Input:
	Background

		U.S. Sanctions

Sanctions are imposed pursuant to statute, executive order, or other  authorities. For example, the President may use authorities granted in the  International Emergency Economic Powers Act (IEEPA) and the National  Emergencies Act (NEA) to issue executive orders authorizing sanctions.  The United Nations Participation Act of 1945 provides the basis for the  U.S.’s implementation of United Nations Security Council sanctions  mandated under Article 41 of the United Nations Charter. Sanctions  provide a range of tools that Congress and the President may use to  attempt to alter or deter the behavior of a foreign government, an  individual, or an entity in furtherance of U.S. national security or foreign  policy objectives. For example, sanctions may be imposed in response to  human rights abuses, weapons proliferation, or occupation of a foreign  country. Sanctions may include actions such as limiting trade; blocking  assets and interests in assets subject to U.S. jurisdiction; limiting access  to the U.S. financial system, including limiting or prohibiting transactions  involving U.S. individuals and businesses; restricting private and  government loans, investments, insurance, and underwriting; and denying  foreign assistance and government procurement contracts.
The United States imposes comprehensive sanctions and targeted  sanctions.
Comprehensive sanctions generally include broad-based trade  restrictions and prohibit commercial activity with an entire country.  Examples of comprehensive sanctions include U.S. sanctions against  Iran and Cuba.
Targeted sanctions restrict transactions of, and with, specific persons or  entities. For example, the U.S. sanctions program related to Somalia  targets persons engaging in acts threatening the peace, security, or  stability of that country.
Sectoral sanctions are a form of targeted sanctions directed at a  specified sector, or sectors, of a target’s economy. For instance,  Executive Order 13662 authorized sanctions targeting persons  operating in certain sectors of the Russian economy as might later be  determined by the Secretary of the Treasury in consultation with the  Secretary of State, such as the financial services, energy, mining, and  defense and related materiel sectors.
Supplementary sanctions, also known as secondary sanctions, target  third-party actors doing business with, supporting, or facilitating  targeted regimes, persons, and organizations. For example, in  February 2017, Treasury imposed sanctions against 13 individuals  and 12 entities for their involvement in, or support for, Iran’s ballistic  missile program as well as for acting for or on behalf of, or providing  support to, Iran’s Islamic Revolutionary Guard Corps–Qods Force.
OFAC’s implementation of sanctions includes publishing the Specially  Designated Nationals and Blocked Persons List of individuals, groups,  and entities whose assets in the United States are blocked and with  whom U.S. persons are prohibited from dealing. The addition of an  individual, group, or entity to this list is referred to as a sanctions  designation.
Agencies may issue licenses to authorize transactions with sanctioned  entities that otherwise would be prohibited by existing sanctions.  According to OFAC, many of its licensing determinations are guided by  U.S. foreign policy and national security concerns. In making these  determinations, OFAC must often coordinate with State and other  government agencies, such as Commerce. OFAC issues two types of  licenses: (1) general licenses, which authorize a particular type of  transaction for a class of persons without the need to apply for a specific  license, and (2) specific licenses, which OFAC issues to a particular  person or entity to authorize a particular transaction. Commerce’s Bureau  of Industry and Security (BIS) issues two forms of authorization: (1) an  individual validated license requiring an application and (2) a license  exception allowing an export or reexport, under stated conditions, for  which no application is required.

		Agency Roles and Selected Mandated Resource and Activity Reporting

Laws and executive orders establishing sanctions may designate agency  implementation roles. Some sanctions-related executive orders designate  both primary and consultative agencies. For example, Executive Order  13818 establishes sanctions that include blocking the U.S. assets of  persons whom the Secretary of the Treasury, in consultation with the  Secretary of State and the Attorney General, determines to be  responsible for, or complicit in, serious human rights abuse, among other  measures. Executive orders may also broadly direct U.S. government  agencies to take appropriate measures within their authorities to perform  specified functions and duties. When roles are not assigned by the law or  executive order authorizing the sanctions, agency roles are typically  assigned through an interagency process.
The IEEPA and the NEA mandate that the President report to Congress  when using authorities granted under those laws. The IEEPA requires  the President to report, among other things, actions taken in the exercise  of IEEPA authorities to Congress at least once during each succeeding 6- month period following the administration’s initial reporting of the  authorities’ use. The NEA requires the President to transmit a report to  Congress within 90 days after the end of each 6-month period following a  declaration of a national emergency, providing the total U.S. government  expenditures that are directly attributable to the exercise of powers and  authorities conferred by declaration of the emergency. The President  has delegated responsibility for many of these reports to the Secretary of  the Treasury. However, the President delegated responsibility for the  report on the National Emergency With Respect to Proliferation of  Weapons of Mass Destruction, Executive Order 12938, to the Secretary  of State.
The Foreign Narcotics Kingpin Designation Act (Kingpin Act), enacted in  1999, mandates that the President prepare classified reports by July 1 of  each year that include the number of new Kingpin Act designations and  the personnel and resources directed toward the imposition of Kingpin  sanctions.
The Trade Sanctions Reform and Export Enhancement Act of 2000  (TSRA) mandates that the applicable department or agency submit  quarterly and biennial reports on activity under the act regarding the  department or agency’s determinations and processing of license  applications for export of agricultural commodities, medicines, and  medical devices to specified entities and destinations, including state  sponsors of terrorism. OFAC and Commerce’s BIS submit reports in  response to the TSRA.

		Strategic Workforce Planning

To implement sanctions, agencies need to identify the human resources  needed for the work. Strategic workforce planning focuses on developing  long-term strategies for acquiring, developing, and retaining an  organization’s total workforce to meet the needs of the future. Agency  approaches to such planning can vary with each agency’s particular  needs and mission. We have previously identified five principles that a  strategic workforce planning process should address:  1)  Involve top management, employees, and other stakeholders.  2)  Determine the critical skills and competencies that will be needed.  3)  Develop strategies that are tailored to address gaps in number,  deployment, and alignment of human capital approaches.  4)  Build the capability needed to address administrative, educational,  and other requirements important to support workforce strategies.  5)  Monitor and evaluate progress toward human capital goals and  the contribution that human capital results have made toward  achieving programmatic goals.

	Treasury, State, and Commerce Have Units with Roles in Sanctions Implementation

Treasury, State and Commerce have units dedicated primarily to  sanctions implementation and also have units with roles in sanctions  implementation in addition to other responsibilities. Other agencies,  including the Departments of Defense, Energy, Homeland Security, and  Justice and federal financial regulatory agencies, play specific roles in  sanctions implementation based on their expertise or broader duties.

		Agencies May Have One or More Roles in Sanctions Implementation

Agencies’ roles in sanctions implementation may be assigned to them in  legislation, by executive order, in presidential memorandums, or through  the interagency process. Table 1 shows the roles that agencies may have  in sanctions implementation and examples of agency actions associated  with each role.

		Treasury, State, and Commerce Have Units Dedicated Primarily to Sanctions Implementation

