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GAO-09-512R: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 22, 2009: 

The Honorable John D. Rockefeller, IV: 
Chairman: 
The Honorable Kay Bailey Hutchison: 
Ranking Member: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Henry A. Waxman: 
Chairman: 
The Honorable Joe Barton: 
Ranking Member: 
Committee on Energy and Commerce: 
House of Representatives: 

Subject: Feasibility of Requiring Financial Assurances for the Recall 
or Destruction of Unsafe Consumer Products: 

In 2008, the Consumer Product Safety Commission (CPSC) announced that 
it had obtained the voluntary recall of 563 unsafe or potentially 
unsafe products by the companies that manufactured, imported, 
distributed, or sold the products--the largest number for the agency in 
the past 10 years. In the prior year, CPSC announced 472 recalls--which 
was also an increase from the previous year and included some high- 
profile recalls of lead-tainted toys--leading some consumer groups to 
call 2007 the "year of the recall." Consumer products can be recalled 
for a variety of reasons, including violations of safety standards, 
incidents of injuries that can occur from the design or manufacture of 
a product, or other conditions that present an imminent or substantial 
hazard to consumers. Since 1979 there have been few instances in which 
CPSC could not obtain cooperation from manufacturers or importers to 
conduct recalls, either because these companies did not have the 
financial resources to conduct a recall or because the companies 
refused to assume responsibility for a recall. This included troubled 
recalls involving more than 1.5 million imported cribs associated with 
multiple deaths of children. Another recall of imported tires, 
conducted under the National Highway Traffic Safety Administration, was 
the responsibility of a small importer that did not have the resources 
to conduct an effective recall. 

These, and similar events, have raised concerns from consumer groups 
and others about the ability of businesses to conduct effective recalls 
and of the federal government to ensure consumer safety. In addition to 
these concerns, CPSC reports that more than two-thirds of recalled 
products in 2008 were imported. The proportion of consumer goods sold 
in the United States that are manufactured abroad has shifted 
significantly since CPSC was created in the 1970s. From 1997 to 2007, 
for example, the amount of imported consumer goods sold in the U.S. has 
more than tripled--an increase of 217 percent--according to CPSC. 

In response to these issues, Congress in 2008 passed the Consumer 
Product Safety Improvement Act (CPSIA), which greatly expanded CPSC's 
authorities over recalls and its ability to ensure the safety of 
products under its jurisdiction, including imported goods.[Footnote 1] 
Neither CPSIA nor other existing laws require companies to demonstrate 
that they have the financial resources to recall or destroy unsafe or 
potentially unsafe products.[Footnote 2] Instead, section 224 of CPSIA 
mandated that GAO study the feasibility of requiring companies to 
demonstrate their financial ability to recall or destroy unsafe 
products by posting funds in escrow, insurance, or security, such as a 
bond. This law required GAO to submit, no later than February 14, 2009, 
a report to the Senate Committee on Commerce, Science, and 
Transportation and the House Committee on Energy and Commerce. As 
agreed with your offices, we briefed your staffs on February 13, 2009, 
on the results of our work. This product documents our compliance and 
provides supplementary information based on our written and oral 
briefing; enclosure I contains a copy of our briefing slides. Our 
objectives were to describe (1) the potential policy options for 
assuring CPSC that companies have adequate resources for the recall or 
destruction of consumer products, (2) the factors affecting 
implementation of these options, and (3) the potential consequences of 
implementing a financial assurance requirement, as one policy option, 
including potential benefits and disadvantages. 

To identify policy options that could ensure that companies have 
adequate financial resources for the recall or destruction of unsafe 
products, we reviewed relevant laws and interviewed representatives of 
44 organizations from a variety of stakeholder groups, including trade 
associations representing consumer product companies, consumer 
interests, and financial services firms; international trade experts; 
and consultants that assist companies with product recalls. To identify 
the factors affecting implementation of these options, we relied on the 
interviews described above, and on interviews with officials from CPSC, 
Customs and Border Protection, the Office of the U.S. Trade 
Representative, and the U.S. Small Business Administration Office of 
Advocacy. We also convened a roundtable of 20 participants representing 
consumer product companies, financial services firms, product recall 
consultants, and federal government agencies on January 30, 2009, at 
GAO headquarters in Washington, D.C., to foster a dynamic discussion of 
the key options and challenges affecting their implementation.[Footnote 
3] We selected roundtable participants primarily based on their ability 
to provide a broad range of perspectives, level of expertise, 
geographic proximity, and availability. To identify potential 
consequences of implementing a financial assurance requirement, we 
relied on our interviews and the roundtable discussion. Finally, we 
analyzed CPSC recall announcements dating back to 1979 for incidences 
in which companies went bankrupt or did not have the financial 
resources to conduct a recall. We found this information on CPSC's Web 
site by using the search terms, "bankruptcy," "bankrupt," and 
"liquidation." As a data reliability measure, GAO provided a draft of 
this analysis to CPSC and received technical comments, which we 
addressed as appropriate. These data are limited in that they do not 
speak to the effectiveness of the thousands of recalls that have been 
conducted under CPSC's jurisdiction or the financial condition of the 
companies that conducted them. 

We conducted our work from September 2008 to April 2009 in accordance 
with all sections of GAO's Quality Assurance Framework that are 
relevant to our objectives. This framework requires that we plan and 
perform our work to obtain sufficient, appropriate evidence to provide 
a reasonable basis for our findings and conclusions based on our 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our objectives. 

Results in Brief: 

We identified a variety of approaches to assure the federal government 
that companies have the financial resources to recall or destroy unsafe 
products. Many of these approaches took the form of financial 
instruments that companies could be required to obtain in amounts 
established by statute or regulation to cover, for example, the 
projected costs of a recall. These financial instruments included an 
escrow account, insurance policy, or surety bond to guarantee a 
company's financial stability or ability to perform a recall, as well 
as line of credit guaranties, guaranties of personal or corporate 
assets, or liens on personal or corporate assets. Alternatively, many 
roundtable participants supported providing CPSC with funds to assist 
companies in conducting a recall, citing the approach as a potentially 
more efficient and suitable approach for industry and the federal 
government given the low incidence of troubled recalls in CPSC's 
history. Nonfinancial options suggested by several sources we 
interviewed include requiring companies to document their strategies 
for ensuring product safety or conducting product recalls. Another 
option is to make no change, according to some roundtable participants 
and others we interviewed, citing the low number of inadequately funded 
recalls under CPSC and the ability of companies to generally fund 
recalls. They said CPSC should use its existing authorities to compel 
companies to conduct effective product recalls. For example, some 
participants said CPSC should strengthen efforts to obtain cooperation 
from companies throughout the supply chain, as well as act more quickly 
on its mandatory recall authority by filing an administrative complaint 
when a consumer product company says it has no resources to conduct a 
recall.[Footnote 4] 

Several roundtable participants and those we interviewed identified 
challenges that could complicate efforts to implement financial 
assurance options involving the use of financial instruments or a CPSC 
fund. Although they suggested various strategies for mitigating some of 
these challenges, significant limitations exist in using the proposed 
options as financial assurance for the recall and destruction of unsafe 
products. Representatives of consumer product companies said many 
companies--especially small businesses--would be unable to afford the 
cost of posting assurance, especially during difficult economic times 
and if the required amount of assurance were high. Those representing 
financial services firms asserted that many of the proposed financial 
instruments are not currently designed for consumer product recalls and 
that a firm's willingness to underwrite consumer product recalls would 
depend on a variety of factors, including the risk profile of companies 
seeking coverage and the amount of coverage sought. Enforcement of a 
financial assurance requirement presents challenges in that CPSC does 
not have the resources or experience to administer and enforce this 
type of requirement. Furthermore, there is no program or process that 
tracks all domestically produced consumer goods or companies, making it 
difficult to identify companies that may need to comply with a 
requirement. The proposed financial instruments also present challenges 
because firms may not make them available to consumer product companies 
that are financially unstable. In addition, it is unclear whether a 
requirement to post assurance using any of the financial instruments we 
studied would fully address cases involving companies that refused to 
assume responsibility for the recall of products produced by 
manufacturers it purchased, or recalls companies find to be financially 
catastrophic. We also note that a requirement targeted to the 
destruction or recall of goods under CPSC's jurisdiction would not 
address some of the troubled recalls that have occurred involving other 
industries such as food, drugs, and automotive parts.[Footnote 5] 

Although roundtable participants and others we interviewed identified 
several benefits and disadvantages of implementing policies that ensure 
resources exist to recall or destroy unsafe products, there was no 
consensus on whether there is a need to pursue policy changes at this 
time. Consumer interest groups told us some of the potential benefits 
of requiring financial assurance, either through the use of financial 
instruments or a CPSC fund, include ensuring the public's safety and 
improving the effectiveness of recalls conducted under CPSC, among 
other things. However, some roundtable participants and others we 
interviewed identified several potential negative consequences, 
including potentially limiting growth and innovation in consumer 
product companies and distorting incentives for companies to conduct 
voluntary recalls. Despite these potentially negative consequences, 
consumer interest groups said some financial backstop is needed to 
protect consumers when companies fail to effectively recall hazardous 
products and to address conditions that may increase the incidence of 
troubled recalls, such as increased U.S. reliance on imported products 
and new statutory provisions that require, among other things, testing 
products for lead. However, many others we interviewed and those that 
participated in the roundtable questioned the need for requiring 
financial assurances, citing the low incidence of product recalls for 
which funding is not available and the low cost of most recalls, which 
companies have funded through operating income or insurance. They also 
cited incentives that will likely continue to facilitate cooperation 
from the industry to conduct recalls voluntarily, including the ability 
of consumers to sue companies to seek remedies for damages from the use 
of unsafe products, the risk of damaging a firm's reputation from being 
associated with unsafe products, and CPSC authorities to fine companies 
for lapses in product safety. 

