Foreign Trade Zones: CBP Should Strengthen Its Ability to Assess and Respond to Compliance Risks across the Program
Published: 2017-07-27T00:00:00

Fast Facts:
Foreign Trade Zones are secure areas within the United States that are generally considered as outside of U.S. customs territory. As incentive to keep or grow their U.S. operations, companies can reduce, eliminate, or defer duties on imported goods they store or use in the zones. U.S. Customs and Border Protection oversees the zones, which includes collecting duties and fees and assessing risks of noncompliance with laws and regulations. While it regularly reviews individual zones, CBP has not assessed risks across the program—which may affect the program's effectiveness and revenue. CBP should strengthen its risk assessment and response.

Highlights:
section_title: Why GAO Did This Study
paragraphs: The FTZ program was established in 1934 to expedite and encourage international trade and commerce. FTZs provide benefits to companies that import foreign goods for distribution or for manufacturing in order to encourage them to maintain and expand their operations in the United States. The total value of foreign and domestic goods admitted to FTZs in 2015 was about $660 billion. CBP is responsible for oversight and enforcement in FTZs, including revenue collection and assessing risk of noncompliance with U.S. laws and regulations.
GAO was asked to review CBP's oversight of FTZs and FTZs' economic impact. This report examines (1) the benefits of the FTZ program to companies operating FTZs and revenues collected from FTZs, (2) what is known about FTZs' economic impact, and (3) CBP's ability to assess and respond to compliance risks across the FTZ program. GAO analyzed CBP documents and data, interviewed agency officials and FTZ operators, and visited five FTZs based on trade volume, industry sector, and FTZ activity.
section_title: What GAO Found
paragraphs: The Foreign Trade Zones (FTZ) program provides a range of financial benefits to companies operating FTZs by allowing them to reduce, eliminate, or defer duty payments on goods manufactured or stored in FTZs before they enter U.S. commerce or are exported. FTZs are secure areas located throughout the United States that are treated as outside U.S. customs territory for duty assessments and other customs entry procedures. Companies using FTZs may be warehouse distributors or manufacturers (see figure). A manufacturer, for example, that admits foreign components into the FTZ can pay the duty rate on either the foreign components or the final product, whichever is lower—resulting in reduced or eliminated duty payments. Distributors can also benefit by storing goods in FTZs indefinitely and thereby deferring duty payments until the goods enter U.S. commerce. In 2016, U.S. Customs and Border Protection (CBP) collected about $3 billion in duties from FTZs.
While FTZs were created to provide public benefits, little is known about FTZs' economic impact. For example, few economic studies have focused on FTZs, and those that have do not quantify FTZs' economic impacts. In addition, these studies do not address the question of what the economic activity, such as employment, would have been in the absence of companies having FTZ status.
CBP has not assessed compliance risks across the FTZ program, and its methods for collecting compliance and enforcement data impair its ability to assess and respond to program-wide risks. While CBP regularly conducts compliance reviews of individual FTZ operators to ensure compliance with U.S. customs laws and regulations, it does not centrally compile FTZ compliance and enforcement information to analyze and respond to compliance and internal control risks across the program. Federal internal control standards state that management should obtain relevant data and assess and respond to identified risks associated with achieving agency goals. Without a program-wide assessment of the frequency and significance of problems identified during compliance reviews, risk levels determined, and enforcement actions taken, CBP cannot verify its assertion that the FTZ program is at low risk of noncompliance. Incorrect determinations about program risk level may impact program effectiveness and revenue collection for the FTZ program, which accounted for approximately 11 percent of U.S. imports in 2015.
section_title: What GAO Recommends
paragraphs: GAO makes three recommendations to CBP to strengthen its ability to assess and respond to compliance risks across the FTZ program, including actions to centrally compile FTZ compliance and enforcement data, and to conduct a risk analysis of the FTZ program. CBP concurred with these recommendations and identified steps it will take to address them.

section_title: Letter
paragraphs: Foreign Trade Zones (FTZ) are secure areas located throughout the  United States that are generally treated as outside U.S. customs territory  for the purposes of customs entry procedures, including payment of  duties. Congress established FTZs to expedite and encourage  international trade and commerce. Companies operating FTZs are able to  bring foreign goods into FTZs for distribution or for use in manufacturing  new products, among other purposes, without paying customs duties or  fees until the goods are transferred from the FTZs for import into U.S.  commerce. No duties or fees are paid if the goods are exported from the  FTZs. In 2015, the total value of goods admitted to FTZs was  approximately $660 billion, representing goods from foreign and domestic  sources. In 2015, the value of foreign goods admitted to FTZs was  approximately $245 billion and represented about 11 percent of the value  of total U.S. imports that year. Exports from FTZs have grown from  approximately $54 billion in 2011 to $85 billion in 2015. U.S. Customs and  Border Protection (CBP) is responsible for oversight and enforcement in  FTZs, including revenue collection and assessing risk of noncompliance  with laws and regulations.
You asked us to review issues related to CBP’s oversight of FTZs and the  benefits and economic impacts of FTZs. This report examines (1) the  benefits that the FTZ program provides to companies operating FTZs and  revenues that CBP has collected from FTZs, (2) what is known about the  economic impact of FTZs on the U.S. and local economies, and (3) CBP’s  ability to assess and respond to compliance risks across the FTZ  program.
To examine the benefits that the FTZ program provides to companies  operating FTZs and revenues that CBP has collected from FTZs, we  analyzed and reported on aggregate, national-level data on goods  admitted into FTZs and goods entered into U.S. commerce from FTZs. In  addition, we characterized the types of benefits that companies operating  FTZs receive by providing illustrative examples and calculations of  associated savings at the company level, using financial data and  testimonial evidence obtained through interviews with FTZ companies  and CBP officials, CBP data, and industry publications. We used CBP  data to identify trends in total government revenue collected from FTZs,  including user fees. To examine what is known about the economic  impact of FTZs on the U.S. and local economies, we reviewed economic  studies on FTZs dating back to 1990, including their methodologies,  assumptions, and findings. We also reviewed and analyzed economic  information from company applications for FTZ production authority to  illustrate FTZs’ anticipated economic impacts at regional and local levels.  We did not assess the FTZ application process. To examine CBP’s ability  to assess and respond to compliance risks across the FTZ program, we  reviewed and compared information on CBP’s oversight processes and  enforcement actions against CBP requirements, and federal internal  control standards. We also analyzed a random, generalizable sample of  CBP compliance reviews of FTZs to determine whether control  deficiencies exist in CBP’s monitoring and oversight processes. Estimates  from this statistical analysis have a margin of error of no more than 8  percentage points. To assess CBP’s response to compliance risks in  FTZs, we examined data on FTZ enforcement actions and compared the  results of these actions against criteria for when and how enforcement  actions are to occur. We selected five FTZs in Maryland, Texas, and  Virginia for site visits based on factors including trade volume, industry  sector, and FTZ activity. For each of the objectives, we interviewed CBP,  Department of Homeland Security (DHS), and Department of Commerce  (Commerce) officials at headquarters and traveled to FTZ sites to  interview CBP officials and FTZ representatives. In conducting our  review, we assessed the reliability of the CBP data we used by  performing electronic testing of required data elements, reviewing existing  information about the data and the systems that produced the data, and  interviewing CBP officials knowledgeable about these topics. After  conducting these assessments, we found the data to be generally reliable  for the purposes of our analysis. See appendix I for additional information  about our objectives, scope, and methodology.
