Audit Report
ASSETS FORFEITURE FUND AND SEIZED ASSET DEPOSIT FUND ANNUAL FINANCIAL STATEMENT FISCAL YEAR 2000
September 2001 01-23

The Assets Forfeiture Fund and Seized Asset Deposit Fund (AFF/SADF) is a reporting entity within the Department of Justice (DOJ). The AFF/SADF reports the amount of monies seized, along with the amounts realized from forfeitures, by agencies participating in the DOJ Asset Forfeiture Program (AFP). The AFF/SADF also reports the operating expenses of the AFP and the status of property seized and forfeited. In FY 2000, the AFF/SADF reported $731.8 million in forfeited property and $545.2 million in seized property.

The SADF and AFF were created to serve as repositories for seized funds and the sale proceeds from forfeited property. The proceeds deposited in the AFF are used to cover the operating costs of the AFP. These include payments to state, local, and foreign governments; joint law enforcement operations; contract services in support of the program; and satisfaction of innocent third party claims. Operational expenses do not include the salaries and administrative expenses of AFP participants incurred while conducting investigations leading to seizure and forfeiture, and these are not reported in the AFF/SADF financial statements.

This audit report contains the Annual Financial Statement of the AFF/SADF for the fiscal year ended September 30, 2000. Under the direction of the Office of the Inspector General, the audit was performed by PricewaterhouseCoopers LLP (PwC) and resulted in an unqualified opinion. An unqualified opinion means that the financial statements present fairly, in all material respects, the financial position and results of operations of the entity. The AFF/SADF also received an unqualified opinion on its financial statements for FY 1999 (OIG Report No. 00-24). Comparative financial statements were not required this year and are therefore not presented.

The AFF/SADF continued to improve in its ability to meet federal financial reporting requirements. The improvements in the quality of the financial records allowed the auditors to continue issuing an unqualified opinion. However, the auditors identified a reportable condition on recording and accounting procedures for seized and forfeited property that still requires management's attention. No instances of noncompliance with laws and regulations were reported for FY 2000.

I.   Mission and Organization Structure

The mission of the asset forfeiture program is to disrupt, damage and dismantle criminal organizations, through the use of civil and criminal forfeiture. The program attempts to remove those assets that are essential to the operation of those criminal organizations and punish the criminals involved by denying them use of the proceeds of their crimes.

The funds of the asset forfeiture program are under the management control of the Asset Forfeiture Management Staff, Justice Management Division (AFMS). The Seized Asset Deposit Fund (SADF) is listed in the U.S. Treasury Federal Account Symbols and Titles as 15X6874. The Assets Forfeiture Fund (AFF or Fund) is a special fund and is listed as 15X5042. The SADF and most AFF activities are administered by the U.S. Marshals Service (USMS).

The SADF was created administratively by the Department to ensure positive control over, and security of, funds seized by agencies participating in the Department's asset forfeiture program. Public Law (P.L.) 102-140, dated October 28, 1991, provided authority for the investment of SADF monies. The SADF serves as a repository for seized funds that are not the property of the Government. The SADF holds seized cash, the proceeds of any pre-forfeiture sale of seized property, and forfeited cash not yet transferred to the AFF. The income and expenses from operating businesses under seizure may also be managed through the SADF. Because most funds held in the SADF are not Government property, funds in the SADF cannot be spent for law enforcement purposes of the Department. The SADF is a dynamic fund. At any given time, there are several thousand cash seizures resident in the SADF in various stages of the forfeiture process. During any accounting period, several hundred accounting transactions occur that affect the balance in the SADF. The majority of these transactions involve the deposit of new seizures into the SADF or the withdrawal of funds from the SADF for deposit into the AFF upon the successful conclusion of a forfeiture action. Once the funds have been forfeited successfully, they are transferred from the SADF to the AFF.

The AFF was created by the Comprehensive Crime Control Act of 1984 (P.L. 98-473, dated October 12, 1984) to be a repository of the proceeds of forfeitures under any law enforced and administered by the Department of Justice. See 28 U.S.C. § 524(c). Forfeited cash is transferred from the SADF to the AFF by the USMS. Proceeds from the sale of forfeited property are also deposited into the AFF by the USMS. Also, pursuant to 28 U.S.C. § 524(c)(5), all amounts earned on investment of AFF and SADF balances are deposited to the AFF. The interest earned on the AFF balances is the property of the Government. Interest earned on SADF balances is initially deposited to the AFF pursuant to the statute cited above. The earnings either remain there or are disposed of in accordance with the prevailing law of the judicial circuit with jurisdiction over the funds.

A.     Limitations on the Use of the Assets Forfeiture Fund

The AFF is defined by statute. Authorities and limitations governing use of the AFF are specified in 28 U.S.C. § 524(c). In addition, use of the AFF is controlled by laws and regulations governing the use of public monies and appropriations (e.g., 31 U.S.C. § 1341-1353, 1501-1558, Office of Management and Budget (OMB) Circulars, and provisions of annual appropriation acts). It is further controlled by the Attorney General's Guidelines on Seized and Forfeited Property (July 1990), policy memoranda, and statutory interpretations issued by appropriate authorities. Restrictions on the use of AFF monies retain those limitations after the monies are made available to a recipient agency unless otherwise provided by law. Monies are available for use only to the extent receipts are available in the AFF.

