, Panama, Saint Lucia, and Trinidad and 
Tobago are currently eligible for these benefits.

[End of figure]

Countries with free trade agreements (FTA) with the United States 
accounted for 18.8 percent of total textile and apparel imports in 
2002. This includes the North American Free Trade Agreement (NAFTA) 
countries, Mexico and Canada, which supplied 17.1 percent. Other FTA 
partners--Chile, Israel, Jordan, and Singapore--supplied the remaining 
1.7 percent.[Footnote 64] In addition, the United States is negotiating 
FTAs with several other countries, which combined accounted for 15 
percent of U.S. imports.[Footnote 65] The most important (in terms of 
imports) of these potential FTA partners are the countries in the 
Central American FTA negotiations (Costa Rica, El Salvador, Guatemala, 
Honduras, and Nicaragua) and the Dominican Republic, all of which are 
also part of the overall Free Trade Area of the Americas (FTAA) 
negotiations.

Top U.S. Ports: 

The service ports of New York and Los Angeles were the top two 
recipients of textile and apparel imports into the United States in 
2002. Together they accounted for more than 40 percent of imports. 
Furthermore, the top 10 U.S. service ports accounted for about 77 
percent of textile and apparel imports in 2002 (see fig. 12). Overall, 
Customs has 42 service ports, encompassing more than 300 individual 
ports of entry. For example, the New York service port encompasses the 
individual ports of JFK Airport; Newark, New Jersey; and New York City.

Figure 12: Share of U.S. Textile and Apparel Imports by Service Port, 
2002: 

[See PDF for image]

[End of figure]

On the West Coast, Los Angeles receives a large portion of its imports 
from Asian suppliers such as China and Hong Kong; while in the South, 
Miami and Laredo receive a large portion of their imports from 
Caribbean countries. In-land ports, such as Columbus, Ohio, receive 
imports shipped across country by truck or rail from other ports or 
flown directly into the airports in its district.

Textile and Apparel Products Affected by Quotas: 

Under the WTO's 1995 Agreement on Textiles and Clothing (ATC), the 
United States and other WTO members agreed to gradually eliminate quota 
barriers to textile and apparel trade during a 10-year transition 
period, ending by January 1, 2005.[Footnote 66] By 1995, the United 
States, the European Union, Canada, and Norway were the only WTO 
members to maintain quotas on textile and apparel. Each agreed, 
however, to remove a share of their quotas by January 1 in 1995, 1998, 
2002, and 2005. Based on 2002 Department of Commerce import statistics 
and our analysis, the United States still maintains quotas on products 
that account for about 61 percent of its textile and apparel imports by 
value. Not all of these imports, however, are subject to quotas because 
not all U.S. trade partners are subject to quotas on these products. 
For instance, U.S. textile and apparel categories 338 and 339 (men and 
women's cotton knit shirts and blouses) account for over 12 percent of 
U.S. imports of textile and apparel products, and categories 347 and 
348 (men and women's cotton trousers and shorts) account for about 
another 13 percent. Although several countries face U.S. quotas in each 
of these categories, not all countries are restricted. Therefore, 
quotas only limit a portion of the 25 percent of imports accounted for 
by products in these categories. Customs, though, is concerned with the 
trade flows relating to all the products under quotas, despite which 
country they originate in because the country of origin may be 
misrepresented.

Future Barriers to Trade in Textile and Apparel: 

Under the ATC, the United States agreed to remove by 2005 textile and 
apparel quotas maintained against other WTO members. These quotas have 
created significant barriers to imports of certain types of textile and 
apparel products from quota-restricted countries. For example, in 2002, 
the U.S. International Trade Commission estimated that quota barriers 
amounted to an approximately 21.4 percent tax on apparel imports and a 
3.3 percent tax on textile imports.[Footnote 67] However, these 
estimates were calculated across all textile and apparel products and 
countries. Therefore, actual barriers may be significantly higher for 
certain highly restricted products. Upon removal of these quotas, trade 
patterns are likely to change, with more efficient foreign suppliers 
that were formerly restricted under the quotas capturing a larger share 
of the U.S. market.

