encumbrances can complicate the closing of a
real property sale. Through close coordination
with the seized property contractor, the seizing
agency and the US. Attorneys, Fund
management continues to work to ensure that
properties are 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 rights of citizens
are protected and that revenue is collected in a
timely manner, a goal of the forfeiture program
is to process administrative cases quickly. A
by-product of this 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 9
months for the U.S. Customs Service (Customs)
and 6 months for all other enforcement bureaus
as a reasonable period to process administrative
seizure cases.

The timely processing of administrative cases
within the prescribed times decreased from 65
percent in FY 1996 to 56 percent in FY 1997.
Of the cases remaining outside the standard,
nearly 60 percent were ATF cases, principally
associated with illegal weapons. Most of ATF's
cases are tied to firearms forfeitures and
Specific statutes require that the criminal
proceedings be resolved before the
administrative seizure can be closed, This
results in a noticeably longer administrative
Processing procedure for ATF. When ATF is
factored out, the Fund achieved a timeliness
rate of 74 percent for processing administrative
cases, down from 85 percent in FY 1996,
though consistent with long Tange targets for
the performance measure. The majority of
administrative forfeitures are executed by
Customs. However, estimates were used by

Customs in the current year to support
performance data for this measure. An
itemization of Over-age cases was not provided
by Customs as required by EOAF Directive #26
dated March 1, 1995 ‘Timely Processing of
Administrative and Civil Judicial Forfeiture
Cases,’

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, 1997. 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). 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 Teports used to
monitor and control budgetary resources that are
Prepared from the same books and records and
are subsequently presented in federal budget
documents. Therefore, the reader is advised
that direct comparisons are not possible
between figures found in this report and similar
financial figures found in the FY 1999 and FY
1998 Budget of the United States Government.
Further, the notes to the financial statements
and the independent auditor's opinion and report
on internal controls are also integral
components to understanding fully the financial
highlights of Fund operations described in this
chapter.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

17


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NOTES TO FINANCIAL STAT, ‘EMENTS

other federal agencies which would benefit from the
use of the item. In 1995, a new class of asset
distribution was established for victim restitution.
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
(allocations or revenue) are recognized for the net
realizable value of the asset to be shared or
transferred, thereby resulting in no gain or loss
Tecognized. Liabilities are recognized when EOQAF
approves payments.

Entity Assets

Entity assets are used to conduct the operations and
activities of the Fund. Entity assets consist of
forfeited 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, receivables, and forfeited property
which is held for sale or to be distributed.

¢ Fund Balances with Treasury and Cash --
Forfeiture Fund balances with Treasury and
cash represents the aggregate amount of the
Fund’s accounts with Treasury for which the
Fund is authorized to make expenditures and
pay liabilities, and includes forfeited cash not
yet deposited.

* Investments -- This includes forfeited cash
held by the Fund that has been converted to
U.S. Government Obligations.

* Receivables -- Intra-governmental receivables
principally represent monies due from Customs.
The values reported for governmental
receivables are primarily funds due from EG&G
Dynatrend, the seized and forfeited property
contractor.

Prepaid Expenses --

Intra-governmental Prepaid Expenses-
primarily represents advances paid to the
Department of Treasury for the wireless
communication program.

Governmental Prepaid Expenses- are
mortgages and other claims paid before
final closing of sale of related Property, as
required by court order. The values
reported here are associated with these
special transactions.

Forfeited Property -- Forfeited Property is
tecorded at 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 time of
forfeiture. Direct and indirect holding costs are
not capitalized for individual forfeited assets.
Forfeited currency is included in Fund Balances
with Treasury and Cash in the Statement of
Financial Position.

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

OMB issued Statement of Federal Financial
Accounting Standards Number 3, Accounting
Sor Inventory and Related Property (SFFAS
No. 3). SFFAS No. 3 requires seized monetary
instruments (cash and cash equivalents) to be
Tecognized as an asset in the financial
statements and a liability be established in an

34 NOTES TO FINANCIAL STATEMENTS


SECTION 0
INDEPENDENT AUDITOR'S REPORTS ON COMPLIANCE
AND INTERNAL CONTROL STRUCTURE


valued at more than $2.7 million. Six persons
were arrested and convicted on hundreds of
counts in this case including racketeering,
money laundering, contraband cigarette
trafficking and conspiracy violations, For their
information and help in conducting the
investigation, an equitable share for the Tribal
Police was approved in 1997. Also assisting
with the case and receiving a share from the net
Proceeds of the forfeited assets was the
Montana Department of Justice Narcotics
Investigation Bureau.

Long_Island Inf ion Leads to Miami
Currency Seizures

Port Washington is a well-heeled residential
community situated on a cove of Long Island’s
North Shore, with some of its estates
reminiscent of the homes portrayed in F. Scott
Fitzgerald’s classic tale of the 1920s, The Great
Gatsby. Seventy years after that story first
appeared, while Port Washington detectives
were searching the residence of a money
launderer, they chanced upon a business card
for a firm in Miami that led to two Customs
administrative forfeitures totaling over $15
million.

The card was for a South Florida freight
forwarder doing business as Universal
American Cargo. In August of 1996, Customs
agents arrived at Universal American Cargo in
Miami and, with the help of the Forensic
Imaging Bureau of the Dade County Medical
Examiner, photographed electronic and other
cargo documenting how these items had been
gutted to conceal undeclared outbound
currency. Approximately, $6.3 million was
seized on the spot.

Meanwhile, during that same month,
information was developed that a container
shipped from Universal American Cargo and
hiding another $9.2 million in cash, was on a

vessel bound for Cartagena, Columbia, Upon
the request of the Government of the United
States, the suspect container was not unloaded
in Colombia but instead returned with the vessel
to Miami, where this Currency was discovered
and seized. In FY 1997, the Customs’
recommendation to share from the net forfeited
proceeds in this case was approved. Equitable
shares were paid to the Drug Enforcement
Administration, the police departments of
Metro-Dade, the City of Miami and Port
Washington as well as to the Dade County
Medical Examiner.

Shad Rel Property Tain West Visa’

Jerry Wandling likely had come to believe that
he was living in “almost heaven.” For many
years he had been the largest marijuana dealer
in southern West Virginia and despite attempts
by several law enforcement agencies since
1989, none had been able to successfully
conclude their investigations of his activities.
That track record changed in 1995 when the
West Virginia State Police Bureau of Criminal
Investigation enlisted the aid of the Internal
Revenue Service in pursuing Wandling and his
previously impervious operation,

Working together, IRS and state police
investigators soon found the weak link in
Wandling’s marijuana empire, his wife, who
provided enough evidence to establish probable
cause for the issuance of search warrants on his
residence. That evidence showed that
Wandling had accumulated hundreds of
thousands of dollars of assets while at the same
time showing minimal income on his tax
retums. Once the initial crack in the
organization was identified, progress came
rapidly. On one day alone, ten agents and
officers interviewed thirty of Wandling’s
associates over a fourteen hour span and came

DETERRING CRIMINAL ACTIVITIES 1


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Uncontested Seizures of C
$100,000, Taking More
For the year ended September 30, 1997

‘urrency and Monetary instruments Valued Over

Than 120 Days from Seizure to Deposit in Fund

(@ollars in Thousands)
(Unaudited)

Number of Dollar Amount
State / U.S. Territory Seizures (in Thousands)

United States Customs Service (Customs)
California 5 $ 2,060
Florida 9 3,048
Indiana 1 103
Maryland 1 149
Massachusetts 2 1,691
Michigan 2 589
Nevada 1 145
New Jersey 2 895
New York 14 4,245
Tennessee 1 239
Texas 8 4,228
Total Customs 46 $ 17,392

Internal Revenue Service (IRS)
No State / Territory Provided 3 $ 1,443
GRAND TOTAL 49 $18,835
——sSeees

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

date.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION 71


ACCOUNTING RECORDS ARE MAINTAINED ON A CASH

CONDITION

The Treasury Forfeiture Fund's (the Fund) general ledger as well as the U.S. Customs Service
(Customs), U.S. Secret Service (Secret Service), Internal Revenue Service (IRS) and the Bureau
of Alcohol, Tobacco and Firearms (ATF) supporting systems are maintained primarily on a cash
basis. In addition, the Supporting computer systems maintained by each enforcement bureau do
not interface with one another or with the Fund's general ledger to ensure that all transactions are
accurately and timely recorded. To produce accrual basis financial statements that can be
substantiated through an audit, year end manual procedures for each enforcement bureau were
developed. The Fund's management provided each bureau representative with year end close out
procedures designed to identify the amounts which should be accrued in the financial statements
at year end.

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

Mortgage and Claims payable - The issue of how to determine a lien liability and when to
reduce it has been addressed by Executive Office of Asset Forfeiture (EOAF) in the updated
directive issued by the Department of the Treasury, titled number 14, "Expeditious Payment
of Liens, Mortgages and Taxes”, effective October 1995. However, the updated directive
does not provide clear instructions as to when the liability is to be recorded. Therefore,
implementation of the instructions, while resolving other issues, will not ensure that a
liability is recorded for claims and mortgages throughout the year. In fact, the directive
requires that upon EOAF's approval of payment, the appropriate accounting strip data be
affixed to the paperwork authorizing the obligation and disbursement of funds which are then
to be forwarded to the Accounting Services Division (ASD) for processing. Also, the
directive requires ASD to disburse the approved payments within 14 calendar days from the
date of EOAF's approval of payment. Because ASD cannot record the liability unless
EOAF's approval with the accompanying accounting strip is received, these requirements do
not provide for a complete accrual of all liens and mortgages.

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

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

52 INDEPENDENT AUDITOR’S EXHIBIT |


EXHIBIT I
MATERIAL WEAKNESSES

51


CONDITION

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

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

56 INDEPENDENT AUDITOR’S EXHIBIT 1


1 DIFFERING INVENTORY 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. The four Treasury law enforcement bureaus use
different inventory tracking systems to Prepare the required analysis of changes in forfeited and
seized property schedules. The different systems collect and account for seized and forfeited assets
differently and use slightly different data definitions. As a result, manual manipulation and
reconciliation are required to Prepare the 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 recorded.

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

to SEACATS non performance, other law enforcement bureaus had to revert to information
produced by their independent tracking systems for financial Teporting purposes at year-end:

Customs - In order to produce the SFFAS No. 3 for property, Customs relied on the property reports
produced by SEACATS and manually manipulated them to meet the reporting requirements.
Significant manual adjustments were Tequired to prepare the SFFAS No. 3 exhibits for property.
SEACATS provided unreliable information for currency, therefore, manually compiled information
was used to produce the SFFAS No. 3 exhibits for currency and monetary instruments.

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

INDEPENDENT AUDITOR’S EXHIBIT I 61


Property on hand at year-end. Additionally, the value of forfeited and seized currency
teported by SEACATS is unreliable. Consequently, exhaustive year-end procedures
were developed to manually compile forfeited and seized currency as of September
30, 1997, for financial reporting purposes.

R ble Conditi

Prior Year Reportable Conditions:

The reportable conditions identified below were reported in the Prior year's Independent
Auditor's Report on Internal Control Structure and are of continuing significance:

As a result, manual manipulation and reconciliation are required to produce the
analysis of change in forfeited and seized property schedules,

Improper Timing for Valuation of Forfeited Property - During the year, forfeited
Property is not recorded in the subsidiary system at its fair value at the time of
forfeiture as required by Statement of Federal Financial Accounting Standards
(SFFAS No. 3). As a result, an adjustment is made at year end to record forfeited
property at an estimate of fair value.

Current Year Reportable Conditions:

The following additional reportable conditions were identified for fiscal year 1997:

Lack of Inventory Control - The Fund does not adequately monitor property placed
with the national 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.

Lack of Sales Revenue Reconciliations - The Fund does not adequately monitor the
sale of property by EG&G during the year. It does not reconcile properties which
it has recorded as sold to EG&G Teports 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.

49


End of Year Assets of the Fund

($ millions)
(Continued)
1997 996

Prepaid Expenses 3 0
Forfeited property, net of liens
payable 36 34
Seized currency and other
investments *207 238
Total $618 **$494

— —=

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
Fepresents seized monetary instruments accounted for
in the Fund's suspense account and which is: (a) on
deposit with Treasury; (b) on hand in vaults at field
office locations; or (c) converted to interest-bearing
U.S. Government obligations.

+8 Column does not foot due to rounding of amounts,

Liabilities and Net Position

A summary of the liabilities and net position of
the Fund as of September 30, 1997, as
compared with September 30, 1996 is shown in
the following table. The large increase in
distributions payable is principally associated
with over $30 million in victim restitution
payments arising from i
matter completed in FY 1997 for which
restitution payments will be distributed in FY
1998. Revenue from forfeited property held for
sale is deferred until the property is sold. When
compared to FY 1996, more forfeited property
was held for sale on September 30, 1997, which
accounts for the increase in deferred revenue
of $6 million. Accounts payable totaled $28
million on September 30, 1997, a decrease from
FY 1996 of $23 million.

