Foreign Trade Zones: CBP Should Strengthen Its Ability to Assess and Respond to Compliance Risks across the Program
Fast Facts
Foreign Trade Zones are secure areas within the United States that are generally considered as outside of U.S. customs territory. As incentive to keep or grow their U.S. operations, companies can reduce, eliminate, or defer duties on imported goods they store or use in the zones. U.S. Customs and Border Protection oversees the zones, which includes collecting duties and fees and assessing risks of noncompliance with laws and regulations. While it regularly reviews individual zones, CBP has not assessed risks across the program—which may affect the program's effectiveness and revenue. CBP should strengthen its risk assessment and response.
Foreign Trade Zones Include Distribution Warehouses and Car Manufacturers
Two photos, one showing a warehouse interior and the other showing a car being built.
Highlights
What GAO Found
The Foreign Trade Zones (FTZ) program provides a range of financial benefits to companies operating FTZs by allowing them to reduce, eliminate, or defer duty payments on goods manufactured or stored in FTZs before they enter U.S. commerce or are exported. FTZs are secure areas located throughout the United States that are treated as outside U.S. customs territory for duty assessments and other customs entry procedures. Companies using FTZs may be warehouse distributors or manufacturers (see figure). A manufacturer, for example, that admits foreign components into the FTZ can pay the duty rate on either the foreign components or the final product, whichever is lower—resulting in reduced or eliminated duty payments. Distributors can also benefit by storing goods in FTZs indefinitely and thereby deferring duty payments until the goods enter U.S. commerce. In 2016, U.S. Customs and Border Protection (CBP) collected about $3 billion in duties from FTZs.
Foreign Trade Zones Include Distribution Warehouses and Car Manufacturers
While FTZs were created to provide public benefits, little is known about FTZs' economic impact. For example, few economic studies have focused on FTZs, and those that have do not quantify FTZs' economic impacts. In addition, these studies do not address the question of what the economic activity, such as employment, would have been in the absence of companies having FTZ status.
CBP has not assessed compliance risks across the FTZ program, and its methods for collecting compliance and enforcement data impair its ability to assess and respond to program-wide risks. While CBP regularly conducts compliance reviews of individual FTZ operators to ensure compliance with U.S. customs laws and regulations, it does not centrally compile FTZ compliance and enforcement information to analyze and respond to compliance and internal control risks across the program. Federal internal control standards state that management should obtain relevant data and assess and respond to identified risks associated with achieving agency goals. Without a program-wide assessment of the frequency and significance of problems identified during compliance reviews, risk levels determined, and enforcement actions taken, CBP cannot verify its assertion that the FTZ program is at low risk of noncompliance. Incorrect determinations about program risk level may impact program effectiveness and revenue collection for the FTZ program, which accounted for approximately 11 percent of U.S. imports in 2015.
Why GAO Did This Study
The FTZ program was established in 1934 to expedite and encourage international trade and commerce. FTZs provide benefits to companies that import foreign goods for distribution or for manufacturing in order to encourage them to maintain and expand their operations in the United States. The total value of foreign and domestic goods admitted to FTZs in 2015 was about $660 billion. CBP is responsible for oversight and enforcement in FTZs, including revenue collection and assessing risk of noncompliance with U.S. laws and regulations.
GAO was asked to review CBP's oversight of FTZs and FTZs' economic impact. This report examines (1) the benefits of the FTZ program to companies operating FTZs and revenues collected from FTZs, (2) what is known about FTZs' economic impact, and (3) CBP's ability to assess and respond to compliance risks across the FTZ program. GAO analyzed CBP documents and data, interviewed agency officials and FTZ operators, and visited five FTZs based on trade volume, industry sector, and FTZ activity.
