of the Fund. The Fund's accompanying financial statements received a "qualified"
opinion by independent auditors. The Treasury Forfeiture Fund received an
"unqualified" opinion from the independent auditors for fiscal year 1993.

The Independent Auditors’ Report on Internal Control included in this report details six
key material weaknesses in the Fund's internal control structure. Specifically, the report
states:

« Analysis of changes in seized and forfeited property - USCS and IRS CID
were not able to provide an auditable analysis of changes in seized property,
and IRS CID was not able to provide an auditable analysis of changes in
forfeited property in a timely manner, which resulted in a scope limitation
qualification in the auditors’ report to the financial statements.

¢ Accounting records are primarily maintained on a cash basis - The
Fund's accounting records are primarily maintained on the cash basis of
accounting, rather than the accrual basis. Accordingly, most transactions are
reflected in the accounting system when the cash is received or disbursed
rather than when the transactions occur. Year-end manual procedures were
developed in order to produce accrual basis financial statements that could
be substantiated through an audit.

¢ General ledger - The Fund's general ledger does not record all balances and
transactions that are reflected in the financial statements. Rather, procedures
were developed to identify and capture information manually from other
systems in order to compile the financial statements.

« Forfeited Property - The value of forfeited and seized property is not
recorded in the general ledger and is not recorded in supporting subsidiary
systems in a timely manner. As a result, year-end procedures were
developed to identify forfeited and seized property not entered in the
subsidiary systems as of September 30, 1994, and to adjust the financial
statements for the value of forfeited and seized property on hand at year end.

¢ Forfeited property valuation - Forfeited property is not recorded in the
subsidiary system during the year at its fair value at the time of forfeiture.
An adjustment is made to the financial statements as of September 30, 1994,
to record forfeited property at an estimate of fair value.

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

While these material weaknesses were included in the fiscal year 1993 Report on
Internal Control, many improvements in internal controls have been made as the result
of a corrective action plan developed from the findings of the 1993 audit. An example
of internal controls improvements are the internal accounting reports that the Treasury
Fund developed to generate monthly Income Summaries and Cash Flow Statements.
Additionally, Performance Indicators were identified during fiscal year 1994. Further,

xvi


(6)

(7)

(8)

DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

Related Party Transactions

Certain capital assets of the agencies, such as communication equipment and conveyances,
are utilized at times for the Fund's activities. These assets are capitalized and reported by
the participating agencies. During the years ended September 30, 1994 and 1993,
$7,488,000 and $6,540,000, respectively, of capital assets purchased with forfeited
currency were transferred to that fund within the agencies and are shown as discretionary
expenses in the accompanying financial statements.

Commitments

As of year end, there are asset sharing requests in the various stages of approval. Because
final approval had not been obtained by September 30, they are not recorded as liabilities of
the Fund. However, the Fund has identified asset sharing requests in the amount of
approximately $18,427 which were approved or in the final Stages of approval subsequent
to September 30, 1994. The forfeited currency revenue was recognized in fiscal year 1994;
however, the distribution will not be recognized in the financial statements until fiscal year
1995. In addition to the amount estimated above, there are additional amounts which may
ultimately be shared which are not identified at this time.

Property Held Evidence

In addition to the seized and forfeited property and monetary instruments disclosed in these
financial statements and related notes, all law enforcement agencies possessing
investigative responsibility in their respective enabling legislation, have the authority, in
accordance with provisions of the Federal Crime Code and Federal Rules of Criminal
Procedure, to seize property for evidentiary purposes only. Because this property is not
seized under seizure and forfeiture laws, it cannot become property of the TFF and is
intended to be returned to the owner at some future date. This evidence is not disclosed in
the financial statements or related notes, but does represent a fiduciary responsibility of the
custodial agency. The dollar value of property held as evidence at September 30, 1994, is
not determinable.


(3)

DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

Reclassifications

During fiscal year 1994, the Fund’s management determined that due to the change in the
law governing the activities of the Fund, the Fund was not authorized to transfer amounts
to the Department of the Treasury. Therefore, amounts shown in fiscal year 1993 as
distributions payable to the Treasury general fund should be shown in net position as
cumulative results of operations. Therefore, beginning net position for fiscal year 1993 has
been increased by $54,358,000 to show the amount previously reported as distributions
payable to the Treasury general fund as the amount of cumulative results of operations.

Mortgages and claims payable of $1,972,000 in fiscal year 1993 was reclassified as a
valuation allowance against forfeited property to conform with fiscal year 1994 financial
statement presentation.

hange in Accounting Principle

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

FASAB No. 3 requires certain additional disclosures in the notes to the financial
statements, including an analysis of change in seized property and an analysis of change in
forfeited property, for both carrying value and quantities from that on hand at the beginning
of the year to that on hand at the end of the year. These analyses are disclosed in notes 4
and 5.

Prior to fiscal year 1994, seized currency and property was unaudited and disclosed, in
total only, in the notes to the financial statements.

(Continued)

1-15


kPMG Peat Marwick LLP

2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452

Independent Auditors’ Report on Internal rol Structure

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

We have audited the financial statements of the Department of the Treasury Forfeiture Fund (the
Fund) as of and for the year ended September 30, 1994, and have issued our report thereon dated
January 6, 1995.

We conducted our audit in accordance with generally accepted auditing standards; Government
Auditing Standards (1994 revision), issued by the Comptroller General of the United States; and
the Office of Management and Budget (OMB) Bulletin 93-06, Audit Requirements for Federal
Financial Statements. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.

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

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

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

* transactions are properly recorded and accounted for to permit the preparation of reliable
financial reports in accordance with applicable accounting principles described in note 2
to the financial statements and to maintain accountability over the assets; and

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

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

Tl-1

: Member bem of
€ Ayovelc Peat Mavwick Goa-dees



Timeliness of deposits of
uncontested seizures into the Fund

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 that were not deposited in the Treasury Forfeiture Fund within 120 days of the
seizure date. The following comparative summary shows the dollar value of
uncontested seizures over $100,000 that were not deposited in the Fund within the
specified period.

1994 1993
Uncontested seizures over $100,000
(in millions) $16 7
Total number of cases 44 25

The summary shows an increase in the number of uncontested seizures over $100,000
that were not deposited in the Fund within 120 days of the seizure date from 1993 to
1994,

Payments in lieu of forfeiture
grew due to increased emphasis

To minimize the expenses related to the forfeiture process, as well as protect the tights
of the violator, an increased emphasis has been placed on payments in lieu of forfeiture.
In certain violations, if the violator waives the right to due process, the individual can
make a payment in lieu of forfeiting the property. As a result, payments in lieu of
forfeitures, net of refunds, were $29 million and $22 million for fiscal years 1994 and
1993, respectively.

In fiscal year 1994, the Fund identified several performance measures to further monitor
the Treasury Department's seizure and forfeiture program and the ongoing operations of
the Fund. These include the processing time for asset sharing payments, the
administrative seizure inventory, the maintenance costs of assets, as well as the
administrative and fund expenses. Data collection systems and methods will be
developed during fiscal year 1995 to monitor these performance measures.


EG&G should also provide copies of bank statements (on a timely basis) from which they deposit
the Fund's money. Because, at month end, the Fund's cash is contained in these accounts, EG&G
should provide details of the cash balances (i.e., related to auction sales, reimbursed storage
costs). This information can be compared to the actual sales revenue from sales which took place
in this time period according to the control log.

When it is determined property may be returned to the violator, the District coordinator completes a
disposition order. A copy of the disposition order is sent to EG&G. When EG&G receives the
order, the amount of holding costs owed by the violator is recalculated and documented on the
disposition order. The District should be instructed to update their inventory tracking system to the
proper status of seized property. In addition, SPMS has the capacity to track holding costs to be
reimbursed by the violator. Thus, EG&G should be instructed to update SPMS when the
reimbursement amount is determined. At each month end, an employee at the NFC should
reconcile the seizures to be returned per each agencies’ inventory system with the related
reimbursements to be received from the SPMS system and the collection deposit slips received
from the Federal Reserve Bank of New York to obtain a complete receivable listing from which an
accrual can be posted in the general ledger.

On a monthly basis, an NFC employee should also review the receivables balance to determine the
age of individual items which comprise the receivable balance. Follow-up procedures should be
performed to determine the status of the receivables. Through this process, appropriate
adjustments and/or reserves can be determined.

GENE! LEI

The general ledger system maintained by Customs processes, groups and summarizes transactions
into account balances for all Customs funds and the Department of the Treasury Forfeiture Fund.
The general ledger currently is not utilized to track all balances and transactions that comprise the
Fund, such as forfeited property and revenue, which are tracked by separate systems not directly
interfaced with the general ledger. Therefore, complete financial statements cannot be compiled at
month end or year end by using the general ledger balances. Rather, information is identified and
captured manually from other systems in order to properly compile financial statements. Proper
tracking of all Fund information is critical to properly monitor and analyze Fund activity. By not
maintaining a complete general ledger for the Fund, the likelihood of not capturing all Fund
transactions increases.

The Asset Information Management System (AIMS) project to revamp the general ledger system
was implemented on October 1, 1992. However, the new system did not correct the lack of
automatic interfaces between the general ledger and subsidiary systems. We have been informed
that the interfaces will be implemented in subsequent system projects. Until the interfaces are
operational, and to maintain control and an understanding of the Fund’s operational results, we
recommend developing a separate trial balance to track all Fund related activity for the production
of monthly financial statements. When the subsequent system projects are complete, the trial
balance can be compared to the financial statements produced from the enhanced general ledger
system to verify its completeness.

FORFEITED PROPERTY

The Fund currently does not record forfeited property and the related deferred revenue, in the
general ledger. We recommend forfeited property and the related deferred revenue be recorded in
the Fund's general ledger at the time of forfeiture. If the status of property is updated from seized
to forfeited and the ultimate disposition of the property is recorded on a timely basis, a listing of
forfeited property could be generated from CPTS for Customs; AFTRAK for IRS CID; USSS
Forfeiture System for the USSS; and manually for ATF; to record the entry in the general ledger.
Likewise, the Fund also does not record seized currency, and the related liability, in the general
ledger. As seized currency is now required to be presented on the balance sheet, by Statement of
Federal Financial Accounting Standards No. 3, we recommend the asset and related liability be
recorded in the general ledger at the time of seizure.

TT-11


Forfeited Currency

When Customs seizes currency, it is retained in a secured area, such as sealed evidence bags in a
vault, at the district office or in a bank safe deposit box. When the currency is declared to be non-
evidentiary, the currency is deposited to a U.S. Treasury general bank account and recorded in a
suspense account in a Customs fund. Subsequently, the currency is either administratively or
judicially declared to be forfeited. Administrative forfeiture occurs when an agency uses their
authority, in given circumstances, to declare the currency forfeited. Judicial forfeiture requires the
court system to legally decide whether the currency is to be forfeited. Upon forfeiture, the cash
becomes property of the Fund and revenue should be recognized. Currently, a time lag exists
between when the Field Offices are notified of the forfeiture and when the NFC is notified of the
forfeiture and therefore records revenue in the general ledger. This situation arises because (1) the
Field Offices are not monitoring and updating the system timely to reflect the change in the
currency status and (2) a standardized procedure for documenting the forfeiture date in the system
has not been implemented. For example, at four Customs Field Offices (El Paso, Houston,
Laredo and Miami) where currency was seized prior to fiscal year end, the currency was not
recorded in the Seized Currency Tracking System (SCTS) at year end. In another situation the
NFC was not notified the forfeiture had occurred when the item had been forfeited prior to year
end, thus, revenue was understated in the financial statements presented for audit. Because the
forfeiture date is input into the system by the field and the supporting documentation is maintained
by the field, the NFC is unable to identify when these situations occur. Both of the above
situations were adjusted for in the accompanying financial statements.

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

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

When IRS CID seizes currency, safeguard procedures, similar to Customs as described above, are
implemented. Upon seizure of currency, the seizing agent completes a standard input form, which is
sent to the Asset Forfeiture Tracking System (AFTRAK) headquarters in Dallas for input into
AFTRAK.

Changes made to the status of a seizure, such as forfeiture, are also made via a standard input form
sent to Dallas. Periodically, the IRS CID headquarters personnel in Washington D.C. review
AFTRAK reports of items forfeited. A disposition form is completed and sent to NFC for
recognition of the revenue.

The aforementioned procedures result in significant time lags from the date the items are seized or
forfeited and when the status is updated in AFTRAK. We recommend the IRS CID district
personnel have on-line access to AFTRAK and appropriate review and reconciliations be
implemented to verify the accuracy of the information entered. Implementing this recommendation
would result in more timely recording of revenue to TFF as the disposition forms would be sent to
the NFC on a more timely basis.

Til-9


RECONCILIATION BETWEEN SPMS AND AGENCIES’ PROPERTY SYSTEMS

The agencies’ property tracking systems, Customs Property Tracking System (CPTS), IRS CID’s
AFTRAK and the USSS Forfeiture System, are used to track the property seized and forfeited by
each agency. The Seized Property Management System (SPMS) is used by EG&G Dynatrend to
track inventory held for each participating TFF agency. When EG&G has a sale of forfeited
property, a Notice of Award (NOA) package is submitted to the NFC. At the same time, a listing
of items sold by seizure and line item number is sent to the individual field offices. The field
offices do not reconcile the seizure numbers and line items per the property listing to the seizure
numbers and line items per SPMS. Several instances were noted at each agency during inventory
observation where the property listing per the agency contained items which had been sold by
EG&G prior to the inventory date.

