Customs and Border Protection: Risk Management for Tariff Refunds Should Be Improved

The United States enacted the drawback program in 1789 to create jobs and encourage manufacturing and exports, according to CBP. CBP has primary responsibility for overseeing the drawback program. It disburses about $1 billion in drawback refunds per year.

According to CBP, TFTEA modernized the drawback program, generally broadening the scope of potential claims and allowing electronic filing starting February 24, 2018. As of February 24, 2019, claimants could only file claims under the drawback statute as amended by TFTEA. TFTEA also included a provision for GAO to assess drawback modernization.

This report examines the extent to which (1) modernization affects drawback refund eligibility and CBP's management of its workload, (2) CBP has taken steps to address risks of improper payments in the program, and (3) CBP has analyzed the impact of the changes to the program on industry and government. GAO reviewed statutory, regulatory, and agency documents, and interviewed agency officials and industry representatives.

The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) generally expanded eligibility for the drawback program, which provides refunds to claimants of up to 99 percent of certain customs duties, taxes, and fees. For example, a claimant could claim a drawback refund on exported pants made in the United States using imported foreign fabric. The expansion from TFTEA has resulted in Customs and Border Protection (CBP) facing a growing workload. According to CBP officials, the most significant change from TFTEA is that it is now easier to qualify for certain drawback refunds. Industry representatives explained that new claimants are seeking drawback refunds and existing claimants are able to increase claim amounts. However, CBP has not adequately managed the increased workload and has not developed a plan for doing so. As a result, CBP faces delays in processing drawback claims that could result in uncertainty for industry, potentially impeding trade.

GAO Example of One Potential Drawback Claim

CBP has taken some steps to address risks of improper payments in the drawback program, but several risks remain. To help ensure it does not overpay funds, CBP now electronically verifies drawback claims against underlying import information. However, CBP cannot verify drawback claims against underlying export information because it does not maintain detailed information about exports in its new electronic system. To compensate for this lack of automated controls, CBP requires manual full desk reviews of a selection of claims to mitigate improper payment risks. However, CBP has not targeted certain claims for a full desk review since switching to the new system on February 24, 2018. The lack of review for claims, which numbered over 35,000 and represented an estimated $2 billion in claims filed as of August 23, 2019, increases the risk of improper payments.

CBP has not produced a reliable assessment of the economic impact of the changes to drawback refund eligibility because of data availability constraints, systems limitations, and other factors. CBP has not prioritized developing a plan to revisit its economic analysis, although new data and systems capabilities are becoming available. Without such a plan, CBP will not have a reliable assessment of the impact of the changes on industry and government.

GAO is making six recommendations, including that CBP develop a plan for handling its drawback workload, improve its validation activities, and prioritize developing a plan for an economic analysis of the regulation to understand its impact. CBP concurred with all six recommendations.

The drawback program refunds about $1 billion per year of certain  customs duties, taxes, and fees paid on imported merchandise. U.S.  Customs and Border Protection (CBP) generally provides these refunds  to claimants on imported merchandise following the export or destruction  of the merchandise. The United States first enacted this program in  1789. CBP is the primary entity responsible for overseeing the drawback  program. According to CBP, the purpose of the drawback program is to  create jobs and encourage manufacturing and exports. CBP recognizes  the drawback program as the most complex commercial program it  administers because the program involves every aspect of customs  business, including both imports and exports.

The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) lays  out changes to the drawback program. According to CBP, TFTEA  modernized the program, generally broadening the scope of potential  claims, extending the time period for claimants to file drawback claims,  and requiring electronic filing of them. TFTEA required the Secretary of  the Department of the Treasury (Treasury) to prescribe regulations for  determining the calculation of drawback refunds no later than February 24, 2018. Pursuant to this requirement, Treasury and CBP established  new regulations at the end of December 2018.

TFTEA included a provision for us to assess drawback modernization and  identify industries affected by changes in eligibility for drawback refunds  within 12 months from when the final regulations were issued. We  previously audited the drawback program in March 1994, when we  reported that procedures were inadequate to prevent excessive or  duplicate payments or detect fraudulent drawback claims. In this report,  we examine the extent to which (1) modernization affects drawback  refund eligibility and CBP’s management of its workload, (2) CBP has  taken steps to address risks of improper payments in the program, and  (3) CBP has analyzed the impact of the changes to the program on  industry and government.

To examine the extent to which modernization affects drawback refund  eligibility and CBP’s management of its workload, we reviewed relevant  documents to identify and describe expansions and limitations to  drawback refund eligibility that resulted from amendments made to the  drawback statute by TFTEA. Specifically, we reviewed key changes to  the drawback program enacted in TFTEA, along with other statutory,  regulatory, and agency documents. We then assessed steps that CBP  has taken to manage its workload against federal standards for internal  control. To examine the extent to which CBP has taken steps to address  risks of improper payments in the program, we assessed steps that CBP  has taken relative to federal internal control standards, including how  drawback modernization affects CBP’s ability to better validate claims.

For both of these objectives, we reviewed CBP guidance and interviewed  CBP officials in Washington, D.C., responsible for writing and  implementing the drawback regulations and policy and overseeing the  program’s operation. We also met with CBP officials in each of the four  Drawback Centers located in the field that process drawback claims  (Chicago, Illinois; Houston, Texas; Newark, New Jersey; and San  Francisco, California), as well as 15 industry representatives from a  variety of sectors who were engaged in drawback modernization, to  understand how CBP is implementing the changes to the drawback  program and the impact of the changes to the program.

To examine the extent to which CBP has analyzed the impact of the  changes to the program on industry and government, we evaluated  portions of CBP’s Regulatory Impact Analysis of the Modernized  Drawback Final Rule (RIA) against GAO’s economic analysis  standards. We also assessed whether a future assessment could  overcome the prior data limitations. See appendix I for a more detailed  description of our scope and methodology.

We conducted this performance audit from February 2018 to December  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Drawback refunds are a remittance of up to 99 percent of duties, taxes, or  fees previously paid by an importer. CBP makes these refunds on  imported goods on which the importer previously paid duties, taxes, or  fees, and subsequently exported from the United States or destroyed.  (See fig. 1.)

According to CBP, the rationale for the drawback program was to  encourage American commerce and manufacturing. It permits American  manufacturers to compete in foreign markets without the handicap of  including in their costs, and consequently in their sales price, the duty  they paid on imported merchandise. Claimants can apply for and obtain  the privilege of accelerated payment of drawback refunds. Accelerated  payment allows estimated drawback refunds to be paid prior to  liquidation of the drawback entry, provided that, among other things,  claimants have acquired and posted with CBP a bond in an amount  sufficient to cover the estimated amount of drawback to be claimed.

There are three main categories of drawback refunds: (1) manufacturing  drawback (direct identification and substitution), (2) unused merchandise  drawback (direct identification and substitution), and (3) rejected  merchandise drawback. Within each category, there are variations in  drawback eligibility, such as the ability to substitute imported  merchandise.  a.  Direct identification manufacturing drawback may be claimed on  exported or destroyed articles that have been manufactured or  produced in the United States with imported duty-paid  merchandise, if those articles have not been used in the United  States prior to export or destruction under CBP supervision. For  example, a claimant could claim a drawback refund on exported  pants made in the United States using imported foreign fabric.  (See fig. 2.)  b.  Substitution manufacturing drawback may be claimed on exported  or destroyed articles that have been manufactured or produced  in the United States using domestic merchandise substituted for  imported duty-paid merchandise meeting the statutory criteria,  where the articles have not been used in the United States. As a  result, domestic producers can select the most advantageous  sources for their raw materials and components without regard to  duties, saving them production costs. For example, a claimant  could claim a drawback refund on exported pants made in the  United States using domestic fabric substituted for imported  foreign fabric. (See fig. 3.)  a.  Direct identification unused merchandise drawback may be  claimed on imported merchandise that was exported or destroyed  under CBP supervision, without having been used within the  United States. For example, a claimant could claim a drawback  refund on unused imported designer dresses upon their  destruction. (See fig. 4.)  b.  Substitution unused merchandise drawback may be claimed on  goods that were exported or destroyed under CBP supervision,  without being used, and were substituted for imported  merchandise meeting the appropriate criteria. For example, a  claimant could claim a drawback refund on exported cars  substituted for imported foreign-made cars. (See fig. 5.)  3.  Rejected merchandise drawback may be claimed upon the  exportation or destruction under CBP supervision of imported duty- paid merchandise entered or withdrawn for consumption, provided it  meets the statutory criteria (i.e., not conforming to sample or  specifications, shipped without consent, determined to be defective at  the time of import, or ultimately sold at retail and returned). For  example, a claimant could claim a drawback refund on foreign fabric it  imported but returned to the seller because the fabric did not conform  to the specification of the claimant’s order. (See fig. 6.)

