SEMIANNUAL REPORT OF THE INSPECTOR

GENERAL

FOR THE PERIOD

October 1, 1996, To March 31, 1997

 July 15, 1997
Semiannual Report March 1997 i

PREFACE

Pursuant to Public Law 95-452, the U.S. Small Business Administration's (SBA)

Office of Inspector General (OIG) is required to prepare a Semiannual Report of its activities for

the Congress of the United States. This Semiannual Report, transmitted to the Congress by the

SBA Administrator, covers the full range of SBA/OIG activities from October 1, 1996 to March

31, 1997.

As has been the case in past reports to the Congress, I have highlighted the truly

extraordinary growth of the SBA portfolio over the last few years and the dearth of resources

available to the SBA/OIG to provide more than a modicum of oversight. The current situation

 has not changed; that is, the Agency's portfolio continues to grow, while the OIG's capability to

provide meaningful oversight of program activity remains virtually unchanged. Apparently,

Senator Christopher Bond, Chairman of the Senate Committee on Small Business is also

concerned for in a recent letter (March 1997) to his colleague, Senator Judd Gregg, Chairman

of the cognizant Senate Appropriations Subcommittee, he expressed his support for an increase

in SBA/OIG resources to address the increased risk expected to become a secondary consequence

of the Agency’s plans for transferring the administration of its loan portfolio to the private sector.

I am pleased to report that over the reporting period, the SBA/OIG closed 58 investigative

cases and obtained 22 indictments and 34 convictions. In addition, $37.8 million were realized

from management avoidances and court-ordered recoveries and fines during the reporting period.

For our other operating activities, productivity totals stand at 11 audit and 3 inspection reports

issued and $6.3 million in dollar accomplishments. Again, these OIG achievements enabled the

Agency to operate more effectively and make more funds available to qualified small businesses

who meet the eligibility criteria for SBA assistance.

Beyond productivity statistics, the success of the Agency's tax verification program is

noteworthy in terms of the OIG's mandated mission to prevent and detect fraud and abuse in

SBA's programs and supporting operations. While the Agency formally adopted its income tax

verification program in October 1994, the OIG started recording data on false tax return cases as

early as FY 1992. To date, 91 individuals, from 11 states, have been indicted for submitting false

tax information (or returns); 84 of those have pled or been found guilty; and 78 have been

sentenced, producing $20 million in court-ordered fines and restitutions. More importantly, $32

million of requested loan amounts were never disbursed as a result of SBA's tax verification

policy and the vigilance of its employees. These funds, of course, were subsequently made

available to honest small business men and women who needed their Government's financial

assistance.

As for the SBA/OIG's efforts to promote economy, efficiency, and effectiveness in SBA's

programs and supporting operations, this reporting period’s total of 14 audit and inspection
ii Semiannual Report March 1997

reports speaks to our commitment. For example, an inspection report on the “best practices” of

Section 7(a) lenders focuses on the credit management procedures identified in case studies of

nine successful lenders as the most efficient means of controlling risk. The report was distributed

to the Agency’s Preferred and Certified Lenders, and many of these lenders have requested

additional copies for use within their organizations.

Turning to other initiatives, the SBA/OIG is an active supporter of the inspector general

community's activities. Working closely with the Inspections Roundtable, which supports the

Inspection and Evaluation Committee of the President’s Council on Integrity and Efficiency

(PCIE), the SBA/OIG recently pulled together a compendium of successful initiatives performed

by the community’s inspection and evaluation units across the Federal Government. These

abstracts illustrate the varied nature of the community’s inspections and evaluations and their

impact--ranging from correcting employee ethics problems to saving millions of taxpayers’

dollars. Also, in the spirit of the Government Performance and Results Act (GPRA), the

SBA/OIG completed its Strategic Plan for Fiscal Years 1997-2002, the highlights of which are

summarized in this report’s Executive Summary. While not required by GPRA, the SBA/OIG’s

strategic plan will be included along with the Agency’s strategic plan to be submitted to the

Congress in September 1997. 

 

Finally, I am again pleased to report that the cooperation received from SBA's policy

officials, senior executives, program managers, and employees during the conduct of SBA/OIG

audits, inspections, and investigations has been excellent. The OIG's working hypothesis

continues to prove itself, i.e., the more closely OIG employees work with program managers, the

more effective SBA will be in meeting the critical needs of the Nation's small business

community. Allowing for resource constraints, I trust the results reflected in this Semiannual

Report to the Congress offer strong evidence that the OIG is meeting its responsibilities to the

best of its ability. 

James F. Hoobler

Inspector General
Semiannual Report March 1997 iii

TABLE OF CONTENTS

Title Page

Preface ................................................................... i

Table of Contents .......................................................... iii

Executive Summary ......................................................... 1

Business Loan Program ...................................................... 5

Disaster Loan Program ...................................................... 23

Small Business Investment Companies ......................................... 31

Surety Bond Guarantees ..................................................... 35

Government Contracting Programs ............................................ 38

Minority Enterprise Development ............................................. 40

Economic Development (Business Education and Training) ......................... 43

Agency Management and Financial Activities .................................... 46

Organization, Resources, and Management Initiatives ............................. 52

Profile of Operating Results .................................................. 57

FY 1997 Productivity Statistics ............................................... 60

Statutory Reporting Requirements ............................................. 62

Table of Appendices ....................................................... 63
Semiannual Report March 1997 1

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

October 1, 1996, to March 31, 1997.

Summary of Accomplishments

OIG audits, inspections, and investigations Department of Justice (DOJ) prosecutors;

over the last 6 months achieved $44,150,901 and, most importantly, the actions of SBA

in potential dollar results, 22 indictments, program managers and employees. Indeed,

and 34 convictions. The dollar results much of our success is due to referrals made

consist of $21,251,476 in potential by conscientious SBA employees.

recoveries, including judicially-awarded

fines and restitution; $16,545,466 in

management avoidances; $1,035,911 in

disallowed costs agreed to by SBA's The OIG’s mission for 1997 is delineated in

management; and $5,318,048 in its recently completed Strategic Plan for

management commitments to use funds Fiscal Years 1997-2002. The first two goals

more efficiently. of the strategic plan and their associated

The OIG alone could not have achieved the program-related mission. The OIG’s first

accomplishments set forth in this report to

the Congress. The results for this reporting

period reflect the cooperation and support of

other Federal audit, inspection, and

investigative organizations such as the

Federal Bureau of Investigation (FBI); U.S.

Secret Service; U.S. Marshals Service;

Internal Revenue Service (IRS); Office of

the Comptroller of the Currency; Resolution

Trust Corporation; Environmental Protection

Agency’s (EPA) Office of Criminal

Enforcement; other Federal OIGs;

OIG Mission for FY 1997

objectives provide a roadmap for the OIG’s

goal is to improve the economy, efficiency,

and effectiveness of SBA programs

through the Agency’s adoption of

recommendations resulting from the OIG’s

oversight activities. Achievement of this

goal will be accomplished by meeting the

following objectives:

1. Find opportunities for the reduction

of operating costs (salaries and expenses)
2 Semiannual Report March 1997

associated with and supporting activities of objectives:

SBA's programs.

2. Identify means for reducing the fraud and abuse by auditing a sample of

subsidy cost of SBA programs. defaulted loans and Section 8(a) program

3. Ensure that SBA programs are contracting assistance program.

meeting mandated public policy goals, high

performance standards, and the needs of 2. Assist the SBA in deterring waste,

targeted participants. fraud, and abuse by responding to

4. Improve the accuracy of SBA OIG staff assistance and consultation.

accounting and management information.

5. Assure Agency implementation of program vulnerabilities uncovered as a result

accepted OIG recommendations and, to the of OIG oversight activities.

extent that OIG resources allow, provide

assistance to program managers in 4. Conduct investigations into

implementing recommendations. allegations of fraud in SBA programs

6. Reduce the opportunity for loan Agency and the potential for program impact

packager fraud through cooperation with or increased deterrence.

Agency officials in the registration of loan

packagers and the pursuit of packager 5. Pursue asset forfeiture proceedings in

investigations. all applicable cases.

7. Review proposed legislation, 6. Participate in development of SBA's

regulations, standard operating procedures, fraud and corruption awareness training

and other SBA issuances to improve Agency programs and emphasize cooperation of

programs and to eliminate the potential for Section 7(a) lenders in combating fraud

mismanagement. through fraud awareness briefings and

8. Identify program vulnerabilities or

systems weaknesses found during 7. Refer an average of 75 cases annually

investigations and alert appropriate SBA to the Department of Justice for Affirmative

program managers. Civil Enforcement (ACE) and increase the

The OIG’s second goal is to reduce fraud

and abuse in Agency programs and foster

integrity in SBA’s personnel and the

Agency’s resource partners. This goal will

be accomplished by meeting the following

1. Assist the SBA in its efforts to deter

participants suspected of abusing the

complaints concerning such activities with

3. Recommend actions to reduce any

according to the perceived level of risk to the

outreach contacts with lenders. 

value of civil fines imposed.

8. Preclude persons of poor character

from participating in SBA programs or

employment through the use of name check

requests, fingerprint requests, pre-
Semiannual Report March 1997 3

employment screening, and required and periodically reassess them through the

background investigations. life of the loans; proactively watch for

The OIG’s last two goals involve problems; and identify past due loans early

communicating OIG findings, and initiate vigorous collection efforts.

recommendations, and results to all SBA Although the report contained no formal

stakeholders; and ensuring the economical, recommendations, the OIG suggested that

efficient, and effective operation of the OIG. the Agency incorporate the best practices

The extent to which the OIG will be able to identified into its guidance for new lenders,

achieve its mission depends, in part, on the its monitoring criteria for existing lenders,

sufficiency of resources available to fund its and its selection criteria for the Preferred

operations. Lenders Program. The report was

Highlights of the Past Six

Months

Efforts to Improve SBA

Program Management

Best Practices of Section 7(a) Lenders.

The OIG issued an inspection report focused

on the credit management procedures

identified by nine successful lenders in case

studies as the most effective means for

controlling risk. Although not all the

procedures may be applicable to every

Section 7(a) lender, the OIG believes that

SBA’s encouragement of such “best

practices” could improve the effectiveness of

its lending partners while keeping loan

losses to a minimum. Among other things,

the inspection team found that the successful

lenders in the sample rely more on

evaluating an individual borrower’s situation

than on automated screening methods such

as credit scoring; generally avoid using

external loan packagers; require the

borrower to pledge both personal and

business assets as collateral, despite the

availability of the SBA guarantee; centralize

final lending decisions to ensure consistency

and control; assign risk ratings to new loans

warning signs of future loan repayment

distributed to all Preferred Lenders, Certified

Lenders, and SBA field offices. (See page 7)

Annual Audit of SBA’s Financial

Statements Yields SBA’s First

Unqualified Opinion. For the first time in

6 years of audits conducted in response to

the Chief Financial Officers Act, SBA’s

financial statements for FY 1996 received an

unqualified opinion. The independent

auditors found that SBA had made progress

on the two problems that caused the previous

opinions to be qualified. (See page 47.)

Audit of Early Defaulting Loans Finds

Indications of Fraud and Abuse. An audit

of 17 guaranteed loans that defaulted within

24 months of origination showed that 9 of

the loans had indications of fraud and abuse

that may have contributed to the early

defaults. SBA recorded a loss of $6.2

million on the 17 loans after paying on the

guarantees and liquidating the loans’ assets.

Only one of the nine loans was referred to a

law enforcement agency for investigation;

the remaining eight loans were not because

neither SBA nor the lenders detected any

indications of fraud and abuse. The OIG’s

Auditing Division did, however, refer these

eight loans to the Investigations Division.
4 Semiannual Report March 1997

(See page 8.) reported in the program area chapters, as

Activities to Enhance Fraud

Detection and Deterrence

Results of False Tax Return Cases

Increase. Over the last 6 years, the OIG has

received 333 allegations that false tax returns

were submitted in support of SBA business

or disaster loan applications. These fraud

referrals now involve loan applications

submitted to 48 SBA district offices, totaling

$120 million and involving 1,146 individual

subjects. To date, 91 individuals have been

indicted on criminal charges: 84 have been

adjudicated guilty, 3 indictments have been

dismissed, and 4 others have not gone to

trial.

Affirmative Civil Enforcement Program.

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 program targets cases which might

not be prosecuted criminally because of the

minimal dollar amounts involved, absence of

financial loss to the Government, or because

the facts of the case might not support a

criminal prosecution. Heretofore, our

success with the ACE program was focused

in only 13 states; however, over the course

of this reporting period, the OIG realized its

first ACE results in Connecticut, Louisiana,

and Puerto Rico.

During the approximately 45 months the

OIG has been involved with the ACE

program, we have had a total of 76

successful cases, resulting in $2,742,010 in

civil penalties and $3,735,900 in recoveries

by SBA. Individual ACE outcomes are

appropriate.

Millions Recovered from Disaster Fraud

Scheme. A joint OIG and U.S. Secret

Service investigation targeted two southern

California brothers who had acted as disaster

loan packagers. At the end of the reporting

period, more than $11 million had been

realized through court-ordered restitutions

and fines, loans declined, or loans canceled.

The investigation had also resulted in guilty

pleas from 27 of the 28 persons charged with

crimes in the case. In addition to the

brother who has pled guilty to the largest

fraud scheme ever perpetrated against SBA's

disaster assistance program, 26 others also

pled guilty to false statements made in their

applications for economic injury loans in the

wake of the 1992 civil unrest in Los

Angeles. Many of the applicants applied in

the names of businesses that did not exist;

much of the fraud was facilitated by the

submission of copies of fictitious income tax

returns or the use of altered copies of actual

tax returns. The case was opened as a result

of a tip from a concerned citizen and a

referral from the Disaster Assistance Area 4

Office. (See page 27.)
Semiannual Report March 1997 5

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 77 percent.

More than 8,000 lenders have made at least one Section 7(a) loan in the past 5 years.

Currently, approximately 38 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 9 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 350

participants, reduces processing time on strong credit applications and uses the resources of

SBA's best lenders to the maximum. About 29 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
6 Semiannual Report March 1997

are provided as follows: 50 percent by an unguaranteed first mortgage 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 demand for this

program is unprecedented; over one third 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:

Two audit reports were issued and

eleven audits were underway.

One inspection report was issued and

two others were underway.

Business loan investigations resulted

in 10 new indictments and 21

convictions.

Business loan investigations

produced $10,109,006 in courtordered restitution, $2,374,927 in

other recoveries by SBA, $4,313,934

in reductions to the Agency's

financial risk, and $319,698 in civil

penalties and fines.

The OIG’s name check activity

resulted in the declination of 50

business loans, totaling $10,825,787.

