t y Performance

Strategic View

Over the next several years, the Fund will continue to focus on strategic cases and investigations which
result in high-impact forfeitures. We believe this approach will effect the greatest damage to criminal
organizations while accomplishing the ultimate objective — to disrupt and dismantle criminal activity. To
make significant forfeitures requires longer, more in-depth investigations. To this end, Fund management
emphasizes the use of mandatory funding authorities that fuel large case initiatives including Purchase of
Evidence and Information, expenses associated with Joint Operations, Investigative Expenses Leading to
Seizure, and Asset Identification and Removal teams. In addition, the Fund will support and carry out the
goals of the National Money Laundering Strategy as well as the High Intensity Financial Crime Areas
(HIFCAs); support Treasury’s efforts to attack terrorist financial infrastructures; and continue to improve
our ability to measure, assess and adapt our performance.

Strategic Mission and Goal

The mission of the Treasury Forfeiture Fund is to affirmatively influence the consistent and strategic use
of asset forfeiture by Treasury law enforcement bureaus to disrupt and dismantle criminal enterprises.
The goal of the Treasury Forfeiture F und is to support the Department of the Treasury’s national asset
forfeiture program in a manner that results in Federal law enforcement’s continued and effective use of
asset forfeiture as a high-impact law enforcement sanction to disrupt and dismantle criminal activity. To
achieve our mission and goal, the program must be administered in a fiscally responsible manner that
seeks to minimize the administrative costs incurred, thereby maximizing the benefits for law
enforcement and the society it protects.

Performance Measure

In FY 2001, the Fund measured performance through the use of the following performance measure:
Percent of forfeited cash proceeds resulting from high-impact cases. This measures the percentage of
forfeited cash proceeds resulting from high-impact cases (those with currency seizures in excess of
$100,000). Focusing on strategic cases and investigations which result in high-impact seizures will
effect the greatest damage to criminal organizations while accomplishing the ultimate objective — to
disrupt and dismantle criminal activity.

Results

Fund performance measures and associated results for FY 2001 are as follows:

FY 2000 Fy 2001 FY 2001
Performance Measure Actual Target Actual

Percent of forfeited cash proceeds
resulting from high-impact cases

'"*This measure was not in use prior to FY 2001.

A target of 75 percent high-impact cases was set for FY 2001. The final percentage for FY 2001 was 79
percent, four percentage points over the target. This measure was not put into effect until FY 2001.

This measure is calculated by dividing the total amount of forfeited cash proceeds from cases greater
than $100,000 by the total amount of forfeited cash proceeds for all cases.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 14


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

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

Non-entity Assets

Non-entity assets held by the Fund are not available for use by the Fund. Non-entity assets comprise
intragovernmental and other assets. Intragovernmental balances arise from transactions among
Federal agencies. These assets are claims of a Federal entity against another Federal entity. Non-
entity assets are not considered as financing sources (revenue) available to offset operating expenses,
therefore, a corresponding liability is recorded and presented as governmental liabilities in the
balance sheet to reflect the custodial/fiduciary nature of these activities.

© Seized Currency and Property — Seized Currency is defined as cash or monetary instruments
that are readily convertible to cash on a dollar for dollar basis. OMB issued SFFAS No. 3 which
requires that seized monetary instruments (cash and cash equivalents) be recognized as an asset
in the financial statements and a liability be established in an amount equal to the seized asset
value due to: (i) the fungible nature of monetary instruments, and (ii) the high level of control
that is necessary over these assets; and (iii) the possibility that these monies may be returned to
their owner in lieu of forfeiture.

The prior year’s seized currency balance has been restated from $296,392 to $303,629 and the
forfeited property net of mortgages, liens and claims balance has been restated from $28,114 to
$27,748. These restatements were made to capture other monetary instruments that were
previously disclosed and presented as property. These restatements had no impact on the Fund’s
Net Position.

Seized property is recorded at its appraised value at the time of seizure. The value is determined
by the seizing entity and is usually based on a market analysis such as a third party appraisal,
standard property value publications or bank statements. Seized property is not recognized as
an asset in the financial statements, as transfer of ownership to the government has not occurred
as of September 30. Accordingly, seized property other than monetary instruments are disclosed
in the footnotes in accordance with SFFAS No. 3.

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

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 34


Note 1: Reporting Entity

The Department of the Treasury Forfeiture Fund (Treasury Forfeiture Fund or the Fund) was
established by the Treasury Forfeiture Fund Act of 1992, Public Law 102-393 (the TFF Act), and
is codified at 31 U.S.C. 9703. The Fund was created to consolidate all Treasury law enforcement
bureaus under a single forfeiture fund program administered by the Department of the Treasury
(Treasury). Treasury law enforcement bureaus fully participating in the Fund are the U.S. Customs
Service (Customs); the Internal Revenue Service (IRS); the United States Secret Service (Secret
Service); the Bureau of Alcohol, Tobacco and Firearms (ATF); the Financial Crimes Enforcement
Network (FinCEN); and the Federal Law Enforcement Training Center (FLETC). FinCEN and
FLETC contribute no revenue to the Fund and receive relatively few distributions from the Fund.
The U.S. Coast Guard, part of the Department of Transportation, also participates in the Fund.
However, all Coast Guard seizures are treated as Customs seizures because the Coast Guard lacks
seizure authority.

Prior to the establishment of the Fund, ATF, IRS, and Secret Service participated in the Assets
Forfeiture Fund of the Department of Justice. Customs had its own forfeiture fund into which
deposits of all Customs and Coast Guard forfeitures were made. The Fund basically transformed
the Customs Forfeiture Fund into a Departmental fund serving the needs of all Treasury law
enforcement bureaus. FinCEN and FLETC did not previously participate in any forfeiture fund.
Prior to Fiscal Year (FY) 1994, only Customs and Coast Guard participated in the Fund.

The Fund is a special fund that is accounted for under Treasury symbol number 20X5697. From this
no-year account, expenses may be incurred consistent with 31 U.S.C. 9703, as amended. A portion
of these expenses, referred to as discretionary expenses, are subject to annual appropriation
limitations. Others, referred to as non-discretionary (mandatory) expenses, are limited only by the
availability of resources in the Fund. Both expense categories are limited in total by the amount of
revenue in the Fund. The Fund is managed by the Treasury's Executive Office for Asset Forfeiture
(EOAF).

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

Under a Memorandum of Understanding (MOU) with Treasury, Customs acts as the executive agent
for certain operations of the Fund. Pursuant to that executive agency role, the Customs National
Finance Center (NFC) is responsible for accounting and financial reporting for the Fund, including
timely and accurate reporting and compliance with Treasury, the Comptroller General and the Office
of Management and Budget (OMB) regulations and reporting requirements.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 30


SINIWILVLS TVIONWNIS - I NOLLOIS

6E

goes eizge $ (ooe'9) $ goes elo'ey —$ (609) $= gt ose $ (e40'9) (sez) $ : $ — feloL pues
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cary 69r'b - (z'2) OLE 0vZ'9 - Gey 99 (ora) (72) (2) - - sepyan
z oez - (s) z sez - - - : - - - : yeroury
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210°» = o0e'z - (ety's)— Lho’eat'n : (ozs) 6rS ve (e66'2) (e982) - - Auadoig jereueg,
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= 0206 = (any = 2626 is = esis = = = reigns
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SOUTER TUSUISTETS TOSmTSTIpY BME A CUTE THOT SOURIS SMEAR STOSUSTIPY TINTS PSKONSST, DONMTTSSY UMTTA
TEDUPUTT TOMES INE TSE WEY
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(zat) (eiz'e) (ya0°9) (ozv'riy 9969 vag'eL zes'h ae'9 - 228't z2es'h bos'y saroluen,
- - (y) (ez9) ’ 00g z as : () z $9 yeni
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(90z't)  (evs'z)—(vos'z)—(905'61) ert — gg6'9L €c0'r = dz9'eL : 662'6 f£0'r = zB'€ = Auadoig jesouaD
(en) (girl) (ze) (olz"91) se 96'S) oz 290'bz : (zo) zt yore Ayedosg 104
297) (ovz'6z1) = ez aor ZAVLb = zLt = S00 teiorans,
- - . (ze) - Oy - BES ~ zt - 998 (2) suewnysuy
AseyouoW J8y10.
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Jequinn = enjeA = JequinN —enien, sequinN —enjea, Joquiny = enjeA Ss sequMNonteA Jequinn — enjen
“TSSUCTLTSTESOOSTY SHES TSSOTST] SOMO SMTEA

Sa}0U BY} UI pajuasasd st neaing Aq ainpayos si Jo WeIaP aYL ‘L00Z ‘OE Jaqwardag 01 0002 ‘t 18q0190 wos} seouejeq

CUED CONTTOT

STOUISTIDY = BOURTERTTUSUISTETS:
TEDURUTT OO7T7OT

(spuesnoy) ut st anjea Je70q) ‘neesng yoee jo sjuaweTE}s jeroUeLY ay) oF

Bue Auadoud payieys0) By) ul saBueYO ey sjuaseid ainpayos BUIMO/IO} aU

AIUSIITS PUE ALTSVOTY PITS LOF UY SOBUCYS JO STSAPEUY 18 GION


Officials of the Secret Service reported that the suspect’s attempted fraud on the Los Angeles based
company was a minor deviation from the standard Nigerian/West African fraud. The perpetrators of
this type of fraud solicit numerous intended victims (hoping to hook just a few), usually via fax or the
internet, claiming that they have several million dollars available for wire transfer from Nigeria to the
United States, and need the use of the intended victim’s bank account in order to transfer the funds.
The intended victim is promised upwards of ten percent of the proceeds, which can appear substantial
when the perpetrators claim to have tens of millions of dollars ready for transfer. In support of the
fraud, the perpetrators prepare bogus bank statements and other documents, which appear official and
are faxed to the victim. The perpetrators, never intending to transfer funds, later request that the
intended victim forward a processing fee of several thousand dollars to a bank account outside of the
United States, usually in England or Nigeria. The process of “milking” the victim continues for as
long as possible, with claims that the victim needs to payoff a corrupt Nigerian bank or customs
official, or for the payment of taxes.

The Secret Service has taken an aggressively proactive approach to investigating Nigerian advance fee,
or 4-1-9 fraud (named after the Nigerian criminal fraud statute). The Secret Service, with funding
from the Fund, has established ten multi-agency task forces within the United States that exclusively
investigate this type of fraud. Since January 1999, the Secret Service has had an investigative presence
in Lagos, Nigeria. During June 2000, a Resident Office was officially established at the U.S.
Consulate in Lagos, staffed full time by Secret Service special agents. These agents liaison with
Nigerian police officials, frequently assisting Nigerian police with working leads developed by Secret
Service task forces in the U.S., and other sources, and with executing arrest and search warrants, and
interviewing suspects. The Secret Service Lagos agents also conduct liaison with other law
enforcement members of the Lagos diplomatic community.

Efforts to suppress advance fee fraud operations in the country of Nigeria have resulted in the
displacement of fraud rings to other nations. Since the inception of the Secret Service Lagos Resident
Office, there has been a significant decline in the number of large-scale advance fee fraud operations
being discovered. However, other host countries show a corresponding increase in the number of
large-scale 4-1-9 fraud operations, particularly South Africa, England, Germany and some Far East
countries. The countries that comprise central West Africa (e.g., Benin, Ghana, and Cameroon),
continue to experience an explosive increase in Nigerian criminal activities operating within their
borders.

The perpetration of Nigerian advance fee fraud, both in the U.S. and abroad, is a burgeoning business,
victimizing practically every prosperous, industrialized nation. Although losses due to advance fee
fraud are not tabulated, in the U.S. they easily amount to tens of millions of dollars a year. Worldwide,
unwitting victims of these fraudulent schemes lose hundreds of millions of dollars annually. The
apparent trends indicate that advance fee fraud will continue to be a significant law enforcement
problem in the future.

Bureau of Alcohol, Tobacco and Firearms
Western Kentucky Flea Markets Investigation

An 18-month illegal firearms investigation by the Bureau of Alcohol, Tobacco and Firearms in
Western Kentucky led to the execution of sixteen search warrants and sixteen arrest warrants on March
7, 2001. A total of 465 firearms were seized, including a machinegun and two firearms with
obliterated serial numbers. As a result of this investigation, two Federal Firearms Licensee’s
surrendered their licenses voluntarily to ATF. In April and June of 2001, a total of eighteen defendants
were indicted by a Federal Grand Jury for various firearms violations (two more are pending). From

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 8



SECTION V
OTHER ACCOMPANYING INFORMATION

(Unaudited)




Material weaknesses are reportable conditions in which the design or operation of one or more of
the internal control components does not reduce to a relatively low level the risk that misstatements
in amounts that would be material in relation to the financial statements being audited may occur
and not be detected within a timely period by employees in the normal course of performing their
assigned functions. Because of inherent limitations in internal controls, misstatements, losses, or
noncompliance may nevertheless occur and not be detected. However, we noted certain matters
discussed in the following paragraphs involving the internal control and its operation that we
consider to be reportable conditions. However, none of the reportable conditions is believed to be
a material weakness.

The identified reportable conditions, as defined above, are summarized below with further
explanations and Fund Management’s responses in Exhibit I of this report.

The reportable condition identified below was reported in prior years and is of continuing
significance.

