International Trade: U.S. Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment
Published: 2004-01-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: U.S. policymakers and industry groups are concerned that some foreign textile and apparel imports are entering the United States fraudulently and displacing U.S. textile and apparel industry workers. Congress mandated GAO to assess U.S. Customs and Border Protection's (CBP) system for monitoring and enforcing textile transshipment and make recommendations for improvements, as needed. Therefore, GAO reviewed (1) how CBP identifies potential illegal textile transshipment, (2) how well CBP's textile review process works to prevent illegal textile transshipment, and (3) how effectively CBP uses its in-bond system to monitor foreign textiles transiting the United States.
section_title: What GAO Found
paragraphs: To identify potential illegal textile transshipments, CBP uses a targeting process that relies on analyzing available trade data to focus limited inspection and enforcement resources on the most high-risk activity. In 2002, CBP targeted about 2,500 textile shipments out of more than 3 million processed, or less than 0.01 percent. Given resource constraints at CBP ports, CBP's textile review process for preventing illegal textile transshipment increasingly depends on information from foreign factory visits that CBP conducts, based on the targeting results. However, CBP's foreign factory visit reports are not always finalized and provided to ports, other agencies, or the foreign governments for timely follow-up. Further, after the global textile quotas end in 2005, CBP will lose its authority to conduct foreign factory visits in former quota countries. U.S. overseas Attache offices and cooperative efforts by foreign governments can supplement information provided to the ports. Under CBP's in-bond system, foreign textiles and apparel can travel through the United States before formally entering U.S. commerce or being exported to a foreign country. However, weak internal controls in this system enable cargo to be illegally diverted from its supposed destination, thus circumventing quota restrictions and payment of duties. Moreover, CBP's penalties do not deter in-bond diversion. Bond amounts can be set considerably lower than the value of the cargo, and violators may not view the low payments as a deterrent against diverting their cargo.

section_title: Letter
paragraphs: With overall U.S. imports of textile and apparel products running about $81  billion in 2002, or about 7 percent of all U.S. imports, U.S. policymakers and  industry groups have been concerned that some foreign textile and apparel  imports are entering the United States fraudulently and displacing U.S.  textile and apparel industry workers.  Illegal textile transshipment is one  form of such illegal import activity and occurs when false country-of-origin  information is provided for imported goods in order to evade U.S. textile  quotas and customs duties.  U.S. Customs and Border Protection (CBP)  does not have a reliable estimate of the overall amount of illegal textile  transshipment that occurs annually, but restrictive U.S. quotas and  relatively high tariffs on certain textile and apparel products create  incentives to foreign suppliers and importers to avoid these trade  restrictions.
Congress included a mandate in the Trade Act of 2002 (P.L. 107-210, Aug. 6,  2002) directing that we assess CBP’s system for monitoring and enforcing  textile transshipment and make recommendations for improvements, as  needed.  As discussed with representatives of the Senate Committee on  Finance and the House Committee on Ways and Means, we have focused  on answering the following questions:    How does CBP identify potential textile transshipment?
How well does CBP’s textile review process work to prevent illegal  textile transshipment?
How effectively does CBP monitor foreign textiles transiting the United  States in its in-bond system before entering U.S. commerce or being  exported? and  What challenges, if any, has CBP experienced in using penalties and  other means to deter illegal textile transshipment?
To answer these questions, we conducted fieldwork at seven ports of entry  (New York/Newark, New York; Los Angeles/Long Beach, California;  Laredo, Texas; Columbus and Cleveland, Ohio; and Seattle and Blaine,  Washington) to review how CBP reviews textile shipments at the major  land, sea, and inland ports.  Together, these ports represent CBP service  ports that processed 55 percent of textiles and apparel imported into the  United States in 2002. We also reviewed CBP’s data analysis at its Strategic  Trade Center in New York, observed a Textile Production Verification Team  conduct foreign factory visits in El Salvador, and discussed CBP’s efforts to  coordinate textile enforcement activities with the customs authorities in El  Salvador, Hong Kong, Macau, Mexico, and Canada.  We conducted a survey  of 29 CBP ports, including the 11 largest ports that process textiles and  apparel imports. (See app. I for details about our scope and methodology.)
subsections: section_title: Background
paragraphs: The United States, like the European Union and Canada, maintains annual  quotas on textile and apparel imports from various supplier countries.  When a country’s quota fills up on a certain category of merchandise, that  country’s exporters may try to find ways to transship its merchandise  through another country whose quota is not yet filled or that does not have  a quota.  Transshipment may also occur because obtaining quota can be  very expensive and the exporters want to avoid this expense.  The actual  illegal act of transshipment takes place when false information is provided  regarding the country-of-origin to make it appear that the merchandise was  made in the transited country.   The effects of the illegal act of  transshipment are felt in both the transited country (potentially displacing  its manufactured exports) and the United States, increasing competition  for the U.S. textile and apparel industry.
These U.S. quotas, embodied in approximately 45 bilateral textile  agreements, are scheduled for elimination on January 1, 2005, in  accordance with the 1995 World Trade Organization (WTO) Agreement on  Textiles and Clothing.  However, U.S. quotas will remain for approximately  five countries that are not members of the WTO and for specific product  categories when trade complaint actions, resulting in reinstated quotas, are  approved.  Incentives to engage in transshipment will also continue due to  the differing tariff levels resulting from the various bilateral or multilateral  free trade agreements and preference programs that the United States has  signed with some countries.  U.S. tariffs on certain types of sensitive  textile and apparel products range up to 33 percent, but such tariffs can  fall to zero for imports from trade agreement countries.  As with quotas,  manufacturers from countries facing higher U.S. tariffs may find ways to  transship their merchandise to countries benefiting from lower or no U.S.  tariffs, illegally indicate the merchandise’s country-of-origin, and enter the  merchandise into the U.S. market.
subsections: section_title: Imports Nearly Double over Past Decade, While Production and Employment Decline
paragraphs: Over the past decade, U.S. imports of textile and apparel products have  grown significantly, while domestic production and employment have  declined.  For example, textile and apparel imports in 2002 were about $81  billion, nearly double their value in 1993.  The largest suppliers to the U.S.  market in 2002 were China (15 percent), Mexico (12 percent), and Central  America and the Caribbean (as a group, 12 percent).  See appendix II for  more information on textile and apparel trade, production, and  employment.
While imports have grown over the decade, domestic production and  employment have declined.  Figure 1 shows U.S. domestic production,  imports, exports, and employment in the U.S. textile and apparel sector.   From 1993 through 2001 (latest year available), textile and apparel  production (as measured by shipments to the U.S. market or for export)  declined by 11 percent, and employment fell by 38 percent.  However, the  United States still maintains significant production (over $130 billion) and  employment (about 850,000 jobs) in the textile and apparel sector.
section_title: U.S. Government Roles in Monitoring Textile Transshipment
paragraphs: CBP has responsibility for ensuring that all goods entering the United  States do so legally.  It is responsible for enforcing quotas and tariff  preferences under trade agreements, laws, and the directives of the  interagency Committee for the Implementation of Textile Agreements  (CITA) involving the import of textiles and wearing apparel.  CBP has  established a Textile Working Group under its high-level Trade Strategy  Board that prepares an annual strategy for textiles and apparel.  This  annual strategy establishes national priorities and an action plan to carry  out its goals. Within the framework of this overall strategy, CBP  administers quotas for textiles, processes textile and apparel imports at  U.S. ports, conducts Textile Production Verification Team (TPVT) visits to  foreign countries, provides technical input for trade agreement  negotiations, and monitors existing trade agreements.  In addition to staff  at CBP’s headquarters, officials at 20 Field Operations Offices and more  than 300 CBP ports of entry oversee the entry of all goods entering the  United States.   CBP has a specific unit, the Strategic Trade Center (STC) in  New York City, assigned to analyze textile trade data and other information  sources for the targeting process.
In addition to CBP, the departments of Commerce, Justice, State, and  Treasury, and the Office of the U.S. Trade Representative (USTR) also play  a role in transshipment issues.  Further, as an interagency committee, CITA  determines when market-disrupting factors exist, supervises the  implementation of textile trade agreements, coordinates U.S.  administration efforts to combat illegal textile and apparel transshipment,  and administers the phase-out of textile and apparel quotas on WTO  countries required under the 1995 Agreement on Textiles and Clothing.
section_title: CBP Uses a Targeting Process to Identify Potential Textile Transshipment
paragraphs: CBP’s process for identifying potential illegal textile transshipments  depends on targeting suspicious activity by analyzing available data and  intelligence.  Due to increased trade volumes and shifted priorities, CBP  seeks to focus its limited enforcement resources on the most suspect  activity.  CBP targets countries, manufacturers, shipments, and importers  that it determines to be at a higher risk for textile transshipment.  First,  CBP identifies the countries in which trade flows and other information  indicate a high potential for transshipment.  CBP then targets selected  manufacturers in those high-risk countries for overseas factory visits.   Information from the factory visits is then used to target shipments to the  United States for review and potential exclusions or penalties.  Finally, CBP  also targets importers based on high-risk activity and conducts internal  control audits that include verifying that controls against transshipment  exist.  However, CBP selects only a small share of foreign factories and  shipments for review due to limited resources.
subsections: section_title: Targeting Is Essential, Due to High Trade Volumes and Shifting Priorities for Resources
paragraphs: In response to a rapidly growing volume of trade at the border and limited  resources for enforcement, CBP relies on a targeting process to identify  shipments that have a high risk of being transshipped.  According to CBP  officials, trade growth and expanding law enforcement efforts have nearly  overwhelmed its staff and resources.  In addition, CBP’s modernization of  its processes and technology, as called for in the Customs Modernization  and Informed Compliance Act of 1993, recognizes that the nearly 25 million  entries (shipments) CBP processes annually cannot all be inspected.   Furthermore, since the terrorist attacks of September 11, 2001, CBP has  shifted resources to security concerns as its priority mission.   Inspection  and some other port-level staff have been diverted from detecting  commercial violations to ensuring security.  In addition, during higher alert  levels (such as code orange and above), additional staff is also refocused to  assist in port and national security.
section_title: CBP Targets Risky Countries, Manufacturers, Shipments, and Importers
paragraphs: CBP’s process of targeting high-risk activity begins by identifying the  countries that supply textile imports that pose the greatest risk of illegal  textile transshipment.   Applying a risk-management approach, CBP  targets shipments for review based on trade data, such as sudden surges of  products restricted by quotas from nonquota countries, production data,  results of past factory and port inspections, suspicious patterns of  behavior, and tips from the private sector.  CBP then reviews the targeted  shipments for evidence of transshipment, while expediting the processing  of nontargeted shipments.  From its country-level review, CBP targets 16  countries per year on average, and actually visits 11 of them on average.   For the countries CBP selects, it targets on average about 45 high-risk  manufacturing plants to visit.  These visits seek to find evidence of  transshipment or to verify that the factories are in compliance with U.S.  trade laws and regulations regarding the origin of the goods exported to the  United States.  If problems are found, CBP uses that information to target  shipments (entries) entering the United States for possible detention and  exclusion.  CBP targeted 2,482 shipments in 2002.  CBP has begun to target  high-risk importers’ shipments for review while also conducting internal  audits of selected importers.  Figure 2 shows the general process CBP uses  to target suspicious activity.
Before the beginning of each fiscal year, CBP analyzes trade and  production data, as well as other available intelligence, to assess the  relative risk of each major U.S. trade partner for engaging in illegal textile  transshipment.  CBP generally identifies 16 countries a year on average as  being at high risk for transshipment or other trade agreement violations  and updates its assessment at least once during the fiscal year.  The risk  level (high, moderate, or low) is based largely on the volume of trade in  sensitive textile categories, such as certain types of knit apparel and fabric,  and the likelihood of transshipment through that country.  For example, as  of November 1, 2003, quotas on men and women’s knit shirts and blouses  were approximately 80 percent or more filled for China, India, and  Indonesia.  This situation creates an incentive for producers in those  countries concerned that the quotas will close before the end of the year to  transship their goods.  CBP may increase its monitoring of trade in these  products through neighboring countries.  The likelihood of transshipment  is a qualitative judgment that CBP makes based on available intelligence.
