TRADE AND PASSENGER PROCESSING: 

Customs NAFTA Enforcement Program 

Information Is Limited 

 OIG-02-096 June 19, 2002 

Office of Inspector General

******* 

The Department of the Treasury 
Contents 

NAFTA Enforcement Information Is Limited (OIG-02-096) Page 1

Audit Report................................................................................................. 2 

 Results in Brief............................................................................................ 2 

 Background................................................................................................. 3 

 Findings and Recommendations..................................................................... 7 

 Customs Does Not Track Its Efforts To Improve NAFTA Compliance............. 7 

 Recommendations................................................................................. 12 

 Customs NAFTA Audits Have Not Identified Significant Noncompliance ...... 13 

 Recommendation .................................................................................. 16 

Appendices 

 Appendix 1: Objectives, Scope, and Methodology...................................... 18 

 Appendix 2: Management Comments ....................................................... 20 

 Appendix 3: Major Contributors To This Report ......................................... 23 

 Appendix 4: Report Distribution............................................................... 24 

Abbreviations

 ACS Automated Commercial System 

 OIG Office of Inspector General 

 CF Customs Form 

 CM Compliance Management 

 EET Enforcement Evaluation Team 

 FP&F Fines, Penalties and Forfeiture 

 FY Fiscal Year 

 ISDA Import Specialist Discrepancy Add 

 JVT Joint Verification Team 

 NAFTA North American Free Trade Agreement 

 OST Office of Strategic Trade 

 RAD Regulatory Audit Division 

 SEACATS Seized Asset and Case Tracking System 

 STC Strategic Trade Center 

 TASP Trade Agreement Sub Plan 
OIG Audit 

Report

The Department of the Treasury 

Office of Inspector General 

NAFTA Enforcement Information Is Limited (OIG-02-096) Page 2

 June 19, 2002 

 Mr. Robert C. Bonner 

 Commissioner 

 U.S. Customs Service 

The North American Free Trade Agreement (NAFTA) provides 

preferential tariff treatment for merchandise imported from Canada 

and Mexico that qualify under specific rules of origin. 

Customs created the North American Free Trade Agreement 

Subplan (TASP) to ensure that only goods entitled to NAFTA dutyfree benefits were given such treatment. The TASP consists of 

enforcement tools such as mandatory Compliance Measurement 

(CM) Verifications, port-initiated verifications, Joint Verification 

Teams (Regulatory Audit Division reviews), and enforced 

compliance. Penalties would be assessed for NAFTA violations. 

This audit was included in our Office of Inspector General Annual 

Plan for FY 2001. We performed the audit to determine the 

adequacy of Customs efforts to identify and penalize violators who 

falsify country of origin in order to qualify for NAFTA duty-free 

treatment. We conducted our audit work from August 2000 

through February 2002 at Customs headquarters, and at seven 

Customs ports of entry that process the majority of NAFTA-related 

entries. A more detailed description of our objective, scope and 

methodology is provided in Appendix 1. 

Results in Brief

We could not fully assess the adequacy of Customs enforcement 

efforts to identify NAFTA noncompliance or identify and penalize 

violators, because Customs does not have accurate and sufficient 

NAFTA enforcement data. Customs does not have a reliable 

tracking system that identifies and allocates monies generated from 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 3

NAFTA enforcement activities such as mandatory and port-initiated 

verifications and penalty actions. In addition, because it is difficult 

to identify NAFTA penalties from Customs Seized Asset and Case 

Tracking System data, accurate NAFTA penalty data is not 

available to determine if penalties were appropriately assessed for 

NAFTA violations. 

The systems for recording noncompliant NAFTA claimants and the 

collections of duties from these parties were not reconciled. Also 

revenue recoveries from penalty cases were not consistently 

recorded and reconciled with the collections for violations of 

NAFTA regulations. As a result, Customs has no means of 

measuring the effectiveness of its NAFTA enforcement efforts. 

In addition, we found that the Regulatory Audit Division (RAD) has 

not been able to identify significant noncompliance from its 

NAFTA-related audits. While we do not have evidence that 

significant noncompliance exists, we believe RAD could enhance its 

opportunity to identify noncompliance by modifying how it selects 

potential noncompliant claimants for audit. Customs targeting 

efforts have centered almost solely on large importers and 

manufacturers who appear to have generally followed NAFTA rules 

of origin, instead of reviewing industries and companies that have 

shown trends of noncompliance, and who have been scrutinized by 

port personnel who process import entries for NAFTA filers. 