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

Asset specific expenses resulting from asset disposition activities are not recorded and accounted
for by the Fund in the various seized property and forfeited assets tracking systems. The Fund’s
Property Custodian incurs costs on behalf of the Fund from the time of seizure until the asset is
ultimately disposed. Currently, only holding costs and direct selling costs related to real property are
captured in the Seized Assets and Case Tracking System (SEACATS) at the line item level.

The reportable condition identified below was reported as a material weakness in prior years.

2. The General Ledger Does not Capture All Balances and Transactions that Comprise
the Fund during the Year.

The Asset Information Management System (AIMS), which is the general ledger system maintained
by the U.S. Customs Service (Customs), processes, groups and summarizes transactions into account
balances for the Fund. Currently, it is interfaced with the seized property and forfeited assets tracking
system of Customs (SEACATS) only. The integration process achieved so far, although an
enhancement over prior years, did not result in complete and accurate balances in AIMS for FY
2001. Additionally, AIMS is not interfaced with the asset tracking systems used by the other law
enforcement agencies participating in the Fund. As a result, balances relating to accounts receivable,
liens and mortgages payable, forfeited property and deferred revenue, and seized currency and its
offsetting liability originating from those bureaus are not recorded in the general ledger during the
year. The Fund has implemented compensating procedures to capture these balances for financial

reporting purposes.

Because these conditions impact many functions and lines of authority between the Treasury
agencies, We recommend the Fund Management develop a joint plan with the other Treasury
agencies, to implement the recommendations included in Exhibit I.

46


1. ASSET SPECIFIC EXPENSES ARE NOT RECORDED AND ACCOUNTED FOR
BY THE FUND (Partial Repeat Condition)

CONDITION

Asset specific expenses resulting from asset disposition activities are not recorded and accounted
for by the Fund in the various seized property and forfeited assets tracking systems. The Fund’s
Property Custodian incurs costs on behalf of the Fund from the time of seizure until the asset is
ultimately disposed. Currently, only holding costs and direct selling costs related to real property are
captured in SEACATS at the line item level.

CRITERIA

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

CAUSE

The Fund relies on the Property Custodian for providing asset specific expenses information.
Deficiencies in the system (SEACATS) that the Property Custodian uses preclude the capturing of
certain expense information at the asset level. Currently, only holding costs and direct selling costs
related to real property are captured in SEACATS at the line item level.

EFFECT

The Fund is unable to report asset specific expenses. The Fund’s asset management function will
deteriorate if the above conditions are allowed to continue, resulting ultimately in a lack of
accountability over the assets of the Fund.

RECOMMENDATION

In view of the Fund’s acknowledgement of this condition and SEACATS’ inability to capture the
required information we make the following recommendations:

a. For all direct costs and common support costs not directly traceable to individual seizures,
an allocation process needs to be developed and implemented. Indirect costs will have to be
applied to the individual seizures. Direct and indirect costs will have to be added together to
provide total costs per seizure.

50 EXHIBIT I —- REPORTABLE CONDITIONS


EXHIBIT IT

STATUS OF PRIOR YEAR FINDINGS


SECTION III
OTHER REPORTS


Treasury Forfeiture Fund
Statements of Net Cost
For the Years Ended September 30, 2001 and 2000
(Dollars in millions)

2001 2000
Program:
ENFORCEMENT
Intra-governmental
Seizure Investigative costs and asset management... $46 $55
Other asset-related contract services 1 2
Awards to informers .......-....+++ 3 2
Data systems, training, and others. 16 27
Super Surplus........... * 1
Federal law enforcement conveyances. * *
Secretary’s Enforcement Fund _l _*
Total Intra-governmental...............ssecessesseeeseeeeneeeneeseeeseeseneaenees 67 87
With the Public:
National Contract Services Seized Property and other.. 32 35
Joint Operations 9 10
Total with the Public.. 41 45
Total Program Costs.........cssssssssccessrsncsencesenensccsesseesenaneeseaseensoaeas 108 = 132
Less: earned revenues..............0sceecee cess eeeeeeceneeeeteceeeeeeeeenennnneeeneeeeeenes 0 0
NET COST OF OPERATIONSG........:ccccsesccesseceessensensecseesseseaesseeeeeees 108 132

(*) Less than $500,000 in amount.

Intra-governmental Costs. These represent the amounts incurred by participating bureaus in
running their respective forfeiture programs.

National Seized Property Contract. The largest single program cost of the Fund is the storage,
maintenance and disposal of real and personal property. This function is performed by EG&G
Dynatrend, a private firm under contract to the U.S. Customs Service. EG&G provides storage
for Treasury’s forfeiture program through a nationwide system of 17 warehouse facilities with a
capacity in excess of 470,000 square feet, as well as supplemental facilities provided by over 200
active vendors under contract to EG&G. In FY 2001, EG&G expenses were approximately $32
million, down from a total of nearly $35 million in FY 2000.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 18


© Cash and Other Monetary Assets ~ This balance Tepresents the aggregate amount of the Fund’s
seized currency on deposit in the Fund’s Suspense account held by Treasury, seized cash on
deposit held with other financial institutions, and, cash on hand in vaults held at field office
locations.

The following schedule presents the intragovernmental and other hon-entity assets as of September
30, 2001 and 2000, respectively, (dollars in thousands):

2001 2000
Intragovernmental Assets:

Seized currency:
Investments (Note 3) $ 213,181 $ 216.890

Seized currency:
Cash and other monetary assets 65,745 86,518
Proceeds from interlocutory sales 221
Total Non-Entity Assets 278,926 303,629
Total Entity Assets 318,626 338,531
Total Assets $_597,552 $ 642,160

Liabilities Covered by Budgetary Resources

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

¢ Distributions Payable — Distributions payable to Federal and non-Federal agencies is primarily
related to equitable sharing payments and payments to be made by the Fund to the victims of
fraud.

¢ Accounts Payable — Amounts reported in this category include accrued expenses authorized by
the TFF Act (See "Allowable Fund Expenses") for which payment was pending at year end.

¢ Seized Currency — Amounts reported in this category represent the value of seized currency that
is held by the Fund which equals the amount of seized currency reported as an asset.

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

Liabilities Not Covered by Budgetary Resources

The Fund does not currently have liabilities not covered by available budgetary resources.

35 SECTION II - FINANCIAL STATEMENTS


TREASURY FORFEITURE FUND
Required Supplemental Information
(Required by OMB Bulletin 01-09)

For the Years Ended September 30, 2001 and 2000
(Dollars in Thousands)

Intragovernmental Amounts — Revenues and Costs (Dollars in thousands)

ki

2001 2000
Cost to Generate Costs to Generate Cost to Generate — Costs to Generate.
Exchange Non-Exchange Exchange Non-Exchange
; Intragovernmental _Intragovernmental Intragovernmental _Intragovernmental
Budget Functions Revenue Revenue Revenue Revenue
Administration of
Justice $ - § 66,888  § = § 86,510
Intragovernmental Amounts — Non-exchange Revenue Transfers in/Transfers out (Dollars in thousands)
2001 2000
Partner Agency In Qut In Out
Department of Agriculture $ - - $ - $ -
Department of Justice - 2,057
Department of Health and Human Services - - - --
Department of Treasury ~ - ~ -
Internal Revenue Service -- 9,400 - -
Alcohol, Tobacco and Firearms - 1,856 - 13,536
U.S. Customs Service - 36,430 - 28,649
Financial Crimes Enforcement Network - 1,781 - 426
Federal Law Enforcement Training Center - 472 - 6,716
Secret Service -- 28.020 = 28.830
Totals $ = $77,959 $ = $80,214

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 61


Vossage jrom the Director

Tam pleased to present this Accountability Report for fiscal year (FY) 2001. While highlighting
the Fund’s financial and Operational performance over the past year, this report also focuses on
some of the significant achievements and accomplishments made by our Treasury law
enforcement bureaus.

FY 2001 was an excellent year for the Treasury Forfeiture Fund. Revenue for the year was
strong, reflective of an increase in high impact forfeitures and their effect upon criminal
enterprises. During FY 2001, the Fund undertook the integration of the seized property and
forfeited assets tracking system of Customs (SEACATS) with the general ledger system which
led to the remediation of a material weakness previously reported by our external auditors.

The events of September 11, 2001 had a profound effect upon the United States and the world at
large. The mission and major focus for many federal law enforcement organizations shifted with
the events of that day, and now anti-terrorism and terrorist financing investigations are a national
priority. With the passage of the USA PATRIOT ACT in 2001, law enforcement agencies now
have greater ability to investigate potential money laundering and terrorist financing operations.

As we enter fiscal year 2002, the Fund is focused on supporting money laundering and terrorist
financing investigations. The Fund will support the development and implementation of the
High Intensity Financial Crimes Area Task Forces (HIFCAs) which are an integral part of The
2001 National Money Laundering Strategy and a priority of Treasury’s Office of Enforcement.
In addition, we plan to increase our investment in technologies and data collection; encourage
our law enforcement bureaus to pursue truly major cases and establish financial plans that reflect
such priorities; and further develop and modify forfeiture training and forfeiture awareness
programs that are responsive to today’s needs and are designed to foster the understanding and

application of asset forfeiture.

Raymond M. Dineen, Director
Executive Office for Asset Forfeiture
U.S. Department of the Treasury


TREASURY FORFEITURE FUND

Equitable Sharing Summarized by State and U.S. Territories

For the Year Ended September 30, 2001
(Dollars in Thousands)

(Unaudited)

State/U.S. Territories Currency Value Property Value
Subtotal brought forward 51,442 6,051
Virgin Islands 0 0
Virginia 1,137 594
Washington 804 0
West Virginia 206 4
Wisconsin 31 0
Wyoming 8 —_0

Totals $53,628 6,649

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
statement of the Department of the Treasury Forfeiture Fund. Information presented on 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.

TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 2001

63


TREASURY FORFEITURE FUND
Equitable Sharing Summarized by State and U.S. Territories
For the Year Ended September 30, 2001
(Dollars in Thousands)

(Unaudited)
State/U.S. Territories Currency Value Property Value
Alabama $ 54 $69
Alaska 0 0
Arizona 1,080 80
Arkansas 3 1
California 6,220 598
Colorado 69 0
Connecticut 280 12
D.C. Washington 27 0
Delaware 0 9
Florida 7,855 910
Georgia 199 218
Guam 187 0
Hawaii 40 0
Idaho 15 10
Illinois 3,421 92
Indiana 210 0
lowa 0 2
Kansas 0 0
Kentucky 94 0
Louisiana 41 131
Maryland 174 17
Massachusetts 602 1
Michigan 1,268 3
Minnesota 3 16
Mississippi 103 188
Missouri 126 338
Montana 19 18
Nebraska 22 0
Nevada 128 0
New Jersey 1,798 32
‘New Hampshire 0 0
New Mexico 38 3
New York 21,300 966
North Carolina 433 321
North Dakota 0 2
Ohio 980 29
Oklahoma 0 0
Oregon 46 0
Pennsylvania 699 87
Puerto Rico 77 0
Rhode Island 0 673
South Carolina 100 56
South Dakota 0 0
Tennessee 1,384 836
Texas 2,346 333
Utah 1 0
Vermont o o
Subtotal carried forward $51,442 $6,051

62 SECTION V - OTHER ACCOMPANYING INF 'ORMATION


TREASURY FORFEITURE FUND
Analysis of Revenue and Expenses and Distributions
For the Year Ended September 30, 2001
(Dollars in Thousands)

Revenue, Expenses and Distributions by Asset Category:

Expenses and
Revenue Distributions
Vehicles $ 8,841 $29,654
Vessels 2,456 37,780
Aircraft 2,456 12,172
General Property 7,858 119,918
Real Property 27,504 4,697
Currency and monetary instruments 220,671 57,967
269,786 262,188
Less:
Mortgages and claims (5,507) (5,507)
Refunds (5,411) (5,411)
Add:
Excess of net revenues and financing sources over total program
expenses 7,598
Total $258,868 $258,868
Revenues, Transfers, Expenses and Distributions by Type of
Disposition:
Sales of property and forfeited currency and monetary instruments $ 201,277 $ 49,816
Reimbursed storage costs 2,336 26,219
Assets shared with state and local agencies 56,422 56,422
Assets shared with other Federal agencies 4,805 4,805
Assets shared with foreign countries 1,079 1,079
Victim Restitution 3,867 3,867
Destructions ~ 31,462
Pending disposition = 88.518
$ 269,786 $ 262,188
Less:
Mortgages and claims (5,507) (5,507)
Refunds (5,411) (5,411)
Add:
Excess of net revenues and financing sources over total program
expenses 7,598
Total $258,868 258.868

The revenue amount of $ 258,868 is from the Statement of Net Position. This supplemental schedule “Analysis
of Revenues, Expenses and Distributions” is required under the Treasury Forfeiture Fund Act of 1992. Because
the Fund does not have a cost accounting system, the method used does not provide reliable information in the
analysis of revenue and expenses and distributions by type of disposition. The information is presented to comply

with the requirements of the Treasury Forfeiture fund Act of 1992.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001

65


Department of Treasury Forfeiture Fund
STATEMENTS OF BUDGETARY RESOURCES
For the years ended September 30, 2001 and 2000
(Dollars in Thousands)

2001 2000
Budgetary Resources:
Budget authority $ 269,925 $ 226,196
Unobligated balance- beginning of year 62,895 190,947
Spending authority from offsetting collections 124 68
Recoveries from prior year obligations 9,198 29,856
Total Budgetary Resources $ 342,142 $ 447,067
Status of Budgetary Resources:
Obligations incurred $ 251,943 $ 384,172
Unobligated balances - available 90,199 62,895
Total Status of Budgetary Resources $ 342,142 $ 447,067
— —==
Relationship of Obligations to Outlays:
Obligated balance, net - beginning of year $ 229,153 $ 221,982
Obligated balance, net - end of year (189,922) (229,153)
Obligations incurred 251,943 384,172
Subtotal 291,174 377,001
Less: Offsetting receipts (9,322) (29,924)
Net Outlays $ 281,852 $ 347,077
— —— =
The accompanying notes are an integral part of these financial statements
TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 28


Financial Highlights

The following provides a brief explanation for each major section of the audited financial
statements accompanying this report for the fiscal year ended September 30, 2001.