In Fiscal Year (FY) 2000, these monies were available under a permanent indefinite appropriation to finance the following:

The monies deposited in the AFF are not available for general use by a recipient agency for investigative, prosecutive, or other purposes, even if that activity may result in the seizure of assets for forfeiture. Resources of the AFF are intended to cover the business expenses of the asset forfeiture program, with any excess balances available for other more discretionary purposes, including investigative expenses covered by the appropriated, definite portion of the Fund. Excess unobligated balances identified at the end of a fiscal year may be declared a "Super Surplus" balance. Super Surplus balances may be allocated at the discretion of the Attorney General for "... any Federal law enforcement, litigative/prosecutive, and correctional activities or any other authorized purpose of the Department of Justice" pursuant to 28 U.S.C. § 524 (c) (8) (E).

B.     Holding and Accounting for Seized and Forfeited Property

The USMS is responsible for holding and maintaining real and tangible personal property, seized by participating agencies, for disposition. Seized property can be either returned to the owner or forfeited to the Government. Forfeited property is subsequently sold, placed into official use, destroyed, or transferred to another agency. Seized and forfeited property is not to be considered inventory held for resale in the normal course of business.

The estimated value of non-monetary seized assets (property), net of estimated liens, held by the USMS at the end of FY 1999 and FY 2000 is presented in the Notes to the Principal Statements, rather than within the Principal Statements, because the Government does not have title to the property. The Statement of Federal Financial Accounting Standards (SFFAS) Number 3, Accounting for Inventory and Related Property, mandates this method of presentation, in order to avoid overstating the entity's assets and liabilities, while providing needed accountability over seized assets.

II.   Performance Goals and Results

The AFF directly supports the Department's Strategic Plan for FY 2000-2005, Goal 1, to keep America safe by enforcing Federal criminal laws and, Goal 2, to prevent and reduce crime and violence by assisting state, tribal, local and community-based programs. In support of the Department's goals, allocations in the amount of $428.4 million were provided in FY 2000 for program operations, investigative expenses, joint law enforcement operations, and equitable sharing. This was made possible by $440.1 million in revenues generated from the cash and proceeds from the sale of assets deposited into the AFF. To the extent that deposits do not cover expenses, AFF carry forward balances are used to support program expenses. The carry forward balances consist primarily of special case funds and reserves for operational requirements.

From current balances, $231.4 million was shared with foreign governments and state and local law enforcement agencies that participated in joint investigations with Federal agencies that led to asset seizures and forfeitures. Goal 2 expenses are displayed in Figure 4, under Section III.

The program invests cash balances from both the AFF and SADF in Government securities. These investments resulted in earnings of $61.5 million during FY 2000, including $5.2 million in interest earnings on deposits from the Bank of Credit and Commerce International (BCCI) case. Investment earnings over a five-year period are indicated in Figure 3, under Section III.

The AFF's end-of-year unobligated balance increased to $419.9 million, a change of $65.2 million from the 1999 balance of $354.7 million. The increase is due in part to reserves for pending extraordinary equitable sharing payments associated with revenues recognized as a result of deposits into the Fund from the disposal of forfeited assets. As of September 30, 2000, known extraordinary sharings pending (comprises 62 cases with asset values in excess of $1.0 million for which the forfeiture process, including disposition, has concluded and assets proceeds have been deposited into the Fund) total $144.9 million. One of the cases included is Nasser-David for which sharing is expected to exceed $47.0 million. Due to the size of the expected equitable sharing payments, it is extremely unlikely that current year receipts will be available to support these extraordinary payments. Therefore, a portion of the unobligated balance is reserved to ensure sufficient funds are available for payment as these funds will be the source of sharing payments when final approval is received.

Efforts continue to capture all relevant program expenses against revenues earned. For example, in the sale of forfeited real estate, the USMS enters into the Consolidated Asset Tracking System deposits for the net proceeds of the sale because this is the normal industry practice. To capture all relevant expenses, the USMS obtains and scrutinizes HUD-1 forms to obtain information on the gross sales amount and associated sales expenses. As the financial systems are refined or replaced, program improvements are implemented, and personnel receive continuing education in appropriate topics, the quality of the financial information will increase. Systemic improvements include the capability to capture delivered and undelivered orders accruals in the Department's financial system, the Financial Management Information System (FMIS); a review initiated by the AFMS in FY 2000 of the costs and efficiency of the property management functions within the federal asset forfeiture program; and continuing education for program personnel in financial investigations, tracing assets, presenting financial evidence in court, and new legislative topics (e.g., Civil Asset Forfeiture Reform Act (CAFRA), P.L. 106-185, April 25, 2000) and financial personnel in accruals (Ex CAP), obligation concepts and policies, obligation reporting, and reimbursements.