Treasury, State, and Commerce each have units that focus primarily on  sanctions implementation and that act in all five of the roles we identified.
Treasury. Treasury’s OFAC, part of the department’s Office of  Terrorism and Financial Intelligence (TFI), administers and enforces  economic sanctions based on U.S. foreign policy and national security  through consultation with the Secretary of State. OFAC acts under  presidential national emergency powers, as well as authority granted  by specific legislation, to impose controls on transactions and freeze  assets under U.S. jurisdiction. OFAC consists of four offices:
The Office of Sanctions Policy and Implementation leads OFAC’s  design, implementation, and evaluation of sanctions programs and  develops OFAC’s public guidance, licenses, and regulations.
The Office of Compliance and Enforcement works to promote  compliance with OFAC’s sanctions programs and investigates  apparent violations.
The Office of Global Targeting works with other units within TFI,  other U.S. agencies, and foreign partners to identify and  investigate targets for sanctions designation.
The Office of Sanctions Support and Operations supports all  sanctions-related functions at OFAC, including human capital and  budgetary functions.
State. State’s Office of Economic Sanctions Policy and  Implementation (SPI)—housed in the Bureau of Economic and  Business Affairs, Division for Counter Threat Finance and  Sanctions—is responsible for providing foreign policy guidance for the  vast majority of sanctions programs and obtaining international  cooperation with U.S. agencies enforcing sanctions. According to SPI,  it acts as State’s central coordinating office for 25 of the 30 sanctions  programs that were active as of April 2019. SPI also implements  sanctions under authorities delegated to the Secretary of State,  including sanctions on Iran and Syria.
Commerce. In Commerce’s BIS, the Foreign Policy Division (FPD) of  the Office of Nonproliferation and Treaty Compliance is one of the  components that implements sanctions through U.S. export controls.  The division is responsible for developing, analyzing, evaluating, and  coordinating export controls related to sanctions policy.
In addition to having units that primarily focus on sanctions, Treasury,  State, and Commerce have units that carry out roles in sanctions  implementation in addition to other responsibilities.
Treasury. Treasury has several other units that support sanctions  implementation. For example, in TFI, the Office of Intelligence and  Analysis examines classified and unclassified reporting, financial  transactions, and open-source databases for evidence of sanctions  violations. The Financial Crimes Enforcement Network monitors and  analyzes financial information on threats, producing intelligence  reports that may identify targets for designation and sanctions  violators. In addition to TFI units, the Internal Revenue Service, the  Office of International Affairs, and the Office of the General Counsel  also have roles in sanctions implementation. For example, the Office  of International Affairs helps to assess the likely impact of sanctions  and conducts outreach to foreign counterparts regarding sanctions  implementation.
State. Units at State have sanctions implementation roles related to  their expertise. Some of these units take actions in all five of the  sanctions roles shown in table 1 and are responsible for specific  sanctions authorities within State, according to State officials. For  example, the Bureau of International Narcotics and Law Enforcement  Affairs is responsible for coordinating and communicating State’s  position on existing or proposed new sanctions in relation to the  Kingpin Act and transnational criminal organizations. According to  State officials, the Bureau of Counterterrorism and Countering Violent  Extremism leads State in designating Specially Designated Global  Terrorists under Executive Order 13224 and Foreign Terrorist  Organizations under Section 219 of the Immigration and Nationality  Act. The Bureau of Economic and Business Affairs’ Office of Threat  Finance Countermeasures has a primary role in implementing  sanctions under Executive Order 13224, which targets terrorist  financiers and others who provide material support to terrorists.
Commerce. Commerce has several other units that support sanctions  implementation. For example, the Office of Export Enforcement  provides input regarding sanctions proposals and feedback regarding  any adverse impact to existing investigations. The Office of National  Security and Technology Transfer Controls implements primarily  sectoral sanctions by providing technical analyses of items and  recommendations during sanctions development. The Office of  Exporter Services provides a range of resources, including electronic  resources and educational seminars, which provide exporters with  guidance on export compliance processes and procedures.
Table 2 provides an overview of the various roles that Treasury, State,  and Commerce units play in sanctions implementation. See appendix II  for additional details.

		Other Agencies Have Roles in Sanctions Implementation in Addition to Other Responsibilities

Several other agencies have more-specific roles in sanctions  implementation, with the extent of their involvement dependent largely on  their area of expertise. These agencies carry out their sanctions-related  roles in addition to other responsibilities.
Department of Defense. The Office of the Under Secretary of  Defense for Policy contributes to sanctions implementation,  participating in all roles except targeting. The office coordinates  department units’ reviews of sanctions proposals, provides the  department’s recommendation to interagency partners during  sanctions development, and represents the department during  interagency discussions regarding sanctions enforcement.
Department of Energy. The National Nuclear Security Administration  supports sanctions by providing technical analyses of weapons of  mass destruction and conventional arms transactions that may be  subject to sanctions and by providing recommendations during  sanctions development. The National Nuclear Security Administration  also reviews export licenses for munitions and items with both military  and commercial applications, known as dual-use items, which may  include parties subject to sanctions.
Department of Homeland Security. Units of the Department of  Homeland Security also have varied roles in sanctions  implementation. For example, the Human Rights Violators and War  Crimes Unit in U.S. Immigration and Customs Enforcement’s  Homeland Security Investigations includes a Global Magnitsky  investigative support team, which targets serious human rights  abusers and corrupt foreign officials through OFAC sanctions and visa  denials. Units in U.S. Customs and Border Protection maintain a list  of sanctioned countries and couriers for which shipment applications  are rejected and use an automated targeting system to identify high- risk shipments and coordinate appropriate enforcement actions.
Department of Justice. Multiple Department of Justice units  contribute to sanctions implementation, participating in all roles except  licensing. For example, the National Security Division works with law  enforcement partners to facilitate the investigation and prosecution of  sanctions violators.
Financial regulatory agencies. Financial regulatory agencies with  roles in sanctions implementation may review the compliance  programs of the institutions they oversee with respect to OFAC  requirements. Some of these agencies can also enforce penalties  for significant deficiencies in institutions’ OFAC compliance programs.  Financial regulatory agencies generally examine institutions’  compliance with OFAC policies concurrently with examinations for  compliance with the Bank Secrecy Act (BSA) and anti–money  laundering (AML) statutes.
Table 3 provides an overview of the various roles of these agencies in  sanctions implementation. Also see appendix II for additional details of  agency units’ sanctions implementation roles. See appendix III for  information about agency units’ number of personnel with sanctions  implementation responsibilities.

	Sanctions Implementation Units at Treasury, State, and Commerce Have Received Steady or Increasing Resources but Faced Challenges in Filling Some Positions

All three of the sanctions implementation units we reviewed have  generally received steady or increasing resources since fiscal year 2015  but have faced challenges in filling some positions. OFAC has received  increasing inflation-adjusted budgetary and authorized human resources  each fiscal year since 2015 but has consistently experienced a gap  between the number of authorized and actual full-time equivalents  (FTEs). OFAC officials attributed the gap to challenges in hiring due to  competition from other agencies and the private sector and the time  needed for new hires to obtain security clearances. State SPI has also  generally received additional authorized inflation-adjusted budgetary and  human resources but has not been fully staffed in recent years.  Commerce’s FPD has received relatively steady inflation-adjusted  budgetary resources but, according to Commerce officials, lacks funding  to fill one of its 10 positions.

		Treasury’s OFAC Received Increasing Resources in Fiscal Years 2015-2019 but Faces Hiring Challenges

OFAC received increasing budgetary resources in each of the last 5 fiscal  years. In inflation-adjusted terms, OFAC’s budgetary resources increased  by a total of 58 percent, from approximately $29.7 million in fiscal year  2014 to approximately $46.8 million in fiscal year 2019. (See fig. 1.)
OFAC has also received authority to hire additional FTEs since fiscal year  2014, yet a number of the additional authorized positions have remained  unfilled. According to OFAC officials, OFAC allocated most of its  additional authorized FTEs to the Office of Global Targeting, which is  responsible for conducting investigations of sanctions targets. At the start  of fiscal year 2014, 10 of OFAC’s 173 authorized positions (6 percent)  were unfilled. By the start of fiscal year 2020, 55 of OFAC’s 259  authorized positions (21 percent) were unfilled. In the intervening period,  the gap between authorized and actual FTEs at the start of each fiscal  year ranged from 34 to 58 positions (14 to 26 percent of authorized  FTEs). (See fig. 2.)
Despite the increase in authorized FTEs, OFAC has faced challenges in  filling the additional positions. At the start of fiscal year 2020, 21 percent  of OFAC’s authorized sanctions investigator positions (13 of 62) were not  filled. Also unfilled were nine of 25 OFAC sanctions licensing officer  positions, three of 18 enforcement officer positions, two of 15 sanctions  policy analyst positions, and six of 14 sanctions compliance officer  positions. Officials of both OFAC and Treasury’s Office of the Assistant  Secretary for Management cited three primary challenges in hiring  candidates with the necessary qualifications:
Competition with other agencies, including those in the intelligence community, which can use direct-hire authority to expedite the hiring process
Competition with the private sector, which offers higher salaries The time required for security clearance processing, which delays hiring for positions, such as sanctions investigators, who need a special sensitive investigation that must be adjudicated at the top secret/sensitive compartmented information levelTreasury does not currently have direct-hire authority for OFAC but can  use other authorities to address hiring challenges. OFAC can use TFI’s  agency-specific schedule A authority, which excepts up to 100 positions  at TFI from competitive selection requirements; schedule A authority is  not specific to OFAC. In August 2019, officials of Treasury’s Office of the  Assistant Secretary for Management stated that the office was not  seeking direct-hire authority through the Office of Personnel  Management. Additionally, the officials noted that Treasury has used  flexibilities such as veterans’ hiring preferences to fill positions. However,  in December 2019, Treasury officials stated that they had determined to  seek direct-hire authority and would support the passage of legislation  providing such authority.