FTAs, though, will still provide preferential access to products that 
meet rules of origin requirements from FTA partners. FTAs generally 
provide tariff-free access, while 2002 tariff rates on more restricted 
textile and apparel products ranged from 15 to 33 percent. Also, the 
United States provides similar preferential access unilaterally to 
countries from the Caribbean Basin, sub-Saharan Africa, and the Andean 
region under the CBTPA, AGOA, and ATPDEA preferential 
programs.[Footnote 68] Officials and experts that we spoke with said 
they believed these tariff differentials to be a significant incentive 
for continued illegal textile transshipment because they act as a tax 
on textile and apparel products from non-FTA partners. Also, under WTO 
rules, the United States may impose antidumping or countervailing 
duties on imports from certain countries if it can be shown that these 
products have either been "dumped" in the U.S. market or were 
subsidized.[Footnote 69] Furthermore, under China's accession 
agreement with the WTO, members may impose a special safeguard 
mechanism on imports from China if they are shown to cause market 
disruption.[Footnote 70] In fact, in December 2003 the United States 
imposed this mechanism against imports from China of certain types of 
knit fabrics, dressing gowns and robes, and brassieres.

U.S. Textile and Apparel Production and Employment: 

U.S. textile and apparel employment has declined over the past decade 
(1993 through 2002), while production has declined from 1995 through 
2001 (latest year statistics were available for production data). 
Production of apparel (and textiles to a lesser extent) in the United 
States tends to be relatively intensive in its use of labor. 
Consequently, the U.S. industry has faced strong competition from 
developing countries, such as China and India, where labor rates are 
significantly lower than in the United States. Employment in the U.S. 
apparel sector is higher than in the textile sector, overall; however, 
employment declines in the U.S. textile and apparel industry have 
primarily been due to declines in the apparel sector. As figure 13 
shows, employment in the overall textile and apparel industry fell from 
about 1,570,000 jobs in 1993 to about 850,000 jobs in 2002. The 
majority of this decline was due to the fall in apparel employment from 
more than 880,000 workers in 1993 to about 360,000 workers in 
2002.[Footnote 71] However, employment in the other sectors of the 
industry--textile mills (yarns, threads, and fabrics) and textile 
product mills (carpets, curtains, bedspreads, and other textile 
products besides apparel)--also declined.

Figure 13: Employment in Major Sectors of the Textile and Apparel 
Industry, 1993-2002: 

[See PDF for image]

[End of figure]

Regarding U.S. production (as measured by shipments) in the textile and 
apparel sectors, figure 14 shows overall textile and apparel production 
declined between 1997 and 2001.[Footnote 72] During that period, the 
value of U.S. shipments of textile and apparel products (either to the 
U.S. market or overseas) fell from nearly $158 billion to about $132 
billion. This decline was due to contraction in the apparel and textile 
mills sectors. However, the textile product mills sector remained 
relatively stable during the same time period.

Figure 14: U.S. Production (Shipments) in Textile and Apparel Sectors, 
1997-2001: 

[See PDF for image]

Note: Data from the Annual Survey of Manufacturers only available 
through 2001.

[End of figure]

[End of section]

Appendix III: Comments from the Department of Homeland Security: 

U.S. Department of Homeland Security 
Washington, DC 20528:

Homeland Security:

January 14, 2004:

Loren Yager:

Director, International Affairs and Trade 
U.S. General Accounting Office:

441 G St., NW Washington, DC 20548:

Dear Mr. Yager:

Thank you for providing us with a copy of your draft report entitled 
"INTERNATIONAL TRADE: U.S. Customs and Border Protection Faces 
Challenges in Addressing Illegal Textile Transshipment" and the 
opportunity to discuss the issues in this report.

We agree with the General Accounting Office's (GAO) observations that 
the U.S. Customs and Border Protection (CBP) needs to take additional 
steps to improve the information available for textile transshipment 
reviews, to improve monitoring of in-bond cargo and to strengthen the 
deterrence value of in-bond enforcement provisions. We have taken, and 
will continue to take, prudent steps to address these factors. Attached 
are comments specific to the recommendations, as well as technical 
corrections.

If you have any questions concerning this response, please contact me 
at (202) 772-9580.

Sincerely,

Anna Dixon:

Director, Bankcard Programs And GAO/OIG Liaison:

Signed by Brenda B. Smith for Anna Dixon: 

www.dhs.gov:

Department of Homeland Security Comments on GAO Draft Report:

INTERNATIONAL TRADE: U.S. Customs and Border Protection Faces 
Challenges in Addressing Illegal Textile Transshipment:

Response to Recommendations and Planned Corrective Actions:

GAO has made several recommendations to the Commissioner of Customs and 
Border Protection to improve the information available for textile 
transshipment review, to encourage continued cooperation by foreign 
governments, to improve CBP's monitoring of in-bond cargo and to 
strengthen the deterrence value of in-bond enforcement provisions.