In addition to total liabilities of $345 million
recognized by the Fund on September 30, 1997,
$130 million was reserved as the unobligated
balance to be carried forward to begin 1998
operations and $81 million was reserved for
unliquidated obligations of FY 1997, Further,
the Fund recorded an increase in distributions to
the Office of National Drug Control Policy's
(ONDCP) Special Forfeiture Fund. FY 1997
ended with the cumulative results of fund
Operations totaling $97 million,

End of Year Fund Liabilities and Net

Position
($ millions)
1997 996
Liabilities
Distributions
payable $73 $ 29
Deferred revenue
from
forfeited assets 37 31
Seized currency 207 238
Accounts payable 28 51
Net Position
Unobligated balance 130 40
Unliquidated
obligations 81 67
Distributions to
ONDCP’s
Special Forfeiture
Fund (36) (16)
Cumulative Results
of Operations 97 54
Total **$618 — ** $49.
==
** Column does not foot due to rounding of amounts

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

21


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DEPARTMENT OF THE TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the year ended September 30, 1997

(@ollars in Thousands)
(Unaudited)

State/U.S. Territories Currency Value Property Value
Alabama $339 $3
Alaska 0 0
Arizona sos 7
Arkansas 46 oO
California 3,269 wn
Colorado 23 °
Connecticut 64 oO
D.C. Washington 109 0
Delaware 7 0
Florida 11,743 295
Georgia 3 0
Guam 0 0
Hawaii Cy) 0
Idaho 4 0
Dlinois 774 32
Indiana 252 0
Towa ° 0
Kansas 0 0
Kentucky 282 3
Louisiana 165 5
Maryland 550 53
Massachusetts 137 0
Michigan 4 48
Minnesota oO 0
Mississippi 234 0
Missouri 415 4
Montana 7 0
Nebraska 0 0
Nevada 4 0)
New Jersey $47 0
New Hampshire oO 0
New Mexico 4 88
New York 9,389 2B
North Carolina 568 30
North Dakota o 0
Ohio 237 78
Oklahoma 0 0
Oregon 24 0
Pennsylvania 338 0
Puerto Rico ° 0
Rhode Island 0 o
South Carolina 15 1
South Dakota 0 0
Tennessee 1,186 0
Texas 1,499 101
Utah 60 0
Vermont 0 cy)
0 0
40 oO
ington 138 1
West Virginia 2 o
Wisconsin 7 °
Wyoming —8 —2
Total $33,763 286

Summarized above are the currency and property values of assets forfeited and shared with state and local agencies and U.S. territories

70 SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION


retain their interest in the Property. Such
notification begins a process designed to
safeguard the rights of affected parties. The
main points of this process include:

* Personal Notice - This is the most direct
form of notice and occurs whenever the true
Owner or owners of the property are known,
or if there is a valid lien against the property
held by an individual or institution, In these
circumstances, these Persons must be
extended personal notice of the seizure and
intended proceedings by registered or
certified mail.

* Publication - To be sure that anyone with
an interest in the property is not overlooked,
even if they are unknown to the seizing
agency, personal notice is supplemented by
publishing a notice of the specific seizure
and pending proceedings in a newspaper of
general circulation.

* The Claim and Cost Bond - Upon being
notified of the seizure of the property, the
interested person may choose to contest the
forfeiture of the property by filing a claim
and cost bond. This action stops the
investigative agency from ruling on the
forfeiture and requires that the matter be
resolved in civil court. At this point, the
action is referred to the U.S. Attorney. If an
interested person cannot afford the cost
bond, he or she may file an in Jorma
pauperis petition to have the requirement of
the cost bond waived and still move the
matter into the judicial arena.

* Petitions for Remission or Mitigation -
Filing a claim and cost bond is only one
course of action available to the interested
party. Alternatively, the party may
acknowledge the validity of the seizure and
file what is known as a petition for
remission or mitigation. In this course of

action, the party is asking, in effect, that the
Property be pardoned. For a remission, the
Party must prove that they have an interest in
the property and that they had no knowledge
that the property would be used illegally. If the
petition for remission is granted, the
government will return the property or make a
Payment equal to the petitioner's interest in the
Property. A mitigation is a partial pardon and
usually results in the government returning the
Property on the condition that the petitioner pay
a penalty.

Whether civil forfeiture is accomplished
administratively by an investigative agency or
judicially in a court of law, it must always
Proceed through a very structured and
delineated Process; a process that
comprehensively notifies affected parties,
invites arguments against the intention to
forfeit, accommodates the indigent and offers
Opportunities to achieve compromise
resolutions.

Supportive Policy of the 1 Forfei

Eund

Since its establishment in 1992, Treasury’s
Executive Office for Asset Forfeiture has issued
policies and directives designed to effectively
and efficiently realize the purposes of the Fund
as intended in its enabling _ legislation.
Recognizing the critical linkage between
meriting the public trust and the Fund’s
continued ability to benefit law enforcement,
several of these directives have been aimed at
safeguarding the integrity of the Fund and the
rights of individuals affected by seizure and
forfeiture actions.

Treasury Department employees and their
immediate families are prohibited from
purchasing property that has been forfeited
to the United States and is being sold by

is)

SAFEGUARDING INDIVIDUAL RIGHTS


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1997
(Unaudited)

The Treasury Forfeiture Fund Act of 1992, 31 U.S.C. 9703(f), requires the Secretary of the Treasury
to transmit to Congress, not later than February 1, of each year, certain information. The following
summarizes the required information.

(1) A report on:

(A) The estimated total value of Property forfeited with respect to which funds were not

(B)

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

At September 30, 1997, the Fund had forfeited currency of $18,103,000 not deposited. 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, 1997, the Fund had forfeited
property held for sale of $36,131,000. 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 U.S. Customs Service (Customs) Suspense account. Upon
forfeiture, it is transferred to the Treasury Forfeiture Fund. At September 30, 1997, there was
$2,706,000 of forfeited currency and other monetary instruments that had not yet been
transferred to the Fund. This is reported as a part of - “Intra governmental accounts
receivables” in the audited financial statements.

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

The estimated total value of all such Property transferred to any state or local law enforcement
agency is summarized by state and U.S. territories. Total currency transferred was
$46,915,000 and total property transferred was $786,000 at appraised value.

(2) A Report on:

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

The total net position of the Treasury Forfeiture Fund on September 30,1996, which became
the beginning balance for the Fund on October 1, 1996, as reported in the audited financial
statements is $144,672,000.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION 73


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Analysis of Revenues, Expenses, and Distributions
For the year ended September 30, 1997

(Dollars in Thousands)
(Unaudited)
Revenues and expenses and distributions by asset category:
Expenses and
R Sinn
Vehicles $ 8,322 $9,416
Vessels 2,312 11,997
Aircraft 2,312 3,865
General Property 7,398 38,080
Real Property 25,893 1,492
Currency and monetary instruments 228,418 77,282
274,655 142,132
Less:
Mortgages and claims (4,821) (4,821)
Refunds (7,028) (7,028)
Add:
Allocation of revenue to ONDCP Special Forfeiture Fund - 35,679
Excess of net revenues and financing sources
Over total program expenses - 96,844
$262,806 $262,806
Revenues and expenses and distributions by type of disposition:
Expenses and
R Distribuai
Sales of property and forfeited Currency and monetary instruments $ 191,210 $ 27,005
Reimbursed storage costs 1,477 14,213
Assets shared with state and local agencies 42,375 42,375
Assets shared with other federal agencies 6,310 6,310
Assets shared with foreign countries 231 231
Victim Restitution 33,052 33,052
Destructions 17,056
Pending disposition —_ — L890
274,655 142,132
Less:
Mortgages and claims (4,821) (4,821)
Refunds (7,028) (7,028)
Add:
Allocation of revenue to ONDCP Special Forfeiture Fund ~ 35,679
Excess of net revenues and financing sources
over total program expenses —_= 26,844
$262,806 $262,806

72 SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(
For the year ended September 30, 1997
(Unaudited)

(E)

G

@

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 $17,392,000. A Separate schedule is presented on
page 71.

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

The total net position of the Fund at September 30, 1997, as reported in the audited financial
statements is $272,713,000.

The net amount, if any, of the excess unobligated amounts remaining in the Fund at the
end of the Preceding fiscal year and available to the Secretary for federal law
enforcement related Purposes,

There is no cap on amounts that can be carried forward into fiscal year 1998 per fiscal year
1997 Omnibus Appropriations Act (PL104-208). The amount carried over to fiscal year 1998
is $130, 186,000.

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

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

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

A separate schedule is presented on page 72.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION 75


NOTES TO FINANCIAL STATEMENTS

Fund financial statements are presented in
accordance with the following hierarchy as
Prescribed by OMB, which constitutes an other
comprehensive basis of accounting:

* Individual standards agreed to by the Secretary
of the Treasury, the Director of OMB, and the
Comptroller General of the United States, 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 Bulletins in effect for the period
covered by the financial statements.

* Accounting Standards contained in agency
accounting policy, procedures, manuals, and /or
related guidance, which are prevalent practices.

* Accounting principles _ published by
authoritative standard setting bodies and other
authoritative sources: (a) in the absence of other
guidance in the first three parts of this
hierarchy; and (b) if the use of such accounting
standards improve the meaningfulness of these
financial statements.

Financial Statements Presented

To appropriately present the results of its principal
activities (i.e.,custodial/fiduciary responsibilities)
and the funding of such, the Fund has presented a
statement of operations and changes in net position
with the detailed changes in net position presented
in note 7.

The form and content of the statement of financial
Position, as suggested by OMB, has been adjusted
to present non-entity assets (and offsetting
liabilities) for revenue collected or to be collected
but not yet distributed to the various entities
expected to receive these funds,

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, other foreign governments and the
Office of National Drug Control Policy (ONDCP)
Special Forfeiture Fund 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 enforce.

Pursuant to 31 USC 9703, as amended, the Fund is
authorized to pay certain discretionary and non-
discretionary expenses.

Non-discretionary expenses include all proper
expenses of the seizure (including investigative
costs and purchases of evidence and information
leading to seizure, holding cost, security Costs, etc.),
awards of compensation to informers, satisfaction
of liens against the forfeited property, and claims of
parties in interest to forfeited property. Expenses
incurred by state and local law enforcement
agencies in joint law enforcement operations with
a Treasury law enforcement organization are also
recognized as non-discretionary expenses. Under
the enabling legislation, non-discretionary expenses
are authorized by permanent indefinite authority
and limited only by revenue generated from
forfeiture activities.

Discretionary expenses include purchases of
evidence and information related to smuggling of
controlled substances; equipment to enable vessels,

32 NOTES TO FINANCIAL STATEMENTS


Revenues and Financing Sources

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

Revenues and Financing Sources

($ millions)
(continued)
1997 1996
Forfeited Currency and
onetary Instruments $203 $120
Forfeited property 25 32
Payments in lieu of
forfeiture 7 3
Reimbursed costs 2 2
Proceeds from participation
with other Federal agencies 1] 9
Interest 14 9
Other miscellaneous 1 1
Total $263 $176

Currency and Monetary Instruments

The Fund's primary source of revenue is
forfeited currency and monetary instruments.
For FY 1997 revenue from forfeited currency
and monetary instruments totaled $203 million,
or 77 percent of total revenues, versus $120
million, or 68 percent, in FY 1996. The
increase in forfeited currency is largely due to a
currency forfeiture in the Bulldog medical case
of over $32 million as well as a slight upswing
in general currency forfeitures during fiscal year
1997,

Forfeited Property

The revenue from forfeited Property, net of
mortgages, was $25 million in FY 1997 and
$32 million in FY 1996.

Payments in Lieu of Forfeiture

After property is seized for forfeiture, the
government may enter into negotiations with
the violator for a cash payment to settle the
pending case instead of proceeding with the
formal forfeiture Process. Such payments in
lieu of forfeiture totaled $7 million in FY 1997,
an increase of $4 million over FY 1996.

Interest

The Fund is authorized to invest cash balances
in certain special Treasury securities. On
September 30, 1997, investments totaled $407
million. This included $261 million invested
from balances of the Fund and $146 million
invested from seized balances not yet forfeited.
Interest income earned on these investments
totaled $14 million, an increase of $5 million
over FY 1996.

Allocation of Revenues

A comparison of allocation of revenues for the
Past two fiscal years is shown in the table that
follows.

Allocation of Revenues

(S$ millions)
1997 1996
State and local $ 42 $ 48
Foreign countries * *
Other federal agencies 6 7
Victim restitution 33 3
Total $ 81 $ 58
—_ ——

* Less than $500,000

The total revenues allocated from the Fund
increased to $82 million in FY 1997, Most of
this increase is attributable to about $32 million

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


SECTION 0
FINANCIAL STATEMENTS


Property Contractor

The single largest program expense of the Fund
is for the storage, maintenance and disposal of
Teal and personal property. This function is
performed by EG&G Dynatrend, a private firm
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 1997 EG&G
expenses were approximately $26 million,
about the same as FY 1996.

Super Surplus and the
Enforcement Fund

Secretary's

Super Surplus expenses totaled less than
$1 million in FY 1997. The Super Surplus is
one of the Fund's permanent spending
authorities, authorized under 31 USC. §
9703(g)(4)(B). At the end of each fiscal year,
after reserving the Fund's authorized retained
capital, one-half of the remaining Funds are
declared as the Super Surplus available to the
Secretary of the Treasury for any federal law
enforcement activity. As referenced previously,
a proposed allocation of Super Surplus funds
for FY 1997 totaling $14.4 million was not
released by Congress in time for FY 1997
expenses, but is expected to be expensed in FY
1998,

Expenses of the Secretary's Enforcement Fund
(SEF) totaled $6 million in FY 1997, a decrease
of $7 million from FY 1996. As with the Super
Surplus, the SEF is another one of the Fund's
permanent spending authorities. The SEF is
authorized under 31 U.S.C. § 9703(b)(5) and is
derived from asset sharing revenue received
from the Justice Department or the U.S. Postal
Service. Such revenue represents Treasury's

share of forfeitures that resulted from joint
investigations with these agencies. The SEF is
available for any Treasury law enforcement
purpose,

Assets

A summary of the assets of the Fund as of
September 30, 1997, is presented in the
following table. Undistributed funds and
fund balances with Treasury and cash totaled
$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, 1997, the Fund
had investments in Treasury securities of $261
million and accrued interest on investments of
$634,000. The balance for receivables totaled
$3,858,000 on September 30, 1997, and is
principally associated with Funds forfeited but
still in the U.S. Customs suspense account. The
value of forfeited Property, net of mortgages, on
September 30, 1997, was $37 million, an
increase of $3 million over FY 1996. Finally,
the total for seized currency on September 30,
1997, was $207 million, a decrease of $31
million from FY 1996, reflecting the large U.S.

ical forfeiture of over $32
million during FY 1997.

