-_-..~_-_.--.- (kfolwr 1!)!I0 INTERNAL CONTROLS Black Marketing of U.S. Commissary and Base Exchange Merchandise in South Korea RELEASED RESTRICTED --Not to be released outside the General Accounting Off& unless specifhlly approved by the Office of Congressional Relations. GAO,‘NSIAI)-91-W National Security and International Affairs Division B-237390 October 30,lQQO The Honorable Carl Levin Chairman, Subcommittee on Oversight of Government Management Committee on Governmental Affairs United States Senate Dear Mr. Chairman: As you requested, we reviewed the black marketing of duty-free goodsacquired from U.S. retail outlets in South Korea for profit or personal gain, Weplan no further distribution of this report until 30 days from its issue date, unless you releaseits contents earlier. At that time, we will send copiesto other interested committees and Membersof Congress,the Secretary of Defense,and the Director of the Office of Managementand Budget. We will make copies available to other interested parties upon request. Pleasecall me on (202) 276-8412 if you or your staff have questions on this report. Other major contributions are listed in appendix VI. Sincerely yours, Donna M. Heivilin Director, Logistics Issues Ekecutive Summary Black marketing in Korea is the act of transferring duty-free goodsto Purpose unauthorized individuals for profit or personal gain. The Status of ForcesAgreement requires the U.S. government, in cooperation with the Republic of Korea, to prevent the black marketing of duty-free goods acquired from the US. Forces,Korea, retail outlets. The Chairman, Sub- committee on Oversight of Government Management,SenateCommittee on Governmental Affairs, asked GAOto estimate the scopeof black market activities in Korea and evaluate the effectiveness of the ration control system. The black marketing of U.S. and other foreign-made products has been a Background problem since the end of the Korean War. Even though there is a great demand for these products, Korean government trade restrictions and high tariffs have limited their legal import and increasedtheir prices. At the sametime, the unlimited duty-free import of these products by the U.S. military for its forces and other authorized individuals has resulted in a thriving black market. Under the Status of ForcesAgreement with South Korea, U.S. military personnel and other specified individuals are entitled to purchase items from U.S. retail outlets, which are not subject to Korean taxes. In return for this privilege, authorized users have an obligation not to sell or transfer these items to unauthorized individuals. US. Forces,Korea, commissary and exchangesalesamounted to $260.4 million during fiscal year 1988. Food, appliances, and clothing are some of the types of merchandise sold. There were about 70,300 customers, including about 20,800 dependents,authorized to shop at U.S. outlets. The commissariesand exchangesare basically self-supporting, but the U.S. government pays the cost of shipping merchandise to Korea from the United States. Shipping costs and other U.S.-appropriated funds sup- port, excluding funds for the ration control system, amounted to about $23.7 million in fiscal year 1988. To reduce black marketing, U.S. Forces,Korea, operates a ration control system that sets monthly monetary and quantity limits on customers’ purchases. Page2 GAO/NSliUS@1.88 BlackMarketing Executiveslunmary Results in Brief The black marketing of duty-free goodsappeared to be widespread throughout South Korea. GAOoften saw goodsfrom the U.S. Forces, Korea, retail system in Korean markets and stores. However, GAOwas unable to accurately estimate how much of the goodswere making their way to the black market. The ration control system established to prevent black marketing has not been effective. Salesrates for selecteditems indicated that author- ized customers could not be consuming all of the items sold. For example, during fiscal year 1989, Army and Air Force commissariesin South Korea received about 1.2 million pounds of oxtail meat for sale, or more than 16 pounds for every man, woman, and child authorized to buy commissary items. In most of the casesGAOreviewed, the US. com- missaries and exchangeswere paid for the items that were black marketed. Someration control system procedures were not consistently followed. For example, cashiers at U.S. commissariesand base exchangesdid not always verify customer identification or record salesdata. In addition, renewed efforts to work with Korean government officials to deter black market activities appear warranted. Principal Findings Extent of Black Market GAOoften found a significant amount of merchandise from U.S. Forces, Activities Korea, retail outlets at large open markets and regular retail stores. Neither GAOnor military officials can accurately measurethe magnitude of black marketing in terms of the number of people involved or the value of duty-free goodsthat reach Korean retail outlets. Salesof somemerchandise from U.S. Forces,Korea, retail outlets are much higher than the number of authorized customers could be expected to consume.Items such as oxtail meat, rice, Spam,hot dogs, cheese,chicken, hair spray, and Chivas Regal Scotch have unusually high sales rates. For example, almost 316,000 bottles of Chivas Regal 12-year-old Scotch were sold by these outlets in 1988. Per capita, U.S. military personnel in Korea purchased 46 times more of this Scotch than their counterparts in Europe. Page8 %, Eluxntive sumnuuy The Ration Control System Black marketeers are able to obtain duty:free merchandise operating Is Ineffective within the ration control system becausepurchase limits are high and small purchases are not recorded. U.S. commissary and exchangecash- iers and clerks are generally Korean, and somework as accomplicesto black marketeers by not recording all sales.Black marketeers also receive diverted merchandise and use fraudulent or altered ration con- trol plates and identification cards. For example, GAOfound that as much as 26 percent of certain appliances and stereo equipment at two stores were purchased with fraudulent ration control plates, GAOfound that the ration control system was not being implemented as designed.Ration controls that were in place were not being followed; for example, cashiers did not consistently check identification cards. In addition, the system did not always track somesales data, especially for sales involving temporary ration control cards. During 1987, the latest year for which data were available, the ration control system cost about $12 million, mostly for personnel costs. Enforcement Actions Under the Status of ForcesAgreement, the United States, in cooperation with the Korean government, is responsible for preventing abusesof the commissary and exchangeprivilege system and deterring black market activities. Army and Air Force investigations and security units have jurisdiction over ration control violations by U.S. military personnel. In fiscal year 1988, the latest year for which data were available, these enforcement groups investigated about 790 casesinvolving ration control violations. In the sameyear, 66 military memberswere court-martialed for black market activities, and an unknown number received less serious penal- ties, such as losing ration privileges or prohibited accessto U.S. bases. The Korean government considersblack marketing a customs violation and does not maintain separate statistics on the number of individuals prosecuted for black marketing US. merchandise,However, U.S. offi- cials believe that only a small number of offenders have been prosecuted. Page4 GAO/NSIAD-91-99 BlackMarketing ExecutiveSummary GAOrecommendsthat the Secretary of Defensedirect the Commander, Recommendation U.S. Forces,Korea, to (1) implement cost-effective ration control system procedures that provide reasonableassurancethat the objectives of the system will be accomplishedand (2) work with U.S. embassyofficials in Korea to develop new approachesto encouragethe Korean government to increase its efforts to deter black market activities. GAOdid not obtain official agency comments;however, it obtained the Agency Comments and views of responsible agency officials during its review and incorporated GAO’s Evaluation their commentswhere appropriate. Page5 GAO/TWAD4l~BhkMuLetsne .' Contents Executive Summary 2 Chapter 1 8 Introduction Requirements Under the Status of ForcesAgreement 8 How the Ration Control System Works 9 Ration Control Enforcement 9 The Commissary and Exchange Systemsin Korea 10 Objectives,Scope,and Methodology 10 Chapter 2 14 Indications of the Large Number of Korean Retail Outlets Selling USFK Duty-Free Goods 14 Black Market Problem Unusually Large Salesand PurchaseRates 14 Chapter 3 17 How Black Mm&tiers Black Market SchemesOutside the Ration Control System 17 Limits Operate Use of Fraudulent Documents 20 Black Marketing Within the Ration Control System 22 Chapter 4 26 Weaknessesin the Proceduresto Prevent Abuses Are Not Being Followed 26 27 ChangesHave Weakenedthe Ration Control System Ration Control System The Number of Authorized PurchasersHas Gradually 29 Contribute to Black Increased Market Activities U.S. and Korean Efforts to Deter Black Market Activities 29 Conclusions 33 Recommendations 33 Appendixes Appendix I: General Demographic Data on USFK 34 Personnel for Calendar Year 1988 Appendix II: Comparison of U.S. and USFK