Young Talented Children

Bolstering Treasury Law Enforcement

To the uninitiated, Young Talented Children (YTC)
is a”name likely to connote a suburban school
district's program for its most gifted pupils. Instead
on the mean streets of the Upper West side of
Manhattan, YTC represented a much more sinister
program. It was a gang that ran a crack cocaine
business, grossing more than a $100,000 per week.
It had taken over its drug dealing territory from a
group known as the Natural Born Killers, whose
leaders had succumbed to a hazard of the trade.
They were murdered in 1993. YTC's main drug
gang rival in this part of the city, also known as
Manhattan Valley, was the Young City Boys (YCB).
Both gangs battled for market share, controlling
buildings and entire blocks, with shootings and
assaults common. The gangs sold crack cocaine to
street customers as well as powdered cocaine and
heroin to other dealers. They were also heavily
involved in the sale of firearms.

The Manhattan District Attorney's Office has availed
itself of Treasury Forfeiture Fund resources to help
battle this problem on two fronts. First, in a
coordinated effort with the NYPD's Manhattan
North Narcotics Gang Task Force, it has
successfully pursued Operation Rainbow, arresting,
indicting and convicting numerous gang members
for murders, attempted murders, assaults and the
Possession and sale of weapons and drugs.
Homicides in the neighborhood have dropped
substantially. Second, partly drawing on equitable
sharing monies received from the Treasury
Forfeiture Fund, the District Attorney's Office has
set up a summer playstreet near a City Parks
Department playground in the very area once tightly
controlled by the drug gangs. The playstreet
operates from 9 am to 5 pm during school summer
vacation months and during that time, is closed to
all traffic. It offers a variety of drug prevention,
tecreational, educational, cultural and social
programs to residents. In this instance, the fruits of
Cooperation between local and federal law
enforcement have paid dividends to the children of
a community sorely tested by drugs and crime.

A basic point made in support of the legislation that
eventually established a consolidated Department of
the Treasury Forfeiture Fund in 1992, was that the
Secretary of the Treasury needed direct control over
the increasingly significant resources coming from
the proceeds of Treasury law enforcement
forfeitures. Since then, the Fund has used its
Statutory authorities to disburse these resources in
specific support of the Treasury enforcement
bureaus’ forfeiture programs and, more generally, to
strengthen law enforcement within the Department.

The Fund uses an indefinite, unlimited appropriation
of monies it receives to pay certain seizure-specific
mandatory expenses of the Treasury forfeiture
Program, such as the costs of its seized property
Management contract and certain investigative
expenses. It uses another annual, definite,
Congressional appropriation, again from its receipts,
to pay for other discretionary forfeiture program
Costs not tied to specific seizures. Finally, from
either surpluses available to the Fund after these
mandatory and discretionary expenses are met or
from equitable sharings received by the Fund
because of Treasury bureau contributions to other
law enforcement agency forfeitures, it can make
payments for law enforcement purposes. Some
examples of just how the Fund has made use of its
several authorities to strengthen Treasury law
enforcement will show the wide range of areas in
which it has had an effect.

* Operation Hardline - The southwest border of
the United States has been a favored point for the
smuggling of currency, drugs and other illegal
contraband. The Treasury Forfeiture Fund has
helped the Customs Service cover the costs of
personnel moves under Operation Hardline to re-
direct resources to where they are acutely needed.

+ Computer Evidence Recovery - Breakthroughs
in microprocessing continue to assist not only
legitimate businesses but criminal enterprises as
well. To keep up with the pace of technology
and allow investigators to recover the often
critical evidence stored in computer systems, the

STRENGTHENING LAW ENFORCEMENT 13


NOTES TO FINANCIAL STATEMENTS

hand at the end of the year. These analyses
are disclosed in notes 5 and 6.

In fiscal year 1995, the Department of the
Treasury issued guidance defining currency
for the purposes of applying SFFAS No. 3.
This definition excluded marketable
securities, foreign currency and other non-
cash equivalents from the definition of
currency. The change in accounting
principle results from the reclassification of
other financial instruments from cash which
does not produce revenue until it is disposed.
Prior to fiscal year 1995, these types of
assets were treated as currency and revenue
was recognized immediately upon forfeiture.

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 -- 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.

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 above
non-entity assets section, seized currency presented
here is a corresponding liability recorded to reflect
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,

34 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


NOTES TO FINANCIAL STATEMENTS

(1) Reporting Entity

The Department of the Treasury Forfeiture Fund
(Treasury Forfeiture Fund or the Fund) was
established by the Treasury Forfeiture Fund Act of
1992, Public Law 102-393 (the 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 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 is a special fund that is accounted for
under Treasury symbol numbers 20X5693 and
20X5697, The Fund is managed by the Executive
Office for Asset Forfeiture (EOAF).

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, the Comptroller General
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 assets forfeited; 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 accompanying financial statements have been
prepared to report the financial position and results
of operations of the Fund. Until a sufficiently
comprehensive set of accounting standards is agreed
to and published by the Joint Financial Management
Improvement Program (JFMIP) principals, which
will constitute generally accepted accounting
principles for the federal government, the following
hierarchy shall constitute an "other comprehensive
basis of accounting" used for preparing these
financial statements:

° Individual standards developed by the
Federal Accounting Standards Advisory
Board and agreed to and published by the
JFMIP principals.

30 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


NOTES TO FINANCIAL STATEMENTS

(7) Net Position

The following summarizes the changes in net position for the years ended September 30, 1996, and 1995

(dollars in thousands):

Balances, September 30, 1994

Excess of net revenues and financing
sources over total program expenses

Net change in obligations of current resources

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

Cumulative Total
Unobligated  Unliquidated Results of Net
Balance Qbligations Operations Position
$50,000 $52,513 $48,817 $151,330
- - 28,509 28,509
= 4,656 (4,656) =
$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

Recission of Apportionment -- During Fiscal Year 1996, Public Law 104-134 adjusted previously approved
OMB apportionments for amounts not subject to appropriation. 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.

(continued)

NOTES TO FINANCIAL STATEMENTS .

39


Peoples Republic of China. Initial information was
developed that a Taiwanese resident alien living in
California had thousands of Chinese manufactured
weapons stored in his warehouse. As_ the
investigation developed, this individual served as a
middleman between undercover Treasury agents
posing as arms traffickers looking for assault
weapons for criminal activity and American-based
Tepresentatives of the Peoples Republic of China
munitions companies. After lengthy negotiations,
the sale and importation of 2,000 fully automatic
weapons from Norinco was arranged.

It was these AK-47 type 7.62 mm machine guns,
commonly used as military assault weapons around
the world, that were seized by Treasury agents in
March of 1996. This smuggling attempt was in
violation of the Presidential embargo on the
importation of weapons and munitions designated on
the United States Munitions List as well as a
violation of U.S. law regarding the importation,
Possession and sale of illegal weapons. Included
with this shipment was approximately 4,000 thirty
to forty round ammunition magazines. The street
value of the cache was estimated to be more than
four million dollars.

DETERRING CRIMINAL ACTIVITY


AOU ANAINEA UE 2A RAAOUNL PURERILURE FUND
Equitable Sharing Summarized by State and U.S. Territories
. For the year ended September 30, 1996
* @ollars in thousands)

(Unaudited)

State/U.S. Territories * Currency Value Property Value
Alabama $ 87 $+
Alaska 56 ~
Arizona 1,138 262
Arkansas - 1
California 5,685 69
Colorado 131 2
Connecticut 58 -
D.C. Washington - 60
Delaware 46 ~
Florida 8,764 31S
Georgia 264 19
Guam 13 ~
Hawaii 15 ~
Idaho I -
Mlinois 1,541 13
Indiana - ~
Towa 160 -
Kansas 10 2
Kentucky 6 1
Louisiana 5 ~
Maryland 45 17
Massachusetts. 325 17
Michigan 152 -
Minnesota 10 ~
Mississippi 101 YW
Missouri 418 1
Montana 28 5
Nebraska - ~
Nevada - -
New Jersey 2,430 96
New Hampshire ~ -
New Mexico 357 36
New York 12,339 29
North Carolina 552 69
North Dakota - 4
Ohio 345 6
Oklahoma 135 -
Oregon 41 -
Pennsylvania 572 -
Puerto Rico - ~
Rhode Island 2 -
South Carolina 98 1
South Dakota - -
Tennessee s7 -
Texas 10,988 27
Utah 24 -
Vermont - -
Virgin Islands - -
Virginia 329 17
‘Washington 103 5
West Virginia 123 9
‘Wisconsin 38 10
Wyoming = =

Total $47,602 $1,104

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

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION

57


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

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

Material Weaknesses

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

. General ledger - The Fund's general ledger does not record all balances and transactions
that are reflected in the financial statements. Financial information needed from each
bureau to accurately record the Fund's activities are not sent timely. Rather, procedures
were developed to identify and capture information manually from other bureaus’ systems
in order to compile the financial statements.

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

Reportable Conditions

. Inventory property tracking systems - The four Treasury law enforcement bureaus used
four different inventory tracking systems to prepare the required analysis of changes in
forfeited and seized property schedules. The four systems collect and account for seized
and forfeited assets differently and used slightly different data definitions. As a result,
manual manipulation and reconciliation are required to produce the analysis of change in
forfeited and seized property schedules.

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

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

47


Gardiner, Kamya & Associates, B.C.

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

Fax: 202 857-1778

Independent Auditor's Report on Internal Control Structure

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

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

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

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

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

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

- transactions are properly recorded and accounted for to permit the
preparation of reliable financial statements and to maintain accountability
over the assets; and :

Member of the American Institute of Certified Public Accountants


ACCOUNTING RECORDS ARE PRIMARILY
MAINTAINED ON A CASH BASIS

CONDITION

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

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

Mortgage and Claims payable - The issue of how
to determine a lien liability and when to reduce it
has been addressed by EOAF in the updated
directive number 14, “Expeditious Payment of
Liens, Mortgages and Taxes by the Department of
the Treasury”, effective October 1995. However,
the updated directive does not provide clear
instructions as to when the liability is to be
recorded. Therefore, implementation of the
instructions, while resolving other issues will not
ensure that a liability is recorded for claims and
mortgages throughout the year. In fact, the directive
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 is then to be forwarded
to the Accounting Services Division (ASD) for
processing. Also, the directive Tequires ASD to
disburse the approved payments within 14 calendar
days from the date of EOAF's approval of payment.
These requirements do not provide for a complete
accrual of all liens and Mortgages that would
provide reliable information throughout the year,
because ASD cannot record the liability unless
EOAF's approval with the accompanying accounting
strip is received allowing recordation of a liability
only for claims and Mortgages that have been
approved for payment.

