ngs. These funds have offset the costs of

ils and supplies in the County Sheriff's
Department's Positively kNOw Drugs curriculum
and have allowed that department's drug educa-
tion unit to get its message to tens of thousands of
county schoolchildren from kindergarten through
sixth grade.

* West Palm Beach Police Department—Benefi-
cial ripple effects for the community are apparent
in some of the uses of Treasury shared assets by
the police in Florida’s West Palm Beach. After
using these funds to purchase upgraded and en-
hanced computer systems for the department, the
prior equipment was transferred to city owned
neighborhood recreation facilities where it re-
mains serviceable teaching computer skills and
applications to the city’s youth. Additionally,
these Treasury Fund resources were able to suffi-
ciently augment the police budget to allow for a
department contribution from state forfeitures, in
excess of that required by the state, to support
drug abuse education, crime prevention and safe
neighborhood programs.

APPLYING SCIENCE AND
TECHNOLOGY IN THE SECRET
SERVICE

Between its own protective and investigative mis-
sions, the United States Secret Service has work to
keep its Forensic Services Division occupied. The
reputation for talent and expertise of the Division’s
researchers and investigators, however, has also
made it a valuable resource for other parts of the
government beyond the Department of the Trea-
sury. In FY 1995, the Division added to its list of
accomplishments due, in notable measure, to tech-
nology acquisitions paid for out of the Treasury
Forfeiture Fund.

¢ Uncovering War Criminals Half a Century
Later—The Division’s Questioned Document
Branch probably knows more about inks, papers
and printing processes than most people could
possibly imagine. Thanks to forfeiture funded
equipment that replaced outdated and unservice-
able technology, the branch was able to act on a
referral from the Department of Justice’s Office of
Special Investigations and show that papers pur-
ported by a suspect to be of more recent vintage
were actually World War II era documents show-
ing involvement in Nazi concentration camps.

¢ Falsifying AIDS Research—The Questioned
Documents Branch in another referred case, this
time by the Department of Health and Human
Services, used a Treasury Forfeiture Fund sup-
plied thin layer chromatography and densitometry
system to show that a primary AIDS researcher
receiving funds from the National Institute of
Health had falsified up to 25 percent of a notebook
supporting publication of his findings. The case
was brought to the attention of the House Subcom-
mittee on Oversight and Investigations and due to
the Secret Service analysis, all research money to
the recipient was terminated.

* Selling Expired Baby Formula—aA Food and
Drug Administration case was referred to the Divi-
sion in which the popular baby formula, Similac,
was being removed from store shelves, re-stamped
with a new expiration date, and re-sold to the pub-
lic. The ink used to re-stamp the bottoms of the
cans of formula was compared to a number of inks
recovered from the trash of a principal suspect.
When one of the inks in the trash sample seemed
to match, this preliminary finding was confirmed
by the chromatography and densitometry system,
acquired courtesy of the Treasury Forfeiture Fund.

CONTRIBUTING TO THE OFFICE OF
NATIONAL DRUG CONTROL POLICY

For the second straight year, the Treasury Forfeiture
Fund was able to draw from certain of its surpluses
to contribute to the Office of National Drug Control
Policy (ONDCP). Commonly referred to as the office
of the Drug Czar, ONDCP is part of the Executive
Office of the President and from that vantage point
it reviews, coordinates and assists the many federal
efforts aimed at cutting the flow of drugs into Amer-
ica and reducing American demand for drugs. This
contribution of excess Treasury funds totalled
approximately $22 million for the 1995 fiscal year.

REACHING OUT TO INTERNATIONAL
LAW ENFORCEMENT

When President Clinton addressed the fiftieth an-
niversary meeting of the United Nations in New
York in October, 1995, he cited the globalization of
criminal activity and the threat that this poses to
national security interests. The President’s remarks
regarding such threats as illegal arms and drug
trafficking, money laundering, the spread of

16 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


NOTES TO FINANCIAL STATEMENTS

Entity Assets and Liabilities—Continued

¢ Distributions Payable — Distributions payable to federal sources is principally related to
surplus revenue that, by law, must be transferred to the Office of National Drug Control Policy
(ONDCP). (See “Transactions with Office of National Drug Control Policy”.) Distributions
payable to non—federal sources is associated with asset 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 associated with accrued
expenses authorized by the Treasury Forfeiture Fund Act (See “Allowable Fund Expenses”) for
which reimbursement was pending at September 30, 1995.

* Deterred Revenue — At September 30, 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.

Non-entity Assets and Liabilities

“Non-entity assets” consists 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 “Non-entity Liabilities” in the Statements of Financial Position to reflect
the custodial/fiduciary nature of these activities.

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

¢ Seized Property: Currency — Seized property 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. Seized
currency is defined as cash or financial instruments that are readily convertible to cash on a
dollar for dollar basis without consideration to delivery of specific goods or services.

Net Position

+ Authorized Retained Capital — 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 not more than 10 percent of the total obligations from the Fund in the pre-
ceding fiscal year.

* Unliquidated Obligations Discretionary — This represents the amount of undelivered purchase
orders and contracts which have been obligated with current discretionary budget resources. A
discretionary expense is recognized and the corresponding obligations are reduced as the goods
are received and services performed.

* Unliquidated Obligations Non-discretionary-asset sharing — This category represents the
amount of asset sharing requests for which the related forfeiture revenue has been recognized
and have been obligated by the Fund from current non-discretionary budget resources. A non-
discretionary expense is recognized and the corresponding obligations are reduced as the goods
are received and services performed.

NOTES TO FINANCIAL STATEMENTS 37


QQ)

(2)

NOTES TO FINANCIAL STATEMENTS

Reporting Entity

The Department of the Treasury Forfeiture Fund (TFF or the Fund) was established by the Treasury
Postal Appropriations Act of 1992, Public law 102-393 (the Act), and is codified at 31 USC 9703.
The TFF was created to consolidate all Treasury law enforcement organizations under a single for-
feiture fund program administered by the Treasury Department. Treasury Law enforcement agencies
fully participating in the TFF in fiscal year 1995 are the U.S. Customs Service (USCS or Customs);
the Criminal Investigation Division of the Internal Revenue Service (IRS CID); the United States Se-
cret Service (USSS); the Bureau of Alcohol, Tobacco and Firearms (ATF); the Financial Crimes En-
forcement Network (FinCEN); and the Federal Law Enforcement Training Center (FLETC). FinCEN
and FLETC contribute no revenue to the Fund and receive relatively small support from the Fund.
The U.S. Coast Guard (USCG) also participates in the Fund. Prior to the establishment of the Fund,
ATF, IRS CID and USSS participated in the Assets Forfeiture Fund of the Department of Justice.
USCS had its own forfeiture fund into which deposits of all Customs and USCG forfeitures were
made. The TFF basically transformed the Customs Forfeiture Fund into a Departmental fund serv-
ing the needs of all Treasury enforcement bureaus. FinCEN and FLETC did not previously partici-
pate in any forfeiture fund. Prior to fiscal year 1994, only USCS and USCG participated in the
Fund. The Fund is accounted for under Treasury symbol numbers 20X5693 and 20X5697.

The principal goals of the Treasury forfeiture program are to (1) be cognizant of the due process
tights of affected persons, (2) punish and deter criminal activity by depriving criminals of property
used in or acquired through illegal activities, (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.

Summary of Significant Accounting Policies

Basis of Accounting and Presentation

The Chief Financial Officers Act of 1990 (CFO Act) requires certain executive agencies or compo-
nents of the executive agencies of the federal government to prepare and have audited financial
statements and related footnotes for all agency activities and funds. Applicable accounting stan-
dards and principles for federal entities, as well as the form and content to be followed for the
preparation of these statements, are currently published by the Director of the OMB.

To assist OMB in recommending and publishing comprehensive accounting standards and principles
for agencies of the federal government, the Secretary of the Treasury, the Comptroller General of the
United States and the Director of the OMB (the Joint Financial Management Improvement Program
(JFMIP) Principals) established in 1990 the Federal Accounting Standards Advisory Board (FASAB).
However, as FASAB is in its inception, FASAB recommended agencies continue using the applicable
accounting standards contained in agency accounting policy and procedures manuals now in effect
for the preparation of financial statements. The Fund’s financial statements are prepared in accor-
dance with the following hierarchy which constitutes a comprehensive basis of accounting.

¢ Individual standards agreed to and published by the Joint Financial Management Improvement
Program (JFMIP), based upon recommendations from the Federal Accounting Standards Advi-
sory Board (FASAB).

¢ Form and content requirements included in OMB Bulletin 94-01, Form and Content of Agency
Financial Statements dated November 16, 1993, and subsequent issuances.

¢ Accounting standards contained in agency accounting policy, procedures manuals, and/or
related guidance as of March 29, 1991 so long as they are prevalent practices.

NOTES TO FINANCIAL STATEMENTS 33


(7)

(8)

(9)

NOTES TO FINANCIAL STATEMENTS

Related Party Transactions

Certain capital assets of the agencies, such as communication equipment and conveyances, are
utilized at times for the Fund's activities. These assets are reported by the participating agencies.
During the years ended September 30, 1995 and 1994 $16,797,000 and $7,488,000, respectively, of
capital assets purchased with forfeited currency were transferred to the agencies and are shown as
discretionary expenses in the accompanying financial statements.

Under a Memorandum of Understanding (MOU) with the Department of the Treasury, the U.S.
Customs Service 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 General Accounting Office (GAO), and the Office of Management and Budget (OMB)
regulations and reporting requirements.

Commitments and Contingencies

As of year end, there are asset sharing requests in various stages of approval. Because final approval
has not been obtained as of September 30, 1995, they are not recorded as liabilities of the Fund.
However, the Fund has identified asset sharing requests in the amount of approximately
$23,731,000 which were approved or in the final stages of approval subsequent to September 30,
1995. The forfeited currency revenue was recognized in fiscal year 1995; however, the distribution
will not be recognized in the financial statements until fiscal year 1996. In addition to the amount
estimated above, there are additional amounts which may ultimately be shared which are not iden-
tified at this time.

In recent decisions the United States Court of Appeals for the Ninth, Sixth and Fifth Circuits ruled
that a criminal prosecution and a civil forfeiture proceeding against the same defendant for the
same offense constituted double jeopardy in violation of the United States Constitution. In these
Circuits, which include the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada,
Oregon, and Washington in the Ninth Circuit; Kentucky, Ohio, Tennessee in the Sixth Circuit; and
Louisiana, Mississippi, and Texas in the Fifth Circuit, individuals may request that any property
forfeited in a subsequent civil forfeiture proceedings be returned. The assets of the Treasury Forfei-
ture Fund will be used to pay the value of property returned. At present, it is not possible to deter-
mine the number of individuals who may request that their property be returned. The courts will
then be required to examine each case individually. Similarly, it is not possible to determine the
value of potential claims against the Fund. It is likely that any civil forfeiture cases within the pro-
hibition defined by the Court of Appeals for the respective Circuit will be overturned and require
that the forfeited property be returned. The amount representing the value of the returned property
will be paid from the assets of the Fund.

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 laun-
dered 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. Ap-
proximately $100 million of the $260 million was traced to the purchase of these assets.

42

TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


Mexico when a member of the organization,
Ricardo Aguirre-Villagomez, met with bankers in
New York to figure out how to launder the mil-
fions of dollars in drug profits being generated.
Over six ye oo, a scheme was developed in-

volving the establishment of off-shore investments,
bank accounts in several foreign countries and the
movement of proceeds by courier from Aguirre’s
casa de cambio or money e hange house in
Monterrey, Mexico, to the First City Bank in
McAllen, Texas. It was this Monterrey to McAllen
‘ink in the plan that first attracted the attention of
the Customs resident agent-in-charge in McAllen.

Operation Choza-Rica received national busi-
ness p. coverage in FY 1995 because of the
complicity of executives of American Express
Bank International (AEBI) in the laundering of the
money. The case included the illegal disclosure to
a target by AEBI officials that Customs was investi-
gating his accounts, the likelihood of Aguirre’s
faked death in a car crash so his widow could
claim unwitting ownership of a portfolio of seized
assets and the servicing of several London bank
accounts by New Scotland Yard that was critical in
maintaining the undercover operation.

A little less than a year before Garcia-Abrego
was himself apprehended, Choza-Rica had already
levelled a hit against his criminal business that re-
sulted in 32 indictments, 23 arrests, 19 convictions
and seizures with a value of approximately $64 mil-
lion. In FY 1995, to acknowledge the important
contributions from the several enforcement agen-
cies and foreign governments to Customs forfeitures
then totalling in excess of $33 million, the Depart-
ment of the Treasury approved equitable shares for
the Drug Enforcement Administration, the Office of
the Mexican Attorney-General, Britain’s Metropoli-
tan Police New Scotland Yard and the police
department of the City of Pharr, Texas.

EQUITABLE SHARING COLLECTIONS
SUMMARY—FY 95

($ thousands)
Receiving Bureau FBI DEA USPS Other*
Customs Service $288 $1,849 $0 $9
IRS 2,493 1,537 21 to)
USSS 9 40 23 0
ATF a4 499 i) 44
Total $2,884 $3,925 $43, $53

"Includes equitable sharing payments received from a state or local government.

SHARING TO HELP VICTIMS
OF ABUSE

The trade in illegal drugs has negatively impacted
the lives of countless individuals but in Douglas,
-\rizona, forfeited assets of real property are offer-
ing shelter and hope for victims of domestic vio-
lence thanks to the equitable sharing authority of
the Treasury Forfeiture Fund.

Six years ago, the international commerce
between Douglas and the City of Agua Prieta on
the other side of the Mexican border was being
clandestinely augmented by a 200 foot tunnel that
was used to move drugs from Mexico into the
United States. The Customs Service received
information that there might be more than simply
commuting convenience between the proximate
locations of two businesses in Douglas and the
home of their owner on the other side of the
international fence in Agua Prieta. Francisco
Raphael Camarena ran the building supply and
concrete companies in Douglas that shared a
square block directly across the border from his
residence. When Customs agents first searched
a tractor-trailer parked at the business site, they
found it loaded with over a ton of cocaine. A fur-
ther search of the business revealed the northern
terminus of a tunnel concealed under the false
floor of a warehouse drain. The southern portal
came up in what purported to be a recreational
outbuilding behind Camarena’s home and was
masked by a pool table atop a concrete slab that
could be raised or lowered by hydraulic lifts.

On June 16th, 1995, the Customs Service
turned over the forfeited square block of property
on the American side to the City of Douglas
through an equitable sharing with the municipal
police department who had assisted with the case.
The transfer was done through the Weed and Seed
program to further the goal of turning criminal
property to productive community use. An office
building on the site will serve as the shelter and
be operated by the Douglas Task Force to Stop
Domestic Violence.

IRS INVESTIGATIVE SUPPORT
FOR THE COMMONWEALTH OF
PUERTO RICO

In the summer of 1993, an agent of Puerto Rico’s
Special Investigation Bureau took the initiative in
looking at a criminal organization on the island

10 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


Executive Office for Asset Forfeiture
Office of the Under Secretary (Enforcement)
Department of the Treasury
Washington, DC 20220



their authority, in a given circumstance, to declare the currency forfeited. Judicial forfeiture re-
quires the court system to legally decide whether the currency is to be forfeited. Upon forfeiture,
the cash becomes property of the Fund and revenue should be recognized.

Currently, a time lag exists between when the Field Offices are notified of the forfeiture and when
the Accounting Services Division, ASD, is notified of the forfeiture and therefore records revenue
in the general ledger.

When IRS CID seizes currency, safeguard procedures, similar to USCS as described above, are im-
plemented. Upon seizure of currency, the seizing agent completes a standard input form, which is
sent to the Asset Forfeiture Tracking System (AFTRAK) unit in Dallas for input into AFTRAK.
Changes made to the status of a seizure, such as forfeiture, are also made via a standard input form
sent to Dallas. These procedures, occasionally, result in significant time lags from the date the items
are seized or forfeited and when the status is updated in AFTRAK.

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 for-
feited 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—USCS 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 be-
half of the Fund are deposited into various bank accounts in the name of EG&G and, within one
week, are accumulated and transferred to the U.S. Treasury account at the Federal Reserve Bank of
New York. The money collected by EG&G represents a significant portion of the revenues earned by
the Fund. However, the ASD only records revenue upon receipt of a validated deposit slip, which
is approximately one week later.

CRITERIA

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

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. 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 fed-
eral agencies and Title 2 of the United States General Accounting Office’s Policy and Procedures Manual
for Guidance of Federal Agencies.

CAUSE

In order for the 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 in-
formation received from the bureaus for accounts payable and accrued liabilities, mortgages and claims
payable, and forfeited currency is not current. For example, the 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

INDEPENDENT AUDITOR’S EXHIBIT I 53


EXHIBIT I

INDEPENDENT AUDITOR’S EXHIBIT ON MATERIAL WEAKNESSES


for all items forfeited, transferred, sold or disposed. Consequently, ASD does not have updated seized cur-
rency and forfeited property data to timely record in the general ledger.

