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CONCLUSION

CUSTOMS IS A MULTI-MISSION AGENCY. IT BEARS THE TREMENDOUS RESPONSIBILITY OF THWARTING TRADE IN ILLICIT NARCOTICS WHILE AT THE SAME TIME FACILITATING LEGITIMATE INTERNATIONAL TRADE IN MERCHANDISE. CUSTOMS PLANS TO USE THE RESOURCES AT ITS DISPOSAL AND THE MANAGEMENT INNOVATIONS DISCUSSED TODAY TO RECONCILE THESE TWO SOMETIMES CONFLICTING GOALS.

THIS CONCLUDES MY INTRODUCTORY STATEMENT. WE ARE AVAILABLE TO DISCUSS THE DETAILS OF THE REQUEST AND ANSWER YOUR QUESTIONS AND THOSE OF THE SUBCOMMITTEE MEMBERS.

STATEMENT OF ALLAN MENDELOWITZ, SENIOR ASSOCIATE DIRECTOR, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, DC, ACCOMPANIED BY LAMONT J. KINCAID, SENIOR PROJECT MANAGER, GAO; JOSEPH NATALICCHIO, SENIOR PROJECT MANAGER, GAO; JAMES BUROW, SENIOR PROJECT MANAGER, GAO Mr. MENDELOWITZ. Thank you, Mr. Chairman. With your permission, I would like to invite two additional members of my staff to the table.

Senator MATSUNAGA. For the record, will you state the names of those who are your assistants?

Mr. MENDELOWITZ. Certainly. I am happy to introduce, on my left, Mr. James Burow, who is a Senior Project Manager with the General Accounting Office and the Site Senior at our Customs Audit Site; and on my right, Mr. Lamont Kincaid and Mr. Joseph Natalicchio, both of whom are Senior Project Managers working in the area.

Senator MATSUNAGA. Welcome to the committee.

Mr. MENDELOWITZ. Thank you. With your permission, I will submit a full statement for the record, and read a shortened statement, in the interest of time.

Senator MATSUNAGA. Without objection, your full statement will appear in the record as though presented in full.

Mr. MENDELOWITZ. In light of the proposals to reduce the Customs' staffing levels, we are happy to be here to discuss the results of our reviews regarding the Customs Service's efforts to enforce laws and regulations governing imports. I will focus my remarks today on the adequacy of Customs' cargo examination process and on Customs' efforts to protect intellectual property rights. My full statement also includes a summary of our work on the role of Customs' import specialists. I would like to begin by discussing the quality of Customs' cargo examinations.

In September 1986, we issued a report based on work we performed at the request of Senator D'Amato on how well the Customs Service examines cargo entering the United States. The report "Cargo Imports: Customs Need to Better Assure Compliance With Trade Laws and Regulations"-concluded that the manner in which Customs inspectors conduct physical examinations of cargo does not ensure compliance with trade laws and regulations.

The Customs Service is responsible for ensuring that imported merchandise complies with the trade laws of the United States. Customs relies on physical examinations of the merchandise by inspectors as the primary means of ensuring compliance.

We observed 635 examinations at the New York Seaport and JFK Airport and 234 examinations at seven other ports of entry. In sum, we found that, regardless of the reasons for examining the cargo or the size of the shipment, the inspectors usually examined only one or two packages selected from the most accessible locations in the shipment-and we are talking here about shipments that come in very large cargo containers, 20 feet long, 30, 40 feet long, holding as many as thousands of packages. Often, non-Customs employees, such as an employee of the warehouse or representative of the purchaser, were allowed to select the merchandise

that was going to be examined. And, usually, the Customs inspectors did not verify that the quantity in the shipment was equal to the amount declared by the importer.

Since 1981, Customs has used a selective inspections system which enables inspectors to physically examine shipments identified as high risk; that is, those most likely to involve violations. The remaining shipments are released without physical examination. According to Customs officials, about 20 percent of the shipments are selected for physical examinations. However, the reasons the inspectors were given for performing the examinations did not seem to affect how the examinations were conducted. We observed that inspectors usually did not seek full access to cargo shipments and examined only a few packages of the most accessible merchandise in a given shipment. Even when all cargo was fully accessible, inspectors usually only examined the most conveniently located merchandise.

As I said, we also observed that non-Customs employees, such as warehouse workers or carrier representatives, were allowed to select the specific packages to be examined. Inspectors are required to ascertain whether the quantities of merchandise entering the country agree with those on the invoices in order to help protect revenue and to enforce quota requirements. In 194 of the 289 examinations we observed at the New York Seaport, and 277 of the 346 examinations we observed at JFK Airport, inspectors did not count, weigh, or estimate the merchandise quantities.

We agree with the initiative to improve cargo processing by a selectivity system, but whether it will enhance importer compliance with trade laws depends on the thoroughness of Customs' physical examinations. The results of these examinations and information from other sources provide Customs with the basis for selecting which shipments to physically examine in the future and which to release without physical examinations. We observed 177 examinations of first-time importers. Now, first-time importers are very important to the selectivity process because there is no history or track record with respect to how reliable they are. The shipments had an average size of 318 packages or items at the New York sites. In 64 percent of these examinations, the inspectors examined at most only one package out of the full shipment.