Countries with high production capabilities and subject to restrictive  quotas and tariffs, such as China, India, and Pakistan, are considered  potential source countries.  These countries could produce and export to  the United States far more textile and apparel products than U.S. quotas  allow.  Countries that have relatively open access to the U.S. market, either  through relatively generous quotas (Hong Kong and Macau) or trade  preferences programs (Central America and the Caribbean, and sub- Saharan Africa) are considered potential transit points for textile  transshipment.  CBP focuses its efforts on targeting and reviewing goods  from these transit countries rather than source countries because any  evidence that goods were actually produced elsewhere, such as closed  factories or factories without the necessary machinery to produce such  shipments, would be found in the transit country.
After selecting the high-risk countries, CBP then selects a subset of these  countries to visit during the year to conduct TPVT factory visits.  During  the past 4 years, CBP conducted 42 TPVT visits to 22 countries.  Cambodia,  Hong Kong, Macau, and Taiwan in Asia, and El Salvador in Latin America  received three or more visits between 2000 and 2003.  Table 1 shows the  U.S. trade partners that CBP visited on a TPVT trip in those years, along  with their share of U.S. imports of textile and apparel products in 2002.   For some U.S. trade partners, their share of overall textile and apparel  trade may be relatively low, but for certain products they are significant  suppliers.  For example, although Thailand is the tenth largest supplier  overall, it is the fifth largest supplier of cotton bed sheets.
The number of countries CBP visits each year has varied, but from 1996  through 2003 CBP visited 11 countries per year on average.  Although the  overall size of trade is an important factor in targeting countries, CBP also  looks at a range of information in making its determination.  For example,  several relatively small suppliers, such as Nicaragua, Swaziland, and  Botswana, were visited because they receive special preferences as  developing countries.  Also, Vietnam, which only accounted for about 1  percent of U.S. imports in 2002, was selected partly due to trade anomalies  occurring during a period when Vietnam’s quota-free access to the U.S.  market made it a potential transit country. Figure 3 describes the case of  Vietnam as an example of the role and limitations of the targeting process.   However, Canada and Mexico are both top U.S. trade partners and  designated as high-risk countries, but CBP has not made any TPVT visits.   Under the NAFTA, producers in these countries are subject to visits to  verify NAFTA eligibility.  However, these visits do not focus on  transshipment specifically and although CBP has sought to send a TPVT  visit to Canada, it has not yet been successful in persuading the Canadian  government.
CBP targets about 45 factories on average per country visit, although this  number varies depending on the characteristics of each country.  For  example, the proximity of factories to one another and the length of trip (1  to 2 weeks) will affect the number of factories that can be visited.  The  importance of the trade partner in U.S. textile and apparel trade will affect  the length of the trip and number of factories targeted.  On the November  2003 Hong Kong TPVT trip, for example, CBP visited over 200 factories.   Before undertaking a TPVT visit in a foreign country, CBP conducts a  special targeting session to identify the manufacturers in that country that  it suspects may be involved in textile transshipment.  Similar to its  targeting of countries, CBP import and trade specialists consider the recent  trade flows, available intelligence, experience from past factory visits, and  reviews of merchandise at U.S. ports in order to narrow down from the  total list of factories in the country to a list of the highest-risk factories that  they will target for a visit.  The process involves collaboration between  the STC trade specialists, the port-level import specialists that will travel to  the factories, and headquarters staff.
During the past 4 years, CBP found that about half the manufacturers that it  targeted as high risk were actually found by TPVT visits to have serious  problems.  These problems included actual evidence of transshipment,  evidence that indicated a high risk of potential transshipment, permanently  closed factories, and factories that refused admission to CBP officials.   Each of these problems is considered a sufficient reason to review and  detain shipments from these factories as they reach U.S. ports.  In addition,  some factories were found to warrant additional monitoring by the STC.   They were listed as low risk and their shipments were not targeted for  review when they reached U.S. ports.
Although the share of targeted factories found to have problems is  relatively high, the factories that CBP targeted were those that generally  had some indication of risk, based on intelligence or trade data analysis.  Also, the targeted manufacturers that were visited (about 1,700) during the  4-year period generally make up a small share of the total number of  manufacturers in each country.  However, for smaller trade partners, such  as those that receive trade preferences under the Caribbean Basin Trade  Partnership Act (CBTPA) or African Growth and Opportunity Act (AGOA),  CBP can visit a sizable share of the factories within the country because  their overall number of factories is smaller.  For El Salvador and Nicaragua,  CBP has visited about 10 percent of the factories, and for Swaziland and  Botswana, CBP has visited about 22 and 28 percent of the factories,  respectively.
Due to the small share of factories that CBP can actually visit, the STC says  it is developing evaluation tools to improve CBP’s process of targeting  foreign manufacturers for TPVT visits.  Currently, the STC tracks the  number and results of the TPVT visits in order to assess whether the  targeted factories were actually found to have problems by the TPVT visits.   CBP says it is developing a database to keep track of the specific criteria it  used to target manufacturers for TPVT visits.  It plans to use the results of  the TPVT visits to identify which criteria were most useful in its targeting  process.
subsections: section_title: CBP Identified More Than 2,400 Shipments in 2002
paragraphs: In 2002, CBP identified 2,482 high-risk shipments (entries) for greater  scrutiny or review—less than one-tenth of 1 percent of the more than 3  million textile and apparel entries that year.  CBP actually reviewed 77  percent of the shipments that were identified.  Of the shipments reviewed,  about 24 percent resulted in exclusions from U.S. commerce, 2 percent in  penalties, and 1 percent in seizures.  To choose shipments for review, CBP  headquarters uses information collected from TPVT factory visits as well as  other intelligence information to create criteria for its targeting system.   When shipments match these criteria, they are flagged at the ports for a  review.  For instance, when a TPVT visit finds that a foreign factory has  been permanently closed, CBP will place this information in its automated  system to be used as criteria for targeting any shipments destined for entry  into the United States that claimed to have been produced in that factory.   In addition, other information such as prior shipment reviews or  intelligence information concerning possible illegal activity by  manufacturers, importers, or other parties can be entered as criteria to stop  shipments.  Criteria can be entered nationally for all ports, or individual  ports can add criteria locally that only affect shipments to their own port.
section_title: CBP Identifies High-Risk Importers for Review and Audit
paragraphs: CBP has recently begun to increase targeting of U.S. importers of textile  and apparel products who demonstrate patterns of suspicious behavior.   For example, CBP identified more than 40 importers in the past year who  have a pattern of sourcing from foreign manufacturers involved in  transshipment.  According to CBP officials, they can pursue penalties  against these companies, because this pattern of behavior may violate  reasonable care provisions of U.S. trade laws.  CBP also uses this  information and other intelligence it collects to target for review shipments  that these importers receive.  In addition to this targeting, CBP’s Regulatory  Audit division has traditionally conducted internal control audits of  importers, and it uses a separate targeting process to identify the importers  that it will audit.  One component of its audits focuses on whether the  importer has and applies internal controls for transshipment.  The STC has  also provided information about the companies it targets to Regulatory  Audit for its own investigations or audits.
section_title: Number of Targets Identified Is Limited by CBP Resource Constraints
paragraphs: Although CBP’s textile transshipment strategy relies on targeting, resource  constraints limit both the number of targets that CBP generates and the  type of targeting analysis that CBP can conduct.  First, the number of  foreign factories and shipments targeted is limited by the ability of CBP to  conduct the reviews.  As previously discussed, CBP is able to visit only a  small share of the foreign factories exporting textile and apparel products  to the United States. The results of these visits then provide key  information for targeting shipments for review as they arrive at U.S. ports.   Similarly, CBP targets only a small share of textile and apparel shipments  to U.S. ports for review.  CBP officials with whom we met said CBP limits  the number of shipments it targets for port reviews because port staff are  unable to effectively examine a significantly larger number of shipments.
In addition to resource constraints due to security (previously discussed),  reviewing shipments for textile transshipment is labor intensive and  involves more than a simple visual inspection of the merchandise.  Unlike  cases involving narcotics in which physical inspections alone can lead to  discovery of the drugs, physical inspections of textile or apparel products  rarely provide sufficient evidence of transshipment.  Port staff generally  needs to scrutinize detailed production documentation, which is time  consuming, to determine a product’s origin and assess the likelihood of  transshipment.
Second, staff constraints restrict the extent to which CBP can utilize and  develop its targeting process. As of December 2, 2003, the STC had 25  percent of its staff positions unfilled (3 out of 12 positions), while its  responsibilities are growing as trade agreements are increasing.  For each  new trade agreement, STC staff monitor trade and investment patterns to  detect whether anomalies are developing that should be targeted.   Consequently, CBP officials said that resource constraints have meant that  several types of analysis that the STC planned on conducting have either  been delayed or not conducted at all.  These included analyses of high-risk  countries, improvements to existing targeting processes, and studies of  alternative targeting techniques.  Despite these resource limitations, CBP  and the STC, in particular, have made regular improvements to the  targeting process.  For example, CBP’s targeting of countries and  manufacturers for TPVT visits has become more systematic, relying on  trade data and other intelligence to select factories for visits.
section_title: CBP Has Adapted Textile Review Activities to Changing Environment but Faces Further Challenges
paragraphs: CBP has consolidated textile functions at headquarters and has adapted  textile review activities at the ports to changing resource levels.  In  response to national security priorities, CBP inspectors at the ports are  being shifted to higher-priority duties, leaving import specialists at the  ports to play the critical role in making decisions on excluding or seizing  illegal textile shipments. CBP now relies on TPVT visits as an essential part  of its targeting process, but CBP has not always finalized these TPVT  results and provided them to CBP ports, CITA, and the foreign governments  for follow-up in a timely manner.  With the expiration of the WTO global  textile quota regime in 2005, CBP will lose its authority to conduct TPVTs in  the former quota countries, and supplementing the enforcement  information provided to the ports will be important.  Information from  overseas Customs Attaché offices and cooperative efforts with foreign  governments can provide additional important information for port  inspections.
subsections: section_title: CBP Has Consolidated Its Textile Activities Amid National Security Priorities
paragraphs: CBP has moved most textile functions into a single headquarters division to  foster a coordinated agency approach to monitoring textile imports and  enforcing textile import laws, but it must still depend on its port staff to  identify and catch illegal textile transshipments.  As CBP inspectors are  shifted to higher-priority functions, such as antiterrorism and drug  interdiction efforts, import specialists at the ports are playing an  increasingly central role in scrutinizing the growing volume of textile  imports.  They review the entry paperwork for all textile imports covered  by quotas or needing visas in order to exclude shipments that are  inadmissible or to seize those that are illegal, according to port officials.   However, resource constraints at the ports have forced them to depend  increasingly on STC targeting, results of TPVTs, and information from  headquarters to identify suspect shipments and enforce textile laws.
subsections: section_title: CBP Has Centralized Textile Transshipment Activities, but Ports Still Key
paragraphs: In 2001, CBP consolidated oversight of most of its textile operations into  one headquarters division in the Office of Field Operations, creating the  Textile Enforcement and Operations Division.  One important exception to  that consolidation was the Textile Clearinghouse in the New York STC,  which remained in the Office of Strategic Trade.  The Textile Enforcement  and Operations Division is responsible for monitoring and administering  textile quotas; providing technical input to textile negotiations; overseeing  implementation of textile import policies at the ports; and for planning,  reporting, and following up on TPVT visits.  It uses the results of targeting  by the STC, the findings of the TPVTs, and input from the ports to oversee  the daily implementation of textile policy at the ports.  It also works with  CITA, the domestic textile industry, the importing community, and the  Bureau of Immigration and Customs Enforcement (BICE).
Notwithstanding this, the critical point in identifying and preventing  illegally transshipped textiles from entering the United States is at the  ports.  There are more than 300 CBP ports across the country—including  seaports, such as Los Angeles/Long Beach, California; land border  crossings for truck and rail cargo such as Laredo, Texas; and airports  handling air cargo such as JFK Airport in New York, New York.  The top 10  of 42 CBP service ports that processed textile imports accounted for about  75 percent by value of all shipments in 2002, according to the official trade  statistics of the Commerce Department.  The key staff resources for textile  enforcement at the ports are the inspectors and the import specialists.