III.   Financial Performance

During FY 2000, a total of $507.0 million in cash and proceeds was deposited into the AFF (see Figure 1). This is $136.5 million less than the $643.5 million deposited in FY 1999. Receipts in FY 1999 were significantly higher primarily due to deposits from several large cases, such as Nasser-David ($89.0 million). The FY 2001 Budget of the United States Government (Budget) estimated FY 2000 receipts at $503.0 million, $4.0 million less or 1.0 percent lower than realized.

Figure 1

¹ Excludes BCCI interest income.

² Includes interest income of $5.2 million and payments of principle and interest in the amounts of $24.6 million and $24.1 million, respectively.

Figure 2

d

A five-year history of AFF deposits is indicated in Figure 2.

Revenues represent actual or expected cash inflows that occur as a result of the asset forfeiture program's ongoing activities. Revenues are a measurement of the activities that occurred in FY 2000. To be recognized, revenues must meet two criteria: (1) they have been realized (noncash resources have been converted to cash or rights to cash) and (2) they have been earned. SFFAS Number 3, Accounting for Inventory and Related Property, requires that revenue associated with property not disposed of through sale be recognized upon approval of distribution. AFF revenues over a five-year period are shown in Figure 3.

Investment earnings realized totaled $61.5 million for FY 2000, $7.7 million more than the $53.8 million in interest earned in FY 1999 and are 23 percent greater than the $50.0 million estimated for FY 2000 in the FY 2001 Budget. The greater earnings are due in part to longer investment periods because disbursements for pending extraordinary equitable sharings did not occur. Actual sharing is difficult to predict because many factors influence both the amount and time of disbursement of sharing payments, including the time needed for Departmental approval of equitable sharing requests for cases with asset values exceeding $1.0 million and appeals of forfeiture judgments.

Net forfeiture revenue is the sum of cash and proceeds from the sale of forfeited property and includes adjustments for transactions such as transfers to and from other Federal agencies, refunds to other Federal agencies, and recoveries of asset management costs.

Figure 3

d

The investment of seized cash from the BCCI case accounted for $5.2 million or 8.4 percent of the interest earnings. BCCI funds are restricted funds subject to claims and are disbursed by Court Order. In FY 2000, payments of principal and interest in the amounts of $24.6 million and $24.1 million, respectively, occurred. Earnings from the investment of BCCI funds will be reduced in the future as the remaining balance is disbursed.

Expenses in support of Goal 1 of the Department's Strategic Plan include program operation expenses such as asset management expenses, case related expenses, payment to third parties, special contract services, training and printing, and ADP equipment. Expenses in support of Goal 2 include equitable sharing and joint law enforcement operations. The distribution of Goal 1 and Goal 2 expenses over a five-year period is shown in Figure 4.

Figure 4

d

Net position, which is the equity of the U.S. Government in the asset forfeiture program, has increased 5.7 percent since FY 1999. The ratio of net position to total assets was .42 to 1.0 in FY 2000, an increase of .07 since FY 1999. The ratio of net position to total assets, excluding the value of BCCI cash on deposit in the SADF, was .42 to 1.0 in FY 2000, an increase of .02 since FY 1999. Due to continual investment of idle cash in Government securities, the AFF and SADF Fund balances with the U.S. Treasury remain low.

Current assets exceed short term liabilities by a ratio of 3.5 to 1.0. This relationship indicates an increase of 1.9 from FY 1999 primarily because there was over a 50 percent decrease in liabilities and continues to indicate that the AFF will be able to meet its obligations when due. In the ratio of current assets to current liabilities, current assets equal total entity assets while current liabilities equal the total of liabilities covered by budgetary resources except for deposit funds.

IV.   Systems, Controls, and Legal Compliance

AFMS is responsible for maintaining internal accounting and administrative controls that are adequate to ensure that (1) transactions are executed in accordance with applicable budgetary and financial laws and other requirements, consistent with the purposes authorized, and are recorded in accordance with Federal accounting standards; (2) assets are properly safeguarded to deter fraud, waste, and abuse; and (3) appropriate performance measurement information is adequately supported. AFMS is materially in compliance with the requirements and responsibilities defined in numerous laws and administrative requirements, including the Federal Manager's Financial Integrity Act of 1982, Federal Financial Management Improvement Act of 1996, and OMB Circulars A-123 and A-127.

The General Accounting Office has reported the asset forfeiture programs of the Department of the Treasury and the Department of Justice on their most recent list of high risk program areas. This designation has been based on an assertion that the two cabinet agencies have failed to properly implement the provisions of Section 887 of Title 21 of the United States Code. The two Departments have disagreed with the interpretation of the statute in light of subsequent enactments for the following reasons.

In 1990, all agencies except Customs participated in one fund (Justice Assets Forfeiture Fund) and the U.S. Marshals Service managed all property subject to judicial forfeiture. The Treasury Forfeiture Fund Act of 1992 (P.L. 102-393, §638) created the Treasury Forfeiture Fund (see 31 U.S.C. 9703), and established separate property and funds management as the new national public policy. All Treasury agency seizures were directed to the Customs property management contractor.