Statement: Changes in Net Position

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

Treasury Forfeiture Fund
Statements of Changes in Net Position
For the Years Ended September 30, 2001 and 2000
(Dollars in millions)

Net Position — Beginning of Year.
Prior Period Adjustments.......... .

Adjusted Net Position — Beginning of Year............sscsssssssssssesssssesssseeosss. 230 = 325

Financing Sources (Non-exchange revenues):
Intragovernmental

Investment Interest Income.. 24
Public

Forfeited currency and monetary instruments............. 172 141

Sale of forfeited Property (net of mortgages and claims), 25 31
Proceeds from Participating with other Federal agencies. 34 16
Value of property transferred in equitable sharing........ 7 7
Payments in lieu of forfeiture, net of refund.. wee 2 1
Reimbursed costs............ : 2 2

see —l _4
258 226

TS SECTION 1 - OVERVIEW


Program Performance

general ledger did not capture all balances and transactions that comprise the Fund and they
classified this condition as a material weakness,

During fiscal year 2001, U.S. Customs implemented an integration process to capture seized and
forfeited currency and property transactions and balances originating from its inventory system
through an integrated system (FGL). The FGL will eventually be extended to include

integration process as a follow up to the material weakness reported in fiscal year 2000 and have
reduced the level of this finding to a reportable condition in fiscal year 2001.

In fiscal year 2000, the auditors Teported two reportable conditions. They were briefly, (1a)
inadequate accounting and recording of liens and claims; (1b) asset expenses and revenue are not
recorded and accounted for; and (2) unsubstantiated values for seized Property.

The various bureaus improved their accounting and reporting of liens and Claims and the liens
payable listing had fewer discrepancies than in Previous years, This condition is now considered
to have been resolved.

In addition, the Fund is now capable of recording revenue at the asset level but not expenses. In
fiscal year 2001, the auditors will repeat this finding but only as it pertains to expenses.

No new reportable conditions were identified during fiscal year 2001. However, the previous
material weakness Pertaining to the general ledger capturing of balances and transactions has
been down-graded to a reportable condition for FY 2001.

Fund Management’s Plan Regarding Reportable Conditions. In fiscal year 2002, Fund
Management will Continue to perfect the integration process and will extend FGL to include
transactions generated by all Participating agencies of the Fund to link its general ledger with
their inventory systems. In addition, Fund Management has Contracted with a private contractor
to warehouse its seized and forfeited Property and will work with this Contractor to develop and
implement an acceptable methodology for allocating expenses to specific line items,

aI SECTION I- OVERVIEW


total of $92 million in FY 2000. An additional $4 million was shared with other Federal
agencies in FY 2001, as compared to $7 million in FY 2000. Victim restitution totaled $4
million in FY 2001 as compared to $10 million in FY 2000.

Transfers-Out. During FY 2001, $78 million in Super Surplus funding, and Secretary’s
Enforcement Funds were transferred out. This compares to a slightly higher total in FY 2000 of

Statement: Net Cost
Statement: Net Cost

Costs of the Forfeiture Program — Intragovernmental. After revenue is applied toward policy
mandates such as equitable sharing, shown in the Statement of Changes in Net Position as
negative revenue or applied non-exchange revenue, the Temaining financing supports the law
enforcement activities of the Fund and pays for the storage of seized and forfeited Property and
sales associated with the disposition of forfeited Property,

7 SECTION 1 - OVERVIEW


Department of Treasury Forfeiture Fund
STATEMENTS OF FINANCING
For the years ended September 30, 2001 and 2000
(Dollars in Thousands)

2001 2000

Resources Used to Finance Activities:

Budgetary Tesources obligated
Obligations incurred

$ 251,943 $ 384,172
Less: Spending authority from offsetting collections and

adjustments (9,322) (29,924)
Net obligations 242,621 354,248
Other Resources
Transfers - out (77,959) (80,214)
Total Resources Used to Finance Activities 164,662 274,034
Resources Used to Finance Items not Part of the Net Cost of
Operations
Change in budgetary Tesources obligated for goods,
services and benefits ordered but not yet Provided 21,936 (23,239)
Resources that finance the acquisition of assets (2,369) -
Other resources or adjustments to net obligated resources that
do not affect net Cost of operations
Mortgages and Claims (5,507) (4,453)
Refunds (5,411) (5,842)
Equitable Sharing (Federal, state/local and foreign) (61,881) (98,230)
Victim restitution (3,867) (10,540)
Total Resources Used to Finance Items not Part of the
Net Cost of Operations (57,099) (142,304)
Total Resources Used to Finance the Net Cost of Operations 107,563 131,730

Ne ie 131,7.
let Cost of Operations $ 107,563 $ 31,730

The accompanying notes are an integral part of these Sinancial statements
29 SECTION IT - FINANCIAL STA TEMENTS



In addition to the basic training, 72 Treasury agents were given advance training in the area of
computer networks and network intrusions. Other agents received specialized training in online
investigations and other computer platforms (Macintosh, Linux, Unix, etc.). It should be noted that the
majority of the training administered during FY 2001 was conducted by senior CIS agents from the
four Treasury bureaus.

During FY 2001, agents of the CIS Program successfully conducted computer forensics exams and
contributed to investigations involving identity theft and credit card fraud, bank fraud, money
laundering, wire fraud, access device fraud, network intrusion as well as child pornography. The
Secret Service conducted computer forensic examinations involving protective _ intelligence
investigations cases. Agents also assisted state and local law enforcement with a wide variety of
investigations including but not limited to cases involving murder and missing persons.

Secretary's Enforcement Fund

The Secretary’s Enforcement Fund (SEF) is derived from equitable shares received from the Justice
Department’s forfeiture fund for work done by Treasury law enforcement bureaus leading to Justice
forfeitures. SEF revenue is available for federal law enforcement purposes of any Treasury law
enforcement organization. In FY 2001, the Fund allocated $31.8 million in SEF spending to the law
enforcement agencies, the majority of which was spent on major case funding, database development,
and computer forensic efforts. The remainder of the funding went to support several projects at
Customs (vault construction and Seized Asset Case Tracking System enhancements) and to support the
new ATF Fire Laboratory.

Major Case Funding

Major case funding provided by the SEF covers expenses related to highly focused and intensive large-
scale investigations into organized criminal enterprises. This funding supports high risk, high return
investigations that develop over a one to two year period. These types of cases typically involve
undercover work. This funding covers expenses that cannot be covered under the Fund’s mandatory
authorities. Overall, the Treasury law enforcement bureaus received $2.5 million in SEF funds to
support major case activities in FY 2001.

Database Development

Funding for database development allows the bureaus to design or enhance sophisticated intelligence-
gathering systems for case development and case initiation. Information sources are becoming more
accessible through the Internet and other computerized information sources. Law enforcement sources
are expanding with additional cross-agency access being granted for enforcement purposes. Database
development facilitates the sharing of important investigative information through multiple interfaces.
It assists in the rapid search of information in various repositories, enhances investigative
collaboration, and facilitates the process of link-analysis. These databases help detect patterns and
trends, identify types of criminal behaviors, and assist in predicting future behavior. The Fund
allocated $3.75 million to the law enforcement bureaus for database development efforts in FY 2001.

Computer Forensics

A growing percentage of the investigations that our agencies handle now center on computer evidence.
It is critical for the law enforcement bureaus to protect the integrity of original computer evidence and
be able to authenticate any evidence originating from an electronic source. The funding provided for
these initiatives has allowed the agencies to maintain or build computer forensic programs and

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 12


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, 2001
(Dollars in Thousands)

31 U.S.C. 9703(f)(2)(E) requires the Secretary of the Treasury to report annually to Congress uncontested seizures

of currency or proceeds of monetary instruments over $100,000, which were not deposited in the Department of the

Treasury Forfeiture Fund within 120 days of the seizure date. There were no administrative seizures over $100,000
over 120 days old for all bureaus in FY 2001.

SECTION V - OTHER ACCOMPANYING INFORMATION


2. THE GENERAL LEDGER DOES NOT CAPTURE ALL BALANCES AND
TRANSACTIONS THAT COMPRISE THE FUND DURING THE YEAR.
(Reported as a Material Weakness in FY 2000)

CONDITION

The Asset Information Management System (AIMS), which is the general ledger system maintained
by the U.S. Customs Service (Customs), processes, groups and summarizes transactions into account
balances for the Fund. Currently, it is interfaced with the seized Property and forfeited assets tracking
system of Customs (SEACATS) only. The integration process achieved so far, although an
enhancement over prior years, did not result in complete and accurate balances in AIMS for FY
2001. Additionally, AIMS is not interfaced with the asset tracking systems used by the other law

CAUSE

The output from AIMS did not agree with the compensating procedures used for reporting
Procedures because of minor inaccuracies and timing differences, Additionally, the Fund is
comprised of different agencies with different asset tracking systems. The asset tracking systems
maintained by IRS, USSS and ATF do not interface with the Fund’s general ledger, which is owned

by Customs. Accordingly, inventory-related transactions originating from these agencies that are
non-cash generated are not recorded in the Fund’s general ledger during the year.

EFFECT

Timing differences between SEACATS and AIMS and the lack of interface between the other

compensating procedures to capture these balances for financial reporting purposes.

52 EXHIBIT 1 - REPORTABLE CONDITIONS


Forex, and Mr. Lyn-Shue together as alleged money launders of narcotics proceeds to individuals and
businesses in Jamaica. On May 8, 2001, $2,155,290 was forfeited to the United States.

Artificial Reef Program

Customs, the Miami-Dade County Department of Environmental Resources Management and the
Atlantic Game-Fish Foundation have joined forces to create a new artificial reef off the Florida
coastline. On July 13, 2001, the motor vessels Brandywine, Miguana, and Etoile de Mer were scuttled
approximately four miles off the coast of Key Biscayne, Florida, becoming a part of Florida’s
extensive artificial reef system. The artificial reef will simulate nature and create habitats for fish and
other marine life as well as provide a recreational area for scuba diving and other maritime activities.

The three vessels were seized on the Miami River in January and February 2001 during “Operation
Riverwalk.” During the operation, Customs agents found 925 pounds of cocaine hidden onboard. The
cocaine had an estimated wholesale value of approximately $7.7 million. Operation Riverwalk is a
federal, state and local law enforcement effort aimed at cleaning up the Miami River area and
combating drug smuggling.

On January 18, 2001, the M/V Etoile de Mer was seized after Customs Inspectors found 186 pounds of
cocaine, worth $ 1.5 million wholesale. The cocaine was discovered on the main deck of the ship in
two duffel bags and hidden in a false wall between the cargo hold and the engine room. The M/V
Etoile de Mer was an 80-foot steel hulled fishing vessel converted to carry dry cargo.

On February 27, 2001, the M/V Miguana was seized as part of Operation Riverwalk after Customs
Inspectors and Florida Highway Patrol officers found 125 pounds of cocaine, worth $ 1.1 million
wholesale. The cocaine was initially discovered when “Bandit,” a U.S. Customs drug detection dog,
and “SPEC,” a Florida Highway Patrol drug detection dog, alerted to the presence of cocaine near two
propane tanks at the stern of the ship. While examining the tanks, Inspectors discovered they were not
properly connected to the galley stove contained no propane gas and was unusually heavy. An
examination of the bottom of those tanks revealed that the bottoms had been cut and patched with a
Bondo type material in an apparent effort to hide the illegal cargo. The M/V Miguana is a 101 foot
former garbage scow converted to carry dry cargo.

On February 12, 2001, the M/V Brandywine was seized after Customs Inspectors discovered a false
compartment under a waste oil tank in the forward cargo hold. The false compartment was created
with a false floor in the waste oil tank and accessed through a 4-inch by 12-inch steel plate that was put
in place with a Bondo type material.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 4


Department of Treasury Forfeiture Fund
STATEMENTS OF NET COST
For the years ended September 30, 2001 and 2000
(Dollars in Thousands)

2001 2000
Program:
ENFORCEMENT
Intragovernmental:
Seizure investigative costs and asset management $ 45,482 $ 54,591
Other asset related contract services 1,490 1,872
Awards to informer 3,017 1,624
Data systems, training and others 15,722 27,176
Super surplus (Note 14) 284 1,243
Federal law enforcement conveyance 13 4
Secretary's enforcement fund (Note 15) 880 -
Total Intragovernmental 66,888 86,510
With the Public:
National contract services seized property and other 31,777 34,883
Joint operations 8,898 10,337
Total with the Public 40,675 45,220
Net Cost of Operations $ 107,563 $ 131,730
—— —

The accompanying notes are an integral part of these financial statements
TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 26


Asset specific expenses and revenue are not recorded and accounted for by the Fund

Asset level revenue is currently being recorded in the various inventory systems used by the Fund.
The Fund continues to be incapable of tracking asset specific expenses related to individual seizures.
Currently, only holding costs and direct selling costs related to real property are captured in
SEACATS at the line item level. For all other direct costs not directly traceable to individual
seizures, an allocation process needs to be developed and implemented. Indirect costs will have to
be applied to individual seizures. Direct and indirect costs will have to be added together to provide
total costs per seizure. These asset specific expenses related to individual seizures have to be tracked
in the respective inventory tracking systems.

