Semiannual Report September 1997 i

SEMIANNUAL REPORT OF THE INSPECTOR

GENERAL

FOR THE PERIOD

April 1, 1997, To September 30, 1997

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 Semiannual Report, transmitted to the Congress

by the SBA Administrator, covers the full range of SBA/OIG activities from April 1, 1997, to

September 30, 1997.

In past reports to the Congress, I have regularly highlighted the extraordinary growth

of the SBA portfolio over the last few years and the dearth of SBA/OIG resources available to

provide much more than a modicum of oversight. This information and supporting data have

been dutifully reported to the Congress but with little recognition, by its membership, of the

risk to the American taxpayer created by the present situation.

While the Agency's portfolio continues to grow to new heights, i.e., an estimated $38

billion by the end of FY 1997, the oversight context for this growth is about to change even

more dramatically. A recent congressional mandate requiring that significantly more portfolio

management activity, from loan origination to close out to liquidation, be turned over to the

private sector has created a problem for OIG oversight operations. I say problem, rather than

challenge, because OIG s criminal investigators currently receive over half of their referrals or

leads from SBA employees involved in the administration of the Agency s portfolio. I am

very concerned that a comparable commitment to fraud prevention and detection may not be

shared by SBA s resource partners. Time will, of course, prove whether my concerns are

valid. In the interim, a fundamental question remains: Should the American taxpayer be
ii Semiannual Report September 1997

asked to underwrite even more financial risk to the SBA portfolio, while its Government

experiments with this significant change in public policy?

Obviously, the risk discussed above can be mitigated somewhat if the Congress would

address the resource shortfall being experienced by the SBA/OIG. After all, there is little risk

in funding more independent oversight resources for the OIG, particularly when one

recognizes that it has consistently paid its own way as demonstrated by its continuing high

return on investment (ROI). For FY 1997 alone, the OIG s ROI offers an impressive ratio of

7:1; that is, for every dollar the Congress appropriates for its operations, seven dollars are

returned or put to better use through its audit, inspection, and investigation oversight

activities. Actually, the ROI would be even higher if there was an acceptable methodology

for pricing the myriad of internal consulting services provided to SBA policy and program

managers on a daily basis. With only marginal productivity improvements that can be further

extracted from the OIG staff, current OIG staffing is just plain inadequate for the task at hand,

and I would be remiss in not reporting this fact to the Congress of the United States.

Another problem that has received national attention over the past reporting period is

the substantiated fraud being perpetrated by a number of SBA s program applicants, which is

exacerbated by the constraints placed on the OIG s ability to deal with it. As reflected in this

report, an estimated 3.2 percent of SBA s Section 7(a) loan recipients fail to disclose criminal

histories that could preclude loan approval. Furthermore, these borrowers are almost three

times as likely to default on their guaranteed loan obligations than those without such

histories. This means that in FY 1998 alone, individuals who do not meet the Agency s

character eligibility test will receive a projected $321 million in Government guaranteed loans

that will cost taxpayers over $30 million. Current SBA procedures and OIG resource

constraints, however, prevent the OIG from conducting the background checks necessary to

identify these ineligible borrowers and prevent these loans from being approved. I have,

therefore, recommended to the SBA Administrator that all applicants for Section 7(a)

financial assistance be thoroughly screened by the OIG prior to loan disbursements being

made by a participating lender. This recommendation is not without cost implications,

however. To conduct a pilot of this proposal in the fourth quarter of FY 1998, the Agency

and/or the Congress will have to invest an estimated $400 to $500 thousand in the OIG s

security investigations program and another $500 to $600 thousand thereafter per annum to

implement the clearance program on a full time basis -- a small price to pay to ensure that the

Nation s honest small business men and women have access to the estimated $321 million in

capital that would otherwise be provided to ineligible borrowers.

Turning to the OIG s performance over the reporting period, the SBA/OIG closed 45

investigative cases and obtained 30 indictments and 20 convictions, bringing the year-end

totals to 52 indictments and 54 convictions. In addition, $56 million was realized from

management avoidance and court-ordered recoveries and fines during the year. For our other

operating activities, year-end productivity totals stand at 26 audit and 4 inspection reports
Semiannual Report September 1997 iii

issued and $13 million in dollar accomplishments. The bottom line is that these OIG

achievements enabled the Agency to operate more effectively and to make more funds

available to qualified small businesses who meet the eligibility criteria for SBA assistance.

Beyond statistical productivity measures, what else has the SBA/OIG been able to

accomplish? First, the success of the Agency's tax verification program continues to be

impressive in terms of supporting the OIG's mission to prevent and detect fraud and abuse in

SBA's programs and supporting operations. While the Agency formally adopted the OIG s

recommendation to implement an income verification program in October 1994, the OIG

started recording data on false tax return cases as early as FY 1992. To date, 99 individuals,

from 11 states, have been indicted for submitting false financial information (or bogus copies

of tax returns); 91 of those have pled or been found guilty; and 84 have been sentenced,

producing $20 million in court-ordered fines and restitutions. More importantly, $34 million

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

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

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

 Moreover, the names of some 1,677 non-filers were given to the Internal Revenue Service

for its review and appropriate disposition.

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

SBA's programs and supporting operations, this year's total of 30 audit and inspection reports

speaks to our commitment. As a measure of the mutually beneficial and productive

relationship that exists between the OIG and the SBA, over half of these audit and inspection

reviews were, in fact, requested by SBA program officials. In addition, it should be

understood that while such OIG activities may often be narrowly focused on a single program

participant or a group of participants, much broader program policy issues are usually

identified and brought to the attention of Agency policy and program officials for appropriate

corrective action. Beyond the number of its formal audits and inspections issued, it is also

important to convey the breadth of the OIG s general consultative activities. At the request of

the Administrator, the Deputy Administrator, and other senior Agency officials, the OIG has

also participated in the following major initiatives: assisting the Agency in reviewing and

improving the quality of its standard operating procedures and regulations; assessing the

breakdown in internal controls associated with its subsidy rate model; advising on the

formulation of the SBA's strategic plan, as required by the Government Performance and

Results Act; and participating in various Agency-wide initiatives targeted at fraud detection

and prevention, contract assistance, and disaster assistance. The OIG also prepared its first 6-

year strategic plan over the course of the reporting period; it was transmitted to the Congress

on September 30, 1997, as an appendix to SBA s strategic plan.

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

officials, senior executives, program managers, and employees during the conduct of
iv Semiannual Report September 1997

SBA/OIG audits, inspections, and investigations has once again been excellent. The OIG's

working hypothesis continues to prove itself, i.e., the more closely OIG employees work with

program managers, the more effective SBA will be in meeting the critical needs of the

Nation's small business community. I trust the results reflected in this Semiannual Report to

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

ability.

James F. Hoobler

Inspector General
Semiannual Report September 1997 v

TABLE OF CONTENTS

Title Page

Foreword.....................................................................................................................................i

Table of Contents......................................................................................................................iv

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

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

Disaster Loan Program ............................................................................................................21

Small Business Investment Companies ...................................................................................29

Surety Bond Guarantees ..........................................................................................................34

Government Contracting Programs .........................................................................................37

Minority Enterprise Development ...........................................................................................39

Economic Development (Business Education and Training)...................................................42

Agency Management and Financial Activities ........................................................................44

Organization, Resources, and Management Initiatives............................................................49

Profile of Operating Results.....................................................................................................54

FY 1997 Productivity Statistics ...............................................................................................57

Statutory Reporting Requirements...........................................................................................60

Table of Appendices ................................................................................................................61

Semiannual Report September 1997 1

Executive Summary

This report on the activities of the Office of Inspector General (OIG)

of the Small Business Administration (SBA) is submitted pursuant to

Section 5(b) of P.L. 95-452, the Inspector General Act of 1978, as

amended. It summarizes OIG activities for the 6-month period from

 April 1, 1997, to September 30, 1997.

Summary of Accomplishments

OIG audits, inspections, and investigations

over the last 6 months achieved

$24,649,175 in potential dollar results, 30

indictments, and 20 convictions. The

dollar results consist of $3,429,588 in

potential recoveries, including

judicially-awarded fines and restitution;

$15,044,652 in management avoidances;

$22,264 in disallowed costs agreed to by

SBA's management; and $52,671 in

management commitments to use funds

more efficiently. The results also include a

$6.1 million settlement related to audit

work conducted during 1993.

The 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 Federal audit, inspection, and

investigative components of organizations

such as the Federal Bureau of Investigation

(FBI); U.S. Secret Service (USSS); U.S.

Marshals Service (USMS); Internal

Revenue Service (IRS); Office of the

Comptroller of the Currency (OCC);

Resolution Trust Corporation (RTC);

Environmental Protection Agency s (EPA)

Office of Criminal Enforcement; other

Federal OIGs; and the Department of

Justice (DOJ). Most importantly, the

actions of SBA program managers and

employees must be acknowledged. 

Indeed, much of our success is due to

referrals made by these conscientious SBA

employees.

OIG Mission for FY 1997

The OIG s mission for 1997 is delineated

in its recently completed Strategic Plan for

Fiscal Years 1997-2002. The first two

goals of the strategic plan and their

associated objectives provide a roadmap

for the execution of the OIG s mission. The

OIG s first goal is to improve the

economy, efficiency, and effectiveness of

SBA programs through the Agency s
2 Semiannual Report September 1997

adoption of recommendations resulting

from the OIG s oversight activities.

Achievement of this goal will be

accomplished by meeting the following

objectives:

1. Find opportunities for the

reduction of operating costs

(salaries and expenses) associated

with and supporting activities of

SBA's programs.

2. Identify means for reducing

the subsidy cost of SBA

programs.

3. Ensure that SBA programs are

meeting mandated public policy

goals, high performance

standards, and the needs of

targeted participants.

4. Improve the accuracy of SBA

accounting and management

information.

5. Assure Agency

implementation of accepted OIG

recommendations and, to the

extent that OIG resources allow,

provide assistance to program

managers in implementing

recommendations.

6. Reduce the opportunity for

loan packager fraud through

cooperation with Agency officials

in the registration of loan

packagers and the pursuit of

packager investigations.

7. Review proposed legislation,

regulations, standard operating

procedures, and other SBA

issuances to improve Agency

programs and to eliminate the

potential for mismanagement.

8. Identify program

vulnerabilities or systems

weaknesses found during

investigations and alert

appropriate SBA program

managers.

The OIG s second goal is to reduce fraud

and abuse in Agency programs and

foster integrity in SBA s personnel and

the Agency s resource partners. This goal

will be accomplished by meeting the

following objectives:

1. Assist the SBA in its efforts to

deter fraud and abuse by auditing

a sample of defaulted loans and

Section 8(a) program participants

suspected of abusing the

contracting assistance program.

2. Assist the SBA in deterring

waste, fraud, and abuse by

responding to complaints

concerning such activities with

OIG staff assistance and

consultation.

3. Recommend actions to reduce

any program vulnerabilities

uncovered as a result of OIG

oversight activities.

4. Conduct investigations into

allegations of fraud in SBA

programs according to the

perceived level of risk to the

Agency and the potential for

program impact or increased

deterrence.

5. Pursue asset forfeiture

proceedings in all applicable

cases.

6. Participate in development of

SBA's fraud and corruption

awareness training programs and

emphasize cooperation of Section

7(a) lenders in combating fraud
Semiannual Report September 1997 3

through fraud awareness briefings

and outreach contacts with

lenders.

7. Refer an average of 75 cases

annually to the Department of

Justice for Affirmative Civil

Enforcement (ACE) and increase

the value of civil fines imposed.

8. Preclude persons of poor

character from participating in

SBA programs or employment

through the use of name check

requests, fingerprint requests, preemployment screening, and

required background

investigations.

The OIG s last two goals involve 

communicating it s findings,

recommendations, and results to all SBA

stakeholders and ensuring the economical,

efficient, and effective operation of the

OIG. The extent to which the OIG will be

able to achieve its objectives depends, in

part, on the sufficiency of resources

available to fund its operations.

Highlights of the Past Six

Months

Efforts to Improve SBA

Program Management

White Paper Describing Critical Issues

Facing the Small Business

Administration Provided to SBA s New

Administrator

In May 1997, the OIG provided

Administrator Aida Alvarez a compendium

of critical issues facing the SBA. The

document presented a range of issues

facing the Agency and offered

recommendations on actions to be taken. 

The critical issues identified were derived

from recent audit and inspection oversight

activities, as well as other program

vulnerabilities identified through

investigations conducted over the last few

years. Additional issues and recommended

actions, drawn from the experiences,

perceptions, and concerns of OIG staff,

were also shared in this same document.

While acknowledging that resource

shortfalls could be an impediment to

reform, the Inspector General counseled

that most shortfalls could be

accommodated through a rational

reprogramming of existing resources and

increased productivity generated by the

introduction of new management systems,

use of state of the art technologies, and a

retrained employee base that works

smarter than ever before.

Lastly, the paper expressed the view that

both OMB and the Congress would be

more sympathetic to Agency resource

needs if SBA could demonstrate that it had

already done all it could do to make itself a

model financial credit agency, as

envisioned by the SBA Administrator.

Administrator Alvarez has distributed the

critical issues paper to the Agency s

program managers and is in the process of

evaluating the OIG s recommended

actions.

Inspector General Testifies Before the

U.S. Senate Committee on Small

Business Concerning the HUBZone Act

of 1997
4 Semiannual Report September 1997

On April 10, 1997, the Inspector General

testified before the U.S. Senate Committee

on Small Business regarding SBA s ability

to implement the HUBZone Act of 1997. 

The Act is intended to provide Federal

contracting opportunities for small

business concerns located in historically

underutilized business zones. The

Committee also specifically requested the

Inspector General s views on SBA s

management of the Section 8(a) contract

assistance program and his judgment on

whether the program is meeting its public

policy purpose. A synopsis of the Inspector

General s testimony is included in the

Minority Enterprise Development chapter

of this report.

CPA Firm Pays $6.1 Million Settlement

to SBA for Inadequate Audits

A major CPA firm agreed this year to pay

$6.1 million to settle SBA's claim that

inadequate audits contributed to the

Agency's loss when a large small business

investment company (SBIC) failed. 

Based upon the OIG Auditing Division s

review of the CPA firm's working papers,

SBA s General Counsel and the

Department of Justice alleged that the firm

was negligent in not requiring financial

statement disclosure of risky participation

agreements negotiated by the SBIC. After

an arbitration panel ruled in favor of SBA,

but declined to set damages, the parties

negotiated a $6.1 million settlement that

was concluded in June 1997.