We recommended that Customs implement a (1) tracking system 

that accurately accounts for Customs NAFTA-related enforcement 

efforts and (2) RAD audit targeting strategy that includes more of a 

risk-based focus. 

Background

Significance of NAFTA

The Customs Service’s Strategic Plan for Fiscal Years (FY) 2000 

through 2005 has, as one of its objectives, improving the 

enforcement of international trade agreements. NAFTA is by far 

the largest of these trade agreements. Approximately 40 percent 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 4

of all entry lines in FY 2001 were subject to a claim for reduced 

duty treatment under NAFTA. 

In passing NAFTA, Congress appropriated a significant amount of 

funds and resources for the verification of NAFTA claims. 

Therefore, it is important for Customs to demonstrate that it is 

effectively enforcing NAFTA trade provisions. 

Customs created the TASP to ensure that only goods entitled to 

NAFTA preferential treatment actually receive such treatment. The 

TASP consists of the following components: mandatory 

CM verifications, port-initiated verifications, joint verification teams 

(JVT), and enforced compliance that we reviewed in our audit. 

Verifications of NAFTA Claims

NAFTA authorizes each member country to conduct verifications to 

confirm imported merchandise is eligible for NAFTA benefits. 

Verifications are conducted by import specialists via either a 

Request For Information (CF-28), a NAFTA Questionnaire (CF-446) 

or by on-site visits to exporter or producer sites in Canada and 

Mexico. 

Customs completed 2,110 mandatory verifications in FY 2001. 

Each port of entry is provided with lists of specific line items that 

they are required to verify. Eight ports of entry accounted for 

approximately 80 percent of the NAFTA line items verified by the 

Customs Service. 

The results of the verification are entered into the Import Specialist 

Discrepancy Add (ISDA) module of the Automated Commercial 

System (ACS). In addition, automated ports also input their results 

directly into the NAFTA database while non-automated ports will 

mail or fax their results to Customs personnel in Buffalo, NY, and 

to the Trade Agreements branch in Headquarters. Whenever 

NAFTA benefits are denied, Customs generates a bill and collects 

applicable duties and fees plus interest. 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 5

The results of the mandatory verifications are compiled and a 

compliance rate is calculated and reported by Customs. For 

NAFTA transactions, Customs has established a compliance goal of 

95 percent and the collection of 99 percent of all NAFTA-related 

duties, fees, and interest by the year 2005. However, Customs 

has recently reported a 96 percent NAFTA compliance rate and a 

99 percent revenue collection rate for FY 2001 NAFTA-related 

transactions. 

Similar to mandated verifications, Customs ports are assigned to 

review import entry line items to ensure they qualify for NAFTA 

duty free benefits in a port-initiated verification. Each year 

Customs is required to perform 800 port-initiated verifications that 

are assigned to each port. The verification techniques are identical 

to those used in the mandatory verifications and the results are 

also entered into the ISDA module in ACS and into the NAFTA 

database. During FY 2001 a total of 1,425 port-initiated 

verifications were completed. 

As with mandatory verifications, when non-compliant importers are 

identified, bills are generated for collection of duties, fees and 

interest owed to Customs. Customs has reported a 70 percent 

compliance rate for port-initiated verifications. This lower 

compliance rate compared to the mandatory rate is understandable 

since these reviews typically focus on problem importers and 

high-risk merchandise. 

A JVT is composed of a regulatory auditor, import specialist and 

international trade specialist, with other team members as 

necessary. JVTs are conducted annually and involve audit-based 

verifications of NAFTA claims from approximately 40 importers. 

The Office of Strategic Trade (OST), RAD, selects the companies 

to be audited. 

Enforced Compliance

Each Customs service port is required to maintain an Enforcement 

Evaluation Team (EET) led by a port trade compliance program 

officer and an Office of Investigations representative. Additional 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 6

members may include an account manager, a RAD audit manager, 

the local Fines Penalties & Forfeiture (FP&F) officer, a supervisory 

import specialist and a compliance assessment team leader. EETs 

are required to meet at least once a month. 

Customs officers make NAFTA enforcement referrals to their local 

EET, who assess and prioritize violations and allegations, and select 

the appropriate enforcement action. If the impact level warrants, 

the EET refers the violation or allegation to the local trade 

enforcement coordinator for action. Low impact violations are 

returned to the referring officer for administrative resolution. 

