Customs Automation: Duties and Other Collections Vulnerable to Fraud and Abuse

Published by the Government Accountability Office on 1990-02-28.

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

                       United   State   General   Accounting   Office

GAO                    Report to the Chairman, Subcommittee
                       on Oversight, Committee on Ways and

GruarS:       1990
                       Duties and Other
                       Collections Vulnerable
                       to Fraud and Abuse

6 h0     IMTlX-90-29
GAO   General Accounting Office
      Washington, D.C. 20648

      Information Management and
      Technology Division

      February 281990
      The Honorable J. J. Pickle
      Chairman, Subcommittee on Oversight
      Committee on Ways and Means
      House of Representatives
      Dear Mr. Chairman:
      This report responds to your May 17, 1989, letter, in which you
      requested that we examine certain controls relating to the U.S. Customs
      Service’s automated revenue collection and deposit processes.Your
      request was triggered, in part, by our disclosure of internal control
      weaknessesin these processesduring hearings before your Subcommit-
      tee on April 17,198g.l During those hearings and in an earlier report,*
      we indicated that inadequate controls over the automated tracking of
      pre-numbered collection documents and untimely reconciliation of col-
      lections to bank deposits may have contributed to $4.2 million in thefts
      that remained undetected for lengthy periods of time-in one casefor
      nearly a year and in another for more than 2 months. Accordingly, you
      requested that we conduct a comprehensivereview of these two areas.

      As agreed with your office, we initiated a review of Customs’ internal
      controls related to the use of pre-numbered collection documents and
      the processesused for reconciling collections to bank deposits. Although
      our review is still underway, several important and disturbing facts
      have cometo our attention regarding Customs’ use of pre-numbered col-
      lection documents at ports of entry. For this reason we are providing
      you with the results of our work in this area earlier than previously
      planned so corrective actions can be taken as soon as possible. Our work
      relating to reconciliation of collections to bank deposits is continuing,
      and we will report on that work at a later date.

      At 300 ports of entry (including airports, seaports, and land border
      crossings),over 8,000 Customs inspectors, tellers, and other employees
      collect duties on imports and goods brought into the country. These
      employees also collect taxes, fees, fines, and penalties. Often the duty
      and other collections are paid in cash or with a check and recorded using

      *Intemal Control Weaknesses in Customs Revenue C&xtion   Process (GAO/T-IMTEC-89-5, April 17,

      *Customs Automation: Internal Control Weaknessesin Customs’ Revenue Collection F’rocess(GAO/
      -60,         April 11,198!3>.

      Page 1                          GAO/MTEGBO-29 iMlectbm         Vulnerable to Fraud and Abuse

                   pre-numbered collection documents. These documents serve as a receipt
                   to the payer and a source for entering the transaction into Customs’
                   automated information system known as the Automated Commercial
                   System (A@. Customs doesnot maintain records on how much of its
                   collections are made using pre-numbered collection documents. At our
                   request, Customs analyzed its computer records of fiscal year 1989 col-
                   lections and estimated that between $600 and $700 million was collected
                   using about 630,000 such documents.

                   Becausecash collections (including checks) offer the potential for theft,
                   fraud, and abuse,they must be carefully controlled. The basic control
                   that Customs uses for cash collected by its employees is the pre-num-
                   bered collection document. Pre-numbering these documents facilitates
                   their control and each one is supposedto be accounted for in ACS. Docu-
                   ments that cannot be located or otherwise accounted for could represent
                   lost or stolen collections.