Drawback Refunds Claimed Annually Ranged from $631.6 Million to $1.4 Billion from 2009 through August 21, 2019

During calendar years 2009 through August 21, 2019, the total amount of  drawback refunds claimed ranged from $631.6 million to $1.4 billion. The  amount of drawback refunds claimed varied from year to year, but  generally rose between 2011 and 2016. Overall, in dollar terms,  substitution unused merchandise drawback remained the largest category  of drawback refund, as shown in table 1.

CBP’s Transition to Drawback Modernization

As originally enacted in 1789, the drawback program was limited to duties  paid on certain imported merchandise if the merchandise was exported  within a year. In the 1930s, drawback claimants could use substituted  merchandise for imported merchandise in specified circumstances.  Congress has continued to allow substitution for drawback refunds in  various forms. (See fig. 7.)

The U.S. International Trade Commission publishes and maintains the HTS. The HTS is  used to determine tariff classifications for goods imported into the United States. Each  item imported into the United States is classified in a category with an assigned 8-digit  HTS subheading number. The category may be subdivided into 10-digit HTS subheading  numbers for statistical purposes. The 4-digit and 6-digit nomenclature is consistent  internationally. CBP is responsible for fixing the final classification.

For unused merchandise substitution drawback claims, TFTEA also allows drawback  using the U.S. Department of Commerce Schedule B commodity number. Pub. L. No.  114-125, § 906(e)(4). We do not discuss the use of the Schedule B commodity number in  this report because, according to CBP, it is very rare that the Schedule B commodity  number is not identical to the HTS number. stating that importers are now jointly and severally liable with  claimants for refunds associated with their imported goods.

Treasury and CBP had 2 years from the date of enactment of TFTEA to  promulgate regulations implementing the TFTEA drawback provisions.  TFTEA also provided for an additional 1-year transition period (February  24, 2018–February 23, 2019) during which drawback claimants could file  under either the amended provisions or the drawback law as it previously  existed. When the government did not meet the 2-year deadline for  issuing regulations, which lapsed on February 24, 2018, a number of  companies filed suit. Subsequently, Treasury and CBP published the  Modernized Drawback Notice of Proposed Rulemaking in the Federal  Register on August 2, 2018 and separately published the Regulatory  Impact Analysis of the Modernized Drawback Notice of Proposed  Rulemaking. In an October 12, 2018 order, the Court of International  Trade ordered the United States to file the final rule developed pursuant  to the Modernized Drawback Notice of Proposed Rulemaking with the  Office of the Federal Register by December 17, 2018. The government  met that deadline, publishing the Modernized Drawback Final Rule in the  Federal Register and the Regulatory Impact Analysis of the Modernized  Drawback Final Rule (RIA). In the final rule, CBP summarized and  responded to public comments received on the Modernized Drawback  Notice of Proposed Rulemaking and established new policies and  procedures for the drawback program pursuant to TFTEA. In the RIA,  CBP provided its predictions of the impact—primarily in terms of costs,  benefits, and revenue transfers—of key changes to the drawback  program on industry and the U.S. government. CBP did not make  accelerated payments on or liquidate any TFTEA drawback claims until  the final rule was issued. CBP also did not make any drawback payments  during the partial federal government shutdown (December 22, 2018– January 25, 2019).

Under drawback modernization, CBP transitioned its filing process for  making claims for payment under the drawback program from its  Automated Commercial System (ACS) to its Automated Commercial  Environment (ACE). Previously, CBP required claimants to file a paper  claim, and electronic transmission of a claim summary through ACS was  optional. TFTEA required claimants to file all claims electronically on and  after February 24, 2018, but also allowed for a 1-year transition period  where claims could be filed under the existing drawback statute or under  the statute as amended by TFTEA. CBP designated ACE as the  electronic system for filing drawback claims.

CBP initially partially deployed ACE for the drawback program on  February 24, 2018, to allow electronic filing of claims. During the  transition period, claimants could file claims under the existing drawback  process (detailed in 19 C.F.R. part 191) or under the new drawback  process (detailed in 19 C.F.R. part 190). CBP fully deployed ACE for the  drawback program on February 24, 2019, the first day after the transition  period when all drawback claims had to be filed under the amended  statute and implementing regulations. After CBP mandated electronic  filing in ACE, drawback entry summary data had to be filed at the more  detailed line item level. ACE has expanded capabilities, such as  accounting for line item reporting for drawback claims and automatically  validating drawback claims against underlying import entries.

Changes in the broader trade policy context may also impact CBP’s  drawback program. In particular, 2018 witnessed a series of presidential  and agency actions that resulted in higher tariffs on a range of goods. For  example, in January 2018, the President issued Presidential Proclamation  9693 and Presidential Proclamation 9694, imposing tariff rate quotas and  increased duties on imports of solar cells and panels, and washing  machines and parts, effective February 7, 2018. Further, at the direction  of the President, the United States Trade Representative has imposed  additional duties on products of China in four tranches, in June 2018,  August 2018, September 2018, and August 2019. According to the United  States Trade Representative request for comments on a modification to  the fourth tranche, the four tranches cover an annual aggregate trade  value of approximately $550 billion. CBP has determined that the  aforementioned tariffs (commonly referred to as section 201 and 301  duties, respectively) are eligible for drawback refunds and issued  guidance on how to make such claims. For fiscal year 2019, Treasury  reported that it collected $70.8 billion in customs duties, as compared to  $41.3 billion in fiscal year 2018.

CBP Offices Responsible for Drawback Program

Within the Department of Homeland Security, CBP’s Office of Trade is  primarily responsible for managing the drawback program. CBP officials  described the roles and responsibilities of the several offices within CBP  that are involved, as follows:

Trade Policy and Programs. The Office of Trade Policy and  Programs provides policy and program oversight for the drawback  program.

Field Operations. The Office of Field Operations is responsible for  implementing the drawback program, including ensuring that the  Drawback Centers have the resources—allocations, staffing,  equipment—to perform their duties and meet CBP’s trade mission.

Drawback Centers. Drawback specialists located in one of the four  Drawback Centers in Chicago, Houston, Newark, or San Francisco  are responsible for reviewing and processing drawback claims. They  review claims, in whole or in part, to determine eligibility for drawback  refunds. (Appendix II describes CBP’s steps for filing and processing  drawback claims.) They also review and make determinations  concerning claimants’ (1) requests for drawback privileges for  accelerated payment and waiver of prior notice, (2) applications for  certain manufacturing rulings, and (3) protests of denied claims.

Regulations and Rulings. The Office of Regulations and Rulings is  responsible for issuing various types of binding rulings and decisions  on drawback refunds. These include decisions on protest applications  flagged for further review by the Drawback Centers as well as  prospective ruling requests filed by drawback applicants, such as  rulings on specific manufacturing drawback rulings and on the proper  classification of merchandise for substitution manufacturing drawback.  In addition to issuing binding rulings, the Office of Regulations and  Rulings is responsible for drafting any regulatory changes involving  the drawback program and provides technical advice for drawback  policy and litigation.

TFTEA Generally Expanded Eligibility for Drawback Refunds, but CBP Has Not Adequately Managed Its Growing Workload

TFTEA generally expanded eligibility for drawback refunds, with some  caveats, but CBP is not adequately managing its growing workload of  claims resulting from the changes. The substitution standard for drawback  claims under TFTEA generally allowed more merchandise to potentially  qualify for drawback refunds. However, it also limited the eligibility of  certain broadly categorized merchandise. TFTEA also expanded the  scope of the refund of taxes and fees for manufacturing claims and  standardized time limits to file claims. On balance, these changes, along  with certain limitations in CBP’s Automated Commercial Environment  (ACE), have led to an increase in the workload of drawback specialists.  However, CBP did not anticipate the increased workload and does not  have a plan to manage the increased workload, which has caused delays  resulting in uncertainty for industry—potentially impeding trade.

