Moving Illegal Proceeds: Challenges Exist in the Federal Government's Effort to Stem Cross-Border Currency Smuggling
Released: 2010-11-30T00:00:00

Letter

Background

CBP Is the Lead Federal Agency Responsible for Stemming the Flow of Bulk Cash Leaving the U.S. at Land Ports of Entry

CBP is the lead federal agency charged with securing our nation’s borders while facilitating legitimate travel and commerce. To meet the Secretary’s March 2009 mandate that CBP conduct inspections of traffic leaving the U.S. for Mexico at all 25 land ports of entry on the southwest border, CBP expanded or initiated inspections of outbound travelers, including those leaving by foot, private vehicle (see fig. 1), or commercial trucks. CBP’s effort to stem the flow of bulk cash is part of a larger counternarcotics strategy to secure the southwest border.

CBP has three main components that have border security responsibilities. First, CBP’s Office of Field Operations is responsible for inspecting the flow of people and goods that enter and leave the country through air, land, and sea ports of entry. Second, CBP’s Border Patrol works to prevent the illegal entry of persons and merchandise, including contraband, into and out of the United States between the ports of entry and at checkpoints located in major traffic routes away from the border. In doing so, the Border Patrol is responsible for controlling nearly 7,000 miles of the nation’s land borders between ports of entry and 95,000 miles of maritime border in partnership with the United States Coast Guard. Third, CBP’s Office of Air and Marine helps to protect the nation’s people and critical infrastructure through the coordinated use of an integrated force of air and marine resources and provides mission support to the other CBP components. For fiscal year 2010, CBP had a $11.4 billion budget, of which $2.7 billion was for border security and trade facilitation at ports of entry. For outbound operations, CBP’s budget was about $109 million in fiscal year 2009 and is an estimated $145 million for fiscal year 2010.

In carrying out its responsibilities, CBP operates 327 ports of entry, composed of airports, seaports, and designated land ports of entry along the Northern and southwest border. While CBP does not know the number of travelers that leave the United States through land ports of entry, it estimates that it inspected over 360 million travelers who entered the country in fiscal year 2009 through land, air, and sea ports of entry. In total, the number of travelers who entered the country through land ports of entry represented over 70 percent of all travelers entering the country.

CBP’s Process for Inspecting Travelers Leaving the Country

The process used by CBP to inspect travelers leaving the country differs from the inspection process for those entering the United States at land ports of entry. CBP centers attention, among other things, on the citizenship and admissibility of the travelers for those who seek to enter or reenter the country through land ports of entry. In contrast, CBP officers ask a different set of questions of travelers leaving the country. To determine whether travelers are in compliance with the reporting requirements for the international transport of currency and monetary instruments, officers may ask travelers whether they (1) intend to leave the country by asking where they are going (i.e., Mexico on the southwest border and Canada on the Northern border), (2) are carrying more than $10,000 in currency, checks, money orders, or any other type of monetary instrument, and (3) are transporting any weapons or ammunition into Mexico or Canada. While carrying more than $10,000 in currency or other type of monetary instrument across the border is legal, failure to report the currency or monetary instrument with the intent to evade the reporting requirement is illegal. Further, it is illegal for an individual to knowingly conceal more than $10,000 in currency or other monetary instruments and transport or attempt to transport such currency or monetary instruments into or out of the United States with the intent of evading the reporting requirements. In addition to the interview process, CBP officers may also inspect, among other things, the content of car trunks, vehicle compartments, and packages in the vehicle. Figure 2 shows CBP officers querying outbound travelers at a land port of entry.

When conducting outbound operations, CBP officers may refer travelers for a more detailed inspection—called secondary inspection. Secondary inspections generally involve inspections of vehicles in a separate area from the primary inspection. They can include more in-depth interviewing of travelers, checking the traveler’s identifying information against law enforcement databases, or inspecting containers and boxes (see fig. 3).

FinCEN Plays a Key Role in Regulating Money Services Businesses

While smuggling cash is one method of taking illegal proceeds out of the country, criminals have also begun using other means to move proceeds from illegal activities across U.S. borders. One such method is the use of electronic media called stored value. This method can involve a broad range of technologies, including the use of prepaid cards, prepaid telephone cards, and financial transactions carried out through a cell phone. Money services businesses play a key role in issuing, selling, and redeeming stored value.

FinCEN, a bureau within the Department of the Treasury, is responsible for the administration of the Bank Secrecy Act (BSA)—a statute that authorizes FinCEN to require MSBs and other financial institutions as well as nonfinancial trades or businesses and many individuals to maintain records and file reports that have a high degree of usefulness in criminal, tax, regulatory investigations or procedures, or certain types of counterterrorism investigations. FinCEN carries out this responsibility as part of its broad mission of enhancing U.S. national security, deterring and detecting criminal activity, and safeguarding financial systems from abuse by among other things, requiring financial institutions to establish anti-money laundering programs as well as file reports on large currency transactions. FinCEN has about 300 staff to carry out its analytical, administrative, and regulatory responsibilities. Within FinCEN, the Regulatory Policy and Programs Division is responsible for, among other things, BSA compliance in the financial industry and for issuing regulations for U.S. financial institutions.

To carry out its mission, FinCEN supports and networks with law enforcement agencies across the federal government that may be involved in investigating money laundering and terrorism financing. For example, FinCEN works with agencies in DHS, such as CBP, ICE, and Secret Service; agencies in DOJ, including the DEA, Bureau of Alcohol, Tobacco, Firearms, and Explosives, and the FBI; and the Criminal Investigation Division within the IRS. In addition, FinCEN coordinates its efforts with another IRS unit called the Small Business/Self Employed Division which conducts BSA compliance examinations of certain nonfederally regulated non-bank financial institutions, such as MSBs and casinos.

MSBs Play a Key Role in Offering Stored Value Products to Consumers

Among the businesses that FinCEN has defined as MSBs are those that issue, sell, or redeem stored value. In some cases, such businesses may provide a variety of services in addition to offering stored value products, including check cashing, money orders, and money transmitting services. In other cases, such businesses may only issue, sell, or redeem stored value. These businesses play a key role in providing financial services to a segment of the population that may not maintain checking or savings accounts. Such businesses are common and are located in large and small communities across the country. Examples of MSBs can range from national companies with a large number of agents and branches, such as Western Union and MoneyGram, to small “mom and pop” money services businesses that may offer check cashing, money orders, and other financial services. The volume of transactions for MSBs nationwide is not known.

One type of product offered by MSBs that falls under the definition of stored value are stored value cards, which include gift cards or prepaid cards. In this report, we will refer to such cards as stored value cards, the same term that FinCEN currently uses for such products. Stored value cards are a growing alterative to cash transactions and they offer individuals without bank accounts an alternative to cash and money orders. They have many legitimate uses that help consumers in a variety of ways. For example, retail establishments sell gift cards to customers as an easy and convenient way to purchase goods or services. Employers may issue cards in lieu of checks when paying salaries to employees.

Consumers can also purchase cards and use them to purchase goods or services at retail stores across the country or to, in some cases, withdraw cash at automated teller machines overseas. For example, rather than paying for groceries using cash, a consumer could use a prepaid card. Also, the federal government uses prepaid cards in conjunction with its food stamp program.

The two main types of stored value cards are the following.

Closed system cards (see fig. 4)—These are the most common form of stored value cards and are often called gift cards. These cards are issued by major merchants and retailers, such as department stores, electronics stores, and coffee shops. They can be bought at many different types of retailers, including drugstores, grocery stores, and other businesses. Other examples include cards that students may use to purchase food on college campuses or that passengers use on subway systems or phone cards. Generally, closed system cards are limited in use in that they can only be used to purchase goods or services from a single merchant. These cards may be limited to the initial value posted to the card or may allow the card holder to add value. A study conducted for the Federal Reserve estimated that in 2006, the value of transactions for closed system cards amounted to $36.6 billion.

Open system cards—These cards have greater use as a cash alternative since a single card may be used at a myriad of stores, merchants, or automated teller machines (ATM) within and across U.S. borders. Such cards are easy to buy and can be bought on-line or in person. Open system cards may not require a bank account or face-to-face verification of the card holder’s identity. Domestically, companies may voluntarily place a dollar limit on the cards. Such cards may be used to access cash from ATMs in and out of the United States and can be reloaded to add value on the card. In certain countries outside of the United States, open system cards can be purchased and can be used to withdraw cash at ATMs across the world. A study conducted for the Federal Reserve estimated that in 2006, the value of transactions for open system cards in the United States totaled $13.2 billion.

Hybrid forms of closed system and open system cards are also available. One form of a semi-closed system card can be used at more than one store rather than a single store. For example, a shopper may be able to use a card at a group of stores located in the same shopping mall. Another example of a hybrid card is one that can be used at any merchant that accepts debit or credit cards, but the card cannot be used to withdraw cash at ATMs.

The Departments of Treasury, Justice, and Homeland Security recognized stored value as a potential threat for cross-border currency smuggling and money laundering as early as 2005. For example, law enforcement agencies from these three departments stated that “stored value cards provide a compact, easily transportable, and potentially anonymous way to store and access cash value” and that “federal law enforcement agencies have reported used as alternatives to smuggling physical cash.” Further, they stated that “the volume of dirty money circulating through the United States is undeniably vast and criminals are enjoying new advantages with globalization and the advent of new financial services such as stored value cards.” A year later, in 2006, a Treasury official stated that while stored value cards serve legitimate markets, without adequate controls, such payment innovations pose significant risks for money laundering and terrorist financing. This official noted that the risks involved access to bank payment networks without requiring a bank account or verifying customer identification.

