SEMIANNUAL REPORT TO CONGRESS

OFFICE OF INSPECTOR GENERAL

U.S. SMALL BUSINESS ADMINISTRATION

PERIOD: APRIL 1, 1999 TO SEPTEMBER 30, 1999
Semiannual Report September 1999 i

Foreword

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 report covers the full range of SBA/OIG activities from

April 1, 1999, to September 30, 1999.

Fiscal Year 1999 has proven to be another period of solid accomplishment by this Office.

Looking at the usual productivity measures for OIG activities, we see that the Office issued

reports on 26 audits, 2 inspections, and 4 advisory initiatives. OIG investigations resulted in 44

indictments and 50 convictions for criminal violations. The Office brought its collective

experience to bear in reviewing 288 legislative, regulatory, policy, and procedural proposals

concerning SBA and Government-wide programs. Overall, OIG dollar accomplishments from

all activities totaled over $44 million. All of this was accomplished with an appropriation of

$11.3 million and an average staff level of 109.

While the numbers are impressive, they do not tell the whole story. One of the more significant

activities we completed this year has been to revise our strategic plan. SBA’s increased

emphasis on outsourcing and information systems modernization has provided us with increased

challenges in our oversight efforts. Our new plan, which has been sent to Congress, the Office of

Management and Budget, and SBA program officials as part of our consultative efforts, outlines

our strategic focus on five key areas: financial management systems, information systems and

computer security, lender oversight, other selected high risk issues, and new Agency initiatives.

In FY 2000 and beyond, we will focus our efforts and resources in these areas.

Over the past year, the Office has addressed many of the critical issues facing SBA. In the area

of information technology (IT), we devoted resources towards oversight of the Agency’s IT

security, electronic records, and Y2K efforts. We issued an inspection report identifying the

potential security, legal, and management issues that public and private sector managers face in

converting existing business processes to an electronic environment. Our investigative staff has

responded to new situations involving misuse of the Internet and has worked proactively with

Agency managers to address these issues. As to lender oversight, we issued the last in a series of

audits on lender procedures for Section 7(a) business loans, and an inspection on SBA’s

oversight of the certified development company program. Both of these efforts contain

significant findings and recommendations for improvements. With respect to financial

management within SBA, we provided oversight for the audit of SBA’s FY 1998 financial

statements. The Agency obtained an unqualified opinion on its financial statements for the third

year in a row, and is taking significant actions to address timeliness, systems controls, and the

estimating process.

Finally, because we do not work in a vacuum, I would like to express my appreciation for the

ongoing support and interest of the Administrator, Deputy Administrator, and SBA’s senior staff.
ii Semiannual Report September 1999

Without their willingness to assist us and take action on our recommendations, we would not be

effective. I look forward to continuing this professional and productive relationship.

Phyllis K. Fong

Inspector General
Semiannual Report September 1999 i

Table of Contents

Title Page

Table of Contents...................................................................................................................... i

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

Business Loan Program............................................................................................................ 7

Disaster Loan Program........................................................................................................... 19

Small Business Investment Companies .................................................................................. 25

Surety Bond Guarantees. ....................................................................................................... 28

Government Contracting Programs........................................................................................ 31

Section 8(a) Business Development ....................................................................................... 33

Entrepreneurial Development (Business Education and Training) .......................................... 35

Agency Management and Financial Activities........................................................................ 38

Organization, Resources, and Management Initiatives............................................................ 45

Profile of Operating Results. ..................................................... ............................................ 50

FY 1999 Productivity Statistics................................................. ............................................ 53

Statutory Reporting Requirements.......................................................................................... 55

Table of Appendices .............................................................................................................. 56
Semiannual Report September 1999 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 Public Law (P.L.) 95-452, the Inspector General Act of

1978, as amended. It summarizes OIG activities for the 6-month period

from April 1, 1999 to September 30, 1999.

Summary of Accomplishments

OIG audits, inspections, and investigations

over the last 6 months achieved

$19,537,668 in potential dollar results,

19 indictments, and 26 convictions. The

dollar results consist of $4,898,128 in

potential recoveries, including judicially

awarded fines and restitution, $12,123,521

in loans not approved as a result of

investigations and name checks, $1,434,464

in disallowed costs agreed to by SBA’s

management, and $1,081,555 in

management commitments to use funds

more efficiently.

OIG alone could not have achieved the

accomplishments set forth in this report to

the Congress. The results for this reporting

period reflect the cooperation and support of

other audit, inspection, and investigative

organizations such as: the Federal Bureau of

Investigation; U.S. Marshals Service; U.S.

Secret Service; Postal Inspection Service;

Internal Revenue Service; Immigration and

Naturalization Service; Bureau of Alcohol,

Tobacco and Firearms; other Federal OIGs;

Department of Justice (DOJ) prosecutors;

State and local law enforcement agencies;

and most importantly, the actions of SBA

program managers and employees. Indeed,

many of our results are due to referrals

made by conscientious SBA employees.

Highlights of the Past Six Months

Efforts to Improve SBA Program

Management

Audits of Section 7(a) Lending Find

Lender Non-Compliance with Required

Procedures

A nationwide audit of Section 7(a) business

loans concluded during this period with the

issuance of the report on Kansas City the

last of eight districts in the sample. A

summary report on the systemic issues

identified is nearing completion and will

be issued in the first quarter of fiscal year

(FY) 2000.

The purpose of the audit was to determine if

Section 7 (a) loans were originated,

disbursed, and used in accordance with

22 key procedures. The eight districts were

randomly selected, and 30 loans in each

district were randomly picked for

examination.

Results in Kansas City were similar to

results in the preceding 7 reports, with 17 of

30 loans having at least 1 noncompliance
2 Semiannual Report September 1999

with the 22 procedures. Typical lender

errors are lack of IRS tax verification,

failure to verify use of proceeds, failure to

verify equity injections, and failure to issue

joint payee checks. Recommendations were

made to the district office to correct the

problems found.

Inspection Finds SBA Needs to Improve

Oversight of CDC Program

An inspection of the Certified Development

Company (CDC) Program found that SBA’s

monitoring of the CDCs needs tightening

to be effective. The report contains

recommendations for strengthening internal

controls and improving the effectiveness and

timeliness of program delivery.

To correct oversight problems, SBA needs

to require more specific data in the annual

reports submitted by the CDCs and make

more effective use of that information for

monitoring CDC activities. The Agency

should also clarify its policy on CDCs

contracting out services to for-profit

companies and exercise closer oversight to

prevent program violations. SBA needs to

track fees charged to borrowers more

closely, ensure that district offices approve

Accredited Lenders Program (ALP) loan

applications within the required three-day

time period, revoke the ALP status of CDCs

that submit loan packages that do not meet

ALP standards, and ensure that all district

offices perform site visits of CDCs at least

once every three years.

Audit of Disaster Home Loan Servicing

Centers Finds Need for More Timely and

Frequent Collection Effort

An OIG audit of Disaster Home Loan

Servicing Centers found more timely and

frequent collection efforts were needed. The

audit also found that delinquent disaster

home loans were routinely charged off

without using available liquidation tools,

such as litigation and garnishment.

The Associate Administrator for Financial

Assistance agreed with the recommendation

to increase referrals to the Department of

Justice.

Audits of Two Surety Bond Companies

Find Failure to Comply with SBA

Requirements and Inappropriate Claims

Audit reports on two sureties identified

noncompliance with SBA procedures for

guarantees and claims in the areas of:

(1) executing a bond after work on the

contract had started, (2) submitting bond

applications in excess of the number

allowed, (3) submitting legal expenses that

were not allocable to the bond, (4) not

remitting salvage on time, and (5) not

remitting claim recoveries and fees due

SBA. The Associate Administrator for

Surety Guarantees agreed with our

recommendations to recover funds due the

SBA.

Inspection Identifies Management Issues

in a “Paperless” Environment

An inspection report identified potential

security, legal, and organizational challenges

that managers need to be aware of before

converting existing paper procedures to an

electronic process. To address security and
Semiannual Report September 1999 3

privacy concerns, we recommend that SBA

(1) identify the types of data that require a

high level of security, (2) develop

precautionary contracts with trusted third

parties providing Public Key Infrastructure

services, (3) limit the amount of information

in the digital certificates used to verify an

electronic document’s authenticity, and

(4) periodically post on computers

prominent notices to remind employees of

their security responsibilities and the lack

of privacy in using the Agency’s computer

system.

Until uniform standards are developed

for electronic transactions, the OIG

recommends that the Agency ensure that

its contractual agreements with resource

partners and small businesses include each

party’s (1) electronic identity,

(2) responsibility for providing accurate

information, and (3) recourse if the other

fails to meet the terms of the agreement.

Finally, we recommend that a central

coordination group be formed to identify the

work processes that are appropriate for

electronic conversion.

SBA’s Financial Statements Received

Third Straight Unqualified Opinion

SBA’s FY 1998 financial statements for the

third straight year received an unqualified

opinion. The unqualified opinion means

that the auditors found SBA’s principal

financial statements to be presented fairly in

all material respects in accordance with

Office of Management and Budget (OMB)

guidelines and SBA accounting policies.

The audit, however, found three material

weaknesses in SBA’s internal control

structure: (1) lack of planning for financial

reporting which resulted in untimely and

erroneous draft financial statements;

(2) incorrect calculations used in the credit

reform subsidy modeling and reestimating

process for the Section 7(a), 504, and

disaster programs, resulting in substantial

errors (these calculations were corrected

upon discovery by the auditors); and

(3) inadequate SBA computer security and

applications development standards.

Audit Finds Agency Has Not Fully

Implemented Requirements of Debt

Collection Improvement Act

As part of a project of the President’s

Council on Integrity and Efficiency, OIG

conducted an audit to determine whether

SBA had implemented the Debt Collection

Improvement Act of 1996 (DCIA) and

whether SBA accurately reported delinquent

debt to the Department of the Treasury

(Treasury). The audit found SBA had not

fully implemented the DCIA and had not

established a timeframe to implement

wage garnishment. Also, purchased loans

serviced by lenders were not referred to

the Treasury Offset Program (TOP). The

delinquent debt reported to Treasury was

accurate.

The report recommended that the Associate

Administrator for Financial Assistance

(AA/FA) revise the loan accounting system

to automatically refer to Treasury eligible

loans over 180 days delinquent, refer to TOP

purchased loans serviced by lenders, and

establish a timeframe for implementing

garnishment of non-Federal wages. The

AA/FA agreed with the recommendations

and advised that the revisions to the loan

accounting system to refer loans to Treasury

were in process and a date to implement

wage garnishment has been established.
4 Semiannual Report September 1999

Top Ten Management Issues Facing SBA

Identified by OIG

In response to separate requests from the

Senate Committee on Governmental Affairs,

the House Majority Leader, and the House

Committee on Government Reform and

Oversight, in December 1998, OIG

identified what it considered to be the top

10 management issues facing SBA. OIG

continued to work with SBA officials to

implement the recommended actions that

would resolve these issues. The issues that

were identified in December 1998 were the

following:

• SBA needed to hold lenders more

accountable for errors in loan

processing and servicing.

• Borrowers needed to be held accountable for misuse of funds.

• SBA was not maximizing recoveries in

servicing and liquidation.

• Fraud deterrence and detection required

continued emphasis.

• Contract dollars were too concentrated

among relatively few 8(a) companies

whose owners remain in the program

after amassing substantial wealth.

• SBA did not adequately enforce its rule

precluding excessive subcontracting.

• SBA should more closely monitor

Section 8(a) companies.

• SBA needed to develop and implement a

program-based, cost accounting system.

• SBA needed to improve its information

system controls.

• The Paperwork Reduction Act and the

Privacy Act need to be rationalized with

the Government Performance and

Results Act (GPRA) to permit effective

measurement of performance outcomes.

OIG will review and update the list of top

management issues in December 1999, to

reflect the current challenges facing SBA.

GPRA Activities

OIG has developed a new FY 2001-2006

Strategic Plan that will allow us to respond

more effectively to changes in SBA,

particularly the Agency's increasing

emphasis on outsourcing and information

systems modernization. Our strategic

focus will be on five areas: Financial

management systems, information systems

and computer security, lender oversight,

other selected high risk issues, and new

Agency initiatives. The plan is designed

also to emphasize our commitment to the

goals of recent Government reform

legislation and maximize OIG

management efficiency, effectiveness,

and accountability. We have also begun

GPRA audits of the Small Business

Investment Company and Disaster Loan

Programs, and most OIG inspections will

include a review of program performance

measures.
Semiannual Report September 1999 5

Activities to Enhance Fraud

Detection and Deterrence

Results of False Tax Return Cases

Increased

Over the last 9 years, OIG has received

437 allegations that false tax returns were

submitted in support of SBA business

or disaster loan applications. These fraud

referrals now involve loan applications

totaling $127 million that have been

submitted to 52 SBA district offices.

