New Performance Measure for FY 2001.
Beginning in FY 2001, Fund management will rely
on a new performance measure with which to
gauge progress against its Strategic Mission. This
measure is more strategic in nature and consistent
with the recently revised Strategic Plan of the
Treasury Forfeiture Fund. Performance measures
from FY 2000 related to the timing of real property
sales, equitable share payments and administrative
case processing will continue to be monitored as
significant program measures. However,
beginning in FY 2001, this new measure will be
tracked as a strategic indicator of Fund mission
progress.

Percent of forfeited cash proceeds resulting
from high-impact cases, This will measure the
percentage of cases with asset seizures in excess of
$100,000. A target of 75% high-impact cases has
been set for FY 2001.

Financial Highlights

The following provides a brief explanation for
each major section of the audited financial
statements accompanying this report for the fiscal
year ended September 30, 2000.

These statements have been prepared to disclose
the financial position, results of operations and
changes in net position pursuant to the
requirements of the Chief Financial Officers Act of
1990 and the Government Management Reform
Act of 1994 (GMRA). While the financial
statements have been prepared from the books and
records of the Fund in accordance with the formats
prescribed by the Office of Management and
Budget, the statements are different from the
financial reports used to monitor and control
budgetary resources that are prepared from the
same books and records and are subsequently
presented in Federal budget documents.

Therefore, it should be noted that direct
comparisons are not possible between figures
found in this report and similar financial figures
found in the FY 2002 and FY 2001 Appendix,
Budget of the United States Government. Further,
the notes to the financial statements and the
independent auditor’s opinion and report on

internal controls are also integral components to
understanding fully the financial highlights of Fund
operations described in this chapter.

Statement: Changes in Net Position

A comparison of revenues and financing sources
for the past two fiscal years is shown in the table.

Total Financing Sources
End of Year
(Dollars in millions)

2000

—
Ne
No

Financing Sources

Non-exchange Revenue from
Public Sources

Forfeited currency and
monetary instruments $140 $261

Sale of forfeited property, net
of mortgages and claims 31

is)
i)

Value of property transferred in
equitable sharing 7 6

Payments in lieu of forfeiture,
net of refund

Reimbursed costs
Other

|. i) ~
Leg

Subtotal, revenue from
public sources 1

wa
i)
Rel
Re)

Non- exchange Revenue from
Intra-governmental Sources
Proceeds from participation with other

Federal agencies 16 12

Investment interest income 24 23

Subtotal, financing from
intra-governmental sources __40 35

Total, gross financing from
non-exchange revenues 22.

In
we
je
a

|
|

15 SECTION I - OVERVIEW


lhe Fund’s financial statements are presented in accordance with OMB Bulletin 97-01, Form and Content
of Agency Financial Statements, as amended.

The Fund’s entity and non-entity financial statements with respect to the balance sheet, the statement of net
cost, and the statement of changes in net position are reported using the accrual basis of accounting. Under
the accrual method, revenues are recognized when earned and expenses are recognized when a liability is
incurred without regard to receipt or payment of cash. The Fund’s statement of budgetary resources is
reported using the budgetary basis of accounting. Budgetary accounting facilitates compliance with legal
constraints and controls over the use of Federal funds. The Fund’s statement of financing is reported on both
an accrual (authorization) and budgetary basis of accounting (obligations and unfilled customer orders) as
a means to facilitate an understanding of the differences between these bases of accounting.

Financial Statements Presented

These financial statements are provided to meet the requirements of the Chief Financial Officers Act of
1990, and the Government Management Reform Act of 1994. They consist of the balance sheet, the
statement of net cost, the statement of changes in net position, the statement of budgetary resources, and the
statement of financing, all of which are prescribed by OMB Bulletin 97-01, as amended.

The form and content of the balance sheet, as suggested by OMB, has been adjusted to present non-entity
assets (and offsetting liabilities) to reflect the custodial/fiduciary nature of certain activities of the Fund.

These financial statements should be read with the realization that they are for a component of a sovereign
entity, that liabilities not covered by budgetary resources cannot be liquidated without the enactment of an
appropriation, and that the payment of all liabilities other than for contracts can be abrogated by the
sovereign entity.

Comparative financial statements are presented in order to provide a better understanding of, and identifying
trends in the financial position and results of operations of the Fund.

Allowable Fund Expenses

The majority of the revenue recorded by the Fund is utilized for operating expenses or distributed to state and
local law enforcement agencies, other Federal agencies, and foreign governments, in accordance with the
various laws and regulations governing the operations and activities of the Fund. Under the TFF Act, the Fund
is authorized to pay certain discretionary and non-discretionary expenses.

Discretionary expenses include purchases of evidence and information related to smuggling of controlled
substances; purchases of equipment such as vessels, vehicles, or aircraft to assist in law enforcement
activities; reimbursement of private persons for expenses incurred while cooperating with a Treasury law
enforcement organization in investigations; and publication of the availability of awards. Discretionary
expenses are subject to an annual, definite Congressional appropriation from revenue in the Fund.

Non-discretionary expenses include all proper expenses of the seizure (including investigative costs and
purchases of evidence and information leading to seizure, holding cost, security costs, etc.), awards of
compensation to informers, satisfaction of liens against the forfeited property, and claims of parties with
interest in forfeited property. Expenses incurred by state and local law enforcement agencies in joint law
enforcement operations with Treasury law enforcement agencies are also recognized as non-discretionary
expenses. Under the Act, non-discretionary expenses are subject to a permanent indefinite Congressional

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 34


Treasury Forfeiture Fund
Statement of Changes in Net Position

For the Years Ended September 30, 2000 and 1999

(Dollars in Thousands)

Net Cost of Operations

Financing Sources (Non-Exchan ge Revenues):

Intragovernmental
Investment interest income

Public
Forfeited currency and monetary instruments
Sales of forfeited property net of mortgages and claims
Proceeds from participating with other Federal agencies
Value of property transferred in equitable sharing
Payments in licu of forfeiture, net of refund
Reimbursed costs
Others

Total Gross Non-Exchange Revenues

Less: Equitable Sharing
Intragovernmental
Federal
Public
State and local agencies
Foreign countries
Victim restitution

Total Equitable Sharing

Total Non-Exchange Revenues, Net
Transfers-Out
Intragovernmental
Super Surplus (Note 14)
Secretary’s Enforcement (Note 15)
Property
Total Transfers-Out

Total Financing Sources

Net Results of Operations

Net Position-Beginning of Year
Net Position-End of Year

2000.

$_131.730

23,895

140.414
30,896
16,205
7,112
880
2,299
4.045

225.746

6,557

(85,104)
(6,569)
(10,540)
(102.213)
(108.770)

116,976

(70,927)
(8,244)

(1,043)
(80,214)

36,762
(94,968)

324.710

$_ 229.742

The accompanying notes are an integral part of these financial statements

Restated
1999

$ 145.539

22,789

261,255
23,192
12,420
6,385
5,536
2,006
862
334.445

(12.058

(150,480)
(2,416)
(1,465)

(154,361)

(166,419)

168,026

(37,430)
(3,960)

(41,390)

26,636
18,903

343.613,

$324.71

S

BE

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 30


Information Required by 31 U.S.C. 9703(f)
For the Year Ended September 30, 2000
(Dollars in Thousands)

The amount of forfeited currency and property shared with Federal, and distributed to state,
local and foreign law enforcement bureaus as reported in the audited financial statements was

as follows:
State and local $85,104
Foreign countries 6,569
Other Federal agencies 6,557
Victim restitution 10,540

(C) The net amount realized from the operations of the Fund during the preceding fiscal year, the
amount of seized cash being held as evidence, and the amount of money that has been carried
over into the current fiscal year.

The net cost of operations of the Fund as shown in the audited financial statements is $131 5730.

The amount of seized currency not on deposit in the Fund’s suspense account at September 30,
2000, was $48,074. This amount includes some funds in the process of being deposited at year
end; cash seized in August or September 2000, that is pending determination of its evidentiary
value from the U.S. Attorney; and the currency seized for forfeiture being held as evidence.

On a budgetary basis, unobligated balances as originally reported on the Office of Management
and Budget Reports, SF-133, “Report on Budget Execution” was approximately $62,895 for
Fiscal Year 2000.

(D) Any defendant’s property not forfeited at the end of the preceding fiscal year, if the equity in
such property is valued at $1 million or more.

The total approximate value of such property for the Treasury Forfeiture Fund, at estimated
values determined by bureau and contractor’s officials, and the number of seizures is as follows:

U.S. Customs Service $74,694 18 seizures
IRS 90,516 27 seizures
USS. Secret Service 6,397 2 seizures

(E) The total dollar value of uncontested seizures of monetary instruments having a value of over
$100,000 which, or the proceeds of which, have not been deposited into the Fund within 120
days after the seizure, as of the end of the preceding fiscal year.

The total dollar value of such seizures is $2,326. A separate schedule is presented on page 76.

79 TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000


The following schedule presents the investments on hand as of September 30, 2000 and 1999, respectively
(dollars in thousands):

Entity Assets
Unamortized _ Investment,
Description Cost Discount Net
September 30, 2000:
Treasury Forfeiture Fund -
28 days 5.875% U.S.

Treasury Bills $243,902 $1,114) $242,788
Interest Receivable —

On entity investments

, 32
On non-entity Investments 320
Total Investment, Net, and

Interest Receivable $243.466

it September 30, 1999:
: Treasury Forfeiture Fund -
35 days 4.40% U.S.

Treasury Bills $287,801 $(1,230) $286,571
Interest Receivable —

On entity investments 493
On non-entity investments 434

Total Investment, Net, and

| Interest Receivable $287,498
Non-entity Assets
u Unamortized Investment,
Description Cost Discount Net

September 30, 2000:

Treasury Forfeiture Fund ~— Seized Currency
Suspense Account
28 days 5.875%

US. Treasury Bills $217,886 $(996) $216,890
September 30, 1999:

U.S. Customs Suspense Account
35 days 4.40%

USS. Treasury Bills $254,225 $(1,086) $253,139

39 FINANCIAL STATEMENTS


manipulated. During FY 2000, approximately $1
million in unlawful proceeds was seized and
forfeited. Included in the seizures was a piece of
real property located in Pound Ridge, NY,
appraised at $850,000. Indictments of five targets
are anticipated for April 2001. Included in the
indictments will be proceeds and assets of
approximately $12 million, including four
properties in New York and Florida.

Treasury Computer Investigative Specialist
Program

Treasury’s law enforcement bureaus continue to
adapt to the rapidly changing technology and
develop the capability to conduct investigations in
an electronic environment. A key component of
the agencies’ efforts to maintain such proficiency
has been the Treasury Computer Investigative
Specialist Program, Formerly the Computer
Investigative Specialist (CIS) 2000 Program.
Established in 1997, the CIS Program is one of the
Treasury Department’s responses to the challenge
of collecting, analyzing, preserving and presenting
evidence extracted from electronic media.

CIS is a Treasury-wide training initiative to ensure
that all Treasury law enforcement bureaus have a
technically skilled and highly equipped cadre of
computer investigative specialists to meet their
investigative needs. There are four principal
components to the CIS initiative:

° Training

¢ Equipment (hardware and software)

¢ Internet Web site with dedicated servers
« Classroom equipment improvements

This past year was again a successful one in terms
of training new specialists, providing upgraded
equipment for computer forensics, and adding
value to the investigations conducted by the
special agents of the Treasury law enforcement
bureaus.

In FY 2000, the Forfeiture Fund gave
approximately $7.5 million to the CIS program.
In part, these funds went to train special agents in
basic and advanced evidence recovery techniques

and to provide them with the latest computer
forensic equipment.

Overall, 96 special agents were trained in basic
evidence recovery and 80 were trained in advanced
evidence recovery during FY 2000. Thirty-seven
special agents were trained in advanced network
training which included classes in Microsoft
MSCE, Novell CNE, and Linux LNE.

CIS Case Highlights

¢ A joint IRS-Customs High Intensity Drug
Trafficking Area investigation resulted in the
seizure of two notebook computers from a
sailboat transporting cocaine. The individuals
arrested during the seizure claimed that they
were new acquaintances and were not
tesponsible for the narcotics. Evidence
obtained from the computers established that
the individuals had known each other for a long
period of time. The computers also
documented other trips they had taken together
to and from the Caribbean which corresponded
to narcotics transactions. Email also connected
these individuals with a Canadian smuggling
financier and to other narcotics transported to
England. The Canadian was located in
Switzerland. Swiss authorities would not
extradite the individual but when they were
shown the evidence, they indicted him for
violation of Switzerland’s laws. The Canadian
has agreed to cooperate and has identified
additional defendants. U.K. Custom’s agents
have been provided the computer evidence to
add to their investigation of the loads
transported to England. The amount of
narcotics involved in the U.K. investigation
make it one of the largest currently under
investigation there. The CIS may be required
to testify in both England and Switzerland.

¢ The Missouri Water patrol requested Criminal
Investigation Division assistance in their
investigation of an alleged murder of a St.
Louis area woman at the Lake of the Ozarks.
This case was assigned to the Criminal
Investigation Division because possible money
laundering charges were involved. The subject,

9 SECTION I - OVERVIEW


3. U.S. CUSTOMS SERVICES’ SEIZED PROPERTY AND FORFEITED ASSETS TRACKING
SYSTEM IS INADEQUATE (REPEAT CONDITION FROM PRIOR YEARS)

CONDITION

System controls deficiencies continue to exist in the U.S. Customs Services’ seized property and forfeited
assets tracking system, the Seized Asset and Case Tracking System (SEACATS). These deficiencies may
result in SEACATS generating property and currency case data that is not complete, accurate or authorized.

Property

Significant enhancements were made to SEACATS during fiscal year 1999 with respect to its
capabilities for tracking and reporting seized and forfeited property. However, the overall design and
effectiveness of controls over the input, processing, and monitoring activities associated with the use
of SEACATS are not adequate to ensure that all financial transactions associated with the system
are complete, accurate and authorized,

Currency

SEACATS does not contain accurate and sufficient currency data that can be relied upon for
financial reporting purposes without substantial manual manipulation and _ reconciliation.
Consequently, exhaustive year-end procedures were developed to manually compile forfeited and
seized currency as of September 30, 1999, to report information in the financial statements in
accordance with Statement of Federal Financial Accounting Standards (SFFAS) No. 3, Accounting
Jor Inventory and Related Property.

RECOMMENDATION

a. The shortfalls identifiable to SEACATS must be immediately corrected to allow for cradle to grave
tracking of all property and currency seizures from case initiation to final resolution;

b. System control deficiencies identified within SEACATS must be corrected to ensure that all financial
transactions associated with seizures are complete, accurate and authorized, and complies with
JFMIP Federal Financial Management Systems Requirements for Seized Property and Forfeited
Assets, and OMB Circular A-127, Section 7;

c. Customs must continue to provide user training, and also provide comprehensive updated system
documentation to conform to user requirements; and

d. As further systems changes are made, Customs must conduct post conversion audits to ensure that
SEACATS works as purported.

63 EXHIBIT III - STATUS OF PRIOR YEAR FINDINGS


ta

1.2 Asset Disposition Activities
“Asset specific expenses and revenue are not recorded and accounted for by the Fund

Asset specific expenses and revenue generated from asset disposition activities are not recorded and
accounted for by the Fund in the various seized property and forfeited assets tracking systems. The
Fund’s Property Custodian incurs costs on behalf of the Fund from the time of seizure until the asset
is ultimately disposed. The Fund requests cost information from the Property Custodian and relies
on the information provided.

The reportable condition identified below was observed during fiscal year 2000.

2. Unsubstantiated Values for Seized Property

A considerable number of seizures had $0 appraised value on the inventory reports although they
were not of the contraband or prohibited categories. These seizures include real property, vehicles
and jewelry, which should have an appraised value other than $0. Additionally, we found instances
where the financial values assigned to Property were significantly higher than the supporting
appraisal worksheets.

In preparing the financial statements, Fund Management uses year-end manual procedures to compensate
for the above identified conditions and weakness. These conditions and weakness existed throughout the
year. Therefore, information obtained from the accounting system during the year may not be reliable.
Consequently, Fund Management cannot place reliance on this information as the sole basis on which to
make decisions.

Because these conditions and weakness impact many functions and lines of authority between the Treasury
agencies, we recommend the Fund Management develop a joint plan with the other Treasury agencies, to
implement the recommendations included in Exhibits I and IL.

We also noted other matters involving the internal control structure and its operation that we have reported
to Fund Management in a separate letter dated January 8, 2001.

Finally, with respect to internal control related to performance measures reported in Section 1, “Program
Performance and Financial Highlights,” we obtained an understanding of the design of significant internal
controls relating to the existence and completeness assertions, as required by OMB Bulletin No. 01-02. Our
procedures were not designed to provide assurance on internal control over reported performance measures,
and, accordingly, we do not provide an opinion on such controls.

This report is intended for the information and use of the Management of the Fund, the U.S. Department of

the Treasury, OMB, and the U.S. Congress. However, this report is a matter of public record and its
distribution is not limited.

January 8, 2001

he ctey
lp ha, banger .


Gardiner, Kamya & Associates, P.C.

Management Consultants and Certified Public Accountants
1717K Street, N.W,, Suite 601 Washington, D.C. 20036
Phone: 202 857-1777

Fax: 202 857-1778
Independent Auditor's Report on Internal Control

The Inspector General
United States Department of the Treasury
Washington, D.C.

We have audited the Principal Statements (balance sheet and the related statements of net cost,
changes in net position, budgetary resources and financing, hereinafter referred to as “financial
statements”) of the Department of the Treasury Forfeiture Fund (the F und) as of and for the
years ended September 30, 2000 and 1999, and have issued our report thereon dated January
8, 2001. We conducted our audits in accordance with generally accepted auditing standards; the
standards applicable to financial audits contained in Government Auditing Standards, issued by
the Comptroller General of the United States; and, Office of Management and Budget (OMB)
Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

In planning and performing our audits, we considered the Fund’s internal control over financial
reporting by obtaining an understanding of the Fund’s internal control, determined whether
these internal controls had been placed in operation, assessed control risk, and performed tests
of controls in order to determine our auditing procedures for the purpose of expressing our
opinion on the financial statements. We limited our internal control testing to those controls
necessary to achieve the objectives described in OMB Bulletin No. 01-02. We did not test all
internal controls relevant to operating objectives as broadly defined by the Federal Managers’
Financial Integrity Act of 1982, such as those controls relevant to ensuring efficient operations.
The objective of our audits was not to provide assurance on internal control. Consequently, we
do not provide an opinion on internal control.

Our consideration of the internal control over financial reporting would not necessarily disclose
all matters in the internal control over financial reporting that might be reportable conditions.
Under standards issued by the American Institute of Certified Public Accountants, reportable
conditions are matters coming to our attention relating to significant deficiencies in the design
or operation of the internal control that, in our judgment, could adversely affect the Fund’s
ability to record, process, summarize, and Teport financial data consistent with the assertions by
Fund Management in the financial statements. Material weaknesses are reportable conditions
in which the design or operation of one or more of the internal control components does not
reduce to a relatively low level the risk that misstatements in amounts that would be material
in relation to the financial statements being audited may occur and not be detected within a
timely period by employees in the normal course of performing their assigned functions.
Because of inherent limitations in internal controls, misstatements, losses, or noncompliance
may nevertheless occur and not be detected. However, we noted certain matters discussed in the
following paragraphs involving the internal control and its Operation that we consider to be a
material weakness and reportable conditions.

46

Member of the American Institute of Certified Public Accountants


1, THE GENERAL LEDGER DOES NOT CAPTURE ALL BALANCES AND
TRANSACTIONS THAT COMPRISE THE FUND DURING THE YEAR. (Repeat Condition)

CONDITION

The Asset Information Management System (AIMS) which is the general ledger system maintained by the
U.S. Customs Service ( Customs), processes, groups and summarizes transactions into account balances for
the Fund. Currently, it is not interfaced with the seized property and forfeited assets tracking systems (asset
tracking systems) used by the various law enforcement agencies participating in the Fund. As a result,
accounts such as accounts receivable, liens and mortgages payable, forfeited property and deferred revenue,
and seized currency and its offsetting liability are not recorded in the general ledger during the year. Instead,
the Fund has implemented procedures to capture these balances only at year end.

CRITERIA

Office of Management and Budget (OMB) Circular A-1 27, Financial Management Systems, and the Joint
Financial Management Improvement Program (JFMIP) Framework For Federal Jinancial Management
Systems require that each agency establish and maintain a single integrated financial management system.
Interface where one system feeds another is acceptable, but the interface linkages must be electronic unless
the number of transactions is so small that it is not cost beneficial to automate the interface.

CAUSE

The Fund’s general ledger is maintained on a cash basis. Accordingly, accounts are not maintained on an
accrual basis during the year. In addition, the asset tracking systems maintained by each of the participating
agencies do not interface with the Fund’s general ledger. Accordingly, inventory-related transactions that
are non-cash generated are not recorded in the Fund’s general ledger at any time during the year.

