**SEMIANNUAL REPORT OF THE INSPECTOR GENERAL**

**FOR THE PERIOD**

**April 1, 1995, To September 30, 1995**

[]{#FOREWORD .anchor}**FOREWORD**

Public Law 95-452 requires the Office of Inspector General (OIG) to
prepare an activity report to the United States Congress. This
Semiannual Report, transmitted to the Congress by the Administrator of
the Small Business Administration (SBA), covers the full range of OIG
activities from April 1, to September 30, 1995.

Over the reporting period, the OIG closed 74 investigative cases and
obtained 31 indictments and 27 convictions. The office also issued 12
audit reports; 2 inspection reports; and realized \$27 million in
potential dollar results (potential recoveries and fines, management
avoidances due to investigative activities, disallowed costs agreed to
by management, and recommendations that funds be put to better use).
These tangible results enabled the Agency to make most of these funds
available to qualified small business men and women who are eligible for
SBA financial assistance.

For FY 1995, the OIG\'s fivefold return for every dollar appropriated to
its operations represents a prudent investment of the American
taxpayer\'s money. When added to the accomplishments reported earlier
this year, I am pleased to report to the Congress that the OIG has had a
very successful year: \$47 million in dollar accomplishments; 131 cases
closed, with 77 indictments and 78 convictions; and 20 audit reports and
2 inspections issued. Moreover, OIG staff has been engaged in daily
consultations with the Agency\'s program managers in an effort to
improve the efficiency and effectiveness of the SBA\'s programs. Also,
the OIG\'s outreach initiatives have been productive in engaging SBA\'s
resource partners in a constructive dialogue about ways and means of
detecting and deterring fraud in their operations.

With one full year\'s operation completed, our Federal income tax
verification initiative continues to perform effectively. With over
55,000 loan applications processed in FY 1995, only 90 problems required
the OIG to contact the Internal Revenue Service (IRS) to ensure their
resolution. While tax verification represents a strong deterrent to many
who might be inclined to risk falsifying their income when applying for
an SBA loan or guarantee, FY 1995 still produced 118 referrals of false
tax returns, representing 267 individuals who were denied \$17 million
in SBA loans or loan guarantees because of the tax verification program.
These statistics are impressive and support the continuation of the
program. I am very concerned, however, that after one year\'s operation
and considerable media coverage of this initiative, there were still 267
individuals who were willing to risk the commission of a felony to gain
access to SBA\'s financial assistance programs.

SBA\'s loan portfolio continues to grow (now approaching \$32 billion),
while the OIG\'s resources remain virtually static. Our limited
resources cannot keep pace with the workload we are experiencing across
the OIG\'s divisions, e.g., approximately 160 cases involving over \$20
million in Government funds were declined by the OIG in FY 1995 due to
insufficient resources, nor can we be as responsive to the Congress, the
SBA Administrator, or other key Agency program personnel as we should
be. We are currently carrying 326 investigations in progress, which
translates into 1291 subjects and some \$378 million of Government funds
at risk. Moreover, many parts of the country are not being covered
adequately by the limited numbers of OIG investigative and auditing
personnel available, nor are we able to meet the growing demand for
audits and inspections being requested by Agency program managers in
central office. The OIG, therefore, has had to choose its priorities
carefully and set rigorous dollar thresholds for the types of cases it
will open and oversight requests it will entertain. This means, of
course, that the SBA\'s business loans and disaster assistance programs
continue to receive the lion\'s share of the OIG\'s attention, while the
balance of the Agency\'s programs receives little or no independent
oversight.

Finally, SBA\'s policymakers, employees, and program participants have
continued to be vigilant and helpful to the OIG in its efforts to ferret
out waste, fraud, and abuse in the delivery of SBA\'s programs.
Cooperation received from SBA\'s senior executives, program managers,
and employees during the conduct of OIG audits, inspections, and
investigations, as well as throughout the review of our findings and
consideration of associated recommendations, continues to be excellent.
I remain convinced, therefore, that the more the OIG works with program
managers to improve the performance of the Agency during these
challenging times of downsizing and fiscal constraints, the better
chance we will have to ensure a more efficient and effective SBA. The
challenge is clear: to eliminate opportunities for those who would take
unfair advantage of SBA programs and, thereby, deny assistance to those
honest, small business men and women who are truly in need of the
financial assistance being offered by their Government.

**James F. Hoobler**

**Inspector General**

[]{#TOC .anchor}**TABLE OF CONTENTS**

**Title Page**

Foreword [1](#FOREWORD)

Table of Contents [3](#TOC)

Executive Summary [1](#EXECSUM)

Business Loan Program [6](#SRR2A)

Disaster Loan Program [24](#DISASTER)

Small Business Investment Companies [38](#SBIC)

Surety Bond Guarantees [44](#SURETY)

Government Contracting Programs [49](#GC)

Minority Enterprise Development [53](#MED)

Economic Development [60](#ECONDEV)

Agency Management and Financial Activities [64](#AGYMGT)

Organization, Resources, and Management Initiatives [75](#ORG)

Profile of Operating Results [83](#PROFILE)

FY 1995 Productivity Statistics [88](#a95PROD)

Statutory Reporting Requirements [89](#STATREP)

Table of Appendices [90](#T_O_APPS)

[]{#EXECSUM .anchor}**Executive Summary**

  -----------------------------------------------------------------------
  This report on the activities of the Office of Inspector General (OIG)
  of the Small Business Administration (SBA) is submitted pursuant to
  Section 5(b) of P.L. 95-452, the Inspector General Act of 1978, as
  amended. It summarizes OIG activities for the 6-month period from April
  1, 1995, to September 30, 1995.

  -----------------------------------------------------------------------

**Summary of Accomplishments**

OIG audits, inspections, and investigations during this 6‑month period
achieved \$27,391,466 in potential dollar results, 31 indictments, and
27 convictions. The dollar results consist of: (1) \$4,385,377 in
potential recoveries, including judicially‑awarded fines and
restitution; (2) \$18,857,516 in management avoidances; (3) \$167,790 in
disallowed costs agreed to by SBA\'s management; and (4) \$3,980,783 in
management commitments to use funds more efficiently.

As noted in previous Semiannual Reports, the OIG alone could not have
achieved the accomplishments set forth in this report to the Congress.
The results for this period reflect the cooperation and support of other
Federal audit and investigative organizations such as the Federal Bureau
of Investigation (FBI), the U.S. Secret Service, the Bureau of Alcohol,
Tobacco and Firearms (BATF), the Postal Inspection Service, the Internal
Revenue Service (IRS), and other OIGs; the support of Department of
Justice (DOJ) prosecutors; and, most importantly, the actions of SBA
program managers and employees. Indeed, much of our success is due to
referrals made by conscientious Agency employees.

**OIG Mission for FY 1995**

The OIG\'s challenge in FY 1995 was to focus its resources on those
activities with the highest potential for improving the management of
the SBA and deterring and detecting the loss of the Federal
Government\'s substantial investment in SBA programs. To meet this
challenge, the OIG shifted resources away from traditional oversight
activities, i.e., compliance audits with minimal impact and criminal
investigations with limited deterrence potential. The office currently
concentrates its limited resources on efforts to produce greater dollar
savings, to provide maximum deterrence and prevention of fraud, and to
secure definitive improvement in SBA\'s program efficiency and
effectiveness.

The OIG\'s mission over the next several years will include a special
focus on the SBA\'s disaster assistance program. In late 1994, Congress
and the Office of Management and Budget (OMB) made \$3 million available
to the OIG for the purpose of disaster-related oversight. The OIG
subsequently developed a strategy to guide disaster-related oversight
activity and to make optimal use of these funds. Increased temporary
staffing located near disaster sites will provide the needed personnel
to achieve the goals of the OIG\'s disaster plan.

The OIG continues to build greater awareness of its mission with SBA
employees, the Agency\'s customers, and its resource partners. The OIG's
information dissemination activities should have a significant deterrent
effect on fraud, while raising SBA program managers\' interest in
management improvement. We continue to pursue this dual goal through
attendance at SBA-sponsored events, the development and use of more
educational presentations, more creative use of key OIG reports and
activities, and staff involvement in other initiatives designed to make
the OIG more visible with the Agency and its clientele groups. One such
example is the OIG's use of IGNet, an Internet-based forum for the
inspector general community. Summaries of audit and inspection reports
are being made available to the general public on IGNet, which is
coordinated for the inspector general community by the SBA/OIG. These
are relatively economical methods of reporting our work and they are
having a substantial impact on the accomplishment of our mission and
goals.

**Highlights of the Past Six Months**

**Efforts to Improve Agency Management**

[Annual Financial Audit Results in Qualified Opinion]{.underline}. The
annual audit of SBA\'s FY 1994 financial statements resulted in a
qualified opinion for the fourth straight year, i.e., SBA does not
maintain comprehensive inventory records of \$148 million of acquired
property and fails to value the acquired property at its net realizable
value. Except for these issues, the financial statements were presented
fairly, meaning that they represent an accurate picture of the Agency's
financial condition. In a separate report on management issues, there
were nine findings related to general ledger and reporting procedures,
electronic data processing internal controls, and other compliance
matters.

[Deputy Inspector General Testifies on Disaster Assistance
Program]{.underline}. On May 25, 1995, the Deputy Inspector General
(DIG) appeared before the Subcommittee on Government Programs of the
House Committee on Small Business to discuss the SBA\'s disaster
assistance program. The DIG summarized investigative, audit, and
inspection activities; highlighted two situations which have a major
impact on the rising number of fraud cases; and outlined the OIG
disaster plan for the use of the supplemental funding received in FY
1994.

[Availability of Credit Elsewhere]{.underline}. An SBA/OIG audit
disclosed that the Agency is not strictly enforcing the law that
prohibits making SBA-guaranteed loans to persons who can get "credit
elsewhere" on reasonable terms. Based on SBA managers' and loan
specialists\' responses to an audit questionnaire, an estimated \$244 to
\$316 million a year is loaned to persons who could have obtained credit
elsewhere. Auditors found that both lenders and SBA have
incentives---such as the pressure to reduce loan losses---that
cause"credit elsewhere loans to be approved contrary to law and
regulations. The SBA\'s Associate Administrator for Financial Assistance
has taken action to improve the understanding of the credit elsewhere
provision by issuing a new Agency Procedural Notice.

[Section 8(a) Competitive Mix Requirements Studied]{.underline}. SBA is
not effectively implementing the competitive mix requirements of the
Section 8(a) program, thereby permitting companies to develop an
unhealthy dependency on sole source, Government contracts. This failure
undermines the objectives of the Business Opportunity Development Reform
Act of 1988, which requires Section 8(a) companies to increase their
non-8(a) sales to be ready to compete after graduating from the program.
A recent audit found that SBA\'s business opportunity specialists were
not reacting appropriately to sales reports required by the Act. As a
result, many firms received millions of dollars in Section 8(a) sole
source contract awards despite having insignificant levels of non-8(a)
business. Companies not complying with the competitive mix targets still
managed to receive \$1.4 billion in Section 8(a) contracts in their last
year, according to SBA's database in February 1995. The Associate
Administrator for Minority Enterprise Development agreed with the audit
recommendations to issue more rigorous rules for enforcement of
competitive mix and to establish procedures to evaluate post-graduation
success in relation to competitive mix.

**Activities to Enhance Fraud Detection and Deterrence**

[SBA/OIG Investigators Receive Deputation as Special Deputy U.S.
Marshals]{.underline}. A Memorandum of Understanding (MOU) has been
signed by the SBA/OIG, the FBI, and DOJ implementing our part of a
1-year pilot project involving 7 selected OIGs. Under the MOU, all
eligible SBA/OIG criminal investigators have been given a blanket
deputation as Special Deputy U.S. Marshals. The MOU gives OIG criminal
investigators, who have met specified training requirements, full law
enforcement powers, including the authority to execute warrants and to
carry firearms in the performance of official duties.

[Affirmative Civil Enforcement Program]{.underline}. The OIG continues
to expand the scope of its efforts to make optimal use of the Department
of Justice\'s Affirmative Civil Enforcement (ACE) program. This U.S.
Attorney-managed program targets cases which might not be prosecuted
criminally because of the minimal dollar amounts involved, or because
other facts of the case might not support a criminal prosecution.
Heretofore, our ACE results had come from only seven states; however,
during this reporting period, the OIG obtained its first ACE results in
Indiana and Washington.

During the approximately 27 months the OIG has been involved with the
ACE program, we have had a total of 38 successful cases, resulting in
\$1,538,403 in civil penalties and \$350,758 in recoveries by SBA.
Individual ACE outcomes are reported in the program area chapters.

[Results of False Tax Return Cases Increase]{.underline}. Over the last
5 years, the OIG has received 150 allegations that false tax returns
were submitted in support of SBA business or disaster loan applications.
These fraud referrals, which began to surface in southern California,
now represent loan applications submitted to 27 SBA district offices,
totaling \$98,418,150 and involving 783 individual subjects. To date, 53
individuals have been indicted on criminal charges: 42 have been
adjudicated guilty, 1 indictment was dismissed in the negotiation of her
husband\'s guilty plea, and 10 others have not yet gone to trial.

**Internal OIG Management Activities**

[Auditing Division Builds Its Presence in the Disaster Assistance
Program]{.underline}. Using the special disaster funding described in
the preceding section, the OIG\'s Auditing Division took steps to
establish its presence in the Agency\'s disaster assistance program.
During the reporting period, six auditors were assigned to OIG audit
initiatives related to the disaster assistance program\--four in Los
Angeles and one in Atlanta and Washington, D.C., respectively. Based on
surveys conducted at the Los Angeles District Office and the Disaster
Area Offices in Atlanta and Sacramento, the OIG has initiated several
audit projects. An audit of delinquent and defaulted disaster loans has
identified problems in origination, servicing, and liquidation
practices; it also has resulted in a number of fraud referrals to the
OIG\'s Investigations Division. Other areas receiving attention include:

• SBA\'s assignment of disaster-funded personnel in Los Angeles to tasks
unrelated to the disaster assistance program;

• SBA\'s failure to use the Department of Housing and Urban
Development\'s centralized database of Federal debt delinquencies
(CAIVRS) in screening disaster loan applicants;

• fraud identification, follow-up, and referral practices at SBA
disaster loan servicing centers; and

• staffing, overtime, travel, and administrative procedures in the
disaster assistance program.

[Survey of OIG Inspection and Evaluation Units]{.underline}. The
President\'s Council on Integrity and Efficiency (PCIE) Committee on
Inspection and Evaluation, which is chaired by the SBA's Inspector
General (IG), commissioned a survey of all inspection and evaluation
units across the inspector general community. The study, which was
completed in July 1995, documents the diverse roles of the units, the
different ways in which they are structured and staffed, and their
perceived benefits. It also provides insight into the relative value of
inspection and evaluation units to their respective IGs and their host
departments and agencies.

[]{#SRR2A .anchor}**Business Loan Program**

+-----------------------------------------------------------------------+
| SBA\'s small business loan programs serve one of the most important   |
| missions of the Agency: to ensure that Federal funds and resources    |
| are used to help finance qualified small enterprises. Under the       |
| **Section 7(a) Guaranteed Loan Program**, SBA guarantees loans to     |
| small businesses that are unable to obtain private financing. These   |
| loans must be of such merit, or be so secured, as to reasonably       |
| ensure repayment to the lending institution. No loan may be made      |
| unless the financial assistance is not otherwise available on         |
| reasonable terms from elsewhere in the credit market. Under the       |
| guarantee plan, SBA agrees to purchase the guaranteed portion of the  |
| loan upon default by the small business. SBA\'s guarantee share of    |
| loans by private lenders averages about 80 percent.                   |
|                                                                       |
| More than 8,000 lenders have made at least one Section 7(a) loan in   |
| the past 5 years. Currently, approximately 22 percent of these loans  |
| are being made by participants in the Agency\'s **Certified Lender    |
| Program (CLP)** or its **Preferred Lender Program (PLP).**            |
|                                                                       |
| Lenders who are heavily involved in the SBA guarantee program and     |
| meet the Agency\'s criteria can participate through the CLP. Over 900 |
| participating lenders, approved for the **CLP** program, are          |
| permitted to assume greater authorities and responsibilities in       |
| processing, closing, servicing, and liquidating loans. As a result,   |
| SBA can process loan guarantee applications in 3 days, rather than    |
| the 2 weeks that it may take for a thorough analysis by Agency staff. |
| About 24 percent of all business loan guarantees are made through the |
| CLP process.                                                          |
|                                                                       |
| As permitted by Section 7(a)(2) of the Small Business Act, SBA        |
| delegates even wider authority to preferred lenders, i.e., lenders    |
| who can commit the Agency to guarantee eligible business loans and    |
| decide the level of SBA participation. This program, with over 259    |
| participants, reduces processing time on strong credit applications   |
| and uses the resources of the SBA\'s best lenders to the maximum.     |
| About 8 percent of all business loan guarantees are made through the  |
| **PLP** process.                                                      |
|                                                                       |
| The **504 Loan Program** provides long-term, fixed-rate financing     |
| through certified development companies (CDCs) to small businesses to |
| acquire real estate, machinery, and equipment for expansion of        |
| business or modernizing facilities. Typically, 504 loan proceeds are  |
| provided as follows: 50 percent by an unguaranteed bank loan, 40      |
| percent by an SBA-guaranteed debenture, and 10 percent by the small   |
| business customer. The maximum SBA debenture is \$1 million.          |
+-----------------------------------------------------------------------+
| With the creation of the Agency\'s Low Documentation (LowDoc)         |
| application process, lenders are now able to use their own internal   |
| loan application documents, plus a single, two-sided SBA form to      |
| apply for an SBA guarantee on a loan of \$100,000 or less. The        |
| success of this program is unprecedented; **56 percent of all SBA     |
| loan guarantee applications are now submitted through the LowDoc      |
| application process.**                                                |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s business loan
programs over the reporting period:

• Three audit reports were issued and five audits were underway.

• Business loan investigations resulted in 19 indictments and 11
convictions.

• Business loan investigations produced \$933,385 in court-ordered
restitution to SBA; \$610,656 in civil penalties, fines, and restitution
to participating lenders and other third parties; and \$107,000 in
reductions to the Agency's financial risk.

• Office of Security Operations name check activity resulted in the
declination of 59 business loans, totaling \$14,064,677.

• Twenty-seven business loan investigations were closed, leaving an
inventory of 203 active cases. Due to workload demands, another 33
business loan cases were referred to other law enforcement agencies for
investigation, giving us a total of 57 business loan referrals to
monitor.

• One piece of legislation, six proposed regulations, and two standard
operating procedures (SOPs) were reviewed.

Efforts to Improve SBA Program Management

**SBA Loans Made to Borrowers Who Could Get Credit Elsewhere**

Based on a survey of SBA managers, the OIG estimated that \$244 to \$316
million a year is **loaned to persons who could get "credit elsewhere,"
contrary to law and SBA regulations.** In an audit report issued in
September 1995, the OIG recommended improved procedures to assure that
District Offices and lenders adhere to the credit elsewhere rule.

The Associate Administrator for Financial Assistance has initiated the
corrective actions recommended in the audit report, including issuing a
new Agency notice clarifying the credit elsewhere requirement.

+-----------------------------------------------------------------------+
| > ![](media/image1.emf){width="6.263194444444444in"                   |
| > height="2.4493055555555556in"}                                      |
| >                                                                     |
| > 1                                                                   |
|                                                                       |
| **Figure 1**                                                          |
+-----------------------------------------------------------------------+

Section 7(a) of the Small Business Act authorizes SBA to expand capital
availability to small businesses by guaranteeing loans made by banks to
persons who cannot obtain credit elsewhere on reasonable terms. SBA
regulations require consideration of several sources of credit
elsewhere: a conventional loan from the same bank, a conventional loan
from another bank, and the borrower's own resources.