CBP agrees with the recommendations and will take the appropriate steps 
needed to implement the recommendations. Key actions are listed below:

Recommendation #1:

Improve Textile Production Verification Team (TPVT) follow-up by 
immediately entering all criteria resulting from overseas factory 
visits into ACS to trigger port reviews.

Corrective Action:

U.S. Customs and Border Protection plans to complete an update of its 
September 21, 2001 Standard Operating Procedure (SOP) for TPVT's in 
Spring, 2004. The update will incorporate the immediate input of high-
risk factories into the Automated Commercial System (ACS), diminishing 
the five-week time period for input and headquarters approval.

Recommendation #2:

Assign import specialists to Customs Attache Offices in high-risk 
textile transshipment countries to assist with textile monitoring and 
enforcement activities, including conducting follow-up to TPVTs.

Corrective Action:

DHS will evaluate the assignment of import specialists to Customs 
Attache Offices in high-risk textile transshipment countries to assist 
with textile monitoring and enforcement activities, including 
conducting follow-up to TPVTs, given available resources and an 
assessment of associated threat.

Recommendation #3:

Place priority on timely implementation of a fully automated system, 
including more information, to properly track the movement of in-bond 
cargo from the U.S. port of arrival to its final port of destination.

Corrective Action:

The Trade Act of 2002 requires the implementation of a fully automated 
system to track in-bond shipments. CBP will complete implementation of 
this increase in automation in FY 2004 and 2005. This newly implemented 
automated system, along with the Automated Commercial Environment (ACE) 
system, will allow for the automated tracking of most in-bond 
shipments.

Recommendation #4:

Increase port targeting and inspection of in-bond shipments.

Corrective Action:

U.S. Customs and Border Protection is developing an in-bond action plan 
to increase enforcement actions. This action plan, combined with CBP 
Directive 3240-036A (dated August 7, 2003) which improves data quality 
and ensures electronic tracking of in-bond merchandise, will refine the 
inspection and targeting of in-bond shipments. An Automated Targeting 
System is being implemented for in-bond shipments as well. In FY 2004, 
six to eight enforcement operations led by headquarters level program 
staff will also be undertaken.

Recommendation #5:

Routinely investigate overdue shipments and, pending implementation of 
an automated system, require personnel at ports of entry to maintain 
accurate and up-to-date data on in-bond shipments.

Corrective Action:

CBP Directive 3240-036A, issued in August 2003, provides direction for 
CBP Officers on data collection and maintenance until full automation 
is complete.

Recommendation #6:

Revise CBP regulations governing (1) the time intervals allowed for in-
bond shipments to reach their final destinations depending on the 
distance between the port of arrival and the final port of destination 
and (2) the ability of importers or carriers to make changes in the 
intended destination port without notifying CBP.

Corrective Action:

U.S. Customs and Border Protection will consider appropriate revisions 
in these two areas. CBP believes that any regulatory changes should be 
made with appropriate automation and is therefore assessing the 
creation of flexible automation that supports these regulatory changes. 
Time frames for implementation of a new process are dependent upon the 
completion of the automation systems.

Recommendation #7:

Review the sufficiency of the amount of the bond for deterring illegal 
diversion of goods.

Corrective Action:

New guidelines for determining bond sufficiency are currently being 
developed which will use a more risk-based approach based on type of 
commodity, history of carrier and potential loss of revenue. CBP will 
evaluate methods for determining bond sufficiency, including setting a 
more reasonable minimum bond amount.

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Virginia Hughes (202) 512-5481 Leyla Kazaz (202) 512-9638: 

Staff Acknowledgments: 

In addition to those individuals named above, Margaret McDavid, 
Michelle Sager, Josie Sigl, Tim Wedding, Stan Kostyla, Ernie Jackson, 
and Rona Mendelsohn made key contributions to this report.