We recommend that each agency receive and reconcile the monthly report from SPMS to their
respective property listings.

As stated before, ATF does not maintain a detailed inventory listing. ATF’s Chain of Custody
Forms (3400.16), are maintained in a log book which is kept in the district vaults. We previously
recommend ATF develop a comprehensive detailed automated listing of property. Before this
listing is developed, we recommend ATF reconcile the SPMS listing to the Chain of Custody
Forms.

ATF DOES NOT MAINTAIN A DETAILED INVENTORY LISTING

ATF does not maintain a detailed listing of the quantity and dollar amount of individual property
items which adds to the total quantity and amount of property on hand at any point in time. ATF
completes a Property Inventory/Forfeited Appraisal Report, Form 3400, for each seizure. These
3400 forms are maintained in property log books at each field office location. The individual
property log book, in essence constitutes the controls over property items. We noted no significant
differences in the information recorded on these forms when compared to the property on hand
during the year end site visits. However, we do recommend ATF develop a comprehensive
detailed automated listing of property seized and forfeited to more efficiently keep track of the
property items. We understand ATF has begun implementing the CATS systems as their property
tracking system.

* RK x

All the above material weaknesses, with the exception of Analysis of Changes in Seized and
Forfeited Property, were identified in prior year reports and are of continuing significance. No
reportable conditions were noted in prior year reports, however there were four reportable
conditions noted for the current year; Fund Organization, Reconciliation of Property Activity,
Reconciliation Between SPMS and Agencies’ Property Systems, and ATF Does Not Maintain A
Detailed Inventory Listing.

TH-15


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Analysis of Revenue and Expenses and Distributions

For the year ended September 30, 1994

(Dollars in thousands)
(Unaudited)

Revenue and expenses and distributions by asset category:

Revenue

Vehicles
Vessels
Aircraft
General property

Real property
Currency and monetary instruments

Less:
Mortgages and claims
Refunds
Add:
Allocation of revenue to ONDCP Special
Forfeiture Fund
Excess of net revenues and financing sources
over total operating expenses

and expenses and distributions by type of disposition:

Sales of property and forfeited currency
and monetary instruments
Reimbursed storage costs
Placed into official use of other Customs funds
Assets shared with state and local agencies
Destructions
Cancellations (including payments in lieu of forfeiture)
Assets shared with other federal agencies
Assets shared with foreign countries
Pending disposition

Less:
Mortgages and claims
Refunds
Add:
Allocation of revenue to ONDCP Special
Forfeiture Fund
Excess of net revenues and financing sources
over total operating expenses

Revenue

$ 19,747
3,590
2,993

16,755
16,755
142,909
202,749

(2,382)
(2,669)

$ 197,698

Revenue

$ 107,039
2,793

53,372
31,861
7,318
366
202,749

(2,382)
(2,669)

$ 197,698

Expenses and
Distributions

15,279
19,353
6,112
59,078
2,037
53,375
155,234

(2,382)
(2,669)

3,843

Expenses and
Distributions

7,774
4,697
285
54,406
9,733
2,669
8,334
366
66,970
155,234

(2,382)
(2,669)
3,843

197,698

This supplemental schedule “Analysis of Revenue and Expenses and Distributions" is required under the Treasury Forfeiture
Fund Act of 1992. The allocations in the schedule were determined from information obtained from a U.S. Customs Service’
information system. This system maintains revenue and expenses by each seizure for property held at the contractor. The
percentages of revenue and expenses from this system were applied to revenue and expenses and distributions as reflected in
the Statement of Operations. 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.

presented to comply with the requirements of the Treasury Forfeiture Fund Act of 1992.

Iv-3

The information is


Establishing Year-End Account Balances

As stated above, to prepare the year-end financial statements, the Fund's management revised year-
end manual procedures (e.g., procedures to supplement information contained in the numerous
cash basis sub-systems) to identify amounts which should be accrued in the financial statements at
year end. In fiscal year 1994, to help ensure the agencies understood the year-end procedures, a
working group meeting was held between representatives of TFF management, NFC and each of
the agencies. After the meeting, a final version of the procedures were distributed to each of the
agencies by TFF management. However, because the procedures were not consistently followed
by all agencies, significant financial statement adjustments were required in order for the financial
statements to be fairly presented.

Because manual year-end procedures will continue to be necessary in the foreseeable future to
prepare subsequent year financial statements, we recommend the agencies be reminded of the
importance of properly following the year-end procedures. We also recommend the procedures be
again reviewed with the agencies to identify any possible misunderstandings or refinements to the
procedures (e.g., revenue misclassifications). The review should focus on:

* The completeness and clarity of the instructions;

¢ Definitions of transactions to be included in each account;

* Timing of the accounting closing dates contained in the procedures; and

* Completeness of the procedures performed.

In looking forward, when most of the recommendations that follow are implemented, many of the
manual supplemental year-end procedures will no longer be necessary.

Accou ayable an Liabilities

The Fund does not follow accrual accounting whereby a liability and an expense is recognized
when the underlying goods are received or the services have been performed. In the day-to-day
operations, the Fund generally incurs two types of expenses, direct payments and reimbursements.
Under the "Memorandum of Understanding between the Fund's participating agencies and the
Departmental Offices Regarding the Treasury Forfeiture Fund" (MOU), the agencies are required
to incur certain types of expenses related to TFF activities and subsequently request reimbursement
from the Fund. Expenses paid directly from the Fund include payments of mortgage and liens,
refunds, remission and mitigation claims, claims of parties in interest, national contractor storage,
equitable asset sharing, and joint operations. All other expenses incurred related to TFF activities
are submitted for payment through a reimbursement request. Types of reimbursable expenses
include purchase of information and evidence, equipment, rent and contracting services.

During fiscal year 1994, reimbursement requests were not submitted on a regular predetermined
basis throughout the year. Requests for reimbursements of significant amounts, approximately
28% of total reimbursement requests, occurred near year end. The MOU allows each agency to
submit a reimbursement request to TFF monthly. Each agency should take full advantage of this
policy and submit requests for reimbursement monthly. The monthly submission of
reimbursements will provide more timely results of operations for the Fund and thereby allow for
more timely analysis of the financial position of the Fund.

The reimbursement requests submitted by the agencies, but not yet paid by TFF should be accrued

as liabilities ateach month end. Also, any direct payment requests which have been received but
not paid at month end should be accrued as liabilities.

Til-7


KPMG Peat Marwick wp

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

In our opinion, except for the effects of such adjustments, if any, as might have been determined to
be necessary had we been able to examine evidence regarding the analysis of change in seized and
forfeited property, other than forfeited property held by U.S. Customs Service, the U.S. Secret
Service and the Bureau of Alcohol, Tobacco and Firearms (as discussed in third paragraph of this
report), the financial statements referred to above present fairly, in all material respects, the
financial position of the Department of the Treasury Forfeiture Fund as of September 30, 1994 and
1993, and the results of its operations and changes in net position, its cash flows, and its
budgetary resources and actual expenses for the years then ended, on the basis of accounting
described in note 2.

In accordance with Government Auditing Standards, we have also issued a report dated January 6,
1995 on our consideration of the Fund's internal control structure and a report dated January 6,
1995 on its compliance with laws and regulations.

Our audits were conducted for the purpose of forming an opinion on the financial statements
referred to in the first paragraph of this report taken as a whole. The information presented in
management's Overview of the Department of the Treasury Forfeiture Fund and the Supplemental
Financial and Management Information sections is not a required part of the financial statements
but is supplementary information required by OMB Bulletin No. 94-01, Form and Content of
Agency Financial Statements, or the Treasury Forfeiture Fund Act of 1992. Such information has
not been subjected to the auditing procedures applied in the audits of the financial statements and,
accordingly, we express no opinion on it.

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

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

KPMG teak MarutcK LLP

January 6, 1995




Department of the Treasury Forfeiture Fund
Overview
Year Ended September 30, 1994

Highlights for the Year

The Department of the Treasury Forfeiture Fund (the Treasury Forfeiture Fund. or the
Fund) was created through enactment of Section 638 of Public Law 102-393 in 1992.
The Fund succeeds the Customs Forfeiture Fund and is similar to the Department of
Justice Assets Forfeiture Fund. The Fund's primary purpose is to consolidate all
Treasury asset forfeitures under one Fund controlled by the Secretary, to be used to pay
or reimburse expenses related to seizures of property involved in criminal activity. The
major change from fiscal year 1993 to fiscal year 1994 was the full participation of the
non-Customs Treasury law enforcement organizations; which include the Bureau of
Alcohol, Tobacco, and Firearms (ATF), the Internal Revenue Service, Criminal
Investigation Division (IRS CID), and the U.S. Secret Service (USSS). This overview
discusses the ongoing operations of the Fund, as well as the initiatives for managing the
asset forfeiture activities of all the Department of the Treasury (Treasury) law
enforcement organizations in fiscal year 1994.

This document presents the financial statements of the Treasury Forfeiture Fund for the
fiscal year ended September 30, 1994. These statements have been prepared to report
the financial position, results of operations, changes in net position, and cash flows of
the Fund, pursuant to the requirements of the Chief Financial Officers Act of 1990.
While the financial statements have been prepared from the books and records of the
Fund in accordance with the formats prescribed by the Office of Management and
Budget, the statements are different from the financial reports used to monitor and
control budgetary resources that are prepared from the same books and records and are
subsequently presented in Federal budget documents. Therefore, readers are advised
that direct comparisons are not possible between figures found in this report and similar
financial concepts found in the fiscal year 1993 and fiscal year 1994 Budget of the
United States Government.

The following are some of the significant highlights for fiscal year 1994:

¢ Developed performance indicators and processes for measuring these
indicators in order to report the progress toward achieving the Fund's goals
and objectives. These performance indicators will be regularly monitored
throughout the next year.

¢ Implemented eight new guidelines for the Secretary of Treasury's Guidelines
for Seized and Forfeited Property to ensure that all Treasury bureaus are
handling forfeitures in a uniform manner.

« In conjunction with the requirements of the Federal Accounting Standards
Advisory Board Statement 3 - Accounting for Inventory and Related
Property (FASAB 3), the participating bureaus in the Fund performed a
100% inventory of all seized property.


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

Forfeited Property

Forfeited property is recorded at estimated fair value at the time of forfeiture, based on
historical sales experiences. Direct and indirect holding costs are not capitalized for
individual forfeited assets. Forfeited currency is reflected as funds with Treasury in the
accompanying Statements of Financial Position.

Allowance for Mortgages and Claims

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

Seized Property

Seized property (including currency and monet®ry instruments) is recorded at its market
value at the time of seizure. This value is determined by the seizing entity and is usually
based on market analysis such as a third party appraisal, standard property value
publications or bank statement.

with Treasury and Cash

Fund balances with Treasury and cash are funds remaining as of fiscal year end and
represent the Fund's authority to incur allowable expenditures. Cash receipts and
disbursements are processed by Treasury.

Investigative and Travel Advances

Investigative and travel advances include monies advanced to agents for use in conducting
investigative operations and payments to informants. Advances are reflected in the Fund
when the monies are provided to the agents. An expense is recognized in the Fund when
the payment to the informant or purchase of evidence is made.

ts Distribut

Forfeited property, currency or proceeds from the sales of forfeited property may be shared
with federal, state or local law enforcement agencies or foreign countries who provide
direct or indirect assistance in the related seizure. In addition, the Fund may transfer
forfeited property to other federal agencies which would benefit from the use of the item.
Upon proper approval to share or transfer the asset, both revenue from distributed forfeited
assets and distributions (allocations of revenues) are recognized for the net realizable value
of the asset to be shared or transferred, thereby resulting in no gain or loss recognized.

ized Retained Capit

Under the Act, the Secretary of the Treasury is authorized to retain in the Fund up to $50
million of the unobligated balance on a budgetary basis of the Fund, or, if the Secretary
determines a greater amount is necessary for asset specific expenses, an amount equal to
not more than 10 percent of the total obligations from the Fund in the preceding fiscal year.

(Continued)

1-13


in conjunction with the Customs National Finance Center, the Treasury Forfeiture
personnel rewrote and updated existing internal control procedures. The National
Finance Center issued the procedures and trained the appropriate personnel. The
alleviation of the remaining material weaknesses will require major improvements to
Customs’ computer systems.

In conclusion, the managers of the Fund recognize deficiencies in the existing systems
and operations of the Treasury law enforcement organizations in the area of seized and
forfeited property. It is management's responsibility to oversee corrective actions
designed to ensure the identification and elimination of system weaknesses.

xvii


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Statements of Changes in Net Position
For the years ended September 30, 1994 and 1993
(Dollars in thousands)

Authorized Reserve Cumulative Total
retained Unliquidated for results of net
. ra 7 : ne
Balances, September 30, 1992,
as previously presented $ 238 16,421 7,726 - 24,385
Reclassification (note 2) = = = 54,35: 54,35:
Balances, September 30, 1992,
as reclassified 238 16,421 7,726 54,358 78.743
Excess of net revenues and financing
sources over total operating expenses - - - 20,503 20,503
Net change in obligations of current
resources. - 2,891 - (2,891) -
Net change in reserve for advances - - (7,726) - (7,726)
Distribution to authorized retained capital 30,000 - - (30,000)
Addition to authorized retained capital 9.762 = : 9.762) -
Balances, September 30, 1993 50,000 19,312 - 22,208 91,520
Excess of net revenues and financing
sources over total operating expenses - - - 43,672 43,672
Net change in obligations of current
Tesources — 33.201 — (33,201) =
Balances, September 30, 1994 $ 50,000 52,513 - 32,679 135.192

See accompanying notes to financial statements.

