we

SECTION III

INDEPENDENT AUDITOR’S REPORTS ON COMPLIANCE WITH LAWS AND
REGULATIONS AND INTERNAL CONTROL


cooperation of state and local and foreign law
enforcement with Federal law enforcement. The
FY 1999 figure also includes a change in the
estimate to reflect the majority of amounts

previously identified in earlier statements as .

contingent liabilities.

Statement: Net Cost

Program Costs. After revenue is applied toward
policy mandates, the remaining financing supports
the law enforcement expenses of the Fund and
pays for the storage of seized and forfeited
property and sales costs associated with the
disposition of forfeited property. Non-
discretionary’ costs increased to nearly $187
million in FY 1999, up $64 million from the FY
1998 level, an increase of 52 percent. This is
largely due to increases in non-discretionary
expenses associated with investigative costs and
asset management and additional super surplus
expenses in FY 1999. Recent operational
surpluses of the Fund have resulted in greater
super surplus declarations in the past couple of
years, and the expenses from projects approved
for funding from that authority are now appearing
on the Fund’s financial statements.

Among the initiatives toward which the Fund has
applied substantial resources has been the
Department’s Year 2000 (¥2K) automation
initiative. The Treasury asset forfeiture program is
heavily automated and failure of the program’s
widely-cast automation network to function in the
year 2000 (Y2K) would have damaging effects on
the program’s ability to properly track nationwide
seized and forfeited assets of the program. To help
ensure against catastrophic problems in this
regard, significant resources totaling about $55
million were authorized from the Fund in FY
1998 for automation-related purchases designed to
correct Y2K deficiencies identified by the
Department, including the referenced $50 million
from non-discretionary authority. A portion of
these resources were expensed during FY 1999
and are included among the increased programs
costs this year.

Program Costs
End of Year

(ollars in Millions)

Non-discretionary
Costs incurred with the Public

National seized property
contractor

State and local law
enforcement joint operations

Subtotal non-discretionary
costs incurred with the Public

Intragovernmental

Seizure investigative costs
asset management

Other asset related contract
services

Awards to informer

Data systems, training and
others

Super surplus

Secretary’s enforcement Fund
Total, intragovernmental
Total non-discretionary
Discretionary*
Intragovernmental

Purchase of evidence or
information

Federal law enforcement
conveyance

Data systems, training and
others

Total discretionary

Total Program Costs

*Less than $500,000

1999

$33

78

(oo)

RBEL2s

*)
@)

A
mea)
$187

1998

$ 28

55

BlhL as

(*)

Eb kL

$,

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


DEPARTMENT OF THE TREASURY
WASHINGTON, D.c. 20220

March 3, 2000

OFFICE OF
INSPECTOR GENERAL

MEMORANDUM FOR RAYMOND M. DINEEN, DIRECTOR
EXECUTIVE OFFICE ho. FORFEITURE

FROM: Dennis S. Schindel ome
Assistant Inspector General for Audit

SUBJECT: Report on the Audited Fiscal Year 1999 Financial
Statements of the Treasury Forfeiture Fund

I am pleased to transmit the attached report on the audited
Fiscal Year 1999 financial statements of the Treasury Forfeiture
Fund (TFF). Gardiner, Kamya, & Associates, P.C., an independent
public accountant (IPA), performed the audits and issued the
following reports, which are included in the attachment:

Independent Auditor's Report on Financial Statements;
Independent Auditor's Report on Internal Control; and
Independent Auditor's Report on Compliance with Laws and
Regulations.

The IPA rendered an unqualified opinion on the TFF's Balance
Sheets as of September 30, 1999 and 1998, and the related
Statements of Net Cost, Changes in Net Position, Budgetary
Resources, and Financing for the Fiscal Years ended September 30,
1999 and 1998. However, the Independent Auditor's Report on
Internal Control cited three material weaknesses: (1) accounting
records are primarily maintained on a cash basis (repeat
finding); (2) all balances and transactions that comprise the TFF
are not captured by the general ledger (repeat finding); and (3)
systems control deficiencies exist in the United States Customs
Service's (Customs Service) seized property and forfeited assets
tracking system (repeat finding).

In addition, the Independent Auditor's Report on Internal Control
cited the following three reportable conditions: (1) improper
timing for valuation of forfeited Property (repeat finding); (2)
lack of control over assets (repeat finding); and (3) inadequate
property management functions (repeat finding).

The Independent Auditor's Report on Compliance with Laws and
Regulations cited one (repeat) instance of noncompliance with
applicable laws and regulations. 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


EXHIBIT I

MATERIAL WEAKNESSES


. SEACATS was used as the system of record for property. However, seized and forfeited
property information from SEACATS contained erroneous information in certain instances.
Consequently, year-end procedures were developed to identify seized and forfeited property
not recorded in SEACATS as of September 30, 1998. As a result of the implementation of
these procedures, a number of adjustments were made to the SEACATS data to adjust to the
value of seized and forfeited property on hand at year-end.

. Reliable seized and forfeited currency information could not be provided from SEACATS.
Exhaustive year-end procedures were developed to manually compile seized and forfeited
currency as of September 30, 1998, for financial reporting purposes.

RECOMMENDATION

The Fund’s current intention is to develop SEACATS until it is fully functional so that Customs can
process property and currency transactions as intended and ultimately use SEACATS as the Customs
system of record for both property and currency transactions in fiscal year 1999. We strongly
reaffirm the following recommendations from the previous financial statement audit:

1. The shortfalls identifiable to SEACATS must be immediately corrected to allow for cradle
to grave tracking of all property and currency from case initiation to final resolution
including Statement of Federal Financial Accounting Standards No. 3, Accounting for
Inventory and Related Property requirements;

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

3. Customs must conduct post conversion audits to ensure that the system works as purported,
if any further systems changes are made.

MANAGEMENT RESPONSE

Management Assessment on Progress: \t is anticipated that this material weakness will continue
to be identified until such time as the inventory system(s) can properly document seized and forfeited
property in a manner sufficient to support the change in inventory analysis for financial reporting

purposes.

Planned Actions/Events (Short Term - Next 12 Months):

Fund management has approved funding to resolve performance problems associated with
SEACATS. In addition, Fund management has rejoined the Customs working group designated to
identify and coordinate resolution of SEACATS performance problems. Property tracking by the
SEACATS system had been significantly corrected in time to support year end financial reporting
requirements for FY 1998. However, while SEACATS could provide the original seized currency

64 INDEPENDENT AUDITOR’S EXHIBIT I


numbers that were used were either from collusive
cardholders or they were stolen numbers. As with
its legitimate merchants, American Express would
then have money deposited into the bogus
merchants’ accounts either by check or wire. As
soon as the payments from American Express were
received in their accounts, the suspects would
move the money out and issue a credit back to the
cardholder’s American Express card account.
When the American Express Company then tries
to debit the charge from the merchant’s account,
there would be no balance there to debit.

For two and a half years, the Secret Service’s
South Florida Organized Fraud Task Force with
additional assistance from the IRS, the Postal
Inspection Service and the Plantation, Florida,
Police Department extensively investigated the
activities of the group believed to be behind the
scheme. Thirty-five fraudulent merchant accounts
were identified and linked to thirteen suspects. In
March of 1998, search warrants were executed on
the residences of the main suspects and detailed
records were found implicating numerous others.
One of the principal suspects, Charles Tischler,
and his wife signed plea agreements with the U.S.
Attomey’s Office and agreed to forfeit to the
United States Government $219,000, a 1995 Lexus
$C400, a 1996 Mercedes Benz C280, a 1996
Landrover Discovery and several computer
systems. By the beginning of FY 1999, shares
from forfeited assets in the case were approved to
recognize the vital assistance provided by the non-
Treasury law enforcement agencies.

The Brazilian Connection. Another Secret
Service: fraud investigation that resulted in a
substantial forfeiture started out in the spring of
1997 when a detective with the Montgomery
County, Maryland police department received a
call from the Sandy Spring National Bank. The
bank’s employee had some suspicions about an
account that had been opened by two brothers,
Alexandre and Vincente Pereira. The detective
initiated an investigation into the activities of the
brothers and, as it proceeded, sought the assistance
of the United States Secret Service and its Metro
Area Fraud Task Force based out of the
Washington area field office.

What the Pereira brothers were involved in was a
sophisticated embezzlement scheme. Their
operation involved the submission of inflated and
fraudulent bills to the Brazilian Aeronautical
Commission for the purchase of tactical fighter
parts and, possibly, weapons systems. Violations of
bank and wire fraud laws seemed to be part and
parcel of their activities.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


end and year-out efforts to support the asset forfeiture sanction by our law enforcement bureaus can
continue with financial confidence.

Fund management will continue to review the financial needs of Customs in this regard and will
work assertively toward ensuring that this area of stewardship receives proper attention, and is
reviewing the accrual issue.

Additionally, AFTRAK system requirements needed to support the change in inventory analysis for
the three non-Customs bureaus will also be addressed in ongoing contracting efforts by Fund

management.

INDEPENDENT AUDITOR’S EXHIBIT I 59


te we ee ee

aw

SECTION II
FINANCIAL STATEMENTS


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the year ended September 30, 1998
(ollars in thousands)

(Unaudited)

State/IS, Territories Currency Value Property Value
Alabama $ 210 $5
Alaska 21 -
Arizona 1,084 "248
California 7,078 293
Colorado : 115 1
Connecticut 2 ~
D.C. Washington 58 2
Delaware 3 4
Florida 19,521 160
Georgia 909 72
Hawaii 295 6
Idaho - 13
Illinois 2,207 19
Indiana 694 35
lowa - 25
Kentucky 56 104
Louisiana 350 4
Maryland 537 49
Massachusetts 1,015 8
Michigan 895 8
Minnesota - 15
Mississippi 62 -
Missouri 20 25
Montana 157 190
Nevada 6 -
New Jersey 1,950 -
New Mexico 21 6
New York 20,718 594
North Carolina 2,948 _157

Subtotal carried forward 60,932 2,043

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION
86


Treasury Forfeiture Fund
Statements of Budgetary Resources
September 30, 1999 and 1998
(Dollars in Thousands)

Budgetary Resources:

Budget authority

Unobligated balance - beginning of year
Adjustments

Total Budgetary Resources

Status of Budgetary Resources:

Obligations incurred
Unobligated balance - available

Total, Status of Budgetary Resources
Outlays:

Obligations incurred

Less: adjustments

Obligated balance, net - beginning of year

Less: obligated balance, net - end of year

Total Outlays

1999

$ 346,738
165,588
~22,574

232,200

348,953
190,947

232,200

348,953
(27,574)
200,905
(221,982)

$_300,302

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

1998

$ 295.014
204,121
8,375

507510

341,922
165,588

207510

341,922
(8,375)
141,155

$273,197

FINANCIAL STATEMENTS

aA


Current Year Material Weakness:

The following additional material weakness was identified in fiscal year 1998:

4.

Internal Revenue Service (Criminal Investigation Division) - Inadequate Accounting
and Reporting of Seized and Forfeited Property Transactions.

The Analysis of Changes in Seized and Forfeited Property and currency (the Rollforwards)
of the Internal Revenue Service (IRS) provided at year end did not account for and properly
teport property and currency transactions for financial reporting purposes. Year end balances
presented on the Rollforwards were incorrect, and in other instances had not been captured.
Consequently, substantial manual procedures and reconciliations were undertaken to correct
balances for year end financial reporting purposes.

R ble Conditi

Prior Year Reportable Conditions:

The reportable conditions identified below were reported in prior years and are of continuing

significance:

1.

50

Differing Asset Tracking Systems

The four Treasury law enforcement bureaus used different asset tracking systems to prepare
the individual Rollforwards. These systems collect and account for seized and forfeited
assets differently and used slightly different data definitions.

As a result, manual manipulation and reconciliation are required to produce the Rollforwards
for the Fund.

Improper Timing for Valuation of Forfeited Property

During the year, forfeited property is not recorded in the subsidiary system at its fair value
at the time of forfeiture. An adjustment is made at year end to record forfeited property at
an estimate of fair value.

Lack of Control Over Assets

The Fund does not adequately monitor property placed with the national seized property
contractor, EG&G Dynatrend (EG&G) during the year. Consequently, the Fund is unable
to independently report the quantity and value of property held by EG&G at any particular
time during the year.


Treasury Forfeiture Fund
Balance Sheets
September 30, 1999 and 1998
(Dollars in Thousands)

Assets

Entity Assets:

Intragovernmental Assets:
Cash and other monetary assets
Investments and related interest (Note 3)
Accounts receivable (Note 4)
Advances (Note 5)

Total Intragovernmental Assets

Cash and other monetary assets (Note 6)
Accounts receivable (Note 4)

Forfeited property (Note 7)
Held for sale, net of mortgages, liens and claims
To be shared with Federal, state or local, or foreign
governments
Total forfeited property, net of mortgages, liens
and claims

Total Entity Assets
Non-Entity Assets:
Intragovernmental Assets:
Seized currency:
Investments (Note 3)

Total Intragovernmental Assets

Seized currency:
Cash and other monetary assets

Total Non-Entity Assets

Total Assets

1999

$ 126,724
287,498
112

47.055
300,194

$ 756,828

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

1998

$ 119,577
248,131
1,037

28,059

12,220
423,167

$ 861.782

FINANCIAL STATEMENTS

20


vw

clear as to the distribution of the Funds, these instructions were not adhered to for the
processing of these transactions.

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

Because these conditions and weaknesses impact many functions and lines of authority between the
Treasury bureaus, we recommend the Fund's management, together with the other Treasury bureaus,
develop a joint plan to implement the recommendations included in Exhibits I and II.

We also noted other matters involving the internal control structure and its operation that we have
reported to the management of the Fund in a separate letter dated January 15, 1999.

In addition, with respect to internal controls related to performance measures reported in Chapter 2,
“Program Performance and Financial Highlights” we obtained an understanding of the design of
significant controls relating to the existence and completeness assertions, as required by OMB
Bulletin 98-08, as amended. 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 Congress. However, this report is a matter of public record
and its distribution is not limited.

Mado, Kungyer e Arar k

. January 15, 1999

§3


tw

DEPARTMENT OF THE TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the year ended September 30, 1998
(ollars in thousands)

(Unaudited)
tate/U.S. Territori Currency Value Property Value

Subtotal brought forward 60,932 2,048
North Dakota $+ $ 17
Ohio 347 48
Oklahoma 7 6
Oregon 90 36
Pennsylvania 384 49
Puerto Rico 1,612 163
South Carolina 283 12
Tennessee 158 8
Texas 7,519 598
Virginia 443 19
Washington 121 115
West Virginia _137 —_64

Totals $72,033 $3,178

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 nota
required part of the financial statements of the Department of the Treasury Forfeiture Fund.
Information presented on this schedule Tepresents 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.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION
87


NOTES TO FINANCIAL STATEMENTS

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 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) 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 is disclosed in the footnotes in
accordance with SFFAS No. 3.

. Investments - This balance includes seized cash on deposit in a Customs’ 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 a Customs’ 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. The components of such liabilities for the Fund are as follows:

. Distributions Payable - Distributions payable to Federal and non-Federal agencies is primarily

FINANCIAL STATEMENTS
40


the FY 1999 financial statements. In the interim, Fund management will continue to rely on
AFTRAK for IRS inventory reconciliation at year-end, and once deployed to Secret Service and
ATF, AFTRAK would be relied upon for the inventory reporting of those two bureaus as well.

Discussion/Background and Planned Action: We agree with the auditors recommendation that
Customs evaluate and correct SEACATS deficiencies so that Customs can process property and
currency transactions; and that the three non-Customs bureaus should manually reconcile
information generated from their individual asset tracking systems until such time as SEACATS is
fully functional. Fund management will work diligently with Customs and the non-Customs bureaus
to ensure that the recommendations are implemented.

INDEPENDENT AUDITOR’S EXHIBIT II n


Ww SS Se.

Chapter 2:

Deterring Criminal Activity

When the final 1998 figures from 17,000 city,
county and state police agencies were in, analyzed
and released, the Uniform Crime Reports from the
Department of Justice showed that the United
States had recorded the fewest number of serious
crimes since 1985. These figures showed a seventh
straight year of decline in the nation’s crime rate.
Commentators and analysts were quick to offer a
variety of reasons which ranged from the aging of
the baby boom generation, to the robust national
economy, to the implementation of get-tough-on-
crime policies. Undoubtedly, many factors have
likely contributed to this trend, including more
police officers on the street, greater cooperation
between law enforcement agencies, truth in
sentencing policies, initiatives to keep guns away
from criminals and the overall effects of various
innovative approaches to prevention, intervention,
punishment and supervision.

The last fifteen years have also been marked by the
re-invigoration and growth of asset forfeiture as a
tool of law enforcement. The Department of the
Treasury (the Department) has employed asset
forfeiture in its law enforcement operations since
1789, when George Washington’s former aide-de-
camp, Alexander Hamilton, served as the
Department's first secretary. The forfeiture rules
and attendant procedures that were first developed
for the Department’s Customs Service at the end
of the eighteenth century, have been models for
much of the expansion of Federal asset forfeiture
at the end of the twentieth. A decade and a half of
asset forfeiture program growth interspersed with
years of downward trend in serious crime begs a
question of cause and effect.

While such a question may remain unanswerable,
consider what Federal asset forfeiture programs
have accomplished since the Comprehensive
Crime Control Act of 1984 afforded them the
forfeiture funds that have made the programs
largely self-sustaining. Between the forfeiture
funds of the Departments of Justice and the

Treasury several billions of dollars worth of assets
have been siphoned away from either reinvestment
in criminal enterprises or service as the reward for
criminal pursuits. If crimes, other than those of
passion and ideology, are mostly motivated by a
desire for profit, then the looming presence of an
effective asset forfeiture authority may enter into
teasonable calculations of costs, benefits and
related risks. Minimally, asset forfeiture raises the
stakes involved. Incarceration is no longer the only
cost of criminality. The higher the perceived risk,
the greater the likelihood of some deterrent effect.

Today, in meeting the threats posed by
sophisticated criminal elements, who show scant
regard for international boundaries, the original
forfeiture authorities of the Customs Service have
been expanded. At the same time, Treasury’s
Bureau of Alcohol, Tobacco and Firearms (ATF),
the United States Secret Service (Secret Service)
and the Criminal Investigation Division within the
Internal Revenue Service (IRS) have all been
allotted new and significant authorities to seize and
forfeit in furthering their law enforcement missions,
By taking a look at just some of the areas in which
these authorities have been applied in FY 1999, one
gains an insight into the range of the Department’s
law enforcement responsibilities and how asset
forfeiture works to deter related criminal activities.

Operation Cash Back. When the National Money
Laundering Strategy for 1999 was released in
September of that year, it mentioned the existence
of the Black Market Peso Exchange, citing it as the
largest known money laundering system for drag
proceeds in the Wester Hemisphere. One year
earlier, the Under Secretary of the Treasury for
Enforcement set up the Black Market Peso
Exchange Working Group to bring together Federal
enforcement, banking and related agencies to
mount a coordinated attack on this peso exchange
system, which is estimated to launder as much as
$5 billion per year. One breakthrough in this effort
occurred in Miami at the end of FY 1999 when

DETERRING CRIMINAL ACTIVITY


DEPARTMENT OF THE TREASURY
OFFICE OF THE UNDER SECRETARY
WASHINGTON, DC

TO TREASURY LAW ENFORCEMENT:

Everyday, the women and men of ‘Treasury’s law enforcement organizations pursue a
wide variety of cases that range from trade and financial fraud to narcotics smuggling, illegal
firearms trafficking, terrorism, counterfeiting, money laundering and other threats to our own
citizens as well as our neighbors throughout the world. Asset forfeiture is a formidable tool
available to us as we pursue our mission. It places a high levy on criminal activity, taking apart
the very structures that support many illegal enterprises.

I am pleased to present this annual Teport of the Treasury Forfeiture Fund for fiscal year
1999. In its financial statements, along with accompanying reports and exhibits, is a measure of
how we have performed in managing the Fund on behalf of the American public. In its
narrative of related occurrences and achievements is a sense of how the Treasury forfeiture
program strives to meet its four fundamental goals of protecting individual Tights, deterring
crime, promoting cooperation and strengthening law enforcement.

When we look to the future of asset forfeiture, we see it ultimately resting upon public
faith in the integrity of its administration. Only with that faith secured, will it continue to
provide valuable service — doing what prisons alone cannot do, giving the victimized a chance
at recovery, building communities torn apart by drugs and violence and strengthening all of law
enforcement’s ability to protect and serve.

’ JAMES E. JOHNSON
Under Secretary (Enforcement)


veo

NOTES TO FINANCIAL STATEMENTS

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) required executive
agencies, including the Treasury, to produce audited consolidated annual reports and related footnotes for
all activities and funds.