We conducted this performance audit from July 2016 to July 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: The FTZ Program: Purpose and Locations
paragraphs: The FTZ program was created under the Foreign-Trade Zones Act of  1934, during the Great Depression, to expedite and encourage foreign  commerce. Furthermore, according to CBP officials, the FTZ program  aims to encourage companies to maintain and expand their operations in  the United States. To encourage such expansion, FTZs provide benefits  to companies that import foreign goods for distribution or for incorporation  into manufactured products. In this report, we refer to these companies as  FTZ operators. Goods admitted into a zone may be manufactured,  assembled, exhibited, repaired, stored, or destroyed, among other  processes. Companies using FTZs include both warehouse distributors  and manufacturers (see fig. 1). Leading industry sectors by value of  foreign and domestic goods admitted into FTZs include petroleum  refining, vehicles, and consumer electronics.
In addition to collecting duties, CBP also generally collects a Merchandise  Processing Fee (MPF) between $25 and $485 from importers on a per- shipment basis to offset costs related to customs processing and other  functions. CBP collects data on duties and fees collected from FTZs in  its Automated Commercial Environment (ACE), which is the primary  system through which CBP electronically collects and distributes import  and export data. CBP uses it to, among other things, receive relevant  data from FTZ operators and documentation required for the release of  imported cargo.
In 2016 there were 276 authorized FTZs across the United States, with at  least 1 in each state and in Puerto Rico. Figure 2 shows the locations of  FTZs in the United States and Puerto Rico. Generally, one FTZ has been  approved to serve an area near each CBP port of entry. Most FTZs  consist of multiple physical locations, known as sites or subzones, which  include individual companies’ plants as well as multiuser facilities such as  seaports or airports.
section_title: The Foreign-Trade Zones Board and Applications for Production Authority in FTZs
paragraphs: The Foreign-Trade Zones Board (FTZ Board) consists of the Secretary of  Commerce and the Secretary of the Treasury. The staff of the FTZ Board  is located within Commerce and consists of an executive secretary and  eight analysts. The FTZ Board is responsible for approving the  establishment of zones and reviewing applications for production  authority, among other responsibilities. Production authority, also called  manufacturing authority, authorizes an FTZ operator to make  transformations or changes to admitted goods.
Under the FTZ Board’s revised regulations adopted in 2012, businesses  applying for permission to conduct FTZ production activities must file a  production notification and then may be required to file a more detailed  production application if necessary.
Production notification. An applicant first submits a production  notification to the FTZ Board that briefly summarizes the proposed  production activity and is published in the Federal Register for public  comment. The FTZ Board has generally approved a company’s  notification and granted production authority unless issues or  concerns are raised by third parties or industry specialists within the  government, according to the FTZ Board. Of the 222 production  notifications submitted to the FTZ Board from January 2012 through  August 2016, it reported approving 167. For the remaining 55, the  FTZ Board reported denying 11 and approving 44 with some  restrictions.
Production application. According to the FTZ Board, businesses  that have had their production notifications denied or approved with  restrictions can continue to seek approval, but they must submit a  more detailed production application that discusses the economic  factors involved in the proposed activities. According to the FTZ  Board, the applicant must demonstrate that approval would result in a  net positive national economic effect and a significant public benefit,  such as creating employment opportunities and encouraging the  retention of domestic business activity. Of the 55 production  notifications that the FTZ Board either denied or approved with  restrictions, seven businesses continued to seek approval and  submitted production applications. The FTZ Board reported that it has  disapproved one production application and approved two others with  significant restrictions based on industry-impact considerations. The  four remaining production applications were pending as of May 2017.
section_title: CBP’s Oversight and Enforcement Responsibilities in FTZs
subsections: section_title: Oversight
paragraphs: CBP is responsible for oversight and supervision of FTZ operators,  including collection of duties, taxes, and fees. CBP’s principal interest and  concern in overseeing FTZs is to (1) control movement of the goods in  and out of the zones, (2) ensure the collection of duties and taxes owed  on goods transferred from FTZs, and (3) ensure that FTZ procedures are  in compliance with the FTZ Act and laws and regulations pertaining to  zone use.
CBP’s responsibility for overseeing goods moving into and from FTZs  involves three control points:  1.  CBP authorizes and supervises the admission of goods to FTZs.  2.  Once the goods are admitted to FTZs, CBP delegates direct  supervision of the merchandise and inventory control to the FTZ  operator until the goods leave the zone.  3.  CBP resumes supervision when goods are removed from zones and  enter U.S. customs territory or are exported.
CBP oversees FTZs through the audit-inspection method, meaning that  CBP does not maintain FTZ inventory records and that CBP personnel  are not physically assigned to FTZs to supervise FTZ operators. To  ensure FTZs’ compliance with U.S. customs policies, laws, and  regulations, CBP primarily conducts compliance reviews, which are  periodic visits by CBP personnel to observe or examine FTZ transactions,  records, procedures, and conditions. FTZ operators are also required to  post an operator’s bond, which insures the operator’s agreement to  comply with the pertinent laws and CBP regulations and delineates the  particular responsibilities under the bond. As part of its oversight of FTZ  operators, CBP reviews FTZ operators’ bond amounts to ensure that they  are sufficient to cover duties and fees owed based on the value of  merchandise held in the zone by the FTZ operator.
As part of its compliance reviews, CBP assigns risk levels to FTZ  operators based on violations or deficiencies found during the reviews,  such as thefts, inventory control problems, or security errors. CBP  guidance for conducting compliance reviews is outlined in its Foreign- Trade Zones Manual  and its Compliance Review Handbook for Foreign  Trade Zones. The Compliance Review Handbook specifically directs  CBP officers to document the risk level associated with each compliance  review. These assigned risk levels—high, medium, or low—determine the  frequency of future compliance reviews, with no fewer than one review  every other year. According to the Compliance Review Handbook,  zones found to be not in full compliance (i.e., not low risk) will have no  fewer than two compliance reviews per year. CBP considers high-risk  determinations to be an unacceptable burden on CBP resources and the  handbook states that Port Directors shall take enforcement actions to  bring zone operators deemed high-risk into full compliance. For these  high-risk zones, the Compliance Review Handbook states that  compliance reviews will be performed as often as needed to ensure that  the relevant zone operator is following the established improvement plan.