1-5


kemG Peat Marwick LLP

2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452

Independent Auditors’ Report on Financial Statements

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

We have audited the accompanying statements of financial position of the Department of the
Treasury Forfeiture Fund (the Fund) as of September 30, 1994 and 1993, and the related
statements of operations, changes in net position, cash flows and budgetary resources and actual
expenses for the years then ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an Opinion on these financial statements based on
our audits.

Except as discussed in the following paragraph, we conducted our audits in accordance with
generally accepted auditing standards; Government Auditing Standards (1994 revision), issued by
the Comptroller General of the United States: and the Office of Management and Budget (OMB)
Bulletin 93-06, Audit Requirements for Federal Financial Statements. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

As described in note 3, the Statement of Federal Financial Accounting Standards Number 3,
Accounting for Inventory and Related Property, became effective and was implemented during
fiscal year 1994. Statement Number 3 requires an analysis of change in seized and forfeited
property, including both the dollar value and number of seizures and forfeitures. Although the
Fund initiated procedures during fiscal year 1994 to develop this analysis, the Fund was unable to
present detailed documentation to support activity presented in the analysis. Accordingly, we were
unable to satisfy ourselves as to the fair Presentation of the analysis of change in seized and
forfeited property, other than forfeited property held by U.S. Customs Service, the U.S. Secret
Service and the Bureau of Alcohol, Tobacco and Firearms, described in notes 4 and 5.

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

I-1



DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

Unliquidated Obligations

Unliquidated obligations represent the amount of undelivered purchase orders and contracts
which have been obligated with current resources. A liability is recognized and the
corresponding unliquidated obligations are reduced as goods are received or services are
performed.

Cumulative Results of Operations

Cumulative results of operations represents the net difference, since the inception of the
activity, between 1) expenses and losses and 2) financing sources including appropriations,
revenues and gains.

venue and nse Ry ition

Revenue from the forfeiture of property is deferred until the property is sold, or transferred
to a state, local or federal agency or foreign government. Revenue is not recorded if the
forfeited asset is ultimately destroyed, such as counterfeit property.

Revenue from currency and monetary instruments is recognized upon forfeiture. Payments
in lieu of forfeiture (mitigated seizures) are recognized as revenue when the payment is
received.

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

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

Tax status

The Fund, as part of a federal agency, is not subject to federal, state or local income taxes.
tater f Bu Resources and Actual enses

The accompanying Statements of Budgetary Resources and Actual Expenses reconcile total

expenses and distributions, as reported in the accompanying Statements of Operations,

with outlays as reported in the Office of Management and Budget Report, SF-133, "Report

on Budget Execution" for the years ended September 30, 1994 and 1993. Subsequent

adjustments represent adjustments made to the financial statements subsequent to the
preparation of SF-133 and will be reflected as such on a future SF-133.

(Continued)

1-14


Assets

A summary of the assets (in millions) of the Fund as of September 30, 1994, as
compared with September 30, 1993 follows:

1994 1993

Undistributed funds and Fund balances
with Treasury and cash $175 122
Receivables 4 8
Forfeited property (net of liens payable) 29 7
Seized currency and monetary instruments ** 195 0
Prepaid expenses 1 0
Investigative and travel advances _4 _4
$408 141

** Under FASAB 3, effective September 30, 1994 and thereafter, seized currency
and monetary instruments are reported as a custodial asset upon seizure. The FY
1994 amount represents the currency held by the Fund's suspense account, on
hand at field offices, as well as all other seized currency held in the custody of
the United States Marshals Service.

Forfeited property grew significantly
with the full participation of all Treasury
law enforcement bureaus in the Fund

The balance of the undistributed funds and Fund balances with Treasury and cash
fluctuates based on the timing of receipts for deposits of forfeited currency into the Fund
and payments of forfeited currency shared with local, state, and federal law enforcement
agencies and foreign governments. However, a large portion of the increase is due to
the inclusion of all Treasury law enforcement bureaus participation in the Fund. A large
percentage of receivables represents currency that has been forfeited but not yet been
deposited into the Fund. (The Fund requires that as soon as practical after the seizure
the currency is deposited into the Treasury Forfeiture Fund suspense account.) The
decrease in the receivable balance at year end is due to more timely deposits of forfeited
currency into the Fund. The value of forfeited property has increased approximately
$22 million, or 314 percent, over the prior year due to an increased emphasis in timely
disposition of the forfeited property and the volume of forfeitures of seized property.
As discussed earlier, an increased emphasis was placed on negotiating payments in lieu
of seizing and forfeiting the violator's property. Also, included in the financial
statements for fiscal year 1994 are the seized currency and monetary instruments
from all Treasury law enforcement bureaus, which totaled $195 million. Investigative
and travel advances at September 30, 1994, remained constant at approximately $4
million.

xiv


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Asset Sharing Summarized by State and U.S. Territones
For the year ended September 30, 1994
(Dollars in thousands)

(Unaudited)
State Currency Value Property Value
Alabama $ 480 37
Alaska 73 -
Arizona 925 1,735
Arkansas - -
California 11,335 166
Colorado 148 9
Connecticut - 5
D.C., Washington - 69
Florida 12,006 628
Georgia 353 10
Hawaii 38 16
Idaho 2 -
Illinois 759 -
Indiana 527 -
Towa 8 1
Kansas 26 86
Kentucky 55 3
Louisiana 110 21
Maryland 26 10
Massachusetts 89 -
Michigan 613 70
Minnesota 35 -
Mississippi 54 -
Missouri 80 24
Montana 19 4
Nebraska 72 -
Nevada 2 31
New Jersey 689 36
New Mexico S 65
New York 7,319 165
North Carolina 481 53
North Dakota 1 -
Ohio 807 5
Oklahoma 242 13
Oregon 17 -
Pennsylvania 150 16
Puerto Rico - -
South Carolina - -
South Dakota - -
Tennessee 371 1
Texas 11,666 255
Utah 25 15
Vermont - 3
Virgin Islands - 110
Virginia 269 21
Washington 155 59
West Virginia - 80
Wyoming 8 :
Total $ 50,050

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


¢ Equipment for Treasury vessels, vehicles, or aircraft available to assist in
law enforcement functions, as well as other seizure- and forfeiture-related
equipment, including laboratory, protective, and communications equipment,
and the costs of their operation and maintenance

+ Equipment for state or local law enforcement agency's vessels, vehicles,
or aircraft to enable assistance in joint law enforcement operations with a
Treasury law enforcement organization

¢ Expenses incurred by state and local law enforcement organizations
during joint operations with Treasury law enforcement organizations
(including overtime salaries, travel, fuel, training, equipment, and other
similar costs)

« Reimbursement of private persons for expenses incurred in joint
investigations and undercover operations with Treasury law enforcement
organizations

¢ Training of foreign law enforcement personnel with respect to Treasury
seizure and forfeiture activities

¢ Necessary and direct seizure and forfeiture expenses for automated data
processing systems, training, printing, as well as contracting for services
related to identifying forfeitable assets, processing and accounting for
forfeitures, and storing, maintaining, protecting, and destroying controlled
substances

Major issues facing the Fund

There are several major issues which arose in fiscal year 1994, including a
reorganization, court cases, and the expiration of the national seized property contract.
The Fund will prepare to meet the challenges that will occur with regards to these, as
well as any other issues.

During fiscal year 1994, Treasury Forfeiture Fund
personnel were divided between the Assistant Secretary (Management) and the Under
Secretary (Enforcement). A task force was assembled to study a proposed
reorganization. The task force recommended a consolidation of the entire staff under
the Under Secretary (Enforcement). Pursuant to an Order of the Secretary, Fund
personnel were consolidated on January 10, 1995. Although responsibility for the Fund
is now within one office, full authority to affect Fund operations remains divided.
Offices providing executive agent functions for the Fund report to the Commissioner of
Customs. Further, the Under Secretary (Enforcement) has no line authority over any
activities of the Internal Revenue Service.

Court Cases: There have been recent Supreme Court decisions that will have a
significant effect on the seizure and forfeiture programs of the Federal law enforcement
agencies. Generally, these decisions have limited the ability of the Government to use
forfeiture proceedings to assist law enforcement. Further, the U.S. Court of Appeals for

vi


(2)

DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

The Fund maintains a contract with an unrelated entity whereby the other entity holds
certain seized and forfeited property on consignment. Upon direction from TFF, the
contractor conducts auction sales on behalf of the Fund, collects sales proceeds from the
purchaser and deposits the sale proceeds in the Fund. For assets returned to the violator,
the contractor collects reimbursements from violators for asset management expenses
incurred.

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

Summary of Significant Accounting Policies
Basi ounti id entation

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

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

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

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

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

(Continued)


()

DEPARTMENT OF THE TREASURY FORFEITURE FUND
Notes to Financial Statements

September 30, 1994 and 1993

Department of the Treasury Forfeiture Fund

Background

The Department of the Treasury Forfeiture Fund (TFF or the Fund) was established by the
Treasury Postal Appropriations Act of 1992, Public Law 102-393 (the Act), and is codified
at 31 USC 9703. The TFF was created to consolidate all Treasury law enforcement
organizations under a single forfeiture fund program administered by the Treasury
Department. Treasury law enforcement agencies fully participating in the TFF in fiscal year
1994 are the U.S. Customs Service (USCS or Customs); the Criminal Investigation
Division of the Internal Revenue Service (IRS CID); the United States Secret Service
(USSS); the Bureau of Alcohol, Tobacco and Firearms (ATF); the Financial Crimes
Enforcement Network (FinCEN); and the Federal Law Enforcement Training Center
(FLETC). The U.S. Coast Guard (USCG) also Participates in the Fund. Prior to the
establishment of the Fund, ATF, IRS CID and USSS participated in the Asset Forfeiture
Fund of the Department of Justice. USCS had its own forfeiture fund into which deposits
of all Customs and USCG forfeitures were made. The TFF basically transformed the
Customs Forfeiture Fund into a Departmental fund serving the forfeiture needs of all
Treasury enforcement bureaus. FinCEN and FLETC did not previously participate in any
forfeiture fund. Prior to fiscal year 1994, only USCS and USCG participated in the Fund.

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

The following is a discussion of the relevant activities of the most significant participating
agencies. In addition, under a Memorandum of Understanding (MOU) with the
Department of the Treasury, the U.S. Customs Service acts as the executive agent for
certain Fund operations. Pursuant to that executive agency role, the Customs National
Finance Center (NFC) is responsible for accounting and financial reporting for the Fund;
including timely and accurate reporting and compliance with Treasury, the General
Accounting Office (GAO), and the Office of Management and Budget (OMB) regulations
and reporting requirements.

U.S. Customs Service

The USCS is responsible for controlling carriers of imports and exports as well as
combating smuggling, commercial frauds, money laundering and the illegal export of items
such as munitions and critical technologies. " Customs inspectors and special agents

nationwide are empowered to seize narcotics and other contraband being illegally
transported into or out of the United States.

(Continued)

1-8


The Treasury asset forfeiture program has four primary goals:

«Punish and deter criminal activity by depriving criminals of property used in
or acquired through illegal activities

¢ Be cognizant of the due process rights of all persons

« Enhance cooperation among foreign, federal, state, and local law
enforcement agencies through the equitable sharing of assets forfeited

* Produce revenues to enhance the forfeiture program and strengthen law
enforcement

The Treasury Forfeiture Fund was established as a special fund of Treasury. Special
funds consist of separate receipt and expenditure accounts and are used to report
collections that are earmarked by law for a specific purpose. The Fund has two
accounts for paying expenses: a permanent indefinite appropriation and an annual
appropriation. The permanent indefinite appropriation is available for costs specifically
related to the seizure and forfeiture process, or to expenses tied to a specific seizure.
The annual appropriation is enacted in the Treasury Appropriations Act and represents a
Congressional limitation on the use of the proceeds of seized and forfeited assets for
purposes only generally relating to the forfeiture program. Further, P.L. 103-322 states
that at the end of fiscal years 1994, 1995, 1996, and 1997 the Secretary shall transfer
from the Fund not more than $100 million of the excess unobligated amounts remaining
in the Fund at the end of the fiscal year, to the Office of National Drug Control Policy's
(ONDCP) Special Forfeiture Fund. Certain deposits from the net proceeds of forfeitures
resulting from joint investigations with other federal agencies are transferred to the Fund
under the authority of Section 9703(b)(5). These deposits are available to the Secretary
of the Treasury, without further action by Congress, for federal law enforcement related
purposes of Treasury law enforcement organizations.

Customs is the executive agent for the Fund. An executive agent is a bureau office
designated to manage the operation of a particular program to minimize duplication of
effort among the Treasury bureaus. Customs provides accounting, payment processing,
auditing, and seized property management and administration on behalf of the Fund.

The primary sources of revenue for the
Fund are forfeited cash, proceeds of forfeited
monetary instruments, and proceeds
Srom the sale of forfeited assets.

The primary sources of revenue for the Fund are forfeited cash, proceeds of forfeited
monetary instruments, and proceeds from the sale of forfeited property. In addition, the
Fund participates in reverse asset sharing whereby a federal, state, or local law
enforcement agency or a foreign government transfers currency or monetary instruments
or proceeds from the sale of forfeited property to the Fund for participating in a joint
seizure operation. The Fund includes forfeited assets, as well as seized currency and
monetary instruments of all participating bureaus. Seized property assets of all


¢ Revenues, expenses, and assets of the Fund significantly increased as a result
of the participation of the additional Treasury Forfeiture bureaus in the Fund.

