SEMIANNUAL REPORT OF THE INSPECTOR

GENERAL

FOR THE PERIOD

April 1, 1996, To September 30, 1996
Semiannual Report September 1996 i

PREFACE 

Pursuant to Public Law 95-452, the Office of Inspector General (OIG) is required to prepare a

Semiannual Report of its activities for the Congress of the United States. This Semiannual

Report, transmitted to the Congress by the Administrator of the Small Business Administration

(SBA), covers the full range of OIG activities from April 1, 1996, to September 30, 1996.

Text of IG’s preface. page i
ii Semiannual Report September 1996

Text of IG’s preface. page ii 

James F. Hoobler

Inspector General
Semiannual Report September 1996 iii

TABLE OF CONTENTS

Title Page

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

Table of Contents .......................................................... ii

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

Business Loan Program ...................................................... 6

Disaster Loan Program ...................................................... 24

Small Business Investment Companies ......................................... 32

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

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

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

Economic Development ..................................................... 45

Agency Management and Financial Activities .................................... 48

Organization, Resources, and Management Initiatives ............................. 55

Profile of Operating Results .................................................. 62

FY 1996 Productivity Statistics ............................................... 66

Statutory Reporting Requirements ............................................. 68

Table of Appendices ....................................................... 69
Semiannual Report September 1996 1

Executive Summary

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

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

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

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

April 1, 1996, to September 30, 1996.

Summary of Accomplishments

OIG audits, inspections, and investigations other Federal OIGs; Department of Justice

over the last 6 months achieved $15,133,398 (DOJ) prosecutors; and, most importantly,

in potential dollar results, 36 indictments, the actions of SBA program managers and

and 44 convictions. The dollar results employees. Indeed, much of our success is

consist of (1) $2,041,896 in potential due to referrals made by conscientious SBA

recoveries, including judicially-awarded employees.

fines and restitution; (2) $10,857,466 in

management avoidances; (3) $1,313,113 in

disallowed costs agreed to by SBA's

management; and (4) $1,437,923 in In FY 1997, the OIG will continue to focus

management commitments to use funds its attention on SBA’s two largest programsmore efficiently. This brings the OIG’s FY -Business Loans and Disaster Assistance.

1996 accomplishments to almost $70 The continuing growth of these two

million. programs, as discussed throughout this

The OIG alone could not have achieved the several years. While the number of dollars

accomplishments set forth in this report to at risk in these two programs continues to

the Congress. The results for this reporting grow, both the Agency and the OIG have

period reflect the cooperation and support of undergone reductions in resources for their

other Federal audit, inspection, and respective management and oversight

investigative organizations such as the activities. The Agency’s total portfolio,

Federal Bureau of Investigation (FBI); U.S. which includes its loan and disaster

Secret Service; Bureau of Alcohol, Tobacco programs, now exceeds $35.3 billion. This

and Firearms (BATF); Internal Revenue represents a 7 percent growth over last

Service (IRS); Air Force Office of Special

Investigations; Federal Protective Service;

OIG Mission for FY 1997

report, has been substantial over the last
2 Semiannual Report September 1996

year’s portfolio of $32.8 billion. The Summaries of OIG audit and inspection

burgeoning size of the oversight universe is reports are being made available over IGnet,

clearly outpacing the OIG’s ability to a communications system coordinated for

provide responsible levels of monitoring, the federal inspector general community by

and this is a major concern of the Inspector

General.

Using $3 million made available to the OIG

by the President and the Congress in FY

1994 for the purpose of disaster-related

oversight, the OIG subsequently developed

a strategy to guide disaster-related oversight

activity and to make optimal use of these

funds. Increased temporary staffing, located

near disaster sites, now provides needed

personnel to meet the oversight goals of the

OIG's disaster plan. The Congress again

demonstrated its concern in the FY 1997

budget by appropriating an additional

$500,000 to the OIG for its the disasteroversight effort.

The OIG continues to build greater

awareness of its mission with SBA

employees, program participants, and the

Agency’s resource partners. We believe the

OIG’s information dissemination activities

are deterring some level of fraud, but equally

important, these activities are also raising

SBA program managers' interest in

management and systems improvement. The

office continues to pursue this dual goal

through attendance at SBA-sponsored

events, the development and use of

educational presentations, more creative use

of key OIG reports and activities, and staff

involvement in other initiatives designed to

make the OIG more visible within the

Agency and its client groups. One such

example is the OIG’s use of IGnet, an

Internet-based forum for the inspector

general community and the public at large.

the SBA/OIG. IGnet can be reached

through the Internet at

http://www.sbaonline.sba.gov/ignet. These

are relatively economical methods of

reporting our work, and they are having a

substantial impact on the accomplishment of

our mission goals. The OIG is also

becoming progressively more visible to

SBA’s resource partners through attendance

of key OIG officials at the National

Association of Guaranteed Government

Lenders (NAGGL) conference, active

leadership and participation in the activities

of the National Intergovernmental Audit

Forum, and professional presentations at the

annual meeting of the American Institute of

Certified Public Accountants and other

professional and trade organizations. The

OIG’s visibility is also enhanced through the

Inspector General’s (IG) leadership role in

the President’s Council on Integrity and

Efficiency (PCIE).

Highlights of the Past Six

Months

Efforts to Improve SBA

Program Management

Annual Audit of SBA’s Financial

Statements Yields Qualified Opinion.

Three material weaknesses caused a

qualified opinion to be issued for the FY

1995 independent audit of SBA’s financial

statements, required by the Chief Financial

Officers Act of 1990. SBA did not (1)

maintain comprehensive inventory records

of acquired property, (2) consistently value
Semiannual Report September 1996 3

the acquired property at its net realizable Government. Section 8(a) contractors would

value, and (3) reconcile certain fund also have to supply the products of a small

balances with the U.S. Department of business, if available. These requirements

Treasury. The first two exceptions were would aid the firms in developing their

repeated from the 1994 audit. Because of businesses while reducing the pass-through

the lack of an automated inventory system of contracts to large businesses.

with unit detail, SBA cannot reconcile the

estimated $140 million of collateral

purchased property to its general ledger.

The SBA’s CFO has indicated, however, that

field office records fully document this

general ledger balance. The fund balance

problem refers to loan accounting balances,

which were reported to be $32 million

higher on SBA’s books than on those of the

Department of Treasury. The CFO has been

reconciling these balances over the past year,

working with the audit staff. The FY 1996

audit is underway, and the CFO has been

correcting the problems reported in previous

years working toward an unqualified opinion

for FY 1996.

Two Audits Call for Procedural Changes

To Prevent Abuse in the Section 8(a)

Program. One OIG audit report addressed

a procurement method called basic ordering

agreements (BOA). Such agreements can

result in unlimited sole source awards to

single companies, thereby undermining

statutory competitive thresholds. The OIG

auditors recommended (1) limiting the

dollar amount of sole source BOA delivery

orders to regulatory competitive thresholds,

i.e., $5 million for manufacturing and $3

million for other SIC codes; and (2) limiting

Standard Industrial Classification (SIC)

codes in a BOA to one major group.

A second audit report called for SBA to

require firms to be established wholesalers

or retailers in the products they sell to the

OIG Audits SBA’s New Low

Documentation (LowDoc) Loan Program.

An audit of the LowDoc program found

that, as of July 1996, only 2 of 70 loans

examined were past due or in liquidation,

indicating a relatively low failure rate due to

LowDoc credit procedures. The audit did,

however, find that 5 loans out of the sample

of 70 were approved for borrowers with

questionable repayment ability and 2 were

approved for ineligible borrowers. The

auditors also found that 54 loans, including

6 of the 7 with approval errors, had at least

one other processing or disbursement

deficiency compared to Section 7(a) loan

program guidelines. 

Inspector General Community Supports

OIG Involvement in the GPRA Process.

Under the auspices of the President’s

Council on Integrity and Efficiency (PCIE),

the SBA and Treasury Department

Inspectors General recently directed a

survey of all IGs. The survey’s goals were

to determine current and planned OIG

involvement in the implementation of the

Government Performance and Results Act

(GPRA) within host agencies and to solicit

IG perceptions as to the appropriate role of

the IGs in that process. The majority of IG

respondents believed OIGs should act in an

advisory/consultative capacity in the Act’s

implementation stages, but they should also

perform independent audits and reviews of

results once the host department or Agency
4 Semiannual Report September 1996

has had an opportunity to implement both its

strategic and performance plans.

SBA Should Discontinue Using the

Section 7(a) Loan Program Commercial

Loss Rate. An OIG inspection report,

requested by the SBA Administrator, found

that the methodology for determining the

Section 7(a) general business loan program’s

commercial loss rate is valid. The rate is

not, however, comparable with banking

industry loss rates because of significant

differences in the loan portfolios. SBA’s

loan-making objectives also vary

considerably from those of the for-profit

banking industry, and differing charge-off

policies affect the timing of charge-offs and,

therefore, loss rates. The commercial loss

rate is further misleading as an indicator of

the Agency’s Section 7(a) loan program

performance because of the rapidly

expanding portfolio and the 3-to-4 year lag

between loan disbursals and charge-offs.

For these reasons, the IG recommended that

SBA discontinue using the Section 7(a)

commercial loss rate to compare Section 7(a)

program performance with that of the

banking industry.

Activities to Enhance Fraud

Detection and Deterrence

California Loan Broker and Nine Others

Charged With Making False Statements.

A loan broker from La Canada, California,

and nine other southern Californians

involved with SBA-guaranteed business

loans he brokered, were charged with

making false statements. The broker and

seven of the nine others have pled guilty.

The loan broker pled guilty to five counts of

making false statements in a loan

application to a Federally-insured

financial institution. He also pled guilty to

a criminal forfeiture count allowing the

Government to recapture the illegal proceeds

of his crimes. Between 1987 and 1992, the

man brokered more than two dozen

fraudulent loans totaling more than $9

million. His scheme involved the

submission of falsified financial information,

including Federal tax returns, financial

statements, invoices, etc., to induce the

banks and SBA to grant the loans. When the

banks and SBA approved the loan

applications, the broker would launder part

of the proceeds through a business which he

fraudulently represented had sold equipment

to various applicants.

Results of False Tax Return Cases

Increase. Over the last 6 years, the OIG has

received 284 allegations that false tax returns

were submitted in support of SBA business

or disaster loan applications. These fraud

referrals now involve loan applications

submitted to 44 SBA district offices, totaling

$115 million and involving 1,039 individual

subjects. To date, 82 individuals have been

indicted on criminal charges: 72 have been

adjudicated guilty, 2 indictments were

dismissed, and 8 others have not yet gone to

trial.

Affirmative Civil Enforcement Program.

The OIG continues to expand the scope of its

efforts to make optimal use of the

Department of Justice's Affirmative Civil

Enforcement (ACE) program. This U.S.

Attorney program targets cases which might

not be prosecuted criminally because of the

minimal dollar amounts involved, absence of

financial loss to the Government, or because
Semiannual Report September 1996 5

other facts of the case might not support a

criminal prosecution. Heretofore, our

success with the ACE program was focused

in only ten states; however, during this

reporting period, the OIG realized its first

ACE results in Iowa, Kansas, and Utah.

During the approximately 39 months the

OIG has been involved with the ACE

program, we have had a total of 52

successful cases, resulting in $2,372,917 in

civil penalties and $1,656,218 in recoveries

by SBA. Individual ACE outcomes are

reported in the program area chapters, as

appropriate.
6 Semiannual Report September 1996

Business Loan Program

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

to ensure that Federal funds and resources are used to help finance qualified small enterprises.

Under the Section 7(a) Guaranteed Loan Program, SBA guarantees loans to small

businesses that are unable to obtain private financing. These loans must be of such merit, or

be so secured, as to reasonably ensure repayment to the lending institution. No loan may be

made unless the financial assistance is not otherwise available on reasonable terms from

elsewhere in the credit market. Under the guarantee plan, SBA agrees to purchase the

guaranteed portion of the loan upon default by the small business. SBA's guarantee share of

loans by private lenders averages about 77 percent.

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

Currently, approximately 38 percent of these loans are being made by participants in the

Agency's Certified Lender Program (CLP) or its Preferred Lender Program (PLP). 

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

criteria can participate through the CLP. Over 900 participating lenders, approved for the

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

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

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

Agency staff. About 9 percent of all business loan guarantees are made through the CLP

process.

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

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

business loans and decide the level of SBA participation. This program, with over 350

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

SBA's best lenders to the maximum. About 29 percent of all business loan guarantees are

made through the PLP process.

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

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

equipment for expansion of business or modernizing facilities. Typically, 504 loan proceeds
Semiannual Report September 1996 7

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

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

maximum SBA debenture is $1 million.

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

are now able to use their own internal loan application documents, plus a single, two-sided

SBA form to apply for an SBA guarantee on a loan of $100,000 or less. The demand for this

program is unprecedented; 36 percent of all SBA loan guarantee applications are no w

submitted through the LowDoc application process. 

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's business loan programs

over the reporting period:

Three audit reports were issued and

eight audits were underway.

One inspection report was issued and

two others were underway.

Business loan investigations resulted

in 29 indictments and 29 convictions,

not necessarily the same cases,

however.

Business loan investigations

produced $395,427 in court-ordered

restitution, $500,000 in other

recoveries by SBA, $986,797 in

reductions to the Agency's financial

risk, and $52,540 in civil penalties

and fines.

Office of Security Operations name

check activity resulted in the

declination of 37 business loans,

totaling $7,826,617.

Twenty-six business loan

investigations were closed, leaving

an inventory of 153 active cases

involving 730 subjects. Due to other

workload demands, another 12

business loan cases were referred to

another law enforcement agency for

investigation, giving the OIG a total

of 78 business loan referrals to

monitor.

One proposed piece of legislation

and one Standard Operating

Procedure were reviewed.
8 Semiannual Report September 1996

Figure 1

Efforts to Improve SBA

Program Management

SBA’s 7(a) Loan Program Loss Rate

Methodology Deemed Valid, But Rate

Not Comparable to Banking Industry

Loss Rates 

The Office of Inspector General (OIG)

issued an inspection report requested by the

SBA Administrator on the Agency’s 7(a)

loan program loss rate. The report focusses

on the methodology used to compute the

commercial loss rate for the 7(a) general

business loan program and on the use of this

rate by Small Business Administration

(SBA) officials. 

While there are minor differences in how the

SBA and the banking industry compute the

commercial, or one-year, loss rate, the OIG

found that the methodology used by SBA to

calculate the rate is fundamentally valid and

consistent with that used by the banking

industry. The OIG also found, however,

that SBA’s commercial loss rate is not

comparable with banking industry’s loss

rates because of the significant differences

in their loan portfolios--SBA’s portfolio

includes only small businesses, whereas the

industry rate reflects losses on loans to

businesses of all sizes; SBA’s loans are

concentrated primarily in retail trade and

services, while private lender loans cut

across all industrial sectors; and SBA’s

portfolio includes real estate loans, which are

excluded from the industry loss rates.

SBA’s loan-making objectives also vary

considerably from those of the for-profit

banking industry, and differing charge-off

policies affect the timing of charge-offs and,
Semiannual Report September 1996 9

therefore, the loss rates. Finally, the Agency’s Annual Loss Study. The OCFO is

commercial loss rate is misleading as an addressing these issues. 

indicator of current 7(a) loan program

performance because of the rapidly

expanding portfolio and the 3-to-4 year lag

between loan disbursals and charge-offs. It

should also be noted that SBA program An audit of SBA’s Low Documentation

officials do not use the commercial loss rate Loan Program (LowDoc) found that 5 loans

for internal management purposes; instead, out of an audit sample of 70 were approved

they focus on cohort performance and other for borrowers with questionable repayment

indicators such as purchase, currency, and ability and 2 were approved for ineligible

subsidy rates. These indicators appear to be borrowers. As of July 1996, only 2 of the 70

more useful measures of loan performance. loans were past due or in liquidation,

For these reasons, the Inspector General also found that 54 loans, including 6 of the 7

recommended that SBA discontinue the use with approval errors, had at least one other

of the commercial loss rate for the 7(a) processing or disbursement deficiency

general business loan program. While compared to Section 7(a) loan program

conceding the validity of the report’s

arguments, SBA officials believe that the

Agency should continue using the

commercial loss rate. They assert that it is

useful for comparisons with the commercial

lending industry because the methodology is

similar and the rate is easily understood--

whereas the subsidy rate and its derivatives

are not. 