Follow-Up Audit of Agency s LowDoc

Program Confirms Previous Findings

A follow-up audit of the Low

Documentation (LowDoc) loan program

confirmed the results of the report issued in

September 1996. Each audit found that

about 10 percent of LowDoc loans should

not have been approved because of

departures from required procedures.

The first report was based on a nationwide

random sample of 70 LowDoc loans. At

the request of the former Administrator, the

Auditing Division repeated the audit with a

larger sample of 120 loans, 30 each in 

Atlanta, Santa Ana, Washington, and

Dallas. Separate reports were issued on the

four offices; a consolidated report will be

issued early in FY 1998.

Audit of Loan Guarantee Purchases

Raises Conflict of Interest Issue

An audit of business loan guarantee

purchases found that at least 8 out of 58

purchase decisions reviewed were

inappropriate because lenders did not

comply with SBA requirements in

processing and servicing the loans. An

additional nine purchases were not

supported by sufficient documentation at

the time of the decision, but documentation

obtained during the audit found that five of

these decisions were acceptable when all

the facts were known. The auditors

concluded that district offices may be too

lenient with lenders because of an inherent

conflict between pursuit of loan production

and enforcement of SBA policies. The

report recommended that SBA centralize

the guarantee purchase function to

eliminate the possibility of a conflict of

interest at the local level of SBA

operations.
Semiannual Report September 1997 5

Audit of Surety Company Results in

Withdrawal of Claims Against SBA

One of SBA's largest preferred surety firms

agreed to withdraw two claims totaling

$934,492 during an audit of the surety's

claims. Both of the projects that led to the

claims started before the bond was issued,

a clear violation of SBA regulations. 

Audit Finds That Disaster Home Loan

Processing Complies with Regulations

An audit of disaster loan processing found

that processing was generally consistent

with regulations. About 91 percent of

disaster home loan approvals were

consistent with SBA regulations and

procedures; the other 9 percent lacked

support for repayment ability, credit

worthiness, or other eligibility criteria.

Disaster field office managers attributed

the approval errors to limited training and

experience and to policy imperatives on

processing speed.

OIG Study Evaluates SBA and Lender

Loan Liquidation Responsibilities

The OIG issued an inspection report on

Increasing Lender Liquidation

Responsibility in the Section 7(a)

Business Loan Program. The report

explores the potential for increasing

Preferred Lender Program (PLP) and

Certified Lender Program (CLP) lenders

responsibility for liquidating SBA loans. It

concludes that SBA currently has in place

sufficient regulations, procedures, and

other controls to encourage lenders to

obtain maximum recoveries and to allow

the Agency to take action for negligent

liquidation actions. It also found, however,

that SBA does not take full advantage of

lender liquidation capabilities. Some

districts give lenders a great deal of

latitude, while others insist on making

many of the liquidation decisions

themselves. Given the Agency s reduced

resources, the OIG believes SBA should no

longer involve itself in step-by-step

liquidation transactions on PLP- and CLPdefaulted loans. Instead, SBA needs to

commit its resources to monitoring the way

PLP and CLP lenders are handling these

activities. The study is detailed in the

Business Loan chapter of this report.

Activities to Enhance Fraud

Detection and Deterrence

Results of False Tax Return Cases

Increase

Over the last 7 years, the OIG has received

366 allegations that false tax returns were

submitted in support of SBA business or

disaster loan applications. These fraud

referrals now involve loan applications

submitted to 50 SBA district offices,

totaling $122 million and involving 1,194

individual subjects. To date, 99

individuals have been indicted on

criminal charges: 91 have been

adjudicated guilty, 3 have had indictments

dismissed, and 5 others are awaiting trial.

Affirmative Civil Enforcement Program

The OIG continues to expand the scope of

its efforts to make optimal use of the

Department of Justice's Affirmative Civil

Enforcement (ACE) program. This
6 Semiannual Report September 1997

relatively new program targets cases for

civil action which might otherwise not be

prosecuted criminally because of the

minimal dollar amounts involved, absence

of financial loss to the Government, or

because the facts of the case might not

support a criminal prosecution. 

Heretofore, the OIG s success with the

ACE program was focused in only 15

states and the Commonwealth of Puerto

Rico; however, over the course of this

reporting period, the OIG also realized its

first ACE results in Maryland, Missouri,

and South Carolina.

During the time that the OIG has been

involved with the ACE program, it has had

a total of 95 successful cases, resulting in

$2,853,260 in civil penalties and

$4,085,900 in recoveries. Individual ACE

outcomes are reported in the program area

chapters, as appropriate.

Leaders of Incorporated New York

State Village Indicted for Conspiracy,

Embezzlement, Fraud, and Money

Laundering

Six men from an incorporated village in

Rockland County, New York, were

charged with participating in a number of

fraudulent schemes to obtain tens of

millions of dollars through the Specialized

Small Business Investment Company

(SSBIC) program and other Federal and

State grant, loan, and subsidy programs. 

The charges in the indictment, all related to

the incorporated village, include

conspiracy, embezzlement of Federal

program funds, making false statements,

mail fraud, wire fraud, mortgage fraud,

and money laundering. The U.S.

Attorney's Office for the Southern District

of New York asked the SBA/OIG to join

its ongoing investigation with the IRS and

the respective OIGs of the Departments of

Education and Housing and Urban

Development.
Semiannual Report September 1997 7
8 Semiannual Report September 1997

Business Loan Program

SBA's small business loan programs serve one of the most important missions of the

Agency: to ensure that Federal funds and resources are used to help finance qualified

small enterprises. Under the Section 7(a) Guaranteed Loan Program, SBA guarantees

loans to small businesses that are unable to obtain private financing. These loans must be

of such merit, or be so secured, as to reasonably ensure repayment to the lending

institution. No loan may be made unless the financial assistance is not otherwise available

on reasonable terms from elsewhere in the credit market. Under the guarantee 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 averages about 75 percent.

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 Certified Lender Program (CLP) or its Preferred Lender Program (PLP).

Lenders who are heavily involved in the SBA guarantee program and meet the Agency's

criteria can participate through the CLP. Over 1,000 participating lenders, approved for

the CLP program, are permitted to assume greater authorities and responsibilities in

processing, closing, servicing, and liquidating loans. As a result, SBA can process loan

guarantee applications in 3 days, rather than the 2 weeks that it may take for a thorough

analysis by Agency staff. About 9 percent of all business loan guarantees are made

through the CLP process.

As permitted by Section 7(a)(2) of the Small Business Act, SBA delegates even wider

authority to preferred lenders, i.e., lenders who can commit the Agency to guarantee

eligible business loans and decide the level of SBA participation. This program, with over

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

resources of SBA's best lenders to the maximum. About 31 percent of all business loan

guarantees are made through the PLP process.

The 504 Loan Program provides long-term, fixed-rate financing through certified

development companies (CDCs) to small businesses to acquire real estate, machinery, and

equipment for expansion of business or modernizing facilities. Typically, 504 loan

proceeds
Semiannual Report September 1997 9

are provided as follows: 50 percent by an unguaranteed first mortgage bank loan, 40

percent by an SBA-guaranteed debenture, and 10 percent by the small business customer.

 The maximum SBA debenture is $1 million.

With the creation of the Agency's Low Documentation (LowDoc) application process,

lenders are now able to use their own internal loan application documents, plus a single

page, two-sided SBA form to apply for an SBA guarantee on a loan of $100,000 or less. 

The demand for this program is unprecedented, i.e., 33 percent of all Section 7(a) loan

approvals are currently made through the LowDoc application process.

Summary of OIG Activity / Business Loan Program

Audits Underway 11

Audit Reports Issued 7

Indictments Resulting from Investigations 12

Convictions Resulting from Investigations 8

Investigations Closed / Remaining Inventory 25 / 150

Investigations: Restitutions / Fines / Other Recoveries $1,178,176 / $209,500 / $56,300

Investigations: Reduction to the Agency s Financial

Risk

$15,831

Investigations: Loan Declinations Due to Name Checks 45 / $13,775,624

Investigations: Cases Referred to Other Agencies 16

Inspections Underway 1

Inspection Reports Issued 1

Reviews of Proposed Regulations 1

Reviews of Standard Operating Procedures 2

Reviews of Other Issuances 27
10 Semiannual Report September 1997

Figure 1

Efforts to Improve SBA

Program Management

Review of Subsidy Rate Calculation

Error Identifies Internal Control

Weaknesses

In June 1997, the General Accounting

Office (GAO) uncovered an error in SBA s

formula for calculating its loan guarantee

subsidy rate. This rate is critical in

determining the Agency s lending levels

and its supporting budget requests. SBA

Administrator Alvarez asked the Inspector

General to investigate the source of the

error and to recommend future safeguards.

 The OIG s study concluded that the initial

error had resulted from OMB s incorrect

data entry into the SBA s subsidy rate

model. While SBA officials reviewed

OMB s changes to the model s

assumptions, they failed to check the

impact of the changes on the model s

spreadsheet cells upon its return to the

Agency for review. The OIG s

recommendations included establishment

of internal controls for the model s

management, introduction of safeguards to

prevent such errors from being made in the

future, and development of a check list to

ensure the review of changes both to the

model s assumptions and data.

Follow-Up Audits of LowDoc Loans in

Four District Offices Yield Results

Similar to Previous National Sample

In a follow-up to an audit of a national

sample of LowDoc loans, the OIG audited

LowDoc activity at four SBA District

Offices (Atlanta, Dallas, Santa Ana, and

Washington). In the earlier review,
Semiannual Report September 1997 11

auditors concluded that 7 of 70 sampled

loans should not have been made because

of loan origination deficiencies. In the four

follow-up audits, a total of 13 of 120

sampled loans were judged deficient

enough that they should not have been

made. The most prevalent of 157

deficiencies found by auditors involved (1)

failure to perform IRS verifications or to

reconcile them to the borrowers financial

information when obtained, (2) failure to

require equity injections or failure to obtain

evidence thereof, (3) improper use of loan

proceeds or failure to verify proper use,

and (4) failure to use joint payee checks to

disburse loan proceeds when required. 

Although most of the deficiencies

pertained to non-compliance with general

Section 7(a) program requirements, as

opposed to requirements specific to the

LowDoc program, the lenders cited loan

officer error and lack of knowledge of the

requirements as the most common reason

for the deficiencies. The four District

Office reports were issued in July of 1997.

 All four District Directors agreed to

provide training.

Audit Recommends Centralization of

Loan Guarantee Purchasing to Avoid

Conflict of Interest

An OIG audit recommended centralizing

the business loan guarantee purchase

process to eliminate the district offices

inherent conflict as both the Agency s

marketer and regulator. It reviewed a

random sample of 58 purchase decisions

out of the Agency s 2,819 purchases

valued at $434 million for FY 1995. The

audit found that at least eight of the

purchase decisions totaling $333,730 were

inappropriate due to SBA mistakes or

leniency in evaluating lender errors. The

lenient evaluations could all stem from the

district offices dual roles of marketing

SBA loans through the lenders and

providing oversight to those same lenders.

 The conflicting roles force district offices

to balance favorable working relationships

with lenders against the need to impose

sanctions if SBA regulations are violated. 

A statistical projection to all purchase

decisions made in FY 1995 estimated there

could be 389 inappropriate guarantee

purchases totaling $16.2 million. Other

audit recommendations included the

recommendation that SBA recover the

$333,730 paid on the inappropriate

purchase decisions identified. The Acting

Associate Administrator for Financial

Assistance agreed with the majority of the

audit s recommendations.

Follow-Up Program Vulnerability

Memorandum Issued on Checking for

Undisclosed Prior Defaulted SBA Loans

In July 1997, the Inspector General issued

a program vulnerability memorandum

(PVM) to the acting Associate Deputy

Administrator for Economic Development

(ADA/ED). This was a follow-up to a

February 1994 PVM, citing an Agency

program vulnerability regarding the

approval of SBA loans to applicants who

fail to disclose personal or business

liabilities from prior defaulted SBA

loans. In a summer 1994 response, the

Associate Administrator for Disaster

Assistance--the only SBA official to

respond--spelled out his office's procedures

for checking the names of every applicant's

principals and proposed guarantors against
12 Semiannual Report September 1997

records of prior SBA loans and debts. The

Office of Financial Assistance (OFA)

claims that staff shortages and workload

have prevented it from resolving the IG s

concerns.

In the absence of a response from the OFA,

the follow-up PVM identified another four

SBA-guaranteed loans valued at

$1,030,000 which were made to applicants

who failed to disclose their connections to

previously defaulted SBA loans. On these

defaulted loans, SBA eventually lost

$913,641. Research conducted during the

course of the investigations indicated that

processing loan officers in SBA's field

offices only query the computer files for

prior SBA loans and related outstanding

debts when applicants voluntarily disclose

their respective existence. The Office of

Economic Development lacked a uniform

policy requiring such queries in those

instances where the applicants had not

voluntarily disclosed their prior loans. 

Unfortunately, SBA's computer system did

not allow queries to be made by using the

addresses of the applicant businesses, their

principals, or proposed guarantors. If such

a query were allowed by the computer

system (and required by SBA), two of the

four loans discussed in the 1997 PVM

would not have been made as the

principals and/or guarantors had not

changed their addresses since the earlier

defaults.

To ensure applicants' eligibility prior to

approving new loan applications, the OIG

recommended that the responsible SBA

offices should be required to query SBA's

computer files using the names and Social

Security numbers of all principals and

guarantors reflected on the loan

application. This procedure would ensure

that SBA personnel are made aware of any

prior loans and outstanding debts

associated with loan guarantee applicants. 

In addition, the OIG recommended that

SBA consider augmenting its computer

system to allow queries using the addresses

of the businesses, principals, and proposed

guarantors as search keys. As of the end of

FY 1997, this remains an outstanding

issue.

SBA Has Adequate Controls in Place

But Does Not Take Full Advantage of

Lender Liquidation Capabilities

An inspection report examined the role of

Section 7(a) lenders in the liquidation

process and explored the potential for

increasing their responsibility for

liquidating SBA loans. The OIG

concluded that existing controls in the

liquidation process should adequately

protect the interests of the Government,

if they were consistently and effectively

applied.

