presented in the following table. The large
increase in total liabilities covered by
budgetary resources is principally associated
with the large increase in FY 1998 seized
currency balances.

Revenue from forfeited property held for sale is
deferred until the property is sold. When
compared to FY 1997, less forfeited Property
was held for sale on September 30, 1998, which
accounts for the decrease in deferred revenue
from forfeited assets of $14 million. Accounts
payable to both intra-governmental accounts
and public related accounts totaled $30 million
on September 30, 1998, as compared to $28
million on September 30, 1997,

Seized currency totaled $423 million on
September 30, 1998, forming the largest
liability of the Fund, and is covered in full by
deposits in the Customs Suspense Account,
investments in Treasury securities, cash on
hand, and seized bank accounts. The liability
for seized currency compares to a total on
September 30, 1997, of $207 million. The net
position of the Fund on September 30, 1998,
totaled $344 million, as compared to $273
million on September 30, 1997, an increase of
$71 million or 26 percent. However, only the
unobligated balance portion of the net
Position represents unencumbered cash
available for “investment” in program needs by
Fund management. At the end of FY 1998,
the unobligated balance totaled $188
million as compared to $227 million at the end
of FY 1997, a reduction of $39 million, or 17
percent. FY 1997 was an unusual year, in which
long-idle balances of ONDCP’s Special
Forfeiture Fund of over $67 million were
transferred to the Fund, resulting in a large
increase to the end of year unobligated balance
portion of the net position.

Liabilities and Net Position
End of Year
(ollars in millions)
1998 1997
Liabilities
Distributions payable
Other federal
agencies/victim restitution $34 $32
ONDCP - 35
State and local agencies
and foreign governments 7 5
Accounts payable
Intragovernmental 25 19
Public 5 9
Deferred revenue from
forfeited assets 24 38
Seized currency 423 207
Total Liabilities 518 345
Net Position
Unobligated balance 188 227
Unliquidated obligations 156 81
Distributions to ONDCP = (35)
Total Net Position $344 $273
Equals:
Total Balance Sheet
Liabilities and Net Position $862 $618
SUMMARY OF FINANCIAL

HIGHLIGHTS

In summary, Fund management concluded FY "
1998 with sufficient resources necessary to
commence the important business of the next
fiscal year, FY 1999, and enough resources to

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


NOTES TO FINANCIAL STATEMENTS

Forfeited Property and Currency - Forfeited Property and currency is recorded in the
accounting system 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 is included
as part of Cash and Other Monetary Assets in the accompanying Balance Sheet.

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

property.

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

Non-entity Assets

Non-entity assets 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 teadily 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 maybe 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 other than monetary instruments is disclosed in the footnotes in accordance
with SFFAS No. 3.

34

NOTES TO FINANCIAL STATEMENTS


NOTES TO FINANCIAL STATEMENTS

Note 2: § tStenif tnt Pokici

Basis of Accounting

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

The Fund’s financial statements are Presented in accordance with the following hierarchy of federal
accounting standards, as prescribed by OMB Bulletin 97-01, Form and Content of Agency Financial
Statements, as amended:

. Individual standards agreed to by the Director of OMB, the Comptroller General, and the
Secretary of the Treasury, and published by OMB and the General Accounting Office;

. Interpretations related to the Statements of Federal Financial Accounting Standards (SFFAS)
issued by OMB in accordance with the procedures outlined in OMB Circular A-134,
“Financial Accounting Principles and Standards;”

. Requirements contained in OMB’s Form and Content Bulletin in effect for the period
covered by the financial statements;

. Accounting principles published by other authoritative standard setting bodies and other
authoritative sources: (i) in the absence of other guidance provided in this hierarchy; and, (ii)
if the use of such accounting principles improves the meaningfulness of the financial
statements.

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

30 NOTES TO FINANCIAL STATEMENTS


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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
cover 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 takes time and varies on a case by case
basis. Through close coordination with the
national seized property contractor, Customs,
the seizing agency, and the U.S. Attomeys, Fund
management continues to provide oversight to
identify ways and procedures to ensure that
forfeited property is disposed of 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 tights 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 management initiative is a more
efficient equitable sharing process which serves
to reinforce the working relationship between
federal, and state and local law enforcement.
Fund management established nine months for
Customs and six months for all other Treasury
enforcement bureaus as a reasonable period to
process administrative seizure cases.

The timely processing of administrative cases
within the prescribed times decreased from 72
percent in FY 1997 to 68 percent in FY
1998, just under the target goal of 69

percent for FY 1998. Referenced figures
exclude weapons cases for ATF because ATF
does not administratively forfeit firearms and
ammunition until judicial activities are
completed as required by the Gun Control Act.
Also excluded from the performance statistic
are two unusual investigations of the IRS that
date back to the early 1990s and include more
than 1,300 lines of investigative tracking that
would distort the routine administrative case
processing performance of the IRS.

Extent to which Regular Revenue Covers
Mandatory Expenses

The objective of this measure is to manage the
Treasury forfeiture program in a way 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 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 or other conflicts of interest
between our program and the due process
rights of citizens. For FY 1998, Fund
management successfully achieved the 100
percent target. A similar analysis reconstructed
for FY 1997, for which this measure was not
established, also indicates that Fund
management achieved the 100 percent
“coverage” ratio of regular revenue to
mandatory expenses of the Fund.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


a:

DEPARTMENT OF THE TREASURY
WASHINGTON, D.c.

UNDER SECRETARY

Department of the Treasury
Office of the Under Secretary
Washington, DC

TO TREASURY LAW ENFORCEMENT:

Fiscal year 1996 marked the fourth year of operation for the Department of the Treasury's
Forfeiture Fund. During these years, the Fund has taken in hundreds of millions of dollars in
receipts and disbursed comparable amounts according to the various payment categories
authorized by law. In doing this, the Fund has served a very valuable purpose. It has taken profit
out of crime and turned it back to constructive societal use. It has provided significant resources
not only for Treasury law enforcement but also for federal, state and local police agencies
throughout the United States and for those foreign governments who have assisted our
international investigations.

We have a double obligation to manage wisely the costs related to our forfeiture program.
First, these expenses are paid from the public monies of the Fund and American citizens deserve
sound financial management. Second, holding down direct costs leaves additional monies
available to support and strengthen law enforcement. The financial statements of the Fund, along
with their notes and accompanying reports and exhibits, are a measure of how we have performed
in meeting that obligation.

This annual report also looks at the four goals of the Treasury forfeiture program and
some related occurrences and achievements. Protecting individual rights, deterring crime,
promoting cooperation and strengthening law enforcement guide the actions of forfeiture program
personnel each day. All the Fund has accomplished in the past fiscal year and since its inception is
a tribute to all the women and men of Treasury law enforcement, to their dedication, to their
service and to their sacrifice. It merits the public's trust and my gratitude.

RAYMOND W. KELLY
Under Secretary (Enforcement)


mi

SECTION III
INDEPENDENT AUDITOR’S REPORTS ON COMPLIANCE
AND INTERNAL CONTROL STRUCTURE



its operation that we consider to be material weaknesses as defined below. These conditions
were considered in determining the nature, timing and extent of the procedures to be performed
in our audit of the financial statements of the Fund as of and for the year ended September 30,
1996.

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

Material Weaknesses

° Accounting records are primarily maintained on a cash basis - The Fund's accounting
records are primarily maintained on the cash basis of accounting, rather than the accrual
basis. 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 bureau 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.

. 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. Rather, procedures
were developed to identify and capture information manually from other bureaus’ systems
in order to compile the financial statements.

The above material weaknesses were identified in the prior year's Independent Auditor's Report
on Internal Control Structure and are of continuing significance.

Reportable Conditions

. Inventory property tracking systems - The four Treasury law enforcement bureaus used
four different inventory tracking systems to prepare the required analysis of changes in
forfeited and seized property schedules. The four 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 analysis of change in
forfeited and seized property schedules.

. Forfeited property valuation - Forfeited property is not recorded in the subsidiary
system during the year at its fair value at the time of forfeiture. An adjustment is made
to the financial statements as of September 30, 1996 and 1995, to record forfeited
property at an estimate of fair value.

The above reportable conditions were identified in the prior year's Independent Auditor's Report
on Internal Control Structure and are of continuing significance.

47


the updated lien and mortgage information obtained
from the national seized property contractor be used
in the agencies’ tracking systems.

Forfeited Currency - ASD performed a
reconciliation of forfeited currency between the
revenue recorded in 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 system is not timely updated, this
reconciliation cannot provide the information
necessary to capture the recognition of revenue for
currency that was forfeited prior to year end.

In accordance with SFFAS No. 3, we recommend
that forfeited currency be recognized as revenue at
the time of forfeiture. The Seized Currency
Tracking System (SCTS) is designed to account for
Customs seized currency from the point of seizure
(at which time it is recorded in a Customs’ Fund)
until the seized currency is either returned to the
violator or forfeited. The F-13 report, produced
from the SCTS, includes information for all
currency seizures presently maintained in security
vaults, bank suspense accounts, and safe deposit
boxes at Customs locations and banks throughout
the country. If the status of seizures are timely
updated in SCTS by the Field Offices and the
system is modified to record the forfeiture date, a
forfeited currency receivable could be recorded by
ASD based on the F-13 report.

However, in November 1996, Customs implemented
a new tracking system, Seized Assets and Case
Tracking System (SEACATS), that eliminates
SCTS. SEACATS is supposed to perform all the
functions previously performed by SCTS and will
also interface with the Fund’s general ledger. We
recommend that: (1) Customs remind the field that
the forfeiture date should be entered into SEACATS
immediately after forfeiture, and (2) check
SEACATS to ensure that it has been designed

properly to recognize revenue upon input of the
forfeiture date.

While it may be less efficient, an alternative methoc
to implement these recommendations is to require.
at each month end, each district coordinator tc
submit a signed letter to the appropriate individual
at the ASD indicating all seizures forfeited during
the current month. A journal entry could then be
recorded in the general ledger to recognize the
forfeited currency as revenue.

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. The
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 indicating the
composition of revenue (that is sales, reimbursed
storage costs, etc.). Based on this information, we
recommend that the ASD accrue revenues not
collected.

Until the necessary system changes can be
implemented, the manual year-end procedures will
continue to be necessary to prepare subsequent year
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.

EXHIBIT ON MATERIAL WEAKNESSES 51


INVENTORY PROPERTY TRACKING SYSTEMS
CONDITION

Customs, IRS, Secret Service, and ATF maintain
seized and forfeited property, the value of which is
included in the Fund's financial statements. In the
previous fiscal year, each bureau prepared an
analysis of changes in forfeited and seized Property,
including the dollar amounts and quantities of
Property. However, no reliance was placed on the
quantities presented because uniform measurements
were not consistently used. In the current fiscal
year, each bureau prepared an analysis of changes in
forfeited and seized property, which included the
dollar amounts of property and numbers of seizure
case records.

The four Treasury law enforcement bureaus use four
different inventory tracking systems to prepare the
required analysis of changes in forfeited and seized
Property schedules. The four 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 analysis in forfeited and
seized property schedules. 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 realized.

CRITERIA

SFFAS No. 3 requires disclosure of an analysis of
changes in forfeited and seized property. The
standard requires presentation of both dollar
amounts and quantity changes. Therefore, each of
the law enforcement bureaus’ inventory property
tracking systems should provide all data necessary
to produce the analysis of changes in forfeited and
seized property, with minimal manual intervention
and reconciliation, and to provide management with
meaningful information.

CAUSE

Customs - The Customs’ tracking system, Customs
Property Tracking System (CPTS), maintains no
historical data. The system overwrites data when
changes are made and leaves no audit trail of when,
how or why the changes were made. Specifically,
any CPTS user can make changes to the system data
to disguise a loss or theft of seized property, without
a record of who made the change. Additionally, the
system does not periodically generate a log of
changes made, for supervisory review.
Unauthorized changes would not likely be detected
during seized property inventories since Custom's
inventory instructions require only that quantity
differences between CPTS and on-hand amounts be
investigated.

ATF - In order to produce the SFFAS No. 3
exhibits, ATF printed a variety of standard reports
and manually manipulated them to meet the
reporting requirements. ATF's system, Consolidated
Asset Tracking System (CATS), does not
automatically perform the required reconciliation
between seized currency and deposits to the
Customs suspense account, or the reconciliation
between forfeited currency and deposits to the Fund.
ATF manually reconciled this information based on
printed reports generated from the CATS system.