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

Distributions Payable - The Fund, under certain
laws and regulations, has the authority to share
forfeited property and currency with federal, state,
and local agencies or foreign countries who
Participate either directly or indirectly in a related
seizure. In addition, the Fund may transfer forfeited
Property to other federal agencies with appropriate
approval. Currently the Fund does not record the
transfer of property to other federal agencies during
the fiscal year. Instead, the Fund makes an
adjustment to record this information on the
financial statements as part of the year end manual
procedures.

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

EXHIBIT ON MATERIAL WEAKNESSES 49


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

EXHIBIT ON MATERIAL WEAKNESSES

53


Gardiner, Kamya & Associates, PC.

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

Fax: 202 857-1778

Independent Auditor's Report on Compliance

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

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

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

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

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

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

31 USC 9703, Treasury Forfeiture Fund Act of 1992

19 USC 1300 Series

19 USC 1500 Series

19 USC 1600 Series

18 USC 981, 21 USC 881

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

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

. Section 112 of the Treasury/Postal Appropriations Bill

ey

Member of the American Institute of Certified Public Accountants


maintenance costs to sales increased from 0.7
percentage in FY 1995, it is still considered to be
within an appropriate range. Fund management
remains concerned that maintenance costs for
Property held in inventory be kept as low as
possible without jeopardizing the value of the

Property.
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. Fund
management established-9 months for the Customs
Service and 6 months for all other enforcement
bureaus as a reasonable period to process
administrative seizure cases.

In FY 1996, the percentage of administrative cases
Processed within these prescribed time frames
increased from 51 to 65 percent. Almost three
quarters of the cases remaining outside the standard
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 85 percent for
Processing administrative cases.

FINANCIAL HIGHLIGHTS

The following provides a brief explanation for each
major section of the fiscal year 1996 audited
financial statements accompanying this report. These
Statements have been prepared to disclose the
financial position, results of operations and changes
in net position pursuant to the requirements of the
Chief Financial Officers Act of 1990 and the
Government Management Reform Act of 1994
(GMRA). While the financial statements have been
Prepared from the books and records of the Fund in
accordance with the formats prescribed by the

Office of Management and Budget, the statements
are different from the financial 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, be advised that direct comparisons are
not possible between balances found in this report
and similar financial information found in the fiscal
year 1996 and fiscal year 1995 Budget of the United
States Government. Further, the notes to the
financial statements and the independent auditor's
opinion and reports on internal controls and
compliance with laws and regulations are also
integral components to understanding fully the
financial highlights of the Fund's operations
described in this chapter.

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)
1996 1995
Forfeited currency and monetary
instruments $120 $146
Forfeited property 32 75
Payments in lieu of forfeiture 3 7
Reimbursed costs 2 3

Proceeds from participating with

other federal agencies 9 8
Investment interest income 9 7
Other miscellaneous 1 6

Total $176 $252

° Forfeited Currency and Monetary Instruments

The Fund's primary source of revenue is forfeited
currency and monetary instruments. For FY 1996,
revenue from forfeited currency and monetary
instruments totaled $120 million, or 68 percent of
total revenues, versus $146 million or 58 percent, in
FY 1995. The forfeited currency and monetary
instruments of $120 million for FY 1996 consist of
the undistributed forfeited currency and monetary

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS 17


NOTES TO FINANCIAL STATEMENTS

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 -- Under the Act, the
Secretary of the Treasury is authorized to
retain in the Fund up to $50 million of the
unobligated balance, on a budgetary basis of
the Fund or, if the Secretary determines a
greater amount is necessary for asset specific
expenses, an amount equal to but not more
than 10 percent of the total obligations from
the Fund in the preceding fiscal year. As
provided for under the TFF Act, effective
September 30, 1996, EOAF reduced the
unobligated balance to $40 million.

. 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)
expenses and losses and distributions; and
(2) financing sources including used
appropriations, revenues and gains.

. 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 - Fund Balance with Treasury and
Cash

Fund balance with Treasury and cash as of
September 30, 1996, and 1995, consists of the
following (dollars in thousands):

1996 1995
Obligated $118,089 $ 91,240
Unobligated (42,107 129,177

75,982 $220,417

The negative unobligated fund balance with
Treasury and cash is offset by investments.
Forfeited cash held as evidence included in fund
balances with Treasury and cash amounted to
approximately $9.0 million and $12.6 million at
September 30, 1996, and 1995, respectively.

(4) Investments

All investments are short-term (31 days or less)
non-marketable par value Federal debt securities
issued by the Bureau of Public Debt and purchased
through the Department of the Treasury’s Financial
Management Service. 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
revenue of the Fund. The following schedule
presents the investments on hand as of September
30, 1996, and 1995 (dollars in thousands):

NOTES TO FINANCIAL STATEMENTS : 35






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

(Unaudited)

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

As reported in the audited financial statements,
at September 30, 1996, the Fund had forfeited
property held for sale of $32,747,000. The
proceeds will be deposited in the Fund when the
property is sold.

Upon seizure, currency, and other monetary
instruments not needed for evidence in judicial
proceedings are deposited in a Customs suspense
account. Upon forfeiture, it is transferred to the
Treasury Forfeiture Fund. At September 30,
1996, there was $379,000 of forfeited currency
and other monetary instruments that had not yet
been transferred to the Fund. This is reported as
a part of - “Intragovernmental accounts
receivables” in the audited financial statements.

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

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

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

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

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

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

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

60

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996 +


DEPARTMENT OF THE TREASURY FORFEITURE FUND
Uncontested Seizures of Currency and Monetary instruments Valued Over.
$100,000, Taking More Than 120 Days from Seizure to Deposit in Fund <‘ .
For the year ended September 30, 1996

(Dollars in thousands)
(Unaudited)
Forfeited
Total Number Being Held Uncontested
State/U.S. Territory of Cases as Evidence Cash
United States Customs Service
Florida 10 $155 $6,680
New York il 200 4,332
Puerto Rico 8 121 1,915
California 6 - 1,852
Texas 2 - 985
Illinois ma —= 138
Total 38 $476 $15,902
Internal Revenue Service
Missouri 3 - 612
North Carolina a1 150
Total 4 == 762
Grand Total 42 $476 $16,664

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

58 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


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

(Unaudited)

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

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

The amount of seized currency not on deposit in the
Fund's suspense account at September 30,1996, was
$20,171,000. This amount includes some funds in
Process of being deposited at year end; cash seized
in August or September 1996, that is pending
determination of its evidentiary value from the U.S.
Attorney; and the currency seized for forfeiture
being held as evidence.

On a budgetary basis, unobligated balances as
originally reported on the Office of Management
and Budget Reports, SF-133, “Report on Budget
Execution,” was approximately $72,775,000 for
fiscal year 1996. As provided by the Omnibus
Crime Control Act of 1995, $40 million and one
half of the excess unobligated balances of
$16,388,000 in fiscal year 1996, are retained in the
Fund.

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

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

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

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

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

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

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

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

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

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

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

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION 61


Veparmment o1 wie areasury rusicnure rune
Statements of Operations and Changes in Net Position
For the years ended September 30, 1996 and 1995
(Dollars in thousands)

1996 1995,
Revenues and financing sources:
Federal:
Investment interest income $ 9,021 $ 6,894
Proceeds from participating with other federal agencies 8,920 8,137
Public:
Undistributed forfeited currency and monetary instruments 73,889 81,892
Distributed forfeited assets (note 8) 57,518 112,253
Sales of forfeited property, net of mortgages and claims
of $4,062 and $4,789, respectively 20,918 26,452
Payments received in lieu of forfeiture, net of refunds
of $6,677 and $4,423, respectively 2,880 6,649
Reimbursed costs 1,773 2,807
Other revenues and financing sources 1,253 6,418
Total revenues and financing sources 176,172 251,502

Allocation of revenues:
Equitable sharing:

State and local agencies 47,683 58,100
Foreign countries 1 7,319
Federal agencies 6,774 8,393
Victim restitution (note 10) 2,950 38,441
Total allocations of revenue 57,518 112,253
Net revenues and financing sources 118,654 139,249

Program expenses - Non-discretionary:
Seizure investigative costs and asset management 35,804 44,402
Seized property national contract services 26,248 27,938
Other asset related contract services 2,711 1,309
Awards to informer (moiety payment) 1,985 2,519
Other 10,809 6,822
Super Surplus (note 11) 13,515 399
Secretary’s Enforcement Fund (note 12) 12,902 4,505
Total non-discretionary expenses $103,974 $87,894

(continued)

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

28

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


IRS with the help of Treasury forfeiture funding,
sponsors a computer laboratory and classroom at
the Department's Federal Law Enforcement
Training Center in Brunswick, Georgia.

° Ceasefire - The Bureau of Alcohol, Tobacco and
Firearms has benefited from Fund resources not
only in the development of its sophisticated,
computerized Ceasefire system that inventories,
identifies and matches bullet projectiles but also
in the rollout of the system to additional,
violence-plagued cities around the country.

¢ Federal Wireless Communications -
Convenient, secure and mobile communications
among law enforcement officers from various
jurisdictions are increasingly important as multi-
agency task forces and joint operations become
more and more commonplace. The U.S. Secret
Service has received discretionary monies from
the Treasury Forfeiture Fund to aid its effort to
develop a new generation of wireless law
enforcement communications.

¢ Improvements at JFK - Anyone flying into or
out of New York's John F. Kennedy International
Airport knows how busy that location can get.
What had been severely taxed facilities of the
Customs Service at JFK have been upgraded and
enhanced thanks in part to support provided by
the Treasury Forfeiture Fund.

¢ Gun Dog Program - Canines have been
employed for years by police and military
agencies to provide security and to ferret out
drugs and explosives where they might not be
noticeable to their handlers. Recently, with the
support of the Treasury Forfeiture Fund, the
Bureau of Alcohol, Tobacco and Firearms has
begun to train and use dogs to detect concealed
weapons.

Building Law Enforcement Capacity Overseas

The threats we Americans face respect no
nation's borders — terrorism, the spread of
weapons of mass destruction, organized crime,
drug trafficking, ethnic and religious hatred,

aggression by rogue states, environmental
degradation. If we fail to address these threats
today, we will suffer the consequences of our
neglect tomorrow. —

President William J. Clinton
State-of-the-Union Address
January 23, 1996

In a post-Cold War World characterized by
numerous transformational economies, law
enforcement expertise and capabilities can differ
widely from one nation to another. The disparities
that exist present opportunities to international
criminal organizations to move key components of
their operations to locales where law enforcement
may be less experienced and, therefore, less ready to
deal with the sophisticated threats being posed
today. In 1996, the Treasury Forfeiture Fund used
a portion of its discretionary spending authority to
help address the challenge posed by the President by
strengthening law enforcement capacity in two
overseas locations.

Guyana - A tropical nation about the size of Idaho
on the northeast coast of South America, Guyana is
one of the poorest countries in the Western
hemisphere with a gross domestic product per
person of only $500 in 1992. Its sizeable unpeopled
and unpatrolled interior with its numerous airstrips
allows transport free of effective government
controls. For these reasons, it has afforded
criminals an opportunity to transship narcotics from
South America through Guyana to the United States
and Europe and to smuggle Guyanese gold to the
same destinations in money laundering schemes.