TFTEA Generally Expanded Eligibility for Drawback Refunds

Substitution Standard under TFTEA Generally Expanded Drawback Refund Eligibility, but Also Limited the Eligibility of Some Merchandise

Change of substitution standard: According to CBP officials, the most  significant change resulting from TFTEA is that it is now easier to  substitute merchandise and still qualify for drawback refunds. TFTEA  changed the substitution standard for certain drawback types, with new  rules reflecting a shift from a subjective to a more objective standard.  Previously, CBP applied a subjective ‘‘same kind and quality’’ standard  for manufacturing substitution drawback and ‘‘commercially  interchangeable’’ standard for unused merchandise drawback. For  example, CBP did not permit a U.S.-based clothing manufacturer, Jockey,  to substitute light blue underwear for dark blue underwear for an unused  merchandise drawback claim before modernization. In 1995, Jockey  submitted a request to CBP for a “commercially interchangeable” ruling to  permit it to substitute underwear that is the same size, style, and  specification, but different in color and part number—for example,  substitute light blue underwear for dark blue underwear. CBP ruled that  Jockey underwear was not “commercially interchangeable” for the  purpose of the unused merchandise substitution drawback. Under the new substitution standard for manufacturing drawback and unused  merchandise drawback, both the imported merchandise and the  substituted merchandise generally must match at the 8-digit or 10-digit  HTS classification to be eligible for drawback refunds. The new  substitution standard has made more merchandise eligible for drawback  refunds, such as the Jockey underwear that would now be eligible for  unused merchandise substitution drawback, as shown in the example for  one type of product in figure 8 below. It has also enabled automatic  acceptance and verification of drawback claims in ACE. CBP officials told  us that they had seen an increase in new claimants as a result of the  changes to the substitution standard, among other factors.

According to industry representatives we interviewed, the changes to the  substitution standard have enabled new companies to file for drawback  refunds and have expanded eligibility for existing clients. For example,  they stated that the changes to the substitution standard have allowed the  automotive industry to substitute domestic car exports for imported  foreign-made cars, as mentioned earlier. One industry representative  noted that as a result of the new substitution standard, an automotive  company that had been recovering about $2 million in drawback refunds  per year before TFTEA can now recover about $20 million a year.

Drawback trading: The new substitution standard may also broaden the  scope for “drawback trading,” according to industry representatives we  interviewed. They described “drawback trading” as matching excess  import and export activity through the use of a third-party special purpose  entity that exists for the sole purpose of maximizing drawback refund  recovery between currently unrelated importers and exporters with no  existing commercial relationship.

CBP officials we spoke to did not think the new substitution standard  should have any bearing on the potential for “drawback trading.” CBP  officials explained that although the substitution standard for certain  drawback claims had changed, TFTEA should not significantly affect  “drawback trading” because, as before TFTEA, the claimant would still  need to fulfill the possession and assignment standards. Finished  petroleum derivative drawback claims do not have a possession  requirement. CBP has permitted drawback where a company set up  relationships with the importer and exporter expressly to maximize  drawback for finished petroleum derivatives.

Limitation of basket provisions from unused merchandise substitution  drawback: While TFTEA’s change to the use of HTS classifications  generally expanded eligibility for certain drawback substitution claims, it  concurrently limited eligibility in certain situations. Specifically, TFTEA  prohibited eligibility for unused merchandise substitution of merchandise  that is classified as “other” at both the 8-digit and 10-digit HTS  subheadings for drawback refunds. Such classifications are considered  basket provisions. For example, shrimps and prawns that fall under the  HTS 1605.21.10.30 basket provision, as shown in figure 9, are not eligible  for substitution unused merchandise drawback, as follows. If the shrimps  and prawns are not in airtight containers, and are not products containing  fish meat or prepared meals, they fall under “other” at the 8-digit HTS  subheading (1605.21.10). If these shrimps and prawns are also frozen  but not breaded, they fall under “other” at the 10-digit HTS statistical suffix  (1605.21.10.30), categorizing them in a basket provision.

According to CBP, the products most affected by the limitation on basket  provisions from unused merchandise substitution drawback based solely  on 2016 HTS counts will be screws, nuts, and bolts; motor vehicle parts  and accessories; and transmission shafts. One company we spoke with  had been able to claim over $1 million in unused merchandise  substitution drawback a year prior to modernization, for an imported  ceramic substrate used for cleaning emissions in cars. The company also  makes domestically sourced ceramic substrate, which it exports. CBP  considered these two products commercially interchangeable. However,  according to the company, the ceramic substrate is classified as a basket  provision and the company is no longer eligible for drawback refunds. from the same inventory. If the imported item is substituted for an  exported item that is not fungible with the imported item, it does not  qualify for direct identification. able to administer the new statistical  reporting number. For example, the  article description must be clear, the HTS  classification must be correct, and the  new number must not require difficult or  prohibitively expensive laboratory or other  testing.

If merchandise is not eligible for direct identification drawback but is  classified as a basket provision, it may still qualify for a drawback  refund if a company can successfully petition the Committee for  Statistical Annotation of Tariff Schedules for new 10-digit HTS  statistical breakouts. However, such a workaround is time-intensive  and not guaranteed, according to an industry representative. In one  example, the representative explained that a chemical company with  a product classified as a basket provision successfully petitioned for a  new statistical breakout. The company produces chemical methanol  and was unable to file a TFTEA drawback claim in 2018 because of  the basket provision restriction. Such requests are generally  considered by the committee twice a year.

Standardizing time limits: TFTEA also expanded eligibility for drawback  refunds by standardizing the drawback filing deadline. Previously,  drawback claim filing deadlines varied based on type of claim and time  between import and export or destruction, ranging from 3 years to 5 years  from importation to exportation or destruction, followed by a 3-year  window to file a claim. TFTEA generally standardized the timelines for the  acceptance of claims to be up to 5 years from import. CBP expects the  new eligibility time frames will give some drawback claimants more time  to file for drawback and potentially increase drawback eligibility for some  claimants.

Expanding taxes and fees: TFTEA expanded the scope of drawback  refunds by explicitly including taxes and fees for manufacturing drawback  claims. Prior to TFTEA, the drawback statute did not specify that taxes  and fees were eligible for manufacturing drawback. TFTEA extended  drawback refunds to taxes and fees for manufacturing claims. Some  industry representatives we spoke to told us they were benefiting from  this expansion. For example, a representative from the U.S. oil industry  noted that the new law is “much more lucrative” for oil companies that  refine crude oil because they can now get drawback refunds on the oil  spill tax and harbor maintenance fee.

CBP Has Not Adequately Managed the Growing Workload Resulting from TFTEA

CBP has not adequately managed the growing workload drawback  specialists have been experiencing since TFTEA. Drawback specialists  told us that they had been experiencing increasing workloads since CBP  implemented the changes from TFTEA. The largest Drawback Centers  expect their backlog of old claims will take about 5 years to work through.  This workload is the cumulative result of various factors that have caused  delays with processing claims, rulings, and privileges applications. The  workload of the Drawback Centers is growing because of a learning curve  related to the switch from a paper-based to an electronic process, delays  in processing claims, and an increase in the number of claims, as  discussed below. Further, the Drawback Centers continue to face staffing  shortages.

Learning curve: According to CBP officials, drawback specialists face a  learning curve as they become familiar with ACE and the new rules for  drawback refunds. They explained that drawback specialists are still  working through pre-TFTEA claims that were migrated into ACE. From  January 1, 2019 to September 13, 2019, CBP Drawback Centers  liquidated about 18 percent of the value of the remaining claims filed in  CBP’s Automated Commercial System (ACS) and about 27 percent of the  number of remaining claims filed in ACS. For TFTEA claims, CBP  provided in-person training to drawback specialists before the final  regulations were issued, as well as in May 2019 and September 2019.  CBP has also been updating its guidance for processing claims, and,  according to officials, plans to continue to offer trainings for drawback  specialists as it finalizes the guidance. Nevertheless, adjusting to the  changes has hampered the efficiency of drawback specialists. For  example, drawback specialists explained that they had to learn to toggle  between different systems that require separate logins to review event  history, file uploads, and tax information within ACE in order to fully  process a claim.

Delays in processing claims: CBP faced a delay in processing drawback  claims because of a hold relating to the issuance of the drawback final  rule. Claimants could begin filing TFTEA claims on February 24, 2018,  but CBP did not process any of these claims pending the final rule— which CBP issued on December 17, 2018. As a result, all 18,319 claims  filed during this 10-month period were put on hold. CBP lifted the hold  when the final rule was issued.

CBP’s workload continued to grow because certain TFTEA manufacturing  claims were on hold. Following TFTEA, the proposed and final rule  required claimants who wanted to operate under an existing  manufacturing ruling to file a supplemental application for a limited  modification to the existing ruling, as previously discussed. According to  CBP interim guidance, to ensure compliance with TFTEA drawback  requirements, a limited modification must include a bill of materials or  formula, annotated with the applicable HTS subheading numbers.