Beyond cards, new forms of stored value have surfaced in recent years. In 2008, the World Bank issued a report that identified the risk of international smuggling and money laundering of illegal proceeds through the use of financial transactions initiated from a mobile phone, also called mobile financial services. That report describes how technology is now available in countries such as South Korea, the Philippines, and Malaysia that allows individuals to make transactions from an account in one country to an account in another country through a mobile phone. This technology has begun to penetrate the market in the United States and will become more readily available to consumers in the next several years. According to the report, the risks of money laundering with the use of such devices include (1) user identity may not be known, (2) “smurfing,” or splitting large financial transactions into smaller transactions, can be carried out to evade scrutiny and reporting by the financial institution, and (3) mobile financial services fall outside of anti-money laundering regulations.

CBP Has Established an Outbound Enforcement Program, but Further Actions Are Needed to Address Program Challenges

CBP Has Created an Outbound Enforcement Program and Seized about $41 Million in Bulk Cash Leaving the Country Since March 2009

In March 2009, CBP reestablished an Outbound Enforcement Program within its Office of Field Operations (OFO). The immediate goal of the program was to increase outbound enforcement activities along the southwest border in order to obstruct the illegal flow of firearms and currency being smuggled from the United States to the Mexican Drug Trafficking Organizations. The program is staffed by a Director and 6 other officials. Since March 2009, CBP officers conducting outbound operations have conducted more than 3 million inspections.

In addition to increasing outbound inspections, CBP has taken further action to support its efforts to seize bulk cash and other items. For example, CBP has developed a training curriculum that provides officer training in outbound enforcement operations for all port environments, including land, air, and sea. The training curriculum includes a 6-part, Web-based, training series, an 8-day classroom session, and on-the-job training. During the classroom session, officers complete modules on legal authority, targeting, inspecting, and processing, and participate in scenario-based activities. As of July 2010, 131 officers had completed the training in fiscal year 2010. In addition to developing outbound training, the Outbound Enforcement Division integrates the work of outbound operations with other CBP components. For example, the Division coordinates with the Tactical Operations Division and the Office of Intelligence and Operations Coordination to develop tactical and strategic operations based on a review of intelligence information and seizure activity. Further, the Division coordinates its efforts with staff involved in carrying out the Western Hemisphere Travel Initiative as well as with the Office of Border Patrol. For example, outbound enforcement efforts are augmented by 116 Border Patrol agents.

OFO also coordinates its efforts with other law enforcement entities working to combat bulk cash smuggling, such as DEA and ICE. For example, CBP coordinates with DEA by providing staff and intelligence to the El Paso Intelligence Center (EPIC), a national tactical intelligence center led by DEA and designed to support law enforcement efforts, with a significant emphasis on the southwest border. Among other functions, EPIC analyzes bulk cash seizure data and develops various reports on bulk cash smuggling methods, which are provided to various law enforcement agencies. EPIC also responds to requests for bulk currency seizure data from officers in the field. Additionally, CBP participates with ICE in Operation Firewall and the Border Enforcement Security Task Force (BEST) initiative. Operation Firewall, started in 2005, targets criminal organizations involved in outbound currency smuggling, while the BEST initiative focuses on increasing information sharing and collaboration among agencies involved in disrupting and dismantling criminal organizations that pose a significant threat to border security.

As a result of its outbound enforcement activities, CBP seized about $41 million in illicit bulk cash leaving the country at land ports of entry from March 2009 through June 2010. The vast majority of this currency, 97 percent, was seized along the southwest border. While CBP seized more than twice the amount of bulk cash during the first year of the outbound program as compared to the year prior, total seizures account for a small percentage of the estimated $18 billion to $39 billion in illicit proceeds being smuggled across the southwest border and out of the United States annually.

CBP was most successful in seizing bulk cash during the first 6 months of the Outbound Enforcement Program. As shown in table 1 below, CBP seized nearly $21 million from March 2009 through August 2009, averaging about $3.5 million each month. Despite the number of seizures increasing by 17 percent during the second 6 months of the outbound program, the total amount of cash seized decreased by 37 percent when compared to the first 6-month period.

The amount of cash seized in any given month varied. As shown in figure 5 below, since the start of the Outbound Enforcement Program, total seizures spiked in March, April, and September 2009. The spikes in March and April 2009, totaling $6.4 million and $8.2 million respectively, were each driven by a single incident in which CBP seized a large amount of currency. For example, of the $6.4 million CBP seized in March 2009 across all ports of entry, CBP seized more than $3 million during a single incident at a port of entry. In contrast, the $6.3 million spike in September is comprised of multiple seizures of smaller amounts of currency, with no single seizure larger than $803,000.

From March 2009 through June 2010, CBP had at least one bulk cash seizure at 21 of the 25 land ports of entry along the southwest border while conducting outbound operations; however, the total amount seized varied significantly by port. Along the southwest border, the total cash seized at each port during this time period ranged from about $11,000 to about $11 million, with more than 80 percent of the cash seized at 5 land ports. Two ports represent about half of all seizures. CBP officials stated that the concentration of seizures in these 5 land ports may be the result of high-traffic volumes and proximity to major drug trafficking routes.

In addition to bulk cash seizures, CBP’s Outbound Enforcement Program has carried out other enforcement actions, such as firearm seizures, drug seizures, stolen vehicle recoveries, and enforcement of immigration violations. Examples include the following: In April 2010, officers conducting outbound operations at the San Ysidro port of entry in California apprehended a male subject wanted in Mexico for a triple homicide, trafficking of cocaine, methamphetamines, firearms, and ammunitions.

In June 2010, officers conducting outbound operations at the San Luis, Arizona port of entry seized a large sports utility vehicle, 114 grenades, and over 2,500 rounds of various types of ammunition.

Stemming the Flow of Bulk Cash Is a Challenging Task

CBP has succeeded in establishing an Outbound Enforcement Program, but the program is in its early phases and there is a general recognition by CBP managers and officers that the agency’s ability to stem the flow of bulk cash is limited because of the difficulty in detecting bulk cash. Beyond the inherent difficulty in identifying travelers who attempt to smuggle cash, three main factors limit CBP’s success in this area.

First, CBP currently does not conduct outbound operations on a full-time basis, providing smugglers opportunities to circumvent detection by crossing the border when CBP officers are not conducting operations. Second, officers have limited equipment, technology, and infrastructure for conducting outbound operations. CBP officers and managers report that additional resources would improve officer effectiveness at discovering bulk cash and enhance officer safety. CBP began a $23 million project to determine how to deploy additional technology to outbound lanes in 2009 and expect cost estimates to be ready in September 2010. CBP also plans to spend approximately $10 million in funds from the Fiscal Year 2009 Supplemental Appropriations Act for temporary infrastructure improvements and to install additional infrastructure at up to 21 crossings on the southwest border starting in February 2011. Third, long wait times impact CBP’s ability to inspect all outbound travelers given CBP’s need to balance its mission of facilitating the cross-border movement of legitimate travelers and billions of dollars in international trade with its mission of inspecting travelers. Additional data and information on the challenges CBP faces in stemming the flow of bulk cash smuggling is law enforcement sensitive and not included in this report.

While factors such as staffing, infrastructure, and technology limit CBP’s ability to detect large amounts of cash, the fact that CBP conducts outbound inspections does not guarantee that the agency will identify attempts to smuggle bulk cash. For example, our investigators tested outbound operations at three ports of entry on the southwest border. Our investigators observed that CBP officers and Border Patrol agents were interviewing travelers, inspecting vehicles, and performing secondary inspections at each port. At each of these locations, our investigators bypassed opportunities to turn around and proceeded on a traffic lane at the entrance to the port of entry marked as the route to Mexico, signaling their intent to leave the country. They entered a designated outbound inspection area with shredded cash hidden in the trunk of their car. At two of the three ports of entry our investigators claimed that they only wanted to see the border and would like to turn around when approached by CBP officers and Border Patrol agents conducting outbound inspections. At both of these ports of entry, officers and agents allowed the investigators to turn around without searching the vehicle, asking for identification, or probing further to determine whether our investigators posed a risk of smuggling. In addition, the officers and agents did not question our investigators on why they did not turn around earlier when they had an opportunity to do so. At the third port of entry, CBP officers did not interview our investigators or physically inspect the vehicle that contained the shredded cash. However, CBP officers used an X-ray detector on the vehicle.

Program Data, Policies and Procedures, and Performance Measures Could Be Strengthened to Improve the Outbound Program

Addressing the limitations described above could require substantial capital investments at all ports of entry. However, the extent that such investments could result in greater seizures of bulk cash, weapons and ammunition is not known, in part because CBP lacks data on benefits and costs of an expanded program. CBP will likely need more time to gain a clearer understanding of how well the program is working and what factors will contribute most to improved results. Data on the expected costs and benefits of the program are a basic building block for informing decisions on whether to expand the program, continue the program at current levels, or to reduce the size of the program. In addition, policies and procedures to ensure the safety of officers are not in place. CBP has developed strategic goals for its outbound program, but it lacks performance measures that assess the effectiveness of the program.

Limited Data on Expected Program Costs and Benefits Hinders CBP’s Ability to Inform Decisions on the Budget and Outbound Program

As the outbound program matures, developing additional cost data in four key areas—staffing, technology, infrastructure, and wait times created by outbound operations—could help inform decisionmakers on program and budget decisions. OMB provides guidance on how agencies can evaluate the costs and benefits of a program, such as the Outbound Enforcement Program, to inform policymakers on budget and program decisions. In addition, DHS calls on its components to carry out analyses of costs and benefits to assist in planning a project and in managing costs and risks. The Southwest Border Counternarcotics Strategy states that law enforcement agencies should analyze the effectiveness of outbound inspections and, if warranted, consider expanding the number of inspections in search of bulk currency.