To date, 138 individuals have been indicted

on criminal charges, 132 have been

adjudicated guilty, 3 indictments were

dismissed, and 3 others have not yet gone to

trial.

Affirmative Civil Enforcement Program

The OIG continued to produce results from

its participation in DOJ’s Affirmative Civil

Enforcement (ACE) program. This

program, which is implemented by U.S.

attorney offices around the country, targets

cases which might not be prosecuted

criminally because of the minimal dollar

amounts involved, absence of financial loss

to the Government, or because other facts of

the case might not support a criminal

prosecution.

During the 61⁄2 years that OIG has been

involved with the ACE program, we have

had a total of 112 successful cases, resulting

in $3,031,820 in civil penalties and

$5,009,126 in recoveries by SBA. These

successes came from actions in 21 States

(including, during this reporting period,

OIG’s first ACE success in Nevada) and the

Commonwealth of Puerto Rico. During this

reporting period, OIG had two successful

ACE outcomes. Each was a $5,000 civil

penalty in connection with SBA’s business

loan program.

Results of California Loan Broker

Investigation Continued to Multiply

The number of individuals charged with

crimes in the wake of the investigation of an

Inglewood, California, loan brokerage firm

has grown to 18. All 18 have entered guilty

pleas, and with 13 defendants sentenced,

court-ordered restitution and fines thus far

total nearly $2.25 million in this case

revolving around loan packages submitted to

a now-defunct participating lender bank.

The brokerage firm’s portfolio at the bank

totaled approximately 160 loans, originally

valued at some $60 million. During the last

6 months, the following results occurred.

• Four more borrowers were charged with

and pled guilty to making false

statements to a federally insured

lender; the one who was sentenced was

ordered to serve 10 months’

confinement and to pay a $4,050 fine.

• Five other borrowers who previously

entered guilty pleas to SBA-related

charges were sentenced. Their

sentences totaled 43 months’

confinement and more than $1.2 million

in restitution.

• A Harbor City, California, tax preparer

who previously entered an SBA-related

guilty plea was sentenced to serve

15 months in prison and to pay

$15,000 in restitution. He assisted

principals of the loan brokerage by

preparing fraudulent documents for the

firm’s clients.
6 Semiannual Report September 1999

All these actions related to the borrowers’

SBA-guaranteed loans and resulted from an

extensive investigation by OIG, conducted

jointly with the Federal Bureau of

Investigations and Internal Revenue Service,

based on allegations from an anonymous

complainant. Partially as a result of the

default rate of these allegedly fraudulent

loans, the Office of the Comptroller of the

Currency closed the bank in 1994.

Former SBA Employees Sentenced for

Making False Statements

A former employee in SBA’s Disaster

Assistance Area 4 Office pled guilty to two

counts of making a material false statement

and was sentenced to serve 4 months in

prison, 4 months in a halfway house, and

3 years on supervised release. He was

ordered to pay $57,400 in restitution to SBA,

$10,000 in restitution to the Federal

Emergency Management Agency (FEMA),

and $10,150 in fines.

A second former employee, who was also a

licensed contractor, was sentenced after

pleading guilty to one count of making a

material false statement. He was ordered to

serve 4 months in home confinement and

3 years on probation, pay $2,100 in fines, and

perform 300 hours of community service. In

addition, each man was prohibited from

seeking Federal employment.
Semiannual Report September 1999 7

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

market. Under the guarantee program, 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

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

approximately 40 percent of these loans are being made by participants in the Agency's

 or its Preferred Lender Program (PLP).

can participate through CLP CLP program, are

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 6 percent of all

CLP process.

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 more than

of SBA's best lenders to the maximum. About 33 percent of all business loan guarantees are

made through the process.

The provides long-term, fixed-rate financing through Certified

Development Companies (CDCs) to small businesses to acquire real estate, machinery, and

proceeds are provided as follows: 50 percent by an unguaranteed first mortgage bank loan,

The maximum SBA debenture is $750,000, except for projects that fulfill a public policy goal,

in which case the maximum is $1,000,000.
8 Semiannual Report September 1999

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 page, two-sided

SBA form to apply for an SBA guarantee on a loan of $150,000 or less. The demand for this

The SBAExpress Loan Program allows lenders to use their own loan analyses, procedures,

and documentation to originate loans of $150,000 or less with a 50 percent SBA guarantee.

Lenders can thus use their own application forms, internal credit memoranda, notes, and

documentation pertaining to loan collateral, servicing, and liquidation. This pilot program

minimizes the use of Government mandated forms and procedures while reducing the cost of

originating smaller, less complex SBA loans.

Summary of OIG Activity / Business Loan Program

Audit Reports and Advisory Memoranda Issued 6

Audits Underway 14

Indictments Resulting from Investigations 13

Convictions Resulting from Investigations 13

Investigations Closed / Canceled / Remaining Inventory 22 / 1 / 193

Investigations: Restitutions / Fines / Other Recoveries $2,858,800 / $279,458 / $0

Investigations: Declination of Loans Due to Name Checks $10,724,550

Investigations: Cases Referred to Other Agencies 3

Inspections Completed 1

Inspections Underway 1

Reviews of Proposed Regulations 4

Reviews of Standard Operating Procedures 2

Reviews of Other Issuances 24
Semiannual Report September 1999 9

Figure 1

Efforts to Improve SBA Program

Management

Audit Finds Agency Has Not Fully

Implemented Requirements of Debt

Collection Improvement Act

As part of a project of the President’s

Council on Integrity and Efficiency, OIG

conducted an audit to determine whether

SBA had implemented the Debt Collection

Improvement Act of 1996 (DCIA) and

whether SBA accurately reported delinquent

debt to the Department of the Treasury

(Treasury). The audit found SBA had not

fully implemented the DCIA and had

not established a timeframe to

implement wage garnishment. Of the

88 loans reviewed, 22 loans (25 percent)

should have been referred to Treasury for

collection. The 22 loans had a value of

$1.5 million. Also, purchased loans

serviced by lenders were not referred to

the Treasury Offset Program (TOP). The

delinquent debt reported to Treasury,

however, was accurate. The report

recommended that the Associate

Administrator for Financial Assistance

(AA/FA) revise the loan accounting system

to automatically refer to Treasury eligible

loans over 180 days delinquent, refer to TOP

purchased loans serviced by lenders, and

establish a timeframe for implementing

garnishment of non-Federal wages. The

AA/FA agreed with the recommendations

and advised that the revisions to the loan

accounting system to refer loans to Treasury

were in process and a date to implement

wage garnishment has been established.

Outstanding Guaranteed SBA

Business Loans

$24,811,582,381

$26,547,087,185

$29,340,744,471

$30,514,622,689

$31,234,755,020

15.0 20.0 25.0 30.0 35.0

9/30/95

9/30/96

9/30/97

9/30/98

9/30/99

Billions of Dollars
10 Semiannual Report September 1999

Oversight Evaluation of SBLC Exams

SBA entered into an agreement to have the

Farm Credit Administration (FCA) conduct

safety and soundness examinations of the

14 Small Business Lending Companies

(SBLCs). SBLCs are non-bank lending

companies that are authorized to participate

in SBA’s 7(a) loan guarantee program, but

have no financial institution oversight other

than that performed by SBA. The OIG

performed a review of the adequacy of

FCA’s examination process after FCA

completed four exams.

OIG review found that, in general, the

examinations were adequate. SBA however,

had not established routine procedures

to (1) report problem loans to OIG

(2) completely analyze the allowance for

loan losses, and (3) rate the safety and

soundness of SBLCs, using a rating process

similar to the process used by other financial

institution examiners. A rating system

would help identify the types of corrective

and follow-up actions needed on

examination findings.

The OIG recommended development of

these procedures. The Deputy to the

Associate Deputy Administrator for Capital

Access agreed to take appropriate action.

7(a) Loans Audited in SBA’s Kansas City

District Office

As part of a nationwide review to determine

whether Section 7(a) loans were processed,

disbursed, and used in accordance with SBA

requirements, OIG conducted an audit of

30 Section 7(a) loans assigned to SBA’s

Kansas City District Office. The audit

found that lenders and SBA loan officers

did not follow at least 1 of 22 selected

SBA procedures for 17 of the 30 loans

reviewed. The report recommended that

SBA deny the guarantee of $100,500 for one

loan in liquidation based upon unauthorized

use of proceeds, the lender’s failure to issue

joint payee checks, and the lender’s failure

to verify financial data with the IRS. In

addition, the report recommended that the

district office: Verify financial information

with the IRS for four loans, reduce the

guarantee of another loan by $17,830 that

was used to pay off other debt owed the

lender, require that the remaining equity

injections for two loans be made, and reduce

the guarantee percentage of one loan to

reflect the lender’s failure to verify the use

of $23,847 of loan proceeds. The district

director agreed with the recommendations

and stated that guarantees would be denied

or reduced for these loans. Appropriate

action will be taken to ensure the lenders

verify equity injections and financial

information with the IRS.

Inspection Finds SBA Needs to Improve

Oversight of CDC Program

OIG issued an inspection report on the CDC

Program that examines the oversight and

operations of the Section 504 Loan Program.

The report contains recommendations for

strengthening internal controls and

improving the effectiveness and timeliness

of program delivery. More specifically, it

focuses on CDC reporting requirements,

CDC contractual agreements with service

providers, Section 504 fees charged to

borrowers, compliance with program rules,

and performance measurement.

Overall, OIG believes that SBA’s oversight

of the CDCs needs tightening to be

effective. OIG found that some SBA

district offices were not diligent in
Semiannual Report September 1999 11

reviewing CDC annual reports,

preparing summary assessments, and

forwarding the reports and assessments

to Headquarters. To correct this problem

and improve oversight, OIG recommends

that SBA (1) ensure that the district

offices obtain, review, and forward all

CDC annual reports and assessments to Headquarters in a timely

manner, and (2) provide the field offices

with appropriate guidance on reviewing

the reports.

CDCs are allowed to contract for certain

services, such as marketing, packaging,

processing and servicing, with SBA’s prior

approval. Some district offices did not

have a prior approval process in place,

nor did they review CDC contracts on an

annual basis, as required. We found that

at least three non-profit CDCs contracted out

virtually all CDC functions to for-profit

companies whose owners were directly

involved in the management of the CDC.

Further, most or all CDC compensation was

passed to these for-profit companies. Not

only does this arrangement allow CDCs to

circumvent the rules barring for-profit

CDCs, it also violates regulations that forbid

self-dealing. To correct such problems,

OIG recommends that SBA (1) provide

district offices with standard procedures

for reviewing CDC contracts, (2) hold

those offices accountable for conducting

annual reviews, (3) require CDCs to

provide copies of all contractual

agreements in their annual reports,

(4) clarify its policy on

contracting out the majority of services to

for-profit companies, and (5) exercise

closer oversight to prevent program

violations.

OIG attempted to use the information

provided in CDC annual reports to

determine if CDCs were charging borrowers

the appropriate processing fees. Although

we identified five CDCs that were

charging excessive fees, most of the

annual reports did not contain sufficient

detail to allow the Agency to verify

specific Section 504 revenues. We also

found that some CDCs’ financial

statements did not comply with Generally

Accepted Accounting Principles (GAAP),

as required. CDCs are not compelled to

undergo an audit by a Certified Public

Accountant (CPA); their expense may make

such audits inappropriate for smaller CDCs.

As a result of these findings, OIG

recommends that SBA (1) require

CDCs to list separately each Section 504-

related revenue and expense in their

financial statements, (2) review all Section

504 revenues to identify CDCs that may

be charging borrowers excessive fees,

(3) issue guidance to all district offices

and CDCs clarifying what fees can be

charged to borrowers, and (4) develop a

means for certifying compliance with

GAAP requirements by CDCs that do not

have their financial statements audited by

a CPA.

OIG also conducted a survey of CDC

directors that identified significant

variation in closing fees charged by CDCs

and substantial dissatisfaction with the

time district offices took to approve loans

submitted under the Accredited Lender

Program (ALP). The survey also revealed

that 21 percent of the CDCs had not

received a site visit from their district offices

in 4 or more years. As a result of these

findings, OIG recommends that SBA

(1) monitor closing fees in excess of

$2,500 to ensure that they are reasonable
12 Semiannual Report September 1999

for the work performed, (2) ensure that

district offices approve ALP applications

within the required 3-day time period,

(3) take necessary steps to revoke the

ALP status of CDCs that submit loan

packages that take longer to review

because they do not meet ALP standards,

and (4) ensure that all district offices

perform site visits of CDCs at least once

every 3 years.

Audit Finds Ineligible Loan

An audit of a Section 7(a) loan in upstate

New York found that a PLP lender approved

an $82,000 SBA guaranteed loan, of which

$49,993 was ineligible for the guarantee

because the borrower had credit available

elsewhere. In obtaining SBA’s approval,

the lender misinformed SBA about the status

of the applicant’s existing loan. While the

lender disagreed with the finding,

the Associate Administrator for Financial

Assistance agreed to notify the lender that a

record of the finding would be placed in its

PLP file for review during consideration

of any future request for PLP renewal or

expansion. Furthermore, if the loan

defaults, the lender will be called upon to

explain why the refinancing was eligible and

why SBA should not deny liability.

