DHS OIG Still Finds Almost No Financial Controls on Drawback (Part II)

This is Part II of a multi-part series of summaries of this report and provides an overview of the report’s FY 2010 finding of “material weakness”¹ in the area of drawback². See future issues of ITT for additional summaries. (A similar finding on drawback was made for FY 2009.)

Internal Control Weaknesses due to Manual Process & Inadequate Procedures

The auditors identified a number of weaknesses related to CBP's internal controls over drawback of duties, taxes, and fees, noting that much of CBP's drawback process is manual, placing an added burden on limited resources. CBP uses a sampling approach to compare, verify, and match consumption entry and export documentation to drawback claims submitted by importers. However, system and procedural limitations decrease the effectiveness of this approach.

The inherent risk of fraudulent claims or claims made in error is high, which increases the risk of erroneous payments. In addition, the length of the drawback claim lifecycle is often indeterminate, while the document retention period is set by statute at only three years.

The following are highlights of the weaknesses the auditors identified related to internal controls over drawback paid by the importer.

Excessive Claims Cannot be Prevented or Discovered due to ACS Limitations

CBP is unable to prevent, or detect and correct excessive drawback claims against an entry summary due to the inherent limitations of the Automated Commercial System (ACS) and the lack of controls therein. ACS does not have the capability to compare, verify, and track essential information on drawback claims to the related underlying consumption entries (UCEs), their individual line items, or export documentation upon which the drawback claim was based.

In addition, the drawback module within ACS does not provide information at the line item level to ensure drawback claims are not over claimed and thus are not overpaid at the individual line item level. (By law, the amount paid for drawback claims against a given import entry should not exceed 99% of the duties, taxes, and fees collected at the individual line item level.)

ACS only provides information to ensure that the total amount of all drawback claims against a given import entry summary does not exceed 100% of the total amount of duties, taxes, and fees collected, at the entry summary level. In addition, export information is not linked to the Drawback module and, therefore, electronic comparisons of export data cannot be performed within ACS to ensure that overpayments of drawback claims are not made.

Statistically Valid Approach Not Used to Check for Over Claims

Drawback review policies did not require drawback specialists to review all or a statistically valid sample of prior drawback claims against a selected import entry to determine whether, in the aggregate, an excessive amount had been claimed against import entries. The auditors also note that CBP utilizes a “validity tree” approach when selecting prior related drawback claims for review, which requires CBP to review the largest prior related drawback claims; however, the approach is not statistical.

Drawback review policy and procedures allow drawback specialists, with supervisory approval, to judgmentally decrease the number of underlying consumption entries (UCEs) randomly selected for review, which decreases the review’s effectiveness. Further, CBP’s sampling methodology for selecting UCEs is not considered to be statistically valid and CBP’s Drawback Operations Guide does not include procedures for statistically projecting errors noted in the sample.

Insufficient Document Retention Period of 3 Years

The statutory period for document retention related to a drawback claim is only three years from the date of payment. However, there are several situations that could extend the life of the drawback claim well beyond three years.

Auditor Recommendations to CBP to Improve Controls over Drawback

The auditors recommended that CBP take the following actions:

1. Implement effective internal controls over drawback claims as part of any new system initiatives, including the ability to compare, verify, and track essential information on drawback claims to the related underlying consumption entries and export documentation for which the drawback claim is based, and identify duplicate or excessive drawback claims;
2. Develop and implement automated controls to prevent overpayment of a drawback claim; and
3. Pilot statistically valid drawback claim review programs at each Drawback Center. Analyze the results of the pilots and determine the benefit of full implementation of the programs.

¹A “material weakness” is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.

²Drawback is a remittance, in whole or in part, of duties, taxes, or fees previously paid by an importer. CBP collected approximately $26.4 billion in import duties, taxes and fees in FY 2009 on merchandise arriving in the U.S. from foreign countries.

(KPMG audited the consolidated balance sheets of CBP; it also considered CBP's internal controls over financial reporting and tested CBP's compliance with certain provisions of applicable laws, regulations, and contracts agreements that could have a direct and material effect on these consolidated financial statements.)

(See ITT's Online Archives or 04/14/11 news, 11041401, for Part I of BP's summary of this report.

See ITT's Online Archives or 04/20/10 news, 10042026, for BP summary of a CBP webinar update on the Automated Commercial Environment and the International Trade Data System “Concept of Operations” regarding the drawback process, etc.

See ITT's Online Archives or 12/08/09 news, 09120805, for BP summary of Trade Support Network documents on ACE system priorities, including a legacy drawback program in ACS.

See ITT’s Online Archives or 03/11/10 news, 10031115, for BP overview of the FY 2009 OIG Report.)

(OIG-11-61, dated 03/25/11)