		State’s Office of Economic Sanctions Policy and Implementation Received an Overall Increase in Resources in Fiscal Years 2014-2019, but More Than Half of Its Positions Are Vacant

SPI received annual budgetary resource increases in fiscal years 2015  through 2018, before a slight decline in fiscal year 2019. In inflation- adjusted terms, SPI budgetary resources increased overall by 42 percent,  from $2.3 million in fiscal year 2014 to $3.2 million in fiscal year 2019.  (See fig. 3.)
SPI has received authority to hire six additional FTEs for fiscal year 2020,  but more than half of its authorized positions were vacant at the start of  the year. SPI’s authorized FTEs ranged from 13 to 16 in fiscal years  2014 to 2019 and increased to 21 FTEs for fiscal year 2020. At the start  of each fiscal year from 2014 to 2019, SPI had one to three fewer actual  FTEs than authorized. However, the increase in authorized FTEs for  fiscal year 2020 followed a decline in the number of filled positions during  fiscal year 2019, when SPI lost more than a third of its staff. As a result,  as of the beginning of fiscal year 2020, more than half of SPI’s 21  authorized FTEs were unfilled. (See fig. 4.) According to SPI officials, the  departures during fiscal year 2019 were for the most part unscheduled  and resulted from staff promotions, moves to elsewhere in State, or  resignations to accept positions in other agencies or the private sector.  SPI officials added that a department-wide backlog in hiring constrained  SPI’s ability to fill these gaps and that the office would have to pay for the  additional six FTEs without an increased budget. As of December 2019,  State was recruiting to fill some of these positions, according to SPI  officials. SPI expected one staff member to start in early January, had  extended an offer to another, and was advertising to fill four additional  positions.
While SPI has generally received increased budgetary resources and  authorized FTEs in recent years, State discontinued the Office of the  Coordinator for Sanctions Policy, formerly housed in the Office of the  Secretary. The office was responsible for, among other things,  coordinating sanctions strategies, integrating sanctions into foreign policy  plans, and analyzing the effects of sanctions. According to data that State  provided, the office had an authorized staff of seven FTEs at the start of  each fiscal year from 2014 through 2018, with the exception of fiscal year  2016, when eight FTEs were authorized. State also reported that the  office had one to four unfilled positions at the start of each fiscal year  during this period.

		Commerce’s FPD Has Received Relatively Constant Resources since Fiscal Year 2015

FPD received an overall increase in budgetary resources from fiscal year  2014 to fiscal year 2019, but most of the increase occurred from fiscal  year 2014 to fiscal year 2015. Overall, FPD’s budgetary resources  increased by 28 percent, adjusted for inflation, from fiscal year 2014 to  fiscal year 2019. However, after a 24 percent increase in fiscal year 2015,  resources remained steady through fiscal year 2019 at approximately  $1.4 million per year, adjusted for inflation. (See fig. 5.)
FPD has had the same number of authorized FTEs since fiscal year  2014, maintaining an authorized level of 10 FTEs from fiscal year 2014 to  fiscal year 2020. FPD generally had one fewer actual FTE than  authorized as of the beginning of each fiscal year. (See fig. 6). At the  beginning of fiscal year 2020, according to Commerce officials, the  Foreign Policy Division lacked funding to advertise and hire for the vacant  position. According to Commerce officials, FPD receives a funding  amount for personnel and the funding they have received is sufficient for  nine FTEs.

	Agencies Assess Resource Needs through the Annual Budget Process and OFAC Has Begun Workforce Planning, but All Agencies Face Challenges in Determining Needs

Officials at sanctions-focused units at Treasury, State, and Commerce all  described their use of the annual budget process to assess their resource  needs, and Treasury and Commerce have undertaken broader planning  efforts. Treasury’s OFAC has begun an internal workforce planning  process that, if implemented as described, would satisfy principles for  strategic workforce planning that we have previously identified. According  to State SPI officials, SPI assesses its resources in the annual budget  formulation process and has been able to add temporary positions in  response to workforce needs. Commerce BIS officials stated that they  shift resources in response to needs, and BIS has previously prepared a  budget strategy that included its office primarily responsible for sanctions  implementation. Treasury, State, and Commerce all face challenges in  measuring changes in their sanctions workload over time.

		Treasury OFAC Assesses Resources through Budget Development and Has an Additional Ongoing Workforce Planning Effort

Treasury’s OFAC reviews and requests resources as part of the annual  TFI budget development process, which considers OFAC’s requests  along with those of other TFI components. According to OFAC officials,  OFAC submits its funding and resource needs to TFI for consideration.  The OFAC budget justification for TFI includes the number of positions  requested for all OFAC components as well as a description of each  request. According to OFAC, once TFI has considered all of its  component submissions, TFI submits its budget request to the Assistant  Secretary for Management, who considers it as part of Treasury’s larger  budget request. OFAC also stated that it has also used quarterly  meetings and discussions as part of Treasury’s quarterly performance  reviews to review resource needs and challenges.
In addition to undertaking reviews as part of the budget process, OFAC  launched a workforce planning effort in fiscal year 2019 and stated that it  would be led by OFAC’s Office of Sanctions Support and Operations. As  part of this effort, the Office of Sanctions Support and Operations stated  that it plans to use Treasury’s department-wide workforce planning model  and tools to gather information from OFAC’s component offices as a  basis for, among other things, analyzing risks to OFAC’s mission,  identifying resource gaps, and developing an action plan to address them.  OFAC further stated that it plans to use its ongoing workforce planning  model to assess the effectiveness of its current hiring authorities. In  October 2019, OFAC officials stated that they expected to submit  preliminary recommendations for each OFAC component to OFAC  leadership by the end of December 2019. However, OFAC officials later  stated that, because of the departure of the Assistant Director of  Management Programs—the OFAC senior leader responsible for  implementing the workforce planning initiative—on October 1, 2019, the  planned date to submit preliminary recommendations to OFAC leadership  was rescheduled to March 31, 2020.
We analyzed the model and tools that OFAC is using for its ongoing  resource analysis, to determine whether the process they set out would  address five principles for strategic workforce planning that we had  previously identified. We concluded that, if it were implemented as  OFAC documents describe, the process would satisfy these principles.  For example, the process calls for involving management and employees  during its development and implementation and calls on managers to  consider critical skills and competencies in their workforce analysis.

		State SPI Assesses Workforce Needs through the Budget Process and Has Filled Positions on a Temporary Basis

State SPI requests resources as part of its annual budget process. State  does not request a separate budget for SPI but instead combines SPI  with the Office of Threat Finance Countermeasures (TFC) in its annual  budget request. According to SPI officials, State sends the combined  request for TFC and SPI to the Office of Management and Budget (OMB)  every year, although the resources obtained may not reflect SPI’s original  request. For example, SPI officials stated that SPI requested a greater  increase in authorized positions for fiscal year 2020 than it ultimately  received.
SPI officials described ways that they assess staff workloads and seek to  add or adjust resources on a continual basis. According to SPI officials,  they have worked to fill positions on a temporary basis in response to  rising needs. For example, SPI was authorized to add three temporary  positions to cover the additional workload from Iran and Venezuela  sanctions in early 2019. According to SPI officials, in justifying the request  for additional temporary positions, SPI noted a significant increase in  officer workload during the reimposition of sanctions against Iran, as well  as maximum-pressure campaigns against Iran and Venezuela and  increased activity related to existing and new sanctions authorities. As of  October 2019, State planned to convert the three positions to permanent  positions. Similarly, SPI officials stated that SPI justified its request for an  increase in positions for fiscal year 2020 by noting an increasing use of  sanctions as part of U.S. maximum economic pressure campaigns across  multiple regions.
Agency approaches to workforce planning can vary depending on each  agency’s particular needs and mission. For subunits such as SPI, using  the budget process, identifying changing priorities, and responding  flexibly to those changes can address workforce planning needs. SPI  officials further stated that SPI expects to review its workforce needs and  structure if new executive orders delegate additional sanctions authorities  to the Secretary of State.

		Commerce Assesses Needs through the Budget Process and Shifts Personnel in Response to Demands

Commerce BIS units such as FPD assess and communicate their  resource needs as part of the annual budget formulation process,  according to BIS officials. BIS officials described budget formulation at  Commerce as a “bottom-up” process, with BIS units providing information  that is folded into Commerce’s overall budget. During this process, BIS  budget office staff meet with program staff, review budget guidance  provided by OMB as well as BIS’s own guidance, and ask program  officials to identify any new initiatives or any new requirements for  resources. According to BIS officials, each program office prepares a  summary description of the request and needed resources for approval  by the Assistant and Deputy Assistant Secretary for that office, the  Deputy Under Secretary, and ultimately the BIS Under Secretary.  According to BIS officials, BIS’s budget office then requests additional  information about the approved activities. BIS’s Budget Office in turn  submits the materials to the Commerce Departmental Budget Officer,  who takes into account any known OMB and congressional viewpoints  and department priorities. According to BIS officials, because of  competing priorities, BIS funding priorities are not always carried over into  the department’s overall request. BIS officials noted that, absent  additional resources, they have some flexibility to shift personnel within  the bureau to address periods of increased sanctions-related demand.  For smaller units such as FPD, using the budget process, identifying  changing priorities, and responding flexibly to those changes can address  their workforce planning needs.
Commerce previously prepared a multiyear budget strategy that  assessed workforce needs throughout BIS, including FPD. In 2016, a  contractor that Commerce hired prepared a Five-Year Budget Strategy  Plan, which included workforce planning and projections. As part of the  assessment, the plan analyzed BIS license volume and estimated the  amount of time that staff in the BIS Export Administration’s Office of  Nonproliferation and Treaty Compliance (which includes FPD) spent on  particular tasks, such as conducting license application reviews, making  license determinations, and developing regulations related to sanctioned  countries. The plan projected future BIS license volume, external factors  that would affect BIS workload, and the future FTEs that BIS would need  to perform its mission. The plan examined the workload projection and  the effect of attrition and concluded that FPD would need 0.5 additional  FTEs by 2020 and 1.25 additional FTEs by 2022. BIS officials stated that  they initially used the budget strategy plan to help with budgeting.  However, according to the officials, the plan and its assumptions quickly  became obsolete and they did not use it in subsequent years. In addition,  BIS officials stated that the plan did not recognize BIS’s ability to shift  resources or request appropriations as needed.

