Federal Bureau of Investigation

Annual Financial Statement

Fiscal Year 1996

Audit Report 97-29A, (8/97)



















This audit report contains the Annual Financial Statement of the Federal Bureau of Investigation (FBI) for the fiscal year ended September 30, 1996. The report includes the FBI management's overview, the principal financial statements and related notes, supplemental financial and management information, and the independent auditor's reports on the principal financial statements, internal controls, and compliance with laws and regulations. The annual financial statement is the responsibility of the FBI's management. This audit was performed as part of the Department of Justice's (DOJ) effort to implement the Government Management Reform Act of 1994 (GMRA) which requires an annual financial statement audit of the DOJ beginning with FY 1996. The results of the annual financial statement audit of the FBI as presented in this report will be relied upon by Price Waterhouse LLP in its performance of the consolidated financial statement audit of the DOJ, which will be issued in a separate report by the Office of the Inspector General (OIG).

The OIG contracted with KPMG Peat Marwick LLP, Certified Public Accountants (CPA), to perform the FY 1996 audit of the FBI's Statement of Financial Position. The audit was conducted in accordance with generally accepted government auditing standards and Office of Management and Budget Bulletin No. 93-06, "Audit Requirements for Federal Financial Statements." The OIG performs an oversight role in the audit process and ensures compliance with the GMRA by monitoring the progress of the audit, reviewing supporting workpapers, coordinating the issuance of reports, and following up on findings and management letter issues.

Reporting Entity

The FBI's mission of serving the needs of the public is many-fold. At present, the FBI has investigative jurisdiction over violations of more than 200 categories of federal crimes. To achieve their mission, the FBI received $2.5 billion in direct appropriations for FY 1996, including those for the Violent Crime Reduction Program. Reimbursable funding levels, totaling about $393 million, provided the FBI with the resources to participate in several joint-agency enforcement efforts, including Organized Crime Drug Enforcement Task Forces, Regional Drug Intelligence Squads, and the Asset Forfeiture Program. The FBI also offers cooperative services such as fingerprint identification, laboratory examination, police training, Uniform Crime Reports, and the National Crime Information Center to duly authorized law enforcement agencies.

Audit Results

The audit resulted in a qualified opinion on the statement of financial position due to the FBI's inability to provide adequate records to support its capital lease assets and liabilities, and the FBI's inability to support the completeness of its seized assets records. The accompanying report on the internal control structure identified material weaknesses with respect to the above mentioned items and also identified reportable conditions with respect to accounts receivable, property and equipment, accounts payable, and electronic data processing service interruption. The accompanying report on compliance with laws and regulations did not identify any material weaknesses. Other conditions involving the internal control structure and its operations were noted by the independent auditors and will be communicated, under separate letter, to management. The CPA firm also reviewed management's process for evaluating and reporting on internal controls and accounting systems as required by the Federal Managers' Financial Integrity Act (FMFIA), and compared the agency's most recent FMFIA reports with the evaluation they conducted of the FBI's internal control structure. The auditors were not contracted to perform control testing sufficient to enable them to express an opinion on the management's assertions over the effectiveness of the internal control structure or compliance with laws and regulations. Accordingly, they did not express such an opinion.

Financial and Other Operating Highlights

During FY 1996, funding was approved for the construction of a new state-of-the-art laboratory facility in Quantico, Virginia. Moving the laboratory from FBI headquarters will allow expansion of current laboratory examinations in the new facility. According to the FBI, the estimated cost of construction is $130 million.

In August 1996, President Clinton signed the Health Insurance Portability and Accountability Act. The act calls for joint establishment of a Fraud and Abuse Control Program by the Attorney General and the Department of Health and Human Services no later than January 1, 1997. The Act appropriates $47 million to the FBI in FY 1997 for the administration and operation of the program. Fraudulent health care expenditures were estimated at $100 billion during FY 1996.




U. S. Department of Justice

Federal Bureau of Investigation

Washington, DC 20535



Background, Mission, and Goals

The agency now known as the Federal Bureau of Investigation (FBI) was founded in 1908 when Attorney General Charles J. Bonaparte appointed an unnamed force of Special Agents to be the investigative force of the Department of Justice (DOJ). Prior to that time, DOJ borrowed Agents from the U.S. Secret Service to investigate violations of federal criminal laws within its jurisdiction.