End of Year Assets of the Fund

millions)
1997 1996
Undistributed funds and fund
“ahs th Treasury and $106 $ 76
Investments 261 145
Accrued Interest 1 1
Receivables 4 1

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

20


NOTES TO FINANCIAL STATEMENTS

vehicles or aircraft to assist in law enforcement
activities, reimbursement of private persons for
expenses incurred while cooperating with a
Treasury law enforcement organization in
investigations; and publication of the availability of
awards. Discretionary expenses are subject to an
annual, definite Congressional appropriation
limitation and are paid from deposits made to the
Fund.

The Fund's expenses are generally paid on a
reimbursement basis. Reimbursable expenses are
incurred by the respective bureaus Participating in
the Fund against the Salaries and expenses
appropriation and then submitted to the Fund for
reimbursement. The bureaus are reimbursed
through Inter-Agency Transfer (SF-1081) or Online
Payments and Collections (OPAC). Certain
expenses such as equitable sharing payments, are
paid directly from the Fund.

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

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 or foreign government.
Revenue is not recorded if the forfeited property is
ultimately destroyed or cannot be legally sold.

Revenue from seized monetary instruments 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. Similar to the distributions of forfeited
property or currency made to federal, state or local
agencies or foreign countries who provide direct or
indirect assistance in related seizures, the fund
receives proceeds from certain other federal
agencies. Operating costs are recorded as expenses
when goods are received or services are performed.

As provided for in the enabling legislation, the
Fund has invested seized and forfeited currency.
Treasury’s Bureau of the Public Debt invests the
funds in obligations of, or guaranteed by, the United
States Government. Interest is reported to the Fund
and recorded monthly in the general ledger.

Transactions with the Office of National Drug
Control Policy

At fiscal year end, certain excess unobligated
balances, on a budgetary basis, remaining in the
Fund are to be transferred to the Office of National
Drug Control Policy (ONDCP) Special Forfeiture
Fund. The Omnibus Crime Control Act of 1994
requires the transfer of one half of all excess
unobligated balances, up to $100 million, to the
ONDCP Special Forfeiture Fund. The remaining
excess unobligated balances are retained in the
Fund. Liabilities of approximately $35.7 million
and $16.4 million to the ONDCP Special Forfeiture
Fund for fiscal years 1997 and 1996, respectively,
have been recognized in the Statements of Financial
Position.

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

NOTES TO FINANCIAL STATEMENTS 33


fielding numerous investigative collateral
requests and requests for training in everything
from basic investigative techniques to how
South Africa might best implement its Proceeds
of Crime Act and a proposed money laundering
law.

Four Camden Properties

It has been many years since the prized and
plentiful jobs at places like RCA and the
Campbell Soup Company provided the engine
that powered the thriving economy of the
industrial city of Camden, New Jersey. Like
many other similar cities in the Midwest and
northeast, Camden suffered a decline in the last
several decades. It lost jobs and population and
to many became a pass through on the way
from suburban homes to work and other
activities just across the Delaware River in
Philadelphia.

The city and people of Camden have admirably
fought back from economic decline and the
spread of street crime that often accompanies it.
In the first quarter of FY 1997, the Criminal
Investigation Division of the Internal Revenue
Service was able to share four forfeited real
properties with the Camden Police Department,
which put them to productive community use.

The properties had been forfeited as a result of
an investigation of the Holland drug
organization. Walter Holland had become a
local folk anti-hero to vulnerable youngsters in
Camden and Philadelphia thanks to his
marijuana trafficking business. Holland and a
longtime family friend and officer in a real
estate agency, Evelyn Moody, invested millions
of dollars of drug proceeds in real estate and
expensive automobiles. Moody would locate
the properties and Holland provided the cash
for the purchases. Thanks to a tireless three
year joint investigation by IRS and the Camden
Police Department, both Holland and Moody

pled guilty to conspiracy and currency
structuring charges. Moody provided key
testimony regarding the banking and real estate
transactions of the organization.

Two of the four forfeited Properties are being
retained by the city police for use as satellite
station houses and represent an equitable share
for their contributions to the investigation. The
other two properties are being transferred to
acity agency and a Community service
group under the federal Weed and Seed
program to help accomplish the goal of ridding
neighborhoods of crimes and fostering their
economic development.

STRENGTHENING LAW ENFORCEMENT 15


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(
For the year ended September 30, 1997
(Unaudited)

74

(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 $4,821,000.
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 Teported in the audited financial statements was as follows:

State and local agencies $42,376,000
Foreign countries 231,000
Other federal agencies 6,310,000
Victims restitution 33,052,000

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 $96,844,000.

The amount of seized Currency not on deposit in the Fund’s Suspense account at September
30,1997, was $13,006,000. This amount includes some funds in Process of being deposited
at year end; cash seized in August or September 1997, 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
$205,067,000 for fiscal year 1997,

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:

U.S. Customs Service $91,979,872 26 seizures
IRS 30,119,724 21 seizures
U.S. Secret Service 7,933,069 1 seizure

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION


3. U.S. CUSTOMS SERVICE’S INADEQUATE INVENTORY
TRACKING SYSTEM

CONDITION

The U.S. Customs Service (Customs) seized and forfeited Property and currency tracking system,
the Seized Assets and Case Tracking System (SEACATS), does not contain accurate and sufficient
data that can be relied upon to Prepare the analysis of changes in forfeited and seized currency and
Property without substantial manual manipulation and reconciliation. As a result, year-end
procedures were developed to identify forfeited and seized Property not recorded in SEACATS as
of September 30, 1997, and to adjust the financial statements for the value of forfeited and seized
Property on hand at year-end.

CRITERIA

Federal Financial Management Systems Requirements issued by the Joint Financial Management
Improvement Program (JFMIP) demand that an agency’s Core financial system be able to provide
financial information on a timely and useful fashion to meet five goals: (1) support management’s
fiduciary role; (2) support budget formulation and execution functions; (3) support fiscal
management of program delivery and Program decision making; (4) support internal and external
Teporting requirements, including, as necessary, the requirements for financial statements prepared
in accordance with the form and content Prescribed by OMB, reporting Tequirements prescribed by
Treasury, and legal, regulatory and other management requirements of the agency; and monitor the
financial management system.

CAUSE

SEACATS was implemented without sufficient user requirement analysis and comprehensive system
documentation. Additionally, the system was implemented without user training, acceptance testing,
or comprehensive parallel testing.

EFFECT

The difficulties encountered in Preparing the changes in forfeited and seized Property and currency
analysis indicates that Customs lacks the ability to properly, fully and accurately account for seized
and forfeited property and currency at this time. Specifically:

. SEACATS was used as the system of record for Property. However, seized and forfeited
Property information from SEACATS contained substantial erroneous information indicating

58 INDEPENDENT AUDITOR’S EXHIBIT 1


Chen and his wife were Taiwan natives who
became American citizens, and from selling
herbal remedies out of the back of their car built
up a formidable and lucrative international
conglomerate with sales of over $700 million.
By 1995, they had been indicted on numerous
tax and customs fraud charges.

The Customs Service had earlier begun the
investigation when the Chens had filed a
statement saying that they had undervalued their
imports of raw materials by hundreds of
millions of dollars. This was actually part of a
Tuse involving shell companies set up in Hong
Kong in which the costs of imported raw
materials were inflated up to 900 percent to
help Sunrider avoid paying much higher
amounts in federal taxes. Additionally, Chen
was accused of greatly undervaluing other items
and of smuggling artifacts. In 1997, the Chens
paid $93 million to the U.S, Government to
settle one of the largest tax evasion cases ever
filed. In addition, Mr. Chen made a $4 million
payment in lieu of forfeiture to the Customs to
Tegain some of the artifacts he had brought into
the country without paying duty.

Drug Diversion in Newark, New

There are numerous drugs approved for use in
the United States that when prescribed by a
physician and administered under his or her
care and supervision are perfectly legal. It is
only when these substances are diverted from
this controlled distribution and structure does
the element of criminality enter the picture. In
December 1994, the Federal Bureau of
Investigation and the Office of Criminal
Investigation of the Food and Drug
Administration began a general investigation of
street level drug diverters working out of
Newark, New Jersey after having been advised
by New Jersey Medicaid officials of a scheme
by pharmacies and individuals in the area to
defraud the government.

Within six months of the Start of the initial
investigative effort, the Criminal Investigation
Division of the Internal Revenue Service was
looking at financial information on specific
pharmacies that were targets of the probe. It
seems that street level drug diverters were
fraudulently buying and selling drugs to and
from the pharmacies undergoing IRS scrutiny.
The U.S. Attorney’s Office for New Jersey
quickly merged the parallel investigations. By
1997, this merger paid significant dividends in
that numerous seizures of bank accounts and
Property were made based upon violations of
several federal statutes including the
Prescription Drug Marketing Act, and involving
Medicaid fraud, mail and wire fraud and money
laundering. In all, over $5 million in assets
were seized as one large scale drug diversion
enterprise ground to a halt.

Criminal Undertaki

In a case calling to mind Evelyn Waugh’s
famous 1940s novel, The Loved One, criminal
investigators from the Internal Revenue Service
uncovered a money laundering operation that
utilized a prominent Dallas area funeral home to
launder the proceeds from cocaine trafficking.
The business had been a Prominent part of the
community for generations but a recent owner
apparently found the lure of profits to be made
from _ laundering drug monies to be
overwhelming. The owner and two women
accomplices were convicted in 1995 on charges
that they laundered almost $5 million for a
Texas cocaine dealer back in 1989. They
forfeited $3.9 million in substitute assets that
consisted mostly of funeral homes and
cemeteries belonging to the business. After
Sorting out community Property considerations
and outstanding liabilities against some of the
assets, the Fund received a deposit of
approximately $2 million in net Proceeds from
the sale of the substitute assets in the first
quarter of FY 1997.

DETERRING CRIMINAL ACTIVITIES 7


Treasury Forfeiture Fund

Statements of Operations and Changes in Net Position
For the years ended September 30, 1997 and 1996

(Dollars in thousands)

Program expenses- Discretionary:

Awards for information or assistance
Purchases of evidence and information
Federal law enforcement conveyance (note 9)
Other

Total discretionary expenses

Total program expenses

Excess of net revenues and financing sources over
total program expenses

Distribution to ONDCP’s Special Forfeiture Fund
Transfer from ONDCP (note 7)
Recission of apportionment (note 7)

Net Position, beginning of year

Net Position, end of year (note 7)

1997

96,844
(35,679)
66,876

144,672

£_272.713

The accompanying notes are an integral part of the financial statements

30

3,337
(16,388)
(194)
157,917

$144,672



EFFECT

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

RECOMMENDATION

We recommend that quarterly reconciliations between Customs and EG&G's inventory reports be
performed. This will ensure that the Property held as reported by Customs agrees with the amount
recorded and reported by EG&G. Any differences should be resolved timely.

We also strongly recommend that Customs conduct a physical inventory of Properties held prior to
year end. The physical count should be reconciled to both Customs’ and EG&G’s inventory records.

Additionally, we recommend that IRS, Secret Service, and ATF manually reconcile assets in
EG&G’s custody against EG&G inventory records produced by SEACATS. If it continues to be
impossible to record inventory properly in SEACATS for these agencies, the Fund’s Management
should consider having EG&G conduct the year-end inventory using reports produced by the
agencies independent inventory systems (AFTRAK and CATS), rather than SEACATS.

66 INDEPENDENT AUDITOR’S EXHIBIT Ir


RECOMMENDATION

We recommend that sales be monitored by a representative of the Fund, independently of EG&G.
This representative should compile records of sales, which should be later reconciled to EG&G’s
sales reports. Any differences should immediately be cleared with EG&G.

Additionally, we recommend that ASD reconcile deposits from EG&G on a monthly basis and
investigate any differences immediately.

68 INDEPENDENT AUDITOR’S EXHIBIT II


SECTION IV
SUPPLEMENTAL FINANCIAL AND MANAGEMENT
INFORMATION
(Unaudited)


Department of the Treasury Forfeiture Fund

Statements of Financial Position
September 30, 1997 and 1996

(Dollars in thousands)

Assets

Entity Assets:
Intra governmental
Fund Balance with Treasury and cash (note 3)
Investments (note 4)
Interest receivable (note 4)
Accounts receivable

Prepaid expenses
Total Intra governmental
Governmental

Accounts receivable
Prepaid expenses

Forfeited property (note 5):
Held for sale, net of mortgages, liens and claims

To be shared with Federal, state or local, or foreign
governments

Total forfeited property, net of mortgages, liens and
claims

Total governmental

Total entity assets

Non-Entity Assets:
Seized currency (note 6):
Fund balance with Treasury and cash
Investments (note 4)

Total seized currency

Total non-entity assets

Total Assets

1997 1996
$ 105,777 $ 75,982
260,868 145,379
634 590
3,858 448
3,142 -
—___-
374.279 222,399
238 142
- 200

_———

36,131 30,653

418 2,749

36,549 33,402

36,787 33,744
411,066 256,143

oe

60,264 72,505

146,249 165,519

206,513 238,024

206,513 238,024

£617,579 $§ 494,167

The accompanying notes are an integral part of the financial statements

27


Chapter 2:

DETERRING CRIMINAL ACTIVITIES

Sh criminal justice administration, questions
that often arise involve whether or not law
enforcement actions have a deterrent effect and,
if so, whether or not is there any possibility of
measuring that effect. Although practitioners
may dismiss this questioning as arcane and
irrelevant, the essence of this issue has
reappeared in the last several years to frame a
number of public policy debates around the
nation. Commentators, observing the
experience of New York City, have attributed at
least some of the decrease in crime rates to a
conscious crackdown by police on nuisance
crimes. Turnstile jumpers in subway Stations,
Squeegee men on Canal Street, and graffiti
expressionists throughout the mass transit
system all have found a less tolerant
environment in which to practice their
avocations. The theory is that the resultant
increasing sense of order and decreasing
appearance of lawlessness has had some
deterrent effect on even more serious crimes.

