Customs and Border Protection: Risk Management for Tariff Refunds Should Be Improved
Released: 2019-12-17T00:00:00

Letter

Background

Drawback Program

Drawback refunds are a remittance of up to 99 percent of duties, taxes, or fees previously paid by an importer. CBP makes these refunds on imported goods on which the importer previously paid duties, taxes, or fees, and subsequently exported from the United States or destroyed. (See fig. 1.)

According to CBP, the rationale for the drawback program was to encourage American commerce and manufacturing. It permits American manufacturers to compete in foreign markets without the handicap of including in their costs, and consequently in their sales price, the duty they paid on imported merchandise. Claimants can apply for and obtain the privilege of accelerated payment of drawback refunds. Accelerated payment allows estimated drawback refunds to be paid prior to liquidation of the drawback entry, provided that, among other things, claimants have acquired and posted with CBP a bond in an amount sufficient to cover the estimated amount of drawback to be claimed.

Types of Drawback Refunds

There are three main categories of drawback refunds: (1) manufacturing drawback (direct identification and substitution), (2) unused merchandise drawback (direct identification and substitution), and (3) rejected merchandise drawback. Within each category, there are variations in drawback eligibility, such as the ability to substitute imported merchandise. a. Direct identification manufacturing drawback may be claimed on exported or destroyed articles that have been manufactured or produced in the United States with imported duty-paid merchandise, if those articles have not been used in the United States prior to export or destruction under CBP supervision. For example, a claimant could claim a drawback refund on exported pants made in the United States using imported foreign fabric. (See fig. 2.) b. Substitution manufacturing drawback may be claimed on exported or destroyed articles that have been manufactured or produced in the United States using domestic merchandise substituted for imported duty-paid merchandise meeting the statutory criteria, where the articles have not been used in the United States. As a result, domestic producers can select the most advantageous sources for their raw materials and components without regard to duties, saving them production costs. For example, a claimant could claim a drawback refund on exported pants made in the United States using domestic fabric substituted for imported foreign fabric. (See fig. 3.) a. Direct identification unused merchandise drawback may be claimed on imported merchandise that was exported or destroyed under CBP supervision, without having been used within the United States. For example, a claimant could claim a drawback refund on unused imported designer dresses upon their destruction. (See fig. 4.) b. Substitution unused merchandise drawback may be claimed on goods that were exported or destroyed under CBP supervision, without being used, and were substituted for imported merchandise meeting the appropriate criteria. For example, a claimant could claim a drawback refund on exported cars substituted for imported foreign-made cars. (See fig. 5.) 3. Rejected merchandise drawback may be claimed upon the exportation or destruction under CBP supervision of imported duty- paid merchandise entered or withdrawn for consumption, provided it meets the statutory criteria (i.e., not conforming to sample or specifications, shipped without consent, determined to be defective at the time of import, or ultimately sold at retail and returned). For example, a claimant could claim a drawback refund on foreign fabric it imported but returned to the seller because the fabric did not conform to the specification of the claimant’s order. (See fig. 6.)

Drawback Refunds Claimed Annually Ranged from $631.6 Million to $1.4 Billion from 2009 through August 21, 2019

During calendar years 2009 through August 21, 2019, the total amount of drawback refunds claimed ranged from $631.6 million to $1.4 billion. The amount of drawback refunds claimed varied from year to year, but generally rose between 2011 and 2016. Overall, in dollar terms, substitution unused merchandise drawback remained the largest category of drawback refund, as shown in table 1.

CBP’s Transition to Drawback Modernization

As originally enacted in 1789, the drawback program was limited to duties paid on certain imported merchandise if the merchandise was exported within a year. In the 1930s, drawback claimants could use substituted merchandise for imported merchandise in specified circumstances. Congress has continued to allow substitution for drawback refunds in various forms. (See fig. 7.)

The U.S. International Trade Commission publishes and maintains the HTS. The HTS is used to determine tariff classifications for goods imported into the United States. Each item imported into the United States is classified in a category with an assigned 8-digit HTS subheading number. The category may be subdivided into 10-digit HTS subheading numbers for statistical purposes. The 4-digit and 6-digit nomenclature is consistent internationally. CBP is responsible for fixing the final classification.

For unused merchandise substitution drawback claims, TFTEA also allows drawback using the U.S. Department of Commerce Schedule B commodity number. Pub. L. No. 114-125, § 906(e)(4). We do not discuss the use of the Schedule B commodity number in this report because, according to CBP, it is very rare that the Schedule B commodity number is not identical to the HTS number. stating that importers are now jointly and severally liable with claimants for refunds associated with their imported goods.

Treasury and CBP had 2 years from the date of enactment of TFTEA to promulgate regulations implementing the TFTEA drawback provisions. TFTEA also provided for an additional 1-year transition period (February 24, 2018–February 23, 2019) during which drawback claimants could file under either the amended provisions or the drawback law as it previously existed. When the government did not meet the 2-year deadline for issuing regulations, which lapsed on February 24, 2018, a number of companies filed suit. Subsequently, Treasury and CBP published the Modernized Drawback Notice of Proposed Rulemaking in the Federal Register on August 2, 2018 and separately published the Regulatory Impact Analysis of the Modernized Drawback Notice of Proposed Rulemaking. In an October 12, 2018 order, the Court of International Trade ordered the United States to file the final rule developed pursuant to the Modernized Drawback Notice of Proposed Rulemaking with the Office of the Federal Register by December 17, 2018. The government met that deadline, publishing the Modernized Drawback Final Rule in the Federal Register and the Regulatory Impact Analysis of the Modernized Drawback Final Rule (RIA). In the final rule, CBP summarized and responded to public comments received on the Modernized Drawback Notice of Proposed Rulemaking and established new policies and procedures for the drawback program pursuant to TFTEA. In the RIA, CBP provided its predictions of the impact—primarily in terms of costs, benefits, and revenue transfers—of key changes to the drawback program on industry and the U.S. government. CBP did not make accelerated payments on or liquidate any TFTEA drawback claims until the final rule was issued. CBP also did not make any drawback payments during the partial federal government shutdown (December 22, 2018– January 25, 2019).

Under drawback modernization, CBP transitioned its filing process for making claims for payment under the drawback program from its Automated Commercial System (ACS) to its Automated Commercial Environment (ACE). Previously, CBP required claimants to file a paper claim, and electronic transmission of a claim summary through ACS was optional. TFTEA required claimants to file all claims electronically on and after February 24, 2018, but also allowed for a 1-year transition period where claims could be filed under the existing drawback statute or under the statute as amended by TFTEA. CBP designated ACE as the electronic system for filing drawback claims.

CBP initially partially deployed ACE for the drawback program on February 24, 2018, to allow electronic filing of claims. During the transition period, claimants could file claims under the existing drawback process (detailed in 19 C.F.R. part 191) or under the new drawback process (detailed in 19 C.F.R. part 190). CBP fully deployed ACE for the drawback program on February 24, 2019, the first day after the transition period when all drawback claims had to be filed under the amended statute and implementing regulations. After CBP mandated electronic filing in ACE, drawback entry summary data had to be filed at the more detailed line item level. ACE has expanded capabilities, such as accounting for line item reporting for drawback claims and automatically validating drawback claims against underlying import entries.

