FALL2000

Semiannual

Report of the

Inspector

General

A Report to Congress

April 1, 2000 – September 30, 2000

Pursuant to Public Law 95-452

Foreword

Semiannual Report September 2000 i

I am pleased to submit our Semiannual Report on the Office of Inspector General’s (OIG) activities

from April 1, 2000, to September 30, 2000.

Fiscal Year 2000 has proven to be another period of solid accomplishment by this Office. Looking at

the standard productivity measures for OIG activities, we see that the Office issued reports

on 31 audits and 2 inspections. OIG investigations resulted in 73 indictments and 38 convictions for

criminal violations. The Office brought its collective experience to bear in reviewing 323 legislative,

regulatory, policy, and procedural proposals concerning SBA and Government-wide programs.

Overall, OIG dollar accomplishments from all activities totaled over $39 million. All of this was

accomplished with an appropriation of $11.4 million (after rescission) and an average staff level of

about 110.

While the numbers are impressive, they do not tell the whole story. SBA’s increased emphasis on

outsourcing and information systems modernization has provided us with increased challenges in our

oversight efforts. Over the past year, the Office has addressed many of the critical issues facing the

Agency. With respect to financial management within SBA, we contracted with a CPA firm to

conduct the audit of SBA’s FY 1999 financial statements. The Agency obtained an unqualified

opinion on its financial statements for the fourth year in a row, and is taking significant actions to

address financial reporting and systems control problems. OIG also issued reports on SBA’s financial

reporting process and eligible costs for the Small Disadvantaged Business Certification and Eligibility

Program, which should lead to significant changes in those programs. In the area of information

technology (IT), we reviewed the Agency’s IT security, systems development, critical infrastructure,

and Y2K efforts. Our investigative staff responded to situations involving misuse of the Internet and

worked proactively with Agency managers to address these issues. As to lender oversight, we

embarked on a joint audit/inspection effort to review SBA’s oversight of its preferred lenders,

continued our oversight of the Small Business Lending Company review program, and issued audits

on early defaulted loans and the Y2K loan program. We also examined the level of coordination of

SBA’s many entrepreneurial development programs and recommended significant improvements in

the way their performance is measured and reported. Finally, we completed the first in a series of

reviews on SBA’s implementation of the Government Performance and Results Act. These reports

contain significant findings and recommendations for continued improvements in SBA’s operations.

I would like to express my deep appreciation for the ongoing support and interest of the

Administrator, Deputy Administrator, and SBA’s senior staff. Without their willingness to assist us

and take action on our recommendations, we would not be effective. Over the past year we have

worked together to address many of the challenges facing SBA, and I believe that this has made a

positive difference in the way Agency programs are being delivered to our customers, the small

business men and women in America.

Phyllis K. Fong

Inspector General
.

ii

Table of Contents

Semiannual Report September 2000 ii

 Chapter Page

SBA Overview iii

Significant Activities and Management Challenges 1

OIG Profile 11

OIG Activities 13

Statistical Highlights 37

Inspector General Act Statutory Reporting Requirements 41

Table of Appendices 42


SBA Overview

Semiannual Report September 2000 iii

Administrator

Deputy Administrator

Office of Inspector General

Office of

Congressional & Legislative Affairs

Office of Veterans Business Development

Office of Disaster Assistance

Office of General Counsel

Chief Operating Officer

Chief of Staff

Counselor to the Administrator

Office of Advocacy

Office of Field Operations

Regional Administrators

Office of Communications &

Public Liaison

Associate Deputy Administrator

for Capital Access

Associate Deputy Administrator

for Entrepreneurial Development

Associate Deputy Administrator

for Management & Administration

Associate Deputy Administrator for Government

Contracting & Business Development

Office of Financial Assistance

Investment Division

Office of Surety Guarantees

Office of International Trade

Office of Business Initiatives

Office of Small Business

Development Centers

Office of Women's Business Ownership

Office of Native American Affairs

Office of the

Chief Information Officer

Office of Human Resources

Office of Administration

Office of Government Contracting

 Office of Minority Enterprise

Development

Office of Technology

Office of Size Standards

United States Small Business Administration

27JAN99

Office of Small

Disadvantaged Business

Certification & Eligibility

Office of Lender Oversight

Office of HUBZone

Empowerment Contracting

This chart reflects the SBA’s organizational structure during the reporting period of this report.

Ombudsman

Office of Hearings and Appeals

Office of the Chief Financial

Officer

Equal Employment Opportunity

& Civil Rights Compliance

Agency Overview. The Small Business Administration (SBA) was established in 1953 to assist small

businesses from startup through the many stages of growth. SBA’s two major goals are to help small

businesses succeed and help Americans recover from disasters. SBA offers many services to new

entrepreneurs, including developing a business plan, obtaining financing, marketing products and services,

and addressing management issues.

SBA programs are delivered in every State, the District of Columbia, the Virgin Islands, Guam, and Puerto

Rico. SBA has a FY 2000 appropriation of $873.7 million and has 4,217 employees including Disaster

Assistance and Office of Inspector General (OIG).

The Office of Capital Access has several loan and other programs that assist small businesses. The largest

business loan program is the Section 7(a) program. Currently, the Agency is authorized to guarantee up to

$750,000 of small business loans. The maximum guarantees are 75 percent for loans over $100,000, and

80 percent for loans of $100,000 or less. Under the Section 7(a) authority, SBA offers a variety of

specialized products and processes including the Certified and Preferred Lender programs (CLP and PLP),

Low Documentation (LowDoc), SBAExpress, Community Express, Pre-Qualification, CAPLines, Defense
SBA Overview

 iv Semiannual Report September 2000

Loan and Technical Assistance (DELTA), Community Adjustment and Investment Loan, Export Working

Capital, International Trade Loan, Energy and Conservation Loan, Pollution Control Loan loan programs.

In addition, under the authority of Section 7(a) of the Small Business Act, SBA provides loans and grants to

not-for-profit organizations that use these funds to provide small loans (currently up to $25,000) and

technical assistance to small businesses. The Small Business Investment Act also authorizes SBA to

guaranty debentures used to fund long term fixed asset purchases for developing small businesses. All of

the specialized business loan programs are intended to provide entrepreneurs financing vehicles needed to

help them start or grow their small businesses. In FY 2000, the Office of Lender Oversight was established

to effectively coordinate oversight of the Section 7(a) and 504 programs. In addition to the loan programs,

the Office of Capital Access also has the Surety Bond Guarantee Program.

The Office of Entrepreneurial Development administers programs which offer counseling and assistance

through SBA’s many resource partners, such as Service Corps of Retired Executives (SCORE), Small

Business Development Centers (SBDCs), Business Information Centers (BICs), U.S. Export Assistance

Centers (USEACs), and One Stop Capital Shops (OSCS). These resource partners provide guidance and

expertise to new entrepreneurs.

The Office of Government Contracting and Minority Enterprise Development administers programs

that assist small businesses with Federal procurement opportunities. The Office of Minority Enterprise

Development (MED) provides technical and procurement assistance to eligible businesses through two

principal programs: (1) Business Development, which encompasses the Section 8(a) program and the

Mentor-Protégé program; and (2) Management and Technical Assistance. The Office of Technology

expands the competitiveness of small high technology research and development businesses in the Federal

marketplace through two programs: Small Business Innovation Research and Small Business Technology

Transfer. The Office of Size Standards reviews and establishes industry size standards. The HUBZone

Empowerment Contracting (HUBZone) program is designed to stimulate economic development and create

jobs in urban and rural communities by providing contracting preferences to small businesses located in

historically underutilized business zones. The Office of Small Disadvantaged Business Certification and

Eligibility (SDBC&E) certifies companies applying as small disadvantaged businesses (SDB); oversees a

nationwide network of selected private certifiers who help process applications; and maintains a public

on-line registry of certified SDBs for access by contracting officers and the general public.

The Office of Disaster Assistance offers assistance to victims of hurricanes, floods, earthquakes, wildfires,

tornadoes, and other physical disasters. SBA's disaster loans are the primary form of Federal assistance for

non-farm, private sector disaster losses. SBA is authorized by the Small Business Act to make two types of

disaster loans: (1) physical disaster loans, which provide a primary source of funding for permanent

rebuilding and replacement of uninsured disaster damages to homeowners, renters, non-farm businesses of

all sizes, and nonprofit organizations; and (2) economic injury disaster loans, which provide businesses with

necessary working capital until normal operations resume after a physical disaster. The disaster program is

SBA's largest direct loan program, and the only SBA program for entities other than small businesses. SBA

delivers disaster loans through four specialized Disaster Area Offices located in Niagara Falls, NY;

Atlanta, GA; Ft. Worth, TX; and Sacramento, CA.
Significant Activities and Management Challenges

Semiannual Report September 2000 1

 OIG’s strategic plan articulates the office’s vision to improve SBA’s

programs by identifying key issues facing the Agency, ensuring that corrective

actions are taken, and promoting a high level of integrity. OIG continues to

focus on serving the needs of our customers and stakeholders and on

safeguarding SBA resources from waste, fraud, and abuse. We strive to provide

a work environment in OIG that is conducive to excellent performance by our

employees. Our vision was translated into a new Strategic Plan for

FYs 2001-2006 and a companion FY 2001 Annual Performance Plan that

expands on the goals and objectives in the Strategic Plan. The three goals in the

Strategic Plan are to: (1) improve the economy, efficiency, and effectiveness of

SBA programs; (2) prevent and detect fraud and abuse, and foster integrity in

SBA programs and operations; and (3) ensure the economical, efficient, and

effective operation of OIG. These goals provide the broad framework of our

mission from which we further focus our work in the following five crosscutting areas: (1) financial management systems; (2) information systems and

computer security; (3) lender oversight; (4) other selected high-risk issues; and

(5) Agency initiatives. A summary of our strategic plan is provided on the

inside cover of this report.

In response to a request from Chairmen of the House and Senate

Government Affairs and Budget Committees, and the House Majority Leader in

December 1999, OIG developed a list of ten serious management challenges

facing SBA. Below is a summary of the Agency’s recently reported efforts to

implement the recommended actions that would resolve these challenges. A full

discussion of these issues can be found on OIG’s web site: www.sba.gov/ig.

OIG recommended that the Agency develop and implement a program-based

cost accounting system. The Agency’s action plan is to implement a state-ofthe-art allocation model using an activity-based costing system with semiannual

surveys of employee time usage, and to provide a seamless interface between

the Joint Accounting and Administrative Management System with cost

accounting data in the future. In addition, the Agency is scheduled to

implement a core accounting system at the beginning of FY 2002. This system

will provide a foundation for development of a cost accounting system to

provide more detailed unit cost data and meet Federal Accounting Standards

Advisory Board requirements. In the interim, SBA has conducted four surveys

for FYs 1997, 1998, 1999, and 2000 that measure employees’ time spent

administering various SBA programs and activities. This translates to cost data

attributed to various SBA programs and activities in SBA’s accounting system.

OIG recommended that SBA improve its information system controls. The

Agency is monitoring the status of the security enhancement program through

the Information Systems Control Committee, documenting the security

program, implementing access controls, creating an application development

and change control system, building a service continuity plan, and segregating

duties. In FY 2000, the Agency issued a standard operating procedure (SOP)

OIG Strategic Plan

Focus #1

Financial Management

Focus #2

Information Systems

Top Ten Major

Management

Challenges
Significant Activities and Management Challenges

2 Semiannual Report September 2000

on Information Systems Security, significantly increased the staffing and

resources directed to this area, and conducted several risk assessments on key

Agency systems which are critical steps in addressing this challenge.

OIG reported that SBA district offices do not consistently apply guaranty

purchase requirements. The Agency has centralized the guaranty purchase

review process for SBAExpress loans and created a system to review 10 percent

of all loans purchased on a quarterly basis. The Agency conducted two of these

reviews during FY 2000. SBA recently began tracking the loan purchase

process to identify offices with shortcomings in their processing of guaranty

purchase requests and repair actions taken by field offices. The system changes

now being developed will include detailed information on purchase actions,

including information on full and partial denials of liability.

OIG recommended that SBA improve loan monitoring. The Agency is

developing a comprehensive lender oversight program to include a risk

management system that benchmarks lender performance, a loan monitoring

system that tracks loan status and lender performance, and a review process for

lender compliance.

The Agency recently established an Office of Lender Oversight to further

ensure that lenders originate and service SBA-guaranteed loans in a manner that

protects the borrowers and SBA from unnecessary loan defaults. SBA also

began developing a more detailed automated monitoring system for Section 504

and 7(a) loan programs. The system is intended to monitor such factors as the

size of a lender’s portfolio of SBA-guaranteed loans, the size of recent additions

to the portfolio, default and purchase rates, and industry concentrations. The

system will also detect problems with the portfolio that merit scrutiny.

OIG reported that SBA needs an effective oversight process for Small Business

Lending Companies (SBLC). OIG delegated its authority to the Agency to

implement a safety and soundness oversight program for SBLCs. As of July

2000, two rounds of SBLC examinations were completed. The Agency has

directed all SBLCs to implement the recommendations made in the FY 2000

reviews. The first round of examinations also resulted in a consolidated report

with 15 recommendations to SBA. SBA is considering the actions it needs to

take on these recommendations.

OIG concluded that more participating companies need to obtain contracting

opportunities in the Section 8(a) program. The Agency plans to improve the

fair and equitable distribution of contracting opportunities for Section 8(a) firms

and provide enhanced business development and procurement assistance to

Section 8(a) firms.

OIG concluded that participants who become wealthy are allowed to remain in

the Section 8(a) program and be considered economically disadvantaged. SBA

plans to address this issue through a reinvention process hosted by the

Focus #3 

Lender Oversight

Focus #4

High Risk
Significant Activities and Management Challenges

Semiannual Report September 2000 3

Department of Defense’s (DOD) Change Management Center (CMC).