CBP’s Office of Field Operations (OFO) manages FTZ policy and  operational guidance and is primarily responsible for overseeing the  FTZs, including conducting compliance reviews. OFO’s Port Directors  operating within the jurisdiction of 20 field offices are responsible for  overseeing the supervision of FTZs. CBP officers located at the ports  conduct compliance reviews in addition to their other trade enforcement  responsibilities, such as examining high-risk shipments and reviewing  shipment data that arrive at U.S. ports for entry into U.S. commerce.  Within CBP, the Office of Trade is CBP’s lead entity for developing trade  policy and operational guidance. Within the Office of Trade, the  Regulatory Audit directorate conducts audits, which may involve FTZs.  Also within the Office of Trade, the Trade Transformation Office is  responsible for collecting trade data from FTZs.
section_title: Enforcement
paragraphs: As part of its oversight responsibilities, CBP can take a range of  enforcement actions in FTZs. When CBP officials discover FTZ operator  violations, the Port Director overseeing the FTZ operator can take  enforcement actions depending on the violations uncovered during  compliance reviews and audits including, but not limited to, warning  letters, assessments of liquidated damages, fines, penalties, and  seizures. CBP’s system of record for enforcement actions is the Seized  Assets and Case Tracking System (SEACATS), which contains data for  seizures, penalties, and liquidated damages on imports in general and not  exclusive to FTZs.
section_title: The FTZ Program Provides a Range of Financial Benefits to FTZ Operators, and Duties Collected from FTZs Increased over the Past 10 Years
paragraphs: The FTZ program provides a range of financial benefits to FTZ operators  by allowing them, in certain circumstances, to reduce, eliminate, or defer  duty payments on goods manufactured or stored in FTZs. For example,  FTZ operators that admit foreign components to manufacture final  products for import can pay the duty rate of either the component part or  the final product, whichever is lower—resulting in reduced or eliminated  duty payments. In addition, companies operating FTZs can benefit from  the ability to reduce the frequency of user fee payments and the  opportunity to receive tax incentives in certain circumstances. Duties  collected from FTZs increased as a proportion of total duties collected on  all U.S. imports from 3.3 percent to 8.4 percent over the past 10 years. In  addition, MPF collections from FTZs have more than doubled over the  same period, though they consistently account for less than 1 percent of  CBP’s MPF collections from all U.S. imports.
subsections: section_title: The FTZ Program Provides a Range of Financial Benefits to FTZ Operators
subsections: section_title: Duty Reduction on Imports and Duty Elimination on Exports
paragraphs: FTZ operators that manufacture final products with a lower duty rate than  their imported foreign component parts can elect to pay the duty rate on  the final product rather than on the foreign status component. For  example, the FTZ Board may authorize an automobile manufacturer to  pay the duty rate for finished passenger motor vehicles (2.5 percent)  instead of the duty rate on foreign-produced component parts, such as  engines, transmissions, and other components, which have duties  generally ranging from 0 percent to approximately 10 percent. This  benefit provides an incentive to companies to manufacture in the United  States rather than move their manufacturing operations overseas to avoid  paying U.S. duties. Figure 3 shows an example of duty savings for a  dietary supplement product that has a 0 percent duty rate and uses  foreign status components with a 5.2 percent duty rate, representing 50  percent of the final product’s value. As the figure shows, an FTZ operator  importing $1.5 million in capsules each week can save approximately $2  million in duties annually on the final product because it would be subject  to a 0 percent duty.
Similarly, companies operating FTZs pay no duties on goods exported  from FTZs to other countries, effectively eliminating duty payments on  foreign status goods brought to FTZs either for storage or incorporation  into a manufactured product prior to export. For example, a foreign- headquartered power tool manufacturer may establish an FTZ in the  United States in order to eliminate duty payments on foreign components  in tools that it exports back to its home country.
Actual business savings from duty reduction or elimination vary and  depend upon the proportion and dutiable value of foreign status  components that the FTZ operator incorporates into production. For  example, representatives of a consumer electronics manufacturer that we  interviewed stated that duty reduction or elimination resulted in the largest  savings associated with FTZ status. The manufacturer reported that it  admitted approximately $189 million in foreign status electronic  components into its FTZ in 2015, and according to company  representatives, these duty rates ranged from 2.5 to 5.8 percent. The  manufacturer paid no duties on these components, however, as they  were either incorporated into a duty-free final product for import into U.S.  commerce or exported duty free. Company officials stated that the cost  savings from duty reduction and elimination enable them to better  compete for U.S. market share. For other FTZ operators, the duty  savings are a less important benefit of their FTZ status. For example,  representatives of a petroleum product manufacturer stated that because  of the low duty rates on crude oil imports, cost savings from duty  reduction amounted to less than $500,000 annually, whereas other  benefits, such as tax savings (discussed below) were more significant to  this manufacturer. Company officials added that the plant would probably  not shut down if it lost its FTZ status, as the lost savings would not  outweigh the significant cost to relocate.
section_title: Indefinite Storage of Goods in FTZs and Duty Deferral
paragraphs: Among FTZ operators we interviewed, those engaged in warehousing  and distribution discussed the importance of the ability to store goods in  the zone indefinitely and thereby defer duty payments until the goods  enter U.S. commerce. FTZ operators engaged in automobile distribution  that we spoke with, for example, valued the ability to hold vehicles in the  zone for quality inspection and only pay duties on those goods whose  functionality has been verified. Similarly, distributors may also reduce  their exposure to market variability by holding goods in the zone until  seasonally advantageous market opportunities open or retailers liquidate  their current inventory. Further, a zone operator that leases space to  distributors of quota-restricted commodities, such as sugar and tuna,  discussed with us the FTZ benefit of holding onto the stock indefinitely  until import quotas are lifted.
FTZ operators we met with did not attempt to quantify the associated  savings of indefinite storage and duty deferral. However, as our analysis  of different industries’ capital costs demonstrates, companies with higher  capital costs may benefit more from deferring duty payment. Figure 4  demonstrates the potential cost savings that a company engaged in  distributing four different types of goods may obtain from deferring duty  payments for 1 or more 3-month periods. For companies importing  electronics, for example, cost savings from deferring duty payments for  an 18-month period can amount to approximately 10 percent of the value  of the deferred duty. Because companies using FTZs pay duties when  goods enter U.S. commerce rather than when these goods are admitted  to the FTZ, they are able to reduce costs by an amount equal to the  company’s cost of capital over the period the payment is deferred.
