DHS OIG, OIG-20-07, Lack of Internal Controls Could Affect the Validity of CBP’s Drawback Claims (2019)

Lack of Internal Controls Could Affect the Validity of CBP’s Drawback Claims December 12, 2019 OIG-20-07 DHS OIG HIGHLIGHTS Lack of Internal Controls Could Affect the Validity Of CBP’s Drawback Claims December 12, 2019 What We Found Why We Did This Review The Department of Homeland Security Fiscal Year 2018 Independent Auditors’ Report on Financial Statements and Internal Control over Financial Reporting identified recurring CBP internal control deficiencies in drawback claims. Drawbacks are refunds of duties, taxes, and fees imposed on imported products later exported or destroyed. CBP management stated the timeframe for correcting deficiencies over drawback claims depends on successful implementation of information technology upgrades and legislative revisions. Our objective was to determine to what extent the identified control deficiencies impact drawback claims.

What We Recommend This report contains no recommendations because appropriate recommendations are contained in the annual Financial Statements and Internal Control over Financial Reporting reports. For Further Information: Contact our Office of Public Affairs at (202) 981-6000, or email us at [email protected] Between 2011 and 2018, U.S. Customs and Border Protection (CBP) processed an average of $896 million in drawback claims annually. However, a lack of internal controls could affect the validity and accuracy of the drawback claims amount. This occurred, in part, because CBP did not address internal control deficiencies in drawback claims.

Specifically:  CBP lacked appropriate documentation retention periods to ensure importers and claimants maintained support for drawback transactions;  CBP’s policies did not require drawback specialists to review an importer’s prior drawback claims to determine whether, taken together, the importer claimed an excessive amount; and  CBP’s legacy drawback system lacked effective automated controls to prevent, or detect and correct, excessive drawback claims. CBP plans to correct these deficiencies with the full implementation of the legislative and automated requirements under Trade Facilitation and Trade Enforcement Act of 2015 that occurred on February 24, 2019. However, we are unable to determine whether the prior year audit findings have been resolved until sufficient data is generated to support compliance testing. As a result, we could not verify whether CBP remedied the identified internal control deficiencies and the related recommendations remain open.

CBP Response We included a copy of CBP’s comments in their entirety in Appendix B. www.oig.dhs.gov OIG-20-07 December 12, 2019 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Background U.S. Customs and Border Protection’s (CBP) mission is to safeguard America’s borders, thereby protecting the public from dangerous people and materials while enhancing the Nation’s global economic competitiveness by enabling legitimate trade and travel. CBP is the second largest revenue collection agency for the Federal government, collecting more than $47.3 billion in fiscal year 2018. This includes, by order of statute, issuing drawbacks. A drawback is a refund of any duties, taxes, and fees imposed on imported products later exported or destroyed.

Figure 1 shows CBP personnel processing goods crossing U.S. borders. Figure 1. CBP Personnel Processing Imported Goods Source: https://www.cbp.gov/newsroom/photo-gallery An importer or claimant must file a drawback entry, along with all documents necessary to complete the claim, generally within 3 years of exportation or destruction of merchandise. In accordance with Federal regulations,1 CBP should verify the claim is complete and satisfies all drawback requirements.

Additionally, CBP should verify the drawback amount and accounts for the refund, as well as pay the claim. The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA), Public Law 114–125, dated February 24, 2016, is the first comprehensive legislative change since 2003 affecting CBP’s authorities when facilitating trade. TFTEA strengthens CBP’s capabilities to enforce U.S. trade laws and regulations, streamlines and facilitates the movement of legitimate trade, and prevents noncompliant trade. TFTEA also changes the process that importers use to submit drawback claims.

During the TFTEA implementation process from February 24, 2018, to February 23, 2019, importers filed drawbacks based on either the drawback law as it existed prior to TFTEA or under the new TFTEA rules. 1 19 Code of Federal Regulations (CFR) Part 191 www.oig.dhs.gov 2 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Further, TFTEA extended funding through 2018 for the Automated Commercial Environment (ACE) system. On February 24, 2018, CBP deployed the core trade processing capabilities in its ACE system, including electronic claims filing, built-in system validations, and improved system controls. ACE’s use eliminates more than 200 forms, which streamlines trade processes.

ACE now serves as the primary automated system through which the trade community reports imports and exports. CBP also uses the system to determine import or export admissibility. ACE replaced the Automated Commercial System (ACS), which was CBP’s paper-based import process system importers used to file drawback claims prior to ACE’s implementation. Lack of Internal Controls Could Affect Validity and Accuracy of CBP’s Drawback Claims Between 2011 and 2018, CBP processed an average of $896 million in drawback claims annually.