EFFECT

Complete financial statements cannot be produced from the general ledger at month-end or year end by
using the general ledger balances; consequently, inventory data is identified and captured only annually
from the inventory tracking systems in order to properly prepare year-end financial statements. Also, the
inventory data obtained from these inventory tracking systems are often inaccurate and not updated which
could result in preparation of misleading financial statements.

RECOMMENDATION

We recommend that seized currency, forfeited property and the related revenue be recorded in the Fund's
general ledger at the time of seizure and forfeiture. As seized currency is now required to be presented in
the balance sheet by SFFAS No. 3, we recommend that the asset and related liability be recorded in the
general ledger at the time of seizure. We recommend that existing procedures be followed requiring bu-
reaus’ staff to forward the forfeiture instructions as authorized, to the appropriate personnel for updating
the bureaus’ inventory tracking systems and, if held by the contractor, to EG&G, to update SPMS to reflect
changes in property status. Additionally, bureaus’ staff should be required to specifically identify and re-
port to the ASD, monthly, the status of all seized property items. We recommend that reconciliation proce-
dures continue to be performed on a routine basis (e.g. quarterly). We have been informed that the imple-
mentation of the SEACATS inventory system will correct this condition. However, until SEACATS is
operational, we recommend that ASD follow our recommendation above.

INDEPENDENT AUDITOR'S EXHIBIT I 57


The current policies and procedures were developed piecemeal and independently of any one systems ini-
tiative, 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 accu-
rate 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 the Seized Asset and Case Tracking System (SEACATS) has been approved and is un-
derway for the USCS Service. 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 but they will not be required to use
it, We recommend, and the Fund is hopeful, that SEACATS will become the system of record for the
seized and forfeited property of all Treasury 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 SEACATS system.
This will allow the agencies 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 SEACATS.

The Fund’s management plans to implement the SEACATS system beginning in fiscal year 1997.

RECONCILIATION BETWEEN THE SEIZED PROPERTY MANAGEMENT SYSTEM
(SPMS) AND THE AGENCIES’ PROPERTY SYSTEMS

CONDITION

USCS, the IRS CID, the USSS and the ATF manage and record seized and forfeited property in their re-
spective inventory tracking systems. EG&G Dynatrend, an outside contractor, also manages and records
seized and forfeited property transferred to and held by them for each of these bureaus in its inventory
tracking system, SPMS. Currently, the inventory held by EC&G does not consistently agree to what is
recorded in the bureaus’ inventory tracking systems and inventory is not recorded in the general ledger
until year-end. The year-end physical inventory value and count for all bureaus requires significant adjust-
ments because seizures and forfeitures are not recorded in the various systems on a timely basis.

CRITERIA

The Federal Manager’s Financial Integrity Act (FMFIA) requires that financial management systems record
and report financial data to provide for full financial disclosure and accountability in a useful, timely, reli-
able and complete manner.

CAUSE

There are no procedures in place requiring the regular reconciliation of inventory systems’ records main-
tained by each agency with inventory records maintained by EG&G.

The Fund records inventory in the general ledger based on the physical inventory count at year-end.

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

62 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


In planning and performing our audit of the financial statements of the Fund for the year ended September
30, 1995, we obtained an understanding of the internal control structure. With respect to the internal control
structure, we obtained an understanding of the design of relevant policies and procedures and whether they
have been placed in operation, and we assessed control risk 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 ob-
taining 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.

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 Accoun-
tants and OMB Bulletin 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 judgment, 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 inter-
nal 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.

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 re-
flected in the financial statements. Rather, procedures were developed to identify and capture informa-
tion manually from other systems in order to compile the financial statements.

* Forfeited property—The value of forfeited and seized property is not recorded in the general ledger
and is not recorded in supporting subsidiary systems in a timely manner. As a result, year-end proce-
dures were developed to identify forfeited and seized property not entered in the subsidiary systems as
of September 30, 1995, and to adjust the financial statements for the value of forfeited and seized prop-
erty on hand at year-end.

All of the above material weaknesses were identified in prior year reports and are of continuing significance.

Reportable Conditions

¢ Inventory property tracking systems—United States Customs Service (USCS), United States Secret
Service (USSS) and the Bureau of Alcohol, Tobacco and Firearms’ (ATF) individual property tracking
systems do not contain accurate and sufficient data required to prepare the analysis of change in forfeited
and seized property, without significant manual manipulation and reconciliation. The USCS, USSS, ATF
and the Internal Revenue Service Criminal Investigation Division (IRS CID) prepared manual reconcilia-
tions of property with respect to dollar values. However, due to limitations of the inventory tracking

48


ruptcy Court to reimburse innocent victims of
fraud. These victims lost money in a major money
laundering case, previously cited, of United States
v. Ken International. In addition, much of the rev-
enue collected was distributed to state and local
law enforcement agencies, foreign governments,
and other federal agencies. For FY 1995, such dis-
tributions totalled $74 million, or 66 percent of the
total revenue allocated.

ALLOCATION OF REVENUES
($ millions)

1995 1994

State and local agencies $58 $53
Foreign countries 7 .
Other federal agencies 8 7
Victim restitution 39 )
Total $112 * $61

“Less than 500,000
* Columns do not foot due to rounding of amount.

Operating 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 for-
feited property and sales associated with the dis-
position of forfeited property. Operating expenses
increased $22 million in FY 1995. A comparative
summary of operating expenses (in millions) of the
Fund is given in the following table.

OPERATING EXPENSES

($ millions)
1995 1994

Property contractor $28 $30
Purchase of evidence and information 17 20
Payroll costs 12 10
Super Surplus . 0
Secretary's Enforcement Fund 4 4
Equipment to support

forfeiture program 17 7
Specialized contracts 22 7
Joint operations with state and

local governments 4 3
Case related and

program management 6 8

Total “$111 $89
“Less than 500,000

> Columns do not foot due to rounding of amounts.

* Property Contractor

The single largest operating expense of the Fund
is for the storage, maintenance and disposal of
real and personal property. This function is
performed by a private firm, EG&G Dynatrend,
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 as well as supplemental
facilities provided by vendors under contract to
EG&G. In FY 1995, EG&G expenses were approx-
imately $28 million, somewhat less than the
prior year.

¢ Purchase of Evidence and Information

Expenses for the purchase of evidence and infor-
mation totalled $17 million in FY 1995. Most of
these costs are incurred as investigative expenses
and are authorized under the Fund’s permanent
indefinite authority. Such expenses are asset—
specific and may be traced to individual seizures.
In addition, some purchases of evidence and infor-
mation are authorized as a discretionary expense
of the Fund and need not be tied to a specific
seizure. Although these expenditures are helpful
in investigating laws enforced by the Treasury
Department, many of these payments are related to
the seizure of illegal narcotics, which do not result
in revenue to the Fund.

¢ Payroll Costs

Payroll costs totalled $12 million in FY 1995. Ap-
proximately two-thirds of these expenses provided
reimbursement for 146 employees of the Customs
Service. Most Customs employees reimbursed by
the Fund are Seized Property Custodians or Spe-
cialists who process seized property into inventory
before it is turned over to EG&G, or who maintain
custody of sensitive property, such as narcotics. In
addition to these Customs employees, the Fund
also reimburses a portion of the salaries of approxi-
mately 40 IRS employees who help manage the
seizure and forfeiture program. Finally, the Fund
pays the salaries of all 20 employees of the Execu-
tive Office for Asset Forfeiture.

+ Super Surplus and the Secretary’s
Enforcement Fund

Super Surplus expenses totalled $399,000 in FY
1995. No Super Surplus funding was available in
FY 1994. The Super Surplus is one of the Fund’s
permanent spending authorities, authorized under

20 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


NOTES TO FINANCIAL STATEMENTS

Net Position—Continued

(3)

(4)

* Unliquidated Obligations Non-discretionary-other — This category represents the amount of
undelivered purchase orders and contracts which have been obligated with current non-discre-
tionary budget resources. A non-discretionary expense is recognized and the corresponding
obligations are reduced as the goods are received and the services perfomed.

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

Statement of Federal Financial Accounting Standards Number 3 Requirement

In October 1993, the Office of Management and Budget issued Statement of Federal Financial
Accounting Standards Number 3, Accounting for Inventory and Related Property (SFFAS No. 3).
SFFAS No. 3 is effective for fiscal years ending September 30, 1994 and thereafter. SFFAS No. 3
requires seized monetary instruments to be recognized in the financial statements and a liability
be established in an amount equal to the seized asset value. SFFAS No. 3 also specifies a valuation
allowance be established against forfeited property for liens or claims from a third party.

SSFAS No. 3 requires certain additional disclosures in the notes to the financial statements, includ-
ing an analysis of change in seized property and an analysis of change in forfeited property, for both
carrying value and quantities from that on hand at the beginning of the year to that on hand at the
end of the year. These analyses are disclosed in notes 5 and 6.

Change in Accounting Principle

In fiscal year 1995, the Department of Treasury issued guidance defining currency for the purposes
of applying SFFAS 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. In prior years these types of assets were treated as currency and revenue was
recognized immediately upon forfeiture. The cumulative effect of the change in accounting princi-
ple is recognized in FY 1995 as a reduction of revenue instead of an accounting change due to the
immateriality of the amount.

Investments

All investments are short term (30 days or less) nonmarketable par value Federal debt securities
issued by the Bureau of Public Debt and purchased through Treasury's Financial Management
Service. When securities are purchased, the investment is recorded at face value and the discount
is recorded for the full amount earned at maturity. Investments are always purchased at a discount.
They are not amortized and are always held to maturity. Investments are made from cash in the
Treasury Forfeiture Fund and from seized currency held in the Customs Suspense Account. As of
September 30, 1995, Fund investments included $34,770,000 in 24 day 5.34 percent U.S. Treasury
Bills from excess forfeited cash and Suspense Account investments of $86,160,000 in 27 day 5.35
percent U.S. Treasury Bills from seized currency deposited in the Customs Suspense Account.
Interest earned on investments of seized currency is recognized as revenue of the Fund. The follow-
ing schedule presents the investments on hand as of September 30, 1995:

38

TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


DEPARTMENT OF THE TREASURY F' ORFEITURE FUND

Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1995
(Unaudited)

(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.

Tn fiscal year 1995, $ 50 million was allowed to be retained in the Fund, One half of all excess unobligated
amounts were to be transferred to the ONDCP Special Forfeiture Fund. In addition, ona budgetary basis,
the Fund was allowed to retain the remaining $ 21,922,000 of the excess unobligated amounts.

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

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

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

A separate schedule is presented earlier in this Section.

SUPPLEMENTAL SCHEDULES 71


CHAPTER 1:

SAFEGUARDING INDIVIDUAL RIGHTS

IT N DECEMBER OF 1994, THE New YorK TIMES MAGaA-
ZINE CARRIED AN ARTICLE ON CIVIL FORFEITURE WRITTEN
by a former assistant district attorney entitled, The
Law Goes on a Treasure Hunt. Although the exam-
ples cited dealt largely with seizures and forfeitures
outside of the federal purview, the general concerns
raised about non-criminal forfeitures reverberate
across government jurisdictions. Two underlying
concerns expressed in the essay were that this type
of forfeiture deprives citizens of due process of law
and, by allowing those assets taken to be used to
finance seizure units, it simply serves as a pretext
for augmenting government revenues. In closing, it
posed the rhetorical question of whether or not this
powerful tool has turned law enforcement officers
into dangerous bounty hunters.

The Department of the Treasury Forfeiture
Fund (the Fund) is the result of administrative as
well as judicial forfeitures involving violations of
federal law. The Fund has become an increasingly
valuable resource for the Treasury Department's en-
forcement bureaus and organizations since it was
established as the successor to the Customs Service
Forfeiture Fund in October of 1992. Along with its
growth as a Treasury resource, however, lies the
recognition that the Treasury asset forfeiture
program ultimately relies for its effectiveness and
standing upon public confidence in its integrity.

If concerns about due process and bounty hunting
are dismissed or not addressed at all, then that
confidence can be eroded, to the detriment of the
program itself and law enforcement in general.

In FY 1995, the Treasury Forfeiture Fund not
only continued to contribute directly to law
enforcement but also worked to merit public trust
by pursuing its fundamental program goal of safe-
guarding individual rights. To address these two
most commonly mentioned criticisms of govern-
ment forfeiture activities, the program must afford
fair process to those affected by the seizure, espe-
cially in non-criminal cases, and then, after the fact
of forfeiture, it must regulate and filter disburse-
ments from the Fund to ensure against the develop-
ment of a bounty inducement to further seizures.
Some explanation of how :e Fund’s authorizing

statute, as well as its operating policies and proce-
dures, all work together to accomplish these ends
will provide a context for assessing the degree of
continued support for this goal in FY 1995.

RECOGNIZING THE INTERESTS OF
AFFECTED PERSONS

While civil forfeiture actions can be pursued either
administratively by the seizing agency or judicially
in court, they always proceed against property and
not persons. It is, however, readily apparent that
property, by definition, cannot exist without some-
one, somewhere, having an ownership or other in-
terest in it. Fairness demands that those persons
having any interest in seized property be notified
of the seizure and the intent to forfeit so that they
may have an opportunity to come forward and be
heard. Such notification begins a process designed
to safeguard the rights of affected parties. Some of
the main points of this process include:

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

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

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

SAFEGUARDING INDIVIDUAL RIGHTS 1


Treasury Forfeiture Fund
Statement of Changes in Net Position
September 30, 1995 and 1994

(Dollars in thousands}

Unliquidated Unliquidated
Authorized Unliquidated Obligations Obligations Cumulative Total

retained Obligations Asset Non-discr. results of net
capital Discretionary Sharing Other operations —_ position
Balances, September 30, 1993 $50,000 $13,662 $8 $ 5,642 $22,208 $ 91,520
Excess of net revenues and
financing sources over total
operating expenses 0 0 0 0 47,515 47,515

Net change in obligations
of current resources 0 12,154 10,597 10,450 (33,201) 0

Balances, September 30, 1994
before Distribution to ONDCP’s

Special Forfeiture Fund $50,000 $25,816 $10,605 $16,092 $36,522 $139,035

Distribution to ONDCP’s

Special Forfeiture Fund it) 0 0 0 (3,843) (3,843)
Balances, September 30, 1 994

as previously presented 50,000 25,816 10,605 16,092 32,679 135,192
Prior period adjustment

(note 12) i) i) 0 0 16,138 16,138
Balances, September 30, 1994

as restated 50,000 25,816 10,605 16,092 48,817 151,330

Excess of net revenues and
financing sources over total

operating expenses 1) 0 i) i) 28,509 28,509
Net change in obligations of
current resources 0 (15,815) 10,594 9,877 (4,656) 0
Balances, September 30, 1995
before Distribution to ONDCP’s
Special Forfeiture Fund $50,000 $10,001 $21,199 $25,969 $72,670 $179,839
Distribution to ONDCP’s
Special Forfeiture Fund 0 0 0 i) (21,922) (21,922)
Balances, September 30, 1995
Net of Distribution to ONDCP’s
Special Forfeiture Fund $50,000 $10,001 $21,199 $25,969 $50,748 $157,917

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

FUND FINANCIAL STATEMENTS 31


weapons of mass destruction and terrorism reaf-
firmed what have been Department of the Treasury
priorities and concerns in international enforce-
ment for a number of years. As organized criminal
elements operate with less and less regard for
national boundaries, a cooperative international
response is crucial to adequately meet these
threats. In FY 1995, the Treasury Forfeiture Fund
discretionary payment authority was used to fur-
ther develop such a response by funding combined
Treasury bureau presentations and training on
asset forfeiture and money laundering to foreign
enforcement agency counterparts in Israel, Japan
and South Africa.

¢ Jerusalem—Meetings with the Israeli National
Police focused on the problem of laundering crimi-
nal proceeds in financial transactions between Is-
rael and the United States. Follow-on actions that
were also assisted by the Treasury Fund included
refining proposals for Israeli asset forfeiture and
anti-money laundering legislation and laying the
groundwork for targeted joint investigations.

¢ Tokyo—This forfeiture funded training was
conducted with Japan's National Police Agency
and established protocols for exchanges of informa-

tion as well as the implementation of reciprocal
initiatives. Some of these initiatives include ex-
changing selected enforcement personnel to work
several rotations within the hosting organization.

¢  Pretoria—The Treasury Fund allowed for a
demonstration of its usefulness to the South
African Police Service, which was particularly in-
terested in the forfeiture fund model as a means of
strengthening that country’s law enforcement. Ex-
changes on asset forfeiture and money laundering
produced a basis for further cooperation in com-
batting the trade in illegal firearms and pursuing
other investigative and training efforts.

Apart from these combined Treasury enforce-
ment bureau presentations to their operational col-
leagues overseas, the Treasury Forfeiture Fund also
lent its resources in FY 1995 to restoring and ensur-
ing democratic governance in Haiti. The Bureau of
Alcohol, Tobacco and Firearms, the Secret Service
and Treasury’s Federal Law Enforcement Training
Center all used amounts of forfeited monies to help
develop the Haitian police organization into a pro-
fessional law enforcement agency capable of pre-
serving public order in a democratic setting.