Data for Determining Staffing Costs for Expanded Operations Has Limits While CBP has data on the current cost of the Outbound Enforcement Program, it faces challenges in developing cost data to estimate the future size of the program. From fiscal years 2008 through 2010, the cost of CBP’s outbound program increased from about $89 million to an estimated $145 million. Costs for the outbound program involved primarily the cost of headquarters and mission support staff as well as salaries, benefits, overtime and premium pay for officers. Together these items represent more than 98 percent of the total cost for each fiscal year. Appendix I provides a more detailed breakdown of costs for the outbound program.

CBP plans to improve its data for estimating the cost of staff involved in inspecting outbound traffic for its current level of effort. For example, CBP plans to refine the data by calling on CBP managers at ports of entry to estimate the total number of hours officers worked during an outbound shift rather than simply counting the number of officers who worked that day.

While CBP has cost data for staffing the current level of effort, challenges remain for estimating costs of staffing the program in the future. CBP has developed an Outbound Workload Staffing Model to assist managers in determining future staffing levels. However, the model has data limitations, in part, because data on outbound operations is limited or missing because the program is new. For example, the model does not identify the number of CBP canine handlers that are needed to support outbound operations. Having such data would inform future iterations of the model in estimating the number of currency canine handlers that may be needed. Also, the model assumes that outbound traffic volumes are the same as inbound traffic volumes because CBP does not have data on the number of travelers and vehicles that leave the country through land ports of entry. According to these staff, having such data would be helpful in determining staffing needs.

CBP is Making Progress in Developing Cost Estimates of Equipment Needed by CBP Officers to Carry Out Outbound Operations at Land Ports of Entry CBP managers stated that they are developing a list of equipment officers need to conduct outbound operations at land ports of entry. Such a list would include equipment, such as mirrors, fiber-optic scopes, and density readers that CBP officers need to inspect vehicles leaving the country. Managers stated that they plan to develop the initial list by the end of 2010 and they would submit the list to managers at ports of entry for comment in 2011. Once comments have been received, CBP plans to develop a cost estimate for outbound equipment later in 2011.

One source of funding for purchasing equipment by CBP is the Department of the Treasury’s Forfeiture Fund. In fiscal year 2009, CBP deposited more than $25 million into the fund from currency forfeitures. CBP is permitted by the Department of the Treasury’s Executive Office of Asset Forfeiture to use money from the fund to purchase equipment and infrastructure such as canopies, signage and lighting to support outbound operations. However, CBP has expressed concern about using the funds for a one-time purchase of equipment and infrastructure because funding is not available for maintenance and repair of the equipment in the CBP Office of Field Operations budget. For fiscal year 2010, CBP requested $7.5 million so that the agency could pay overtime to state and local law enforcement officers who work outbound operations with CBP at ports of entry and $500 thousand for equipment, such as currency counters, digital cameras, and contraband detection kits. In total, CBP requested about $102 million from the Treasury Forfeiture Fund for fiscal year 2010. As of June 2010, CBP had received almost $55 million from the fund, however, none of this money was for the outbound program.

CBP is Making Progress in Developing Cost Estimates of Technology Improvements CBP has a project underway to determine how to upgrade and install license plate readers and to enable computer connectivity, but the agency has not yet determined how much this would cost at each port. According to CBP, license plate readers are available at 48 of 118 outbound lanes on the southwest border and none of the 179 outbound lanes on the northern border. Additionally, CBP officials estimated that there are a limited number of outbound lanes networked to support computer stations or wireless computing, both necessary for document readers that we discussed earlier in this report. CBP officials in charge of the project stated that they plan to determine the costs involved in deploying license plate readers and computer connectivity and that a cost estimate will be available in September 2010. Such estimates could provide important information for CBP outbound program managers as they assess scenarios for outbound operations at each port of entry.

Cost Estimates of Infrastructure Improvements Are Limited Although CBP has plans to consider outbound infrastructure needs, it has not yet conducted an analysis of outbound infrastructure needs at ports of entry and the related costs for improving infrastructure for its outbound operations. The strategic plan for the Outbound Enforcement Program states that the program will request the necessary budgetary funding to conduct facility assessments at ports of entry and articulate the operational needs for outbound facilities. CBP has completed a preliminary assessment of Southwestern ports of entry in which it determined the readiness of each site to accommodate outbound infrastructure. However, this preliminary assessment did not estimate the costs of infrastructure improvements at each port of entry. Building on this effort, CBP plans to conduct a site survey that would consider needed infrastructure at each port of entry and stakeholders that would be involved in construction such as local governments and private landholders. However, Outbound Enforcement Division officials told us in July 2010, that they will not begin to conduct site surveys until they receive funds for construction. They have not requested this funding because DHS has not yet determined whether to expand the program. Without cost estimates, it will be difficult for CBP to inform program managers and policymakers about costs involved in improving infrastructure for the Outbound Enforcement Program.

Developing Data on the Costs Created by Wait Times Is a Difficult Task In its Circular A-94 guidance, OMB states that agencies should consider all costs of a program when conducting a cost-benefit analysis, such as the costs resulting from waiting at the border. CBP officials told us that they have not yet collected data on wait times for outbound inspections because they have been initially focused on establishing the program. Furthermore, they said that developing cost data on wait times for outbound inspections would be difficult based on CBP’s experiences in collecting similar wait time data for inbound inspections.

In July 2010, we reported that CBP’s wait times data for personal and commercial vehicles in inbound inspections are collected using inconsistent methods and the data are unreliable. CBP acknowledged problems with its wait times data and has initiated a pilot project to automate wait times measurement, and to improve the accuracy and consistency of the data collected. The objectives of the project are to measure wait times in both directions—inbound and outbound—for cars and trucks, determine real-time and predictive capabilities, replace the manual process for calculating wait times, and explore long-term operations. Understanding what kinds of delays might result from outbound inspections and how expanding the program might affect such delays could better position CBP in determining the program’s costs.

Analyzing Seizure Data and Other Benefits of Outbound Operations Is Challenging While seizure data are useful for determining many of the benefits of outbound operations, some benefits are more difficult to quantify. For example, it is difficult to quantify the degree to which outbound operations deter drug trafficking organizations from attempting to smuggle bulk cash. Another benefit that is difficult to quantify is the intelligence information that officers may obtain by conducting outbound operations, including information that may help in discovering smuggled cash, weapons and drugs. To address this type of difficulty, OMB encourages agencies to enumerate any other benefits beyond those that can be quantified. For example, agencies that have conducted such analyses have used subject matter experts to offer a qualitative evaluation of benefits.

In analyzing the costs and benefits of the outbound inspections program, it is important to recognize that CBP is part of a larger effort by federal, state, and local agencies to disrupt and dismantle drug trafficking organizations, in part by denying them the profits of their drug sales. How much CBP spends to combat such activities could be indirectly affected by the efforts of other agencies involved in interdiction activities. For example, if local police officers were to increase enforcement on highways leading to the border, they may intercept bulk cash before it gets to the border, potentially changing the results of CBP’s efforts. Additionally, if CBP increases its outbound operations, criminals may respond to the increased difficulty of smuggling bulk cash by changing tactics to use other means of moving currency out of the country, such as using stored value. We discuss the use of stored value later in this report.

CBP’s Outbound Policies and Procedures Do Not Address Weaknesses Related to Officer Safety

CBP has not yet developed policies and procedures to help ensure officer safety in conducting outbound operations. At all five ports of entry we visited, CBP officers and managers cited safety concerns related to conducting outbound inspections. In addition, at each of these ports, we observed that officers used the side of the highway to conduct secondary inspections, while other vehicles moved past, potentially endangering officers. Also, at the Blaine port of entry, the officers conducted inspections of the underside of vehicles in the traffic by lying on the ground with their legs exposed while traffic moved by in neighboring lanes at speeds up to approximately 25 miles per hour.

CBP program managers noted that one way to improve the safety of officers is to improve infrastructure, such as developing designated areas for secondary inspections and installing speed bumps and barriers. We agree that improved infrastructure could enhance officer safety, however, whether CBP will receive funds to improve infrastructure remains an open question. Until such improvements are made, CBP will be faced with the important issue of how to ensure officer safety.

At two of the five ports of entry we visited, CBP was using guidance for outbound operations that was developed prior to the reestablishment of the Outbound Enforcement Program and it does not specify how CBP officers should inspect travelers in a way that ensures the officers’ safety. This guidance states that the safety of teams conducting outbound operations is an important consideration, but otherwise does not provide safety guidance for officers. At two other ports of entry we visited, CBP officials stated that the ports began conducting outbound operations after the Outbound Enforcement Program was reestablished but did not reference any specific guidance for officers to use. At the Laredo port of entry, officials provided us with locally developed guidance for officers that details specific actions that the officers should take to help ensure their safety. For example, the officer should always face the traffic, use loud commands to vehicles when escorting a vehicle to secondary screening, and remain aware of traffic passing him or her.

At the time of this report, CBP had not yet issued an outbound directive to ports of entry that provides guidance for ensuring officer safety. In July 2010, a CBP outbound program manager told us that a directive for the program was under review by CBP management; however the official could not provide estimates on when the directive is to be approved and issued. The manager agreed that policies and procedures on officer safety are important. However, the manager said that developing such policies and procedures should be done at the local level because each port of entry is unique. For example, traffic volumes vary for each port of entry. The manager stated that the draft directive does not include guidance that directs managers at land ports of entry to develop policies and procedures for ensuring officer safety. GAO’s Standards for Internal Control in the Federal Government state that policies and procedures enforce management directives and help ensure that actions are taken to address risks. In addition, the standards state that such control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Directing and ensuring that managers at ports of entry develop policies and procedures for officer safety could help protect officers from danger when they are conducting outbound operations.