Twenty-nine business loan

investigations were closed, leaving

an inventory of 145 active cases

involving 725 subjects. Due to other

workload demands, another 13

business loan cases were referred to

another law enforcement agency for

investigation, giving the OIG a total

of 50 business loan referrals to

monitor.

Four regulations and five Standard

Operating Procedures (SOP) were

reviewed.
Semiannual Report March 1997 7

Figure 1

Efforts to Improve SBA

Program Management

Study of “Best Practices” of Section 7(a)

Lenders Issued

The OIG issued an inspection report on the

“best practices” of Section 7(a) lenders. The

report focuses on the credit management

procedures identified in case studies of

nine successful lenders as the most

effective means for controlling risk.

Although not all the procedures may apply

to every Section 7(a) lender, the OIG

believes that by encouraging such practices,

SBA will be able to improve the

effectiveness of its lending partners, while

keeping loan losses to a minimum.

Among other things, the OIG found that the

successful lenders in the sample:

rely more on evaluating an individual

borrower’s situation than on

automated screening methods such as

credit scoring; 

generally avoid using third-party

loan packagers, who prepare

prospective borrowers’ Section 7(a)

applications for a fee, because of

concerns over the quality of the loans

and/or supporting documentation; 

require the borrower to pledge both

personal and business assets as

collateral, despite the availability of

the SBA guarantee; 

centralize final lending decisions to

ensure consistency and control over
8 Semiannual Report March 1997

originating loan officers’ actions; liquidation, including 1,100 loans that were

assign risk ratings to new loans and theory that loans which default within 2

periodically reassess those ratings years of origination may be the result of poor

through the life of the loans; origination or servicing, the OIG

proactively watch for warning signs latter group for review.

of future loan repayment problems,

such as the borrower’s failure to A review of the borrowers’ accounting

renew hazard insurance; and books and records for the 17 loans disclosed

identify past due loans early and were incomplete or false financial data and

initiate vigorous collection efforts. misuse of working capital. Neither SBA nor

Although the report contains no formal borrowers’ books and records after defaults

recommendations, the OIG suggests that the were declared, a practice that could detect

Agency incorporate these “best practices” irregularities such as fraud and abuse. After

into its guidance for new lenders and its the completion of the audit field work, the

criteria for monitoring existing lenders. Associate Administrator for Financial

Audit of Early Defaulting Loans Finds

Indications of Fraud and Abuse

An audit of 17 guaranteed loans that have to include a review of the borrower’s

defaulted within 24 months of origination accounting books and records. 

showed that 9 of the loans had indications

of fraud and abuse that may have

contributed to the loans’ early default.

SBA recorded a loss of $6.2 million on the

17 loans after paying on the guarantees and

liquidating the loan assets. Only one of the

nine loans was referred by SBA to a law

enforcement agency for investigation; the

remaining eight loans were not referred

because neither SBA nor the lenders

involved detected any indications of fraud

and abuse. The remaining eight loans were

referred by the Auditing Division for

investigation. 

During a 3 year period ending September 30,

1993, SBA transferred 4,335 loans to

less than 24 months old. Applying the

judgmentally selected 17 loans from the

that the primary indicators of irregularities

the lenders routinely reviewed the

Assistance (AA/FA) issued a policy notice

effective July 15, 1996, requiring lenders to

make a site visit to the borrower when a loan

is transferred to liquidation; this visit would

The audit report recommended that the

AA/FA incorporate the site visit policy in the

new SOPs, increase referrals to OIG for

irregularities, and determine the feasibility of

using joint payee checks or partial

disbursements as an internal control over the

use of working capital loans. Although the

AA/FA agreed with these recommendations

as presented in a summary report, final

agreement with the audit recommendations

is not due until August 1997.

Audit Uncovers Improper Loan Made to

Missouri Company

A Missouri firm was approved for a $1.1
Semiannual Report March 1997 9

million international trade loan by SBA’s

St. Louis District Office, even though

there was little evidence that the firm was

involved in international trade. The loan

was one of three loans made to the Missouri

firm by a Preferred Lending Company (the

lender). All three loans went into liquidation

7 months after their approval.

The three loans were reviewed because they

defaulted early and the St. Louis District

Director requested the audit due to concerns

about a possible conflict of interest by a

representative of the lender. Although the

auditors found no basis for a conflict of

interest, they found that origination of one of

the loans was indeed defective because

neither the lender nor the District Office

established that the Missouri firm met

program requirements. To qualify for an

international trade loan, an applicant must

demonstrate that (1) the loan will enable the

borrower to significantly expand existing

markets or develop new export markets, or

(2) that the borrower was adversely affected

by import competition.

The audit also showed that $29,000 in

interest expenses charged by the lender was

inappropriate because it exceeded the

amount authorized by SBA. The lender

collected the unauthorized interest expenses

from the sale of collateral. Because the

$29,000 interest expense was not authorized,

it should have been considered a recovery on

collateral and shared with SBA at the agreed

upon ratio. 

The audit report recommended that the

St. Louis District Office take steps to ensure

that eligibility for international trade loans is

established before loan approval and that the

lender be required to return $22,000 (75%)

of the amount improperly retained as interest

expenses. While the St. Louis District

Director had no objections to the draft audit

findings and recommendations, the OIG has

not yet received his formal management

decisions.

Business Loan Program SOPs Reviewed

As part of SBA's initiative to update and

streamline its SOPs, the OIG reviewed five

business loan program SOPs and commented

on proposed revisions to three of them. In

reviewing SOP 50 10 4, Loan Origination,

the office commented on collateral

requirements, tax verification procedures,

prudent and quality lending practices, use of

loan proceeds, assignment of primary

standard industrial codes (SIC), eligibility

determinations, loan modifications, lender

servicing procedures, and audits of Small

Business Lending Companies (SBLC) and

Certified Development Companies (CDC).

The review of SOP 50 50 4, Loan Servicing,

led to comments on procedures for referrals

of suspected irregularities to the OIG, site

reviews of delinquent borrowers, reviews of

lenders, loan modifications, and releases of

SBA from liability on a guarantee. Finally,

in reviewing the loan liquidation procedures

(SOP 50 51 2), the OIG commented on

“charge-offs” of secured loans and the

required provision of data concerning

charge-offs to a Government-wide database.
10 Semiannual Report March 1997

Activities to Enhance Fraud

Detection and Deterrence

Latest Results From Affirmative Civil

Enforcement (ACE) Program

Over this reporting period, the OIG's

participation in DOJ's ACE program

produced 11 successful business loan cases,

resulting in $2,003,203 in recoveries and

$236,348 in civil penalties. The nine

smallest cases, which produced the civil

penalties, involved fraudulent

representations in applications for loans

(primarily bogus tax returns), most of which

were stopped before funds were disbursed.

(One produced a $90,000 civil penalty

against an unsuccessful applicant for a

$614,000 loan.) The two other cases,

described in detail below, involved

settlements of claims against participating

lenders in Connecticut and New York.

OIG Briefs Members of Lender

Community

During this reporting period, OIG

investigations staff continued its practice of

making presentations to groups of

participating lenders. More than 50 bankers

at a Lenders Quality Circle Forum in

Washington, D.C. were briefed on

Procedures for Receiving Positive Responses

to the Statement of Personal History (SBA

Form 912). In addition, senior investigators

from the Los Angeles and Washington field

offices gave presentations to more than 220

participants in Phoenix, Arizona; Glendale,

California; and Greenbelt, Maryland,

highlighting the benefits to be gained from

cooperating with OIG personnel in

combating waste, fraud, and abuse in the

Agency’s guaranteed loan programs.

Connecticut Businessmen Sentenced for

Bank Fraud and Accessory-After-theFact

Two officers of a Chester, Connecticut,

manufacturer of wire products were

convicted and sentenced for a fraud scheme

against SBA. One was convicted on one

count of bank fraud for submitting false

information while applying for a $300,000

SBA-guaranteed loan. He was sentenced to

30 months imprisonment and $450,000

restitution. The second negotiated a guilty

plea to one count of being an accessoryafter-the-fact to a false statement used in

obtaining the loan; he was sentenced to 1

year probation. In applying for the loan, the

existence of previous loans was not

disclosed and the offer of certain items of

unavailable machinery and equipment as

collateral was made. He also falsely

certified that the other principal officer had

no criminal record. After the SBAguaranteed loan proceeds had been

disbursed, the principal with the criminal

record perpetuated the misrepresentation.

The joint OIG/FBI investigation was based

on a referral from SBA's Hartford District

Office.

Ohio Medical Equipment Manufacturer

Sentenced for Bank Fraud

The president of a now-bankrupt

manufacturer of medical equipment in

Chardon, Ohio, negotiated a guilty plea to

one count of bank fraud. He was sentenced

to 5 months imprisonment, 5 months home

confinement, 5 years supervised release, and
Semiannual Report March 1997 11

$75,000 restitution, of which 82 percent detected by SBA's tax return verification

goes to SBA. An OIG investigation program, were referred to the OIG by SBA’s

determined that at the time the company Philadelphia District Office.

president was negotiating to obtain a

$700,000 SBA-guaranteed loan, and during

the subsequent loan disbursement period, he

concealed from SBA and the participating

lender bank his intent to sell a substantial The president of a Bloomington, Minnesota,

portion of the business assets. He also technology company was sentenced to 1

diverted a majority of the proceeds from month incarceration, 90 days home

those sales to pay off other debts and caused detention, and 3 years supervised release.

$100,000 to be fraudulently wired from He had previously pled guilty to one count

another bank to the participating lender.

During a subsequent interview by an OIG

special agent, the company president made

material false statements by stating that

officials of the participating lender had

known about and approved the sale of assets.

This investigation was initiated based on a

referral from SBA's Cleveland District

Office.

Two Pennsylvania Jewelry Retailers

Sentenced for Making False Statements

The president and vice president of a watch

and jewelry retailer in Plymouth Meeting,

Pennsylvania, were each sentenced to 2

years probation and a $4,050 fine. The

businessmen had pled guilty to making false Jamaica, he also was sentenced to 5 years

statements to SBA in an unsuccessful

attempt to obtain a $50,000 LowDoc loan.

They had submitted altered tax returns to a

participating lender bank. On learning that submitting false documents to SBA in

the tax returns submitted with the application connection with a $154,000 SBA-guaranteed

differed significantly from those on file with loan to his sole proprietorship. The

the IRS, SBA canceled the loan before any investigation established that he submitted

funds were disbursed. The certified public altered copies of tax returns for the years

accountant (CPA) for the company had 1986-88, substantially overstating his

previously been sentenced for preparing income for the purpose of procuring the

altered tax returns and he has surrendered his loan. He also submitted a "deed to secure

CPA license. The discrepancies, which were debt" as collateral, on which his wife's

Minnesota Businessman Sentenced for

Bank Fraud

of bank fraud. A joint SBA/OIG

investigation with the FBI revealed that the

businessman submitted a bogus independent

auditor's report to a participating bank in an

unsuccessful effort to obtain a $175,000

SBA-guaranteed loan. The investigation

was based on a referral from the bank

forwarded by SBA’s Minneapolis District

Director.

Former Georgia Tax Accountant

Sentenced for Submitting False

Documents

A former Decatur, Georgia, tax accountant

was sentenced to pay SBA $81,688

restitution. Now a resident of Montego Bay,

probation and is prohibited from returning to

the United States for 3 years. He had

previously pled guilty to one count of
12 Semiannual Report March 1997

signature had been forged. The OIG investigation also found that the rancher

initiated the investigation based on a referral

from SBA's Atlanta District Office.

Indiana Businessman Sentenced for from the loan file. The DOI/OIG asked the

Making False Statement SBA/OIG to join the investigation.

A Muncie, Indiana, businessman was

sentenced to 3 months home detention, 2

years probation, and $115,000 restitution to

SBA. He had pled guilty to one count of

making a false statement to obtain a sentenced to 5 months and 1 month

$400,000 SBA-guaranteed loan. The imprisonment, respectively. They were also

SBA/OIG's joint investigation with the FBI sentenced to 3 years supervised release, the

disclosed that the man falsely certified that first 5 months of which will be under home

the loan proceeds were to be used as restriction, and a $50 special assessment.

operating capital for his machine and

foundry company when he actually used a

substantial portion of the loan proceeds for

his personal benefit. This investigation was

initiated based on a referral from SBA's

Indianapolis District Office.

South Dakota Rancher’s False

Statements Lead to Prison Sentence

An Eagle Butte, South Dakota, rancher was

sentenced to 24 months imprisonment, 3

years supervised release, $115,000

restitution, and a $5,000 fine. He had

previously pled guilty to one count of

making a false statement to a Federal

agency. The SBA/OIG's joint investigation

with the Department of the Interior (DOI)

OIG determined that, to obtain a $150,000

SBA-guaranteed loan, the applicant

concealed from SBA and the participating

lender that he had failed to repay a previous

$30,000 loan guaranteed by DOI's Bureau of

Indian Affairs (BIA). He also submitted a

document falsely claiming that he had

received a $50,000 BIA grant. The

tampered with a witness by attempting to

persuade the participating bank's loan officer

to remove the fraudulent BIA document

Texas Couple Sentenced to Prison for

Making False Statements

An Alvin, Texas, wife and husband were

Both had pled guilty to one count of making

false statements on loan applications to

Federally-insured financial institutions in

an unsuccessful attempt to obtain more than

$500,000 in SBA-guaranteed loans. The

couple submitted bogus tax returns for their

convenience store in Houston, Texas, in an

effort to obtain approval of a $338,000 loan

to finance their purchase of the store. They

also submitted false tax returns for another

convenience store in LaMarque, Texas, to

obtain approval of a $200,000 loan to be

used for the purchase of the store. SBA

foiled the couple’s scheme by declining the

loan applications after the profits reflected

on the false returns could not be verified.

The charges were the result of an OIG

investigation based on a referral from the

Office of District Counsel of SBA’s Houston

District Office.

California Gas Station Owner Sentenced

for Forgery and Possession of Stolen

Mail

The owner of a gas station in San Diego,
Semiannual Report March 1997 13

California, was sentenced to 2 years both reimbursement of amounts the SBA had

imprisonment and a $10,000 fine. He had paid to the bank earlier on six loan

previously been convicted of forging U.S.

Treasury checks and possession of stolen

mail. The U.S. Secret Service asked the

SBA/OIG to join its investigation, which had

identified $340,000 in stolen U.S. Treasury

checks deposited into the man’s business

bank account. The OIG's portion of the

investigation confirmed that he had also

submitted altered tax returns to a

participating lender bank to obtain an

$80,000 SBA-guaranteed loan for business

improvements. As part of his application,

the owner provided "copies" of 3 years of

corporate income tax returns which greatly

overstated the business' taxable income. In

the returns actually filed with the IRS, the

business had reported losses for the same 3-

year period.