EFFECT

The lack of interface among the relevant subsidiary systems and the general ledger precludes the capturing
of all transactions related to the Fund on a regular basis. Therefore, complete financial statements or current
financial information cannot be readily produced using the general ledger balances. Seized and forfeited
property, related liabilities, and various other accounts subject to accrual, are not captured in the general
ledger during the year. As a result, the financial information produced during the year does not correctly
present the results of operations and net position of the Fund.

RECOMMENDATION

We reaffirm our recommendations from previous financial statement audits, specifically:

1. In the absence of an integrated system, manually record all accounts subject to accrual, such as seized
currency and its offsetting liability, and forfeited property and the related revenue and any applicable

liability, on a regular basis in the Fund’s general ledger.

2. Expedite the implementation of the FGL system, an integrated financial system that is capable of
capturing all transactions related to the Fund’s activities, in the general ledger.

3 EXHIBIT I - MATERIAL WEAKNESS



CAUSE

1.1

Seizure Activities
Inadequate accounting and recording of liens and claims

The Fund instructed the various agencies to update their inventory systems with liens and claims
information at the time of forfeiture. USCS and IRS attempted to record this information. However,
SEACATS faced technical difficulties to capture payee and other related information, while
AFTRAK’s information on liens was inaccurate with Tespect to payment status. ATF and USSS,
both of which use CATS, were unable to capture this information.

1.2 Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted for by the Fund
The Fund relies on the Property Custodian for providing asset specific expenses and revenue
information. Deficiencies in the system (SEACATS) that the Property Custodian uses preclude the
capturing of expense and revenue information at the asset level.

EFFECT

1.1 Seizure Activities
Inadequate accounting and recording of liens and claims
The value of properties will be overstated by the amount of the liens or claims outstanding.
Additionally the situation may ultimately result in non-compliance with Statement of Federal
Financial Accounting Standard (SFFAS) No. 3, Accounting for Inventory and Related Property,
which prescribes that a valuation allowance be established and recorded for liens and claims on
forfeited property.

1.2 Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted for by the Fund
The Fund is unable to report asset specific expenses and revenues. The Fund’s asset management
function will deteriorate if the above conditions are allowed to exist, resulting ultimately in a lack
of accountability over the assets of the Fund.

RECOMMENDATION

We recommend that the following actions be immediately implemented:

Ld

Seizure Activities
Inadequate accounting and recording of liens and claims

Implement procedures to have field offices track liens and claims manually on a monthly basis and

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 34


2. Ina recent decision, the Supreme Court has ruled that the government must return forfeited currency in
those cases of individuals convicted for currency reporting violations who have had currency forfeited
due to the violation. The amount of the currency that might be refunded will be payable from the Fund,
and, at present, represents a possible claim of potential significance.

At present, it is not possible to determine the likelihood that the above claims will arise. Similarly, it
is not possible to determine the value of such potential claims against the Fund.

Judgements and settlements of $2,500 or greater, resulting from litigation and claims against the Fund
are satisfied from various claims and judgement funds maintained by Treasury.

(17) Disclosures Related to the Statement of Net Cost

Gross costs and earned revenue related to Law Enforcement Programs administered by the Fund are
presented in Treasury’s budget functional classification (in thousands) as set out below:

Restated
2000 1999
Gross Costs $131,730 $145,539
Earned Revenues - --
Net Costs $131,730 $145,539

The Fund falls under the Treasury’s budget functional classification related to Administration of Justice.

(18) Disclosures Related to the Statement of Budgetary Resources

The Fund’s net amount of budgetary resources obligated for undelivered orders at the end of Fiscal Year
2000 and 1999 are $135.6 million and $113.8 million, respectively. This amount is fully covered by cash
on hand in the Fund. The Fund does not have borrowing or contract authority and, therefore, has no
repayment requirements, financing sources for tepayment, or other terms of borrowing authority. No
adjustments were required during the reporting period to budgetary resources available at the beginning of
the year. There are no legal arrangements, outside of normal government wide restrictions, specifically
affecting the Fund’s use of unobligated balances of budget authority.

Adjustments to budgetary resources available at the beginning of Fiscal Year 2000 and 1999 consist of the
following (in thousands):

2000 1999
Recoveries of Prior Year Obligations $29,856 $27,566
Spending Authority from Offsetting Collections 68 8
Total $29,924 $27,574

(19) Dedicated Collections .

The Fund is classified as a special fund. All its activities are reported as dedicated collections held for
later use.

45 FINANCIAL STATEMENTS


Statement: Balance Sheet

Assets of the Fund’s balance sheet are composed
of entity and non-entity assets. Entity assets are
assets that have been forfeited to the Fund and are
in custody pending disposition. Non-entity assets
are seized assets, not yet forfeited to the Federal
Government, but which are in the custody of the
government.

A summary of all assets required for presentation
on the Balance Sheet of the Fund as of September
30, 2000 is presented in the following table’. As
shown on the Balance Sheet, the total of both
entity and non-entity assets decreased from $757
million at the end of FY 1999, to a total of $635
million at the end of FY 2000, a decrease on the
Balance Sheet of $122 million or sixteen percent.
Also, as shown in the footnote 9 disclosure,
physical property under seizure not shown on the
Balance Sheet decreased from $273 million at the
end of FY 1999 to $196 million at the end of FY
2000, a decrease of $77 million. Isolating physical
property of the forfeiture program, both entity and
non-entity physical property totaled $227 million
at the end of FY 2000 as compared to $301 million
at the end of FY 1999, a reduction of $74 million
or twenty five percent of the FY 1999 value. This
accounts for the stable cost of the national property
contract between FY 1999 and FY 2000 of $32.8
million and $33.4 million, respectively.

Assets owned by the Fund (Entity Assets):

Cash and other monetary instruments totaled
$66 million on September 30, 2000, as compared
to a balance of $140 million on September 30,
1999. This balance fluctuates based on the timing
of deposits of forfeited currency into the Fund and
distributions of forfeited currency shared with
local, state and foreign law enforcement agencies.
On September 30, 2000, the Fund had entity
investments and related interest in Treasury

2 Non-entity property assets, which are seized assets other
than cash and monetary instruments, are not shown on the
face of the Balance Sheet, consistent with the current
Statement of Federal Financial Accounting Standards
Number 3, but are disclosed in Note 9. Beginning with FY
2001 financial statements , these assets will be shown on the
face of the Balance Sheet.

securities of $244 as compared to $288 million on
September 30, 1999. The balance for total
accounts receivable, intra-governmental and non-
intra-governmental, totaled about $0.3 million on
September 30, 2000, as compared to about $0.8
million on September 30, 1999. The value of
forfeited property, held for sale, net of
mortgages, liens and claims on September 30,
2000, was $28 million, up from $26 million
reported on September 30, 1999. The value of
forfeited property, to be shared with Federal,
state or local or foreign governments on hand at
the end of both fiscal years was less than $1
million.

Advances had diminished from about $1.4 million
on September 30, 1999, to just over $0.7 thousand
on September 30, 2000. Minimizing advances
serves to increase balances available for investment
for the Fund, improving investment earnings.

Assets not owned by the Fund (Non-Entity
Assets):

Finally, the total for seized currency and other
monetary assets, invested and not invested, on
September 30, 2000 was $296 million, only a slight
decrease from the $300 million reported on
September 30, 1999.

Entity and Non-Entity Assets of the Fund
End of Year
(Dollars in millions)

2000 1999
Entity Assets (Forfeited assets,
owned by the Fund)

Intra-Governmental (in the custody
of the Federal Government)

Cash and other monetary
Assets $49 $127

Investments and related

Interest 244 288
Accounts receivable (*) @)
Advances 1 _1

19 SECTION I - OVERVIEW


appropriation, and financed through the revenue generated from forfeiture activities without congressional
limitation.

Prior to fiscal year 2000, without regard of funding sources, the Fund's expenses were either paid on a
reimbursement basis or paid directly on behalf of a participating bureau. Reimbursable expenses are incurred
by the respective bureaus participating in the Fund against their appropriation and then submitted to the
Fund for reimbursement. The bureaus are reimbursed through Inter-Agency Transfers (SF-1081) or Online
Payments and Collections (OPAC). However, in fiscal year 2000, pursuant to a directive from the Treasury
Departmental Office, this accounting policy was changed. The Fund records the distribution of funds to the
bureaus from the Super Surplus Fund or the Secretary’s Enforcement fund as transfers-out. Treasury bureaus
(except for Departmental Office) record the receipt of the funds as transfers-in. Treasury Departmental
Office will still recognize the Fund’s disbursements as revenue. The change in accounting policy has no
cumulative effect on the net results of operations. However, prior year Super Surplus and Secretary’s
Enforcement expenses have been reclassified to reflect this change. Certain expenses such as equitable
sharing, liens, claims and state and local joint operations costs are paid directly from the Fund.

Further, the Fund is a component unit of the Treasury and as such, employees of the Treasury perform
certain operational and administrative tasks related to the Fund. Payroll costs of employees directly
involved in the security and maintenance of forfeited property are also recorded as expenses in the financial
statements of the Fund (included in the line item “seizure investigative costs and asset management” in the
statement of net cost.)

Revenue and Expense Recognition

Revenue from the forfeiture of property is deferred until the property is sold or transferred to a state, local
or Federal agency. Revenue is not recorded if the forfeited property is ultimately destroyed or cannot be
legally sold.

Revenue from currency is recognized upon forfeiture. Payments in lieu of forfeiture (mitigated seizures)
are recognized as revenue when the payment is received. Revenue received from participating with certain
other Federal agencies is recognized when the payment is received. Operating costs are recorded as expenses
and related liabilities when goods are received or services are performed. Beginning Fiscal Year 1999
certain probable equitable sharing liabilities existing at year end are accrued based on estimates.

As provided for in the TFF Act, the Fund invests seized and forfeited currency that is not needed for current
operations. Treasury’s Bureau of Public Debt invests the funds in obligations of, or guaranteed by, the
United States Government. Interest is reported to the Fund and recorded monthly as revenue in the general
ledger.

Equitable Sharing (Assets Distributed)

Forfeited property, currency, or proceeds from the sales of forfeited property may be shared with Federal,
state and local law enforcement agencies or foreign governments, which provided direct or indirect
assistance in the related seizure. In addition, the Fund may transfer forfeited property to other Federal
agencies, which would benefit from the use of the item. A new class of asset distribution was established
for victim restitution in 1995. These distributions include property and cash returned to victims of fraud and
other illegal activity. Upon approval by Fund management to share or transfer the assets, both revenue from
distributed forfeited assets and distributions are recognized for the net realizable value of the asset to be
shared or transferred, thereby resulting in no gain or loss recognized. Revenue and or expenses are

35 FINANCIAL STATEMENTS



2. ALL BALANCES AND TRANSACTIONS THAT COMPRISE THE FUND ARE NOT
CAPTURED BY THE GENERAL LEDGER (REPEAT CONDITION FROM PRIOR
YEARS)

CONDITION

The Asset Information Management System (AIMS) which is the general ledger system maintained by the
U.S. Customs Service (Customs), processes, groups and summarizes transactions into account balances for
the Fund. The general ledger system is currently not used to track all balances and transactions that comprise
the Fund, such as accounts receivable, liens and mortgages payable, forfeited property and deferred revenue,
and seized currency and its offsetting liability. This is due to the lack of interface between AIMS the seized
property and forfeited assets tracking systems (asset tracking systems) used by the various law enforcement
agencies participating in the Fund. Procedures are not developed to identify and capture information
manually on a regular basis from other agencies’ systems during the year. Instead, procedures are in place
to capture these balances only at year end. The reconciliation process currently in place between the various
transactions in the asset tracking systems and general ledger is cumbersome and reconciling items are not
posted timely.

RECOMMENDATION
We reaffirm our recommendations from previous financial statement audits, specifically:

a. In the absence of an integrated financial system, all accrual basis accounts, seized currency and its
offsetting liability, and forfeited property and the related revenue should be recorded manually on
a regular basis in the Fund’s general ledger during the year.

b. Alternatively, the Fund must develop and implement an integrated financial system that will capture
all transactions related to the Fund’s activities in the general ledger.

The issuance of the Federal Financial Management Improvement Act of 1996 further emphasizes the need
for compliance with financial management system requirements, which mandates integration.

FY 2000 STATUS

The Fund continues to manually identify transactions that apply to the Fund only at year-end and not ona
monthly basis. Also, the necessary system changes have not been made in FY 2000 to the Fund’s general
ledger system to accommodate the capture of all balances and transactions that comprise the Fund.

Customs is developing an integrated system (FGL) that will capture all Customs generated transactions in
the general ledger and eventually, will be extended to transactions generated by all the participating
agencies. It is expected that the system will be moved into production in fiscal year 2001 for Customs based
transactions. However, this condition will continue until the integration is completed.

This deficiency will be repeated in FY 2000 as a Material Weakness.

TREASURY FORFETURE FUND ANNUAL REPORT - FISCAL YEAR 2000 62


fy

ta

if
ft

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TREASURY FORFEITURE FUND
ANNUAL REPORT
FISCAL YEAR 2000

Table of Contents
Page No.
Section I: Overview
Fiscal Year 2000 Program Performance and Financial Highlights... eccssecccsssessssssssseeeseseee 1

Section II: Financial Statements

Independent Auditor's Report on Financial Statements...

Financial Statements:
Balance Sheet...

Statement of Changes in Net Position
Statement of Budgetary Resources
Statement of Financing.........
Notes to Financial Statements

Section III: Other Reports

Exhibit I

Material Weakness..
Exhibit II

Reportable Conditions
Exhibit III

Status of Prior Year Findings.......cccccssecsssesssssessesussssusssssssssssnsstiussssssatssasiesssessesesee 59

Section IV:

Supplemental Information

Section V:

Other Accompanying Information


4. IMPROPER TIMING FOR VALUATION OF FORFEITED PROPERTY (REPEAT
CONDITION FROM PRIOR YEARS)

CONDITION

financial statement value of forfeited property.
RECOMMENDATION

We reaffirm our recommendations from previous financial statement audits that:

a. Fund Management evaluates the accuracy of fair market values assigned to forfeited property,
Accordingly, the fair market value should be determined by performing an appraisal at the date of
forfeiture;

b. Failing this, we recommend that Fund Management continue reviewing the methodology used to

arrive at the fair market value to refine its accuracy and ease in preparation. As the process is
refined, it will become easier to prepare a monthly analysis to properly value and record month-end
forfeited property values;

on Individual law enforcement agencies participating in the Fund must prepare the ‘sales value’ to
‘appraised amounts’ ratio in order that the fair market value for property disclosed in the financial
statements is reported at the best estimate. .

FY 2000 STATUS

An analysis by property category of sales values compared to the initial appraised amounts was prepared
by Customs, IRS and ATF in FY 2000 to determine the value of forfeited property for year end financial
reporting.

Although computation of the estimated value arrived at in this manner provides reasonable estimates, the
Fund is still required to comply with Statement of Federal F inancial Accounting Standards (SFFAS) No.
3, Accounting for Inventory and Related Property, which requires forfeited Property to be stated at fair
market value at the time of forfeiture.

This deficiency will be reported in the form of a Management Letter Comment for FY 2000.

65 EXHIBIT IIT — STATUS OF PRIOR YEAR FINDINGS


FY 2000 STATUS

Significant enhancements were made to SEACATS during FY 2000 with respect to its capability to track
and report seized and forfeited property. Additionally, for the first time, USCS used SEACATS to generate
the currency rollforward. The results reveal the ability of SEACATS to generate reports that meets the
financial statement reporting standards required by SFFAS #3.

In FY 2000 SEACATS’ general and application controls were reviewed by other auditors whose report
indicates that the general and application controls reviewed were adequately designed and operating with
sufficient effectiveness to provide reasonable assurance over the integrity, confidentially, and availability
of financial reporting.

This deficiency is considered to have been resolved and will not be reported in FY 2000.

TREASURY FORFETURE FUND ANNUAL REPORT — FISCAL YEAR 2000 64


Additionally, any reconciliations performed during the year were not formally documented.

This deficiency will be reported in the form of a Management Letter Comment in FY 2000.

67 EXHIBIT III - STATUS OF PRIOR YEAR FINDINGS


Treasury Forfeiture Fund
Statement of Net Cost
For the Years Ended September 30, 2000 and 1999
(Dollars in Thousands)

Restated
2000 1999
Non-Discretionary:
Intragovernmental:
Seizure investigative costs and asset management $ 54,591 $ 78,059
Other asset related contract services 1,872 1,460
Awards to informer 1,624 305
Data systems, training and others 27,176 17,576
Super Surplus (Note 14) 1,243 3,585
if Secretary's Enforcement Fund (Note 15) = 1,673
ot
Total Intragovernmental 86.506 102,658
With the Public:
National contract services seized property and other 34,883 32,797
Joint operations 10,337 10,086
Total with the Public 45.220 42,883
| Total Non-Discretionary 131,726 145.541
Discretionary:
a Intragovernmental:
7 Awards for information or assistance - 2
; j Federal law enforcement conveyance 4 13
uf Data systems, training and others - a7
Total Intragovernmental 4 (2)
Total Program Costs 131,730 145,539
Less: earned revenues : :
Net Cost of Operations $ 131.730  $ 145,539

The accompanying notes are an integral part of these financial statements

29 FINANCIAL STATEMENTS


Non-Exchange Revenue Applied
to Public Expenses
Equitable Sharing - state and local
law enforcement (85) (150)

Equitable Sharing — foreign

countries (6) (2)
Victim restitution 1) (2)
Subtotal, financing applied to

expenses incurred with the

public (02) (154)

Non-Exchange Revenue Applied
to Intra-governmental Expenses
Equitable Sharing —

other Federal agencies (7) (12)
Total, applied financing (109) __(166)
Total, Net Financing before

Transfers Out 116 168
Revenue Applied to Transfers-Out'
Intra-governmental

Super Surplus (71) (37)
Secretary’s Enforcement

Fund (8) (4)
Property (1) —
Total, Transfers-Out (80) (41)
Total Net Financing

Sources $37 _$127

Less: Cost of Operations
(from Statement of Net Cost) (132) (146)

Equals: Net Results
of Operations

$95 $19)

1A policy change for FY 2000 requires that revenue applied to Super
Surplus and the Secretary's Enforcement Fund be shown as Transfers Out,
an “application” of revenues on the Statement of Changes in Net Position.
In FY 1999, such amounts were captured as Non-Discretionary, Intra-
governmental costs on the Statement of Net Cost.

Net Position, Beginning
of the Year $325 $344

Net Position, End of Year $230 $325

Currency and Monetary Instruments. The
Fund’s primary source of revenue is forfeited
currency and monetary instruments. For FY 2000,
revenue from forfeited currency and monetary
instruments totaled $140 million, or 76 percent of
total revenues from public sources, versus $261
million, or 87 percent of public source revenue in
FY 1999. FY 1999 represents a banner year in
high-impact cash forfeiture cases.

Sale of Forfeited Property. The revenue from
forfeited property, net of mortgages and claims,
was $31 million in FY 2000 and $23 million in FY
1999, a pattern that also supports the slightly higher
cost of the national seized property contract in FY
2000 versus FY 1999.

Proceeds from Participating with Other Federal
Agencies. Pursuant to Title 28 U.S.C. 524(c), the
Department of Justice is authorized to share
forfeited proceeds with the Department of the
Treasury reflecting the degree of Treasury law
enforcement in the effort leading to seizure of the
forfeited asset. Funding from these sources is
available to the Secretary of the Treasury, without
fiscal year limitation, for any Treasury law
enforcement purpose. For FY 2000, these proceeds
from joint investigations with other Departments
totaled $16 million, and for FY 1999 they totaled
$12 million.

Investment Interest Income. The Fund is
authorized to invest cash balances in Treasury
securities. On September 30, 2000, investments
totaled $460 million. This included $243 million
invested from balances of the Fund and $217
million invested from seized balances not yet
forfeited. Interest income earned on these
investments during FY 2000 totaled $24 million,
up from $23 million in FY 1999.

Transfers-Out. Beginning in FY 2000, financing
applied to Super Surplus and Secretary’s
Enforcement Fund authorities is to be shown on the

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 16


initiate forfeiture proceedings.

i)

State and local law enforcement officials
request Federal assistance and state a belief
that:

e A forfeiture action could not be maintained
under state law.

¢ The seized asset poses unique management
or disposition problems.

e State laws or procedures will delay the
forfeiture and adversely affect the rights of
the parties that have an interest in the
property, or cause significant diminution in
the value of the asset.

e Federal adoption will enhance the scope
and objective of the overall criminal
investigation.

Requirements for an Adoption:

The following requirements should be met before
a Treasury agency agrees to adopt a state or local
seizure:

1. The state or local agency must conduct all of
the pre-seizure and underlying investigative
activity before requesting a Treasury adoption
of the seizure.

2. There must be a violation of state law and a
basis for forfeiture under Federal law.

w

The state prosecutor must have declined to take
the seizure to forfeiture.

4. A turnover order must be obtained if required
by state law.

New Legislation and Related Policy
Publications. The Civil Asset Forfeiture Reform
Act of 2000 (CAFRA), Public Law 106-185, 114
Stat. 202, became law on April 25, 2000.
Provisions of CAFRA apply to forfeitures
commenced on or after August 23, 2000, except
for the fugitive disentitlement provision, which
was effective on the date of enactment.