Changes in the broader trade policy context may also impact CBP’s drawback program. In particular, 2018 witnessed a series of presidential and agency actions that resulted in higher tariffs on a range of goods. For example, in January 2018, the President issued Presidential Proclamation 9693 and Presidential Proclamation 9694, imposing tariff rate quotas and increased duties on imports of solar cells and panels, and washing machines and parts, effective February 7, 2018. Further, at the direction of the President, the United States Trade Representative has imposed additional duties on products of China in four tranches, in June 2018, August 2018, September 2018, and August 2019. According to the United States Trade Representative request for comments on a modification to the fourth tranche, the four tranches cover an annual aggregate trade value of approximately $550 billion. CBP has determined that the aforementioned tariffs (commonly referred to as section 201 and 301 duties, respectively) are eligible for drawback refunds and issued guidance on how to make such claims. For fiscal year 2019, Treasury reported that it collected $70.8 billion in customs duties, as compared to $41.3 billion in fiscal year 2018.

CBP Offices Responsible for Drawback Program

Within the Department of Homeland Security, CBP’s Office of Trade is primarily responsible for managing the drawback program. CBP officials described the roles and responsibilities of the several offices within CBP that are involved, as follows:

Trade Policy and Programs. The Office of Trade Policy and Programs provides policy and program oversight for the drawback program.

Field Operations. The Office of Field Operations is responsible for implementing the drawback program, including ensuring that the Drawback Centers have the resources—allocations, staffing, equipment—to perform their duties and meet CBP’s trade mission.

Drawback Centers. Drawback specialists located in one of the four Drawback Centers in Chicago, Houston, Newark, or San Francisco are responsible for reviewing and processing drawback claims. They review claims, in whole or in part, to determine eligibility for drawback refunds. (Appendix II describes CBP’s steps for filing and processing drawback claims.) They also review and make determinations concerning claimants’ (1) requests for drawback privileges for accelerated payment and waiver of prior notice, (2) applications for certain manufacturing rulings, and (3) protests of denied claims.

Regulations and Rulings. The Office of Regulations and Rulings is responsible for issuing various types of binding rulings and decisions on drawback refunds. These include decisions on protest applications flagged for further review by the Drawback Centers as well as prospective ruling requests filed by drawback applicants, such as rulings on specific manufacturing drawback rulings and on the proper classification of merchandise for substitution manufacturing drawback. In addition to issuing binding rulings, the Office of Regulations and Rulings is responsible for drafting any regulatory changes involving the drawback program and provides technical advice for drawback policy and litigation.

TFTEA Generally Expanded Eligibility for Drawback Refunds, but CBP Has Not Adequately Managed Its Growing Workload

TFTEA generally expanded eligibility for drawback refunds, with some caveats, but CBP is not adequately managing its growing workload of claims resulting from the changes. The substitution standard for drawback claims under TFTEA generally allowed more merchandise to potentially qualify for drawback refunds. However, it also limited the eligibility of certain broadly categorized merchandise. TFTEA also expanded the scope of the refund of taxes and fees for manufacturing claims and standardized time limits to file claims. On balance, these changes, along with certain limitations in CBP’s Automated Commercial Environment (ACE), have led to an increase in the workload of drawback specialists. However, CBP did not anticipate the increased workload and does not have a plan to manage the increased workload, which has caused delays resulting in uncertainty for industry—potentially impeding trade.

TFTEA Generally Expanded Eligibility for Drawback Refunds

Substitution Standard under TFTEA Generally Expanded Drawback Refund Eligibility, but Also Limited the Eligibility of Some Merchandise

Change of substitution standard: According to CBP officials, the most significant change resulting from TFTEA is that it is now easier to substitute merchandise and still qualify for drawback refunds. TFTEA changed the substitution standard for certain drawback types, with new rules reflecting a shift from a subjective to a more objective standard. Previously, CBP applied a subjective ‘‘same kind and quality’’ standard for manufacturing substitution drawback and ‘‘commercially interchangeable’’ standard for unused merchandise drawback. For example, CBP did not permit a U.S.-based clothing manufacturer, Jockey, to substitute light blue underwear for dark blue underwear for an unused merchandise drawback claim before modernization. In 1995, Jockey submitted a request to CBP for a “commercially interchangeable” ruling to permit it to substitute underwear that is the same size, style, and specification, but different in color and part number—for example, substitute light blue underwear for dark blue underwear. CBP ruled that Jockey underwear was not “commercially interchangeable” for the purpose of the unused merchandise substitution drawback. Under the new substitution standard for manufacturing drawback and unused merchandise drawback, both the imported merchandise and the substituted merchandise generally must match at the 8-digit or 10-digit HTS classification to be eligible for drawback refunds. The new substitution standard has made more merchandise eligible for drawback refunds, such as the Jockey underwear that would now be eligible for unused merchandise substitution drawback, as shown in the example for one type of product in figure 8 below. It has also enabled automatic acceptance and verification of drawback claims in ACE. CBP officials told us that they had seen an increase in new claimants as a result of the changes to the substitution standard, among other factors.

According to industry representatives we interviewed, the changes to the substitution standard have enabled new companies to file for drawback refunds and have expanded eligibility for existing clients. For example, they stated that the changes to the substitution standard have allowed the automotive industry to substitute domestic car exports for imported foreign-made cars, as mentioned earlier. One industry representative noted that as a result of the new substitution standard, an automotive company that had been recovering about $2 million in drawback refunds per year before TFTEA can now recover about $20 million a year.

Drawback trading: The new substitution standard may also broaden the scope for “drawback trading,” according to industry representatives we interviewed. They described “drawback trading” as matching excess import and export activity through the use of a third-party special purpose entity that exists for the sole purpose of maximizing drawback refund recovery between currently unrelated importers and exporters with no existing commercial relationship.

CBP officials we spoke to did not think the new substitution standard should have any bearing on the potential for “drawback trading.” CBP officials explained that although the substitution standard for certain drawback claims had changed, TFTEA should not significantly affect “drawback trading” because, as before TFTEA, the claimant would still need to fulfill the possession and assignment standards. Finished petroleum derivative drawback claims do not have a possession requirement. CBP has permitted drawback where a company set up relationships with the importer and exporter expressly to maximize drawback for finished petroleum derivatives.

Limitation of basket provisions from unused merchandise substitution drawback: While TFTEA’s change to the use of HTS classifications generally expanded eligibility for certain drawback substitution claims, it concurrently limited eligibility in certain situations. Specifically, TFTEA prohibited eligibility for unused merchandise substitution of merchandise that is classified as “other” at both the 8-digit and 10-digit HTS subheadings for drawback refunds. Such classifications are considered basket provisions. For example, shrimps and prawns that fall under the HTS 1605.21.10.30 basket provision, as shown in figure 9, are not eligible for substitution unused merchandise drawback, as follows. If the shrimps and prawns are not in airtight containers, and are not products containing fish meat or prepared meals, they fall under “other” at the 8-digit HTS subheading (1605.21.10). If these shrimps and prawns are also frozen but not breaded, they fall under “other” at the 10-digit HTS statistical suffix (1605.21.10.30), categorizing them in a basket provision.

According to CBP, the products most affected by the limitation on basket provisions from unused merchandise substitution drawback based solely on 2016 HTS counts will be screws, nuts, and bolts; motor vehicle parts and accessories; and transmission shafts. One company we spoke with had been able to claim over $1 million in unused merchandise substitution drawback a year prior to modernization, for an imported ceramic substrate used for cleaning emissions in cars. The company also makes domestically sourced ceramic substrate, which it exports. CBP considered these two products commercially interchangeable. However, according to the company, the ceramic substrate is classified as a basket provision and the company is no longer eligible for drawback refunds. from the same inventory. If the imported item is substituted for an exported item that is not fungible with the imported item, it does not qualify for direct identification. able to administer the new statistical reporting number. For example, the article description must be clear, the HTS classification must be correct, and the new number must not require difficult or prohibitively expensive laboratory or other testing.

