Civil Fines and Penalties Debt: Review of U.S. Customs Service's Management and Collection Processes
Published: 2002-05-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO reviewed the Customs Service's management of and practices for collecting civil fines and penalties (CFP) debt.
section_title: What GAO Found
paragraphs: GAO found that Customs' gross CFP debt more than tripled from the start of fiscal year 1997 to the end of fiscal year 2000, rising from $218.1 million as of October 1, 1996, to $773.6 million as of September 20, 2000. During the same period, Customs annually reserved from 75 to 87 percent of its reported CFP receivables in an allowance for uncollectible accounts. The primary reason for the growth in Customs' reported uncollected CFP debt from fiscal year 1997 through fiscal year 2000 was the bankruptcy of a Customs broker in fiscal year 2000. The broker's bankruptcy resulted in Customs assessing 422 claims for $566 million and recording CFP receivables totaling $484 million during fiscal years 1999 and 2000. The remaining $82 million of assessed amounts was eliminated through the CFP mitigation process, and accordingly these amounts were not recorded as receivables. Customs can strengthen some of its CFP debt collection policies and procedures both by enhancing them and better adhering to them. The Office of Management and Budget stated that it had broad oversight responsibility for monitoring and evaluating governmentwide debt collection activities, but that it is the specific responsibility of the agency's office of inspector general to provide oversight through audits of the agency's debt collection activities. In addition, the Financial Management Service (FMS) officials stated that they rely on agencies to determine what debt should be referred to FMS for collection and offset as required by the Debt Collection Improvement Act of 1996, and Customs refers certain delinquent CFP debts to FMS for collection action.

section_title: Letter
paragraphs: This report responds to your request that we review selected federal  agencies’ management and collection practices related to civil fines and  penalties (CFP) debt.  As agreed to with your office, this work focused on  the debt collection processes and procedures used by the Department of  the Treasury’s U.S. Customs Service, the Department of the Interior’s Office  of Surface Mining, and the Department of Health and Human Services’  Centers for Medicare and Medicaid Services.
This report provides the results of our review of Customs’ management of  and practices for collecting CFP debt.  According to Customs’ records, its  gross CFP debt more than tripled from the start of fiscal year 1997 to the  end of fiscal year 2000, rising from about $218.1 million as of October 1,  1996, to about $773.6 million as of September 30, 2000.  During the same  period, Customs annually reserved from 75 to 87 percent of its reported  CFP receivables in an allowance for uncollectible accounts.
As also agreed, our objectives were to determine (1) the primary reasons  for the growth in Customs’ reported uncollected CFP debt, (2) whether  Customs’ processes to collect CFP debt needed to be strengthened, and (3)  what role, if any, the Office of Management and Budget (OMB) and  Treasury play in overseeing Customs’ collection of CFP debt.  We provided  separate reports on our work on the Office of Surface Mining and the  Centers for Medicare and Medicaid Services.
subsections: section_title: Scope and Methodology
paragraphs: To accomplish our objectives, we reviewed Customs’ accountability  reports, including its audited financial statements, for fiscal years 1997  through 2000, and analyzed its CFP receivables and the related allowance  for uncollectible accounts, as well as other financial information for the 4- year period.  We also obtained an understanding of Customs’ CFP debt  collection policies and procedures and of applicable federal rules and  regulations.
We nonstatistically selected 17 CFP claims from a list of fines and penalty  receivables outstanding as of September 30, 1999, at the San Francisco  Fines, Penalties, and Forfeitures (FP&F) Office.  Our purpose in selecting  these claims was to perform a walk-through to confirm our understanding  of Customs’ processes for managing and collecting CFP debt.  We selected  the 17 claims on the basis of several factors, including high dollar value and  unpaid CFP receivable balances as of September 30, 1999.
From Customs’ Seized Asset and Case Tracking System (SEACATS), we  obtained a list of all  7,184 Customs CFP claims still outstanding (open) as of September 30,   82,273 and 95,441 CFP claims during fiscal years 1999 and 2000,  respectively, for which cases were canceled or the collection activity  was terminated because amounts were paid in full or written off  (closed).
These 184,898 claims had a total value of approximately $7 billion.  We  sorted the population of CFP claims into four groups: Group 1 included 2,469 CFP claims for which Customs stopped collection  activities during fiscal years 1999 and 2000 and wrote off the receivable  amounts totaling approximately $41 million.  In addition, we included in  group 1 the 173 CFP claims, totaling approximately $28 million, that were  written off during fiscal year 1998, since this was the largest amount  written off from fiscal year 1997 through fiscal year 2000.  From these 2,642  CFP claims, we selected all claims involving write-offs of receivable  amounts greater than $1 million.  The receivable total for the 8 selected  claims in this group equaled about $47 million, or just over two-thirds of the  $68 million written off during the 3-year period.  We used these 8 claims to  test various attributes of Customs’ processes for collecting CFP claims at  each of the applicable FP&F offices.
Group 2 consisted of 32,675 CFP claims for which Customs represented  that collection actions were not necessary or appropriate and had not been  performed.  According to Customs’ records, these claims, totaling about $4  billion, or 57 percent of the total dollar value of the entire population,  involved cases in which (1) Customs decided that the alleged violation did  not occur, (2) there was insufficient probable cause to support an alleged  violation, (3) substantial mitigating factors caused Customs to decide to  remit (forgive) the penalty in full without payment of any mitigated  amount, or (4) system input errors occurred, typically resulting in  cancellation of the original case and its replacement with a new case.  We  statistically selected 36 claims from group 2 to confirm that Customs had  not performed any collection actions for the reasons noted above.  We did  not include any of the claims from this group in our population to be  selected for testing, since no collection actions were taken and the claims  were therefore outside the scope of our audit.
Group 3 consisted of 2,052 CFP claims involving various violation codes  for which amounts were partially collected or the claims were closed  without payment.  These claims totaled about $36 million, or less than 1  percent of the total dollar value of the entire population.  We did not review  the claims in this group because their average dollar amount was about  $18,000 and their total dollar amount was deemed immaterial.
Group 4 consisted of the remaining 147,702 CFP claims, with a total  receivable amount of approximately $3 billion, for which Customs  performed collection activities, made collections, and either closed the  claims as paid in full or the unpaid amounts were still outstanding as of  September 30, 2000.  We sorted the population of CFP claims in this group  into and performed certain steps for the following five strata:  Stratum 1 consisted of individual claims with a receivable amount  greater than $2.5 million.  The receivable total for the 33 claims in this  stratum was about $2 billion, or 68 percent of the receivable total for the  entire 147,702 claims in group 4.  Because of their high dollar value, we  reviewed all 33 claims.  We used these 33 claims to test various  attributes of Customs’ processes for collecting CFP claims at each of the  applicable FP&F offices.
Stratum 2 consisted of all claims relating to a Customs broker that  went out of business during fiscal year 1999.  This broker’s bankruptcy  resulted in 422 CFP claims with an original assessed amount of almost  $566 million, of which about $484 million was recorded as CFP  receivables.  The September 30, 2000, receivables balance for these  claims was about $484 million, or 16 percent of the dollar value of all  147,702 claims in group 4.  We discussed the broker’s bankruptcy with  Customs officials and limited our procedures to reviewing related  documents to determine whether Customs took appropriate steps, in  accordance with its policies and procedures, to assess and resolve CFP  claims resulting from the event.