Based on provisions of CAFRA, management
revised Directive No. 5, Sixty Day Notice Period in
All Administrative Forfeiture Cases, and issued two
new directives during FY 2000. Directive No. 5
was revised to ensure that notice is sent within
appropriate timeframes as mandated by CAFRA,
and includes a model notice letter for bureaus to
send to persons affected by asset seizure to either
contest the seizure or agree to it and petition for
return of the property or an interest in the property.
Directive No. 35, Hardship Petitions, gives
guidance to bureaus on handling hardship petitions,
and Directive No. 36, Payment of Attorneys Fees,
provides the Executive Office for Asset
Forfeiture’s policy concerning the payment of
attorneys’ fees under CAFRA.

FY 2000 Audit. The Fund’s independent auditors
have given the FY 2000 financial statements an
Unqualified Opinion.

Program Performance

Financial and Program Performance -What is
needed and planned. OMB Bulletin No. 97-01, as
amended, Form and Content of Agency Financial
Statements, requires that agencies include an
explanation of what needs to be done and what is
planned to be done to improve financial or program
performance. In that regard, Fund management
provides the following information with regard to
material weaknesses and reportable conditions
identified by auditors during the FY 2000 financial
statement audit.

Material Weaknesses. For FY 1999, auditors of
the Fund’s financial statements identified three
material weaknesses which, in brief, were: (1)
Accounting records are primarily maintained on a
cash basis; (2) All balances and transactions that
comprise the Fund are not captured by the general
ledger; and (3) the U.S. Customs Service’s Seized
Property and Forfeited Assets Tracking Systems is
inadequate.

During FY 2000, the Fund’s management worked
to resolve two of the three long-term material
weaknesses, specifically items (1) and (3) above,

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 22


Other asset related contract

services 2 1
Awards to informer 2 (*)
Data systems, training and

others 27 18
Super Surplus 1 4
Secretary’s Enforcement Fund __-- _2
Subtotal, costs incurred

with other Federal
Government entities 87 103

Discretionary *
Costs Incurred with Other Federal Government
Entities

Intra-governmental
Purchase of information or assistance(*)  (*)
Federal law enforcement

conveyance (*) (*)

Data systems, training and

others (*) (*)
Subtotal, discretionary intra-

governmental costs (*) (*)
Total Net Cost of the Treasury

Forfeiture Program $132 _ $146

(*) Less than $500,000 in amount.

@ These amounts represent the delivery of goods for
which obligations were made in previous years.

National Seized Property Contract. The single
largest program cost of the Fund is the storage,
maintenance and disposal of real and personal
property. This function is performed by EG&G
Dynatrend, a private firm under contract to the
U.S. Customs Service. EG&G provides storage
for Treasury’s forfeiture program through a
nationwide system of 17 warehouse facilities with
a capacity in excess of 470,000 square feet, as well
as supplemental facilities provided by over 200
active vendors under contract to EG&G. In FY

2000, EG&G expenses were approximately $35
million, only very slightly higher than those of FY
1999.

Super Surplus and the Secretary’s Enforcement
Fund. Pursuant to a directive from Treasury’s
Departmental Office, Super Surplus and Secretary
Enforcement Fund expenses are shown as
Transfers-Out on the Statement of Changes in Net
Position beginning with the FY 2000 financial
statements. Super Surplus expenses totaled $72
million in FY 2000, as compared to $41 million in
FY 1999. This difference depicts much higher
beginning retained earnings, available as Super
Surplus, for FY 2000 as compared to amounts for
FY 1999. The Super Surplus is one of the Fund’s
permanent spending authorities, authorized under
Title 31 U.S.C. § 9703(g)(4)(B). At the end of
each fiscal year, after reserving the Fund’s retained
capital for start-up expenses, the remaining funds
may be declared as Super Surplus authority
available to the Secretary of the Treasury for any
Federal law enforcement activity in the subsequent
year and are available until expended.

Expenses of the Secretary’s Enforcement Fund
(SEF) totaled $8 million in FY 2000, up from $6
million in FY 1999. As with the Super Surplus, the
SEF is another one of the Fund’s permanent
spending authorities. The SEF is authorized under
Title 31 U.S.C. § 9703(b)(5) and is derived from
asset sharing revenue received from the Justice
Department or the U.S. Postal Service. Such
revenue represents Treasury’s share of forfeitures
to the Justice asset forfeiture program that resulted
from joint investigations. The SEF is available for
any Treasury law enforcement purpose.

Net Cost of Operations. As explained previously,
the restated Net Cost of Operations for FY 1999
was $146 million as compared to $132 million for
FY 2000. The difference reflects reduced revenue
eared from forfeitures in FY 2000 as compared to
FY 1999, leaving less available to apply to more
discretionary costs of the program such as
investigative costs leading to seizure.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 18


Treasury Forfeiture Fund
Statement of Net Cost
For the Years Ended September 30, 2000 and 1999
(Dollars in Thousands)

2000
Non-Diseretionary:
Intragovernmental:

Seizure investigative costs and asset management $ 54,591
Other asset related contract services 1,872
Awards to informer 1,624
: Data systems, training and others 27,176
Super Surplus (Note 14) 1,243

Secretary's Enforcement Fund (Note 15) -
Total Intragovernmental 86.506

With the Public:

National contract services seized property and other 34.883
Joint operations 10.337
Total with the Public 45.220
7 Total Non-Discretionary 131.726
Discretionary:
’ Intragovernmental:
it Awards for information or assistance -
Federal law enforcement conveyance 4
Data systems, training and others -
Total Intragovernmental 4
Total Program Costs 131,730
Less: earned revenues -
Net Cost of Operations $ 131,730

The accompanying notes are an integral part of these financial statements

Restated
1999

$ 78.059
1,460

305
17.576
3,585

1,673

102,658

32,797
10,086

E

42.88.

BS
wa
wa
rs

29 FINANCIAL STATEMENTS


for 2000 — 2005 to Congress in September 2000.
The Plan provides the Fund with the requisite road
map toward achievement of our ultimate goal
which is the disruption of criminal organizations
through application of the forfeiture sanction.

The essence of this program involves applying
forfeiture to the infrastructure of criminal
enterprises, identifying and disrupting organizers
and facilitators, versus an emphasis on criminals at
the “bottom of the food chain.” The only real
damage that can be done to drug cartels and
criminal syndicates is the removal of facilitating
assets and the profit incentive on a significant
scale. It would be imprudent to expect to have the
law enforcement resources on any level, Federal,
state or local, to afford to tackle the problem of
illegal drugs one user at a time and expect to
finally resolve the problem. Fund management
believes that the Treasury forfeiture program can
continue to grow and to faithfully carry out its
Congressional mandate to punish and deter
criminal activity through enhanced strategic use of
asset forfeiture, and a return to an emphasis on
high-impact cases that work to destroy the root of
insidious criminal behavior on an effective scale.

The Treasury Forfeiture Fund is an extremely
critical law enforcement program, and we envision
that in partnership with its member bureaus, as
well as Departmental leadership, we can further
our mission of dismantling criminal enterprises,
while earnestly protecting the due process rights of
affected persons.

Mission

The mission of the Treasury Forfeiture Fund is to
affirmatively influence the consistent and Strategic
use of asset forfeiture by Treasury law
enforcement bureaus to disrupt and dismantle
criminal enterprises.

Goal

The goal of the Treasury Forfeiture Fund is to
support the Department of the Treasury’s national
asset forfeiture program in a manner that results in
Federal law enforcement’s continued and effective

use of asset forfeiture as a high-impact law
enforcement sanction to punish and deter criminal
activity. There are four principal guidelines
embraced by Fund management in order to
effectively achieve the strategic mission and they
are: (1) to affirmatively influence the use of asset
forfeiture by Federal law enforcement to punish
and deter criminal activity; (2) to manage Fund
revenues to cover the costs of seizure and
forfeiture; (3) to affirmatively influence Federal
law enforcement to enforce the due process rights
of affected persons; and (4) to urge and enhance
cooperation among foreign, Federal, state and local
law enforcement agencies on issues pertaining to
asset forfeiture.

Performance Measures

In FY 2000, the Fund measured performance
through the use of three performance measures:
(1) Days elapsing between forfeiture and
disposition of real property; (2) Timely
processing of administrative forfeiture cases; and
(3) Days required to process equitable sharing
payments.

Program Performance

Fund performance measures and associated results
for FY 2000 are as follows:

Performance FY FY FY
Measure 1999 2000 2000

Actual Standard Actual

Days elapsing 394 365 337
between

forfeiture and

disposition of

real property

Timely 70% 72% 74%
processing of

administrative

forfeiture cases.

Days required 219 200 297
to process

equitable

sharing

payments.

13 SECTION I - OVERVIEW


TREASURY FORFEITURE FUND

Analysis of Revenue and Expenses and Distributions
For the Year Ended September 30, 2000

(Dollars in Thousands)

Revenue, Expenses and Distributions by Asset Category:

Vehicles

Vessels

Aircraft

General Property

Real Property

Currency and monetary instruments

Less:
Mortgages and claims
Refunds
Add:
Excess of net revenues and financing sources over total program
expenses

Revenues, Transfers, Expenses and Distributions by Type of
Disposition:

Sales of property and forfeited currency and monetary instruments
Reimbursed storage costs

Assets shared with state and local agencies

Assets shared with other Federal agencies

Assets shared with foreign countries

Victim Restitution

Destructions

Pending disposition

Less:

Mortgages and claims

Refunds
Add:

Excess of net revenues and financing sources over total program
expenses

Revenue

$ 9,997
2,776
2,776
8,884

31,095

180,513

236,041

(4,453)
(5,842)

225,746

124,972
2,299
85,104
6,557
6,569
10,540

236,041

(4,453)
(5,842)

$225,746

Expenses and
Distributions

$ 34,269
43,662
14,066
138,587
5,428
94,997

331,009

(4,453)
(5,842)

(94,968)

225,746

62,892
33,101
85,104
6,557
6,569
10,540
39,721
86,525
331,009

(4,453)
(5,842)

(94,968)
$225,746

The revenue amount of $225,746 is from the Statement of Net Position. This supplemental schedule “Analysis of
Revenues, Expenses and Distributions” is required under the Treasury Forfeiture Fund Act of 1992. Because the
Fund does not have a cost accounting system, the method used does not provide reliable information in the analysis
of revenue and expenses and distributions by type of disposition. The information is presented to comply with the

requirements of the Treasury Forfeiture fund Act of 1992.

7 TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 2000


5. LACK OF CONTROL OVER ASSETS (REPEAT CONDITION FROM PRIOR YEARS)
CONDITION

The U.S. Customs Service (Customs) manages and records seized and forfeited property in its Seized Assets
and Case Tracking System (SEACATS). The national seized property contractor (the Property Custodian),
also manages and records the seized and forfeited property transferred to and held by them on behalf of all
Treasury law enforcement agencies through a module within SEACATS. Currently, the inventory held and
reported by the Property Custodian through the SEACATS module does not agree to what is recorded in
SEACATS by Customs during the year. The year end physical inventory value and count per Customs’
SEACATS inventory records require significant adjustments because seizures and forfeitures are either not
recorded at all or not recorded in the modules within SEACATS by the Property Custodian on a timely
basis. Additionally, inventory counts and reconciliations were not performed during the year to identify and
resolve discrepancies in a timely manner.

Additionally, the Property Custodian, as part of their property management function provides services to
dispose of the Fund’s properties mainly through public auctions. The sale proceeds are transferred and
reported by the Property Custodian to the Fund, however, the information provided does not itemize the sale
proceeds by seizure. Consequently, Customs and the other law enforcement agencies are unable to reconcile
on an asset by asset basis to what is recorded as sold in their respective systems. This situation further
complicates the inventory reconciliation process between the records of the Property Custodian and that of
Customs and the other law enforcement agencies.

RECOMMENDATION

We reaffirm our recommendations from previous financial statements’ audits to have the following
procedures implemented:

a. Regular (at least semi-annually) reconciliations between Customs and the Property Custodian's
inventory reports must be conducted to ensure that the property held as reported by Customs is
agreed with what has been included in the Property Custodian’s system and any differences
identified and resolved timely.

db. All law enforcement agencies participating in the Fund must conduct a physical inventory of
properties at least on a semi-annual basis and compare the information compiled to their respective
inventory records and the Property Custodian’s inventory records.

c. IRS, Secret Service, and ATF must continue to manually reconcile on a regular basis to the Property
Custodian’s inventory records. If it continues to be impossible to record inventory properly in
SEACATS for these agencies, then Fund Management must instruct the Property Custodian to
conduct the year-end inventory using reports from the respective agencies records.

FY 2000 STATUS

Actions were taken by Fund Management to correct the deficiencies within SEACATS that precluded it
from tracking seizure transactions applicable to non-Customs agencies. However, discrepancies continue
to exist as a result of timing differences related to receiving and recording of the status of the property both
by the Property Custodian and the individual law enforcement agencies. Property held by Customs and non-
Customs agencies was not reconciled periodically to the inventory records of the Property Custodian.

TREASURY FORFETURE FUND ANNUAL REPORT —- FISCAL YEAR 2000 66


EXHIBIT II

REPORTABLE CONDITIONS


i
{

40 members or associates of the Mongols for
weapons, narcotics, and murder violations. The
warrants were executed in California, Oklahoma,
and Georgia. The investigation and subsequent
searches resulted in the recovery of 101 firearms
including two machineguns and a sawed off
shotgun, in excess of $42,000 in cash, 10 pounds
of narcotics, and 21 stolen motorcycles.

Three Federal fugitives remain at large. The
investigation has also uncovered evidence
supporting two murder investigations. The
Department of Justice authorized a Racketeer-
Influenced and Corrupt Organizations (RICO)
prosecution. Evidence sought and recovered, as a
result of the investigation will be utilized to perfect
a Violent Crimes in Aid of Racketeering case.

The Huns

In 1993, the Brevard County Sheriff's Office
initiated an investigation targeting an outlaw
motorcycle gang called “The Huns.” The Huns
Motorcycle Gang investigation targeted a criminal
enterprise that made over $15 million in illicit
funds and was involved in arson, murder, money
laundering, tax evasion, and firearms violations in
Florida and Connecticut.

In November 1993, the Fairfield Police
Department assisted the Brevard County Sheriff's
Department by providing information concerning
the activities of this criminal organization in
Connecticut. In January 1994, the Brevard County
Sheriff's Office presented this investigation to
ATF and IRS. Based on the information
presented, both agencies agreed to assist in the
investigation.

In September 1994, 28 search warrants and 30
seizure warrants for locations in Florida and
Connecticut were served, resulting in the
identification and arrest of 27 defendants. The
property taken for evidence from both states
included over $2 million in cash assets, several
vehicles, records relating to RICO violations and
money laundering, and thirty-six firearms
including two sawed-off shotguns. The criminal
case solved seven arsons and two murders.

In FY 2000, $1.7 million seized during this
investigation (including cash, financial instruments,
vehicles and the proceeds from two property sales)
was finally forfeited and deposited into the Fund’s
receipt account. The State of Florida purchased
one of the properties seized during _ this
investigation and plans to use it for a Highway
improvement project.

Operation Smokescreen

This investigation began in 1996 when Iredell
County authorities noticed people with out-of-state
license plates making large cash purchases from JR
Tobacco, a discount tobacco outlet in Statesville,
North Carolina. The The joint investigation
between ATF and the local police department later
revealed that two individuals had been directing the
smuggling of contraband cigarettes from Charlotte
to the Detroit/Dearborn, Michigan area.

On July 21, 2000, ATF, FBI, and INS executed 18
Federal search warrants and 18 Federal arrest
warrants in and around the Charlotte, North
Carolina, area. One of the defendants was taken
into custody in California. Over 200 Federal, state,
and local law enforcement personnel were involved
in this operation. In addition, a seizure warrant was
served for 6 vehicles and 22 bank accounts. A
legal notice was also filed on four residences and
one business. A preliminary review of the bank
accounts revealed funds in excess of $100,000. On
July 31, 2000, the eight coconspirators were
indicted by a Federal grand jury in Charlotte, North
Carolina on 34 counts to violate INS laws and 2
counts to violate ATF laws.

The FBI has been conducting a parallel
investigation into alleged violations of Title 18
USC § 2339A and 2339B, - providing material
support to terrorists and providing material support
or resources to designated foreign terrorist
organizations. It is alleged by the FBI that the
smuggling organization has ties to the Hezbollah
terrorist organization in Lebanon and has been
acting in a fund raising capacity for this
organization. As a result, this investigation has
become a joint investigation with the State
Department, the Immigration and Naturalization

> SECTION I - OVERVIEW


Treasury Forfeiture Fund
Balance Sheet
As of September 30, 2000 and 1999
(Dollars in Thousands)

Assets
Entity Assets: 200 1999
Intragovernmental Assets:
Cash and other monetary assets $ 49,262 $ 126,724
Investments and related interest (Note 3) 243,466 287,498
Accounts receivable (Note 4) 8 112
Advances (Note 5) 704 1,476
: Total Intragovernmental Assets 293.440 415.810
Cash and other monetary assets (Note 6) 16,639 13,266
Accounts receivable (Note 4) 338 690
16,977 13.956
Forfeited property (Note 7)
Held for sale, net of mortgages, liens and claims 27,832 26,101
To be shared with Federal, state or local, or foreign
governments 282 767
] Total forfeited property, net of mortgages, liens
and claims 28,114 26,868
i Total Entity Assets 338.531 456,634
: Non-Entity Assets:
i
i Intragovernmental Assets:
: Seized currency:
Investments (Note 3) 216.890 253,139
Total Intragovernmental Assets 216,890 253.139
Seized currency:
Cash and other monetary assets 79,281 47,055
Proceeds from interlocutory sales 221 -
Total Non-Entity Assets 296,392 300,194
Total Assets $ 634.923 $ 756.828

The accompanying notes are an integral part of these financial statements.

27 FINANCIAL STATEMENTS



EXHIBIT Il
STATUS OF PRIOR YEAR FINDINGS


The money collected by the Property Custodian represents a significant portion of the revenues earned by
the Fund. However, the revenue is only recorded by the Fund upon receipt of a validated deposit slip, which
is approximately one week later.

RECOMMENDATION

Although the necessary adjustments are made each September 30 to convert the cash basis financial data
to the accrual basis, in order to comply with the requirements of SFFAS No. | and to improve financial
information on which daily decisions are based, we reaffirm our recommendation from previous financial
Statement audits that the following procedures be implemented by the Fund to properly account for
transactions on the accrual basis of accounting:

Accounts Payable and Accrued Liabilities - Customs, Secret Service, IRS and ATF should submit
monthly requests for reimbursement to provide more timely results of operations for the Fund and
thereby allow for a more timely analysis of the financial position of the Fund. The reimbursement
requests submitted by each law enforcement agency, but not yet paid by the Fund should be accrued
as liabilities at the end of each month. Also, any direct payment requests, which have been received
but not paid at month end, should be accrued as liabilities.

Mortgages and Claims Payable - We recommend that the law enforcement agencies record lien and
mortgage information in their seized property and forfeited assets tracking systems. We also
recommend that the updated lien and mortgage information obtained from the national seized
Property contractor be used to record liens and mortgages information in the agencies’ tracking
systems.

Forfeited Currency - We recommend that the Fund emphasize the need to update cases in the
respective law enforcement agencies supporting seized property and forfeited assets tracking systems
and notify the Fund on the change of status as soon as possible.

While it may be less efficient, a method to manually monitor these forfeitures is to require each
District Coordinator to submit a quarterly report to the appropriate individual at the ASD indicating
all seizures forfeited during the current month. A journal entry could then record forfeited currency
as revenue in the general ledger.

Distributions Payable - We recommend that the Fund establish and implement policies and
procedures to ensure the recordation of property distributed to F. ederal, state, and local agencies or
foreign countries during the fiscal year. These procedures may require that each law enforcement
agency submit, on a monthly basis, a list of all property distributed to Federal, state, and local
agencies or foreign countries for accrual in the general ledger.

Accounts Receivable - Due to the significance of the revenues collected by the Property Custodian
and the average two week lapse between receipt of funds by the Property Custodian and the
recordation of revenue by the ASD, we recommend that the Property Custodian provide the Fund
with details of cash held as of month-end and indicate the composition of revenue (that is sales,
reimbursed storage costs, etc.) which it represents. Based on this information, we recommend that
the ASD record the revenue and related accounts receivable due from the Property Custodian.

TREASURY FORFETURE FUND ANNUAL REPORT — FISCAL YEAR 2000 60


Until the necessary system changes can be implemented, the manual year-end procedures will continue to
be necessary to prepare the annual financial statements. Therefore, we recommend that the law enforcement

FY 2000 STATUS

System enhancements have been made to SEACATS during FY 2000 with respect to its capability to track
and report seized and forfeited Property and currency and to generate the property and currency rollforwards

Customs is developing an integrated system (Ft GL) that will capture all Customs generated transactions in
the general ledger and eventually, will be extended to transactions generated by all the participating
agencies. It is expected that the system will be moved into production in FY 2001 for Custom’s based
transactions,

This deficiency is inter-related with the general ledger material weakness and neither will be resolved until
the Fund has completed the implementation of an integrated financial system. In view of this relationship,
this material weakness will not be reported in FY 2000, However, some elements of this deficiency have
been included in the Material Weakness and Reportable Condition No. 1 in FY 2000.