According to MED officials, SBA, DOD, and the Office of Management and

Budget (OMB) have entered into an agreement whereby a team of Federal

agency representatives will identify key issues and recommend areas for

improvement in the following areas: (1) Section 8(a) firms’ competitiveness in

today’s business environment; (2) Section 8(a) program eligibility; (3) Section

8(a) contracting processes; and (4) Metrics to determine program success.

SBA’s Jumpstart Rapid Improvement Team (RIT) was held November 1 – 3,

2000. The RIT, comprised of 31 stakeholders from across government, was

tasked to identify breakthrough opportunities and recommend a prioritized

action path for Governmentwide SBA 8(a) program improvement.

OIG reported that SBA does not enforce its rules to limit pass-through

procurement activity to non-Section 8(a) program participants. The Agency

intends to accurately define and classify, under the appropriate North American

Industry Classification System (NAICS) code, goods and services being

procured by the Government through Section 8(a) firms and identify and define

those industry areas where goods and services are being procured by the

Government, but are not addressed in the NAICS coding structure.

OIG recommended that SBA put more emphasis on preventing loan agent

fraud. The Agency submitted a legislative proposal and plans to register loan

agents and monitor loan agent association with individual loans.

OIG recommended that all borrowers in SBA’s business loan program be

subject to criminal background checks. The Agency submitted a legislative

proposal to change legislation to require background checks of all loan

applicants and agents. The Agency also assisted in the collection of documents

from 3,000 loan files in support of Operation Cleansweep III, which is a

proactive OIG investigative initiative to determine the accuracy of criminal

history information reported by loan applicants.

OIG continues to monitor SBA’s progress in addressing the management

challenges identified by OIG in previous years. To assist us in developing the

management challenges for FY 2001, we are conducting focus groups across

the country with SBA employees to obtain greater Agency input.

The next section of this chapter details significant OIG accomplishments

in the five areas of strategic focus.

OIG continues to

monitor management

challenges.
Significant Activities and Management Challenges

4 Semiannual Report September 2000

Financial Management Systems

Financial Reporting Process Audit

 In July 2000, based on direction from the Senate Appropriations

Committee, OIG issued an audit report on the integrity of SBA's internal

financial management systems, including an examination of Agency difficulties

in completing its FY 1998 annual financial statements and account balances.

OIG had previously reported SBA's financial reporting process as a material

weakness. The July 2000 report described how SBA's financial reporting

system did not ensure that its financial statements would be prepared timely and

free of material misstatements. Specifically, SBA: (1) lacked a single

integrated general ledger as required by OMB; (2) relied on complex, error

prone, manual processing; and (3) lacked comprehensive plans and procedures

for preparing financial statements. The report also noted that SBA had begun a

significant project that, if fully implemented, could overcome those

weaknesses. The Agency generally agreed with the report’s recommendations.

Small Disadvantaged Business Certification and Eligibility (SDB) Program

Audits

OIG issued an audit of SDB obligations and expenditures. The SDB

program provides Federal procurement benefits to SDBs bidding on Federal

contracts by giving them a price preference of up to 10 percent on their bids.

SBA was approved to certify all SDBs bidding for Federal contracts beginning

in FY 1998 and receives reimbursements for the cost of certification from the

top 20 agencies utilizing SDBs. OIG identified weaknesses in the financial

management controls over the allocation of costs to the SDB program.

Specifically, OIG identified about $3 million in expenditures and obligations

that were for non-SDB certification purposes. These activities included costs

related to construction, furnishings, equipment, personnel, consultants, training,

and marketing. The OIG was initially unable to satisfy its documentation

requirements for an additional $3.2 million ($2.8 million in overhead

and $.4 million for a Section 8(a)/SDB application system) in SDB

expenditures to conclude whether the costs were correctly allocated. OIG

recommended that the Agency develop and implement an allocation

methodology that meets Economy Act requirements. SBA has since

accomplished this. Additionally, OIG made recommendations concerning other

areas where management action was required; one of which concerned the

overstaffing of SDB program and supporting offices. As a result, SDB funding

for FY 2001 has been reduced by $8.3 million. OIG also completed and issued

three additional audits relating to the SDB program. The results of all four

audits are discussed further in the OIG Activities chapter.

SDB Audit identifies

weakness in financial

management controls.

OIG conducts audit of

SBA’s financial

reporting process and

finds that the Agency

has begun significant

effort to overcome

weaknesses.
Significant Activities and Management Challenges

Semiannual Report September 2000 5

Information Systems and Computer Security

Systems Security Program Audit

 OIG issued an audit report of its review of the general controls over

SBA’s financial management systems to determine if those controls complied

with various Federal requirements. The report included several

recommendations for further implementing the agencywide systems security

program. SBA agreed to address OIG’s recommendations and to implement

solutions to improve information systems controls. This audit is further

discussed in the OIG Activities chapter.

Presidential Decision Directive (PDD) 63 Audit

OIG issued an audit report on SBA’s planning and assessment for

implementing PDD 63. PDD 63 calls for a national effort to ensure the security

of the United States’ critical infrastructures. OIG evaluated SBA’s planning

and assessment activities for protecting its critical cyber-based infrastructure.

OIG concluded that SBA has made significant progress toward implementing

key aspects of PDD 63, but additional actions are still needed. The Chief

Information Officer (CIO) agreed with the recommendations. This audit is

further discussed in the OIG Activities chapter.

Lender Oversight

PLP Loan Oversight Review

 As part of an effort to improve efficiency in its loan programs while

addressing staff reductions, SBA has moved toward increased privatizing of its

loan functions. Currently, over 75 percent of the Agency's loan approvals are

originated and serviced by Agency lending partners through the Preferred

Lender Program (PLP), LowDoc, and SBAExpress programs. SBA developed

a field review process, conducted by a mix of SBA employees and contractor

staff to assess the performance of all PLP lenders. The PLP review process has

been used as the model for oversight of regular and certified lenders. Because

the PLP review process is a key tool for adequate monitoring of PLP lenders, in

FY 2000 the Inspection and Evaluation (I&E) and Auditing Divisions began a

joint effort to assess the effectiveness of the PLP review process.

I&E staff conducted extensive interviews with SBA program and review

officials, and officials of the National Association of Government Guaranteed

Lenders, a trade association representing Section 7(a) lenders. They also

examined written reviews and lender action plans developed to address

inadequate review ratings and observed the PLP review process. Based on this

SBA has made

progress and

agrees to OIG’s

recommendations to

improve information

systems controls.

I&E and Auditing

Divisions collaborate

on review of PLP loan

oversight process.
Significant Activities and Management Challenges

6 Semiannual Report September 2000

work, they conducted a PLP review process survey of all SBA district offices to

solicit the opinions of field managers on the current PLP review process and the

future direction of the PLP reviews, including the possible use of field staff to

conduct the review process. Building on the I&E Division’s research and

survey results, the Auditing Division completed an audit survey of the PLP

oversight process and is conducting an audit of SBA’s oversight of PLP lenders.

The objectives of the audit are to determine whether SBA has appropriate

mechanisms in place to: (1) ensure lenders are properly selected for PLP status;

and (2) identify lenders that are not processing, servicing, and liquidating loans

in accordance with SBA requirements. The audit will include a review of a

selected sample of lenders participating in the program and PLP loans. The

report will be completed in FY 2001.

SBLC Oversight Continues to Receive OIG Attention

OIG executed a Memorandum of Understanding (MOU) with the SBA

Office of Capital Access (OCA) to delegate the authority to examine SBLCs to

ensure that SBLCs operate in a safe and sound manner. OIG retained its

oversight and quality control functions. To carry out this effort, OCA and OIG

signed an agreement with the Farm Credit Administration (FCA) whereby FCA

will examine up to 14 SBLCs annually to evaluate their safety and soundness

and compliance with applicable laws and regulations. During the initial round

of SBLC examinations conducted in FY 1999, the OIG completed a quality

assurance review of the examination process and issued a report in April 1999.

The Office of Capital Access agreed to implement the three recommendations

contained in the report.

The second round of SBLC examinations included procedures to assess the

corrective actions taken by each SBLC in response to prior findings and

recommendations. OIG reviewed this process and expects to issue a report in

early FY 2001. In addition, the General Accounting Office (GAO) conducted a

review of the SBLC examination process and, as part of that review, looked at

SBA’s responses to the recommendations contained in the FCA FY 1999

Comprehensive Summary Report on SBLCs. GAO plans to issue its report in

November 2000.

Audit of Y2K Loan Program

OIG conducted an audit of the Y2K Loan program to comply with the

requirement of the Small Business Year 2000 Readiness Act (the Y2K Act).

The objective of the audit was to determine if the Y2K loans were properly

processed and disbursed by the lenders, and proceeds used in accordance with

the Y2K Act. OIG found that, with one exception, the loans were generally

processed, disbursed, and the proceeds used in accordance with the Act. A

more detailed discussion can be found in the OIG Activities chapter.

OIG oversight of

SBLC program

continues.

Y2K audit finds SBA

program generally

sound.
Significant Activities and Management Challenges

Semiannual Report September 2000 7

Early Default Audits

OIG has an ongoing program to audit early defaulted SBA-guaranteed

loans. An early default is a loan that is charged off or transferred to liquidation

within 36 months of origination. Three early default audit reports were issued

from April 2000 through September 2000. OIG found that in two of the three

audits, the lender did not execute the loans in accordance with SBA rules and

regulations. The third audit revealed that the loan in question was processed,

closed, and disbursed in compliance with SBA’s requirements. OIG concluded

that the loan defaulted due to lack of adequate sales volume that led to

bankruptcy, therefore, no recommendation was made.

Other Selected High-Risk Issues

Over the years, OIG investigations of fraud in SBA’s loan programs

have identified trends or types of fraud. Three major trends in recent years are:

(1) fraud involving loan agents; (2) fraud involving false tax returns; and

(3) fraud involving borrowers who do not disclose criminal histories.

Fraud Involving Loan Agents

 Loan agents provide referral and loan application services to prospective

borrowers or lenders for a fee. Some agents, particularly loan packagers, have

been involved in a variety of fraudulent schemes, such as submitting false tax

returns or other financial data, charging the borrower excessive fees, using

fictitious names on SBA forms, exaggerating the borrower’s ability to gain loan

approval, acting in illegal collusion with officials of lending institutions,

conspiring with borrowers to submit false loan packages, and performing other

illegal acts. These schemes, which have been copied from one fraudulent agent

to another, have resulted in loan purchases and losses by SBA and, ultimately,

the taxpayers.

During this reporting period, OIG investigations of this type of fraud resulted in

two indictments and two convictions. Details of the cases are described in the

OIG Activities chapter.

Fraud Involving False Tax Returns

Over the last 10 years, OIG has received nearly 500 allegations that false

tax returns were submitted in support of SBA applications (over 98 percent for

business or disaster loans). These fraud referrals involved loan applications

totaling approximately $130 million that were submitted to 57 SBA offices. To

date, 159 individuals have been indicted on criminal charges, 140 have been

adjudicated guilty, 3 indictments were dismissed, 1 defendant was acquitted,

OIG identifies three

trends in fraud in the

Agency’s loan

programs.
Significant Activities and Management Challenges

8 Semiannual Report September 2000

and 15 others have not yet gone to trial. Because of the implicit credibility of

Federal tax returns, SBA has traditionally relied heavily on information they

contain in making its credit-related decisions, so falsification of “copies” of

returns can have a significant negative impact on SBA’s consideration of those

applications.

Significant results of investigations of this type of fraud include 10 indictments,

5 convictions, and more than $535,000 in restitution during the last 6 months.

Summaries of OIG investigations related to the use of altered or fictitious tax

returns can be found in the OIG Activities chapter.

Fraud Involving Borrowers Who Do Not Disclose Criminal Histories

 A series of investigative projects known as Operations Cleansweep I, II,

and III have disclosed that borrowers who fail to disclose criminal histories

have higher rates of default on SBA loans than those that either disclose their

records or have no criminal histories. To address this problem and reduce the

loss to the Government, SBA has requested legislative language strengthening

the Agency’s authority to require the information needed to run background

checks on all loan applicants. During this period OIG investigations for

criminal-record fraud in connection with SBA’s programs yielded the following

significant results: one indictment, one conviction, and two arrests. Details of

these accomplishments can be found in the OIG Activities chapter.

 Operation Cleansweep III was initiated by OIG to detect fraudulent

applications so they may be referred for appropriate criminal and/or civil action,

provide a heightened level of deterrence through increased enforcement actions,

and determine if additional changes in SBA policy are necessary to deter and

prevent false statements in applicants’ submissions of criminal history

information. The current Section 7(a) business loan procedures rely on the

truthfulness of the applicant in declaring the existence of a prior criminal record

and allows for criminal and civil penalties for misstatements. Cleansweep III

examined 3,000 loans randomly selected from the population of 9,038 nonSBAExpress and non-disaster business loans approved during period from

October 1, 1998, to December 31, 1998. The Cleansweep III report is being

finalized and will be included in the next semiannual report.

Agency Initiatives

GPRA Audits

OIG is focusing attention on the Agency’s implementation of the

Government Performance and Results Act (GPRA). During the last 6 months,

OIG issued two GPRA-related audits. The objectives of the audits are to

determine whether the GPRA goals for the programs reflect the statutory

OIG investigations for

criminal-history fraud

yield one indictment,

one conviction, and two

arrests for the second

half of FY 2000.
Significant Activities and Management Challenges

Semiannual Report September 2000 9

missions, are consistent with the strategic plan, include efficiency and

effectiveness measures, have measurable performance measures, and are

supported by reliable data. SBA’s Office of Policy has overall responsibility

for directing and coordinating the implementation of the Results Act for all

SBA program offices. Performance measures were developed by the program

offices based on direction provided by the Office of Policy.