		Agencies Face Challenges in Measuring Workload to Assess Resource Needs

Treasury, State, and Commerce units that focus primarily on sanctions  implementation have information that can measure changes in agency  workload over time; however, agency officials cited challenges in using  this information as accurate measures of workload for the purpose of  informing resource needs. For example, counting the number of individual  actions taken to implement sanctions (e.g., designations, licenses, or the  imposition of a penalty) does not capture the actions’ varying complexity  or the time spent on developing potential actions that are ultimately not  taken. Agency officials noted that, in general, the drivers of their  workloads are global events and U.S. foreign policy priorities that may  lead to more or less sanctions activity. Table 4 shows (1) selected  information that can be used to measure changes in agency workload  over time and (2) the potential weaknesses of these measures.

	Agencies Provide Information on Sanctions Activities and Expenses in Selected Mandated Reports

OFAC and State each prepare and submit reports in response to the  requirements of the IEEPA and the NEA. Both OFAC and State report  sanctions implementation actions in response to the requirements of the  IEEPA. OFAC’s NEA-mandated reports generally include information on  expenditures reported by Treasury and State and by any other agencies  identified in the relevant executive order. However, according to State’s  most recent NEA reports, no specific State expenditures were directly  attributable to the exercise of authorities conferred by the declaration of a  national emergency under the NEA during the reporting period. In  previous reviews, we and Treasury’s Office of Inspector General have  found weaknesses in the consistency and timeliness of OFAC reports  mandated by the Kingpin Act and the TSRA, respectively.

		OFAC’s Mandated NEA Reports Include Expenses for Agencies with Roles in Sanctions Implementation, while State’s Have Reported No Expenditures

			IEEPA Reporting on Sanctions Activities

Both OFAC and State include information on actions taken to implement  sanctions programs in response to the requirements of the IEEPA.  OFAC’s reports on sanctions programs under the IEEPA include data on  the number of designations and the type of entity designated, the number  of licensing actions, and the number and value of blocked transactions for  sanctions programs authorized by the IEEPA. State’s IEEPA-mandated  report for a weapons of mass destruction sanctions program (Executive  Order 12938), prepared by State’s Bureau of International Security and  Nonproliferation (ISN), summarizes the actions State has taken to  address nonproliferation through bilateral and multilateral channels,  including actions taken against Russia, North Korea, Syria, and the  reimposition of nuclear-related sanctions on entities in Iran. Both OFAC  and State included the reports responding to IEEPA requirements as part  of the same document submitted in response to the NEA report  requirements.

			NEA Reporting on Sanctions Expenditures

OFAC’s reports on sanctions programs under the NEA include a  summary total of expenditures reported by various agencies to implement  those programs, as well as a listing of the agencies whose expenditures  are included in the reports. The reports state that the expenditures  included are predominantly personnel wage and salary costs. OFAC  contacts multiple agencies to compile estimates of total expenditures for  its NEA reports. According to OFAC officials, OFAC contacts an agency  about its expenditures if the relevant executive orders have delegated  sanctions implementation authority to the agency or tasked it with certain  duties. Using a standardized request message, OFAC asks such  agencies to estimate their expenditures for the national emergency by, for  example, estimating the hours spent by staff members on activities  related to the emergency and multiplying that number by appropriate  hourly compensation rates. OFAC stated that it always asks State to  provide estimated expenditure information and contacts other agencies to  seek their expenditures on a program-by-program basis.
OFAC’s NEA reports include Treasury and other agencies. All 25 of the  NEA reports from mid- to late 2018 that we reviewed included Treasury  expenditures, which were in many cases limited to OFAC and the  Treasury Office of General Counsel. All but one report included State  expenditures. Three reports included Commerce expenditures, five  included Department of Homeland Security expenditures, and 12 included  Department of Justice expenditures. While the reports did not include  other agencies’ expenditures, some of the reports explicitly acknowledged  that they did not reflect certain operating costs incurred by the intelligence  and law enforcement communities.
State ISN’s May 2019 NEA-mandated report for Executive Order 12938  stated that there were no specific expenditures directly attributable to the  exercise of authorities conferred by the declaration of a national  emergency under the NEA during the 6-month reporting period. The prior  two reports also stated that there were no specific expenditures directly  attributable to the sanctions program. The reports included no other  information about the program expenditures.
In response to our requests, State officials provided additional information  about the NEA reporting of expenditures. According to the officials, State  reported no expenditures for implementation activities for Executive Order  12938 because those activities have been subsumed into expenditures  for normal, daily work—similar to overhead expenses. Expenditures for  the implementation activities are mixed with, and indivisible from, the  ongoing programming activities of the relevant offices and agencies.  State officials indicated that State would report an amount other than zero  if funds were reprogrammed, additional staff were required, or staff  engaged in activities in addition to daily, normal work to implement the  executive order. State officials also told us that they consulted State’s  Bureau of Arms Control, Verification and Compliance, regional bureaus,  and offices in the Departments of Commerce, Defense, and Energy in  preparing the report.
However, State’s reports have not included any of these additional  statements about the information that State considered in concluding  there were no specific expenditures attributable to the sanctions program.  Standards for Internal Control in the Federal Government states that  management should externally communicate the necessary quality  information to achieve the entity’s objectives so that external parties can  help the entity achieve its objectives and address related risks. Because  State’s reports do not include the additional information that State  considered, Congress lacks complete information regarding sanctions  implementation expenditures.

		Prior Studies Have Noted Limitations in Other Required OFAC Sanctions Reporting

			Kingpin Act Reports Do Not Provide Consistent Expenditure Data

We have previously found that agencies do not report expenditures in  response to OFAC’s Kingpin Act data requests in a consistent fashion.  The Kingpin Act mandates that the President prepare a classified report  to the Permanent Select Committee on Intelligence of the House of  Representatives and the Select Committee on Intelligence of the Senate  by July 1 of each year that, among other things, includes the status of  sanctions imposed under the Kingpin Act and the personnel and  resources directed to the imposition of Kingpin sanctions. OFAC  compiles and submits these reports. OFAC’s Kingpin reports include  previous year and cumulative data on the number of asset-blocking  actions and Kingpin designations. The reports also include Treasury,  State, DOD, and Justice expenditures, which the reports indicate are  mostly personnel salary costs. However, we recently found that the  agencies did not use consistent methods, across agencies and time, in  providing their expenditures to OFAC for Kingpin Act program activities.  We recommended that the Secretary of the Treasury (1) ensure that  OFAC provide its partner agencies more specific guidance regarding  Kingpin Act–related expenditure data to improve the consistency of data  submitted by these agencies and (2) disclose information about  limitations in the consistency and reliability of the agency expenditure  data in its annual reports to Congress.

			Treasury’s Inspector General Has Recommended OFAC Improve Timeliness of TSRA- Mandated Reports

Treasury OFAC and Commerce BIS each submit reports to Congress  mandated by the TSRA. Treasury’s Inspector General found that OFAC  had not submitted its reports in a timely fashion and recommended OFAC  take steps to improve the timeliness of its submissions.
OFAC. OFAC’s TSRA-mandated reports include information about its determinations regarding applications for licenses as well as the time it spent processing the applications. In April 2018, Treasury’s Office of Inspector General found that OFAC had not issued these reports in a timely manner and recommended that OFAC provide guidance to ensure that future TSRA-mandated reports are timely. According to the Treasury Office of Inspector General, Treasury’s actions in response—bringing its submission of the TSRA-mandated reports up to date and revising its TSRA report procedures—satisfied the intent of the office’s recommendation, but the Inspector General would continue to follow up. However, OFAC’s submission of the TSRA- mandated reports has continued to lag. OFAC released the TSRA- mandated reports for the second, third, and fourth quarters of fiscal year 2018 (i.e., January through September 2018) in November 2019; released the report for the first quarter of fiscal year 2019 in December 2019; and released the report for the second quarter of fiscal year 2019 in February 2020. OFAC’s most recent biennial report, for October 2014 through September 2016, was issued in August 2019.
BIS. BIS’s TSRA-mandated reports include information about the licensing actions taken by BIS in relation to exports of agricultural commodities to Cuba, as well as processing times for those actions. BIS submitted its most recent report on January 17, 2020, covering the period from October 1 to December 31, 2019. BIS’s most recent biennial report, for October 2016 through September 2018, was issued in November 2018.

