Appendix 1

ABBREVIATIONS

CIT U.S. Court of International Trade

FMS Financial Management Service, U.S. Treasury

Government U.S. Government

HMT Harbor Maintenance Tax

Justice U.S. Department of Justice

US. United States

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"Harbor Maintenance Tax Payment Report and Certification" form
(payment report and certification form) listing all payments by the
plaintiff which were eligible for refund. The plaintiff was to review
the listing and, if satisfied, fill out and sign a judgment form with the
certification attached, and send it to Justice. Justice was to sign and
file the proposed judgment with the CIT for entry of judgment.‘
Once the CIT entered judgment, Justice would forward a copy of the
approved judgment to Customs to process for payment. The court
order required Phase I to start as soon after October 15, 1998, as
Customs arranged the claim forms by plaintiffs’ first complaint filing
date.

In Phase II, which began March 15, 1999, plaintiffs could dispute
payments verified during Phase I. For example, a disputed payment
would be one not listed on the payment report and certification form.
In that instance, plaintiffs were to send appropriate supporting
documentation to Customs. Customs was to search its database and
original documentation to resolve the dispute, then send the plaintiffs
a revised payment report and certification form within 60 days.
Claims not resolved under Phase I or Phase II would be resolved
under Phase III (judicial review).

Under the court order, Customs was to process court-approved
judgments so payment could be made within 30 days of approval.
Also, Customs was to process no fewer than 500 claims per month
after December 15, 1998. Furthermore, Customs was to report on
its claims processing progress monthly to the CIT starting
November 15, 1998, and the 15th of every month thereafter.

Customs hired a contractor to help accomplish the task of (1)
developing and implementing refund procedures, and (2) processing
the claims. The contractor developed a stand-alone HMT database
that contained HMT payment and refund data downloaded from
Customs' Automated Commercial System. The contractor, in
concert with Customs, also developed procedures to process the

“Entry of judgement" refers to a submission seeking the court's approval of the proposed judgment. Once the
judgment is approved and entered onto the court's docket, it then becomes an "entered judgment."

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accounted for four overpayments. Contractor errors included
incorrect court filing dates input to the HMT database.

Two of the 12 overpayments were included in our sample of paid
judgments. The contractor identified one of these two overpayments
prior to providing the files for our review. We identified the other
overpayment. The contractor identified eight other overpayments
from its close-out review of the claim files that began in May 1999
and continued until its principal involvement with the refund process
ended on July 15, 1999. In September 1999, Customs identified two
additional overpayments.

One aspect of the close-out review focused on HMT export payments
not eligible for refund. Ineligible payments included payments made
before the two-year statute of limitations period. For example, if a
plaintiff filed a court action on May 1, 1995, then any payments
made before May 1, 1993, would not be eligible for refund. As
stated earlier, also ineligible for refund under the court-ordered
refund process were payments received by Customs after

April 25, 1998.

In each overpayment instance, Customs notified Justice. Justice has
the responsibility to determine whether to seek recovery of the
overpayments. As of September 10, 1999, one overpayment of $292
had been recovered from one of the plaintiffs.

Proper Separation of Duties Existed

Our walk-throughs of Customs' refund and payment processes
showed that proper separation of duties existed. Contractor
personnel did not have access to the payment module in Customs'
Asset Management Information System. Likewise, the Customs
employees assigned to process refunds for payment did not have
access to the HMT database. Within both groups, further separation
of duties existed. For example, contractor personnel designated as
initial claim processors did not have access to the HMT database
functions reserved for quality control reviewers, and vice versa.
Also, the Customs employee who approved refunds for payment did
not have access to the input module, while the employees who had
input capabilities did not have access to the payment module.

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pertinent background information including, but not limited to,
applicable court filings and decisions, related HMT statutes, monthly
status reports for November 1998 through September 1999, and
Customs’ refund procedures; (3) conducted walk-throughs of
Customs’ refund and payment processes; and (4) tested a sample of
paid refunds.

For our sampled refunds, we (a) judgmentally selected all (80) paid
claims greater than $1 million, (b) randomly selected 22 paid claims
under $1 million, and (c) judgmentally selected the eleven oldest
claims greater than $100,000, excluding those already selected using
the two prior sampling methodologies. We discarded one sample
selection of more than $1 million because it was a court test case;
thus, it was not processed under the same procedures as the other
112 claims. However, our review determined that the claim and
payment for that case was valid. In total, we reviewed 112 paid
claims totaling $267 million (or 68 percent) of the $391 million
(1,076 paid claims) refunded as of April 26, 1999.