One audit evaluated implementation of GPRA performance measures for

the Small Business Investment Company (SBIC) program. OIG found that the

SBA Office of Policy and the Investment Division had not fully implemented

the performance measurements requirements of the Results Act for the SBIC

program. The performance indicators were not outcome-oriented and did not

address GPRA priorities, such as customer satisfaction or program cost. Also,

some of the underlying data supporting performance measurement were not

reliable. The reporting of the number and dollar amount of financings made

each year was inaccurate due to late reporting by the SBICs. About 26 percent

of the financings reported for FY 1999 were from FYs 1994 to 1998. However,

according to the Investment Division, the reported results, when adjusted for

FY 1999 financings that were reported in FY 2000, understated the actual

number and dollar amount of financings by at least 6 percent that should have

been reported in FY 1999. Also, data relating to business ownership by women

and minorities, as reported by the SBICs, was not supported by documentation.

(The 30-day comment period for the final audit report ended 7 days after the

reporting period for this report. Investment Division officials accepted all

recommendations within the 30-day comment period.)

 The other audit evaluated GPRA performance measurement for the

Surety Bond Guarantee (SBG) program. The audit found that the program does

not have performance measures to show it is fully achieving the intended

purposes of the authorizing legislation. Further, the performance measures in

SBA’s FYs 2000 and 2001 performance plans do not address GPRA priorities

such as program outcomes, service quality, or cost. The audit found that

although the SBG program performance data are reliable, a few improvements

in data collection and presentation could be made. OIG recommended that the

Office of Policy, in conjunction with the Office of Surety Guarantees, ensure

that SBG program goals include program outcomes, service quality, and

program costs, as appropriate; SBG program indicators reflect these goals; and

SBG performance data are complete and accurately presented. SBA

management concurred with the findings and recommendations.

OIG completes SBG

Program and SBIC

Program audits to

determine whether

GPRA goals are met.
Significant Activities and Management Challenges

10 Semiannual Report September 2000

OIG has two additional GPRA implementation-related audits in progress

for the Section 7(a) and Disaster Loan programs. An additional audit covering

the Section 8(a) program is scheduled to begin in early FY 2001.

Entrepreneurial Development Inspection

OIGperformed an inspection of coordination and performance

measurement in SBA’s Office of Entrepreneurial Development (OED)

programs. OIG found evidence of effective coordination among service

providers in the three markets studied, and recommended a central intake

function for districts lacking an efficient referral process. OIG also found

significant differences in the performance measures used by providers, and

recommended ways to standardize the measures for GPRA reporting. The

Agency agreed with the recommendations. The findings are discussed in the

OIG Activities chapter.

Loan Processing Center Advisory Memorandum

 OIG issued an inspection advisory memorandum on data accuracy and

verification issues regarding SBA Loan Processing Centers. OIG noted that

addressing these data issues will improve accountability and risk management,

and ensure data reliability for GPRA reporting. The Agency generally agreed

with the recommendations and indicated that steps will be taken to implement

them. The memorandum is discussed further in the OIG Activities chapter.

I&E Division completes

two inspections of SBA

programs.
OIG Profile

Semiannual Report September 2000 11

SBA/OIG was established by the Inspector General (IG) Act of 1978.

OIG provides nationwide coverage of SBA’s programs and activities. In

addition to the Immediate Office, OIG’s five divisions work together to

perform the missions mandated by the Congress.

• Auditing Division provides comprehensive audit coverage of SBA’s

operations through program performance reviews, internal controls

assessments, and financial and mandated audits to promote the

economical, efficient, and effective operation of SBA programs.

Audits give SBA managers an objective and systematic assessment of

how well their offices are carrying out their programs and operations. 

Financial audits examine the presentation of financial information,

internal controls, and adherence to financial requirements. Performance

audits assess operations in terms of economical and effective use of

resources.

• Investigations Division is an investigative unit that manages a

nationwide program to prevent and detect illegal and/or improper

activities involving SBA programs, operations, and personnel. The

criminal-investigative staff carries out a full range of traditional law

enforcement functions, including (in the last 2 years) executing 24 arrest

warrants, 9 search warrants, and 5 electronic monitorings. The security

operations staff ensures that all Agency employees have the appropriate

background investigations and security clearances for their duties. The

name check program provides SBA officials with character-eligibility

information on loan applicants and other potential program participants.

• Inspection and Evaluation Division conducts assessments of the

effectiveness of SBA programs and activities, analyses of critical

program issues, best practices studies, and research on matters

concerning SBA performance.

• Counsel Division is an in-house legal staff that provides legal advice

and assistance to all OIG components, represents OIG in litigation

arising out of or affecting OIG operations, processes Freedom of

Information and Privacy Act requests, and manages OIG

legislative/regulatory review functions.

• Management and Policy Division provides planning, information

systems, budgetary, administrative, personnel, and communications

services.

There are five

divisions of SBA/OIG.
OIG Profile

12 Semiannual Report September 2000

OIG is headquartered in Washington, D.C. and has field audit and

investigation offices in Atlanta, Chicago, Dallas, Denver, Houston, Kansas

City, Los Angeles, Philadelphia, New York, San Francisco, San Juan,

Seattle, and Syracuse.

As of September 30, 2000, our on-board strength was 111. The OIG

FY 2000 appropriation was $11.0 million (less a .8274% rescission of

$95,000), and $500,000 transfer for disaster assistance oversight activities.

SBA/OIG has offices

nationwide.

SBA/OIG resources.

OFFICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

KANSAS CITY

INSPECTOR GENERAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

WASH., DC CHICAGO

SEATTLE

HOUSTON

PHILADELPHIA FRANCISCO

AUDITING DIVISION

BUSINESS DEVELOPMENT

PROGRAMS GROUP

WASH., DC WASH., DC

ATLANTA

DALLAS

LOS ANGELES

MANAGEMENT AND

POLICY DIVISION

SAN JUAN
OIG Activities

Semiannual Report September 2000 13

This chapter includes details of audits, investigations, and inspections

summarized in the Significant Activities and Management Challenges

chapter, as well as other significant OIG activities that do not fall under the

strategic plan’s five focus points. The material in this chapter is organized

by major SBA program area.

Business Loan Programs

Y2K Loan Audit

 OIG issued an audit report on SBA’s Y2K Loan program. The audit

was done to comply with the requirement of the Y2K Act that OIG perform

periodic reviews of a representative sample of loans to mitigate the risk of

fraud and to ensure the safety and soundness of the program. The objective

of the audit was to determine if the Y2K loans were properly processed and

disbursed, and proceeds used in accordance with the Y2K Act. From a

universe of loans, the auditors selected and reviewed five loans, valued

at $992,000. OIG found that, with one exception, the loans were generally

processed, disbursed, and the proceeds used in accordance with the Y2K

Act. The exception was a $727,000 loan for which undisbursed loan

proceeds of $346,000 became ineligible for the Y2K program after loan

closing. The audit disclosed that the borrower had corrected its Y2K

problems after receiving only $381,000 of the loan proceeds. SBA agreed

with our recommendation to require the lender to limit disbursement to the

amount needed for Y2K readiness purposes and to cancel the undisbursed

loan proceeds and thereby saved SBA’s guaranty authority for the remaining $346,000. Additionally, the audit disclosed minor noncompliances with

SBA’s policies and procedures in the areas of equity injections, monitoring

of disbursements, and use of proceeds for three loans.

Review of LowDoc and Preferred Lender Program (PLP)

An Inspection Advisory Memorandum on Data Issues Regarding the

Processing Centers reported several problems in the FY 1999 LowDoc and

PLP loan database. First, OIG found that while identification of the

approving office is important for defining accountability in risk management

systems and for developing activity based costing, the approving/processing

office for many FY 1999 LowDoc loans is not readily apparent in SBA's

database. Second, OIG found that although SBA certified in its FY 2001

Annual Performance Plan that there are no limitations on the data for the

number of loans provided to women, minorities, and veterans, SBA is

dependent on the lenders' accuracy in recording the original data. Moreover,

there appears to be some uncertainty in the Office of Financial Assistance

(OFA) concerning what constitutes adequate data verification. Third, for

OIG inspection revealed

several problems with

the FY 1999 LowDoc

and Preferred Lender

Program loan database.

OIG audit

recommendations on

the Y2K audit will

reduce a loan guaranty

to $346,000.
OIG Activities

14 Semiannual Report September 2000

approximately 40 percent of FY 1999 LowDoc and PLP loans, the name of

the individual business owner is not recorded in SBA's database. As SBA

increasingly outsources loan making and loan servicing operations and

redefines its core business activities to include outreach, product

development, and marketing, it is important for district office staff to have

the names of the individual borrowers to effectively implement these efforts.

To address these problems, we recommended that OFA:

(1) Clarify responsibility within OFA for providing instructions to the

field regarding making changes in data fields;

(2) Ensure that SBA field offices understand the requirement to fill in

the approving office data field;

(3) Work with the Office of the Chief Information Officer (OCIO) to

ensure that processing/approving office data are accurate;

(4) Align policy and practice for reconsidered LowDoc loans;

(5) Correct the Annual Plan certification statement regarding limitations

on minority, women and veterans' data;

(6) Work with SBA's GPRA coordinators to ensure that adequate data

verification methods are in place; and

(7) Require that the name(s) of the individual business owner(s) be

entered into SBA's database.

OFA generally agreed with the recommendations. Addressing these data

problems will improve accountability and risk management, and ensure data

reliability for GPRA reporting.

 OIG has an ongoing program to audit early defaulted SBAguaranteed loans. An early default is a loan that is transferred to liquidation

or charged off within 36 months of origination. Three early default audit

reports were issued from April 2000 through September 2000. The first

report was on an $855,000 defaulted loan that OIG found was not made in

accordance with SBA rules and regulations. The lender did not perform the

proper evaluation of the new business’ projected income and consequently

approved the loan to a borrower that lacked repayment ability. OIG

recommended that SBA’s liability for the $635,981portion of the loan be

denied. The second report was on a $296,000 SBA loan that defaulted 14 months after approval. OIG found that the lender inappropriately used

funds designated for accrued taxes to assist in the purchase of real estate and

imprudently disbursed the balance of these same funds to the borrower’s

principals. The borrower in turn failed to pay the taxes and defaulted on the

loan. SBA’s recovery was reduced by the amount of the unpaid taxes plus

interest and penalties, and OIG recommended the district director

recover $26,723 from the lender to repair SBA’s guaranty of the loan. The

third audit revealed that the loan in question was processed, closed, and

disbursed in compliance with SBA’s requirements. However, based on

interviews and documentation in the loan file, OIG concluded that the loan

OIG recommends that

the Agency recover

guarantees on two early

defaulted SBA loans.
OIG Activities

Semiannual Report September 2000 15

defaulted due to lack of adequate sales volume that led to bankruptcy,

therefore, no recommendation was made.

The following cases illustrate OIG investigations of fraud involving

loan agents.

• In July 2000, a former SBA district director (DD) who later headed the

SBA division of a now-defunct Paramount, California, bank was

charged with and pled guilty to one count each of accepting a gift for

procuring a loan and fraudulently receiving money from a loan

transaction. The allegations date back to 1990 and 1992 actions at the

bank, which the former DD joined after leaving SBA in 1984. He

improperly accepted a $24,000 automobile from an Inglewood,

California, loan brokerage as a reward for its business with the bank.

Also, in his official capacity at the bank, he received money both

directly and indirectly from the proceeds of a $1 million SBAguaranteed loan made to the head of the loan brokerage to purchase a

gas station and mini-mart business. The former DD failed to disclose

either that he owned 50 percent of the business or that he would receive

at least $65,000 of the loan proceeds for his personal use. According to

a plea agreement he signed, he received approximately $2 million in

incentive bonuses and commissions from the bank’s secondary-market

sale of SBA-guaranteed loans plus a base salary that eventually reached

$250,000. During the former DD’s years at the bank, at least 17

borrowers submitted fraudulent documents, including falsified “copies”

of tax returns, seeking SBA-guaranteed loans.

Eighteen other individuals have been charged to date in this loan

brokerage case and an additional 6 in the case of a loan broker in

Upland, California (see below), with whom the former DD did business.

Twenty-one of the 24 have pled guilty, 1 was acquitted, and trial of the

other 2 is pending.

In addition, one borrower was indicted in the Inglewood, California,

loan brokerage case during the past 6 months. A former owner of a fish

market in Castaic, California, was indicted in June 2000 on five counts

of making false statements to federally-insured financial institutions.

The investigation disclosed that he submitted altered Federal income tax

returns as part of his loan broker packaged application to the Paramount,

California, bank for a $1 million SBA-guaranteed loan. He

subsequently defaulted on the loan. After all liquidation efforts were

completed, SBA charged off the balance of approximately $505,663.

Subsequent investigation disclosed that the borrower had also submitted

different altered Federal income tax returns to another bank to obtain a

$580,000 home loan. He defaulted on the loans leaving the lender to

charge off $215,570. OIG initiated the investigation based on allegations

from an anonymous complainant.

Former SBA district

director charged with

and pled guilty to one

count of accepting a gift

for procuring a loan and

fraudulently receiving

money from a loan

transaction.

Fraud involving loan

agents.
OIG Activities

16 Semiannual Report September 2000

• A former accountant from Alta Loma, California, and a California City,

California, businessman were previously indicted on nine counts of

making false statements to a federally-insured financial institution in

connection with SBA-guaranteed loans. In April 2000, the accountant

pled guilty to two counts; as part of his negotiated plea, the Government

agreed to dismiss the other counts on which he had been indicted. The

indictment charged him with preparing altered copies of tax returns

submitted with four SBA-guaranteed loan applications. In May 2000,

the businessman was acquitted on all counts. He had been charged with

submitting altered tax returns in support of his $550,000 loan application

and with aiding and abetting the accountant’s crimes. This was one of

six loan applications presented in 1991 by an Upland, California,

SBA-loan broker to the Paramount, California, bank for SBA guaranty

consideration. These applications totaled over $2.7 million but were

actually part of a $4 million scheme.