	Conclusion

The United States has increasingly relied on sanctions as a means to  achieve important foreign policy goals. Implementing these sanctions  involves multiple government agencies, some of which have multiple units  with roles in sanctions implementation. Key agencies that implement  sanctions have generally received steady or growing resources in recent  years, but Treasury and State have staffing gaps and face challenges in  securing the staff needed to fill their authorized positions. Treasury OFAC  has an ongoing effort to assess its workforce needs, and Treasury, State,  and Commerce all assess workforce needs through the budget process.
The IEEPA and NEA each include requirements for reports to Congress  that Congress can use to review the activities and expenditures that have  been used for implementing these sanctions. However, State’s reports for  Executive Order 12938 have not explained the information that State  considered in reporting no expenditures. As a result, Congress does not  have complete information about the data that State considers in  calculating its sanctions implementation resources, which Congress could  use to inform its review of agency resource requests.

	Recommendation for Executive Action

The Secretary of State should direct the Assistant Secretary for  International Security and Nonproliferation to include additional  information about the expenditures it considers in its NEA-mandated  reporting for Executive Order 12938.

	Agency Comments

We provided a draft of this report to the Departments of Commerce,  Defense, Energy, Homeland Security, Justice, State, and the Treasury,  as well as the Commodity Futures Trading Commission, Federal Deposit  Insurance Corporation, Federal Reserve System, Internal Revenue  Service, National Credit Union Administration, Office of the Comptroller of  the Currency, and Securities and Exchange Commission for review and  comment. State provided official comments, which are reproduced in  appendix IV. State concurred with our recommendation and indicated that  it will provide additional clarity on its procedures in future NEA-mandated  reporting for Executive Order 12938. The Departments of Commerce,  Homeland Security, Justice, State, and the Treasury, as well as the  Internal Revenue Service, Office of the Comptroller of the Currency, and  Securities and Exchange Commission also provided technical comments,  which we incorporated as appropriate.
We are sending copies of this report to the appropriate congressional  committees and to the Secretaries of Commerce, Defense, Energy,  Homeland Security, Justice, State, and the Treasury, as well as the  Chairman and Chief Executive of the Commodity Futures Trading  Commission, Chairman of the Federal Deposit Insurance Corporation,  Chair of the Board of Governors of the Federal Reserve System,  Commissioner of the Internal Revenue Service, Chairman of the National  Credit Union Administration, the Comptroller of the Currency, and the  Chairman of the Securities and Exchange Commission. In addition, the  report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8612, or GianopoulosK@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) agencies’ roles in sanctions  implementation, (2) the resources available to agency units that focus  primarily on sanctions implementation, (3) the extent to which agency  units that primarily focus on sanctions implementation have assessed  their resource needs, and (4) agencies’ reporting to Congress on  sanctions implementation expenses and activities.
To examine agencies’ roles in sanctions implementation, we identified  agencies involved in sanctions implementation by reviewing sanctions  authorities, including statutes and executive orders, and agency  documents and websites and interviewing agency officials. We used  these documents and interviews to summarize agencies’ principal roles in  sanctions implementation, and we vetted this summary with the  Departments of the Treasury (Treasury), State (State), and Commerce  (Commerce), which we had identified through our initial interviews and  review of background materials as having units that focus primarily on  sanctions implementation. We then prepared a data collection instrument  to obtain information on sanctions implementation from agencies across  the government. Using this instrument, we requested information about  the specific actions these agencies performed for each of the roles we  identified, the number of staff they devoted to sanctions implementation,  and the estimated percentage of time these staff spent on sanctions  implementation in fiscal year 2019. We also requested information about  the sources and methods that agencies or agency units used to produce  these estimates. We pretested the instrument with the Office of the  Comptroller of the Currency and the Department of Homeland Security’s  U.S. Customs and Border Protection and made changes based on the  results of the pretest before sending the instrument to all agencies or  agency units that we had identified as having a role in sanctions  implementation. To estimate in full-time equivalents (FTE) the staff  resources that agencies devoted to sanctions implementation, we  multiplied agencies’ estimates of the number of staff devoted to sanctions  implementation by the agencies’ estimates of the percentage of time  those staff spent on sanctions-related duties.
To examine the resources available to agency units that focus primarily  on sanctions implementation, we reviewed congressional budget  justifications and used a data collection instrument to obtain information  on (1) funding for units that focused primarily on sanctions  implementation at Treasury, State, and Commerce in fiscal years 2014  through 2019 and (2) personnel in these units as of the beginning of fiscal  years 2014 through 2020. We compared the information that agencies  provided with data in their congressional budget justifications and  determined that these data were sufficiently reliable for reporting on  trends in funding, authorized FTEs, and filled positions at these agency  units. We then examined challenges associated with hiring for, and filling,  positions at these agency units by interviewing agency officials and  reviewing agencies’ responses to our written questions.
To examine the extent to which agency units that primarily focus on  sanctions implementation have assessed their resource needs, we  interviewed agency officials and reviewed their written responses to our  questions about their budget development processes and any relevant  workforce analyses and plans they had prepared. We reviewed  documentation of Treasury’s ongoing workforce planning process against  criteria for strategic workforce planning that we had previously identified,  to assess whether the process, if completed according to plan, would  address principles of strategic workforce planning that we had previously  identified. We reviewed agency performance reports and annual reports  and interviewed agency officials representing Treasury, State, and  Commerce units that focus primarily on sanctions implementation, to  identify any additional information the agencies had that could measure  changes in agency workload over time. We then reviewed that  information and interviewed agency officials to assess how accurately the  measures reflected each agency’s sanctions workload.
To examine agency reporting to Congress on sanctions implementation  expenses and activities, we reviewed background information on  sanctions implementation to identify mandated reports that included  information on sanctions expenses and activities. We confirmed our list of  the mandated reports that included sanctions expenses and activities with  Treasury’s Office of Foreign Assets Control. We also reviewed sanctions  legislation such as the International Emergency Economic Powers Act,  the National Emergencies Act, the Foreign Narcotics Kingpin  Designation Act and the Trade Sanctions Reform and Export  Enhancement Act of 2000 to identify the specific requirements for those  mandated reports on agency expenses and activities. We then requested  from agency officials copies of the agencies’ most recently submitted  mandated reports as of January 2019 and analyzed the agencies and  types of expenses the reports identified. We requested information from  agency officials and reviewed supporting documentation in order to  describe how agencies estimated their expenses for sanctions  implementation.
We conducted this performance audit from October 2018 to March 2020  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Agency Roles in Sanctions Implementation

To determine agencies’ roles in sanctions implementation, we sent a data  collection instrument to all agency units that we had identified as having a  role in sanctions implementation, requesting information on the specific  actions the agency units perform for each role. Tables 5 through 12  summarize the information provided in the agency units’ responses to the  data collection instrument.