61 EXHIBIT III ~ STATUS OF PRIOR YEAR FINDINGS


SECTION II
FINANCIAL STATEMENTS


Asset Disposition Activities

Asset specific expenses are not recorded and accounted for accurately by the Fund

The auditor’s recommendations have not been fully implemented and the problems continue to
persist. The Fund continues to be incapable of tracking asset specific expenses related to individual

seizures.

This condition will be repeated as a reportable condition in FY 2000.

71

EXHIBIT III - STATUS OF PRIOR YEAR FINDINGS


Since its inception, Operation Journey has resulted
in the seizure of over 22,000 kilograms of cocaine
or nearly 25 tons of cocaine. On the streets of
Europe, this cocaine could generate roughly $1
billion at the retail level. The location of these
seizures ranged from the Netherlands to
Venezuela. The operation has also resulted in the
seizure of commercial shipping vessels, high-
speed boats, and communications equipment.

The organization targeted by Operation Journey
served as a one-stop shipping service for
Colombian cartels interested in moving cocaine
via maritime vessels to U.S. and European
markets. Based in Colombia and Venezuela, the
organization used a fleet of 8-to-10 commercial
freighters capable of hauling huge loads of cocaine
anywhere in the world. Some of these ships were
owned by shipping firms in Greece and other
nations, while others were owned by this
Colombian organization.

Typically, the cocaine was transported from
Colombia via land or air to the Orinoco River
Delta on Venezuela’s northeast coast. Upon
arrival, the cocaine was stashed by the
organization in remote jungle hideouts. From
these camps, high-speed boats hauled the cocaine
to commercial ships stationed offshore. Once
onboard, the cocaine was often concealed in secret
compartments constructed for smuggling purposes.
Upon reaching its intended destination, the
cocaine was then offloaded to waiting high-speed
boats or other vessels and ferried ashore to
locations in Europe and the United States.

To guard against law enforcement, the
organization used several techniques. Often, the
organization conducted “dry runs” in which the
ships only delivered legitimate cargo. On other
occasions, the ships hauled legitimate cargo and
cocaine. Members of the organization also used
sophisticated equipment to communicate in code
and frequently changed cell phones to prevent their
conversations from being monitored.

Nevertheless, investigators from around the globe
were able to penetrate the highest levels of the
transportation organization. Working with foreign

counterparts, the DEA developed information on
the European connections, while Customs agents
developed information on the South American
connections. In the end, U.S. agents were able to
document the movement of at least 68 tons of
cocaine by this organization over a three-year
period.

As part of the takedown, a U.S. Naval vessel
stopped the Maltese-flagged ship, the Suerte I, off
the coast of Grenada on August 17, 2000. A U.S.
boarding party searched the vessel, but found no
cocaine. The vessel was believed to have been
destined to carry tons of cocaine as part of the
Colombian cocaine smuggling venture revealed by
the investigation. The Suerte I was seized under a
civil seizure warrant.

Multimillion Dollar Smuggling Ring Disbanded

Customs officials disbanded a multimillion dollar
smuggling ring which illegally imported goods
from China. A total of ten defendants were
charged for their involvement in a plot that illegally
imported large quantities of clothing and medicines
that were falsely declared to Customs to be cheap,
low-duty plastic bags and wooden furniture. The
purpose of the scheme was to avoid high duties
imposed on Chinese-made apparel, which can be as
much as 30 percent of the declared value; to
circumvent quota agreements that limit the amount
of Chinese-made clothing that may be imported
into the United States; and to import Asian
medications regulated by the Food and Drug
Administration.

On May 25, 1999, a stipulation was signed by a
U.S. District Judge, Central District, to forfeit
$1,400,000 by Stephen Juang on May 1, 2000 to
the U.S. Customs Service. In the stipulation,
Juang, the organizer of the scheme, agreed that the
$1,400,000 belonged to him and that it constituted
proceeds of the unlawful smuggling scheme to
which he pled guilty.

The smuggling scheme operated from October
1995 through February 1997. The conspiracy to
smuggle goods involved clothing manufactured in
the People’s Republic of China and in Hong Kong,

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 2


Program Performance and Financial Highlights

Profile of the Treasury Forfeiture Fund

The Treasury Forfeiture Fund (the Fund or TFF) is
the receipt account for the deposit of non-tax
forfeitures made pursuant to laws enforced or
administered by Treasury law enforcement
agencies and the United States Coast Guard. It
was established in October of 1992 as the
successor to the Forfeiture Fund of the United
States Customs Service. When the enabling
legislation for the Fund was enacted, it brought
together all of Treasury law enforcement under a
single forfeiture program. The member law
enforcement bureaus of the Treasury Forfeiture
Fund are the U.S. Customs Service ( Customs), the
USS. Secret Service (Secret Service), the Bureau of
Alcohol, Tobacco and Firearms (ATF), and the
Internal Revenue Service’s (IRS) Criminal
Investigation Division. These Treasury bureaus
are joined by the U.S. Coast Guard of the
Department of Transportation, a member of the
Fund as the result of a long-standing close law
enforcement relationship with Customs.

The Fund’s enabling legislation was first published
in Public Law 102-393, enacted October 6, 1992,
106 Stat, 1729, and is codified under Title 31
U.S.C. § 9703.

The Fund is a “special receipt account,” (Le, a
resource account which provides funding to other
Federal entities toward accomplishment of a
specific objective for which the recipient bureau is
authorized to spend money, used to augment their
effort in the specific regard.) Through the
provision of leadership, guidance and stewardship,
the Fund works to maximize forfeiture program
impact as executed by Treasury law enforcement
bureaus.

The Fund falls within the auspices of the Under
Secretary for Enforcement, U.S. Department of the
Treasury. The Fund’s organizational structure
includes the Fund Director, Legal Counsel,
Assistant Director/Policy and Operations, and
Assistant Director/Financial Management and
Chief Financial —_ Officer. Functional

responsibilities are delegated to various team
leaders. The Fund is located in Washington, D.C.
and currently has 20 full time equivalent positions.

Executive Organizational Structure

DIRECTOR

LEGAL COUNSEL

{7

ASSISTANT DIRECTOR ASSISTANT DIRECTOR
POLICY AND FINANCIAL
OPERATIONS MANAGEMENT/CFO.

Highlights of the Year

The following are some of the significant cases
which occurred during FY 2000.

Case Highlights

‘Operation Journey’ Dismantles Colombian
Drug Organization

The U.S. Customs Service, in coordination with the
Drug Enforcement Administration and the Joint
Interagency Task Force-East concluded “Operation
Journey,” a two-year, multi-national initiative
against a Colombian drug transportation
organization that used commercial vessels to haul
multi-ton loads of cocaine to 12 countries, most of
them in Europe and North America.

The investigation, which involved authorities from
12 nations and three continents, resulted in the
arrest of 47 individuals, including the alleged
leader of the maritime drug transportation
organization and several of his subordinates. A
Colombian citizen, he was arrested in Maracaibo,
Venezuela on August 16, 2000 and turned over to
USS. custody, and faces Federal drug charges in Ft.
Lauderdale, Florida.

1 SECTION I - OVERVIEW


The average time between forfeiture and
disposal of real property. The processing of real
property is the most complex function encountered
by the Treasury law enforcement agencies, and as
such, has required Fund Management to develop
special procedures to dispose of this property. The
real property performance measure tracks the
average number of days from forfeiture to the sale
of the forfeited real property. The program
performance goal is 12 months or 365 days from
forfeiture to sale. In FY 1999, the actual
performance was an average of 12.95 months,
which represented an improvement from FY
1998’s performance of 13.84 months. For FY
2000, the performance continued to improve and
the average has lowered to 337 days or 11.2
months.

To arrive at the performance measure, the Fund
compiled data derived from contractor reports and
stored in its internal database for sales of real
property occurring during FY 2000. From the
master list of real property sales, a list of
properties that could be excluded from the
performance measure was identified. Accepted
legitimate reasons for exclusion identified
previously included: (1) interlocutory sales -
property is not forfeited; (2) properties offered for
sale in previous fiscal years; and (3) appeals of
forfeitures.

Age of administrative seizure inventory.
Administrative forfeitures are those in which an
asset is forfeited without judicial involvement. To
ensure that due process rights of citizens are
protected and that revenue is collected in a timely
manner, a goal of the forfeiture program is to
process administrative cases quickly.

The timely processing of administrative cases
within the prescribed times improved by one
percent over FY 1999 (70 percent), and three
percent over FY 1998 (68 percent). Management
is pleased that the law enforcement bureaus are
showing steady progress in this area and will
ensure that continued improvement is achieved in
FY 2001.

Referenced figures exclude weapons cases for

ATF because ATF does not administratively forfeit
firearms and ammunition until all judicial activities
are completed. This is consistent with the Gun
Control Act. Additionally, calculations related to
this performance measure were based on
information provided in reports submitted by the
respective law enforcement bureaus as required by
the Fund’s Directive 26, “Timely Processing
Administrative and Civil Judicial Forfeiture
Cases.”

Processing time for equitable sharing payments.
Equitable sharing expenses represent a substantial
amount of the expenses of the Fund every year.

State and local law enforcement agencies derive a
valuable benefit from equitable sharing proceeds
that assist them in ongoing operations to combat
drug trafficking and violent crime. Delayed
payments can damage critical working
relationships with state and local law enforcement
agencies that work hard in partnership with the
Federal sector in the fight against crime.

The equitable sharing performance measure tracks
the average number of days to process equitable
sharing payments to other law enforcement
agencies. The program performance goal is 200
days to process equitable sharing payments. In FY
2000, the actual performance was an average of
297 days, which represented a decline from FY
1999’s performance of 219 days.

Currently, no single explanation for this processing
decline has been determined. The vast majority
(82.5 percent) of equitable sharing payments are
made by the U.S. Customs. In fiscal year 2001, an
automated equitable sharing module will be
incorporated into the Customs’ Seized Asset and
Case Tracking System (SEACATS) which will
streamline and expedite the equitable sharing
payment process. Additionally, documents
associated with 125 equitable sharing payments
were misplaced by a bureau adding to the overall
delay. Without this problem, the bureau would
have been very close to achieving the goal.
Corrective actions were taken to prevent a repeat of
this problem. Management will continue to review
this shortfall for processing equitable sharing
payments.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 14


obtain search and arrest warrants. Because of
logistical and operational concerns, a decision was
made to target the most heavily involved
businesses and individuals first, and to pursue the
second tier at a later date.

On September 19, 2000, over three hundred law
enforcement personnel from a total of 8 Federal
and 7 local agencies simultaneously executed 14
search warrants on 11 of the targeted businesses
and 3 residences owned by some of the store
owners at locations throughout southeastern
Louisiana. Four consent searches (two residences
and two businesses) were also conducted.

Fifteen arrest warrants were obtained for violations
of Title 18, United States Code, Sections 2 (Aiding
and Abetting), 371 (Conspiracy), 1029 (Access
Device Fraud), 1343 (Wire Fraud), and 1956
(Money Laundering), as well as Title 7, United
States Code, Section 2024 (Food Stamp Fraud).

Six seizure warrants were also served on bank
accounts, resulting in the seizure of approximately
$700,000 and a $100,000 certificate of deposit.

An additional $200,000 in cash was seized from
the various search warrant locations, as were 16
large diamonds. Documentary evidence seized
pursuant to the search warrants indicates that
additional funds are located in bank accounts in
Switzerland and Venezuela.

Midwest Investment Scheme

This case originated in December 1999 when the
Secret Service received information regarding an
alleged scam which enticed victims to purchase
fraudulent and fictitious Certificates of Deposits
(CDs), supposedly insured by the FDIC. The
Bank of America became suspicious when a large
number of deposits started appearing in an account
within one month of it being opened. Suspicion
was further aroused when one of the account
signatories attempted to wire transfer $1 million
from the account.

The investigation determined that the subjects
operating this account were advertising CDs in
local Oklahoma newspapers with a rate that was
much higher than other CDs. Additionally, these

advertisements stated that all the CDs were FDIC
insured, that they were issued by FDIC insured
banks, and that all money would be maintained in
FDIC insured accounts. The investigation later
determined that none of this was true, and that the
subjects who organized this scheme intended to
place the money into a high-risk, high-yield trading
program which was not FDIC insured.

Based on information obtained through the bank, it
was determined that almost all of the investors
were elderly individuals who were investing large
portions of their retirement.

Secret Service agents obtained a Federal seizure
warrant for the contents of the account which
totaled approximately $1.3 million. The funds
were eventually forfeited and restitution was made
to 25 elderly victims.

Mongols - Outlaw Motorcycle Gang

This investigation began in January 1998,
investigating the illicit activities of the Mongols,
one of Southern California’s most violent and
criminally active motorcycle gangs. As a result of
ATF’s investigative efforts, an undercover ATF
agent infiltrated the organization and rose within its
ranks to become an officer of one the chapters. The
Mongols are a documented, self-proclaimed “one
percenter” outlaw motorcycle gang. The term one
percenter stems from a statement made many years
ago by a defender of the rights of motorcyclists.
That statement claimed that only one percent of
those who ride motorcycles are involved in
criminal activities. Those who belong to criminal
gangs proudly adopted the term.

The Mongols established themselves in Southern
California in the early 1970’s with seventeen
chapters in the Los Angeles County area. They
have secured themselves as a national and
international organization by establishing chapters
in Oklahoma, Georgia, Colorado, and Mexico.

On May 19, 2000, ATF, in conjunction with the
Los Angles County Sheriff's Department utilizing
760 ATF and Los Angeles County Sheriff's
Deputies, executed 75 search warrants and arrested

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 4


TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the Year Ended September 30, 2000
(Dollars in Thousands)

The Treasury Forfeiture Fund Act of 1992, 31 U.S.C. 9703(f), requires the Secretary of the Treasury to
transmit to Congress, no later than February 1, of each year, certain information. The following summarizes
the required information.

(dy)

(A)

(B)

Q)

(A)

(B)

A report on:

The estimated total value of property forfeited with respect to which funds were not deposited
in the Department of the Treasury Forfeiture Fund during the preceding fiscal year under any
law enforced or administered by the Department of the Treasury law enforcement
organizations of the United States Coast Guard, in the case of fiscal years beginning after 1993.

As reported in the audited financial statements, at September 30, 2000, the Fund had forfeited
property held for sale, net of mortgages, liens and claims of $27,832. The realized proceeds will
be deposited in the Fund when the property is sold.

Upon seizure, currency and other monetary instruments not needed for evidence in judicial
proceedings are deposited in the Fund’s suspense account. Upon forfeiture, it is transferred to
the Treasury Forfeiture Fund. At September 30, 2000, there was $16,639 of forfeited currency
and other monetary instruments that had not yet been transferred to the Fund. This is reported
as a part of “Cash and Other Monetary Assets” in the audited financial statements.

The estimated total value of all such property transferred to any state or local law enforcement
agency.

The estimated total value of all such property transferred to any state or local law enforcement
bureau is summarized by state and U.S. territories. Total currency transferred was $82,631 and
total property transferred was $2,498 at appraised value.

A report on:

The balance of the Fund at the beginning of the preceding fiscal year.
The total net position of the Treasury Forfeiture Fund on September 30, 1999, which became
the beginning balance for the Fund on October 1, 1999, as reported in the audited financial

statements is $324,710.

Liens and mortgages paid and the amount of money shared with Federal, state, local and
foreign law enforcement bureaus during the preceding fiscal year.

Mortgages and claims expense, as reported in the audited financial statements, was $4,453. The
amount actually paid on a cash basis was not materially different.

TREASURY FORFEITURE FUND

OTHER ACCOMPANYING INFORMATION 78


TREASURY FORFEITURE FUND
Required Supplemental Information
(Required by OMB Bulletin 01-02)
For the Year Ended September 30, 2000
(Dollars in Thousands)

Intragovernmental Amounts — Assets (Dollars in thousands)

2000 1999
Fund Accounts

Fund Balance Accounts Balance Receivable

A . with /Advances
Partner Agenc with Receivable/ Investments T Investments

~anner Agency Treasury Advances ~feasury

Departmental Offices $ -- $712 $ - $ -- $1,536 $ -
a Department of Justice -- - - ~ 52 -
Bureau of Public Debt —s = 460,356 _- = 540,637
Totals $ -- $712 $460,356 $ -- $1,588 $540,637

Intragovernmental Amounts — Liabilities (Dollars in thousands)

2000 1999
Accounts Accounts
1 Partner Agency Payable Payable
Department of Justice $ 3,048 $ 2,626
Departmental Offices 1,884 1,639
Federal Law Enforcement Training Center ~ 3
U.S. Customs Service 13,527 8,813
Internal Revenue Service 3,880 10,883
Alcohol, Tobacco and Firearms 12,805 13,600
USS. Secret Service 2,760 833
Financial Crimes Enforcement Network 292 388
Totals $38.196 $38,785

REQUIRED SUPPLEMENTAL INFORMATION 22


TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the Year Ended September 30, 2000

(Dollars in Thousands)

(Unaudited)
State/U.S. Territories Currency Value Property Value
Alabama $ 239 $11
Alaska - 26
Arizona 1,030 60
Arkansas 30 -
California 16,903 465
Colorado ~ 17
Connecticut 69 25
D.C. Washington 223 5
Delaware 53 8
Florida 8,641 386
Georgia 509 14
Guam 172 -
Hawaii - -
Idaho ~ ~-
Illinois 4,697 27
Indiana 232 5
Towa 9 2
Kansas - 22
Kentucky 27 8
Louisiana 423 3
Maryland 1,741 6
Massachusetts 55 -
Michigan 512 6
Minnesota 20 69
Mississippi 2 39
Missouri 106 168
Montana 155 19
Nebraska 7 -
Nevada 37 -
New Jersey 5,717 -
‘New Hampshire ~ ~
New Mexico 544 4
New York 27,445 8
North Carolina 972 46
North Dakota ~ 2
Ohio 709 7
Oklahoma - -
Oregon 45 35
Pennsylvania 572 121
Puerto Rico 323 4
Rhode Island 4 4
South Carolina 182 -
South Dakota ~ -
Tennessee 388 88
Texas 8,339 605
Utah ~ -
Vermont 68 ~
Virgin Islands = J
Subtotal carried forward $81,200 $2,417

OTHER ACCOMPANYING INFORMATION

74


Subtotal, intra-governmental
entity assets 294 416

Non-Intra-Governmental (in the

custody of the private sector

Cash and other monetary
instruments 17 13

Accounts receivable (*) 1

Forfeited property
Held for sale, net of Mortgages,
liens and claims 28 26

To be shared with Federal, state or
local or foreign governments _—_(*)

Subtotal, Entity Assets 339

k
a
SN

Non-Entity Assets (Seized assets,
not owned by the Fund)

Intragovernmental Assets

Seized currency
(investments*) 217 253

Non-Intragovernmental

Seized currency ~ cash
and other monetary assets 79 47
Accounts Receivable (*) (*)

Subtotal, Non-
Entity Assets 296 300

Equals: Total Balance
Sheet Assets $635"  $757%

*Under the Statement of Financial Accounting Standards
(SFFAS) Number 3, effective September 30, 1994, and
thereafter, seized currency is reported as a custodial asset
upon seizure. The amount cited here represents currency
held in the Fund’s suspense account, invested, or on hand at
field office locations. (*) Amount is less than $1 million.

a/ Column may not add due to rounding.

Liabilities and Net Position:

A summary of the liabilities and net position of the
Fund as of September 30, 2000, as compared with
September 30, 1999 is shown in the following
table. Accounts payable remained fairly stable at
$38 and $39 million for September 30, 2000 and
September 30, 1999, respectively. Seized
Currency, composing the single largest liability,
totaled $296 million at the end of FY 2000, as
compared to $300 million at the end of FY 1999,
also fairly stable. Net position decreased from
$325 million at the end of FY 1999 to $230 million
at the end of FY 2000, a decrease of $95 million or
29 percent. The decrease largely reflects a
reduction in forfeited cash on hand between the two
years. FY 1999 was a banner year for forfeited
cash revenue, a level not repeated in FY 2000.

Revenue from forfeited property held for sale is
deferred until the property is sold. When compared
to FY 1999, slightly more forfeited property was
held for sale on September 30, 2000, with deferred
revenue from forfeited assets of $28 million at the
end of FY 2000 compared to $27 million at the end
of FY 1999, Accounts payable to both
intragovernmental accounts and non-
intragovernmental accounts totaled $45 million and
$44 million at the end of FY 2000 and FY 1999,
respectively, fairly stable. Distributions payable
to state and local agencies and foreign
governments, representing estimated equitable
sharing liabilities at the end of each fiscal year,
remained stable at $35 million and $31 million for
FY 2000 and FY 1999, respectively.