In response to a Guyanese government request, a
Department of the Treasury delegation consisting of
representatives from various law enforcement
bureaus presented a week long training seminar for
law enforcement and justice ministry officials in the
capital city of Georgetown. Assistance was
provided regarding the best methods of enforcing
newly- enacted currency reporting requirements and
how Guyana might go about the drafting and
implementation of anti-money laundering legislation.

14 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


approximately $7 million. The Fund’s discretionary
authorities allows for equipping law enforcement
vehicles, as well as for communications equipment,
protective equipment, and certain types of laboratory
equipment. The decreased spending level in this
category is directly attributable to reductions in the
Fund’s annual appropriation in the past several
years.

Assets

A summary of the assets of the Fund as of
September 30, 1996, is presented (in millions) in the
following table. Undistributed funds and fund
balances with Treasury and cash totaled
approximately $76 million on September 30, 1996.
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, 1996, the Fund had investments in
Treasury securities of $145 million and accrued
interest on investments of $590,000. The balance
for accounts receivable totaled approximately
$590,000 on September 30, 1996, and is principally
associated with funds forfeited but still in the U.S.
Customs suspense account. The value of forfeited
property (net of mortgages and liens) on September
30, 1996, was approximately $33 million, an
increase of over $3 million from FY 1995. Finally,
the total for seized currency on September 30,
1996, was $238 million, an increase of $61 million
from FY 1995.

END OF YEAR ASSETS OF THE FUND ($ millions)

19961995,
Undistributed funds and fund

balances with Treasury and cash $76 $ 220
Investments 145 35
Accrued interest 1 1
Receivables 1 4
Forfeited property (net of liens payable) 33 30
Seized currency & other

investments (*) 238. 177.

Total $494 $467

= Under the Statement of Federal Financial Standards (SFFAS) Number 3,
effective September 30, 1994 and thereafter, seized currency is reported as a
custodial asset upon seizure. The amount cited here represents currency held
in the Fund's suspense account, or on hand at field office locations.

Liabilities and Net Position

A summary of the liabilities and net position of the
Fund as of September 30, 1996, as compared with
September 30, 1995, is shown (in millions) in the
following table. The large decrease in distributions
payable is principally associated with $39 million in
victim restitution payments arising from United
States v. Ken International in FY 1995. Revenue
from forfeited property held for sale is deferred until
the property is sold. When compared to FY 1995,
more forfeited property was held for sale on
September 30, 1996, which accounts for the increase
in deferred revenue of $2 million. Accounts
payable totaled $51 million on September 30, 1996,
an increase over FY 1995 of $17 million.

In addition to liabilities of $349 million recognized
by the Fund on September 30, 1996, $40 million
was reserved as the unobligated balance to be
carried forward to begin 1997 operations and $67
million was reserved for unliquidated obligations
of FY 1996. Further, the Fund recorded a decrease
in distributions to the Office of National Drug
Control Policy's (ONDCP) Special Forfeiture
Fund. FY 1996 ended with the cumulative results
of fund operations totaling $54 million of which
$16 million is to be distributed to ONDCP.

END OF YEAR FUND LIABILITIES AND

NET POSITION (§ millions)
19961995
Liabilities:
Distributions payable $29 $ 69
Deferred revenue from
forfeiture assets 31 29
Seized currency 238 17
Accounts payable 51 34
Net Position:
Unobligated balance 40 50
Unliquidated obligations 67 s7
Distributions to ONDCP’s Special
Forfeiture Fund (16) (22)
Cumulative results of operations 54 B
Total $494 $467

20 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996



CHAPTER 5

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

PROGRAM PERFORMANCE

As the second year in which the Fund has had in
place performance indicators, results from FY 1996
allowed for comparison with results from FY 1995
as a means of monitoring forfeiture program
operations. For FY 1996, the performance measures
selected for monitoring were: (1) processing time
for equitable sharing payments with a target time
frame of 7.5 months; (2) time between forfeiture of
real property and disposal through sale with a target
time frame of 7 months; (3) maintenance costs of
assets sold as a percentage of sales revenue with a
target of 0.7 percent and (4) processing time of the
administrative seizure inventory with a target time
frame of 56 percent being processed in a timely
fashion. Among the Fund's four performance
measures, some improvements were noted in the age
of the administrative seizure inventory. In the other
three performance measures, there was a
deterioration in the processing time for equitable
sharing payments, and slight increases in the time
required to dispose of real property and in the
maintenance costs of assets sold as a percentage of
sales revenue. 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 the 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 in FY 1996 increased
from 8 to 10 months. Although this is not the
desired progress, there are reasons to believe that
this degradation ‘is not permanent. Many of the
2,580 payments made during the year were for
forfeitures that had occurred several years earlier as
the result of efforts to relieve backlogged sharing

requests, i.e., over half of the Customs and IRS
sharing payments were for forfeitures that had
occurred prior to FY 1996. These forfeitures
inflated the average time that it took to make a
payment. The Executive Office for Asset Forfeiture
(EOAF) management continues to be concerned
with the delay associated with equitable sharing
payments and will examine processes that might
relieve the situation.

The Average Time Between Forfeiture and
Disposal of Real Property

During FY 1996, the average time between
forfeiture and disposal of real property was 7.8
months, an increase over FY 1995’s average
disposal period of 7.2 months. The target range for
this measure was 7.0 months. The increase is
attributed to the Fund's handling more properties in
FY 1996 than in FY 1995 and it is deemed
insignificant. 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 encumbrances can complicate
the closing of a real property sale. Through close
coordination with the national seized property
contractor, the seizing agency and the U.S.
Attorneys, Fund management was able to identify
properties that required closer attention in order to
dispose of them in a timely manner.

Maintenance Costs of Assets Sold as a Percentage
of Sales Revenue

Maintenance costs are those that the national seized
property contractor incurs to ensure that seized
property retains its condition and value until sold.
For the purposes of this indicator, these expenses
were measured only for the costs incurred by the
national seized property contractor after
consignment from the seizing enforcement bureau.
In FY 1996, maintenance costs incurred by the
national seized property contractor as a percentage
of gross sales were 1.3 percent. While this ratio of

16 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996

aad

J

tos

ad


Department of the Treasury Forfeiture Fund
Statements of Operations and Changes in Net Position
For the years ended September 30, 1996 and 1995
(Dollars in thousands)

(Continued)
1996 1995
Program expenses - Discretionary:
Awards for information or assistance $ 355 $ 186
Purchases of evidence and information 1,770 2,349
Federal law enforcement conveyance 8,617 16,182
Other 601 4,129
Total discretionary expenses 11,343 22,846
Total program expenses $115,317 $110,740
Excess of net revenues and financing
sources over total program expenses 3,337 28,509
Distribution to ONDCP’s Special Forfeiture Fund (16,388) (21,922)
Recission of apportionment (note 7) (194) -
Net Position, beginning of year 157,917 151,330
Net Position, end of year (note 7) $144,672 $157,917

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

FINANCIAL STATEMENTS


house Gateway's administrative offices while
providing gutpatient services, one-to-one counseling
and a variety of community awareness seminars.

FOSTERING LAW ENFORCEMENT COOPERATION


reas

ees ne ne

ee

cen

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

Revenues and expenses and distributions by asset category:

Expenses and
Revenues Distribution
Vehicles $ 8,699 $ 17,130
Vessels 2,416 21,826
Aircraft 2,416 7,031
General Property 1,732 69,275
Real Property 27,062 2,713
Currency and monetary instruments 138,586 49,211
186,911 167,186
Less:
Mortgages and claims (4,062) (4,062)
Refunds (6,677) (6,677)
Add:

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

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

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

Revenues Distribution

Sales of property and forfeited currency

and monetary instruments $127,620 $ 31,739
Reimbursed storage costs 1,773 17,214
Assets shared with state and local agencies 47,683 47,683
Assets shared with other federal agencies 6,774 6,774
Assets shared with foreign countries lil i
Victim Restitution 2,950 2,950
Destructions - 19,826
Pending disposition = 40,889

186,911 167,186
Less:
Mortgages and claims (4,062) (4,062)
Refunds (6,677) (6,677)
Add:

Allocation of revenue to ONDCP Special

Forfeiture Fund ~ 16,388
Excess of net revenues and financing sources

over total program expenses = 3,337

$176,172 $176,172

This supplemental schedule “Analysis of Revenues, Expenses and Distributions” is required under the Treasury Forfeiture
Fund Act of 1992. The allocations in the schedule were determined from information obtained from a U.S. Customs Service
information system. This system maintains revenue and expenses by each seizure for property held at the contractor. The
percentages of revenue and expenses from this system were applied to revenue and expenses and distributions as reflected
in the statement of operations and changes in net position. Because the Fund does not have a cost accounting system, the
method used does not provide reliable information in the analysis of revenue and expenses and distributions by type of
disposition. The information is presented to comply with the requirements of the Treasury Forfeiture Fund Act of 1992.

SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION 59


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

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

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

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

properly to recognize revenue upon input of the
forfeiture date.

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

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

Accounts Receivable - Due to the significance of
the revenues collected by EG&G and the average
two week lapse between receipt of funds by EG&G
and the recordation of revenue by the ASD, we
recommend that EG&G provide the Fund with
details of cash held as of month-end indicating the
composition of revenue (that is sales, reimbursed
storage costs, etc.). Based on this information, we
recommend that the ASD accrue revenues not
collected.

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

EXHIBIT ON MATERIAL WEAKNESSES . a 51


Prove that the property owner knowingly
committed the crime to obtain a conviction.

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

The Decision of the Court

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

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

Safeguarding the Rights of Individuals

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

enforcement practices in conformity with those law:
A serious challenge to federal forfeiture wa
Overcome partly because of the lengthy history o
forfeiture in the United States but also partl:
because modern federal law enforcement ha
carefully applied these substantial authorities t
achieve their Congressionally intended purpose - t
take the profit out of crime.

The Department of the Treasury’s forfeiture
program, with its additional support from the
resources of the Treasury Forfeiture Fund,
Tecognizes its obligation to observe and respect the
rights of affected Persons in matters of seizure and
forfeiture. That forfeiture authorities always be
applied in a fair and even manner, that innocent
Parties not be deprived of their Property, and that no
one with a legitimate interest in Property be denied
the opportunity to Protect that interest, are all
constant considerations in the administration of the
program. In 1996, this goal continued to
fundamentally guide Treasury forfeiture activities
while the nation’s highest court reached a key
decision on the suitability of this law enforcement
tool in a constitutionally Protected society.