This condition will be modified and repeated as a reportable condition in FY 2001.

58 EXHIBIT I —- STATUS OF PRIOR YEAR FINDINGS


SECTION IV

REQUIRED SUPPLEMENTAL INFORMATION


TREASURY FORFEITURE FUND

Required Supplemental Information
(Required by OMB Bulletin 01-09)

For the Years Ended September 30, 2001 and 2000

(Dollars in Thousands)

Intragovernmental Amounts — Assets (Dollars in thousands)

2001 2000
Fund Accounts
Fund Balance Accounts Balance Receivable
with Receivable/ with ‘Advances
Partner Agency Treasury Advances Investments Treasury Investments
Departmental Offices $ -- $10 $ - $ -- $712 $ -
Department of Justice -- - - -- -
Bureau of Public Debt — = 388,451 = —_ =: 460,536
Totals g- $10 $388,451 $- $712 $460,536
Intragovernmental Amounts — Liabilities (Dollars in thousands)
2001 2000
Accounts Accounts
Partner Agency Payable Payable
Department of Justice $112 $ 3,048
Departmental Offices 1,240 1,884
Federal Law Enforcement Training Center 186 -
U.S. Customs Service 9,738 13,527
Internal Revenue Service 9,641 3,880
Alcohol, Tobacco and Firearms 1,359 12,805
USS. Secret Service 195 2,760
Financial Crimes Enforcement Network __- ___292
Totals 22.471 $38,196

60

SECTION IV — REQUIRED SUPPLEMENTAL INFORMATION


PAG)

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

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

We have audited the Principal Statements (balance sheets and the related statements of
net cost, changes in net position, budgetary resources and financing, hereinafter referred
to as “financial statements”) of the Department of the Treasury Forfeiture Fund (the
Fund) as of and for the years ended September 30, 2001 and 2000. These financial
statements are the responsibility of Fund Management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in
the United States of America; the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United
States; and, Office of Management and Budget (OMB) Bulletin No. 01-02, Audit
Requirements for Federal Financial Statements. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by Fund Management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material
tespects, the financial position of the Fund as of September 30, 2001 and 2000, and its
net costs, changes in net position, budgetary resources, and the reconciliation of net
costs to budgetary obligations, for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

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

December 21, 2001, on our consideration of the Fund's internal control structure and a
report dated December 21, 2001, on its compliance with laws and regulations.

Member of the American Institute of Certified Public Accountants




OVERVIEW

Profile of the Treasury Forfeiture Fund

a miemememeeeeeeeeemeeemeeneeeens
The Treasury Forfeiture Fund (the Fund) is the receipt account for the deposit of non-tax forfeitures
made pursuant to laws enforced or administered by Treasury law enforcement agencies and the
United States Coast Guard. It was established in October of 1992 as the successor to the Forfeiture
Fund of the United States Customs Service. When the enabling legislation for the Fund was enacted,
it brought together all of Treasury law enforcement under a single forfeiture program. The member
law enforcement bureaus of the Treasury Forfeiture Fund are the U.S. Customs Service (Customs),
the U.S. Secret Service (Secret Service), the Bureau of Alcohol, Tobacco and Firearms (ATF), and
the Internal Revenue Service’s Criminal Investigation (IRS-CI). These Treasury bureaus are joined
by the U.S. Coast Guard of the Department of Transportation, a member of the Fund as the result ofa
long-standing close law enforcement relationship with Customs.

The Fund’s enabling legislation was first published in Public Law 102-393, enacted October 6, 1992,
and is codified under Title 31 of the United States Code, Section 9703. The Fund is a “special receipt
account.” This means the Fund can provide money to other Federal entities toward the
accomplishment of a specific objective for which the recipient bureaus are authorized to spend

money.

The Executive Office for Asset Forfeiture (EOAF), which provides management oversight of the
Fund, falls under the auspices of the Under Secretary for Enforcement, U.S. Department of the
Treasury. EOAF’s organizational structure includes the Director, Legal Counsel, Assistant
Director/Policy and Operations, and Assistant Director/Financial Management and Chief Financial
Officer. Functional responsibilities are delegated to various team leaders. EOAF is located in
Washington, D.C. and currently has 20 full time equivalent positions.

SECTION I - OVERVIEW


Table of Contents

Message from the Director ...cccessscessserecsesrensceseseessseaneenneencensensenseneensenecnnenneasonnanesenssys i
Table of Content ....ccecccceccsececesecsseseresseneeesesencerscsenesecasansnsssaneccsceenenenenenesnanensensnenaeeseegs ii

Overview
Profile of the Treasury Forfeiture Fund
Case Highlights .............+
Program and Fund Highlights.
Program Performance
Financial Highlights.

Financial Statements
Independent Auditor’s Report on Financial Statements ...........--sssessssseesecnseerteess 23
Financial Statements:

Balance Sheets ...........
Statements of Net Cos
Statements of Changes in Net Position.
Statements of Budgetary Resources..
Statements of Financing.......
Notes to Financial Statements.

Other Reports
Independent Auditor’s Report on Internal Control
Independent Auditor’s Report on Compliance with Laws and Regulations.
Exhibit I, Reportable Conditions ..
Exhibit II, Status of Prior Year Findings

Required Supplemental Information

Other Accompanying Information .......s.sssssesseseenseneensententenrensenssentnneearensenerneenetnen 62

ii


laboratories. These forensic Programs involve a significant amount of research and development which
cannot be funded through the mandatory authority. In FY 2001, $4.5 million was Provided to the
bureaus to Support computer forensic initiatives.

Super Surplus

Super Surplus Tepresents the remaining unobligated balance after an amount is reserved for Fund

operations in the next fiscal year. Super Surplus can be used for any federal law enforcement Purpose.
No Super Surplus was declared for FY 2001. However, $11.3 million remaining in Super Surplus from

the Customs Service Southwest Border Initiative which Congress approved in F Y 2000 was carried over
into FY 2001.

The Fund has declared a Super Surplus for FY 2002 in the amount of $35.198 million,

SECTION [- OVERVIEW


eon

Operation Monopoly

Operation Monopoly is a Customs initiated and led financial task force investigating money laundering
and Bank Secrecy Act (BSA) violations involving financial institutions, money service businesses
(wire remitters and check cashing businesses), and telephone calling card businesses in Puerto Rico.

assigned to Operation Monopoly effected 15 seizures totaling more than $4.4 million, seized 3
firearms, made 18 arrests, and secured 8 money laundering indictments.

Outbound Currency Initiatives

In an effort to attack the illegal exportation of unreported currency derived from illicit activities,
Customs periodically conducts “outbound initiatives” designed to detect such illegal enterprises. One
such initiative, Operation Windfall, commenced on June 18, 2001. As with previous outbound
initiatives, a critical component of Operation Windfall was the ability to gather investigative and
intelligence information and forward it to the appropriate entity in an expedient manner.

Operation Windfall, which was in effect from June 2001 through August 2001, resulted in 199
currency seizures totaling $7,209,515 and 29 arrests for BSA violations. Overall in FY 2001, Customs
personnel effected 1,110 currency seizures totaling $44,484,000, resulting in 229 arrests for BSA
violations.

In connection with an investigation into outbound currency smuggling, the Outbound Currency Task
Force (OCTF) conducted an examination on June 23, 2000 of an individual subsequently identified as
Victor Anthony Lyn-Shue. Mr. Lyn-Shue attempted to depart from the United States via the Miami
International Airport in route to Montego Bay, Jamaica.

Customs Inspectors conducting x-ray examinations in the baggage handling area revealed numerous
boxes with compact, dense objects inside corresponding with Mr. Lyn-Shue’s baggage. A subsequent
search of the bins revealed that they were filled with several grocery and small appliance boxes. The

A Customs Inspector located Mr. Lyn-Shue in the jet-way prior to boarding Air Jamaica flight. The
Inspector identified himself and provided Mr. Lyn-Shue with a Currency Reporting Form (Customs
Publication-503), which states the currency reporting laws in writing. On the Form 503, Mr. Lyn-Shue
represented that he was carrying only $1,500 in currency or monetary instruments. Mr. Lyn-Shue

On July 3, 2000, the OCTF executed a federal search warrant at the residence of Mr. Lyn-Shue in
Broward County, Florida. As a result of the execution of this search warrant, Customs agents
determined the residence was utilized by Mr. Lyn-Shue to house and conceal large sums of U.S.
currency. A computer and numerous financial documents were also seized.

Further investigation by the OCTF resulted in two seizures totaling over $1,600,000 on April 5, 2000.
This investigation allegedly revealed and linked the Universal Cambios, Miami, the Miami Beach

3 SECTION I- OVERVIEW


Net Cost of Operations. As a result of the decline in overall expenses during FY 2001, the net
cost of operations dropped to $108 million in FY 2001, from $132 million in FY 2000, a
decrease of eighteen percent.

Statement: Balance Sheet
oreement: Balance Sheet
Assets, Liabilities and Net Position

Treasury Forfeiture Fund
Balance Sheets
September 30, 2001 and 2000

(Dollars in millions)

ASSETS

Intra-governmental Assets

Fund Balance with Treasury... $49
Investments and Related Interest. 460
Accounts Receivable... *
Advances .....0.000... . sees 1
Total Intragovernmental.. . 510
Cash and Monetary Assets, 104
Accounts Receivable _*
104

Forfeited Property
Held for sale, net of mortgages, liens and claims... 26 28
To be shared with Federal, State or Local, or Foreign Governments - iF
Total Forfeited Property, net of mortgages, liens and claims... 26 28
Capitalized Software. 2 _*

Total Assets

id SECTION I - OVERVIEW


FINANCIAL MANAGEMENT:
Audit of the Treasury Forfeiture
Fund Fiscal Years
2001 and 2000
Financial Statements

OIG-02-048 February 21, 2002

Office of Inspector General

Yobteeik

The Department of the Treasury



Note 10: Capitalized software

During fiscal year 2001, the Fund spent $2.4 million developing the FASTRAK seized property and
forfeited asset system to be used to record seized and forfeited property relating to the Secret Service
and Alcohol, Tobacco, and Firearms. Prior to fiscal year 2001 both bureaus used a Department of
Justice record keeping system.

Note 11: Distributions Payable (state and local agencies and foreign governments)

Distributions Payable (state and local agencies and foreign governments) amounted to $22.4 million
and $34.7 million in fiscal year 2001 and 2000 respectively. Included in this amount for fiscal year
2001 and 2000, respectively, is $21.7 and $27.6 million arising from a decision made by Fund
management to recognize as a liability a portion of the equitable sharing requests (based on the
average of historical pay-out percentage), that were approved or in final stages of approval on
September 30, 2001 and 2000, respectively. Prior experience with the nature of this account
indicated that a substantial portion of these requests were certain to be paid out by the Fund during
the following fiscal year.

Note 12: Net Position
Cumulative Results

The following summarizes components of cumulative results for the years ended September 30,
2001 and 2000, respectively, (dollars in thousands):

2001 2000
Retained Capital $ 19,072 $189,071
Unliquidated Obligations 210,670 135,639
Results of Operations 7,598 (94,968)

$237,340 $229,742
Unliquidated Obligations

The following summarizes the components of unliquidated obligations as of September 30, 2001
and 2000, respectively, (dollars in thousands):

2001 2000
Discretionary $ + $ 160
Equitable Sharing 61,618 604
Non-discretionary 149.052 134.875

$210,670 $135,639

41 SECTION II - FINANCIAL STATEMENTS


number. This unauthorized redemption by Moore, along with a scheme to purchase food coupons at a
discount and then redeem them for face value using Greer’s authorization number, form the basis of
the charged fraud scheme thus defrauding the government. The defendants were charged with money
laundering (18 USC 1957), conspiracy (18 USC 371) and various tax charges.

USDA OIG submitted requests for equitable shares of the four specific assets named in the indictment
of Greer and Moore. Those assets included a Lexus automobile and three multi-unit apartment
buildings, which were purchased using proceeds of the food coupon scheme. The apartment buildings
were owned jointly by Greer and Moore. In reaching their plea agreements, Greer and Moore agreed
to plead guilty to the conspiracy count and that the money laundering count would be dropped, thus
rendering the forfeiture action moot.

The defendants also agreed that they would not contest any forfeiture undertaken as a civil action. The
contemplated civil forfeiture action would seek forfeiture of the original vehicle, the three real
properties and three bank accounts valued at $232,652.90.