Borrower resources that are counted as credit elsewhere include
securities; assets not needed for growth of the business; and personal
resources of the owner, management, or principal shareholders. The
regulations exempt life insurance, individual retirement accounts,
educational reserve and \$50,000 per family from the "credit elsewhere"
consideration. Lenders certify to SBA on each guaranteed loan
application that they would not make the loan without the guarantee.

Two questionnaires were used in the audit to analyze the perceptions and
attitudes of SBA field office personnel during the period from October
1992 through June 1994. One questionnaire was completed by district
directors and assistant district directors. The other questionnaire was
completed by loan specialists selected at random.

The questionnaire responses raised concerns that some SBA managers and
loan specialists may tolerate loans to borrowers who could get credit
elsewhere. A total of 66 of 130 managers perceived correctly that the
Section 7(a) program is "definitely" restricted to persons who cannot
get credit elsewhere. Those answering \"No\" (11) or \"Qualified Yes\"
(53) to the question of whether the program was \"definitely\"
restricted, attributed their opinion to a variety of contributing
factors: SBA management no longer emphasizes enforcement of the credit
elsewhere rule, lenders would not participate if the rule were strictly
enforced, high quality loans are needed to keep loss rates from rising,
and others.

Although SBA relies on the lender certification, more than half of the
loan specialists and 28 percent of the managers said that lenders
"seldom" or "never" adequately address the credit elsewhere requirement
in preparing loans for SBA guarantees. The various types of credit
available elsewhere identified in prior audits were ignored by from 9 to
35 percent of the loan specialists answering the questionnaire.

Most of the loan specialists said they had seen applications with credit
available elsewhere, and they estimated that the indicators were present
in 6.7 percent of preferred lender applications and 8.2 percent of
regular and certified lender applications. Furthermore, loan specialists
estimated that 37.5 percent of the loans with credit elsewhere
indicators were approved anyway. Managers estimated that 3.9 percent of
approved loans had credit elsewhere indicators. Applying the managers\'
percentages to SBA's \$8.1 billion in loan approvals in 1994 gives an
overall estimate of \$316 million in loans approved with potential
credit available elsewhere.

About half of the loan specialists and a third of the managers agreed
with the proposition that making loans to borrowers with credit
elsewhere diverts funds from more needy applicants. Making some credit
elsewhere loans can result in unfair competition between banks, a
situation not contemplated by the Small Business Act, causing some
non-SBA lenders to complain that they are losing conventional loans to
lenders making SBA-guaranteed loans.

**SBA Withdraws Loan Guarantee from California Firm and Finds Loan
Administration Errors at SBA\'s Los Angeles District Office**

An audit report on an \$825,000 guaranteed revolving line of credit to a
Los Angeles consulting firm identified four deficiencies by a
participating lender bank in originating and servicing the loan. In
processing the loan application, the bank improperly allowed a
distribution of \$122,000 to the owner to be treated as a current asset
and did not disclose this information to the SBA. In servicing the loan,
the bank neither detected nor reported to SBA three adverse conditions
totaling \$417,257.

During the audit, the OIG recommended that the Director of the Los
Angeles District Office terminate the loan guarantee of \$580,000. The
recommendation was accepted by the District Office, and the bank agreed
to release SBA of liability on the loan guarantee.

As a result of the audit described above, auditors found that the SBA
Los Angeles District Office made **errors in the origination and
administration** of the \$825,000 working capital loan guarantee. The
District Office staff did not reconcile conflicting Standard Industrial
Classification (SIC) code information and issued the loan guarantee
under an incorrect SIC code. The borrower may have exceeded the size
standard for its correct SIC code and may have been ineligible for the
loan. The District Office also approved an excessive 65 percent increase
in the loan, almost double the maximum allowable increase of 33 percent,
and erroneously advised the lender that a \$200,000 advance to a
relative was permissible.

On another issue, auditors noted that the applicant was delinquent
\$900,000 on Federal income taxes at the time the loan was approved by
SBA. The District Office relied on an SBA policy that permitted a loan
to be made under these circumstances, if there was a repayment plan
approved by the Internal Revenue Service. The audit found, however, that
other SBA policies that require consideration of the borrower's
character were not applied in evaluating this loan. The audit
recommended that SBA strengthen its procedures for considering the
character issue when the borrower has a tax delinquency. The Associate
Administrator for Financial Assistance agreed with the audit
recommendation.

**OIG Fact-Finding Team Visits a Midwest Bank**

In September, members of the OIG executive team met with the Senior Vice
President/Chief Auditor and the Executive Vice President/Chief Credit
Officer, and members of their staffs, at a participating lender bank in
Minneapolis, Minnesota. The discussion agenda included credit policy and
administration, problem loan administration, audit of credit activities,
and loan fraud detection and prevention. The visit provided an
appreciation of how a quality lending institution can protect the
Government\'s interest by using its credit policy, standards, and
procedures efficiently and effectively. It also generated ideas that the
OIG is pursuing to assist the SBA in improving the oversight of its
business loan program.

**Review of SBA Legislative Proposal for Maximum Loan Guarantee**

We reviewed an SBA legislative proposal that would reduce the maximum
SBA guarantee for business loans but would still permit a higher
guarantee percentage (85 percent) for loans under \$100,000. These
LowDoc loans now account for more than half of all SBA guaranteed loans,
and there have been some industry concerns that many lenders are not
analyzing these loans sufficiently, leading to a higher projected
default rate. The OIG, therefore, recommended lowering the guarantee
rate to 75 percent to encourage lenders to be more prudent in their
lending decisions. After due consideration, Agency officials decided not
to adopt the OIG recommendation, but they stated that they would monitor
the LowDoc program carefully.

**Review of Section 504 Loan Program Regulations**

The OIG reviewed a proposed amendment to 13 C.F.R. Part 108 governing
the collection of fees and the use of interest accruing in accounts
established to administer the Section 504 Certified Development Company
(CDC) loan program, and had two significant concerns. First, Section
108.504(e)(3) would allow the Central Servicing Agent\'s (CSA)
compensation to be paid from initiation fees on specific loans or from
aggregated service fees, but it does not define the source of funds that
will comprise the \"aggregated service fees.\" The OIG recommended that
this oversight be clarified and suggested that one approach would be to
identify the funds as the difference between the servicing fee paid by
the borrower (1/10th of 1 percent) and the CSA\'s servicing fee (3/64ths
of 1 percent). Program officials agreed to address this issue by
publishing updated notices of fee changes.

Second, Section 108.504(e)(4) would provide that funds in the master
reserve account representing interest not attributable to a specific
Section 503 company may be expended by SBA for program administration
purposes. This appears to be contrary to the provisions of the Treasury
Financial Manual, Volume I, Part 6, Sections 3020 and 3030, which
require that these types of funds be turned over to the Treasury.
Program officials agreed to clarify this provision by specifying that
only those funds in the master reserve escrow account, representing
interest earned prior to October 1991 and not distributed to a specific
Section 503 company, may be used for program administration.

**Review of Accredited Lenders Program for Certified Development
Companies**

The OIG reviewed a proposed SBA Notice and Guide to the Accredited
Lenders Program (ALP) and made several recommendations to improve the
administration of the program. We noted that the Guide provides that,
before approving a renewal of an ALP designation, the District Office
shall make a field visit to the ALP-CDC to review the adequacy and
completeness of the CDC\'s files. We suggested that, in addition to this
visit and review, the District Office consider additional criteria in
renewing an ALP designation, including: (1) a loss rate threshold; (2) a
currency rate threshold; and (3) adequate CDC compliance with all
applicable SBA procedures, as determined by on-site reviews, with an
emphasis on credit analysis and borrower and loan eligibility
determinations.

The Guide also requires ALP-CDCs to assemble loan packages, ensure their
completeness, and include all necessary exhibits. We recommended that
some language be included to hold ALP-CDCs responsible for referring to
the OIG's Investigations Division any evidence of false statements or
other suspected violations of Federal law of which the ALP-CDC may
become aware. We also recommended that instructions be provided to the
ALP-CDCs as to their responsibilities, and that established procedures
be followed in obtaining fingerprints and forwarding such information to
the OIG, whenever a loan applicant provides a \"Yes\" answer on the Form
912. Program officials concurred with our recommendations and included
language in the Guide that addressed our concerns.

Activities to Enhance Fraud Detection and Deterrence

**Newest Results from Affirmative Civil Enforcement (ACE) Program**

During this period, the OIG\'s participation in the Department of
Justice\'s ACE program produced an additional 11 successful business
loan cases, resulting in \$169,224 in civil penalties ranging from \$750
to \$47,714. All 11 cases involved fraudulent representations in
applications for loans that were stopped before funds were disbursed.
All but one case, a Texas real estate company, involved applications to
Federally-insured lenders. Two of the cases represent the OIG\'s first
ACE results in the state of Washington.

**Indictment Charges that New York Company Was a Racketeering
Enterprise**

A Syracuse, New York, computer software development company, its chief
executive officer (CEO), and an attorney and business consultant for the
company were charged in a 54-count Federal indictment. The CEO was
charged with running the company as a **criminal enterprise under the
Racketeer Influenced and Corrupt Organization statute** and with
**racketeering conspiracy**. Specific charges against him included
**wire fraud, mail fraud, bank fraud, bankruptcy fraud,** and **money
laundering**. The CEO and the attorney were also charged with
**perjury**, and the corporation was charged with **mail fraud** and
**bank fraud**. The investigation disclosed that the company and its CEO
defrauded SBA and a participating lender bank by failing to disclose a
significant debt in an application for a \$750,000 SBA-guaranteed loan.
A substantial portion of the loan proceeds were used to pay off that
debt. They also defrauded the Government by submitting false information
in connection with a \$7 million Navy contract. In addition, the
investigation revealed that the CEO transferred company assets and
concealed these transfers from the bankruptcy court, defrauded his
corporate investors, laundered funds obtained by the company from the
SBA-guaranteed loan and its corporate investors, and made a false sworn
statement in connection with the Navy contract. The attorney was charged
with perjury based on statements he had made to the grand jury that
returned this indictment. The OIG conducted this investigation jointly
with the Defense Criminal Investigative Service, which brought the case
to our attention.

**Idaho Couple Sentenced for Making False Statements to a
Federally-Insured Lender and SBA**

A Boise, Idaho, businessman pled guilty to, among other financial
crimes, **making false statements** to a Federally-insured lender and to
SBA. The charges resulted from the submission of false tax return
information in support of an \$80,000 SBA-guaranteed loan application.
He was sentenced to 41 months imprisonment, 4 years supervised release,
and a \$4,250 fine. For her part in this scheme, his spouse was
sentenced to 4 weekends imprisonment, 4 months home detention, 3 years
supervised release, and 200 hours of community service. She was also
ordered to sign over to the bankruptcy court her home (valued at
\$44,000) and her \$15,000 truck. She had claimed that she operated the
condiment company, when, in fact, it was her husband who ran the
operation. The couple engaged in this deception because, if SBA had
known the truth, the loan would have been declined because of the man\'s
prior criminal fraud convictions. The OIG\'s joint investigation with
the IRS and the FBI was initiated based on information received from the
SBA Boise District Office.

**Two More Individuals Sentenced in Ongoing Southern California Loan
Packager Investigation**

Two more persons have been sentenced as a result of the OIG\'s
investigation of a southern California packager of SBA-guaranteed loans:

• The former owner of a Santa Ana, California, machine shop was
sentenced to 30 days imprisonment, 5 years probation, 3,000 hours of
community service, and \$81,452 in restitution to SBA. The OIG\'s joint
investigation with the FBI disclosed that he had made **false
statements** on his application to obtain a \$100,000 SBA-guaranteed
loan.

• A former vice president and manager of the SBA loan department of a
Pasadena, California, bank was sentenced for **making false entries on
bank documents**, **embezzlement by a bank officer,** and **acceptance
by a bank officer of corrupt payments**. He was sentenced to 21 months
imprisonment, 3 years supervised release, and restitution of \$35,477 to
SBA and \$26,450 to the Pasadena bank. The investigation was carried out
in two phases. Initially, the bank officer was found to have accepted
more than \$35,000 from a southern California loan packager representing
various borrowers, in exchange for his approval recommendations on the
borrowers\' loan applications while he was employed as a loan officer at
a City of Industry, California, bank.

The second phase of the investigation was initiated following the
manager's guilty plea to **accepting the corrupt payments**. At the
request of SBA\'s Los Angeles District Office, the Pasadena bank, where
he was employed at the time of the initial guilty plea, performed an
audit of all loans processed by him. The audit discovered that he had
falsified SBA compensation agreements by failing to disclose that a
third party finance company was paid to \"package\" numerous SBA loans.
He also had failed to disclose to the bank that he was the actual loan
packager working for that company and that he was then paid by the
finance company for his packaging services. The former bank officer also
had improperly approved payment by the bank of the company\'s invoices
for loan packaging services on a number of non-SBA loans, even though no
packaging had been done; this action constituted embezzlement of bank
funds. The packaging company received a total of \$38,450 from the
Pasadena bank, and the investigation showed that the bank officer
received most of that total for himself.

The OIG initiated this investigation based on a referral from SBA\'s Los
Angeles District Office.

**More Californians Plead Guilty to Using False Tax Returns to Get
Loans**

Three more Californians have entered guilty pleas as a result of the
OIG\'s joint investigation with the FBI regarding the inclusion of false
tax returns in applications for SBA-guaranteed business loans:

• The former owner of a Los Angeles area machinery distribution business
pled guilty to **making false statements** to obtain an SBA-guaranteed
loan and was sentenced to 5 years probation and \$131,015 in restitution
to the participating lender bank. The man obtained a \$150,000 loan
after submitting false income tax returns as part of his loan
application.

• A Los Angeles sportswear manufacturer and retailer and his wife were
charged in a superseding indictment on 13 counts and 2 counts,
respectively, of **submitting a false loan application to a
Federally-insured financial institution**. The man pled guilty to five
counts (the others will be dismissed by the court in return). The wife
pled guilty to one count in connection with a bank loan for the purchase
of her business, a Culver City, California, shoe store, the other count
was dismissed.

As previously reported, the businessman was originally charged with five
counts of **submitting a false loan application to a Federally-insured
financial institution** in connection with his \$465,000 SBA-guaranteed
loan. Following that indictment, the investigation was expanded to
pursue additional potential violations in connection with other loans;
this portion of the investigation resulted in the additional charges.
The investigation disclosed that, in addition to the SBA-guaranteed
loan, applications for four other loans (a \$14,500 automobile loan, a
\$412,000 residential loan, a \$200,000 loan for her business, and
another \$712,000 residential loan) all contained false tax returns.

The OIG initiated the investigation in response to a referral from
SBA\'s commercial loan servicing center in Fresno, California.

**Indiana Businessman Sentenced for Making False Statements to SBA, Bank
Fraud, and Wire Fraud**

The president and owner of an Indianapolis, Indiana, clothing
manufacturer pled guilty to an information that charged him with
scheming to defraud SBA, a participating lender bank, and a private
financing business. The businessman pled guilty to three counts:
**making false statements to SBA**, **bank fraud**, and **wire fraud**.
He was sentenced to 28 months imprisonment, 5 years supervised release,
restitution of \$9,250 to the private financing business and \$3,567 to
the bank, and a \$2,150 fine. The OIG investigation disclosed that he
made false statements to SBA and the bank to conceal an outstanding debt
as well as his prior criminal history. The investigation also disclosed
that he submitted a falsified invoice, claiming that his company had a
\$42,000 account receivable, to obtain \$22,912 in loan proceeds from
the private financing business; the funds were subsequently
wire-transferred to the bank. The investigation was opened based on a
referral from SBA\'s Indianapolis District Office.

**Three Associated with Ohio Manufacturer Charged with Fraud**

Three midwestern businessmen associated with a motor-manufacturing
company in Mentor, Ohio, have been charged with participating in a fraud
scheme involving a \$400,000 SBA-guaranteed loan. Two personal
guarantors of the loan were indicted on charges of **bank fraud**,
**wire fraud**, and **making false statements in a loan application to a
Federally-insured financial institution**, and the corporation\'s
president was charged with one count of **making a false statement in a
loan application to a Federally-insured financial institution**. The
OIG\'s joint investigation with the FBI revealed that, over a period of
nearly 3 years, the guarantors carried out a scheme to defraud a
participating lender bank in Cleveland, Ohio by submitting falsified
individual tax returns and financial statements overstating their
adjusted gross incomes and personal net worths. The company\'s
president, in signing the Authorization and Loan Agreement, represented
that the use of the proceeds of the loan would be limited to the
purchase of machinery, equipment, furniture, and fixtures when he knew
that proceeds were being diverted to him and his two co-defendants. The
OIG initiated the investigation based on a referral from SBA\'s
Cleveland District Office.

**Florida Business Owner Sentenced for Submitting False Loan
Application**

The owner of an herbal products company located in Jupiter, Florida, was
sentenced to 16 months incarceration, 3 years supervised release, and
restitution to SBA of \$13,796. He previously had pled guilty to
**submitting a false loan application to a Federally-insured financial
institution**. The OIG investigation found that he obtained a \$50,000
SBA-guaranteed loan by lying about a prior bankruptcy and how he
intended to use the loan proceeds. After receiving checks co-payable to
vendors, he canceled the orders from those vendors, obtained refunds,
and used the money for his own benefit. The OIG initiated the
investigation based on a referral from SBA\'s Jacksonville District
Office.

**Georgia Caterer Sentenced for Defrauding Financial Institutions**

The owner of a now-defunct Atlanta, Georgia, catering company pled
guilty to an information charging her with two counts of **theft of
property of Federally-insured financial institutions**. In return, the
40 felony counts on which she had been indicted in 1991 were dismissed.
She was subsequently sentenced to 3 years probation, restitution of
\$650,000 to SBA and \$180,000 to a Georgia savings bank, and a \$25,050
fine. The OIG investigation, based on a referral from SBA\'s Atlanta
District Office, disclosed that she and her husband defrauded SBA and
seven Federally-insured lenders out of more than \$1.2 million. The
couple had fled the country prior to their 1991 indictment, but in
January 1995 she was deported from Russia to the United States. Efforts
are being made to return her husband, who was recently located in
Cyprus, to the United States to stand trial on 42 felony counts.

**California Father and Daughter Indicted on Conspiracy Charge**

A California father and daughter were each indicted on one count of
**conspiracy** and one count of **making a false statement in a loan
application to a Federally-insured financial institution**. The
investigation revealed that the daughter, who received a \$665,000
SBA-guaranteed loan to purchase real property in Woodland Hills,
California, to operate a nursery, submitted false financial documents,
including false tax returns, to obtain the loan. Her father purchased
the property for \$450,000 and then immediately sold it to her for
\$900,000. The father also falsely represented to the bank that he was
giving his daughter a gift of \$160,000 to purchase the property. The
nursery never opened for business, and the loan went into default after
only two loan payments had been made. Arrest warrants have been issued
for the pair, one or both of whom may have left the country. The case
was referred to the OIG by SBA\'s Los Angeles District Office.

**Two More Georgia Businessmen Charged with Loan Fraud Scheme**

The owner of a Georgia corporation which sold land and a building in
LaGrange, Georgia, to a restaurant owner was indicted on two counts of
**making false statements** to SBA and one count of **conspiracy**. The
proprietor of the now-defunct LaGrange restaurant was indicted on the
same **conspiracy** count; he had previously been indicted on eight
other felony counts in this case. The restaurant owner had received a
\$400,000 SBA-guaranteed loan from a non-bank lender in 1990. The new
counts charge that the two men schemed to fabricate documentation of a
capital injection into the restaurant, which was required by SBA to
guarantee the loan. Also, an attorney involved with the sale of the land
and building pled guilty to a criminal information that charged him with
one misdemeanor count of **theft of property of a Federally-insured
financial institution**. The OIG initiated this investigation based on a
referral from SBA\'s Atlanta District Office.

