oversight

Unauthorized and Questionable Use of Appropriated Funds to Pay Transportation Costs of Non-Appropriated-Fund Activities

Published by the Government Accountability Office on 1977-06-03.

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

                         DOCUMENT BESOUE

02616 - [A1612600]

Unauthorized and Questionable Use of Appropriated Funds to Pay
Transportation Costs of Non-Appropriated-Fund Activities.
LCD-76-233; B-148581. June 3, 1977. 15 pp. + 5 appendices (11
pp.)
Report to the Congress; by Elmer B. Staats, Comptroller General.

Issue Area: Facilities and Material Management: Federal
    Transportation of Things (704).
Contact: Logistics end Communications Div,.
Budget Function: National Defense: Department of Defense -
    Military (except procurement g contracts) (051).
Organizaticn Concerned: Department of Defense.
Congressional Relevance: House Committee on Armed Services;
    Senate Committee on Armed Services; Congress.
Authority: DOD Directive -060.3.
         Non-appropriated-fund activities provide members of the
armed services with goods and services not furnished by the
Government. These activities include post exchanges, liquor
stores, clubs, and recreational facilities. The activities
operate primarily with funds generated from their own
operations, but the Department of Defense tDOD) gives them some
appropriated-fund support. Findings/Conclusions: In addition to
the support authorized by DOD, millions in appropriated funds
have been spent for transportation support that should have been
funded by the non-appropriated-fund activities.
Non-appropriated-fund activities did not always reimburse DOD
for using the Defense Transporte.tion System. Unreimbursed costs
primarily related to the overseas transportation of foreign-made
merchandise and personal property. The Navy financed overseas
land transportation costs with appropriated funds, a practice
inconsistent with Army and Air ?orce practices.
Recommendations: The Secretary of Defense should: direct the
non-appropriated fund activities to reimburse the appropriation
for ocean costs incurred in excess of those applicable to
shipment through the port of embarkation nearest the overseas
destination; institute procedures for assuring that
non-appropriated fund activities are properly charged for
reimbursable transportation services, considering the need for
both manual and mechanical controls over the correct use of
transportation account codes; recover the unreimbursed costs for
improper appropriated fund support provided
non-appropriated-fund activities; direct the Secretary of the
Navy to stop using appropriated funds for overseas land
transportation of non-appropriated-fund property; and revise the
applicable DOD directive to prohibit any foreign-made
merchandise shipments from receiving support. (Author/QM)
                 REPORT TO THE CONGRESS
i\   ,    I ,,



         fi~     BY THE COMPTROLLER GENERAL
     :s -        OF TIHE UNITED STATES




                 Unauthorized And Questionable Use
                 Of Appropriated Funds To Pay
                 Transportation Costs Of
                 Non-Appropriated-Fund Activities
                 Department Of Defense

                 Post exchanges and other non-appropriated-
                 fund activities received millions of dollars of
                 transportation support from the Department
                 of Defense that should not have beeii
                 financed with appropriated funds. Improper
                 routing of shipments, poor billing and review
                 procedures, inconsistent payment practices,
                 and failure to follow Defense's policies all
                 contr ibuted to the unauthorized payments.
                 Defense has since billed the pon-appropriated-
                 fund activities for many of the reimbursable
                 costs. GAO is recommending that Defense
                 recover additional costs and take action to
                 preclude the future unauthorized use of
                 appropriated funds.




                 LCD-76-233                                        JUNE 3, 1977
              COMPTROLLER GkNERAL OF THE UNITED IATEI1
                         WAIHIN'TON, D.C.   21Ws




B-148581




To the President of the Senate and the
Speaker of the House of Representatives

     This report describes how the Department of Defense has
been providing non-appropriated-fund activities with
appropriated-fund support by paying for unauthorized trans-
portation services. It discusses Defense's need to better
control appropriated funds and to recover expenditures
already made.

     We made our review pursuant to the Pudget and Accounting
Act, 1921 (31 U.S.C. 53), and the Accounting and Auditing Act
of 1950 (31 U.S.C. 67).
     Copies of this report are being sent to the Director,
Office of Management and Budget; the Secretary of Defense;
and the Secretaries of the Army, Navy, and Air Force.




                                    Comptroller General
                                    of the United States
  COMPTROLLER GENERAL'S                 UNAUTHORIZED AND QUESTIONABLE
  REPORT TO THE CONGRESS                USE OF APPROPRIATED FUNDS TO
                                        PAY TRANSPORTATION COSTS OF
                                        NON-APPROPRIATED-FUND ACTIVITIES
                                        Department of Defense


              DIGEST
              Non-appropriated-fund activities provide
              members of the armed services with goods
              and services not furnished by the Govern-
              ment. These activities include post ex-
              changez, liquor stores, clubs, and recrea-
              tional facilities.
              The activities operate primarily with funds
              generated from their own operations, but
              the Department of Defense gives them some
              appropriated-fund support.
             GAO found that, in addition to the support
             authorized by the Department, millions in
             appropriated funds have been spent for
             transportation support that should have
             been funded by the non-apprcpriated-fund
             activities. 0Fllowing are reasons for
             these improper payments.

             The Department's policy requires that mer-
             chandise purchased in the United States be
             moved at nor -appropriated-fund expense to
             the port of embarkation nearest the over-
             seas destination. This was not always done.

             Non-appropriated-fund activities saved land
             transportation costs by selecting ports
             closer to the merchandise sources, but ap-
             propriated-fund costs increased because of
             the longer ocean distances to the overseas
             destinations. (See ch. 2.)