Also, difficulties were encountered in obtaining
accurate reports of forfeited items. ATF staff were
often aware that an item had been forfeited because
they were in possession of a Final Order of
Forfeiture. However, the CATS system did not
recognize this item as forfeited and ATF staff were
not allowed to enter a forfeiture date into the CATS
system if the asset had been forfeited judicially.
Consequently, manual adjustments were required in
order to prepare the SFFAS No. 3 exhibits.

Secret_Service - The Secret Service's tracking
system known as Asset Tracking System (ATS),
does not provide historical data on cases which have
had subsequent activity. For example, if the Secret
Service staff were to produce a schedule on October
31 requesting information as of September 30, but
an event occurred during the period of September 30

54 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


ue

Gardiner, Kamya & Associates, PC.

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

Fax: 202 857-1778

Independent Auditor's Report on Internal Control Structure

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

We have audited the financial statements of the Department of the Treasury
Forfeiture Fund (the Fund) as of September 30, 1996, and for the year then ended,
and have issued our report thereon dated January 17, 1997.

We conducted our audit in accordance with generally accepted auditing standards;
Government Auditing Standards, issued by the Comptroller General of the United
States; and the Office of Management and Budget (OMB) Bulletin No. 93-06,
Audit Requirements for Federal Financial Statements. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.

The management of the Fund is responsible for establishing and maintaining an
internal control structure. In fulfilling this responsibility, estimates and judgements
by management are required to assess the expected benefits and related costs of
internal control structure policies and procedures. The objectives of an internal
control structure are to provide management with reasonable, but not absolute,
assurance that:

- transactions including those related to obligations and costs, are executed in
compliance with applicable laws and regulations that could have a direct and
material effect on the financial statements and any other laws and
regulations that the OMB, Fund management, or the Inspector General have
identified as being significant for which compliance can be objectively
measured and evaluated;

- funds, property, and other assets are safeguarded against loss from
unauthorized use or disposition;

- transactions are properly recorded and accounted for to permit the

preparation of reliable financial statements and to maintain accountability
over the assets; and

Member of the American Institute of Certified Public Accountants


Short Term Plans

In the interim, in November 1998, Fund
management formally proposed to deploy a
version of the IRS’ inventory tracking system,
AFTRAK, to the two smaller bureaus of
Treasury’s asset forfeiture program that are
currently using the Department of Justice
Consolidated Asset Tracking System (CATS).
Implementation of that initiative is underway.
In this manner, Fund management intends to
relieve the use of two separate systems used
among the three non-Customs bureaus to one
system used by the three. Fund management has
commenced the AFTRAK contracting work
which will continue throughout FY 1999.
AFTRAK performance related to additional
accrual information will be deferred pending
further management review.

Longer Term Plans

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 inventory
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.
However, until we are confident in SEACATS’”
ability to document inventory, we consider it
imperative that IRS’ AFTRAK system be
diversified and further deployed to the Secret
Service and ATF to ensure their inventory is
tracked in a manner that will support their
inventory reporting.

Until SEACATS performance issues are fully
resolved, Fund management takes the position
that the current priority is the ability to

document the inventory of all our bureaus in a
manner that can be substantiated through audit,
and that the general ledger can be properly, if
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. Currently, both
SEACATS and AFTRAK are integrated with
AIMS only through manual re-entry of select
data. A considerable effort is required to link
these systems. At this time, it is impossible to
identify a realistic date concerning the expected
resolution of this problem.

Material Weakness (iv)

The Analysis of Changes in Seized and
Forfeited Property of the IRS provided to
support FY 1998 balances did not account for
and properly report property transactions
needed for the preparation of the Fund’s
financial statements. Year-end balances
presented in the analysis were incorrect, and in
other instances had not been captured.
Consequently, substantial manual procedures
and reconciliations were necessary to correct
the analysis in order to make it usable for
financial statement purposes. Instructions
issued by Fund management for compiling
year-end inventory information were not
followed.

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 about seized
and forfeited property involved in the IRS asset
forfeiture program. Additionally, Fund
management agrees that such procedures must

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


NOTES TO FINANCIAL STATEMENTS

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

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

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 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 are mainly accrued expenses
authorized by the TFF Act (see “Allowable Fund Expenses”) for which reimbursement 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 assets.

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

Liabilities Not Covered by Budgetary Resources

These amounts represent liabilities of the Fund, which are not covered by available budgetary
resources. Such liabilities consist of contingencies, which is disclosed in note 15.

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).

NOTES TO FINANCIAL STATEMENTS 35


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1996
(Unaudited)

(1) 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 59.

62

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


twee

DEPARTMENT OF THE TREASURY FORFEITURE FUND
ANNUAL REPORT
FISCAL YEAR 1998

Table of Contents

Page No.

Section I: Overview
Chapter 1

Forfeiture Program Goals and Activities... 0... 00.0. ooo cece ccc eecceeee ee. 1
Chapter 2 ;

Program Performance and Financial Highlights ..0.... 00... 6
Section II: Financial Statements
Independent Auditor's Report on Financial Statements 0.0.0... .0. 0.000.000 e-c0005. 21

Financial Statements:

Statement of Budgetary Resources
Statement of Financing

Section III: Independent Auditor's Reports

Independent Auditor's Report on Compliance with Laws and Regulations

Independent Auditor's Report on Internal Control... 2.2... eee eee eee cece eee. 48



a:

SECTION I
OVERVIEW



DEPARTMENT OF THE TREASURY FORFEITURE FUND
ANNUAL REPORT
FISCAL YEAR 1996

Table of Contents

Page No

Section I: Overview
Chapter 1

Safeguarding Individual Rights 6... I
Chapter 2

Deterring Criminal Activity eee cece. 4
Chapter 3

Fostering Law Enforcement Cooperation «6... eee, 8
Chapter 4

Strengthening Law Enforcement... 2... 12
Chapter 5

Program Performance and Financial Highlights»... 16
Section II: Financial Statements
Independent Auditor’s Report on Financial Statements... 6.0.0.0... 24
Financial Statements:

Statement of Financial Position 6... eee 26

Statement of Operations and Changes in Net Position .............00..........., 28

Notes to Financial Statements 2... 30

Section III: Independent Auditor’s Reports on Compliance and Internal Control Structure

Independent Auditor’s Report on Compliance ...........00..00..........., 43
Independent Auditor’s Report on Internal Control Structure 45
Exhibit I. Material Weaknesses .................. 49
Exhibit Il. Reportable Conditions»... 0... 54



forfeitures complement each other and provide for
a comprehensive response to the modern criminal
challenge.

This traditional working together of civil and
criminal forfeiture as effective law enforcement
resources was seriously questioned by rulings of the
United States Court of Appeals for the Sixth and
Ninth Circuits, holding that a criminal prosecution
and a civil forfeiture action for the same offense
violated the double jeopardy clause of the fifth
amendment to the United States Constitution. In the
Sixth Circuit case, United States v. Ursery, the
defendant had agreed to pay cash in lieu of
forfeiting real property that had been involved in the
production of marijuana. Afterwards, the defendant
was convicted on criminal drug charges and
sentenced to prison. The Court of Appeals for the
Sixth Circuit held that any civil forfeiture under the
federal drug statute in this case was punishment for
double jeopardy purposes. In the Ninth Circuit case,
United States v. $405,089.23 in United States
Currency, the government had obtained indictments
against the defendants for trafficking in
methamphetamines and money laundering when it
filed a separate civil forfeiture action against the
proceeds of the narcotics offenses. That civil action
was stayed until the conclusion of the criminal case,
when the district court entered a summary
judgement of forfeiture for the government. Similar
to the Ursery case, the Court of Appeals for the
Ninth Circuit held that all civil forfeitures constitute
punishment and, therefore, are barred by an earlier
criminal prosecution of the property owner.

Treasury law enforcement bureaus would have been
faced with significant difficulties enforcing the
forfeiture provisions under their jurisdictions if the
determination that a civil forfeiture action and a
criminal prosecution for the offense violated the
double jeopardy clause was allowed to stand.
Forfeiture as a critical enforcement tool in the battle
against narcotics and weapons trafficking,
smuggling, financial institution fraud and money
laundering would have been severely limited. The
Department of Justice's Solicitor General filed a
petition for certiorari on August 28th, 1995, and just
over four months later the Supreme Court agreed to

review these rulings of the Sixth and Ninth Circuit
Courts of Appeals.

The Government’s Case

The government based its case that parallel criminal
convictions and civil in rem forfeitures do not
violate the double jeopardy clause of the fifth
amendment on five key arguments:

* Civil in rem forfeiture, that is a forfeiture against
the thing or the property, does not place a
defendant in jeopardy. As a civil sanction, it
does not violate the prohibition against multiple
prosecutions.

* Although defendants should have an expectation
of finality in a criminal judgement, such an
expectation is not disturbed by a civil forfeiture
proceeding because the government is not seeking
to increase a sentence with which it is
dissatisfied. Since the defendants were not in
double jeopardy in the civil forfeiture, there can
be no double jeopardy situation in a subsequent
criminal prosecution.

+ All forfeitures are not punishments and to
categorically declare them so is incorrect.
Forfeiting property that facilitates criminal
activity serves a traditional remedial purpose,
encouraging owners to take care of the use of
their property. Forfeiting other property that
represents the proceeds of crime is designed to
take: the profit out of criminal activity, prevent
unjust enrichment, and serves a remedial rather
than a punitive goal.

© Double jeopardy becomes an issue if a defendant
is prosecuted and punished more than once for
the same crime. This key element of sameness is
lacking in this case, Even if one grants that civil
forfeiture involves an offense, it is not the same
offense that leads to a conviction in the related
criminal case because the elements of the
involved offenses differ. In the civil forfeiture,
it is only necessary to prove that the property
played a role in the commission of the crime,
while in the criminal case, it is necessary to

is)

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


Department of the Treasury Forfeiture Fund
Statement of Financing
For the Year Ended September 30, 1998
(Dollars in thousands)

Obligations and Non-Budgetary Resources
Obligations incurred
Less: Spending authority from offsetting collections and adjustments
Transfers-in/(out)
Total obligations and non-budgetary resources

Resources That Do Not Fund Net Cost of Operations

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

Financing sources that do not fund cost of operations:
Mortgages and claims
Refunds
Equitable sharing (federal, state/local and foreign)
Victim restitution
Total resources that do not fund net cost of operations
Costs Not Requiring Resources

Financing Sources Yet to be Provided

Net Cost of Operations

The accompanying notes are an integral part of the financial statements

$341,922
(8,375)

(44.133)
—289,414

(73,530)

(5,207)
(5,587)
(73,113)

—(1.473)
158.910)

FINANCIAL STATEMENTS
28


we

declare Super Surplus funds at the end of the
year. While Fund management works to ensure
this type of outcome, management also
acknowledges that doing so is a credit to the
hard-working program people across the country
who make countless decisions everyday that
affect the program and its financial well-being.
Without close attention to a myriad of details by
everyone involved in the unique, complex and
dynamic program, the forfeiture program could
be damaged significantly and/or irreparably. The
dedicated individuals assigned to the national
asset forfeiture program are to be commended
for a job well done.

Policy

During FY 1998, Fund management continued
to identify incremental improvements in
operational processes and financial management
operations. Recognizing the close connection
between field operations and proper financial
management, Fund management continued the
process of reviewing and updating the policy
guidelines disseminated by the office.
Additionally, extensive training continued
throughout FY 1998. The purpose of the
training was to ensure that the field staff of the
four Treasury law enforcement bureaus involved
in forfeiture are fully aware of the Fund's
policies and the proper practices associated with
the asset seizure and forfeiture process.

Title Insurance - Improved Efficiency, Real
Property Sales

In FY 1998, the Executive Office for Asset
Forfeiture issued Directive No. 32 - Use of
Special Warranty Deed and Indemnification
Agreement for the Sale of Real Property. From
time to time, the expeditious sale of forfeited
teal property is hampered by what is referred to
as a “cloud on the title.” This refers to the

inability of a title company to satisfy itself that
all liabilities surrounding the property are
Properly identified and resolved.

In order to resolve this issue, effective July
9, 1998, it became the policy of the Department
of the Treasury to issue a Special Warranty
Deed and an Indemnification Agreement, if
necessary, for those properties being sold
without title insurance. Fund management
hopes that this will expedite the sale of those
properties that heretofore have been subject to
long delays in offerings for sale as the result of
clouded title issues.