SBA has in place a number of regulations,

Standard Operating Procedures (SOPs),

and other controls that encourage lenders

to obtain maximum recoveries or allow

SBA to take action against lenders for

negligent liquidation actions. Controls

include the requirement of a lender

liquidation plan, a reduced guarantee

percentage on Section 7(a) loans, the

ability to deny or repair SBA s guarantee

liability, special requirements for

participation in the CLP and PLP

programs, and laws outlined in the

Uniform Commercial Code governing the
Semiannual Report September 1997 13

sale of certain collateral. The lenders in

our sample believe that these measures

provide effective incentives and

disincentives and safeguard SBA s interests

when objectively and uniformly applied.

The OIG also concluded that SBA

currently does not take full advantage of

lender liquidation capabilities. SBA

should no longer play a role in routine

liquidation transactions for PLPs and

CLPs, especially given the Agency s

resource constraints. Instead, SBA needs

to commit its available resources to the

effective monitoring of lender liquidation

activities. This approach would make

more efficient use of SBA resources.

At the district level, two distinct and

equally entrenched points of view exist

about how much responsibility lenders

should be given to liquidate loans. Some

districts give lenders a great deal of

latitude, while others have adopted a more

conservative approach by making many of

the liquidation decisions themselves. 

Inconsistencies among district offices have

often confused and frustrated lenders

seeking guidance on liquidation policies

and procedures. SBA recognizes this

problem and is addressing it with policy

notices intended to encourage greater

consistency. The Agency is also making

an effort to upgrade its information

systems used for monitoring liquidation

activities.

The OIG found substantial differences of

opinion between lenders and SBA officials

regarding the ability of lenders to take on

more liquidation responsibility and to

maximize recoveries. Most Agency

officials expressed reservations about

relying on the liquidation capabilities of

lenders, while most lenders stressed the

advantages of handling liquidations

without any SBA intervention. Because of

deficiencies in performance data on

individual lenders, district officials are,

however, seriously hampered in assessing

the lenders ability to handle liquidation

responsibilities.

There appear to be no compelling

operational reasons for keeping PLP and

CLP lenders from assuming full

responsibility for liquidating their SBAguaranteed loans. All credible lenders

have procedures for loan liquidation, and

banks are tightly regulated by Federal and

State government agencies which

uniformly require written liquidation

procedures. Further, as a pre-condition for

entering the PLP or CLP programs, lenders

are required to demonstrate the ability to

liquidate loans.

Based on these findings, the Inspector

General recommended that the Associate

Administrator for Financial Assistance:

1. Develop policies to refocus

SBA s efforts away from direct

involvement in liquidation activities

and toward improved oversight of

PLP and CLP liquidation

performance;

2. Use the new decision-making

authority given to PLPs and CLPs

to conduct a test of a hands-off

liquidation policy; and

3. Create a reliable method for
14 Semiannual Report September 1997

collecting data to measure

individual lender liquidation

performance.

Georgia Borrower and Participating

Lender Withhold Information Which

Could Have Avoided Government Loss

In one of a continuing series of audits of

early defaulting loans, the OIG s Auditing

Division discovered that both a borrower (a

business with several principals) and an

SBA participating lender failed to disclose

material information that could have

precluded approval of a $455,000 loan to

buy a golf driving range in Georgia in

1994. The loan defaulted in less than 1

year, resulting in SBA s honoring its

$340,000 loan guarantee. The audit

revealed that the borrower failed to

disclose either to the lender or to SBA

prior felony convictions for check fraud

and drug possession.

Through SBA s tax verification process

with the IRS, the lender learned that a

principal s 1992 tax return, showing a

liability of $2,600, had not been filed. The

lender, however, did not disclose this fact

to SBA. After the borrower declared

bankruptcy, tax liens totaling $26,000 were

filed by the State of Georgia and the IRS. 

The OIG recommended that SBA recover

the guarantee amount from the lender

because the loan agreement required that

the borrower be current on all taxes. In

addition, the applicable SBA Policy Notice

requires that the lender notify the Agency

if there is any material discrepancy

between the tax return data submitted by

the borrowers and the data received from

the IRS. Finally, SBA regulations state

that the Agency is released from its

guarantee obligation if the lender has not

"substantially complied with all of the

provisions" of the regulations and lender

agreements.

Neither the lender nor SBA s Atlanta

District Office agreed with the

recommendation. The lender said it was

not required to get IRS verification of

principals tax returns on a new business

and that tax return verification on the

principals was, nonetheless, acceptable for

1991 and 1993. The District Office agreed

that the lender did not have to verify

personal tax returns of the principals and

believed that there was no basis for action

against the lender unless there was

ultimately a loss in liquidating the loan. 

The OIG requested the District Office to

reconsider its position because the lender

should have disclosed the tax discrepancy

once it was known. Further, SBA

regulations do not require a monetary loss

as a condition of release from the

guarantee liability. The issue remains

unresolved pending reconsideration by the

District Office and SBA s Office of

Financial Assistance.

Business Loan Program SOPs Reviewed

As part of SBA s initiative to update and

streamline its SOPs, the OIG reviewed and

commented on two business loan program

SOPs. The review of SOP 50 50 4, Loan

Servicing, led to comments on procedures

for referring suspected irregularities to the

OIG, adopting methods to identify lenders

in need of review, and incorporating credit

elsewhere evaluations as part of the

review. In reviewing SOP 50 51 2, Loan
Semiannual Report September 1997 15

Liquidation, the OIG commented again on

procedures used for referring suspected

irregularities to the OIG and suggested that

procedures should be added for referring

charged-off loans to either the Credit Alert

Interactive Voice Response System

(CAIVRS) or the Government-wide

database to be established by the

Department of Treasury.

Guides for the Preferred Lenders

Program Reviewed

The OIG reviewed two guides prepared for

the Preferred Lender Program (PLP). The

review of the proposed PLP review process

led to the comment that the Agency, upon

discovery of a material deficiency, should

immediately seek resolution with the

lender rather than wait for the lender to

request SBA s purchase of the guaranty. 

Additional comments included requiring

the review team to study all previous

review reports and the lender s

implementation of recommended

corrective action, and having the review

team confirm that the lender is using the

tax verification process. The OIG also

reviewed PLP liquidation guidelines and

recommended that lenders be required to

review the books and records of the

borrowers during site visits and verify

compliance with program regulations and

loan provisions, retain site visit records for

a specified time, and conduct post purchase

reviews for all secondary market loans

within the same time frame as required for

other loans.

Activities to Enhance Fraud

Detection and Deterrence

Latest Results from Affirmative Civil

Enforcement (ACE) Program

Over this reporting period, the OIG's

participation in the Department of Justice s

ACE program produced six successful

business loan cases, resulting in a $50,000

recovery and $51,250 in civil penalties. 

Five cases, all of which produced the civil

penalties, involved fraudulent

representations (primarily bogus tax

returns) in loan applications, all of which

were stopped before funds were disbursed.

 The other case involved a $100,000

LowDoc loan on which the participating

lender bank had already disbursed $53,000

when significant discrepancies between tax

returns submitted to the IRS and the bank

were identified. The balance of the loan

was then canceled.

OIG Briefs Members of Lender

Community

During this reporting period, OIG

investigations staff continued its practice of

making presentations to groups of

participating lenders. Senior investigators

from the Los Angeles and Chicago field

offices gave presentations to 75

participants in Los Angeles, California;

Seattle, Washington; and Anchorage,

Alaska, highlighting the benefits to be

gained from cooperating with OIG

personnel in combating waste, fraud, and

abuse in the Agency s guaranteed loan

programs.

Idaho Farm Supply Company President

Indicted for Bank Fraud, Money

Laundering, and Bankruptcy Fraud
16 Semiannual Report September 1997

The former president of a Caldwell, Idaho,

farm implement business was indicted on 2

counts of bank fraud, 1 count of wire

fraud, 11 counts of bankruptcy fraud,

and 6 counts of money laundering. Also

included in his indictment was a demand

for criminal forfeiture of assets which he

allegedly hid from the bankruptcy court. 

FBI and SBA/OIG special agents arrested

the man, and the FBI seized his Range

Rover vehicle. The joint SBA/OIG, FBI,

and IRS investigation found that the

company president made several false

statements to obtain a $750,000 SBAguaranteed loan, a $250,000 revolving line

of credit, and a $210,000 short-term bank

loan. The investigation also found that he

used over $1 million of the company s

funds for his family s personal gain,

including the purchase of a luxury home

and several luxury vehicles. The company

was forced to file for bankruptcy and,

during the course of the bankruptcy

proceedings, allegedly diverted accounts

receivable to other bank accounts under his

control and hid assets from the bankruptcy

trustee by filing false liens on some of the

assets he had purchased with company

funds. In addition, during a bankruptcy

hearing, the company president made

several false statements in response to the

judge s direct questions. The current loss

on the SBA-guaranteed portion of the loan

is above $86,000.

Two Massachusetts Trade Association

Employees Indicted on Host of Charges

Two residents of Stoughton,

Massachusetts, were indicted on 13 counts

of conspiracy, mail fraud, wire fraud,

and making false statements to a

Federally-insured financial institution. 

The organizer of a Massachusettsheadquartered trade association and its

office manager were charged with a

scheme to defraud a number of interstate

truckers. The trade association put

together 46 SBA loan applications to cover

the purchase of trucks, submitted them to a

participating lender bank in Wisconsin,

and handled all insurance arrangements. 

The pair allegedly submitted loan

application documents that, unbeknownst

to the truckers, fraudulently overstated the

cost of the insurance and pocketed the

difference when the loans were disbursed. 

During 1993-1994, the difference

amounted to $215,546. The trade

association's assistance to its

Massachusetts members also allegedly

included a scheme to defraud the

Commonwealth of Massachusetts of its 5%

sales tax on the purchase of each truck. 

The two trade association employees

informally contracted with a New Jersey

resident to file truck registration documents

with the New Jersey Department of Motor

Vehicles and accept the truck titles mailed

in response. The loans were guaranteed by

SBA as part of a pilot program started at

the request of the trade association s

organizer. Based on a referral from SBA s

Boston District Office, the investigation is

being conducted jointly by the SBA/OIG

and the FBI.

Illinois Machine Manufacturer Pleads

Guilty to Making False Statement

The former owner of an industrial machine

manufacturing company in Dolton, Illinois,

pled guilty to one count of knowingly

making a false statement to influence
Semiannual Report September 1997 17

SBA. The firm was approved in February

1992 for a $325,000 SBA-guaranteed

business loan, of which $42,500 was to be

used to purchase machinery and

equipment. The owner subsequently

submitted an SBA settlement sheet that

certified that he already had spent $38,500

of the loan proceeds to purchase a milling

machine and would spend an additional

$4,000 to purchase more machinery. The

OIG's investigation documented that his

certification was false; he actually spent

only $2,000 on machinery and equipment.

 To carry out this fraud, the man submitted

to the participating lender bank fraudulent

invoices totaling more than $43,000, as

well as a $7,700 check that he falsely

represented as a 20 percent down payment

on a milling machine. The owner also

forged the endorsement of the joint payee

of a $30,800 check the bank gave him to

pay the remaining 80 percent cost of the

machine. The OIG initiated the

investigation based on a referral from a

liquidation loan officer in SBA's Chicago

District Office.

Georgia Motel Owner Pleads Guilty to

Making Material False Statements

The former owner of a motel in Tybee

Island, Georgia, pled guilty to two counts

of making material false statements to

influence the actions of SBA. Approved

for a $950,000 SBA-guaranteed business

loan, he submitted falsified invoices to the

participating lender bank, representing

$213,150 in services and equipment, to

obtain the loan proceeds. The OIG initiated

this investigation based on information

received by the OIG Fraud Line.

Pennsylvania Business Loan Applicant

Pleads Guilty to Making False

Statements

A Lansdale, Pennsylvania, loan applicant

pled guilty to making false statements to

influence SBA to approve a $200,000

guaranteed loan to his company. In

applying for the loan, the applicant

submitted a 1991 tax return which had

been altered to substantially overstate his

income; he also submitted fictitious returns

for 1992 and 1993. The loan proceeds

were to be used to purchase a tavern, but

the loan was subsequently canceled when

the tax return discrepancies were

confirmed by the IRS. The case was based

on a referral from SBA's Philadelphia

District Office.

Wisconsin Businesswoman Indicted for

Making False Statement

A business consultant in Menomonie,

Wisconsin, was indicted on one count of

making a material false statement to

SBA to obtain a $25,000 SBA-guaranteed

business loan. The indictment charges that

she knowingly failed to disclose a recent

criminal history and provided a false Social

Security number on SBA Form 912,

Statement of Personal History, in a loan

application for her consulting firm. The

OIG's investigation found that she had

been arrested on a local charge for forging

company checks the day before applying

for the SBA-guaranteed loan, and she was

convicted on that charge after obtaining the

loan. The OIG initiated the investigation

in response to a request from the U.S.

Attorney for the Eastern District of

Wisconsin.
18 Semiannual Report September 1997

Florida Auto Repair Shop Owner

Sentenced for Using Falsified Tax

Documents

The president of a Longwood, Florida,

auto repair shop was sentenced to 2 years

probation and a $50 special assessment. 

He previously pled guilty to one count of

using false documents. The businessman

had submitted tax returns that he knew to

be altered in an effort to obtain a $450,000

SBA-guaranteed loan. The loan

application was denied based on the

overwhelming differences between the

copies of tax returns submitted to SBA and

those submitted to IRS. This investigation

was based on a referral from SBA's North

Florida District Office.

New York Bank Officer Sentenced for

Witness Tampering

A former administrator and assistant to the

general manager at a New York City

participating lender bank was sentenced to

2 years probation and a $5,000 fine. The

woman had pled guilty to witness

tampering in connection with a joint OIG

and FBI investigation into kickbacks and

fraud involving the bank s small business

loan division. According to her plea, she

attempted to prevent a witness in a grand

jury proceeding from testifying. She asked

the witness to withhold information from

the grand jury concerning the nature of a

$5,000 payment he made to another bank

officer who headed the bank s small

business loan division. That bank officer

was ultimately convicted of receiving

kickbacks from SBA borrowers, and the

bank paid a $1,260,033 civil settlement

and released SBA from guaranties totaling

more than $3.5 million.

Washington Company Owner Charged

with Making False Statements

The president of a company which owned

several sandwich stores in the Tacoma,

Washington, area was charged in an

information with making false statements

on a loan application to a Federally-insured

financial institution. While applying for a

$322,197 SBA-guaranteed business loan,

the man provided allegedly fraudulent

guaranties, financial statements, and other

documents to a participating lender bank

and SBA. The OIG investigation found

that he forged the signature of one

shareholder and had several employees

forge the signature of another shareholder

on the guaranties, financial statements, and

other supporting documents. In addition,

the investigation found that he converted

SBA collateral by selling it to a leasing

company through a third party and leasing

the equipment back from the leasing

company. The investigation, conducted

jointly with the FBI, was based on a

referral from the bank to the U.S.