We also tested the requirement that Customs was to issue a revised
payment report and certification form, under Phase II, within 60 days
of March 15, 1999 (the start of the Phase II process), to plaintiffs
who disputed the amount determined by Customs to be refunded
under Phase I. This test covered all (103) Phase II payment report
and certification forms issued as of May 18, 1999. Payment report
and certifications forms were the means by which Customs
communicated to plaintiffs the amount of proposed refund. In
addition, we had the contractor test all (1,201) claims totaling $420
million paid as of May 4, 1999, to determine whether the claims
were processed and paid within 30 days of the court entering
judgment.

We conducted our review in accordance with Government Auditing
Standards, issued by the Comptroller General of the United States,
and included such tests and inquiries considered necessary.

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claims. The contractor hired temporary personnel’ to perform
payment searches and generate the payment report and certification
form listing all HMT export payments identified from the HMT
database. The contractor also assisted Customs in preparing the
required status reports.

Objectives, Scope, and Methodology

Our review objectives were to evaluate whether: (1) Customs had put
in place adequate controls over refunds of HMT on exports, and (2)
Customs’ refund procedures complied with the CIT's court order
governing such refunds. Our objectives were not to opine on the
adequacy of Customs' internal controls over the refund process or its
compliance with the court order.

HMT export payments eligible for refund included those made by
plaintiffs starting two years prior to their first filing with the CIT to
recover such payments. The scope of our review focused principally
on (1) Customs’ responsibilities regarding HMT export refunds, and
(2) the related procedural criteria specified in the CIT's court order.
We did not focus our review efforts on actions required by Justice or
the plaintiffs. We considered those entities to be outside the scope of
our review. We did, however, include the work performed by the
contractor Customs hired to (1) help develop and implement refund
procedures, and (2) process claims. We did not include the
contractor's close-out review of the claim files because that review
had no bearing on the refund process.

We conducted our fieldwork during May 1999; however, we updated
our report, where applicable, to reflect activity that occurred through
the September 1999 reporting period. We conducted our fieldwork
at Customs' Accounting Services Division and at an off-site facility
rented by Customs, both located in Indianapolis, Indiana.

To accomplish our review objectives, we: (1) met with Customs and
contractor personnel involved in the refund process; (2) reviewed

>We considered the temporary personnel hired by the contractor to be "contractor personnel" and refer to them
as such throughout the report.

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search of the HMT database did not resolve instances where the
recorded total export fees did not equal the total check amount(s).

Refunds were based on total fees recorded instead of total amounts
paid because a one-for-one correlation did not always exist between
the HMT fee due and the check amount. For example, some
exporters paid a quarterly HMT with multiple checks. In these
instances, a separate transaction was recorded for each check, but the
total fee was not allocated to each check received. The total fee was
associated with the first check recorded. Also, a freight forwarder,
who ships goods for others, typically would submit one check to
cover the HMT fees for several exporters. In those instances, the
total fees due for a particular exporter would not equal the check
amount. In these types of situations, additional research of the HMT
database, including some paper document searches, was done.
However, the additional searches did not significantly impact the
overall processing of claims.

In addition, Customs performed a "clean-up" of HMT payments
received as cash receipts at its Accounting Services Division versus
receipt of such payments at the lockbox bank. In this effort,
Customs created a separate file to record such payments because the
information could not be added to the export user fee file created by
the lockbox bank. This effort included ensuring that those payments
were posted to the correct collection classification code. The
contractor included this file in the HMT database.

Also, Customs advised the contractor not to include, on the payment
report and certification form, any payments after April 25, 1998.
Customs stopped collecting HMT on exports after that date. HMT
export payments received by Customs after that date were refunded
separately from the court-ordered refund process.