If merchandise is not eligible for direct identification drawback but is classified as a basket provision, it may still qualify for a drawback refund if a company can successfully petition the Committee for Statistical Annotation of Tariff Schedules for new 10-digit HTS statistical breakouts. However, such a workaround is time-intensive and not guaranteed, according to an industry representative. In one example, the representative explained that a chemical company with a product classified as a basket provision successfully petitioned for a new statistical breakout. The company produces chemical methanol and was unable to file a TFTEA drawback claim in 2018 because of the basket provision restriction. Such requests are generally considered by the committee twice a year.

Standardizing time limits: TFTEA also expanded eligibility for drawback refunds by standardizing the drawback filing deadline. Previously, drawback claim filing deadlines varied based on type of claim and time between import and export or destruction, ranging from 3 years to 5 years from importation to exportation or destruction, followed by a 3-year window to file a claim. TFTEA generally standardized the timelines for the acceptance of claims to be up to 5 years from import. CBP expects the new eligibility time frames will give some drawback claimants more time to file for drawback and potentially increase drawback eligibility for some claimants.

Expanding taxes and fees: TFTEA expanded the scope of drawback refunds by explicitly including taxes and fees for manufacturing drawback claims. Prior to TFTEA, the drawback statute did not specify that taxes and fees were eligible for manufacturing drawback. TFTEA extended drawback refunds to taxes and fees for manufacturing claims. Some industry representatives we spoke to told us they were benefiting from this expansion. For example, a representative from the U.S. oil industry noted that the new law is “much more lucrative” for oil companies that refine crude oil because they can now get drawback refunds on the oil spill tax and harbor maintenance fee.

CBP Has Not Adequately Managed the Growing Workload Resulting from TFTEA

CBP has not adequately managed the growing workload drawback specialists have been experiencing since TFTEA. Drawback specialists told us that they had been experiencing increasing workloads since CBP implemented the changes from TFTEA. The largest Drawback Centers expect their backlog of old claims will take about 5 years to work through. This workload is the cumulative result of various factors that have caused delays with processing claims, rulings, and privileges applications. The workload of the Drawback Centers is growing because of a learning curve related to the switch from a paper-based to an electronic process, delays in processing claims, and an increase in the number of claims, as discussed below. Further, the Drawback Centers continue to face staffing shortages.

Learning curve: According to CBP officials, drawback specialists face a learning curve as they become familiar with ACE and the new rules for drawback refunds. They explained that drawback specialists are still working through pre-TFTEA claims that were migrated into ACE. From January 1, 2019 to September 13, 2019, CBP Drawback Centers liquidated about 18 percent of the value of the remaining claims filed in CBP’s Automated Commercial System (ACS) and about 27 percent of the number of remaining claims filed in ACS. For TFTEA claims, CBP provided in-person training to drawback specialists before the final regulations were issued, as well as in May 2019 and September 2019. CBP has also been updating its guidance for processing claims, and, according to officials, plans to continue to offer trainings for drawback specialists as it finalizes the guidance. Nevertheless, adjusting to the changes has hampered the efficiency of drawback specialists. For example, drawback specialists explained that they had to learn to toggle between different systems that require separate logins to review event history, file uploads, and tax information within ACE in order to fully process a claim.

Delays in processing claims: CBP faced a delay in processing drawback claims because of a hold relating to the issuance of the drawback final rule. Claimants could begin filing TFTEA claims on February 24, 2018, but CBP did not process any of these claims pending the final rule— which CBP issued on December 17, 2018. As a result, all 18,319 claims filed during this 10-month period were put on hold. CBP lifted the hold when the final rule was issued.

CBP’s workload continued to grow because certain TFTEA manufacturing claims were on hold. Following TFTEA, the proposed and final rule required claimants who wanted to operate under an existing manufacturing ruling to file a supplemental application for a limited modification to the existing ruling, as previously discussed. According to CBP interim guidance, to ensure compliance with TFTEA drawback requirements, a limited modification must include a bill of materials or formula, annotated with the applicable HTS subheading numbers.

Claimants who did not apply for a limited modification by February 23, 2019, would need to apply for a new manufacturing ruling. CBP received about 800 applications for limited modifications, which it began approving on September 16, 2019. Between February 2019 and July 2019, CBP also received about 50 applications for new manufacturing rulings, which it has not yet begun to process. These processes remain paper-based (see fig. 10). CBP officials explained that CBP generally does not process manufacturing drawback claims until claimants are issued up-to-date ruling numbers. Until the new or modified manufacturing rulings are approved, CBP officials explained, they will not provide accelerated payment or process manufacturing claims. Moreover, some manufacturing rulings can take years to finalize. For example, one chemical company noted that CBP’s lab analyzes every piece of the manufacturing process, and as a result, it is awaiting final decisions on new manufacturing rulings from 2013.

Increase in number of claims: CBP has also seen an increase in the number of drawback claims because of TFTEA’s changes to the drawback program and limitations in ACE. Prior to TFTEA, the number of drawback claims per calendar year ranged from 11,690 to 13,291. CBP saw a large increase in the number of drawback claims in 2018 and 2019. (See table 2.)

CBP limited the number of lines in a drawback claim in ACE, which increased the number of drawback claims filed. Prior to TFTEA, claims were not limited by line. Because of system constraints, claims filed in ACE are restricted to 10,000 lines per claim. CBP had predicted that this ACE line limitation would increase the number of claims by a factor of four. Evidence to date indicates a significant increase in workload for certain Drawback Centers. For example, the Chicago Drawback Center noted that two claimants had filed over 4,000 claims between February 24, 2018 and February 23, 2019, whereas these same claimants had filed less than 50 claims in the prior year. According to the industry representatives we spoke with, the line limit in ACE added more work for industry and CBP because it made it necessary for claimants to break up the volume of their claims into different applications. For example, one broker used to file drawback claims four times a year on behalf of one refinery, but now has to file 300 times per year to account for the line limit. Drawback specialists pointed out that each claim stands on its own. As a result, they explained that they must liquidate each claim in ACE, which involves a number of quality control steps such as verifying that the claim is ready to be liquidated, relevant rulings are valid, and all validation activities are complete.

As discussed earlier, the changes to the substitution standard have also led to an increase in new drawback claimants, according to CBP officials. CBP has received applications from over 500 new claimants since February 24, 2018. New claimants require additional work, including drawback specialists’ manual reviews of claims, privilege applications, and ruling requests, as follows.

Claims. Drawback specialists explained that drawback claims from new claimants are subject to a full desk review. The specialists will request supporting documentation to ensure that the appropriate statutory and regulatory requirements are met. They also determine drawback due on the basis of the completed drawback claim, the applicable general manufacturing drawback ruling or specific manufacturing drawback ruling, and any other relevant evidence or information. According to CBP, the time it takes a drawback specialist to conduct a full desk review varies by claim, based on the nature of the claim and the experience of the drawback specialist. CBP reported that it could take more than 3 years for CBP to conduct a full desk review and determine the final disposition of a drawback claim.

Privilege applications. Claimants can also apply for privileges including accelerated payment privileges, a waiver of prior notice of intent to export or destroy, or a one-time waiver of prior notice of intent to export or destroy. Claimants must continue to submit paper applications for such privileges and drawback specialists must manually review the privilege applications. According to CBP, most claims are eligible for accelerated payment of drawback refunds.