Per Capita 36 Rice Shipments and/or Sales Appendix III: Comparison of Consumption Rates for 37 Chivas Regal ScotchWhisky in Europe and Korea Appendix IV: USFK Retail Facility Appropriated Funds 38 Support (Fiscal Year 1988) Appendix V: Cost of USFK Ration Control System (Fiscal 39 Year 1987) Appendix VI: Major Contributors to This Report 40 Page8 GAO/NSIAD-9l-99 Blacklbbkdng Tables Table 2.1: Per Capita Rates for High Selling Consumable 16 Items for 1988 Table 2.2: Average Salesof 40-OunceBagsof Chicken 16 Drumsticks During the Olympics Table 3.1: PurchasesWith Fraudulent Ration Control 21 Plates (September 1,1988, to April 16,1989) Table 3.2: Ration Control Monetary Limits 23 Table 3.3: Ration Control Quantity Limits 24 Table 4.1: Ration Control Violations (Fiscal Year 1988) 31 Table 4.2: Number of Individuals Punished for Black 30 Market Activities Abbreviations Army and Air Force ExchangeService DOD Department of Defense GAO General Accounting Office USFK U.S. Forces,Korea Page7 GAO/NSIAD-B1-88 BlackMarketing . Chapter 1 Introduction As used in this report, black marketing is the act of transferring duty- free goods acquired from U.S. Forces,Korea (USFK),commissaries,base exchanges,and other retail outlets to unauthorized individuals for profit or personal gain. The Status of ForcesAgreement requires the U.S. gov- ernment, in cooperation with the Republic of Korea, to prevent the black marketing of these goods. Under the Status of ForcesAgreement with South Korea, U.S. military Requirements Under personnel and other specified individuals are entitled to purchase items the Status of Forces from USFKretail outlets that are not subject to Korean taxes. In return Agreement for this privilege, authorized users have an obligation not to sell or transfer duty-free items to others not authorized to receive them. The US. armed forces, in cooperation with the Korean government, are required to take steps necessaryto prevent abuseof this privilege. The servicesuse a ration control system to (1) fulfill U.S. obligations under the Status of ForcesAgreement regarding the disposition of duty- free goods,(2) ensure that adequate supplies of goods are available to meet the needsof authorized purchasers, and (3) deter black market activities. Basedon 1987 data, USFKestimated that it costs almost $12.1 million to operate the ration control system-$2.7 million in direct costs and $9.4 million in indirect costs.Indirect costs include partial salary costs for personnel who spend most of their time on nonration control duties. U.S. forces in South Korea have had a ration control system since the end of the Korean War. USFKhas used various versions of manually con- trolled systems, including punch cards and coupon books. None were totally effective in stopping the black marketeers. USFKchangedthe system in 1971 by replacing the paper cards with the current plastic ration control plate, which is similar to a credit card. The current ration control system usesthree types of controls: monthly How the Ration monetary limits, monthly quantity limits, and specifically controlled Control System Works 1.tems. A ration control plate and a picture identification card are nor- mally required when making purchases.Authorized customers use tem- porary ration control cards until they receive their permanent plates. Y Cashiers record purchasesof duty-free goodsby using the plastic ration control plate. The plate is embossedwith raised identification data, such as the individual’s name, social security number, rank, sex, family size, Page8 GAO/NSIAD-91-38 BlackMarketing . Chapter1 Introduction and expiration date. When an authorized person makes a purchase, the sales clerk makes an impression of the plate onto a three-part salescard, which is similar to running a credit card through an embossingmachine. The customer keeps one copy of the salescard, the retail outlet keeps the second,and the USFKData ManagementDivision receivesthe third copy for processing.At the Division an optical character reader scans the paper cards and records the information in a database. The database contains an individual’s purchasesfor each month recorded by social security number. Each month, salesdata are com- pared with the control limits to determine if violations have occurred. The database identifies those individuals who exceedtheir monthly limits or buy unauthorized items. Purchasereports for violators are pro- duced monthly and are sent to the violator’s military unit for appro- priate action-for example, counseling,reprimand, or court-martial. A number of military organizations are responsible for managing and Ration Control enforcing the ration control program and deterring black market activi- Enforcement ties. The Office of the USFKAssistant Chief of Staff, J-l (Manpower and Personnel Directorate), and its Data ManagementDivision implement and managethe ration control program. Area, installation, and unit com- manders have certain responsibilities for ensuring compliance with the ration control system and administering disciplinary actions. Various military law enforcement groups are involved in trying to sup- press black market activities. USFK’Sprovost marshal investigates lost and stolen documents, maintains a file of controlled-item salescards, collects data on ration control violations, and coordinates efforts to sup- press black market activities. The U.S. Army Criminal Investigation Command and the Air Force Office of Special Investigations investigate violations of the ration control system and black market activities. They generally conduct major investigations involving items valued at more than $1,000. The Army military police and the Air Force security police at the installation level investigate black market casesinvolving smaller amounts. Page9 GAO/NSIAD91-38 BlackMarketing --- Ckaprl Introdu&on Three major military organizations in South Korea sell duty-free goods. The Commissary and The largest, in terms of retail sales,is the Army and Air Force Exchange Exchange Systems in Service (IILAFES),which has 103 retail outlets in South Korea. This Korea includes 8 main exchanges,38 branch stores, 33 small annexes,13 mili- tary clothing stores, and 11 auto parts and gasoline stations. These out- lets sell items ranging from refrigerators and televisions in the exchangesand branch stores to snack food and beer in the annexes. The Army’s Far East Commissary District operates three full-service food stores and other smaller annexesin South Korea. Similarly, the Air Force Commissary Service operates two full-service stores and other small annexes.The commissariessell all types of grocery items, including meats, fruits, cigarettes, cheeses,juices, snacks,and Korean food. There are also 28 ClassSix outlets currently operated by AAFES.’ The ClassSix outlets sell liquor, wine, beer, cigarettes, cheeses,juices, snacks, and other items. AAFESis a sales-oriented,profit-motivated, and nonappropriated fund organization. It is the largest contributor to the military Morale, Welfare, and Recreation Fund. It contributes 60 percent of its net profits to the fund and usesthe remainder for capital improvements. The commissaries,although also sales-oriented,sell their merchandise at cost plus a S-percentmarkup. Although they receive someappropriated funds, they are primarily funded through customer purchases,and profits are used to pay for operating expensesand construction. On September 16,1988, the Chairman, Subcommitteeon Oversight of Objectives,Scope,and Government Management,SenateCommittee on Governmental Affairs, Methodology requested us to review black market activities occurring on and near military basesin South Korea. Basedon concernsvoiced by the Chairman, our objectives were to estimate the scopeof black market activity and evaluate the effectiveness of the current ration control system. We conducted audit work in the Republic of South Korea, Hawaii, and various locations in the continental United States. In South Korea, we reviewed records and interviewed officials at YongsanArmy Garrison, ‘ClassSix is the namegiven to the Army and Air Forcepackagealcoholicbeverageoperation.The namewas changedfrom ClassVI to ClassSix when AAFEStook over managementon March 26, 1989. Page10 GAO/NSLADgl-9SBlackMarketing chapter 1 Introduction OsanAir Base,and CampsCasey,Coiner, Howez, Long, Market, and Page.We visited several well-known black market areas in Seoul, near Camp Caseyor OsanAir Base. We discussedthe black market and ration control system in Korea with officials in command positions and other officials from the following areas: . USFKData ManagementDivision, which is responsible for operating the ration control system; l US. Army’s Criminal Investigations Command and USFXprovost mar- shal’s office, which conduct investigations of black marketing; l Army and Air Force ExchangeService,Army Far East Commissary Dis- trict, Air Force Commissary Service, ClassSix Stores, and other Morale, Welfare, and Recreation operations, which operated the retail facilities in South Korea; l USFXjudge advocate’soffice, which provided statistics on prosecutions for ration control abusesfor both U.S. and Korean violators; l USFK Public Affairs Office, which provided published and videotaped information concerning the black market and the ration control system; and . Military Traffic ManagementCommand,which provided estimates of the cost of shipping duty-free