U.S. Department of Justice
Assets Forfeiture Fund and Seized Asset Deposit Fund
Notes to the Principal Financial Statements
(Dollars in Thousands)

Note 1. Summary of Significant Accounting Policies

1. Summary of Reporting Entity
   
   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 criminals involved by denying them use of the proceeds of their crimes.
   
   The Asset Forfeiture Fund (AFF) was created by the Comprehensive Crime Control Act of 1984 to be a repository of proceeds from forfeitures under any law enforced and administered by the Department of Justice. AFF funds are managed by the Assets Forfeiture Management Staff, Justice Management Division. The Seized Asset Deposit Fund (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 until a decision on final forfeiture is made.
   
   
2. Basis of Presentation
   
   Generally accepted accounting principles in effect as of September 30, 2002, 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 01-09, Form and Content of Agency Financial Statements (effective for fiscal years beginning October 1, 2001), 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.
   
   
3. Basis of Accounting
   
   Transactions are recorded on an accrual and a budgetary basis of accounting. Under the accrual method, revenues are recorded when earned and expenses are recorded when incurred, regardless of when cash is exchanged. Under the budgetary basis, however, funds availability is recorded based upon legal considerations and constraints. As a result, certain line items on the proprietary financial statements may not equal similar line items on the budgetary financial statements. Examples include, but are not limited to, the following:
   
   
   • Total Accounts Receivable on the Balance Sheet may not equal Accounts Receivable on the Statement of Budgetary Resources because receivables due from the public are presented on the Balance Sheet and not on the Statement of Budgetary Resources;
   • Total Accounts Payable on the Balance Sheet may not equal Accounts Payable on the Statement of Budgetary Resources because funded liabilities that are not presented on the Balance Sheet are included on the Statement of Budgetary Resources; and
   • Appropriations Received on the Statement of Changes in Net Position may not equal Appropriations Received on the Statement of Budgetary Resources because offsetting receipts for Special funds are reported as Appropriations Received on the Statement of Budgetary Resources but are reported as either exchange revenue on the Statement of Net Cost or non-exchange revenue on the Statement of Changes in Net Position.
     
     
4. Revenues and Other Financing Sources
   
   The funds in the AFF are derived primarily from non-exchange revenue and are presented on the Statement of Changes in Net Position as other financing sources. Non-exchange revenue includes forfeited cash, proceeds from the sale of forfeited property, interest earned on investments, receipt of payments in lieu of property forfeiture, and recovery of asset management expenses. This revenue is recognized when cash is forfeited, forfeited property is sold, or when forfeited property is placed into official use or transferred to another federal agency. The revenue from judgments is not recognized until the judgment has been enforced. Revenue from judgments is recognized at the time they are collected or when the forfeited property is sold or put into official use.
   
   Deferred revenue represents a liability for forfeited property held for sale. The deferred revenue is recorded when the property is forfeited and is reversed when the property is sold or otherwise disposed and forfeiture revenue is recorded.
   
   The AFF recognizes exchange revenue when services to other Federal agencies have been provided. This revenue is presented on the Statement of Net Cost as earned revenue.
   
   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.
   
   
5. Fund Balance with the U.S. Department of Treasury and Cash
   
   The funds in the AFF are 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 a non-entity asset and is not available to finance the Asset Forfeiture Program activities.
   
   
6. Investments in U.S. 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.
   
   
7. Accounts Receivable
   
   Accounts receivable consist of amounts due from other Federal agencies for goods or services provided by the Asset Forfeiture Program. Receivables from services provided to other Federal agencies are considered fully collectible. Therefore, no allowance for doubtful accounts was established.
   
   
8. Property, Plant and Equipment
   
   Statement of Federal Financial Accounting Standards No. 10, "Accounting for Internal Use Software" was implemented as of October 1, 2000. Property, plant and equipment consists of enhancements to the Consolidated Asset Tracking System (CATS), which meet the SFFAS 10 definition of "internal use software." Internal use software is capitalized when developmental phase costs or enhancement costs are $500 or more and the asset has an estimated useful life of two or more years. Depreciation is calculated using the straight-line method over the useful lives of the asset. Internal use software purchases with an acquisition cost of less than $500 are expensed when purchased.
   
   
9. Advances and Prepayments
   
   Advances and prepayments classified as assets on the balance sheet include the current balance of travel advances issued to Federal employees in advance of official travel. Amounts issued are limited to meals and incidental expenses expected to be incurred by the employees during official travel. Payments in advance of the receipt of goods and services are recorded as prepaid charges at the time of prepayment and recognized as expenses when the related goods and services are received.
   