Figure 4 provides an overview of CBP’s textile monitoring and enforcement  process, including targeting, port inspections, and penalty investigations.   The figure also provides data for the results obtained at each stage of the  process in 2002.  CBP processed about 3 million entries in that year, with  2,482 entries triggering targeting criteria, of which 981 entries were  detained, 455 excluded, and 24 seized. (2,482 hit targeting criteria in 2002)
Entry seized (24 entries,  (1,908 entries, 77 percent of targeted)
1 percent of targeted) (981 entries, 40 percent of targeted)
Civil investigation and case (71 CBP cases; 45 penalties) (455 entries, 18 percent of targeted)
At any point in the review or detention of an entry,  entry can either be released into commerce or  seized, depending on the circumstances.
As national security and counternarcotics concerns have become CBP’s top  priorities, CBP inspectors’ roles have shifted away from textile and other  commercial inspection. The result is that, even at the larger ports, fewer  CBP inspectors are knowledgeable about a specific commodity, such as  textiles. These inspectors now have less time and expertise to inspect  textile shipments.  For example, at all but one of the ports we visited,  inspectors were mainly pulling sample garments from shipments for import  specialists to examine rather than acting as an additional, knowledgeable  source on textiles who could do a first level of review.
As a result, the import specialists have become more critical in preventing  textile transshipment.  About 900 import specialists work at the ports, of  which approximately 255 are assigned to work on textiles, according to a  senior CBP official.  These specialists have always been central to  determining whether illegal textile transshipment has occurred, because  visual inspection is usually not sufficient.  While physical clues such as cut  or resewn labels can provide an indicator that a garment should be further  examined, in many cases nothing about the garment itself indicates that a  problem exists.  To establish textile transshipment, import specialists must  request production documents from the importer (who, in turn, requests  them from the manufacturer) and review them to see if they support the  claimed country of origin.  This is a highly complex, technical, and labor- intensive process.
Import specialists (or at some ports, entry specialists or inspectors) review  the basic entry paperwork for all textile shipments arriving at the ports that  are covered by quotas or need visas.  They will place a hold on a textile  shipment: 1. if there are “national criteria,” that is, if headquarters has entered an  alert in the Automated Commercial System (ACS), CBP’s computer  system for imports, based on targeting, TPVT findings, and other risk  factors, to detain all shipments from that manufacturer or to that  importer and request production documents;  2. if there are “local criteria,” that is, the port has entered an ACS alert  based on concerns particular to that port;  3. if the port has conducted its own targeting on shipments arriving at the  port and found questionable entries;  4. if there are abnormalities in the paperwork that warrant further review;  or 5. if there is other information that may be provided by domestic industry,  the Office of Textiles and Apparel at the Commerce Department, CITA,  foreign governments, or informants.
In most cases, shipments with national criteria will automatically be  detained, a sample pulled from the shipment, and production verification  documents requested.  For shipments held due to local criteria, port  targeting, abnormalities, or other information, the import specialist may  request that the CBP inspectors pull a sample from the shipment, which  must be done within 5 days.  The import specialist examines the sample  garments and determines whether shipments being held can be released or  require further review.  If further review is warranted, they detain the  shipment and send the importer a detention letter, in which they ask the  importer to provide the production verification documentation for an in- depth review.  CBP must receive and review the documents within 30 days,  or the shipment is automatically excluded.
Based on the in-depth review of the documentation, the import specialist  decides whether to release the goods into commerce, exclude them if  found to be inadmissible, or seize them if found to be illegal.  Goods are  inadmissible and are denied entry when the importer has not provided  sufficient information to substantiate the claimed country of origin or if  documents required for entry have not been provided.  Goods may be  seized when the import specialist has evidence that the law has been  broken; this requires a higher level of evidence than exclusion.
section_title: Port Staff Review “National Criteria” Shipments but Have Less Time for Local Monitoring
paragraphs: In the post-September 11, 2001, environment, the ports have become more  likely to rely on national criteria.  At all of the ports we visited, CBP  officials said that, in response to national criteria in ACS for textile  shipments, they will detain all such shipments and request production  documents.  However, only a few large ports that handle a high level of  textile imports, such as Los Angeles/Long Beach and New York/Newark,  have been able to do much proactive local targeting.  At most of the other  ports, officials said that they do as much local criteria or targeting as they  can but rarely get the spare time to do very much.  CBP data support these  statements.  While national criteria accounted for about 75 percent of  inspections in 2002, local criteria and self-initiated reviews accounted for  25 percent.  Further, local criteria and self-initiated reviews had declined by  half, from 2000 to 2002; and most of the local criteria in 2002 were  generated by the ports in Los Angeles and New York.
According to a senior CBP official, headquarters directs the input of  national criteria to improve communications to the ports and foster greater  uniformity of response and action by all affected ports.  National criteria  are continually tracked, analyzed, and adjusted as appropriate.  One reason  is that smaller ports have fewer import specialists; and in some cases, no  import specialists are dedicated to specific commodities.  In some ports,  the import specialist is responsible for the entire range of products that can  enter the country.
section_title: TPVTs Are Critical to Enforcement, but Follow-up Reporting Is Not Always Timely
paragraphs: TPVTs are a critical enforcement tool, and the conduct and reporting of  TPVT visits have been made more uniform and rigorous in recent years.   However, while the TPVT reports are an important part of the targeting  process, they are not always provided in a timely manner to CBP ports,  CITA, and the foreign governments.
subsections: section_title: TPVT Process Triggers Port Textile Reviews
paragraphs: TPVTs are critical to enforcement because the ports increasingly depend  on the national criteria that headquarters supplies to trigger enforcement.   These national criteria primarily result from STC targeting and the findings  of the TPVTs conducted in high-risk countries.  Additionally, CBP may  receive enforcement information provided by a foreign government or  other sources.
The TPVT process has two main objectives: (1) to verify that the  production capacity of the factory matches the level and kind of shipments  that have been sent to the United States and (2) to verify production of the  specific shipments for which they have brought copies of the entry  documents submitted to CBP.  If a factory is closed, refuses entry, or the  team finds evidence of transshipment, the team immediately notifies  headquarters so that national criteria can be entered into ACS.  Any further  shipments from the closed factories will be excluded.  Shipments from  factories refusing entry or found to be transshipping will be detained, and  importers will be asked for production verification documents.  If a factory  is deemed to be at high risk for transshipment, but no clear evidence has  been found, CBP has generally waited until the TPVT report is approved  before entering the criteria.  Figure 5 shows a TPVT team verifying  production in El Salvador textile factories.
TPVT report drafting and approval involves several steps.  First, the import  specialists on the team write the initial draft of their TPVT results report  while in country. When the team members return to their home ports, the  team leader completes the report and forwards it to headquarters, where it  is reviewed, revised, and finally approved by CBP management.  Once the  TPVT report is approved, the remaining national criteria for the high-risk  factories are entered into ACS.
section_title: TPVT Follow-Up Is Not Always Timely
paragraphs: CBP’s standard operating procedures for TPVTs, dated September 21, 2001,  state that the TPVT team leader should finalize the reports within 21  calendar days after completing the trip and get headquarters approval  within 2 weeks afterwards, or 5 weeks total.  However, when we examined  the approval timeline for TPVT reports during the past 4 years, we found  that, in practice, report approvals have averaged 2.3 months, or almost  twice as long as the procedural requirement.  For example, the El Salvador  TPVT we observed was conducted from July 21 through August 1, 2003, but  headquarters did not approve the TPVT report until October 20, 2003.
More importantly, during such interim periods, although national criteria  have been identified for high-risk factories, they are generally not entered  into ACS until the report is approved within CBP.  The result is that  questionable shipments for which criteria are intended can continue to  enter commerce for another 2.3 months on average.  From 2000 to 2003, an  average of 37 percent of TPVT-generated criteria were for high-risk  factories.  This means that import specialists at the ports may not see more  than a third of the criteria for about 2.3 months after the TPVT visits.  At  that time, if examination of these high-risk factories’ production  documents show transshipment of textiles during the interim period, the  import specialists will not be able to exclude these shipments, because  they will have already entered commerce.  Instead, import specialists will  have to ask for redelivery by the importer to the port.  At that point, most  garments will likely have been sold.  Although, according to CBP, it can  charge the importer liquidated damages for failure to redeliver, additional  transshipped garments will have entered commerce nevertheless.
section_title: CITA Uses TPVTs to Generate Information Exchange with Foreign Governments
paragraphs: The TPVT reports are also sent to CITA and trigger another set of actions in  the textile enforcement process.  If the TPVT cannot verify the correct  country of origin in all shipments being investigated, then CITA will ask the  foreign government to investigate, which also provides it with an  opportunity to respond before CITA takes an enforcement action.  CITA’s  goal is to get foreign governments to monitor and control their own  plants—essentially to self police.  According to a CITA official, if the  government does not provide a satisfactory response, CITA is then  obligated to direct CBP to exclude the illegal textiles.
When CBP provides CITA with information that the TPVT (1) was refused  entry to the factory, (2) found evidence of textile transshipment, or (3)  found the factory was unable to produce records to verify production, CITA  will send a letter to the foreign government requesting that it investigate  whether transshipment has occurred and report back to CITA.  The  foreign government has 30 days to respond; if there is no response, CITA  can also direct CBP to block entry of that factory’s goods, generally for 2  years.  In such cases, CBP ports do not even have to review production  documents first; the goods will be denied entry.  Notice of this prohibition  is published in the Federal Register to inform U.S. importers.
When CITA sends a letter to the foreign government, CITA officials said  that most governments respond with an investigation of the manufacturer.   Sometimes governments penalize the factory with a suspended export  license, or they report back that the factory has closed.  As long as they are  taking steps to prevent further transshipment, CITA is satisfied, according  to CITA officials.
CITA officials stated that TPVT reports are essential to CITA’s efforts to  address illegal transshipment and that CBP has made progress in providing  CITA, through the TPVT reports, with useful information to identify suspect  factories and to determine the nature and extent of illegal transshipment.   However, CITA officials continue to seek improvement in these reports, in  particular for the reports to contain factual, verifiable information with  definitive conclusions regarding whether a visited factory is involved in  illegal transshipment and for this information to be provided clearly and  concisely.  While CITA officials acknowledged that it may be extremely  difficult to CBP to find a “smoking gun” necessary to make this type of  conclusion, CITA officials believe that increased clarity and more definitive  conclusions are possible.  Also, delay in receiving the reports hamper  prompt action by CITA, and CBP in many instances does not advise CITA of  follow-up action it has taken against factories that the CBP found to be  unable to verify production or otherwise suspect.
A CITA official estimated that about one-half to three-quarters of TPVTs  result in CITA letters.  He estimated that CITA sent about six to seven  letters between October 2002 and October 2003.  Overall, CBP’s TPVTs  and TPVT reports are more geared toward providing CBP with national  criteria, as recognized by a CBP official.  However, CITA officials said that  they need more detailed evidence to better support CITA enforcement  actions.
section_title: Information from Attaché Offices, Cooperation of Foreign Governments Crucial
paragraphs: CBP faces further challenges to which it must adapt with the expiration of  the Agreement on Textiles and Clothing—the global textile quota regime— on January 1, 2005.  The end of the quota regime will mean that the United  States will also lose its authority under that agreement to conduct TPVTs in  former quota countries, unless customs cooperation provisions with the  foreign governments are renewed. CBP has other means by which it can  supplement the enforcement information it receives from targeting and  TPVTs, including placing import specialists in overseas Customs Attaché  offices in high-risk countries and obtaining greater foreign government  cooperation.
subsections: section_title: End of Global Quota Regime Could Affect CBP’s Cooperation with Foreign Governments
paragraphs: Finding means of supplementing the enforcement information provided to  CBP ports will be critical once the global textile quota regime, embodied in  the WTO Agreement on Textiles and Clothing, expires on January 1, 2005.   The numerous U.S. bilateral quota agreements with WTO-member textile  exporting countries were all subsumed in the global regime.  The textile  enforcement provisions in these agreements provided the authority for  CBP to conduct TPVTs.  All of these provisions will expire together with  the global textile quota regime. CBP will have continued authority to  conduct TPVTs in countries with free trade agreements and preference  agreements (such as the Caribbean Basin Trade Preference Act), as well as  in non-WTO countries whose bilateral quota agreements will not expire  (such as Vietnam).
However, certain incentives for transshipment will continue to exist.  For  example, special provisions that apply to imports of Chinese textiles have  recently been invoked under the safeguard provision of China’s Accession  Agreement to the WTO to limit growth of imports of certain textile  categories.  The safeguard provision allows individual categories of  textiles to remain under quota for up to an additional 12 months, if the  domestic industry petitions CITA for relief and CITA affirms the petition.   The petition must establish that imports of Chinese origin textiles and  apparel products are threatening to impede the orderly development of  trade in these products, due to market disruption.