With the exception of crimes of passion and
certain other ideologically motivated crimes,
most criminal activity is motivated by a simple
desire for profit. As such, it involves choice
and, in this case, choice in the traditional
economic sense of choosing to allocate limited
Or scarce resources among potential alternative
employments. It involves consideration of
costs and benefits and an assessment of risk.
Asset forfeiture is partly designed to increase
the risks associated with crime and in so doing
serve as a deterrent.

The Department of the Treasury has exercised
asset forfeiture in its law enforcement

operations since Alexander Hamilton served as
the Department's first Secretary. The forfeiture
rules and procedures first developed for
Treasury’s Customs Service have been models
for much of the expansion of federal asset
forfeiture during the last two decades. Does the
existence of asset forfeiture affect the decision
to commit or not commit a crime? Lacking
empirical evidence, the answer, at best, can only
be surmised. At the least, it raises the stakes far
beyond the prospects of mere personal
incarceration as a_ potential penalty. Asset
forfeiture defines an environment less tolerant
of crime, one that is willing to take away the
instruments and proceeds of crime to regain
some of the balance upset by the criminal
action. Although a deterrent effect may be
difficult to measure, it is not implausible.

During Fiscal Year 1997, asset forfeiture was
used throughout the operations of all four
Treasury law enforcement bureaus. From
narcotics trafficking and money laundering to
trade fraud and counterfeiting, Treasury law
enforcement personnel pursued a wide variety
of investigations and, as appropriate, applied
asset forfeiture authorities. Some representative
Cases give a sense of how the use of forfeiture
has sought to deter further criminal activity in
various areas of Treasury investigative
responsibility.

The Criminal E ise of Dr. Lofti

The Secret Service receives thousands of
requests each year to investigate forgeries of
government checks. In August of 1991, one of
these requests involved a $19,000 check from

4 DETERRING CRIMINAL ACTIVITIES


the department or its agents. This
safeguard is designed to eliminate even
the appearance of a conflict of interest
between the law enforcement actions
Tesulting in the forfeiture and the ultimate
disposition of property.

Sixty Day Notice - An integral part of due
Process in any forfeiture proceeding is that
notice be given as soon as practicable to
advise interested persons of the pending
action and give them an opportunity to be
heard. Congress has clearly intended that
the government be expeditious in
Providing notice and in initiating
forfeiture actions against seized property.
This directive requires written notice from
Treasury law enforcement to all interested
parties in administrative forfeiture cases
within sixty days of either seizure or of
reasonably determining ownership or
interest.

- This
directive requires that Treasury law
enforcement agencies obtain appropriate
judicial approval before the seizure of real
property and underscores that, whenever
practicable, Treasury officers should
obtain ex parte judicial approval before
the seizure of personal property. This
safeguard ensures that, as much as
possible, a neutral and detached judicial
officer can review the basis for seizures
before they occur.

i - To
avoid the appearance of impropriety, this
directive, with few exceptions, forbids the
use of property by department personnel
for any reason until a final decree or court
order of forfeiture is issued. It also
extends this prohibition to making such
property available for use by others.

Guideli

In addition to its policy directives, Treasury's
Executive Office for Asset Forfeiture has issued
two publications to set out and explain
Prominent financial policies of the Fund. Both
of these guides closely track counterpart
volumes of the Department of Justice Asset
Forfeiture Fund in order to ensure as much as
possible that the federal forfeiture program has
fair and consistent policies and procedures.

Property - Known as the “Secretary's
Guidelines’, this document explains
Tequirements for the retention and use of
Property forfeited by Treasury agencies:
the transfer of forfeited property to other
federal agencies, Participating state and
local agencies and foreign governments;
and the appropriate uses of fund resources
received by Treasury agencies. It is a
seminal document of the Fund designed to
inform the reader about the most
prominent policies of the program.

* The Guid Equitable Sharing f
Foreign C i Federal Si
This document referred to as the ‘Equitable
Sharing Guide’, is intended for use by state
and local recipients of equitable shares
from the Fund. It cites the statutory
authority for sharing and describes the
mechanics of the equitable sharing decision
making process. The guidelines also
describe the state and local responsibilities
in accounting for the property and/or funds
that are shared with them. Included is a
discussion of compliance requirements that
must be met before the state or local agency
can receive a sharing payment from the
Fund.

SAFEGUARDING INDIVIDUAL RIGHTS 3


Chapter 5:

PROGRAM PERFORMANCE AND FINANCIAL
HIGHLIGHTS

A the third year in which the Fund has had
performance indicators in place, results from
FY 1997 allowed for comparison with results
from FY 1996 as a means of monitoring
forfeiture program operations. For FY 1997,
the performance measures selected for
monitoring were: (1) processing time for
equitable sharing payments with a target time
frame of 9.3 months; (2) time between
forfeiture of real Property and disposal through
sale with a target time frame of 7.7 months; and
(3) timely Processing of the administrative
seizure inventory with a target time frame of 68
Percent processed in a timely fashion. Among
these three performance measures,
improvement was noted in the processing time
of equitable sharing payments. The other
performance measures showed an increase in
the time required to dispose of real property
after forfeiture and a deterioration in the percent
of administrative cases processed timely. The
tracking of this information and the availability
of comparison data are of significant benefit to
management of the Fund.

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. State and local
law enforcement agencies derive a valuable
benefit from equitable sharing proceeds which
assist them in ongoing operations to combat
drug trafficking and violent crime. The average
time to make an equitable sharing payment

decreased from 10 months in FY 1996 to 9.4
months in FY 1997. The equitable share
payment process was achieved in an average of
8.5 months for currency forfeitures and 12.9
months for noncurrency forfeitures, for a
combined average of 9.4 months for all
forfeitures. The improved processing times
reflect quality control assurances implemented
by the Department's Executive Office for Asset
Forfeiture to ensure that all such payments are
consistent with Departmental policy. This is a
credit to the law enforcement bureaus that
process the associated Paperwork nationwide,
accomplishing the targeted goal while
processing over 2,100 such equitable sharing
Payments to state and local law enforcement
agencies nationwide.

The Average Time Between Forfeiture and
Disposal of Real Property

During FY 1997, the average time between
forfeiture and disposal of real property was 10.8
months, a deterioration from FY 1996's
disposal period of 7.8 months. The target range
for this measure was 7.8 months, Information
about hard-to-dispose-of-properties in the FY
1997 inventory base targeted for sale during the
year caused management to revise expectations
to an anticipated performance of 10 months.
The program did not achieve the revised goal,
but did dispose of several "problem" properties,
which should contribute to improved statistics
in future years. The disposal of real property is
one of the more complicated activities
associated with the forfeiture program. The
existence of liens, taxes, mortgages and other

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

16


excise taxes on domestic sales.

As part of the plea agreement, the individuals
and the corporation agreed to forfeit almost

$5 million held in the off-shore accounts, real
Properties in Miami and London worth over
$3 million and 11,200 thirty pound cylinders of
freon gas valued at $6.7 million. The United
States Attorney for the Southern District of
Florida, in commending the investigation
leading to the guilty pleas, noted that this was
the largest forfeiture of assets yet achieved in an
environmental crimes case.

Forfeit Bribes Paid by _D

Traffickers

The Galleria district of Houston exudes wealth.
From boutique shopping to tree-lined avenues,
it is a section of the city quite comfortable with
money. As such, it was not particularly unusual
when, in December of 1993, a prominent
Mexican government official appeared at the
Texas Commerce Bank there to open a personal
account with $40,000 in cash.

The new account holder was Mario Ruiz-
Massieu who at the time was the Deputy
Attorney General of Mexico and that nation’s
top drug prosecutor. Over the course of the
next thirteen months, the balance in Massieu’s
account grew substantially. Massive cash
deposits were routinely made by an aide often
in the form of rubber banded bundles of twenty
dollar bills. Although the activity was unusual,
appropriate reporting documents were filed
both upon entry into the country at the border
and by the bank at the time of the deposits.

Meanwhile, other events in Mexico were
unfolding that were to have a bearing on this
case. In August of 1994, a commander of the
Mexican federal police took delivery of several
tons of cocaine unloaded from a converted
passenger jet that landed near the northern town

of Sombrerete. Ruiz-Massieu supervised the
investigation of this incident but found no
wrongdoing. A month later, his brother, a high
ranking official in the ruling Institutional
Revolutionary Party, was assassinated and
shortly thereafter, incoming President Emesto
Zedillo asked Ruiz-Massieu to conduct an
investigation of the murder. After only two
months, Ruiz-Massieu quit that investigation
and was on his way to Spain via Newark
International Airport when U.S. Customs agents
arrested him on charges of failing to fully
declare the cash he was taking out of the United
States.

After the arrest, Ruiz-Massieu’s assets in
the Houston bank account were frozen,
having by then grown to an amount in excess
of $9 million. During the course of the civil
asset forfeiture trial that followed, Ruiz-
Massieu and his family maintained that all those
cash deposits came from his family’s fortune as
well as generous government bonuses for his
work. The U.S. prosecutors maintained that the
money was derived from drug corruption and
the jury delivered a verdict in March of 1997
that supported that contention, forfeiting the
money to the U.S. Government and its Treasury
Forfeiture Fund.

The three Customs Service special agents who
led the forfeiture investigation of Riuz-Massieu
and his bribe derived assets, received special
Tecognition from Janet Reno, the Attorney
General of the United States, in September of
1997 when she personally presented them with
the prestigious Excellence in Asset Forfeiture
Award from the Department of Justice.

Pacific Rim Tax Fraud C. Iso Yield
Forfeiture Fund Payment

Sunrider International, a health food company
based in Torrance, California, had an element of
the Horatio Alger story in its history. Tei Fu

6 DETERRING CRIMINAL ACTIVITIES


Summary of Financial
Improvements

Management

During FY 1997, Fund management continued
to identify incremental improvements in
Operational processes and __ financial
management operations. Recognizing the close
connection between field operations and proper
financial management, the Executive Office for
Asset Forfeiture continued the process of
reviewing and updating the policy guidelines
disseminated by the office. Additionally,
extensive training was conducted throughout
FY 1997. The purpose of these seminars was to
ensure that the field staff of the four Treasury
law enforcement bureaus are fully aware of the
Fund's policies and the proper practices
associated with the asset seizure and forfeiture
process.

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 1997. Additionally, the
Fund has identified another area for FY 1998
where it would be appropriate to gather data
and assess performance. Steps are anticipated
to ensure that the appropriate data elements and
reports are incorporated into the Fund’s
automated systems so that the manual collection
of data will no longer be necessary.

FY 1997 Audit

The Fund's independent auditors have given the
FY 1997 financial statements an unqualified
opinion. This is the third consecutive year that
the Fund has received an unqualified opinion,
and gives the Fund's management reassurance

that the — financial management _ efforts
undertaken in the past several years have been
fruitful. However, the number of material
weaknesses and reportable conditions cited by
the auditors in the accompanying Independent
Auditor's Report on Internal Control have
increased as a result of automated system
malfunctions detected during the FY 1997 audit
process, discussed below.

Inventory Tracking Systems

The remaining material weaknesses and
Teportable conditions pertain principally to
deficiencies contained in financial accounting
and property inventory systems maintained by
Customs. The Fund had previously reported
that those weaknesses would be corrected with
the inception of the Seized Asset and Case
Tracking System (SEACATS). SEACATS was
intended to support the financial system of
record for the Fund, and serve as a single
Tepository 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 was to rectify the
remaining material weaknesses identified in the
Fund's annual financial audits. With the
assistance and participation of Fund
management, SEACATS was approved under
Treasury Directive 32-02, which requires that
the development of revenue and financial
management systems be sanctioned by the
Assistant Secretary for Management.

In November 1996, the SEACATS system was
implemented by Customs. The system has been
beset with a number of start-up problems,
including system conversion difficulties, The
auditors of the Fund did not perform tests on
SEACATS and other Customs’ systems used by
the Fund, as they were not the auditors of

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

22


TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 1997

DEPARTMENT OF THE TREASURY

WASHINGTON, D.C.

Gardiner, Kamya & Associates, PCC.

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


statement amounts, and certain other laws and regulations specified in OMB Bulletin 93-06, as
amended, including the requirements referred to in FFMIA.