We provided a draft of this report to Customs and Border Protection 
(CBP), the Consumer Product Safety Commission, and the Office of the 
U.S. Trade Representative for review and comment. We received technical 
comments from CPSC staff and USTR that we incorporated where 
appropriate. CBP did not provide written or technical comments. 

Background: 

CPSC was created in 1972 under the Consumer Product Safety Act to 
regulate consumer products to protect the public against those products 
that pose an unreasonable risk of injury and death.[Footnote 6] In this 
role, CPSC oversees more than 15,000 types of consumer products, 
including household appliances and furniture, toys, and children's 
products. CPSC issues and enforces mandatory safety standards and 
participates in the setting of voluntary standards; conducts compliance 
activities, such as obtaining the recall of hazardous products; and 
alerts the public to and provides information about safety hazards of 
and safe practices for using consumer products. According to CPSC, its 
objectives for companies conducting recalls are (1) to locate all 
defective products as quickly as possible, (2) to remove these products 
from the distribution chain and from the possession of consumers, and 
(3) to notify the public about the defect and the actions being taken 
to correct the hazard (e.g., refund consumers the price of the product, 
repair the defect, or replace the product). According to CPSC 
officials, products may be destroyed as part of a product recall or at 
a port of entry into the United States.[Footnote 7] 

The majority of CPSC's recalls are conducted by companies on a 
voluntary basis, with CPSC negotiating a corrective action plan with 
the responsible companies. According to CPSC officials, the agency 
rarely uses its authority to seek a mandatory recall, citing a high 
level of cooperation from companies. The officials said some companies 
pursue recalls voluntarily in acknowledgment of CPSC's authorities to 
seek mandatory recalls through litigation or to seek civil penalties 
for engaging in prohibited acts, such as, among other things, failing 
to report hazardous products.[Footnote 8] 

Moreover, although recalls are typically conducted by manufacturers, 
CPSC holds all companies along the supply chain responsible for 
recalls, including those companies that sell, import, or distribute 
consumer products. As such, according to CPSC, the agency is generally 
able to obtain recalls from these other entities when a manufacturer is 
unable to do so. 

The Consumer Product Safety Improvement Act (CPSIA) includes provisions 
that may possibly affect the frequency of recalls and, perhaps 
consequentially, the number of companies lacking adequate financial 
resources to carry out recalls. In particular, the CPSIA established, 
among other things, a stricter lead content standard for children's 
products, which could increase the number of recalls from companies 
unable to meet these new requirements.[Footnote 9] The CPSIA also made 
it easier for CPSC to require companies to stop distributing unsafe 
products and strengthened CPSC's bargaining power over corrective 
action plans when companies pursue voluntary recalls. Also, a possible 
increase in CPSC's budget and resources may result in a much more 
active staff that is able to more quickly investigate, test, and demand 
corrective action by companies. Furthermore, the CPSIA gave authority 
to each state's attorney general to enforce consumer product safety 
standards and regulations, which could result in increased enforcement 
actions by CPSC to avoid multiple different approaches at the state 
level. CPSIA brought about another change that may counteract potential 
increases in the number of product recalls. Specifically, CPSIA 
increased the maximum civil penalty from $8,000 to $100,000 for 
individual violations and from $1.825 million to $15 million for a 
related series of violations, which could motivate companies to 
cooperate with CPSC on voluntary recalls in order to avoid potentially 
costly penalties.[Footnote 10] However, the full extent of the impact 
of these, and other, provisions of the CPSIA is unknown at this time 
because implementation is ongoing. 

Using data from CPSC's Web site, we identified 15 recall events dating 
back to 1979 involving companies that did not have adequate financial 
resources to carry out a recall. These recalls involved 12.8 million 
units, mostly fire sprinklers, cribs, and wall heaters, but also 
included gas grills, thermostat regulating devices, worm probes, and a 
pull toy.[Footnote 11] For many of these events, the responsible 
company--typically the manufacturer or importer--was bankrupt or in the 
process of declaring bankruptcy at the time of CPSC's recall 
announcement. In these cases, the responsible manufacturer or importer 
may have still provided consumers with a remedy for a limited time. To 
protect consumer interests, CPSC may have issued public notice advising 
consumers to either destroy to stop using the recalled product, or 
retailers may have refunded consumers the purchase price of the 
product. Some of the more recent events, notably those involving more 
than 1.5 million cribs in 2007 and 2008, involved issues relating to 
the entities that purchased or succeeded the bankrupt responsible 
company. In that case, the acquiring company refused to conduct a 
recall, claiming that it was not responsible for products that had been 
manufactured by a company whose assets it had purchased after the 
products were made. See enclosure II for additional details on these 15 
recall events, including the size and scope of each recall. 

Out of the three financial instruments specified in the mandate, only 
insurers offer a product specifically designed to cover costs of 
consumer product recalls. Consumer product companies that choose to 
manage risk associated with potential product recalls through insurance 
generally either obtain an insurance policy from a private insurer or 
self-insure the risk by underwriting it to a captive insurance 
entity.[Footnote 12] According to some financial services 
representatives, insurers in the United States currently underwrite 
limited amounts of product recall insurance, with most of the market 
written for food and beverage products and comparatively little written 
for consumer goods. Some insurers said that for lower limits of 
coverage--generally $2 million or less--they may include coverage for 
withdrawing recalled products from distribution, among other 
activities, as part of a commercial general liability policy and, 
according to an insurer, may or may not charge a premium for this 
coverage.[Footnote 13] For higher limits--such as above $10 million--
they said that policyholders typically obtain a customized policy that 
is written on a stand-alone basis, and not part of a general liability 
policy. Some insurance brokers also indicated that, as a condition of 
underwriting, insurers increasingly require policyholders to develop 
policies and procedures for conducting recalls and maintaining product 
quality. For this reason, and because recalls can result in potentially 
large claims, product recall coverage is generally viewed by those we 
interviewed as an expensive form of insurance. The product recall 
insurance market covering consumer goods shows indications of 
expanding, with brokers and consultants reporting a noticeable increase 
in requests for this type of insurance, including from Asian 
manufacturers. Also, a risk consulting firm that designs computer 
models to help insurers understand their exposures has said it 
envisions developing models for recall risks within a few years, which 
could increase the willingness of some insurers to expand their product 
recall coverage. 

Potential Policy Options to Ensure That Companies Have Resources to 
Recall or Destroy Unsafe Products: 

We identified a variety of approaches to assure the federal government 
that companies have the financial resources to recall or destroy unsafe 
or potentially unsafe products. Many of these approaches took the form 
of financial instruments that companies could be required to obtain in 
amounts established by statute or regulation to cover, for example, the 
projected costs of a recall. These financial instruments included an 
escrow account, insurance policy, or bond to guarantee a company's 
financial stability or ability to perform a recall. Additionally, 
roundtable participants and others we interviewed suggested that line 
of credit guaranties, guaranties of personal or corporate assets, or 
liens on personal or corporate assets could be suitable financial 
instruments. As discussed in table 1, these instruments function 
differently, leading some to say that if companies were required to 
post financial assurance, the federal government should allow them to 
choose from among a variety of financing options.[Footnote 14] 

Table 1: How Proposed Financial Instruments Might Work as Financial 
Assurance: 

Option: Escrow; 
How option might work: CPSC develops master escrow agreement and 
partners with one or more banks that act as escrow agents to establish 
escrow accounts with consumer product companies. Companies deposit cash 
or other approved assets in the account; the bank holds the funds until 
CPSC approves disbursement, and; CPSC, an agent of CPSC, or the 
consumer product company receives the funds to conduct or complete the 
recall. 

Option: Insurance; 
How option might work: CPSC establishes coverage requirements, 
including minimum limits and covered risks. Consumer product companies 
purchase required coverage from private insurers and submit claims to 
cover costs of a troubled recall. 

Option: Bond; 
How option might work: Sureties assess the financial strength, 
character, and capability of a consumer product company to perform a 
recall in accordance with requirements established by statute or 
regulation. CPSC makes a claim on the bond if a company failed to 
comply with regulatory requirements. The surety would pay CPSC for its 
claim, or it could conduct the recall according to regulation. 