We noted that Customs inadvertently overpaid, in total, $150,000 on
12 of 2,891 court-approved judgments ($689 million) paid as of
September 10, 1999. Processing errors by lockbox bank personnel,
at the time of initial receipt of the HMT payments, accounted for
eight overpayments. Specifically, bank personnel incorrectly coded
some non-export HMT payments as export HMT payments.
Processing errors by contractor personnel, during the refund process,

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FINAL REPORT ON REVIEW
OF CONTROLS OVER REFUNDS
OF HARBOR MAINTENANCE
TAX ON EXPORTS

OIG-00-016 February 7, 2000

Office of Inspector General

United States Department of the Treasury


Customs sent monthly processing results to Justice, who forwarded
the reports to the CIT. Our review of the status reports for
November 1998 through September 1999, showed that Customs, in
concert with Justice, issued monthly status reports timely.

The September 1999 status report, related attachments, and other
data showed Customs' cumulative progress with respect to claims
received by October 15, 1998. Customs had received 3,248 such
claims (including 35 duplicates) and issued 3,185 payment report and
certification forms, which listed payments eligible for refund. Of
those, the CIT received 2,803 proposed judgments and, of that
number, approved 2,774 of them totaling $683.3 million. Of the
approved judgments, 2,745 of them totaling $681.7 million had been
paid as of September 10, 1999.

The same information used above showed Customs' cumulative
progress with respect to claims received after October 15, 1998.
Customs had received 224 such claims (including 1 duplicate) and
issued 216 payment report and certification forms. Of those, the CIT
received 158 proposed judgments and, of that number, approved 148
of them totaling $7,046,000. Of the approved judgments, only one
($2.8 million) had been paid and included in our sample of paid
judgments we selected in May 1999. The remaining 147 claims
($4.2 million) were paid in July-September 1999.

The court order also required Customs to process no fewer than 500
claims per month after December 15, 1998. Review of status reports
for January 1999 through May 1999 showed that Customs exceeded
the requirement to process at least 500 claims per month. The May
1999 status report showed that Customs had processed 91 percent
(3,090/3,409) of the claims received. Comparisons of the May
through September 1999 status reports showed that Customs had
received only 27 new claims since the May reporting period.

Lastly, with minor exceptions, Customs met the court-ordered
processing timeframes related to revised payment report and
certification forms and court-approved judgments. We conducted
tests to determine whether Customs (1) issued revised payment report
and certification forms within 60 days, and (2) processed court-
approved judgments for payment within 30 days. We tested all (103)

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To test this control, we had some of the contractor personnel and
Customs employees attempt to perform functions not assigned to
them. In each instance, each system denied the individuals access to
functions they did not have in his or her individual system profile.

Finding 2 No Significant Instances of Non-Compliance with the Court of
International Trade’s Court Order Were Identified

Our review did not disclose significant instances of non-compliance
with the CIT's court order. The adequacy of Customs' refund
procedures, as discussed in Finding 1, contributed largely to
Customs' general compliance with the court order. Efforts by
Customs and its contractor resulted in Customs: (1) meeting,
generally, the requirement to process claims received by October 15,
1998, as required; (2) meeting the CIT's status report issuance
timeframe; and (3) exceeding the requirement to process at least 500
claims per month after December 15, 1998. In addition, only minor
exceptions occurred regarding the processing timeframes for issuing
revised payment report and certification forms and processing court-
approved judgments for payment.

The court order required Customs to process claim forms received by
October 15, 1998, in chronological order by date of filing of
plaintiff's first complaint. The contractor generally processed those
claims as required by the court order. Some deviation occurred
when multiple plaintiffs filed multiple claim forms using the same
exporter name and Employer Identification Number. In those
instances, the contractor combined the claim forms and processed
them simultaneously as one claim.

In addition, Customs was to process claim forms received after
October 15, 1998, in order of receipt of the claim form. However,
only one such claim, which we included in our sample of paid
judgments, had been processed and paid at the time of our fieldwork.
Therefore, we do not comment on whether other such claims were
processed as required.

The court order required Customs to report monthly on its claims
processing progress to the CIT. The first status report was due
November 15, 1998, and on the 15th of every month thereafter.

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Audit Results

Finding 1 Customs' Harbor Maintenance Tax Refund Procedures Were Adequate

Our review disclosed that, overall, Customs had put in place
adequate procedures related to refunds of HMT on exports. Customs
accomplished this in part by hiring a contractor to (1) help develop
and implement refund procedures, and (2) process claims. In
addition, Customs limited the payment process of export HMT
refund claims to certain employees.

