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Survey of Disbursement Procedures at the U.S. Treasury, Manila Regional Disbursing Office Related to Payments Made by "Restricted" Dollar Checks

Published by the Government Accountability Office on 1971-02-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                        UNITED STATES GENERALACCOUNTINGOFFICE
                                                 WASHINGTON,     D.C.     20548


lNl-ERNATlONAL        DIVISION




                 B- 118709
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                                                                                                 LM095708


                 Dear Mr,        Secretary:

                 The General Accounting       Office recently   completed a survey of
        / disbursement    procedures     at the U,S. Treasury,     Manila Regional Dis-
          bursing Office      (RDO) related    to payments made by "restricted"    checks,                   0. IqzT
           .
          i.e.,   a U.S, dollar    denominated instrument      cashable only in local
    8.f
    ;r    currency   (pesos).

                        We estimate    that a change in the form of payment from "restricted"
                 dollar     checks to straight   peso checks would result     in an annual savings
                 to the U,S. Government of about $660,000 and increased benefits                 to
                 individual      payees of about $1.2 million.       These benefits     would accrue
                 due to elimination       of the profit     earned by banking institutions       which
                 buy pesos at a more favorable          rate than they give their      customers
                 when cashing "restricted"       checks*

                 PRESENT DISBURSEMENT PROCEDURE

                        At the time of our review the Manila RDO was making monthly
                 disbursepents    of about $5 million      in restricted    U.S. dollar   checks.
                 These disbursements     were generally      repetitive   monthly benefit   pay-
                 ments to individuals.       The U.S. Government has a dollar        denominated
                 commitment to recipients      of restricted       dollar checks; however, a
                 U.S. dollar   commitment in a foreign         country may be paid in either
                 U.S, dollars    or in foreign   currency.

                         The Manila RDG issues two types of dollar            denominated checks
                 cashable only in pesos.             One type of restricted      dollar    check is
                 drawn on a U.S. Treasury depositary              in Manila, and is used in dis-
                 charging the U.S. commitment to a certain               group of World War II
                 Filipino      veterans0       This type of dollar    denominated check, repre-
                 senting about $2.5 million            of the monthly restricted        dollar  payments,
                 is inscribed        as follows:      "Pay only in pesos the equivalent         of U.S.
                 dollars      shown."     We were advised that in spite of the restricting
                 inscription,        a certain     amount of these checks have been flowing          into
                 the Hong Kong money market,            thus circumventing     the Philippine      Govern-
                 ment foreign        exchange regulations,




                                              50 TH ANNIVERSARY         1921- 1971
   i, Prior to March 1970, payees receiving        this type of restricted
dollar   check were paid in the form of a peso check.          In March 1970
the Manila RDO began issuing    restricted     dollar   checks in place of
peso checks in order to resolve certain        bookkeeping problems en-
countered by the administrative      agency.    These problems resulted
from rate fluctuations    caused by the Philippine       Government's
February 1970 de facto devaluation       of the pesoa Based on the pro-
posed procedure discussed below, we do not anticipate            that these
bookkeeping problems would recur by changing the form of payment
from restricted    dollar check to peso check.

        The second type of restricted            dollar    denominated check issued
by the Manila ED0 is a regular              U.S. Treasury check which is over-
printed     as follows:       "This check payable only through Manila Office,
First    National      City Bank.    Payment     will    be made in accordance     with
Philippine      foreign     exchange regulations."          U.S. Treasury checks,
mailed from the United States and overprinted                   as above, are used to
discharge     U.S. Government obligations             to residents     living in the
Philippines       including    veterans     of the U.S. Armed Forces, and Social
Security,     Civil     Service Commission, and U.S. Coast Guard beneficiaries.
The overprinting          of U,S. Treasury checks resulted           from an April    1969
U.S,-Philippine         Government agreement whereby the U,S, agreed to assist
in the implementation           of Philippine      foreign   exchange regulations       in
an attempt      to preclude U.S. Treasury dollar             checks from entering       the
black market.