A Default Judgement and Decree of Forfeiture was entered in the case in December 2000 and an
amended order was entered on January 3, 2001 forfeiting assets valued at $905,782.35 to the Federal
Government.

Money Laundering - Three Generation Family Affair

In January 1998, IRS-CI began an investigation of individuals involved in narcotics trafficking in the
Columbus, Ohio area. These individuals were looking for ways to conceal the proceeds they derived
from the sale of narcotics. The ensuing investigation subsequently flushed out a drug organization,
culminating with the conviction of five individuals, including a career criminal, his mother, and his
son.

The ringleader of the organization was Thomas A. Henderson, who had been twice convicted for bank
robbery and once for voluntary manslaughter during the 1970s and 1980s. He was imprisoned for
these crimes from 1981 to 1995 until released on a ten-year parole. However, it did not take
Henderson long to get himself back into trouble. With the help of his son, Henderson smuggled as
much as 3.3 tons of marijuana from Houston, Texas into the Columbus, Ohio area during a three-year
period. His mother then helped him launder the proceeds by transferring money among bank accounts
and purchasing money orders that were used to buy and repair apartment buildings for him.

Based upon the information developed during the undercover operation, Henderson was arrested and
search warrants were obtained for five residences, two vehicles, two safe deposit boxes, and a
business. Henderson, his son, Thomas D. Henderson, and his mother, Nedra Angel, were indicted on
February 9, 2001 and charged with a number of violations including making a false statement in the
acquisition of a firearm, conspiracy to distribute marijuana, and money laundering. All three
subsequently signed plea agreements. As part of his plea agreement, Henderson agreed to the
forfeiture of $11,900 currency seized from his residence, and six pieces of rental property worth nearly
$400,000. He also agreed to pay money judgments totaling $59,191 for assets he previously owned
but for which he no longer held title.

The Henderson investigation was jointly worked with the Bureau of Alcohol, Tobacco, and Firearms
(ATF) and the Narcotics Bureau of the Columbus Police Department. The investigation not only
dismantled a criminal organization and forfeited almost a half-million dollars of assets, but also is an
excellent example of the cooperation that exists between federal and local law enforcement agencies.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 6


Internal Revenue Service

The Pegg Case

brother, Joe H. Pegg, imported vast
during the 1970s and 1980s. i

District of Georgia, whereby he pled guilty to money laundering and conspiracy. In exchange for the
guilty plea, Buck Pegg received three years probation on each count, and agreed to forfeit at least $20
million in monies and Property to the United States of America.

In January of 1998, with the written consent of Pegg and his attomeys, the overseas bank accounts
were transferred to Customs pending forfeiture. In the summer of 2001, the Final Order of Forfeiture

Agriculture, Office of Inspector General (USDA OIG), in an entitlement fraud case. This investigation
focused on Robert Greer and Floyd Moore, owners of two Chicago area retail food and liquor
businesses. Greer Food and Liquor was authorized to accept and redeem USDA Food Coupons, which
it did. Floyd Moore’s business was not an authorized Food Coupon Retailer. However, Food Coupon
redemption proceeds were deposited into Moore’s business checking account through a scheme to
purchase food Coupons at a discount and then redeem them for face value using Greer’s authorization

5 SECTION I - OVERVIEW



b. EOAF should vigorously pursue the enhancement of SEACATS system capabilities to record
and report expenses at the asset level.

MANAGEMENT RESPONSE

Management Assessment on Progress:

During FY 2001, Fund management awarded a contract to an independent public accounting firm
(IPA) for the review of the Property Contractor’s accounting system and methodology for
determining and distributing indirect costs at the asset level. This contract was for the review of costs
associated with real property only. The IPA determined that the accounting system utilized by the
Real Property Contractor is capable of capturing and reporting both direct and indirect costs, but a
methodology for determining and distributing the indirect costs at the asset level had not been
developed.

In regard to the inventory systems maintained by the bureaus participating in the Fund, two of the
three inventory tracking systems currently captures cost data for seized and forfeited property. While
indirect costs are not being recorded in the two systems that do capture cost data, SEACATS and
FASTRAK, direct costs, such as advertising and liens, are being captured. The IRS’ AFTRAK
system does not currently record certain direct cost data; however, the IRS maintains the relevant
cost data in the seizure case files.

Discussion/Background and Planned Action:

Fund management concurs with the auditor’s recommendation regarding the development and
implementation of an allocation process for indirect costs. EOAF relies on a national seized property
contractor (the Contractor) to account for all costs related to the storage, maintenance and sale of
seized and forfeited property. Currently, the Contractor does not consistently collect and record both
direct and indirect costs. EOAF will direct the Contractor to propose and implement a methodology
for determining indirect costs for all real property. EOAF will also begin reviewing proposed
methodologies for determining indirect costs for general property. However, implementation will
not be completed until after a new contract has been awarded for the storage and maintenance of

general property.

Additionally, in regard to systems capabilities for recording and reporting expenses at the asset level,
EOAF will require that each of the three inventory tracking systems record costs and revenue
uniformly. This will include costs directly related to achieving a seizure, such as: investigative
expenses; storage, maintenance and sales costs; POE/POI; liens; and advertising.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 31


Entity Assets

Description
September 30, 2001:

Treasury Forfeiture Fund -
10 days 1.970% U.S.
Treasury Bills

Interest Receivable —

On entity investments

On non-entity Investments
Total Investment, Net, and

Interest Receivable

September 30, 2000:

Treasury Forfeiture Fund -
28 days 5.875% U.S.
Treasury Bills

Interest Receivable —

On entity investments
On non-entity investments

Total Investment, Net, and
Interest Receivable

Non-entity Assets

Description
September 30, 2001:

Treasury Forfeiture Fund — Seized Currency

Suspense Account
10 days 1.970%
USS. Treasury Bills

September 30, 2000:

U.S. Customs Suspense Account
28 days 5.875%
US. Treasury Bills

Unamortized Investment,

Cost Discount Net
$175,326 $(269) $175,057
96
117
$175,270
$243,902 $1,114) $242,788
358
320
$243,466
Unamortized Investment,
Cost Discount Net
$213,508 $327) $213.181
$217,886 $996) $216,890

37

SECTION II - FINANCIAL STA TEMENTS


Department of the Treasury Forfeiture Fund
BALANCE SHEETS
As of September 30, 2001 and 2000
( Dollars in Thousands)

2001 2000
Assets:
Intragovernmental :
Fund balance with Treasury § 105,064 § 49,262
Investments and related interest (Note 3) 388,451 460,356
Accounts receivable (Note 4) - 8
Advances (Note 5) 10 704
Total Intragovernmental 493,525 510,330
Cash and other monetary assets (Note 6) 74,978 103,744
Accounts receivable (Note 4) 812 338
75,790 104,082
Forfeited Property (Note 7)
Held for sale, net of mortgages, liens and claims 25,853 27,466
To be shared with Federal, state or local, or foreign
governments 15 282
Total forfeited Property, net of mortgages, liens
and claims 25,868 27,748
Capitalized software (Note 10) 2,369 :
Total Assets $ 597,552 $ 642,160
Liabilities:
Intragovernmental:
Distributions Payable
Other Federal agencies $ 61 $ 94
Accounts payable 22,410 38,102
Total Intragovernmental 22,471 38,196
Seized currency (Note 9) 278,926 303,629
Distributions Payable (Note 11)

State and local agencies and foreign governments 22,385 34,656
Accounts payable 10,327 7,816
Deferred revenue from forfeited assets 26,103 28,121

Total Liabilities 360,212 412,418
Net Position:

Cumulative results of operations (Note 12) 237,340 229,742
Total Liabilities and Net Position $ 597,552 $ 642,160

The accompanying notes are an integral part of these financial statements

25 SECTION IT- FINANCIAL STA TEMENTS


Note 13: Related Party Transactions

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

Note 14: Super Surplus

31 U.S.C. 9703 (g)(4)(B) allows for the expenditure, without fiscal year limitation, after the
reservation of amounts needed to continue operations of the Fund. This “Super Surplus” balance
may be used for law enforcement activities of any Federal agency.

Amounts distributed to other Federal agencies for law enforcement activities under “Super Surplus”
requirements amounts to $65.8 million and $72.2 million in fiscal year 2001 and 2000, respectively.

Note 15: Secretary’s Enforcement Fund

31 U.S.C. 9703 (b)(5) is another category of permanent indefinite authority. These funds are
available to the Secretary, without further action by Congress and without fiscal year limitation, for
Federal law enforcement purposes of Treasury law enforcement organizations. The Source of
Section 9703(b)(5) funds is equitable sharing payments received from the Department of Justice and
the U.S. Postal Service (USPS) Tepresenting Treasury's share of forfeiture proceeds from Justice and
USPS cases.

Amounts distributed for Federal law enforcement purposes of Treasury law enforcement
organizations amounted to $13.3 million and $8.2 million in fiscal year 2001 and 2000, respectively.

Note 16: Commitments and Contingencies

COMMITMENTS

Beginning in fiscal year 1999, Fund management decided to recognize the liability for equitable
sharing requests that were approved or in final stages of approval subsequent to September 30 (See
also Note 11, Distributions Payable).

In addition to the amounts estimated above, there are additional amounts, which may ultimately be
shared, which are not identified at this time.

CONTINGENCIES
Possible claims of potential significance include the following:

1. In recent decisions, the United States Court of Appeals for the Ninth Circuit tuled that it is
unconstitutional to forfeit currency based upon a violation of a Federal currency reporting
statute. Accordingly, the court has ruled that in returning currency, the government must return

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 42


Our audits were conducted forthe purpose of forming an opinion on the financial statements referred
to in the first paragraph of this report as a whole. The information presented in Fund Management's
Overview of the Fund and Other Accompanying Information sections is not a required part of the
financial statements but is supplementary information required by OMB Bulletin No. 01-09, Form
and Content of Agency Financial Statements, or the Treasury Forfeiture Fund Act of 1992. Although
we have read the information presented, such information has not been subjected to the auditing
procedures applied in the audits of the financial statements and, accordingly, we express no opinion
on it.

This report is intended for the information and use of the Management of the Fund, the U.S.

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

December 21, 2001

At. aay an o betes

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 24


RECOMMENDATION
We recommend that the following actions be immediately implemented:
2.1 Seizure Activities

Inadequate accounting and recording of liens and claims

Implement procedures to have field offices track liens and claims manually on a monthly
basis and request that a quarterly list of liens and claims be prepared and forwarded to the
Fund’s accounting staff for monitoring purposes. System enhancements/changes must be
made where necessary to accommodate this information, as it is available.

2.2 Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted for by the Fund

In view of the Fund’s acknowledgement of this condition and SEACATS? inability to capture
the required information, we make the following recommendations:

a. EOAF ensures that the new property management contract requires the awardee to
record and distribute overhead costs at the asset level.

b. EOAF vigorously pursue the enhancement of SEACATS system capabilities to
record and report revenue and expenses at the asset level.

FY 2001 STATUS:
Inadequate accounting and recording of liens and claims

The various bureaus have improved on the accounting and reporting of liens and claims both
manually and in their respective systems. The Customs’ lien payable listing for FY 2001 produced
from SEACATS had fewer discrepancies as compared to previous years, when compared to the
manual listing. The differences were mainly due to timing in updating SEACATS. A successful
reconciliation was performed between SEACATS generated information and the manual
information. Lien data for the non-Customs bureaus were generated from the seizing agency’s
inventory tracking system.

The Fund has made significant improvements in this area and this deficiency has been substantially
resolved. This condition will not be reported in FY 2001.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 37


Case Highlights

OLS. Customs Service
Operation Skimflick

Operation Skimflick is a Customs initiated and directed financial task force dedicated to investigating
money laundering violations related to the alleged skimming of millions of dollars from adult
entertainment retail establishments. The unreported income is suspected of being smuggled to
numerous foreign tax havens, and returned to the U.S. in the form of business loans.

Since its inception in June 1999, agents assigned to Operation Skimflick have identified 100 pieces of
real property valued at nearly $14 million as being subject to seizure and forfeiture. A total of 33
search warrants have been executed, over 900 grand jury subpoenas have been served, and over $2.1
million in cash has been seized. In addition, an account located in the Channel Islands with a balance
of $960,000 has been frozen. In FY 2001, 20 videotapes depicting child pornography were seized.

Project Colt

Project Colt is an international task force based in Montreal, Canada that targets telemarketing fraud.
The task force is led by the Royal Canadian Mounted Police and Customs has assigned agents to this
multi-national, multi-departmental task force. To date, Project Colt has identified over 1,200 U.S.
and Canadian victims of telemarketing fraud. By gathering strategic intelligence information, Project
Colt personnel have identified locations where the telemarketers instructed their victims to send
money. As a result of the identification of these locations, Project Colt personnel have seized and
returned $10 million to U.S. and Canadian victims.

There are currently 6 open cases in the U.S. involving a total of 19 persons accused of multiple
charges, including the interstate transportation of stolen goods, There have been 5 U.S. indictments
and 3 convictions. In FY 2001, $689,198 was seized and/or recovered under the auspices of Project
Colt, | arrest was effected, and 23 separate seizures of fraudulent lottery material were made.

Software, Inc.