Liabilities and Net Position

End of Year
(Dollars in millions)

2000 1999
Liabilities covered by
Budgetary Resources

Intra-governmental liabilities covered
by budgetary resources

Distributions payable
Other Federal agencies $(*) $1
Accounts payable 38

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 20


FINANCIAL MANAGEMENT:
Audit of the Treasury Forfeiture Fund’s

Fiscal Years 2000 and 1999
Financial Statements

OIG-01-051 March 1, 2001

Office of Inspector General

HEH

The Department of the Treasury



TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the Year Ended September 30, 2000
(Dollars in Thousands)

(Unaudited)

State/U.S. Territories Currency Value Property Value
Subtotal brought forward $81,200 $2,417
Virginia 1,203 -
Washington 144 36
West Virginia 21 --
Wisconsin 63 45
Wyoming = =

Totals $82.631 $2,498

Summarized above are the currency and property values of assets forfeited and shared with state and local
agencies and U.S. Territories participating in the seizure. This supplemental schedule is not a required part
of the financial statement of the Department of the Treasury Forfeiture Fund. Information presented on this
schedule represents assets physically transferred during the year and, therefore, does not agree with total
assets shared with state and local agencies in the financial statements. In addition, the above numbers do
not include the adjustment to present property distributed at net realizable value.

75 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000


SINFIWALVLS TVIONWNIS
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28 O10N


States. The purpose of the companies was to
provide a large labor force to fulfill lucrative
cleaning contracts with hotels and large retail
stores in eastern Virginia and other states. The
defendant and his co-conspirators could effectively
undercut any competition based on the lower
wages, lack of overtime, lack of benefits, and
failure to withhold taxes.

The defendant purchased sophisticated computer
equipment, software and elaborate inks and paper
which were used to manufacture false documents
to enable the illegal aliens to enter and obtain
employment in the United States. The defendant
used the companies he set up to launder the illegal
proceeds. The Czech Republic Police provided
two undercover agents who contracted with the
defendant, came to the United States, and worked
for one of the defendant’s companies.

A Final Order of Forfeiture filed on August 11,
2000, ordered assets of the defendant, including
funds seized from the bank accounts of his
companies that were laundered proceeds he
obtained from the employment of alien workers
who were not authorized to work in the United
States and the computer equipment, forfeited to the
United States.

International Cigarette Smuggling Operation

In June 1997, a Federal grand jury in Syracuse,
New York returned a seven-count indictment
charging 21 defendants with money laundering,
conspiracy to defraud the United States, and
racketeering based upon their participation in
schemes to defraud the United States and Canada
of tax revenue by smuggling millions of dollars’
worth of contraband cigarettes and liquor from the
United States into Canada through the St. Regis
Mohawk Indian Reservation. These charges,
which included RICO charges against a Mohawk
Indian Tribal Chief, were based upon evidence
developed during a five-year investigation by a
task force that consisted of agents from the IRS
Criminal Investigation, the Customs Service, ATF,
the FBI, the New York State Police, and the
United States Border Patrol.

This case is not only the largest money laundering
case in the history of the Northern District of New
York, involving more than $687 million in criminal
transactions, but by far the largest, most significant
Federal law enforcement effort ever undertaken to
attack border-related crime in northern New York.
The indictment also included forfeiture allegations
against assets of the defendants. On June 23, 2000,
a Partial Order of Forfeiture was entered ordering
over $5 million of the main defendant’s currency,
stock, personal property, real estate, vehicles, boats,
jewelry, and coin and baseball card collections to
be forfeited and disposed by the IRS Criminal
Investigation.

One of the real estate parcels forfeited is a former
restaurant and bar that will be transferred to the
Immigration and Naturalization Service/United
States Border Patrol through the Weed and Seed
Initiative for official use as a substation for its
agents in Massena, New York. In addition, fifty
percent of the net proceeds from the forfeited assets
will be shared with the Royal Canadian Mounted
Police.

This case received very favorable, widespread
national and international publicity, including an
article in the publication “Money Laundering
Alert.”

Public Corruption/Bribery

A joint investigation between the IRS Criminal
Investigation and the FBI that began in 1993
resulted in the indictment and guilty pleas of a
Florida county public utilities commissioner, a
bond company, and a lobbyist. The scheme
involved the solicitation of bribes by the
commissioner for his vote in awarding contracts to
the bond company.

Shortly after the award of contracts to the bond
company, the commissioner, who had financial
problems, began purchasing new cars and
remodeling his home. An analysis of the
commissioner’s bank records showed that just prior
to his vote awarding a $16 million bond issue to the
bond company, the commissioner was several
months delinquent on loans and had written

7 SECTION I - OVERVIEW


Service (INS), and the FBI’s Joint Terrorism Task
Force.

Methamphetamine/Money Laundering

In October 2000, a northern California man was
sentenced to serve 15 years 8 months in Federal
prison and ordered to forfeit $5.6 million after he
was convicted by a jury in April 2000 of all counts
in the Indictment charging him and five others,
including his wife, with conspiracy to distribute
precursor chemicals, money laundering,
conspiracy, and structuring.

The husband and wife owned and operated a
company in Redding, California through which
they purchased huge — quantities of
pseudoephedrine, a common decongestant that can
be used to make methamphetamine, through east
coast suppliers. The husband and wife then
shipped the product by the pallet-load to
codefendants in southern California, who in turn
supplied the pseudoephedrine to large-scale
methamphetamine manufacturing operations. The
methamphetamine produced by those clandestine
labs was sold throughout the state and across the
nation.

The assets forfeited included the husband and
wife’s personal residence, vacation property,
vehicles, and more than $1.1 million seized from
various financial accounts. This investigation was
a joint effort by the IRS Criminal Investigation
Division and the Drug Enforcement
Administration.

Victims Recover Money from Fraudulent
Investment Scheme

Seven defendants indicted in an $8.4 million
investment fraud case pleaded guilty to Federal
charges related to a scheme that caused financial
losses to thousands of investors in Missouri,
Arkansas, Texas and elsewhere. The defendants
received varied sentences of up to 37 months
imprisonment.

The investigation by the IRS Criminal
Investigation Division and the U.S. Postal

Inspection Service proved that investors were
promised unusually high returns on their funds
through the purported use of various short-term
financing transactions. In order to create the
appearance that the investments were legitimate,
and to induce other persons to invest, some of the
invested funds were actually returned to investors,
an illegal strategy sometimes referred to as a
“Ponzi scheme.” Potential investors were also
fraudulently lulled into believing that the
investment was guaranteed by a bank and the
principal insured by a major insurance company.
During the course of the investigation, nearly $5
million in investors’ funds was seized from
numerous bank accounts controlled by the
codefendants and a trust account controlled by an
attorney for one of the defendants.

In September 2000, the United States Attomey for
the Western District of Missouri announced that
refund checks totaling more than $5.8 million were
mailed to almost 2,600 victims of this investment
fraud scheme. In addition to personally thanking
the agents of the IRS Criminal Investigation
Division, the U.S. Attorney emphasized that
without Federal asset forfeiture laws, it is unlikely
that any of the money lost by investors in this case
could have been seized or forfeited, let alone
returned to victims.

Eastern European Illegal Alien Smuggling

A joint investigation conducted by the IRS
Criminal Investigation Division, the Immigration
and Naturalization Service, the Department of State
Office of Inspector General, and the Social Security
Administration Office of Inspector General resulted
in the money laundering conspiracy conviction, 84
month prison sentence, and forfeiture of assets of a
defendant who is a citizen and national of the
Czech Republic.

Shortly after his arrival in the United States in
1997, the defendant, who was not authorized for
employment and only allowed to remain in the
United States for six months, used various aliases
and set up companies to operate an elaborate
network for the purpose of smuggling hundreds of
illegal aliens from Eastern Europe into the United

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 6


3. MANAGEMENT RESPONSE:
Management Assessment on Progress:

Fund Management has identified integration of the asset tracking system(s) with the Fund’s financial system
as a priority challenge. Fund Management continues to work on the development and deployment of a
single inventory system to support the systems integration of the three non-Customs agencies participating
in the Fund. Additionally, the U.S. Customs Service has made significant progress in implementing an
integrated system to capture transactions from SEACATS for posting to the general ledger. However, until
such time as the asset tracking system(s) can fully integrate with the Fund’s financial system, manual
adjustments to the standard general ledger will continue.

Discussion/Background and Planned Action (Short Term — Next 12 Months):

Fund Management anticipates that the integration of SEACATS to the general ledger will be fully
implemented during FY 2001. Customs has made significant progress in resolving programming issues for
this system integration. However, Fund Management will continue to work diligently with Customs to
identify and resolve issues associated with the general ledger integration.

Discussion/Background and Planned Action (Long Term):

In order for the general ledger to automatically record all transactions associated with the Fund’s financial
reporting requirements, it will be necessary to integrate all the asset tracking systems used by the various
law enforcement agencies participating in the Fund. To address this issue, Fund Management has provided
high priority to the development of a single inventory system, FASTRAK, to be used by the three non-
Customs bureaus. The first installation of FASTRAK is scheduled for FY 2002.

In the absence of this integrated system, Fund Management concurs with the auditor’s recommendation to
manually adjust the general ledger for all accounts subject to accrual.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 92


ue

not considered as financing sources (revenue) available to offset operating expenses, therefore, a
corresponding liability is recorded and presented as governmental liabilities in the balance sheet to reflect
the custodial/fiduciary nature of these activities.

Seized Currency and Property — Seized Currency is defined as cash or monetary instruments that are
readily convertible to cash on a dollar for dollar basis. OMB issued SFFAS No. 3 which requires that
seized monetary instruments (cash and cash equivalents) be recognized as an asset in the financial
statements and a liability be established in an amount equal to the seized asset value due to: (i) the
fungible nature of monetary instruments, and (ii) the high level of control that is necessary over these
assets; and (iii) the possibility that these monies may be returned to their owner in lieu of forfeiture.

Seized property is recorded at its appraised value at the time of seizure. The value is determined by the
seizing entity and is usually based on a market analysis such as a third party appraisal, standard property
value publications or bank statements. Seized property is not recognized as an asset in the financial
statements as transfer of ownership to the government has not occurred as of September 30.
Accordingly, seized property other than monetary instruments are disclosed in the footnotes in
accordance with SFFAS No. 3.

Investments — This balance includes seized cash on deposit in the Fund’s suspense account held by
Treasury which has been invested in short term U.S. Government Securities.

Cash and Other Monetary Assets — This balance represents the aggregate amount of the Fund’s seized
currency on deposit in the Fund’s suspense account held by Treasury, seized cash on deposit held with
other financial institutions, and, cash on hand in vaults held at field office locations.

Liabilities Covered by Budgetary Resources

Liabilities covered by budgetary resources represent liabilities incurred, which are covered by available
budgetary resources. [he components of such liabilities for the Fund are as follows:

Distributions Payable — Distributions payable to Federal and non-Federal agencies is primarily related
to equitable sharing payments and payments to be made by the Fund to the victims of fraud.

Accounts Payable — Amounts reported in this category include accrued expenses authorized by the TFF
Act (See "Allowable Fund Expenses") for which payment was pending at yearend.

Seized Currency — Amounts reported in this category represent the value of seized currency that is held
by the Fund which equals the amount of seized currency reported as an asset.

Deferred Revenue from Forfeited Assets — At year end, the Fund held forfeited assets, which had not
yet been converted into cash through a sale. The amount reported here represents the value of these
assets, net of mortgages and claims.

Liabilities Not Covered by Budgetary Resources

The Fund does not currently have liabilities not covered by available budgetary resources.

FINANCIAL STATEMENTS


TREASURY FORFEITURE FUND
Required Supplemental Information
(Required by OMB Bulletin 01-02)
For the Year Ended September 30, 2000
(Dollars in Thousands)

Intragovernmental Amounts — Revenues and Costs (Dollars in thousands)

2000 1999
Cost to Generate Costs to Generate Cost to Generate — Costs to Generate
Exchange Non-Exchange Exchange Non-Exchange
: Intragovernmental Intragovernmental Intragovernmental _Intragovernmental
Budget Functions Revenue Revenue Revenue Revenue
Administration of
Justice 8 = § 86,510 § = § 102.656

Intragovernmental Amounts — Non-exchange Revenue Transfers in/Transfers out (Dollars in thousands)

2000 1999

Partner Agency In Qut In Out

Department of Justice $ - 2,057 $ - $ -
Office of Personnel Management - - - 1,000
Internal Revenue Service - - ~ 4,471
Alcohol, Tobacco and Firearms - 13,536 -- 13,593
U.S. Customs Service ~ 28,649 ~ 11,274
Financial Crimes Enforcement Network - 426 -- 790
Federal Law Enforcement Training Center - 6,716 - 44
Secret Service = 28.830 = 10,218
Totals $ = $80,214 $ = $41,390

R TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000


Although we have read the information Presented, such information has not been subjected to the auditing
procedures applied in the audits of the financial statements and, accordingly, we express no opinion on it.

This report is intended for the information and use of the Management of the Fund, the U.S. Department of
the Treasury, OMB, and the U.S. Congress. However, this report is a matter of public record and its
distribution is not limited.

January 8, 2001

ford, kenga Meowdes

4

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 26


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AUBIN PUL ALSVOIY PIzyss UT SOHUBTS JO SSATEUY 26 O10N


Gardiner, Kamya & Associates, PC.

Management Consultants and Certified Public Accountants
1717 K Street, N.W, Suite 601 Washington, D.C. 20036
Phone: 202 857-1777

Fax: 202 857-1778

Independent Auditor's Report on Financial Statements

The Inspector General
United States Department of the Treasury
Washington, D.C.

We have audited the Principal Statements (balance sheet and the related statements of net cost,
changes in net position, budgetary resources and financing, hereinafter referred to as “financial
statements”) of the Department of the Treasury Forfeiture Fund (the Fund) as of and for the
years ended September 30, 2000 and 1999, These financial statements are the responsibility of
Fund Management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing standards: the
standards applicable to financial audits contained in Government Auditing Standards, issued by
the Comptroller General of the United States; and, Office of Management and Budget (OMB)
Bulletin No. 01-02, Audit Requirements for Federal F; inancial Statements. Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence Supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by Fund
Management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material Tespects,
the financial position of the Fund as of September 30, 2000 and 1999, and its net costs, changes
in net position, budgetary resources, and the reconciliation of net costs to budgetary obligations,
for the years then ended, in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a Teport dated January
8, 2001, on our consideration of the Fund's internal control structure and a report dated January
8, 2001, on its compliance with laws and regulations.

Our audits were conducted for the Purpose of forming an opinion on the financial statements
referred to in the first paragraph of this report as a whole. The information presented in Fund
Management's Overview of the Fund and Other Accompanying Information sections is nota
required part of the financial statements but is supplementary information required by OMB
Bulletin No. 97-01, Form and Content of Agency Financial Statements, as amended, or the
Treasury Forfeiture Fund Act of 1992.

25 Member of the American Institute of Certified Public Accountants


MANAGEMENT RESPONSE

Management Assessment on Progress:

Fund Management concurs with the auditor’s finding that a number of assets held by the national seized
Property contractor were improperly valued on the inventory reports. However, Fund Management
identified this condition prior to the auditor’s finding, and we immediately took action to resolve the
valuation issue.

Discussion/Background and Planned Action:

Fund Management has worked with Customs regarding the modification of procedures for updating
appraised values in SEACATS. As a result, the national seized property contractor is able to enter appraised
value data for the non-Customs agencies. Fund Management believes that these changes will resolve this
reportable condition in full. However, we will continue to work with Customs to monitor the valuation of
assets in SEACATS.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 38


in.

as well as prohibited Chinese medicines. The
scheme centered on a Customs-bonded container
freight station operated by Juang, who owned
several Compton-based firms.

According to Customs investigators, Juang and his
partners arranged for wearing apparel or Asian
medicines to be shipped to the Los Angeles Port of
Entry. Once the goods arrived, Juang and others
would file a Permit to Transfer with the Customs
Service, which would allow him to move the
containers laden with clothes or medicines from
the docks to his container freight station. Instead
of delivering the goods to his companies, Juang
and others would in many instances deliver the
good to various importers. Juang would then file
entry documents that falsely described the
imported goods as plastic bags or wooden
furniture, which have no quota restrictions and
very low duty rates.

In exchange for smuggling the goods, Juang
received millions of dollars in smuggling fees. By
submitting false entry documents, Juang and his
partners, defrauded the U.S. government of more
than $10 million in actual duties that should have
been paid to the Customs Service. In addition to
these losses, the scheme circumvented trade
restrictions designed to protect the United States’
textile and apparel industries.

Operation Clean Swipe

This case was initiated by the Secret Service New
Orleans Field Office in March of 1999 in an effort
to disrupt organized food stamp/Electronic
Benefits Transfer (EBT) fraud in the greater New
Orleans metropolitan area. This operation was
conceived with the idea of using financial and link
analysis, in addition to traditional investigative
methods, in order to strengthen conspiracy and
money laundering charges against the suspected
ringleaders and to more thoroughly target assets
derived from criminal proceeds for forfeiture.

The initial focus of this investigation was on
analyzing the bank records of 22 small grocery and
convenience stores located in New Orleans and
Baton Rouge, Louisiana. For the period of August

1997 through May 1999, these stores had combined
deposits of $153 million, including $17 million in
EBT benefits. During this same period, there were
also combined withdrawals of $153 million.
Approximately 70 to 80 percent of the deposit base
was comprised of cashed checks, and
approximately $20 million was withdrawn from the
accounts for money order sales. Subpoenaed
records revealed that $14 to $16 million worth of
the money orders were made payable to the various
owners of the stores.

A review of total EBT/food stamp deposits versus
reported sales tax revenue for the subject stores was
conducted, and the ratio was determined to be
roughly 80 percent, compared to the industry
standard of 12 to 18 percent. Previous large scale
food stamp/EBT investigations have established
that it is accepted practice to use the difference
between the industry standard and that of the
subject stores to estimate the amount of fraud loss.
Using this method, it is estimated that
approximately $14 million of the $17 million in
EBT deposits to the subject stores was fraudulent.

Once this review was completed, investigative
techniques to corroborate this documentary
information were initiated. Initial attempts to
introduce a confidential informant failed, but in
January 2000, a new informant was introduced with
excellent results. Over the next six months,
multiple EBT cards were used fraudulently in
amounts exceeding $100 at almost all of the subject
stores, with the full cooperation and knowledge of
the merchants.

Using funds obtained from the Forfeiture Fund, a
forensic accounting firm was hired to analyze
subpoenaed bank and financial records to develop
probable cause concerning the number and amount
of fraudulent transactions, to establish that the
proceeds from this fraud were being laundered, and
to develop probable cause for the seizure of
criminally derived assets. This analysis confirmed
that the targeted businesses were engaged in EBT
fraud, food stamp fraud, and money laundering on
a large scale, and coupled with the information
developed through the use of the confidential
informant, there was ample probable cause to

3 SECTION I - OVERVIEW


Statement of Changes in Net Position as
“Transfers-Out,” versus a Non-Discretionary Cost
on the Statement of Net Cost. The Net Results of
Operations is unchanged using either technique;
however, the Cost of Operations is less for FY
2000 to the extent of any Super Surplus or
Secretary’s Enforcement Funding now shown as
an applied revenue rather than as a program cost.
The policy change is Department-wide (except for
Departmental Office) and is intended to reflect
greater consistency with provisions of Statement
of Federal Financial Accounting Standard Number
7 (SFFAS 7), Accounting for Revenue et al.

Cost of Operations. For FY 2000, costs of
operations total $132 million, which is down from
$146 million in FY 1999,

Net Results of Operations. The Statement of
Changes in Net Position indicates a greater cost of
operations in FY 2000 versus FY 1999, with Net
Results from Operations dropping from a negative
figure of $19 million in FY 1999, toa greater
negative figure of $95 million in FY 2000. A
negative figure for this entry suggests costs in
excess of revenue. However, if Super Surplus and
Victim Restitution are subtracted from the cost of
operations, the figures become a positive net
results of operations of $24 million for FY 1999,
and a negative net results of operations of $12
million for FY 2000.

Changes in Net Position. The net position at the
end of FY 2000 totals $230 million, compared to
$325 million at the end of FY 1999, a reduction of
$95 million or 29 percent from FY 1999, This
decrease is largely attributable to the difference in
forfeiture revenue earned by the Fund in FY 2000
as compared to FY 1999. Total gross non-
exchange revenues of the Fund totaled $225
million for FY 2000, as compared to $334 million
for FY 1999, a decrease of $109 million or 33
percent from the FY 1999 earned revenue level.

Statement: Net Cost

Costs of the Forfeiture Program — Intra-
governmental. After revenue is applied toward
policy mandates such as equitable sharing, shown

in the Statement of Changes in Net Position as
negative revenue or applied non-exchange revenue,
the remaining _ financing supports the law
enforcement activities of the Fund and pays for the
storage of seized and forfeited property and sales
associated with the disposition of forfeited
property.

On the Statement of Net Cost, non-discretionary
costs appear to have decreased by $14 million to
$132 million in FY 2000, down from $146 million
in FY 1999, a decrease of 10 percent. However,
this decrease is largely due to the accounting policy
change (pursuant to a directive from Treasury’s
Departmental Office) which shifts Super Surplus
Fund and Secretary Enforcement Fund expenses to
the Statement of Changes in Net Position from the
Statement of Changes in Net Cost.