        Although there are two distinct          types of restricted         U.S. dollar
checks issued by the Manila RDO, the procedures                for issuing each type
of check are basically         identical.     Under current      procedure the admini-
strative     office    submits a payment voucher to the disbursing               office
in the normal manner stated in U.S. dollars,                Payment vouchers for
checks drawn on the Manila depositary              are annotated     "payable only
in peso as the equivalent          of U.S. dollars     shown."      Payment vouchers
for regular       U.S. Treasury checks are not so annotated,              However,
all U,S. Treasury checks issued by the Manila RDO for delivery                        in
the Philippines        are overprinted    unless documentation        is provided
entitling      the payee to receive U.S. dollars.           The accounting        pro-
cedure and actual printing           of checks for repetitive        benefit     pay-
ments is nearly identical,           with only minor exceptions,         regardless
of the type of restricted          dollar   check involved,

        We estimate    that under the current       procedure of issuing restricted
dollar     checks cashable only in pesos, Philippine             banking institutions
cashing these dollar        checks for pesos will realize          an annual profit
of about $1.9 million,         This estimated      profit     is computed based on the
difference      between the peso exchange rate granted by banks when cashing
dollar     checks and the inter-bank      rate--the       rate banks receive in
exchanges with each other.          We noted that during the period October


                                                                                         -2-
through December 1970 the rate granted by banks when cashing restricted
dollar     checks fluctuated    substantially     between banks on a daily basis.
Further,     outside the Manila area where about 80 percent of the individual
recipients      live,  the peso/dollar     exchange rate is even less favorable
than in the Manila area.

PROPOSED DISBURSEMENT PROCEDURE

       We believe     that a change in the form of payment from U.S, dollar
checks payable only in pesos to peso denominated checks would result
in an estimated       annual benefit      to individual        recipients    of about
$1.2 million,     and an annual savings to the U.S. Government of about
$660,000.     The potential      benefits      to be derived from issuing peso
denominated checks in lieu of restricted                dollar      checks would be the
same to the U.S. Government and the individual                    recipients   regardless
of whether the restricted          checks were regular U.S. Treasury checks or
drawn on a depositary        bank.     Further,    the issuing        of peso denominated
checks rather      than restricted      dollar    checks would be consonant with
the LJ.S,-Philippine       Government agreement designed to curtail                U.S.
dollar   black market activities.

       The proposed method for discharging  U.S. obligations       currently
being paid by restricted   dollar  check would basically     involve    the
following   procedures:

      --   Payment vouchers stated in U.S. dollars       would be submitted
           to the disbursing office   by the administrative       office  in the
           same manner as under the current     procedures,    thus precluding
           any change in the accounting    system of the administrative
           office.

      --   The required       amount of pesos would be purchased by the
           disbursing     office   at the inter-bank     rate and deposited in
           a "Foreign     Service Accountability"       (FSA) account which
           represents     a clearing    account insofar     as disbursement
           operations     are concerned.

      --   An initial    determination     would be made by the administrative
           agency to ascertain       those payees entitled     to receive U.S.
           dollars    and those payees not entitled       to receive U.S. dollars
           in accordance     with Philippine    foreign   exchange regulations.

      --   For those payees not entitled         to receive U.S, dollar       checks--
           those currently   receiving    restricted      dollar    checks--peso
           checks would be issued at a fixed "accommodation"              exchange
           rate computed monthly or semi-monthly;           the fixed "accommodation"
           rate to be established      near the most advantageous prevailing
           over-the-counter    rate for the period.


                                                                                        -3-
           .

 I_




      --
               The gains resulting      from the difference        between the pesos
               purchased at the prevailing        inter-bank      rate and disbursed     at
               the prevailing     "accommodation"      over-the-counter     rate would be
               deposited    to Treasury    account "Gains and Deficiencies         on
               Exchange Transactions,       Treasury     (fiscal   year)," account
               number 20-6763 for the current          fiscal    year, or returned    to
               the appropriation      account from which the gains were derived,
               as appropriate.