SAFEGUARDING INDIVIDUAL RIGHTS 3


Department of the Treasury Forfeiture Fund

Statements of Financial Position
September 30, 1996 and 1995
(Dollars in thousands)

Assets

Entity Assets:
Intragovernmental
Fund balance with Treasury and cash (note 3)
Investments (note 4)
Interest receivable
Accounts receivable
Total intragovernmental
Governmental
Accounts receivable
Prepaid expenses
Forfeited property, net (note 5):
Held for sale, net
To be shared with federal, state or local,
or foreign governments :
Total forfeited property, net
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

1996 1995

$ 75,982 $220,417

145,379 34,646
590 566
448 2,086

222,399 257,715

142 1,766

200 487
30,653 27,417
2,749 2,228
33,402 29,645
33,744 31,898
256,143 289,613
72,505 91,307
165,519 85,814
238.024 177,121
238,024 177,121
494,167 66,734

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

26

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


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

EFFECT

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

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

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

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

RECOMMENDATION

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

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

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

FORFEITED PROPERTY VALUATION

CONDITION

Forfeited property is not recorded in the subsidiary
system during the year at its fair value at the time
of forfeiture. Rather, the value of forfeited property
is currently recorded in the law enforcement

EXHIBIT ON REPORTABLE CONDITIONS 55




SECTION IV
SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION



SECTION II
FINANCIAL STATEMENTS

23




SECTION I
OVERVIEW



CHAPTER 4

STRENGTHENING LAW ENFORCEMENT

If federal forfeiture programs stopped at the point of
taking the instrumentalities and proceeds of crime
away from criminals, they would be of significant
service to law enforcement. To some who choose
crime, the threat of incarceration is merely one risk
attendant upon that choice. A well organized
criminal enterprise can survive one member's prison
time. What asset forfeiture does, however, is
remove the building blocks that actually form the
organization. It can, in effect, bankrupt the criminal
business by removing its assets, making them
unavailable to those who remain or would follow.
For this reason alone, it has been a very effective
and valuable device in helping to dismantle criminal
organizations. :

If federal forfeiture programs simply went one
additional step and allowed for reimbursement, from.
forfeited proceeds, of the direct costs of seizure and
forfeiture, federal law enforcement would once
again be well-served. In a national program with
seizures of everything from real property to
narcotics to vessels, vehicles, aircraft and an entire
range of other commodities, these costs can be
substantial. In addition to these property
management costs, there are also sizeable costs of
noticing any and all parties with any interest in the
seized property so that they may have an
opportunity to come forward and be heard during
the forfeiture proceedings. Before the institution of
the modern federal forfeiture funds, these types of
expenses had to be borne by the seizing agency out
of their limited mission-oriented appropriations.
With today's federal forfeiture funds, these costs can
be paid for out of the funds themselves, allowing
appropriated tax dollars to be used to support the
agency's primary law enforcement purpose.

What is uniquely remarkable about modern federal
forfeiture funds is that they not only accomplish
these first two ends but go beyond them by
permitting the re-investment of the proceeds of
crime in efforts to fight crime. After property is
removed from criminal control, after its value has

been used to pay the direct costs associated with
seizure, then, whatever is leftover is retained to be
recycled in to strengthening law enforcement. The
Treasury Forfeiture Fund has the statutory authority
to apply this dividend in a number of ways to help
create a stronger law enforcement presence at all
levels of government. A look at some specific FY
1996 examples of the application of this authority at
the state and local, Treasury law enforcement bureau
and foreign levels will give some sense of progress
made toward this goal.

Support for Cops

President Clinton's pledge to put an additional
100,000 police officers on America's streets has
been coordinated through the Community Oriented
Policing Services (COPS) office at the Department
of Justice. During FY 1996, that program's
resources received multiplier support from the
Treasury Forfeiture Fund.

Florida's Broward County is one example of how
Fund monies are being used to complement the
resources available under the COPS program. The
county sheriff's office used some of the almost
$400,000 it received in equitable shares attributable
to joint investigations with Treasury law
enforcement, to match and extend its share of grants
under the program. It used some of these Treasury
resources to match COPS Phase I funding in the
hiring of 26 new deputies to backfill veteran officers
re-assigned to elementary schools. It has applied
Treasury equitable sharing monies to purchase
laptop computers in support of COPS MORE
initiative to re-deploy officers so that they spend
more time on the streets and less in moving paper,
and finally it has taken a portion of its share of
Treasury forfeited proceeds to supplement a COPS
grant for community policing to curb domestic
violence.

12 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996

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

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

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

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

The Government’s Case

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

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

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

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

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

2 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


instruments in the amount of $74 million, as
presented in the statement of operations and changes
in net position, and the distributed forfeited currency
in the amount of $46 million, as shown in note 8.

¢ Forfeited Property

The revenue from forfeited property (net of
mortgages) was $32 million in FY 1996 and $75
million in FY 1995. The $75 million in FY 1995
was primarily attributed to the sale of properties
associated with the final disposition of a significant
Customs’ case, United States v. Ken International.
The 32 million of revenues from forfeited property
(net of mortgages) consist of $21 million of sales of
forfeited property (net of mortgages and claims), as
presented in the statement of operations and change
in net position, $6.8 million of the distributed
forfeited assets, and $4.6 million of the distributed
proceeds from sales of forfeited property, as shown
in the note 8.

© 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
$3 million in FY 1996, a decrease of $4 million
from FY 1995.

¢ Investment Interest Income

The Fund is authorized to invest cash balances in
certain special Treasury securities. On September
30, 1996, investments totaled $311 million. This
included $145 million invested from balances of the
Fund and $166 million invested from seized
balances not yet forfeited. Interest income earned
on these investments totaled $9 million, an increase
of $2 million over FY 1995.

Allocation of Revenues

A comparison of allocation of revenues (in millions)
for the past two fiscal years is shown in the table
that follows.

ALLOCATION OF REVENUES

($ millions)
1996 1995
Equitable Sharing
State and local agencies $48 $58
Foreign countries * 7
Other federal agencies 7 8
Victim restitution 3 39
Total $58 $112

* Less than $500,000

The total revenues allocated from the Fund
decreased to $58 million in FY 1996. Most of this
decrease is attributable to $39 million in restitution
that was paid by the Fund to the Federal Bankruptcy
Court to reimburse innocent victims of fraud in FY
1995. These victims lost money in the previously
cited United States v. Ken International money
laundering case. Amounts allocated to state and
local law enforcement agencies for equitable sharing
decreased from 1995 to 1996, but sharing amounts
allocated to other federal agencies remained static.
The decrease in equitable sharing to state and local
agencies is attributable to the decrease in forfeited
currency overall. For FY 1996, equitable sharing
distributions totaled $55 million, or 95 percent of
the total revenue allocated.

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
increased $4.5 million above the FY 1995 level, or
about four percent.

18 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996

o

a

Qo


TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 1996

DEPARTMENT OF THE TREASURY
WASHINGTON, D.c.

Gardiner, Kamya & Associates, PC.

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



NOTES TO FINANCIAL STATEMENTS

Accordingly, EOAF reduced the unobligated fund
balance from $50 million (prior fiscal year balances)
to $40 million.

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

(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,
they are not recorded as liabilities of the Fund.
However, the Fund identified equitable sharing
Tequests in the amount of approximately
$19,439,000, and $23,731,000 which were approved
or in the final stages of approval subsequent to
September 30, 1996, and 1995, respectively. The
forfeited currency revenue was recognized in one
fiscal year; however, the distribution will not be
recognized in the finaricial 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 returning
currency, the government must return the benefit
that is received from holding the currency. The
interest to be returned will be payable out of the

income of the Fund, and, at Present, represents a
possible claim of potential significance. 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 $25,000 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.

(14) Subsequent Events

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

(15) Prior Period Adjustment -- Fiscal Year 1995

Certain adjustments were made during fiscal year
1995 to restate the October 1, 1994, balances of
seized and forfeited property and currency. Those
adjustments were for corrections or errors,
adjustments to the property classifications, and
conversions from quantities reported in recorded
units of measure to number of seizure case records.
Also, sales revenue recorded initially during fiscal

NOTES TO FINANCIAL STATEMENTS 41


from the Italian subcontractor and Dong Ah
Construction came to the United States and met
with an undercover Customs agent to look at
additional equipment to buy for use in Libya.
While on a trip to inspect the prospective purchase
in a Pennsylvania warehouse, they were arrested in
Parkersburg, West Virginia.

A month after the arrests, the employees along with
their parent companies pled guilty in United States
District Court in Louisville to violations of criminal
laws on conspiracy, false declarations and money
laundering. The money laundering involved two
transfers totaling over a million dollars made
between a bank in Rome and National City Bank in
Louisville which were used to finance the export of
the equipment. At sentencing, Dong Ah
Construction agreed to pay a $3 million forfeiture.
This case represented the Customs Service’s effort
to use money laundering laws in non-drug
investigations. In this instance, the export of U.S.
goods to Libya violated regulations issued by
Treasury’s Office of Foreign Assets Control and are
deemed specified unlawful activities under Title 18
of the U.S. Code.

Pursuing the Proceeds of Medicare Fraud

Medicare was established in 1965 as Title 18 of the
Social Security Act. This federal system of health
care cost reimbursement has been the subject of
much recent policy debate as to the best way of
ensuring the program's continued fiscal soundness.
Cracking down on program fraud is but one means
to this end and in FY 1996, the Internal Revenue
Service (IRS) helped unmask a scheme that had
bilked Medicare out of tens of millions of dollars.

IRS had been joined in the three year investigation
by the United States Department of Health and
Human Services and their target became a Florida
medical supplier, who owned and operated Bulldog
Medical of Kissimmee and MLC-Geriatric Health
Services in Osceola County. Between the summer
of 1993 and September of the following year,
Bulldog and MLC characterized the adult diapers
they supplied as medical devices and billed
Medicare Part B between $5 and $9 per item when

the actual value was no more than 50 cents. The
firms caused these and other incontinence care
supplies to be delivered to nursing homes while
knowing that they were not medically necessary for
the Medicare beneficiaries of the homes and,
therefore, not reimbursable, They would then bill
Medicare for the unnecessary supplies and collected
close to $47 million in improper payments.
Prosecutors also charged that the owner of the
companies paid kickbacks to officers of a national
chain of nursing homes for their cooperation in the
scheme.

In October 1996, the defendant entered into a plea
agreement in U.S. District Court for the Middle
District of Florida whereby he agreed to the
forfeiture of approximately $32 million in cash and
securities that had been seized by the IRS.

The Viper Militia

Images of asset seizures often entail suitcases full of
cash, luxury residences, fast and expensive cars,
yachts and other accoutrements of high-living
criminals. On the first of July, 1996, agents from
ATF’s Phoenix Field Division along with dozens of
other federal, state and local law enforcement
officers made some significant seizures of a
different kind - about 650 pounds of ammonium
nitrate, 20 gallons on nitromethane, well over a
hundred firearms many of which field tested as
machine guns, about 8,000 rounds of ammunition,
live hand grenades and components, detonation cord,
blasting caps, battle dress uniforms, bullet proof
vests and gas masks.