The following cases illustrate OIG’s work on fraud involving false

tax returns.

• The owner of a pork processing plant in Herscher, Illinois, was

sentenced in April 2000 to 1 year plus 1 day incarceration, 3 years

supervised release, and $460,833 in restitution to a participating lender

and SBA. He previously pled guilty to one count of making false

statements to a federally-insured financial institution, in connection with

a $490,000 SBA-guaranteed business loan. The investigation revealed

that he submitted altered tax returns to the bank and SBA to obtain the

loan, failed to make the promised $150,000 capital injection, and sold a

majority of the farmland pledged as collateral. The investigation was

initiated based on a referral from the bank to SBA’s Illinois District

Office.

• The president and the corporate secretary of a residential real estate

company in Santa Fe Springs, California, pled guilty to conspiracy, wire

fraud, making material false statements, and money laundering. The

corporate secretary pled guilty in August 2000 to 19 counts; the

president pled guilty in July 2000 to 30 counts plus 1 count of

bankruptcy fraud. In addition, a southern California tax preparer was

charged in April 2000 in a criminal information with one count of

conspiracy, two counts of mail fraud, and one count of aiding and

abetting. The investigation found that the real estate company had

obtained a $550,000 SBA-guaranteed loan to purchase a billiards club in

Whittier, California, by using a false Social Security number (SSN) and

fraudulent checks, submitting false financial statements, and by omitting

the corporate secretary’s criminal record from the SBA application. The

tax preparer allegedly prepared altered income tax returns so that the

Former accountant

pled guilty to making

false statements to a

federally-insured

financial institution.

OIG focuses on fraud

involving false tax

returns.
OIG Activities

Semiannual Report September 2000 17

president could obtain loans from the Department of Housing and Urban

Development and SBA. The corporate secretary and the president also

devised a double escrow scheme involving $4.5 million in fraudulent

Federal Housing Authority-insured loans, made in connection with the

sale of eight properties, on which the defendants would then collect rent

payments. OIG joined the investigation at the request of the U.S.

Attorney’s Office.

• Four persons associated with an automotive repair business in Irving,

Texas, were indicted in June 2000 on one count of conspiracy and nine

counts of making material false statements to induce a non-bank

participating lender and SBA to fund a $350,000 SBA-guaranteed loan.

The firm’s proprietor, his brother, and his sister-in-law allegedly

submitted a falsified “copy” of a tax return along with fraudulent

documentation of capital injections and equipment purchases. An

employee of the business allegedly provided his co-conspirators with

bogus sales invoices and other fraudulent documentation of their

required capital injections and equipment purchases. In a related action,

the proprietor’s brother’s $115,963 disaster loan applic ation was

declined in June 2000 after OIG notified SBA’s Area 3 Disaster Office

of his indictment. OIG initiated this investigation based upon an

anonymous referral.

In a related action, four persons associated with a gasoline station and

convenience store in Grand Prairie, Texas, were indicted in August 2000

on 1 count of conspiracy and 11 counts of making material false

statements to induce a non-bank participating lender and SBA to fund a

$256,000 SBA-guaranteed loan. The firm’s proprietor, a convicted

felon, posed as his brother, using his brother’s credit identifiers. The

proprietor, along with the sellers, allegedly submitted six falsified copies

of tax returns, three fraudulent Internal Revenue Service (IRS) tax return

verifications, and numerous other fraudulent documents in support of

a $75,500 capital injection into the business.

 Summaries of some criminal history fraud investigations involving

SBA loan programs are listed below.

• The president of a company in St. Louis, Missouri, pled guilty in April

2000 to one count each of mail fraud, wire fraud, making material false

statements, using a false SSN, and impersonation of a U.S. Government

officer. He was sentenced in September 2000 to 51 months

incarceration and 3 years of supervised release. He had applied for

a $295,000 SBA-guaranteed loan in March 1999, to purchase and

operate a day care center. The investigation confirmed that mailings

were used in his scheme to submit false statements regarding his

educational background, work experience, criminal history, and

OIG investigative results

of three cases of criminal

history fraud involving

SBA loan programs.
OIG Activities

18 Semiannual Report September 2000

financial status to a non-bank lender and SBA to obtain the loan. The

non-bank lender canceled the loan before disbursement. This

investigation was initiated based on a referral from the Department of

Health and Human Services OIG.

• The owner of a now defunct photo studio in Bronx, New York, was

indicted in August 2000 on one count of submitting false statements.

The indictment charges that he falsely stated in an application for

a $260,000 SBA-guaranteed loan that he was a U.S. citizen and that he

did not have any prior criminal convictions. In fact, he had been

convicted of alien smuggling and was a Federal fugitive wanted by the

U.S. Marshals Service on a parole warrant. Further, Immigration and

Naturalization Service (INS) records showed that he was not a

U.S. citizen, but rather a legal resident alien facing deportation

proceedings. SBA eventually charged off the $249,166 outstanding loan

balance. OIG initiated this investigation based on information provided

by the U.S. Marshals Service.

• The owner of a North Hollywood, California, telemarketing agency was

arrested by OIG in May 2000. It was alleged that he had violated the

terms of his supervised release from prison by making false statements to

a federally-insured bank in applying for a $135,000 SBA-guaranteed

loan. In the Statement of Personal History included with his 1999

application, he allegedly indicated that he had no criminal history. In

fact, he had previously been convicted of transporting cocaine into the

U.S. and was sentenced to more than 10 years in prison. When he

applied for the SBA-guaranteed loan (his application was subsequently

declined), he was on parole for this crime. Further investigation revealed

that he had also made false statements, including concealing his criminal

history, in applying for an earlier $430,000 SBA-guaranteed loan. The

U.S. Probation Office asked OIG to join its investigation.

The following cases illustrate OIG investigations involving fraud to

obtain loans.

• The owner of a clothing manufacturer in Dallas, Texas, was convicted in

August 2000 on one count each of SSN fraud and making material false

statements to obtain a $675,000 SBA-guaranteed loan. The Government

subsequently dismissed the count of misappropriation of SBA collateral

on which she had also been indicted. Using a false name, the

businesswoman applied for the loan to open a second business in

Prattville, Alabama. In the loan application, she gave a false SSN and a

false name to conceal that her previous business had defaulted on an

SBA loan and that she had previously filed for bankruptcy. The

businesswoman also submitted fictitious tax returns and supporting IRS

documentation, falsified financial statements, and other documents to

North Hollywood

telemarketing agency

owner arrested for

violating the terms of

his supervised release

by making false

statements on his

Personal History form

when applying for an

SBA loan.
OIG Activities

Semiannual Report September 2000 19

obtain the loan. She then failed to purchase the equipment pledged as

collateral and allegedly spent most of the loan proceeds for unauthorized

personal purchases including two homes, cars, furniture, and other

items. The businesswoman immediately defaulted on this loan, with

a $689,983 loss to the non-bank lender and SBA. OIG initiated this

investigation based on a referral from the participating lender.

• Three persons associated with an equipment manufacturer in San Diego,

California, were indicted in April 2000 on four counts of bank fraud,

three counts of making false statements to a bank, four counts of wire

fraud, four counts of mail fraud, five counts of fraudulent transfer of

property in contemplation of bankruptcy, and one count of bankruptcy

fraud. The company had obtained an $833,000 SBA-guaranteed Export

Working Capital loan. The line of credit disbursements were to be used

to finance production of mining conveyors. The defendants allegedly

submitted false documentation to obtain the loan disbursements,

including false invoices and false facsimile transmissions. To carry out

the alleged fraud, they made false representations by wire communication

and by Federal Express. The defendants also allegedly transferred

property of the company to conceal it from the U.S. Bankruptcy Court.

The indictment also charges that the company president made material

omissions on the company’s Statement of Financial Affairs to the U.S.

Bankruptcy Court. SBA’s net charge-off on the loan was $175,051. OIG

joined the investigation at the request of the U.S. Attorney’s Office.

The following cases illustrate OIG investigations involving fraud

after loan default.

• A manufacturer in Lancaster, Pennsylvania, was indicted in May 2000 on

three counts of mail fraud and three counts of making false statements to

SBA. His company had obtained a $315,000 SBA-guaranteed loan that

defaulted in 1991. The manufacturer made various offers of compromise

to SBA during the period 1992-1995, including stating that his only asset

was $60,000 of equity in his home. The indictment charges that during

this time period he obtained $551,000 through an unrelated stock sale,

opened various bank accounts in the names of his children, prepared

bogus stock certificates showing that his children and other entities

actually owned the stock, and purchased a warehouse for $475,000 in

1994. The indictment further alleges that the manufacturer at all times

had complete control of the shares of stock and monies from the stock

sale. He allegedly concealed financial information from SBA by

submitting various false financial statements and false stock certificates

via the U.S. Postal Service and Federal Express. The purpose was to

induce SBA to accept his $60,000 compromise offer thus releasing him

from personal liability for the remaining balance of the loan, estimated to

SBA charge off of

$175,051 on loan results

from borrower

submitting false

documentation to obtain

loan disbursements.

OIG investigation

based on referral

from SBA’s

Philadelphia District

Office.
OIG Activities

20 Semiannual Report September 2000

be $437,000. OIG conducted this investigation based on a referral from

SBA’s Philade lphia District Office.

• The owner of a die cutting company in Fairfield, New Jersey, voluntarily

surrendered to arrest in June 2000 after a criminal complaint was sworn

against him by an OIG special agent. He was subsequently indicted on

two counts of bankruptcy fraud. His company had received a nowdefaulted $940,000 SBA-guaranteed loan from a non-bank participating

lender. The indictment charged that, in connection with his personal

bankruptcy petition, he concealed estate property from creditors and the

U.S. Trustee. During the investigation, OIG obtained the court file

pertaining to his bankruptcy proceedings, which contained a schedule in

which he was required to list all real property he owned at the time of the

bankruptcy filing. In the petition he allegedly signed, he claimed to own

no real property. The investigation however, uncovered a deed and

mortgage for a condominium that he took ownership of a year prior to

signing the petition and that tax records show he still owns. SBA’s New

Jersey District Office brought the case to the attention of OIG.

The following narratives illustrate investigations of cases involving

SBA’s lending partners.

• A former executive director of a nonprofit microlender in Manchester,

New Hampshire, was indicted in July 2000 on 10 counts of submitting

false statements and 3 counts of conversion of funds. The Microloan

program provides short-term loans ranging from under $100 to $25,000

through SBA-approved, nonprofit intermediaries. The executive

director was required to report to SBA on a quarterly basis the balances

of the bank accounts established to manage the microloan funds.

According to the indic tment, between November 1996 and March 1997,

he knowingly submitted material false statements to SBA by vastly

overstating the actual balances of the microloan accounts. Based on

reports he submitted for the quarters ending June and December 1996,

he claimed account balances of $325,678 and $409,486; however, the

actual balances totaled only $15,900 and $67,071, respectively. From

December 1995 to December 1996, he allegedly converted to his

personal use $13,042 in microloan funds when he withdrew these funds

from the microlender’s accounts and deposited them into his private

accounts. In June 1997, the microlender became insolvent and SBA

took over administration of its loan portfolio. This investigation was

initiated based on information provided by SBA’s Office of Financial

Assistance and New Hampshire District Office.

• A May 2000 Federal civil fraud complaint charged a Neodesha, Kansas,

bank and the bank’s president with making false statements to SBA and

OIG investigates cases

involving SBA’s lending

partners.
OIG Activities

Semiannual Report September 2000 21

breach of contract. SBA had guaranteed 85 percent of the bank’s

$630,000 loan to a company that failed the following year. According to

the lawsuit, the bank and its president submitted to SBA a falsely

redacted appraisal that included buildings that were not part of the loan

collateral. Although the lender did not obtain or review the credit report,

they stated that the applicants had an excellent credit history. Further, the

pair certified that there had been no substantial adverse change in the

applicants’ financial condition. In fact, upon learning that the company

would not be receiving a $500,000 Community Development Block

Grant (the grant application was never disclosed to SBA), they demanded

additional security for the loan. Finally, the bank and its president

certified that they had not received any Certificates of Deposit (CD) in

connection with making his loan, when in fact they had obtained CDs

totaling $55,000. The lawsuit claims SBA incurred damages of $474,587

due to the defendants’ actions, and seeks triple damages, other civil

penalties, and interest and costs. The investigation previously resulted in

the prosecution of officials of the borrower company for making false

statements regarding their true ownership and officer positions. This

investigation was initiated based on a referral from SBA’s Kansas City

District Office.

Disaster Loan Program

 The following case involves alleged SBA-related identity theft.

• A resident of Inglewood, California, pled guilty in June 2000 to eight

felony counts (three counts of perjury, three counts of filing false

information with the California Department of Motor Vehicles, one

count of identity theft, and one count of grand theft against SBA). He

was sentenced to 32 months in State prison and $153,560 in restitution

to SBA. The investigation documented that the man obtained a

$137,300 disaster home loan following the Northridge earthquake using

the name and SSN of his brother. The man also quitclaimed his

disaster-damaged Los Angeles property to his brother so the ownership

and title of the property would match his forged identity. The man also

forged pay stubs and W2 forms with his brother’s name, SSN, and

income to match the IRS verific ations used by SBA to confirm the

applicant’s income. In addition, the investigation showed that the man

had California driver’s licenses (bearing his photograph) concurrently in

his own name/date of birth and in his brother’s name/date of birth. OIG

initiated the investigation based on a referral from SBA’s Santa Ana

Loan Servicing and Liquidation Office.