             Non-appropriated-fund activities did not
             always reimburse the Department for using
             the Defense Transportation System when
             appropriated-fund support was not authorized.
             Unreimbursed costs for the period 1964-76
             totaled over $7 million because reimbursable
             transportation account codes had not been
             assigned or properly charged.
c3 -Lbt. Upon rmoval, the rport     i                     LCD-76-233
cov(ter   should be noted hereon.
These codes are on the shipping documents
and are the basis for determining who
should be billed for transportation costs.
The unreimbursed costs primarily related
to the overocean transportation of foreign-
made merchandise and personal property.
After GAO brought the matter to Defense's
attention, it billed the non-appropriated-
fund activities for about $3.6 million of
these costs.   (See ch. 3.)

The Navy financed overseas land transpor-
tation costs with appropriated funds.
This practice was inconsistent with the
Army's and Air Force's practices of not
financing these costs.  (See ch. 4.)

Foreign-made merchandise was shipped from
New York to Hawaii by the Defense Transpor-
tation System at appropriated-fund expense,
Defense permitted using these funds because
U.S. customs duties and taxes had been
paid on the merchandise.

This practice is contrary to Defense's
policy of promoting the :sale of U.S. goods
and services in overseas non-appropriated-
fund activities. GAO believes this prac-
tice should be stopped.   (See ch. 5.)

GAO recommends that, to correct these
deficiencies, the Secretary of Defense:
-- Direct the non-appropriated-fund activi-
   ties to reimburse the paying appropriation
   for ocean costs incurred--for all past and
   future shipments--in excess of those ap-
   plicable to shipment through the port of
   embarkation nearest the overseas destina-
   tion. (See ch. 2.)
-- Institute procedures for assuring that
   non-appropriated-fund activities are
   properly charged for reimbursable trans-
   portation services, considering the need
   for both manual and mechanical controls
   over the correct use of transportation
   account coder.  (See ch. 3.)


                    ii
             -- Recover the unreimbursed costs for im-
                proper appropriated-fund support provided
                non-appropriated-fund activities.  (See
                ch. 3 and app. I.)

             -- Direct the Secretary of the Navy to stop
                using appropriated funds for overseas
                land transportation of non-appropriated-
                fund property.   (See ch. 4.)
             -- Revise the applicable Defense directive to
                prohibit any foreign-made merchandise ship-
                ments from receiving appropriated-fund
                support. (See ch. 5.)
             Defense concurred with GAC's first and
             second recommendations. With respect to
             the third recommendation, Defense has
             billed the exchanges about $3.6 million, of
             which $2 million has been collected. It
             has taken no action as yet to bill $1.1 mil-
             lior. ct unreimbursed costs and does not
             concur that $2.3 million spent for shipping
             foreign-made merchandise to Vietnam and
             Thailand should be billed.
             Defense said the issues involved in GAO's
             recommendations to stop appropriated-fund
             support for overseas land transportation and
             imported merchandise were being studied.




Tear Sheet
                          Contents
                                                         Page
DIGEST

CHAPTER

       1   INTRODUCTION                                    1
       2   IMPROPER ROUTING OF SHIPMENTS RESULTS IN
             MORE APPROPRIATED-FUND SUPPORT THAN
             THAT AUTHORIZED BY DOD                       3
               Agency comments and our evaluation         4
               Recommendation                             4
       3   PROCEDURES NEEDED TO ASSURE REIMBURSEMENT
             FOR USE OF THE DEFENSE TRANSPORTATION
             SdSTEM                                        5
               Foreign-made merchandise                   6
               Personal property                          7
               Other services                             8
               Agency comments and our evaluation         9
               Conclusion                                 9
               Recommendation                            10
   4       NAVY'S USE OF APPROPRIATED FUNDS FOR OVER-
             SEAS LAND TRANSPORTATION SUPPORT IS IN-
             CONSISTENT WITH OTHER SERVICES' PRACTICES   11
               Agency comments and our evaluation        11
               Recommendation                            12
   5       TRANSPORTATION SUPPORT FOR IMPORTED
             FOREIGN-MADE MERCHANDISE IS CONTRARY
             TO DOD'S POLICY                             13
               Agency contnents and our evaluation       13
               Recommendation                            14
   6       SCOPE OF REVIEW                               15
APPENDIX

   I       Summary of estimated amounts of appro-
             priated funds erroneously used by
             non-appropriated-fund activities, as
             of December 31, 1976                        16
  II       Letter dated August 2, 1976, from the
             Assistant Secretary of Defense
             (Comptroller)                               17
APPENDIX
 III       Letter dated March 3, 1975, from the
             Transportation and Claims Division,
             GAO                                    20
  IV       Letter dated July 23, 1976, from the
             Assistant Secretary of Defense (Man-
             power and Reserve Affairs)             23
      V    Principal officials responsible for
             activities discussed in this report    25
                         ABBREVIATIONS
DOD        Department of Defense
GAO        General Accounting Office
OMB        Office of Management and Budget
                          CHAPTER 1

                        INTRODUCTION

     Non-appropriated-fund activities provide members of the
Armed Forces with goods and services not furnished by the
Government. From initially small operations, the activities
have grown into giant systems with a combined annual sales
volume in the billions.
     The best known of these activities are the post ex-
changes; namely, the Army and Air Force Echange Service,
the Navy Resale System Office, and the Marine Corps Ex-
change Service. Other activities include liquor stores,
clubs, and recreational faci3ities.
     Although the non-appropriated-fund activities were
created by the Department of Defense (DOD) and continue to
be governed by DOD regulations, the activities are organiza-
tions technically separate from the mililary. They do, how-
ever, retain a status as instrumentalities of the Federal
Government.

     The non-appropriated-fund activities opeLate primarily
with funds generated from their own operations. They re-
ceive appropriated-fund support for, among other things,
the overocean transportation of American-made merchandise
in the Defense Transportation System--a term applied to the
services provided or procured by the Military Airlift Com-
mand, the Military Sealift Command, and the Military Traffic
Management Command.