(320152): 

FOOTNOTES

[1] As defined in the Trade Act of 2002, illegal textile transshipment 
occurs when preferential treatment under any provision of law has been 
claimed for a textile or apparel article on the basis of material false 
information concerning the country of origin, manufacture, processing, 
or assembly of the article or any of its components. False information 
is material if disclosure of the true information would mean or would 
have meant that the article is or was ineligible for preferential 
treatment under the provision of law in question. "Country of origin" 
for customs purposes generally refers to the country, territory, or 
insular possession where a textile or apparel product is grown, 
produced, or manufactured. Exceptions to this general principle exist 
and are briefly discussed in later sections of this report. Quotas are 
quantitative restrictions on the amount of a good that can be entered 
into commerce. A tariff is a duty or tax levied at the border on goods 
going from one country to another. 

[2] On March 1, 2003, the U.S. Customs Service was transferred to the 
new Department of Homeland Security. The border inspection functions of 
the Customs Service, along with other U.S. government agencies having 
border protection responsibilities, were reorganized into the U.S. 
Customs and Border Protection (CBP). The U.S. Customs Service's Office 
of Investigations was transferred into the Department's new Bureau of 
Immigration and Customs Enforcement (BICE).

[3] Textile transshipment is difficult to detect, and CBP has not 
attempted to systematically determine the size of illegal transshipment 
occurring. 

[4] For purposes of this report, the term "transshipment" refers to 
illegal textile and apparel transshipment; and "textiles" refers to 
textiles and apparel, unless otherwise specified.

[5] The Committee for the Implementation of Textile Agreements is an 
interagency group composed of members from the Office of the U.S. Trade 
Representative and the departments of Commerce, Labor, State, and the 
Treasury. 

[6] The United States has negotiated free trade agreements or enacted 
trade preference programs with numerous countries or regions. The Trade 
and Development Act of 2000 includes the African Growth and Opportunity 
Act (AGOA) and the Caribbean Basin Trade Partnership Act (CBTPA) and 
gives nations of both regions quota-free and duty-free access to the 
U.S. market for products meeting rules of origin requirements. In 
addition, the Trade Act of 2002 provides for expanded access to U.S. 
markets from AGOA countries and also provides duty-free and quota-free 
treatment for merchandise from Colombia, Peru, Ecuador, and Bolivia. In 
addition, the United States, Mexico, and Canada participate in the 
North American Free Trade Agreement (NAFTA), and in 2003 the United 
States entered into free trade agreements with Chile and Singapore. The 
rule-of-origin provisions differ in these various trade agreements.

[7] This compares to an overall average U.S. tariff rate of less than 5 
percent.

[8] Textile and apparel imports, as we define them in this report, 
include all textile and apparel products, whether or not quotas or 
other restrictions cover them. See appendix II for more information on 
textile and apparel trade and appendix I for more information on our 
methodology.

[9] Field Operations Offices provide centralized management oversight 
and technical assistance for port operations within their regions.

[10] Public Law 103-182, title VI of the North American Free Trade 
Agreement Implementation Act, subtitles A, B. The Customs Modernization 
and Informed Compliance Act 1993 (also known as the "Mod Act") places 
part of the responsibility for compliance on importers while requiring 
CBP, then known as Customs, to modernize its processes and technology 
to enforce trade laws.

[11] By identifying a country as high risk for textile transshipment, 
CBP is not making a determination that the country's government is 
involved in transshipment. Rather, the significance of the trade and 
the intelligence data concerning certain of that country's 
manufacturers identify the country as a potentially important transit 
point for transshipped goods. 

[12] Although a good may be physically transshipped through a country 
with available quota or tariff preferences, it is also possible that 
the good would never enter the transit country. Rather, the product's 
documentation can be falsified to claim a certain country of origin 
without it ever entering that country.

[13] See appendix II for a list of top U.S. trade partners that supply 
textile and apparel products to the U.S. market.

[14] Due to an increase in imports of these products from Thailand, CBP 
selected Thailand for a TPVT visit. The visit uncovered that three of 
the top five exporters were illegally transshipping bed linens to the 
U.S. market. According to CBP, the Government of Thailand cooperated 
fully with U.S. authorities and revoked the companies' export rights.

[15] Between December 10, 2001, when Vietnam received lower tariff 
rates under normal trade relations, and July 17, 2003, when bilateral 
quotas were effective, there were no quotas on imports of Vietnamese 
textile and apparel products into the United States. Until December 10, 
2001, Vietnam was subject to higher tariffs reserved for countries with 
which the United States does not maintain normal trade relations.

