ASSETS FORFEITURE FUND AND SEIZED ASSET DEPOSIT FUND
ANNUAL FINANCIAL STATEMENT
FISCAL YEAR 1998

OFFICE OF THE INSPECTOR GENERAL
COMMENTARY AND SUMMARY

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 operational expenses of the AFP and the status of property seized and forfeited.

The SADF and AFF are special funds 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 operational costs of the AFP, which include payments of equitable sharing arrangements with state, local, and foreign governments. 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, 1998. The audit was performed by PricewaterhouseCoopers LLP (PwC) and resulted in a disclaimer of opinion on the FY 1998 financial statements. The auditors were unable to substantiate opening account balances and amounts reported for seized and forfeited property, accounts payable and related expenses and unliquidated obligations. AFF/SADF also received a disclaimer of opinion on its FY 1997 financial statements (Office of the Inspector General Report No. 98-24).

The Asset Forfeiture Management Staff, Justice Management Division, continues to express commitment to implement policies and procedures that will address weaknesses identified in the audit. During FY 1998, progress was made in correcting errors in the value and status of seized and forfeited property. A Data Quality Control Team was created to improve the integrity and quality of the data in the Consolidated Asset Tracking System (CATS).

The AFF/SADF noted as part of its "Management Overview" that Year 2000 implications for the CATS have been fully assessed and needed renovations are underway and scheduled for completion by the end of the second quarter of FY 1999. The Office of the Inspector General is unable to provide any assurance as to whether CATS will be compliant or that the system is at minimal risk.

For FY 1998, new reporting formats as required by Office of Management and Budget Bulletin No. 97-01, Form and Content of Agency Financial Statements, were implemented. For FY 1997, AFF/SADF prepared a statement of financial position and statement of operations and changes in net position. For FY 1998, AFF/SADF prepared a balance sheet, statement of net cost, statement of changes in net position, statement of budgetary resources, and statement of financing. Accordingly, comparative financial statements are not presented or required this year.

The Asset Forfeiture Program supports the Department's strategic goals to investigate and prosecute criminal offenses, and to provide assistance to state and local governments. In support of these goals, allocations in excess of $408 million were provided in Fiscal Year (FY) 1998 for program operations, investigative expenses, joint law enforcement operations, and equitable sharing. This was made possible by FY 1998 revenues of $448.9 million from the forfeiture of cash, sale of forfeited property, and investment of funds.

Following a decade of rapid growth when the use of asset forfeiture as a significant sanction against criminal conduct was first embraced on a widespread basis, the level of asset seizures and forfeitures has stabilized in recent years. Criminals are now sensitive to the risk of forfeiture of their ill gotten gains. As a result, criminals are employing more sophisticated methods of hiding their assets, both here and abroad. Finding, seizing and forfeiting their wealth presents new challenges for law enforcement. Against the backdrop of the hundreds of billions of dollars of revenue generated each year by illegal drug trafficking, organized crime, health care fraud, telemarketing fraud, and other forms of criminality, it is clear that the potential of the asset forfeiture sanction to remove the profit from crime, restore funds to victims, and improve public safety and security has barely been tapped. To meet this challenge, the government must itself become more sophisticated in understanding and attacking the financial infrastructure of the criminal organizations that plague our society.

During FY 1998, at the direction of the Attorney General, the Asset Forfeiture Management Staff joined forces with other Departmental components to focus attention on the strategic use of asset forfeiture against criminal organizations, in further support of the attainment of the goals and objectives of the Department's strategic plan. The strategic approach focuses on the use of our law enforcement powers to identify, analyze, attack and eliminate a criminal enterprise. The strategic approach (1) requires a strong intelligence function that provides all-source information on target organizations to permit the assessment of vulnerabilities and the identification of key structural assets; (2) transcends specific cases to coordinate and target enforcement actions against the vulnerabilities of the underlying criminal organization; and (3) focuses on removal of the assets that are key to the functionality and viability of the criminal organization. Special emphasis is placed on creative ways to use the proceeds of asset forfeiture, in conjunction with other funds available to our investigative and prosecutive offices, to support operations that focus on the disruption and destruction of criminal organizations and not merely on the conviction of individuals and forfeiture of their personal property.

This challenge also requires the dedication of greater human resources to development of the financial aspects of criminal operations. Continuing education in conducting financial investigations, tracing assets, presenting financial evidence in court, and managing and disposing of sophisticated properties is needed to develop and support experienced law enforcement professionals capable of dismantling criminal enterprises. The increasing use of sophisticated technology by criminals and the relative ease of operating across international boundaries also present special challenges for law enforcement that must be met if the power of the asset forfeiture sanction is to be realized. The Department will continue to seek opportunities to use asset forfeiture funds to advance the ability of our investigators, prosecutors, and other professionals to meet these challenges successfully.

I.   Introduction

The funds of the Asset Forfeiture Program are under the management control of the Asset Forfeiture Management Staff (AFMS) , Justice Management Division. 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) 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. 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. Cost bonds, and 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 balances 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 deposited into the AFF by the USMS. Also, pursuant to 28 U. S. C. 5 524 (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. The interest earned on invested SADF balances becomes property of the Government only when the SADF principal has been successfully forfeited. With the exception of the SADF interest, which is kept on reserve, the AFF is the repository for monies that are the property of the Government and may be spent for purposes authorized by the AFF statute, 28 U. S. C. 5 524 (c).