Option: Line of credit guaranty; 
How option might work: A consumer product company pays an annual fee to 
access a line of credit from a financial institution in an amount 
established by CPSC to fund potential recalls. 

Option: Guaranty of personal or corporate assets; 
How option might work: Sole proprietors or the senior officers or 
principals of consumer product companies provide a written guaranty to 
CPSC that personal or corporate assets, such as real estate or 
machinery, would be available to fund potential recalls. 

Option: Lien on personal or corporate assets; 
How option might work: CPSC receives a security interest in the 
personal assets of a sole proprietor or the corporate assets of a 
consumer product company to prioritize its right to collect payment in 
the event of a troubled recall before other creditors collect payment 
on unsecured claims. 

Source: GAO. 

[End of table] 

Instead of requiring any of the previously described financial 
instruments, many roundtable participants supported the idea of 
providing CPSC with funds to assist companies in conducting a recall, 
citing it as a potentially more efficient and suitable approach for 
industry and the federal government given the low incidence of troubled 
recalls in CPSC's history, among other things. CPSC could maintain an 
account to fund troubled recalls by completing them itself or through 
its agent, or by providing the responsible company with funds to 
complete a recall. Funding sources could include federal 
appropriations, assessments on consumer product companies, or civil 
penalties CPSC obtains from consumer product companies for violations 
of safety standards. Unlike the other proposed financial instruments, 
this fund could potentially cover recalls where the responsible company 
is no longer in business and no other company can be held responsible 
for the recall. 

Several sources we interviewed also suggested nonfinancial options to 
ensure that companies are better prepared to recall unsafe products, 
including requiring companies to document their strategies for ensuring 
product safety or conducting product recalls. A consumer products trade 
association said that the best way to deal with potential recalls was 
to prevent problems from happening in the first place and suggested 
that companies be required to develop quality assurance plans.[Footnote 
15] Alternatively, some recall consultants we interviewed told us that 
a requirement to develop product recall plans could help companies 
mitigate the cost of potential recalls by virtue of increasing their 
awareness of how to budget for them.[Footnote 16] 

The final option suggested was to make no change to the current system. 
Some roundtable participants and others we interviewed who suggested 
this option cited the low number of inadequately funded recalls under 
CPSC and the ability of companies to generally fund recalls with 
operating income or insurance, among other things. They said that CPSC 
should do more to use its existing authorities to compel companies to 
conduct effective product recalls. For example, some participants said 
that CPSC should strengthen efforts to obtain cooperation from 
companies throughout the supply chain, as well as act more quickly on 
its mandatory recall authority by filing an administrative complaint 
when a consumer product company said that it had no resources to 
conduct a recall.[Footnote 17] One roundtable participant said that 
CPSC has not pushed companies enough to recall unsafe products. 
According to CPSC, the agency has rarely acted on its mandatory recall 
authority, citing a high level of cooperation from the companies it 
regulates to conduct voluntary recalls. Moreover, a CPSC official said 
that if using its mandatory recall authority were perceived as 
penalizing companies that otherwise comply with statutory reporting 
requirements--the same ones that become the basis for some voluntary 
recalls--then the agency's ability to obtain voluntary recalls could be 
negatively affected. Nonetheless, as recently as 2001, they filed suit 
against the manufacturers of defective fire sprinklers and obtained 
cooperation from some in recalling the product. For one company that 
did not have the resources to conduct a recall, CPSC obtained their 
cooperation in notifying building owners to replace the sprinklers. 

Some Challenges Could Make Implementing an Assurance Requirement 
Difficult: 

Several roundtable participants and those we interviewed identified 
challenges that could complicate efforts to implement alternative 
financial assurance options. Some of these challenges were specific to 
stakeholder groups, particularly the financial services industry, and 
others were specific to the financial instruments themselves. However, 
strategies that were suggested could mitigate some of these challenges 
and make a financial assurance requirement more viable. 

Challenges Specific to Consumer Product Companies, Financial Services 
Industry, and CPSC: 

Those we interviewed and roundtable participants identified several 
major factors and challenges that affect the feasibility of 
implementing a financial assurance, either through the use of a 
financial instrument requirement or CPSC fund. First, stakeholder 
groups representing businesses said that a financial assurance 
requirement would be cost-prohibitive for many companies--especially 
for small businesses and during difficult economic times--if the amount 
of resources needed to conduct a recall were high. A variety of sources 
have indicated that recalls can cost from a few thousand dollars to 
tens of millions of dollars depending on the industry, product, and 
corrective action pursued. For example, items that require specialized 
repairs, such as fire sprinkler systems, might be more costly to recall 
than toys and other low-priced items, which consumers tend to discard 
rather than return for repair or other replacement. 

Those representing the financial services industry asserted that 
another challenge is that financial services firms might not have 
enough capacity to meet the potential demand for insurance or other 
coverage because of the limited number of large and specialized firms 
that could be willing to provide the coverage. They also said that 
firms--such as those that provide bonds--would be reluctant to provide 
coverage for recalls if only high-risk consumer product companies were 
subject to a financial assurance requirement or if potential costs for 
recalls rose to millions of dollars. Some suggested that financial 
service providers might be unwilling to pay for relatively costly 
remedies designated by CPSC, such as the repair and replacement of 
items. In addition, those we interviewed and roundtable participants, 
indicated that the willingness and ability of financial service firms 
to extend coverage for product recalls would depend on the terms and 
conditions of a financial assurance, including the financial service 
firm's obligations, types of recall events or company actions that 
trigger provision of coverage, and pricing. For example, surety bonds 
are typically designed to cover short-term obligations of two years or 
less, but a product can be recalled after several years in commerce. 
Some suggested that financial service firms might be unwilling to pay 
for recall costs triggered by a voluntary recall, which constitute the 
majority of CPSC recalls. Moreover, pricing these new instruments would 
also be difficult because the financial firms would need to fully 
understand all the risk challenges of both the companies and their 
products--an especially daunting task if all companies were required to 
obtain coverage. Many of these financial instruments--excluding 
insurance--are not currently designed for consumer product recalls, so 
financial services firms would have to design financial products to 
cover product recalls. 

CPSC officials and others said, moreover, that any financial assurance 
requirement would be challenging to enforce. They said CPSC did not 
have the resources or experience to administer and enforce an assurance 
requirement. Moreover, consumer products trade associations reported 
there is no program or process that tracks all domestically-produced 
consumer goods or companies doing business in the United States, making 
it difficult to identify companies that may need to comply with this 
requirement. Any financial assurance requirement that is targeted at 
imported products could be perceived as a barrier to trade and 
implicate U.S. obligations under international trade agreements. 

Challenges and Limitations Specific to Implementing Financial 
Instruments: 

Those we interviewed and roundtable participants identified specific 
issues that were associated with using each of the financial 
instruments or CPSC fund to meet a financial assurance requirement. For 
example, according to financial services representatives, product 
recall insurance offered very limited coverage, would be too expensive 
for many companies needing large amounts of coverage, and was generally 
not available to the riskiest companies or industries. Because 
insurance relies on spreading risk among a broad range of companies, it 
would not be a viable financial tool if applied only to the riskiest 
companies. Escrows, as another financial instrument, allow companies to 
accrue interest on funds they set aside. However, escrows are difficult 
to establish without first determining the specific amount of money to 
set aside. Escrow accounts could also tie up a company's resources to a 
greater extent than the other proposed financial instruments and could 
be particularly burdensome during difficult economic conditions. A bond 
program might not be an appropriate option for ensuring that company 
funds were available for recalls but could be used to keep financially 
unstable companies from engaging in commerce due to surety firms' 
practice of prescreening companies for financial and operational 
stability. Companies that are in poor financial condition would have 
similar problems obtaining line of credit guaranties or providing 
personal or corporate guaranties, although these options might be 
comparatively less expensive and could potentially require less capital 
than other options. A CPSC fund could target resources to troubled 
recalls, but specific parameters and controls on the use of funds and 
capitalization would be needed for potentially large or catastrophic 
recalls. Some roundtable participants raised the concern that the 
availability of CPSC funds for recalls could create a disincentive for 
companies throughout the supply chain, such as retailers, to 
voluntarily cooperate with CPSC in conducting and paying for recalls 
when a manufacturer was unable to do so. 

A financial assurance requirement targeted to products under CPSC 
jurisdiction and that uses financial instruments we identified or a 
CPSC fund, faces several major limitations. It is unclear whether a 
requirement to post assurance using any of the financial instruments we 
studied would fully address cases involving companies that do not 
assume responsibility for recalled products produced by entities it 
purchased. It is also unclear whether highly catastrophic events, such 
as the incomplete recalls of fire sprinklers, could be adequately 
covered by any of the financial assurance options we studied, given 
that the cost of repair, replacement, or refund could be very high. A 
requirement targeted to the destruction or recall of goods under CPSC's 
jurisdiction would not address some of the troubled recalls that have 
occurred involving other industries such as food, drugs, and automotive 
parts. 