Audits of Early Defaulted Loans

A program of auditing early defaulted loans

is yielding dollar recoveries for SBA. In

this period, a lender was collecting

payments on a note receivable held as

collateral on a defaulted loan, but was not

forwarding SBA its guarantee share

(62.5 percent) as required by the lender

agreement. As a result of the audit,

the lender started making payments to

SBA. SBA should now continue to receive

$4,881 a month through the year 2006, a

potential recovery of $419,971, or

75 percent of the amount SBA paid out to

honor the guarantee on the loan.

An “early default” is a loan which goes into

liquidation within 3 years of origination.

This sometimes indicates there was error or

fraud on the part of the lender or borrower.

The Auditing Division is auditing a sample

of early defaulted loans each year.

Proposed Rule to Modify Certified

Development Companies’ Operations

Reviewed

OIG reviewed a proposed rule, which would

modify the operations of CDCs. While

supporting the proposed modifications, OIG

recommended that the regulations address

the steps a CDC should take to obtain the

advice of someone with commercial lending

experience in those situations where the

member of the board of directors with such

experience must disqualify himself or

herself from evaluating a loan because of an

actual or apparent conflict of interest. OIG

further noted that while the proposed rule

attempts to restrict “self-dealing” by

members of the board of directors or loan

committees, it lacked a specific definition

of “self-dealing.”

Activities to Enhance Fraud

Detection and Deterrence

Latest Results from Affirmative Civil

Enforcement Program

During this reporting period, OIG’s

participation in the Department of Justice’s

Affirmative Civil Enforcement (ACE)

program produced two successful business

loan cases, each resulting in a $5,000 civil
Semiannual Report September 1999 13

penalty. One case involved a loan

application, including “copies” of income

tax returns that were determined to be false,

which was stopped before the participating

lender bank disbursed any funds. The

other case involved a business executive

who failed to disclose, in applying for an

SBA-guaranteed loan, that 15 years

earlier another corporation of his had

received, and subsequently defaulted on,

an SBA loan. During an earlier reporting

period, while OIG was investigating the

matter, the executive fully satisfied a

7 year-old judgment for the defaulted loan’s

balance.

OIG Briefs Members of Resource-Partner

Community

The investigations staff continued its

practice of making presentations to groups

of SBA’s resource partners. A Special

Agent from OIG’s Los Angeles field office

gave a presentation to 115 attendees at a

meeting sponsored by SBA’s Santa Ana

District Office. The presentation

highlighted the benefits to be gained from

cooperation between participants (in the

Section 7(a) lending program, in this case)

and OIG in combating waste, fraud, and

abuse in SBA’s programs.

Texas Clothing Manufacturer Indicted

for Making Material False Statements

The owner of a clothing manufacturer in

Dallas, Texas, was indicted on one count

each of making material false statements,

misuse of a Social Security number

(SSN), and misappropriation of SBA

collateral in connection with a $675,000

SBA-guaranteed loan from a participating

nonbank lender. Using an alias, she sought

the loan to open a second business in

Prattville, Alabama. In the loan application,

she allegedly represented the second

company as employing 75 people with a

1995 profit of more than $2 million.

Actually, she was its sole employee and

worked out of a 700 square foot apartment.

She also allegedly gave a false SSN and a

false name on the loan application as part of

an effort to conceal the fact that her previous

business had defaulted on an SBA loan. She

also allegedly submitted fictitious tax

returns and supporting IRS documentation,

falsified financial statements, false lessors’

agreements, and false invoices to secure the

loan. To substantiate some documents, she

allegedly established several telephone

numbers in the names of fictitious

companies and had voice-mail taking

messages for the bogus companies. This

loan was disbursed in August 1996. The

business owner then failed to purchase the

equipment pledged as collateral and

allegedly used most of the loan proceeds for

personal purchases including two homes,

cars, furniture, and other unauthorized items.

She went into immediate default on this

loan, with a loss to the nonbank lender and

SBA of $689,983. This investigation was

based on a referral from the lender through

SBA’s Alabama District Office.

Missouri Child Care Center Operator

Indicted for Making False Statements to

SBA

The president of an educational center in

Kansas City, Missouri, was indicted on

seven counts of making false statements to

SBA in connection with a $387,000

guaranteed PLP loan she received from a

nonbank lender. The businesswoman

received this loan in January 1998 to

purchase a building and expand her child

care operation. According to the indictment,
14 Semiannual Report September 1999

she failed to disclose on her application and

related documents that she owed delinquent

taxes and had a prior arrest for passing a bad

check. She also allegedly made numerous

false statements to document her required

$111,000 cash injection and falsely reported

that she purchased 50 new computers funded

partially by proceeds of the loan. She made

no regular payments on the loan, and the

lender has foreclosed on the real property

and is in the process of evicting the

occupants. SBA/OIG initiated this

investigation based on information received

from the Treasury Department’s Inspector

General for Tax Administration and

conducted it jointly with that office.

Missouri Businessman Indicted for Mail

Fraud and Making False Statements

A Missouri businessman was indicted on

two counts of mail fraud; two counts of

using a false Social Security number;

one count of making material

false statements; and one count of

impersonating a U.S. Government officer

in connection with alleged schemes to

defraud SBA, a small business lending

company, and an insurance company. One

count each of mail fraud and making

material false statements relate to a

$295,000 SBA-guaranteed loan he applied

for in March 1999. His corporation was

supposed to use SBA loan proceeds to

purchase an existing day care center in

St. Louis. The investigation found that the

businessman submitted false statements

regarding his educational background, work

experience, criminal history, and financial

status, for the purpose of obtaining the SBAguaranteed loan. The joint SBA/OIG,

Department of Health and Human Services

(HHS) OIG, Social Security Administration

OIG, and Postal Inspection Service

investigation was initiated based on a

referral from HHS/OIG. Following the

man’s indictment, a warrant for his arrest

was issued, and he subsequently surrendered

to Federal authorities.

Virginia Insurance Agent Sentenced for

Mail Fraud

A Vienna, Virginia, field agent for a life

insurance company was charged with and

pled guilty to one count of mail fraud. He

was sentenced to serve 18 months in prison

and 3 years on supervised release. He was

also ordered to pay the insurance company

$261,758 in restitution. A joint investigation

by SBA/OIG, the Postal Inspection

Service, and FBI showed that, from 1992

through 1998, the agent fraudulently

misappropriated approximately $261,758

from the insurance company and its

policyholders. OIG initiated its

investigation following a May 1998 referral

from SBA’s Washington District Office.

The insurance company had forwarded a

copy of a letter authorizing them to release a

collateral lien SBA held on an insurance

policy that belonged to one of the agent’s

clients, a former SBA loan applicant. The

letter was purportedly from SBA’s

Washington District Director, who actually

had retired more than 1 year before the date

on the letter. The investigation proved that

the bogus letter was prepared and sent by the

agent as part of his scheme to defraud the

insurance company and the policyholder.

Iowa Restaurateur Pleads Guilty to

Making Material False Statements

The former president of a restaurant and

dairy freeze in Lineville, Iowa, was charged

with and pled guilty to one count of making

material false statements to SBA regarding
Semiannual Report September 1999 15

his use of funds from a $50,000 direct SBA

loan he received in 1994. The restaurant

owner qualified for this loan as a

Vietnam-era veteran. OIG’s investigation

found that he made numerous false

statements to SBA regarding his use of the

loan proceeds, which were intended to pay

for equipment, remodeling expenses, and the

remainder of the purchase price of his

restaurant. After making only a few

payments, he defaulted on this loan, closed

the restaurant, and left Iowa. SBA

recovered only $2,280 in the resulting

liquidation. This investigation was initiated

based on a referral from SBA’s Des Moines

District Office.

Virginia Taxicab Company Owner

Indicted for Making False Statement to

SBA

The president and owner of a taxicab

company in Culpeper, Virginia, was indicted

on one count of making a false statement

to SBA to obtain a $35,000 LowDoc loan

for her business. She had represented on

SBA Form 4-L, Application for Business

Loan, that she had no previous criminal

history. The investigation by OIG

established, however, that prior to the date

of her loan application she had been arrested

in five separate incidents.

Results of Previously Reported

Investigations

President of Washington, D.C., Waste

Paper Recycling Company Sentenced for

Making False Statements and Perjury

The president of a now-defunct wastepaper

recycling company in Washington, D.C.,

was sentenced to serve 37 months in prison

and 5 years of supervised release. She was

also ordered to pay restitution of $427,865

to SBA and $114,916 to the participating

lender bank. She was previously convicted

on one count each of making false

statements in a loan application to a

federally insured bank, making false

statements to SBA, and perjury. (Updated

from the September 1998 Semiannual

Report.)

Former Law Enforcement Official

Sentenced to Prison for Franchise-Loan

Fraud

A former chief deputy sheriff in Minnesota

was sentenced in U.S. District Court in

Colorado. He was ordered to serve

21 months of incarceration and 5 years of

supervised release and to pay $126,207 in

restitution. He had pled guilty to one count

of wire fraud and one count of bank fraud.

(Updated from the March 1999 Semiannual

Report.)

Investigation of California Loan

Brokerage Firm Yields Further Results

The number of individuals charged with

crimes, in the wake of the 6-year

investigation of an Inglewood, California,

loan brokerage firm, has grown to 18. All

18 have entered guilty pleas, and with the

number of defendants sentenced having

risen to 13, total court-ordered restitution

and fines thus far total nearly $2.25 million.

This case revolves around loan packages

submitted to a participating lender bank that,

partially as a result of the default rate of the

allegedly fraudulent loans, the Office of the

Comptroller of the Currency closed in 1994.

1 A former owner of a gas station in San

Bernardino, California, was sentenced to

serve 5 months of home detention and
16 Semiannual Report September 1999

3 years of supervised release. She also was

ordered to pay $10,000 restitution to SBA.

She previously pled guilty to three counts of

making false statements to a federally

insured lender by submitting altered

individual income tax returns for 1988

through 1990 as part of her application for a

$300,000 SBA-guaranteed loan.

2 A former owner of a car wash in Hemet,

California, and his brother, a former owner

of a car wash in Palmdale, California, were

each charged with and pled guilty to one

count of making false statements to a

federally insured lender. The brothers had

submitted altered 1987 through 1989

individual income tax returns in support of

their separate applications for $1 million

SBA-guaranteed loans (one for each car

wash).

3 A former owner of a fish market in

Castaic, California, was charged with one

count of making false statements to a

federally insured lender. He allegedly

submitted altered individual income tax

returns for 1988 through 1990 as part of his

application for a $1 million SBA-guaranteed

loan.

4 A former owner of an automotive repair

business in Glendale, California, was

charged with and pled guilty to one count of

making false statements to a federally

insured lender. He was sentenced to serve

5 months imprisonment, 5 months on home

detention, and 3 years of supervised release.

He was also ordered to pay $4,050 in fines.

He had submitted altered Federal income tax

returns for 1987 through 1989 as part of his

application for a $1 million SBA-guaranteed

loan.

5 Married owners of a gas station in West

Covina, California, who previously pled

guilty to four counts of making false

statements to a federally insured financial

institution, were sentenced. The husband

was sentenced to serve 15 months in prison,

5 months of home detention, and 5 years of

supervised release; his wife was sentenced

to serve 1 month in prison, 5 months of

home detention, and 5 years of supervised

release. In addition, they were ordered

jointly to pay $25,000 in restitution to SBA.

6 The former owner of a gas station in

Fontana, California, was sentenced to serve

2 months in prison, 4 months of home

detention, and 5 years on supervised release.

He was also ordered to pay $1,044,514 in

restitution (75 percent to SBA). He

previously pled guilty to three counts of

making false statements to a federally

insured lender.

7 A Harbor City, California, tax preparer

was sentenced to serve 15 months in prison

and 5 years on supervised release. He was

also ordered to pay $15,000 in restitution.

He previously pled guilty to three counts of

aiding and abetting the making of false

statements to a federally insured lender.

8 The former co-owner of a West Covina,

California, gas station was sentenced to

serve 1 month in prison, 5 months on home

detention, and 5 years on supervised release.

He was also ordered to pay $132,000 in

restitution. He previously pled guilty to one

count of making false statements to a

federally insured lender for submitting

altered income tax returns for 1987 through

1989 with his application for a $1 million

SBA-guaranteed loan. (March 1999 and

September 1998 Semiannual Reports.)
Semiannual Report September 1999 17

President of Washington Construction

Company Pleads Guilty to Making False

Statements on Loan Application

The former president of a construction/

management company in Des Moines,

Washington, pled guilty to one count of

making false statements on a loan

application. He was sentenced to serve

1 year and 1 day in prison and 5 years on

supervised release. He was also ordered to

pay $480,150 in restitution and an additional

$37,506 obligation to the Internal Revenue

Service. (Updated from March 1999

Semiannual Report.)