CBP Has Developed Strategic Goals for Its Outbound Enforcement Program, but Challenges Remain in Developing Measures Related to Program Effectiveness

In October 2009, CBP issued a strategic plan for fiscal years 2010 through 2014 that represented a first step toward developing performance measures for outbound efforts, but challenges remain in developing the measures. The plan states that the immediate goal of the program was to obstruct the illegal flow of firearms and currency being smuggled from the United States to drug trafficking organizations in Mexico. According to the plan, a key objective of CBP’s outbound efforts is to detect and remove people and goods that pose a threat from the legitimate annual flow of millions of people, cargo and conveyances departing from the United States. To help achieve this objective, the Outbound Enforcement Program plans to carry out 11 initiatives, such as conducting an outbound threat assessment and tracking and reporting on outbound activities.

The strategic plan for the outbound program also recognizes that developing or obtaining better data on the threat of bulk cash smuggling and other illegal activities is one key to understanding the effectiveness of its operations. For example, the outbound program recognizes the value of assessments that identify major trafficking routes and methods for illegal export activities. However, CBP has yet to develop a performance measure that shows the degree to which its efforts are stemming the flow of bulk cash leaving the country. While we recognize that doing so is a difficult task, we reported in September 2005 that agencies can use performance information to inform decisions on future strategies, planning and budgeting, and allocating resources. In addition, Standards for Internal Control in the Federal Government state that control activities, such as establishing and reviewing performance measures, are an integral part of an entity’s planning, implementing, reviewing and accountability for stewardship of government resources and achieving effective results. Such activities could call for comparisons and assessments relating different sets of data to one another so that analyses of the relationships can be made and appropriate actions can be taken.

Using information and data from other agencies that evaluate drug trafficking organizations provides one way to measure the effectiveness of CBP’s outbound operations. Two examples of how such information could inform managers and policymakers of CBP’s efforts involve studies by NDIC and ICE. In March 2008, NDIC estimated that while current bulk cash interdiction efforts successfully disrupt the transport of tens of millions of dollars in drug proceeds en route to or at the southwest border every year, the interdicted currency is less than 1 percent of the total amount of illicit bulk cash destined for Mexico. In addition, a November 2009 study issued by ICE stated that gross revenue generated by Mexican drug trafficking organizations, and subsequently smuggled into Mexico, is substantial. CBP officials stated that while it may not be possible to know the extent to which its officers are intercepting cash, they believe such information is useful. For example, they cited analyses by ICE’s Bulk Cash Smuggling Center as another data source that could help in developing performance measures. In July 2010, CBP officials stated that they plan to develop draft performance measures comparing program costs to outcomes such as the amount of bulk cash seized by the end of fiscal year 2011. While this is a good first step, without data to show the degree to which CBP efforts are stemming bulk cash smuggling and other criminal activities, it will be difficult for managers and policymakers to assess the effectiveness of CBP’s outbound program.

Regulatory Gaps Involving Cross- Border Reporting and Other Anti-Money Laundering Requirements Exist for Stored Value

Regardless of the success of efforts to stem the flow of bulk cash, criminals can use other methods of transporting proceeds from illegal activities across the nation’s borders. Stored value is one such method. Regulatory exemptions heighten the risk that criminals may use stored value to finance their operations. For example, unlike cash, FinCEN does not require travelers to report stored value in excess of $10,000 to CBP when crossing the border. FinCEN has initiated actions to address these exemptions, but much work remains before the regulatory gaps are closed and anti-money laundering practices are fully implemented.

Unlike with Cash, Travelers Are Not Required to Report More than $10,000 in Stored Value When Crossing the U.S. Border

The Bank Secrecy Act (BSA) is a key federal statute that seeks to safeguard the U.S. financial system from criminal activity and to combat the exploitation of the U.S. financial system by criminals and terrorists. Among other things, the BSA authorizes the Secretary of the Treasury to require financial institutions, as well as non-financial trades or businesses and many individuals, to make reports and maintain records that have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism. Among other things, the BSA and its current implementing regulations require an individual who physically transports, mails, or ships more than $10,000 in currency or monetary instruments, such as traveler’s checks, across the U.S. border to file a Report of International Transportation of Currency or Monetary Instrument (CMIR).

Unlike this reporting requirement for currency and monetary instruments, there is no similar requirement for stored value. According to Treasury, no requirement exists because stored value is not defined as a monetary instrument under the BSA or its implementing regulations. Instead, according to FinCEN, stored value is a device that provides access to monetary value, rather than being a monetary instrument itself.

MSBs That Issue, Sell, or Redeem Stored Value Are Exempt from Three Key Anti-Money Laundering Provisions of the BSA

Many of the anti-money laundering requirements contained in the BSA regulations do not apply to MSBs that offer stored value products. The BSA and its regulatory framework focus on financial institutions’ record keeping and reporting requirements that create a paper trail of financial transactions that federal agencies can use to deter criminal activity and apprehend criminals. Some BSA regulations apply to MSBs that offer stored value products. For example, financial institutions, including MSBs that provide stored value products, are required to report currency transactions made by the same customer that exceed $10,000 during the course of any one day.

However, FinCEN exempted MSBs that offer stored value products from many other anti-money laundering provisions of the BSA regulations. According to FinCEN, they provided these exemptions in their 1999 rulemaking due to the “complexity of the industry and the desire to avoid unintended consequences with respect to an industry then in its infancy.” In 2008, FinCEN recognized that these exemptions created a situation whereby issuers, sellers, and redeemers of stored value are subject to a less comprehensive Bank Secrecy Act/Anti-Money Laundering regime than are other actors falling within the scope of FinCEN’s regulations. FinCEN later stated that “if these gaps are not addressed, there is increased potential for the use of as a means for furthering money laundering, terrorist financing, and other illicit transactions through the financial system.” Below is a discussion of three key exemptions related to stored value activity by MSBs. We discuss FinCEN’s efforts to address these exemptions later in the report.

FinCEN Does Not Require MSBs That Are Sole Issuers, Sellers, or Redeemers of Stored Value to Register

Under the BSA and its implementing regulations, certain MSBs must register with Treasury by filing information with FinCEN. The purpose of registration is to assist supervisory and law enforcement agencies in th enforcement of criminal, tax, and regulatory laws and to prevent MSBs While most types of MSBs are required from engaging in illegal activities. to register, there are exemptions for certain types of MSBs. For example, a MSB that solely issues, sells, or redeems stored value is not required to register under current BSA regulations. The total number of MSBs that are solely issuers, sellers, or redeemers of stored value, and thus exempt from registration, is unknown.

A MSB that issues, sells, or redeems stored value is generally required to register with FinCEN if that MSB also provides another financial service which is subject to registration, such as check cashing. However, in 2007, the Secretaries of the Treasury and Homeland Security, and the Attorney General, stated that the majority of MSBs that are required to register continue to operate without doing so. According to FinCEN officials, roughly 25,000 MSBs were registered in May 2007. Through an outreach program to unregistered MSBs, FinCEN increased the number of registered MSBs to 43,041, as of June 15, 2010. However, the total number of MSBs operating nationwide is unknown.,78 FinCEN officials stated that MSBs may not register because of language barriers, cost, training issues, or a lack of awareness as to the requirements.

FinCEN Does Not Specifically Require MSBs to Develop and Implement a Customer Identification Program

Under BSA regulations, some financial institutions, such as banks, are required to have customer identification programs that include, among other things, procedures for verifying customer identity and determining whether a customer appears on specified government watch lists. However, current BSA regulations do not specifically require MSBs to have a customer identification program. Despite this, MSBs may choose to implement customer identification protocols voluntarily or in order to satisfy other requirements. For example, MSBs are required to maintain anti-money laundering programs. These programs are designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities. As part of this requirement, MSBs are required to develop and implement policies, procedures, and internal controls which include, to the extent applicable to the MSBs under BSA regulations, requirements for verifying customer identification. We discuss FinCEN’s efforts to monitor MSB compliance with these requirements later in this report.

A 2005 study by KPMG attempted to estimate the total number of MSBs operating nationwide. The study estimated the number to be approximately 203,000. This estimate excludes the U.S Postal Service, an entity that falls under the definition of MSB because it offers money order services. However, because the survey obtained an 8 percent response rate, the large percentage of non-responses may have affected the survey results. See KPMG, LLP Economic and Valuation Services, 2005 Money Services Business Industry Survey Study, (Washington D.C.: September 2005). activity. For example, a threat assessment of stored value cards by Treasury stated the following: “The 9/11 hijackers opened U.S. bank accounts, had face-to-face dealings with bank employees, signed signature cards and received wire transfers, all of which left financial footprints. Law enforcement was able to follow the trail, identify the hijackers and trace them back to their terror cells and confederates abroad. Had the 9/11 terrorists used prepaid cards to cover their expenses, none of these financial footprints would have been available.”

FinCEN Does Not Require MSBs to Report Suspicious Transactions Involving Stored Value

While depository institutions are required to file suspicious activity reports (SAR) for stored value transactions, FinCEN does not require MSBs to do so.82,,83 84 Although some MSBs may file SARs related to stored value as part of their anti-money laundering programs or on a voluntary basis, the fact that suspicious activity involving stored value does not have to be reported by all financial institutions heightens the risk that cross-border currency smuggling or the illegal use of stored value may go undetected or unreported.

The USA PATRIOT Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001), expanded SAR reporting requirements to include nondepository institutions. However, under 31 C.F.R. § 103.20(a)(5), money services businesses are not required to file suspicious activity reports for transactions that involve solely the issuance, or facilitation of the transfer of stored value, or the issuance, sale, or redemption of stored value.