Manufacturing rulings. Lastly, if a claimant is seeking either a direct identification manufacturing drawback or a substitution manufacturing drawback, it must manually apply for a manufacturing ruling using a paper form submitted through email, which may require significant documentation and review, as discussed earlier. CBP maintains the manufacturing rulings as paper files. For example, the Drawback Center in Newark stores manufacturing rulings in rows of filing cabinets. (See fig. 11.)

Additionally, CBP has not been able to respond to all privilege applications within 90 days, as set forth in the regulations. Between February 2018 and July 2019, CBP received almost 600 new privilege applications. CBP missed the 90-day deadline about 60 percent of the time. According to drawback specialists, they missed this deadline because of their workload. According to an industry representative, delays in processing privilege applications mean companies cannot receive their drawback money in a timely manner. Such delays cause uncertainty for industry, potentially impeding trade.

Drawback specialists face new obstacles to managing automatic liquidation of drawback claims in ACE. According to CBP officials, previously, drawback specialists had at least 10 days of lead time to address an automatic liquidation. Now, Drawback Centers must continually monitor the automatic liquidation reports. Because of the way ACE operates, drawback specialists may only have 1 day of lead time before a claim automatically liquidates. According to drawback supervisors, such monitoring is significantly increasing their workload. Further, drawback specialists told us that one way they were managing their increased workload was by extending automatic liquidation, which can be done up to three times, as discussed in appendix II. This practice goes directly against CBP’s guidance. Moreover, if they continue this practice, specialists may be forced to liquidate claims at zero if they run out of extensions.

Further, as the workload continues to grow, Drawback Centers continue to face staffing shortages. As of October 26, 2019, CBP met the congressionally mandated staffing level for drawback specialists of 37 for the first time in over 5 years. In CBP’s 2017 Resource Optimization Model, it reported an optimal staffing level of 40 to meet its drawback staffing needs. CBP’s staffing level of 37, as of October 2019, did not meet this target. According to CBP officials, although Drawback Centers are utilizing overtime, the drawback specialists are not able to keep up with the influx of work.

CBP has not adequately managed its drawback workload because it did not anticipate the increase in workload and did not plan for the increase accordingly. Federal standards for internal control note that management should evaluate performance and hold individuals accountable for their internal control responsibilities, which include evaluating pressure on personnel to help personnel fulfill their assigned responsibilities in accordance with the entity’s standards of conduct. Management can adjust excessive pressures using many different tools, such as rebalancing workloads or increasing resource levels. However, CBP has not brought staffing to its optimal level, and has not adjusted the workload in Drawback Centers through ACE to account for the increase in claims, rulings, and privilege applications. Prior to TFTEA, CBP officials explained that CBP could not control the workload of the Drawback Centers because claimants mailed their paper-based claims to the Drawback Center of their choice. Now, CBP has greater visibility and flexibility to potentially control the work flow to the Drawback Centers through ACE, but has not done so. CBP officials said they had anticipated that ACE automation would reduce drawback specialists’ workload, but experience, to date, indicates that workload increased. Until CBP develops a plan for managing its increased workload, it risks further delays in drawback claim processing that result in uncertainty for industry, potentially impeding trade—which runs counter to its strategic goal of enhancing U.S. competitiveness by enabling lawful trade and travel, such as by reducing barriers to the efficient flow of trade and streamlining and unifying processes and procedures.

CBP Has Taken Steps to Address Certain Risks of Improper Payments in the Drawback Program under Modernization, but Has Not Addressed Others TFTEA Made Three Key Changes to the Drawback Process That CBP Expects to Strengthen Its Ability to Validate Claims and Recover Inaccurately Claimed Drawback Refunds

CBP has taken steps to mitigate improper payment risks in the drawback program. Specifically, CBP expects three key changes to the drawback process under modernization will strengthen its ability to validate claims and recover inaccurately claimed drawback refunds: (1) requiring electronic filing in ACE, (2) extending the record retention period, and (3) broadening liability. However, CBP has not addressed several other risks for improper payments in the drawback program. These risks relate to (1) limitations in CBP’s existing desk review process, (2) establishing electronic proof of export, and (3) targeting a selection of claims for review.

TFTEA contained provisions amending the drawback statute that CBP expects will help it to remediate certain internal control deficiencies over drawback claim processing. Prior independent audits identified significant or material internal control weaknesses related to CBP’s processing of drawback claims, including that CBP’s drawback system lacked effective automated controls to prevent the overpayment of drawback claims and that the record retention period was not appropriate to ensure that support for drawback claims was maintained for the length of the drawback claim lifecycle. CBP expects that three key changes to the drawback process under modernization will strengthen its ability to validate claims and recover inaccurately claimed drawback refunds, as follows.

Requiring the electronic filing of drawback claims. On February 24, 2019, the drawback program fully transitioned to ACE. Specifically, all drawback claims are now required to be filed electronically in ACE and include drawback entry summary data at the more detailed line item level. Line item reporting requires claimants to provide certain relevant information for the designated imported merchandise on a drawback claim associated with the line item on an import entry summary, including the tariff classification, quantity, and value, as well as the duties, taxes, and fees assessed thereon.

With electronic filing and line item reporting, CBP can now automatically compare and verify the amounts of duties, taxes, and fees claimed on the drawback claim against the amounts paid on the import entry summary, which CBP expects will help ensure that it does not overpay funds. CBP’s prior system for filing drawback claims did not have the capability to electronically compare and verify claims against underlying import entries upon which the drawback claim was based to determine whether an excessive amount had been claimed at the individual line item level, according to prior independent audits. CBP’s transition to ACE is intended to mitigate risks of improper payments on drawback-related imports, by helping to ensure through automated validations that the amount paid for drawback claims against a given import entry does not exceed 99 percent of the duties, taxes, and fees collected at the individual line item level.

Extending the record retention period for certain drawback claims. For all TFTEA drawback claims, supporting records must now be maintained for a period of 3 years from the date of liquidation of the claim, rather than 3 years from the date CBP pays a drawback claimant. This new time frame requires claimants with accelerated payment privileges to maintain supporting records for a longer period than before modernization. Prior to modernization, the drawback record retention period sometimes fell short of the time in which CBP liquidated a drawback claim, preventing CBP from substantiating a claim with complete documentation. The extension of the record retention period provides CBP with more time to request documents needed to verify claims during desk reviews, which in turn should strengthen its ability to recoup over claimed drawback refunds.

According to CBP officials, if a claimant fails to provide documents as directed, or if the documents do not support the claim as presented, CBP can liquidate the claim at $0, or other diminishment as appropriate, and ACE will then issue a bill for outstanding funds owed.

Broadening liability for drawback claims. Following TFTEA, liability for the full amount of a drawback claim shifted from the claimant to both the claimant and the importer of the designated imported merchandise upon which drawback refunds are claimed. CBP expects that establishing joint and several liability, consistent with TFTEA, will help it to recoup over claimed drawback refunds by holding the importer of record, in addition to the claimant, responsible for payment of erroneous or false drawback claims. According to the industry representatives we spoke to, the impact of the joint and several liability change remains to be seen, but it could limit the incentive of importers to engage in drawback filing with exporters or claimants to avoid liability.

In addition to implementing these statutory changes, CBP has been working with a statistician to develop a more robust basis for sampling and selecting claims for review. For example, CBP has determined that it will target higher-value claims for more frequent review.