FTZ operators also can benefit from the ability to file customs entries and  pay associated MPFs for imported goods on a per-week rather than a  per-shipment basis, which can result in a lower amount of fees paid and  potentially reduce the administrative burden. Companies that import  frequently and in high volumes may benefit more from FTZs than those  that do not. For example, an automobile distributor not located in an FTZ  that is importing 10 shipments of vehicles per week and paying the  maximum MPF would make 10 MPF payments of $485 each, totaling  $252,200 per year. With FTZ status, the same distributor could make one  $485 MPF payment per week for a total annual payment of $25,220,  resulting in annual savings of $226,980. In contrast, an FTZ operator that  imports high-value items on an infrequent basis—such as a heavy  machinery manufacturer that we interviewed—would be less likely to see  MPF savings as significant.
FTZ operators utilizing a U.S. seaport to admit merchandise to the zone  also pay a Harbor Maintenance Fee (HMF) on a quarterly rather than a  per-shipment basis, potentially reducing administrative work for the FTZ  operator. In contrast to the MPF, however, total HMF amounts are not  reduced through FTZ status and remain based upon the value of cargo  admitted to the FTZ in a fiscal quarter. We previously reported on  challenges that CBP faced in monitoring HMF payments associated with  FTZs as a result of CBP’s use of paper payment for FTZ operators.  CBP now accepts electronic payment of the HMF.
section_title: Tax Savings
paragraphs: The FTZ Act also exempts FTZ operators from state and local ad valorem  taxation on foreign goods admitted into the zone and domestic goods  held in a zone for exportation. According to CBP, some states also  provide additional tax benefits to companies operating FTZs, including  personal property tax reductions. For some FTZ operators we met with,  the benefit of property tax waivers and exemption from state and local ad  valorem taxation provided the largest source of savings associated with  FTZ status. In Texas, for example, one automobile distributor estimated  saving up to $3 million annually in property taxes granted by the county.  To prevent possible negative impacts on local entities, the FTZ Board  requires that all applications for FTZ designation contain a list of parties  that would be affected by any reduction in local tax collections related to  the FTZ and provide evidence that those parties concur with the proposed  FTZ designation.
section_title: Duties Collected from FTZs Increased as a Proportion of Total Duties Collected on All U.S. Imports over the Past 10 Years
paragraphs: Over the last decade, duties collected from FTZs increased as a  proportion of total duties collected on all U.S. imports, as did the  proportion of foreign status goods among total FTZ admissions. Duties  collected from FTZs have increased from $854 million to $2.9 billion in the  past 10 years, representing an increase from 3.3 percent to 8.4 percent of  total CBP duty collections on all U.S. imports during the same time period  (see table 1). While total duty collections on all U.S. imports grew by 34  percent over the past 10 years, collections from FTZs grew by 242  percent over the same time period.
Similarly, the proportion of foreign to domestic status goods admitted to  FTZs has risen, from 20 percent in 1995 to 37 percent by 2015.  According to the FTZ Board, which reports annually on the extent and  growth of the FTZ program to Congress, a total of approximately $659  billion in domestic and foreign goods was admitted to FTZs in 2015, of  which approximately $245 billion —about 37 percent—was foreign.
section_title: User Fees Collected from FTZs Varied as a Percentage of User Fees Collected on all U.S. Imports over the Past 10 Years
paragraphs: User fees collected by CBP from FTZs, including MPFs and HMFs, varied  as a percentage of user fees collected on all U.S. imports over the past  10 years. MPF payments from FTZs approximately doubled from fiscal  years 2007 to 2016, although these payments have accounted for less  than 1 percent of CBP’s total MPF collections (see table 2). Many FTZ  operators that we interviewed reported taking advantage of the ability to  bundle a week’s worth of shipments in one entry filing, thereby paying the  MPF weekly rather than on each individual shipment.
HMF payments on admissions to FTZs, which FTZ operators are  authorized to make quarterly rather than on a per-shipment basis,  accounted for 17.4 percent of combined HMF collections from FTZs and  from all U.S. imports over the same period. HMF payments from FTZs  were the highest in fiscal year 2011, accounting for 20.6 percent (see  table 3).
section_title: FTZs Were Created to Provide Public Benefits, but Little Is Known about Their Economic Impact
paragraphs: While FTZs were created to provide benefits to the American public, little  is known about their economic impact. For example, few economic  studies have focused on FTZs, and those that have do not quantify  economic impacts or address the question of what the economic activity,  such as employment, would have been in the absence of companies  having FTZ status. In addition, the detailed FTZ production applications  filed since 2012 by seven companies seeking FTZ Board approval for  manufacturing authority provided limited information on economic impact  and no data to support their estimates of job creation. Public comments  on these applications revealed disagreements among industry members  on the anticipated economic impacts of the proposed FTZ activities.
subsections: section_title: Few Economic Studies of FTZs Have Been Completed, and None Quantify Economic Impacts
paragraphs: Our literature review uncovered few academic studies regarding FTZs.  The studies that we reviewed did not estimate the overall economic  impact of FTZs on the United States or local economies. Several  academic studies we reviewed used a theoretical framework, explaining  why it was profitable for companies to use a FTZ, but the assertions were  not corroborated with empirical analysis of the effect on the economy.  Some studies reported that limited empirical data were available to  conclude that FTZs had increased employment, particularly at the  national level. This finding is consistent with our prior work on FTZs.  One study, for example, concluded that because the academic literature  on U.S. FTZs did not look at the impact on labor costs as a factor in FTZ  location decisions, it was unclear whether FTZs contributed to local  employment growth. Another study, examining the effect of FTZs on the  global supply chain, administered a survey to U.S. firms operating in  FTZs and found that the most important benefits reported were U.S. duty  waivers, potential to increase foreign sales, and relaxed need to apply for  drawback.
The annual FTZ Board report to Congress publishes data on FTZs,  including employment data. Figure 4 presents the total number of firms  that use FTZs and the associated number of employees each year from  2011 through 2015. However, the number of jobs cannot be completely  attributed to the existence of FTZs because it does not address whether  the companies’ hiring decisions would have taken place in the absence of  the benefits provided by FTZ status.
FTZ operators and representatives of the National Association of Foreign  Trade Zones have attributed increased trade and employment to FTZs.  For example, in 2016, an official with Hawaii’s FTZ reported that FTZ  benefits have increased the advantages for refineries to operate in the  state. However, it did not provide data that the FTZ status was a deciding  factor in the refineries’ decisions to locate and continue operations in the  state.
section_title: Recent Applications for FTZ Production Authority Revealed Disagreements among Industry Members on FTZs’ Economic Impacts
paragraphs: Our analysis of the seven applications for FTZ production authority  submitted from 2012 through 2016 revealed disagreements among  industry members on the anticipated economic impacts of the proposed  FTZ activities. All seven applications—involving primarily the textiles  and industry materials sectors—stated that FTZ manufacturing would  have economic benefits and anticipated increases in employment ranging  from 10 to 75 new jobs. However, our analysis found that these  applications provided limited data to support their estimates of job  creation. They also cited other economic benefits, including increases in  domestic production, exports, and capital investment but provided limited  supporting data.