The 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 sheets, the statements of
net cost, and the statements 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
Tesources 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

The 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 sheets, the statements
of net cost, the statements of changes in net position, the statements of budgetary resources, and the
statements 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

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
37


of the SEACATS system had been significantly corrected in time to support financial reporting at
year end. However, SEACATS could not adequately support currency transactions for FY 1998 year
end financial reporting purposes. Customs has been working to initiate enhancements so that
SEACATS will be able to support currency tracking for the FY 1999 financial statements. The latter
is significant because the Fund is currency-intensive, with cash seizures forming the majority of
asset-types seized by the Fund’s law enforcement bureaus.

At present, Customs’ information specialists indicate that programming necessary for SEACATS
to capture all accrual expense information needed to properly document the financial statements
using the automated system is in the execution phase. Funding requested in the near term by
Customs to meet SEACATS performance problems has been recommended for approval by Fund

management.

Fund management will work diligently with Customs to identify and resolve SEACATS
performance requirements needed to support the Fund’s financial statements.

Fund management has also undertaken to deploy a single inventory system to support the three non-
Customs bureaus participating in the Fund. In this manner, Fund management intends to relieve the
use of two separate systems used among the three bureaus to one system used by the three bureaus.
Contracting for the deployment of IRS’ AFTRAK system to support the change in inventory analysis
requirements of the financial statements should be completed by the end of FY 2000. Contract
provisions pertaining to accrual information will be deferred pending management’s review of the
matter.

Planned Actions/Events (Long Term):

Before the AIMS 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 AIMS financial systems or successor financial system. Only
in this manner, can fully automated accrual transaction accounting occur through the general ledger.

However, Fund management has concerns regarding SEACATS ability to properly document the
change in inventory analysis requirements for non-Customs bureaus and considers it imperative that
IRS’ AFTRAK system be diversified and further deployed to the Secret Service and the ATF to
ensure their inventory is tracked in a manner that will support their individual changes in inventory
analyses.

Until SEACATS performance issues are resolved, Fund management is taking the position that the
current priority is the ability to document the change in inventory analysis in a manner that can be
substantiated through an audit, and that the general ledger can be manually adjusted from there for
accrual data. Fund management sees no benefit to an automated-transaction level general ledger if
the automated data is so flawed that it cannot be substantiated through audit. It is more important
to Fund management that the valid net position of the Fund is established and validated so that year-

58 INDEPENDENT AUDITOR’S EXHIBIT I


EFFECT

The status of seized and forfeited property and currency reported at year end are not presented
accurately, resulting in substantial manual adjustments to ending balances or to beginning balances
in the following year. The accountability of the assets is impaired accordingly. The manual
adjustments process was a time consuming and cumbersome process which delayed the completion
of the annual audit.

RECOMMENDATION
We have the following recommendations to correct the deficiencies identified:

1. Fund management must provide guidance or policy that specifies uniform procedures
to be followed by all of the law enforcement agencies participating in the Fund, in
order to strengthen controls over the collecting, processing, maintaining,
transmitting, and reporting of data relating to seized and forfeited property and
currency transactions;

2. Procedures must be implemented to regularly (on a quarterly basis) reconcile seized
and forfeited property and currency amounts reported by AFTRAK to that teported
by the Fund and the property custodian, EG&G Dynatrend;

3. Periodic training must be provided to staff that are involved in the accounting and
reporting process so that they are well versed in the nature of the Fund’s programs
and activities and the various internal and external reporting requirements for the
Fund. Additionally, we also recommend periodic training to familiarize staff (both
at Field Offices and Headquarters) with the AFTRAK System who are involved in
the recording and processing of transactions through AFTRAK. The staff must also
be required to be familiar with the input documents and the nature of the information
required for input into AFTRAK and this should form a part of the training; and

4. Any system changes/enhancements must be documented as to the changes
themselves, impact of changes to the current procedures and new procedures to be
followed.

MANAGEMENT RESPONSE

Management Assessment on Progress: Fund management concurs with the audit recommendation
that we request IRS management to re-examine and revise procedures and training necessary to
ensure proper collection, processing, maintenance, transmission and reporting of data involving the
seized and forfeited property of the IRS asset forfeiture program. Additionally, Fund management
agrees that such procedures must include the regular reconciliation between financial accounting
transactions reported by the Fund and the financial information reported by AFTRAK.

INDEPENDENT AUDITOR’S EXHIBIT I 67


REPORT ON THE
AUDITED FISCAL YEAR 1999
FINANCIAL STATEMENTS
OF THE
TREASURY FORFEITURE FUND

OIG-00-063 MARCH 3, 2000

Office of Inspector General

RRRRERR

United States Department of the Treasury



DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1998
(Unaudited)

bureaus as reported in the audited financial
statements was as follows:

State and local agencies $ 71,934,000
Foreign countries 1,179,000
Other federal agencies 8,454,000
Victim restitution 1,473,000

(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
$130,504,000.

The amount of seized currency not on deposit in
the Fund’s suspense account at September
30,1998, was $50,643,000. This amount includes
some funds in the process of being deposited at
year end; cash seized in August or September
1998, 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 $165,588,000 for
fiscal year 1998.

(D) Any defendant’s property, not forfeited at

the end of the proceeding 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 the bureau and
contractor’s officials, and the number of
seizures is as follows:

U.S. Customs Service

$ 274,289,000 61 Seizures
IRS

$ 109,269,000 42 Seizures
US. Secret Service

$ 4,003,000 1 Seizure

() 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
$7,801,000. A separate schedule is presented
on page 88.

(F) The balance of the Fund at the end of
the preceding fiscal year.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION

91


TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 1999

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

Gardiner, Kamya & Associates, PC.

Management Consultants and Certified Public Accountants
Washington, D.C.



DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1998
(Unaudited)

The total net position of the Fund at September
30, 1998, as reported in the audited financial
statements is $343,613,000.

(G) 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 fiscal year 1999 per Fiscal Year
1997 Omnibus Appropriations Act (PL 104-208).
The amount carried over to fiscal year 1999 is
$187,190,000.

(H) 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 89.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION
92


Property Custodian at any particular time
during the year;

(iii) 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;
and, asset specific revenue and expenses
are not recorded and accounted for
accurately by the Fund in the various
property management systems. As a
result, the Fund is unable to accurately
assess the revenue and costs related to
individual seizures.

Background. We have previously reported that
the three material weaknesses would be corrected
with the complete deployment of the Customs’
Seized Asset and Case Tracking System
(SEACATS). SEACATS was intended to serve as
the financial system of record for the Fund and as
a single repository for all inventory and case
information related to seized and forfeited
property, fines, penalties or liquidated damages of
Customs. The development of this system was
intended to replace several non-integrated tracking
systems operated by Customs and would, once
fully operational and interfaced with the general
ledger, rectify all three of the prior year’s material
weaknesses identified by the Fund’s auditors.
With the assistance and participation of Fund
Management, SEACATS was approved under
Treasury Directive 32-02, which requires that the
development of revenue and __ financial
management systems be sanctioned by the
Assistant Secretary for Management. However,
upon deployment in November 1996, the
SEACATS system was beset with a number of
start-up problems, including data conversion
difficulties. Assisting the U.S. Customs Service
with resolution of these problems has been among
the highest priorities for Fund Management.

Short Term Plans - Material Weaknesses. Fund
Management has contracted to deploy a version of
the IRS seized property and forfeited assets tracking
system, Asset Forfeiture Tracking and Retrieval
System (AFTRAK), to the two smaller agencies
participating in the Fund that are currently using the
Department of Justice Consolidated Asset Tracking
System (CATS). In this manner, we intend to reduce
the use of two separate systems used among the
three non-Customs agencies to one system.
Meanwhile, in FY 1999 significant enhancements
were made to the property processing and reporting
capabilities of SEACATS. However, system control
deficiencies continue to exist. It is expected that the
currency processing capability of SEACATS will be
corrected in a manner that will support year end
reporting for FY 2000.

Long Term Plans - Material Weaknesses. Before
the Fund’s general ledger can automatically record
all accrual transactions associated with Fund’s
financial statements, it will be necessary to integrate
all asset tracking systems supporting the Fund’s
financial statements with Customs’ Asset
Information Management System (AIMS). Only in
this manner can fully automated accrual transaction
accounting occur through the general ledger.

Until SEACATS performance issues are fully
resolved, Fund Management has determined that the
current priority is the ability to document the
inventory of all our agencies in a manner that can be
substantiated through audit, and the general ledger
manually adjusted from there.

Fund Management’s Plan Regarding Reportable
Conditions. | Management concurs with the
auditor’s recommendation that forfeited property be
properly valued on inventory records and will work
with Customs and the other agencies to ensure that
a statistical adjustment is made for future financial
statements until such time as automated systems are
able to track such changes in value from seizure to
forfeiture.

Fund Management concurs with the Auditor’s
recommendation that semi-annual reconciliations
between Customs and the Property Custodian’s

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

26


yw

2. Failing this, we recommend that the Fund's management continue reviewing the
methodology used to arrive at 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;

3. Individual 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.

MANAGEMENT RESPONSE

Management Assessment on Progress: Management concurs with the auditor’s recommendation
that forfeited property be properly valued on inventory records and will work with Customs and the
non-Customs bureaus to ensure that a “modeled” adjustment is made for financial reporting purposes
until such time as automated systems are able to track such changes in value from seizure to
forfeiture.

Discussion/Background and Planned Action: Fund management will continue to work to resolve
this reportable condition, to ensure that forfeited Property is most properly valued for year end
financial reporting purposes.

INDEPENDENT AUDITOR’S EXHIBIT II B


EXHIBIT II

REPORTABLE CONDITIONS


Chapter 3:

Fostering Law Enforcement Cooperation

When the Comprehensive Crime Control Act of
1984 established Federal forfeiture funds, the
framers of the statute had the foresight to also
include language authorizing the equitable sharing
of forfeited proceeds with state and local law
enforcement agencies who contributed to the
Federal investigations leading to forfeiture. That
key authority to share, which was later extended to
foreign governments who similarly assist the
United States, has gone a long way to promote law
enforcement cooperation as the various agencies
Pursue their common mission against criminal
activity. The sharing of forfeited asset Provides a
very real incentive to work together, breaking
down the institutional and jurisdictional barriers
that may have hindered joint operations in the past.

The Federal government’s leading role in fostering
law enforcement cooperation through its equitable
sharing program has served as a model for other
governmental entities. Increasingly, foreign, state
and local governments are allowing for the sharing
of the proceeds from their forfeitures with United
States Federal law enforcement agencies who have
assisted with their investigations. The Fund,
therefore, both disburses payments of equitable
shares to other Federal, state and local law
enforcement agencies as well as foreign countries,
and also receives deposits into its Secretary’s
Enforcement Fund of shares that recognize
Treasury or Coast Guard contributions to
forfeitures under other Federal, state, local or
foreign law.

Asset sharing from the Fund is guided by the
principle of equity. The value of such a share must
bear a reasonable relationship to the degree of
Participation of the state or local agency in the
total law enforcement effort that resulted in the
forfeiture. Sharing is also designed to encourage
continued cooperation between the recipient and
Treasury or other Federal law enforcement
agencies. For those shares awarded to state and
local law enforcement agencies, the Department

generally requires that they be used for law
enforcement purposes.

The dollar amounts involved in the equitable
sharing program make them the single most
significant support of the Fund’s goal of fostering
law enforcement cooperation. Asset sharing,
however, is not the only way in which the Fund
Pursues this goal. Another important statutory
authority is the Fund’s ability to pay for the
overtime incurred by state and local officers while
working on Treasury investigations. This overtime
reimbursement authority is an important factor
contributing to the success of many of the cases in
which Treasury law enforcement has a lead role.

During FY 1999, the benefits of inter-agency law
enforcement cooperation were evident in a variety
of areas. Throughout this year, the Fund again has
offered a very real incentive to the various
members of the law enforcement community to
work together, to complement one another’s
experience and expertise and to Present an
effective, coordinated response to the increasingly
internationalized threat of organized criminal
activity. In FY 1999, that critical Cooperation was
Present throughout the United States and abroad as
evidenced by the following cases.

Swiss Authorities Assist with IRS Case. The first
quarter of FY 1999 saw Treasury’s Executive
Office for Asset Forfeiture host a reception for the
Presentation of an asset sharing check to the
Government of Switzerland for approximately $1
million dollars. The Internal Revenue Service’s
Criminal Investigation Division case involved a
Raymond Whelan who had started selling
marijuana while he was a college student in New
England in the 1970s. By 1984, Whelan had begun
to realize sizeable profits not only from his own
trafficking but also from serving as a courier of
currency going from drug smugglers to Colombian
sources. He was, by that time, depositing his profits
in Swiss accounts in Zurich and Geneva.

FOSTERING LAW ENFORCEMENT COOPERA TION


NOTES TO FINANCIAL STATEMENTS

: Di e: te t Co:

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:

1999 1998
Gross Costs $ 186,929 $ 130,504

Earned Revenues - -
Net Costs $ 186,929 $ 130,504

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

The Fund’s net amount of budgetary resources obligated for undelivered orders at the end of fiscal year 1999
and 1998 are $113.8 million and $156.4 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 Tepayment
Tequirements, 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

Adjustments to budgetary resources available at the beginning of fiscal year 1999 and 1998 consist of the
following (in thousands):

1999 1998
Recoveries of Prior Years Obligations $ 27,566 $ 8,289
Spending Authority from Offsetting Collections —_8 — 86
Total $ 27,574 $ 8375

Note 19: Dedicated Collecti

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

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
49


the preparation of accounts and reliable financial and statistical reports and to maintain
accountability over the assets.

CAUSE

3.1

@

(ii)

(ii)

(iv)

Seizure Activities
Differing property identification numbers

There are no documented instructions issued by the Fund for end user purposes since the
inception (November 1996) of the Seized Asset and Case Tracking System (SEACATS) for
addressing uniformity of tracking numbers or the lack thereof. The law enforcement bureaus
Participating in the Fund that do not use SEACATS for tracking continue to track properties
with their system tracking number and does not request a corresponding SEACATS number.
In certain instances, when requests are made for a corresponding number, it is not provided.
The property custodian and Customs both of whom use SEACATS for Property management
purposes do not request IRS, Secret Service and ATF for their identifying numbers. Periodic
reconciliations are not carried out to reconcile properties that are unidentified.

Untimely and inaccurate recording of assigned values

For various reasons, in certain instances, field officers have not captured this information or
record this information incorrectly. Valid reasons exist in some cases, and in other cases
misinterpretation of the seizure notice or input errors caused this problem.

Untimely recording of seized and forfeited property

In certain instances, the delays in recording are caused by the untimely receipt of
seizure/forfeiture documents, or inadequate disposition instructions from field offices that
are required to either capture a seizure in the system or change the status of a seizure. Also,
in some instances, although the appropriate document is on hand, processing is delayed for
unknown reasons. In other instances, although the appropriate documents were received, it
was not forwarded to the staff responsible for data entry.

Inadequate accounting and recording of liens and claims

Although the Fund has in place procedures for the process to be followed to establish liens
and claims, the procedures do not address the specific recording and tracking requirements
for liens and claims since the inception of SEACATS in November 1996, by requiring
manual procedures for those systems (such as SEACATS) that do not have the capability to
track liens and claims.

Additionally, the procedures do not address the specific tracking requirements for the non-
customs law enforcement bureaus.

80

INDEPENDENT AUDITOR’S EXHIBIT II


CONDITION

The Asset Information Management System (AIMS) which is the general ledger system maintained
by the U.S. Customs Service (Customs), processes, groups and summaries transactions into account
balances for the Fund. The general ledger 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 due to the lack of interface
between the systems. Instead, at the end of the fiscal year, information is identified and captured
manually from other systems, in order to properly compile the financial statements.

CRITERIA

The Budget and Accounting Procedures Act of 1950, 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. 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 assurance 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. Finally, the Federal Accounting Standards Advisory Board (FASAB)
has recommended certain standards, which have been issued by the OMB, requiring the use of the
accrual basis of accounting (SFFAS No. 1) and accounting and reporting requirements for inventory
and related property (SFFAS No. 3).

CAUSE

The Fund’s general ledger is maintained on the cash basis. Accordingly, accrual basis accounts are
not maintained during the year. In addition, the inventory subsidiary systems maintained by each of
the Treasury law enforcement bureaus 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.

EFFECT

The combined effect of the use of cash-basis accounting and 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 (monthly) basis. Therefore, complete financial statements cannot be produced
using the general ledger balances. Seized and forfeited property, related liabilities, and various other
accrual accounts are not captured in the general ledger during the year. As a result, financial

60 INDEPENDENT AUDITOR’S EXHIBIT I


Treasury Forfeiture Fund
Balance Sheets
September 30, 1999 and 1998
(Dollars in Thousands)

Liabilities and Net Position

Liabilities Covered by Budgetary Resources:
Intragovernmental Liabilities:
Distributions payable:
Other Federal agencies
Accounts payable
Total Intragovernmental Liabilities
Seized currency (Note 9)
Distributions payable:
State and local agencies and foreign governments (Note 10)
Victim restitution (Note 11)

Accounts payable
Deferred revenue from forfeited assets

Total Liabilities Covered by Budgetary Resources
Liabilities not Covered by Budgetary Resources:
Commitments and Contingencies (Note 16)
Total Liabilities not Covered by Budgetary Resources
Total Liabilities

Net Position (Note 12)
Cumulative results of operations

Total Liabilities and Net Position

1999

$ 1,320
32.465

300,194

31,470
28,675
6,088

$ 236,828

The accompanying notes are an integral part of these financial statements

1998

$ 1,390
24,757

~26,147
423,167
7,225
32,075
3,095
~24,460
492,022

518,169

$ 861,782

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999

oy


pw it

NOTES TO FINANCIAL STATEMENTS

te 4: Ac Receivab|

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

Note 5: Advances

Advances of $28.1 million were carried forward from the prior year, of which $26 million represented
undelivered orders of the Treasury’s Working Capital Fund for Year 2000 (Y2K) expenses, for which the
Fund had agreed to provide the funding through its various authorities. 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.

Cash and Other Monetary Assets held on hand include forfeited currency not yet deposited, as well as
forfeited currency held as evidence, amounting to $13.3 million and $17.5 million in fiscal year 1999 and
1998, respectively.

e 7:

The following summarizes the components of forfeited property (net), as of September 30, 1999 and 1998,
respectively (dollars in thousands):

1999 19298
Held for Sale $28,904 $25,632
To be shared with Federal, state or local, or foreign
government 767 —186
Total forfeited property (Note 8) 29,671 25,818
Less: Allowance for mortgages and claims (2,803) (1,598)
Total forfeited property, net $26,868 $24,220

Forfeited property held for sale, net of allowance for mortgages and claims as of September 30, 1999 and
1998 was $26 million and $24 million respectively, and is reported in the Balance Sheet.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
43


NOTES TO FINANCIAL STATEMENTS

representing Treasury’s share of forfeiture proceeds from Justice and USPS cases.

Amounts distributed for Federal law enforcement purposes to Treasury law enforcement organizations
amounted to $5.6 million and $5.2 million in FY 1999 and 1998, respectively.

Note 16: mit t ti i
Commitments:

In FY 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 FY 1998 the Fund identified equitable sharing requests in the amount of approximately $24.7 million,
which were approved or in the final stages of approval subsequent to September 30, 1998. They were not
recorded as liabilities of the Fund because final approval had not been obtained as of September 30. The
forfeited currency revenue will be recognized in one fiscal year. However, the distribution will not be
recognized in the financial statements until the following fiscal year.

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.

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.