A majority of AFF and SADF balances are invested with the Treasury through its Bureau of Public Debt. Options for investment include Treasury bills, notes, and bonds, and one (1) day certificates. As a general rule, AFF and SADF balances are invested in thirty (30) day Treasury bills. This approach balances a desire to earn the best rate of return with the need to maintain periodic liquidity to permit reasonably prompt movement of funds upon completion of large pending cases. Separate, shorter term investments have been handled for specific large volume cases where disbursements are imminent. The rate of return offered by the Bureau of Public Debt for investment of AFF and SADF balances is the same rate offered to the general public for the same investment period.

In determining the amount of the SADF balance to invest for a given period, AFMS (a) determines the current fund balance, and (b) deducts estimated net disbursements to be made during the upcoming investment period, i.e., court-ordered disbursements or movement of forfeited funds to the AFF. In determining the amount of the AFF balance to invest for a given period, AFMS (a) determines the current fund balance, (b) adds the accumulated interest earned from the prior investment period for the AFF and SADF so that it can be reinvested, and (c) deducts anticipated net changes in AFF balances due to payment requirements during the upcoming investment period. There is a demand for a margin of liquidity to meet disbursement and payment requirements. Therefore, a portion of each fund balance is not invested. This portion is required primarily to support disbursement of forfeited cash.

The government invests available SADF balances on an aggregate level due to the impracticality of investing and tracking each of the thousands of cash seizures separately. Thus, the Government cannot demonstrate conclusively that any particular cash seizure was or was not invested. However, the balances invested generally exceed the total amount of non-forfeited cash on deposit, i.e., the total of all SADF deposits less the amount of forfeited cash awaiting transfer to the AFF. Therefore, the Government operates on the basis that one hundred percent (100%) of non-forfeited dollars on deposit in the SADF are included in the amounts invested.

When a decision is made not to pursue a forfeiture action against seized cash, or when the court orders the Government to release monies previously seized, the Government will return the benefit realized from possession of the seized cash. This benefit consists of the seized cash, as well as the actual interest earned from investing the seized cash and any prior interest earned on that cash. In so doing, the Government is not paying interest on the returned cash.

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, OMB Circulars, and provisions of annual appropriations 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 FY 1998, these monies were available under a permanent indefinite appropriation to finance the following:

1. The operational costs of the forfeiture program, including handling and disposal of seized and forfeited assets, and the execution of legal forfeiture proceedings to perfect the title of the United States in that property.
   
   
2. The satisfaction of innocent third party claims.
   
   
3. The payment of equitable shares to participating foreign governments and state and local law enforcement agencies.
   
   
4. The costs of ADP equipment and ADP support for the program.
   
   
5. Contract services in support of the program.
   
   
6. Training and printing associated with the program.
   
   
7. Other management expenses of the program subject to AFMS approval.
   

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 to "... any Federal law enforcement, litigative/prosecutive, and correctional activities or any other authorized purpose of the Department of Justice."

Holding and Accounting for Seized and Forfeited Property

The U. S. Marshals Service 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 U. S. Government and 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 U. S. Marshals Service at the end of FY 1997 and FY 1998 is presented in the Notes to the Principal Statements, rather than within the Principal Statements, because the Federal Government does not have title to the property. The Federal Accounting Standards Advisory Board (FASAB), 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.   Program Performance Information

During FY 1998, a total of $448.9 million in cash and proceeds was deposited into the AFF. From current balances, $189.5 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. Several state or local agencies received aggregate sharing payments in excess of $1 million in 1998. An additional $7.6 million of real and personal property was transferred to state and local agencies for use in future law enforcement efforts. After payment of statutorily authorized expenses, in FY 1998, the AFF generated a surplus of $33.7 million. Thus, the AFF end-of-year unobligated balance increased to about $252.4 million. Of this amount, $145.3 million is available to pay initial program costs for FY 1999. In FY 1998, the program invested cash balances from both the AFF and SADF in Government securities. These investments resulted in earnings of $49.7 million during FY 1998, including a return of $8.8 million in interest earnings on deposits from the Bank of Credit and Commerce International (BCCI) case.¹

The largest criminal forfeiture to date was achieved in January 1992, when a preliminary forfeiture order for $347 million was issued for all of the domestic assets of BCCI and three related corporations. Subsequently, the court amended the forfeiture order several times  to add additional assets, bringing the total amount forfeited to more than $1 billion. Substantial BCCI funds remain in the SADF pending the resolution of third party claims. In 1998, over $136 million in BCCI funds were distributed as refunds under court order.

During FY 1998, $9 million from the AFF was used to support the Weed and Seed Program pursuant to the Fund's authority (28 U. S. C. § 524 Cc) (1) (I)). Resources were provided to more than 100 cities nationwide for this high priority program.

The following table includes the performance measures that have been traditionally used and are reported in the "Program Performance Information" in the Fiscal Year 2000 AFF budget.

III.   Financial Performance Information

The revenue for the AFF was $448.9 million for FY 1998 (see table below). FASAB's Statement 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.