STRENGTHENING LAW ENFORCEMENT 17


ing the SFFAS information on seized and forfeited
property balances as of March 30, 1995. Fund
management subsequently reviewed this material
and provided an assessment to bureau program
officials on how well they had done.

¢ Inventory Tracking Systems

In order to alleviate problems with inventory
tracking systems which support the Fund, the
Customs Service has undertaken a major develop-
ment effort for a new seized asset and case track-
ing system (SEACATS). With the assistance and
participation of Fund management, SEACATS has
been approved under Treasury Directive 32-02,
which requires that the development of all such
financial management systems be sanctioned by
the Assistant Secretary for Management. When
fully developed, there will be an integrated system
built around SEACATS to record the seized and
forfeited property transactions of Treasury enforce-
ment bureaus. SEACATS will provide a cradle—
to-grave system for tracking all property from case
initiation to final financial resolution. Also, SEA-
CATS will meet all SFFAS accounting require-
ments for seized and forfeited property and will
eliminate the two material weaknesses associated
with inventory systems. SEACATS will be used to
help produce the audited financial statements for
both Customs and the Fund starting in FY 1997.

+ Accounting Systems

The Customs Service provides all accounting
support for the Fund. Accounting weaknesses
identified by the Fund’s auditor are principally
issues associated with systems operated by Cus-
toms. However, Fund management initiated some
improvements with respect to these weaknesses
during FY 1995. To help compensate for account-
ing records being maintained on a cash basis, the
Fund approved revisions to extensive year—end
adjustment procedures designed to produce
accrual basis financial statements that could be
sustained through an audit. These revised proce-
dures were drafted in February and reviewed by
each bureau for comment. The final instructions,
FY 1995 Year End Closing Procedures, were issued.
by the Fund on August 10. In addition, the
successful development of the SEACATS system
should substantially improve the two material
weaknesses associated with accounting systems.

* Performance Indicators

The Fund made important progress during

FY 1995 at developing performance measures.
Although current measures yet need to be refined,
and additional measures are contemplated, the
Fund began tracking several performance mea-
sures in late FY 1995 through a manual data col-
lection and calculation process. Performance indi-

A 48 foot Vista Sportfisher-
man, the Good Times, at
dockside in Freeport, Texas.
This vessel was forfeited as a
result of an investigation of
marijuana smuggling by the
Customs Service office in
Galveston and was sold during
the summer of 1995.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS 23


FINANCIAL HIGHLIGHTS

‘The following provides a brief explanation for
each major section of the audited financial state-
ments accompanying this report for the fiscal year
ended September 30, 1995. These statements have
been prepared to disclose the financial position,
results of operations, changes in net position, and
cash flows of the Fund, pursuant to the require-
ments of the Chief Financial Officers Act of 1990.
While the financial statements have been pre-
pared from the books and records of the Fund in
accordance with the formats prescribed by the Of-
fice of Management and Budget, the statements
are different from the financial reports used to
monitor and control budgetary resources that are
prepared from the same books and records and are
subsequently presented in federal budget docu-
ments. Therefore, be advised that direct compar-
isons are not possible between figures found in
this report and similar financial concepts found in
the fiscal year 1994 and fiscal year 1995 Budget of
the United States Government. Further, the notes
to the financial statements and the independent
auditor’s opinion and report on internal controls
and compliance with laws and regulations are
also integral components to understanding fully
the financial highlights of Fund operations high-
lighted 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)
1995 1994

Forfeited currency

and monetary instruments $146 $154
Forfeited property 75 20
Payments in lieu

of forfeiture 7 14
Reimbursed costs 3 3
Proceeds from participating

with other Federal agencies 8 4
Interest 7 2
Other miscellaneous 6 1

_—__
Total $252 $198

* Currency and Monetary Instruments

The Fund's primary source of revenue is forfeited
currency and monetary instruments. For FY 1995,
revenue trom forfeited currency and monetary in-
struments. totaled $154 million, or 61 percent of
total revenues, versus $158 million (80 percent) in
FY 1994, This amount includes revenues from par-
ticipating in joint investigations with other federal
agencies of $8 million, or 3 percent, versus $4 mil-
lion, or 2 percent of total revenues and financing
sources in FY 1994.

+ Forfeited Property

The net revenue from the sale of forfeited property
(net of mortgages) was $75 million in FY 1995 and
$20 million in FY 1994. The increase of 275 per-
cent is primarily attributable to the sale of proper-
ties associated with the final disposition of a sig-
nificant Customs’ case, United States v. Ken
International. This case involved the disposition
of property with a gross value of close to $60 mil-
lion. In addition to property sales, $9 million of
property was placed into official use by state,
local, and federal agencies in FY 1995.

+ Payments in Lieu of Forfeiture

After property is seized for forfeiture, the govern-
ment may enter into negotiations with the violator
for a cash payment to settle the pending case, in-
stead of proceeding with the formal forfeiture
process. Such payments in lieu of forfeiture to-
talled $7 million in FY 1995, a decrease of $7
million from FY 1994.

+ Interest

The Fund is authorized to invest cash balances in
certain special Treasury securities. At September
30, 1995, investments totalled $120 million. This
included $35 million invested from balances of the
Fund, and $85 million invested in seized balances,
which were not yet forfeited. Interest income
earned on these investments totalled $7 million, an
increase of $5 million, or 71 percent, over FY 1994.

Allocation of Revenues

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

The total revenues allocated from the Fund
increased to $112 million in FY 1995. Most of this
increase is attributable to $38 million in restitution
that was paid by the Fund to the Federal Bank-

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS 19


Treasury Forfeiture Fund
Statement of Cash Flows
September 30, 1995 and 1994

(Dollars in thousands)
1995 1994
Cash flows from operating activities: eel
Excess of net revenues and financing sources over total operating expenses $ 28,509 $ 47,515
oe
Adjustments to reconcile excess of net revenues and financing sources over total operating
expenses to cash provided from operating activities:
(Increase) decrease in accrued interest and receivables (3,754) 6.867
Decrease (increase) in forfeited Property 6,277 (29,717)
Decrease in investigative and travel advances 3,573 37
Decrease (increase) in prepaids 113 (600)
Increase (decrease) in distributions Payable 44,150 (8,120)
Increase in allowances for mortgages and claims 407 391
Increase in accounts payable 10,417 13,043,
(Decrease) increase in deferred revenue (7,165) 30,083
Prior period adjustment 16,138 10)
—
Net cash provided by operating activities 98,665 59,499
— eee
Cash flows from investing activities:
Purchase of investments (34,646) 0
oo
Net cash provided (used) by investing activities (34,646) ¢)
oe
Cash flows from financing activities:
Distributions to ONDCP (21,922) (3,843)
— ee
Net cash provided (used) by financing activities (21,922) (3,843)
ee
Cash, beginning of year 178,320 122,664
Cash, end of year $220,417 $178,320
—_—_———

Property forfeited of approximately $9 million and $5 million respectively was shared with state and local agencies and foreign countries, or trans-
ferred to other federal agencies during the years ended September 30. 1995 and 1994

Unliquidated obligations increased approximately $6 million and $33 million tor the years ended September 30. 1995 and 1994, respectively.

Interest paid amounted to approximately $1 thousand and $3 thousand for the years ended September 30. 1995 and 1994, respectively.

The accompanying notes are an integral part of the financial statements

32 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1 995


CHAPTER 4:

STRENGTHENING LAW ENFORCEMENT

Tiere was a time not too long ago, before the
creation of today’s federal asset forfeiture funds,
when forfeiting criminal assets was likely to be a
drain on law enforcement resources. Proceeds of
forfeiture went to the general fund and the costs
of seizing property and managing it through final
forfeiture and disposition were borne out of the
normal appropriations for salaries and expenses
available to a federal law enforcement agency.
The more that was seized, the more these expenses
mounted. The more time special agents had to
devote to property management issues outside of
their vocation and training, the less time they had
available for their primary enforcement missions.

Seizing property meant that both time and money
had to be obligated and taken out of already lim-
ited resources for tasks that were often unfamiliar
and distracting.

The creation of federal asset forfeiture funds
with enactment of the Comprehensive Crime
Control Act of 1984 along with subsequent related
fund legislation has done much to turn around
that previous situation. Today, the Treasury For-
feiture Fund is a repository for retention of the
value of Treasury forfeitures. This retained value
is then invested in a variety of ways to strengthen
law enforcement at all levels of government.
Whether it is equitably shared with state and local

[BATA Toe

seat

ma

rr

Commanding a classic view of Diamond Head and Maunalua Bay, this Honolulu residence featured such amenities as a Spanish
tiled lanai or patio by the pool as well as a 156 bottle temperature controlled wine vault. Forfeited as part of a U.S. Customs case
for violations of money laundering statutes, it was sold at auction in September 1995.

14 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


INVENTORY PROPERTY TRACKING SYSTEMS

CONDITION

The United States Customs Service (USCS), the Internal Revenue Service Criminal Investigation Division
(IRS CID), the United States Secret Service (USSS) and the Bureau of Alcohol, Tobacco and Firearms (ATF)
maintain seized and forfeited property, the value of which is included in the Pund’s financial statements.
In the prior year, USCS and IRS CID were not able to prepare, in a timely manner, an auditable analysis of
changes in seized property and IRS CID was not able to prepare an auditable analysis of changes in for-
feited property, which resulted in a scope limitation qualification in the auditor's report on the financial
statements. In fiscal year 1995, each of the agencies was able to prepare an auditable analysis of changes in
forfeited and seized property, with respect to the dollar amounts of property. However, due to limitations
of the inventory tracking systems, the appropriate unit of measurement for quantities (e.g., cases, pounds,
etc.) was not presented in accordance with the requirements of SFFAS No. 3.

USCS, USSS and ATF’s individual property tracking systems do not contain accurate and sufficient data re-
quired to prepare the analysis of changes in forfeited and seized property, without significant manual manip-
ulation and reconciliation. Additionally, available data, such as liens and claim amounts or quantity (units of
measurement) information, are not consistently available in separate bureaus inventory tracking systems. As
a result, the analysis of changes in seized and forfeited property schedules was limited by data availability.

CRITERIA

The Federal Accounting Standards Advisory Board (FASAB) approved and the Office of Management and
Budget (OMB) issued Statement of Federal Financial Accounting Standards No. 3 (SFFAS No. 3), Account-
ing for Inventory and Related Property, which became effective beginning in fiscal year 1994. As such, the
Fund is required to present certain disclosures. 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 agencies’ inventory property tracking systems should provide all data nec-
essary to produce the analysis of changes in forfeited and seized property, with minimal manual interven-
tion and reconciliation, and to provide management with meaningful information.

CAUSE

United States Customs Service—The USCS tracking system, CPTS, maintains no historical data. The sys-
tem 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 de-
tected during seized property inventories since Custom’s inventory instructions require only that quantity
differences between CPTS and on-hand amounts be investigated.

For the most part, USCS’ procedures for recording inventory activity in CPTS were adequate but the proce-
dures were not always followed. For example, it was noted by a seized property supervisor, at one district,
that seizures of certain firearms and small quantities of controlled substances from individuals at land bor-
der crossings are not recorded in TECS I and, therefore, not downloaded into CPTS for tracking purposes.

According to the supervisor, USCS lacks written procedures to manually input these seizures in CPTS.

Seizures were not always recorded and approved in TECS II in a timely manner, resulting in delays in the
seizures being downloaded to and tracked in CPTS. USCS’ procedures require that information about new
seizures be recorded and approved by supervisors in TECS II within 5 business days. This time frame was
exceeded for approximately 4,000, or 10 percent, of fiscal year 1995 seizures, including about 400 seizures
that were not approved until a month or more after the seizures.

60 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


vation. The Customs Service in Miami conducted
an investigation that led to the conviction of two
leaders of the Commandos F-4, an anti-Castro group
who tried to purchase explosives and rockets to be
used as underwater mines on tourist cruise ships in
Havana harbor, Also, Customs agents assigned to the
Joint Miami Terrorism Task Force seized numerous
weapons and military equipment destined for armed
incursions to Cuba and commando-type raids there.

Operation Exodus has been a significant long-
term export control program of the Customs Service
and owes much of its success to cooperation with
other federal, state, local and international law en-
forcement. From addressing the critical problem of
nuclear weapons proliferation to the more routine
interdiction of handguns that become the instru-
ments of foreign street crimes, the seizures resulting
from Operation Exodus have had an impact in
deterring criminal activity while advancing U.S.
foreign policy objectives.

BATTLING CREDIT CARD FRAUD

Credit cards are ubiquitous accompaniments to
the American economy. It is difficult to conceive
of payment transactions before their widespread
use. Along with this, however, is the substantial
problem of credit card fraud with upwards of
$700 million in losses to bank card companies
annually according to the American Bankers As-
sociation. In the first quarter after the end of FY
1995, a Secret Service undercover operation that
was initiated in Orange County, California, nine
months earlier, resulted in forty-one individuals
being charged with fraud and the seizure of a vast
array of criminal proceeds.

This particular fraud took advantage of a federal
consumer credit regulation that requires card issu-
ing banks to credit an account as soon as payment
is received. The suspects in the case would send
booster checks, checks that were considerably
above the amount due and that were certain to
bounce, to the card issuers and then take advantage
of the temporarily increased credit line to finance
shopping sprees for costly jewelry, clothing, and
other merchandise. The items that were thereby
fraudulently purchased were then sold for cash and
the proceeds divided between the ringleaders of the
operation and those who allowed their checks and
credit cards to be used. Oftentimes, the cardholding
individuals, having little or no income but having

charged thousands of dollars worth of goods, would
end up filing for bankruptcy protection.
Indictments in the case contain criminal forfei-
ture counts which would allow for the forfeiture of
the homes, cars and other possessions of those guilty
of the fraud. The case sends a strong signal that the
U.S. Secret Service working with the American
banking industry will not tolerate credit card fraud.

BUREAU COLLECTIONS SUMMARY—FY 95
($ thousands)

Collections uscs IRS usss ATF
Currency $128,099 $39,988 $1,444 $82
Property 14,957 11,952 389 297
Reverse Asset
Sharing 2,146 4,051 72 637
Total $145,202 $55,991 $1,905 $1,016

MONEY LAUNDERING: A MOTOR
FUEL TAX EVASION SCHEME

Along Pennington Road in New Jersey’s Ewing
Township, just outside Trenton, was a business
known as Packer Petroleum. Likely of little notice
to its neighbors in this industrial stretch of the
northeast corridor until it burned down in Febru-
ary of 1992, Packer Petroleum was actually an un-
dercover operation run by the Criminal Investiga-
tion Division of IRS and the FBI and was
instrumental in finally unmasking, by the summer
of 1995, what was reportedly the largest motor fuel
tax evasion scheme in U.S. history.

In the legitimate gasoline and diesel fuel busi-
ness, excise taxes are paid at some point along the
wholesale to retail distribution chain and the cost
of the tax is passed along to gasoline and diesel
fuel customers. In this scheme, however, a Brook-
lyn, New York firm known as Kings Motor Oil pur-
chased hundreds of millions of gallons of tax-free
home heating oil and then sold it as tax paid diesel
fuel to PetroPlus Petroleum, a major motor fuel
distributorship in New Jersey. When PetroPlus
then turned around and sold the diesel fuel to its
customers, eventually including the IRS/FBI un-
dercover business, it charged them the requisite
federal and state taxes. Instead of going to the U.S.
and New Jersey state treasuries, these tax amounts
were distributed among the conspirators at Kings
Motor Oil and PetroPlus.