        Under the above procedures    we estimate     that individual      recipients
of the peso checks would benefit       by about $1.2 million       annually--the
difference    between the disbursing    office    "accommodation"     exchange rate
and the rate payees are able to command from local banks.                 The U,S,
Government would benefit      by about $660,000 annually--the         difference
between the prevailing     "accommodation"     exchange rate and the inter-
bank rate,

        During our survey we evaluated                the mechanical          processing
configuration        utilized       at the Manila Disbursing             Office     in issuing
checks to determine             whether our proposed procedure                may be economically
implemented       within      the existing      processing        configuration.           We noted
that a method was needed to convert                   numerous individual             dollar   amounts
into peso equivalents              at the prevailing         "accommodation"          rate,   print
the check in the peso amount , and at the same time retain                               the dollar
amount on the master pay card,                   We understand        that there is equipment
on the market today, available                 at nominal cost, which could perform
this function        within      the constraints        of the present         data processing
configuration.           Other portions        of the data processing             system would
remain unchanged, including               printed     listings      provided      to the admini-
 strative    offices       for accounting        purposes,        Further,     the implementation
of the proposed procedure               would eliminate         the need to overprint            U,S.
Treasury      checks.

       We reviewed U.S, Treasury          and State Department            regulations
governing    foreign     currency    disbursements        to determine       whether any
regulations     exist which may preclude            implementation        of the proposed
procedure.      We found that foreign          currency      acquisitions       and dis-
bursements     are to be made at the prevailing               exchange rate.          However,
the prevailing       exchange rate at which foreign              currency     is acquired--
the inter-bank       rate-- is not necessarily          the same prevailing           exchange
rate at which disbursements            are made-- the over-the-counter              rate0    We
noted that at the present          time certain       transactions        at the Manila
RDO are conducted at differing             prevailing       exchange rates.         Based on
our review,     we are not aware of any existing                laws or regulations
which would preclude         implementation       of the proposed procedures.




                                                                                              -4-
               - We discussed        the proposed procedures        with the Manila Regional
     "     Disbursing      Officer     pointing  out the significant         potential        benefits
           to both the U.S. Government and individual                 recipients        obtainable     as
           a result     of the suggested change.            The disbursing       officer     generally
           agreed with the procedural           feasibility      of such a change,           He stated
           that some problem may be encountered               in reconciling         the local currency
           account;     however, this could most likely            be resolved.          The disbursing
           officer    indicated      that returning       the gains derived to the agencies'
           appropriation        account may be the more desirable            alternative,        since
           returning     funds appropriated        for an agency's activities             to the
           Treasury by this method may be of questionable                   legality.        However,
           the savings to the Government would be the same regardless                          of which
           of the two methods are used in accounting                for the gains.

                Treasury officials    with whom we discussed    this matter in
           Washington said that they could not comment on overall        savings                 that
           might be realized    by a change of procedures   without  a thorough                  study
           of benefits   and costs*

            CONCLUSIONS AND REXOMMEXDATION

                  We believe that substantial        benefits    would be derived by both
           the U,S. Government and individual          recipients     if disbursements     were
           made/in the form of peso checks rather than restricted                dollar   checks,\
           Further,     the issuing of peso checks by the Manila RD6 would preclude
           these funds from flowing       into dollar     black market activities       in
           consonance with Philippine        foreign   exchange regulations       and the
           U,S.-Philippine      Government agreemente

                  We recommend that the Secretary     of the Treasury,    in coordination     a/
    .I..                                                                                     $2
            with the Secretary    of State, the Administrator     of the U.S. Veterans
            Administration,    and the heads of other cognizant     administrative     agencies,            14
             take steps to implement the proposed procedure to make disbursements            by
           /peso check rather than restricted     dollar   checks '



                 Copies of this letter are being sent to the Director,    Office of
           Management and Budget, the Secretary    of State, and the Foreign Operations
           and Government Information  Subcommittee,   House Committee on Government    b IS"//
4          Operations.

                   We shall appreciate   receiving your comments relative  to the
            foregoing,    together  with advice of any action taken or planned.   We
            shall be happy to discuss these matters with you or members of your
            staff   at your convenience,




           The Honorable
           The Secretary      of Treasury                                                            -5-