The seizures were part of an investigation that led to
the indictment and arrest of twelve members of
Arizona’s Viper Militia for violations of federal
explosives and firearms laws. The discovery of the
explosives and destructive devices forced ATF
agents to evacuate three residential neighborhoods
as well as an industrial area due to concerns for the
public safety. All twelve of the militia members
arrested were charged with conspiracy to make
explosive devices and to furnish instruction on their
use as part of a plot against the government. Some

DETERRING CRIMINAL ACTIVITY 5


CHAPTER 2
DETERRING CRIMINAL ACTIVITY

July of 1789 was a notable month in Customs
legislative history. In the course of those thirty-one
days, three significant pieces of legislation were
passed by the First Congress. One was the Tariff
Act of July 4th, followed closely by a duties and
tonnage statute mandating a revitalized national
Customs Service, and finally, on the last day of the
month, an act establishing fifty-nine customs
districts in eleven states. Together, these three laws
formed the initial basis of a federal enforcement
presence aimed at protecting the economic health of
the United States and deterring crime that has been
vested in the Department of the Treasury for more
than two centuries.

Over the years, Treasury enforcement
responsibilities have evolved and grown to meet the
developing needs of the nation. Today’s Internal
Revenue Service had its earliest beginnings during
the Civil War when the first income tax was
imposed to help finance the war effort. At the close
of that conflict in April of 1865, one of President
Lincoln’s last official acts before his death was to
establish the United States Secret Service in order to
combat the wartime flood of counterfeit currency
that was threatening faith in the American dollar.
While the Bureau of Alcohol, Tobacco and Firearms
was not organized as a separate entity until 1972, its
predecessor agency, the Alcohol Tax Unit of the
IRS, had long pursued lawbreakers from the hollows
of Appalachia to the gangland plagued streets of
Chicago, New York and Detroit in the 1920’s and
30's.

During the last two decades, the historic law
enforcement tool of asset forfeiture, that has been
available to the U.S. Customs Service since ‘those
early days of the First Congress, has been
increasingly applied in the operations of other
federal law enforcement agencies. To meet the
threats posed today by internationalized and
sophisticated criminal enterprises, Customs’ original
forfeiture authorities have been expanded while the

IRS, the Bureau of Alcohol, Tobacco and Firearms,
and the U.S. Secret Service all have authorities to
seize and forfeit. A sampling of just some of the
various areas in which these authorities have been
used in fiscal year (FY) 1996 will provide an idea
of the range of Treasury law enforcement
responsibilities and how forfeiture seeks to deter
related criminal activity by going after its bottom
line.

Violating the Libyan Sanctions

Short of military conflict, the imposition of
economic sanctions is a traditional means of
pursuing a punitive foreign policy against an
uncooperative or recalcitrant state. Economic
sanctions, however, are only as effective as their
enforcement and for sanctions imposed by the
United States, much of that key task falls to the
Customs Service. A FY 1996 Customs investigation
of violations of Libyan sanctions eventually would
lead to a payment of $3 million to the Treasury
Forfeiture Fund.

The Great Man-Made River has been an eight year
project of Libyan dictator, Moammar Gadhafi. Its
aim is to eventually pump water over a thousand
miles from a Saharan Desert aquifer in western
Libya to Tripoli on the Mediterranean coast. Such
an ambitious effort requires the importation of
technology and expertise which, in the summer of
1996, ran afoul of trade sanctions against Libya for
its support of international terrorist activities.

The case began about a year earlier when the U.S.
Customs Service attaché at the American consulate
in Milan noted that equipment from the United
States was being transshiped from Italy to Libya. A
Korean corporation, Dong Ah Construction Co. Ltd.,
was responsible for completing the infrastructure of
the Man-Made River project and was working with
an Italian firm to purchase American water well
drilling equipment. During the summer, employees

4 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


EG&G represents a significant portion of the
revenues earned by the Fund. However, the ASD
only records revenue upon receipt of a validated
deposit slip, which is approximately one week later.

CRITERIA

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

The accrual basis of accounting contributes
significantly to effective financial control over
resources and costs of operations and is essential to
the development of meaningful cost information.
The accrual basis.of accounting involves identifying
and recording costs and revenues in the period in
which the revenue is earned or the cost is incurred,
rather than in the period revenue is collected or the
cost is disbursed. This position is further supported
by the Office of Management and Budget (OMB)
Bulletin 94-01, Form and Content of Agency
Financial Statements, which recommends the use of
accrual basis of accounting by federal agencies.

CAUSE

In order for ASD to accurately record the Fund's
activities on an accrual basis of accounting, financial
transactions received from each bureau must be
current and timely. Currently, the financial
statement information received from the bureaus for
accounts payable and accrued liabilities, mortgages
and claims payable, and forfeited currency is not
current. For example, ASD is not notified timely of
the forfeiture of currency because: (1) the Field
Offices are not monitoring and updating the system
timely to reflect the change in the currency status;
and (2) a standardized procedure for documenting
the forfeiture date in the system has not been
implemented. ASD is unable to identify that the

forfeiture has occurred prior to year end unless the
system is updated or proper notification is given,
because the forfeiture date is entered into the system
by the field and the supporting documentation is
maintained by the field.

EFFECT

The Fund's maintenance of the general ledger on a
cash basis and the untimely recordation of
transactions distorts the information reported in the
financial statements on a monthly basis and results
in the unavailability of accrual-basis financial
information on which to rely for management's daily
decision making procedures and evaluating the
achievement of the Fund's objectives.

RECOMMENDATION

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

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

Mortgages and Claims Payable - We recommend
that agencies record lien and mortgage information

_.in their tracking systems. We also recommend that

50 TREASURY FORFEITURE FUND ANNUAL REPORT = FISCAL YEAR 1996



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SLNAWALVLS IVIONYNIA OL SALON


In accordance with Government Auditing Standards, we have also issued a report dated January
17, 1997, on our consideration of the Fund's internal control structure and a teport dated January
17, 1997, 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 No. 94-01, Form and Content of
Agency Financial Statements, or the Treasury Forfeiture Fund Act of 1992. 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.

Fdinan Koma. Derecretan, PC.

January 17, 1997

25


NOTES TO FINANCIAL STATEMENTS

(15) Prior Period Adjustment -- Fiscal Year 1995
(continued)

year 1995 was determined to be earned during fiscal
year 1994. Adjustments were also made to reduce
previously recorded liabilities for mortgages and
claims on forfeited property which were
subsequently determined to be invalid.

42 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


Gardiner, Kamya & Associates, P.C.

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

Fax: 202 857-1778

Independent Auditor's Report on Financial Statements

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

We have audited the accompanying statements of financial position of the Department
of the Treasury Forfeiture Fund (the Fund) as of September 30, 1996 and 1995, 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: a
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. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. t

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 tH
of accounting other than generally accepted accounting principles. a

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 ai
September 30, 1996 and 1995, 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.

The Department of the Treasury was granted a waiver by the OMB from preparing the
statement of cash flows and the statement of budgetary resources and actual expenses,
beginning with fiscal year 1995. Accordingly, the Fund did not include a statement of “Ss
cash flows or a statement of budgetary resources and actual expenses in its fiscal year .
1996 Annual Report. zt

Member of the American Institute of Certified Public Accountants



INVENTORY PROPERTY TRACKING SYSTEMS
CONDITION

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

The four Treasury law enforcement bureaus use four
different inventory tracking systems to prepare the
required analysis of changes in forfeited and seized
Property schedules. The four systems collect and
account for seized and forfeited assets differently
and use slightly different data definitions. As a
result, manual manipulation and reconciliation are
required to prepare the analysis in forfeited and
seized property schedules. Additionally, since these
inventory tracking systems do not tie to the Fund’s
system of record, it is Necessary to perform
substantive reconciliations between the Fund’s
records and the bureaus’ records to give assurance
that all transactions are being properly realized.

ERITERIA

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

CAUSE

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

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

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

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

54 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


CHAPTER 1
SAFEGUARDING INDIVIDUAL. RIGHTS

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

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

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

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

Despite this recent and accelerated evolution, the
effectiveness of asset forfeiture still Tests
fundamentally upon public confidence in the
integrity of the program. In this vein, safeguarding
individual rights has been a goal in the
administration of the Treasury Forfeiture Fund since
its inception. That asset forfeiture not transgress
upon rights guaranteed by the Constitution of the
United States is essential, if this law enforcement
resource is to merit the public trust. In 1996, a
most significant issue involving civil asset forfeiture
and the matter of double jeopardy was addressed by
the Supreme Court of the United States.

Prelude to the Supreme Courts Ruling on Double
Jeopardy

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

SAFEGUARDING INDIVIDUAL RIGHTS 1


South Africa - Additional forfeiture funded training
was provided in FY 1996 to the Republic of South
Africa's National Police Service by “Treasury
enforcement bureau personnel as a follow-on to
initial training presented the previous year. South
Africa's location coupled with its developed
transportation networks make it a transshipment
point for narcotics and other contraband moving
between Asia, Europe and North and South
America. Additionally, increasing amounts of
illegal drugs are being marketed in South Africa
itself.

Besides the valuable exchanges of information and
the development of strategies for mutual cooperation
that took place during this training, the Treasury
Forfeiture Fund is also assisting with the establish-
ment of a new U.S. Customs Service attaché office
to be located in Pretoria.

STRENGTHENING LAW ENFORCEMENT

15




EXHIBIT II
REPORTABLE CONDITIONS



NOTES TO FINANCIAL STATEMENTS

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. 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 currency is recognized upon
forfeiture. Payments in lieu of forfeiture (mitigated
seizures) are recognized as revenue when the
payment is received. Revenue received from
participating with certain other federal agencies is
recognized when the payment is received. 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 TFF Act, the Fund has
invested seized and forfeited currency. Treasury's
Financial Management Service 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 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 $16.4 million
and $21.9 million to the ONDCP Special Forfeiture
Fund for fiscal years 1996 and 1995, respectively,
have been recognized in the accompanying
statement 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
other federal agencies which would benefit from the
use of the item. A new class of asset distribution
was established for victim restitution in 1995.
These distributions include property and cash
returned to victims of fraud and other illegal
activity. Upon approval by EOAF management to
share or transfer the assets, both revenue from
distributed forfeited assets and distributions
(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
recognized. Liabilities are recognized when EOAF
approves payments.

Reclassification
During fiscal year 1996, the Fund’s management

reclassified the operating expense categories in the
statement of operations and changes in net position

32 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996



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

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

A separate schedule is presented on page 59.

62 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


NOTES TO FINANCIAL STATEMENTS

to align with the expense categories used in
preparing the budget for the Fund. Although the
total amount of non-discretionary and discretionary
expenses did not change, the individual expense line
items were changed. Accordingly, the
accompanying financial statements of the Fund for
1995 have been restated to be comparable to 1996’s
presentation.