6 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


Treasury Forfeiture Fund
Statement of Financial Position

September 30, 1995 and 1994
(Dollars in thousands)

Liabilities and Net Position

1995 1994
Entity Liabilities: el
Distributions Payable:
Federal:
ONDCP Special Forfeiture Fund $ 21,922 $ 3,843
Other federal agencies 2,107 2,768
24,029 6,611
Non-federal:
State and local agencies and foreign governments 6,628 18,172
Victim restitution (note 9) 38,276 0
44,904 18,172
Total distributions Payable: 68,933 24,783
ie
Accounts Payable:
Non-federal 5,853 10,120
Federal 28,218 13,534
34,071 23,654
Deferred revenue from forfeited assets 28,692 35,857
eee
Total entity liabilities 131,696 84,294
~
Non-entity liabilities:
Seized currency (note 6) 177,121 143,603
ea alta
Total non-entity liabilities 177,121 143,603
ES
Committments and contingencies (note 8)
Total liabilities 308,817 227,897
EEO
Net Position:
Authorized retained Capital 50,000 50,000
Unliquidated obligations
Discretionary 10,001 25,816
Non-discretionary—asset sharing 21,199 10,605
Non-discretionary—other 25,969 16,092
Distributions to ONDCP’s Special Forfeiture Fund (21,922) (3,843)
Cumulative results of operations 72,670 36,522
SE
Total net position 187,917 135,192
Total liabilities and net Position $466,734 $363,089
ee

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

FUND FINANCIAL S' TATEMENTS 29


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, 1995

(Dollars in thousands)

(Unaudited)
Forfeited
Total Number Being Held Uncontested

Region/Districts of Cases as Evidence Cash
United States Customs Service (USCS)

New York - JFK 7 $1,192 $ 111

New York - Seaport 5 1,752

Cleveland 1 178

Puerto Rico 3 907

Miarni 8 262 3,765

San Diego 3 482

Seattle 1 246

Washington, DC 1 602
Agency Total 29 5,621 3,876
Internal Revenue Service-CID (IRS CID)

Pittsburgh 1 150

Laguna Niguel 1 675

Cleveland 2 313

Greensboro 1 158

Ft. Lauderdale 2 400

Austin 1 112

Houston 3 1,570
Agency Total 1 0 3,378
Grand Total 40 $5,621 $7,254

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

SUPPLEMENTAL SCHEDULES

67


DEPARTMENT OF THE TREASURY FORFEITURE FUNY

Information Required by 31 U.S.C. 9703(f}
For the year ended September 30, 1995
(Unaudited)

The Treasury Forfeiture Fund Act of 1992, 31 U.S.C. 9703(f), requires the Secretary of the Treasury to trans-
mit to the 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 (Treasury Forfeiture Fund or Fund) during the preceding
fiscal year under any law enforced or administered by the Department of Treasury law enforcement
organizations or the United States Coast Guard, in the case of fiscal years beginning after 1993.

At September 30, 4995, the Fund had forfeited currency of $ 12,635,267 held and not deposited in the
Department of the Treasury Forfeiture Fund. 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, 995, the Fund had forfeited property
held for sale of $ 30,187,000. 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 proceed-
ings are deposited in a U.S. Customs Service (Customs) suspense account. Upon forfeiture, it is trans-
ferred to the Treasury Forfeiture Fund. At September 30, 1995, there was $ 2,017,000 of forfeited cur-
rency and other monetary instruments that had not yet been transferred to the Fund. This is reported
as a part of “receivables: federal” in the audited financial statements.

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

‘The estimated total value of all property transferred to any state OF local law enforcement agency is
summarized by state and U.S. territories. Total currency transferred was $62,973,000 and total prop-
erty transferred was $ 4,027,000 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, 1994, which became the
beginning balance for the Fund on October 1, 1994, as reported in the audited financial statements is
$135,192,000.

(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 $4,789,000.

The amount actually paid on a cash basis was not materially different.
(Continued

‘SUPPLEMENTAL SCHEDULES


UEPARTMENT OF THE TREASURY FORF EITURE FUND

Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1995
(Unaudited)

State and local agencies $58,100,000

Foreign countries 7,319,000

Other federal agencies 8,393,000
(C) The net amount realized from the Operations of the Fund during the preceding fiscal year, the
amount of seized cash being held as evidence, and the amount of money that has been carried over
into the current fiscal year,

statements is $28,509,000.

U.S. Customs Service $67,360,916 36 seizures
IRS CID $45,829,448 14 seizures
ULS. Secret Service $2,144,000 1 seizure

$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 $12,875,000. A detailed schedule is provided on page 67.

((F) the balance of the Fund at the end of the Preceding fiscal year

The total net Position of the Fund at September 30, 1995, as reported in the audited financial

statements is $ 157,917,000.
(Continued)

70 TREASURY Fi ORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


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,
1995, and the related statements of operations, changes in net position, and
cash flows for the year then ended. These financial statements are the re-
sponsibility of the Fund’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial state-
ments of the Fund as of September 30, 1994 were audited by other auditors
whose report dated January 6, 1995 on those statements included an ex-
planatory paragraph that described the inability of the auditors to satisfy
themselves as to the fair presentation of the analysis of change in seized and
forfeited property, other than forfeited property held by the U.S. Customs
Service, the U.S. Secret Service and the Bureau of Alcohol, Tobacco and
Firearms. The Fund’s management could not present detailed documentation
to support activity presented in the analysis of change in seized and forfeited
property, other than forfeited property held by the U.S. Customs Service, the
U.S. Secret Service and the Bureau of Alcohol, Tobacco and Firearms dis-
cussed in the notes to the fiscal year 1994 financial statements.

We conducted our audit in accordance with generally accepted auditing
standards; Government Auditing Standards, issued by the Comptroller Gen-
eral 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 as-
surance about whether the financial statements are free of material misstate-
ment. 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 presenta-
tion. We believe that our audit provides a reasonable basis for our opinion.

As described in note 2, these financial statements were prepared in confor-
mity with the hierarchy of accounting principles and standards as approved
by the principals of the Federal Accounting Standards Advisory Board. This
hierarchy is a comprehensive basis of accounting other than generally ac-
cepted accounting principles.

In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Department of the Treasury

Member of the American Institute of Certified Public Accountants


¢ Discretionary Payments—These are payments
from the Fund not related to a specific seizure but
more generally supportive of the forfeiture programs
of Treasury enforcement bureaus. These may in-
clude payments for the costs of taining, payments
for laboratory, communications and protective
equipment, payments for certain state and local
costs incurred in joint operations with Treasury law
enforcement bureaus and payments to equip vessels,
vehicles and aircraft.

¢ Other Payments—These are payments made
from cither surpluses available to the Fund after
mandatory and discretionary expenses are met or
from asset sharings received by the Fund in recog-
nition of Treasury bureau contributions to other
law enforcement agency forfeitures. These pay-
ments must be for law enforcement purposes.

Payments from the Treasury Fund, therefore,
either go to paying the costs associated with a
specific seizure or to strengthening law enforce-
ment. If they go to strengthening law enforcement,
the decision regarding the amount of value
involved and where it should be applied is based
upon the recommendation of the headquarters of
the Treasury bureau, revised and modified in light
of the Department’s national enforcement needs as
determined by the offices of the Secretary of the
Treasury. These decisions on the allocation of for-

feited proceeds are purposefully distanced from
the daily operational choices that confront field
personnel so that they may pursue their sworn
enforcement missions free of any ulterior concerns.

APPLYING A DUE PROCESS
SAFEGUARD IN FY 1995

Administrative and civil judicial forfeiture cases
play a significant role in federal asset forfeiture
programs. To help ensure that the Department of
the Treasury and its law enforcement bureaus are
vigilant in seeing to it that due process is fully
observed in these cases, the Executive Office for
Asset Forfeiture issued a policy directive in the
spring of 1995 on the timely processing of adminis-
trative and civil judicial forfeitures. Twice each
year, Treasury enforcement bureaus are asked to
examine their open civil forfeiture cases and deter-
mine how many have exceeded what are general
timeliness standards in the administrative and
judicial categories. If more than a minimal amount
are found to be untimely in any category according
to the standard, then a report on these cases is for-
warded to the Executive Office for Asset Forfeiture.
This policy aims at promoting active caseload
monitoring so that seized property will either
proceed to forfeiture or be returned to an interested
party without suffering any undue delay.

A custom designed, sunken, circular wet bar
overlooking the pool acts as the focal point
of the entertainment/family room in the
Walden Drive Beverly Hills residence. Part of
the proceeds from the sale of this and other
Mizuno properties have gone to compensate
the Japanese victims of the original fraud.

SAFEGUARDING INDIVIDUAL RIGHTS 3


The pool and fountain area of one of the Mizuno properties on
North Walden Drive in Beverly Hills, California. This luxury home
had earlier served as a set for the 1989 film, Beverly Hills Cop Il,
starring Eddie Murphy as Detroit detective, Axel Foley.

he or she may file an in forma pauperis petition to
have the requirement of the cost bond waived and
still move the matter into the judicial arena.

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

Federal civil forfeiture is not a covert activity,
bereft of concerns for process and rights. Whether

civil forfeiture is accomplished administratively
by the investigative agency or judicially in a court
of law, it must always proceed through a very
structured and delineated process—a process that
comprehensively notifies affected parties, invites
arguments against the intention to forfeit, accom-
modates the indigent and offers opportunities to
achieve compromise resolutions.

ADMINISTERING THE PROCEEDS
OF FORFEITURE

The statute that authorizes the Treasury Forfeiture
Fund, as well as the policies and guidelines
adopted by Treasury’s Executive Office for Asset
Forfeiture in administering the Fund, provide
checks, safeguards and an important degree of
filtering distance between seizing personnel and
the ultimate benefit of forfeited value that make it
exceedingly difficult to creditably ascribe bounty
hunting as a motivation in the conduct of seizure
and forfeiture activities. In Treasury’s national pro-
gram, forfeited value is first deposited in the Fund
and only then disbursed according to the available
mandatory, discretionary and other payment cate-
gories specified by law. Every asset taken does not
go directly to financing the seizure units them-
selves. The Treasury Forfeiture Fund does indeed
strengthen law enforcement but only through a
reasoned, comprehensive and deliberative method.
An examination of some of the allowable payment
categories of the Fund will show how they
strengthen law enforcement while defusing the en-
ticement to hunt for bounty.

* Mandatory Payments—Seizing property is not
without costs. Often it must be moved, stored,
maintained, operated if it is a business, newspaper
advertisements must be purchased to inform inter-
ested persons of the proceedings, and, if it is for-
feited, the property must be disposed of—auc-
tioned off, donated, transferred or even destroyed.
Before the establishment of the modern federal
forfeiture funds, all these costs were taken out of
the limited mission oriented appropriations avail-
able to the investigative agency and any value real-
ized from forfeiture went to the general fund. Now,
the Congress has designated seizure specific costs
such as these as a priority for payments from the
Fund and this category also includes the satisfac-
tion of valid liens as well as the payment of
amounts remitted to victims of fraud.

2 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


police and foreign governments in recognition of
their participation in joint investigations, or used
to pay contractor employees to do the program
support and property management work so neces-
sary to free up investigators’ expertise to attend to
their primary duties, or channeled back to Trea-
sury enforcement bureaus to cover their direct
forfeiture expenses and more generally support
their seizure and forfeiture programs, or even
contributed from certain fund surpluses to the
promotion of the national anti-drug effort, the
Treasury Forfeiture Fund is constantly about the
work of strengthening law enforcement. A sam-
pling of some specific FY 1995 examples in this
area should give some idea of the breadth of Fund
accomplishments in pursuit of this goal.

COMBATTING VIOLENT STREET
CRIME IN THE NATION’S CAPITOL

Behind the White House and the national monu-
ments commemorating the famous and the dead,
behind world class museums and the headquarters
of federal agencies, behind the imposing dome of
the Capitol Building and network news anchors
reporting against that backdrop, lies the City of
Washington and the struggle of its residents with
many of the violent criminal activities that chal-
lenge our nation’s urban centers. Operation Cease-
fire, a citywide gun seizure program, is part of the
District of Columbia’s response to this challenge
and involves important contributions from the
Bureau of Alcohol, Tobacco and Firearms sup-
ported. by the Treasury Forfeiture Fund.
Ceasefire’s goal is to reduce gun-related vio-
lence to pre-1986 levels, the time before crack co-
caine trafficking brought record numbers of illegal
weapons into the city. Gun squads of from six to
eight Metropolitan Police officers, accompanied by
an ATF agent operate in six of the city’s seven po-
lice districts. Their purpose is to seek out and
seize illegal handguns with a view toward extract-
ing as much investigative information as possible
from these seizures. Recovered handguns are ex-
amined and compared in an effort to link weapons
to crimes and to determine a gun’s place of origin
and the trail it followed in eventually getting to
the streets of D.C. The Treasury Forfeiture Fund
has underwritten this key analytical phase of the
operation through its funding of ATF’s own, and
similarly named, Ceasefire technology, a sophisti-
cated computerized system that inventories, iden-

tifies and matches bullet projectiles, as well as
through the acquisition of recent database en-
hancements at ATF’s National Firearms Tracing
Center in Martinsburg, West Virginia.

ENABLING STATE AND LOCAL
POLICE IN NEW YORK, CALIFORNIA
AND FLORIDA

The ability of the Treasury Fund to share the for-
feited proceeds of crime with state and local law
enforcement agencies which assisted in an investi-
gation recognizes the valuable contributions they
make to the total effort leading to forfeiture and
paves the way for future cooperation. The require-
ment that these shared amounts then be used for
law enforcement purposes enables many state and
local police agencies to strengthen their programs
and initiatives in ways that may not have been
options absent these additional resources. Exam-
ples from three of our most populous states
demonstrate how FY 1995 monies from the Trea-
sury Forfeiture Fund not only benefit Treasury
enforcement bureaus but also the state and local
departments with whom they work and serve.

¢ The New York State Police—For years, the
State Police in New York have been supported by
their forensic laboratory in Albany. Over time the
lab’s capacity to keep up with increasing investiga-
tive demands, advancing technologies and newer
and higher standards for such facilities has been
tested. Now, thanks in part to equitable sharing
payments received from the Treasury Forfeiture
Fund, the State of New York is building a brand
new, state-of-the-art Forensic Investigation Center
that will meet all current standards for forensic
science laboratories and bring in, under one roof,
other associated disciplines to aid investigations.
Since almost half of the work of the State Police lab
serves the needs of county and municipal authori-
ties in New York, this new center will strengthen
all of the state’s criminal justice system.

* Orange County’s Regional Narcotics Suppres-
sion Program (RNSP)—A task force of over fifty
officers from twenty-one city, county and federal
agencies represents a main weapon in this Califor-
nia jurisdiction’s fight against drugs. Shared
amounts from the Treasury Forfeiture Fund have
been used not only to supplement the supply
interdiction sides of member budgets but also to
help in educating youths to resist the lure of drugs

STRENGTHENING LAW ENFORCEMENT 15


¢ In New York, undercover Customs agents posing
as representatives of Saddam Hussein's traqi govern-
ment, negotiated for over a year with three suspects
regarding obtaining zirconium, a strategic material
with various weapons applications. In June of 1995,
the three New York residents were arrested on
charges of attempting to illegally export the zirco-
nium to Iraq in violation of the Iraqi sanction regula-
tions which have been in effect since August, 1990.
It is believed that the seized zirconium. a metallic el-
ement similar to titanium and used primarily to
cover nuclear fuel in the core of a reactor, had been
stolen in the Ukraine from the reserves of the former
Soviet Union. Five tons had been brought into the
U.S. via Germany and stored in a Queens warehouse,
while two more tons had been shipped directly to
Cyprus for forwarding to Iraq. This case represented
a significant milestone in the federal government's
anti-proliferation law enforcement efforts.

¢ In 1993, the Customs resident agent-in-charge
in Lake Charles, Louisiana, began an investigation

of a company known as Smith Aviation Inc.,
which had licenses for the export of military air-
craft parts to Germany and Saudi Arabia. The
problem was that neither the governments of Ger-
many nor Saudi Arabia had ordered the parts
listed on the licenses. Working with British Cus-
toms, who had developed information that the
shipments from Smith Aviation were being di-
verted to Iran, a search warrant was executed in
the first quarter of FY 1995 which uncovered evi-
dence that the company was also making other il-
legal and unlicensed exports. Smith Aviation and a
British intermediate consignee had been exporting
the military aircraft parts to Iran through Switzer-
land. The owner of Smith Aviation has pled guilty
and agreed to provide testimony against the other
firm in British courts.

¢ Export controls have not only enforced the
United States trade embargo of Cuba but also, in
FY 1995, have thwarted several anti-Castro
planned raids and terrorist activities in that island

Stable and paddock area from the 30 acre Double D Farm in North Fort Myers, Florida, which was sold at auction in September 1995.
With access to a private air park, the property was used to smuggle an estimated 9,000 pounds of Cali Cartel cocaine into the United
States between 1986 and 1992.

DETERRING CRIMINAL ACTIVITY 5


31 U.S.C. § 9703(g)(4)(B). At the end of each fiscal
year, after reserving the Fund’s authorized retained
apital of $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) totalled $4 million in FY 1995, approximately
the same level as FY 1994. As with the Super Sur-
plus, the SEF is another one of the Fund’s perma-
nent spending authorities. The SEF is authorized
under 31 U.S.C. § 9703(b)(5) and is derived from
asset sharing revenue received from the Justice
Department or the U.S. Postal Service. Such rev-
enue represents Treasury’s share of forfeitures that
resulted from joint investigations with these depart-
ments. The SEF is available without fiscal year lim-
itation for any Treasury law enforcement purpose.

+ Equipment to Support Forfeiture Program

Expenses in this category totalled $17 million in FY
1995, an increase from the FY 1994 level of $10
million. Generally, most of these expenses are pro-
vided for under the Fund’s discretionary authority,
which authorizes equipment for federal law en-
forcement vehicles, as well as communications
equipment, protective equipment, and certain types
of laboratory equipment. Discretionary spending is
authorized by the Fund’s annual appropriation.

* Specialized Contracts

‘The Fund is authorized to pay for certain contracts
which support Treasury's forfeiture program. In FY
1995, these expenses totalled $22 million. In-
cluded in this total were the costs of the Consoli-
dated Assets Tracking System (CATS), contract
employees who help identify assets to be forfeited,
ADP systems, training, and expenses associated
with the destruction of narcotics. In FY 1994,
many of these expenses where provided for under
the Fund’s limited annual appropriation. Effective
in FY 1995, however, these kinds of contract ser-
vices were authorized from the Fund’s permanent
authority. Further, a significant portion of the in-
crease from FY 1994 to FY 1995 is associated with
prior year budgetary obligations which were liqui-
dated during FY 1995 and recognized as expenses.

Assets

A summary of the assets (in millions) of the Fund
as of September 30, 1995 is presented in the fol-
lowing table. Undistributed Funds and Fund bal-

ances with Treasury and cash totals $220 million
at September 30. 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 enforce-
ment agencies. At September 30, the Fund had in-
vestments in Treasury securities of $35 million (at
par), and accrued interest on investments of
$566,000. None of the Fund’s assets were invested
at September 30, 1994. The balance for receivables
totals $4 million at September 30 and is princi-
pally associated with sales proceeds owed from
EG&G. The value of forfeited property at Septem-
ber 30 was $30 million, a decrease of $6 million
from FY 1994. Finally, the total for seized cur-
rency at September 30, 1995 was $177 million, an
increase of $33 million from FY 1994.

END OF YEAR ASSETS OF THE FUND

($ millions)

1995 1994

Undistributed funds and fund
balances with Treasury and cash $220 $178
Investments 35 oO
Accrued Interest 1 i)
Receivables 4 1
Forfeited property (net of liens payable) 30 36
Seized currency & other investments” 177 144
Other i) 4

—_——————

Total $467 $363

* Under the Statement of Federal Financial Accounting Standards (SFFAS) Num-
ber 3, effective September 30, 1994 and thereafter, seized currency is reported at
a custodial asset upon seizure. The amount cited here represents currency held ir
the Fund’s suspense account, on hand at field office locations, or seized currency
balances invested in Treasury securities.

Liabilities and Net Position

A summary of the liabilities and net position (in
millions) of the Fund as of September 30, 1995, as
compared with September 30, 1994 is shown in
the following table. The large increase in distribu-
tions payable is principally associated with $38
million in victim restitution payments owed aris-
ing from United States v. Ken International. Rev-
enue from forfeited property is deferred until the
property is sold or transferred. When compared to
FY 1994, less forfeited property was held for sale
at September 30, which accounts for the decrease
in deferred revenue of $7 million. Accounts
payable totalled $34 million at September 30, an
increase over FY 1994 of $10 million.

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHT: ‘S 2


TREASURY
FORFEITURE
FUND

Annual Report
Fiscal Year 1995

Department of the Treasury
Washington



NOTES TO FINANCIAL STATEMENTS

Prior Period Adjustments—Continued

Details of the adjustments are as follows:

FORFEITED PROPERTY

Balance as Reported Prior Period Restated Balance
September 30, 1994 Adjustments September 30, 1994
Value Number Value Number Value Number
Currency $ 7,064,564 76 $22,847,096 (76) $29,911,660 0
Total Currency 7,064,564 76 22,847,096 (76) 29,911,660 i)
Other Monetary Instruments 1,156,880 0 817,900 0 1,974,780 0
Real Property 22,554,908 113 8,664,558 64 31,219,466 177
General Property 4,995,966 15,522 784,944 (9,801) 5,780,910 5,721
Vessels 751,220 39 225,000 (1) 976,220 38
Aircraft 725,931 14 (25,000) 0 700,931 14
Vehicles 2,502,113, 939 515,677 18 3,017,790 957
Ilegal Drugs 0 0 0 1,164 o) 1,164
Total OMI and Property 32,687,018 16,627 10,983,079 (8,556) 43,670,097 8,071
Total $39,751,582 16,703 $33,830,175 (8,632) $73,581,757 8,071

SEIZED PROPERTY

Balance as Reported Prior Period Restated Balance
September 30, 1994 Adjustments September 30, 1994
Value Number Value Number Value Number
Currency $176,091 ,493 1,573 ($32,488,913) (1,537) $143,602,580 (0)
Total Currency 176,091,493 1,573 (32,488,913) (1,537) 143,602,580 0
Other Monetary Instruments 19,294,507 0 3,507,295 0 22,801,802 0
Real Property 63,183,914 236 (477,160) 1 62,706,754 237
General Property 164,074,137 9,197 (545,811) 10,217 163,528,326 19,414
Vessels 4,132,714 115 (132,412) (5) 4,000,302 110
Aircraft 5,423,642 36 165,000 0 5,588,642 36
Vehicles 16,384,907 1,389 124,458 110 16,509,365 1,499
Mlegal Drugs 0 0 0 4,940 0 4,940
Total OMI and Property 272,493,821 10,973 2,641,370 15,263 275,135,191 26,236
Total $448,585,314 12,510 ($29,847,543) 13,726 $418.737,771 26,236

44 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


SEIZED CURRENCY SUSPENSE

ACCOUNT BALANCES—FY 95
($ thousands)

Beginning Ending 12 months
FY 95 FY 95 change in

Bureau Balance Balance account balance
Customs Service $74,289 $72,787 ($1,502)
IRS 42,198 79,869 37,671
USSS 2,766 3,998 1,232
ATF 372 1,565 1,193
Total $119,625 $158,219 $38,594

In San Diego, the U.S. Customs Service off-
loaded 24,325 pounds of cocaine wrapped in fifty
pound parcels. The Treasury Forfeiture Fund’s
national seized property management contractor
removed the perishables on board, inventoried the
contents of the vessel and arranged for the Navy
to drain and recycle its diesel fuel. The ship itself
was moved to a storage facility where it awaited
final disposition. Initial estimates had put the
value of the vessel somewhere in the neighbor-
hood of $200,000.

TARGETING THE MULTI-LEVEL
DRUG ORGANIZATION

Its membership included financiers, manufactur-
crs, cooks and first and second level distributors.
In the legitimate economy, it might have been a
purveyor of fine foods and gourmet kitchenware.
Instead, it was a violent, large scale methampheta-
mine organization, supplying this potent, addictive
stimulant in and around the City of Dallas. It was
broken up in June, 1995, after a two year investiga-
tion by agents of the Bureau of Alcohol, Tobacco
and Firearms and the Dallas Police Department.
Undercover agents and officers infiltrated the
organization setting up buys and developing the
government's case against the group’s members.

Along with 54 arrests, agents seized forty
pounds of methamphetamine, 316 pounds of mari-
juana, 19 gallons of synthesized hashish oil and
other ingredients used in the manufacture of ille-
gal narcotics. Other seized items included Yamaha
Jet Ski Watercraft, a Range Rover, a Lexus and a
Toyota 4-Runner, night vision goggles, assorted
firearms and over $40,000 in currency.

8 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


renee mete ai tec me

The 80 foot ocean-going motorsailer Tangier on the waters off Fort Lauderdale. With four staterooms accommodating eight persons
lus an additional crew’s quarters, the vessel was seized and forfeited by the Customs Service for being purchased with the proceeds

of narcotics trafficking.

A series of sham or nominee companies were
set up in the chain between Kings Motor Oil and
PetroPlus for the purpose of obscuring who was
responsible for paying federal and state taxes, A
number of Russian emigrés participated in the
scheme, using false identification, overseas bank
accounts and storefront offices to create the insulat-
ing companies. The indictment in the case included
charges of money laundering, wire fraud. tax eva-
sion, extortion and a currency reporting violation.
The government is seeking to forfeit at least $11
million based upon the money laundering charges.

RECORD DRUG BUST ON HIGH SEAS

-\ Coast Guard law enforcement detachment,
working from the U.S. Navy cruiser, Cape St.
George. seized in excess of twelve tons of cocaine
found on a Panamanian fishing vessel in July,

1995. This was the largest maritime drug seizure
ever made by U.S. law enforcement.

The Coast Guard group came upon the fishing
ship, the Nataly I, approximately 800 miles off
the Peruvian coast. The ship's Colombian crew
consented to a search of the vessel and the Coast
Guard conducted tests suggesting that cocaine
was concealed somewhere on board. The next day,
with the permission of the Government of Panama,
the ship was re-boarded and the search for drugs
began. A first sign of the formidable cache of
cocaine was discovered when waste oil was
drained from a storage tank revealing a hidden
compartment. Upon finding the contraband, the
Government of Panama authorized arrest of the
crew and their removal to the United States for
prosecution. The Nataly I was then brought to San
Diego at the end of a Coast Guard towline.

DETERRING CRIMINAL ACTIVITY


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Treasury Forfeiture Fund
Statement of Financial Position

September 30, 1995 and 1994
(Dollars in thousands)

Assets
1995 1994
Entity Assets:
Undistributed funds with Treasury and cash $220,417 $178,320
Investments (note 4) 34,646 0
Accrued interest (note 4) 566 0
Receivables:
Federal 2,086 626
Non-Federal 1,766 38
3,852 664
Investigative and travel advances 0 3,573
Prepaid expenses 487 600
Forfeited Property (note 5):
Held for sale 30,187 37,091
To be shared with federal, state or local, or foreign governments 2,228 1,601
Allowances for mortgages and claims (2,770) (2,363)
29,645 36,329
Total entity assets 289,613 219,486
Non-Entity Assets:
Seized currency
Cash 91,307 143,603
Investments (note 4) 85,814 0
Total Seized Currency (note 6) 177,121 143,603
Total non-entity assets 177,121 143,603
Total Assets $466,734 $363,089

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

28 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


Gardiner, Kamya & Associates, PC.

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

Fax: 202 857-1778

Independent Auditor's Report on Compliance

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

We have audited the financial statement of the Department of the Treasury Forfeiture Fund
(the Fund) as of and for the year ended September 30, 1995, and have issued our report
thereon dated February 23, 1996.

We conducted our audit in accordance with generally accepted auditing standards; Govern-
ment 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.

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 fi-
nancial statements are free of material misstatements, we performed tests of the Fund’s com-
pliance with certain provisions of laws and regulations that may directly affect the financial
statements, including the following.

* Budget Accounting Procedures Act of 1950
* Anti-Deficiency Act, Federal Manager's Financial Integrity Act of 1982 (FMFIA),
Prompt Payment Act, and Chief Financial Officers Act of 1990

¢ Treasury Forfeiture Fund Act of 1992. Anti-Drug Abuse Act

¢ Trade and Traffic Act

* 19 USC 1300 Series

* 19 USC 1500 Series

* 19 USC 1600 Series

* 18 USC 981, 21 USC 881

* 31 USC 9703. Customs and Trade Act

* Comprehensive Crime Control Act

* Title VI sections 670 and 685 of the North American Free Trade Agreement
Implementation Act

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

* Section 112 of the Treasury/Postal Appropriations Bill and Title II of the Health
and Human Services Appropriations Bill

Member of the American Institute of Certified Public Accountants


Vorfeiture Fund as of September 30, 1995, and the results of its operations and changes in net position and
its cash flows for the year then ended, on the basis of accounting described in note 2.

In accordance with the OMB Bulletin 94-01 which defines the form and content of financial statements to
be used by executive departments and agencies, the Treasury Department requested and received a waiver
{rom the OMB for all Treasury organizations preparing the statement of budgetary resources and actual ex-
penses, beginning fiscal year 1995. Accordingly, the Fund did not include the statement of budgetary re-
sources and actual expenses in its fiscal year 1995 financial statements.

In accordance with Government Auditing Standards, we have also issued a report dated February 23, 1996
on our Consideration of the Fund’s internal control structure and a report dated February 23, 1996 on its
compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the financial statements referred to in
the first paragraph of this report taken as a whole. The information presented in management’s Overview
of the Department of the Treasury Forfeiture Fund and the Supplemental Financial and Management Infor-
mation sections is not a required part of the financial statements but is supplementary information re-
quired 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 audit 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.

Marder, Harn? haere eG,

February 23, 1996


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Asset Sharing Summarized by State and U.S. Territories
For the year ended September 30, 1995
(Dollars in thousands)
(Unaudited)

State Currency Value Property Value
Alabama $ 151 0
Alaska 57 0
Arizona 940 2,264
Arkansas 52 0
California 12,274 364
Colorado 491 1
Connecticut 58 e)
D.C., Washington 149 0
Delaware 30 te)
Florida 13,657 446
Georgia 437 34
Hawaii 25 4
Idaho 30 4
Minos 2,535 15
Indiana 35 20
lowa 367 18
Kansas 16 O
Kentucky 58 4
Louisiana 70 13
Maryland 17 9
Massachusetts 164 40
Michigan 1,164 7
Minnesota 186 is)
Mississippi 743 35,
Missouri 116 3
Montana 65 1
Nebraska 63 le)
Nevada 18 it)
New Jersey 3,948 15
New Hampshire 74 0
New Mexico 4 49
New York 10,400 108
North Carolina 537 53
North Dakota 12 oO
Ohio 1,205 27
Oklahoma 9 te)
Oregon 117 i)
Pennsylvania 81 0
Puerto Rico te) 60
Rhode Island 326 0
South Carolina 20 0
South Dakota i) i?)
Tennessee 209 )
Texas 11,402 325
Utah 20 ie}
Vermont 3 0
Virgin Islands 0 2
Virginia 451 46
Washington 121 7
West Virginia 50 0
Wisconsin 18 20
Wyoming 0 i+)
Total *$ 62,973 *$ 4,027

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 statements of the Department of the Treasury Forfeiture Fund. Information
in this schedule represents assets physically transferred during the year and therefore does not agree with total assets shared with state and local agencies
in the financial statements. In addition, the above numbers do not include the adjustment to present property distributed at net realizable value.

* Detail may not add to total due to rounding.

66 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


CHAPTER 2:

DETERRING CRIMINAL ACTIVITY

T. IE REACH OF TREASURY LAW ENFORCEMENT IS EX-
‘TENSIVE. PRESERVING ‘THE INTEGRITY OF OUR NATIONAL
borders, attacking drug and firearms trafficking,
safeguarding our currency, pursuing tax and bank-
ing fraud, are just some of the more prominent re-
sponsibilities of the Department's law enforcement
personnel. Since the Department of the Treasury
is at the center of our government's financial
operations, its related enforcement authorities
have tended to evolve around the flows of value in
our market economy, especially those flows of
value that involve the national or international
economy. Whether they derive from the tax cen-
tered authorities of the Internal Revenue Service,
the Customs Service and the Bureau of Alcohol,
Tobacco and Firearms or the original and still piv-
otal responsibility of the Secret Service to ensure
public confidence in our medium of exchange, the
daily operations of Treasury law enforcement are
important to the smooth and proper functioning of
the economic life of the United States.

This fundamental relationship between the
Department's enforcement organizations and Trea-
sury’s key role in the national economy has resulted

FORFEITURE FUND RECEIPTS—FY 93-95
($ millions)

$300
$271.7

$250 |~
$200 [~ $184.3
$168.1

$150 [~

$100 [~

al

so FY 93 FY 94 FY 95,

in wide-ranging law cnforcement responsibilities
since the allure of easy and substantial profit has
always been a primary criminal motivator. Aside
from crimes of passion, profit is usually the goal,
and always the lifeblood, of most criminal enter-
prise. Keeping that profit out of the economy and
taking it away from those who have disregarded our
tule of law has always been a basic aim of Trea-
sury’s asset forfeiture program. As such. it seeks at
the federal level to deter profit motivated criminal
behavior that undermines the legitimate operations
of our market economy. During fiscal year 1995,
seizure and forfeiture activities accompanied and
supported the reach of Treasury law enforcement in
a broad variety of areas.

OPERATION EXODUS—A PROGRAM
IN EXPORT CONTROL

To most United States citizens, experience with
the Customs Service has involved clearing cus-
toms upon return from a trip abroad and answer-
ing the question whether or not one has anything
to declare. This concern with regulating the impor-
tation of goods into the U.S. is certainly one of the
principal and traditional tasks of the U.S. Customs
Service but imports are only one part of the inter-
national trade equation. Operation Exodus is the
Customs Service effort to address its responsibili-
ties on the export side of the trade ledger—to
prevent illegal exports and/or the diversion of
controlled commodities.

Exodus has been a Customs operation since
October of 1981 and FY 1995 marked a particularly
successful year in terms of the results achieved.
During the fiscal year, there were a total of 273
arrests made for export violations, the second high-
est arrest total since the beginning of the program.
Also, during FY 1995, Operation Exodus saw over
$46 million in seizures, with the average seizure
being valued at just over $100,000. Some of the
highlights of Operation Exodus accomplishments
in FY 1995 involved the following cases:

4 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


CHAPTER 5:

PROGRAM PERFORMANCE AND FINANCIAL HIGHLIGHTS

PROGRAM PERFORMANCE

Th FY 95, the Fund developed and put into place
performance measures to monitor major seizure
and forfeiture operations. In FY 95, these measures
were: (1) monitoring the processing time for equi-
table sharing payments; (2) measuring the time for
disposing of forfeited property; (3) calculating
maintenance costs of sold assets; and (4) monitor-
ing administrative seizure cases greater than nine
months. (For the performance measures presented
in this section, no comparison data are available
for FY 1994, since a system had not yet been de-
veloped to track this information.)