Pennsylvania Beauty Supply Company

Owner Pleads Guilty to Making False

Statements on Loan Application

The owner of a beauty supply company in

Philadelphia, Pennsylvania, pled guilty to

two counts of making material false

statements in an unsuccessful 1994 attempt

to obtain a $60,000 SBA-guaranteed bank

loan. The man was sentenced to serve

3 years on probation and perform 250 hours

of community service and ordered to pay

$2,800 in fines. (Updated from March 1999

Semiannual Report.)

Carolina Computer Consultant Sentenced

for Aiding and Abetting Making of

Material False Statement

The president of a computer consulting firm

in Charlotte, North Carolina, was sentenced

to serve 4 months of community

confinement, 4 months of home detention,

and 5 years of supervised release. He was

also ordered to pay $102,201 restitution to

SBA and a $50 special assessment. He

previously pled guilty to one count of

aiding and abetting the making of a

material false statement in a loan

application to a federally insured bank.

(Updated from the September 1998

Semiannual Report.)

Owner of a Mississippi Trucking

Accessories Business Sentenced for Bank

Fraud

The owner of a trucking accessories

business in Long Beach, Mississippi, was

sentenced to serve 1 month in prison,

5 months in home confinement, and 5 years

on supervised release. He was also ordered

to pay restitution of $109,505 to SBA and

$79,084 to other lenders. He previously

pled guilty to one count of bank fraud in

connection with a $100,000 SBA LowDoc

loan. (Updated from the March 1999

Semiannual Report.)

California Loan Broker Pleads Guilty to

Making False Statements

The principal of a brokerage firm in San Jose,

California, pled guilty to two counts of

making false statements to a federally

insured lender to obtain SBA-guaranteed

loans. In return, the other 16 felony counts on

which he had been indicted were dismissed.

The joint investigation conducted by OIG

and FBI was initiated based on information

provided by SBA’s San Francisco District

Office. In his plea agreement, he

acknowledged that in the course of securing

financing for two clients to purchase

convenience stores, he assisted them by

preparing and submitting fraudulent

applications for SBA-guaranteed loans to a

bank. The personal financial statements

provided failed to disclose loans that the loan

broker was making to his clients to facilitate

their store purchases. (Updated from the

March 1998 Semiannual Report.)
18 Semiannual Report September 1999

President of Washington Credit Exchange

Pleads Guilty to Making False Statements

on Loan Application

The president of a credit exchange in

Kennewick, Washington, pled guilty to one

count of making false statements to SBA.

In return, a bank fraud count on which she

had also been indicted was dismissed. She

was sentenced to serve 3 years on probation

with the first 4 months to be served as home

detention with electronic monitoring. She

was also ordered to pay restitution of $54,604

(65 percent to SBA and 35 percent to the

participating bank). (Updated from March

1999 Semiannual Report.)

Massachusetts Businessman Sentenced

for Making False Statements on Loan

Application

The president of a company located in

Quincy, Massachusetts, was sentenced to

serve 5 months of incarceration, 5 months of

home detention, and 3 years of supervised

release. He was also ordered to pay

restitution totaling $216,838 to SBA and

two other victims. He previously pled guilty

to five counts of making false statements

on loan applications to a federally insured

financial institution. (Updated from

September 1998 Semiannual Report.)

President of Washington College

Foundation Charged with Mail Fraud

A superseding indictment was returned

against a Seattle, Washington, man. The

superseding indictment charged him with an

additional count of mail fraud pertaining to

a grant he obtained for a college foundation,

a nonprofit organization of which he was the

president. The investigation found that he

used the U.S. mail to submit false statements

to the Boeing Employees Good Neighbor

Fund for a $187,000 grant. In addition, he

used the U.S. mail to submit additional false

documents to support his expenditures of the

grant proceeds. Previously, while operating

an injury rehabilitation clinic, he was

charged in a seven-count indictment. The

original charges included two counts of

bank fraud, one count of making false

statements to SBA, one count of false

claim of citizenship, and three counts of

making false statements on loan

applications. The original indictment

pertained to his February 1994, application

for an $80,000 SBA-guaranteed business

loan from a participating lender to purchase

chiropractic equipment for his clinic. The

investigation found that he made false

statements on his loan application

documents to obtain the loan, and later

converted loan proceeds to his personal use.

In addition, the investigation found that he

falsely claimed that he was a U.S. citizen on

SBA’s Statement of Personal History form,

and on three loan applications in order to

obtain guaranteed student loans from a

federally insured financial institution. The

joint SBA/OIG and FBI investigation is still

ongoing. (Updated from the March 1999

Semiannual Report.

Missouri Music Company President

Sentenced for Making False Statements to

SBA

The former president of a retail musical

instruments company in Springfield,

Missouri, was sentenced to serve 1 year on

probation. He previously pled guilty to one

count of making false statements to SBA.

(Updated from the March 1999 Semiannual

Report.)
Semiannual Report September 1999 19

Disaster Loan Program

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

the primary form of direct Federal loan assistance for non-farm, private sector disaster losses.

Moreover, the Disaster Loan Program is the only form of SBA assistance not limited to small

businesses. Disaster loans from SBA also help homeowners, renters, businesses of all sizes,

and nonprofit organizations to rebuild. 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. Department

of the Treasury, the SBA program helps to defray Federal costs. 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 1999, SBA approved

36,176 loans. Since the inception of the program, SBA has approved more than

1,452,300 disaster loans valued at some $26 billion. As of the end of FY 1999, the

SBA disaster loan portfolio included more than 270,000 loans worth more than $6.8 billion.

SBA is authorized by law to make two types of disaster assistance 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 nonprofit organizations; and (2) economic injury disaster loans which provide

necessary working capital to small businesses until normal operations can be resumed after a

physical disaster. SBA delivers its disaster loans through four specialized Disaster Assistance

Area Offices located in Niagara Falls, New York (Area 1); Atlanta, Georgia (Area 2); Fort

Worth, Texas (Area 3); and Sacramento, California (Area 4).
20 Semiannual Report September 1999

Summary of OIG Activity / Disaster Loan Program

Audit Reports Issued 1

Audits Underway 1

Indictments Resulting from Investigations 2

Convictions Resulting from Investigations 7

Investigations Closed / Canceled / Remaining

Inventory

18 / 2 / 146

Investigations: Restitutions / Fines / Other Recoveries $1,338,259 / $16,600 / $0

Investigations: Declination of Loans Due to Name

Checks

$1,398,971

Investigations: Cases Referred to Other Agencies 4

Reviews of Regulations 4

Reviews of Other Issuances 4

Figure 2

SBA Disaster Portfolio

$6,747,768,714

$6,969,759,194

$7,155,135,998

$6,915,620,234

$6,907,727,301

5.0 5.5 6.0 6.5 7.0 7.5

9/30/95

9/30/96

9/30/97

9/30/98

9/30/99

Billions of Dollars
Semiannual Report September 1999 21

Efforts to Improve SBA Program

Management

Audit of Disaster Home Loan Servicing

Centers Finds Need for More Timely and

Frequent Collection Effort

An OIG audit of Disaster Home Loan

Servicing Centers found that more timely

and frequent collection efforts were

needed for past due disaster home loans.

For example, the audit found that collection

contacts were concentrated on loans more

than 180 days past due, whereas the

Department of the Treasury guidance calls

for collection actions at the earliest stages of

delinquency. The audit also found the goal

of weekly contact was achieved in only 40

percent of the delinquent loans in 1997.

Additional staff was assigned to the

collection function, and by February 1999

there was weekly contact with 99.9 percent

of the delinquent loans.

The audit also found that delinquent

disaster home loans were routinely charged

off without using available liquidation

tools such as litigation and garnishment.

The Associate Administrator for Disaster

Assistance agreed with the recommendations to increase referrals to the

Department of Justice.

The audit findings and recommendations

were based on a statistical sample of

432 loans that were past due,

delinquent, or in liquidation status as of

September 30, 1997. As of that date, SBA’s

disaster loan portfolio totaled 185,417 loans

valued at $3 billion, including 12,843 loans

valued at $179 million that were past

due, delinquent, or in liquidation.

Activities to Enhance Fraud

Detection and Deterrence

Florida Jeweler Indicted for Making False

Statements and Mail Fraud

The owner of a jewelry store in Miami,

Florida, was indicted on three counts of

making false statements to SBA and two

counts of mail fraud to induce SBA to

approve and disburse a $70,400 SBA

physical-damage disaster loan for her

business. Following Hurricane Andrew, the

owner applied for a loan purportedly to

replace damaged machinery, equipment, and

inventory, and to repair/replace damaged

leasehold improvements. She received

SBA’s permission to open a new store in

a different part of Miami from where

the storm-damaged store was located.

She submitted numerous receipts as

documentation of her expenditures of the

loan proceeds. After the loan defaulted, an

on-site inspection by an SBA liquidation

loan officer indicated that the new store

might never have been opened. Subsequent

inquiries determined that the “receipts” she

submitted to SBA were false and most were

altered estimates. SBA charged off this loan

in 1997 with a loss of $69,368. This

indictment was returned as a result of a joint

investigation with FBI and IRS. Special

agents from FBI and OIG arrested the

woman at her home in Miami and, while

there, observed and seized numerous

apparently counterfeit credit cards and the

computer used to produce them. This

evidence was referred to the U.S. Secret

Service. The referral from SBA’s South

Florida District Office was originally

referred to FBI; in 1998, the Assistant U.S.

Attorney overseeing the investigation asked

OIG to join the case.
22 Semiannual Report September 1999

California Owner of Italian Marble

Business Indicted for Mail Fraud

The former owner of an Italian marble

business in North Hills, California, was

indicted on three counts of mail fraud. It

was almost 3 months later that the

Immigration and Naturalization Service

(INS) arrested him in New York City as he

entered the country following a flight from

Italy; INS subsequently turned him over to

the custody of SBA/OIG special agents. He

had obtained a $417,000 physical-damage

disaster loan for his business from SBA

following the 1994 Northridge earthquake.

OIG initiated this investigation based on a

call to its Fraud Line and additional

information provided by SBA’s Disaster

Assistance Area 4 Office. The investigation

revealed that the owner submitted a false

corporate tax return and an altered personal

tax return to secure the disaster loan from

SBA. According to his accountant, he

transferred most of the funds from the SBA

disaster loan to his bank account in Italy.

The loan has been placed into liquidation

status.

Results of Previously Reported

Investigations

California Resident Sentenced for

Making Material False Statements

A resident of Los Angeles, California, was

sentenced to serve 5 years probation. She

previously pled guilty to three counts of

making material false statements to

Federal agencies and one count of making

false statements to a Federally insured

financial institution. (Updated from the

September 1998 Semiannual Report.)

Missouri Marina Operator Sentenced for

Making Material False Statements

A marina operator in West Alton, Missouri,

was sentenced to perform 60 hours of

community service and to serve 3 years of

probation. He previously pled guilty to one

count of making material false statements

to SBA to fraudulently obtain disaster

assistance for his company. (Updated from

the March 1998 Semiannual Report.)

Former SBA Employees Sentenced for

Making False Statements on Loan

Application

A former employee in SBA’s Disaster

Assistance Area 4 Office pled guilty to two

counts of making a material false statement

and was sentenced on the same day. He was

ordered to serve 4 months in prison, 4 months

in a halfway house, and 3 years on

supervised release. He was ordered to pay

$57,400 in restitution to SBA, $10,000 in

restitution to the Federal Emergency

Management Agency (FEMA), and $10,150

in fines. In addition, he was prohibited from

seeking future Federal employment. A

second former employee, who was also a

licensed contractor, was sentenced after

pleading guilty to one count of making a

material false statement. He was ordered to

serve 4 months in home confinement and

3 years on probation, pay $2,100 in fines, and

perform 300 hours of community service. In

addition, he is prohibited from seeking

Federal employment. (Updated from the

March 1999 Semiannual Report.)

Illinois Contractor Convicted of Making

Material False Statements

The president and owner of a construction

company in Silvis, Illinois, was convicted on
Semiannual Report September 1999 23

all four counts of making material false

statements on which he was indicted in

1998. He made the false statements to SBA

in connection with a $151,000 physicaldamage disaster loan made to a resort in

Orion, Illinois, after the Great Midwest

flood of 1993. (Updated from the September

1998 Semiannual Report.)

Alabama Realtor Sentenced for Mail

Fraud

The owner of a real estate company in

Enterprise, Alabama, was sentenced to serve

4 months in prison, 4 months in home

confinement, and 3 years on supervised

release. He was also ordered to pay

$206,316 (principal and interest) in

restitution to SBA. The owner previously

pled guilty to one count of mail fraud.

(Updated from the March 1997 Semiannual

Report.)