The Customs San Francisco field office received referrals from several software companies regarding
an Internet website offering counterfeit software for sale. The website (http://www.software-
inc.com) had advertised counterfeit Adobe, Macro-media, Auto-desk, and Microsoft software for
sale. The investigation disclosed that the website was located in Spain and proceeds from the sales of
the counterfeit software were being deposited in New York. Estimates indicated a potential loss of
millions of dollars in revenue for at least three U.S. software manufacturers. Based on an extensive
multi-jurisdictional and multi-national investigation, three suspects pled guilty in the Central District
of California for violations of law pertaining to the distribution and sales of copyrighted computer
software, criminal copyright infringement, and conspiracy to commit wire fraud. The defendants
further agreed to the forfeiture of approximately $900,000, a late model luxury car, and a large
quantity of computer and other electronic components.

TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 2001 2


Less:Equitable Sharing

Intragovernmental
Federal........c.ccceeccccecceeceececeeeseaeeeeenesetnceeueseaneseeaessegaeersces (4) _(7)
Public
State and local agencies........-...:seeseeeeeeeneeeeeereaseeseseeeennns (56) (85)
Foreign Countries... ag @”
Victim Restitution... (4) _G0)
(61) (102)
Total Equitable Sharing.... (65) (109)
Total Non-Exchange Revenues, Net..............:2+11:1eseeeeeeseeeeettetertes 193 17
Transfers-Out
Intragovernmental
Super Surplus (66) (71)
Secretary’s Enforcement Fund ... (i2)—(8)
Property.......seeeeeeeeeeeeeesereeeeteeees _ = qd)
Total Transfers-Out............000.0cceecerseeeeeeeee ee eeeeeeeee eee teersese eens es eeees (78) (80)
Total Financing Sources.. . 115 (37
Net Cost of Operations... 108 132
Net Results of Operations 7 (95)
Net Position — End of Year...........csssssssseeecceseseceeeennneseeseeeneenaseen eee $237 $230

Cost of Operations. For FY 2001, the Cost of Operations totaled $108 million, down from
$132 million in FY 2000. The difference reflects lower costs in seizure investigative costs and
asset management, as well as fewer data systems expenses.

Investment Interest Income. The Fund is authorized to invest cash balances in Treasury
securities. On September 30, 2001, investments totaled $388 million. This compares to a total
of $460 million invested on September 30, 2000. Interest income earned on investments during
FY 2001 totaled $15 million, down from $24 million in FY 2000. The difference reflects lower
interest rates on earnings during 2001.

Currency and Monetary Instruments. The Fund’s primary source of revenue is forfeited
currency and monetary instruments. For FY 2001, revenue from forfeited currency and
monetary instruments totaled $172 million, or 71 percent of total revenues from public sources,
versus $141 million, or 70 percent of public source revenue in FY 2000.

FY 2001 represents another successful year in high-impact cash forfeiture cases, with 79 percent
of all cash forfeitures stemming from cases with a value of $100,000 or more.

TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 2001 16


EXHIBIT I

REPORTABLE CON, DITIONS


Fund’s total forfeited property at fair market value. Since transactions and balances originating from
Customs are material to the Fund, and these are currently being captured in AIMS except for some
completeness and accuracy issues, this deficiency will be reported in the form of a reportable
condition in FY 2001.

TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 2001 55


from revenue in the Fund.

Non-discretionary expenses include all proper expenses of the seizure (including investigative costs
and purchases of evidence and information leading to seizure, holding cost, security costs, etc.),
awards of compensation to informers, satisfaction of liens against the forfeited property, and claims
of parties with interest in forfeited property. Expenses incurred by state and local law enforcement
agencies in joint law enforcement operations with Treasury law enforcement agencies are also
recognized as non-discretionary expenses. Under the Act, non-discretionary expenses are subject
to a permanent indefinite Congressional appropriation, and financed through the revenue generated
from forfeiture activities without congressional limitation.

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

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

Revenue and Expense Recognition

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

Revenue from currency is recognized upon forfeiture. Payments in lieu of forfeiture (mitigated
seizures) are recognized as revenue when the payment is received. Revenue received from
participating with certain other Federal agencies is recognized when the payment is received.
Operating costs are recorded as expenses and related liabilities when goods are received or services
are performed. Beginning Fiscal Year 1999 certain probable equitable sharing liabilities existing
at yearend are accrued based on estimates.

As provided for in the TFF Act, the Fund invests seized and forfeited currency that is not needed for
current operations. Treasury’s Bureau of Public Debt invests the funds in obligations of, or
guaranteed by, the United States Government. Interest is reported to the Fund and recorded monthly
as revenue in the general ledger.

Equitable Sharing (Assets Distributed)

Forfeited property, currency, or proceeds from the sales of forfeited property may be shared with

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 32


[a

TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the Year Ended September 30, 2001
(Dollars in Thousands)

The Treasury Forfeiture Fund Act of 1992, 31 U.S.C. 9703(f), requires the Secretary of the Treasury to transmit to
Congress, no later than February 1, of each year, certain information. The following summarizes the required

information.
qd) A report on:
(A) _ The estimated total value of Property forfeited with respect to which funds were not deposited in the

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

As reported in the audited financial statements, at September 30, 2001, the Fund had forfeited property
held for sale of $ 25,868. The realized proceeds will be deposited in the Fund when the Property is sold.

Upon seizure, currency and other monetary instruments not needed for evidence in judicial proceedings
are deposited in a U.S. Customs Services (Customs) suspense account. Upon forfeiture, it is transferred

(B) The estimated total value of all such property transferred to any state or local law enforcement
agency.
The estimated total value of all such Property transferred to any state or local law enforcement bureau
is summarized by state and U.S. territories. Total currency transferred was $ 53,628 and total property
transferred was $6,649 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, 2000, which became the
beginning balance for the Fund on October 1, 2000, as reported in the audited financial statements is
$ 229,742.
(B) Liens and mortgages paid and the amount of money shared with Federal, state, local and foreign law
enforcement bureaus during the preceding fiscal year.
Mortgages and claims expense, as Teported in the audited financial Statements, was $ 5,507. The
amount actually paid on a cash basis was not materially different.
66 SECTION V ~ OTHER ACCOMPANYING INFORMATION


Entity assets are used to conduct the operations and activities of the Fund. Entity assets comprise
intragovernmental and non-intragovernmental assets, Intragovernmental balances arise from
transactions among Federal agencies. These assets are claims of a Federal entity against another
Federal entity. Entity assets consist of cash or other assets, which could be converted into cash to

¢ Cash and Other Monetary Assets — This Tepresents amounts on deposit with Treasury,
including forfeited cash on hand not yet deposited.

¢ Investments and Related Interest Receivable — This includes forfeited cash held by the Fund
that had been invested in short term U.S. Government Securities.

enforcement agencies Participating in the Fund. The values reported for other receivables are
primarily funds due from the national seized Property contractor for Properties sold; the Proceeds
of which have not yet been deposited into the Fund.

° Advances — This primarily represents cash transfers to Treasury or law enforcement bureaus
Participating in the Fund for orders to be delivered.

¢ Forfeited Property and Currency — Forfeited Property and currency is recorded in the

Tespective seized Property and forfeited asset tracking systems at the estimated fair value at the
time of seizure. However, based on historical sales experiences for the year, properties are

Further, mortgages and claims on forfeited assets are Tecognized as a valuation allowance and a

33 SECTION I - FINANCIAL STATEMENTS


We also noted other matters involving the internal control structure and its operation that we have
reported to Fund Management in a separate letter dated December 21, 2001.

Finally, with respect to internal control related to performance measures reported in Section 1,
“Program Performance and Financial Highlights,” we obtained an understanding of the design of
significant internal controls relating to the existence and completeness assertions, as required by
OMB Bulletin No. 01-02. Our procedures were not designed to provide assurance on internal control
over reported performance measures, and, accordingly, we do not provide an opinion on such
controls.

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

Mn), Eben r AendAn

December 21, 2001

47


Look Forward. Fund management is pleased with the resolution of all material weaknesses and
the reduction in the number of reportable conditions identified against the FY 2001 financial
statements. Efforts will continue for the enhancement of systems performance and the
development of systems integration.

Limitations of the Financial Statements. As required by OMB Bulletin 01-09, Form and
Content of Agency Financial Statements, Fund management makes the following statements
regarding the limitations of the financial statements:

¢ The financial statements have been prepared to report the financial position and results of
operations of the entity, pursuant to the requirements of 31 USC § 3515(b).

© While the statements have been prepared from the books and records of the entity in
accordance with the formats prescribed by OMB, the statements are in addition to the
financial reports used to monitor and control budgetary resources which are prepared from.
the same books and records.

e The statement should be read with the realization that they are for a component of the U.S.
government, a sovereign entity. One implication of this is that liabilities cannot be liquidated
without legislation that provides resources to do so.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 22


The results of our tests of compliance with the laws and regulations described in the preceding
paragraph exclusive of FFMIA disclosed one instance of noncompliance with the following laws and
regulations that is required to be reported under Government Auditing Standards and OMB Bulletin
No. 01-02, which is described below:

The Budget and Accounting Procedures Act of 1950, as amended, Section 3512,
Executive Agency’s Accounting System, requires Federal agencies to establish an
internal control structure, which ensures the safeguarding of assets and the proper
recording of revenues and expenditures. As described in our Report on Internal
Control dated December 21, 2001, the Fund’s internal control structure has a
reportable condition, which results in noncompliance with this Act. This reportable
condition requires significant computer system improvements to correct. Until the
system enhancements can be implemented, Fund Management has developed year-
end manual procedures to compensate for the system’s weaknesses.

The results of our tests of compliance disclosed no instances of noncompliance with other laws and
regulations discussed in the preceding paragraph exclusive of FFMIA, that are required to be
reported under Government Auditing Standards or OMB Bulletin No. 01-02.

The report of the other auditors on the substantial compliance of Customs, as it relates to the Fund,
with the requirements of Federal Financial Management Systems Requirements (FFMSR) disclosed
no instances where Customs’ financial management systems, as they relate to the Fund, did not
substantially comply with FFMSR. Our audit tests disclosed no instances in which the Fund did not
substantially comply with Federal accounting standards and the U.S. Government Standard General
Ledger requirements.

Providing an opinion on compliance with certain provisions of laws and regulations was not an
objective of our audits and, accordingly, we do not express such an opinion.

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

A pebons, lrmngne bemibes

December 21, 2001

49


2. INADEQUATE PROPERTY MANAGEMENT FUNCTIONS (Partial Repeat
Condition)

CONDITION

The Fund’s property management functions require improvement to ensure that: (i) funds, property,
and other assets are safeguarded against loss from unauthorized use or disposition; and (ii)
transactions are properly recorded and accounted for to permit the preparation of reliable financial
Statements and to maintain accountability over the assets, The following issues/concems were noted
in this regard under the following functions:

2.1 Seizure Activities
Inadequate accounting and recording of liens and claims

The Fund’s updated directive does not provide clear instructions as to when the liability is
to be recorded. Therefore, implementation of the instructions contained therein, while
resolving other issues, will not ensure that a liability is recorded for claims and mortgages
throughout the year. In fact, the Directive Tequires that upon EOAF's approval of payment,
the appropriate accounting strip data be affixed to the paperwork authorizing the obligation
and disbursement of funds which are then to be forwarded to the Custom’s Accounting
Services Division (ASD) for processing. Also, the Directive requires ASD to disburse the
approved payments within 14 calendar days from the date of EOAF's approval of payment.

Because ASD cannot record the liability unless EOAF's approval with the accompanying
accounting strip is received, these requirements do not provide for a complete accrual of all
liens and mortgages.

In addition, there are no controls in place to track and record liens and claims either by the
individual law enforcement agencies or by the Property Custodian during the year. Manual
procedures are developed at year-end to compensate for this weakness.

2.2 Asset Disposition Activities
Asset specific expenses and revenue are not recorded and accounted | for by the Fund

Asset specific expenses and revenue generated from asset disposition activities are not
recorded and accounted for by the Fund in the various seized property and forfeited assets
tracking systems. The Fund’s Property Custodian incurs costs on behalf of the Fund from the
time of seizure until the asset is ultimately disposed. The Fund requests cost information
from the Property Custodian and relies on the information it provides.

56 EXHIBIT Il - STATUS OF PRIOR YEAR FINDINGS


PRO

TREASURY
FORFEITURE
FUND

ANNUAL REPORT
FISCAL YEAR 2001

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

Gardiner, Kamya & Associates, P.C.

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


4002 YVFA TWISIS - LYOdIY TWANNY GNNS BYNLFIMOS AMNSVIYL

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Note 4: Accounts Receivable

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

Note 5: Advances

In fiscal year 2001, approximately $0.7 million was utilized toward expenses leaving a balance of
$0.01 million at year end. In fiscal year 2000, $0.8 million was utilized toward expenses leaving a
balance of $0.7 million at yearend.

Note 6: Cash and Other Monetary Assets
Entity Assets

Cash and Other Monetary Assets held on hand included forfeited currency not yet deposited, as
well as forfeited currency held as evidence, amounting to $9.1 million and $17.0 million in fiscal
year 2001 and 2000, respectively.

Non-Entity Assets

Cash and Other Monetary Assets included seized currency not yet deposited, as well as deposited
seized currency which is not invested in order to pay remissions, and proceeds from interlocutory
sales for FY 2000 amounting to $65.8 million and $86.7 million in fiscal year 2001 and 2000,
respectively.