CBP Has Not Addressed Several Other Risks for Improper Payments in the Drawback Program

CBP lacks effective automated controls to prevent overpayment of drawback refunds related to export information. CBP guidance notes that a statutory prohibition on multiple drawback claims is set forth in 19 U.S.C. § 1313(v), which restricts the use of merchandise that is exported or destroyed to a single claim for drawback. Unlike import information, which is included in ACE to allow CBP to electronically compare and verify claims against underlying import entries, similar export information is not included in ACE. Therefore, CBP cannot perform electronic comparisons of export data within ACE to help ensure that it does not make overpayments on drawback-related exports. For example, if a claimant exported 10 widgets and filed one drawback claim for six exported widgets and another claim for five exported widgets, CBP would not be able to systematically verify that the second drawback claim was excessive and thus invalid. To compensate for the lack of automated controls, CBP designed an internal control for the drawback program that targets a selection of claims for a manual full desk review by drawback specialists. (See appendix II for an explanation of what such desk reviews involve). However, CBP has not addressed several other risks for improper payments in the drawback program. These risks relate to (1) limitations in CBP’s existing desk review process, (2) establishing electronic proof of export, and (3) targeting a selection of claims for review.

CBP’s Existing Desk Review Process Cannot Systematically Identify Duplicate or Excessive Claims for Drawback Related to Export Information

CBP’s existing manual desk review process does not have the ability to systematically confirm the validity of export documentation and confirm that export documentation is accurately being used across multiple claims. CBP officials noted that, while export documentation could be used across multiple claims, by law, claimants cannot file multiple drawback claims based on the same exported merchandise, as discussed above. Under TFTEA, a person claiming drawback refunds based on the exportation of an item must provide proof of export. Such proof must establish fully the date and fact of exportation and the identity of the exporter and may be established through the use of records kept in the normal course of business or through an electronic export system, as determined by CBP. To comply with this requirement, CBP requires claimants to (1) provide summary data as part of the drawback claim in ACE that includes the date of export, name of exporter, description of the goods, quantity and unit of measure, tariff classification number, and country of ultimate destination; and (2) maintain actual proof of export, which can be records kept in the normal course of business, and provide such proof upon demand by CBP. However, CBP officials told us that claimants only provide proof of export upon request by the drawback specialist, and that such requests typically are made after the claim is accepted in ACE and only in the context of desk reviews. Drawback specialists do not routinely request, store, or compare export documentation except for claims selected for desk reviews. CBP has no way of tracking whether claimants are using their export information excessively, and, according to officials, CBP has not yet assessed the feasibility of doing so. CBP officials explained that having the ability to flag excessive export submissions across multiple claims would enhance CBP’s protection against over claiming, but that further review is needed to determine whether flagging is feasible with current system capabilities. CBP officials said that they intend to look further into the matter in fiscal year 2020. As a result, the drawback program remains at risk of improper payments on drawback related to export information as claimants could over claim drawback refunds by using non-existent, insufficient, or falsified export documentation, or by reusing export documentation across multiple claims for merchandise that was never exported.

CBP Has Not Taken Steps to Establish Electronic Proof of Export

CBP has not taken any steps to establish electronic proof of export, although it has a longstanding goal to designate the Automated Export System as an electronic means of establishing proof of export. Federal standards for internal control call for agency management to design the entity’s information system and related control activities to achieve objectives and respond to risks. However, CBP has not yet deemed the Automated Export System as a reliable system of record for proof of export. At the time the final rule was issued in December 2018, CBP commented that the Automated Export System, as it stands, could not provide sufficient proof of export, and CBP would therefore continue to require documentary proof of export until further notice. Specifically, CBP determined that the Automated Export System does not establish the date and fact of exportation, or the identity of the exporter—information that can be relied upon to demonstrate drawback eligibility. CBP officials in headquarters told us that while being able to develop a reliable system of record for proof of export remains a goal, CBP does not have a plan or time frames for doing so as it intends to revisit the matter in fiscal year 2020. CBP officials explained that their focus has been on transitioning the drawback program to ACE, including by training staff and addressing industry concerns. Until CBP implements effective control activities for the drawback program, the government may be subject to revenue loss through duplicate or excessive claims for drawback related to export information. We cannot precisely estimate the potential savings that might result from CBP taking steps to prevent over-claims because the current rate of improperly claiming against the same export documentation multiple times is unknown. Further, the current number and amount of drawback claims improperly using export information is unknown. However, if these steps reduced drawback-related costs by even 1 percent of the over $1 billion in annual drawback refunds, this could equate to millions of dollars in savings.

CBP Has Not Targeted over 35,000 Claims for Review since It Disabled the Selection Feature, and the Number of Claims Not Targeted for Review Continues to Increase

CBP has not targeted a selection of claims for a manual full desk review since it disabled the selection feature in ACE, and the number of claims not targeted for review continues to increase because CBP has not turned the selection feature back on. The lack of review increases the risks of improper payments for claims filed, which stood at over 35,000 as of August 23, 2019, and represented an estimated $2 billion. To mitigate risks of improper payments in the drawback program, CBP designed an internal control for the drawback program in which a selection of claims is targeted for a manual full desk review by drawback specialists. Prior to modernization, CBP officials told us that they would target 1 percent of the claims per claimant and 1 percent of the entries on a drawback claim for a full desk review. Drawback specialists provided examples of having conducted full desk reviews in which they discovered that the claimants had failed to substantiate the claim by, for example, providing insufficient proof of export. They explained that the claimants had to repay their drawback refund and had CBP target subsequent claims for a limited desk review. However, CBP officials explained that when CBP transitioned the drawback program to ACE starting on February 24, 2018, a system error forced CBP to disable the selection feature in ACE. Certain claims that have been submitted since the system error was discovered have not been targeted for a full desk review.

Federal standards for internal control call for agency management to identify, analyze, and respond to risks related to achieving the defined objectives. These standards note that agency managers should comprehensively identify risks and analyze them for their possible effects, as well as design responses to these risks as necessary to mitigate them. CBP officials told us that they are working toward turning the selection feature back on as soon as CBP can address the system error. However, CBP did not expect the issue to persist as long as it has to date (22 months, as of December 2019). As a result, even when the selection feature is reactivated, it will only be applied to new claims filed after that point. CBP does not have a plan to retroactively target claims for review that had already been accepted in ACE during the system error, or to identify and analyze risks from targeting to adjust targeting in the future. For example, CBP has not determined whether specific claimant characteristics or claim types are more frequently associated with compliance problems. CBP officials explained that analyzing risks from targeting to identify non-compliance patterns across claimants is not something CBP has done in the past because CBP is account based and does not compare claims across claimants. However, CBP officials acknowledged the feasibility—with ACE’s new capabilities—of systematically pulling and analyzing non-compliance data input into ACE by the drawback specialists during limited or full desk reviews, and told us that they intend to explore this matter further in fiscal year 2020. These officials stated that taking these steps would be valuable for improving risk management in the drawback program and that doing so is likely to be feasible with current staff resources.

Without finalizing or implementing procedures to retroactively target claims for review and taking steps to analyze non-compliance patterns to improve future compliance processes, CBP may miss opportunities to protect U.S. trade revenue from improper payments of drawback claims. We cannot precisely estimate the potential savings that might result from CBP pursuing claims from the period when the selection feature was disabled, because the amount of drawback recovery resulting from the review of this universe is unknown, and the actual amount would depend on the number of reviews conducted, amount of improper payments discovered, and ability to recover these payments. However, if these reviews recovered even half of 1 percent of the $2 billion in un-reviewed claims, this could equate to millions of dollars in additional recoveries.