Stratum 3 consisted of all claims identified in SEACATS as involving a  late paperwork violation for failure to file a timely entry summary,  which, in accordance with Customs’ policies, typically results in the  payment of a minimal amount.  The 50,806 claims in this stratum totaled  about $10.6 million, or 0.4 percent of the dollar value of the 147,702  claims in group 4.  During our walk-through at the San Francisco FP&F  Office, we reviewed 3 claims that involved late paperwork violations  and determined that the amount ultimately subject to collection by  Customs might be as little as $100 per claim.  As agreed with your staff,  we performed no further review of this stratum.
Stratum 4 consisted of all claims with an assessed amount less than or  equal to $5,000.  The 73,741 claims in this stratum totaled about $47.5  million, or 1.6 percent of the dollar value of the 147,702 claims in group  4.  As agreed with your staff, we did not review the claims in this stratum  because the dollar amounts of individual claims were low and the total  dollar amount of all 73,741 claims was deemed immaterial.
Stratum 5 consisted of the remaining 22,700 CFP claims, some open  and some closed, that were not included in one of the first four strata.   These claims totaled about $406 million, or 14 percent of the dollar value  of the 147,702 claims in group 4.  We sorted these claims by FP&F office  and selected the four offices that managed the highest number of CFP  claims during fiscal years 1999 and 2000.  From the 7,747 claims for the  four selected offices, we drew a random stratified sample of 179 claims,  which totaled about $5.7 million, or 1.4 percent of this stratum’s dollar  value and 0.2 percent of the dollar value of the 147,702 claims in group 4.   We used these 179 claims to test various attributes of Customs’  processes for collecting CFP claims at the four selected FP&F offices.
We nonstatistically selected an additional 20 CFP claims that Customs  labeled as fraud violations (fraud claims) at the four selected FP&F  offices.  The cases were selected from the “FP&F Case Listing Logs for FY  2000” and the “1592/592 Cases Active During 2000” reports that were open  as of September 30, 2000.  The 20 claims were selected to further evaluate  issues related to alleged fraud violations that we found when we tested the  sample of CFP claims at the four FP&F offices.  We selected the additional  claims on the basis of such factors as assessed amounts, receivable  amounts, loss of revenue, and expired statute of limitations.
We performed detailed reviews of case files for all the CFP claims that we  selected.  We did not independently verify the completeness or accuracy of  the data in the claims population or test information security controls over  the systems used to compile the data because such verification was not  necessary for the purposes of this request.
We interviewed Customs representatives to obtain explanations for any  significant trends and instances of noncompliance with Customs’ CFP debt  collection policies and procedures, as well as about areas where  enhancements could strengthen Customs’ processes.  We also interviewed  OMB and Financial Management Service officials to determine what roles,  if any, OMB and the Financial Management Service play in overseeing and  monitoring the government’s collection of CFP debt.
We performed our work at Customs’ FP&F offices at five locations; the  National Finance Center in Indianapolis, Indiana; and the Office of  Regulations and Rulings in Washington, D.C., from September 2000 through  March 2002.  We conducted our work in accordance with generally  accepted government auditing standards.  We provided the Commissioners  of Customs and the Financial Management Service and the Deputy Director  of OMB’s Office of Federal Financial Management with a draft of our report  for review and comment.  We received general and technical comments  from Customs.  These comments are discussed in the “Agency Comments  and Our Evaluation” section and appendix I of this report and are  incorporated in the report as applicable.  Customs’ and the Financial  Management Service’s letters are reprinted in appendixes I and II,  respectively.  We did not reprint Customs’ technical comments.  OMB  stated that it had no comments.
section_title: Background
paragraphs: Customs, a bureau of the Treasury, provides the nation with its second- largest source of revenue.  Customs assesses duties, taxes, and fees on  goods brought into the United States from foreign countries.  During fiscal  year 2000, Customs reported $22.9 billion in collections of duties, taxes,  and fees.  Part of Customs’ collections consists of CFP, which are assessed  when Customs determines that an importer violated trade and importation  laws and regulations that Customs is responsible for enforcing.
Fines and liquidated damages arise from importer/brokers’ violations of  Customs’ bond agreements or trade laws and regulations (e.g., late filing or  nonfiling of entry summaries).  Penalties arise from violations of the  federal laws and regulations governing the import and export of goods  (e.g., commercial fraud, gross negligence, negligence, and customs broker  and recordkeeping penalties).  These laws and regulations contain  guidelines for establishing the amount of fines and penalties to be assessed.   Customs regulations establish guidelines and criteria for negotiation or  mitigation to a lower fine or penalty amount to settle the case.  Also,  Customs regulations allow the violator and/or surety a period in which to  file petitions challenging the fine or penalty amount assessed.
Initial assessments are typically at the maximum amount provided for by  law and vary according to type of violation.  For example, the CFP-assessed  amount for a violation under Commercial Fraud, Gross Negligence, and  Negligence Penalties (19 U.S.C. 1592) ranges from a minimum of two times  the loss of revenue for negligence to an amount not to exceed the domestic  value of merchandise for fraud.
For fiscal year 2000, Customs reported about $119 million in CFP debt  collections and approximately $25.4 million of CFP debts that were written  off.  As of September 30, 2000, Customs reported about 7,180 outstanding  CFP debts that represented about $773.6 million in gross receivables.   Customs reduced this gross amount by about $36.4 million to adjust for  validity and designated $675.7 million as uncollectible, resulting in a net  receivable balance of about $61.5 million.
In 1993, we reported that Customs did not effectively manage its collection  process to prevent or minimize delinquent receivables.  Factors that  increased the likelihood of delinquent receivables included delays in  finalizing amounts owed, poor monitoring of bond coverage, and delayed  processing of protested bills.  We also reported on the disparity between  Customs’ gross receivables and the amounts expected to be collected.  We  noted during this review that Customs’ assessment and mitigation  processes continued to be primarily responsible for the significant  reductions in the recorded CFP receivable amounts compared to the  amounts it expected to be collected.
For the 4-year period covering fiscal years 1997 through 2000, Customs  reported the following CFP receivables activity:  $9.3 billion of recorded CFP assessments,  $8.4 billion of recorded adjustments to reduce the originally recorded  CFP assessments to reflect the postmitigation amounts that Customs  collected or intended to collect,  $257.0 million of CFP receivables balances that were collected, and  $74.5 million of CFP receivables that were written off from balances that  had typically been adjusted downward to the postmitigation amounts  that Customs intended to collect.
The initially assessed amount for a CFP claim should not be viewed as the  actual postmitigation CFP receivable amount that Customs is likely to  pursue for collection from importers.  Certain Customs’ processes and  practices typically result in significant reductions to initially assessed CFP  amounts before or after a receivable is recorded.  Customs records a CFP  receivable once it determines that it has a legal right to the claim, which  may or may not be the initial assessed amount of the CFP.
