Customs Modernization

erman Melville, author of Moby Dick, became an inspector for the Customs Service in 1866. For nearly two decades he worked at the port of New York, reviewing import documents, collecting duties and checking ships for illegal cargo. Although inspectors now wear uniforms and use computers, some people say very little has changed in the import process since Melville's time.

"Customs' business processes are essentially two hundred years old," says an official of Customs' parent department, the Treasury, who insisted on remaining anonymous. "The process requires the importer to file paperwork on every crate and shipping container."

Customs has attempted, in fits and starts, to streamline its processes for more than a century. But progress has been slow. The agency has had little success rounding up funding on Capitol Hill for its latest effort to overhaul its systems, and was forced to shut down a promising prototype project earlier this year due to lack of funding.

In the 1980s, Customs computerized its import and export systems. But the fundamental premise under which the agency operates-that a duty, or import fee, is assessed on each and every parcel that crosses the border-stayed the same. Meanwhile, imports have increased at an unprecedented rate. As a result, the agency's workload is staggering.

Customs handles 18 million to 19 million cargo summaries per year-a trillion dollars worth of commerce. Customs expects its workforce will remain flat at 15,000 employees while trade continues to increase; it's expected to double by 2005. Customs collects $22 billion in duties each year, which makes it the federal government's second-largest revenue source.

Many companies see Customs' role in the import process as vital to the success of their business operations. If Customs stands in the way of faster processing and shipments delivery, the agency becomes a hindrance, not an aid, to U.S. commerce.

Facing rising workloads and expectations with little prospect of bigger budgets, Customs has had to look to technology to meet its mission. "We have to grow our systems to meet the demand," says Charles R. Armstrong, director of Customs' modernization efforts.

80-20 Rule

To meet the demand, Customs wants to change the entire import process.

Now, when a shipment arrives at a U.S. port, a carrier must file an entry document that describes the shipment's contents. A Customs inspector investigates the shipment for contraband and either confiscates or approves the entry of the goods.

The company then has ten days to file an entry summary detailing the products in the shipment and pay the import duty. And because entry summaries tend to be complex documents, many companies use brokers to prepare and file them. Brokers upload the summaries to Customs' current import processing system, known as the Automated Commercial System (ACS).

The Customs Modernization Project, a 10- to 15-year, $2 billion effort, would fundamentally change this process. Under the project, a new Automated Commercial Environment (ACE), estimated to cost $1.25 billion over four years, would pay little attention to the 80 percent of importers who don't cheat. Under the ACE framework, freight companies would still file entry documents that explain the contents of shipments. However, Customs wouldn't ask for as much information as it currently requires and would allow companies to file the documents interactively.

Once the entry documents were processed through the ACE system, companies would still have 10 days to file entry summaries. However, Customs' idea is to combine 15 days' worth of activity into a single bill rather than requiring separate payments for each shipment. The agency would then audit a random sample of these transactions.

ACE would focus agency resources on the 20 percent of importers who are responsible for 80 percent of import violations. To do this, Customs would utilize data mining and data warehousing techniques aimed at narrowing the scope of its investigations. And, like credit card companies that investigate charges that are outside of the purchase patterns of consumers, Customs would evaluate the histories of importers and investigate unusual changes in activity.

Another part of the ACE vision is aimed at giving Customs inspectors instant access to one view of all the Customs data and information they might need on carriers and importers rather than forcing them to log on and off multiple systems.

ACE will also replace Customs' slow, aging network with one that is state of the art and high speed. It will link every Customs office with a high-speed connection. Customs will consider using enterprise resource planning software to modernize its import tariff accounting system and to enable the agency to produce more detailed reports.

As a test of the new process inherent in ACE, Customs implemented a prototype program called the National Customs Automation Program Prototype (NCAPP) at three border crossing sites. NCAPP lets a group of automobile manufacturers such as Ford Motor Co., DaimlerChrysler AG and General Motors Corp. build auto parts just across the borders in Canada and Mexico and ship them into the United States just when they are needed at assembly plants. The key to this "just in time" system is speedy border crossings.

"Import data is filed electronically 20 minutes before a border crossing," Armstrong says. "The prototype allows highly compliant, repetitive shipments to move across the border quickly."

The system uses transponders similar to those found on toll roads across the nation and electronic wands that read information about the cargo. The information gathered by transponders or wands becomes the entry document for the shipment. The information is automatically transmitted to the Customs inspector at the border and ACS as well. When ACE is built, ACS will stop processing entry documents.