Note 7: Forfeited Property

The following summarizes the components of forfeited property (net), as of September 30, 2001 and
2000, respectively, (dollars in thousands):

2001 2000
Held for Sale $27,128 $30,535
To be shared with Federal, state or local, or foreign government 15 282
Total forfeited property (Note 8) 27,143 30,817
Less: Allowance for mortgages and claims (1,275) (3,069)
Total forfeited property, net $25,868 $27,748

Forfeited property held for sale, net of allowance for mortgages and claims as of September 30, 2001
and 2000 was $25.9 million and $27.7 million respectively, and is presented in the Balance Sheet.

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 38


3. UNSUBSTANTIATED VALUES FOR SEIZED PROPERTY
CONDITION

A considerable number of seizures had $0 appraised value on the inventory reports although they
were not of the contraband or prohibited categories. These seizures include real property, vehicles
and jewelry, which should have an appraised value other than $0. Additionally, we found instances
where the financial values assigned to property were significantly higher than the supporting
appraisal worksheets.

RECOMMENDATION
We recommend that:

a. All seized property that are not of the contraband or prohibited categories be valued at its market
value when seized or, if market value cannot be readily determined, as soon thereafter as
reasonably possible. The inventory system should be immediately updated with such values.

b. In updating the inventory system with property values, the best market estimate should be used
as required by SFFAS No. 3. In the absence of such an estimate, or in the event of Teceiving
unreliable or questionable appraisals, the lowest available appraisal should be used in keeping
with the conservative principle. Steps should then be taken to immediately obtain and update the
inventory system with a reliable estimate.

FY 2001 STATUS

Fund Management worked with Customs to modify the procedures for updating appraised values
in SEACATS. The national seized property contractor was able to enter appraised value data for the
non-Customs agencies. Consequently, the number of seizures with $0 appraised value on the
inventory reports for property that were not contraband or prohibited were insignificant in FY 2001.
Our testwork did not reveal any material instances of valuation problems.

This deficiency is considered to have been resolved and will not be reported in FY 2001.

TREASURY FORFEITURE FUND ANNUAL REPORT ~ FISCAL YEAR 2001 59


In June 2001, the flea markets in Greenville and Lietchfield, Kentucky were visited. No firearms were
found displayed and no vendors selling firearms could be found.

In August 2001, thirteen defendants plead guilty. The remaining defendants are scheduled to plead
guilty in October with one exception going to trial.

Alcohol Diversion

order to avoid taxes. The company cooperated and an offer in compromise was reached resulting in a
total of $400,000 paid to the U.S. Government. Of this amount, $200,000 was forfeited to the
Treasury Forfeiture Fund and the plant was closed for three days.

9 SECTION I- OVERVIEW


PRO

Gardiner, Kamya & Associates, P.C.

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

Fax: 202 857-1778

Independent Auditor's Report on Compliance with Laws and Regulations

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

We have audited the Principal Statements (balance sheets and the related statements of
net cost, changes in net position, budgetary resources and financing, hereinafter referred
to as “financial statements”) of the Department of the Treasury Forfeiture Fund (the
Fund) as of and for the years ended September 30, 2001 and 2000, and have issued our
teport thereon dated December 21 , 2001. Our responsibility is to report on the Fund’s
compliance with laws and regulations based on our audits, Under the Federal Financial
Management Improvement Act of 1996 (FFMIA), we are required to report whether the
Fund’s financial management systems substantially comply with the Federal financial

Federal financial management systems requirements using the implementation guidance

America; the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States; and, OMB Bulletin
No. 01-02.

The management of the Fund is responsible for complying with laws and regulations
applicable to the Fund. As Part of obtaining reasonable assurance about whether the

compliance with certain provisions of laws and regulations, noncompliance with which
could have a direct and material effect on the determination of financial statement

Member of the American Institute of Certified Public Accountants


RECOMMENDATION
We recommend the following:

1. Customs should ensure the capture of complete and accurate information originating from
SEACATS to AIMS. Periodic balancing and reconciliation of data passed between the two
systems should be performed and any disputed data should be resolved.

2. In the absence of an integrated system for IRS, USSS and ATF, manually record all balances
originating from these bureaus that are subject to accrual, such as seized currency and its
offsetting liability, and forfeited property and the related revenue and any applicable liability,
on a regular basis in the Fund’s general ledger.

3. Expedite the extension of the FGL system, an integrated financial system that is capable of
capturing all transactions related to the Fund’s activities in the general ledger, to AFTRAK
(IRS) and ultimately to FASTRAK (USSS and ATF).

MANAGEMENT RESPONSE:

Management Assessment on Progress:

The integration of Customs’ inventory data with the general ledger during FY 2001 represented
achievement of a major milestone for the Fund toward the goal of fully automated financial
statements. However, in order for the general ledger to automatically record all transactions
associated with the Fund’s financial reporting requirements, it will be necessary to integrate all the
asset tracking systems used by the various law enforcement agencies participating in the Fund.
Accordingly, Fund management continues to provide high priority to the integration of data from
the inventory systems of the three non-Customs bureaus to the general ledger through FASTRAK.
The first phase of FASTRAK went into production with the Secret Service and ATF beginning on
October 1, 2002. However, until such time as the asset tracking systems can fully integrate with the
Fund’s financial system, manual adjustments to the standard general ledger will continue.

Discussion/Background and Planned Action:

Fund management concurs with the auditor’s recommendations. Customs will continue to conduct
reconciliations between SEACATS and AIMS to ensure the accuracy of information, as well as
resolve any discrepancies identified during the reconciliation. Fund management will also continue
to pursue the enhancement of FASTRAK to enable the automated integration of inventory data from
the non-Customs bureaus with the general ledger. However, in the absence of this integrated system,
Fund management will continue to require that the IRS, Secret Service and ATF provide quarterly
financial data in order to manually post accrual data to the general ledger for these bureaus.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 53


mid

fy

Treasury Computer Investigative Specialist Program
An increasing number of investigations conducted by the Treasury’s Law Enforcement Bureaus are in
an electronic environment or contain electronic evidence. A key component of the bureaus’ ability to

ar. Department of the Treasury EO)
(9) , Computer Investigations Specialist Field Locations «

ee

—
Some of the primary features of the program are:

¢ All “special agent” personnel (as opposed to other Programs that have technicians conducting
exams);

¢ Combined coordinated training (basic and advanced) between the four bureaus in the area of
electronic crimes;

* State of the art equipment; and

¢ Continuous in-service training and equipment upgrades for CIS agents in the field.

In FY 2001, EOAF provided just over $5.5 million to the CIS program. The majority of the funding
went for basic and advanced training and specialized equipment. Three basic classes were held in
which 72 Treasury agents were given instruction in computer forensics. In addition, for the first time,
a fourth class was held that combined Treasury agents and state and local law enforcement officials
from EOAF funded task forces. This class was another means of outreach by the Treasury bureaus to
our partners in the local law enforcement community.

Il SECTION I - OVERVIEW


Page 2

Recorded and Accounted for by the Fund) caused the Fund to be in
non-compliance with The Budget and Accounting Procedures Act of
1950, Section 3512, Executive Agency’s Accounting System, which
states agencies need to ensure the safeguarding of assets and
the proper recording of revenues and expenditures. There are no
other instances of noncompliance with other laws and
regulations. The IPA will issue a management letter discussing
various issues that were identified during the audit, but were
not required to be included in the audit report.

My staff monitored the conduct of the audit and performed a
quality control review of the IPA’s working papers. The audit
work was performed in accordance with Government Auditing
Standards, issued by the Comptroller General of the United
States and OMB Bulletin No. 01-02, Audit Requirements for
Federal Financial Statements.

Should you have any questions, please contact me at

(202) 927-5430, or a member of your staff may contact

Thomas A. Moschetto, Director, Financial Management Audits at
(202) 927-5074.

Attachment


Note 2: Summary of Significant Accounting Policies

Basis of A ccounting

tion 31 U.S.C. 9703(f)(2)(H), and the Chief Financial Officers Act of 1990,
Beginning with the F iscal Year 1996 report, the Government Management Reform Act of 1994
(GMRA) requires executive agencies, including the Treasury, to produce audited consolidated
annual reports and related footnotes for all activities and funds,

The Fund’s financial Statements are presented in accordance with OMB Bulletin 01-09, Form and
Content of A gency Financial Statements.

(obligations and unfilled customer orders) as a means to facilitate an understanding of the differences
between these bases of accounting.

Financial Statements Presented

These financial statements are provided to meet the requirements of the Chief Financial Officers Act
of 1990, and the Government Management Reform Act of 1994, They consist of the balance sheet,
the statement of net cost, the statement of changes in net Position, the statement of budgetary
resources, and the statement of financing, all of which are prescribed by OMB Bulletin 01-09.

Comparative financial statements are presented in order to provide a better understanding of, and
identifying trends in the financial Position and results of Operations of the Fund,

Allowable Fund Expenses

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

31 SECTION I - FINANCIAL STA TEMENTS


TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the Year Ended September 30, 2001
(Dollars in Thousands)

©

@)

(E)

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

State and local $56,422
Foreign countries 1,079
Other Federal agencies 4,380
Victim restitution 3,867

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

The net cost of operations of the Fund as shown in the audited financial statements is $ 107,563.

The amount of seized currency not on deposit in the Fund’s suspense account at September 30, 2001,
was $ 65,745. This amount includes some funds in the process of being deposited at year end; cash
seized in August or September 2001, that is pending determination of its evidentiary value from the
U.S. Attorney; and the currency seized for forfeiture being held as evidence.

On a budgetary basis, unobligated balances as originally reported on the Office of Management and
Budget Reports, SF-133, “Report on Budget Execution” was approximately $ 90,199 for Fiscal Year
2001.

Any defendant’s property not forfeited at the end of the preceding fiscal year, if the equity in such
property is valued at $1 million or more.

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

U.S. Customs Service $39,594,604.69 18 seizures
IRS 102,111,915.98 37 seizures
U.S. Secret Service 6,396,534.83 2 seizures

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

The total dollar value of such seizures is $ 0. This is also documented on page 64.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 67


LIABILITIES
Intra-governmental Liabilities

Distributions payable:

Other Federal Agencies . $F $*
Accounts Payable.........-.6:-++2sseeseeeeee . 23 _38
Total Intra-governmental Liabilities........-...--seserssrrerseeersees eres _23 _38
Seized Currency.......- . 279 303
Distributions Payable.. 22.35
Accounts Payable............-+ 10 8
Deferred revenue from forfeited assets.. 26 8

TOTAL LIABILITIES.
NET POSITION

Cumulative results of operations. 237 230
TOTAL LIABILITIES AND NET POSITION.......0.s00eersesrereeeereeesesenes $597 $642

(*) Less than $500,000 in amount

Summary of Financial Highlights

Net Position. To summarize, Fund management concluded FY 2001“‘in the black,” with the
necessary resources to commence the business of the asset forfeiture program for FY 2002.
Fund management declared a significant Super Surplus from FY 2001 operations, which will be
used for law enforcement needs of Department of Treasury bureaus. If use of prior year retained
earnings, i.e., Super Surplus, is subtracted from current year costs, the Fund shows net results of

operations of $73 million for FY 2001, a strong equity position.

FY 2001 Audit. The Fund’s independent auditors have given the FY 2001 financial statements
an Unqualified Opinion and determined that all material weaknesses of the Fund have been
resolved. Not since the inception of the Fund in 1992 has the audit opinion been free of at least
one material weakness until now. Fund management is pleased to report this status.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 20


DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

February 21, 2002

OFFICE OF
INSPECTOR GENERAL

MEMORANDUM FOR RAYMOND M. DINEEN, DIRECTOR
TREASURY FORFEITURE FUND

FROM: William H. Pugh Mhbam W. fe

Deputy Assistant Inspector General
for Financial Management and Information
Technology Audits

SUBJECT: Report on the Treasury Forfeiture Fund
Fiscal Years 2001 and 2000 Financial Statements

I am pleased to transmit the attached Report, Audit of the
Treasury Forfeiture Fund (TFF) Fiscal Years (FY) 2001 and 2000
Financial Statements. TFF’s financial statements were audited
by the firm of Gardiner, Kamya & Associates, P.C., an
Independent Public Accountant (IPA). The IPA issued the
following reports:

¢ Independent Auditor's Report on Financial Statements;

¢ Independent Auditor’s Report on Internal Control; and,

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

The IPA rendered an unqualified opinion on the FY 2001 financial
Statements. However, the IPA’s report on internal controls
cited two reportable conditions, neither of which were
considered material weaknesses. The first reportable condition,
(The General Ledger Does Not Capture All Balances and
Transactions that Comprise the Fund During the Year), was
downgraded from a material weakness in FY 2000 to a reportable
condition in FY 2001. The second reportable condition (Asset
Specific Expenses are not Recorded and Accounted for by the
Fund) was reported in prior years and is of continuing
significance.

The IPA’s report dated December 21, 2001 on compliance with laws
and regulations reported one instance of noncompliance.
Specifically, one of the reportable conditions in the IPA’s
Internal Control Report (Asset Specific Expenses are not


the benefit that is received from holding the currency.

The interest to be returned will be payable out of the income of the Fund, and, at present,
represents a possible claim of potential significance.

2. Ina recent decision, the Supreme Court has ruled that the government must return forfeited
currency in those cases of individuals convicted for currency reporting violations who have had
currency forfeited due to the violation. The amount of the currency that might be refunded will
be payable from the Fund, and, at present, represents a possible claim of potential significance.