Indiana Resident Sentenced for Making

False Statement

A resident of Indianapolis, Indiana, pled

guilty to one count of making a material

false statement to SBA, and was sentenced

to serve 7 months in prison, 7 months of

home detention, and 3 years of supervised

release. She was also ordered to pay SBA

$23,815 in restitution. (Updated from the

March 1999 Semiannual Report.)

Pennsylvania Attorney Pleads Guilty to

Failing to File Federal Income Tax

An attorney in Harrisburg, Pennsylvania,

pled guilty to one count of failing to file a

Federal income tax return. He was

previously indicted on one count of making

false statements to SBA by overstating his

income, and by omitting a theft conviction,

on his application for three SBA disaster

loans. As part of his plea agreement, the

indictment was dismissed and a criminal

information charging him with the tax

charge was substituted. (Updated from the

March 1998 Semiannual Report.)

Colorado Telemarketer Convicted of

Making False Statements on Loan

Application

The owner of a telemarketing company in

Denver, Colorado, was convicted on two

counts of making false statements to

SBA. (Updated from the March 1999

Semiannual Report.)

California Shopping Center Owner

Sentenced for Grand Theft and Insurance

Fraud

The owner of a shopping center in

Los Angeles, California, was sentenced to

serve 2 years in prison and ordered to pay

a $200 fine, $281,800 in restitution to SBA,

and $521,371 in restitution to an insurance

company. The owner previously pled guilty

to one count of grand theft and one count

of insurance fraud. (Updated from the

March 1999 Semiannual Report.)

California Businessman Sentenced for

Making False Statements on Loan

Application

A Canoga Park, California, man was

sentenced to serve 5 months in prison,

5 months in a halfway house, and 5 years on

supervised release. He was ordered to pay

$247,557 in restitution (88 percent to SBA).

He had pled guilty to one count of making a

false statement to a federally insured

financial institution. (Updated from the

March 1999 Semiannual Report.)
24 Semiannual Report September 1999

North Dakota College President

Sentenced for Failure to Refund

Unearned Federal Student Aid Funds

The former president of a corporation that

operated a business college in Grand Forks,

North Dakota, was sentenced to serve

18 months in prison and 3 years on

supervised release. She was also ordered to

pay $914,000 in restitution to the U.S.

Department of Education. She previously

pled guilty to one count of failure to refund

unearned Federal student aid funds.

(Updated from the March 1999 Semiannual

Report.)

Virgin Islands Grocery Store Owner

Sentenced for Making False Statements to

SBA

The owner of a grocery and feed shop on St.

Croix, U.S. Virgin Islands, was sentenced to

serve 2 years on probation and ordered to

pay $4,050 in fines. He previously pled

guilty to making false statements to SBA

in connection with two disaster loan

applications, totaling $215,900, which he

had submitted for his business and for his

home. (Updated from the March 1999

Semiannual Report.)
Semiannual Report September 1999 25

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, profit-making

investment companies licensed by SBA to finance small businesses through long-term loans and

investments in their equity securities. SBICs often also provide management assistance to the

companies they finance.

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

licensees, and (c) 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 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 sufficient income to cover the interest on debenture

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

cost of the leverage until profits have been generated from the SBIC's investments. In

consideration, SBA participates in approximately 10 percent of the SBIC's profits. The Agency

arranges periodic public offerings of trust certificates backed by pools of SBIC debentures or

participating securities. SBA guarantees the payment of principal and interest on the trust

certificates.

As of September 30, 1999, there were 354 licensed and active SBICs, with a total capitalization

of $10.6 billion (private capital of $8.3 billion and committed leverage of $2.3 billion). Included

are 66 Specialized SBICs (SSBICs) which were licensed under Section 301(d) of the Small

Business Investment (SBI) 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.) While the SBIC

program level utilized in FY 1998 was $1.37 billion, authorization ceilings allow for

$1.5 billion in the FY 1999 program level, signaling a continuing expansion of the

program. As of March 31, 1999, $682 million of the FY 1999 program level was committed.

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 Opportunity Enhancement 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.
26 Semiannual Report September 1999

Summary of OIG Activity / Small Business Investment Companies

Audits Underway 1

Indictments Resulting from Investigations 0

Convictions Resulting from Investigations 2

Investigations Closed / Remaining Inventory 1 / 9

Investigations: Restitutions / Fines / Other

Recoveries

$0 / $0 / $400,000

Reviews of Regulations 1

Reviews of Other Issuances 2

Figure 3

Results of Previously Reported

Investigations

New York Small Business Investment

Company Official Pleads Guilty

The president of an SBIC in New York,

New York, pled guilty to one count each of

bank fraud and making material false

statements. In return, the Government

agreed to dismiss the charge of

misapplication of SBIC funds on which

he was previously indicted. His actions

caused the SBIC to fail and forced SBA to

begin liquidating the SBIC in 1997. SBA

expects to lose $1.4 million as a result of

this failure. (Updated from the March 1999

Semiannual Report.)

SBIC Program Financing to Small Businesses

$2,475,008,681

$2,079,711,887

$1,839,871,565

$1,782,899,088

$1,329,944,348

0.75 0.90 1.05 1.20 1.35 1.50 1.65 1.80 1.95 2.10 2.25 2.40 2.55

9/30/95

9/30/96

9/30/97

9/30/98

9/30/99

Billions of Dollars
Semiannual Report September 1999 27

Florida Consultant Pleads Guilty to Bank

Fraud

A West Palm Beach, Florida, man who was

a consultant to the officers of a now-failed

SBIC in New York, New York, pled guilty

to the one count of bank fraud on which he

was previously indicted. (Updated from the

September 1998 Semiannual Report.)
28 Semiannual Report September 1999

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 SBA's size eligibility

standards if their average annual receipts (including those of their affiliates) for the last

three fiscal years do not exceed $5 million. A contract bond is generally eligible for SBA’s

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

P. L. 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 1998,

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

program, was $328 million. The appropriated guarantee authority level for FY 1999 surety

bond guarantees was $1.672 billion.
Semiannual Report September 1999 29

Summary of OIG Activity / Surety Bond Guarantees

Audit Reports Issued 4

Audits Underway 1

Investigations Closed / Remaining Inventory 0 / 2

Investigations: Declinations Due to Name Checks 1

Investigations: Cases Referred to Other Agencies 1

Reviews of Other Issuances 1

Figure 4

Efforts to Improve SBA Program

Management

Surety Company Audit Finds

Noncompliance

An audit of a surety company in New York,

New York, found certain instances of

noncompliance with SBA’s policies and

procedures for bond guarantees and claims.

OIG reviewed 10 bonds with claim

payments totaling about $2.3 million. The

noncompliances included execution of a

bond after work on the contract had

started, submission of bond applications

in excess of the number allowed by SBA,

submission of legal expenses that were not

allocable to the bond, and untimely

remittance of salvage. The audit report

Surety Bond Guarantees

SBA's Contingent Liability

964,889,948

724,596,082

614,876,018

414,098,442

328,042,172

0 100 200 300 400 500 600 700 800 900 1000 1100

9/30/95

9/30/96

9/30/97

9/30/98

9/30/99

Millions of Dollars
30 Semiannual Report September 1999

recommended corrective actions to recover

$142,284. The Associate Administrator for

Surety Guarantees agreed with the

recommendations and the surety company

agreed to remit $142,284 to SBA.

Audit of California Surety Finds

Noncompliance with SBA Procedures

An audit of a surety company located in San

Diego, California, found that the surety did

not comply with SBA procedures for

remitting claim recoveries and fees due

SBA. Specifically, the insurance company

failed to remit $1,124 in additional fees

when the original contract was increased. In

addition, SBA requires sureties to remit

recoveries within 90 days; however, the

company averaged 256 days in remitting the

recoveries to SBA. OIG recommended that

the fees owed SBA be paid by the company

and that it timely remit recoveries to SBA.

The Associate Administrator for the Office

of Surety Guarantees agreed with

the recommendations. Upon receipt of the

draft audit, the company paid additional fees

owed SBA, and has agreed to implement

controls to ensure timely remittance of

recoveries to SBA.
Semiannual Report September 1999 31

Government Contracting Programs

SBA provides assistance to small businesses to obtain 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 small

businesses. The Agency's Government contracting programs include Prime Contracts,

Subcontracting Assistance, Certificate of Competency (COC), Natural Resources Sales

Assistance, Procurement Marketing Access Network (PRO-Net), HUBZone

Empowerment Contracting Program, and the Small Disadvantaged Business (SDB).

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 program objective 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 ensure 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

lowest bidder on a contract but is found to be non-responsible in its ability to fulfill the

contract’s requirements, 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.

PRO-Net is SBA's Internet-based inventory of U.S. small businesses that are interested in

Federal procurement opportunities, either directly with the Government or with prime

contractors. Federal agencies, large prime contractors, state and local governments use PRONet as a resource in identifying small businesses for procurement opportunities. Small

businesses use this interactive mechanism to market their products and services.
32 Semiannual Report September 1999

The HUBZone Empowerment Contracting Program encourages economic development

in historically underutilized business zones – “HUBZones” – through the establishment of

Federal contract awards preferences for small businesses located in such areas. After

determining eligibility, SBA lists qualified businesses in its PRO-NET database.

The Small Disadvantaged Business (SDB) Certification Program ensures that small

businesses owned and controlled by individuals claiming to be socially and economically

disadvantaged meet the eligibility criteria. Once certified, the businesses are eligible to

receive price evaluation credits when bidding on Federal contracts.

Summary of OIG Activity / Government Contracting

Audits Underway 3

Investigations Closed /Remaining Inventory 2 / 5

Reviews of Proposed Regulations 8

Reviews of Other Issuances 4

Efforts to Improve SBA Program

Management

Government Contracting Audits in

Process

OIG has three audits in process: (1) Small

Disadvantaged Business (SDB) expenses;

(2) Private Certifiers for SDB; and

(3) Economic Disadvantage for SDB. The

objectives of the audit on SDB expenses are

to determine the guidelines for the usage of

SDB funds and whether the funds were used

for SDB purposes. The objectives of the

audit on private certifiers for SDB are to

determine whether the criteria used for

allowing a company to become a private

certifier ensure that the process will not be

compromised and whether the criteria has

been followed. The objective of the audit on

SDB economic disadvantage is to determine

whether the net worth limits established by

SBA are reasonable.
Semiannual Report September 1999 33

Section 8(a) Business Development

Section 7(j)(10) of the Small Business Act established the Minority Small Business and

Capital Ownership Development Program, recently renamed the Section 8(a) Business

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 also meets other program eligibility

requirements. Such companies may participate in the program for a maximum of 9 years and

must enhance their competitiveness during this period so as to prepare for commercial sector

competition 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, 1999, based on preliminary data pending the final Federal Procurement Data

System report, there were 5,452, approved program participants. In FY 1999, active Section

8(a) program participants received 4,937 contracts and 17,903 modifications with an

aggregate value of $4.552 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 two 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 Section 8(a) Business 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 more than $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 the

OIG’s $35 billion audit, inspection, and investigation universe.
34 Semiannual Report September 1999

Summary of OIG Activity / 8(a) Business Development

Audits Underway 2

Indictments Resulting from Investigations 1

Convictions Resulting from Investigations 1

Investigations Closed / Canceled / Remaining

Inventory

0 / 4 / 27

Investigations: Declinations Due to Name Checks 4

Investigations: Cases Referred to Other Agencies 1

Reviews of Other Issuances 3

Activities to Enhance Fraud

Detection and Deterrence

OIG Briefs Members of Resource-Partner

Community

The investigations staff continued its

practice of making presentations to groups

of SBA’s resource partners. A Special

Agent from OIG’s Washington, D.C., field

office participated in an Ethics in

Government Contracting training seminar

sponsored by SBA’s Richmond District

Office. He served as a panelist presenting

information on criminal and civil

investigations of eligibility issues in the

Section 8(a) program. Attendees included

approximately 20 representatives of local

Section 8(a) contractors.

New York Contractor Pleads Guilty

The president of a Long Island City, New

York, construction company was arrested by

special agents of OIG and FBI pursuant to

an arrest warrant charging him with one

count of making material false statements

to SBA. The complaint charged that in his

application to obtain certification into the

Section 8(a) Program in 1995, he falsely

stated on an SBA Form 912, Statement of

Personal History, that he had never been

arrested or charged with a crime. The

investigation disclosed that Maryland

authorities had arrested him on theft charges

in 1986. Four months after his arrest, he was

charged in a three-count criminal

information with conspiracy, making

material false statements to SBA, and

bank fraud. The charges, related to the

Section 8(a) application, included

submitting documents containing inflated

income information to induce a federally

insured financial institution to extend a

$50,000 line of credit to his company. In

1997, the company was awarded a $378,000

Section 8(a) contract to do work at the

Federal Correctional Institution in Otisville,

New York. The information charges that he

and others conspired to defraud the United

States by submitting fraudulent payment and

performance bonds and falsified payroll

reports in connection with the contract. He

pled guilty to all three charges.
Semiannual Report September 1999 35

Entrepreneurial Development (Business Education and Training)

SBA provides assistance to small business owners, managers, and prospective owners

through a variety of counseling and training programs housed under its Office of Entrepreneurial Development.