Once a CFP claim is closed by either (1) payment, (2) termination of  collection activity and write-off of a postmitigated CFP amount, or (3)  cancellation of the debt, Customs records an adjustment to its CFP  receivables that is equal to the difference between the original amount  recorded as a receivable and the postmitigation amount that Customs  intends to collect.  Customs’ processes that often result in significant  reductions to the initially assessed amounts or subsequently recorded  receivables are Option 1, mitigation through a petition for relief or an offer  in compromise, or cancellation of the CFP debt.
Option 1.  When Customs knows all the facts concerning an alleged  violation at the time of the initial review and the harm to the government is  readily quantifiable and understood, an Option 1 resolution may be  possible.  Option 1 can be described as a “parking ticket” approach.  It  involves payment of a preset amount, which eliminates the mitigation  process and allows quick claim settlement.  Specifically, Customs’ penalty  notice to a violator includes (1) a CFP amount assessed in accordance with  a Customs-related statute or regulation for the particular violation, which  the violator is given an opportunity to petition for mitigation, and (2) a  lesser, or Option 1, amount that the violator can accept in settlement of the  case.  The most common types of claims that can be resolved through  Option 1 are those related to filing late paperwork (late filing of an entry  summary, invoice, or other entry document).  An Option 1 resolution  generally results in a significant reduction of the amount initially assessed.
Petition for Relief.  A person who receives a notice of violation from  Customs has 60 days to file a petition for relief or pay the amount initially  assessed.  Customs is not to establish a receivable until the petition period  expires or until it reaches agreement on the amount of the CFP claim with a  violator that has filed a petition.  Customs may also accept a petition after  the petition period expires.
Petitioners may be granted mitigation for a number of reasons, including  contributory Customs error, extraordinary cooperation with the  investigation, immediate remedial actions, inexperience in importing, and  prior good record.  Mitigation of initial assessments may be substantial.   For example, we reviewed a CFP claim involving delivery of restricted  merchandise without Customs approval for which the violator was  assessed $500,000.  The violator filed a petition that explained that a  clerical error had been made on the entry form.  Based on the facts of the  case and the additional information in the petition, Customs granted  mitigation and reduced the amount of the claim to $250.  In turn, Customs  recorded a receivable amount of $250 and subsequently collected that  amount.
Offer in Compromise.  An alleged violator may make an offer in  compromise to settle a CFP claim at any time after the violation.  Customs  has specific authority under 19 U.S.C. 1617 and 19 CFR 161.5 to  compromise claims, and Customs bases its decisions on whether to  compromise claims on many factors, including, but not limited to, the  following:  (1) risk that the government may not recover a significant  portion of the assessed amount if the claim is litigated and (2) the alleged  violator’s financial inability to pay the initially assessed amount or the  amount established through the petition for relief.  The compromises  generally result in significant reductions of the amounts initially assessed.
An example of an offer in compromise that reduced an initial CFP  assessment is a case in which Customs claimed gross negligence.  Customs  alleged that an importer made false statements and omitted costs such as  development costs and royalty payments associated with video game  cartridges.  Customs issued a penalty notice to the alleged violator in the  amount of $90,376 (four times the lost revenue of $22,594).  The importer  made an offer in compromise, proposing the payment of the lost revenue  and a penalty of $2,295 in monthly installments with interest at 8 percent  per annum.  After Customs’ Regulatory Audit Division concluded that the  importer might not be able to pay the full amount of CFP assessed,  Customs accepted an offer in compromise of $28,543, which included  interest of $3,654.
Cancellation of a CFP Debt.  After an initiating officer (discoverer of the  alleged violation) makes a CFP assessment and the claim is forwarded to  an FP&F office, the FP&F officer or other deciding official can decide to  cancel a CFP debt and close the claim without attempting to collect any  amount.  The majority of cases closed without collection (canceled) in  accordance with law and Customs guidance are closed for one of the  following reasons:  The penalty case is remitted in full without payment.  The FP&F officer  determines that a violation occurred, but the presence of substantial  mitigating factors causes the officer to remit the penalty in full.  The  discretion to remit in full is provided in Customs’ mitigation guidelines  and is based on a finding that a violation resulted from circumstances  beyond the control of the violator or that the violator is without  culpability.
The automated record is canceled when there is an error in the input of  a case into SEACATS that cannot be corrected by the case initiator.  The  canceled SEACATS record is usually replaced with a new case.
The case is closed because there was no violation.  The FP&F officer or  other deciding official determines that the alleged violation did not  occur or there was insufficient probable cause to support an alleged  violation.  According to a Customs official, such determinations occur  because the receivables are recorded by the initiating officer who is  responsible for sending notices to alleged violators before the cases are  forwarded to the FP&F offices for review.  After a notice is sent and a  case is forwarded to an FP&F office, the deciding official determines  whether the alleged violation occurred or can be sufficiently supported.   In addition, the Customs official stated that when case initiators are  determining whether a violation occurred, they often do not have the  benefit of additional documentation and information presented with  petitions for relief.  Moreover, additional documentation is often only  obtained through the course of discovery if a case goes to litigation.
section_title: Broker’s Bankruptcy Is the Primary Reason for the Increase in Uncollected Customs CFP Debt
paragraphs: Customs’ gross CFP receivables increased by about $556 million from the  beginning of fiscal year 1997 to the end of fiscal year 2000.  According to  Customs officials, claims resulting from the bankruptcy of a Customs  broker, who handled a significant amount of import business on the U.S.- Canadian border, were primarily responsible for the increase in CFP  receivables during the 4-year period.  Such claims represented about 87  percent of the increase.  Customs identified 422 CFP claims against  importers associated with this broker and, in most cases, recorded the  initial CFP assessments as CFP receivables.  At the time of the bankruptcy  in June 1999, Customs had not received entry filing summaries, payments  of estimated duties, or both from numerous importers who had previously  relied on the broker to handle such activities on their behalf.
According to Customs officials, the bankruptcy of this broker was a unique  situation for Customs, but it provides a clear illustration of the significant  adjustments that can result from Customs’ assessment and mitigation  processes.  During fiscal years 1999 and 2000, Customs assessed numerous  importers a total of about $566 million of CFP relating to the bankruptcy of  the broker and recorded CFP receivables totaling about $484 million for  these 422 claims.  Customs records indicated that the remaining $82 million  of assessed amounts was mitigated and thus these amounts were not  recorded as CFP receivables.  Postmitigated CFP amounts were nominal,  consistent with Customs’ guidance.  As of September 30, 2000, almost all of  these receivables remained uncollected, and about $481 million had been  recorded in a reserve account as amounts deemed uncollectible.  The  uncollected CFP receivables arising from the bankruptcy represented  about 66 percent of Customs’ total reported gross CFP receivables and  about 72 percent of Customs’ allowance for uncollectible CFP accounts as  of that date.  As of June 2001, Customs reported that 237 of the 422 CFP  claims had been closed and that the outstanding related receivable balance  was about $268.3 million.
According to Customs officials, in examining the available entry records  for each of the 422 alleged violations that resulted from the broker going  out of business, Customs initially assessed each claim at the value of the  affected merchandise or, in the case of restricted merchandise, up to  three times the value of the merchandise when the value of the  merchandise was known.  If the value of the relevant merchandise was not  known, Customs assessed each claim at $2.5 million, the amount of the  bond posted by the broker.  According to a Customs official, Customs’  assessment process and the Option 1 and mitigation processes generally  resulted in Customs collecting considerably less than the CFP amounts  initially assessed for the claims related to the bankruptcy of the broker.