**Washington Restaurant Owner Pleads Guilty to Making False Statements**

The former owner of a restaurant in Sequim, Washington, was indicted on
six counts of **making false statements** to SBA. He subsequently pled
guilty to one count, and in return, the U.S. Attorney\'s Office agreed
to dismissal of the other charges. The investigation disclosed that the
man made numerous false statements to induce SBA to approve and disburse
a \$45,000 Vietnam-Era Veteran direct SBA loan. He was charged with
understating his personal and business debts and with concealing his
misuse of loan proceeds by submitting forged and altered invoices and
other false documents to SBA. The restaurant owner defaulted on the loan
with an outstanding balance of approximately \$43,000. This matter was
referred to the OIG by a loan officer in SBA\'s Seattle District Office.

**Missouri Bank Owner Pleads Guilty to Falsifying Bank Records**

A former banker and business owner pled guilty to making or causing a
**false entry** in the records of a Missouri bank, of which he was an
owner. He had been charged with using the bank\'s funds to pay
approximately \$76,000 in expenses incurred by another bank, which he
also owned, and with having these payments falsely recorded as expenses
of the first bank. This OIG joint investigation with the FBI was
initiated in response to a referral from the SBA's Kansas City District
Office.

**Kansas Automobile Dealership Manager Sentenced for His Part in Fraud
Conspiracy**

The former manager of an automobile dealership in Ottawa, Kansas, was
sentenced to 3 years probation and a \$50 special assessment. He had
pled guilty to one count of **conspiracy** to commit mail fraud by
filing an insurance claim in connection with a fire which destroyed the
dealership. The OIG\'s joint investigation with the BATF disclosed that
the manager and three other men conspired to make false statements to
SBA and others to obtain financing (including a \$150,000 SBA-guaranteed
loan) for the dealership. They later conspired to burn it down and
fraudulently collect the insurance proceeds. As a result of the fire,
losses to the automobile manufacturer and others totaled about
\$453,000. The manager agreed to cooperate in the prosecution of the
three others (the dealership\'s owner and the two men the owner
allegedly paid to set the fire) on charges of **conspiracy, arson,** and
**mail fraud;** however, at the conclusion of their trial, all three
were acquitted for undetermined reasons. The application for the
\$150,000 SBA-guaranteed loan was declined. The OIG joined this
investigation at the request of the BATF.

**Missouri Businessman Pleads Guilty to Overvaluing Assets to Obtain
Bank Loans**

A former partner in a Branson, Missouri, novelty item company pled
guilty to a one-count information that charged him with making **false
statements in loan applications to a Federally-insured financial
institution**. The investigation disclosed that the businessman
overvalued his company\'s inventory and accounts receivable by more than
\$240,000 each to obtain a \$1,250,000 line of credit and a \$775,000
SBA-guaranteed loan. The borrower made no payments on these loans before
they defaulted. The plea agreement stated that the readily provable loss
attributable to the businessman\'s conduct was \$495,000. This
investigation was conducted jointly by the FBI and the OIG, which
initiated its case based on a referral from SBA\'s Springfield,
Missouri, Branch Office.

**California Landscaper Charged With Fraud in Second Set of Loans**

The owner of a landscape maintenance company in Anaheim, California, was
charged in a criminal information with two counts of **making false
statements in loan applications to Federally-insured financial
institutions** and two counts of **filing false tax returns**. These
charges stemmed from a follow-on investigation based on a report by the
man's bookkeeper, that produced his February 1995 guilty plea to a
felony charge for fraud in obtaining a \$400,000 SBA-guaranteed loan.
Suspecting that this was not the first time the man had used false
documents to obtain bank loans, the prosecutor requested that the OIG
examine the files of the man\'s other loans. This led to both the
identification of another two bank loans which were obtained with false
tax returns and the discovery that the man was under investigation by
the IRS for other suspected crimes. The OIG then joined forces with the
IRS in the investigation which resulted in the more recent charges.

**New York Bank Officer Indicted for Illegally Soliciting Commissions**

A former vice president of one of the largest SBA lender banks in New
York City was indicted on three felony counts. The indictment charged
that the man **solicited** **commissions for procuring loans** which
were guaranteed by SBA, in return for his assistance in obtaining loan
approvals. The OIG investigation, conducted jointly with the FBI,
disclosed that he demanded cash fees from two applicants as a condition
for approving their loans. He also ordered a subordinate bank employee
to demand cash from a third applicant. The illegal commissions totaled
\$17,000 on loans totaling more than \$800,000. The investigation was
initiated based on information received from a confidential source.

**California Loan Packager Indicted for Causing False Statements to Be
Made**

A Garden Grove, California, loan packager was indicted on 23 counts of
**causing false statements to be made in loan applications to
Federally-insured financial institutions**. The indictment charges that
he caused 18 false tax returns to be included with 8 SBA-guaranteed loan
applications submitted to a Santa Ana, California, bank and 5 false tax
returns to be included with 2 SBA-guaranteed loan applications submitted
to an Anaheim, California, bank. The joint OIG/FBI investigation,
initiated in 1990 based on information provided by the Santa Ana
District Office, involved 32 loans packaged by this man. To date, 20 of
the loans have defaulted, resulting in more than \$3.2 million in losses
to SBA and the banks. An investigation of several of the borrowers is
continuing.

[]{#DISASTER .anchor}**Disaster Loan Program**

+-----------------------------------------------------------------------+
| SBA\'s disaster loans, made pursuant to Section 7(b) of the Small     |
| Business Act, as amended, represent the primary form of Federal       |
| assistance for non-farm, private sector disaster losses. For this     |
| reason, the **Disaster Loan Program** is the only form of SBA         |
| assistance not limited to small businesses. Disaster loans from SBA   |
| help homeowners, renters, businesses of all sizes, and non-profit     |
| organizations fund rebuilding. SBA\'s disaster loans are also a       |
| critical source of economic stimulation in disaster-ravaged           |
| communities, helping to spur employment and stabilize tax bases.      |
|                                                                       |
| By providing disaster assistance in the form of loans which are       |
| repaid to the U.S. Treasury, the SBA disaster loan program helps      |
| reduce Federal disaster costs compared to other forms of assistance   |
| like grants. When victims need to borrow to repair uninsured damages, |
| the low interest rates and the long terms available from SBA make     |
| recovery affordable. Because SBA tailors the repayment of each        |
| disaster loan to each borrower\'s capability, unnecessary interest    |
| subsidies paid by the taxpayers are avoided.                          |
|                                                                       |
| The need for SBA disaster loans is unpredictable. During FY 1995, SBA |
| approved 45,041 loans for \$1.21 billion. During FY 1994, in the      |
| aftermath of the Northridge earthquake, Tropical Storm Alberto, the   |
| Great Midwest Floods, and other disasters, SBA approved 125,861 loans |
| for an all-time record amount of \$4.16 billion. Since the inception  |
| of the program, SBA has approved more than 1,303,000 disaster loans   |
| for more than \$23 billion. As of the end of FY 1995, the SBA         |
| disaster loan portfolio included more than 271,000 loans valued at    |
| over \$6.7 billion. The total available for FY 1996 disaster loans,   |
| including carryover and contingency funds, is approximately \$568     |
| million.                                                              |
|                                                                       |
| SBA is authorized by law to make two types of disaster loans: (1)     |
| physical disaster loans, which are a primary source of funding for    |
| permanent rebuilding and replacement of uninsured disaster damages to |
| real and personal property homeowners, renters, businesses of all     |
| sizes, and non-profit organizations; and (2) economic injury disaster |
| loans (available by law only to small businesses), which provide      |
| necessary working capital until normal operations resume after a      |
| physical disaster. SBA delivers disaster loans through four           |
| specialized Disaster Area Offices located in Niagara Falls, New York; |
| Atlanta, Georgia; Fort Worth, Texas; and Sacramento, California.      |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s disaster loan
programs during the reporting period:

• Five audits were underway during the period.

• Disaster loan investigations resulted in 7 indictments and 12
convictions.

• Disaster loan investigations produced \$442,100 in court-ordered
restitution to SBA, \$286,286 in other recoveries by SBA, \$39,750 in
fines and special assessments, and \$35,400 in reductions in financial
risk.

• Office of Security Operations name checks resulted in the declination
of 17 disaster loans totaling \$4,650,439.

• Sixteen disaster loan investigations were closed, leaving an inventory
of 61 active cases. Due to workload demands, another four disaster loan
cases were referred to other law enforcement agencies for investigation,
resulting in a total of ten disaster loan referrals to monitor for
performance.

• Two proposed regulations and one SOP were reviewed.

+-----------------------------------------------------------------------+
| > ![](media/image2.emf){width="6.154861111111111in"                   |
| > height="2.4305555555555554in"}                                      |
| >                                                                     |
| > 2                                                                   |
|                                                                       |
| **Figure 2**                                                          |
+-----------------------------------------------------------------------+

Efforts to Improve SBA Program Management

**Deputy Inspector General Testifies on Disaster Assistance Program**

On May 25, 1995, the Deputy Inspector General (DIG) appeared before the
Subcommittee on Government Programs of the House Committee on Small
Business to discuss the SBA\'s Disaster Assistance program. The DIG
summarized investigative, audit, and inspection activities to date;
highlighted two situations which have a major impact on the number of
fraud cases; and outlined the OIG Disaster Plan for the use of the
supplemental funding received in FY 1994. A short synopsis of her
testimony follows.

Since 1990, the Investigations Division has initiated 148 criminal
investigations involving 533 subjects and approximately \$64 million in
potential losses from disaster loans. To date, 79 individuals have been
indicted and \$5.3 million has been recovered through court-ordered
restitution, fines, or savings. The current inventory consists of 65
active cases involving 414 subjects and \$45 million in potential
Government losses.

Two situations have had a significant impact on the number of fraud
cases stemming from disasters: (1) the use of falsified copies of
Federal income tax returns or other financial data submitted with loan
applications and (2) the marked increase in false applications prepared
by \"loan packagers.\" The DIG reported that the number of investigative
referrals including allegations of false tax returns or other financial
data has declined significantly since all loan applicants have been
required to sign a waiver allowing the SBA to obtain Federal income tax
information from the IRS. In response to the loan packager problem, the
Administrator has also created a Fraud Prevention Task Force to develop
and present recommendations for protecting the public and the SBA from
unscrupulous packagers and others who might try to take advantage of the
Agency\'s programs. The Task Force's report should be completed by the
end of the next reporting period.

In addition to providing support for ongoing fraud investigations, the
OIG's Auditing Division completed a study to determine the validity of
applications submitted 10 months after the Northridge earthquake. The
report concluded that these applications were based on actual damages
and there were a number of legitimate reasons for the delay in
submitting applications. In some cases, however, the delay in filing
made it difficult to determine precisely if the damages were caused by
the earthquake. The DIG also discussed the Division\'s current audit
work in Los Angeles involving loans in liquidation and the audit survey
work in Atlanta that has just begun. The expected results from this
audit activity should include both additional referrals to the OIG's
Investigations Division and recommendations to disaster assistance
program managers for systemic improvements.

Under the OIG Disaster Plan, the Investigations Division has hired six
criminal investigators, using temporary appointment authority, to help
handle the ever-increasing disaster assistance workload. Also, pursuant
to the Disaster Plan, the OIG's Auditing Division has hired six auditors
who are dedicated to the analysis of both known and potential problem
areas in the disaster assistance program.

**Disaster Loan Processing SOP**

**Reviewed**

The OIG reviewed SBA's proposed comprehensive revision of SOP 50 30,
**Disaster Loan Processing**, and made several comments and suggestions.
We suggested that the SOP inform disaster employees of specific criminal
acts, such as bribery overtures, attempts, or solicitations which should
be reported immediately to the OIG. We suggested further that the OIG
\"Fraud Line\" telephone number be listed in the SOP; both
recommendations were accepted by the Associate Administrator for
Disaster Assistance (AA/DA). The OIG review also expressed concern that
the proposed revision did not fully explain the phrase \"caution should
be exercised,\" which had been used in the section explaining the
repayment analysis applicable to determining the loan eligibility of
resident aliens. The AA/DA agreed and supplied a clearer statement
intended to alert Loan Officers to potential problems. We also suggested
that the \$250 allowance for reimbursement for the loss of alcoholic
beverages be removed. The AA/DA explained that the amount was a
limitation, and that it would not be appropriate for them to make such a
moral decision. Finally, we expressed concern over the section
addressing \"Lending for the \[Insurance\] Deductible Only,\" because we
felt that the paragraph did not fully explain the concept of lending
money to individuals to cover their insurance deductible. Moreover, it
created possible loopholes for potential borrowers. The AA/DA agreed and
drafted new wording which addressed our concern.

Activities to Enhance Fraud Detection and Deterrence

**Results from Affirmative Civil Enforcement (ACE) Program**

During this period, the OIG\'s participation in the Department of
Justice\'s ACE program produced two successful disaster loan cases,
resulting in \$10,500 in civil penalties and \$130,446 in recoveries by
SBA. One case produced the payoff in full of a disaster loan, plus \$500
awards for costs to both SBA and the Department of Justice. The other
case, which involves a bowling alley and is discussed in detail at the
end of this chapter, represents the OIG\'s first ACE result in Indiana.

**Ongoing Investigation into California Disaster Loan Packagers Yields
More Results**

The joint OIG/Secret Service investigation of false disaster loan
applications prepared by two southern California brothers acting as loan
packagers has yielded additional results. Eight men, whose guilty pleas
to **submitting false claims** to SBA we had previously reported, were
sentenced:

• An Encino, California, businessman was sentenced to 3 years probation
and a \$5,000 fine. He had applied for a \$150,000 economic injury loan
for his business, which allegedly was a clothing wholesale operation in
Los Angeles. The investigation determined that the business was
nonexistent.

• The owner of a Los Angeles, California, clothing company was sentenced
to 5 years probation, 1,500 hours of community service, and a \$2,500
fine. He had applied for a \$400,000 economic injury loan.

• A Los Angeles, California, man was sentenced to 5 years probation,
1,500 hours of community service, and a \$2,500 fine. He had applied for
a \$350,000 economic injury loan for his clothing manufacturing
business, allegedly located in Los Angeles. The investigation determined
that the business was nonexistent.

• The owner of a wholesale textile company in Los Angeles, California,
was sentenced to 5 years probation, 1,500 hours of community service,
and a \$2,500 fine. He had applied for a \$300,000 economic injury loan.

• The owner of a South Gate, California, discount store was sentenced to
5 years probation, 1,500 hours of community service, and a \$2,500 fine.
He had applied for a \$210,000 economic injury loan.

• The owner of a West Los Angeles, California, market was sentenced to 5
years probation, 1,500 hours of community service, and a \$2,500 fine.
He had applied for a \$350,000 economic injury loan.

• The sole proprietor of a rug company in Los Angeles, California, was
sentenced to 6 months in a halfway house, 5 years probation, and 1,500
hours of community service. He was also ordered to make restitution to
SBA for the \$215,600 total outstanding balance of the loans to his Los
Angeles business. In addition to pleading guilty to his own false claim,
he also pled guilty to **aiding and abetting the submission of false
claims** to SBA by three other loan applicants.

• A Reseda, California, businessman was sentenced to 5 years probation,
1,500 hours of community service, and a \$2,500 fine. He had applied for
a \$500,000 economic injury loan for his business.

Owners of three other Los Angeles, California, businesses pled guilty to
one count each of filing **false claims** with SBA and were sentenced:

• The owner of a fashion boutique submitted a claim for a \$250,000
economic injury disaster loan and received \$166,900; he submitted a
false tax return as part of his loan application package. He was
sentenced to 5 years probation, \$166,900 restitution to SBA, 1,500
hours of community service, and a \$2,500 fine.

• The owner of a jewelry store submitted a claim for a \$250,000
economic injury disaster loan; he submitted false tax returns as part of
his application package, but the loan was never funded. He was sentenced
to 5 years probation, 1,500 hours of community service, and a \$1,000
fine.

• The owner of a textile company submitted a claim for a \$450,000
economic injury disaster loan and received \$51,700; he submitted a
false lease agreement as part of his application package. He was
sentenced to 5 years probation, 1,500 hours of community service, a
\$2,500 fine, and restitution to SBA of \$51,700.

Another defendant who had previously pled guilty to filing a **false
claim** with SBA entered a guilty plea to three new charges. The Santa
Monica, California, resident pled guilty to three counts of making
**false statements in loan applications to Federally-insured financial
institutions**. She had previously entered a guilty plea in connection
with her fraudulent application for a \$300,000 economic injury disaster
loan. The latest counts charged her with submitting false tax returns to
a California savings and loan to obtain a \$716,000 loan and to a
California Federal bank to obtain loans of \$1,320,000 and \$1,440,000,
respectively.

Yet another Los Angeles businessman was charged with filing a **false
claim** with SBA; he subsequently pled guilty. Following the 1992 civil
disturbance in Los Angeles, this businessman had applied for a \$126,000
economic injury disaster loan for his (then nonexistent) fashion
business and received \$46,900. The investigation showed that, as part
of his application, he submitted a false copy of his 1991 tax return
reporting income from the bogus business. In fact, the return had never
been filed with the IRS, and the SBA loan funds were used to start the
business. The businessman\'s application was prepared by his cousins,
the two loan packagers at the center of this investigation.

Finally, one of these two loan packagers has been indicted on 21 counts
that supersede the 8 charges already filed against him. In the new
indictment, the man was charged with nine counts of making **false
statements in loan applications to Federally-insured financial
institutions** by submitting false tax returns with applications for
four commercial and residential bank loans totaling approximately \$11.4
million. In addition, he was charged with 12 counts of **causing false
documents to be submitted to a Government agency** by assisting others
in the submission of false tax returns as part of six SBA disaster
business loan applications totaling approximately \$3.95 million. The
disaster loan applications included claims of both physical and economic
injury and spanned three disasters: the 1992 civil unrest in Los
Angeles, the 1993 Malibu fires, and the 1994 Northridge earthquake. Of
the 19 individuals who have been charged as a result of this
investigation, all but the two brothers have pled guilty. The original
investigation of loan packages prepared by the brothers stemmed from a
referral from the Disaster Assistance Area 4 Office and a tip from a
concerned citizen.

**Los Angeles Resident Sentenced for False Claim and False Statements in
a Loan Application**

A Los Angeles, California, resident was sentenced to 3 years probation,
650 hours of community service, and a \$3,000 fine. In October 1994, he
had pled guilty to making a **false claim** to SBA in connection with a
disaster home loan application following the Northridge, California,
earthquake. After his initial guilty plea, the man furnished false
financial documents to the court officer conducting his pre-sentence
investigation. As a result, OIG special agents discovered discrepancies
that led to an added charge of making a **false statement in a loan
application to a Federally-insured financial institution**, to which he
pled guilty in April 1995. He had submitted tax returns to a lender
using a bogus, second Social Security number which he obtained to
disguise a poor credit history. The OIG initiated the investigation
based on information provided by the Disaster Assistance Area 4 Office.

**Oregon Shoe Store Owner Sentenced for Illegally Converting Loan
Check**

The owner of a now-defunct shoe store in Burns, Oregon, pled guilty to
one count of **illegally converting** an SBA loan disbursement check. He
was sentenced to 6 months home detention, 5 years probation, and \$6,100
in restitution to SBA. The man had been approved for a \$71,800 SBA
economic injury disaster loan. During the disbursement process, however,
SBA discovered that he had failed to list a number of accounts payable,
many of which had already been reduced to judgments. The loan was then
reduced to the amount already disbursed, \$25,200, and was ultimately
charged off as uncollectible. The investigation revealed that the store
owner had diverted several of the disbursement checks into accounts
other than the business account and that he had not used all of the
proceeds as specified in the SBA loan agreement. The OIG initiated the
investigation in response to a referral from SBA\'s Boise District
Office.