Performance Indicators

Performance indicators are a tool for ensuring
that a program's operations are functioning as
intended and that the mission is being
achieved. In FY 1995, the Fund began tracking
several performance measures through a
manual data collection and calculation Process.
This effort continued during FY 1998, and, as
aresult, the Fund's auditors were able to review
and validate the information. Additionally, the
Fund identified another measurement
appropriate to gauge Fund efficiency and
effectiveness during FY 1998.

FY 1998 Audit

The Fund's independent auditors rendered an
Unqualified Opinion on the FY 1998 financial
statements.

Program Performance

Finance and Program Performance - What is
needed and planned as prescribed by OMB
Bulletin No. 97-01, Form and Content of
Agency Financial Statements, as amended,
Tequires that agencies include an explanation of

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


‘wa

SECTION II
FINANCIAL STATEMENTS


vwe

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
recorded and accounted for accurately by the
Fund in the various property management
systems.

(vi) All or part of amounts related to
remissions/retums 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 clear as to the distribution of the Funds,
these instructions were not adhered to for the
processing of these transactions.

Fund Management’s Plan Regarding
Material Weaknesses

Background - Material Weakness (i),(ii) and
iii)

We have previously reported that the first three
material weaknesses would be corrected with
the complete deployment of the 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 in
the Fund's FY 1998 audit report.

Recent Activity

SEACATS was approved under Treasury
Directive 32-02, which Tequires that the
development of revenue and financial
management systems be sanctioned by the
Assistant Secretary for Management.

In November 1996, the SEACATS system was
implemented by Customs. The system was
beset with a number of start-up problems,
including data conversion difficulties.
Assisting Customs with resolution of these
problems was among the highest Priorities for
Fund management during FY 1997 and FY
1998. Fund Management has recommended for
approval all recent funding requests by
Customs to meet SEACATS performance
problem correction, and will continue to work
diligently with Customs to identify and resolve
SEACATS performance requirements needed
to support Fund financial statements.

In FY 1998, Customs initiated improvements
to SEACATS which improved the processing
of seized and forfeited currency. In FY 1999,
Customs is enhancing SEACATS reports that
will provide the information to prepare the
Tequired analysis of changes in seized and
forfeited currency directly from SEACATS
information. In addition, enhancements to
SEACATS that will allow for tracking liens
and mortgage payables, and the interface
between SEACATS and the Fund’s general
ledger are currently in the testing phase. Both
enhancements are expected to be implemented
in FY 1999.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

17


NOTES TO FINANCIAL STATEMENTS

te 1: i 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
bureaus under a single forfeiture fund Program administered by the Department of the Treasury
(Treasury). Treasury law enforcement bureaus fully participating in the Fund are: the U.S. Customs
Service (Customs); the Internal Revenue Service (IRS); the United States Secret Service (Secret
Service); the Bureau of Alcohol, Tobacco and 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 bureaus. FinCEN and FLETC did not previously participate in any forfeiture fund, Prior
to Fiscal Year 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 USC. 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 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.

NOTES TO FINANCIAL STATEMENTS 29


Program Costs

(Continued) 1998 1997

Super Surplus 17 (*)

Secretary’s Enforcement

Fund —s —o

Subtotal, non-

discretionary intra-

governmental costs 2 _53

Discretionary”

Intra-governmental

Purchase of evidence or

information (*) 1

Federal law enforcement

conveyance 1 2

Data systems, training

and others 7 (*)

Other —_ —l

Subtotal, discretionary

intra-governmental costs 8 4

Equals:

Total Program Costs $131 $83
*Less than $500,000

° FY 1997 financial statements did not break out this
expense category separately. Amounts for this authorized
Purpose were included under the Intra-governmental cost
category, “Others” for purposes of FY 1997 statements.

° Although the Fund did not have discretionary authority
in FY 1998, these expenses represent obligations of prior
years, the purchases of which were delivered during FY
1998, and, therefore, expensed during FY 1998.

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 EG&G Dynatrend, under
contract to Customs. EG&G provides coverage
for Treasury's forfeiture program through a
nationwide system of 17 warehouse facilities
with a capacity in excess of 470,000 square
feet, as well as supplemental facilities provided
by over 200 active vendors under contract to
EG&G. In FY 1998 EG&G expenses were
approximately $28 million, as compared to
$26 million for FY 1997.

Super Surplus and the Secretary's
Enforcement Fund

Super Surplus expenses totaled $17 million in
FY 1998 as compared to less than 0.5 million
in FY 1997. The Super Surplus is one of the
Fund's permanent spending authorities,
authorized under 31 U.S.C. § 9703(g)(4)(B).
At the end of each fiscal year, through the end
of FY 1997, after reserving the Fund's
authorized retained capital for start-up
expenses, one-half of the remaining Funds
could be declared Super Surplus available to
the Secretary of the Treasury for any federal
law enforcement activity and available until
expended.

Expenses of the Secretary's Enforcement Fund
(SEF) totaled $5 million in FY 1998, a
decrease of $1 million from FY 1997. As with
the Super Surplus, the SEF is another one of
the Fund's permanent spending authorities. The
SEF is authorized under 31 USC. §
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 with
these agencies that resulted from joint
investigations with these departments. The SEF
is available for any Treasury law enforcement

purpose.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


CHAPTER 1
SAFEGUARDING INDIVIDUAL RIGHTS

The Department of the Treasury’s Forfeiture Fund
(Treasury Forfeiture Fund or the Fund) was
established by the Treasury Forfeiture Fund Act of
1992, also known as Public Law 102-393 and
codified at 31 USC 9703. With its creation, all
Treasury law enforcement organizations were
consolidated under a single forfeiture fund program
administered by the Department of the Treasury.
Before the Treasury Forfeiture Fund came into
being, the Bureau of Alcohol, Tobacco and
Firearms, the Internal Revenue Service and the
United States Secret Service were members of the
Asset Forfeiture Fund of the Department of Justice.
The U.S. Customs Service had had its own
forfeiture fund, into which deposits of all Customs
and U.S. Coast Guard forfeitures were made. Today,
the Treasury Forfeiture Fund is a Departmentwide
fund servicing the forfeiture Program needs of all
Treasury enforcement bureaus.

AS _a repository for the value of all non-tax
forfeitures made pursuant to laws enforced or
administered by the Department of the Treasury, the
Fund has become an increasingly valuable source of
resources for law enforcement efforts. Its monies
are invested in a variety of ways to support law
enforcement at all levels of government. The
funding provided is used to defray the direct
expenses of seizure and forfeiture incurred by
Treasury law enforcement in the daily pursuit of its
mission, or more generally used to support the
Treasury forfeiture program. Additionally, the
Statutory authorities of the Fund permit it to serve
law enforcement agencies and police departments
throughout the United States and internationally as
well.

Forfeiture has been an authority of law enforcement
that dates back to the earliest days of the American
Republic. In the last dozen years, however,
Congress has developed and expanded forfeiture to
address the many varied manifestations of
sophisticated, modern and financially profitable
crime. By enabling federal law enforcement to go

after the proceeds and instrumentalities of crime
asset forfeiture has evolved to the point where j
strikes at the very core of criminal organizations an
has become an essential part of an overall lav
enforcement strategy. By relentlessly focusing o1
the profitability of crime, it is a very powerfu
enforcement tool keeping pace with evermore well.
financed and internationalized criminal groups.

Despite this recent and accelerated evolution, the
effectiveness of asset forfeiture still rests
fundamentally upon public confidence in the
integrity of the program. In this vein, safeguarding
individual rights has been a goal in the
administration of the Treasury Forfeiture Fund since
its inception. 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. In 1996, a
Most significant issue involving civil asset forfeiture
and the matter of double jeopardy was addressed by
the Supreme Court of the United States.

Prelude to the Supreme Courts Ruling on Double
Jeopardy

Civil forfeitures proceed against property rather than
persons. Often they are the only available means by
which the government can confiscate the
instrumentalities of crime. When the leaders of
drug cartels are outside of the United States and
beyond the reach of extradition laws, when a pilot
smuggles drugs in a plane owned by another, when
tenants use a residence for the sale and consumption
of drugs with the knowledge of the landlord, civil
forfeiture is the law enforcement tool that allows the
Properties involved to be taken by the government.
Criminal forfeiture, on the other hand, proceeds
against a person and requires a criminal trial and a
conviction. It can only target property that is owned
by the defendant. If the aircraft’s pilot, the vessel’s
captain, or the drug courier carrying the satchel full
of cash is not the owner, then criminal forfeiture is
not effective by itself. Together, civil and criminal

SAFEGUARDING INDIVIDUAL RIGH' TS 1


forfeited property, deferred revenue, and seized
currency and its offsetting liability.

EXHIBIT ON MATERIAL WEAKNESSES

53


Metzger had operated his illicit business
for over ten years when the IRS leamed
about it through a cooperating government
defendant. During this time, he had collected
nearly $3 million from the illegal electronic
gambling devices commonly known as Joker
Poker machines. In an undercover IRS
Operation, Metzger discussed the methods he
used to launder his gambling business Proceeds
and how he smuggled over a million dollars in
bearer bonds out of the United States and into
offshore accounts. He placed his gambling
devices in the poorer neighborhoods of New
York City. To hide these profits from his wife,
children and employer, he rented a one room
unfurnished apartment in Queens from which
he directed his operations.

In October of 1997, federal agents arrested
Metzger at his Queens location and executed
six search warrants. Metzger tried to hide the
existence of a safe deposit box by shredding its
rental receipts, but careful investigators put
together the torn pieces and were able to seize
over half a million dollars from information in
that one box alone. In all, IRS was able to
seize close to $3 million in assets including
brokerage accounts in Califomia and New
York, a Swiss bank account, a vehicle and
exclusive real property on Skidaway Island in
Georgia.

In their investigative work on this case, IRS
was assisted by both the Nassau and Suffolk
county police departments.

Aiding Tobacco Smugglers Results in
Forfeiture

At the end of 1998, Northern Brands
International, a Canadian affiliate of the
American tobacco giant, R.J. Reynolds, pled

guilty to aiding and abetting smuggling and
agreed to pay $10 million into the Treasury
Forfeiture Fund as well as a $5 million fine.
Northern Brands International had conspired
with two export companies to send cigarettes
they made into the United States, while falsely
claiming that they were ultimately destined for
shipment to Estonia and Russia. These
cigarettes were then sold to wholesalers on the
Akwesasne Mohawk reservation in northern
New York who smuggled them back across the
border into Canada where they were re-sold on
the black market. The scheme thereby avoided
excise taxes in both Canada and the United
States.

The case that led to this forfeiture began in
1993 when the Buffalo and Albany field
offices of ATF began to look into the illegal
diversions. ATF first identified the two
companies who were initially bringing the
cigarettes into the United States and then soon
identified Northem Brands International as the
supplier. The federal case for the prosecution
of the co-conspirators was perfected through
the cooperative efforts of ATF, the IRS, the
Customs, the U.S. Border Patrol, the Federal
Bureau of Investigation and the New York
State Police.

Equitable Sharing Highligt
Equitable sharing continues to be one of the
most visible operations of the Treasury
Forfeiture Program. State and local law
enforcement agencies and foreign governments
derive valuable benefits from equitable sharing
proceeds, which serve to enhance law
enforcement cooperation in combating drug
trafficking and other violent crimes.

The increased cooperation that the equitable

FORFEITURE PROGRAM GOALS AND ACTIVITIES


Department of the Treasury Forfeiture Fund
Statement of Changes in Net Position
For the Year Ended September 30, 1998

(ollars in thousands)
Net Cost of Operations $130,504
Financing Sources:
Non-exchange revenues
Intragovernmental
Investment interest income 21,221
Public
Forfeited currency and monetary instruments 167,183
Sales of forfeited property net of mortgages and claims 36,656
Value of property transferred in equitable sharing 5,528
Payments in lieu of forfeiture, net of refund 1,754
Reimbursed costs 1,997
Others 857
Total gross non-exchange revenues 235,196
Less:
Equitable sharing
State and local agencies (71,934)
Foreign countries (1,179)
Victim restitution —C.473)
(74.586)
Total non-exchange revenues, net 160,610
Transfers-in
Intragovernmental
Transfer from ONDCP 35,679
Proceeds from participating with other federal agencies 13,569
Total transfers-in 49,248
Transfers-out
Intragovernmental
Equitable sharing 18,454)
Total transfers-out (8.454)
Total Financing Sources 201.404
Net Results of Operations 70,900
Net Position-Beginning of Year 272.713
Net Position-End of Year $343,613

The accompanying notes are an integral part of the financial statements

FINANCIAL STATEMENTS
26


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, 1996
(Dollars in thousands)

(Unaudited)
Forfeited
Total Number Being Held Uncontested
State/U.S. Territory of Cases as Evidence Cash
United States Customs Service
Florida 10 $155 $6,680
New York 11 200 4,332
Puerto Rico 8 121 1,915
California 6 - 1,852
Texas 2 - 985
Illinois 41 = 138
Total 38 $476 $15,902
Internal Revenue Service
Missouri 3 - 612
North Carolina 1 = 150
Total A -- 762
Grand Total 42 $476 $16,664

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.