Processing Time for Equitable Sharing
Payments

Equitable sharing of Fund revenue is one of the
most visible operations of the Executive Office

for Asset Forfeiture (EOAF). State and local law
enforcement agencies derive a valuable benefit from
equitable sharing proceeds which assists them in
ongoing operations to combat drug trafficking and
violent crime. In FY 1995, the average time between
forfeiture and the issuance of an asset sharing check
was approximately 8 months. The EOAF manage-
ment believes this time interval can be shortened
significantly. Much of the delay is associated with
an elaborate approval process within some bureaus,
before a request to process an asset sharing check
reaches the Fund. EOAF plans to work with the
bureaus during FY 1996 in an effort to speed the
processing of these important payments.

The Average Time Between Forfeiture and
Disposal of Real Property

The timely processing of forfeited assets through
auction is deemed significant because of the need
to reduce maintenance, storage, and holding costs
of assets in inventory. Due to the large number of
assets in the forfeited inventory (over 7,000 items),
Fund management decided to focus initially on a
class of high value assets — real property. During

FY 1995, the average time between forfeiture and
disposal of real property was 7 months. Given the
complex nature of these transactions, this interval
seems reasonable. However, the Fund management
will be working to identify ways of improving this
performance during FY 1996.

Maintenance Costs of Assets Sold as a
Percent of Sales Revenue

Fund management is concerned that maintenance
costs for property held in inventory be kept as low
as possible, without jeopardizing the value of
property prior to sale. In FY 1995, maintenance
costs incurred by the seized property contractor as
a percentage of gross sales revenue was only about
0.7 percent. This ratio of maintenance costs to
sales is in an appropriate range. (This statistic does
not include salaries and other property mainte-
nance costs which may be expended by individual
bureaus before the property is consigned to EG&G.)

Age of Administrative Seizure Inventory

To ensure that revenue is collected timely, as well
as protect the due process rights of citizens, a goal
of the forfeiture program is to process administra-
tive cases quickly. A standard established by the
Fund for the timely completion of administrative
cases was 9 months for the Customs Service and 6
months for all other enforcement bureaus. On this
basis, during FY 1995 approximately 49 percent *
of Treasury cases could not meet the standard estab-
lished by the Fund. However, about three-fourths
of these items were ATF cases, principally associ-
ated with illegal weapons. When ATF is factored
out, only 23 percent of administrative cases could
not meet the Fund’s timeliness standard.

‘ EOAF Directive 26 outlines the procedures for calculating
these data. IRS does not report to EOAF the detailed explana-
tions associated with each administrative case taking longer
than six months to resolve. IRS data are included in the sum-
mary statistics reported here, but even if these data were
excluded, the percentages reported would not change.

18 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


trols be established to provide reasonable assurances that revenues and expenditures applicable to agency
operations are properly recorded and accounted for to permit the preparation of accounts and reliable fi-
nancial and statistical reports and to maintain accountability over the assets.

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 Trea-
sury investigative 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 accounts and the lack of interface between the relevant sub-
sidiary systems and the general ledger increases the likelihood of not capturing all transactions related to
the Fund. 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 have been informed that the lack of automatic interfaces between the general ledger and subsidiary
systems will be corrected via the subsequent implementation of the SEACATS inventory systems. How-
ever, until the interfaces are operational, and to maintain control and an understanding of the Fund’s oper-
ational results, we recommend that a separate trial balance be utilized to track all Fund related activity for
the production of monthly financial statements. When the SEACATS system and general ledger interfaces
are complete, the trial balance can be compared to the financial statements produced from the enhanced
general ledger system to verify its completeness.

FORFEITED PROPERTY

CONDITION

The Fund currently does not record forfeited property and related deferred revenue in the general ledger. In
addition, the Fund does not record seized currency and the related liability in the general ledger. The inven-
tory data obtained from each of the inventory systems for input in the general ledger is often not updated.

CRITERIA

The OMB issued Statement of Federal Financial Accounting Standards Number 3 (SFFAS No. 3) requiring
that seized monetary instruments be recognized as assets when seized and a liability established in an
amount equal to the seized asset value. Upon forfeiture, seized monetary instruments shall be reclassified
to forfeited and revenue recognized. In addition, other forfeited property (intangible, real and tangible
property) shall be recorded with an offsetting deferred revenue when forfeiture judgement is obtained. To
properly monitor and analyze Fund activity, seized currency and forfeited property should be recorded in
the general ledger at the time of seizure and forfeiture.

CAUSE

The inventory tracking systems utilized by the participating bureaus do not interface with the Fund’s gen-
eral ledger. As a result, inventory data from these inventory tracking systems are manually entered into the
general ledger by journal entries only at year end. Information sent to the Accounting Services Division
(ASD) is often late and not updated because the inventory systems of each bureau are not timely updated

56 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


RECOMMENDATION

For inventory tracking and financial reporting purposes, we recommend that the Fund’s management, as
was done in previous financial statements, assign a zero value to forfeited property that will ultimately be
destroyed. In addition, 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 perform-
ing an appraisal at the date of forfeiture. We also recommend that the Fund’s management continue re-
viewing the methodology used to arrive at fair market value to refine its accuracy and ease in preparation.
‘\s the process is refined, it will become easier to prepare the monthly analysis to properly value and
record month-end forfeited property balances.

PERFORMANCE INDICATORS

CONDITION

Performance indicators are assessments (both quantitative and qualitative) intended to help show how the
Fund is accomplishing its mission through the delivery of services or processes. Performance indicators are
derived from articulating the Fund’s mission; developing and refining objectives, targets, goals, and bench-
marks; and measuring actual performance against objectives, targets, goals, and benchmarks. The Fund’s 1995
mission statement included in the Overview section does not specifically identify the Fund’s objectives, tar-
gets, goals, and benchmarks. During fiscal year 1995, the Fund developed and reported on four performance
indicators. However, these indicators are not all inclusive of the Fund’s mission, goals, and objectives.

CRITERIA

OMB Bulletin No. 94-01, “Form and Content of Agency Financial Statements” requires the inclusion of
performance indicators in the Overview section of the annual financial statements. These indicators
should provide meaningful information with respect to the Fund’s accomplishment of its mission, goals,
and objectives.

CAUSE

The Fund has not fully identified, developed and implemented performance indicators that are all-inclu-
sive and essential in measuring its performance in achieving its mission, goals, and objectives based on its
enabling legislation.

EFFECT

The lack of feedback on the Fund’s performance inhibits management's ability to assess its achievement
of its mission, goals, and objectives.

RECOMMENDATION

We recommend that the Fund identify, develop and implement additional performance indicators that are
specific to the goals and objectives of the Fund. In addition, policies and procedures should be imple-
mented to accumulate, report and measure performance indicators on a routine (e.g. monthly) and consis-
tent basis.

64 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


NOTES TO FINANCIAL STATEMENTS

Allowable Fund Expenses—Continued

Further, the Fund is a component unit of Treasury and as such, employees of Treasury perform
certain operational and administrative tasks related to the Fund. Payroll cost of employees directly
involved in the security and maintenance of forfeited property are included in the financial state-
ments of the Fund.

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 asset is
ultimately destroyed, such as counterfeit property.

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 partici-
pating 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 re-
ceived or services are performed.

As provided for in the Act, the Fund has invested seized and forfeited currency. Treasury’s Finan-
cial Management Service invests the funds in obligations of, or guaranteed by, the United States
government. Interest is reported to the Fund and recognized monthly on the general ledger.

Transactions with Office of National Drug Control Policy

At the end of fiscal year 1995, 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 Secretary of the Treasury is authorized to retain in the Fund up to $50 million
of the unobligated balance of the Fund, or, if the Secretary determines a greater amount is necessary
for asset specific expenses, an amount equal to not more than 10 percent of the total obligations
from the Fund in the preceding fiscal year (authorized retained capital). The Omnibus Crime Con-
trol Act of 1994 requires the transfer of one half of all excess unobligated balances, up to $100 mil-
lion dollars, to the ONDCP Special Forfeiture Fund. The remaining excess unobligated balances are
retained in the Fund. Liabilities of approximately $21.9 million and $3.8 million to the ONDCP
Special Forfeiture fund for fiscal years 1995 and 1994 respectively have been recognized in the ac-
companying Statements of Financial Position.

Assets Distributed

Forfeited property, currency or proceeds from the sales of forfeited property may be shared with federal,
state and local law enforcement agencies or foreign governments which provide direct or indirect assis-
tance in the related seizure. In addition, the Fund may transfer forfeited property to other federal agen-
cies which would benefit from the use of the item. Upon proper approval to share or transfer the asset,
both revenue from distributed forfeited assets and distributions (allocations of revenue) are recognized
for the net realizable value of the asset to be shared or transferred, thereby resulting in no gain or loss
recognized. In prior years, the individual bureaus participating in the Fund had authority to approve
asset distribution payments and therefore a liability was recognized when it was determined that
bureau approval was given. In fiscal year 1995, EOAF established procedures where no obligations of
or payments from the Fund could be made without review and approval from EOAF management.
Beginning fiscal year 1995, liabilities are recognized when final EOAF approval for payment is given.
Beginning fiscal year 1995, a new class of asset distribution was established for victim restitution.
This distribution includes property and cash returned to victims of fraud and other illegal activity.

NOTES TO FINANCIAL STATEMENTS 35


NOTES TO FINANCIAL STATEMENTS

Tax Status

The Fund, as part of a federal agency, is not subject to federal, state or local taxes.

Reclassifications

During fiscal year 1995, the Fund’s management determined that payments received in lieu of
forfeiture collected against currency cases is more appropriately reported as currency forfeitures.
Unliquidated obligations of the fund have been classified and reported as discretionary. non-dis-
cretionary asset sharing, and other non-discretionary. Contractor and sales expenses for the current
year include only the expenses of the national seized property management contract. Other
non—discretionary contractor expenses charged to the Fund are reported as specialized contract
services. The accompanying financial statements of the fund for 1994 have been restated to be com-
parable to 1995's presentation.

Entity Assets and Liabilities

Entity assets are used to conduct the operations and activities of the Fund. Entity assets consist

of cash or other assets which could readily be converted into cash to meet the Fund’s current or
future operational needs, investments, receivables, and forfeited property which is held for sale or
to be distributed.

« Undistributed Funds with Treasury and Cash — Undistributed funds with Treasury and cash rep-
resents monies, including forfeited cash not deposited. Forfeited cash held as evidence amounted
to $12,635,267 and $7,064,564 at September 30, 1995 and 1994, respectively.

© Receivables — Federal receivables principally represent monies due from the Justice Assets
Forfeiture Fund. This includes asset sharing income from Justice cases which included Trea-
sury’s participation, as well as interest due on asset sharing income that was not delivered to
the Treasury Forfeiture Fund at year end. The values reported for non—federal receivables is
primarily associated with funds owed from EG&G Dynatrend.

+ Investigative and Travel Advances — Investigative and travel advances include monies advanced
to agents for use in conducting investigative operations and payments to informants. An expense
is recognized in the Fund when the payment to the informant or purchase of evidence is made.
Beginning fiscal year 1994 the fund discontinued the practice of directly advancing monies for
investigative purposes. All investigative advances are made by participating bureaus. In fiscal year
94, investigative advances issued by U.S. Customs for expenditures which would eventually be
reimbursed by the Fund were included in the balances of investigative and travel advances.

¢ Prepaid Expenses — In some instances, mortgages and other claims are paid in advance of the
actual forfeiture date, as required by court order. 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, properties are adjusted to reflect the
current fair market value at September 30. Direct and indirect holding costs are not capitalized
for individual forfeited assets. Forfeited currency is reflected as funds with Treasury in the
accompanying Statement of Financial Position.

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

36

TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


ACCOUNTING RECORDS ARE MAINTAINED ON A CASH BASIS

CONDITION

The Treasury Forfeiture Fund’s (Fund) general ledger as well as each bureau’s supporting system are main-
tained primarily on a cash basis. In addition, these supporting computer systems maintained by each bu-
reau 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 agency 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 are recognized when the underlying goods are received or the services
have been performed. Furthermore, during the fiscal year, reimbursement requests were not sub-
mitted regularly and on a timely basis. In the day-to-day operations, the Fund generally incurs two
types of expenses, direct payments and reimbursements. Under the Memorandum of Understand-
ing (MOU) between the Fund’s participating agencies and the Treasury Departmental Offices re-
garding the Fund, the agencies are required to incur certain types of expenses related to the Fund’s
activities and subsequently request reimbursement from the Fund. Expenses paid directly from the
Fund include payments of mortgage and liens, refunds, remission and mitigation claims, claims of
parties in interest, national contractor storage, equitable asset sharing, and joint operations. All
other expenses incurred related to the Fund’s activities are submitted for payment through a reim-
bursement request. Types of reimbursable expenses include purchase of information and evidence,
equipment, rent and contracting services.

Mortgages and Claims Payable—Property that is seized in anticipation of forfeiture may have secu-
rity interests, such as liens, property taxes, and mortgages. The seizing officer or agent is responsi-

ble for identifying the existence of a mortgage or claim at the time of seizure through inquiry of the
violator and/or title search. When the seizure is made as a result of an ongoing investigation, a title
search should be performed before the seizure. In addition, during forfeiture proceedings, a public

notice is issued through newspapers indicating that the property has been seized and notifying any
lien holder to file a claim/petition with the proper agency for any outstanding claims or mortgages.

Subsequent to forfeiture and the sale of the property, the Fund is responsible for paying all security
interests attached to the property in accordance with Treasury Guidelines for Seized and Forfeited
Property which prescribe that liens and mortgages be satisfied after the sale of forfeited property.
Payment of the liens may be made from the Fund prior to sale if: the payment prior to sale or other
disposition will improve the United States’ ability to convey title to the property; the United States
has substantial equity in forfeited real property and payment prior to sale will not result in a net
loss to the United States; or the property is approved for placement into official use by an investiga-
tive agency and all necessary approvals have been obtained. The payment of the liens and mort-
gages related to real property, as prescribed by Title 31 USCS Section 9703 (a)(1)(D), cannot exceed
the value of the property at the time of the seizure.

Throughout the year, the Fund records the lien expenses as approvals for the payment of liens and
mortgages that are received from EOAF. At year end, a list of open liens is received from each bu-
reau and a liability is created to accrue the liens and mortgages payable on forfeited property.

Forfeited Currency—When USCS seizes currency, it is retained in a secured area, such as sealed
evidence bags in a vault, at the district office or in a bank safe deposit box. When the currency is
declared to be non-evidentiary, the currency is deposited into a U.S. Treasury general bank account
and recorded in a suspense account in a USCS’ fund. Subsequently, the currency is either adminis-
tratively or judicially declared to be forfeited. Administrative forfeiture occurs when agencies use

52

TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


cators developed and implemented include those
cited earlier in this chapter.

+ Internal Control Improvements

In addition to addressing several of the material
weaknesses cited by the Fund’s auditors, Fund
management also made significant improvements
in FY 1995 to internal control procedures, sys-
tems, and organizational arrangements which
affect Fund operations. Management of the Fund
was reorganized in January 1995 from two offices
which reported to different Treasury officials, to
one office reporting to the Under Secretary for
Enforcement. Further, during FY 1995, the Fund’s
managers issued new financial management dele-
gations regarding the obligation and certification
of Funds and developed a new Financial Opera-
tions and Processes Manual. In addition, during
FY 1995, the Fund worked closely with each
bureau to ensure their ability to reconcile and
track property inventories and provide sufficient
documentation to support SFFAS requirements.
Finally, the Management Letter prepared by the
independent auditors, based on their FY 1994
audit, contained 32 recommendations to improve

Fund operations. The Fund management reviewed
and considered each recommendation.

* FY 1995 Audit

The Fund’s independent auditors have given the
FY 1995 financial statements an unqualified opin-
ion. This is a significant improvement from the
qualified opinion received by the Fund in FY 1994,
and is based, in large measure, on the several finan-
cial management improvements undertaken by the
Fund during FY 1995. Notwithstanding these con-
siderable efforts, however, the accompanying Inde-
pendent Auditor’s Report on Internal Control
details some material weaknesses in the Fund’s in-
ternal control structure that existed during FY 1995.
These weaknesses are principally related to the
accounting and inventory tracking systems which
support Fund operations and are maintained by the
U.S. Customs Service. These weaknesses have been
identified in past audit reports, and Fund manage-
ment is well aware of these issues and hopes to
make yet further improvements during FY 1996 to
correct these material weaknesseses. The imple-
mentation of SEACATS should do much to correct
or mitigate many of the weaknesses cited in the FY
1995 audit report.

24 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


turned 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 USCS 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.

