I \ 10 United States General Accounting Office ; ‘GAO Report to Congressional Committees . 3 and Subcommittees C -1 . .‘: .: June 1990 ASSETFORFEITURE :’ Legislation Needed to Improve Cash Processing and c F’inancial Reporting _’ United States General Accounting Office Washington, D.C. 20548 General Government Division B-240015 June 19,199O The Honorable John Glenn Chairman, Committee on Governmental Affairs United States Senate The Honorable Joseph R. Biden, Jr. Chairman, Committee on Judiciary United States Senate The Honorable Lloyd Rentsen Chairman, Committee on Finance United States Senate The Honorable John Conyers, Jr. Chairman, Committee on Government Operations House of Representatives The Honorable Jack Brooks Chairman, Committee on Judiciary House of Representatives The Honorable Dan Rostenkowski Chairman, Committee on Ways and Means House of Representatives The Honorable William J. Hughes Chairman, Subcommittee on Crime Committee on Judiciary House of Representatives The Honorable J.J. Pickle Chairman, Subcommittee on Oversight Committee on Ways and Means House of Representatives This report is one of a series we will be issuing to address various aspects of the Department of Justice’s and the U.S. Customs Service’s asset forfeiture programs. The Comptroller General has designated the asset forfeiture programs as 1 of 14 high-risk areas warranting special audit effort. Both programs deal with hundreds of millions of dollars of Page 4 GAO/GGD-90-94 Asset Fmfeiture B-240016 Requiring uncontested cash seizures over $100,000 to be forfeited judi- cially adds an unnecessary burden on the district courts and contributes to inefficient use of US. Attorney resources. Changing the law to permit administrative forfeiture of all uncontested cash seizures, regardless of amount, would have multiple benefits. It would reduce the court system’s burden, permit more efficient use of attorney resources, and allow millions of dollars to be put to use sooner by the government without affecting individual due process rights. H.R. 1594, currently pending before Congress, contains a provision allowing Justice and Cus- toms to administratively forfeit all uncontested cash seizures regardless of amount. Contested seizures would continue to be resolved judicially. Another cash management issue needing attention is the long-standing problem of agencies unnecessarily holding seized cash for evidence pur- poses. Both Justice and Customs established policies to minimize the unnecessary holding of cash as evidence. While the situation is much improved from earlier years, the problem remains. Justice and Customs need to do a better job of insuring that seized cash is not held unnecessa- rily for evidence purposes in order to maximize the economic benefits to the government and minimize the risks associated with holding cash. Stronger financial information and internal controls are also needed to adequately and accurately assess program performance. Currently, neither Congress nor the agencies have a clear picture of whether the government is making or losing money on the management and sale of seized assets. The asset forfeiture funds have been in operation for 6 years, but the agencies have never produced a full set of audited finan- cial statements even though the programs have been designated by their agencies as highly vulnerable to fraud, waste, and mismanagement. Stat- utorily requiring a full set of annually audited financial statements would significantly strengthen internal controls and improve the infor- mation available for effective oversight by both Congress and the affected agencies. H.R. 1594 establishes such a requirement for Customs. Our objectives were to (1) determine if seized cash could be forfeited Objectives, Scope, and faster and thereby put to use sooner and (2) assess the adequacy of Methodology Justice’s and Customs’ forfeiture fund financial reporting. Our audit work concentrated on those locations where Justice and Cus- toms seize the most property-Florida, California, Texas, and New York. Work included interviewing knowledgeable Justice and Customs Page 3 GAO/GGD90-94 Asset Forfeiture B240016 because contested cases would continue to be resolved judtiially. Both Justice and Customs have endorsed the proposal, and H.R. 1594, which is currently pending before Congress, contains a provision to implement this recommendation. Thus far, Justice and Customs have been only partially successful in Agencies Continue to identifying and depositing seized cash not needed for evidence. Failure Unnecessarily Hold to promptly identify and deposit seized cash not needed for evidence Seized Cash for prevents the government from obtaining economic benefits from the idle cash and increases the risks associated with handling, storing, Evidence accounting for, and safeguarding the cash. In 1987 Justice and Customs established policies designed to minimize the unnecessary holding of cash. Although the situation has much improved because of the new pol- icies, problems remain. Both Justice and Customs policies stress the need to promptly identify and deposit into their Treasury holding accounts all seized cash not needed