Appendix III: Agency Personnel with Sanctions Implementation Duties

We identified units of 13 agencies that have a role in sanctions  implementation, and we requested that each unit report the number of  personnel with sanctions-related duties and the estimated percentage of  time these personnel spent on such duties in fiscal year 2019. The  agency units used various methods to generate their estimates. Several  of the units were unable to estimate numbers of personnel with sanctions- related duties or the percentage of time these personnel spent on  sanctions-related duties. In many cases, agency units were unable to  disaggregate the relatively minimal resources devoted to sanctions  implementation from the resources for wider duties related to their  mission. The following provides information about each agency or agency  unit.
Department of State (State). All nine units that State identified as having a role in sanctions implementation were able to estimate the number of personnel with sanctions implementation duties in fiscal year 2019. The units used sources such as position descriptions and management surveys of staff to generate the estimates.
Department of the Treasury (Treasury). Of the seven Treasury units from which we received information, five were able to estimate the number of personnel with sanctions implementation duties in fiscal year 2019. Officials of the sixth unit stated that they could not provide such an estimate. The seventh unit, the Office of Intelligence and Analysis of the Office of Terrorism and Financial Intelligence (TFI), provided an estimate of the percentage of time its analytic staff devoted to sanctions but, because of sensitivity concerns, did not provide estimates of the number of personnel with sanctions implementation duties.
Department of Commerce (Commerce). Of the six Commerce units from which we received information, five were able to estimate the number of personnel with sanctions implementation duties in fiscal year 2019. However, Export Enforcement, a much larger BIS unit with over 170 employees, was not able to disaggregate the time its personnel spent on sanctions implementation from its broader export control enforcement activities. According to Export Enforcement officials, its investigative management system does not record whether its activities respond to potential violations of Office of Foreign Assets Control (OFAC) sanctions or violations of the Export Administration Regulations. Many of the cases that the office investigates include potential violations of both sanctions and the regulations.
Department of Defense. The Department of Defense’s Office of the Under Secretary of Defense for Policy, which includes the Defense Technology Security Administration, was able to estimate the number of personnel with sanctions implementation duties. To generate the estimates, the office used sources including position descriptions and management judgement of time spent by individual action officers on sanctions.
Department of Energy. The Department of Energy’s National Nuclear Security Administration relied on management judgment to estimate the number of personnel with sanctions duties.
Department of Homeland Security. At the Department of Homeland Security, units in U.S. Immigration and Customs Enforcement were able to estimate the number of personnel with sanctions implementation duties in fiscal year 2019 by analyzing their investigative case management database. However, other department units were unable to provide such estimates. For example, Coast Guard officials reported that it would be difficult to estimate the number of personnel with sanctions implementation duties because these personnel are located throughout the United States and the world and do not record the time they spend on sanctions.
Department of Justice. At the Department of Justice, the National Security Division and most sections of the Criminal Division were able to estimate the number of personnel with sanctions implementation duties in fiscal year 2019. However, other department units were unable to provide such estimates. For example, Drug Enforcement Administration (DEA) officials stated that it is difficult to quantify the time that DEA’s special agents dedicate specifically to sanctions. According to agency officials, investigations and operations to secure evidence for indictments can also be used to support sanctions designations. As a result, according to DEA, the agents spend minimal time on sanctions implementation that they would not have spent on their work in any case. The Federal Bureau of Investigation noted the same justification for why the bureau was unable to provide estimates of the number of personnel with sanctions-related duties.
Financial regulatory agencies. The six financial regulatory agencies identified as having a role in sanctions implementation were unable to estimate numbers of personnel with sanctions implementation duties. Financial regulators were generally unable to disaggregate the time that personnel spent on OFAC compliance examinations because these are often performed concurrently with broader Bank Secrecy Act/Anti–Money Laundering examinations.
See table 13 for additional information about each agency unit.

Appendix IV: Comments from the Department of State

Appendix V: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgements

In addition to the contact named above, Drew Lindsey (Assistant  Director), Michael Simon (Analyst-in-Charge), Neil Doherty, Justin Fisher,  Reid Lowe, Grace Lui, Christina Pineda, Julia Robertson, and Paul Sturm  made key contributions to this report.


Input:
	Introduction

The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage for residential properties in the United States, with more than five million policies in over 22,000 communities in 56 states and jurisdictions. The program collects about $4.6 billion in annual revenue from policyholders' premiums, fees and surcharges and provides over $1.3 trillion in coverage. The NFIP was established by the National Flood Insurance Act of 1968. The general purpose of the NFIP is both to offer primary flood insurance to properties with significant flood risk, and to reduce flood risk through the adoption of floodplain management standards. A longer-term objective of the NFIP is to reduce federal expenditure on disaster assistance after floods.
The Federal Emergency Management Agency (FEMA), which administers the NFIP, is planning to introduce Risk Rating 2.0 , which represents the biggest change to the way the NFIP calculates flood insurance premiums since its inception. The new rates are scheduled to go into effect on October 1, 2021, for all NFIP policies.
The price of insurance is generally based on three components: (1) the average annual loss, which is the expected loss per year; (2) the risk, which depends on the variability or uncertainty in loss estimates; and (3) expenses. These rating factors are used to calculate the premium that is sufficient to cover expected losses. The methodologies used to estimate these components, particularly the average annual loss and the risk, have changed over the decades that the NFIP has been in operation. This report will outline how the NFIP currently rates risks and sets premiums to cover losses, and how these are expected to change with the introduction of Risk Rating 2.0.

	The NFIP's Current Rating Structure

		How the NFIP Currently Determines Flood Insurance Premiums

The NFIP's current rating structure follows general insurance practices in effect at the time that the NFIP was established and has not fundamentally changed since the 1970s. The current NFIP rating structure uses several basic characteristics to classify properties based on flood risks. Structures are evaluated by their specific flood zone on a Flood Insurance Rate Map (FIRM), occupancy type, and the elevation of the structure relative to the Base Flood Elevation (BFE). In addition, the premium structure includes estimates for the expenses of the NFIP, including servicing of policies.
FEMA uses a nationwide rating system that combines flood zones across many geographic areas. Individual policies do not necessarily reflect topographical features that affect flood risk. FEMA calculates expected losses for groups of structures that are similar in flood risk and key structural aspects, and assigns the same rate to all policies in a group. For example, two properties that are rated as the same NFIP risk (e.g., both are one-story, single-family dwellings with no basement, in the same flood zone, and elevated the same number of feet above the BFE ) , are charged the same rate per $100 of insurance, although they may be located in different states with differing flood histories or rest on different topography, such as a shallow floodplain as opposed to a steep river valley. In addition, two properties in the same flood zone are charged the same rate, regardless of their location within the zone.

			Risk Modeling

FEMA's current efforts to model risk consider only the potential for coastal storm surge and fluvial (river) flooding. The NFIP expresses flood risk in terms of the expected economic loss due to inundation and the probability of that loss. Information about the flood hazard is determined through NFIP flood studies, the vulnerability of the structure being insured, and the performance of certain flood protection measures. This is incorporated into a flood risk assessment, which yields an estimate of the average annual loss. The insurance rate is determined from this loss after adjusting for expenses, deductibles, underinsurance (because not all structures are insured to their full value), and other factors.
In inland areas, NFIP flood studies focus on a river's watershed, the topography along the river and adjacent floodplain where structures are located, and the hydraulic characteristics of the river and floodplain. In coastal areas, the studies also assess the effects of storm surge and wave action. Models of relevant physical processes are coupled with statistical models of weather events to compute flood depths and velocities, and their likelihood of occurring. The model prediction results are summarized in reports and portrayed on FIRMs which show water surface elevations, floodplain boundaries, and flood zones.
An area of specific focus on the FIRM is the Special Flood Hazard Area (SFHA). Properties in an SFHA are subject to the mandatory purchase requirement, which requires owners of properties in the mapped SFHA, in a community that participates or has participated in the NFIP, to purchase flood insurance as a condition of receiving a federally backed mortgage. Within the SFHA, there are two broad flood zones, the A zone and the V zone. V zones are distinguished from A zones in that V zones are subject to wave action (i.e., coastal flooding).

			Geographical and Structural Variables

To calculate the premium, the current rating system considers the flood zone , the building occupancy type, the foundation type, the number of floors, the presence or not of a basement, whether the property is entitled to a subsidy, whether or not the property is a primary residence, prior claims, and the structure's elevation relative to the BFE. The amount of coverage and the deductible will also affect the premium.

			Premium Subsidies and Cross-Subsidies

Except for certain subsidies, flood insurance rates in the NFIP are directed to be "based on consideration of the risk involved and accepted actuarial principles," meaning that the rate is reflective of the true flood risk to the property. FEMA determines full-risk rates by estimating the probability of a given level of flooding, damage estimates based on that level of flooding, and accepted actuarial principles. However, Congress has directed FEMA not to charge actuarial rates for certain categories of properties and to offer subsidies or cross-subsidies to certain classes of properties in order to achieve the program's objectives so that that owners of certain existing properties in flood zones are able to afford flood insurance. There are three main categories of properties which pay less than full risk-based rates:
1. Those built or substantially improved before FEMA published the first post-1974 flood insurance rate map (FIRM); 2. Most properties newly mapped into a SFHA on or after April 1, 2015, if the applicant gets flood insurance coverage within a year of the mapping; and 3. Those that had flood insurance on the property that complied with a prior FIRM, but the property was remapped into a different rate class (a practice known as "grandfathering").

				Pre-FIRM Subsidy

Pre-FIRM properties are those which were built or substantially improved before December 31, 1974, or before FEMA published the first FIRM for their community, whichever was later. By statute, premium rates charged on structures built before they were first mapped into a flood zone that have not been substantially improved, known as pre-FIRM structures, are allowed to have lower premiums than what would be expected to cover predicted claims. The availability of this pre-FIRM subsidy was intended to allow preexisting floodplain properties to contribute in some measure to pre-funding their recovery from a flood disaster instead of relying solely on federal disaster assistance. In essence, flood insurance could distribute some of the financial burden among those protected by flood insurance and the public. As of September 2018, approximately 13% of NFIP policies received a pre-FIRM subsidy. Historically, the total number of pre-FIRM policies is relatively stable, but the percentage of those policies by comparison to the total policy base has decreased.

				Newly Mapped Subsidy

The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) established a new subsidy for properties that are newly mapped into a SFHA on or after April 1, 2015, if the applicant obtains coverage that is effective within 12 months of the map revision date. Certain properties may be excluded based on their loss history. The rate for eligible newly mapped properties is equal to the Preferred Risk Policy (PRP) rate, but with a higher Federal Policy Fee, for the first 12 months following the map revision. After the first year, the newly mapped rate begins to transition to a full-risk rate, with annual increases to newly mapped policy premiums calculated using a multiplier that varies by the year of the map change. As a result of the increases to the multiplier, premiums for newly-mapped policies are increasing 15% per year. As of September 2018, about 4% of NFIP policies receive a newly mapped subsidy.