The FBI is the principal investigative arm of the DOJ. Title 28, United States Code (U.S.C.), Section 533, authorizes the Attorney General to "appoint officials to detect...crimes against the United States," and other federal statutes give the FBI the authority and responsibility to investigate specific crimes. At present, the FBI has investigative jurisdiction over violations of more than 200 categories of federal crimes. Top priority has been assigned to the five areas that affect society the most: counterterrorism, drugs/organized crime, foreign counterintelligence, violent crimes, and white-collar crimes. The FBI is also authorized to provide other law enforcement agencies with cooperative services, such as fingerprint identification, laboratory examinations, police training, Uniform Crime Reports, and the National Crime Information Center.

The Mission of the FBI is to uphold the law through the investigation of violations of federal criminal law; to protect the United States from foreign intelligence activities; to provide leadership and law enforcement assistance to federal, state, local, and international agencies; and to perform these responsibilities in a manner that is responsive to the needs of the public and is faithful to the Constitution of the United States.

The General Goals of the FBI are to:

- Investigate violations of the laws of the United States within FBI jurisdiction, collect evidence in domestic and international cases in which the United States is or may be a party of interest.

- Collect, analyze, and exploit information to identify and neutralize the activities of foreign powers and their agents, and domestic entities, that adversely affect the United States' national security through counterintelligence, counterterrorism, and security countermeasures investigations.

- Provide forensic, identification, information, and training services external to the FBI.

- Provide effectively and efficiently those supporting services necessary to the accomplishment of the FBI mission.

- Provide effective national and organizational leadership, as well as, effective direction, control, and administration of resources.


The FBI is a field-oriented organization in which nine divisions and four offices at FBI Headquarters (FBIHQ) in Washington, D.C., provide program direction and support services to 56 field offices, approximately 400 satellite offices known as resident agencies, four specialized field installations, and 34 foreign liaison posts. (See FBI Organization Chart in the Supplemental Financial and Management Information section). The foreign liaison offices, each of which is headed by a Legal Attaché or Legal Liaison Officer, work abroad with American and local authorities on criminal matters within FBI jurisdiction.

The FBI has approximately 10,900 Special Agents and 14,600 other employees who perform professional, administrative, technical, clerical, craft, trade, or maintenance operations.

FBI field offices are located in 56 major cities. Of those, 55 are in the United States, and one is located in Puerto Rico. Each FBI field office is overseen by a Special Agent in Charge (SAC) except for those located in Los Angeles, New York City and Washington, D.C. Due to their large size, those offices are each managed by an Assistant Director in Charge (ADIC).

The FBI also operates specialized field installations: one Regional Computer Support Center at Fort Monmouth, New Jersey; and three Information Technology Centers (ITCs) -- one at Butte, Montana, one at Pocatello, Idaho, and one at Savannah, Georgia. The ITCs provide information services to support field investigative and administrative operations.

The Critical Incident Response Group (CIRG) was established in 1994 to facilitate the coordination of FBI responses to major law enforcement crises and special investigations. The CIRG responds to crimes which pose great dangers and require skills that are not routinely available in many law enforcement agencies.

Budget Resources and Initiatives/Accomplishments

The FBI is provided direct budget authority through the Salaries and Expenses (S&E), Violent Crime Reduction Program, Construction, and Telecommunications Carrier Compliance appropriations (beginning in FY 1997). The FBI is also provided significant levels of budget authority through reimbursable funding. For FY 1996, the FBI's enacted level included $2,530,045,000 in direct appropriated funding. (See FY 1996 budget chart in the Supplemental Financial and Management Information section). The FBI also received approximately $393 million in reimbursable funding. Reimbursable funding is received from a number of sources, such as the Organized Crime Drug Enforcement, Assets Forfeiture Fund, Identification User Fee (Non-federal), and Name Check program activities. Additionally, on August 21, 1996, President Clinton signed the Health Insurance Portability and Accountability Act (HIPAA) of 1996. The HIPAA established a health care fraud enforcement fund with the United States Treasury and directs that the FBI be provided specific funding levels for health care fraud investigations without further appropriation. The funding provided under this legislation will be provided on a reimbursable basis. Health care expenditures in 1996 are estimated to exceed $1 trillion, of which $100 billion is estimated to be fraudulent.

It should be noted that many critical investigations were conducted during FY 1996, such as those relating to the Oklahoma City bombing, Centennial Park Olympic bombing, and the UNABOMB case. Additionally, significant investigative results were achieved in the programs addressing terrorism, organized crime, drugs, white-collar crime, violent crime, gangs and juvenile crime, sexual exploitation of children, hate crimes, and foreign counterintelligence.