Attorney's Office.

Two California Businessmen Charged

with Bank Fraud

The owner of a car wash in La Crescenta,

California, and the owner of a grocery

store in Pasadena, California, were each

charged with one count of bank fraud. 

The OIG was asked to join an investigation

already underway by the FBI and the IRS,

into an allegation that a Pasadena tax

practitioner was responsible for the
Semiannual Report September 1997 19

preparation of altered tax returns submitted

to financial institutions and SBA. SBA

records revealed that the car wash owner

had received guaranteed loans totaling

$805,000 and that the grocer had received

a $255,000 SBA-guaranteed loan. The

investigation confirmed that "copies" of

their Federal tax returns, submitted to the

participant bank during the loan

application process, had been altered from

those submitted to the IRS in an effort to

overstate their incomes substantially.

Results of Previously Reported

Investigations

Former New York Bank Directors

Sentenced for Conspiracy, Fraud, and

Bribery

The former president (and board chairman)

of a now-defunct SBA participating lender

headquartered in Watertown, New York,

and a former counsel to the bank were

sentenced for conspiracy, bank fraud,

and bank bribery. The OIG investigation

revealed that the bank s president had

agreed to refer the bank s legal work to the

attorney s law firm in return for one-sixth

of the legal fees collected. The bank

officer received more than $332,000 from

the scheme and caused the bank to make

loans totaling $1,879,500 to the attorney

and his associates, allowed other

individuals to borrow money from the

bank for transfer to the attorney, and

permitted the attorney to represent both

parties in connection with the closing of

most of these loans.

California Jewelry Store Owner

Sentenced for Making False Statements

The former owner of a retail jewelry store

in San Luis Obispo, California, was

sentenced to 21 months imprisonment, 3

years supervised probation, a $5,050 fine,

and $336,894 in restitution (82.5 percent

payable to SBA and 17.5 percent payable

to the participating lender bank). He had

been convicted of making false

statements to a Federally-insured financial

institution (submission of fictitious tax

returns to support applications for

$550,000 in SBA-guaranteed loans).

Ohio Automobile Repair-Shop Owner

Sentenced for Conversion of

Government Property

The owner of an automobile repair facility

in South Euclid, Ohio, pled guilty to one

felony count of conversion of

Government property in connection with a

$50,000 SBA-guaranteed LowDoc

business loan. He was sentenced to 3 years

probation, 300 hours community service,

$8,170 in restitution, and $200 in court

fees.

Illinois Farm Equipment Manufacturer

Sentenced for Making False Statement

and Unlawful Disposal of Hazardous

Waste

A manufacturer of grain wagons and other

farm equipment in Arthur, Illinois, was

sentenced to 5 years probation, a $100,400

fine, and $97,112 restitution to the State of

Illinois' Hazardous Waste Fund. The

corporation had pled guilty to one count of

making a false statement to obtain a $1

million SBA-guaranteed loan and one

count of unlawful disposal of hazardous
20 Semiannual Report September 1997

solvents and paint wastes.

Montana Clothing Retailer Sentenced

for Making False Statements

A partner in a clothing retailer in

Whitefish, Montana, was sentenced to 3

years probation and a $7,500 fine. He had

pled guilty to one count of making false

statements to SBA. In 1993, the man

submitted financial statements and other

documents purporting to give a true picture

of the partnership's financial situation to

persuade SBA and a Montana participating

lender to accept an offer-in-compromise

for his liability for two defaulted SBA

loans ($780,000). Subsequent to SBA s

1993 acceptance of the compromise, the

owner (under a corporate name) received

three additional SBA-guaranteed loans

totaling $205,000 from another

participating lender in Idaho based on a

substantially different set of financial

statements.

California Tax Preparer Sentenced for

Making False Statement in Loan

Application

A tax preparer in Los Angeles, California,

was sentenced to 3 years probation, 100

hours community service, and a $10,000

fine. He had pled guilty to aiding and

abetting the making of false statements

in a loan application to a Federally-insured

bank, i.e., he prepared altered copies of

income tax returns submitted in support of

a $265,000 loan application by the owner

of a restaurant in Pomona, California.

California Talk Show Host Sentenced

for Lying on Loan Application

A Los Angeles, California, businessman

and former radio talk show host was

sentenced to 4 months home detention, 3

years probation, 300 hours community

service, and $100,000 restitution to SBA. 

He had pled guilty to one count of making

a false statement in a loan application to a

Federally-insured financial institution. The

investigation disclosed that the

businessman signed an escrow

modification statement which falsely stated

that she had paid him $160,000 outside of

escrow. The $160,000 "payment" was

submitted as evidence to both the

participating lender bank and SBA that the

purchaser had made the necessary capital

injection into her project to qualify for an

SBA-guaranteed loan.

Missouri Osteopath and Convenience

Store Owner Sentenced for Making

False Statement

The owner of a convenience store in

Liberty, Missouri, was sentenced to 6

months home confinement, 3 years

probation, and $58,000 restitution to SBA.

 Based on an investigation by the OIG, the

man previously pled guilty to making

false statements to obtain a $300,000

SBA-guaranteed loan from a "non-bank"

participating lender located in the

geographical area served by SBA's St.

Louis District Office In his loan

application, the owner failed to disclose tax

debts and a defaulted 1977 loan to a group

of his health clinics to SBA's Kansas City

District Office; he also submitted copies of

Federal tax returns which had been altered

to overstate his income.
Semiannual Report September 1997 21

New York Software Company and its

Chief Executive Sentenced for Money

Laundering and RICO Violations

Under the provisions of the Racketeer

Influenced and Corrupt Organization

(RICO) statute, a Syracuse, New York,

warfare-simulation software development

company and its chief executive officer

(CEO) were recently sentenced. The firm

was sentenced to 1 year probation and

$478,000 restitution; the CEO was

sentenced to 8 months imprisonment, 1

year home confinement, 1040 hours

community service, 3 years supervised

release, and a $30,000 fine. The man had

pled guilty to one count of money

laundering, and the firm had pled guilty to

being a criminal enterprise under the

RICO statute, both in connection with the

firm s $750,000 SBA-guaranteed loan. In

return for the guilty pleas, the Government

agreed to dismissal of the other charges in

a 54-count indictment alleging that they

defrauded the Navy, the participating bank,

investors, and creditors of over $8 million.

 The investigation found that the

company s principals had failed to disclose

a significant debt when applying for the

loan and then used loan proceeds to pay off

the debt. The OIG conducted this

investigation jointly with the Defense

Criminal Investigative Service, which

brought the case to the OIG s attention.
22 Semiannual Report September 1997

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 loan Federal 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 non-profit 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.

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 1997, SBA approved

49,515 loans. Since the inception of the program, SBA has approved more than

1,386,000 disaster loans valued at some $25 billion. As of the end of FY 1997, the SBA

disaster loan portfolio included more than 285,000 loans worth over $7.1 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 non-profit 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 Area Offices located in Niagara Falls, New York;

Atlanta, Georgia; Fort Worth, Texas; and Sacramento, California.

Summary of OIG Activity / Disaster Loan Program
Semiannual Report September 1997 23

Audits Underway 3

Audit Reports Issued 2

Indictments Resulting from Investigations 11

Convictions Resulting from Investigations 11

Investigations Closed / Remaining Inventory 10 / 88

Investigations : Restitutions / Fines / Other Recoveries $461,018 / $70,250 / $0

Investigations: Declination of Loans Due to Name Checks 19 / $1,253,197

Investigations: Cases Referred to Other Agencies 2

Reviews of Proposed Regulations 1

Reviews of Other Issuances 1

Figure 2
24 Semiannual Report September 1997

Efforts to Improve SBA

Program Management

Audit Supports SBA s Non-Use of the

Credit Alert Interactive Voice Response

System (CAIVRS)

OMB Circular A-129 requires Federal

credit agencies to use the CAIVRS system

to test loan applicants for delinquent

Federal debt; the existence of such debt

would, as a matter of SBA policy, bar

applicants from obtaining new loans. 

SBA's disaster loan program officials have

not used CAIVRS because they believe it

duplicates credit bureau information and its

data is difficult to verify with creditor

agencies. Moreover, its use adds too much

time to loan processing. An OIG audit

confirmed the Agency s position; namely,

that commercial credit bureau information

is now more complete and usable and

using CAIVRS would not be beneficial.

To determine the number of disaster loans

made to ineligible applicants, OIG auditors

used CAIVRS to review a sample of

FY 1995 disaster loan cases and found that

.4 percent of borrowers appeared to have

outstanding delinquent debt with other

Federal agencies. Verification of these

matches with those Federal agencies

revealed, however, that 37 percent of the

CAIVRS matches were not valid. The

auditors also tested 600 disaster loan

applications in process during April and

May 1997 and found that 10 of the

borrowers had a record in CAIVRS. The

same information on eight of the ten,

however, was also available from

commercial credit reports which were more

readily accessible when compared to the

lengthy CAIVRS verification.

As a result of the audit, the Inspector

General wrote to the Acting Deputy

Director for Management, Office of

Management and Budget, and

recommended the elimination of the

CAIVRS requirement for SBA s disaster

assistance program. His letter stated: The

OIG has concluded that there would be no

significant benefit in using CAIVRS as

part of the applicant screening process,

particularly with the requirement, under the

Debt Collection Improvement Act of 1996,

that agencies report all delinquencies to

commercial credit bureaus.

Audit Finds that Disaster Home Loan

Processing Complies with Regulations

An audit issued during the reporting period

found that disaster home loan processing

was generally consistent with

regulations. About 91 percent of disaster

home loan approvals were consistent with

SBA regulations and procedures; the other

9 percent (14 out of 150 in the audit

sample) lacked support for repayment

ability, credit worthiness, or other

eligibility criteria. Disaster field office

managers attributed the approval errors to

limited training and experience and to

policy imperatives on loan processing

speed. The Associate Administrator for

Disaster Assistance (AA/DA) disagreed

with the audit error rate. Based on his

review of the loans cited in the audit, he

concluded that only six were erroneously

approved.

The audit was based on a sample of 150

loans out of a universe of 191,169 disaster
Semiannual Report September 1997 25

home loans (totaling $4.7 billion) approved

from October 1991 through September

1995. The error rate of 14 loans projected

to an estimated 7,811 loans totaling $175

million in the universe. Borrower

cancellations reduced this estimate to $114

million projected to have been disbursed

for loans without required documentation,

and another $14 million can be projected

for charge-offs.

The audit recommended that the AA/DA

(1) ensure that loan officers receive

adequate training, (2) determine a realistic

time frame for processing loans, and

(3) establish baseline goals for approval

processing errors. The AA/DA disagreed

with the second recommendation saying

that the processing time goal is an external

policy decision that the program officials

must attempt to carry out and that there

was no empirical evidence that such goals

caused any level of error rate. He

disagreed with the third recommendation

saying that the program was taking

appropriate steps to reduce processing

errors and that establishing a goal for

processing errors in this program was

impractical.

Activities to Enhance Fraud

Detection and Deterrence

Latest Results from Affirmative Civil

Enforcement (ACE) Program

Over this reporting period, the OIG's

participation in the Department of Justice's

ACE program produced 12 successful

disaster loan cases, resulting in $60,000 in

civil penalties. These cases involved

fraudulent representations (primarily bogus

tax returns) intended to mislead SBA into

making disaster loans that should have

been declined. Interestingly, half of these

loans were stopped before any funds were

disbursed and the balance were never fully

disbursed by SBA.

California Video Store Owner/Jeweler

Pleads Guilty to Filing False Claim

The owner of a Norwalk, California,

jewelry shop pled guilty to one count of

filing a false claim with SBA. After a Los

Angeles videotape rental store which she

owned was looted and burned during the

1992 civil unrest, the woman was approved

for SBA disaster loans totaling $185,000 to

rehabilitate that business. The OIG's

investigation revealed that, as part of the

loan application, she submitted a copy of a

fictitious 1989 individual income tax return

and an altered copy of her 1990 individual

income tax return. Both of these

documents significantly overstated her

income. The investigation also revealed

that, instead of using the $159,700 of loan

proceeds to reopen the video store, she

chose to open a jewelry store. (SBA

canceled the final loan disbursement of

$25,300.) The investigation was initiated

based on referrals received from SBA's

Fresno district counsel and Disaster

Assistance Area 4 Office.

Texas Automobile Repair Shop Owner

Sentenced for Making False Statements

The owner of a Fort Worth, Texas, auto

repair shop was sentenced to $29,400

restitution and 5 years probation. He had

previously pled guilty to one count of

making false statements to SBA. 
26 Semiannual Report September 1997

Following a December 1991 flood, he had

received three disaster loans: a $16,800

home loan, a $16,700 business physical

damage loan, and a $12,700 economic

injury loan. In applying for these loans,

the recipient reported owning $39,000 in

stocks and bonds that he knew he did not

own. While the home loan is current, the

two business loans are in repayment

default. This was a joint investigation by

the OIG and the U.S. Secret Service. It

was opened in response to a referral from

SBA's Disaster Assistance Area 3 Office.

Missouri Consultant Pleads Guilty to

Making Material False Statements

A Cuba, Missouri, industrial construction

consultant pled guilty to one count of

making material false statements to

obtain SBA disaster assistance. In support

of the loan application, he submitted three

fictitious tax returns for a St. Louis

business that he had purchased subsequent

to the disaster and which received SBA

disaster loans totaling $407,800. The OIG

initiated the investigation based on

information from an anonymous source.

Nebraska Loan Guarantor Pleads

Guilty to Making False Statement

A guarantor of economic injury and

physical damage disaster loans received by

a Plattsmouth, Nebraska, resort pled guilty

to one count of making a false statement

to SBA. A joint investigation by the U.S.

Secret Service and the SBA/OIG had

shown that the man defrauded SBA by

submitting a false invoice regarding use of

the loan proceeds. The resort, which

featured camping, fishing, and swimming,

received SBA disaster loan proceeds

totaling $206,400 following the 1993 flood

of the Platte River; it has made no

repayment to SBA. This investigation was

based on a referral from SBA's Omaha

District Office.