				Grandfathering

FEMA allows owners of properties that were built in compliance with the FIRM which was in effect at the time of construction to maintain their old flood insurance rate class if their property is remapped into a new flood rate class. This practice is colloquially referred to as grandfathering, and is separate and distinct from the pre-FIRM subsidy. A property can be grandfathered due to a change in its flood zone or a change in its BFE.
Zone grandfathering is the most common form of grandfathering. An example of zone grandfathering would be a property that is initially mapped into a flood zone and is built to the proper building code and standards, and is later remapped to a higher-risk flood zone. If the policyholder has maintained continuous insurance coverage under the NFIP, the owner of this property can pay the flood insurance premium based on the prior mapped zone.
Elevation grandfathering occurs when a new FIRM increases the BFE, but the property itself does not change flood zones. For example, a property that was initially mapped as being four feet above BFE but is now, under the revised FIRM, only one foot above BFE, would still be allowed to pay the premium associated with a property four feet above BFE.
FEMA does not consider the practice of grandfathering to be a subsidy for the NFIP, per se, because grandfathered properties are within a class of policies that are not subsidized for the class as a whole; instead, the discount provided to an individual policyholder is cross-subsidized by other policyholders in the NFIP. Thus, while grandfathering does intentionally allow policyholders to pay premiums that are less than their actuarial rate, the discount is offset by others in the same rate class as the grandfathered policyholder. As of September 2018, about 9% of NFIP policies were grandfathered.

		Premium, Fees, and Surcharges

In addition to the building and contents premium, NFIP policyholders pay a number of fees and surcharges mandated by law.

			Paid by All Policyholders

The Federal Policy Fee (FPF) was authorized by Congress in 1990 and helps pay for the administrative expenses of the program, including floodplain mapping and some of the insurance operations. The amount of the Federal Policy Fee is set by FEMA and can increase or decrease year to year. Since October 2017, the FPF has been $50 for Standard Flood Insurance Policies (SFIPs), $25 for Preferred Risk Policies (PRPs), and $25 for contents-only policies. A reserve fund assessment was authorized by Congress in the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) to establish and maintain a reserve fund to cover future claim and debt expenses, especially those from catastrophic disasters. Since April 2016, FEMA has charged every NFIP policy a reserve fund assessment equal to 15% of the premium. All NFIP policies are also assessed a surcharge following the passage of HFIAA. The amount of the HFIAA surcharge is dependent on the type of property being insured. For primary residences, the charge is $25; for all other properties, the charge is $250.

			Paid by Most Policyholders

The NFIP requires most policyholders to purchase Increased Cost of Compliance (ICC) coverage . This is in effect a separate insurance policy to offset the expense of complying with more rigorous building code standards when local ordinances require them to do so. The ICC policy has a separate rate premium structure, and provides an amount up to $30,000 in payments for certain eligible expenses. Congress has capped the amount that can be paid for ICC coverage at $75. ICC coverage is not required on condominium units and content-only policies.

			Paid by Some Policyholders

In April 2019, FEMA began charging a Severe Repetitive Loss premium equivalent to 5% of the premium on all severe repetitive loss properties. If a community is on probation from the NFIP, all policyholders in that community will be charged a probation surcharge of $50 for a full one-year period, even if the community brings its program into compliance and is removed from probation.

	Proposed Rating Structure Under Risk Rating 2.0

		How the NFIP Will Determine Flood Insurance Premiums

As proposed, NFIP premiums calculated under Risk Rating 2.0 will reflect an individual property's flood risk, in contrast to the current rating system in which properties with the same NFIP flood risk are charged the same rates. This will involve the use of a larger range of variables than in the current rating system, both in terms of modeling the flood risk and also in assessing the risk to each property.

			Risk Modeling

The current rating system includes only two sources of flood risk: the 1%-annual-chance fluvial flood and the 1 %-annual-chance coastal flood . In contrast, Risk Rating 2.0 is designed to incorporate a broader range of flood frequencies and sources, including pluvial flooding (flooding due to heavy rainfall) , flooding due to tsunami, and coastal erosion outside the V zone. Risk Rating 2.0 is expected to use a multi-model approach to support the development of the new rates, with data from multiple sources including existing NFIP map data, NFIP policy and claims data, United States Geological Survey (USGS) 3-D elevation data, National Oceanographic and Atmospheric Administration (NOAA) SLOSH storm surge data, and U.S. Army Corps of Engineers data sets.
According to FEMA, Risk Rating 2.0 will also use three commercial catastrophe models to estimate future loss potential. The use of catastrophe models to estimate potential losses caused by events such as hurricane wind, storm surge, inland flooding, tornadoes, earthquakes, and wildfires has become a standard risk management practice in the insurance industry. Catastrophe models were initially developed to address the shortcomings inherent in using historical data to project potential losses from infrequent, severe events that impacted many properties that were not geographically diverse. While each peril model reflects factors specific to the peril being modeled, catastrophe models generally have similar components, including modules simulating (1) the probability of the particular catastrophe occurring; (2) the intensity of the catastrophe; (3) the damage to structures; and (4) the allocation of the amount of the loss among those responsible for payment.
The first stage of catastrophe modeling is to generate a stochastic event set, which is a database of simulated events. Each event is characterized by a probability of occurrence (event rate) and geographic area affected. Thousands of possible event scenarios are simulated, based on realistic parameters and historical data, to model probabilistically what could happen in the future. The hazard component of catastrophe models quantifies the severity of each event in a geographical area, once the event has occurred. An event footprint is generated, which is a spatial representation of hazard intensity from a specific event. For example, a model could calculate the peak wind speeds at each location affected by hurricane winds. Property vulnerability is modeled using mean damage ratios (MDRs), which are losses expressed as a percent of value, for a given hazard level (e.g., hurricane wind speed) and location. MDRs give the average percentages of damage that are expected for a structure with the characteristics input into the model. Finally, a financial or insurance module quantifies the financial consequences of each event from various financial perspectives. The policy terms such as deductibles, limits, and reinsurance are applied to the damage from each insured property from the vulnerability model to calculate the allocation of the loss amount.
In the first stage of Risk Rating 2.0 modeling, FEMA is to conduct probabilistic flood risk analyses, in which structures are assigned specific annualized probabilities of being impacted by flood, and to validate these results with NFIP historical data. The next step is to compare the results of this analysis with the output of commercial catastrophe models. Finally, FEMA is to generate average annual loss values for certain geographies, focusing particularly on leveed areas and complex flooding hazards.

			Geographic and Structural Variables

Geographical variables to be used in Risk Rating 2.0 are to include the distance to water and the type of water (e.g., river, stream, coast), the elevation of the property relative to the flooding source, and the stream order, which is a measure of the relative size of streams and rivers. The structural variables which have been identified by FEMA for use in Risk Rating 2.0 include the foundation type of the structure, the height of the lowest floor of the structure relative to BFE, and the replacement cost value of the structure.

			Replacement Cost Value

In the current NFIP rating system, rates are based on the amount of insurance purchased for a structure rather than the replacement cost of that structure. For most actuarially-rated structures, the NFIP classifies the first $60,000 of building coverage for single-family residences ($175,000 for businesses) and $25,000 of contents coverage as the basic limit. It charges higher rates for coverage below this amount, because losses are more likely to occur in this range. Rates for additional coverage above the basic limit are lower. The basic and additional rates are weighted to account for the average tendency to buy less insurance than the replacement value. For example, a post-FIRM single-family property in Zone A with no basement would currently pay a basic rate of 1.1% per $100 coverage on the first $60,000 and an additional rate of 0.3% per $100 of coverage over $60,000.
The two-tiered rating structure was used by the NFIP for two reasons. First, it ensured that the premium collected is sufficient to cover the typical claim, even if a policy is under-insured; according to FEMA, most NFIP claims are below $60,000. By charging a high rate for coverage up to $60,000, a policyholder's premium is likely to be sufficient to cover a typical claim. Secondly, it encouraged policyholders to insure their structure fully. By charging a low additional rate, policyholders are encouraged not just to insure a typical claim, but to insure against the unlikely but possible higher claim.
For much of the NFIP's existence, the two-tiered rating structure operated with minimal inequity. However, as the range of replacement values widened, particularly through the 2000s, the potential for inequity caused by rating based on coverage instead of structure value grew. Two groups are most subject to inequity. First, structures whose value is closer to the $60,000 basic limit pay more than they would if their rate was based on their structure value because their entire rate is mainly comprised of the higher basic rate. Second, structures whose value is above $250,000 pay less than they would if their rate was based on structure value, because their rate is based on an average structure value that is much less than their actual structure value. In addition, high-valued structures can produce much higher claims than lower valued structure with the same intensity of damage.
If replacement cost value were to be used in setting NFIP premium rates, it is anticipated that those structures with higher replacement costs than current local or national averages would begin paying more for their NFIP coverage than those structures that are below the average, which would pay less. How much more, or how much less, is undetermined.