CBP Has Not Produced a Reliable Assessment of the Economic Impact of the Changes to Drawback Refund Eligibility Because of Data Constraints and Other Factors CBP Has Not Reliably Established the Economic Impact to Industry and Government through Its Prospective Estimate of the Impact of Drawback Refund Eligibility Changes

CBP published a required Regulatory Impact Analysis of the Modernized Drawback Final Rule (RIA) of new drawback regulations in 2018 to outline, prospectively, the anticipated consequences of this economically significant regulatory action. The RIA was to include a quantification and monetization of anticipated benefits and costs, to the best extent possible with information available at the time. As of December 2019, CBP’s RIA was the only formal analysis that had been conducted on the impact of changes to drawback eligibility under modernization on industry and government.

We assessed three key portions of the RIA relating to impact on industry and changes to drawback eligibility against GAO’s standards for review of economic analysis, and found that CBP had not produced reliable estimates. Various factors limited the analyses that CBP could conduct. For example, because the RIA was published prospectively, post- modernization program data were, necessarily, not yet available. According to CBP officials, CBP also developed the RIA before it had transitioned to ACE, a database with enhanced capabilities. However, in some cases, we found that CBP was not transparent about the level of uncertainty in its assumptions resulting from these limitations. We did not comprehensively assess the entire RIA (a 251-page document containing more than 90 tables) or assess any of it against the Office of Management and Budget’s guidelines for an RIA. Therefore, the following discussion of the RIA is not an assessment of whether the RIA met the criteria for required regulatory analyses outlined in the Office of Management and Budget Circular A-4. Our assessment of each of the relevant portions of the RIA is based on GAO’s standards for review of economic analysis, and outlined below.

Affected industries: CBP determined that a wide range of industries would be affected by modernization but did not determine whether the dollar impact of eligibility changes from modernization would be more concentrated in some industries than in others because of data limitations. To reach the conclusion that a wide range of industries would be affected by modernization, CBP took a sample of companies that had submitted drawback claims and examined these companies to determine their primary industry. According to GAO standards, an economic analysis should state its objective and the scope of the analysis should be designed to address this objective. According to CBP officials, CBP designed this sample to support statements about the number of companies affected but not the dollar size of the impact, although CBP did not explicitly state the intent of this design in the RIA. At the time of the RIA, according to these officials, designing a dollar-weighted sample—which could support statements about which industries were most affected in terms of financial costs and benefits—would have required a prohibitive amount of work with paper records. However, the officials noted that a dollar-weighted sample should now be feasible because most of the necessary information is now stored electronically in ACE.

Expansion of substitution eligibility: CBP estimated that the expansion of substitution eligibility would account for $1 billion (98 percent) of the $1.02 billion estimated total 10-year amount of increased drawback refunds under modernization; however, we found that this estimate was not reliable because of the amount of uncertainty in key assumptions. According to GAO standards, an economic analysis should consider all relevant alternatives and describe and justify the analytical choices, assumptions, and data used. CBP’s estimate was based on assumptions about changes to the dollar amount per drawback claim and number of drawback claims as a result of modernization and system limitations in the number of lines per claim. Specifically, CBP assumed that claim values would remain equal to their historical average (adjusted for line limitations in ACE) and that the number of claims under modernization would grow primarily in the first year after modernization.

However, CBP did not justify some key methodological assumptions about the amount and number of claims and did not take sufficient steps to inform on the extent to which the conclusions of the analysis would remain similar, even if it changed some of these assumptions. CBP estimated the dollar amount per claim based on a historical average of drawback claim amounts but did not explain in the RIA why the historical average is an appropriate assumption for drawback claim amount. CBP officials told us that they considered a range of different drawback claim amount values and growth rates as a result of significant annual variation in drawback claim amounts prior to TFTEA. However, CBP did not include variation in claim dollar amounts in its published sensitivity analyses for this table or otherwise discuss, within the scope of these analyses, whether its conclusions would have been affected by this variation in the assumed amount per claim.

Additionally, CBP’s estimate of expected increase in the number of claims that would be filed under modernization contains several key assumptions that it justifies based on emails and discussions with industry representatives and CBP subject matter experts, the details of which are not transparent in the RIA. We reviewed these emails and found that the two industry representatives whom CBP cited expressed uncertainty about the effects of modernization and provided estimates of growth in substitution drawback claims that varied by 20 percentage points from one another. CBP also sought public comments on these estimates and did not receive any, according to officials. As the estimated effect of this change constitutes nearly all of the estimated increase in drawback refunds in the RIA, the uncertainty around key assumptions for this analysis means that the overall actual effects of modernization could differ widely from CBP’s estimate.

Limitations on basket provisions: CBP estimated that eliminating claims with basket provisions would cost industry about $11 million over 10 years; however, we found that this estimate was not reliable because of the amount of uncertainty in key assumptions. According to GAO standards, an economic analysis should consider all relevant alternatives and describe and justify the analytical choices, assumptions, and data used. These standards further note that, when feasible, an economic analysis should adequately quantify how the statistical variability of the key data elements underlying the estimates of the economic analysis impacts these estimates. While CBP’s general methodology was reasonable, its sample design was too small to ensure reliable results and some assumptions were not fully explained or transparent. CBP sampled 50 out of 2,346 substitution unused merchandise claims from 2016, of which 16 contained lines classified under basket provisions in the HTS code, and used this sample to estimate the number of affected claims and lines, as well as average affected line value. CBP officials told us that CBP selected this sample size because of the labor-intensive process required to examine paper records from the relevant claims. However, in the RIA, CBP did not discuss how this small sample size caused imprecision in its estimates. Further, CBP did not establish that this time-limited sample was generalizable beyond 2016, either for the proportion of affected claims and lines or for the average affected line value. CBP officials said that, to alleviate these issues, CBP sought public comments on these estimates and did not receive any. According to CBP officials, at the time of their analysis, there was no evidence about the average dollar amount of future claims. However, CBP did not conduct a sensitivity analysis on these assumptions, for example, to determine how much its estimates would change if the number or dollar amount of claims utilizing basket provisions was larger or smaller than CBP had assumed.

TFTEA Has Enhanced Data and System Capabilities for Economic Analysis of Changes to Drawback Eligibility, but CBP Has No Plans to Conduct Further Analysis in the Near Future

Beyond its RIA, CBP has not conducted economic impact analysis of the changes to drawback eligibility under modernization, including on industry, and does not have plans to do so in the near future. Because the changes are new and CBP has devoted many of its resources to rolling out modernization, CBP stated that, while it intends to follow relevant requirements for regulatory review, it has not yet prioritized developing a plan for further assessments of the economic impact of the regulation. CBP officials stated that any future plans for retrospective review would follow Treasury guidance. This guidance states that priorities for retrospective review projects of existing significant regulations should be based upon an understanding of the economic impact of the regulatory action on industry and the government, among other factors. According to the RIA, the drawback modernization regulations are an “economically significant regulatory action.” The Treasury guidance states that such an understanding can be achieved through an ex post analysis of the effects of the regulation on the public, industry, or the government, including increased revenue or costs.

An ex post analysis of impact on industry and the impact of major changes to drawback eligibility would have fewer limitations than the RIA, which analyzed the changes prospectively (using historical data to predict future outcomes). For example, because of system updates, more detailed data about lines within claims are now stored electronically, which may reduce the need to conduct sampling in order to estimate the impact of changes. Additionally, because the regulation is now in effect, information such as the number of claims filed can be determined with actual data rather than by projection. According to CBP officials, within 3 to 5 years the agency will have sufficient data to conduct a reliable ex post analysis of the impact of the changes. Useful analysis might be possible sooner, as well. CBP assumed in the RIA that some of the most important effects of modernization would occur in the first year. According to GAO standards, the reliability of an ex post analysis will depend not only on the sufficiency of data, but also on whether the analysis has considered and properly dealt with elements such as objective and scope, methodology, analysis of effects, transparency, and documentation.