goodsto Korea. We also interviewed and obtained documents from unit commanderssta- tioned at various Army, Air Force, and Navy units throughout South Korea and officials at a number of other U.S. and Korean organizations. Among these were the American embassy,the US. Status of Forces Agreement Secretariat, Korea-US. Economic Council, Korean Chamber of Commerceand Industry, the American Chamber of Commercein Korea, Korean Customs, and the Korean National Police. In Hawaii we obtained data from officials at the Headquarters, U.S. Pacific Command,Camp Smith; Air Force Commissary Service-Pacific Region,Pacific Air Force’s Office of Special Investigations, and Security Police at Hickam Air Base;and Army and Air Force Exchange Services- Pacific, Honolulu. We also interviewed officials from the Office of the Assistant Secretary of Defensefor Force Managementand Personnel;Office of the Assistant Secretary of Defensefor Production and Logistics; DefenseLogistics Agency, Cameron Station, Alexandria, Virginia; DefensePersonnelSup- port Center, Philadelphia, Pennsylvania; U.S. Army Troop Support Page11 GAO/NSIAD-9138 BlackMarketing chapter 1 Introdu&on Agency, Fort Lee, Virginia; U.S. Air Force Commissary Service, San Antonio, Texas; U.S. Army and Air Force ExchangeService, Dallas, Texas; U.S. Army Criminal Investigations Command,Falls Church, Vir- ginia; and US. Air Force Office of Special Investigations, Bolling Air Force Base,Maryland. To determine the overall extent of the black market for high value items, we compared numbers of items received by two AAFESretail stores for sale with (1) recorded salesmade using counterfeit ration con- trol plates and (2) total recorded salesof the sameitems. We obtained data on salesof high value items using fraudulent cards from a U.S. Army Criminal Investigations Command database.The Command gave us the database,and we modified it slightly by removing salesprior to the date on which our analysis started and salesafter the date our anal- ysis ended. Total recorded salescame from the ration control database. m was unable to give us sales data for those specific high value items we wanted to analyze becauseit tracks salesonly by dollar amounts of similar groups of items (e.g., electronic equipment or appli- ances),not by specific item (e.g., Sony 27-inch televisions). In addition, AAFESwas unable to give us a beginning inventory or an ending inven- tory for these items. Therefore, we analyzed receipts of the selected high value items at two AAFESexchangesminus transfers from the exchangesbetween September 1,1988, and April 161989. We assumed that receipts less transfers approximated salesand used these figures in our analysis so we could estimate the percentageof salesof selected AAFESitems using fraudulent ration control cards. We also inventoried the selectedexchangeitems as of April 161989. Similarly, since sales figures for selectedliquors were not readily available, we assumedthat issuesfrom the Yongsan liquor warehouse were equal to total salesof those items at the ClassSix stores. To calculate the per capita salesrates, we used all 70,328 authorized consumersduring 1988 as our universe, which included 37,428 service memberswith no dependentsin Korea and 8,000 service memberswith 16,909 dependents.Also, 1,667 civilians in Korea have no dependents and another 2,483 civilians have 4,961 dependents.Given the large number of unaccompaniedauthorized consumerswho eat in military dining facilities and live in barracks, we believe that our universe of actual consumersis too large. As a result, many of the per capita sales rates are lower than they would be if only actual consumersof the items could be determined and measured.(Appendix I contains demographic data on military personnel in Korea.) / Page12 GAO/NSIAD91-%? BlackMarketing chapter 1 lntrodueUon We conducted our work between January 1989 and June 1990 in accor- dance with generally acceptedgovernment auditing standards. Y Page13 GAO/NSIAD.Bl-36 BlackMarkethg Chapter 2 Indications of the Black Market Problem Black marketing is widespread in South Korea. During our visits to large Korean black market shopping areas and regular Korean retail stores and small shops, we saw products that were originally sold at USFXcom- missaries, baseexchanges,ClassSix stores, and other retail outlets. Items are being sold on the black market for between two and three times their price in USFKretail stores. We cannot accurately measurethe magnitude in terms of the number of people participating or the value of USFXduty-free goodsthat reach Korean retail outlets. Also, USFK,its provost marshal, Office of Special Investigations, and U.S. Army Criminal Investigations Command offi- cials are unable to estimate, with any confidence, how many people are participating in black market activities or how much of the U.S.-pro- vided goodsreach the black market. However, we believe it is a serious problem and that the current ration control system cannot ensure items purchased in USFKretail outlets do not reach Korean markets and stores. Oneof several large market areas in Seoul where black market goodsare Large Number of sold is called Namdaemun.It has many small shops selling a variety of Korean Retail Outlets USFXduty-free goodsalong with Korean products. Many of the items still Selling USF’KDuty- have the exchangeor ClassSix price sticker on them. Commissary items are not as easily identified becausethe commissariesuse bar coding Free Goods rather than price stickers, except on meat. In addition to large markets, “hawkers” on the streets of Itaewon, a shopping area near the YongsanArmy Garrison in Seoul, sell all types of American products, such as beer, wine, canned meats, peanut butter, and jelly. Stores also sell a variety of repriced American products. In somecases,under a sticker or two, the exchangeor ClassSix stickers can be seen.Food and liquor are not the only items sold on the black market, We also found Korean stores selling a variety of American prod- ucts. For example, in one store we visited, a 19.6~cubicfoot General Electric refrigerator still had an AAFESsticker on its shipping box. .- Current sales and purchase rates for someitems popular on the Korean Unusually Large Sales economy are good indicators of the nature and extent of black mar- and Purchase Rates keting. We calculated the per capita salesrates for selectedUSF’K duty- free items we saw frequently on the black market. The products with ” unusually high salesrates were rice, Spam, hot dogs, cheese,and hair spray. In addition, a commissary study showed unusually high chicken Page14 GAO/NSIAD91-38 BlackMarketing Chapter2 lndicatlo~ of the BlackMarketProblem salesduring the 1988 Summer Olympics. Table 2.1 shows the per capita rates for the high selling items. Table 2.1: Par Capita Rater for High Soiling Conrumabio items for 1988 Item Rate Rice 170 Ibs. Soam 12 Ibs. Hot dogs 365 to 456 packages Sliced American cheese 34 Ibs. Aqua Net hair spray 33 cans per female Of the consumableitems, rice saleswere much higher than expected. While the per capita rate for USFXpersonnel in Korea was 170 pounds, it was 13.6 pounds in the United States (see app. II). The rate for Army dining facilities was 10.3 pounds of rice for all active duty personnel stationed in South Korea. In one case,a serviceman’swife purchased 626 pounds of rice during a 2-month period. During the Seoul Summer Olympics, salesof 40-ouncebags of chicken drumsticks increased from 12,000bags per month to an estimated 40,000 bags per month. After the Olympics, saleswent back to normal. According to the Commander of the Army Far East Commissary Dis- trict, the black market causedthe increased demand. When the stock of chicken was depleted, the commissary issued high priority requisitions to have chicken flown in from the United States. Table 2.2 shows the growth in salesfor 40-ouncebags of chicken drumsticks, as reported by the commissary in August 1988. Table 2.2: Average Sale@of 40.Ounce Bags of Chicken Prumatick~ During the Sale Oiymplca period Bags sold Average monthly sales through April 1988 12,000 May 15,400 June 17,000 July 1st throuah 13th 24.000 August 1st through 5th 9,500 6th through 7th 1,800 Although we did not seeoxtail (generally used to make oxtail soup, which is a traditional Korean dish) sold on the black market, the com- missaries had difficulty keeping it in stock. The Yongsan Commissary Page16 GAO/NSIAD-91-39 BlackMarketing Indleatlonaof the BlackMarket Problem allowed only one packageto be purchased per shopper per visit. During fiscal year 1989, the commissariespurchased about 1.2 million pounds of oxtail, or over 16 pounds for every authorized consumer. Chivas Regal Scotch Salesof Chivas Regal Scotch whisky show the impact of the black Whisky and Other market. ClassSix stores in South Korea received 314,748 l-liter bottles of Chivas Regal 12-year-old Scotch in 1988 for sale at about $23 a bottle. Alcoholic Beverages In addition, the stores received 26,680 three-quarter liter bottles of Chivas Regal Royal Salute 21-year-old Scotchin 1988 for sale at $66 a bottle. We saw many boxes of Chivas Regal,many with ClassSix price stickers still attached, in Korean markets and stores. According to U.S. Army Criminal Investigations Command and Air Force Office of Special Inves- tigation officials, Koreans who can afford it prefer Chivas Regal. We compared overall sales figures for Chivas Regal 12-year-old Scotch with the number of active duty military in South Korea and Europe and found that sales were significantly larger in Korea.1In Europe approxi- mately 306,000 military memberspurchased 47,086 liters of Chivas Regal during fiscal year 1988, or 0.15 liters per soldier per year. Chivas Regal was not among the top 26 brands of liquor sold in U.S. military ClassSix stores in Europe. In Korea approximately 46,600 active duty military memberspurchased 314,748 liters of Chivas Regal during cal- endar year 1988, or 6.9 liters per soldier per year. In other words, fewer military members in Korea-16 percent of the total in Europe-pur- chasedmore than six times the number of Chivas Regal bottles pur- chasedin Europe. On a per capita basis, 46 times more Chivas Regal was purchased in Korea than was purchased in Europe. Other alcoholic bev- eragesalso have unusually high salesrates, but none is as unusual as Chivas Regal.Appendix III contains more details on liquor sales. 