     Although annual DOD appropriation acts have generally
provided funds for welfare and recreation, they have not
specifically provided funds for transportation of merchandise
for-resale through these activities. Also, as we pointed
out in our report to the Congress "Should Appropriated Funds
Be Used for Transportation Procured Specifically for Armed
Forces Exchange Goods?" (2-169972, Aug. 6, 1973), we be-
lieve a reasonable interpretation of the basic statutes
authorizing the use of appropriated funds for transportation
of exchange goods permits such only when the goods are car-
ried on conveyances owned, leased, or chartered by the
Government, where the Government is already obligated to
pay for the space whether it is used or not.
     DOD. however, relies on other statutes, longstanding
practice, and congressonal awareness of that practice as
the authority for the continued appropriated funding of


                             1
these shipments. DOD also permits the transportation of
foreign-made merchandise and personal property (household
goods and privately owned vehicles; of non-appropriated-
fund activity employees in the Defense Transportation Sys-
tem but requires that the transportation costs be reimbursed
by the non-appropriated-fund activity.




                             2
                          CHAPTER 2

            IMPROPER ROUTING OF SHIPMENTS RESULTS

              IN MORE APPROPRIATED-FUND SUPPORT

                 THAN THAT AUTHORIZED BY DOD

     Non-appropriated-fund shipments are not always made
from the ports of embarkation nearest the overseas destina-
tions.  As a result, millions in appropriated funds are
spent annually for non-appropriated-fund shipments route9
through other ports of embarkation.
     The Department of Defense policy requires that merchan-
dise purchased in the United States with nonappropriated
funds be moved at either non-appropriated-fund or vendor
expense to the port of embarkation nearest the overseas
destination. Overocean transportation from this port is
financed with appropriated funds.

     Non-appropriated-fund activities can save land trans-
portation costs by selecting ports close to the merchandise
sources rather than distant ports that are closer to the
overseas destinations. However, appropriated-fund trans-
portation costs increase because of the longer ocean dis-
tances.
     Our tests showed that improper ports were frequently
being selected. For example, from July 1974 through February
1975 over $621,000 of excess transportation costs were fi-
nanced by appropriated funds because merchandise for the Army
and Air Force Exchange Service outlets in the Pacific area
was shipped from east coast ports of Lhe United States.

     As another example, 89 containerized shipments of liquor
for Army and Air Force liquor stores were made from west
coast ports of the United States to England, the Netherlands,
and Germany between January and June 1975. Over $59,000 of
appropriated funds would have been saved if these shipments
had been made from east coast ports.

     If we had extended our review period and had reviewed
additional shipments, excess transportation costs could have
run into the millions. Compliance with DOD's policy would
reduce considerably the expenditure of appropriated funds
for transportation.




                             3
AGENCY COMMENTS AND OUR EVALUATION

     The Assistant Secretary of Defense (Comptroller), in
commenting on our draft report, said that a joint Office of
Management and Budget (OMB)/DOD study is in progress and
that some of the comments on our findings must be tentative
at this time.   (See app. II.)

     We reviewed a draft report on this study which was
published on March 25, 1977. The joint OMB/DOD report ad-
dresses only twc of the issues discussed in this report;
i.e., appropriated-fund support for land transportation
overseas and support for imported foreign-made merchandise.
(See chs. 4 and 5, respectively.) DOD's specific comments
on our findings, as well as the positions taken in the
OMB/DOD joint report, are discussed in the appropriate
chapters.
     We originally recommended that the Secretary of Defense
direct the non-appropriated-fund activities to comply with
DOD's policy requiring the activities to bear transportation
costs to the points of embarkation nearest the overseas
destinations. Since DOD felt that it is prudent to use the
port of embarkation which produces the lowest overall trans-
portation cost as long as the Government is reimbursed for
any excess costs caused by this routing, we agreed and have
revised our recommendation.
RECOMMENDATION

      We recommend that the Secretary of Defense direct the
non-appropriated-fund activities to reimburse the paying
appropriation for ocean costs incurred--for all past and
future shipments--in excess of those applicable to shipment
through the port of embarkation nearest the overseas destina-
tion.
                          CHAPTER 3
          PROCEDURES NEEDED TO ASSURE REIMBURSEMENT

        FOR USE OF THE DEFENSE TRANSPORTATION SYSTEM
     Non-appropriated-fund activities did not always reimburse
the Department of Defense for using the Defense Transportation
System when appropriated funds were not authorized. Proce-
dures for assuring reimbursement are needed.

     We identified over $7 million which should have been
billed to non-appropriated-fund activities during 1964-76
but was not because reimbursable transportation account
codes had not been assigned or properly charged.  (See
app. I.) After we brought this matter to their attention,
various military agencies billed the non-apnropriated-fund
activities for about $3.6 million of these costs. Some
costs have been refunded, some are being repaid incre-
mentally, while others are a matter of contention.
     DOD authorizes non-appropriated-fund activities to
ship American-made products overocean at appropriated-fund
expense. Overocean transportation covers shipments to and
between ports in Europe, the Far East, Alaska, Hawaii,
Panama, Guam, Puerto Rico, Cuba, and other locations through-
out the world.

     DOD also allows non-appropriated-fund activities to
ship foreign-made merchandise and personal property of non-
appropriated-fund employees overocean in the Defense lrans-
portation System on a reimbursable basis. Under current
procedures, transportation costs should be reimbursed by
the non-appropriated-fund activity requesting the shipment.
DOD does this by assigning reimbursable transportation ac-
count codes to the various non-appropriated-fund activities.
The code is then designated on shipping documents by the
shipping activity.

     The Army and Air Force Exchange Service and the Navy
Resale System Office are included as shipping activities
in the Defense Transportation System. If an incorrect
code number is used, it usually is undetected in the
documentation, shipping, and billing process and thus con-
tinues throughout the system.

     We foind the assignment and use of transportation
account codes to be highly inaccurate. Specific examples
of failure to properly charge non-appropriated-fund activi-
ties follow.

