SPRING2001

Semiannual

Report of the

Inspector

General

A Report to Congress

October 1, 2000 – March 31, 2001

Pursuant to Public Law 95-452

Foreword

Semiannual Report September 2000 

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

from October 1, 2000, to March 31, 2001.

During this period, the Office issued reports on 17 audits and 2 inspections. OIG investigations

resulted in 32 indictments and 28 convictions for criminal violations. The Office brought its

collective experience to bear in reviewing 115 legislative, regulatory, policy, and procedural proposals

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

activities totaled over $20 million. All of this was accomplished with an appropriation level of

$12.4 million (before rescission) and an average staff level of about 108.

While the numbers are impressive, they do not tell the whole story. The Office must continually

strive to address those critical issues facing the Agency. As part of this effort, we developed a new

list in December 2000 of the top ten management challenges facing SBA. We will continue to work

with SBA managers to ensure that appropriate actions are taken to address these challenges. With

respect to financial management within SBA, we contracted with a CPA firm to conduct the audit of

SBA’s FY 2000 financial statements. The Agency obtained an unqualified opinion on its financial

statements for the fifth year in a row. The report contained no material weaknesses, based on SBA’s

actions over the past year to address financial reporting and systems control problems. In the area of

information systems and computer security, we reviewed the Agency’s activities under PDD 63 and

its information systems controls. We will continue to assess SBA’s progress in developing its loan

monitoring system. As to lender oversight, we issued audit reports on ineligible borrowers and early

defaulted loans, and continued to pursue investigations involving allegations of fraud against

borrowers, lenders, and loan agents. Finally, we completed three more audits in a series of reviews on

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

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

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

Administrator and SBA’s senior staff. Without their willingness to assist us and take action on our

recommendations, we would not be effective. Over the past year we have worked together to address

many of the challenges facing SBA, and I believe that this has made a positive difference in the way

Agency programs are being delivered to our customers, the small business men and women in

America.

Phyllis K. Fong

Inspector General

Table of Contents

Semiannual Report March 2000 i

 Chapter Page

SBA Overview 1

Significant Activities and Management Challenges 3

OIG Profile 11

OIG Activities 13

Statistical Highlights 35

Inspector General Act Statutory Reporting Requirements 37

Table of Appendices 38

SBA Overview

Semiannual Report March 2001 1

Administrator

Deputy Administrator

Office of Inspector General

Office of

Congressional & Legislative Affairs

Office of Veterans Business Development

Office of Disaster Assistance

Office of General Counsel

Chief Operating Officer

Chief of Staff

Counselor to the Administrator

Office of Advocacy

Office of Field Operations

Regional Administrators

Office of Communications &

Public Liaison

Associate Deputy Administrator

for Capital Access

Associate Deputy Administrator

for Entrepreneurial Development

Associate Deputy Administrator

for Management & Administration

Associate Deputy Administrator for Government

Contracting & Business Development

Office of Financial Assistance

Investment Division

Office of Surety Guarantees

Office of International Trade

Office of Business Initiatives

Office of Small Business

Development Centers

Office of Women's Business Ownership

Office of Native American Affairs

Office of the

Chief Information Officer

Office of Human Resources

Office of Administration

Office of Government Contracting

 Office of Minority Enterprise

Development

Office of Technology

Office of Size Standards

United States Small Business Administration

27JAN99

Office of Small

Disadvantaged Business

Certification & Eligibility

Office of Lender Oversight

Office of HUBZone

Empowerment Contracting

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

Ombudsman

Office of Hearings and Appeals

Office of the Chief Financial

Officer

Equal Employment Opportunity

& Civil Rights Compliance

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

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

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

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

and addressing management issues. SBA programs are delivered by a network of field offices in every state,

the District of Columbia, the Virgin Islands, Guam, and Puerto Rico. SBA has a FY 2001 appropriation of

$899.5 million and has 4,190 employees including Disaster Assistance and Office of Inspector General

(OIG).

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

business loan program is the Section 7(a). Currently, the Agency is authorized to guarantee up to $1 million

of a small business loan. The maximum guarantees are 75 percent for loans over $150,000, and

85 percent for loans of $150,000 or less. Under the Section 7(a) authority, SBA offers a variety of

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

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

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

2 Semiannual Report March 2001

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

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

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

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

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

Small Business Investment Company (SBIC) program provides supplemental funding to licensed SBICs

who make equity-type investments in small business. All of the specialized business loan programs are

intended to provide entrepreneurs financing vehicles needed to help them start or grow their small business.

In FY 2000, the Office of Lender Oversight (OLO) was established to effectively coordinate oversight of the

Sections 7(a) and 504 programs. In addition to the loan programs, the Office of Capital Access (OCA) also

has the Surety Bond Guarantee (SBG) program, and an International Trade program.

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

through SBA’s many resource partners and district offices. The resource partners include Service Corps of

Retired Executives (SCORE), Small Business Development Centers (SBDC), Business Information Centers

(BIC), Tribal Business Information Centers (TBIC), U.S. Export Assistance Centers (USEAC), One Stop

Capital Shops (OSCS), and Women’s Business Centers (WBC). These resource partners provide guidance

and expertise to new entrepreneurs.

The Office of Government Contracting and Business Development administers programs that assist

small businesses with Federal procurement opportunities. The Office of Business Development (BD)

provides technical and procurement assistance to eligible businesses through two principal programs:

(1) Business Development, which encompasses the Section 8(a) program and the Mentor-Protégé program;

and (2) Management and Technical Assistance. BD also encompasses the Office of Small Disadvantaged

Business Certification and Eligibility (SDBC&E), which certifies companies applying as small

disadvantaged businesses. The Office of Policy, Planning and Liaison (OPPL) provides policy support for

all of the Agency’s procurement assistance programs. OPPL also encompasses the Office of Technology,

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

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

Technology Transfer. OPPL also includes the Office of Size Standards, which reviews and establishes

industry size standards. The HUBZone Empowerment Contracting (HUBZone) program is designed to

stimulate economic development and create jobs in urban and rural communities by providing contracting

preferences to small businesses located in historically underutilized business zones. The Office of

Government Contracting (GC) works with Federal agencies to establish and achieve goals for small business

participation in Federal contracting. Through its field structure, GC reviews proposed procurements and

identifies opportunities for all categories of small businesses.

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

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

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

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

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

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

necessary working capital until normal operations resume after a physical disaster; and (3) pre-disaster

mitigation loans. The disaster program is SBA's largest direct loan program, and the only SBA program for

entities other than small businesses. SBA delivers disaster loans through four specialized Disaster Area

Offices located in Niagara Falls, NY; Atlanta, GA; Ft. Worth, TX; and Sacramento, CA.
Significant Activities and Management Challenges

Semiannual Report March 2001 3

 OIG’s Strategic Plan articulates the office’s vision to improve SBA’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(5) Agency initiatives. A summary of our Strategic Plan is provided on the

inside cover of this report.

In response to a congressional request on December 1, 2000, OIG

submitted a list and assessment of the 10 most serious management challenges

facing SBA in FY 2001. The current list identifies three new challenges and

updates and/or consolidates those submitted last year.

This year, we do not list oversight of the Small Business Lending Companies

(SBLC) as a separate challenge because we no longer consider it to be a major

challenge on its own. SBA has agreed with nearly all the recommendations

made in the Farm Credit Administration examination reports. Because the

Agency has not yet implemented the recommended actions, however, we have

included SBLC oversight in our challenge on improving lender oversight. SBA

has established OLO that will oversee the SBLC examinations. Because cost

accounting is now included in SBA's Systems Modernization Initiative (SMI),

we have incorporated last year’s cost accounting challenge into this year’s

challenge on modernizing Agency information systems for loan monitoring and

financial management.

We also consolidated last year’s challenges on loan agent fraud and criminal

background checks on business loan borrowers into a single challenge on

preventing loan fraud. The legislation needed to conduct criminal background

checks on loan agents and on loan applicants, without requiring fingerprints,

was proposed by SBA last year, but it was not reported out of the congressional

conference committee. The fraud prevention measures cannot be implemented

without specific legislative authority, so OIG is working with SBA to resubmit

this proposal for Congressional approval this year.

OIG solicited and received substantial feedback from Agency managers and

OIG Strategic Plan

Top 10 Major

Management Challenges
Significant Activities and Management Challenges

4 Semiannual Report March 2001

staff in developing these challenges. While OIG and SBA do not fully agree on

some issues, the Agency’s feedback helped OIG ensure that all points of view

were given careful consideration and that the narrative discussions were

factually accurate. The first four challenges focus on agency-wide issues that

are critical to SBA’s goal of modernizing the Agency. The following

summaries represent the status of the challenges as of December 1, 2000, and

do not reflect activities subsequent to that date.

Agency-wide Issues

Challenge 1. SBA needs to improve its managing for results processes and

produce reliable performance data.

SBA needs to develop effective outcome measures, ensure that its performance

data are accurate and reliable, and establish systems to manage for results. The

Agency has taken steps to identify more program outcomes, improve

performance measures, and increase the accuracy of its data. SBA still needs to

develop: (1) agency-wide guidance on preparing performance goals and

indicators; (2) standards and procedures for data verification and validation; and

(3) client surveys and other methods to obtain outcome information.

Challenge 2. SBA faces significant challenges in modernizing its major loan

monitoring and financial management systems.

SBA has ambitious plans to upgrade its systems for loan monitoring and

financial management, but implementing those plans will require sustained

commitment to achieve objectives and overcome systems development

obstacles. The Agency has identified modernizing these systems as a major

priority and has made progress in developing information technology

procedures and controls. SBA needs to continue to formulate and implement

sound procedures for systems development and acquisition to enable more

effective and efficient loan monitoring and financial management.

Challenge 3. Information systems security needs improvement.

SBA operations depend heavily on the Agency’s information systems; therefore

the security of those systems is critical. The Agency has made a substantial

commitment of resources for enhancing computer security, providing technical

staff support, and developing security training. Although SBA has continued to

make significant progress in implementing its information security program,

further improvements are still needed. It needs to fully implement its agencywide systems security program to include assessing risks, establishing and

updating policies and controls, promoting awareness, and evaluating security

effectiveness.

SBA needs to improve its

managing for results, loan

monitoring and financial

management systems,

information systems

security, and human

capital strategies.
Significant Activities and Management Challenges

Semiannual Report March 2001 5

Challenge 4. Maximizing program performance requires that SBA fully

implement its human capital management strategies.

The nature and scope of SBA's work has changed significantly, requiring a

different set of skills in the Agency's workforce to maintain productivity. SBA

has prepared an analysis that projects future workforce needs, expanded training

and candidate development programs, and contracted for a workload and

staffing study. The Agency needs to continue to develop its workforce

planning, retraining, and other human capital management activities to ensure

optimal performance of its employees.

Loan Programs

Challenge 5. Field offices do not consistently apply guaranty purchase

requirements.

OIG audits have shown that SBA field offices do not consistently follow

Agency requirements when purchasing guaranties from lenders after loan

defaults, resulting in purchases that may not be justified and are unnecessary

expenditures for the Agency. In response to this concern, SBA reports that it

has taken steps to establish a purchase review and follow-up process

mechanism, a guaranty repair tracking system, an early warning system, and

improved procedures and training. The Agency needs to: (1) ensure that it

denies liability or reduces the guaranty when a lender fails to comply with SBA

requirements; and (2) continue to develop a reporting process for guaranty

repairs.

Challenge 6. SBA needs to continue improving lender oversight.

As SBA becomes increasingly dependent on private lenders to perform business

loan functions, an effective lender oversight program is critical for ensuring that

lender activities serve Agency objectives and comply with all rules and

procedures. SBA has established OLO, completed the second round of PLP

reviews and started the third, completed the second cycle of safety and

soundness examinations of the non-depository SBLCs, and begun development

of a comprehensive loan monitoring system (LMS). The Agency needs to

ensure that all non-PLP lenders are reviewed periodically on a consistent basis,

fully implement the LMS, establish baseline goals and measures for lender

processing errors, and compare actual performance to goals.

Section 8(a) Business Development

Challenge 7. More participating companies need access to business

development and contracts in the Section 8(a) BD program.