1Active duty military in EuropeincludesAir Forceand Army personnelas of September30,19&3. Active duty miM9ryin South Koreaincludesall servicemembersasof September30,1988. Liquor salesin Koreawere calculatedbssedon shipmentsto stores. Page16 GAO/NSIAJ&91-39 Black Marketing Chapter 3 How Black Marketeer Operate Black marketeers use various schemesto acquire USFKduty-free goods. Whether these schemesare used to circumvent the ration control system or to work within the system, they are difficult to detect and stop. We identified the various schemesby reviewing investigative casefiles on violators, interviewing military criminal investigators and police, and observing on-sceneactivities. Generally, black marketeers work as a team or as an organized ring, with several servicemen’swives who assist the ringleaders by recruiting other dependentsand service mem- bers to purchase duty-free goods. Schemesused by black marketeers that work outside the ration control Black Market Schemes system include (1) “racetracking,” (2) using cashiers and clerks, gener- Outside the Ration ally Koreans who do not record purchases,as accomplices,(3) diverting Control System Limits items from the warehouse or showroom, and (4) using fraudulent or altered ration control documents. Racetracking Racetracking is defined as making multiple daily purchases from the sameor different sales facilities but always keeping the purchase under $6, either to avoid ration control or to circumvent shelf limits. Cashiers were not required to record purchasesunder $6 (subsequently reduced to $2), which then did not count against the shopper’s monthly mone- tary limit. As a result, shoppers making multiple purchasesunder $6 becameone of the more visible means of circumventing the ration con- trol system. In one caseinvolving an AAFESconveniencestore, the U.S. Army Crim- inal Investigations Command identified several servicemen’swives who made frequent trips to the store and each time left with a purchase under $6. One shopper made sevenpurchaseswithin an hour. According to the casefile, store staff allowed the practice to occur to circumvent the ration control system. The Command estimated a racetracker could earn about $67 in 30 min- utes, just by shopping at one housing area in Seoul. To avoid detection, a shopper from this housing area could take an exchangetaxicab to Yongsan-about a 6-minute ride- and visit several other convenience stores. A Command special agent estimated that after paying all taxicab fares, a racetracker could earn about $171 in lessthan 2-l/2 hours. Page17 GAO/NSIAD-91-3S BlackMarketing In some locations racetracking was made easier by the retail outlets’ stockage policy and store location. One housing area in Seoul has three separate retail outlets: a commissary, an exchange, and an exchange managed delicatessen and ice cream store. At least two and sometimes all of the outlets sold similar American products, such as rice, hot dogs, chicken, cheese, and shampoo-items in demand on the Korean economy. We visited this housing area and saw a large number of shop pers buying items popular on the black market. Many purchases were under $6. Use of Cashiers and Clerks Nearly 98 percent of AAFESpersonnel in South Korea, or 6,040 out of 6,164, are local national employees. Cashiers’ complicity with shoppers is a mJor problem, according to a U.S. Army Criminal Investigations Command officer. One case involved six Korean cashiers at the Osan Air Base Commissary. According to Office of Special Investigations docu- mentation, the operation was well organized and run as if it were a legit- imate business, with participants sharing profits. Servicemen’s wives from Osan and Camp Humphreys were recruited as shoppers by several women acting as ringleaders. Others were introduced to the ring by friends already involved. Prior meetings or prearranged signals were used to identify which cash- iers and shoppers were members of the ring. The shoppers would go through the checkout line of a particular cashier, usually shopping off- peak hours to avoid using a cashier they did not know. The cashiers used several methods to avoid recording the purchase. If the cashiers were not being observed, they either would not record the sale or record it for less than the actual purchase. More commonly, the cashiers would record the amount properly, but hide the card for later destruction. The shoppers then took the items to one of several black market houses off base. For $100 of purchases, each shopper received a profit of almost $80, which she split with the cashier. More than 16 servicemen’s wives were linked to the ring in some fashion. One made a profit of over a $600 in 11 visits to the Osan Com- missary. Another had $27,000 in a bank account, and the source of most of the money could not be accounted for other than from black marketing. The Office of Special Investigations estimated that before its investiga- tion, the commissary was selling between 16,000 and 20,000 26-pound Pyre 18 GAO/NSIAD-9138 BJackBbrketing bags of rice per month. However, ration control records showed that only 8,060 to 9,000 bags were being sold. The month after the cashiers were apprehended, the commissary sold 6,900 fewer bags of rice. In another case, a soldier testified that prior to a July 1988 purchase at an exchange, a black marketeer told him to take a 6-pack of juice to the television counter so that the sales clerk would know he was there for a particular television. The black marketeer gave the soldier a counterfeit letter of authorization, a counterfeit ration control plate, and $1,700 to purchase the television set. The soldier was also given $60 to bribe two exchange workers to expedite the illegal sale of the television. In his testimony the soldier said he followed these instructions. Another soldier testified in June 1988 that a black marketeer told him he had connections who could ensure the sales cards would not be recorded. Four of his eight exchange purchases were never entered into the ration control database. The U.S. Army Criminal Investigations Command investigators presumed the copies were destroyed or removed from the system. According to U.S. military investigators, dependents caught black marketing said that the Korean cab drivers and, in some cases, the Korean gate security guards are part of the overall black market scheme. The cab drives the black marketeers to the USFKretail outlets and transports them and their purchases off base. The Korean gate security guards allow the cabs to leave the base with the merchan- dise for the black market. Diversion of Duty-Free Another scheme is diversion, which involves employees, usually Korean Items by Ehployees nationals, buying items from U.S. retail outlets for their own use or resale to black marketeers. According to the Chief of the AAFB Merchan- dise Security Office in Korea, the diverted items usually end up on the black market. The employees diverting the items normally ensure that the money representing the retail selling price is put into the cash reg- ister and rung up as a sale. It appears as if the item was sold legiti- mately and no crime was committed. This reduces the chance of generating criminal investigations According to USFKofficials, black marketeers pay for items they sell and prefer not to sell stolen goods. USFKofficials said that actual theft is not significant. However, we did find inventory shortages, which indicate instances of theft of products that could have ended up on the black market. For example, during fiscal year 1988, three main exchanges had shortages of inventory worth over $1.2 million. Page19 GAO/NSIAD-91-39BlackMarketing .