                   Customs could be losing millions of dollars in duties and other collec-
Results in Brief   tions due to fraud and abuse becauseof an almost total breakdown of
                   internal controls over its pre-numbered collection documents.Although
                   the total is unknown, Customs estimates that several million collection
                   documents could not be accounted for following nationwide inventories
                   conducted in fiscal years 1987 and 1988.
                   In addition, over the last 5 years, Customs’ National Finance Center
                   (NFC)  changed the status of nearly 5 million documents from “unused”
                   to “used” in ACS.According to NFC officials, these changeswere made
                   becausethey feared an astronomical growth in the number of unac-
                   counted for documents when the next inventory was taken. In 98 per-
                   cent of these cases,however, there were no collections recorded in ACS.
                   One obvious implication of an “unaccounted for” document is that
                   money could have been collected and subsequently lost or stolen along
                   with the document. By changing the status of these documents to
                   “used,” Customs exacerbatesthe problem becausemany of them may
                   still be in the possessionof Customs employeesbut will no longer be
                   tracked in m and are no longer considered a problem. This breakdown
                   in internal controls could present a significant opportunity to misuse
                   them without fear of detection. Also disturbing is that the Deputy Com-
                   missioner and Comptroller of Customs told us they were unaware that
                   nearly 5 million unaccounted for documents had been changedto a used

                   Page 2                   GAO/IMTEC30-29   Collection   Vulnerable to kaud   and Abuse


              Several other internal control weaknessesat ports of entry have led to
              this breakdown in accountability over these documents.We visited three
              major ports accounting for about 12 percent of Customs’ total revenue
              in fiscal year 1989 and found poorly executed controls over the assign-
              ment of documents to Customs employees.For convenience,documents
              were assignedto groups of employeesinstead of to individual employees
              as required by Customs’ procedures. In addition, even though prudent
              management and Customs’ own policies call for timely investigation of
              unaccounted for documents, these investigations were done on a part-
              time, low priority basis. As a result, at the three ports we visited, about
              67 percent of their unaccounted for documents as of December 1989 had
              been in this status for over 6 months.

              Under the Federal Managers’ Financial Integrity Act of 1982 (31 U.S.C.
              3512 (1982)), agenciesmust establish internal controls to ensure that
              their missions and related activities are effectively carried out and to
              annually report weaknessesin these controls and the status of correc-
              tive actions taken. We believe the weaknessesin Customs’ internal con-
              trols over its collections using pie-numbered collection documents are
              sufficiently serious to warrant disclosure and corrective actions under
              the act’s provisions.

              It is possible that modern technology could be used in place of current
              pre-numbered collection documents to help control collections. For
              example, the ACSsystem has the capability to electronically “capture”
              collection information from cash registers at ports thus negating the
              need to manually record collection transactions on pre-numbered collec-
              tion documents. In addition, hand-held devices are available on the mar-
              ket to automate the revenue collection processin locations where there
              are no cash registers.
              Appendix I contains background information on the matters discussed
              in this report and details of our findings. Our objective, scope,and meth-
              odology are shown in appendix II.

Conclusions   and the staggering number of unaccounted for documents provide an
              enormous potential for abuse and cover-up. Widespread thefts and other
              fraud and abuse may be occurring. Accordingly, such weaknessesmate-
              rially affect Customs’ ability to carry out its mission and therefore
              should be reported under the Federal Managers’ Financial Integrity Act.

              Page 3                    GAO/IMTECo-223   Collections Vulnerable to Fraud and Abuse

                      Given the almost complete breakdown in internal controls over pre-num-
                      bered collection documents and the large thefts that have already
                      occurred, prompt and vigorous action is needed.
                      Modern technology could make the use of pre-numbered collection docu-
                      ments obsolete. But technology alone cannot solve the problems we
                      found with Customs’ control over collections. A careful assessmentof all
                      controls is and will be needed,even with new technology, to assure that
                      each collection is accounted for properly.

                      We recommend that, in the short term, the Commissioner of Customs:
                  l   Discontinue immediately the use of the current pre-numbered collection
                      documents and convert to a new pre-numbered format that would
                      clearly be a recognizable change in document design and/or color
                      scheme.Brokers, importers, and others likely to do businesswith Cus-
                      toms should be notified not to accept as a receipt for payment a collec-
                      tion document other than one in the new format.
                  l   Enforce stringent internal controls over the assignment and use of the
                      new pre-numbered documents.At a minimum, internal controls should
                      be instituted so that documents can always be traced to the individual to
                      whom assigned,all changesin the status of documents are properly jus-
                      tified, and error reports on missing documents are promptly resolved.
                  l   Report the lack of internal controls over pre-numbered collection docu-
                      ments as a material weaknessunder the Federal Managers’ Financial
                      Integrity Act, and report the status of corrective actions taken.