Under 31 C.F.R. § 103.18, which discusses the filing of suspicious activity reports by banks, there is no exemption for stored value transactions.

For transactions other than stored value, MSBs are generally required to file a suspicious activity report when a transaction is conducted or attempted by, at, or through a MSB, involves or aggregates funds or other assets of at least $2,000, and the MSB knows, suspects, or has reason to suspect that the transactions or pattern of transactions: involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law, regulation or reporting requirement under federal law or regulation; are designed to evade BSA requirements or other financial reporting requirements; have no business or apparent lawful purpose; or involve the use of the MSB to facilitate criminal activity. criminals. For example, in February 2009, we reported that law enforcement agencies in the Department of Justice and DHS use SARs in their investigations of money laundering, terrorist financing, and other financial crimes. In one example, a bank-filed SAR began an investigation that resulted in the discovery of a predatory certificate of deposit fraud scheme. The SAR narrative described critical elements of the crime in detail and law enforcement and prosecutors in this case noted that the SAR proved instrumental in ending the scheme.

FinCEN has determined that suspicious activities related to stored value have been reported by depository institutions and voluntarily reported by MSBs. For example, in 2006, FinCEN conducted an analysis of SARs that identified stored value cards as the nexus of the suspicious activity in order to highlight trends and patterns associated with the questionable/criminal use of stored value cards. FinCEN found that between January 1, 2004, and February 15, 2006, 471 SARs were filed that were associated with stored value activity. Of these, 341 SARs (72 percent), generally described activities associated with structuring and/or money laundering.

Law Enforcement Case Examples and Reported Suspicious Activities Demonstrate the Use of Stored Value for Cross- Border Currency Smuggling and Other Illicit Activities

In its 2010 report on bi-national criminal proceeds led by the Office of Counternarcotics Enforcement and ICE, DHS reported that little is known about whether Mexican criminal enterprises are making use of stored value technologies. Further, it reported that intelligence gaps center around a lack of data on emerging technologies like stored value cards, especially those that are offshore based. However, in a March 2010 testimony before the House Appropriations Committee, the FBI Director stated that recent money laundering investigations demonstrate that criminals are able to exploit existing vulnerabilities in the reporting requirements in order to move criminal proceeds using stored value devices, such as prepaid cards.

While the extent to which stored value is used for illicit purposes is unknown, law enforcement case examples and reported suspicious activities demonstrate that stored value has been used for cross-border currency smuggling and other illicit activities.At least two mechanisms that can be used to move currency out of the country using stored value devices have been documented by law enforcement and reported suspicious activities. First, illegal proceeds can be loaded on stored value devices and physically carried across the border. Two examples of the physical transport of stored value across the U.S. border are described below.

CBP officers at a Washington state port of entry stopped a commercial shipping truck and discovered $7.2 million worth of prepaid phone cards. CBP officers report that they were unable to detain or seize these phone cards because there is no requirement that such cards be reported at the border. Later analysis revealed the manufacturer had sent five other shipments of phone cards across the border in a 3- month period, totaling more than $25 million.

ICE agents assisting with outbound inspections at the San Ysidro port of entry encountered an individual attempting to leave the country in possession of a laptop computer, several merchandise gift cards, credit cards, and cell phones. Upon further investigation, the agents uncovered that the passenger had over 1,000 stolen credit card numbers and was working as part of a credit card fraud operation. The passenger explained that for his work, he was paid with prepaid gift cards. The man used these gift cards to purchase prepaid phone cards, which he smuggled into Mexico and sold for a profit.

The second method involves moving illicit proceeds out of the country by shipping stored value cards out of the country, where co-conspirators can use the cards to make purchases or to withdraw cash from local ATMs. Many cards can also be reloaded with additional value remotely via the Internet. For example, in 2008, DEA agents in Connecticut were investigating a narcotics and money laundering organization allegedly using stored value cards to launder narcotics proceeds. The investigation revealed that illicit proceeds were loaded onto stored value cards, which were then shipped to Colombia, South America. In Colombia, co- conspirators withdrew the money from local ATMs. The investigation revealed that in a 5-month period, conspirators withdrew more than $7 million from the stored value cards at a single location in Medellin, Colombia.

As discussed above, stored value devices are not subject to cross-border reporting requirements. As a result, individuals are not required to file any report if they physically transport, mail, or ship more than $10,000 in value in the form of stored value products. Four of six law enforcement agencies with whom we spoke expressed concern about the lack of a cross-border transport reporting requirement for stored value. For example, CBP senior officials report that because stored value is not subject to CMIR requirements, they lack the authority to seize stored value devices at the border without establishing probable cause or linking the stored value devices to a specified unlawful activity. In contrast, an IRS special agent told us that a cross-border reporting requirement would not entirely address the illicit use of stored value because there are other mechanisms by which stored value can be used to transport funds internationally. For example, smugglers could physically carry or ship stored value cards with no value out of the country and then add value to the cards remotely.

Beyond the use of stored value for cross-border currency smuggling, law enforcement examples and reported suspicious activities demonstrate that stored value can be used for other illicit purposes, such as money laundering, tax fraud, and identity theft. Below are two examples: In a recent law enforcement case, stored value cards were used to conceal proceeds of a $15 million tax fraud scheme. In this example, suspects filed more than 540 fraudulent tax returns. On some occasions, the suspects routed electronic transfers of tax refunds directly to prepaid cards obtained anonymously through an Internet application process.

A depository institution filed a suspicious activity report describing a customer who loaded $73,405 on one prepaid card and $9,987 on a second prepaid card over the course of about a year and a half. All transactions were made in cash, mostly $20 bills, and reporting officials noted that the cash had an odor similar to marijuana. Of the $73,405 loaded on the card, $72,212 was withdrawn in cash. While the deposits took place in Washington state, the transactions on the card occurred in Southern California and Mexico.

Efforts Are Under Way to Address Regulatory Gaps Related to Stored Value, but Much Work Remains

FinCEN Is in the Process of Developing and Issuing Regulations that Require Anti-Money Laundering Practices for Stored Value

At the time of our review, FinCEN was in the process of developing and issuing regulations, as required by the Credit CARD Act, to address the risk associated with the illicit use of stored value. On May 22, 2009, the Credit CARD Act was enacted which, among other things, required the Secretary of the Treasury, in consultation with the Secretary of Homeland Security, to do the following: Issue regulations in final form implementing the BSA, regarding the sale, issuance, redemption, or international transport of stored value, including stored value cards. In doing so, the Credit CARD Act stated that Treasury may issue regulations regarding the international transport of stored value to include reporting requirements pursuant to 31 U.S.C. § 5316 which applies to the transport of monetary instruments.

Take into consideration current and future needs and methodologies for transmitting and storing value in electronic form in developing the regulations.

The Credit CARD Act also called on Treasury to issue final regulations implementing the above requirements by February 2010. FinCEN is in the early phases of issuing the related regulations and much work remains before it addresses the risk of cross-border currency smuggling and money laundering through the use of stored value. For significant regulatory action, such as the proposed rule that FinCEN developed on stored value, OMB prescribes an 11-step process. This process involves steps that range from drafting a Notice of Proposed Rulemaking (NPRM) to publication of the final rule at least 60 days before its effective date. In June 2010, FinCEN issued a NPRM. FinCEN proposes to revise the BSA regulations applicable to MSBs with regard to stored value by, among other things, renaming “stored value” as “prepaid access” and defining that term; imposing suspicious activity reporting requirements, customer information and transaction recordkeeping requirements on providers and sellers of prepaid access; and imposing a registration requirement on providers of prepaid access.

In preparing the NPRM, FinCEN carried out several actions. For example, FinCEN consulted with Treasury components, such as IRS SB/SE and IRS- Criminal Investigations Divisions. In addition, it obtained input from external stakeholders including industry, law enforcement, and federal agencies and departments. In doing so, FinCEN officials told us they consulted with and obtained input from DHS agencies, such as ICE and CBP, before and after writing versions of the draft rule. In addition, FinCEN received comments from OMB prior to issuing the NPRM.

Treasury and FinCEN officials told us that they accelerated their efforts toward developing and issuing a new rule on stored value due in part to the requirements under the Credit CARD Act. They acknowledged that the existing regulations for stored value—issued in 1999—have not kept pace with developments in the stored value industry and that the regulations were now outdated. However, agency officials said they believe that their efforts prior to the Credit CARD Act, such as leading an interagency effort to develop and issue the 2007 Money Laundering Strategy Report, establishing a Stored Value Subcommittee of the Bank Secrecy Act Advisory Group in May 2008, and posing questions related to stored value to the public as part of proposed revisions to MSB definitions in May 2009, placed them in a better position to establish a regulatory framework for stored value in response to the Credit CARD Act.

We describe in more detail below how FinCEN plans to address several of the regulatory gaps that apply to MSBs involved in stored value. However, FinCEN has not established an end date for the regulations, which is discussed later in this report.

FinCEN Proposes Addressing Three Regulatory Gaps Related to MSBs Involved in Stored Value

Recognizing that stored value products are vulnerable to money laundering, FinCEN’s June 2010 NPRM proposes to address regulatory gaps related to MSBs involved in stored value or “prepaid access” in the following three areas: Registration with FinCEN. The NPRM proposes that providers of prepaid access must (1) register with FinCEN as a MSB, (2) identify each prepaid program for which it is the provider of prepaid access, and (3) maintain a list of its agents. However, sellers, such as grocery stores or drug stores, of prepaid access would not have to register. According to FinCEN, it is proposing to exempt the seller from registering with FinCEN because the seller’s role is complementary with, but not equal to, the authority and primacy of the provider of prepaid access, and the seller is generally acting as an agent on behalf of the provider. As stated in the NPRM, providing an exemption would be consistent with the treatment of other agents under the MSB rules.