The inspection also found that loss and

default rates are sometimes used

interchangeably and not always properly

identified, providing the potential for an

inadvertent misrepresentation of 7(a) loan

program performance. The inspectors

recommended that information on loss and

default rates be more clearly defined and

labeled. Because of changes resulting

from credit reform, the OIG also

recommended that the Office of the Chief

Financial Officer (OCFO) determine whether

revisions can be made in the format of the

OIG Conducts Audit of SBA’s LowDoc

Loan Program

1

indicating a relatively low failure rate due to

LowDoc credit procedures. The auditors

guidelines. The most prevalent

deficiencies involved inadequate

verification of equity injections, use of

proceeds, and Federal tax returns.

The auditors examined a random sample of

70 loans totaling $3.7 million out of the

27,045 loans totaling $1.5 billion approved

from inception of LowDoc in December

1993 until May 1995. Based on a statistical

projection of the sample results, it was

estimated that loans totaling $115.9 million

 LowDoc is a new 7(a) loan program that 1

minimizes paperwork for loans under $100,000. 

After a pilot phase in Texas, the program was

expanded nationwide in June 1994. For loans of

less than $50,000, participating lenders need send

only an application form to SBA for approval. For

loans from $50,000 to $100,000, lenders provide

SBA with business tax returns, financial statements,

and a credit analysis. SBA guarantees 80 percent of

approved LowDoc loans. Banks are expected to

apply credit criteria in the same manner as they

would for their own non-guaranteed loans.
10 Semiannual Report September 1996

were approved for borrowers who had Assistance Program, unaware of the 7(a)

questionable repayment ability, and loans loan default, awarded a $353,000 contract to

totaling $34.8 million were approved for the Dallas firm a year later. SBA’s Houston

borrowers not meeting eligibility District Office agreed with the audit

requirements. Limited SBA guidance at the recommendation that SBA withdraw the

start of the LowDoc program and limited settlement agreement and pursue collection

monitoring of both lenders and District of the amount that had been written off.

Offices may have caused the processing This audit was one of a series of reviews of

deficiencies. LowDoc procedures were early defaulting loans. An overall report on

clarified in April 1996 after 11 months of the audits’ systemic findings will be issued

operation. The audit report recommended at a later date.

that the Associate Administrator for

Financial Assistance (AA/FA) develop

performance standards for LowDoc loans

and conduct periodic reviews to identify

unacceptable performance by either lenders

or District Offices. The report also

recommended that the SBA guarantee be

denied or withdrawn for five specific loans

cited in the audit and whenever there are

significant lender deficiencies. It further

recommended that SBA establish criteria for

evaluating other sources of income that are

used to supplement an applicant's repayment

ability. The AA/FA agreed with the findings

and recommendations.

Houston Management Consultant

Secretly Reorganizes, Defaults on Loan,

and Improperly Causes $117,518 SBA

Writeoff

Shortly after obtaining a $200,000 Section

7(a) loan, a management consulting firm in

Houston, Texas, reorganized and

transferred its assets to Dallas without processing and for lender overhead costs

SBA’s knowledge or consent. When the (such as photocopying and office supplies).

loan later defaulted, SBA thought the

borrower had gone out of business and, The Associate Administrator for Financial

consequently, charged off $117,518 in a Assistance (AA/FA) concurred in the audit

negotiated settlement of the loan balance. findings and took corrective actions. The

SBA’s Management and Technical officials for the SBLC generally agreed with

New York Small Business Lending

Company Sustains Losses Attributable

to Procedural Weaknesses

An OIG audit found that a Small Business

Lending Company (SBLC) needed

significantly improved procedures in loan

origination and servicing, monitoring

delinquent debt, and internal controls. At

the request of the responsible SBA program

office, the OIG audited the New York City

SBLC licensed by SBA because one-third of

its loan guarantees had been repurchased

between 1986 and 1995. A review of 18

repurchased loans identified $627,039 in

recoverable losses to SBA. The losses

involved loan origination and servicing

errors including: (1) failure to secure

collateral, (2) disbursement of loan proceeds

for inventory already purchased, and (3)

acceptance of low real estate appraisals. The

audit also indicated that the SBLC charged

borrowers inappropriate fees for application
Semiannual Report September 1996 11

the findings, except for the finding that fees undisclosed criminal records at a very

charged to borrowers were inappropriate. reasonable price, with little or no effect on

The SBLC also asserted that it should not be the loan application process. Name checks

held accountable for actions prior to 1991, could be implemented with no extra

when the present ownership was established. paperwork on the part of the applicant. The

The AA/FA disagreed with the SBLC's process would only involve forwarding the

position on these two points. SBA Form 912 (the applicant's Statement of

Program Vulnerability Memorandum

Issued on Undisclosed Criminal

Histories of Loan Applicants

During the reporting period, the OIG issued turnaround time at the FBI from 2 weeks to

a program vulnerability memorandum 48-72 hours. The cost of FBI Name Checks

(PVM) to the acting Associate Deputy has also been reduced from $12 for a manual

Administrator for Economic Development check to $1.40 for each MRD check which

(ADA/ED). The PVM cited the results of a identifies no record and $10.65 for each

recent OIG investigative project, conducted check which identifies a record. 

jointly with the U.S. Secret Service, to

determine what percentage of borrowers Incorporate Waiver Into Form 912 . The

within a sample concealed information Form 912 could be modified to include a

regarding their criminal histories when statement that the applicant authorizes the

applying for Section 7(a) loans. Of the more OIG to verify the criminal-history

than 3,300 borrowers in the sample, 11.6% representations on the form submitted. This

(representing more than $33 million in SBA waiver would supplement the existing

exposure) were found to have concealed warning against making false statements to

their criminal records. Under current SBA the Government, and the signature of the

procedures, the approximately 95% of loan applicant would overcome any Privacy Act

applicants who answer "No" to the three concerns of the Department of justice (DOJ).

criminal history questions are not subject to The inclusion of the waiver would provide a

further criminal record checks to get their needed level of deterrence against many of

loan, i.e., their denials are accepted as fact. those who would otherwise submit

In the context of the potential negative applications containing false statements as to

impact of these loans on the Agency's the applicant's criminal record.

subsidy rate, the IG made three suggestions

to the ADA/ED for procedural changes to Submit Copies of Every Form 912. A

tighten this loophole.

 Conduct FBI Name Checks on All

Applicants. The Federal Bureau of

Investigation (FBI) Name Check provides a

minimal level of capability to detect

Personal History) to the OIG's Office of

Security Operations (OSO) and awaiting a

response from the FBI. In the past year, the

OIG has implemented a Machine Readable

Data (MRD) system that will reduce the

copy of the Form 912 for every applicant

should be forwarded to the OIG’s OSO,

which will conduct random MRD checks

and notify SBA's Office of Financial

Assistance of any discrepant information.

The OSO would attempt to conduct these
12 Semiannual Report September 1996

random checks quickly to preclude any review program for PLPs.

disbursement of funds to ineligible

applicants; the OIG normally would receive Finally, the OIG proposed two technical

results from the FBI within 48-72 hours. amendments, one each to Title 12 and Title

As of the end of this reporting period, the in litigation involving false statements made

OIG, in consultation with the ADA/ED’s to SBA. The amendments would make clear

staff, was selecting a sample of loans that SBA stands in the shoes of its

approved in FY 1994-96 to further test predecessor, the Reconstruction Finance

inferences drawn from the original study. Corporation, and that a false statement made

Review of Small Business Act

Amendments of 1996

The OIG reviewed H.R. 3719 (a bill to

amend the Small Business Act of 1953) and

commented on several provisions. First, it

was noted that one provision of the bill

would give PLP lenders "complete

authority" to service and liquidate loans

without obtaining prior specific approval

from SBA. The OIG expressed concern that

this language could be interpreted as

superseding the present requirement that

PLPs submit liquidation plans for SBA

approval. It is essential that PLPs continue

to prepare liquidation plans, and that SBA

review and approve such plans.

Second, the bill would require SBA to

develop and implement a standard review

program for PLPs. The OIG suggested that

this program be expanded to include small

business lending companies (SBLCs). This

would relieve the OIG of the responsibility

for providing mandatory and primary regular

reviews of SBLCs, for which the OIG does

not presently have sufficient resources. The

OIG would continue to initiate audits of

individual SBLCs where appropriate.

Because some SBLCs are also PLPs, they

would already be included in the standard

18, to address an issue that recently surfaced

to SBA or an SBIC would be a criminal

violation. The courts could then assess civil

and criminal penalties for such violations.

Activities to Enhance Fraud

Detection and Deterrence

Latest Results from Affirmative Civil

Enforcement (ACE) Program

Over this reporting period, the OIG's

participation in DOJ's ACE program

produced six successful business loan cases,

resulting in $500,000 in recoveries and

$23,500 in civil penalties. The five smallest

cases, which produced the civil penalties,

involved fraudulent representations in

applications for loans that were stopped

before funds were disbursed. Two of those

cases produced the OIG's first ACE results in

Kansas. The sixth case represents the OIG's

largest business loan ACE recovery and its

first ACE result in Utah. Fraudulent

statements in the loan applications in these

cases involved tax returns, a standby

agreement, a previous charge-off and

bankruptcy, and the applicant's repayment

record on other loans.
Semiannual Report September 1996 13

OIG Briefs Members of Lender

Community

During this reporting period, our

investigations staff continued its practice of

making presentations to groups of

participating lenders. The Assistant

Inspector General for Investigations

addressed more than 60 bankers at an SBA

Lenders Conference in Seattle, highlighting

the benefits to be gained from cooperation

between participants and the OIG in

combating waste, fraud, and abuse in the

guaranteed loan programs.

Washington Fundraiser Sentenced for

Conversion of Collateral

The former president of a fund-raising service

company in Bellevue, Washington, was

sentenced to 3 years probation, a $50 special

assessment, and $18,008 in restitution to SBA

and a participating lender bank. He had pled

guilty to conversion of collateral pledged for

a $750,000 SBA-guaranteed business loan.

The investigation revealed that he sold more

than $360,000 of his firm’s accounts

receivable pledged as collateral on the loan.

The OIG investigation was based on a referral

from the Seattle District Office and was

conducted jointly with the FBI.

Missouri Water Bottling Executive

Sentenced for Mail Fraud

The secretary of a water bottling company in

New Bloomfield, Missouri, was sentenced to

366 days imprisonment, 2 years supervised

release, and a $50 special assessment. He had

pled guilty to one count of mail fraud. Both

he and his wife, the company’s president, had

been indicted for using the U.S. mails in a

scheme to defraud SBA. (The charges against

the wife were dismissed as a condition of her

husband's plea agreement.) The investigation

showed that the couple made false statements

to obtain a $150,000 SBA-guaranteed loan,

diverted loan proceeds to their own use, and

sold or traded collateral after the business

failed. The company made only one payment

before defaulting on the loan. The OIG

initiated this investigation based on a referral

from the St. Louis District Office.

Pennsylvania Business Owner Sentenced

for Bank Fraud and Making False

Statements

The owner of an Allentown, Pennsylvania,

dog grooming business pled guilty to bank

fraud, making a false statement to SBA,

and making a false statement to a

Federally-insured lender. She was

sentenced to 1 day imprisonment, 3 years

supervised release, a $2,000 fine, and a $150

special assessment for submitting false

information to SBA and a Small Business

Lending Corporation (SBLC). The charges

relate to her scheme to defraud SBA, the

SBLC, and a participating lender bank by

submitting fictitious Federal income tax

returns as part of her loan applications. The

woman first applied to the SBLC for a

$107,000 SBA-guaranteed loan, which was

subsequently canceled due to discrepancies

between the tax returns she submitted and

those on file with the Internal Revenue

Service (IRS). While being interviewed by an

SBA/OIG special agent, she also omitted that

she then went to the bank in Emmaus,

Pennsylvania, and, using the same fictitious

tax returns, applied for and received two nonSBA loans totaling $100,000. This matter

was referred to the OIG by the Financing

Division of SBA's Philadelphia District

Office.
14 Semiannual Report September 1996

New York Computer Company Owner Three Pennsylvania Businessmen

Pleads Guilty to Bank Fraud and Charged with Making False Statements

Making False Statements to SBA

The former owner of a computer sales and Three southeastern Pennsylvania men were

service business in Binghamton, New York, charged in an information with one count of

pled guilty to five counts of bank fraud and making false statements to SBA. The

one count of making false statements to

SBA. A multi-agency investigation revealed

that the owner had grossly overstated the

value of assets in a listing he submitted, to

forestall the participating lender and SBA

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

personal and business credit cards to obtain

approximately $34,000 in fraudulent cash

advances (establishing a false account

receivable with his credit card and then

withdrawing cash against the credit) and

“kiting” approximately $10,000 in checks

drawn on his credit union account. The OIG

and the FBI joined the investigation initiated

by the Secret Service.

Minnesota Business Owner Indicted for

Bank Fraud

The owner of a technology company dealing

in graphics software in Bloomington,

Minnesota, was indicted on one count of

bank fraud and one count of making a

false statement to SBA. The OIG's joint

investigation with the FBI determined that

the man prepared and submitted a bogus

independent auditor's report to a

participating bank in an unsuccessful attempt

to obtain a $175,000 SBA-guaranteed loan

for his technology company. The OIG

initiated this investigation based on a referral

from SBA’s Minneapolis District Office.

president and vice president, respectively, of

a watch and jewelry retailer in Plymouth

Meeting, Pennsylvania, and the store's

certified public accountant, allegedly

collaborated in the preparation of tax returns

containing fictitious information and

submitted them to a participating lender

bank to qualify for a $50,000 Low-Doc loan.

On learning that the tax returns submitted as

part of the application differed significantly

from those on file with the IRS, SBA

canceled the loan before any proceeds were

disbursed. The accountant pled guilty to the

charge and has surrendered his CPA license.

The discrepancies, which were detected by

SBA's tax return verification program, were

referred to the OIG by the Philadelphia

District Office.

Three Georgia Businessmen Sentenced

on a Variety of Charges

Three LaGrange, Georgia, businessmen--the

proprietor of a restaurant, a corporate

president, and an attorney in private

practice-were convicted on a variety of false

statement, theft, and conspiracy counts.

The restaurant owner was sentenced to 20

months incarceration, 4 years supervised

release, 200 hours community service,

$35,000 restitution, and a $350 special

assessment. The corporate president was

sentenced to 18 months incarceration, 4

years supervised release, $85,000 restitution,

a $4,000 fine, and a $150 special
Semiannual Report September 1996 15

assessment. The attorney was sentenced to releases, she was unaware the attorney had

2 months home detention, 3 years probation, died several years earlier! The OIG initiated

$4,620 restitution, and a $2,000 fine. The this investigation based on a referral from

restaurant owner had received a $400,000 the SBA’s Chicago District Office.

SBA-guaranteed loan for his restaurant from

a non-bank lender in 1990. He had

submitted false documents relating to his use

of the loan proceeds and forged an

endorsement on a joint-payee loan A Muncie, Indiana, businessman was

disbursement check. The second charged in an information with one count of

businessman's corporation sold the land and

a building for use as a site for the restaurant.

He conspired with the restaurant owner to

fabricate documentation of a capital injection

into the restaurant. The attorney in the real

estate transaction admitted complicity in

their fraud scheme. The OIG opened this

investigation based on a referral from SBA's

Atlanta District Office.

Illinois Businesswoman Pleads Guilty to based on a referral from the Indianapolis

Theft by Deception District Office.