Strategies for Mitigating Challenges: 

Those we interviewed and roundtable participants suggested various 
strategies for mitigating some of the challenges that could potentially 
affect implementation of the proposed financial options. To make a 
financial assurance more affordable, for example, several interviewees 
and roundtable participants suggested that companies could be allowed 
to choose the type of financial coverage that would be most cost- 
effective, an option that would be particularly beneficial for low- 
margin or small businesses. Some suggested that a financial assurance 
requirement be targeted towards specific types of companies or 
industries, such as those with a high incidence of troubled recalls. 
For example, one individual suggested that small businesses be excluded 
from meeting a financial assurance requirement and some suggested that 
a CPSC fund be created to target only those companies with troubled 
recalls. Furthermore, the terms and conditions of any requirement can 
be used to manage affordability and availability. For example, minimum 
financial coverage requirements should be set at a level low enough for 
companies to afford the coverage, yet high enough to meet the policy 
objective, such as covering the cost of a potential recall. Other terms 
and conditions that can affect the cost to companies, as well as the 
willingness of financial services firms to provide coverage, include 
the specific recall activities that an assurance would be required to 
address, as well as the point in time when coverage would be required-
-either once a product had been produced or once the need for a recall 
had been determined. 

In addition, clear policy goals should be established before devising 
the financial assurance requirement. According to some roundtable 
participants, for those rare instances in which having some form of 
financial backstop to protect consumers from unsafe products may be 
useful, the success of any new policy option depends on how well it 
matches the specific policy objectives for covering troubled recalls. 
For example, if the purpose of the requirement is to prevent 
financially weak companies from selling products, those we contacted 
said a bond program might be a suitable solution because sureties are 
unlikely to underwrite bonds for companies that cannot demonstrate the 
wherewithal to recall goods. This is because surety firms screen 
companies on their ability to perform either financially or 
operationally before underwriting a bond on their behalf, whereas other 
instruments we studied do not directly screen companies. In contrast, 
if the purpose is to ensure that resources are available to conduct a 
troubled recall, then some suggested a CPSC fund might be suitable 
given the infrequency of these events that make other financing options 
comparatively more onerous for consumer product companies and CPSC. 
However, care should be taken that such a fund does not inhibit the 
maturation of an insurance market or other private-sector solution 
covering product recall risks by crowding out, or competing with, 
insurers or others willing to assume these risks. To achieve this, some 
roundtable participants said a fund should be narrow in scope to fund 
only the most crucial recall activities, such as public notification, 
and be used in only the most critical circumstances. Also, some 
roundtable participants said that if civil penalties become the source 
of the funds, then controls should be designed to anticipate how this 
might affect the incentives facing CPSC to pursue civil penalties on 
companies under its jurisdiction. 

To improve CPSC's ability to enforce a financial assurance requirement, 
some sources suggested requiring companies to register with CPSC, 
thereby creating a means to track companies or products under its 
jurisdiction and enabling CPSC to identify companies that may need to 
comply with a requirement. Alternatively, some roundtable participants 
suggested that CPSC may have existing authority it could use to request 
more financial information from consumer product companies. 

A Financial Assurance Requirement Could Provide Benefits but May Have 
Negative or Unintended Consequences, with No Consensus on the Need for 
a Financial Assurance Requirement at this Time: 

Although roundtable participants and others we interviewed identified 
several benefits and disadvantages of implementing policies that ensure 
resources exist to recall or destroy unsafe products, there was no 
consensus on whether there is a need to pursue policy changes at this 
time. Consumer interest groups told us that a financial assurance 
requirement mandating the use of financial instruments or a CPSC fund 
would help ensure the public's safety. This would be particularly 
important when economic conditions put pressure on companies to lower 
costs, potentially compromising product quality and increasing the 
incidence of troubled recalls. According to one group, a requirement 
would have been particularly useful in the recent and incomplete recall 
of a large number of imported cribs that were associated with at least 
two infant deaths and that caused much confusion among consumers about 
how to repair the crib. Further, such a requirement could help improve 
companies' quality controls and standards if companies needed to meet 
underwriting requirements for financial services firms. For example, as 
a condition of underwriting, insurers typically require companies to 
document their quality assurance and product recall plans and a trade 
association told us surety firms would likely require companies to 
carry recall insurance as a condition of qualifying for a bond. 
Finally, these consumer interest groups said a financial assurance 
requirement could improve the effectiveness of recalls conducted under 
CPSC, given that the agency has made limited use of its mandatory 
recall authority.[Footnote 18] 

However, some roundtable participants and others we interviewed 
identified several potentially negative consequences that could affect 
companies, consumers, and U.S. exports. For example, the cost 
associated with providing financial assurance could limit growth and 
innovation in consumer product companies and cause bankruptcies, 
especially among small business or businesses in low-margin industries, 
such as toys. Also, it could distort incentives for companies to 
conduct voluntary recalls or continue risk management programs that 
support product safety because coverage would be available for these 
events. Finally, some international trade experts noted that any 
financial assurance requirement could cause other countries to 
establish similar requirements for U.S. exports, particularly if the 
requirement were viewed as a trade barrier on goods imported to the 
United States. 

Despite these potentially negative consequences, consumer interest 
groups said some financial backstop was needed to protect consumers 
when companies fail to effectively recall hazardous products. Increased 
U.S. reliance on imported products and new statutory provisions that 
require, among other things, testing products for lead, may also 
increase the incidence of troubled recalls. Finally, CPSIA also 
strengthened CPSC's recall authorities, which may create additional 
troubled recalls depending on the extent to which CPSC exercises its 
new authorities over product recalls. 

However, many others we interviewed and those that participated in the 
roundtable questioned the need for such a requirement, citing, among 
other things, the low incidence of product recalls for which funding is 
not available, recent statutory changes that improved product safety 
standards, and the low cost of most recalls, which companies have 
funded through operating income or insurance. They also cited 
industry's increased attention to product quality after the high 
profile recalls of 2007. A variety of incentives appear to contribute 
to a high level of cooperation from industry to conduct voluntary 
recalls. For example, CPSC has authority to require companies to recall 
unsafe products involuntarily and to assess civil penalties against 
companies that fail to meet certain safety standards. CPSIA expanded 
these authorities by, for example, increasing the maximum civil penalty 
amount from $1.825 million to $15 million for a related series of 
violations.[Footnote 19] Other incentives that will likely continue to 
facilitate cooperation from industry include the risk of damaging a 
company's reputation by being associated with the manufacture or sale 
of unsafe products, and U.S. tort law that allows consumers to sue 
companies for liability associated with unsafe products. 

Agency Comments: 

We provided a draft of this report to Customs and Border Protection 
(CBP), the Consumer Product Safety Commission, and the Office of the 
U.S. Trade Representative for review and comment. We received technical 
comments from CPSC staff and USTR that we incorporated where 
appropriate. CBP did not provide written or technical comments. 

We are sending copies of this report to the Consumer Product Safety 
Commission, Customs and Border Protection, the Office of the U.S. Trade 
Representative, and interested congressional committees. In addition, 
the report will be available on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions, please contact me at (202) 
512-8678 or sciremj@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Major contributors to this report were Debra 
Johnson, Assistant Director; Meghana Acharya; Emily Chalmers; Elizabeth 
Guran; Linda Rego; and Kathryn Supinski. 

Signed by: 

Mathew Scirè: 
Director, Financial Markets and Community Investment: 

Enclosures: 

[End of section] 

Enclosure I: Briefing to the Senate Committee on Commerce, Science, and 
Transportation and the House Committee on Energy and Commerce: 

Feasibility of Financial Assurances for Consumer Product Recalls: 

Briefing to the House Energy and Commerce Committee and Senate 
Commerce, Science, and Transportation Committee: 

February 13, 2009: 

Overview: 

* Objectives; 
* Summary of Findings; 
* Background; 
* Scope and Methodology; 
* Discussion of Findings. 

Objectives: 

In response to a mandate in the Consumer Product Safety Improvement Act 
of 2008, GAO addressed the following objectives:[Footnote 20] 

(1) Identify public policy options that the Consumer Product Safety 
Commission (CPSC) could use to ensure that companies have the resources 
to conduct product recalls, including destroying recalled products. 

(2) Identify factors that could affect the feasibility of implementing 
the proposed policy options. 

(3) Identify potential consequences of requiring a financial assurance, 
as one policy option, including potential benefits and disadvantages. 

Summary of Findings: 

Public policy options for ensuring that companies can carry out recalls 
include the use of financial assurances and other options. 

* Financial assurance options such as escrow, insurance, or bond, as 
well as letter of credit, guarantee of, or lien on personal or 
corporate assets, and a CPSC fund for recalls. 

* Nonfinancial options, such as requiring quality assurance or recall 
plans. 

* No change to current laws, but have CPSC make better use of existing 
recall authorities. 