**California Couple Sentenced for Submitting False Claims**

A California husband and wife were sentenced for **submitting false
claims** in connection with a southern California disaster. Both were
sentenced to 3 years probation; they had already paid \$11,256 in
restitution to the Federal Emergency Management Agency (FEMA). The
SBA/OIG\'s joint investigation with the FEMA/OIG disclosed that the
couple had falsified information on three separate SBA disaster loan
applications and on a FEMA application for rental assistance. Each of
their disaster home loan applications was declined due to their lack of
repayment ability. The SBA/OIG entered this case based on information
received from the FEMA/OIG.

**California Loan Applicant Pleads Guilty to Three Felony Counts**

A resident of Santa Barbara, California, pled guilty to 3 counts of an
11-count felony indictment: **making a false claim to SBA, misuse of a
Social Security number, and making a false statement to a
Federally-insured lender**. In return, the Department of Justice agreed
to dismissal of the other counts, which included **making a false
claim** to FEMA. The applicant claimed to have lost an Isuzu Trooper
containing valuable tools in the floods of January 1995. The
investigation, which was conducted jointly with the FEMA/OIG, disclosed
that the vehicle had been repossessed more than a year before the
disaster. The investigation further established that this individual had
used five Social Security numbers which were not his, and a variety of
spellings of his name, to apply for four loans. The man has remained in
custody since his arrest. This matter was referred to the SBA/OIG by the
Disaster Assistance Area 4 Office.

**Owner of a California Alarm Company Sentenced for Making False
Statements**

The president and owner of an alarm-device manufacturing business in
Canoga Park, California, was sentenced to 5 months in a halfway house
and 2 years probation. He had previously pled guilty to **making false
statements** to SBA in applying for disaster loans for his business. He
had applied for a \$122,925 physical damage loan and a \$112,000
economic injury loan. Both of these loans were declined based on the
company\'s lack of repayment ability and poor credit history. After the
company owner submitted additional documents as part of a
reconsideration request, the loan processing department of the Disaster
Assistance Area 4 Office discovered irregularities with the documents
and referred the matter to the OIG. To overcome his unfavorable credit
record, the subsequent investigation disclosed that the businessman
falsely claimed to have satisfied several debts and judgments. He also
falsely represented that the tax returns and extensions he had submitted
with his application were authentic copies of the documents submitted to
the IRS when they had not been submitted at all.

**California Restaurant Owner and Loan Preparer Sentenced for False
Statement and False Claim**

A restaurant owner who received two SBA disaster loans for her Los
Angeles, California, restaurant and an associate who helped prepare the
loan application entered guilty pleas\--the owner to **making a false
statement** to SBA and her associate to **submitting a false claim** to
SBA. Subsequently, the owner was sentenced to 3 months home detention, 5
years probation, and 250 hours of community service, and her associate
was sentenced to 3 months in a community confinement center, 5 years
probation, and 250 hours of community service. The restaurant owner had
applied for a \$160,000 physical damage loan and a \$40,000 economic
injury loan, claiming that her business was destroyed by a fire caused
by the Northridge earthquake. Having discovered irregularities on the
Fire Incident Report included as part of the application, the loan
processing department of the Disaster Assistance Area 4 Office referred
the matter to the OIG. The investigation revealed that the fire which
destroyed the restaurant occurred weeks after the date claimed on the
loan application and was not caused by the earthquake. The investigation
also confirmed that the owner\'s associate helped prepare the
application and altered the Fire Incident Report.

**Georgia Arena Owner Convicted of Perjury**

A Federal trial jury convicted the president and major stockholder of a
Unadilla, Georgia, horse-show arena on two counts of **perjury**. The
charges related to his claims that his signature on a personal guaranty
submitted to obtain an economic injury disaster loan was a forgery. In
1992, we reported that, as a result of the OIG\'s early investigative
determination that the signature was not a forgery, SBA had obtained a
civil judgment against the man for the principal amount of the loan
(\$44,200) plus accrued interest of more than \$8,800. The OIG initiated
the investigation, which was conducted jointly with the FBI, based on a
referral from SBA\'s Atlanta District Office.

**Los Angeles County Resident Acquitted of Filing False Claim with SBA**

A resident of Los Angeles County, California, was convicted of one of
the two felony counts on which he had been indicted. The man was
convicted of making a **false claim** to FEMA but acquitted of making a
**false claim** to SBA. The investigation disclosed that the man falsely
claimed to both SBA and FEMA that a residential property he owned in
Granada Hills was his primary residence at the time of the Northridge
earthquake. His applications for a \$41,600 disaster home loan and an
\$11,730 economic injury loan were both declined by SBA due to his lack
of repayment ability. The FEMA/OIG and the Postal Inspection Service
invited the SBA/OIG into this investigation.

**California Resident Pleads Guilty to Theft of Government Funds**

An Anaheim, California, resident entered a guilty plea to an information
charging her with one count of **theft of Government funds**, and in
return, the **false claim** indictment against her was dismissed. The
woman received funds from FEMA based on her claim to have lived in an
apartment where she suffered personal property damage from floods. The
investigation revealed, however, that at the time of the floods she
occupied a different apartment which did not sustain damage. She was
found to have submitted a similar claim to SBA which was rejected by a
disaster assistance program official. The SBA/OIG initiated this
investigation after being contacted by a concerned private citizen; the
investigation was conducted jointly with the FEMA/OIG and the Postal
Inspection Service.

**Rhode Island Commercial Lobsterman Sentenced for Mail Fraud**

A Bristol, Rhode Island, commercial lobsterman was sentenced to 21
months in prison, 3 years probation, \$1,800 in restitution, and a \$150
fine. He had previously pled guilty to three counts of **mail fraud**.
The man had received \$55,100 in SBA disaster loan funds to repair his
boat and replace lobster traps and other damaged gear. An OIG
investigation found that he had submitted financial statements to SBA
which overstated the purchase price of the boat, failed to disclose his
brother\'s ownership interest, and masked an outstanding debt on the
boat. In addition, the lobsterman had submitted to SBA false receipts
for the \"destroyed\" fishing gear, including a \$32,400 receipt for
lobster traps which he never purchased. Finally, he had failed to
disclose his prior arrest record to SBA. The OIG initiated the case
based on a referral from the Disaster Assistance Area 1 Office.

**Judgment Entered Against Bowling Alley Owner for Disaster Fraud**

A \$133,393 civil judgment for the Government was entered against the
owner of a Sellersburg, Indiana, bowling alley who in 1991 had received
\$116,500 in SBA disaster assistance for his business. The award
included (1) \$26,200 for the man\'s **false claim** of a \$10,000
account payable resulting from the disaster-related shutdown of his
business, and (2) \$107,193 for his **breaches of contract** and
**unjust enrichment** in misusing the proceeds of a \$100,000 loan
intended to repair or replace property at the business premises damaged
by a tornado and another \$16,500 loan intended to alleviate economic
injury caused by the disaster. The unjust enrichment count in the civil
complaint related to the businessman\'s diversion of loan proceeds to
his personal use. His June 1993 indictment on one count of making a
**false statement** to obtain the disaster loans had previously been
dismissed by the court. The OIG initiated the investigation in response
to a referral from the Indianapolis District Office.

[]{#SBIC .anchor}**Small Business Investment Companies**

+-----------------------------------------------------------------------+
| The primary business of **Small Business Investment Companies**       |
| (SBIC) is to provide a source of equity capital and long-term loans   |
| to new or expanding small businesses. SBICs are profit-making         |
| corporations that make investments in small businesses. SBICs finance |
| small firms in two general ways: (1) straight loans and (2)           |
| equity-type investments which give the SBIC actual or potential       |
| ownership of a portion of a small business\' equity securities. Many  |
| SBICs also provide management assistance to the companies they        |
| finance.                                                              |
|                                                                       |
| SBA licenses, regulates, and provides financial assistance to SBICs,  |
| which are privately owned, operated, and capitalized. The Small       |
| Business Investment Act (SBI Act), as amended, authorizes SBA to      |
| purchase or to guarantee the timely payment of all scheduled interest |
| and principal on debentures issued by such companies. Under Section   |
| 301(d) of the SBI Act, SBA also licenses Specialized SBICs (SSBIC) to |
| help those small businesses owned and managed by socially or          |
| economically disadvantaged persons. As of the end of FY 1995, there   |
| were 275 licensed, active SBICs, including SSBICs, with leverage      |
| funds of over \$1.02 billion and combined private capital of almost   |
| \$3.5 billion. In addition, there were 190 SBICs in liquidation owing |
| SBA over \$506 million. In FY 1995, the program level for investment  |
| companies, including participating securities, was \$355.4 million.   |
|                                                                       |
| The SBI Act generally requires that all SBICs licensed by SBA be      |
| examined once every 2 years to ensure licensee compliance with law    |
| and Agency regulations. The Small Business Credit and Business        |
| Enhancement Opportunity Act of 1992 transferred the responsibility    |
| for examining SBICs to the Agency effective October 1, 1992. The      |
| SBA\'s Investment Division is now responsible for these examinations; |
| the OIG, however, continues to have authority to audit aspects of the |
| SBIC program pursuant to its responsibility to oversee all Agency     |
| programs and activities.                                              |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to the SBIC program
during the reporting period:

• SBIC investigations resulted in one indictment and one conviction.

• SBIC investigations produced \$1,457,434 in recoveries by

+-----------------------------------------------------------------------+
| > ![](media/image3.emf){width="6.154861111111111in"                   |
| > height="2.3694444444444445in"}                                      |
| >                                                                     |
| > 3                                                                   |
|                                                                       |
| **Figure 3**                                                          |
+-----------------------------------------------------------------------+

SBA and a \$250,000 civil penalty.

• Three SBIC investigations were closed, leaving an inventory of 16
active cases. Due to workload demands, an additional SBIC case was
referred to another law enforcement agency for investigation. It is the
only SBIC referral for the OIG to monitor for performance.

• Two SOPs were reviewed.

Efforts to Improve SBA Program Management

**Review of Draft SBIC Regulations**

The OIG reviewed an SBA working group\'s comprehensive revision of 13
C.F.R. Part 107, the regulation governing the SBIC program, and had
several comments. First, the draft regulation provides that one of the
tests for determining whether an SBIC is \"active\" is whether, during
the 18 months preceding the SBIC\'s most recent fiscal year end, the
SBIC made financings (excluding commitments) totaling at least 20
percent of its regulatory capital. This test would not, however, cover a
situation where, for example, an SBIC made financings totaling 90
percent of its regulatory capital 2 years ago and is holding those
investments for the statutory 5-year period. In our opinion, an SBIC in
such a situation should be considered \"active,\" for the bulk of its
funds are tied up in investments and it has no more funding to invest.
Second, we disagreed with the revised wording of subsection (e),
requiring SBICs to file financial statements with SBA, because it
appears to exclude licensee reporting on the economic impact of
financings in such areas as technology development or commercialization,
minority business development, urban or rural business development, and
expansion of exports. When reporting on program results to Congress or
other interested parties, we believe it would be beneficial for SBA to
be able to reflect these positive outcomes, [in addition]{.underline} to
tax revenue and jobs created. The OIG agreed, however, that the
reporting of assistance to manufacturing firms may be unnecessary.

Third, the draft regulation would require SBICs that do not meet the 10
percent dollar threshold of Smaller Business investments to finance
[only]{.underline} Smaller Businesses until the 10 percent dollar
threshold is met. We are concerned that this remedy may force SBICs to
make inappropriate investments in Smaller Businesses that they would not
be willing to make otherwise, potentially putting Government dollars at
unnecessary risk, or it may result in SBICs passing up otherwise viable
investments in Small Businesses. A preferred remedy may be to require
the SBIC to meet the 10 percent threshold within one fiscal year of the
year of noncompliance, which would give the SBIC reasonable time to
invest in viable Smaller Businesses.

Finally, we noted that the prohibition with regard to \"project
financing\" appears to relate to high-risk ventures, e.g., making a
motion picture or drilling for oil or gas, that are not deemed
appropriate for SBIC financings. The actual language of the draft
regulation, however, is vague and unclear and technically could apply to
any business that sells its inventory as its primary revenue source. The
OIG therefore suggested clarifying the regulation\'s language to more
specifically describe the types of businesses to be covered.

Activities to Enhance Fraud Detection and Deterrence

**Consent Judgment Entered Against Canadian Financier**

A consent judgment was entered against a Canadian national, requiring
him to pay a \$250,000 civil penalty to the Government for **corruptly
giving something of value to an agent of a financial institution**. This
settlement was a result of the SBA/OIG\'s investigation of an SSBIC in
Jacksonville, Florida, conducted jointly with the FBI, the OIG of the
Resolution Trust Corporation, and the Criminal Investigation Division of
the IRS. The investigation disclosed that the SSBIC\'s owner had
secretly sold the SSBIC to a second Canadian national, while agreeing to
\"front\" for him in dealings with SBA. Knowing the illegal purpose to
which the new \"owner\" was going to put it, the first Canadian national
had provided the second one with money to purchase the SSBIC. This
action brings recoveries and savings in this case to approximately \$2.8
million. The OIG joined this investigation at the request of the FBI.

**Specialized SBIC President Sentenced for Participating in a
Borrower\'s Loan Proceeds**

The president of an SSBIC in Houston, Texas, was sentenced to 1 day
imprisonment, 5 years supervised release, and repayment of SBA losses,
currently calculated at \$3,567,296. He had pled guilty to an
information charging him with **unlawfully participating in the
proceeds** of a \$308,151 loan made by the licensee to a small business
concern. The SSBIC principal, a Chinese national, had told the court
that he used the money to pay a divorce settlement he owed his ex-wife.
The OIG\'s joint investigation with the FBI was based on a referral from
the OIG\'s Auditing Division.

[]{#SURETY .anchor}**Surety Bond Guarantees**

+-----------------------------------------------------------------------+
| Small and emerging contractors who cannot get surety bonds through    |
| regular commercial channels can apply for SBA bonding assistance      |
| under the **Surety Bond Guarantee Program.** Under this program, SBA  |
| guarantees a portion of the losses sustained by a surety company as a |
| result of the issuance of a bid, payment, and/or performance bond to  |
| a small business concern.                                             |
|                                                                       |
| Businesses in the construction and service industries can meet the    |
| SBA\'s size eligibility standards if their average annual receipts    |
| (including those of their affiliates) for the last 3 fiscal years do  |
| not exceed \$5 million. Any contract bond is eligible for SBA         |
| guarantee if the bond is covered by the Contract Bonds section of the |
| Surety Association of America Rating Manual, required by the          |
| invitation to bid or by the contract, and executed by a surety        |
| company that is determined by SBA to be eligible to participate in    |
| the program and certified acceptable by the U.S. Treasury.            |
|                                                                       |
| The **Preferred Surety Bond (PSB)** program allows selected sureties  |
| to issue, monitor, and service surety bonds without SBA\'s prior      |
| approval. SBA accomplishes two primary objectives through this        |
| program: (1) expanding the number of sureties participating in the    |
| surety bond guarantee program, and (2) increasing bonding             |
| availability to business concerns that would otherwise not be able to |
| obtain bonding in the standard marketplace. Title II of Public Law    |
| 100-590 also requires an annual review of each surety participating   |
| in this program.                                                      |
|                                                                       |
| SBA can guarantee bonds for contracts with a face value of up to      |
| \$1.25 million. In FY 1995, SBA contingent liability for new final    |
| bond guarantees, including those issued under the PSB program, was    |
| \$1.220 billion. The appropriated credit level for FY 1995 surety     |
| bond guarantees was \$1.767 billion.                                  |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s surety bond
guarantee program during the reporting period:

• One program inspection report was issued.

• Office of Security Operations name checks resulted in the declination
of three surety bonds.

• One surety bond investigation remained active at the end of the
reporting period.

• One surety bond investigation continued to be monitored. Due to
workload constraints, it had previously been referred to another law
enforcement agency for investigation.

• One piece of proposed legislation was reviewed.

Efforts to Improve SBA Program Management

**Improvements Needed in Managing Surety Bond Guarantees**

An OIG inspection examined three aspects of the Surety Bond Guarantee
Program: (1) the extent to which contractors from the Prior Approval
(Plan A) and Preferred (Plan B) programs graduate, i.e., become bondable
on their own without the SBA guarantee; (2) the reasonableness of SBA\'s
losses on its guaranteed bonds; and (3) recoveries on SBA surety bonds,
in comparison with non-SBA surety bonds.

The OIG inspectors found that the program\'s goal of assisting
contractors to become bondable on their own was not being met in many
cases. At the Plan A surety companies reviewed, for example, fewer than
eight percent of the contractors who received their first SBA-guaranteed
bond had graduated from the program. The OIG recommended that SBA
establish target graduation rates, require participating surety
companies to keep records on contractors\' graduation, and disseminate a
brief handout for contractors that emphasizes graduation as a program
objective and identifies the types and sources of available technical
assistance.

The inspectors also found that the program\'s loss rates on Plan A bonds
were nearly three times those of the surety industry when calculated
using the industry method. Despite these large loss rates, the surety
companies earned profits on SBA bonds comparable to those earned on
standard bonds, due to SBA\'s guaranteed reimbursement of up to 90
percent of losses. To reduce loss rates, the OIG recommended that SBA
propose legislation, in consultation with Congress and the surety
industry, for a modest reduction in the guarantee percentages on Plan A
surety bonds. This would provide needed incentive for surety companies
to minimize losses on SBA-guaranteed bonds.

Finally, the OIG\'s comparison of recovery rates on SBA and non-SBA
bonds was inconclusive due to the difficulty of obtaining reliable data.
To enable SBA to better evaluate whether participating surety companies
are pursuing recoveries prudently, the OIG recommended that SBA require
the companies to produce reliable recovery data on their SBA bonds. In
cases where a surety company offers both SBA and non-SBA bonds, we
recommended that SBA periodically request both sets of data for
comparison. Such reporting would provide incentive for the surety firms
to maximize SBA recoveries.

+-----------------------------------------------------------------------+
| > ![](media/image4.emf){width="6.154861111111111in"                   |
| > height="2.9381944444444446in"}                                      |
| >                                                                     |
| > 4                                                                   |
|                                                                       |
| **Figure 4**                                                          |
+-----------------------------------------------------------------------+

The Office of Surety Guarantees (OSG) disagrees with two of the five
recommendations. It believes that target graduation rates are
unnecessary and that reducing the guarantee percentage would prompt the
surety industry to decline to bond needy contractors.

In a subsequent meeting, the SBA Administrator directed the OSG to work
with the OIG to identify reasonable performance measures for evaluating
and managing this important SBA program.

**Review of SBA Legislative Proposal**

The OIG also reviewed an SBA legislative proposal that would make the
Preferred Surety Bond (PSB) program permanent and would increase the
amount of surety guarantee budget authority available for the program in
FY 1996. While we did not object to these proposals, we requested that
the OIG\'s proposal concerning the PSB program also be incorporated in
the package. Briefly, this would amend Section 411(g)(3) of the Small
Business Investment Act to replace the present requirement for an annual
audit of participating sureties with a requirement for an annual
**review**. This would relieve the OIG of the requirement to conduct
such audits while allowing the Office of Surety Guarantees to conduct
appropriate management reviews commensurate with the level of activity
and risk posed by each surety. The OIG would, however, retain its
authority under the Inspector General Act to perform formal audits of
participating sureties on its own initiative or in response to requests
from program officials. The expected result of these proposed changes
would be better utilization of limited OIG audit resources, as well as
more effective annual review of participating sureties\' activities. If
enacted, this proposal would enable both the OIG and the program office
to concentrate on those sureties with the most activity and/or risk.