   
10. 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. The value of seized property is its estimated fair market value at the time it was seized. Seized 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, 2002 and 2001, as well as in related revenue and liability accounts, include management's estimates of forfeitures and seizures that occurred during FY 2002 and 2001. 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 from the amounts reported.
    
    In accordance with Federal Financial Accounting and Auditing Technical Release Number 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.
    
    
11. Non-Entity Assets
    
    Non-entity assets consist of seized property and investments of seized cash and are not available to fund the operations of the Asset Forfeiture Program.
    
    
12. Liabilities and Loans and Interest Payable to the U.S. Treasury
    
    Liabilities represent the amount of monies or other resources that are due to be paid by the AFF as the result of a transaction or event that has already occurred. All liabilities of the AFF are covered by budgetary resources, since the AFF has no imputed or unfunded costs. AFF accounts payable represent liabilities with both federal and nonfederal entities. Other liabilities include deferred revenue, the SADF and seized cash not on deposit, expected BCCI distributions (Note 10), and liability for prior year surplus allocations (Note 16).
    
    
13. Interest on Late Payments
    
    Pursuant to the Prompt Payment Act, 31 U.S.C. § 3901-3907, Federal agencies must pay interest on payments for goods or services made to concerns after the due date. The due date is generally 30 days after receipt of a proper invoice or acceptance of the goods or services.
    
    
14. Use of Estimates
    
    The preparation of financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
    
    
15. Reclassifications
    
    The FY 2001 financial statements were reclassified to conform with FY 2002 Departmental financial statement presentation requirements. The reclassifications had no material effect on total assets, liabilities, net position, or the change in net position as previously reported.

Note 2. Fund Balance with Treasury

The Fund Balance with Treasury consists of funds in the AFF. The balances on September 30, 2002 and 2001 are presented below.

The status of fund balances reported above includes only fund balances with Treasury, while the AFF invests excess funds in short term securities, which are considered budgetary resources and are included with fund balance as unobligated balances on the Statement of Budgetary Resources. Because of this difference, amounts reported as obligated (or unobligated) in this note will not agree to amounts reported on the Statements of Budgetary Resources.

Note 3. Cash and Other Monetary Assets

Other monetary assets consist of seized cash on deposit in the SADF and seized monetary assets not on deposit. The balances on September 30, 2002 and 2001, are presented below.

Note 4. Investments - Federal Securities, Net

Investments are short term Federal debt securities issued by the Bureau of the Public Debt and purchased exclusively through Treasury's Financial Management Service. All securities purchased by the AFF and SADF are intragovernmental, non-marketable securities. 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 informational purposes only.

Note 5. Accounts Receivable, Net

Accounts receivable consist of amounts owed to the AFF for CATS-related services provided to the U.S. Treasury. There is no allowance for uncollectible accounts since accounts receivable from business with other Federal entities is considered fully collectible.

Note 6. Forfeited and Seized Property

1. Forfeited Property
   
   The following tables show the analysis of change in and methods of disposition of forfeited property as of September 30, 2002 and 2001.

2. Seized Property
   
   Property seized for any purpose other than forfeiture and held by the seizing agency or a custodial agency is disclosed by the seizing agency. All property seized for forfeiture, including property with evidentiary value, is reported by the SADF.
   
   The following tables show the analysis of change in and methods of disposition of property seized for forfeiture as of September 30, 2002 and 2001.

3. Anticipated Equitable Sharing in Future Periods
   
   The statute governing the use of the AFF (28 U.S.C. §524(c)) permits the payment of equitable shares of forfeiture proceeds to participating foreign governments and state and local law enforcement agencies. The statute does not require such sharing and permits the Attorney General wide discretion in determining those transfers. Actual sharing is difficult to predict because many factors influence both the amount and time of disbursement of sharing payments, such as the length of time required to move an asset through the forfeiture process to disposition, the amount of net proceeds available for sharing, the elapse of time for Departmental approval of equitable sharing requests for cases with asset values exceeding $1 million, and appeal of forfeiture judgments. Because of uncertainties surrounding the timing and amount of any equitable sharing payment, an obligation and expense are recorded only when the actual disbursement of the equitable sharing payment is imminent. From 1997 through 2002, equitable sharing allocation levels averaged $239,212. The anticipated equitable sharing allocation level for FY 2003 is $206,000.

Note 7. General Property, Plant and Equipment (PP&E)

The CATS enhancement project was initiated during FY 2002. Therefore, data as of September 30, 2001, is not presented.