Customer identification program. The NPRM proposes that providers and sellers of prepaid access must establish procedures to verify the identity of a person who obtains prepaid access under a prepaid program; obtain identifying information concerning such a person, including name, date of birth, address, and identification number; and retain such identifying information for 5 years after the termination of the relationship.

Submitting reports on suspicious activities. The NPRM proposes that MSBs must file reports on suspicious activities related to prepaid access.

The next steps that FinCEN plans to follow include (1) summarizing and analyzing the comments, (2) revising the regulation as proposed in the NPRM, if appropriate, (3) consulting with law enforcement and regulatory stakeholders and clearance within Treasury, (4) preparing a final rule for OMB to review, and (5) addressing any further comments from OMB.

FinCEN Has Not Yet Decided How Best to Address the International Transport of Stored Value

At the time of our review, FinCEN was considering several options to address the international transport of stored value; however, the agency has not yet decided on what course of action it will take or when. In the June 2010 NPRM, FinCEN stated that it plans to regulate the cross-border transport of stored value in a future rulemaking proposal in part because of issues identified with respect to financial transparency while performing its regulatory research of the stored value industry. According to FinCEN officials, they have not addressed the cross-border transport of stored value in the June 2010 NPRM because addressing regulatory gaps in (1) registration with FinCEN, (2) customer identification programs, and (3) reporting on suspicious activities had a higher priority.

While FinCEN may ultimately call upon individuals to report stored value at the borders, FinCEN officials indicated that cross-border transparency and monitoring may be achieved through other means. According to FinCEN, one option it may use to achieve cross-border transparency is to call upon entities in the stored value industry to report suspicious activities related to the use of stored value that cuts across the nation’s borders. In addition, FinCEN is proposing in the June 2010 NPRM that providers of prepaid access maintain records that may include information on the type and amount of the transaction and the date, time, and location where the transaction occurred. For example, such information could identify the purchase and use of stored value in and outside of the United States. FinCEN’s success in using this approach depends, in part, on (1) the degree to which entities report such instances in a complete and accurate fashion and (2) the timeliness of such reporting and the degree to which the information is shared with law enforcement agencies. The challenges FinCEN faces in using this approach are discussed later in this report.

FinCEN Has Developed Initial Plans for Issuing the Final Rule on Stored Value, but Its Plans Do Not Assess Ways to Mitigate Risks for Completing Rules on Stored Value

FinCEN has developed initial plans for issuing the final rules for stored value; however, its plans are missing key elements that are consistent with best practices for project management. Best practices for project management established by the Project Management Institute state that managing a project involves project risk management, which serves to increase the probability and impact of positive events, and decrease the probability and impact of events adverse to the project. Project risk management entails determining which risks might affect a project, prioritizing risks for further analysis by assessing their probability of occurrence, and developing actions to reduce threats to the project. Other practices include (1) establishing clear and achievable objectives, (2) balancing the competing demands for quality, scope, time, and cost, (3) adapting the specifications, plans, and approach to the different concerns and expectations of the various stakeholders involved in the project, and (4) developing milestone dates to identify points throughout the project to reassess efforts under way to determine whether project changes are necessary.

In an effort to meet the statutory deadline of February 2010, FinCEN developed preliminary plans and milestones for issuing the final rule on stored value. For example, the agency identified certain steps in the rulemaking process, such as summarizing comments and making recommendations to management before finalizing the rule. However, FinCEN’s plans did not assess which risks might affect the project, prioritize risks for further analysis by assessing their probability of occurrence, or develop actions to reduce threats to the project as suggested by best practices for project management. While FinCEN officials acknowledge risks exist, such as not knowing whether the nature of these comments may cause FinCEN to change its policy path with respect to the NPRM, they have not produced a plan that identifies actions to reduce threats to the project nor does their plan (1) consider alternative approaches that the agency may need to take based on comments received, or (2) include the time it may take to produce a series of rules, including a rule that addresses the cross-border transport of stored value. Assessing ways to mitigate risks associated with issuing rules on stored value and the cross-border transport of stored value could better position FinCEN to provide reasonable assurance that it can produce a set of rules that (1) fulfills the requirements of the Credit CARD Act and (2) informs decisions related to improving anti-money laundering practices among the stored value industry.

In general, federal rulemaking can be a lengthy process for significant regulatory action. In April 2009, we reported that the average time needed to complete a significant rulemaking across 16 case-study rules at four federal agencies was about 4 years—having a range from about 1 year to nearly 14 years with considerable variation among the federal agencies and rules. However, as called for by best practices for project management, all four of the federal agencies examined in the report set milestones for their regulatory development. Additionally, during the course of our review one of the four agencies provided data showing it routinely tracked these milestones, and two federal agencies subsequently provided some documentation and data to show likewise, when commenting on our draft report. Our report concluded that monitoring actual versus estimated performance enables agency managers to identify steps in the rulemaking process that account for substantial development time and provides information necessary to further evaluate whether the time was well spent.

A project management plan that is consistent with best practices could help FinCEN better manage its rulemaking effort. The Credit CARD Act required FinCEN’s effort in issuing regulations in final form implementing the BSA regarding the sale, issuance, redemption, or international transport of stored value to be completed within the prescribed time frame of 270 days from the date of enactment. However, FinCEN was unable to meet the statutory deadline of February 2010 to develop and issue these regulations and has much work to do to carry out the requirements of the Credit CARD Act. In addition to identifying and mitigating risks associated with the regulatory process, a project management plan could also help FinCEN (1) track and measure progress on tasks associated with completing mandated requirements, and (2) identify points throughout the project to reassess efforts under way to determine whether goals and milestones are achievable or project changes are necessary. If such plans call for changes to time lines, then FinCEN could request for legislation to extend the statutory deadline. Until the rule is finalized and implemented, vulnerabilities could continue to exist in the stored value industry with respect to the cross-border transport of stored value and money laundering for the purpose of supporting illegal activities.

More Work Remains to Ensure Agencies Enforce Cross-Border Currency Smuggling and Industry Complies with the Final Rule

While issuing the final rule on stored value will be a major step toward addressing regulatory gaps, much work remains to ensure enforcement by law enforcement agencies to identify cross-border currency smuggling with the use of stored value and to ensure issuers, sellers, and redeemers of such devices implement anti-money laundering requirements after the final rule is issued. For example, FinCEN faces the task of conducting awareness programs about the new rule for officials in law enforcement and industry, as well as determining whether the new rule will address the Credit CARD Act requirements or if additional rules will need to be developed. Beyond these tasks, federal law enforcement agencies and FinCEN face other challenges as well. These are described in more detail below.

Enforcing the Cross-Border Requirements Related to Stored Value Will Be a Challenge

If FinCEN requires individuals to declare stored value at the border when leaving the country, law enforcement officials we spoke to report that they would encounter the following challenges.

Detecting illegitimate stored value cards. According to the law enforcement officials we spoke with, it may be difficult to detect illegitimate stored value for three reasons. First, stored value cards loaded with large amounts of currency can be easily concealed in a wallet, letter, or package given the minimal amount of physical space a stored value product occupies, particularly when compared to bulk cash. Second, stored value cards do not contain any features that distinguish them from traditional credit or debit cards. Third, there is no mechanism by which to distinguish stored value cards that an individual possesses for legitimate reasons and those possessed for illegitimate reasons.

Obtaining proper traveler declarations. The public would have to be made aware of any new declaration requirement for the international transport of stored value. Further, it may be difficult for the traveler to recall the value on a stored value card and for law enforcement to verify the value on a card. Unlike cash which can be counted, the value of a stored value card can only be determined using a card reader or by accessing the account information.

Seizing the funds. Unlike cash, which can be physically seized, the process of seizing funds from a stored value card is much more difficult. Law enforcement first has to identify where the funds are held, which could be at any financial institution worldwide. Second, law enforcement would need to obtain the right to freeze the funds and to seize the funds through obtaining a warrant. However, in the time it takes to obtain a warrant, it is possible that a suspect and any co- conspirators could transfer the funds off of the stored value card to another account.

FinCEN Faces Challenges in Ensuring Industry Compliance With the New Rules

FinCEN’s approach for addressing vulnerabilities with cross-border currency smuggling and other illicit use of stored value depends, in part, on ensuring that industry complies with the new rules. Among other things, FinCEN faces challenges in areas such as monitoring MSBs, addressing gaps in anti-money laundering practices of off-shore issuers and sellers of stored value, and educating industry about the new anti- money laundering requirements.

Current Guidance for Monitoring MSB Compliance With Anti- Money Laundering Requirements Is Silent on Stored Value As administrator of the BSA, FinCEN is responsible for, among others things, developing regulatory policies for agencies that examine financial institutions and businesses for compliance with the BSA regulations. FinCEN is also responsible for overseeing agency compliance examination activities and provides these agencies with assistance to ensure they are able to carry out their compliance exams. Treasury, through FinCEN, has delegated the authority to conduct compliance examinations of certain nonfederally regulated nonbank financial institutions (NBFI), including MSBs, to the Office of Fraud/BSA, within IRS’ Small Business/Self- Employed Division. IRS Fraud/BSA carries out this function with approximately 385 field examiners nationwide.