Claimants who did not apply for a limited modification by February 23,  2019, would need to apply for a new manufacturing ruling. CBP received  about 800 applications for limited modifications, which it began approving  on September 16, 2019. Between February 2019 and July 2019, CBP  also received about 50 applications for new manufacturing rulings, which  it has not yet begun to process. These processes remain paper-based  (see fig. 10). CBP officials explained that CBP generally does not process  manufacturing drawback claims until claimants are issued up-to-date  ruling numbers. Until the new or modified manufacturing rulings are  approved, CBP officials explained, they will not provide accelerated  payment or process manufacturing claims. Moreover, some  manufacturing rulings can take years to finalize. For example, one  chemical company noted that CBP’s lab analyzes every piece of the  manufacturing process, and as a result, it is awaiting final decisions on  new manufacturing rulings from 2013.

Increase in number of claims: CBP has also seen an increase in the  number of drawback claims because of TFTEA’s changes to the  drawback program and limitations in ACE. Prior to TFTEA, the number of  drawback claims per calendar year ranged from 11,690 to 13,291. CBP  saw a large increase in the number of drawback claims in 2018 and 2019.  (See table 2.)

CBP limited the number of lines in a drawback claim in ACE, which  increased the number of drawback claims filed. Prior to TFTEA, claims  were not limited by line. Because of system constraints, claims filed in  ACE are restricted to 10,000 lines per claim. CBP had predicted that  this ACE line limitation would increase the number of claims by a factor of  four. Evidence to date indicates a significant increase in workload for  certain Drawback Centers. For example, the Chicago Drawback Center  noted that two claimants had filed over 4,000 claims between February  24, 2018 and February 23, 2019, whereas these same claimants had filed  less than 50 claims in the prior year. According to the industry  representatives we spoke with, the line limit in ACE added more work for  industry and CBP because it made it necessary for claimants to break up  the volume of their claims into different applications. For example, one  broker used to file drawback claims four times a year on behalf of one  refinery, but now has to file 300 times per year to account for the line limit.  Drawback specialists pointed out that each claim stands on its own. As a  result, they explained that they must liquidate each claim in ACE, which  involves a number of quality control steps such as verifying that the claim  is ready to be liquidated, relevant rulings are valid, and all validation  activities are complete.

As discussed earlier, the changes to the substitution standard have also  led to an increase in new drawback claimants, according to CBP  officials. CBP has received applications from over 500 new claimants  since February 24, 2018. New claimants require additional work, including  drawback specialists’ manual reviews of claims, privilege applications,  and ruling requests, as follows.

Claims. Drawback specialists explained that drawback claims from  new claimants are subject to a full desk review. The specialists will  request supporting documentation to ensure that the appropriate  statutory and regulatory requirements are met. They also determine  drawback due on the basis of the completed drawback claim, the  applicable general manufacturing drawback ruling or specific  manufacturing drawback ruling, and any other relevant evidence or  information. According to CBP, the time it takes a drawback  specialist to conduct a full desk review varies by claim, based on the  nature of the claim and the experience of the drawback specialist.  CBP reported that it could take more than 3 years for CBP to conduct  a full desk review and determine the final disposition of a drawback  claim.

Privilege applications. Claimants can also apply for privileges  including accelerated payment privileges, a waiver of prior notice of  intent to export or destroy, or a one-time waiver of prior notice of  intent to export or destroy. Claimants must continue to submit paper  applications for such privileges and drawback specialists must  manually review the privilege applications. According to CBP, most  claims are eligible for accelerated payment of drawback refunds.

Manufacturing rulings. Lastly, if a claimant is seeking either a direct  identification manufacturing drawback or a substitution manufacturing  drawback, it must manually apply for a manufacturing ruling using a  paper form submitted through email, which may require significant  documentation and review, as discussed earlier. CBP maintains the  manufacturing rulings as paper files. For example, the Drawback  Center in Newark stores manufacturing rulings in rows of filing  cabinets. (See fig. 11.)

Additionally, CBP has not been able to respond to all privilege  applications within 90 days, as set forth in the regulations. Between  February 2018 and July 2019, CBP received almost 600 new privilege  applications. CBP missed the 90-day deadline about 60 percent of the  time. According to drawback specialists, they missed this deadline  because of their workload. According to an industry representative,  delays in processing privilege applications mean companies cannot  receive their drawback money in a timely manner. Such delays cause  uncertainty for industry, potentially impeding trade.

Drawback specialists face new obstacles to managing automatic  liquidation of drawback claims in ACE. According to CBP officials,  previously, drawback specialists had at least 10 days of lead time to address an automatic liquidation. Now, Drawback Centers must  continually monitor the automatic liquidation reports. Because of the way  ACE operates, drawback specialists may only have 1 day of lead time  before a claim automatically liquidates. According to drawback  supervisors, such monitoring is significantly increasing their workload.  Further, drawback specialists told us that one way they were managing  their increased workload was by extending automatic liquidation, which  can be done up to three times, as discussed in appendix II. This practice  goes directly against CBP’s guidance. Moreover, if they continue this  practice, specialists may be forced to liquidate claims at zero if they run  out of extensions.

Further, as the workload continues to grow, Drawback Centers continue  to face staffing shortages. As of October 26, 2019, CBP met the  congressionally mandated staffing level for drawback specialists of 37 for  the first time in over 5 years. In CBP’s 2017 Resource Optimization  Model, it reported an optimal staffing level of 40 to meet its drawback  staffing needs. CBP’s staffing level of 37, as of October 2019, did not  meet this target. According to CBP officials, although Drawback Centers  are utilizing overtime, the drawback specialists are not able to keep up  with the influx of work.

CBP has not adequately managed its drawback workload because it did  not anticipate the increase in workload and did not plan for the increase  accordingly. Federal standards for internal control note that management  should evaluate performance and hold individuals accountable for their  internal control responsibilities, which include evaluating pressure on  personnel to help personnel fulfill their assigned responsibilities in  accordance with the entity’s standards of conduct. Management can  adjust excessive pressures using many different tools, such as  rebalancing workloads or increasing resource levels. However, CBP has  not brought staffing to its optimal level, and has not adjusted the workload  in Drawback Centers through ACE to account for the increase in claims,  rulings, and privilege applications. Prior to TFTEA, CBP officials  explained that CBP could not control the workload of the Drawback  Centers because claimants mailed their paper-based claims to the  Drawback Center of their choice. Now, CBP has greater visibility and  flexibility to potentially control the work flow to the Drawback Centers  through ACE, but has not done so. CBP officials said they had anticipated  that ACE automation would reduce drawback specialists’ workload, but  experience, to date, indicates that workload increased. Until CBP  develops a plan for managing its increased workload, it risks further  delays in drawback claim processing that result in uncertainty for industry,  potentially impeding trade—which runs counter to its strategic goal of  enhancing U.S. competitiveness by enabling lawful trade and travel, such  as by reducing barriers to the efficient flow of trade and streamlining and  unifying processes and procedures.

CBP Has Taken Steps to Address Certain Risks of Improper Payments in the Drawback Program under Modernization, but Has Not Addressed Others TFTEA Made Three Key Changes to the Drawback Process That CBP Expects to Strengthen Its Ability to Validate Claims and Recover Inaccurately Claimed Drawback Refunds

CBP has taken steps to mitigate improper payment risks in the drawback  program. Specifically, CBP expects three key changes to the drawback  process under modernization will strengthen its ability to validate claims  and recover inaccurately claimed drawback refunds: (1) requiring  electronic filing in ACE, (2) extending the record retention period, and (3)  broadening liability. However, CBP has not addressed several other risks  for improper payments in the drawback program. These risks relate to (1)  limitations in CBP’s existing desk review process, (2) establishing  electronic proof of export, and (3) targeting a selection of claims for  review.

TFTEA contained provisions amending the drawback statute that CBP  expects will help it to remediate certain internal control deficiencies over  drawback claim processing. Prior independent audits identified significant  or material internal control weaknesses related to CBP’s processing of  drawback claims, including that CBP’s drawback system lacked effective  automated controls to prevent the overpayment of drawback claims and  that the record retention period was not appropriate to ensure that  support for drawback claims was maintained for the length of the  drawback claim lifecycle. CBP expects that three key changes to the  drawback process under modernization will strengthen its ability to  validate claims and recover inaccurately claimed drawback refunds, as  follows.

Requiring the electronic filing of drawback claims. On February  24, 2019, the drawback program fully transitioned to ACE.  Specifically, all drawback claims are now required to be filed  electronically in ACE and include drawback entry summary data at  the more detailed line item level. Line item reporting requires  claimants to provide certain relevant information for the designated  imported merchandise on a drawback claim associated with the line  item on an import entry summary, including the tariff classification,  quantity, and value, as well as the duties, taxes, and fees assessed  thereon.