As discussed earlier, Customs’ guidance includes a range of mitigation  amounts for each type of violation, as well as the authority to modify the  assessed amount based on the particular facts and circumstances of any  case.  Customs based its mitigated CFP amounts for these claims on the  CFP amounts suggested in its guidance for the late filing of an entry  summary-–$100 to $200-–and gave consideration to the fact that the late  paperwork resulting from the broker going out of business was out of the  importers’ control.
As of September 30, 2000, Customs’ records showed collections of $19,792  on 129 of the 422 CFP claims associated with the bankrupt broker.   According to a Customs official, 5 of the 129 CFP claims totaling about  $6,500 involved carnet violations in which the merchandise was not  destroyed or exported.  The assessments for these claims were collected in  full.  The other 124 CFP claims, which totaled about $67 million in  assessed amounts, were mitigated, and the total remaining CFP receivable  amount of about $13,200 was collected.  The $19,792 collected on these 129  claims was relatively small because postmitigated CFP amounts were  nominal, consistent with Customs’ guidance.  At the end of fiscal year 2000,  293 claims remained open, of which the entire CFP receivable amount, net  of the $2.5 million surety bond amount, was reserved in the allowance for  uncollectible accounts.
As of June 30, 2001, Customs’ records showed that 185 of the 422 CFP  claims still remained open, meaning that from October 1, 2000, through  June 30, 2001, Customs closed 108 CFP claims.
Forty-seven of the 108 CFP claims were closed without collections because  of errors.  Customs attributed these errors to the broker going out of  business and the unique efforts required by Customs to identify and assess  CFP for all of the entries resulting from this bankruptcy.  These closed CFP  claims, representing a total assessed value of about $80.3 million, were  canceled without any collections for the following reasons:  Eighteen claims, valued at about $7.8 million, were subsequently  deemed invalid because no violation occurred.  Customs subsequently  found entry summaries that were not entered into its Automated  Commercial System (ACS) timely.
Twenty-nine claims, valued at about $72.5 million, were subsequently  deemed invalid and not violations because they were duplicates of  already existing claims.
Five of the 108 closed CFP claims, valued at $12.5 million, were reissued  under new case numbers for fiscal year 2001 because the type of violation  was incorrectly identified when the CFP was initially assessed.  For each of  the 5 cases, Customs closed the initial CFP claim and established a new  claim that reflected the correct type of violation.
The remaining 56 of the 108 CFP claims were closed for the following  reasons after collections were made by Customs:  Fifty of the 56 CFP debts were reclassified from violations for not filing  entry summaries to violations for filing late entry summaries, once the  importer subsequently filed the entry summary.  In addition, according  to a Customs official, the debts involved duty-free merchandise and  each claim was subsequently reduced to a nominal amount in  accordance with Customs’ mitigation guidance.  Each claim was closed  after the violator paid a postmitigation amount of $50, resulting in a total  amount collected of $2,500.  Before mitigation, the total assessed  amount on these 50 CFP debts was $125 million.
Six of the 56 CFP debts, initially assessed at a total of about $128,000,  reflected a receivable amount of $700 of which a total of $450 was  collected.
section_title: Opportunities Exist for Strengthening Customs’ CFP Debt Collection Policies and Procedures
paragraphs: Customs can strengthen its CFP debt collection and might improve its  collection efforts by enhancing and better adhering to existing policies and  procedures.
subsections: section_title: Enhancing CFP Debt Collection Policies and Procedures
paragraphs: We found several CFP policies and procedures that can be strengthened  through enhancements.  These enhancements represent good management  practices and could enable Customs to collect more CFP amounts.  The  needed enhancements relate to (1) using promissory notes to collect CFP  debt when the debtor has significant assets, (2) obtaining evidence that  CFP claims related to carnets were received by the guaranteeing  association, (3) determining the adequacy of surety bond coverage for CFP  debts, and (4) obtaining evidence of CFP debtors’ inability to pay CFP debt.
subsections: section_title: Using Promissory Notes to Collect CFP Debts When the Debtor Has Significant Assets
paragraphs: A debtor may indicate to Customs that it is financially unable to pay a CFP  debt in a lump sum.  Customs’ policy in cases where the debtor is unable to  pay the full amount is to use a promissory note to collect the debt.   However, the policy does not require that debtor assets secure the  promissory note.  Obtaining secured promissory notes in certain situations,  such as when the debtor has significant assets, is a good business practice  and increases the likelihood of collecting the amounts promised by the  debtor because Customs would have a claim against the secured assets in  the event of debtor default.
We reviewed three CFP claims (one high-dollar claim and two  nonstatistically selected alleged fraud claims) in which unsecured  promissory notes were used.  In one of these alleged fraud claims, Customs  accepted a $140,000 unsecured promissory note from a debtor even though  Customs’ Regulatory Audit Division determined that sufficient assets were  available to cover the debt when the note was executed.  At the time of our  review, the note was in default and the debtor had paid only about $43,000  of the $140,000 owed.  If Customs had obtained a secured promissory note,  it would have been in a better position to collect the remaining unpaid CFP  amount.
section_title: Obtaining Evidence That CFP Claims Related to Carnets Were Received
paragraphs: Customs has 1 year from the expiration date of a carnet to issue a CFP  claim.  Approved associations issue carnets, which are valid for 1 year, and  guarantee any Customs claims associated with the merchandise covered.   Customs has designated the U.S. Council for International Business as the  issuing and guaranteeing association in the United States for carnets.  If the  1-year period covered by a carnet expires and the covered merchandise has  not been exported or destroyed, a CFP claim arises.  Establishing a CFP  claim is time critical because, under Customs guidance, Customs may not  make a CFP claim against the council more than 1 year after the expiration  of a carnet.  For properly established claims, the council must pay the  claim unless it furnishes Customs with proof within 6 months of the date of  the claim period that the merchandise was returned, exported, or  destroyed.
During our review, we found that Customs does not always obtain  documentary evidence that the council received CFP claims related to  carnets within the 1-year period.  As stated in Standards for Internal  Control in the Federal Government, all transactions and other significant  events need to be clearly documented, and documentation should be  readily available.  For the eight CFP claims we reviewed involving  carnets, we found that Customs did not maintain the necessary  documentation.  Customs had records indicating that the CFP claims were  issued within the required 1-year period.  However, Customs could not  prove that the council received the CFP claims within the required 1-year  period and did not have evidence that it contacted the council as a follow- up to the issuance of the CFP claim within the 1-year period.  The contact  helps ensure that CFP claims were received by the council or enable  Customs to provide a copy of the claim before the 1-year period expires.   An FP&F paralegal asserted that Customs made frequent telephone  contacts with the council to verify receipt of notices of carnet expirations  but did not document the contacts.
Subsequent to discussing the 8 carnet claims that were from one FP&F  office, Customs stated that a total of approximately 300 carnet-related CFP  claims issued by that office from 1996 through 2000, totaling about $1.8  million, were still outstanding.  Customs stated that the council alleged it  did not receive violation notices for these claims within the 1-year period  and therefore has declined to pay the claims.  Customs also stated that  since it could not prove that the council received the notices within the  required 1-year time frame, collections would be minimal on these claims.