58 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1996

(Unaudited)
The Treasury Forfeiture Fund Act of 1992, 31 (B) The estimated total value of all such property
U.S.C.9703(f), requires the Secretary of the Treasury transferred to any state or local law enforcement
to transmit to Congress, not later than February 1, agency.

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

The estimated total value of all property
transferred to any state or local law enforcement
agency is summarized by state and U.S.
territories. Total currency transferred was
$47,602,000 and total property transferred was
$1,104,000 at appraised value.

Forfeiture Fund during the preceding fiscal (2) A Report on:

year under any law enforced or administered
by the Department of the Treasury law
enforcement organizations or the United
States Coast Guard, in the case of fiscal years
beginning after 1993.

At September 30, 1996, the Fund had forfeited
currency of $9,048,000 held as evidence. These
amounts are reported as undistributed funds with
Treasury and cash in the audited financial
statements.

As reported in the audited financial statements,
at September 30, 1996, the Fund had forfeited
property held for sale of $32,747,000. The
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 Customs suspense
account. Upon forfeiture, it is transferred to the
Treasury Forfeiture Fund. At September 30,
1996, there was $379,000 of forfeited currency
and other monetary instruments that had not yet
been transferred to the Fund. This is reported as
a part of - “Intragovernmental accounts
receivables” in the audited financial statements.

(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 30,1995, which became the
beginning balance for the Fund on October 1,
1995, as reported in the audited financial
statements is $157,917,000.

(B) Liens and mortgages paid and the amount
of money shared with federal, state, local and
foreign law enforcement agencies during the
preceding fiscal year.

Mortgages and claims expense as reported in the
audited financial statements were $4,062,000.
The amount actually paid on a cash basis was
not materially different.

The amount of forfeited currency and property
shared with federal, state, local and foreign
law enforcement agencies as reported in the
audited financial statements was as follows:

State and local agencies $47,683,000
Foreign countries $111,000
Other federal agencies $6,774,000

60 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1996

(Unaudited)

(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 amount realized from the operations of the
Fund as shown in the audited financial statements is
$3,337,000.

The amount of seized currency not on deposit in the
Fund's suspense account at September 30,1996, was
$20,171,000. This amount includes some funds in
process of being deposited at year end; cash seized
in August or September 1996, 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 $72,775,000 for
fiscal year 1996. As provided by the Omnibus
Crime Control Act of 1995, $40 million and one
half of the excess unobligated balances of
$16,388,000 in fiscal year 1996, are retained in the
Fund.

(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 Agency and contractor officials, and
the number of seizures is as follows:

Customs Service $159,761,000 52 seizures
IRS $66,831,000 22 seizures
Secret Service $1,037,000 1 seizure

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

The total dollar value of such seizures is
$16,664,000. A separate schedule is presented
on page 58.

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

The total net position of the Fund at September
30, 1996, as reported in the audited financial
statements is $144,672,000.

(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.

In fiscal year 1996, $40 million was allowed to
be retained in the Fund. One half of the excess
unobligated amounts were to be transferred to
the ONDCP Special Forfeiture Fund. In
addition, on a budgetary basis, the Fund was
allowed to retain the remaining $16,388,000 of
the excess unobligated amounts.

(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.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION 61


\ Department of the Treasury Forfeiture Fund
Balance Sheets
September 30, 1998 and 1997
(Dollars in thousands)

Assets
Entity Assets: 1998 _ —1997_
Intragovernmental assets
Cash and other monetary assets (note 3) $ 137,115 $ 105,777
Investments and related interest (note 4) 248,131 261,502
Accounts receivable (note 5) 1,037 3,858
Advances (note 6) 28.059 — 3,142
Total intragovernmental assets 414,342 374,279
Accounts receivable (note 5) —_53 ___238
Forfeited property (note 7)
Held for sale, net of mortgages, liens and claims 24,034 36,131
To be shared with federal, state or local, or foreign
governments —__186 ——418
Total forfeited property, net of mortgages, liens
and claims —24,220 36,549
Total entity assets 438.615 411,066
Non-Entity Assets:
Intragovernmental assets
Seized currency
Cash and other monetary assets (note 3) 79,920 60,264
Investments (note 4) 343,247 146,249
Total intragovernmental assets 423,167 206,513
Total non-entity assets 423.167 206,513
Total Assets $ _861,782 $ _617,579

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

FINANCIAL STATEMENTS
23


Yee

Chapter 1:

FORFEITURE PROGRAM GOALS AND ACTI VITIES

The Asset Forfeiture Fund of the Department
of the Treasury (the Fund) came into being in
fiscal year (FY) 1993 with the passage of the
Treasury Forfeiture Fund Act of 1992, Public
Law 102-393. That statute brought all of
Treasury’s diverse law enforcement
organizations under a single forfeiture fund
Program. Prior to that time, the United States
Secret Service (Secret Service), the Bureau of
Alcohol, Tobacco and Firearms (ATF) and the
Criminal Investigation Division of the Internal
Revenue Service (IRS) were all members of ‘the
Asset Forfeiture Fund of the Department of
Justice. Before FY 1993, the Treasury
Department’s Customs Service (Customs) had
its own forfeiture fund which received
forfeitures of Customs and the United States
Coast Guard (Coast Guard).

Today, the Fund serves the forfeiture program
needs of all of the Department’s law
enforcement organizations. It stands as the
Tepository for the value of all of the non-tax
forfeitures made pursuant to laws enforced or
administered by the Department of the
Treasury (Treasury) and the Coast Guard. In
turn, its monies are invested in various ways to
support law enforcement at all levels of
government.

In the half dozen or so years of its existence, it
has become an increasingly valuable resource
for America’s law enforcement community.
The funding it provides is used to defray the
direct expenses of seizure and forfeiture that
are incurred each day as the men and women of
Treasury law enforcement pursue their

agencies’ missions. Besides covering these
direct costs, the resources of the Fund are also
applied to more generally support the Treasury
forfeiture program. Additionally, important
statutory authorities of the Fund allow it to
share forfeited assets with other law
enforcement organizations, both in the United
States and overseas, that have assisted Treasury
investigations leading to forfeiture.

Although forfeiture has been a Customs law
enforcement tool since the earliest days of our
Republic, it is only in the last two decades that
expanded federal seizure and forfeiture
authorities have been coupled with the
mechanisms of forfeiture funds to create a
formidable challenge to modern, sophisticated
criminal organizations.

Goals of the Treasury Forfeiture
Program

The effectiveness of asset forfeiture rests
fundamentally upon public confidence in the
integrity of the program. To be worthy of that
confidence, the Treasury forfeiture program
has set for itself four principal goals. These
goals are:

(i) To safeguard the due process tights of
affected persons;

(ii) To deter criminal activity by depriving
criminals of property used in or
acquired through illegal activity;

FORFEITURE PROGRAM GOALS AND ACTIVITIES


SECTION I

OVERVIEW


itatement: Balai ee
(Entity and Non-Entity Assets)

A summary of the assets of the Fund as of
September 30, 1998 is presented in the
following table. As shown, the total of both
entity and non-entity assets, i.e. forfeited and
seized assets, increased from $618 million at the
end of FY 1997, to a total of $862 million at the
end of FY 1998, an increase of $244 million or
nearly 40 percent.

Entity Assets (Forfeited Assets)

Cash and Other Monetary Assets totaled
$137 million on September 30, 1998, as
compared to a balance of $106 million on
September 30, 1997. 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, 1998 the Fund had investments
and related interest in Treasury securities of
$248 million. The balance for accounts
receivable totaled $2 million on September 30,
1998, and is mostly associated with funds that
are due from other law enforcement agencies.
The value of forfeited property, held for
sale, net of liens payable on September
30, 1998, was $24 million, as compared to
$37 million on September 30, 1997. Advances
totaled $28 million and represent advances to
Treasury’s Working Capital Fund for Y2K
automation initiatives to meet contracts
obligated during FY 1998 but not delivered by
the end of FY 1998.

Non-Entity Assets (Seized Currency)

Finally, the total for seized currency and
related investments on September 30, 1998,

was $423 million, as compared to $207 million
on September 30, 1997, an increase of $216
million from FY 1997.

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

1998 1997
Entity Assets (Owned by
the Fund)
Cash/Monetary Assets $137 $106
Investments 248 = 261
Accounts receivable, net 2 4
Advances 28 3
Forfeited property, net of
liens payable 24 _37
Subtotal, Entity Assets as of
the end of the year 43941
Non-Entity Assets (In
Custody, not owned by the
Fund)
Seized currency and related
investments (*) 423 207
Equals:
Total Balance Sheet Assets $862 $618

*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 currency held in the Fund's
suspense account, invested, or on hand at field office locations.

Liabilities and Net Position
A summary of the liabilities and net position of

the Fund as of September 30, 1998, as
compared with September 30, 1997 is

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


ten

and his co-defendants interrupted their criminal
trial after a week of testimony to enter into a
plea agreement. The agreement called for
Kimball to forfeit all assets of Spy Factory,
Inc., which at the time of his indictment was
the nation’s largest chain of this type of shop.
The assets were valued at over $2 million.

Asset Sharing with the Swiss

During FY 1998, all necessary approvals were
received for an international asset sharing with
the Government of Switzerland related to an
IRS criminal investigation case involving a
Raymond Whelan who had started selling
marijuana as a college student in New England
in the 1970s. By 1984, Whelan had made
sizeable profits not only from trafficking but
also from serving as a courier of | currency from
drug smugglers to Colombian sources.

As his profits grew, Whelan began putting his
money in Swiss accounts in Zurich and
Geneva. He 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, marrying
and moving funds from account to account.
Money under the control of his wife was used
to purchase resort property in Sun Valley,
Idaho, and when it was sold, the proceeds went
back into Whelan’s accounts in Switzerland.

Swiss authorities assisted IRS agents during
the investigation and prosecution of this case
by tracing and accounting for over $4 million
that was moved into and through Swiss bank
accounts. The Swiss froze several of the
accounts for almost four years while United
States prosecutors were proving their case.
Thanks to this restraint on the accounts, a large
portion of the funds Whelan laundered was

tecovered. The amount shared with the
Government of Switzerland came to just over
$900,000.

Medicaid Fraud Yields Sharing

The Secret Service was able to present the
Georgia Bureau of Investigation (GBI) with a
large motor home to be used as a mobile
command post as a result of a fourteen month
long Medicaid fraud investigation. The vehicle,
a 1990 Fleetwood Model K, was slated to be
used by the GBI’s special operations unit in
high risk situations such as those involving
hostage takers or barricaded gunmen.

The investigation that led to the forfeiture was
a multi-agency effort led by the Secret
Service’s West African Fraud Task Force,
involving the Georgia Department of Medical
Assistance as well as the state’s health care
fraud control unit. The investigation focused on
a company known as S&S Convalescent
Transportation, a non-emergency transport
company in Atlanta. The defendants, all family
members, billed the state Medicaid system for
over $1.3 million in fraudulent claims during
the first half of 1994. Arrested during the first
quarter of FY 1998, the defendants later pled
guilty to fraud and conspiracy charges.

The Joker Poker Case

In the summer of 1998, Harvey Metzger, a
New York City schoolteacher and guidance
counselor was sentenced to fifteen months in
prison and ordered to forfeit to the United
States $2.5 million of gambling proceeds. The
dual existences of Harvey Metzger - as city
schoolteacher and criminal entrepreneur - were
finally brought to light thanks to the efforts of
the Criminal Investigation Division of the IRS.

FORFEITURE PROGRAM GOALS AND ACTIVITIES


we

include the regular reconciliation between
financial accounting transactions shown by the
Fund’s reports and the financial information
teported by AFTRAK. The AFTRAK inventory
system 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.