With electronic filing and line item reporting, CBP can now  automatically compare and verify the amounts of duties, taxes, and  fees claimed on the drawback claim against the amounts paid on the  import entry summary, which CBP expects will help ensure that it  does not overpay funds. CBP’s prior system for filing drawback  claims did not have the capability to electronically compare and verify  claims against underlying import entries upon which the drawback  claim was based to determine whether an excessive amount had  been claimed at the individual line item level, according to prior  independent audits. CBP’s transition to ACE is intended to mitigate  risks of improper payments on drawback-related imports, by helping  to ensure through automated validations that the amount paid for  drawback claims against a given import entry does not exceed 99  percent of the duties, taxes, and fees collected at the individual line  item level.

Extending the record retention period for certain drawback  claims. For all TFTEA drawback claims, supporting records must now  be maintained for a period of 3 years from the date of liquidation of  the claim, rather than 3 years from the date CBP pays a drawback  claimant. This new time frame requires claimants with accelerated  payment privileges to maintain supporting records for a longer period  than before modernization. Prior to modernization, the drawback  record retention period sometimes fell short of the time in which CBP  liquidated a drawback claim, preventing CBP from substantiating a  claim with complete documentation. The extension of the record  retention period provides CBP with more time to request documents  needed to verify claims during desk reviews, which in turn should  strengthen its ability to recoup over claimed drawback refunds.

According to CBP officials, if a claimant fails to provide documents as  directed, or if the documents do not support the claim as presented,  CBP can liquidate the claim at $0, or other diminishment as  appropriate, and ACE will then issue a bill for outstanding funds owed.

Broadening liability for drawback claims. Following TFTEA, liability  for the full amount of a drawback claim shifted from the claimant to  both the claimant and the importer of the designated imported  merchandise upon which drawback refunds are claimed. CBP expects  that establishing joint and several liability, consistent with TFTEA, will  help it to recoup over claimed drawback refunds by holding the  importer of record, in addition to the claimant, responsible for payment  of erroneous or false drawback claims. According to the industry  representatives we spoke to, the impact of the joint and several  liability change remains to be seen, but it could limit the incentive of  importers to engage in drawback filing with exporters or claimants to  avoid liability.

In addition to implementing these statutory changes, CBP has been  working with a statistician to develop a more robust basis for sampling  and selecting claims for review. For example, CBP has determined that it  will target higher-value claims for more frequent review.

CBP Has Not Addressed Several Other Risks for Improper Payments in the Drawback Program

CBP lacks effective automated controls to prevent overpayment of  drawback refunds related to export information. CBP guidance notes  that a statutory prohibition on multiple drawback claims is set forth in 19  U.S.C. § 1313(v), which restricts the use of merchandise that is exported  or destroyed to a single claim for drawback. Unlike import information,  which is included in ACE to allow CBP to electronically compare and  verify claims against underlying import entries, similar export information  is not included in ACE. Therefore, CBP cannot perform electronic  comparisons of export data within ACE to help ensure that it does not  make overpayments on drawback-related exports. For example, if a  claimant exported 10 widgets and filed one drawback claim for six  exported widgets and another claim for five exported widgets, CBP would  not be able to systematically verify that the second drawback claim was  excessive and thus invalid. To compensate for the lack of automated  controls, CBP designed an internal control for the drawback program that  targets a selection of claims for a manual full desk review by drawback  specialists. (See appendix II for an explanation of what such desk reviews  involve). However, CBP has not addressed several other risks for  improper payments in the drawback program. These risks relate to (1)  limitations in CBP’s existing desk review process, (2) establishing  electronic proof of export, and (3) targeting a selection of claims for  review.

CBP’s Existing Desk Review Process Cannot Systematically Identify Duplicate or Excessive Claims for Drawback Related to Export Information

CBP’s existing manual desk review process does not have the ability to  systematically confirm the validity of export documentation and confirm  that export documentation is accurately being used across multiple  claims. CBP officials noted that, while export documentation could be  used across multiple claims, by law, claimants cannot file multiple  drawback claims based on the same exported merchandise, as discussed  above. Under TFTEA, a person claiming drawback refunds based on the  exportation of an item must provide proof of export. Such proof must  establish fully the date and fact of exportation and the identity of the  exporter and may be established through the use of records kept in the  normal course of business or through an electronic export system, as  determined by CBP. To comply with this requirement, CBP requires  claimants to (1) provide summary data as part of the drawback claim in  ACE that includes the date of export, name of exporter, description of the  goods, quantity and unit of measure, tariff classification number, and  country of ultimate destination; and (2) maintain actual proof of export,  which can be records kept in the normal course of business, and provide  such proof upon demand by CBP. However, CBP officials told us that  claimants only provide proof of export upon request by the drawback  specialist, and that such requests typically are made after the claim is  accepted in ACE and only in the context of desk reviews. Drawback  specialists do not routinely request, store, or compare export  documentation except for claims selected for desk reviews. CBP has no  way of tracking whether claimants are using their export information  excessively, and, according to officials, CBP has not yet assessed the  feasibility of doing so. CBP officials explained that having the ability to  flag excessive export submissions across multiple claims would enhance  CBP’s protection against over claiming, but that further review is needed  to determine whether flagging is feasible with current system capabilities.  CBP officials said that they intend to look further into the matter in fiscal  year 2020. As a result, the drawback program remains at risk of improper  payments on drawback related to export information as claimants could  over claim drawback refunds by using non-existent, insufficient, or  falsified export documentation, or by reusing export documentation  across multiple claims for merchandise that was never exported.

CBP Has Not Taken Steps to Establish Electronic Proof of Export

CBP has not taken any steps to establish electronic proof of export,  although it has a longstanding goal to designate the Automated Export  System as an electronic means of establishing proof of export. Federal  standards for internal control call for agency management to design the  entity’s information system and related control activities to achieve  objectives and respond to risks. However, CBP has not yet deemed the  Automated Export System as a reliable system of record for proof of  export. At the time the final rule was issued in December 2018, CBP  commented that the Automated Export System, as it stands, could not  provide sufficient proof of export, and CBP would therefore continue to  require documentary proof of export until further notice. Specifically, CBP  determined that the Automated Export System does not establish the  date and fact of exportation, or the identity of the exporter—information  that can be relied upon to demonstrate drawback eligibility. CBP officials  in headquarters told us that while being able to develop a reliable system  of record for proof of export remains a goal, CBP does not have a plan or  time frames for doing so as it intends to revisit the matter in fiscal year  2020. CBP officials explained that their focus has been on transitioning  the drawback program to ACE, including by training staff and addressing  industry concerns. Until CBP implements effective control activities for the  drawback program, the government may be subject to revenue loss  through duplicate or excessive claims for drawback related to export  information. We cannot precisely estimate the potential savings that might  result from CBP taking steps to prevent over-claims because the current  rate of improperly claiming against the same export documentation  multiple times is unknown. Further, the current number and amount of  drawback claims improperly using export information is unknown.  However, if these steps reduced drawback-related costs by even 1  percent of the over $1 billion in annual drawback refunds, this could  equate to millions of dollars in savings.

CBP Has Not Targeted over 35,000 Claims for Review since It Disabled the Selection Feature, and the Number of Claims Not Targeted for Review Continues to Increase

CBP has not targeted a selection of claims for a manual full desk review  since it disabled the selection feature in ACE, and the number of claims  not targeted for review continues to increase because CBP has not  turned the selection feature back on. The lack of review increases the  risks of improper payments for claims filed, which stood at over 35,000 as  of August 23, 2019, and represented an estimated $2 billion. To mitigate  risks of improper payments in the drawback program, CBP designed an  internal control for the drawback program in which a selection of claims is  targeted for a manual full desk review by drawback specialists. Prior to  modernization, CBP officials told us that they would target 1 percent of  the claims per claimant and 1 percent of the entries on a drawback claim  for a full desk review. Drawback specialists provided examples of having  conducted full desk reviews in which they discovered that the claimants  had failed to substantiate the claim by, for example, providing insufficient  proof of export. They explained that the claimants had to repay their  drawback refund and had CBP target subsequent claims for a limited  desk review. However, CBP officials explained that when CBP  transitioned the drawback program to ACE starting on February 24, 2018,  a system error forced CBP to disable the selection feature in ACE.  Certain claims that have been submitted since the system error was  discovered have not been targeted for a full desk review.