Recommendations
GAO makes three recommendations to CBP to strengthen its ability to assess and respond to compliance risks across the FTZ program, including actions to centrally compile FTZ compliance and enforcement data, and to conduct a risk analysis of the FTZ program. CBP concurred with these recommendations and identified steps it will take to address them.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| United States Customs and Border Protection | To strengthen CBP's ability to assess and respond to compliance risks across the FTZ program, the Commissioner of CBP should centrally compile information from FTZ compliance reviews and associated enforcement actions so that standardized data are available for assessing compliance and internal control risks across the FTZ program. |
CBP concurred with the recommendation and responded that it intended to prepare and disseminate a summary template for compiling FTZ compliance reviews and internal control risks across the FTZ program. Following the release of the GAO report, CBP provided updates on steps it has taken to address the recommendation. In its 60-day letter, CBP discussed steps it has taken to identify and review technical requirements for a SharePoint system to centrally store compliance review information. CBP subsequently reported that it created the SharePoint system, and it provided us with memos to CBP staff requiring that they enter Compliance Review summaries into this system. In response to our follow-up questions, CBP provided documentation on the summary information that the SharePoint system provides for assessing compliance and internal control risks across the FTZ program. CBP also reported that CBP staff had entered 36 compliance review summaries into the system as of December 2017. CBP's creation of a system for centrally compiling compliance review summary information is a promising step that enables CBP officials to access information for assessing internal control risks across the FTZ program.
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| United States Customs and Border Protection | To strengthen CBP's ability to assess and respond to compliance risks across the FTZ program, the Commissioner of CBP should conduct a risk analysis of the FTZ program using data across FTZs, including an analysis of the likelihood and significance of compliance violations and enforcement actions. |
CBP concurred with the recommendation and responded that it intended to collect data to conduct a risk analysis across the FTZ program. Following the release of the GAO report, CBP provided updates on steps it has taken to address the recommendation. In its 60-day letter, CBP stated that it would begin the risk analysis after the initial creation and deployment of a SharePoint system to centrally store compliance review information. After creating the SharePoint system and collecting data from FTZ compliance reviews, CBP completed a risk analysis using fiscal year 2018 data from across the FTZ program. CBP found that over 98 percent of FTZ facilities were ranked as low risk and that the medium and high risk FTZs were all non-production or distribution facilities. The violations found for these facilities included admission violations and failure to enter the goods. Based on this risk analysis, CBP deemed the FTZ program to be low risk. CBP's completion of a risk analysis of the FTZ program is a promising step that will enable CBP to utilize the results of the risk analysis to update risk assessment tools and develop best practices for its FTZ compliance reviews.
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| United States Customs and Border Protection | To strengthen CBP's ability to assess and respond to compliance risks across the FTZ program, the Commissioner of CBP should utilize the results of the program-wide risk analysis to respond to identified risks, such as updating risk assessment tools and developing best practices for CBP's FTZ compliance review and risk categorization system. |
In July 2017, GAO reported that CBP had not assessed compliance risk across the Foreign Trade Zones (FTZ) program or updated FTZ policies and procedures in response to identified compliance risks. For example, CBP had not updated its Compliance Review Handbook for Foreign Trade Zones since 2008 to respond to compliance risks identified since then. While some CBP field offices and ports have incorporated additional steps or questions into their compliance reviews, CBP officials stated that they lacked the resources to support a working group to examine existing practices and improve the templates used by officers conducting compliance reviews. Because CBP has not made the evaluation of the compliance review process improvements and identification of best practices a priority, CBP may be missing opportunities to reduce compliance risk and lower compliance costs through improved tools and targeting. To strengthen CBP's ability to assess and respond to compliance risks across the FTZ program, GAO recommended that the Commissioner of CBP utilize the results of a program-wide risk analysis to respond to identified risks, such as updating risk assessment tools and developing best practices for CBP's FTZ compliance review and risk categorization system. CBP concurred with the recommendation and responded that it would finalize a compliance review handbook that incorporated risk assessment tools and best practices for FTZ compliance review and risk categorization. In its 60-day letter, CBP stated that any identified trends as well as best practices would be distributed to the field and would be incorporated into the compliance review handbook. After completing a risk analysis using fiscal year 2018 data from across the FTZ program, CBP created a working group to review and provide recommendations to update the FTZ compliance review handbook. Based on its review, CBP replaced the compliance review handbook with newly developed National Standard Operating Procedures (SOP) for Foreign Trade Zones Compliance Reviews. To make FTZ risk assessments uniform across the country, the updated SOP include a standard risk assessment worksheet, and require all ports to utilize the worksheet beginning in FY2020. The SOP also include an updated Compliance Review Checklist and FTZ Facility Security Checklist based on the risk analysis of the FTZ program. CBP disseminated the SOP to field offices and linked the new requirements to GAO's recommendation.
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