This change is explained in the previous section
under the subtitle, “Cost of Operations.”
Comparable figures indicate approximately $16
million less in costs in FY 2000 than FY 1999,
largely due to decreased revenue in FY 2000
available for more discretionary investigative
expenses.

Program Costs

End of Year
(ollars in millions)
2000 = 1999
Non-discretionary

Costs Incurred with the Public

National seized property

Contract $35 $33
State and local law

enforcement joint operations __10 _10
Subtotal, non-discretionary

costs incurred with the public_45 __43

Costs Incurred with Other Federal Government
fosts incurred with Other Federal Government
Entities

Intra-Governmental

Seizure investigative costs and
asset management $55 $78

17 SECTION I - OVERVIEW


SECTION V

ACCOMPANYING INFORMATION

(Unaudited)


EXHIBIT I

MATERIAL WEAKNESSES


SECTION IV

REQUIRED SUPPLEMENTAL INFORMATION


TREASURY FORFEITURE FUND
Uncontested Seizures of Currency and Monetary Instruments Valued Over
$100,000, Taking More Than 120 Days from Seizure to Deposit in Fund
For the Year Ended September 30, 2000
(Dollars in Thousands)

Number of Dollar Amount
State/U.S. Territory Seizures (In Thousands)
United States Customs Service (Customs)
California 3 $1,042
Georgia 1 100
Puerto Rico 2 420
Total Customs 6 1,562
Internal Revenue Service (IRS) 4 764
GRAND TOTAL _10 $2,326

31 U.S.C. 9703(f)(2)(E) requires the Secretary of the Treasury to report annually to Congress uncontested
seizures of currency or proceeds of monetary instruments over $100,000, which were not deposited in the
Department of the Treasury Forfeiture Fund within 120 days of the seizure date.

OTHER ACCOMPANYING INFORMATION 6


captured at the asset level. Fund Management concurs with the auditor’s recommendation to ensure
that the new property management contract requires the awardee to record and distribute costs at the
asset level.

Additionally, while the national seized property contractor reports revenue from forfeited property
at the asset level, this data is not being captured adequately in SEACATS. Fund Management
concurs with the auditor’s recommendation to pursue enhancements of SEACATS system
capabilities to record and report revenue and expenses at the asset level.

TREASURY FORFEITURE FUND ANNUAL REPORT - F1 ISCAL YEAR 2000 56

tii


Treasury Forfeiture Fund
Statement of Financing

For the Years Ended September 30, 2000 and 1999

(Dollars in Thousands)

Obligations and Nonbudgetary Resources
Obligations incurred

Less: Spending authority from offsetting
collections and adjustments

Transfers-out
Total Obligations and Non-budgetary Resources
Resources That Do Not Fund Net Cost of Operations

Changes in amount of goods, services, and benefits
ordered but not yet received or provided

Financing sources that do not fund cost of operations
Mortgages and claims

Refunds
Equitable sharing (Federal, state/local and foreign)
Victim restitution
Total Resources That do Not Fund Net Cost of Operations
Costs That Do Not Require Resources
Financing Sources Yet to be Provided

Net Cost of Operations

Restated
1999

[S)
i>
iS
iS

$ 384,172 $348,953

(29,924) (27,574)
(80.214) 41,390

274.034 279,989

(23,239) 46,515

(4,453) (9,703)

(5,842) (4,843)
(98.230) (164,954)
(10,540) (1,465)
142.304) (134.450

$131,730 $145,539

The accompanying notes are an integral part of these financial statements

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 32

nc


6. INADEQUATE PROPERTY MANAGEMENT FUNCTIONS (REPEAT CONDITION FROM.
PRIOR YEARS)
CONDITION

The Fund’s property management functions require improvement to ensure that: (i) funds, property, and
other assets are safeguarded against loss from unauthorized use or disposition; and (ii) transactions are
properly recorded and accounted for to permit the preparation of reliable financial statements and to
maintain accountability over the assets. The following issues/concerns were noted in this regard under the
following functions:

6.1

i)

(ii)

(iii)

Seizure Activities
Differing property identification numbers

Differing property identification numbers are being used to track the seized and forfeited property
(assets). The law enforcement agencies originating the seizure assign a case/seizure number that is
supposed to facilitate asset tracking through seizure, forfeiture, holding and disposition. The national
seized property contractor (the Property Custodian) for the Fund tracks the same property by
assigning an identification number that is different and at times unknown to the law enforcement
agencies responsible for originating the case. In certain instances, the case/seizure number is
unidentifiable or erroneous resulting in properties that remain unidentifiable until extensive research
is conducted.

Untimely recording of seized and forfeited property

Seized property is not recorded timely in the respective agencies’ seized property and forfeited assets
tracking systems. We noted several instances of assets that were seized in prior periods and recorded
as current year seizures. Significant delays were noted between the time the transaction occurred and
the time it was recorded.

Additionally, changes to the legal status of property (through correction, amendment, and
cancellation) are not incorporated timely.

Significant delays were noted between the date the change in status occurred and the time of
recordation in the various seized property and forfeited assets tracking systems. For example,
property seized in September was recorded in the respective asset tracking system in November, a
two month delay. In certain instances further delays were noted. Also, in certain instances the
disposition instructions that change/correct the status of property are not followed when recording
the transaction, resulting in the erroneous recordation of property transactions.

Inadequate accounting and recording of liens and claims

There are no controls in place to track and record liens and claims either by the individual law
enforcement agencies or by the Property Custodian during the year. Manual procedures are
developed at year end to compensate for this weakness. However, due to the lack of controls during
the year, information accumulated at year end may be incomplete.

TREASURY FORFETURE FUND ANNUAL REPORT — FISCAL YEAR 2000 68


Note 1: Reporting Entity

‘The Department of the Treasury Forfeiture Fund (Treasury Forfeiture Fund or the Fund) was established by
the Treasury Forfeiture Fund Act of 1992, Public Law 102-393 (the TFE Act), and is codified at 31 U.S.C.
9703. The Fund was created to consolidate all Treasury law enforcement bureaus under a single forfeiture
fund program administered by the Department of the Treasury (Treasury). Treasury law enforcement
bureaus fully participating in the Fund are the U.S. Customs Service (Customs); the Internal Revenue
Service (IRS); the United States Secret Service (Secret Service): the Bureau of Alcohol, Tobacco and
earms (ATF); the Financial Crimes Enforcement Network (FinCEN); and the Federal Law Enforcement
‘Training Center (FLETC). FinCEN and FLETC contribute no revenue to the Fund and receive relatively
few distributions from the Fund. The U.S. Coast Guard, part of the Department of Transportation, also
participates in the Fund. However, all Coast Guard seizures are treated as Customs seizures because the
Coast Guard lacks seizure authority.

Prior to the establishment of the Fund, ATF, IRS, and Secret Service participated in the Assets Forfeiture
Fund of the Department of Justice. Customs had its own forfeiture fund into which deposits of all Customs
and Coast Guard forfeitures were made. The Fund basically transformed the Customs Forfeiture Fund into
a Departmental fund serving the needs of all Treasury law enforcement bureaus. FinCEN and FLETC did
not previously participate in any forfeiture fund. Prior to Fiscal Year (FY) 1994, only Customs and Coast
Guard participated in the Fund.

The Fund is a special fund that is accounted for under Treasury symbol number 20X5697. From this no-year
account, expenses may be incurred consistent with 31 U.S.C. 9703. A portion of these expenses, referred
to as discretionary expenses, are subject to annual appropriation limitations. Others, referred to as non-
discretionary (mandatory) expenses, are limited only by the availability of resources in the Fund. Both
expense categories are limited in total by the amount of revenue in the Fund. The Fund is managed by the
Treasury's Executive Office for Asset Forfeiture (EOAF).

"he principal goals of the Treasury forfeiture program are to: (i) punish and deter criminal activity by
depriving criminals of property used in, or acquired through, illegal activities; (ii) be cognizant of the due
process rights of affected persons; (iii) enhance cooperation among foreign, Federal, state, and local law
enforcement agencies through the equitable sharing of assets forfeited: and (iv) produce revenues to enhance
the forfeiture program and strengthen law enforcement.

Under a Memorandum of Understanding (MOU) with Treasury, Customs acts as the executive agent for
certain operations of the Fund. Pursuant to that executive agency role, the Customs Accounting Services
Division (ASD) is responsible for accounting and financial reporting for the Fund, including timely and
accurate reporting and compliance with Treasury, the Comptroller General and the Office of Management
and Budget (OMB) regulations and reporting requirements.

NOTE (2) Summary of Significant Accounting Policies

Basis of Accounting

The Fund began preparing audited financial statements in Fiscal Year 1993 as required by the Fund’s
enabling legislation 31 U.S.C. 9703(f)(2)(H), and the Chief Financial Officers Act of 1990. Beginning with
the Fiscal Year 1996 report, the Government Management Reform Act of 1994 (GMRA) requires executive
agencies, including the Treasury, to produce audited consolidated annual reports and related footnotes for
all activities and funds.

or)

3

FINANCIAL STATEMENTS


lhe identified material weakness and reportable conditions, as defined above, are summarized below with
further explanations and Fund Management’s responses in Exhibits [and H of this report.

Material Weakness

The material weakness identified below was reported in prior years and is of continuing significance:

General Ledger Does not Capture All Balances and Transactions that Comprise the Fund

The Asset Information Management System (AIMS) which is the general ledger system maintained by the
U.S. Customs Service (Customs), processes, groups and summarizes transactions into account balances for
the Fund. Currently, it is not interfaced with the seized property and forfeited assets tracking systems (asset
tracking systems) used by the various law enforcement agencies participating in the Fund. As a result,
accounts such as accounts receivable, liens and mortgages payable, forfeited property and deferred revenue,
and seized currency and its offsetting liability are not recorded in the general ledger during the year. Instead,
the Fund has implemented procedures to capture these balances only at year end.

Reportable Conditions

The reportable condition identified below was reported in prior years and is of continuing significance:

1.

47

Inadequate Property Management Functions

The Fund’s property management functions require improvement to ensure that transactions are
properly recorded and accounted for to permit the preparation of reliable financial statements and
to maintain accountability over the assets. The following issues/concerns were noted in this regard
under the following functions:

Seizure Activities
Inadequate accounting and recording of Liens and Claims

The Fund’s updated Directive does not provide clear instructions as to when liabilities must be
recorded. Therefore, implementation of the instructions contained therein, while resolving other
issues, will not ensure that a liability is recorded for claims and mortgages throughout the year. In
fact, the Directive requires that upon EOAF's approval of payment, the appropriate accounting strip
data be affixed to the paperwork authorizing the obligation and disbursement of funds which are then
to be forwarded to the Custom’s Accounting Services Division (ASD) for Processing. Also, the
Directive requires ASD to disburse the approved payments within 14 calendar days from the date
of EOAF's approval of payment. Because ASD cannot record the liability unless EOAF's approval
with the accompanying accounting strip is received, these requirements do not provide for a
complete accrual of all liens and mortgages.

In addition, there are no controls in place to track and record liens and claims either by the individual
law enforcement agencies or by the Property Custodian during the year. Manual procedures are
developed at year end to compensate for this weakness.


pertaining to accounting records maintained
primarily on a cash basis and inventory system
adequacy. Material weakness number 3 will be
removed while material weaknesses number 1 and
2 will be combined and reported as one material
weakness pending the integration of inventory
systems with the general ledger.

FY 2000 Material Weakness. No new material
weaknesses were identified during the FY 2000
audit. The following material weakness was
identified in the FY 2000 audit Teport and is a
repeat finding:

(1) General Ledger does not capture all balances
and transactions that comprise the Fund.

Reportable Conditions. For FY 1999, auditors of
the Fund’s financial statements identified three
reportable conditions which, in brief, were: ()
Improper timing for valuation of forfeited
property; (2) Lack of control over assets; and (3)
Inadequate property management functions.

During FY 2000, Fund management resolved two
of the three prior-year reportable conditions,
specifically items (1) pertaining to property
valuation and (2) Lack of control over assets. A
significant portion of the third condition was also
resolved, but a portion remains as discussed below.

The following reportable conditions were
identified by our auditors in the FY 2000 audit
report:

Repeat Condition:

(1) The Fund’s property management functions
require improvement to ensure that (i) funds,
property and other assets are safeguarded
against loss from unauthorized use or
disposition and (ii) that transactions are
properly recorded and accounted for to permit
the preparation of reliable financial statements
and to maintain accountability over assets. The
following issues/concerns were noted in this
regard under the following functions: (i)
inadequate accounting and recording of liens
and claims; and (ii) asset specific expenses and
revenue are not recorded and accounted for by

the Fund.
New Reportable Condition:
1. Unsubstantiated Values for Seized Property

A considerable number of seizures had $0
appraised value on the inventory reports
although they were not of the contraband or
prohibited categories. These seizures include
real property, vehicles and jewelry, which
should have an appraised value other than $0.
Additionally, we found instances where the
financial values assigned to property were
significantly higher than the supporting
appraisal worksheets.

Fund Management’s Plan Regarding Material
Weaknesses. For FY 2000, two of three material
weaknesses brought forward from FY 1999 were
resolved. The first, “Accounting records are
maintained on a cash basis, rather than the accrual
basis of accounting as required by title 31 of the
U.S. Code” was a Section 2 violation, Management
Controls, of the Federal Managers Financial
Integrity Act (FMFIA).

The second material weakness resolved was a
FMFIA Section 4 material weakness, “Customs
Service’s seized and forfeited property and
currency tracking system, SEACATS, does not
contain accurate and sufficient data that can be
relied upon to prepare the analysis of changes in
forfeited and seized currency and property without
substantial manual manipulation and
reconciliation.” For FY 2000, the physical
property processing capability of the SEACATS
system had been corrected in a manner sufficient to
support the financial statements.

The only remaining material weakness identified
for FY 2000, which was brought forward from
previous years, pertains to the General Ledger (i.e.,
“the Fund’s general ledger does not record all
balances and transactions that are reflected in the
financial statements). Financial information
needed from each bureau to accurately record the
Fund’s activities is not received throughout the
year. Instead, procedures have been developed to

23 SECTION I - OVERVIEW


The results of our tests of compliance with the laws and regulations described in the preceding paragraph
exclusive of FFMIA disclosed one instance of noncompliance with the following laws and regulations that
is required to be reported under Government Auditing Standards and OMB Bulletin No. 01-02, which is
described below:

The Budget and Accounting Procedures Act of 1950, as amended, Section 3512, Executive
Agency's Accounting System, requires Federal agencies to establish an internal control
structure which ensures the safeguarding of assets and the proper recording of revenues and
expenditures. As described in our Report on Internal Control dated January 8, 2001, the
Fund’s internal control structure has a material weakness which results in noncompliance
with this Act. This material weakness requires significant computer system improvements
to correct. Until the system enhancements can be implemented, Fund Management has
developed year-end manual procedures to compensate for the system’s significant
weaknesses.

The results of our tests of compliance disclosed no instances of noncompliance with other laws and
regulations discussed in the preceding paragraph exclusive of FFMIA, that are required to be reported under
Government Auditing Standards or OMB Bulletin No. 01-02.

The report of the other auditors on the substantial compliance of Customs, as it relates to the Fund, with the
requirements of Federal Financial Management Systems Requirements (FFMSR) disclosed no instances
where Customs’ financial management systems, as they relate to the Fund, did not substantially comply with
FFMSR. Our audit tests disclosed no instances in which the Fund did not substantially comply with Federal
accounting standards and the U.S. Standard General Ledger requirements.

Providing an opinion on compliance with certain provisions of laws and regulations was not an objective
of our audits and, accordingly, we do not express such an opinion.

This report is intended for the information and use of the Management of the Fund, the U.S. Department of
the Treasury, OMB, and the U.S. Congress. However, this report is a matter of public record and its
distribution is not limited.

January 8, 2001

bad 1 Rega © Mero ahes

50


2. UNSUBSTANTIATED VALUES FOR SEIZED PROPERTY
CONDITION

A considerable number of seizures had $0 appraised value on the inventory reports although they were not
of the contraband or prohibited categories. These seizures include real property, vehicles and jewelry, which
should have an appraised value other than $0. Additionally, we found instances where the financial values
assigned to property were significantly higher than the supporting appraisal worksheets.

CRITERIA

Statement of Federal Financial Accounting Standards (SFFAS) Number 3, Accounting for Inventory and
Related Property, requires seized property to be valued at its market value when seized or, if market value
cannot be readily determined, as soon thereafter as reasonably possible. Market value is defined as the
estimated amount that can be realized by disposing of an item through arm’s length transactions in the
marketplace or the price (usually Tepresentative) at which bonafide sales have been consummated for
products of like kind, quality, and quantity in a particular market at any moment of time. Market value is
based on the value of the property assuming an active market exists for the property. If no active market
exists for the property in the general area in which it was seized, a value in the principal market nearest the
place of seizure should be used.

CAUSE

Delays in performing appraisals at the time of seizure and use of appraisers who do not fully understand the
requirements of SFFAS No. 3.

EFFECT

Seizures with $0 appraised value on the inventory reports, although they are not of the contraband or
prohibited categories lead to under-valuation and erroneous presentation and disclosure of property on the
financial statements. Instances where the financial values assigned to property are significantly higher than
the supporting appraisal worksheets cause over-valuation and over-statement of property values.

RECOMMENDATION
We recommend that:

a. All seized property that are not of the contraband or prohibited categories be valued at its market value
when seized or, if market value cannot be readily determined, as soon thereafter as reasonably possible.
The inventory system should be immediately updated with such values.

b. In updating the inventory system with Property values, the best market estimate should be used as
required by SFFAS No. 3. In the absence of such an estimate, or in the event of receiving unreliable or
questionable appraisals, the lowest available appraisal should be used in keeping with the conservative
principle. Steps should then be taken to immediately obtain and update the inventory system with a
reliable estimate.

37 EXHIBIT II - REPORTABLE CONDITIONS


tee

TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 2000

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

Gardiner, Kamya & Associates, P.C.
Management Consultants and Certified Public Accountants
Washington, D.C.


(4) Accounts Receivable

No allowance has been made for uncollectible amounts as the accounts recorded as a receivable at year-end
were considered to be fully collectible.

(5) Advances
In Fiscal Year 2000, $800,000 was utilized toward expenses leaving a balance of $700,000 at year end. In

Fiscal Year 1999, Treasury refunded $21.8 million to the Fund and $4.8 million was utilized towards Y2K
expenses leaving a balance of $1.5 million at year end,

(6) Cash and Other Monetary Assets

Cash and Other Monetary Assets held on hand included forfeited currency not yet deposited, as well as
forfeited currency held as evidence, amounting to $16.6 million and $13.3 million in Fiscal Year 2000 and
1999, respectively.

(7) Forfeited Property

The following summarizes the components of forfeited property (net), as of September 30, 2000 and 1999,
respectively, (dollars in thousands):

2000 1999

Held for Sale $30,901 $28,904
To be shared with Federal, state or local, or foreign government 282 767

Total forfeited property (Note 8) 31,183 29,671
Less: Allowance for mortgages and claims 3,069) (2,803)
Total forfeited property, net $28,114 $26,868

Forfeited property held for sale, net of allowance for mortgages and claims as of September 30, 2000 and
1999 was $27.8 million and $26.1 million tespectively, and is presented in the Balance Sheet

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 40


Net Position
The components of net position are classified as follows:

¢ Retained Capital — There is no cap on amounts that the F und can carry forward into Fiscal Year 2001.
The cap was removed by the Fiscal Year 1997 Omnibus Appropriations Act (PL 104-208).

¢ Unliquidated Obligations — This category represents the amount of undelivered purchase orders,
contracts and equitable sharing requests which have been obligated with current budget resources. An
expense and liability are recognized and the corresponding obligations are reduced as goods are received
or services are performed. In Fiscal Year 1999, Fund management decided to recognize as liabilities,
4 portion of the equitable sharing requests that were in final Stages of approval subsequent to yearend.
Prior experience with the nature of this account indicated that a substantial portion of these requests
were certain liabilities at yearend. Prior to Fiscal Year 1999, expenses and liabilities were recognized
and the corresponding obligations reduced when final management approval for an equitable sharing
request was given (See also Distributions Payable at Note 10).

¢ Results of Operations — This category represents the net difference, for the activity during the year,
between: (i) financing sources including transfers, revenues, and gains; and (ii) expenses and losses.

(3) Investments and Related Interest

All investments are intragovernmental short-term (35 days or less) non-marketable par value Federal debt
securities issued by, and purchased through, Treasury's Bureau of the Public Debt. Investments are always
purchased at a discount and are reported at acquisition cost (market value), net of discount. The discount
is amortized into interest income over the term of the investment. The investments are always held to
maturity. Prior to FY 2000, investments were made from cash in the Fund and from seized currency held
in the Customs Suspense Account. The Customs Suspense Account became the depository for seized cash
for the Fund following enactment of the TFF Act. During FY 2000, the Fund established its own Suspense
Account, and it became the depository for seized cash for the Fund. The investment, net, represents the
required market value.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 38


1. ACCOUNTING RECORDS ARE PRIMARILY MAIN
(REPEAT CONDITION)

CONDITION

The Treasury Forfeiture Fund's (the Fund) general ledger as well as the U.S. Customs Service (Customs),
U.S. Secret Service (Secret Service), Internal Revenue Service (IRS) and the Bureau of Alcohol, Tobacco
and Firearms (ATF) supporting seized property and forfeited assets tracking systems are maintained
primarily on a cash basis. To produce accrual basis financial statements that can be substantiated through

provides each agency representative with year end close out procedures designed to identify the amounts
which should be accrued in the financial statements at year end.