At the present time, consolidation is feasible only if one Department adopts the additional workload of the other fund and provides property management services to the other. In addition, the sample data GAO relied on for its conclusion that savings could be realized was very limited, was developed several years prior to creation of a separate Treasury forfeiture program, and is not directly applicable to the current environment. In our view, the savings of such a consolidation have not been proven to be sufficient to embark upon this complicated undertaking. Before any policy decision is made to consolidate, a thorough, independent review should be conducted to determine if consolidation makes sense operationally as well as financially.

Limitations of the Financial Statements

The financial statements have been prepared as required by the Chief Financial Officers Act of 1990. Generally Accepted Accounting Principles in effect as of September 30, 2000, were followed in the preparation of these financial statements. The statements were prepared from the books and records of the AFF and SADF in accordance with OMB Bulletin 97-01, Form and Content of Agency Financial Statements, as amended, and the AFF and SADF accounting policies which are summarized in the financial statements. These statements are, therefore, different from the financial reports, also prepared by the AFF and SADF pursuant to OMB directives, used to monitor and control the program's use of budgetary resources.

While the statements have been prepared from the books and records of the asset forfeiture program in accordance with the formats prescribed by OMB, the statements are in addition to the financial reports used to monitor and control budgetary resources which are prepared from the same books and records.

The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity. Should unfunded liabilities arise, the cost of which may be met by the permanent, indefinite portion of the Fund, these liabilities may be met without further appropriation action.

V.   A Prospective View

Deposits for FY 2000 totaled $507.0 million, which is $136.5 million less than the $643.5 million received in FY 1999. The FY 1999 receipts included some unusual activity that may not recur in future years, i.e., a deposit of $89.0 million, representing the U.S. Government's share of proceeds repatriated from the Swiss Government as a result of the Drug Enforcement Administration's successful efforts to forfeit millions of dollars in drug proceeds from a Colombian drug trafficker, Julio Nasser-David. It is difficult to project future receipt levels since receipts are dependent upon many factors including new cases being developed, the uneven flow of cases through the forfeiture process, the level of appropriations that federal law enforcement agencies receive, the level of personnel and monetary resources dedicated to the forfeiture program, international cooperation in forfeiture and repatriation matters, federal court decisions, and evolving forfeiture legislation.

CAFRA makes various changes to federal laws relating to the forfeiture of civil assets that may significantly decrease receipts deposited into the AFF over the next two to three fiscal years. The reform legislation was effective on August 23, 2000. The fiscal resources of the AFF must first cover the business or operational expenses of the asset forfeiture program, and the Fund is not allowed to operate at a deficit.

AFMS is projecting a decline in FY 2001 of about $100.0 million in receipts due to the effects of CAFRA, a 20 percent decline from FY 2000 receipts. AFMS anticipates the decline in receipts will occur in the second half of FY 2001 because assets "in the pipeline" will keep FY 2001 receipts up through the first half of the fiscal year. By FY 2002, overall receipts are anticipated to decline for a second consecutive year by another $100.0 million, reflecting a 40 percent drop from FY 2000 receipts. Subsequently, it is expected that the declining effect will diminish as the program adjusts to the new environment.

While it is too early to judge with confidence the effects of the reform legislation, there are early signs that new seizures by the Drug Enforcement Administration, Federal Bureau of Investigation, and Immigration and Naturalization Service are declining. Significant decreases in forfeiture revenue will make it more difficult to cover operational expenses. At risk are the discretionary expenses, with the most at risk being allocations for joint operations with state and local law enforcement agencies, followed by investigative expenses.

On the other hand, CAFRA expands forfeiture into new areas, resolves ambiguities and issues that split the courts, and gives the Government new procedural tools. The potentially significant negative impacts of CAFRA can be decreased if the Department moves aggressively to use the expanded forfeiture of proceeds authority and is cautious in allocating Fund monies for discretionary expenses that might be in excess of anticipated receipts.

Office of the Inspector General
U.S. Department of Justice

Director, Asset Forfeiture Management Staff
Asset Forfeiture Program
U.S. Department of Justice

We have audited the accompanying balance sheet of the Assets Forfeiture Fund and Seized Asset Deposit Fund, a financial reporting component of the U.S. Department of Justice referred to herein as the AFF/SADF, as of September 30, 2000, and the related statements of net cost, changes in net position, budgetary resources and financing, for the year then ended, and have issued our report thereon dated January 2, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, after giving effect to the adjustment described in Note 10, present fairly, in all material respects, the financial position of the AFF/SADF at September 30, 2000, and its net cost of operations, changes in net position, budgetary resources, and financing for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The Management's Discussion and Analysis (MD&A) and Required Supplementary Information (RSI) are not required parts of the financial statements but are supplementary information required by the Federal Accounting Standards Advisory Board and OMB Bulletin No. 97-01, Form and Content of Agency Financial Statements, as amended. We did not audit the information and express no opinion on it. However, we have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the MD&A and RSI. We determined that the AFF/SADF management had not fully completed the reconciliation of financial transactions with its intra-governmental trading partners, as required by OMB Bulletin No. 97-01.