California man

sentenced to 32 months

and $153,560 in

restitution to SBA after

pleading guilty to 8

felony counts.
OIG Activities

22 Semiannual Report September 2000

The following case involves alleged fraud to both obtain and avoid

liability for a disaster home loan.

• Two Phoenix, Arizona, residents were indicted in July 2000 on four

counts each of mail fraud. The couple obtained a $231,300 disaster

home loan after the Northridge earthquake. OIG’s investigation

revealed that they had submitted a series of false invoices to SBA

indicating that various contractors had done work when in fact they had

not. The couple also received two loan payment deferments from SBA.

Both times they claimed they had no money or assets. The investigation

later revealed the defendants owned five properties in the Phoenix area

that were not disclosed to SBA. OIG initiated the case based on a

referral from SBA’s Santa Ana Loan Servicing and Liquidation Office.

This case resulted from a criminal-history fraud investigation.

• In September 2000, a seafood company in Grand Isle, Louisiana, was

charged with and (through its president) pled guilty to one count of

making false statements to influence SBA to disburse a $325,600

disaster loan for the business. The company admitted submitting

documents that were false because they failed to disclose that the

corporation and its president had been indicted for, and subsequently

pled guilty to, violations of the Lacey Act. In their Lacey Act guilty

pleas, they had admitted participating in the illegal transportation and

sale of approximately 6,200 pounds of closed-season red snapper. In

April 2000, SBA recovered $161,798 toward the outstanding balance of

the seafood company’s disaster loan based on findings of OIG’s

investigation. OIG initiated its investigation based on an anonymous

Fraud Line complaint.

Small Business Investment Companies

The following case involves bank fraud and embezzling from an

SBIC.

• A consultant to the officers of a now-failed SBIC in New York, New

York, was sentenced in May 2000 to 12 months incarceration, 3 years

probation, and $244,847 restitution. He previously pled guilty to one

count of bank fraud. He acquired control over the day-to-day operations

of the company, a financial institution licensed by SBA, during

The 15 months before it failed. He executed a scheme to defraud the

SBIC by misappropriating and embezzling funds and other assets

intended for, or belonging to, the SBIC. In furtherance of the scheme,

he opened accounts at three banks in a name deceptively similar to that

A consultant to an SBIC

was sentenced to

12 months incarceration, 3 years probation

and $244,847 in

restitution for bank

fraud.
OIG Activities

Semiannual Report September 2000 23

of the company he consulted for. He also deposited checks made

payable to the investment company into the bogus accounts and

converted the proceeds. Over $1 million was misappropriated in this

fashion. After the SBIC failed and was placed in receivership, SBA,

honoring its guaranty, was obligated to pay $4.7 million to the bank that

issued the federally-guaranteed debentures to the SBIC. The

investigation was based on a referral from SBA’s Office of General

Counsel.

Surety Bond Guarantees

 At the request of the Office of Surety Guarantees, OIG conducted an

audit of a surety company participating in SBA’s Surety Bond Guarantee

program, and found that the surety in question did not maintain complete

underwriting documentation for seven of the eight bonds reviewed and

failed to obtain SBA’s consent prior to a material alteration of one bond. The

alteration resulted in a significant amount of additional work that was not

part of the original bonded contract. The audit also found that the surety did

not limit SBA’s guarantee percentage on one bond when the contract

exceeded the $1.25 million statutory limit, and it did not pursue its rights to

liquidate colla teral on another bond. In addition, the surety misallocated the

loss on one SBA-guaranteed bond to another SBA guaranteed bond, did not

have a valid power of attorney when executing a bond, and did not maintain

a cancelled check to support one claim payment. As a result of the findings,

the report recommended that SBA recover $880,677 from the surety. The

Agency agreed with the recommendation to request return of the funds.

Minority Enterprise Development Program

 OIG issued two audit reports concerning a cosponsorship between

SBA and a nonprofit organization (nonprofit) to provide training regarding

new Section 8(a), HUBZone, and SDB rules and contracting procedures in

12 major cities from October 1998, through April 1999. The nonprofit was

responsible for general administration as well as executing and overseeing

various contracts for the training events.

Audit of Nonprofit’s Compliance with Cosponsorship Agreement

The objectives of the first audit were to determine whether the

payments made to the nonprofit for services related to the cosponsorship

were justified, to determine the nonprofit’s compliance with the terms of the

cosponsorship agreement, and to determine whether the nonprofit properly

accounted for the fee income it collected. OIG found that the nonprofit was

paid $121,394 for unjustified expenses under the cosponsorship, did not

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. 
OIG Activities

24 Semiannual Report September 2000

provide the amount of in-kind contribution agreed upon in the agreement,

and did not provide the auditors with documentation supporting the accuracy

of the $81,545 that it reported as fees collected.

The audit report contained four recommendations that SBA should recover

any funds due the Agency from the nonprofit and determine appropriate

actions to rectify the nonprofit’s noncompliance with the cosponsorship

agreement terms regarding the shortfall of in-kind contribution. SBA

management officials agreed to seek reimbursement from the nonprofit for,

or obtain invoices to substantiate the unjustified expenses with the condition

that SBA first obtain a final accounting from the nonprofit.

In response to the audit, the nonprofit stated that it had appropriate

documentation for all expenses incurred and fees collected, but was not able

to provide it by the requested date. Any additional documentation provided

by the nonprofit will be evaluated as part of the audit resolution process.

Agency’s Administration of Cosponsorship Agreement Audit

In concert with the first audit, OIG conducted a second audit of SBA’s

administration of the nonprofit cosponsorship. OIG found that SBA did not

take appropriate actions before or after signing the cosponsorship agreement,

which committed SBA to disburse up to $900,000 of Government funds to

the nonprofit. The audit found that SBA:

(1) Entered into the cosponsorship without determining SBA’s authority

to disburse Government funds through such agreements;

(2) Entered into the cosponsorship without ensuring adequate safeguards

over the Government’s interests;

(3) Lacked controls to ensure appropriated funds were properly spent;

(4) Failed to raise known significant problems with the nonprofit’s

handling of the cosponsorship to the appropriate levels; and

(5) Failed to enforce the terms of the cosponsorship in reviewing the

nonprofit’s claimed expenses.

In the report, OIG recommended six corrective actions regarding the

execution and administration of future cosponsorships where SBA is

disbursing funds, and one action specific to the nonprofit cosponsorship.

Although SBA did not agree with several of the findings, SBA officials

generally agreed with all seven recommendations.

Section 8(a) Audit

OIG issued an audit report on a Section 8(a) firm (firm) which

contracted with SBA to construct SDB space. The objective of the audit was

to determine whether SBA properly evaluated the firm’s initial eligibility for

OIG recommends six

corrective actions

regarding the execution

and administration of

future cosponsorships.
OIG Activities

Semiannual Report September 2000 25

the Section 8(a) program in 1997, ensured the firm’s continuing compliance

with Section 8(a) program requirements, and awarded and administered

$658,000 in contracts to the firm according to applicable policies and

procedures.

The results of the audit revealed SBA’s process for evaluating the firm’s

initial Section 8(a) program eligibility was flawed because it relied on

inaccurate and unverified financial information. Subsequently, the Agency

did not ensure the firm’s compliance with Section 8(a) program

requirements by accepting a contract on the firm’s behalf for which it was

not eligible. In addition, SBA did not comply with its Standards of Conduct

(SOC) regulations by awarding contracts without required approvals, and

Federal Acquisition Regulations (FAR) by not documenting significant

contract actions.

As a result, the Agency had reduced assurance that its programs and

operations are achieving their intended purposes, in accordance with

prescribed policies, procedures, and ethical requirements.

The auditors recommended that SBA: (1) suspend the firm from the Section

8(a) program based on the owner’s non-disclosure of significant personal

liabilities; (2) ensure that Section 8(a) program participants are in

compliance with program requirements before accepting awards on their

behalf; (3) review and revise the Agency’s policies and procedures for

ensuring compliance with the Agency’s SOC regulations as necessary;

(4) revise 13 CFR §105.201 to clarify that a Section 8(a) contractor’s spouse

should be considered a “household member,” regardless of place of abode;

and (5) document the contract files for two firm contracts to comply with the

requirements of the FAR. SBA officials generally agreed with all five

recommendations.

SDB Obligations and Expenditures Audit

OIG issued an audit of SDB obligations and expenditures. In the

audit of funds received from other agencies in FYs 1998 and 1999 to certify

SDBs, the auditors identified about $3 million in expenditures and

obligations that were for non-SDB certification purposes. These

Activities included costs related to construction, furnishings, equipment,

personnel, consultants, training, and marketing. The OIG initially was

unable to sufficiently satisfy documentation requirements for an

Additional $3.2 million ($2.8 million in overhead and $.4 million for a

Section 8(a)/SDB application system) in SDB to conclude whether the costs

were correctly allocated. In addition to these results, SBA cancelled its

plans to obligate approximately $410,000 for a construction project after the

auditors questioned the appropriateness of using SDB funds for the project.

The audit also noted that there was no legal authority to enforce collection of

OIG determines that

SBA did not comply

with its standards of

conduct and Federal

Acquisition

Regulations.
OIG Activities

26 Semiannual Report September 2000

reimbursements from participating agencies that ensured continual funding

for this program, and the SDB program and supporting offices were

overstaffed with SDB-funded employees based on actual workload.

Subsequent to initiation of this audit in FY 1999, SBA reduced staffing and

related expenses and, as a result, the requested SDB funding for FY 2001

is $8.3 million less than the amount received from other agencies for FY

1999. In addition, SDB furniture and equipment was not tracked in SBA’s

electronic inventory management system, and the SDB office ordered excess

equipment that remained in storage for over 1 year.

After OIG fieldwork ended, SBA completed a cost study for FY 1999 that

justifies charging $2.8 million in overhead for FYs 1998 and 1999. At the

time the report was issued, SBA was in the process of determining a

reasonable allocation of the $.4 million spent on the Section 8(a)/SDB

application system. The Agency agreed with 10 of the 11 recommendations

contained in the report. The Agency did not believe it needed additional

authority to require reimbursement from other agencies as we recommended.

The following case involves alleged fraud in connection with bonds

on Section 8(a) contracts.

• A project manager of a Long Island City, New York, construction

company was indicted in May 2000 on one count each of conspiracy and

altering, forging, or counterfeiting a bond to defraud the Government.

In August 2000, he pled guilty to one count of conspiracy, and the

Government agreed to dismiss the other count of the indictment. As a

condition of a $379,079 Section 8(a) contract with the Federal Bureau of

Prisons (BOP), the construction company had been required to obtain

payment and performance bonds to cover any cost resulting from its

failure to perform adequately and/or pay its subcontractor. In the spring

of 1997, the project manager submitted to a BOP contracting officer

payment and performance bonds purportedly issued to the construction

company by an insurance company. The investigation found that the

insurance company never issued the bonds and that the signatures on

them were forged. According to the indictment, the man knowingly

submitted forged bonds and conspired with others to defraud the

Government through the counterfeit bonds and the alteration of other

records. The president of the construction company previously pled

guilty to one count of conspiracy in connection with his role in the

construction company’s submission of fraudulent payment and

performance bonds. OIG initiated the case based on a referral

From BOP.
OIG Activities

Semiannual Report September 2000 27

The following articles describe the results of other investigations

involving the Section 8(a) program.

• In May 2000, a Federal grand jury in Kentucky returned a 12-count

indictment of a former Section 8(a) contractor and five associates on

charges of racketeering, racketeering conspiracy, money laundering,

bank fraud, mail fraud, and obstruction of a Federal audit. This

prosecution under the Racketeer Influenced and Corrupt Organizations

Act involves allegations that the group of persons formed an

“enterprise” that then engaged in a series of corrupt or illegal activities.

In this case, the contractor initially entered SBA’s Section 8(a) program

in Ohio as primary owner of a hazardous-waste cleanup contractor. The

indictment alleges that the year after the company was “graduated” from

the Section 8(a) program, he obtained (in the name of his son and

codefendant, to conceal his role) Section 8(a) status in Kentucky (and

later in California) for another company he controlled.

The indictment further alleges that a third environmental company

purportedly headed by another son/codefendant of the former

Section 8(a) contractor later also fraudulently obtained Section 8(a)

status in Kentucky. During the period these companies participated in

the Section 8(a) program, they were awarded Federal contracts totaling

more than $150 million. The OIGs of the Environmental Protection

Agency and DOD investigated this matter, with the assistance of

SBA/OIG.

• The president of a defunct Philadelphia, Pennsylvania, Section 8(a)

construction company pled guilty in July 2000 to 15 felony counts. The

charges, in connection with alleged schemes to defraud SBA, the

Department of the Navy, and the Department of Agriculture,

Were 1 count of conspiracy to defraud the Government, 12 counts of

false claims, 1 count of major fraud against the United States,

And 1 count of making a material false statement. The false statement

count related to his representing his assets at $40,000 to SBA on the

same day that he represented his assets at over $1.6 million to a bonding

company. The other counts related to falsely reported payments to

subcontractors and false progress payment certifications. Civil

judgments totaling $2,778,921 were filed in U.S. District Court against

the man and his wife in February and March 2000. These judgments

were entered in favor of the bonding company due to the losses it

incurred after the construction company defaulted on Section 8(a) and

other Government contracts. OIG joined the investigation based on a

referral from the Naval Criminal Investigative Service.

