MANAGEMENT'S DISCUSSION AND ANALYSIS
(Unaudited)

ASSETS FORFEITURE FUND AND SEIZED ASSET DEPOSIT FUND

Mission

The primary mission of the Department of Justice Asset Forfeiture Program (AFP) is to employ asset forfeiture powers in a manner that enhances public safety and security. This is accomplished by removing the proceeds of crime and other assets relied upon by criminals and their associates to perpetuate their criminal activity. Components responsible for administration and financial management of the asset forfeiture program are charged with lawfully, effectively and efficiently supporting law enforcement authorities in the application of specified forfeiture statutes. The Assets Forfeiture Fund and Seized Asset Deposit Fund together comprise a single financial reporting entity of the Department of Justice (DOJ) which for reporting purposes includes the specified funds, property seized for forfeiture and the transactions and program activities of DOJ forfeiture program components and other participating agencies as described more fully herein.

Organizational Structure of the Asset Forfeiture Program

Table 1 below displays the functional activities of the participating agencies as these relate to the AFP. These agencies investigate or prosecute criminal activity under statutes, such as the Comprehensive Drug Abuse Prevention and Control Act of 1970, the Racketeer Influenced and Corrupt Organizations statute, the Controlled Substances Act, and the Controlled Substances Import and Export Act, or provide administrative support services to the program.

As a result of the Homeland Security Act, enacted November 25, 2002, certain functions of DOJ, including the Immigration and Naturalization Service (INS), were transferred to the Department of Homeland Security (DHS) and some functions of the Bureau of Alcohol, Tobacco, and Firearms were transferred from the Department of the Treasury to DOJ and renamed the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). The effective date of the INS transfer was March 1, 2003; however, legacy INS asset seizure and forfeiture activity remained part of the DOJ AFP for the entire fiscal year. ATF became an official participant of the DOJ AFP effective January 24, 2003.

Financial Structure

The AFP comprises two funds, which are under the management control of the Asset Forfeiture Management Staff, Justice Management Division (AFMS). The Assets Forfeiture Fund (AFF or Fund) is a special fund listed in the U.S. Treasury Federal Account Symbols and Titles as 15X5042. The Seized Asset Deposit Fund (SADF) is listed as 15X6874.

The AFF was created by the Comprehensive Crime Control Act of 1984 to be the repository of the proceeds of forfeitures under any law enforced and administered by the DOJ (28 U.S.C. 524(c)). 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. These earnings are either returned to the owner with the underlying principal or become the property of the government upon forfeiture of the principal.

The proceeds deposited in the AFF are used to cover operating costs of the program. These include equitable sharing payments to participating state, local, and foreign governments; funding of joint law enforcement operations; contract service payments; and payments 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.

While the AFF is the repository for forfeited currency and proceeds arising from the sale of forfeited property and also serves as the operating fund for specified program expenditures, the SADF serves as a repository for seized currency and specified deposits.

The SADF was created administratively by the DOJ to ensure control over monies seized by agencies participating in the Department's AFP. Public Law (P.L.) 102-140, dated October 28, 1991, provided authority for the investment of SADF balances pending adjudication. Generally, monies in the SADF 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 also may be managed through the SADF. Because most funds held in the SADF are not Government property, monies in the SADF cannot be spent. SADF balances are transferred to the AFF upon the successful conclusion of a forfeiture action.

The Fund receives most of its revenue from the forfeiture of cash and other monetary assets and, secondly, from the sale of forfeited property. Fund participants receive annual allocations by suballotment advice or reimbursement agreement. The Fund's first priority is to cover the business or operational expenses of the AFP. After it is determined that there will be sufficient receipts, allocations may be made for investigative expenses, such as awards for information, purchase of evidence, and equipping of conveyances, and also discretionary expenses, such as storage, protection and destruction of controlled substances.

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. Unless otherwise provided by law, restrictions on the use of AFF monies retain those limitations after any monies are made available to a recipient agency. Moreover, monies are available for use only to the extent receipts are available in the AFF.

In Fiscal Year (FY) 2003, monies were available under a permanent indefinite appropriation to finance the following:

Resources of the AFF are intended to cover the business expenses of the AFP, 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 DOJ" pursuant to 28 U.S.C. 524(c)(8)(E).