The results of our tests of compliance with the laws and regulations described in the preceding
Paragraph disclosed instances of noncompliance with the following laws and regulations that are
required to be reported under Government Auditing Standards and OMB Bulletin 93-06, as amended,
which are described below:

The Budget and Accounting Procedures Act of 1950 as amended, Section
3512, Executive Agency's Accounting System requires Federal agencies to
establish an internal control structure which ensures the safeguarding of
assets and the proper recording of revenues and expenditures. As described
in our Report on Internal Controls dated February 13, 1998, the Fund's
internal control structure has certain material weaknesses which result in
noncompliance with this Act. Most of the material weaknesses require
significant computer system improvements to correct. Until the system
enhancements can be implemented, management has developed year-end
manual procedures to compensate for the system’s significant weaknesses.

The report of the other auditors on the substantial compliance of Customs with the requirements of
FFMIA disclosed instances where Customs’ financial management systems did not substantially
comply with Federal Financial Management Systems Requirements (FFMSR). These instances and
Customs’ planned remedial actions and time frames to implement such actions are described in the
schedule titled “Open Section 4 Non-conformance as of September 30, 1997" of the United States
Customs Service Fiscal Year 1997 Accountability Report. The results of their tests also disclosed
no instances where Customs’ financial management systems did not substantially comply with
applicable accounting standards and the United States Standard General Ledger at the transaction
level.

Providing an opinion on compliance with certain provisions of laws and regulations was not an
objective of our audit and, accordingly, we do not express such an opinion. This report is intended
for the information and use of the management of the Fund, the U.S. Department of the Treasury,
and the U.S. Congress. However, this report is a matter of public record and its distribution is not
limited.

February 13, 1998

hod, Ken & Avs te,

45


Forty years later, the meetings continue but the
revenue and participants have changed. Today,
Sources are quoted in news accounts describing
meetings between Russian organized crime
figures and Italian mafia contacts, between
South American drug cartel leaders and post-
Soviet underworld bosses from Eastern Europe,
between representatives of Japan’s Yakusa and
other criminal elements operating on the Pacific
Rim. The combinations, both potential and
actual, are many and varied: political terrorists,
drug and illegal arms traffickers, financial
criminals and money launderers. All share a
common realization that has existed for years
on that side of the social divide that opposes
law enforcement. When interests coincide,
Cooperation can be useful, beneficial and
rewarding.

The Comprehensive Crime Control Act of 1984
gave a tremendous boost to promoting
Cooperation on the other side of that same
divide. This Act set up the basic structure of
the federal forfeiture funds that we have today,
and in so doing allowed federally forfeited
proceeds to be equitably shared with state and
local law enforcement organizations that
assisted federal investigations leading to
forfeiture. In time, this sharing authority of the
forfeiture funds was extended to foreign
governments whose authorities provided similar
assistance.

Today, one of the largest single categories of
disbursements from the Treasury Forfeiture
Fund involves the payment of equitable shares
to assisting police agencies. The Fund,
however, also has some other disbursement
authorities that foster cooperation with state and
local law enforcement personnel. When they
are conducting operations with Treasury law
enforcement, the Fund can help reimburse the
state and local police officers’ overtime costs.
The Fund is also authorized to help pay some of
the expenses of equipping another agency’s

vehicles, vessels and aircraft when they are used
in joint operations with Treasury enforcement
bureaus.

The value of law enforcement Cooperation and
the key role that equitable sharing of forfeited
assets plays in promoting it, is increasingly
Tecognized by state, local and foreign
governments as they enact authorities to share
from their own forfeitures to the federal
forfeiture funds whose agencies have assisted in
the local forfeiture. The Fund, therefore, is also
the recipient of this multi directional asset
sharing, receiving monies not only from the
forfeitures of the Department of Justice and
other federal agencies but also from a growing
number of state, local and foreign authorities
who have been helped by Treasury agents in
their investigations.

Cooperation among law enforcement agencies
stretches limited resources, allows specialized
expertise to be brought to bear as needed and
Provides a more effective response to criminal
organizations that are no longer confined within
county lines, national borders or even
continents. The Fund continued, throughout FY
1997, to do its part to support this vital
Cooperation nationally and overseas.

Crewing for the Cartel

Retailed on the streets of New York, the
cocaine would have had a value of over
$30 million. The problem for the cartel was to
get it from the growing fields to the market and,
when dealing in contraband, this can become a
complex distribution challenge. Fortunately for
law enforcement, the delivery option contracted

for in this instance turned out to be not in the
best interests of the traffickers.

Jesus Orlando Balza was ostensibly a sales
Tepresentative for an export-import company
doing business in South Florida. In February of

DETERRING CRIMINAL ACTIVITIES 9


Chapter 3:

FOSTERING LAW ENFORCEMENT C OOPERATION

She grainy black and white images from the
1950s newsreel persist. New, massive and
expensive American-built automobiles are
parked outside of the hilltop mansion of a
Joseph Barbara in rustic, upstate Appalachian,
New York. It was the afternoon of November
14, 1957, and inside the residence was an
unprecedented convocation of representatives
of America’s organized crime families. The

FY 97 Equitable Sharing National Summary

meeting took place less than a month after the
assassination of Albert Anastasia while he sat in
a barber’s chair in New York City’s Park-
Sheraton Hotel. On leaving, participants told
New York State Police that the gathering had
been nothing more than simply friends visiting
a friend.

FY 1997 Legend

Wh - reater nan $5 miton
Be semwoanss mition and $5 milion
ED setwaen $100,000 - $909,990

Fe between $0 - $80,990

8 DETERRING CRIMINAL ACTIVITIES


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 Tequiring 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 that will capture all
transactions in the general ledger, including accounts receivable, liens and Mortgages payable,
forfeited property, deferred revenue, and seized currency and its offsetting liability.

INDEPENDENT AUDITOR’S EXHIBIT 1 57


NOTES TO FINANCIAL STATEMENTS

(7)_Net Position (( continued)

(9) Related Party Transactions

Recission of Apportionment -- During Fiscal Year
1997, the fund has received $66,876,000 from the
Office of National Drug Control Policy (ONDCP)
per Public Law 104-208. The Secretary of the
Treasury is authorized to receive all unavailable
collections transferred from the ONDCP as deposit
into the Treasury Forfeiture Fund.

During Fiscal Year 1996, Public law 104-134
adjusted previously approved OMB apportionments
for amounts not subject to apportionments.
Rescissions were taken on a Pro rata basis from
funds available to every federal agency, department
and office in the Executive Branch. Accordingly,
the Fund's portion of the recission was $194,000.

The following summarizes the components of
unliquidated obligations as of September 30,1997,
and 1996 (dollars in thousands):

1997 1996
Discretionary $12,016 $ 6,577
Equitable Sharing 6,305 25,544
Non-discretionary 63.041 __34,592
Total $8132 $66,713

(8) Distributed Forfeited Assets

The following summarizes the components of
distributed forfeited assets for the years ended

September 30, 1997, and 1996 (dollars in
thousands):
1997 1996
Currency $77,282 $ 46,132
Property 2,337 6,757
Proceeds from sales of
forfeited property 2.350 __ 4,629
Total $81,969 $57,518

The Fund reimbursed agencies for their purchases
of certain capital assets. These assets are reported
by the participating agencies. During the fiscal
years ended September 30, 1997 and 1996,
$1,639,000 and $8,617,000, respectively, of
Capital assets were reimbursed by the Fund and are
Teported as discretionary expenses in the
accompanying financial statements.

(10) U.S. vs. Bulldog Medical Fraud Case

The Bulldog medical case was a culmination of a
three year investigation initiated by the Department
of Health and Human Services, Office of Inspector
General, into the alleged false billings practices of
a Kissimmee Florida company, Bulldog Medical.
In October 1996, pursuant to a plea agreement, the
defendant pled guilty to conspiracy to defraud
Medicare of over $70 million and mail fraud and
agreed to forfeit the $32 million previously seized.

(11) Super Surplus

31 USC 9703 (g)(4)(B) allows for the expenditure,
without fiscal year limitation, of funds amounting
to one half of the excess of unobligated balances
after the reservation of amounts needed to continue
operations of the Fund. This “super surplus”
balance may be used for law enforcement activities
of any Federal agency. Super surplus expenses for
FY 1997 were limited because the notice of
Proposed uses of Super Surplus funds was pending
in Congress at the end of the fiscal year, leaving
the funds unavailable for obligation by the bureaus.

(12) Secretary's Enforcement Fund

31 USC 9703 (b)(5) is another category of
permanent indefinite authority. These funds are
available to the Secretary, without further action by
Congress and without fiscal year limitation, for
federal law enforcement purposes of Treasury law

NOTES TO FINANCIAL STATEMENTS 41


Department Treasury Forfeiture Fund
Statements of Operations and Changes in Net Position
For the years ended September 30, 1997 and 1996

(Dollars in thousands)

Revenues and financing sources:

Federal:

Investment interest income

Proceeds from participating with other federal agencies
Public:

Undistributed forfeited currency and monetary instruments
Distributed forfeited assets (Note 8)

Sales of forfeited property, net of mortgages and claims of
$4,821 and $4,062, respectively

Payments in lieu of forfeiture, net of refunds of $7,028 and
$6,677, respectively

Reimbursed costs
Other revenues and financial sources

Total revenues and financing sources

Allocation of revenues:
Equitable sharing:
State and local agencies
Foreign countries
Federal agencies
Victim restitution (note 10)

Total allocations of revenue
Net revenues and financing sources

Program expenses - Non-discretionary:
Seizure investigative costs and asset management
Seized property national contract services

Other asset related contract services

Awards to informer (moiety payment)

Others

Super Surplus (note 11)

Secretary’s Enforcement Fund (note 12)

Total non-discretionary expenses

1997

$ 14,284
11,439

125,372
81,969

20,800

6,791

1,477

674

262,806

180,837

28,958
26,335
1,364
1,099
16,276
435
5,862

$ 80,329

The accompanying notes are an integral part of the financial statements

$ 9,021

35,804
26,248

2,711

1,985
10,809
13,515
12,902

$103,974

29


i

PAO

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, 1997, and for the year then ended,
and have issued our report thereon dated February 13, 1998.

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, as amended. Those standards
Tequire 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
intemal 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;

Member of the American Institute of Certified Public Accountants


Department of the Treasury Forfeiture Fund
Statements of Financial Position
September 30, 1997 and 1996
(Dollars in thousands)

Liabilities and Net Position

Liabilities
Liabilities covered by budgetary resources:
Intra governmental liabilities:
Distributions payable:
ONDCP Special Forfeiture Fund
Other Federal agencies
Accounts payable

Total Intra governmental

Governmental liabilities:
Distributions payable:
State and local agencies and foreign governments
Victim restitution
Accounts payable

Deferred revenue from forfeited assets
Total governmental

Total liabilities covered by budgetary
resources
Liabilities not covered by budgetary resources:
Governmental:
Commitments and contingencies (note 13)

Seized currency (note 6)
Total governmental

1 lia biliti t d by dget.
Total liab ilities not covered by bu igetary

Total liabilities

Net Position (note 7):
Unobligated balance
Unliquidated obligations
Cumulative results of operations

Distributions to ONDCP’s Special Forfeiture Fund
Total net position
Total liabilities and Net Position

The accompanying notes are an integral part of the financial statements

28

1997 1996
$ 35,6799 § 16,388
32,420 3,062
——___ 19121 46,365
87,280 65,815
4,537 7,910
- 1,697
9,065 5,011
37.471 31,038
51,073 45,656
138,353 111,471
206,513 238,024
206,513 238,024
206,513 238,024
344.866 349,495
130,186 40,000
81,362 66,713
96,844 54,347
(35,679) (16,388)
—__272.713 —__144,672

$ 617,579

& 494,167



3. LACK OF INVENTORY CONTROL

CONDITION

The U.S. Customs Service (Customs) manages and records seized and forfeited property in the
Seized Assets and Case Tracking System (SEACATS). EG&G Dynatrend (EG&G), the national

Property transferred to and held by them on behalf of all Treasury law enforcement agencies (IRS,
Secret Service, and ATF) through a module within SEACATS. Currently, the inventory held by
EG&G does not agree to what is recorded in SEACATS by Customs. Also, the inventory held by
EG&G on behalf of IRS, Secret Service, and ATF differed significantly from the inventory reports
generated by SEACATS. The year end physical inventory value and count per Customs’ SEACATS
inventory records Tequire significant adjustments because seizures and forfeitures are either not
recorded at all or not recorded in the modules within SEACATS ona timely basis, Additionally, no
reconciliations were performed during the year to identify discrepancies,

CRITERIA

Federal Financial Management Systems Requirements issued by the Joint Financial Management
Improvement Program (JFMIP) demand that an agency’s Core financial system be able to provide

fiduciary role; (2) support budget formulation and execution functions; (3) support fiscal
management of program delivery and Program decision making; (4) support internal and external
Teporting requirements, including, as necessary, the requirements for financial statements prepared
in accordance with the form and content prescribed by OMB, reporting Tequirements prescribed by
Treasury, and legal, regulatory and other management requirements of the agency; and monitor the
financial management system.

CAUSE

Inventory systems (SEACATS) were not in place to track property seizures and forfeitures, and,
consequently, there were no inventory records at any time during the year for reconciliation purposes.
Additionally, design flaws within SEACATS made it impossible for EG&G to update the SEACATS
system to correctly reflect inventory.

There are no procedures in place Tequiring the regular reconciliation of inventory systems’ records
maintained by Customs with inventory records maintained by EG&G.

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

INDEPENDENT AUDITOR’S EXHIBIT II 65


the Resolution Trust Corporation, the agency
entrusted with implementing the national
savings and loan bailout. The initial
investigation conducted by the Dallas field
office indicated that a Dr. Dean Loftis was the
forger, even though he had taken extensive
Measures to implicate his wife and thereby
insulate himself from the crime.