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 chambers of commerce, economic development

corporations, institutions of higher learning, or in downtown storefronts. In FY 1999,

SBDCs provided counseling and training to more than 595,000 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. In addition, this year SCORE began providing assistance by e-mail from

their website (www.score.org). On-site sessions are free to the public, and formal training is

provided at a low cost. In FY 1999, SCORE conducted more than 383,000 client sessions.

The vast majority of SBA business development and education activities in the areas of

training, counseling, and the provision of management information materials occur through

outreach efforts with external organizations. Co-sponsorship 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. Centers can address the varied

business start-up and growth issues encountered by small business owners and provide access

to computer applications and the internet. There are currently 61 BICs in operation.

The Women’s Business Center (WBC) program provides training and counseling

specifically tailored to the needs of the vastly underserved market of women entrepreneurs.

This program includes a network of 80 funded and graduated women’s business centers in

nearly every state, Puerto Rico, the Virgin Islands and the District of Columbia. One of the
36 Semiannual Report September 1999

currently funded sites is the Online Women’s Business Center on the internet

(www.onlinewbc.org), which receives more then 1 million hits per month from over

100 countries.

SBA’ s 18 One-Stop Capital Shops (OSCS) provide centralized access to the full range of a

community’s small business resources, including entrepreneurial development, access to

capital, and procurement of Government contracts. The program cuts across and combines a

variety of SBA’s technical assistance resources. Clients can access small business information resources (through the BICs), receive counseling (from SCORE volunteers) and training

(from a local SBDC chapter), learn to develop a business plan or mend damaged credit (from

non-Governmental resource partners), as well as apply for financing (traditionally with

microloan intermediaries). An OSCS is a partnership between the Federal Government, led

by SBA, and a local community designed to offer small business assistance from a single,

easy to access, retail location. In FY 1999, more than 53,000 clients were served. The web

site is also available in Spanish and Russian.

In 1997, SBA began an aggressive Welfare to Work (W2W) initiative that cuts across

SBA’s technical assistance programs to increase small business access to hiring new

employees. Through local contacts in each of the 70 district and 15 branch offices SBA

provides businesses with information on tax credits and other incentives for hiring, as well as

assist in creating new entrepreneurs from the welfare rolls. Using a combination of the SBA

toll free number (1-800 U ASK SBA), the SBA web page (www.sba.gov/welfare), electronic

and paper versions of pledge cards and a welfare to work toolkit, and through the assistance

of SBDC’s, SCORE, and WBC programs. SBA has provided assistance to more than 130,000

businesses and entrepreneurial training to more than 50,000 former welfare recipients. The

initiative serves as a vehicle to help businesses find effective resources and solutions to their

labor shortage needs.

Summary of OIG Activity / Entrepreneurial Development

Audit Reports Issued 2

Audits Underway 1

Investigations Closed / Canceled / Remaining Inventory 0 / 1 / 1

Inspections Underway 1
Semiannual Report September 1999 37

Efforts to Improve SBA Program

Management

Audits of Women’s Business Develop-

ment Center Finds Unallowable Costs

An audit of a women’s business develop-

ment center identified $167,448 of claimed

costs that were unallowable. The audit

found that the grantee used grant funds to

purchase equipment and supplies, and

entered into consulting agreements with

board members. In addition, the grant

period had expired and there were

unexpended Federal funds totaling $60,007.

Of the amount identified as unallowable,

$142,779 was attributed to lack of

documentation to support the expenditures.

The cooperative agreement required the

grantee to maintain complete and

accurate records, including supporting

documentation. Furthermore, the grantee

did not meet the cash match requirements.

The audit recommended reimbursement for

the unallowable costs. Since the project had

ended, no recommendation was necessary to

address the conflicts of interest. The

Assistant Administrator for Administration

agreed with the findings and

recommendations.

A second audit of the same grantee found an

additional $16,799 of claimed costs that

were unallowable, $2,650 of unexpended

funds, and the required amount of training

sessions had not been conducted. The audit

report recommended that the center

reimburse SBA $15,000 for unallowable and

unexpended Federal funds. The Assistant

Administrator for Administration concurred

with the recommendation.
38 Semiannual Report September 1999

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 its internal administration and financial management

operations. OIG audit, investigative, and inspection activities assist SBA managers by

reviewing their operations for efficiency and effectiveness. The audits of SBA’s financial

statements, as required by the Chief Financial Officers Act, review the Agency’s cash

management and integrity assurance activities.

SBA’s management and financial activities are supported by the Agency’s $819.9 million in

operating funds, partially provided by FY 1999 appropriations enacted in P.L. 105-119.

Of the $819.9 million available, which includes carry-overs and estimated recoveries,

$288.3 million funds Salaries and Expenses, $30.9 million is for disaster loan servicing, and

$85.3 million is for disaster loan making. In addition, $224.2 million is available for business

loans, $147.3 million for disaster loans, and $3.8 million for the Surety Bond Guarantee

program.

Summary of OIG Activity / Agency Management and Financial

Audit Reports and Advisory Memoranda Issued 6

Audits Underway 6

Indictments Resulting from Investigations 3

Convictions Resulting from Investigations 3

Investigations Closed / Canceled / Remaining Inventory 11 / 1 / 11

Investigations: Restitutions / Fines / Other Recoveries $5,011 / $0 / $0

Inspections Completed 1

Reviews of Proposed Legislation 5

Reviews of Proposed Regulations 3

Reviews of Standard Operating Procedures 3

Reviews of Other Issuances 45
Semiannual Report September 1999 39

Figure 5

Efforts to Improve SBA Program

Management

SBA’s Financial Statements Receive

Unqualified Opinion

The SBA’s FY 1998 financial statements

received an unqualified opinion from its

independent auditors. The unqualified

opinion means that the auditors found

SBA’s principal financial statements to be

presented fairly in all material respects in

accordance with OMB guidelines and SBA

accounting policies. The results of the audit

were transmitted to the Chief Financial

Officer by OIG, which contracted for the

independent audit. This was the third year

that the Agency received an unqualified

opinion.

The Auditors did, however, find three

problems that were considered

“reportable conditions” in the internal

control structure: (1) lack of planning for

financial reporting which resulted in

untimely and erroneous draft financial

statements; (2) incorrect calculations

were used in the credit reform subsidy

modeling and reestimating process for the

Section 7(a), 504, and disaster programs,

resulting in substantial errors (these

calculations were corrected upon

discovery by the auditors); and

(3) inadequate SBA computer security

and applications development standards.

The independent auditors considered the

three reportable conditions to be material

control weaknesses. The auditors issued a

separate report for the material weaknesses

related to SBA information systems (see

below).

SBA Appropriations

$.939 billion

$.814 billion

$.852 billion

$.820 billion

$.702 billion

0.0 0.2 0.4 0.6 0.8 1.0 1.2

FY 1995

FY 1996

FY 1997

FY 1998

FY 1999

Billions of Dollars
40 Semiannual Report September 1999

Internal Control Weaknesses in SBA’s

Information Systems

As a part of the audit of the financial

statements, the independent public

accountants reviewed SBA’s general

information systems controls to determine if

they complied with established policies and

procedures. The auditors concluded that

SBA’s general controls were not fully in

compliance with established policies and

procedures. For example, (1) SBA had not

funded and implemented an entity-wide

security program, (2) unnecessary and

excessive access privileges reduced

accountability and created segregation of

duties weaknesses, (3) application

development and change control procedures

were not consistently applied in systems

outside the Office of Chief Information

Officer’s control, (4) programmers’ abilities

to access operating systems could not be

monitored, and (5) security administrators

and program managers needed training.

The report included two recommendations

for establishing an ongoing Agency-wide

information systems security program. The

Agency response to the draft report stated

that responsible SBA management officials

will be establishing a committee to work on

this issue.

Audit Finds SBA Could Improve Its

Administration of Special Appropriation

Grants

OIG issued a report identifying areas where

SBA’s Office of Procurement and Grants

Management (OPGM) could have used

different procedures in the administration of

a special appropriations grant that involved a

relatively unique set of circumstances. The

grant funded a portion of the construction of

a building. Although funds other than grant

funds were necessary to complete the

project, there was no requirement in the

grant language to withhold funds until

outside funding became available, i.e. a

match requirement. OPGM interpreted the

grant language to require payment of

legitimate construction costs up to the total

grant amount as they were incurred. The

audit found that in this situation OPGM

could have authorized payments on a

percentage basis for the portion of the

building that was actually to be used for

grant purposes even though there is no such

requirement in the grant language. Using

this method, the grantee could be viewed as

charging 41 percent of the cost of the

building to the grant but only allotting

13 percent of the space to grant purposes. In

addition, by making partial payments on

reimbursement requests, OPGM could have

withheld more grant funds until the building

was completed. OIG recommended that the

Director of OPGM work with the Office of

General Counsel to confirm that the OIG

approach is appropriate and, if so, develop

and implement procedures for grants of this

nature.

Inspection Identifies Management Issues

in a “Paperless” Environment

To maintain efficient operations in a period

of reduced staffing, many SBA programs

will need to make the transition to a more

“paperless” environment. An OIG

inspection report identified the security,

legal, and organizational problems that

program managers are likely to face in

converting their existing paper procedures to

an electronic process.

The report also recommends steps to be

taken by SBA to ensure a successful
Semiannual Report September 1999 41

transition Agency-wide. To address security

and privacy concerns while conserving its

limited resources, SBA should (1) identify

the types of data requiring the highest

level of security, (2) develop precautionary

contracts with trusted third parties providing

Public Key Infrastructure services, (3) limit

the amount of information in the digital

certificates used to verify an electronic

document’s authenticity, and (4) create a

computer screen notice reminding SBA

employees and contractors of their

security responsibilities.

Until uniform standards are developed for

electronic transactions, OIG recommends

that the Agency make certain that its

contractual agreements with resource

partners and small businesses clearly specify

each party’s (1) electronic identity,

(2) responsibility for providing accurate

information, and (3) recourse if the other

fails to meet the terms of the agreement.

Finally, OIG recommends that SBA form a

central coordination group to identify the

work processes that are appropriate for

electronic conversion. Senior SBA officials

agreed with OIG recommendations.

Proposed Legislation Reviewed;

Government Waste Corrections Act of

1999

OIG reviewed and commented on H.R.

1827, Government Waste Corrections Act of

1999. OIG recommended that the

terminology “recovery audits” be changed

to avoid confusion with the statutory audit

function of Inspectors General (IGs)

pursuant to the Inspector General Act

(IG Act). The legislative history for the IG

Act clearly indicates it was the intent of

Congress to centralize auditing functions in

an independent office. Establishing an audit

function in a department or agency would

erode the independence and audit authority

of its IG and minimize his or her oversight

responsibilities in the area of auditing

overpayments by program activities. The

OIG suggested substituting terminology

such as “recovery examinations,”

“recovery reviews,” or “payment matching

reviews” to distinguish between the

differing roles and functions. The

requirement to consult and coordinate with

the IG should, however, be retained. OIG

advocated that language be added requiring

department or agency officials or contractors

performing recovery reviews to immediately

report to the IG any indication of fraud or

other criminal activity discovered during the

course of the reviews. Additionally, the bill

should expressly state that the act of

repayment of overcharges does not preclude

the department or agency or any other

governmental entity from pursuing other

administrative, civil, or criminal actions or

proceedings that may be available.

Activities to Enhance Fraud

Detection and Deterrence

OIG Conducted Employee Awareness

Briefings

In addition to investigating complaints of

waste, fraud, and abuse involving SBA

programs, OIG Investigations Division staff

presented integrity awareness briefings to

approximately 60 Agency employees in two

cities. 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.
42 Semiannual Report September 1999

During the reporting period, employee

contributions to our mission were

significant. As Figure 6 shows, more than

69 percent of the investigations initiated by

OIG originated with referrals from within

the Agency. 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.

SBA Employee in Colorado Indicted for

Embezzlement and Misusing Social

Security Number

A former voucher examiner in SBA’s Office

of Chief Financial Officer (OCFO),

Denver, Colorado, was indicted on

13 felony counts of embezzlement and one

count of misusing a Social Security

number. She subsequently pled guilty to

one felony count of embezzlement; in

return, the Government agreed to dismiss

the other counts on which she had been

indicted. OIG’s investigation determined

she fraudulently obtained more than $21,000

in SBA funds by means of false electronic

travel vouchers and false electronic vendor

invoices. Her scheme involved entering

false information via her work computer in

order to have Government funds

electronically deposited into her bank

account. After being contacted by OIG, the

employee resigned her position at SBA. An

internal review by OCFO of their procedures

following OIG’s investigation revealed that

substantially more funds were embezzled

than OCFO was initially aware of. This

investigation was initiated based on a

referral from OCFO’s Denver Finance

Center.