[16] Import specialists generally are the port-level experts that are 
responsible for processing textile and apparel shipments and 
potentially detaining and examining the products and documentation 
before entry. Headquarters staff are also generally import specialists. 
International trade specialists conduct the trade data analysis and 
targeting at the STC.

[17] Not all shipments (entries) identified for review were actually 
inspected, since some were low-valued shipments that were exempted or 
entered during a security alert period in which nonsecurity inspections 
were limited. 

[18] "Review" refers to the entire process of analyzing entry 
documents, inspecting shipments, and verifying foreign production 
documents.

[19] Reasonable care provisions require importers entering textile or 
apparel products into the commerce of the United States to ensure that 
the documentation covering the imported merchandise is accurate as to 
the country of origin. These provisions require that the importer not 
solely rely on information provided by the foreign supplier of the 
merchandise.

[20] Since no reliable estimates exist of the amount of imports that 
are illegally transshipped, CBP is unable to assess whether the number 
of inspections is a sufficient tool to detect and deter textile 
transshipment.

[21] In addition, CBP does not want to adversely affect importers by 
detaining shipments without some evidence of transshipment besides 
trade data anomalies. However, even if a shipment is not targeted, CBP 
port staff can still select the shipment for inspection.

[22] In addition, preference and free trade agreements have particular 
"rules of origin" requirements that must be met in order to obtain 
reduced or zero tariffs. These requirements are part of the complexity 
port staff face in determining whether transshipment has occurred. 
Rules of origin are the conditions that specify how a product must be 
produced or what materials must be used for the product to claim a 
particular country as its origin and qualify for trade preferences. 

[23] A textile visa is an endorsement in the form of a stamp on an 
invoice or export control license that is provided by an authorized 
official of a foreign government. It is used to control the exportation 
of textiles and textile products to the United States and to prevent 
their unauthorized entry into U.S. customs territory. A visa may cover 
either quota or nonquota merchandise; and conversely, quota merchandise 
may or may not require a visa, depending upon the terms of negotiated 
bilateral textile agreements with the particular country of origin.

[24] As of September 30, 2003, there were 892 import specialists. While 
approximately 255 import specialists were assigned to textile teams, 
CBP estimates that only 214 handled textiles and wearing apparel 
exclusively. This is because many of the teams handle other commodities 
as well.

[25] The rule of origin determines the country of origin that can be 
claimed for goods that include components manufactured in more than one 
country. For apparel products, the country of origin is generally 
determined to be the country where the "most important" assembly 
process occurred. The import specialist reviews the production 
documents to be sure that they substantiate the requirements for 
claiming origin. In addition, free trade or preference programs may 
have additional requirements, such as using domestic or U.S. fabric, 
yarn, or thread. The rules of origin for any particular product differ 
under various free trade agreements and preference programs.

[26] They would also be reviewing any nonquota or nonvisa textiles that 
were presented for entry.

[27] According to a senior CBP official, this provision was implemented 
in a flexible manner, so that in some cases, if a high-risk factory 
were deemed sufficiently risky, they would immediately enter criteria.

[28] In some instances, import specialists have immediately entered 
criteria for high-risk factories of particular concern, according to a 
senior CBP official.

[29] "Liquidated damages" are a charge against the bond for a breach of 
a bond condition. 

[30] Under 19 C.F.R. 12.130, CBP, then known as Customs, is required to 
make a country-of-origin determination before allowing entry of 
textiles and textile products.

[31] When TPVTs find the factory was closed, it results in automatic 
criteria and exclusion. CITA does not have to be consulted first, and 
it would not be included in the CITA letter.

[32] A CITA letter to a foreign government may include requests to 
investigate more than one factory.

[33] The Accession Agreement textile and apparel safeguard allows U.S. 
and other WTO member countries that believe imports of Chinese origin 
textile and apparel products are, due to market disruption, threatening 
to impede the orderly development of trade in these products to request 
consultations with China to ease or avoid such market disruption. Upon 
receipt of the request, China has agreed to hold its shipments to a 
level no greater than 7.5 percent (6 percent for wool categories) above 
the amount entered during the first 12 months of the most recent 14 
months preceding the request for consultations. The limit is effective 
beginning on the date of the request for consultation and may not 
remain in effect for more than 1 year, without reapplication, unless 
otherwise agreed between the United States and China. The domestic 
industry has the right to petition for safeguard relief until Dec. 31, 
2008, including reapplying for additional years of protection for 
categories that have quota imposed. 