Federal standards for internal control call for agency management to  identify, analyze, and respond to risks related to achieving the defined  objectives. These standards note that agency managers should  comprehensively identify risks and analyze them for their possible effects,  as well as design responses to these risks as necessary to mitigate them.  CBP officials told us that they are working toward turning the selection  feature back on as soon as CBP can address the system error. However,  CBP did not expect the issue to persist as long as it has to date (22  months, as of December 2019). As a result, even when the selection  feature is reactivated, it will only be applied to new claims filed after that  point. CBP does not have a plan to retroactively target claims for review  that had already been accepted in ACE during the system error, or to  identify and analyze risks from targeting to adjust targeting in the future.  For example, CBP has not determined whether specific claimant  characteristics or claim types are more frequently associated with  compliance problems. CBP officials explained that analyzing risks from  targeting to identify non-compliance patterns across claimants is not  something CBP has done in the past because CBP is account based  and does not compare claims across claimants. However, CBP officials  acknowledged the feasibility—with ACE’s new capabilities—of  systematically pulling and analyzing non-compliance data input into ACE  by the drawback specialists during limited or full desk reviews, and told us  that they intend to explore this matter further in fiscal year 2020. These  officials stated that taking these steps would be valuable for improving  risk management in the drawback program and that doing so is likely to  be feasible with current staff resources.

Without finalizing or implementing procedures to retroactively target  claims for review and taking steps to analyze non-compliance patterns to  improve future compliance processes, CBP may miss opportunities to  protect U.S. trade revenue from improper payments of drawback claims.  We cannot precisely estimate the potential savings that might result from  CBP pursuing claims from the period when the selection feature was  disabled, because the amount of drawback recovery resulting from the  review of this universe is unknown, and the actual amount would depend  on the number of reviews conducted, amount of improper payments  discovered, and ability to recover these payments. However, if these  reviews recovered even half of 1 percent of the $2 billion in un-reviewed  claims, this could equate to millions of dollars in additional recoveries.

CBP Has Not Produced a Reliable Assessment of the Economic Impact of the Changes to Drawback Refund Eligibility Because of Data Constraints and Other Factors CBP Has Not Reliably Established the Economic Impact to Industry and Government through Its Prospective Estimate of the Impact of Drawback Refund Eligibility Changes

CBP published a required Regulatory Impact Analysis of the Modernized  Drawback Final Rule (RIA) of new drawback regulations in 2018 to  outline, prospectively, the anticipated consequences of this economically  significant regulatory action. The RIA was to include a quantification and  monetization of anticipated benefits and costs, to the best extent possible  with information available at the time. As of December 2019, CBP’s RIA  was the only formal analysis that had been conducted on the impact of  changes to drawback eligibility under modernization on industry and  government.

We assessed three key portions of the RIA relating to impact on industry  and changes to drawback eligibility against GAO’s standards for review of  economic analysis, and found that CBP had not produced reliable  estimates. Various factors limited the analyses that CBP could conduct.  For example, because the RIA was published prospectively, post- modernization program data were, necessarily, not yet available.  According to CBP officials, CBP also developed the RIA before it had  transitioned to ACE, a database with enhanced capabilities. However, in  some cases, we found that CBP was not transparent about the level of  uncertainty in its assumptions resulting from these limitations. We did not  comprehensively assess the entire RIA (a 251-page document containing  more than 90 tables) or assess any of it against the Office of  Management and Budget’s guidelines for an RIA. Therefore, the  following discussion of the RIA is not an assessment of whether the RIA  met the criteria for required regulatory analyses outlined in the Office of  Management and Budget Circular A-4. Our assessment of each of the  relevant portions of the RIA is based on GAO’s standards for review of  economic analysis, and outlined below.

Affected industries: CBP determined that a wide range of industries would  be affected by modernization but did not determine whether the dollar  impact of eligibility changes from modernization would be more  concentrated in some industries than in others because of data  limitations. To reach the conclusion that a wide range of industries would  be affected by modernization, CBP took a sample of companies that had  submitted drawback claims and examined these companies to determine  their primary industry. According to GAO standards, an economic  analysis should state its objective and the scope of the analysis should be  designed to address this objective. According to CBP officials, CBP  designed this sample to support statements about the number of  companies affected but not the dollar size of the impact, although CBP  did not explicitly state the intent of this design in the RIA. At the time of  the RIA, according to these officials, designing a dollar-weighted  sample—which could support statements about which industries were  most affected in terms of financial costs and benefits—would have  required a prohibitive amount of work with paper records. However, the  officials noted that a dollar-weighted sample should now be feasible  because most of the necessary information is now stored electronically in  ACE.

Expansion of substitution eligibility: CBP estimated that the expansion of  substitution eligibility would account for $1 billion (98 percent) of the $1.02  billion estimated total 10-year amount of increased drawback refunds  under modernization; however, we found that this estimate was not  reliable because of the amount of uncertainty in key assumptions.  According to GAO standards, an economic analysis should consider all  relevant alternatives and describe and justify the analytical choices,  assumptions, and data used. CBP’s estimate was based on  assumptions about changes to the dollar amount per drawback claim and  number of drawback claims as a result of modernization and system  limitations in the number of lines per claim. Specifically, CBP assumed  that claim values would remain equal to their historical average (adjusted  for line limitations in ACE) and that the number of claims under  modernization would grow primarily in the first year after modernization.

However, CBP did not justify some key methodological assumptions  about the amount and number of claims and did not take sufficient steps  to inform on the extent to which the conclusions of the analysis would  remain similar, even if it changed some of these assumptions. CBP  estimated the dollar amount per claim based on a historical average of  drawback claim amounts but did not explain in the RIA why the historical  average is an appropriate assumption for drawback claim amount. CBP  officials told us that they considered a range of different drawback claim  amount values and growth rates as a result of significant annual variation  in drawback claim amounts prior to TFTEA. However, CBP did not  include variation in claim dollar amounts in its published sensitivity  analyses for this table or otherwise discuss, within the scope of these  analyses, whether its conclusions would have been affected by this  variation in the assumed amount per claim.

Additionally, CBP’s estimate of expected increase in the number of claims  that would be filed under modernization contains several key assumptions  that it justifies based on emails and discussions with industry  representatives and CBP subject matter experts, the details of which are  not transparent in the RIA. We reviewed these emails and found that the  two industry representatives whom CBP cited expressed uncertainty  about the effects of modernization and provided estimates of growth in  substitution drawback claims that varied by 20 percentage points from  one another. CBP also sought public comments on these estimates and  did not receive any, according to officials. As the estimated effect of this  change constitutes nearly all of the estimated increase in drawback  refunds in the RIA, the uncertainty around key assumptions for this  analysis means that the overall actual effects of modernization could  differ widely from CBP’s estimate.

Limitations on basket provisions: CBP estimated that eliminating claims  with basket provisions would cost industry about $11 million over 10  years; however, we found that this estimate was not reliable because of  the amount of uncertainty in key assumptions. According to GAO  standards, an economic analysis should consider all relevant alternatives  and describe and justify the analytical choices, assumptions, and data  used. These standards further note that, when feasible, an economic  analysis should adequately quantify how the statistical variability of the  key data elements underlying the estimates of the economic analysis  impacts these estimates. While CBP’s general methodology was  reasonable, its sample design was too small to ensure reliable results and  some assumptions were not fully explained or transparent. CBP sampled  50 out of 2,346 substitution unused merchandise claims from 2016, of  which 16 contained lines classified under basket provisions in the HTS  code, and used this sample to estimate the number of affected claims and  lines, as well as average affected line value. CBP officials told us that  CBP selected this sample size because of the labor-intensive process  required to examine paper records from the relevant claims. However, in  the RIA, CBP did not discuss how this small sample size caused  imprecision in its estimates. Further, CBP did not establish that this  time-limited sample was generalizable beyond 2016, either for the  proportion of affected claims and lines or for the average affected line  value. CBP officials said that, to alleviate these issues, CBP sought public  comments on these estimates and did not receive any. According to CBP  officials, at the time of their analysis, there was no evidence about the  average dollar amount of future claims. However, CBP did not conduct a  sensitivity analysis on these assumptions, for example, to determine how  much its estimates would change if the number or dollar amount of claims  utilizing basket provisions was larger or smaller than CBP had assumed.