Investigation Finds that New York City

Bank Improperly Administered SBAGuaranteed Loans

An Argentine bank, which was once one of

SBA's largest participating lenders in New

York City, paid $1,260,033 to the U.S.

Treasury to settle civil claims for

improperly administering loans

guaranteed by SBA. The OIG investigation

found that bank officers (1) demanded and

obtained from borrowers compensating

balances to offset the non-guaranteed portion

of loans; (2) failed to disburse loan proceeds

in accordance with the bank’s agreements

with SBA; (3) recovered repayments on a

loan without sharing such proceeds guilty to a criminal forfeiture count

proportionately with SBA; and (4) solicited allowing the Government to

illegal "commissions" in connection with recapture the illegal proceeds of his

certain SBA-guaranteed loans. In addition crimes, although at sentencing this

to the $1,260,033 payment, which comprised count was dismissed in the interest of

guaranties and resulting penalties, the bank,

which did not admit to any wrongdoing, has

released SBA from liability on its guaranties

of 22 other loans totaling $4,423,668. In an

earlier result of the OIG investigation

conducted jointly with the FBI and the

bank's cooperation, a former bank vice

president was sentenced to 18 months

imprisonment for soliciting the illegal

commissions.

California Loan Broker and One Client

Sentenced to Prison

A former La Canada, California, loan broker

and eight other persons connected to SBAguaranteed loans he brokered were

sentenced; three more individuals associated

with his SBA loan fraud scheme had charges

brought against them.

 The loan broker was sentenced to

18 months imprisonment, 3 years

supervised release, and $2,928,211

restitution, with $2,499,358

specifically designated for payment

to SBA. He had previously pled

guilty to five counts of making false

statements in a loan application to

a Federally-insured financial

institution in connection with his

scheme to broker more than $15

million of fraudulent SBAguaranteed business loans and SBA

disaster loans. In addition, he pled
14 Semiannual Report March 1997

justice and in return for the California, restaurant pled guilty to

defendant’s cooperation. The

investigation, based on information

provided by a participating lender,

disclosed that the subject brokered

over two dozen fraudulent loans

between 1987 and 1992, primarily

for Korean-American clients. His

scheme involved submitting false

financial information to induce both

the banks and SBA to grant and

guarantee the loans. That false

information included numerous

bogus tax returns, financial

statements, invoices, and cashier's

checks evidencing cash infusions

into the businesses. When the banks

and SBA approved the loan

applications, he would launder part

of the proceeds through his

“dummy” equipment business.

 The owner of an automobile

transmission establishment in Los

Angeles, California, was sentenced to

3 years probation, 300 hours

community service, a $50,000 fine,

and restitution to SBA of $366,155.

He previously pled guilty to one

count of making a false statement

on a loan application to a

Federally-insured financial

institution in connection with his

$420,000 SBA-guaranteed business

loan. The applicant submitted altered

tax returns for the years 1988-90,

each of which significantly

overstated his income. He also

submitted invoices using the names

of nonexistent businesses.

 The former owner of a Pomona,

one count of making a false

statement on a loan application to

a Federally-insured financial

institution; in return, the other

counts on which he had been indicted

were dismissed. He was sentenced to

3 years probation and 200 hours

community service. In applying for

his $550,000 SBA-guaranteed loan,

the businessman submitted tax

returns to the participating lender

which significantly overstated his

business income; he also submitted a

false financial statement to induce

the lender to grant a payment

deferment and not foreclose on the

loan.

 The owner of a general

merchandise discount store in Los

Angeles, California, was sentenced to

3 months in a halfway house, 3

months in home detention, 3 years

probation, 1,500 hours community

service, and $1,144,070 restitution.

He had pled guilty to one count of

making a false statement on a loan

application to a Federally-insured

financial institution in connection

with his $1,000,000 SBA-guaranteed

loan. In addition to false documents

associated with his capital injection,

the man submitted altered Federal

income tax returns for 1987-89,

which significantly overstated his

income, to induce approval of the

loan.

A former personal banking officer

at a bank in Paramount, California,

was sentenced to 3 years probation, a
Semiannual Report March 1997 15

$5,000 fine, and 200 hours of

community service. The judge also The former owner of a Riverside,

prohibited her from ever again California, cafe pled guilty to one

working for a financial institution.

The bank officer had previously pled

guilty to making a false statement

to SBA. In an attempt to help her

sister, who had applied for a $2.1

million Section 504 loan, she

prepared a false deposit verification

form for submission to SBA and a

participating lender bank. On the

form, the bank officer represented

that her bank had two accounts, with

a combined balance of $790,000,

held solely in the loan applicant’s

name. In fact, the accounts were

never the sole property of her sister.

The accounts listed on the form had

been opened by another person, and

the bank officer had added her

sister's name at a later date. The

false statement was detected during

the investigation and SBA canceled

the loan, producing a $750,000 cost

avoidance (SBA's guaranteed share);

the bank officer was terminated from

her position.

The bank officer's sister was

charged in a criminal information

with one count of making a false sentenced to 1 year home detention,

statement to SBA. She had been

approved for a $1.5 million Section

504 loan to fund the acquisition of a

motel in Tehachapi, California.

SBA, however, canceled the loan as guilty to making a false statement

a result of this investigation. The

investigation revealed that the

applicant made false statements

concerning the source of her capital

for the project.

count of making a false statement

on a loan application to a

Federally-insured bank. In return,

the Government agreed to dismissal

of four other counts on which he had

been indicted. He was sentenced to

4 months in a halfway house, 2 years

probation, and 50 hours community

service. In pleading guilty, the man

admitted submitting altered income

tax returns for the years 1987-89

with his application for a $225,000

SBA-guaranteed loan to purchase the

cafe. He also represented on his

business plan that his personal capital

came from the sale of another

business; in fact, he had borrowed

the funds from a friend. The man

also represented that he intended to

purchase machinery and equipment

totaling $125,000 from a company

which was controlled by the loan

broker. The loan broker returned the

funds to the applicant, who then

repaid the undisclosed personal loan.

 The owner of a sporting goods

store in Los Angeles, California, was

3 years supervised release, $50,000

restitution, and 600 hours of

community service. The

businesswoman previously pled

to a Federally-insured financial

institution in support of her

application for a $1,000,000 SBAguaranteed business loan. She

admitted submitting altered tax
16 Semiannual Report March 1997

returns, each of which significantly

overstated her income.

The owner of a grocery and liquor

store in Los Angeles, California, was

sentenced to 2 years probation, 200

hours community service, $231,000

restitution, and a $5,000 fine. The

businessman previously pled guilty

to making a false statement to SBA falsely claimed that she had paid him

in applying for his $231,000 disaster $160,000 outside of escrow. The

business loan. The investigation $160,000 "payment" was submitted

initially discovered that an altered tax as evidence to both the bank and

return had been submitted to obtain SBA that she had made the necessary

an earlier $161,119 SBA-guaranteed capital injection into the project

loan that enabled him to purchase the (purchasing the land and building in

market; it also established that he had which her company was located) to

submitted altered tax returns to qualify for an SBA-guaranteed loan.

obtain a disaster loan for the repair of

damage stemming from the 1992 12 A tax preparer in Los Angeles,

civil unrest. Each of the returns California, pled guilty to aiding and

significantly overstated his income.

The owner of a clothing

manufacturer in La Canada,

California, was sentenced to 1 year

imprisonment, 5 years supervised

release, and restitution of $875,827

to SBA for making false statements

in a loan application to a business’ income, the tax preparer

Federally-insured bank. He had created the illusion that the applicant

obtained a $1 million SBA- had adequate repayment ability and

guaranteed loan, supported by an was creditworthy. The OIG/U.S.

application that contained altered Secret Service investigation revealed

copies of income tax returns for several more individuals for whom

1987-89, each of which significantly the tax preparer had prepared false

overstated the net profit from his income tax returns.

business.

11 A Los Angeles, California, after a participating lender and SBA's Los

businessman and radio talk show Angeles District Office referred the matter.

host was indicted on one count of The U.S. Secret Service subsequently joined

making a false statement in a loan

application to a Federally-insured

financial institution. The

investigation disclosed that the man

sold land and a building to the

sporting goods store owner

mentioned above and assisted her

with the purchase by signing an

escrow modification statement which

abetting the making of false

statements in a loan application to

a Federally-insured bank. He

prepared false income tax returns

submitted in support of a loan

application submitted by the

Pomona, California, restaurant

mentioned earlier. By overstating the

The SBA/OIG initiated this investigation
Semiannual Report March 1997 17

the investigation at the OIG's invitation. false invoice to conceal the true

California Loan Packager Sentenced to

Prison, More Clients Indicted or Pled

Guilty

A fourth former client of a Garden Grove, Gabriel, California, pled guilty to one

California, loan packager has been indicted, count; in return, the other counts on

two others who were indicted earlier have which he had been indicted were

entered guilty pleas, and these two and the dismissed. He was sentenced to 6

packager were sentenced on charges of months home confinement, 3 years

making false statements on loan

applications to Federally-insured financial

institutions.

 The former packager was

sentenced to 2 years imprisonment, 3

years supervised release, and

$15,000 restitution. He had pled

guilty to five counts more than 1 year

earlier, but the plea agreement

remained sealed while the

investigation of his former clients

was completed. The packager

admitted putting together SBA loan

applications containing altered copies

of the applicants' income tax returns

which were submitted to two

southern California participating

lender banks.

 The former owner of a Garden

Grove, California, furniture company

was indicted on one count. She

obtained a $250,000 SBA-guaranteed

loan for her business, but the OIG

investigation found that she had

diverted the loan proceeds to the

purchase of a personal residence and

subsequently defaulted on the loan.

The indictment charged the Illinois Manufacturing Company Pleads

businesswoman with providing a Guilty to Making False Statement

source of her down payment on the

home.

The former owner of a Vietnamese

restaurant and billiard club in San

supervised release, and $16,600

restitution to SBA. The applicant

submitted altered income tax returns

with his application for a $150,000

SBA-guaranteed loan, which

subsequently defaulted.

The former owner of a beauty

salon in Long Beach, California, pled

guilty to one count; the other count

on which he had been indicted was

dismissed. He was sentenced to 6

months home confinement, 3 years

supervised release, and $5,000

restitution, of which 80 percent goes

to SBA. The applicant submitted

false documents to obtain

disbursement of his $150,000 SBAguaranteed loan; the loan also

defaulted.

The joint OIG/FBI investigation, initiated in

1990 based on information provided by

SBA’s Santa Ana District Office, involved

32 loan applications prepared by this

packager. To date, 20 of those loans have

defaulted, resulting in more than $3.2

million in losses to SBA and the banks.
18 Semiannual Report March 1997

An Arthur, Illinois, manufacturer of grain off the debt. The OIG conducted this

wagons and other farm equipment pled investigation jointly with the Defense

guilty to one count of making a false

statement to obtain a $1 million SBAguaranteed loan. In a loan application

document, the company stated that it had not

discharged any hazardous waste onto its

property (a question regarding compliance

with environmental laws is included in the

application), when it knew that hazardous

waste had indeed been unlawfully buried on

its property. The corporation also pled

guilty to one count of unlawful disposal of

hazardous solvents and paint wastes. This

plea agreement was a result of the OIG's

joint investigation with the Environmental

Protection Agency's Office of Criminal

Enforcement.

Guilty Pleas to Money Laundering and

Racketeering in New York Defense

Contractor Case

A Syracuse, New York, warfare-simulation

software development company and its chief

executive officer (CEO) recently pled guilty.

The CEO pled to one count of money

laundering, and the corporation--through its

attorney--pled to being a criminal

enterprise under the Racketeer

Influenced and Corrupt Organization

statute, both in connection with a $750,000

SBA-guaranteed loan. In return for the

guilty pleas, the Government agreed to

dismissal of the other charges against them

listed in a 54-count indictment alleging that

they defrauded the U.S. Navy, the

participating bank, investors, and creditors

of $8 million. The investigation found that

the company and its CEO had failed to

disclose a significant debt when applying for

the loan and used the loan’s proceeds to pay

Criminal Investigative Service, which

brought the case to the OIG’s attention.

Former New York Bank Directors

Convicted on Conspiracy and Bank

Fraud Charges

The former president (and board chairman)

of a now-defunct SBA participating lender

headquartered in Watertown, New York, and

a former counsel to the bank were convicted

on charges of conspiracy, bank fraud, and

the acceptance and payment, of money as

an inducement and reward for bank

transactions. The OIG investigation

revealed that the bank’s president had agreed

to refer the bank’s legal work to the

attorney’s law firm in return for one-sixth of

the legal fees collected. The bank officer

received more than $332,000 from the

scheme. In furtherance of the conspiracy, he

caused the bank to make loans totaling

$1,879,500 to the attorney and his

associates, allowed other individuals to

borrow money from the bank for transfer to

the attorney, and permitted the attorney to

represent both parties in connection with the

closing of most of these loans. As a

consequence of these arrangements, the

loans, several of which were guaranteed by

SBA, were not properly secured and not

repaid. Having lost $13 million on bad

loans, the participating lender bank, which

had been a major community lender to small

business, was declared insolvent and seized

by the Office of the Comptroller of the

Currency (OCC) in 1993. The SBA/OIG

investigation was conducted jointly with the

OCC, the Resolution Trust Corporation, and
Semiannual Report March 1997 19

the FBI; it was based on a referral from investigation, based on a referral from SBA's

SBA's Syracuse District Office. Atlanta District Office, disclosed that the

Washington Manufacturing Company

President Pleads Guilty to Bank Fraud

and Money Laundering

The former president of a Port Angeles, couple had fled the country prior to their

Washington, crane manufacturer pled guilty 1991 indictment, but they were deported to

to one count of bank fraud and one count of

money laundering. He was sentenced on to

37 months imprisonment; 5 years probation;

and restitution of $43,298 to SBA and its

participating lender bank, and $390,500 to

the bank’s investors. The SBA/OIG's joint

investigation with the FBI and the IRS found

that the man made false statements about his

criminal history, his Social Security number,

and his cash injections into his company to

obtain a $100,000 SBA-guaranteed business

loan. Once the loan was disbursed, the

businessman also misused approximately

$12,000 of the loan proceeds for personal

expenses, including payment of his rent and

credit card bills. The loan defaulted after he

fled the Port Angeles area with his firm’s

investors' funds. OIG and FBI agents

subsequently arrested him. The OIG's

investigation was initiated after SBA's

Seattle District Office referred an inquiry

from the Washington State Attorney

General's Office.