In accordance with Government Auditing Standards, we have also issued a report dated January 2, 2001 on our consideration of the AFF/SADF's internal control and a report dated January 2, 2001 on its compliance with laws and regulations. Those reports are an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

PriceWaterhouseCoopers LLP
January 2, 2001
Arlington, Virginia

Office of the Inspector General
U.S. Department of Justice

Director, Asset Forfeiture Management Staff
Asset Forfeiture Program
U.S. Department of Justice

We have audited the accompanying balance sheet of the Assets Forfeiture Fund and Seized Asset Deposit Fund, a financial reporting component of the U.S. Department of Justice referred to herein as the AFF/SADF, as of September 30, 2000, and the related statements of net cost, changes in net position, budgetary resources and financing, for the year then ended, and have issued our report thereon dated January 2, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

The Asset Forfeiture Management Staff (AFMS) of the AFF/SADF is responsible for establishing and maintaining accounting systems and internal control. In fulfilling this responsibility, estimates and judgments are required to assess the expected benefits and related costs of internal control policies and procedures. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that: (1) transactions are properly recorded, processed, and summarized to permit the preparation of reliable financial statements in accordance with generally accepted accounting principles, and to safeguard assets against loss from unauthorized acquisition, use or disposition; (2) transactions are executed in compliance with laws governing the use of budget authority and other laws and regulations that could have a direct and material effect on the financial statements, and any other laws, regulations and government-wide policies identified in Appendix C of OMB Bulletin No. 01-02; and (3) transactions and other data that support reported performance measures are properly recorded, processed, and summarized to permit the preparation of performance information in accordance with criteria stated by the AFMS. Because of inherent limitations in any internal control, errors or fraud may nevertheless occur and not be detected. Also, projection of any evaluation of internal control to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate.

In planning and performing our audit of the AFF/SADF's financial statements, we obtained an understanding of the design of significant internal controls and whether they had been placed in operation, tested certain controls and assessed control risk in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements. We limited our control testing to those controls necessary to achieve the objectives described above and we did not test all controls relevant to operating objectives as broadly defined by the Federal Managers' Financial Integrity Act of 1982. Our purpose was not to provide an opinion on the AFF/SADF's internal controls. Accordingly, we do not express such an opinion.

With respect to internal control relevant to data that support reported performance measures, we obtained an understanding of the design of significant internal controls relating to the existence and completeness assertions, as required by OMB Bulletin No. 01-02. Our procedures were not designed to provide assurance on internal control over reported performance measures. Accordingly, we do not provide an opinion on such controls.

We noted certain matters in the AFF/SADF's internal control that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of internal control that, in our judgment, could adversely affect the entity's ability to meet the internal control objectives described in the second paragraph. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control elements does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited or material to a performance measure or aggregation of related performance measures may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of internal control would not necessarily disclose all matters in internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, none of the reportable conditions identified below are considered material weaknesses.

1. Improvements are still needed in the AFF/SADF's internal control to ensure transactions are properly recorded and accounted for to permit the preparation of reliable financial statements and maintain accountability over seized and forfeited property. (Repeat Condition - modified)

2. Control weaknesses existed in the Financial Management Information System for most of the fiscal year. (Repeat Condition - modified)

As of September 30, 2000, the AFF/SADF's financial statements reported over 6,700 seized properties with an estimated seizure value of $330 million and over 7,800 forfeited properties with an estimated forfeiture value of $81 million, net of liens and excluding cash items. Although the AFMS improved coordination among the seizing and custodial agencies during fiscal year 2000, we continue to identify weaknesses in internal control that increase the risk that transactions relating to seized and forfeited property are not recorded properly in accordance with the Statement of Federal Financial Accounting Standards (SFFAS) No. 3 Accounting for Inventory and Related Property. We noted the following:

Errors in seized and forfeited property inventory. During our interim and year-end testing of seized and forfeited properties, we identified the following errors:

Seized Property	No. of Errors		Rate of Error		Amount of Error (a)
	Interim	Y/E	Interim	Y/E	Interim	Y/E
Status Errors	36	2	2.19%	0.95%	$3.30	$2.00
Valuation Errors	43	9	2.62%	4.27%	$4.20	$8.60
Conversion Errors	5	1	0.30%	0.47%	$1.00	$0.30
Un-supported Items	17	4	1.03%	1.90%	$4.00	$4.50
(a) Dollars in Millions ($000,000)

Forfeited Property	No. of Errors		Rate of Error		Amount of Error (a)
	Interim	Y/E	Interim	Y/E	Interim	Y/E
Status Errors	12	3	2.67%	1.92%	$0.40	$1.80
Valuation Errors	11	10	2.45%	6.41%	$0.30	$1.00
Conversion Errors	5	0	1.11%	0.00%	$0.20	$0.00
Un-supported Items	19	1	4.23%	0.64%	$2.10	$0.02
(a) Dollars in millions ($000,000)

We used statistical sampling techniques for selecting our samples for interim and year-end testing. Our sample size for seized assets was 1,646 at interim and 211 at year-end. Our sample size for forfeited assets was 432 at interim and 156 at year-end.