Customs' Contractor Developed a Stand-Alone HMT Database to
Process Claims

The contractor developed a unique, stand-alone HMT database to
process claims. Before developing the database, the contractor
assessed the quality of Customs' HMT data. The contractor then
used the results of its assessment to develop the HMT database.
Initial input of data into the database came from downloaded data
from Customs' Harbor Maintenance Fee Module (HMT collection
data) and Refund Module, which contained HMT refund data.
Customs provided periodic updated HMT data to the contractor.

The HMT database structure allowed contractor personnel to: (1)
perform in-depth searches to locate HMT export payments eligible
for refund; (2) identify prior refunds of such payments; (3) image
documents received from the plaintiffs; and (4) generate letters to
plaintiffs confirming the receipt of initial claim forms, as well as
disputed payment report and certification forms. In addition, the
database provided audit trails of database searches performed by
claim processors and quality control reviewers.

Additional Procedures Were Implemented to Guard Against
Erroneous Refunds and Overpayments

Customs, in concert with its contractor, implemented additional
procedures to guard against erroneous refunds and overpayments.
These procedures included searching original documents when the

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In September 1994, the United States Shoe Corporation (U.S. Shoe)
filed suit to challenge the constitutionality of the HMT on exports.
The U.S. Department of Justice (Justice) represented the U.S.
Government (Government) in the various court actions that followed
based on U.S. Shoe's filing. The U.S. Court of International Trade
(CIT), the U.S. Court of Appeals of the Federal Circuit, and the
U.S. Supreme Court all held that the HMT on exports was
unconstitutional. The U.S. Supreme Court also held that the CIT
was the proper jurisdiction over controversies regarding HMT
administration and enforcement. The U.S. Supreme Court rendered
its decision on March 31, 1998.

On August 28, 1998, the CIT issued a court order, which required
the Government to refund immediately the HMT on exports. HMT
export payments eligible for refund included those payments received
by Customs starting two years prior to a plaintiff's filing of a
complaint with the CIT to recover such payments. During the period
September 1992 through April 1998, Customs collected $1.1 billion
related to the export HMT.

The court order required each plaintiff to complete a "Harbor
Maintenance Tax Refund Claim Form" (claim form), attach the filed
complaint or complaints, and return it to Customs by

October 15, 1998. Customs was to process those claim forms in
chronological order by date of filing of plaintiff's first complaint, and
to process claim forms received after October 15, 1998, in order of
receipt. The court order established no filing cut-off date. As such,
Customs continues to receive claim forms; however, the number is
minimal. Review of the May 1999 through September 1999 status
reports disclosed that Customs received only 27 new claims since the
May reporting period.

The court order also established a three-phase claims process. In that
regard, Customs was to perform the initial processing of claims
(Phase I). Part of the process included sending to each plaintiff a

3The Government and co-counsels for the plaintiffs agreed that payment report and certification forms and
payments would be sent to the attorney-of-record for each respective plaintiff. However, we do not make this
definitive distinction, since the ultimate responsibility for the correctness of the refund or for providing supporting
documentation on disputed payments rests with the plaintiff and not the plaintiff's attorney.

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Appendix 2

MAJOR CONTRIBUTORS TO THE REPORT

U.S. Department of the Treasury
Office of Inspector General

William H. Pugh, Deputy Assistant Inspector General for Audit, Financial Management
Audits

Thomas A. Moschetto, Director, Financial Management Audits

Robert M. Todero, Audit Manager

John E. Clymer, Auditor-in-Charge

Robert C. Davis, Auditor-in-Charge

Elizabeth R. Haskett, Auditor-in-Charge

Bernard P. Kavanagh, Auditor

Robert F. Long, Auditor

U.S. Customs Service

Pamela A. Miller, Team Leader, Collection Team, Accounting Services Division
Deborah Thompson, Accountant, Collection Team, Accounting Services Division

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Overview

Background

This report presents the results of our review related to refunds of
unconstitutionally collected harbor maintenance tax (HMT) on
exports. The review was conducted as an addition to the Office of
Inspector General's Office of Audit Annual Plan for Fiscal Year
1999, issued October 1, 1998. Our review objectives were to
evaluate whether the U.S. Customs Service (Customs) (1) had put in
place adequate controls over refunds of HMT on exports, and (2)
complied with the U.S. Court of International Trade's court order
governing such refunds. Our objectives were not to opine on the
adequacy of Customs' internal controls over the refund process or its
compliance with the court order.