The bulk of the dollar value of Section 8(a) BD contracts goes to a relatively

The Agency needs to

apply the guaranty

purchase requirements

consistently and continue

to improve lender

oversight.
Significant Activities and Management Challenges

6 Semiannual Report March 2001

small number of companies in the program. SBA is participating in a recently

formed interagency task force designed to, among other things, improve

business development initiatives, including access to contracts. The Agency

needs to give greater emphasis to business development assistance and ensure a

more equitable distribution of contracting opportunities to program participants.

Challenge 8. SBA needs clearer standards to determine economic

disadvantage.

New standards for determining economic disadvantage should be established to

effectively measure diminished capital and credit opportunities–the definition

included in the law. SBA anticipates issuing procedural guidance on the

definition of “economic disadvantage” based on revisions to be made by a new

interagency task force (see Challenge 7). The Agency should: (1) redefine

"economic disadvantage" using objective, quantitative, qualitative, and other

criteria that effectively measure capital and credit opportunities; and (2) provide

sufficient training to SBA staff responsible for evaluating companies.

Challenge 9. SBA needs to clarify its rules intended to deter Section 8(a) BD

participants from passing through procurement activity to non-Section 8(a) BD

firms.

SBA’s rules, while restricting the amount of a contract that a Section 8(a) BD

firm may pass through to a non-Section 8(a) BD firm, allow many nonparticipating companies to receive substantial financial benefit. SBA intends to

include value-added resellers as a legitimate industry under North American

Industry Code. SBA needs to tighten the definition of “manufacturing” to

preclude the pass-through practice of making only minor modifications to the

products of other manufacturers.

Fraud Deterrence and Detection

Challenge 10. Preventing loan fraud requires additional measures, including

the necessary legislative authority and funding.

Fraud in the business loan program could be reduced by obtaining criminal

background information on prospective borrowers and on loan packagers and

other for-fee agents. SBA submitted a proposal for the legislation necessary to

conduct the background checks, but it was excluded from the reauthorization

bill by the congressional conference committee. The Agency needs to resubmit

the legislative proposal, establish a loan agent registration process, and track

loan agent association with individual loans.

SBA needs to increase

access to business

development and

contracts, provide clearer

standards to determine

economic disadvantage,

and clarify rules that

deter participants from

passing procurement

activity to non-Section

8(a) BD firms.

OIG recommends that the

Agency obtain legislative

authority to conduct

background checks to

deter and detect fraud.
Significant Activities and Management Challenges

Semiannual Report March 2001 7

The next section of this chapter details significant OIG accomplishments

in the five areas of strategic focus.

Financial Management Systems

FY 2000 Financial Statements

SBA’s FY 2000 financial statements received an unqualified opinion for

the fifth consecutive year. The opinion also noted that there were no material

weaknesses this year, and that SBA is in substantial compliance with the

Federal Financial Management Improvement Act. The independent auditors

determined that the financial statements presented fairly, in all material aspects,

the financial position of SBA as of September 30, 2000, and its net costs,

changes in net position, budgetary resources, and financing for the years then

ended were in conformity with generally accepted accounting principles. The

independent auditors determined that there were two reportable conditions

involving SBA’s internal control and its operation that were not material

weaknesses. Recommendations were made to correct these reportable

conditions. In its response to the audit findings, the Chief Financial Officer

(CFO) stated that SBA is working to eliminate the reportable conditions. The

financial statements audit is discussed further in the OIG Activities chapter.

Information Systems and Computer Security

Presidential Decision Directive (PDD) 63 Audit

OIG issued an audit report titled, “SBA’s Planning and Assessment for

Protecting SBA’s Critical, Physical Infrastructure.” PDD 63 calls for a national

effort to ensure the security of the United States’ critical infrastructures. OIG

found that SBA has made some progress toward implementing PDD 63

requirements. OIG recommended that SBA revise its Critical Infrastructure

Protection (CIP) Plan to include milestones and responsibilities for

identification of physical Mission Essential Infrastructure (MEI), performance

of vulnerability assessments, development of remedial plans, determination of

resource requirements, and updating of policies and procedures as necessary.

The Chief Information Officer (CIO) agreed with OIG’s recommendations.

This audit is further discussed in the OIG Activities chapter.

Loan Monitoring System (LMS) Advisory Memorandum

As part of an ongoing evaluation of the development of SBA’s LMS, the

first phase of the SBA’s SMI, OIG released the first of a series of reports it

plans to issue as project milestones are reached or significant concerns arise.

SBA’s FY 2000 financial

statements received an

unqualified opinion for

the fifth consecutive year.

OIG makes suggestions

for improving the

Agency’s loan

monitoring system.
Significant Activities and Management Challenges

8 Semiannual Report March 2001

The advisory memorandum report addresses the need to: (1) update the LMS

Project Plan; (2) expand the LMS security risk assessment as systems assets are

defined; (3) document and distribute project status reports and the results of

meetings and reviews; (4) strengthen the quality assurance function; and (5)

strengthen acquisition planning. The Chief Operating Officer agreed with

OIG’s recommendations.

FY 2000 SBA Information Systems Control Audit

OIG issued an audit report on SBA’s information systems controls. The

report was based on the review of general controls over SBA’s financial

management systems, as part of the audit of SBA’s FY 2000 financial

statements. The report concluded that while SBA has continued to make

significant progress in implementing its information systems security program,

further improvements are still needed. The CIO generally agreed with the

findings and recommendations. This audit is further discussed in the OIG

Activities chapter.

Lender Oversight

Ineligible Borrowers Advisory Memorandum

OIG conducted an audit that identified possible ineligible borrowers in

the Section 7(a) business loan program and found 180 loans made during fiscal

years 1998, 1999, and 2000, to applicants whose principals had previously

defaulted on SBA loans. SBA regulations prohibit making new loans to

borrowers who previously defaulted on a Federal loan, or federally-assisted

financing, resulting in a loss to the Government. Of the 180 loans, 31 were loan

commitments where proceeds were not yet disbursed. OIG recommended that

OCA suspend loan disbursement until a determination is made that the

principals are the same, that they declared the prior default, and that a waiver

was granted. In the event a waiver was not granted, OIG recommended the

loan commitment be cancelled. OCA concurred with our recommendations.

This advisory audit is discussed further in the OIG Activities chapter.

Early Default Audits

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

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

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

from October 2000, through March 2001. In both audits, OIG found that the

lender did not comply with SBA regulations and procedures, and in the first

audit, the borrower did not comply as well. The audits identified over $760,000

for possible recovery. As a result of both audits, SBA is taking appropriate

action to correct the situations. Both audits are discussed further in the OIG

OIG recommends that

OCA suspend

disbursement of 31 loans

to possible ineligible

borrowers.

OIG identifies $760,000

of funds recommended

for better use when

conducting early default

audits.
Significant Activities and Management Challenges

Semiannual Report March 2001 9

Activities chapter.

Other Selected High-Risk Issues

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

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

(1) fraud involving borrowers who do not disclose criminal histories; (2) fraud

involving loan agents; and (3) fraud involving false tax returns. The first two

trends correspond to SBA’s Management Challenge 10 described above.

Fraud Involving Borrowers Who Do Not Disclose Criminal Histories

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

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

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

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

loss to the Government, SBA has requested legislative language strengthening

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

checks on all loan applicants. During this period, OIG investigations of

criminal-record fraud in connection with SBA’s programs yielded: four

indictments, two convictions, two arrests, and more than $5 million in courtordered restitution to SBA and other victims. Examples of these investigations

are described further in the OIG Activities chapter.

Operation Cleansweep III was designed to extend the scope and update the

results of earlier proactive investigations by examining a sample of 3,000 loans

randomly selected from the population of 9,038 non-canceled, nonSBAExpress, Section 7(a) loans approved between October 1, 1998, and

December 31, 1998. The report on Operation Cleansweep III was finalized in

March 2001, and will be issued in early April. The findings disclosed that 9.1

percent of the loans had borrowers who failed to fully disclose his/her criminal

record. OIG believes the results of this study support the need for SBA to

obtain the authority to conduct criminal history checks on all borrowers. OIG is

working with SBA to request legislative authority for this purpose.

Fraud Involving Loan Agents

Loan agents provide referral and loan application services to prospective

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

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

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

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

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

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

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

OIG reports that

borrowers who fail to

disclose criminal histories

are more likely to default

on their loans.

OIG focuses on

fraudulent schemes

devised by loan agents

that have resulted in

losses to the Agency and

the taxpayer.
Significant Activities and Management Challenges

10 Semiannual Report March 2001

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

the taxpayers.

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

four indictments, one conviction, and almost $130,000 in restitution. Details of

such cases are discussed further in the OIG Activities chapter.

Fraud Involving False Tax Returns

Over the last 10 1⁄2 years, OIG has received nearly 500 allegations that

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

percent for business or disaster loans). These fraud referrals involved loan

applications totaling approximately $130 million that were submitted to 57

SBA offices. To date, 167 individuals have been indicted on criminal charges,

145 have been adjudicated guilty, 7 indictments were dismissed, 1 defendant

was acquitted, and 14 others have not yet gone to trial. Because of the implicit

credibility of Federal tax returns, SBA has traditionally relied heavily on

information they contain in making its credit-related decisions, so falsification

of “copies” of returns can have a significant impact on SBA’s consideration of

those applications.

Significant results of investigations of this type of fraud during the last 6

months include 1 arrest, 7 indictments, 4 convictions, and more than $1.1

million in restitution. Summaries of OIG investigations related to the use of

altered or fictitious tax returns can be found in the OIG Activities chapter.

Agency Initiatives

Performance Results Act Audits

OIG continues to focus attention on the Agency’s implementation of the

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

OIG issued three GPRA-related audit reports. The objectives of the audits were

to determine whether the GPRA goals for the programs reflected the statutory

missions, were consistent with the strategic plan, included efficiency and

effectiveness measures, had measurable performance measures, and are

supported by reliable data. SBA’s former Office of Policy had overall

responsibility for directing and coordinating the implementation of the GPRA

for all SBA program offices. Performance measures were developed by the

program offices based on direction provided by the former Office of Policy.

The three audits found that SBA had not fully implemented the performance

measurement requirements of GPRA for the programs. In addition, some of the

performance data in each of the three programs audited was unreliable. The

audits are discussed further in the OIG Activities chapter.

OIG continues to

investigate allegations of

fraud involving false tax

returns.
OIG Profile

Semiannual Report March 2001 11

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

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

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

together to perform the missions mandated by the Congress.

• Auditing Division provides comprehensive audit coverage of SBA’s

operations through program performance reviews, internal control

assessments, and financial and mandated audits to promote the

economical, efficient, and effective operation of SBA programs.

Audits give SBA managers an objective and systematic assessment of

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

Financial audits examine the presentation of financial information,

internal controls, and adherence to financial requirements. Performance

audits assess operations in terms of economical and effective use of

resources.

• Investigations Division manages a nationwide program to prevent and

detect illegal and/or improper activities involving SBA programs,

operations, and personnel. The criminal-investigative staff carries out a

full range of traditional law enforcement functions, including (in the last

2 years) executing 24 arrest warrants, 2 search warrants, and 3 electronic

monitorings. The security operations staff ensures that all Agency

employees have the appropriate background investigations and security

clearances for their duties. The name check program provides SBA

officials with character-eligibility information on loan applicants and

other potential program participants.

• Inspection and Evaluation Division conducts assessments of the

effectiveness of SBA programs and activities, analyses of critical

program issues, best practices studies, and research on matters

concerning SBA performance.

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

and assistance to all OIG components, represents OIG in litigation

arising out of or affecting OIG operations, processes Freedom of

Information and Privacy Act requests, and manages OIG

legislative/regulatory review functions.

• Management and Policy Division provides planning, information

systems, budgetary, administrative, personnel, and communications

services.

There are five divisions

of SBA/OIG.
OIG Profile

12 Semiannual Report March 2001

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

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

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

Seattle, and Syracuse.

As of March 31, 2001, our on-board strength was 108. The OIG FY

2001 appropriation was $11.9 million (less a .22% rescission of $26,297),

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

SBA/OIG has offices

nationwide.

SBA/OIG resources.

OFFICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

 KANSAS CITY

INSPECTOR GENERAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

WASH., DC CHICAGO

SEATTLE

HOUSTON

PHILADELPHIA FRANCISCO

AUDITING DIVISION

 BUSINESS DEVELOPMENT

 PROGRAMS GROUP

WASH., DC WASH., DC

ATLANTA

DALLAS

LOS ANGELES

MANAGEMENT AND

POLICY DIVISION

 SAN JUAN
OIG Activities

Semiannual Report March 2001 13

This chapter includes details of audits, investigations, and inspections

summarized in the Significant Activities and Management Challenges

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

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

by major SBA program area.

Business Loan Programs

Section 7(a) Business Loan Program’s Compliance with GPRA

OIG issued an audit that evaluated the Section 7(a) business loan

program’s compliance with GPRA. The audit found that the program did

not have indicators to determine the extent to which it was accomplishing its

mission under the Small Business Act. Most indicators measured outputs

rather than outcomes. The program did not have performance indicators to

address each of the FY 2000 Annual Plan’s performance goals. Also, some

of the program’s performance data were not reliable due primarily to a lack

of effective validation and verification strategies and methods. Lastly, loan

quantity indicators were not a valid measure of loan output. The program

was reporting loans approved rather than actual loans made. OCA

acknowledged problems related to its 7(a) program indicators and data

limitations and availability, and is working on specific short-term and longterm approaches to addressing these issues.

Early Defaulted SBA-Guaranteed Loans

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

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

reports were issued from October 2000, through March 2001. The first

report was on an $830,000 defaulted loan for which OIG found that both the

lender and the borrower did not comply with SBA regulations. The lender

neither ensured that over $299,000 of equity was injected into the business,

as required, nor followed its own policy for monitoring collateral. Also, the

borrower provided misleading information to the lender regarding equity

injections and use of loan proceeds. The district office concurred with the

audit findings and recommendations and agreed to send the lender a letter

demanding remittance to SBA of $641,944, the guaranteed amount. The

lender did not provide a response to the draft report. The second report was

on a $200,000 SBA loan that was placed in liquidation status 14 months

after approval. OIG found that the lender’s noncompliance with SBA policy

contributed to the loan default. The lender neither evaluated the credit

history of the borrower nor informed SBA of adverse credit information. In

addition, the lender did not disburse the loan proceeds prudently, report the

OIG issues audits on

early defaulted SBAguaranteed loans.

OIG examines the

Section 7(a) Loan

program’s compliance

with GPRA.
OIG Activities

14 Semiannual Report March 2001

disbursements accurately, or ensure the proceeds were used for authorized

purposes. At the date of default the outstanding principal balance of the loan

was $200,000. The lender disagreed with our conclusions. The district

office agreed that the lender did not comply with SBA’s policies and

procedures when making and disbursing this loan, but did not believe the

lender’s actions warranted a denial of liability by SBA. Instead, SBA stated

that it will pursue appropriate action.

Field Perspective on Preferred Lender Review Process

An inspection advisory memorandum on District Office Perspectives

on SBA’s Preferred Lenders Program Review Process reported the views

of district officials on the PLP review process. Over half of the survey

respondents were either “slightly dissatisfied” or “very dissatisfied” with the

current PLP review process, while nearly 40 percent reported being “fairly

satisfied” or “very satisfied.” As revealed in various comments, much of the

dissatisfaction stems from the lack of participation by district offices and the

high cost of the reviews, particularly for small volume lenders and locally

owned banks. Survey results further indicated that district officials believed

PLP oversight could be strengthened by shifting the review process’

emphasis from a compliance checklist to more thoroughly examining a

lender’s credit underwriting practices and procedures for loan servicing and

liquidation. It should be emphasized that the survey results were provided

exclusively by district officials. OCA found the report informative and

stated that certain changes it is implementing are consistent with district

officials’ opinions; however, it did not concur with all of the issues

presented.

Review of Timeliness of Character Determinations on Loan Applicants

An inspection advisory memorandum on the Timeliness of Formal

Character Determinations on Loan Applicants examined the Office of

Financial Assistance’s (OFA) efforts to prevent fraud and monetary loss by

making any loan applicant who discloses a prior or pending criminal record

subject to a formal character determination. Some district office officials

have expressed concern that delays in this process can slow the processing

of loan applications and thus place some prospective borrowers’ businesses

at risk. Minimizing the time needed for this process requires prompt action

by all parties involved, including the local SBA field office, OIG, the

Federal Bureau of Investigations (FBI), and OFA. Accordingly, OIG

recommended that OFA and OIG jointly prepare a procedural notice

outlining: (1) all participating offices’ responsibilities in terms of timeframes

and required documentation; and (2) how e-mail will be used to provide

advance notice of OFA’s final decisions. OCA concurred that this report

addresses its concerns.

OIG asks the SBA field

offices for their

perspective on the

preferred lender program

review process.
OIG Activities

Semiannual Report March 2001 15

Agency Response to Ineligible Borrowers Advisory Memorandum

While conducting an audit of the PLP oversight process, OIG

identified a principal with three current loans who had caused SBA a loss on

a prior loan. A subsequent query of the SBA loan accounting system using

the SSNs of principals showed that this was not a unique situation. OIG

found 180 loans made during fiscal years 1998, 1999, and 2000, whose

principals had previously defaulted on SBA loans. Of the 180 loans, 31

were loan guarantees valued at about $10.3 million. A further analysis of

the 180 loans showed that because the SSNs for the principals of the

committed and defaulted loans were the same, it appeared that the loans may

have been inappropriately approved. These commitments involved the

FA$TRACK, Section 504, International Trade, and General Business Loan

programs using the preferred, express, and regular loan processing

procedures.

OIG recommended that OCA suspend loan disbursement until a

determination is made that the principals are the same, they declared the

prior default, and a waiver was granted. In the event a waiver was not

granted, OIG recommended the loan commitment be cancelled. OCA

concurred with OIG’s recommendations and advised of actions being taken

to address OIG recommendations. Additional audit work will be done later

this fiscal year to address the remaining 149 loans (180-31).

Summaries of some criminal history fraud investigations involving

SBA loan programs are listed below.

• Four residents of the Cleveland, Ohio, area were indicted and charged

each with one count of making false statements to SBA. Three were

charged with one count of conspiracy. These charges relate to an

alleged scheme devised by a business broker to facilitate a $325,000

SBA-guaranteed loan to purchase a forklift sales and repair business in

Parma, Ohio, from two of the defendants. The scheme essentially

provided the borrower with 100 percent financing and resulted in

inflation of the contract sales price. This was also facilitated by each of

the subjects’ concealment of the transfer of funds from the two sellers to

the borrower, and their supporting false statements to the participating

lender and SBA.

In addition, the borrower was charged with one count of making

material false statements for allegedly certifying in the loan application

that he had no criminal history when in fact the investigation revealed

that he had a substantial criminal history. He had been arrested and

charged with various crimes; these charges resulted in four convictions

prior to his loan application, including one felony conviction for firstdegree burglary. OIG initiated this investigation based upon a referral

from SBA’s Cleveland District Office.

The three cases listed in

this section give

examples of fraud

detected by OIG

involving SBA loan

programs.
OIG Activities

16 Semiannual Report March 2001

• A borrower who received a $200,000 SBA-guaranteed loan (which he

defaulted on less than 9 months after receiving it) to start a Central Islip,

New York, restaurant was arrested pursuant to a 1995 warrant based on

a complaint charging him with making a false statement to a federallyinsured lender on an SBA Personal History Statement in support of a

loan application. Allegedly, the defendant failed to disclose his criminal

history that included convictions for robberies, weapons possession, and

possession of stolen property, and arrests for assault with intent to

injure, possession of dangerous drugs, and possession of a forged

instrument. The case, which originated from OIG’s “Operation

Cleansweep,” received national attention when it was featured on

NBC’s televised news segment, “The Fleecing of America,” by Tom

Brokaw. After learning that he would be criminally charged, the

defendant became a fugitive, living under a false name, SSN, and date of

birth. He was recently traced when OIG learned that he had applied for

a New York State Realtor's license under his alias.

• The president of a residential real estate company in Santa Fe Springs,

California, was sentenced to 88 months in prison, 3 years supervised

release, $103,100 in fines, and $571,888 in restitution to SBA for

conspiracy, wire fraud, making material false statements, money

laundering, and bankruptcy fraud. The firm’s corporate secretary was

sentenced to 46 months in prison, 3 years supervised release, and a

$1,900 fine for conspiracy, wire fraud, making material false statements,

and money laundering. The real estate company obtained a $550,000

SBA-guaranteed loan by using a false SSN, fraudulent checks, and false

financial statements, and by omitting the secretary’s criminal record

from the SBA application. SBA/OIG joined the investigation at the

request of the U.S. Attorney’s Office for the Central District of

California.

The following cases illustrate OIG investigations of fraud involving

loan agents.

• A husband and wife who ran a business-brokerage firm in Phoenix,

Arizona, were each indicted for submitting fraudulent documents to

SBA lenders. The couple allegedly came up with a “no money down”

plan for clients to purchase a business at 100 percent financing contrary

to SBA requirements. The scheme inflated the purchase price to cover

the selling price plus the down payment. To cover up the scheme, the

brokers arranged for the buyer to obtain a real estate license and listed as

an asset on the borrower’s SBA paperwork the commission that the

borrower would be earning for the sale of the business, which equaled

their required down payment. For the scheme to work, the brokers also

arranged for third parties to loan, just before closing, the required down

Operation Cleansweep

reveals that a loan

recipient failed to

disclose his extensive

criminal history that

included convictions for

three robberies, weapons

possession, and

possession of stolen

property, arrests for

assault with intent to

injure, possession of

dangerous drugs, and

possession of a forged

instrument.

OIG has identified fraud

involving loan agents as a

high-risk issue for the

Agency. These cases

illustrate investigations of

this type.
OIG Activities

Semiannual Report March 2001 17

payment. The records indicated that the buyer had supplied the down

payment funds. After the loan closed, the brokers received an inflated

commission and paid the loan back to the third party.

Another client who obtained a $900,000 loan to purchase six fast-food

franchises in Arizona recently pled guilty to one count of making

material false statements. At the direction of the brokers, this client

submitted false financial information to obtain the SBA-guaranteed loan.

In total, the couple brokered approximately $2.9 million in loans to

small business owners throughout Arizona and to date, $2.5 million

appears to be uncollectable, resulting in losses to SBA and the

participating lenders. OIG’s investigation was based on a referral from

SBA’s Arizona District Office.

• A former principal of an Inglewood, California, loan brokerage firm was

sentenced to 5 months incarceration, 5 months home detention, 5 years

supervised release, and $60,000 restitution for aiding and abetting the

submission of false income tax returns that had been altered to overstate

a borrower’s adjusted gross income. The loans applied for totaled $1.85

million.

Also, the former head of an SBA division of a bank was sentenced to

15 months incarceration, 5 years supervised release, and $6,000

restitution. He previously pled guilty to accepting a gift for procuring a

loan and fraudulently receiving money from a loan transaction. This

individual was a former SBA district director who left SBA in 1984. He

accepted a $24,000 automobile from a loan brokerage, received money

both directly and indirectly from the proceeds of a $1 million SBAguaranteed loan, and failed to disclose that either he owned 50 percent

of the business or he was going to receive at least $65,000 of the loan

proceeds for his personal use. According to his plea agreement, from

1989 through 1992, he received approximately $2 million in incentive

bonuses and commissions from the bank’s secondary-market sale of

SBA-guaranteed loans plus a base salary that eventually reached

$250,000. During his years at the bank, at least 17 borrowers submitted

fraudulent documents, including falsified “copies” of tax returns,

seeking SBA-guaranteed loans, resulting in 25 individuals being

charged. Of these, 22 have pled guilty, 1 was acquitted, and the trial of

the other 2 is pending. OIG initiated the investigation based on

allegations from an anonymous complainant.

• An Internal Revenue Service (IRS) employee, a certified public

accountant (CPA)/SBA-loan package preparer, and six others were

indicted for involvement in schemes that utilized falsified tax returns to

obtain SBA-guaranteed loans. Two other individuals who had been

indicted previously were adjudicated guilty, one at trial and one by plea,

Some investigations

reveal not only fraud

involving loan agents, but

fraud involving tax

returns and criminal

histories.
OIG Activities

18 Semiannual Report March 2001

and one of them was sentenced during this period as well.