- chapter 3 HowBlnckMarketeersOperate One caseinvolved the diversion of about $30,000 in televisions and stereo equipment while the items were being transported from OsanAir Baseto the main exchangeat the Yongsan Army Garrison in Seoul. The Office of Special Investigations was told about the planned diversion and arranged to have the vehicle watched leaving Osanand arriving at Yongsan.The truck left Osancarrying the equipment but arrived at Yongsanempty. According to the driver’s testimony, he sold the mer- chandise between the two locations and planned to pay for the merchan- dise after he returned to Osan.According to the Office’s casefile, approximately 1 month after the diversion, the driver’s wife paid the exchange$30,000 as restitution for her husband’s crime. We believe the use of fraudulent documents to purchase high value Use of Fraudulent items from AAFESstores is one of the most serious black market Documents problems becauseof the potential dollar amounts involved. It is impos- sible to determine how many purchases are made using fraudulent docu- mentation. The most commonly forged documents are the permanent ration control plates, temporary ration control cards, identification cards, and letters of authorization. In most cases,the purchasers are U.S. military memberswho are approached by Korean nationals and asked if they want to make extra money. If they show interest, they are given false identification and ration control plates and sufficient cash, transported to exchangeout- lets, and told what items to purchase. According to somecasefiles, ser- vice members have to give their military identification card and ration control plate to the black marketeers in exchangefor the forged docu- ments. Oncethe member buys the merchandise and transfers it to the black marketeers, the identification card and plate are returned. The black marketeer encouragesthe service member to make multiple purchasesin a short period of time. According to one casefile, one ser- vice member made eight purchases,including television sets and refrig- erators, totaling almost $3,600 on three shopping days between May 31 and June 8, 1988, at five different stores. Extent of Black Marketing The U.S. Army Criminal Investigations Command did an analysis to Using Fraudulent Plates determine the number of fraudulent purchasesof refrigerators and Y washers made with altered or counterfeit ration control plates. It ana- lyzed salesof these high value items during October and November 1988 at the Yongsan Main Exchange and the Exchange Furniture Store- Page20 GAO/NSIAD-9139 BlackMarketing ckaptar 3 How Black Marketeers Opemte 2 stores out of 8 main exchanges,38 branch exchanges,and 33 annexes in the SAFESsystem in South Korea. The Commandexamined sales records and identified which ones had been made with counterfeit con- trolled item purchase/refund records. The analysis showed that 107 sales,or 43 percent of the total salesof 244, were made to personnel with either altered or counterfeit ration control plates. Out of the 137 valid sales,45 were made to noncommand sponsoredsoldiers, i.e., those having no dependentsin Korea. We analyzed m salesof appliances and stereo equipment at these two stores and combined our analysis with the work performed by the Command. Overall, about 5.4 percent of the items were purchased with fraudulent ration control plates, and as much as 26 percent of certain types of appliances and stereo equipment were sold that way. Table 3.1 shows the results of these analyses for purchasesbetween September 1, 1988, and April 15,1989. Table 3.1: Purchases With Fraudulent Ration Control Plates (September 1, Purchased with fraudulent 1988, to April 15,1989) Total number plates Type of item purchased Number Percent Washers 150 39 26.0 Refriaerators/freezers 456 111 24.3 Ranges 129 15 11.6 Dryers 31 2 6.5 Music systems 1,134 72 6.4 Speakers 1.768 72 4.1 Televisions 2,461 97 3.9 Video recorders 2,057 30 1.5 Total 8.188 438 5.4 The value of the 438 items purchased with fraudulent plates over the study period was $303,074. We did not include fraudulent purchasesmade with temporary ration control cards, which are never entered into the ration control system, or purchases made with valid ration control plates and later transferred illegally to the black market. The U.S. Army Criminal Investigations Command also performed a study in fiscal year 1988 of the use of fraudulent ration control plates at Camp Casey.This study indicated that fraudulent documents were used to purchase 674 high value items costing $258,908. Page21 GAO/NSIAD9138BlackMarketing Chapter3 HowBlackMarketee~~Opemte Black Market Earnings Black marketing can be very profitable and, according to casefiles, From Exchange Items money is one of the major inducements for involvement. One soldier’s casefile indicated that he was paid at least $1,870 for purchasing 17 items from July 2 to September 18,1988--a period when he made 13 separate shopping trips to 6 different exchanges.His testimony indi- cated he had earned $60 for each videocassetterecorder, $160 for each television, and $460 for a refrigerator he purchased for the black market ring. It is possible to stay within the ration control system limits and still be Black Marketing involved with the black market. The system currently has three types of Within the Ration controls: monthly monetary limits, monthly quantity limits, and spe- Control System cially controlled items. Somelimits are so high that they may actually encourageblack marketing, and someration controls have been reduced, which also makes black marketing easier. High Monthly Dollar Many of the military commanderswe interviewed believe the monetary Allowances Contribute to limits set by the ration control system are too high, especially for unac- companied service membersin South Korea. These service members are Black Marketing authorized to spend up to $600 each month for consumablegoods.1Since about 88 percent of these service memberslive on base and many eat in military dining facilities, many commandersdo not believe that these members require $500 worth of goods.Due to the high monetary limit, personnel could use the amount above their own personal needsto purchase items for resale on the black market. The security officer, the USFK’Sprovost marshal, said that it is extremely difficult to detect abuserswho are shopping within their dollar limits for the black market. Except for the transfer of goodsto the black marketeer, these individuals are completely within their rights. To prove they are involved with the black market, they must be observed transferring or reselling the goodsto an unauthorized person. The USFK’S official position is that the dollar limits are adequate to ensure a good quality of life and spending flexibility for military per- sonnel. The limits apply to unaccompaniedservice members authorized to live off base and individuals living in barracks and eating at military dining facilities. A few commanderssaid that the monthly limit should be about $200 for an unaccompaniedservice member living on base. l All milttary personnelwere authorizedcommissary privilegeseffective June 8,1982. Page22 GAO/NSIAD-9138 BlackMarketing Ciqtur8 HowBlwklUarkekw~raOpwate The monetary limits were changedin August 1986 and again in July 1987. According to a USFKdocument, these “changes are based on a peri- odic review that evaluates the imposed ration control limits in light of salaries versus commodity costs,black marketing trends, and the dollar/ won ratio.” However, USFKofficials were unable to produce a copy of the last review. Table 3.2 shows changesin the monthly monetary limits. .,. . . Table 3.2: Ration Control Monetary Limits Family size Period “-. - -..- .-.._-.-..-- __.._ - ____-^____.__ -.-_ One Two Three Four Five Six or more Prior toJuly 1985----. _-_ _ _.. ll,l”.. ..L.. .“..““._ -___- ___.__. _ $275 $550 $680 $850 $980 $1.075 August1985toJune1987 --..--....- __-.-...-.__-..-...-_- -..- ___ -- 256 470 580 725 835 915 Julv 1987 to oresent 500 700 800 900 1.000 1.200 Somepurchases do not count against the monthly monetary limits. Becauseexpensive items sold in exchangeoutlets could quickly reach the monthly dollar limits, the ration control system exempts from the limits purchases of single items priced at $50 or more. Other items that do not count against the purchaser’s monthly dollar limit regardless of their price are the following: military uniforms and accessories; records, computer software, and other prerecorded items; clothing and footwear; liquor, cigarettes, and beer whose alcohol content is over 3.2 percent by weight; wine, soft drinks, water, and ice; gasoline; and nonconsumable,Korean-madeproducts. Monthly Quantity Limits Cigarettes and sometypes of alcoholic beveragesare the only duty-free items that have monthly quantity limits. Table 3.3 shows ration control monthly limits2 for alcoholic beveragesand cigarettes basedon family size. 21nthe past moreitemswere controlled,but liits have been eliminatedfor such black market items ascoffee,salt, mayonnaise,and pepper. Page23 GAO/NSIAD-9138 BlackMarketing Chapter8 HowBlackMarketeersOperate Table 3.3: Ratlon Control Qusntity Limits Famllv sire Alcoholic beveraaes Ciaarettes One 4 units 60 packs Two or more 7 units 100 Dacks Note: Liquor and beer are rationed in units. One case (24 cans or bottles) of beer with over 3.2 percent alcohol by weight is one unit, and one bottle (usually a liter) of liquor is one unit. Partial units are accu- mulated through the month. Wine is not recorded. Although alcoholic beveragesand cigarettes are controlled, in some instances,people can purchase someof these items without them counting against the quantity limits. For example, individual purchases of less than $6 do not count against the limits. This amount has since been lowered to $2. In addition, all types of wine and beer with 3.2 per- cent or less alcohol content by weight do not count against the limits. We saw both of these items on the black market. Controlled High Value Purchasesof certain types of merchandise, such as televisions, refriger- Items ators, ranges, washers, and dryers, are specifically controlled and recorded in the ration control database.Individuals below the pay grade equivalent of E-6 or GS-6are required to obtain written permission to purchase controlled items over $60. All other individuals may purchase controlled items without permission. Purchasesof controlled items are recorded in the ration control system, and purchasers may be required to account for any item purchased while in Korea. This requirement, however, is not applied all the time. According to commanders,usually only individuals suspectedof ration control abusesare required to account for items purchased. Ration-Free Items Someitems that are not controlled (ration-free items) are also sold on the black market. Authorized personnel can purchase as many of these items as they want each month, and the purchase does not count against their monthly limits. We saw wine, light beer, military uniforms, clothing, and U.S.