Twelve-count

indictment of a former

Section 8(a) contractor

and five associates

delivered by a Federal

grand jury in the Eastern

District of Kentucky.
OIG Activities

28 Semiannual Report September 2000

Entrepreneurial Development

Office of Entrepreneurial Development (OED) Program Inspection

An inspection examined coordination among OED programs in the

field and the methods used for gathering program performance data. In the

three markets studied, there was substantial evidence of effective

coordination among OED service providers. To further improve

coordination in the field, the inspection recommended that OED: (1)

identify districts lacking an efficient referral process or cooperation among

providers; and (2) work with the Office of Field Operations to have relevant

DDs designate and train at least one intake coordinator to route clients to the

appropriate service providers. Regarding program performance

measurement, the inspection found significant differences in the way

providers count their clients and services. To ensure consistency and

accuracy in service provider reporting, the inspection recommended that

OED: (1) use the number of clients served and the number of client

counseling and training sessions as its principal output measures; and

(2) issue specific guidance to providers on how to count clients and client

sessions. To obtain outcome information, such as businesses’ expanding

sales or employment, OED should develop a client survey to be

administered periodically by the Office. The Agency agreed with most of

the recommendations.

Agency Management and Financial Activities

SBA’s Financial Management Systems Audit

OIG issued an audit report of its review of the general controls over

SBA’s financial management systems to determine if those controls

complied with various Federal requirements. General controls are the

policies and procedures that apply to all or a large segment of an entity’s

information systems to help ensure their proper operation. They affect the

overall effectiveness and security of computer operations, rather than

specific computer applications. OIG concluded that SBA has made

significant progress toward implementing an agencywide systems security

program, but that improvements are still needed. The report describes, for

example, how: (1) security policies and plans need to be established and

implemented; (2) access controls need strengthening to reduce the risk of

unauthorized activities; (3) application development and change control

procedures need to be consistently applied; (4) programmers’ access to

operating systems needs to be controlled and monitored; (5) segregation of

duties controls need improvement; and (6) disaster recovery plans need to be

completed and tested. The report also includes several recommendations for

Inspection finds

substantial evidence of

effective coordination

among Office of

Entrepreneurial

Development service

providers in three

markets.

SBA has made progress

and agrees with OIG’s

recommendations to

further improve

information systems

controls.
OIG Activities

Semiannual Report September 2000 29

further implementing the agencywide systems security program. SBA

agreed to address OIG’s recommendations and to implement solutions to

improve information systems controls.

Presidential Decision Directive (PDD) 63 Audit

OIG issued an audit report on SBA’s planning and assessment for

implementing PDD 63. PDD 63 calls for a national effort to ensure the

security of the United States’ critical infrastructures. Critical infrastructures

are the physical and cyber-based systems essential to the minimum

operations of the economy and Government. This audit report evaluated

SBA’s planning and assessment activities for protecting its critical cyberbased infrastructure.

OIG concluded that SBA has made significant progress toward

implementing key aspects of PDD 63, but additional actions are still needed.

Although SBA was not identified as a “Tier One” or “Tier Two” agency

with specific milestones for completing PDD 63 requirements, the Agency

has committed to the completion of those requirements. In November 1998,

the Agency completed a Critical Infrastructure Protection Plan (CIPP) that

identified a number of tasks to be accomplished. Subsequently, however,

based on feedback from the Critical Infrastructure Assurance Office, SBA

shifted the focus of its information systems security efforts to related areas

such as PDD 67 (Continuity of Operations), Year 2000 Contingency

Planning, and recommendations made in previous OIG audits of information

systems controls. Although these efforts satisfied a number of PDD 63

requirements, the Agency did not complete all of the tasks identified in its

CIPP and needs to refocus its efforts toward meeting PDD 63 requirements.

The Agency agreed with the auditors and recommended that the CIO:

(1) complete the study to determine what information systems, data, and

associated assets constitute SBA’s critical infrastructure; (2) conduct or

complete vulnerability assessments on the critical infrastructure; (3) develop

remedial plans to address critical infrastructure vulnerabilities; (4) update

the CIPP; (5) develop and adopt a multi-year funding plan to remedy the

vulnerabilities identified by Vulnerability Assessments; and (6) include

infrastructure assurance functions within the Agency’s GPRA strategic

planning and performance measurement framework.

Advisory Council Audit

OIG conducted an audit of a district advisory council (council). SBA

district advisory councils are advisory committees established in accordance

with the Small Business Act and an approved charter filed with the General

Services Administration, the Library of Congress, and the Small Business

Committees of Congress. The council is one such advisory committee,

OIG conducts an audit

of a district advisory

council.
OIG Activities

30 Semiannual Report September 2000

established at the discretion of SBA’s Administrator pursuant to the

provisions of the Federal Advisory Committee Act (FACA) and the Small

Business Act. The purpose of this audit was to determine whether the

council operated in accordance with governing laws, regulations, and

policies. Though under the current charter SBA’s district advisory councils

are only allowed to advise, the council engaged in the following SBA or

SBA-related activities for non-advisory purposes:

(1) Soliciting funds and charging fees;

(2) Maintaining a private checking account;

(3) Paying expenses for and managing SBA events;

(4) Developing and giving training seminars;

(5) Developing and maintaining a web site; and

(6) Entering into MOUs and cosponsorship agreements with SBA and other

organizations.

The OIG audit found that the SOP does cite non-advisory activities,

contradicting the charter and possibly FACA in those areas. FACA and the

charter, however, take precedence over the SOP.

To improve its management and oversight of its district advisory councils,

the auditors recommended that SBA: (1) ensure that district advisory

councils do not engage in any non-advisory activities unless the charter is

amended; (2) determine whether impermissible augmentation of SBA’s

appropriation has occurred and, if so, take appropriate corrective actions;

(3) properly dispose of all funds which district advisory councils should not

possess; (4) ensure that the SOP provides for full compliance with governing

laws, district advisory council charters, and regulations; and (5) appoint a

Committee Management Officer to control and supervise the establishment,

procedures, and accomplishments of district advisory councils.

The Agency is taking appropriate actions to address the recommendations

made in the audit.

The following cases involve OIG investigations of alleged criminal

conduct by SBA employees.

• The former coordinator of SBA’s BIC at a Mississippi One Stop Capital

Shop was indicted on four counts of filing false claims relating to her

relocation from Texas (where her previous SBA job was) to Mississippi.

The woman obtained reimbursement of expenses for her two children

and her husband when they allegedly did not relocate with her as she

claimed. She began her new position in Mississippi in December 1998.

OIG’s investigation determined that one child was in a reformatory

facility until January 1999, and another child has been in an adult

reformatory since October 1998 and, at the time of the employee’s

removal, was still incarcerated. Her husband did not move to

SBA employee

integrity cases.
OIG Activities

Semiannual Report September 2000 31

Mississippi. The total amount of false relocation expenses claimed

Was $8,779. Prior to her indictment, she was removed from SBA

employment based on the results of this investigation. OIG initiated this

case based on a referral from SBA’s Mississippi District Office.

• A former economic development specialist in SBA’s Sacramento

District Office was sentenced to 27 months incarceration and 3 years

supervised release. He previously pled guilty to one count of knowingly

possessing visual depictions of minors engaged in sexually explicit

conduct. The former employee had retired just after being indicted

In 1999. OIG initiated the investigation after receiving complaints that

he was accessing pornographic sites while on duty, using the computer

SBA had assigned him.

• An employee in SBA’s New York District Office was arrested pursuant

to a warrant charging him with one count of fraud and misuse of visas,

permits, and other documents. The underlying criminal complaint

charges that between October 1998 and July 2000, he counterfeited and

sold Panama Canal Zone birth certificates and Panama Canal Zone voter

identification cards to individuals who used them to fraudulently obtain

Social Security cards. The U.S. immigration law establishes that any

person born in the Panama Canal Zone on or after February 26, 1904,

whose father or mother was a citizen of the United States, is declared to

be a citizen of the United States. The allegedly fraudulent documents at

issue in this case would give an otherwise illegal immigrant the right to

enter the United States, claim citizenship, and obtain employment. OIG

joined this investigation after INS requested our assistance.

OIG reviewed and commented on draft initiatives from several

Government agencies on the use of modern technology, especially the

Internet, to facilitate interactions between citizens and their Government.

The following initiatives were reviewed:

(1) Department of Justice’s (DOJ) draft “Guidance on Implementing

Electronic Processes;”

(2) Department of Treasury’s draft “Electronic Authentication Policy;”

(3) OMB’s draft “Guidance on Inter-Agency Sharing of Personal Data;” and

(4) OMB’s and National Archives and Records Administration’s draft

guidance for documentation under the Government Paperwork

Elimination Act.

Several crosscutting themes emerged from our review. Perhaps most

important, agencies should not underestimate the importance of security,

reliability, information availability, and legal sufficiency when moving to

electronic systems. Failure to adequately address these issues may open the

door to massive new opportunities for waste, fraud, and abuse. On the other

OIG’s Counsel

Division reviews

significant

Government initiatives

and legislation.
OIG Activities

32 Semiannual Report September 2000

hand, OIG noted that it is a mistake to insist that electronic alternatives must

be superior in every way to the paper-based processes that they replace. In

many cases electronic processes will be inferior to current processes in one

or more respects, but the deficiencies will be outweighed by other factors,

such as cost savings, a higher quality of service to the public, or a

countervailing improvement in some aspects of security. The test should not

be whether the electronic process is superior in every particular, but

whether, on balance, it is better for the Government and the public. Lastly,

OIG commented that rapidly changing technological standards may make it

unwise for policy makers to lock into a particular standard prematurely. For

example, it may be undesirable to specify that digital signatures must be

used for authentication, since biometric devices are rapidly improving in

quality and reliability.

OIG also commented on several pieces of legislation.

• OIG reviewed and had a number of comments on S. 870, the IG Act

Amendments of 1999. OIG strongly supports term appointments for IGs

as a way to enhance an IG’s independence. While OIG supports the

concept of external reviews of OIGs’ internal contract, travel and

training, and personnel practices, it is suggested that these reviews be

conducted by another OIG. Currently, OIG auditing units are required

to have peer reviews in order to comply with the GAO Yellow Book

standards. Consequently, changing this section to provide for a peer

review of these OIG practices would result in a more consistent

treatment of the various practices and functions of an OIG.

Alternatively, OIG suggested that peer reviews be incorporated as a

further option to the bill’s current language providing for a review by

GAO or by a private entity contractor. This would have possible costsavings advantages to an OIG over using a contractor, if GAO did not

have resources available to perform a review. Also, OIG strongly

supports the change from a semiannual to an annual reporting

requirement. In order to capture significant OIG work product, OIG

suggested that the words “evaluation” and “inspection” be incorporated

into the reporting requirement provisions. OIG did not, however,

support the section of the bill that would consolidate OIGs at certain

designated Federal entities, and suggested that more study be done on

this issue of consolidation. There is a need to balance the benefit of

having an OIG presence in each entity with the efficiencies that can

result from consolidation with larger OIGs. Perhaps another workable

solution would be to have a partnering (or other) relationship between

two OIGs. A smaller OIG could request and draw upon the resources of

a larger OIG in necessary situations without having improper

appropriations augmentations.
OIG Activities

Semiannual Report September 2000 33

• OIG reviewed and commented on S. 3030, the Senate Fraud Recovery

Bill, a companion bill to H.R. 1827, the Government Waste Corrections

Act of 1999. OIG suggested that the terminology “recovery audits” be

changed to avoid confusion with the statutory audit function of IGs

pursuant to the IG Act. OIG suggested substituting terminology such as

“recovery examinations,” “recovery reviews,” or “payment matching

reviews” to distinguish between the differing roles and functions. OIG

also advocated that language be added requiring department or agency

officials or contractors performing recovery reviews to immediately

report to IG any indication of fraud or other apparent criminal activity

discovered during the course of reviews.

• Based upon its review, OIG fully supported the extension of full law

enforcement authority to all establishment OIGs proposed by S. 3144, a

bill to amend the IG Act. This proposal recognizes the growing

responsibility that OIG has assumed in confronting crimes against SBA,

and similar responsibilities assumed by OIGs across the Government,

and would provide establishment OIGs with the statutory law

enforcement authority necessary to carry out those responsibilities. At

present, OIG has the authority contemplated by this proposal through an

MOU with DOJ granting OIG “blanket deputation;” however,

deputations under the MOU are of limited duration and, therefore, must

be renewed on a regular basis. There is also a risk that the MOU can be

terminated or changed at any time, leaving an OIG without the tools

needed to perform its mission. This proposal is the most efficient and

effective means for OIGs needing full law enforcement authority.

Office of Inspector General

OIG Fraud Awareness Briefings

OIG conducted several briefings for SBA’s employees, lenders, and

other resource partners as part of its mission to educate its customers on

identifying waste, fraud, and abuse. During this reporting period, SBA

employee contributions to the OIG mission were significant. As the chart

below illustrates, over 50 percent of the investigations initiated by OIG

originated with referrals from within the Agency in the form of referrals

either from program heads or other SBA employees. This cooperation

indicates the strong commitment of SBA employees to reducing waste,

fraud, and abuse in Agency programs and improving the Agency’s

management and control of its programs. However, we have recognized the

shift in SBA’s role from primarily reviewing and processing loans to

increasingly providing oversight of lending practices; accordingly, we have

changed our briefing strategy. Much of our past success resulted from

referrals from conscientious SBA employees; our continued successes will

depend more on lender referrals. The Investigations Division has now

OIG conducts fraud

awareness briefings for

SBA employees,

lenders, and resource

partners.
OIG Activities

34 Semiannual Report September 2000

expanded our integrity-awareness briefing program to include participating

lenders and other interested parties, as well as SBA employees. During this

reporting period we conducted the following briefings.

• OIG staff gave presentations to 76 attendees at a Florida lenders’

conference.

• OIG staff gave presentations to 64 attendees at disaster-fraud awareness

meetings in California conducted jointly with special agents from the

Federal Emergency Management Agency. The meetings were held for

State and local law enforcement officers.