The IRS employee and three principals of an Irving gas station were

indicted on 1 count of conspiracy and 14 counts of making material false

statements to induce a lender and SBA to fund a $200,000 SBAguaranteed loan. One of the principals and his wife allegedly posed as

borrowers intending to purchase the gas station from another principal

who posed as sole proprietor. The three principals allegedly submitted

numerous fraudulent documents (including their required $60,000

capital injection into the business) in support of the loan. (Charges

against the wife have been dismissed.) The IRS employee allegedly

used his position to produce bogus tax verifications for three false tax

returns by manipulating the use of IRS’s Integrated Data Retrieval

System.

In a related case, a Federal jury found an employee of an Irving auto

body shop guilty of one count of conspiracy and nine counts of making

material false statements to induce a lender to fund a $350,000 SBAguaranteed loan. He was sentenced to 37 months incarceration and

ordered to pay $506,203 in restitution to the lender and SBA.

Two persons associated with another gasoline station/convenience store

in Grand Prairie acknowledged their involvement to fraudulently

induced a lender to fund a $256,000 SBA-guaranteed loan, purportedly

for one defendant to buy the store from a group that included the second.

Both defendants were previously indicted on 1 count of conspiracy and

11 counts of making material false statements. The purchaser pled

guilty to one count of making material false statements in return for

dismissal of the other counts against him. Since he is a convicted felon,

he posed as his brother and used his brother’s credit identifiers to qualify

for the loan. The seller signed a pretrial diversion agreement; if he

complies with its terms, his record will be expunged in 1 year. Both

were involved in the submission of falsified copies of tax returns in

support of the loan.

Three Dallas businessmen were indicted on one count each of

conspiracy and seven counts each of making material false statements

relating to a $293,000 SBA-guaranteed loan for the purchase of a

restaurant from one of them. The three businessmen allegedly devised a

scheme whereby the purported buyer (who has subsequently been

dismissed from the indictment) would apply for the loan in place of the

actual buyer (the third businessman), at an inflated selling price. They

also submitted falsified copies of tax returns, fraudulent IRS tax return

verifications, and numerous other fraudulent documents in support of

the loan.

Two principals of a Dallas service station and the CPA/SBA-loan
OIG Activities

Semiannual Report March 2001 19

package preparer were indicted on 1 conspiracy count and 25 counts of

making material false statements for fraudulently inducing a lender to

fund a $355,000 SBA-guaranteed loan. They allegedly falsified Federal

tax returns, IRS tax verifications, leases containing forged signatures of

the fuel company’s regional and district managers, and an $85,000

capital injection. The indictment also charges the three with fraudulently

inducing a $200,000 SBA-guaranteed loan to the Irving gas station

mentioned above.

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

tax returns.

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

serve 54 months in prison, 3 years supervised release, and $656,955

restitution for SSN fraud and making material false statements to obtain

a $675,000 SBA-guaranteed loan. In her application, she gave a false

name and SSN to conceal that she defaulted on another SBA loan and

previously filed for bankruptcy. She also submitted false tax returns and

supporting IRS documentation, falsified financial statements, and other

fraudulent documents to obtain the loan. She then failed to purchase the

equipment pledged as collateral and spent most of the loan proceeds for

unauthorized purchases. She immediately defaulted on this loan. This

investigation was based on a referral from the lender.

• The president of a defunct Kansas City, Missouri, dry cleaning business

in Oklahoma pled guilty to one count of making false statements to a

federally-insured bank that related to his SBA loan. He had been

indicted on 10 counts of the same charge and using false SSNs. The dry

cleaning business had received a $98,235 SBA-guaranteed loan and

immediately defaulted. The businessman defaulted on a total of six

loans, resulting in total lender losses of about $197,000.

The following cases illustrate OIG investigations involving fraud to

obtain business loans.

• Two associates of an equipment manufacturer in San Diego, California,

pled guilty to one count of misappropriation of SBA collateral and one

count of mail fraud, respectively. The company had obtained an

$833,000 Export Working Capital loan to finance production of mining

conveyors. The indictment charged that the defendants submitted false

documentation to obtain the SBA-guaranteed loan disbursements,

transferred property of the company to conceal it from the U.S.

Bankruptcy Court, and made material omissions on the company’s

Statement of Financial Affairs to the U.S. Bankruptcy Court. SBA’s net

chargeoff on the loan was $175,051. OIG joined the investigation at the

request of the U.S. Attorney’s Office for the Southern District of

OIG has found several

examples of falsified tax

returns submitted with

SBA loan applications.

Two indictments issued

that charged four

individuals and two

corporations with fraud

against SBA and

violations of

environmental laws.
OIG Activities

20 Semiannual Report March 2001

California.

• A New Jersey State grand jury issued two indictments charging four

individuals and two corporations with fraud against SBA and violations

of environmental laws. In the first indictment, an East Rutherford, New

Jersey, plating and finishing company and three of its principal officers

were charged in connection with a $500,000 SBA-guaranteed loan. The

company was charged with theft by failure to make required disposition

and four counts of uttering a forged instrument. The three principals

were each charged with theft by failure to make required disposition and

misconduct by a corporate official. Two were also indicted on four

counts of uttering a forged instrument, while the third was indicted on

three counts of uttering a forged instrument. The indictment alleges that

the defendants failed to purchase equipment as required in the loan

agreement; provided a forged landlord waiver in applying for the loan;

and passed three checks to banks knowing that endorsements were

unauthorized. The investigation also resulted in a second indictment

naming the same four defendants plus a second plating and finishing

company and its owner for discharging chemical and industrial waste

into a county sewer line and unlawfully storing and abandoning toxic

pollutants and hazardous waste. The first company ceased operating

under its name in 1996; by then the fourth man was its owner, and he

established the second plating and finishing company at that site. The

State of New Jersey’s Division of Criminal Justice requested

SBA/OIG’s assistance.

• Two persons associated with the sale of a pet store acknowledged that

they induced a bank to make a $150,000 SBA-guaranteed loan. Both

defendants were previously indicted on one count of conspiracy and one

count of making false statements to SBA. The president of a Millstone

Township, New Jersey, franchising company pled guilty to making a

false statement to SBA; as part of the plea agreement, the conspiracy

count was dismissed. He was sentenced to 2 years incarceration, 1 year

supervised release, and $650,000 restitution to an investor in his

company. The seller signed a pretrial diversion agreement; if he

complies with its terms, his record will be expunged in 6 months. He

had allegedly signed and submitted a bill of sale that indicated a total

price of $225,000 and verified that he had received a $75,000 cash

injection from the buyers. The franchiser’s president admitted

submitting a letter to the bank corroborating the $75,000 cash injection.

In fact, the buyers had made a cash injection of only $25,000. An

undisclosed note between the seller and the buyers made up the

difference. OIG conducted this investigation based a referral from

SBA’s South Florida District Office.

• The former president of a wholesale meat company in Cumming, Iowa,

was indicted on one count each of concealing a material fact from SBA

Owner of a die cutting

company pled guilty to

one count of bankruptcy

fraud and was sentenced

to 4 months incarceration,

2 years supervised

release, and a $10,000

fine. He had received a

$940,000 SBAguaranteed loan.
OIG Activities

Semiannual Report March 2001 21

and bank fraud in connection with a $1,400,000 SBA-guaranteed loan

he received from a bank to purchase the business. Allegedly, the

businessman wrote an insufficient-funds check and perpetrated a check

kite to make it appear the required equity injection was made, and

concealed an undisclosed promissory note to the seller. The second

charge alleged that he subsequently converted vehicles pledged to a

successor to the bank on this same loan. His business failed and he

defaulted on the SBA-guaranteed loan, leaving an unpaid balance of

about $1,258,000. OIG initiated its investigation based on a referral

from SBA’s Des Moines District Office.

The following cases illustrate OIG investigations involving fraud

after business loan default.

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

received a now-defaulted $940,000 SBA-guaranteed loan pled guilty to

one count of bankruptcy fraud. He was sentenced to 4 months

incarceration, 2 years supervised release, and a $10,000 fine. In

connection with his personal bankruptcy petition, he claimed to own no

real property. The investigation uncovered a deed and mortgage that

revealed that he took ownership of a condominium the year before the

bankruptcy plus tax records showing his ownership continuing to the

present. The case was referred to OIG by SBA’s New Jersey District

Office.

• The president of a southwest Ohio real estate business was convicted on

36 of the 40 counts on which he was previously indicted. Two of the 36

counts charged him with aggravated theft by deception over $100,000

and forgery utterance over $100,000 in connection with a $439,000

SBA-guaranteed business loan. The businessman deposited funds

associated with a $5 million bad check to an escrow account, then

induced the title company to issue a $427,074 check from that account,

in the name of his Section 504 lender, asserting that these funds were to

pay down the SBA loan. He then forged an endorsement on the check

and deposited the money to his business account. The county

prosecutor’s request that OIG join this investigation was facilitated by

SBA’s Columbus District Office.

The following narrative illustrates investigations of cases involving

SBA’s business-lending partners.

• The former president of a Keystone, Nebraska, bank pled guilty to a

one-count information that charged him with submitting a false

statement to SBA. He was sentenced to 3 years probation, $14,640

restitution to a borrower, and a $5,000 fine. OIG’s investigation found

that the defendant requested and received $1,750 in cash payments from

OIG audit finds that SBA

had not fully implemented the performance

measurement requirements of GPRA for the

Disaster Assistance

program.
OIG Activities

22 Semiannual Report March 2001

two local small businessmen applying for SBA-guaranteed loans from

the bank. Although he told the businessmen he needed these sums for

expenses, the defendant falsely reported on an SBA settlement sheet that

the bank collected no additional fees. The defendant actually

misappropriated the money he received.

Disaster Loan Program

Disaster Assistance Program’s Implementation of GPRA

OIG issued an audit report on the Disaster Assistance program’s

performance measurement requirements of GPRA that found that SBA had

not fully implemented them. Specifically, the program did not have

performance indicators to determine the extent to which it accomplished its

mission under the Small Business Act. Furthermore, disaster home loan

currency and delinquency rates were misleading since they excluded a large

portion of disaster loans and the indicator for effective field presence was

not consistently applied. As a result, program officials could not measure

the extent to which the program helped businesses and families recover from

disasters, and whether the products and services were cost-effectively

delivered.

OIG recommended that the Office of Disaster Assistance: (1) develop an

outcome indicator to measure results aligned with the statutory mission; (2)

develop an indicator to gauge program delivery costs; and (3) consistently

report disaster field staff presence. In addition, OIG recommended that the

Office of Disaster Assistance revise the disaster loan currency/delinquency

performance indicator. SBA management officials concurred with three of

OIG’s recommendations. Their response included both short-term and longterm plans to implement the recommendations. The action SBA

management proposed for the last recommendation was not fully responsive.

OIG has outlined the actions SBA needs to take before this recommendation

is considered resolved.

The following cases illustrate OIG investigations of fraud to obtain

disaster loans.

• A Reno, Nevada, man was indicted on one count of making material

false statements to SBA and one count of mail fraud. He obtained a

$213,600 disaster home loan following floods in Washoe County,

Nevada, based on his loan application, on which he claimed he was

employed at a restaurant for 10 months in that year and earned $60,000.

However, the investigation disclosed that he was employed at the

business for 3 months and had earned only $2,060. OIG initiated this

case based on a referral from the Nevada Attorney General’s Office.

President of New York

SBIC sentenced to 1 year

of incarceration, 5 years

supervised release, and

$770,000 restitution to

SBA for bank fraud and

making material false

statements.
OIG Activities

Semiannual Report March 2001 23

• An Albuquerque, New Mexico, woman was indicted on three counts of

mail fraud, one count of wire fraud, one count of filing false claims, one

count of impersonation of a Federal employee, one count of making

material false statements, and one count of false representation of an

SSN. The charges relate to her attempt to obtain post-disaster assistance

from SBA and the Federal Emergency Management Agency (FEMA),

including a $40,000 SBA disaster home loan using the name and SSN of

a deceased acquaintance, submitting false documents in support of her

damage claim, and attempting to obtain information about her claim and

the investigation by posing as a representative of the U.S. Attorney’s

Office. The investigation determined that neither the defendant nor the

person whose name she falsely used ever resided at the address claimed

in the disaster-assistance application.