                             5
FOREIGN-MADE MERCHANDISE

     Although foreign merchandise was normally shipped on a
reimbursable basis, in September 1970 the Army established
an appropriated-fund transportation account code which, in
conjunction with other Army regulations, allowed the move-
ment of foreign-made merchandise of the Army and Air Force
Exchange Service to isolated locations such as Greenland,
which was not rerviced by commercial transportation at a
reasonable cost. In July 1974, the Army eliminated this
code and again put the transportation of all foreign-made
merchandise on a reimbursable basis.
     We found that the transportation account code was
being used to ship merchandise to locations which were not
isolated, such as England and Japan, and from Japan to
Vietnam and Thailand. Transportation costs of $3.4 million
were erroneously charged to this code during fiscal years
1971-74. After we brought this matter to its attention,
the Army concurred and billed the Army and Air Force Ex-
change Service for this amount. However, the Exchange Serv-
ice said these shipments were properly made at appropriated-
fund expense,
     We also found instances in the Far East in which
foreign-made merchandise of the Exchange Service was coded
and shipped as American-made products at appropriated-fund
expense.
     In contrast to the Army, the Navy did not establish a
reimbursable transportation account code for shipments of
foreign-made merchandise until July 1, 1974. During fiscal
years 1973-74, shipments of foreign-made merchandise for the
Navy Resale System Office were incorrectly coved as American-
made products, and consequently, about $1.1 million was er-
roneously charged to appropriated funds. In April 1975 we
told the Navy about these charges, but it has not yet taken
any recovery action.
     There also were coding problems with transportation of
foreign-made liquor and wine. Ii,Europe, the Air Force and
Army operate non-appropcritee-fund retail liquor stores,
know as Class VI stores.

     The Air Force did not establish a reimbursable trans-
portation account code for foreign-made liquor and wine
shipments until November 1974. During the 10 years pre-
ceding that date, the Air Force Class VI Agency received



                             6
$629,000 of appropriated-fund support for the transporta-
tion of these products. The Class VI Agency was to repay
this amount over a 3-year period ending February 1977.

     The Army Audit Agency identified $350,000 of
appropriated-fund support for the transportation of foreign-
made liquor and wines for the Army Class VI Agency between
fiscal years 1966-70, when there was no reimbursable trans-
portation account code for shipments of foreign-made liquor
and wine. The Class VI Agency agreed to reimburse $221,000
and did so in August 1971.

     We checked the coding of shipments made after the
reimbursable code was established in 1971 and found that
the appropriated fund code continued to be charged quite
frequently. We identified $41,000 of unreimbursed costs
for shipments of foreign-made liquor and wines between July
1971 and October 1973. The Army Class VI Agency repaid
this amount in March 1 .4.

     The cost of bhipping Canadian liquor from the United
States to the Army Class VI Agency in Europe was incorrectly
charged to an appropriated-fund transportation account code
between November 1973 and December 1974. The Agency refunded
these incorrect charges of $12,000 in July 1975.

     In Japan the Army operates a non-appropriated-fund
wholesale liquor activity, known as the Far East Locker
Fund. Before 1975 an appropriated-fund transportation ac-
count code was charged for shipments of locker fund foreign-
made liquor from Japan to Korea, Taiwan, and Okinawa because
a reimbursable code had not been established. Between 1965
and 1974 nearly $393,000 of appropriated funds was used for
this transportation.

     In May 1975 we told the Army that a reimbursable
transportation account code was needed for locker fund
foreign-made liquor shipments and suggested that action be
taken to recover earlier transportation charges. In June
1975 DOD published a reimbursable code, and in December
1975 the locker fund made its first monthly payment for the
charges incurred before i;75.

PERSONAL PROPERTY

     Some shipments of personal property of employees of the
Army and Air Force Exchange Service were incorrectly charged
to the appropriated-fund transportation account code used to
transport American-made merchandise sold at exchange outlets


                            7
overseas. For example, our review of 903 shipments made
between January 1971 and July 1972 showed that 388 shipments
of personal property had been incorrectly assigned an
appropriated-fund code.

     In other cases the proper code was charged but the
Exchange Service did not pay DOD for the shipments. The
Army Finance and Accounting Center thought reimbursements
were being made at the origin ports, while the ports
thought reimbursements were being made at the Accounting
Center. As a result, DOD was not being reimbursed.
     We estimate that between fiscal years 1966 and 1975,
about $902,000 was erroneously spent from appropriated
funds to ship personnl property of Exchange Service em-
ployees. The Exchange Service has paid this amount. In
January 197[, the Army issued instructions requiring that
transportation costs for shipments of personal property be
paid in advance.

     Shipments of personal property of employees of the
Navy Resale System Office also were incorrectly charged to
an appropriated-fund transportation account code used for
merchandise sold at exchange outlets overseas. We told the
System Office of this, and in November 1974, it reimbursed
the appropriated fund $78,000.
OTHER SERVICES

     Merchandise for exchanges generally is moved from the
United States to overseas locations in containers known as
seavans. DOD policy provides that costs resulting from de-
lays in unloading seavans at inland destinations be paid by
the non-appropriated-fund activities.

     In Hawaii and Guam we found that seavan-delay costs
incurred between July 1972 and September 1974 for Exchange
Service shipments had been improperly paid from appropriated
funds due to inc¢crect use of a transportation account code.
In March 1975 a $52,000 collection action was processed
against the Exchange Service, but reimbursement had not been
received as of February 1977.
     Seavan-delay costs incurred for Navy Resale System
Office shipments also were improperly paid from appropriated
funds because a transportation account code was incorrectly
used. We identified $103,000 of such costs and the System
Office made full reimbursement in September 1975.