Factors affecting the feasibility of implementing the financial 
assurance options include: 

* The cost to businesses, 

* The capacity of the financial services industry to provide coverage, 

* Terms and conditions, and, 

* Enforcement mechanisms. 

Potential consequences of a financial assurance requirement include 
potential improvements to consumer safety, but many stakeholders 
question the need for such a requirement, citing the low incidence of 
CPSC recalls for which companies could not pay, among other things. 

Background: 

CPSC oversees more than 15,000 types of consumer products, including 
household products, toys, children’s products, and sports products, 
among other things. 

Recalls conducted under the jurisdiction of CPSC are intended to 
protect consumers from unsafe or potentially unsafe products. 

CPSC may require companies to conduct recalls, but most recalls have 
been voluntary. 

* CPSC reported that all recalls it oversaw in fiscal year 2008 were 
voluntary, totaling 563. 

* According to CPSC officials, the agency rarely uses its authority to 
seek a mandatory recall, citing a high level of cooperation from 
companies. They said some companies pursue recalls voluntarily in 
acknowledgment of CPSC’s authorities to seek mandatory recalls through 
litigation or to seek civil penalties for failing to report hazardous 
products. 

CPSC holds all companies along the supply chain responsible for 
implementing product recalls, including manufacturers, importers, 
distributors, and retailers. 

CPSC’s objectives for companies conducting recalls are: 

* To locate all defective products as quickly as possible; 

* To remove these products from the distribution chain and from the 
possession of consumers, and; 

* To notify the public about the defect and the actions being taken to 
correct the hazard (e.g., refund consumers the price of the product, 
repair the defect, or replace the product). 

* According to CPSC, products may be destroyed as part of a product 
recall. 

Background: Incomplete Recalls under CPSC: 

GAO identified 15 recalls since 1979 under CPSC jurisdiction that 
involved companies without adequate resources to conduct a product 
recall. 

* These recalls involved 12.8 million units, mostly fire sprinklers, 
cribs, and wall heaters. Other products included gas grills, thermostat 
regulating devices, worm probes, and a pull toy.[Footnote 21] 

* The companies could not carry out these recalls because they had 
limited financial resources, had filed for bankruptcy protection as a 
result of a recall, or for reasons unrelated to a recall. 

* GAO provided a draft of this analysis to CPSC and received technical 
comments, which we incorporated where appropriate. Our interviews with 
product recall consultants and others did not supplement or contradict 
these data. 

* These data do not intend to describe the effectiveness of other 
recalls conducted under CPSC. 

Scope and Methodology: 

Our review included: 

* Recalls conducted under the jurisdiction of CPSC to protect consumers 
from hazardous products, 

* Imported and domestically produced products, and, 

* All products under CPSC jurisdiction. 

To do this work, we: 

* Compiled and analyzed data from 1979 to 2008 on product safety 
recalls that CPSC collected on companies lacking adequate resources to 
conduct a recall; 

* Interviewed organizations representing consumer product companies, 
financial services firms, product recall consultants, consumer interest 
groups, international trade experts, and government agencies; and; 

* Convened a roundtable of experts and others to obtain a deeper 
understanding of the need for and issues involved in implementing a 
financial assurance requirement. 

We conducted our work from September 2008 to February 2009 in 
accordance with all sections of GAO's Quality Assurance Framework that 
are relevant to our objectives. 

Scope and Methodology: Interviews: 

As of January 30, 2009, we had conducted interviews with 48 
organizations representing various stakeholder groups, including: 

* Consumer product trade associations (12) representing large and small 
manufacturers, importers, distributors, and retailers; 

* Individual retailers (5); 

* Financial services trade associations (7) representing banks, 
insurers, sureties, and brokers of these services; 

* Large insurers, sureties, banks and insurance brokers (8); 

* Product recall consulting firms (8); 

* Consumer interest groups (2); 

* International trade experts (2); and; 

* Federal agencies (4), including CPSC, Customs and Border Protection, 
the Office of the U.S. Trade Representative, and the U.S. Small 
Business Administration Office of Advocacy. 

We selected organizations to interview based on breadth of membership, 
size, prior knowledge, and availability. 

Scope and Methodology: Roundtable: 

We convened a roundtable of 20 participants representing consumer 
product companies, financial services firms, product recall 
consultants, consumer interests, and federal government agencies. 

On January 30, 2009 we held an all-day meeting with these participants 
at our headquarters office in Washington, D.C. 

We selected participants who represented the different stakeholder 
groups that would likely be involved in developing a financial 
assurance requirement for product safety recalls, if such a program 
were initiated. We judgmentally selected participants based on: 

* Ability to provide a broad range of perspectives and speak to as many 
areas of knowledge as possible, 

* Nationally renowned expertise or national constituency, 

* Our professional judgment on a participant’s knowledge of issues, 
and, 

* Geographic proximity and availability for our panel. 

Table: Scope and Methodology: Roundtable participants: 

Consumer Products Industry: 
American Association of Importers and Exporters; 
National Association of Home Appliance Manufacturers; 
Retail Industry Leaders Association. 

Consumer Interests: 
Consumer Federation of America; 
Public Citizen. 

Product Recall Consultants: 
Marsh USA; 
Safe-T-Source Inc. 

Financial Services Industry: 
Bank of America; 
Colemont Insurance Brokers; 
Insurance Information Institute; 
International Fidelity Insurance Company for the National Association 
of Surety Bond Producers; 
SunTrust Banks, Inc. 
Surety and Fidelity Association of America; 
The Bank of New York Mellon; 
Zurich North America. 

Government: 
CPSC; 
Customs and Border Protection; 
Office of the U.S. Trade Representative; 
Small Business Administration. 

Source: GAO. 

[End of table] 

Objective 1: Proposed options: 

The mandate requires that GAO study escrow, insurance, and a bond as 
potential options for use as financial assurance. 

Roundtable participants and others we interviewed suggested additional 
financial instruments that could be used as financial assurance, 
including: 

* A letter of credit, 

* Guarantee of personal or corporate assets, 

* Lien on personal or corporate assets, and, 

* CPSC fund that would provide funds to cover troubled recalls. 

Objective 1: Proposed Options: Escrow – How It Might Work: 

CPSC partners with one or more banks that act as escrow agents to 
establish escrow accounts. 

CPSC establishes terms and conditions through a draft model escrow 
agreement. Under the agreement: 

* Companies deposit cash or other approved assets in an amount that is 
calculated according to the volume of goods sold or produced or 
projected recall costs. 

* The bank holds the escrow funds until CPSC approves disbursement in 
the event of a recall or upon determining that a company has not 
dedicated adequate resources for conducting a recall. 

* CPSC, an agent of CPSC, or the consumer product company receives the 
escrow funds to conduct or complete the troubled recall. 

Objective 1: Proposed Options: Insurance – How It Might Work: 

CPSC establishes coverage requirements, such as terms of minimum limits 
and covered risks (e.g., public notification, product removal, and 
corrective action), among other things. 

Consumer product companies purchase required coverage from private 
insurers. 

Companies then submit claim(s) to the insurer on their policy to cover 
the costs of a troubled recall. 

Variation: If required coverage is not available in the private market, 
the federal government could establish an insurance pool funded with 
premiums assessed on consumer product companies (i.e., policyholders). 

Objective 1: Proposed Options: Bond – How It Might Work: 

Consumer product companies obtain a bond from a surety company to 
assure the CPSC that resources are available to cover legal recall 
obligations. 

* In exchange for an annual premium, sureties assess the financial 
strength, character, and capability of a consumer product company to 
perform a recall in accordance with requirements established by statute 
or regulation. 

CPSC could make a claim on the bond if a company failed to comply with 
regulatory requirements. 

The surety company would pay CPSC for its claim, or it could conduct 
the recall according to regulation. 

Variation: Instead of using a bond to cover all aspects of a recall 
that can be costly, require companies to obtain a bond to guarantee 
their compliance with CPSC statutes or regulations related to consumer 
safety or recalls, such as a requirement to develop a quality assurance 
plan. This option might carry bond penalties in amounts lower than the 
potential costs of conducting recalls, making the underwriting more 
feasible for surety firms. 

Table: Objective 1: Proposed Options: Other Financial Options: 

Option: Letter of credit; 
How it Might Work: A consumer product company pays an annual fee to 
access a line of credit from a financial institution to fund potential 
recalls. 

Option: Guarantee of personal or corporate assets; 
How it Might Work: Sole proprietors or the senior officers or 
principals of consumer product companies provide a written guarantee to 
CPSC that personal or corporate assets, such as real estate or 
machinery, would be available to fund potential recalls. 

Option: Lien on personal or corporate assets; 
How it Might Work: CPSC receives a security interest in the personal 
assets of a sole proprietor or the corporate assets of a consumer 
product company to prioritize its right to collect payment in the event 
of a troubled recall before other creditors collect payment on 
unsecured claims. 