The sole proprietor of a weight loss center in

Chicago, Illinois, was charged with and pled

guilty in Cook County (Illinois) Circuit

Court to one misdemeanor count of theft by

deception. She was sentenced to 2 years

supervised conditional discharge and 30

days community service. The woman Miami District Office canceled the final

admitted filing with the Cook County

Recorder of Deeds two fraudulent lien

releases on properties previously pledged as

collateral for a $64,900 SBA-guaranteed

loan. After obtaining the unauthorized

releases, she pledged the properties to a local

mortgage company to obtain more than

$50,000 in additional financing. The OIG's

investigation found that the woman prepared

and filed two release deed forms that she

represented to have been prepared by an

SBA attorney. At the time she filed the false

Indiana Businessman Charged with

Making False Statement to SBA

making a false statement to obtain a

$400,000 SBA-guaranteed loan. The

SBA/OIG's joint investigation with the FBI

disclosed that the man falsely certified that

the loan proceeds were to be used as

operating capital for his foundry and

machine shop, albeit he actually intended to

(and subsequently did) use a substantial

portion of the loan proceeds for his personal

benefit. This investigation was initiated

Florida Dairy Product Supplier

Suspended from Federal Programs--

Balance of SBA-Guaranteed Loan

Canceled

Following notification by the OIG, SBA’s

disbursement of $734,037.80 of a

$1,200,000 SBA-guaranteed loan to a Fort

Lauderdale, Florida, dairy product supply

company. SBA took this action after the

General Services Administration suspended

the firm from participating in all Federal

programs. The dairy supply company

allegedly falsely entered into an agreement

with the U.S. Department of Agriculture

(USDA) to export milk powder to the United

Arab Emirates. Investigation by USDA's

OIG determined that the firm had diverted
16 Semiannual Report September 1996

the milk powder through Singapore to the of tax returns for the years 1986-88, thereby

Philippines in violation of the agreement. substantially overstating his income for the

The firm had earlier received an SBA- purpose of procuring his loan. The

guaranteed loan of $375,000 to purchase accountant also submitted as collateral for

inventory and equipment. The company's the loan a "deed to secure debt" on which his

repayment ability remains heavily reliant on wife's signature had been forged. The OIG

the Government’s export subsidies that will initiated the investigation based on a referral

be eliminated by the current suspension. from the Atlanta District Office.

Jewelry Store Owner Indicted for One Sentenced, Two More Indicted for

Making False Statements False Statements to SBA Lender

The owner of a retail jewelry store in San One loan applicant pled guilty and was

Luis Obispo, California, was indicted on five sentenced and two other borrowers were

counts of making false statements to a indicted for making false statements to a

Federally-insured financial institution. Federally-insured lender in southern

An SBA/OIG investigation conducted jointly California. These were the latest results of a

with the FBI revealed that the businessman joint OIG/FBI investigation.

submitted altered copies of his 1986 and

1987 individual income tax returns in The former owner of a food company in

applying for a $450,000 SBA-guaranteed Garden Grove, California, pled guilty to one

loan approved in 1988. He subsequently count. She was sentenced to 4 months

provided altered copies of tax returns, both imprisonment, 4 months home detention,

individual and corporate, for 1988-90 and and 1 year supervised release. She

obtained yet another SBA-guaranteed loan submitted false tax returns and a false

for $100,000. Both loans ultimately went equipment purchase contract to obtain SBAinto default and were liquidated. Following guaranteed loans totaling $420,000.

the liquidation efforts, a total of $336,895.72

was charged off by the SBA. The The former owner of a restaurant and

investigation was initiated based on billiard club in San Gabriel, California, was

information provided by the Fresno District charged with six counts, two of which

Office. charged him with submitting altered income

Georgia Tax Accountant Pleads Guilty

to Submitting False Documents

A former Decatur, Georgia, tax accountant

pled guilty to one count of submitting false

documents to SBA in connection with a

$154,000 SBA-guaranteed loan to his sole

proprietorship. The OIG's investigation

established that he submitted altered copies

tax returns with his application for a

$150,000 SBA-guaranteed loan which

subsequently defaulted. The four other

charges were related to non-SBA loans. 

 The former owner of a beauty salon in

Long Beach, California, was charged with

two counts of submitting false documents to

obtain disbursement of his $150,000 SBAguaranteed loan. This loan also defaulted.
Semiannual Report September 1996 17

The OIG initiated the investigation, centered

on the packager of the loans, based on

information provided by the Santa Ana

District Office. The president of a swimming equipment

California Landscaper Sentenced for one count of making material false

Making False Statements and Filing

False Tax Returns

The owner of a landscape maintenance

company in Anaheim, California, was

sentenced to 366 days imprisonment, 3 years

supervised release, and payment of all

personal and corporate taxes he owed. He

had pled guilty to three counts of making

false statements to Federally-insured returns he submitted with the loan

lenders and two counts of filing false tax application and those he filed with the IRS.

returns. These charges stemmed from two

investigations. The OIG initiated the first

investigation when the owner’s bookkeeper

reported that he wanted her to prepare false New York Banker Sentenced for

tax returns and related financial documents Soliciting Commissions for Procuring

as part of an application for a $400,000 Loans

SBA-guaranteed loan. Fortunately, the loan

application was declined by the bank before

it became aware of the false financial

figures, and the man subsequently pled

guilty to one false statement charge. The

second investigation began when, suspecting

that this was not the first time this same soliciting commissions for procuring loans

individual had used false documents to

defraud a bank, the prosecutor requested that

the OIG examine the files of his other loans.

This led to both the identification of two

other bank loans that were obtained with

false tax returns and the discovery that he

was under investigation by the IRS for other

suspected crimes. The OIG then joined the

ongoing IRS investigation, which resulted in

the four later charges and the second guilty

plea.

Florida Swimming Pool Supplier Pleads

Guilty to Making False Statements

seller in Fort Myers, Florida, pled guilty to

statements to influence actions of SBA. He

was sentenced to 5 years probation and a

$9,000 fine. The businessman submitted

personal and corporate tax returns he knew

to be fraudulent in an effort to obtain a

$100,000 SBA-guaranteed loan. Approval

of his application was canceled because of

the considerable discrepancies that existed

between information contained in the tax

The OIG initiated the investigation based on

a referral from the Miami District Office.

A former vice president of the New York

City branch of an Argentine bank was

sentenced to 18 months imprisonment, 5

years supervised release, and a $150 special

assessment. He had been convicted of

guaranteed by SBA. The $20,000 in

commissions were paid by three loan

applicants in return for his assistance in

obtaining loan approvals totaling $930,000.

The banker headed the SBA-guaranteed loan

program of the bank, which was at that time

one of SBA’s largest participating lenders in

New York City. The OIG investigation was

conducted jointly with the FBI.
18 Semiannual Report September 1996

California Gas Station Owner Indicted

for Forgery and Possession of Stolen

Mail

The owner of a gas station in San Diego, signature of a former officer of the

California, was indicted on 15 counts of participating lender on the release-of-lien

forging U.S. Treasury checks and 2 counts

of possession of stolen mail. The Secret

Service asked the OIG to join its

investigation, which had identified $340,000

in stolen U.S. Treasury checks deposited into

the man’s business bank account. The OIG's

portion of the investigation also confirmed

that he had obtained an $80,000 SBAguaranteed loan from a participating lender

bank for business improvements. As part of making false statements to an FDIChis application, the man provided "copies" of insured bank, and five counts of

3 years' corporate income tax returns which,

as he admitted when interviewed,

significantly overstated the business’ taxable

income. In the returns filed with the IRS, the

business reported losses for the 3-year

period.

Utah Motorcycle Dealer Pleads Guilty to

Bank Fraud

An owner of a motorcycle dealership in Salt

Lake City, Utah, was charged with and pled

guilty to one count of bank fraud. He was

sentenced to 6 months home confinement, 3

years supervised release, and $71,799

restitution. The dealership had received a

$185,000 SBA-guaranteed loan in 1979,

pledging three pieces of real property as

collateral. The felony information to which

he pled guilty charged that in the fall of

1993, when the loan was in serious default,

he caused the filing of reconveyance

documents fraudulently releasing the liens

on the properties. Having obtained release

of the liens, he then pledged two of the

properties to another Federally-insured bank

to obtain an additional $150,000 in

financing. The SBA/OIG investigation also

determined that the businessman forged the

documents. The investigation was based on

a referral from the Salt Lake City District

Office.

Texas Couple Pleads Guilty to Making

False Statement to FDIC-Insured Bank

An Alvin, Texas, couple were indicted on

one count of conspiracy, five counts of

submitting false documents to a Federal

agency. They later pled guilty to one count

of making a false statement to an FDICinsured bank; in return, the Government

agreed to dismiss the other ten felony

charges. In an effort to obtain approval of a

$338,000 SBA-guaranteed loan to finance

their purchase of a convenience store in

Houston, Texas, the couple altered and

submitted copies of the previous owner’s tax

returns. They also submitted false tax

returns for another store in LaMarque,

Texas, to obtain approval of a $200,000,

SBA-guaranteed loan for its purchase. SBA

officials foiled their scheme by declining the

loan applications after the profits reflected

on the false returns could not be verified.

The charges were the result of an OIG

investigation which was based on a referral

from the Office of District Counsel of the

Houston District Office.
Semiannual Report September 1996 19

California Father Convicted for Bank

Fraud and Making a False Statement

A Woodland Hills, California, man was $1,500 fine, and a $150 special assessment;

convicted on charges of bank fraud and

making a false statement to a Federallyinsured lender. His daughter had also been

indicted on two charges, which were

previously dismissed based on her claim statements in connection with the owner’s

that, at only 18 years of age, she had not application for a $65,000 SBA-guaranteed

understood the significance of the loan for his business. The OIG's

documents she signed. The OIG investigation found that the associate

investigation revealed that the daughter’s prepared and the owner signed and

application for a $665,000 SBA-guaranteed submitted false Federal income tax returns to

loan to purchase real property for the a participating bank. The returns showed a

operation of a nursery contained false net profit of more than $40,000 for each of

financial documents, including false tax the years 1993 and 1994; however, the

returns. Her father, acting under an alias, restaurant actually incurred losses in both

had purchased the property for $450,000 and years. On learning that the tax returns

then immediately sold it to her for $900,000, submitted as part of the application differed

thereby doubling its purchase price. The significantly from those on file with the IRS,

participating bank financed the purchase SBA officials canceled the loan before any

based on this inflated price. The man also proceeds were disbursed. The discrepancies,

falsely represented to the bank that he was which were detected by SBA's tax return

giving his daughter a gift of $160,000 verification program, were referred to the

toward the purchase of the property. The OIG by the Philadelphia District Office.

nursery never opened for business, and the

loan went into default after only two loan

payments had been made. Because of

statements the father made about a plan to

flee the country should he be convicted, the

court immediately remanded him into the A loan broker from La Canada, California,

custody of the U.S. Marshals Service and eight other persons connected to SBAfollowing the jury verdict. The OIG initiated guaranteed loans he brokered were charged

this investigation based on a referral from with making false statements. The broker

the Los Angeles District Office. and seven of the nine others have pled

Pennsylvania Restaurant Owner and

Associate Sentenced for Conspiracy and

Making False Statements guilty to five counts of making false

The owner of a restaurant in Downingtown,

Pennsylvania, and his associate were

sentenced. The owner was sentenced to 4

months home detention, 3 years probation, a

his associate was sentenced to 200 hours

community service, 2 years probation, and a

$150 special assessment. Each had pled

guilty to conspiracy and making false

California Loan Broker and Nine

Others Charged with Making False

Statements

guilty.

The loan broker was charged with and pled

statements in a loan application to a

Federally-insured financial institution.
20 Semiannual Report September 1996

He also pled guilty to a criminal forfeiture

count allowing the Government to recapture

the illegal proceeds of his crimes. Between guilty to one count of making a false

1987 and 1992, the man brokered more than

two dozen fraudulent loans totaling more

than $9 million, primarily for KoreanAmerican clients. His scheme involved the

submission of falsified financial information,

including tax returns, financial statements,

invoices, and cashiers checks representing

bogus cash infusions into the businesses, to

induce the banks and SBA to grant the loans.

When the banks and SBA approved the loan

applications, the broker would launder part

of the proceeds through a business that he

fraudulently represented had sold equipment

to the various applicants.

 The owner of a Los Angeles automotive

transmission shop was charged with and pled

guilty to one count of making a false La Canada, California, was charged with and

statement on a loan application to a pled guilty to one count of making false

Federally-insured financial institution in

connection with his $420,000 SBAguaranteed business loan. The investigation

revealed that the owner submitted altered tax

returns for the years 1988-90, each of which

significantly overstated his income. He also

submitted invoices in the names of

nonexistent businesses.

 The owner of a Los Angeles sporting

goods store was charged with and pled guilty

to one count of making a false statement

on a loan application to a Federallyinsured financial institution in support of

her $1,000,000 SBA-guaranteed business

loan. The investigation revealed that she

submitted altered tax returns for the years

1988-90, each of which significantly

overstated her income.

 The owner of a combined grocery market

and liquor store was charged with and pled

statement to SBA in connection with his

$231,000 disaster business loan. The

investigation first discovered that an altered

tax return for 1989 had been submitted to

obtain the $161,119 SBA-guaranteed loan

that enabled the man to purchase the market.

The investigation also found that he

submitted altered 1989 and 1990 returns to

obtain the disaster loan for repair of damage

stemming from the 1992 civil unrest. Each

of the three returns significantly overstated

his income. The defendant sold the store in

1992, including SBA's only collateral for the

disaster loan, and received nearly $500,000

from the sale of the business.

 The owner of a clothing manufacturer in

statements in a loan application to a

Federally-insured bank. He had obtained

a $1,000,000 SBA-guaranteed business loan,

supported by an application that contained

altered copies of income tax returns for

1987-89, each of which significantly

overstated the net profit from his business.

 The owner of a general merchandise

discount store in Los Angeles, California,

pled guilty to one count of making false

statements in a loan application to a

Federally-insured bank. The false

statements were made in connection with his

$1,000,000 SBA-guaranteed business loan

from a participating lender bank. The loan

was referred to the OIG by officials at the

bank who became suspicious of the

documentation supporting the borrower's

capital injection. In addition to the false
Semiannual Report September 1996 21

documents associated with the capital the sole property of her sister. The accounts

injection, the man submitted altered Federal listed on the form had been opened by

income tax returns for 1987-89 that another person, and the banker had added

significantly overstated his income to her sister's name to them at a later date. The

support his loan application. false statement was detected during the

 The owner of a market in West Covina, investigation of the loan broker who had

California, pled guilty to one count of submitted the loan application to the

making false statements in a loan

application to a Federally-insured bank.

He had obtained a $285,000 SBAguaranteed business loan based on an

application containing altered copies of

income tax returns for 1988-90. Each of the

returns significantly overstated his income.

 The former owner of a Pomona, making a false statement in a loan

California, restaurant was indicted on five application to a Federally-insured bank.

counts of making false statements to

Federally-insured financial institutions.

The restaurateur submitted altered tax

returns to the lender of his $550,000 SBAguaranteed business loan that significantly

inflated his business income. He also

submitted a false financial statement to

induce the participating lender to grant a

payment deferment and not foreclose the

loan.

 A former personal banking officer at a

Federal bank, located in Paramount,

California, was charged with one count of

making a false statement to SBA. In an

attempt to help her sister, who had applied

for a $2.1 million Section 504 loan, the

banker prepared a false deposit verification

form for submission to both SBA and the

participating lender. On the form, she

represented that her employer had two

accounts, with a combined balance of

$790,000, held solely in her sister's name. In

fact, as she knew, the accounts were never

OIG's and U.S. Secret Service’s joint

participant. As results of this part of the

investigation, SBA canceled the loan,

producing a $750,000 cost avoidance (SBA's

guaranteed share), and the banker was

terminated from her position.

 The former owner of a cafe in Riverside,

California, was indicted on five counts of

He allegedly submitted altered income tax

returns for the years 1987-89 with his

application for a $225,000 SBA-guaranteed

loan to purchase the cafe. He allegedly

represented on his Business Plan that his

personal capital came from the sale of

another business; in fact, he had borrowed

the funds from a friend. The cafe owner also

represented that he intended to purchase

machinery and equipment totaling $125,000

from a company which was in fact

controlled by the loan broker. The loan

broker returned the funds to the cafe owner

who subsequently repaid the undisclosed

personal loan.

The OIG initiated the investigation, which

the U.S. Secret Service subsequently joined,

after the participating lender and the SBA’s

Los Angeles District Office referred the

matter. Loans still being examined in this

investigation total over $16 million.
22 Semiannual Report September 1996

California Loan Packager Sentenced to

Prison Term for Fraud

A Westminster, California, loan packager

was sentenced to 24 months imprisonment,

3 years supervised release, and $86,000

restitution. The man had previously pled

guilty to two counts of bank fraud and one

count of making false statements to a

Federally-insured financial institution.