Penalty Cases And Prior Disclosures

The two main types of penalty cases that affect NAFTA 

transactions involve violations of 19 USC 1592 and of 

19 USC 1509. The provisions of 19 USC 1592 authorize penalties 

against any person who enters any merchandise into the commerce 

by fraudulent means. The penalty provisions of 19 USC 1509 can 

be invoked whenever certain persons fail to produce, upon 

demand, an entry record enumerated in Customs Regulations. This 

includes individuals who complete and sign a NAFTA Certificate of 

Origin. 

A valid prior disclosure is an admission of a violation of 

19 USC 1592. This section of law permits Customs to assess 

monetary penalties against parties who make material false 

statements, acts or omissions in connection with their 

importations. Parties who elect to make a complete disclosure of 

such a violation before or without knowledge of a formal Customs 

investigation of the violation are eligible for reduced penalties. 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 7

Findings and Recommendations

Finding 1 Customs Does Not Track Its Efforts To Improve NAFTA 

Compliance 

 

Customs does not have a reliable tracking system that accurately 

summarizes the revenue recoveries resulting from its NAFTA 

verifications and penalty actions. Customs maintains its NAFTA 

enforcement program activity in several databases—the NAFTA 

database, ISDA Module, ACS module, and the Seized Asset and 

Case Tracking System (SEACATS)—but these databases do not 

reconcile with each other and only raise further questions about the 

actual benefits achieved from enforcement activity. As a result, 

Customs cannot ensure that resources committed to various 

program efforts are being effectively or efficiently utilized. 

Specifically, we found that: 

• there was no system link between the databases and 

collection records to ensure that revenue recoveries reflected 

the dollar amounts collected from importers, 

• the listing of NAFTA penalties identified by Customs 

Headquarters FP&F was not appropriately updated in the 

NAFTA database with amounts collected from penalties, 

• it is difficult to identify NAFTA penalties from existing 

SEACATS data, and 

• the SEACATS listing was incomplete, as amounts collected 

from prior disclosures for non-compliant filers were not 

consistently recorded as penalties by each port. 

We believe that Customs should focus more attention on 

accurately recording and accessing the results of its enforcement 

efforts in ensuring NAFTA compliance. This information would 

allow Customs to better evaluate its current performance and plan 

its future enforcement efforts. 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 8

NAFTA Database Is Inaccurate

Most NAFTA enforcement activity is devoted to conducting the 

annual mandatory and port-initiated verifications. Import 

specialists are required to verify NAFTA eligibility for thousands of 

line items and to calculate any projected revenue recoveries that 

result from denial of NAFTA benefits. These recoveries usually 

consist of duty amounts, fees, and taxes that were not assessed at 

the time entry was made. 

Once these revenue amounts are determined, the import specialists 

enter the amounts into the ISDA module in ACS and into the 

NAFTA database. Entry personnel use the ACS collection modules 

for billings and collections of duties from NAFTA denials. 

The results of enforcement efforts, including both the mandatory 

verifications and port-initiated verifications, showed discrepancies 

between the amounts reported in the NAFTA database and the 

amounts collected by Customs personnel. During a 21-month 

period covering October 1999 through June 2001, the seven major 

ports in our review completed a total of 2,545 mandatory 

verifications, 65 of which resulted in NAFTA denial, and 

1,675 port-initiated verifications, 635 of which were denied. 

We reviewed 56 of the 65 mandatory verifications that were 

denied, and 260 of the 635 port verifications that were denied. 

We found that discrepancies occurred in the databases for each 

type of verification, although the mandatory verifications yielded 

smaller discrepancies. In the 260 line items from port verifications, 

we found a total of $639,929 in revenue recoveries had been input 

into the NAFTA database but only $204,730 were identified as 

actually collected in the ACS module. Discrepancies were found in 

187, or 72 percent, of these line items, totaling $435,199 as 

follows: 
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Table 1. Discrepancies Between The NAFTA Database 

And The ACS Collections System 

The largest number of discrepancies, though not in dollar amount, 

resulted from the posting and payment of interest in ACS. The 

potential revenue recoveries entered into the NAFTA database do 

not include interest. 

In certain instances, the amounts billed were successfully protested 

by importers and the bills were cancelled but never updated in the 

database. In other cases, there was no evidence of any collection 

being initiated or outstanding bills for amounts reported in 

database. In addition, we found a case in which the amount in the 

database may have significantly overstated the revenue recovery. 

