Ways To Improve the Effectiveness of the Checks-Paid Letter of Credit Program

Gao ID: FGMSD-78-53 August 3, 1978

The letter of credit system is used for paying contractors who are eligible to be financed by advance government payments. According to Department of Energy (DOE) officials, use of this system over the past 10 years has saved the government substantial interest costs because it eliminated the need to pay contractors billions of dollars in advances. Contractors surveyed, who were paid under the checks-paid letter of credit system, had excess federal funds in their bank accounts. One factor contributing to this situation was the difficulty experienced by commercial banks in operating checks-paid letter of credit accounts consistent with Treasury policy. DOE does not have the specific procedures necessary to ensure that federal funds disbursed under the system are not excessive. The Controller, DOE, should: (1) meet with the Department of the Treasury and consult with the Social Security Administration to refine the checks-paid letters of credit policy and develop specific procedures which will minimize federal funds in contractor bank accounts; (2) require contractors to negotiate with commercial banks to ensure that the bank requiring the least compensation is chosen and that the amount of compensation is not more than that required by the bank to cover its stated charges; (3) periodically monitor the balances of federal funds in contractor checks-paid letter of credit bank accounts; and (4) use bank-supplied account analyses to help accomplish these recommendations.

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