• OIG staff gave a presentation to 14 attendees at a Section 8(a) marketing

seminar sponsored by SBA’s Houston District Office.

• OIG staff presented integrity awareness briefings to a total of 42 Agency

employees in Denver and Honolulu.

Sources of Referrals in OIG 

Investigations from April 1, 2000, to 

September 30, 2000

53.0%

22.7%

7.6%

7.6%

9.1%

SBA Program Heads

and Employees

Other Federal

Agencies

Private Citizens

Participating Lenders

Other
OIG Activities

Semiannual Report September 2000 35

Office of Security Operations

Pursuant to provisions of the Small Business Act and the Small

Business Investment Act, SBA requires applicants for assistance to meet

certain character standards before participating in Agency programs. OIG’s

Office of Security Operations (OSO) provides a vital service to help SBA

ensure that Agency program participants meet the standards by processing

name checks and, where appropriate, fingerprint checks on applicants. To

make character eligibility determinations, OSO makes use of its on-line

connection with the Federal Bureau of Investigation’s (FBI) Machine

Readable Data system. When program applicants appear to be ineligible for

Assistance based on character, OSO makes referrals to program officials

for adjudication. During this reporting period, OSO made referrals that

resulted in SBA’s business loan program managers declining 39 applications

and disaster loan program officials declining 12 applications, totaling

$9,653,082 and $251,060, respectively, for character reasons. Those

declinations made available that amount of credit for applicants in whom

SBA can have confidence of repayment. In addition, officials of SBA’s

Section 8(a) program declined 18 applications for certification.

Almost $185 million in loans have been declined during the last 10 years

due to character ineligibility.

OSO also performs background checks to comply with Federal regulations

that require Agency employees to have security clearances appropriate for

their positions. During this reporting period, OSO initiated 49 background

investigations and issued 17 security clearances. OSO also reviewed and

adjudicated 84 background investigative reports in accordance with

Executive Order 10450 and OMB Circular A-130, and coordinated with

SBA’s Office of Disaster Assistance to ensure the timely adjudication of

the 23 derogatory background investigative reports forwarded for review

and appropriate action.

OIG Annual Performance Plan

OIG issued its FY 1999 Annual Performance Report in compliance

with GPRA requirements. OIG is reviewing its Strategic Plan for

FYs 2001-2006 while developing its FY 2002 GPRA Annual Plan.

OIG issued its FY 1999

Annual Performance

Report.
OIG Activities

36 Semiannual Report September 2000

Direct Audit Time by Program Area

April 1, 2000, to September 30, 2000

Program Area Direct Time % Number of Audits

Issued In Progress

Business Loans 45% 5 3

Disaster Loans 6% 0 1

SBIC 2% 1 0

Surety Bond Guarantees 5% 2 2

Government Contracting 2% 0 0

Small Disadvantaged Business 20% 4 1

Minority Enterprise Development 6% 0 1

Entrepreneurial Development 0% 0 0

Agency Management and Financial 14% 4 3

Total

100% 16 11

Direct Investigation Time by Program Area

April 1, 2000, to September 30, 2000

Program Area Direct Time % Number of Investigations**

Closed*** In Progress

Business Loans 58% 28 208

Disaster Loans 20% 15 107

SBIC 2% 1 10

Surety Bond Guarantees 2% 1 2

Government Contracting   0 1

Small Disadvantaged Business 6% 1 5

HUBZone ** ** 0 1

Minority Enterprise Development 8% 0 31

Entrepreneurial Development   0 1

Employee Conduct 4% 3 21

Total

100% 49 387

**  Includes civil cases *** Includes cases canceled   Less than 1⁄2 percent
Statistical Highlights

Semiannual Report September 2000 37

FY 2000 Productivity Statistics

April 1, 2000, through September 30, 2000

Officewide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines......................................................... $1,455,968

B. Loans Not Made as Result of Investigations and Name Checks ............................ $11,308,671

C. Disallowed Costs Agreed to by Management............................................................$880,677

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ............................................................................ $9,056,000

Total $22,701,316

Auditing Division Activities

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

B. Audit Recommendations Issued.........................................................................................66

C. Dollar Value of Costs Questioned......................................................................... $7,828,717

D. Dollar Value of Recommendations that Funds

Be Put to Better Use .................................................................................... $9,056,000

Audit Followup Activities

A. Audit Recommendations Closed.......................................................................................53

B. Disallowed Costs Agreed to by Management...........................................................$880,677

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

Agreed to by Management............................................................................ $9,181,177

D. Unresolved Audit Recommendations................................................................................58

Inspection and Evaluation Division Activities

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

Legislation/Regulations/SOP/Other Review

A. Legislation Reviewed.......................................................................................................17

B. Regulations Reviewed ......................................................................................................22

C. Standard Operating Procedures Reviewed............................................................................4

D. Other Issuances Reviewed** ........................................................................................... 102

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

communications, which frequently involve the implementation of new programs and policies.
Statistical Highlights

38 Semiannual Report September 2000

Investigations Division Activities

A. Total Cases.................................................................................................................... 436

B. Closed Cases....................................................................................................................49

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

D. Open Cases.................................................................................................................... 371

E. Subjects Under Investigation........................................................................................ 1,098

F. Cases Referred to FBI or Other Agencies for Investigation. ...................................................9

Summary of Indictments and Convictions

A. Indictments from OIG Cases.............................................................................................43

B. Convictions from OIG Cases.............................................................................................16

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations....................................................................................... $1,455,968

B. Loans Not Approved as a Result of OIG Investigations.......................................... $1,404,529

C. Loans Not Approved as a Result of the Name

 Check Program............................................................................................ $9,904,142

Total: ................................................................................................................. $12,764,639

SBA Personnel Actions Taken as a Result of Investigations

A. Dismissals..........................................................................................................................1

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

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......................................................................................... 757

B. Total Calls/Letters Referred to Investigations Division for Evaluation..................................19

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

Investigative Agencies..............................................................................................64

D. Total Other Calls/Letters................................................................................................. 674
Statistical Highlights

Semiannual Report September 2000 39

FY 2000 Productivity Statistics

Full Year

Officewide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines*....................................................... $7,555,827

B. Loans Not Made as Result of Investigations and Name Checks ............................ $28,741,121

C. Disallowed Costs Agreed to by Management......................................................... $1,153,535

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ............................................................................ $9,637,523

Total* $47,088,006

Auditing Division Activities

A. Audit Reports Issued........................................................................................................31

B. Audit Recommendations Issued....................................................................................... 115

C. Dollar Value of Costs Questioned......................................................................... $8,313,768

D. Dollar Value of Recommendations that Funds

Be Put to Better Use .................................................................................. $10,982,622

Audit Followup Activities

A. Audit Recommendations Closed..................................................................................... 104

B. Disallowed Costs Agreed to by Management........................................................ $1,153,535

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

Agreed to by Management............................................................................ $9,762,700

D. Unresolved Audit Recommendations................................................................................58

Inspection and Evaluation Division Activities

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

Legislation/Regulations/SOP/Other Review

A. Legislation Reviewed.......................................................................................................36

B. Regulations Reviewed ......................................................................................................37

C. Standard Operating Procedures Reviewed............................................................................9

D. Other Issuances Reviewed**........................................................................................... 241

* This dollar figure includes $3,079,046 attributable to first 6-monh, but not reported during that period.

**This includes policy notices, procedural notices, Administrator’s action memoranda, and other communications, which frequently involve the

implementation of new programs and policies.
Statistical Highlights

40 Semiannual Report September 2000

Investigations Division Activities

A. Total Cases.................................................................................................................... 519

B. Closed Cases.................................................................................................................. 132

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

D. Open Cases.................................................................................................................... 371

E. Subjects Under Investigation........................................................................................ 1,274

F. Cases Referred to FBI or Other Agencies for Investigation. .................................................24

Summary of Indictments and Convictions

A. Indictments from OIG Cases.............................................................................................73

B. Convictions from OIG Cases.............................................................................................38

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations*..................................................................................... $7,555,827

B. Loans Not Approved as a Result of OIG Investigations.......................................... $1,404,529

C. Loans Not Approved as a Result of the Name

 Check Program.......................................................................................... $27,336,592

Total:* ................................................................................................................. $36,296,948

SBA Personnel Actions Taken as a Result of Investigations

A. Dismissals..........................................................................................................................1

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

C. Suspensions........................................................................................................................1

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...................................................................................... 2,015

B. Total Calls/Letters Referred to Investigations Division for Evaluation..................................40

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

Investigative Agencies............................................................................................ 117

D. Total Other Calls/Letters.............................................................................................. 1,858

* This dollar figure reflects first 6-month results reported after publication of the October 1, 1999 – March 31, 2000, semiannual report.
Inspector General Act Statutory Reporting Requirements

Semiannual Report September 2000 41

The specific reporting requirements prescribed in the Inspector General Act of 1978, as amended by the

Inspector General Act Amendments of 1988, are listed below.

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 31-33

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 1-35

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

 And Deficiencies 1-35

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 47

Section 5(a)(4) Matters Referred to Prosecutive Authorities 48-52

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 43

Section 5(a)(7) Summary of Significant Audits 3-30

Section 5(a)(8) Audit Reports Containing Questioned Costs 44

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use 45

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 47

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
42 Semiannual Report September 2000

TABLE OF APPENDICES

Appendix Page

Appendix I – Audit Reports Issued......................................................................................43

Appendix II

 Part A – Inspector General-Issued Audit Reports

 With Questioned Costs.........................................................................................44

 Part B – Inspector General-Issued Audit Reports

 With Recommendations that Funds Be Put to Better Use ........................................45

 Part C – Inspector General-Issued Audit Reports

 With Non-Monetary Recommendations .................................................................46

 Part D – Inspector General-Issued Audit Reports

 With Overdue Management Decision.....................................................................47

 Part E – Significant Audit Reports

 Without Final Action............................................................................................47

Appendix III – Six Month Arrested/Indicted/Convicted Summary.........................................48

Appendix IV – Six Month Sentencing Summary..................................................................51
APPENDIX I

Audit Reports Issued

April 1, 2000, to September 30, 2000

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER

USE

Business Loans

Stop One Convenience Store #2 0-17 4/28/00 $635,981

Volumetrics, Inc. 0-18 6/27/00

Y2K Loan to Municipal Management 0-21 7/20/00 $346,000

Accurate Research, Inc. 0-22 7/26/00 $26,723

Y2K Loan Program 0-24 8/22/00

Program sub-total 5 Reports $662,704 $346,000

Small Business Investment Companies

Results Act Performance Measurement-SBIC 0-25 9/7/00

Program sub-total 1 Report

Surety Bond Guarantees

American Reliable Insurance Companies 0-23 8/21/00 $880,677

Results Act Performance Measurement-SBG 0-26 9/25/00

Program sub-total 2 Reports $880,677

Minority Enterprise Development

SDB Business Certification Program 0-19 6/30/00 $6,163,942 $8,710,000

MBELDEF Cosponsorship 0-29 9/29/00 $121,394

SBA’s Administration of MBELDEF 0-30 9/30/00

Boscart Construction, Inc. 0-31 9/30/00

Program sub-total 4 Reports $6,285,336 $8,710,000

Agency Management & Financial Activities

Information Systems Control 0-16 4/25/00

SBA’s Financial Reporting Process 0-20 7/11/00

Critical Infrastructure-PDD 63 0-27 9/26/00

Rhode Island District Advisory Council 0-28 9/29/00

Program sub-total 4 Reports

TOTALS (all programs) 16 Reports $7,828,717 $9,056,000
44 Semiannual Report September 2000

APPENDIX II - Part A

Audit Reports with Questioned Costs

April 1, 2000, to September 30, 2000

REPORTS RECs*

COSTS**

QUESTIONED UNSUPPORTED

A. For which no management decision had

been made by March 31, 2000

2 3 $1,600,242 $781,461

B. Which were issued during the period 5 11 $7,828,717 $3,309,690

Subtotals (A + B) 7 14 $9,428,959 $4,091,151

C. For which a management decision was

made during the reporting period

3 7 $4,746,199 $3,532,201

(i) Disallowed costs 1 4 $880,677 $409

(ii) Costs not disallowed 2 3 $3,865,522 $3,531,792

D. For which no management decision had

been made by September 30, 2000 ***

5 7 $4,682,760 $558,950

* Recommendations.

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

 lack documentation.

*** In one or more reports, one or more recommendations were closed and at least one remains open.
APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

April 1, 2000, to September 30, 2000

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

March 31, 2000

4 4 $1,926,622

B. Which were issued during the

period

2 3 $9,056,000

Subtotals (A + B) 6 7 $10,982,622

C. For which a management

decision was made during the

reporting period

4 5 $10,015,258

(i) Recommendations

agreed to by SBA

management

3 4 $9,181,177

(ii) Recommendations

not agreed to by SBA

management

1 1 $834,081

D. For which no management

decision had been made by

September 30, 2000

2 2 $967,364

* Recommendations.
46 Semiannual Report September 2000

APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

April 1, 2000, to September 30, 2000

REPORTS RECOMMENDATIONS

A. For which no management decision had

been made by March 31, 2000

10 38*

B. Which were issued during the period 13 52

Subtotals (A + B) 23 90

C. For which a management decision was

made (for at least one recommendation in

the report) during the reporting period

13 41

D. For which no management decision (for

at least one recommendation in the

report) had been made by September 30,

2000

12** 49

* Beginning balance corrected to reflect prior period adjustment.

** In one or more reports, one or more recommendations were closed and at least one remains open.
APPENDIX II – Part D

Issued Audit Reports with Overdue Management Decisions

September 30, 2000

TITLE NUMBER ISSUED STATUS

Dixieland Events/Tamingo Farms 0-05 2/16/00

Referred to Office of Litigation for

review

Vincent R. Forshan Medical Corp. 0-12 3/28/00

Awaiting final resolution with

Lender.