Georgia Caterer Found Guilty of

Conspiracy and Bank Fraud

A co-owner of a now-defunct Atlanta,

Georgia, catering company was found guilty

of conspiracy, bank fraud, and submission

of false loan documents to SBA. The man

was sentenced to 10 years imprisonment and

$745,115 restitution. The SBA/OIG

owner and his former wife and business

partner defrauded SBA and Federallyinsured lenders of more than $1 million,

including a $650,000 SBA-guaranteed loan

from a non-bank participating lender. The

the United States--she from Russia in 1995

and he from Cyprus in April 1996. As a

condition of his extradition under Cypriot

law, the U.S. Government dismissed 15

other felony counts on which he had been

indicted. As previously reported, his wife

negotiated a guilty plea to two counts and

agreed to cooperate with the Government's

prosecution of her husband.

California Jewelry Store Owner

Convicted of Making False Statements

The owner of a retail jewelry store in San

Luis Obispo, California, was convicted of

making false statements to a Federallyinsured financial institution. A lengthy

investigation, based on information provided

by SBA’s Fresno District Office and

conducted jointly with the FBI, revealed that

the man submitted fraudulent 1986 and 1987

individual tax returns in support of an

application for a $450,000 SBA-guaranteed

loan approved in 1988. He subsequently

provided false tax returns, both individual

and corporate, for 1988-90 and was

successful in obtaining another SBAguaranteed loan for $100,000. Both loans,

however, went into default and were

liquidated. Following liquidation efforts, a

total of $336,895 was “charged off” by the

lender.
20 Semiannual Report March 1997

Montana Clothing Retailer Pleads

Guilty to Making False Statements

A partner in a clothing retailer in Whitefish, obtained loans valued at $2,408,600. After

Montana, was charged with and pled guilty the collateral supporting the $3,064,600 in

to one count of making false statements to

SBA. This businessman submitted financial

statements and other documents purporting

to give a true picture of the partnership’s

financial situation in an effort to persuade

SBA and its participating lender bank to

accept a $27,500 offer in compromise of its

liability for two SBA loans which defaulted

in 1993; however, the OIG's joint

investigation with the FBI found that the

man had failed to disclose over $165,000 in Ohio Limousine Repair Company

assets, including real estate and corporate Owner Charged with Conversion of

stock, in the offer-in-compromise package. Government Property

This fraudulent offer was intended to

persuade SBA to settle for an unreasonably

small amount. In 1993, he (under a

corporate name) also received $205,000 in

SBA-guaranteed loans from a participating of conversion of Government property in

lender in Idaho based on substantially connection with a $50,000 SBA-guaranteed

different financial statements. The OIG LowDoc business loan. The SBA/OIG

initiated its investigation based on referrals investigation found that the owner sold

from SBA's Helena and Boise District assets of the business which he had pledged

Offices. as collateral for the SBA loan guarantee.

California Automobile Repair Business

Owner Pleads Guilty to Making False

Statements

The owner of an automobile repair business

in North Hollywood, California, was charged

with and pled guilty to one count of making

false statements in a loan application to a

Federally-insured bank. The investigation

revealed that the man submitted false

individual and corporate income tax returns

for 1987-89, all of which significantly

overstated his income to qualify for two statements to obtain a $300,000 SBASBA-guaranteed loans totaling $656,000.

The investigation expanded into his

acquisition of two additional fraudulentlyloans was sold, the lenders suffered losses of

$1,062,068. Information regarding this

borrower was established by SBA/OIG and

U.S. Secret Service agents looking into

disaster loan applications prepared by two

southern California brothers acting as loan

brokers. The repair business owner and his

brother were the only businessmen who had

obtained Section 7(a) loans.

The owner of a limousine repair company in

South Euclid, Ohio, was charged in a

criminal information with one felony count

Moreover, he had converted $8,170 of the

proceeds to his own use. The OIG initiated

the investigation in response to a referral

from SBA's Cleveland District Office.

Missouri Osteopath Arrested Based on

Indictment for Making False Statements

The president of an Excelsior Springs,

Missouri, convenience store was arrested as

he reentered the United States. Based on an

investigation by the OIG, the osteopath had

been indicted on one count of making false
Semiannual Report March 1997 21

guaranteed loan, but the indictment was that also defaulted. Without admitting

suppressed while he was out of the country. liability, he had paid the Government a

The loan to his convenience store, the $65,000 settlement in 1989. The

guaranteed share of which SBA purchased in Department of Justice had requested both the

1993 for $242,508, was made by a “non- SBA/OIG audit and the investigation. Half

bank” participating lender located in the of the dollar recoveries associated with this

geographical area served by SBA's St. Louis claim are reported under the OIG’s

District Office. The man’s alleged false Investigative Recoveries and Fines category

statements included failure to report his debt of the FY 1997 Productivity Statistics table,

to SBA from a defaulted 1977 loan to a the other half under Disallowed Costs

group of his health clinics through SBA's Agreed to by Management.

Kansas City District Office. He also

submitted tax returns which allegedly

overstated his adjusted gross income. This

matter was referred to the SBA/OIG by a

servicing loan officer in SBA's Kansas City

District Office. The former owner of a computer sales and

$1.4 Million Paid on Behalf of

Connecticut Bank for Fraudulent

Representations and Improper

Servicing of SBA-Guaranteed Loans of bank fraud and one count of making

The Federal Deposit Insurance Corporation,

as receiver for the successor to an Orange,

Connecticut, bank, issued a $1,486,340

Notice of Allowance of Claim and paid the

first $1,398,081 of that claim, in connection

with a settlement of the bank's liability for its

handling of nine SBA-guaranteed loans that

ultimately went into default. SBA had

alleged, based on findings of an OIG audit

and an investigation, that the bank had

violated the False Claims Act and breached

its contract with SBA by knowingly "kiting" approximately $10,000 in checks

allowing false statements to be submitted to drawn on his credit union account. The

the Agency, failing to properly collateralize SBA/OIG and the FBI joined the

the loans, and generally failing to follow investigation initiated by the U.S. Secret

prudent banking practices in servicing the Service.

loans. The bank's president had acted as

both loan officer and approving official on

both these guaranteed loans and five others

New York Computer Company Owner

Sentenced for Bank Fraud and Making

False Statements

service business in Binghamton, New York,

was sentenced to 5 years probation, 1,000

hours community service, and $164,025

restitution. He had pled guilty to five counts

false statements to SBA. A multi-agency

investigation revealed that the businessman

had grossly overstated the value of assets in

a listing he submitted to forestall a

participating lender bank and SBA from

calling his delinquent $450,000 SBAguaranteed loan. He also admitted using

personal and business credit cards to obtain

approximately $34,000 in fraudulent cash

advances (establishing a false account

receivable with his credit card and then

withdrawing cash against the credit) and
22 Semiannual Report March 1997

Last Client of California Loan Packager

Sentenced to Prison for False Tax

Returns in Loan Application

The former owner of a Paramount, then immediately sold it to her for $900,000,

California, marble flooring company was thereby doubling its purchase price. The

sentenced to 30 months imprisonment, 10 participating bank financed the purchase

years supervised release, and $292,581 based on this inflated price. The father also

restitution. He had been found guilty on falsely represented to the bank that he was

seven counts of making false statements on

a loan application to a Federally-insured

financial institution in connection with his

$300,000 SBA-guaranteed business loan.

The businessman was identified in a joint

SBA/OIG and FBI investigation examining

the inclusion of false tax returns and false

invoices in applications submitted to SBA's

participating lenders by a Westminster,

California, loan packager (who also was

sentenced to 2 years imprisonment). The

investigation was opened based on a referral

from SBA's Los Angeles District Office.

California Father Sentenced to Prison

for Bank Fraud and Loan Fraud

A Woodland Hills, California, man was

sentenced to 41 months imprisonment, 3

years supervised release, and $524,891

restitution payable 80 percent to SBA and 20

percent to the participating lender bank. He

had been convicted on charges of bank

fraud and making a false statement to a

Federally-insured lender. His daughter

had also been indicted on two felony

charges, which were subsequently dismissed

based on her claim that, at only 18 years of

age, she had not understood the significance

of the documents she signed. The OIG

investigation revealed that the daughter's

application for a $665,000 SBA-guaranteed

loan to purchase real property for the

operation of a nursery contained false

financial documents, including false tax

returns. Her father, acting under an alias,

had purchased the property for $450,000 and

giving his daughter a gift of $160,000

toward the purchase of the property. The

nursery never opened for business, and the

loan went into default after only two loan

payments had been made. The SBA/OIG

initiated this investigation based on a referral

from SBA's Los Angeles District Office.
Semiannual Report March 1997 23

Disaster Loan Program

Pursuant to Section 7(b) of the Small Business Act, as amended, SBA's disaster loans

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 energize

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 more 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 1996, SBA approved 37,822

loans for $987.9 million, of which almost 30,000 loans totalling $867 million were actually

disbursed. Since the inception of the program, SBA has approved more than 1,336,800

disaster loans for more than $23.9 billion. As of the end of FY 1996, the SBA disaster loan

portfolio included more than 274,000 loans valued at over $6.9 billion. The total available

for FY 1997 disaster loans, including carryover and contingency funds, is approximately

$1.628 billion.

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 can

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.
24 Semiannual Report March 1997

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's disaster loan programs

during the reporting period:

Three audit reports were issued

during the reporting period, and three

others were underway.

Disaster loan investigations resulted

in 9 new indictments and 10

convictions, and produced

$7,292,782 in court-ordered

restitution, $39,000 in other

recoveries by SBA, and $13,900 in

fines and civil penalties.

Office of Security Operations name

checks resulted in the declination of

14 disaster loans totaling $1,405,745.

Six disaster loan investigations were

closed, leaving an inventory of 92

active cases involving 414 subjects.

Due to workload demands, another

two disaster loan cases were referred

to other law enforcement agencies

for investigation, resulting in a total

of seven disaster loan referrals for the

OIG to monitor.

Five Standard Operating Procedures

(SOP) were reviewed during the

reporting period.

Fi gur

e 2
Semiannual Report March 1997 25

Efforts to Improve SBA

Program Management

Audit Finds Electronically Disbursed

Disaster Funds Are Supported by

Appropriate Internal Controls

The OIG issued an audit survey report that

found that internal controls for a new system

to disburse disaster loans electronically

were generally appropriate. The survey also

found that some required procedures,

however, had not been adopted. An audit

survey of the conversion found that

improvements were needed relating to

certain physical security measures,

separation of duties, documentation of

certain Electronic Fund Transfer (EFT)

procedures, data protection (encryption),

password renewal, dual controls for setting

up new users, written procedures for rejected

transmissions to the Department of the

Treasury, and the keeping of troubleshooting

logs. The audit survey also found a need for

a contingency plan for emergencies,

computer security training, and a computer

security recertification of the Office of

Disaster Assistance's Automated Loan

Control System. The Associate

Administrator for Disaster Assistance, who

requested the review, agreed to consider Mississippi Businessmen Sentenced for

these issues in the overall development of a Conspiracy and Making False

system security plan. Statements

Disaster Loan Origination and Servicing

Problems Found at SBA’s Los Angeles

District Office

An OIG audit of disaster loan servicing at

SBA’s Los Angeles District Office (LADO)

found that there were problems in the

origination or servicing of 17 of a

judgmental sampling of 24 disaster loans

assigned to the LADO. Origination

shortcomings included approving loans to

borrowers that had access to credit

elsewhere, overestimating borrower

repayment ability, misjudging the impact of

undisclosed liens on SBA collateral, not

verifying information supplied by borrowers,

and not detecting or rejecting potentially

fraudulent documents. Servicing shortfalls

included failure to contact borrowers, lack of

follow up on servicing actions, uneven

enforcement loan terms, and failure to

respond to early warning signals.

The auditors recommended the

establishment of a quality assurance process;

the Associate Administrator for Disaster

Assistance concurred and agreed to take

action. The auditors also recommended

increasing the servicing and liquidation staff

or developing other alternatives to address

the problems identified; the Associate

Administrator for Financial Assistance

generally concurred with this

recommendation. 

Activities to Enhance Fraud

Detection and Deterrence

The proprietor of a timber company in

Hattiesburg, Mississippi, and his attorney

were sentenced. Each was ordered to pay

$3,600 restitution and a $150 special

assessment. In addition, the owner was

sentenced to 18 months imprisonment and 2

years supervised release, and the attorney

received a sentence of 4 months home
26 Semiannual Report March 1997

confinement and 2 years probation. The to 5 years probation, 1,500 hours community

attorney had pled guilty to making material

false statements to influence SBA, and the

owner had been convicted on one count of

conspiracy and two counts of making

material false statements to influence the

Agency. At the sentencing hearing, the

judge set aside the conviction of the owner’s

wife, who had been found guilty on one

count of making material false statements

to influence SBA. All the charges relate to

a $222,400 economic injury disaster loan the

owner received in 1993. The OIG initiated

the investigation based on a referral from

SBA's Gulfport Branch Office.

North Dakota Resident Sentenced for

Theft of Public Money

A resident of Mandan, North Dakota, was

sentenced to 1 month home detention, 1 year

probation, and 25 hours community service.

She previously pled guilty to one count of

theft of public money. The OIG

investigation determined that the applicant

failed to show a $103,189 judgment on her

application for a $35,000 disaster home loan.

A court-authorized search of her home by an

SBA/OIG agent and Deputy U.S. Marshals

documented that she had not used the loan

proceeds to repair her home, as she had

claimed, resulting in the charge of theft of

public money. The investigation was

initiated based on a referral from SBA's

Fargo District Office.

California Food Market Owner

Sentenced for Filing a False Claim

The owner of a food market in Reseda,

California, pled guilty to one count of filing

a false claim with SBA. He was sentenced

service, and a $2,500 fine. The OIG

investigation, opened in response to a

referral from the Disaster Assistance Area 4

Office, revealed that the man falsely claimed

that his business suffered $180,000 in

physical damage and $260,000 in economic

injury following the Northridge earthquake.

The market closed permanently nearly 4

months before the earthquake, and all the

invoices submitted by the applicant to

support disbursement of loan proceeds were

bogus.

California Homeowner Pleads Guilty to

Lying About Debts

A Northridge, California, homeowner pled

guilty to one count of making a false

statement to SBA. He was approved for a

$123,100 disaster home loan following the

1994 earthquake. After receiving $38,900 in

disaster loan proceeds, the man submitted a

series of letters, one supported by a signed

financial statement, requesting that SBA

reduce his monthly payments because his

financial condition had worsened due to a

new $20,000 installment debt incurred for

the purchase of a 1994 Acura automobile.