California Nurse Registry Owner

Indicted for Filing False Claim and

Making False Statement

The owner of a nurse registry in Los

Angeles, California, was indicted on one

count of filing a false claim with SBA and

one count of making a false statement to

a Federally-insured lender. The OIG

investigation, based on a referral from

SBA's Disaster Assistance Area 4 Office,

found that the man submitted fraudulent

applications for disaster-related business

loans to a bank and SBA. He obtained a

$50,000 bridge loan from the bank and

subsequently received an $89,600

economic injury loan and a $72,800

physical damage loan, respectively, from

SBA. In each of the loan applications, the

owner claimed his business was located in

a building that had been damaged by fire

during the 1992 civil unrest in Los

Angeles. The investigation disclosed,

however, that his business sustained no

damage whatsoever because he actually

operated the nursing service out of his

personal residence. Allegedly false

documents which he submitted with the

loan applications include a lease, a

telephone installation invoice, and an

estimate of the cost of replacing his

business' files. The SBA disaster loans

went into default early, and SBA charged

off both loan balances in 1993. The

business owner did not make any payments

on the bridge loan; consequently, the bank
Semiannual Report September 1997 27

charged it off in 1994.

California Disaster Home Loan

Recipient Pleads Guilty to Making False

Statements to Government Agencies

A Mission Hills, California, disaster home

loan recipient pled guilty to one count each

of making a false statement to SBA and

making a false statement to the Federal

Emergency Management Agency

(FEMA). The SBA/OIG's joint

investigation with the FEMA/OIG, opened

in response to a referral from SBA's Santa

Ana Servicing Center, revealed that he had

submitted three disaster home loan

applications--two were submitted using

fictitious names and all three contained

false claims for damages from the 1994

Northridge earthquake. A total of $27,000

was disbursed in connection with the first

two loans, and both loans defaulted

without a single payment having been

made. The third loan, for $113,000, was

approved but not disbursed because SBA s

Disaster Assistance Area 4 Office detected

inconsistencies in the loan application s

documentation.

California Disaster Loan Recipient

Indicted for Making False Statements

The former owner of a fashion outlet

located in Los Angeles, California, was

indicted on one count of making a false

statement to SBA. The OIG initiated the

investigation based on a referral from

SBA's Santa Ana Servicing and

Liquidation Center and continued it jointly

with the U.S. Secret Service. Following

the 1992 civil unrest, the businessman had

obtained two SBA disaster assistance

loans. The investigation found that, in

support of his applications for a $87,300

physical damage loan and a $28,100

economic injury loan, the applicant had

submitted copies of tax returns which had

been altered to overstate his income. The

investigation established that the disaster

assistance loans would not have been made

had his true financial condition been

known; his alleged fraudulent activity

resulted in a $77,000 loss to SBA.

Texas Businessman Pleads Guilty to

Three Counts of Forgery

The owner of a Clute, Texas, computer

services company pled guilty to three

counts of forging endorsements on U.S.

Treasury checks which represented a

portion of the proceeds of a $183,400

economic injury disaster loan his business

had obtained from SBA. The man

fraudulently negotiated three Treasury

checks (totaling approximately $27,000),

each jointly-payable to the applicant s

business and another business whose

endorsement was falsely made. His

indictment resulted from an OIG

investigation based on a referral from

SBA's Houston District Office.

Mississippi Couple Indicted on Variety

of Fraud Charges

A husband and wife who owned an auto

parts franchise in New Hebron,

Mississippi, were indicted on seven counts

of making false statements, filing false

claims, possessing documents used to

defraud the Government, and

conspiracy. Their company obtained a

$120,000 SBA-guaranteed loan in 1991; it
28 Semiannual Report September 1997

also received a $42,500 physical damage

loan and a $29,800 economic injury

disaster loan in 1992. An investigation by

the OIG found that the couple used

fraudulent receipts and invoices to conceal

their misuse of proceeds of all three SBA

loans. The indictment also charges that

their loss claims were false. The

investigation was based on a referral from

SBA's Jackson District Office.

California Pharmacist Pleads Guilty to

Making False Statement

The former owner of a pharmacy in

Sherman Oaks, California, pled guilty to

one count of making a false statement to

SBA. Based on a referral received from

the Santa Ana Disaster Loan Servicing and

Liquidation Center, an investigation was

initiated into alledgedly false financial

information given to SBA in support of

three disaster loans. The pharmacist had

received a $100,000 disaster home loan

following the 1993 severe winter storms

and a $45,000 disaster home loan, as well

as a $218,000 disaster business loan,

following the 1994 Northridge earthquake.

 In 1996, he requested that SBA release its

lien on his business assets. Information

supporting the request contradicted

information in his loan applications, and

the investigation revealed that he had given

SBA fictitious Wage and Tax Statements

(Form W-2), altered Individual Income

Tax Returns, a fictitious S Corporation

Income Tax Return, and a fraudulent

Corporation Profit and Loss Statement.

Results of Previously Reported

Investigations

North Carolina Disaster Home-Loan

Recipient Sentenced for Making False

Statements

A Waynesville, North Carolina, woman

was sentenced to 1 year in prison and 3

years supervised release. She had pled

guilty to two counts of making false

statements to obtain a $38,400 SBA

disaster home loan. To secure SBA's

approval of her loan application and a

disbursement of the initial $10,000 of the

loan, she submitted a deed of separation

from her husband, which had been altered

to significantly overstate her alimony

income, as well as other falsified

documentation.

Georgia Equestrian Center Owner

Sentenced for Perjury

The president of a Unadilla, Georgia,

horse-show arena was sentenced to 15

months imprisonment and 3 years

supervised release. He had been convicted

on two counts of perjury. The charges

related to his testimony that his signature

had been forged on a personal guaranty

submitted to obtain an SBA economic

injury disaster loan. The OIG's

investigation determined that the signature

was not a forgery.

California Store Owner Sentenced for

Making False Statement

The former owner of a TV and VCR repair

shop in Los Angeles, California, was

sentenced to 6 months home detention, 5

years probation, and $37,918 restitution to

SBA. He had pled guilty to one count of

making false statements to SBA. The
Semiannual Report September 1997 29

man had filed for bankruptcy under several

SSNs and concealed the bankruptcy filings

from SBA to obtain two disaster loans

totaling $39,700 for his business following

the 1992 civil unrest. He also submitted

altered copies of income tax returns in

support of his loan applications.

California Disaster Loan Recipient

Sentenced for Making False Statement

A Northridge, California, resident was

sentenced to 2 years probation, 100 hours

community service, and a $5,000 fine for

making a false statement to SBA. He had

been approved for a $123,100 disaster

home loan following the 1994 earthquake.

 The man requested that SBA reduce his

monthly payments because his financial

condition had worsened as a result of a

new $20,000 installment debt incurred with

the purchase of a 1994 Acura automobile. 

The OIG's investigation revealed, however,

that he had paid cash for the vehicle!

California Tax Preparer Sentenced for

Making Material False Statements

A tax preparer in Glendale, California, was

sentenced to 3 years probation, 400 hours

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

had pled guilty to aiding and abetting the

making of material false statements by

preparing altered income tax returns which

were submitted to SBA in support of a

$450,000 economic injury disaster loan

application. The tax preparer significantly

overstated the incomes of both the

applicant company and its owner.

Arizona Businessman Sentenced for

Forgery

The owner of a now-defunct machinery

company in Buckeye, Arizona, was

sentenced in Arizona Superior Court to 3

months imprisonment, 4 years probation,

and $383,700 restitution to SBA. He had

pled guilty to one count of forgery. The

investigation revealed that the man had

forged his estranged wife's signature on

numerous disaster loan documents to

obtain a $56,100 business physical disaster

loan and a $327,600 economic injury

disaster loan.

St. Croix Resident Sentenced for

Making False Statements to SBA

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

Islands, was sentenced to 21 months

imprisonment and $10,000 restitution to

SBA. He had pled guilty to one count of

making false statements to SBA. The

investigation developed evidence that the

man's application for a $10,000 disaster

home loan contained false claims for lost

property, a false bill of sale for an

automobile, and falsified property rental

agreements.

California Restaurant Owner Pleads

Guilty to Making False Statement and

Fraud

The former owner of a restaurant in

Compton, California, pled guilty to one

count of making a material false

statement to SBA and one count of

fraudulent use of a Social Security

number (SSN). The OIG's investigation

disclosed that his application package

included a fictitious individual income tax

return and an SBA Form 413, Personal

Financial Statement, that overstated his
30 Semiannual Report September 1997

income. He used an SSN that was not his

on those documents, as well as on his SBA

Form 912, Statement of Personal History. 
Semiannual Report September 1997 31

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 which are 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 (a) to determine which SBICs to license, (b) to oversee and regulate

those licensees, and (c) to arrange for Government-guaranteed financing from private

sources to add to their capital. Such financing, termed "leverage," is provided through

either debentures or participating securities issued by the SBIC. The participating security

was created by the Small Business Equity Enhancement Act of 1992 to serve the needs of

SBICs investing principally in equity securities which do not generate sufficient income to

cover the interest on their debenture leverage. They represent a limited partnership interest

in the SBIC, whereby SBA advances the cost of the leverage until profits have been

generated from the SBIC's equity investments. In consideration, SBA participates in

approximately 10 percent of the SBIC's profits. The Agency arranges quarterly public

offerings of trust certificates which are backed by pools of SBIC debentures or

participating securities which SBA guarantees as to the payment of principal and interest.

As of the end of FY 1997, there were 300 licensed and active SBICs, with a total

capitalization of $6.7 billion (private capital of $5.1 billion and leverage of $1.6 billion).

Included are 80 Specialized SBICs (SSBICs) which were licensed under Section 301(d) of

the Small Business Investment Act to invest only in small businesses owned and managed

by socially or economically disadvantaged persons. (Section 301(d) was repealed in 1996,

but existing SSBICs were "grandfathered" and continue to operate as before.) I At the end

of FY 1996 there were 160 SBICs in liquidation owing SBA $302 million. While the

SBIC program level in FY 1997 was $667 million, the FY 1998 program level will be

$832 million, signaling a continuing expansion of the program.

The SBI Act generally requires that all SBICs licensed by SBA be examined every 2 years

to ensure licensee compliance with law and Agency regulations. The Small Business

Credit and Business Enhancement Opportunity Act of 1992 transferred the responsibility
32 Semiannual Report September 1997

for examining SBICs from the OIG to the Agency effective October 1, 1992. While SBA's

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

authority to audit the SBIC program pursuant to its responsibility to oversee all Agency

programs and activities.

Summary of OIG Activity / Small Business Investment Companies

Indictments Resulting from Investigations 6

Investigations Closed / Remaining Inventory 0 / 13

Investigations : Restitutions / Fines / Other Recoveries $20,000 / $0 / $1,127,000

Reviews of Proposed Regulations 3

Reviews of Standard Operating Procedures 3
Semiannual Report September 1997 33

Figure 3
34 Semiannual Report September 1997

Efforts to Improve SBA

Program Management

Major CPA Firm Pays SBA $6.1 Million

to Resolve Defective SBIC Audits

A major CPA firm agreed to pay $6.1

million to settle allegations that its

inadequate audits contributed to SBA's

losses when an SBIC failed. The SBA

claim against the independent auditors

centered on the SBIC's failure to disclose

risky participation agreements in its

financial statements. Participants were

guaranteed their share of loan payments

whether or not the borrower actually paid,

and the participants could also "put" their

investment back to the SBIC on short

notice. Under generally accepted

accounting principles, such practices

should have been disclosed in the

company s financial statements but were

not. Thus, the auditors incorrectly

certified that the financial statements

fairly presented the SBIC's financial

condition.

When the SBIC declared bankruptcy in

1990, SBA had $27.5 million invested in

leverage. One third of the leverage was

invested after the SBIC increased its

participation agreements to a material

amount in 1987. 

After a review of the audit firm's working

papers by the OIG s Auditing Division,

SBA s Office of General Counsel and the

Department of Justice (DOJ) alleged that

the audit firm was negligent in its audits. 

The DOJ accepted the case and represented

SBA in an arbitration proceeding. The

arbitration panel ruled that the audit firm

was liable for negligence, but it declined to

set damages because of insufficient

information. The parties then negotiated

the $6.1 million settlement that was

concluded in June 1997.

Program Vulnerability Memorandum

Issued on Reporting of Criminal History

Information by SBIC Officers

In June 1997, the Inspector General issued

a program vulnerability memorandum

(PVM) to the Associate Administrator for

Investment (AA/I). According to the

PVM, a recent OIG investigation had

revealed an Agency vulnerability regarding

the timely disclosure of criminal history

information by SBIC officers. The

vulnerability had delayed and almost

prevented the Agency from learning about

an SBIC president's use of a firearm to

intimidate a borrower and Federal

examiners.

The investigation corroborated a

borrower's allegation that the SBIC's

president brandished a pistol intimidating

him, his attorney, and his fiancee during a

February 1996 SBIC loan closing. The

investigation disclosed that the SBIC's

president had also flashed a gun before two

U.S. Securities and Exchange Commission

examiners during a June 1995 examination

of the SBIC. The SBIC's president was

arrested for the 1996 incident and charged

with Menacing in the second degree; he

subsequently pled guilty to a lesser charge

of second degree Harassment, and was

sentenced to a Conditional Discharge.

Charges were not filed for the 1995

incident.
Semiannual Report September 1997 35

The Agency did not become aware of the

SBIC president's misconduct until a

complaint was lodged by a borrower. 

Under the present regulations, applicants

for SBIC licenses must submit to the

Agency a completed SBA Form 415A,

Statement of Personal History and

Qualifications of Management, which asks

among other things whether the applicant

has ever been charged with or convicted of

any criminal offense other than a

misdemeanor involving minor motor

vehicle violations. Once an SBIC is

licensed, only subsequently elected or

appointed officers of the licensee must

submit a Form 415A. After these initial

submissions, SBIC officers are not

required to advise the Agency of any

criminal charges filed against them. 

Consequently, the Agency had no means

of knowing if an SBIC officer had ever

been arrested or charged with a serious

crime since the time of the original

application. An SBIC could, therefore,

have been managed for years by one or

more officers with criminal records without

the Agency's knowledge. This situation

could pose a needless threat to both

borrowers and Government examiners. 

Moreover, Government funds could be

placed in jeopardy and the public s

perception of the Agency damaged.