                      For the longer term, we recommendthat the Commissioner direct that
                      an analysis be made of the collection processwith a view towards the
                      possible use of modern information technology to eliminate the use of
                      such documents, when feasible. The analysis should include a thorough
                      risk assessmentto determine the vulnerabilities of any such technology
                      and the establishment of appropriate internal controls to mitigate the

                      As requested by your Office, we did not obtain formal comments from
                      Customs on a draft of this report. We did, however, discuss its contents
                      with the Deputy Commissioner and Comptroller of Customs. These offi-
                      cials agreed that Customs faces serious internal control problems in its
                      use of pre-numbered collection documents and stated that they were

                      Page 4                   GAO/TMTEC9tM3   C!allecdo~   Vulnerable   to Fraud and Abuse

unaware that nearly 5 million documents were converted to a used sta-
tus without corresponding collections recorded in ACS.They also agreed
with our recommendations, and stated that they would act upon them.
The Deputy Commissioner also said that Customs would seek to estab-
lish additional improvements in its internal controls over these
As agreed with your office, unless you publicly announce this report’s
contents earlier, we plan no further distribution until 30 days after the
date of its issuance.At that time we will send copies of this report to the
Chairmen, House and SenateCommittees on Appropriations; Chairman,
House Committee on Government Operations; Chairman, SenateCom-
mittee on Governmental Affairs; and the Director, Office of Management
and Budget. We will also send copies to the Secretary of the Treasury,
the Commissioner of Customs and other interested parties.

This report was prepared under the direction of Howard G. Rhile, Direc-
tor, General Government Information Systems,who can be reached at
(202) 275-3455. Other major contributors are listed in appendix III.

Sincerely yours,

Ralph V. Carlone
Assistant Comptroller General

Page 5                   GAO/lMIWSO-29   tI!oUe&o~   Vulnerable to Fraud and Abuse

Letter                                                                                                 1

Appendix I                                                                                            8
Background and          Millions of Pre-Numbered Collection Documents                                10
                              Unaccounted for and Status Improperly Changed
Details of Our          Other Internal Control WeaknessesOver Pre-Numbered                           13
Findings                     Collection Documents Led to Unaccounted for
                        Control WeaknessesNeed to Be DisclosedUnder the                               15
                             Federal Managers’ Financial Integrity Act
                        Customs DoesNot Use Available Technology to Control                           16
                              Cash Receipts

Appendix II                                                                                           17
Objective, Scope,and
Appendix III                                                                                          18
Major Contributors to
This Report
Table                   Table 1: Resolution of Unaccounted for Collection
                            Documents Sampled in Fiscal Years 1987 and 1988

Figures                 Figure I. 1: Unaccounted for Collection Documents,Fiscal                      11
                            Years 1987 and 1988
                        Figure 1.2:Percentageof Collection Documents Appearing                        15
                            on December 1989 Error Reports Less Than/More
                            Than 6 Months

                        Page 6                  GAO/lMTEGW-29   Collections Vulnerable to Fraud and Abwe

AC3       Automated Commercial System
GAO       General Accounting Office
IMTEC     Information Management and Technology Division
NIT       National Finance Center

p4w7                    GAO-29       lhlkctio~~   Vdnemble   to Fraud and Abuse
Background and Details of Our Findings