FinCEN’s guidance for these examiners lacks specific information to follow when assessing MSB compliance by issuers, sellers, and redeemers of stored value. To provide guidance for performing MSB examinations to these examiners, in December 2008, FinCEN issued, jointly with IRS, the Bank Secrecy Act/Anti-Money Laundering Examination Manual For Money Services Businesses. FinCEN’s goal was to ensure consistency in the application of the anti-money laundering requirements called for by BSA. The manual includes general procedures that are applicable to all MSBs, such as procedures for reviewing an anti-money laundering program, but it does not specifically address transaction testing procedures for examining issuers, sellers and redeemers of stored value. Standards for Internal Controls in the Federal Government state that an effective control environment is a key method to help agency managers achieve program objectives.The standards state, among other things, that agencies should have policies and procedures that enforce management’s directives. The standards also state that such control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Developing policies and procedures for monitoring entities that issue, sell, and redeem stored value could help ensure that such entities carry out current and future anti-money laundering requirements. IRS Fraud/BSA officials acknowledged that there are no specific transaction testing procedures in the manual for examiners to follow at a MSB that issues, sells, and redeems stored value. They told us that at the time the manual was developed, FinCEN did not have sufficient information on the stored value industry and it wanted to get a better understanding of the industry before including examination procedures in the manual. In July 2010, FinCEN told us that it intends to update the manual to reflect final rules on MSB re-definitions and prepaid access. However, it is uncertain when it will do so because the manual update is contingent on completion of the final rules.

FinCEN Faces Challenges in Tracking Reports on Suspicious Activities Related to Stored Value FinCEN faces challenges regarding the ease in which it can analyze the SAR database for reports related to stored value. We sought to identify the types of reported suspicious activities involving stored value or prepaid products by analyzing the SAR database; however, we experienced significant data challenges that limited our efforts. Currently, SAR forms do not contain a mechanism to indicate that stored value was the financial service involved in the suspicious activity, aside from including this information in the narrative portion of the form. Therefore, to identify SARs potentially involving stored value products, the narrative portion of the form must be searched using key terms, such as “stored value,” “prepaid card,” or “gift card,” that might indicate this activity.

We reviewed a random, probability sample of 400 SARs that were identified by using narrative search terms believed to identify SARs filed due to stored value. However, for an estimated 39 percent of the reports, the suspicious activity described did not involve the use of stored value, even though one of the key search terms appeared in the narrative. For example, the search term identified in the narrative did not describe the type of suspicious activity that occurred, but rather, was included in a description of the type of services the reporting entity offered. In another example, the SAR was filed for suspicion of credit card fraud or structuring but the report also described the type of transactions the customer completed, one of which might have been the purchase of gift cards.

Due to these database limitations, it is difficult to track and monitor suspicious activity and the risks related to the use of stored value. Standards for Internal Controls in the Federal Government state that internal controls should include an assessment of the risks the agency faces from both external and internal sources. This guidance defines risk assessment as the identification and analysis of relevant risks associated with achieving the agency’s objectives and forming a basis for determining how risks should be managed. In addition, internal control standards state that once risks have been identified, they should be analyzed for their possible effect. Risk analysis includes estimating the risk’s significance, assessing the likelihood of its occurrence, and deciding how to manage the risk and what actions should be taken.

To address the difficulty in tracking suspicious activities related to stored value, FinCEN has discussed SAR form revisions with the Data Management Council that include check boxes for the types of items involved in the suspicious activity, including prepaid products. FinCEN plans to implement a revised SAR form with these changes in fiscal year 2012. Making such changes could better position FinCEN to fully evaluate the potential impact of the stored value industry on their ability to carry out the agency’s broad mission of enhancing U.S. national security, deterring and detecting criminal activity, and safeguarding financial systems from abuse.

FinCEN Faces Challenges in Developing a More Complete Database of MSBs FinCEN does not have a complete database on MSBs, including those that issue, sell, and redeem stored value. The lack of a comprehensive database complicates FinCEN’s ability to educate all MSBs and other entities about the new rule and its anti-money laundering requirements since the agency does not have full knowledge of the MSB population or other entities involved with stored value such as the telecommunications industry (mobile devices—cellular phones and other wireless communication devices). These entities may not be as familiar with BSA anti-money laundering requirements and need more time and orientation to understand and meet the new requirements.

Historically, identifying the population of MSBs subject to BSA requirements has been a challenge for FinCEN and IRS Fraud/BSA. This challenge has been well-documented over the years by, among others, Treasury’s Inspector General, us,and, more recently in the 2007 National Money Laundering Strategy Report. To illustrate this problem, IRS Fraud/BSA uses its Web-based Currency and Banking Retrieval System, public and commercial databases, Internet searches, and the yellow pages to identify MSBs to monitor because a complete database of MSBs does not exist. FinCEN performed searches of past BSA reports and got referrals from other law enforcement officials about potential MSBs to monitor. However, not all of the businesses identified were actually subject to BSA requirements. FinCEN officials told us they plan to use the Bank Secrecy Act Advisory Group and its Subcommittees, including the Stored Value Subcommittee, to identify ways to perform appropriate outreach to applicable MSBs, in part, to develop a more complete database. FinCEN has not set a date for completion of this effort as its plans have not been finalized.

FinCEN officials told us that under the new rule, monitoring and compliance may be performed by its Office of Compliance, Office of Enforcement, and IRS’ Fraud/BSA. However, even if it is able to develop a more complete database of MSBs, the degree to which IRS will monitor MSBs involved in issuing, selling, and redeeming stored value is an open question. For example, in March 2010, IRS told us that MSBs which provide stored value services generally have not been the target of compliance exams in recent years. IRS Fraud/BSA officials told us that most MSBs they examined for fiscal years 2007 through 2009 provided some other financial service (e.g. money transmission, check cashing, and issuing and selling traveler’s checks) as their primary financial service, and may have conducted stored value transactions as an auxiliary financial service. IRS Fraud/BSA work plans during this period as well as for the current fiscal year (2010) excluded examination of MSBs whose primary financial service is stored value for the following two reasons: (1) most MSBs that were examined provided multiple financial services of which stored value may have been only one of them, and (2) the existing statutory requirements for entities that offer stored value products are minimal and IRS resource expenditures would be more beneficial in focusing on other MSBs.

FinCEN’s Efforts to Close Gaps in Anti-Money Laundering Regulations for Off-Shore Entities Has Made Progress, but More Work Remains Combating the use of stored value by criminals involves not only efforts to implement anti-money laundering practices domestically, but also involves extending these efforts to international financial markets. Stored value issuers outside of the United States are generally not subject to FinCEN’s anti-money laundering regulations, even though the stored value products they issue may be used in the United States or elsewhere in the world. Such devices can be used to load money from this country and download money in foreign countries through ATMs.

Prior to enactment of the Credit CARD Act, FinCEN had begun the process of proposing a new rule to address, among other things, off-shore MSBs that market their stored value products in the United States but the final rule is being delayed. As of April 2010, agency officials told us its final rule related to off-shore MSBs will be delayed and issued at the time FinCEN issues the final rule addressing the requirements under the Credit CARD Act. This would allow for the provisions in both rules to be synchronized along with appropriate references because the two rules are closely related to one another.

Meanwhile, one way Treasury and FinCEN are addressing off-shore providers of stored value is through an intergovernmental entity called the Financial Action Task Force (FATF). FATF’s purpose is to establish international standards and to develop and promote policies for combating money laundering and terrorist financing. In 2006, FATF issued a study concluding that providers of new payment methods, such as stored value and mobile payments that are outside the jurisdiction of a given country, may pose additional risks of money laundering when (1) the distribution channel being used is the Internet, (2) there is no face-to-face contact with the customer, and (3) the new payment network operates through an open network that can be accessed in a high number of jurisdictions (e.g. ATMs worldwide). More recently, in its Strategic Plan (2008-2012) FinCEN recognized that to address the risk of cross-border transport and money laundering through the use of such devices calls for an approach that involves international cooperation with regulatory and law enforcement agencies outside of the United States. The degree to which FinCEN will succeed in gaining the cooperation of agencies outside of the United States in regulating stored value remains an open question. Officials at three of six law enforcement agencies we spoke with expressed concern about the risk of money laundering from off-shore MSBs.

According to Treasury officials we interviewed, the agency led the 2006 effort to disclose risks of money laundering related to off-shore MSBs that sell and issue stored value products and informed us that a new effort is currently under way to update the conditions and findings to see what more needs to be done to deter the use of such products for money laundering and terrorist financing activities. Treasury officials told us the updated report is being co-chaired by FATF representatives from Germany and the Netherlands with Treasury as a participating member. Although originally scheduled for June 2010, the revised issuance date for the updated report on new payment methods is October 2010.

FinCEN May Need to Evaluate Alternative Approaches to the Proposed Rule In the NPRM, FinCEN has included a request for comments on the proposed rule, as well as 15 questions it asks stakeholders to comment on. For example, FinCEN’s proposed rule exempts certain types of prepaid devices from anti-money laundering requirements. Specifically, the proposed rule exempts those devices that are (1) used to distribute payroll or benefits; (2) used to distribute government benefits; or (3) used for pre-tax flexible spending accounts for health care and dependent care expenses. The proposed rule also exempts programs offering closed system products that can only be used domestically as well as products that limit the maximum value and transactions to $1,000 or less at any given time. As stated in the NPRM, FinCEN recognizes that some members of the law enforcement community have expressed concern about exempting prepaid access payroll programs from anti-money laundering requirements. To address concerns such as these, FinCEN has requested comments on methods for ensuring that the company and its employees are legitimate, and that the program is valid. FinCEN has also asked for comments on the $1,000 a day threshold as it may apply to transactions involving multiple MSBs. According to FinCEN, it will consider this matter and any comments that it receives. In doing so, when FinCEN reviews the comments it receives, it may need to evaluate alternatives to exempting such prepaid programs to address the risk of money laundering and the transport of such devices across the nation’s borders to finance illegal activities. OMB Circular A-4 and Executive Order 12866, as amended, indicate that analysis of alternatives is a key component in assessing proposed rules.

