WASHINGTON - Theft of government funds could be reduced if the Treasury Department monitored its lockbox arrangements with commercial banks better, according to a federal report issued this week.

The Treasury's Financial Management Service contracts with banks to collect income tax and other payments to the federal government. The banks establish post office boxes and electronic accounts to receive the payments, and eventually they transfer the funds to a Treasury account at the Federal Reserve Bank of New York. In fiscal 1999 banks collected about $288 billion for the federal government under this system.

A General Accounting Office report issued Wednesday said that though the Treasury had improved its oversight of these banks' internal controls and practices, it has failed to follow up on problems spotted by the federal agencies for which the lockbox services are provided.

"Without effectively monitoring banks' lockbox operations," wrote Gary T. Engel, the GAO's associate director of government accounting and financial management issues, the Financial Management Service "does not know whether the banks are adequately safeguarding and properly processing billions of dollars of federal collections."

For example, the Treasury said that a bank employee who in fiscal 1999 had stolen five checks that were sent to the bank with the agency-payee line left blank, the report said.

The Treasury, for instance, found that in fiscal 1999 a bank employee stole five checks that had been sent to the bank with the agency payee line left blank, the report said. Though the bank told the Treasury that it had taken steps to improve its controls, the report said, the agency failed to verify that the changes were adequate to prevent future thefts.

The report also said the Treasury had failed to ensure that banks had pledged sufficient collateral to cover deposits in their lockboxes. Deficiencies were found at three of the four lockbox banks, including one that had pledged $103,500 for $3.5 million of transactions - a 97% deficiency.

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