[34] As of November 1, 2003, the domestic textile industry had already 
applied for safeguards for four categories of textiles that had been 
removed from quotas in 2002. CITA reviewed three petitions received on 
July 24, 2003, related to knit fabric, dressing gowns, and brassieres, 
and declined to review a fourth petition for cotton gloves. On November 
17, 2003, CITA approved the three petitions it had reviewed.

[35] It is a violation of Hong Kong law to falsely claim Hong Kong as a 
country of origin for textiles, according to Hong Kong officials. See 
later discussion of penalties and Customs' administrative list for 
further details.

[36] See 19 U.S.C. 1552 and 1553.

[37] A bonded carrier is a carrier company that is allowed to move 
goods that have not been entered into commerce from one place to 
another under a Customs bond. A Customs bond is a contract between all 
parties that import merchandise and CBP; it is given to insure the 
performance of an obligation or obligations imposed by law or 
regulation, backed by a monetary guarantee.

[38] Data for Miami, Florida and Charlotte, North Carolina were 
excluded because they did not have complete data for this period. 

[39] Report of the Interagency Commission on Crime and Security in U.S. 
Seaports, Fall 2000. 

[40] Since our investigation began, CBP has issued Directive 3240-036A 
requiring that merchandise declared for exportation (T&E and I.E. 
shipments) be physically inspected before the merchandise can be 
exported to Mexico. As of October 20, 2003, all merchandise must be 
presented to CBP before export certification. 

[41] CBP issued a directive in August 2003 requiring all CBP officers 
reviewing Form 7512 documents to ensure that all required information 
is furnished and correct at time of presentation.

[42] 19 C.F.R. 18.2 (b), 18.11 (e).

[43] ACS is CBP's current automated import system. Originally designed 
in 1984, ACS will be replaced in order for CBP to be able to meet the 
increasingly complex, long-term requirements resulting from the growth 
in trade, enforcement responsibilities, and legislation. Consequently, 
the first modernization project will focus on the trade system, 
replacing ACS with the Automated Commercial Environment (ACE).

[44] See U.S. General Accounting Office, Examination of Customs' Fiscal 
Year 1993 Financial Statements, GAO/AIMD-94-119 (Washington, D.C., June 
15, 1994); U.S. General Accounting Office, Financial Management: 
Control Weaknesses Limited Custom's Ability to Ensure That Duties Were 
Properly Assessed GAO/AIMD-94-38 (Washington, D.C. March 7, 1994); and 
U.S. General Accounting Office, High-Risk Program: Information on 
Selected High-Risk Areas HR-97-30 (Washington, D.C., May 16, 1997).

[45] Pilot testing is being conducted in three seaports and three land 
ports: Los Angeles, California; New York, New York; Miami, Florida; 
Port Huron, Michigan; Buffalo, New York; and Laredo, Texas.

[46] 19 C.F.R. 18.5(a), (f).

[47] 19 C.F.R. 18.2.

[48] There are 24 ports of entry along the U.S.-Mexico border of which 
only 5 have export lots: Otay Mesa, Calexico, Nogales, Laredo, and El 
Paso. 

[49] 19 U.S.C. 1595a (c)(1)(A).

[50] See 19 C.F.R. 18.8.

[51] 19 C.F.R. 113 sets forth the general requirements applicable to 
bonds. 

[52] Bond amounts are not set by regulation but by the port director's 
exercise of sound discretion. 

[53] Amount of penalty may vary between $100 to $500, depending on the 
presence of aggravating or mitigating factors.

[54] Multiple claims can be made against the same bond.

[55] U.S. Customs Directive No. 4410-012, dated December 1, 1989.

[56] U.S. Customs Directive No. 099 3510-004 dated July 23, 1991; and 
Customs Directive No. 099 3510-005 dated May 17, 1993.

[57] Public Law 103-182, Title VI. The Customs Modernization and 
Informed Compliance Act 1993 (also known as the "Mod Act").

[58] On March 1, 2003, the U.S. Customs Service was transferred to the 
new Department of Homeland Security. The border inspection functions of 
the Customs Service, including specifically the Office of Field 
Operations, along with other U.S. government agencies having border 
protection responsibilities, were reorganized into the U.S. Customs and 
Border Protection (CBP). The Office of Investigations was moved into 
the new Bureau of Immigration and Customs Enforcement (BICE).