Customs officials instituted a process in fiscal year 2000 requiring that  notices of carnet violations be sent by registered mail so that Customs  would have proof of the council’s receipt of the notices.  In February 2002,  Customs stated that the outstanding CFP claims involving carnet violations  were canceled without payment.  Without documentation to prove that the  council received these claims, Customs determined there was a reasonable  likelihood that the port office did not issue them timely.  Customs also  stated that its Office of Regulations and Rulings has drafted claim issuance  and mitigation guidelines for carnet violations.  On April 19, 2002, Treasury  Directive 02-20, setting forth claim issuance and mitigation guidelines for  carnet violations, was published in the Federal Register.
section_title: Determining the Adequacy of Surety Bond Coverage for CFP Debts
paragraphs: Customs did not have adequate surety bond amounts to cover all CFP  entries we reviewed.  Customs regulations require that importers maintain  bonds as insurance against losses to Customs from unpaid duties, taxes,  charges, and CFP amounts for liquidated damages claims and certain  penalty claims associated with violations of the international carrier bonds.   Single-entry bonds cover merchandise listed on a single-entry summary and  are attached to entry summaries filed with Customs.  Continuous bonds  cover multiple entries for a specified period and are generally maintained  on file at the port of entry.
Out of 83 statistically selected open CFP claims, we found six continuous  entry bonds involving liquidated damages that were not adequate to protect  Customs from losses resulting from unpaid duties, taxes, charges, and CFP  amounts.  Based on our analysis of the selected open CFP claims, we  estimate that about 7.2 percent of the 615 open CFP claims managed by the  four selected FP&F offices did not have sufficient amounts to cover duties  and CFP.
Specifically, we found that 2 of the statistically selected CFP claims  involved insufficient continuous-entry bond amounts to cover in total  about $101,000 out of about $201,000 of assessed antidumping fees and  charges.  At the time of our review, both of the claims had been referred to  Customs’ Office of Chief Counsel to determine potential for litigation.  We  also found four instances in which the importer’s continuous-entry bond  was sufficient to cover the claim we reviewed but was not sufficient to  cover other Customs’ claims against that importer. For the four instances,  the bond insufficiencies included about $668,000 out of about $768,000 of  fees and duties and about $686,000 out of about $1.2 million of CFP.  At the  time of our review, the claims for one of the instances had been referred to  Customs’ Assistant Chief Counsel; one of the instances had been resolved  in favor of the importer; one of the instances had been referred to the  Department of Justice for litigation since the surety stated that the related  continuous bond had already been exhausted on another claim; and one of  the instances had been settled against the bond.  In the instance that the  claims were settled, Customs did not collect about $200,000 of the CFP that  was in excess of the bond coverage.
Customs implemented new procedures for use with the dedicated bond  liability module of the ACS to address the recommendations that we  previously reported.  However, Customs officials stated that additional  changes to ACS were postponed so that the changes can be incorporated  into the new tracking system, the Automated Commercial Environment  (ACE), which will replace ACS.  These officials said that Customs is  proceeding with the requirements development task for ACE as part of the  agency’s automated systems modernization project.  Upon completion of  this task, Customs will know more about the wide range of business  requirements that the new system must address, which will include surety  bond tracking capability.  Until the task is completed, however, Customs  cannot determine when the development and implementation of the ACE  system will be completed and lacks a reliable way to determine on a real- time basis whether coverage on continuous bonds is sufficient for a given  entry.  As a result, Customs’ system capability problems will continue to  undermine FP&F offices’ ability to track the sufficiency of bonds and  Customs officials’ ability to administer Customs laws.
Customs officials stated that the bond information in the various systems  that process entries and penalties is not real time, does not aggregate  potential debts against bonds, and does not show reductions in the bond  amounts to reflect actual amounts paid.  Specifically, an FP&F official  stated the following:  Customs’ bond sufficiency report compares the current bond amount  with 10 percent of the importer’s dutiable imports for the prior year.   Since only prior-year detail is used, this historical comparison does not  take into consideration the potential debt for entries such as temporary  importation bonds or for increased import activity in the current year.
Customs’ ACS does not provide adequate information to determine  whether the current single- or continuous-entry bond is sufficient to  cover a current entry, without significant research of the system.  The  system does not show the potential duties, fees, and CFP of an entry  against a bond amount or actual payouts against that bond.
Customs’ SEACATS provides a notice if an individual entry’s total duties,  fees, and CFP exceed a bond amount, but it does not accumulate  information on the duties, fees, and CFP from other entries at a  particular port that have already been applied to the current bond.  It is  also unlikely that Customs staff at one port would be aware of other  duties, fees, and CFP charged against the bond if an importer enters  merchandise at other ports that are also covered by that bond, since  SEACATS does not accumulate this information.
Customs’ monthly bond liability report provides information that is  necessary to alert importers of the need to increase their current bonds.   However, Customs is still susceptible to surety bond amounts that are  insufficient to cover duties and CFP on entries made prior to when an  importer actually increases a bond amount.
section_title: Obtaining Evidence of CFP Debtors’ Inability to Pay CFP Debt
paragraphs: During the period of our review, Customs regulations required debtors who  claimed they were unable to pay CFP debts to present documentary  evidence to support their claims.  Examples of documentary evidence  that were to be provided by the debtor included copies of income tax  returns, current financial statements, and independent audit reports.   However, Customs was not required to obtain and review independent  audit reports, which include audited financial statements, to determine  whether a debtor was not able to pay CFP debt.
We reviewed six CFP claims (two high-dollar claims and four  nonstatistically selected fraud claims) in which the debtor’s representation  of inability to pay was a factor in Customs’ petition or offer-in-compromise  process, consistent with Customs policy.  For five of these CFP claims (two  high-dollar claims and three fraud claims), each of which involved fraud or  counterfeiting, Customs obtained tax returns and/or current financial  statements from the debtors.  Customs records indicated that through  mitigation and the use of offers in compromise, the originally assessed CFP  amounts totaling about $28.7 million were reduced to a total CFP  receivable amount of about $1.5 million, of which only about $108,000 had  been collected through March 2002.  We asked for, but Customs could not  provide, documentation of the debtor’s inability to pay the sixth CFP claim.
Customs was not required to obtain and review independent audit reports,  such as audited financial statements, as part of the documentary evidence  it used to determine these debtors’ inability to pay.  However, in June 2000,  Customs regulations were revised, requiring that both income tax returns  for the past 3 years and recent audited financial statements be provided by  parties claiming they were unable to pay CFP debts.
section_title: Better Adherence to Certain CFP Debt Collection Policies and Procedures
paragraphs: In addition to the enhancements to its collection capacity discussed above,  Customs needs to adhere more closely to certain of its existing policies and  procedures.  We found instances in which Customs did not always follow  its policies and procedures related to (1) requesting waivers of the statute  of limitations for CFP debts, (2) issuing Notices of Penalty or Liquidated  Damages Incurred and Demand for Payment (penalty and payment  notices), (3) responding to violators that filed petitions for relief, and (4)  issuing notices of redelivery.
subsections: section_title: Requests for Waivers of the Statute of Limitations for CFP Debts
paragraphs: Customs does not always timely request waivers of the statute of  limitations for CFP debts to enable it to have sufficient time to continue  collection actions.  In order to obtain a waiver, which extends the statute of  limitations by the amount of time agreed to in the waiver, Customs  guidance requires the appropriate FP&F office to request a waiver of the  statute of limitations from the violator when less than 2 years remain  before the expiration of the statute of limitations.  In instances in which  Customs determines that a waiver is necessary, its policy is to request that  the violator agree to a 2-year waiver of the statute of limitations.  If a waiver  is not obtained, Customs is to refer the CFP debt to the Department of  Justice no later than 6 months before the expiration date of the statute of  limitations to allow Justice sufficient time to file the CFP claim with the  Court of International Trade.