This action was the latest result of an

extensive SBA/OIG joint investigation with one count of wire fraud. An OIG

the FBI to examine a fraudulent loan investigation determined that, at the time the

packaging scheme implemented by this businessman was negotiating to obtain a

individual. To obtain SBA-guaranteed loans $700,000 SBA-guaranteed loan, he

for himself and numerous clients, he created concealed from both SBA and the

false financial documents such as tax returns participating lender bank his intent to sell a

and invoices. A total of 14 borrowers, all of substantial portion of the business assets. He

whom were his clients, have been convicted also diverted a majority of the proceeds from

of making false statements to Federallyinsured lenders, and one bank official has

been convicted of illegal receipt of

commissions for procuring loans. Two of

the actions, which took place during this

reporting period, are reported below:

 A former owner of a retail jewelry

company in Garden Grove, California, pled

guilty to one count of making a false

statement on a loan application to a

Federally-insured financial institution in

connection with his $100,000 SBAguaranteed business loan.

 The former owner of a Paramount,

California, marble flooring company was

convicted on all counts of his indictment.

The indictment charged the man with

making false statements on a loan

application to a Federally-insured

financial institution in connection with his

$300,000 SBA-guaranteed business loan.

The OIG initiated this investigation based on

a referral from SBA's Los Angeles District

Office.

Ohio Businessman Indicted on Four

Fraud Charges

The president of a now-bankrupt Chardon,

Ohio, manufacturer of medical equipment,

was indicted on one count of bank fraud,

two counts of making false statements, and

those sales to pay off other debts and caused

$100,000 to be fraudulently wired from

another bank to the participating lender.

During a May 1996 interview by an OIG

special agent, he also made material false

statements by stating that officials of the

participating lender had known about and

approved the sale of assets. This

investigation was initiated based on a

referral from the Cleveland District Office.

South Dakota Rancher Pleads Guilty to

Making False Statement

An Eagle Butte, South Dakota, rancher pled

guilty to one count of making a false

statement to a Federal agency. In return,

the Government agreed to dismissal of 15

other felony charges on which he had been

indicted. The SBA/OIG's joint investigation

with the Department of the Interior (DOI)

OIG determined that, to obtain a $150,000

SBA-guaranteed loan, the rancher concealed
Semiannual Report September 1996 23

from SBA and the participating lender that

he had failed to repay a previous $30,000

loan guaranteed by DOI's Bureau of Indian

Affairs (BIA). He also submitted a The United States Attorney’s Office for the

document falsely claiming that he had Eastern District of Pennsylvania issued a

received a $50,000 BIA grant. The special commendation to Martin Carroll, a

investigation also found that the rancher special agent in the OIG’s Philadelphia

tampered with a witness by attempting to Resident Office, for his outstanding

persuade the participating bank's loan officer performance, dedication, and

to remove the fraudulent BIA document professionalism in an investigation that

from the loan file. The DOI/OIG asked the resulted in the payment of $1.56 million by

SBA/OIG to join the investigation. a Preferred Lender to the Government. The

Washington Manufacturer Indicted for

Bank Fraud and Money Laundering

The former president of a Port Angeles, of an OIG audit, in which the bank made a

Washington, crane manufacturer was $1 million SBA-guaranteed loan to a

indicted on one count of bank fraud and

one count of money laundering. The OIG's

joint investigation with the FBI and the IRS

found that he made false statements about

his criminal history, his Social Security

number, and his cash injections into the

corporation, to obtain a $100,000 SBAguaranteed business loan. In addition, once

the loan was disbursed, the businessman

misused approximately $12,000 of the loan

proceeds to pay personal expenses, including

his rent and his credit card bills. The loan

defaulted after the man fled the Port Angeles

area with the corporation's investors' funds.

A warrant was issued for his arrest, and

SBA/OIG and FBI agents arrested the man.

The OIG's investigation was initiated after

SBA’s Seattle District Office referred an

inquiry from the Washington State Attorney

General's Office.

OIG Criminal Investigator Receives

Special U.S. Attorney Award

U.S. Department of Justice (DOJ) award was

presented by U.S. Attorney Michael R.

Stiles. Mr. Carroll was the primary

investigator in a case, based on the findings

foundry, knowing that the company did not

qualify. The audit found, and the

investigation confirmed, that the bank

concealed the fact that the foundry's chief

executive owned 46 percent of the company

and that his substantial assets therefore made

the company ineligible for a Section 7(a)

loan. The borrower defaulted on the loan 9

months after it was approved, and SBA

purchased the guaranteed portion from the

bank. The case resulted in a civil penalty of

over $600,000 and approximately $950,000

in reimbursement to SBA for its payment

and interest on the loan guarantee, the largest

recovery in the history of SBA’s

participation in the DOJ's Affirmative Civil

Enforcement program.
24 Semiannual Report September 1996

Disaster Loan Program

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

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

For this reason, the Disaster Loan Program is the only form of SBA assistance not limited

to small businesses. Disaster loans from SBA help homeowners, renters, businesses of all

sizes, and non-profit organizations fund rebuilding. SBA's disaster loans are also a critical

source of economic stimulation in disaster-ravaged communities, helping to energize

employment and stabilize tax bases.

By providing disaster assistance in the form of loans which are repaid to the U.S. Treasury,

the SBA disaster loan program helps reduce Federal disaster costs compared to other forms

of assistance like grants. When victims need to borrow to repair uninsured damages, the low

interest rates and the long terms available from SBA make recovery more affordable.

Because SBA tailors the repayment of each disaster loan to each borrower's capability,

unnecessary interest subsidies paid by the taxpayers are avoided.

The need for SBA disaster loans is unpredictable. During FY 1996, SBA approved 37,822

loans for $987.9 million. Since the inception of the program, SBA has approved more than

1,336,800 disaster loans for more than $23.9 billion. As of the end of FY 1996, the SBA

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

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

approximately $1,535 billion.

SBA is authorized by law to make two types of disaster loans: (1) physical disaster loans,

which are a primary source of funding for permanent rebuilding and replacement of uninsured

disaster damages to real and personal property homeowners, renters, businesses of all sizes,

and non-profit organizations; and (2) economic injury disaster loans (available by law only

to small businesses), which provide necessary working capital until normal operations can

resume after a physical disaster. SBA delivers disaster loans through four specialized

Disaster Area Offices located in Niagara Falls, New York; Atlanta, Georgia; Fort Worth,

Texas; and Sacramento, California.
Semiannual Report September 1996 25

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's disaster loan programs

during the reporting period:

Six audits and one inspection were

underway during the reporting

period.

Disaster loan investigations resulted

in 7 indictments and 13 convictions,

and produced $586,500 in courtordered restitution, $405,460 in other

recoveries by SBA, and $27,990 in

fines and civil penalties.

Office of Security Operations name

checks resulted in the declination of

10 disaster loans totaling $299,331.

Nine disaster loan investigations

were closed, leaving an inventory of

83 active cases involving 404

subjects. Due to workload demands,

another 2 disaster loan cases were

referred to other law enforcement

agencies for investigation, resulting

in a total of 12 disaster loan referrals

to monitor.

Two Standard Operating Procedures

were reviewed during the reporting

period.

Figure 2
26 Semiannual Report September 1996

Efforts to Improve SBA

Program Management

Program Vulnerability Memorandum

Issued on Terminology on Disaster

Home Loan Forms

The Inspector General (IG) issued a program

vulnerability memorandum (PVM) to the

Associate Administrator for Disaster

Assistance (AA/DA), citing the outcomes of

two recent OIG investigations involving

disaster home loan fraud. In each case, an

applicant, who resided elsewhere when a

disaster struck, obtained an SBA home loan

for a property he claimed as his "primary

residence" on the disaster home loan

application (Form 5C).

In the first case, the owner of a damaged

house applied to both SBA and the Federal

Emergency Management Agency (FEMA)

for financial assistance in recouping his

"disaster losses." The investigation revealed,

however, that at the time of the earthquake a

tenant was renting the house, and none of the

personal property damaged by the quake

belonged to the landlord. A grand jury

charged the landlord with making false

claims to both FEMA and SBA. At the trial,

he asserted that because he owned the house

and was preparing to occupy it, he

considered it his "primary residence." He

claimed neither SBA nor FEMA ever

advised him of the definition of "primary

residence." He also established that he

owned the personal property he listed on the

Verification of Personal Property Damage

(Form 739) and claimed that, although it was

at his actual residence at the time of the

quake, it was damaged by the quake there

and that he subsequently moved it to the

house listed on the loan application.

Because Form 739 asks for the location of

damaged property without drawing a

distinction between real and personal

property, the defendant asserted at trial that

he believed he was allowed to claim

earthquake-damaged personal property,

regardless of its location at the time of the

quake, at the address he listed. He was

convicted of making a false claim to FEMA

but acquitted of defrauding SBA. A

subsequent polling of the jurors revealed that

they agreed the defendant was not entitled to

receive FEMA funds because he did not

reside at the house when the quake hit, but

they were confused about the SBA charge

and acquitted in part because SBA forms

were unclear. The jurors called the forms

unclear because they lacked a clear

definition of "primary residence" and did not

specifically ask for the location of damaged

personal property.

In the other investigation, an applicant

claimed a damaged vacation home as his

"primary residence." The investigation

revealed that while he did not live there, he

lived in the vicinity of his work location.

The borrower claimed in an interview that he

intended to move to the vacation home

permanently following retirement. Criminal

prosecution of this subject was declined

because of the lack of a published definition

of "primary residence."

The first case also highlighted another

limitation in Form 5C, which asks whether

the applicant has ever been convicted of a

felony "in connection with a riot or civil

disorder." The form does not ask for

disclosure of any other convictions for

serious offenses, as other SBA programs do.
Semiannual Report September 1996 27

To tighten these loopholes, the IG’s PVM probation, a $10,000 fine, and $300,000

suggested changes to and expansions of the restitution. He had pled guilty to one count

terminology in Forms 5C and 739. These

included substituting "primary home," which

is used elsewhere, for "primary residence"

and enumerating a list of a primary home's

attributes. A definitive statement of the

ineligibility of secondary or to-be-occupied

homes was also suggested. The expansion

of the criminal)history question is intended

to protect SBA from making disaster home

loans to any applicant with a serious criminal

record. Also, the PVM suggested expanding

the property-location question on Form 739

to differentiate, as appropriate, the locations

of damaged personal and real property.

In his response to the IG, the AA/DA

disagreed with most of the recommended

changes, stating that "we think the costs

outweigh the benefits," that such additions

would be "contrary to the Government's

efforts to simplify and shorten applications,"

and that the suggestion regarding Form 739

evidenced "some confusion about" the

eligibility for assistance of personal property

located elsewhere in a disaster area than at a

primary residence. He did agree to

substitute the term "primary home" for

"primary residence" when Form 5C is

reprinted.

Activities to Enhance Fraud

Detection and Deterrence

North Carolina Businessman Sentenced

for Making False Statements and Mail

Fraud

The owner of a Charlotte, North Carolina,

furniture franchisee was sentenced to 6

months home confinement, 3 years

each of making false statements to SBA

and mail fraud in connection with a

$114,000 economic injury disaster loan

approved in 1989. The OIG's joint

investigation with the FBI disclosed that the

man had submitted false statements

regarding his personal financial condition

and criminal history to induce SBA’s

approval of the loan in the aftermath of

Hurricane Hugo. The investigation also

showed that he had used the U.S. Mail in

furtherance of his scheme to defraud SBA.

Georgia Disaster Loan Applicant Pleads

Guilty to Making False Statements

A St. Marys, Georgia, man was indicted on

nine counts of making material false

statements to induce SBA to disburse a

$125,000 disaster business loan based on

physical damage to a mobile home park. He

pled guilty to one count; in return, the

Government agreed to dismiss the other

eight felony charges. The investigation

found that he had falsely represented himself

as the sole owner of a mobile home park and

six mobile homes when they were damaged

or destroyed during a severe storm. He also

falsely stated that he would use proceeds of

the disaster loan to repair or replace the six

mobile homes. The OIG initiated the

investigation based on information from an

anonymous caller.

Three Guilty in Mississippi Tree Farm

Scheme

The proprietor of a tree farm and lumber

business in Hattiesburg, Mississippi, and his

wife were found guilty by a Federal trial
28 Semiannual Report September 1996

jury. He was convicted on one count of (FEMA)’s OIG developed evidence that the

conspiracy and two counts of making

material false statements to influence SBA,

and his wife was convicted on one count of

making material false statements to

influence SBA. His attorney pled guilty to

making material false statements to

influence SBA. All the charges relate to a

$222,400 economic injury disaster loan

received in 1993. Both the businessman and

his attorney had been charged with

submitting a personal financial statement

falsely representing that he owned certain

real and personal property that, in fact, had

previously been foreclosed on and seized by

creditors. All three defendants had been

charged with submitting title documents

falsified to support the fictitious claim that

the couple was mortgaging an 80-acre real

property to SBA. Finally, the indictment

alleged that the couple improperly

negotiated joint-payee Treasury checks

representing $124,900 of the disaster loan

proceeds. Parenthetically, evidence

developed by the OIG's investigation also

resulted in the businessman's indictment by

a Lamar County, Mississippi, grand jury on

one count of false pretense for improperly

negotiating one of the joint-payee Treasury

checks; this particular charge has not yet

gone to trial. The OIG initiated the

investigation based on a referral from SBA’s

Gulfport Branch Office.

U.S. Virgin Islands Loan Applicant

Indicted for Making False Statement

A St. Croix, U.S. Virgin Islands, disaster

loan applicant was indicted on charges of

making false statements to SBA. The

SBA/OIG's joint investigation with the contract in connection with two disaster

Federal Emergency Management Agency loans. The company, which was operating a

application for a $10,000 disaster home loan

contained false claims for lost property, a

fabricated bill of sale for an automobile, and

falsified property rental agreements. The

investigation was based on a referral from

the Disaster Assistance recovery center in St.

Croix.

North Dakota Resident Indicted for

Making False Statements and Theft of

Public Money

A resident of Mandan, North Dakota, was

indicted on three counts of making a false

statement to SBA and three counts of theft

of public money. The SBA/OIG

investigation determined that the loan

applicant failed to show a $103,189

judgment on her application for a $35,000

disaster home loan. A court-authorized

search of her home by an OIG agent and

Deputy U.S. Marshals documented that she

had not used the loan proceeds to repair her

home, as she had claimed. Consequently,

she was charged with theft of public money

for failing to return the loan proceeds that

had not been used for their authorized

purposes. The OIG initiated the

investigation based on a referral from the

Fargo District Office.

Government Awarded Treble Damages

in Judgment Over Fraudulent Disaster

Loans

The Government was awarded a $418,000

civil judgment against a restaurant holding

company and its president for false claims,

conversion of collateral, and breach of
Semiannual Report September 1996 29

restaurant in Des Moines, Iowa, at the time application, he had also failed to disclose

of the Midwest Flood of 1993, had already two Government loans on which he had

received the first $110,000 of the loan defaulted. Aware of the 1978 SBA loan, but

proceeds when the Des Moines District not the HUD loan, SBA declined his

Office was told that the firm’s president had $500,000 application. The SBA/OIG joined

sold equipment pledged as collateral for the HUD/FBI investigation after being made

SBA loans. The OIG's subsequent aware of the situation by the Minneapolis

investigation showed that he had failed to District Office.

disclose a significant debt when applying for

the disaster loans, lied to conceal his misuse

of disaster loan proceeds, and repeatedly lied

to prevent SBA from recovering the

collateral he had unlawfully sold. The The president of a sports entertainment

judgment included three times the $110,000 business in Belleair Beach, Florida, was

amount of loan proceeds disbursed, a sentenced to 1 year probation, 100 hours

$10,000 penalty for each of five false claims, community service, and a $150 fine. He had

plus a 10 percent surcharge. The OIG previously pled guilty to one count of

initiated this Affirmative Civil Enforcement

investigation based on a referral from the

Des Moines District Office.

