SEMIANNUAL REPORT TO CONGRESS

OFFICE OF INSPECTOR GENERAL

U.S. SMALL BUSINESS ADMINISTRATION

PERIOD: APRIL 1, 1998, TO SEPTEMBER 30, 1998

.
Semiannual Report September 1998 i

Foreword

Pursuant to Public Law 95-452, the U.S. Small Business Administration's (SBA) Office of

Inspector General (OIG) is required to prepare a Semiannual Report of its activities for the

Congress of the United States. This report covers the full range of SBA/OIG activities from

April 1, 1998, to September 30, 1998.

As Acting Inspector General, I am pleased to report on the many accomplishments of the men

and women of the Office of Inspector General. Their work helps to ensure integrity in SBA's

programs and provides senior policy officials and program managers with information critical to

improving program effectiveness and operational efficiency. Several examples are illustrative of

these accomplishments. In FY 1998, a record 81 indictments were obtained of individuals

alleged to have committed fraud against the SBA and its resource partners. A nationwide audit of

7(a) business loans is finding lender non-compliance with required procedures in approximately

45 percent of the loan sample reviewed to date. Moreover, almost 90 percent of the deficiencies

identified were processing or disbursing actions not normally reviewed by or reported to SBA

under existing procedures –- a condition that has implications for SBA's lender oversight

program. An inspection assessed performance measurement efforts in the Small Business

Development Center (SBDC) program. The findings provide guidance to SBA and the SBDCs

on ways to improve current performance measurement to fulfill both internal management needs

and Government Performance and Results Act (GPRA) requirements. In depth reviews of draft

regulations assisted the Agency in implementing new initiatives such as the HUBZone and small

disadvantaged business contracting programs.

OIG staff has also worked closely with senior SBA managers on various task forces and working

groups addressing the challenges and risks associated with the Agency's increased reliance on

private sector partners. Examples include initiating implementation of the Committee of

Sponsoring Organizations internal control framework in the SBA, structuring the sale of loan

portfolio assets, validating the renovation of automated information systems to accommodate the

year 2000, and implementing GPRA performance planning. In addition to performing its

traditional audit, inspection, and investigations work, the OIG will continue to proactively assist

the Agency in its transition to the 21st century.

Finally, I am happy to note that the OIG continues to receive excellent support and cooperation

from SBA policy officials, senior executives, program managers, and employees. The OIG alone

could not have achieved the reported accomplishments without their support and cooperation.

Karen S. Lee

Acting Inspector General

Table of Contents

Title Page

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

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

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

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

Small Business Investment Companies ......................................................................................27

Surety Bond Guarantees ............................................................................................................30

Government Contracting Programs ............................................................................................33

Minority Enterprise Development ..............................................................................................35

Entrepreneurial Development (Business Education and Training) ............................................38

Agency Management and Financial Activities...........................................................................41

Organization, Resources, and Management Initiatives...............................................................46

Profile of Operating

Results.......................................................................................51

FY 1998 Productivity Statistics

..................................................................................55

Statutory Reporting Requirements..............................................................................................57

Table of Appendices ...................................................................................................................58
Semiannual Report September 1998 1

Executive Summary

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

the Small Business Administration (SBA) is submitted pursuant to

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

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

1, 1998, to September 30, 1998.

Summary of Accomplishments

OIG audits, inspections, and investigations

over the last 6 months achieved $18,704,564

in potential dollar results, 37 indictments,

and 31 convictions. The dollar results

consist of $2,843,277 in potential recoveries,

including judicially-awarded fines and

restitution; $12,524,605 in management

avoidances; $393,386 in disallowed costs

agreed to by SBA's management; and

$2,943,296 in management commitments to

use funds more efficiently.

The OIG alone could not have achieved the

accomplishments set forth in this report to

the Congress. The results for this reporting

period reflect the cooperation and support of

other Federal audit, inspection, and

investigative organizations such as the

Federal Bureau of Investigation (FBI); U.S.

Secret Service; U.S. Marshals Service;

Internal Revenue Service (IRS); U.S.

Customs Service; U.S. Drug Enforcement

Administration; other Federal OIGs;

Department of Justice (DOJ) prosecutors;

and, most importantly, the actions of SBA

program managers and employees. Indeed,

much of our success is due to referrals made

by conscientious SBA employees.

