International Trade:

U.S. Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment

GAO-04-345: Published: Jan 23, 2004. Publicly Released: Jan 23, 2004.

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U.S. policymakers and industry groups are concerned that some foreign textile and apparel imports are entering the United States fraudulently and displacing U.S. textile and apparel industry workers. Congress mandated GAO to assess U.S. Customs and Border Protection's (CBP) system for monitoring and enforcing textile transshipment and make recommendations for improvements, as needed. Therefore, GAO reviewed (1) how CBP identifies potential illegal textile transshipment, (2) how well CBP's textile review process works to prevent illegal textile transshipment, and (3) how effectively CBP uses its in-bond system to monitor foreign textiles transiting the United States.

To identify potential illegal textile transshipments, CBP uses a targeting process that relies on analyzing available trade data to focus limited inspection and enforcement resources on the most high-risk activity. In 2002, CBP targeted about 2,500 textile shipments out of more than 3 million processed, or less than 0.01 percent. Given resource constraints at CBP ports, CBP's textile review process for preventing illegal textile transshipment increasingly depends on information from foreign factory visits that CBP conducts, based on the targeting results. However, CBP's foreign factory visit reports are not always finalized and provided to ports, other agencies, or the foreign governments for timely follow-up. Further, after the global textile quotas end in 2005, CBP will lose its authority to conduct foreign factory visits in former quota countries. U.S. overseas Attache offices and cooperative efforts by foreign governments can supplement information provided to the ports. Under CBP's in-bond system, foreign textiles and apparel can travel through the United States before formally entering U.S. commerce or being exported to a foreign country. However, weak internal controls in this system enable cargo to be illegally diverted from its supposed destination, thus circumventing quota restrictions and payment of duties. Moreover, CBP's penalties do not deter in-bond diversion. Bond amounts can be set considerably lower than the value of the cargo, and violators may not view the low payments as a deterrent against diverting their cargo.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To improve its monitoring of in-bond cargo and ensure compliance with U.S. laws and enforcement of national security, the Commissioner of U.S. Customs and Border Protection should assess and revise as appropriate CBP regulations governing (1) the time intervals allowed for in-bond shipments to reach their final destinations, taking into consideration the distance between the port of arrival and the final port of destination and (2) whether importers or carriers can change the destination port without notifying CBP.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: CBP agreed with GAO's observations and recommendation. In May 2004, CBP's 60-day memo to Congress stated that CBP will consider appropriate revisions in these two areas. In response to GAO audit findings, a working group of CBP in-bond experts was created to identify weaknesses in the in-bond process and to recommend solutions. The working group identified four major areas of weakness, including regulatory weaknesses. In July 2007, CBP's 60-day memo to Congress stated that CBP is amending 19 CFR Part 18 and expected the first draft to be completed in October 2007. Again in October 2007, CBP reported to Congress that reducing the amount of time to conclude an in-bond transaction is feasible and intends to propose a regulation change to this effect. Although CBP stated that a firm proposal had yet to be developed, it is envisioned that in-transit times could be shortened for all modes of transport. In addition, CBP stated that it is also exploring requiring more advance information on the manifest and the in-bond applications to assist their efforts to monitor in-bond movements.

    Recommendation: To improve its monitoring of in-bond cargo and ensure compliance with U.S. laws and enforcement of national security, the Commissioner of U.S. Customs and Border Protection should routinely investigate overdue shipments and, pending implementation of an improved automated system, require personnel at ports of entry to maintain accurate and up-to-date data on in-bond shipments.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: Since the issuance of Directive 3240-036A in August 2003, CBP has undertaken several other steps to further clarify in-bond processing and improve data collection for monitoring, targeting and inspection purposes. July 2005: CBP issued a memo to its Directors of Field Operations reiterating the importance of entering all in-bond transactions and mandatory data fields prior to authorizing the movement of the in-bond goods and provided further clarification of the process. September 2005: CBP issued a memo to the field informing CBP Officers that in-bond programming changes have been made that require any subsequent in-bond movement to include the previous in-bond control number. If the filer fails to provide the previous control number, the system will reject the in-bond. January 2006: CBP issued a memo to field operations requiring mandatory recording of the bill of lading information for in-bond shipments. March 2006: CBP's Office of Field Operations issued to its CBP Officers a manual for processing in-bond cargo. June 2006: CBP issued a memo to field operations to consolidate the Sept 2005 and January 2006 memos and reinforce the instructions provided by Directive 3240-036A. According to CBP's October 2007 report to Congress, the number of overdue in-bond shipments is shrinking due to increased reconciliation and investigations of open in-bond shipments by CBP efforts. Moreover, CBP expects the enhancements to the overdue in-bond reports in ACS will help reduce the number of investigations needed into overdue in-bond entries. In July 2008, CBP's Office of Information and Technology (OIT) completed significant programming changes to improve the performance of the MO2 report-- a report that assists CBP officers track and investigate overdue in-bond shipments. The programming changes allowed CBP to (1) accurately report the universe of overdue shipments, (2) administratively close all in-bonds more than one year old and begin the process of assessing liquidated damages, and (3) ease reconciliation of future M02 reports. These improvements help eliminate false reports of open, overdue in-bond entries and increase the CBP Officers ability to target, inspect, and investigate overdue in-bond shipments. In addition, CBP began using its Automated Targeting System (ATS) to target in-bond movements in the summer of 2008, according to CBP Cargo Control officials during an August 2008 interview. In June 2008, CBP distributed guidance to field operations staff on how to use ATS for targeting in-bond and follow through with inspections. ATS now has an in-bond rule set to help CBP officers identify high-risk in-bond cargo. Some ports have In-Bond Enforcement Teams (IBET), other ports use their normal cargo targeters/cargo analysis units. The composition of the targeting team is left to each port director. Targeting occurs at all ports of entry.