Accounts Payable and Accrued Liabilities - The Fund does not follow accrual accounting whereby a
liability and an expense are recognized when the underlying goods have been received or the services have
been performed. Furthermore, during the fiscal year, reimbursement Tequests were not submitted regularly
or timely.

Mortgage and Claims Payable - The issue of how to determine a lien liability and when to reduce it has
been addressed by Executive Office of Asset Forfeiture (EOAF or Fund Management) in the updated
directive issued by the Department of the Treasury, titled Number 14, "Expeditious Payment of Liens,
Mortgages and Taxes”, effective October 1995. However, the updated directive does not provide clear
instructions as to when the liability is to be recorded. Therefore, implementation of the instructions, while

forwarded to the Custom’s Accounting Services Division (ASD) for processing. Also, the Directive requires
ASD to disburse the approved payments within 14 calendar days from the date of EOAF's approval of
payment. Because ASD cannot record the liability unless EOAF's approval with the accompanying ac-
counting strip is received, these Tequirements do not provide for a complete accrual of all liens and
mortgages.

Forfeited Currency - Currently, a time lag exists between when the Field Offices are notified of a forfeiture
and when ASD is notified and records revenue in the general ledger.

Distributions Payable - The F und, under certain laws and regulations, has the authority to share forfeited

Accounts Receivable - Customs maintains a contract with a contractor (the Property Custodian), whereby
the Property Custodian stores Property seized by any agency participating in the Fund, conducts auction
sales of forfeited property, and collects storage costs reimbursed by violators. Cash collections made by the
Property Custodian on behalf of the Fund are deposited into various bank accounts in the name of the
Property Custodian and, within one week, are accumulated and transferred to the U.S. Treasury account at
the Federal Reserve Bank of New York.

39 EXHIBIT III - STATUS OF PRIOR YEAR FINDINGS


a U.S. government employee, had used his
work computer, with an NT password
protected system, in connection with the
murder scheme. The CIS was able to defeat
the password protection on the computer and
reconstruct temporary Internet files that
provided substantial evidence of intent. The
trial is scheduled to begin in early 2001, and it
is anticipated that the state will attempt to
obtain a death sentence for the alleged
murderer.

On February 11, 2000, two suspects were
arrested by Secret Service agents of the New
York Electronic Crimes Task Force
(NYECTF) for violation of Title 18 USC 1029
(Access Device Fraud). Investigative leads
provided by Cell One and AT&T to the
NYECTF indicated that three locations were
suspected of being involved in an international
call sell operation. As a result of the
information provided and the initiation of an
electronic surveillance, teams consisting of the
NYECTF and industry representatives were
able to determine where the fraudulent activity
was emanating.

Based upon the information provided and the
identification of the addresses, search warrants
were issued. Simultaneous executions of the
search warrants by representatives of NYECTF,
New York Police Department, New York State
Police, Government Services Administration, and
industry officials resulted in the suppression of this
call sell operation and cell phone cloning
operation. Substantial implements of fraudulent
access device operations were seized (estimated at
over 15,000 devices). The actual loss in the case
is estimated at $2.5 million.

In March 2000, Internet Trading Technologies
(ITT, located in New York, NY, received
several Internet based attacks on its servers.

ITTI is a business that provides inter broker
trade execution services. ITTI directly
connects these customers to Wall Street.

Secret Service agents of the NYECTF were
contacted by the CEO of ITTI. Agents assisted
ITTI in determining that a former employee

was responsible for the attacks that crashed
their servers. The former employee and his
brother then attempted to extort ITTI by
demanding increased pay and benefits.

The attackers were using passwords internal in
nature and known only to a select few people to
access the computer systems. In addition, the
attacks preyed on vulnerabilities that would only be
known to the former employee and his brother.
These attacks continued through March 13, 2000,
and as a result, ITT! and its customers lost access
to ITTI’s trading systems.

On March 13, 2000, during one of the attacks,
agents identified the Internet Protocol (IP) address
of the attacking computer. Agents were able to
determine that the IP address of the attacking
computer was associated with a particular computer
at the City University of New York (CUNY),
located in Flushing, NY. Agents responded to
CUNY and were directed to the individuals using
the identified computer. In a post arrest statement,
the former employee advised that he was
responsible for the denial of service attacks on
ITTI’s systems. Approximately $3.5 million was
identified in lost trading fees, commissions and
liability for not allowing customers to trade.

Super Surplus

Super Surplus represents the remaining unobligated
balance after an amount is reserved for Fund
operations in the next fiscal year. Super Surplus
can be used for any Federal law enforcement

purpose.

In FY 2000, Congress approved $142 million in
Super Surplus funding for the following law
enforcement projects:

Customs

¢ Southwest Border Initiative

¢ FTE/Equipment (from S&E)

¢ Other Base Equipment Funding

¢ Customs Integrity Assurance Program
¢ Training Initiative

¢ Vehicles

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 10


PAC)

Gardiner, Kamya & Associates, PC.

Management Consultants and Certified Public Accountants
1717 K Street, N.W,, Suite 601 Washington, D.C. 20036
Phone: 202 857-177

Fax: 202 857-1778

Independent Auditor's Report on Compliance with Laws and Regulations

The Inspector General
United States Department of the Treasury
Washington, D.C.

We have audited the Principal Statements (balance sheet and the related statements of net cost,
changes in net position, budgetary resources and financing, hereinafter referred to as “financial
statements”) of the Department of the Treasury Forfeiture Fund (the Fund) as of and for the
years ended September 30, 2000 and 1999, and have issued our report thereon dated January
8, 2001. Our responsibility is to report on the Fund’s compliance with laws and regulations
based on our audits. Under the Federal Financial Management Improvement Act of 1996
(FFMIA), we are required to report whether the Fund’s financial management systems
substantially comply with the Federal financial management systems requirements, Federal
accounting standards, and the United States Standard General Ledger at the transaction level.
The U.S. Customs Service (Customs) provides cross-servicing of the accounting for the Fund.
We are not the auditors of Customs and, consequently, we did not perform tests of Customs”
compliance with Federal financial management systems requirements using the implementation
guidance for FFMIA included in Appendix D of the Office of Management and Budget (OMB)
Bulletin No. 01-02, Audit Requirements for Federal Financial Statements. Those tests were
performed by other auditors whose report has been furnished to us. Our report, insofar as it
relates to compliance with Federal financial management systems requirements, is based solely
on the report of the other auditors. We conducted our audits in accordance with: generally
accepted auditing standards; the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States; and,
OMB Bulletin No. 01-02.

The management of the Fund is responsible for complying with laws and regulations applicable
to the Fund. As part of obtaining reasonable assurance about whether the Fund’s financial
statements are free of material misstatement, we performed tests of its compliance with certain
provisions of laws and regulations, noncompliance with which could have a direct and material
effect on the determination of financial statement amounts, and certain other laws and
regulations specified in OMB Bulletin No. 01-02, including the requirements referred to in
FFMIA. We limited our tests of compliance to these provisions and we did not test compliance
with all laws and regulations applicable to the Fund.

Member of the American Institute of Certified Public Accountants
49


1. INADEQUATE PROPERTY MANAGEMENT FUNCTIONS (Partial Repeat Condition)

The Fund’s property management functions require improvement to ensure that: (i) funds, property, and
other assets are safeguarded against loss from unauthorized use or disposition; and (ii) transactions are
properly recorded and accounted for to permit the preparation of reliable financial statements and to
maintain accountability over the assets. The following issues/concerns were noted in this regard under the
following functions:

Ll Seizure Activities
Inadequate accounting and recording of liens and claims

The Fund’s updated directive does not provide clear instructions as to when the liability is to be
recorded. Therefore, implementation of the instructions contained therein, while resolving other
issues, will not ensure that a liability is recorded for claims and mortgages throughout the year. In
fact, the Directive requires that upon EOAF's approval of payment, the appropriate accounting strip
data be affixed to the paperwork authorizing the obligation and disbursement of funds which are then
to be forwarded to the Custom’s Accounting Services Division (ASD) for processing. Also, the
Directive requires ASD to disburse the approved payments within 14 calendar days from the date
of EOAF's approval of payment.

Because ASD cannot record the liability unless EOAF's approval with the accompanying accounting
strip is received, these requirements do not provide for a complete accrual of all liens and mortgages.

In addition, there are no controls in place to track and record liens and claims either by the individual
law enforcement agencies or by the Property Custodian during the year. Manual procedures are
developed at year-end to compensate for this weakness,

1.2 Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted for by the Fund

Asset specific expenses and revenue generated from asset disposition activities are not recorded and
accounted for by the Fund in the various seized property and forfeited assets tracking systems. The
Fund’s Property Custodian incurs costs on behalf of the Fund from the time of seizure until the asset
is ultimately disposed. The Fund requests cost information from the Property Custodian and relies
on the information it provides.

CRITERIA

The Budget and Accounting Procedures Act of 1950, Section 35 12, Executive Agency's Accounting System
requires Federal agencies to establish an internal control structure which ensures the safeguarding of assets
and the proper recording of revenues and expenditures. It is further reinforced by the Federal Manager's
Financial Integrity Act of 1982 (FMFIA) which requires that internal accounting and administrative controls
be established to provide reasonable assurances that revenues and expenditures applicable to agency
operations are properly recorded and accounted for to permit the preparation of accounts and reliable
financial and statistical reports and to maintain accountability over the assets.

53 EXHIBIT II - REPORTABLE CONDITIONS


previous offenders.

The NRB trained 19 ATF Law Enforcement
Divisions on AEXIS. The training included giving
special agents, inspectors, and investigative
assistants access to AEXIS data from their office
computer. In addition, other Federal, state, and
local law enforcement agencies including the
Department of Justice were given presentations on
AEXIS. The repository provided international
training on AEXIS to law enforcement officials in
the United Kingdom, Australia, Germany, and
France.

National Integrated Ballistics Information
Network Program

In FY 2000, ATF received $3 million from the
Fund to support the National Integrated Ballistics
Information Network (NIBIN) program. ATF is
committed to reducing gun violence while
effectively regulating the legitimate firearms
industry. One tool that ATF uses to target suspects
who illegally use firearms and/or supply guns to
criminals or children is the NIBIN program.

The NIBIN program provides and uses intelligence
information regarding crime guns that are traced
by the National Tracing Center. Additionally, the
NIBIN program provides intelligence information,
which assists investigators in identifying and
addressing illegal firearms trafficking by
criminals. The NIBIN program employs the
Integrated Ballistics Identification System (IBIS)
to compare images of ballistic evidence
(projectiles and cartridge casings) obtained from
crime scenes and recovered firearms. This allows
investigators to link a shooting in one city to
shootings involving the same weapon in other
localities. The system automatically compares the
crime scene bullet or cartridge casing with other
bullet and cartridge casings that have been
previously entered into the system and produces a
list of likely matches. The NIBIN program and
IBIS have proven to be invaluable tools for local,
state and Federal law enforcement personnel and
have led to the identification and apprehension of
countless violent criminals.

Candidate Nominee Protection

In FY 2000, the Fund provided the Secret Service
with over $25 million to support the physical
protection of protectees and ongoing protective
intelligence during the 2000 Presidential
Campaign. This funding helped Secret Service
achieve its performance goals by providing the
maximum physical protection possible for Secret
Service’s protectees in their residences and while
traveling, and maintaining an ongoing protective
intelligence program to support risk assessment and
the determination of the protective requirements.
In the most basic terms, the result of this funding
was the protection of the lives of our nation’s
leading political figures.

Countering the Chemical and Biological
Protective Threat

The increased use of chemical and biological
agents or other hazardous materials poses a
tremendous threat to Secret Service protectees.
The Fund provided Secret Service with $3.3
million in FY 2000 to purchase the latest, most
sophisticated  chemical/biological detection
technologies as well as decontamination and
personnel protective equipment, neutralizing
materials and containment systems. This funding
supported the purchase of replacement equipment
due to expired shelf life, outdated technology and
use of expendable material. This initiative enabled
the Secret Service to significantly improve its
ability to provide the best possible and most
effective portable equipment to mitigate, neutralize,
contain, test, identify and sample threats that use
chemical/biological or hazardous materials.

Program Performance

Strategic View

The Treasury Forfeiture Fund has long recognized
the benefit of having a clearly articulated sense of
direction that has been well communicated to all
Fund participants. With policy direction from the
Under Secretary of Enforcement and by attention to
evolving Federal law enforcement priorities and
strategies, the Fund provided a new Strategic Plan

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 12


Page 2

The IPA will issue a management letter that discusses certain
matters identified during the audit which were not required to be
included in the audit report.

My staff monitored the conduct of the audit and performed a
quality control review of the IPA’s working papers. The audit
work was performed in accordance with Government Auditing
Standards, issued by the Comptroller General of the United
States, and OMB Bulletin No. 01-02, Audit Requirements for
Federal Financial Statements.

Should you have any questions, please contact me at

(202) 927-5430, or a member of your staff may contact

Thomas A. Moschetto, Director, Financial Management Audits at
(202) 927-5074.

Attachment


‘sates

Treasury Forfeiture Fund
Statement of Budgetary Resources

For the Years Ended September 30, 2000 and 1999

(Dollars in Thousands)

Budgetary Resources:

Budget authority

Unobligated balance - beginning of year
Spending Authority from offsetting collections
Adjustments

Total Budgetary Resources

Status of Budgetary Resources:

Obligations incurred
Unobligated balance - available

Total, Status of Budgetary Resources
Outlays:
Obligations incurred

Less: Spending authority from offsetting collections
and adjustments

Obligated balance, net - beginning of year
Less: obligated balance, net - end of year

Total Outlays

The accompanying notes are an integral part of these financial statements

2000

$ 226,196
190.947
68

29,856

$ 447.067

$ 384,172

(29,924)

1999

$ 346,738
165,588

27,574

$539,900

$ 348,953
190,947

$ 539.900

$ 348,953

(27,574)
200,905

(221,982)

$300,302

31 FINANCIAL STATEMENTS


6.2

Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted for accurately by the Fund

Asset specific expenses and revenue generated from asset disposition activities are not recorded and
accounted for accurately by the Fund in the various seized property and forfeited assets tracking
systems. As a result, the Fund is unable to accurately assess the costs and revenue related to
individual scizures.

The Fund’s Property Custodian incurs costs on behalf of the Fund from the time of seizure until the
asset is ultimately disposed. The Fund requests cost information from the Property Custodian from
lime to time for purposes of calculating the net dollar value realized for those assets that are subject
to equitable sharing with other Federal, state and local agencies, and relies on the information
provided by the Property Custodian. In some instances, the cost data provided by the Property
Custodian is incomplete, not supported, or absent for various reasons. Consequently, the net amount
arrived at for equitable sharing purposes may be overstated or understated. The Fund does not
monitor costs for those assets not subject to equitable sharing.

The Property Custodian, as part of their property management services, disposes of the Fund’s
property mainly through public auctions. Revenue generated as a result of these sales is not reported
to the Fund on an asset by asset basis. As a result, the Fund is unable to reconcile on an asset by asset
basis to what is recorded as sales revenue in the Fund and to what is recorded as sold in the various
seized property and forfeited assets tracking systems.

The Fund’s asset management function will deteriorate if the above conditions are allowed to exist, resulting
ultimately in a lack of. accountability over the assets of the Fund.

RECOMMENDATION

We recommend that the following actions be implemented immediately:

6.1

@

(ii)

Seizure Activities
Differing property identification numbers

Issue uniform procedures to each of the law enforcement agencies that is participating in the Fund
regarding the basic requirements for tracking an asset and specify the procedure to be followed by
law enforcement agencies with non-SEACATS tracking numbers. If management requires that both
tracking numbers be recorded, then the procedures should state this requirement and insist on
compliance.

Untimely recording of seized and forfeited property

Issue uniform procedures regarding the lines of communication between agencies (Headquarters and
Field Offices), management of the Fund, the Property Custodian and the Fund’s accounting staff
based in Indianapolis (the Accounting Services Division of the U.S. Customs Service). The
procedures must identify the documents involved for transactions to be processed, as well as the
timelines for ensuring that transactions are captured to satisfy the Fund’s requirements.

69

EXHIBIT III - STATUS OF PRIOR YEAR FINDINGS


Subtotal, intra-governmental

liabilities 38 39
Liabilities covered by budgetary
resources
Non-intra-governmental liabilities
Seized currency 296 300
Distributions payable
State, local and foreign law

enforcement agencies 35 31
Victim restitution - 29
Accounts payable 8 6
Deferred revenue from forfeited

Assets 28 27
Subtotal, non-intra-governmental

Liabilities 367 39:

Total liabilities covered by

budgetary resources $405 $432
Liabilities not covered by
Budgetary resources
Commitments and Contingencies___-- =
Total Liabilities 405 432
Net Position
Retained Capital 189 230
Unliquidated obligation 136 114
Results of Operations (95) (19)
Total Net Position $230 _$325
Equals: Total Balance Sheet
Liabilities and Net Position” _$635 _$757

a! Amounts may not add due to rounding.

Summary of Financial Highlights

Net Position. Although Fund management
concluded FY 2000 with current year expenses,
transfers and applied revenue exceeding current
year revenue by $13 million, (from FY 2000 — see
page 17) this reflects a reduction of backlogged
equitable sharing expenses brought forward FY
1999.

Policy Issuance. During FY 2000, the Fund
management continued to identify incremental
improvements in operational processes and
financial management operations. Recognizing the
close connection between field operations and
proper financial management, the Executive Office
for Asset Forfeiture continued the process of
reviewing and updating the policy guidelines
disseminated by the office.

Adoptive Seizure Policies and Procedures.

In FY 2000, the Executive Office for Asset
Forfeiture issued Directive No. 34 — Adoptive
Seizure Polices and Procedures. The Department
of the Treasury’s approach to adoptions was
established in 1992, at a time when the majority of
states did not have statutory authority to seize and
forfeit. The Federal adoption process was created
to provide a mechanism to allow Treasury law
enforcement bureaus to assist: (1) states not
possessing the requisite authority to forfeit
criminally obtained property, and (2) in cases
where the scope of the investigation (multi-state
violators or international violators) warranted
Federal investigation.

Since that time, the majority of states have obtained
statutory seizure/forfeiture authority, thereby
significantly decreasing the need for adoptions.
The purpose of the new directive was to clarify the
circumstances under which adoptions are
appropriate given the evolving state legislation.

Circumstances that may make Federal forfeiture
appropriate include, but are not limited to:

1. The pertinent state or local prosecuting official
has reviewed the case and has declined to

21 SECTION I - OVERVIEW


DEPARTMENT OF THE TREASURY
WASHINGTON, D.c. 20220

March 1, 2001

OFFICE OF
INSPECTOR GENERAL

MEMORANDUM FOR RAY DINEEN, DIRECTOR
TREASURY FORFEITURE FUND

FROM: William H. Pugh, bilb.am W Lag

Deputy Assistant Inspector General
for Financial Management and Information
Technology Audits

SUBJECT: Audit of the Treasury Forfeiture Fund’s
Fiscal Years 2000 and 1999 Financial Statements

I am pleased to transmit the attached report, Audit of the
Treasury Forfeiture Fund’s (the “Fund”) Fiscal Years (FY) 2000
and 1999 Financial Statements. The Funds’s financial statements
were audited by the firm of Gardiner, Kamya & Associates, P.C.,
an independent public accountant (IPA). The IPA issued the
following reports:

¢ Independent Auditor’s Report on Financial Statements;
¢ Independent Auditor’s Report on Internal Control;

e Independent Auditor’s Report on Compliance with Laws and
Regulations.

The IPA rendered an unqualified opinion on the Fiscal Year 2000
financial statements. The IPA’s report on internal controls
cited one material weakness and two reportable conditions. The
material weakness, pertains to the general ledger (i.e., the
Fund’s general ledger does not record all balances and
transactions that are reflected in the financial statements). The
reportable conditions related to inadequate property management
functions and unsubstantiated values for seized property.

The IPA’s report on compliance with laws and regulations reported
that the Fund was not in compliance with “The Budget and
Accounting Procedures Act of 1950”, specifically, because the
general ledger does not capture all balances and transactions
that comprise the Fund during the year. No other instances of
noncompliance with other laws and regulations were disclosed.


(10) Distributions Payable (state and local agencies and foreign governments)

Included in the amount for Distributions Payable (state and local agencies and foreign governments) for
Fiscal Year 2000 and 1999, respectively, is $27.6 and $29.1 million arising from a decision made by Fund
management to recognize as a liability a portion of the equitable sharing requests (based on the average of
historical pay-out percentage), that were approved or in final stages of approval on September 30, 2000 and
1999, respectively. Prior experience with the nature of this account indicated that a substantial portion of
these requests were certain to be paid out by the Fund during the following fiscal year.