Entity Assets

Entity assets are used to conduct the operations and
activities of the Fund. Entity assets consist of cash
or other assets which could be converted into cash
to meet the Fund’s current or future operational
needs. Such other assets include . investments,
receivables, and forfeited property which is held for
sale or to be distributed.

° Fund Balance with Treasury and Cash --
Fund balance with Treasury and cash
represents monies, including forfeited cash
not deposited.

. Investments -- This includes cash in the
Treasury Forfeiture Fund and seized
currency held in the Customs suspense
account.

. Receivables -- Intragovernmental receivables
principally represent monies due from
Customs and thé Justice Assets Forfeiture
Fund. The values reported for governmental
receivables are primarily funds owed from
EG&G Dynatrend, the seized and forfeited
property contractor.

. Prepaid Expenses -- In some instances,
mortgages and other claims are paid before
final closing of sale of related property, as
required by court order. Such amounts paid
are eventually obtained from the sale of the
property. The values reported here are
associated with these special transactions.

Forfeited Property -- Forfeited property is
recorded at estimated fair value at the time
of seizure. However, based on historical
sales experiences for the year, properties are
adjusted to reflect the current fair market
value at the end of the fiscal year. Direct
and indirect holding costs are not capitalized
for individual forfeited assets. Forfeited
currency is included in fund balance with
Treasury and cash in the accompanying
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 asset when the asset
is forfeited. The allowance includes
mortgages and claims on forfeited property
held for sale and a minimal amount of
claims on forfeited property previously sold.
Mortgages and claims expenses are
recognized when the related asset is sold and
is reflected as a reduction of sales of
forfeited property.

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

NOTES TO FINANCIAL STATEMENTS 33


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

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

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

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

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

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

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

46


Summary of Financial Management Improvements

During FY 1996, Fund management continued to
improve in operational processes and financial

management operations. Recognizing the close |

connection between field operations and proper
financial management, EOAF began reviewing and
updating the policy guidelines disseminated by the
office. Additionally, EOAF conducted a number of
training seminars throughout FY 1996 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 1996 and, as a result, the
Fund's auditors were able to review and validate
the information. Accordingly, this area was not
cited by the auditors as a Reportable Condition in
FY 1996. Additionally, the Fund has identified
several more areas where it would be appropriate
to gather data and assess performance. Steps are
currently being undertaken to ensure that the
appropriate data elements and reports are
incorporated into our automated systems so that
the manual collection of data will no longer be
necessary.

° FY 1996 Audit

The Fund's independent auditors have given the
FY 1996 financial statements an unqualified
opinion. This is the second 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. The
number of material weaknesses and reportable
conditions cited by the auditors ‘in the

accompanying Independent Auditor's Report on
Internal Control have been reduced.

Inventory Tracking Systems

The remaining material weaknesses and
reportable conditions pertain principally to
deficiencies contained in financial accounting and
Property inventory systems maintained by the
Customs Service. We have previously reported
that these weaknesses would be corrected with
the inception of the Seized Asset and Case
Tracking System (SEACATS). SEACATS was
intended to serve as the financial system of
tecord for the Fund and as a single repository for
all inventory and case information related to
seized and forfeited property, fines, penalties or
liquidated damages of the Customs Service. The
development of this system was intended to
replace several, non-integrated tracking systems
operated by the Customs Service and would
rectify the remaining material weaknesses
identified in the Treasury Forfeiture 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, Customs implemented
SEACATS. However, there have been a
considerable number of start-up problems,
including system conversion _ problems.
Consequently, the difficulties encountered by
SEACATS could ultimately affect the ability of
the Fund to record and track revenues, expenses
and changes in the seized and forfeited inventory
during fiscal year 1997. Assisting the Customs
Service with resolution of 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
ensure that the Fund’s general ledger records all
balances and transactions reflected in the
financial statements. This will correct the Fund's

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS 21


EXHIBIT I
MATERIAL WEAKNESSES





DEPARTMENT OF THE TREASURY FORFEITURE FUND
ANNUAL REPORT
FISCAL YEAR 1996

Table of Contents

Page No.

Section I: Overview
Chapter 1

Safeguarding Individual Rights... 2... cece, I
Chapter 2

Deterring Criminal Activity ©... 6... cece cece, 4
Chapter 3

Fostering Law Enforcement Cooperation ...... 2.00.00... 0.0 c cece cece eee ee. 8
Chapter 4

Strengthening Law Enforcement ...... 2.6.2... e eee, 12
Chapter 5

Program Performance and Financial Highlights ...........0....0.00.00.....0..... 16
Section II: Financial Statements
Independent Auditor’s Report on Financial Statements ..........000 0000000000000 0000... 24
Financial Statements:

Statement of Financial Position... 2... e ee cee eee 26

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

Notes to Financial Statements... 02.00. ceee eee. 30

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

Independent Auditor’s Report on Compliance»... 2.6... e eee 43
Independent Auditor’s Report on Internal Control Structure 45
Exhibit I. Material Weaknesses ................... 49
Exhibit Il. Reportable Conditions... 2.0... cc cece cece. 54


NOTES TO FINANCIAL STATEMENTS

(7) Net Position (continued)

The following summarizes the components of
unliquidated obligations as of September 30,1996,
and 1995 (dollars in thousands):

1996 1995

Discretionary $ 6,577 $10,001
Equitable Sharing 25,544 21,199
Non-discretionary 34,592 25,969
Total $66,713 $57,169

De eee eee

(8) Distributed Forfeited Assets

The following summarizes the component of
distributed forfeited assets for the years ended
September 30, 1996, and 1995 (dollars in
thousands):

1996 1995

Currency $46,132 $ 64,078

Property 6,757 9,084
Proceeds from sales of

forfeited property 4,629 39,091

Total $57,518 $112,253

(9) Related Party Transactions

The Fund reimbursed agencies for the purchase of
certain capital assets. These assets are reported by
the participating agencies. During the fiscal years
ended September 30, 1996 and 1995, $8,617,000
and $16,182,000, respectively, of capital assets were
reimbursed by the Fund and are reported as
discretionary expenses in the accompanying
financial statements.

(10) Mizuno Fraud and Money Laundering Case

The Mizuno case arose out of criminal activities of
a Japanese firm headed by Ken Mizuno (Ken
International Inc.) a Japanese citizen. Mizuno
purchased U.S. properties with illegal funds obtained

from a conspiracy to oversell memberships in a
nonexistent Japanese golf course. The case involved
$800 million in fraudulent memberships, of which
$260 million was concealed, disguised, and
laundered in the U.S. Through numerous complex
financial transactions, large purchases of
automobiles, jewelry, a DC-9 jet, and various real
properties in Nevada, California, and Hawaii, were
made. Approximately $100 million of the $260
million was traced to the purchases of these assets.

The Japanese court system and the U.S. Attorney
entered into an agreement in 1992 to dispose of
designated assets belonging to the Mizuno firm that
were located by Customs officials. in the U.S.
Under this agreement, certain proceeds from the sale
of the Mizuno assets and forfeiture of currency were
to be returned to Japan to pay victims of the fraud.
The Treasury Forfeiture Fund would get ten percent
of the net proceeds after costs.

EG&G Dynatrend, through their contract with
Customs, disposed of the property through auction.
The following summarizes the activity for fiscal
years 1996 and 1995 (in millions):

1996 1995
Sales proceeds $2 $54
Currency forfeiture proceeds : 2
Other revenues - 3
Payments due to victims of the

fraud 3 38
Total expenses (including payments

to victims) 2 53

Retained by the Fund and the Fund’s share

a

(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 fund balances
after the’ reservation of $40 million for law
enforcement activities of any Federal Agency.
Under the TFF Act, the Fund is allowed to retain
$40 million effective September 30, 1996.

40 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


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bureaus’ inventory tracking systems at appraised
value (fair market value), determined at the seizure
date, by the seizing agent, import specialist or
independent appraiser.

To develop year end value of forfeited property for
inclusion in the Fund's 1995 and 1996 financial
statements, management performed a historical
analysis by property category of sales values
compared to the initial appraised amounts. These
ratios were applied to the ending forfeited property
value to determine the financial statement value of
forfeited property.

CRITERIA

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

CAUSE

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

EFFECT

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

RECOMMENDATION

We recommend that the Fund's management
evaluate the accuracy of fair market values assigned
to forfeited property. Accordingly, the fair market
value should be determined by performing an
appraisal at the date of forfeiture. We also
recommend that the Fund's management continue
reviewing the methodology used to arrive at fair
market value to refine its accuracy and ease in

preparation. As the process is refined, it will
become easier to prepare the monthly analysis to

properly value and record month-end forfeited
property balances.

56 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


CHAPTER 3

FOSTERING LAW ENFORCEMENT COOPERATION

William Friedken's 1971 Academy Award winning
film, The French Connection, is memorable for its
fast paced action that followed the pursuit of
narcotics traffickers through the streets and transit
systems of New York City. A more subtle, yet
telling subplot involved the professional tension that
existed between the federal officers and city
detectives who were supposed to be working
together on the case. Confronted today by
international criminal enterprises that seem to
readily employ sophisticated organizational
developments and the latest technological advances,
law enforcement cannot afford anything like the
wariness depicted in that film if it is to mount an
effective response.

When the Comprehensive Crime Control Act of
1984 set up the basic structure of the modern
federal forfeiture funds, it went a long way toward
tearing down any of the remaining institutional
barriers that may have worked against joint
operations in the past. It did this by authorizing
equitable sharing federally forfeited proceeds with
state and local law enforcement agencies who
contributed to an investigation that led to a
forfeiture. This sharing authority was later extended
to include foreign governments whose police
agencies similarly assisted these investigations.
Fostering law enforcement cooperation, therefore,
was a major Congressional intent underlying the
forfeiture program and continues to be a primary
goal of the Treasury Forfeiture Fund.

For the Treasury Forfeiture Fund, equitable sharing
as the program is known, is a two way street. The
Fund not only distributes payments to federal, state
and local law enforcement agencies and foreign
govemments who have assisted Treasury
enforcement bureaus or the Coast Guard in their
forfeiture investigations, but it also receives
payments in return for Treasury and Coast Guard
contributions to other agency forfeiture activities.
While most sharings received by the Fund continue
to result from Treasury’s help provided to the

Department of Justice law enforcement agencies in
their cases, a steady and increasing amount are
attributable to the forfeitures of state, local and
foreign police agencies who are developing their
own authorities to share equitably with contributors
to their investigations.

Simply in terms of total dollars, the equitable
sharing program is the most prominent way in
which the Treasury Forfeiture Fund supports its goal
of fostering law enforcement cooperation. There
are, however, other permitted disbursement
authorities of the Fund that also enhance and
facilitate cooperation in joint operations. One of
these areas allows the Fund to pay some of the
overtime expenses of state and local police officers
when it is incurred in operations with Treasury law
enforcement. Another lets the Fund defray some of
the costs of equipping state and local vehicles and
other conveyances when they are used in a Treasury
investigation.