    Recommendation: To improve its monitoring of in-bond cargo and ensure compliance with U.S. laws and enforcement of national security, the Commissioner of U.S. Customs and Border Protection should increase port targeting and inspection of in-bond shipments.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: Since the issuance of Directive 3240-036A in August 2003, CBP has undertaken several other steps to further clarify in-bond processing and improve data collection for monitoring, targeting and inspection purposes. July 2005: CBP issued a memo to its Directors of Field Operations reiterating the importance of entering all in-bond transactions and mandatory data fields prior to authorizing the movement of the in-bond goods and provided further clarification of the process. September 2005: CBP issued a memo to the field informing CBP Officers that in-bond programming changes have been made that require any subsequent in-bond movement to include the previous in-bond control number. If the filer fails to provide the previous control number, the system will reject the in-bond. January 2006: CBP issued a memo to field operations requiring mandatory recording of the bill of lading information for in-bond shipments. March 2006: CBP's Office of Field Operations issued to its CBP Officers a manual for processing in-bond cargo. June 2006: CBP issued a memo to field operations to consolidate the Sept 2005 and January 2006 memos and reinforce the instructions provided by Directive 3240-036A. According to CBP's October 2007 report to Congress, the number of overdue in-bond shipments is shrinking due to increased reconciliation and investigations of open in-bond shipments by CBP efforts. Moreover, CBP expects the enhancements to the overdue in-bond reports in ACS will help reduce the number of investigations needed into overdue in-bond entries. In July 2008, CBP's Office of Information and Technology (OIT) completed significant programming changes to improve the performance of the MO2 report-- a report that assists CBP officers track and investigate overdue in-bond shipments. The programming changes allowed CBP to (1) accurately report the universe of overdue shipments, (2) administratively close all in-bonds more than one year old and begin the process of assessing liquidated damages, and (3) ease reconciliation of future M02 reports. These improvements help eliminate false reports of open, overdue in-bond entries and increase the CBP Officers ability to target, inspect, and investigate overdue in-bond shipments. In addition, CBP began using its Automated Targeting System (ATS) to target in-bond movements in the summer of 2008, according to CBP Cargo Control officials during an August 2008 interview. In June 2008, CBP distributed guidance to field operations staff on how to use ATS for targeting in-bond and follow through with inspections. ATS now has an in-bond rule set to help CBP officers identify high-risk in-bond cargo. Some ports have In-Bond Enforcement Teams (IBET), other ports use their normal cargo targeters/cargo analysis units. The composition of the targeting team is left to each port director. Targeting occurs at all ports of entry.

    Recommendation: To improve its monitoring of in-bond cargo and ensure compliance with U.S. laws and enforcement of national security, the Commissioner of U.S. Customs and Border Protection should place priority on timely implementation of a fully automated system, including more information to properly track the movement of in-bond cargo from the U.S. port of arrival to its final port of destination.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: To facilitate trade, the U.S. customs system allows imported cargo intended for either U.S. or foreign markets to move from one U.S. port to another without being assessed U.S. duties or quotas and without officially entering U.S. commerce. The oversight of this system, called the in-bond system, is the responsibility of the Department of Homeland Security's Customs and Border Protection (CBP). In January 2004, GAO recommended in its report (INTERNATIONAL TRADE: U.S. Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment) that the Commissioner of U.S. Customs and Border Protection (CBP) should place priority on timely implementation of a fully automated system, including more information to properly track the movement of in-bond cargo from the U.S. port of arrival to its final port of destination. GAO noted that CBP had not effectively monitored movements of textiles in its in-bond system due to weak internal controls, including a lack of an automated system to track in-bond shipments. In response to our recommendations, CBP took steps to fully automate its in-bond processing to improve the tracking of in-bond cargo. In March 2006, CBP issued directives to its field offices describing systemic changes made to the in-bond section in Automated Commercial System (ACS). The first of these changes required second-leg in-bond records to reference the first leg of the in-bond movement so that when the second in-bond transactions is closed, the first in-bond transaction will be closed as well. The second change required the bill-of-lading field on the in-bond form to be filled in to facilitate the tracking of in-bond shipments and ensure that the bill of lading and in-bond transactions are posted and closed out. In May 2007, CBP's Information Technology Specialists began re-programming the existing ACS in-bond module to facilitate the automatic closure of in-bond entries at the ports of destination by linking the in-bond movements to succeeding transactions. Automated changes will ensure that in-bond entries are properly closed at the port of destination and eliminate false reports of open overdue in-bond entries; reports will be refreshed daily rather than monthly. In addition, CBP's Automated Commercial Environment (ACE), which will replace ACS, is being developed with improved in-bond tracking capabilities.

