oversight

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)

-_-..~_-_.--.-
(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’




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