Our review disclosed that, overall, Customs' refund procedures were
adequate. Also, no significant instances of non-compliance with the
court order were identified. We discussed the contents of this report
with appropriate Customs personnel and contractor management. We
incorporated their comments in this report, as applicable. Also, we
identified no areas where the refund process needed improvement;
thus, we make no recommendations. Accordingly, no formal
response to this report is required.

The Harbor Maintenance Revenue Act of 1986 established an HMT,
effective April 1, 1987, which was assessed on: (1) imported,
exported, and domestically shipped waterborne cargo; (2) foreign
trade zone admissions, and (3) arriving passengers aboard
commercial vessels. The HMT was initially 0.04 percent of the
value of commercial cargo’ loaded onto or unloaded from
commercial vessels at U.S. ports. Effective January 1, 1991, the
HMT increased to a rate of 0.125 percent of cargo value.

‘The Harbor Maintenance Revenue Act of 1986 was enacted November 17, 1986, under Title XIV of the Water
Resources Development Act of 1986, Public Law 99-662, and amended Chapter 36 of the Internal Revenue Code
of 1954 (relating to certain other excise taxes).

Under the Harbor Maintenance Revenue Act, the term "commercial cargo" includes passengers transported for
compensation or hire, e.g., cruise ships.

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DEPARTMENT OF THE TREASURY
WASHINGTON, D.c. 20220

February 7, 2000

OFFICE OF
INSPECTOR GENERAL,

MEMORANDUM FOR COMMISSIONER RAYMOND KELLY

UNITED STATES CUSTOMS “SERVICE tbl
A Viz 4

FROM: Dennis S. Schindel
Assistant Inspector General for Audit

SUBJECT: Final Report on Review of Controls Over
Refunds of Harbor Maintenance Tax on Exports

This memorandum transmits our final report on Review of Controls
Over Refunds of Harbor Maintenance Tax on Exports. The review
was conducted as an addition to the Office of Inspector General's
Office of Audit Annual Plan for Fiscal Year 1999, issued

October 1, 1998. The objectives of the review were to evaluate
whether the U.S. Customs Service (Customs) had: (1) established
adequate controls over refunds of harbor maintenance tax on
exports, and (2) complied with the U.S. Court of International
Trade's (CIT) court order governing such refunds.

Our review disclosed that, overall, Customs had put in place
adequate controls over refunds of harbor maintenance tax on
exports. Our review did not identify any significant instances
of non-compliance with the CIT's court order. We identified no
significant areas needing improvement relating to the refund
process; therefore, we make no recommendations. As such, no
formal response to this report is required.

We appreciate the courtesies and cooperation provided to our
staff during the review. If you wish to discuss this report, you
may contact me at (202) 927-5400, or a member of your staff may
contact Thomas A. Moschetto, Director, Financial Management
Audits at (202) 927-5074.

Attachment


revised payment report and certification forms issued as of
May 18, 1999. In addition, we had the contractor test all (1,201)
entered judgments paid as of May 4, 1999.

In each test, we identified one instance where the processing
timeframe was not met. In one instance, a Phase II claim processor
did not forward timely for review, and mailing to the plaintiff, a
revised payment report and certification form. The 60-day timeframe
had expired by three days by the time the error surfaced and
corrective action was taken.

In another instance, Customs inadvertently tried to process a single
check for more than $1 million. Treasury's Financial Management
Service (FMS), which issues checks for the Government, cannot
process a single payment for $1 million or more. Therefore, any
payment that equals or exceeds $1 million requires multiple checks.
The 30-day timeframe had expired by four days by the time Customs
re-processed the rejected payment and FMS issued multiple checks.
We noted no other processing timeframe exceptions attributable to
the contractor or Customs, respectively.

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Appendix 3

REPORT DISTRIBUTION

U.S. Department of the Treasury

Office of the Under Secretary of the Treasury for Enforcement
Assistant Secretary for Enforcement

Office of Organizational Improvement, Departmental Offices
Office of Strategic Planning, Departmental Offices

Office of Accounting and Internal Control, Departmental Offices

U.S. Customs Service

Commissioner

Deputy Commissioner

Assistant Commissioner, Office of Strategic Trade
Assistant Commissioner, Office of Field Operations

Chief Counsel, Office of Chief Counsel

Chief Financial Officer, Office of Finance

Director, Accounting Services Division, Office of Finance
Director, Office of Planning

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