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 0h ci 00 0 0 0 0 *.1 00 0Q 0 0 0 ogi 00NC 0 0 0 0 Q 01 VD0 .4MI 0.iN .8 N U I eel ol a~~~ C U VI a C, f4 C 0 0 0 0 0 10 .r .5C 0 0 0 0 I0 .5 0. * ii 0~~ C.. ~~~o I2 Y 0 n * I C O *~~~~~~'4 it ~0.50~~~~~~~ . i Iv -.. Ii C .5 .0 .* F a la IS.c.: * * a W 1 0. 000 0 0 0 0 0 00 -V 0 A c0 0.0 C 0 0 0 a 0c a aU 000 IA 0 0 0 0 C 0 C 000 a 0* A.I .-I -C r,... u oa ~ 0 0 0 0 0 0 .I U0 ha ~kel O 0~ O W C .8P A.a A. c .8 r 4o 0 s. a W j cc -P 0 C 0 . a 0~~~~~~~~~~ 0, c - ~~ a 8 - ~ o -w- a ~ -. a ~ ac u ~ ~ ~ .5 u-c fl . .5~ C 1 - A 4 -0 I q0 u g U. C C C C Cr .. 5 6 U IAI M Am 0 0 0 0' *I 0F MU -O - - - I.0 0 U .5W ZI ~~ a. 0 0 csu 4I54-1P CA I 1.5 o o ~~· i. M.0- - V - - *C 5.. C 4'5C ~~: C ~O~~~~~~~~r ~ 0 b.0 I 5. 41 ~ : 0 .5 a~ 5.. UC a 0.5 C ur .5 54 ~~~~~~~~~~~~~~C -Iu ~ ~ a~ ~ ~o0V i~0SD ~~~4 A a ~ .50.5-5 O U 545 rC5 1 C - Z to C 41c .8~~~ ~ ~~ 5. A1 5. ~ A,5. @5..9 415. uI5. A-'6 4 5 0 0SC U 0 U54 C V U 45 a . o 0 A ul If~ ~~ 5 C" .5 0 C: U M. . ~~ A ~~ II A . u u a ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ IC~~~ · *' U~ .5 .5 Va u1'1 *e 00 04 OC 0 X 0U S CL) .~~~~~~~~~~~~~~~~~~~~~~~~~A 5 CII ECU ~ :~~~A-J .4UC A - - 0'u Ac aI .8 . . .5 n .5V .4 .. - . . *4 * 11 b rb A1 P ao UI OI Al 5.1 f 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
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)