as evidence. Basically, this process is to be done within 60 days of seizure. Decisions to hold for evidence amounts of less than $5,000 reside with U.S. Attorneys. Decisions to hold amounts of $5,000 or more require Department of Justice headquarters approval. Agency policies discourage retaining seized cash for evidence unless it is absolutely crit- ical to the case. These policies take into account the fact that photo- graphs or videotapes can be used as substitutes for seized cash. Reasons used to justify retention of seized cash include unique packaging, finger- prints, and narcotic residue. Justice’s policy also points out that cash, unlike other assets seized by the government (e.g. real property, conveyances), is a fungible item, and this fact allows the government more flexibility in its decision whether to hold it for evidence. For example, a decision to return seized cash to its owner following case dismissal requires only that a like amount of cash be returned-not the actual cash seized. Therefore, given the agen- cies’ policies and the fact that cash is a fungible item, it seems reason- able to expect that most cash would normally be deposited in the agencies’ holding accounts. We asked Justice and Customs how much seized cash was being held as evidence in February 1990. We learned that both agencies were still unnecessarily holding substantial amounts. Customs, for example, was holding about $36 million nationwide. About $31 million of this amount involved seizures of $5,000 or more that had been on hand for more Page 5 GAO/GGD99-94 Asset Forfeiture B-240015 Both agencies have identified their seized property programs as highly vulnerable to fraud, waste, and abuse, and have acknowledged that sig- nificant internal control weaknesses plague these programs. Both agen- cies have embarked upon ambitious efforts to correct these problems. A key part of any effort would be to have integrated, sound financial sys- tems in place that can produce accurate, timely, and comprehensive financial statements capable of audit verification. The successful prepa- ration of financial statements on an annual basis would help provide a clear picture of Justice’s and Customs’ financial condition and the results of their operations. In its 1989 Financial Integrity Act report to the President and Congress, Justice said its seized property program had material weaknesses that included . inadequate systems for tracking inventories, . insufficient internal controls, and . a lack of adequate periodic program and functional audits. At Customs, key management weaknesses included . insufficient data to effectively manage inventories, . inadequate physical inventories, and l an absence of regular financial audits. These fundamental problems exist for a number of reasons. First, the seized property program must compete for limited resources with other enforcement programs within Justice and Customs. Second, both agen- cies acknowledge that they lack property management expertise. Third, both agencies acknowledge that there has not been effective headquar- ters oversight. The bottom line is that neither agency has a good way of measuring the effectiveness or efficiency of its operations. To address these problems, Justice and Customs have begun efforts to (1) redesign their seized property data systems, (2) provide more prop- erty management training to field operations, and (3) increase their headquarters oversight. In addition, both Justice and Customs have recently initiated efforts to prepare a set of financial statements for their forfeiture programs. We have assisted these agencies by helping them develop pro forma financial statements (see app. I). We and pro- gram managers from both agencies agree that these statements can help these agencies to Page 7 GAO/GGBSO-94 Asset Forfeiture B-240015 To ensure compliance with existing cash management policies, we also Recommendation to recommend that the Attorney General and the Secretary of the Treasury the Department of aggressively monitor t,he holding of seized cash for evidence purposes to Justice the insure that cash is not being held without adequate justification. This can be accomplished by routinely following-up with the seizing agencies Department of the and U.S. Attorney offices t,o determine if the reasons for initially holding Treasury seized cash as evidence remain valid and that the required approvals have been obtained. - We did not obtain written comments on this report. However, we dis- cussed the report with Justice and Customs officials and have incorpo- rated their comments where appropriate. Agency officials agreed with the recommendations contained in the report. We are sending copies of this report to the Attorney General; Secretary, Depart,ment of the Treasury; and the Commissioner, U.S. Customs Ser- vice. We will provide copies to other parties upon request. Major contributors to this report are listed in appendix II. If you have questions about this report, please call me on 275-8387. .J. William Gadsby / Director, Federal Management Issues Page 9 GAO/GGD-90-94 Asset Forfeiture Page 11 GAO/GGD-90-94 Asset Forfeiture Appendix I Pro Forma Financial