I appreciate the opportunity to appear before the Subcommittee today to discuss one of the Department of Justice's most important law enforcement initiatives -- the asset forfeiture program -- and in particular the U.S. Marshals Service's management of seized assets. I am accompanied by my Assistant Director, Kenneth Holecko, and Gerald McDowell, Chief of the Criminal Division's Asset Forfeiture and Money Laundering Section.
As you are aware, pursuant to the Comprehensive Crime Control Act of 1984 (Public Law 98-473), the Marshals Service is responsible for the management and disposal of assets seized by investigative agencies participating in the Department of Justice asset forfeiture program. My belief in the value of this law enforcement tool is rooted in my personal experience. I have been in law enforcement most of my adult life, starting at the Metro-Dade Police Department in Miami, Florida, in 1965. In the 26-1/2 years I spent with Metro, I witnessed first-hand the ravages visited on our communities by drug dealers and other criminals whose motivation for committing crimes was to support their drug habits.
I witnessed the growing despair of law-abiding citizens, the desperation of young men and women, suffocated by the rising tide of criminality in their schools, their jobs, and their neighborhoods. As I rose through the ranks, I experienced the frustration that came from our inability to respond other than through traditional methods which had already proven to be ineffective.
Relief did come to Dade County and countless other jurisdictions across the nation, however, in the form of asset forfeiture and equitable sharing programs. These programs provided the impetus to forego "turf wars" and to focus instead on cooperative efforts which would benefit our law-abiding citizens while striking fear in the hearts of criminals.
As more joint efforts were launched, more criminals were arrested and more assets were seized. As these funds started to flow into the agency, Metro-Dade was able to move more effective law enforcement strategies from the planning table to the streets of the community.
It was these equitable sharing funds that enabled Metro-Dade to launch its nationally recognized Tactical Narcotics Teams (TNT), a policing strategy that reflected the basic tenets of community policing: consultation with the community to determine its needs, the adaptation of policing strategies to meet those needs, and a mobilization of the agency and the community.
These funds also enabled us to pilot the DARE program -- which has gained national recognition for its success in raising drug awareness and promoting drug resistance among school-age children -- and eventually to install it in all of the middle schools of Dade County. And these funds enabled community-based groups to take young men and women who had had minor scrapes with the law and to provide them with the education and skills to make them productive, rather than destructive, members of the community.
As Chief of Police in Tampa, Florida, I saw asset forfeiture proceeds used to fund school resource officers -- police assigned to local schools, bringing stability and guidance to their areas. Funds were also used to support narcotics investigations.
In my opinion, asset forfeiture is one of the most effective law enforcement tools we have. It is a critically important element of the Department of Justice's law enforcement efforts, and there is no question in my mind that the program, by any measure, is a success. It advances important national law enforcement objectives in two major respects.
First, and fundamentally, the primary purpose of the forfeiture laws is to deter criminal activity by depriving criminals of property used or acquired through illegal activities. Separating the criminal from the fruits of his crime is a major goal of any case involving asset forfeiture, and whether any such case is a success or not has to be judged, in large part, by whether this goal was accomplished. Criminals must not be allowed to view a jail sentence as simply a cost of doing business, a temporary interruption in their otherwise luxurious life styles. Throughout my career in law enforcement, I too often heard criminals say that they would gladly trade time in prison for a millionaire's life after their release. Asset forfeiture has shattered that fantasy in countless cases.
Second, through the asset forfeiture statute's "equitable sharing" provisions, the forfeiture program provides critical resources to state and local law enforcement. Equitable sharing of seized assets encourages higher levels of cooperation among law enforcement agencies, and the citizens in our communities are the beneficiaries of these cooperative efforts.
We can all agree that there is a sense of poetic justice in the way the asset forfeiture program shifts funds generated by criminal enterprises and uses them to fight crime. Since the equitable sharing program began in 1985, the Justice Department has transferred over $1.6 billion to State and local law enforcement agencies to use in their communities. Attached for the record are the most recent state-by-state equitable sharing statistics.