Ruthlessness seemed to be quite a pattern for
Dr. Loftis. Already a convicted felon for
sending a mail bomb with intent to murder,
information began to develop that he was
attempting to hire a “hit man” to murder his
wife, that he abused and battered both wives
and girlfriends, and that he was engaged in the
manufacture of dangerous and illegal drugs.
Dr. Loftis also came under suspicion for the
murder of a pharmaceutical company executive
in Texarkana who had a pipe bomb placed
under his vehicle, and for a hospital co-worker
who had died of cyanide poisoning. Potential
witnesses in the case were characteristically
nervous, scared and intimidated.

As the day of the arrest approached, three raid
teams were organized; one for Dr. Loftis’
residence, one for his medical practice and one
for a storage facility he used. The execution of
the search warrants led to much in the way of
incriminating evidence including recipes for
methamphetamine, a secret room in his house
with a cache of weapons, many of which were
illegally modified and bore no serial numbers,
volumes of fraudulent medical records and even
bank records pertaining to the original check
forgery. Dr. Loftis’ house was seized as well as
quantities of sophisticated surveillance and
eavesdropping equipment found at his office
and used to protect his criminal activities.

The case against Dr. Loftis was divided into
three separate trials. He was convicted on all
counts in the gun case and agreed to a plea in
the fraud/forgery and drug cases. Dr. Loftis

agreed to the forfeiture of the seized electronic
equipment and to the $19,000 he received from
the forged check that he used to pay off the
mortgage on his house. He received
Consecutive sentences that totaled thirty-seven
and a half years. Dr. Loftis will be in his
eighties before his earliest possible release from
prison.

Clean Air Act Enforcement

The Treasury Department’s Customs Service
along with the Criminal Investigation Division
of the Internal Revenue Service joined forces
with the Environmental Protection Agency
(EPA) to unmask a smuggling operation that
had brought over 4,000 tons of the ozone
depleting refrigerant gas, freon, into the United
States from 1993 to 1995. The importation of
freon, alternatively known as CFC-12 or
dichlorodifluoromethane gas, is strictly
regulated by the EPA as a result of the Clean
Air Act. Under an international agreement
known as the Montreal Protocols, the United
States has pledged to take effective measures to
teduce the production and consumption of such
ozone depleting chemicals. To do this,
Congress has imposed significant taxes on their
sale and use and has charged the EPA with
overseeing consumption allowances designed to
reduce, each year, the amounts that can be
manufactured and imported for use in the
United States.

On June 2, 1997, three individuals and their
corporation, Refrigeration USA, entered guilty
pleas in Miami to charges of smuggling and
associated money laundering. The defendants
purchased freon from a variety of sources in
Europe and paid for it through fictitiously
named accounts in Switzerland and the Channel
Islands. They then used nominee corporations
and bank accounts in the Turks and Caicos
Islands to conceal further their activities and
impede Internal Revenue Service collection of

DETERRING CRIMINAL ACTIVITIES 5


recovered and available to distribute as
restitution in the U.S. v.

matter, also referred to as "U.S. v. Bulldog
Medical." The Bulldog Medical case was a
culmination of a three year investigation
initiated by the Department of Health and
Human Services, Office of the Inspector
General, into the alleged false billing practices
of a Kissimmee Florida company, Bulldog
Medical. The HHS OIG contacted IRS to
request their assistance in evaluating potential
money laundering violations. The investigation
revealed that substantial wealth had been
accumulated from the alleged payment of
fraudulent Medicare claims. In 1996, the
defendant was charged with mail fraud,
interstate transportation, money laundering,
witness tampering, conspiracy, aiding and
abetting, and criminal forfeiture. In October
1996, pursuant to a plea agreement, the
defendant pled guilty to conspiracy to defraud
Medicare of over $70 million and mail fraud
and agreed to forfeit the $32 million previously
seized. The defendant was sentenced to 10
years in prison without the possibility of parole,
and ordered to pay $4.1 million additional
Testitution above the $32 million forfeited.
After expenses and other adjustments consistent
with the judicial order, substantial funds will be
forwarded to the Medicare entitlement account
of the U.S. Government as restitution.

Program Expenses

After allocation of revenues, the remaining net
revenues support the law enforcement activities
of the Fund and pay for the storage of seized
and forfeited property and sales associated with
the disposition of forfeited property. Program
expenses decreased $31.3 million from the FY
1996 level, or about 27 percent. This is largely
due to a 1997 Super Surplus allocation proposal
held in abeyance by Congress pending a

comparison of the proposal with the FY 1998
enacted appropriation. In addition, a large
discretionary expense item for which funds
were obligated in FY 1997 will not be delivered
until a subsequent year, resulting in a reduction
in expenses for FY 1997.

Program Expenses

($ millions)
1997 1996

Non-discretionary
Seizure investigative
Costs and asset
management $29 $ 36
Seized property national
contract services 26 26
Other asset related
contract services 1 1
Awards to informer

(moiety payment) 1 3
Other 16 11
Super Surplus 1 14
Secretary’s Enforcement
Fund 6 13
Discretionary
Awards for information
or assistance *
Purchase of evidence 1 2
or information
Federal law enforcement
conveyance 2 9
Other —_1 —l
Total $84 **$115

=

. Less than $500,000
ae Column does not foot due to rounding of
amounts.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS


SEACATS user training sessions. Customs should also review the design of SEACATS with
respect to revenue recognition upon input of forfeiture status into the system.

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 and indicate the composition of revenue (that is sales, reimbursed storage costs,
etc.) which it represents. Based on this information, we recommend that the ASD record the
revenue and related accounts receivable due from EG&G.

Until the necessary system changes can be implemented, the manual year-end procedures will
continue to be necessary to prepare the annual financial statements. Therefore, we
recommend that the law enforcement bureaus be reminded of the importance of properly
following the year-end procedures. We also recommend that procedures be again reviewed
with the law enforcement bureaus to identify any possible misunderstandings or refinements
to the procedures.

INDEPENDENT AUDITOR’S EXHIBIT 1 55


2. IMPROPER TIMING FOR VALUATION OF
FORFEITED PROPERTY

CONDITION

unable to calculate ratios for this Purpose as sales value for property disposed were not compiled to
compute this ratio.

CRITERIA

Statement of Federal Financial Accounting Standards (SFFAS) No. 3 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 appraised values as of seizure date, in particular, for financial reporting
Purposes can be misleading because the values are often overstated and therefore do 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. Failing this, we recommend that the Fund's management continue
reviewing the methodology used to arrive at fair market value to refine its accuracy and ease in
Preparation. As the process is refined, it will become easier to prepare the monthly analysis to

INDEPENDENT AUDITOR’S EXHIBIT II 63


NOTES TO FINANCIAL STATEMENTS

the custodial/fiduciary natures of the non-entity
assets.

The presentation of non-entity assets and the
Corresponding liabilities in a separate, self-
balancing set of accounts ensures that the net
Position of the Fund presents only those resources
which will be consumed in current or future
operating cycles, while the non-entity categories
contain resources relating to the Fund’s
custodial/fiduciary activities.

Net Position

The components of net position are classified as
follows:

* Unobligated Balance --There is no cap on
amounts that the Fund can carry forward into
FY 1998. The cap was removed by the FY
1997 Omnibus Appropriations Act (PL 104-
208).

* Unliquidated Obligations -- This category
Tepresents the amount of undelivered purchase
orders, contracts and equitable sharing requests
which have been obligated with current budget
resources. 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 EOAF approval for payment is given.

* Cumulative Results of Operations -- This
category represents the net difference, since the
inception of the activity, between:(1) financing
sources including used appropriations, revenues
and gains; and (2) expenses and losses and
distributions.

* Distributions to ONDCP's Special Forfeiture
Fund -- This category represents the balance
to be transferred to ONDCP.

(See "Transactions with the Office of National Drug
Control Policy"),

(3) Entity - Assets Fund Balances with Treasury
and Cash

Fund balances with Treasury and cash as of
September 30, 1997, and 1996, consists of the
following (dollars in thousands):

1997 1996
Obligated $ 138,410 $ 118,089
Unobligated (32.633) (42.107)

£105,777 75,98,

The negative unobligated Fund Balance with
Treasury and Cash is offset by investments. Fund
balances with Treasury include forfeited currency,
as well as forfeited currency held as evidence, and
amounted to approximately $18 million and $9
million at September 30, 1997 and 1996
respectively.

@)_Investments

All investments are short-term (31 days or less)
non-marketable par value Federal debt securities
issued by the Bureau of the Public Debt and
purchased through the Department of the Treasury's
Bureau of the Public Debt. Investments are always
purchased at a discount and are reported at
acquisition cost, 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 Treasury
Forfeiture Fund and from seized currency held in
the Customs Suspense Account. Interest earned on
investments of seized currency is recognized as

36 NOTES TO FINANCIAL STATEMENTS




NOTES TO FINANCIAL STATEMENTS

revenue of the Fund. The following schedule
Presents the investments on hand as of September
30, 1997, and 1996 (dollars in thousands):

Description Par Discount Net

September 30, 1997:

Treasury Forfeiture Fund -

28 days 4.65% U.S.

Treasury Bills $261,815 ¢ (947) $260,868

U.S. Customs Suspense

Account -

28 day 4.65% U.S.

Treasury Bills 446.780 __(531) 146,249
Total $408,595 $(1.478) $407,117

September 30, 1996:

Treasury Forfeiture Fund -

31 days 4.86% U.S.

Treasury Bills $145,990 $(611) $145,379

U.S. Customs Suspense

Account -

317 day 4.86% U.S.

Treasury Bills 106.215 (696) 165.519
Total $212,205 $11,307) $310,893

The Customs suspense account became the
Tepository for seized cash for the Treasury
Forfeiture Fund following enactment of Public Law
102-393 on October 6, 1992. Interest receivable at
September 30, 1997, and 1996, was $634,000 and
$590,000, Tespectively.

(5) Analysis of Changes in Forfeited Property
and Currency

The following summarizes the components of
forfeited property (net), as of September 30, 1997
and 1996 (dollars in thousands):

1997 1996
Held for Sale $38,794 $32,747
To be shared with Federal, state
or local, or foreign
government 418 2.749
Total forfeited Property 39,212 35,496
Less: Allowance for mortgages
and claims (2,663) _(2,094)
Total forfeited Property, net $36, 549 $33 402

Forfeited property held for sale, net of allowance
for mortgages and claims as of September 30,
1997 and 1996, were $36,131,000 and
$30,653,000, Tespectively, and is presented in the
Statement of Financial Position.

NOTES TO FINANCIAL STATEMENTS 37


EXHIBIT II
REPORTABLE CONDITIONS


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
se United States Department of the Treasury
Washington, D.C.:

We have audited the accompanying statements of financial position of the
Department of the Treasury Forfeiture Fund (the Fund) as of September 30, 1997 and
1996, and the related statements of operations and changes in net position for the
years then ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards;
Government Auditing Standards, issued by the Comptroller General of the United
States; and the Office of Management and Budget (OMB) Bulletin 93-06, Audit
Requirements for Federal Financial Statements, as amended. Those standards
‘ require that we plan and perform the audit to obtain reasonable assurance about
j whether the financial statements are free of material misstatement. An audit includes
“a 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.

Member of the American Institute of Certified Public Accountants


EFFECT

RECOMMENDATION

Although the necessary adjustments are made each September 30 to convert the cash basis financial
data to the accrual basis, in order to comply with the requirements of SFFAS No. | and to improve
financial information on which daily decisions are based, we recommend that the following specified

procedures be implemented to Properly account for transactions on the accrual basis of accounting.

Accounts Payable and Accrued Liabilities - Customs, Secret Service, IRS and ATF should
submit monthly requests for reimbursement to provide more timely results of operations for
the Fund and thereby allow for more timely analysis of the financial position of the Fund.

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

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

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

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

54 INDEPENDENT AUDITOR’S EXHIBIT 1


properly value and record month-end forfei
participating in the Fund must prep:
forfeited value for property disc!

ited property balances. Additionally, individual agencies
are the ‘sales value’ to ‘appraised amounts’ ratio in order that the

losed in the financial statements is reported at the best estimate,

INDEPENDENT AUDITOR’S EXHIBIT II


Chapter 1:

SAFEGUARDING INDIVIDUAL RIGHTS

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

The Treasury Forfeiture Fund now stands as the
Tepository of all the non-tax forfeitures made
pursuant to laws enforced or administered by
the Department of the Treasury. It is a valuable
resource for law enforcement in its continuing
efforts to meet the challenges posed by criminal
activity. Monies from the Treasury Forfeiture
Fund assist and support American law
enforcement at all levels of government. They
are used to cover the direct expenses of seizures
and forfeitures incurred by Treasury law
enforcement agencies in their various
operations. They are also used to more
generally support aspects of Treasury’s
forfeiture program. The statutory authorities of
the Fund that permit the sharing of forfeited
assets with other law enforcement organizations
that have assisted Treasury investigations have

carried the benefits of the Fund to numerous
Police agencies throughout the United States
and internationally as well.

Asset forfeiture is a powerful law enforcement
tool. It is capable of not only disrupting
criminal organizations, but also of taking them
apart and effectively putting them out of
business. Although forfeiture authorities have
been re-invigorated and expanded in the last
two decades, the theory and Practice of
forfeiture is not new. In fact, in the United
States, the ability to forfeit assets used in
criminal activity has been an option available to
the Customs Service since the late eighteenth
century. The effectiveness of asset forfeiture,
now as then, rests upon public confidence in its
integrity. This is especially true of civil
forfeitures; those conducted outside of the
criminal courts. A discussion of some of the
Process safeguards in civil forfeiture as well as
the related policies of the Treasury Forfeiture
Fund will give a view of how the goal of
safeguarding individual rights is being pursued.