Statements r ASSET FORFEITURE FUND STATEMENT OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30 (in thousands) REVENUES 199x Forfeited Cash Sales of Forfeited Property, Net (Note 3) Assets Retained for Agencies Use State and Local Agencies Foreign Governments Federal Agencies Interest Income Investment Income Fines and Penalties in Lieu of Forfeiture Recovery of Returned Asset Management Costs Miscellaneous Income Total Operating Income Less - Refunds Net Operating Income EXPENSES Asset Management Expenses Property Management and Maintenance Expenses Contractor/Selling Expenses Theft, Loss, and Damage Evidence Storage and Destruction Case Related Expenses Legal Advertising Expense Other Expenses Program Management Expenses Automated Data Processing Training and Printing Specialized Contract Services Miscellaneous -- Total Expenses - - Excess of Revenues over Expenses -- Page 13 GAO/GGD-90-94 Asset Forfeiture Appendix I Pm Forma Financial Statements ASSET FORFEITURE FUND STATEMENT OF CHANGES IN FINANCIAL POSITION (Cash Basis) FOR THE YEARS ENDED SEPTEMBER 30 (in thousands) --199x 199x SOURCESOF CASH Excess of Revenues over Expenses Items Not Affecting Cash: Allowance for Theft, Loss, and Damages Decrease (increase) in Accounts Receivable Decrease (increase) in Interest Receivable Increase (decrease) in Accounts Payable Increase (decrease) in Liens Payable Increase (decrease) in Taxes Payable Increase (decrease) in Distributions Payable Increase (decrease) in Refunds Payable -- Total Sources of Cash USES OF CASH Distributions State/Local Agencies Foreign Governments Federal Agencies Total Cash Distributed -- Total Uses of Cash Cash Retained in Fund -- CASH - beginning of the year -- CASH - end of the year -- Page 15 GAO/GGD9&94 Asset Forfeiture Appendix I Pro Forma Financial Statements Asset Forfeiture Fund Schedule of Revenues Over Asset Specific Expenses for the Year Ended September 30,19Xx (In Thousands) Revenues Cash Property Investments Vehicles Vessels Aircraft Other Total Sales of forfelted property, net Assets retalned for use by: xxx xx xx xx xx xx xx xxx state and local agencies X X X X X X X foreign governments X X X X X X X federal agencies X X X X X X X Interest Income X X Investment Income X __- Recovery of returned asset management costs X X X X X X X X Miscellaneous income X X X X X X X ______ Fines ~-__ and penalties X X X ~-.X X X X Total operating income xxx xx xx ___--xx xx xx xx xxx less refunds __---__-- X X Net ooeratina income xxx xx xx xx xx xx xx xxx Asset specific expences Property management and maintenance X X X X __-X X X xx Contractor/selllnq _ expenses X X X -__ X X X xx Theft, loss, and damages X X X X X X xx ---_______ Evidence storage and destructIon X X X X X X xx .____~. ~. __-__-..-__.-- Total asset soecific exoenses X X X X X X X xx Revenues over asset specific expenses xxx xx xx xx xx xx xx xxx Page 17 GAO/GGD9&94 Asset Forfeiture Appendix II Major Contributors to This Report John Stahl, Assistant Director General Government *JamesBlack, Advisor Division, Washington, Roger Lively, Assignment Manager D.C. - Shirley Bates, Evaluator Donald Wurtz, Special Assistant to the Assistant Accounting and Comptroller General Financial Management -Judith Czarsty, Evaluator-in-Charge Division, Washington, D.C. Shellee Soliday, Site Senior Atlanta Regional Office Aleta Hancock, Evaluator Los Angeles Regional Office (246004) Page 18 GAO/GGD90-94 Asset Forfeiture Appendix 1 Pro Forma Financial Statements NOTES TO ASSET FORPEITUPX FUND PRO-FOWA BINAUCIAL STATNNNNTS 1. Organization and Purpose Background information on agency, the forfeiture act, and fund capitalization. 2. Summary of Significant Accounting Policies - distribution of net proceeds, - distribution of forfeited assets out of the fund, - interest income, - investments, - reimbursement of other agencies, - seized cash and assets. 3. Table Showing the Derivation of Net Sales Sales of Forfeited Property Less: Liens Fair Market Value Adjustment on Disposal Net Sales of Forfeited Property Total cash (no netting of equity sharing). 5. Overall Note on Expenses Disclose any significant contractor relationship and responsibilities. When multiple contractors are used, suggest including a small schedule indicating expenses related to each of the contractors. 6. Accounts Receivable 7. Table Showing Distributions of Excess Revenues over Expenses -- including equipping conveyances. Agencies Cash Non-cash State/local Federal Foreign 8. Contingencies 9. Reconciliation to Budget Page 16 GAO/GGD90-94 Asset Forfeiture Appendix I Pm Forma Financial Statements DISTRIBUTION OF EXCESS OF REVENUES OVER EXPENSES Transfers to State and Local Agencies Transfers to Foreign Governments Transfers to Federal Agencies Total Distributions -- Increase (Decrease) in Fund Balance -- Beginning Fund Balance -- Ending Fund Balance -- Page14 GAO/GGIWO-94AssetForfeiture Appendix I Pro Forma Financial Statements ASSET FORFEITURE FUND STATEMENT OF FINANCIAL POSITION FOR THE YEARS ENDED SEPTEMBER 30 (in thousands) 199x m ASSETS Forfeited Cash- Held in Treasury In Commercial Banks Other Cash Accounts Receivable Interest Receivable Forfeited Property - Real