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 either can be 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 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 2003 and FY 2002 is presented in the Notes to the Principal Financial Statements rather than within the Principal Financial Statements because the Government does not have title to the property. The Statement of Federal Financial Accounting Standards 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.

2003 Financial Highlights

As indicated in Table 3, the AFF supports Strategic Goals 2 and 3 of the Attorney General's Strategic Plan for Fiscal Years 2001 - 2006. The AFF has no costs associated with counter terrorism or homeland security.

d

Strategic Goal 2, Enforce Federal Criminal Laws. Included are mandatory expenditures made for case and program support authorized expenses by AFP participants to operate the activities of the program. The Fund's resources cover the costs of seizing, evaluating, inventorying, maintaining, protecting, advertising, forfeiting, and disposing of property seized for forfeiture. These costs are necessary to support the federal AFP and fluctuate in direct relation to the forfeiture activity levels of the investigative, prosecutive, litigative and administrative participants of the Fund. In FY 2003, $244.6 million was expended while $219.6 million was expended in FY 2002. Goal 2 expenses are presented in Figure 1.

Strategic Goal 3, Prevent and Reduce Crime and Violence by Assisting Tribal, State, Local, and Community-Based Programs. Included are expenditures made for equitable sharing and joint federal/state and local law enforcement operations. Equitable sharing payments represent the transfer of portions of federally forfeited cash and proceeds from the sale of forfeited property to state and local law enforcement agencies that directly assisted in targeting or seizing the property. P.L. 102-393, the 1993 Treasury Department Appropriations Act, enacted new authority for the Fund to pay for "overtime, travel, fuel, training, equipment, and other similar costs of state or local law enforcement officers that are incurred in a joint law enforcement operation with a Federal law enforcement agency participating in the Fund." In FY 2003, $190.9 million was expended for equitable sharing and joint law enforcement operations vs. $240.0 million in FY 2002. Goal 3 expenses are presented in Figure 1.

d

AFF net revenues over an eight-year period are shown in Figure 2. Net forfeiture revenue is the sum of forfeited cash and proceeds from the sale of forfeited property adjusted for transactions such as transfers to and from other federal agencies, refunds to other federal agencies, and recoveries of asset management costs.

Investment earnings realized totaled $12.7 million for FY 2003, $7.8 million less than the $20.5 million in interest earned in FY 2002 and are less than the $20.0 million estimated for FY 2003 in the Budget of the United States Government, Fiscal Year 2004--Appendix. The reduced earnings are due primarily to the fall in short-term interest rates. In addition, the amounts available for investment are difficult to predict because many factors influence the balance. For example, one significant factor is the level of equitable sharing distributions, associated with uncertainties in the amount and timing of disbursements of 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 position, which is the equity of the U.S. Government in the AFF, increased 8.9 percent over FY 2002. The ratio of net position to total assets was .41 to 1.0 in FY 2003, an increase of .02 from FY 2002. Due to the continual investment of cash in government securities, the AFF and SADF Fund balances with the U.S. Treasury remain low.

Current assets exceeded short-term liabilities by a ratio of 3.9 to 1.0. This relationship reflects an increase of .36 from FY 2002. The ratio 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 (a) seized cash and monetary assets and (b) funds not on deposit.

In FY 2003, $435.5 million were provided for Goal 2 and 3 expenses while in FY 2002, $459.7 million were provided. This was made possible by $478.7 million and $ 419.1 million in non-exchange revenue net of transfers in FY 2003 and FY 2002, respectively, 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's carry forward balances are used to support program expenses. The carry forward balances consist primarily of special case funds and monies for operational requirements.

In FY 2003, approximately 43 thousand assets were seized valued at about $649.4 million compared to approximately 26 thousand assets seized with an estimated value of $560.1 million in FY 2002. Seventy-five percent of the increase in the number of seizures is attributed to new ATF activity, while eighty-six percent of the increase in the value of seizures is attributed to a general increase in seizure activity among the legacy program components. The program invests cash balances from both the AFF and SADF in Government securities. These investments resulted in earnings of $12.7 million during FY 2003 and $20.5 million during FY 2002. Earnings over an eight-year period are presented in Figure 2.