Highlights of the Past Six

Months

Efforts to Improve SBA Program

Management

Audits of Section 7(a) Business Loans

Find Lender Non-compliance with

Required Procedures

Audits of Section 7(a) business loans in

Atlanta, Buffalo, Newark, Madison, and

Glendale found 92 procedural errors in 68 of

150 loans reviewed. The errors involved

financial data not verified with IRS data,

misuse of loan proceeds, lack of joint

payee checks and credit reports, lack of

capital injection, ineligible purposes,

incorrect size standards, adverse changes

not reported to SBA, and no standby

agreements. The auditors also identified

five borrowers who made false statements

concerning their criminal histories.

Recommendations were generally agreed to

by the directors of the five SBA district

offices and the Preferred Lender Program

(PLP) processing center, except that the

Buffalo District Director disagreed with two

recommendations—one concerning
2 Semiannual Report September 1998

obtaining credit reports before disbursement

and one concerning actions to protect the

Government’s interest before default or

purchase request. The PLP processing center

agreed with the latter statement by the

Buffalo District Director, further stating that

SBA does not have a procedure to

recommend denial of the guarantee prior to

receipt of a purchase request from the

lender. This issue is being negotiated

currently between the Office of Financial

Assistance and the OIG.

The audits were performed as part of a

national audit of lender processing of

Section 7(a) loans. Three additional audits

are being done in Kansas City, Charlotte,

and Denver. After the eight individual

district office reports are completed, the

OIG will summarize the findings in a

national report.

Inspection Finds SBAExpress Pilot

Program Effective but in Need of Policy

Clarification

The OIG issued an inspection report on

SBAExpress, a pilot program to test the

concept of granting selected banks

additional authority and autonomy in

approving SBA-guaranteed loans of up to

$150,000. The report found that the

program appears to be meeting its overall

objectives and is considered by lenders to

be highly effective in increasing the

capital available to small businesses. The

OIG did find, however, that language

governing the program leaves room for

broad interpretation in two areas. First, it is

unclear whether SBA considers credit

scoring alone sufficient for loan

underwriting analysis. Second, there is

substantial ambiguity over whether

promissory notes are required. The Office

of Financial Assistance agreed with the

OIG’s recommendation that the language

governing each of these areas be reviewed

and clarified.

Audits of Two Early Defaulted loans

Estimate SBA Sustained Losses of

$609,400

Two audits of SBA guaranteed loans that

defaulted within 12 months of origination

showed that the early defaults were the

result of the lenders not following SBA

requirements. One audit found that the

lender failed to verify the status of a major

debt of the borrower, and that the borrower

made false statements during the application

process. The debt, which comprised nearly

50 percent of the borrower’s liabilities, had

been in default since October 1, 1992. The

second audit determined that the lender

neither compared income tax information

with the business’ financial statements nor

notified SBA of the significant discrepancy,

materially misrepresented the value of the

collateral, and did not perform a proper

credit analysis of projected sales. SBA

sustained total losses of about $609,400.
Semiannual Report September 1998 3

Audits of Three Preferred Surety Bond

Companies Found Inappropriate Bond

Guarantees and Claims

The OIG issued contract audits of claims

submitted to SBA by surety companies in

Calabasas, California; Philadelphia,

Pennsylvania; and Seattle, Washington. The

audits were requested and funded by the

Associate Administrator for Surety

Guarantees (AA/SG). The audits found that

the sureties did not always comply with

SBA’s policies and procedures for

underwriting; claimed unallowable

expenses; and calculated fees accurately,

but did not remit them to SBA in a timely

manner. The audits identified inappropriate

claims of $687,639, inappropriately obtained

SBA bond guarantees of $934,967, and

unremitted fees of $274,724. The AA/SG

generally concurred with the findings and

recommendations, but stated he needed to

obtain legal clarification on one issue.

Ineligible 8(a) Sole Source IDIQ

Contracts Awarded Under GSA’s Federal

Acquisition Services for Information

Technology (FAST) Program

A limited review of 157 sole source

Indefinite Delivery/Indefinite Quantity

(IDIQ) Section 8(a) contracts awarded by

the Federal Telecommunications Service of

the General Services Administration (GSA),

Kansas City, found that GSA should not

have awarded, and SBA should not have

accepted, the contracts into the Section

8(a) Program. As of March 2, 1998, the

OIG estimated that GSA could potentially

place approximately $400 million in orders

against the 157 contracts. During the audit,

two additional offers were made to SBA’s

Washington District Office with a

cumulative value not to exceed $6 million.