It is obvious that the amount of funds available for equitable sharing will be maximized through an efficient and professionally managed seized assets program. Mr. Chairman, this committee's devotion, and your personal dedication, to improving the economy and efficiency of government operations is renowned, and I want to assure you of my shared commitment to that goal.
Upon becoming Director of the Marshals Service, I fully embraced the principles of the President's National Performance Review to create a government that costs less and works better. To that end, at our House appropriations hearings last March, I committed to improving the overall operation of our seized asset management program through a major structural reorganization. It will not only improve our business practices, but also will strengthen our oversight of the program. I hope that this reorganization will be cleared by our oversight committees quickly, so that we can implement these valuable reforms.
At last year's appropriations hearing, I also committed to reducing our seized asset inventory before my next appearance before that committee. I am pleased to tell you that we have done so. Between July 1995 and November 30, 1995, we reduced our inventory of salable properties that have been forfeited for more than a year by 35%, from 751 to 489. Of these 489, 136 currently have firm contracts for sale, 31 are scheduled for auction, 16 will be disposed of through Weed and Seed, and 130 are being actively marketed and targeted for sale before April 1, 1996.
In addition, of the 489 properties, there are 129 which we are not legally authorized to dispose of at this time, generally because of the nature of the asset or the appeal status of the forfeiture. This means that only 47 overage, readily saleable properties will probably not be disposed of by April 1, 1996.
I have instituted other management reforms. In August 1995, all district offices were required to submit marketing plans for any forfeited properties that had been in their inventories for over one year. These plans were carefully reviewed and each U.S. Marshal received a personal response from me regarding their district plan. Each Marshal was also advised that he or she would be held personally responsible for seized asset management in his or her district.
Currently, we are engaging Arthur Andersen & Co., one of the "Big Six" accounting firms, to develop a comprehensive quality program, which will include process reviews of our overall strategy for the management and disposition of seized assets. This program will give each district the skills and tools it needs to manage its seized assets program effectively. Additionally, we are in the process of organizing a title symposium in conjunction with the American Land Title Association in an effort to educate the title insurance industry about the forfeiture process, thereby making it easier for buyers of forfeited property to obtain title insurance. The end result will be the expeditious disposal of properties that would have otherwise been difficult to sell.
Our increased emphasis on strategic planning and marketing, along with the personal involvement of each Marshal, is already showing results. For example, the Central District of California (Los Angeles), which has the largest real property inventory in the nation, has gone from 431 properties in August 1994 to 160 properties at present -- a 63% reduction. A major reason for Los Angeles' success has been its development of several creative marketing strategies. One of those strategies includes the disposal of 25 mostly over-aged residential real properties by auction through the General Services Administration. This auction came to be known as the "203K Auction," because the District identified several properties as potentially eligible for a 203K approved loan, under which the buyer not only finances the price of the property, but also the cost of the repairs, which rolls into a 30-year mortgage. This enables many buyers the opportunity of purchasing a home they otherwise might not have. The Marshal in Los Angeles has told me that his ability to apply his knowledge of the local market had been a significant factor in the eventual sale of the properties. It is clear that placing authority and responsibility with a manager in the affected area produces results.
Several other districts have participated in a project called "Government Owned Real Estate" (G.O.R.E.), under which difficult-to-sell properties held by a number of federal agencies were disposed of through auction. Three U.S. Marshals Service employees received Hammer Awards from the Vice President for work on the G.O.R.E. project. Other large districts throughout the country are also pursuing this strategy of combining resources with other government agencies and disposing of properties through auctions.
The Marshals Service reorganization envisions streamlining the seized asset management structure by eliminating seized asset regional offices and granting more authority to the Marshals in the various districts. It also provides for the establishment of performance standards and strengthening of our oversight program. Oversight will be enhanced through the reassignment of 10 personnel from these regional offices to our Program Review Division. Our goal is to review, on an annual basis, the 20 largest districts, which manage 80% of the total inventory.
Our seized assets performance standard establishes the goal of disposing of real property, within one year of seizure, at 85% of the appraised value. Each district will be measured against this standard, and assistance will be provided to districts experiencing difficulties in achieving the goal.
