CBP Should Centralize FTZ Compliance Data to Better Assess and Respond to Risks, GAO Says

Currently, CBP regularly conducts compliance reviews of individual FTZ operators to ensure compliance with U.S. customs laws and regulations -- with a required minimum of one compliance review for FTZs every other year -- but that’s not holistic enough, the GAO said. “Without a program-wide assessment of the frequency and significance of problems identified during compliance reviews, risk levels determined, and enforcement actions taken, CBP cannot verify its assertion that the FTZ program is at low risk of noncompliance,” the report says.

CBP estimated that it will have collected data to conduct its risk analysis across the FTZ program by Oct. 1, 2018, with OFO completing the first across-the-board risk analysis, using the first full year of fiscal data across the FTZs, by March 31, 2019, according to DHS’s response to the GAO report.

Because of the absence of a centralized and standard FTZ compliance review format, CBP can’t reliably obtain compliance review information in a timely manner for assessing FTZ risks and program controls, such as completion of all required compliance reviews. For instance, the GAO requested to examine all FTZ compliance reviews conducted in fiscal years 2015 and 2016, but CBP officials said it would take more than 2,600 staff hours to compile the full set of reviews and warning letters.

The GAO thus examined a generalizable random sample of FY15-FY16 compliance reviews from 174 FTZ operator sites. CBP’s risk determination was unclear for an estimated 16 percent of FTZ operators included in the analyzed compliance reviews, the GAO said. “Incomplete information on the compliance reviews may limit CBP’s ability to determine the cause of compliance violations as well as reach conclusions about the overall program risk level,” the GAO said. “Further, for an estimated 36 percent of FTZ operators, FY2015-FY2016 compliance review documentation did not provide evidence of specific transactions reviewed, which may limit the validity of conclusions reached in the compliance reviews.”

While CBP officials stated that enforcement actions in FTZs other than warning letters and liquidated damages against FTZ bondholders are rare, the GAO found that CBP can’t effectively determine the total number or type of enforcement actions taken against FTZ operators to verify those assertions. Further, there’s no reliable way to determine what seizures and penalties recorded in CBP’s Seized Assets and Case Tracking System (SEACATS) -- which tracks all types of imports -- occurred in FTZs, though the limited information available suggests the number of such actions is low, the GAO said.

GAO estimated that 7 percent of FTZ operators reviewed in FY15 and FY16 have received at least one warning letter. While CBP can retrieve liquidated damages data because SEACATS allows searches for a statute number specific to FTZ liquidated damages, the system doesn’t specify the type of violation -- such as an FTZ operator missing FTZ inventory information -- that triggered a given liquidated damages claim. CBP expects to roll out a modernized version of SEACATS in September, which will allow officers to classify specific FTZ violations that led to assessments of liquidated damages, but won’t improve the agency’s ability to identify seizures and other enforcement actions in FTZs, the GAO said.

CBP officials also said that they intend to update policies and procedures reflected in CBP’s Compliance Review Handbook for Foreign Trade Zones after adding FTZ-related features to ACE. DHS said in its response to the GAO report that OFO expects to finalize a compliance review handbook for ACE incorporating updated risk assessment tools and best practices for FTZ compliance reviews and risk categorization by Sept. 30, 2019. DHS added in its response that it expects to embed its online electronic admission system into ACE by Aug. 30. The agency previously said it planned to deploy its electronic Form 214 application for FTZ admission in ACE on Aug. 20 (see 1706120054).

In addition to compliance and internal control concerns, the GAO review revealed a lack of clarity on whether FTZs deliver on intended economic benefits, such as job creation. The GAO reviewed production applications filed since 2012 by seven companies that provided "no data" to support job creation estimates, and public comments on the applications revealed disagreements between industry members on anticipated FTZ economic impacts. Further, several academic studies the GAO reviewed used a theoretical framework to explain why it was profitable for companies to use an FTZ, but the assertions weren't corroborated with empirical analysis of economic effects. In an emailed statement, Senate Finance Committee ranking member Ron Wyden, D-Ore., who requested the report, raised concerns about this lack of clarity. “Americans need to know if FTZ are effective at creating jobs, and whether operators are complying with all laws on imports into the United States," he said. "This report revealed that there are gaps in our understanding of both those issues. I look forward to discussing the report's recommendations with CBP."

The GAO recommended that CBP centrally compile information from FTZ compliance reviews and related enforcement actions so standardized data are available for assessing compliance and internal control risks across the FTZ program. The GAO also recommended that CBP conduct a risk analysis of the FTZ program using data across FTZs, including an examination of the likelihood and significance of compliance violations and enforcement actions. The GAO’s third and final recommendation in the report is for CBP to use the results of the program-wide risk analysis to respond to identified risks.. DHS said that OFO will identify requirements and costs to build a “manual process” to be used for all compliance reviews and internal control risks across the FTZ program. DHS estimates that the new compliance review system will be in place by Oct. 31.