               Customs has been developing and implementing its ACS since 1984. This
               system is aimed at integrating all of Customs’ commercial operations to
               aid Customs in inspecting merchandise imported into this country and
               collecting related duties, taxes, fees, fines, and penalties.
               In fiscal year 1989, Customs collected nearly $19.1 billion in duties, fees,
               fines, and other charges. Most of this represents duties on large imports.
               Each large import enters the United States through a processknown as
               a formal entry. In this process,most brokers and large importers elec-
               tronically transmit information to ACSon the type and quantity of mer-
               chandise being imported, along with an estimate of the associated
               duties, taxes and fees. These transmissions are made in advance of the
               cargo’s arrival. Generally, payments must be received by Customs
               within 10 days after the imported merchandise has been released into
               the commerceof the United States.
               A portion of the $19.1 billion was collected from importers and the gen-
               eral public and consists of taxes, fees, fines, penalties, and duties on
               small imports and on goods brought into the country by airline and ship
               passengers.* In contrast to the formal entry process,these amounts are
               not always entered into ACSprior to payment and are usually in the form
               of small checks and currency. Often these collections are recorded first
               on pre-numbered collection documents’ by Customs’ inspectors, tellers,
               and other employees before being entered into AB, Customs’ records
               indicate that approximately 630,000 pre-numbered collection documents
               were used in fiscal year 1989. However, Customs does not maintain
               records on how much of its collections are made using these documents.
               At our request, Customs analyzed its computer records of collections
               made with pre-numbered collection documents. Between $600 and $700
               million of the $19.1 billion collected in fiscal year 1989 was collected
               using such documents.

               Document numbers are entered into ACSwith the amount collected so
               documents missing from the sequencecan be (1) identified on monthly
               error lists, (2) researchedto determine the causefor the discrepancy,

               lPassengers and importers receive a cash register receipt at those ports that have registers. When a
               register is used, prenumbered collection documents are used to summarize the amounts collected
               during a work shift.

               “Customs uses two documents for this purpose. The most frequently used is the Cash Receipt (CF-
               5104) which is used primarily for recording taxes, fees, passenger duties and any collection where
               there is no other designated form for the particular type of collection involved. The other document is
               called an Informal Entry Form (CF-6119-A). This is used to record collections of duties and other
               amounts due from importers and brokers on imports vahxd at $1,260 or less.

               Page g                             GAO/IbiTEGB@Z9 Ckdlectlom Vulnerable to Fraud and Abuse
and (3) removed from the error list after the discrepancy has been
Customs has had problems using and controlling pre-numbered collec-
tion documents. For example, in our report and testimony in April 1989
on Customs revenue controls, we cited a major fraud at a Customsport
involving repeated thefts of collections over almost a l-year period
totaling nearly $840,000. The thefts, which occurred at the Los Angeles
International Airport, were accomplished by a former Customs’ supervi-
sory aide who failed to deposit funds received, and either falsified or
destroyed pre-numbered collection documents tocover up the thefts. A
Customs Internal Affairs investigation concluded that several internal
control weaknesses,including failure to resolve discrepanciesshown on
error reports of missing collection documents, created an environment
which contributed to the thefts not being detected by Customs.3In this
case,the fraud was detected only after a passengercomplained to Cus-
toms about not receiving a canceledcheck. The subsequentinvestigation
by Customs Internal Affairs disclosed the magnitude of the fraud. The
employee has since been convicted and sentencedand procedures at Los
Angeles have been changed to prevent the reoccurrenceof a similar
The following sections in this report discussthree major internal control
breakdowns in Customs’ use of pre-numbered collection documents. Mil-
lions of documents were unaccounted for and their status improperly
changed as a result of Customs’ nationwide inventories conducted in
1987 and 1988. Also, at the three major ports we visited-JFK airport,
New York; New Orleans seaport, Louisiana; and San Ysidro land border
crossing, California-we found poorly executed controls over the
assignment of collection documents to Customs’ employeesand low pri-
ority given to resolving unaccounted for documents. These three ports
accounted for about 12 percent of Customs’ total collections in fiscal
year 1989.

3Durlng the past several years, customs’ Office of Internal Affairs has produced numerous reports
that criticized weakneses in the controls over pm-numbered collection documents and noted that
such weakneses contributed to thefts and losses of revenue.