The budget initiatives identified in the "FY 1998 Authorization and Budget Request for the Congress" were in the planning and/or implementation phases during FY 1996. The seven initiatives are summarized below:

· Technology Crimes. Illegal electronic intrusion into computer networks is a rapidly escalating crime problem. White-collar criminals, economic espionage agents, organized crime groups, foreign intelligence agents, and terrorist groups have been identified as "electronic intruders" responsible for penetrations of American computer networks. Recognizing the potential impact to the government and the private sector, as well as the national security, the FBI established a Computer Investigations and Infrastructure Threat Assessment Center (CITAC) at FBI Headquarters.

A significant threat to computer information security is the theft of trade secrets, whether conducted by insiders or competitors. An example involves William Gaede, who was employed by Intel Corporation until he was terminated for theft of proprietary information. After an FBI investigation, Gaede was indicted in October 1995, for Mail Fraud and Interstate Transportation of Stolen Property. This indictment related to material valued at approximately $20 million that Gaede had stolen from Intel.

· International Law Enforcement. The FBI believes it is essential to station agent and support staff in other countries to prevent foreign terrorism and foreign crime from reaching into the United States. These employees work closely with authorities of host countries to build cop-to-cop bridges that help all law abiding societies to develop cooperative efforts that better protect their people and our people. In June 1996, the FBI provided Congress with a four-year plan for expanding overseas operations beginning in 1996. Under this plan, the number of FBI Legal Attaché offices would increase from 23 in 1996 to 46 in 1999.

· La Cosa Nostra (LCN). The LCN remains the foremost organized criminal threat to American society. There are currently over 1,200 "made" members of the LCN and many additional associates. Less than 10 percent of identified LCN members are currently incarcerated.

In 1996, the FBI began implementation of a five-year strategic plan, named "Operation Heaven's Gate," to further reduce the LCN's influence over labor unions and certain industries, as well as to reduce the membership of all LCN families.

On June 10, 1996, a Grand Jury in the Southern District of New York indicted the Acting Boss, the Acting Underboss, the Consigliere, and 16 other members and associates of the Genovese LCN Family on racketeering charges. The acts of racketeering included murder, extortion, labor racketeering, gambling, loansharking, money laundering, the fraudulent operation of the Feast of San Gennaro, obstruction of justice and tax evasion. The indictment also seeks forfeiture to the United States of numerous assets of the defendants including approximately $20 million representing the proceeds of the charged acts of racketeering, property, a boat, numerous bank accounts belonging to the defendants and approximately $115,000 in cash seized from safe deposit boxes.

· Infrastructure. The Office of Public and Congressional Affairs provides information to the public as they request information for themselves, family members, movie stars, court cases, and other matter for which the FBI holds government documentation. The FBI is developing the Freedom of Information/Privacy Acts (FOIPA) Document Processing System (FDPS) to fully automate the FBI's FOIPA operation. During 1994, the Department of Justice recognized the FBI's FDPS as a National Performance Review laboratory. The Electronic Freedom of Information Act of 1996 (EFOIA) requires all Government agencies to provide public information to requesters in electronic format, i.e., compact disk or floppy diskette. The EFOIA also requires that computer-based information in addition to paper records kept by agencies be subject to review. Further, all FOIPA reading room material created on or after November 1, 1996, must be available in electronic format by November 1, 1997.

· Telecommunications Carrier Compliance. The Communications Assistance for Law Enforcement Act (CALEA) (P.L. 103-414) clarified the duty of the telecommunication carriers to assist law enforcement agencies with the lawful interception of communications and the collection of call-identifying information in a rapidly changing telecommunications environment. This legislation was necessitated by the erosion of law enforcement interception abilities and the frustration of court orders for electronic surveillance as a result of the deployment of advanced telecommunications technologies. The FBI documented to Congress 183 cases where advanced telecommunications equipment had impaired or prevented execution of a wiretap court order.

· Southwest Border. The Southwest Border Project is a joint FBI, Drug Enforcement Administration, United States Customs Service, and DOJ initiative targeting the most significant Mexican Drug Trafficking Organizations (MDTOs). These organizations are involved in the trafficking of bulk quantities of cocaine, marijuana, and heroin, as well as the laundering of money obtained from drug activities. Furthermore, they employ violence to support their operations.

The project has had a significant impact on Mexican Criminal Enterprise Activity along the Southwest Border during 1996, resulting in the disruption of the four most significant target organizations and the dismantlement of several related organizations. The major targeted organizations are the Amado Carrillo Fuentes Organization; Arellano Felix Organization; Miguel Caro Quintero Organization; and the Juan Garcia Abrego Organization (JGAO).