¢ $61 million in forfeited assets were shared with other federal, state, and local
law enforcement agencies or foreign governments.

« Revenue from forfeited currency and other monetary instruments, including
proceeds received from participating with non-Treasury agencies, increased
from $113 million in fiscal year 1993 to $143 million during fiscal year
1994.

« Revenue from net payments in lieu of forfeiture increased from $22 million
in fiscal year 1993 to $29 million in fiscal year 1994.

¢ Non-discretionary expenses increased from $51 million in fiscal year 1993 to
$70 million in fiscal year 1994.

Before 1984, seizing agencies paid expenses related to the seizure and forfeiture of
property from their appropriated funds. If seized property was forfeited and sold, costs
of the seizure and forfeiture could be deducted from the proceeds of the sale of the
property. If the property was not forfeited, or the costs exceeded whatever proceeds
were realized from the property, seizing organizations were forced to absorb excess
costs. As a result, seizing agencies suffered. Confronted with inadequate funds,
agencies found it difficult to properly manage and maintain seized property. To address
these concerns and provide resources for seizure and forfeiture operations, the
Comprehensive Crime Control Act of 1984 created the Assets Forfeiture Fund (AFF)
within the Department of Justice (Justice) and the Customs Forfeiture Fund within the
U.S. Customs Service (Customs). Treasury law enforcement organizations other than
Customs, (ATF, IRS CID, and USSS) participated in the AFF.

Statutes pertaining to forfeiture funds were amended again in October 1992 through the
enactment of Section 638 of P.L. 102-393, which created a new Treasury Forfeiture
Fund. After October 1, 1992, Customs and U.S. Coast Guard (USCG) continued to
make deposits into the Fund. In addition to Customs, Treasury law enforcement
organizations that deposited their forfeitures into the Justice AFF, began making
deposits into the Fund in fiscal year 1994. The Treasury Forfeiture Fund was created to
consolidate all Treasury law enforcement organizations under a forfeiture fund program
administered by the Treasury Department. Throughout fiscal year 1993, the Treasury
law enforcement organizations other than Customs, continued to fully participate in the
Justice AFF, although they also received a limited amount of monies from the Fund. As
part of the consolidation effort, two additional Treasury organizations participate in the
Fund: the Financial Crimes Enforcement Network (FinCEN) and the Federal Law
Enforcement Training Center (FLETC). The USCG continues to be a participant in the
Fund.


_

Liabilities and net position

A summary of the liabilities and net position (in millions) of the Fund as of September
30, 1994, as compared with September 30, 1993 follows:

1994 1993
Distributions 25 33
Deferred revenue 29 6
Seized currency & monetary instruments 195 0
Accounts payable 24 11
Net position 135 21

$ 408 lal

Net position increased $44 million

At the end of fiscal year 1993, and at the end of each fiscal year thereafter, the Secretary
of the Treasury is authorized to retain in the Fund up to $50 million of the unobligated
balance of the Fund, or, if the Secretary determines a greater amount is necessary for
asset specific expenses, an amount equal to not more than 10 percent of the total
obligations from the Fund in the preceding fiscal year. Distributions represent asset
sharing of forfeited currency or property or transfers of forfeited property approved
before the end of the fiscal year, but not yet physically transferred. Revenue from the
forfeiture of property is deferred until the property is sold or transferred. Accordingly,
the increase in deferred revenue parallels the increase in forfeited property held for
sale. Since the other Treasury law enforcement organizations started making deposits
into the Fund in fiscal year 1994, the Fund began paying certain expenses related to
seizure activities of those bureaus in fiscal year 1993. At the end of fiscal year 1994, the
Fund owed approximately $14 million, up from $3 million in fiscal year 1993, to the
other Treasury bureaus related to these expenses, accounting for the increase in
accounts payable. The net position of the Fund in fiscal year 1994 had increased
approximately $44 million, or 48 percent, from the prior year.

Summary

As fiscal year 1994 marked the first year of full scale Treasury Forfeiture Fund
operations, there were numerous obstacles to overcome. The inclusion of all Treasury
law enforcement bureaus to the Fund required modifications to the financial operations

xv


the end of fiscal year 1994, all Treasury law enforcement agencies performed a 100%
on-site inventory of all seized and forfeited property, and the auditors observed selected
inventories across the country. The results of the inventory were compared to
information maintained in the referenced systems and discrepancies were resolved.

Increased coordination between the SPC/SPSs and EG&G resulted in the average time
from determination of disposition to actual disposal being decreased by approximately
10 percent from 33.3 days to 30.1 days. As a result, there was less of a chance for
forfeited assets to lose their value from the time of seizure to their ultimate disposition.
This helped preserve value for both the alleged offender and the federal government.

Fund expenses

Generally, all personnel and administrative expenses associated with the Fund are paid
from the permanent indefinite appropriation. Other authorized Fund expenses that are
paid from the permanent indefinite appropriation include:

¢ Expenses of seizure, (including investigative costs leading to a seizure, or
the costs of forfeiture and sale, such as expenses of detention, inventory,
security, maintenance, advertisement, or disposal of property, and certain
costs taxed by the court)

* Contract services, (including the employment of outside contractors, and
reimbursement of any federal, state, or local agency for seizure-related tasks)

« Awards of compensation to informers under section 619 of the Tariff Act
of 1930

¢ Satisfaction of valid liens and mortgages against forfeited property

« Remission and mitigation amounts authorized by law

« Claims of parties of interest to property disposed under section 612(b) of
the Tariff Act of 1930

¢ Equitable sharing payments made to federal, state, and local law
enforcement agencies and foreign countries

+ Services of experts and consultants needed to carry out duties related to
seizure and forfeiture

At the discretion of the Secretary of the Treasury, the annual appropriation may be used
to pay for:

¢ Awards for information leading to civil or criminal forfeitures involving
Treasury law enforcement organizations

« Purchases of evidence or information with respect to violations of laws
enforced or administered by Treasury law enforcement organizations

¢ Costs for publicizing awards available under section 619 of the Tariff Act
of 1930


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Statements of Financial Position
September 30, 1994 and 1993
(Dollars in thousands)

Assets 1994
Custodial assets:
Undistributed funds with Treasury and cash $ _20,949
Receivables:
Federal-U.S. Customs Service funds 3,323
Non-federal —38
3.361
Forfeited property (note 4):
Held for sale 29,929
To be shared with federal, state or local agencies, or foreign governments 1,601
Allowance for mortgages and claims 2.363)
22,167
Seized currency and monetary instruments (note 5) 95,386
Total custodial assets 248,863
Operating assets:
Fund balances with Treasury and cash 154,673
Investigative and travel advances 3,573
Prepaid expenses 000
Total operating assets 58,846
Total assets $ 407,709
Liabititi

Current liabilities:
Custodial liabilities:
Distributions payable:
Federal:

ONDCP Special Forfeiture Fund 3,843
Other federal agencies 2.768
6.611
Non-federal:

State and local agencies 18,172

Foreign countries =
1872
Total distributions payable 24,783
Deferred revenue from forfeited assets 28,694
Seized currency and monetary instruments (note 5) 195,386
Total custodial liabilities 248,863

Operating liabilities:
Accounts payable:
Non-federal 10,120
Federal 13,534
Total operating liabilities 23,654
Total liabilities 222.517
Net Position

Authorized retained capital 50,000
Unliquidated obligations 52,513
Cumulative results of operations 32,679
Total net position 135,192
Commitments (note 7) —
Total liabilities and net position $ 407,709

See accompanying notes to financial statements.

1-3



=a

1994 AUDITED ANNUAL
CHIEF FINANCIAL OFFICER'S REPORT
FOR THE TREASURY FORFEITURE FUND

OIG-95-043 JANUARY 26, 1995

Office of Inspector General

eeeenee

United States Department of the Treasury


Kwa Peat Marwick ie

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

¢ Forfeited property - The value of forfeited and seized property is not recorded in the general
ledger and is not recorded in supporting subsidiary systems in a timely manner. As a result,
year-end procedures were developed to identify forfeited and seized property not entered in the
subsidiary systems as of September 30, 1994, and to adjust the financial statements for the
value of forfeited and seized property on hand at year end.

¢ Forfeited property valuation - Forfeited property is not recorded in the subsidiary system
during the year at its fair value at the time of forfeiture. An adjustment is made to the financial
statements as of September 30, 1994, to record forfeited property at an estimate of fair value.

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

All of the above material weaknesses with the exception of Analysis of Changes in Seized and
Forfeited Property were identified in prior year reports and are of continuing significance.

Reportable Conditions

¢ Fund organization - The current management structure of the Fund, while in the process of
being reorganized, does not facilitate an effective system of communication nor present the
management with line authority for forfeiture operations of the individual law enforcement
agencies.

¢ Reconciliation of property activity - Currently there are no procedures in place that
reconcile actual sales activity as reported on the general ledger to individual sales removed from
the property listing. As a result, cases can be closed on the property system for which no
revenues are recorded.

¢ Reconciliation between the Seized Property Management System (SPMS) and
agencies’ property systems - The field offices do not reconcile the seizure numbers and
line items per the property listing to the seizure numbers and line items per SPMS. Several
instances were noted at each of the Fund’s participating agencies during inventory observation,
where the property listing per the agency contained items which had been sold by EG&G prior
to the inventory date.

¢ ATF does not maintain a detailed property listing - ATF does not maintain a detailed
listing of the quantity and dollar amounts for individual property. Therefore, the year end
balances of property reported were not supported by a detailed listing of balances.

HOR KORE

Il-3


* Memoranda of Understandings (MOUs) were fully implemented to effect the
procedures for custodial responsibilities related to seized property, resulting
in an organized and effective transition of the Treasury law enforcement
agencies seized property management to the national seized property
contractor.

¢ Implemented financial reimbursement MOUs with all Treasury law
enforcement bureaus and the U.S. Coast Guard. These MOUs established
the funding arrangement, the financial plan, and the reimbursement process
which enabled the Fund to pay for asset forfeiture activities performed by
these agencies.

¢ Fund Management continued to develop additional policy directives in
cooperation with the Department of Justice to ensure that the procedures are
uniform in the federal seized asset management community.

+ A directive was written that established policy for the proper handling and
timely deposit of seized cash into the Fund's suspense account.

+ A computer database was designed to track asset sharing records for all
Treasury bureaus. This database includes prior year records, and tracks all
new sharing requests.

« Members of the Fund attended all Asset Forfeiture Conferences held by the
Department of Justice in order to promulgate the goals of the Treasury
Forfeiture Fund, as well as seminars and conferences sponsored by Treasury
bureaus.

+ Fund Management co-hosted interdepartmental monthly meetings with the
Department of Justice and the Department of the Treasury law enforcement
asset forfeiture offices, the United States Postal Service, and the Food &
Drug Administration to discuss issues of mutual concern, and to establish
uniform guidelines and procedures,

As previously stated, the major change in the Fund from fiscal year 1993 to fiscal year
1994 was the full participation of the non-Customs Treasury law enforcement
organizations, which include the ATF, IRS CID, and USSS. These Treasury
enforcement organizations previously participated in the Department of Justice Assets
Forfeiture Fund and were full participants in the Fund in fiscal year 1994. In addition,
FinCEN and FLETC participate in the Fund.

viii


the 9th Circuit recently held that the government cannot pursue separate civil forfeiture
cases against an individual's property while simultaneously prosecuting them for the
underlying criminal conduct. The court ruled that this would violate the Constitution's
double-jeopardy clause. If this opinion is upheld, it will likely result in a decrease in
Tevenues, since approximately 25 percent of the Fund revenues originate in the 9th
Circuit.

Seized Property Contract: The National Seized Property Contract began the

Tecompetition process during fiscal year 1994. The current contract with EG&G
Dynatrend has been extended until March 31, 1995. On April 1, 1995, a "bridge"
contract will be initiated with EG&G Dynatrend to cover the period of April 1, 1995
through September 30, 1995. It is anticipated that the successful bidder for the seized
Property contract will be in place to begin Operations on October 1, 1995. Proper
planning and adequate Management controls will offer minimal disruption to the
forfeiture community.

Fund Transiti

The major change in the Fund
from fiscal year 1993 to fiscal year 1994
was the full participation of the non-Customs
Treasury law enforcement organizations

As previously stated, under Section 638 of P.L. 102-393 Treasury established an
oversight office to manage the ongoing operations of the Treasury Forfeiture Fund and
to integrate the Treasury law enforcement organizations’ forfeiture activities into the
Fund. In order to obtain a consistent management and policy focus, and to enhance
fiscal controls over the Treasury Forfeiture Fund, financial management plans were
developed and implemented for all Treasury law enforcement organizations. Some of
the achievements to date include:

* The Treasury Forfeiture Fund provided operational guidance and instructions
to the operative field organizations to accomplish the transition goals. In
addition, the national seized Property contractor provided training
opportunities for the Treasury law enforcement agencies in the local
processing and transfer of seized property. As a result, there were very few
disruptive incidents nationwide, and all were quickly resolved.

* One liaison from each Treasury law enforcement organization was assigned
to the Fund's oversight office to assist in the transition stage and encourage
cooperation between the bureaus within the Fund. This has resulted in
enhanced and expeditious resolution of field operational problems, as well as
providing the Fund with the agency's perspective on policy and procedural
issues,

vii




Rita Peat Marwick ue

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

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

The Budget and Accounting Procedures Act of 1950, Section 3512, Executive Agency's
Accounting System requires federal agencies to establish an internal control structure which
ensures the safeguarding of assets and the proper recording of revenues and expenditures. As
described in our Report on Internal Controls dated January 6, 1995, the Fund's internal
control structure has certain material weaknesses which results in noncompliance with this
Act. Most of the material weaknesses require significant computer system improvements to
correct. Until the system enhancements can be implemented, management has developed
year-end manual procedures to compensate for many of the system weaknesses.