The cumulative result of these authorities of the
Treasury Forfeiture Fund is the offering of a very
real incentive to the various members of the law
enforcement community to work together, to
complement each other's expertise and to present an
effective, coordinated response to the common threat
of organized criminal activity. In FY 1996, that
cooperation was on display throughout the United
States and abroad allowing Treasury law
enforcement to meet the criminal challenge.

Help from the Swiss - The Trahan Case

Robert Victor Trahan was an enterprising individual,
but, unfortunately, on the wrong side of the law. In
1989, he captained a vessel that smuggled 27,000
pounds of Southeast Asian marijuana into the United
States at Cordova, Alaska. Based upon information
provided by the Nevada County Sheriff's
Department, an Organized Crime Drug Enforcement
Task Force (OCDETF) investigation was begun that
included the sheriffs office, the Customs Service,

8 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


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

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

We also noted other matters involving the internal control structure and its operation that we have
reported to the management of the Fund in a separate letter dated January 17, 1997.

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

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

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

Ko dawa Komi. % Daaseratio, PU.

January 17, 1997

48



GENERAL LEDGER

CONDITION

The Asset Information Management System
(AIMS), which is the general ledger system
maintained by Customs, processes, groups and
summaries transactions into account balances for all
Custom funds and the Fund. The general ledger is
currently not used to track all balances and
transactions that comprise the Fund, such as
accounts receivable, liens and mortgages payable,
forfeited property and deferred revenue, and seized
currency and its offsetting liability due to the lack
of interface between the systems. Rather,
information is identified and captured manually, at
the end of the fiscal year, from other systems in
order to properly compile financial statements.

CRITERIA

The Budget and Accounting Procedures Act of
1950, Section 3512, Executive Agency's Accounting
System requires federal agencies to establish an
internal control structure which ensures the
safeguarding of assets and the proper recording of
revenues and expenditures. It is further reinforced
by the Federal Manager's Financial Integrity Act of
1982 (FMFIA) which requires that internal
accounting and administrative controls be
established to provide reasonable assurance that
revenues and expenditures applicable to agency
operations are properly recorded and accounted for
to permit the preparation of accounts and reliable
financial and statistical reports and to maintain
accountability over the assets. Finally, the Federal
Accounting Standards Advisory Board (FASAB) has
recommended certain standards, which have been
issued by the OMB, requiring the use of the accrual
basis of accounting (SFFAS No. 1) and accounting
and reporting requirements for inventory and related
property (SFFAS No. 3).

CAUSE

The Fund's general ledger is maintained on the cash
basis. Accordingly, accrual basis accounts are not
maintained during the year. In. addition, the
inventory subsidiary systems maintained by each of
the Treasury law enforcement bureaus do not
interface with the Fund's general ledger.
Accordingly, inventory related transactions that
are non-cash generated are not recorded in the
Fund's general ledger.

EFFECT

The combined effect of the use of cash-basis
accounting and the lack of interface among the
relevant subsidiary systems and the general ledger
precludes the capturing of all transactions related to
the Fund on a regular (monthly) basis. Therefore,
complete financial statements cannot be produced
using the general ledger balances. Seized and
forfeited property, related liabilities, and various
other accrual accounts are not captured in the
general ledger during the year. As a result,
financial statements produced during the year do not
correctly present the results of operation and net
position of the Fund.

RECOMMENDATION

We recommend that all accrual basis accounts,
seized currency and its offsetting liability, and
forfeited property and the related revenue, be
recorded in the Fund's general ledger in a timely
manner. We recommend that existing procedures,
be followed requiring each law enforcement bureaus’
staff to forward the forfeiture information as
authorized, to the appropriate personnel for updating
the bureaus’ inventory tracking system and, if held
by the contractor, to EG&G, to update SEACATS to
reflect changes in property status.

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

52 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


range of criminal and civil remedies available to the
various law enforcement and regulatory agencies
that make up its membership. It is headed by the
Customs Service and the IRS, and includes the U.S.
Secret Service among its participants. Since its
inception, El Dorado investigations have resulted in
the arrests of over 500 persons, monetary seizures in
excess of $140 million, as well as a number of
narcotics seizures including over 3,500 pounds of
cocaine. In FY 1996 alone, more than $60 million
was seized.

One typical case involving the El Dorado task force
resulted in the Treasury Forfeiture Fund in 1996
disbursing over a million dollars in equitable sharing
payments to a dozen state and local law
enforcement agencies.

Room Check on 7* Avenue - Jt was an April
evening in 1995 when the night security officer at
the Sheraton Hotel on Seventh Avenue informed task
force agents that a hotel guest had paid cash not
only for his own room but also for several others.
Questioning the persons staying in the room led to
competing and conflicting stories and finally a
consent to go ahead and search the rooms. That
search uncovered a pair of duffel bags containing
almost a million and a half dollars in cash that was
later forfeited.

What on the surfaced appeared to be a
straightforward incident was actually the result of a
studiously planned and coordinated effort.
Recognizing the many contributions made by the
non-Treasury agencies to this investigation leading
to forfeiture, the Treasury Forfeiture Fund has
shared 20 percent of the net proceeds with the New
York City Police Department while awarding single
digit percentage shares to six northern New Jersey
agencies, district attorney offices in the Bronx,
Manhattan and Queens and the New Jersey National
Guard.

Forfeited Tucson Property Reborn as Drug/Alcohol
Rehab Center

In certain circumstances, the equitable share
awarded to an assisting state or local law

enforcement agency will take the form of a real
property transfer, and, under the Weed and Seed
Program, these properties may be passed on to
community service agencies to support the endeavor
of reclaiming blighted neighborhoods. In 1996,
such an occurrence took place in Tucson where a
forfeited radio property received new life as a point
of hope and renewal for victims of substance abuse.

Radio Pantera, known as KTZR 1450 AM on the
dial, was once the most popular Spanish language
station in Tucson. Just over five years ago, the
Internal Revenue Service received reports from a
local bank that the farther and son owners of the
station were engaged in structuring cash deposits.
Shortly thereafter, the Customs Service obtained
other information that the pair was also involved in
smuggling marijuana into the United States and
delivering it to other parts of the country. By early
1992, the Customs Service and the IRS, working as
part of the Southern Arizona Financial High
Intensity Drug Trafficking Area (HIDTA) task force,
opened an investigation of Radio Pantera.

This effort revealed that the father and son were
arranging for the movement of the drugs to
Columbus, Ohio, for distribution and sale. At one
point, during an intercepted telephone call, the
father boasted about how he was making lots of
money for his Mexican connections and investing
the drug proceeds in his radio station. In the spring
of 1994, Radio Pantera and its owners were indicted
on more than 40 marijuana trafficking and money
laundering charges. By June of the following year,
a jury found that the defendants’ interests in the real
estate property where Radio Pantera was located
were subject to forfeiture.

Shortly after the close of FY 1996, the Customs
Service was able to transfer the station property to
the Gateway Foundation, through the Pima County,
Arizona, Sheriff's department. Gateway is a private,
non-profit organization that was opened in 1972 as
one of the first centers in the state to provide help
to alcoholics who had no resources. Today, it
extends its treatment programs to indigent drug as
well as alcohol abusers. The former radio station
property on North Jackrabbit Avenue in Tucson will

10 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996




NOTES TO FINANCIAL STATEMENTS

° Form and content requirements included in
OMB Bulletin No. 94-01 and subsequent
issuances.

. Accounting standards contained in agency

accounting policy, procedures manuals
and/or related guidelines, so long as they are
prevalent practices.

. Accounting principles published by
authoritative standard setting bodies and
other authoritative sources: (1) in the
absence of other guidance in the first three
parts of this hierarchy; and (2) 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 Department of the Treasury was
granted a waiver by the Office of Management and
Budget from preparing the statement of cash flows
and the statement of budgetary resources and actual
expenses. As such, these statements are not
included in the annual report of the Fund.

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.

Under the TFF Act, 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.

Discretionary expenses include purchases of
evidence and information related to smuggling of
controlled substances; equipment to enable vessels,
vehicles or aircraft to assist in law enforcement
activities; reimbursement of private persons for
expenses incurred while cooperating with a Treasury
law enforcement organization in investigations; and
publication of the availability of awards.

Discretionary expenses are subject to an annual,
definite Congressional appropriation from deposits
made to the Fund. Under the Act, non-discretionary
expenses are subject to a permanent indefinite
Congressional appropriation and financed through
the revenue generated from forfeiture activities
without limitation.

The Fund’s expenses are generally paid on a
reimbursement basis. Reimbursable expenses are
incurred by the respective bureaus participating in
the Fund against their appropriation and then
submitted to the Fund for reimbursement. The
bureaus are reimbursed through Inter-Agency

NOTES TO FINANCIAL STATEMENTS 31


PROGRAM EXPENSES
($ millions) :
pp
Non-discretionary

Seizure investigative costs and

asset management $36 0 6$ 44
Seized property national contract

services 26 28
Other asset related contract services 3 1
Awards to informer (moiety

payment) 2 3
Other 11 7
Super Surplus 14 *
Secretary's Enforcement Fund 13 5

Discretionary

Awards for information or assistance * *
Purchases of evidence and

information 2 2
Federal law enforcement conveyance 9 16
Other 1 4

Total “$115 +*$111

* Less than $500,000
**Columns do not foot due to rounding of amounts

* Seizure Investigative Costs and Asset
Management

A number of expenses are covered in this category
including payroll costs; liens and Mortgages;
investigative costs leading to a seizure; and
purchases of evidence or information that ultimately
resulted in a seizure. Payroll costs covered
approximately 150 Customs employees, 40 IRS
employees, and 20 EOAF employees. Most Customs
employees reimbursed by the Fund are Seized
Property Custodians or Specialists who are
responsible for overseeing Property turned over to
the national seized property contractor, and for all
seized property and narcotics that have not been
tumed over to the contractor.

* Seized Property National Contract Services

The single largest contract paid for by the Fund
covers the storage, maintenance and disposal of real
and personal property. This function is performed
by EG&G Dynatrend, a private firm under contract
to the U.S. Customs Service. EG&G provides
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
1996, EG&G expenses were approximately $26
million, somewhat less than the previous year. The
higher cost in FY 1995 is largely attributable to the
sales activity experienced in FY 1995 related to the
Properties forfeited under United States v. Ken
International.

* Super Surplus and the Secretary’s Enforcement
Fund

Super Surplus expenses totaled approximately $14
million in FY 1996. The Super Surplus is one of the
Fund's permanent spending authorities, authorized
under 31 U.S.C. § 9703(g)(4)(B). At the end of
each fiscal year, after Teserving the Fund's
authorized retained capital of no more than $50
million, one-half of the remaining funds are
appropriated as the Super Surplus — available to
the Secretary of the Treasury for any federal law
enforcement activity.