These seven applications generated a total of 68 opposition letters and  58 support letters including from competitors, suppliers, trade  associations, and other relevant entities. Opposition letters from domestic  suppliers and competitors argued that the proposed FTZ manufacturing  status would have negative, rather than positive, economic impacts.  These opposition letters cited negative impact on employment and unfair  advantage over domestic producers and suppliers, among other negative  impacts. Support letters from industry members, trade associations, and  local government representatives, among others, supported applicants’  assessment of increased employment and benefits to suppliers, among  other positive impacts.
section_title: CBP’s Methods for Collecting Compliance and Enforcement Information Impair Its Ability to Assess and Respond to Compliance Risks across the FTZ Program
paragraphs: CBP has not assessed compliance risk across the FTZ program, and its  methods for collecting compliance and enforcement data impair its ability  to assess and respond to program-wide risks. For example, while CBP  regularly conducts compliance reviews of individual FTZ operators and  considers the program to be low risk, it does not centrally compile  compliance reviews and FTZ enforcement data to assess risk across the  program. As a result, CBP has not reviewed compliance and enforcement  information across the FTZ program to assess the frequency and  significance of compliance risks and verify its assertion that the FTZ  program is low risk. In addition, CBP has not taken steps to update its  FTZ policies and procedures and develop best practices for FTZ  compliance reviews in response to compliance risks that have been  identified. According to federal internal control standards, management  should obtain relevant data and assess and respond to identified risks  associated with achieving agency goals. CBP assesses liquidated  damages as its primary enforcement tool to bring FTZs into compliance,  and CBP guidance allows for discretion in reducing the amounts  assessed.
subsections: section_title: CBP Conducts Compliance Reviews of FTZ Operators to Identify Compliance Risks but Does Not Centrally Compile Compliance Reviews and FTZ Enforcement Data
subsections: section_title: CBP Conducts Compliance Reviews of FTZ Operators to Identify Risks
paragraphs: CBP conducts compliance reviews of individual FTZ operators to ensure  compliance with U.S. customs laws, regulations, and CBP policies. In  these reviews, CBP examines operators’ records, procedures, and  conditions to assess compliance with laws and regulations, such as by  identifying the risk of fraud, duty evasion, or other violations that could  result from noncompliance (compliance risk). These compliance reviews  are managed at the field office level and conducted by CBP officers at the  ports, who use the agency’s Compliance Review Handbook for Foreign  Trade Zones for guidance. The Compliance Review Handbook includes a  standard checklist of questions meant to identify and assess risks such as  the physical security of the FTZ merchandise and the appropriateness of  systems and procedures for inventory management. CBP assigns a risk  level to individual zone operators based on the results of the compliance  reviews and other risk factors, and the Compliance Review Handbook  directs officers to document the risk level associated with each  compliance review. These assigned risk levels then determine the  frequency of future compliance reviews. CBP guidance states that field  office personnel should conduct compliance reviews of FTZ operators at  a rate that is generally determined by the magnitude of problems found  from previous reviews – at a minimum, every 2 years when no problems  have been found, and at least twice a year if serious problems have been  found, with exceptions possible at the discretion of the Port Director.
Enforcement actions taken based on violations found during the  compliance review are also managed at the discretion of the Port  Director. CBP officials said that their goal is to encourage compliance.  According to CBP guidance, when there is reason to believe that minor  problems can be corrected upon simple notification of the zone operator,  the Port Director may issue a verbal warning or warning letter with the  operator with no further penalty. Otherwise, the Port Director has  discretion to take a corrective enforcement action commensurate with the  seriousness of the violation. Enforcement actions can include liquidated  damages, fines, and seizures. Liquidated damages are amounts of  money that CBP assesses against FTZ operators following violations of  the operator’s bond, such as violations involving FTZ inventory control  and recordkeeping systems. In addition to these civil actions, CBP may  also take actions, such as arrests, for violations of criminal law.
CBP officials conducting compliance reviews may request support from  technical experts within the agency. For example, CBP officials stated  that they may reach out to CBP’s petroleum specialists when they  encounter issues with tracking production at an oil refinery. CBP officials  stated that they may also refer findings from compliance reviews to CBP’s  Regulatory Audit officials for more comprehensive audits that include  thorough reviews of FTZ operators’ inventory and financial records.  Regulatory Audit officials told us that 44 audits have been conducted  involving FTZs over the past 10 years and that 7 of these audits involved  petroleum FTZs. These officials stated that the findings from the FTZ- focused audits typically involved deficiencies with FTZ operators’ internal  controls over their inventory systems. Regulatory Audit officials stated  that audits involving FTZs have been initiated based on referrals from  officers conducting compliance reviews, or from other sources, but FTZs  have not been a specific focus of Regulatory Audit’s planning.
section_title: CBP Does Not Centrally Compile Compliance Review Information
paragraphs: CBP does not centrally compile—centralize and standardize—information  from its compliance reviews of individual FTZ operators. As a result,  management cannot reliably obtain compliance review information in a  timely manner for assessing FTZ risks and program controls, such as  completion of all required compliance reviews. Instead of centrally  compiling compliance review information, CBP requires Port Directors to  maintain a file for each FTZ operator under their jurisdiction, which stores,  among other things, various documents associated with the compliance  review. CBP field offices that we visited employed varying practices for  storing compliance reviews, from maintaining an updated spreadsheet  containing the risk determination and compliance review documentation  for each FTZ operator to maintaining paper and electronic files without  centrally tracking compliance review results and status. CBP does not  require compliance reviews to use a standardized template or format,  such as the checklist in the Compliance Review Handbook, to summarize  findings and risk level determinations.
In response to our request to examine all FTZ compliance reviews  conducted over the period of fiscal years (FY) 2015-2016, CBP officials  estimated that it would take more than 2,600 staff hours to assemble the  full set of compliance reviews and warning letters associated with  violations in this time period. Because CBP could not provide us with  copies of compliance reviews for all the FTZs in the program in a timely  manner, we examined a generalizable random sample of compliance  reviews during this time period from 174 FTZ operator sites. In  conducting an analysis of this sample, we found that field offices  managed and stored the compliance reviews in paper files at some  locations and electronically at others. In addition, we found that the  compliance review checklists appeared in at least eight different formats.  The compliance review checklist questions were generally consistent, but  the information was recorded in various ways, some with handwritten  notes and others electronically.