The U.S. government currently maintains a Memorandum of Understanding  with Hong Kong under which customs cooperation has been conducted.   Given the possibility of additional safeguard quotas being imposed on  Chinese textiles after the global quota regime expires, it will be critical that  U.S.-Hong Kong customs cooperation continues.  However, the United  States does not have such memorandums of understanding with other high- risk countries in the region, such as Taiwan, Macau, and Bangladesh.  CBP  will no longer have the authority to conduct TPVTs in these high-risk  countries unless customs cooperation agreements are renewed.
section_title: CBP Has Other Possible Means to Supplement Its Enforcement Information
paragraphs: CBP has sought to supplement the enforcement information it receives by  placing some import specialists in overseas Customs Attaché offices in  high-risk countries and by obtaining greater foreign government  cooperation.  CBP started sending import specialists to its overseas  Customs Attaché offices in 2000.  The reason for this effort was that most  staff in the Customs Attaché offices were special agents who were criminal  investigators and had no trade background.  Import specialists were to  provide this missing trade experience.  CBP identified the countries that  would most benefit from having an import specialist in the Attaché office,  and by November 2003, six import specialists were assigned to Canada,  Hong Kong, Japan, Mexico, Singapore, and South Africa.
A CBP official said that the import specialists are assisting with providing  information.  They have been able to help in following up on TPVT findings.   They also have been useful in uncovering counterfeit visa cases in which  fake company names and addresses are given in import documents.  If  more import specialists were in Customs Attaché offices in high-risk  countries to assist with textile monitoring and enforcement, additional  benefits would result, according to the CBP official.  In between TPVT  visits, they would be able to assist the targeting effort with activities such  as checking to see whether a particular factory really exists or has the level  of capacity claimed.  They could also verify factory addresses and  licensing.  Finally, they would be able to facilitate cooperation and  coordination with the foreign government on textile transshipment issues,  including conducting training on transshipment prevention.
Another means by which CBP can also supplement the enforcement  information it receives is by encouraging foreign government cooperation  and self-policing.  A good example of such an arrangement is CBP’s present  relationship with Hong Kong customs authorities.  The Hong Kong Trade  and Industry Department has established an extensive system for  regulating Hong Kong’s textile industry, which it enforces together with the  Customs and Excise Department.  Hong Kong officials work closely with  the U.S. Customs Attaché Office in Hong Kong and CBP’s Textile  Enforcement and Operations Division at headquarters.  Hong Kong also  provides self-policing assistance to CBP.  Hong Kong officials conduct  follow-up investigations on findings by the TPVTs, called Joint Factory  Observation Visits in Hong Kong, which have resulted in numerous  cancelled or suspended export licenses.  Hong Kong officials have also  actively prosecuted and convicted individuals violating Hong Kong’s textile transshipment laws. As it is a matter of public record, CBP gets the names  of those companies that have been convicted of violations. Macau and  Taiwan also provide CBP with such information.  CBP creates national  criteria for these manufacturers, and the ports would detain any future  shipments for production verification documentation.  Figure 6 shows the  high volume of commercial traffic coming into Hong Kong from Shenzhen,  China, at the Lok Ma Chau Control Point.
However, it is not clear whether many other high-risk countries have the  capacity to self-police.  In some countries, customs authorities may be  constrained by domestic laws that either limit their authority or do not  extend sufficient authority to adequately enforce textile transshipment  provisions in their bilateral agreements with the United States.  For  example, government officials in El Salvador said that they do not have the  same authority that U.S. CBP has in requesting production documentation  from Salvadoran factories, because such authority is not provided in their  customs laws. Such lack of authority was also an issue that USTR  addressed when it negotiated the U.S.-Singapore Free Trade Agreement  (FTA), finalized in 2003.  CBP, which is a technical advisor to such  negotiations, encouraged the addition of a provision to require the  government of Singapore to enact domestic legislation that provided the  authority needed to fully enforce the agreement’s textile transshipment  provisions.
The United States is currently negotiating numerous new FTAs.  As with the  Singapore FTA negotiations, USTR may be able to include such provisions  in new FTAs, providing an opportunity for the United States to buttress  textile transshipment enforcement provisions and enhance the ability of  foreign governments to conduct more effective self-policing.  Such  provisions have generally been included in the FTAs negotiated since  NAFTA, according to a senior CBP official.
section_title: Weak Internal Controls Hinder Effectiveness of CBP’s In-bond System
paragraphs: CBP uses its in-bond system to monitor cargo, including foreign textiles,  transiting the U.S. commerce or being exported to a foreign country.   However, weak internal controls in this system enable cargo to be illegally  diverted from the supposed destination, thus circumventing U.S. quota  restrictions and duties.  At most of the ports we visited, CBP inspectors we  spoke with cited in-bond cargo as a high-risk category of shipment because  it is the least inspected and in-bond shipments have been growing.  They  also noted that CBP’s current in-bond procedures allow too much reliance  on importer self-compliance and that little actual monitoring of cargo using  this system takes place.  Lack of automation for tracking in-bond cargo,  inconsistencies in targeting and examining cargo, in-bond practices that  allow shipments’ destinations to be changed without notifying CBP and  extensive time intervals to reach their final destination, and inadequate  verification of exports to Mexico hinder the tracking of these shipments.   Although CBP has undertaken initiatives to tighten monitoring, limitations  continue to exist.  These limitations pose a threat not only to textile  transshipments but also to other areas related to national security.  Without  attention to this problem, enforcement of national security, compliance  with international agreements, and proper revenue collection cannot be  ensured.
subsections: section_title: In-bond System Designed to Expedite Flow of Commerce
paragraphs: To expedite the flow of commerce into the United States, Congress   established in-bond movements to allow cargo to be transported from the  port of arrival to another U.S. port for entry into U.S. commerce or for  export to a foreign country.  Cargo can be transported in several ways  using the in-bond system.  When a vessel arrives with containers, an  importer may elect to use the in-bond system to postpone payment of taxes  and duties while moving the goods from the original port of arrival to  another port.  By doing this, the importer delays paying duties until the  goods are closer to their ultimate destination—for example, goods arriving  by ship in Los Angeles may transit the country and ultimately be inspected  and have duties levied in Chicago.  Or goods may pass through the United  States on their way to another destination, such as goods that are  transported from Los Angeles to Mexico or from Canada to Mexico.
There are three types of in-bond movements:  Immediate transportation (I.T.). This is merchandise that is moved  from one U.S. port to another for entry into U.S. commerce.
Transportation and exportation (T&E).  This is merchandise “in  transit” through the United States.  Export to another country is  intended at the U.S. destination port.
Immediate exportation (I.E.).  This is merchandise exported from the  port at which it arrives in.
Once the shipment leaves the port of arrival, the bonded carrier has 30  days to move the merchandise to the U.S. destination port.   Upon arrival at  the destination port, the carrier has 48 hours to report arrival of  merchandise.  The merchandise must then be declared for entry or  exported within 15 days of arrival (see fig. 4).
section_title: Use of the In-Bond System Growing Rapidly
paragraphs: Based on responses from our survey of 11 of 13 major area ports, the use of  the in-bond system as a method of transporting goods across the country  nearly doubled from January 2002 through May 2003.  For our study, we  surveyed the 13 ports across the country that process the largest amount of  textiles and apparel and asked them about in-bond operations at their port.   Figure 7 shows the increase in in-bond shipments processed in the past 17  months at 11 of these ports.  From January 2002 through May 2003, in- bond entries increased 69 percent.  A recent study on crime and security at  U.S. seaports estimated that approximately 50 percent of all goods entering  the United States use the in-bond system and projects that this figure will  increase.
Based on our survey, the top three U.S. ports that were the most frequent  reported destinations for in-bond shipments from October 2002 to May  2003 were Miami, New York, and Los Angeles.  In-bond entries comprised a  significant portion of the total entries for these ports, with 58.2 percent of  total entries in Miami, 60 percent in New York, and 45.9 percent in Los  Angeles.   For goods arriving at the Los Angeles-Long Beach seaport, the  top three intended in-bond destination ports for fiscal year 2002 were  Chicago, New York, and Dallas-Fort Worth, Texas.
section_title: In-bond System May Facilitate Textile Transshipment
paragraphs: Many officials at the ports we surveyed expressed concern in their  responses over the growth of in-bond shipments and their lack of  additional resources to examine and track these shipments.  In addition,  some port officials we spoke with also expressed concern that the in-bond  system is increasingly being used for diverting goods that are quota  restricted (such as textiles) or that have high duty rates.
One example of how illegal in-bond diversion occurs is when textile  shipments arrive by vessel at Los Angeles and are transported by truck to a  port such as Laredo, Texas, where the carrier (trucking company) may  declare immediate exportation to Mexico (see fig. 5).     However, instead of  exporting the goods to Mexico, they are shipped to another U.S. location  for sale.  This can occur because CBP relies heavily on importer  compliance, and it requires only that carriers drop off paperwork showing  exportation, without actually requiring physical inspection of the cargo.
CBP and BICE presently have ongoing investigations to address the  problem of illegal diversion of in-bond merchandise.  For example, a 2003  in-bond diversion investigation found that 5,000 containers of apparel were  illegally imported, thus avoiding quota restrictions and payment of $63  million in duties.  Between May 2003 and October 7, 2003, the ports of Long  Beach and El Paso made 120 seizures with cases involving a textile in-bond  diversion smuggling scheme. The total domestic value for these goods was  more than $33 million.  Table 2 shows the number of in-bond cases and the  penalty amounts assessed by CBP for the past 3 fiscal years.  Total penalty  amounts assessed were more than $350 million.
section_title: In-bond System Lacks Automation and Critical Information to Properly Monitor Cargo Movement
paragraphs: At present, CBP lacks a fully automated system that can track the  movement of in-bond transfers from one port to another.  Much shipment  information must be entered manually—a time-consuming task when  thousands of in-bond shipments must be processed every day—and as a  result, recorded information about in-bond shipments is minimal and  records are often not up to date.   In addition, in-bond arrival and departure  information recording is not always timely; and according to our survey  results, insufficient cargo information, along with a lack of communication  between U.S. ports about in-bond shipments, makes it difficult for ports of  destination to monitor cargo and know the number of in-bond shipments to  expect.  CBP has begun to automate its in-bond system but concerns  remain.
subsections: section_title: Under Current CBP Procedures, In-bond Shipments Transit with Minimal Information Provided to CBP
paragraphs: By definition, an in-bond movement is entry for transportation without  appraisement. CBP collects significantly less information on in-bond  shipments than regular entries that are appraised.  While CBP has the  ability to collect additional information for textile products, our survey  results show that very little information is collected by CBP for in-bond  shipments in general.
To process an in-bond shipment, all in-bond paper transactions require a  Customs Form 7512, Transportation and Entry form.  This form is filled out  by brokers and submitted to the port of arrival.  According to many in-bond  personnel responding to our survey, the information that is provided on  this form to allow the shipment to travel in-bond is often minimal,  capturing some, but not all, shipment manifest information, shipment data,  and carrier data.  They also responded that the information on the Customs  Form 7512 is often vague, with not enough descriptions of the commodities  shipped.  The form also lacks any invoice or visa information—information  that is critical for shipment targeting.  This lack of information causes  difficulty in tracking.  Without this information, CBP is unable to effectively  track in-bond shipments.
In-bond shipments of textiles or textile products have specific description  requirements. CBP regulations require that these shipments be described in  such detail as to allow the port director to estimate any duties or taxes due.   In addition, the port director may require evidence of the approximate  correctness of value and quantity or other pertinent information.   However, our survey results show that such additional information has not  been obtained in practice.
section_title: CBP’s Recording of Arrival and Departure In-bond Information Is Not Always Timely
paragraphs: In-bond data are not entered in a timely, accurate manner, according to  some port in-bond personnel we spoke with, as well as some survey  respondents.  Currently, CBP accounts for goods that initially arrive at one  CBP port (port of arrival) but are shipped immediately to the port of entry  (port of destination) through an in-bond module in CBP’s ACS.  For  automated entry forms submitted on electronic manifests, departure data  can be entered in ACS automatically showing that an in-bond transfer is  planned from the port of arrival.  For nonautomated entries  (paper), CBP  officials are supposed to input departure data manually at the port of  arrival to establish accountability for the merchandise.  When the goods  arrive at the port of destination, personnel are to input data indicating that  the goods have arrived, at which time accountability is transferred from the  port of arrival to the port of destination.