The SBA/OIG's investigation revealed,

however, that the applicant had paid cash for

the vehicle. The man learned of the OIG

investigation in September 1996 and

immediately repaid the $39,000 balance of

his SBA loan. The investigation was

initiated at the request of the U.S. Attorney

for the Central District of California.

Two Alabama Businessmen Plead Guilty

to Mail Fraud

The owner of a real estate company in
Semiannual Report March 1997 27

Enterprise, Alabama, pled guilty to one by the SBA/OIG's Auditing Division. One

count of mail fraud in an effort to obtain a

$186,800 SBA business physical disaster

loan. In return, the Department of Justice

agreed to dismissal of the other 11 counts on

which he had been indicted and the 1 count

on which his codefendant, a Dothan,

Alabama, man had been indicted. The SBA/

OIG's investigation determined that,

following a 1990 flood, the real estate

company owner applied for the loan and

fraudulently listed damaged properties that

he did not own. While misusing the loan

proceeds, he mailed claims and receipts

showing that these properties had been

repaired or replaced. His accomplice’s California Loan Packager Sentenced to

alleged part in the scheme involved Prison for Submitting False Documents

falsifying repair receipts and thereby to Government

precipitating SBA’s ordering of a $12,800

joint payee Treasury check; the accomplice

endorsed the check but the co-payee never

received any of the proceeds. The

investigation was based on a referral from

SBA's Birmingham District Office.

California Real Estate Development

Company Owners Sentenced for Filing a

False Claim

The former co-owners of a real estate his criminal activity, he also assisted others

development company in Monterey Park, in the submission of false tax returns

California, each pled guilty to one count of supporting six SBA disaster business loan

filing a false claim with SBA. One was

sentenced to 366 days imprisonment and a

$50 special assessment; the other was

sentenced to 4 months home detention, 3

years probation, and a $50 special

assessment. Together, they were ordered to

pay $109,300 restitution. the man admitted making false statements

The investigation leading to the above

results was based on information provided

partner applied for a $300,000 economic

injury disaster loan following the 1992 Los

Angeles civil unrest. The investigation

disclosed that the application package,

prepared with the assistance of the owner,

included copies of falsified individual

income tax returns for the second man and

an altered copy of the 1991 corporate

income tax return. Relying on these false

documents, SBA approved and disbursed a

$109,300 loan that ultimately went into

default without a single payment having

been made.

One of two Beverly Hills, California,

brothers, both primary subjects of the OIG’s

investigation of unscrupulous loan

packagers, was sentenced to 61⁄2 years

imprisonment and restitution of $7,069,332

in connection with the eight felony counts to

which he had previously pled guilty. The

man admitted that he had participated in the

submission of false documents to a

Federal Government agency. As a part of

applications, totaling more than $3.9 million.

The disaster loan applications included

claims of both physical and economic injury

and spanned three Los Angeles-area

disasters: the 1992 civil unrest, the 1993

fires, and the 1994 earthquake. In addition,

to Federally-insured financial institutions,

i.e., submitting false tax returns. This

sentencing was one result of a joint
28 Semiannual Report March 1997

SBA/OIG and U.S. Secret Service returns, which significantly

investigation prompted by a tip from a overstated her business income, SBA

concerned citizen and a referral from SBA’s disbursed $61,500; she has failed to

Disaster Assistance Area 4 Office. Of the 27 make a single payment on this loan.

individuals who have been charged as a

result of this investigation, all have pled The owner of another company

guilty. One of the two brothers remains a was sentenced to 5 years probation,

fugitive at large. Other results in this period 2,000 hours community service,

are: $116,300 restitution to SBA, and a

 The owner of a Los Angeles,

California, clothing manufacturer

was sentenced to 2,000 hours

community service, 5 years

probation, a $2,000 fine, and full

restitution to SBA. He pled guilty to

knowingly converting SBA disaster schedule of liabilities that included

loan proceeds to his own use. He numerous creditors with whom he

had submitted a fraudulent had never actually done business.

application for a $180,000 economic

injury disaster loan following the The owner of a liquor store in Los

1992 Los Angeles civil unrest. Angeles, California, pled guilty to

Because he applied for a loan for

which he knew he was ineligible, his

use of the loan proceeds constituted

conversion.

The owner of a clothing

manufacturer in Los Angeles,

California, was charged with and

pled guilty to one count of filing a

false claim with SBA. She was

sentenced to 4 months home

detention, 3 years probation, and 100

hours community service. She

submitted falsified income tax

returns for 1990-91 with her

application for a $300,000 economic

injury disaster loan following the

1992 Los Angeles civil unrest.

Based on the bogus financial

information reflected in her tax

$2,500 fine. He had pled guilty to

filing a false claim with SBA. With

his application for a $500,000 loan,

the businessman submitted altered

copies of tax returns which

significantly overstated his business'

income. He also submitted a

one count of making false

statements in a loan application to

a Federally-insured bank and one

count of making a false statement

to SBA. In March 1991, the man

submitted fraudulent 1987-90 income

tax returns to a participating lender

bank to obtain a $631,500 SBAguaranteed business loan. Following

the 1992 Los Angeles civil unrest, he

submitted false tax returns for 1989-

91 to SBA in an effort to obtain

disaster assistance. He ultimately

obtained both a $71,800 physical

damage business loan and a $59,200

economic injury loan. In addition,

the investigation led to his

acquisition of other additional

fraudulently-obtained bank loans

totaling $1,193,750. The store
Semiannual Report March 1997 29

owner's actions resulted in losses to when they were damaged or destroyed

SBA and other lenders of $1,097,388 during a severe storm; he also falsely stated

after he filed for bankruptcy and the that he would use proceeds of the disaster

existing collateral was sold. loan to repair or replace the six mobile

 A tax preparer in Glendale, investigation based on information from an

California, was charged with and anonymous caller.

pled guilty to aiding and abetting the

making of material false Virgin Islands Resident Pleads Guilty to

statements. He prepared altered Making False Statements

income tax returns which were

submitted to SBA in support of a

$450,000 economic injury disaster pled guilty to one count of making false

loan application. The man

significantly overstated a loan

applicant's income on both corporate

and personal tax returns. The

SBA/OIG's joint investigation with

the U.S. Secret Service revealed that

the tax preparer altered income tax

returns for other SBA disaster loan

applicants as well, two of whom

previously pled guilty to related

criminal charges. This is the first tax

preparer charged in the continuing

investigation of disaster loan

applications packaged by the two

southern California brothers.

Georgia Disaster Loan Applicant

Sentenced for Making False Statements

A St. Marys, Georgia, businessman was

sentenced to 5 years probation, 200 hours

community service, and a $5,000 fine. He

had pled guilty to making material false

statements to induce SBA to disburse a investigation based on a referral from the

$125,000 disaster business loan to cover Liquidation Division of SBA's Los Angeles

physical damage to a mobile home park. District Office and continued it jointly with

The investigation found that he falsely the Social Security Administration’s OIG

represented that he had been the sole owner and the U.S. Secret Service. The

of a mobile home park and six mobile homes investigation revealed that the man had filed

homes. The SBA/OIG initiated the

A resident of St. Croix, U.S. Virgin Islands,

statements to SBA. The SBA/OIG's joint

investigation with the Federal Emergency

Management Agency's (FEMA) OIG

developed evidence that the man’s

application for a $10,000 disaster home loan

contained false claims for lost property, a

false bill of sale for an automobile, and

falsified property rental agreements. The

applicant received the loan and a $1,290

grant from FEMA to cover purported

damage from Hurricane Marilyn. The

investigation was based on a referral from

the temporary SBA Disaster Assistance

Office in St. Croix.

California Television Repair Shop

Owner Indicted for Making False

Statements

The former owner of a television repair shop

in Los Angeles, California, was indicted on

two counts of making false statements to

SBA. The SBA/OIG initiated the
30 Semiannual Report March 1997

for bankruptcy under several Social Security had applied for disaster loans totaling

numbers and concealed the bankruptcy $240,579 for his business following the 1992

filings from SBA to obtain two disaster loans Los Angeles civil unrest. The SBA/OIG's

for his business following the 1992 civil investigation disclosed that his application

unrest. He also submitted altered copies of package included a falsified individual

income tax returns with his applications for income tax return and a Form 413, Personal

the $26,400 physical damage loan and the Financial Statement, that overstated his

$13,300 economic injury loan. income. On both those documents, as well

North Carolina Disaster Home Loan

Borrower Indicted for Making False

Statements

A Waynesville, North Carolina, disaster injury loan. The investigation was based on

home loan borrower was indicted on two information provided by SBA's Disaster

counts of making material false statements

that influenced SBA to disburse a $38,400

disaster home loan. The homeowner California Meat Market Owner Pleads

allegedly submitted to SBA's Disaster Guilty to Filing False Claim

Assistance Area 2 Office falsified

documentation of her use of the loan

proceeds, including a mobile home

certificate of title, a purchase order, a one count of filing a false claim with SBA.

certification of hazard insurance, a deed of In return, the Federal Government agreed to

separation, and a title insurance policy. dismissal of the five remaining felony

Subsequently, the woman also submitted charges on which he had been indicted. The

allegedly false documents, including a SBA/OIG initiated the investigation of the

purchase contract and two bank statements, owner following receipt of a letter from his

to the investigating OIG special agent in insurance company. The investigation

support of her disaster-related claims. This documented that the man had received a

SBA/OIG investigation was initiated based $174,100 disaster business loan following

on a referral from SBA's Disaster Assistance the 1992 civil unrest in Los Angeles,

Area 2 Office. claiming extensive damage to his store from

California Restaurateur Indicted for

SBA and Social Security Fraud

The former owner of a Compton, California, interviewed, the owner confessed that he had

restaurant was indicted on one count of overstated his losses and admitted

making a material false statement to SBA

and one count of fraudulent use of a Social

Security number (SSN). The restaurateur

as on his Form 912, Statement of Personal

History, the man is alleged to have used a

bogus. Relying on this false information,

SBA disbursed a $115,800 physical damage

loan and another $18,200 of his economic

Assistance Area 4 Office.

A former owner of a meat market in

Huntington Park, California, pled guilty to

looting. After only making two payments,

the loan went into default. Interviews with

numerous witnesses confirmed that little or

no looting took place at the market. When

overstating his income on the bogus tax

returns submitted with the loan application.

The IRS had no record of the owner having
Semiannual Report March 1997 31

filed any tax returns for the years in

question, 1988 through 1991. He was

sentenced to 3 months home detention with

electronic monitoring and 3 years probation.
32 Semiannual Report March 1997

Small Business Investment Companies

The primary purpose of the Small Business Investment Company Program is to provide a

source of long-term debt and equity capital to new or expanding small businesses. Small

Business Investment Companies (SBICs) are independently-owned and managed, profitmaking investment companies which are licensed by SBA to finance small businesses by

making long-term loans and investing in their equity securities. SBICs often also provide

management assistance to the companies they finance.

The role of SBA is (a) to determine which SBICs to license, (b) to oversee and regulate those

licensees, and (c) to arrange for government-guaranteed financing from private sources to add

to their capital. Such financing, termed "leverage", is provided through either debentures or

participating securities issued by the SBIC. The participating security was created by the

Small Business Equity Enhancement Act of 1992 to serve the needs of SBICs investing

principally in equity securities which do not generate income to cover the interest on their

debenture leverage. They represent a limited partnership interest in the SBIC whereby SBA

advances the cost of the leverage, termed prioritized payments and equivalent to interest, until

profits have been generated from the SBIC's equity investments. In consideration, SBA

participates in approximately 10 percent of the SBIC's profits. SBA arranges quarterly public

offerings of trust certificates backed by pools of SBIC debentures or participating securities

which it guarantees as to payment of principal and interest. 

As of the end of FY 1996, there were 282 licensed, active SBICs, with private capital of $4.5

billion and leverage of $1.4 billion for total capital of $5.9 billion. Included are 88

Specialized SBICs (SSBICs) which were licensed under Section 301(d) of the Small Business

Investment Act to invest only in small businesses owned and managed by socially or

economically disadvantaged persons. (Section 301(d) was repealed in 1996, but existing

SSBICs were "grandfathered" and continue to operate as before.) In addition, there were 160

SBICs in liquidation owing SBA $302 million. The SBIC program level in FY 1996 was $374

million. The FY 1997 program level will be $667 million, signaling a material expansion of

the program.
Semiannual Report March 1997 33

The SBI Act generally requires that all SBICs licensed by SBA be examined 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 from the OIG to the Agency effective October 1, 1992. While SBA's Investment

Division is now responsible for these examinations, the OIG continues to have authority to

audit 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, one conviction, and a $1

million recovery.

One SBIC investigation was closed,

leaving an inventory of 13 active

cases, involving 29 subjects.

Two SBIC regulations were

reviewed, as were four Standard

Operating Procedures (SOP).

Figure 3
34 Semiannual Report March 1997

Efforts to Improve SBA

Program Management

SBIC Program SOPs Reviewed

As part of SBA's initiative to update and

streamline its SOPs, the OIG reviewed and

commented on proposed revisions to several

SBIC program SOPs. In reviewing SOP 10

06 2, Oversight and Regulation of SBICs,

the OIG commented on plans for orderly

liquidation, examination report findings,

resolution of adverse findings, capital

impairment, and repeated regulatory

violations. The office’s review of SOP 10

08, SBIC Examinations, and SOP 10 09,

Examination of SBICs, led to comments on

the review of independent public

accountants’ reports and verification of use

of proceeds by portfolio concerns. 

Activities to Enhance Fraud

Detection and Deterrence

California Restaurateur Indicted for

Bank Fraud

The former owner of a restaurant in La

Mesa, California, was indicted on three

counts of bank fraud. One count involved

a $465,000 loan from a now-defunct

specialized small business investment

company (SSBIC) in Southfield, Michigan.

The owner applied for the loan in the name

of the restaurant, purportedly to make

improvements to the facility. He is alleged

to have falsified documents submitted to the

SSBIC in an effort to conceal that the true

(and ineligible) use of the loan proceeds was

to make a down payment on an option

contract to purchase stock in a chain of

convenience stores. The joint SBA/OIG,

FBI, and U.S. Secret Service investigation

developed from information uncovered in a

previous OIG investigation of this particular

SSBIC.