In accordance with Government Auditing Standards, we have also issued a report dated January 6,
1995 on our audit of the Fund's financial statements which was qualified for the inability of the
Fund’s management to provide documentation to support the analysis in change of seized and
forfeited property and a report dated January 6, 1995 on our consideration of the Fund's internal
control structure.

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

KPMG, Peat NartuxcK LLP

January 6, 1995

T-2


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

TFF Operations

Under the Act, the Fund is available for payment of certain discretionary and non-
discretionary expenses. Non-discretionary expenses include all proper expenses of the
seizure (including investigative costs and purchases of evidence and information leading to
seizure, holding costs, security costs, etc.), awards of compensation to informers,
satisfaction of liens against the forfeited property, and claims of parties in interest to
forfeited property. {\iscretionary expenses include purchases of evidence and information
related to smuggling of controlled substances; equipment to enable vessels, vehicles or
aircraft to assist in law enforcement activities; reimbursement of private persons for
expenses incurred while cooperating with a Treasury law enforcement organization in
investigations; reimbursements of costs incurred by state and local law enforcement
agencies in joint law enforcement operations with a Treasury law enforcement organization;
and publication of the availability of awards.

Discretionary expenses are subject to an annual, definite Congressional appropriation from
deposits made to the Fund. Congress authorized up to $25 million in fiscal year 1993 and
up to $50 million in fiscal year 1994. Under the Act, non-discretionary expenses are
subject to permanent indefinite Congressional appropriation and may be financed through
the revenue generated from forfeiture activities without limitation. The Fund is accounted
for under Treasury symbol! numbers 20X5693 and 20X5697.

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

At the end of fiscal year 1994, certain excess unobligated balances, on a budgetary basis,
remaining in the Fund are to be transferred to the Office of National Drug Control Policy
(ONDCP) Special Forfeiture Fund. The Secretary of the Treasury is authorized to retain in
the Fund up to $50 million of the unobligated balance of the Fund, or, if the Secretary
determines a greater amount is necessary for asset specific expenses, an amount equal to
not more than 10 percent of the total obligations from the Fund in the preceding fiscal year
(authorized retained capital). The Omnibus Crime Control Act of 1994, effective for fiscal
year 1994, changed the distribution for requirements to require the transfer of one half of
all excess unobligated balances, up to $100 million dollars, to the ONDCP Special
Forfeiture Fund. The remaining excess unobligated balances were retained in the Fund in
fiscal year 1994. As of September 30, 1994, a liability of approximately $3.8 million to
the ONDCP Special Forfeiture Fund has been recognized in the accompanying Statements
of Financial Position. On a budgetary basis, unobligated balances as originally reported on
the Office of Management and Budget Reports, SF-133, Report on Budget Execution,
approximated $57.7 million for fiscal year 1994.

In fiscal year 1993, any excess unobligated balances, on a budgetary basis, remaining in

the Fund were required to be transferred to the Treasury general fund. During fiscal year
1993, no such excess occurred so no such transfer was made.

(Continued)

1-10


KPMG Peat Marwick up

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

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

Because these conditions and weaknesses impact many functions and lines of authority between
the Treasury bureaus, we recommend the Fund's management, together with the other Treasury
bureaus, develop a joint plan to implement the recommendations included in Exhibit 1.

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

We also noted other matters involving the internal control structure over financial reporting and its
operation that we will report to the management of the Fund in a separate letter dated January 6,
1995.

In accordance with Government Auditing Standards, we have also issued a report dated January 6,
1995 on our audit of the Fund's financial statements which was qualified for the inability of the
Fund’s management to provide documentation to support the analysis in change of seized and
forfeited property and a report dated January 6, 1995 on its compliance with laws and regulations.

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

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

KPMG Peat MartuxckK LLP

January 6, 1995

Ti-4


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

Since enactment of the Bank Secrecy Act of 1970, it has become increasingly difficult to
hide the profits of criminal activity by depositing them in domestic banks. To avoid
required financial reporting, currency is smuggled out of the United States, deposited in
foreign financial institutions and later spent or transferred back to the United States where it
is then less likely to be exposed. Customs has authority to seize and forfeit smuggled
monetary instruments involved in international money laundering schemes.

The lineage of federal seizure and forfeiture authority begins with USCS. The laws
governing a significant portion of modern federal forfeiture activity are derived from
Customs statutes. Today, the authority of USCS in these areas flows mainly from two
sources, the Tariff Act of 1930 as codified in Title 19 USC which pertains to the
importation of articles contrary to law, and from Title 22 USC which refers to the illegal
export of materials of war.

Criminal Investigation Division of the Internal Revenue Service

The IRS CID is charged with enforcing federal tax, bank secrecy and money laundering
statutes. IRS CID financial investigations of tax, currency and money laundering
violations often provide the basis for its own or multi-agency initiatives against those
engaged in narcotics trafficking and other illegal activities as well as for the subsequent
seizure and forfeiture of their assets.

IRS CID's seizure and forfeiture authorities are derived from its responsibilities for
pursuing violations of required cash transaction reporting under the Bank Secrecy Act (Title
31) and money laundering (Title 18) provisions of the United States Code.

United States Secret Service

The USSS was created in 1865 for the express purpose of stopping counterfeiting
operations which had arisen after the introduction of paper currency during the Civil War.
The executive protection function of the USSS began after the assassination of President
William McKinley in 1901.

The principal statute which authorizes the USSS to seize and forfeit assets is Title 18 USC
981. The USSS has the authority to seize and forfeit property in money laundering cases
involving counterfeit and fraud violations as well as in investigations relating to frauds
against federally insured financial institutions.

Bureau of Alcohol, Tobacco and Firearms

The ATF was established on July 1, 1972. It is a Treasury bureau succeeding what had
previously been the Alcohol Tax Unit of the Internal Revenue Service. Its principal
authorities are established under the National Firearms Act of 1934 and the Gun Control
Act of 1968, as amended.

ATF has authority to seize and forfeit firearms, ammunition, explosives, alcohol, tobacco,
currency, conveyances and certain real property involved in violations of law. The primary
statute used by ATF in combating drug trafficking is 18 USC 924(c), which prohibits the
use or the carrying of a firearm during a drug trafficking crime. Oftentimes, ATF's
forfeiture activities arise from investigations focusing on violent criminals using firearms in
furtherance of their illegal activities.

(Continued)

1-9


participating bureaus are presented as a footnote disclosure to the Fund's financial
statements.

To encourage the participation of state and local law enforcement agencies in Treasury
law enforcement operations, forfeited property or currency may be shared on a
proportional basis with the state and local agencies who provide direct or indirect
assistance. In addition, forfeited property or currency may be shared with any federal
agency or foreign country that participated in the investigation. This activity is called
asset sharing. The total assets shared with state, local, and federal agencies and foreign
countries totaled approximately $61 million during fiscal year 1994.

The Fund's approach to
Seized property management

Property held for sale represents a significant future source of revenue to the Fund.
Customs, as the executive agent for the Treasury Forfeiture Fund and the administrator
of the national seized property contract (EG&G Dynatrend or EG&G), is responsible for
the acceptance, storage, maintenance, and disposition of seized and forfeited assets. It
has been determined that having a national seized property contractor, such as EG&G,
to store, maintain, and sell forfeited property is both cost and operationally effective.
By having these functions performed by the private sector, the bureaus’ personnel can
concentrate on their prime areas of responsibility. During fiscal year 1994, Customs
prepared the "Request For Proposal" for the five-year national seized property contract.

The Fund's management monitors the operation of EG&G through utilization of
Customs’ Headquarters staff, regional Fines, Penalties & Forfeiture program managers,
and 102 Seized Property Custodians/Specialists. These personnel oversee the property
management and disposal operations for assets seized and consigned to the contractor
by participating Treasury law enforcement organizations. EG&G's compliance with the
contract is monitored through regular visits to its warehouses and auction sales
locations. Follow-up procedures exist to monitor correction of any noted deviation from
the contract. Also, the contract contains performance indicators that govern the ultimate
compensation paid for services rendered by EG&G.

To maximize operational efficiency, Customs established 102 Seized Property
Custodian (SPC) and Seized Property Specialist (SPS) positions in the 44 Customs
District/Area offices. These positions oversee the field operations of EG&G and the
storage and disposal of property not consigned to the contractor, such as narcotics,
currency, and firearms. During fiscal year 1994, the SPC/SPSs oversaw property
management for all Treasury law enforcement agencies from the point of seizure until
disposition.

In addition, the Fund utilizes the Custom's Seized Property Management System and the
Internal Revenue Service's Asset Forfeiture Tracking System (AFTRAK) databases to
track property status from seizure to disposition for all seized and forfeited items. At




REPORTABLE CONDITIONS
FUND OR‘ IZATION

The accountability for the operations of the Fund rests with the Executive Office for Asset
Forfeiture (EOAF) and Asset Forfeiture Financial Management (AFFM) herein referred to as TFF
management. The activities of the participating law enforcement agencies are governed by the
individual policies and procedures of the individual agencies. This leads to a disconnect between
the operations of the Fund and the management of the Fund whereby the management of the Fund
has no or little line authority for the forfeiture operations of the individual agencies. In addition,
the communication channels within and between EOAF and AFFM did not appear to be clearly
established and operating effectively. As a result, communication between TFF management and
the individual law enforcement agencies often is cumbersome, inefficient or non-existent. For
example: 1) the reporting process for cash paid in lieu of forfeited property is compiled
inconsistently among the bureaus, 2) the methods and frequency for reconciling accounts and
balances is performed inconsistently among bureaus (for example the reconciliation of ACS cash
collections to the individual agencies records is not consistently performed by all of the agencies)
and 3) there is an apparent cumbersome process of decision making within TFF management.
Recognizing that TFF management has the responsibility to manage the Fund, but minimal line
authority to manage the forfeiture activities of the individual law enforcement agencies, we
recommend the establishment of a structure with the law enforcement agencies to ensure
cooperation between TFF management and the agencies. In addition, NFC, as Executive Agent
for financial operations of the Fund, should be an integral part of this structure for developing
accounting policies and procedures to support consistent accounting and in gathering information
for the preparation of the financial statements. We understand the management structure of the
Fund is currently being reorganized. In finalizing the new management structure, we recommend
establishing clear lines of decision making authority and communication channels.

RECONCILIATION OF PROPERTY ACTIVITY

Currently, there are no procedures in place to reconcile inventory sold as reported by the individual
agencies property tracking systems with the actual sales proceeds reported in the general ledger.
When the auction sales packages are received at the NFC, the list of items sold, the notice of award
and the deposit ticket indicating sales proceeds are all reconciled. However, the auction sales
packages are not reconciled to the system data of sold items. Without such a reconciliation being
performed, it is possible for cases to be closed on the system indicating disposition was obtained
through sale when, in fact, the sale never occurred. We recommend that monthly a listing of items
sold be generated from the individual agencies property tracking systems, which is in turn
reconciled with the sales packages received that month to determine whether all sales have been
included in the general ledger.

In addition, we noted a similar review of property destruction was not occurring. Again, it is
possible for cases to be closed on the system indicating disposition was obtained through
destruction which never actually occurred. This situation would generally only be discovered if the
property remained on the premises at the time of physical inventory. We recommend monthly a
report of all destructions be prepared and a sample of the items be selected from the report to
review documentation proving the destruction occurred.

TH-14


(C)

(D)

(E)

(F)

DEPARTMENT OF THE TREASURY FORFEITURE FUND

Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1994
(Unaudited)

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

State and local agencies $ 53,375,000
Foreign countries 366,000
Other federal agencies 7,318,000

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

The net amount realized from the operations of the Fund is shown in the audited financial
statements is $43,672,000.

The amount of seized cash being held as evidence at September 30, 1994, is
approximately $24 million.

On a budgetary basis, unobligated balances as originally reported on the Office of
Management and Budget Reports, SF-133, “Report on Budget Execution,” was
$57,687,000 for fiscal year 1994. As required by the Omnibus Crime Control Act of
1994, $50 million and one half of the excess unobligated balances of $3.8 million in
fiscal year 1994, are retained in the Fund.

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

U.S. Customs Service $ 87,869,506 34 seizures
IRS CID 24,516,318 14 seizures
U.S. Secret Service 2,841,630 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 $15,604,000. A detailed schedule is provided
on page IV-2.

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

The total net position of the Fund at September 30, 1994, as reported in the audited
financial statements is $135,192,000.

(Continued)
IV-5


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

Distributions Payable

The Fund, under certain laws and regulations, has the authority to share forfeited property and
currency with federal, state, and local agencies or foreign countries who participate either directly or
indirectly in a related seizure. In addition, the Fund may transfer forfeited property to other federal
agencies with appropriate approval. Presently, currency shared with federal, state or local agencies
or foreign countries is not recognized as a distribution until the cash is disbursed to the other agency.
In addition, property shared with or transferred to another agency is not recorded on the general
ledger. As part of the year-end procedures, NFC makes an adjustment to record this information on
the financial statements.

A record of approved asset sharing and property transfer transactions is maintained at Customs. IRS
CID, ATF and USSS do not have an internal tracking system that supports an accrual at any point in
time. However, TFF does track all asset sharing requests that reach final approval status. Through
our audit procedures, we determined the asset sharing approval listings were not complete as several
transactions approved and distributed were not included on any approval listing. We recommend
that TFF track all asset sharing requests to ultimate disposition. This will ensure asset sharing
requests are fully accountable.