CBP headquarters officials stated that they were aware that some ports  and field offices had developed electronic systems for storing compliance  reviews that would enable more efficient access to the results than paper  files and handwritten notes. However, they said that they had not  examined whether these systems could be scaled across the program or  whether other options existed for electronic storage of compliance  reviews that would meet the needs of the FTZ program. According to  federal internal control standards, management should obtain relevant  data from reliable sources in a timely manner based on agency goals.  With its current information management practices, however, CBP  management cannot reliably obtain compliance review information in a  timely manner for assessing FTZ risks and program controls.
section_title: CBP Collects Some FTZ Enforcement Information in a Database, but Systems Limitations Hinder Compilation across FTZs
paragraphs: While CBP collects some FTZ enforcement data in its SEACATS  database, systems limitations impair CBP’s ability to compile information  on enforcement actions across the FTZ program. CBP officials stated that  enforcement actions in FTZs other than warning letters and liquidated  damages against FTZ bond-holders are rare, but we found that CBP  cannot efficiently determine the total number or type of enforcement  actions taken against FTZ operators to examine trends or to verify its  assertions that such actions are in fact rare. According to CBP officials,  there is no reliable way to determine which of the seizures and penalties  recorded in SEACATS occurred in FTZs, although the limited information  available suggests that the number of such actions is low. According to  CBP officials, information about enforcement actions other than seizures,  penalties, and liquidated damages is contained in the FTZ files managed  by individual field offices and is not centrally compiled. We estimate that 7  percent of FTZ operators with compliance reviews in FY2015 and FY2016  have received at least one warning letter.
CBP centrally compiles FTZ liquidated damages data in SEACATS, but  the data are not complete. CBP can retrieve FTZ liquidated damages  data because officials can search SEACATS for a statute number specific  to FTZ liquidated damages. These data show that CBP assessed 1,103  liquidated damages claims in FTZs from FY2006 through FY2015. The  causes of these liquidated damages, however, were difficult to determine  because of limitations in the way that data on liquidated damages is  categorized in SEACATS. For example, CBP officials stated that  SEACATS does not specify the type of violation, such as the operator  missing information on FTZ inventory, that triggered a given liquidated  damages claim. While CBP officials are able to enter notes into  SEACATS, CBP officials stated that notes associated with liquidated  damages claims are often incomplete and contain insufficient information  without retrieving additional documentation.
According to CBP officials, CBP is upgrading SEACATS to modernize its  capabilities, which will improve CBP’s capacity to track more specific  information on enforcement actions, including on FTZ liquidated  damages. For example, CBP officials stated that the SEACATS  modernization will allow CBP officers to classify the specific FTZ  violations that led to assessments of liquidated damages. However, CBP  officials stated that these changes to SEACATS will not enhance CBP’s  ability to identify seizures and other enforcement actions in FTZs, except  insofar as the system improvements will require CBP officers to enter  more detailed information in a standardized format. This format may  provide more detail on the cause of enforcement actions and enhance  CBP’s ability to perform keyword searches for seizures and penalties in  FTZs. CBP officials stated that data on enforcement actions other than  seizures, penalties, and liquidated damages will remain in FTZ files  stored at ports and field offices. CBP officials further stated that the  SEACATS modernization is scheduled to be fully implemented in  September 2017.
While CBP will have more data on liquidated damages from the  improvements to SEACATS, and may have some additional information  on seizures and penalties in FTZs, information on other enforcement  actions will remain in FTZ files stored at ports and field offices along with  compliance reviews. According to federal internal control standards,  management should obtain relevant data from reliable sources in a timely  manner based on agency goals. With its current information management  policy, CBP management cannot reliably obtain enforcement information  in a timely manner for assessing FTZ risks and program controls, such as  completion of all required compliance reviews and associated  documentation of enforcement actions.
section_title: CBP Has Not Assessed Compliance Risks across the FTZ Program or Updated Guidance to Respond to Identified Risks
subsections: section_title: CBP Has Not Conducted Program-wide Analysis of Compliance Review Results and FTZ Enforcement Actions
paragraphs: While CBP analyzes risks in individual FTZs as part of its compliance  reviews, it has not conducted a program-wide risk analysis using  available FTZ compliance and enforcement information. CBP officials told  us that they generally consider FTZs’ security and revenue risk to be low  based on regular compliance reviews of individual FTZ operators and  anecdotal evidence from field office personnel. CBP officials stated that  these reviews had found relatively few problems and that they had not  heard of many major issues, such as fraud, occurring in FTZs. They said  that any major issues would be escalated up the chain of command upon  discovery by CBP officers. They also noted that the rate at which  liquidated damages occur in FTZs—an average of approximately 108 out  of 41,000 entries per year from FY2011 to FY2015—is very low in  comparison to the rate at which similar problems occur in trade outside of  FTZs.
Most of the compliance reviews that we analyzed did not identify  compliance problems, but many did not contain sufficient information to  verify CBP’s assertion that the program is low risk. Our analysis of the  FY2015 and FY2016 compliance reviews for the FTZ operators in our  generalizable sample showed that CBP found compliance problems for  an estimated 15 percent of these operators. Problems identified in our  sample of compliance reviews included receiving and storing  unauthorized merchandise in the FTZ and missing required  documentation for inventory in FTZs, among other issues. FY2015 and  FY2016 compliance reviews for an estimated 80 percent of FTZ operators  resulted in at least one low-risk determination and no evidence of being  medium or high risk during this time period. Compliance reviews of an  estimated 3 percent of FTZ operators resulted in at least one medium- or  high-risk determination during this time period. Because of missing and  incomplete information, however, CBP’s risk determination was not clear  for an estimated 16 percent of FTZ operators from these compliance  reviews. CBP also was not able to provide FY2015-FY2016 compliance  review checklists for an estimated 34 percent of the FTZ operators.  Incomplete information on the compliance reviews may limit CBP’s ability  to determine the cause of compliance violations as well as reach  conclusions about the overall program risk level. Further, for an estimated  36 percent of FTZ operators, FY2015-FY2016 compliance review  documentation did not provide evidence of specific transactions reviewed,  which may limit the validity of conclusions reached in the compliance  reviews.