FINANCIAL STATEMENTS
48


SIN3W3LV1S WIONVNIS

"6661 2804 jeo8y U1 poyop10) AyeWEd 40 Ayny Gam YOHYA SAEED OMNW}O}10) EZ) SIUESOsdOY (z)
“GGG 280K yeOsy UJ PoeHO} AjjemEd 40 Ayn) asOM YOIYM SasED OsNYo}I0) a}Z'y SlUOSaiday (1)

“Agquenb yun 40 esneBew Jo UN ei JO Sse;prEBer pops0oe) SUIO}) OUN,
jueseides Apedoid 40 sep yoRe 40) pajuaseld swe)! Jo JequinU ey) ‘LOB9}E> josEe YRS UNM slORse JO SOdA} ‘oyeds jo xj PeueA Sy) 0} NG “FREA jBOSy JUOLUNO ey) GuLNP SNES
Je0A jeOSY 1010 U! pallay10) ANedoid jusseidey AjewUd eAoge sjuoWsnipe JOUIO ‘S]UOLUO}E}S /BOUEUY 64) U; PEPICIe JUNOWE BY) $] YOHYA ‘BBA fEDSy Oty JO PUB OY) JB ENJEA JOEW
1 (@1NZ}98 JO oun BY) Je Bn}eA JoxseW) BNJeA paserdde WOH AUedoid pay!e}J0) YeAUOD Oo} AUBEEEORU G1e BE/OLIG 18 S]USWISNipE ONjer jexLeW se) BLL) “ONjeA (pastesdde) Bu)AsIED OM 0)
780K 04) Jo Buivuj6aq By) 1e play AVadord peyiaji0} @)8)8e) 0} puE aBEL Jee jeosy UJ EpELI SjUBWJENIpe anjeA joIBW JIE) EfJOR0) 0} LUESseDmU ale S@OUEIEG Ayedord po}j9}10) BulUedo O} sjuAWsnioy

eunzies jo sequinu

ose'S §=léeze OS - teés'vt} ‘08e"9 oesus $ ~~ (166) $ ( esce $s (aize)” eal) = - s (e104 pues
ogt’9 = $49'6Z : (e6s'pt) o8t's yO2'bb - (66) 6sl'e (ize) ~~ (eet) Oe se1oiqns
e061 S6s'r £06) = $66"S + (eH) (et) WW) SORIUGA
’ y lov : : : : : : yerony
zs zs Pray > (te) (ee) sjasson
vsz'y Sty = veR'zh > (688) (e0t'e) : Auedoig jes0u85
19 dot wer'ee - Lob : - - Ayedoig joy
. 7 BbP' : - - - ‘sjuawnysuy
‘Are @uoWy JOU
werer $s > = s ~ wre ¢ = oF $ $ > > ry Aoueuing,
seqUNN enyeA sequinn — enjea sequiny — anit, 4equuNN — enjeA sequin —eniea JeqUNN  enlEA,
ued Weuieripy SHIRA BUIADES G6ET ‘BBUETS SHEA POROTRED CONSE HIST
ABA TOO Jey
Was'ly “Uyseciy Ss Uiziou) (orere) $sev'oz Cov'ece §  sro® orcos © - veer § Shoo  9setr $ 18104 pusig
(zal) (vere) (2401) (ozv'18) ~~ Sap‘oz—evo'eo spa zoL'th : veo'st =" = Sho’ a'sz ieiorqns
(zsz) (bape) (vao's) — (ezz"th) ~—abe'z p's ears = ests : 999 eey's = L89'P sepD1YeA
( (poe) : 8 9pz't ‘ sot - (sz) ‘ 08 wesony
( (tps) cy OLL'9 oy vol . ben Sv els ‘sesseA
(cow's) — (g80'2) geez = Ezz OLE» «68h - 29st ore'y = _Zor'e Auadorg je18v09,
(y) (sos) the 2e6'9h wh 9088} - 66c'e ia) 20v'9t Auedoig ey
- (9v9) (2) 26s'9 - Sze : 99 . esz ‘sjuewnssu)
Aieyauow sey10,
wih 6s = CETTE) Ty =«SETER Ot > eT s = -— $ = eeSTT $ : Aoueung,
sequnN — aniea, JequUnN — enieA sequiny = enjea JOqUN —OnjeA sequinn = enywA, soquNN ene,
STeRUETLSTSOTEG SHES RTSOTED FeInepoy FUSUTSAIBY Suge

ener

“spussnoy) Wt 51 enjen J80q ‘ADUABe YyoeD jo
Syuawojels (eoueUy ay) UI peyodas ele sa‘ouaBe jenpiripul 0} BuiSuojeq siunowe ey) ‘PUNY ey) UI SuNedio;Ved seoueBs jueWeD!0jUe Mel {Ie JO ‘OF Jequie;des je pueY UO AdUBLIN puE ALedosd paye}0} JO
SlunOWE PeUiquicS ey) jUeseidas Mojag pepinoid SjuNOWE BY “666s ‘OE Jequia}das O} ‘BEEL ‘1 4940}90 Woy SaduE}eq AoUeZND puB Apedoid pa}!e}0} sy) UI SeBUEYD ey) S\UASasd E;npsYyDs BUIMO}IO} CYL

vy


veg

3. U.S. CUST 2 UATE ASSET T: Ss
(REPEAT CONDITION)

CONDITION

The U.S. Customs Service’s (Customs) seized and forfeited property and currency (asset) tracking
system, the Seized Assets and Case 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. As a result, year-
end procedures were developed to identify seized and forfeited property and currency, not recorded
correctly in SEACATS as of September 30, 1998, and to adjust the financial statements for the value
of seized and forfeited property on hand at year-end.

CRITERIA

Federal Financial Management Systems Requirements issued by the Joint Financial Management
Improvement Program (JFMIP) demand that an agency’s Core financial system be able to provide
financial information on a timely and useful fashion to meet five goals: (i) support management’s
fiduciary role; (ii) support budget formulation and execution functions; (iii) support fiscal
management of program delivery and program decision making; (iv) support internal and external
reporting requirements, including, as necessary, the requirements for financial statements prepared
in accordance with the form and content prescribed by OMB, reporting requirements prescribed by
Treasury, and legal, regulatory and other management requirements of the agency; and (v) monitor
the financial management system.

Additionally, Statement of Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for
Inventory and Related Property requires disclosure of an analysis of changes in seized and forfeited
property and currency (Rollforwards). The standard requires presentation of both dollar amounts and
quantity changes. Therefore, asset tracking systems should provide all data necessary to produce the
Rollforwards, with minimal manual intervention and reconciliation, and to provide management with
meaningful information.

CAUSE

Comprehensive system documentation has not yet been compiled. Additionally, SEACATS
continues to experience programming problems that are yet to be corrected.

EFFECT
The difficulties encountered in preparing the changes in forfeited and seized property and currency

analysis indicates that Customs lacks the ability to properly, fully and accurately account for seized
and forfeited property and currency at this time. Specifically:

INDEPENDENT AUDITOR’S EXHIBIT I 63


CONDITION

Forfeited property is not recorded in the subsidiary system during the year at its fair value at the time
of forfeiture. Rather, the value of forfeited property is currently recorded in the law enforcement
bureaus’ asset tracking systems at appraised value, determined at the seizure date, by the seizing
agent, import specialist or independent appraiser.

To develop year end value of forfeited property for inclusion in the Fund's financial statements,
management performed a historical analysis by property category of sales values compared to the
initial appraised amounts. These ratios were then applied to the ending forfeited property value to
determine the financial statement value of forfeited property. In fiscal year 1998, the Internal
Revenue Service (IRS), U.S. Secret Service (Secret Service) and the Bureau of Alcohol, Tobacco
and Firearms (ATF) did not provide ratios for this purpose as sales value for property disposed were
not compiled to compute this ratio.

CRITERIA

Statement of Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for Inventory and
Related Property, requires forfeited property to be stated at fair market value at the time of forfeiture,
in the bureaus' general ledger (asset tracking systems).

CAUSE

The Fund does not perform an appraisal to determine the fair market value of property at the date
of forfeiture.

EFFECT

Carrying forfeited property at appraised values as of seizure date, in particular, for financial reporting
purposes can be misleading because the values are often overstated or understated and therefore do
not present an accurate picture of the net realizable value to the Fund.

RECOMMENDATION

We reaffirm our recommendations from previous financial statement audits that:

1. The Fund's management evaluate 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;

72 INDEPENDENT AUDITOR’S EXHIBIT II


NOTES TO FINANCIAL STATEMENTS.

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

The Fund’s expenses are either paid on a reimbursement basis or paid directly on behalf of a participating
agency. Reimbursable expenses are incurred by the respective agencies participating in the Fund against
their appropriation and then submitted to the Fund for reimbursement. The agencies are reimbursed through
Inter-Agency Transfers (SF-1081) or Online Payments and Collections (OPAC). 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 recorded as expenses in the financial statements
of the Fund (included in the line item “seizure investigative costs and asset management” in the Statements
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 recognized 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 FY 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 the 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,

FINANCIAL STATEMENTS
38


Page 2

safeguarding of assets and the proper recording of revenues and
expenditures. As summarized above, the TFF's internal control
structure has certain material weaknesses which signify
noncompliance with this Act.

Furthermore, the Customs Service, which acts as the executive
agent for certain TFF operations and is responsible for
accounting and financial reporting for the TFF, did not comply
with the Federal Financial Management Improvement Act of 1996.
In a separate report, the OIG noted instances where the Customs
Service's financial management systems do not substantially
comply with Federal Financial Management Systems Requirements.

These issues, some of which were identified during prior year
audits, will remain of continuing significance until the
necessary internal control improvements and systems changes are
implemented.

The IPA will issue a management letter discussing matters that
were identified during the audit which are not required to be
included in the audit reports.

As in the prior year, my staff monitored the conduct of these
audits and performed a quality control review of the IPA's
working papers. The audits were performed in accordance with
Government Auditing Standards, issued by the Comptroller General
of the United States, and met the requirements of Office of
Management and Budget Bulletin No. 98-08, Audit Requirements for
Federal Financial Statements, as amended.

Should you have any questions, please contact me at
(202) 927-5400, or a member of your staff may contact
William H. Pugh, Deputy Assistant Inspector General for
Audit (Financial Management) at (202) 927-5430.

Attachment


vw &

DEPARTMENT OF THE TREASURY FORFEITURE FUND
Analysis of Revenues, Transfers, Expenses, and Distributions
For the year ended September 30, 1998
(Dollars in thousands)

(Unaudited)

Revenues, Transfers, Expenses and Distributions by Asset Category:

Revenues and Expenses and
Vehicles $ 10,365 $ 16,058
Vessels 2,879 20,460
Aircraft 2,879 6,591
General Property 9,214 64,940
Real Property 32,248 2,544
Currency and monetary instruments 201,974 78,067.
259,559 188,660
Less:
Mortgages and claims (5,207) (5,207)
Refunds —G.587) —G58D)
Add:
ONDCP allocation - 35,679
Excess of net revenues and financing sources over total program
expenses. —_ 35,220
$248,765 $248,765
Revenues, Transfers, Expenses and Distributions by Type
of Disposition:
Sales of property and forfeited currency and monetary instruments $174,521 $35,845
Reimbursed storage costs 1,997 18,866
Assets shared with state and local agencies 71,934 71,934
Assets shared with other federal agencies 8,454 8,454
Assets shared with foreign countries 1,179 1,179
Victim Restitution 1,474 1,474
Destructions ~ 22,639
Pending disposition = 28,269
259,559 188,660
Less:
Mortgages and claims (5,207) (5,207)
Refunds (5,587) (5,587)
Add:
ONDCP allocation - 35,679
Excess of net revenues and financing sources over total program
expenses —_— 35.220
$248,765 $248,765

Revenue/Transfers amount ($248,765) combines gross non-exchange revenue of ($235,196) and transfers-in Proceeds from
participating with other federal agencies ($13,569) from the statement of net position. This supplemental schedule “Analysis of
Revenues, Expenses and Distributions” is Tequired 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.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION
89


52

value) by the seizing officer, several instances were noted whereby recorded assets had no
values.

(iii) Untimely recording of seized and forfeited property

Seized property is not recorded timely in the Fund’s asset management records. We noted
several instances of seizures 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 in a timely manner.
Significant delays were noted between the date the change in status occurred and time of
recordation in the asset management system. 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.

(iv) 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 bureaus 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.

5.2 Asset Disposition Activities
Asset Specific Expenses are not Recorded and Accounted for Accurately by the Fund

Asset specific expenses generated from asset disposition activities are not recorded and
accounted for accurately by the Fund in the various asset tracking systems. As a result, the
Fund is unable to accurately assess the costs related to individual seizures. The Fund’s
property custodian EG&G Dynatrend (EG&G) incurs costs on behalf of the Fund from the
time of seizure until the asset is ultimately disposed. The Fund requests cost information
from EG&G from time 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 EG&G. In some instances, the cost data provided
by EG&G is incomplete, not supported, or absent due to 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.

Improper Recording of Remissions/Returns

All or part of amounts related to remissions/returns of seized and forfeited currency to
individuals who have successfully challenged the Government’s right to seizure were
recorded by the Fund as revenue, thereby overstating the revenue of the Fund. In other
instances, significant delays existed between the order to remit as per the disposition
instructions and the time of payment. Additionally, although disposition instructions were


bw

NOTES TO FINANCIAL STATEMENTS

Unliquidated Obligations

The following summarizes the components of unliquidated obligations as of September 30, 1999 and 1998,
respectively, (dollars in thousands):

1999 1998
Discretionary $ 348 $ 2,432
Equitable Sharing 9,489 42,473
Non-Discretionary 103,967 111518
$113,804 $156,423

Transfers to and from the Office of National Drug Control Policy (ONDCP)

The Fund did not transfer and was not required to transfer any amounts to the ONDCP in fiscal year 1999
or 1998.

No funds were due to be received from ONDC?P in FY 1999. During fiscal year 1998, the Fund received
$35.7 million transferred from the ONDCP per Public Law 104-208. The Secretary of the Treasury is
authorized to receive all unavailable collections transferred from the ONDCP as a deposit into the Fund
pursuant to Public Law 104-208 and 105-61.

Note 13: Related Party Transactions

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

Note 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 to fund law
enforcement activities of any Federal agency.

Amounts distributed to other Federal agencies for law enforcement activities under “Super Surplus”
requirements amounted to $41.0 million and $17.1 million in FY 1999 and 1998, respectively.

Note 15: Secretary’s Enforcement Fund

31 U.S.C. 9703 (6)(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)

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
47


pwt

taken to correct the system deficiencies or manual compensating procedures must be
implemented.

2. Field officers and other staff dealing with such cases must ensure that Forfeiture Orders and
Court Orders are strictly followed as to the disposition instructions.

3. Fund management must implement policies and procedures to ensure uniform tracking of
remissions/returns by all the asset tracking systems used by the law enforcement bureaus
participating in the Fund.

MANAGEMENT RESPONSE

Management Assessment on Progress: Fund management has been apprized of this issue during
the FY 1998 audit process and will act promptly to resolve the issue.

Discussion/Background and Planned Action: The Fund has authority to deposit forfeited proceeds
whether or not these funds are successfully appealed and returned to the property holder.
Management will review this issue with the Customs’ Accounting Services Division (ASD) to
determine the proper recording of the transaction, and once successfully appealed and dispositioned,
has to be returned to the property owner.

INDEPENDENT AUDITOR’S EXHIBIT II 85


° Although the Fund did not have discretionary authority in
FY 1999, these expenses represent obligations of prior
years, the purchases of which were delivered during FY
1999, and, therefore, expensed during FY 1999.

National Seized Property Contractor. The
single largest program expense of the Fund is for
the storage, maintenance and disposal of real and
personal property. This function is performed by
the Property Custodian, a private firm under
contract to the U.S. Customs Service. The
Property Custodian 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 the Property
Custodian. The seized property contract expenses
in FY 1999 were approximately $33 million, as
compared to $28 million for FY 1998. The
difference in cost reflects increased physical
property on hand during FY 1999 as compared
with FY 1998.

Super Surplus and _ the Secretary's
Enforcement Fund. Super Surplus expenses
totaled $41 million in FY 1999 as compared to
$17 million in FY 1998. 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 $6 million in FY 1999, from $5
million in FY 1998. 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 and 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 to

fund any Treasury law enforcement activity.
Statement: Balance Sheets

Assets of the Fund’s balance sheet are composed of
entity and non-entity assets. Entity assets are assets
that belong to the Fund. Non-entity assets are seized
assets not legally used by the Fund until judicially or
administratively forfeited, but 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,
1999 is presented in the following table. As shown
on the Balance Sheet, the total of both entity and
non-entity assets decreased from $862 million at
the end of FY 1998, to a total of $757 million at the
end of FY 1999, a decrease of $105 million or
twelve percent. However, as disclosed in Footnote
9 in the financial statements, seized property
reported increased from $249 million at the end of
FY 1998, to $273 million at the end of FY 1999, an
increase of $24 million or ten percent. This accounts
for the majority of the increased costs of the seized
property contract discussed in the Statements of Net
Cost above. However, we also experienced an
increase in forfeited physical inventory of $3 million
from the end of FY 1998 to the end of FY 1999,
further contributing to increased costs of the seized
contract in FY 1999. Overall, seized and forfeited
property on hand at year end increased by $24
million from the end of FY 1998 to the end of FY
1999.

Assets Owned by the Fund (Entity Assets):

Cash and Other Monetary Assets totaled $140
million on September 30, 1999, as compared to a
balance of $137 million on September 30, 1998.
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, 1999 the Fund had entity
investments and related interest in Treasury
securities of $288 as compared to $248 million on
September 30, 1998. The balance for total accounts
receivable —_—intragovernmental and non-

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


The average time between forfeiture and
disposal of real property. The processing of real
property through forfeiture 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. Fund Management has
made a decision that all forfeited real property
offered for sale by the Department will possess
clear title. The issuance of clear title benefits the
purchaser by allowing the buyer to obtain a
mortgage on the property. The process of issuing
clear title requires the government to resolve all
outstanding issues regarding the property
including outstanding taxes, liens, building
violations and environmental issues. The process
of providing clear title increases the time the
property is held in the status of forfeited, but not
sold. While the process of providing clear title
increases the timeframe by which property is held
by the government and as a result increases the
holding costs per property; the difference is more
than made up by allowing the Fund to sell the
property at market value and thus increase the
revenue per property.

Given the complexities of selling real property
versus other types of assets, it is Fund
Management’s opinion that the best achievable
performance target for this measure is nine
months. Our interim target for FY 1999 was 12
months. During FY 1999, the average time
between forfeiture and disposal of real property
was 12.95 months, an improvement over FY
1998's disposal period of 13.8 months.
Performance against this measure reflects program
initiatives designed to eliminate “problem”
properties from the inventory, which on average
take considerably longer to dispose of than
routinely processed properties. In addition, the
statistic includes properties for which private title
insurance was unavailable, preventing would-be
purchasers from obtaining loans... Fund
Management’s continuing initiative to issue
Special Warranty Deeds for such properties
should prevent this type of property problem from
skewing future performance data. Nevertheless,
the disposal of real property is one of the more

complicated activities associated with the Treasury
asset forfeiture program.

The very fact that the government must resolve any
potential issues against a real property that was
created by a violator whose sole intent was to
conceal either the existence or proceeds of illegal
activities complicates the closing of a forfeited
property sale. These issues burden the government
to ensure due process to the original violator and/or
legally interested parties. including possible
innocent family members, payment of all
outstanding encumbrances against the property and
the legal resolution of any complications that could
harm a potential purchaser. The resolution of these
types of issues all takes time and vary on a case by
case basis. Through close coordination with the
seized property contractor, the executive agent, the
seizing agency and the U.S. Attomeys, Fund
Management continues to provide oversight to
identify ways and procedures to ensure that forfeited
real property is disposed in a timely manner.

Age of administrative seizure inventory.
Administrative forfeitures are those in which an
asset is forfeited without judicial involvement. To
ensure that the 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. A by-product
of this Fund Management initiative is a more
efficient equitable sharing process which serves to
reinforce the working relationship between Federal,
and state and local law enforcement bureaus. Fund
management established 9 months for the Customs
Service and 6 months for all other enforcement
bureaus as a reasonable period to process
administrative seizure cases.

The timely processing of administrative cases within
the prescribed times improved by more than one
percent to over 69.5 percent in FY 1999 as
compared to 68 percent in FY 1998, but still falls
short of our goal of 75 percent. 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. Also excluded

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

18


DEPARTMENT OF THE 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, 1998
@oollars in thousands)

(Unaudited)
Number of Dollar Amount
State/U.S. Territory —Seizures__ —{n Thousands) _
United States Customs Service
California 4 $1,427
Florida 11 3,912
New York 1 540
Texas 1 —1.064
Total Customs 17 6,943
Internal Revenue Service (IRS) _4 — 858
Grand Total 21 $7,801

31 U.S.C. 9703(f)(2)(E) requires the Secretary of 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.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION
88


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 not a 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 Fi orfeiture Fund Act of 1992. 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 7, 2000

Brande, Kang cr Arsoustes

29


Note 18: Dedi cti

The Fund is classified as a sp
collections held for later use.

ecial fund therefore, all its activities are reported as dedicated

NOTES

TO FINANCIAL STATEMENTS 45


statements produced during the year do not correctly present the results of operation and net position
of the Fund.

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

1. All accrual basis accounts, seized currency and its offsetting liability, and forfeited
property and the related revenue, be recorded in the Fund’s general ledger in a timely
manner. Existing procedures should be followed on a monthly basis requiring each
law enforcement bureaus’ staff to forward the forfeiture information as authorized,
to the appropriate personnel for updating the bureaus’ inventory tracking system; and

2. Alternatively, the Fund should develop and implement an integrated financial system
that will capture all transactions in the general ledger, including accounts receivable,
liens and mortgages payable, forfeited property, deferred revenue, and seized
currency and its offsetting liability.

MANAGEMENT RESPONSE

Management Assessment on Progress: This material weakness will continue to be identified until
such time as the inventory system(s) can integrate to the Fund’s financial system, to accrue the
seized and forfeited asset and liability information required to support financial statement
preparation. It is Fund management’s priority to be able to document and substantiate through audit
the respective change in inventory analyses of the various bureaus supporting the Treasury asset
forfeiture program. Management review and contracting are currently being applied in this regard
The existence of two diverse inventory systems among the three non-Customs bureaus of the Fund
is identified for current remedial action. These priorities may result in the continuing need to
manually adjust the standard general ledger of the Fund as Fund management proceeds through
priority deficiencies.