Small Business Investment Companies

The following narratives illustrate OIG investigations of fraud by

principals of Small Business Investment Companies (SBIC).

• The president of a New York, New York, SBIC was sentenced to 1 year

of incarceration, 5 years supervised release, and $770,000 restitution to

SBA for bank fraud and making material false statements. During a 1-

year period, he fraudulently obtained over $750,000 in loans from the

SBIC, as well as over $250,000 in salary advances, while drawing an

annual salary of $150,000. He caused the SBIC’s vice president to

cosign the salary advance and loan checks by falsely representing that

the loans were permissible under SBA regulations. He falsely claimed

that the SBIC’s loan committee had approved the loans and advances

and subsequently made the same false representations to SBA on several

occasions, seeking the Agency’s retroactive approval for the monies

already received. He then used the fraudulently-obtained funds for

unauthorized purposes, including repayment of his personal gambling

and other debts to the two other members of the SBIC’s loan committee.

His actions caused a loss to SBA of over $900,000 and forced the

Agency to liquidate the SBIC. The SBIC’s vice president recently

settled for $170,000 the SBA receiver’s civil suit. This investigation

originated from a referral from SBA’s Office of SBIC Operations.

• The president of another New York City SBIC pled guilty in February

2001 to an information charging him with embezzling and misapplying

funds belonging to the SBIC. He had caused the SBIC to overpay, to

the advantage of two private companies affiliated with him,

approximately $71,176 more than its rightful rent obligations at the site

they jointly occupied. The president’s actions delayed SBA's seizure of

control of the SBIC and significantly contributed to the Agency’s loss,
OIG Activities

24 Semiannual Report March 2001

which exceeded $2,229,000. This investigation originated from a

referral from SBA’s Office of General Counsel (OGC).

Surety Bond Guarantees

At the request of the Office of Surety Guarantees (OSG), OIG

continues to conduct audits of surety companies participating in SBA’s SBG

program. During the reporting period, OIG issued five audit reports on five

surety companies. The Small Business Investment Act requires OIG to

conduct audits of preferred sureties. One of the five audited sureties was a

preferred surety. OIG found that the surety companies did not always

comply with SBA regulations and requirements for underwriting and

servicing bonds and processing claims. OIG recommended that the surety

companies implement and maintain written underwriting and servicing

policies and procedures for SBA-guaranteed bonds. OIG also found that all

of the surety companies correctly calculated fees and four remitted them

timely. For four of the five surety companies, OIG found that they did not

maintain complete underwriting documentation for one or more bonds. In

one of the audits, OIG found that the surety: (1) issued one bond after work

under the contract had begun without obtaining SBA approval; (2) failed to

obtain the required certifications for five bonds; (3) input bond information

for one bond into the Preferred Surety Bond system prior to the bond

effective date; (4) submitted inadequately supported legal expenses for one

bond; and (5) remitted salvage to SBA in an untimely manner for one bond.

In two audits the surety companies did not notify SBA of bond default in a

timely manner. OIG identified a total of $432,242 in questioned costs for

three of the audits and recommended that the surety companies implement

policies and procedures to correct the problems. OSG agreed with OIG’s

recommendations in all five audits.

Government Contracting and Business

Development Program

OIG issued an audit report that reviewed the Section 8(a) BD

program’s compliance with GPRA. OIG found that SBA has not adequately

implemented performance measurement requirements of GPRA for the

Section 8(a) BD program. SBA’s definition of success for the Section 8(a)

BD program contained in its FY 2001 Results Act Annual Performance Plan

(Performance Plan) omitted the measures of success. OIG found that:

(1) the performance plan lacked effectiveness and efficiency performance

indicators for the Section 8(a) BD program; (2) the data contained in the

SBA database for the program were generally accurate concerning the fiscal

year in which Section 8(a) BD program participants left the program; and (3)

some performance data were unreliable or incorrectly described. OIG

OIG continues to audit

surety companies and

identifies a total of

$432,242 in questioned

costs in three of the five

audits.

OIG audit finds that the

Section 8(a) BD program

has not adequately

implemented its performance measurement

requirements of GPRA.

President of a Long

Island City, New York,

Section 8(a) general

contractor sentenced to 5

years of supervised

release and $259,369

restitution for conspiracy,

bank fraud, and lying.
OIG Activities

Semiannual Report March 2001 25

recommended that: (1) SBA define Section 8(a) BD program success in

accordance with the law; (2) include indicators in the Performance Plan that

allow for a determination of how effectively and efficiently the Section 8(a)

BD program is operating; (3) accurately describe and report performance

goals and data; and (4) implement a system that ensures that termination

requests of Section 8(a) firms are tracked through final resolution. The

Acting Associate Deputy Administrator for Government Contracting and

Business Development and the Associate Administrator for Business

Development took no exception to the audit results presented in the draft

report.

 Summaries of some criminal history fraud investigations involving

the Section 8(a) BD program are listed below.

• A defunct Philadelphia, Pennsylvania, Section 8(a) construction

company pled guilty to 1 count of conspiracy to defraud the

Government, 12 counts of filing false claims, and 1 count of major fraud

against the United States for schemes to defraud SBA, the Department

of the Navy, and the United States Department of Agriculture (USDA)

subcontractors. The vice president was convicted of conspiracy, false

claims, and major fraud against the United States. The false statement

claims counts related to his denying in the company’s Section 8(a)

application that he had a criminal history. In fact, he had been arrested

seven times and convicted three times. The other charges related to the

schemes to defraud SBA, the Navy, and USDA.

• The president of a Long Island City, New York, general construction

contractor was sentenced to 5 years supervised release and $259,369

restitution for conspiracy, making material false statements and bank

fraud. During the application process for the Section 8(a) program, he

falsely stated that he had never been arrested or charged with a crime,

when in fact he had been arrested on theft charges. He also admitted

submitting documents containing inflated income information to induce

a federally-insured financial institution to extend a $50,000 line of credit

to the company, and that he and others conspired to defraud the

Government by submitting fraudulent bonds and falsified payroll reports

in connection with a Section 8(a) contract.

One of his co-conspirators was sentenced to 1 year and 1 day of

incarceration, 3 years of supervised release, and restitution of $45,375

for conspiracy. As a condition of the contract, the construction company

was required to obtain payment and performance bonds to cover any

cost resulting from its failure to perform adequately and/or pay its

subcontractor. The co-conspirator submitted counterfeit payment and

performance bonds and the altering of other records. OIG initiated its

case based on a referral from Federal Bureau of Prisons.

OIG reviews legislation

designed to improve the

operations of the SDB

program and makes

several recommendations.
OIG Activities

26 Semiannual Report March 2001

The following narratives illustrate OIG investigations involving other

types of fraud in connection with Section 8(a) contractors.

• A Newark, New Jersey, general construction company and its president

pled guilty to informations charging them with one count of major fraud

against the United States and two counts of making material false

statements to obtain more than $8 million in Section 8(a) contracts. The

president also pled guilty to an information charging him with three

counts of mail fraud to obtain more than $3 million in contracts from the

Port Authority of New York and New Jersey. The president had

submitted a Section 8(a) program application to SBA with false

documents claiming to identify employees and equipment of the

company. He then submitted a Section 8(a) business plan representing

that the company was equipped to handle construction work in 26

different specialties. However, the company was really a storefront

operation that never had the employees, equipment, or experience

necessary to be a viable construction company. To perform the

company’s contractual obligations, the president brokered the contracts

to non-minority-owned companies in return for a percentage of the

contract value, which progressively got larger. Eventually, the company

defaulted on four of its seven Section 8(a) contracts, causing a loss of

approximately $800,000 on one contract alone.

• The president of a defunct construction company in Huntingdon Valley,

Pennsylvania, pled guilty to one count of mail fraud for falsely-reported

payments to subcontractors and false progress payment certifications on

a $1.6 million contract and one count of making a material false

statement for representing that he was the 100 percent owner of the

company on his Section 8(a) program application when he only owned

40 percent. A principal condition of the plea agreement is that the

defendant will make restitution (pursuant to a stipulated $3.2 million

judgment) to his surety-bonding company before he is sentenced.

OIG reviewed a proposed regulation to improve the operations of

SBA’s SDB program based on SBA’s gained experience in the certification

process. The proposed regulation stated that the presumption of economic

disadvantage might be rebutted “if SBA finds that the individual is not

economically disadvantaged due to his or her access to capital and credit.”

OIG recommended that the proposed regulation define what access to capital

and credit is needed to overcome economic disadvantage, and what factors

SBA will look at in making this determination. The proposed regulation also

stated that the “disadvantaged individual must devote sufficient time to the

concern to enable SBA to conclude that such individual controls the day-today operations of the concern....” OIG recommended that “sufficient time”

be defined in the regulation rather than only discussed in the preamble
OIG Activities

Semiannual Report March 2001 27

section discussing the proposed changes to the regulations. Additionally,

OIG recommended that safeguards be added to the proposed regulation

ensuring that private certifiers do not certify any companies that they have or

will have business dealings with. Lastly, the proposed regulation provides

that when the Agency has evidence that a firm may not be eligible for the

SDB program, it may take action to decertify the firm. OIG recommended

that this language be changed to require SBA to take action to decertify

rather than leaving it as an option.

Agency Management

FY 2000 Financial Statements Audit

SBA’s FY 2000 financial statements received an unqualified opinion

for the 5th consecutive year. The opinion also noted that there were no

material weaknesses this year, and the SBA is in substantial compliance with

the Federal Financial Management Improvement Act. The opinion was

issued in an audit report dated February 28, 2001. The independent auditors

determined that the financial statements presented fairly, in all material

aspects, the financial position of SBA as of September 30, 2000, and its net

costs, changes in net position, budgetary resources, and financing for the

years then ended were in conformity with generally accepted accounting

principles.

The independent auditors also determined that there were two reportable

conditions involving SBA’s internal control and its operation that were not

material weaknesses. This is the first time that the independent auditors did

not find any material weaknesses in SBA’s internal control and operation.

More specifically the independent auditors reported that: (1) SBA’s

financial reporting processes and procedures were not adequately

documented and a fully effective quality assurance process was not in place;

and (2) SBA’s security-monitoring program was not fully implemented.

Recommendations were made by the independent auditors to correct these

reportable conditions. In its response to the audit findings, SBA

management stated that they are working to eliminate the reportable

conditions. The reportable condition involving the security-monitoring

program is addressed in detail in a separate report titled Audit of SBA’s

Information Systems Controls-FY 2000.

Presidential Decision Directive (PDD) 63 Audit

OIG issued an audit report titled, “SBA’s Planning and Assessment

for Protecting SBA’s Critical, Physical Infrastructure.” PDD 63 calls for a

national effort to ensure the security of the United States’ critical

infrastructures. Critical infrastructures are the physical and cyber-based

SBA’s information

systems controls reviewed during OIG audit.
OIG Activities

28 Semiannual Report March 2001

systems essential to the minimum operations of the economy and

Government. SBA has made progress toward implementing PDD 63

requirements, but its focus has been on protecting the Agency’s critical,

cyber-based infrastructure. To fully comply with PDD 63, the Agency

needs to expand its infrastructure protection efforts to address its critical,

physical infrastructure. SBA’s current CIP Plan does not require protection

of the Agency’s physical MEI. We recommended that the plan be revised to

include milestones and responsibilities for identification of physical MEI,

performance of vulnerability assessments, development of remedial plans,

determination of resource requirements, and updating of policies and

procedures as necessary. PDD 63 and related guidance call for agencies to

establish effective CIP coordination with other applicable entities. To avoid

duplication of key functions, we recommended that SBA coordinate its CIP

efforts with the General Services Administration, which is responsible for

the security of the Federal and leased buildings in which SBA operates. The

CIO agreed with our recommendations and stated that his office has already

taken steps to address the issue.

SBA’s Information Systems Controls for FY 2000

OIG issued an audit report on SBA’s information systems controls.