Property Investments Vehicles Vessels Aircraft Other -- Total Forfeited Property Less - Allowance for Theft, Loss and Damages Allowance for Fair Market Value Adjustment on Disposal Total Assets LIABILITIES Accounts Payable - Contractor Liens Payable Taxes Payable Accounts Payable - Other Deferred Revenue from Forfeited Assets Distributions Payable to State and Local Agencies Distributions Payable to Foreign Governments Distributions Payable to Federal Agencies Refunds Payable -- Total Liabilities Contingencies (See Note 8) FUND BALANCE Total Liabilities and Fund Balance -- page12 GAO/GGD-99-94 Asset Forfeiture Contents Letter Appendix I 12 Pro Forma Financial Statements Appendix II General Government Division, Washington, D.C. 18 Major Contributors to Accounting and Financial Management Division, 18 Washington, D.C. This Report Atlanta Regional Office 18 Los Angeles Regional Office 18 Page 10 GAO/GGD-SO-94 Asset Forfeiture B249915 l more accurately report forfeiture program results by facilitating a full disclosure of their asset management and disposal activities, . more accurately determine the cost effectiveness of the asset manage- ment and disposal strategies, and l limit Justice’s and Customs’ exposure to fraud, waste, and mismanagement. While the current *Justice and Customs seized property program man- agers seem committed to preparing these statements, fixing their cur- rent data systems will require a long-term commitment. Indeed, the time required could likely exceed the tenure of the current seized property program managers. Congress can help ensure continuity of effort by requiring a set of annually audited financial statements. H.R. 1594, which is currently pending before Congress, establishes such a require- ment for Customs. _________~ Both Justice and Customs have administrative actions underway to cor- Conclusions rect, within their authority, the serious, long-standing cash management and financial reporting problems faced by t,hese programs. However, legislative actions are needed to further improve the effectiveness of these programs. __________~ We recommend that, Congress Recommendations to Congress . amend 28 IJSC. 524(c) to require that the Justice annual forfeiture fund report to Congress include a complete set of audited financial state- ments prepared in a manner consistent with the requirements of the Comptroller General and l amend 19 IJSC. 1613b to require that the Customs annual forfeiture fund report to Congress include a complete set of audited financial state- ments prepared in a manner consistent with the requirements of the Comptroller General. Page a GAO/GGtWO-94 Asset Forfeiture B240015 than 60 days. About $19 million of the $31 million was in Miami, New York, and Los Angeles. Our inquiries of Customs officials at these loca- tions showed that much of this money was not necessary for evidence and should have been deposited in the agency’s holding account. Deposits totaling about $8.3 million were made within 2 weeks following our initial inquiries and at least $1.5 million more was deposited during the following 2 weeks. At the time of our inquiries in February 1990, Justice was holding about $35 million nationwide for evidence. Following our inquiries, Justice queried its agencies to determine if any of this money was being held unnecessarily. Justice’s follow-up resulted in the identification and deposit of another $16 million that was being unnecessarily held. On at least two occasions since 1987, Justice has formally reminded its employees of its policy concerning the holding of cash as evidence. Cus- toms has drafted a proposed revision to its seized cash directive that requires more communication between its office and the office of the U.S. Attorney. However, because the problem of unnecessarily holding seized cash as evidence has been recurring, Justice and Customs need to more aggressively monitor the practice of holding cash as evidence to insure that the cash is not being held without adequate justification. This can be accomplished by routinely following-up with the seizing agencies and ITS. Attorney offices to determine if the reasons for ini- tially holding seized cash as evidence remain valid and that the required approvals have been obtained. Justice and Customs are responsible for the control and management of Audited Financial their seized property, which, as of December 1989, was estimated to be Statements Needed worth $1.4 billion. Operations of this nature and size should be managed on a day-to-day basis through effective and efficient use of business- type financial information flowing from good accounting systems. Reli- able financial information is needed for program managers to make informed decisions and evaluations. In addition, Congress needs the information in its oversight role to have an accurate and complete pic- ture of whether the government is managing its forfeiture program in the most cost effective and efficient manner. However, neither agency has produced a full set of audited financial statements covering forfei- ture program operations. Page 6 GAO/GGD9094 Asset Forfeihue B-249915 officials; examining cash management