The AFF's end-of-year unobligated balance increased to $437.9 million, an increase of $42.6 million from the FY 2002 balance of $395.3 million. The unobligated balance carried forward is retained in the AFF to ensure the availability of sufficient monies in the upcoming fiscal year for authorized purposes. These purposes include mandatory program operating expenses as well as pending extraordinary equitable sharing distributions, pending innocent third party payments, uncommitted super surplus authority, and other essential items. For example, as of September 30, 2003, extraordinary sharing distributions pending total an estimated $83.2 million (comprises 63 assets with values in excess of $1.0 million for which the forfeiture process, including disposition, has concluded and asset proceeds have been deposited into the Fund).

The AFP management views data reliability and validity as critically important in the planning and assessment of its performance. As such, this document includes a discussion of data validation and verification for the performance information presented. In addition, the data reported meets the OMB standards for data reliability. The standard is as follows:

Performance data is acceptably reliable when there is neither a refusal nor a marked reluctance by agency managers or government decision makers to use the data in carrying out their responsibilities. Performance data need not be perfect to be reliable, and the cost and effort to secure the performance data possibly can exceed the value of any data so obtained.

The financial management of the Fund is supported by the Justice Management Division's Financial Management Information System II (FMIS II), the USMS's Financial Management System (FMS), the AFF/SADF's Consolidated Asset Tracking System (CATS) and ATF's Forfeited and Seized Assets Tracking System (FASTRAK). FMIS II is a computerized, general-purpose accounting and reporting facility that supports the financial operations of the Department. FMS is the USMS field offices' financial management system. CATS is an integrated system providing services to the asset forfeiture community and serving as a subsidiary system for the financial accounting and reporting of the seized and forfeited inventory. FASTRAK is an asset tracking and forfeiture status information system used by ATF. As enhancements or refinements are made in these systems, they will strengthen the data supporting the activities of the AFF and SADF.

The FY 2002 financial statements of the AFF and SADF received an unqualified opinion from the independent auditors; however, the report on internal controls cited a reportable condition. The auditors indicated that improvements were needed in seized and forfeited transaction processing to permit preparation of timely and reliable financial statements in accordance with generally accepted accounting principles. Specifically, they recommended that continued monitoring and evaluation is needed of participating agencies' efforts to improve CATS data quality. AFMS took a number of actions this fiscal year to address this issue; including, (1) increased on-site data quality reviews at participating agencies field offices, (2) issuance of detailed procedures relating to the annual physical inventory, and (3) the issuance of detailed monthly closing instructions for all participating agencies.

While expressing an unqualified opinion on the fiscal year 2003 financial statements, the auditors reported a material weakness related to improvements needed in controls over monitoring, accounting, and reporting of financial transactions. The report on internal controls identified that seizing and custodial agencies and litigation offices, which are integral parts of the seizure and forfeiture process, do not place sufficient emphasis on recording the correct status or valuation of seized/forfeited property or obligations throughout the year. As noted in Section IV Analysis of Systems, Controls, and Legal Compliance, management will prepare a detailed action plan to address the material weakness.

STRATEGIC GOAL 2: Enforce Federal Criminal Laws
56 Percent of the Asset Forfeiture Fund's Net Costs support this Goal.

Annual Goal: To provide funds to federal agencies engaged in the AFP, in a manner designed to support use of the asset forfeiture sanction against the financial infrastructure of criminal organizations, to eliminate the burden of forfeiture-related costs as a disincentive to use of the asset forfeiture powers, to facilitate the efficient execution of forfeiture program responsibilities, and to enhance program accountability by ensuring the availability of current and accurate information on the status of all assets seized for forfeiture.

Background/Program Objectives: The primary purpose of the Fund is to provide a stable source of resources to cover the costs of an effective AFP. Prior to the creation of the Fund in 1984, costs of activities had to be diverted from agency operational funds. The more effective an agency was in seizing property, the greater the drain on its appropriated funds. A secondary benefit of an aggressive and well-managed forfeiture program is the production of surplus revenues to assist in financing important law enforcement programs. The Fund's authority to incur program operation expenses is limited only by the level of receipts deposited into the Fund.

Receipts to the Fund were $478.7 million in FY 2003. These receipts must cover program operation expenses, which include all costs incurred in support of the federal AFP such as case support costs, ADP equipment, training and printing, and other program management. The FY 2003 ratio of program operation expenses to deposits is 42 percent while in FY 2002 it was 41 percent. After program operation expenses are deducted from receipts, the remainder represents the results of the year's operations ($478.7 million - $201.6 million = $277.1 million in FY 2003 and $419.1 million - $172.1 million = $247.0 million in FY 2002). This net income is distributed in various ways. It is paid out as equitable sharing; state and local overtime; and investigative expenses after the annual appropriation of funds.