Minnesota Businessman Sentenced to $190,400 in business physical disaster loan

Prison for Fraud Scheme proceeds, he also submitted fraudulent

The owner of an agricultural service

company in Clarkfield, Minnesota, was

sentenced to 23 months imprisonment, 2

years supervised release, and $5,000

restitution to the State of Minnesota. He had

been indicted on 16 criminal counts,

including 2 counts of making false the $19,393 balance of his economic injury

statements in applying for a $500,000 SBA

disaster business loan in 1992 to repair

tornado damage to his business. He and

three other defendants had also been indicted

on multiple felony counts of conspiracy,

bribery, mail fraud, and false statements to Florida Veterinarian and Wife Plead

defraud the Department of Housing and Guilty to Making False Statements

Urban Development (HUD) in another loan

scheme. Adjudicated guilty of conspiracy

and mail fraud, all the other charges against

him were dismissed. In his SBA loan

Florida Company Executive Sentenced

for Making False Statement

making false statements to SBA. Having

submitted Borrower's Progress Certifications

to SBA that contained a number of false

statements to induce disbursement of

copies of invoices, proposals, checks, and

other documents purportedly corroborating

his certification of damaged video

equipment used in his business. In 1995,

after being interviewed by an OIG special

agent, he voluntarily repaid the $95,609

balance of the fraudulently-obtained loan,

disaster loan, and the $40,837 balance of his

disaster home loan. This investigation was

based on a referral from the Disaster

Assistance Area 2 Office.

The president and owner of a corporation

that operated veterinary clinics in Homestead

and Miami, Florida, and his wife pled guilty
30 Semiannual Report September 1996

to two counts and one count, respectively, of owner having filed any tax returns for the

making false statements to SBA. Each was

sentenced to 4 months home detention with

electronic monitoring, 3 years probation, and More Results From Ongoing

a $7,500 fine. The company had received a Investigation of California Loan

$106,100 loan to repair or replace Packagers

machinery, equipment, inventory, and real

property damaged by Hurricane Andrew.

The SBA/OIG investigation disclosed that,

to obtain the loan and to conceal their misuse

of some of the proceeds, the couple

submitted fictitious receipts, invoices, and

copies of checks as documentation of

expenses they had neither incurred nor paid.

The investigation was based on a referral

from FEMA's OIG.

California Meat Market Owner Indicted

for Filing False Claim and Making False

Statements charged with and pled guilty to filing a false

A former owner of a meat market in

Huntington Park, California, was indicted on

one count of filing a false claim with the

SBA and five counts of making false business, the man provided copies of income

statements to the Agency. The OIG

initiated the investigation of the owner

following receipt of a letter from his

insurance company. The investigation

revealed that the man had received a

$174,100 disaster business loan following pled guilty to a misdemeanor count of theft

the 1992 civil unrest in Los Angeles,

claiming extensive damage to his store from

looting. The loan went into default,

however, after only two payments were

made. Interviews with numerous witnesses

confirmed that no looting took place at the

market. When interviewed, he confessed

that he had overstated his losses and

admitted that he also inflated his income on

the bogus tax returns submitted with the loan

application. The IRS had no record of the

years in question, 1988 through 1991.

In the latest results from the continuing

investigation of two southern California

brothers who acted as disaster loan

packagers, two more of their clients have

been charged with crimes against SBA, five

have entered guilty pleas, and three of the

five have been sentenced. All of these

actions involve applications for economic

injury disaster loans filed in the wake of the

1992 civil unrest in Los Angeles, California.

 An owner of a clothing manufacturer was

claim with SBA. He was sentenced to 5

years probation, $28,000 restitution, and

2,000 hours community service. In his

application for a $300,000 loan for his

tax returns that were never filed with the IRS

and that significantly overstated his business

income.

 A client of the disaster loan packagers

of Government funds. He was sentenced to

5 years probation, $218,500 restitution, and

2,000 hours community service. In

connection with his application for a

$360,000 loan for his business, the applicant

claimed to be the sole owner of a clothing

manufacturer in Los Angeles, when he

actually owned only 65 percent. He

concealed the other owner's interest from

SBA in an effort to hide the other owner's

poor credit history.
Semiannual Report September 1996 31

 A Northridge, California, man pled guilty The owner of a clothing manufacturer in

to one count of making a false statement to

a Federally-insured bank. He was

sentenced to 3 months in a half-way house, a false claim with SBA. She submitted

3 months home detention, 5 years probation, allegedly fictitious income tax returns for

300 hours of community service, and 1990-91 with her application for a $300,000

$35,000 restitution. To facilitate the loan. Based on the financial information in

approval of a loan, the applicant submitted a those returns, which significantly overstated

false employment verification form, her business income, SBA disbursed

claiming that his wife was employed at a $61,500 to the businesswoman. She has yet

salary in excess of $100,000 per year; in to make a single payment on this loan. Her

fact, she was unemployed. The couple application reflected the assistance of an

became subjects of the investigation when employee of the loan packagers currently

the Disaster Assistance Area 4 Office under investigation. This employee has pled

questioned their application for a $300,000 guilty to earlier charges relating to his own

disaster loan for the wife’s non-existent SBA disaster loan. 

business, a fashion boutique. SBA turned

down the application, and the investigation These were the most recent results of a joint

later established that the business did not OIG and U.S. Secret Service investigation of

exist. falsified loan applications prepared by the

 An owner of a clothing manufacturer pled disaster loan packagers. The case was

guilty to knowingly converting SBA

disaster loan proceeds to his own use and

the use of others. The charge emanated

from his fraudulent application for a

$180,000 loan for his business. Because he

applied for a loan for which he knew he was

ineligible, his expenditure of the proceeds

constituted conversion.

 The owner of a clothing manufacturer in

Los Angeles, California, was charged with claim with SBA. This action resulted from

and pled guilty to filing a false claim with

SBA. With his application for a $500,000

loan for his business, the man submitted

altered copies of income tax returns that

significantly overstated his business's

income. He also submitted a schedule of

liabilities that included numerous creditors

with which he had never done business.

Los Angeles, California, was charged in a

criminal information with one count of filing

two southern California brothers acting as

opened as a result of a tip from a concerned

citizen and a referral from the Disaster

Assistance Area 4 Office.

Development Company Owner Charged

With Filing False Claim

An owner of a Monterey Park, California,

development company was charged in an

information with one count of filing a false

an OIG investigation based on information

provided by the Auditing Division. The

businessman applied for a $300,000

economic injury disaster loan following the

1992 Los Angeles civil unrest. The

investigation disclosed that the application

package included copies of fictitious

individual income tax returns for the
32 Semiannual Report September 1996

businessman and a copy of a fictitious 1991

corporate income tax return. Relying on

these documents, SBA approved and

disbursed a $109,300 loan that ultimately

went into default without a single payment

having been made.
Semiannual Report September 1996 33

Small Business Investment Companies

The primary business of Small Business Investment Companies (SBICs) is to provide a

source of equity capital and long-term loans to new or expanding small businesses. SBICs

are profit-making corporations that make investments in small businesses. SBICs finance

small firms in two general ways: (1) straight loans and (2) equity-type investments which give

the SBIC actual or potential ownership of a portion of a small business' equity securities.

Many SBICs also provide management assistance to the companies they finance.

SBA licenses, regulates, and provides financial assistance to SBICs, which are privately

owned, operated, and capitalized. The Small Business Investment Act (SBI Act), as

amended, authorizes SBA to purchase or to guarantee the timely payment of all scheduled

interest and principal on debentures issued by such companies. Under Section 301(d) of the

SBI Act, SBA also licenses Specialized SBICs (SSBICs) to help those small businesses

owned and managed by socially or economically disadvantaged persons. As of the end of FY

1996, there were 282 licensed, active SBICs, including 88 SSBICs, with private capital of

$4.5 billion and leverage of $1.4 billion for total capital of $5.9 billion. In addition, there

were 166 SBICs in liquidation owing SBA an estimated $320 million. In FY 1996, the

program level for investment companies, including participating securities, was $374 million.

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

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

and Business Enhancement Opportunity Act of 1992 transferred the responsibility for

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

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

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

programs and activities.

Summary of OIG Activity

The following summarizes OIG activities

relating to the SBIC program during the

reporting period:

Two SBIC investigations were closed,

leaving an inventory of 11 active cases

involving 32 subjects. Three SBIC cases

continued to be monitored which, due to

workload demands, had previously been

referred to another law enforcement

agency for investigation.

One proposed piece of legislation

and two proposed regulations were

reviewed.
34 Semiannual Report September 1996

Figure 3

Efforts to Improve SBA

Program Management

Review of Small Business Investment

Act Amendments

The OIG reviewed H.R. 3720 (a bill to

amend the Small Business Investment Act of

1958) and commented on two provisions.

First, the bill allows an SBIC to include, as

part of its private capital, ". . . unfunded

binding commitments . . . to contribute

capital to the licensee." The bill provides

some limits by requiring that such investors

meet certain criteria to be set by the

Administrator. It also specifies that such

commitments may not be used as a basis for

actually funding leverage. The OIG is

concerned, however, that this provision, if

enacted, could unnecessarily increase the

risk of admitting potentially underfunded

SBICs to the program. 

Second, the bill would require SBA to

provide each applicant with a written report

detailing the status of its application within

90 days of its filing. The OIG does not see

the need for this requirement and, in view of

SBA's constrained staffing outlook, believes

that it could result in even more delays in

processing such applications.

Review of SBIC Regulations

The OIG reviewed a proposed amendment to

Part 121.103(b)(5) that would provide an

exemption from the affiliation requirements

for investors who coinvest with SBICs, as

long as the small business concern retains an

entrepreneurial group that has a 10%

ownership interest. Under the proposal, a

group of investors and SBICs could own up

to 90% of a small business concern and not

be considered affiliated entities; neither

would they be presumed to control the small

business.
Semiannual Report September 1996 35

In the absence of a well-documented

empirical basis for this proposal, the OIG

expressed concern with the proposed

amendment’s contentions that all or a great

majority of the ownership interest in a

business does not equal control, that major

co-owners would not collaborate in

controlling a firm, or that controlling

interests by large entities have no bearing on

a firm's status as a small business. In short,

the proposal does not appear to be consistent

with the principle that a small business

concern be independently-owned and

operated. To allow a small business to be

90%-owned by SBICs and investors would

serve to deprive that firm of control of its

operations, which would not be in its best

interest.

The OIG also noted that the proposed

change in the SBIC affiliation rules could

lead to a similar change in other SBA

program areas, as SBA rethinks the

relationship between the concepts of

ownership and control of a business.

Because of this possibility, the OIG

recommended that this proposal be given a

comprehensive review by other program

offices.
36 Semiannual Report September 1996

Surety Bond Guarantees

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

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

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

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

business concern.

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

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

fiscal years do not exceed $5 million. Any contract bond is eligible for SBA guarantee if the

bond is covered by the Contract Bonds section of the Current Manual of Rules, Procedures

and Classifications of the Surety Association of America, required by the invitation to bid

or by the contract, and executed by a surety company that is determined by SBA to be eligible

to participate in the program and certified acceptable by the the Department of the Treasury.

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

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

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

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

that would otherwise not be able to obtain bonding in the standard marketplace. Title II of

Public Law 100-590 also requires an annual audit of each surety participating in this program.

SBA can guarantee bonds for contracts with a face value of up to $1.25 million. In FY 1996,

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

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

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

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's surety bond guarantee

program during the reporting period:

One audit of a surety is underway.

No inspection reports were issued

during this period, but follow-up was

conducted on the results of a

previous inspection.

One surety bond investigation

remained active at the end of the
Semiannual Report September 1996 37

reporting period.

One surety bond investigation

continued to be monitored. Due to

workload constraints, it had

previously been referred to another

law enforcement agency for

investigation.

Figure 4
38 Semiannual Report September 1996

Government Contracting Programs

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

contracting opportunities. SBA also works with each department or agency to establish

procurement goals for contracting with small, small-disadvantaged, and women-owned

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

Subcontracting Assistance, Certificate of Competency, Natural Resources Sale s

Assistance, and the Procurement Automated Source System.

The goals of the Prime Contract Program are to increase small business opportunities in

the Federal acquisition process and to expand full and open competition to effect savings to

the Federal Government. Supporting initiatives are carried out by traditional and breakout

procurement center representatives assigned to major Federal acquisition activities.

The Subcontracting Assistance Program promotes the optimal use of small businesses by

the Government’s large prime contractors. This is carried out by commercial market

representatives who monitor the procurement activities of the large prime contractors.

The Certificate of Competency (COC) Program provides an appeal process to assure that

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

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

successful offeror on a contract but is found non-responsible, it can appeal to SBA. After

reviewing a firm's capabilities, SBA can issue a COC that requires the contracting officer to

award the contract to that business.

Natural Resources Sales Assistance helps small businesses obtain a fair share of Federal

property offered for sale or disposal, with a focus on sales of Federal timber, royalty oil, coal

leases, and other mineral leases.

The Procurement Automated Source System (PASS) is SBA's computerized inventory of

U.S. small businesses that are interested in Federal procurement opportunities, either directly

with the Government or with prime contractors. Both Federal agencies and large prime

contractors use PASS as a resource in identifying small businesses for procurement

opportunities.
Semiannual Report September 1996 39

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's Government contracting

programs during the reporting period:

Government contractin g

investigations produced a $32,500

recovery by SBA.

One Government contracting

investigation was closed; seven

others were active involving 16

subjects.

Due to workload constraints, one

additional Government contracting

case was referred to another law

enforcement agency for

investigation, giving the OIG a total

of two Government contracting

referrals to monitor.

Two proposed regulations were

reviewed, as were six Standard

Operating Procedures (SOP).

Efforts to Improve SBA

Program Management

Review of Government Contracting

SOPs 

As part of SBA's initiative to update and

streamline its SOPs, the SBA/OIG reviewed

proposed revisions to six government

contracting SOPs and commented on

several. In reviewing SOP 60 03 5,

Subcontracting Assistance Program, the OIG

commented on purchase order analyses,

outside resources, contractor ratings, and

subcontractor of the year award procedures.

The review of SOP 60 04 4, Certificate of

Competency Program, led to comments to

clarify the "significant portion" requirement,

"cost of materials" definition, joint ventures,

contractor contacts, and integrity referrals.

Finally, in reviewing the Prime Contracts

Program procedures (SOP 60 02 6), the OIG

commented on the locations of procurement

center representatives (PCRs) and

consultations between PCRs and contracting

officers. 

Review of Department of Defense’s

Nonmanufacturer Rule 

The OIG reviewed a proposed rule that

would amend the Defense Federal

Acquisition Regulation Supplement

(DFARS) to include a new definition of

"nonmanufacturer" for use with the

Department of Defense's (DOD) small and

disadvantaged business set-aside program.

The OIG objected to the proposed definition

as it significantly varies from the definition

of "nonmanufacturer" used by SBA in its

small business size standards, and the prior

approval by SBA to a variance, as required,

has been neither requested nor given. DOD,

in proposing this change, has not explained

why the SBA size standard is not appropriate

and has not provided any reasons as to why

the proposed change would better meet its

needs. In addition, the proposed DFARS

definition is inadequate in that it does not

specify the number of employees an

employer may have to be eligible as small

nor does it specify that the end item of a

small business manufacturer must be

supplied. Finally, we noted that because the

DFARS and SBA definitions differ

significantly from each other, adoption of

the DFARS proposal is likely to cause
40 Semiannual Report September 1996

confusion for small businesses involved in This is the fourth Government Contracting

the Federal procurement arena. The Agency case to generate an Affirmative Civil

incorporated the OIG’s objections into its Enforcement settlement. Each involved a

opposition to the proposed DOD rule. contractor who disregarded SBA’s eligibility

Activities to Enhance Fraud

Detection and Deterrence

Latest Result From Affirmative Civil

Enforcement (ACE) Program

During this period, the OIG’s participation in

the Department of Justice’s ACE program

produced another result in the Government

contracting area. A Uniontown,

Pennsylvania, dairy agreed to pay the

Government $32,500 to settle (while

denying any fraud) a civil action filed by the

U.S. Attorney's Office for Eastern

Pennsylvania under the False Claims Act.

An OIG investigation had disclosed that the

firm falsely certified that it was eligible to

bid on Government contracts set aside for

small businesses. The dairy’s owner was

awarded contracts to provide dairy products

to Fort McNair, Andrews Air Force Base,

and Bolling Air Force Base after falsely

certifying that, together with its affiliated

companies, it had fewer than 500 employees.

In fact, the dairy’s owner was affiliated with

three companies, with total reported net sales

of $160 million and total number of

employees exceeding 500; therefore, it was

formally judged by SBA to be ineligible for

small business set-aside contracts. The

owner nevertheless continued to bid on and

obtain such set-asides, submitting to the

Government at least 686 false claims for

reimbursement totaling $483,671. This

matter was referred to the OIG by the Office

of Government Contracting's Area II Office.

determination and bid on subsequent setaside contracts for which he was ineligible.