Pye 9                             GAOfMTE4XGBB         Cdleetlona Vulnerable to Fraud and Abuee
                        Appendix I

                        A basic tenet of good accounting controls over the handling of cash col-
Millions of Pre-        lections is the use and proper control of pre-numbered collection docu-
Numbered Collection     ments. However, we found a significant breakdown of this basic internal
Documents               control. According to Customs, millions of unused pre-numbered docu-
                        ments could not be accounted for following annual inventories in fiscal
Unaccounted for and     years 1987 and 1988. In addition, over the last 5 years, Customs
Status Improperly       changed approximately 4.8 million documents to a used status without
                        evidence in ACSthat any funds were actually collected. Customs made
Changed                 these changesto avoid increasesin the number of unaccounted for docu-
                        ments. Although we have not determined if the abuseof pre-numbered
                        documents has resulted in widespread fraud, the lack of effective con-
                        trols and the fact of previous thefts signal its potential.

Millions of Documents   In fiscal years 1987 and 1988, Customs’ NE conducted nationwide
Unaccounted for         inventories of its pre-numbered collection documents on a district-by-
                        district basis.4Each district was requested to conduct an inventory and
                        forward the serial numbers of all documents in its inventory to NFC. NIX
                        entered the serial numbers into ACSfor comparison with ACSfiles con-
                        taining each document’s assignedlocation and status. From this compar-
                        ison, discrepancy reports were generated that listed (1) unused
                        documents that were assignedto a port but not in the port’s reported
                        inventory, (2) documents that were not assignedto a port but were in
                        the port’s reported inventory, and (3) documents that were assignedto
                        one port but reported as used by another. From this initial comparison,
                        millions of documents had to be researchedand reconciled.

                        The inventories conducted in 1987 and 1988 disclosed that Customs
                        could neither locate nor otherwise account for a sizeablenumber of doc-
                        uments. m does not retain past inventory results, and the hard-copy
                        inventory reports were at each of Customs’ nearly 300 ports of entry in
                        a format which neither Customs nor GAO could readily summarize.
                        Accordingly, we did not obtain the number of unaccounted for docu-
                        ments nationwide or on a port-by-port basis. However, NIT officials and
                        staff researching the inventories said the number nationwide was in the

                        4A nationwide   inventory on a region-by-region basis was attempted in the early 1980s before the
                        establishment of NE. The inventory was never completed due to what was described by Customs
                        officials as “coordination problems” between Customs’ Headquarten and the seven Customs regions
                        in forwarding and receiving information on document discrepancies. The results of the 1989 inven-
                        tory were not available   at the time of our review.

                        Page 10                               GAO/IMTEG90-29 cOUecXiona Vulnerable to Fraud and Abuse
                                         Our review of hard-copy inventory records for the 3 ports we visited
                                         showed unaccounted for documents totaling 306,604 and 14,799 for fis-
                                         cal years 1987 and 1988. A large number of unaccounted for documents
                                         suggeststhat money could have been collected and later lost or stolen
                                         along with the associatedcollection documents. As shown in Figure 1
                                         below, the number of unaccounted for documents declined significantly
                                         in fiscal year 1988. But, as discussedin the next section, this decline was
                                         mainly attributable to unsubstantiated changesor adjustments made by

Figure 1.1: Unaccounted for Collection
Dbments,     Fiacel Years lSM7 end 190
                                         11     (h-1

                                         Page 11                   GAO/IMTEGB@2@ Ck&ctio~   Vulnerable to Fraud and Abuse
                                         Background and Details of Our Fkdhga

Status of Unaccounted for                To determine how the status of those documents identified as unac-
                                         counted for on inventory discrepancy reports was resolved, we ran-
Collection Documents                     domly selected a sample of 50 documents for each port from the fiscal
Improperly Changed to                    years 1987 and 1988 inventory discrepancy reports-a total of 300 doc-
Appear as If Properly                    uments. For each document, we researchedcomputerized ACSfiles and
Used or Canceled                         NFC hard-copy files. Our purpose was to determine how the discrepan-
                                         cies were resolved and the basis for any revisions. We found, as shown
                                         in Table 1, that 72 percent of these documents were changed to a used
                                         status or canceledas of September 1989.
Table 1: Resolution of Unaccounted for
CoMedon Documents Sampled in Fiscal                                                      NOW           San       Total
Years 1987 l nd 1988 Inventories         Resolution                             JFK   Orleana       Ysidro   Number    Percent
                                         Unused                                  25        20            0          45         15
                                         Used                                     5        31            2          38         13
                                         Changed      to used                    42        49           97         188         62
                                         Canceled                                28         0            1          29         10
                                                                                100       100         100         300         100