Planned Actions/Events (Short Term - Next 12 Months):

Fund management has undertaken to provide funding to Customs to resolve performance problems
associated with SEACATS. In addition, Fund management has rejoined the Customs working group
designated to identify and coordinate resolution of SEACATS performance problems. Property
tracking of the SEACATS system had been significantly corrected in time to support FY 1998 year
end financial reporting.

However, information to date indicates that SEACATS did not adequately support currency asset
transactions for FY 1998 year end financial reporting. However, Customs personnel indicate that the
SEACATS system will support currency inventory transactions for FY 1999. Also, the Customs

INDEPENDENT AUDITOR’S EXHIBIT I 61


wee

ve.

end of FY 1999. Accounts payable (both
intragovernmental accounts and public accounts)
totaled $44 million on September 30, 1999, an
increase of about $14 million over the total
reported at the end of FY 1998 of $30 million.

Seized currency totaled $300 million on
September 30, 1999, forming the largest liability
of the Fund. The liability for seized currency
compares to a total on September 30, 1998, of
$423 million. The net position of the Fund on
September 30, 1999, totaled $325 million, as
compared to $344 million on September 30, 1998,
a decrease of $19 million or 5.5 percent from FY
1998.

Liabilities and Net Position
End of Year
(@ollars in Millions)
1999 = 1998

Liabilities Covered by
Budgetary Resources
Intragovernmental
Distributions payable

Other federal agencies $1 $1
Accounts payable _38 25,
Total, intragovernmental
liabilities $39 $26
Liabiliti he Publi
Seized currency $300 $ 423

Distributions payable

State, local and foreign law

enforcement agencies 31 7
Victim restitution 29 33
Accounts payable 6 5

Deferred revenue from
forfeited assets 272 24

Total liabilities to the Public 393 ©4492

Total Liabilities covered by
budgetary resources $432 $518

Liabilities and Net Position
End of Year (Continued)
(Dollars in Millions)
19991998
Liabilities not Covered by
Budgetary Resources
Commitments and
Contingencies $_- $=
Total Liabilities 432 518
Net Position
Retained Capital 230 117
Unliquidated obligations 114 156
Results of Operations (19) 35
Transfers from ONDCP —- —36
Total Net Position 325 344
Total Liabilities and Net
Position $757 $862

Summary of Financial Highlights

Net Position. In summary, the Fund concluded FY
1999 “in the black,” with more than sufficient
resources necessary to commence the business of the
next fiscal year. This outcome was achieved even
though there was a $18.9 million deficit in the
results of operations in FY 1999. This deficit arose
largely due to increases in non-discretionary
expenses associated with investigative costs and
asset management, and, increased super surplus
expenses in FY 1999.

Additionally, equitable sharing expenses reported
for the year includes approximately 29.1 million
accrued for certain probable equitable sharing
liabilities existing at year end (treated as contingent
liabilities of the Fund in prior years).

Policy Issuance. During FY 1999, Fund
Management continued to identify incremental
improvements in operational processes and financial
management operations. Recognizing the close
connection between field operations and proper

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


5. INADEQUATE PROPERTY MANAGEMENT FUNCTIONS
(FISCAL YEAR 1998 CONDITION)

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:

5.1

@

(i)

(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 bureau originating the seizure assigns a case/seizure
number that is supposed to facilitate asset tracking through seizure, forfeiture, holding and
disposition. The national seized Property contractor (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 bureau responsible for originating the case. The Customs
Accounting Services Division (ASD), who Processes those transactions for the Fund, records
transactions related to these properties using either the property custodian’s assigned number
or the law enforcement tracking number, and in certain instances appears to have assigned
a tracking number to record the transaction that has no relationship to either the originating
bureau’s or the property custodian’s tracking number. In certain instances, the case/seizure
number is unidentifiable or erroneous resulting in Properties that remain unidentifiable until
extensive research is conducted.

Untimely and inaccurate recording of assigned values

Values assigned to seized property are not captured in a timely and accurate manner in the
Fund’s various asset tracking systems maintained by the law enforcement bureaus
participating in the Fund. Upon seizure an asset is assigned a value (appraised value) by the
Seizing officer. Several instances were noted where recorded assets did not have values
assigned.

Untimely recording of seized and forfeited property

Seized property is not recorded timely in the Fund’s asset 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.

78

INDEPENDENT AUDITOR’S EXHIBIT II


over $4 million was seized and dozens were
indicted and arrested in the United States and
Columbia as the result of an IRS led investigation
known as Operation Cash Back.

Operation Cash Back began in 1996 as an
undercover probe that eventually exposed a
scheme to launder millions of dollars in narcotics
proceeds through the sale of computer equipment
and other goods to businesses in South America.
Colombian traffickers would sell their drug dollar
in the United States to a peso broker at a discount.
The broker would then pay the trafficker with
pesos in Colombia, providing the trafficker with
his money and now making the broker the money
launderer, confronting the challenge of getting the
U.S. drug dollars into the financial system. In
Operation Cash Back, the Colombian brokers
would sell these drug dollars at an attractive
discount to Colombian import businesses who
were seeking U.S. denominated funds to purchase
American goods. Employees of several U.S.
corporations who sold the goods, including
computer equipment, agreed to accept the drug-
tainted funds and not file the cash transaction
reports required by the IRS.

When the indictments were made public in
September 1999, IRS agents had frozen some sixty
bank accounts containing approximately $12
million in addition to the monies already seized.
Indictments charged Colombian brokers and
couriers as well as the employees of some sixteen
American businesses with charges ranging from
money laundering to failure to file requisite IRS
forms. Assisting the Criminal Investigation
Division of the IRS in this case were investigators
from the Broward County Sheriff's Office, the
Sunrise Police Department and the Coral Springs
Police Department.

Deputy Secretary of the Treasury, Stuart Eizenstat,
in a joint statement with the Deputy Attorney
General, noted that the indictments from Operation
Cash Back “...demonstrated that law enforcement
will not tolerate businesses giving drug traffickers
and money launderers a free hand to sanitize their
illicit profits, and that they” ... illustrate the way
money laundering systems can tempt some

otherwise legitimate businesses to knowingly
violate the law.

Years Later, Marijuana Proceeds Forfeited. By
June of 1999, the story of Paul Edward Hindelang
Jr. had made the front page of the Wall Streer
Journal under the caption, Secret Accounts-Ghosts
of Hidden Past Come Back to Haunt a Star
Entrepreneur. The accompanying article chronicled
Hindelang’s own peculiar odyssey, which six
months earlier ended another chapter with his
agreement to forfeit $50 million in drug proceeds
thanks to the dogged determination of investigators
from the United States Customs Service and the
Monroe County Sheriff's Office in the Florida
Keys.

Hindelang, now in his fifties, had received a six
month prison term back in 1970 when he was
stopped trying to smuggle seventy-five pounds of
marijuana into the United States. After that brush
with the law, he applied his substantial
entrepreneurial talents into developing innovative
drug smuggling methods and techniques.
Reportedly, he was the mind behind the concept of
the mother ship, whereby a large vessel full of
contraband, unloads its cargo to several mid-sized
boats on the high seas, who in tum offload their
shipments to even smaller craft for the final trips to
shore. Over the next decade, Hindelang earned
substantial compensation in the smuggling business
for his skills and ideas.

By 1981, his criminal successes had started to sour
as he found himself caught up in an undercover
operation in Louisiana. Pleading guilty in Federal
district court in New Orleans to drug trafficking
charges, Hindelang agreed to cooperate with law
enforcement and to forfeit his criminal proceeds,
which he contended amounted to only $640,000 in
currency. Sentenced to ten years, he was released in
Jess than three. From that point, he appears to have
applied his formidable aptitudes to legitimate
businesses and encountered success by availing
himself of the opportunities presented by the
breakup of the AT&T telephone monopoly. The
company he put together, Pacific Coin, became one
of the largest independent pay phone operators in
the United States and by 1998 had merged with

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


SEACATS Project Director indicates that current SEACATS performance plans include an
automated interface with the standard general ledger.

Fund management will work diligently with Customs to identify and resolve SEACATS
performance requirements needed to support the Fund’s financial reporting requirements.

Additionally, Fund management has undertaken to deploy a single inventory system to support the
three non-Customs bureaus participating in the Fund. In this manner, Fund management intends to
relieve the use of two separate systems used among the three bureaus to one system used by the three
bureaus. It is identified that complete contracting for the deployment of IRS’ AFTRAK system to
support the change in inventory analysis requirements of the financial statements should be
completed by FY 2000.

Planned Actions/Events (Long Term):

Before the AIMS general ledger can automatically record all transactions associated with the Fund’s
financial reporting requirements, it would be necessary to integrate all inventory systems supporting
the Fund’s financial statements with the AIMS financial systems or successor financial system. Only
in this manner, can fully automated transaction-level accounting occur through the general ledger.

Fund management remains concemed regarding SEACATS ability to properly document the change
in inventory analysis requirements for non-Customs bureaus and views it currently imperative that
IRS’ AFTRAK system be diversified and further deployed to the Secret Service and the ATF to
ensure their inventory is tracked in a manner that will support their individual changes in inventory
analyses.

Until SEACATS performance issues are resolved, Fund management is taking the position that the
current priority is the ability to document the change in inventory analysis in a manner that can be
substantiated through audit, and that the general ledger can be manually adjusted from there. Fund
management sees no benefit to an automated-transaction level general ledger if the automated data
is so flawed that it cannot be substantiated through audit. It is more important to Fund management
that the valid net position of the Fund is established and validated so that year-end and year-out
efforts to support the asset forfeiture sanction by our law enforcement bureaus can continue with
financial confidence.

Additionally, AFTRAK system requirements needed to support the change in inventory analysis for
the three non-Customs bureaus will be addressed in ongoing contracting efforts by Fund
management.

62 INDEPENDENT AUDITOR’S EXHIBIT I


The AFTRAK inventory systems itself appears sound. Therefore, Fund management fully
expects that this material weakness can be resolved with IRS attention to improved management
function associated with the use of the system.

Planned Actions/Events (Short Term - Next 12 Months):

Fund management will work closely with IRS to ensure that management issues related to AFTRAK
are fully resolved.

68 INDEPENDENT AUDITOR’S EXHIBIT I


Chapter I:

Safeguarding Individual Rights

The Treasury Forfeiture Fund (the Fund) 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. It is codified at 31 USC
9703 and brings together all of Treasury law
enforcement under a single forfeiture fund
program. When the enabling legislation for the
Department of the Treasury Forfeiture Fund (the
Fund) was enacted as Public Law 102-393, it
brought into alignment the substantial Federal law
enforcement responsibilities of the Secretary of the
Treasury with authority and control over an
increasingly significant source of resources for the
Department of the Treasury’s (the Department)
law enforcement efforts.

Recent growth in Federal forfeiture programs only
underscores the fundamental principle that their
effectiveness ultimately rests upon public
confidence in their integrity. Since the inception of
the Fund, the Department's forfeiture program has
always set as one of its principal goals the
safeguarding of individual rights. That asset
forfeiture not transgress upon rights guaranteed by
the Constitution of the United States is essential, if
this law enforcement resource is to merit the
public trust. This is especially true in the realm of
civil forfeitures; those conducted outside of the
criminal courts system. A look at the civil
forfeiture process as well as some of the related
reforms the Treasury forfeiture program has
implemented during the last several years will give
some idea of how this goal is constantly being
pursued.

Safeguarding Due Process. While civil forfeiture
actions can be pursued either administratively by
the seizing agency or judicially in civil court, they
always proceed against property and not persons.
It is also readily apparent that property cannot

exist without someone, somewhere, having an
ownership or other interest in it. Simple fairness
demands that those persons having any interest in
seized property be notified of the seizure and the
intent to forfeit so that they may have an
opportunity to come forward and be heard. In
Treasury’s forfeiture program, such notice begins
a process designed to safeguard the rights of
affected parties. Some of the main points of this
process include:

. Personal Notice - This is the most direct
form of notice and occurs whenever the true
owner or owners of the property are known
or if there is a valid lien against the
property held by an individual or an
institution. In these circumstances, these
persons must be extended personal notice
of the seizure and intended proceedings by
registered or certified mail. We have even
held discussions with the Bureau of Prisons
to be certain that interested parties who may
be incarcerated actually receive the notice
of intent to forfeit.

. Publication - Ensure that anyone with an

interest in the property is not overlooked,
even if they are unknown to the seizing
agency. Personal notice is supplemented by
publishing a notice of the specific seizure
and pending proceedings in a newspaper of
general circulation.

. The Claim and Cost Bond - Upon being
notified of the seizure of the property, the
interested person may choose to contest the
forfeiture of the property by filing a claim
and cost bond. This action stops the
investigative agency from ruling on the
forfeiture and requires that the matter be
resolved in civil court. At this point the
action is referred to the U.S. Attomey. If an
interested person cannot afford the cost
bond, he or she may file an “in forma

‘SAFEGUARDING INDIVIDUAL RIGHTS


CONDITION

The Analysis of Changes in Seized and Forfeited Property and Currency (the Rollforwards) of the
Intemal Revenue Service (IRS) compiled at year end did not account for and properly report property
and currency transactions for financial reporting purposes in accordance with Statement of Federal
Financial Accounting Standards (SFFAS) No.3, Accounting for Inventory and Related Property. .
Year end balances presented on the Rollforwards were incorrect, and in other instances had not been
captured. Supporting schedules to the Rollforwards revealed significant differences from the
amounts reported on the Rollforwards, and amounts deposited into the Fund resulting from forfeited
currency or sale of property could not be reconciled to amounts reported on the Rollforwards.
Consequently, substantial manual procedures and reconciliations were undertaken to correct balances
for year end financial reporting purposes.

CRITERIA

SFFAS No. 3 requires seized and forfeited property and currency to be accounted for in property
management records so that reliable financial and statistical reports may be prepared. Specifically,
SFFAS No. 3 requires the preparation of an analysis of changes in seized and forfeited property and
currency including the dollar value and number of seized property and currency that are: (i) on hand
at the beginning of the year; (ii) seized during the year; (iii) disposed of during the year and the
method of disposition; and (iv) are on hand at the end of the year. Additionally, the General
Accounting Office (GAO) internal control objectives require that proper internal controls are in place
to ensure that transactions are properly recorded, processed and summarized to permit the
preparation of reliable financial statements and to maintain accountability over the assets.

CAUSE

Instructions issued by the Fund for compiling year end information were not being followed.
Additionally, seizure activities and related asset disposition activities were not updated timely in the
inventory tracking system, the Asset Forfeiture Tracking System (AFTRAK) maintained by the IRS.
Regular reconciliations and reviews were not being conducted during the year to monitor AFTRAK
generated information and documentation to the transactions that are recorded by the Fund.
Additionally, certain system enhancements effected in FY 1998 were not documented and
implemented with sufficient user analysis.

66 INDEPENDENT AUDITOR’S EXHIBIT I


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1998
(Unaudited)

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.

(1) A report on:

(A) 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 and the United
States Coast Guard, in the case of fiscal years
beginning after 1993.

As reported in the audited financial statements, at
September 30, 1998, the Fund had forfeited
property held for sale of $24,034,000. 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 a U.S. Customs
Service (Customs) suspense account. Upon
forfeiture, it is transferred to the Treasury
Forfeiture Fund. At September 30, 1998, there
was $17,797,000 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.

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

The estimated total value of all property
transferred to any state or local law
enforcement bureau is summarized by state
and U.S. territories. Total currency
transferred was $72,033,000 and total
Property transferred was $3,178,000 at
appraised value.

(2) A Report on:

(A) The balance of the Fund at the
beginning of the preceding fiscal year.

The total net position of the Treasury
Forfeiture Fund on September 30,1997,
which became the beginning balance for the
Fund on October 1, 1997, as reported in the
audited financial statements is $272,713,000.

(B) 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
$5,207,000. The amount actually paid on a
cash basis was not materially different.

The amount of forfeited currency and
property shared with federal, and distributed
to state, local and foreign law enforcement

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION

90


4. LACK OF SALES REVENUE RECONCILIATIONS
(REPEAT CONDITION)

CONDITION

EG&G Dynatrend (EG&G), the national seized property contractor, provides property management
services to the U.S. Customs Service (Customs), such as: storage of property seized by any law
enforcement bureau participating in the Fund; disposal of the properties through public auctions;
and, collection of storage costs reimbursed by violators. Cash collections received by EG&G on
behalf of the Fund are deposited into various bank accounts in the name of EG&G and, within one
week, are accumulated and transferred to the U.S. Treasury account at the Federal Reserve Bank of
New York. The money collected by EG&G represents a significant portion of the revenues earned
by the Fund. However, the Customs’ Accounting Services Division (ASD), who processes these
transactions only records revenue upon receipt of a validated deposit slip, which is approximately
one week later. Although sale proceeds are transferred and reported by EG&G to the Fund, the
information provided does not itemize the sale proceeds by seizure. Consequently, 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 asset tracking systems. Additionally, Customs does not
independently verify the revenue earned from sales of inventory items. The money deposited into
the Fund by EG&G is reported as revenue and no reconciliations are performed to verify sales
proceeds owed to the Fund.

CRITERIA

The Budget and Accounting Procedures Act of 1950, 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. 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.

CAUSE

Since FY 1997 the Fund discontinued the practice of reconciling proceeds received from sales to
EG&G sales reports, due to the difficulties encountered in identifying sales proceeds to specific
seizures. Also, the Fund has no procedures in place to independently monitor the sales conducted
by EG&G.

76 INDEPENDENT AUDITOR’S EXHIBIT IT


Gardiner, Kamya & Associates, P.C.

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 Compliance with Laws and Regulations

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

We have audited the accompanying balance sheets of the Department of the Treasury
Forfeiture Fund (the Fund) as of September 30, 1998 and 1997, and the statement of net
cost, statement of changes in net position, statement of budgetary resources and statement
of financing for the year ended September 30, 1998, and have issued our report thereon
dated January 15, 1999. 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, applicable 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 the above
requirements using the implementation guidance for FFMIA included in Appendix D of
the Office of Management and Budget (OMB) Bulletin 98-08, Audit Requirements for
Federal Financial Statements, as amended. Those tests were performed by other auditors
whose report has been furnished to us. Our opinion, insofar as it relates to FFMIA
compliance, 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. 98-08, as amended.

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 98-08, as amended, including the
requirements referred to in FFMIA.

Member of the American Institute of Certified Public Accountants


Dw

NOTES TO FINANCIAL STATEMENTS

Amounts distributed to other Federal agencies for law enforcement activities under “Super Surplus”
requirements amounted to $17,150,000 in FY 1998.

Note 14: 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.

Amounts distributed for federal law enforcement purposes of Treasury law enforcement
organizations amounted to $5,160,000 in FY 1998.

te 15: itme ingenci
COMMITMENTS

As of year-end, there are equitable sharing requests in various stages of approval. Because final
approval has not been obtained as of September 30, they are not recorded as liabilities of the Fund.
The Fund identified equitable sharing requests in the amount of approximately $24,701,000 and
$22,283,000, which were approved or in the final stages of approval subsequent to September 30,
1998 and 1997, respectively. The forfeited currency revenue was recognized in one fiscal year,
however, the distribution will not be recognized in the financial statements until the following fiscal
year. In addition to the amount 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.

2. In a recent decision, the Supreme Court has ruled that the government must return forfeited

NOTES TO FINANCIAL STATEMENTS 43


analysts who are specially trained to identify the
assets of criminal organizations. The personnel
assigned to the groups partake in special programs
at Treasury’s Federal Law Enforcement Training
Center to thoroughly prepare them in the areas of
asset identification, removal and forfeiture. Their
expertise becomes integrated into the ongoing case
Strategy and is initiated as early as Possible in
investigations.

Enhancing Egyptian Counter-Narcotics Efforts.
In November of 1999, Treasury’s Executive Office
for Asset Forfeiture was honored to receive his
Excellency, Ambassador Nabil Famy of the Arab
Republic of Egypt, who accepted a check on
behalf of his government to be used to promote
Egyptian law enforcement efforts to control and
eliminate drug trafficking as well as other narcotic-
related criminal activity. This sharing of forfeited
assets, in an amount approximately $1 million
dollars, was in recognition of the assistance
provided by Egyptian authorities to an IRS
Criminal Investigation Division case involving a
Fatih Radwan.

The case had begun all the way back in 1988 when
the International Criminal Police Organization,
better known as INTERPOL, learned that Radwan
had purchased a residence in the quiet upstate New
York hamlet of Lake Mohigan for $450,000 in
cash. By 1993, the IRS Criminal Investigation
Division in Mahattan had been brought in to
investigate Radwan’s financial affairs in the
United States. According to Egyptian authorities,
Radwan was one of their nation’s biggest drug
smugglers who had been moving hashish and
opium into Egypt since at least the mid-1960s.
After his assets in Egypt had been finally seized,
Radwan fled his native land and established
residences in both the United Kingdom and the
United States by the late 1980s.