Fund Management’s Plan Regarding
Reportable Conditions

Resolution of seized and forfeited property
inventory systems deficiencies will significantly
eliminate the reportable conditions identified by
the auditors in FY 1998. However, with tegard
to the re-valuation of property at the time of
forfeiture, this will require inventory systems
capability currently not available. In the interim,
Fund management will re-value property upon
forfeiture using the current approach of
modeling an adjustment factor to be applied to
the ending forfeited property _ balance.
Fortunately, the majority of assets are cash
assets which are not affected by the re-valuation
issue. 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 recorded properly.

Reporting Year 2000 (Y2K) Issues

Regarding Year 2000 (Y2K) readiness, it
appears to Fund management that the majority
of systems required to support the forfeiture
program in the year 2000 will be Y2K
compliant. The local area network used by the
Executive Office for Asset Forfeiture is
compliant with Year 2000 requirements. Other

systems which support information included in
the Fund’s financial statements are owned by
the various participating bureaus or by other
Federal Agencies, i.e., the Department of
Justice. Although these systems are vital to the
Fund’s financial reporting capability, Fund
management can only influence progress with
Y2K compliance.

With regard to costs, Fund management
worked to ensure compliance through the
provision of essential funding in FY 1998. .
Fund management provided over $54 million
toward Treasury’s Y2K compliance
requirements, including $26 million to
Customs’ needs in this area. Information made
available from Customs, the Fund’s most
significant bureau in terms of overall forfeiture
activity, is that they are well ahead of most
federal agencies. Customs reports that it has
fixed, tested and implemented all of its
mission-critical information technology (IT)
systems for Y2K compliance. Fund
management is currently working with the IRS
to ensure that their Y2K compliance
requirements are up to date for the AFTRAK
system. The remaining system, the
Consolidated Asset Tracking System (CATS)
of the Department of Justice supports minor
portions of the Fund’s inventory. Fund
Management is working to move the two
bureaus, ATF and Secret Service, which use
CATS onto the IRS AFTRAK system or
successor system. Costs of executing the move
of Secret Service and ATF to AFTRAK will
cover Y2K compliance.

Given the Customs and IRS compliance with
Y2K, potential impact to the Fund of non-
compliant systems appears minimal. By FY
2000, the national property contractor should
have the Customs’ SEACATS system available

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


rer

REPORT ON THE
AUDITED FISCAL YEAR 1998
FINANCIAL STATEMENTS
OF THE
TREASURY FORFEITURE FUND

OIG-99-076 APRIL 5, 1999

Office of Inspector General

United States Department of the Treasury


&

NOTES TO FINANCIAL STATEMENTS

Cumulative Results

The following summarizes the compo!
30, 1998 and 1997, respectively, (dol!

nents of the cumulative results for the
lars in thousands):

years ended September

1998 1997
Retained Capital $116,290 $63,310
Unliquidated Obligations 156,423 81,362
Results of Operations 35,221 96,844
Transfers from ONDCP 35,679 66,876
Distributions to ONDCP = (35.679)
$343,613 $272,713.

Unliquidated Obligations

The following summarizes the components of unli

1997, respectively, (dollars in thousands):

Discretionary
Equitable Sharing
Non-Discretionary

Transfers to and from ONDCP

The Fund did not transfer and was no’

iquidated obligations as of September 30, 1998 and

1998 1997

$2,432 $12,016

42,473 38,380
1518 30,966
$156,423 $81,362

t liable to transfer any amounts to the

1998, as existing statutes, specifically the FY 1998 and FY 1999

Appropriations Acts authorized balanc

es with ONDCP to be transferred back

of approximately $35,679,000 million to the ONDCP Special Forfeiture F

ONDCP in fiscal year
Treasury Department
to the Fund. A liability
und was recognized in

NOTES T

O FINANCIAL STATEMENTS

41


Chapter 2:

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

PROGRAM PERFORMANCE

The Fund has had performance measures in
place for the past four years. Results from FY
1998 allowed for comparison with results from
FY 1997 as a means of monitoring forfeiture
program operations. For FY 1998, the
performance measures selected for monitoring
were: (1) processing time for equitable sharing
payments for currency assets with a target time
frame of 8.42 months; (2) time elapsing between
forfeiture of real property and disposal through
sale with a target time frame of 7.3 months; (3)
timely processing of the administrative seizure
inventory with a target time frame of 69 percent
being processed in a timely fashion; and (4)
extent to which mandatory operational costs of
the asset forfeiture program are funded by
current year regular revenue. The latter
performance measure represents a new measure
introduced during FY 1998.

Although we did not achieve performance
targets in most of our performance measures, we
came very close. Given the circumstances
associated with certain key measures, Fund
management considers this year’s performance
to be largely satisfactory. Data on the timely
processing of equitable sharing payments for
currency assets indicates that performance
eroded from 8.4 months in FY 1997 to 8.9
months in FY 1998. The timely disposal of real
Property, taking 13.8 months on average after
forfeiture, eroded by 2.8 months from the level
achieved in FY 1997 of 11 months. Sixty-eight
percent of open administrative seizure cases at

the end of the year were within prescribed time
frames versus seventy two percent at the end of
FY 1997. The tracking of this information and
the availability of comparison data are of
significant benefit to Fund management.

Processing Time for Equitable Sharing
Payments

Equitable sharing of Fund revenue continues to
be one of the most visible operations of the
Treasury forfeiture program. The reason this
measure is important to management is that
equitable sharing payments represent fully one-
third of all mandatory expenses of the Fund
every year. Performance delays in this measure
can distort financial data needed for resource
management planning. 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.

Data indicates that the average time to make an
equitable sharing payment for a currency asset
increased from 8.4 months in FY 1997 to 8.9
months in FY 1998. Although performance
against this measure eroded slightly, FY 1998
was a banner year for equitable sharing with
state and local law enforcement partners. FY
1998 financial statements indicate equitable

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


Yee

sharing program has fostered among federal,
State, local, and foreign law enforcement
agencies has been highly successful and is a
major factor in the dramatic growth of federal
forfeitures. Since the Treasury Forfeiture Fund
became operational in FY 1993, $1.2 billion in
forfeiture revenue has been deposited into the
Fund. In FY 1998 alone, $235 million of
regular revenue, exclusive of transfers, was
deposited into the Fund.

The first equitable share from the Fund
occurred in FY 1993. That year, $67 million in
federally forfeited cash and proceeds were
shared with foreign countries and state and
local law enforcement agencies. Since FY
1993, more than $282.7 million in cash and
proceeds have been reinvested into law
enforcement efforts of foreign governments
and state and local agencies.

FY 1998 marked the highest equitable sharing
year in the history of the Treasury forfeiture
Program with a 71% increase in equitable
sharing expenses over FY 1997. During FY
1998, a total of $81.6 million in forfeited cash
and proceeds were expensed as follows: $1.2
million to foreign countries, $71.9 million to
state and local agencies, and $8.5 million to
other federal law enforcement agencies.
International sharing expenses of FY 1998
included the presentation of $900,000 to the
Goverment of Switzerland for their
contributions to a Treasury drug and money
laundering investigation.

Treasury is committed to promoting
international and domestic law enforcement
Cooperation as a means to combat serious
financial crimes, money laundering, and drug
trafficking. To that end, our equitable sharing
Program will be strengthened so that it

continues to be an effective tool in enhancing
cooperation between federal, state, local and
foreign law enforcement agencies.

FORFEITURE PROGRAM GOALS AND ACTIVITIES


GENERAL LEDGER

CONDITION

The Asset Information Management System
(AIMS), which is the general ledger system
maintained by Customs, processes, groups and
summaries transactions into account balances for all
Custom funds and 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. Rather,
information is identified and captured manually, at
the end of the fiscal year, from other systems in
order to properly compile 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 statements produced during the year do not
correctly present the results of operation and net
position of the Fund.

RECOMMENDATION

We recommend that 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. We recommend that existing procedures,
be followed 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, if held
by the contractor, to EG&G, to update SEACATS to
reflect changes in property status.

Alternatively, the Fund should develop and
implement an integrated system which will capture
all transactions in the general ledger, including
accounts receivable, liens and mortgages payable,

52 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


NOTES TO FINANCIAL STATEMENTS

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, 1998 and 1997, respectively (dollars in thousands):

Entity Assets

Unamortized Investment,
Description Cost Discount ___ Net
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

September 30, 1997:
Treasury Forfeiture Fund - 28 days

4.65% U.S. Treasury Bills $261,815 $(947) $260,868

Interest Receivable - on entity investments 406
- on non-entity investments __ 228

Total Investment, Net, and Interest Receivable $261,502

Non-entity Assets

September 30, 1998:

U.S. Customs Suspense Account - 28 days
4.44% USS. Treasury Bills $334,436 $(1,189) $343,247

September 30, 1997:

U.S. Customs Suspense Account - 28 days
4.65% U.S. Treasury Bills $ 146,780 $ (531) $146,249

NOTES TO FINANCIAL STATEMENTS 37


wee

Department of the Treasury Forfeiture Fund
Statement of Net Cost
For the year ended September 30, 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
Secretary's Enforcement Fund (note 14)

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

The accompanying notes are an integral Part of the financial statements

$54,663
1,530
650
12,259
17,150
—5.160

91,412
28,323
—3.255
-3L578
122,990

84

726
—$.204
—L514

130,504

$130,504

FINANCIAL STATEMENTS

25


TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 1996

DEPARTMENT OF THE TREASURY

WASHINGTON, D.C.

Gardiner, Kamya & Associates, P.C.

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



Department of the Treasury Forfeiture Fund
Balance Sheets
September 30, 1998 and 1997
(Dollars in thousands)

Liabilities and Net Position

Liabilities: —1998 —1997_

Intragovernmental liabilities covered by budgetary resources:

Distributions payable :
Other Federal agencies $ 1,390 $ 345
ONDCP Special Forfeiture Fund (note 10) - 35,679
Accounts payable —24,757 19,181
Total intragovernmental liabilities — 26,147 55,205
Seized currency (note 9) 423,167 206,513
Distributions payable
State and local agencies and foreign governments 7,225 4,537
Victim restitution (note 12) 32,075 32,075
Accounts payable 5,095 9,065
Deferred revenue from forfeited assets 24,460 37471
Total liabilities covered by budgetary resources 492,022 289,661

Liabilities not covered by budgetary resources:
Commitments and contingencies (note 15) - -

Total liabilities not covered by budgetary resources es —=_

Total liabilities 518,169 344,866

Net Position (note 10)
Cumulative results of operations 343,613 272.713
Total net position 343.613 272.713
Total Liabilities and Net Position $_861,782 $_617,579

The accompanying notes are an integral part of the financial statements

FINANCIAL STATEMENTS
24


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the year ended September 30, 1996
(Dollars in thousands)

(Unaudited)

State/U.S. Territories Currency Value Property Value
Alabama $s 87 s+
Alaska 56 -
Arizona 1,138 262
Arkansas ~ 1
California 5,685 69
Colorado 131 2
Connecticut 58 -
D.C. Washington - 60
Delaware 46 a
Florida 8,764

Georgia 264

Guam 13

Hawaii 15

Idaho uN a
Mlinois 1541 13
Indiana - -
Towa 160 -
Kansas 10 2
Kentucky 6 1
Louisiana 5 -
Maryland 45 17
Massachusetts 325 7
Michigan 152 -
Minnesota 10 -
Mississippi 101 NW
Missouri 418 1
Montana 28 5
Nebraska ~ ~
Nevada - -
New Jersey 2,430 96
New Hampshire -
New Mexico 387 36
New York 12,339 29
Nonh Carolina 352 69
North Dakota ~ 4
Ohio 345 6
Oklahoma 135 -
Oregon 41 -
Pennsylvania 572 -
Puerto Rico - -
Rhode Island 2 -
South Carolina 98 1
South Dakota - -
Tennessee 37 -
Texas 10,988 27
Uuh 24 -
Vermont - -
Virgin Islands ” -
Virginia 329 7
Washington 5
West Virginia 9
Wisconsin 10
Wyoming —

Total

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

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION

57


(ii) To enhance cooperation among federal,
State, local and foreign law
enforcement agencies through the
equitable sharing of assets obtained
through joint efforts; and

(iv) _ To produce revenues to cover the costs
of seizures and forfeitures and
generally strengthen law enforcement.

While criminal forfeitures pursued within the
court system proceed against an individual and
afford him or her the protections of the
criminal courts, civil forfeitures proceed
against property rather than persons and must
be particularly sensitive to the due process
rights of those with any interests in the
Property. Civil forfeiture actions, whether they
are processed administratively by the seizing
agency or judicially in court, always go
through a very structured Process that
comprehensively notifies affected parties,
invites arguments against the intention to
forfeit, accommodates the indigent and offers
opportunities to achieve compromise
resolutions. The Fund, in its Secretary's
Guidelines, its Guide to Equitable Sharing and
its various policy directives aims to always
support the process that safeguards the tights of
individuals.