Status errors are properties that are listed in the Consolidated Asset Tracking System (CATS) as either seized or forfeited, but are in fact forfeited or disposed. Valuation errors consist of seized or forfeited properties that have an incorrect value in CATS. Conversion and un-supported properties are those where the participating agencies could not provide support for the current status and/or valuation listed in CATS.

The AFMS continued to direct resources to monitor participating agencies' efforts to correct errors in the value and status of seized and forfeited property; including, conducting on-site reviews of the underlying data supporting the seizure and forfeiture data in CATS. The AFMS and participating agencies made necessary corrections to improve the quality of the seizure and forfeiture data in CATS; however, the errors identified above indicate that the AFMS must continue to monitor participating agencies' efforts to correct misstatements in the seized and forfeited property inventory reported in CATS, and the financial statements and related footnotes.

Improvements are needed in the seizing and custodial agencies physical inventory counts. We reviewed 44 disposed properties in CATS and identified 7 (16%) of the disposed properties were listed on physical inventory count sheets after the date the properties had been disposed. We noted this condition at 3 of the 13 participating agencies' field offices that had disposed assets in our year-end testing. In general, we found that participating agencies were performing inventory counts in accordance with the AFMS's instructions; however, it appears that a number of the participating agencies' field offices were certifying inventory as being on hand, although the property had already been recorded as being disposed in CATS.

The AFMS does not have procedures in place to account for delays in recording forfeiture income. Our testing identified $28.9 million of forfeiture income that was posted to the AFMS's accounting records in October 2000; however, this income should have been recognized as forfeiture income in fiscal year 2000. In accordance with SFFAS No. 7, Accounting for Revenue and Other Financing Sources, forfeiture income is recognized by the AFF/SADF when a final order of forfeiture is received (for seized cash) or upon the sale of property that has been forfeited to the government. Delays in receiving final order of forfeitures (for seized cash) or in recording forfeited property sales will delay the recognition of forfeiture income in the AFF/SADF's financial statements. Delays may occur because participating agencies are not providing the final order of forfeiture to the custodial agency in a timely manner. The custodial agency is responsible for transferring funds from the SADF to the AFF upon receipt of a final order of forfeiture for all forfeited cash and for depositing funds in the AFF upon sale of forfeited property. Forfeiture orders received after September 30, 2000, with a forfeiture date prior to September 30, would not be recognized as forfeiture income in fiscal year 2000. Likewise, property sales occurring before the fiscal year end where the proceeds are not posted to the AFF until the following month would not be recorded as forfeiture income in fiscal year 2000. The AFMS agreed with the projected misstatement and recorded a $28.9 million adjustment to recognize this forfeiture income in fiscal year 2000.

Recommendations

We recommend the Director of the AFMS:

1. Continue monitoring and evaluating participating agencies' efforts to improve CATS data quality and continue to perform on-site monitoring. Corrections should be made timely to ensure amounts recorded in CATS and the financial statements are reliable.
    
2. Reaffirm with the participating agencies the proper procedures for correcting errors found in the physical inventory counts. Specifically, participating agencies should be instructed to clearly identify assets listed on their inventory count sheets that are no longer in their inventory. The participating agencies should provide a copy of the inventory count sheets to the AFMS who should ensure that errors identified in CATS are corrected in a timely manner.
    
3. Establish procedures to accumulate information on forfeiture income that is posted in the month(s) following the end of the fiscal year. Consideration should be given to using existing systems (e.g. CATS / FMIS) to accumulate this information and to identify forfeiture income that may be recorded in the wrong fiscal year. If existing systems cannot be used to identify this information, the AFMS should develop and implement a methodology that would estimate this amount at the end of each fiscal year.

The Department of Justice Management Division (JMD) should ensure that a secured environment exists for its Financial Management Information System (FMIS) to prevent unauthorized access and promote financial statement integrity. As part of our audit of the AFF/SADF's fiscal year 2000 financial statements, we reviewed the automated security controls over the FMIS 2 application. Overall general controls were reviewed as part of our separate audit of the Department of Justice data centers, the results of which will be issued in a separate limited distribution report. Our limited reviews were performed in accordance with certain provisions of the General Accounting Office's Federal Information System Controls Audit Manual, OMB Circulars A-127 and A-130, and other applicable Federal information systems laws & regulations. Our limited control testing of the FMIS 2 application identified the following conditions:

Inadequate procedures and segregation of duties over FMIS 2 database tables. The review of controls over FMIS 2 database tables revealed weaknesses in (a) the process used for making database changes and (b) segregation of duties, as FMIS lead developers, "Module Managers," had the ability to make unrestricted changes to certain FMIS database tables.