A possible solution to properly record asset sharing and property transfer transactions is for each
participating agency to have a centralized tracking system. On a monthly basis, reports on the asset
sharing accruals will be sent to TFF for monitoring purposes. TFF would review the reports and
supporting documents as an overall control, then forward the accrual to NFC to be posted.

There are separate disposition codes for property transferred to other federal agencies and for
property shared with state or local agencies. We recommend items with asset sharing dispositions
per the inventory system be reconciled to TFF approval listings and, thus, to the general ledger on a
monthly basis.

Accounts Receivable from Contractor

Customs maintains a contract with EG&G Dynatrend (EG&G) whereby EG&G stores property
seized by any agency participating in the Fund, conducts auction sales of forfeited property, and
collects storage costs reimbursed by violators. Cash collections made by EG&G on behalf of the
Fund are deposited to various bank accounts in the name of EG&G and, within one week, are
accumulated and transferred to the U.S. Treasury account at the Federal Reserve Bank of New
York. The NFC receives a validated deposit slip approximately one week later, at which time
revenue is recognized.

Under accrual accounting, a receivable should be recorded at the time the revenue is earned (i.e.,
when the reimbursement from the violator is assessed or when the auction sale is completed). An
alternative method to properly recognize the receivable and revenue is to establish the following
formalized procedures. On a monthly basis, EG&G currently provides a listing from SPMS which
lists all auction sales for the month. This report is reconciled monthly to ACS (includes all cash
collected from sales). This report could be used by NFC to manually record a receivable from the
auction sale, along with the related revenue. When ACS is later integrated with the general ledger,
the receivable can be updated automatically as the cash collection is input into ACS from deposit
information received from banks. In addition, the NFC could make the appropriate entries to
inventory and mortgages and claims payable by identifying the fair market value of the items sold
from SPMS and by identifying associated claims on CPTS.

TH-10


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Statements of Cash Flows
For the years ended September 30, 1994 and 1993
(Dollars in thousands)

Cash flows from operating activities:
Excess of net revenues and financing sources
over total operating expenses $ 43,672
Adjustments to reconcile excess of net revenues and
financing sources over total operating expenses
to cash provided from operating activities:

Decrease in accounts receivable 4,170
(Increase) decrease in forfeited property (22,555)
Decrease in investigative and travel advances 37
Increase in prepaids (600)
Increase (decrease) in custodial liabilities 15,191
Increase in accounts payable 13,043
Net cash provided (used) by operating
activities 52.958

Cash flows from financing activities:
Distribution to authorized retained capital -
Addition to authorized retained capital -
Net cash provided (used) by financing
activities -

Net cash provided (used) by operating

and financing activities 52,958
Cash, beginning of year 122.664
Cash, end of year $ 175,622

20,503

15,436
2,010
T7457

(59,705)
2.695

11,604)
30,000
19,762
49.762

38,158

84,506
122,664

Property forfeited of approximately $5 million was shared with state and local agencies and foreign
countries, or transferred to other federal agencies during both the years ended September 30, 1994

and 1993.

Unliquidated obligations increased approximately $33 million for the year ended September 30,
1994 and when combined with reserve for advances, decreased approximately $5 million for the

year ended September 30, 1993.

Interest paid amounted to approximately $3 thousand and $7 thousand for the years ended

September 30, 1994 and 1993, respectively.

See accompanying notes to financial statements.

1-6


Using seizure values, in particular, for financial reporting purposes can be misleading because the
values are often overstated and therefore does not present an accurate picture of the net realizable
value to the Fund. For example, if a seizure of counterfeit goods was recorded in CPTS at its
street value, these goods would then be ultimately destroyed and the net amount realized by the
Fund is actually zero. Therefore, for financial reporting purposes, we recommend the Fund's
management, as was done in previous financial statements, assign a zero value to forfeited
property that will ultimately be destroyed. In addition, we recommend the Fund's management
evaluate the accuracy of market values assigned to forfeited property in CPTS, AFTRAK and the
USSS Forfeiture System. Due to the relatively short time from the time of forfeiture to the sale,
the subsequent sales price becomes a good estimate for the fair value at the time of forfeiture.
Accordingly, the fair value could be estimated by comparing the seizure values to the actual sales
proceeds obtained at subsequent auction sales.

To develop numbers for inclusion in the Fund's 1993 and 1994 financial statements, management
performed a historical analysis of the ultimate sales values compared to the initial appraised
amounts. These ratios were applied to the ending forfeited property amount to value it at its
approximate fair value at the time of forfeiture. This analysis is an important first step to properly
value forfeited property. We encourage management to continue reviewing this analysis to refine
its accuracy and ease in preparation. As the process is refined, it will become easier to prepare the
analysis monthly to properly value and record month-end forfeited property balances.

PEI S

OMB Bulletin No. 94-01, "Form and Content of Agency Financial Statements" requires the
inclusion of performance indicators in the Overview section of the annual financial statements. As
such, as part of the audit of the annual financial statements, the auditor is to consider the internal
control structure surrounding the development and reporting of performance indicators and to
report on any identified material weaknesses in the procedures used to develop and report
performance indicators.

The Fund has not fully developed performance indicators specific to the Fund and implemented
ongoing procedures to measure performance indicators and report the progress toward achieving
the Fund's goals and objectives. We understand initiatives are underway to develop additional
performance indicators such as processing time for equitable sharing payments and the number of
days between the forfeiture of property and disposal through sale.

We recommend performance indicators specific to the goals and objectives of the Fund be

enhanced and developed. In addition, policies and procedures should be implemented to
accumulate and report performance indicators on a routine (e.g., monthly) and consistent basis.

TH-13


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1994
(Unaudited)

(G) the net amount, if any, of the excess unobligated amounts remaining in

@)

the Fund at the end of the preceding fiscal year and available to the
Secretary for federal law enforcement related purposes

In fiscal year 1994, $50 million was allowed to be retained in the Fund. One half of all
excess unobligated amounts were to be transferred to the ONDCP Special Forfeiture
Fund. In addition, on a budgetary basis, the Fund was allowed to retain the remaining
$3.8 million of the excess unobligated amounts.

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 Auditors' Report is on pages
I-1 through I-16.

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 IV-3.


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Table of Contents

Overview of the Department of the Treasury Forfeiture Fund

Independent Auditors’ Report on Financial Statements

Financial Statements and Footnotes

Independent Auditors' Report on Compliance

Independent Auditors’ Report on Internal Control Structure
Exhibit 1 - Material Weaknesses

Supplemental Financial and Management Information
Asset Sharing Summarized by State and U.S. Territories
Uncontested Seizures of Monetary Instruments Valued
Over $100,000, Taking More than 120 days From
Seizure to Deposit in Fund

Analysis of Revenue and Expenses and Distributions

Information Required by 31 U.S.C. 9703(f)

I-]

1-3
I-1
Til-1
IHl-5

IV-2
Iv-3
Iv-4


kee Peat Marwick ue

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

In planning and performing our audit of the financial statements of the Fund for the year ended
September 30, 1994, we obtained an understanding of the internal control structure. With respect
to the internal control structure, we obtained an understanding of the design of relevant policies and
procedures and whether they have been placed in operation, and we assessed control risk in order
to determine our auditing procedures for the purpose of expressing our opinion on the financial
statements and not to provide an opinion on the internal control structure. Accordingly, we do not
express such an opinion. Our consideration included obtaining an understanding of the significant
internal control structure policies and procedures and assessing the level of control risk relevant to
all significant cycles, classes of transactions, or account balances.

We noted certain matters involving the internal control structure and its operation that we consider
to be reportable conditions under standards established by the American Institute of Certified
Public Accountants and OMB Bulletin 93-06. Reportable conditions involve matters coming to our
attention relating to significant deficiencies in the design or operation of the internal control
structure over financial reporting that, in our judgment, could adversely affect the Fund's ability to
ensure that the objectives of the internal control structure, as previously defined, are being
achieved.

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

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

Material Weaknesses

e Analysis of changes in seized and forfeited property - The U.S. Customs Service
(USCS) and the Criminal Investigation Division of the Internal Revenue Service (IRS CID)
were not able to provide an auditable analysis of changes in seized property, and IRS CID was
not able to provide an auditable analysis of changes in forfeited property in a timely manner,
which resulted in a scope limitation qualification in the auditors’ report to the financial
statements.

« Accounting records are primarily maintained on a cash basis - The Fund’s
accounting records are primarily maintained on the cash basis of accounting, rather than the
accrual basis. Accordingly, most transactions are reflected in the accounting system when the
cash is received or disbursed rather than when the transactions occur. Year-end manual
procedures were developed in order to produce accrual basis financial statements that could be
substantiated through an audit.

¢ General ledger - The Fund’s general ledger does not record all balances and transactions that
are reflected in the financial statements. Rather, procedures were developed to identify and
capture information manually from other systems in order to compile the financial statements.

Ti-2




Fi ial Highligt
The following analysis seeks to assist the reader in understanding the accompanying

financial statements. As stated previously, the major change from fiscal year 1993 to
fiscal year 1994 was the full participation of all Treasury law enforcement bureaus.

Revenue and financing sources

A comparison of revenues and financing sources (in millions) for the past two fiscal
years follows:

1994 1993
Forfeited currency and monetary instruments $ 143 113
Forfeited property 20 18
Payments in lieu of forfeiture 29 22
Other miscellaneous __6 _3
$ 198 156

The Fund's primary source of revenue is forfeited currency and monetary
instruments. For fiscal year 1994, revenue from forfeited currency and monetary
instruments, including proceeds received from participating with other Federal agencies,
totaled $143 million, or 72 percent of total revenues, versus $113 million, also 72
percent of total revenues in fiscal year 1993. The increase is primarily attributable to
the participation of the additional Treasury law enforcement bureaus in the Fund. This
amount also includes revenues from participating with other law enforcement
organizations (reverse asset sharing) of $4 million, or 2 percent, versus $6 million, or 4
percent of total revenues and financing sources in fiscal year 1993. In addition, the
Fund receives revenue from the sale of forfeited property. The net revenue from the
sale of forfeited property (net of mortgages and claims) for fiscal years 1994 was $15
million and fiscal year 1993 was $12 million. Additionally, $5 million of property was
placed into official use by state and local, and federal agencies. This represented 10
percent of total revenues and financing sources in fiscal years 1994 and 12 percent in
fiscal year 1993. The net revenue does not reflect the cost of related contractor and
sales expenses. The third type of revenue received by the Fund is payments received
in lieu of forfeiture totaling $29 million, or 15 percent of total revenues and financing
sources in fiscal year 1994. This represents an increase from $22 million, or 14 percent
of total revenues and financing sources in fiscal year 1993. During fiscal year 1994, an
even greater emphasis was placed on negotiating payments in lieu of forfeiting the
violator's property. Other miscellaneous revenues are from investment income and
sales of subscriptions to the catalogs for sales of forfeited property.

xi


While it may be less efficient, if the information in the agencies’ inventory system is not timely
updated, an alternative method to implement this recommendation in the short term is to require, at
each month-end, each District, field office or division coordinator to submit a signed letter to the
NFC TFF Team indicating all seizures forfeited during the current month. (This is the same
procedure as described under "Forfeited Currency" and the two letters may be submitted in the
same reporting package.) A journal entry should be recorded in the general ledger to recognize the
forfeited property and the related deferred revenue. A designated individual at the NFC should
compare this information to the property subsidiary systems and investigate differences.

Property listings produced by CPTS, AFTRAK and the USSS Forfeiture System contained
inaccurate data about property on hand. We identified items during the physical inventory
observation that were not listed on the inventory property reports, and items on the reports that had
been sold, transferred, or disposed. One cause of these exceptions is that documentation for
seizures is not prepared and input to the participating agencies’ inventory systems on a consistent
and timely basis.

Also, the final forfeited property listings produced by CPTS, AFTRAK and the USSS Forfeiture
System failed to include all forfeitures occurring in the current fiscal year. The main cause of this
situation is that the agencies staff are not properly monitoring and updating their systems to
communicate the change in status to the appropriate personnel for updating the CPTS, AFTRAK
and the USSS Forfeiture System.

We recommend existing procedures be followed requiring agencies’ staff to forward the forfeiture
instructions as authorized, to the appropriate personnel for updating the agencies’ inventory system
and, if held by the contractor, to EG&G, to update SPMS to reflect changes in property status.
Additionally, agencies’ staff should be required to specifically identify and report to the NFC,
monthly, the status of all seized property items older than six months or with appraised/fair market
values greater than $50,000. Procedures by which the agencies’ inventory system are updated and
maintained should be followed. These procedures include formal training of agency employees as
well as written policies providing guidance to the districts, and EG&G employees. We
recommend these reconciliation procedures continue to be performed on a routine basis (e.g.,
quarterly). Additionally, since seized currency is also reported on the balance sheet, similar
procedures should be implemented for seized property.

FO) ID PROPERTY VALUATION

Under the 1930 Tariff Act and later amendments, Customs enforces importing and exporting and
drug-related laws of the United States. Under Bank Secrecy Act (Title 31) and money laundering
(Title 18), IRS-CID enforces federal tax, bank secrecy and money laundering statutes. The
USSS's principal statute is Title 18 USC 981 which authorizes the USSS to seize and forfeit assets
in conjunction with counterfeiting operations. The principal authorities of ATF are the National
Firearms Act of 1934 and the Gun Control Act of 1968, as amended.