                                         The 38 documents listed as used appear to have been used properly.
                                         However, of the 188 documents changed to a used status, we found no
                                         supporting collection data in the computerized MS records or in the
                                         hard-copy files at NFC. In addition, of the 29 canceleddocuments, 27 or
                                         93 percent did not have supporting documentation-copies of the can-
                                         celed documents in the NFCfiles-to show that they were properly
                                         accounted for.

                                         Becauseof the significant number of pre-numbered collection documents
                                         in our sample that were either changedor canceledwithout supporting
                                         documentation, we queried the MS system to determine how many docu-
                                         ments throughout all of Customs had been changedto used or canceled
                                         during the past 5 years. We also determined how many of those that
                                         were changed to used had corresponding collection data recorded in ACS.
                                         We found 8.3 million documents identified by MS as having been either
                                         used or canceled for the period October 1984 to September 1989. Of
                                         these, 4.8 million (57 percent) had been changedto a used status; only
                                         83,000 or about 2 percent of the 4.8 million had collections recorded in
                                         NFC officials, who were responsible for making the above changes,said
                                         that the changeswere made to lower the overall number of unaccounted
                                         for documents. They explained that the massive number of unaccounted

                                         Page 12                        GAO/IIblTECW22   Coll&ons    Vulnerable to Fraud and Abuse

                          for documents, coupled with the failure on the part of ports and dis-
                          tricts to locate them during the annual inventories, would otherwise
                          result in an astronomical increase.NFC staff acknowledged that no col-
                          lection data were available to support most of the changes,but that
                          many changeswere requested in memorandums from Customs districts.
                          These memorandums indicated that the documents or copiesof them
                          were no longer available at the ports and directed that such changesbe
                          made. The Chief, NFC RevenueBranch, explained that in fiscal year
                          1987, NFC began requesting the districts to prepare such memorandums
                          as a basis for making the changes.

                          Without evidence in the form of collections recorded in ACSor in the
                          hard-copy NFC files that collections were actually made, many docu-
                          ments changed to a used status or canceledmay still be in the possession
                          of Customs employees.The documents will also no longer appear on
                          inventory discrepancy reports. In addition, if an attempt is made to
                          enter into ACSa document previously changedto used, the system will
                          alert the user that the document was already recorded as used, thus
                          offering an additional opportunity for abuse.This breakdown in internal
                          controls provides an unparalleled opportunity to misuse these docu-
                          ments without detection.

                          The high number of missing or unaccounted for pre-numbered collection
Other Internal Control    documents was the result of other major breakdowns in Customs’ inter-
WeaknessesOver Pre-       nal controls. These include (1) poorly executed controls over the assign-
Numbered Collection       ment of unused pre-numbered collection documents to Customs
                          employees, and (2) the low priority given to resolving unaccounted for
Documents Led to          documents at ports.
Unaccounted for

Procedures Not Followed   The NFC is responsible for distributing pre-numbered collection docu-
for Assigning Documents   ments to districts and ports. Accountability and use of these documents
                          are tracked through XS. Customs’ Policies and ProceduresManual,
                          5311.9B, dated December3,1984, requires that each district and port
                          designate a forms issuanceofficer responsible for issuing pre-numbered
                          collection documents, maintaining a log of the documents issued for use,
                          and receiving and reviewing record copies of used documents. The man-
                          ual states that the log should include the numbers of the documents
                          issued and the signature of the employee to whom issued. To assure

                          Page 12                          GAO-29   CLdkctiona Vulnerable to Fraud and Abuse
                          Appendix I
                          Background and Details of Our Pindings