After discussions with the auditor, those

offers were not accepted into the 8(a)

Program. The Acting Associate

Administrator for Minority Enterprise

Development generally agreed with the

findings and recommendations.

Inspection Examines SBDC Performance

Measurement

The OIG issued an inspection report that

assesses performance measurement efforts

in the Small Business Development Center

(SBDC) program. Because the program is

decentralized and involves negotiated

agreements between SBA and the SBDCs,

the inspection looked at performance

measurement from the perspectives of both

SBA and the SBDCs. To maximize the use

of existing data sources, SBA has two

options for evaluating the SBDC program’s

economic impact and customer satisfaction.

If SBA decides to continue to use the results

of the national impact study sponsored by

the SBDC Association, the OIG

recommended that SBA validate the

study’s methodology, arrange for it to be

conducted annually, eliminate current

direct reporting requirements, and

require that a statistical sample of SBDC

clients be surveyed for customer

satisfaction.

If SBA decides instead to collect the impact

data and customer evaluations directly from

the individual SBDCs, the OIG

recommended that the Agency require only

the data from the SBDCs that it plans to use

for measuring program performance,

provide guidelines to SBDCs on how

information is to be collected to ensure data

integrity, and revise the customer

satisfaction questionnaire to ensure that it

meets the feedback needs of both the

Agency and the SBDCs.
4 Semiannual Report September 1998

Inspection Surveys Administrative

Officers in Field Offices

The OIG conducted a survey of

administrative officers and regional support

staff on the effectiveness of communications

between SBA headquarters and the field

offices on administrative matters. The

inspection found that the respective roles of

the Offices of Administration, Field

Operations, and Chief Financial Officer

need clarification; that certain offices

should improve the timeliness and

accuracy of their responses to queries

from field personnel; that field

administrative personnel have developed an

internal support network for obtaining

answers to questions and keeping informed

about issues and procedures affecting their

work; and that there is a need for more

training.

The OIG recommended that SBA clearly

identify points of contact in headquarters

who have the expertise, authority, and

resources to respond to administrative

inquiries from the field. It was also

recommended that the designated points of

contact be held accountable for responding

in a prompt and effective manner. Finally,

the OIG urged SBA to develop a structured

training program for administrative officers

and regional support staff.

Activities to Enhance Fraud

Detection and Deterrence

Results of False Tax Return Cases

Increase

Over the last 8 years, the OIG has received

398 allegations that false tax returns were

submitted in support of SBA business or

disaster loan applications. These fraud

referrals now involve loan applications

submitted to 51 SBA district offices, total

$124 million, and include 1,262 individual

subjects. To date, 126 individuals have been

indicted on criminal charges: 114 have

been adjudicated guilty, 3 indictments were

dismissed, and 9 others have not yet gone to

trial.

Affirmative Civil Enforcement Program

The OIG continues to produce results from

its participation in the Department of

Justice’s Affirmative Civil Enforcement

(ACE) program. This program, which is

implemented by U.S. Attorney offices

around the country, targets cases which

might not be prosecuted criminally because

of the minimal dollar amounts involved,

absence of financial loss to the Government,

or because other facts of the case might not

support a criminal prosecution.

During the time that the OIG has been

involved with the ACE program, the office

has had a total of 107 successful cases

resulting in $2,910,518 in civil penalties

and $4,484,842 in recoveries by SBA.

These successes come from actions in 20

states (including, during this reporting

period, the first ACE success in Virginia)

and the Commonwealth of Puerto Rico.

Individual ACE successes are reported in the

program area chapters, as appropriate.

Results of California Loan Broker

Investigation Multiply

The number of individuals charged with

crimes in the wake of the investigation of an

Inglewood, California, loan brokerage firm

has more than doubled, to 13. Ten have

entered guilty pleas, and the first three
Semiannual Report September 1998 5

defendants have been sentenced. The case

revolves around loan packages submitted to

a now-defunct participating lender bank.

The firm’s portfolio at the bank totaled

approximately 170 loans, originally valued

at more than $60 million. During the last six

months, a tax preparer was charged with and

pled guilty to three counts of aiding and

abetting the making of false statements to

a Federally-insured lender. The man

assisted principals of the loan brokerage

firm by preparing fraudulent tax returns

(some fictitious, others altered), fraudulent

personal financial statements, fictitious

profit and loss statements, and other false

documentation for their clients. He admitted

having known that the false documents

would be included in application packages

being submitted for SBA-guaranteed loans.