(11) Victim Restitution - U.S. vs. Bulldog Medical Case

The “Bulldog Medical Case” was a culmination of a 3-year investigation that ultimately led to Federal
charges of criminal mail fraud, interstate transportation, money laundering, witness tampering, conspiracy,
aiding and abetting, and criminal forfeiture. Although over $32 million associated with this case was
forfeited during Fiscal Year 1997; the majority of the forfeited proceeds remain undistributed to victims of
the underlying crime of fraud. The reason for the delay in distributing payments is related to litigation
associated with a gui_relator, that is, an individual who provides information to the Government ina
case can file for a portion of proceeds from the case. The qui tam relator in this case filed outside of the
district in which the principal case was filed and came to the attention of Fund management only after
forfeiture. The referenced gui tam relater’s claim must be resolved before any distribution of the proceeds
can be returned to victims or otherwise distributed. The claim was resolved in Fiscal Year 1999.
Approximately $3.4 million was distributed during Fiscal Year 1999. The balance of $28.7 million was
distributed in Fiscal Year 2000.

(12) Net Position
Cumulative Results

The following summarizes components of cumulative results for the years ended September 30, 2000 and
1999, respectively, (dollars in thousands):

2000 1999
Retained Capital $189,071 $229,809
Unliquidated Obligations 135,639 113,804
Results of Operations (94.968) (18.903)

$229.742 $324,710
Unliquidated Obligations

The following summarizes the components of unliquidated obligations as of September 30, 2000 and
1999, respectively, (dollars in thousands):

2000 1999
Discretionary $ 160 $ 348
Equitable Sharing 604 9,489
Non-discretionary 134,875 103.967

$135,639 $113,804
B FINANCIAL STATEMENTS



Treasury Forfeiture Fund
Balance Sheet
As of September 30, 2000 and 1999
(Dollars in Thousands)

Liabilities and Net Position

2000 1999
Liabilities Covered by Budgetary Resources:
Intragovernmental Liabilities:
Distributions payable:
Other Federal agencies $ 94 = =$ 1,320
Accounts payable 38,102 37,465
Total Intragovernmental Liabilities 38.196 38,785
Seized currency (Note 9) 296,392 300,194
Distributions payable:
State and local agencies and foreign governments (Note 10) 34,656 31,470
Victim restitution (Note 11) - 28,675
Accounts payable 7.816 6,088
Deferred revenue from forfeited assets 28,121 26.906
366.985 393.333
Total Liabilities Covered by Budgetary Resources 405,181 432,118
Liabilities not Covered by Budgetary Resources:
Commitments and Contingencies (Note 16) - -
Total Liabilities not Covered by Budgetary Resources : -
Total Liabilities 405,181 432,118
Net Position (Note 12)
Cumulative results of operations 229,742 324,710
Total Liabilities and Net Position $ 634.923 $ 756,828

The accompanying notes are an integral part of these financial statements

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000


recognized for property and currency, which are distributed to or shared with non-Federal agencies, per
SFFAS No. 7, Accounting for Revenue and Other Financing Sources.

Entity Assets

Entity assets are used to conduct the operations and activities of the Fund. Entity assets comprise
intragovernmental and non-intragovernmental assets. Intragovernmental balances arise from transactions
among Federal agencies. These assets are claims of a Federal entity against another Federal entity. Entity
assets consist of cash or other assets, which could be converted into cash to meet the Fund's current or future
operational needs. Such other assets include investments of forfeited balances, accrued interest on seized
balances, receivables, and forfeited property, which are held for sale or to be distributed.

¢ Cash and Other Monetary Assets — This represents amounts on deposit with Treasury, including
forfeited cash on hand not yet deposited.

¢ Investments and Related Interest Receivable — This includes forfeited cash held by the Fund that are
invested in short term U.S. Government Securities.

¢ Receivables — Intragovernmental receivables principally represent monies due from the law enforcement
agencies participating in the Fund. The values reported for other receivables are primarily funds due
from the national seized property contractor for properties sold: the proceeds of which have not yet been
deposited into the Fund.

e Advances — This primarily represents cash transfers to Treasury or law enforcement bureaus
participating in the Fund for orders to be delivered.

¢ Forfeited Property and Currency — Forfeited property and currency is recorded in the respective seized
property and forfeited asset tracking systems at the estimated fair value at the time of seizure. However,
based on historical sales experiences for the year, properties are adjusted to reflect the market value at
the end of the fiscal year for financial statement reporting purposes. Direct and indirect holding costs
are not capitalized for individual forfeited assets. Forfeited currency not deposited into the Fund is
included as part of Entity Assets - Cash and Other Monetary Assets, in the accompanying Balance Sheet.

Further, mortgages and claims on forfeited assets are recognized as a valuation allowance and a reduction
of deferred revenue from forfeited assets when the asset is forfeited. The allowance includes mortgages and
claims on forfeited property held for sale and a minimal amount of claims on forfeited property previously
sold. Mortgages and claims expenses are recognized when the related asset is sold and is reflected as a
reduction of sales of forfeited property.

Additionally, SFFAS No. 3, Accounting for Inventory and Related Property, requires certain additional
disclosures in the notes to the financial statements, including an analysis of changes in forfeited property
and currency, for both carrying value and quantities, from that on hand at the beginning of the year to that
on hand at the end of the year. These analyses are disclosed in Notes 8 and 9.

Non-entity Assets

Non-entity assets held by the Fund are not available for use by the Fund. Non-entity assets comprise
intragovernmental and other assets. Intragovernmental balances arise from transactions among Federal
agencies. These assets are claims of a Federal entity against another Federal entity. Non-entity assets are

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 36



TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the Year Ended September 30, 2000
(Dollars in Thousands)

(F)

(G)

(H)

()

The balance of the Fund at the end of the preceding fiscal year.

The total net position of the Fund at September 30, 2000, as reported in the audited financial
statements is $229,742.

The net amount, if any, of the excess unobligated amounts remaining in the Fund at the end
of the preceding fiscal year and available to the Secretary for Federal law enforcement related
purposes.

There is no cap on amounts that can be carried forward into FY 2001 per Fiscal Year 1998
Omnibus Appropriations Act (PL 104-208). The amount carried over to FY 2001 is $94,103.

A complete set of audited financial statements prepared in a manner consistent with the
requirements of the Chief Financial Officers Act of 1990.

The audited financial statements, including the Independent Auditor’s Report, is found in
Section II.

An analysis of income and expense showing revenue received or lost: (i) by property category
(such as general property, vehicles, vessels, aircraft, cash, and real property); and (ii) by type
of disposition (such as sale, remission, cancellation, placement into official use, sharing with
state and local agencies, and destruction).

A separate schedule is presented on page 77.

OTHER ACCOMPANYING INF ORMATION 80


identify and capture information manually from
other bureaus’ systems at the end of the year in
order to compile the financial statements.”

Eventual integration of the inventory system(s)
with the Fund’s general ledger will relieve this
long-standing material weakness. Fund
management intends to work with the agencies to
ensure that seized and forfeited property inventory
systems continue to generate accurate inventory
data automatically, and to use this data to manually
adjust the Fund’s general ledger. For the future,
Fund management is working toward an
automated link between the inventory system(s)
and the general ledger.

Longer Term Plans. Before the Fund’s general
ledger can automatically record all accrual
transactions associated with the Fund’s financial
statements, it will be necessary to integrate all
inventory systems supporting the Fund’s financial
statements with the US Customs Service’ Asset
Information Management System (AIMS).

Fund Management’s Plan Regarding
Reportable Conditions. Repeat Condition:
Management continues to work on systems
enhancements to ensure the proper tracking and
reporting of liens and claims, as well as the
tracking and reporting of revenue and expense on
an asset-specific basis.

New Condition: Fund management will work with

the participating agencies to ensure that seizures
are appropriately valued in a timely manner and
that, when appropriate, documentation is available
to support the recorded value.

Look Forward. Fund management is pleased with
the reduction in the number of material
weaknesses and reportable conditions identified
against the FY 2000 financial statements as
compared to both FY 1998 and FY 1999. Efforts
will continue for the enhancement of systems
performance and the development of systems
integration.

Limitations of the Financial Statements. As
required by OMB Bulletin 97-01, as amended,

Form and Content of Agency Financial Statements,
Fund management makes the following statements
regarding the limitations of the financial
statements:

¢ The financial statements have been prepared to
report the financial position and results of
operations of the entity, pursuant to the
requirements of 31 USC § 3515(b).

¢ While the statements have been prepared from
the books and records of the entity in
accordance with the formats prescribed by
OMB, the statements are in addition to the
financial reports used to monitor and control
budgetary resources which are prepared from
the same books and records.

e The statement should be read with the
realization that they are for a component of the
U.S. Government, a sovereign entity. One
implication of this is that liabilities cannot be
liquidated without legislation that provides
resources to do so.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 24




numerous bad checks. Within days of voting for
the award of the bond issue, the commissioner
deposited several large checks to his bank account.
Additional bank records obtained showed that the
bond company was paying off the commissioner’s
loans through another company.

In May, the United States Attorney for the
Northern Judicial District of Florida presented an
equitable sharing check in the amount of
$1,125,000 to the IRS Criminal Investigation
Division. These funds represented a 50 percent
share of the funds forfeited in the bribery scheme.

Program and Funding Highlights

The Treasury Forfeiture Fund is a special fund.
‘Special funds are Federal fund collections that are
earmarked by law for a specific purpose. The
enabling legislation for the Treasury Forfeiture
Fund (31 U.S.C. § 9703) defines those purposes
for which Treasury forfeiture revenue may be
used. The funds can be allocated and used without
the enactment of an annual appropriation by
Congress.

Once property or cash is seized, there is a
forfeiture process. Upon forfeiture, seized
currency, initially deposited into a suspense, or
holding account, is. transferred to the Fund as
forfeited revenue. Once forfeited, physical
properties are sold, and the proceeds are deposited
into the Fund as forfeited revenue. It is this
forfeiture revenue that composes the budget
authority for meeting expenses of running
Treasury’s forfeiture program.

Expenses of the Fund are set in a relative priority
so that unavoidable, or “mandatory” costs are met
first. Expenses may not exceed revenue in the
Fund. The Fund has several different spending
authorities. Each of them is described below.

Mandatory Authority

The mandatory authority items are generally used
to meet “business expenses” of the Fund, including
expenses of storing and maintaining seized and
forfeited assets, valid liens and mortgages;

investigative expenses incurred in pursuing a
seizure; information and inventory systems; and
certain costs of local police agencies incurred in
joint law enforcement operations. Following
seizure, equitable shares are paid to state and local
law enforcement agencies that contributed to the
seizure activity at a level proportionate to their
involvement.

It is a strategic goal of the Fund to emphasize and
monitor high impact forfeitures. The impact on a
criminal enterprise is considered greater, the large
the forfeiture. However, to make significant
forfeitures requires longer, more in-depth
investigations and investigative investment. To
this end, Fund management emphasizes the use of
mandatory funding authorities that fuel large case
initiatives including Purchase of Evidence and
Information, expenses associated with Joint
Operations, Investigative Expenses Leading to
Seizure, and Asset Identification and Removal
teams.

Asset Identification and Removal Groups

Asset Identification and Removal Groups (AIRGs)
help ensure that seizure operations are done in the
right way, with a maximum of precision and
efficiency. In FY 2000, the Fund contributed over
$3.5 million in mandatory funding to the efforts of
Customs’ AIRGs. The groups are comprised of
special agents, auditors, accountants and contract
data analysts who are specially trained to identify
assets of criminal organizations. The personnel
assigned to the groups receive special training at
Treasury’s Federal Law Enforcement Training
Center to prepare them in the areas of asset
identification, removal and forfeiture. The AIRGs
are particularly valuable in international
investigations, where criminal proceeds can be
moved rapidly around the world. Their expertise in
identifying and tracking these assets is critical to an
effective seizure and forfeiture program.

Customs’ Philadelphia AIRG has been
investigating an extensive, international stock fraud
and money laundering conspiracy. The scheme
involved the fraudulent issuance, promotion, and
sale of stock, the price of which was illegally

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2000 8


request that a quarterly list of liens and claims is prepared and forwarded to the Fund’s accounting
staff for monitoring purposes. System enhancements/changes must be made where necessary to
accommodate this information, as it is available.

Asset Disposition Activities

Asset specific expenses and revenue are not recorded and accounted for by the Fund

In view of the Fund’s acknowledgement of this condition and SEACATS’ inability to capture the
required information we make the following recommendations:

a. EOAF ensures that the new Property management contract requires the awardee to record and
distribute overhead costs at the asset level.

b. EOAF vigorously pursue the enhancement of SEACATS system capabilities to record and
report revenue and expenses at the asset level.

MANAGEMENT RESPONSE

Management Assessment on Progress:

Ld

Inadequate accounting and recording of liens and claims

Fund Management has procedures in place that require the law enforcement agencies to record in
their inventory tracking systems all valid liens and claims at the time of forfeiture. Unforeseen
systems issues complicated the reporting of this data for FY 2000. However, manual procedures
were implemented to produce this data for the year-end reporting requirements.

Asset specific expenses and revenue are not recorded and accounted for by the Fund

Fund Management has identified this condition as an important financial information deficiency.
While manual procedures are in place to determine revenue and expense data at the asset level when
required for financial transactions, it is a priority of Fund Management to pursue SEACATS
enhancements for the automated recording and reporting of the revenue and expense data.

Discussion/Background and Planned Action:

1d

1.2

Inadequate accounting and recording of liens and claims

Fund Management concurs with the auditor’s recommendation regarding system enhancements to
accommodate the necessary lien and claim information to support the Fund’s financial reporting
requirements. We will work with the bureaus to implement systems enhancements for the recording
and reporting of valid liens and claims data.

Asset specific expenses and revenue are not recorded and accounted for by the Fund

The majority of the expense data for seized and forfeited property is captured by SEACATS, as well
as the inventory tracking systems for the non-Customs bureaus. However, for property held by the
national seized property contractor, overhead costs for contractor operated facilities are not being

EXHIBIT II - REPORTABLE CONDITIONS


(iii) Inadequate accounting and recording of liens and claims
Implement procedures to have field offices track liens and claims manually on a monthly basis and
request that a quarterly list of liens and claims is prepared and forwarded to the Fund’s accounting
staff for monitoring purposes. Alternatively, system enhancements/changes must be made where
necessary to accommodate this information, as it is available.

6.2 Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted for accurately by the Fund
Fund Management must consider meeting with the Property Custodian to determine the reason/cause
for the lack of information related to asset specific expenses and revenues. Fund management must
take steps to correct the problem once the proper cause has been identified.

FY 2000 STATUS

6.1 Seizure Activities

(i) Differeut property identification numbers
The auditor’s recommendations were not fully implemented. However, it was less difficult to track
property items, sales of forfeited property and related issues in FY 2000.
This condition will be reported in the form of a Management Letter Comment in FY 2000.

(ii) Untimely recording of seized and forfeited property
‘The Fund has made significant improvements in this area and fewer discrepancies were noted in FY
2000 as compared to previous years.
This condition will be reported in the form of a Management Letter Comment in FY 2000.

(iii) Inadequate accounting and recording of liens and claims

The Fund instructed the various agencies to update their inventory systems with liens and claims
information at the time of forfeiture and USCS and IRS attempted to record this information.
However, SEACATS faced technical difficulties to capture payee and other related information,
while AFTRAK’s information on liens was inaccurate with respect to payment status. ATF and
USSS, both of which use CATS, were unable to capture this information.

This condition will be repeated as a reportable condition in FY 2000.

TREASURY FORFETURE FUND ANNUAL REPORT — FISCAL YEAR 2000 70


(13) Related Party Transactions

The Fund reimbursed agencies for the purchase of certain capital assets. These assets are reported by the
participating agencies in their financial statements.

(14) Super Surplus

31 U.S.C. 9703 (g)(4)(B) allows for the expenditure, without fiscal year limitation, after the reservation of
amounts needed to continue operations of the Fund. This “Super Surplus” balance may be used for law
enforcement activities of any Federal agency. Pursuant to a directive from the Treasury Departmental Office,
management changed its accounting policy regarding disbursements from the Super Surplus Fund (see Note
2 Summary of Significant Accounting Policies — Allowable Fund Expenses).

Amounts distributed to other Federal agencies for law enforcement activities under “Super Surplus”
tequirements amounted to $72.2 million and $41.0 million in Fiscal Year 2000 and 1999, respectively.

(13) Secretary’s Enforcement Fund

31 U.S.C. 9703 (b)(5) is another category of permanent indefinite authority. These funds are available to
the Secretary, without further action by Congress and without fiscal year limitation, for Federal law
enforcement purposes of Treasury law enforcement organizations. The Source of Section 9703(b)(5) funds
is equitable sharing payments received from the Department of Justice and the U.S. Postal Service (USPS)
representing Treasury's share of forfeiture proceeds from Justice and USPS cases. This “Surplus” balance
may be used for law enforcement activities of any Federal agency. Pursuant to a directive from the Treasury
Departmental Office, management changed its accounting policy regarding disbursements from the
Secretary’s Enforcement Fund (see Note 2 Summary of Significant Accounting Policies — Allowable Fund
Expenses).

Amounts distributed for Federal law enforcement purposes of Treasury law enforcement organizations
amounted to $8.2 million and $5.6 million in Fiscal Year 2000 and 1999, respectively.

(16) Commitments and Contingencies

COMMITMENTS

Beginning in Fiscal Year 1999, Fund management decided to recognize the liability for equitable sharing
requests that were approved or in final stages of approval subsequent to September 30 (See also Note 10,
Distributions Payable).

In addition to the amounts estimated above, there are additional amounts, which may ultimately be shared,
which are not identified at this time.

CONTINGENCIES
Possible claims of potential significance include the following:

1. In recent decisions, the United States Court of Appeals for the Ninth Circuit ruled that it is
unconstitutional to forfeit currency based upon a violation of a Federal currency reporting statute.
Accordingly, the court has ruled that in returning currency, the government must return the benefit that
is received from holding the currency. The interest to be returned will be payable out of the income of
the Fund, and, at present, represents a possible claim of potential significance.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2000 44



SECTION III
OTHER REPORTS


ATF

« Headquarters Construction

* Major Case Funding

¢ Laboratory Equipment Modernization

¢ National Integrated Ballistics Information
Network

¢ Arson and Explosives Repository

* Canine Explosives Detection

¢ Building Security Annualization

Secret Service

+ Candidate Nominee Protection

¢ Non-Personnel Anti-Terrorism Costs

¢ Countering Chemical/Biological Threats

¢ Treasury Communications System

* Local Area Network Replacement

* Protective Security — White House Complex
¢ Uniformed Division Move

FinCEN
« Money Service Business Regulations

Below are some highlights of these Super Surplus
projects:

Southwest Border Initiative

In the FY 2000 Appropriations Bill, Congress
directed that $25 million of Super Surplus funding
be provided for a Customs Southwest Border
Initiative. This initiative allowed for an increase in
inspectors, agents and detection technology in
order to reduce wait times and prevent trafficking
in illegal drugs and other contraband on the
Southwest Border.

Congress approved that the funding could be split
between FY 2000 and FY 2001. In FY 2000,
Customs began to hire canine officers, inspectors
and agents, relocated agents, and purchased body
scan equipment and density meters. The Fund has
reserved the remaining $11.3 million in Super
Surplus for continuation of this project in FY
2001.

Arson and Explosives Repository

In 1996, Congress recognized ATF’s expertise in
the arson and explosives arena and passed

legislation authorizing the Treasury Secretary to
establish a National Repository of information on
arson incidents and the criminal misuse of
explosives throughout the United States. The
Secretary of the Treasury directed ATF to carry out
this Congressional mandate. The principal Federal
partners in the data collection effort are ATF, the
Federal Bureau of Investigation, and the United
States Fire Administration. In FY 2000, ATF’s
National Repository Branch (NRB) received $1.6
million from the Forfeiture Fund.

With support from the Fund, the NRB developed
the Arson Explosives Incident System (AEXIS)
which provides a comprehensive database of
records for arson/explosive incidents and serves as
a repository for those incidents reported by local
and state jurisdictions. The result is this country’s
most comprehensive set of data describing
arson/explosives victimization, device components,
and the theft and recovery of explosives. The NRB
supports individuals at the policy making level as
well as the investigators conducting investigations
in the field.

The National Repository Branch’s secure web-site
was placed in operation to provide bomb
technicians, explosives investigators, law
enforcement and fire service with an intelligence
database that could aid investigators by identifying
trends and similarities between arson and
explosives incidents. The National Repository
helps authorized investigators identify case-specific
similarities regarding explosive and incendiary
device construction, methods of initiation, types of
fuels/explosives used, and methods of operation.
The system will link thefts of explosive material
with the later criminal misuse of the explosives.

The NRB has a highly experienced staff equipped
with some of ATF’s most modern information
system tools. The AEXIS database contains over
108,400 incident records containing 25 years of
incident history. It describes the nation’s arson and
bombing occurrences with information on trends,
patterns, and criminal methodologies. The records
contain sufficient incident detail to identify similar
device construction, target selection, device
delivery techniques and provide the identity of

i SECTION I- OVERVIEW