                          accountability for the documents and money collected using them, the
                          manual also states that the documents are to be under the personal con-
                          trol of an employee and shall not be issued to a dock or desk, such as a
                          passengerprocessingdesk. Also, the documents are not to be loaned or
                          transferred between employeeswithout authorization.
                          Customs is not following these procedures. At two of the ports we vis-
                          ited, books of pre-numbered collection documents were not being issued
                          to individuals as required by Customs’ policies. At the San Ysidro land
                          border crossing, books of collection documents were being issued to the
                          passengerprocessingdesk where several inspectors used the samebook.
                          At the New Orleans Customshouse,books of the documents were being
                          issued to a division. In both instances, port officials said this was done
                          for convenienceand to reduce the manual record-keeping resulting from
                          assigning documents to individuals. We also found the three ports we
                          visited were not using ACSto track the assignmentof documents to indi-
                          viduals, although A@was designedto perform this function. Instead,
                          NE used the system to record the assignment of documents only at the
                          district or port level. Port officials said that, becausem is limited to
                          tracking document assignmentsto individuals using only a 5-digit
                          number, they did not use this system feature. They suggestedredesign-
                          ing the system to use nine digits to track document assignments through
                          employees’ Social Security numbers. Customs plans to modify the AC%
                          system to accept a nine-digit employee identification number by June

Law Priority Given to     According to Customs’ policies and procedures, district and port direc-
                          tors are responsible for reviewing ACSerror reports identifying unac-
Resolving Monthly Error   counted for collection documents. These monthly reports identify
Reports                   missing documents and documents used out of sequence.Section
                          5311.9D of Customs’ Policies and ProceduresManual states that these
                          “reports are to be verified on a timely basis by an assignedresponsible
                          employee....” However, at the ports we visited, personnel assigned to
                          investigate error reports said they had other duties and did not consider
                          the error reports a high priority. At the San Ysidro port the responsibil-
                          ity for investigating error reports was assigned to a cashier; howwer,
                          the cashier was not able to work on the report becauseof other tvork-
                          load responsibilities. At the two other ports visited, we were told that
                          work on the report is done only on a part-time basis. Becauseof t he low
                          priority accordedthis task, documents remained unaccounted fc)I‘over

                          Page 14                         GAO/MTECBG22   cOllectionr   Vulnerable to Fraud and Abuse
                                      Appendix 1

                                      long periods of time. As indicated in Figure 2, most of the 660 docu-
                                      ments on the December1989 error reports for these ports were unac-
                                      counted for longer than 6 months.

Figun 1.2: Pwcentago of CoUoctM
Docunrmta Appuring on Docembw
l## Error Reporta Lmu Than/Mom Than                                                         218 documen!s appeared on error
6Montho                                      I                                              reports for 6 months of less

                                                                                            442 documents appeard on ermr
                                                                                            reports for more than 6 months

                                      Selected Customs ports of entry: JFK, New Orleans, and San Ysidro

                                      The internal control weaknessesidentified during our review-a pre-
Control Weaknesses                    ponderance of unaccounted for collection documents coupled with the
Need to Be Disclosed                  improper changeof millions of these to a “used” status, the failure to
Under the Federal                     follow required procedures in assigning documents, and the low priority
                                      given to resolving monthly error reports-impair Customs’ effective-
Managers’ Financial                   nessin collecting taxes, fines, penalties, and duties on small imports and
Integrity Act                         goods brought into the country by airline and other passengers.These
                                      are the kinds of problems that require review, disclosure, and corrective
                                      actions under the provisions of the Federal Managers’ Financial Integ-
                                      rity Act. Agencies must establish a system of internal controls to ensure
                                      that their mission and related activities are carried out. This includes
                                      annually reviewing their internal controls and reporting any weaknesses
                                      identified in these controls along with the status of corrective actions.
                                      Customs did not disclose these weaknessesin its annual report for fiscal
                                      year 1989.