[]{#GC .anchor}**Government Contracting Programs**

+-----------------------------------------------------------------------+
| SBA provides assistance to small businesses in obtaining a fair share |
| of Federal Government contracting opportunities. The SBA also works   |
| with each department or agency to establish procurement goals for     |
| contracting with small, small-disadvantaged, and women‑owned          |
| businesses. The Agency\'s government contracting programs include     |
| **Prime Contracts, Subcontracting Assistance, Certificate of          |
| Competency, Natural Resources Sales Assistance,** and the             |
| **Procurement Automated Source System.**                              |
|                                                                       |
| The goals of the **Prime Contract Programs** are to increase small    |
| business opportunities in the Federal acquisition process and to      |
| expand full and open competition to effect savings to the Federal     |
| Government. Supporting initiatives are carried out by traditional and |
| breakout procurement center representatives assigned to major Federal |
| acquisition activities.                                               |
|                                                                       |
| The **Subcontracting Assistance Program** promotes the optimal        |
| utilization of small businesses by the Nation\'s major prime          |
| contractors. This is carried out by commercial market representatives |
| who monitor the procurement activities of the large prime             |
| contractors.                                                          |
|                                                                       |
| The **Certificate of Competency (COC) Program** provides an appeal    |
| process to assure that small business concerns, especially those new  |
| to the Federal procurement market, are given a fair opportunity to    |
| compete for and win Government contracts. If a small business is the  |
| successful offeror on a contract but is found non-responsible, it can |
| appeal to SBA. After reviewing a firm\'s capabilities, SBA can issue  |
| a COC that requires the contracting officer to award the contract to  |
| that business.                                                        |
|                                                                       |
| **Natural Resources Sales Assistance** helps small businesses obtain  |
| a fair share of Federal property offered for sale or disposal, with a |
| focus on sales of Federal timber, royalty oil, coal leases, and other |
| mineral leases.                                                       |
|                                                                       |
| The **Procurement Automated Source System (PASS)** is the SBA\'s      |
| computerized inventory of U.S. small businesses that are interested   |
| in Federal procurement opportunities, either directly with the        |
| Government or with prime contractors. Both Federal agencies and large |
| prime contractors use PASS as a resource in identifying small         |
| businesses for procurement opportunities.                             |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s Government
contracting programs during the reporting period:

• One draft inspection report was issued.

• No Government contracting investigation was closed; seven were active.

• One Government contracting investigation continued to be monitored.
Due to workload constraints, it had previously been referred to another
law enforcement agency for investigation.

Efforts to Improve SBA Program Management

**Coping with Major Downsizing in the Prime Contracts and Subcontracting
Programs**

In August, the OIG\'s Inspection and Evaluation Division provided a
draft report on the prime contracts and subcontracting programs to the
Office of Government Contracting. During the inspection, SBA began to
downsize and reorganize the programs significantly. Accordingly, we made
recommendations for improving program oversight, performance incentives,
deployment, data base support, internal coordination, and field
reporting. At the close of the reporting period, we were awaiting the
response of the Assistant Administrator for Government Contracting.

Activities to Enhance Fraud Detection and Deterrence

**Listing of Companies Ineligible to Self-Certify as Small Recommended**

Over the past few years, the Investigations Division has noted several
instances of a particular fraudulent practice: companies that SBA, after
sustaining protests against them, had prohibited from representing
themselves as small businesses, under a particular SIC code, were
continuing to falsely certify themselves as eligible for small business
set-aside contracts. Because contracting agencies had no simple way of
knowing whether SBA had found a company too large for set-aside
contracts under a particular SIC code, they were sometimes awarding
contracts to ineligible businesses by relying on false certifications.
To prevent such awards, the Inspector General issued a program
vulnerability memo suggesting to the Deputy Administrator, in her
capacity as chairperson of SBA\'s Size Policy Board, that the Agency
periodically generate a list of companies found ineligible to
self-certify as small for contracts under specified SIC codes and
circulate it to all Federal agencies for their use.

The Assistant Administrator for Government Contracting, responding for
the Deputy Administrator, responded that, while the suggestion had
merit, its risks outweighed the benefits. With the stringent time
deadlines of the size determination process potentially producing
frequent appeals and reversals, with novice contracting officers
possibly confusing SIC codes, and with resource constraints limiting the
frequency of SBA\'s production of the list, agencies would often be
ruling out contractors who are in fact eligible for the procurements at
issue.

[]{#MED .anchor}**Minority Enterprise Development**

+-----------------------------------------------------------------------+
| **Section 7(j)(10)** of the Small Business Act established the        |
| **Minority Small** **Business and Capital Ownership Development       |
| Program** for the purpose of promoting greater access to the free     |
| enterprise system for socially and economically disadvantaged         |
| individuals. Under the Act, SBA provides business development         |
| assistance to small business concerns that are at least 51 percent    |
| unconditionally owned, controlled, and managed by one or more         |
| socially and economically disadvantaged individuals, and that meet    |
| other eligibility requirements. Firms may participate in the program  |
| for a maximum of 9 years and must take steps to enhance their         |
| competitiveness during this period, to be prepared to compete in the  |
| private sector upon graduation from the program                       |
|                                                                       |
| One of the business development tools available to participant firms  |
| is access to Federal contracting opportunities authorized by          |
| **Section 8(a)** of the Small Business Act. Under the Section 8(a)    |
| program, SBA contracts with other Government agencies to provide      |
| goods and services, and subcontracts the performance of these         |
| contracts to program participants. As of September 30, 1995, there    |
| were more than 5,400 approved program participants. In FY 1995,       |
| Section 8(a) program participants received over 6,056 contracts with  |
| an aggregate value in excess of \$4.4 billion. Generally, Section     |
| 8(a) contracts with estimated values, including all options, of more  |
| than \$5 million (manufacturing) or \$3 million (all other            |
| industries) must be competed among eligible Section 8(a) program      |
| participants. The vast majority of the contracts awarded under the    |
| program, however, have estimated values below these thresholds and    |
| are awarded on a sole-source basis.                                   |
|                                                                       |
| Under the **Section 7(j) Management and Technical Assistance          |
| Program**, which is housed in the Office of Minority Enterprise       |
| Development, SBA funds services by private or public organizations to |
| provide a broad range of management and technical assistance to       |
| certified Section 8(a) firms, socially and economically disadvantaged |
| individuals whose firms are not participants in the Section 8(a)      |
| program, low‑income individuals, and small businesses located in      |
| areas of low income or high unemployment. The Section 7(j) program    |
| uses cooperative agreements with private sector organizations and     |
| institutions of higher learning to deliver assistance in three        |
| categories: (1) [Task Order Services]{.underline} are used to provide |
| one-on-one assistance to eligible companies in accounting, marketing, |
| and industry-specific services; this is the largest Section 7(j)      |
| assistance category.                                                  |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| \(2\) [On-going Services]{.underline} provide seminars and workshops  |
| in management and technical assistance. (3) The [Minority Business    |
| Executive Program]{.underline} provides executive development         |
| training opportunities in an academic setting to selected executives  |
| of Section 8(a) companies.                                            |
|                                                                       |
| There are over \$9 billion in Section 8(a) subcontracts currently     |
| outstanding and subject to OIG audit, inspection, and investigation.  |
| These contracts are reflected in other Government agencies\'          |
| portfolios and, therefore, their values are not included in our \$26  |
| billion audit, inspection, and investigation universe.                |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s minority
enterprise development programs during the reporting period:

• Two audits were issued in this program area; six audits were in
progress.

• Minority enterprise development investigations resulted in two
indictments and one conviction.

• Minority enterprise development investigations produced \$365,766 in
restitution to procuring agencies and other third parties.

• Office of Security Operations name checks resulted in the declination
of 11 applications for the Section 8(a) program.

• Eleven minority enterprise development investigations were closed,
leaving an inventory of 21 active cases. Due to workload demands,
another eight minority enterprise development cases were referred to
other law enforcement agencies for investigation, and at the end of the
reporting period we still had six minority enterprise development
referrals to monitor.

• One proposed regulation and one SOP were reviewed.

Efforts to Improve SBA Program Management

**SBA Efforts to Enforce Section 8(a) Competitive Mix Requirements Have
Not Always Been Effective**

SBA is not always effectively implementing the competitive mix
requirements of the Section 8(a) program. According to an OIG audit
report, business opportunity specialists took minimal or no action when
companies reported that their non-8(a) sales ratio was lower than the
targets established in the regulations. Companies not complying with the
targets received \$1.4 billion in Section 8(a) contracts in their latest
year, according to SBA's database in February 1995. This was two-thirds
of the total Section 8(a) sales by 1,000 companies who had Section 8(a)
sales and were subject to the competitive mix targets as of their last
reporting date.

The Business Opportunity Development Reform Act of 1988 required that
Section 8(a) companies develop significant levels of non-8(a) business
to prepare for competitive success after graduation, rather than
becoming dependent on sole source contracts. Implementing regulations
issued by SBA established targets for non-8(a) sales, rising from a
minimum of 15 percent in the fifth year of program participation to 55
percent by the ninth year (graduation). In the February 1995 list,
**many firms receiving millions of dollars of Section 8(a) sole source
awards had insignificant levels of non-8(a) business.**

The OIG auditors found that SBA did not often use the strict measures
available in the regulations. Although SBA regulations identified a
range of actions including denial of further sole source contracts or
even termination, SBA program managers generally chose "remedial action
plans" if there was any response at all to non-complying business mix.
The remedial action plans, however, usually had little or no impact on
the level of Section 8(a) contracts the companies could still receive.

In addition, SBA had not established a tracking system to gauge the
impact of the competitive mix requirement on Section 8(a) firms' ability
to stay in business after leaving the Section 8(a) program. SBA could
not, therefore, measure the success of the Section 8(a) program as
required by Congress in the 1988 act, i.e., data was not available to
correlate compliance with competitive mix requirements. Hence, the
Agency is unable to track a company\'s continuing success after Section
8(a) contracts are no longer available.

The audit recommended that SBA (1) set mandatory dollar limits on
Section 8(a) awards to firms not complying with competitive mix, and (2)
establish procedures to evaluate post-graduation success in relation to
competitive mix. The Associate Administrator for Minority Enterprise
Development concurred with the recommendations.

**Section 8(a) Owner Distorts Net Worth; Withdraws from Program**

The owner of a Section 8(a) firm, who gave SBA inaccurate financial
statements, exceeded the program's net worth limit and withdrew from the
program after an audit that was requested by the Washington District
Office. The District Office requested the audit after noting that the
owner withdrew millions of dollars from the company from 1988 to 1993,
including over half of that sum in the last 2 years alone, but reported
a net worth of only one eighth of the total cash he withdrew.

The owner was uncooperative with the auditors, thereby forcing the
issuance of an IG subpoena for the company\'s records. The auditors also
used records of financial institutions to complete the audit. The audit
report demonstrated that the owner's 1994 net worth for Section 8(a)
eligibility was well above the \$750,000 limit for continued
participation in the program. The owner had understated his assets in
cash, stocks, real estate, and retirement plans, while overstating the
balance on a mortgage.

The Section 8(a) company owner stated that he was unaware of the net
worth requirements for the Section 8(a) program, although he certified
to SBA that he had read the pertinent regulations. The owner voluntarily
withdrew from the program in September 1995.

**Review of Business Activity Targets**

The OIG reviewed a proposed revision to 13 C.F.R. Part 124 concerning
the computation and effect of non-8(a) business activity targets. While
we agreed that SBA must take some action to help program participants
attain their non-8(a) business activity targets, we objected to the
proposed rule because our analysis indicated that adopting the 4-step
formula would not ensure that Section 8(a) firms meet the competitive
mix requirements.

As an alternative, we proposed that companies not meeting their
competitive mix targets be limited to the level of Section 8(a) sales
that are supported by their non-8(a) sales. For example, a company with
\$1 million in non-8(a) sales and a target of 25 percent would be
allowed \$3 million in Section 8(a) sales the following year. This
proposal would bring Section 8(a) companies into compliance immediately
and would keep Section 8(a) contracts from going to companies who are
not meeting the statutory business development requirements. The Section
8(a) sales limit could be increased whenever a company documents an
increase in non-8(a) sales.

**Review of General Services Administration (GSA) Policy on Information
Technology**

The OIG reviewed a proposed GSA notice, \"Interagency Sharing of
Indefinite Delivery/Indefinite Quantity Contracts for Information
Technology,\" and expressed our strong opposition to the proposal. We
recommended that GSA specifically exclude Section 8(a) sole source
indefinite delivery/indefinite quantity (IDIQ) contracts from this
proposed notice. The proposal would change existing GSA policy and allow
agencies to open up, for use by other agencies, all existing IDIQ
contracts for information technology products and services to a maximum
of 20 percent of the total contract amount. If adopted, this policy
would effectively circumvent current SBA regulations governing the
Section 8(a) program, which cap sole source 8(a) procurements at \$5
million for procurements with manufacturing SIC codes and \$3 million
for all other procurements.

The proposed policy would also exacerbate problems that SBA has
attempted to resolve through a recent change in the method used to
determine the value of Section 8(a) IDIQ procurements for sole source
purposes. Prior to August 7, 1995, the value of IDIQ procurements for
sole source purposes was the guaranteed minimum value of the
procurement, rather than the total anticipated award price. As such, the
actual value of various sole source Section 8(a) IDIQ contracts is many
times greater than the sole source cap. Unless GSA exempts sole source
Section 8(a) contracts from its proposed new policy, this proposal would
allow both current and former Section 8(a) companies that had received
these original large contracts to receive up to 20 percent more of the
contracts\' value in amendments.

Activities to Enhance Fraud Detection and Deterrence

**Maryland Computer Company Owner Indicted for Fraud**

The president and owner of a computer support contractor in Landover,
Maryland, was indicted on seven counts of **false statements, misuse of
a Social Security number, wire fraud**, and **bank fraud.** To obtain
the company\'s admission to the Section 8(a) program, the owner had
concealed two prior bankruptcy proceedings from SBA, used five false
Social Security numbers, and submitted to SBA personal and corporate tax
returns which had not been filed with the IRS. She also billed inflated
indirect costs on a BATF Section 8(a) contract and diverted the extra
funds to her own use; converted to her own use monies withheld from the
employees\' paychecks for income, Social Security, unemployment, and
disability taxes; and submitted false and forged documents to two
Federally-insured banks to obtain loans for the purchase and
construction of real estate. Following a referral from SBA\'s Washington
District Office (WDO), the SBA/OIG joined the Treasury/OIG\'s ongoing
investigation of the company. The Health and Human Services/OIG and the
IRS are also participating. The WDO has recommended termination of the
company from the Section 8(a) program and, in conjunction with BATF,
denied the company \$9 million in Section 8(a) contract options.

\[Editor\'s note: The Office of Minority Enterprise Development
terminated the company from Section 8(a) program participation,
effective October 29, 1995.\]

**Pennsylvania Section 8(a) Company Officer Sentenced for Fraud**

The vice president of a former Section 8(a) contractor in Ardmore,
Pennsylvania, pled guilty to two counts of **mail fraud**. To obtain
loans totaling \$321,033, he had submitted to two lending institutions
modification orders which he had altered to inflate their value as
collateral on contracts at the Philadelphia Naval Shipyards. The
businessman was sentenced to 1 year incarceration, 3 years supervised
release, and \$134,000 in restitution to the two lenders, one of which
referred the matter to the OIG. The investigation was conducted jointly
with the Naval Criminal Investigative Service.

[]{#ECONDEV .anchor}**Economic Development**

+-----------------------------------------------------------------------+
| SBA provides assistance to small business owners, managers, and       |
| prospective owners through its many counseling and training programs. |
| SBA established the **Small Business** **Development Center** (SBDC)  |
| program to make management assistance and counseling widely           |
| available. SBDCs offer one‑stop assistance to small businesses by     |
| providing a wide variety of information and guidance in easily        |
| accessible locations. The program is a cooperative effort by the      |
| private sector; the educational community; and Federal, State, and    |
| local governments. There are SBDCs in all 50 states, the District of  |
| Columbia, Puerto Rico, the Virgin Islands, and Guam, with over 950    |
| subcenters or service locations located at colleges, universities,    |
| vocational schools, chambers of commerce, economic development        |
| corporations, or downtown storefronts.                                |
|                                                                       |
| The **Small Business Institute** (SBI) program gives small business   |
| owners an opportunity to receive intensive management counseling from |
| qualified undergraduate and graduate college business students        |
| working under faculty guidance. Established in 1972, the SBI program  |
| provides help to approximately 6,000 businesses each year. SBI        |
| counseling focuses on the full range of management problems which may |
| be encountered by a small business; the program\'s emphasis is on     |
| practical, realistic, and affordable solutions.                       |
|                                                                       |
| The **Service Corps of Retired Executives** (SCORE) is another of the |
| valuable business development resource partners of SBA. Composed of   |
| approximately 13,000 volunteers working in over 700 sites, SCORE      |
| provides counseling and training to current or prospective business   |
| persons. Counseling sessions are free to the public and training is   |
| provided at a low cost.                                               |
|                                                                       |
| The vast majority of SBA business development and education           |
| activities in the areas of training, counseling, and providing        |
| management information materials occur through outreach efforts with  |
| external organizations. **Cosponsorship** arrangements, authorized    |
| under the Small Business Act, play a key part in this process. The    |
| Act gives SBA the authority to cosponsor training and counseling      |
| activities for small business concerns with non‑profit entities       |
| and/or with other Federal Government agencies. In addition, the Act   |
| authorizes the Agency to cosponsor training, but not counseling, with |
| for‑profit concerns.                                                  |
+-----------------------------------------------------------------------+

  -----------------------------------------------------------------------
  **Business Information Centers (BICs)** provide business owners with
  access to computers, software, databases, and other resources to assist
  them in starting and expanding their businesses. All BICs have at least
  one on-site counsellor and can address the varied business start-up and
  growth issues encountered by small business owners. In FY 1994, SBA had
  12 BICs, and by the end of FY 1995, 25 BICs were in operation.

  -----------------------------------------------------------------------

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s economic
development programs during the reporting period:

• Two audit reports were issued in the economic development program
area; a third was in progress.

• One economic development investigation was opened; it was active at
the end of the reporting period.

• One economic development investigation continued to be monitored. Due
to workload constraints, it had previously been referred to another law
enforcement agency for investigation.

• One proposed regulation and two SOPs were reviewed.

Efforts to Improve SBA Program Management

**Audit Finds Non-Compliance with Grant Rules at a Puerto Rico Small
Business Development Center and Agency Monitoring in Need of
Improvement**

The OIG issued a report on the Puerto Rico Small Business Development
Center (SBDC) which included 3 findings and 15 recommendations to
improve the operations of the SBDC. During the audit, the OIG found the
SBDC: (1) provided **minimal amounts of counseling** assistance to
clients and directed a majority of resources toward administrative
functions rather than counseling, (2) provided **insufficient cash match
funds** for the SBA grant and was not in conformance with various
program requirements, and (3) expended grant funds for **excessive
compensation** to SBDC and University officials and overseas travel
unrelated to the SBA grant. Agency officials agreed with the findings,
and the SBDC will be required to reimburse SBA for the insufficient cash
match and unallowable expenditures of grant funds.

A follow-up audit initiated based on thefindings reported above,
revealed that Agency monitoring was in need of improvement. The SBA
project officer did not analyze reports submitted by the SBDC and,
consequently, several deficiencies were not detected. Deficiencies
included **cash match shortages, minimal counseling hours, and
ineffective use of resources**, i.e., nearly 60 percent of the SBDC\'s
employees were occupying administrative support positions. In addition,
there was no documentation on site visits nor any evaluation of fees
charged to clients. The SBA District Director also concurred with these
findings and initiated corrective actions.