SBA Employee Sentenced for Theft of

Government Property

A former office automation assistant in the

Office of Field Operations (OFO) in SBA’s

Headquarters was charged with and pled

guilty to one misdemeanor count of theft of

Government property. She was sentenced

to serve 3 years on probation and perform

25 hours of community service. She was

ordered to pay SBA full restitution of

$3,918. The restitution amount was less

than SBA’s original loss due to deductions

for 1) annual leave hours that would have

actually accumulated had she properly

reported her leave; 2) useful items she

wrongfully purchased which were returned

to SBA; and 3) her final paycheck, which

SBA withheld. In January 1999, when her

supervisor discovered that a number of

unauthorized purchases had been made on

their supply credit card, OFO asked OIG to

investigate. The investigation also

determined the employee had transmitted

fraudulent time and attendance records on

herself to the National Finance Center. SBA

sustained a loss of more than $6,300 as

a result of her conduct. The

unauthorized credit card purchases, totaling

$2,168, included computer hardware and

software, a stereo, a cordless telephone,

gasoline, and car rentals. The

documentation for some of the purchases

contained the forged signature of her

supervisor. The investigation showed that,

from March 1998 through January 1999,

she fraudulently reported 132 hours of

overtime and she failed to report 130 hours

of annual leave she had taken. These

fraudulent time and attendance submissions

resulted in her receiving $4,149 of

unearned income. Based on the

investigative findings, she was terminated
Semiannual Report September 1999 43

from her employment with SBA in March

1999.

SBA Employee Indicted for Child

Pornography on Office Computer

An economic development specialist in

SBA’s Sacramento District Office was

indicted by a Federal grand jury on four

counts of knowingly possessing visual

depictions of minors engaged in sexually

explicit conduct. Subsequently, the

employee pled "not guilty" during his initial

court appearance. OIG initiated the

investigation after complaints were received

that he was accessing pornographic sites

while on duty, using the computer SBA had

assigned him. The investigation consisted

primarily of copying the hard drive from his

computer on several different occasions and

monitoring his daily activity on the

computer over a period of time. The

investigation determined the employee was

accessing Internet sites where images of

children involved in a variety of sexual acts

were displayed and he was storing many of

these images on the hard drive of his SBA

computer. OIG presented the results of the

investigation to an assistant U.S. attorney

who requested that FBI join the case. Prior

to the indictment, a U.S. Magistrate issued

an arrest warrant and agents of OIG and

FBI arrested the employee at SBA’s

Sacramento District Office.

Results of Previously Reported

Investigations

SBA Employee in Ohio Sentenced for

Felony Theft

A former office automation assistant in

SBA’s Cleveland District Office pled guilty

to one count of felony theft 5, a violation of

the Ohio Revised Code. She was sentenced

in Cuyahoga County, Ohio, to serve

6 months in jail and ordered to pay SBA

$1,093 in restitution. (Updated from March

1999 Semiannual Report.)
44 Semiannual Report September 1999

Figure 6

Sources of OIG Investigations

April 1, 1999 to September 30, 1999

Other

14.5%

Private Citizens

8.1%

Other Federal 

Agencies

8.1%

SBA Program 

Heads and 

Employees

69.4%
Semiannual Report September 1999 45

Organization, Resources, and Management Initiatives

The dual 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. Mission goals and objectives are

accomplished through the provision of audit, investigation, and inspection and evaluation

oversight of the Agency's portfolio, programs, and supporting operations. This chapter

provides an overview of the OIG's organizational structure and its personnel and financial

resources. It also summarizes key internal management initiatives designed to use available

resources as effectively as possible.

Organization

SBA/OIG is organized into four divisions as

follows:

• Auditing Division

• Investigations Division

• Inspection and Evaluation Division

• Management and Legal Counsel

Division

The Auditing and Investigations Divisions

each administer their field activities through

field offices and resident offices around the

country. The Auditing Division has offices

located in Atlanta, Dallas, Los Angeles, and

Washington. The Investigations Division

has offices in those cities as well as in

Chicago, Denver, Houston, Kansas City,

New York, Philadelphia, San Francisco,

Seattle, and Syracuse. The Investigations

Division’s Office of Security Operations is

located in Washington, D.C. Both the

Inspection and Evaluation Division and the

Management and Legal Counsel Division

operate out of Washington, D.C. A current

OIG organization chart can be found on the

following page.

Resources

In FY 1999, OIG operated with a funding

level of $10.8 million for operating costs

and an additional $500,000 for disaster

oversight, for a total of $11.3 million.

Although OIG had an authorized personnel

ceiling of 122 full time equivalent (FTE)

positions, an increase of 8 FTE over the FY

1998 ceiling, the funding level only

permitted an average FTE level of 109. This

level of funding and FTE only provided for

a minimal level of oversight to SBA

programs and program dollars at risk.

Congressionally mandated law

enforcement availability pay, annual
46 Semiannual Report September 1999

Figure 7

cost of living increases, and various locality

pay adjustments are still not fully funded by

OIG’s authorized spending levels. In

FY 1999, 12 temporary appointments

supported by disaster funding were

converted to permanent status to retain

expertise and experience in disaster

assistance oversight.

In FY 1994, OIG received $3 million in

supplemental “no year” disaster funds to be

used for activities related to the Agency’s

expanding disaster assistance program.

These funds will remain available until

expended. At this time, OIG projects that

these “no year” funds will be expended by

the end of FY 2000.

Additionally, in each of the FY 1997, 1998,

and 1999 appropriations, Congress directed

the Agency to transfer $500,000 from its

disaster assistance account to OIG for

disaster program oversight.

The relatively static level of resources over

the past 5 years remains a concern. As

depicted in both Figures 1 and 2 (pages 9

and 23, respectively), the dynamics of the

Agency’s portfolio and the President’s New

Markets Initiative, designed to reach more

distressed rural and urban areas of the

country, would suggest that OIG’s resources

must be increased to ensure an adequate

level of program oversight. While the

increase in resources from FY 1998 to

FY 1999 ($10.5 million to $11.3 million)

has been helpful, it did not allow OIG to

“catch up” to its expenses after years of

chronic underfunding, and still does not

allow OIG to fully address SBA’s increasing

portfolio and programs. OIG continues to

experience difficulty in carrying out its

mandate to provide meaningful oversight of

the Agency’s programs and supporting

activities and to safeguard the Government’s

investment in SBA’s extensive credit

programs. As is apparent from the

accompanying narrative, some SBA

programs received only modest oversight

while others virtually went without

oversight.

OFF ICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

KANSAS CITY

INSPECTOR GENERAL

MANAGEMENT & LEGAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

CHICAGO HEADQUARTERS

OPERATIONS

WASH., DC

OPERATIONAL

SUPPORT

SEATTLE

PHILADELPHIA HOUSTON

FRANCISCO

AUDITING DIVISION

BUSINESS DEVELOPMENT

PROGRAMS GROUP

WASH., DC WASH., DC

ATLANTA

DALLAS

LOS ANGELES
Semiannual Report September 1999 47

As the table on page 53 illustrates, the

business and disaster loan programs

consume most of OIG’s direct investigation

and auditing time (80 and 55 percent,

respectively). Because these two programs

represent the greatest risk of financial loss to

the taxpayer, OIG has made a conscious

decision to devote a substantial amount of

its limited resources to these programs. As

the table also illustrates, however, this

emphasis on these critical areas results in

only minimal or no audit and investigative

coverage of other program areas.

For FY 2000, the President has requested

Congress to appropriate $11 million for

OIG. Although OIG expects to be funded

by SBA for six FTE for oversight of the

Small and Disadvantaged Business Program,

the OIG budget will be unable to completely

absorb the combined cost-of-living and

locality pay raises of an estimated

4.8 percent in FY 2000.

Management Initiatives

Government Performance and Results

Act Activities

OIG has developed a new FY 2001 through

2006 Strategic Plan under the Government

Performance and Results Act (GPRA).

Drafts have been provided to SBA's

Administrator and Management Board, key

congressional committees, and to the

Office of Management and Budget for

consultations. We developed the plan to

accomplish the following objectives.

• To respond more effectively to changes

in SBA. The Agency's emphasis on

outsourcing and information systems

modernization poses increasing

challenges to our oversight efforts and

led us to develop a strategic focus on

five are as: financial management

systems, information systems and

computer security, lender oversight,

other selected high risk issues, and new

Agency initiatives.

• To maximize OIG management

efficiency, effectiveness, and

accountability.

• To emphasize our commitment to the

goals of recent Government reform

legislation, including the GPRA,

the Chief Financial Officer's Act,

and the Clinger-Cohen Act.

We are also directing OIG resources to

oversight of SBA's implementation of

GPRA requirements. Most of our

inspections will include a review of program

performance measures; for example, a recent

report on SBA oversight of the CDC

program found that the CDC job creation

data currently being used in Agency plans

has serious flaws and has not been verified.

GPRA audits begun during the last quarter

of FY 1999 will focus on the Small Business

Investment Company and Disaster Loan

Programs. The audits will review the goals

and performance measures of these and

other SBA programs in the FY 2000 Annual

Plan to determine if they 

• reflect the statutory mission,

• include efficiency and effectiveness

measures,

• have measurable performance

indicators, and

• have reliable supporting data.
48 Semiannual Report September 1999

An OIG representative continued to

participate on the President’s Council on

Integrity and Efficiency/Chief Financial

Officers’ Council Dialogue Series

Committee. The committee is an ad hoc

interagency group that develops periodic

seminars on GPRA issues of common

interest to IGs and Chief Financial Officers.

In May she organized a Dialogue on

"Moving to the Next GPRA Level: Using

the Plans for Decision-Making" with

panelists from OMB, congressional staff,

and several Federal departments/agencies.

Our representative was also active in the

OIG GPRA Coordinators' Interest Group

OIG Annual Training Conference

The annual training conference for OIG

professional and support staff was held in

June in San Antonio, Texas. Among the

topics presented to the entire staff were

Government Performance Results Act

(GPRA) strategic and annual planning,

Government ethics, and conflict resolution.

The remainder of the conference focused on

providing technical training on audit,

investigation, inspection, and administrative

topics.
Semiannual Report September 1999 49

Direct Investigation Time by Program Area

April 1, 1999 to September 30, 1999

Program Area Direct Time % Number of Investigations*

Closed** In Progress

Business Loans 55% 23 193

Disaster Loans 25% 20 146

SBIC 3% 1 9

Surety Bond Guarantees 1% 0 2

Government Contracting*** 2% 2 5

Minority Enterprise Development 8% 4 27

Entrepreneurial Development   1 1

Agency Management and Financial 5% 12 11

 Total 99%** *** 63 394

Direct Auditing Time by Program Area

April 1, 1999 to September 30, 1999

Program Area Direct Time % Number of Audits

Issued In Progress

Business Loans 53 % 6 14

Disaster Loans 2 % 1 1

SBIC 0 0 2

Surety Bond Guarantees 10 % 4 1

Government Contracting*** 3% 0 3

Minority Enterprise Development 9 % 0 2

Entrepreneurial Development 7 % 2 1

Agency Management and Financial 16 % 6 6

Total 100% 19 30

* Includes civil cases **** Less than 1⁄2 percent

** Includes cases canceled ***** Total less than 100% due to rounding

*** Includes Small Disadvantaged Business
50 Semiannual Report September 1999

Profile of Operating Results

April 1, 1999 to September 30, 1999

Audit Activities Totals

A. Reports Issued...............................................................................................................16

B. Audit Recommendations Issued.....................................................................................48

C. Dollar Value of Costs Questioned.......................................................................$364,534

D. Dollar Value of Recommendations that Funds

Be Put to Better Use ..........................................................................................$482,628

Audit Follow-Up Activities

A. Audit Recommendations Closed....................................................................................75

B. Disallowed Costs Agreed to by Management................................................... $1,434,464

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

Agreed to by Management .............................................................................. $1,081,555

D. Unresolved Audit Recommendations.............................................................................46

E. Dollar Value of Unresolved Audit Recommendations.................................... $12,233,288

Inspection Activities

A. Reports Issued................................................................................................................ 2

Legislation/Regulation/SOP/Other Reviews

A. Legislation Reviewed ..................................................................................................... 5

B. Regulations Reviewed...................................................................................................20

C. Standard Operating Procedures Reviewed ...................................................................... 5

D. Other Issuances Reviewed* ...........................................................................................83

* 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 September 1999 51

Status of Investigations as of September 30, 1999

A. Total Cases.................................................................................................................457

B. Closed Cases................................................................................................................ 63

C. Pending Cases.............................................................................................................. 16

D. Open Cases.................................................................................................................378

E. Subjects Under Investigation....................................................................................1,303

F. Cases Referred to FBI or Other Agencies for Investigation.....................................8

Summary of Indictments and Convictions

A. Indictments from OIG Cases........................................................................................ 19

B. Convictions from OIG Cases........................................................................................ 26

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations.......................................................................................... $4,898,128