			Mitigation Credits in Risk Rating 2.0

Risk Rating 2.0 is to initially provide credits for three mitigation actions:
1. installing flood openings according to the criteria in 44 C.F.R. Â§60.3 ; 2. elevating onto posts, piles, and piers; and 3. elevating machinery and equipment above the lowest floor .
FEMA has not yet given any information on how these credits will be applied to individual property premiums. Currently the only mitigation activity for which the NFIP gives premium credit is elevating a structure, so Risk Rating 2.0 could encourage individual policyholders to do more to mitigate the flood risk for their property.

		Risk Rating 2.0 and Flood Zones

Flood zones are to no longer be used in calculating a pro perty's flood insurance premium following the introduction of Risk Rating 2.0; instead, the premium are to be calculated based on the specific features of an individual property. However, as proposed, flood zones will still be needed for floodplain management purposes ; for example, all new construction and substantial improvements to buildings in Zone V must be elevated on pilings, posts, piers, or columns. T he boundary of the SFHA will still be required for the mandatory purchase requirement . The FIRM map appeal process will still exist, but once Risk Rating 2.0 begins, map appeals are not to have any effect on the premium that a policyholder pays.
Although FEMA has not yet given any details of how grandfathered properties will be affected by Risk Rating 2.0, other than to say that "all properties will be on a glide path to actuarial rates," the implication of the fact that flood zones will no longer be used to set premiums appears to indicate that zone grandfathering, at least, will no longer be relevant.

	Maximum Premium Increases under Current Statute

FEMA has statutory authority to set premium rates. The limitations on annual premium increases are also set in statute, and Risk Rating 2.0 will not be able to increase rates annually beyond these caps. HFIAA set maximum rate increases for primary residences at 5-18% per year. HFIAA permits individual property increases of up to 18%, but limits the rate class increases to 15% per year. In other words, the average annual premium rate increase for primary residences within a single risk classification rate may not be increased by more than 15% a year, while the individual premium rate increase for any individual policy may not be increased by more than 18% each year. Other categories of properties are required to have their premium increased by 25% per year until they reach full risk-based rates: this includes non-primary residences, non-residential properties, business properties, properties with severe repetitive loss, properties with substantial cumulative damage, and properties with substantial damage or substantial improvement after July 6, 2012.
However, FEMA does not consider everything that policyholders pay to the NFIP to be part of the premium and therefore subject to these caps. When premium rates are calculated for compliance with the statutory caps, FEMA only includes the building and contents coverage, the Increased Cost of Compliance coverage, and the reserve fund assessment. Other fees and surcharges are not considered part of the premium and therefore are not subject to the premium cap limitations, including the Federal Policy Fee, the HFIAA surcharge and, if relevant, the 5% Severe Repetitive Loss premium and/or probation surcharge.
 Table 1 shows the effects of a maximum statutory increase on the national average premium for a Standard Flood Insurance Policy (SFIP) which pays the full $75 for Increased Cost of Compliance (ICC) coverage. According to FEMA, the national average premium for an SFIP is $700. The reserve fund assessment for this policy would be $105 and the ICC premium would be $75, for a total premium of $880. For an SFIP primary residence, the maximum 18% increase would be calculated on this premium of $880, leading to an increase of $158.40 and a new premium of $1038.40. However, an SFIP primary residence would also pay an FPF of $50 and a HFIAA surcharge of $25, so the total amount due to the NFIP after an 18% increase would be $1113.40.
An SFIP for a non-primary residence would be subject to a 25% increase on the initial premium of $880, leading to an increase of $220 and a new premium of $1100. Costs for such a policy for a non-primary residence would also include an FPF of $50 and a HFIAA surcharge of $250, so the total amount due to the NFIP after a 25% increase would be $1,400.

		Risk Rating 2.0 and NFIP Cross-Subsidies

The current three categories of properties which pay less than the full risk-based rate (pre-FIRM, newly-mapped, and grandfathered) are determined by the date when the structure was built relative to the date of adoption of the FIRM, rather than the flood risk or the ability of the policyholder to pay. As proposed, the new rating system will not eliminate the three categories, nor the process of phasing out subsidies which began with BW-12, but rate changes will not necessarily be uniform within each category. Premiums for individual properties will be tied to their actual flood risk rather than the flood zone, but the rate at which the subsidies will be phased out will continue to be constrained by law.
In general, Risk Rating 2.0 is expected to lead to the reduction of cross-subsidies between NFIP policyholders, and the eventual elimination of premium subsidies and cross-subsidies once all properties are paying the full risk-based rate. However, certain non-insurance activities of the NFIP are funded by cross-subsidies from NFIP policyholders' premiums. For example, through a program called the Community Rating System (CRS), FEMA encourages communities to improve upon the minimum floodplain management standards that are required to participate in the NFIP. Policyholders in communities which participate in the CRS can get discounts of 5% to 45% on their flood insurance premiums. These discounts are determined by the activities carried out by the community to reduce flood and erosion risk and adopt measures to protect natural and beneficial floodplain functions. The National Research Council estimated that the CRS program provided an average 11.4% discount on SFIP premiums across the NFIP. The CRS discount is cross-subsidized into the NFIP program, such that the discount for one community ends up being offset by increased premium rates in all communities across the NFIP. An average 11.4% discount for CRS communities is cross-subsidized and shared across NFIP communities through a cost (or load) increase of 13.4% to overall premiums. It is not yet clear how Risk Rating 2.0 will affect the CRS cross-subsidy.
In addition, as much as 42% of the funding for flood mapping and floodplain management is collected from NFIP policyholders in the form of the FPF. About 66% of the resources from the FPF are allocated to flood mapping, with floodplain management receiving about 19% of the overall income from the FPF. Again, it is not yet clear how Risk Rating 2.0 might affect funding for floodplain management and flood risk mapping.

	Concluding Observations

FEMA believes that the more transparent and accurate flood insurance pricing in Risk Rating 2.0 will lead to better risk communication and an increase in flood insurance take-up rate. However, Risk Rating 2.0 is not designed to increase or decrease revenue for the NFIP. According to FEMA, Risk Rating 2.0 will not be allowed to create a shortfall relative to the amount of premium income under the current rating system. If the new rates lead to a shortfall, the rating plan will be revised.
FEMA is carrying out an actuarial analysis and cannot give any information at the time of writing about the number or percentage of properties which will see their premiums change under Risk Rating 2.0. However, certain types of properties may be more likely to be affected, either positively or negatively. These may include zone-grandfathered properties, properties which are currently on the border of flood zones, properties currently outside the SFHA at risk of pluvial flooding, and properties with above-average or below-average replacement cost values. For example, the use of distance to water, rather than flood zone, may mean that premiums for properties at the landward boundary of an SFHA could go down, while premiums for a property at the water boundary could go up.
Concerns about premium increases in the past have focused on certain subsidized properties, but under Risk Rating 2.0 all types of properties may be subject to higher rates of increase than at present. For example, as of April 1, 2019, the premium for pre-FIRM properties increased by 7.3% and the premium for newly mapped properties increased by 15%. Premiums for post-FIRM V zone properties increased by 6%, post-FIRM A zones increased by 4%, and X zone properties increased by 1%. These properties could face higher premiums under Risk Rating 2.0.
Risk Rating 2.0 is may lead to premium increases for some NFIP policyholders, which could raise questions of affordability. When the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) went into effect, constituents from multiple communities expressed concerns about the elimination of lower rate classes, arguing that it created a financial burden on policyholders, risked depressing home values, and could lead to a reduction in the number of NFIP policies purchased. Similar concerns may be expressed with Risk Rating 2.0. Although risk-based price signals could give policyholders a clearer understanding of their true flood risk, charging actuarially sound premiums may mean that insurance for some properties is considered unaffordable, or that premiums increase at a rate which may be considered to be politically unacceptable.
FEMA does not currently have the authority to implement an affordability program, nor does FEMA's current rate structure provide the funding required to support an affordability program. However, affordability provisions are included in the three bills which have been introduced in the 116 th Congress for long-term reauthorization of the NFIP: the National Flood Insurance Program Reauthorization Act of 2019 ( H.R. 3167 ), and the National Flood Insurance Program Reauthorization and Reform Act of 2019 ( S. 2187 ) and its companion bill in the House, H.R. 3872 . As Congress considers a long-term reauthorization of the NFIP, a central question may be who should bear the costs of floodplain occupancy in the future and how to address the concerns of constituents facing increases in flood insurance premiums.