    Recommendation: To improve information available for textile transshipment reviews at CBP ports and to encourage continued cooperation by foreign governments, the Commissioner of U.S. Customs and Border Protection should assign import specialists to Customs Attachi Offices in high-risk textile transshipment countries to assist with textile monitoring and enforcement activities, including conducting follow-up to TPVTs.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: CBP has taken a range of steps to improve its ability to monitor and enforce textile transshipment: In 2008, CBP continued to designate the textile industry as a priority trade issue, due to the high-risk nature of textile and apparel imports and the numerous requirements placed on textile products entering the United States. Although textile quotas were to be largely eliminated under the World Trade Organization by January 1, 2005, the United States maintains quotas on textile imports from China, and China continues to be a problem where the illegal transshipment of textiles is concerned. According to CBP, in fiscal year 2007, its TPVTs visited 671 foreign factories in 15 countries, which CBP said represented a 57 percent increase over fiscal year 2006 factory visits, and the number of audits it conducted of textile importers rose to 66, which it said also represented an increase in audit activity. In addition, CBP has seized a growing number of textile and apparel products through its efforts to target for intellectual property (IP) violations, a category of IP seizures that grew in value from $16 million in fiscal year 2005 to $27 million in fiscal year 2007. Finally, in fiscal year 2005, the Department of Commerce began an intellectual property attaches program to better address country-specific and regional issues involving IP protection and enforcement. Under this program, it had, as of January 2008, assigned eight attaches in six countries of concern for IP theft, including China, Thailand, and India, all of which are countries of concern to CBP for textile transshipment. As noted in the 2008 STOP report, these attaches work closely with other U.S. agencies including enforcement officials to provide technical support and coordination on IP issues. Given the improvement in related textile enforcement efforts, particularly in the context of the phase out of the worldwide textile quota system, we believe that the actions taken by the Customs and other U.S. agencies are responsive to the recommendation and it is closed as implemented.

    Recommendation: To improve information available for textile transshipment reviews at CBP ports and to encourage continued cooperation by foreign governments, the Commissioner of U.S. Customs and Border Protection should improve TPVT follow-up by immediately entering all criteria resulting from overseas factory visits into ACS to trigger port reviews.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: CBP updated its standard operating procedures for textile production verification teams on July 14, 2005. Under the revised SOP, the Office of Field Operations will ensure that appropriate cargo or summary criteria are input immediately after the draft report is received from the TPVT for any factory found to have the following criteria; closed, evidence of transshipment, high potential for transshipment and refused admission. Previously, CBP officials did not input information from factories that met the high-risk criteria into ACS until after CBP approved the report. The revised SOP also shortens the time between the completion of the visit and draft report submission from 21 calendar days to 5 calendar days.

    Recommendation: Finally, to strengthen the deterrence value of in-bond enforcement provisions, the Commissioner of U.S. Customs and Border Protection should review the sufficiency of the amount of the bond for deterring illegal diversion of goods.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security: Bureau of Customs and Border Protection

    Status: Closed - Implemented

    Comments: Customs and Border Protection (CBP) agreed with GAO's observations and recommendation. In its agency comments to the GAO report as well as in its 60-day letter to Congress, CBP stated that new guidelines for determining bond sufficiency are currently being developed which will use a more risk-based approach based on type of commodity, history of carrier and potential loss of revenue. CBP will evaluate methods for determining bond sufficiency, including setting a more reasonable minimum bond amount. According to an August 2008 telephone interview with Mr. Bruce Ingalls (Chief, Debt Management, CBP Office of Finance), CBP's Office of Finance (OFO) is currently undertaking formal steps to review and revise a CBP Directive related to bond sufficiency (Directive 099 3510-004) after years of informal discussions. The Office of Finance, Revenue Division, is in the final stages of drafting a revised directive, which will be soon released for internal review within CBP (Office of Field Operations, Office of Trade, Office of Chief Counsel, and the Office of International Affairs and Trade Relations) for comments. The draft represents proposed new guidelines for determining bond sufficiency that will use a more risk-based approach. The Office of Finance is expecting to complete the internal review within the next 30 - 60 days. The next phase involves formal discussions with effected external trade groups to solicit their input. In addition, staff from the Office of Finance will travel to a few CBP ports to review current bond processing procedures with CBP field staff. Depending upon the results of the internal vetting and external discussions and other CBP priorities, the Office of Finance plans to publish a new CBP directive for setting bond amounts. Based on these actions, the recommendation is closed.

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