The OIG recommended that SBIC officers

be required to notify the Agency whenever

they are charged with a criminal offense,

other than a misdemeanor involving minor

motor vehicle violations. Such notification

could be given ( 1) within 10 days from the

date of the arrest or filing of charges, (2)

during the annual examination, or (3) in

response to a question in the SBIC's

required yearly submissions. Proposed

regulations requiring an SBIC to notify

SBA if an officer, director, general partner,

or other Control Person is charged with, or

convicted of, any criminal offense other

than a misdemeanor involving a minor

motor vehicle violation were published in

the Federal Register on October 14, 1997.

Activities to Enhance Fraud

Detection and Deterrence

Leaders of Incorporated New York

State Village Indicted for Conspiracy,

Embezzlement, Fraud, and Money

Laundering

A 21-count indictment of six men from an

incorporated village in Rockland County,

New York, was unsealed on May 28, 1997.

The indictment charged the men with

participating in a number of fraudulent

schemes to obtain tens of millions of

dollars through the Specialized Small

Business Investment Company (SSBIC)

program and other Federal, State grant,

loan, and subsidy programs. The charges,

all relating to the incorporated village,

include conspiracy, embezzlement of

Federal program funds, making false

statements, mail fraud, wire fraud,

mortgage fraud, and money laundering.

 One man was a member of the board of

directors of the SSBIC, a wholly-owned

subsidiary of a local development

corporation (LDC); a second man was a

member of the board of directors of the

LDC; and four other alleged coconspirators were affiliated with other

entities related to the village. The

indictment charged the first man with

misappropriating SBA funds through the

SSBIC, in which SBA had invested $1
36 Semiannual Report September 1997

million. In violation of Federal

regulations, he is alleged to have

participated in extending loans to small

businesses affiliated with the SSBIC's

officers and directors, and concealing these

improper loans by submitting fraudulent

documents to SBA. He is also accused of

loaning SBA funds to enterprises that were

not independently controlled by private

business-owners but affiliated with a

religious school in the village, a not-forprofit entity that was ineligible to receive

SBA funds. The SSBIC also allegedly

loaned money to small businesses that, in

turn, improperly paid a portion of the loan

proceeds to the religious school or to

related entities. The other defendants

allegedly conspired to facilitate these

illegal transactions. The office of the U.S.

Attorney for the Southern District of New

York asked the SBA/OIG to join its

ongoing investigation with the IRS and the

OIGs of the Departments of Education and

Housing and Urban Development.

Results of Previously

Reported Investigations

Korean Businessman in California

Sentenced for Misapplication of SBIC

Funds

A Korean national who had been president

and majority shareholder of a now-defunct

 SSBIC in Los Angeles, California, was

sentenced to 6 months home detention, 5

years probation, and $20,000 restitution to

SBA. He had pled guilty to four felony

counts of misapplication of funds of a

small business investment company

following a lengthy investigation which the

OIG conducted jointly with the FBI. The

case was initiated after allegations of

wrongdoing were received from the

SSBIC s investment advisor, an individual

who had been placed in that position by

SBA to monitor the company s operations.

 The investigation disclosed that the man

made false statements concerning the

amount of money he had invested in the

SSBIC; he also misapplied more than

$400,000 by pledging company assets for

his personal enrichment. To conceal his

illegal activities, he falsely reported in the

SSBIC s records that loans totaling at least

$337,500 had been repaid. In 1987, the

SSBIC was placed in receivership by SBA,

and the Agency subsequently obtained a

civil judgment in excess of $5 million

against the company and its president. 

Unfortunately, SBA ultimately suffered a

loss of more than $3.4 million because of

these actions.
Semiannual Report September 1997 37

Surety Bond Guarantees

Small and emerging contractors who cannot get surety bonds through regular commercial

channels can apply for SBA bonding assistance under the Surety Bond Guarantee

Program. Under this program, SBA guarantees a portion of the losses sustained by a

surety company as a result of the issuance of a bid, payment, and/or performance bond to

a small business concern.

Businesses in the construction and service industries can meet the SBA's size eligibility

standards if their average annual receipts (including those of their affiliates) for the last 3

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

guarantee if the bond is covered by the Contract Bonds section of the Current Manual of

Rules, Procedures and Classifications of the Surety Association of America; required by

the invitation to bid or by the contract; and executed by a surety company that is

determined by SBA to be eligible to participate in the program and certified acceptable by

the Department of the Treasury.

The Preferred Surety Bond (PSB) program allows selected sureties to issue, monitor,

and service surety bonds without SBA's prior approval. SBA accomplishes two primary

objectives through this program: (1) expanding the number of sureties participating in the

surety bond guarantee program, and (2) increasing bonding availability to business

concerns that would otherwise not be able to obtain bonding in the standard marketplace. 

Title II of Public Law 100-590 also requires an annual audit of each surety participating in

this program.

SBA can guarantee bonds for contracts with a face value of up to $1.25 million. In FY

1997, SBA contingent liability for new final bond guarantees, including those issued

under the PSB program, was $615 million. The appropriated guarantee authority level for

FY 1996 surety bond guarantees was $1.767 billion; in FY 1997, it was $1.767 billion.

Summary of OIG Activity / Surety Bond Guarantees

Audits Underway 1

Audit Reports Issued 1

Investigations Closed / Remaining Inventory 1 / 1

Investigations: Declination Due to Name Check 1
38 Semiannual Report September 1997

Reviews of Standard Operating Procedures 2

Figure 4

Efforts to Improve SBA

Program Management

Audit Uncovers Non-Compliance with

SBA Underwriting Standards at a

Maryland Surety

After an audit revealed non-compliance

with SBA regulations and underwriting

standards, a Maryland surety company

withdrew claims for $934,492 on two

defaulted surety bonds. Both bonds were

written after work had started, a violation

of SBA regulations. One bond was issued

without an evaluation of reasonableness of

cost and feasibility of successful

completion, as required by the

underwriter s own standards. The

contractor had no experience in the type of

contract and grossly underbid the project. 

The OIG audit recommended that SBA

cease payments on the two claims and

recover $866,942 already paid to the firm. 

The Associate Administrator for Surety

Guarantees concurred with the audit

recommendations.

Surety Bond Guarantee Program SOPs

Reviewed
Semiannual Report September 1997 39

As part of SBA s initiative to update and

streamline its SOPs, the OIG reviewed

proposed revisions to two SOPs. Its

review of SOP 50 45 2, Surety Bond

Guarantee Program, called for clarifying

when certain SBA forms are required for

both initial and subsequent applications

from the same contractor, adding more

guidance for on-site reviews of sureties,

and making changes to procedures for

referral of suspected irregularities to the

OIG. After reviewing SOP 50 46 1,

Claims and Recovery, the OIG suggested

that a clarification be added to the

discussion of appropriate actions where an

actual breach of contract has not yet

occurred.
40 Semiannual Report September 1997

Government Contracting Programs

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

Government contracting opportunities. SBA also works with each department or agency

to establish procurement goals for contracting with small, small-disadvantaged, and

women-owned businesses. The Agency's Government contracting programs include

Prime Contracts, Subcontracting Assistance, Certificate of Competency, Natural

Resources Sales Assistance, and the Procurement Marketing Access Network (PRONet)

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 assure

that small business concerns, especially those new to the Federal procurement market, are

given a fair opportunity to compete for and win Government contracts. If a small business

is the 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.

The Procurement Marketing Access Network (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 and large prime contractors both use as PRO-Net a resource in identifying small

businesses for procurement opportunities. Small businesses use this interactive
Semiannual Report September 1997 41

mechanism to market their products and services.
42 Semiannual Report September 1997

Summary of OIG Activity / Government Contracting

Investigations Closed / Remaining Inventory 0 / 5

Investigations : Restitutions / Fines / Other Recoveries $0 / $0 / $300,000

Reviews of Proposed Legislation 1

Reviews of Other Issuances 3

Activities to Enhance Fraud

Detection and Deterrence

Largest Government Contracting Result

from Affirmative Civil Enforcement

(ACE) Program

During this period, the OIG's participation

in the Department of Justice's ACE

program produced the best results (a cash

settlement) to date in the Government

Contracting program. An OIG

investigation documented that a

Government contractor falsely certified

that the company was a small business

to obtain ten awards of procurement

contracts reserved for small businesses. 

While denying any allegation that it

knowingly submitted a false size

certification, the company agreed to pay

SBA $300,000 to resolve its potential

liability under the False Claims Act. The

OIG initiated the investigation in response

to an anonymous complaint.

Please Note:

On April 10, 1997, the Inspector General

testified before the U.S. Senate Committee

on Small Business on the ability of SBA to

implement the HUBZone Act of 1997. 

The Act is intended to provide Federal

contracting opportunities for small

business concerns located in historically

underutilized business zones. Because the

testimony also included extensive

comments pertinent to the Minority

Enterprise Development (MED) program, a

summary description of the testimony is

presented in the MED chapter.
Semiannual Report September 1997 43
44 Semiannual Report September 1997

Minority Enterprise Development

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

Capital Ownership Development Program for the purpose of promoting greater access

to the free enterprise system for socially and economically disadvantaged individuals. 

Under the Act, SBA provides business development assistance to small business concerns

that are at least 51 percent unconditionally owned, controlled, and managed by one or

more socially and economically disadvantaged individuals and also meet 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, 1997, there were more than 5,570 approved program

participants. In FY 1997, Section 8(a) program participants received 4,733 contracts and

24,026 modifications with an aggregate value of $5.6 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 Minority Enterprise Development, SBA provides specialized

training, professional consultant assistance, and executive development to certified

Section 8(a) firms, socially and economically disadvantaged individuals whose firms are

not participants in the Section 8(a) program, low-income individuals, and small businesses

located in areas of low income or high unemployment.

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

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

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

OIG s $35 billion audit, inspection, and investigation universe.
Semiannual Report September 1997 45

Summary of OIG Activity / Minority Enterprise Development

Audits Underway 3

Investigations Closed / Remaining Inventory 0 / 9

Investigations: Cases Referred to Other Agencies 1

Investigations: Declinations Due to Name Check 11

Reviews of Proposed Regulations 1

Reviews of Other Issuances 8

Inspector General Testimony Before the

U.S. Senate Committee on Small

Business Concerning the HUBZone Act

of 1997

On April 10, 1997, the Inspector General

testified before the U.S. Senate Committee

on Small Business on SBA s perceived

ability to implement the HUBZone Act of

1997. The Act is intended to provide

Federal contracting opportunities for small

business concerns located in historically

underutilized business zones. The

Committee specifically requested the

Inspector General to comment on the

success and failure SBA has experienced

in running its Section 8(a) program. The

Inspector General was also asked to

comment on the Agency s stewardship of

the Section 8(a) contract assistance

program and whether the program is truly

meeting its public policy purpose.

The Inspector General listed eight specific

concerns with the HUBZone Act of 1997,

as contained in S. 208. Specifically:

1. Language was needed to

ensure that HUBZone companies

do not broker contracts.

2. Clear size standards should be

added.

3. The term principal office

needed to be defined.

4. Criteria were needed so SBA

would be able to determine how

to calculate the percentage of

employees that must live in the

designated HUBZone.

5. Clarifying language should

require SBA to verify each

company s initial and continuing

eligibility to participate in the

program, specifying the

verification method, and how

often verifications must be

conducted.

6. Language needed to be added

ensuring that SBA will take swift

and final action to terminate all

companies that falsify data for

purposes of entering or remaining

in the program.

7. Language should define who is

an interested party for protest

purposes.

8. A cap should be placed on the

dollar value of any sole source
46 Semiannual Report September 1997

contract received by a

participating HUBZone company.

In the Inspector General s judgment, SBA

lacked sufficient staff resources to

implement the act s requirements

successfully.

Commenting on SBA s stewardship of the

Section 8(a) program, the Inspector

General stated that while SBA had

implemented a limited number of changes

in an effort to administer the Section 8(a)

program more equitably, the Agency

continued to have difficulty managing the

program. Much of the difficulty could be

traced to:

1. SBA s reluctance to place

dollar limits on various criteria

used to judge whether participants

should continue in the program.

2. Its continued use of overly

generous net worth limits.

3. The retention of regulations

which constrained SBA officials

from completing needed actions

expeditiously.

4. Inexplicable delays in taking

corrective actions, e.g., a

graduation letter being lost

within SBA and no resolution of

the company s status for almost 4

months.

5. The ineffective enforcement of

regulations and SOPs that would

correct some of the program s

deficiencies.

The Inspector General suggested that a

pilot HUBZone be implemented for a 2 to

3 year period in a carefully selected,

limited number of rural and urban

underutilized business zones, and that

Congress provide the necessary funds for

SBA to effectively manage the proposed

pilot program. Results could then be

compared with the Department of

Commerce s Empowerment Contracting

Program, and Congress could take the best

from each initiative to fashion an economic

opportunity program that might better

serve rural and urban areas needing such

Federal assistance. Finally, he urged the

SBA Administrator to take decisive action

to improve SBA s management of the

Section 8(a) program.

Minority Enterprise Development

Program Regulations Reviewed

The OIG reviewed a final draft of the

proposed amendments to 13 C.F.R. Part

124, governing the MED program, and

provided numerous comments to the

Agency for its consideration in developing

new regulations. The OIG s comments

focused on such issues as evidence of

social disadvantage, determinations of

economic disadvantage, net worth limits,

the 2 year business experience rule,

brokers participation in the program, the

non-manufacturer rule, graduation

experience, termination proceedings,

transfers and withdrawals of business

assets, sole source contracts, competitive

mix requirements, joint ventures, Section

8(a) sole source contracts, subcontracting

limitations, and small disadvantaged

business private certifiers and the

certification process.
Semiannual Report September 1997 47

Economic Development

(Business Information Education and Training)

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

through its many counseling and training programs. SBA established the Small Business

Development Center (SBDC) program to make management assistance and counseling

widely available. SBDCs offer one-stop assistance to small businesses by providing a

wide variety of information and guidance in easily accessible locations. The program is a

partnership between the private sector; the educational community; and Federal, State,

and local governments. There are SBDCs in all 50 states, the District of Columbia, Puerto

Rico, the Virgin Islands, and Guam, with approximately 1,000 subcenters or service

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

economic development corporations, or in downtown storefronts. In FY 1996, SBDCs

provided counseling and training to over 570,000 clients.

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

development resource partners of SBA. Composed of approximately 12,400 volunteers

working in over 700 sites, SCORE provides counseling and training to current or

prospective business persons. These sessions are free to the public, and formal training is

provided at a low cost. Over 293,000 clients were assisted in FY 1997.