Because contracting agencies have no

effective way of knowing whether SBA has

deemed a company too large for set-aside

contracts within certain industries, they have

sometimes awarded contracts to ineligible

businesses as a result of relying on false selfcertifications. In FY 1995, the OIG issued a

Program Vulnerability Memorandum

suggesting that SBA periodically generate a

list of companies found ineligible to selfcertify as small and circulate it to all Federal

agencies. Although the Assistant

Administrator for Government Contracting

rejected the suggestion by stating that such a

listing would be unable to keep pace with

SBA's recertification process, the OIG

continues to believe that this practice would

prevent a substantial number of fraudulent

awards and preclude many size appeals.

Any company on the list could rebut the

presumption of ineligibility by presenting

SBA's recertification to the procuring

agency.
Semiannual Report September 1996 41

Minority Enterprise Development

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

Capital Ownership Development Program for the purpose of promoting greater access to

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

the Act, SBA provides business development assistance to small business concerns that are

at least 51 percent unconditionally owned, controlled, and managed by one or more socially

and economically disadvantaged individuals and that meet other eligibility requirements.

Firms may participate in the program for a maximum of 9 years and must take steps to

enhance their competitiveness during this period to be prepared to compete in the private

sector upon graduation from the program.

One of the business development tools available to participant firms is access to Federal

contracting opportunities authorized by Section 8(a) of the Small Business Act. Under the

Section 8(a) program, SBA contracts with other Government agencies to provide goods and

services, and subcontracts the performance of these contracts to program participants. As of

September 30, 1996, there were more than 5,800 approved program participants. In FY 1996,

Section 8(a) program participants received between 5,400 and 5,600 contracts and between

23,000 and 25,000 modifications with an aggregate value estimated between $5.4 and $5.8

billion. Generally, Section 8(a) contracts with estimated values, including all options, of more

than $5 million (manufacturing) or $3 million (all other industries) must be competed among

eligible Section 8(a) program participants. The vast majority of the contracts awarded under

the program, however, have estimated values below these thresholds and are awarded on a

sole-source basis. 

Under the Section 7(j) Management and Technical Assistance Program, which is housed

in the Office of Minority Enterprise Development, SBA provides specialized training,

professional consultant assistance, and executive development to certified Section 8(a) firms,

socially and economically disadvantaged individuals whose firms are not participants in the

Section 8(a) program, low-income individuals, and small businesses located in areas of low

income or high unemployment. 

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

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

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

$35 billion audit, inspection, and investigation universe.
42 Semiannual Report September 1996

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's minority enterprise

development (MED) programs during the

reporting period:

Three audit reports in MED were

issued.

MED investigations resulted in 2

convictions and produced $10,000 in

court-ordered restitution, $26,100 in

fines and special assessments, and a

$1,227,000 reduction in financial

risk.

Office of Security Operations name

checks resulted in the declination of

3 applications for the Section 8(a)

program.

Five MED investigations were

closed, leaving an inventory of 13

active cases involving 46 subjects.

Due to workload demands, one other

case was referred to another law

enforcement agency for

investigation, and at the end of the

reporting period we still had ten

MED referrals to monitor.

Efforts to Improve SBA

Program Management

Audit Uncovers Unauthorized Contract

Brokering by Section 8(a) Firm

A recent audit found that a Section 8(a)

company filled an office supplies contract by

brokering the entire procurement to other

firms who drop-shipped the orders directly

to the procuring agency. In such cases, the

SBA/OIG stated in an audit-related

memorandum dated August 21, 1996, the

Section 8(a) firm added no value and did not

prepare for competitive business

development, while the Government was not

assured fair market pricing. 

SBA regulations require that a Section 8(a)

firm be a manufacturer or regular dealer in

items supplied to the Government, referring

to the requirements of the Walsh-Healy Act.

Although that Act has been amended to

eliminate the section on “regular dealers,”

the MED program office and the Office of

General Counsel have both stated that it

would still be appropriate to apply the

standards of the Walsh-Healy Act to the

Section 8(a) program. The OIG thus

recommended that the definitions in the

Agency’s procedures be clarified to

accommodate the Walsh-Healy amendments.

Further, although “brokers” and “packagers”

are ineligible under SBA regulations, these

terms are not defined.

The Associate Administrator for Minority

Enterprise Developmen t

(AA/MED)generally concurred with the

findings of the report and drafted a

procedural notice addressing the

recommendation. SBA will clarify the

Section 8(a) procedures to require firms to

be established wholesalers and retailers in

the products they sell to the Government.

The Section 8(a) contractors will also have

to supply the products of a small firm, if

available. These requirements will aid firms

in developing their businesses, while

preventing pass-through contracts in

products that the firms do not normally sell.
Semiannual Report September 1996 43

It will also preclude the passing through of

contracts to large businesses.

Audit of Florida Section 8(a) Firm

Yields Recommendation to Restrict Use

of Basic Ordering Agreements

The OIG recommended restrictions on the

use of basic ordering agreements (BOA)

by Section 8(a) companies. Under present

procedures, BOAs can result in unlimited

sole source awards to a company,

undermining statutory competitive

thresholds. The OIG recommended (1)

limiting the dollar amount of sole source

BOA delivery orders to regulatory

competitive thresholds--$5 million for

manufacturing and $3 million for other SIC

codes--and (2) limiting SIC codes in a BOA

to one major group. These

recommendations were contained in a

follow-up report to an audit of a Fort Walton

Beach, Florida, Section 8(a) firm that

obtained sole-source delivery orders in

excess of $29 million under one BOA in

force from 1992 to 1994. In two instances,

delivery orders were split to avoid

competitive thresholds. The audit concluded

that SBA procedures permit BOAs to be

used to thwart the competitive business

development purposes of the Small Business

Act. Because each BOA delivery order is

treated as a separate contract, there is no

limit on the aggregate value of orders, the

SIC codes used, or the number of procuring

agencies that can use a single BOA. Some

BOAs include both services and supplies,

which have different SIC codes and different

competitive thresholds. The AA/MED

agreed with the recommendation.

Activities to Enhance Fraud

Detection and Deterrence

Illinois Construction Company

President and Accountant Sentenced for

Obstruction of Justice

The president of a Section 8(a) construction

company in Villa Park, Illinois, and the

company's accountant pled guilty to one

count of obstruction of justice. The

president was sentenced to 6 months home

detention, 3 years probation, a $25,000 fine,

and $10,000 restitution. The accountant was

sentenced to 3 years probation and a $1,000

fine. The OIG's joint investigation with the

Air Force Office of Special Investigations

(AFOSI) revealed that in 1990-1991 the two

men submitted fraudulent claims to SBA and

the Air Force pertaining to a Section 8(a)

contract for landscaping on the Air Force

Reserve Facility at O'Hare International

Airport. During the course of the subsequent

investigation, both provided false testimony

to a Federal grand jury and attempted to

tamper with witnesses whose testimony was

to be presented to the grand jury. The

AFOSI asked the OIG to join the

investigation.

California Section 8(a) Company

Accounting Manager, Trustee, and

CEO’s Administrative Assistant

Sentenced

Sentences were imposed for the three

remaining defendants of a group of ten who

entered guilty pleas following the OIG's

participation in a Federal task force

investigation of a Section 8(a) company with

offices in Los Angeles and Houston. The

firm's former accounting manager and a
44 Semiannual Report September 1996

trustee of a trust created by the chief Dallas Resident Office, for their outstanding

executive officer (CEO) and his wife both performance, dedication, and

pled guilty to one count of violation of

National Aeronautics and Space

Administration (NASA) security

regulations. Both were sentenced to 6

months supervised probation and 120 hours

community service. The CEO’s

administrative assistant, who had also pled

guilty to one count of conspiring with the

firm’s CEO and others to file false claims for

payment by NASA under various

subcontracts, was sentenced to 3 years

probation and 180 hours community service.

The CEO had used the trust and three other

associated corporations to bill inflated rents

and other expenses to NASA subcontracts,

including a Section 8(a) contract initiated in

1981 for $4.4 million and extended through

December 1989 with additional charges of

$6.4 million. Also included in the

conspiracy were a series of materially false

statements, regarding the existence of the

firm’s San Diego office, that were made to

secure and maintain Section 7(j) cooperative

agreements totaling more than $60,000. The

SBA/OIG was asked by the NASA/OIG to

join the task force, which also included the

IRS, the Postal Inspection Service, the FBI,

the Defense Contract Audit Administration,

the Department of Labor’s Office of Labor

Racketeering, and its Pension and Welfare

Benefits Administration.

OIG Auditor and Criminal Investigator

Receive Special U.S. Attorney Awards

The U.S. Attorney’s Office for the Southern

District of Texas recently issued special

commendations to Donald Ward, an auditor

in the OIG’s Los Angeles Field Office, and

Cheryl Jones, a special agent in the OIG’s

professionalism in the investigation of a

contractor supporting the space shuttle

program at the Johnson Space Center. The

awards were presented by U.S. Attorney

Gaynelle Griffin Jones in Houston, Texas.

Ms. Jones was SBA’s primary investigator,

and Mr. Ward was one of two auditors who

worked with a large multi-agency task force,

headed by the NASA/OIG, to uncover and

successfully prosecute 5 individuals and 5

companies for defrauding NASA or SBA.

The case resulted in the largest fraud

indictment and conviction in NASA’s

history, with potential fines and recoveries

totaling approximately $12 million.

Pennsylvania Construction Company

Suspended from Section 8(a) Program,

$1.2 Million in Contracts Rescinded

The award of pending Section 8(a) contracts

totaling $1,227,000 to a Pennsylvania

construction company was rescinded

because of an OIG investigation report. The

company was suspended from the Section

8(a) program after the investigation

determined that the company's entry into the

program had been approved based, in part,

on fictitious corporate and individual

income tax returns submitted to SBA.

Each rescinded contract was awarded to

another Section 8(a) contractor. Following

an appeal, the company's suspension was

reversed.
Semiannual Report September 1996 45

Economic Development

(Business Education and Training)

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

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

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

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

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

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

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

the Virgin Islands, and Guam, with nearly 1,000 subcenters or service locations located at

colleges, universities, vocational schools, chambers of commerce, economic development

corporations, or downtown storefronts. In FY 1996, SBDCs provided counseling and training

to nearly 570,000 clients.

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

development resource partners of SBA. Composed of approximately 13,000 volunteers

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

business persons. Counseling sessions are free to the public and training is provided at a low

cost. Over 27,000 clients were assisted in FY 1995.

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

training, counseling, and providing management information materials occur through

outreach efforts with external organizations. Cosponsorship arrangements, authorized under

the Small Business Act, play a key part in this process. The Act gives SBA the authority to

cosponsor training and counseling activities for small business concerns with non-profit

entities and/or with other Federal Government agencies. In addition, the Act authorizes the

Agency to cosponsor training, but not counseling, with for-profit concerns.

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

software, databases, and other resources to assist them in starting and expanding their

businesses. All BICs have at least one on-site counselor and can address the varied business

start-up and growth issues encountered by small business owners. There are currently 37 BICs

in operation.
46 Semiannual Report September 1996

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's economic development

programs during the reporting period:

One audit report was issued in the

economic development program

area; one was in progress.

Economic developmen t

investigations produced a $517,721

reduction to the Agency's financial

risk and one investigation remained

active at the end of the reporting

period.

Six Standard Operating Procedures

were reviewed.

Efforts to Improve SBA

Program Management

Audit of Virginia Small Business

Development Center (SBDC) Finds

Variety of Non-Compliance Issues

An audit of the Virginia Small Business

Development Center showed that

improvements are needed in expenditure

controls and program matching funds.

The audit report questioned $31,400 in

unallowable costs and identified $176,217 in

overstated match. No repayment to SBA

was necessary, however, because the SBDC

had provided more than the required 50

percent match of private funds to Federal

funds. The audit, requested by SBA’s

Associate Administrator for SBDCs

(AA/SBDC), covered 2 of the 15 subcenters

of the Virginia Department of Economic

Development. The unallowable costs

included charges for equipment not yet

obligated in 1994, airfare for a trip not taken,

gift bags for an employee retreat, and

employee parking permits. The match errors

included unreasonable rates for a volunteer

counselor, inadequate documentation,

double counting of invoices, and

miscalculations.

The OIG recommended that SBA take

corrective actions for the specific findings as

well as require the lead center to review the

remaining 13 subcenters for similar

problems. The Richmond District Director

agreed to implement all recommendations.

Puerto Rico SBDC Terminated From

Agency Program

Based on the findings of an initial audit (see

Semiannual Report for the period April 1,

1995 to September 30, 1995) and a

subsequent investigation, the AA/SBDC

terminated SBA’s cooperative agreement

with the University of Puerto Rico program,

ending that institution’s participation in the

Agency’s SBDC program. The audit

uncovered programmatic shortcomings

including the insufficient provision of

counseling, insufficient cash match funding,

and excessive compensation and

unauthorized expenditures. The

investigation confirmed the findings of the

audit and documented numerous additional

unauthorized activities by specific

individuals. A follow-up review by SBA’s

San Juan District Office prior to the

termination revealed that little progress had

been made in correcting areas of noncompliance. The AA/SBDC’s letter to the

institution cited “. . . widespread misuse of
Semiannual Report September 1996 47

Federal funds and disregard of . . .

requirements . . . over a lengthy period of

time. . . .” as the basis for the decision.

Funding for the program in FY 1997 was

slated to be $1,035,441. The investigative

findings have also been referred to the U.S.

Attorney’s office for the District of Puerto

Rico.
48 Semiannual Report September 1996

Agency Management and Financial Activities

Agency Management and Financial Activities include SBA's administration of the loan

programs, as well as the full range of internal administration and financial management

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

reviewing these operations and by conducting audits of Agency financial statements as

required by the Chief Financial Officers Act, audits of cash management activities, and

integrity assurance activities.

SBA's management and financial activities, represented by the Agency's total appropriation,

involved about $1.1 billion in FY 1996. Of this amount, $589 million was for non-disaster

related activities of the Agency. SBA’s final FY 1997 appropriation has been enacted in P.L.

104-208, and includes $852 million in new appropriations. Combined with carry-forward

balances, and estimated recoveries, it provides an FY 1997 availability of about $1.1 billion.

Of this amount, $657 million is for non-disaster related activities of the Agency.

Summary of OIG Activity

The following summarizes OIG activities

relating to SBA's administration and

financial management activities during the

reporting period:

Four audit reports on Agency

activities were issued; two other

audits were underway.

One inspection survey report was

issued.

Integrity assurance investigations

resulted in $3,747 in court-ordered

restitution and a $1,632 recovery.

Eleven integrity assurance

investigations were closed, leaving

an inventory of 18 active cases

involving 28 subjects.

Two integrity assurance

investigations continued to be

monitored. Due to workload

constraints, they had previously been

referred to other law enforcement

agencies for investigation.

Three proposed regulations, and 12

Standard Operating Procedures were

reviewed.
Semiannual Report September 1996 49

Figure 5

Efforts to Improve SBA

Program Management

Audit Expresses Qualified Opinion on

FY 1995 Financial Statements

SBA’s financial statements for FY 1995

received a qualified opinion in the annual

independent audit because SBA did not (1)

maintain comprehensive inventory

records of acquired property, (2)

consistently value the acquired property

at its net realizable value, and (3)

reconcile certain fund balances with the

U.S. Department of the Treasury. The

audit, required by the Chief Financial

Officers Act of 1990, was performed for the

SBA/OIG by the Certified Public

Accounting firm of Cotton & Company.

The first two exceptions were repeats from

the 1994 audit. Because of the lack of an

automated inventory system with unit detail,

SBA could not reconcile the estimated $140

million of collateral purchased property to its

general ledger. A new computerized

inventory system has been planned but not

implemented. The valuation question was

addressed in an SBA Information Notice in

October 1994, but the auditors said the

requirement for current appraisals of

acquired property has not been consistently

implemented. The Office of the Chief

Financial Officer (OCFO) has indicated that

detailed inventory records are maintained in

SBA’s field offices in paper format. The

new system would provide this information

in an automated format. SBA’s OCFO

advises that this system is planned for 1997.

