Between 2011 and 2018, U.S. Customs and Border Protection (CBP) processed an average of $896 million in drawback claims annually. But reviews by the Government Accountability Office (GAO) and Office of the Inspector General (OIG) have uncovered weaknesses in the drawback claims process at CBP.
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.
The GAO review has found problems in how CBP checks these claims. For example, the review found CBP’s new electronic records system doesn’t include enough details on exports.
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. The expansion from TFTEA has resulted in CBP facing a growing workload. CBP officials told the GAO review that 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, GAO found 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.
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, GAO’s December 17 report says 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 report notes that 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.
GAO is therefore making several 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 recommendations and expects to complete all work required to meet the recommendations by November 2020, with some issues being addressed as early as February 2020.
OIG’s review also found a lack of internal controls could affect the validity and accuracy of the drawback claims amount.
OIG said CBP did not address internal control deficiencies in drawback claims. Specifically, it found CBP lacked appropriate documentation retention periods to ensure importers and claimants maintained support for drawback transactions. In addition, OIG found CBP’s policies did not require drawback specialists to review an importer’s prior drawback claims to determine whether, taken together, the importer claimed an excessive amount; and CBP’s legacy drawback system lacked effective automated controls to prevent, or detect and correct, excessive drawback claims.
CBP plans to correct these deficiencies with the full implementation of the legislative and automated requirements under TFTEA. However, OIG noted that it is unable to determine whether the prior year audit findings have been resolved until sufficient data is generated to support compliance testing. As a result, it could not verify whether CBP remedied the identified internal control deficiencies.