Owner of Defunct California SSBIC

Pleads Guilty to Misapplying Funds

A Korean national who had been president

and majority shareholder of a now-defunct

SSBIC in Los Angeles, California, pled

guilty to four felony counts of

misapplication of funds of an SBIC. In

return, the Government agreed to dismissal

of the 11 remaining charges on which he had

been indicted in May 1989. At that time, the

businessman was believed to be out of the

country, and a fugitive warrant for his arrest

was issued. The warrant remained

outstanding until November 1996 when he

re-entered the United States and was

arrested. The indictment was a result of a

lengthy investigation which the SBA/OIG

conducted jointly with the FBI. The case

was initiated after allegations of wrongdoing

were received from the SSBIC’s investment

advisor, an individual who had been placed

in that position by SBA to monitor the

company’s operations. The investigation

disclosed that the owner made false

statements concerning the amount of money

he had invested in the SSBIC and that he

misapplied more than $400,000 by pledging

company assets for his personal enrichment.

To conceal his illegal activities, he also

falsely reported in the SSBIC’s records that

loans totaling at least $337,500 had been

repaid. In 1987, the SSBIC was placed in

receivership by SBA, which thereafter

obtained a civil judgment in excess of $5
Semiannual Report March 1997 35

million against the SSBIC and its owner.

SBA ultimately suffered a loss of more than

$3.7 million, however, because of his

actions.

Receivership of Corruptly-Run SSBIC

Pays SBA Another $1 Million

The receivership of a Southfield, Michigan,

SSBIC, which was ordered as a result of

information developed during the

SBA/OIG's joint investigation with the U.S.

Secret Service, paid SBA another $1 million

generated from its "closing down" of the

former licensee's business. This brings the

total recovered by SBA under the terms

of the 3-year old receivership to $4

million. The SSBIC's former owner was

previously sentenced to 1 day's

imprisonment and forfeiture of $50,000 to

the Government for receiving an unlawful

benefit during the time period he operated

the SSBIC. The investigation found that

from 1987 through 1992 he solicited and

received money or payment of a personal

debt from prospective borrowers of the

SSBIC in exchange for approving and

disbursing loans to their companies.
36 Semiannual Report March 1997

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 Current Manual of Rules, Procedures

and Classifications of the Surety Association of America, 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 Department of the 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 audit 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 1996,

SBA contingent liability for new final bond guarantees, including those issued under the PSB

program, was $724 million. The appropriated guarantee authority level for FY 1996 surety

bond guarantees was $1.767 billion; in FY 1997, it is $1.767 billion.

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's surety bond guarantee

program during the reporting period:

Two audit reports were issued during

the reporting period.

One surety bond investigation, with

two subjects, remained active at the

end of the reporting period.
Semiannual Report March 1997 37

Figure 4

Audit Reveals Incomplete Forms Used

to Support Surety Guarantees

A recently released audit of a surety

company in Baltimore, Maryland, revealed

that complete information on surety Bonds Improperly Underwritten

applications was not being provided to

SBA on Form 994. The surety company

claimed that the form was not being filled

out completely because of improper

instructions issued by SBA in March 1996.

Without the completed form, SBA lacks

important information on start dates,

subcontractors, previous SBA bonds, SBA

debts, type of business, affiliates, and gross

receipts. As a result of the audit, which was

requested by the Office of Surety

Guarantees, the Associate Administrator for

Surety Guarantees issued clarifying

instructions on January 27, 1997, that Form

994 is to be completed in its entirety on

initial surety bond guarantees for a

contractor.

Audit of a Maryland Surety Uncovers

An audit of a preferred surety company (a

company that can underwrite SBAguaranteed bonds without prior approval of

SBA) in Maryland found that SBA

guarantees were issued inappropriately in

10 of 50 bonds examined in the audit. As a

result, SBA provided $5.3 million in

guarantees that should not have been made.

The bonds were inappropriate because of

contract splitting and the fact that some

projects had already started. Splitting a

contract into two or more contracts to avoid

the $1,250,000 limit on SBA-bonded
38 Semiannual Report March 1997

projects is a violation of the regulations.

Bonding a project after it has started is also

a violation of regulations, unless the Surety

obtains SBA written permission. Nine of the

10 bonds cited in the audit involved contract

splitting; 6 were issued after the project

started and without Agency approval. The

OIG recommended that SBA deny liability

on all the bonds involving contract splitting

or untimely approvals and remind the

company that it must adhere to SBA

regulations. The Associate Administrator for

Surety Guarantees agreed with the

recommendations.
Semiannual Report March 1997 39

Government Contracting Programs

SBA provides assistance to small businesses in obtaining a fair share of Federal Government

contracting opportunities. 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 Sale s

Assistance, and the Procurement Automated Source System.

The goals of the Prime Contract Program 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 use of small businesses by

the Government’s large 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 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.
40 Semiannual Report March 1997

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's Government contracting

programs during the reporting period:

One Government contracting

investigation was closed; 6 others

were active, involving 14 subjects.

One Government contracting

investigation continued to be

monitored. Due to SBA/OIG

workload constraints, it had

previously been referred to another

law enforcement agency for

investigation.

Two regulations were reviewed in

this program area, as were six

Standard Operating Procedures

(SOP).

Efforts to Improve SBA

Program Management

Women-Owned Business Regulations

Reviewed

The SBA/OIG reviewed a proposed

amendment to 13 C.F.R. Part 125 (SBA’s

Government contracting regulations) that

would incorporate the definition of “womenowned business,” as established in the

Federal Acquisition Streamlining Act of

1994; provide for a self-certification process

for firms claiming status as women-owned

businesses; and establish administrative

procedures for resolving challenges to such

self-certifications. The OIG commented on

ownership requirements for limited liability

companies, the self-certification process, the

penalties for adverse status determinations,

and groups or individuals who may protest

awards of sole source contracts.

Government Contracting SOPs

Reviewed

As part of SBA's initiative to update and

streamline its SOPs, the OIG reviewed

proposed revisions to six Government

contracting SOPs and commented on

several. In reviewing SOP 60 03 5,

Subcontracting Assistance Program, the OIG

commented on prime contractor and

subcontractor of the year award procedures.

Our review of SOP 60 04 4, Certificate of

Competency Program, led to a comment on

procedures for integrity referrals. Finally, in

reviewing the Size Determinations

procedures (SOP 90 01 3), the OIG

commented on provisions concerning

criminal, civil, and administrative penalties

for misrepresenting small business size

status. 
Semiannual Report March 1997 41

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 commercial

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, 1996, there were more than 6,115 approved program participants. In FY 1996,

Section 8(a) program participants received 5,678 contracts and 27,262 modifications with an

aggregate value of $6.0 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 provides specialized training,

professional consultant assistance, and executive development 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. 

There are over $9 billion in Section 8(a) subcontracts currently outstanding and subject to

OIG audit, inspection, and investigation oversight activities. These contracts are reflected in

other Government agencies' portfolios; therefore, their values are not included in our almost

$35 billion audit, inspection, and investigation universe.
42 Semiannual Report March 1997

Summary of OIG Activity

The following summarizes SBA/OIG

activities relating to the Agency’s minority

enterprise development (MED) programs

during the reporting period:

The Investigations Division’s name

checks resulted in the declination of

six applications for the Section 8(a)

program.

Seven MED investigations were

closed, leaving an inventory of 6

active cases involving 18 subjects.

Three MED cases continued to be

monitored which, due to workload

demands, had previously been

referred to other law enforcement

agencies for investigation.

Two audits were underway during

the reporting period.

The OIG reviewed two regulations in

the MED program area.

Efforts to Improve SBA

Program Management

Program Vulnerability Memorandum

Issued on Need for Nationwide Section

8(a) Applicant Database

In October 1996, SBA’s Inspector General

(IG) issued a program vulnerability

memorandum (PVM) to the Associate

Deputy Administrator for Government

Contracting and MED (ADA/GC&MED).

The PVM was prompted by a referral to the

OIG's Investigations Division that revealed

an Agency vulnerability to potentially

fraudulent Section 8(a) applications. The

PVM was based on the understanding that

applicants for the Section 8(a) program are

not checked against a list of prior applicants;

consequently, a rejected Section 8(a)

applicant could move to another state and

simply reapply for admission to the program,

possibly with a fraudulent application or

with the hope that the reason for

disqualification would be overlooked.

An OIG review of SOP 80 05 02 found no

requirement to check an applicant company's

name or its principals against a nationwide

list of previous applicants and participants.

As a result, unscrupulous company

principals could fraudulently tailor their

application to satisfy program admission

requirements, change their company's

mailing address, and reapply for admission

to the Section 8(a) program.

The OIG suggested the creation of a

database containing, at a minimum, the

names of both current and prior Section 8(a)

participants, as well as those whose

applications were either withdrawn or

rejected. Identifiers, such as address, Social

Security number, date and place of birth,

employer identification number, and type of

business, should accompany each name.

The OIG also suggested that, to put such a

database to effective use, SOP 80 05 02

should be revised to include a requirement

that the database be queried by any SBA

district office or Central Office Duty Station

processing a Section 8(a) application. While

duplicate "hits" would in most cases be

resolved in favor of the applicant, deceptive
Semiannual Report March 1997 43

or fraudulent applications could be detected

and unjustified certifications avoided.

Finally, the OIG expressed the view that

MED's Central Tracking System, currently

being converted from mainframe to Personal

Computer use, represents a good start on a

workable solution. The OIG urged MED to

continue refining the system’s capabilities

and to make its use part of the routine

processing of Section 8(a) applications. As

of the close of this reporting period, the OIG

had received no reply from the

ADA/GC&MED.

Minority Enterprise Development

Program Regulations

The OIG reviewed a draft of proposed

amendments to 13 C.F.R. Part 124,

governing the minority enterprise

development program, and provided

numerous comments to the Agency for its

consideration in developing proposed

regulations. The OIG’s comments focused

on such issues as evidence of social

disadvantage, determinations of economic

disadvantage, net worth limits, the

requirement that a firm have been in

business for two years, brokers’ participation

in the program, the non-manufacturer rule,

graduation from the program, termination

proceedings, transfers and withdrawals of

business assets, sole source contracts,

competitive mix requirements, joint

ventures, Section 8(a) sole source contracts,

and subcontracting limitations.

Activities to Enhance Fraud

Detection and Deterrence

Colorado Construction Company

Terminated from Program

SBA's termination of a Denver, Colorado,

company from the Section 8(a) program

became final during this period. SBA had

proposed the termination more than 1 year

earlier based on the findings in an OIG

investigation report. Shortly after the

company was awarded a $22.5 million Small

Disadvantaged Business (SDB) set-aside

contract, a complaint was received that the

owner was not disadvantaged, as he had

claimed. At the time of this protest, the OIG

and the FBI were investigating the man on a

separate contracting-related allegation. The

investigation determined that the company

owner also submitted documents to SBA

representing that he was born in Bombay,

India and was therefore, presumed to be

disadvantaged. Documents obtained during

the investigation disclosed that he was

actually born in Iran, a country of origin to

which the presumption of disadvantage has

not been accorded. Based on the

investigation report, SBA determined that

the construction company was ineligible for

SDB set-aside contracts.
44 Semiannual Report March 1997

Economic Development

(Business Education and Training)

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

partnership between 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 approximately 1,000 subcenters or service locations

located at colleges, universities, vocational schools, chambers of commerce, economic

development corporations, or downtown storefronts. In FY 1996, SBDCs provided

counseling and training to over 570,000 clients.

The Service Corps of Retired Executives (SCORE) is another of the valuable business

development resource partners of SBA. Composed of approximately 12,400 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. Over 250,000 clients were assisted in FY 1996.

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 counselor and can address the varied business

start-up and growth issues encountered by small business owners. There are currently 40 BICs

in operation.
Semiannual Report March 1997 45

Summary of OIG Activity

The following summarizes SBA/OIG

activities relating to the Agency’s economic

development programs during the reporting

period:

One economic development case

produced civil settlements totaling

$91,479, and two other cases were

opened; three cases (four subjects)

remained active at the end of the

reporting period.

One audit was issued during the

reporting period and another was

underway.

Efforts to Improve SBA

Program Management

Audit of Maryland Small Business

Development Center Identifies

Erroneous Claims

An audit of a Maryland small business

development center identified $529,000 of

claimed costs that were unallowable under

program guidelines. These included the

salary of a non-SBDC employee, paid leave

for employees not entitled to the benefit,

unrelated travel, improper procurement, and

excessive indirect cost. The SBDC’s

sponsor, the Maryland Department of

Business and Economic Development,

acknowledged $152,000 in erroneous claims

during the audit. After netting the remainder

of questioned costs against cash match

requirements, the audit report said the SBDC

should reimburse SBA $125,000.

Problems in counseling services for small

businesses were also noted in the audit

report. SBDC counselors at one subcenter

spent an unreasonable amount of time on

administrative functions and failed to

document the delivery of counseling

services. While the sponsor disputed some

of the findings, SBA's Baltimore District

Director concurred in all the audit’s findings

and recommendations.

Puerto Rico University Pays $122,454 in

Administrative Settlement

A university in Puerto Rico paid the

Government $122,454 to settle (without

admitting guilt) OIG findings that the

university had deposited program income of

its small business development center

(SBDC) it administered into a revolving

account but had not, as required, reported it

to SBA. An initial audit had found

numerous violations of program

requirements and unallowable charges to

grant funds; the ensuing investigation

uncovered evidence of even more extensive

misuse of SBA funds and of the university's

efforts to conceal program income and

unauthorized expenditures. The

settlement agreement specifically excluded

the former SBDC Director, who has already

made a $30,252 settlement payment but

whose liability for alleged misuse of SBDC

funds has not yet been resolved. In response

to the investigative report, SBA previously

terminated its cooperative agreement with

the university, whose SBA funding in FY
46 Semiannual Report March 1997

1997 was slated to be $1,035,441; during

this reporting period, SBA awarded $1.5

million to another Puerto Rico university to

administer the SBDC in 1997.
Semiannual Report March 1997 47

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 are supported by the Agency’s total availability

of $1.061 billion for FY 1997, including appropriations enacted in P.L. 104-208. Of the

$1.061 billion available, which includes carry-overs and estimated recoveries, $379.4 million

are for Salaries and Expenses, $22 million for Disaster loan servicing, and $103.8 million for

Disaster loan making. $226.6 million are available for Business Loans, $314.8 million for

Disaster loans, and $3.73 million for the Surety Bond Guarantee program.

Summary of OIG Activity

The following summarizes SBA/OIG

activities relating to the Agency’s

administration and financial management

activities during the reporting period:

Three audit reports were issued and

two other audits were underway.

One study was completed and issued

during the reporting period.

Integrity assurance cases resulted in

two indictments, two convictions,

and a $10,684 recovery.

Fourteen integrity assurance

investigations were closed, leaving

an inventory of 16 active cases

involving 20 subjects.

Two integrity assurance

investigations continued to be

monitored. Due to workload

constraints, they had previously been

referred to other law enforcement

agencies for investigation.

The OIG reviewed 2 pieces of

proposed legislation, 2 regulations,

and 23 Standard Operating

Procedures (SOP).
48 Semiannual Report March 1997

Figure 5

Efforts to Improve SBA

Program Management

SBA’s Annual Chief Financial Officers

Act Audit Results in Unqualified

Opinion

For the first time in 6 years of audits under

the mandated requirements of the Chief

Financial Officers Act, the SBA financial

statements for FY 1996 received an

unqualified opinion. The unqualified

opinion means that the independent auditors,

Cotton & Company (Cotton), found SBA's

principal financial statements to be presented

fairly in all material respects in accordance

with Office of Management and Budget

guidelines and SBA accounting policies.

The results of the audit were transmitted to

the Chief Financial Officer by the SBA/OIG,

which had contracted with Cotton to perform

the independent audit.

Cotton found that SBA had made progress

on the two problems that caused the 1995

opinion to be qualified: (1) reconciliation of

fund balances with Treasury and (2)

inventory of foreclosed properties. These

two problems, however, were still identified

as "reportable conditions" in the internal

control structure, and the cash reconciliation

was still classified as a material control

weakness.

Four other internal control weaknesses were

reported: (1) inconsistent valuation of

foreclosed property, (2) lack of annual

estimates of credit reform subsidy rates for

disaster loans, (3) inadequate computer user

password security procedures, and (4)
Semiannual Report March 1997 49

unclear year-end cut-off procedures. In the information from the grantee, the AA/A

section on compliance with laws and resolved this issue by extending the grant to

regulations, the auditors found SBA cover the period when all remaining grant

complied in all material respects with funds were expended.

provisions of applicable laws and regulations

tested.

OIG Completes Study of Centralization Pertaining to Grant 

of Agency Functions Close-outs

In response to a request from SBA’s A pre-award audit of an SBA grantee

Administrator, the OIG issued a study revealed that a West Virginia foundation had

identifying SBA functions which might

potentially be centralized. Entitled "A

Framework for Considering the

Centralization of SBA Functions," it

suggests a rationale for centralizing SBA

programs where appropriate, outlines an

approach for deciding whether to consolidate

the common functions of various SBA

programs in central locations, and discusses

the advantages and disadvantages of

centralized operations compared with

decentralized operations. 

Audit-Related Memorandum Seeks

Recovery of Unexpended Grant Funds

During the conduct of a pre-award audit of a

West Virginia grantee’s work proposal, the

OIG discovered that as much as $435,775

from a previous $2 million grant had not

been expended or obligated by the grant

expiration date. Because there was no

provision for carryover of funds, further

obligation of funds could not occur without

an extension of the grant period. The

memorandum recommended that SBA’s

Assistant Administrator for Administration

(AA/A) require the grantee to remit the

outstanding advance. However, after

requesting and receiving additional

Audit-Related Memorandum

Recommends Revision of SOPs

not submitted final financial reports within

90 days of the grant expiration dates on two

prior grants. The OIG discovered that as

much as $435,755 had not been expended or

obligated by the expiration date in

connection with one of these prior grants

(see previous article). The auditors found

that procedures were not in place requiring

the Office of Procurement and Grants

Management (OPGM) to follow up with the

grantee if the final financial report was not

received in a timely manner. The OIG

recommended that SOP 00 11 2 be modified

to require followup with grantees to ensure

that financial reports are submitted within

the prescribed period and unobligated

advances, if any, are returned promptly. In

addition, the OIG recommended a review of

all grants awarded within the last 3 years.

The Assistant Administrator for

Administration agreed with the

recommendations.

Agency Management and Financial

Activities SOPs

As part of SBA's initiative to update and

streamline its SOPs, the OIG reviewed

proposed revisions to 23 SOPs governing

SBA management and financial activities.
50 Semiannual Report March 1997

The OIG provided comments on directives

concerning issues such as delegations of

authority, directives management, imprest

funds, travel, disbursement functions, audit As a result of an OIG investigation into

follow up, congressional and legislative

activities, employee relations, labor

relations, attendance and leave, position

classification, and property management.

Activities to Enhance Fraud

Detection and Deterrence

OIG Conducts Employee Awareness

Briefings

In addition to investigating complaints of

waste, fraud, and abuse involving SBA

programs, OIG Investigations Division staff

presented 10 Standards of Conduct

briefings to a total of more than 500 Agency

employees. The involvement and

cooperation of all SBA employees in

combating 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 on page 51 shows,

more than 67 percent of all investigative

referrals originated from within the Agency,

in the form of referrals either from program

heads or from 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.

Investigation Prompts SBA to Establish

Sole Source Review Process

possible improprieties regarding the

award of a sole-source contract, SBA

established a board to review all proposed

sole-source contracts for more than $25,000.

The investigation had disclosed several

irregularities in the procedures and timing of

how SBA awarded a $150,000 consulting

contract. In January 1997, following the

OIG's issuance of the report of investigation,

the SBA manager who selected the solesource contractor retired from Federal

service. The OIG opened the investigation

in response to a request from SBA

management.

SBA Employee Pleads Guilty to Credit

Card Fraud

On January 16, 1997, a former Minority

Enterprise Development technician in SBA’s

New York District Office pled guilty to a

criminal information charging her with using

unauthorized access devices (credit cards)

in an offense affecting interstate commerce.

The investigation was based on a complaint

by another SBA employee that her name and

Social Security number (SSN) were being

illegally used by someone to open charge

accounts and purchase merchandise. The

investigation, conducted jointly with the

Social Security Administration’s OIG,

disclosed that, from an undetermined date in

1994 until January 1996, the SBA employee

used her position to obtain the SSNs of at

least three current or former co-workers.

She used their names and SSNs to open

numerous fraudulent charge accounts and to

purchase merchandise valued at over $3,000.
Semiannual Report March 1997 51

Based upon a criminal complaint by the Office of General Counsel (OGC) and the

investigating SBA/OIG agent, the technician OIG became aware of allegations that a

was arrested in the Agency’s New York former Department of Commerce (DOC)

District Office on July 18, 1996. She employee, subsequently employed by SBA,

resigned her position with the SBA in

August.

OIG Concern Leads Office of Financial both the safe and its contents and notified

Assistance to Clarify Policy on Purging U.S. District Judge Royce C. Lamberth of its

of Loan Files at Servicing Centers action. The records in question are allegedly

As a result of concerns expressed by the

OIG’s Investigations Division, SBA's Office

of Financial Assistance has clarified its

policy concerning the purging of certain House Small Business Committee requesting

documents from loan files. In an effort to

deal with a shortage of file storage space,

SBA staff had been removing and disposing

of duplicates of materials in larger files,

routine financial statements not related to

any loan servicing action, and "boilerplate"

portions of voluminous reports such as

appraisals and EPA studies. The OIG was

concerned that any misunderstanding on the

part of SBA staff as to Agency policy in this

area could result in the disposal of records

critical to criminal or civil prosecution of

false claims. This matter was brought to the

attention of the OIG by an employee of the

Fresno Servicing Center.

In response to the OIG’s concerns, SBA

program managers have reaffirmed Agency

policy (regarding the removal of duplicate

and boilerplate material from loan files) to

assure that all essential loan documentation

is properly maintained in the case files.

OIG Takes Custody of Safe Containing

Subpoenaed Documents

On October 23, 1996, officials of SBA’s

was storing DOC records (including

classified documents) in his SBA office

safe. The OIG immediately took custody of

the subject of ongoing litigation between a

public interest group and the DOC. On the

same day, SBA’s Inspector General (IG)

received a letter from the then-Chair of the

access to the entire contents of the safe.

Judge Lamberth directed the IG to retain

custody of the safe and its contents but noted

that nothing precluded the IG from providing

controlled access pursuant to appropriate

Congressional requests. The judge also

endorsed the IG’s plan to inventory the

contents of the safe in the presence of certain

observers (DOC and SBA officials, selected

Congressional staff members, a

representative from the U.S. Attorney’s

office, the employee in question, and his

counsel); the inventory took place on

October 28, 1996. Since taking custody of

the safe, the OIG has taken strict security

measures to ensure the integrity of the safe

and its contents pending further instructions

from the court. Based on initial OIG

findings, the employee's security clearance

was downgraded on October 29, 1996, and

he resigned from SBA on November 15,

1996.

SBA Clerk Pleads Guilty to Defrauding

Businesses by Abusing Client's Social

Security Number
52 Semiannual Report March 1997

A former miscellaneous documents clerk in

SBA's Disaster Assistance Area 4 Office

(DAO-4) pled guilty to one count of misuse

of a Social Security number (SSN). The

OIG initiated the investigation based on

information provided by the DAO-4, which

had received an anonymous complaint that,

while employed by SBA, the clerk had

obtained and subsequently misused the SSN

of a loan applicant with the same name. The

investigation confirmed that the clerk had

applied for and received credit and

merchandise from four Sacramento-area

businesses using her own address, telephone

number, and California driver's license, but

the loan applicant's SSN. The stores lost a

total of $6,217 as a result of this activity.

Fi gu

re 6
Semiannual Report March 1997 53
54 Semiannual Report March 1997

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 dual 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 SBA/OIG is organized into four

divisions as follows:

 Auditing Division

 Investigations Division funding level of $9.0 million and at an

 Inspection and Evaluation Division equivalent (FTE) positions. While this level

Management and Legal Counsel Division the number of dollars appropriated in FY

The Auditing and Investigations Divisions oversight to SBA programs and program

each administer their field activities through dollars at risk. Congressionally-mandated

field offices and resident offices around the law enforcement availability pay, annual

country. The Auditing Division has offices cost of living increases, and various locality

located in Atlanta, Dallas, Los Angeles, and pay adjustments are still not fully reflected in

Washington. In addition to these cities, the authorized spending levels. Consequently,

Investigations Division has offices in in 1996, the OIG was forced to request a

Chicago, Denver, Houston, Kansas City, transfer of funds from the Agency to ensure

New York, Philadelphia, San Francisco, that ongoing operations could be funded.

Seattle, and Syracuse. The Investigations SBA’s Administrator transferred $200,000 in

Division’s Office of Security Operations is May 1996 to the OIG’s appropriation,

located in Washington, D.C. enabling the OIG to avoid uncompensated

Both the Inspection and Evaluation Division priority activities.

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 1997, the OIG is operating at a

authorized personnel ceiling of 102 full-time

of funding represents a modest increase from

1996, it provides only a minimal level of

furloughs of its staff and to carry out other
Semiannual Report March 1997 55

Figure 7

Notwithstanding the transfer of funds, the available until expended (see discussion

OIG ended FY 1996 with an average FTE of below). Also, the Congress authorized a

just over 98, or 4 positions under its transfer of $500,000 in Agency funds in the

authorized ceiling. FY 1997 budget specifically for OIG

In FY 1994, the OIG also received $3 the current reporting period, four auditors,

million in supplemental “no year” disaster four investigators, one attorney, and two

funds to be used for activities related to the secretaries were on board on temporary

Agency's vastly expanding disaster appointments using disaster funding.

assistance program; these funds will remain Although the OIG’s disaster staffing plan

disaster-related oversight. As of the end of
56 Semiannual Report March 1997

calls for as many as 16 disaster-funded disaster loan fraud continue to be our major

employees to be on board at this time, areas of concentration, in terms of both

considerable difficulty has been experienced active cases carried and time expended on

in recruiting, training, and retaining those cases. During this reporting period the

employees in these temporary-appointment lion’s share of investigative time (81.6

positions. percent) was expended on business and

The nature of the funding for disaster SBA business and disaster loans remaining

oversight forces the OIG to pursue high, we expect that our investigative efforts

recruitment of disaster-funded auditors and will continue to be dominated by those two

investigators on a “non-permanent” basis. programs and our resources stretched

Temporary employees are understandably severely.

eager to obtain more permanent positions

elsewhere, and when they are successful, the The table on page 56 also illustrates the

OIG is deprived of both the expertise they Auditing Division's emphasis on the

have developed as well as their productivity. business loan and disaster assistance

The continuing reduction in OIG FTE increase in Auditing Division time spent

resources remains troubling. As depicted in looking at the disaster assistance program,

Figures 1 and 2, the expanding nature of the which has grown incrementally from 3

Agency's portfolio and its concomitant percent to 12 percent of the available audit

demand for OIG oversight would suggest hours over the last 6 reporting periods. The

that resources be increased (not reduced) to IG is, of course, also greatly concerned by

ensure adequate oversight. In recognition of the meager coverage the OIG is able to

this need, the President requested $9.985 provide to other Agency programs,

million for the OIG for FY 1997. With the supporting activities, and its program

resources made available in the FY 1997 participants. There has been no audit

appropriation ($9 million), the OIG will oversight of the Agency computer systems,

again find it difficult to carry out its mandate and the OIG has been virtually unable to

to provide oversight of the Agency's respond to specific Agency requests for audit

programs and activities and to safeguard the coverage. Key programs such as Section

Government's investment in its extensive 8(a) have received but minimal audit

credit programs. For FY 1998, the President oversight during the past year. Other

has requested a slight increase in the OIG’s programs such as Small Business Investment

budget ($10.6 million and 10 additional Companies have had no OIG oversight

FTE) in recognition of these rapidly whatsoever.

growing programs.

The OIG continues to be concerned with the

strong demand for investigations of fraud in

Agency programs. As evidenced by the

table on page 56, both business loan and

disaster loan fraud cases. With demand for

programs. This priority is reflected in the
Semiannual Report March 1997 57

Management Initiatives

Inspector General Issues Study of

Inspection and Evaluation Units

The Inspection and Evaluation Committee of

the President’s Council on Integrity and

Efficiency, which is chaired by SBA’s

Inspector General, issued a report on OIG

Inspection and Evaluation Units:

Examples of Impact. The report provides

examples of the work performed by

inspection and evaluation units across the

inspector general community. The abstracts

show the varied nature of OIG inspections

and evaluations and the impact they have

had. The document will be made available

on the Internet (http://www.sbaonline.

sba.gov/ignet).

OIG Legislative Proposals

The OIG developed four legislative

proposals that, if enacted, would improve

OIG operations, provide necessary staff and

budget resources, and facilitate OIG

oversight of SBA programs.

Asset forfeiture - the proposal would

authorize the SBA/OIG to participate in

the equitable sharing of cash and

proceeds from the sale of forfeited

property, when such assets are obtained

as a result of SBA/OIG direct

participation in law enforcement

activities.

Audits of preferred sureties - the

proposal would remove the annual audit

requirement for preferred sureties and

replace it with a requirement for an

annual review.

False statements to SBICs - the proposal

would provide civil and criminal

penalties under the Financial Institutions

Reform, Recovery, and Enforcement Act

for false statements made to SBA or to

an SBIC.

Funds for disaster oversight - the

proposal would authorize the

Administrator to transfer funds to the

OIG for disaster loan program oversight

activities.

Inspector General Hosts Canadian

Government Visitors

The Inspector General hosted a delegation of

staff members from Canada’s Auditor

General’s office on March 24-25, 1997.

Topics discussed included risk exposure

management, cost recovery policies and

practices, and a variety of other guaranteeand loan-related topics. The visitors also

met with officers from SBA’s Office of the

Chief Financial Officer and the Office of

Financial Assistance.
58 Semiannual Report March 1997

Direct Investigation Time by Program Area

October 1, 1996, to March 31, 1997

Program Area Direct Time Number of Investigations

%

Closed In Progress

Business Loans 55% 29 145

Disaster Loans 26% 6 92

SBIC 3% 1 13

Surety Bond Guarantees * 0 1

Government Contracting 1% 1 6

Minority Enterprise Development 1% 7 6

Economic Development 1% 0 3

Agency Management and Financial 12% 14 16

Total 100% 58 282

Direct Auditing Time by Program Area

October 1, 1996, to March 31, 1997

Program Area Direct Time Number of Audits

%

Issued In Progress

Business Loans 69% 2 11

Disaster Loans 12% 3 3

SBIC 0% 0 0

Surety Bond Guarantees 2% 2 0

Government Contracting 0% 0 0

Minority Enterprise Development 4% 0 2

Economic Development 9% 1 1

Agency Management and Financial 4% 3 2

Total 100% 11 19
Semiannual Report March 1997 59

* less than 1⁄2 percent
60 Semiannual Report March 1997

Profile of Operating Results

October 1, 1996 to March 31, 1997

Audit Activities Totals

A. Reports Issued ................................................. 11

B. Desk Reviews of CPA Audit Reports Issued ........................... 0

C. Audit Recommendations Issued .................................... 35

D. Dollar Value of Costs Questioned ............................ $734,867

E. Dollar Value of Recommendations that Funds Be Put to Better Use $5,318,048

Audit Followup Activities

F. Audit Recommendations Closed .................................... 18

G. Disallowed Costs Agreed to by Management .................. $1,035,911

H. Dollar Value of Recommendations That Funds Be Put to Better Use

Agreed to by Management .............................. $5,318,048

I. Unresolved Audit Recommendations ................................ 40

J. Dollar Value of Unresolved Audit Recommendations ............ $1,686,906

Inspection Activities

A. Reports Issued ..................................................3

Legislation/Regulation/SOP/Other Reviews

A. Legislation Reviewed ............................................. 2

B. Regulations Reviewed ........................................... 12

C. Standard Operating Procedures Reviewed ........................... 43

D. Other Issuances Reviewed* ....................................... 56

* This includes policy notices, procedural notices, Administrator's action memoranda, and other

communications which frequently involve the implementation of new programs and policies.
Semiannual Report March 1997 61

Status of Investigations as of March 31, 1997 Totals

A. Total Cases ............................................................... 340

B. Closed Cases .............................................................. 58

C. Pending Cases ............................................................. 28

D. Open Cases .............................................................. 254

E. Subjects Under Investigation ................................................ 1,226

Summary of Indictments and Convictions

A. Indictments from OIG Cases ................................................... 22

B. Convictions from OIG Cases ................................................... 34

Summary of Recoveries and Reductions of Risk

A. Potential Recoveries and Fines as a Result of OIG Investigations ............... $21,251,476

B. Reductions of Financial Risk as a Result of OIG Investigations .................. $4,313,934

C. Reductions of Financial Risk as a Result

of the Name Check Program ....................................... $12,231,532

 Total: ............................................................. $37,796,942

SBA Personnel Actions Taken as a Result of Investigations

A. Dismissals .................................................................. 0

B. Resignations/Retirements ...................................................... 2

C. Suspensions ................................................................ 0

D. Reprimands ................................................................ 2

Program Actions Taken as a Result of Investigations

A. Suspensions ................................................................ 0

B. Debarments ................................................................ 0

C. Removals from Program ....................................................... 1

D. Other Program Actions ........................................................ 2

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters ............................................... 1,226

B. Total Calls/Letters Referred to Offices Outside the OIG ........................... 1,202

C. Total Calls/Letters Referred to Investigations Division for Evaluation ..................... 24
62 Semiannual Report March 1997

Investigations Activities - Referral Program

A. Cases Referred to FBI ....................................................... 13

B. Referred to Other Agencies (Excluding FBI) ........................................ 2

C. Indictments from Referrals ..................................................... 0

D. Convictions from Referrals ..................................................... 1

E. Potential Recoveries and Fines as a Result of Referral Program ........................ $0

F. Reductions of Financial Risk as a Result of Referral Program .......................... $0
Semiannual Report March 1997 63

Office of Inspector General

Staffing as of March 31, 1997

A. Immediate Office ............................................................ 3

B. Auditing Division ............................................................ 34

 Professional ......................................................... 30 

 Support ............................................................. 4 

 

C. Investigations Division ....................................................... 46

 Professional ......................................................... 37 

 Support ............................................................. 9 

 

D. Inspection and Evaluation Division ............................................... 9

 Professional ........................................................... 8 

 Support .............................................................. 1 

 

E. Management and Legal Counsel Division .......................................... 9

 Professional .......................................................... 7 

 Support ............................................................. 2 

 OIG Total ............................................................... 101

Additional Temporary Disaster Staffing

Funded from Supplemental Appropriations

A. Auditing Division ........................................................... 5.5

B. Investigations Division ........................................................ 4

C. Management and Legal Counsel Division .......................................... 1

 OIG Disaster Total ........................................................ 10.5
64 Semiannual Report March 1997

FY 1997 Productivity Statistics

First Six Months

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ............................... $21,251,476

B. Management Avoidances as Result of Investigations ........................ $16,545,466

C. Disallowed Costs Agreed to by Management ............................... $1,035,911

D. Recommendations that Funds Be Put to Better

Use Agreed to by Management ...................................... $5,318,048

Total ............................................................... $44,150,901

Auditing Division Activities

A. Reports Issued ............................................................. 11

B. Disallowed Costs Agreed to by Management ................................ $1,035,911

C. Recommendation that Funds Be Put to Better

Use Agreed to by Management ..................................... $5,318,048

Inspection and Evaluation Division Activities

A. Reports Issued .............................................................. 3

Investigations Division Activities

A. Cases Closed .............................................................. 58

B. Indictments ................................................................ 22

C. Convictions ................................................................ 34

D. Potential Investigative Recoveries and Fines ............................... $21,251,476

E. Management Avoidances ............................................ $16,545,466

 - Investigation Cases ........................................ $4,313,934 

 - Name Check Program ..................................... $12,231,532 

 
Semiannual Report March 1997 65

Statutory 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 5 to 52

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies Pages 5 to 52

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

Problems, Abuses, and Deficiencies Pages 5 to 52

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented Page 70

Section 5(a)(4) Matters Referred to Prosecutive Authorities Pages 5 to 52

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 64

Section 5(a)(7) Summary of Significant Audits Pages 5 to 52

Section 5(a)(8) Audit Reports Containing Questioned Costs Page 66

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use Page 67

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made Page 69

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

Section 5(a)(12) Significant Management Decisions With Which OIG Disagreed None
66 Semiannual Report March 1997

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued ............................................. 64

Appendix II

 Part A - Inspector General-Issued Audit Reports

with Questioned Costs ................................................ 66

 Part B - Inspector General-Issued Audit Reports

with Recommendations that Funds Be Put

to Better Use ........................................................ 67

 Part C - Inspector General-Issued Audit Reports

with Non-Monetary Recommendations ................................... 68

 Part D - Inspector General-Issued Audit Reports

 with Overdue Management Decision .................................... 69

 Part E - Significant Audit Reports

 Without Final Action ................................................. 70
Semiannual Report March 1997 67

APPENDIX I

Audit Reports Issued

October 1, 1996 to March 31, 1997

TITLE NUMBER ISSUE QUESTIONED FUNDS FOR

DATE COSTS BETTER USE

Business Loans

Defaulted Loans Made by

Allied Lending Corporation 76F006002 1/29/96 $22,264

Early Default of

Guaranteed Loans 74E001009 2/18/97

Program Subtotal Reports: 2

Disaster Loans

Disaster Loan Fraud

Complaints 75F004001 11/8/96

Disaster Loans Assigned to

Los Angeles District Office 75F005004 12/23/96

Survey of Electronic Fund

Transfer Disbursements 76H005003 12/20/96

Program Subtotal Reports: 3

Surety Bond Guarantees 

Use of SBA Surety Form 76H007005 12/20/96

994

Surety Bond Underwriting

Process 76H007008 2/14/97 $5,318,048

Program Subtotal Reports: 2

SBDC 

Maryland Small Business

Development Center 76H001006 2/6/97 $277,848

Program Subtotal Reports: 1

Agency Management and Financial

SBA’s 1996 Financial

Statements 76H006010 2/28/97

Grant Closeout Procedures 77H001011 3/31/97
TITLE NUMBER ISSUE QUESTIONED FUNDS FOR

DATE COSTS BETTER USE

68 Semiannual Report March 1997

West Virginia High

Technology Consortium 77H001007 2/10/97 $434,755

Foundation

Program Subtotal Reports: 3

TOTALS (all programs) Reports: 11 $734,867 $5,318,048
Semiannual Report March 1997 69

APPENDIX II - Part A

Audit Reports with Questioned Costs

October 1, 1996 to March 31, 1997

REPORTS RECs*

DOLLAR VALUES

QUESTIONED UNSUPPORTED

A. For which no management

decision had been made by

September 30, 1996 2 2 $769,698

B. Which were issued during

the period 3 3 $734,867

Subtotals (A + B) 5 5 $1,504,565

C. For which a management

decision was made during

the reporting period 1 1 $142,659

(I) Disallowed costs 1 1 $144,454**

(a) Due SBA

(b) Due program

participant

(ii) Costs not disallowed

D. For which no management

decision had been made by

March 31, 1997 4 4 $1,361,906

* Recommendations

** Management disallowed $1,795 more than recommended

Note: The total number of dollars reported in the category of Disallowed Costs Agreed to by Management

in the FY 1997 Productivity table and the Profile of Results table is $1,035,911. This amount includes the

$144,454 shown above as well as other settlements and non-routine recoveries described in this report

which have been classified into this category.
70 Semiannual Report March 1997

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

October 1, 1996 to March 31, 1997

REPORTS RECs*

RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

September 30, 1996 1 1 $325,000

B. Which were issued during

the period 2 2 $5,318,048

Subtotals (A + B) 3 3 $5,643,048

C. For which a management

decision was made during

the reporting period 1 1 $5,318,048

(I) Recommendations

agreed to by SBA

management 1 1 $5,318,048

(a) SBA level 1 1 $5,318,048

(b) Program participant

level

(ii) Recommendations not

agreed to by SBA

management

D. For which no management

decision had been made by

March 31, 1997 2 2 $325,000

 Recommendations. *

*
Semiannual Report March 1997 71

APPENDIX II - Part C 

Audit Reports with Non-Monetary Recommendations

October 1, 1996 to March 31, 1997

REPORTS RECOMMENDATIONS

A. For which no management decision

had been made by 

September 30, 1996 7 20

B. Which were issued during the

period 9 31

Subtotals (A + B) 16 51

C. For which a management decision

was made (for at least one

recommendation in the report)

during the reporting period 9 16

D. For which no management decision

(for at least one recommendation in

the report) had been made by

March 31, 1997 10 35
72 Semiannual Report March 1997

APPENDIX II - Part D

Overdue Management Decisions

March 31, 1997

AUDITEE REPORT ISSUED STATUS

NUMBER

Business Loan Center 6-5-H-002-019 9/20/96 Office of Financial

Assistance (OFA) is

reviewing recommendations.

Low Documentation Loan OFA’s response was not

Program 6-5-E-002-022 9/30/96 acceptable; awaiting final

response.

Virginia SBDC 6-6-H-003-023 9/30/96 No response received from

SBA’s district office.
Semiannual Report March 1997 73

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of March 31, 1997

REPORT TITLE DATE DATE OF FINAL

NUMBER ISSUED MANAGEMENT ACTION

DECISION TARGET

3-2-S-401-014 Colson Service Corp. 12/03/92 09/24/96 06/30/96

3-3-E-002-025 Controls over Advisory and 03/01/93 03/10/93 03/31/93

Assistance Services

3-2-C-002-033 Administration of 8(a) Program 03/31/93 09/30/94 09/30/95

4-3-H-011-016 SBA’s Award of 8(a) Contracts 05/16/94 12/30/94 06/30/95

to ASCI

5-3-H-004-006 SBA Loan Servicing and Debt 03/31/95 09/30/96 9/30/98

Collection Activities

5-4-H-008-008 Population and Marketing 03/31/95 09/30/96 None

Analysis Center

5-3-W-010-018 Section 7(a) Credit Elsewhere 09/18/95 03/29/96 06/30/96

5-5-H-004-016 Administration of $825,000 Line 08/18/95 03/29/96 06/30/96

of Credit

5-3-E-010-021 8(a) Competitive Mix 09/29/95 03/29/96 09/30/96

5-4-H-003-014 National Education Center for 08/04/95 02/15/96 09/11/95

Women in Business

6-4-W-008-003 California SBDC 01/11/96 09/30/96 12/31/96

6-5-S-918-006 Daniel Dennis & Co. 01/24/96 09/30/96 10/14/96

6-6-H-002-011 GeoDemographics, Ltd. 03/29/96 09/30/96 04/01/98

6-5-H-002-019 Business Loan Center 9/20/96 None None

6-5-E-002-022 Low Documentation Loan 9/30/96 * *

Program

6-4-W-005-013 Woodway Bank and Trust Co. 4/26/96 9/13/96 11/4/96

6-5-E-001-021 Basic Ordering Agreements 9/25/96 2/10/97 9/25/97

6-5-H-006-017 Section 8(a) Regular Dealers 8/21/96 9/30/96 8/20/97

6-6-H-003-023 Virginia SBDC 9/30/96 None None

6-5-S-918-018 Boone, Young & Associates 9/20/96 3/20/97 5/30/97
REPORT TITLE DATE DATE OF FINAL

NUMBER ISSUED MANAGEMENT ACTION

DECISION TARGET

74 Semiannual Report March 1997

6-5-H-007-014 FY 1995 Financial Statements 5/1/96 10/28/96 9/30/97

6-5-H-007-016 FY 1995 Financial Statements - 5/31/96 8/22/96 8/31/96

Management Letter

6-5-S-918-020 Rushman Associates, Inc. 9/23/96 12/20/96 3/23/97

Closeout Audit

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