Also, extensive training conducted in 1996

addressed the valuation concern and will be

considered in the 1996 audit. The OCFO

reports that all issues have been addressed,

and they will work with the auditors toward

an unqualified opinion for the 1996

statements.
50 Semiannual Report September 1996

The third exception relates to online and valuations by certified real estate appraisers

offline loan accounting balances, which were on collateral estimated at more than

$32 million higher on SBA’s books than on $100,000.

Treasury’s. Monthly reconciliations are

required by the Treasury Financial Manual, The three new findings for 1995 are (1)

but the difference had not been reconciled at inconsistency in applying Agency

the time of the audit. SBA has retained a requirements in debt collection, with loans

contractor to assist in the reconciliation and under $15,000 not receiving intensive

expected to become current by late 1996. collection procedures; (2) nonIn the report on internal controls, the of a June 1995 report by the Office of

auditors classified the three problems with Government Ethics on SBA compliance with

the financial statement as material the Ethics in Government Act of 1978; and

weaknesses. Six other control weaknesses (3) lack of effective self-assessment of

were reported, including: (1) computer internal control weaknesses as required by

passwords are known to persons other than the Federal Managers’ Financial Integrity

the owner, (2) SBA lacks policies and Act, with 14 of 17 reviewed district offices

procedures to verify that accounting responded that they were not involved in the

transactions initiated by field offices are process.

complete and accurate, and (3) SBA has not

performed the required annual re-estimate of SBA officials generally agreed with the

disaster loan subsidy rates since 1991. In the findings and recommendations and have

report on compliance with laws and initiated corrective actions, working toward

regulations, the auditors found no material eliminating most, if not all, findings in time

non-compliance with laws and regulations for the 1996 audit.

tested during the audit. 

Management Letter Describes Six Inspector General Community Supports

Internal Control Weaknesses OIG Involvement in the GPRA Process

Six internal control weaknesses were

reported in the management letter

associated with the independent audit of

SBA financial statements for 1995. 

Three of the findings were repeated from the

1994 audit because SBA management had

not fully implemented corrective actions.

These concern the need for segregation of

duties in the cash reconciliation process, the

lack of security and efficiency reviews of

local area network systems, and the lack of

implementation of some of the 12 findings

Inspection Survey Indicates That

Under the auspices of the President’s

Council on Integrity and Efficiency (PCIE),

the SBA and Treasury Department OIGs

recently conducted a comprehensive survey

of all Inspectors General (IGs) who are

members of either the PCIE or the Executive

Council on Integrity and Efficiency (ECIE).

The survey’s scope was designed to

ascertain current and planned OIG

involvement in the implementation of the

Government Performance and Results Act

(GPRA) within their host departments or
Semiannual Report September 1996 51

agencies, solicit IGs’ views on the is there a benefit in developing a common

appropriate role of the OIGs in their position within the community on an

agencies’ GPRA process, and ascertain the appropriate level of OIG participation in the

status of strategic planning initiatives within implementation and review of GPRA

individual OIGs. activities? Finally, would clarifying the

Nearly all of the 27 PCIE IGs and about

half of the remaining 27 ECIE IGs

reported some involvement in their host

agencies’ implementation of GPRA. Most

IGs plan to become more involved in the

process over the next two years. The

majority believed that OIGs should act in an Audit Discloses Contractor Altered

advisory/consultative capacity in the Act’s Dates on U.S. Postal Service Forms

implementation stages but perform

independent audits and reviews of results

once GPRA has been fully implemented.

There was no clear consensus that OIGs

should focus resources on only one specific

area. Most IGs, however, believed their

offices should focus on a few primary

activities, such as helping their department

or agency to develop a strategic plan and

performance measures to validate or assess altered dates on U.S. Postal Service forms

results; and to perform audits, evaluations,

and investigations.

While the survey did not ask whether the

OIGs had the resources to take on the

additional GPRA responsibilities, several

IGs questioned whether they would have

sufficient resources to support substantial Review of General Accounting Office

involvement in their host departments’ or Management Reform Act of 1996

agencies’ GPRA process. Finally, we found

that while nearly all IGs are engaged in

internal OIG strategic planning, few have

completed a full fiscal year cycle.

The report called attention to several issues

that the PCIE may want to consider. First, do

IGs have sufficient resources to take on

additional GPRA responsibilities? Second,

connection between Chief Financial Officer

Act and GPRA activities help ensure the

consistent use of standard performance

measures? The PCIE found the survey’s

information useful and has addressed all

questions raised.

The OIG recommended denial of a mailing

service contractor's final claim of $142,659

on a $568,000 contract that ran from 1989 to

1992. The recommendation was based on an

audit by the Defense Contract Audit Agency

(DCAA) for the OIG.

 

According to the audit, the contractor

to obtain bonus payments for expedited

delivery. DCAA also found that the firm’s

accounting system was not reliable because

of internal discrepancies, missing invoices

and supporting documentation, and duplicate

invoices. 

The OIG reviewed the Congressional draft

bill entitled "General Accounting Office

Management Reform Act of 1996" and

commented on several of its provisions.

Briefly, the legislation would change the

term of office and annuity computations for

the Comptroller General and his or her

Deputy, establish an Office of Inspector
52 Semiannual Report September 1996

General (OIG) for GAO, and amend PVM was prompted by the actions of a

numerous laws authorizing GAO to audit Regional Advocate who, unaware that SBA

and report on various Government functions. has had a series of problems with a

Most of the OIG’s comments pertained to praising the bank's excellent small business

the provisions establishing a GAO/OIG and lending practices. Following visits to several

recommended language changes that should area banks, the advocate issued press

be made in this bill as well as in the releases recognizing them for their small

Inspector General Act itself at some future business lending practices. He based his

time. First, the office recommended that

the bill make clear the IG's authority to

perform inspections and evaluations,

activities that many established IGs have

been conducting for years. Second, the

office noted that the bill provides that the

GAO/IG have demonstrated ability in certain

enumerated disciplines. We recommended

that this list be expanded to include both the

policy analysis and program analysis fields,

in recognition of an OIG's inspection and

evaluation responsibilities and the need for

such expertise in the inspector general

community. Finally, the bill provides that

the Comptroller General may not, among

other things, prevent the GAO/IG from

carrying out an audit or investigation or from

issuing a subpoena during the course of an

audit or investigation. Again, in recognition

of the inspector general community’s

ongoing inspection and evaluation activities,

the SBA/OIG recommended that this

language be revised and applied to the

GAO/IG's inspection and evaluation

activities.

Program Vulnerability Memorandum

Issued on Regional Advocate Activities

During this reporting period, the SBA’s

Inspector General (IG) issued a program

vulnerability memorandum (PVM) to the

Chief Counsel for Advocacy (CCA). The

participating lender, issued press releases

action on an Office of Advocacy analysis of

reports filed by the banks with Federal

regulators. The Office of Advocacy's

analysis made no distinction, however,

between SBA-guaranteed loans and regular

commercial loans.

Unbeknownst to the Regional Advocate,

SBA has had a series of problems with one

of the banks. Because of a variety of

questionable lending and servicing practices,

the SBA district office declined to renew this

bank's participation in the Certified Lender

program in 1995. Moreover, the OIG has an

ongoing investigation regarding one of this

bank's SBA-guaranteed loans for which the

bank and its president face possible legal

action. Finally, on the same day the

Regional Advocate issued the press releases,

the district office made a written request to

the bank president that he voluntarily release

SBA from its guarantee on another loan

because of numerous lending and servicing

deficiencies by the bank. The district office

has subsequently made an investigative

referral to the OIG regarding this loan as

well. Not surprisingly, the bank has cited

the Regional Advocate's laudatory press

release in its refusal to voluntarily terminate

the SBA guarantee and will probably raise it

again as SBA and the U.S. Department of

Justice consider legal action.
Semiannual Report September 1996 53

The Office of Advocacy has no policy During the reporting period, employee

requiring Regional Advocates to check with contributions to our mission were

other SBA offices prior to granting official significant. As Figure 6 shows, more than

recognition to participants. This lack of 61 percent of all investigative referrals

communication allowed the Agency to send originated from within the Agency, in the

contradictory messages to the bank in form of referrals either from program heads

question. or from other SBA employees. This

The IG recommended to the CCA that, of SBA employees to reducing waste, fraud,

before making any public announcement of and abuse in Agency programs and

this sort, Regional Advocates should be improving the Agency's management and

required to contact the appropriate district control of its programs.

office for any information related to the

financial institution in question. Regional

Advocates should also request a name check

from the OIG's Office of Security Operations

before making such announcements. These A former clerk with the Disaster Assistance

steps should ensure that potentially Area 4 Office, Sacramento, California, was

embarrassing situations such as described sentenced to 30 days home detention, 5

above are avoided in the future. As of the years probation, and $3,748 restitution. He

end of this reporting period, the CCA had previously pled guilty to one count of

not replied to the PVM, because the

memorandum was issued late in the period.

Activities to Enhance Fraud

Detection and Deterrence

OIG Conducts Employee Awareness

Briefings

In addition to investigating complaints of

waste, fraud, and abuse involving SBA

programs, OIG Investigations Division staff

presented 16 Standards of Conduct

briefings to a total of almost 700 Agency

employees. The involvement and

cooperation of all SBA employees in

combating waste, fraud, and abuse is critical

to an effective OIG investigations program

and to the Agency's overall productivity and

efficiency.

cooperation indicates the strong commitment

Former SBA Employee Sentenced for

Conversion of Government Property

conversion of Government property to

personal use. A joint OIG/Federal Protective

Service investigation of the man was

initiated based on information provided by

the Area 4 Office. It determined that,

without authorization, he obtained a rented

automobile, paid for by SBA, and used it

exclusively for personal business. Area 4

officials became aware of his behavior when

the employee was involved in an accident

with the vehicle.

OIG Criminal Investigator Receives

Special U.S. Attorney Award

The U.S. Attorney’s Office for the Eastern

District of Pennsylvania issued a special

commendation to Nicholas Carroll, a special

agent in the OIG’s Philadelphia Resident

Office, for his outstanding performance,

dedication, and professionalism in an
54 Semiannual Report September 1996

investigation that resulted in the ordered

payment of $1,526,893 by a tax return

preparer in restitution to the dozens of

individuals he had defrauded using SBA's

name. The award was presented by U.S.

Attorney Michael R. Stiles. Mr. Carroll was

SBA's primary investigator of a case in

which the tax preparer defrauded more than

50 investors, many of them elderly, by

selling them approximately $1,143,000 of

bogus tax-free municipal bonds purportedly

guaranteed by SBA.

Figure 6
Semiannual Report September 1996 55

Organization, Resources, and Management Initiatives

The two missions of the Office of Inspector General are to help improve management in the

Agency and to detect and deter fraud in SBA's programs. These dual missions are

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

oversight to the Agency's portfolio and programs. This chapter provides an overview of the

OIG's organizational structure and personnel and budget resources and summarizes key

internal management initiatives to use those resources as effectively as possible. 

Organization

The OIG is organized into four divisions as

follows:

 Auditing Division

 Investigations Division of congressional Continuing Resolutions

 Inspection and Evaluation Division million and an authorized personnel ceiling

 Management and Legal Counsel Division While this level of funding represented the

The Auditing and Investigations Divisions FY 1995, it was not able to support OIG

each administer their field activities through activity at the FY 1995 operating level.

field offices and resident offices around the Uncontrollable expenditures such as

country. The Auditing Division has offices congressionally-mandated law enforcement

located in Atlanta, Dallas, Los Angeles, and availability pay, annual cost of living

Washington. In addition to these cities, the increases, and various locality pay

Investigations Division has offices in adjustments were not reflected in the CR

Chicago, Denver, Houston, Kansas City, spending levels. In early April, the OIG was

New York, Philadelphia, San Francisco, forced to request a transfer of funds from the

Seattle, and Syracuse. The Investigations SBA to ensure that ongoing operations could

Division’s Office of Security Operations is be funded. The SBA Administrator

located in Washington, D.C. transferred $200,000 in May to the OIG’s

Both the Inspection and Evaluation Division

and the Management and Legal Counsel

Division operate out of Washington, D.C. A

current OIG organization chart can be found

at Figure 7.

Resources

In FY 1996, the OIG operated under a series

(CR) at an annualized funding level of $8.5

of 102 full-time equivalent (FTE) positions.

same number of dollars as appropriated in

appropriation, enabling the OIG to avoid
56 Semiannual Report September 1996

uncompensated furloughs of its staff and to Agency's vastly expanding disaster

carry out other priority activities. Even with assistance program; these funds will remain

this transfer of funds, the OIG ended the available until expended (see discussion

fiscal year with an average FTE of just over below). By the end of the current reporting

98, or 4 positions under its authorized period, six auditors, five investigators, one

ceiling. attorney, and two secretaries had been hired

In FY 1994, the OIG also received $3 funding.

million in supplemental “no year” disaster

funds to be used for activities related to the Funding will continue to be problematic in

on temporary appointments using disaster
Semiannual Report September 1996 57

FY 1997, even though the Congress has loan fraud cases. With demand for SBA

appropriated $9 million in funding for the business and disaster loans remaining high,

OIG and authorized the Administrator to we expect that our investigative efforts will

transfer an additional $500,000 to support continue to be preoccupied by those two

OIG’s disaster oversight activities. The programs and our resources stretched

nature of the funding for disaster oversight severely. The table on page 61 also

forces the OIG to pursue recruitment of illustrates the Auditing Division's emphasis

disaster-funded auditors and investigators on on the business loan and disaster assistance

a “non-permanent” basis. Temporary programs. This is demonstrated by the

employees are understandably quick to Auditing Division's effort in the disaster

pursue more permanent positions elsewhere, assistance program, which has gone

and the OIG is deprived of the expertise that incrementally from 3 percent to 26 percent

they would otherwise develop through their over the last 5 reporting periods. The OIG

longevity with the OIG. is, of course, also greatly concerned by the

The continuing reduction in OIG FTE Agency programs, supporting activities, and

resources remains troubling. As depicted in program participants. It has been unable to

Figures 1 and 2, the expanding nature of the provide audit oversight of the Agency

Agency's portfolio and its concomitant computer systems, and it has been virtually

demand for OIG oversight would suggest unable to respond to specific Agency

that resources be increased (not reduced) to requests for audit coverage. Key programs

ensure adequate oversight. In recognition of such as Section 8(a) have also gone with

this need, the President had requested $9.985 minimal audit oversight during the past year.

million for the OIG for FY 1997. With the Other programs such as Small Business

resources made available in the FY 1997 Investments Companies have had no OIG

appropriation, the OIG will again find it oversight.

difficult to carry out its mandate to provide

oversight to the Agency's programs and

activities and to safeguard the Government's

investment in the extensive credit programs

of the Agency.

The OIG continues to be concerned with the

strong demand for investigations of fraud in

Agency programs. As evidenced by the

table on page 61, both business loan and

disaster loan fraud continue to be our major

areas of concentration, in terms of both

active cases carried and time expended on

those cases. This reporting period continued

the high share of investigative time (79.5

percent) expended on business and disaster

meager coverage it is able to provide to other
58 Semiannual Report September 1996

HOW TO REACH US ON THE INTERNET:

SBA OIG’s home page:

http://www.sbaonline.sba.gov/IG

IGnet home page:

http://www.sbaonline.sba.gov/ignet

Management Initiatives

The OIG Enters CyberSpace

The OIG has joined the Internet

communications revolution as a new channel

for distributing news of OIG activities. The

OIG home page on the World Wide Web

tells the public how to contact the OIG and

gain access to its audit, inspection, monthly

activity, and semiannual reports. The SBA/

OIG’s homepage also contains a host of

other informational items such as the

description of the OIG’s mission, its office

locations, and testimony by office principals.

The OIG homepage is

part of IGnet, an Internet

network housed at SBA

and serving the inspector

general community of

auditors, investigators,

and inspectors at the

Federal, State, and local

government levels, as

well as educational, nonprofit, and private sector

organizations. The goals

of the IGnet are to (1)

promote public access to

IG information and (2)

provide information and

communication tools for

community professionals.

In addition to OIG

reports, IGnet contains

pages on the

Government’s Single

Audit program, job

opportunities, training

opportunities, and a

variety of Internet search tools. 

OIG Conducts Annual Training in

Washington, D.C.