The charges address the preparation of false

documents in three loan application

packages, which resulted in the approval of

SBA-guaranteed loans totaling $2.5 million.

Five additional borrowers were charged with

making false statements to a Federallyinsured lender, four pled guilty to that

charge, and three were sentenced. In

addition, another borrower was charged with

and pled guilty to fraudulent receipt of

money from a bank transaction. All these

charges related to the borrowers’ SBAguaranteed loans. These actions resulted

from an extensive investigation by the OIG,

conducted jointly with the FBI and the IRS,

based on allegations from an anonymous

complainant. Partially as a result of the

default rate of these allegedly fraudulent

loans, the Office of the Comptroller of the

Currency closed the bank in April 1994.

Five Indicted for Conspiracy and Making

False Statements in North Dakota

Business School Fraud

Five individuals were indicted on nine

counts, including conspiracy to defraud

SBA, in a scheme to obtain a $122,900

disaster loan for a private business school in

Grand Forks, North Dakota. The Red River

flooded the school in April 1997. In addition

to conspiracy, the indictment charged four

of the defendants with making false

statements to SBA regarding withholding

taxes payable and computers purportedly

purchased for the school. The school was

closed by January 1998, and the borrower

made no payments on the disaster loan it

received from SBA.
6 Semiannual Report September 1998

Business Loan Program

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

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

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

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

as to reasonably ensure repayment to the lending institution. No loan may be made unless the

financial assistance is not otherwise available on reasonable terms from elsewhere in the credit

market. Under the guarantee program, SBA agrees to purchase the guaranteed portion of the

loan upon default by the small business. SBA's guarantee share of loans by private lenders

averages about 75 percent.

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

approximately 42 percent of these loans are being made by participants in the Agency's

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

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

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

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

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

three days, rather than the two weeks that it may take for a thorough analysis by Agency staff.

About eight percent of all business loan guarantees are made through the CLP process.

As permitted by Section 5(b)(7) of the Small Business Act, SBA delegates even wider authority

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

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

reduces processing time on strong credit applications and uses the resources of SBA's best

lenders to the maximum. About 34 percent of all business loan guarantees are made through the

PLP process.

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

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

expansion of business or modernizing facilities. Typically, 504 loan proceeds are provided as

follows: 50 percent by an unguaranteed first mortgage bank loan, 40 percent by an SBAguaranteed debenture, and 10 percent by the small business customer. The maximum SBA

debenture is $1 million.

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

are now able to use their own internal loan application documents, plus a single page, two-sided
Semiannual Report September 1998 7

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

program continues to exceed 25 percent of all Section 7(a) loan approvals.

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

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

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

pertaining to loan collateral, servicing, and liquidation. This pilot program minimizes the use of

Government mandated forms and procedures while reducing the cost of originating smaller, less

complex SBA loans.

Summary of OIG Activity / Business Loan Program

Audit Reports Issued 9

Audits Underway 6

Indictments Resulting from Investigations 19

Convictions Resulting from Investigations 23

Investigations Closed / Remaining Inventory 20 / 151

Investigations : Restitutions / Fines / Other

Recoveries

$2,136,001 / $15,121 /

$47,815

Investigations: Reductions to SBA’s Financial

Risk

$144,040

Investigations: Declination of Loans Due to

Name Checks

$11,832,338

Investigations: Cases Referred to Other Agencies 4

Inspection Reports Issued 1

Inspections Underway 1

Reviews of Proposed Regulations 2

Reviews of Other Issuances 31
8 Semiannual Report September 1998

Figure 1

Efforts to Improve SBA Program

Management

Inspection Report Finds SBAExpress

Pilot Program Effective, but Identifies

Need for Some Policy Clarification

The OIG issued an inspection report on

SBAExpress, a pilot program to test the

concept of granting selected banks

additional authority and autonomy in

approving SBA-guaranteed loans of up to

$150,000. The report found that the program

appears to be meeting its overall objectives

and is considered by lenders to be highly

effective in increasing the capital

available to small businesses. The OIG did

find, however, that language governing

certain SBAExpress rules, regulations, and

standard operating procedures leaves room

for broad interpretation in two areas. First, it

is unclear whether SBA considers credit

scoring alone sufficient for loan

underwriting analysis. Second, there is

considerable ambiguity over whether

promissory notes are required for

SBAExpress loans. The OIG recommended

that SBA’s Office of Financial Assistance

(OFA) review the language governing each

of these areas and clarify SBA policy on

those issues. OFA agreed and subsequently

revised the SBAExpress operating

procedures to address the use of credit

scoring and promissory notes.