However, at three of the seven ports we visited, officials stated that the  departure and arrival information was not consistently maintained,  because personnel did not input data promptly.  As the volume of  shipments transiting via in-bond has increased, the workload for ports  across the country to enter this information has created a backlog, often  resulting in entries that are never entered into the system.  More than half  of the 29 ports we surveyed reported that between 50 and 100 percent of  their in-bond entries were paper entries.  At two of the largest ports  processing the highest volume of in-bond entries, officials reported that  more than 75 percent of the entries received were paper entries requiring  that staff manually enter information.  CBP personnel at two major ports  told us that in-bond data are often not entered into the system at the port of  arrival, because CBP lacks the personnel to enter in-bond information for  every shipment.
section_title: Communication between Ports Regarding In-bond Arrival/Departure Data Is Minimal
paragraphs: Results from our survey showed that 80 percent of the ports did not track  in-bond shipments once they left the port of arrival.  A CBP official at the  Port of Laredo, Texas, a major port of destination, said that they have no  way of knowing the number of shipments intended to arrive at their port.   Without proper communication between them, ports are unable to  determine the location of a shipment traveling in-bond until it reaches its  destination.  As a result, personnel at the port of destination were unable to  anticipate a shipment’s arrival and thereby identify and report any delayed  arrivals, because a record of departure had never been set up.  However,  some ports such as Laredo, Texas are beginning to communicate with other  ports more frequently to anticipate and track in-bond shipments.
Finally, although CBP has computer-generated reports available to identify  in-bond shipments that were not reported and closed within the required 30  days, 70 percent of ports we surveyed report that they have never used  these reports.   They said they do not do so because (1) they either did not  consider the report to be reliable or (2) they had never heard of these  reports.  Tracking overdue shipments is a critical internal control, because  it alerts CBP to shipments that never made it to their stated destinations.   Without consistent examination of overdue shipments, CBP cannot  account for in-bond shipments that failed to meet the time requirements for  delivery.
We reported these limitations in 1994 and 1997, and we made several  recommendations to CBP on improving the monitoring of in-bond  shipments.  In 1998, CBP initiated the TINMAN Compliance Measurement  Program to address some of the weaknesses noted in our 1997 report,  including the ability to generate reports to follow-up on overdue shipments.   In 2001, the Treasury Department’s Inspector General conducted a financial  management audit and found that although TINMAN resolved some of the  weaknesses found in prior audits, CBP was still unable to ensure that  goods moving in-bond were not diverted into U.S. commerce, thereby  evading quotas and proper payment of duties.  Results from our survey  show that this compliance program is not consistently implemented across  ports.
section_title: CBP Is Making Progress in Automating Its In-bond System; However, Concerns Remain
paragraphs: In March 2003, CBP launched an initiative to automate the in-bond system  with a pilot program called the Customs Automated Form Entry System  (CAFÉ’s), currently being tested at six U.S. ports. CAFÉ’s is an interim  step toward full automation.  It is intended to allow more detailed shipment  data to be entered into the system electronically, thus reducing the amount  of time personnel must spend entering shipment data.   The CAFÉ’s  program is currently voluntary, and, so far, about 8 to 10 percent of the  brokers at the pilot ports are participating.  However, according to a 2003  CBP Action Plan, all land border truck ports will be required to use the  automated in-bond system by midyear 2004.  Nevertheless, no time frame  yet exists for deploying CAFÉ’s at other locations.
Although CAFÉ’s will improve automation of the in-bond system, it will not  resolve the tracking of in-bonds until full automation occurs.  When we  spoke to CBP headquarters officials about this continuing weakness, they  stated that they had not made additional improvements to the in-bond  program, because those improvements will be made when their new  Automated Commercial Environment (ACE) computer system is rolled out.   CBP stated that it does not have a time frame for deploying the system to  fully automate in-bonds because development is still under way but it  estimated this might be accomplished within 3 years.  Without a definite  time frame, it is not clear if the automation of in-bonds will actually be  implemented.
section_title: In-bond Shipments Are Not Consistently Targeted and Examined Before Leaving the Arrival Port
paragraphs: Although all incoming cargo is targeted for national security purposes,  once the paperwork is filled out for a shipment to travel in-bond, CBP does  not generally perform any additional targeting for these shipments.  CBP  instead focuses on targeting shipments making an official entry into U.S.  commerce.  The New York STC also does not analyze information from in- bond shipments in order to perform additional targeting.   Conducting  additional targeting for in-bond is also critical because in-bond shipments  that are not identified as high-risk shipments by Container Security  Initiative may go through CBP undetected and without inspection.   Recognizing the need for targeting in-bond shipments, some ports we  surveyed responded that they have begun to target in-bond shipments.   However, targeting is not consistently performed because ports do not  have the staff to conduct targeting or exams.  Port management officials we  spoke with at two major ports stated that since the September 11 attacks,  resources have shifted to other antiterrorism areas.  In addition, because  brokers for in-bond shipments at the port of arrival provide very little  information regarding shipments, targeting of in-bond shipments is difficult  to conduct (See fig. 9 for illustration of in-bond shipment process and  points of concern).
CBP officials at most of the ports we visited cited resource constraints as a  top reason for not inspecting in-bond shipments.  For example, CBP  officials at the Los Angeles/Long Beach, California, port—one of the  busiest, with the highest volume of in-bond entries—told us that the  current understaffing does not allow examination for many in-bond  shipments.  Moreover, results from our survey showed that more than 80  percent of the 13 area ports we surveyed do not have full-time staff  dedicated to inspecting in-bond shipments.  Some ports responded that if  they had more staff dedicated to in-bond shipments, they would have a  greater ability to inspect in-bond shipments.  In addition, seven of the eight  largest ports that responded to our survey stated that inspectors dedicate  less than 10 percent of their time to in-bond inspections.   For example,  CBP officials at the port of New York/Newark said that they estimated that  less than 2 percent of in-bond entries are actually inspected.
section_title: Nature of In-bond Regulations May Make It Difficult to Monitor In-bond Shipments
paragraphs: According to several CBP in-bond personnel we spoke with at two ports,  certain provisions in the in-bond regulations make it more difficult to track  in-bond shipments.  These regulations pertain to (1) whether importers can  change a shipment’s final destination without notifying CBP and (2) the  time allowed for in-bond shipments to reach their final destination.
Under the regulations, an in-bond shipment can be diverted to any Customs  port without prior notification to CBP, except where diversions are  specifically prohibited or restricted.  For example, an importer with a  shipment arriving in Los Angeles may declare that it will travel in-bond to  Cleveland, Ohio.  However, after filing the paperwork, the importer may  then elect to change the final destination to New York, without filing new  paperwork or informing CBP.  The information provided to CBP at the port  of arrival will still state Cleveland as a final destination.  CBP has no way of  knowing where the shipment is going until and if it shows up at another  port.
For in-bond shipments of textiles or textile products, a change in  destination requires approval of CBP’s director at the port of origin.  However, officials at three ports that handle high volumes of textile in-bond  shipments said that they were either unaware of the regulation or that it  was too difficult to enforce due to the high volume of shipments they  processed.
Another problem CBP in-bond personnel mentioned in monitoring in-bond  movements is the extensive time allowed to carriers to transport  merchandise across the country.  The Tariff Act of 1930 established the in- bond system and CBP regulations set time limits at 30 days for the delivery  of merchandise at the port of destination for entry or for exportation.   Port officials stated that this time limit is excessive and may contribute to  the diversion of cargo by giving carriers too much time to move  merchandise to different locations.  Tracking would be easier if a carrier  had a more restricted time period during which brokers or carriers would  have to close out the in-bond, such as 10 to 20 days, depending on the  distance between the port of arrival and the final port of destination,  according to these CBP officials.
Mexico’s in-bond system works differently than the U.S. system.  In fact,  when we spoke with Mexican Customs officials at the port of Nuevo  Laredo in Mexico regarding illegal textile transshipment, they said that  their in-bond system could track the movement of goods more easily  because (1) importers were not allowed to change the final destination and  (2) carriers are given a certain time limit to deliver merchandise, depending  on the distance between the port of arrival and the port of destination.
section_title: Shipments Declaring Exportation to Mexico Lack Sufficient Monitoring to Ensure Actual Exportation
paragraphs: Several BICE investigations have uncovered in-bond fraud concerning  textile shipments that were allegedly exported to Mexico but instead  entered into U.S. commerce to circumvent quota and duty payment.  To  cope with this problem, BICE officials in Laredo, Texas, initiated an effort  to improve the verification of exports to Mexico by requiring that for  shipments processed for immediate exportation, brokers had to submit a  Mexican document known as a “pedimento,” as proof that shipments were  exported to Mexico.  However, these documents are easily falsified and can  be sold to willing buyers for submission to CBP, according to Laredo CBP  officials.  When we spoke with Mexican Customs officials at the Nuevo  Laredo, Mexico, port, they acknowledged that reproducing false  government pedimentos is easy to do and that it is not a reliable method for  verifying exportations.  The broker community in Laredo, Texas, also  expressed serious concerns with fraudulent activity by some Mexican  government officials.   They suspected that pedimentos were being sold by  some Mexican Customs officials to facilitate the diversion of goods into the  United States.  In fact, in August 2003, the port director of Nuevo Laredo,  Mexico, was indicted for selling false Mexican government documents for  $12,000 each.
Moreover, many ports along the U.S.-Mexican border do not have export  lots where trucks with shipments bound for Mexico can be physically  examined to ensure that the shipments are actually exported to Mexico  instead of entering the U.S. commerce.   Although export lots were  opened at one time, they have been closed at many ports as a result of  resource constraints.  When export lots were open, inspectors were able to  verify exportation because carriers were required to physically present the  truck with the shipments for inspection.
Since our review began, CBP has opened an export lot in Laredo, Texas,  and has required that all shipments declared for export to Mexico be  presented and inspected at the export lot.  However, not all ports along the  border have export lots, and Laredo in-bond personnel have noticed that as  a result many trucks were now choosing to clear their goods through those  ports without export lots.  CBP officials we interviewed in Laredo, along  with the members of the Laredo broker community, have raised this  concern and have noted the need to reopen export lots as a way to  minimize fraud.
As of October 20, 2003, a CBP directive mandated that all merchandise to  be exported should be presented for export certification.  Certification is  not to take place until the merchandise is physically located where export  is reasonably assured.  According to a senior CBP official, as a result of this  directive, ports with export facilities have reopened them or provided a  reasonable alternative such as reporting to the import facility.  He also  stated that CBP has developed plans to verify that at least a representative  sample of reported exports are actually reported.  However, officials we  spoke with at two ports are not sure whether they will have the resources  to verify every in-bond export.  A senior CBP official confirmed this  problem, saying that verification of exports might not occur during periods  of staffing constraints.
section_title: CBP Has Experienced Serious Challenges in Enforcing Textile Transshipment
paragraphs: CBP has broad enforcement authority regarding illegal textile  transshipment, but it has experienced challenges in implementing  enforcement actions.  These challenges include a complex and lengthy  investigative process, as well as competing priorities.  As a result of these  challenges, CBP generally has relied on excluding transshipped textiles  from entry into the United States, rather than seizing merchandise or  assessing penalties.  In addition, addressing in-bond violations presents  special challenges due to weaknesses in CBP’s internal controls and in the  nature of the penalty structure.  CBP also employs other means to deter  illegal transshipment, such as informing the importer community of  violations of textile transshipment laws and by making available lists of  foreign violators.
subsections: section_title: CBP Has Extensive Authority to Address Textile Transshipment Violations
paragraphs: CBP has broad authority to act when violations of textile transshipment  occur.  Depending on the circumstances, CBP may pursue the following  enforcement actions:    Exclusion of the textile shipment.  CBP can exclude textiles from entry  if the importer has not been able to prove country of origin.  Before  admitting goods into the United States, CBP may ask for production  records, review them, and then make a determination on origin.  The  importer must be able to prove the textiles’ country of origin.  If CBP  cannot clear the goods within 30 days, the textiles are automatically  excluded.  CBP may also deny entry of textiles if production documents  reveal that the textiles were produced at a factory identified in the  Federal Register by the Committee for the Implementation of Textile  Agreements, as discussed below.