Some sense of how the Fund contributes to
attaining its other three goals of deterring
criminal activity, promoting cooperation and
strengthening law enforcement, may be
gleaned from a look at some representative
program activities during FY 1998.

Significant P sits

Operation Casablanca

In May 1998, Customs concluded the largest,
most comprehensive narcotics money
laundering investigation in the history of U.S.
law enforcement. Known as Operation
Casablanca, the investigation linked twelve of
the nineteen largest Mexican banks and their
officials to the laundering of the drug profits
generated by the Cali and Juarez cartels.
Coordinated from Los Angeles, this Customs
effort was able to identify and disrupt essential
financial functions of these two notorious
international criminal enterprises.

Operation Casablanca was responsible for the
seizure of over $66 million in currency as well
as more than two tons of cocaine and four tons
of marijuana. Its success was due to the support
of Customs offices throughout the country and
abroad as well as state, local and foreign law
enforcement agencies.

Spy Factory, Inc.

In June 1998, Customs agents from the New
York office seized $49,000 to comply with a
criminal order of forfeiture against Ronald
Kimball and his company, Spy Factory, Inc.
This seizure was applied toward a $2.3 million
judgment ordered by the court.

Fifteen months earlier, Kimball had entered a
guilty plea of smuggling for the illegal
importation of bugging and wiretapping
devices into the United States. He also entered
a corporate guilty plea on behalf of the
company for conspiracy, smuggling, money
laundering and sending these devices through
the mail. The guilty pleas came after Kimball

FORFEITURE PROGRAM GOALS AND ACTIVITIES


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 tegard
to material weaknesses and reportable
Conditions identified by auditors during the FY
1998 financial statement audit.

Material Weaknesses

The following material weaknesses were
identified in the FY 1998 audit report:

(i) Accounting records are maintained ona cash
basis;

(ii) The Fund’s general ledger does not record
all balances and transactions that comprise the
Fund;

(iii) Customs’ 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; and

(iv) The IRS Analysis of Changes in Seized and
Forfeited Property provided at year-end did not
account for and properly Teport property
transactions for financial reporting purposes.
Year-end balances presented on the analysis
were incorrect, and in other instances had not
been captured. Consequently, substantial
manual procedures and reconciliations were
undertaken to correct the analysis in order for it
to be usable for year end financial Teporting

purposes.

Reportable Conditions

The following reportable conditions were

identified in the FY 1998 audit Teport:

(i) Customs, the IRS, the Secret Service and
the ATF use different asset tracking systems to
Prepare the required analysis of changes in
forfeited and seized property schedules which
support the Fund’s financial statements. These
systems collect and account for seized and
forfeited assets differently and used different
date definitions. As a result, manual
manipulations and reconciliations are required
at year end to produce Rollforwards for the
Fund;

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

iii) 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.

(iv) 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. Also, it does not reconcile proceeds
received from EG&G for sale of properties to
EG&G sales reports. 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.

(v) The Fund’s Property management
functions require improvement to ensure that:
(i) funds, property, and other assets are

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


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 the 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 accrual 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 and Budget (OMB)
Bulletin 94-01, Form and Content of Agency
Financial Statements, 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 an accrual basis of accounting, financial
transactions received from each bureau 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.

EFFECT

The Fund's maintenance of the general ledger on a
cash basis and the untimely recordation of
transactions distorts the information reported in the
financial statements on a monthly basis and results
in the unavailability of accrual-basis financial
information on which to rely for management's daily
decision making procedures and evaluating 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 recommend that the following specified
procedures be implemented to properly account for
transactions on the accrual basis of accounting
throughout the year.

Accounts Payable and Accrued Liabilities -
Customs, Secret Service, IRS and ATF should
submit requests for reimbursement monthly to
provide more timely results of operations for the
Fund and thereby allow for more timely analysis of
the financial position of the Fund. The
reimbursement requests submitted by each law
enforcement bureaus, but not yet paid by the Fund
should be accrued as liabilities at each month end.
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 agencies record lien and mortgage information
in their tracking systems. We also recommend that

50 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


bureaus’ inventory tracking systems at appraised
value (fair market 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 1995 and 1996 financial
statements, management performed a historical
analysis by property category of sales values
compared to the initial appraised amounts. These
ratios were applied to the ending forfeited property
value to determine the financial statement value of
forfeited property.

CRITERIA

Statement of Federal Financial Accounting
Standards (SFFAS) No. 3 requires forfeited property
to be stated at fair market value at the time of
forfeiture, in the bureaus’ general ledger (inventory
tracking systems).

CAUSE

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

EFFECT

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

RECOMMENDATION

We recommend that 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. We also
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 wi
become easier to prepare the monthly analysis t
properly value and record month-end forfeite
Property balances.

56 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


NOTES TO FINANCIAL STA TEMENTS

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. Under the Act, non-discretionary expenses are subject to a permanent indefinite

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

The Fund’s expenses are either paid on a reimbursement basis or paid directly on behalf of a
participating bureau. Reimbursable expenses are incurred by the respective bureaus participating in
the Fund against their appropriation and then submitted to the Fund for reimbursement. The bureaus
are reimbursed through Inter-Agency Transfers (SF-1081) or Online Payments and Collections
(OPAC). Certain expenses such as equitable sharing, liens, claims and state and local joint
operations costs are paid directly from the Fund.

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

Revenue and Expense Recognition

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

Revenue from currency is recognized upon forfeiture. Payments in lieu of forfeiture (mitigated
seizures) are recognized as revenue when the payment is received. Revenue received from
participating with certain other federal agencies is recognized when the payment is received.
Operating costs are recorded as expenses when goods are received or services are performed.

32 NOTES TO FINANCIAL STATEMENTS


prove that the Property owner knowingly
committed the crime to obtain a conviction.

* Even if forfeitures constitute punishment, the
civil and criminal sanctions should be considered
as part of a single Proceeding for purposes of the
double jeopardy clause. Because the government
does not seek further punishment, the defendant’s
legitimate expectation of finality in the criminal
judgement is not infringed. The conduct of the
government reveals a design to seek civil and
criminal sanctions in parallel and
contemporaneous proceedings,

The Decision of the Court

By the end of June of 1996, the Supreme Court had
delivered an 8-1 opinion, written by Chief Justice
Rehnquist, reversing the earlier decisions of both the
Sixth Circuit in U.S. v. Ursery and the Ninth Circuit
in U.S. v. $405,089.23 in United States Currency,
This decision that civil forfeitures do Not constitute
punishment for the purposes of the double jeopardy
clause ended some two years of uncertainty over
just how double jeopardy arguments would affect
the most commonly used civil forfeiture statutes.

One foundational point that the Court noted in its
opinion, was that the United States has had a long
history of Proceeding against Property through civil
in rem forfeiture while still bringing criminal
charges against the person alleged to have
committed the underlying crime. When the Court
referred to this historical Practice of the United
States, mentioning a statute enacted as early as
1789, it was referencing the civil forfeiture
authorities used by the Customs Service and
Treasury law enforcement since the very founding
of our constitutional Republic. This evidence of
what the Court called a “longstanding legislative
practice” went far towards proving that it was not
violative of the protection the Constitution affords
individuals against double jeopardy.

Safeguarding the Rights of Individuals

The Supreme Court’s decision in this case endorsed
federal forfeiture laws as well as federal law

enforcement practices in conformity with those law
A serious challenge to federal forfeiture wi:
overcome partly because of the lengthy history «
forfeiture in the United States but also part]
because modern federal law enforcement hz
carefully applied these substantial authorities t
achieve their Congressionally intended purpose - t
take the profit out of crime.

The Department of the Treasury’s forfeitur
Program, with its additional support from th
Tesources of the Treasury Forfeiture Fund
recognizes its obligation to observe and respect the
rights of affected Persons in matters of seizure anc
forfeiture. That forfeiture authorities always be
applied in a fair and even manner, that innoceni
parties not be deprived of their Property, and that nc
one with a legitimate interest in Property be denied
the opportunity to Protect that interest, are all
constant considerations in the administration of the
program. In 1996, this goal continued to
fundamentally guide Treasury forfeiture activities
while the nation’s highest court reached a key
decision on the Suitability of this law enforcement
tool in a constitutionally protected society.

SAFEGUARDING INDIVIDUAL RIGHTS 3


hwy

NOTES TO FINANCIAL STATEMENTS

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, and
guaranteed by, the United States Government. Interest is reported to the Fund and recorded monthly
as revenue in the general ledger.

Assets Distributed

Forfeited property, currency, or proceeds from the sales of forfeited property may be shared with
federal, state and local law enforcement agencies or foreign governments, which provided direct or
indirect assistance in the related seizure. In addition, the Fund may transfer forfeited Property to
other federal agencies, which would benefit from the use of the item. A new class of asset
distribution was established for victim restitution in 1995. These distributions include property and
cash returned to victims of fraud and other illegal activity. Upon approval by EOAF 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. Liabilities are Tecognized when EOAF approves payments. 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 Fi inancing Sources.

Entity Assets

Entity assets are used to conduct the operations and activities of the Fund. 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 had 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 Tepresents cash transfers in the current fiscal year to Treasury or
law enforcement bureaus participating in the Fund for orders to be delivered.

NOTES TO FINANCIAL STATEMENTS 33


Although 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 and therefore information obtained from the
accounting system during the year may not be reliable and management of the Fund should not
place reliance on the 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 17, 1997.

In accordance with Government Auditing Standards, we have also issued reports dated January
17, 1997 on our audit of the Fund's financial statements and its compliance with laws and
regulations.

This report is intended for the information and use of the U.S. Congress, the management of the

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

January 17, 1997

48


vwe

Gardiner, Kamya & Associates, PC.

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

Fax: 202 857-1778

Independent Auditor's Report on Financial Statements

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

We have audited the 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. These financial statements are the
responsibility of the Fund's management. Our tesponsibility 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
teasonable 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 management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

These financial statements were prepared in conformity with the hierarchy of accounting
policies described in Note 2 to the financial statements, which is a comprehensive basis of
accounting other than generally accepted accounting principles.

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, 1998 and 1997, and the net
Costs, changes in net position, budgetary resources and the reconciliation of net costs to
budgetary obligations for the year ended September 30, 1998, on the basis of accounting
described in Note 2.

In accordance with Government Auditing Standards, we have also issued a report dated

January 15, 1999, on our consideration of the Fund's internal control structure and a report
dated January 15, 1999, on its compliance with laws and regulations.

Member of the American Institute of Certified Public Accountants


ACCOUNTING RECORDS ARE PRIMARILY
MAINTAINED ON A CASH BASIS

CONDITION

The Treasury Forfeiture Fund's (the Fund) general
ledger as well as Customs, Secret Service, IRS and
ATFs supporting systems are maintained primarily
on a cash basis. In addition, these 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 were
developed. The Fund's management provided each
bureau representative with year end close out
procedures 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 received 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 EOAF in the updated
directive number 14, “Expeditious Payment of
Liens, Mortgages and Taxes by the Department of
the Treasury”, 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
Tequires 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 is then to be forwardec
to the Accounting Services Division (ASD) fo:
processing. Also, the directive requires ASD tc
disburse the approved payments within 14 calendai
days from the date of EOAF's approval of payment
These requirements do not provide for a complete
accrual of all liens and mortgages that would
provide reliable information throughout the year.
because ASD cannot record the liability unless
EOAF's approval with the accompanying accounting
strip is received allowing recordation of a liability
only for claims and mortgages that have been
approved for payment.

Forfeited Currency - Currently, a time lag exists
between when the Field Officers are notified of the
forfeiture and when ASD, is notified of the
forfeiture and therefore 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 who
Participate either directly or indirectly in a related
seizure. In addition, the 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 the
financial statements as part of the year end manual
procedures.

Accounts Receivable - Customs Service maintains
a contract with EG&G Dynatrend (EG&G) whereby
EG&G stores property seized by any agency
Participating in the Fund, conducts auction sales of
forfeited property, and collects storage costs
reimbursed by violators. Cash collections made by
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

EXHIBIT ON MATERIAL WEAKNESSES 49


SECTION IV
SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION



vwe

TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 1998

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

Gardiner, Kamya & Associates, P.C.