                             8
AGENCY COMMENTS AND OUR EVALUATION

     The Assistant Secretary of Defense (Comptroller) by
letter of August 2, 1976, concurred in our findings and
conclusions. He noted actions taken by the Army and Navy
to restructure transportation account codes and by the
Military Sealift Command to establish a unit level billing
system.  (See app. II.)
     The Assistant Secretary of Defense (Manpower and
Reserve Affairs) responded separately to the matter of ship-
ments of foreign-made merchandise to Vietnam and Thailand
during fiscal years 1971-74.   (See app. IV.) In his July 23,
1976, letter, the Assistant Secretary said DOD believed that
the Army and Air Force Exchange Service should not have to pay
for shipments of foreign-made goods to Vietnam and Thailand
before 1974. This belief is based not only on whether rea-
sonable ocean shipping costs existed before 1974, but on
the unusual conditions at the time, such as costs associated
with warehousing, pilferage, and damage incident to commer-
cial shipping. DOD also said that when adequate commercial
shipping at reasonable cost had become available to transport
foreign-made goocs to these locations, Army policy was
changed to discontinue use of appropriated funds.

     We know of no significant changes in commercial trans-
portation to, or warehousing in, those areas in 1974 that
were not available before. We also know of no significant
changes in the security afforded these shipments after 1974.
The foreign-made goods were, for the most part, shipped on
commercial vessels under contract to the Military Sealift
Command at reasonable costs.

     In our opinion, both Vietnam and Thailand were ade-
quately served by commercial transportation at reasonable
cost and shipping charges to those destinations should
have been borne by the Exchange Service and not the mili-
tary services. Furthermore of the $3.4 million involved,
about $1.1 million represents shipments of foreign mer-
chandise to other overseas locations such as Korea, Taiwan,
the Philippines, England, and Germany.  These costs should
be collected.
CONCLUSION

     Transportation services have been improperly charged
to appropriated funds. The improper charges resulted from
the failure to either establish or correctly designate a
reimbursable transportation account code.


                             9
     Contributing to the irnaccuracies were human error, the
complexity of the ceding system, and the absence of reviews
for the validity of codes.

     Procedures are needed to assure that reimbursable
transportation account codes are charged for services not
authorized for payment from appropriated funds. Proper
training of personnel responsible for assigning codes and
reviews of codes as merchandise passes through the system
would help.

      Mechanized controls could be instituted to preclude the
erronec.s3 use of appropriated-fund codes. To some degree,
the Navy recently implemented such controls for checking
personal property codes. Its computerized program matches
transportation account and commodity codes.   It :ejects
shipments which have a personal property commodity code that
are charged to a retail merchandise transportation account
code. The exceptions are manually investigated to determine
the proper coding.
RECOMMENDATION
     We recommend that the Secretary of Defense institute
procedures for insuring that non-appropriated-fund activi-
ties are properly charged for reimbursable transportation
services, considering the need for both manual and mechanical
controls over the correct use of transportation account codes.
DOD should also recover the unreimbursed costs for improper
appropriated-fund support provided non-appropriated-fund
activities, particularly those identified in appendix I of
this report which have been outstanding for some time.




                              10
                          CHAPTER 4

             NAVY'S USE OF APPROPRIATED FUNDS FOR
           OVERSEAS LAND TRANSPORTATION SUPPORT IS

         INCONSISTENT WITH OTHER SERVICES' PRACTICES

     The Navy's practice of financing overseas land trans-
portation costs with appropriated funds is inconsistent
with the Army's and Air Force's practices of not financing
these costs. This land transportation support for the
Navy exchange exceeds $300,000 annually.
     Army and Air Force regulations provide that appropriated
funds can be used for overocean transportation of American-
made non-appropriated-fund merchandise. Navy regulations
have similar provisions and authorized paying overseas
land transportation costs from the overseas port to the
inland destination.
      The overseas land transportation costs can be consider-
able.   In Hawaii $44,000 of appropriated funds were used for
land transportation of Navy exchange cargo during the 12-month
period erded November 1974. The Navy also has overseas ex-
changes in Japan, Spain, Italy, Scotland, and other countries
where appropriated funds are used for land transportation.
     On July 24 1975, we wrote to the Secretary of Defense
about the inconsistencies among the military services in fund-
ing overseas land transportation costs.  In a March 9, 1976,
letter, the Assistant Secretary of Defense (Comptroller) ac-
knowledged the inconsistency and agreed that it was inappro-
priate for the Army, Air Force, and Navy exchanges to receive
different levels of appropriated-fund support.
     The Comptroller said that a major effort to detect and
correct all such inconsistencies had begun. However, he did
not say how the inconsistencies would be resolved.

     We believe the Army's and the Air Force's practices
should be adopted. Neither of these services uses appropri-
ated funds for overseas land transportation nor suffers any
apparent ill effects.
AGENCY COMMENTS AND OUR EVALUATION

     DOD's comments on this matter were tentative, since they
related to issues to be resolved in the joint OMB/DOD study.
The tentative comments state, however, that if the rationale

                             11
for paying overocean costs from appropriated funds is to
equalize sales costs to the overseas service member, then
the cost of overseas land transportation should also be
absorbed by appropriated funds as representing an added
cost of doing business overseas.  (See app. II.)

     Furthermore, a review of a draft of the OMB/DOD study
report indicates that this rationale is being accepted, and
rather than having the Navy conform to the Army and Air
Force policies, increased appropriated fund support will be
provided to the Army and Air Force exchanges for overseas
land transportation.
     We believe a new interpretation of legislative intent
by DOD which would provide payment for even more transporta-
tion services overseas for non-appropriated-fund shipments is
unwarranted. If additional appropriated-fund support is
contemplated, it should be specifically authorized by the
Congress.
RECOMMENDATION
     We recommend that the Secretary of Defense direct the
Secretary of the Navy to stop using appropriated funds for
overseas land transportation of non-appropriated-fund
property.