Seizure of the textile shipment.  CBP can seize the textiles, if it has  evidence that violations of a law have occurred. By law, seizure is  mandatory if textiles are stolen, smuggled, or clandestinely imported.    In other instances, CBP can exercise discretion in deciding whether  seizure is the most appropriate enforcement action.  When seizure is  invoked, CBP takes physical possession of the merchandise.  In order  for textiles to be seized, there must be specific statutory authority that  allows for the seizure.
Imposition of penalties.  CBP has several administrative penalties  available, based on the nature of the violation.  CBP may levy  administrative penalties locally at the port level without conducting an  investigation.  Alternatively, CBP may refer a suspected violation for an  investigation by BICE.  The outcome of the BICE investigation may be a  referral to (1) CBP for an administrative penalty or (2) a referral to the  U.S. Attorney for possible criminal prosecution of the importer and its  principal officers and the imposition of criminal monetary penalties.   Thus, some monetary penalties result from investigations performed by  BICE, while others simply result from activity within a port.  In addition  to civil administrative penalties, CBP may also assess liquidated  damages claims against bonded cartmen (carriers) implicated in  violations involving cargo transported in-bond.  CBP’s Office of Fines,  Penalties and Forfeitures is responsible for assessing certain penalty  actions for transshipment violations and is responsible for adjudicating  penalties, liquidated damages claims and seizures occurring at the ports,  up to a set jurisdictional amount.
Pursuit of judicial criminal or civil prosecutions.  CBP may refer unpaid  civil administrative penalty or liquidated damages cases to the  Department of Justice for the institution of collection proceedings  either in federal district court or in the Court of International Trade.   Additionally BICE investigates potential violations to establish the  evidence needed for criminal prosecution of the violations.  When BICE  deems sufficient evidence can be established, cases may be referred to  the appropriate U.S. Attorney’s Office for criminal prosecution.
section_title: CBP Relies Primarily on Exclusions Due to Lengthy and Complex Investigative Processes
paragraphs: CBP has increasingly relied on exclusions rather than seizures or penalties  for textile transshipment enforcement for two primary reasons.  First, it is  easier to exclude transshipped goods than to seize them because  exclusions require less evidence.   Second, although excluded textile  shipments may incur penalties, often CBP does not assess penalties against  importers of excluded merchandise because it is impossible to attach  specific culpability to the importer.  According to CBP officials, absent the  evidence to conclude the importer failed to exercise reasonable care, it  would be difficult to sustain a penalty against an importer of excluded  merchandise.  CBP also avoids the lengthy and complex process associated  with criminal and civil prosecutions and penalties by excluding the  shipments.
subsections: section_title: CBP Relies on Exclusions for Enforcement
paragraphs: In enforcing textile transshipment violations, CBP has relied more on  exclusions than on seizures or penalties.  Textiles may be excluded if the  importer is unable to prove country of origin, whereas seizures may occur  when false country of origin documents are presented to evade quota or  visa restrictions—a situation requiring a higher standard of evidence.    Exclusions usually have an immediate effect, although if the importer  chooses to protest the decision to exclude, the importer can appeal CBP’s  decision to the Court of International Trade.  Import specialists in Long  Beach/Los Angeles said that when an exclusion determination is made,  they are ready to go to court if needed.  The importer can ship to another  country, abandon, or destroy the excluded textiles.
CBP may elect not to levy penalties on excluded goods where culpability of  the importer cannot be established, and generally issues penalties against  the importer only if the importer is implicated or the transshipped textiles  entered the commerce of the United States.  However, a senior CBP official  said that the exclusion of textiles is considered a better deterrent than  penalties because the importer cannot receive the goods and, therefore,  cannot get them into U.S. stores that are waiting for them—often for  seasonal shopping.   Also, the complexity and length of investigations and  litigation are no longer of concern, since the goods are simply excluded  from entering the United States.  Table 3 presents port-level data on  selected enforcement actions in 2000 to 2002.
The investigative phase for textile transshipment cases can be a complex  and lengthy effort, resulting in few criminal penalties.  Investigators often  must follow convoluted paper trails for the movement of goods and money,  obtain accounting records—sometimes having to get Internal Revenue  Service records (which can be a 6 to 9 month process).  They also may have  to subpoena banks, interview brokers and shippers, get foreign government  cooperation, and pursue new leads as they arise.  A BICE official noted that  it is often difficult to pursue textile transshipment criminal cases because,  unlike with some crimes, there is no “smoking gun” at the port.  For  example, when drugs are found, the drugs themselves are evidence of the  violation.  With textile transshipment, an illegal T-shirt will look no  different than a legal one.  The basis for the violation is established by  proving that a false country of origin was knowingly claimed and that the  importer intended to commit fraud, committed negligence, or gross  negligence.
Although CBP does not keep records on the length of time for disposition  of cases, import specialists and inspectors voiced concern that  investigations can be lengthy.  For example, a senior CBP official noted that  in 1989, there were 83 illegal entries.  Although some civil cases went to the  Court of International Trade in 1990, the first decisions were made in 1993,  and the last were not decided until 1995, 1997, and 1999.  Two of the larger  civil cases against multinational corporations took 7 and 10 years to pursue  at the Court of International Trade.  Accordingly, CBP has a process in  place to determine whether to accept offers to settle civil cases out of  court, which includes evaluating the litigation risk and the resources CBP  would have to devote to a trial.
One factor relating to the length of the case is that, if BICE initiates a  criminal investigation, any action relating to that case is held in abeyance  pending possible criminal prosecution of the case.  If sufficient evidence  exists to justify a criminal prosecution, the case then goes to the U.S.  Attorney’s Office.  This move delays related civil proceedings.  BICE  officials in Los Angeles/Long Beach noted that U.S. attorneys are short on  resources, since they are also working on drug-smuggling and money- laundering investigations; and in the past 10 years in that district, fewer  than 10 cases have been sent to the U.S. Attorney’s Office and prosecuted.   They noted, though, that the U.S. attorneys had not rejected any textile  transshipment cases that BICE had brought to them.  Neither CBP nor the  Justice Department could provide exact figures on the numbers of  prosecutions of illegal textile transshipments, but CBP officials noted that  the figures were low.
In addition, investigating a case may entail allowing the suspect textile  transshipments to continue for a while, to obtain sufficient evidence.   However, investigators can be pulled off a particular textile investigation  for a higher priority; and then the textile case sits, with CBP sometimes  never getting back to it, according to a senior CBP official.
When CBP pursues a case, the monetary amounts of the penalties may get  reduced, according to CBP staff, in line with CBP’s mitigation guidelines.   CBP data are not available to summarize the penalty amounts assessed and  the final mitigated penalty amounts.  But in one example, CBP discovered  that a company transshipped $600,000 worth of blue jeans to evade quota  and visa restrictions.  Company officials pled guilty and, in the end, paid  CBP civil penalties totaling only $53,000.  CBP officials in the field  expressed concern that substantial penalty reductions may be a  disincentive to pursuing penalties or investigations.
section_title: CBP’s Enforcement of In- bond Violations Presents Challenges
paragraphs: CBP has experienced two basic challenges in deterring in-bond diversions  through enforcement actions.  First, the previously discussed weaknesses  in the system make it difficult for CBP to track in-bond movements and  catch the violators.  Second, when CBP discovers a breach of a bond by a  bonded cartman (carrier), the total liability associated with the bond  breach is limited to the value of the bond, rather than the value of the  merchandise.  Additionally, it is difficult for CBP to enforce payment of  unpaid penalties and liquidated damages because the Department of  Justice does not have sufficient resources available to prosecute all the  referrals for collections actions.
Because in-bond shipments are not tracked, CBP cannot account for all the  in-bond shipments that fail to fulfill the requirements of timely cargo  delivery. According to a senior BICE official involved in in-bond  investigations, when an investigation is initiated, BICE must physically  track the cargo to prove a violation has occurred. This is difficult because  the cargo is often not at the port but at a warehouse, and CBP’s surveillance  must be constant in order to establish that the cargo was not exported.
When CBP does find in-bond diversion occurring, it typically seeks  liquidated damages for breach of the bond.  When CBP demands payment  of liquidated damages, the claim cannot exceed the amount of the bond.   Several CBP and BICE officials stated that the bond amounts set by CBP  regulations are low, compared with the value of the merchandise.  The  original bond amount for textile entries relates to the total value of  shipments.  However, according to BICE officials, convention has allowed  bonds for bonded cartmen (carrier) to be generally set at $25,000-$50,000 a  year—a minimal amount that, as one BICE investigator put it, is the “cost of  doing business.”   For example, if a textile shipment with a domestic value  of $1 million is illegally diverted, liquidated damages can be set at three  times the value of the merchandise.  However, if the bond is set at $50,000,  the demand for payment of liquidated damages cannot go above this bond  amount.  Furthermore, violators may request mitigation of the $50,000 fine  so that the resulting mitigation may only be as little as $500.  Bond  amounts are usually set every calendar year and, if the liquidated damages  claims in one year exceed that year’s bond amount, the next year’s bond  cannot be used to pay the liquidated damages incurred the previous year.
In 1989, CBP recognized the problem in which the amount of delinquent  liquidated damages claims against a bonded carrier exceeded the amount  of the bond.  CBP then issued a directive that required district directors to periodically review bond sufficiency.  CBP again issued directives in 1991  and 1993 to provide guidelines for the determination of bond sufficiency.   However, CBP and BICE officials we spoke with stated that inadequate  bond amounts continue to make liquidated damages for in-bond diversion a  weak deterrent.
section_title: CBP Also Uses Informed Compliance and Outreach to the Community as Deterrence Methods
paragraphs: CBP also employs methods to deter illegal transshipment by informing the  importer community of violators of illegal textile transshipment.   CBP  officials view the publication of violators as a means to deter  transshipment.  CBP and CITA maintain various lists of foreign violators, in  part, for this purpose.  In addition, under the Customs Modernization Act,  CBP is obligated to use informed compliance and outreach with the trade  community.  CBP regularly meets with the trade community to keep it  informed of the latest enforcement information and to help encourage  reasonable care on its part.  CBP is looking increasingly at patterns of  company conduct to establish lack of reasonable care.  It currently is  investigating or monitoring 40 U.S. importers it suspects may have violated  the reasonable care standard.
subsections: section_title: CBP Maintains Lists to Serve as Deterrence
paragraphs: CBP maintains three lists associated with illegal transshipment violations:  the “592A list,” the “592B list,” and the “administrative list.”
The 592A list is published every 6 months in the Federal Register and  includes foreign manufacturers who have been issued a penalty claim  under section 592A of the Tariff Act of 1930.
The 592B list enumerates foreign companies to which attempts were  made to issue prepenalty notices, but were returned “undeliverable” and  therefore could not be included on the 592A list.
The administrative list identifies companies that have been convicted or  assessed penalties in foreign countries, primarily Hong Kong, Macau,  and Taiwan.  CBP decided that because these companies had due  process in their countries and were determined by that country’s law to  have illegally transshipped textiles (false country of origin), CBP could  legally make this information public, according to a senior CBP official.   This list is updated as necessary.  Between 1997 and October 2003, the  names of 488 companies from Hong Kong, 7 from Taiwan, and 34 from  Macau have been published in the administrative list.
section_title: CITA Maintains an Exclusion List and May Issue Chargebacks
paragraphs: CITA has a policy in place whereby a letter is sent to the government of an  offending country requiring it to address what is being done to enforce anti- transshipment policies.  If the government does not respond, the company  is placed on an “exclusion” list; and goods from that company may not be  shipped to the United States.  This exclusion could run anywhere from 6  months to 5 years, but the standard period is 2 years.  In 1996, CITA issued  a new policy stating that all goods could be banned if a TPVT visit was not  allowed in that factory.  After the policy was issued, Hong Kong began  allowing the United States to observe enforcement efforts in factories,  although it does not allow CBP access to companies’ books and records.   Extensive enforcement efforts led to 500 convictions in Hong Kong courts  for origin fraud from 1997 to October 2003.