[]{#AGYMGT .anchor}**Agency Management and Financial Activities**

+-----------------------------------------------------------------------+
| Agency **Management and Financial Activities** include SBA\'s         |
| administration of the loan programs, as well as the full range of     |
| internal administration and financial management operations. OIG      |
| audit, investigative, and inspection activities assist SBA managers   |
| by reviewing these operations and by conducting audits of Agency      |
| financial statements as required by the Chief Financial Officers Act, |
| audits of cash management activities, and integrity assurance         |
| activities.                                                           |
|                                                                       |
| SBA\'s management and financial activities, represented by the        |
| Agency\'s total appropriation, involved almost \$1.893 billion in FY  |
| 1994. The SBA\'s FY 1995 actual appropriation used was \$821.8        |
| million\*, including Section 7(a) and disaster carryover funds and    |
| released disaster contingency funds. FY 1995 budget authority,        |
| including contingency funds, is \$1.062 billion.                      |
|                                                                       |
| \* The sharp decline in FY 1995 from FY 1994 levels is attributable   |
| to the extraordinary cost of the 1994 Northridge earthquake.          |
+-----------------------------------------------------------------------+

Summary of OIG Activity

The following summarizes OIG activities relating to SBA\'s
administration and financial management activities during the reporting
period:

• Five audits of Agency activities were issued; one other audit was
underway.

• Integrity assurance investigations resulted in two indictments and two
convictions.

• Seventeen integrity assurance investigations were closed, leaving an
inventory of 20 active cases.

• Two integrity assurance investigations continued to be monitored. Due
to workload constraints, they had previously been referred to other law
enforcement agencies for investigation.

• We reviewed 1 proposed piece of legislation for Agency

+-----------------------------------------------------------------------+
| > ![](media/image5.emf){width="6.154861111111111in"                   |
| > height="2.953472222222222in"}                                       |
| >                                                                     |
| > 5                                                                   |
|                                                                       |
| **Figure 5**                                                          |
+-----------------------------------------------------------------------+

management and financial activities, 19 regulations, and 3 SOPs.

• The Inspection and Evaluation Division issued one report on behalf of
the PCIE.

Efforts to Improve SBA Program Management

**Auditors Qualify Opinion on 1994 SBA Financial Statements**

The annual audit of SBA\'s FY 1994 financial statements resulted in a
qualified opinion for the fourth straight year because of property
inventory and valuation questions. The OIG-contracted Independent
Auditor\'s Report stated that SBA did not maintain comprehensive
inventory records of acquired property and did not consistently value
the acquired property at its net realizable value. The statements valued
acquired property at \$148 million. Except for these two recurring
issues, the audit found that the Agency\'s financial statements were
presented fairly. In a separate report on management issues, there were
nine findings related to general ledger and reporting procedures,
electronic data processing internal controls, and other compliance
matters.

[General Ledger and Reporting]{.underline}

• Cash was not being reconciled to the U.S. Treasury balances during
1994. Manual reconciliations were postponed while an automated system
was under development (a repeat finding from 1993 management letter).

• Accruals for estimated losses in the Surety Bond Guarantee Program
only include losses for the following year instead of all future losses
(a repeat finding).

• Year-end closing procedures for acquired property are still
inaccurate, with \$35 million of 1994 transactions recorded in 1995 (a
repeat finding).

[Electronic Data Processing Controls]{.underline}

• Off-line general ledger systems lack segregation of duties because
system designers, operators and users can all access transactions. There
is also inadequate documentation for transactions.

• A new automated procedure for the Standard Form 224 report to Treasury
also lacks segregation of duties.

• Local Area Network (LAN)-based personal computer systems have replaced
mainframe terminals in the Office of the Comptroller, creating a need
for electronic Data processing security reviews that have not been
implemented.

[Other Compliance Matters]{.underline}

• Some provisions of OMB Circular A-129 cited in the 1993 report were
still not implemented:

\-- Lenders should be required to suspend loan processing if an
applicant is delinquent on other Federal debt.

\-- Collateral over \$100,000 should be valued by a certified real
estate appraiser.

\-- Lenders should be held to a reasonable due diligence standard as a
precondition for making a claim to SBA for payment of a loan guarantee.

• File room security in the Small Business Investment Company program
office was inadequate (a repeat finding from 1993).

• Annual subsidy re-estimates under the Federal Credit Reform Act of
1990 were not being done as required by OMB Circular A-34. Until
recently, SBA lacked a mechanism for calculating the amounts.

**Grant Violations Uncovered at a Pennsylvania College Women\'s
Program**

An audit of an SBA grant to an education center for women in business at
a Pennsylvania college questioned \$319,742 in costs and identified
**numerous violations of SBA grant requirements**. The center had
received \$1.9 million in special grants to assist current and potential
women entrepreneurs. This was a final audit of the initial \$1 million
grant and an interim audit of a \$930,000 continuation grant. The
largest category of cost questioned was \$114,083 for a billing error of
first year estimated expenditures that were not incurred. The college
reimbursed SBA \$85,963 of the billing error and SBA management agreed
to obtain a commitment from the college to pay the \$28,120 balance. The
college also charged an inequitable share of the cost of a local area
network. SBA management agreed that \$96,367 of the cost was not
allocable to the grant. This report was reissued after evaluating
additional information submitted by the college after an initial audit
report was issued.

**Salaries and Other Costs Questioned at Genome Research Center**

An audit of a New Mexico-based genome research center questioned
\$147,000 in salaries and other costs out of \$1.4 million expended over
a 20-month period.

SBA has awarded the Santa Fe, New Mexico-based center \$8 million in
special appropriated funds to establish a genome research database. An
interim report in June 1995 stated that the project was not fulfilling
the statutory objective of "assisting small businesses." After the
report was issued, Congress passed Public Law 104-19 to remove the small
business requirement.

The audit covered the project startup period from May 1994 through
December 1995. Excessive salaries included \$250,000 for the project
director, which was about twice the director's salary at another
Federally-funded genome center. Other inappropriate costs included
charging SBA \$64,000 in bid and proposal costs related to a different
Federal grant, counting \$17,000 in security deposits as expense, and
incurring \$4,000 in unallowable travel and entertainment costs. In
addition to recovering costs questioned, the Auditing Division also
recommended that SBA negotiate lower salaries for the remainder of the
project, with a potential savings of \$417,000

**Review of Federal Acquisition Streamlining Act of 1994 and**

**Proposed Regulations**

The OIG reviewed proposed General Services Administration (GSA) Federal
Acquisition Regulations (FAR) implementing Sections 6005 and 6006 of the
Federal Acquisition Streamlining Act of 1994 (Act), which provide
whistleblower protections for employees of Government contractors. We
had several significant concerns regarding the interpretation and impact
of the Act. First, Sections 6005(b) and 6006(b) of the Act require an
Inspector General (IG) to investigate all non-frivolous complaints of
reprisal against contractor employees. The Act, however, does not
specifically provide for IG access to a contractor\'s books, records, or
employees for the purpose of obtaining evidence in such investigations.
While individual agency regulations may provide for such access, it
would be more effective to include language in the Act mandating
contractor cooperation in such investigations.

Second, Sections 6005(b) and 6006(b) of the Act require the IG to submit
a report of the findings of the investigation to the complainant, the
contractor, and the head of the agency concerned. While the OIG does not
oppose a requirement to provide some information to the complainant and
the contractor concerning the results of the investigation, we question
the need to provide a \"report of the findings of investigation,\"
particularly where the allegation is deemed unfounded. This requirement
could have a chilling effect on the willingness of contractor employees
to cooperate with OIG investigations, as individuals may be reluctant to
face potential reprisal from their employers. Also, certain categories
of information such as confidential informant, personal privacy, law
enforcement process, and trade secret information are very sensitive and
otherwise protected from disclosure by the Freedom of Information Act,
the Privacy Act, and the Trade Secrets Act. At a minimum, we believe
that an IG should consider and give weight to these statutory provisions
when releasing any information to a complainant or contractor under
Sections 6005 and 6006 of the Act.

Third, Sections 6005(c) and 6006(c) of the Act provide that an agency
head may take any of several actions if an IG investigation discloses
improper reprisal against a whistleblower. Subsection (C) allows an
agency head to order the contractor to pay the complainant\'s costs and
expenses, including attorney fees and expert witness fees, incurred in
bringing the complaint. We recommended that the Act be amended to allow
an agency head to order the contractor to also pay the reasonable cost
of any OIG investigation which substantiates a whistleblower\'s
allegation of reprisal. This measure would provide some budget relief to
the OIGs in an era of declining resources and increasing workload. The
SBA/OIG faces a potentially substantial increase in its investigative
workload with the passage of the Act, i.e., unless a complaint is deemed
\"frivolous,\" it must be investigated. Because of the nature and
structure of the Section 8(a) minority set-aside program, SBA is the
contracting agency and would have jurisdiction over all allegations
filed by employees of Section 8(a) companies. No concomitant increase in
investigative resources, however, has been provided by the Congress to
address this workload.

Finally, Part 3.904 of the proposed implementing regulations provides
that once an IG has completed an investigation of an alleged instance of
reprisal and issued a report, \"the head of the agency shall determine
whether the report is **complete** (emphasis added).\" The regulations
further provide that \"if additional investigation is necessary the head
of the agency may **direct** the Inspector General to continue the
investigation (emphasis added).\" While the Act confers the final
decision authority on the agency head to determine whether reprisal has
occurred and the type of penalty to be imposed, the use of the language
quoted above serves to undermine the perception of the IG\'s
impartiality, professionalism, and independence and serves no useful
purpose. We therefore recommended that it be deleted.

**Review of Paperwork Reduction Act Regulations**

The OIG reviewed OMB\'s proposed rule on \"Controlling Paperwork Burdens
on the Public; Regulatory Changes Reflecting Recodification of the
Paperwork Reduction Act,\" 5 C.F.R. Part 1320. We opposed some
provisions of the proposed regulation because of their potential to
seriously erode the independence of the inspector general community
throughout the Government.

Pursuant to Section 3(a) of the Inspector General Act of 1978, as
amended, each IG reports to and is under the general supervision of the
agency head, but the agency head does not have the authority to prevent
or prohibit the IG from initiating, carrying out, or completing any
audit or investigation. Under the Paperwork Reduction Act of 1995 and
Section 1320.4(b) of the proposed OMB rules, however, the agency head or
a designated senior official would have the authority to impede certain
types of IG audits and inspections of agency programs and operations;
namely, audits or inspections that focus on a category of individuals or
entities (such as a class of licensees or an entire industry) and that
involve a survey or collection of information from ten or more persons.
In such cases, the agency head or designated senior official must review
the proposed survey to evaluate whether it should be approved by OMB and
provide the public with 60 days to review and comment on the survey. The
agency head or designated senior official must then certify that the
information collection meets certain standards and forward the survey to
OMB for final clearance.

We recommended that the most effective way to ensure the independence of
the IGs is to exempt information collections related to audits and
inspections of agency programs and operations from agency and OMB
oversight, as well as the public comment period, in the same manner that
audits and investigations which involve \"an agency against specific
individuals or entities\" are currently exempted under Section
1320.4(a)(2) of the proposed regulations. The objectives of the
Paperwork Reduction Act of 1995 can still be met by requiring each IG to
conduct a review of all surveys and questionnaires exempted from agency
and OMB review using criteria similar to those set forth in proposed
Section 1320.8. Such procedures would ensure that an IG could fulfill
his or her statutory obligation of conducting fair and complete audits
and inspections of the agency\'s programs and supporting operations
without interference from the agency head or OMB.

We also voiced our concern that the approval process, as envisioned by
the proposed rules, may cause delays as a result of disagreements
regarding the information sought, the manner in which it is sought, or
the necessity of any burden on the respondents which may be imposed by
the collection activity. The approval process itself is lengthy,
involving substantial time periods for public comment and for an OMB
review alone that can take up to 90 days. Such delays in the
identification and subsequent correction of fraud, abuse, inefficiency,
ineffectiveness, or other deficiencies in an agency program places
another burden on the public in the form of wasted resources which could
be put to better use in providing services to the taxpayer.

If it is determined that IG collection activities cannot be exempted
from the extensive approval process outlined in the proposed rules,
then, at a minimum, we recommended a change to Section 1320.7(b) to
allow an agency head to delegate, to the IG, full review authority for
OIG collections of information.

**Review of Simplified Acquisition/FACNET Regulations**

The OIG reviewed FAR Case 94-770, which would amend 48 C.F.R. Parts 2-53
to implement the new simplified acquisition and Federal Acquisition
Computer Network (FACNET) requirements of the Federal Acquisition
Streamlining Act of 1994. We had several significant concerns with the
proposal. First, it would establish an electronic procurement process
that allows agencies to transmit solicitations, provide notice of
contract awards and orders, issue contracts and orders, and initiate
payments to contractors. The private sector would be permitted to
respond to solicitations, receive contracts and awards, and receive
payment by automated means. We are concerned that this electronic
procurement process may not provide the necessary safeguards or
\"evidence trails\" necessary to detect and prosecute fraud against the
Government. Under the traditional procurement process, Government
contracts have generally included documents with signatures and dates to
signify each side\'s acknowledgement of the penalties for fraud and
failure to perform, as well as any other terms and conditions of the
agreement. With an electronic system, however, some additional steps
will be necessary to ensure that the necessary signatures and other
legally binding acknowledgements of contract requirements and penalties
are obtained. Without these documents, it will be extremely difficult,
if not impossible, to successfully prosecute instances of contract fraud
through either the criminal or civil process.

Second, the proposal states that contractors shall not enter into any
subcontract in excess of the simplified acquisition threshold
(\$100,000) with a contractor that has been debarred, suspended, or
proposed for debarment, unless there is a compelling reason to do so. We
recommended that this prohibition apply to all subcontracts, regardless
of dollar amount. A contractor that has been debarred or suspended for
poor performance or unethical conduct (or any other grounds) should not
have an opportunity to perform additional Government contracts,
regardless of their dollar amounts.

Finally, the proposal would limit the need for appropriate
certifications and contract clauses protecting the Government\'s
interest to those contracts over the simplified acquisition threshold
(\$100,000). Again, we recommended that these provisions apply to all
contracts.

Activities to Enhance Fraud Detection and Deterrence

**SBA/OIG Investigators Receive Deputation as Special Deputy U.S.
Marshals**

A Memorandum of Understanding (MOU) has been signed by the SBA/OIG, the
FBI, and DOJ implementing our part of a 1-year pilot project involving
seven OIGs. Under the MOU, eligible SBA/OIG criminal investigators have
been given a blanket deputation as Special Deputy U.S. Marshals. This
MOU replaces the investigation-by-investigation request for special
deputation that the OIG has been required to submit to DOJ prior to this
pilot program. The MOU also gives OIG investigators, who have met
specified training requirements, full law enforcement powers, including
authority to execute warrants, make arrests, and carry firearms in the
performance of their official duties. During the past 6 months, OIG
investigators have made eight arrests.

**Fraud Awareness Briefings**

In addition to investigating complaints of waste, fraud, and abuse
involving SBA programs, our investigations staff presented six Standards
of Conduct briefings to a total of 160 Agency employees. The involvement
and cooperation of all SBA employees in combatting waste, fraud, and
abuse is critical to an effective OIG investigations program and to the
Agency\'s overall productivity and efficiency.

During the reporting period, employee contributions to our mission were
significant. As Figure 6 shows, almost 52 percent of all investigative
referrals originated from within the Agency, in the form of referrals
from either program heads or other SBA employees. This cooperation
indicates the strong commitment of SBA employees to reducing waste,
fraud, and abuse in Agency programs and improving the Agency\'s
management and control of its programs.

**Pennsylvania Tax Return Preparer Pleads Guilty in Municipal Bond
Fraud**

A Riegelsville, Pennsylvania, tax return preparer pled guilty to the one
count of **mail fraud** with which he previously had been charged. The
criminal information had been filed in connection with his scheme to
defraud investors by selling them approximately \$1,143,000 of bogus
tax-free municipal bonds purportedly guaranteed by SBA. The OIG\'s joint
investigation with the Postal Inspection Service documented that the man
designed the bonds, devised a fictitious name (the Upper Bucks County
Industrial Development Authority), and falsely stated on the bonds that
they were guaranteed by SBA. He then convinced clients and prospective
clients of his business to purchase the bonds as a safe investment and a
means of reducing their income tax liability. The bonds were sold
between 1985 and 1993 to approximately 50 investors. The investigation
was predicated on information supplied by SBA\'s Philadelphia District
Office.

**New York Teen Pleads Guilty to Forgery**

A 16-year-old from Clifton Park, New York, pled guilty to a two-count
Juvenile Division information charging him with violating the
**forgery** section of the New York State criminal code. The charges
were the result of a joint investigation conducted by Western Union\'s
security division, the U.S. Secret Service, and the SBA/OIG. The OIG
entered the investigation when advised by Western Union Security that
SBA telephone numbers assigned to the Disaster Assistance Area 4 Office
in Sacramento, California, had been used to fraudulently wire-transfer
funds via Western Union to various destinations in New York. The OIG\'s
portion of the investigation involved analyzing SBA telephone system
usage to determine whether any SBA employees participated in the scheme.
The OIG was able to rule out any employee complicity and provide
additional information to authorities which assisted in isolating the
telephone number used to initiate the calls. This information aided in
the identification of the young man as the computer \"hacker\" who had
broken into the SBA telephone system to order the wire transfers.
Simultaneously, a Secret Service informant identified the teenager as
the

perpetrator of the scheme, and when he was arrested, law enforcement
authorities seized computer equipment and modems from his room. He
subsequently confessed and claimed that he had obtained instructions on
how to perpetrate the scheme, as well as the telephone number to use,
from the Internet. He claimed that he did not know who had put the
information on the Internet.

  -----------------------------------------------------------------------
  **Figure 6**

  -----------------------------------------------------------------------

[]{#SRR2B .anchor}

[]{#ORG .anchor}**Organization, Resources, and Management Initiatives**

  -----------------------------------------------------------------------
  The two missions of the Office of Inspector General are to help improve
  management in the Agency and to detect and deter fraud in SBA\'s
  programs. These two missions are accomplished through the provision of
  audit, investigation, and inspection and evaluation oversight to the
  Agency\'s portfolio and programs. This chapter provides an overview of
  the OIG\'s organizational structure and personnel and budget resources,
  and summarizes key internal management initiatives to use those
  resources as effectively as possible.

  -----------------------------------------------------------------------

**Organization**

The OIG is organized into four operating divisions as follows:

 Auditing Division

 Investigations Division

 Inspection and Evaluation Division

 Management and Legal Counsel Division

The Auditing and Investigations Divisions each administer their field
activities through field offices and resident offices around the
country. The Auditing Division has offices located in Atlanta, Dallas,
Los Angeles, and Washington. In addition to these cities, the
Investigations Division has offices in Denver, Kansas City, Seattle,
Chicago, New York City, Philadelphia, San Francisco, and Syracuse.

Both the Inspection and Evaluation Division and the Management and Legal
Counsel Division operate out of Washington, D.C. A current OIG
organization chart can be found at Figure 7.

**Resources**

In FY 1995, the OIG had an appropriation of \$8.5 million and an
authorized personnel ceiling of 104 full-time equivalent (FTE)
positions. While this appropriation represented an increase in dollars
from the FY 1994 level of \$7.96 million, it also required a reduction
in personnel resources from the FY 1994 level of 106 FTE positions. This
reduction was executed in response to the President\'s FTE guidance. At
the end of the current reporting period, the OIG had 102 employees on
board.

In FY 1994, the OIG also received \$3 million in supplemental disaster
funds to be used for activities related to the Agency\'s vastly expanded
disaster assistance program.