The report was based on the review of general controls over SBA’s financial

management systems as part of the audit of SBA’s FY 2000 financial

statements. General controls are the policies and procedures that apply to all

or a large segment of an entity’s information systems to help ensure their

proper operation. They impact the overall effectiveness and security of

computer operations, rather than specific computer applications. The

objective of the review was to determine if those controls complied with

various Federal requirements. The report concludes that while SBA has

continued to make significant progress in implementing its information

systems security program, further improvements are still needed. The report

describes areas where controls can be strengthened, such as, (1) monitoring,

assessing, and measuring security program effectiveness; (2) restricting

physical access to network servers; (3) documenting application

development and software changes; (4) controlling changes to operating

system configurations; (5) segregating incompatible duties; and (6) testing

disaster recovery plans. The CIO, CFO, and Assistant Administrator for

Disaster Assistance generally agreed with the findings and

recommendations.

FY 1999 Cost Allocation Study Advisory Memorandum

OIG issued an advisory memorandum on the FY 1999 Cost

Allocation Study used by SBA to determine all costs attributable to each

SBA program. OIG found that the costs identified through the study

overstated SDB certification expenses by $3.9 million. It reported SDB

OIG investigates criminal

conduct by SBA

employees.
OIG Activities

Semiannual Report March 2001 29

expenses as $14.6 million rather than $10.7 million. Additionally, since the

Cost Allocation Study was based on obligations that included unliquidated

balances on closed obligations, the model did not show actual SDB

expenditures. The Economy Act, which applied to cost reimbursements from

other agencies, requires SBA to determine the actual cost of the SDB

certification program. Lastly, SBA did not clearly document the model, as

required by the Office of Management and Budget (OMB) Circular A-127.

The auditors recommended that SBA’s CFO implement internal controls to

verify the accuracy of future surveys and models, enforce procedures for

immediate de-obligation of unliquidated obligations on completed

projects/contracts, and document the logic and methodology behind the cost

allocation model. While Office of the Chief Financial Officer (OCFO)

officials stated that procedures for the FY 2000 cost study included internal

control improvements that should address OIG’s concerns, they did not

address verifying the model to detect and correct potential errors. OCFO

agreed to the recommendations in the report, and the FY 2000 cost study

process included procedures to verify the model and correct potential errors.

The following cases involve OIG investigations of criminal conduct

by SBA employees.

• The former coordinator of SBA’s BIC in Itta Bena, Mississippi, pled

guilty to filing a false claim when relocating from Texas to Mississippi,

and was sentenced to 4 years probation and to pay SBA $8,779 in

restitution and was also fired. As part of the plea agreement, the

Government agreed to dismiss the three false claims counts on which

she had also been indicted. The investigation was initiated based on a

referral from SBA’s Mississippi District Office.

• A former SBA time-and-attendance keeper pled guilty to one count of

Theft II and she was sentenced to pay $5,430 in restitution to SBA,

serve 1 year of probation, and undergo weekly drug testing. She

admitted to submitting falsified time sheets to be paid more than $5,400

in overtime that she did not work. She retired from the Government

during the investigation, which OIG initiated based on a referral from

SBA’s OGC.

OIG reviewed and commented on H.R. 4181, the “Debt Payment

Incentive Act of 2000.” OIG supported the proposed legislation, but

recommended that the provision requiring a prospective contractor to enter

into a repayment plan within 6 months following the award of a contract be

changed to require the contractor to enter into a repayment plan with the

Federal agency to which the delinquent outstanding debt is owed beginning

not later than the contract award date. OIG believed there is no justification

to postpone the entry into a repayment plan following the award of a

OIG reviews two proposed standard operating

procedures: 1) the

Agency’s Equal

Employment Opportunity

program, and 2) SBA’s

advisory committees.
OIG Activities

30 Semiannual Report March 2001

contract. If the deadline is delayed for 6 months and the party fails to enter

into a repayment plan, then substantial contract performance may have

already occurred. Additionally, termination and appeal expenses would

already have been incurred as opposed to the much more economical and

efficient method of handling Federal debt repayment as either a

responsiveness or responsibility issue before award. The proposed

legislation also provided that partners or shareholders owning more than 25

percent of an applicant for financial assistance or a contractor would certify

that they have not been assessed a penalty under section 6672 of the Internal

Revenue Code. OIG recommended these certifications be extended to

include delinquencies on any Federal debt owed. Further, if the individuals

certified they are delinquent on a Federal debt, then they should also be

required to enter into a repayment plan before Federal financial assistance is

granted or a Federal contract is awarded.

OIG reviewed the Agency’s draft of standard operating procedure

(SOP) 90 54 5, on SBA’s advisory committees established pursuant to the

Federal Advisory Committee and Small Business Acts. Among its

comments, OIG recommended that the advisory role of district advisory

councils (DAC) be emphasized. OIG considered the some of the language

referring to DAC authority contained in the SOP to be too broad, taking into

consideration the significant non-advisory activities of at least one DAC

revealed by a recent OIG audit. See Audit of Rhode Island District

Advisory Council, Audit Report No. 0-28, September 29, 2000), available at

http://www.sba.gov/ig/audits.html. OGC generally agreed with OIG

comments and is making the requested changes.

OIG reviewed a proposed revision of SOP 37 13, that would amend

the Agency’s Equal Employment Opportunity (EEO) program to include

new regulations promulgated by the EEO Commission and introduce the

Agency’s alternative dispute resolution program. OIG recommended

changes to ensure that employees and managers involved in the EEO

process for the first time would be able to understand what to expect from

the process and their respective rights and responsibilities during that

process. SBA’s Office of Equal Employment Opportunity and Civil Rights

Compliance agreed with the recommended changes and the final version of

the SOP was published in December 2000.

OIG reviewed and commented on the Agency’s draft FY 2000

Performance and Accountability Report. OIG suggested that the proposed

transmittal letter by the head of the Agency include a more comprehensive

assessment of data completeness and accuracy as required by the Reports

Consolidation Act of 2000, as codified at 34 U.S.C. § 3516(e).

Additionally, OIG recommended that the Agency improve its description of

OIG’s list of the most serious management challenges facing SBA, provide

OIG works with SBA to

identify the 10 most

serious management

challenges facing the

Agency and submits its

findings to Congress.
OIG Activities

Semiannual Report March 2001 31

SBA’s progress on resolving those challenges, and describe any areas of

remaining concerns and how and when the Agency plans on addressing or

overcoming them.

Office of Inspector General

Top Ten Management Challenges Submitted to Congress

In response to a congressional request, OIG submitted its assessment

of the 10 most serious management challenges facing SBA in FY 2001. The

current list identifies three new challenges and updates and/or consolidates

those submitted last year. The first four focus on agency-wide issues for

modernizing the Agency. The second two discuss loan program challenges.

The third three deal with Section 8(a) BD challenges. The final challenge

focuses on preventing loan fraud. The full assessment of the 10 most serious

management challenges is detailed in the Significant Activities and

Management Challenges chapter.

OIG Fraud Awareness Briefings

OIG conducted several briefings for SBA’s employees, lenders, and

other resource partners as part of its mission to educate its customers on

identifying waste, fraud, and abuse. During this reporting period (as the

chart below illustrates) over 50 percent of the investigations initiated by OIG

originated from within the Agency in the form of referrals either from

program heads or other SBA employees. This cooperation indicates the

strong commitment of SBA employees to reducing waste, fraud, and abuse

in Agency programs and improving the Agency’s management and control

of its programs. However, we have recognized the shift in SBA’s role from

primarily reviewing and processing loans to increasingly providing oversight

of lending practices; accordingly, we have changed our briefing strategy.

Much of our past success resulted from referrals from conscientious SBA

employees; our continued successes will depend more on lender referrals.

OIG has expanded its integrity-awareness briefing program to include

participating lenders and other interested parties. During this reporting

period we conducted the following briefings.

• OIG staff gave a presentation to 40 attendees at a New York Bank

Clearinghouse Committee meeting.

• OIG staff gave presentations to 72 attendees at disaster-fraud awareness

meetings in California conducted jointly with special agents from

FEMA. The meetings were held for State and local law enforcement

officers.
OIG Activities

32 Semiannual Report March 2001

• OIG staff gave a presentation to 10 attendees at a Section 8(a) marketing

seminar sponsored by SBA’s Houston District Office.

• OIG staff presented integrity awareness briefings to a total of 68 Agency

employees in Puerto Rico, the Virgin Islands, and Kansas City.

Sources of Referrals in OIG 

Investigations from October 1, 2000, to 

March 31, 2001

13.6%

6.8%

13.6%

13.6%

52.5%

SBA Program Heads

and Employees

Other Federal

Agencies

Private Citizens

Participating Lenders

Other

* Due to rounding, the total of the above percentages is 100.1 percent.
OIG Activities

Semiannual Report March 2001 33

Office of Security Operations

Pursuant to provisions of the Small Business Act and the Small

Business Investment Act, SBA requires applicants for assistance to meet

certain character standards before participating in Agency programs. OIG’s

Office of Security Operations (OSO) helps SBA ensure that Agency

program participants meet the standards by processing name checks and,

where appropriate, fingerprint checks on applicants. To make character

eligibility determinations, OSO makes use of its on-line connection with

FBI’s Machine Readable Data system. When program applicants appear to

be ineligible for assistance based on character, OSO makes referrals to

program officials for adjudication. During this reporting period, OSO made

referrals that resulted in SBA’s business loan program managers declining

36 applications and disaster loan program officials declining 3 applications,

totaling $7,468,700 and $7,583, respectively, for character reasons. Those

declinations made available that amount of credit for applicants in whom

SBA can have confidence of repayment. In addition, officials of SBA’s

Section 8(a) program declined five applications for certification. Almost

$185 million in loans have been declined during the last 10 years due to

character eligibility.

OSO also performs background checks to comply with Federal regulations

that require Agency employees to have security clearances appropriate for

their positions. During this reporting period, OSO initiated 84 background

investigations and issued 14 security clearances. OSO also reviewed and

adjudicated 101 background investigative reports in accordance with

Executive Order 10450 and OMB Circular A-130, and coordinated with

SBA’s Office of Disaster Assistance to ensure the timely adjudication of 45

derogatory background investigative reports forwarded for review and

appropriate action.

OIG continues to make

referrals that result in

SBA declining loans in

both the business loan

and disaster loan

programs. OIG also

continues to perform

background checks and

security clearances for

Agency employees.
OIG Activities

34 Semiannual Report March 2001

Direct Audit Time by Program Area

October 1, 2000, to March 31, 2001

Program Area Direct Time % Number of Audits

Issued In Progress

Capital Access 65% 9 7

Disaster Assistance 1% 1 0

Government Contracting and

Business Development

12% 1 1

Agency Management 22% 6 10

Total

100% 17 18

Direct Investigation Time by Program Area

October 1, 2000, to March 31, 2001

Program Area Direct Time % Number of Investigations**

Closed*** In Progress

Capital Access 69% 17 228

Disaster Assistance 9% 4 110

Government Contracting and

Business Development

9% 4 39

Agency Management 13% 4 27

Entrepreneurial Development   0 2

Total

100% 29 406

**  Includes civil cases *** Includes cases canceled   Less than 1⁄2 percent
Statistical Highlights

Semiannual Report March 2001 35

FY 2000 Productivity Statistics

October 1, 2000, through March 31, 2001

Officewide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ..............................................................$8,004,382

B. Loans Not Made as Result of Investigations and Name Checks .................................$7,534,002

C. Disallowed Costs Agreed to by Management..............................................................$3,371,798

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ...................................................................................$1,454,258

Total $20,364,440

Auditing Division Activities

A. Audit Reports Issued..................................................................................................................17

B. Audit Recommendations Issued ................................................................................................61

C. Dollar Value of Costs Questioned ..................................................................................$432,242

D. Dollar Value of Recommendations that Funds

Be Put to Better Use .........................................................................................$11,061,994

Audit Followup Activities

A. Audit Recommendations Closed ..............................................................................................82

B. Disallowed Costs Agreed to by Management.............................................................$3,371,798

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

Agreed to by Management ..................................................................................$1,454,258

D. Unresolved Audit Recommendations .......................................................................................37