When CITA has evidence of textile transshipment from CBP’s TPVTs or  other sources, it may also apply chargebacks if it has evidence of the actual  country of origin and the goods have entered the commerce of the United  States.  Chargebacks occur when goods were not charged against quotas as  they should have been.  CITA then will go ahead and “charge those goods  back” against the appropriate levels for an appropriate country.  For  example, if textiles have been transshipped through Vietnam, but their  actual country of origin was found to be China, China’s quota will be  reduced by the appropriate amount.  CITA also has the authority to “triple  charge” goods.  Although CITA has the authority to issue chargebacks, over  the last decade it has only issued chargebacks against China and Pakistan.   The last chargebacks were issued in 2001 for a sum of $35 million.  From  1994 to 2001, chargebacks totaled $139 million.   Chargebacks require a  higher burden of proof because they require that the actual country of  origin be established.
section_title: CBP Conducts Outreach with the Textile Trade Community
paragraphs: When the Customs Modernization Act became effective on December 8,  1993, CBP, then known as Customs, was given the responsibility of  providing the public with improved information concerning the trade  community’s rights and responsibilities.   In order to do so, Customs  created initiatives aimed at achieving informed compliance, that is, to help  ensure that the importers are meeting their responsibilities under the law  and to help deter illegal transshipment.  Accordingly, Customs issued a  series of publications and videos on new or revised Customs requirements,  regulations, or procedures.  CBP also has the responsibility to inform  importers of their duty to act in accordance with its reasonable care  standard.  To that end, CBP provides guidance to help importers avoid  doing business with a company that may be violating CBP laws.  For  example, CBP suggests the U.S. importer ask its supplier questions  regarding the origin of the textiles, the labeling, and the production  documentation, among others.  CBP is currently investigating 40 importers  for potential violations of the reasonable care standard.   In a continuing  effort to deter transshipment and meet its own responsibilities, CBP  officials regularly meet with members of the trade industry to share  information about the latest developments regarding textile transshipment.
section_title: Conclusions
paragraphs: Despite increasing trade volumes and heightened national security  priorities, CBP has maintained a focus on textile transshipment by  consolidating its various textile enforcement activities and by using its  expertise to target its review process at the most suspect shipments.  The  actual number of textile and apparel shipments CBP reviews at the ports is  low (less than 0.01 percent), and in 2002 about 24 percent of these reviews  resulted in exclusions, 2 percent in penalties, and 1 percent in seizures.   CBP’s overall efforts at deterrence are aimed more at excluding problem  shipments from U.S. commerce and emphasizing importer compliance  responsibilities rather than at pursuing enforcement actions in the courts,  due to the complexity and length of the investigative process and past  experiences with ultimate imposition of minimal penalties.  The low  likelihood of review and minimal penalties limit the system’s deterrent  effect and make high-quality intelligence and targeting essential to focusing  limited resources on the highest risk overseas factories and shipments.   Although textile import quotas on WTO members will be eliminated on  January 1, 2005, with the expiration of the Agreement on Textiles and  Clothing, the roles of the STC and the port import specialists will continue  to be important, because incentives will continue to exist to illegally  transship merchandise through countries benefiting from trade preferences  and free trade agreements.  In addition, quotas will remain on Vietnam until  its WTO accession, and quotas may be placed into effect on certain imports  from China under the safeguard provision of China’s WTO Accession  Agreement.
Because transshipment will remain a concern beyond this coming year,  CBP will still face challenges in implementing its monitoring system.  First,  CBP has been slow to follow up on some of the findings from the TPVT  factory visits, which are one of the key sources of information used in  decisions on what textile shipments to review.  CBP has not fully made the  results of these trips known and acted quickly by entering all national  criteria at an earlier stage rather than waiting until CBP approves the TPVT  report.  CBP has the authority to review any shipments presented for  import.  The result of waiting for TPVT report approval may mean that  some suspect shipments are not reviewed or inspected at the ports.   Second, CBP faces challenges in ensuring that additional import specialists  are placed in Customs Attaché Offices overseas to assist with textile  monitoring and enforcement activities.  CBP would be able to further  facilitate cooperation on textile issues, follow up on TPVT findings, and  supplement the enforcement information it needs to trigger port textile  reviews if it placed more import specialists in Customs Attaché Offices in  high-risk countries.
In addition, we found weaknesses in CBP’s current monitoring of in-bond  cargo transiting the United States, and CBP has only in the last year begun  to intensively address the issue of in-bond textile and apparel shipments  being diverted into U.S. commerce.  CBP’s current in-bond procedures may  facilitate textile transshipment by allowing loosely controlled interstate  movement of imported cargo upon which no quota or duty has been  assessed.   Internal control weaknesses have meant that CBP places an  unacceptably high level of reliance on the integrity of bonded carriers and  importers.  Without an automated system and detailed and up-to-date  information on in-bond shipments, CBP cannot properly track the  movement of in-bond cargo.   In addition, limited port targeting and  inspections of in-bond shipments constitute a major vulnerability in  monitoring possible textile transshipments and other areas of national  security.  CBP’s regulations regarding delivery time and shipment  destination also hinder proper monitoring.  Unless these concerns are  addressed, proper revenue collection, compliance with trade agreements,  and enforcement of national security measures cannot be ensured.  While  CBP has taken some preliminary steps, much remains to be done before  the in-bond system has an acceptable level of internal controls.
Moreover, CBP’s system for assessing liquidated damages does not provide  a strong deterrent against in-bond diversion.   With bond amounts set  considerably lower than the value of the merchandise and mitigation of  liquidated damages down to a fraction of the shipment value, violators may  see paying the bond as a cost of doing business and may not perceive it as a  deterrent against the diversion of goods.  CBP has the authority to review  bond sufficiency and can change the bond amounts to provide an effective  deterrent against the illegal diversion of goods.
section_title: Recommendations for Executive Action
paragraphs: To improve information available for textile transshipment reviews at CBP  ports and to encourage continued cooperation by foreign governments, we  recommend that the Commissioner of U.S. Customs and Border Protection  take the following two actions:  Improve TPVT follow-up by immediately entering all criteria resulting  from overseas factory visits into ACS to trigger port reviews.
Assign import specialists to Customs Attaché Offices in high-risk textile  transshipment countries to assist with textile monitoring and  enforcement activities, including conducting follow-up to TPVTs.
To improve its monitoring of in-bond cargo and ensure compliance with  U.S. laws and enforcement of national security, we also recommend that  the Commissioner of U.S. Customs and Border Protection take the  following four steps:   Place priority on timely implementation of a fully automated system,  including more information to properly track the movement of in-bond  cargo from the U.S. port of arrival to its final port of destination.
Increase port targeting and inspection of in-bond shipments.
Routinely investigate overdue shipments and, pending implementation  of an improved automated system, require personnel at ports of entry to  maintain accurate and up-to-date data on in-bond shipments.
Assess and revise as appropriate CBP regulations governing (1) the time  intervals allowed for in-bond shipments to reach their final destinations,  taking into consideration the distance between the port of arrival and  the final port of destination and (2) whether importers or carriers can  change the destination port without notifying CBP.
Finally, to strengthen the deterrence value of in-bond enforcement  provisions, we recommend that the Commissioner of U.S. Customs and  Border Protection review the sufficiency of the amount of the bond for  deterring illegal diversion of goods.
section_title: Agency Comments
paragraphs: The Department of Homeland Security provided written comments on a  draft of this report, which is reproduced in appendix III.  The Department  agreed with our recommendations and stated that it would take the  appropriate steps needed to implement the recommendations.  In its letter,  the department listed its key planned corrective actions for each of our  recommendations.  In addition, we received technical comments from the  Departments of Homeland Security, Commerce, and the Office of the U.S.  Trade Representative, which we incorporated in this report as appropriate.
We are sending copies of this report to appropriate congressional  Committees and the Secretaries of Homeland Security, Commerce, and  State and the Office of the U.S. Trade Representative.  We will also make  copies available to others upon request.  In addition, this report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  on (202) 512-4128.  Additional contacts and staff acknowledgments are  listed in appendix IV.
section_title: Objectives, Scope, and Methodology
paragraphs: In a legislative mandate in the Trade Act of 2002 (P.L. 107-210, Aug. 6, 2002),  Congress directed GAO to review U.S. Customs and Border Protection’s  (CBP) system for monitoring and enforcing textile transshipment and  make recommendations for improvements, as needed, to the Chairman and  the Ranking Minority Member of the Senate Committee on Finance and the  Chairman and the Ranking Minority Member of the House Committee on  Ways and Means.  As discussed with Committee representatives, we have  focused on answering the following questions: (1) how CBP identifies  potential textile transshipment, (2) how well CBP’s textile review process  works to prevent illegal textile transshipment, (3) how effectively CBP  monitors foreign textiles transiting the United States in its in-bond system  before entering U.S. commerce or being exported, and (4) what challenges  CBP experienced in using penalties and other means to deter illegal textile  transshipment.
To examine how CBP identifies potential textile transshipment, we  reviewed and analyzed internal planning documents and trade studies from  the Office of Strategic Trade’s Strategic Trade Center (STC) in New York  City, which conducts analysis and targeting of textile transshipment.  We  also analyzed CBP foreign factory and cargo shipment reports and  summaries from the STC; the Office of Field Operations’ Textile  Enforcement and Operations Division at CBP’s headquarters; and some  ports of entry, from 2000 to 2003.  We collected and analyzed data from  2000 to 2003 on the targeting process from CBP’s internal database and  documents and reviewed how CBP collected the data. We examined the  data for their reliability and appropriateness for our purposes.  We found  the data to be sufficiently reliable to represent CBP’s targeting activity.  In  addition, we also collected official U.S. international trade statistics from  the Census Bureau for 1993 to 2002, textile and apparel production  statistics from the Census Bureau (Annual Survey of Manufacturers) for  1993 to 2001, and employment statistics from the Bureau of Labor Statistics  (Current Employment Survey) for 1993 to 2002.  We defined “textile and  apparel goods for international trade,” based on the definition in the World  Trade Organization’s (WTO) Agreement on Textiles and Clothing (Annex),  as well as additional textile and apparel goods not covered by the  agreement but identified as textile and apparel goods by the Department of  Commerce’s Office of Textiles and Apparel on the Department of  Commerce’s Web site.  We reviewed these statistics for their reliability and  appropriateness for our purposes and found them sufficiently reliable to  represent the trends and magnitude of trade, production, and employment  in the textile and apparel sector.  We also observed a targeting session at  the STC in preparation for a foreign factory visit to El Salvador.  In  addition, we interviewed CBP officials in the Office of Strategic Trade’s  STC and Regulatory Audit Division, the Office of Field Operations, and in  seven ports of entry (New York/Newark, New York; Los Angeles/Long  Beach, California; Laredo, Texas; Columbus and Cleveland, Ohio; and  Seattle and Blaine, Washington) about their targeting activities and roles.  Together, these ports represent CBP service ports that processed 55  percent of textiles and apparel imported into the United States in 2002.   However, we recognize that activities among individual ports of entry  within CBP service port areas may vary from ports that we visited.  To gain  additional perspectives on CBP’s targeting operations, we interviewed  officials of the Department of Commerce and the Office of the U.S. Trade  Representative (USTR), as well as former Customs officials and private  sector business associations.
To examine CBP’s textile review process to prevent illegal textile  transshipment, we reviewed internal planning documents, directives, and  reports of the Office of Field Operations’ Textile Enforcement and  Operations Division, the Office of International Affairs, and the Office of  Strategic Trade’s STC and Regulatory Audit Division covering the years  1999 to 2003.  We visited seven ports of entry and observed operations.  To  review CBP’s foreign factory visits, we observed a Textile Production  Verification Team (TPVT) visit in El Salvador.  To report on CBP’s overall  textile review activity, we collected data on TPVT visits and port-level  textile review activity from 1996 to 2003 from CBP’s internal database and  documents.  We reviewed how CBP collected the data and examined the  data for their reliability and appropriateness for our purposes.  We found  the data to be sufficiently reliable to represent CBP’s foreign factory  inspections and port-level activity.  We interviewed CBP officials in the  Office of Field Operations, the Office of International Affairs, the Office of  Strategic Trade, and the seven ports of entry we visited.  We also  interviewed officials of the Department of Commerce, including the  Committee for the Implementation of Textile Agreements (CITA) and the  Office of Textiles and Apparel; USTR; and the Department of State; as well  as former Customs officials and private sector business associations.  In  addition, we interviewed customs and trade officials in Hong Kong and  Macao, as well as a Mexican embassy trade official in Washington, D.C.,  and Mexican port officials in Nuevo Laredo, Mexico.  We communicated  with Canadian officials through an exchange of written questions and  answers.