The entry had $256,641 recorded in the NAFTA database, but 

when ACS was queried for that entry only $2,755 was entered as 

collected. 

Further, there were several instances in which collections were 

deposited but the corresponding revenue amounts had not been 

input into the database. In these cases, it appeared that the import 

specialist failed to record the amount of revenue recovered. 

Inaccurate Penalty And Prior Disclosure Records

Several ports showed discrepancies between the revenues reported 

from penalties as recorded in penalty case files with the amounts 

shown on the listing provided by Customs Headquarters FP&F. For 

example, at Champlain, NY, there were three penalty case files in 

which the revenue recovered did not agree with the amounts 

Discrepancy Category Line Items with 

Exceptions 

Dollar Amount 

Of Discrepancies 

Collections Exceeded Database 

Amounts 

 80 ($ 8,141) 

Database Amounts Not Collected 28 43,714 

Collection Not Entered Into 

Database 

 24 (13,447) 

Database Amount Exceeded 

Collection 

 55 413,073 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 10

recorded on the listing. At Laredo, TX, a penalty case with a 

collection recorded in the amount of $500 actually generated a 

$24,027 collection. The listing had only three penalty cases for 

Buffalo with revenue recoveries collected for each case. However, 

we determined that 2 of the 3 cases had been cancelled with no 

revenue recoveries. 

The listing also contained cases that did not involve NAFTA 

violations. At the port of Detroit, 1 of the 9 cases listed on the 

FP&F listing was not a NAFTA case while at the port of St Albans 

1 of the 7 cases listed was a drug seizure case. 

One reason for discrepancies was the different handling of prior 

disclosure cases. Prior disclosures are admissions of violations that 

are sent to the local FP&F officer, often accompanied by a check 

for monies owed Customs.1

 We found that whether or not these 

cases were treated as penalty cases depended on the port. For 

example: 

• At the port of Buffalo, only three cases were on a 

Headquarters listing provided by FP&F showing revenue 

recoveries because of the frequent receipt of valid prior 

disclosures that the port did not record as NAFTA penalty 

cases. 

• At St. Albans, prior disclosures were reviewed and closed 

without being designated as penalty cases. 

• In the penalty case files at the ports of Otay Mesa, CA, and 

Detroit, MI, prior disclosures were assigned penalty case 

numbers unlike Buffalo, NY. For the port of Detroit, a case 

was listed with a $10,000 revenue recovery for which there 

was no documentation. This case, however, was a prior 

 

1 When a prior disclosure is made, there could be a number of reasons for its submission. It may be the 

result of a company’s discovery of an honest mistake, or it may be the result of some type of action 

taken by Customs personnel. In these cases import specialists will make contacts and queries with 

companies, often in mandatory and port-initiated verifications about NAFTA filings that reveal duties 

that should not have qualified for NAFTA duty-free status. There are cases in which companies are 

made aware of an upcoming JVT audit, so they concede to errors in their claim for NAFTA duty free 

benefits. Other companies become aware that competitors have been targeted and found ineligible for 

NAFTA benefits and disclose this information to Customs. 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 11

disclosure case and a $135,000 recovery was collected by 

Customs. 

The revenue recoveries from these prior disclosures are not 

properly allocated to the enforcement effort that may have 

prompted such action on the part of the companies. To review this 

issue we requested from the Dallas Strategic Trade Center (STC) a 

report of all prior disclosures for the period during April 24, 2000, 

through 

November 3, 2000. This listing showed thirty prior disclosures 

totaling almost $5.9 million that had been submitted to Customs. 

This listing, however, did not identify the source that generated the 

prior disclosure in order that the revenue generated was properly 

recorded for the port. This additional information would allow 

Customs the means of measuring the performance of the NAFTA 

enforcement program. 

Improving Validity And Reliability Of Revenue Data

The numerous discrepancies in revenue recoveries being entered 

into ACS and the NAFTA database limit their usefulness as sources 

for valid data on actual revenue recoveries that result from NAFTA 

verification. However, we believe, with a minor adaptation, the 

NAFTA database can be used as the source of determining actual 

revenue recoveries. 

NAFTA coordinators already monitor their port’s compliance with 

mandated and port-initiated verifications. They have access to the 

NAFTA database and can easily identify those line items denied 

NAFTA benefits and the amounts of revenue recoveries entered by 

the import specialists. NAFTA coordinators, on an annual basis, 

could query ACS and determine actual revenue billed and collected 

for those line items as well as for those that were cancelled as a 

result of successful protests. 