B. Loans Not Approved as a Result of OIG Investigations................................................ $0

C. Loans Not Approved as a Result of the Name

 Check Program ............................................................................................. $12,123,521

 Total:..................................................................................................................... $17,021,649

SBA Personnel Actions Taken as a Result of Investigations

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

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

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

D. Reprimands ................................................................................................................... 1

Program Actions Taken as a Result of Investigations

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

B. Debarments*.................................................................................................................. 2

C. Removals from Program................................................................................................. 0

D. Other Program Actions................................................................................................... 0

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters..................................................................................1,315

B. Total Calls/Letters Referred to Investigations Division for Evaluation .......................... 32

C. Total Calls/Letters Referred to Program Offices or Other Federal

Investigative Agencies ................................................................................................. 86

D. Total Other Calls/Letters..........................................................................................1,197

*Former officers of participating lender were debarred from jobs in the banking industry.
52 Semiannual Report September 1999

Office of Inspector General

Actual Personnel on Board as of September 30, 1999

A. Immediate Office .................................................................................................................. 4

B. Auditing Division................................................................................................................ 42

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

 Support................................................................................................................................. 5

C. Investigations Division........................................................................................................ 53

 Professional ........................................................................................................................ 44

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

D. Inspection and Evaluation Division ....................................................................................... 7

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

 Support................................................................................................................................. 0

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

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

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

 OIG Total ..........................................................................................................................115
Semiannual Report September 1999 53

FY 1999 Productivity Statistics

Last Six Months

Officewide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ........................................................... $4,898,128

B. Loans Not Approved as Result of Investigations and Name Checks....................... $12,123,521

C. Disallowed Costs Agreed to by Management........................................................... $1,434,464

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ............................................................................... $1,081,555

Total $19,537,668

Auditing Division Activities

A. Audit Reports Issued.............................................................................................................16

B. Disallowed Costs Agreed to by Management........................................................... $1,434,464

C. Recommendation that Funds Be Put to Better Use

 Agreed to by Management ...................................................................................... $1,081,555

D. Advisory Reports............................................................................................3

Inspection and Evaluation Division Activities

A. Reports Issued........................................................................................................................ 2

Investigations Division Activities

A. Cases Closed.........................................................................................................................63

B. Indictments ...........................................................................................................................19

C. Convictions...........................................................................................................................26

D. Potential Investigative Recoveries and Fines ........................................................... $4,898,128

E. Loans Not Approved as a Result of:...................................................................... $12,123,521

 - Investigation Cases... .....................................................................................$0

 - Name Check Program.........................................................................$12,123,521

F. Advisory Reports............................................................................................1
54 Semiannual Report September 1999

FY 1999 Productivity Statistics

Full Year

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ......................................................... $10,419,102

B. Loans Not Approved as Result of Investigations and Name Checks....................... $28,382,286

C. Disallowed Costs Agreed to by Management........................................................... $2,322,780

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ............................................................................... $2,929,983

Total $44,054,151

Auditing Division Activities

A. Audit Reports Issued.............................................................................................................26

B. Disallowed Costs Agreed to by Management........................................................... $2,322,780

C. Recommendation that Funds Be Put to Better Use

 Agreed to by Management ...................................................................................... $2,929,983

D. Advisory Reports............................................................................................3

Inspection and Evaluation Division Activities

A. Reports Issued........................................................................................................................ 2

Investigations Division Activities

A. Cases Closed.......................................................................................................................130

B. Indictments ...........................................................................................................................44

C. Convictions...........................................................................................................................53

D. Potential Investigative Recoveries and Fines ......................................................... $10,419,102

E. Loans Not Approved as a Result of:...................................................................... $28,382,286

 - Investigation Cases... .....................................................................................$0

- Name Check Program.........................................................................$28,382,286

F. Advisory Reports.............................................................................................1
Semiannual Report September 1999 55

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 Pages

Section 4(a)(2 ) Review of Legislation and Regulations 6 - 45

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 6 - 45

Section 5(a)(2) Recommendations with Respect to Significant Problems, Abuses,

 and Deficiencies 6 - 45

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 65

Section 5(a)(4) Matters Referred to Prosecutive Authorities 6 - 45

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 59

Section 5(a)(7) Summary of Significant Audits 6 - 45

Section 5(a)(8) Audit Reports Containing Questioned Costs 61

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use 62

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 64

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
56 Semiannual Report September 1999

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued ..............................................................................57

Appendix II

 Part A - Inspector General-Issued Audit Reports

 with Questioned Costs..................................................................................58

 Part B - Inspector General-Issued Audit Reports

 with Recommendations that Funds Be Put to Better Use...............................59

 Part C - Inspector General-Issued Audit Reports

 with Non-Monetary Recommendations.........................................................60

 Part D – Inspector General-Issued Audit Reports

 with Overdue Management Decision ............................................................61

 Part E – Significant Audit Reports

 without Final Action.....................................................................................62
Semiannual Report September 1999 57

APPENDIX I

Audit Reports Issued

April 1, 1999 to September 30, 1999

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER USE

Business Loans

Bank of Castile 9-14 7/29/99 $0

Kansas City District 7(a) Loans 9-16 8/4/99 $118,330 $0

Main Street Athletic Club 9-25 9/24/99 $419,971

Non-Tax Delinquent Debt 9-11 7/28/99 $0 $0

SBLC Examination Process Unnumbered 4/29/99 $0 $0

Ken’s Air 9-21 9/10/99 $0 $0

 Program sub-total 6 Reports $118,330 $419,971

Disaster Loans

Disaster Home Loan Servicing 9-15 8/3/99

Program sub-total 1 Reports $0

Surety Bond Guarantees

Bankers Insurance Group 9-20 9/10/99 $0 $0

Great American Ins. Co. 9-26 9/28/99 $1,326 $0

Gulf Insurance Group 9-13 7/28/99 $142,284

Insurance Company of the West 9-17 8/19/99 $1,124 $0

Program sub-total 4 Reports $144,734 $0

Entrepreneurial Development

Texas Women’s BDC 9-12 7/28/99 $12,350 $2,650

Texas Women’s BDC 9-22 9/15/99 $65,273 $60,007

Program sub-total 2 Reports $77,623 $62,657

Agency Management & Financial Activities

Electronic Records Mgt 9-23 9/15/99

FY 1998 Financial Statements 9-24 9/20/99

Information System Controls 9-19 9/2/99

Special Appropriation Grants 9-18 8/24/99

Budget Execution 9-1 4/29/99

Y2K Verification 9-2 7/29/99

Program sub-total 6 Reports $0 $0

TOTALS (all programs) Reports: 19 $340,687 $482,628
58 Semiannual Report September 1999

APPENDIX II - Part A

Audit Reports with Questioned Costs

April 1, 1999 to September 30, 1999

REPORTS RECs*

COSTS***

QUESTIONED UNSUPPORTED

A. For which no management

decision had been made by

March 31,1999

11 27 $3,952,872 $781,461

B. Which were issued during

the period

6 11 $364,534 $2,650

Subtotals (A + B) 17 37 $4,317,406 $784,111

C. For which a management

decision was made during

the reporting period

13 28 $2,525,141 $784,111

(i) Disallowed costs 10 25 $1,434,464 $2,650

(ii) Costs not disallowed 5 8 $1,090,677 $0

D. For which no management

decision had been made by

September 30, 1999

5 9 $1,792,265 $781,461

* Recommendations.

** The recommendations resolved did not address all the recommendations within the reports where they

 appeared.

*** Questioned costs are those which are found to be improper, whereas unsupported costs may be proper but

 lack documentation.
Semiannual Report September 1999 59

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

April 1, 1999, to September 30, 1999

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

March 31, 1999

11 20 $ 17,197,375

B. Which were issued during the

period

3 4 482,628

Subtotals (A + B) 14 24 $ 17,680,003

C. For which a management

decision was made during the

reporting period

4 5 7,238,980

(i) Recommendations

agreed to by SBA

management

3 3 $ 1,081,555

(ii) Recommendations

not agreed to by SBA

management

2 2 $ 6,157,425

D. For which no management

decision had been made by

September 30, 1999

11 19 $10,441,023

* Recommendations.

** The recommendations resolved did not address all the recommendations within the reports where they

 appeared.

*** Management agreed to $159,178 more than recommended.
60 Semiannual Report September 1999

APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

April 1, 1999 to September 30, 1999

REPORTS RECOMMENDATIONS

A. For which no management decision

had been made by March 31, 1999

14 26

B. Which were issued during the period 13 33

Subtotals (A + B) 27 59

C. For which a management decision

was made (for at least one

recommendation in the report)

during the reporting period

17 42

D. For which no management decision

(for at least one recommendation in

the report) had been made by

September 30, 1999

12 17

* Beginning balance corrected to reflect prior period adjustment.

** The recommendations resolved did not address all the recommendations within the reports where they appeared.
Semiannual Report September 1999 61

APPENDIX II - Part D

Audit Reports with Overdue Management Decisions

September 30, 1999

TITLE NUMBER ISSUED STATUS

Low Documentation Loan Program 65E002022 9/30/96 Reopened and will be escalated.

LowDoc Loan Program – Atlanta 77F006017 7/7/97 Reopened and will be escalated

LowDoc Loan Program -

Santa Ana 77F009020 7/8/97 Reopened and will be escalated.

LowDoc Loan Program -

Dallas 77F008022 7/31/97 Reopened and will be escalated.

Business Loan Guarantee Purchases 75H011026 9/30/97 Impasse will be escalated.

SBIC Surety 9-10 3/31/99 Under OGC review.

7(a) Loan Processing -

Atlanta 87F019014 5/13/98 Reopened and will be escalated.

7(a) Loan Processing -

New Jersey 88F003019 7/8/98 Reopened and will be escalated.

7(a) Loan Processing - Buffalo 87F021018 7/8/98 Reopened and will be escalated.

Emergent Business Capital, Inc. 87F013020 7/13/98

DD reversed prior agreement- will be

escalated.

7(a) Loan Processing -

Madison 87F020022 7/22/98 Reopened and will be escalated.

7(a) Loan Processing – Colorado 9-05 2/24/99 Reopened and will be esvalated.
62 Semiannual Report September 1999

APPENDIX II – Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of September 30, 1999

REPORT

NUMBER

TITLE DATE

ISSUED

DATE OF

MANAGEMENT

DECISION

FINAL

ACTION

TARGET`

3-2-C-002-033 Administration of the 8(a)

Program Work Performance

Requirements

3/31/93 9/30/94 9/30/95*

4-3-H-006-021 8a Continuing Eligibility

Reviews

12/13/94 3/31/95 1/31/95

5-3-H-004-006 SBA Loan Servicing and

Debt Collection Activities

3/31/95 4/30/95 12/31/95

5-3-H-010-021 8(a) Competitive Mix 9/29/95 3/29/96 3/29/97

6-5-E-001-021 Basic Ordering Agreements 9/15/96 2/10/97 9/25/97

6-5-E-002-022 Low Documentation Loan

Program

9/30/96 * *

7-7-H-001-011 Grant Closeout Procedures 3/26/97 10/20/97 10/20/97

7-6-H-006-015 FY 1996 Financial

Statements

4/29/97 9/30/97 4/30/99

7-7-S-918-018 User Technology Associates

Inc.

6/06/97 3/26/98 6/05/98

7-7-F-006-017 LowDoc Program – Atlanta

DO

7/7/97 * *

7-7-F-009-020 LowDoc Loan Program –

Santa Ana DO

7/8/97 * *

7-7-F-007-021 LowDoc Loan Program –

Washington DO

7/18/97 10/06/97 7/22/97

7-7-F-008-022 LowDoc Loan Program –

Dallas DO

7/31/97 * *

7-5-H-011-026 Business Loan Guarantee

Purchases

9/30/97 * 3/30/00

8-7-F-005-002 LowDoc Loan Program

Summary Report

11/24/97 * 3/31/99*

8-7-F-019-014 7a Loans – Atlanta 5/13/98 * *
Semiannual Report September 1999 63

8-7-F-021-018 7a Loans – Buffalo 7/8/98 * *

8-8-F-003-019 7(a) Loans – New Jersey 7/31/98 * *

8-7-F-013-020 Emergent Business Capital 7/13/98 * *

8-8-H-006-025 GSA Kansas City Sole

Source 8(a) IDIQ Contracts

9/29/98 9/30/99 10/15/99

8-8-H-004-027 SBG Fee Refunds 9/30/98 2/25/99 3/31/99

8-7-H-002-017 NOAA Computer Contracts 6/18/98 3/1/99 12/31/99

9-03 CAN Surety Companies 1/29/99 4/23/99 7/28/99

9-05 Colorado 7(a) Loans 2/24/99 * *

9-08 Giving of Self Partnership 3/24/99 6/24/99 12/31/99

9-09 Northridge Defaulted Loans 3/31/99 4/30/99 9/30/00

9-10 SBIC Surety 3/31/99 6/14/99 9/30/99

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