Option: CPSC fund for troubled recalls; 
How it Might Work: CPSC maintains an account to fund troubled recalls 
by completing them itself or through its agent, or by providing the 
responsible companies with funds to complete a recall. The account is 
funded by federal appropriations or civil penalties that CPSC assesses 
on consumer product companies under its jurisdiction. 

Source: GAO. 

[End of table] 

Objective 1: Proposed Options: Nonfinancial Policy Alternatives: 

In lieu of requiring financial assurance, several sources we 
interviewed suggested the federal government could do more to promote 
product safety and effective recalls by requiring consumer product 
companies to develop: 

* Quality assurance plans that describe procedures and controls for 
monitoring the quality of materials and manufacturing procedures, among 
other things. 

* Product recall plans that describe procedures for conducting a 
product recall, including the roles and responsibilities of key 
personnel. 

- According to a risk management firm retained by two large product 
recall insurers, about 15 percent of consumer product companies have 
written recall plans, compared with more than 90 percent of food 
companies. 

Some roundtable participants and others we interviewed said no change 
is needed, citing the low number of troubled recalls, among other 
things. Some roundtable participants said CPSC should do more to use 
its existing authorities to compel companies to conduct effective 
product recalls. 

Objective 2: Factors Affecting Feasibility: 

Those we interviewed and roundtable participants identified several 
major factors and challenges that affect the feasibility, including the 
affordability, availability, and enforceability, of implementing a 
financial assurance requirement using any of the financial tools 
considered in the mandate. These include: 

* The cost to consumer product companies, 

* The capacity of the financial services industry to provide coverage, 

* The difficulty of establishing terms and conditions, and, 

* The lack of an existing enforcement mechanism. 

Objective 2: Factors Affecting Feasibility Cost to Consumer Product 
Companies: 

Given difficult economic conditions, companies might not be able to put 
resources toward obtaining financial coverage, particularly when many 
are struggling to stay in business. 

Several interviewees, including a consumer group, expressed concern 
that a financial assurance requirement could negatively impact small 
businesses in particular and potentially drive them out of the market. 

Determining the amount of financial assurance companies should maintain 
could be difficult, given that the costs of conducting a recall can 
vary widely. A variety of sources have indicated that recalls can cost 
from a few thousand to billions of dollars depending on the industry, 
product, and corrective action required. 

Objective 2: Factors Affecting Feasibility Capacity: 

A variety of sources representing the financial services industry 
reported concerns about whether insurers, sureties, and banks would 
provide adequate capacity to meet the increased demand for their 
products that requiring a financial assurance could create, 
particularly if the assurance is intended to cover all aspects of a 
recall and to cover recalls that are infrequent, costly, and difficult 
to predict. 

* For example, according to a corporate escrow agent, there is a finite 
number of banks large enough to handle the potential demand for escrow 
agreements. 

Industry representatives said sureties and insurers in particular would 
be reluctant to underwrite bonds and insurance, respectively, if 
financial assurance was required only from high-risk companies or 
companies that had already initiated a recall, potentially resulting in 
adverse selection. Roundtable participants cited concern about their 
ability to profit from these arrangements. 

Some of the financial firms indicated that the industry may not have 
enough capacity to cover large recalls that could cost in the millions 
or billions of dollars. 

Objective 2: Factors Affecting Feasibility Establishing Terms and 
Conditions: 

Those we interviewed and roundtable participants, including financial 
services firms, indicated that it would be difficult to extend coverage 
for product recalls without first determining the terms and conditions 
of a financial assurance. Some of these terms and conditions include: 

* Duration of the financial obligation. Products can be recalled after 
several years, but financial tools such as surety bonds are typically 
designed to cover short-term obligations. 

* Point in time when coverage would be required. Companies could 
provide financial assurance once a product had been produced or once a 
recall was about to occur, for example. 

* The recall activities covered. A financial assurance could cover the 
costs of notification, removal, and remedies. However, some financial 
service providers might be unwilling to pay for relatively costly 
remedies, such as the repair and replacement of products. 

* Triggering recall event for coverage. Financial assurance 
requirements could specify whether voluntary and mandatory recalls were 
covered, for example. One concern has been that some insurance 
providers might only cover mandatory recalls, even though the majority 
of CPSC recalls are voluntary. 

* Pricing of financial coverage. It would be difficult to price a 
financial product if not enough is known about the quality controls and 
other risks presented by a consumer product company and how much a 
recall might cost. Obtaining this information would difficult for the 
wide range of products regulated by CPSC and for imported products. 

Objective 2: Factors Affecting Feasibility No Existing Enforcement 
Mechanism: 

There is no existing mechanism at CPSC, nor the resources or experience 
to administer and enforce a financial assurance requirement for 
consumer product companies, according to CPSC officials and sources we 
contacted. 

Consumer products trade associations reported there is no program or 
process that tracks all domestically-produced consumer goods or 
companies doing business in the United States, making it difficult to 
identify companies that may need to comply with this requirement. 

International trade experts indicated that any financial requirement 
that is targeted or perceived to be targeted unfairly towards imported 
products or is restrictive beyond what is needed to meet its regulatory 
objective could be challenged under international trade agreements. 

Objective 2: Factors Affecting Feasibility Challenges to Implementing 
Financial Assurance Options: 

Those we interviewed and roundtable participants, including financial 
services firms, described challenges that were specific to implementing 
the financial assurance options presented in the mandate. 

* Insurance: Insurance functions by spreading risk among a broad pool 
of individuals. For insurance to be a viable tool, it would have to be 
applied to all companies rather than the ones that have the greatest 
number of recalls. Moreover, current product recall insurance is 
expensive because this type of coverage is considered risky. One 
advantage of insurance is that it requires less capital from companies 
than other financial options. 

* Escrow: Escrows would be difficult to establish unless a specific 
amount of assurance is first determined. While escrows are relatively 
easy to establish, provide contractual flexibility, and allow companies 
to accrue interest on any funds they set aside, determining the 
specific amount might be difficult given the range of recall costs. 
Moreover, it could tie up resources that companies could use for other 
purposes. 

* Bond: Bonds operate with the expectation of zero loss (claims) and 
require pre screening of companies. Thus, while a bond program could 
help keep financially unstable companies from engaging in commerce, 
another financial option might be more appropriate for providing funds 
for recalls. 

Those we interviewed and roundtable participants, including financial 
services firms, described challenges that were specific to implementing 
other financial assurance options. 

* Letters of Credit: Unlike cash escrows, companies would not have to 
set aside capital to cover recalls and the annual fees might be less 
than those for cash escrows. However, companies could find it difficult 
to obtain letters of credit under difficult economic conditions and 
companies that are not in good financial standing might not meet pre 
screening conditions for accessing credit. 

* CPSC Fund: A fund could ensure that recalls would be covered even if 
companies could not pay for them. However, possible challenges include: 

- The fund could create a moral hazard in that if CPSC funds were 
available, companies, such as retailers, might be less inclined to 
conduct and pay for voluntary recalls. 

- The parameters and controls would have to be established on the use 
of such a fund, as would a means for initial capitalization and any 
subsequent capitalization. 

- Roundtable participants debated what the size of such a fund would 
need to be to account for potentially large or catastrophic recalls, 
such as the recent ineffective recalls involving 1.6 million cribs. 

Objective 2: Factors Affecting Feasibility Strategies for Mitigating 
Major Challenges: 

Those we interviewed and roundtable participants suggested various 
strategies for mitigating some of the factors affecting implementation 
of the proposed financial options: 

* Providing flexibility. To make a financial assurance more affordable, 
several interviewees and roundtable participants suggested that 
companies should be allowed to choose the type of financial coverage 
that would be most cost effective,an option that would be particularly 
beneficial for small businesses. 

* Establishing clear goals. The feasibility of using a financial 
assurance tool to provide coverage depends on the goals of the program. 
For example, if the purpose is to prevent financially weak companies 
from selling products, then a bond program might be a suitable 
solution. In contrast, if the purpose is to ensure that resources are 
available to conduct a troubled recall, which is an infrequent event, 
then some suggested the CPSC fund might be suitable. 

* Targeting the requirement to specific companies. Some suggested that 
a financial assurance requirement be targeted towards specific types of 
companies or industries, such as those with a high incidence of 
troubled recalls. For example, one individual suggested that small 
businesses be excluded from meeting a financial assurance requirement 
and some suggested that the CPSC fund be created to target only those 
companies with troubled recalls. 

* Establishing terms and conditions. To make a financial assurance 
requirement more affordable and available, terms and conditions would 
need to be established, such as minimum financial coverage requirements 
for companies, specific recall activities and obligations for financial 
service firms, and limits on the use of CPSC funds. 

* Establishing an enforcement mechanism. Some sources suggested 
establishing a voluntary system that allowed companies to register with 
the CPSC, or for CPSC to use its existing authority to request more 
financial information from consumer product companies. These strategies 
could support CPSC’s enforcement of recalls. 