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. Cosponsorship arrangements,

authorized under the Small Business Act, play a key part in this process; the Act gives

SBA the authority to cosponsor training and counseling activities for small business

concerns with non-profit entities and/or with other Federal Government agencies. In

addition, the Act authorizes the Agency to cosponsor training, but not counseling, with

for-profit concerns.

Business Information Centers (BICs) provide business owners with access to

computers, software, databases, and other resources to assist them in starting and

expanding their businesses. All BICs have at least one on-site counselor and can address

the varied business start-up and growth issues encountered by small business owners.

There are currently 41 BICs in operation.
48 Semiannual Report September 1997

Summary of OIG Activity / Economic Development

Audits Underway 1

Indictments Resulting from Investigations 1

Convictions Resulting from Investigations 1

Investigations Closed / Remaining Inventory 2 / 1

Inspections Underway 1

Reviews of Proposed Regulations 2

Reviews of Standard Operating Procedures 1

Reviews of Other Issuances 1

Efforts to Improve SBA

Program Management

Program Vulnerability Memorandum

Issued on Program Income and Fiscal

Reporting Requirements

On April 2, 1997, the Inspector General

issued a program vulnerability

memorandum (PVM) to the acting

Associate Deputy Administrator for

Economic Development (ADA/ED). The

PVM pointed out that a recent OIG

investigation had revealed a procedural

"looseness" that blurred accountability

for the use of SBDC funds. The PVM

suggested a number of procedural changes,

including certifications of truthfulness and

compliance with the regulations, to

introduce more accountability. On April

29, 1997, the acting ADA/ED replied that

the OIG's audit and investigation of the

SBDC had already:

resulted in significant

changes to deter similar

occurrences in the future. . .

. [T]he SBDC FY 1998

Program Announcement . . .

added a number of

additional financial controls

to

guard against a recurrence . .

. includ[ing] both reporting

responsibilities for the

SBDCs and increased

oversight and monitoring

responsibilities for SBA

Project Officers.

In an effort to introduce more

accountability in the use of SBDC funds,

the Office of SBDCs has been working on

the revision of the program s Federal

regulations and the Program

Announcement since the Spring of this

year. The Office has scheduled a meeting
Semiannual Report September 1997 49

with members of the newly appointed

Association of SBDCs Operations

Committee during the first week in

February 1998 to discuss these revisions. 

The focus of this meeting will be on the

revision of the SBDC Federal regulations

and the Program Announcement (the

Request for Proposal for the SBDC

program) to correct this situation.
50 Semiannual Report September 1997

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, reviews the Agency s cash

management and integrity assurance activities.

SBA s management and financial activities are supported by the Agency s $852.4 million

in operating funds, partially provided by FY 1997 appropriations enacted in P.L. 104-208.

 Of the $852.4 million available, which includes carry-overs and estimated recoveries,

$235 million funds Salaries and Expenses, $22 million is for Disaster loan servicing, and

$86.5 million is for Disaster loan making. In addition, $277.7 million is available for

Business Loans, $218.4 million for Disaster loans, and $3.73 million for the Surety Bond

Guarantee program.

Summary of OIG Activity / Agency Management and Financial

Audits Underway 3

Audit Reports Issued 5

Investigations Closed / Remaining Inventory 7 / 18

Investigations: Restitutions / Fines / Other Recoveries $7,294 / $50 / $0

Inspections Underway 2

Reviews of Proposed Regulations 2

Reviews of Standard Operating Procedures 13

Reviews of Other Issuances 52
Semiannual Report September 1997 51

Figure 5

Efforts to Improve SBA

Program Management

Audit-Related Management Letters

Highlight Internal Control Weaknesses

SBA does not have effective procedures

for identifying and reporting internal

control weaknesses as required by the

Federal Managers Financial Integrity Act

(FMFIA), according to management letters

issued in conjunction with the audit of

SBA financial statements for FY 1996. 

The Computerized Internal Control Review

system was canceled by the Agency in

February 1996 and a task force formed to

establish a "more meaningful review

process." The SBA Administrator

announced this summer that the Agency

will adopt the internal control standards

promulgated by the Committee of

Sponsoring Organizations of the Treadway

Commission which, when implemented,

should bring SBA into compliance with

FMFIA and OMB Circular A-123. 

Notwithstanding the Agency s first

unqualified audit opinion of its financial

statements, this was one of a number of

issues identified in an audit-related

management letters to the Chief Financial

Officer, the Chief Information Officer, and

the Atlanta Disaster Area Office. Other

issues concerned verification of field office

transactions, documentation of new

automated cash reconciliation procedures,
52 Semiannual Report September 1997

reconciliation of SBIC loan balances, SBIC

subsidy rate reestimates, collateral

appraisals, debt collection procedures,

computer security and training, and ethics

program reporting.

Indirect Rates for SBA Contract

Questioned by Audit

On June 5, 1997, the OIG issued a Defense

Contracting Audit Agency (DCAA) report

on an Arlington, Virginia, technology

company. The report questioned the

contractor s indirect rates for fringe

benefits, office overhead, onsite

overhead, and general and

administrative expenses for the 3 year

audit horizon (1992-94). DCAA

provisionally approved the contractor s

direct costs pending final acceptance of the

work being completed. Based on the

DCAA audit report, the OIG recommended

that SBA s Director of Procurement and

Grants Management ensure that the

contractor s indirect rates reflect those

determined to be acceptable by DCAA.

Pre-Award Audit of West Virginia

Grantee Finds Unallowable Costs and

Depreciation

A pre-award audit of a West Virginia

foundation s grant proposal for $3 million,

appropriated under Public Law 104-208,

questioned $463,905 of proposed costs

that were unreasonable or unallowable

and need reprogramming to other

allowable cost areas.

In addition, the pre-award audit identified

$9.7 million in unallowable depreciation

proposed for allocation to Federal grants in

future years. Of this amount, $4,248,000

related to a building paid for by Federal

funds for which depreciation is not

allowed. The balance related to a

commercially-rented building for which

depreciation is also inappropriate, unless

the revenue generated is allocated as

program income to the Federal grant. The

OIG recommended that the foundation

prepare a revised proposal which corrected

the deficiencies found during the audit. 

SBA s Assistant Administrator for

Administration agreed with the OIG s

findings and recommendations.

Agency Management and Financial

Activities SOPs Reviewed

As part of SBA s initiative to update and

streamline its SOPs, the OIG reviewed

proposed revisions to 13 SOPs governing

SBA management and financial activities. 

The OIG provided comments on directives

concerning issues such as audit follow-up,

budget execution and funds control,

disbursement functions, employee

development, and travel.

Activities to Enhance Fraud

Detection and Deterrence

OIG Conducts Employee Awareness

Briefings

In addition to investigating complaints of

waste, fraud, and abuse involving SBA

programs, OIG Investigations Division

staff presented 17 Standards of Conduct

briefings to some 400 Agency employees.

 The involvement and cooperation of all

SBA employees in combating waste, fraud,
Semiannual Report September 1997 53

and abuse is critical to an effective OIG

investigations program and to the Agency's

overall productivity and efficiency.

During the reporting period, employee

contributions to our mission were

significant. As Figure 6 (page 48) shows,

nearly half of all investigative referrals

came from SBA employees. This

cooperation reflects the strong commitment

of SBA program managers and employees

to reducing waste, fraud, and abuse in the

Agency s programs and improving

management and control of program

delivery.

Results of Previously Reported

Investigations

Former SBA Employee Sentenced for

Misuse of Social Security Number

A former miscellaneous documents clerk

in SBA's Disaster Assistance Area 4 Office

(DAO-4) was sentenced to 5 years

probation and $4,794 restitution for misuse

of a Social Security number (SSN). The

OIG initiated an investigation based on

information provided by the DAO-4 that

one of its employees had obtained and

subsequently misused the SSN of a loan

applicant who had the same name. The

investigation confirmed that the employee 

had applied for and received credit and

merchandise from four Sacramento-area

businesses using the loan applicant's SSN. 

The retail stores lost a total of $6,217 as a

result of this fraudulent activity.

Former SBA Employee Sentenced for

Opening and Using Charge Accounts in

Other Employees Names

A former Minority Enterprise

Development technician in SBA's New

York District Office (NYDO) was

sentenced to 3 years probation and $2,500

restitution. She had pled guilty to using

unauthorized access devices (credit

cards) in an offense affecting interstate

commerce. The investigation disclosed

that, over a period of more than 1 year, the

technician used her position to obtain the

Social Security numbers of at least three

current or former co-workers. She

subsequently used their names and Social

Security numbers to open numerous

fraudulent charge accounts and to purchase

merchandise valued at over $3,000. 
54 Semiannual Report September 1997
Semiannual Report September 1997 55

Figure 6
56 Semiannual Report September 1997

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

The 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. In addition, the

Investigations Division has offices 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 at

Figure 7.

Resources

In FY 1997, the OIG operated with a

funding level of $9.0 million and an

authorized personnel ceiling of 102 fulltime equivalent (FTE) positions. While

this level of funding represents a modest

increase from the number of dollars 

appropriated in FY 1996, it provides only

a minimal level of oversight to SBA

programs and program dollars at risk. 

Congressionally-mandated law

enforcement availability pay, annual cost

of living increases, and various locality pay

adjustments are not fully funded by the

OIG s authorized spending levels.
Semiannual Report September 1997 57

Figure 7

In FY 1994, the 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 (see discussion below). Also, the

Congress authorized an FY 1997 transfer

of $500,000 in Agency funds for OIG

disaster-related oversight. At the end of

the current reporting period, 6 auditors, 5

investigators, 2 attorneys, and 2 secretaries

were serving with the OIG on temporary

appointments supported by disaster

funding. Although the OIG s disaster

staffing plan calls for 18 disaster-funded

employees, considerable difficulty has

been experienced in recruiting, training,

and retaining employees serving on

temporary appointments.
58 Semiannual Report September 1997

The nature of the special funding for

disaster assistance oversight forces the OIG

to pursue recruitment

of auditors,

investigators, and

attorneys on a nonpermanent basis. 

These temporary

employees are

understandably eager

to obtain more

permanent positions

elsewhere, and when

they are successful,

the OIG is deprived

of the expertise they

have developed, their

productivity, and its

investment in their

training.

The reduction in OIG

FTE resources over

the past 5 years

remains troubling. As

depicted in both

Figures 1 and 2

(pages 9 and 22,

respectively), the

dynamics of the

Agency's portfolio,

and the concomitant

demand for oversight,

would suggest that

the OIG s resources

be increased to ensure

an adequate level of

program oversight. In recognition of this

fact, the President requested $9.985 million

for the OIG for FY 1997, however, the

Congress chose to appropriate but $9

million. The OIG again found it difficult

to carry 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. Despite

the inadequacy of its

resources, the OIG,

nevertheless,

generated a Return

on Investment of $7

to $1 for FY 1997.

For FY 1998, the

President has 

requested another

small increase in the

OIG s budget ($10.6

million) in recognition

of SBA s burgeoning

portfolio and its

mandate to transfer

much of its

responsibility for

portfolio management

to the private sector.

The Inspector General

continues to be

concerned with the

strong demand for

investigations of fraud

in Agency programs. 

As evidenced by the

table on page 53, both

business and disaster loan fraud continue

to be the OIG s two priorities, in terms of

both active cases carried and time

expended on these cases. During this

reporting period the lion s share of

SBA NEWS RELEASE

Release Date: October 23, 1997

SBA SETS LOAN VOLUME RECORD IN

FY 1997, BOOSTS SMALL BUSINESS

CAPITAL BY MORE THAN $13 BILLION

WASHINGTON The U.S. Small Business

Administration (SBA) posted strong gains in its

major small business financing programs in the

recently completed FY 1997, setting records in total

loan dollars, dollars loaned to minority borrowers

and venture capital investments, SBA Administrator

Aida Alvarez said today. The total for loans and

venture capital financing exceeded $13.25 billion.

The SBA s accomplishments this past year have

helped tens of thousands of Americans start or

expand their small businesses, Administrator

Alvarez said. This record reflects the Clinton

Administration s ongoing commitment to a growing

economy and the President s awareness that small

businesses make up the sturdy foundation for that

growth. Since the end of fiscal year 1992, the SBA

has backed more than $48 billion in loans to small

businesses, more than was accomplished in the

previous 12 years combined.

For FY 1997 (ending Sept. 30, 1997), the SBA

approved 45,288 loan guaranties amounting $9.46

billion in the 7(a) General Business Loan Guaranty

program, a 23 percent increase in loan dollars from

FY 1996. SBA also approved 4,131 loans worth $1.44

billion under the Certified Development Company

(CDC) loan program. The combined dollar amount

of $10.9 billion is a record, exceeding the previous

mark of nearly $10.2 billion set in FY 1996.
Semiannual Report September 1997 59

investigative time (79.7 percent) was

expended on business and disaster loan

fraud cases. With demand for SBA

business and disaster loans remaining high,

it is expected that the bulk of the OIG s

investigative efforts will continue to be

devoted to these two programs, stretching

resources severely.

The table on page 53 also illustrates the

Auditing Division's emphasis on the

business loan and disaster assistance

programs, as reflected in the increase in the

time spent reviewing the disaster assistance

program. Available audit hours devoted to

disaster assistance has grown from 3 to 16

percent over the last 7 reporting periods. 

The Inspector General is, of course, also

concerned by the modicum of coverage the

OIG is able to provide to other Agency

programs, supporting operations, and

program participants. There has been only

minimal audit oversight of the Agency

computer systems, and the OIG has been

virtually unable to respond to specific

Agency requests for other program audit

coverage. Key programs such as Section

8(a) have also received only minimal audit

oversight coverage over the past year, and

other programs such as Small Business

Investment Companies, International

Trade, Micro-Loans, etc., have also

received only a modicum of OIG

oversight.

Management Initiatives

OIG Annual Training Conferences

The OIG conducted its annual training

session for its administrative support

personnel in New Orleans, Louisiana,

during the week of June 9, 1997. There

were 19 attendees who received training in

database management software,

communications skills, and procurement

and budget procedures. The Inspector

General also addressed the conferees and

presented the Management Support

Employee of the Year award.

The OIG also conducted its annual

training conference for professional

personnel in San Diego, California, during

the week of July 21, 1997. SBA

Administrator Aida Alvarez addressed the

attendees during a general session and

highlighted the productive and cooperative

working relationship which has developed

between the OIG and the Office of the

Administrator. She also discussed her

vision for SBA and a variety of new

Agency initiatives.