Note 8. Other Assets

Note 9. Non-Entity Assets

Note 10. Other Liabilities

Other liabilities include seized funds invested in U.S. Treasury securities and seized cash on deposit with the U.S. Treasury. In addition, the AFF is expected to pay third party claimants proceeds from the BCCI case. All other liabilities are liabilities with the public and are current liabilities of the AFF/SADF.

Note 11. Contingencies and Commitments

SFFAS No. 5 and SFFAS No. 12 contain the criteria for recognition and disclosure of contingent liabilities. A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss. The uncertainty should ultimately be resolved when one or more future events occur or fail to occur. The likelihood that the future event or events will confirm the loss or the incurrence of a liability can range from probable to remote.

The AFF and SADF are parties to various legal actions and claims, some of which are purported class actions relating to seizure and forfeiture activity. These actions typically allege, among other things, the improper retention of earnings on seized assets or that forfeitures are invalid. In the opinion of management, the ultimate resolution of the proceedings, actions and claims will not materially affect the financial position or cost of operations of the AFF and SADF. The amount of loss or range of loss cannot be determined. However, management believes that the Government has meritorious defenses to these actions and that it acted properly at all times in administering seizure and forfeiture actions.

Note 12. Gross Cost and Earned Revenue by Budget Functional Classification

Note 13. Permanent Indefinite Appropriations

28 U.S.C. § 524(c)(4) authorized the Attorney General to retain AFF receipts to pay program operations expenses, equitable sharing to state and local law enforcement agencies who assist in forfeiture cases, and lienholders. This permanent indefinite authority is open-ended in its period of availability and amount.

Note 14. Statement of Budgetary Resources vs Budget of the United States Government

Reconciliations of budgetary resources, obligations incurred, and outlays from the Statement of Budgetary Resources to amounts included in the Budget of the United States Government for the year ending September 30, 2001, is presented below. The reconciliation as of September 30, 2002, is not presented, because the submission of the Budget of the United States occurs after publication of these financial statements. The Department of Justice Budget Appendix can be found on the OMB website (http://www.whitehouse.gov/omb/budget) and will be available in early February 2003.

In addition to the above, a reconciliation with the SF-133, Report on Budget Execution and Budgetary Resources, was also performed and confirmed that differences between the Statement of Budgetary Resources and the SF-133 are also the result of the adjustments identified above.

Note 15. Apportionment Categories of Obligations Incurred

Apportionment categories are determined in accordance with the guidance provided in OMB Circular A-34, Instructions on Budget Execution. Category A represents resources apportioned for calendar quarters. Category B represents resources apportioned for program operations expenses, equitable sharing payments, and prior year surplus allocations.

Note 16. Allocation Transfers of Appropriation

Allocation transfers by the AFF include transfers of Super Surplus Allocations and transfers of forfeited property to participating agencies for official use:

A. Transfers-out of Super Surplus Allocations. 28 U.S.C. § 524(c)(9)(E), provides authority for the Attorney General to use excess end-of-year monies, without fiscal year limitation, in the AFF for any Federal law enforcement, litigative, prosecutorial, and correctional activities, or any other authorized purpose of the Department of Justice. During FYs 2002 and 2001, the following allocations were approved by the Attorney General.

During FY 2002, $18,937 in prior years' surpluses were transferred out to the agencies listed above, $8,563 was owed and $2,688 was advanced to these agencies for super surplus allocations in the current and prior years. On September 30, 2001, $17,302 was transferred out, $12,186 was owed, and $6,680 was advanced.

B.Transfers-out of Forfeited Property for Official Use. Statement of Federal Financial Accounting Standards 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. Property was distributed pursuant to the Attorney General's authority to share forfeiture revenues with agencies that participated in the forfeiture that generated the property, and pursuant to the Department's authority to place forfeited property into official use by the Government. In FY 2002 and 2001, transfers out of forfeited property for official use totaled $6,134 and $7,747, respectively.

Note 17. Non-exchange Revenue

Non-exchange revenue consists of income from the investment of the AFF and SADF in U.S. Treasury securities. The earnings of BCCI funds held by the AFF and SADF are tracked separately due to special disposition requirements.

Note 18. Donations and Forfeitures

Forfeiture income includes forfeited cash, sales of forfeited property, penalties in lieu of forfeiture, recovery of returned asset management costs, judgment collections, and other miscellaneous income. Net forfeiture income totaled $423,628 and $406,868 in FYs 2002 and 2001, respectively.

Forfeiture income is returned to certain individuals or agencies that participated in seizures that led to forfeiture and is a component of net forfeiture income, above.