At present, however, CBP has not prioritized developing a plan with time frames to conduct such an analysis when the data are available—a plan that could include identifying key areas of analysis, data sources, and appropriate methodologies. Without an ex post analysis, CBP cannot reliably determine the financial effects of changes to drawback refund eligibility on industry and the government.

Conclusions

CBP disburses about $1 billion in drawback refunds per year and expects the amount of drawback refunds dispersed to continue growing. According to CBP, TFTEA modernized CBP’s system for processing drawback claims, transitioning it from a paper-based to an electronic system, in an attempt to mitigate longstanding risks in the program.

Despite the expected increase in drawback claims, CBP did not anticipate and then adequately manage the increase in drawback specialists’ workload. As a result, CBP has delayed timely processing of some drawback claims, rulings, and privilege applications, which has resulted in uncertainty for industry—potentially impeding trade.

Since modernization, drawback claims continue to be at risk of improper payments with vulnerabilities in CBP’s export verification and quality control system. While drawback modernization addressed longstanding risks associated with the program by automatically verifying import information, export information still creates a risk. CBP cannot systematically verify the validity and accuracy of a company’s proof of export. As a result, companies could still over claim drawback refunds by using non-existent, insufficient, or falsified export documentation, or by reusing export documentation across multiple claims.

Additionally, while CBP established internal controls to mitigate improper payment risks in the program, such as by targeting a selection of claims for review, it disabled this quality control measure for claims submitted since drawback modernization began in February 2018. Over 35,000 claims accepted since drawback modernization—amounting to over $2 billion—remain at risk for noncompliance. Without CBP finalizing and implementing procedures to target claims retroactively and in the future, CBP will continue to miss opportunities to protect U.S. trade revenue. Further, if CBP does not design its targeting system to mitigate identified risks, future claims also are at risk of noncompliance.

Prior to drawback modernization, CBP was not able to produce a reliable assessment of the economic impact of the changes to the drawback program on industry and government because of data availability constraints, systems limitations, and other factors. However, modernization has eliminated some of these constraints, and CBP estimates that within several years it will have sufficient data to conduct an ex post analysis. However, CBP has not prioritized developing a plan to do so. Without such an analysis, CBP cannot be certain about the economic impact of drawback modernization.

Recommendations

We are making a total of six recommendations to CBP. Specifically: The Commissioner of CBP should ensure that the Office of Field Operations, in consultation with the Office of Trade, develops a plan for managing its increased workload. (Recommendation 1)

The Commissioner of CBP should ensure that the Office of Trade assesses the feasibility of flagging excessive export submissions across multiple claims and takes cost-effective steps, based on the assessment, to prevent over claiming. (Recommendation 2)

The Commissioner of CBP should ensure that the Office of Trade develops a plan, with time frames, to establish a reliable system of record for proof of export. (Recommendation 3)

The Commissioner of CBP should ensure that the Office of Trade turns the claim selection feature in ACE back on and finalizes and implements procedures to target claims for review that were accepted into ACE during the period in which the selection feature was disabled. (Recommendation 4)

The Commissioner of CBP should ensure that the Office of Trade analyzes the results of its targeting of claims for review and designs responses to mitigate identified risks. (Recommendation 5)

The Commissioner of CBP should ensure that the Office of Trade prioritizes developing a plan to conduct an ex post analysis of the impact on industry and government of key changes to the drawback program, including time frames and methodology. (Recommendation 6)

Agency Comments

We provided a draft of this report to CBP and Treasury for comment. In its comments, reproduced in appendix III, CBP concurred with all six of our recommendations. CBP also provided technical comments, which we incorporated as appropriate. We requested comments from Treasury, but none were provided.

We are sending copies of this report to the appropriate congressional committees, the Commissioner of CBP, and the Secretary of Treasury. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8612 or gianopoulosk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) the extent to which modernization affects drawback refund eligibility and U.S. Customs and Border Protection’s (CBP) management of its workload, as well as the extent to which CBP has (2) taken steps to address risks of improper payments in the program and (3) analyzed the impact of the changes to the program on industry and government.

To examine the extent to which modernization affects drawback refund eligibility and CBP’s management of its workload, we reviewed statutory, regulatory, and agency drawback documents to identify and describe expansions and limitations to drawback refund eligibility. Specifically, we reviewed the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA), the Modernized Drawback Notice of Proposed Rulemaking, and the Modernized Drawback Final Rule to identify key changes resulting from amendments made to the drawback statute and implementing regulations. We also reviewed CBP’s internal guidance, which defines the standards that drawback specialists must meet when processing claims for drawback refunds in the Automated Commercial Environment (ACE) and under TFTEA. To understand the regulations and policies for drawback modernization, we interviewed CBP officials with the Offices of Regulations and Rulings and Trade Policy and Programs within the Office of Trade. To gain insight into how drawback modernization is working, in practice, we interviewed CBP officials from the Office of Field Operations and the four Drawback Centers. We visited the largest Drawback Centers, located in Newark, New Jersey, and San Francisco, California, to observe how they manage their workload and process claims. As context for CBP’s increasing workload following drawback modernization, we also collected data on the following:

The number of drawback claims filed in calendar years 2018 and 2019, as of August 21, 2019. We also compared these data against the historical number of drawback claims filed from 2009 through 2017, as reported by CBP in its Regulatory Impact Analysis of the Modernized Drawback Final Rule (RIA). In addition, we reported on the amount of drawback claimed during this period as context for the size of the drawback program. TFTEA (1) provided for a transition period, from February 24, 2018 to February 23, 2019, during which drawback claimants could file under either the amended provisions or the drawback law as it existed previously; and (2) thereafter required all claims to be filed under TFTEA starting on February 24, 2019. As such, claims filed between 2009 and 2017 reflect pre-TFTEA drawback claims. Claims filed in 2018 and 2019 reflect drawback claims filed under both the amended provisions and the drawback law as it existed previously.

The number and value of claims migrated to ACE from the Automated Commercial System—CBP’s prior system for filing drawback claims— as well as the number and value of these claims liquidated in the first 9 months of 2019.

The number of limited modifications to existing manufacturing rulings submitted between February 24, 2018 and February 23, 2019. Claimants who wanted to operate under an existing manufacturing ruling were required to file a supplemental application for a limited modification to the existing ruling by February 23, 2019.

The number of new manufacturing rulings submitted between February 24, 2019 and July 22, 2019. Claimants who want to operate under a manufacturing ruling but did not apply for a limited modification by February 23, 2019, need to apply for a new manufacturing ruling.

The number of privilege applications submitted between February 24, 2018 and July 22, 2019. Claimants can apply for and obtain drawback privileges for accelerated payment and waiver of prior notice.

We incorporated data reliability questions in our interviews with agency officials, such as how the data are derived, maintained, and updated, and how CBP ensures their completeness and accuracy. Based on our interviews with agency officials, we found these data to be sufficiently reliable for providing context for CBP’s growing workload since modernization. We then discussed steps that CBP had taken to manage its workload, such as how it had updated its staffing models, managed processing privilege applications, and managed automatic liquidation. We assessed CBP’s responses against federal standards for internal control, which call for agency management to evaluate pressure on personnel to help personnel fulfill their assigned responsibilities in accordance with the entity’s standards for conduct.