CBP officials said that they had not conducted a program-wide risk  analysis of the FTZ program because it would be too time-consuming and  costly based on how compliance review and enforcement information is  currently collected and stored, and because of their assertion that the  program has a low risk of noncompliance. CBP officials also stated that  the agency had not studied trends in the frequency or cause of liquidated  damages claims because they first developed the method for identifying  FTZ-specific liquidated damages in response to our request for these  data and have considered such an analysis a low priority. Without  program-wide analyses of the frequency and significance of problems  found during compliance reviews, risk levels determined, and  enforcement actions taken, CBP cannot verify that the FTZ program is at  a low risk of noncompliance or assess the effectiveness of its internal  controls. Data systems improvements, such as the planned  enhancements to SEACATS discussed earlier, may reduce the cost of  such an analysis, and CBP could further reduce the cost by examining  representative samples. According to federal internal control standards,  agency managers should comprehensively identify risks and analyze  them for their possible effects. Incorrect determinations about risk level  may impact program effectiveness and revenue collection for the FTZ  program, which accounted for 11 percent of U.S. imports in 2015.
section_title: CBP Has Not Updated FTZ Policies and Procedures in Response to Identified Compliance Risks
paragraphs: CBP last updated its Compliance Review Handbook for Foreign Trade  Zones in 2008, and it has not updated the handbook to respond to  compliance risks identified since then, although some ports have made  improvements to their processes for conducting compliance reviews in  the interval. CBP officials stated that the policies and guidance in the  handbook represent a minimum standard for conducting compliance reviews, but Port Directors have discretion to incorporate additional steps  into their compliance reviews. CBP field office personnel we spoke with  said that they had added questions or forms to their compliance review  process in response to identified problems, and they provided some  examples. Our analysis of the generalizable sample of compliance  reviews also found that some ports had taken steps to improve their  compliance review process. For example, we found that at least some  compliance reviews for an estimated 28 percent of FTZ operators  included a risk assessment tool that explained the basis for their risk  determination, although CBP officials stated that this was not a  requirement.
CBP officials stated that they were aware that some ports had developed  additional questions and methods to respond to compliance risks;  however, these officials said that they lacked the resources to support a  working group to examine existing practices and improve the templates  used by officers conducting the compliance reviews. These officials  stated that they intend to update policies and procedures reflected in the  handbook after they add FTZ-related features to ACE. However, CBP  officials have not reached out to field offices to identify best practices or  improvements or provided interim guidance to ports and field offices prior  to completing the transition to ACE and formally updating the handbook.  According to federal internal control standards, management should  respond to identified risks according to program objectives. In doing so,  management should consider risk that remains despite its current risk  management efforts and design responses appropriate for these residual  risks. Because CBP has not made the evaluation of the compliance  review process improvements and identification of best practices a  priority, CBP may be missing opportunities to reduce compliance risk and  lower compliance costs through improved tools and targeting.
section_title: Liquidated Damages Assessments Are CBP’s Primary Enforcement Tool to Bring FTZs into Compliance, and CBP Guidance Allows for Discretion in Reducing the Amounts Assessed
paragraphs: CBP assesses FTZ liquidated damages as a primary enforcement tool to  bring FTZ operators into compliance, and CBP guidance for assessing  liquidated damages allows for discretion in mitigating (reducing) the  amount of these assessments. Our analysis of SEACATS data on  enforcement actions found that liquidated damages assessments  accounted for nearly all enforcement actions we and CBP identified.  CBP guidance states that assessments of liquidated damages against  FTZ operators who are in breach of their bond contracts may be mitigated  to a lower level if a petition for relief is submitted by the relevant FTZ  operator. CBP provides additional guidance to staff for determining the  appropriate mitigated amounts for liquidated damages, instructing officials  to consider factors such as the frequency of the FTZ operator’s past  violations, remedial actions taken, and cooperation with agency officials.  CBP’s mitigation guidance also provides ranges for different types of  violations. CBP officials stated that if operators are making  improvements as part of a mitigation decision, then the liquidated  damages have served their function even if the initial amount was  mitigated to an amount lower than the range provided in mitigation  guidelines.
We analyzed data on the 1,103 liquidated damages claims made from  FY2006 through FY2015 and found that nearly all FTZ operators who  were assessed claims for liquidated damages submitted a petition for  relief of the liquidated damages, resulting in significant reductions in the  original assessed amount (see table 4). CBP assessed approximately  $100 million in liquidated damages claims from FTZ operators from  FY2006 to FY2015. CBP officials mitigated approximately 97.5 percent of  the liquidated damages claims over this period, resulting in a final total  liquidated collection amount of approximately $2.8 million, representing  2.9 percent of the original assessed amount.
CBP officials stated that variation in the extent that liquidated damages  are mitigated over time might be attributable to variation in the types of  cases different ports see, such as unusually large cases, or other factors.  In addition, these officials said that they are aware that some CBP  officials are consistently reducing liquidated damages to the minimum of  the ranges in the guidance while others may mitigate to higher levels.  These officials said that, for example, some ports may be overwhelmed  with cases and want to clear them by mitigating to the bottom of the range  to avoid appeals. CBP officials stated that they have not reviewed or  analyzed liquidated damages decisions across the FTZ program, as their  focus is on reviewing FTZ liquidated damages decisions on a case-by- case basis to ensure that the mitigations are consistent with CBP policy.
These officials also stated that CBP conducts periodic site surveys,  which are intended to review penalties, liquidated damages and forfeiture  procedures pertaining to seizure cases. According to CBP officials, while  these site surveys are not specific to FTZ violations, they cover FTZ  liquidated damages cases to ensure compliance with laws, regulations,  and mitigation guidelines. These officials also noted that they are aware  the mitigation guidance is out of date and CBP is in the process of  updating the mitigation guidelines.
section_title: Conclusions
paragraphs: Officials from CBP field offices conduct regular compliance reviews of  individual FTZ operators and take a range of enforcement actions based  on the violations found. Because of CBP’s information management  practices, however, CBP officials cannot store and access compliance  reviews in a manner that would allow program officials to reliably obtain  compliance review and enforcement information in a timely manner for  assessing FTZ risks and program controls. Although CBP officials believe  that FTZs represent low risk based on individual compliance reviews,  CBP has not conducted a systematic risk assessment of the FTZ program  to confirm that this is the case. Without a program-wide assessment of  the frequency and significance of problems identified during compliance  reviews, risk levels determined, and enforcement actions taken, CBP  does not have reasonable assurance that the FTZ program is at low risk  of noncompliance.