But we are not waiting for the completion of the reorganization of the Marshals Service. We already are aggressively pursuing ways to make the program better. For example, in addition to establishing a comprehensive quality program in November 1995, we awarded a contract to Price Waterhouse to perform a variety of business services nationwide, such as pre-seizure planning, business valuations, and business disposals. We are also seeking a contractor with a national reputation for expertise in property management and marketing. We anticipate that we will be able to obtain such services off the GSA schedule and begin implementation in the near future. In short, we are doing much to make our asset management program businesslike and efficient.
Although, as I have indicated, the asset forfeiture program is a law enforcement tool, we must also recognize that it also is a complex financial and management operation. During FY 95 we disposed of 31,615 assets valued at $706 million. We also took custody of 32,315 new assets valued at $606 million.
Some of these assets presented novel management and disposition issues. For example, we seized two medical clinics and a laboratory from a defendant convicted in an insurance fraud scheme. The ongoing businesses had over 25,000 patient files and 650 pieces of equipment that had to be inventoried. After the successful collection of outstanding receivables and liquidation of the assets, over $1 million was recovered by the government from this case.
In another case, the Marshals Service took custody of a 25-acre vineyard that had served as a front for a marijuana growing operation. We sold the vineyard for $345,000, or 90% of its appraised value. The Marshals Service has also managed and disposed of an exotic car dealership and a real estate business seized in a drug trafficking and money laundering case, resulting in a recovery of over $2.1 million dollars for the government.
Should we back off from seeking forfeiture of a criminal's assets because they are complicated or difficult to manage? I don't think so. In fact, I know that we can never let criminals believe there is a safe haven to hide or launder their dirty money. Even the most sophisticated or devious criminal must be certain of our resolve to track down their ill-gotten assets and place those assets at the disposal of the law abiding community.
The Bicycle Club, which your Subcommittee has targeted as a topic of this hearing, is one example of this resolve. Before I discuss this particular case, I must stress for the record that it represents but a tiny fraction of the entire and ever-changing inventory of seized assets the Marshals manage. Businesses make up less than six hundredths of one percent of our total inventory, and the Bicycle Club is one of only 13 operating businesses we manage. It is indeed fortunate that these assets are rare, because, as I have mentioned, they are generally the most complex and time consuming to manage and dispose of.
Bicycle Club
The Bicycle Club is a card club casino, licensed by the State of California and located in the city of Bell Gardens, California. The Club was largely financed with the proceeds of a massive drug trafficking ring which literally reached across the entire United States. This wasn't any low-level, street corner operation: Barge loads of marijuana -- over 500,000 pounds, in fact -- were smuggled in by this ring. The drugs were offloaded in ports including San Francisco; New Orleans; Melbourne, Florida; the Brooklyn Navy Yard; and Bridgeport, Connecticut.
When the government put an end to this operation's drug trafficking and consequent money laundering, the United States acquired an interest in the Club through forfeiture. While the description of the process through which the government acquired its interest is complicated, it is important because this sequence of events led to many of the circumstances that have made operation and disposition of this asset a unique challenge for the Marshals.
In 1988, Benjamin Barry Kramer and certain co-defendants were convicted in the Southern District of Illinois of conspiring to import and distribute marijuana in violation of 21 U.S.C. 841(a) and 846, and of being principal administrators of a continuing criminal enterprise, in violation of 21 U.S.C. 848. The jury also returned a special verdict ordering Kramer to forfeit $60 million, which represented a portion of his ill-gotten gains from these criminal violations. When traced, part of the marijuana money Kramer was ordered to forfeit was demonstrated to have been invested in the Bicycle Club. In short, Kramer used the Bicycle Club to launder the huge profits he made smuggling drugs.
Kramer's money laundering was intricate. While conducting his drug trafficking operation, Kramer sent his drug proceeds to a bank in Liechtenstein from whence it went to another offshore entity and then eventually to something called the LCP Partnership (LCP), controlled by Sam Gilbert. Under Gilbert's direction, LCP entered into a joint venture with another California partnership, Park Place Associates (PPA), run by California businessman George Hardie, to establish the Bicycle Club. Michael Gilbert, Sam Gilbert's son, assisted his father in the money laundering and acquired a portion of LCP in the process.