Agreement for Examinations of Small

Business Lending Companies

15.0 20.0 25.0 30.0 35.0 

Billions of Dollars

9/30/94

9/30/95

9/30/96

9/30/97

9/30/98

Outstanding Guaranteed SBA

$21,188,886,942

$24,811,582,381

$26,547,087,185

$29,340,744,471

$30,514,622,689

Business Loans
Semiannual Report September 1998 9

Small Business Lending Companies

(SBLCs) are non-depository lenders that

enter into agreements with SBA to provide

guaranteed loans to qualified small

businesses. SBA is the only regulator of

SBLCs and supervises them, while the OIG

has authority under the Inspector General

Act of 1978 to audit them. Presently, there

are 14 active SBLCs that account for as

much as 10 percent of SBA’s FY 1997 loan

volume and 20 percent of its dollar volume.

Given the unprecedented growth in all SBA

lending activities, the Agency has

determined that each SBLC should be

periodically examined to evaluate the safety

and soundness of its operations and ensure it

is in compliance with applicable laws and

SBA regulations. Given limited Agency

examination resources and limited OIG

audit resources, the OIG supported the

Agency’s decision to execute an agreement

with the Farm Credit Administration (FCA)

for FCA to perform examinations of SBLCs.

Several Audits of Section 7(a) Business

Loans Find Lender Non-Compliance with

Required Procedures

Recent audits in Atlanta, Georgia; Buffalo,

New York; Newark, New Jersey; Madison,

Wisconsin; and Glendale, California, found

that lenders did not comply with at least 1 of

the 22 required procedures examined during

the 5 audits. In total, 92 procedural errors

were noted in 68 loans, out of 150 loans

reviewed. The errors involved financial

data not verified with IRS data, misuse of

loan proceeds, lack of joint payee checks

and credit reports, lack of capital

injection, ineligible purposes, incorrect

size standards, adverse changes not

reported to SBA, and no standby

agreements.

These audits were requested by the Acting

Associate Administrator for Financial

Assistance. Atlanta, Buffalo, Newark,

Madison, and Glendale are five of eight

areas randomly selected for review in the

national audit, with a random sample of 30

loans drawn from all loans made in each

district from March 1996 through June

1997. Lenders did not comply with at least

one or more of the above requirements in 15

loans at Atlanta, 16 at Buffalo, 11 at

Newark, 15 at Madison, and 11 at Glendale.

The objective of the audit was to review

lenders’ compliance with 22 required

procedures. Failure to follow these

procedures increases the chance that

ineligible or risky loans will be approved.

After the eight individual district reports are

completed, the OIG will summarize the

findings in a national report. The majority of

the loans with deficiencies were originated

when SBA had limited or no oversight of the

lenders’ loan processing and disbursing. Of

the 92 deficiencies identified in the five

audits, 81 were processing or disbursing

actions not normally reviewed by or

reported to SBA under existing procedures.

In six loans, borrowers made false

statements concerning their criminal history.

For three of the six loans, the criminal

offenses were serious enough to have

precluded financial assistance and were

referred to the OIG’s Investigations

Division.

Recommendations were generally agreed to

by the directors of the five district offices

and the PLP processing center, except that

the Buffalo District Director disagreed with

two recommendations—one concerning

credit reports before disbursement and one

concerning actions to protect the

Government’s interest before default or
10 Semiannual Report September 1998

purchase request. The PLP processing center

agreed with the latter statement by the

Buffalo District Director, further stating that

SBA does not have a procedure to

recommend denial of the guarantee prior to

receipt of a purchase request from the

lender. This issue is being negotiated

currently between SBA’s Office of Financial

Assistance and the OIG.

Audit Finds Loan-Making Policy Change

Increases Risk

An audit of Section 7(a) loan processing

found that a revision of SBA loan-making

policy increased the risk of losses to SBA.

The change allowed lenders to waive the

IRS verification requirement as a means to

check the accuracy of financial information

of an existing business being acquired.