FY 1999 SBA Financial Statements 0-13 3/29/00

Negotiating with Office of Chief

Financial Officer.

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of September 30, 2000

Report

Number

Title Date

Issued

Date of

Management

Decision

Final

Action

Target

5-3-4-006 SBA Loan Servicing and Debt

Collection Activities

3/31/95 4/30/95 12/31/01

7-5-H-001-026 Business Loan Guarantee Purchases 9/30/97 8/15/00 12/31/01

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

9-11 Non-Tax Delinquent Debt 7/28/99 8/13/99 3/31/01

9-23 Survey of Electronic Records

Management

9/15/99 11/30/99 11/30/00

0-03 7(a) Loan Processing Summary 1/11/00 8/21/00 1/3/01

0-05 Dixieland Events/Tamingo Farms 2/14/00 * **

0-06 SBA’s FY 1999 Financial

Statements

2/29/00 3/29/00 9/30/00

0-10 Roshni Foods 3/23/00 8/15/00 10/20/00

0-11 NADI Manufacturing 3/28/00 3/15/00 3/15/00 ***

0-12 Vincent R. Forshan Medical Corp. 3/28/00 * **

0-13 FY 1999 SBA Financial

Statements-Management Letter

3/29/00 * 2/28/01

0-14 7(a) Service Fee Collections 3/30/00 8/22/00 10/31/01

0-15 Systems Development Method 3/30/00 9/29/00 9/30/02

* At least one recommendation remains open.

** There are two recommendations. One is final and the other does not have an OIG approved Management Decision.

*** Final action completed based on issued draft audit report.
48 Semiannual Report September 2000

APPENDIX III

Six Month Arrested/Indicted/Convicted Summary

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 CA BL Former banker accepted $24,000 automobile from SBA-loan

broker; received share of proceeds from $1 million SBAguaranteed loan. *

Charged and

pled guilty

FBI

 CA BL Fish market owner submitted altered tax returns in application for

$580,000 loan. *

Indicted FBI

 CA DL Couple obtained $231,300 disaster home loan following

Northridge earthquake by submitting false invoices; received

repayment deferments by concealing ownership of real estate

properties. *

Two indicted None

 CA BL Equipment manufacturer obtained $833,000 SBA-guaranteed

Export Working Capital loan by president, associate, and

employee participating in scheme utilizing false invoices and

faxes; concealed property from bankruptcy court; president

omitted significant information from financial statements. *

Three indicted FBI

 CA BL Telemarketing agency owner concealed criminal history in

applying for $430,000 and $135,000 SBA-guaranteed loans. *

Arrested USPO

 CA BL Accountant prepared altered tax returns submitted in applications

for $2,020,000 in loans. *

Pled guilty FBI

 CA BL Businessman submitted altered tax returns in application for

$550,000 loan and abetted accountant. *

Acquitted FBI

 CA BL Real-estate company president and corporate secretary obtained

$550,000 SBA-guaranteed loan by using false SSN and fraudulent

checks, submitting false financial statements, and omitting

corporate secretary’s criminal record from SBA application. *

Two pled guilty HUD/OIG,

FBI, IRS

 CA BL Tax preparer helped real-estate company obtain $550,000 SBAguaranteed loan by preparing altered tax returns.*Charged in

information

HUD/OIG,

FBI, IRS

 DC EC Former SBA timekeeper submitted time sheets to be paid $5,441

in overtime that she did not work.

Charged None

 FL BL Seller of franchised store signed and submitted bill of sale falsely

indicating total price of $225,000 and verifying his receipt of

$75,000 cash injection from buyers.

Indicted FBI

 FL BL President of franchiser submitted letter to bank falsely

corroborating that $75,000 cash injection from buyers had been

paid.

Indicted FBI

 GA BL Couple signed loan documents falsely verifying payment to seller

of $105,000 in earnest money toward purchase of daycare

franchise business.

Two indicted None
State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

KS BL Participating lender bank and its president submitted to SBA

fraudulently redacted appraisal including buildings not part of loan

collateral; falsely stated that applicants had excellent credit history

and certified there had been no substantial adverse change in

applicants’ financial condition. *

Federal civil

fraud complaint

filed

None

 KY 8(a)BD Former Ohio Section 8(a) contractor participated in fraudulent

conspiracy to circumvent program graduation rules, using his sons

to establish Section 8(a) companies in other states to

surreptitiously maintain his participation in program. Other

conspirators were his wife, nephew, and former vice president. *

Six indicted EPA/OIG,

DCIS

 MS EC SBA employee, having transferred to SBA office in different

region, obtained extra $8,779 in reimbursement of expenses for

her two children and her husband when they did not relocate with

her as she claimed. *

Removed from

Federal

employment,

indicted

None

 MT BL Owners of hot tub company obtained $170,000 SBA-guaranteed

Women’s Pre-Qualification loan using inflated invoice; used most

of extra $13,000 generated by this scheme to pay off undisclosed

$8,000 business debt and pocketed $5,000 remainder.

Two indicted None

 NH BL Former executive director of nonprofit microlender greatly

overstated, in reports to SBA, actual balances of microloan

accounts; converted to his personal use $13,042 in microloan

funds. *

Indicted None

 NJ BL Owner of die cutting company with defaulted $940,000 SBAguaranteed loan concealed property (condominium) from creditors

and bankruptcy trustee. *

Surrendered,

indicted

FBI

 NY BL Photo studio owner, in applying for $260,000 SBA-guaranteed

loan, lied to conceal that 1) he had been convicted of alien

smuggling and was Federal fugitive and 2) he was resident alien

facing deportation proceedings. *

Indicted SSA/OIG

 NY 8(a)BD Project manager of construction company forged bond to defraud

Government in connection with $379,079 Section 8(a) contract. *

Indicted and

pled guilty

FBI

 NY EC SBA employee counterfeited and sold Panama Canal Zone birth

certificates and voter identification cards to individuals who used

them to fraudulently obtain Social Security cards. *

Arrested INS

 PA BL In offers of compromise of liability for his manufacturing

business’s defaulted $315,000 SBA-guaranteed loan, owner made

false representations and otherwise concealed assets.*

Indicted None

 PA 8(a)BD Construction executive conspired to improperly obtain Section

8(a) contracts; represented his assets at $40,000 to SBA while

representing his assets at over $1.6 million to bonding company.*

Pled guilty USDA/OIG,

DOL/OIG,

Navy, Army,

DCIS

 TX BL Attorney induced disbursement of $95,000 SBA-guaranteed loan

by false invoices and certifications of expenditures; falsely

negotiated joint-payee disbursement checks; and used some loan

proceeds to purchase another business.

Indicted None
50 Semiannual Report September 2000

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 TX BL To obtain $350,000 SBA-guaranteed loan, proprietor of auto

repair business and two relatives submitted false tax return and

falsified capital injections and equipment purchases. Employee

provided bogus sales invoices and other fraudulent documents. *

Four indicted TIGTA

 TX BL Three sellers of gas station and buyer (a convicted felon) used the

buyer’s brother’s identifiers, false tax returns, and false

documentation of capital injection to obtain $256,000 SBAguaranteed loan. *

Four indicted TIGTA

 TX BL To obtain $675,000 SBA-guaranteed loan, owner of clothing

manufacturer used false SSN and false name to conceal that her

previous business had defaulted on SBA loan and that she had

previously filed for bankruptcy; also submitted fictitious tax

returns, falsified financial statements, and other documents; then

failed to purchase equipment pledged as collateral and spent most

of loan proceeds for personal purchases.*

Convicted TIGTA,

SSA/OIG

 TX BL Convenience-store leasehold owner cashed $54,211 SBA loan

disbursement check payable jointly to him and financial institution

by forging endorsement of financial institution.

Indicted FBI

 WI BL Pre-Qualification applicant for $105,000 loan concealed his

criminal history of weapons violations; after being declined, he

made threatening telephone call to SBA loan officer.

Arrested for

violating

probation

Local police

department

* This case is further discussed in the narrative section of this report.

Program codes: BL=business loans, DL=disaster loans, EC=SBA employee conduct, 8(a)BD=Section 8(a) business

development, SBIC=small business investment companies

Joint-investigation Federal agency acronyms: ATF=Bureau of Alcohol, Tobacco and Firearms; DCIS=Defense Criminal

Investigative Service; DOL/OIG=Labor Department OIG; ED/OIG=Education Department OIG; EPA/OIG=Environmental

Protection Agency OIG; FBI=Federal Bureau of Investigation; HHS/OIG=Health & Human Services Department OIG;

HUD/OIG=Housing & Urban Development Department OIG; INS=Immigration & Naturalization Service; IRS=Internal

Revenue Service; PIS=Postal Inspection Service; SSA/OIG=Social Security Administration OIG; TIGTA=Treasury

DepartmentTax Administration OIG; USDA/OIG=Agriculture Department OIG; USPO= U.S. Probation Office
APPENDIX IV

Six Month Sentencing Summary

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 CA DL In applying for $67,700 in SBA disaster loans,

businessman failed to disclose he had filed for

bankruptcy under different name and SSN; also

failed to inform SBA he was on criminal

probation.

15 months incarceration,

$72,200

ATF,

SSA/OIG

 CA BL In application for $161,500 loan, liquor store

owner listed real estate properties he had

transferred to brother.

1 day incarceration, $115,000 None

 CA EC Using computer SBA had assigned him, SBA

employee repeatedly accessed Internet

pornography sites, including images of children

involved in various sexual acts. *

27 months incarceration, $100 FBI

 CA DL Man obtained $137,300 disaster home loan

following Northridge earthquake using name

and SSN of brother. *

Pled guilty, 32 months

incarceration, $153,560

State law

enforcement

agency

 IL BL Meatpacking executive submitted altered tax

returns to obtain $490,000 loan, failed to make

promised $150,000 capital injection, sold

majority of farmland pledged as collateral. *

12 months plus 1 day

incarceration, $460,833

FBI

 LA DL Application for $325,600 disaster loan failed to

disclose applicants’ (seafood company and its

president) criminal records. *

Corporation charged and pled

guilty, $161,798 administrative

recovery (not sentenced yet)

None

 MO BL To obtain $70,000 loan, accountant generated

documents, including client’s SBA loan

application and fictitious tax returns that

contained false SSN.

Pled guilty, $36,748 HUD/OIG,

SSA/OIG,

IRS, FBI

 MO BL To obtain $70,000 loan, real estate executive

submitted documents, including SBA loan

application and fictitious tax returns that

contained false SSN.

Pled guilty, $36,748 HUD/OIG,

SSA/OIG,

IRS, FBI

 MO BL To obtain $387,000 loan, child care executive

failed to disclose that she owed delinquent taxes

and had prior arrest; also falsely documented her

required $111,000 cash injection; also submitted

false documents as to use of $12,690 loan funds.

4 months at home, $12,790 TIGTA
52 Semiannual Report September 2000

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 MO BL

In applying for $295,000 loan to buy day care

center, businessman made false statements re:

educational background, work experience,

criminal history, and financial status. *

Pled guilty, 51 months

incarceration, $500

HHS/OIG,

SSA/OIG, PIS

 MT BL

To obtain $54,000 loan, restaurateur represented

on his SBA application that he had no criminal

history; in fact, he had been arrested more than

20 times.

21 months incarceration, $1,000 FBI

 NY SBIC

Consultant to SBIC officers, embezzled over $1

million in funds and other assets intended for or

belonging to the SBIC. *

12 months incarceration,

$244,847

FBI

 NY BL

Coffeehouse owner filed tax returns with IRS

that significantly differed from “copies” he gave

bank with application for $38,000 LowDoc loan.

Charged and pled guilty,

6 months at home, $40,000

FBI

 NY BL

Bridal shop owner used name and SSN of

another person to obtain $100,000 SBAguaranteed loan.

Charged and pled guilty,

4 months at home, $150,000

SSA/OIG

 TX BL

Having been indicted on 10 felony counts of

fraud in connection with $350,000 business

loan, businessman’s application for $115,963

SBA disaster loan was declined. *

Savings of $115,963 TIGTA

 VA BL Having been sentenced to 6 months of home

detention for obtaining SBA loan by fraud, taxi

owner is arrested for conspiring to distribute

marijuana in violation of probation.

12 months incarceration SSA/OIG

* This case is further discussed in the narrative section of this report.

Program codes: BL=business loans, DL=disaster loans, EC=SBA employee conduct, 8aBD=Section 8(a) business

development, SBIC=small business investment companies

Joint-investigation Federal agency acronyms: ATF=Bureau of Alcohol, Tobacco and Firearms; DCIS=Defense Criminal

Investigative Service; DOL/OIG=Labor Department OIG; ED/OIG=Education Department OIG; EPA/OIG=Environmental

Protection Agency OIG; FBI=Federal Bureau of Investigation; HHS/OIG=Health & Human Services Department OIG;

HUD/OIG=Housing & Urban Development Department OIG; INS=Immigration & Naturalization Service; IRS=Internal

Revenue Service; PIS=Postal Inspection Service; SSA/OIG=Social Security Administration OIG; TIGTA=Treasury

DepartmentTax Administration OIG; USDA/OIG=Agriculture Department OIG; USPO= U.S. Probation Office
MAKE A DIFFERENCE

To promote integrity, economy, and efficiency, we encourage

you to report instances of fraud, waste, or mismanagement to

the SBA OIG FRAUD LINE.*

CALL

1-800-767-0385 (Toll Free)

202-205-7151 (Washington, DC, Area)

Write or Visit

U.S. Small Business Administration

Office of Inspector General

Investigations Division

409 Third Street, SW. (5th Floor)

Washington, DC 20416

Or E-mail Us At OIG@SBA.GOV

*Upon request your name will be held in confidence.