Objective 3: Potential Consequences: Benefits of Requiring a Financial 
Assurance: 

Representatives for consumer interest groups said some financial 
backstop was needed to protect consumers when companies failed to 
effectively recall hazardous products, citing of the 15 troubled 
recalls under CPSC that GAO identified and another under the National 
Highway Traffic Safety Administration. Also, increased U.S. reliance on 
imported products and new Consumer Product Safety Improvement Act 
provisions that curtail the export of recalled products and require 
testing products for lead may increase the incidence of troubled 
recalls, justifying the need for a financial assurance requirement. 
Benefits include: 

* Ensuring public safety: Because of current economic pressures to keep 
consumer prices low, potentially leading to declines in product 
quality, requiring a financial assurance would ensure that companies 
could pay for a recall in those instances when the consequences of not 
conducting a recall could result in widespread injury or death. 

* Improving the effectiveness of CPSC’s recalls: A proponent said a 
financial assurance requirement could give CPSC an important tool to 
enable product safety recalls in light of challenges it faces in using 
its mandatory recall authority. 

- Prior to CPSIA, mandatory recalls involved a trial-type 
administrative hearing that could take a year or longer to complete, 
according to a CPSC official. With new authorities under CPSIA, CPSC 
may file a suit and notify the manufacturer that it has determined a 
product to be imminently hazardous to cease the distribution of the 
product. 

* Improving quality controls and standards: Given that insurance 
providers, for example, require companies to develop recall and quality 
assurance plans before extending coverage, a financial assurance 
requirement could encourage companies to improve their quality controls 
and standards. 

Objective 3: Potential Consequences Disadvantages of Requiring a 
Financial Assurance: 

Those we interviewed and some roundtable participants also identified 
several potentially negative consequences of establishing a financial 
assurance requirement: 

* Could limit company growth and product innovation by restricting the 
cash and credit available to companies, 

* Could increase the cost of consumer goods and possibly limit consumer 
choice, 

* May distort incentives for companies to conduct voluntary recalls or 
continue risk management programs that support product safety by 
introducing an element of moral hazard, 

* May increase the number of bankruptcies among smaller and low-margin 
businesses, depending on the cost of a financial assurance, 

* May increase lawsuits against companies to access the “new” pool of 
financial assurance funds, knowing there is a financial remedy 
available, and, 

* Could cause other countries to impose similar requirements on U.S. 
exporters if it were viewed as a trade barrier. 

Objective 3: Potential Consequences Many Questioned Need for Financial 
Assurance: 

Consumer advocates said there was some need for requiring a financial 
assurance, but many others we interviewed and those that participated 
in the roundtable questioned the need, citing: 

* The low incidence of product recalls for which funding is not 
available; 

* The small proportion of products that are recalled; 

* Improved safety standards and attention to product quality and 
safety; 

* The low cost of most recalls, which companies have funded through 
operating income or insurance, and; 

* Incentives from the U.S. tort system for private companies to ensure 
the safety of their products. 

However, perhaps acknowledging that some recalls under CPSC are not 
conducted effectively and put consumers at risk, many roundtable 
participants from a variety of perspectives supported the idea of 
providing CPSC with funds to deal with these troubled recalls. 

[End of section] 

Enclosure II: Data on Incomplete Recalls: 

Table 2 describes recalls announced by CPSC in which companies did not 
have adequate resources to complete a recall program. For many of these 
events, the responsible company--typically the manufacturer--was 
bankrupt or in the process of declaring bankruptcy at the time of the 
recall announcement. More recently, a company that had purchased a 
manufacturer of recalled products--baby cribs--refused to cooperate 
with CPSC, claiming it was not responsible for products manufactured 
before the purchase was completed. We obtained these data from recall 
announcements published on CPSC's Web site and incorporated technical 
comments from CPSC officials who reviewed our analysis. These data do 
not intend to describe the effectiveness of other recalls conducted 
under CPSC. 

Table 2: Incomplete Recalls under CPSC, 1979-2008: 

Event number: 1; 
Original date of recall announcement: September 17, 2008; 
Product/estimated number units affected/estimated unit price: Crib; 
600,000; $150-$300; 
Defect description: Hardware is not appropriate size and can cause 
structural failure; 
Reported injury: None; 
Company disposition/scope of recall: Manufacturer went out of business. 
Company that purchased the assets of the manufacturer of these cribs 
refused to conduct recall program. CPSC eventually compelled retailers 
to refund consumers. 

Event number: 2; 
Original date of recall announcement: September 21, 2007; 
Product/estimated number units affected/estimated unit price: Crib; 
1,000,000; $100-$300; 
Defect description: Error in assembly instructions, if followed, can 
weaken hardware and pose entrapment hazard; hardware not appropriate 
size and can cause structural failure; 
Reported injury: 3 deaths, 7 infant entrapments, 55 incidents; 
Company disposition/scope of recall: Manufacturer provided consumers 
with repair until company was sold in March 2008. The purchasing 
company (same as above) refused to conduct recall program, but 
continued with limited repair program on at least one affected crib 
model, and published revised assembly instructions for some other 
affected models. 

Event number: 3; 
Original date of recall announcement: March 4, 2004; 
Product/estimated number units affected/estimated unit price: Fire 
engine pull toy; 323; $20; 
Defect description: Small parts pose a choking hazard; 
Reported injury: None; 
Company disposition/scope of recall: Private label retailer had 
declared bankruptcy at time of recall announcement. They refunded 
consumers the purchase price for a period lasting less than a month 
after the recall announcement. When discontinued, CPSC advised 
consumers to destroy or discard the product. 

Event number: 4; 
Original date of recall announcement: April 25, 2003; 
Product/estimated number units affected/estimated unit price: Fire 
sprinkler; 60,000; not reported; 
Defect description: Units fail to operate in a fire; 
Reported injury: None; 
Company disposition/scope of recall: Company that purchased bankrupted 
manufacturer dedicated $1 million towards consumer reimbursement of 
replacement products for approximately 29 months from the date of the 
recall announcement. 

Event number: 5; 
Original date of recall announcement: April 25, 2003; 
Product/estimated number units affected/estimated unit price: Fire 
sprinkler; 400,000; not reported; 
Defect description: Units fail to operate in a fire; 
Reported injury: None; 
Company disposition/scope of recall: Manufacturer had no assets to 
conduct a recall, but issued notice to building owners to replace 
sprinklers. 

Event number: 6; 
Original date of recall announcement: July 19, 2002; 
Product/estimated number units affected/estimated unit price: Gas 
grill; 155,000; $160; 
Defect description: Design flaw can cause grill to collapse; 
Reported injury: 44 burn incidents to legs, hands, and fingers; 
Company disposition/scope of recall: Manufacturer declared bankruptcy 
after CPSC sued to obtain a recall. Some retailers announced a program 
to provide consumers with refunds. CPSC advised consumers to stop using 
the grill and seek a remedy from their retailer. 

Event number: 7; 
Original date of recall announcement: September 27, 2000; 
Product/estimated number units affected/estimated unit price: Gas-fired 
furnace; 190,000; $2,000; 
Defect description: Unit can overheat, deteriorate, and ignite; 
Reported injury: 30 reports of fires and damage to homes; no injuries; 
Company disposition/scope of recall: Manufacturer had declared 
bankruptcy by time of recall announcement. In 2001, some distributors 
provided free inspection, repairs, or replacements covering 30,000 
units. In 2002, the settlement of private class action litigation 
created a fund to compensate owners for some expenses of repairing or 
replacing units. CPSC advised consumers to inspect units using a 
licensed heating contractor. 

Event number: 8; 
Original date of recall announcement: February 1, 2000; 
Product/estimated number units affected/estimated unit price: In-wall 
heater; 1,900,000; not reported; 
Defect description: Unit can overheat and ignite, and become energized 
and create risk of electric shock; 
Reported injury: 4 deaths, 2 serious burn incidents, property damage 
claims exceeding $4.3 million; 
Company disposition/scope of recall: Manufacturer declared bankruptcy 
after CPSC sued to obtain a recall. As part of the court settlement, 
manufacturer sold replacement heaters at a discount for about 2 years 
following original recall notice. After this period, CPSC advised 
consumers to replace unit at their own expense. 

Event number: 9; 
Original date of recall announcement: October 14, 1998; 
Product/estimated number units affected/estimated unit price: Fire 
sprinkler; 8,400,000; not reported; 
Defect description: Units fail to operate in a fire; 
Reported injury: At least 4 burn or smoke inhalation incidents; $4.3 
million in reported property damage; 
Company disposition/scope of recall: The manufacturer's reported 
financial condition revealed limited ability to pay for sprinkler 
replacement. Manufacturer provided replacement parts and partial 
reimbursement for removal and replacement of defective units for 10 
months from date of recall announcement. 

Event number: 10; 
Original date of recall announcement: July 12, 1993; 
Product/estimated number units affected/estimated unit price: Crib; 
8,000; not reported; 
Defect description: Small parts pose a choking hazard; 
Reported injury: None; 
Company disposition/scope of recall: Company was in bankruptcy at time 
of recall announcement and did not proceed with a recall. CPSC advised 
consumers to contact retailers for replacement part. 