In October 1994, SBA issued Policy Notice

9000-941 to require lenders to obtain IRS

verification of financial information of

business applicants prior to loan

disbursement. When a loan was for the

purchase of another existing business, the

verification was obtained before that

business was purchased. In December 1997,

SBA revised SOP 50-10(4), Loan

Processing, to waive the IRS verification

requirement for the business to be

purchased.

The report recommended that the Office of

Financial Assistance revise the language of

SOP 50-10(4) to require IRS verification of

seller financial information for all loan

applications except when the seller provides

audited financial statements. The Acting

Associate Administrator for Financial

Assistance concurred with the

recommendation and has already begun the

modifications.

Lender’s Failure to Follow SBA

Requirements Results in $420,000 Loss

An audit of a defaulted SBA-guaranteed

loan, made by an Arkansas lender, showed

that the loan's default was the result of the

lender not following SBA requirements.

Specifically, the lender neither compared

income tax information with the business'

financial statements nor notified SBA of the

significant discrepancy between the two

records as required by the loan agreement,

materially misrepresented (overstated) the

value of the collateral, and did not perform a

proper credit analysis of projected sales.

SBA sustained a loss of about $420,000.

The audit report recommended that SBA’s

Office of Financial Assistance recover from

the lender the amount of the sustained loss.

The Acting Associate Administrator for

Financial Assistance agreed with the

recommendation and has requested an

opinion from Office of General Counsel

concerning initiation of litigation to recover

the guarantee purchase.

Lender Failed to Follow SBA

Requirements and False Information

Submitted by Borrowers

An audit of an SBA-guaranteed loan that

defaulted within 12 months of origination

found that the lender did not comply with

SBA’s processing and disbursing

requirements and that the borrower

made false statements to obtain the loan.

In 1995, SBA guaranteed a $1 million loan

to operate four retirement hotels in Florida.

About half of the hotels’ long-term debt was

owed to the estate of the owner’s father.

SBA purchased the loan a year later with a

balance of $908,043. After the loan was
Semiannual Report September 1998 11

fully liquidated, SBA sustained a loss of

approximately $189,400.

Before disbursing the loan, the lender failed

to learn that the debt owed to the estate had

been in default since October 1, 1992. One

month after the loan guarantee was

approved, the borrowers and the estate

entered into a workout agreement, a fact that

was not disclosed to SBA. The estate

eventually foreclosed on the borrowers and

took control of its operations and assets.

SBA’s ability to recover the full amount of

the outstanding debt was adversely affected

because the lender failed to execute a

binding agreement with the estate not to

pursue its debt. The lender also failed to

notify SBA of the adverse change in the

borrowers’ financial condition as required

by the loan agreement.

In addition, the borrower made several false

statements during the application process,

including failure to disclose the delinquent

status of the debt to the estate, falsely

affirming in writing that no material adverse

changes had occurred in the borrower’s

financial condition, and concealment of

prior criminal records. The audit report

recommended that SBA’s acting district

director recover from the lender the loss plus

accrued interest and remind the lender of its

obligation to comply with the terms of the

loan agreement and SBA regulations; the

acting district director agreed with the

recommendation.

Audit Report Finds Weaknesses in SBA’s

Ability to Adequately Monitor Small

Business Lending Companies

Several Small Business Lending

Companies (SBLCs) routinely did not

submit required audited financial

statements to SBA. SBLCs are nondepository lending institutions that are not

subject to oversight by State and Federal

bank regulators. SBA is solely responsible

for supervising, examining, and regulating

SBLCs. Audited financial statements are a

key tool with which to monitor the financial

stability of the SBLCs that participate in the

program. For FY 1997, 9 of 14 SBLCs had

submitted audited financial statements. The

others either submitted consolidated

financial statements of the parent company,

unaudited financial statements, or portions

thereof. The report recommended that the

Acting Associate Administrator for

Financial Assistance take steps to ensure

that all SBLCs submit annual audited

financial statements that include the

information needed to monitor compliance

with SBA capital requirements. The Acting

Associate Administrator for Financial

Assistance concurred with the

recommendation and agreed to take action to

ensure compliance with the requirement. As

of April 1998, the Office of Financial

Assistance had received audited financial

statements from all 14 SBLCs.