The time it takes to get a part from a supplier along the border to an auto plant can be as short as five minutes. As a result, manufacturers no longer stockpile large quantities of parts in warehouses near assembly plants. General Motors keeps only several hours' worth of inventory at its plants, says Kevin Smith, the company's director of customs administration. "Trucks are arriving every hour basically carrying an hour or two hours worth of material for immediate manufacturing. Managing large inventories is very costly. Plus, things happen to stuff that sits in inventory."

While the operating procedures are somewhat different for importers who ship items by rail, sea and air freight, ACE would streamline those procedures as well.

The White Whale

For now, though, ACE exists only on paper. The reason is that finding the funds for the modernization project has been as difficult as hunting down Moby Dick. Propelled by the 1993 Customs Modernization Act and the increasingly poor performance of the aging ACS, Customs has been attempting to come up with an acceptable IT modernization plan since 1995. But development and funding problems have dogged the project.

In a 1995 report (AIMD-99-41), the General Accounting Office warned that ACE might not be cost-effective, and raised several technical concerns about the proposed project. "GAO found serious weaknesses relating to architectural definition, investment management, and software development and acquisition," the report said.

For the past two years, Congress has failed to appropriate the $210 million Customs says it needs to get started on ACE. The request was unpopular because the White House planned to pay for the system with a new user fee, to be paid by importers. That struck many Republicans as a new tax and drew complaints from the importers, who say they already pay almost $1 billion annually in such fees.

A Treasury official says the department and Customs are "perfectly happy to provide the current level of service to importers. But if they are asking for something more, services over and above what is currently provided now, we have to come up new revenues for new expenses."

The White House has again asked Congress for $210 million for the project for 2001 and again has proposed user fees to pay for it. This time, however, officials say they are willing to entertain other funding ideas should they come up.

On the upside, GAO gave ACE a clean bill of health in a letter to Congress last May. GAO became more comfortable when Customs decided to hire a contractor to help it create technology solutions for the overhaul of the import process, Armstrong says.

"We have seen the plans improve to a point where they would serve as a model of how a modernization architecture should be prepared in any major department or agency in the federal government," says Thomas Fritz, president and chief executive officer of the not-for-profit Private Sector Council, a coalition of the nation's top importers that helped develop the ACE plan.

The Hunt for $15 Million

But as Customs officials wait for the great leap forward, progress has come to a halt. The agency announced in February that it would shut down the NCAPP effort for lack of funding. It also put the Treasury Department, Congress and the trade community on notice that efforts to modernize its import processes were effectively dead for the year because it didn't have the funds to get through the source selection process to complete a contract to implement ACE.

"Right now, we need $15 million to keep the modernization effort moving forward," Armstrong says. "We'll put the program in mothballs until we can get funding."

When it became evident in January that there was not enough money for Customs to select a contractor, Customs commissioner Raymond W. Kelly decided not to keep the office open nor to continue the NCAPP.

The proposal to halt the prototype would have threatened the benefits Customs and the major U.S. automobile manufacturers have seen from such streamlined processes. "Customs and the trade community had made really good progress in developing a real, modern, electronic Customs entry process," Smith says. "To see that effort lost is disturbing."

In February, multiple interest groups had begun lobbying efforts on Capitol Hill expressing support for Customs' modernization efforts. These groups include the Information Technology Association of America (ITAA) and the Coalition for Customs Automation Funding, a group of customs brokers, importers, exporters, freight companies and retailers.

A halt in the NCAPP might hurt only automakers. However, when the existing ACS system has brushes with large-scale failure, as it did with two "brownouts" in 1998, the entire nation can be affected.

"ACS slowed down to the point of being disruptive. There were interruptions at many ports. Customs folks had to process the import transactions manually," says General Motors' Smith. "The brownouts didn't disrupt production. But they did slow the flow of goods across the border. We are fortunate it wasn't a blackout-I don't think all the transactions could have been handled manually if it was."

Armstrong agrees. "ACS is an overtaxed and overloaded system," he says. "The way the system is designed today, all it takes is one choke point to cause a denial of service."

Treasury's position is that ACS can handle the increase in trade expected by 2005 as long as there is money for yearly upgrades. However, ACS uses the outdated COBOL programming language, and upkeep costs are high. Plus, Customs spends substantially more each year for what Armstrong terms "ACS life support": $35 million in 1999, $80 million this year and $123 million next year.

But Customs wants to replace ACS rather than expanding its capacity. Customs has drafted a proposal for an innovative share-in-savings contracting scheme in which vendors would keep a portion of the extra revenues generated by a more efficient system. That would save Customs some up-front costs.

In early March, Treasury officials found enough money to keep the prototype operational. But they were still hunting for the funding to keep overall modernization efforts afloat. "We need the concurrence of Congress but we are hopeful that we can prevent a shutdown," the Treasury official says.