To review how CBP uses its in-bond system to monitor foreign textiles  transiting the United States before entering U.S. commerce or being  exported, we observed in-bond operations at six of the ports of entry we  visited: Newark, New Jersey/New York, New York; Long Beach/Los  Angeles, California; Cleveland and Columbus, Ohio; Laredo, Texas; and  Blaine, Washington.  We reviewed documents on CBP’s in-bond operations  from the Office of Field Operations’ Cargo Verification Division, as well as  documents on in-bond penalties from the Office of Field Operations’ Fines,  Penalties, and Forfeitures Branch.  We conducted interviews on the in-bond  system with CBP officials in the Cargo Verification Division; the Fines,  Penalties, and Forfeitures Branch; and the Textile Enforcement and  Operations Division at headquarters; and at the ports of entry and Bureau  of Immigration and Customs Enforcement (BICE) headquarters and Field  Offices.
In addition, we conducted a survey of in-bond activities at 11 major U.S.  area ports that process the highest levels of textile and apparel imports and  2 smaller area ports that also process textile and apparel imports.  For each  area port, we also requested that the survey be distributed to two  additional subports that also processed textile and apparel imports.  We  asked ports to respond to the survey, based on in-bond activities from  October 2001 to May 2003.  We received responses from all 13 area ports  and 29 subports we surveyed.  We selected ports for our survey, based on  four criteria: (1) ports with the highest value of textile and apparel imports;  (2) geographic distribution that included coastal, in-land, northern, and  southern border ports; (3) ports with the highest value of textile and  apparel imports by trade preference program (such as the African Growth  and Opportunity Act and the Caribbean Basin Trade Partnership Act); and  (4) ports of various sizes, allowing us to include smaller ports that also  process textile and apparel imports.  We found the data to be sufficiently  reliable to review how the in-bond system monitors foreign textiles  transiting the United States.  Not all ports were able to provide data for the  entire time period requested; therefore, we were not able to use some of  the data for the missing time period.  In addition, although we received a  100-percent response rate, the in-bond data we received from the 13 area  ports and 29 subports are not representative of in-bond operations at all  Customs ports.  Copies of the survey are available from GAO.
To examine the challenges CBP experienced in using penalties and other  means to deter illegal textile transshipment, we reviewed internal planning  documents, memorandums, and reports, dating from 1999 to 2003, from  former Office of Investigations officials now in the BICE, as well as from  CBP’s Offices of Chief Counsel; Field Operations (including the Textile  Enforcement and Operations Division and the Fines, Penalties, and  Forfeitures Division); Strategic Trade, (including the STC and Regulatory  Audit Division); and Regulations and Rulings.  We also reviewed CBP’s  enforcement authorities in the relevant statutes and federal regulations, as  well as reviewing informed compliance publications and other information  on CBP’s and BICE’s Web sites.  We collected data on CBP’s enforcement  and penalty actions for the years 2000 to 2002, from CBP’s internal  databases and documents.  We reviewed how CBP collected the data and  examined the data for their reliability and appropriateness for our  purposes.  We found the data to be sufficiently reliable to represent CBP’s  enforcement and penalty actions.  We interviewed officials in BICE and in  CBP’s Offices of Chief Counsel; Field Operations (including the Textile  Enforcement and Operations Division and the Fines, Penalties, and  Forfeitures Division); Strategic Trade (including the STC and Regulatory  Audit Division); and Regulations and Rulings, as well as at the seven ports  of entry we visited, and associated BICE Field Offices.  We also interviewed  officials of the Department of Commerce, including CITA and OTEXA; as  well as former Customs officials and private sector business associations.
We performed our work from September 2002 through December 2003 in  accordance with generally accepted government auditing standards.
section_title: U.S. Textile and Apparel Trade, Production, and Employment
paragraphs: U.S. textile and apparel imports have grown considerably over the past  decade and have been comprised largely of apparel products.  In 2002,  China surpassed Mexico as the largest foreign supplier of textile and  apparel to the U.S. market, followed by Caribbean Basin countries that  benefit from preferential access.  New York and Los Angeles are the  service ports that receive the largest share (by value) of textile and apparel  imports, with Miami, Florida, and Laredo, Texas, important service ports  districts for imports from Latin America.  The United States is in the  process of gradually phasing out textile and apparel quotas under a 1995  World Trade Organization (WTO) agreement, but a significant number of  quotas are still to be eliminated at the end of the agreement’s phase-out  period on January 1, 2005.  Elimination of these quotas is likely to affect  trade patterns as more efficient producers acquire greater market share.   Tariffs and other potential barriers, however, such as antidumping and  safeguard measures, still exist and could still affect trade patterns and  create an incentive for illegal textile transshipment.  Also, as quotas are  removed, a more competitive market may place increasing pressure on the  U.S. textile and apparel industry.  Industry production and employment in  the United States has generally been declining in recent years, with  employment in the apparel sector contracting the most.
subsections: section_title: Imports of Textile and Apparel
paragraphs: U.S. imports of textile and apparel products have nearly doubled during the  past decade (1993 to 2002), rising from about $43 billion to nearly $81  billion.  Because overall imports have also nearly doubled during the  decade, textile and apparel products have maintained about a 7 percent  share of total U.S. imports throughout this period.   As figure 10 shows, the  majority of U.S. textile and apparel imports are apparel products (about 73  percent in 2002).  The remaining imports consist of yarn (10 percent),  uncategorized textile and apparel products (9 percent), made-up and  miscellaneous textile products (7 percent), and fabric (2 percent).
The major foreign suppliers of textile and apparel to the U.S. market are  China, Mexico, and the Caribbean Basin countries.   However, as figure 11  shows, no major supplier had more than a 15 percent share of overall  textile and apparel imports in 2002.  Also, after the top 10 suppliers,  remaining suppliers still provided more than a third of imports.  These  smaller suppliers include Africa Growth and Opportunity Act (AGOA)  countries, which supplied $1.1 billion (about 1.4 percent) of imports, and  Andean Trade Promotion and Drug Eradication Act (ATPDEA) countries,  which supplied $790 million (about 1 percent) of imports.
Countries with free trade agreements (FTA) with the United States  accounted for 18.8 percent of total textile and apparel imports in 2002.  This  includes the North American Free Trade Agreement (NAFTA) countries,  Mexico and Canada, which supplied 17.1 percent.  Other FTA partners— Chile, Israel, Jordan, and Singapore—supplied the remaining 1.7 percent.   In addition, the United States is negotiating FTAs with several other  countries, which combined accounted for 15 percent of U.S. imports.  The  most important (in terms of imports) of these potential FTA partners are  the countries in the Central American FTA negotiations (Costa Rica, El  Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican  Republic, all of which are also part of the overall Free Trade Area of the  Americas (FTAA) negotiations.
section_title: Top U.S. Ports
paragraphs: The service ports of New York and Los Angeles were the top two recipients  of textile and apparel imports into the United States in 2002.  Together they  accounted for more than 40 percent of imports.  Furthermore, the top 10  U.S. service ports accounted for about 77 percent of textile and apparel  imports in 2002 (see fig. 12).  Overall, Customs has 42 service ports,  encompassing more than 300 individual ports of entry.  For example, the  New York service port encompasses the individual ports of JFK Airport;  Newark, New Jersey; and New York City.
On the West Coast, Los Angeles receives a large portion of its imports from  Asian suppliers such as China and Hong Kong; while in the South, Miami  and Laredo receive a large portion of their imports from Caribbean  countries.  In-land ports, such as Columbus, Ohio, receive imports shipped  across country by truck or rail from other ports or flown directly into the  airports in its district.
section_title: Textile and Apparel Products Affected by Quotas
paragraphs: Under the WTO’s 1995 Agreement on Textiles and Clothing (ATC), the  United States and other WTO members agreed to gradually eliminate quota  barriers to textile and apparel trade during a 10-year transition period,  ending by January 1, 2005.  By 1995, the United States, the European  Union, Canada, and Norway were the only WTO members to maintain  quotas on textile and apparel.  Each agreed, however, to remove a share of  their quotas by January 1 in 1995, 1998, 2002, and 2005.  Based on 2002  Department of Commerce import statistics and our analysis, the United  States still maintains quotas on products that account for about 61 percent  of its textile and apparel imports by value.  Not all of these imports,  however, are subject to quotas because not all U.S. trade partners are  subject to quotas on these products.  For instance, U.S. textile and apparel  categories 338 and 339 (men and women’s cotton knit shirts and blouses)  account for over 12 percent of U.S. imports of textile and apparel products,  and categories 347 and 348 (men and women’s cotton trousers and shorts)  account for about another 13 percent.  Although several countries face U.S.  quotas in each of these categories, not all countries are restricted.   Therefore, quotas only limit a portion of the 25 percent of imports  accounted for by products in these categories.  Customs, though, is  concerned with the trade flows relating to all the products under quotas,  despite which country they originate in because the country of origin may  be misrepresented.
section_title: Future Barriers to Trade in Textile and Apparel
paragraphs: Under the ATC, the United States agreed to remove by 2005 textile and  apparel quotas maintained against other WTO members.  These quotas  have created significant barriers to imports of certain types of textile and  apparel products from quota-restricted countries.  For example, in 2002,  the U.S. International Trade Commission estimated that quota barriers  amounted to an approximately 21.4 percent tax on apparel imports and a  3.3 percent tax on textile imports.  However, these estimates were  calculated across all textile and apparel products and countries.  Therefore,  actual barriers may be significantly higher for certain highly restricted  products.  Upon removal of these quotas, trade patterns are likely to  change, with more efficient foreign suppliers that were formerly restricted  under the quotas capturing a larger share of the U.S. market.
FTAs, though, will still provide preferential access to products that meet  rules of origin requirements from FTA partners.  FTAs generally provide  tariff-free access, while 2002 tariff rates on more restricted textile and  apparel products ranged from 15 to 33 percent.  Also, the United States  provides similar preferential access unilaterally to countries from the  Caribbean Basin, sub-Saharan Africa, and the Andean region under the  CBTPA, AGOA, and ATPDEA preferential programs.  Officials and experts  that we spoke with said they believed these tariff differentials to be a  significant incentive for continued illegal textile transshipment because  they act as a tax on textile and apparel products from non-FTA partners.   Also, under WTO rules, the United States may impose antidumping or  countervailing duties on imports from certain countries if it can be shown  that these products have either been “dumped” in the U.S. market or were  subsidized.  Furthermore, under China’s accession agreement with the  WTO, members may impose a special safeguard mechanism on imports  from China if they are shown to cause market disruption.  In fact, in  December 2003 the United States imposed this mechanism against imports  from China of certain types of knit fabrics, dressing gowns and robes, and  brassieres.
subsections: section_title: U.S. Textile and Apparel Production and Employment
paragraphs: U.S. textile and apparel employment has declined over the past decade  (1993 through 2002), while production has declined from 1995 through 2001  (latest year statistics were available for production data).  Production of  apparel (and textiles to a lesser extent) in the United States tends to be  relatively intensive in its use of labor.  Consequently, the U.S. industry has  faced strong competition from developing countries, such as China and  India, where labor rates are significantly lower than in the United States.   Employment in the U.S. apparel sector is higher than in the textile sector,  overall; however, employment declines in the U.S. textile and apparel  industry have primarily been due to declines in the apparel sector.  As  figure 13 shows, employment in the overall textile and apparel industry fell  from about 1,570,000 jobs in 1993 to about 850,000 jobs in 2002.  The  majority of this decline was due to the fall in apparel employment from  more than 880,000 workers in 1993 to about 360,000 workers in 2002.   However, employment in the other sectors of the industry—textile mills  (yarns, threads, and fabrics) and textile product mills (carpets, curtains,  bedspreads, and other textile products besides apparel)—also declined.
Regarding U.S. production (as measured by shipments) in the textile and  apparel sectors, figure 14 shows overall textile and apparel production  declined between 1997 and 2001.  During that period, the value of U.S.  shipments of textile and apparel products (either to the U.S. market or  overseas) fell from nearly $158 billion to about $132 billion.  This decline  was due to contraction in the apparel and textile mills sectors.  However,  the textile product mills sector remained relatively stable during the same  time period.
section_title: Comments from the Department of Homeland Security
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those individuals named above, Margaret McDavid, Michelle  Sager, Josie Sigl, Tim Wedding, Stan Kostyla, Ernie Jackson, and Rona  Mendelsohn made key contributions to this report.
section_title: GAO’s Mission
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subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs