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entitled 'International Trade: Persistent Weaknesses in the In-Bond 
Cargo System Impede Customs and Border Protection's Ability to Address 
Revenue, Trade, and Security Concerns' which was released on May 17, 
2007. 

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Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

April 2007: 

International Trade: 

Persistent Weaknesses in the In-Bond Cargo System Impede Customs and 
Border Protection's Ability to Address Revenue, Trade, and Security 
Concerns: 

GAO-07-561: 

GAO Highlights: 

Highlights of GAO-07-561, a report to the Committee on Finance, U.S. 
Senate 

Why GAO Did This Study: 

The U.S. Customs and Border Protection (CBP) must strive to balance its 
competing goals of facilitating trade, providing port security, and 
collecting trade revenues. CBPs in-bond system, which allows goods to 
transit the United States without formally entering U.S. commerce, must 
also balance these goals. In response to concerns that previously 
identified weaknesses in the in-bond system have not been remedied, GAO 
examined (1) the purpose of the in-bond system and the extent of its 
use (2) CBP efforts to ensure that revenues are collected and trade 
concerns are minimized, and (3) CBP efforts to ensure that security-
related inspections are properly targeted. GAO examined audit reports 
and agency documents, interviewed officials at CBP headquarters and at 
10 CBP port offices. GAO also discussed the in-bond system with trade 
groups impacted by the in-bond system. 

What GAO Found: 

The in-bond system is designed to facilitate the flow of trade; 
however, CBP does not know the extent of the in-bond systems use as a 
result of lax oversight. The system allows cargo to be transported from 
the arrival port, without appraisal or payment of duties, to another 
U.S. port for official entry into U.S. commerce or for exportation. 
Although the in-bond system is estimated to be widely used, CBP cannot 
assess the extent of program use because it collects little information 
on in-bond shipments and performs limited analysis of data that it does 
collect. 

Despite numerous program reviews and audits that identified problems in 
CBPs management of the in-bond system, weaknesses persist and continue 
to impede CBPs ability to ensure proper collection of trade revenue 
and management of trade risks. The major weakness is that CBP does not 
adequately monitor and track in-bond goods. In particular, it does not 
consistently reconcile in-bond documents issued at the arrival port 
with documents at the destination port to ensure that the cargo is 
either officially entered with appropriate duties or quotas applied, or 
is in fact exported. CBP records show that many in-bond cargo shipments 
remained unreconciled, or open, with one port reporting that 77 
percent of its in-bond transactions were open. Also, in-bond 
regulations provide unusual flexibility for the trade community, but 
create challenges for CBP in tracking movements. Finally, some CBP 
ports do not consistently perform in-bond compliance reviews which 
could identify weaknesses and possible solutions. 

The limited information available on in-bond cargo also impedes CBP 
efforts to manage security risks and ensure proper targeting of 
inspections. In-bond goods transit the United States with a security 
score based on manifest information and do not use more accurate and 
detailed entry type information to re-score until and unless the cargo 
enters U.S. commerce. As a result, some higher risk cargo may not be 
identified for inspection, and scarce inspection resources may be used 
for some lower risk cargo. 

Figure: Port Estimate of Percentage of In-Bond Records Remaining Open 
in FY 2005: 

[See PDF for Image] 

Source: GAO. 

[End of figure] 

What GAO Recommends: 

GAO is recommending that the Commissioner of CBP take action in three 
areas (1) collect and use improved information on in-bond shipments to 
enable better informed decisions, (2) assess the systemic problems 
associated with identifying open in-bonds and take steps to resolve 
these problems, and (3) ensure that the compliance measurement system 
is performed to improve CBPs in-bond management. DHS agreed with most 
of our recommendations in these three areas. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-561]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Loren Yager, 
Yagerl@gao.gov 202-512-4347 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

The In-Bond System Facilitates the Flow of Trade, but CBP Does Not Know 
the Extent of Its Use: 

In-Bond System Management Weaknesses Impede CBP's Ability to Ensure 
Proper Collection of Trade Revenues and Address Trade Concerns: 

Limited Information Collected on In-Bond Cargo Impedes CBP Efforts to 
Manage Security Risks: 

Conclusions: 

Recommendations: 

Agency Comments and GAO Response: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Department of Homeland Security: 

GAO Comments: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Comparison of Data Requirements for Entry Summary and In-Bond 
Forms: 

Figures: 

Figure 1: Process for IT, T&E, and IE In-Bond Movements: 

Figure 2: Value of All U.S. Imports by Fiscal Year, 1998 to 2006: 

Figure 3: Number and Percent of In-Bond Transactions by Type, October 
2004 through March 2005: 

Figure 4: Number of In-Bond Transactions by Type for Selected Ports in 
Fiscal Year 2005: 

Figure 5: CBP Estimate of Percentage of In-Bond Records Remaining Open 
for Fiscal Year 2005: 

Figure 6: Change in ATS Target Score after Obtaining Entry Information 
for Selected Ports: 

Abbreviations: 

ACE: Automated Commercial Environment: 
ACS: Automated Commercial System: 
AMS: Automated Manifest System: 
ATS: Automated Targeting System: 
CBP: Customs and Border Protection: 
DHS: Department of Homeland Security: 
FDA: Food and Drug Administration: 
FTZ: Foreign Trade Zone:
HTS: Harmonized Trade Schedule: 
ICE: Immigration and Customs Enforcement: 
IE: Immediate Exportation: 
IT:Immediate Transportation: 
OFO: Office of Field Operations: 
OIT: Office of Information Technology: 
T&E: Transportation and Exportation: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 17, 2007: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United State Senate: 

With the recent growth in global trade and U.S. imports, U.S. Customs 
and Border Protection (CBP) faces an increasingly heavy workload at the 
nation's ports. CBP has responsibilities related to facilitating trade, 
providing port security, and collecting trade-related revenues, which 
totaled about $28.5 billion in fiscal year 2006. 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. This cargo referred to as an in-bond shipment--requires a 
responsible party to be covered by a CBP-approved bond and agree to 
comply with applicable regulations. Some CBP port officials have 
estimated that in-bond shipments represent from 30 percent to 60 
percent of goods received at their ports. Over the past years, reports 
from GAO and other audit agencies have noted various internal control 
weaknesses in the CBP in-bond shipment system. These weaknesses have 
sometimes allowed goods to be improperly diverted and sold in U.S. 
markets, thus avoiding duties and quotas and possibly also posing 
security risks. For example, according to an Immigration and Customs 
Enforcement (ICE) report, from September 1999 through December 2002, 
more than 7,500 in-bond shipments of wearing apparel were diverted from 
Los Angeles to customers throughout the United States, with an 
estimated loss of revenue to the United States of more than $100 
million. 

At your request, we addressed these issues (1) What is the in-bond 
system and to what extent is it used? (2) How has CBP managed the 
system to ensure that revenues are collected and trade concerns are 
minimized? and (3) How has CBP managed the system to ensure that 
security-related inspections are properly targeted? 

To meet these objectives, we reviewed project documentation and 
interviewed knowledgeable officials from CBP headquarters and selected 
port locations. We interviewed officials and examined documents at the 
six field operations offices processing the greatest numbers of in-bond 
transactions in 2005 (excluding in-bond transactions initiated by large 
couriers such as DHL, FedEx, and UPS). Major ports within those field 
operations offices include Buffalo, New York; Los Angeles and Long 
Beach, California; Laredo, Texas; Miami, Florida; New York, New York; 
Newark, New Jersey; and Blaine and Seattle, Washington. We also visited 
the Port of Dallas, Texas, which was identified by the Los Angeles CBP 
field office as a major inland destination port for in-bond goods. We 
examined CBP's treatment of in-bond shipments in each of these ports 
and where possible we obtained data showing the number of in-bond 
documents processed. To identify previously identified in-bond internal 
control weaknesses, we reviewed GAO, Inspector General, and other audit 
reports on the in-bond program. We discussed the views of CBP 
headquarters and port management personnel regarding any revenue, 
security, or other risks associated with processing in-bond cargo and 
with the actions taken to address these risks. We conducted our work in 
accordance with generally accepted government auditing standards. A 
detailed description of our scope and methodology is included in 
appendix I of this report. 

Results in Brief: 

The in-bond system is designed to facilitate the flow of trade 
throughout the United States; however, CBP does not know the extent of 
use of the in-bond system because it collects little information on in- 
bond shipments and performs limited analysis of data that are 
collected. The system allows cargo to be transported from the arrival 
port, without appraisement of the cargo or payment of duties, to 
another U.S. port for official entry[Footnote 1] into U.S. commerce or 
for exportation. The trade community believes the flexibilities 
provided by the in-bond system are needed to facilitate trade, 
particularly allowing it to avoid congestion and delays at U.S. 
seaports whose infrastructure has not kept up with the dramatic growth 
in trade. For example, CBP reported that import values increased from 
$881 billion in fiscal year 1998 to an estimated $1.82 trillion in 
fiscal year 2006. The in-bond system is estimated to be widely used; 
according to CBP records between October 2004 and March 2005, over 6.5 
million in-bond transactions were initiated nationwide. However, CBP 
cannot assess the extent of the program because it does not collect 
accurate information on the value and volume of in-bond cargo, and its 
analysis of existing data is limited to the number of in-bond 
transactions. For example, CBP officials at the Port of Los Angeles 
estimated that 40 to 60 percent of all imports arriving at the port in 
2005 were transported in-bond, but they were unable to provide reliable 
data to confirm this estimate. 

Despite numerous program reviews and audits that identified problems in 
CBP's management of the in-bond system, weaknesses persist and continue 
to impede CBP's ability to ensure proper collection of trade revenue 
and management of trade risks. The major weakness is that CBP does not 
adequately monitor and track in-bond goods; in particular, it does not 
consistently reconcile the in-bond documents issued at the arrival port 
with documents at the destination port, to ensure that the cargo is 
either officially entered, with appropriate duties or quotas applied, 
or is in fact exported. For example, one of the ports with the highest 
amount of in-bond traffic reported that up to 77 percent of their in- 
bond cargo shipments remained unreconciled, or "open." Several factors 
contribute to CBP's inability to monitor these shipments. One is that 
CBP does not collect appropriate data or analyze available data to 
adequately manage the in-bond system and identify risks associated with 
revenue loss and trade violations. As a result, the agency has not been 
able to implement compliance measurements to assess revenue gaps and 
the effectiveness of trade compliance controls. A second factor is that 
the in-bond regulations provide unusual flexibility for the trade 
community, but create challenges for CBP. The regulations currently 
allow bonded carriers from 15 to 60 days,[Footnote 2] depending on the 
mode of shipment, to reach their final destination and allow them to 
change a shipment's final destination without notifying CBP. Also, 
administrative errors by both shipping agents and CBP staff contribute 
to the high numbers of open in-bond records. Finally, CBP continues to 
inconsistently perform in-bond compliance exams, with some ports not 
performing these exams at all and other ports only recently beginning 
to perform them. Results from these compliance exams, when consistently 
performed, can aid port and CBP management in identifying system 
weaknesses. 

The limited information available on in-bond cargo impedes CBP efforts 
to manage associated security risks and ensure proper targeting of 
inspections. CBP uses information from the manifest as an input in 
developing an initial screening score to establish inspection 
priorities. However, information from the manifest may lack detail and 
reduce the quality of targeting. Carriers of goods officially entering 
commerce are required to present more detailed information on entry 
documents. As a result, in-bond goods transit the United States after 
the initial targeting based on less detailed information than goods 
that have been officially entered with required information. In 
addition, scarce inspection resources are misdirected to in-bond goods 
that a security score based on better information might have shown did 
not warrant inspection. Recent CBP data for four large ports showed 
that security screening scores for cargo increased 23 percent of the 
time and decreased 47 percent of the time after information from entry 
documents had been considered. 

In this report, we are making recommendations in three general areas. 
First, to improve the level of detail in information available on in- 
bond cargo, we are making several recommendations to allow CBP to make 
better management decisions regarding trade, revenue, and security 
concerns. Second, to improve monitoring of in-bond cargo, we are 
recommending that CBP assess the systemic problems associated with 
identifying open in-bond transactions, take steps to resolve these 
problems, and improve the agency's ability to track and close open in- 
bond transactions. Third, to make the in-bond compliance measurement 
program a more effective monitoring tool, we are recommending that CBP 
ensure that compliance measurement exams are consistently conducted to 
inform CBP management of needed corrective actions. 

We provided a draft of this report to DHS for review by CBP and ICE, 
and DHS agreed with most of our recommendations in all three areas. In 
the area of improving in-bond information, DHS agreed with three of our 
five recommendations. DHS disagreed with one recommendation, stating 
that it would change the nature of in-bond transactions and increase 
costs. DHS was also concerned that another recommendation called for 
improved information in a system that would not enhance CBPs' 
antiterrorism efforts. We modified our recommendations in these areas 
to address DHS concerns. In the area of improving CBP monitoring of 
open in-bond transactions, DHS agreed with three of our five 
recommendations. DHS stated that CBP had met the intent of our 
recommendation to ensure that bondholders close in-bond documents 
within required time frames. We modified this recommendation to 
emphasize that a more systematic enforcement strategy is needed. DHS 
also disagreed with our recommendation that CBP should prioritize their 
efforts to close open in-bonds based on risk. Given limited CBP 
resources and the high number of open in-bond transactions, we 
maintained our recommendation regarding the need for prioritization. In 
the area of improving CBP's compliance measurement program, DHS agreed 
with our recommendations. CBP also provided technical comments, which 
we have incorporated in this report as appropriate. 

Background: 

Provisions for the in-bond-type movements of cargo date back to the 
1800s, although current authority for in-bond movements is contained in 
the Tariff Act of 1930, as amended.[Footnote 3] Under the current 
system, merchandise arriving from foreign countries can be authorized 
to move in-bond, without appraisement of the merchandise or payment of 
duties, from a port of arrival to any other U.S. port to be officially 
entered into U.S. commerce or exported. Several parties can be involved 
in an in-bond transaction, including the importer and shipping agents 
such as carriers and customs brokers. 

In-bond goods must be transported by a carrier covered by a CBP- 
approved bond that allows goods that have not yet entered U.S. commerce 
to move through the United States. Such carriers can move goods by 
ship, truck, rail, plane, or any combination of these. The bond is a 
contract given to ensure performance of obligations imposed by law or 
regulation and guarantees payment to CBP if these obligations are not 
performed. The three parties involved in a CBP bond are (1) the 
principal, which can be an importer, broker, carrier, or other business 
entity; (2) a surety authorized by the Department of the Treasury to 
write CBP bonds, normally an insurance company; and (3) CBP, which 
would be the beneficiary of the bond if conditions are not met. If CBP 
finds that the bonded party has violated laws or regulations in moving 
the in-bond goods, it can take action to recover against the bond. 

CBP is the unified border agency within the Department of Homeland 
Security (DHS) charged with the mission of preventing terrorists and 
terrorist weapons from entering the United States, while also 
facilitating the flow of legitimate trade and travel. This agency, with 
its more than 40,000 employees covering 308 ports of entry, is 
responsible for the in-bond process and controls and protects the 
nation's borders. CBP's Office of Field Operations (OFO) is the primary 
CBP component responsible for enforcing customs, immigration, and 
agriculture laws and regulations at U.S. borders, including in-bond 
regulations. OFO maintains programs at 20 field operation offices, 308 
ports of entry, and 14 preclearance stations in Canada and the 
Caribbean. Port directors oversee points of entry in their operational 
areas, where virtually all conveyances, passengers, and goods legally 
enter and exit the United States. 

To carry out its trade-related obligations, CBP relies on information 
systems and management processes to help its staff track, control, and 
process all commercial goods imported into the United States. The 
agency is in the midst of modernizing its current trade processing 
system, the Automated Commercial System (ACS). CBP is currently 
replacing ACS with the Automated Commercial Environment (ACE) system in 
11 increments, referred to as "releases," to be completed in 
approximately 8 1/2 years. When the system is fully operational, it is 
expected to provide an improved technology foundation for CBP border 
security and trade activities. We have periodically reported on the 
development of the ACE system. Most recently, we reported that CBP 
faces long-standing management challenges and new risks associated with 
the development of ACE.[Footnote 4] 

Since the 1990s, a number of audits and program reviews completed by 
GAO, the Department of the Treasury Inspector General, independent 
public accounting firms, and others have identified weaknesses in the 
in-bond system. Among weaknesses identified were problems in monitoring 
and tracking in-bond records and in targeting and inspecting in-bond 
shipments, and inconsistent performance of the in-bond system's 
compliance measurement program.[Footnote 5] A 2001 Department of the 
Treasury Inspector General audit of the U.S. Customs Service's[Footnote 
6] financial statements for fiscal years 1999 and 2000 found that its 
inability to close open in-bond records because of administrative 
errors and lack of appropriate system checks impeded its ability to 
ensure that goods moving in-bond were not substituted or diverted into 
U.S. commerce without proper assessment. The Financial Statement audits 
for fiscal years 2002 to 2006 by an independent public accounting firm 
cited CBP's lack of a reliable process for monitoring in-bond shipments 
and inconsistent performance of its compliance measurement program, 
known as Tinman. 

The recently enacted Security and Accountability for Every Port Act of 
2006 (SAFE Port Act) contains several provisions related to securing 
the international cargo supply chain against potential terrorist acts. 
Some provisions relate to the movement of in-bond cargo. Title IV 
requires that CBP submit a report to several congressional committees 
by June 30, 2007, including an assessment of whether ports of arrival 
should require additional information for in-bond cargo, a plan for 
tracking in-bond cargo in the ACE system, and an assessment of how to 
ensure reconciliation of in-bond cargo between arrival port and 
destination port. The report must also contain an assessment of the 
feasibility of reducing transit time while traveling in-bond, an 
assessment of the resources needed to complete the reconciliation of in-
bond entries, and an evaluation of the criteria for targeting and 
examining in-bond cargo. 

The In-Bond System Facilitates the Flow of Trade, but CBP Does Not Know 
the Extent of Its Use: 

The in-bond system facilitates the flow of trade by allowing importers 
and shipping agents to choose the ports at which their cargo is 
officially entered into U.S. commerce and duties are paid or quotas are 
assessed. The in-bond system also covers cargo that is not intended for 
official entry into U.S. commerce--that is, cargo that arrives at U.S. 
ports, transits the United States for exporting to another country 
(such as goods arriving at Los Angeles and moving to Texas ports for 
exporting to Mexico). U.S. importers and shipping agents may elect to 
use the in-bond system for several reasons, and the in-bond system has 
become an integral part of the trade process for some industries. CBP 
information on the number of in-bond transactions indicates that the in-
bond system is widely used. However, CBP collects limited detailed 
information on the in-bond system and has done minimal analysis of the 
extent and patterns of its use. 

The In-Bond System Facilitates the Flow of Goods: 

The in-bond system facilitates the flow of trade by allowing cargo to 
be transported from the arrival port, without payment of duties, to 
another U.S. port for official entry into U.S. commerce or for 
exportation. There are three types of in-bond movements that importers 
and shipping agents can use (see fig. 1). One type of in-bond movement, 
known as "Immediate Transportation" (IT), allows merchandise arriving 
at a U.S. port to be transported to another U.S. port where it is 
entered into commerce. Alternatively, IT in-bond shipments can be 
admitted to a bonded warehouse or Foreign Trade Zone (FTZ).[Footnote 7] 
A second type of in-bond movement, known as "Transportation and 
Exportation" (T&E), covers merchandise "in transit" through the United 
States; such merchandise arrives at a U.S. port and is allowed to be 
transported through the United States and exported from another U.S. 
port without the payment of duties. A third type of in-bond movement 
relates to cargo arrivals that are unloaded at the U.S. port, but are 
to be immediately exported from that same port without payment of 
duties. This is known as "Immediate Exportation" (IE). 

Figure 1: Process for IT, T&E, and IE In-Bond Movements: 

[See PDF for image] 

Source: GAO analysis of CBP information. 

[End of figure] 

The in-bond system is governed by a system of statutes, regulations and 
procedures that provide importers and shipping agents considerable 
flexibility. CBP regulations allow importers and shipping agents the 
ability to initiate and close in-bond transactions, to extend 
transportation time frames, and to make revisions in their 
destinations. Some of the features that complicate administration of 
the in-bond system include the following: 

* Documentation for in-bond transactions may be provided electronically 
or on paper by using the in-bond form (CBP Form 7512). 

- For electronic in-bond transactions, shipping agents initiate and 
submit the form electronically to CBP prior to arrival through the 
Automated Manifest System (AMS) and close the in-bond transaction once 
the cargo is officially entered or exported. 

- For paper in-bond transactions, in-bond form is received at CBP at 
the time the in-bond shipment arrives at the port; CBP staff must enter 
the information manually and are responsible for closing the in-bond 
transaction once it is entered or exported. 

* The in-bond system allows extended periods for transportation and 
reporting of cargo movements. 

- Once the in-bond shipment leaves the arrival port, the carrier has 
from 15 to 60 days, depending on the mode of shipment, to transport the 
merchandise to the destination port. 

- The carrier then has 2 working days from physical arrival at the 
destination port to report the arrival. 

- The carrier then has 15 days from the time of arrival at the 
destination port to officially enter cargo (if movement was an IT) or 
export (if a T&E). 

* Carriers are allowed to change the destination port while in transit 
without notifying CBP, with some limited exceptions. 

* At the destination port, liability for the shipment may be 
transferred to another carrier with the filing of a subsequent in-bond 
(IT, T&E, or IE), allowing shipments to continue to move without making 
official entry. 

The In-Bond System Provides Several Advantages to the Trade Community: 

The in-bond system allows the trade community to avoid congestion and 
delays at U.S. seaports whose infrastructure has not kept up with the 
dramatic growth in trade volume. In-bond facilitates trade by allowing 
importers and shipping agents the flexibility to move cargo more 
efficiently. Trade community representatives who we interviewed 
indicated the in-bond system allows importers to overcome insufficient 
infrastructure and resources at CBP ports dealing with large volumes of 
cargo. Some CBP officials noted that if all cargo had to be entered at 
the time of arrival, some busier ports would probably not have space 
and personnel to accommodate the volume. For example, CBP reports that 
the value of all U.S. imports has risen from $881 billion in fiscal 
year 1998 to an estimated $1.82 trillion in fiscal year 2006 (see fig. 
2). These import amounts do not include in-bond shipments received at 
U.S. ports that are exported to other countries. According to CBP, 
about 1.2 million in-bond transactions were initiated in the Port of 
Los Angeles alone in fiscal year 2005. CBP staff estimate that this 
accounts for 30 to 60 percent of all imports moving through the port; 
however, CBP was unable to provide reliable data to confirm this. 

Figure 2: Value of All U.S. Imports by Fiscal Year, 1998 to 2006: 

[See PDF for image] 

Source: CBP. 

[End of figure] 

The in-bond system allows importers and shipping agents considerable 
flexibility in moving goods. A customs broker provided an example of a 
case in which his company was dealing with imported shrimp that needed 
to be examined by the Food and Drug Administration (FDA) in a timely 
manner before entering into U.S. commerce. The broker said that the 
shrimp was coming into New York, but both FDA and CBP had significant 
delays in inspecting cargo there. The broker's company transported the 
shrimp in-bond to a nearby inland port where FDA and CBP could process 
it more quickly. The shrimp was then sent back to market in New York. 
In addition, members of the American Trucking Association explained 
that the in-bond system allows them to move cargo faster and provides 
the flexibility to choose the most convenient port to deliver goods. 
For example, the members are able to move mixed loads rapidly through 
the border by avoiding the lengthy inspections that could be required 
for a variety of goods, and then deal with Customs arrival requirements 
at the destination port. 

The in-bond system has become an integral part of the trade process for 
some industries. Trade community representatives stated that larger 
importers use the in-bond system because they prefer to ship 
merchandise to central distribution warehouses to more conveniently 
enter the shipments, rather than dealing with multiple ports of 
arrival. Industries such as express consignment couriers also rely on 
the in-bond program for the expeditious movement of shipments as an 
integral part of the services they offer. The in-bond system also 
allows importers to delay payment of trade duties. Using the in-bond 
system, importers do not pay applicable import duties until the 
merchandise officially enters U.S. commerce--which can be delayed from 
15 to 60 days after it arrives at the initial U.S. port and an 
additional 15 days at the destination port. 

The in-bond system is also fundamental to FTZ operation, in which 
foreign and domestic merchandise is considered to be outside of 
Customs' territory.[Footnote 8] The FTZ program was created in the 
1930s to facilitate international trade and increase the global 
competitiveness of U.S.-based companies. There are currently 256 FTZs, 
and they are found in every state. Businesses using FTZs depend on the 
in-bond system to import certain types of merchandise into the zones 
without going through formal Customs entry procedures or paying import 
duties. Goods may either be exported directly from FTZs or may enter 
U.S. commerce at which point appropriate duties are assessed. 

CBP Reports Extensive Use of the In-Bond System but Has Not Done 
Analysis of Its Use: 

CBP has some data that indicate that the in-bond system is widely used, 
but it has not organized or analyzed its data to provide detailed 
information on the extent or patterns of use of the system. CBP's data 
are limited to the number of in-bond transactions initiated and 
information contained on the in-bond form. While the form captures some 
shipment manifest information such as foreign port of lading, final 
foreign destination, port codes, and vessel information, it does not 
require appraisal value of in-bond cargo.[Footnote 9] We requested that 
CBP provide data on the value and quantity of cargo transported in- 
bond, but CBP could not provide reliable data. CBP did not have 
existing reports on in-bond shipments, the extent of the program or 
patterns of in-bond shipments. Any data we requested on the in-bond 
system had to be compiled specifically for us, in some cases by using 
estimates. A description of data limitations and the impact on managing 
the in-bond system is provided in the next section of this report. 

Using the number of in-bond transactions reported by CBP for the 6- 
month period of October 2004 to March 2005, we found that the system is 
widely used, and IT in-bond transactions are the most common type. CBP 
records show that during this period a total of about 6.5 million in- 
bond transactions were initiated nationwide. IT movements accounted for 
about 4.5 million, T&E movements accounted for about 1.4 million, and 
IE movements accounted for about 0.6 million (see fig. 3). CBP data 
also showed that the in-bond system is widely used by couriers such as 
UPS and FedEx. Couriers accounted for almost half of all in-bond 
transactions initiated during this period. However, CBP is unable to 
calculate what share of U.S. imports is transported in-bond because the 
number of in-bond transactions alone reveals limited information. A 
"transaction" can be an entire shipping container or a single package. 
For example, the Port of Seattle recorded an increase of 30 percent in 
in-bond transactions between 2004 and 2005; however, staff explained 
that the value and volume of cargo moving in-bond did not change 
significantly. Port officials said that the increase in the number of 
transactions related to a change in procedures--couriers were required 
to change from filing a single in-bond form for an entire truck to 
filing one for each package in the truck moving in-bond. 

Figure 3: Number and Percent of In-Bond Transactions by Type, October 
2004 through March 2005: 

[See PDF for image] 

Source: GAO analysis of CBP data. 

[End of figure] 

According to CBP, the four field offices that process the largest 
numbers of in-bond movements are Los Angeles, New York, Miami, and 
Seattle. As part of our audit work, we visited and requested data from 
ports in these field offices with the highest numbers of in-bond 
transactions, as well as other ports with high numbers of in-bond 
transactions. Staff in all the ports we visited indicated having great 
difficulties in providing data on the in-bond system because of 
limitations with its Automated Commercial System (ACS). We requested 
data on the number of in-bond transactions for the past 5 years; 
however most ports were not able to provide data for all 5 years. The 
most recent time period that the majority of ports were able to provide 
information was for fiscal year 2005. The information provided by some 
of these ports is summarized in figure 4. According to this 
information, the Los Angeles/Long Beach has the largest number of in- 
bond transactions, and IT was the most prevalent type of in-bond 
transaction used. 

Figure 4: Number of In-Bond Transactions by Type for Selected Ports in 
Fiscal Year 2005: 

[See PDF for image] 

Source: GAO analysis of CBP data. 

Note: The Port of Miami was unable to provide reliable data for fiscal 
year 2005. The Port of Dallas was unable to provide T&E and IE data. 

[End of figure] 

To assess the extent to which the in-bond system is used, we requested 
data on total imports from entry summary forms, since these forms 
provide complete information on imports and indicate if the in-bond 
system was used. This information would allow us to determine what 
percentage of all cargo intended for U.S. commerce is transported in- 
bond and make an accurate assessment of the extent of the in-bond 
system. CBP attempted to compile these data but was unable to provide 
this information. 

CBP does not include information on the extent that the in-bond system 
is used in its annual Performance and Accountability Report or Import 
Trade Trends. Without proper systems in place to inform management 
about in-bond transactions, CBP is unable to properly evaluate the 
risks associated with in-bond transactions and make decisions about how 
to best manage the system. 

In-Bond System Management Weaknesses Impede CBP's Ability to Ensure 
Proper Collection of Trade Revenues and Address Trade Concerns: 

Weaknesses in CBP's management of the in-bond system continue to impede 
CBP's ability to ensure proper collection of trade revenue and minimize 
trade risks. CBP does not collect adequate data or analyze existing 
data needed to effectively manage the system. As a result, CBP is not 
able to identify risks in the system associated with potential revenue 
losses or trade violations, and thus it cannot implement compliance 
measures targeted at reducing these risks. CBP is unable to ensure that 
in-bond shipments in fact enter U.S. commerce, with appropriate duties 
paid, due to management weaknesses related to tracking in-bond 
shipments and reconciling paperwork. CBP conducts in-bond reviews and 
audits to assist in identifying system weaknesses, but these continue 
to be inconsistently performed. 

CBP Does Not Collect Adequate Data or Analyze Existing Data to Make 
Risk Management Decisions: 

CBP does not collect appropriate data to adequately manage the in-bond 
system. While the official entry summary form (CBP Form 7501)[Footnote 
10] requires accurate information on description, value, and quantity 
of cargo, the in-bond form (CBP Form 7512) allows estimates to be 
provided. The entry summary form requires the use of Harmonized Tariff 
Schedule (HTS)[Footnote 11] numbers to collect correct data on 
description, value, and quantity of trade imported for consumption in 
the United States. However, the data available to CBP for in-bond cargo 
are limited to the number of in-bond transactions initiated and the 
information contained on the in-bond form. CBP staff explained that 
while there is a value field on the in-bond form, the value provided is 
most often what it is described as a "shipper's valuation" for 
insurance purposes and not the actual value of goods. CBP instructions 
for the in-bond form indicate that for IT movements, merchandise should 
be described in sufficient detail to enable the port director to 
estimate the duties and taxes, however, importers and shipping agents 
do not usually provide this level of information. Further, CBP 
officials noted that the in-bond form is often filled out by shipping 
agents who provide imprecise estimates of value and quantity and vague 
cargo descriptions. CBP at the headquarters level provides limited 
specific guidance to the ports regarding how to assess value and volume 
of in-bond traffic and any associated risks. Table 1 compares the data 
required for certain items in the official entry summary and in-bond 
forms. 

Table 1: Comparison of Data Requirements for Entry Summary and In-Bond 
Forms: 

Type of information: Description; 
Information required on entry summary form (7501): Detailed cargo 
descriptions using 10-digit HTS numbers; 
Information required on in-bond form (7512): General description of 
goods (HTS numbers not required). 

Type of information: Value; 
Information required on entry summary form (7501): Accurate dollar 
amount required for assessment of duties; 
Information required on in-bond form (7512): Estimated value allowed. 

Type of information: Quantity; 
Information required on entry summary form (7501): Net quantity in 
specified HTS units; 
Information required on in-bond form (7512): Quantity in terms of the 
smallest external packaging unit, such as containers, boxes, etc. (HTS 
units not required). 

Source: GAO analysis of CBP information. 

[End of table] 

CBP has also not used existing data it collects on in-bond to identify 
risks in the system associated with potential revenue loss or trade 
violations. Port officials indicated the lack of data entered into the 
system limits the information that can be used for tracking in-bond 
cargo. For example, officials at a major port told us that often for 
transactions filed in hard copy, only about half of the more than 20 
data elements in the form are entered into the ACS, due to the large 
quantity of in-bond shipments and relatively few officers to review 
them. In addition, CBP officials said that company names and numbers 
may not be accurately entered into the ACS, further complicating risk 
management decisions. Staff in CBP's Office of Information Technology 
(OIT) explained that they are not generally required to provide 
management, at the port or national level, with existing data on the 
extent of the in-bond system and patterns of trade among in-bond ports. 
According to staff, if any information is requested by management about 
in-bond transactions, it is handled on an ad hoc basis. In addition, 
according to OIT staff, ACS is inefficient in creating records that 
allow analysis of the extent to which the in-bond system is used, of 
trade flows, and diversion risks. Creating any type of report on the in-
bond system is laborious and time consuming. OIT staff indicated that 
the ACE system under development to replace ACS should provide better 
information to aid in managing the in-bond system. 

Data Collection Limitations Impede CBP's Assessment of Potential 
Revenue Losses: 

Lack of accurate information on the value of in-bond cargo prevents CBP 
from accurately determining the extent of any lost revenue. CBP staff 
explained that regulations do not require the appraisement of in-bond 
cargo; such appraisal and collection of duties occurs when the cargo is 
entered at the destination port. CBP officials noted that they do not 
require importers and shipping agents to provide accurate value 
information on the in-bond form because it is not required under 
legislation or current CBP in-bond regulations. Further, CBP does not 
collect and report data showing the trade patterns for in-bond use. If 
CBP knew which ports receive the most in-bond cargo from the major U.S. 
ports it could better prioritize its oversight of the system. However, 
CBP does not consider information on main receiving ports in managing 
the system. In addition to allowing CBP to determine potential loss of 
revenue, obtaining accurate information on value, specific category of 
merchandise, and trade patterns could help CBP focus efforts on 
monitoring in-bond cargo with high revenue. 

CBP Also Cannot Accurately Assess Potential Trade Violations: 

CBP's data management weaknesses impede its ability to target in-bond 
cargo for trade violations at the arrival port. Currently, CBP uses the 
Stratified Compliance Exam and the Cargo Selectivity System for trade 
compliance purposes, such as identifying intellectual property rights 
violations and revenue collection. The Stratified Compliance 
Examination randomly selects cargo making official entry into the 
United States for physical inspection, while the Cargo Selectivity 
System uses criteria to evaluate information from an entry summary and 
then selects cargo for inspection. Both systems use entry information 
for cargo entering into U.S commerce at the arrival port to initiate 
the exams. Because in-bond cargo does not make official entry at the 
arriving port, the Stratified Compliance Examination is not applied to 
in-bond cargo being exported and is not initiated for in-bond goods 
entering at other U.S. ports until official entry occurs. Without 
proper targeting of in-bond shipments at the arrival port, cargo 
transiting to another U.S. port for official entry or exportation may 
be diverted and stay in the United States, contraband or goods 
violating intellectual property rights laws could be smuggled, duties 
may be unpaid, or quotas could be violated. In fiscal year 2006 about 
30 percent of seizure value for intellectual property rights violations 
were associated with shipments that had moved through the in-bond 
system. Examples of some past diversions that involved use of the in- 
bond system include: 

* From September 1999 through December 2002, more than 7,500 shipments 
of wearing apparel shipped to Los Angeles from China and Hong Kong were 
smuggled into the United States. The in-bond documents were filed in 
Los Angeles for export to Mexico via Laredo, Texas. However, the goods 
were diverted from Los Angeles to customers throughout the United 
States. The declared foreign value of shipments was in excess of $600 
million, and estimated loss of revenue to U.S. Customs was more than 
$100 million. 

* In 2006, CBP seized 77 containers of counterfeit athletic shoes and 
designer clothing with an estimated domestic value of nearly $70 
million. These containers entered the Los Angeles seaport, and in-bond 
documents were filed for eventual export to Mexico. The goods moved in- 
bond through California and Arizona before being seized by ICE agents. 

While CBP performs a security screen for all arriving cargo, it does 
not have a formal targeting system to identify trade concerns specific 
to in-bond cargo. However, in some instances, CBP port officers do take 
steps to target in-bond shipments on an ad-hoc basis. In most of the 
ports we visited, port officials said that for in-bond shipments filed 
using the paper in-bond form, cargo is often selected by CBP officers 
at the time documentation is presented to the port office. CBP officers 
inputting the in-bond data from the paper forms into the system may 
select cargo for inspection based on experience and available 
information. Cargo moving in-bond for which the in-bond form was filed 
electronically is not screened by CBP officers for these types of 
additional inspections, because approval of these transactions is 
automated and officers do not regularly access this information. 

Numerous Open In-Bond Records Reflect Lack of Control of In-Bond 
Movements: 

CBP often cannot ensure that cargo officially entered U.S. commerce, or 
was exported, because many in-bond transaction records remain open with 
uncertain disposition. An open in-bond record occurs when a paper or 
electronic transaction has been initiated at the arrival port for an in-
bond shipment but the record has not been completed, or closed, because 
CBP has not recorded the shipment's official entry at the destination 
port. An open in-bond transaction record that is never closed 
represents an internal control weakness in that there is no control in 
place to ensure that open items are closed or to determine whether 
potential revenue losses or trade violations have occurred. As previous 
audit reports have noted, the number of open in-bond records is 
substantial, however, CBP does not have accurate measures of the number 
of open records. Several factors contribute to the high number of open 
in-bond records. CBP does not appear to have placed a priority on 
reducing the number of open in-bond records, in that it has not 
consistently reconciled open records. In addition, CBP's in-bond 
regulations that were intended to provide flexibility to business 
result in it being more difficult to track in-bond transaction. 
Finally, administrative errors by both CBP and the trade industry add 
to the numbers of open in-bond records. CBP has recently issued 
directives to address some of these issues, but it is too early to 
judge their effectiveness. 

Number of Open In-Bond Records Is Substantial, but CBP Lacks Accurate 
Data: 

Previous audit reports have noted that the high number of open in-bond 
records impedes CBP efforts to track in-bond shipments and ensure that 
they have properly entered U.S. commerce. An open in-bond record 
indicates a risk that cargo could have been diverted without paying 
applicable duties or in violation of trade regulations or quotas. 
Without data on the value and volume of in-bond cargo, and information 
on the number of in-bond records that remain open, CBP is not able to 
account for them or set a high priority on tracking open in-bonds with 
high duties. We reported this problem in 1994, 1997, and 2004 and made 
recommendations to CBP for improving the monitoring of in-bond 
shipments. However, in our current review, we found large numbers of 
open in-bond records at all the ports we visited, and CBP admits that 
there are many open in-bond records nationwide. 

Of the 10 ports we visited, only 6 were able to provide fiscal year 
2005 data on the number of open in-bond records in their systems. As 
figure 5 shows, for the six ports that provided data, the percentage of 
open in-bond transactions for fiscal year 2005, ran as high as 77 
percent at one location. The other four ports, including Los Angeles-- 
the port with the largest estimated number of in-bond transactions-- 
were unable to provide reliable data on the number of open in-bond 
records. Without consistent evaluation and reliable data on overdue 
shipments, CBP cannot account for in-bond shipments that failed to meet 
time requirements and trade regulations. CBP attributed some of the 
open in-bond records to systemic problems that do not show in-bonds as 
closed even after they have been completed. 

Figure 5: CBP Estimate of Percentage of In-Bond Records Remaining Open 
for Fiscal Year 2005: 

[See PDF for image] 

Source: GAO analysis of CBP data. 

[End of figure] 

CBP Has Not Consistently Reconciled Open In-Bond Records: 

Ports that we visited have not consistently performed several CBP 
designated reviews intended to resolve open in-bond records. For 
example, CBP reports such as the Monthly List of In-Bond Shipments 
Delivered Late for Export (MO2), along with the Monthly List of In-Bond 
Shipments Delivered Late (MO6) and the Monthly List of In-Bond 
Shipments Overdue (MO7), are designed to notify ports of in-bond 
shipments that are delivered late for exportation, are delivered late, 
or are overdue for delivery.[Footnote 12] We found most of the ports we 
visited had not regularly conducted these reviews since CBP increased 
emphasis on security after September 11, 2001. Since issuance of a June 
2006 CBP headquarters directive requiring ports to track exportation in-
bond transactions in a timely manner, most ports we visited had 
reinstituted this type of review. Officials at ports we visited stated 
that these reviews were very time consuming and labor intensive. 

CBP officials observed that there are many systemic problems with the 
existing data system (ACS) used to generate these monthly lists of in- 
bond transactions needing reconciliation. Officials noted that some in- 
bond transactions appearing as open on these reports have already been 
closed. Port officials also noted the difficult and time-consuming 
nature of working with the ACS system. For example, staff in the 
Seattle Field Office explained that because of limitations with the 
system, it took 50 working hours to extract the data we had requested 
on the number of in-bond transactions at their port. Furthermore, some 
of the data was incomplete and contained other limitations. 

According to CBP officials, the ACS was originally designed in 1984 and 
has been increasingly difficult and expensive to operate, maintain, and 
enhance due to its antiquated hardware and software and limited 
processing capacity. CBP is in the process of replacing ACS with the 
ACE system in 11 increments, referred to as "releases," with a 
scheduled completion in approximately 8 1/2 years. The first three 
releases are deployed and operating, and the fourth release is 
currently being deployed. Other releases are in various states of 
definition and deployment. CBP headquarters officials stated that they 
were aware of problems in ACS, but they cited restrictions placed on 
funding for changes to the legacy ACS as impeding changes to the 
system. 

Regulations Provide Trade Flexibility but Complicate CBP's Monitoring 
of In-Bond Movements: 

CBP's in-bond regulations provide considerable flexibility for the 
importer and shipping agents, but such flexibility complicates CBP's 
monitoring of in-bond movements. Some CBP regulations governing in-bond 
movements make it difficult for CBP officers at the ports to track in- 
bond shipments and ensure their proper disposition. For example, under 
the regulations an importer or shipping agent can initiate an in-bond 
shipment by ground transport to one U.S. port and then decide to 
initiate another in-bond transaction to transport that same cargo to 
another U.S. port, allowing an additional 30 days to transport cargo. 
When the cargo finally reaches its ultimate destination and the most 
recent in-bond transaction is closed, all previous in-bond transactions 
associated with that cargo remain open. In other cases, the regulations 
allow an importer or shipping agent to transport cargo in-bond to a 
U.S. border port, place it in a warehouse, and obtain a second in-bond 
transaction for exportation once a buyer is located abroad. Depending 
on the mode of transport, regulations currently allow bonded carriers 
from 15 to 60 days to reach their final destination and allow them, 
with some exceptions, to change a shipment's final destination without 
notifying CBP. Port officials stated that this makes it impossible to 
know whether an in-bond shipment arrived at its declared destination 
until a record appears later on an unresolved in-bond report. For an in-
bond shipment moving, for example, from Los Angeles to Laredo intended 
for export to Mexico, the importer or shipping agent may at the last 
minute change the port used for export; the CBP staff at the new 
destination port would not know that they should expect such shipments 
and thus would not be able to whether ensure the shipments actually 
exited the United States. 

Administrative Errors Contribute to High Number of Open In-Bond 
Records: 

Administrative errors by shipping agents and by CBP staff contribute to 
the high numbers of open in-bonds. According to CBP officials, most 
open in-bond records remain unresolved because of administrative or 
procedural errors. CBP officials said that carriers have high staff 
turnover and do not provide personnel with adequate training in in-bond 
procedures. For example, the in-bond system depends on importer and 
shipping agents personnel to file the correct paperwork. For in-bond 
transactions filed electronically, the system allows carriers and 
brokers to initiate, process, and close in-bond transactions without 
CBP involvement, and CBP officials told us that many of these 
individuals do not follow the proper steps to close in-bond 
transactions. For in-bond transactions that are filed in paper format, 
CBP officers are responsible for closing them at the destination port 
(where the cargo makes official entry). According to CBP, personnel 
sometimes make administrative errors and do not properly close the in- 
bond transactions or may not process the documents at all. 

CBP Recently Issued Directives to Address Open In-Bond Records, but It 
Is Too Early to Determine Their Effectiveness: 

To address some of the issues surrounding open in-bond transactions, in 
March 2006, CBP issued several directives to the field describing 
systemic changes made to the in-bond section in ACS. The first of these 
changes requires second-leg in-bond records[Footnote 13] to reference 
the first leg of the in-bond movement so that when the second in-bond 
transactions is closed, the first in-bond transactions will be closed 
as well. The second change requires 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. Furthermore, in June 2006, CBP issued a 
directive requiring ports to track in-bond transactions in a timely 
manner by monitoring records that appear on the system's monthly in- 
bond status reports. 

CBP Has Not Consistently Performed Its Compliance Measurement Program 
Reviews and Has Not Used Its Results to Manage the Program: 

CBP instituted a compliance measurement program in 1998 known as 
Tinman[Footnote 14] to help track in-bond movements, protect revenues, 
and perform risk assessments. However, ports do not consistently 
perform the reviews required under the program and CBP headquarters 
does not collect national data describing the results of these reviews. 
Due to the inconsistent performance of the physical inspections and 
post-audits called for by this system, as well as the limited 
collection and use of the data these reviews provide, CBP is unable to 
fully determine compliance within the in-bond system and therefore 
potential trade and revenue risks associated with the system. 

While conducting our port visits, we found that some ports just 
recently began conducting physical examinations and completing post- 
audits required under Tinman because they previously did not have the 
resources available to support these duties after September 11, 2001. 
Tinman was designed to improve the tracking and monitoring of in-bond 
cargo by initiating compliance examinations of cargo and post-audits. 
Every week, ports are supposed to query the system to determine if a 
Tinman exam has been designated. After a port has been notified of an 
exam or audit, the mechanics of the examination are left to the 
discretion of the port.[Footnote 15] The Department of the Treasury 
Inspector General and its' independent auditor noted in their fiscal 
year 2002 financial audit that Tinman inspections and post-audits had 
been suspended in fiscal year 2002 to allocate resources to other 
mission objectives. Although we found the ports making efforts to 
complete the Tinman exams during our audit work, the fact that the 
ports were not completing these physical inspections and audits 
suggests that CBP has not been able to effectively measure revenue gaps 
or the effectiveness of controls over trade compliance to the in-bond 
process. 

Moreover, no policies or procedures exist at the headquarters level to 
monitor or use the results of the Tinman inspections and audits to 
improve the management of the system. For example, we made repeated 
requests to CBP to obtain national data on the number of Tinman 
inspections and post-audits that were generated, completed, and that 
resulted in some sort of negative findings over the past 5 years, but 
we were provided little information on the results of these audits and 
no summary conclusions. We were also told that, at the headquarters 
level, reports generated from Tinman are not routinely produced and 
that there is no overall report that management could use to evaluate 
trade compliance and determine overall risks to the in-bond system. 
Therefore, CBP management would have to rely on a review of port-by- 
port results, and it would be difficult and labor intensive to 
determine if the results of the audits or inspections showed an overall 
compliance issue. 

Limited Information Collected on In-Bond Cargo Impedes CBP Efforts to 
Manage Security Risks: 

CBP does not collect detailed information on in-bond cargo that could 
aid in identifying cargo posing a security risk and promote effective 
use of inspection resources. CBP uses the Automated Targeting System 
(ATS) as one mechanism within its multilayered security strategy for 
monitoring cargo arriving at U.S. ports. Manifest information for all 
cargo arriving at U.S. ports, including in-bond cargo, is part of the 
ATS security score. For regular cargo, the ATS score is updated with 
more detailed information as the cargo makes official entry at the 
arrival port, but ATS scores are not updated for T&E in-bond cargo and 
are not updated for IT in-bond goods until official entry occurs. As a 
result, in-bond goods transit the United States without having the most 
accurate ATS security score, posing a potential security risk, and 
potentially misdirecting scarce inspection resources to goods that 
otherwise would not warrant inspection. 

Automated Targeting System Is Part of the CBP Multilayered Security 
Strategy for Cargo Arriving at U.S. Ports: 

CBP has developed a multilayered security strategy to manage the risk 
associated with the movement of cargo, including in-bond cargo. The ATS 
is a key component of this multilayered security strategy.[Footnote 16] 
ATS is a complex model of weighted rules CBP officers use to help 
decide which cargo to inspect. CBP uses ATS to review documentation for 
arriving shipments and assign a risk score for each shipment arriving 
in the United States. CBP officers located at the ports then use these 
ATS scores to help decide on the need for and extent of cargo 
inspections. We have previously reported on improvements needed in ATS 
targeting of cargo inspections.[Footnote 17] 

The CBP risk management strategy includes taking steps such as using 
ATS to limit potential security risks without unduly interfering with 
the flow of commerce. The Congress and the President have endorsed risk 
management, which involves a strategy of helping policymakers make 
decisions about assessing risks, allocating resources, and taking 
actions under conditions of uncertainty. The CBP Fiscal Year 2006 
Performance and Accountability Report states its priority mission in 
part as "preventing terrorists and terrorist weapons from entering the 
United States, while also facilitating the flow of legitimate trade and 
travel." CBP uses ATS as part of its risk management strategy of 
identifying cargo warranting inspection based on risk and maintains 
that it would be impossible to inspect all arriving cargo without 
disrupting the flow of commerce. 

CBP Uses Manifest Information for All Cargo, Including In-Bond Cargo, 
to Aid in ATS Scoring and in Prioritizing Inspections: 

CBP uses information it receives on all cargo arriving at U.S. ports, 
including in-bond cargo, as input for ATS scoring to aid in identifying 
security risks and setting inspection priorities. Although the 
requirements vary by mode of transportation (sea, air, rail, and 
truck), federal law generally requires carriers to submit manifest 
information prior to goods arriving at U.S. ports. For example, CBP 
generally requires ocean carriers to submit manifest information to CBP 
24 hours before cargo shipped in containers is loaded on a ship at a 
foreign port.[Footnote 18] CBP requires air carriers to submit manifest 
information at departure or 4 hours before arrival at a U.S. airport. 
These cargo manifests are prepared by the carrier and are composed of 
bills of lading, which include a description of the shipment. ATS 
analyzes the electronic data related to individual shipments and ranks 
them in order of risk to develop an ATS score for each shipment. CBP 
officers located at the ports then use ATS scores to help them make 
inspection decisions. 

CBP adjusts the ATS score assigned to arriving cargo when it receives 
the more detailed information for cargo making official entry at the 
arrival port. For example, CBP would have an ATS score for sea cargo 
arriving in Los Angeles based on the ship's manifest information but 
would adjust the ATS score when more detailed information is included 
on the entry documents. CBP generally requires importers and shipping 
agents to provide entry documentation for items arriving in the United 
States within 15 calendar days of arrival so that it is not warehoused 
at the port indefinitely. This entry information often provides more 
detailed information on contents than does the manifest information. 
For in-bond cargo, such adjustments are made at the destination port, 
or are not made at all for cargo that is intended to be exported. 

Entry information sometimes changes the ATS security score from that 
based on manifest information. CBP provided data for four major 
ports[Footnote 19] comparing the ATS score given cargo based on the 
bill of lading to the ATS score given after goods made official entry 
(see fig. 6). This data show that for the four ports, the ATS score 
based on the bill-of-lading information stayed the same an average of 
30 percent of the time after being updated with entry information. 
However, for the four ports, ATS scores increased an average of 23 
percent of the time and decreased in an average of 47 percent of the 
time. A higher ATS score can result in higher priority being given to 
cargo for inspection than otherwise would be given based solely on the 
bill-of-lading information. A lower ATS score can result in cargo being 
given a lower priority for inspection and potentially shift inspection 
resources to cargo deemed a higher security risk. 

Figure 6: Change in ATS Target Score after Obtaining Entry Information 
for Selected Ports: 

[See PDF for image] 

Source: GAO analysis of CBP data. 

[End of figure] 

In-Bond Cargo Transits the United States without an Updated ATS Score: 

In-bond cargo transits the United States without an updated ATS 
inspection priority score because it does not make official entry at 
the arrival port, and in-bond documents do not contain detailed data 
similar to entry documents used to update the ATS score. CBP officers 
with security responsibilities at several of the ports we visited 
observed that the lack of entry information for in-bond cargo meant 
that they did not have additional information for ATS scoring that 
would help them assess the need for inspection. Although in-bond cargo 
is given an ATS score based on manifest information, this score is not 
generally updated prior to the movement of these goods within the 
United States. For example, the ATS scores for IT in-bond transactions, 
which represent about 70 percent of all in-bond documents, are not 
updated until the cargo makes official entry at another U.S. port. T&E 
in-bond cargo, which represents about 22 percent of in-bond documents, 
does not make official entry, so additional entry data are not 
available to update an ATS score. The in-bond form, required for in- 
bond movement, does not have the same level of detail contained in 
entry documents, and data from the form is not used to update ATS 
scores. As a result, in-bond goods transit the United States without 
having the most accurate ATS security score, posing a potential 
security risk, and potentially misdirecting scarce inspection resources 
to goods that otherwise would not warrant inspection. 

Conclusions: 

In managing the in-bond system, CBP must strive to balance its goals of 
facilitating the efficient movement of cargo, ensuring effective 
revenue collection, and providing a secure trade environment. The in- 
bond system's overall objective is to facilitate global and domestic 
trade. However, the in-bond system poses risk to CBP's other goals of 
revenue collection and trade security. CBP will be less able to fulfill 
its revenue collecting responsibilities if in-bond goods are diverted 
and make illegal entry without the payment of applicable taxes or trade 
tariffs. CBP may also be less able to fulfill its trade-security 
responsibilities because the information collected for in-bond 
movements across the United States is less detailed than that collected 
for goods entering at their arrival port. 

We found that CBP's ability to assess and manage the risks of the in- 
bond cargo system is impaired by both (1) the limited information it 
collects on in-bond cargo and (2) the limited analysis it performs on 
available information. With the tremendous volume of trade coming 
through U.S. ports, CBP needs detailed information and accurate 
monitoring systems to set priorities for targeting and tracking cargo 
shipments that have security or revenue interest. However, CBP does not 
currently collect detailed information on the value or type of in-bond 
cargo being transported through U.S. ports; the in-bond form asks only 
for a general description. As a result, CBP does not have the 
information needed to set priorities for targeting and tracking cargo 
moving within the in-bond program, so as to concentrate on cargo of 
highest security, law enforcement, or revenue impact. 

CBP has also failed to perform even the most basic analyses of 
available information. CBP was not able to tell us, for example, the 
extent of the system's use, what products are shipped in-bond, or what 
shipments are expected for entry (and thus expected revenue collection 
from applicable trade duties) at inland ports. Despite prior audit 
recommendations, important management weaknesses persist in CBP's 
tracking of in-bond cargo, with the result that CBP still does not know 
whether in-bond cargo shipments of greatest security or revenue 
interest are in fact entered into U.S. commerce or exported as 
required. In particular, CBP continues to have high numbers of open in- 
bond transactions with uncertain disposition. 

CBP is currently addressing the requirements of the SAFE Port Act, 
which focuses on many of the same issues discussed in this report. CBP 
must submit a report to the Congress by June 30, 2007. In addition, CBP 
is in the midst of a multiyear development of its new ACE system, which 
it expects to have improved capability to track in-bond documents. 
However, the system is not expected to be fully implemented before 4 to 
5 years. CBP has also recently issued administrative directives to 
improve in-bond document tracking. However, these directives address 
only some of the in-bond system weaknesses. Therefore, we believe 
several additional changes are needed in a timely manner to resolve 
persistent weaknesses in the in-bond system, consistent with the SAFE 
Port Act. 

Recommendations: 

To improve management of the in-bond program through better informed 
decisions affecting trade, revenue collection, and security goals, we 
recommend that the Secretary of Homeland Security, acting through the 
CBP Commissioner, take the following actions: 

1. With respect to collecting more detailed information on in-bond 
cargo, 

* For all in-bond goods to be eligible for a consumption entry into the 
United States, require additional information on the in-bond form (CBP 
Form 7512) at the time of arrival. This information should include data 
elements that provide a more precise description of the cargo and that 
further identify the entities involved in the movement of these goods. 
As part of this effort, CBP should--6 months after implementation of 
new data requirements--report to Congress whether the enhanced data 
obtained are adequate to address security and trade concerns for in- 
bond transactions or whether current CBP authority should be adjusted. 

* For all goods to be exported, revise the in-bond form (CBP Form 7512) 
to include the six-digit code from the Harmonized Commodity Coding and 
Classification System (Harmonized System). 

* Use information collected in the revised in-bond form to ensure that 
the new ACE system can generate reports useful to CBP management in 
making prioritized, risk-based management decisions related to revenue 
and security risks. 

* Use information from the revised in-bond form as input to the Cargo 
Selectivity process at the arrival port instead of limiting this 
process to cargo that has made entry for consumption, to ensure that in-
bond shipments are adequately tracked between the arrival and 
destination ports. 

* Use information from the revised in-bond form to update ATS security 
scores for in-bond movements at the arrival port instead of delaying 
this process until after cargo has been transported through the United 
States to the destination port. 

2. With respect to improving monitoring of cargo moving within the in- 
bond system, 

* Conduct an analysis of the extent of use of the in-bond system and 
the patterns of shipments within the system. 

* Assess the systemic problems causing open in-bond transactions and 
impeding their identification. Make adjustments to ACE and provide 
appropriate tools to eliminate these problems and improve the capacity 
of CBP officers, importers, and shipping agents to track and close open 
in-bond transactions. 

* Revise in-bond regulations to reduce the time allowed for 
transporting cargo and to limit the ability of carriers to change the 
final destination for cargo without CBP knowledge. 

* Develop a more systematic enforcement strategy to increase bondholder 
compliance in closing out open in-bond transactions within required 
time frames. 

* Prioritize closing in-bond records for shipments with high potential 
risks of security, law enforcement, and revenue loss, using updated 
information from the in-bond form. 

3. To make the in-bond compliance measurement program a more effective 
tool for monitoring compliance with in-bond regulations, 

* Ensure that the current compliance measurement program (Tinman) or 
any updated commercial compliance tool is consistently conducted by the 
ports so as to inform CBP national and port management of needed 
corrective actions. 

Agency Comments and GAO Response: 

We provided a draft of this report to DHS for review by CBP and ICE. We 
received official written comments from DHS, which are printed in 
appendix II. We made 11 recommendations to improve the management of 
the in-bond system in three general areas (1) improving the level of 
information available on in-bond cargo, (2) improving monitoring of in- 
bond cargo, and (3) improving the efficiency of in-bond compliance 
measurement programs. DHS agreed with seven of our recommendations, 
disagreed with three, and stated that one has already been implemented. 
DHS also provided technical comments, which we have incorporated in 
this report as appropriate. 

Regarding the first area of recommendations--for improving the level of 
information available on in-bond cargo--DHS agreed with three of our 
recommendations and disagreed with two. DHS agreed with our 
recommendation to revise the in-bond form to contain more information, 
with respect to goods that are to be exported. DHS also agreed with the 
recommendation that CBP ensure that the new ACE system can generate 
reports useful to CBP in making prioritized, risk-based management 
decisions related to revenue and security risks. Additionally, DHS 
agreed with the recommendation that it use information from the revised 
in-bond form to update ATS security scores for in-bond movements at the 
port of arrival instead of delaying this process until after the cargo 
has been transported through the United States to the destination port. 

However, DHS disagreed with our recommendation to require the 10-digit 
HTS number for in-bond cargo to be eligible for import into the United 
States. DHS stated that this would lead to a major legal problem and 
represent a revolutionary change in the in the way in-bond business is 
done. DHS stated that requiring the10-digit HTS number would require 
Customs Brokers to file in-bond entries and bar carriers from doing so. 
DHS stated that cost to the owner of the goods would rise because of 
the mandated added party to the filing. We remain concerned that in- 
bond cargo routinely transits the United States without a detailed 
description of the cargo and the entities involved in the movement of 
these goods. Therefore, we have revised our recommendation to call for 
additional information to be collected for all in-bond goods to be 
eligible for a consumption entry into the United States, in lieu of the 
10-digit HTS number. This information should include data elements that 
provide a more precise description of the cargo and that further 
identify the entities involved in the movement of these goods. In 
addition, we recommend that--6 months after the implementation of these 
new data requirements--CBP report to Congress whether the enhanced data 
obtained are adequate to address security and trade concerns for in- 
bond transactions or whether its current authority should be adjusted. 

DHS also disagreed with our recommendation that revised in-bond 
information should be used in CBPs' Stratified Compliance Examination 
and Cargo Selectivity processes. DHS stated that these exams apply only 
to cargo for which official entry has been made. We revised this 
recommendation to focus on using the additional information in CBP's 
Cargo Selectivity process. CBP's current inability to track in-bond 
shipments and the examples of notable trade and revenue violations 
including in-bond cargo provide strong evidence of the need to identify 
potential trade and revenue risks for in-bond cargo. The revised 
recommendation indicates that CBP should use information from the 
amended in-bond form as input to the Cargo Selectivity process at the 
arrival port instead of limiting this process to cargo that has made 
entry for consumption. 

Regarding the second area of recommendations--for improving the 
monitoring of in-bond cargo--DHS agreed with three of our 
recommendations, stated that one has already been implemented, and 
disagreed with one. DHS agreed to conduct an analysis of the extent of 
the in-bond system and patterns of shipment within the system. DHS also 
agreed that a systematic assessment of problems causing open in-bond 
transactions should be used to improve ACE and assist CBP officers and 
the trade in closing in-bond transactions. DHS agreed with our 
recommendation and is planning to revise in-bond regulations to reduce 
the time allowed for transporting cargo and to limit carriers' ability 
to change the final destination for in-bond cargo. 

Regarding our recommendation to develop requirements, including 
penalties to ensure that bondholders close in-bond documents, DHS 
responded that these requirements already exist. We note, however, that 
the high number of open in-bond transactions indicates a persistent 
problem. We modified the wording of this recommendation to emphasize 
that CBP should develop a more systematic enforcement strategy in order 
to increase bondholder compliance in closing out open in-bond 
transactions within required time frames. 

DHS disagreed with our recommendation to prioritize their activities 
related to closing open in-bond transactions with potentially high 
security, law enforcement, and revenue risks. DHS stated that they 
already employ risk-based targeting for all shipments, including in- 
bond cargo. However, we did not observe CBP efforts to prioritize 
closing open in-bond transactions based on risk. Open in-bond 
transactions appear on CBP reports without any designation of the 
importance of individual records. With limited resources available, we 
believe that CBP should prioritize its monitoring of open in-bond 
transactions to those that pose the most significant risks to revenue 
collection and other trade risks, and so we have not modified our 
recommendation. 

With respect to the third area of recommendations--for improving CBP's 
compliance measurement program--DHS agreed with our recommendation to 
ensure that the program is consistently conducted by the ports. DHS 
stated that CBP management will issue updated guidance to the field 
emphasizing the importance of conducting these audits in a timely 
manner and accurately reporting their findings. 

In our recommendations, we attempted to find a balance between the 
commercial interests of the various parties involved in international 
trade and the CBP requirements for information and structure in order 
to ensure that security goals, as well as revenue and law enforcement 
goals, are achieved. One of the persistent challenges of the in-bond 
program is that the unusual flexibility that the program provides to 
the trade community--the limited information required, the time periods 
and lax notification requirements for shipments transiting the United 
States, and the ability to use multiple in-bond transactions for a 
single shipment--all exacerbate the challenges for CBP in performing 
its security and trade enforcement duties. 

As the report details, persistent weaknesses in the in-bond system 
existed long before customs functions shifted to DHS and now create new 
challenges for DHS in ensuring security of shipments entering the 
United States. While DHS disagrees with three of our recommendations, 
we believe that the evidence of weakness in the system overwhelmingly 
demonstrates that a coherent set of modifications is needed. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to interested congressional committees as well as the Secretary of 
Homeland Security. We will also make copies of this report available to 
others upon request. In addition, the report will be available at no 
charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4347 or yagerl@gao.gov. Contact points for our 
Office of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions to 
this report are listed in appendix III. 

Signed by: 

Loren Yager, Director: 
International Affairs and Trade: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

To determine how the in-bond program addresses its trade, revenue, and 
cargo security functions, we examined relevant documents and conducted 
interviews to answer the following questions: (1) What is the in-bond 
system and to what extent is it used? (2) How has Customs Border 
Protection (CBP) managed the system to ensure that revenues are 
collected and trade concerns are minimized? and (3) How has CBP managed 
the system to ensure that security-related inspections are properly 
targeted? 

To obtain an understanding of the CBP in-bond system and assess the 
extent of its use, we analyzed laws, regulations, and relevant CBP 
policies, procedures, and related documents. We interviewed officials 
and examined documents at CBP headquarters and at six district port 
offices, including Buffalo, New York; Los Angeles/Long Beach, 
California; Laredo, Texas; Miami, Florida; New York, New York /Newark, 
New Jersey; and Seattle, Washington. Our work at the Seattle port 
district office included work at its Blaine, Washington, border port. 
We also visited the Port of Dallas, Texas, which is a major inland 
destination port for in-bond goods. We also discussed industry views of 
the in-bond program with the National Brokers and Forwarders 
Association of America, Association of American Railroads, American 
Trucking Association, and National Association of Foreign Trade Zones. 
The six CBP district offices we visited processed the greatest numbers 
of noncourier in-bond transactions from October 2004 to March 2005. We 
used data from this period because CBP officials stated that they had 
recently assembled data for this period and that would pose a 
substantial work load for them to obtain more recent 2006 data. 

To determine how CBP has managed the system to address revenue and 
trade concerns, we examined in-bond guidance, policies, procedures, and 
practices at CBP headquarters and at the ports visited. To identify 
previously identified weaknesses in CBP's management of trade and 
revenue concerns related to the in-bond program, we examined audit 
reports by GAO, DHS Inspector General and public accounting firms. We 
noted internal control weaknesses in the in-bond program identified in 
previous audit reports and discussed these weaknesses with CBP 
headquarters and port officials. We discussed views of CBP headquarters 
and port management personnel regarding any trade related and revenue 
risks associated with processing in-bond cargo and discussed actions 
taken to address these risks. We reviewed our previous work that 
assessed CBP's data reliability and internal controls. We found some 
inconsistencies between various data sets we received and reported 
these inconsistencies to CBP. These inconsistencies, however, did not 
indicate major discrepancies in the data, and for purposes of reporting 
on general in-bond issues, we found CBP's data sufficiently reliable. 

To determine how CBP has managed the system to ensure that security- 
related inspections are properly targeted, we examined CBP procedures 
for targeting security inspections of in-bond cargo and discussed these 
practices at CBP headquarters and at the ports visited. To assess the 
impact of not having entry information for in-bond cargo, we obtained 
data showing the impact of this information on the ATS security score 
assigned. We discussed views of CBP headquarters and port management 
personnel on security-related concerns associated with in-bond 
processing. 

We conducted our work from January 2006 through February 2007 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: Comments from the Department of Homeland Security: 

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix. 

U.S. Department of Homeland Security: 
Washington, DC 20528: 

April 2, 2007: 

Mr. Loren Yager: 
Director, International Affairs and Trade: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Yager: 

RE: Draft Report GAO-07-561, International Trade: Persistent Weaknesses 
in the In-Bond Cargo System Impede Customs and Border Protection's 
Ability to Address Revenue, Trade, and Security Concerns (GAO Job Code 
320369): 

The Department of Homeland Security (DHS) appreciates the opportunity 
to review and comment on the draft report referenced above. The 
Government Accountability Office (GAO) makes eleven recommendations to 
improve management of the in-bond program through better informed 
decisions affecting trade, revenue collection, and security goals. We 
agree with seven recommendations, disagree with three, and believe one 
should be closed as implemented. 

GAO makes three broad recommendations to the Secretary and the 
Commissioner of U.S. Customs and Border Protection (CBP). First, with 
respect to collecting more detailed information on the type and value 
of in-bond cargo, GAO recommends that: 

Recommendation 1.1: For all goods to be eligible for import into the 
United States require additional information at the time of arrival 
(i.e. the 10-digit Harmonized Trade Schedule number and more accurate 
value information). 

We disagree with the recommendation. Requiring 10-digit information and 
more accurate value information at the time of arrival leads to a major 
legal problem in that providing such detailed entry information will 
rise to the level of Customs business as provided by 19 USC 1641. If 
that is the case, only Customs brokers will be allowed to file in-bond 
entries and carriers will be barred from doing so. That will cause a 
revolutionary change in the way that in-bond business is done and will 
involve considerable pushback from the carrier community. Costs to the 
owner of the goods will rise because of the mandated added party to the 
filing. Under current law, in-bond entries are specifically exempted 
from Customs business as stated in 19 CFR 111.2. 

Recommendation 1.2: For all goods to be exported, revise the in-bond 
form (CBP Form 7512) to include the six-digit code from the Harmonized 
Commodity Coding and Classification System (Harmonized System). 

We agree with the recommendation. CBP personnel are amending 19 CFR 
Part 18. The first draft of the new in-bond regulations should be 
issued in March 2008. 

Recommendation 1.3: Use information collected in the revised in-bond 
form to ensure that the new Automated Commercial Environment (ACE) 
system can generate reports useful to CBP management in making 
prioritized, risk-based management decisions related to revenue and 
security risks. 

We agree with the recommendation. Full ACE deployment is expected by 
December 2011. 

Recommendation 1.4: Use information from the revised in-bond form to 
initiate the Stratified Compliance Examination and Cargo Selectivity 
process for in-bond movements at the arrival port instead of delaying 
this examination until after the cargo has been transported through the 
United States to the port of formal entry or exportation. 

We disagree with the recommendation. Stratified Compliance Examinations 
are 100% randomly generated trade exams that only apply to cargo for 
which formal entry has been made. For in-bond cargo, formal entry is 
not made until the cargo arrives at the port of destination. All in- 
bond cargo is screened for terrorism risk through the Automated 
Targeting System, and any high-risk cargo is already designated for 
inspection at the initial port of arrival. Export cargo is not subject 
to Stratified Compliance Examinations because no formal entry is ever 
made. Stratified Compliance Examinations do not enhance anti-terrorism 
efforts. 

Recommendation 1.5: Use information from the revised in-bond form to 
update Automated Targeting System security scores for in-bond movements 
at the port of arrival instead of delaying this process until after 
cargo has been transported through the United States to the destination 
port. 

We agree with the recommendation. CBP however will not be able to 
implement this recommendation until after new regulations have been 
approved and published. The first draft of the regulation changes is 
due March 31, 2008. 

Second, GAO recommends that with respect to improving monitoring of 
cargo moving within the in-bond system, CBP officials: 

Recommendation 2.1: Conduct an analysis of the extent of use of the in- 
bond system and the patterns of shipments within the system. 

We agree with the recommendation. CBP personnel will conduct an 
analysis to determine the percentage of in-bond shipments by type and 
will determine patterns that identify destination and origination 
ports. An estimated time for completion is the end of February 2008. 

Recommendation 2.2: Assess the systemic problems causing open in-bond 
transactions and impeding their identification. Make adjustments to ACE 
(Automated Commercial Environment) and provide appropriate tools to 
eliminate these problems and improve the capability of CBP officers, 
importers and shipping agents to track and close open in-bond 
transactions. 

We agree. CBP's Office of Field Operations has identified numerous 
systemic causes of in-bonds remaining in an open status, and forwarded 
these to CBP's Office of Information and Technology via memorandums in 
August 2006 and October 2006. The assessment is already completed. Full 
ACE deployment is expected by December 2011. 