A wide variety of professional

development training was provided to the

attendees at the July meeting, including

interviewing techniques and defense

tactics/firearms (investigators); quantitative

analysis and risk assessment (auditors and

inspectors); and courses in interpersonal

skills, ethics, time management, and CPR. 

The Inspector General s state of the

office address to the staff included a

summary of the OIG s accomplishments

for the year. The SBA Administrator

joined the Inspector General for the

presentation of awards to the OIG s

professional cadre.
60 Semiannual Report September 1997

The Office of Inspector General notes

with deep sorrow the passing of

Michael Stansberry, supervisory

auditor in its Dallas field office. Mike

was respected and admired by his

many friends and colleagues in the

OIG. We will miss him.
Semiannual Report September 1997 61

Direct Investigation Time by Program Area

April 1, 1997, to September 30, 1997

Program Area Direct Time

%

Number of Investigations

Closed In Progress

Business Loans 58% 25 150 

Disaster Loans 22% 10 88 

SBIC 5% 0 13 

Surety Bond Guarantees 1% 1 1 

Government Contracting * 0 5 

Minority Enterprise Development 2% 0 9 

Economic Development 1% 2 1 

Agency Management and Financial 11% 7 18 

Total 100% 45 285 

Direct Auditing Time by Program Area

April 1, 1997, to September 30, 1997

Program Area Direct Time

%

Number of Audits

Issued In Progress

Business Loans 46% 7 16 

Disaster Loans 16% 2 3 

SBIC 0% 0 0 

Surety Bond Guarantees 3% 0 1 

Government Contracting 0% 0 0 

Minority Enterprise Development 10% 0 3 

Economic Development 14% 0 1 

Agency Management and Financial 11% 6 3 
62 Semiannual Report September 1997

Total 100% 15 27 

* less than percent
Semiannual Report September 1997 63

Profile of Operating Results

April 1, 1997, to September 30, 1997

Audit Activities Totals

A. Reports Issued.................................................................................................. 15

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

C. Audit Recommendations Issued....................................................................... 52

D. Dollar Value of Costs Questioned....................................................... $2,049,683

E. Dollar Value of Recommendations that Funds Be Put to Better Use $9,092,825

Audit Followup Activities

F. Audit Recommendations Closed...................................................................... 37

G. Disallowed Costs Agreed to by Management.......................................... $22,264

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

Agreed to by Management.................................................................... $52,671

I. Unresolved Audit Recommendations...............................................................55

J. Dollar Value of Unresolved Audit Recommendations....................... $12,754,479

K. Settlement Recoveries........................................................................ $6,100,000

Inspection Activities

A. Reports Issued.................................................................................................... 1

Legislation/Regulation/SOP/Other Reviews

A. Legislation Reviewed.......................................................................................... 1

B. Regulations Reviewed...................................................................................... 11

C. Standard Operating Procedures Reviewed...................................................... 21

D. Other Issuances Reviewed*............................................................................. 92

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

other communications which frequently involve the implementation of new programs and

policies.
64 Semiannual Report September 1997

Status of Investigations as of September 30, 1997 Totals

A. Total Cases............................................................................................................................330

B. Closed Cases......................................................................................................................45 

C. Pending Cases....................................................................................................................26 

D. Open Cases......................................................................................................................259 

E. Subjects Under Investigation............................................................................................... 1,060

Summary of Indictments and Convictions

A. Indictments from OIG Cases....................................................................................................30

B. Convictions from OIG Cases....................................................................................................20

Summary of Recoveries and Reductions of Risk

A. Potential Recoveries and Fines as a Result of OIG Investigations................................ $3,429,588

B. Reductions of Financial Risk as a Result of OIG Investigations.........................................$15,831

C. Reductions of Financial Risk as a Result

of the Name Check Program...........................................................................$15,028,821

 Total:..........................................................................................................................$18,474,240

SBA Personnel Actions Taken as a Result of Investigations

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

B. Resignations/Retirements...........................................................................................................1

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

D. Reprimands..............................................................................................................................0

Program Actions Taken as a Result of Investigations

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

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

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters.............................................................................................. 1,261

B. Total Calls/Letters Referred to Offices Outside the OIG.........................................................1,234

C. Total Calls/Letters Referred to Investigations Division for Evaluation..........................................27

Investigations Activities - Referral Program

A. Cases Referred to FBI..............................................................................................................19

B. Referred to Other Agencies (Excluding FBI)................................................................................0

C. Indictments from Referrals.........................................................................................................1

D. Convictions from Referrals.........................................................................................................1
Semiannual Report September 1997 65

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

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

Office of Inspector General

Actual Personnel on Board as of September 30, 1997

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

B. Auditing Division......................................................................................................................32

 Professional.....................................................................................................................28 

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

 

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

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

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

D. Inspection and Evaluation Division.............................................................................................8

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

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

 

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

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

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

 OIG Total............................................................................................................................. 98

Additional Temporary Disaster Staffing

Funded from Supplemental Appropriations

A. Auditing Division........................................................................................................................8

B. Investigations Division...............................................................................................................5

C. Management and Legal Counsel Division...................................................................................2

 OIG Disaster Total...................................................................................................................15

FY 1997 Productivity Statistics

Second Six Months

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines............................................................... $3,429,588
Semiannual Report September 1997 67

B. Management Avoidances as Result of Investigations..................................................$15,044,652

C. Disallowed Costs Agreed to by Management.................................................................... $22,264

D. Recommendations that Funds Be Put to Better

Use Agreed to by Management.....................................................................................$52,671

E. Settlement Recoveries.............................................................................................. $6,100,000

Total.............................................................................................................................$24,649,175

Auditing Division Activities

A. Reports Issued.........................................................................................................................15

B. Disallowed Costs Agreed to by Management.................................................................... $22,264

C. Recommendation that Funds Be Put to Better

Use Agreed to by Management ....................................................................................$52,671

D. Settlement Recoveries.............................................................................................. $6,100,000

Inspection and Evaluation Division Activities

A. Reports Issued...........................................................................................................................1

Investigations Division Activities

A. Cases Closed...........................................................................................................................45

B. Indictments............................................................................................................................. 30

C. Convictions............................................................................................................................. 20

D. Potential Investigative Recoveries and Fines............................................................... $3,429,588

E. Management Avoidances..........................................................................................$15,044,652

 - Investigation Cases.............................................................................................. $15,831 

 - Name Check Program.....................................................................................$15,028,821 

FY 1997 Productivity Statistics

Full Year

Office-Wide Dollar Accomplishments Totals
68 Semiannual Report September 1997

A. Potential Investigative Recoveries and Fines...............................................................$24,681,064

B. Management Avoidances as Result of Investigations..................................................$31,590,118

C. Disallowed Costs Agreed to by Management............................................................... $1,058,175

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management................................................................................$5,370,719

E. Settlement Recoveries.............................................................................................. $6,100,000

Total.............................................................................................................................$68,800,076

Auditing Division Activities

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

B. Disallowed Costs Agreed to by Management............................................................... $1,058,175

C. Recommendation that Funds Be Put to Better

 Use Agreed to by Management ...............................................................................$5,370,719

D. Settlement Recoveries.............................................................................................. $6,100,000

Inspection and Evaluation Division Activities

A. Reports Issued...........................................................................................................................4

Investigations Division Activities

A. Cases Closed.........................................................................................................................103

B. Indictments............................................................................................................................. 52

C. Convictions............................................................................................................................. 54

D. Potential Investigative Recoveries and Fines...............................................................$24,681,064

E. Management Avoidances.........................................................................................$31,590,118

 - Investigation Cases..........................................................................................$4,329,765 

 - Name Check Program.....................................................................................$27,260,353 

 

Statutory Reporting Requirements

The specific reporting requirements as prescribed in the Inspector General Act of 1978, as amended
Semiannual Report September 1997 69

by the Inspector General Act Amendments of 1988, are listed below.

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 7 - 48

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 7 - 48

Section 5(a)(2) Recommendations With Re spect to Significant

Problems, Abuses, and Deficiencies 7 - 48

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 68

Section 5(a)(4) Matters Referred to Prosecutive Authorities 7 - 48

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 62

Section 5(a)(7) Summary of Significant Audits 7 - 48

Section 5(a)(8) Audit Reports Containing Questioned Costs 64

Section 5(a)(9) Audit Reports Recommending that F unds Be Put to Better Use 65

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 67

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

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

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued ..........................................................................................62

Appendix II

 Part A - Inspector General-Issued Audit Reports

 with Questioned Costs...............................................................................................64

 Part B - Inspector General-Issued Audit Reports

 with Recommendations that Funds Be Put to Better Use.........................................65

 Part C - Inspector General-Issued Audit Reports

 with Non-Monetary Recommendations ....................................................................66

 Part D - Inspector General-Issued Audit Reports

 with Overdue Management Decision ........................................................................67

 Part E - Significant Audit Reports

 Without Final Action.................................................................................................68
Semiannual Report September 1997 71

APPENDIX I

Audit Reports Issued

April 1, 1997, to September 30, 1997

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER USE

Business Loans

Defaulted Loan Made by

Eastside Bank & Trust

7-7-F-002-016 6/30/97 $339,572 

LowDoc Loan Program -

Atlanta

7-7-F-006-017 7/7/97 $67,500 

LowDoc Loan Program at

the Santa Ana DO

7-7-F-009-020 7/8/97 $133,671 

LowDoc Loan Program at

WDO

7-7-F-007-021 7/18/97 $23,677 

LowDoc Loan Program -

Dallas

7-7-F-008-022 7/31/97 $152,500 

West End Plaza

Recreational Center,

Hinesville, GA

7-7-F-019-024 9/25/97 $12,000 

Business Loan Guarantee

Purchases

7-7-H-011-026 9/30/97 $1,115,191 $7,900,000 

Disaster Loans

CAIVRS 7-5-F-002-019 7/7/97

Approval of Disaster Home

Loans

7-6-F-003-023 9/4/97

Surety Guarantees

Fidelity & Deposit Co. of

MD

7-7-H-006-025 9/30/97 $934,492 

Agency Management and Financial

FY 1996 Financial

Statements - Management

Letter to the CFO

7-6-H-006-012 4/11/97
72 Semiannual Report September 1997

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER USE

FY 1996 Financial

Statements - Management

Letter to Atlanta Disaster

OPC

7-6-H006-013 4/11/97

Evaluation of Grant

Proposal for WVHTCF

7-7-H-006-014 4/25/97 $463,905 

FY 1996 Financial

Statements - Management

Letter to the OCIO

7-6-H-006-015 4/29/97

User Technology

Associates, Inc.

7-7-S-918-018 6/6/97

TOTALS (all programs) Reports: 15 $2,049,683 $9,092,825 
Semiannual Report September 1997 73

APPENDIX II - Part A

Audit Reports with Questioned Costs

April 1, 1997, to September 30, 1997

REPORT

S

RECs

*

COSTS**

QUESTIONE

D

UNSUPPORTE

D

A. For which no management

decision had been made by

March 31, 1997

4 4 $1,361,906 $0

B. Which were issued during

the period

2 3 $2,049,683 $781,461

Subtotals (A + B) 6 7 $3,411,589 $781,461

C. For which a management

decision was made during

the reporting period

1 1 $22,264 $0

(i) Disallowed costs 1 1 $22,264

 (a) Due SBA $22,264

 (b) Due program 

 participant

(ii) Costs not disallowed

D. For which no management

decision had been made by

September 30, 1997

5 6 $3,389,325 $781,461

* Recommendations

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

proper but lack documentation.
74 Semiannual Report September 1997

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

April 1, 1997, to September 30, 1997

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

March 31, 1997

1 1 $325,000

B. Which were issued during

the period

8 13 $9,092,825

Subtotals (A + B) 9 14 $9,417,825

C. For which a management

decision was made during

the reporting period

2 2 $52,671

(I) Recommendations

agreed to by SBA

management

2 2 $52,671

(a) SBA level

(b) Program participant

level

(ii) Recommendations not

agreed to by SBA

management

D. For which no management

decision had been made by

September 30, 1997

9

** 12 $9,365,154

*

 Recommendations.

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

therefore, the number of reports without management decisions remains unchanged.
Semiannual Report September 1997 75

APPENDIX II - Part C

Audit Reports with Non-Monetary Recommendations

April 1, 1997, to September 30, 1997

REPORTS RECOMMENDATIONS

A. For which no management decision

had been made by

March 31, 1997

10 35

B. Which were issued during the

period

13 36

 Subtotals (A + B) 23 71

C. For which a management decision

was made (for at least one

recommendation in the report)

during the reporting period

10 34

D. For which no management decision

(for at least one recommendation in

the report) had been made by

September 30, 1997

16 37
76 Semiannual Report September 1997

APPENDIX II - Part D

Overdue Management Decisions

September 30, 1997

Auditee Report Number Date Issue Status

Business Loan Center 6-5-H-002-019 9/20/96 Under review by Office of

Financial Assistance (OFA)

LowDoc Loan Program 6-5-E-002-022 9/30/96 Two of five recommendations

under negotiation with OFA

Disaster Loans

Assigned to LADO

7-5-F-005-004 12/23/96 One recommendation continues

under review by program office

Maryland SBDC 7-6-H-001-006 2/6/97 One recommendation continues

under negotiation with the

District Office

Early Default of

Guaranteed Loans

7-4-E-001-009 2/18/97 Recommendations continue

under review by the Office of

Financial Assistance

W.V. High Technology

Consortium Foundation

7-7-H-001-007 2/10/97 Recommendation continues

under review by the Assistant

Administrator for Administration

Grant Closeout

Procedures

7-7-H-001-011 3/31/97 Recommendation continue

under review by the Assistant

Administrator for Administration
Semiannual Report September 1997 77

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of September 30, 1997

REPORT

NUMBER

TITLE DATE

ISSUED

DATE OF

MANAGEMENT

DECISION ON

RECOMMENDATION

FINAL

ACTION

TARGET

FOR IMPLEMENTATION

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

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

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

Reviews

09/30/94 12/30/94 04/30/95

4-3-H-011-016 SBA s Award of 8(a) Contracts

to ASCI

05/16/94 12/30/94 06/30/95

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

Collection Activities

03/31/95 04/30/95 9/30/98

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

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

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

Program

9/30/96 * *

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

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

6-6-H-003-023 Virginia SBDC 9/30/96 05/12/97 01/01/98

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

7-6-H-005-003 EFT Disbursement Procedures 12/20/96 2/14/97 08/30/97

7-6-H-006-010 FY 1996 Financial Statements 2/28/97 5/7/97 10/31/97