At present, it is not possible to determine the likelihood that the above claims will arise.
Similarly, it is not possible to determine the value of such potential claims against the Fund.

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

Note 17: Disclosures Related to the Statements of Net Cost

Gross costs and earned revenue related to Law Enforcement Programs administered by the Fund are
presented in Treasury’s budget functional classification (in thousands) as set out below:

2001 000
Gross Costs $107,563 $131,730
Earned Revenues = =
Net Costs 07,563 131,730

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

Note 18: Disclosures Related to the Statements of Budgetary Resources

The Fund’s net amount of budgetary resources obligated for undelivered orders at the end of fiscal
year 2001 and 2000 are $210.7 million and $135.6 million, respectively. This amount is fully
covered by cash on hand in the Fund and Entity Investments. The Fund does not have borrowing or
contract authority and, therefore, has no repayment requirements, financing sources for repayment,
or other terms of borrowing authority. No adjustments were required during the reporting period to
budgetary resources available at the beginning of the year. There are no legal arrangements, outside
of normal government wide restrictions, specifically affecting the Fund’s use of unobligated balances
of budget authority.

Adjustments to budgetary resources available at the beginning of fiscal year 2001 and 2000 consist
of the following (in thousands):

43 SECTION II - FINANCIAL STATEMENTS


Department of Treasury Forfeiture Fund
STATEMENTS OF CHANG ES IN NET POSITION
For the years ended September 30, 2001 and 2000
(Dollars in Thousands)

2001 2000
Net Position - Beginning of year $229,742 $324,710
Financing Sources (Non-Exchange Revenues):
Intragovernmental
Investment interest income 15,453 23,895
Public
Forfeited currency and monetary instruments 171,454 140,414
Sales of forfeited Property net of mortgages and claims 25,271 30,896
Proceeds from Participating with other Federal agencies 33,764 16,205
Value of property transferred in equitable sharing 7,297 TAL
Payments in lieu of forfeiture, net of refund 1,830 880
Reimbursed costs 2,336 2,299
Others. 1,463 4,045
eek —ee
Total Gross Non-Exchange Revenues 258,868 225,746
Less: Equitable Sharing
Intragovernmental
Federal (4,380) (6,557)
Public
State and local agencies (56,422) (85,104)
Foreign countries (1,079) (6,569)
Victim Restitution (3,867) (10,540)
(61,368) (102,213)
Total Equitable Sharing (65,748) (108,770)
Total Non-Exchange Revenues, Net 193,120 116,976
Transfers-Out
Intragovernmental
Super Surplus (Note 14) (65,505) (70,927)
Secretary's Enforcement (Note 15) (12,454) (8,244)
Property : (1,043)
Total Transfers-Out (77,959) (80,214)
Total Financing Sources- Net 115,161 36,762
Net Cost of Operations (107,563) (131,730)
Net Results of Operations 7,598 (94,968)
Net Position - End of Year $237,340 $229,742

The accompanying notes are an integral part of these financial statements
27 SECTION II - FINANCIAL STATEMENTS



Net Position

The components of net position are classified as follows:

Retained Capital — There is no cap on amounts that the Fund can carry forward into Fiscal Year
2002. The cap was removed by the Fiscal Year 1997 Omnibus Appropriations Act (PL 104-
208).

Unliquidated Obligations — This category represents the amount of undelivered purchase
orders, contracts and equitable sharing requests which have been obligated with current budget
resources or delivered purchase orders and contracts that have not been invoiced. An expense
and liability are recognized and the corresponding obligations are reduced as goods are received
or services are performed. In Fiscal Year 1999, Fund management decided to recognize as
liabilities, a portion of the equitable sharing requests that were in final stages of approval
subsequent to yearend. Prior experience with the nature of this account indicated that a
substantial portion of these requests were certain liabilities at yearend. Prior to Fiscal Year 1999,
expenses and liabilities were recognized and the corresponding obligations reduced when final
management approval for an equitable sharing request was given (See also Distributions Payable
at Note 11).

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

Note 3: Investments and Related Interest

All investments are intragovernmental short-term (35 days or less) non-marketable par value Federal
debt securities issued by, and purchased through, Treasury's Bureau of the Public Debt. Investments
are always purchased at a discount and are reported at acquisition cost (market value), net of
discount. The discount is amortized into interest income over the term of the investment. The
investments are always held to maturity. They are made from cash in the Fund and from seized
currency held in the Customs Suspense Account. The Customs Suspense Account became the
depository for seized cash for the Fund following enactment of the TFF Act. The investment, net,
represents the required market value.

The following schedule presents the investments on hand as of September 30, 2001 and 2000,
respectively (dollars in thousands):

TREASURY FORFEITURE FUND ANNUAL REPORT - FISCAL YEAR 2001 36


SECTION II
FINANCIAL STATEMENTS


a

Brian Russell Stearns

On February 9, 2001, in Austin, Texas, Brian Russell Stearns, who purportedly ran a multimillion.
dollar international finance business from his Lake Austin mansion, was found guilty of defrauding
more than $50 million from investors located around the world, After a two-week trial, jurors found
Stearns guilty on all 80 counts of the indictment, including money laundering, mail fraud and other
violations. The jury also ruled that authorities could liquidate $35 million in Proceeds from Stearns’
money laundering operation and Teturn it to the investors.

Sterns was convicted in February 2001 and was sentenced to 30 years in prison on July 12, 2001.
OS. Secret Service

The U. S. Secret Service Los Angeles West African Task Force (LAWATF), a multi-jurisdictional law
enforcement task force formed to combat West African organized crime groups, arrested a foreign
national from Nigeria in Connection with an advance fee fraud scheme operating in the Los Angeles
area. In excess of $600,000 and one automobile were seized by the task force after these funds were
identified as the fruits of fraudulent activity.

The LAWATF initiated their investigation after developing information indicating the Suspect was
utilizing Proprietary information in an attempt to swindle a Los Angeles based company that was owed
$35 million by the Nigerian government. The suspect claimed to be a ranking official of the Central
Bank of Nigeria, and that he was in the Los Angeles area to assist the Los Angeles based company

from the bank accounts of his associates, who were located in the United States, England, and
Germany. German law enforcement authorities Suspect one of his associates, an attorney, of
embezzling legitimate funds or laundering tainted funds. The amount attributed to the embezzling and
laundering activity is reported to be $3 million. The attorney subsequently fled Germany.

7 SECTION I - OVERVIEW


1. THE GENERAL LEDGER DOES NOT CAPTURE ALL BALANCES AND
TRANSACTIONS THAT COMPRISE THE FUND DURING THE YEAR. (Repeat
Condition)

CONDITION

The Asset Information Management System (AIMS) which is the general ledger system maintained
by the U.S. Customs Service (Customs), processes, groups and summarizes transactions into account
balances for the Fund. Currently, it is not interfaced with the seized property and forfeited assets
tracking systems (asset tracking systems) used by the various law enforcement agencies participating
in the Fund. As a result, accounts such as accounts receivable, liens and mortgages payable, forfeited
property and deferred revenue, and seized currency and its offsetting liability are not recorded in the
general ledger during the year. Instead, the Fund has implemented procedures to capture these
balances only at year end.

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

1. In the absence of an integrated system, manually record all accounts subject to accrual, such
as seized currency and its offsetting liability, and forfeited property and the related revenue
and any applicable liability, on a regular basis in the Fund’s general ledger.

2. Expedite the implementation of the FGL system, an integrated financial system that is
capable of capturing all transactions related to the Fund’s activities, in the general ledger.

FY 2001 STATUS

Customs has implemented an integration process to capture seized and forfeited currency and
Property transactions and balances originating from its inventory system — the seized assets and case
tracking system (SEACATS) into AIMS through an integrated system (FGL). The FGL will
eventually be extended to transactions generated by all the participating agencies of the Fund. GKA
evaluated this integration process as a follow-up to the material weakness.

Based on our analysis, we determined that the integration of SEACATS with AIMS(G/L) through
the FGL satisfies the data integrity requirement and that only valid transactions are processed. It is
however short on completeness and accuracy for FY 2001. The completeness and accuracy of the
final numbers reported in the financial statements are achieved by relying on the compensating
procedures embedded in the rollforward preparation process. The integration process achieved so
far is a major enhancement in rectifying the material weakness as discussed above. Customs is aware
of the completeness and accuracy issues and is currently working on rectifying them.

In FY 2001, Customs’ seized currency and monetary instruments comprised about 51% of the
Fund’s total seized currency and monetary instruments. Forfeited property was about 49% of the

54 EXHIBIT I - STATUS OF PRIOR YEAR FINDINGS


TREASURY FORFEITURE FUND
Information Required by 31 U.S.C. 9703(f)
For the Year Ended September 30, 2001
(Dollars in Thousands)

(F)

(G)

@

@

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

The total net position of the Fund at September 30, 2001, as Teported in the audited financial statements
is $ 237,340.

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

There is no cap on amounts that can be carried forward into FY 2002 per Fiscal Year 1998 Omnibus
Appropriations Act (PL 104-208).

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

The audited financial statements, including the Independent Auditor’s Report, is found in Section II.
An analysis of income and expense showing revenue received or lost: (i) by property category (such
as general property, vehicles, vessels, aircraft, cash, and real Property); and (ii) by type of disposition
(such as sale, remission, cancellation, placement into official use, sharing with state and local agencies,

and destruction).

A separate schedule is presented on page 65.

68

SECTION V - OTHER ACCOMPANYING INFORMATION


2001 2000
Recoveries of Prior Year Obligations $9,198 $29,856
Spending Authority from Offsetting Collections 124 68
Total $9,322 $29,924

Note 19: Dedicated Collections
store Aa: Dedicated Collections

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

TREASURY FORFEITURE F UND ANNUAL REPORT — FISCAL YEAR 2001 44


PRO

4

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

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

the Comptroller General of the United States; and, Office of Management and Budget
(OMB) Bulletin No, 01-02, Audit Requirements Sor Federal F; inancial Statements.

Our consideration of the internal contro] over financial reporting would not necessarily
disclose all matters in the internal control over financial reporting that might be
reportable conditions. Under Standards issued by the American Institute of Certified
Public Accountants, Teportable conditions are matters coming to our attention relating
to significant deficiencies in the design or Operation of the internal Control that, in our
judgment, could adversely affect the F und’s ability to record, process, summarize, and
Teport financial data Consistent with the assertions by Fund Management in the financial
statements.

Member of the American Institute of Certified Public Accountants


Program and Fund Highlights

The Treasury Forfeiture Fund is a “special receipt account.” Such accounts represent federal fund
collections earmarked by law for a specific purpose. The enabling legislation for the Treasury
Forfeiture Fund (31 U.S.C. § 9703) defines those purposes for which Treasury forfeiture revenue may
be used.

Once property or cash is seized, there is a forfeiture process. Upon forfeiture, seized currency, initially
deposited into a suspense, or holding account, is transferred to the Fund as forfeited revenue. Once
forfeited, physical properties are sold, and the proceeds are deposited into the Fund as forfeited
revenue. It is this forfeiture revenue that comprises the budget authority for meeting expenses of
running Treasury’s forfeiture program.

Expenses of the Fund are prioritized so that unavoidable, or “mandatory” costs are met first. Expenses
may not exceed revenue in the Fund. The Fund has several different spending authorities. Each of
them is described below.

Mandatory Authority

The mandatory authority items are generally used to meet “business expenses” of the Fund, including
expenses of storing and maintaining seized and forfeited assets; valid liens and mortgages;
investigative expenses incurred in pursuing a seizure; information and inventory systems; and certain
costs of local police agencies incurred in joint law enforcement operations. Following seizure,
equitable shares are paid to state and local law enforcement agencies that contributed to the seizure
activity at a level proportionate to their involvement.

It is a strategic goal of the Fund to emphasize and monitor high impact forfeitures. To make
significant forfeitures requires longer, more in-depth investigations. To this end, Fund management
emphasizes the use of mandatory funding authorities that fuel large case initiatives including Purchase
of Evidence and Information, expenses associated with Joint Operations, Investigative Expenses
Leading to Seizure, and Asset Identification and Removal Groups.

Asset Identification and Removal Groups

Asset Identification and Removal Groups (AIRGs) help ensure that seizure operations are conducted in
the right way, with a maximum of precision and efficiency. In FY 2001, the Fund contributed over
$3.9 million in mandatory funding to the efforts of Customs AIRGs. The groups are comprised of
special agents, auditors, accountants and contract data analysts who are specially trained to identify
assets of criminal organizations. Today, there are 21 AIRGs located within Customs’ field offices
throughout the United States. The personnel assigned to the groups receive special training at
Treasury’s Federal Law Enforcement Training Center to prepare them in the areas of asset
identification, removal and forfeiture. The AIRGs are particularly valuable in international
investigations, where criminal proceeds can be moved rapidly around the world. Their expertise in
identifying and tracking these assets is critical to an effective seizure and forfeiture program. These
groups assist their agencies in meeting their mandates. The results that they attain can be used as a tool
to assist managers in assessing the strength and depth of criminal organizations and gauge their success
in disrupting crime.

TREASURY FORFEITURE FUND ANNUAL REPORT — FISCAL YEAR 2001 10