We identified two claims (one high-dollar claim and one nonstatistically  selected fraud claim) for which Customs requested waivers for some of the  entries only shortly before the statute of limitations was to expire for those  entries.  An alleged violator and two of the three sureties for a second  alleged violator did not agree to the waivers, and the statute of limitations  subsequently expired on various entries.  In one case, Customs originally  stated that it attempted to obtain waivers of the statute of limitations from  three sureties after the dissolution of the importer and the completion of its  investigation, which was 4 years later.  Only one surety granted a waiver,  and the statute of limitations expired without any collections from the  other two sureties.  In the other case, Customs stated that it had filed a  complaint with the Court of International Trade to prevent the expiration of  the statute of limitations.  However, the complaint applied to only 53 of 104  entries, since the statute of limitations had expired on the other 51 entries  prior to Customs’ filing the complaint.
These cases illustrate the risks of not timely attempting to avoid expiration  of the statute of limitations.  For these cases, Customs was unable to  collect original duties that totaled about $74,000 and CFP that totaled about  $136,000.  In contrast, it was able to collect about $97,000 of unpaid duties  for entries on which the statute of limitations had not expired or for which  waivers had been obtained.
In a third case that we identified during our walk-through, we found a CFP  claim involving, among other factors, a failure to request a timely waiver of  the statute of limitations.  The statute of limitations for the entries filed in  the first 3 of the 7 years under this CFP claim had expired.  In this  nonstatistically selected CFP fraud case, Customs assessed $21 million of  CFP against an importer for allegedly using false invoices to undervalue  entries.  While engaged in settlement talks with Customs, the importer  made distributions totaling about $6 million to its two principal  stakeholders.  Before the expiration of the statute of limitations for the  remaining 4 years of entries, Customs was granted a waiver and  subsequently accepted an offer in compromise to settle the CFP claim for  $700,000, consisting of $688,025 to cover the amount of the duties owed to  Customs and $11,975 of the $21 million assessed CFP.  Other factors that  contributed to Customs’ acceptance of this offer in compromise were its  determination that (1) the corporation was unable to pay the CFP debt  after $6 million was distributed to stockholders and (2) Customs might not  be able to hold the principals personally liable for the debt.
In general, Customs paralegals cited both a lack of a tracking system and  human error for the poor tracking of the statute of limitations’ expiration  dates.  Even though a tracking system for statute of limitations expiration  dates could improve Customs’ ability to track expiration dates, our review  found that monthly reports from SEACATS currently provide sufficient  statute of limitations information to paralegals at each office for tracking  expiration dates.
During our review of the eight high-dollar CFP claims that were written off  during fiscal years 1998 through 2000, we found four cases in which the  expiration of the statute of limitations and Customs’ decision to terminate  collection activity were the primary reasons for the write-off of these CFP  debts.  Customs wrote off about $27 million for these four CFP cases,  which represented about 39 percent of the CFP amounts written off during  the 3-year period.  Even though we identified lengthy collection efforts-– investigations, petition processes, and information gathering and review  prior to decisions on petitions by Customs’ Office of Regulations and  Rulings or Office of General Counsel, or decisions on whether to refer them  to Justice-–that took several years, Customs ultimately deemed the debts  uncollectible and legally without merit.  The reasons for these  determinations were the violators either (1) filed for bankruptcy after being  assessed by Customs or (2) went out of business after being assessed by  Customs.
We also noted an instance where the approaching expiration of the statute  of limitations was a contributing factor in Customs accepting a lower  mitigation amount for the CFP claim.  Specifically, in one case we  reviewed, Customs accepted an offer in compromise for $25,000 in April  2000, after the statute of limitations had expired for 252 of 257 entries  relating to a CFP claim.  These entries involved fraud violations where the  importer allegedly undervalued the entries in an effort to avoid paying  duties.  Customs issued the penalty notice on April 6, 2000, at the value of  the merchandise, which was about $20.1 million.  The investigation relating  to this claim occurred from 1995 through 1998, but the proceedings did not  commence until March 2000.  The offer in compromise was accepted  because Customs could not determine the actual unpaid duties since its  files did not include the amount of lost revenue relating to all of the entries.
section_title: Issuance of Penalty and Payment Notices
paragraphs: Customs did not always issue penalty and payment notices to importers  within 10 days of opening a case file in its tracking system, in accordance  with Customs guidance.  Customs guidance states that a penalty and  payment notice be issued to importers within 10 days of when Customs  opens a case in SEACATS.  We found that Customs did not comply with this  requirement for 16 (2 open and 14 closed CFP claims) of the 179  statistically selected CFP claims we reviewed.  For example, a penalty and  payment notice for 1 of these claims in the Los Angeles FP&F Office was  192 days late.  Twelve of the cases were identified at the New Orleans FP&F  Office, and 2 were identified at the Los Angeles FP&F Office.
Based on our evaluation of the open and closed CFP claims, we estimate  that 2.4 percent of open and 14.5 percent of closed CFP claims managed by  the four selected FP&F offices did not have penalty and payment notices  issued within the 10-day period.  Customs paralegals responsible for  managing these CFP claims generally attributed the delays to limited staff  resources.  Such delays may have resulted in reduced collections of CFP at  the four selected FP&F offices.
section_title: Issuance of Responses to Violators That Filed Petitions for Relief
paragraphs: Customs did not consistently respond timely to violators that filed petitions  for relief.  After receiving a notice from Customs, the alleged violator has 60  days to file a petition for relief and Customs has 90 days after receipt of the  petition to respond.  We found that 100 (40 open and 60 closed CFP claims)  of the 179 statistically selected CFP debts involved petitions.  For 25 of  these 100 claims, Customs did not comply with the 90-day requirement.   For example, 1 claim in the John F. Kennedy Airport FP&F Office was 364  days late.  Twelve instances of noncompliance were identified at the New  Orleans FP&F Office, and 11 instances at the Los Angeles FP&F Office.