TFTEA Has Enhanced Data and System Capabilities for Economic Analysis of Changes to Drawback Eligibility, but CBP Has No Plans to Conduct Further Analysis in the Near Future

Beyond its RIA, CBP has not conducted economic impact analysis of the  changes to drawback eligibility under modernization, including on  industry, and does not have plans to do so in the near future. Because  the changes are new and CBP has devoted many of its resources to  rolling out modernization, CBP stated that, while it intends to follow  relevant requirements for regulatory review, it has not yet prioritized  developing a plan for further assessments of the economic impact of the  regulation. CBP officials stated that any future plans for retrospective  review would follow Treasury guidance. This guidance states that  priorities for retrospective review projects of existing significant  regulations should be based upon an understanding of the economic  impact of the regulatory action on industry and the government, among  other factors. According to the RIA, the drawback modernization  regulations are an “economically significant regulatory action.” The  Treasury guidance states that such an understanding can be achieved  through an ex post analysis of the effects of the regulation on the public,  industry, or the government, including increased revenue or costs.

An ex post analysis of impact on industry and the impact of major  changes to drawback eligibility would have fewer limitations than the RIA,  which analyzed the changes prospectively (using historical data to predict  future outcomes). For example, because of system updates, more  detailed data about lines within claims are now stored electronically,  which may reduce the need to conduct sampling in order to estimate the  impact of changes. Additionally, because the regulation is now in effect,  information such as the number of claims filed can be determined with  actual data rather than by projection. According to CBP officials, within 3  to 5 years the agency will have sufficient data to conduct a reliable ex  post analysis of the impact of the changes. Useful analysis might be  possible sooner, as well. CBP assumed in the RIA that some of the most  important effects of modernization would occur in the first year. According  to GAO standards, the reliability of an ex post analysis will depend not  only on the sufficiency of data, but also on whether the analysis has  considered and properly dealt with elements such as objective and scope,  methodology, analysis of effects, transparency, and documentation.

At present, however, CBP has not prioritized developing a plan with time  frames to conduct such an analysis when the data are available—a plan  that could include identifying key areas of analysis, data sources, and  appropriate methodologies. Without an ex post analysis, CBP cannot  reliably determine the financial effects of changes to drawback refund  eligibility on industry and the government.

CBP disburses about $1 billion in drawback refunds per year and expects  the amount of drawback refunds dispersed to continue growing.  According to CBP, TFTEA modernized CBP’s system for processing  drawback claims, transitioning it from a paper-based to an electronic  system, in an attempt to mitigate longstanding risks in the program.

Despite the expected increase in drawback claims, CBP did not anticipate  and then adequately manage the increase in drawback specialists’  workload. As a result, CBP has delayed timely processing of some  drawback claims, rulings, and privilege applications, which has resulted in  uncertainty for industry—potentially impeding trade.

Since modernization, drawback claims continue to be at risk of improper  payments with vulnerabilities in CBP’s export verification and quality  control system. While drawback modernization addressed longstanding  risks associated with the program by automatically verifying import  information, export information still creates a risk. CBP cannot  systematically verify the validity and accuracy of a company’s proof of  export. As a result, companies could still over claim drawback refunds by  using non-existent, insufficient, or falsified export documentation, or by  reusing export documentation across multiple claims.

Additionally, while CBP established internal controls to mitigate improper  payment risks in the program, such as by targeting a selection of claims  for review, it disabled this quality control measure for claims submitted  since drawback modernization began in February 2018. Over 35,000  claims accepted since drawback modernization—amounting to over $2  billion—remain at risk for noncompliance. Without CBP finalizing and  implementing procedures to target claims retroactively and in the future,  CBP will continue to miss opportunities to protect U.S. trade revenue.  Further, if CBP does not design its targeting system to mitigate identified  risks, future claims also are at risk of noncompliance.

Prior to drawback modernization, CBP was not able to produce a reliable  assessment of the economic impact of the changes to the drawback  program on industry and government because of data availability  constraints, systems limitations, and other factors. However,  modernization has eliminated some of these constraints, and CBP  estimates that within several years it will have sufficient data to conduct  an ex post analysis. However, CBP has not prioritized developing a plan  to do so. Without such an analysis, CBP cannot be certain about the  economic impact of drawback modernization.

We are making a total of six recommendations to CBP. Specifically:  The Commissioner of CBP should ensure that the Office of Field  Operations, in consultation with the Office of Trade, develops a plan for  managing its increased workload. (Recommendation 1)

The Commissioner of CBP should ensure that the Office of Trade  assesses the feasibility of flagging excessive export submissions across  multiple claims and takes cost-effective steps, based on the assessment,  to prevent over claiming. (Recommendation 2)

The Commissioner of CBP should ensure that the Office of Trade  develops a plan, with time frames, to establish a reliable system of record  for proof of export. (Recommendation 3)

The Commissioner of CBP should ensure that the Office of Trade turns  the claim selection feature in ACE back on and finalizes and implements  procedures to target claims for review that were accepted into ACE during  the period in which the selection feature was disabled. (Recommendation  4)

The Commissioner of CBP should ensure that the Office of Trade  analyzes the results of its targeting of claims for review and designs  responses to mitigate identified risks. (Recommendation 5)

The Commissioner of CBP should ensure that the Office of Trade  prioritizes developing a plan to conduct an ex post analysis of the impact  on industry and government of key changes to the drawback program,  including time frames and methodology. (Recommendation 6)

We provided a draft of this report to CBP and Treasury for comment. In its  comments, reproduced in appendix III, CBP concurred with all six of our  recommendations. CBP also provided technical comments, which we  incorporated as appropriate. We requested comments from Treasury, but  none were provided.

We are sending copies of this report to the appropriate congressional  committees, the Commissioner of CBP, and the Secretary of Treasury. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8612 or gianopoulosk@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) the extent to which modernization affects  drawback refund eligibility and U.S. Customs and Border Protection’s  (CBP) management of its workload, as well as the extent to which CBP  has (2) taken steps to address risks of improper payments in the program  and (3) analyzed the impact of the changes to the program on industry  and government.

To examine the extent to which modernization affects drawback refund  eligibility and CBP’s management of its workload, we reviewed statutory,  regulatory, and agency drawback documents to identify and describe  expansions and limitations to drawback refund eligibility. Specifically, we  reviewed the Trade Facilitation and Trade Enforcement Act of 2015  (TFTEA), the Modernized Drawback Notice of Proposed Rulemaking,  and the Modernized Drawback Final Rule to identify key changes  resulting from amendments made to the drawback statute and  implementing regulations. We also reviewed CBP’s internal guidance,  which defines the standards that drawback specialists must meet when  processing claims for drawback refunds in the Automated Commercial  Environment (ACE) and under TFTEA. To understand the regulations and  policies for drawback modernization, we interviewed CBP officials with  the Offices of Regulations and Rulings and Trade Policy and Programs  within the Office of Trade. To gain insight into how drawback  modernization is working, in practice, we interviewed CBP officials from  the Office of Field Operations and the four Drawback Centers. We visited  the largest Drawback Centers, located in Newark, New Jersey, and San  Francisco, California, to observe how they manage their workload and  process claims. As context for CBP’s increasing workload following  drawback modernization, we also collected data on the following:

The number of drawback claims filed in calendar years 2018 and  2019, as of August 21, 2019. We also compared these data against  the historical number of drawback claims filed from 2009 through  2017, as reported by CBP in its Regulatory Impact Analysis of the  Modernized Drawback Final Rule (RIA). In addition, we reported on  the amount of drawback claimed during this period as context for the  size of the drawback program. TFTEA (1) provided for a transition  period, from February 24, 2018 to February 23, 2019, during which  drawback claimants could file under either the amended provisions or  the drawback law as it existed previously; and (2) thereafter required  all claims to be filed under TFTEA starting on February 24, 2019. As  such, claims filed between 2009 and 2017 reflect pre-TFTEA  drawback claims. Claims filed in 2018 and 2019 reflect drawback  claims filed under both the amended provisions and the drawback law  as it existed previously.

The number and value of claims migrated to ACE from the Automated  Commercial System—CBP’s prior system for filing drawback claims— as well as the number and value of these claims liquidated in the first  9 months of 2019.

The number of limited modifications to existing manufacturing rulings  submitted between February 24, 2018 and February 23, 2019.  Claimants who wanted to operate under an existing manufacturing  ruling were required to file a supplemental application for a limited  modification to the existing ruling by February 23, 2019.

The number of new manufacturing rulings submitted between  February 24, 2019 and July 22, 2019. Claimants who want to operate  under a manufacturing ruling but did not apply for a limited  modification by February 23, 2019, need to apply for a new  manufacturing ruling.

The number of privilege applications submitted between February 24,  2018 and July 22, 2019. Claimants can apply for and obtain drawback  privileges for accelerated payment and waiver of prior notice.