In January 1996, "Top Ten" fugitive Juan Garcia Abrego was arrested in Mexico and expelled to the United States. He was subsequently convicted on 22 counts. On January 31, 1997, Abrego was sentenced to nine life sentences, eleven 20-year sentences to run concurrently, and a fine of $128,312,098. In March of 1997, Oscar Malherbe, Abrego's chief lieutenant, was arrested in Mexico. These actions have resulted in the dismantlement of the JGAO.

In 1995, the San Diego FBI Office formed a Border Corruption Task Force (BCTF) to target U.S. officials illegally facilitating drug trafficking activity. The efforts of the San Diego BCTF resulted in the convictions of seven federal public officials and 12 nonpublic officials in 1996.

· Construction.

- FBI Laboratory. The FBI Laboratory is one of the largest and most comprehensive crime laboratories in the world. It provides leadership and service in the scientific solution and prosecution of crimes throughout the United States and is the only full-service federal forensic laboratory. During FY 1996, the FBI Laboratory examiners and technicians conducted 696,543 examinations of evidentiary items submitted.

The ability of the FBI to continue to provide forensic examination services to federal, state, and local law enforcement and criminal justice personnel requires an adequate facility in which to perform the necessary examinations and services. Presently, the FBI Laboratory is located in the FBI Headquarters building in Washington, D.C., and the Forensic Science Research and Training Center is located on the campus of the FBI Academy in Quantico, Virginia. The FBI Laboratory suffers from severe space limitations, safety and health risks, and inadequate utility and environmental support.

In recognition of the inadequacies of the present FBI Laboratory, the Administration and the Congress have endorsed the FBI's proposal to construct a new state-of-the-art laboratory facility. The current estimated cost for constructing a new FBI Laboratory facility is $130,000,000.

The FBI has selected a 28-acre site at the FBI Academy in Quantico, Virginia, as the site for the new FBI Laboratory facility. The main office and forensics laboratory building will have approximately 427,400 square feet of space and house the existing staff of approximately 700 Laboratory Division employees. Construction is scheduled to begin in the Summer of 1997, with phased occupancy planned for the Summer/Fall of 2000. In this regard, a number of activities were completed in FY 1996 relative to the project: project funding approval, Architectural and Engineering (A & E) Statement of Work and A & E selection.

- Renovation of FBIHQ Building. The ongoing relocation of the Criminal Justice Information Services (CJIS) Division to Clarksburg, West Virginia, and the planned relocation of the Laboratory Division to new facilities at Quantico, Virginia, will necessitate the renovation of approximately 405,880 square feet of space in the FBI Headquarters Building that is being vacated by these components.

Other Initiatives/Accomplishments

· CJIS Facility. The CJIS division serves as the focal point and central repository for criminal justice information services in the FBI. As a result of several factors, including insufficient space requirements to house new technological systems and the desire to create improved working conditions for a large number of employees, the FBI explored relocation options. Following a thorough and in-depth relocation study, a site in Clarksburg, West Virginia, was selected for the new facility. In January 1991, the FBI purchased a 986-acre site, on which six buildings were constructed. The main office building is of modular construction, approximately 600,000 square feet, and provides office space for 2,500 employees. Construction was completed in July 1995, and the FBI began moving employees into the new facility at that time from FBI Headquarters. Currently, approximately 2,000 employees are working at the new fingerprint identification facility, with plans to transfer the remaining 250 Headquarters employees by the end of Fiscal Year 1997.

· Combined DNA Index System (CODIS). The FBI developed CODIS to function as a national DNA database system containing indices of DNA profiles from convicted offenders and unsolved crime scenes.

DNA testing is provided free of charge to any law enforcement agency in the United States. From 1991 to 1993, DNA cases submitted to the FBI Laboratory increased by 53 percent. From 1995 to 1997, it is projected that DNA cases submitted will increase by another 92 percent.

· DRUGFIRE. DRUGFIRE is a computer database system which allows laboratories within a region or large metropolitan area to exchange and compare images of firearms evidence (i.e., bullets and cartridge cases). As of December 1996, there were 73 DRUGFIRE sites within the United States, with another 75 laboratories expected to install DRUGFIRE by the end of calendar year 1997. DRUGFIRE has linked nearly 1,400 pairs of cartridge cases, matching one of every eight cartridge cases entered from crime scenes and providing police with investigative leads that would otherwise have gone undetected.

· Integrated Automated Fingerprint Identification System (IAFIS). The FBI is developing IAFIS, which will completely replace the existing fingerprint system and improve processing capabilities and turnaround time. IAFIS is designed to process an average volume of 60,000 fingerprint records per day within two to 24 hours. The updated cost estimate for IAFIS is $640 million, which includes $611,500,000 for developmental activities (including $48,400,000 for system integration), and $28,500,000 for non-development costs.