Based on our evaluation of the 40 open and the 60 closed CFP claims that  had petitions, we estimate that for 22.3 percent of open and 26.6 percent of  closed CFP claims managed by the four selected FP&F offices, Customs  did not respond to the petitions within the 90-day period.  Customs  paralegals responsible for managing these CFP claims generally attributed  the delays to limited staff resources.  Such delays may have resulted in  reduced CFP collections at the four selected FP&F offices.
section_title: Issuance of Notices of Redelivery
paragraphs: The timing of Customs’ issuance of Notices of Redelivery, which are sent to  importers when the Department of Health and Human Services’ Food and  Drug Administration (FDA) deems goods unsafe for importation, raised  legal issues that affected settlement determinations.  The Food, Drug, and  Cosmetic Act authorizes the Secretary of Health and Human Services to  refuse admission of food, drugs, devices, and cosmetics for a number of  reasons, including that the items were packed under unsanitary conditions  or that the articles are adulterated or misbranded.  When FDA makes a  determination to refuse admission of goods, it issues a Notice of Refusal of  Admission to the importer.  While awaiting an admission decision from  FDA, Customs may authorize delivery of the article to the owner or  consignee upon the execution of a bond sufficient to pay liquidated  damages in the event of default.
Customs regulations establish conditions for importation and entry  bonds.  One of the conditions is that the importer must timely redeliver  released merchandise on demand to Customs after receiving a redelivery  notice.  Customs must issue the redelivery notice no later than 30 days after  the date of release of the merchandise or 30 days after the end of the  conditional release period, whichever is later.  Failure to redeliver could  result in the importer’s having to pay liquidated damages under the bond.
Disputes over when Customs has to issue redelivery notices for articles  subject to FDA approval have affected Customs’ collection of assessments.   For example, in United States v. Likas International, Inc. and  Washington International Insurance Company, a surety denied liability  under a bond because Customs issued the redelivery notice more than 30  days after FDA issued a refusal notice. The government asserted that it had  120 days to issue the redelivery notice because the importer retained  custody of the article for 90 days after the FDA refusal notice, which ended  a conditional release period, and then Customs had an additional 30 days to  issue a redelivery notice.  During the Likas proceedings, another  significant issue arose: Has Customs defined a conditional release period  for the FDA context?  The government essentially argued that the  conditional release period automatically began when Customs delivered  articles subject to FDA approval to the importer.  The surety argued that  Customs had never by regulation defined a conditional release period in the  FDA context.  The surety further argued that Customs’ assertion of a  conditional release period amounted to an indefinite period because the  period would run from delivery of the goods until 90 days after FDA issued  its notice, whenever that occurred.
As a result of the issues raised in Likas, Customs and the Department of  Justice in the summer of 1999 settled the Likas case with a number of  sureties.  As part of the Likas settlement, Customs agreed to implement a  nationwide policy for issuing a redelivery notice following FDA’s issuance  of a refusal notice.  The policy provides that Customs must issue a  redelivery notice no later than 30 days after FDA issues a refusal notice.  In  return, the affected sureties agreed to settle all outstanding claims for  liquidated damages in which the Customs redelivery notice was issued  more than 30 days but less than 120 days after issuance of the FDA refusal  notice and all cases where Customs’ redelivery notice was issued more  than 30 days after the release of the merchandise.  The sureties agreed to  pay 30 percent of the value of the merchandise or the amount of the bond,  whichever was less.
We reviewed eight CFP claims with redelivery notices issued before fiscal  year 1999 (one statistically selected and seven nonstatistically selected at  Customs’ Los Angeles and San Francisco ports, respectively) and found  that the redelivery notices were issued after 30 days but within 120 days of  the issuance of the refusal notices.  The total assessed amount of these  claims was about $686,000, and the total amount collected was about  $138,000.
The discussion above indicates how a lack of certainty and clarity  concerning a conditional release period may affect the enforcement of  importation and entry bonds.  Customs has advised us that it has prepared  a Notice of Proposed Rulemaking to amend its regulations to provide a  specific conditional release period in all cases involving products regulated  under the Food, Drug, and Cosmetic Act.  The Notice of Proposed  Rulemaking is currently awaiting departmental approval prior to its  publication in the Federal Register.
section_title: OMB’s and Treasury’s Roles in the Oversight and Monitoring of CFP Debt
paragraphs: OMB and Treasury’s Financial Management Service are provided  information useful in performing their debt oversight roles through  Customs’ reporting of CFP receivables and referral of CFP debt to the  Financial Management Service for collection.  Beginning with financial  statements for fiscal year 1997, Customs has disclosed CFP receivable  information in the notes to its audited financial statements, which are  submitted annually to OMB.  In addition, in accordance with the  requirements of the Debt Collection Improvement Act of 1996, Customs  annually reports receivable information, which includes CFP receivable  information, to the Financial Management Service as part of the Report on  Receivables Due from the Public.
In discussions, OMB officials emphasized that their oversight responsibility  is broad and consists of monitoring and evaluating governmentwide credit  management, debt collection activities, and federal agency performance.   OMB also stated that it is the specific responsibility of agency chief  financial officers and program managers to manage and be accountable for  the debt collection of their agency’s credit portfolios, including debt  collection, in accordance with applicable federal debt statutes, regulations,  and guidance.  OMB further added that it is the role of each agency to  specifically monitor and collect its civil penalty debt regardless of dollar  magnitude and that it is the responsibility of each agency’s office of  inspector general to provide oversight through audit of the agency’s debt  collection activities.
The Debt Collection Improvement Act of 1996 requires that federal  agencies transfer eligible nontax debt or claims delinquent more than 180  days to Treasury for collection action.  Treasury officials stated that they  rely on agencies to determine what debt should be referred to the Financial  Management Service for collection and offset as required by the Debt  Collection Improvement Act of 1996.  A Customs representative stated that  certain CFP debts are referred to the Treasury Offset Program for  collection via the Tax Refund Offset Program.
section_title: Conclusions
paragraphs: The growth in Customs’ uncollected CFP debt resulted primarily from  assessments to importers that were caused by a broker going out of  business.  However, a substantial portion of Customs’ recorded CFP  receivables will continue to be deemed uncollectible and eventually  reduced, since it represents amounts that are required to be assessed in  accordance with Customs’ guidance rather than the smaller portion that is  typically pursued for collection from importers after mitigation or  settlement of a claim.  Even though Customs’ assessment process will  continue to result in significant adjustments, there are several areas where  Customs’ CFP debt collection policies and procedures can be strengthened  and its collection efforts might improve through enhancements or  increased adherence.  These areas include Customs’ ability to track the  sufficiency of surety bond coverage, a concern we originally raised in 1993,  which will not be addressed until Customs completes the implementation  of the new ACE system.
section_title: Recommendations for Executive Action
paragraphs: We are making several recommendations to the Commissioner of the U.S.  Customs Service to strengthen Customs’ CFP debt collection policies and  procedures, improve the collection of CFP debt, and decrease the amount  of CFP receivables that are reduced or written off.
We recommend that the Commissioner of the U.S. Customs Service direct  the Assistant Commissioner, Office of Finance, to develop and implement  detailed CFP debt collection policies and procedures to obtain secured  promissory notes from CFP debtors when evidence shows that they have  significant assets to secure their CFP debts.
We recommend that the Commissioner of the U.S. Customs Service direct  the Assistant Commissioner, Office of Regulations and Rulings, to  expeditiously establish conditional release periods for products regulated  under the Food, Drug and Cosmetic Act.
We recommend that the Commissioner of the U.S. Customs Service direct  the Assistant Commissioner, Office of Information and Technology, to help  ensure that the development and implementation of Customs’ new ACE  system addresses bond sufficiency concerns cited in this report and in our  1993 report.