Some CBP field offices and ports have developed innovations for their  compliance review processes, such as additional questions and methods  to respond to compliance risks. However, CBP has not taken steps to  update and improve its compliance review tools and procedures based on  risk reviews, enforcement actions against noncompliant FTZ operators, or  innovations by field office staff. As a result, the program may be missing  opportunities to mitigate compliance risk and reduce compliance costs  through improved tools and targeting.
section_title: Recommendations for Executive Action
paragraphs: To strengthen CBP’s ability to assess and respond to compliance risks  across the FTZ program, we recommend that the Commissioner of CBP  take the following three actions:  1.  Centrally compile information from FTZ compliance reviews and  associated enforcement actions so that standardized data are  available for assessing compliance and internal control risks across  the FTZ program.  2.  Conduct a risk analysis of the FTZ program using data across FTZs,  including an analysis of the likelihood and significance of compliance  violations and enforcement actions.  3.  Utilize the results of the program-wide risk analysis to respond to  identified risks, such as updating risk assessment tools and  developing best practices for CBP’s FTZ compliance review and risk  categorization system.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for comments to CBP and Commerce.  We received written comments from CBP, which are reproduced in full in  appendix II. In its comments, CBP concurred with our recommendations  and identified actions it intends to take in response to the  recommendations. In response to our first recommendation, CBP  indicated that it intends to prepare and disseminate a summary template  for compiling FTZ compliance reviews and internal control risks across  the FTZ program. In response to our second recommendation, CBP  indicated that it will conduct a risk analysis across the FTZ program. In  response to our third recommendation, CBP responded that it will finalize  a compliance review handbook for ACE that incorporated risk  assessment tools and best practices for FTZ compliance review and risk  categorization. CBP and Commerce also provided technical comments,  which we incorporated in the report, as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional members, the Acting Commissioner of CBP, the Secretary  of Commerce, and other interested parties. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8612 or gianopoulosk@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) the benefits that the Foreign Trade  Zones (FTZ) program provides to companies operating FTZs and  revenues that U.S. Customs and Border Protection (CBP) has collected  from FTZs, (2) what is known about the economic impact of FTZs on the  U.S. and local economies, and (3) CBP’s ability to assess and respond to  compliance risks across the FTZ program.
To examine the benefits that the FTZ program provides to companies  operating FTZs and revenues that CBP has collected from FTZs, we  analyzed and reported on aggregate, national-level data on goods  admitted into FTZs and goods entered into U.S. commerce from FTZs. In  addition, we reviewed documents from CBP headquarters and field  offices and the Foreign-Trade Zones Board and interviewed CBP and  FTZ Board officials. We selected five FTZs in Maryland, Texas, and  Virginia for site visits based on factors including trade volume, industry  sector, and FTZ activity. At these sites, we interviewed representatives of  FTZ operators engaged in warehousing and manufacturing in the vehicle,  oil refinery, consumer electronics, and other industries. We also  characterized the types of benefits that FTZ operators received by  providing illustrative examples and calculations of associated savings at  the operator level, using financial and testimonial evidence obtained  through interviews with FTZ operators and CBP officials and reviewing  CBP data and industry publications. For example, we conducted  illustrative calculations of duty and cash-flow savings using duty rates on  select component and final products, annual financial data provided by  FTZs to the FTZ Board, and cost-of-capital figures published by the New  York University Stern School of Business.
To identify trends in total government revenue collected from FTZs,  including from user fees, we obtained and analyzed CBP data from the  Automated Commercial Environment (ACE) for fiscal years 2007 to 2016  on total customs duties, Merchandise Processing Fee (MPF), and Harbor  Maintenance Fee (HMF) collections from FTZs. We compared revenues  and fees collected from FTZs to revenues and fees collected on total U.S.  imports using Office of Management and Budget data from fiscal years  2007 to 2016 on duties collected on total U.S. imports, CBP data from  annual budget requests on total MPF payments on total U.S. imports, and  Department of the Treasury data on HMF payments on total U.S. imports.  To assess the reliability of the ACE data, we held a series of meetings  with CBP ACE specialists to define and refine our requests for relevant  data to request from the system and to assess their reliability checks and  testing of the system. We also reviewed relevant instructions and data  dictionaries on the data and the system that produced them. We  performed electronic testing by pairing these datasets and conducting  statistical tests on portions of the data with missing information to  determine that the missing data are random with respect to variables of  interest. We found the ACE data to be generally reliable for the purposes  of our analysis.
To examine what is known about the economic impact of FTZs on the  U.S. and local economies, we reviewed economic studies on FTZs  published since 1990. We reviewed the studies primarily to obtain  information on the range of effects on the economy, different methods  and assumptions used, and insights gained from these efforts. We  identified these studies through a literature search and discussions with  representatives from CBP, the Foreign-Trade Zones Board, and the  National Association of Foreign Trade Zones. We also reviewed and  analyzed economic information found in FTZ production applications  prepared by companies seeking FTZ Board approval for production  authority, which allowed us to illustrate FTZs’ anticipated economic  impacts at regional and local levels. We reviewed FTZ production  applications since 2012, when the current regulations for FTZ production  applications were adopted. We also interviewed officials from CBP, the  FTZ Board, and the National Association of Foreign Trade Zones.
To examine CBP’s ability to assess and respond to risk across the FTZ  program, we reviewed and compared information on CBP’s oversight  processes and enforcement actions against CBP requirements and  federal internal control standards. We examined a generalizable random  sample of compliance reviews from 174 FTZ sites out a population of  1,369 FTZ sites, from fiscal years 2015 through 2016 to determine  whether control deficiencies exist in CBP’s monitoring and oversight  processes. We initially requested a sample of 193 FTZ sites, but  determined that 19 of the 193 FTZ sites were out of scope because they  were recently established and thus had not yet received a compliance  review. Our effective final sample size was thus 174. Our estimates  generalize this sample of 174 to the full population of 1,369 active FTZ  sites. As a result, our estimates have confidence intervals of plus or  minus 8 percentage points or smaller with 95 percent confidence. Our  estimates reflect documentation or compliance problems found in any of  the compliance reviews for a given operator over this time period unless  noted otherwise. We also examined data on FTZ enforcement actions  and compared the results of these actions against criteria for when and  how enforcement actions are to occur. We examined data on liquidated  damages, liquidated damages mitigations, and CBP officer notes at the  case file level in CBP’s Seized Assets and Case Tracking System  (SEACATS). To do so, we consolidated and matched data from multiple  tables within this system, consolidating information as necessary to  examine at the case file level. To assess the reliability of the SEACATS  data, we conducted electronic testing of required data elements to  determine inconsistencies in the data; reviewed the data dictionary and  associated documentation about the data and the system that produced  them; and interviewed CBP officials knowledgeable about the data  system. We also consolidated SEACATS tables into a single analysis file  for reporting estimates on liquidated damages in FTZs. We found the  SEACATS data to be generally reliable for the purposes of our analysis.  We also examined warning letters and other enforcement-related  information that we requested from CBP from the same FTZ operators  included in our compliance review sample. We also interviewed CBP and  Department of Homeland Security officials and FTZ representatives.
section_title: Appendix II: Comments from the Department of Homeland Security
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Christine Broderick (Assistant  Director), Jeremy Latimer (Analyst-in-Charge), Sada Aksartova, Pedro  Almoguera, Debbie Chung, Neil Doherty, Andrew Kurtzman, Jill Lacey,  Grace Lui, Susan Murphy, and David Wishard made key contributions to  this report.