Inadequate segregation of duties between the FMIS development staff and the FMIS production environment. During fiscal year 2000, individual FMIS programmers had the unrestricted ability to move software changes into the production environment via a configuration management utility. Granting programmer access to the production environment increases the risk that unauthorized, untested, and undocumented changes may be made to the production environment. This process existed for the majority of the fiscal year and was not corrected until September 1, 2000. A new management policy was issued on September 28, 2000, which formally addressed this condition. The policy, "Restricting Programmer Access to FMIS Production Library" was effective as of September 1, 2000, and mandates that senior management must certify any software change prior to movement into production. Because management corrected this condition by the end of the fiscal year, a recommendation for corrective action is not required.

The conversion routine methodology used for the transition to FMIS 2 is not complete. The current methodology is documented in a diagram format that does not capture the detailed FMIS 2 conversion and reconciliation events. To facilitate the transition and provide an adequate audit trail for the AFF/SADF migration to FMIS 2, a template is needed to document the complete conversion process. The JMD has indicated that additional methodologies are being developed.

This reportable condition is described in several Department of Justice financial reporting components fiscal year 2000 audit reports because they rely primarily on FMIS as their core financial management system. This reportable condition and related recommendation will be addressed to the JMD of the Offices, Boards and Divisions, which has primary responsibility over FMIS, in their auditor's Report on Internal Controls. Accordingly, the AFMS is not required to provide comments to this reportable condition.

STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS:

As required by Government Auditing Standards and OMB Bulletin No. 01-02, Audit Requirements for Federal Financial Statements, we have reviewed the status of the AFF/SADF's corrective actions with respect to findings and recommendations from our prior audits of the AFF/SADF. The analysis below provides our assessment of the progress the AFF/SADF have made in correcting the reportable conditions identified during these audits. We also provide the Office of the Inspector General (OIG) report number and fiscal year when the condition was first identified, our recommendation for improvement, and the status of the condition as of September 30, 2000:

This report is intended solely for the information of the Office of the Inspector General, the management of the Department of Justice, the OMB, and Congress. This report is not intended to be and should not be used by anyone other than these specified parties.

PriceWaterhouseCoopers LLP
January 2, 2001
Arlington, Virginia

Office of the Inspector  General
U.S. Department of Justice

Director, Asset Forfeiture Management Staff
Asset Forfeiture Program
U.S. Department of Justice

We have audited the accompanying balance sheet of the Assets Forfeiture Fund and Seized Asset Deposit Fund, a financial reporting component of the U.S. Department of Justice referred to herein as the AFF/SADF, as of September 30, 2000, and the related statements of net cost, changes in net position, budgetary resources and financing, for the year then ended, and have issued our report thereon dated January 2, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

Compliance with laws and regulations applicable to the AFF/SADF is the responsibility of the Asset Forfeiture Management Staff. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the AFF/SADF's compliance with certain provisions of laws and regulations, noncompliance with which could have a direct and material effect on the determination of financial statement amounts, and certain other laws and regulations specified in OMB Bulletin No. 01-02, including the requirements referred to in the Federal Financial Management Improvement Act of 1996. However, the objective of our audit of the financial statements was not to provide an opinion on overall compliance with such provisions and, accordingly, we do not express such an opinion.

The results of our tests of compliance disclosed no instances of noncompliance with laws and regulations that are required to be reported under Government Auditing Standards or OMB Bulletin No. 01-02.

This report is intended solely for the information and use of the Office of the Inspector General, the management of the Department of Justice, the OMB, and Congress. This report is not intended to be and should not be used by anyone other than these specified parties.