Inspection and Evaluation Division Activities

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

Legislation/Regulations/SOP/Other Review

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

B. Regulations Reviewed ...............................................................................................................22

C. Standard Operating Procedures Reviewed...................................................................................7

D. Other Issuances Reviewed** .....................................................................................................85

* Includes the recommended loan guarantees cancelled

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

communications, which frequently involve the implementation of new programs and policies.
Statistical Highlights

36 Semiannual Report March 2001

Investigations Division Activities

A. Total Cases ............................................................................................................................. 435

B. Closed Cases ............................................................................................................................. 29

C. Pending Cases ........................................................................................................................... 13

D. Open Cases ............................................................................................................................. 393

E. Subjects Under Investigation ............................................................................................... 1,600

F. Cases Referred to FBI or Other Agencies for Investigation........................................................ 9

Summary of Indictments and Convictions

A. Indictments from OIG Cases .................................................................................................... 32

B. Convictions from OIG Cases .................................................................................................... 28

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations ............................................................................................. $8,004,382

B. Loans Not Approved as a Result of OIG Investigations.................................................. $57,719

C. Loans Not Approved as a Result of the Name

 Check Program................................................................................................... $7,476,283

Total: ...........................................................................................................................$15,538,384

SBA Personnel Actions Taken as a Result of Investigations

A. Dismissals................................................................................................................................... 1

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

C. Suspensions................................................................................................................................. 1

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

Program Actions Taken as a Result of Investigations

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

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

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters................................................................................................ 559

B. Total Calls/Letters Referred to Investigations Division for Evaluation...................................... 9

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

Investigative Agencies ..................................................................................................... 95

D. Total Other Calls/Letters ........................................................................................................ 455
Inspector General Act Statutory Reporting Requirements

Semiannual Report March 2001 37

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

Inspector General Act Amendments of 1988, are listed below.

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 26-27, 30-31

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 3-33

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

 And Deficiencies 3-33

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 42

Section 5(a)(4) Matters Referred to Prosecutive Authorities 43-48

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 39

Section 5(a)(7) Summary of Significant Audits 7-29

Section 5(a)(8) Audit Reports with Questioned Costs 40

Section 5(a)(9) Audit Reports with Recommendations that Funds Be Put to Better Use 40

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 41

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
38 Semiannual Report March 2001

TABLE OF APPENDICES

Appendix Page

Appendix I – Audit Reports Issued.............................................................................................39

Appendix II

 Part A – Inspector General-Issued Audit Reports

 With Questioned Costs ................................................................................................40

 Part B – Inspector General-Issued Audit Reports

 With Recommendations that Funds Be Put to Better Use ...........................................40

 Part C – Inspector General-Issued Audit Reports

 With Non-Monetary Recommendations......................................................................41

 Part D – Inspector General-Issued Audit Reports

 With Overdue Management Decision..........................................................................41

 Part E – Significant Audit Reports

 Without Final Action ...................................................................................................42

Appendix III – Six Month Arrested/Indicted/Convicted Summary............................................43

Appendix IV – Six Month Sentencing Summary .......................................................................47
Semiannual Report March 2001 39

APPENDIX I

Audit Reports Issued

October 1, 2000, to March 31, 2001

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER

USE

Capital Access

GPRA – 7(a) Business Loans 1-01 12/4/00

American Contractors Indemnity 1-02 12/27/00

Identification of Possible Ineligible Borrowers A1-02 1/11/01 $10,300,000*

Ranger Insurance 1-03 1/18/01 $180,762

National American Insurance 1-04 1/22/01

St. Paul Surety 1-05 2/1/01 $250,771

Indemnity Insurance 1-07 2/22/01 $709

MVP Sports Café 1-10 3/9/01 $641,994

Alexander’s Auto Salvage 1-13 3/27/01 $120,000

Program sub-total 9 reports $432,242 $11,061,994

Disaster Assistance

GPRA Disaster Assistance 1-06 2/15/01

Program sub-total 1 report

Government Contracting and Business

Development

GPRA 8(a) 1-11 3/27/01

Program sub-total 1 report

Agency Management

Cost Allocation Study A1-01 12/7/00

Loan Monitoring System A1-03 2/23/01

SBA FY 2000 Financial Statements 1-08 2/28/01

Verification of FACTS Data A1-04 3/8/01

PDD 63 1-09 3/26/01

Information System Controls 1-12 3/27/01

Program sub-total 6 reports

TOTALS (all programs) 17 reports $432,242 $11,061,994

*Represents the recommended loan guarantees cancelled
40 Semiannual Report March 2001

APPENDIX II - Part A

Audit Reports with Questioned Costs

October 1, 2000, to March 31, 2001

REPORTS RECs* COSTS**

QUESTIONED UNSUPPORTED

A. For which no management decision had

been made by September 30, 2000

4 6 $4,046,779*** $558,950

B. Which were issued during the period 3 6 $432,242 0

Subtotals (A + B) 7 12 $4,479,021 $558,950

C. For which a management decision was

made during the reporting period

5 8 $3,743,199 $558,950

(i) Disallowed costs 6 8 $3,371,798 $201,642

(ii) Costs not disallowed 2 2 $580,752 $357,308

D. For which no management decision had

been made by March 31, 2001

2 4 $735,822 $112,316

* Recommendations.

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

*** Difference from September 2000 SAR ending balance cause by prior reclassification of prior dollar finding from questioned cost to

funds for better use.

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

October 1, 2000, to March 31, 2001

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management decision

had been made by September 30, 2000

3 3 $1,603,345***

B. Which were issued during the period 3 3 $11,061,994**

Subtotals (A + B) 6 6 $12,665,339

C. For which a management decision was

made during the reporting period

3 3 $1,603,345

(i) Recommendations agreed to

by SBA management

2 3 $1,454,258

(ii) Recommendations not agreed

to by SBA management

0 1 $149,087

D. For which no management decision

had been made by March 31, 2001

3 3 $11,061,994

* Recommendations.

** Includes the recommended loan guarantees cancelled

*** Difference from September 2000 SAR ending balance cause by prior reclassification of prior dollar finding from questioned cost to

funds for better use.
Semiannual Report March 2001 41

APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

October 1, 2000, to March 31, 2001

REPORTS RECOMMENDATIONS

A. For which no management decision had

been made by September 30, 2000

12 49

B. Which were issued during the period 17 52

Subtotals (A + B) 29 101

C. For which a management decision was

made (for at least one recommendation in

the report) during the reporting period

20 71

D. For which no management decision (for

at least one recommendation in the

report) had been made by March 31, 2001

9 30

APPENDIX II – Part D

Issued Audit Reports with Overdue Management Decisions

March 31, 2001

TITLE NUMBER ISSUED STATUS

Dixieland Events/Tamingo Farms 0-05 2/16/00

Awaiting conclusion of further lender

audit.

GPRA – SBIC 0-25 9/7/00

Program office seeking legal guidance

on one recommendation.
42 Semiannual Report March 2001

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of March 31, 2001

Report

Number

Title Date

Issued

Date of

Management

Decision

Final

Action

Target

43H006021 8(a) Continuing Eligibility 9/30/94 10/30/94 6/30/01

53H004006 Loan Servicing and Debt Collection 3/31/95 4/30/95 12/31/01

75H011026 Business Loan Guarantee Purchases 9/30/97 8/15/00 12/31/01

88H002017 NOAA Computer Contracts 6/18/98 3/1/99 9/30/01

86F008023 Defaulted Loan by Arkansas Capital Corp 7/31/98 3/31/99 6/30/01

9-11 Non-Tax Delinquent Debt 7/28/99 8/13/99 7/1/01

9-15 Disaster Home Loan Servicing Centers 8/3/99 9/20/99 4/30/01

9-23 Survey of Electronic Records Management 9/15/99 11/30/99 6/30/01

0-05 Dixieland Events/Tamingo Farms 2/14/00 * *

0-06 FY 1999 Financial Statements 2/29/00 3/29/00 9/30/01

0-11 NADI Manufacturing, Inc. 3/28/00 6/13/00 12/30/01

0-14 7(a) Service Fee Collections 3/30/00 8/22/00 10/31/00

0-15 Systems Development Methodology 3/30/00 9/29/00 9/30/02

0-17 Stop One Convenience Store 4/28/00 10/26/00 9/1/01

0-19 SDB Business Certification Program 6/30/00 *** **

0-20 SBA Financial Reporting 7/11/00 2/2/01 9/30/03

0-25 GPRA – SBIC 9/7/00 * **

0-26 GPRA – Surety Bond Program 9/26/00 1/30/01 5/1/01

0-27 PDD 63 Planning & Assessment 9/26/00 11/22/00 9/30/01

0-28 Rhode Island District Advisory Council 9/29/00 *** 6/30/01

0-29 MBELDEF Cosponsorship 9/29/00 *** **

0-30 SBA Administration of MBELDEF 9/30/00 *** **

0-31 Boscart Construction Inc. 9/30/00 *** **

* At least one recommendation remains open.

** Target dates vary with different recommendations.

*** Management decision dates vary with different recommendations.
Semiannual Report March 2001 43

APPENDIX III

Six Month Arrested/Indicted/Convicted Summary

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 AZ BL Business brokers submitted fraudulent documents to private lenders to

obtain 100-percent financing for clients seeking business acquisition

loans guaranteed by SBA; inflated purchase price to cover actual

selling price plus cash injection; arranged for buyer to obtain real

estate license and listed as asset commission that borrower would earn

for sale of business; arranged for third party injectors to loan required

down payment as cash injection received inflated commission and

arranged for a portion of commission that was loaned by the third

party injectors (plus fee) to be wired back to third party. At brokers’

direction, client submitted false financial information to obtain

$900,000 SBA-guaranteed loan; in plea agreement he admitted

knowing that he did not have cash injection needed to close loan and

being aware that brokers had obtained temporary cash injection from

third party so he could obtain loan. *

Brokers:

Both

indicted

Client:

Charged and

pled guilty

FBI

 CA BL Equipment manufacturer obtained $833,000 SBA-guaranteed Export

Working Capital loan by president, associate, and employee

participating in scheme utilizing false invoices and faxes; concealed

property from bankruptcy court; president omitted significant

information from financial statements. *

President

and

associate

pled guilty

Employee

dismissed

FBI

 CO BL To obtain $100,000 SBA-guaranteed LowDoc loan, painting

company owner failed to disclose $250,000 in business debts and two

pending lawsuits on application; used some loan proceeds for

personal expenses instead of authorized business debts; failed to list

numerous assets during bankruptcy.

Indicted FBI

 IA BL To obtain $1,400,000 SBA-guaranteed loan to purchase business,

former president of meat company wrote insufficient-funds check and

perpetrated check kite to make it appear that required equity injection

was made; concealed undisclosed promissory note to seller; converted

vehicles pledged to bank on same loan. *

Indicted FBI

 KY 8aBD Former Ohio Section 8(a) contractor participated in fraudulent

conspiracy to circumvent program graduation rules, using sons to

establish Section 8(a) companies in other states to surreptitiously

maintain participation in program.

Father pled

guilty

EPA/OIG,

DCIS

 MD BL On documents to obtain $260,000 SBA-guaranteed loan, listed

name/date of birth/SSN of son in place of own; also failed to disclose

he owed approximately $3 million to IRS and others. *

Convicted None
44 Semiannual Report March 2001

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 MS DL Assistant minister of church that received $257,600 disaster loan to

repair hurricane damage misappropriated $75,000 of loan proceeds;

submitted numerous false invoices to SBA in support of request for

loan disbursements.

Charged and

pled guilty

None

 MO BL To receive $98,235 SBA-guaranteed loan, president of defunct dry

cleaners made numerous false statements, including providing false

tax return for business; also used false SSNs and false tax returns to

obtain five personal loans, resulting in total lender losses of about

$197,000. *

Arrested;

pled guilty

USSS,

SSA/OIG, PIS

 MT BL Owners of hot tub company obtained $170,000 SBA-guaranteed

Women’s Pre-Qualification loan using inflated invoice; used most of

extra $13,000 generated by scheme to pay off undisclosed $8,000

business debt, and pocketed $5,000 remainder.