We recommend that the Commissioner of the U.S. Customs Service direct  the Assistant Commissioner, Office of Field Operations, to reinforce and  monitor the four selected Fines, Penalties, and Forfeitures offices’  compliance with certain existing CFP debt collection policies and  procedures, where applicable, to help ensure that  statute of limitations waivers are requested when less than 2 years  remain before the expiration date and waivers are obtained before the  statute of limitations expires to allow adequate time for actions to be  taken against violators by Customs, the Department of Justice, and the  Court of International Trade;  Notices of Penalty or Liquidated Damages Incurred and Demand for  Payment are issued to importers within 10 days of Customs’ opening a  case in the CFP tracking system; and  responses to petitions for relief are made to violators within 90 days of  Customs’ receipt of a petition from a violator.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of our report, Customs and the Financial  Management Service agreed with our recommendations.  Customs  described actions being taken to address each recommendation.  We have  removed our recommendation for Customs to finalize its claim issuance  and mitigation guidelines for carnet violations since these were published  in the Federal Register on April 19, 2002.
Customs also provided general comments, which are reprinted in appendix  I and followed by our evaluative comments.  Customs provided a number  of technical comments that are incorporated in the report as appropriate.   OMB stated that it had no comments.
As agreed with your office, unless you announce its contents earlier, we  plan no further distribution of this report until 30 days after its issuance  date.  At that time, we will send copies to the Chairman of your  subcommittee and to the Chairman and Ranking Minority Member of the  Senate Committee on Governmental Affairs.  We will also provide copies to  the Secretary of the Treasury, the Commissioner of the U.S. Customs  Service, and the Director of the Office of Management and Budget.  We will  also make copies available to others upon request.  In addition, the report  will be available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 3406.  The GAO contact and staff acknowledgments are listed in appendix  III.
section_title: Comments from the Department of the Treasury’s U.S. Customs Service
paragraphs: The following are GAO’s comments on the U.S. Customs Service’s letter  dated May 15, 2002.
subsections: section_title: GAO Comments
paragraphs: 1. See “Agency Comments and Our Evaluation” section. 2. We have inserted a footnote in the report to explain liquidated damages.   However, our report does not focus on revenue, but rather on Customs’  collection of CFP receivables in accordance with its policies and  procedures. 3. We have revised the report to clarify Customs’ policy regarding when to  request a waiver. 4. We fully considered the previous comments provided.  We revised the  discussion of the two CFP claims to focus on the issue of timeliness for  requesting waivers of the statute of limitations.  We augmented our  discussion in the report related to the two cases for which Customs did  not timely request waivers of the statute of limitations and lost  opportunities for further collections. 5. Our discussion regarding eight high-dollar CFP claims that were  written off during fiscal years 1998 through 2000 focused on four cases  in which the expiration of the statute of limitations and Customs’  decision to terminate collection activity were the primary reasons for  the write-off of the CFP debts.  We did not discuss the three cases that  involved penalties related to seizures of foreign-owned conveyances  used to smuggle narcotics that were seized, forfeited, and sold.  For the  four cases discussed in this report, the expiration of the statute of  limitations was one of Customs’ cited reasons for deeming the debts  uncollectible and legally without merit, which led to writing off the  debts.  Even though we cited Customs’ reason for these determinations  as the violators either subsequently filing for bankruptcy or going out of  business, we also identified lengthy collection efforts where Customs’  investigations, petition process, and information gathering and review  prior to decisions on the petitions or referral took several years.  6. We agree that the expiration of the statute of limitations was not in  jeopardy as it related to the entries for the last 4 of the 7 years for this  case.  However, our report focused on the expiration of the statute of  limitations on the entries filed in the first 3 of the 7 years under the CFP  claim.  We also believe it was important to note that Customs only  collected $11,975 of the $21 million CFP assessment when it accepted  the offer in compromise and that $6 million was distributed to two  principal stockholders during Customs’ collection efforts on this CFP  claim.  We moved this case from the section that discusses instances  where the approaching expiration of the statute of limitations was a  contributing factor in Customs’ acceptance of lower mitigation  amounts for CFP claims to the section that discusses instances in  which the statute of limitations expired. 7. We reviewed and considered the information that Customs provided to  us regarding our preliminary findings.  For the two cases for which  Customs asserts the penalty notices were issued on the same day as the  case records were input into SEACATS, we were not provided adequate  documentation to support the assertion. 8. We have revised the report to reduce the number of exceptions from 17  to 16.  Since penalty notices should not be issued for cases involving  penalties related to the seizure of counterfeit trademark infringing  merchandise, we removed this case from the reported exceptions.  It  should be noted that during our fieldwork and subsequent follow-up  after our exit meeting, we had several discussions and were provided  additional explanations and documentation on this issue.  However,  until Customs’ written response to the draft report, Customs had not  indicated that the Los Angeles case that was reported 456 days late  should not have been included. 9. As our report states, we found that in 25 of 100 claims involving  petitions, Customs did not comply with its requirement to respond  within 90 days of receipt of the petition.  We estimated that for 22.3  percent of open and 26.6 percent of closed CFP claims managed by the  four selected FP&F offices, Customs did not respond to the petitions  within the 90-day period.  We do not believe such results demonstrate  only inadvertent noncompliance with the 90-day requirement.   However, we have revised the report to clarify that Customs did not  consistently respond to petitions within 90 days of receipt. 10. While Customs’ records indicated that it did not respond to petitions by  importers until after 90 days for all 29 cases, Customs stated it had an  informal process to extend the 90-day period for the number of days the  petitions were outside of the FP&F office.  In its response to a draft of  this report, Customs informed us that the Commissioner formalized  this process on January 21, 2002, in Customs’ Seized Asset  Management and Enforcement Procedures Handbook.  Customs  subsequently provided us the four case numbers and documentation to  support (1) the number of days the cases were out of the FP&F offices  and (2) that Customs responded within the 90-day period, in  accordance with its informal process that was finalized in January 2002.   The four cases included the Los Angeles case that involved an FDA  refusal of admission.  As a result, we revised the report to reflect that  Customs did not respond to petitions by importers until after 90 days  for 25 cases. 11. We have modified the report to focus on the effect on the reduction in  CFP collections that may have resulted from delays in responding to  violators that filed petitions for relief.  As industry statistics show, the  likelihood of recovering amounts owed decreases dramatically as the  age of the delinquency increases.  12. We clearly stated that Customs did not consistently issue redelivery  notices to importers and that each of the selected cases reviewed  occurred prior to when Customs established its new guidance in fiscal  year 1999.  We also pointed out that Customs is currently addressing the  one outstanding legal issue that resulted from the lawsuits and  settlement.  In fact, our recommendation only addresses the need for  Customs to expeditiously establish a conditional release period.
section_title: Comments from the Department of the Treasury’s Financial Management Service
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Mario Artesiano, Rathi Bose, Sharon Byrd, Richard Cambosos, Perry  Datwyler, Mickie Gray, David Grindstaff, Marshall Hamlett, Fred Jimenez,  Eric John, Laurie King, Victoria Lin, Jon Ling, John Lord, Mel Mench,  Suzanne Murphy, and Maria Stortz made key contributions to this report.
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