  -----------------------------------------------------------------------
  **Figure 7**

  -----------------------------------------------------------------------

These funds are available until expended. By the end of the current
reporting period, six auditors, six investigators, and one staff support
person had been hired on temporaryappointments, using disaster funding.

Within its regular appropriation of \$8.5 million, the OIG absorbed a
portion of the additional net cost of the Law Enforcement Availability
Pay Act (mandated by the Congress last year). This law provides all
criminal investigators with a 25 percent increase in their base salary
as availability pay. The OIG budget also absorbed the combined
cost-of-living and locality pay raises of an estimated 3.6 percent.

The continuing reduction in OIG FTE resources (104 FTE in FY 1995, and
102 FTE in FY 1996) is troubling. The expanding nature of the Agency\'s
portfolio (almost \$33 billion at the end of FY 1995, as illustrated in
Figures 1 and 2, compared to \$26.6 billion at the end of FY 1994) and
its concomitant demand for OIG oversight would suggest that resources be
increased to ensure adequate oversight.

At this writing, the Federal Government is conducting its FY 1996
operations under the provisions of a Continuing Resolution. Pending the
passage and signing of a FY 1996 budget, spending levels are pegged to a
formula 5 percent below the average of the Senate and House of
Representatives budget marks. Given that both the House and Senate marks
are significantly below the level of the President\'s current services
budget request for the OIG, there exists a heightened sense of concern
in this office. Legislatively-mandated implementation of availability
pay (25 percent of base salary for all OIG criminal investigators) is
largely unfunded. The proposed annual cost-of-living and locality pay
increases are not funded at all. While alternative strategies for
operating under a severely reduced budget are being formulated, none of
the options bode well for the OIG\'s ability to carry out its mandate to
provide oversight to the Agency\'s programs and activities and to
safeguard the Government\'s investment in the extensive programs of the
Agency.

The OIG continues to be concerned with the increasing demand for
investigations of fraud in Agency programs. As evidenced by the table on
page [82](#TIMETABLE), business loan fraud continues to be our major
area of concentration, in terms of both number of active cases carried
and time expended on those cases. Disaster loan fraud qualifies as the
second largest area for investigative activity, in terms of both number
of cases and time expended. This reporting period was the first time in
at least 5 years that business and disaster loan fraud consumed more
than 75 percent of the OIG\'s investigative time, and, during the fourth
quarter, their combined share exceeded 80 percent. With 1995 having been
the busiest hurricane season in more than a generation, and with demand
for SBA business loans remaining high, we expect that our investigative
efforts will continue to be preoccupied by those two programs and our
resources stretched severely. The table on page [82](#TIMETABLE) also
illustrates the Auditing Division\'s emphasis on the business loan and
disaster assistance programs. It is of note that the Auditing
Division\'s effort in the disaster assistance program has gone from 3
percent to 10 percent to 25 percent, respectively, during the last 3
reporting periods.

Efforts to Improve SBA Program Management

[Inspector General Alerts Congress Concerning Dangers Associated With
Deep SBA Budget Cuts]{.underline}. In letters sent to members of
selected Congressional oversight and budget committees, the IG, in line
with his responsibility to keep the Congress of the United States \". .
. fully and currently informed about the problems and deficiencies
relating to the administration of . . . programs and operations and the
necessity for and progress of correction action,\" raised the issue of
serious consequences which will result from the possible severe budget
cuts planned by Congress. His letter stated in part:

As I understand the situation, the Senate Appropriations Committee has
marked the Agency\'s 7(a) program at \$133 million and assumes a reduced
subsidy rate of 1.07%, the net effect being that the 7(a) loan program
will rise from an estimated \$7.8 billion in FY 1995 to \$12.4 billion
in FY 1996. In addition, the Small Business Development Center program
will also increase by \$3 million. While the intent of getting more
money and technical assistance to the small business community is
laudable, I am troubled that both the Agency and the OIG\'s capability
for managing and overseeing the successful delivery of these significant
program increases would be diminished markedly. . . .

**Efforts to Improve Internal Management**

[Annual Training Seminar and Professional Development Held for
Professional and Support Staffs]{.underline}. Two training sessions, one
for professional staff and one for support staff, were held during the
reporting period. The SBA\'s Deputy Administrator addressed the
professional staff session in Baltimore, Maryland, and the Agency\'s
Administrator provided a videotape address which he recorded
specifically for the occasion. Support staff held their training session
in Washington, D.C.

Training topics for investigators included presentations on bloodborne
pathogens, arrest techniques and nonlethal control, mental preparedness
for armed confrontation, and firearms on airplanes. Auditors and
inspectors received training in loan administration, loan liquidation,
and loan processing. Management and legal counsel staff attended a
session on project management. In addition, all OIG staff received
instruction on the use of IG subpoenas. Support staff received computer
software application training, which prepared them for anticipated
Agency electronic data processing upgrades.

[Additional Education and Training Events Presented to OIG
Staff]{.underline}. A full day of training for OIG senior managers was
presented on the topic of implementing the Government Performance and
Results Act. The training focussed on developing an OIG strategic plan
and supporting objectives, performance targets, and appropriate outcome
measures.

All headquarters OIG staff attended a full-day\'s training seminar on
writing skills. The training was conducted pursuant to an OIG-wide
initiative to improve the quality and readability of OIG reports and
other products.

**President\'s Council on Integrity and Efficiency**

The Inspector General is a member of the President\'s Council on
Integrity and Efficiency (PCIE) and serves as chairman of the PCIE\'s
Committee on Inspection and Evaluation. He participates in PCIE
initiatives to reduce fraud and improve the management of Federal
programs on a Government-wide basis. During the reporting period, the IG
and his staff have contributed to several key PCIE initiatives:

 The IG continues to serve on the task force developing performance
measures for the inspector general community.

 The IG, in his role as Chairman of the Committee on Inspection and
Evaluation, commissioned and presented a definitive review of inspection
and evaluation activities across the inspector general community .

 Substantive comments were submitted to the Chair of the PCIE on a
draft Executive Order covering administrative allegations against
Inspectors General. Comments were also provided on a draft allegation
referral process to implement the order.

**Survey of Inspection and Evaluation Units in the Inspector General
Community**

At the request of the SBA Inspector General, chair of the Inspection and
Evaluation Committee of the PCIE, an interagency group representing 20
OIG offices surveyed the wide range of services performed by inspection
and evaluation units across the inspector general community. The study
noted that a key asset of these units is their flexibility and
diversity, i.e., each is tailored to meet the individual needs of the
OIG and host agency in which it is located. While the roles of
inspection and evaluation units may vary considerably, most focus on
policy and program performance and fill important gaps in traditional
OIG coverage.

**Review of Inspector General Law Enforcement Act of 1995**

We reviewed and strongly supported a President\'s Council on Integrity
and Efficiency legislative proposal to grant full law enforcement
authority to Inspectors General. The proposal, if enacted, would
authorize OIG criminal investigators to execute and serve warrants and
subpoenas, make arrests, and carry firearms. We strongly support this
proposal as a necessary adjunct to our investigative responsibilities
and an efficient alternative to the current system of seeking deputation
in individual cases.

**Contracting Out of Background Investigations Creates Savings**

The OIG Investigations Division is responsible for ensuring that all SBA
employees have the appropriate security clearance and level of
background investigation to meet the requirements of their positions. In
the past, all employee background investigations were contracted out to
the Office of Personnel Management (OPM). In FY 1995, as a Government
reinvention initiative, the OIG obtained approval from OPM to begin
contracting with private companies to conduct these investigations as a
cost saving initiative. Fifty-eight background investigations were
conducted in FY 1995 for a total cost of \$62,140. Had OPM conducted
these investigations, the total cost would have been \$129,070. The OIG
consequently saved almost \$67,000 by obtaining permission from OPM to
contract out.

**OIG Upgrades Computer Hardware to Meet Agency Standards**

The OIG completed a general upgrade of its computer equipment by
replacing and upgrading obsolete computers and providing laptop
computers to selected field personnel. The new computers will be able to
handle standard Agency software, including Windows 95, electronic mail
and software which supports SBA\'s LANs, as well as communications
between field offices using the Agency\'s Wide Area Network (WAN). These
capabilities will improve the efficiency of each OIG staff member and
will enhance the OIG\'s ability to prepare high quality,
professional-looking documents.

**Direct Investigation Time by Program Area**[]{#TIMETABLE .anchor}

**April 1, 1995 to September 30, 1995**

  ----------------------------- -------------- ------------------ -------------
  **Program Area**              **Direct Time  **Number of        
                                %**            Investigations**   

                                                                  

  Business Loans                56             27                 203

  Disaster Loans                28             16                 61

  SBIC                          7              3                  16

  Surety Bonds                  0              0                  1

  Government Contracting        1              0                  7

  Minority Enterprise           4              11                 21
  Development                                                     

  Economic Development          0              0                  1

  Agency Mgt. and Financial     4              17                 20

  Total                         100            74                 330
  ----------------------------- -------------- ------------------ -------------

**Direct Auditing Time by Program Area**

**April 1, 1995 to September 30, 1995**

  ----------------------------- -------------- ------------ -------------
  **Program Area**              **Direct Time  **Number of  
                                %**            Audits**     

                                                            

  Business Loans                35             3            5

  Disaster Loans                25             0            5

  SBIC                          \*             0            0

  Surety Bonds                  0              0            0

  Government Contracting        0              0            0

  Minority Enterprise           23             2            6
  Development                                               

  Economic Development          9              2            1

  Agency Mgt. and Financial     8              5            1

  Total                         100            12           18
  ----------------------------- -------------- ------------ -------------

\* less than 1 percent

+-----------------------------------------------------------------------+
| []{#PROFILE .anchor}**Profile of Operating Results**                  |
|                                                                       |
| **April 1, 1995 to September 30, 1995**                               |
|                                                                       |
| **Audit Activities Totals**                                           |
|                                                                       |
| A. Reports Issued 12                                                  |
|                                                                       |
| B. Desk Reviews of CPA Audit Reports Issued 0                         |
|                                                                       |
| C. Audit Recommendations Issued 65                                    |
|                                                                       |
| D. Dollar Value of Costs Questioned \$566,772                         |
|                                                                       |
| E. Dollar Value of Recommendations that Funds Be Put to Better Use \* |
| \$10,359,205                                                          |
|                                                                       |
| **Audit Followup Activities**                                         |
|                                                                       |
| F. Audit Recommendations Closed 24                                    |
|                                                                       |
| G. Disallowed Costs Agreed to by Management \$167,790                 |
|                                                                       |
| H. Dollar Value of Recommendations that Funds Be Put to Better Use    |
|                                                                       |
| Agreed to by Management \$3,980,783                                   |
|                                                                       |
| I. Unresolved Audit Recommendations 81                                |
|                                                                       |
| J. Dollar Value of Unresolved Audit Recommendations \$28,233,656      |
|                                                                       |
| **Inspection Activities**                                             |
|                                                                       |
| A. Reports Issued 2                                                   |
|                                                                       |
| **Legislation/Regulation/SOP/Other Reviews**                          |
|                                                                       |
| A. Legislation Reviewed 4                                             |
|                                                                       |
| B. Regulations Reviewed 31                                            |
|                                                                       |
| C. Standard Operating Procedures Reviewed 9                           |
|                                                                       |
| D. Other Issuances \*\* 76                                            |
|                                                                       |
| \* Includes amounts for more effective use of program participant     |
| funds in the furtherance of Government programs.                      |
|                                                                       |
| \*\* This is a new category being reported in FY 1995; it includes    |
| policy notices, procedural notices, Administrator\'s action           |
| memoranda, and other communications which frequently involve the      |
| implementation of new programs and policies. During this reporting    |
| period, we continued to review a significant number of such issuances |
| submitted to us for clearance.                                        |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| **Status of Investigations as of September 30, 1995 Totals**          |
|                                                                       |
| A. Total Cases 404                                                    |
|                                                                       |
| B. Closed Cases 74                                                    |
|                                                                       |
| C. Pending Cases 37                                                   |
|                                                                       |
| D. Open Cases 293                                                     |
|                                                                       |
| **Summary of Indictments and Convictions**                            |
|                                                                       |
| A. Indictments from OIG Cases 31                                      |
|                                                                       |
| B. Convictions from OIG Cases 27                                      |
|                                                                       |
| **Summary of Recoveries and Reductions of Risk**                      |
|                                                                       |
| A. Potential Recoveries and Fines as a Result of OIG Investigations   |
| \$4,385,377                                                           |
|                                                                       |
| B. Reductions of Financial Risk as a Result of OIG Investigations     |
| \$142,400                                                             |
|                                                                       |
| C. Reductions of Financial Risk as a Result of the Name Check Program |
| [\$18,715,116]{.underline}                                            |
|                                                                       |
| Total: \$23,242,893                                                   |
|                                                                       |
| **SBA Personnel Actions Taken as a Result of Investigations**         |
|                                                                       |
| A. Dismissals 1                                                       |
|                                                                       |
| B. Resignations/Retirements 1                                         |
|                                                                       |
| C. Suspensions 2                                                      |
|                                                                       |
| D. Reprimands 3                                                       |
|                                                                       |
| **Program Actions Taken as a Result of Investigations**               |
|                                                                       |
| A. Suspensions 0                                                      |
|                                                                       |
| B. Debarments 0                                                       |
|                                                                       |
| C. Removals from Program 0                                            |
|                                                                       |
| D. Other Program Actions 0                                            |
|                                                                       |
| **Summary of OIG Fraud Line Operation**                               |
|                                                                       |
| A. Total Fraud Line Calls/Letters 1,360                               |
|                                                                       |
| B. Total Calls/Letters Referred to Offices Outside the OIG 1,331      |
|                                                                       |
| C. Total Calls/Letters Referred to Investigations Division for        |
| Evaluation 29                                                         |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| **Investigations Activities - Referral Program**                      |
|                                                                       |
| A. Cases Referred to FBI 39                                           |
|                                                                       |
| B. Referred to Other Agencies (Excluding FBI) 7                       |
|                                                                       |
| C. Indictments from Referrals 5                                       |
|                                                                       |
| D. Convictions from Referrals 6                                       |
|                                                                       |
| E. Potential Recoveries and Fines as a Result of Referral Program     |
| \$78,362                                                              |
|                                                                       |
| F. Reductions of Financial Risk as a Result of Referral Program \$0   |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| **Office of Inspector General**                                       |
|                                                                       |
| **Staffing as of September 30, 1995**                                 |
|                                                                       |
| A. Immediate Office 3                                                 |
|                                                                       |
| B. Auditing Division 34                                               |
|                                                                       |
| Professional 30                                                       |
|                                                                       |
| Support 4                                                             |
|                                                                       |
| C. Investigations Division 48                                         |
|                                                                       |
| Professional 39                                                       |
|                                                                       |
| Support 9                                                             |
|                                                                       |
| D. Inspection and Evaluation Division 8                               |
|                                                                       |
| Professional 7                                                        |
|                                                                       |
| Support 1                                                             |
|                                                                       |
| E. Management and Legal Counsel Division 9                            |
|                                                                       |
| Professional 7                                                        |
|                                                                       |
| Support 2                                                             |
|                                                                       |
| OIG Total [102]{.underline}                                           |
|                                                                       |
| **Additional Temporary Disaster Staffing**                            |
|                                                                       |
| **Funded From Supplemental Appropriations**                           |
|                                                                       |
| A. Auditing Division 6                                                |
|                                                                       |
| B. Investigations Division 7                                          |
|                                                                       |
| OIG Disaster Total [13]{.underline}                                   |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| **FY 1995 Productivity Statistics**                                   |
|                                                                       |
| **Second Six Months**                                                 |
|                                                                       |
| **Office-Wide Dollar Accomplishments Totals**                         |
|                                                                       |
| A. Potential Investigative Recoveries and Fines \$4,385,377           |
|                                                                       |
| B. Management Avoidances as Result of Investigations \$18,857,516     |
|                                                                       |
| C. Disallowed Costs Agreed to by Management \$167,790                 |
|                                                                       |
| D. Recommendations that Funds Be Put to Better                        |
|                                                                       |
| Use Agreed to by Management \* \$3,980,783                            |
|                                                                       |
| Total \$27,391,466                                                    |
|                                                                       |
| **Auditing Division Activities**                                      |
|                                                                       |
| A. Reports Issued 12                                                  |
|                                                                       |
| B. Disallowed Costs Agreed to by Management \$167,790                 |
|                                                                       |
| C. Recommendation that Funds Be Put to Better                         |
|                                                                       |
| Use Agreed to by Management \* \$3,980,783                            |
|                                                                       |
| **Inspection and Evaluation Division Activities**                     |
|                                                                       |
| A. Reports Issued 2                                                   |
|                                                                       |
| **Investigations Division Activities**                                |
|                                                                       |
| A. Cases Closed 74                                                    |
|                                                                       |
| B. Indictments 31                                                     |
|                                                                       |
| C. Convictions 27                                                     |
|                                                                       |
| D. Potential Investigative Recoveries and Fines \$4,385,377           |
|                                                                       |
| E. Management Avoidances \$18,857,516                                 |
|                                                                       |
| \- Investigation Cases \$142,400                                      |
|                                                                       |
| \- Name Check Program \$18,715,116                                    |
|                                                                       |
| \* Includes amounts for more effective use of program participant     |
| funds in the furtherance of Government programs.                      |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| **F**[]{#a95PROD .anchor}**Y 1995 Productivity Statistics**           |
|                                                                       |
| **Full Year**                                                         |
|                                                                       |
| **Office-Wide Dollar Accomplishments Totals**                         |
|                                                                       |
| A. Potential Investigative Recoveries and Fines \$8,319,572           |
|                                                                       |
| B. Management Avoidances as Result of Investigations \$32,948,876     |
|                                                                       |
| C. Disallowed Costs Agreed to by Management \$179,540                 |
|                                                                       |
| D. Recommendations that Funds Be Put to Better                        |
|                                                                       |
| Use Agreed to by Management \* \$5,608,242                            |
|                                                                       |
| Total \$47,056,230                                                    |
|                                                                       |
| **Auditing Division Activities**                                      |
|                                                                       |
| A. Reports Issued 20                                                  |
|                                                                       |
| B. Disallowed Costs Agreed to by Management \$179,540                 |
|                                                                       |
| C. Recommendation that Funds Be Put to Better                         |
|                                                                       |
| Use Agreed to by Management \* \$5,608,242                            |
|                                                                       |
| **Inspection and Evaluation Division Activities**                     |
|                                                                       |
| A. Reports Issued 3                                                   |
|                                                                       |
| **Investigations Division Activities**                                |
|                                                                       |
| A. Cases Closed 131                                                   |
|                                                                       |
| B. Indictments 77                                                     |
|                                                                       |
| C. Convictions 78                                                     |
|                                                                       |
| D. Potential Investigative Recoveries and Fines \$8,319,572           |
|                                                                       |
| E. Management Avoidances \$32,948,876                                 |
|                                                                       |
| \- Investigation Cases \$4,525,530                                    |
|                                                                       |
| \- Name Check Program \$28,423,346                                    |
|                                                                       |
| \* Includes amounts for more effective use of program participant     |
| funds in the furtherance of Government programs.                      |
+-----------------------------------------------------------------------+

**S**[]{#STATREP .anchor}**tatutory Reporting Requirements**

The specific reporting requirements as prescribed in the Inspector
General Act of 1978, as amended by the Inspector General Act Amendments
of 1988, are listed below.