                                      Page 15                           GAO-22               CdlectioM    Vulnerable to Fraud and Abuse
                       A~pe*      I

                       In developing ACSbeginning in 1984, Customs continued the use of pre-
Customs Does Not Use   numbered documents to control collections, although other processes-
Available Technology   such as selecting cargo for inspection and releasing inspected cargo-
to Control Cash        were being automated. According to Customs,the automation of these
                       processeswas its highest priority. As a result, KS doesnot yet use mod-
Receipts               ern technology to control collections. For example, the cash registers
                       used at ports to collect revenues can electronically transmit collection
                       information directly to m, thus eliminating pre-numbered documents
                       and the opportunity to use them fraudulently at these locations. Instead,
                       the cash registers are used to maintain a register tape of daily transac-
                       tions. This tape is used as the basis to manually prepare a pre-numbered
                       collection document which, in turn, is used to manually enter the
                       amounts collected into ACS.

                       Modern technology can also be used instead of these documents where
                       collections are made by an inspector who is far from a cash register. For
                       example, at least three companies manufacture hand-held devicesthat
                       can be used to automate the revenue collection process.These devices,
                       which are used in various businessand government applications such as
                       billing and collecting automobile rental fees and inventory control, can
                       electronically produce a cash receipt; and could store the collections
                       data and transmit the collection information directly to ACS.Their use
                       could therefore eliminate the need for processingpre-numbered collec-
                       tion documents, which is both labor-intensive and difficult to control.

                       Page 16                          GAO/IMTECtMMiB   CdleetioM   Vulnerable to Fraud and Abuse
Appendix II

Objective,Scope,and Methodology

              Cur objective was to assessthe controls over Customs’ use of pre-num-
              bered collection documents at three ports of entry. Customs’ field struc-
              ture consists of 7 regions, 44 districts, and approximately 300 ports. We
              visited ports in three geographically diverse regions: New Orleans, Loui-
              siana; San Ysidro/Otay Mesa’, California; and JFK International Airport,
              New York. These ports include a seaport, land border crossings,and an
              airport; they accounted for $2.3 billion or 12 percent of Customs’ $19.1
              billion in revenue for fiscal year 1989.

              At each port, we conducted a data flow analysis. The purpose of the
              data flow analysis was to document the use of and assessthe internal
              controls over pre-numbered collection documents at each point in the
              revenue collection process.We also obtained and analyzed Customs’
              monthly error reports dated December31,1989, to determine the age of
              the discrepancies shown on the reports. These reports show missing doc-
              uments and those used out of sequence.We also sampled, for the three
              ports visited, 300 documents listed as discrepancieson Customs’ fiscal
              years 1987 and 1988 inventory discrepancy reports. We followed up at
              each port and the National Finance Center to assessCustoms’ efforts to
              account for documents identified in these reports. In addition, we
              obtained a copy of an ACSautomated file listing the status of pre-num-
              bered documents. For documents that were adjusted to a used status
              from October 1984 to September 1989, we asked Customs to provide us
              with ACScollection data to determine the number having revenue collec-
              tions associatedwith them.

              To determine Customs’ policies, practices, and procedures regarding the
              use and tracking of pre-numbered collection documents, we interviewed
              officials at Customs headquarters in Washington, DC. and the National
              Finance Center in Indianapolis, Indiana; and reviewed documentation
              furnished by them. We also interviewed Customs employeesinvolved in
              the distribution, maintenance, storage, and use of these documents at
              the three ports visited. Cur work was performed in accordancewith
              generally acceptedgovernment auditing standards, from May 1989 to
              January 1990.

              ‘Although San Yaidro and Otay Mesa are separate border crossings, they are classified as a single
              port by Customs for acamting purposes.

              Page 17                            GAO/JMTECBO26       C!oUec&na Vulnerable to Fraud and Abuse
Appendix III                                                                                        .

Major Contributors to This &port

                       Thomas E. Melloy, Assistant Director
Information            David B. Alston, Evaluator-in-Charge
Management and         Joyce A. Keyes, Evaluator
Technology Division,
Washington, DC.
                       Roberto Rivera, Evaluator
Cincinnati Regional    Katrina Stewart, Evaluator
                       James D. Moses,Evaluator
Los Angeles Regional   SusanAbdalla, Evaluator

New York Regional      Allen W. Gendler, Evaluator

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