                             12
                          CHAPTER 5

      TRANSPORTATION SUPPORT FOR IMPORTED FOREIGN-MADE

           MERCHANDISE IS CONTRARY TO DOD'S POLICY

     DOD's practice of providing appropriated-fund
transportation support for shipment of foreign-made beer
because U.S. customs duties and taxes are paid hinders its
rtlicy of encouraging the sale of U.S. products overseas.
     DOD Directive 7060.3 states that DOD's policy is to
promote the sale of U.S. goods and services in overseas non-
appropriated-fund activities. The policy's objective is to
aid in achieving a more favorable balance of payments. The
directive specifically provides that no appropriated funds
be used for transshipping foreign-made merchandise.
     Between March 1972 and August 1974 about $88,000 of
appropriated funds was spent to ship foreign-made beer from
New York to Hawaii, which DOD considers an overseas area for
transportation purposes. Military clubs in Hawaii bought
the beer through a commercial broker. The beer originated
in the Netherlands and was shipped to New York at the clubs'
expense.
     After the beer reached New York, customs duties and
taxes were paid and the beer was turned over to the Defense
Transportation System for transshipment to Hawaii at
appropriated-fund expense. By paying about $850 in customs
duties and taxes for each container of beer, the clubs re-
ceived about $1,200 worth of appropriated-fund support in
the form of transportation. Although we specifically cite
foreign-made beer, this situation could occur just as easily
with future shipments of other foreign-made goods.
AGENCY COMMENTS AND OUR EVALUATION

     The DOD Office of General Counsel has determined that
the payment of customs duties and other applicable U.S. taxes
makes foreign merchandise eligible for ocean transportation,
at appropriated-fund expense, on the same basis as American-
made products. This same position has also been taken in
the joint OMB/DOD draft report on funding support for morale,
welfare and recreation activities.

     In our opinion, using appropriated funds and the Defense
Transportation System for the transshipment of foreign-made
merchandise is contrary to DOD's policy of encouraging the


                             13
sale of American-made products overseas. Although using
appropriated funds may be technically permissible, it is
contrary to the intention of the directive. The provision
of "free" Government transportation gives the foreign-
made merchandise advantages of both cost and visibility it
wua"  not otherwise have.
RECOMMENDATION

     We recommend that the Secretary oft Defense revise DOD
Directive 7060.3 to prohibit any foreign-made merchandise
shipments from receiving appropriated-fund sup- rt.




                             14
                           CHAPTER 6
                        SCOPE OF REVIEW
     We made our review to find out (1' the extent to which
appropriated funds were being used to support non-
appropriated-fund activities and (2) whether adequate reim-
bursement was being made by these activities.
     Work was done at the following major activities and
subordinate offices:
     -- Military Traffic Management Command
        Falls Church, Virginia

     -- Military Sealift Command
        Washington, D.C.
     -- Army and Air Force Exchange Service
        Dallas, Texas
     -- Navy Resale System Office
        Brooklyn, New York
     -- United States Army Finance and Accounting Center
        Indianapolis, Indiana

     -- Naval Supply Systems Command
        Washington, D.C.
     -- U.S. Air Force Class VI Agency
        Mainz-Kastel Air Station, Germany

     -- U.S. Army Class VI Agency
        Heidelberg, Germany
     -- Far East Locker Fund
        Camp Zama, Japan
     -- Various military clubs and exchanges in Japan, the
        Philippines, Thailand, and Hawaii
     We discussed our findings with officials of the Offices
of the Assistant Secretaries of Manpower and Reserve Affairs,
Comptroller, and Installations and Logistics, and various
military representatives of the Department of Defense.

     We obtaine9 statistical data for shipments from billing
and shipping records of the Military Traffic Management
Command and the Military Sealift Command.

                               15
APPENDIX I                                                                                                                                                                                                                        APPENDIX I




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                                                                                                                              16
       APPENDIX II                                                      APPENDIX II




                                ASSISTANT SECRETARY OF DEFENSE
                                    WASNHINGTON, D.C.   20301



COMPTROLLER                                                August 2, 1976




      Mr. Fred J. Shafer
      Director, Iogistics and
        Communications Division
      U.S. General Accounting Office
      Washington, D. C. 20548
      Dear Mr. Shafer:

      This is in response to your letter dated May 20, 1976, which requested
      comments on a draft report titled, "Unauthorized and Questionable Use
      of Appropriated Funds to Pay Transportation Costs of Nonappropriated
      Activities." (OSD Case f4373)

      The draft report expresses your concern that appo-priated funds have
      been improperly expended for transportation support that should have
      been funded by nonappropriated fund activities.

      Since the President has directed that a study be completed concerning
      the use of appropriated funds to support nonappropriated fund activi-
      ties and the study is in progress, some of our comments must of
      necessity be tentative at this time. This study is a joint OME/DoD
      effort and is scheduled for completion in September 1976. The objec-
      tives of this study are to:

              -   Identify the amount of appropriated and nonappropriated
                  funds used in support of NAF activities.

              -   Evaluate the effectiveness and equity of the current
                  policies governing that support.

              - Develop alternative plans to modify any deficiencies or
                inefficient policies.

      Our comments on the issues raised in your report follow:




                                                17
APPENDIX II                                                 APPENDIX IT


Chapter 2:   Improper Routing of Shipments Resulting in More Appropriated
             Fund Support Than Authorized by DoD

We concur that shipment through a farther distant portt of embarkation
(POE) increases the cost to DoD. However, we feel tha it is prudent to
use the POE which produces the lowest overall transportation cost,
whether the beneficiary of the resultant savings be the Government or
the nonappropriated fund activity. Therefore, we suggest the recommenda-
tion be revised to indicate "the Secretary of Defense direct the non-
appropriated fund activities to reimLbrse the paying appropriation for
ocean costs incurred in excess of those applicable to shipment through
the port of embarkation nearest the overseas destination."