Note 1.   Significant Accounting Policies
 

A.	Basis of Presentation Generally accepted accounting principles in effect as of September 30, 2000, were followed in the preparation of these financial statements. The statements were prepared from the books and records of the AFF and SADF in accordance with Office of Management and Budget (OMB) Bulletin 97-01, Form and Content of Agency Financial Statements, as amended, and the AFF and SADF accounting policies which are summarized in these notes. These statements are, therefore, different from the financial reports, also prepared by the AFF and SADF pursuant to OMB directives, used to monitor and control the program's use of budgetary resources.
B.	Basis of Accounting The financial statements were prepared on an accrual basis of accounting. Transactions are recorded on an accrual and budgetary accounting basis. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash. Budgetary accounting facilitates compliance with legal restraints and controls over the use of Federal funds.
C.	Revenues and Other Financing Sources The funds in the AFF are derived primarily from forfeited cash, proceeds from the sale of forfeited property, interest earned on investments, payment of penalties in lieu of forfeiture, and recovery of asset management expenses. Revenue is recognized when cash is forfeited, forfeited property is sold, or when forfeited property is placed into official use, transferred to another federal agency, or distributed to a state or local law enforcement agency or foreign government. Revenue from judgments is not recognized until the judgment has been enforced. The revenue from judgments is recognized at the time of the final order of forfeiture for cash or when the forfeited property is sold, put into official use, transferred to another federal agency, or distributed to a state or local law enforcement agency or foreign government. The funds in the SADF are held in trust until a determination is made as to their disposition. These funds include seized cash, proceeds from preforfeiture sales of seized property, and income from property under seizure. No revenue recognition is given to cash deposited in the SADF.
D.	Fund Balance with Treasury and Cash The funds in the AFF are considered an entity asset and are used to finance the operations of the Asset Forfeiture Program. Seized cash is deposited and accounted for in the SADF until a determination has been made as to its disposition. If title passes to the U.S. Government, the forfeited cash is then transferred from the SADF to the AFF. The cash balance in the SADF is not available to finance the Asset Forfeiture Program activities, and is considered a non-entity asset.
E.	Investments in Government Securities Pursuant to 28 U.S.C. § 524(c), idle SADF and AFF cash is invested in U.S. Treasury securities. The earnings and principal on Bank of Credit and Commerce International (BCCI) funds held by the AFF are tracked separately due to special disposition requirements. Investments in U.S. Government Securities are recorded at their cost and associated premiums and/or discounts are amortized through the end of the reporting period. Investments are held to maturity; therefore, no provision is made for unrealized gains or losses on these securities.
F.	Seized and Forfeited Property Property is seized in consequence of a violation of public law. Seized property can include monetary instruments, real property, and tangible personal property of others in the actual or constructive possession of the custodial agency. Most noncash property is held by the U.S. Marshals Service from the point of seizure until its disposition. In certain cases, the investigative agency will keep seized property in its custody if the intention is to place the property into official use after forfeiture or to use the property as evidence in a court proceeding. If title passes to the U.S. Government, the proceeds from the sale of forfeited property are deposited in the AFF. Forfeited property is property for which title has passed to the U.S. Government. This property is recorded at the estimated fair market value at the time of forfeiture. The value of the property is reduced by estimated liens of record.  Amounts reported as assets of the AFF and SADF at September 30, 2000, as well as in related revenue and liability accounts, include management's best estimates of forfeitures and seizures that occurred during FY 2000. They also include management's estimates of the value of forfeited and seized assets. The amount ultimately realized from the forfeiture and disposition of these assets could differ materially from the amounts reported. In accordance with Federal Financial Accounting and Auditing Technical Release 4, Reporting on Non-Valued Seized and Forfeited Property, effective July 31, 1999, seized and forfeited property on hand with no legal market in the United States was disclosed in item number only with no value reported. In addition, the value of unenforced forfeiture judgments has not been disclosed because there is no market value for this type of legal instrument. The judgments are collected either in total or by installments and are recognized as revenue at the time they are collected.
G.	Liabilities Liabilities represent the amount of monies or other resources that are due to be paid by the AFF and SADF as the result of a transaction or event that has already occurred. AFF accounts payable represent liabilities with both federal and nonfederal governmental entities. Other liabilities include the SADF (Note 6A), cash not on deposit (Note 3), liability for prior year surplus allocations (Note 7D), expected BCCI distributions (Note 6B), and deferred revenue (see Note 5A).
H.	Comparative Data OMB Memorandum M-00-14, dated September 11, 2000, waived the requirement to prepare comparative financial statements. Therefore, comparative data is not provided.

Note 2.   Fund Balance with Treasury

Note 3.   Seized Monetary Instruments

On September 30, 2000, cash in the amount of $15,287 was held outside the U.S. Treasury. This cash includes cash held as evidence in legal proceedings and cash awaiting deposit to the AFF or SADF by the seizing agency.

Note 4.   Investments

Investments are short term Federal debt securities issued by the Bureau of the Public Debt and purchased exclusively through Treasury's Financial Management Service. When securities are purchased, the investment is recorded at acquisition cost. Premiums and/or discounts are amortized through the end of the reporting period. Estimated market value of investments is presented for information purposes only, since all investments are in non-marketable securities. The following schedule shows the investment balance as of September 30, 2000:

Note 5.   Seized and Forfeited Property:

A.      Forfeited Property

Pursuant to Federal Financial Accounting and Auditing Technical Release 4, "Reporting on Non-Valued Seized and Forfeited Property," the value of forfeited property with no legal market in the United States (e.g., weapons, chemicals, drug paraphernalia, gambling devices) is not included in the net forfeited property value, although the item count of non-valued items is disclosed. The $84,424 gross value of forfeited property less known liens of $2,712, equals the net forfeited property value of $81,712.

1. Federal Financial Accounting and Auditing Technical Release 4, "Reporting Non-Valued Seized and Forfeited Property," requires disclosure of property that does not have a legal market in the United States. This property includes: alcohol, chemicals, drug paraphemalia, gambling devices, and weapons

2. Adjustments include adjustments made by auditors of the FY 1999 financial statements in the amount of $2,174 and property status and and valuation changes received after, but properly credited to, FY 1999 in the amount of ($15,133). Valuation changes include the difference between an asset's value when recorded and the value when disposed, corrections to an asset's value recorded in a prior year and corrected in the current year, etc.
   

3. There were 497 partial disposals included in the number of assets disposed during the year.