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

Statement of Federal Financial Accounting Standards No. 3 requires forfeited property to be stated
at the fair value at the time of forfeiture. The value of forfeited property is currently recorded in
CPTS, AFTRAK and the USSS Forfeiture System at appraised value, determined at the seizure
date, by the seizing agent or import specialist, or at its fair market value, determined by
independent appraisal immediately before its sale at auction. Forfeited property, such as counterfeit
goods and other seizures which must ultimately be destroyed, should reflect a net realizable value
of zero for financial reporting purposes.

TH-12


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Uncontested Seizures of Currency and Monetary Instruments Valued Over
$100,000, Taking More than 120 Days From Seizure to Deposit in Fund
For the year ended September 30, 1994
(Dollars in thousands)

(Unaudited)
Forfeited
Total Number Being Held Uncontested
Region/Districts of Cases as Evidence Cash
United States Customs Service (USCS)
New York - JFK 3 $ 1,072 -
Detroit 2 1,291 -
Chicago 1 395 -
Odensburg
U.S. currency 2 130 -
Canadian currency 2 411 -
Tampa 1 2,074 -
Miami 14 - 5,482
Houston 2 - 1,109
Seattle 1 143 :
Agency Total 28 5,516 6,591
Internal Revenue Service-CID (IRS CID)
Manhattan 3 - 845
Ft. Lauderdale 4 - 845
Nashville 1 - 340
Dallas 1 - 151
Laguna Niguel 3 - 805
San Francisco 2 - 160
Los Angeles 2 - 351
Agency Total 16 : 497
Grand Total 44 $5,516 10,088

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


Operating expenses

After allocation of revenues, the remaining net revenues support the law enforcement
activities of the Fund and pay for the storage of seized and forfeited property and sales
expenses associated with the disposition of forfeited property. A comparative summary
of operating expenses (in millions) of the Fund follows:

1994 1993
Contractors and sales $33 23
Secretary's Enforcement Expenses 4 0
Purchases of evidence and information 20 14
Other case related 6 10
Payroll costs 10 6
Property purchased for TFF bureaus use 7 7
Other 9 2

$39 $2

Operating expenses increased $27 million

Operating expenses increased $27 million in fiscal year 1994. Contractors and sales
expenses correspond to the amount of seized and forfeited property both held and sold
during the year. Even though seized property is not included in the Fund's financial
statements until the property is forfeited, the associated cost of maintaining and storing
the seized property is an allowable expense of the Fund. The Secretary's Enforcement
expenses are made available from the amounts transferred by the Attorney General
pursuant to section 524(c)(1) of title 28, or by the Postmaster General pursuant to
section 2003 of title 39, for Federal law enforcement related purposes of the Department
of Treasury law enforcement organizations. This amount was used to further enhance
the Secretary's Anti-Violent Crime program. Purchases of evidence and information
expenses are affected by the amount of payments made during the year without any
direct correlation to the amount of revenue from forfeitures ultimately received in the
Fund. Many of the payments are related to seizures of drugs and drug paraphernalia,
which do not result in revenue to the Fund. Included in other operating costs in the
summary is interest expense, specialized contract services, expenses incurred in joint
operations and other program management. Interest expense related to the Prompt
Payment Act of 1988 was $3,000 and $7,000 for fiscal years 1994 and 1993,
respectively.

xiii


not recorded in the subsidiary system during the year at its fair
value at the time of forfeiture; and (6) the Fund has not fully
developed specific performance indicators to report the progress
toward achieving the Fund's goals and objectives.

In addition, the IPA's report on internal control structure
cited the following four reportable conditions: (1) the current
management structure of the Fund does not facilitate an effective
system of communication nor present Fund management with line
authority for forfeiture operations of the individual law
enforcement agencies; (2) there are no procedures in place which
reconcile actual sales activity as reported on the general ledger
to individual sales removed from the property listing; (3) the
field offices do not reconcile the seizure numbers and line items
per the property listing to the seizure numbers and line items
per the Seized Property Management System; (4) and the Bureau of
Alcohol, Tobacco and Firearms does not maintain a detailed
listing of the quantity and dollar amounts for individual
property.

The IPA's report on compliance cited the following instance
of noncompliance with applicable laws and regulations: the Budget
and Accounting Procedures Act of 1950, Section 3512, Executive
Agency's Accounting System requires federal agencies to establish
an internal control structure which ensures the safeguarding of
assets and the proper recording of revenues and expenditures. As
summarized above, the Fund's internal control structure has
certain material weaknesses which result in noncompliance with
this Act.

The management of the Fund reviewed the report and concurs
with the findings.

Should you or your staff have any questions, please contact
me at (202) 927-5400 or Kim H. Stroud, Acting Director, Technical
Services Audit Program Group at (202) 927-5460.

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DEPARTMENT OF THE TREASURY FORFEITURE FUND

Statements of Operations
For the years ended September 30, 1994 and 1993
(Dollars in thousands)

Revenues and financing sources:
Undistributed forfeited currency and monetary instruments
Distributed forfeited assets:
Currency
Property
Proceeds from sales of forfeited property (note 4)
Sales of forfeited property, net of mortgages and claims
of $2,382 and $2,039, respectively (note 4)
Payments received in lieu of forfeitures, net of refunds
of $2,669 and $2,215, respectively
Reimbursed storage costs

Proceeds from participating with other federal agencies
Other miscellaneous
Total revenues and financing sources

Allocations of revenues:
ONDCP Special Forfeiture Fund
State and local agencies
Foreign countries
Other federal agencies
Total allocations of revenues

Net revenues and financing sources

Operating expenses:
Non-discretionary expenses:
Contractors and sales
Purchases of evidence and information leading to seizures
Other case related
Payroll costs
Interest expense
Secretary enforcement expense
Total non-discretionary expenses

Discretionary expenses:
Other purchases of evidence and information
Specialized contract services
Joint operations
Other program management
Property purchased and transferred to a participating agency (note 6)
Total discretionary expenses

Total operating expenses

Excess of net revenues and financing
sources over total operating expenses

See accompanying notes to financial statements.

1-4

ig94

$ 85,569

53,375
4,967
2,715

12,037

29,192
2,793
3,966

2,372
4,125
3,040
1,653

$ 43,672

1993

42,020

65.261
5,482
2,110

10,297

21,487
2,188
5,676

67,035
19

22,602
12,200
9,905
5,926

2,209
1,243
16lt

40



DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

JAN 26 1995

MEMORANDUM TO: Jan P. Blanton
Director, Executive Office for Asset Forfeiture

FROM: Jay M. Weinstein \. on
Assistant Inspector General for Audit

SUBJECT: 1994 Audited Annual Chief Financial Officer's
Report for the Treasury Forfeiture Fund

The attached 1994 Audited Annual Chief Financial Officer's
Report for the Treasury Forfeiture Fund was subjected to an audit
by an independent public accountant (IPA) under the auspices of
the Chief Financial Officer's Act of 1990. The Office of
Inspector General (OIG) contracted for this audit. The report
package includes the audited Fiscal Year (FY) 1994 financial
statements for the Treasury Forfeiture Fund (Fund), an audit
report (opinion) on the Fund's FY 1994 financial statements, a
report on the Fund's internal control structure, and a report on
the Fund's compliance with laws and regulations. The OIG has
submitted a copy of the report package to the Secretary of the
Treasury.

The IPA rendered a qualified opinion on the financial
statements. The qualification was due to the Fund's inability to

to the Fund's financial statements. Accordingly, the IPA was
unable to satisfy themselves as to the fair presentation of these
disclosures.

The IPA's report on internal control structure cited the
following six material weaknesses in the Fund's internal control
structure: (1) the Customs Service and the Internal Revenue
Service (IRS) were not able to provide an auditable analysis of
change in seized property, and IRS was not able to provide an
auditable analysis of change in forfeited property in a timely
manner; (2) the Fund's accounting records are primarily
maintained on the cash basis of accounting, rather than the
accrual basis; (3) the Fund's general ledger does not record all
balances and transactions that are reflected in the financial
statements; (4) the value of forfeited and seized property is not
recorded in the general ledger and is not recorded in supporting
subsidiary systems in a timely manner; (5) forfeited property is


Exhibit 1
DEPARTMENT OF THE TREASURY FORFEITURE FUND

The Secretary of the Treasury designated U.S. Customs Service (Customs or USCS) as its
Executive Agent for financial operations of the Department of the Treasury Forfeiture Fund
(Fund). Pursuant to the executive agency role, the Customs National Finance Center (NFC) is
responsible for accounting and financial reporting for the Fund. In fiscal year 1994, the following
agencies participated in the Fund: Customs, Internal Revenue Service-Criminal Investigations
Division (IRS CID), U.S. Secret Service (USSS), Bureau of Alcohol, Tobacco and Firearms
(ATF), Financial Crimes Enforcement Network (FinCEN), the Federal Law Enforcement Training
Center (FLETC) and the U.S. Coast Guard (USCG).

MATERIAL WEAKNESSES
ALYSIS OF GES IN. D AND Fi ITED PROPERTY

As discussed in note 3 to the financial statements, the Federal Accounting Standards Advisory
Board (FASAB) issued Statement of Federal Financial Accounting Standards No. 3, Accounting
for Inventory and Related Property, FASAB No. 3 which became effective for fiscal year 1994.
As such, fiscal year 1994 was the first year the Fund was required to present the disclosures of
FASAB No. 3. FASAB No. 3 requires disclosure of an analysis of changes in forfeited and
seized property. The standard requires presentation of both dollar amounts and quantity changes.

USCS, IRS CID, USSS and ATF maintain seized and forfeited property, the value of which is
included, on the TFF financial statements. Due to the reasons explained below, USCS and IRS
CID were not able to prepare in a timely manner an auditable analysis of changes in seized property
and IRS CID was not able to prepare an auditable analysis of changes in forfeited property, which
resulted in a scope limitation qualification in the auditors’ report to the financial statements. In
addition to the auditors’ opinion qualification, the inability to prepare the changes in forfeited and
seized property analysis raises questions as to whether the Fund has been able to properly account
for all activity related to seized and forfeited property.

The USCS analysis of changes in seized property was unauditable because it contained a difference
of approximately $13 million which could not be supported by documentation. Customs was
unable to determine the nature and cause for this difference. In addition, the final analysis was not
presented for audit until approximately 2 weeks prior to the completion of the audit.

The IRS CID analysis of changes in seized property was also unauditable. The IRS CID analysis
of changes in seized property had to be reworked several times. In one of the submissions, the
detail transactions supporting the analysis contained an unsupported amount of $15 million. Upon
further analysis, including discussions with the preparer of the analysis, it was determined the
detail did not add to the purported total. In a revised analysis of changes in seized property
submitted for audit, that we received one week prior to completion of the audit, we were again
unable to trace certain individual transactions through the analysis of changes in seized property.

The IRS CID analysis of changes in forfeited property was presented for audit approximately 2

weeks prior to the completion of the audit. We were unable to determine whether all transactions
were included in the analysis.

TII-5


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Notes to Financial Statements

© Accounting principles published by authoritative standard setting bodies and other
authoritative sources (1) in the absence of other guidance in the first three parts of this
hierarchy, and (2) if the use of such accounting standards improve the meaningfulness
of the financial statements.

Financial Statements Presented

The majority of the revenue recorded by the Fund is utilized for operating expenses or
distributed to state and local law enforcement agencies, other federal agencies, other foreign
governments and the ONDCP Special Forfeiture Fund in accordance with the various laws
and regulations governing the operations and activities of the Fund. These activities reflect
the custodial/fiduciary responsibilities that the Fund has been authorized by law to enforce.

To more appropriately present the results of its principal activities (i.¢., custodial/fiduciary
responsibilities) and the funding of such, the Fund has presented Statements of Operations
and Statements of Changes in Net Position in place of the Statements of Operations and
Changes in Net Position as suggested by OMB.

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

Custodial Assets and Liabilities

Custodial assets consist principally of undistributed funds with Treasury, receivables,
seized currency and monetary instruments, and forfeited property which is held for sale or
to be distributed primarily to other federal, state and local agencies or foreign governments.
Because substantially all of the custodial assets are not considered as financing sources
(revenues) available to offset operating expenses, corresponding liabilities are recorded and
presented as "Custodial Liabilities" in the Statements of Financial Position to reflect the
custodial nature of the Fund's activities.

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

Operating Assets

Operating assets are used to conduct the operations and activities of the Fund (i.e., non-
custodial assets). Operating assets consist of cash or other assets which could readily be
converted into cash to meet the Fund's current or future operational needs.

istributed s wit! asul Cas
Undistributed funds with Treasury and cash represents custodial monies, including
forfeited cash held as evidence, to be distributed to various federal, state or local agencies.

Forfeited cash held as evidence amounted to approximately $8,221,000 and $5,667,000 at
September 30, 1994 and 1993, respectively.

(Continued)

1-12


kpmcG Peat Marwick LLP

2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452

Independent Auditors' Report on Compliance

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

We have audited the financial statements of the Department of the Treasury Forfeiture Fund (the
Fund) as of and for the year ended September 30, 1994, and have issued our report thereon dated
January 6, 1995.

We conducted our audit in accordance with generally accepted auditing standards: Government
Auditing Standards (1994 revision), issued by the Comptroller General of the United States; and
the Office of Management and Budget (OMB) Bulletin 93-06, Audit Requirements for Federal
Financial Statements. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.