When IRS discovered that the assets Radwan had
in the United States had been purchased with the
Proceeds of crime, a complaint was filed seeking
their civil forfeiture. Not unexpectedly, Radwan
then claimed that all his defendant properties were
derived from legitimate sources of income in

Egypt or from an inheritance left to him from his
father, a Bedouin Chief in the Sinai. He provided
documents to support his claims that his wealth
was only from honest means - mining quarries, an
automobile import-export enterprise and general
contracting. With the help of the Egyptian anti-
narcotics police and officials from the Ministries of
the Interior and Justice, United States special
agents gathered pertinent documents that refuted
Radwan’s contentions regarding the sources of his
wealth. In August of 1998, a consent order and
Judgment of forfeiture was filed in the Southern
Judicial District of New York where Radwan
agreed to forfeit to the United States $2 million in
full settlement and satisfaction of the govemnment’s
claims.

From this forfeited amount, the Fund has also
shared with DEA and the Government of the
United Kingdom but perhaps the most telling
Portion was the first time ever amount shared with
Egypt from the Fund. As Ambassador Famy
mentioned in his remarks upon accepting the
check, it shows that there are many other positive
interactions between the governments of the United
States and Egypt beyond those normally headlined
on an evening news broadcast. In this particular
instance, it was a very tangible support provided by
the Fund to strengthen the anti-narcotics efforts of
Egyptian law enforcement.

Helping Communities Target Armed and
Violent Criminals. Several years ago, when the
Bureau of Alcohol, Tobacco and Firearms initiated
its Ceasefire program to bring the latest forensic
technology to bear in the battle against violent
offenders, the Treasury Forfeiture Fund was there
to provide the critical funding needed to make it
succeed. Today, the Fund is still there supporting
Ceasefire’s successor, the National Integrated
Ballistics Information Network, as it helps violence
plagued communities across the country link and
prosecute what only a short while ago may easily
have been a series of unrelated occurrences.

A key element from Ceasefire that continues in the
newer national network is the Integrated Ballistic
Identification System or IBIS. What IBIS does is

STRENGTHENING LAW ENF ‘ORCEMENT


NOTES TO FINANCIAL STATEMENTS

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.
They are 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. The investment, net, represents the required market value.

The following schedule presents the investments on hand as of September 30, 1999 and 1998, respectively
(dollars in thousands):

Unamortized Investment,
Entity Assets
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

September 30, 1998:

Treasury Forfeiture Fund - 28 days

4.44% U.S. Treasury Bills $248,038 $(857) $247,181

Interest Receivable - on entity investments 396
- on non-entity investments 554

Total Investment, Net, and Interest Receivable $248,131

Non-entity Assets

September 30, 1999:

U.S. Customs Suspense Account - 35 days 4.40%

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

September 30, 1998:

U.S. Customs Suspense Account - 28 days

4.44% U.S. Treasury Bills $344,436 $ (1,189) $343,247

Interest receivable includes interest earned on seized currency investments (non-entity investments) which
belongs to the Fund once it is earned.

FINANCIAL STATEMENTS
42


NOTES TO FINANCIAL STATEMENTS

Note 10: Distributio ayable (st: o1 ncies an rei ve) e!

Included in the amount for Distributions Payable (state and local agencies and foreign governments) for FY
1999 is $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 a historical pay-out percentage), that were approved or in final
stages of approval on September 30, 1999. 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.

Prior to fiscal 1999, equitable sharing amounts were disclosed as “Commitments” in the Footnotes to the
Fund’s financial statements (1998: $24.7 million).

te 11: Victi - v!

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 FY 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 tam relator, that is, an individual who provides information to the Government in a
case can file for a portion of proceeds from the case. The gui 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 relator’s claim must be resolved before any distribution of the proceeds
can be returned to victims or otherwise distributed. The claim was resolved in FY 1999. Approximately $3.4
million was distributed during fiscal year 1999, leaving a balance of 28.7 million to be distributed shortly.

Note 12:_Net Positi
Curnulative Results

The following summarizes the components of the cumulative results for the years ended September 30, 1999
and 1998, respectively, (dollars in thousands):

1999 1998
Retained Capital $229,809 $116,290
Unliquidated Obligations 113,804 156,423
Results of Operations (18,903) 35,221
Transfers from ONDCP : _35,679

S340: $343,613

FINANCIAL STATEMENTS
46


amount, the system couldn’t fully track currency transactions. Customs has indicated that SEACATS
will be enhanced to support currency inventory tracking in FY 1999. In addition, as mentioned
previously, Customs indicates that an automated interface between SEACATS and the general ledger
is in the testing phase of SEACATS development and should be implemented during FY 1999. All
funding requested in the near term by Customs to meet SEACATS performance problems has been
recommended for approval by Fund management. .

Fund management will work diligently with Customs to identify and resolve SEACATS
performance requirements needed to support the Fund’s financial reporting requirements.

Planned Actions/Events (Longer Term):

Fund management will continue to monitor the long-term requirements of the SEACATS system
and resolve appropriate financial requirements of the system.

INDEPENDENT AUDITOR’S EXHIBIT I 65


Whelan pled guilty to a marijuana charge in New
Orleans in 1984 and served nine months. When he
got out, he worked at legitimizing his criminal
proceeds. He married a Swiss national and moved
funds from account to account. Money under the
control of his wife was used to purchase real
property in Sun Valley, Idaho, and, when it was
sold, the proceeds went back into Whelan’s
account in Switzerland.

Swiss authorities assisted IRS agents during the
investigation and prosecution of this case by
tracing and accounting for over $4 million that
went into and through Swiss accounts held by
Whelan. The Swiss froze several of the accounts
for almost four years while the United States was
proving its case. Thanks to this restraint on the
accounts, a large portion of the funds Whelan
laundered was recovered. The IRS characterized
the Swiss assistance as invaluable. At the
presentation of the asset sharing, a check for
approximately $900,000 from the Treasury
Forfeiture Fund was given to the Embassy of
Switzerland’s Legal Affairs Counselor by the
Chief of the Rocky Mountain Criminal
Investigation Division of the IRS.

Chicago’s Juarez Connection. Amid the rise and
fall of drug cartels, the one based in Juarez,
Mexico, just across the border from El Paso,
Texas, was definitely on the rise. Despite the 1997
death of one of its principal entrepreneurs, Amado
Carrillo-Fuentes, who succumbed as a result of
plastic surgery to alter his appearance, the Juarez
group was pulling in million of dollars moving
cocaine and marijuana by the ton to American
cities. One of their favorite drug destinations was
Chicago, where bulk shipments were brought,
stored, divided up and moved onward to other
points in the country. The very characteristics of
Chicago that had historically attracted legitimate
businesses - its location in the center of the country
and a ready infrastructure of air, road and rail
transport facilities - attracted the notice of the
Juarez ring. In August of 1998, Vice President Al
Gore visited Chicago to announce a concerted
Federal response known as the Chicago Narcotics
Initiative. Under this plan, personnel from the U.S.

Customs Service, the FBI, the Drug Enforcement
Administration (DEA) and the U.S. Attorney’s
Office working together would use the resources of
their organizations to target and disrupt major
narcotics traffickers, money launderers and street
gangs.

The Customs Service had foreshadowed the work
of this initiative two months earlier when, in June
of 1998, their agent had received information about
a significant currency transfer going from Chicago
to Mexico by tractor-trailer. Immediately, radio and
teletype messages went out to state highway patrols
and other law enforcement authorities to deploy
and look for the suspect trailer. On the last day of
June, the Missouri Highway Patrol located the rig
at a weigh station in Strafford, Missouri. The
Missouri Highway Patrol notified the Customs
Service, and their officers, along with DEA agents,
obtained the consent of the truck operator to search
the vehicle. Inside they found twelve large plastic
containers and two gym bags filled with U.S.
currency. A total of $2.9 million was seized and
later forfeited.

To recognize the contributions of the many
agencies that assisted with this forfeiture, asset
sharings were approved in FY 1999 for the
Missouri Highway Patrol, DEA, the Missouri
National Guard, the Springfield Missouri Police
Department, the Sheriff's offices of both Green and
Christian Counties in Missouri, the Combined
Ozarks Multi-Jurisdictional Enforcement Team and
the Texas Department of Public Safety.

A Network in Southwestern Ohio. It wasn’t too
many years ago when Warren County in
Southwestern Ohio was predominantly rural and
known as much for its farms and festivals as for
anything else. Today, it is the second fastest
growing among all of Ohio’s eighty-eight counties
and along with its rapid economic development and
residential growth faces the usual array of
associated problems not the least of which is the
illegal drug market in the greater Cincinnati area.

In the town of Lebanon, James A. McCarty and his
colleagues used a garage close by upscale

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


NOTES TO FINANCIAL STATEMENTS

fiscal year 1997 in accordance with existing statute that required the necessary balances to be
transferred to ONDCP.

Additionally, during fiscal years 1998 and 1997, the Fund received $35,679,000 and $66,876,000,
respectively, transferred from the ONDCP per Public Law 104-208. The Secretary of the Treasury
is authorized to receive all unavailable collections transferred from the ONDCP as a deposit into the
Fund pursuant to Public Law 104-208 and 105-61.

H r

The Fund reimbursed agencies for the purchase of certain capital assets. These assets are reported
by the participating agencies. During the fiscal year ended September 30, 1998, $726,000 of capital
assets purchased by participating agencies was reimbursed by the Fund and is reported as a part of
discretionary expenses in the Statement of Net Cost.

e 12: Victi itution - U.S. vs. Bull edi

The “Bulldog Medical case” was a culmination of a 3-year investigation that ultimately lead 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 FY 1997, 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 tam relator, that is, an individual who provides information
to the Government in a case can file for a portion of proceeds from the case. The gui 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 qui tam relator’s claim must be resolved
before any distribution of the proceeds can be returned to victims or otherwise distributed.
Therefore, this sum remains a proper expense of FY 1997, and a continuing accounts payable for FY
1998 financial statements.

Note 13: Super Surplus

31 U.S.C. 9703 (g)(4)(B) allows for the expenditure, without fiscal year limitation, of funds
amounting to one half of the excess of unobligated balances 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. Super Surplus expenses for FY 1997 were limited because the notice
of proposed uses of Super Surplus funds was pending in Congress at the end of FY 1997, this was
approved by Congress in FY 1998.

42 NOTES TO FINANCIAL STATEMENTS


TREASURY FORFEITURE FUND
ANNUAL REPORT
FISCAL YEAR 1999

Table of Contents

Page No,

Section I: Overview
Chapter 1 :

Safeguarding Individual RUBHES 1
Chapter 2

Deterring Criminal AHN 4
Chapter 3 .

Fostering Law Enforcement Cooperation 8
Chapter 4

Strengthening Law Enforcement 12
Chapter 5

Program Performance and Financial Highlights 16
Section II: Financial Statements
Independent Auditor's Report on Financial Statememts 2. 28
Financial Statements:

See SRS eee eee ee cee teteteteteceteteteeeeee so 30

Statement of Net Cost ee -. 32

Statement of Changes in Net Position eee 33

Statement of Budgetary Resources 2.2... 00 000000020) 34
Statement of Financing . 35
Notes to Financial Statements «00000000 00000000007) (00000 utes 36

Section III: Other Reports


We also recommend that Customs emphasize the need to immediately update cases in
the Seized Asset and Case Tracking System (SEACATS) for forfeiture status during the
SEACATS user training sessions.

Distributions Payable - We recommend that the Fund establish and implement policies and
procedures to ensure the recordation of Property distributed to federal, state, and local
agencies or foreign countries during the fiscal year. These procedures may require that each
law enforcement bureau 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 EG&G and the
average two week lapse between receipt of funds by EG&G and the recordation of revenue
by the ASD, we recommend that EG&G 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 EG&G.

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 bureaus be reminded of the importance of properly
following the year-end procedures. We also recommend that procedures be again reviewed
with the law enforcement bureaus to identify any possible misunderstandings or refinements
to the procedures.

MANAGEMENT RESPONSE

Management Assessment on Progress: Asset tracking systems (inventory systems) deficiencies
represent the vast majority of the reason for non-accrual accounting during the year. To meet this
mandate, sufficient data about assets must be collected with an audit trail. This means that inventory
systems of the asset forfeiture program would have to track not only the entity versus non-entity
status of the asset, but also information about liabilities that confer to the Fund upon forfeiture,
including liabilities incurred through policy or judicial mandate, including liens, mortgages,
equitable sharing and innocent third party interests against the forfeited asset. Until such time as the
inventory systems can accrue the seized and forfeited asset and liability information required to
support financial statement preparation, this material weakness will remain. Fund management has
initiated a review of the accrual requirements for the Fund’s financial statements.

Planned Actions/Events (Short Term - Next 12 Months):

Fund management has undertaken to provide funding to Customs to resolve performance problems
associated with the Seized Asset Case Tracking System (SEACATS). In addition, Fund
management has rejoined the Customs working group designated to identify and coordinate
resolution of SEACATS performance problems. Seized and forfeited Property tracking capabilities

INDEPENDENT AUDITOR’S EXHIBIT I 57


intragovernmental totaled about $1 million on
September 30, 1999, similar to that reported for
September 30, 1998. The value of forfeited
property, held for sale, net of mortgages,
liens and claims on September 30, 1999, was
$26 million, up from $24 million reported on
September 30, 1998. The value of forfeited
property, to be shared with Federal, state, local
or foreign governments totaled about $1 million,
similar to that reported at the end of FY 1998.
Advances totaled about $1 million on September
30, 1999, down from $28 million reported on
September 30, 1998. 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 cash and other
monetary assets, invested and not invested, on
September 30, 1999, was $300 million, a decrease
from the $423 million reported on September 30,
1998.

Entity and Non-Entity Assets of the Fund

End of Year
(Dollars in Millions)
1999 1998
Entity Assets (Assets Owned
by the Fund)
Intragovernmental
Investments and related interest $288 $248
Accounts receivable (*) 2
Advances —_l _28
Subtotal, intragovernmental
assets 282 278
Public
Cash/monetary assets 140. (137
Accounts receivable 2 ©
Carried forward $141 $137

Entity and Non-Entity Assets of the Fund

End of Year (Continued)
(Dollars in Millions)
1999 1998
Brought forward $141 $137
Forfeited property
Held for sale, net of mortgages,
liens and claims 26 24

To be shared with federal, state

or local or foreign governments —_l
Subtotal Public 168 161
Total, entity assets 457 439
Non-Entity Assets (Not Owned
by the Fund)
Seized currency

Cash and other monetary

assets* 47 80

Investments* 253-343
Total, non-entity assets 300 423
Total Assets $782 $862

*Under the Statement of Financial Accounting Standards (SFFAS)
No. 3, effective September 30, 1994. and thereafter, seized currency
is reported as a custodial asset upon seizure. The amount cited here
represents seized currency held by Treasury in a suspense account,
invested, or on hand at field office locations.

Liabiliti i Net Position:

A summary of the liabilities and net position of the
Fund as of September 30, 1999, as compared with
September 30, 1998 is presented in the following
table. The large decrease in intragovernmental
liabilities covered by budgetary resources is
associated with a decrease in seized currency, of
$123 million from last year. This merely reflects the
variable nature of asset forfeiture from year to year.

Revenue from forfeited property held for sale is
deferred until the property is sold. When compared
to FY 1998, slightly more forfeited property was
held for sale on September 30, 1999, which accounts
for the increase in deferred revenue from forfeited
assets of $2 million from the end of FY 1998 to the

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999

Prd


tw th

Fund may transfer forfeited property to other federal agencies with appropriate approval.
Currently the Fund does not record the transfer of property to other federal agencies during
the fiscal year. Instead, the Fund makes an adjustment to record this information on financial
statements as part of the year end manual adjustments.

Accounts Receivable - Customs maintains a contract with EG&G Dynatrend (EG&G),
whereby EG&G stores property seized by any agency participating in the Fund, conducts
auctions sales of forfeited property, and collects storage costs reimbursed by violators. Cash
collections made by EG&G on behalf of the Fund are deposited into various bank accounts
in the name of EG&G and, within one week, are accumulated and transferred to the U.S.
Treasury account at the Federal Reserve Bank of New York. The money collected by EG&G
represents a significant portion of the revenues earned by the Fund. However, the ASD only
records revenue upon receipt of a validated deposit slip, which is approximately one week
later.

CRITERIA

The Statement of Federal Financial Accounting Standards (SFFAS) No. 1, Accounting for Selected
Assets and Liabilities, requires federal agencies to maintain accounts of the agency on an accrual
basis. If the difference between the results of cash and accrual basis of accounting are insignificant,
the cash basis of accounting may be followed.

The accrual basis of accounting contributes significantly to effective financial control over resources
and costs of operations and is essential to the development of meaningful cost information. The ac-
crual basis of accounting involves identifying and recording costs and revenues in the period in
which the revenue is earned or the cost is incurred, rather than in the period revenue is collected or
the cost is disbursed. This position is further supported by the Office of Management (OMB)
Bulletin 97-01, Form and Content of Agency Financial Statements, as amended, which recommends
the use of accrual basis of accounting by federal agencies.

CAUSE

In order for ASD to accurately record the Fund's activities on the accrual basis, financial transactions
received from each law enforcement bureau participating in the Fund, must be current and timely.
Currently, the financial statement information received from the bureaus for accounts payable and
accrued liabilities, mortgages and claims payable, and forfeited currency is not current. For example,
ASD is not notified timely of the forfeiture of currency because: (1) the Field Offices are not
monitoring and updating the system timely to reflect the change in the currency status; and (2) a
standardized procedure for documenting the forfeiture date in the system has not been implemented.
ASD is unable to identify that the forfeiture has occurred prior to year end unless the system is
updated or proper notification is given, because the forfeiture date is entered into the system by the
field and the supporting documentation is maintained by the field.

INDEPENDENT AUDITOR’S EXHIBIT I 55


rwe

certain matters discussed in the following paragraphs involving the internal controls and its operation
that we consider to be material weaknesses and reportable conditions.

The identified material weaknesses and reportable conditions, as defined above, are summarized
below with further explanations in Exhibits I and II of this Teport.

Material Weaknesses

Prior Year Material Weaknesses

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

1.

Accounting Records are Primarily Maintained on a Cash Basis

The Fund's accounting records are primarily maintained on the cash basis rather than the
accrual basis of accounting. Accordingly, most transactions are reflected in the accounting
system when the cash is received or disbursed rather than when the transactions occur.
Financial information and transactions from each law enforcement bureau participating in
the Fund are not received timely to accurately record the Fund's activities during the year.
Hence, year-end manual procedures were developed in order to produce accrual basis
financial statements that could be substantiated through an audit.

All Balances and Transactions that Comprise the Fund Are Not Captured By the
General Ledger

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 are not sent timely. Instead, procedures were developed to identify and
capture information manually from other bureaus’ systems in order to compile the financial
statements.

U.S. Customs Service’s Inadequate Asset Tracking System

The U.S. Customs Service’s (Customs) Property and currency asset tracking system, the
Seized Assets and Case 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.
Asa result, year-end procedures were developed to identify forfeited and seized property not
recorded in SEACATS as of September 30, 1998, and to adjust the financial statements for
the value of forfeited and seized Property on hand at year-end. Additionally, the value of
forfeited and seized currency reported by SEACATS is unreliable. Consequently, exhaustive
year-end procedures were developed to manually compile forfeited and seized currency as
of September 30, 1998, for financial reporting purposes.

49


ee ee

wr

Chapter 5:

Program Performance and Financial Highlights

Mission

The mission of the Treasury Forfeiture Fund (the
Fund) is to support the Department of the
Treasury’s (the Department) national asset
forfeiture program in a manner that results in
Federal law enforcement’s continued and effective
use of asset forfeiture as a law enforcement
sanction to punish and deter criminal activity.

Goals

The goals of the Fund are to:

1. Affirmatively influence the use of asset
forfeiture by Federal law enforcement to
punish and deter criminal activity; and, to
manage revenues to cover the costs of
seizure and forfeiture.

2. Affirmatively influence Federal law
enforcement to enforce due process rights
of affected persons; and, enhance
cooperation among participating foreign,
Federal, state and local law enforcement
agencies.

Objectives

The following are the objectives of Fund
Management in pursuing goals of the program:

Objectives Associated with Goal 1:
. Influence Federal law enforcement to
bring civil and criminal asset forfeiture

counts against criminal enterprises;

. Influence the development of improved
case law;

. Influence the availability of forfeiture
revenue;

. Pay all expenses of the Fund;

. Eliminate the Treasury asset forfeiture
program from GAO’s “high risk list”.

Objectives Associated with Goal 2:

. Prevent violation of citizens’ due process
rights;

° Ensure similarly situated citizens are treated
alike;

. Ensure forfeiture revenue is sufficient to pay

equitable shares, and pay state and local
overtime pursuant to joint task force
operations; and

. Coordinate Federal policy between the two
national asset forfeiture programs.

Performance Measures

The four performance measures currently in use by
Fund Management are:

. Processing time for equitable sharing
payments;

. Days elapsing between forfeiture and
disposition of real property;

. Timely processing of administrative cases;
and

. Percent that regular revenue to the Fund
covers regular expenses of the Fund
program.