**Source Location in this Report**

Section 4(a)(2) - Review of Legislation and Regulations Pages
[6](#SRR2A) - [74](#SRR2B)

Section 5(a)(1) - Significant Problems, Abuses, and Deficiencies Pages
[6](#SRR2A) - [74](#SRR2B)

Section 5(a)(2) - Recommendations With Respect to Significant

Problems, Abuses, and Deficiencies Pages [6](#SRR2A) - [74](#SRR2B)

Section 5(a)(3) - Prior Significant Recommendations Not Yet Implemented
Page [97](#APP2E)

Section 5(a)(4) - Matters Referred to Prosecutive Authorities Pages
[6](#SRR2A) - [74](#SRR2B)

Section 5(a)(5)

and 6(b)(2) - Summary of Instances Where Information Was Refused None

Section 5(a)(6) - Listing of Audit Reports Page [91](#AUDLIST)

Section 5(a)(7) - Summary of Significant Audits Pages [6](#SRR2A) -
[74](#SRR2B)

Section 5(a)(8) - Audit Reports Containing Questioned Costs Page
[93](#QCOST)

Section 5(a)(9) - Audit Reports Recommending that Funds Be Put to Better
Use Page [94](#RFBU)

Section 5(a)(10) - Summary of Reports Where No Management Decision Was
Made Page [96](#NOMGTDEC)

Section 5(a)(11) - Significant Revised Management Decisions None

Section 5(a)(12) - Significant Management Decisions With Which OIG
Disagreed None

**Table of Appendices**[]{#T_O_APPS .anchor}

**Appendix Page**

Appendix I - Audit Reports Issued [91](#APP1)

Appendix II

Part A - Inspector General-Issued Audit Reports

With Questioned Costs [93](#APP2A)

Part B - Inspector General-Issued Audit Reports

With Recommendations that Funds Be Put

to Better Use [94](#APP2B)

Part C - Inspector General-Issued Audit Reports

With Non-Monetary Recommendations [95](#APP2C)

Part D - Inspector General-Issued Audit Reports

With No Management Decision [96](#APP2D)

Part E - Significant Audit Reports

Without Final Action [97](#APP2E)

**APPENDIX I**[]{#APP1 .anchor}

[]{#AUDLIST .anchor}**Audit Reports Issued**

**April 1, 1995 to September 30, 1995**

  --------------------------------------------------------------------------
  **TITLE**            **NUMBER**   **ISSUE    **QUESTIONED   **FUNDS FOR
                                    DATE**     COSTS**        BETTER USE**
  -------------------- ------------ ---------- -------------- --------------
  **Business Loans**                                          

  Section 7(a) Credit  53W010018    9/18/95                   \$6,000,000
  Elsewhere                                                   

  Cordoba              55H004015    8/10/95                   \$580,000
  Corporation -                                               
  Guaranteed Loan                                             

  Administration of    55H004016    8/18/95                   
  \$825,000 Line of                                           
  Credit                                                      

  PROGRAM SUBTOTAL:    Reports: 3              \$0            \$6,580,000

  **Minority                                                  
  Enterprise                                                  
  Development**                                               

  8(a) Competitive Mix 53E010021    9/29/95                   

  Diversified          55H005020    9/29/95                   
  International                                               
  Sciences Corp.                                              

  PROGRAM SUBTOTAL:    Reports: 2              \$0            \$0

                                                              

  **Economic                                                  
  Development**                                               

  University of Puerto 54H005013    6/30/95    \$99,757       
  Rico SBDC                                                   

  Puerto Rico District 55H012017    8/31/95                   
  Monitoring of SBDC                                          

  PROGRAM SUBTOTAL:    Reports: 2              \$99,757       \$0
  --------------------------------------------------------------------------

  -------------------- ----------- ---------- -------------- --------------
  **Agency Management                                        
  and Financial**                                            

  FY 1994 Financial    54H009012   6/28/95                   
  Statements - Mgt.                                          
  Letter                                                     

  FY 1994 Financial    54H009010   6/1/95                    
  Statements                                                 

  National Education   54H003014   8/4/95     \$319,742      
  Center for Women in                                        
  Business                                                   

  National Center for  55H008011   6/7/95                    \$3,348,388
  Genome Resources                                           
  (Interim)                                                  

  National Center for  55H008019   9/29/95    \$147,273      \$430,817
  Genome Resources                                           

  PROGRAM SUBTOTAL:    Reports: 5             \$467,015      \$3,779,205

                                                             

  TOTALS:              Reports: 12            \$566,772      \$10,359,205
  -------------------- ----------- ---------- -------------- --------------

**APPENDIX II - Part A**[]{#APP2A .anchor}

[]{#QCOST .anchor}**Audit Reports with Questioned Costs**

**April 1, 1995 to September 30, 1995**

  ---- --------------------- ------------- ------------ ---------------- -----------------
                             **REPORTS**   **RECs\***   **DOLLAR         
                                                        VALUES**         

                                                        **QUESTIONED**   **UNSUPPORTED**

  A.   For which no          4             8            \$1,969,619      
       management decision                                               
       had been made by                                                  
       April 1, 1995                                                     

  B.   Which were issued     3             10           \$566,772        
       during the period                                                 

       Subtotals (A + B)     7             18           \$2,536,391      

  C.   For which a           2             2            \$167,790        
       management decision                                               
       was made during the                                               
       reporting period                                                  

       \(i\) Disallowed      2             2            \$167,790        
       costs                                                             

       \(a\) Due SBA         2             2            \$167,790        

       \(b\) Due program                                                 
       participant                                                       

       \(ii\) Costs not                                                  
       disallowed                                                        

  D.   For which no          7             16           \$2,368,601      
       management decision                                               
       had been made by                                                  
       September 30, 1995                                                
  ---- --------------------- ------------- ------------ ---------------- -----------------

\* Recommendations

**APPENDIX II - Part B**[]{#APP2B .anchor}

[]{#RFBU .anchor}**Audit Reports with Recommendations that** **Funds Be
Put to Better Use**

**April 1, 1995 to September 30, 1995**

+----+------------------------+-----------+-------+------------------+
|    |                        | **        | **REC | **RECOMMENDED**  |
|    |                        | REPORTS** | s\*** |                  |
|    |                        |           |       | **FUNDS FOR**    |
|    |                        |           |       |                  |
|    |                        |           |       | **BETTER USE**   |
+----+------------------------+-----------+-------+------------------+
|    |                        |           |       |                  |
+----+------------------------+-----------+-------+------------------+
| A. | For which no           | 3         | 7     | \$19,486,633     |
|    | management decision    |           |       |                  |
|    | had been made by April |           |       |                  |
|    | 1, 1995                |           |       |                  |
+----+------------------------+-----------+-------+------------------+
| B. | Which were issued      | 4         | 4     | \$10,359,205     |
|    | during the period      |           |       |                  |
+----+------------------------+-----------+-------+------------------+
|    | Subtotals (A + B)      | 7         | 11    | \$29,845,838     |
+----+------------------------+-----------+-------+------------------+
| C. | For which a management | 3         | 3     | \$3,980,783      |
|    | decision was made      |           |       |                  |
|    | during the reporting   |           |       |                  |
|    | period                 |           |       |                  |
+----+------------------------+-----------+-------+------------------+
|    | \(i\) Recommendations  | 3         | 3     | \$3,980,783      |
|    | agreed to by SBA       |           |       |                  |
|    | management             |           |       |                  |
+----+------------------------+-----------+-------+------------------+
|    | \(a\) SBA level        | 3         | 3     | \$3,980,783      |
+----+------------------------+-----------+-------+------------------+
|    | \(b\) Program          |           |       |                  |
|    | participant level      |           |       |                  |
+----+------------------------+-----------+-------+------------------+
|    | \(ii\) Recommendations |           |       |                  |
|    | not agreed to by SBA   |           |       |                  |
|    | management             |           |       |                  |
+----+------------------------+-----------+-------+------------------+
| D. | For which no           | 5         | 8     | \$25,865,055     |
|    | management decision    |           |       |                  |
|    | had been made by       |           |       |                  |
|    | September 30, 1995     |           |       |                  |
+----+------------------------+-----------+-------+------------------+

\* Recommendations

**APPENDIX II - Part C** []{#APP2C .anchor}

**Audit Reports with Non-Monetary Recommendations**

**April 1, 1995 to September 30, 1995**

  ----- ---------------------------- -------------- -----------------------
                                     **REPORTS**    **RECOMMENDATIONS**

                                                    

  A.    For which no management      6              25
        decision had been made by                   
        April 1, 1995                               

  B.    Which were issued during the 9              51
        period                                      

        Subtotals (A + B)            15             76

  C.    For which a management       3              19
        decision was made during the                
        reporting period                            

  D.    For which no management      13             57
        decision had been made by                   
        September 30, 1995                          
  ----- ---------------------------- -------------- -----------------------

**APPENDIX II - Part D**[]{#APP2D .anchor}

[]{#NOMGTDEC .anchor}**Overdue Management Decisions**

**September 30, 1995**

  ----------------------------------------------------------------------------
  **AUDITEE**              **REPORT        **ISSUED**   **STATUS**
                           NUMBER**                     
  ------------------------ --------------- ------------ ----------------------
  **Business Loans**                                    

  Standard Chartered Bank  4-3-C-001-002   10/22/93     Under legal review

  Tara State Bank          4-3-E-005-001   10/22/93     Under legal review

  Colson Services Corp.    3-2-S-401-014   12/3/92      In negotiation with
                                                        auditee

  Loan Servicing and Debt  5-3-H-004-006   3/31/95      Delay requested by
  Collection                                            program office

  Population and Marketing 5-4-H-008-008   3/31/95      Awaiting response from
  Analysis Center                                       auditee

  Indiana Lumbermens       5-4-W-001-009   3/31/95      Under legal review
  Mutual Insurance Co.                                  
  ----------------------------------------------------------------------------

**APPENDIX II - Part E**[]{#APP2E .anchor}

**Significant Audit Reports Described in Prior Semiannual Reports**

**Without Final Action as of September 30, 1995**

+-----------+------------------------+--------+--------------+--------+
| *         | **TITLE**              | **     | **DATE OF**  | **F    |
| *REPORT** |                        | DATE** |              | INAL** |
|           |                        |        | **           |        |
| *         |                        | **IS   | MANAGEMENT** | **AC   |
| *NUMBER** |                        | SUED** |              | TION** |
|           |                        |        | **DECISION** |        |
|           |                        |        |              | **TA   |
|           |                        |        |              | RGET** |
+===========+========================+========+==============+========+
| 0‑1‑      | Regulations for 301(d) | 06     | 09/30/93     | 12     |
| 0‑007‑140 |                        | /13/90 |              | /31/93 |
+-----------+------------------------+--------+--------------+--------+
| 2‑2‑      | Integon Indemnity      | 03     | 09/30/92     | 03     |
| W‑400‑065 | Corp.                  | /31/92 |              | /31/95 |
+-----------+------------------------+--------+--------------+--------+
| 2‑2‑      | Residual Service Fee   | 05     | 08/19/92     | 09     |
| S‑401‑078 |                        | /26/92 |              | /30/93 |
+-----------+------------------------+--------+--------------+--------+
| 3‑2‑      | Colson Service Corp.   | 12     | \*           | \*     |
| S‑401‑014 |                        | /03/92 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 3‑3‑      | Energy Management      | 02     | 09/30/93     | 11     |
| T‑001‑024 |                        | /25/93 |              | /30/93 |
+-----------+------------------------+--------+--------------+--------+
| 3‑3‑      | Controls over Advisory | 03     | 03/10/93     | 03     |
| E‑002‑025 | and                    | /01/93 |              | /31/93 |
|           |                        |        |              |        |
|           | Assistance Services    |        |              |        |
+-----------+------------------------+--------+--------------+--------+
| 3‑2‑      | Administration of 8(a) | 03     | 09/30/94     | 09     |
| C‑002‑033 | Program                | /31/93 |              | /30/95 |
+-----------+------------------------+--------+--------------+--------+
| 3‑2‑      | SBA\'s Oversight of    | 06     | 03/31/95     | 09     |
| H‑007‑036 | Colson                 | /16/93 |              | /30/95 |
|           |                        |        |              |        |
|           | Services Corp.         |        |              |        |
+-----------+------------------------+--------+--------------+--------+
| 3‑3‑      | SBA FY 1992 Financial  | 07     | 03/31/94     | 03     |
| H‑001‑043 | Statements             | /16/93 |              | /31/95 |
+-----------+------------------------+--------+--------------+--------+
| 4‑3‑      | Tara State Bank        | 10     | \*           | \*     |
| E‑005‑001 |                        | /22/93 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 4‑3‑      | Standard Chartered     | 10     | \*           | \*     |
| C‑001‑002 | Bank                   | /22/93 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 4‑3‑      | SBA\'s Award of 8(a)   | 05     | 12/30/94     | 06     |
| H‑011‑016 | Contracts              | /16/94 |              | /30/95 |
|           |                        |        |              |        |
|           | to ASCI                |        |              |        |
+-----------+------------------------+--------+--------------+--------+
| 4‑3‑      | Washington State SBDC  | 08     | 03/31/95     | 05     |
| W‑009‑018 |                        | /01/94 |              | /31/95 |
+-----------+------------------------+--------+--------------+--------+
| 4‑4‑      | Brokering of 8(a)      | 09     | 03/21/95     | None   |
| E‑005‑024 | Contracts              | /30/94 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 4‑3‑      | SBA FY 1993 Financial  | 08     | 10/18/95     | 06     |
| H‑012‑020 |                        | /31/94 |              | /30/95 |
|           | Statements             |        |              |        |
+-----------+------------------------+--------+--------------+--------+
| 4‑2‑      | Pulsar Data Systems    | 08     | 03/22/95     | None   |
| E‑403‑019 |                        | /15/94 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 5-3-      | SBA Loan Servicing and | 03     | \*           | \*     |
| H-004-006 | Debt Collection        | /31/95 |              |        |
|           | Activities             |        |              |        |
+-----------+------------------------+--------+--------------+--------+
| 5-3-      | Central Wisconsin      | 11     | 12/30/94     | None   |
| E-011-002 | Hardwood, Inc.         | /25/94 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 5-4-      | Indiana Lumbermens     | 03     | \*           | \*     |
| W-001-009 | Mutual Insurance Co.   | /31/95 |              |        |
+-----------+------------------------+--------+--------------+--------+
| 5-4-      | Population and         | 03     | \*           | \*     |
| H-008-008 | Marketing Analysis     | /31/95 |              |        |
|           | Center                 |        |              |        |
+-----------+------------------------+--------+--------------+--------+
| 5-5-      | SBA FY 1994 Financial  | 12     | \*           | \*     |
| H-007-003 | Statements             | /13/94 |              |        |
+-----------+------------------------+--------+--------------+--------+

\* A management decision has not been made on all recommendations in the
audit report.

**SAR \-- 4/1/95 to 9/30/95**

**Appendix - Not for Publication**

Executive Summary 1

Deputy Inspector General Testifies on Disaster Assistance Program 2

Section 8(a) Competitive Mix Requirements Studied 3

SBA/OIG Investigators Receive Deputation as Special Deputy U.S.
Marshals. 3

Results of False Tax Return Cases Increase. 4

Auditing Division Builds Its Presence in the Disaster Assistance
Program. 4

Survey of OIG Inspection and Evaluation Units 4

Business Loan Program 5

SBA Loans Made to Borrowers Who Could Get Credit Elsewhere 6

SBA Withdraws Loan Guarantee from California Firm 8

Loan Administration Errors at SBA\'s Los Angeles District Office 8

OIG Fact-Finding Team Visits a Midwest Bank 9

Review of SBA Legislative Proposal for Maximum Loan Guarantee 9

Review of Section 504 Loan Program Regulations 9

Review of Accredited Lenders Program for Certified Development Companies
10

Newest Results from Affirmative Civil Enforcement (ACE) Program 11

Indictment Charges that New York Company Was a Racketeering Enterprise
11

Idaho Couple Sentenced for Making False Statements 11

Southern California Loan Packager Investigation 12

More Californians Plead Guilty to Using False Tax Returns 13

Indiana Businessman Sentenced for Making False Statements 13

Ohio Manufacturer Charged with Fraud 14

Florida Business Owner Sentenced for Submitting False Loan Application
14

Georgia Caterer Sentenced for Defrauding Financial Institutions 14

California Father and Daughter Indicted on Conspiracy Charge 15

Two More Georgia Businessmen Charged with Loan Fraud Scheme 15

Washington Restaurant Owner Pleads Guilty to Making False Statements 15

Missouri Bank Owner Pleads Guilty to Falsifying Bank Records 16

Kansas Automobile Dealership Manager Sentenced for His Part in Fraud
Conspiracy 16

Missouri Businessman Pleads Guilty to Overvaluing Assets 16

California Landscaper Charged With Fraud in Second Set of Loans 17

New York Bank Officer Indicted for Illegally Soliciting Commissions 17

California Loan Packager Indicted for Causing False Statements to Be
Made 17

Disaster Loan Program 18

Deputy Inspector General Testifies on Disaster Assistance Program 20

Results from Affirmative Civil Enforcement (ACE) Program 21

Ongoing Investigation into California Disaster Loan Packagers 21

Los Angeles Resident Sentenced for False Claim and False Statements in a
Loan Application 23

Oregon Shoe Store Owner Sentenced for Illegally Converting Loan Check 24

California Couple Sentenced for Submitting False Claims 24

California Loan Applicant Pleads Guilty to Three Felony Counts 24

Owner of a California Alarm Company Sentenced for Making False
Statements 25

California Restaurant Owner and Loan Preparer Sentenced for False
Statement 25

Georgia Arena Owner Convicted of Perjury 25

Los Angeles County Resident Acquitted of Filing False Claim with SBA 26

California Resident Pleads Guilty to Theft of Government Funds 26

Rhode Island Commercial Lobsterman Sentenced for Mail Fraud 26

Judgment Entered Against Bowling Alley Owner for Disaster Fraud 27

Small Business Investment Companies 28

Review of Draft SBIC Regulations 29

Consent Judgment Entered Against Canadian Financier 30

Specialized SBIC President Sentenced 30

Surety Bond Guarantees 32

Review of SBA Legislative Proposal 34

Government Contracting Programs 36

Coping with Major Downsizing in the Prime Contracts and Subcontracting
Programs 37

Listing of Companies Ineligible to Self-Certify as Small Recommended 37

Minority Enterprise Development 39

SBA Efforts to Enforce Section 8(a) Competitive Mix Requirements Have
Not Always Been Effective 41

Section 8(a) Owner Distorts Net Worth; Withdraws from Program 41

Review of Business Activity Targets 42

Review of General Services Administration (GSA) Policy on Information
Technology 42

Maryland Computer Company Owner Indicted for Fraud 43

Pennsylvania Section 8(a) Company Officer Sentenced for Fraud 43

Economic Development 44

Non-Compliance with Grant Rules at a Puerto Rico Small Business
Development Center 45

Agency Management and Financial Activities 47

Auditors Qualify Opinion on 1994 SBA Financial Statements 48

Grant Violations Uncovered at a Pennsylvania College Women\'s Program 49

Salaries and Other Costs Questioned at Genome Research Center 50

Review of Federal Acquisition Streamlining Act of 1994 and

Proposed Regulations 50

Review of Simplified Acquisition/FACNET Regulations 53

Fraud Awareness Briefings 54

Pennsylvania Tax Return Preparer Pleads Guilty in Municipal Bond Fraud
54

New York Teen Pleads Guilty to Forgery 54

Organization, Resources, and Management Initiatives 56

Annual Training Seminar and Professional Development Held 59

Survey of Inspection and Evaluation Units in the Inspector General
Community 60

Review of Inspector General Law Enforcement Act of 1995 60

OIG Upgrades Computer Hardware to Meet Agency Standards 61

Direct Investigation Time by Program Area 62

**Direct Auditing Time by Program Area** 62

Staffing as of September 30, 1995 66

Table of Appendices 70

APPENDIX I 71

APPENDIX II - Part A 73

APPENDIX II - Part B 74

APPENDIX II - Part C 75

APPENDIX II - Part D 76

APPENDIX II - Part E 77