Both pled

guilty

None

 NE BL Former president of participating lender bank requested and received

$1,750 in cash payments from two local small businessmen applying

for SBA-guaranteed loans; falsely reported to SBA that bank

collected no additional fees; actually misappropriated money he

received. *

Charged and

pled guilty

None

 NV DL To obtain $213,600 disaster home loan, man claimed he was

employed 10 months and earned $60,000; actually, he was employed

for 3 months and earned only $2,060. *

Indicted State attorney

general

 NJ BL To obtain $500,000 SBA-guaranteed loan, plating/finishing company

and three principal officers failed to purchase machinery and fixtures

as required in loan agreement, provided forged landlord waiver, and

passed three checks to banks knowing that endorsements had not been

authorized by endorsing party. Same four defendants plus second

plating/finishing company and its owner committed environmental

crimes. *

Two

corporations

and four

individuals

indicted

EPA/OIG,

state

enforcement

agency

 NJ 8aBD To obtain more than $8 million in Section 8(a) contracts, construction

company and president included, in program application to SBA,

resumes for individuals falsely purported to be key employees of

company, bogus documents purported to be corporate minutes of

company containing signatures of officers, and other false documents

claiming to identify employees and equipment of company. President

submitted Section 8(a) business plan representing that company was

equipped to handle construction work in 26 different specialties, but

company was really storefront operation that never had

employees/equipment/ experience necessary to be viable. President

brokered contracts to nonminority-owned companies in return for

percentage of contract value. *

Both

charged,

both pled

guilty

ACIC, DCIS,

NCIS,

VA/OIG,

USPS/OIG

 NM DL Using name and SSN of deceased acquaintance, woman obtained

post-disaster assistance, including $40,000 SBA home loan;

submitted numerous false documents; also attempted to obtain

information about claim and investigation by posing as representative

of U.S. Attorney’s Office. Neither she nor deceased acquaintance

ever resided at address claimed in disaster-assistance application. *

Arrested and

indicted

FEMA/OIG
Semiannual Report March 2001 45

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 NY BL Photo studio owner in applying for $260,000 SBA-guaranteed loan,

lied to conceal that: 1) he had been convicted of alien smuggling and

was Federal fugitive; and 2) he was resident alien facing deportation

proceedings. *

Convicted SSA/OIG

 NY BL To obtain $200,000 SBA-guaranteed loan purportedly to start

restaurant, president failed to disclose extensive criminal history. *

Arrested SSA/OIG,

USSS

 NY SBIC SBIC president embezzled and misapplied its funds, causing SBIC to

overpay, to advantage of two private companies affiliated with him,

$71,176 more than rightful rent obligations at site they jointly

occupied; delayed SBA's seizure of control of SBIC and significantly

contributed to Agency’s loss of more than $2,200,000. *

Charged and

pled guilty

FBI

 OH BL Four individuals formed conspiracy to defraud Government, devised

by licensed real estate agent/business broker to facilitate $325,000

SBA-guaranteed loan for purchase of forklift sales/repair business;

fraudulently provided funds for required capital injection prior to loan

closing; inflated contract sales price; concealed transfer of funds

between defendants. One defendant concealed his substantial

criminal history. *

Four

indicted, one

arrested

None

 OH BL Real estate salesman induced title company to issue $427,074 check

from escrow account, in name of his Section 504 lender, based on his

representations that funds were designated for paying down

outstanding balance on SBA loan; then forged endorsement on check

and deposited money to his business account instead. *

Convicted County

prosecutor

 PA 8aBD Construction corporation and executive conspired to improperly

obtain 8(a) contracts; executive also denied in his SBA 8(a)

application that he had criminal history; in fact, he had seven prior

arrests and three convictions. *

Corporation

pled guilty,

executive

convicted

USDA/OIG,

DOL/OIG,

NCIS, ACIC,

DCIS

 TX BL To obtain $293,000 SBA-guaranteed loan (purportedly for purchase

of restaurant), businessmen devised scheme whereby purported buyer

would apply for loan in place of actual buyer, and they would inflate

selling price of business by $110,000. They also submitted falsified

copies of three tax returns, three bogus IRS tax return verifications,

and numerous other fraudulent documents. *

Three

indicted; one

a fugitive,

one

dismissed

TIGTA

 TX BL To obtain $355,000 SBA-guaranteed loan, two principals of service

station and CPA/SBA-loan packager falsified nine Federal tax

returns, six IRS tax verifications, two leases containing forged

signatures of fuel company’s regional and district managers, and

$85,000 capital injection. Indictment also charged all three

defendants in connection with $200,000 loan described below. *

One

completely

new

defendant

indicted

TIGTA
46 Semiannual Report March 2001

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted

Investigated

Jointly

With. . .

 TX BL To obtain $200,000 SBA-guaranteed loan, one principal of gas station

and wife posed as borrowers intending to purchase gas station from

another principal who posed as sole proprietor. They submitted six

falsified copies of tax returns, three fraudulent IRS tax return

verifications, and numerous other fraudulent documents (including

required $60,000 capital injection into business). IRS employee

improperly used position with IRS by producing bogus tax return

verifications for three tax returns by manipulating use of Integrated

Data Retrieval System. *

Four

indicted;

wife

dismissed

TIGTA

 TX BL Three sellers of gas station, and buyer (convicted felon), used buyer’s

brother’s identifiers, false tax returns, and false documentation of

capital injection to obtain $256,000 SBA-guaranteed loan. *

Buyer pled

guilty, one

seller signed

pretrial

diversion,

others

dismissed

TIGTA

 TX BL Convenience-store leasehold owner cashed $54,211 SBA loan

disbursement check payable jointly to him and financial institution by

forging endorsement of financial institution.

Pled guilty FBI

* This case is further discussed in the narrative section of this report.

Program codes: BL=business loans, DL=disaster loans, 8aBD=Section 8(a) business development, SBIC=small business

investment companies

Joint-investigation Federal agency acronyms: ACIC=Army Criminal Investigation Command; DCIS=Defense Criminal

Investigative Service; DOL/OIG=Labor Department OIG; EPA/OIG=Environmental Protection Agency OIG; FBI=Federal

Bureau of Investigation; NCIS=Naval Criminal Investigative Service; PIS=Postal Inspection Service; SSA/OIG=Social

Security Administration OIG; TIGTA=Treasury Department Tax Administration OIG; USDA/OIG=Agriculture Department

OIG; USPO= U.S. Probation Office; USPS/OIG=Postal Service OIG;VA/OIG=Veterans Affairs Department OIG
Semiannual Report March 2001 47

APPENDIX IV

Six Month Sentencing Summary

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 CA BL Former banker accepted $24,000 automobile

from SBA-loan broker; received share of

proceeds of $1 million SBA-guaranteed loan.

Broker caused submission of false tax returns in

support of $1,850,00 in SBA-guaranteed loan

applications. *

Banker: 15 months incarceration, $6,000 restitution

Broker: 5 months incarceration,

5 months at home, $60,000

restitution

FBI

 CA BL Telemarketing agency owner concealed criminal

history in applying for $430,000 and $135,000

SBA-guaranteed loans.

9 months in halfway house USPO

 CA BL Real-estate company president and corporate

secretary obtained $550,000 SBA-guaranteed

loan by using false SSN and fraudulent checks,

submitting false financial statements, and

omitting corporate secretary’s criminal record

from SBA application. *

President: 88 months in prison,

$103,100 fine, $2,676,329

restitution

Secretary: 46 months in prison,

$1,900 fine, $2,104,441

restitution

HUD/OIG,

FBI, IRS

 DC EC Former SBA timekeeper submitted time sheets

to be paid $5,441 in overtime that she did not

work. *

Pled guilty; $5,430 restitution None

 FL BL President of franchiser submitted letter to bank

falsely corroborating that $75,000 cash injection

from buyers had been paid. Store’s seller

allegedly signed and submitted bill of sale that

indicated total price of $225,000 and verified

receiving $75,000 cash injection from buyers. *

Franchiser: Pled guilty; 2 years

incarceration, $650,000

restitution

Seller: Pretrial diversion

FBI

 IA BL In obtaining $45,000 loan, president of repair

shop failed to disclose pertinent negative facts.

$5,000 settlement of civil

complaint to prevent discharge

in bankruptcy of debt to SBA

None

 MS EC SBA employee, having transferred to SBA

office in different region, obtained extra $8,779

in reimbursement of expenses for her two

children and her husband when they did not

relocate with her as she claimed. *

$8,779 restitution None

 NJ BL Owner of die cutting company with defaulted

$940,000 SBA-guaranteed loan concealed

property (condominium) from creditors and

bankruptcy trustee. *

Pled guilty; $10,000 fine FBI

 NJ BL Loan packager whose Internet site offered loan

applications allegedly required applicants to pay

5-percent fee plus 1-percent good-faith deposit;

allegedly falsely represented his company as

authorized to approve consumer loans in New

Jersey; allegedly failed to refund advance fees as

promised.

Agreed to desist from soliciting

mail clients & to repay $62,850

to customers in 11 states

PIS
48 Semiannual Report March 2001

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 NY 8aBD Project manager of construction company forged

bond to defraud Government in connection with

$379,079 Section 8(a) contract. Company’s

president concealed criminal record, obtained

line of credit by fraud, conspired in bond fraud.

*

Project manager: 1 year + 1 day

incarceration, $45,375 restitution

President: $259,369 restitution

FBI

 NY SBIC SBIC president obtained $750,000 in loans and

$250,000 in salary advances by misrepresenting

their legitimacy; then used fraudulently-obtained

funds for personal debts. SBIC vice president

cosigned loan and advance checks. *

President: 1 year incarceration,

$770,000 restitution

Vice president: Settled SBA

receiver’s civil suit for $170,000

FBI

 PA 8aBD President of defunct construction company

falsely represented he was 100 percent owner on

Section 8(a) program application; falsely

reported payments to subcontractors; made false

progress payment certifications on $1.6 million

contract. *

Charged and pled guilty; plea

agreement requires restitution

(pursuant to stipulated

$3,200,000 judgment) to suretybonding company before

sentencing

NCIS,

VA/OIG

 TX BL Attorney induced disbursement of $95,000

SBA-guaranteed loan by false invoices and

certifications of expenditures; falsely negotiated

joint-payee disbursement checks; and used some

loan proceeds to purchase another business.

$13,413 restitution None

 TX BL To obtain $350,000 SBA-guaranteed loan,

proprietor of auto repair shop and employee

submitted false tax return and falsified capital

injections and equipment purchases. *

Employee convicted; 37 months

incarceration, $506,203

restitution

Proprietor: fugitive

TIGTA

 TX BL To obtain $675,000 SBA-guaranteed loan,

owner of clothing manufacturer used false SSN

and false name to conceal that her previous

business had defaulted on SBA loan and that she

had previously filed for bankruptcy; also

submitted fictitious tax returns, falsified

financial statements, and other documents; then

failed to purchase equipment pledged as

collateral and spent most of loan proceeds for

personal purchases. *

54 months in prison, $656,955

restitution

TIGTA,

SSA/OIG

* This case is further discussed in the narrative section of this report.

Program codes: BL=business loans, EC=SBA employee conduct, 8aBD=Section 8(a) business development, SBIC=small

business investment companies

Joint-investigation Federal agency acronyms: FBI=Federal Bureau of Investigation; HUD/OIG=Housing & Urban

Development Department OIG; IRS=Internal Revenue Service; NCIS=Naval Criminal Investigative Service; PIS=Postal

Inspection Service; SSA/OIG=Social Security Administration OIG; TIGTA=Treasury Department Tax Administration OIG;

USPO= U.S. Probation Office; VA/OIG=Veterans Affairs Department OIG
MAKE A DIFFERENCE

To promote integrity, economy, and efficiency, we encourage

you to report instances of fraud, waste, or mismanagement to

the SBA OIG FRAUD LINE.*

CALL

1-800-767-0385 (Toll Free)

202-205-7151 (Washington, DC, Area)

Write or Visit

U.S. Small Business Administration

Office of Inspector General

Investigations Division

409 Third Street, SW. (5th Floor)

Washington, DC 20416

Or E-mail Us At OIG@SBA.GOV

*Upon request your name will be held in confidence.