Compliance with laws and regulations applicable to the Fund is the responsibility of the
management of the Fund. As part of obtaining reasonable assurance about whether the financial
statements are free of material misstatements, we performed tests of the Fund's compliance with
certain provisions of laws and regulations that may directly affect the financial statements,
including the Budget and Accounting Procedures Act of 1950, Anti-Deficiency Act, Federal
Managers’ Financial Integrity Act of 1982 (FMFIA), Prompt Payment Act, and Chief Financial
Officers Act of 1990, which have been identified by OMB; and Treasury Forfeiture Fund Act of
1992, Anti-Drug Abuse Act, Trade and Traffic Act, 19 USC 1300 Series, 19 USC 1500 Series, 19
USC 1600 Series, 18 USC 981, 21 USC 881, 31 USC 9703, Customs and Trade Act, and
Comprehensive Crime Control Act, Title VI sections 670 and 685 of the North American Free
Trade Agreement Implementation Act, section 90205 of the Violent Crime Control and Law
Enforcement Act of 1994, section 112 of the Treasury/Postal Appropriations Bill and Title II of the
Health and Human Services Appropriations Bill, which have been identified by the Fund. As part
of our audit, we also obtained an understanding of management's process for evaluating and
reporting on internal control and accounting systems as required by the FMFIA and compared the
Department of the Treasury's and the participating agencies’ fiscal year 1994 FMFIA reports with
our consideration of the Fund's internal control structure. We also reviewed and tested the Fund's
policies, procedures, and systems for documenting and supporting financial, statistical, and other
information presented in management's Overview of the Department of the Treasury Forfeiture
Fund and Supplemental Financial and Management Information. However, the objective of our
audit of the financial statements was not to provide an opinion on overall compliance with such
laws and regulations. Accordingly, we do not express such an opinion.

I-1

Meme: Fam of
Kiyrwaict Pest Marwace Goerdeien

geome


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Statements of Budgetary Resources and Actual Expenses
For the years ended September 30, 1994 and 1993
(Dollars in thousands)

1994
BUDGET
———__Obligations
Resources Direct Reimbursed
$ 246,808 $ 117,017 $ 2

Budget Reconciliation:
Total operating expenses and allocations of revenues

Net adjustments to present accrual financial statements
Subsequent adjustments
Expenses netted against revenues:
Mortgages and claims
Refunds
Allocation of revenues not requiring outlays, distributed
forfeited assets - property

Accrued expenditures, direct

1993
BUDGET
———_Obligations
Resources Direct Reimbursed
$ 209,993 $ 162,064 $__-

Bud; -econciliation:
Total operating expenses and allocations of revenues

Net adjustments to present accrual financial statements
Subsequent adjustments
Expenses netted against revenues:
Mortgages and claims
Refunds
Allocation of revenues not requiring outlays, distributed
forfeited assets - property

Accrued expenditures, direct

See accompanying notes to financial statements.

1-7

$ 154,026

(35,056)
(2,037)



Asset sharing

One goal of the Fund is to share assets with state and local law enforcement agencies
and other federal agencies and foreign governments. A comparison (in millions) of
assets shared to assets forfeited follows:

1994 1993
Currency and monetary instruments:
Assets forfeited $139 107
Assets shared ** 53 65
Assets shared as % of assets forfeited 38% 61%

Property and net proceeds from sales of forfeited property:

Assets forfeited $20 18
Assets shared 8 8
Assets shared as % of assets forfeited 40% 44%

** The FY 1994 amount excludes significant Customs' asset sharing payments that had
been obligated, but had not been liquidated, at year end. This excluded amount is
included in the unliquidated obligation amount on the Statement of Financial
Position.

Transfer of funds from the contractor

To maximize the monies available to fulfill the goals of the Fund, during fiscal year
1992, Customs had executed a contract with EG&G to transfer monies from the sale of
property at the five largest sale sites to the Fund via wire transfer. At the remaining
sites, the monies are to be transferred within five working days from receipt. Based on
information provided by the contractor, during fiscal years 1994 and 1993, 98 percent
and 93 percent, respectively, of sales revenue was transferred to the Fund within the
time parameters specified. The fiscal year 1994 amount includes the transfer of monies
for the sale of merchandise from all Treasury law enforcement agencies.


DEPARTMENT OF THE TREASURY FORFEITURE FUND

Information Required by 31 U.S.C. 9703(f)
For the year ended September 30, 1994
(Unaudited)

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

(1) A report on:

(A)

(B)

the estimated total value of property forfeited with respect to which funds
were not deposited in the Department of the Treasury Forfeiture Fund
(Treasury Forfeiture Fund or Fund) during the preceding fiscal year under
any law enforced or administered by the Department of Treasury law
enforcement organizations or the United States Coast Guard, in the case
of fiscal years beginning after 1993 .

At September 30, 1994, the Fund had forfeited currency and other monetary instruments
of $8,221,000 held as evidence. These amounts are reported as undistributed funds with
Treasury and cash in the audited financial statements.

As reported in the audited financial statements, at September 30, 1994, the Fund had
forfeited property held for sale of $29,929,000. The proceeds will be deposited in the
Fund when the property is sold.

Upon seizure, currency and other monetary instruments not needed for evidence in
judicial proceedings are deposited in a U.S. Customs Service (Customs) suspense
account. Upon forfeiture, it is transferred to the Treasury Forfeiture Fund. At
September 30, 1994, there was $3,323,000 of forfeited currency and other monetary
instruments that had not yet been transferred to the Fund. This is reported as
"receivables: federal - U.S. Customs Service funds" in the audited financial statements.

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

The estimated total value of all property transferred to any state or local law enforcement
agency is summarized by state and U.S. territories on page IV-1.

(2) areport on:

(A)

(B)

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, 1993, which
became the beginning balance for the Fund on October 1, 1993, as reported in the audited
financial statements is $91,520,000.

liens and mortgages paid and the amount of money shared with federal,
state, local and foreign law enforcement agencies during the preceding
fiscal year

Mortgages and claims expense as reported in the audited financial statements were
$2,382,000. The amount actually paid on a cash basis was not materially different.

(Continued)
Iv-4


None of the participating agencies’ individual property tracking systems contain sufficient data to
prepare the required analysis of seized and forfeited property, without significant manual
manipulation and reconciliation. And as evident from our review, some agencies were unable to
account for all transactions. For example, the USCS tracking system, CPTS, maintains no
historical data. The system overwrites data when changes are made and leaves no evidence of
when, how or why the changes were made.

We understand several systems initiatives are underway. The Justice and Treasury Departments
recently implemented the CATS system which will be utilized by IRS CID, USSS and ATF as
their property tracking system. The USCS Office of Field Operations has begun working on
developing another system to replace CPTS. We recommend all initiatives in progress be reviewed
by appropriate personnel from operations as well as certain individuals from the TFF team at the
USCS National Finance Center who have prepared the current fiscal year schedules to ensure the
new system will provide all data necessary to produce the analysis of seized and forfeited property
and provide management with meaningful information. We also recommend TFF consider the best
aspects of both systems and implement one property tracking system to meet the needs of all
participating law enforcement agencies. In addition, as none of the agencies current seized and
forfeited property tracking systems provide sufficient information to prepare the analysis of
changes and any new system will not be fully operational for fiscal year 1995, we recommend the
Fund immediately begin the process necessary to prepare fiscal year 1995 analysis of change in
seized and forfeited property. This process includes identifying weakness in the current processes
and developing procedures or systems to compensate for the identified weaknesses. We
understand initiatives are underway to improve communications and facilitate this process.

ACCO IG REC S ARE ‘AINED CASH BASIS

Title 2 of the United States General Accounting Office's Policy and Procedures Manual for
Guidance of Federal Agencies requires federal agencies to maintain accounts of the agency on the
accrual basis. If the differences between the results of cash and accrual accounting are
insignificant, the cash basis of accounting may be followed. The NFC maintains the general ledger
for the Fund primarily on a cash basis. Additionally, associated supporting systems are maintained
by the agencies primarily on a cash basis. As a result, certain account balances differ significantly
between the accrual and cash basis of accounting. Accrual accounting contributes significantly to
effective financial control over resources and costs of operations and is essential to the
development of meaningful cost information. _ Accrual accounting involves identifying and
recording costs and revenues in the period in which the revenue is earned or the cost incurred,
rather than in the period revenue is collected or the cost disbursed. This position is further
supported by the Office of Management and Budget (OMB) Bulletin 94-01, "Form and Content of
Agency Financial Statements," which recommends the use of accrual accounting by federal
agencies.

Further, individual supporting computer systems are not interfaced with one another or with the
Fund's general ledger to ensure all transactions are accurately and timely recorded. Accordingly,
financial statements produced directly from the systems are not necessarily reliable and are not in
accordance with the accrual basis of accounting. To produce accrual basis financial statements that
can be substantiated through an audit, year-end manual procedures for each agency were
developed. Under the authority of the Chief Financial Officers Act of 1990, TFF management
provided each agency representative with year-end close out procedures that were to be performed.
TFF has planned changes to the existing systems which they believe will correct many of the
weaknesses noted during the audit. Until the necessary system changes can be implemented,
which in all likelihood will take several years, the manual procedures should be improved and
continued.

Although the necessary adjustments are made each September 30 to convert the cash basis financial
data to the accrual basis, to comply with the requirements of Title 2 and OMB Bulletin 94-01 and to
improve financial information on which daily decisions are based, we recommend the following
specified procedures be implemented to properly account for transactions on the accrual basis of
accounting throughout the year.

T-6


Mortgages and Claims Payable

When an agency seizes property, a claim or mortgage may be outstanding against the property. If,
upon forfeiture, the property is later sold, the Fund honors the claim or mortgage to the extent of
the net proceeds received from the sale of the property or the fair market value at the time of seizure
if the asset is a vessel (preferred ship mortgage) or real estate. On the day before payment, the
liability is recorded in the Fund's general ledger. This procedure results in mortgages and claims
being recorded essentially on the cash basis of accounting. We recommend the liability be
recorded at the time the asset is forfeited. Because this liability reduces the net amount of revenue
which will ultimately be realized through the sale of the asset, deferred revenue should be reduced
at the time of forfeiture for the amount of the claim against the property.

The seizing officer or agent is responsible for identifying information related to the mortgage or
claim at the time the asset is seized or before. The seizing officer identifies the mortgage or claim
through inquiry of the violator and/or title search. When the seizure is made as a result of an on-
going investigation, a title search should be performed before the seizure. In addition, during
forfeiture proceedings, a public notice is issued through newspapers indicating the property has
been seized and notifying any lienholders to file a claim/petition with the proper agency for any
outstanding claims or mortgages.

Customs Field Offices are required to input mortgage and claim information into the Customs
Property Tracking System (CPTS) as this information is identified. A listing of forfeited property
with unpaid claims is generated on a monthly basis. However, adjustments were still necessary to
this listing as a result of year-end procedures and audit tests, because additional mortgages and
claims not previously recorded by Field Offices were identified. We recommend the Field Offices
be reminded of the importance of timely updating the CPTS. The CPTS listing can be produced
monthly from the system in order to manually update the general ledger. This information should
be recorded in the general ledger through a journal entry when the related asset is forfeited.

IRS CID, USSS and ATF submitted a schedule of mortgages and liens payable on forfeited
property as of year end; however, this list was not complete and required adjustments. We
recommend a similar procedure be established monthly in order to record the liability. In addition,
all significant forfeited real property and vehicles on the month end inventory should be reviewed
for the existence of mortgages and claims to ensure the schedule of mortgage and lien payable is
complete.

While it may be less efficient, an alternative method to capture all mortgage and claim liabilities in
the short-term is to instruct the seizing agent to list all mortgage and claim information as they are
identified. This log should include all relevant information pertaining to the mortgage or claim,
such as the lienholder's name, seizure number, description of asset and amount of claim. On a
monthly basis, a copy of this log should be sent to the NFC. Appropriate personnel at the NFC
could identify the claims which have been paid to date and, for remaining claims, record a liability
as previously discussed.

In addition to the aforementioned procedures, the Fund could develop a historical analysis of
unidentified mortgages and claims. Because the current procedures to identify such liabilities
would not necessarily reveal all mortgages and claims that will ultimately be presented for forfeited
property, a liability should be estimated for the amount of yet-to-be identified claims. This estimate
should consider historical percentages of claims paid versus claims identified by the seizing
officer's or agent’s procedures and should be updated periodically. Recording estimated
unidentified mortgages and claims will provide for a more complete liability and the financial
position of the Fund can be more accurately presented.

TI-8


The revenues from forfeiture are directly related to the seizure activity and subsequent
forfeiture proceedings -- both administrative and judicial. In any given year, there is no
direct relationship between the costs incurred for seizure activities and the assets
ultimately forfeited into the Fund. Additionally, in many instances, the assets obtained
as a result of the seizure, such as illegal weapons, drugs, and counterfeit merchandise,
are destroyed and thus do not result in any revenue to the Fund. Therefore, the content
of the seizure can have a significant impact on the amount of revenue recognized in the
Fund.

Allocation of revenues

A comparison of allocation of revenues (in millions) for the past two fiscal years
follows:

1994 1993
ONDCP Special Forfeiture Fund 4 0
State and local agencies 53 67
Foreign countries 1 1
Other federal agencies 7 5
$ 65 B

The total revenues allocated from the Fund decreased to $65 million in fiscal year 1994
from $73 million in fiscal year 1993. Much of the revenue collected is distributed to
state and local law enforcement agencies, foreign governments, and other federal
agencies. For fiscal year 1994, distributions to other federal agencies, state and local
agencies, and foreign countries totaled $61 million, or 94 percent of the total revenue
allocated.

561 million were shared with other federal,
State, and local law enforcement agencies
or foreign governments

xii