We reviewed staffing data covering fiscal years 2014 through 2019 for drawback specialists. We previously reported on staffing data from fiscal years 2014 through 2016. We incorporated data reliability questions in our interviews with agency officials for the fiscal years 2017 through 2019 staffing data. To determine staffing shortfalls, we compared actual staffing data against the minimum staffing level mandated by the Homeland Security Act and the optimal staffing level identified in CBP’s Resource Optimization Model for 2017. We determined these data to be sufficiently reliable for the purposes of comparing actual to optimal and mandated staffing levels.

In addition, to understand how CBP is implementing the changes to the drawback program under modernization and the impact of the changes to the program, we interviewed a non-generalizable sample of 15 industry representatives from a variety of sectors who (a) had submitted public comments on the proposed rule, (b) were part of CBP’s Trade Support Network Drawback Subcommittee, or (c) met our criteria for both (a) and (b). According to CBP officials, this subcommittee was CBP’s primary forum through which officials obtained input on the modernized drawback regulations from industry. We developed a standard set of questions to ask industry representatives, for example, regarding their company’s involvement in the drawback program, how drawback modernization has impacted their company, what industries have been most impacted by the changes, and any unexpected or unintended results of the modernization.

To examine the extent to which CBP has taken steps to address risks of improper payments in the program, we reviewed prior independent audits of the program, as well as statutory, regulatory, and agency documents delineating changes to the program, to understand how the changes are expected to remediate prior audit findings. These documents included TFTEA, as well as CBP’s proposed and final rules for modernized drawback, the RIA, and internal and external guidance for filing and processing drawback claims. We also interviewed agency officials in headquarters and in the field to discuss prior audit findings and the successes and challenges, if any, to drawback modernization addressing identified issues. We then assessed steps that CBP had taken to mitigate improper payment risks in the drawback program against federal standards for internal control, which call for agency management to identify, analyze, and respond to risks related to achieving the defined objectives. We collected data on the number of claims filed between February 24, 2018 and August 23, 2019, and the total amount claimed, that were not targeted for a full desk review. Based on our interviews with agency officials, we found the data to be sufficiently reliable for the purposes of reporting on the total number and value of claims that were not targeted for a full desk review during this period.

To examine the extent to which CBP has analyzed the impact of the changes to the program on industry and government, we evaluated CBP’s RIA against GAO’s standards for review of economic analysis. We assessed those portions of the RIA that relate directly to the financial impact of changes to drawback eligibility, corresponding to three tables describing (1) affected industries, (2) expansion of substitution eligibility, and (3) limitation of basket provisions. We then compared our assessments against applicable Department of the Treasury standards to determine if a future assessment could overcome the prior data limitations, warranting a limited review of certain aspects of an existing rule. However, we did not comprehensively assess the RIA (a 251-page document containing more than 90 tables) or assess it against the Office of Management and Budget’s standards for regulatory impact analysis. Therefore, our discussion of the RIA is not an assessment of whether the RIA met the criteria for required regulatory analyses outlined in the Office of Management and Budget Circular A-4.

We conducted this performance audit from February 2018 to December 2019 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Steps for Filing and Processing Drawback Claims

Drawback claim filing and processing generally follows three steps. Claims are (1) submitted for initial acceptance or rejection, (2) reviewed for drawback eligibility as applicable, and (3) liquidated with full, partial, or no payment. U.S. Customs and Border Protection (CBP) officials indicated that while the transition from the Automated Commercial System (ACS) to the Automated Commercial Environment (ACE) under drawback modernization has automated the initial intake of drawback claims, the review of claims to determine drawback eligibility, as presented, remains largely a manual process. 1. Claim submission. Prior to modernization, claimants had to file paper claims, including supporting documentation. CBP was required to accept or reject claims and authorize accelerated payment within 90 days of receiving the paper claim. However, claimants could also submit an electronic summary of the claim, known as a shell record, through ACS. For accelerated payment claims with a shell record, CBP was required to certify the approved claim for payment within 21 days of receiving the electronic summary of the claim.

Under modernization, claims must be filed electronically. The drawback claim is transmitted electronically via ACE and supporting documentation, when required, is uploaded via the Document Image System component of ACE. CBP officials explained that the transition to ACE had automated the initial intake process of drawback claims. Instead of a drawback specialist having to manually validate the claim for completeness and mail a response back to the claimant, ACE is able to make that determination within seconds and provide immediate feedback to the claimant on whether the claim is accepted or, if rejected, what errors need to be addressed. 2. Claim review. CBP policy before and after modernization has been to require a full or limited desk review of selected claims, according to CBP officials. Claims necessitating a drawback specialist’s full desk review will undergo a more comprehensive verification of the complete drawback claim that often requires additional information from the claimant. If additional information is required to process the drawback claim, CBP will send a formal request for information to the claimant. Additionally, CBP officials said that before and after modernization, if CBP identified compliance issues during its review of a drawback claim, the drawback specialist could target any subsequent claims filed by the claimant for a limited desk review. According to CBP officials, the time it takes a drawback specialist to conduct a desk review varies by claim, based on the nature of the claim and the experience of the drawback specialist. CBP reported that it could take more than 3 years for CBP to conduct a full desk review and determine the final disposition of a drawback claim. 3. Claim liquidation and payment. Prior to modernization, CBP would manually verify that drawback claimants had the accelerated payment privilege on file. CBP stated that claimants with the privilege of accelerated payment of drawback generally received their refunds 14 days after CBP accepted claims and authorized accelerated payment. Now, under drawback modernization, a claimant can receive accelerated payment without a drawback specialist’s involvement. ACE is programmed to automatically make accelerated payment on claims that have on file the accelerated payment privilege and a drawback bond that equals or exceeds the amount of the claim(s). CBP stated that claimants with the privilege of accelerated payment generally receive their refunds within 21 days of claim acceptance.

Before and after modernization, drawback claims are set to automatically liquidate if all the designated import entries within a claim are liquidated and final within 1 year of the claim date, according to CBP officials. CBP officials said that drawback specialists must extend the claim to prevent it from automatically liquidating before the necessary reviews have been completed. Drawback claims can be extended for three 1-year periods. CBP officials explained that liquidation extensions are intended to provide additional time to obtain information or documentation necessary to complete the review of a drawback claim. If the claimant fails to provide documents as directed, or if the documents do not support the claim as presented, the claim will be liquidated based on the information on file, which may result in liquidation at $0, or other diminishment, as appropriate.

CBP officials described the liquidation and payment of drawback claims with and without accelerated payment privileges, as follows. At the time of liquidation, for claims with accelerated payment privileges, ACE issues an additional refund if the final claimed amount is greater than the accelerated payment amount, or a bill, if the accelerated payment amount is greater than the final claimed amount. If the accelerated payment amount is the same as the amount determined at liquidation, no further action is necessary. For claims without accelerated payment privileges, ACE will issue a refund for the drawback amount approved at liquidation. Claimants have 30 days from the issuance of a bill to repay CBP any amount due. Claims may be reliquidated up to 90 days from the date of an original liquidation.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Kim Frankena (Assistant Director), Alana Miller (Analyst-in-Charge), Andrew Kurtzman, and Esther Toledo made key contributions to this report. The team benefited from the expert advice and assistance of Debbie Chung, Martin De Alteriis, Jeff Isaacs, Christopher Keblitis, Grace Lui, and Oliver Richard.