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



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NOTES TO FINANCIAL STATEMENTS

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

Note 5: Accounts Receivable

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

Note 6: Advances

Of the $28,059,000 identified as “advances,” in fiscal year 1998, over $26 million Tepresents
undelivered orders of the Treasury’s Working Capital Fund for Year 2000 (Y2K) expenses for which
the Fund has agreed to provide the funding through its various authorities. The remainder represents
cash transfers to the Treasury’s Working Capital Fund for which no obligations have been recorded
as of September 30, 1998. In the latter instan , Treasury’s Working Capital Fund management

Tequested that cash be transferred in advance of expenses pursuant to authorized reimbursements that
would be processed through the Treasury’s Working Capital Fund in the future.

Advances of $3,142,000 in fiscal year 1997 represents advances paid to a law enforcement bureau
participating in the Fund for which orders have yet to be delivered.

Note 7: Forfeited Property

The following summarizes the components of forfeited property (net), as of September 30, 1998 and
1997, respectively (dollars in thousands):

1998 1997
Held for Sale $25,632 $38,794
To be shared with federal, state
or local, or foreign government __186_ —__ 418
Total forfeited property (note 8) 25,818 39,212
Less: Allowance for mortgages and claims —(1,598) —(2.663)
Total forfeited property, net $24,220 $36,549

Forfeited property held for sale, net of allowance for mortgages and claims as of September 30, 1998
and 1997 was $24,034,000 and $36,131,000, respectively, and is reported in the Balance Sheet.

38 NOTES TO FINANCIAL STATEMENTS


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Analysis of Revenues, Expenses, and Distributions
For the year ended September 30, 1996
(Dollars in thousands)
(Unaudited)

Revenues and expenses and distributions by asset category:

Expenses and

Revenues Distribution
Vehicles $ 8,699 $ 17,130
Vessels 2,416 21,826
Aircraft 2,416 7,031
General Property 7,732 69,275
Real Property 27,062 2,713
Currency and monetary instruments 138,586 49,211
186,911 167,186
Less:
Mortgages and claims (4,062) (4,062)
Refunds (6,677) (6,677)
it Add:
i Allocation of revenue to ONDCP Special
Forfeiture Fund ~ 16,388
ot Excess of net revenues and financing sources
be over total program expenses = 3,337
. $176,172 $176,172

Revenues and expenses and distributions by type of disposition:
Expenses and

Revenues Distribution
; Sales of property and forfeited currency
: and monetary instruments $127,620 $ 31,739
Reimbursed storage costs 1,773 17,214
Assets shared with state and local agencies 47,683 47,683
ij Assets shared with other federal agencies 6,774 6,774
Assets shared with foreign countries 1 M1
Victim Restitution 2,950 2,950
; Destructions 19,826
fi Pending disposition 40,889
167,186
| * Less:
iy Mortgages and claims (4,062) (4,062)
Refunds (6,677) (6,677)
Add:

i Allocation of revenue to ONDCP Special
Forfeiture Fund - 16,388
Excess of net revenues and financing sources

over total program expenses = 3,337
‘ $176,172 $176,172

This supplemental schedule “Analysis of Revenues, Expenses and Distributions” is required under the Treasury Forfeiture
Fund Act of 1992. The allocations in the schedule were determined from information obtained from a U.S. Customs Service
information system. This system maintains revenue and expenses by each seizure for property held at the contractor. The
percentages of revenue and expenses from this system were applied to revenue and expenses and distributions as reflected
in the statement of operations and changes in net position. 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 59


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, 1998. These
statements have been prepared to disclose the
financial position, results of operations and
changes in net position pursuant to the
tequirements of the Chief Financial Officers Act
of 1990 and the Government Management
Reform Act of 1994 (GMRA). For comparison
purposes only, Fund management has extracted
data from audited 1997 financial statements.

St: 7 in Net Posit

A comparison of revenues and financing sources
for the current and prior fiscal years is presented
in the following table:

Total Financing Sources

@ollars in millions)

1998 1997
Public - Sources
Forfeited currency and
monetary instruments $167 = $203
Sale of forfeited property 37 23
Value of property transferred
in equitable sharing 5 2
Payment in lieu of forfeiture 2 7
Reimbursed costs 2 1
Other miscellaneous 1
Subtotal, financing from
public sources 214 237

Total Financing Sources
(Continued) 1998 1997
Vel =

Proceeds from participation

with other Federal agencies 13 11

Interest 21 14

Transfer(s) from ONDCP —36 _ 67

Subtotal, financing from

intragovernmental sources _70 _92
* Total, Gross Revenues and

Transfers In $284 = $329

Less: Applied Financing

Public

Equitable Sharing - State

and local law enforcement (72) (42)

Equitable Sharing - foreign

countries qa) (*)

Victim Restitution Ma) (33)

Subtotal, Revenues applied

to Public (74) (75)

Intragovernmental

Equitable Sharing - other

federal agencies* (8) (6)

Total, Applied Fi ‘inancing (82) (81)

Equals:

Total Financing Sources $ 202 $ 248

(*) Less than $500,000;

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

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


EXHIBIT I
MATERIAL WEAKNESSES



EXHIBIT IT
REPORTABLE CONDITIONS



vee

purposes. In this manner, the federal asset
forfeiture program intends to encourage the
continued, significantly important, cooperation
of state and local law enforcement with federal
law enforcement.

Statement: Net Cost

A comparison of costs for the current and prior
fiscal years is presented in the following table.

Program Costs

After equitable sharing expenses, the Fund’s
Temaining finances support the law enforcement
activities and pays for the storage of seized
and forfeited property and sales associated
with the disposition of forfeited property. Non-
discretionary costs increased to nearly $123
million in FY 1998, up $43 million from the
FY 1997 level, an increase of 54 percent. This is
largely due to non-discretionary funding
provided to Treasury’s Year 2000 (Y2K)
automation initiative. Over $50 million of non-
discretionary resources were approved towards
this critical initiative in FY 1998. These
Tesources were provided to Treasury bureaus or
entities, specifically to ensure that asset seizure
and forfeiture automation operations will be
functional when the year 2000 turns over a few
short months away.

The national asset forfeiture program is heavily
automated and failure of the program’s widely-
cast automation network to function in the year
2000 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
$55 million were authorized from the Fund in
FY 1998 for automation-related purchases
designed to correct Y2K deficiencies identified

by Treasury. A portion of these resources were
expensed during FY 1998 and are counted
among the increased programs costs this year.

In addition, a 1997 Super Surplus allocation
Proposal, totaling in excess of $14 million, held
in abeyance during FY 1997 by Congress, was
released for obligation during FY 1998. Lastly,
non-discretionary funding was provided to the
“Computer Investigation Specialist (CIS) 2000
program." The program is intended to enhance
Treasury’s capability to glean evidence about
forfeitable assets from computer data bases.

Program Costs
(Dollars in millions)

1998 1997

Non-discretionary
Costs paid to the Public

National seized property
contractor $28 $26

State and local law
enforcement joint
operations

Subtotal non-
discretionary costs paid
to the Public 31 26

Intra-governmental costs

Seizure investigative cost
asset management 55 29

Other asset related
contract services 2 1

Awards to informer
(moiety payment) 1 1

Other, ADP, training and
program expenses 12 16

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


,we

Page 2 - Raymond M. Dineen, Acting Director

Procedures Act of 1950 (Act), as amended, Section 3512, Executive
Agency's Accounting System, requires Federal agencies to
establish an internal control structure which ensures the
safeguarding of assets and the proper recording of revenues and
expenditures. As 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 Office of Inspector General 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 audit was 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


a

NOTES TO FINANCIAL STATEMENTS

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 sheet,
the statement of net cost, the statement of changes in net position, the statement of budgetary
Tesources, and the statement of financing, all of which are prescribed by OMB Bulletin 97-01, as
amended.

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

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.

Because OMB prescribed new financial statement formats in fiscal year 1998, comparative
information for fiscal year 1997 is only provided on the balance sheet,

Reclassification of Balance Sheet as of September 30, 1997

In order to present the balance sheets as of September 30, 1998 and September 30, 1997 on a
consistent basis, the balance sheet as of September 30, 1997 was reclassified in accordance with
OMB Bulletin 97-01, as amended. No adjustments were made to the data presented as of September
30, 1997.

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, foreign governments, and
the Office of National Drug Control Policy (ONDCP), in accordance with the various laws
and regulations governing the operations and activities of the Fund. These activities reflect the
custodial/fiduciary responsibilities that the Fund has been authorized by law to meet.

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; equipment to enable vessels, vehicles, or aircraft to assist in law enforcement
activities; reimbursement of private persons for expenses incurred while cooperating with a Treasury

NOTES TO FINANCIAL STATEMENTS 31


for purposes of documenting all property
received in the program. This capability will
help to minimize any risks associated with
potential non-compliance of the Justice CATS
system in the event that the Secret Service and
ATF inventory is still supported by CATS for
part or all of FY 2000.

Fund management does not have a contingency
plan of its own, but rather must tely on the
Contingency plans of the bureaus which own the
Pertinent systems.

Look Forward

Fund management will refresh attention to the
Department's national asset forfeiture program
during FY 1999, as it continues to work to
telieve inventory system issues and financial
systems compliance issues. The Executive
Office for Asset Forfeiture (Fund management)
will shortly publish an Action Plan for FY
1999-2000 which will bring new resolve to
Properly managing the needs of the Fund, as
well as establishing a “roadmap” to higher levels
of efficiency.

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
Teport 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

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
Tesources 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 2000 and FY 1999

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.

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.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

20


DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220
April 5, 1999

OFFICE OF
INSPECTOR GENERAL

MEMORANDUM FOR RAYMOND M. DINEEN, \ACTING DIRECTOR
EXECUTIVE OFFICE

FROM: Dennis S. Schindel
Assistant Inspector General for Audit

SUBJECT: Report on the Audited Fiscal Year 1998
Financial Statements of the Treasury
Forfeiture Fund

I am pleased to transmit the attached report on the audited
Fiscal Year 1998 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:

e Independent Auditor’s Report on Financial Statements;

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

The IPA rendered an unqualified opinion on the TFF’s Balance
Sheets as of September 30, 1998 and 1997, and the related
Statements of Net Cost, Changes in Net Position, Budgetary
Resources, and Financing for the year ended September 30, 1998.
However, the Independent Auditor’s Report on Internal Control
cited four material weaknesses related to: (1) accounting
records that 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); (3) the
United States Customs Service’s (Customs Service) inadequate
asset tracking system (repeat finding); and (4) the Internal
Revenue Service’s inadequate accounting and reporting of seized
and forfeited property transactions (new finding) .

In addition, the Independent Auditor’s Report on Internal Control
cited the following six reportable conditions which pertained to:
(1) differing asset tracking systems (repeat finding); (2) improper
timing for valuation of forfeited property (repeat finding);

(3) lack of control over assets (repeat finding); (4) lack of

sales revenue reconciliations (repeat finding); (5) inadequate
property management functions (new finding); and (6) improper
recording of remissions/returns (new 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


Gardiner, Kamya & Associates, PC

Management Consultants and Certified Public Accountant
1717 K Street, N.W,, Suite 601 Washington, D.C. 2003
Phone: 202 857-177

Fax: 202 857-171

Independent Auditor's Report on Compliance

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

We have audited the financial statements of the Department of the Treasury Forfeiture
Fund (the Fund) as of September 30, 1996, and for the year then ended, and have issued
our report thereon dated January 17, 1997.

We conducted our audit in accordance with generally accepted auditing standards;
Government Auditing Standards, issued by the Comptroller General of the United States;
and the Office of Management and Budget (OMB) Bulletin No. 93-06, Audit
Requirements for Federal Financial Statements. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.