The line items of NAFTA denials is not voluminous. To illustrate, 

for the seven major NAFTA ports of entry there were 

approximately 700 potential line items that were denied NAFTA 

benefits in the 21-month period from which we selected the 
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mandatory and port-initiated verifications to review. This averages 

out to approximately five line entries per month per port of entry 

that would need to be queried and results tracked by the NAFTA 

coordinators. 

We believe this additional step would provide a valid and reliable 

means of determining actual revenue recoveries. It would require a 

minimal effort by a small number of personnel who are already 

charged with monitoring NAFTA transactions. It would recognize 

the successful efforts of port personnel in ensuring that parties not 

eligible for NAFTA benefits are being identified and revenue due the 

government is being billed and collected. It would also 

demonstrate additional evidence that Customs, through its 

effective use of TASP resources, is able to ensure a high degree of 

NAFTA compliance. 

Recommendations

1. The Commissioner of Customs should ensure that Customs 

personnel implement a TASP related tracking system that 

accomplishes the following: 

• identifies revenue recoveries from NAFTA enforcement 

activities for Customs Management Centers with the 

necessary details for management; 

• requires a periodic reconciliation of ACS collection and 

revenue recoveries records; 

• provides an annual report of the accomplishments of 

TASP enforcement efforts; and 

• utilizes TASP performance results to evaluate the 

deployment of NAFTA related resources. 

Management Comments. Customs concurred. Customs will 

compile protected revenue data from denied 520 (d) claims, and 

will conduct a feasibility study to determine how to reconcile 

ACS collection and revenue recovery records. Customs will 

implement a reconciliation process that will be done annually if 

this study finds it feasible to do so. An annual report on TASP 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 13

accomplishments will be produced, and the performance results 

will be used to evaluate deployment of NAFTA resources. The 

planned completion date for these actions is June 30, 2003. 

OIG Comment. We consider this recommendation to have a 

management decision with final action to be completed at June 

30, 2003. 

2. The Commissioner of Customs should ensure that Customs 

personnel are handling prior disclosures in a uniform manner. 

Management Comments. Customs concurred and stated that a 

working group has been established to focus on establishing 

policies and procedures to uniformly handle prior disclosures 

with the goal of developing a Prior Disclosure Directive. The 

planned completion date for this action is June 30, 2003. 

OIG Comment. We consider this recommendation to have a 

management decision with final action to be completed at 

June 30, 2003. 

Finding 2 Customs NAFTA Audits Have Not Identified Significant 

Noncompliance 

Based on the results of RAD audits, significant noncompliance with 

NAFTA has not been identified. Customs targeting has centered 

on large importers and manufacturers that have been highly 

compliant with NAFTA rules of origin. As a result, the majority of 

audits conducted have not reported evidence of NAFTA 

discrepancies nor have they resulted in significant revenue 

recoveries. In order to enhance enforcement efforts to identify 

noncompliance, Customs should develop a targeting strategy that 

considers significant areas of risk, the companies’ NAFTA filing 

histories, and referrals from port personnel. 

Office Of Strategic Trade Recommends Risk-Based Audits

Results from prior regulatory audits of NAFTA have not yielded 

significant revenue recoveries. RAD personnel reported that only 
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20 out of 225 NAFTA audit teams conducting audits during 

May 1995 through May 2001 had identified any negative NAFTA 

determinations. The 20 audits had yielded about $8.7 million in 

additional revenue, with over $5 million of that total resulting from 

a single audit. Each year, as part of the TASP, RAD selects and 

assigns 40 audits to be conducted by teams in various field 

locations. 

OST conducted a review of RAD audits because RAD’s reviews 

had not identified or resulted in significant NAFTA revenue 

recoveries. They wanted to ensure that future selections for audits 

were risk based and more likely to identify material report 

discrepancies. OST concluded that there were no established 

patterns of NAFTA non-compliance that were identified in the 

audits, and that OST and RAD needed to evaluate the use of 

resources to perform reviews that were not resulting in any 

significant NAFTA issues. 

The OST review also recommended that an effort be undertaken to 

identify risk areas that future audit selections would be based on. 

OST organized the NAFTA Task Force that would recommend to 

RAD the areas that should be audited. The majority of this Task 

Force work was assigned to the Dallas STC.

Personnel at the Dallas STC identified 313 major importers that 

account for 60 percent of the total value of NAFTA imports. At 

the time of our reviews, the STC personnel were in the process of 

developing individual profiles for each of the 313 candidates. Each 

profile addressed the major risk elements that Customs has 

identified as being inherent in NAFTA transactions. The Dallas STC 

also devised a targeting strategy that assigned a numerical risk 

factor to each specific NAFTA rule of origin based upon the 

difficulty in meeting the requirement for each rule. As a result, 

candidates that must meet tougher requirements to qualify for 

NAFTA benefits are more likely to be targeted for audit. 

Upon completion of its targeting initiatives that was planned for 

completion at March 2002, the Dallas STC would forward the 

results to OST personnel in Customs Headquarters. The results 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 15

would be used as the basis for targeting candidates for audits and 

will also be used to aid port personnel in selecting candidates for 

port-initiated NAFTA verifications. 

RAD Should Enhance Targeting Of Noncompliance

Customs has historically focused its resources on covering those 

industries or companies that account for the majority of NAFTA 

transactions. During the period FY 1997 through FY 1999, many 

of the audit candidates were selected from the automotive and 

telecommunication industries. The importations pertaining to these 

industries comprised 85 percent of the total value of NAFTA 

merchandise that entered the country. As a result, Customs can 

accurately report that it is dedicating its limited audit resources to 

cover a substantial segment of NAFTA-related importations. 

We realize that Customs has to maximize the efficient use of 

limited resources. Customs, however, could enhance its 

identification of non-compliance if it also considered smaller 

companies that could pose a risk, and review requests from port 

personnel to investigate suspected noncompliance. These 

personnel have the experience with the companies’ NAFTA filings 

and could identify problems. 

Revenue recoveries resulting from RAD work involving the 

petroleum industry illustrate how a particular industry may yield 

results when RAD targets a potentially non-compliant industry. Of 

248 audits that were finalized during May 1995 and 

November 2001, a total of 38 audits resulted in revenue recoveries 

totaling around $11.9 million of which $9.5 million or 

approximately 80 percent pertained to five audits that involved 

petroleum importations. RAD has the potential of identifying 

additional NAFTA noncompliance and revenue recoveries in the 

future if they focus audit selections on those industries with such 

filing histories. 

 

To support the issue of noncompliance in this industry, we found 

that in a report prepared by Chicago STC that there was a high risk 

associated with oil and petroleum derivatives for which specific 
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Canadian-based companies were claiming NAFTA benefits. The 

report identified seven specific companies that should be 

considered as potential candidates for audits. Three of the seven 

were audited and $3.8 million in revenue recoveries was reported.2

In order to target non-compliant filers, Customs may want to 

consider the companies filing histories as well as port personnel 

audit referrals of potentially high-risk small importers that have not 

historically been selected by RAD. Because of their experience and 

knowledge of local manufacturers and importers, field personnel 

are in a good position to establish noncompliance issues, and their 

requests should be more of a priority for RAD to address. If 

Customs wants to be effective in identifying noncompliance, it may 

need to modify its strategies. 

We believe that any targeting strategy that is ultimately developed 

and implemented needs to ensure there is efficient coverage for 

noncompliance issues, and that enforcement efforts are properly 

targeted. As part of this, Customs existing policy for establishing 

audit schedules should be enhanced with a review of all sources 

NAFTA noncompliance, such as industry results of prior audits, and 

referrals from port personnel who have knowledge of companies’ 

NAFTA import entries. 

Recommendation

1. The Commissioner of Customs should ensure that Customs 

finalizes and implements a NAFTA Targeting Strategy this 

fiscal year and that the Office of Inspector General be 

provided with a copy. The Targeting Strategy should 

address areas of risk and include the following: 

• justification for targeting parties for RAD compliance 

audits that include high risk companies; and 

 

2

 Changes to the current rules of origin for oil have been agreed upon by U.S., Canada, and Mexico. The changes will 

allow NAFTA duty-free benefits to those who under the current rules of origin would have been denied. The U.S. and 

Canada have completed their formal notification and comment periods for the new rules and are waiting for Mexico to 

initiate a formal review. These new rules will not be effective until Mexico completes this review process. 
NAFTA Enforcement Information Is Limited (OIG-02-096) Page 17

• consideration of port referrals of potentially noncompliant 

filers. 