While few in number, Fund Management considers
these performance measures to be fairly
comprehensive indicators of major segments of the

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


Treasury Forfeiture Fund
Statements of Net Cost
September 30, 1999 and 1998
(Dollars in Thousands)

Non-Discretionary:

Intragovernmental:
Seizure investigative costs and asset management
Other asset related contract services
Awards to informer
Data systems, training and others
Super Surplus (Note 14)
Secretary's Enforcement Fund (Note 15)

Total Intragovernmental

With the Public:
National seized property contract services
Joint operations
Total with the Public
Total Non-Discretionary
Discretionary:
Intragovernmental:
Awards for information or assistance
Federal law enforcement conveyance
Data systems, training and others
Total Intragovernmental
Total Program Costs

Less: earned revenues

Net Cost of Operations

1999

$ 78.059
1,460

305
17,576
41,015

186,929

$ 186,929

The accompanying notes are an integral part of these financial statements

1998

$ 54,663
1,530

650

12,259
17,150

84
726

130,504

$ 130,304

FINANCIAL STATEMENTS

an


NOTES TO FINANCIAL STATEMENTS

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.

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

: Di te t

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:

Administration of Justice $130,504 $0 $130,504

el7:

The Fund’s net amount of budgetary resources obligated for undelivered orders at the end of the year
is $156,423,000. 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 repayment, or other terms of borrowing authority used. 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 1998 consist of the
following (in thousands):

Recoveries of Prior Years Obligations $8,289
Spending Authority from Offsetting Collections 86
Total $8.375

44 NOTES TO FINANCIAL STATEMENTS


from the performance statistics are several
unusual investigations of the IRS which, although
they are administrative in nature, are actually
under the control of the U.S. Attorneys Office.
Inclusion of these cases in the routine case
statistics would unfairly skew performance data.

Additionally, calculations related to this
performance measure were based on information
provided in reports submitted by the respective
law enforcement bureaus as required by EOAF’s
Directive 26, ‘Timely Processing of
‘Administrative and Civil Judicial Forfeiture
Cases.”

Extent to which Regular Revenue Covers
Mandatory Expenses. The objective of this
measure is to gauge the Fund’s management
program in running the Treasury forfeiture
program in a solvent manner that maintains the
vitality and continuity of the Fund to meet
expenses of the asset forfeiture program in the
current year and in the future. The annual
performance target of 100 percent is calculated by
dividing total regular revenue for the current
fiscal year by total mandatory expenses of the
Fund for the current fiscal year. Fund
Management does not intend to establish a
performance goal in excess of 100 percent for this
measure to avoid “speed trap” problems in the
program. For FY 1999, Fund Management
successfully achieved the 100 percent target. A
similar analysis for FY 1998 also indicates that
Fund Management achieved the 100 percent ratio
of regular revenue to mandatory expenses of the
Fund.

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, 1999. 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 2001 and FY 2000 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.

st ich in Net Positi

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

Total Financing Sources

End of Year
(Dollars in Millions)
1999 1998
Financing Sources
Public
$261 $167

Forfeited currency and
monetary instruments
Sales of forfeited property, net
of mortgages and claims 23 37
Proceeds from participation
with other federal agencies 12 13
Value of property transferred in
equitable sharing 6 5
Payments in lieu of forfeiture,
net of refund 6 2
Reimbursed costs 2 2
Carried forward $310 $226

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


3. LACK OF CONTROL OVER ASSETS
(REPEAT CONDITION)

CONDITION

The U.S. Customs Service (Customs) manages and records seized and forfeited property in the
Seized Assets and Case Tracking System (SEACATS). EG&G Dynatrend (EG&G), the national
seized property contractor, also manages and records the seized and forfeited property transferred
to and held by them on behalf of all Treasury law enforcement bureaus through a module within
SEACATS. Currently, the inventory held by EG&G does not agree to what is recorded in SEACATS
by Customs. Also, the inventory held by EG&G on behalf of IRS, Secret Service, and ATF differed
significantly from the information on the inventory reports generated by SEACATS. The year end
physical inventory value and count per Customs’s SEACATS inventory records requires significant
adjustments because seizures and forfeitures are either not recorded at all or not recorded in the
modules within SEACATS on a timely basis. Additionally, no reconciliations were performed
during the year to identify and resolve discrepancies.

CRITERIA

Federal Financial Management Systems Requirements issued by the Joint Financial Management
Improvement Program (JFMIP) demand that an agency’s Core financial system be able to provide
financial information on a timely and useful fashion to meet five goals: (i) support management’s
fiduciary role; (ii) support budget formulation and execution functions; (iii) support fiscal
management of program delivery and program decision making; (iv) support internal and external
Teporting requirements, including, as necessary, the tequirements for financial statements prepared
in accordance with the form and content prescribed by OMB, reporting requirements prescribed by
Treasury, and legal, regulatory and other management requirements of the agency; and (v) monitor
the financial management system.

CAUSE

Although asset tracking systems (SEACATS) were in place to track property seizures and
forfeitures, design flaws within SEACATS made it impossible for EG&G to update the SEACATS
system to correctly report asset movements, and consequently there were no reliable inventory
tecords during the year for reconciliation purposes.

The Fund has no procedures in place requiring the regular reconciliation of inventory records
maintained by Customs with those maintained by EG&G.

Seizing officers do not adhere to policy with respect to entering seizures and forfeitures in their
bureaus' asset tracking systems within the prescribed time period.

74 INDEPENDENT AUDITOR’S EXHIBIT II


NOTES TO FINANCIAL STATEMENTS

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 separate Class of asset distribution was established
for victim restitution in 1995. These distributions include property and cash retumed 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
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 Tepresents 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
has been 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
for which have not yet been deposited into the Fund.

. Advances - This primarily represents cash transfers to Treasury or law enforcement agencies
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

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
39


1. DIFFERING ASSET TRACKING SYSTEMS
(REPEAT CONDITION)

CONDITION

U.S. Customs Service (Customs), Internal Revenue Service (IRS), U.S. Secret Service (Secret
Service), and the Bureau of Alcohol, Tobacco and Firearms (ATF) maintain seized and forfeited
Property, the value of which is included in the Fund's financial statements. The four Treasury law
enforcement bureaus use different inventory tracking systems to prepare the required Analysis of
Changes in Seized and Forfeited Property and Currency schedules (the Rollforwards). The different
systems collect and account for seized and forfeited assets differently and use slightly different data
definitions. As a result, manual manipulation and reconciliation are required to prepare the
Rollforwards. Additionally, since these inventory tracking systems do not tie to the Fund's system
of record, it is necessary to perform substantive reconciliations between the Fund's records and the
bureaus’ records to give assurance that all transactions are being properly recorded.

CRITERIA

Statement of Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for Inventory and
Related Property requires disclosure of an analysis of changes in seized and forfeited property and
currency. The standard requires presentation of both dollar amounts and quantity changes.
Therefore, each of the law enforcement bureaus' asset tracking systems should provide all data
necessary to produce the Rollforwards, with minimal manual intervention and reconciliation, and
to provide management with meaningful information.

CAUSE

The Seized Asset and Case Tracking System (SEACATS), was developed and implemented by
Customs in November 1996. SEACATS was developed to replace several non-integrated tracking
systems operated by Customs and other law enforcement bureaus participating in the Fund. As a
result of SEACATS deficiencies, other law enforcement bureaus had to revert to information
produced by their independent tracking systems for financial reporting purposes at year end:

Customs - In order to produce the year end analysis of changes for property, Customs relied on the
property reports produced by SEACATS and manually manipulated them to meet the reporting
requirements. Manual adjustments were required to prepare the year end analysis of changes for
property. SEACATS provided unreliable information for currency, therefore, manually compiled
information was used to produce the Customs’ Currency Rollforward for FY 1998.

IRS, Secret Service and ATF - In order to produce the SFFAS No. 3 exhibits, IRS, Secret Service
and ATF produced a variety of standard reports from their asset tracking systems and manually
manipulated them to meet the year end reporting requirements. ATF and Secret Service’s
system, the Consolidated Asset Tracking System (CATS), does not automatically perform the

INDEPENDENT AUDITOR’S EXHIBIT II 69


Gardiner, Kamya & Associates, P.C.

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 Internal Control

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

We have audited the accompanying balance sheets of the Department of the Treasury
Forfeiture Fund (the Fund) as of September 30, 1998 and 1997, and the statement of net
cost, statement of changes in net position, statement of budgetary resources and statement
of financing for the year ended September 30, 1998, and have issued our report thereon
dated January 15, 1999. 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. 98-08, Audit Requirements for Federal
Financial Statements, as amended.

In planning and performing our audits, we considered the Fund’s internal control over
financial reporting by obtaining an understanding of the agency’s internal controls,
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 and not to provide assurance
on the internal control over financial reporting. Consequently, we do not provide an opinion
on internal controls.

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 controls that, in our
judgment, could adversely affect the Fund’s ability to record, process, summarize, and
report financial data consistent with the assertions by 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. However, we noted

Member of the American Institute of Certified Public Accountants


tequired reconciliation between seized currency and deposits to the Customs suspense account, or
the reconciliation between forfeited currency and deposits to the Fund. ATF and Secret Service
manually reconciled this information based on reports generated from the CATS system.

EFFECT

The difficulties encountered in preparing the Rollforwards by the law enforcement bureaus referred
to above indicate that the Fund lacks the ability to properly, fully and accurately account for seized
and forfeited property and currency.

The number of non-integrated systems makes reconciliation extremely difficult and seriously
diminishes the quality of the data available for financial reporting.

The current policies and procedures were developed piecemeal and independently of any one
systems initiative, and, as a result, the systems do not effectively support the policies and procedures.

Because the current systems were developed prior to the recognized need for consistent, timely and
accurate financial management data and strict financial management controls, little or no system
functions (e.g., beginning and ending balances, audit trails, etc.) exist to support these areas.

RECOMMENDATION
We reaffirm our recommendations from previous financial statement audits that:

1. Customs immediately evaluate and correct the shortfalls identified within SEACATS so that
Customs can process property and currency transactions for fiscal year 1999 both for
Customs and non-Customs bureaus;

2. IRS, Secret Service and the ATF should continue to manually reconcile information
generated from their individual tracking systems to that reported by the Fund until such time
as SEACATS is fully functional.

3. Additionally, we recommend that IRS, Secret Service, and ATF manually reconcile
periodically to SEACATS as SEACATS is used by the property custodian as their system
of record. If SEACATS still cannot be correctly updated, then inventory should be accounted
for using information generated from the bureau’s individual asset tracking systems.

MANAGEMENT RESPONSE

Management Assessment on Progress: Management concurs with the auditors’ recommendations.
Currently, it is anticipated that the national seized property contractor will resume recording of
seized property into SEACATS, both for Customs and non-Customs bureaus and that this data will
be reconciled against the non-Customs bureaus asset tracking systems for purposes of supporting

70 INDEPENDENT AUDITOR’S EXHIBIT II


inventory reports be performed. This will ensure
that the property held as reported by all agencies
agrees with the amount recorded by the Property
Custodian.

Fund Management will work with the
Accounting Services Division of Customs (ASD)
regarding the handling of accounting transactions
associated with either the Suspense Account or
the Forfeiture Fund to ensure that revenue and
expenses are reflected in the most accurate
manner.

Look Forward. Fund Management continues
refreshed attention to Treasury’s national asset
forfeiture program during FY 2000. The
Executive Office for Asset Forfeiture has
published an Action Plan for FY 1999 and 2000
that brings new resolve to properly managing the
needs of the Fund, and establish a “roadmap” to
higher levels of efficiency. Fund Management
takes pride in reporting the progress made in FY
1999 and assures its constituency that creative and
vital problem-resolution will continue. Already in
FY 2000, the Fund management has received the
prestigious “Hammer Award,” for innovative
program initiatives.

Limitations of the Financial Statements. As
required by OMB Bulletin 97-01, Form and
Content of Agency Financial Statements, as
amended, 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 financial statements have been
prepared from the books and records of
the entity in accordance with the formats
prescribed by the Office of Management
and Budget, 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.

The financial statements 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 1999


safeguards the rights of individuals. Day-in and
day-out, the Department’s law enforcement
pursues a wide range of cases in its many areas of
responsibility - from trade and financial fraud to
narcotics smuggling, illegal firearms trafficking,
terrorism, counterfeiting and money laundering.
Civil forfeiture, the most historic and tested
element of the forfeiture program, has come to
play a very important role in pursuing the fight
against these and other criminal activities and has
demonstrated a longstanding record of
accomplishment in serving the best interests of
citizens. While reforming civil forfeiture continues
as a topic of public discourse, the Department’s
forfeiture program remains committed to those
fundamental policies and guidance that reflect
America’s sense of fair play.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


NOTES TO FINANCIAL STATEMENTS

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 year-end.

Seized Currency - Amounts reported in this category represents 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.

Net Position

The components of net position are classified as follows:

.

Retained Capital - There is no cap on amounts that the Fund can carry forward into FY 1999. The
cap was removed by the fiscal year 1997 Omnibus Appropriations Act (PL 104-208).

Unliquidated Obligations - This category Tepresents the amount of undelivered purchase orders,
contracts and equitable sharing requests which have been obligated with current budget resources ~
or delivered purchase orders and contracts that have not been invoiced. An expense and liability are
recognized and the corresponding obligations are reduced as goods are received or services are
performed. In FY 1999, Fund Management decided to recognize as liabilities, a portion of the
equitable sharing requests that were in final stages of approval subsequent to year end. Prior
experience with the nature of this account indicated that a substantial portion of these requests were
certain liabilities at year end. Prior to FY 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 revenues and transfers, and (ii) expenses.

Distributions to ONDCP’s Special Forfeiture Fund - This category represents the balance to be
transferred to ONDCP or received from ONDCP. See “Transactions with the Office of National
Drug Control Policy (ONDCP)” at Note 12.

Note 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

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
41


pauperis” petition to have the requirement
of the cost bond waived and still move the
matter into the judicial arena.

° Petitions for Remission or Mitigation -
Filing a claim and cost bond is only one
course of action available to the interested
party. Alternatively, the party may
acknowledge the validity of the seizure and
file what is known as a petition for
remission or mitigation. In this course of
action, the party is asking, in effect, that
the property be pardoned. For a Temission,
the party must prove that they have an
interest in the property and that they had
no knowledge that the property would be
used illegally. If the petition for remission
is granted, the government will return the
property or make a payment equal to the
petitioner’s interest in the property.
Mitigation is a partial pardon and usually
results in the Government returning the
Property on the condition that the
petitioner pays a penalty.

The Department goes to great lengths to ensure
that its civil forfeiture actions are not covert
activities bereft of concerns for process and Tights.
Whether civil forfeiture is accomplished
administratively by the investigative agency or
judicially in a court of law, the Department insists
that it always proceeds through a very structured
and delineated process. It is a Process that
comprehensively notifies affected Parties, invites
arguments against the intention to forfeit,
accommodates the indigent and offers
Opportunities to achieve compromise resolutions
short of forfeiture.

Timeliness in Processing Civil Forfeitures. To
further ensure that the Department and its law
enforcement agencies are Vigilant in seeing to it
that due process is fully granted in civil asset
forfeiture cases, the Department’s Executive
Office for Asset Forfeiture (EOAF ) issued a policy
directive in 1995 on the timely processing of
administrative and civil judicial forfeitures, Twice
each year, the Department’s enforcement bureaus

are asked to examine their open civil forfeiture
cases and determine how many have exceeded what
are general timeliness standards in the
administrative, civil and judicial categories. If more
than a minimal amount are found to be untimely,
ie. older than six to nine months in the
administrative category or older than two years in
the civil judicial category, then a report on these
cases is forwarded to the EOAF. This policy
Promotes active caseload monitoring so that all
seized property will either proceed to forfeiture or
be returned to an interested party without suffering,
and any delay.

Post and Walk for Real Properties. Additionally,
in cases involving real Property, seizures are
usually accomplished with explicit instructions
from a court. Typically, when a warrant of arrest
“in rem *for the real property is issued, agents serve
the warrant on the individuals occupying the
Premises and post a copy of the notice of intent to
forfeit in a conspicuous place on the property.
Institution of this post and walk policy, as it is
commonly known, has allowed claimants to remain
in possession of the premises while contesting the
forfeiture Proceeding in court.

Comprehensive Training for Forfeiture
Personnel. Management of the forfeiture program
and the use of its funds are very important. Fund
Management has taken measures in several other
areas to ensure that the Fund effectively fulfills its
Tesponsibilities to the public. The Department has
conducted and participated in comprehensive
training for all its forfeiture Personnel - from
special agents and their supervisors to seized
Property managers. Such training has Tepeatedly
underscored the importance of considered and
Tesponsible seizures and the need for the pre-
seizure planning that makes these possible. Quality
in the management of seized Property has been
emphasized so that the value of the Property,
whether it is forfeited or retumed, is never
carelessly diminished.

Achieving the Goal. In sum, the Department has
taken various administrative measures to achieve
its goal of having a forfeiture Program that

THE TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


pw

Treasury Forfeiture Fund
Statements of Financing
September 30, 1999 and 1998
(Dollars in Thousands)

Obligations and Nonbudgetary Resources
Obligations incurred
Less: Spending authority from offsetting
collections and adjustments
Transfers-in

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

1999s 1998

$ 348,953 $341,922

(27,574) (8.375)
—— = —(35.679)

321372 _297,868

46,515 (73,530)

(9,703) (5,207)
(4,843) (5,587)
(164,954) (81,567)

(1.465) 473)
(134.450) (167,364)
$186,929, $130,504,

The accompanying notes are an integral part of these financial statements

TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 1999


apply the benefits to computer technology to what
once was a painstaking and time-consuming chore.
IBIS uses computer imaging to match cartridges or
bullets from multiple shooting incidents. Tt allows
investigators to link a shooting in one city to
shootings involving the same weapon in other
localities. It automatically compares the crime
scene bullet or cartridge casing with other bullet
and cartridge casings that have been previously
entered into the system. From its extensive
automated search, it produces a short list of likely
matches which then allows the firearms examiner
to hone in on the best prospects for identifying
bullets or cartridge cases that came from the same
firearm. IBIS has taken what had often been a
quest for a needle in a haystack and greatly
increased the odds for success as the following
examples demonstrate:

. The Seventh Ward Soldiers - They were a
violent New Orleans street gang sometimes
known as the Hardheads and otherwise as
the Seventh Ward Soldiers. They laced
their drug trafficking . enterprise with
violent murders and brutal assaults.
Detectives from the New Orleans PD
provided cartridge casings and bullets
recovered from victims and crime scenes
for the IBIS evaluation system. IBIS
connected several different firearms used
by the gang and the national network
matches or hits contributed to the
identification of witnesses who helped
establish a connection among the crimes.
Law enforcement’s efforts contributed to
the indictment of thirteen Seventh Ward
Soldiers, six of whom were convicted and
sentenced to life in prison while another
six pled guilty and were awaiting
sentencing.

° A Phone Booth Murder - The Oakland
Police found the victim shot to death inside
a telephone booth. They had no suspects
and few leads. What little they had were
bullets found at the scene and these were
entered into the IBIS unit at the Oakland
police crime laboratory. One year later, in

the summer of 1997, two suspects, who
happened to be felons in violation of their
parole, were arrested in possession of a
firearm and jailed. The firearm that was
taken from the two was test-fired and the
results were entered into IBIS. A firearms
examiner was then able to determine that
same firearm had been used in the phone
booth murder. Confronted with this
information, the two suspects confessed,
saying that they had killed their victim
following a daylong robbery and shooting
spree. They also identified a third suspect
involved in the crimes.

From New Britain to Paterson - On St.
Patrick’s Day, a restaurant owner was
murdered execution-style in New Britain,
Connecticut, after three masked and armed
gunmen entered his establishment. Less
than two weeks later, three teenagers were
gunned down in a gang related incident in
Paterson, New Jersey. Two of the three
died. About a year later, in April of 1998,
the shell casings and bullet fragments
recovered from these homicides resulted in
a hit in the IBIS unit at the Essex County
Sheriff's office in Newark. By determining
conclusively that the same gun was used in
the Paterson murders and the restaurant
killing, the State of Connecticut was able to
issue an arrest warrant for a suspect in the
New Britain crime.

THE TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


boutiques and antique shops to prepare shipments
of cocaine and marijuana for lower level
distributors who passed it on to street dealers and
retail sale. McCarty was a mid-level operator who
made purchases from wholesale dealers around the
country. Earlier, he had started out much more
modestly, selling narcotics to employees of his
construction business, Pyramid Builders, but
expansion in his illegal sideline came easily. By
1998, when an Organized Crime Drug
Enforcement Task Force (OCDETF) led by the
Criminal Investigation Division of the IRS and
DEA shut down the operation, it was estimated to
have moved over 700 kilos of cocaine and three
tons of marijuana into the area since 1993.