Protecting Due Process in Civil Forfe

While civil forfeiture actions can be pursued
either administratively by the seizing agency, or
Judicially in court, they always proceed against
property and not persons. It is, however, readily
apparent that property, by definition, cannot
exist without Someone, somewhere, having an
ownership or other interest in it. Fairness
demands that those Persons having any interest
in seized property be notified of the seizure and
the intent to forfeit their interest in the property
so that they may have an Opportunity to come
forward and be heard as to why they should

SAFEGUARDING INDIVIDUAL RIGHTS 1


Gardiner, Kamya & Associates, PCC,

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

Fax: 202 857-1778

Independent Auditor's Report on Compliance

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 and for the year ended September 30, 1997, and
have issued our report thereon dated February 13, 1998. Our responsibility is to
report on the Fund’s compliance with laws and regulations based on our audit.
Under the Federal Financial Management Improvement Act of 1996 (FFMIA), we
are required to report whether the Fund’s financial management systems substantially
comply with the Federal financial management systems requirements, applicable
j accounting standards, and the United States Standard General Ledger at the
are transaction level. The U.S. Customs Service (Customs) provides cross-servicing of
the accounting for the Fund. We are not the auditors of the Customs and,
consequently, we did not perform tests of the Customs’ compliance with the above
requirements using the implementation guidance for FFMIA issued by OMB on
September 9, 1997. Those tests were performed by other auditors whose report has
been furnished to us. Our opinion, insofar as it relates to FFMIA compliance, is
based solely on the report of the other auditors.

cat

We conducted our audit 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. 93-06, “Audit Requirements for
Federal Financial Statements,” as amended,

The management of the Fund is responsible for complying with laws and regulations
applicable to the Fund. As part of obtaining reasonable assurance about whether the
Fund’s financial statements are free of material misstatement, we performed tests of
its compliance with certain provisions of laws and regulations, noncompliance with
which could have a direct and material effect on the determination of financial

Member of the American Institute of Certified Public Accountants


NOTES TO FINANCIAL STA TEMENTS

enforcement organizations. The source of Section
9703(b)(5) funding is equitable sharing payments
received from the Department of Justice and the U.S.
Postal Service (USPS) Tepresenting Treasury's share
of forfeiture proceeds from Justice and USPS cases.

(13) Commitments and Contingencies

As of year end, there are equitable sharing requests
in various stages of approval. Because final
approval has not been obtained as of September 30,
1997, they are not recorded as liabilities of the Fund.
However, the Fund identified equitable sharing
requests in the amount of approximately
$22,283,000 and $19,439,000, which were approved
or in the final stages of approval subsequent to
September 30, 1997, and 1996, respectively. The
forfeited currency revenue was recognized in one
fiscal year; however, the distribution will not be
Tecognized in the financial statements until the
following fiscal year. In addition to the amount
estimated above, there are additional amounts which
may ultimately be shared which are not identified at
this time.

In recent decisions, the United States Court of
Appeals for the Ninth Circuit ruled that it is
unconstitutional to forfeit currency based upon a
violation of a federal currency reporting statute.
Accordingly, the court has ruled that in retuming
currency, the government must return the benefit
that is received from holding the currency. The
interest to be retumed will be payable out of the
income of the Fund; and, at present, represents a
Possible claim of potential significance. However,
at present it is not possible to determine the
likelihood that such claims will arise. Similarly, it
is not possible to determine the value of such
potential claims against the Fund.

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

42 NOTES TO FINANCIAL STATEMENTS


4. _ LACK OF SALES REVENUE RECONCILIATIONS

CONDITION

EG&G Dynatrend (EG&G) provides Property management services to the U.S. Customs Service
(Customs), such as: storage of property seized by any bureau participating in the Fund; disposal of
the properties through public auctions; and, collection of 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

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, Currently, Customs does not
independently verify the revenue earned from sales of inventory items. The money deposited into
the Fund by EG&G is reported as revenue. Additionally, no reconciliations are performed to verify
sales proceeds owed to the Fund.

CRITERIA

The Budget and Accounting Procedures Act of 1950, Section 3512, Executive Agency's Accounting
System requires Federal agencies to establish an internal control structure with ensures the
safeguarding of assets and the Proper recording of revenues and expenditures. It is further reinforced
by the Federal Manager's Financial Integrity Act of 1982 (FMFIA), which requires that internal
accounting and administrative controls be established to provide reasonable assurances that revenues
and expenditures applicable to agency operations are properly recorded and accounted for to permit
the preparation of accounts and reliable financial and statistical reports and to maintain
accountability over the assets.

CAUSE

The Fund does not independently monitor the sales conducted by EG&G. In addition, in FY ‘97 the
Fund discontinued the practice of reconciling proceeds received from the sales to EG&G sales

reports.
EFFECT

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

INDEPENDENT AUDITOR’S EXHIBIT II 67


away with even more incriminating evidence
regarding the illegal enterprise.

Not unexpectedly, when confronted with the
results of the investigation, Wandling agreed to
plead guilty to filing false tax returns, money
laundering, and the cultivation and distribution
of marijuana. Additionally, he agreed to forfeit
Property and cash totaling over $200,000. One
piece of property forfeited was Wandling’s 147
acre farm in Mason County, West Virginia. In
FY 1997, approval was given by the
Department of the Treasury to transfer title to
that property to the West Virginia State Police
as an equitable share Tecognizing their
Contributions to the overall investigation
leading to forfeiture. The state police will use
the land to construct an emergency vehicle
driver training facility to train federal, state,
county and municipal law enforcement
personnel in the area.

12 DETERRING CRIMINAL ACTIVITIES


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

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

CRITERIA

The Statement of Federal Financial Accounting Standards (SFFAS) No. /, 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 ac-
crual basis of accounting involves identifying and recording costs and revenues in the period in
which the revenue is earned or the cost is incurred, rather than in the period revenue is collected or
the cost is disbursed. This position is further supported by the Office of Management (OMB)
Bulletin 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 the accrual basis, financial transactions
teceived 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.

INDEPENDENT AUDITOR’S EXHIBIT | 53


. Reliable seized and forfeited currency information could not be provided from SEACATS.
Exhaustive year-end procedures were developed to manually compile forfeited and seized
currency as of September 30, 1997, for financial reporting purposes. This was a time
consuming and cumbersome process which delayed the completion of the annual audit and
significantly impacted Customs’s daily activity.

RECOMMENDATION

The Fund’s current intention is to develop SEACATS until it is fully functional so that Customs can
Process property and currency transactions as intended and ultimately use SEACATS as the Customs
system of record in fiscal year 1998. We strongly recommend that the shortfalls identifiable to
SEACATS be immediately corrected to allow for cradle to grave tracking of all property and
currency from case initiation to final resolution including SFFAS No. 3 requirements. We also
strongly recommend that Customs provide user training and also, comprehensive system
documentation to conform to user requirements. We also recommend Post conversion audits to
ensure that the system works as purported.

INDEPENDENT AUDITOR’S EXHIBIT 1 59


Support equipment would have consisted mostly
of gun metal gray filing cabinets, an upright
telephone in any color desired as long as it was
black, and a massive Underwood typewriter
covering most of the desktop. Today, Treasury
agents work in an environment that enjoys the
benefits provided by fiber optics, wireless
communications, digital imaging, faxes,
modems, the Internet, and, thanks to advances
in microprocessing, more and more computing
Power in increasingly convenient packaging.
Unfortunately, most of these technological
innovations are also available to and being used
by criminal elements. In FY 1997, the Fund
began to provide resources for Computer
Investigative Specialist (CIS 2000), a planned
four year effort that is aimed at developing a
cadre of computer investigative specialists who
will be able to recover computer evidence
needed for the successful investigation and
Prosecution of cases.

CIS 2000 builds upon and expands an already
existing IRS sponsored computer laboratory and
classroom at Treasury's Federal Law
Enforcement Training Center in Brunswick,
Georgia. Since 1995, that effort has trained law
enforcement personnel as computer evidence
Tecovery specialists, provided for their
continuing _ professional development and
introduced computer evidence recovery into the
international financial fraud training program.
Beginning in FY 1997, the CIS 2000 initiative
aims to train and equip approximately 400
computer investigative specialists from among
special agents in all four Treasury law
enforcement bureaus. CIS 2000 will draw upon
the Fund to provide the resources for
Prerequisite, basic, advanced and Internet
training, additional hardware and software for
the CIS agents, improvements in the classroom
technology and installation of a
communications center and intranet site linking
all Treasury CIS personnel.

In FY 1997, almost $3 million was allocated to
the CIS 2000 initiative. These monies were
provided from the Secretary’s Enforcement
Fund portion of the Treasury Forfeiture Fund.

When he addressed the second session of his
nation’s new parliament in February of 1995,

South Aftican President Nelson Mandela spoke
with force and determination:

“The situation cannot be tolerated in which our
country continues to be engulfed by a crime
wave which includes murder, crimes against
women and children, drug trafficking, armed
robbery, fraud and theft. We will take the war
to the criminals...”

It was not long afterward that the Fund was able
to lend some tangible support to South African
law enforcement and the Pivotal role it plays in
ensuring the success of the post-apartheid
government. In both FY 1995 and FY 1996,
the Fund was able to underwrite, from its
discretionary payment authorities, training for
South Africa’s National Police Service by
Treasury enforcement bureau personnel. Both
these sessions were conducted in South Africa
and both revealed a consensus among the
participants regarding the need for a more
structured and permanent relationship.

That need was translated into a proposal which
became a reality in FY 1997 with the
establishment of a Customs Service attaché
office in Pretoria. The Fund during this fiscal
year contributed over $600,000 to cover start-up
costs for this office, By year’s end, dividends
for both nations were already being realized.
The Customs attaché, working with South
African counterparts in the Border Police, the
commercial and serious crimes sections of the
Police Service, South Africa’s Revenue Service
as well as its Customs and Excise Service, was

14 STRENGTHENING LAW ENFORCEMENT


DEPARTMENT OF THE TREASURY FORFEITURE FUND
ANNUAL REPORT
FISCAL YEAR 1997

Page No,

Section I: Overview
Chapter I

Safeguarding Individual Rights a |
Chapter 2

Deterring Criminal Activity 4
Chapter 3

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

Strengthening Law Enforcement 2 . 13
Chapter 5

Program Performance and Financial Highlights...) rn cee... 16
Section HI: Financial Statements
Independent Auditor's Report on Financial Statements... oo... 25

Financial Statements:



NOTES TO FINANCIAL STATEMENTS

amount equal to the seized asset value. SFFAS
No. 3 also specifies that a valuation allowance
be established against forfeited property for
liens or claims from a third party.

SFFAS No. 3 requires certain additional
disclosures in the notes to the financial
statements, including an analysis of changes in
seized property and an analysis of changes in
forfeited property, 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 5 and 6.

Non-entity Assets

"Non-entity assets" consist of seized currency and
investments of seized currency. Because the non-
entity assets are not considered as financing sources
(revenue) available to offset Operating expenses, a
corresponding liability is recorded and presented as
governmental liabilities under "liabilities not
covered by budgetary resources" in the statement of
financial position to reflect the custodial/fiduciary
nature of these activities.

* Seized Currency and Property -- is defined as
cash or financial instruments that are readily
convertible to cash on a dollar for dollar basis.
Seized property (including currency and
monetary instruments) is recorded at its market
value at the time of seizure. The value is
determined by the seizing entity and is usually
based on market analysis such as a third party
appraisal, standard property value publications
or bank statement.

¢ Fund Balances with Treasury and Cash --
Fund balance with Treasury and cash represents
the aggregate amount of the Fund’s suspense
account balances - cash on deposit and on hand
in vaults at field office locations.

+ Investments -- This includes seized monetary
instruments accounted for in the Fund’s
Suspense account which have been converted to
U.S. Government Obligations.

Liabilities Covered by Budgetary Resources

Liabilities covered by budgetary resources represent
liabilities incurred which will be covered by
available budgetary resources. The components of
such liabilities for the Fund are as follows:

* Distributions Payable -- Distributions payable
to federal sources is Principally related to
surplus revenue that, by law, must be
transferred to the ONDCP. (See "Transactions
with Office of National Drug Control Policy").
Distributions payable to non-federal sources is
associated with equitable sharing payments to
state and local governments, and payments to be
made by the Fund to 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.

* Deferred Revenue from Forfeited Assets --
At year end, forfeited assets were held by the
Fund which had not yet been converted into
cash through sale and deposited. The amount
reported 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 commitments
and contingencies, which is disclosed in note 13,
and seized currency. As explained in the Non.
entity Assets section, seized currency presented
here is a corresponding liability recorded to reflect

NOTES TO FINANCIAL STATEMENTS 35


Customs. However, the report of the Customs’
auditors on the substantial compliance of
Customs with the Federal Financial
Management Improvement Act of 1996
(FFMIA), disclosed instances where Customs’
financial management systems did not
substantially comply with Federal Financial
Management Systems requirements as
Prescribed by FFMIA. Assisting the U.S.
Customs Service to resolve these problems has
been among the highest priorities for
management of the Fund.

Lastly, Fund management has initiated changes
to maintain accounting records on an accrual
basis, and to provide more expense detail
through the automated financial systems. This
will help to correct portions of the Fund's
material weaknesses identified in the FY 1997
audit.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

23


Department of the Treasury
Office of the Under Secretary
(Enforcement)

Washington, DC

TO TREASURY LAW ENFORCEMENT:

The Treasury Forfeiture Fund has completed yet another year of fulfilling its
promise. Besides covering the direct costs of seizing and forfeiting criminal properties, it
has directed millions of dollars back into the support of the law enforcement operations.
This annual report of the Fund shows how that task was accomplished both through the
traditional presentation of Fund financial condition reporting and through a description of
some of the cases and initiatives in which we have been involved.