However, lack of internal controls could affect the validity and accuracy of the drawback claims amount. Table 1 shows CBP’s total drawback refund claims from 2011 through 2018. Table 1: CBP Drawback Refund Claims, 2011–2018 January 1 – December 31 2011 2012 2013 2014 2015 2016 2017 2018 Total Average Per Year Claimed Amount $629,188,101 688,996,404 852,336,808 908,784,032 994,864,046 1,003,188,545 842,936,685 1,250,507,327 $7,170,801,948 $896,350,244 Source: CBP-reported data and Office of Inspector General (OIG) analysis CBP risked paying excessive drawback claims because it has not addressed reported control deficiencies in drawback claims. From FYs 2011 to 2018, Independent Auditors’ Reports on DHS’ Financial Statements and Internal Control over Financial Reporting (Appendix C) identified reoccurring CBP internal control deficiencies in drawback claims in three areas. www.oig.dhs.gov 3 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Inappropriate Documentation Retention Periods CBP’s documentation retention periods were not appropriate to ensure that importers and claimants maintained support for drawback transactions for the full claim period and that CBP maintained support for importers qualifying for accelerated filer status.

According to Federal regulations: During the period of retention, the broker must maintain the records referred to in this part in such a manner that they may readily be examined. Records required to be made or maintained under the provisions of this part must be made available upon reasonable notice for inspection, copying, reproduction or other official use by CBP regulatory auditors or special agents or other authorized CBP officers within the prescribed period of retention or within any longer period of time during which they remain in the possession of the broker.2 Additionally, the Federal regulation3 provides for a general 5-year document retention period. However, it also includes an exception clause, consistent with 19 United States Code § 1508(c)(3), which requires, “Any record relating to a drawback claim shall be kept until the third anniversary of the date of payment of the claim.”4 CBP has sought legislation to extend the period during which CBP can verify a drawback claim since the drawback claim lifecycle may extend beyond the 3-year retention period. Manual Review of Drawback Claims Manual drawback review policies did not require drawback specialists to review prior drawback claims from each importer to determine whether, taken together, the importer claimed an excessive amount.

With TFTEA’s implementation, importers may no longer submit manual claims. Until effective automated and manual controls are implemented to support review of the drawback process and identification of excessive claims, CBP may be subject to financial loss from importers claiming more than the amounts owed them. Even though TFTEA implementation has been completed, CBP should continue to enhance manual controls to prevent excessive drawback claims, as existing paper-based claims will take several years to process through the drawback cycle. 2 19 CFR § 111.25 3 19 CFR § 163.4(a) 4 19 CFR § 163.4(b) www.oig.dhs.gov 4 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Lack of Controls to Detect Erroneous Drawback Claims The ACS drawback system lacked effective automated controls to prevent, or detect and correct, excessive drawback claims.

Specifically, ACS could not link drawback claims to imports in sufficient detail. The system did not have the capability to compare, verify, and track essential information about drawback claims related to underlying consumption entries and export documentation. Consumption entries are a type of entry used when goods are imported for use in the United States and going directly into commerce without any time or use restrictions. Further, ACS did not restrict drawback claims to 99 percent of duties, taxes, and fees collected at the individual line item level and the entry summary level, in accordance with applicable regulations.

Until all claims were submitted under TFTEA requirements, CBP could not rely on the new system controls to prevent payment of erroneous claims. Instead, CBP relied on manual control processes to mitigate risks of inaccurate and fraudulent claims. Because CBP did not have sufficient resources to implement compensating manual controls effectively, the controls may not have been adequate to provide reasonable assurance to detect all excessive drawback claims. Lacking adequate controls, CBP may be subject to financial loss due to excessive drawback claims.

CBP’s Actions to Correct Internal Control Deficiencies Are Ongoing CBP concurred with the annual Financial Statement and Internal Control over Financial Reporting’s findings and maintained that the new ACE system combined with policy updates will remedy the identified deficiencies. However, CBP’s deployment of the ACE data processing system remains ongoing and at this time, we are unable to verify that these changes resolve prior year audit findings. Furthermore, CBP and the Trade Transformation Office have not yet finalized the CBP and Trade Automated Interface Requirements draft incorporating all TFTEA rules and regulations. We will conduct an audit once CBP finalizes policy updates and ACE’s implementation generates sufficient data to support compliance testing.

We made no recommendations in this report as recommendations were reported in the Financial Statement and Internal Control over Financial Reporting audits. This report quantifies drawback revenue at risk because of reported internal control deficiencies. www.oig.dhs.gov 5 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Management Comments and OIG Analysis We have included a copy of CBP’s comments in their entirety in Appendix B. CBP also provided technical comments to the draft report and we updated the report as appropriate. We recognize that, with the implementation of Automated Commercial Environment on February 24, 2019, CBP has completed the transition of drawback processing from paper-based filing and manual drawback claims to mandatory electronic submissions. However, we are unable to conduct an audit to determine whether prior year audit findings have been resolved until sufficient data is generated to support compliance testing. www.oig.dhs.gov 6 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Appendix A Objective, Scope, and Methodology The Department of Homeland Security, Office of Inspector General was established by the Homeland Security Act of 2002 (Public Law 107–296) by amendment to the Inspector General Act of 1978.

We initiated this review to determine to what extent identified control deficiencies impact drawback claims. Our scope included FYs 2011 to 2018. To answer our objective, we conducted a meeting with officials from CBP’s Office of Trade, Office of Financial Management, and Office of Chief Counsel in Washington, DC. During the meeting, we gained a better understanding of the drawback process currently in place and the implementation process for ACE drawback system, the primary automated system CBP uses to determine import and export admissibility.