Performance/ Discussion of FY 2003 Accomplishments: The AFF provided $433.4 million in net obligation authority to participating agencies in FY 2003, of which $244.6 million was used for Goal 2 activities. This was made possible by $478.7 million in receipts from forfeiture activities and interest earnings on invested balances. The AFMS administers the Fund in a fiscally responsible manner that will minimize the costs incurred by the United States while maximizing the impact on criminal enterprises. Funds are available to pay mandatory expenses of the AFF including case support expenses (asset management and disposal, third party payments, case related expenses, special contract services, contracts to identify assets, and awards for information leading to a forfeiture); program support expenses (automated data processing, training and printing, and other program management); and other authorized expenses (storage, protection and destruction of controlled substances). Because receipts exceeded the amounts necessary for program expenses, Fund monies were used for authorized investigative expenses, such as awards for information, purchase of evidence, and equipping of conveyances.

To facilitate the efficient execution of the national forfeiture program, the AFF is providing funds for a Browser Based CATS (BBC) project. The modernization initiative will replace outdated and proprietary software products; replace outdated, complex, and proprietary database query language; and move from a cooperative processing environment to a thin-client processing approach. CATS currently ties more than seven hundred locations together using a national telecommunications network and supports program functions such as seizure, custody, notification, claims, petitions, forfeiture, disposal, official use, financial tracking, status inquiry, advertising copy production, equitable sharing, reporting, and management analysis.

No performance measures are indicated because the Fund's operations are performed by the AFF participants. The Fund is considered to be an enabling/administrative activity where resources are spread across agencies in accordance with full program costing guidance.

STRATEGIC GOAL 3: Prevent and Reduce Crime and Violence by Assisting State, Tribal, Local, and Community--Based Programs
44 Percent of the Asset Forfeiture Fund's Net Costs support this Goal.

Annual Goal: To provide funds to state and local law enforcement agencies for the purpose of encouraging cooperation in development and execution of criminal investigations.

Background/Program Objectives: See Goal 2.

Performance/Discussion of FY 2003 Accomplishments: The AFF provided $433.4 million in net obligation authority to participating agencies in FY 2003, of which $190.9 million was used for Goal 3 activities. This was made possible by $478.7 million in receipts from forfeiture activities and interest earnings on invested balances. The AFMS administers the Fund in a fiscally responsible manner that will minimize the costs incurred by the United States while maximizing the impact on criminal enterprises. Funds are available for payment of authorized expenses consisting of equitable sharing payments and joint law enforcement operations.

No performance measures are indicated because the Fund's operations are performed by the AFF participants. The Fund's budget authority is considered to be an enabling/administrative activity where resources are spread across agencies in accordance with full program costing guidance.

Management Controls Program in the Fund

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 monitors its financial transactions on an on-going basis and also requires participants who enter Fund transactions in their own financial system to report on their activity at least quarterly.

Integrity Act Section 2 - Material Weaknesses

In connection with the fiscal year 2003 financial statements the auditors reported a material weakness related to improvements needed in controls over monitoring, accounting, and reporting of financial transactions in accordance with Federal accounting standards, as discussed in the auditors' Report on Internal Control dated January 14, 2004.

Integrity Act Section 4 - Material Nonconformances

The Fund relies upon the Department's FMIS II managers for Section 4 compliance. No material nonconformance matters are reported.

Legal Compliance

The auditors found that the AFF/SADF was noncompliant with OMB Circular No. A-11, Preparation, Submission and Execution of the Budget, which requires that an obligation (for customer agencies) or an unfilled customer order (for provider agencies) be recorded at the time an agreement/contract to commit the Federal government to incur expenses or receive reimbursable revenue is signed. Additionally, due to the material weakness reported in the Report of Independent Auditors on Internal Control, AFF/SADF was found to be in noncompliance with the Federal Financial Management Improvement Act of 1996.

As part of the reportable condition emanating from the independent audit of the FY 2002 financial statements of the AFF and SADF, the auditors recommended that AFMS provide additional oversight of agencies posting obligations for AFF/SADF, specifically, monitoring the status of these obligations on an on-going basis to ensure compliance with the budgetary and accrual basis of accounting. In response to this recommendation, the AFMS implemented additional steps to monitor outstanding obligations on a regular basis.