The Treasury Fund well serves the interests of American citizens, By taking away
ill-gotten proceeds, asset forfeiture helps restore some of the sense of fairness in lawful
society that is disrupted by criminal activity. By then taking these resources and using
them to strengthen law enforcement throughout the United States and overseas as well,
the Fund accomplishes much of what otherwise would be left to the availability of limited
taxpayer dollars,

The success that the Fund has realized is directly attributable to the conscientious
efforts of Treasury law enforcement personnel. Whether it involves sensible and efficient
management in seized property operation or decisions to apply powerful forfeiture
authorities always in a manner that Tespects and safeguards the rights of affected persons,
the women and men of Treasury law enforcement have commendably carried out their
forfeiture programs responsibilities. Day in and day out, their work delivers on the
significant promise of the Treasury Forfeiture Fund for all our citizens.

RAYMOND W. KELLY
Under Secretary (Enforcement)


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,

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

deteriorate.

In planning and performing our audits of the financial statements of the Fund as of and for the year
ended September 30, 1997, we obtained an understanding of the internal control structure. With

With respect to the performance indicator 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.

Public Accountants and OMB Bulletin No. 93-06, as amended. Reportable conditions involve
matters coming to our attention relating to significant deficiencies in the design or operation of the
intemal control structure over financial Teporting 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.

47


NOTES TO FINANCIAL STATEMENTS

(1) Reporting Entity

The Department of the Treasury Forfeiture Fund
(the Fund) was established by the Treasury
Forfeiture Fund Act of 1992, Public Law 102-393
(the TFF Act), and is codified at 31 USC 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, 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, which is managed by the Executive
Office for Asset Forfeiture (EOAF), is accounted
for under Treasury symbol number 20X5697, 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.

Under a Memorandum of Understanding (MOU)
with the Department of the Treasury, Customs acts
as the executive agent for certain Fund operations.
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 and the Office of
Management and Budget (OMB) regulations and
reporting requirements.

The principal goals of the Treasury forfeiture
program are to: (1) punish and deter criminal
activity by depriving criminals of property used in
or acquired through illegal activities, (2) be
cognizant of the due process rights of affected
Persons; (3) enhance cooperation among foreign,
federal, state, and local law enforcement agencies
through the equitable sharing of forfeited assets;
and (4) produce revenues to enhance the forfeiture
Program and strengthen law enforcement.

(2) Summary of Significant Accounting Policies

Basis of Accounting and Presentation

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

NOTES TO FINANCIAL STATEMENTS 31


NOTES TO FINANCIAL STATEMENTS

(7) Net Position

The following summarizes the changes in net position for the years ended September 30, 1997, and 1996

(dollars in thousands):

Balances, September 30, 1995 before distribution to
ONDCP’s Special Forfeiture Fund

Distribution to ONDCP’s Special Forfeiture Fund

Balances September 30, 1995, net of distribution to
ONDCP’s Special Forfeiture Fund

Excess of net revenues and financing sources over
total program expenses

Net change in obligations of current resources
Reduction of unobligated balance

Recission of Apportionment

Balances September 30, 1996, before distribution to
ONDCP’s Special Forfeiture Fund

Distribution to ONDCP’s Special Forfeiture Fund

Balances September 30, 1996, net of distribution to
ONDCP’s Special Forfeiture Fund

Excess of net revenues and financing sources over
total program expenses

Net change in obligations of current resources
Increase of unobligated balance
Transfer from ONDCP

Balance, September 30, 1997, before distribution to
ONDCP’s Special Forfeiture Fund

Distribution to ONDCP’s Special Forfeiture Fund

Balance, September 30, 1997 net of distribution to
ONDCP’s Special Forfeiture Fund

Cumulative
Unobligated Unliquidated Results of Total Net
Balance Obligations Operations Position
$ 50,000 $ 57,169 $ 72,670 $179,839
——_—_: —: (21,922) _(21,922)
50,000 57,169 50,748 157,917
- - 3,337 3,337
- 9,544 (9,544) -
(10,000) - 10,000 -
= = (194) —(194)
40,000 66,713 54,347 161,060
—__— = 16.388) (16,388)
$40,000 $66,713 $37,959 $144,672
- - 96,844 96,844
- 14,649 (14,649) -
90,186 - (90,186) -
= —_— -96,876 — _66,876
130,186 81,362 96,844 308,392
= — 35,679) (35.679)
$130,186 $81,362 $6165 $272,713

40 NOTES TO FINANCIAL STATEMENTS


In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Department of the Treasury Forfeiture Fund as of September 30, 1997 and
1996, and the results of its operations and changes in net position for the years then ended, on the
basis of accounting described in Note 2.

In accordance with Government Auditing Standards, we have also issued a report dated February 13,
1998, on our consideration of the Fund's internal control structure and a Teport dated February 13,
1998, on its compliance with laws and regulations.

Our audits were conducted for the Purpose of forming an opinion on the financial statements referred
to in the first paragraph of this report as a whole. The information presented in management's
Overview of the Department of the Treasury Forfeiture 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 Bulletin Nos. 94-01 and 97-01, Form and Content of
Agency Financial Statements, or the Treasury Forfeiture Fund Act of 1992. Although we have read
the information presented, such information has not been subjected to the auditing procedures
applied in the audits of the financial statements and, accordingly, we express no opinion on it,

This report is intended for the information and use of the 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.

February 13, 1998

AL, kewya + Aemnts

26


1996, he and two colleagues met with an
individual in Mobile, Alabama, to discuss a
pending importation that was to be outside of
the normal channels of international trade. The
Cargo, approximately 325 kilograms of cocaine,
was to be delivered to a point 200 miles north
of the Colombian coast, where the Mobile
Contact would load it onto a vessel and take it
the rest of the way to the Alabama port city.
The original agreement was for $30,000 to be
delivered up-front for expenses, with another
$120,000 to be paid upon delivery in Mobile
and a final $1 million to be paid after the
cocaine was distributed to associates in the
United States.

During the last week of March, the Mobile
Contact met with a 40-foot fishing vessel at the
pre-determined point and accepted the cache of
cocaine. After a brief layover in the Cayman
Islands, caused by inclement weather, heavy
seas and ongoing negotiations with the drug
traffickers, the vessel arrived back in Mobile on
April Fools Day -- somehow appropriate since
the Mobile contact, the vessel and crew were all
part of a Customs undercover Operation.
Within the next three weeks, various
individuals who arrived in Alabama to accept
delivery were arrested along with some
compatriots in Miami. All but one, who fled
while on bond, were convicted or pled guilty.

Approximately $65,000 in cash was forfeited
and equitable shares were made to the many
law enforcement agencies whose assistance
contributed to the success of this delicate
undercover operation. These included the
Cayman Islands Drug Task Force, the Drug
Enforcement Administration, the Mobile Police
Department and Airport Police, and the police
departments of Prichard, Daphne and Bayou La
Batre.

Tribal Police Lend a Hand in M

While 1997 saw a national debate regarding a
settlement with the cigarette industry over the
health effects of smoking, a more operational
issue for Treasury’s Bureau of Alcohol,
Tobacco and Firearms (ATF) involving the
smuggling of cigarettes on a northwestern
Indian reservation resulted in a sizable
forfeiture to the Fund and the subsequent
sharing of assets,

Dorothy and Larry Clinkenbeard had a ranch in
Arlee, Montana, that was within the boundaries
of the Flathead Indian Reservation. On the
ranch, they would take delivery of huge
quantities of cigarettes from a licensed
wholesaler in Missoula. As telephone and fax
orders would come in from the owners and
managers of smoke shops on the Puyallup
Reservation in the Westen District of
Washington, the Clinkenbeards would dutifully
load the cigarettes into smuggling vehicles
designed to look like mobile campers and drive
to rendezvous points in Idaho and Washington
where smoke shop representatives would pick
up the orders in similar looking vehicles and
Continue to their point-of-sale destinations.
Smoke shop representatives from the Colville
and Spokane reservations in the Eastern district
of Washington would simply drive to the
Clinkenbeard’s ranch and load their specially
designed horse trailers, pickups and vans for the
trip back to their stores. This illegal distribution
ring was set up to circumvent the Washington
State cigarette allocation Program as well as the
thirty-four percent per pack tax.

This smuggling operation began in 1983 and at
its height the wholesaler in Missoula was
selling $13 million worth of cigarettes per year
to the Clinkenbeards. The Flathead Tribal
Police of the Confederated Salish and Kootenai
Tribes had originally contacted ATF about the
violations that eventually led to forfeitures

10 DETERRING CRIMINAL ACTIVITIES


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

EFFECT

The difficulties encountered in Preparing the changes in forfeited and seized Property analysis by the
four bureaus 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 recommend that Customs immediately evaluate and correct the shortfalls identified within
SEACATS so that Customs can Process property and currency transactions for fiscal year 1998. IRS,
Secret Service and the ATF should continue to manually reconcile information generated from their
individual tracking systems until such time as SEACATS is fully functional.

Additionally, we recommend that IRS, Secret Service, and ATF manually reconcile periodically to
SEACATS. If SEACATS still cannot be correctly updated, then inventory should be accounted for
using information generated from their tracking systems.

62 INDEPENDENT AUDITOR’S EXHIBIT II


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 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, 1997.

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

Material Weaknesses
Prior Year Material Weaknesses:

The two material weaknesses identified below were reported in the prior year's Independent
Auditor's Report on Internal Control Structure and are of continuing significance:

. Accounting Records are Maintained on a Cash Basis - The Fund's accounting
records are primarily maintained on the cash basis rather than the accrual basis of
accounting. Accordingly, most transactions are reflected in the accounting system
when the cash is received or disbursed rather than when the transactions occur.
Financial information and transactions from each 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. Instead, procedures were developed to identify and capture information
manually from other bureaus’ systems in order to compile the financial statements.

Current Year Material Weakness:
The following additional material weakness was identified in fiscal year 1997:

. U.S. Customs Services’ Inadequate Inventory Tracking System - The U.S.
Customs Services (Customs) seized and forfeited property and currency tracking
system, the Seized Assets and Case Tracking System (SEACATS), does not contain
accurate and sufficient data that can be relied upon to prepare the analysis of changes
in forfeited and seized currency and property without substantial manual
manipulation and reconciliation. As a result, year-end procedures were developed to

48


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 1.

We also noted other matters involving the internal Control structure and its operation that we have
Teported to the management of the Fund in a Separate letter dated February 13, 1998,

Tn accordance with Government Auditing Standards, we have also issued reports dated February
13, 1998 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 management of the Fund, the U.S.

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

February 13, 1998

aa daw, Kore Heme

50


Chapter 4:

STRENGTHENING LAW ENF ORCEMENT

EReeral forfeiture funds support and strengthen
law enforcement in several interrelated ways.
In doing this they realize a principal
Congressional intent that lay behind their
original enabling legislation as embodied in the
Comprehensive Crime Control Act of 1984.
Before then, certain forfeiture authorities
existed but without the supporting mechanisms
of the forfeiture funds and even in that early
circumstance they assisted law enforcement by
allowing for the dismantling of criminal
organizations by removing their assets,
something that incarceration by itself was often
incapable of doing. In the years since 1984,
forfeiture authorities have been expanded and,
contemporaneously, forfeiture funds have been
established and refined.

Today, the funds bolster law enforcement on
several distinct levels. Primarily, they pay for
most of the costs of the seizure and forfeiture
program. What is known as the non-
discretionary side of the Treasury Forfeiture
Fund is made up of a permanent and indefinite
appropriation of the receipts of the Fund and is
used to pay the expenses associated with
specific seizures and forfeitures. The
discretionary side of the Fund consists of a
specific annual appropriation from Congress,
again from the receipts of the Fund, and is used
to pay expenses more generally supportive of
the Department of the Treasury’s seizure and
forfeiture program. Amounts in the Fund that
are derived from shares that are received as a
result of participation in Justice seizures
(reverse asset sharing) and surplus amounts that
remain after all non-discretionary and
discretionary obligations have been met, are
two other categories of Fund resources that can

be used to strengthen Treasury and other federal
law enforcement.

The overall effect of these Payment authorities
of the Fund is a stronger law enforcement
Presence, more capable of meeting the
challenges posed by increasingly sophisticated
and globalized criminal organizations, First, by
paying for the costs of seizures and forfeitures
from the proceeds of crime, the salary and
expense appropriations of Treasury enforcement
bureaus, derived from tax receipts, are able to
go much further in support of each bureau’s
fundamental mission, Second, the significant
disbursements from the Fund each year for
equitable sharing payments to assisting state
and local law enforcement agencies must be
used by the recipients for law enforcement
Purposes. Finally, the amounts available in the
Fund from reverse asset sharing and year end
surpluses must be used to support either
Treasury or other federal law enforcement.

The deposit of the value of a forfeiture in the
Fund creates a ripple effect that strengthens and
empowers law enforcement not only within the
Department of the Treasury but throughout the
federal, state and local levels of government and
even at times extending internationally as well.
Some specific examples from FY 1997 of how
the Fund is assisting and expanding
enforcement capabilities will provide a picture
of how this goal is being pursued.

C Investigative Speciali

When Eliot Ness and his fellow Treasury agents
were pursuing some of America’s most
notorious criminals during the 1920s, his office

STRENGTHENING LAW ENFORCEMENT 13