policies, procedures, and eviden- tiary cash records; and assisting both Customs and Justice program offi- cials in preparing financial statement formats. Our work in the cash area represents the latest in a series of GAO products addressing the need for a legislative change in the way seized cash is processed. Our method- ology for the work relating to processing seized cash centered around a review of 1,125 closed cases totaling $123.9 million. We worked back- wards from cases closed in 1988, reviewing as many cases as time per- mitted. Our work was done in accordance with generally acceptable auditing standards. Views of responsible agency officials were included where appropriate. Because of a legislative requirement, most seized cash has been forfeited Most Seized Cash Can judicially even though no one came forward to claim the money. Be Forfeited Faster Processing such seizures judicially requires more time and adds unneces- sarily to district courts’ and U.S. Attorney offices’ workloads. Our analysis of the 1,125 cash cases shows that (1) judicial forfeitures take longer than administrative forfeitures and (2) most cash was for- feited judicially even though it was uncontested. Customs’ and Justice’s judicial forfeitures averaged 15 and 12 months, respectively, while administrative forfeitures averaged about 8 months at both agencies. About 82 percent ($101.6 million) of the cash went through a judicial proceeding and 18 percent ($22.3 million) through an administrative proceeding. About 89 percent ($90.4 million) of the judicially forfeited cash was uncontested. These cases were forfeited judicially because of the legal requirement that cash over $100,000 must go through a judicial proceeding. As of December 1989, seized cash represented about 39 percent ($557 million) of Justice’s and Customs’ $1.4 billion inventory in seized prop- erty. Unless the law is changed permitting all uncontested cash seizures to be processed administratively, an estimated $406 million will also go through the slower judicial process uncontested. In April 1989 (GAO/T-GGD-89-17) we first recommended that 19 U.S.C. 1607(a) be amended to provide for the administrative forfeiture of all uncontested cash seizures. We continue to believe that recommendation needs to be implemented. Changing the law to allow uncontested cash seizures of any amount to be forfeited administratively would result in most seized cash being forfeited faster. This change would decrease dis- trict court workloads without affecting individuals’ due process rights Page 4 GAO/GGD-9094 Asset Forfeiture -__________-- B-240015 seized property annually and have been identified by their agencies as having internal control problems. Specifically, this report addresses the need to enact legislative changes designed to (1) speed up the processing of uncontested seized cash and (2) increase congressional and agency oversight through stronger finan- cial controls and reporting requirements. In addition, we are recom- mending that Justice and Customs more aggressively monitor their controls over seized cash held for evidence purposes. Forfeiture law is an important part of law enforcement strategies for Background combating drug traffickers and organized crime because it allows the government to take property, including cash, that has been illegally used or acquired. In cases of $100,000 or less, forfeiture can be handled administratively by the seizing agencies such as the Drug Enforcement Administration and the U.S. Customs Service. Generally, this proceeding is used on smaller cases involving cars, boats, planes, and other types of property such as jewelry and artwork. For amounts above $100,000 and for all real property, the cases are handled judicially by U.S. Attorney offices and the courts. Also, cases under $100,000 are handled judicially when the defendant or other involved parties request this form of handling. The Comprehensive Crime Control Act of 1984 expanded the govern- ment’s seizure authority and established asset forfeiture funds to finance the management and disposal of seized and forfeited assets. As a result of the expanded authority, Justice and Customs estimate the value of their asset inventories has grown from $33 million in 1979 to $1.4 billion in December 1989. The primary objectives of the forfeiture programs are to (1) reduce the economic power of criminals and their enterprises, (2) improve intergov- ernmental cooperation by sharing proceeds with state and local govern- ments, and (3) generate revenues to help fight the war on drugs. Given these objectives and the sharply increasing value of assets being seized, the need for sound policies, good internal controls, and comprehensive financial reporting is paramount. By law, cash seizures over $100,000 must be forfeited judicially even Results in Brief though 89 percent of all cash forfeited judicially is never contested, that is, no one comes forward to claim the money. Page2 GA0/GGD9094AssetFo&&me
Asset Forfeiture: Legislation Needed to Improve Cash Processing and Financial Reporting
Published by the Government Accountability Office on 1990-06-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)