When federal authorities learned about this money laundering operation, both Ben Kramer and Michael Gilbert (Sam Gilbert had died in the interim) were prosecuted in the Southern District of Florida and, in 1990, convicted of violations of the RICO statute and the Travel Act. The underlying offenses included the laundering of about $10.8 million through LCP -- money that, for the most part, had been derived from Ben Kramer's marijuana smuggling. As part of the judgment of conviction, Kramer was ordered to forfeit about $10 million. The interests of Kramer and Michael Gilbert in LCP were also ordered forfeited.
After the jury's verdict, the entire Bicycle Club -- the interests of both LCP (comprising a 65% interest in the Club) and PPA -- were ordered forfeited by the court. But because PPA's interest in the Bicycle Club had not been obtained with Kramer money, PPA subsequently was determined to be an innocent owner and its interest was returned. In addition, a number of LCP partners, pursuant to a settlement with the United States, were allowed to retain varying amounts of their interests in the LCP partnership. One of the LCP partners, M. Dale Lyon, claimed that he was an innocent owner of 15% of the LCP. His claim, which the government contested, led to lengthy and complicated forfeiture proceedings in Florida and California. Finally, in 1993, Lyon entered a plea agreement with respect to criminal charges relating to his dealings with Kramer, which resulted in the forfeiture of his LCP interest. As a result of the Florida and California cases, the Government acquired a 55% interest in LCP.
Because of the multi-jurisdictional nature of the forfeiture, we knew management decisions about the Club would be difficult. Representatives of the United States Attorneys' offices for the Southern District of Florida and the Central District of California, the Marshals Service headquarters and its Los Angeles District office, and the Asset Forfeiture Office (now the Asset Forfeiture and Money Laundering Section) of the Criminal Division therefore formed a working group to make joint decisions in order to protect the United States' interest in the Club.
From the time the Club was seized, a court-appointed trustee has managed the Government's interest. Consistent with the court's orders, this trustee, in turn, has been overseen by the government working group. The Club's then-existing management team was left in place by the District Court for the Southern District of Florida. The Court appointed the Finance Director for the City of Bell Gardens as interim trustee. Because the city received a substantial portion of its revenues from the Club, thereby creating a potential conflict of interest for the Finance Director, it was later determined that he should be replaced. The government working group conducted a search for a suitable replacement in the fall of 1992.
Harry Richard, a former CEO of Main Street Station Casino and Hotel in Las Vegas with considerable experience in the gambling business, was ultimately selected. In March 1993, the Court appointed Mr. Richard as successor trustee.
Due to the nature of the asset and other circumstances, management of the club has posed significant challenges. For example, the Equal Employment Opportunity Commission (EEOC) found that under the management of the then-General Manager, George Hardie, the Club had systematically discriminated against African-Americans and women. Mr. Hardie failed to inform Mr. Richard of the EEOC finding. In addition, there were a number of lawsuits involving the general manager that exposed the Club to significant liability, one of which led to a $10 million settlement payment.
On May 9, 1994, the non-government members of LCP demanded that Mr. Richard remove Mr. Hardie as general manager due to related concerns and declining Club revenues. Mr. Hardie resigned under pressure in July 1994, and Mr. Richard assumed the General Manager's role in addition to his responsibilities as trustee.
Having fulfilled an important law enforcement objective by ending the money laundering of drug trafficking proceeds and forfeiting the interests related to that drug trafficking, we have proceeded diligently to sell the government's interest in the Bicycle Club -- a process that we concede has been more lengthy and complicated than we would have liked. While several previous potential deals have fallen through due to insufficient offering price or lack of solid financing, I am pleased to tell the Subcommittee today, as the Department informed you last week, that we have signed a letter of intent for the sale of the government's interest in the Bicycle Club. We hope to conclude this agreement in the very near future.