The OIG conducted its annual training

conference at SBA’s Central Office in

Washington, D.C., during the week of July

8, 1996. Participants heard “state of the
Semiannual Report September 1996 59

OIG” remarks by the Inspector General, as

well as presentations by Administrator Philip

Lader and Deputy Administrator Ginger

Lew. Sessions attended by OIG auditors and As part of the SBA-wide initiative to update,

inspectors included Surety Bond and SBIC revise, and clarify Agency SOPs, the OIG

program updates presented by SBA program reviewed its own SOPs. Several outdated

officials, ADP information presented by SOPs were canceled, and newly revised

SBA’s Office of Information Resource procedures were prepared for Audit,

Management, statistical sampling Investigations and Security, and Inspection

techniques, and report referencing. All OIG and Evaluation programs.

conference participants attended program

updates on the Agency’s Economic

Development programs, the Section 8(a)

program, and the Disaster Assistance

program; these updates were presented by The Inspector General (IG) is a member of

senior SBA program officials. Finally, all the President's Council on Integrity and

attendees received instruction in Efficiency (PCIE) and serves as chair of the

understanding and avoiding sexual PCIE's Committee on Inspection and

harassment problems. Evaluation. He participates in PCIE

All OIG investigators underwent firearms management of Federal programs on a

qualification training and received Government-wide basis. During the

instruction in the “use of force” policy. reporting period, the IG and his staff have

They also received training in firearms contributed to two key PCIE initiatives.

safety and retention, asset forfeiture, search

warrants, and critical incident trauma. The IG, in his role as Chair of the

The OIG also conducted an administrative

training session for its support staff, June

18-20, 1996. Some of the topics covered

during that week were English and Editing

Principles and Practices, Windows 95,

Introduction to Microsoft Office Suite,

Management and Legal Counsel Division

Initiatives and Issues, Sexual Harassment in

the workplace, and Timekeepers Refresher

Training. Attendees met with their

respective divisions at the completion of the

training sessions.

OIG Standard Operating Procedures

(SOP) Updated

President's Council on Integrity and

Efficiency

initiatives to reduce fraud and improve the

Committee on Inspection and Evaluation,

was requested by the PCIE to join with the

Chair of the Auditing Committee in a survey

of community involvement in the

implementation of the Government

Performance and Results Act (GPRA). The

survey was completed and the results are

summarized in the Executive Summary

section at the outset of this report. The

details are presented in the Agency

Management and Financial Activities

Chapter (see page 50.)

The IG commissioned the Inspections

Round Table, the Committee on Inspection

and Evaluation’s support staff, to review the
60 Semiannual Report September 1996

methods currently used by the inspector

general community to monitor block grants

and similar programs. The report documents

the existing provisions for accountability as

manifested in the 13 Federal block grant

programs. The purpose was to lay the

groundwork for determining the sufficiency

of those provisions by spelling out the

general accountability concepts and

identifying specific issues concerning the

block grant statutes. The review also offered

suggestions for modifying existing block

grant programs to improve their

accountability. The report was issued in July

1996 and was subsequently presented to the

PCIE by the IG.
Semiannual Report September 1996 61

Direct Investigation Time by Program Area

April 1, 1996 to September 30, 1996 

Program Area Direct Time Number of Investigations

%

Closed In Progress

Business Loans 53% 26 153

Disaster Loans 26% 9 83

SBIC 4% 2 11

Surety Bond Guarantees 1% 0 1

Government Contracting 2% 1 7

Minority Enterprise Development 2% 5 13

Economic Development 1% 0 1

Agency Management and Financial 11% 11 18

Total 100% 54 287

Direct Auditing Time by Program Area

April 1, 1996 to September 30, 1996 

Program Area Direct Time Number of Audits

%

Issued In Progress

Business Loans 58% 3 8

Disaster Loans 26% 0 6

SBIC * 0 0

Surety Bond Guarantees 1% 0 1

Government Contracting 0% 0 0

Minority Enterprise Development 2% 3 0

Economic Development 12% 1 1

Agency Management and Financial 1% 4 2

Total 100% 11 18
62 Semiannual Report September 1996

* less than 1⁄2 percent
Semiannual Report September 1996 63

Profile of Operating Results

April 1, 1996 to September 30, 1996

Audit Activities .............................................. Totals

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

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

C. Audit Recommendations Issued .................................... 42

D. Dollar Value of Costs Questioned ............................ $887,216

E. Dollar Value of Recommendations That Funds Be Put to Better Use . $325,000

Audit Followup Activities

F. Audit Recommendations Closed .................................... 53

G. Disallowed Costs Agreed to by Management .................. $1,313,113

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

 Agreed to by Management ................................. $1,437,923

I. Unresolved Audit Recommendations ................................ 23

J. Dollar Value of Unresolved Audit Recommendations ............ $1,094,698

K. Settlement Based on CPA Quality Review (non-recurring category)........ $0

Inspection Activities

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

Legislation/Regulation/SOP/Other Reviews

A. Legislation Reviewed ............................................. 4

B. Regulations Reviewed ........................................... 10

C. Standard Operating Procedures Reviewed ........................... 27

D. Other Issuances Reviewed* ....................................... 55

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

communications which frequently involve the implementation of new programs and policies.
64 Semiannual Report September 1996

Status of Investigations as of September 30, 1996 Totals

A. Total Cases ...................................................341

B. Closed Cases ..................................................54

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

D. Open Cases ...................................................261

E. Subjects under Investigation ..................................... 1268

Summary of Indictments and Convictions

A. Indictments from OIG Cases ....................................... 36

B. Convictions from OIG Cases ....................................... 44

Summary of Recoveries and Reductions of Risk

A. Potential Recoveries and Fines as a Result of OIG Investigations ... $2,041,896

B. Reductions of Financial Risk as a Result of OIG Investigations ..... $2,731,518

C. Reductions of Financial Risk as a Result of the Name Check Program$8,125,948

 Total: ..................................................$12,899,362

SBA Personnel Actions Taken as a Result of Investigations

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

B. Resignations/Retirements .......................................... 3

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

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

Program Actions Taken as a Result of Investigations

A. Suspensions ....................................................1

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

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters ................................... 1,581

B. Total Calls/Letters Referred to Offices Outside the OIG ............... 1,571

C. Total Calls/Letters Referred to Investigations Division for Evaluation........ 10
Semiannual Report September 1996 65

Investigations Activities - Referral Program

A. Cases Referred to FBI ............................................ 14

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

C. Indictments from Referrals ......................................... 3

D. Convictions from Referrals ......................................... 5

E. Potential Recoveries and Fines as a Result of Referral Program ..... $216,862

F. Reductions of Financial Risk as a Result of Referral Program ............. $0
66 Semiannual Report September 1996

Office of Inspector General

Staffing as of September 30, 1996

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

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

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

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

 

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

 Professional .............................................. 38 

 Support ..................................................8 

 

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

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

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

 

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

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

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

 OIG Total .....................................................99

Additional Temporary Disaster Staffing

Funded from Supplemental Appropriations

A. Auditing Division ................................................. 7

B. Investigations Division ............................................ 6

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

 OIG Disaster Total .............................................. 14
Semiannual Report September 1996 67

FY 1996 Productivity Statistics

Second Six Months

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ................................ $2,041,896

B. Management Avoidances as Result of Investigations ........................ $10,857,466

C. Disallowed Costs Agreed to by Management ............................... $1,313,113

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ......................................... $1,437,923

E. Settlement Based on CPA Quality Review (non-recurring category) ..................... $0

Total ............................................................... $15,650,398

Auditing Division Activities

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

B. Disallowed Costs Agreed to by Management ................................ $1,313,113

C. Recommendation that Funds Be Put to Better

 Use Agreed to by Management ......................................... $1,437,923

D. Settlement Based on CPA Quality Review (non-recurring category) ..................... $0

Inspection and Evaluation Division Activities

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

Investigations Division Activities

A. Cases Closed .............................................................. 54

B. Indictments ................................................................ 36

C. Convictions ................................................................ 44

D. Potential Investigative Recoveries and Fines ................................ $2,041,896

E. Management Avoidances ............................................ $10,857,466

 - Investigation Cases ...................................... $2,731,518 

 - Name Check Program .................................... $8,125,948 

 
68 Semiannual Report September 1996
Semiannual Report September 1996 69

FY 1996 Productivity Statistics

Full Year

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ............................... $20,467,211

B. Management Avoidances as Result of Investigations ........................ $38,064,884

C. Disallowed Costs Agreed to by Management ............................... $2,434,007

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ......................................... $7,910,345

E. Settlement Based on CPA Quality Review (non-recurring category) .............. $1,100,000

Total ............................................................... $69,976,447

Auditing Division Activities

A. Reports Issued ............................................................. 23

B. Disallowed Costs Agreed to by Management ................................ $2,434,007

C. Recommendation that Funds Be Put to Better

 Use Agreed to by Management ......................................... $7,910,345

D. Settlement Based on CPA Quality Review (non-recurring category) .............. $1,100,000

Inspection and Evaluation Division Activities

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

Investigations Division Activities

A. Cases Closed ............................................................. 131

B. Indictments ................................................................ 72

C. Convictions ................................................................ 69

D. Potential Investigative Recoveries and Fines ............................... $20,467,211

E. Management Avoidances ............................................ $38,064,884

 - Investigation Cases ..................................... $25,231,518 

 - Name Check Program ................................... $12,833,366 

 
70 Semiannual Report September 1996
Semiannual Report September 1996 71

Statutory Reporting Requirements

The specific reporting requirements as prescribed in the Inspector General Act of 1978, as amended by

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

Source Location in this Report

Section 4(a)(2 ) Review of Legislation and Regulations Pages 6 to 55

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies Pages 6 to 55

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

Problems, Abuses, and Deficiencies Pages 6 to 55

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented Page 76

Section 5(a)(4) Matters Referred to Prosecutive Authorities Pages 6 to 55

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports Page 70

Section 5(a)(7) Summary of Significant Audits Pages 6 to 55

Section 5(a)(8) Audit Reports Containing Questioned Costs Page 72

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use Page 73

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made Page 75

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

Section 5(a)(12) Significant Management Decisions With Which OIG Disagreed None
72 Semiannual Report September 1996

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued ............................................. 70

Appendix II

 Part A - Inspector General-Issued Audit Reports

 with Questioned Costs ...................................................... 72

 Part B - Inspector General-Issued Audit Reports

 with Recommendations that Funds Be Put

 to Better Use ............................................................. 73

 Part C - Inspector General-Issued Audit Reports

 with Non-Monetary Recommendations ........................................ 74

 Part D - Inspector General-Issued Audit Reports

 with No Management Decision ............................................... 75

 Part E - Significant Audit Reports

 Without Final Action ....................................................... 76
Semiannual Report September 1996 73

APPENDIX I

Audit Reports Issued

April 1, 1996 to September 30, 1996

TITLE NUMBER ISSUE QUESTIONED FUNDS FOR

DATE COSTS BETTER USE

Business Loans

Business Loan Center 6-5-H-002-019 9/20/96 $627,039

Low Documentation

(LowDoc) Loan Program 6-5-E-002-022 9/30/96 $325,000

Woodway Bank and Trust

Co. 6-4-W-005-013 $117,518

Program Subtotal Reports 3 $744,557 $325,000

Minority Enterprise Development

Basic Ordering

Agreements 6-5-E-001-021 9/25/96

Section 8(a) Regular

Dealers 6-5-H-006-017 8/21/96

Manufacturing Technology,

Inc. 6-5-E-001-015 5/15/96

Program Subtotal Reports: 3

Economic Development

Virginia SBDC 6-6-H-003-023 9/30/96

Program Subtotal Reports: 1

Agency Management and Financial

Boone, Young &

Associates 6-5-S-918-018 9/20/96

FY 1995 Financial

Statements 6-5-H-007-014 5/1/96

FY 1995 Financial

Statements - Management

Letter 6-5-H-007-016 5/31/96

Rushman Associates, Inc. 

Closeout Audit 6-5-S-918-020 9/23/96
TITLE NUMBER ISSUE QUESTIONED FUNDS FOR

DATE COSTS BETTER USE

74 Semiannual Report September 1996

Program Subtotal Reports: 4

TOTALS (all programs) Reports: 11 $887,216 $325,000
Semiannual Report September 1996 75

APPENDIX II - Part A

Audit Reports with Questioned Costs

April 1, 1996 to September 30, 1996

REPORTS RECs*

DOLLAR VALUES

QUESTIONED UNSUPPORTED

A. For which no management

decision had been made by

March 31, 1996 5 8 $1,906,090

B. Which were issued during

the period 3 3 $887,216

Subtotals (A + B) 8 11 $2,793,306

C. For which a management

decision was made during

the reporting period 6 9 $2,023,608

(I) Disallowed costs 6 9 $1,313,113

(a) Due SBA 6 9 $1,313,113

(b) Due program

participant

(ii) Costs not disallowed 1 1** $710,495

D. For which no management

decision had been made by

September 30, 1996 2 2 $769,698

* Recommendations

** One recommendation was agreed to, in part, by management. It therefore appears in both c(I)

and c(ii).
76 Semiannual Report September 1996

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

April 1, 1996 to September 30, 1996

REPORTS RECs*

RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

March 31, 1996 3 5 $19,392,633

B. Which were issued during

the period 1 1 $325,000

Subtotals (A + B) 4 6 $19,717,633

C. For which a management

decision was made during

the reporting period 3 5 $19,392,633

(I) Recommendations

agreed to by SBA

management 3 4 $1,437,9232**

(a) SBA level 3 4 $1,437,923

(b) Program participant

level

(ii) Recommendations not

agreed to by SBA

management 1 1 $18,471,710

D. For which no management

decision had been made by

September 30, 1996 1 1 $325,000

 Recommendations. *

 This dollar amount contains $517,000 for which no original audit recommendation was made. The dollars represent **

half of the FY 1997 funding slated for the Puerto Rico SBDC which was withheld when the program was terminated. 

The other half of the funding is reflected as Management Avoidances reported by the Investigations Division. 

Normally lines C(I) and C(ii) would total line C--they are now $517,000 out of balance.
Semiannual Report September 1996 77

APPENDIX II - Part C 

Audit Reports with Non-Monetary Recommendations

April 1, 1996 to September 30, 1996

REPORTS RECOMMENDATIONS

A. For which no management decision

had been made by March 30, 1996 9 24

B. Which were issued during the

period 10 38

Subtotals (A + B) 19 62

C. For which a management decision

was made during the reporting

period 12 42

D. For which no management decision

had been made by September 30,

1996 9 20
78 Semiannual Report September 1996

APPENDIX II - Part D

Overdue Management Decisions

September 30, 1996

AUDITEE REPORT ISSUED STATUS

NUMBER

J. W. Collins & Associates 6-5-H-006-010 3/11/96 No response from District

Office.
Semiannual Report September 1996 79

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of March 31, 1996

REPORT TITLE DATE DATE OF FINAL

NUMBER ISSUED MANAGEMENT ACTION

DECISION TARGET

0-1-0-007-140 Regulations for 301(d) 06/13/90 09/30/93 12/31/93

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

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

Assistance Services

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

3-2-H-007-036 SBA’s Oversight of Colson 06/16/93 03/31/95 09/30/95

Services Corp.

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

to ASCI

4-3-W-009-018 Washington State SBDC 08/01/94 03/31/95 05/31/95

4-2-E-403-019 Pulsar Data Systems 08/15/94 03/22/95 None

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

Collection Activities

5-4-W-001-009 Indiana Lumbermens Mutual 03/31/95 08/22/96 None

Insurance Co.

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

Analysis Center

5-5-H-007-003 SBA FY 1993 Financial 12/13/94 09/30/95 10/31/95

Statements

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

5-5-H-004-015 Cordoba Corporation - 08/10/95 09/29/95 08/02/95

Guaranteed Loan

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

of Credit

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

5-4-H-005-013 University of Puerto Rico SBDC 06/30/95 09/30/96 06/30/96

5-4-H-009-012 FY 1994 Financial Statements - 06/28/95 09/30/95 09/30/96

Management Letter

5-4-H-009-010 FY 1994 Financial Statements 06/01/95 08/09/95 09/30/97
REPORT TITLE DATE DATE OF FINAL

NUMBER ISSUED MANAGEMENT ACTION

DECISION TARGET

80 Semiannual Report September 1996

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

Women in Business

6-5-H-006-010 J.W. Collins & Associates 03/11/96 None None

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

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

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

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