Compliance with laws and regulations applicable to the Fund is the responsibility of the
management of the Fund. As part of obtaining reasonable assurance about whether the
financial statements are free of material misstatements, we performed tests of the Fund's
compliance with certain provisions of laws and regulations that may directly affect the
financial statements, including the following:

Budget and Accounting Procedures Act of 1950, as amended
Chief Financial Officers Act of 1990

Federal Manager's Financial Integrity Act of 1982 (FMFIA)
Anti-Deficiency Act, Prompt Payment Act

31 USC 9703, Treasury Forfeiture Fund Act of 1992

19 USC 1300 Series

19 USC 1500 Series

19 USC 1600 Series

18 USC 981, 21 USC 881

Customs and Trade Act, Trade and Traffic Act
Comprehensive Crime Control Act

Section 90205 of the Violent Crime Control and Law Enforcement
Act of 1994

. Section 112 of the Treasury/Postal Appropriations Bill

Member of the American Institute of Certified Public Accountants


Department of the Treasury Forfeiture Fund
Statement of Budgetary Resources
For the Year Ended September 30, 1998

(Dollars in thousands)
Budgetary Resources:
Budget authority $ 295,014
Unobligated balance - beginning of year 204,121
Adjustments : ——8.375
Total budgetary resources $_507.510
Status of Budgetary Resources:
Obligations incurred $ 341,922
Unobligated balance - available 165,588
Total, status of budgetary resources $_507,510
Outlays:
Obligations incurred $ 341,922
Less: adjustment (8,375)
Obligated balance, net - beginning of year 141,155
Less: obligated balance, net - end of year (200,905)
Total Outlays $ 273.797

The accompanying notes are an integral part of the financial statements

FINANCIAL STATEMENTS


NOTES TO FINANCIAL STATEMENTS

. Unliquidated Obligations - This category Tepresents the amount of undelivered purchase
orders, contracts and equitable sharing Tequests 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. For equitable sharing, the expense and liability are
recognized and the corresponding obligations are reduced when final management approval
for payment is given.

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

. 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 10”).
Note 3: Cash and Other Monetary Assets

Cash and Other Monetary Assets as of September 30, 1998 and 1997, respectively, consists of the
following (dollars in thousands):

1998 1997
Cash SISLUS $79,920 $105,777 $60,264

Cash and Other Monetary Assets held by Treasury on behalf of the Fund, and on hand include
forfeited currency, as well as forfeited currency held as evidence, which amounted to approximately
$17 million and $18 million at September 30, 1998 and 1997, respectively.

Note 4: Investments and Related Interest

All investments are intragovernmental short-term (31 days or less) non-marketable par value federal
debt securities issued by, and purchased through Treasury’s Bureau of the Public Debt. Investments
are always purchased at a discount and are reported at acquisition cost (market value), net of
discount. The discount is amortized into interest income over the term of the investment. The
investments are always held to maturity. They are made from cash in the Fund and from seized
currency held in the Customs’ Suspense Account. The Customs’ Suspense Account became the

36 NOTES TO FINANCIAL STATEMENTS


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 management's
Overview of the Fund and the Supplemental Financial and Management Information sections is not
a required part of the financial statements but is supplementary information required by OMB

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

h f. Kaya Ace tes

January 15, 1999

22


Ywe

sharing with state and local enforcement
agencies of nearly $72 million as compared
to just over $42 million in FY 1997. The
associated transaction volume increased to a
remarkable 4,883 separate payment transactions,
up from about 2,100 in FY 1997, more than
double the volume without an increase in the
staff processing these payments.

In addition, the program completed sharing on
a number of very long-standing equitable
sharing commitments, with the conclusion of
the associated case work. Problems in the
functionality of the Customs’ Seized Asset Case
Tracking System (SEACATS) upon deployment
in November 1996 impacted the equitable
sharing payment process through FY 1998.

In summary, although the program’s
performance against this measure deteriorated
during FY 1998, significantly more transactions
were processed toward a significantly higher
expense level than in previous years. Fund
management will resume vigilance in this
important program performance area and work
with participating bureaus to ensure that any
unnecessary or avoidable delays in the
Processing of equitable sharing are identified
and corrected.

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
bureaus and 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 Treasury will possess a 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. This
requirement increases the time the property is
held in a forfeited status, 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. By
implementing this process, the Fund has been
able to realize for FY 1998, 98% of the fair
market value (FMV) in terms of revenue on
Teal property. Given the complexities of selling
teal property versus other types of assets, it is
Fund management’s opinion that the best
achievable performance target for this measure
is nine months. During FY 1998, the average
time between forfeiture and disposal of real
property was 13.8 months, a deterioration from
FY 1997's disposal period of 11 months.
Performance against this measure reflects
continuing program initiatives designed to
eliminate “problem” properties from inventory,
which on average, take considerably longer to
dispose of than routinely processed properties.
In addition, the statistics include Properties for
which private title insurance was unavailable,
preventing would-be purchasers from obtaining
loans. Fund management's initiative to issue
Special Warranty Deeds for such properties
should prevent this type of property problem
from skewing future performance against this
measure.

Nevertheless, the disposal of real property is
one of the more complicated activities
associated with the forfeiture program. The

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


to October 31, the system would produce a schedule
which would include all activities through October
31. Manual adjustments and reconciliations would
have to be performed to reflect only activity as of
September 30. In essence, ATS produces reports as
of the request date. As a result, to produce the
SFFAS No. 3 exhibits, the Secret Service staff
compared two or more schedules and made
significant manual adjustments to complete the
analysis of changes in forfeited and seized property
SFFAS No. 3 exhibits.

EFFECT

The difficulties encountered in preparing the
changes in forfeited and seized property analysis by
the agencies referred to above indicate that the Fund
lacks the ability to properly, fully and accurately
account for seized and forfeited property.

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 understand that a major systems development
effort which focuses on the design, development and
implementation of a new inventory system has been
approved and is underway for Customs. This
system, as purported by the Fund's management,
will provide a cradle-to-grave system for tracking all
property from case initiation to final financial
resolution and will meet all SFFAS No. 3
requirements for seized and forfeited property.

Implementation of the system by the Fund's
management will be used to help produce the
audited financial statements starting in fiscal year
1997. This system will be made available to the
other enforcement bureaus. Prior to final
implementation during the development life cycle,
we recommend that each bureau produce the SFFAS
No. 3 analysis requirements for seized and forfeited
property in order to evaluate and update any
shortfalls in the new system. We also recommend
post conversion audits to ensure that the system
works as purported. We recommend that the Fund
eventually have only one inventory system with
consistent data definitions. This will allow the law
enforcement bureaus to recognize and correct any
problems encountered in a more timely manner as
well as alerting the staff to issues that might need to
be considered in the development of the new
system.

In fiscal year 1995, the Assistant Secretary for
Management (Treasury) approved the development
of the Seized Asset and Case Tracking System
(SEACATS). The development of this system was
intended to replace several non-integrated tracking
systems operated by the Customs. SEACATS was
also intended to serve as the financial system of
record for the Fund and as the single repository for
all inventory and case information related to seized
and forfeited property, fines, penalties or liquidated
damages of Customs. In November 1996, Customs
implemented SEACATS. However, there have been
a considerable number of start-up problems,
including systems conversion problems.
Consequently, the difficulties encountered by
SEACATS could ultimately affect the ability of the
Fund to record and track revenues, expenses and
changes in the seized and forfeiture inventory during
fiscal year 1997.

FORFEITED PROPERTY VALUATION

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

EXHIBIT ON REPORTABLE CONDITIONS 55


As part of our audit, we also obtained an understanding of the process by which the Fund
identifies and evaluates weaknesses required to be reported under the FMFIA and related
Treasury implementing procedures as it relates to the Fund. However, the objective of our audit
of the financial statements was not to provide an opinion on overall compliance with such laws
and regulations. Accordingly, we do not express such an opinion.

The results of our tests disclosed the following instance of noncompliance that is required to be
reported herein under Government Auditing Standards.

The Budget and Accounting Procedures Act of 1950 as amended, Section 3512,
Executive Agency's Accounting System requires federal agencies to establish an
internal control structure which ensures the safeguarding of assets and the proper
recording of revenues and expenditures. As described in our Report on Internal
Controls dated January 17, 1997, 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 many of the system weaknesses.

In accordance with Government Auditing Standards, we have also issued reports dated January
17, 1997 on our audit of the Fund's financial statements and on our consideration of the Fund's
internal control structure.

This report is intended for the information and use of the U.S. Congress, the management of the

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

CoM Bn Xora Rascustas, PG.

January 17, 1997


- data that support reported performance indicators are properly recorded and accounted for
to permit preparation of reliable and complete performance information.

Because of inherent limitation in any internal control structure, errors or irregularities may
nevertheless occur and not be detected. Also, projection of any evaluation of the structure to
future periods is subject to the risk that procedures may become inadequate because of changes
in conditions or that the effectiveness of the design and operation of policies and procedures may
deteriorate.

In planning and performing our audit of the financial statements of the Fund as of and for the
year ended September 30, 1996, we obtained an understanding of the internal control structure.
With respect to the internal control structure, we obtained an understanding of the design of
significant internal control structure policies and procedures, determined whether they have been
placed in operation, assessed control risk and performed tests of the Fund's internal control
structure in order to determine our auditing procedures for the purpose of expressing our opinion
on the financial statements and not to provide an opinion on the internal control structure.
Accordingly, we do not express such an opinion. Our consideration included obtaining an
understanding of the significant internal control structure policies and procedures and assessing
the level of control risk relevant to all significant cycles, classes of transactions, or account
balances.

With respect to the performance measure control objective described above, we obtained an
understanding of relevant internal control structure policies and procedures designed to achieve
this control objective and assessed control risk.

We noted certain matters involving the internal control structure and its operation that we
consider to be reportable conditions under standards established by the American Institute of
Certified Public Accountants and OMB Bulletin No. 93-06. Reportable conditions involve
matters coming to our attention relating to significant deficiencies in the design or operation
of the internal contro] structure over financial reporting that, in our judgement, could adversely
affect the Fund's ability to ensure that the objectives of the internal control structure, as
previously defined, are being achieved.

A material weakness is a reportable condition in which the design or operation of one or more
of the specific internal control structure elements does not reduce to a relatively low level the risk
that errors or irregularities in amounts that would be material in relation to the financial
statements being audited, or material to a performance indicator or aggregation of related
performance indicators, may occur and not be detected within a timely period by employees in
the normal course of performing their assigned functions.

Our consideration of the internal control structure would not necessarily disclose all matters in
the internal control structure that might be reportable conditions and, accordingly, would not
necessarily disclose all reportable conditions that are also considered to be material weaknesses
as defined below. However, we noted two matters involving the internal control structure and

46


Currency and Monetary Instruments

The Fund's primary source of revenue is
forfeited currency and monetary instruments.
For FY 1998, revenue from forfeited currency
and monetary instruments totaled $167 million,
or 78 percent of total revenues from public
sources, versus $203 million, or 86 percent of
public source revenue in FY 1997.

Sale of Forfeited Property

The revenue from forfeited Property was
$37 million in FY 1998 and $23 million in FY
1997.

Proceeds from Participating with Other
Federal Agencies

Pursuant to Title 28 U.S.C. 524(c), the
Department of Justice is authorized to share
forfeited proceeds with the Department of the
Treasury reflecting the degree of Treasury law
enforcement in the effort leading to seizure of
the forfeited asset. Funding from these sources
is available to the Secretary of the Treasury,
without fiscal year limitation, for any Treasury
law enforcement purpose. For FY 1998, these
“reverse asset sharing” transactions totaled over
$13 million, as compared to $11 million for FY
1997,

Interest

The Fund is authorized to invest cash balances
not currently needed for operational purposes in
Treasury securities. On September 30, 1998,
investments totaled $591 million. This amount
included $248 million invested from balances of
the Fund and $343 million invested from seized
balances not yet forfeited. Interest income
earned on these investments totaled $21 million,

as compared to $14 million for FY 1997. The
increase reflects improved investment
strategies, larger invested balances, and higher
Treasury securities interest rates.

Transfers from ONDCP

Through FY 1997, one-half of all Super
Surplus declarations were required for transfer
to the Special Forfeiture Fund (SFF) of the
Office of National Drug Control Policy
(ONDCP). However, Congress mandated that
the SFF be funded from the General Fund of
the Treasury beginning in FY 1997. Asa result,
forfeiture balances, required by existing statute
to be transferred to ONDCP at the end of FY
1996 and FY 1997, were authorized by FY
1998 and FY 1999 Treasury Department
Appropriations Acts, respectively, to be
transferred back to the Treasury Forfeiture
Fund. Balances transferred to the Fund during
FY 1998 are restricted to use in FY 1999 and
will be issued in accordance with the Fund’s
Super Surplus authority, 31 U.S.C.
9703(g)(4)(B). Super Surplus balances are
available to the Secretary, without fiscal year
limitation, for the law enforcement activities of

any federal agency or Treasury law
enforcement organizations.
Applied Financing

The total financing applied from the Fund
increased to $82 million in FY 1998 from
$81 million in FY 1997. The FY 1998 figure
includes a banner year for equitable sharing
with our state and local law enforcement
partners, and FY 1997 includes a large victim
restitution expense recorded as the Bull Dog
Medical Case. Treasury policy restricts the use
of shared funds by the state and local law
enforcement agencies to law enforcement

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

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