[59] The Caribbean Basin Trade Partnership Act (CBTPA) provides 
Caribbean Basin countries (see note to fig. 11 for list of countries) 
reduced or eliminated tariff rates for qualifying textile and apparel 
products.

[60] The textile and apparel industry we refer to in this report is the 
manufacture of textile and apparel products, but not the distribution 
and retail of textile and apparel products.

[61] Textile and apparel imports, as we define them in this report, 
include all textile and apparel products, whether or not quotas or 
other restrictions affect them. See appendix I for more information on 
our methodology.

[62] Made-up and miscellaneous textile products include such products 
as bedspreads, blankets, pillow cases and sheets; towels; floor 
coverings; handbags; and luggage. Uncategorized imports of textile and 
apparel are those products not listed under the U.S. quota category 
system. These products may still fall into one of the four other 
categories, such as yarn or fabric.

[63] AGOA beneficiary countries are Benin, Botswana, Cameroon, Cape 
Verde, Central African Republic, Chad, Republic of the Congo, Cote 
d'Ivoire, Democratic Republic of the Congo, Djibouti, Eritrea, 
Ethiopia, Gabon, the Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, 
Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, 
Namibia, Niger, Nigeria, Rwanda, So Tome and Principe, Senegal, 
Seychelles, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda, 
and Zambia. However, not all beneficiary countries are eligible for 
textile and apparel benefits. According to CBP, Botswana, Cameroon, 
Cape Verde, Cote d'Ivoire, Ethiopia, Ghana, Kenya, Lesotho, Madagascar, 
Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Rwanda, Senegal, 
South Africa, Swaziland, Tanzania, Uganda, and Zambia are eligible for 
these benefits. Countries eligible for ATPDEA benefits are Bolivia, 
Colombia, Ecuador and Peru.

[64] However, imports in 2002 from Chile and Singapore did not yet 
qualify for free trade status. In addition, some textile and apparel 
imports from FTA countries may not have qualified for free trade status 
if they did not meet rules of origin requirements. 

[65] Countries with which the United States had publicly announced its 
intent to negotiate free trade agreements as of November 25, 2003, 
include Australia, Bahrain, and Morocco; the countries of the Southern 
African Customs Union (Botswana, Lesotho, Namibia, South Africa, and 
Swaziland); and the 34 countries of the Free Trade Agreement of the 
Americas (FTAA). In addition to the FTAA, the United States is intent 
on negotiating separate free trade agreements with Central American 
countries (Costa Rica, El Salvador, Guatemala, Honduras, and 
Nicaragua), Andean countries (Bolivia, Colombia, Ecuador, and Peru), 
and the Dominican Republic.

[66] Of the $81 billion in U.S. imports of textile and apparel products 
in 2002, the ATC covered about 95 percent. 

[67] See U.S. International Trade Commission, The Effects of 
Significant U.S. Import Restraints (Washington, D.C.: International 
Trade Commission, 2002).

[68] Some of these programs may be eliminated, as the countries become 
members of FTAs with the United States.

[69] Antidumping or countervailing measures take the form of increased 
duties on imports. Dumping is generally considered to be the sale of a 
commodity in a foreign market at a lower price than its normal value. 
WTO rules allow for the imposition of antidumping duties, or fees, to 
offset dumping. Countervailing duties are special customs duties 
imposed to offset subsidies provided on the manufacture, production, or 
export of a particular good. Subsidies essentially lower a producer's 
costs or increase its revenues.

[70] A safeguard is a temporary import control or other trade 
restriction that a WTO member imposes to prevent serious injury to 
domestic industry caused by increased imports. Upon joining the WTO, 
China agreed to a unique safeguard provision that allows WTO members to 
impose restrictions if imports from China disrupt their markets, as 
well as a special textile safeguard that also allows restrictions on 
textile and apparel products specifically. The China-specific safeguard 
provision expires in 2013, and the textile-specific safeguard expires 
in 2008.

[71] The industry sectors described here (apparel, textile product 
mills, and textile mills) are based on the North American Industry 
Classification System (NAICS). 

[72] Prior to 1997, production data was classified by the Standard 
Industry Classification (SIC) system into two industry sectors, rather 
than three. Therefore, we do not show the individual sectors of the 
industry prior to 1997 for production data, as we do with employment 
data.

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