Expenses of the Secretary's Enforcement Fund
(SEF) totaled approximately $13 million in FY
1996, an increase of $8 million over FY 1995. 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 Department of Justice 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 without
fiscal year limitation for any Treasury law
enforcement purpose.

The increase in expenditures in these two categories
is simply the consequence of greater funds
availability in the revenue areas that support these
two special authorities.

© Federal Law Enforcement Conveyance

Expenses in this category totaled $9 million in FY
1996, a decrease in the FY 1995 balance of

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS 19


DEPARTMENT OF THE TREASURY
WASHINGTON, D.c.

UNDER SECRETARY

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

TO TREASURY LAW ENFORCEMENT:

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

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

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

RAYMOND W. KELLY
Under Secretary (Enforcement)


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



Department of the Treasury Forfeiture Fund
Statements of Financial Position
September 30, 1996 and 1995
(Dollars in thousands)

Liabilities and Net Position

Liabilities:

Liabilities covered by budgetary resources:
Intragovernmental liabilities:
Distributions payable:
ONDCP Special Forfeiture Fund
Other federal agencies
Accounts payable

Total intragovernmental

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

Total liabilities not covered by
budgetary resources

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

i
FE

$ 16,388 $ 21,922

3,062 2,107
46,365 28,218
65,815 52,247
7,910 6,628

1,697 38,276
5,011 5,853
31,038 28,692
45,656 79,449

111,471 131,696
238,024 177,121
238,024 177,121
238,024 177,121
349,495 308,817
40,000 50,000
66,713 57,169
54,347 72,670
(16,388) (21,922)
144,672 157,917

$494,167 ___ $466,734

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

FINANCIAL STATEMENTS


NOTES TO FINANCIAL STATEMENTS

Description Par Discount Net

September _30, 1996:
Treasury Forfeiture Fund -
31 days 4.86% U.S.

Treasury Bills $145,990 $(611) $145,379
U.S. Customs Suspense
Account -
31 day 4.86% U.S.
Treasury Bills 166,215 (696) 165,519
Total $312,205 $1307) $3110, 898

September 30, 1995:
Treasury Forfeiture Fund -

24 days 5.34% U.S.
Treasury Bills $34,770 $(124) $34,646
U.S. Customs Suspense
Account -
27 day 5.35% U.S.
Treasury Bills 86,160 (346) 85,814
Total $120,930 $(470) $120,460

Interest receivable at September 30, 1996, and 1995, was
$590,000 and $566,000, respectively.

(5) Analysis of Changes in Forfeited Property
and Currency

The following summarizes the components of
forfeited property (net), as of September 30, 1996
and 1995 (dollars in thousands):

1996 1995

Held for Sale $32,747 $30,187
To be shared with federal, state
or local, or foreign
government 2,749 2,228
Total forfeited property 35,496 32,415
Less: Allowance for mortgages

and claims (2,094) _ (2,770)
Total forfeited property, net $33,402, $29,645

Forfeited property held for sale, net of allowance for
mortgages and claims is $30,653, and is presented
in the statement of financial position.

36 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


two material weaknesses identified in the FY
1996 audit.

22 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996


of the members were also charged with illegal
possession of automatic weapons.

Customs Fraud and a French Fugitive

In February of 1996, the Treasury Forfeiture Fund
received almost $550,000 from the sale of a luxury
residence that had been owned by French fugitive,
Stephane Pecqueraux. Mr. Pecqueraux had been the
subject of a fifty count indictment in 1995 charging
him with conspiracy, the smuggling of IBM
computer components by false invoice, money
laundering, arson and mail fraud. Cash proceeds
from these illegal activities had been used to
purchase his million dollar plus home.

Despite the absence of Mr. Pecqueraux, the Customs
Service was able to file a lis pendens against the
property, which effectively notified all potential
buyers that it was subject to pending litigation,
while they proceeded with a civil forfeiture action.
Upon forfeiture of the property, the house was sold
with distributions from the sale going to the
Treasury Forfeiture Fund, his wife under an
innocent owner spouse claim and to a lien holder.
The case is a modem example of the continued
effectiveness of civil forfeiture authority which has
been employed by the Customs Service since the
eighteenth century. Just as it originally allowed for
the forfeiture of vessels engaged in smuggling when
the owner resided overseas or was otherwise
unavailable, so today it allows Treasury enforcement
to forfeit criminally derived assets even when the
perpetrator of the crime is currently evading the
reach of the law.

The William Jones Organization

William Yancy Jones organized and led a cocaine
organization in St. Louis that provided him with a
quarter of a million dollar per month in profits from
the summer of 1993 until January of 1995. A year
later, he was sentenced to 23 years in prison. The
organization was brought down through the
cooperation of various law enforcement agencies led
by the Bureau of Alcohol, Tobacco and Firearms
and the IRS, and the application of federal asset
forfeiture authorities.

Jones had arrived in St. Louis in 1987 and using
California connections for his supply, doggedly built
up a cocaine distribution business. During its peak,
the operation received, on average, 40 kilograrns per
month from at least two suppliers and, calculating
the markup on street sales, was clearing three
quarters of a million dollars in quarterly profits. It
was also a family organization, which Jones
employing his son and son-in-law in the business.

As a result of the investigation, the government
seized over a million dollars in cash, numerous
weapons, over a hundred kilos of cocaine and some
heroin. Property seized included such items as
Mercedes and Jeep Cherokee vehicles, jet skis,
several large screen and projection TVs, a motor
home, a pontoon boat and nine parcels of real
property. The real properties were connected to an
entity called Kep-Co, a company Jones had put
together to buy real estate and thereby launder some
of the proceeds of his drug trafficking. Altogether,
assets forfeited in this case were valued at
approximately $2 million.

Smuggling Automatic Weapons

The weapons trade is probably almost as old as
human conflict itself. Today, the illegal side of this
trade is a significant international criminal threat
and can have an impact on anything from random
street crime to state sponsored terrorism. Recently,
East Asia has become an increasingly active arms
market surpassing even the Middle East. In March
of 1996, the Customs Service was able to derail a
component of this market's illegal activity when
Customs and ATF agents conducted the largest
seizure of fully operational automatic weapons in
the history of U.S. law enforcement.

Like any number of Customs smuggling seizures,
this one was much more than simply a serendipitous
discovery. Instead, it was the product of a sixteen
month investigation of an alleged arms trafficking
conspiracy that included Chinese nationals and
resident aliens as well as U.S. citizens. Several of
the suspects represented corporations known as
Polytech and Norinco, munitions manufacturing
facilities that were owned and controlled by the

6 TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 1996






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

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

The Budget and Accounting Procedures Act of 1950 as amended, Section 3512,
Executive Agency's Accounting System requires federal agencies to establish an
internal control structure which ensures the safeguarding of assets and the proper
recording of revenues and expenditures. As described in our Report on Internal
Controls dated January 17, 1997, the Fund's internal control structure has certain
material weaknesses which result in noncompliance with this Act. Most of the
material weaknesses require significant computer system improvements to correct.
Until the system enhancements can be implemented, management has developed
year-end manual procedures to compensate for many of the system weaknesses.

In accordance with Government Auditing Standards, we have also issued reports dated January
17, 1997 on our audit of the Fund's financial statements and on our consideration of the Fund's
internal control structure. . 4

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.

Coe bn Korma © Vascerstna, PC:

January 17, 1997



the Internal Revenue Service and the Drug
Enforcement Administration.

By 1993, this investigation had resulted in the
indictment of sixteen members of the smuggling and
related money laundering organization. Knowing
that Trahan was residing in Aberdeen, Scotland at
the time, the Customs Service office in Sacramento,
California, obtained a provisional arrest warrant
valid in the United Kingdom. Aberdeen police
found that he had left his residence and alerted
British Customs to track any travel. Within eight
months, British Customs noted that Trahan's wife
and children were ticketed to fly to Geneva. In
April of 1994, Swiss police approached Trahan at
the Geneva airport, where he produced a passport in
the name of an Anthony John Adams. He was
arrested for using the false passport.

After locating two safety deposit boxes Trahan had
at the Credit Suisse Bank in Montreux, Switzerland,
Swiss authorities found that they contained over
$900,000 in U.S. currency. These funds were
immediately blocked. Based upon information
provided by the U.S. Government, the Swiss
determined that this money was subject to
extradition to the United States and wired it to a
Customs Service account in San Francisco where
forfeiture proceedings were begun. At the
conclusion of the forfeiture, the government of
Switzerland was presented with a check for over
$300,000 from the Treasury Forfeiture Fund in
recognition of their invaluable assistance in the
arrest of Trahan and the forfeiture of his criminal
gains.

Retrieving Laundered Funds From the Channel
Islands

It was about eleven years ago, when a long-time
Texas drug suspect, Victor Stadter, and his cohort,
Barry Rosen, set up a company in the Channel
Islands called Luftrenser Ltd., for the purpose of
receiving funds from the United States, where
Stadter and Rosen claimed they owned more than
300 fairgrounds with substantial monthly cash
income. During the first six months of Luftrenser
Ltd's existence, over $2 million was paid into this

account through deposits of 362 cashiers checks,
each in amounts under $10,000. By September of
1989, the Jersey bank that serviced Luftrenser's
account reported its mounting suspicions to the State
of Jersey Police Drug Trafficking Investigation Unit
who, in turn, notified the U.S. Customs attaché in
London. Thus began an intricate investigation of
drug trafficking and money laundering that stretched
from the Channel Islands all the way to Texas and
California.

All of these efforts came together in 1994 when a
civil judicial forfeiture of almost $2.1 million was
ordered in the Northern District of California. Not
only did the State of Jersey Police originate the
information on the suspected drug proceeds but they
were instrumental in conducting surveillance and
interviews as well as corroborating information that
was critical in the civil forfeiture trial. In FY 1996,
the Treasury Forfeiture Fund acknowledged this
contribution of the Jersey Police with the
disbursement to them of over a million dollars from
the net forfeited proceeds as an equitable sharing.
Sharings were also made with two assisting Texas
law enforcement agencies - the Richardson City
Police Department and the Real County Sheriff.

Targeting the Money Side in New York

The operation takes its name from the fabled city of
gold, so long and unsuccessfully pursued by Spanish
conquistadors in the American southwest during the
sixteenth century. Today, in another time and place,
Treasury's El Dorado has achieved a significant
record of accomplishment as it goes about its work
of dismantling the major money laundering
organizations that operate around the New York
metropolitan area.

EI Dorado was begun in 1992 by the Customs
Special Agent-in-Charge in Manhattan. It was
designed to bring together the expertise and
resources of the many federal, state and local law
enforcement agencies operating in the designated
New York/New Jersey High Intensity Drug
Trafficking Area (HIDTA). Suiting such a multi-
agency group, El Dorado employs a variety of
investigative methods and has at its disposal the full

FOSTERING LAW ENFORCEMENT COOPERATION 9