Event number: 11; 
Original date of recall announcement: September 16, 1992; 
Product/estimated number units affected/estimated unit price: Worm 
probe; 30,000; $8-$27; 
Defect description: Energized shaft poses electrocution hazard to users 
and, when inserted into the ground, to those nearby; 
Reported injury: At least 28 deaths associated with functionally 
identical worm probes; 
Company disposition/scope of recall: Company was bankrupt at time of 
recall announcement and did not proceed with a recall. CPSC advised 
consumers to destroy product. 

Event number: 12; 
Original date of recall announcement: February 11, 1987;
Product/estimated number units affected/estimated unit price: Crib and 
playpen; unknown; not reported; 
Defect description: Unit design violates multiple CPSC safety 
requirements; 
Reported injury: 21 incidents, several involving bruises to children; 
Company disposition/scope of recall: Company was in bankruptcy at time 
of recall announcement and did not proceed with a recall. CPSC provided 
toll-free telephone hotline and advised consumers to call for potential 
remedies. 

Event number: 13; 
Original date of recall announcement: May 2, 1984; 
Product/estimated number units affected/estimated unit price: Oil/wood 
furnace; 12,000; not reported; 
Defect description: Weld failure can cause carbon monoxide to escape, 
posing risk of illness or death; 
Reported injury: None; 
Company disposition/scope of recall: Company was in process of filing 
for bankruptcy at time of recall announcement and did not proceed with 
a recall. CPSC advised consumers to inspect units using professional 
heating equipment installer. 

Event number: 14; 
Original date of recall announcement: September 22, 1982; 
Product/estimated number units affected/estimated unit price: Crib; 
1,000; $200; 
Defect description: Design of crib slats and rail height pose 
asphyxiation and fall hazard; 
Reported injury: 1 death; 
Company disposition/scope of recall: Company was in bankruptcy at time 
of recall announcement and did not proceed with a recall. CPSC advised 
consumers to discontinue use of the crib. 

Event number: 15; 
Original date of recall announcement: October 15, 1979; 
Product/estimated number units affected/estimated unit price: Energy-
saving thermostat regulator; 20,000; $20-$25; 
Defect description: Unit can overheat and start fire; 
Reported injury: None; 
Company disposition/scope of recall: Manufacturer conducted a repair 
program before filing for bankruptcy about a year after initiating a 
recall. Upon conclusion of the program, CPSC advised consumers to 
contact retailers for refund or replacement. 

Source: GAO analysis of CPSC information. 

[End of table] 

[End of section] 

Footnotes: 

[1] Pub. L. No. 110-314, 122 Stat. 3016 (2008) (amending 15 U.S.C. §§ 
2051 - 2089). 

[2] Section 224 of the CPSIA requires the CPSC to identify the consumer 
products for which the cost of destruction would normally exceed the 
custom bond and to recommend to the U.S. Customs and Border Protection 
a bond amount that would be sufficient to cover the costs. 

[3] Please see enclosure I, slide 11, for a list of participating 
organizations. 

[4] Under Section 12 of the CPSA, 15 U.S.C. § 2061, the CPSC may file 
suit in a United States district court seeking the recall, repair, or 
replacement of, or refund for an imminently hazardous consumer product. 
This is one of two mechanisms for forcing a mandatory recall. Under 
section 15(d) of the CPSA, 15 U.S.C. § 2064(d), the CPSC may order a 
repair, replacement or refund of a consumer product that it finds is a 
"substantial product hazard." The CPSC must conduct an administrative 
hearing unless it has filed a court action under section 12. See 15 
U.S.C. § 2064(f). 

[5] CPSC has jurisdiction over 15,000 types of consumer products, but 
some products subject to recall are regulated by other federal 
agencies. For example, the U.S. Food and Drug Administration regulates 
foods, drugs, and medical devices; the U.S. Department of Agriculture 
regulates meat, poultry, and egg products; and the National Highway 
Traffic Safety Administration regulates motor vehicles and motor 
vehicle equipment. 

[6] Pub. L. No. 92-573, 86 Stat. 1207 (1972), codified at 15 U.S.C. §§ 
2051 - 2089. 

[7] The destruction of goods that occurs at ports of entry is outside 
the scope of our work. However, GAO has been mandated to report by 
August 2009 on the effectiveness of CPSC's authorities to ensure the 
safety of imported goods under its jurisdiction, which includes the 
destruction of goods at U.S. borders. 

[8] For mandatory recalls conducted under section 15 of the CPSA, 15 
U.S.C. § 2064, CPSC can obtain certain involuntary corrective actions 
from consumer product companies. Before the passage of CPSIA, CPSC 
could order a manufacturer, importer, distributor, or retailer to 
engage in certain involuntary corrective actions if it determined that 
a consumer product was a substantial product hazard after conducting a 
trial-type administrative hearing. These actions include (1) to give 
public notice of the defect or failure to comply; (2) to mail notice to 
each person who is a manufacturer, distributor, or retailer; and/or (3) 
to mail notice to each known buyer or recipient. CPSIA gave CPSC 
authority to require these and three additional actions without a prior 
hearing, but only after CPSC notified the manufacturer and filed suit. 
The additional actions include (1) to cease distribution of the 
product, (2) to notify others to cease distribution, and (3) to notify 
State and local public health officials. CPSC may also order notice in 
languages other than English. If, after conducting a hearing, CPSC 
finds that a substantial product hazard exists, CPSIA gave CPSC greater 
authority over the actions a company takes to correct the hazard. 

[9] Other CPSIA provisions, sections 102 and 103, affecting 
manufacturers include a new requirement to certify that a children's 
product had been tested for compliance with various safety standards by 
a third party entity, as well as a requirement to label children's 
products with information--such as manufacturer, production date, and 
production batch--to help consumers identify recalled products and to 
enhance the ability of manufacturers to track unsafe products to their 
precise source. 

[10] We report inflation-adjusted penalty amounts. The maximum penalty 
amounts that were specified in statute before passage of CPSIA--$5,000 
and $1.25 million--was adjusted for inflation in 2004 to $8,000 and 
$1.825 million for individual violations and a related series of 
violations, respectively. See Civil Penalties; Notice of Adjusted 
Maximum Amounts, 69 Fed. Reg. 68884 (Nov. 26, 2004). Civil penalty 
amounts are applicable to violations of the Consumer Product Safety 
Act, the Federal Hazardous Substances Act, and the Flammable Fabrics 
Act. The maximum civil penalty must be adjusted for inflation every 
five years, beginning no later than December 1, 2011. The amended civil 
penalties take effect on August 14, 2009, or the date on which final 
regulations are issued, whichever is earlier. 

[11] Worm probes are steel shafts connected to an electric current, 
which when inserted into soil, shock earthworms to the surface to be 
gathered for fishing. CPSC cited 28 deaths involving worm probes. 

[12] For the purpose of insuring product recall risks, a captive 
insurance entity may generally be a wholly owned insurance company 
within the corporate structure of a consumer product company or a 
separate insurance entity used for the specific purpose of insuring 
risks that share similar characteristics. 

[13] Insurers said that this coverage can be written on standardized 
forms provided by the Insurance Services Office, a provider of 
insurance forms and other services to aid insurers. 

[14] In prior work, we have shown that financial assurances vary in the 
financial risks they pose to the government, the oversight and 
enforcement challenges they pose to regulators, and the costs companies 
may incur to obtain them. See GAO, Environmental Liabilities: EPA 
Should Do More to Ensure That Liable Parties Meet Their Cleanup 
Obligations, [hyperlink, http://www.gao.gov/products/GAO-05-658] 
(Washington D.C.: Aug. 17, 2005). 

[15] A quality assurance plan describes a company's procedures and 
controls for monitoring the quality of its products--for example, 
materials and manufacturing procedures. 

[16] Product recall plans describe procedures for conducting a product 
recall, including the roles and responsibilities of key personnel. 

[17] According to CPSC officials, mandatory recalls are most commonly 
initiated by filing an administrative complaint before an 
administrative law judge. However, the agency may also initiate a 
mandatory recall by filing a court action. 

[18] However, CPSC may begin using its mandatory recall authorities 
more often, because provisions of CPSIA make it easier for the agency 
to require that companies stop distributing unsafe products and 
strengthen the agency's bargaining power over corrective action plans 
when companies pursue voluntary recalls. 

[19] In accordance with 15 U.S.C. § 2069(a)(3), the maximum penalty 
amount for a related series of violations that was specified in statute 
before passage of CPSIA--$1.25 million--was adjusted for inflation in 
2004 to $1.825 million. See 69 Fed. Reg. 68884. 

[20] Pub. L. No. 110-314, § 224, 122 Stat. 3016, 3069 (Aug. 14, 2008). 

[21] Worm probes are steel shafts connected to an electric current, 
which when inserted into soil, shock earthworms to the surface to be 
gathered for fishing. CPSC cited 28 deaths involving worm probes. 

[End of section] 

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