-madetoys in many Korean markets and stores. Many of the items still had AAFESand ClassSix price stickers on them. For example, a recent U.S. and Korean investigation at Kwang-Ju City, near OsanAir Base,identified a person trying to sell 86 bottles of liquor, wine, and other items that came from US. military retail outlets, according to the Office of Special Investigations. Page24 GAO/NSIAD91-88 BlackMarketing Chapter 4 Weaknessesin the Ration Control System Contribute to Black Market Activities The current ration control system is not being implemented as designed. Controls designedto prevent many of the violations we have described are not being followed. Somesalesdata, especially for salesinvolving temporary ration control cards, are missing from the system. Recent changes,such as the elimination of retail outlet ration control monitors, have further weakened the system. All these weaknessescontribute to the black market problem. USFKhas regulations and procedures to prevent ration control abuses. Procedures to Prevent Managers,cashiers, and salesclerks, however, do not always comply Abuses Are Not Being with the requirements of the ration control system, According to AAFES Followed managementofficials, ration control is a USFKresponsibility. AAFESoffi- cials support the ration control system, but they do not believe that they should or can monitor it, becausethey do not receive the necessary appropriated funds to do so. Requirement to Verify USFKRegulation 60-1, “Exchange Service,Ration Control,” requires Identification cashiersto verify identification and record all required sales.It requires the cashier to inspect the ration control plate or temporary card and the purchaser’s identification, even if the items purchased do not count against the dollar limit or are not recorded. Somefacilities do not have entrance monitors, and someindividuals try to circumvent the system by using a different plate or temporary card at the cash register. When we made daily purchasesat exchangeoutlets, ClassSix stores, and smaller commissariesand annexes,we found that the only docu- mentation required was the ration control plate, and only if the item had to be recorded in the ration control database.It was rare that the cash- iers compared the ration control plate and our identification cards, Requirement to Record The AAFESSafety and Security Office has identified casesin which Sales exchangemanagersand cashiers did not record purchasesas required. For example, in January 1988, a merchandise security specialist con- ducted an on-site review of the Camp Falling Water Exchange.The spe- cialist concluded that from October 27 through November 25, 1987, only 106 (11.7 percent) of the 907 customer transactions that should have been recorded actually were. A 1988 review of the Camp Red Cloud Post Branch Exchange showed that approximately 72 percent of the sales had not been recorded. The retail manager admitted to security special- ists that he had failed to record merchandise sold. According to the Page25 GAO/NSIAD-91-29 BlackMarketing ckapter 4 Weakmmealn the Ratloncontrol System ContrIbuteto BlackMarketActivlti~ memorandum of inquiry, the manager said this had been done to increasesalesbecausesomecustomersput merchandise back on the shelf when he tried to record their purchases.A salesclerk at the same exchangealso said he had not recorded purchasesfor the samereason, and he admitted that he sometimeshad not rung up the right price. For instance, he would ring up a 3-pound box of cheesepriced at $7.76 as $6.20, representing the price of a caseof soda,which doesnot have to be recorded. The difference would then be made up in another transac- tion The clerk said that he would also ring up customers’ purchasesas separate transactions under $6 to avoid the requirement to record sales totaling $6 or more. Checks for Fraudulent and Proceduresrequire retail employeesto check for fraudulent and altered Altered Plates documents;however, these employeesdo not always do so. In some cases,the samefraudulent plates and identification cards are used repeatedly in the sameretail outlets. According to a USFXreport, AAFW clerks and managers are unable to identify the simplest errors on bogus plates, due to lack of training. Checks for Lmt and Stolen Black marketeers also purchase high value items with lost and stolen Plates plates. Although the USFKprovost marshal provides lists of lost and stolen plates to retail outlets and cashiers are supposedto check these lists if the purchase is for controlled items, alcohol, cigarettes, or items costing over $100, they frequently do not. This was confirmed by a team from the Data ManagementDivision when it conducted several visits to commissary and exchangeoutlets at the end of March 1989. All SalesData Are Not In many instances,the current ration control system cannot identify vio- Properly Recorded lators becauseactual salesdata are not entered in the database,as required. For example, all purchasesmade with a temporary ration con- trol card are not entered into the databasebecausemany purchasers with temporary cards are new or are on travel and are not in the database.Thus, the salesdata would be recorded as unmatched data and rejected. Another problem is that someretail outlets report sales data to the Data ManagementDivision late. Monthly salesdata dealing with monetary and quantity limits are not entered into the databaseor analyzed if they are received after the fifth working day of the following month. Page28 GAO/NSIAD91-98 BlackMarketing chptar 4 Wdamweo In the Bation control Byetern ContrIbuteto BlackMarketActlvlth Somemorale, welfare, and recreation retail facilities (e.g., bowling cen- ters) were not reporting any salesdata to the Division. As a result, data on high demand black market items, such as bowling equipment, were not collected and reported to commandersand supervisors. For example, we found that the OsanBowling Center was not reporting sales.In responseto our findings, the Data ManagementDivision issued a letter reminding all morale, welfare, and recreation facilities they are required to record and report sales. Since 1987, USFKhas made changesto the system that we believe have ChangesHave weakened it and made transferring goodsto the black market easier. It Weakenedthe Ration increasedthe ration control amount above $1, reduced the number of Control System personnel required to obtain written approval before purchasing con- trolled items, and reduced the types of merchandise requiring a written authorization to purchase. USFKalso eliminated funding for retail outlet ration control monitors. Threshold for Recording In July 1987, USFKincreasedthe threshold for recording ration control Purchases purchases from $1 to $6. It realized that this increase could lead to more racetracking. The increase was supposedto reduce the number of sales cards to process,improve the timing of ration control reports, and pro- vide greater convenienceto the customer. As of July 1, 1989, the recording threshold had been reduced to $2. According to USFK,the changewas supposedto reduce racetracking, which had becomeone of the most visible violations of the ration control system, and ensure better availability of goodson store shelves. ReducedPurchase Controlled items are defined as high value ($50 or more) items that are Approval for Certain in demand on the black market. On October 1,1987, USFKreduced the number of personnel required to obtain written approval to purchase Buyers controlled merchandise. To make these purchasesmore convenient, per- sonnel in pay grades equivalent to E-6 or GS-6or above are no longer required to obtain written approval. During 1988, this changeincreased the number of authorized customers by almost 14,700 active duty mili- tary personnel, not including their dependents. The requirement remains in effect for personnel in pay grades equivalent to E-5 or GS-6and below. The approval must be documented on USFXform 48, “Letter of Authorization Purchase Record,” and the Page27 GAO/NSLAD91-38 BlackMarketing cllaptm 4 Weakn- in the B&lonCbntrol By&em Contributi to BlackMarketActivltiea applicant is supposedto demonstrate a valid need for the item.’ Oncethe letter of authorization is approved, the purchaser takes one copy to the exchange,and the unit maintains the other copy. The purchaser has 30 days to buy the item and return the form to the unit. Many of the mili- tary commanderswe interviewed required less time. List of Controlled Items Effective October 1,1987, USFKreduced the types of merchandise Reduced requiring written authorization. It deleted 13 items from the controlled list and consolidated the remaining 32 items into 16 categories.Sdmeof the items deleted from the list were typewriters, dish sets, irons, rice cookers, vacuum cleaners, and air conditioners. A USFKcommittee stud- ying black marketing concluded that these items were no longer in high demand on the black market. It also concluded that many of the items were generic and could be consolidated to simplify the purchase process for customers and salesclerks. Although these changeshave simplified the process,someof these items are still in demand on the black market. Consequently, shipments for someof these items to Korea were unusu- ally high. For example, 49,177 irons and 35,079 Corning Visionware dish sets were shipped in 1988. Also, 42,536 toasters and toaster ovens, which were not controlled items but were popular with black market- eers, were shipped. Ration Control Monitors At the end of fiscal year 1988, becauseof severebudget constraints, USFKeliminated ration control monitors to save money. The monitors, Eliminated who were employed at about 26 percent of the retail outlets, checked identification cards, ration control plates, and temporary ration cards at, the entrance of major retail outlets and collected sales slips and cards at the exits. They could also require a patron to sign a register of items purchased. In addition, monitors were allowed to punch a hole in or tear an altered or fraudulent plate or temporary card. In opposing the action to eliminate funding for the monitors, an Army provost marshal said they were an invaluable source of information to the U.S. Army Criminal Investigations Command’sOffice of Special Investigations and the military police, since each monitor provided one 1Accordingto USFKRegulation60-1,“ExchangeService,RationControl,” personnelresiding in gov- ernmentbachelorquarters or barracksmay not purchasewashingmachines,clothesdryers, ranges, refrigerators,or freezersunless(1) the itemsare authorizedfor usein governmentquarters,(2) there is a statementof nonavailability of governmentfurniture, and (3) there is a demonstratedneedfor the item. Page28 GAO/NSIAD-91-29 BlackMarketing . ckapter4 Wehauee ln tke Bath CbntrolSyotm ConMbntsto BlackMarketAetlvltler to three leads every,month. The provost marshal also said salesper- sonnel are generally more concernedwith accurate salestransactions and/or making a profit than with the validity of identification cards or ration control plates. Office of Special Investigations casefiles showed that all five casesinvolving the use of fraudulent documents had been initiated as a result of actions by ration control monitors. The number of noncommand-sponsoreddependentsauthorized to use The Number of U.S. retail facilities in South Korea has gradually increased since 1982. Authorized Purchasers Noncommand-sponsoreddependentsare those not authorized by the Has Gradually Department of Defense(DOD)to be in Korea. Therefore, they are nor- mally not allowed the privileges given to command-sponsoreddepen- Increased dents. Giving noncommand-sponsoreddependentscommissary privileges, according to USFKdocuments,was supposedto increase the quality of life for U.S. troops. The effect of this, however, was an increase in the number of people who are associatedwith the black market. In 1982, USFXestablished the “limited command-sponsored”dependent category for dependentsof noncommand-sponsoredindividuals who extended their tour of duty to at least as long as the command-spon- sored tour (24 months). Beginning July 6,1982, these dependents received the sameshopping privileges and ration control limits as com- mand-sponsoreddependents.During 1988,6,691 dependentswere “lim- ited command-sponsored.”On October 1,1982, eligible dependentsof U.S. civilian employeeswere granted the samebenefits as military dependents.During 1988, 1,160 dependentswere in this category. In 1984, DODimplemented a l-year test program to allow 3,000 noncom- mand-sponsoreddependentsto use the retail outlets in Korea. This pro- gram is still in effect, These changesadded over 10,000 dependentsto the list of eligible patrons. By the end of 1986, virtually all dependents in South Korea had accessto USFKretail facilities. Under the Status of ForcesAgreement, the United States, in cooperation U.S. and Korean with the Korean government, is responsible for preventing abusesof the Efforts to Deter Black ration control system and deterring black market activities. Market Activities Page29 GAO/NSIAIMJ1-38 BlackMarketing , Weekmueein the BationC4MrolSystem ContrIbuteto BlackMarketActivities U.S. Enforcement Efforts U.S. efforts against the black market in South Korea are only a portion of the enforcement activities carried out by the Army’s Criminal Investi- gations Command and provost marshal and the Air Force’s Office of Special Investigations and security police. These enforcement groups have jurisdiction over ration control violations by U.S. military per- sonnel. The Command,which investigates casesinvolving $1,000 or more, performed 147 black market investigations-22 percent of the total 666 investigations conducted in fiscal year 1988. The USFKprovost marshal issued a 1988 report on the number of black market casesthroughout South Korea, as shown in table 4.1. fable 4.1: Ratlon Control Vlolatlon8 (Fiscal Year 1988) Offense Number of cases Wronoful transfer of dutv-free aoods 216 Multiple purchases to avoid having purchases recorded 102 Exceed shelf limits 98 Wrongful use and disposition of another’s ration control plate, identification card, or letter of authorization 51 Circumvention of the ration control system 39 Failure to show disuosition of controlled items 25 Total 531 The Office of Special Investigations initiated 40 black market cases during 1988~all involving criminal fraud. In addition, Air Force security police initiated 71 black market cases.The majority of these casesinvolved racetracking. Statistics on Violators A significant number of individuals violate the ration control system. According to USFKPamphlet #4, “Ration Control,” more than 1,000 indi- viduals violate system limits every month. It notes that although many simply exceedthe limits, others flagrantly violate the system. Statistics on offenders who have received an Article 16 hearing2and courts-martial are maintained for all servicesin Korea by the USFKjudge advocate. According to commanders,many of these individuals were problem soldiers and were punished for being involved in the black market and other criminal offenses. Table 4.2 shows the number of per- sonnel punished for these offenses. 2An Article 16 hearing is a non-court-mat-Wpunishmentadministeredunder the Uniform Codeof Military Justice. Page30 GAO/NSIAD91-38 BlackMarketing chapter4 Weakn- ln the Batlon control System Conttibutr,to BlackMarketActivities Table 4.2: Number of Indlvldual8 Punkhed for Black Market Actlvltler 1997 1989 Courts-martial 64 66 Article 15 hearings 229 168 Total 293 234 Many investigations lead to results other than Article 15 hearings or courts-martial. These include losing someor all of the exchangeprivi- legesfor the military members and their dependents,losing on-base driving privileges, or being debarred from a U.S. baseor basesKorea- wide. Korean Government At a 1986 Status of ForcesAgreement meeting, U.S. officials requested Enforcement Efforts that the Korean government closedown the black market retail stores that had openly sold U.S.-provided duty-free goodsand do more to iden- tify and punish Koreans involved in black market activities. U.S. offi- cials asked that the Koreans closethe black market area called Namdaemunin Seoul,but the Korean government did not do so. Even though the Korean government has prosecuted somecustoms and/ or black market offenders, a 1988 Office of Special Investigations talking paper on the black market noted that although both the Korean customs authority and Korean national police know about the problem, only a small number of Korean offenders have been prosecuted. The Office concluded that the Korean government has little interest in prose- cuting black marketeers or deterring black marketing becausethe black market is an acceptedpart of the Korean economy. Another Office docu- ment discussing a 1988 news segmenton black market activities con- cluded that the U.S. government should encouragethe Koreans to assist in enforcement efforts or the United States would never completely resolve the black market issue. In contrast, USFKofficials said that US. authorities should not question Korea’s sovereign prerogative to enforce its own laws as it seesfit. The Korean government doesmaintain statistics on customs and/or black market offenses. According to US. and Korean officials, the Korean government doesnot have a law against black marketing. Instead, it is considered a customsviolation. According to the Korean customs liaison in the USFKjudge advocate’soffice, the Korean Office of Customs collects statistics on these offenses and provides them to USFK. The liaison said the statistics are a combination of customs and/or black Page91 GAO/NSIADQl-39 BlackMarketing cllapter 4 Weakneseee ln the Batlon contnol System Contributeto BlackMarketActlvltlea market offenses and that black market casescannot be separated from customs offenses. In 1988, the Korean Office of Customsreported a total of 2,111 cases. Korean Trade Restrictions In addition to law enforcement, many U.S. officials believe that the key to deterring black market activities in South Korea is for the Korean government to lift its trade restrictions on U.S.