In light of these problems, we recommended that Customs develop specific policy and procedures for inspectors to use for determining the intensity of cargo examinations. The degree of intensity should be based on the risk of the shipment and the purpose of the examination.

To see how the inspection process affected the ability of Customs to enforce U.S. trade law and regulations, we looked in depth at the protection of intellectual property rights. Our report on Customs' protection of intellectual property rights provides the result of surveys we conducted to obtain the perspectives of firms that have sought Customs Service assistance to protect intellectual property rights from counterfeit or infringing imports.

We conducted separate surveys of firms that have recorded registered trademarks and copyrights with Customs and those that have obtained exclusion orders under section 337 of the Tariff Act of 1930. Of the firms responding to our survey, about 79 percent of

those that had recorded their trademarks or copyrights with Customs stated that counterfeit and infringing goods continued to enter the country. And about 87 percent of these firms reported that the counterfeit and infringing goods did at least some damage to sales. About 65 percent of the firms responding to our survey that obtained section 337 exclusion orders stated that counterfeit and infringing goods covered by the exclusion orders continued to enter the country. And about 73 percent of these firms reported that the counterfeit and infringing goods did at least some damage to sales.

Survey respondents pointed to staffing levels as the primary limitation on Customs' ability to protect intellectual property rights. The survey respondents supported three proposals for strengthening the Customs' efforts, and we made appropriate recommendations in our reports.

The CHAIRMAN. Let me ask you, Mr. Mendelowitz, what happens to the morale of the employees in that kind of a situation, where we see them cutting back and then rushing out to re-hire. Where is the continuity of service and the experienced personnel there?

Mr. MENDELOWITZ. Respondents to our surveys generally had very positive things to say about Customs employees. Firms indicated that, when they brought information regarding potential shipments of counterfeit goods to Customs' attention, Customs' personnel were willing to help, were effective, and tried to the best of their ability to be responsive. I would say, based on those responses, Customs is a service that has traditionally had high morale.

But, while we haven't surveyed the Customs inspectors with respect to morale at this point, I think quite clearly that budget cuts, staffing reductions, and increased workloads that reduce the ability of employees conscientiously trying to do their job has to have a negative impact on morale.

The recommendations that we made include a proposal that the International Trade Commission authorize and direct Customs to seize goods and cause them to be forfeited when enforcing exclusion orders, that the time spent for Customs to notify the ports regarding newly-recorded trademarks and copyrights that should be protected can be substantially reduced and that, given the importance of intelligence information, that Customs intensify its efforts to enlist the support of intellectual property rights owners in identifying shipments containing counterfeit or infringing goods.

This concludes my summary statement and we would be happy to try to answer any questions you might have.

The CHAIRMAN. I'm sorry I didn't hear all of your testimony, Mr. Mendelowitz, but I was down at a meeting at the White House with the President on trade. It went a little longer than I had anticipated.

When we were holding hearings down on the Mexican border in Brownsville, we had a statement by one of the witnesses that he had to travel 200 miles to Laredo to get some decisions concerning products being brought in. Isn't that really an impediment to trade; doesn't that delay our traffic across that border?

Mr. BUROW. Mr. Chairman, I believe you are talking about import specialists.

The CHAIRMAN. That's correct.

Mr. BUROW. These would be the people who the importers come to and ask whether the imports that they are about to bring into the country are properly classified and what duties are going have to be paid. Customs has been taking the position recently that it doesn't really matter exactly where those import specialists are located. They try to keep them in their district offices, at a central location because of the knowledge that they need to have in order to answer importers' questions.

I think your statement is absolutely correct; some of these people do have to travel great distances in order to talk to import specialists but, on the other hand, there are people, I'm sure, in Laredo who will also use their services.

I may have to correct this statement if I'm wrong but I think there are only two or three import specialists in Laredo.

The CHAIRMAN. I think that's right.

Mr. BUROW. You could move some of them other places along the border, and then you would have one in Laredo. Now, I don't know whether that one individual would be able to handle the workload at Laredo or not.

The CHAIRMAN. Does that mean that we should talk about minimum staff levels? Should we legislate a thing like that? It seems rather awkward to me for us to start legislating staff levels.

Mr. BUROW. Well, I think you are absolutely right. And it is hard for me to sit here and try to say how many there should be at any particular location. I think that we need to ask whether the public is being served and to what extent are they being served. I think that you will find that the majority of the importing community finds that the Customs Service does respond to their requests.

There are those exceptions to that, however, who seem to be the ones that write letters.

The CHAIRMAN. Well, I must say that anything that delays that trade across that border hurts the economy of both countries. Mr. BUROW. That's right.

The CHAIRMAN. It is a matter of very serious and deep concern to me, and the reason for these hearings and the hearings we had on the border, to further understand the impact of it.

Gentlemen, let me say, that we will take your entire statement into the record. And I would like to now excuse you and call Mr. Banks, the Deputy Commissioner. If you would come back to the stand, please.

[The prepared written statement of Mr. Allan Mendelowitz follows:]