McCarty, like several of his cohorts, were family
men and he laundered the proceeds from the sale
of narcotics by placing various assets in the names
of other family members. As the ring was taken
down, search warrants were executed
simultaneously at five different Warren County
locations and in South Carolina. Assets seized by
the IRS and DEA exceeded three-quarters of a
million dollars and consisted of currency, jewelry,
vehicles, real estate and several financial accounts,
including a life insurance annuity and three mutual
funds held in the name of his minor child. Of the
assets forfeited by the IRS, nearly $230,000 was
shared with five local law enforcement agencies
that had provided valuable assistance as members
of DEA’s multi-agency task force.

Jefferson, West Virginia, Gets Town Hall. It
had a bar, a runway and the requisite disco bar to
lend a certain je ne sais quoi to the routines of its
female performers. It called itself The Sports Page
and it was an exotic show bar in a neighborhood
locally known as the badlands, infamous for
several horrendous murders and other crimes.
Now, the Town of Jefferson, West Virginia, will
be able to transform this Property into a new town
hall, thanks to the successful cooperation between
the West Virginia State Police and the Criminal
Investigation Division of the IRS in a money
laundering and tax evasion case against the club’s
former owner, Richard Allen.

The United States Attomey who Prosecuted the
case noted that Allen had run a prostitution
business out of The Sports Page and another
similarly named bar he owned in the Huntington
area of West Virginia. He then laundered more that
$150,000 in profits from these operations between.
1995 and 1996. On the eve of his trial, Allen
entered into a plea agreement, detailing the money
laundering, the underreporting of income and
failure to pay employment taxes. He agreed to
forfeit $100,000 in cash and his nightclub in
Jefferson.

In some situations, some or all of the equitable
share that would have been awarded to a state or
local law enforcement agency for their assistance in
a Treasury investigation, may take the form of real
Property that can be passed on to a community
service agency under the Weed and Seed Program.
This is what transpired in the Allen case, when in
April of 1999 at the U. S. Attomey’s office in
Charleston, the deed to the Property formerly
known as The Sports Page was Presented to the
Mayor of Jefferson by the chief of the IRS Criminal
Investigation Division’s Virginia-West Virginia
District. The Town of Jefferson had only been
incorporated in 1997 and city officials had been
forced to set up offices in the Mayor’s generator
and starter repair business. With this asset sharing,
the town will now have a place where citizens can
go to conduct official business with the city. The
municipal government has committed funds to
renovate the building and has received promises for
supplies and services from individuals and
businesses to help set up the new town hall.

Fraudulent Merchant Accounts in South
Florida. Back in January of 1996, the American
Express Company notified the Miami field office of
the United States Secret Service that they had
discovered a scheme to create fraudulent merchant
accounts. It seemed that certain persons were
setting up merchant accounts over the telephone
usually claiming that they were engaged in scuba
diving or travel related businesses. The suspects
then utilized point of sale terminals to post charges,
generally between one and five thousand dollars, to
these accounts. The American Express card

FOSTERING LAW ENFORCEMENT COOPERA TION


Exhibit I

Material Weaknesses ....... 0.0... c cece ett ene nents 56
Exhibit II

Reportable Conditions .......... 0... e eee e eet eee e erect een e ee 67
Exhibit III

Status of Prior Year Findings ............ 0.0.00 c cece eee eee eens 77

Section IV:
Supplemental Information ........ 0602-0. e cece cece teen teeeeeeeeee
Section V:

Other Accompanying Information ........... 6.060 e cece etre c eee teen ent e eee eeee




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 systems are maintained primarily on a cash basis.
In addition, the supporting computer systems maintained by each enforcement bureau do not
interface with one another or with the Fund's general ledger to ensure that all transactions are
accurately and timely recorded. To produce accrual basis financial statements that can be
substantiated through an audit, year end manual procedures for each enforcement bureau are —
developed. The Fund's management provided each bureau 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 is recognized when the underlying goods have been re-
ceived or the services have been performed. Furthermore, during the fiscal year,
reimbursement requests were not submitted regularly and on a timely basis.

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 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.

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

Distributions Payable - The Fund, under certain laws and regulations, has the authority to
share forfeited property and currency with federal, state, and local agencies or foreign
countries that participate either directly or indirectly in a related seizure. In addition, the

54

INDEPENDENT AUDITOR’S EXHIBIT I


Total Financing Sources
End of Year (Continued)

(Dollars in Millions)
1999 1998
Brought forward $310 $226
Others —l 1
Subtotal, financing from
public sources 3 227
ia’ Ve tl fai
Investment interest income 23 21
Transfer(s) from ONDCP 0 36
Subtotal, financing from
intragovernmental sources 23 _57
Total, gross revenues and
transfers in 334 9-284
Less: Applied Financing
Public
Equitable sharing - foreign
countries (2) qQ)
Equitable Sharing - State and
local law enforcement (150) (72)
Victim restitution (2) fan)
Subtotal, financing applied to
revenues earned with the
Public (154) (74)
Intragovernmental
Equitable sharing - other
federal agencies* 2 _@
Total, applied financing 466) (82)
Total Financing Sources $168. $202.

* Pursuant to Title 31 U.S.C. 9703(n).

Currency and Monetary Instruments. The
Fund's primary source of revenue is forfeited
currency and monetary instruments. For FY 1999,
revenue from forfeited currency and monetary
instruments totaled $261 million, or 84 percent of
total revenues from public sources, versus $167

million, or 74 percent of public source revenue in
FY 1998.

Sale of Forfeited Property. The revenue from the
sale of forfeited property was $23 million in FY
1999 and $37 million in FY 1998.

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 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 1999,
these proceeds from joint investigations with other
Departments totaled over $12 million, and for FY
1998 they totaled over $13 million.

Investment Interest Income. The Fund is
authorized to invest cash balances in Treasury
securities. On September 30, 1999, investments
totaled $540 million. This amount included $287
million invested from balances of the Fund and $253
million invested from seized currency balances not
yet forfeited. Interest income earned on these
investments during FY 1999 totaled $23 million, up
from $21 million in FY 1998.

Applied Financing. The total applied financing
from the Fund increased to $154 million in FY 1999
from $74 million in FY 1998. The increase is
attributable to another banner year for equitable
sharing with our state, local and foreign law
enforcement partners. FY 1999 financial statements
indicate equitable sharing with state and local, and
foreign law enforcement agencies of over $152
million as compared to just over $73 million in FY
1998. These expenses represent forfeited dollars
shared directly with state and local and foreign law
enforcement agencies for their role leading to the
seizure of assets ultimately forfeited to the
Department’s asset forfeiture program. The
Department’s policy generally restricts the use of
these funds by the state and local, and foreign law
enforcement agencies to law enforcement purposes.
Through this policy, the Federal asset forfeiture
program intends to encourage the continued

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

20


Sete ee

another firm, allowing Hindelang and his partners
to sell half their interests.

Over the last few years, however, a Customs
Service special agent and an investigator from the
Monroe County Sheriffs Office seriously
questioned just how much money Hindelang had
made during his heyday of narcotics trafficking
and just what had become of it. It was soon
apparent that the $640,000 he had forfeited earlier
was only a small fraction of his overall smuggling
profits. Thanks to their painstaking efforts, they
found a money trail that appeared to lead to Teal
estate in Colorado, a ranch in Montana and
possibly even a cable television company in Costa
Rica.

In 1997, Hindelang was first confronted with what
the investigators had found. He acknowledged that
there were indeed other assets traceable to his
trafficking activities and they were still concealed
offshore. Within the year, he had accounted for
these assets and agreed to forfeit $50 million to the
United States. That sum was repatriated and in
June of 1999 was entered as a deposit to the
Treasury Forfeiture Fund (the Fund).

Tobacco Smuggling Nets Forfeiture and Fine.
This case originated in 1993 when special agents
of Treasury’s ATF assigned to the Buffalo and
Albany field offices began to look at illegal
diversions of cigarettes, manufactured in Canada,
and sent to the United States for trans-shipment to
third world countries. Over five years later, in
December of 1998, the work of many investigators
and prosecutors paid off when Northern Brands
International, a Canadian subsidiary of tobacco
giant RJ. Reynolds, pled guilty to aiding and
abetting customers in the complex diversion
scheme. Upon acceptance of the pleas, the Federal
Court imposed a $5 million fine and ordered the
corporate defendant to pay another $10 million to
the Fund.

The object of this criminal activity was straight
forward - avoid paying taxes to both the United
States and Canada. Cigarette smuggling had
become a very lucrative business in the early
1990's as the Government of Canada sharply

increased tobacco taxes in an effort to reduce
smoking. By 1994, Ottawa and several Provincial
governments dramatically slashed their tobacco tax
rates in a bid to stop rampant smuggling but
obviously not enough to remove the incentive to
the defendants involved in the Northern Brands

operation.

Northem Brands Intemational conspired to help the
smugglers by falsely telling U. S. Customs officials
that the Canadian-Brand Export A cigarettes that
they had shipped to the United States were bound
for Russia or Estonia. That falsehood allowed their
customers to avoid paying an excise tax of
$100,000 per truckload that would have been due if
Customs had known that the cigarettes were going
to be sold in the United States. Then, instead of
going on to Eastern Europe, these cigarettes were
sold to wholesalers on the Akwesasne Indian
Reservation in northem New York, who smuggled
them across the border and back into Canada. Once
back in Canada, these Export A cigarettes were
sold on the black market, avoiding Canadian
tobacco taxes.

The case that had started out with ATF field offices
in upstate New York had, by the end of 1998,
resulted in the indictments of twenty-three
individuals and their companies on charges of
conspiracy, money laundering and other Federal
violations in connection with the illegal diversions
of cigarettes and liquor. The successful Federal
Prosecution of the co-conspirators was due to the
Cooperative efforts of ATF, the IRS Criminal
Investigation Division, the Customs Service, the
United States Border Patrol, the Federal Bureau of
Investigation (FBI) and the New York State Police.

Nevada’s Mustang Ranch Closed. On many of
the items in a souvenir shop - the hot pink tee
shirts, the coffee mugs, the styrofoam beer coolers,
the shot glasses and golf shirts - it billed itself as
the “World Famous Mustang Ranch.” That tradition
of notoriety came to a somewhat subdued close
around 5 p.m. on August 9, 1999, when special
agents from the Criminal Investigation Division of
IRS and the Customs Service as well as seized
Property managers took possession of this oldest of
Nevada’s legalized brothels.

DETERRING CRIMINAL ACTIVITY


financial management, the Executive Office for
Asset Forfeiture continued the process of
reviewing and updating the policy guidelines
disseminated by the office.

Seizing Motor Vehicles, Payment of Liens and
Official Use Requirements. In FY 1999, the
Executive Office for Asset Forfeiture issued
Directive No. 33 - Seizure of Motor Vehicles,
Payment of Liens and Official Use Requirements.
(the Directive) The purpose of the new directive is
to update the policies for seizing, forfeiting and
retaining motor vehicles for official use found in
the Department’s Guide to Equitable Sharing for
Foreign Countries and Federal, State, and Local
Law Enforcement Agencies (dated October 1,
1996), and EOAF Directives 20 and 22.

Highlights of the Directive are as follows:

1. Establishment of a $5,000 minimum net
equity requirement for retention of motor
vehicles for official use;

2. Elimination of the $25,000 ceiling for
payments of liens to retain vehicles for
official use; and

3. Establishment of a uniform motor vehicle
appraisal methodology using the
N.A.D.A. “Blue Book’s” “low retail
value.”

From time to time, it is necessary to update
official use policies of the Treasury asset
forfeiture program to ensure that while the goals
and objectives of the program are satisfied, the
relative law enforcement needs of our
participating agencies are also satisfied. In this
particular instance, Fund Management determined
that more than one policy associated with the
retention of vehicles for official use was out of
date and in need of updating.

FY 1999 Audit. The Fund's independent auditors
have given the FY 1999 financial statements an
Unqualified Opinion.

Program Performance

Financial and Program Performance - What is
needed and planned. OMB Bulletin No. 97-01,
Form and Content of Agency Financial Statements,
as amended, 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 1999 financial
statement audit.

Material Weaknesses. The following material
weaknesses were identified in the FY 1999 audit
report:

0) Accounting records are maintained on a cash
basis;

(ii) | The Fund’s general ledger does not record
all balances and transactions that are
reflected in the financial statements;

(iii) | 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;

Reportable Conditions. The following reportable
conditions were identified in the FY 1999 audit

report:

(i) Forfeited property is not recorded in the
subsidiary system during the year at its fair
value at the time of forfeiture;

(ii) | The Fund does not adequately monitor
property placed with the National Seized
Property Contractor (the Property
Custodian) during the year, and as a result
the Fund is unable to accurately report the
quantity and value of property held by the

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999

a


or understated as the case maybe. Also, the Fund will be deemed to be in non-compliance
with the financial management system requirements for seized and forfeited assets, issued
by the Joint Financial Management Improvement Program (JFMIP).

RECOMMENDATION

We recommend that the following actions are followed up by the Fund for either immediate
implementation or incorporated as a part of future correction action plans.

5.1

@

(ii)

(iti)

(wy)

5.2

Seizure Activities

Differing property identification numbers

Issue procedures to each law enforcement bureau tegarding the basic requirements for
tracking an asset and specify the Procedure to be followed by law enforcement bureaus with

non-SEACATS tracking numbers. If management requires that both tracking numbers be
recorded, then the procedures should state this Tequirement and insist on compliance.

Untimely and inaccurate recording of assigned values

Issue procedures to each law enforcement bureau regarding the recording and processing
timelines that are to be adhered to.

Untimely recording of seized and forfeited property

Issue general procedures tegarding the lines of communication between bureaus
(Headquarters and Field Offices), management of the Fund, the seized property custodian
(EG&G) 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.

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 to accommodate this information as it is available.
Asset Disposition Activities

Asset Specific Expenses are not Recorded and Accounted for Accurately by the Fund

Fund management must consider meeting with EG&G to determine the reason/cause for the

82

INDEPENDENT AUDITOR’S EXHIBIT II


we

EFFECT

Due to non-integrated inventory and general ledger systems, the lack of inventory reconciliation and
untimely recordation in the general ledger results in the Fund's inability to provide accurate and
timely financial information in a manner supportive of management's program and administrative
responsibilities.

RECOMMENDATION

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

1. Quarterly reconciliations between Customs and EG&G's inventory reports must be
conducted to ensure that the property held as reported by Customs is compared with what
has been included in the custodian's (EG&G) system and any differences identified and
resolved timely.

2. All law enforcement agencies participating in the Fund must conduct a physical inventory
of properties held prior to year end and compare the information compiled to their respective
inventory records and EG&G’s inventory records.

3. IRS, Secret Service, and ATF must manually reconcile assets in EG&G’s custody against
EG&G inventory produced by SEACATS. If it continues to be impossible to record
inventory properly in SEACATS for these bureaus, the Fund’s Management should consider
having EG&G conduct the year-end inventory using reports from the asset tracking systems
used by IRS, Secret Service and ATF (AFTRAK and CATS), rather than SEACATS.

MANAGEMENT RESPONSE

Management Assessment on Progress: Fund management concurs with the auditor’s
recommendation that quarterly reconciliations between the law enforcement bureaus’ inventory
reports and those of EG&G’s be performed. This will ensure that the property held as reported by
the law enforcement bureaus agrees with the amount recorded and reported by EG&G.

Discussion/Background and Planned Action: Fund management will continue to work to resolve
this reportable condition. It is Fund management’s understanding that the national property
contractor will resume recording seized property in the SEACATS system, which will then be
reconciled to the information recorded by AFTRAK and CATS data where applicable. Fund
management will work with Customs to ensure that SEACATS data integrity is routinely verified
prior to year-end physical inventory requirements.

INDEPENDENT AUDITOR’S EXHIBIT II 15


When Joe Conforte bought the Mustang Ranch in
1967, he had already served time for extortion and
tax evasion. He was one of the principal movers
behind the push for the legalization of prostitution
in Nevada. His efforts were rewarded in 1971
when Storey County, home of the Mustang Ranch,
legalized its operation as a brothel. The ranch
survived being burned to the ground in 1975 ina
suspected arson and Conforte quickly rebuilt it.
The next year, the boxer, Oscar Bonavena, who
was managed by Conforte’s wife, was shot to
death outside the ranch. Conforte continued with
his ownership until 1990 when it was seized by the
IRS for unpaid taxes. The ranch was then sold for
a fraction of its value at a tax sale with Conforte
ater fleeing the country to avoid being prosecuted
on tax charges.

Ina thirty-three count indictment, made public in
the summer of 1998, the government charged that
the subsequent owners of the Mustang Ranch were
actually fronts for Conforte and had purchased it at
his direction and continued to operate it for his
benefit. In the summer of 1999, a Federal jury in
Reno found two of the ownership companies
operating as A.G.E. and the brothel’s madam,
former Storey County Commissioner, Shirley
Colletti, guilty of racketeering, wire fraud and
conspiracy. Conforte himself remains a fugitive
believed to be living in South America. At the
close of the trial, the judge entered a preliminary
order allowing the government to seize the brothel
but citing the need for the ranch’s employees to
find new jobs, he delayed the order for a month.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


5.2

Asset Disposition Activities
Asset Specific Expenses are not Recorded and Accounted for Accurately by the Fund

The Fund relies on the property custodian, EG&G Dynatrend (EG&G) for providing asset
specific expenses. This information is not requested by the Fund unless the case is subject
to asset sharing. Additionally, in certain instances, asset specific expenses are not provided
by EG&G for various reasons. Those instances are not followed up by the Fund as to the
reasons why certain expenses could not or have not been provided.

EFFECT |
3.1 Seizure Activities
fi) Differing property identification numbers

(7)

(iii)

(iv)

5.2

Properties remain unidentifiable until extensive research is conducted. The Fund could
ultimately lose track of the assets concerned.

Untimely and inaccurate recording of assigned values

The value of properties held by the Fund is underestimated to the extent of those assets that
have not been valued. Additionally, it compounds the work to be done at year end for
accounting of property for year end financial Teporting.

Untimely recording of seized and forfeited property

The erroneous recordation of Property transactions results in an overstatement or
understatement as the case maybe of the value of property at any time, and will impact
valuation considerations for year end financial reporting purposes.

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
Finance 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.

Asset Disposition Activities

Asset Specific Expenses are not Recorded and Accounted for Accurately by the Fund

The amount calculated by the Fund for distribution related to asset sharing maybe overstated

INDEPENDENT AUDITOR’S EXHIBIT II 81


SECTION IV
SUPPLEMENTAL FINANCIAL AND MANAGEMENT
INFORMATION
(Unaudited)


Lack of Sales Revenue Reconciliations

The Fund does not adequately monitor the sale of property by EG&G during the year. It
does not reconcile properties which it has recorded as sold to EG&G reports of properties
sold on an asset by asset basis. Also, it does not reconcile proceeds received from EG&G
for sale of properties to EG&G sales Teports. Consequently, the Fund is unable to assess,
from time to time, whether it has received an accurate and complete accounting of all
Properties disposed of by EG&G, or whether it has received all proceeds from the sale of
properties during the year.

Current Year Reportable Conditions:

The following additional reportable conditions were identified for FY 1998:

5.

Inadequate Property Management Functions

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:

5.1 Seizure Activities
(@) Differing property identification numbers

Differing identification numbers are being used to track the seized and forfeited property
(assets). The law enforcement bureau originating the seizure assigns a case/seizure number
that is supposed to facilitate asset tracking through seizure, forfeiture, holding and
disposition. 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 bureau
tesponsible for originating the case. The Customs Accounting Services Division (ASD)
records transactions related to these properties using either the property custodian’s assigned
number or the law enforcement bureau’s tracking number, and in certain instances appears
to have assigned a tracking number to record the transaction that has no relationship to either
the originating bureau’s or the Property custodian’s tracking number. In certain instances,
the case/seizure number is unidentifiable or erroneous resulting in properties that remain
unidentifiable until extensive research is conducted.

(ii) Untimely and inaccurate recording of assigned values

Values assigned to seized Property are not captured in a timely and accurate manner in the
Fund’s asset management records. Upon seizure an asset is assigned a value (appraised

51


EFFECT

The Fund's maintenance of the general ledger on a cash basis and the untimely recordation of
transactions distorts the information reported to Fund management at any time during the year. This
prevents the periodic preparation of accrual-basis financial information on which management can
base its daily decision making or evaluation of the achievement of the Fund's objectives.

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. 1 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 bureau, 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 bureaus record
lien and mortgage information in their asset 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 bureaus' tracking systems.

Forfeited Currency - We recommend that ASD performs a reconciliation of forfeited
currency between the revenue recorded in the Automated Commercial System (ACS) and
the forfeited currency balance reported in the "Analysis of Changes in Forfeited Property"
schedule required by the Statement of Federal Financial Accounting Standards No. 3
(SFFAS No. 3), Accounting for Inventory and Related Property. However, if the ACS
system is not updated timely with the forfeiture status of seized currency, this reconciliation
cannot provide the information necessary to capture the revenue for currency that was
forfeited prior to year end.