We obtained and reviewed the following drawback information:  CBP’s drawback policies and procedures before and after the deployment of the ACE drawback system; laws and regulations prior to TFTEA’s passage;   Notices of Findings and Recommendations from FYs 2011 through 2018 related to drawbacks; and  annual drawback claims from 2011 through 2018. We ensured there was sufficient basis to use work performed by the independent audit firm responsible for the Department of Homeland Security Independent Auditor’s Reports on Financial Statements and Internal Control over Financial Reporting. We obtained evidence of auditor qualifications and independence. We determined the scope, quality, and timing of the audit work was adequately reliable to answer our objective.

We analyzed the total claimed drawback amounts reported by CBP from 2011 through 2018. We did not attempt to verify the claims data, nor did we attempt to validate whether CBP had accurately categorized such data. However, we believe the funds at risk are appropriately quantified in this report. We assessed total claimed amounts from 2011 through 2018 to determine the average claimed amount per year.

We conducted this review under the authority of the Inspector General Act of 1978, as amended, and according to the Quality Standards for Inspections and Evaluations issued by the Council of the Inspectors General on Integrity and Efficiency. www.oig.dhs.gov 7 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security The Office of Audits major contributors to this report are William Johnson, Director; Kathy Hughes, Audit Manager; Kenneth Valrance, Auditor-in-Charge; Calbert Flowers, Auditor; Omar Russell, Auditor; Telogia Moore, Auditor; Thomas Hamlin, Communications Analyst; and Christopher Stephens, Independent Reference Reviewer. www.oig.dhs.gov 8 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Appendix B CBP Comments to the Draft Report www.oig.dhs.gov 9 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security www.oig.dhs.gov 10 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security www.oig.dhs.gov 11 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Appendix C Prior DHS OIG Reports on Independent Auditors’ Reports with Identified Control Deficiencies (2011–2018) Independent Auditors’ Report on DHS’ FY 2011 Financial Statements and Internal Control over Financial Reporting, OIG-12-07, November 2011, https://www.oig.dhs.gov/sites/default/files/assets/Mgmt/OIG_12- 07_Nov11.pdf Independent Auditors' Report on DHS' FY 2012 Financial Statements and Internal Control over Financial Reporting, OIG-13-20, November 2012, https://www.oig.dhs.gov/assets/Mgmt/2013/OIG_13-20_Nov12.pdf Independent Auditors' Report on DHS' FY 2013 Financial Statements and Internal Control over Financial Reporting, OIG-14-18 Revised, December 2013, https://www.oig.dhs.gov/assets/Mgmt/2014/OIG_14-18_Dec13.pdf Independent Auditors' Report on DHS' FY 2014 Financial Statements and Internal Control over Financial Reporting, OIG-15-10, November 2014, https://www.oig.dhs.gov/assets/Mgmt/2015/OIG_15-10_Nov14.pdf Independent Auditors' Report on DHS' FY 2015 Financial Statements and Internal Control over Financial Reporting, OIG-16-06, November 2015, https://www.oig.dhs.gov/assets/Mgmt/2016/OIG-16-06-Nov15.pdf Independent Auditors' Report on DHS' FY 2016 Financial Statements and Internal Control over Financial Reporting, OIG-17-12, November 2016, https://www.oig.dhs.gov/sites/default/files/assets/2017/OIG-17-12- Nov16.pdf Independent’s Auditors’ Report on DHS’ FY 2017 Financial Statements and Internal Control over Financial Reporting, OIG-18-16, November 2017, https://www.oig.dhs.gov/sites/default/files/assets/2017-11/OIG-18-16- Nov17.pdf Independent’s Auditors’ Report on DHS’ FY 2018 Financial Statements and Internal Control over Financial Reporting, OIG-19-04, November 2018, https://www.oig.dhs.gov/sites/default/files/assets/2018-11/OIG-19-04- Nov18.pdf www.oig.dhs.gov 12 OIG-20-07 OFFICE OF INSPECTOR GENERAL Department of Homeland Security Appendix D Report Distribution Department of Homeland Security Secretary Deputy Secretary Chief of Staff Deputy Chiefs of Staff General Counsel Executive Secretary Director, GAO/OIG Liaison Office Assistant Secretary for Office of Policy Assistant Secretary for Office of Public Affairs Assistant Secretary for Office of Legislative Affairs U.S. Customs and Border Protection Commissioner Chief of Staff Chief Counsel Audit Liaison, CBP Office of Management and Budget Chief, Homeland Security Branch DHS OIG Budget Examiner Congress Congressional Oversight and Appropriations Committees www.oig.dhs.gov 13 OIG-20-07 Additional Information and Copies To view this and any of our other reports, please visit our website at: www.oig.dhs.gov. For further information or questions, please contact Office of Inspector General Public Affairs at: [email protected]. Follow us on Twitter at: @dhsoig. OIG Hotline To report fraud, waste, or abuse, visit our website at www.oig.dhs.gov and click on the red "Hotline" tab.

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