Management Comments. Customs concurred and is in the 

process of developing a risk-based strategy for targeting NAFTA 

verification candidates. This strategy will include procedures 

for field personnel to communicate referrals and recommend 

candidates for verification by means of an audit. Customs also 

noted the limitations in determining the relationship between 

actions taken and compliance results in enforcement of trade 

agreements as complex as NAFTA, and the impossibility of 

measuring the effect of discontinuing audits for candidates not 

deemed as high-risk on the NAFTA compliance rate. Planned 

completion for this action is September 30, 2002. 

OIG Comment. We consider this recommendation to have a 

management decision with final action to be completed 

September 30, 2002. We recognize the considerations noted 

by Customs that need to be made when Customs develops this 

risk-based strategy for targeting NAFTA audit candidates. 

* * * * * * 

We would like to extend our appreciation to Customs for the 

cooperation and courtesies extended to our staff during the review. 

If you have any questions, please contact me at (617) 223-8640 or 

a member of your staff may contact Sharon Torosian, Audit 

Manager, at (617) 223-8642. Major contributors to this report are 

listed in Appendix 3. 

/S/ 

Donald P. Benson 

Regional Inspector General for Audit 
Appendix 1 

Objectives, Scope, and Methodology 

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The objective of this audit was to determine the adequacy of 

Customs efforts to identify and penalize violators who falsify 

country of origin in order to qualify for NAFTA duty-free treatment. 

To achieve this objective we reviewed policies and procedures 

pertaining to the processing of NAFTA-related transactions. We 

also reviewed the policies regarding the implementation of the 

NAFTA Trade Agreement Sub Plan. We verified operational 

statistics reported by Customs regarding NAFTA determinations, 

and verifications. We conducted on-site fieldwork at the following 

major NAFTA ports of entry: 

St. Albans, Vermont El Paso, Texas 

Champlain, New York Laredo, Texas 

Buffalo, New York Otay Mesa, California 

Detroit, Michigan 

We selected a judgmental sample of NAFTA verifications to 

determine the validity and reliability of information in the Customs 

NAFTA database to source documents maintained by port 

personnel. We determined that Customs personnel billed and/or 

collected revenue due when NAFTA benefits were denied. 

For each port we visited we verified that self-inspections were 

conducted and that Enforcement Evaluation Teams were in 

operation and were reviewing NAFTA-related issues. We also 

verified the status and results of NAFTA-related penalties cases 

established at each port. 

We selected a judgmental sample of NAFTA-related audits and 

validated revenue recoveries reported by Customs’ Office of 

Regulatory Audit. We also conducted fieldwork at Customs’ 

Strategic Trade Center in Dallas, TX, and reviewed the results of 

NAFTA-related Interventions authorized by Customs’ Office of 

Strategic Trade. 

Our audit fieldwork also included a visit to the Port of Buffalo to 

review policies and procedures pertaining to the operations and 

maintenance of Customs’ NAFTA database. We held meetings at 
Appendix 1 

Objectives, Scope, and Methodology 

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Customs Headquarters with personnel assigned to the Office of 

Strategic Trade, Office of Field Operations, Office of Investigations, 

Laboratories and Scientific Services, and the Office of Rulings and 

Regulations. 

Audit work was performed from August 2001 through February 

2002. We conducted our audit in accordance with generally 

accepted government auditing standards. 
Appendix 2 

Management Comments 

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Appendix 2 

Management Comments 

NAFTA Enforcement Information Is Limited (OIG-02-096) Page 21
Appendix 2 

Management Comments 

NAFTA Enforcement Information Is Limited (OIG-02-096) Page 22
Appendix 3 

Major Contributors To This Report 

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 Northeastern Region

 Donald P. Benson, Regional Inspector General for Audit 

 Sharon Torosian, Audit Manager 

 Thomas Mason, Auditor-in-Charge 

 Preston O’Toole, Auditor 
Appendix 4 

Report Distribution 

NAFTA Enforcement Information Is Limited (OIG-02-096) Page 24

 The Department of the Treasury

 Under Secretary of the Treasury for Enforcement 

 Office of Strategic Planning and Evaluations 

 Office of Accounting and Internal Controls 

 U.S. Customs Service

Commissioner 

Assistant Commissioner, Field Operations 

Director, Evaluation Oversight, Office of Planning 

Office of Management and Budget

OIG Budget Examiner