· International Training. In April 1995, the International Law Enforcement Academy at Budapest began operating within the Hungarian National Police Academy facility. Representatives of 27 countries from Central and Eastern Europe, Russia, and the newly independent states of the former Soviet Union have expressed interest in sending students to the facility, which has a curriculum modeled after the FBI National Academy and will focus on areas including organized crime, economic crime, and nuclear non-proliferation.

· National Crime Information Center (NCIC). In 1967, the FBI established the NCIC as a nationwide database containing data and information files, such as wanted and missing persons, foreign fugitives, unidentified persons, and stolen property. The NCIC system contains over 32 million records stored in 14 information databases. The system is accessed by law enforcement agencies and officers resulting in over 600,000,000 annual transactions. The current NCIC system will be replaced by the NCIC 2000 system. The new system will provide additional functionalities, such as mug shots and fingerprint identification, to serve the criminal justice community into the twenty-first century. The initial operating capability is anticipated for July 1999.

Financial Improvements

The FBI is committed to a process of continuous self-evaluation and streamlining and making improvements to its financial processes. The FBI has previously contracted with outside firms to evaluate the process of preparing financial reports, most recently evaluating the FBI's ability to prepare financial statements for audit. The FBI has also maintained a proactive posture with respect to the implementation of the Standard General Ledger. Other efforts are directed at migration toward electronic payments within the overall electronic commerce initiative (e.g., electronic deposit of funds into employee accounts for official reimbursement and electronic payment of FBI commercial invoices). Many efforts have also been made to reconcile data and to improve the quality of data resident in the FMS.

Another example of the FBI's commitment to improvement involves recent efforts to improve financial analysis and reporting. The FBI has undertaken a rigorous analysis of its annual program costing process with the intent of enhancing the quality of the reportable data, and secondly of increasing the frequency of the analysis to a quarterly basis.

Within the Finance Division, a pilot electronic document management system is being implemented within the Commercial Payments Unit (CPU), Accounting Section. The project is entitled the Business Process Improvement Project (BPI). BPI has been initiated in response to both financial and physical constraints.

The CPU currently generates approximately one million document pages per year for storage; the number will rapidly approach 1.5 million document pages per year. The Accounting Section will address these challenges by employing imaging and workflow technology. Through this technology, the Accounting Section plans to create a paperless office environment within the CPU. Invoices will be stored, processed, filed, and retrieved electronically. The requirements study and the hardware and software evaluation were performed during the Summer of 1996. The prototype will be developed within the coming months. Currently, the project team is procuring hardware, software and integration services.

Additionally, the Government Performance and Results Act (GPRA), the CFO Act of 1990 and other regulatory changes require that the Finance Division produce and process financial information rapidly and provide increasingly complex financial information for external reporting.

Another goal of the Finance Division is to upgrade the Financial Management System (FMS) software. The upgrades are being performed by the Information Resources Division and Mnemonic Systems, Inc. The implementation of the new 96.01 software release will ensure that the FMS is year 2000 compliant and will provide many functional and systemic enhancements.

The current FMS was implemented in 1987 using commercial software developed by Dun & Bradstreet Software. The FMS is composed of a suite of software modules that perform Purchasing, Accounts Payable, Budgetary Control, General Ledger, Inventory Management, Third Party Draft, and Fixed Assets operations. These modules ensure that the FBI manages its financial resources independently and in compliance with established regulations, provide field and Headquarters managers with timely and accurate financial information, enhance the FBI's cash management policies by decentralizing its funds control to the field offices via the Third Party Draft System, and directly support field operations by ensuring case expenditures are paid in a timely manner and vendors are reimbursed as required.

Performance Goals and Results

The FBI established a long-term implementation plan for compliance with the GPRA during early FY 1996, and this plan has been followed aggressively since that time. (See Performance Goals and Results in the Supplemental Financial and Management Information section).

Management's Assertions

FBI management asserts that it is responsible for maintaining internal accounting and administrative controls that are adequate to ensure that transactions are executed in accordance with budgetary and financial laws and other requirements, consistent with purposes authorized, and are recorded in accordance with federal accounting standards; that assets are properly safeguarded to deter fraud, waste, and abuse; and that performance measurement information is adequately supported.

Limitations of the Financial Statements

The FBI's financial statements have been prepared to report the financial position and results of operations of the entity, pursuant to the requirements of 31 U.S.C. 3515(b).

While the financial statements have been prepared from the books and records of the FBI in accordance with 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 United States Government, a sovereign entity. One implication of this is that liabilities cannot be liquidated without legislation that provides resources to do so.