Although our overriding goal since forfeiture has been to sell the government's interest in the Club, we have had a duty as temporary owner of a significant interest in the Club to preserve this asset pending sales efforts. Our review of the Club's performance reveals that, since the ouster of the former general manager in 1994, the Government trustee has successfully maintained the value of the Bicycle Club and revenues have remained high, despite increased competition from new and existing casinos in the area, removal of the Asian games contractor whose illegal activities brought in millions of tainted dollars, and other factors outlined above. Attached for the record is a copy of the most recent review of the Bicycle Club that was prepared by Don Kelly and Company, an independent financial management firm.
Considering the effects of these outside market forces, the financial position of the Club has improved. The financial indicators of the Bicycle Club are as follows:
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FINANCIAL INDICATORS OF THE BICYCLE CLUB
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DESCRIPTION AUDITED NOVEMBER PERCENT
(IN THOUSANDS) 1989 1995 CHANGE
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TOTAL ASSETS $32,179 $35,373 10%
TOTAL LIABILITIES 24,819 18,291 <26%>
PARTNERS' CAPITAL 7,360 17,082 132%
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TOTAL LIABILITIES 32,179 35,373 10%
AND EQUITY
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It is important to note that our management of the Government's interest in the Club, though lasting longer than we would have hoped, has not cost the taxpayers a single penny. Quite to the contrary, the government has received income of approximately $6 million each year from Club distributions, which has vastly outpaced our expenses related to the Club, and has provided significant non-taxpayer deposits to the Assets Forfeiture Fund.
Lessons Learned
Hopefully, the Marshals Service's relationship with the Bicycle Club is near an end. We have learned much from this experience, and it is clear that we made some mistakes in our management and oversight. We are moving forward aggressively to address the problems that have been uncovered. Among the lessons we have learned, and the steps we are taking, consistent with existing statutory authority, are these:
The Marshals Service must play an integral role in any pre-seizure planning, including obtaining our concurrence if trustees are to be used in the management of property. The 1990 seizure of the Bicycle Club predated issuance of the Department's updated policy on pre-seizure planning in 1994; many of the problems involved in management of this asset could have been avoided if that policy had been in effect.
We are developing trustee qualifications guidelines that will specify what experience and background to look for in trustees before we appoint someone to serve in that capacity.
We are developing a policy which defines the scope of a trustee's duties, and which establishes a formal role for the Marshals Service in the oversight of trustees.
We are developing standard contracts that we can enter into with trustees and their attorneys.
We will require trustees to prepare budgets for their management activities and have those budgets approved in advance. In the same vein, we will develop guidelines on trustee compensation.
We will subject trustees to annual audits of their finances and operations, along with contract management reviews of the trustees.
We intend to strengthen the internal oversight of trustees by carefully segregating their authorization, certification, and payment responsibilities.
Finally, I want to address one specific aspect of the Bicycle Club's operations that is of concern to both the Department of Justice and the Subcommittee: the Club's political contributions to committees supporting or opposing ballot referenda as well as to individual candidates and parties. Mr. Chairman, we all know that gambling is a heavily regulated industry and that the gaming industry is an active participant in the political process. As a matter of fact, a recent Sacramento Bee story stated that two dozen of California largest gambling interests made $3.3 million in campaign and lobbying expenditures in 1994 alone.
It may make sound business sense for a gambling operation such as the Bicycle Club to make political contributions to candidates as well as to committees involved in ballot issues that could affect the club's competitive standing. The fact that the government owns part of this business, however, brings different factors into play. Accordingly, the Department has determined that such contributions are inappropriate, and we have taken the following steps in regard to this matter:
I have referred this matter to the Department's Inspector General as part of his review of the Club, in order to determine the legality as well as the propriety of the contributions that have been made.
In the future, Marshals Service policy guidelines on trustee operations which I mentioned earlier will preclude such contributions.
Conclusion
The Bicycle Club has presented management and legal issues unlike any other property in the history of the Marshals Service's seized asset program. It was a challenge we accepted because, as I said before, there must be no safe haven for the proceeds of a criminal enterprise. I promise you that we will not shrink from our duty to combat sophisticated criminals and forfeit their ill-gotten assets just because they may be clever enough to invest their money in businesses that are difficult to manage. We look forward to working with the Subcommittee in our efforts to ensure that crime literally does not pay.
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