Chapter 3:   Procedures Needed to Assure Reimbursement for Use of the
             Defense Transportation System

Concur with findings, conclusion and recommendation. As noted in the
draft report, both Army and Navy have taken action to restructure
Transportation Accounting Codes (TAC) to properly segregate costs for
identification and reimbursement purposes. Concurrently, the Military
Sealift Command is taking steps to establish a unit level billing system,
which will materially enhance the Service's ability to obtain proper
reimbursement.

Chapter 4:   Navy's Use of Appropriated Funds for Overseas Land Trans-
             portation Is Inconsistent with the Other Services

The recommendation in this chapter relates to issues to be resolved in
the Joint 0MB/DoD study. However, in considering the issues involved,
it is important to recognize that the cost of land transportation over-
seas may equally be ccnsidered an added cost of doing business overseas,
since the cost to the nonappropriated fund activity of delivery to the
CONUS POE would equate to the cost of delivery to the CONUS sales/con-
sumption activity. Therefore, if the rationale for paying over-ocean
cost from appropriated funds is to equalize sales cost to the overseas
service member, then the cost of overseas land transportation should
also be absorbed by appropriated funds as representing an added cost of
doing business overseas.

Chapter 5:    Transportation Support for Imported Foreign Made Merchandise
              Is Contrary to DoD Policy

Our Office of General Counsel has determined"     . . that foreign made
merchandise which hLes properly entered the United St+-o ana on which
all required custom duties and other applicable United States taxes have
been paid may be trarsported on the same basis as United States made
products." Therefore, the use of appropriated funds to support ocean
                                                                     the
costs from the United States to another foreign country incurred in
transportation of such  merchandise must be r-solved as part of the over-
all issue of appropriated fund support of nonappropriated fund activities.
                                    18
APPENDIX II                                                      APPENDIX II



                           [See GAO note]




We appreciate this opportunity to comment on your draft report.
                                          Sincerely,




                                     Terencoe . IcClar
                               Assistant SecrotarjY uf DefenSe



GAO note:     Deleted material relates to data in our draft
              which has been deleted from the final report.




                                 19
APPENDIX III                                               APPENDIX III

                                 rnPV

                                            APPENDIX III
                                             Page '
TC-OD-G-607


Deputy Chief of Logistics
Department if the Army                                 MAR 3
The Pentagon 20310

     Attention:   DALO TSP - C

Dear Sir:

     During our work under assignment codes 46216, 43223, 4321G,
and 43219 we have become aware of a situation on which we would
like to receive your comments. The Army and Air Force Exchange
Service (AAFES) has been moving foreign made merchandise to Thai-
land and Vietnam at appropriated fund expense. We feel these
movements should have been charged to AAFES in accordance with DOD
Directive 7060.3 para VA(3) which states that no appropriated funds
will be used for the trans-shipment of foreign-made goods between
nonappropriated fund activities. The policy guidance does allow
appropriated funds to be used to move foreign made goods to isolated
locations where a~dquate commercial transportation is not available
at reasonable costs.

     AR 230-4 indicates that Vietnam and Thailand are isolated loca-
tions and the AAFES officials in Honolulu are using this regulation
as their authority for moving foreign merchandise to Vietnam and
Thailand at appropriated fund expense.

     On September 17, 1970, AR 37-23 established transportation
account code (TAC) A-216 (an appropriated fund TAC) and AAFES began
using this code to fund shipments of foreign merchandise to Vietnam
and Thailand. We disagree with AAFES' position on this matter. We
have identified these shipments and intend to bill AAFES' retroactively
from September 17, 1970 until July 1, 1974 at whic( time Department of
the Army directed that AAFES reimburse Army Operations and Mainten-
ance funds for all foreign merchandise shipments made against TAC A-216.

     We feel that Vietnam and Tahiiand are adequately served by commer-
cial transportation at reasonable cost. Attached for your reference
is an analysis of the MSC's commercial rates between various countries
in the Pacific and we find no appreciable difference betweer the rates
to Vietnam or Thailand and those to other countries in the area strh
as Taiwan, Philippines, or HIong Kong.



                                  20
APPENDIX III                                             APPENDIX III


                                 COPY




TC-OD-G-607



     Prior to our processing collection actions against AAFES for
these shipments we would appreciate receiving your views on the pro-
visions of AR 230-4 relied upon by AAFES.

     We are available to meet with you or your staff to discuss this
problem in more detail. Questions should be directed to Mr. Paul F.
Dinsmore telephone 386-6378.

     Your cooperation is appreciated.

                                      Sincerely yours,

                                      R. E. West

                              ior/ '. E. Sullivan
                                   Director
Attachment




                               COPY


                                 21
APPENDIX III                                         APPENDIX III

                8chedule of Low Cost Carrier Rates
                 of Pacific Intcroort ?r.icments
                        of General Carco


                                MSC Rate Guides Effective
 Btween                         1/1/73     1/1/74 7/1/74
 Japan         Vietnam           1720      1875      2 10.
               Thalland          167S5     1725      2600
               Korea             1250      1480      1846
               Okinawa           1200      1260      2050
               Taiwan            1375      1375      2000
               Hong Kong         1435      1480      2105
               P*hlippines       1700      1730      2347
               .GuaC             2500      2500      3117
 Korea         Vietnam          1725       1725      2717
               Thailand         1750       177S      2905
               Japan            1250       1480      1846
               Okinawa          1485       1627      2244
               Taiwan           1500       1625       -.
               Hong Kong        1435       1600       -
               Philippines      1700      1480        -
               Guam             3000      3000        -
 Okinawa       Vietnam          1725      1850       2100
               Thailand         1665      1600       2905
               Taiwan           1250      1500       2100
               Hong Kong        1250      1275        -
               Philippines      1300      1260       2100
               Guam             3000      3000        -
 Taiwan        Vietnam          1627      1760       2400
               Thailand         1805      1597       2905
               Nong Kong        1250      1260        -
               Philippines      1350      1350       2200
               Guam             3000      2520        -
 bSog Kong     Vietnam          1627      1627        -
               Thailand         1670      1625        -
               Philippines      1325      1600        -
               Guam             2500      2500        -
 Vietnam       Thailand         1325      1325       2000
               Philippines      1627      1760       2400
               Guam             3000      3000        -
  haLland      Pbhiippines      1745      1650       -
               Guam             3000      3000
                               22
       APPENDIX IV                                               APPENDIX IV