FinCEN Acknowledges that Outreach Will Help Ensure Industry Compliance With the New Rules While the June 2010 NPRM proposes regulations that would require each “provider of prepaid access” to register with FinCEN and carry out anti- money laundering requirements related to prepaid access, the degree to which providers will register with FinCEN and carry out the proposed requirements remains an open question. FinCEN may face two challenges in this regard. First, while the proposed rule describes characteristics of MSBs that may qualify as a provider, entities in the prepaid access industry may not immediately know whether they are a provider without further clarification from FinCEN. This condition could lead to entities not registering as a provider when FinCEN intends that they follow the anti- money laundering requirements for such entities. Second, while sellers are exempt from registration requirements under the proposed rule, they are required to comply with certain anti-money laundering requirements. Not knowing whether the universe of providers and sellers is complete and accurate may hinder compliance efforts. As a result, FinCEN may face a higher risk of noncompliance without a program to educate industry about the rule and how to apply it.

In July 2010, FinCEN officials told us that they typically develop and conduct industry outreach, as resources allow, supporting the implementation of major new rulemakings. FinCEN officials explained that these outreach activities greatly assist covered industries in better understanding the new rules and how the new rules are to be applied. Because the prepaid access rulemaking is ongoing and FinCEN is awaiting feedback on its proposed regulations, preparations and planning for outreach to providers of prepaid access and other affected industry participants are in the initial phases, according to agency officials. Officials told us that FinCEN will continue its discussions with the Bank Secrecy Act Advisory Group and its Subcommittees to gain insight on how best to reach those affected by any final regulations. According to FinCEN, the level of effort associated with a major industry outreach effort of this kind will be significant.

Conclusions

Moving illegal proceeds across the border, whether in the form of bulk cash or stored value, represents a significant threat to national security. While CBP’s outbound inspection effort has shown some early results, particularly in terms of bulk cash seized, the program’s future is uncertain. If DHS continues to conduct outbound inspections, CBP faces important decisions regarding resources and processes for outbound inspections, and without all the necessary information, CBP may be unable to most effectively inform decisions on where scarce resources need to be applied. In addition, CBP could also improve its Outbound Enforcement Program by directing and ensuring ports of entry develop guidance that addresses officer safety. Also, by establishing performance measures related to program effectiveness, CBP could be better positioned to show the degree to which its efforts are stemming the flow of cash, weapons, and other goods that stem from criminal activities. While we recognize that this is a new program, without data and information to inform resource decisions, help ensure that officers are safe, and measure program effectiveness, CBP risks that the program could result in an inefficient use of resources, that officers will be endangered, and that Congress could not have the information it needs for its oversight efforts.

Even if efforts to reduce the flow of bulk cash into Mexico are successful, drug trafficking organizations and other criminal elements may shift their tactics and use other methods to smuggle illegal proceeds out of the United States, such as through the use of stored value. FinCEN is in the process of developing and issuing regulations related to the issuance of stored value, as required by the Credit CARD Act, but work remains and it is unclear when the agency will issue the final regulation. By developing a management plan with timelines for issuing final rules, FinCEN could be better positioned to manage its rulemaking efforts and to reduce the risk of cross-border smuggling and other illicit uses of stored value by drug trafficking organizations and others. Developing policies and procedures, such as for transaction testing for monitoring MSBs that issue, sell, and redeem stored value could help ensure that such MSBs carry out current and future anti-money laundering requirements.

Recommendations for Executive Action

To strengthen CBP’s implementation of the Outbound Enforcement Program as well as its planning efforts related to the program, we recommend that the Secretary of Homeland Security direct the Commissioner of Customs and Border Protection to take the following three actions: Collect cost and benefit data that would enable a cost/benefit analysis of the Outbound Enforcement Program to better inform decisions on where scarce resources should be applied. These data could include cost data on training and using currency canine for outbound operations as part of the Outbound Workload Staffing Model, cost estimates for equipping officers, installing technology to support outbound operations, assessments of infrastructure needs at port of entry outbound lanes, an estimate of the costs resulting from travelers waiting to be inspected, and information on quantifiable benefits, such as seizures, as well as non-quantifiable benefits resulting from outbound inspections.

Direct and ensure that managers at land ports of entry develop policies and procedures that address officer safety, such as detailing how officers should conduct outbound inspections on a busy highway environment.

Develop a performance measure that informs CBP management, Congress, and other stakeholders about the extent to which the Outbound Enforcement Program is effectively stemming the flow of bulk cash, weapons, and other goods that stem from criminal activities by working with other federal law enforcement agencies involved in developing assessments on bulk cash and other illegal goods leaving the country.

To strengthen FinCEN’s rulemaking process and to ensure IRS compliance examiners consistently apply the anti-money laundering requirements under the Credit CARD Act, we recommend that the Director of FinCEN take the following two actions: Update its written plan by describing, at a minimum, target dates for implementing all of the requirements under the Credit CARD Act to include FinCEN’s overall strategy and risk mitigation plans and target dates for issuing notices of proposed rulemaking and final rules.

Revise its guidance manual to include specific examination policies and procedures, including for transaction testing, for IRS examiners to follow at a MSB that issues, sells, and/or redeems stored value.

Agency Comments and Our Evaluation

We provided a draft of the sensitive version of this report to DHS, the Department of the Treasury, and DOJ for comment. In commenting on our draft report, DHS, including CBP, concurred with our recommendations. Specifically, DHS stated that it is taking action or plans to take action to address each recommendation. For example, DHS stated that it is collecting cost data as well as identifying quantifiable and non-quantifiable benefits of the outbound program to conduct cost/benefit analysis. In addition, DHS stated that it will update its National Outbound Operations Policy Directive to ensure each Port Director establishes a standard operating procedure for officer safety. DHS also stated that it will work to develop effective performance measures that accurately assess its surge- type outbound operations. CBP stated that it will coordinate with other law enforcement entities, including other DHS components and DOJ as well as the White House Office of National Drug Control Policy to enhance CBP interdiction efforts. DHS also stated that it is investigating the implementation of a random sampling process in the outbound environment that would provide statistically valid compliance results for outbound operations. If effectively implemented, these actions would address the intent of our recommendations.

In commenting on our draft report, Treasury, including FinCEN, stated that they agree with our recommendations. Specifically, Treasury stated that it anticipates issuing additional rulemaking to address all areas of potential vulnerability in the prepaid access sector. Treasury stated that although identifying target dates is particularly challenging when taking a phased approach to rulemaking, it agrees that the existing plan should be updated accordingly. Additionally, Treasury stated that when the initial rulemaking is finalized, it will proceed with its plan to update the Money Services Business examination manual and other related outreach efforts. If effectively implemented, these actions would address the intent of our recommendations.

DOJ did not have formal comments on our report. DHS, Treasury, and DOJ provided technical comments, which we incorporated as appropriate. Appendix III contains written comments from DHS. Appendix IV contains written comments from Treasury.

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If your offices or staff have any questions concerning this report, please contact me at (202) 512-8777 or by e-mail at stanar@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V.

Appendix I: Costs for Outbound Enforcement Program (Fiscal Years 2008-2010)

Appendix I: Costs for Outbound Enforcement Program (Fiscal Years 2008-2010)

Fiscal year 2009 Fiscal year 2010 (projected)

Miscellaneous expenses.

Appendix II: General Overview of the Federal Rulemaking Process

This appendix provides an overview of the steps in the rulemaking process for a significant regulatory action under Executive Order 12866, as amended, and the potential time involved for some of the steps.

Step 1: Agency (or agencies, if a joint rule) completes development of the notice of proposed rule making (NPRM), which includes the proposed rule and supplemental information.

Step 2: Agency submits the draft NPRM and supporting materials, including any required cost-benefit analysis, to the Office of Management and Budget (OMB) for review.

Step 3: OMB reviews the draft NPRM and supporting materials and coordinates review of the proposed rule by any other agencies that may have an interest in it.

Step 4: OMB notifies the agency in writing of the results of its review, including any provisions requiring further consideration by the agency, within 90 calendar days after the date of submission to OMB.

Step 5: OMB resolves disagreements or conflicts, if any, between or among agency heads or between OMB and any agency; if it cannot do so, such disagreements or conflicts are resolved by the President or by the Vice President acting at the request of the President.

Step 6: Once OMB notifies the agency that it has completed its review without any requests for further consideration, the agency reviews the NPRM and publishes it for public comment in the Federal Register.

Step 7: Agency is to give the public a meaningful opportunity to comment on the proposed rule, which generally means a comment period of not less than 60 days.

Step 8: Once the comment period has closed, the agency reviews the comments received, makes appropriate revisions to the proposed rule, and prepares a notice of the final rule, including supplemental information with responses to comments received.

Step 9: Agency submits draft notice and final rule, including updated supporting materials or cost-benefit analysis, to OMB for review.

Step 10: OMB reviews the draft notice, final rule, and supporting materials; coordinates review by any other agencies that may have an interest in the rule; and notifies the agency of the results within 90 calendar days after the date of submission to OMB.

Step 11: Once OMB notifies the agency that it has completed its review without any requests for further consideration, the agency reviews the rule one more time and generally publishes the final rule and supplemental information in the Federal Register at least 60 days before the new rule takes effect.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: Comments from the Department of the Treasury

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to those named above, David Alexander, Neil Asaba, Chuck Bausell, Willie Commons III, Kevin Copping, Mike Dino, Ron La Due Lake, Jan Montgomery, Jessica Orr, Susan Quinlan, Jerome Sandau, Wesley Sholtes, Jonathan Smith, Katherine Trenholme, and Clarence Tull were key contributors to this report.