We understand procedures for updating SCTS are contained in the USCS Seized Property Handbook.
We recommend that the procedures be followed, In the future, when the timeliness of the updating of
the status of the data in SCTS is improved, a systems interface between SCTS and the general ledger
should be considered to automatically update forfeited currency receivable and revenue on the gen-
eral ledger when a change in status from seized to forfeited is input to SCTS. With such modifica-
tions, SCTS could also provide supporting detail for the revenue balance on the general ledger.

While it may be less efficient, an alternative method to implement these recommendations is to re-

quire, at each month end, each district coordinator to submit a signed letter to the appropriate indi-
vidual 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 proce-
dures to ensure the recordation of property distributed to federal, state, and local agencies or for-
eign countries during the fiscal year. The procedures may require that each Treasury investigative
bureau submit, on a monthly basis, a list of all property distributed to federal, state, and local agen-
cies 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 weeks 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 cost, 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 agencies
be reminded of the importance of properly following the year-end procedures. We also recommend the
procedures be again reviewed with the agencies to identify any possible misunderstandings or refinements
to the procedures.

GENERAL LEDGER

CONDITION

The Asset Information Management System (AIMS), that is the general ledger system maintained by USCS,
processes, groups and summarizes transactions into account balances for all USCS funds and the Fund.
The general ledger currently is not utilized to track all balances and transactions that comprise the Fund,
such as accounts receivable, liens and mortgages payable, forfeited property and seized currency, which
are tracked by separate systems not directly interfaced with the general ledger. Rather, information is iden-
tified and captured manually 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 con-

INDEPENDENT AUDITOR'S EXHIBIT I 55


SUPPLEMENTAL SCHEDULES



Treasury Forfeiture Fund
Annual Report
Fiscal Year 1995

Table of Contents

Section I: Overview
Chapter 1

Safeguarding Individual Rights... .. 20.00.00 00.0 ccc cc ccceceeeee

Chapter 2

Deterring Criminal Activity... 2.0.00... e eee eee

Chapter 3

Fostering Law Enforcement Cooperation................0.0..0000-.

Chapter 4

Strengthening Law Enforcement ...........0.0.0 ccc cece cceceeeeee

Chapter 5

Program Performance and Financial Highlights ..............0..00..,

Section II: Financial Statements

Independent Auditor's Report on Financial Statements...................

Financial Statements:

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

Independent Auditor's Report on Compliance...................000.0,

Exhibit I

Material Weaknesses. .... 200... 2... eee ee

Exhibit II

Reportable Conditions... ...........000... 00. c eee ee,

14

18

26

28
30
31
32
33

45
47

51

59

65


(10)

(11)

(12)

NOTES TO FINANCIAL STATEMENTS

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 cur-
rency 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.

In 1994, EG&G Dynatrend was engaged, through their contract with Customs, to dispose of the prop-
erty through auction. ‘As of the end of fiscal year 1995, net sales proceeds were $54 million, net cur-
rency forfeiture proceeds were $2 million, and other revenues were $3 million. Expenses incurred,
including a $38 million accural made at year-end to pay victims of fraud, were $53 million.

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 fund balances after the reservation of $50 million and unliquidated
obligations for law enforcement activities of any Federal agency.

Secretary’s Enforcement Fund

31 USC 9703 (b)(5) allows for expenditures for law enforcement related purposes of the Department
of Treasury law enforcement organizations from amounts transferred by the Attorney General or the
Postmaster General. Monies are transferred to the Fund when Treasury law enforcement organiza-
tions participate in law enforcement actions resulting in the seizure and forfeiture of assets.

Prior Period Adjustments

Certain adjustments were made in the current year to restate the beginning balances of seized and
forfeited property and currency. These adjustments were for corrections to prior year balances,
adjustments to the beginning property classifications, and conversion from quantities reported in
recorded units of measure to number of seizure case records. Also, sales revenue recorded in the
current year was determined to be earned in the prior year. Adjustments were also made to reduce
previously recorded liabilities for mortgages and claims on forfeited property which were subse-
quently determined to be invalid. The effect of the adjustments on excess of net revenues and fi-
nancing sources over total expenditures for fiscal year 1995 is as follows:

Dollars in thousands

Effect on excess of net revenues and financing sources over
total operating expenses for:

Forfeited property and currency $14,377
Sales revenue 1,458
Mortgages and claims 299
Other 4
Total $16,138
—_—_—

NOTES TO FINANCIAL STATEMENTS 43


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DEPARTMENT OF THE TREASURY FORFEITURE FUND

Analysis of Revenues and Expenses and Distributions
For the year ended September 30, 1995
(Dollars in thousands)

(Unaudited)
Expenses and
Revenues and expenses and distributions by asset category: Revenues Distributions
Vehicles $ 6,109 $ 21,346
Vessels 2,971 27,165
Aircraft 832 8,772
General Property 6,634 85,515
Real Property 82,471 3,406
Currency and monetary instruments 161,697 64,078
260,714 210,282
Less:
Mortgages and claims (4,789) (4,789)
Refunds (4,423) (4,423)
Add:
Allocation of revenue to ONDCP Special 0 21,922
Forfeiture Fund
Excess of net revenues and financing sources 0 28,510
over total operating expenses
$251,502 $251,502
Expenses and
Revenues and expenses and distributions by type of disposition: Revenues Distributions
Sales of property and forfeited currency $134,581 $ 11,065
and monetary instruments
Reimbursed storage costs 2,807 2,807
Placed into official use of other Customs funds 38,441 38,441
Assets shared with state and local agencies 58,100 61,328
Destructions ie) 20,663
Cancellations (including payments in lieu of forfeiture) 11,073 4,980
Assets shared with other federal agencies 8,393 9,764
Assets shared with other foreign countries 7,319 7,319
Pending disposition ie) 53,915
260,714 210,282
Less:
Mortgages and claims (4,789) (4,789)
Refunds (4,423) (4,423)
Add:
Allocation of revenue to ONDCP Special ie} 21,922
Forfeiture Fund
Excess of net revenues and financing sources (¢) 28,510

over total operating expenses
$251,502 $251,502

This supplemental schedule “Analysis of Revenues and 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 main-
tains revenues and expenses by each seizure for property held at the contractor. The percentages of revenues and expenses from this system were
applied to revenues and expenses and distributions as reflected in the Statement of Operations. Because the Fund does not have a cost accounting
system, the method used does not provide reliable information in the analysis of revenues 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.

68 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


implicated in narcotics and weapons trafficking,
murder and money laundering. The agent enrolled
cooperating informants, corroborated their infor-
mation and supervised an undercover operation.
Not long after the investigation began, the exper-
tise of the Criminal Investigation Division of IRS
was called in to show how the target laundered
money by purchasing real estate and prized
lottery tickets.

By the end of 1994, property with an aggregate
value of more than $2 million had been seized in-
cluding bank accounts, certificates of deposit, resi-
dential properties, a 140 acre farm, 125 head of
cattle and about an equal number of fighting game
cocks. IRS lent the financial analysis that sup-
ported the seizures for violations of federal money
laundering statutes. The efficient division of labor
between the Commonwealth’s enforcement agency
and the IRS Criminal Investigation Division with
its authorities and specialized skills has been ac-

knowledged in this instance by the approval of a
70 percent share of the net proceeds of forfeiture
for Puerto Rico’s Special Investigation Bureau.

TRAFFICKING FOOD STAMPS
ALONG THE GULF COAST

.\s FY 1995 drew to a close, Secret Service agents
from the Mobile, Birmingham, Jackson and New
Orleans offices arrested twelve Vietnamese store
owners and their employees on food stamp fraud
and related money laundering charges. The inves-
tigation had begun about a year and a half earlier
when it was noted that certain stores in the
Pensacola area were redeeming food stamps in
amounts large enough to cover anywhere from 95
to 120 percent of their food sales. In these types
of discounting operations, food stamps are
exchanged for cash, usually at a mere fraction of
their value. When undercover agents started sell-

FY 95 Asset Sharing National Summary

FY 1995 Legend
JMB = greater than $5 million
iD) ] = between $1 million-$5 million
aj] = between $100,00-$999,999
(5 = between $0-$99,000

FOSTERING LAW ENFORCEMENT COOPERATION 11



system has not been implemented. The 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 unavail-
ability of 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, to comply with the requirements of SFFAS No. 1 and to improve financial information
on which daily decisions are based, we recommend that the following specified procedures be imple-
mented to properly account for transactions on the accrual basis of accounting throughout the year.

Accounts Payable and Accrued Liabilities—Each agency 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 the agencies,
but not yet paid by the Fund should be accrued as liabilities at each month end. Also, any direct pay-
ment requests which have been received but not paid at month end should be accrued as liabilities.

Mortgages 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 li-
ability 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 paper-
work authorizing the obligation and disbursement of funds which is then to be forwarded to ASD
for processing, Also, the directive requires ASD to disburse the approved payments within 14 cal-
endar 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 ac-
counting strip is received allowing recordation of a liability only for claims and mortgages that
have been approved for payment. Therefore, we recommend that EOAF approve the accrual of the
liens and mortgages upon forfeiture of the property to enable ASD to record the liability at the time
the asset is forfeited. We also recommend that deferred revenue be reduced at the time of forfeiture
for the amount of the claim against the property because the liability reduces the net amount of rev-
enue which will ultimately be realized through the sale of the asset; and accordingly that monthly
procedures should be established in order to record the liability.

Forfeited Currency—ASD performed a reconciliation of forfeited currency between the revenue
recorded in ACS and the forfeited currency balance reported in the “Analysis of Change in For-
feited Property” schedule required by the Statement of Federal Financial Accounting Standards No.
3 (SFFAS No. 3). 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 the SFFAS No.3, we recommend that forfeited currency be recognized as rev-

enue at the time of forfeiture. The SCTS is designed to account for USCS seized currency from the
point of seizure (at which time it is recorded in a USCS Fund) until the seized currency is either re-

54 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


Certain adjustments were required to be made to CPTS inventory balances in order to prepare a fair pre-
sentation of the SFFAS No. 3 exhibits, For example, adjustments resulting from the audit of the 1994 fi-
nancial statements had not been recorded in CPTS. Other adjustments made to the beginning balance of
inventory by USCS’ staff were not adequately investigated to ensure propriety of presentation in the
SFFAS No. 3 exhibits. As a result, the Fund performed reconciliations between the 1994 audited financia
statements, CPTS and the outside contractor's system, SPMS, to prepare the SFFAS No. 3 exhibits,

CPTS could not be used to perform the required reconciliation between seized currency and deposits to
the USCS suspense account, or the reconciliation between forfeited currency and deposits to the Fund.
Consequently, manual reconciliations were performed to produce the SFFAS No. 3 exhibits.

Bureau of Alcohol, Tobacco and Firearms—In order to produce the SFFAS No. 3 exhibits, ATF printed a va
riety of standard reports and manually manipulated them to meet the reporting requirements, ATF’s system
Consolidated Asset Tracking System (CATS) could not be used to perform the required reconciliation be-
tween seized currency and deposits to the USCS Suspense account, or the reconciliation between forfeited
currency and deposits to the Fund. ATF manually reconciled this information based on printed reports.

The CATS system was unable to produce reports that listed the fiscal year 1995 ending balance of seized
property or the fiscal year 1995 ending balance of forfeited property that had not been deposited into the
Fund. These reports were produced manually by ATF. There were no reports available that would allow
ATF to segregate assets being held as judicial evidence for a court exhibit. These items were determined by
reviewing individual case files and reconciling them against the CATS reports.

It is a requirement of CATS that an appraised value be entered for all seized assets, Therefore, ATF entered
appraised values for firearms, explosives and other prohibited items. However, the Treasury Department’s
Accounting Policy for Seized and Forfeited Property requires that these items be valued at zero for finan-

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. How-

United States Secret Service—The USSS’ tracking system, ATS, does not provide historical data on cases
which have had subsequent activity. For example, if the USSS 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 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 Septem-
ber 30. In essence, ATS produces Teports as of the request date. As a result, to produce the SFFAS No. 3 ex-
hibits, the USSS staff compared two or more schedules and made significant manual adjustments to com-
plete 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 inventory systems of the Treasury law enforcement agencies do not contain the same data fields and
the information may be defined differently in the four systems. As a result, the TFF was not able to present
information such as lien or mortgage information, nor was the TFF able to use a quantity other than
seizure line items in the analyses of changes in seized and forfeited property.

INDEPENDENT AUDITOR'S EXHIBIT v4 61


addition of architect Emery Roth’s 400 foot high
tower, bringing what critics considered skyscraper
sophistication to a hotel outside Manhattan. By
the end of August, 1995, the St. George along with
the remnants of its 11,000 sq. ft. and three story
high ballroom, a paean to Jazz Age stylishness,
was seriously damaged from one of the largest
fires in New York City history. The fire itself had
gone to eighteen alarms and required hundreds

of pieces of equipment to bring it under control.
Again, ATF along with city police and fire mar-
shals worked around the clock on the fire investi-
gation and about $10,000 in Treasury Forfeiture
Fund money was able to support the city’s contri-
bution to this effort.

* The Middlesex Shopping Center is a strip mall
on Eastern Boulevard in Essex just outside of the
City of Baltimore. In September, it was supposed

to be the destination of a back-to-school shopping
trip for a father, his estranged wife and their three
children but instead became the site of a suicide-
murder when the father detonated a powerful
bomb in the family station wagon, killing himself,
his wife and all three children—a boy of six and
two girls ages eleven and four. The force of the
blast obliterated the vehicle, scattering debris
over the roof of the mall and into nearby woods.
Shortly after the explosion, Baltimore County
police and ATF bomb experts went to work to
reconstruct just what had happened at the shop-
ping center to shatter the early evening routine
along with the lives of five individuals. The imme-
diate post-blast probe into the bombing involved
significant local overtime expense and the Trea-
sury Forfeiture Fund, through ATF, was able to
reimburse the Baltimore County Police Depart-
ment for part of the costs of their personnel.

FOSTERING LAW ENFORCEMENT COOPERATION 13


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

TO TREASURY LAW ENFORCEMENT:

The Department of the Treasury has been entrusted by the citizens of the United States
with significant asset forfeiture authority. We are responsible for exercising this authority
in the pursuit of various illegal activities that threaten the safety, security and prosperity of
the American people. In one form or another, Treasury law enforcement has accepted and
acted upon this delegation for over two hundred years.

This annual report of the Treasury Forfeiture Fund for fiscal year 1995 first looks at our
achievements in light of the four basic goals of the program and then provides an overview
of fund operations and financial performance during the year. Our efforts in these areas
derive from the underlying charge to pursue our forfeiture responsibilities wherever they
apply in our law enforcment operations and always in the sound and fair manner that
bolsters public confidence in the integrity of the forfeiture program.

The year that is the subject of this report will always be shadowed by the tragedy of
the Oklahoma City bombing and the lives that were taken from us. Forfeiture is but one of
the legitimate authorities bestowed upon federal law enforcement. Our obligation is to make
proper use of these public trusts so that we may realize their purpose of protecting the law
abiding, while, at the same time, maintaining unbroken faith with those who have gone
before us.

RONALD K. NOBLE

Under Secretary (Enforcement)


NOTES TO FINANCIAL STATEMENTS

Basis of Accounting and Presentation—Continued

¢ Accounting principles published by authoritative standards setting 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 the financial statements.

Financial Statements Presented

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 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 responsi-
bilities that the Fund has been authorized by law to enforce.

To more appropriately present the results of its principal activities (i.e., custodial/fiduciary respon-
sibilities) and the funding of such, the Fund has presented Statement of Operations and Statements
of Changes in Net Position in place of the Statement of Operations and Changes in Net Position as
suggested by OMB. Further, OMB has made the Statement of Budgetary Resources and Actual Ex-
penses optional in FY 1995. As such, this optional statements are not included in the FY 1995 an-
nual report of the fund.

The form and content of the Statements of Financial Position, as suggested by OMB, has been ad-
justed 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

Under the Act, the Fund is available for payment of 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. Reimbursements of costs incurred by state and
local law enforcement agencies in joint law enforcement operations with a Treasury law enforce-
ment organization are also reimbursable non—discretionary expenses.

Discretionary expenses include purchases of evidence and information related to smuggling of con-
trolled substances; equipment to enable vessels, vehicles or aircraft to assist in law enforcement ac-
tivities; 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 may be financed through the revenue generated from forfeiture ac-
tivities without limitation.

TFF expenses are generally paid on a reimbursement basis. Reimbursable expenses are incurred by
the individual agencies participating in the TFF against their appropriation and then submitted to
TFF for reimbursement. The agencies are reimbursed through Inter-Agency Transfer (SF—1081) or
Online Payments and Collections (OPAC). Certain expenses such as equitable sharing payments,
are paid directly from the TFF.

34

TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


END OF YEAR FUND LIABILITIES AND NET POSITION

($ millions)
1995 1994
Liabilities:
Distributions payable $69 $25
Deferred revenue 29 36
Seized currency & other investments 177 144
Accounts payable 34 24
Net Position:
Authorized retained capital 50 50
Unliquidated obligations 57 52
Distributions to ONDCP’s Special
Forfeiture Fund (22) (4)
Cumulative results of operations 73 37
—
Total $467 $363

* Columns do not foot due to rounding of amounts.