Activities to Enhance Fraud

Detection and Deterrence

Latest Results from Affirmative Civil

Enforcement Program

Over this reporting period, the OIG’s

participation in the Department of Justice’s

Affirmative Civil Enforcement (ACE)

program produced three successful

business loan cases, resulting in $125,159

in recoveries by SBA and $9,871 in civil

penalties. All three cases involved

allegedly fraudulent representations to

obtain loans; one of the loans, the

application for which included false

“copies” of tax returns, was stopped before

funds were disbursed.
12 Semiannual Report September 1998

OIG Briefs Members of Lender

Community

The investigations staff continued its

practice of making presentations to groups

of participating lenders. The Special

Agent in Charge of the OIG’s Los Angeles

field office gave a presentation to 19

attendees at a meeting sponsored by SBA’s

Las Vegas District Office. The presentation

highlighted the benefits to be gained from

cooperation between participants (in the

Section 7(a) and 504 programs, in this case)

and the OIG in combating waste, fraud, and

abuse in SBA’s lending programs.

Florida Couple Pleads Guilty to Making

False Statements and Concealing

Collateral

A couple who owned a crafts and fashion

manufacturer/wholesaler/import firm in

Longwood, Florida, was indicted on one

count each of making a material false

statement to SBA, making a false

statement to SBA, making a false

statement to influence a Federally-insured

financial institution, and converting SBA

collateral. The company’s vice president

subsequently pled guilty to all four counts.

His wife (the company’s president) pled

guilty to making a false statement to SBA;

in return, the Government agreed to

dismissal of the other charges against her.

The company had obtained a $75,000

LowDoc SBA-guaranteed loan in March

1996. The couple admitted falsely stating, in

the September 1995 SBA loan application,

that neither had ever been involved in a

bankruptcy; in fact, both had filed for

bankruptcy in Canada in April 1995. The

man also admitted submitting a forged

Lessor’s Agreement to the participating

lender bank in support of the loan

application. Furthermore, before filing for

bankruptcy in the United States, he

concealed inventory and equipment that was

pledged as collateral for the loan. The OIG’s

investigation was initiated based on a

referral from the participating lender bank.

New Jersey Businessman Pleads Guilty to

Making False Statements

The owner of a waterbed company in West

New York, New Jersey, was charged with

and pled guilty to one count of making

material false statements to SBA. He was

sentenced to 6 months home confinement, 5

years probation, and $12,000 restitution. The

man had failed to disclose in his 1995

application for an SBA-guaranteed loan that

he had been arrested by the U.S. Customs

Service in 1993 as he was departing for

Colombia with $50,000 in unreported

currency. He had pled guilty and was on

probation for that offense at the time of his

SBA loan application. He received a

$30,000 LowDoc business loan through a

participating non-bank lender. After the loan

was disbursed he closed the business,

defaulted on the loan, and disappeared. In

1997, he was located and arrested by

SBA/OIG agents. The participating nonbank lender referred this matter for

investigation.

Pennsylvania Corporate President Pleads

Guilty to Making False Statements

The president of an automotive repair

corporation in Philadelphia, Pennsylvania,

was indicted on and pled guilty to three

counts of making material false

statements to SBA. He had applied for a

$252,000 SBA-guaranteed loan in 1996 to
Semiannual Report September 1998 13

buy a new building for his automobile repair

business. As part of the loan application, the

man submitted purported copies of his 1994-

95 corporate tax returns, which the

participating non-bank lender found to

contain significant discrepancies when

compared to information on file with the

IRS. Each tax return claimed considerably

more income than he had reported to the

IRS. Also, in applying for the loan, he had

failed to disclose his 1992 arrest for

kidnapping and assault. The participating

lender withdrew its loan commitment when

the tax return discrepancies were discovered

and referred the matter to the OIG for

investigation.

Former Minnesota Lawman Indicted on

Eight Fraud Counts

The former Chief Deputy Sheriff of Carver

County, Minnesota, was indicted in Denver,

Colorado, on three counts of mail fraud,

two counts of wire fraud, two counts of

making a material false statement, and

one count of bank fraud. He had personally

guaranteed a $100,000 SBA loan through a

participating non-bank lender for a mailhandling franchise in Denver to be owned

by his wife. A check disbursing $80,000 of

the loan proceeds was issued for the

purchase of this franchise. The OIG’s

investigation revealed, however, that the

man forged an endorsement on the check

and used the funds for his personal benefit,

and that he submitted a falsified Personal

Financial Statement in support of his

personal guaranty. On his financial

statement, the man allegedly failed to

disclose several debts and overstated his

income. During the time period when he was

submitting the false loan documents, he had

been arrested and was awaiting trial for

allegedly misappropriating Drug Abuse

Resistance Education funds in Carver

County. He was ultimately convicted of

these charges and is currently incarcerated in

Federal prison. This investigation was

initiated based on a referral from SBA’s

Denver District Office.