Recommendation 2.3: Revise in-bond regulations so as to reduce the time 
allowed for transporting cargo and to limit the carriers' ability to 
change the final destination for cargo without CBP knowledge. 

We agree. CBP is amending 19 CFR Part 18. The first draft of the 
regulation changes is due March 31, 2008. 

Recommendation 2.4: Develop requirements, including penalties, to 
ensure that bondholders close in-bond documents within required 
timeframes. 

CPB has met the intent of the recommendation and it should be closed. 
These requirements already exist, as includes punishment provisions in 
the form of liquidated damages, as provided for in 19 CFR 18.2, 19 CFR 
18.8, and elsewhere. 

Recommendation 2.5: Prioritize closing in-bond records for shipments 
with high potential risks of security, law enforcement, and revenue 
loss, using updated information from the in-bond form. 

We disagree with the recommendation. CBP already employs risk based 
targeting for all shipments, including those destined for in-bond, and 
will continue to refine this targeting with regulation changes and 
system improvements, to ensure that all in-bond are properly closed. 

Third, in order to make the in-bond compliance measurement program a 
more effective tool for monitoring compliance with in-bond regulations, 
GAO recommends that CBP officials ensure that the current compliance 
measurement program (TINMAN) or any updated commercial compliance tool 
is consistently conducted/used by the ports so as to inform CBP 
national and port management of needed corrective actions. 

We agree. CBP will issue updated guidance to the field emphasizing the 
importance of conducting these audits timely and accurately reporting 
their findings. 

Technical comments will be provided under separate cover. Sincerely, 

Sincerely, 

Signed by: 

Steven J. Pecinovsky: 
Director: 
Departmental GAO/OIG Liaison Office: 

The following are GAO's comments on the Department of Homeland Security 
letter dated April 2, 2007. 

GAO Comments: 

1. We remain concerned that in-bond cargo routinely transits the United 
States without detailed descriptive information and may pose trade, 
revenue and security risks. However, in recognition of the legal 
concerns raised by DHS, we revised our recommendation to obtain 
additional information on in-bond cargo without requiring the 10 digit 
HTS number. In addition, we recommended that CBP--after 6 months of the 
implementation of new data requirements--report to Congress whether the 
enhance data obtained are adequate to address security and trade 
concerns or whether their current authority needs to be adjusted. 

2. We revised this recommendation to focus on using the additional 
information in CBPs' Cargo Selectivity process. Since the Stratified 
Compliance Examination represents a randomly generated trade compliance 
exam at cargo entry, CBP can develop similar information for in-bond 
cargo when it implements our recommendation to improve it's Tinman 
compliance measurement program. The revised recommendation indicates 
that CBP should use information from the amended in-bond form as input 
to the Cargo Selectivity process at the arrival port instead of 
limiting this process to cargo that has made entry for consumption. 

3. We modified the wording of this recommendation to state that CBP 
should develop a more systematic enforcement strategy in order to 
increase bondholder compliance in closing out open in-bond 
transactions. Although CBP has authority to issue penalties to 
bondholders for failure to close in-bond transactions, we noted a high 
number of open in-bond transactions at many CBP ports. CBP should 
consider strengthening its regulations to clearly communicate to 
bondholders their responsibility to close open in-bond transactions and 
increase enforcement of requirements to reduce the number of open in- 
bond transactions. 

4. We did not observe CBP efforts to prioritize closing open in-bond 
transactions based on the potential risk. Open in-bond records appear 
on CBP reports without any designation of the importance of individual 
records. With limited resources available, CBP should place a high 
priority on monitoring and closing open in-bonds transactions that pose 
the most significant risks. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Loren Yager, (202) 512-4128, or yagerl@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Virginia Hughes, Assistant 
Director; Francisco Enriquez; Timothy Fairbanks; and Jessica Kaczmarek; 
made significant contributions to this report. Ernie Jackson, Karen 
Deans, Etana Finkler, and Stan Kostyla also provided assistance. 

FOOTNOTES 

[1] The term "official entry" is used throughout this report to refer 
to the CBP process where importers or shipping agents are required to 
provide accurate appraisement and description of goods, as well as 
other detailed entry information for goods intended for consumption in 
the United Stated. Through this process CBP also assesses appropriate 
duties and taxes on imported goods that will enter the U.S. Commerce. 

[2] The carrier has 60 days by vessel, 30 days by land, and 15 days by 
air to deliver the in-bond cargo to the port of destination or 
exportation. (19 C.F.R. 18.2 and 19 C.F.R. 122.118.) 

[3] Sections 552 and 553 of the Tarriff Act of 1930, as amended (19 
U.S.C. 1552 and 1553). 

[4] GAO, Information Technology: Customs Has Made Progress on Automated 
Commercial Environment System, but It Faces Long-Standing Management 
Challenges and New Risks, GAO-06-580 (Washington, D.C.: May 31, 2006). 

[5] Two separate GAO reports completed in 1994 found that Customs could 
not readily determine the disposition of in-bond shipments. GAO, 
Financial Management: Control Weaknesses Limited Customs' Ability to 
Ensure That Duties Were Properly Assessed, GAO/AIMD-94-38, (Washington, 
D.C.: Mar. 7, 1994) and GAO, Financial Audit: Examination of Customs' 
Fiscal Year 1993 Financial Statements GAO/AIMD-94-119, (Washington, 
D.C.: June 15, 1994). 

[6] On March 1, 2003, the U.S. Customs Service was transferred to the 
new Department of Homeland Security and became part of U.S. Customs and 
Border Protection (CBP). 

[7] For merchandise that is admitted into a bonded warehouse or FTZ, 
duties and taxes are deferred until the goods are withdrawn for 
consumption. Goods may also be withdrawn from a bonded warehouse for 
export, thereby avoiding the payment of U.S. duties and taxes. Goods 
admitted to an FTZ may be further processed and incorporated into new 
products, such as automobiles or refined petroleum products. 

[8] Among the activities permitted in an FTZ are assembly or 
manufacturing of merchandise, as well as storing, packaging, and 
processing of cargo. 

[9] While there is a value field on the in-bond form (CBP Form 7512), 
the value provided is most often what CBP describes as a "shipper's 
valuation" for insurance purposes and not the actual value of goods. 

[10] The official entry summary (CBP Form 7501) is used to complete the 
entry for consumption and determine and collect duties and taxes on 
goods imported into and intended for consumption in the Unites States. 

[11] The HTS of the United States is the primary resource used by CBP 
for determining tariff classification for goods imported into the 
United States. HTS classifies a good by assigning a 10 digit tariff 
classification number, based on such things as its name and use, 
providing CBP detailed information to identify items entering the 
United States. The HTS is based on the international Harmonized 
Commodity Coding and Classification System (Harmonized System) six- 
digit code, which has been establish by the World Customs Organization 
and is used as the base for the tariff schedule for most countries. 

[12] The MO reports provide the ports with data on paperless and 
conventional in-bond movements that are overdue (MO7), delivered late 
(MO6), or delivered late for export (MO2). In-bond movements that are 
considered overdue will appear on the MO7 report if they have not 
arrived at the destination port within 90 days of departure. In-bond 
movements that have not been exported by the expiration of the lay 
order period in the destination port will appear on the MO2 report and 
should receive priority, according to the OFO Guide for In-bond Cargo 
handbook. 

[13] Cargo for which a second in-bond is issued after it reaches the 
port where it is expected to enter U.S. commerce or be exported. 

[14] Originally, the Tinman module in ACS was designed in response to a 
1994 GAO report, where we found that the U.S. Customs Service did not 
have a reliable means of monitoring the movement of in-bond shipments 
from one port to another because the data were not properly maintained. 
GAO, Financial Management: Control Weaknesses Limited Customs' Ability 
to Ensure That Duties Were Properly Assessed (GAO/AIMD-94-38, Mar. 7, 
1994). 

[15] Headquarters staff assign the Tinman exams and post-audits on a 
weekly basis. They determine the ports where the exam is to be 
conducted, the in-bond type, and whether the tasking is a destination 
or origin exam. In the case of post-audits, the specific in-bond number 
that is to be reviewed will also be provided. After the Tinman exams 
are assigned, it is at the discretion of the ports to determine the 
mechanics of the exam (e.g., which bond is to be reviewed, which 
station, etc.) 

[16] Other features of CBP's multilayer security strategy include a 
compliance measurement program that supplements ATS by randomly 
selecting shipments to be inspected to determine whether the shipment 
complies with supply chain security and trade laws; the Container 
Security Initiative (CSI) whereby CBP places staff at foreign ports to 
work with foreign counterparts to inspect high-risk cargo before it is 
shipped to the United States; and the Customs-Trade Partnership Against 
Terrorism (C-TPAT), which is a cooperative program between CBP and 
members of the international trade community in which private companies 
agree to take action to improve the security of their supply chains. 

[17] GAO, Homeland Security: Summary of Challenges Faced in Targeting 
Oceangoing Cargo Containers for Inspection, GAO-04-557T (Washington, 
D.C.: Mar. 31, 2004). 

[18] Cargo manifest transmission requirements are located in 
regulations promulgated under Section 343 of the Trade Act of 2002, 
Pub. L. No. 107-210, as amended by section 108 of the Maritime 
Transportation Security Act of 2002, Pub. L. No. 107-295. Cargo 
manifests are prepared by the carrier and are composed of bills of 
lading for each shipment loaded on a vessel to describe the contents of 
the shipments. Bills of lading are documents issued by a carrier 
describing the goods, the details of the intended voyage, and the 
conditions of transportation. Under 19 C.F.R.  4.7(b)(4), ocean 
carriers carrying bulk and break bulk cargo are not required to submit 
a manifest 24 hours before the cargo is loaded at a foreign port, 
provided, in the case of break bulk cargo, that they receive an 
exemption from CBP. Rather, these ocean carriers must present their 
manifests 24 hours prior to arrival in the United States if they use 
CBP's Automated Manifest System (AMS), a system designed to control 
imported merchandise from the time the carrier's cargo manifest is 
submitted to CBP until the cargo is properly entered and released by 
CBP. If a carrier does not use AMS, the carrier must submit the 
manifest to CBP upon arrival. 

[19] The four major ports included in the CBP analysis were Los 
Angeles, Long Beach, Newark, and New York. 

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