In addition to liabilities of $309 million recog-
nized by the Fund at September 30, 1995, $50 mil-
lion was reserved as authorized retained capital,
and $56 million was reserved for unliquidated
obligations. Further, the Fund recorded a large
increase in distributions to the Office of National
Drug Control Policy’s (QNDCP) Special Forfeiture
Fund. After further appropriations by Congress,
the $22 million provided to ONDCP will be avail-
able to support important drug control programs
of the President. Finally, FY 1995 ended with the
cumulative results of Fund operations totalling
$73 million.

Summary of Financial Management
Improvements

During FY 1995, the Fund management focused on
a number of operations and procedures in need of
improvement. Progress has been made during FY
1995. Among those areas receiving significant
attention were the following issues cited in the FY
1994 audit of the Fund:

SFFAS Compliance — The Fund was not able to
comply adequately with certain inventory report-
ing requirements mandated by the Statement of
Federal Financial Accounting Standards (SFFAS)
Number 3, issued by the Office of

Management and Budget.

Inventory Tracking Systems — Two material weak-
nesses were identified relating to inventory track-
ing systems which support the Fund: 1) the value
of forfeited property and seized property is not

recorded in the general ledger and is not recorded
in supporting subsidiary systems in a timely man-
ner; and 2) forfeited property is not recorded in the
property tracking systems during the year at its fair
market value.

Accounting Systems — Two material weaknesses
were identified relating to accounting systems
which support Fund operations; 1) accounting
records are primarily maintained on a cash basis:
and 2) the Fund’s general ledger does not record
all balances and transactions that are reflected in
the financial statements.

Performance Indicators — The FY 1994 audit
found that the Fund had not fully developed spe-
cific performance indicators to report the progress
toward achieving the Fund’s goals and objectives.
The Fund management has taken significant
steps towards addressing these issues. The follow-
ing is a summary of progress in each of the areas
cited as material weaknesses. In addition to these
efforts, also highlighted are other important inter-
nal control improvements which should have an
important effect on the Fund’s financial operations.

* SFFAS Compliance

As a new requirement during FY 1994, OMB
issued SFFAS Number 3 regarding accounting for
seized and forfeited property. SFFAS mandates a
special disclosure as part of the audited financial
statements of the Fund. This disclosure requires
the Fund to account fully for all transactions dur-
ing the fiscal year which would crosswalk the
seized and forfeited property inventory balances at
the beginning of the year to the ending balances as
of September 30. As part of the FY 1994 audit, nei-
ther the Customs Service nor the IRS could satis-
factorily produce all elements of this financial dis-
closure. The failure to produce supportable SFFAS
information was reported as a material weakness
and resulted in a qualified FY 94 audit opinion.
Although some minimal preparations were
made in advance of the FY 1994 audit to prepare
the bureaus for the SFFAS requirements, these ef-
forts proved to be inadequate. In order to get an
early start on this process for FY 1995, Fund man-
agement worked closely with each bureau to pro-
duce this information. Detailed instructions asso-
ciated with the SFFAS requirements were drafted
in late February and provided to the bureaus for
comment. Based on a revised set of instructions,
bureaus conducted a practice exercise for produc-

22 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


Cover: A View of the Department of the Treasury in Washington taken from the southeast
comer of Lafayette Park. This photograph was originally used in a 1906 brochure for the
Third Annual Encampment of the United Spanish War Veterans.


As part of our audit, we also obtained an understanding of management’s process for evaluating and re-
porting on internal control and accounting systems as required by the FMFIA and compared the Depart-
ment of the Treasury's and the participating agencies’ fiscal year 1995 FMFIA reports with our considera-
tion of the Fund’s internal control structure. We also reviewed and tested the Fund's policies, procedures,
and systems for documenting and supporting financial, statistical, and other information presented in
management's Overview of the Department of the Treasury Forfeiture Fund and Supplemental Financial
and Management Information. 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, Section 3512, Executive Agency's
Accounting System requires federal agencies to establish an internal control structure which
ensures the safeguarding of assets and the proper recording of revenues and expenditures.
‘As described in our Report on Internal Controls dated February 23, 1996, the Funds 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 February 23, 1996 on
our audit of the Fund’s financial statements and on our consideration of the Fund’s internal control structure.

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

ardisar, Haran haorciitar; PC,

February 23, 1996


‘Treasury Forfeiture Fund
Statement of Operations

For the years ended September 30, 1995 and 1994
(Dollars in thousands)

1995 1994
Revenues and financing sources: —_-—_
Undistributed forfeited currency and monetary instruments $ 81,892 $100,255
Distributed forfeited assets

Currency 64,078 53,375
Property 9,084 4,967
Proceeds from sales of forfeited property 39,091 2,718
(note 5 and 9)
Sales of forfeited property, net of mortgages and claims
of $4,789 and $2,382, respectively 26,452 12,037
Payments received in lieu of forfeiture, net of refunds

of $4,423 and $2,669, respectively 6,649 14,506
Reimbursed costs 2,807 2,793
Proceeds from participating with other federal agencies 8,137 3,966
Investment interest income 6,894 1,904
Other miscellaneous 6,418 1,180

Total revenues and financing sources 251,502 197,698
Allocation of revenues:
State and local agencies 58,100 53,372
Foreign countries 7,319 366
Federal agencies 8,393 7,318
Victim restitution (note 9) 38,441 ie}
Total allocations of revenue 112,253 61,056
Net revenues and financing sources 139,249 136,642
Operating expenses—Non-discretionary:
Seized property contractor 27,938 29,943
Purchases of evidence and information leading to seizure 14,289 17,269
Specialized contracts 19,352 3,187
Joint operations 3,213 0
Other case related 6,006 6,433
Payroll costs 12,192 9,834
Super Surplus {note 10) 399 10)
Secretary’s Enforcement Fund (note 11) 4,505 3,783
Total non-discretionary expenses 87,894 70,449
Operating expenses—Discretionary:
Purchases of evidence and information 2,794 2,372
Specialized contracts 2,378 4,125
Joint operations 463 3,040
Other program management 4at4 1,653
Equipment to support forfeiture program 16,797 7,488
Total discretionary expenses 22,846 18,678
Total operating expenses 110,740 89,127
Excess of net revenues and financing sources
over total operating expenses $ 28,509 $ 47,515

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

30 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995


NOTES TO FINANCIAL STATEMENTS

Investments—Continued

Dollars in Thousands Par

Discount Net
Treasury Forfeiture Fund $ 34,770 ($124) $ 34,646
U.S. Customs Suspense Account $ 86,160 ($346) $ 85,814
Total $120,930 ($470) $120,460

As of September 30, 1994 investments in the Customs Suspense Account and the Treasury Forfeiture Fund were zero.

Accrued interest at September 30, 1995 is $566,000.

NOTES TO FINANCIAL STATEMENTS

39


FUND FINANCIAL STATEMENTS



CHAPTER 3

FOSTERING LAW ENFORCEMENT COOPERATION

Tic COMPREHENSIVE CRIME CONTROL ACT OF 1984
AUTHORIZED THE EQUITABLE SHARING OF FEDERALLY
forfeited proceeds with state and local law
enforcement agencies who contributed to the
investigation that led to the forfeiture. That au-
thority to share, which has subsequently been
extended to include sharing with foreign govern-
ments who assist the United States with its inves-
tigations, has gone a long way to promote coopera-
tion among law enforcement agencies as they
pursue their common efforts against criminal
activity. The ability to share forfeited assets
provides a very real incentive to work together,
share resources and apply different areas of exper-
tise for best results in task force settings. It has
served to emphasize the many shared goals of

the different levels of law enforcement and at

the same time to break down some of the jurisdic-
tional or organizational barriers to joint initiatives
that may have existed in the past.

The federal government’s leading role in
promoting law enforcement cooperation through
asset sharing has served as a model for foreign,
state and local governments to increasingly
allow for the sharing of their forfeited assets with
U.S. federal enforcement agencies who have
contributed to their investigations. The Treasury
Forfeiture Fund, therefore, both disburses pay-
ments of equitable shares to other federal, state
and local law enforcement agencies as well as
foreign countries and receives deposits of equi-
table shares that recognize Treasury enforcement
or Coast Guard contributions to forfeitures under
other federal, state, local or foreign law.

The dollars involved in the equitable sharing
program make them probably the single most sig-
nificant support of the Treasury Forfeiture Fund
goal of fostering law enforcement cooperation, yet
they are not the only means by which the Fund
pursues this endeavor. Another important statu-
tory authority of the Treasury Fund in this regard
is its ability to pay for the overtime of state and
local law enforcement officers that is incurred in
joint operations with Treasury. This overtime reim-
bursement authority is a key contributing factor in

the success of many of the investigations in which
‘Treasury enforcement has a lead role.

The 1995 fiscal year saw inter-agency law
enforcement cooperation in a wide variety of areas
both domestically and internationally. From daily
and routine operational activities to high profile
multi-agency cases with significant media atten-
tion, from overseas capitols to our own rural coun-
ties, suburbs and urban cores, the Treasury Forfei-
ture Fund served its purpose of facilitating that
cooperation so vital to law enforcement’s capacity
to comprehensively and successfully respond to
today’s criminal challenge.

EQUITABLE SHARING BY BUREAU—FY 95

(Obligations—$ thousands)
Bureau Amount*
Customs Service $57,763
IRS 18,636
USSS. 327
ATF 123
Total $76,849

* Amounts shown represent obligations against FY 95 collections.

CROSS-BORDER ASSISTANCE IN
OPERATION CHOZA-RICA

When the notorious drug trafficker, Juan Garcia-
Abrego, was apprehended by Mexican authorities
in January of 1996 and flown to Houston as part of
his extradition to the United States to stand trial, it
marked a milestone in the long pursuit of an ex-
tensive criminal organization. A formidable fore-
shadowing blow against his illegal enterprise was
delivered earlier by the U.S. Customs Service
working closely with the Office of the Attorney
General of Mexico, New Scotland Yard and the
local Pharr, Texas, Police Department in an opera-
tion code named Choza-Rica.

Garcia-Abrego and his minions had been re-
sponsible for the smuggling of hundreds of tons of
cocaine and marijuana into the United States from

FOSTERING LAW ENFORCEMENT COOPERATION 9


EFFECT

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

RECOMMENDATION

We recommend that reconciliations of the bureaus and EG&G’s inventory be performed on a quarterly
basis to ensure that the records maintained in all of the bureaus’ inventory property tracking systems be
compared with the contractor's (EG&G) system (SPMS) so that any differences will be determined and re-
solved timely, as appropriate. Accordingly, we recommend that inventory be recorded in the general
ledger on a quarterly basis which will facilitate the implementation of accrual basis of accounting.

FORFEITED PROPERTY VALUATION

CONDITION

Under the 1930 Tariff Act and later amendments, the USCS enforces importing and exporting and drug-related
laws of the United States. Under the Bank Secrecy Act (Title 31) and money laundering (Title 18), the IRS CID
enforces bank secrecy and money laundering statutes. The USSS’ principal statute is Title 18 which authorizes
the USSS to seize and forfeit assets in conjunction with counterfeiting operations. The principal enabling
statutes of the ATF are the National Firearms Act of 1934 and the Gun Control Act of 1968, as amended.

Accordingly, when violations are discovered, the bureaus have the authority to seize the possessions of the
violator at the time of violation. The seized property may eventually be returned to the violator upon pay-
ment of a penalty, or if the violation is canceled or otherwise dismissed. However, if the seized property is
not returned to the violator, the property is forfeited through either administrative or judicial procedures.
Once forfeited, the property is either retained for official use by the bureaus, destroyed, sold, or transferred
to a state, local, or federal agency or foreign government.

The value of forfeited property is currently recorded in the bureaus’ inventory tracking systems at appraised
value (fair market value), determined at the seizure date, by the seizing agent, import specialist or indepen-
dent appraiser.

To develop year-end value of forfeited property for inclusion in the Fund’s 1994 and 1995 financial state-
ments, management performed a historical analysis by category of property of sales values compared to
the initial appraised amounts. These ratios were applied to the ending forfeited property value to deter-
mine 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 market value as of seizure date, in particular, for financial reporting pur-
poses can be misleading because the value is often overstated and therefore does not present an
accurate picture of the net realizable value to the Fund.

INDEPENDENT AUDITOR'S EXHIBIT II 63


Gardiner, Kamya & Associates, P.C.

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

Fax: 202 857-1778

Independent Auditor’s Report on Internal Control Structure

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

We have audited the financial statement of the Department of the Treasury Forfeiture Fund
(the Fund) as of and for the year ended September 30, 1995, and have issued our report
thereon dated February 23, 1996.

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 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 judgments 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 reports in accordance with applicable accounting principles
described in note 2 to the financial statements and to maintain accountability
over the assets; and

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

Because of inherent limitations 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.

Member of the American Institute of Certified Public Accountants


systems, the appropriate unit of measurement for quantities (e.g., cases, pounds, etc.) was not presented
in accordance with the requirements of SFFAS No. 3.

¢ Reconciliation between the Seized Property Management System (SPMS) and the agencies’ property
systems—Currently, the USCS field offices, ATF and USSS do not reconcile the seizure numbers and
line items per the property listing to the seizure numbers and line items per SPMS. IRS prepared a
reconciliation of its inventory listing to SPMS as of September 30, 1995. However, this procedure was
not performed on a regular basis during the year. During the fiscal year 1995 inventory observation,
several instances were noted where the agencies’ property listings contained items which had been re-
mitted or sold by EG&G prior to the inventory date. Also, there were instances where seizures were
placed in EG&G’s custody prior to the inventory date, but the agencies’ property systems did not re-
flect these seizures.

* 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, 1995, to record forfeited property at an estimate of fair value.

¢ Performance indicators—The Fund has not fully developed specific performance indicators to report
the progress toward achieving the Fund's goals and objectives.

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 ex-
isted 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 Trea-
sury 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.

Our consideration of the internal control structure would not necessarily disclose all matters in the inter-
nal 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 above.

We also noted other matters involving the internal control structure over financial reporting and its opera-
tion that we will report to the management of the Fund in a separate letter dated February 23, 1996.

In accordance with Government Auditing Standards, we have also issued reports dated February 23, 1996
on our audit of the Fund’s financial statements and it’s 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.

Aardeier, Harmynt hacevutar, P.O,

February 23, 1996

49


Sen Ee ee St

A 1989 red Corvette convertible seized and forfeited by the Criminal Investigation Division of the Internal Revenue Service in a drug
paraphernalia and money laundering case. The forfeited vehicle was presented to the Polk County lowa Sheriff's Office in recognition

of their contributions to the investigation leading to forfeiture.

ing food stamps to these stores, it was learned that
the profits generated were then being laundered
through a network of Vietnamese grocers spread
across the coast from Florida to Louisiana.

When the Secret Service made the arrests, they
were assisted by other Treasury agents from ATF
and IRS along with officers from the Florida De-
partment of Law Enforcement, the Escambia
County Sheriff's Department, the Florida Division
of Alcohol, Beverage and Tobacco and the Office
of the Inspector General of the U.S. Department of
Agriculture. Protective orders, similar to tempo-
rary restraining orders, were served on the owners
of all the food stores to preserve the government's
interest in the properties pending criminal forfei-
ture. In related earlier raids, over a quarter of a
million dollars in cash, jewelry and genuine food
stamps were seized for forfeiture.

NEW YORK CITY FIRES AND A
BOMBING OUTSIDE BALTIMORE

Besides sharing from the proceeds of forfeited
property, the Treasury Forfeiture Fund also fosters
law enforcement cooperation through its ability to
reimburse state and local governments for certain
expenses incurred in joint law enforcement opera-
tions. Three cases from the Bureau of Alcohol,

Tobacco and Firearms provide examples of how
this authority was instrumental in FY 1995

in helping to defray the immediate and critical
post-incident overtime costs of two arson fires in
New York and a hauntingly tragic bombing in
Essex, Maryland.

¢ Manhattan’s renowned Fulton Fish Market is a
key wholesale distribution point for much of the
seafood consumed along the east coast. Long sus-
pected of being infiltrated and influenced by orga-
nized crime elements, the market became the tar-
get of a crackdown announced by New York City
Mayor, Rudolph Giuliani, in late March of 1995.
Only days later, the building housing the market
was heavily damaged in a fire of suspicious origin.
‘An ATF task force including investigators from the
New York City Police and Fire Marshal's offices
was formed to examine the cause and circum-
stances of the blaze, and ATF was able to channel
over $7,000 to the NYPD from the Treasury Fund
to meet overtime costs and ensure crucial continu-
ity in the investigation.

* Another New York City landmark wracked by
fire in 1995 was the St. George Hotel. Originally
built in 1885. the St. George at 51 Clark between
Henry, Pineapple and Hicks Streets in Brooklyn
Heights had come into its own by 1930 with the

12 TREASURY FORFEITURE FUND ANNUAL REPORT—FISCAL YEAR 1995