-madeand other foreign products and reduce its tariffs. USFKofficials expect that as the trade barriers lessen,the number of U.S. and other foreign products on the Korean economy will increase,and the demand for items from USFK retail outlets will then decrease. The 1988 tariffs on someitems still remain high. For example, the Korean government has loo-percent tariffs on beer, wine, and whiskey. For example, Chivas Regal Scotch sold for about $46 per bottle on the Korean economy. Korea also had 30-percent tariffs on speakers and music systems and large appliances, such as refrigerators, ranges, and washing machines. According to a Korean Ministry of Finance docu- ment, tariffs on these items are scheduledto decreasethrough 1993. According to the Executive Vice President of the American Chamber of Commercein Korea, black marketing can be eliminated by opening the Korean market to imports through legitimate businesschannels. He also said that the Korean government’s policy is to keep its markets closedto foreigners. Through the black market, the Korean government can keep its markets closed and still have the products it wants at a lower cost than the cost the Koreans would incur to produce the sameitem or import it. The Executive Vice President said the black market servesthe officials who are supposedto make policy and laws to eliminate it. According to the Economic Minister-Counsellor at the U.S. embassyin Seoul, Korea, the embassyhas from time to time used black market sales as confirmation of popular desire for greater market liberalization and demand for U.S. products. Moreover, U.S. embassyofficials in Korea also said that black market items could take businessaway from Korea. These include such high value items as electronic equipment and appli- ances.The Republic of Korea believesthat it cannot open its markets to outsiders becausethe Korean people fear competition. Page32 GAO/NSIAD91-39 BlackMarketing Chapt43r 4 Weakneaeee ln the BWloncontrol System tintribute to BlackMarketActlvlti~ US. commissariesand baseexchangesare primarily funded through Conclusions customer purchases and, in most of the caseswe reviewed, the commis- saries and exchangeswere paid for the items that were black marketed. However, over $36 million in fiscal year 1989 appropriated funds were used to pay for shipping goodsand other related activities, the ration control system, and U.S. enforcement activities. Becauseblack marketing is illegal and U.S. resourcesare being spent in an effort to stop it, we believe USFKneedsto ensure that the ration con- trol system functions as intended. The system should provide reasonable assurancethat its objectives will be accomplished,but the cost of the system should not exceedthe benefits to be derived from it. Factors outside the US. government’s control, which may limit the impact of the steps it can take unilaterally, need to be considered.For example, Korean law enforcement authorities prosecute few Korean nationals involved in black marketing U.S. goods,and Korean trade restrictions, which limit the availability of foreign products, foster black marketing. GAOrecommendsthat the Secretary of Defensedirect the Commander, Recommendations U.S. Forces,Korea, to (1) implement cost-effective ration control system procedures that provide reasonableassurancethat the objectives of the system will be accomplishedand (2) work with U.S. embassyofficials in Korea to develop new approachesto encouragethe Korean government to increase its efforts to deter black market activities. Page33 GAO/NSIAD-91-39 BlackMarketing Appendix I GeneralDemogrziphicData on USF’KPerson& for CalendarYear 1988 CtlteQOt’y Number Ac~a~eduty U.S. military, accompanied 7,791 Female 209 Officer 1,528 Enlisted, above E-5 2,578 Enlisted, E-5 and below 3,894 Total 8.000 Military dependents Command-soonsored dependentsa 6,671 Noncommand-sponsored dependentsb 2,647 Limited command-sponsored dependents” 6,591 Total 15,909 Korean born sbouses 5.372 Non-Korean born SDOUS~S 2,628 Dependents under 36 months of age 3,082 Deoendents over 36 months of aae 4.827 Total 15,909 Accayeduty U.S. military, unaccompanied 33,325 Female 4,103 Total 37.428 Officer 3,962 Enlisted, above E-5 6,628 Enlisted. E-5 and below 26.838 Total 37,428 CivJia;s, accompaniedC 2,225 Female 258 Total 2.483 Dependents Command-soonsored debendents 3.602 Noncommand-sponsored dependents 189 Limited command-sponsored dependents 1,160 Total 4.951 Korean born spouses 1,443 Non-Korean born soouses 1.040 Dependents under 36 months of age 487 Dependents over 36 months of age 1,981 Total 4,951 (continued) Page34 GAO/NSIAD91-3S BlackMarketing GeneralDemographicDataon USFK Pemonnelfor CalendarYear1999 Category Number Civilians. unaccomDanied Male 1,089 Female 468 Total 1.557 Total Dersonnel 70.328 ‘Command-sponsored dependents are transported to and from Korea at government expense and are entitled to all applicable benefits. bNoncommand-sponsored dependents are not transported to Korea at government expense and are not entitled to benefits, although they may be given some. OLimitedcommand-sponsored dependents are not transported to Korea at government expense, but they are given limited benefits because the service member has extended his or her stay in Korea to at least 2 years. Y Page86 GAO/NSIAD-91-99 BlackMarketing Appendix II . Comparisonof U.S. and USF’KPer Capita Rice Shipmentsad/or Sales Pounds in thousands Rice 8hiDftWntS and/or sale8 I19881 Amount Shipments for Army commissaries 6,433 Shipments for Air Force dining facilities and commissaries 3,000 Shipments for Army dining facilities 326 Total 1988 shipments 9,759 AAFES average monthly sales times 12 months 2,217 Total shipments and/or sales 11,978 Rice in pounds Consumption for authorized personnel compared with U.S. population and Army dining facilities in Korea Amount Average number of personnel in South Korea during 1988 eligible for commissarv and exchanae privileaes 70,328 Per capita shipments and/or sales of rice in South Korea 170 Per capita consumption of rice in the United States during 1987-8aa 13.6 Per capita consumption of rice in dining facilities by Army active duty personnel in South Korea 10.3 %ased on U.S. Department of Agriculture data. Page36 GAO/N&W-91-38BlackMarkethg I Appepdix III Comparisonof ConsumptionRatesfor Chivas RegalScotchWhisky in Europe and Korea Number of active Total Consumption Per capita Organlratlon __--“- ..-----_- ..-._ -.-_---. duty milltary~ Scotch rate 1P-year-old 21 -year-old U.S. Forces,Europe ..-..- --__ "-.-..-..__I___-.-~.-- 305,947 228,140 48,615 47,085 (0.15) 1,530 U.S.Forces,Korea 45.501 496.596 334,008 314.748 (6.93) 19.260 Note: This table compares fiscal year 1988 U.S. Forces, Europe (Army and Air Force only), sales versus USFK calendar year 1988 issues to stores because USFK data on sales were not available. aAs of September 30, 1988, U.S. Forces, Europe, includes Army and Air Force personnel only, while USFK includes all service personnel. Page87 GAO/N&W-91-NBlnckMarketing * Appendix IV USFK Retail Facility Appropriated Funds ’ Support (Fiscal Year 1988) Fiaures in thousands Outlet Amount Army and Air Force commissary combined supporta Transportation costs $12,173 Army commissary Operations and Maintenance costs $64 Personnel Militarv 355 Civilian 4,734 Air Force commissary Operations and Maintenance costs $18 Personnel Military 187 Civilian 1.057 AAFES Transportation costs $4,651 Class Six Transportation costs $486 Total cobtb $23,725 %cIudes both surface and airlift transportation costs for Army and Air Force commissary goods. Page88 GAO/IWADO1-88BlackMarketing Appendix v” Co&tof USFK Ration Control System(F&&d Year 1987) DIreit coat Amount Personnel Data manaaement $667.900 201 st Signal Support Company 156,000 Investigators 820,000 lssuina aaencies 523.000 Total personnel cost $2,166,900 Supplies 397.196 Eauipment 4,725 Contract (data processing) 104,500 Total direct cost $2,673,321 Indirect cost Personnel 9.362.188 Total costs’ $12.035.509 aThese costs are the latest available from the USFK Data Management Division. Page89 GAO/NSIAD-@l-IM B&k Bhrkethg Appendix VI MqjorConkributorstoThisReport A Richard A. Helmer, Assistant Director National Security and Carolyn S. Blocker, Writer-Editor International Affairs Division, Washington, DC. c Far East Office Richard A. Meeks,Evaluator Nancy E. Pendleton, Evaluator (291620) Page40 GAO/NSIAD9139BlackMarketing , I’ -.-_-l..--.l -... ---_- Orttt~ritlg Inf‘orrnal.itm ‘I‘ltt~ first. fivv copies of each GAO report art* free. Addit,iotral copies ;trv $2 t~*11. Orclers sttoultl he sent, to the followittg address, accotn- ptttitvl by a dttsck or rr~ottey order matie out to t.ttth Sttprritttettdettt of Ihmttttt~nt,s, wheti necessary. Orders for 100 or tnortl copies to be lIliLilt4 to a sin&* address art-L tlisconntkd 25 ptmwlt . iiS. (;t*trt*ral Acconttt,irtg Office I’.(). hx 6016 Gai t.ttt~rshrg, MD 20877 Ordt~rs tttay also be plaid by calling (202) %7!X23 1.
Internal Controls: Black Marketing of U.S. Commissary and Base Exchange Merchandise in South Korea
Published by the Government Accountability Office on 1990-10-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)