We incorporated data reliability questions in our interviews with agency  officials, such as how the data are derived, maintained, and updated, and  how CBP ensures their completeness and accuracy. Based on our  interviews with agency officials, we found these data to be sufficiently  reliable for providing context for CBP’s growing workload since  modernization. We then discussed steps that CBP had taken to manage  its workload, such as how it had updated its staffing models, managed  processing privilege applications, and managed automatic liquidation. We  assessed CBP’s responses against federal standards for internal control,  which call for agency management to evaluate pressure on personnel to  help personnel fulfill their assigned responsibilities in accordance with the  entity’s standards for conduct.

We reviewed staffing data covering fiscal years 2014 through 2019 for  drawback specialists. We previously reported on staffing data from fiscal  years 2014 through 2016. We incorporated data reliability questions in  our interviews with agency officials for the fiscal years 2017 through 2019  staffing data. To determine staffing shortfalls, we compared actual staffing  data against the minimum staffing level mandated by the Homeland  Security Act and the optimal staffing level identified in CBP’s Resource  Optimization Model for 2017. We determined these data to be  sufficiently reliable for the purposes of comparing actual to optimal and  mandated staffing levels.

In addition, to understand how CBP is implementing the changes to the  drawback program under modernization and the impact of the changes to  the program, we interviewed a non-generalizable sample of 15 industry  representatives from a variety of sectors who (a) had submitted public  comments on the proposed rule, (b) were part of CBP’s Trade Support  Network Drawback Subcommittee, or (c) met our criteria for both (a) and  (b). According to CBP officials, this subcommittee was CBP’s primary  forum through which officials obtained input on the modernized drawback  regulations from industry. We developed a standard set of questions to  ask industry representatives, for example, regarding their company’s  involvement in the drawback program, how drawback modernization has  impacted their company, what industries have been most impacted by the  changes, and any unexpected or unintended results of the modernization.

To examine the extent to which CBP has taken steps to address risks of  improper payments in the program, we reviewed prior independent audits  of the program, as well as statutory, regulatory, and agency documents  delineating changes to the program, to understand how the changes are  expected to remediate prior audit findings. These documents included  TFTEA, as well as CBP’s proposed and final rules for modernized  drawback, the RIA, and internal and external guidance for filing and  processing drawback claims. We also interviewed agency officials in  headquarters and in the field to discuss prior audit findings and the  successes and challenges, if any, to drawback modernization addressing  identified issues. We then assessed steps that CBP had taken to mitigate  improper payment risks in the drawback program against federal  standards for internal control, which call for agency management to  identify, analyze, and respond to risks related to achieving the defined  objectives. We collected data on the number of claims filed between  February 24, 2018 and August 23, 2019, and the total amount claimed,  that were not targeted for a full desk review. Based on our interviews with  agency officials, we found the data to be sufficiently reliable for the  purposes of reporting on the total number and value of claims that were  not targeted for a full desk review during this period.

To examine the extent to which CBP has analyzed the impact of the  changes to the program on industry and government, we evaluated  CBP’s RIA against GAO’s standards for review of economic analysis.  We assessed those portions of the RIA that relate directly to the financial  impact of changes to drawback eligibility, corresponding to three tables  describing (1) affected industries, (2) expansion of substitution eligibility,  and (3) limitation of basket provisions. We then compared our  assessments against applicable Department of the Treasury standards to  determine if a future assessment could overcome the prior data  limitations, warranting a limited review of certain aspects of an existing  rule. However, we did not comprehensively assess the RIA (a 251-page  document containing more than 90 tables) or assess it against the Office  of Management and Budget’s standards for regulatory impact analysis.  Therefore, our discussion of the RIA is not an assessment of whether the  RIA met the criteria for required regulatory analyses outlined in the Office  of Management and Budget Circular A-4.

We conducted this performance audit from February 2018 to December  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Steps for Filing and Processing Drawback Claims

Drawback claim filing and processing generally follows three steps.  Claims are (1) submitted for initial acceptance or rejection, (2) reviewed  for drawback eligibility as applicable, and (3) liquidated with full, partial, or  no payment. U.S. Customs and Border Protection (CBP) officials  indicated that while the transition from the Automated Commercial  System (ACS) to the Automated Commercial Environment (ACE) under  drawback modernization has automated the initial intake of drawback  claims, the review of claims to determine drawback eligibility, as  presented, remains largely a manual process.  1.  Claim submission. Prior to modernization, claimants had to file  paper claims, including supporting documentation. CBP was required  to accept or reject claims and authorize accelerated payment within  90 days of receiving the paper claim. However, claimants could also  submit an electronic summary of the claim, known as a shell record,  through ACS. For accelerated payment claims with a shell record,  CBP was required to certify the approved claim for payment within 21  days of receiving the electronic summary of the claim.

Under modernization, claims must be filed electronically. The  drawback claim is transmitted electronically via ACE and supporting  documentation, when required, is uploaded via the Document Image  System component of ACE. CBP officials explained that the  transition to ACE had automated the initial intake process of drawback  claims. Instead of a drawback specialist having to manually validate  the claim for completeness and mail a response back to the claimant,  ACE is able to make that determination within seconds and provide  immediate feedback to the claimant on whether the claim is accepted  or, if rejected, what errors need to be addressed.  2.  Claim review. CBP policy before and after modernization has been to  require a full or limited desk review of selected claims, according to  CBP officials. Claims necessitating a drawback specialist’s full desk  review will undergo a more comprehensive verification of the  complete drawback claim that often requires additional information  from the claimant. If additional information is required to process the  drawback claim, CBP will send a formal request for information to the  claimant. Additionally, CBP officials said that before and after  modernization, if CBP identified compliance issues during its review of  a drawback claim, the drawback specialist could target any  subsequent claims filed by the claimant for a limited desk review.  According to CBP officials, the time it takes a drawback specialist to  conduct a desk review varies by claim, based on the nature of the  claim and the experience of the drawback specialist. CBP reported  that it could take more than 3 years for CBP to conduct a full desk  review and determine the final disposition of a drawback claim.  3.  Claim liquidation and payment. Prior to modernization, CBP would  manually verify that drawback claimants had the accelerated payment  privilege on file. CBP stated that claimants with the privilege of  accelerated payment of drawback generally received their refunds 14  days after CBP accepted claims and authorized accelerated payment.  Now, under drawback modernization, a claimant can receive  accelerated payment without a drawback specialist’s involvement.  ACE is programmed to automatically make accelerated payment on  claims that have on file the accelerated payment privilege and a  drawback bond that equals or exceeds the amount of the claim(s).  CBP stated that claimants with the privilege of accelerated payment  generally receive their refunds within 21 days of claim acceptance.

Before and after modernization, drawback claims are set to  automatically liquidate if all the designated import entries within a  claim are liquidated and final within 1 year of the claim date, according  to CBP officials. CBP officials said that drawback specialists must  extend the claim to prevent it from automatically liquidating before the  necessary reviews have been completed. Drawback claims can be  extended for three 1-year periods. CBP officials explained that  liquidation extensions are intended to provide additional time to obtain  information or documentation necessary to complete the review of a  drawback claim. If the claimant fails to provide documents as directed,  or if the documents do not support the claim as presented, the claim  will be liquidated based on the information on file, which may result in  liquidation at $0, or other diminishment, as appropriate.

CBP officials described the liquidation and payment of drawback  claims with and without accelerated payment privileges, as follows. At  the time of liquidation, for claims with accelerated payment privileges,  ACE issues an additional refund if the final claimed amount is greater  than the accelerated payment amount, or a bill, if the accelerated  payment amount is greater than the final claimed amount. If the  accelerated payment amount is the same as the amount determined  at liquidation, no further action is necessary. For claims without  accelerated payment privileges, ACE will issue a refund for the  drawback amount approved at liquidation. Claimants have 30 days  from the issuance of a bill to repay CBP any amount due. Claims may  be reliquidated up to 90 days from the date of an original liquidation.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Kim Frankena (Assistant  Director), Alana Miller (Analyst-in-Charge), Andrew Kurtzman, and Esther  Toledo made key contributions to this report. The team benefited from the  expert advice and assistance of Debbie Chung, Martin De Alteriis, Jeff  Isaacs, Christopher Keblitis, Grace Lui, and Oliver Richard.

Since 1789, the U.S. government’s drawback program has encouraged manufacturing and exports by refunding certain customs duties. For example, a merchant who paid duties on imported fabric, made it into clothes, and then exported the clothes could claim a refund for import duties paid. The program refunds about $1 billion a year.

We found problems in how CBP checks these claims. For example, CBP’s new electronic records system doesn’t include enough details on exports. CBP must manually check claims but currently isn’t doing so. It could be issuing refunds it shouldn’t issue.

We made 6 recommendations to address this and other problems.