The material weakness reported for FY 2003 emphasizes further improvements needed in controls over monitoring, accounting, and reporting of financial transactions. The FY 2003 report on internal controls identified that seizing and custodial agencies and litigation offices, which are integral parts of the seizure and forfeiture process, do not place sufficient emphasis on recording the correct status or valuation of seized/forfeited property or obligations throughout the year. The FY 2003 report on internal controls also identified obligations under reimbursable agreements that were carried at the amount reported by the provider agency throughout the year. To the extent these agreements provide funding for the entire year without restriction as to when the services can be provided, the full amounts of the obligations should be recorded when the agreements are executed.

Management agrees with the findings and recommendations contained in the report on internal controls and will undertake prompt corrective action.

In the General Accounting Office's (GAO) most recent update to the High-Risk Series (High-Risk Series: An Update, GAO-03-119, January 2003), the Asset Forfeiture Program was removed from the high-risk designation. GAO cited the department's substantial progress in improving the management of and accounting for seized and forfeited property and the demonstrated commitment to joint efforts with the Department of the Treasury targeted at reducing costs and eliminating duplication of effort.

Revenue as of September 30, 2003 for FY 2003 totaled $478.7 million, which is $59.6 million more than the $419.1 million received in FY 2002. It is difficult to project future receipt levels since they 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.

The Homeland Security Act transferred the Customs Service, the Secret Service, and the enforcement elements of ATF out of the Department of the Treasury, leaving the Internal Revenue Service's Criminal Investigation Division as the remaining Treasury component with forfeiture authority. To address issues raised by the creation of the DHS, the President proposed consolidating the Treasury Forfeiture Fund and the Justice Assets Forfeiture Fund into one forfeiture fund within the DOJ. The legislative proposal to effect the transfer is currently being circulated for comment by the Office of Management and Budget. If passed into law, the make-up and operation of the DOJ AFP would change dramatically.

The Fund is continuing to reposition itself to align to the Department's new goals that will impact the Fund, some of which are to streamline, eliminate or consolidate duplicative functions; improve communications; improve financial performance; and utilize technology to improve operations. The Fund is already meeting some of these goals. AFMS has developed a plan to modernize the technology that supports CATS. The primary purpose of CATS is to manage and track seized and forfeited assets; to introduce uniform practices within the asset forfeiture community; to eliminate diverse information systems; and to improve the accuracy and reliability of data. CATS, which was developed and implemented in 1994, established a single central database, and consolidated the asset forfeiture activities of all DOJ law enforcement agencies. In addition, CATS supports the asset forfeiture activities of other federal law enforcement agencies, such as, FDA, USDA, USPP, and USPS.

The technology upon which CATS is based is 10 to 15 years old. The BBC project was initiated to enhance the system's ability to respond to the needs of the Fund and the needs of participating agencies by taking advantage of emerging technologies that will permit the system to operate in a more modern and efficient manner and reduce overall cost to manage, operate and maintain the system.

The BBC project received approval to begin through the Automated Information System (AIS) process in FY 2002. Subsequent approval to proceed has been obtained through the Justice Management Division Information Technology Investment Management process. The BBC project is scheduled for completion in August 2005.

The DOJ is also planning to update its financial management systems through the replacement of the core financial management systems currently operating across the components of DOJ with one core commercial off-the-shelf financial management system certified by the Joint Financial Management Improvement Program. The AFP will be among the first group of components migrating to the Unified Financial Management System.

The financial statements have been prepared to report the financial position and results of operations of the AFF/SADF, pursuant to the requirements of 31 U.S.C. 3515(b).

While the statements have been prepared from the books and records of the AFF/SADF in accordance with generally accepted accounting principles for federal entities and 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.

FOOTNOTES:
1 The participants include the Asset Forfeiture and Money Laundering Section, Criminal Division (AFMLS); Asset Forfeiture Management Staff, Justice Management Division (AFMS); Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF); Drug Enforcement Administration (DEA); Executive Office for United States Attorneys (EOUSA); Federal Bureau of Investigation (FBI); Food and Drug Administration (FDA), Immigration and Naturalization Service (INS); United States Department of Agriculture (USDA); United States Marshals Service (USMS), United States Park Police (USPP); and United States Postal Service (USPS).