While it may be less efficient, an alternative method to implement these recommendations
is to require each District Coordinator to submit a signed letter on a monthly basis 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.

56

INDEPENDENT AUDITOR’S EXHIBIT I


vw

Chapter 4:

Strengthening Law Enforcement

Federal asset forfeiture funds support Federal law
enforcement and the public they serve in several
important and interrelated ways, In doing this they
realize the intent underlying their enabling statutes.
Before the advent of these funds, forfeiting
criminal assets was very likely to be a drain on law
enforcement resources. That situation existed
because prior to 1984, the proceeds of forfeitures
could only be deposited into the general fund of
the United States. That meant that Federal law
enforcement agencies had to bear the sizeable
costs of seizing property and managing it through
forfeiture and final disposition Strictly out of their
normal appropriations for salaries and expenses. In
a national program that seizes an entire range of
commodities such as property, vessels, vehicles,
aircraft and narcotics, such costs can be
substantial. The more that was seized, the more
these expenses grew and the more time law
enforcement’s special agent had to devote to
Property management issues not necessarily within
the scope of their training or mission.

Since 1984, that situation has been effectively
tumed around with the development and growth of
Federal asset forfeiture funds. Today’s Department
of the Treasury Forfeiture Fund (the Fund)
strengthens law enforcement on several levels.
First and foremost, it pays for most of the costs
associated with the Department of the Treasury’s
(the Department) seizure and forfeiture programs.
This is done through the non-discretionary or
mandatory side of the Fund, which is made up of
a permanent, indefinite _ congressional
appropriation of the receipts in the Fund and is
used to pay the expenses of specific seizures and
forfeitures. The Fund also has a discretionary side
which, in certain years, has consisted of a specific
annual congressional appropriation, again from the
receipts of the Fund, and has been used to pay
expenses more generally supportive of the
Department’s seizure and forfeiture program.
Amounts in the Fund that are derived from the
deposit of shares received in recognition of

Treasury contributions to the forfeitures of non-
departmental agencies, also known as reverse asset
sharings, and surplus amounts remaining after all
non-discretionary and other obligations have been
met, are two additional categories of funding
resources that strengthen Treasury and other
Federal law enforcement agencies.

Placing the value of forfeited assets in the Treasury
Fund sets the stage for a reinvestment of these
monies in a variety of ways that enhance law
enforcement. Whether this value is used to pay
contractor employees to provide program support
and property management services to free up
investigators to attend to their principal tasks, or is
shared equitably with state, local and foreign
governments, or is applied to Treasury law
enforcement initiatives, the Fund is constantly
about the work of strengthening law enforcement.
The payment authorities of the Fund underwrite a
law enforcement presence at home and abroad that
is more capable of meeting the challenges posed by
increasingly astute and globalized criminal
organizations. A sampling of how the Fund helped
bolster enforcement capabilities during FY 1999
will give some idea of how it has served its
purpose in this regard.

The Youth Crime Gun Interdiction Initiative.
Newspaper reports of big, unusual and even exotic
seizures and forfeitures sometimes obscure what
later happens to these and other monies that wind
up as deposits in the Fund. During FY 1999, the
Fund once again allocated resources to ATF for the
explicit purpose of supporting the Youth Crime
Gun Interdiction Initiative - a program designed to
address, head-on, the gun-related violence
confronting America’s youth. Some examples from
the Fund’s case files show how the Fund’s dollars
have been put to work.

. Philadelphia, Pennsylvania - Bringing
your product to the likely buyer has always
been a maxim of successful businesses.

STRENGTHENING LAW ENFORCEMENT


lack of information related to asset specific expenses. Fund management must take steps to
correct the problem once the proper cause has been identified.

MANAGEMENT RESPONSE

Management Assessment on Progress: Fund management has recognized these important financial
information deficiencies. Most if not all of the auditor’s recommendations are planned by Fund

management for implementation in the course of deploying the AFTRAK system, and in working
with Customs.

Discussion/Background and Planned Action: Fund management will continue to work to resolve
this reportable condition in full.

83


Treasury’s asset forfeiture program’s financial and
internal controls.

Summary of Program Performance

As the fifth year in which the Fund has had in
place performance indicators, results from FY
1999 allowed for comparison with results from
FY 1998 as a means of monitoring forfeiture
program operations. For FY 1999, the
performance measures selected for monitoring
were: (i) processing time for equitable sharing
payments for currency assets with a target time
frame of 7.3 months; (ii) days elapsing between
forfeiture of real property and disposal through
sale with a target time frame of 12 months; (iii)
timely processing of the administrative seizure
inventory with a target time frame of 75 percent
being processed in a timely fashion; and (iv) the
extent to which mandatory operational costs of the
asset forfeiture program are funded by current
year regular revenue.

Although we did not achieve performance targets
in all of our performance measures, we came very
close, and Fund Management considers this year’s
performance to be largely satisfactory if not on
target for each measure. Data on the timely
processing of equitable sharing payments for
currency assets indicates that performance
improved from 8.9 months in FY 1998 to 73
months in FY 1999. In addition, while
performance against this measure improved
significantly during FY 1999, achieving our target
with a healthy margin, the number of payment
transactions also increased from nearly 4,900 in
FY 1998 to over 5,200 in FY 1999. The dollar
value of FY 1999 equitable sharing expenses
increased by 108.2 percent over the FY 1998
expense level, with expenses of approximately
$152 million in FY 1999, up from expenses of
$72 million in FY 1998. The FY 1999 figure
includes estimates of equitable sharing expenses
amounting to approximately $29 million. This is
because beginning FY 1999 Fund Management
decided to expense a portion of all known
equitable sharing requests pending final approval
at year end.

Though missing the performance target of 12
months, the timely disposal of real property took
12.95 months on average after forfeiture during FY
1999, an improvement from 13.84 months in FY
1998. About sixty nine and a half percent (69.5%) of
open administrative seizure cases at the end of FY
1999 were within prescribed time frames, exceeding
our FY 1998 performance of 68 percent. The
performance fell short of the target rate of 75
percent for the year.

Regular revenue to the Fund for FY 1999 covered
regular expenses to the Fund by 107 percent, more
than meeting the annual target of 100 percent.

Processing time for equitable sharing payments.
Equitable sharing of the Fund’s revenue continues to
be one of the most visible operations of the Treasury
asset forfeiture program. The reason this measure is
important to Fund Management is that 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 and can distort financial data needed
for resource management planning.

Data indicates that the average time to make an
equitable sharing payment for a currency asset
decreased from 8.9 months in FY 1998 to 7.3
months in FY 1999. Performance against this
measure improved by over a month and a half,
inspite of the fact that FY 1999 was another banner
year for equitable sharing with our state and local
law: enforcement partners. FY 1999 financial
statements indicate equitable sharing with state and
local law enforcement agencies, and foreign
countries of over $152 million as compared to $72
million in FY 1998. The associated transaction
volume increased to a remarkable 5,200 separate
transactions, up from 4,900 in FY 1998 and 2,100 in
FY 1997. No additional staff resources were applied
by the program toward this achievement.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


oy

666} UV3A WOSI4 - 1YOd3Y WANNY GNNS SUNLIAIYOS AUNSVSUL

sso)pie6ay papsooes swe} eul] e:NZ/as jo Jequinu ey) sjuBsaldas Ayiadoid jo ssejo yowe 10) pojuasaid ‘SWA} JO JequINU BY) ‘AJOBa}e9 Jasse Yoea UIYYM S]esse jo

“6861 JeaA jeosy Uj passaroid sased osnzjos 244 sjuesedoyy (z)

"666} JBOK jeoey U) passeroid seses onzjos Zey'p SJUasaiday (4)

“Afjuenb yun Jo einseaw jo yun ey) Jo

‘sadA} Dyjoeds jo x} PayeA ey) 0} ENG.

Ovs'rt  Sooves $ -  (esozN) § S29 vsu'zz $ (cev'oe) Teoo'eze) SF Teor vi) (ose'one) § sorve ocsees § terri 2/9700 $ 1eloy pueis
Ovs's «Li b'vez > (seat) sz9 g0z'at (zov'0z)  (eva'ee) (eoe'rt) (ize'asz) Sone tht eve. €2z'vh O1s'vaz teioians
ozz'z —ee'e -  (4e6'2) (siz) 910% {ove's) — (vo8'st) (gec') — (ges'en) vii 0st's9 S90'E Oss'aL
st L92'6 7 ee - 116 (a) {ove"t) (eu) (ez¥'22) zz vee've oz Lez'z
se 1g0'2 (008) (9) (eoe) (oe1) (oze'9) (zy) (es6'2) a zie sti see's
vSe'Lt = Lb¥'69h > (gze'9) ee 40'rE (oge'21)  (vez'4z) (eec'6) = (zte'z91)—so0'ez zest s99'0! gso'cer Anedoig jex2Ua9
992 2ee'zL (9249) (ve) (Ly6'2) (een) (ze6°91) (og) (bee'en) GLE 6z0'¥ zse = v08'8B. Auadoig 105
7 bye LE - ow : 966't : (z6s'9) : (sve'r) (2) pye's : e6r'st sjuawnyjsuy
Aigjeuow 18410,
VErOOE $ > BT $F we S$ Wray ¢ = WET $ WH BRE Dt $ Aouauing
sequny = onjea sequinn —enjen soquinn one, Jequinn —enjen, sequinyn = enyea, sequing enjen
SOIGOS SOO seweG SOINzeS

“mousse | NOMEN USUTENEY

po

ROUOTING PUS ATOTOTS POLSS Uy SOBUETD Jo eATEUY

thes

“SPUBSNOY) Uy 8} NEA Je10Q “AOUaGE YoRa jo sjUOWA}E}s je;UeUY oY) UJ pa]asaid

18 puey Uo AQuauINd pue AWadoud pozjas jo sjunowe paujquios ay) juaseides MOjaQ,

36 SION


(y)

5.2

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

Significant delays were noted between the date the change in status occurred and the time
of recordation in the various asset 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 bureaus 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 maybe incomplete.

Asset Disposition Activities
Asset Specific Expenses are not Recorded and Accounted for Accurately by the Fund

Asset specific expenses generated from asset disposition activities are not recorded and
accounted for accurately by the Fund in the various asset tracking systems. As a result, the
Fund is unable to accurately assess the costs related to individual seizures. The Fi und’s
property custodian EG&G Dynatrend (EG&G) incurs costs on behalf of the Fund from the
time of seizure until the asset is ultimately disposed. The Fund requests cost information
from EG&G from time 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 EG&G. In some instances, the cost data provided
by EG&G is incomplete, not supported, or absent due to various reasons. The net amount
arrived at for equitable sharing purposes may be overstated or understated as the case may
be. The Fund does not monitor costs for those assets not subject to equitable sharing.

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.

CRITERIA

The Budget and Accounting Procedures Act of 1950, 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. 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

INDEPENDENT AUDITOR’S EXHIBIT II 79


Gardiner, Kamya & Associates, P.C.

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 sheets and the related statements of net
costs, 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, 1999 and 1998. 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. 98-08, Audit Requirements. for Federal Financial Statements,
as amended. 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
respects, the financial position of the Fund as of September 30, 1999 and 1998, 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 report dated
January 7, 2000, on our consideration of the Fund's internal control structure and a report
dated January 7, 2000, on its compliance with laws and regulations.

Member of the American Institute of Certified Public Accountants


With this concept in mind, Bonita Marshall
and her compatriot, Robert Townes, a
convicted felon, would cruise the high
crime areas of North Philadelphia. At a
suitable spot, Townes would stop his car,
get out, pop the trunk and negotiate the
sale of AK-47 type assault rifles to persons
suspected of being local drug traffickers.
Townes and Marshall conspired to
purchase over fifty semiautomatic rifles,
boxes of high-powered ammunition, as
well as accessories such as hundred round
drum magazines, high-powered scopes and
laser lights. Seven of his sale rifles were
recovered with one linked to homicides
and at least one sold to a juvenile. In the
courtroom, the jury found the two guilty on
all counts, including firearms trafficking
and possession of a firearms in a school
zone. Townes was sentenced to eleven
years and four months in prison while
Marshall received a sentence of four years
and nine months.

Richmond, Virginia - For three years,
Richmond’s Charlie Boys had gone to war
with other gangs and had their hands in
numerous homicides. One member of the
Charlie Boys was a trafficker who relied
ona straw purchaser to buy firearms at gun
shows and then supply these weapons to
other gang members. ATF, working with
the Street Crimes Unit of the Richmond
Police Department, documented eleven
such weapons of which eight were
recovered in crimes. The trafficking
member of the gang was sentenced to six
and a half years in Federal prison after
pleading guilty to aiding and abetting
illegal possession. Two co-defendants were
sentenced to just under six years each for
their possession of firearms that had been
provided by the gun trafficker. The leader
of the gang was prosecuted separately and
received sixteen years and three months.
All these cases were made under firearms
statutes in conjunction with Project Exile
and the Youth Crime Gun Interdiction
Initiative.

. Cape Girardeau, Missouri - ATF analyses
showed that many of the crime guns
recovered in Washington, D.C., Chicago
and St. Louis had passed through a former
Federally licensed firearms dealer who
resided in Cape Girardeau in southeast
Missouri. Although this dealer had received
and paid for over 1,800 firearms during the
time he was licensed, he only sold 194.
After ATF agents served a search warrant
at his residence, he provided a full
confession and agreed to cooperate with the
investigation. His cooperation helped
uncover a trail of off-paper sales at gun
shows in Kentucky and the identification of
a Nashville youth who regularly placed
orders for these guns, transporting them to
Washington, D.C., for resale to youth gang
members. After engaging in an illegal
transaction with undercover ATF agents,
the Nashville youth was arrested and pled
guilty to numerous Federal firearms
charges in Tennessee.

Asset Identification and Removal Groups. The
United States Customs Service (Customs) has had
forfeiture authority longer than any other Treasury
law enforcement agency. Drawing on its wealth of
asset forfeiture experience, Customs concluded
several years ago that specialized units could
enhance its ability to use this tool in support of its
law enforcement mission. Particularly in the realm
of international investigations, where criminal
proceeds can be moved rapidly around the globe in
attempts to mask their origins, the expertise to
identify and track these assets is critical to an
effective seizure and forfeiture program. Today,
these specialized units within the Customs are
known as Asset Identification and Removal Groups
(AIRGs) and, from an original prototype in the
Miami field office, have been expanded to twenty-
one locations nationwide. In FY 1999, the Fund
supported the efforts of the AIRGs with over $3
million in mandatory funding.

AIRGs help ensure that seizure operations are done
in the right way, with a maximum of precision and
efficiency. The groups are comprised of special
agents, auditors, accountants and contract data

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999


Yes

The results of our tests of compliance with the laws and regulations described in the preceding
paragraph exclusive of FFMIA disclosed instances of noncompliance with the following laws and
regulations that is required to be reported under Government Auditing Standards and OMB Bulletin
98-08, as amended, 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
intemal contro] 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 15, 1999, the Fund’s internal control structure has certain
material weaknesses which result in noncompliance with this Act. Most of the
material weaknesses require significant computer system improvements to correct.
Until the system enhancements can be implemented, 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 Tequired to be
reported under Government Auditing Standards or OMB Bulletin 98-08, as amended.

The report of the other auditors on the substantial compliance of Customs with the requirements of
FFMIA disclosed instances where Custom’s financial management systems did not substantially
comply with Federal Financial Management Systems Requirements. These instances and Customs’
planned remedial actions and time frames to implement such actions are described in the schedule
titled “Open Section 4 Non-conformances as of September 30, 1998" on page 47 of the U. S.
Customs Service Fiscal Year 1998 Accountability Report.

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 Congress. However, this report is a matter of public record,
and its distribution is not limited.

), f | kangen Arete

January 15, 1999

47


wow Le

SECTION I
OVERVIEW


EFFECT

The lack of independent verification of revenue earned from sales of inventory items and the absence
of reconciliations to substantiate sales proceeds owed to the Fund, inhibits the Fund’s ability to
adequately demonstrate the safeguarding of Fund assets and proper and complete recordation of
revenue.

RECOMMENDATION
We reaffirm our recommendations from previous financial statements audits that:

1. Sales be monitored by a representative of the Fund, independently of EG&G. This
Tepresentative should compile records of sales, by seizure number which should be later
reconciled to EG&G’s sales reports. Alternatively, if a record of sales by seizure number
cannot be compiled by the Fund’s representative, then EG&G should be requested to provide
an analysis of the sales by seizure number that agrees to the amounts deposited by EG&G.
Any differences should be immediately resolved with EG&G.

2. ASD reconcile deposits from EG&G by seizure number on a monthly basis and investigate
any differences immediately.

MANAGEMENT RESPONSE

Management Assessment on Progress: Fund management has worked to gain contract support to
correct this program deficiency and anticipates that this reportable condition will be corrected during
FY 1999.

Discussion/Background and Planned Action: Fund management will continue to work to resolve
this reportable condition by the end of FY 1999.

INDEPENDENT AUDITOR’S EXHIBIT IT 71


Treasury Forfeiture Fund
Statements of Changes in Net Position
September 30, 1999 and 1998

(Dollars in Thousands)
1999 1998
Net Cost of Operations $_186.929  $_130,504
Financing Sources (Non-Exchange Revenues):
Intragovernmental
Investment interest income 22,789 21,221
Public
Forfeited currency and monetary instruments 261,255 167,183
Sales of forfeited property net of mortgages and claims 23,192 36,656
Proceeds from participating with other Federal agencies 12,420 13,569
Value of property transferred in equitable sharing 6,385 5,528
Payments in lieu of forfeiture, net of refund 5,536 1,754
Reimbursed costs 2,006 1,997
Others 862 —_ 857.
Total Gross Non-Exchange Revenues 334,445, 248,765
Less: Equitable Sharing
Intragovernmental
Federal 112,058) — _(8.454)
Public
State and local agencies (150,480) (71,934)
Foreign countries (2,416) (1,179)
Victim restitution (1.465) (1.473)
154,361) (74,586)
Total Equitable Sharing (166,419) (83,040)
Total Non-Exchange Revenues, Net 168,026 _ 165,725
Transfers-In
Intragovernmental
Transfer from ONDCP —-—— —s-_- _ 35.679
Total Financing Sources 168,026 201,404
Net Results of Operations . (18,903) 70,900
Net Position-Beginning of Year 343,613. 272,713
Net Position-End of Year $324,710 $ 343.613,

The accompanying notes are an integral part of these financial statements

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1999
33


6. IMPROPER RECORDING OF REMISSIONS/RETURNS_
(FISCAL YEAR 1998 CONDITION)

CONDITION

All or part of amounts related to remissions/returns of seized and forfeited currency to individuals
who have successfully challenged the Government’s right to seizure were recorded by the Fund as
revenue, thereby overstating the revenue of the Fund. In other instances, significant delays existed
between the order to remit as per the disposition instructions and the time of payment. In other
instances, although disposition instructions were clear as to the distribution of the Funds, these
instructions were not adhered to for the processing of these transactions. Such instances were only
corrected over an extended period of time. In other instances, although remissions/returs were
accounted for correctly by the Fund, these were not properly captured by the asset tracking systems
maintained (where applicable) by the various law enforcement bureaus participating in the Fund.

CRITERIA

Remissions/retums represent amounts that are required to be returned to the victim. This decision
is rendered by the court and is stipulated in the Forfeiture Order or Court Orders both of which are
documents issued by a Court after due process.

CAUSE

The Customs’ asset tracking system, SEACATS, could not track Partially forfeited currency cases
for Customs related remissions/returns due to systems related deficiencies. Non-Customs bureaus
on the other hand, transferred the correct forfeited amounts to the Fund and refunded/remitted the
correct amounts, but these transactions were not recorded correctly in their individual asset tracking
systems. In certain instances, the improper recording of remissions and returns were due to the
improper interpretation of Forfeiture Orders and Court Orders that provide instructions for
remittance and/or partial forfeitures.

EFFECT

Any amounts that have not been remitted/returned will ultimately result in an overstatement of
revenue with respect to forfeited currency.

RECOMMENDATION
We have the following recommendations:
1. The Fund must take action to correct SEACATS deficiencies relating to partial forfeitures.

Alternatively, if all asset tracking systems used by the various law enforcement bureaus
participating in the Fund have similar systems deficiencies, then, corrective action must be

84 INDEPENDENT AUDITOR’S EXHIBIT I


NOTES TO FINANCIAL STATEMENTS

te 1: orti ti

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 TFF Act), and is codified at 31 U.S.C.
9703. The Fund was created to consolidate all Treasury law enforcement agencies under a single forfeiture
fund program administered by the Department of the Treasury (Treasury). Treasury law enforcement
agencies 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
Firearms (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 (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 agencies. 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 20 X 5697. From this no-
year account, expenses may be incurred consistent with 31 U.S.C. 9703, as amended. 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).

The 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 that have been 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.

Basis of Accounting

The Fund began preparing audited financial statements in fiscal year 1993 as required by the Fund’s
FINANCIAL STATEMENTS

36