                      ASSISTANT SECRETARY OF DEFENSE
                              WASHINGTON. D. C. 20301



 MANPOWER AND                                                  July 23,   1976
RESERVE AFFAIRS




       Mr. T. E. Sullivan
       Assistant Comptroller General
       U. S. General Accounting Office
       Washington, D. C.   20548

       Dear Mr. Sullivan:

       This is in reply to your letter of March 3, 1975 to the Deputy Chief
       of Logistics, Department of the Army, regarding retroactive billing
       of the Army and Air Force Exchange Service (AAFES) for shipments
       of foreign merchandise to Vietnam and Thailand at appropriated fund
       expense from September 1970 through June 1974. The Assistant
       Secretary of the Army (Financial Management) has asked that I reply
       to your letter.

       During the tine period addressed, DoD policy authorized the use of
       appropriated funds at isolated locations where adequate commercial
       transportation was not available at reasonable cost.

       A review of the matter indicated that the provisions of AR 230-4,
       exempting Vietnam and Thailand from appropriated fund restrictions,
       were based on valid consideration, competent authority, and in
       consonance with DoD policy. The authorization for use of appropriated
       funds was 'based, not solely on the cost of commercial ocean shipping
       referred to in your letter, 'but rather, on the unusual conditions sur-
       rounding shipments to Vietnam and Thailand at the time. It was the
       large attendant costs associated with warehousing, pilferage, and
       damage incident to the use of commercial shipping that prevented the
       use of such shipping at reasonable costs.

       When it was determined in 1974 that adequate commercial transpor-
       tation at reasonable cost had become available for transporting foreign

                                          23
APPENDIX IV                                                  APPENDIX IV




merchandise to remote locations, the Army policy was modified to
discontinue financing such transportation from appropriated funds.
Pursuant to this revised policy, nonappropriated funds, henceforth,
were used to pay transportation costs of all AAFES foreign merchandise
shipments.

Accordingly, it is felt there should be no retroactive billing of the
AAFFS for these shipments.

                                  Sincerely,




                                    24
APPENDIX V                                           APPENDIX V

                    PRINCIPAL OFFICIALS

                RESPONSIBLE FOR ACTIVITIES

                 DISCUSSED IN THIS RE2ORT

                                          Tenure of office
                                          From          To
                   DEPARTMENT OF DEFENSE

SECRETARY OF DEFENSE:
    Dr. Harold Brown                Jan.     1977   Present
    Donald H. Rumsfeld              Nov.     1975   Jan. 1977
    James Schlesinger               July     1973   Nov. 1975
    William P. Clements. Jr.
       (acting)                     Apr.     1973   July   1973
    Elliot L. Richardson            Jan.     1973   Apr.   1973
    Melvin R. Laird                 Jan.     1969   Jan.   1973
    Clark M. Clifford               Mar.     1968   Jan.   1969
    Robert S. McNamara              Jan.     1961   Feb.   1968
DEPUTY SECRETARY OF DEFENSE:
    Charles W. Duncan. Jr.          Jan.     1977   Present
    William P. Clements, Jr.        Jan.     1973   Jan. 1977
    Kenneth Rush                    Feb.     1972   Jan. 1973
    David Packard                   Jan.     1969   bec.  1971
    Paul H. Nitze                   July     1967   Jan. 1969
    Cyrus R. Vance                  Jan.     1964   June 1967
ASSISTANT SECRETARY OF DEFENSE
  (INSTALLATIONS AND LOGISTICS):
    Dale R. Babione (acting)        Jan.     1977   Present
    Frank A. Shrontz                Feb.     1976   Jan. 1977
    Arthur I. Mendolia              June     1973   Feb. 1976
    Hugh McCullough (acting)        Jan.     1973   June J973
    Barry J. Shillito               Feb.     1969   Jan. 1973
    Thomas D. Morris                Sept.    1967   Feb. 1969
    Paul R. Ignatius                Dec.     1964   Sept. 1967
                      DEPARTMENT OF THE ARMY
SECRETARY OF THE ARMY:
    Clifford Alexander              Feb.     1977   Present
    Martin R. Hoffman               Aug.     1975   Jan. 1977
    Howard H. Callaway              June     1973   Aua. 1975
    Robert F. Froehlke              July     1971   June 1973
    Stanley R. Resor                July     1965   June 1971




                               25
APPENDIX V                                          APPENDIX V
                                        Tenure of office
                                        From          To
                    DEPARTMENT OF THE NAVY

SECRETARY OF THE NAVY:
    W. Graham Claytor, Jr.           Feb.    1977   Present
    J. William Middendorf II         Apr.    1974   Jan.  1977
    John W. Warner                   Apr.    1972   Apr.  1974
    John H. Chafee                   Jan.    1969   Apr.  1972
    Paul R. Ignatius                 Sept.   1967   Jan.  1969
    Charles F. Baird (acting)        Aug.    1967   Sept. 1967
    Robert H. B. Baldwin             July    1967   Aug. 1967
    Paul H. Nitze                    Nov.    1963   July 1967
                 DEPARTMENT OF THE AIR FORCE
SECRETARY OF THE AIR FORCE:
    John Stetson                     Apr.    1977   Present
    Thomas C. Reed                   Jan.    1976   Apr.  1977
    James W. Plummer (acting)        Nov.    1975   Jan. 1976
    Dr. John J. McLucas              July    1973   Nov. 1975
    Dr. Robert C. Seamans, Jr.       Jan.    1969   May   1973
    Dr. Harold Brown                 Oct.    1965   Jan. 1969




                                26