President of North Carolina Computer

Consulting Firm Indicted for Making

False Statements

The president of a Charlotte, North Carolina,

computer consulting firm was indicted on

one count each of aiding and abetting the

making of a material false statement in a

loan application to a Federally-insured

bank and the making of a false statement

to influence SBA. The man was charged

with knowingly causing the submission of

false documents, including a balance sheet

that understated his firm’s accounts payable

by more than 55 percent. Based on this and

other allegedly material representations

regarding the firm’s financial condition, the

participating bank approved a $93,000 SBAguaranteed term loan and a $75,000 SBAguaranteed line of credit. The firm failed to

repay any of the $128,145 that was

disbursed to it. The OIG’s investigation was

based on a referral from SBA’s Charlotte

District Office.

Pennsylvania Emergency Vehicle

Manufacturer Pleads Guilty to

Misappropriation of SBA Collateral

The owner of a Luzerne County,

Pennsylvania, manufacturer of ambulances,

fire trucks, and paramedic units pled guilty

to one misdemeanor count of

misappropriation of SBA collateral. The

OIG’s investigation, based on a referral

from SBA’s Philadelphia District Office,

had found that he knowingly disposed of

property which was pledged as collateral to

secure a $171,842 SBA-guaranteed loan. In

the plea agreement, the man acknowledged
14 Semiannual Report September 1998

that he fraudulently pledged as collateral a

$55,842 ambulance that he also sold to a

volunteer fire company without SBA’s

knowledge or permission. The loan is in

liquidation, and the owner is in Chapter 11

bankruptcy.

Mississippi Trucking Accessories

Business Owner Indicted for

Misappropriation of Collateral and Bank

Fraud

The owner of a trucking accessories

business in Gulfport, Mississippi, was

indicted on one count of misappropriation

of SBA collateral and four counts of bank

fraud. The man obtained a $100,000

LowDoc loan for the firm. The OIG’s joint

investigation with the FBI found that he

removed, disposed of, and/or converted to

his own use various items of business

inventory that were pledged as collateral for

the SBA-guaranteed loan. The owner filed

for bankruptcy with SBA facing a loss of

$79,705. The investigation also determined

that he double-billed customer credit cards,

issued checks to several banks without

sufficient funds to cover them, forged

signatures to cash checks, and deposited

closed account checks, producing a total

bank fraud loss of $49,077.

Missouri Music Retailer Pleads Guilty to

Making False Statements

The former president of a Springfield,

Missouri, retailer of musical instruments

was charged with and pled guilty to making

false statements to SBA. The man admitted

misrepresenting on his SBA Application for

Business Loan that certain outstanding

company loans were current, when they

were actually past due. The company

received a $155,000 SBA-guaranteed bank

loan in March 1995 but defaulted after only

two payments. The OIG’s joint

investigation with the FBI was initiated

based on a referral from SBA’s Springfield,

Branch Office.

Pennsylvania Video Store Owners

Charged With Making False Statements

The owner of a video store in Erie,

Pennsylvania, and his wife were charged

with one count of making false statements

to SBA by submitting altered tax returns.

As part of the company's application for a

$110,000 SBA-guaranteed loan, the owner

submitted purported copies of the couple’s

personal Federal income tax returns for the

years 1994-96. After the participating lender

bank found that the “copy” of the 1996 tax

return reflected a higher business income

figure than had been filed with the IRS, the

loan was canceled before any funds were

disbursed. The OIG’s investigation, based

on a referral from SBA’s Pittsburgh District

Office, confirmed that the couple had

submitted altered tax returns with the SBA

loan application.

Pennsylvania Restaurateur Pleads Guilty

to Making False Statement

The president of a Bethlehem, Pennsylvania,

restaurant was charged with and pled guilty

to making a material false statement to

influence SBA to approve a $170,000

guaranteed loan to his business. When

applying for the loan, the man provided the

participating lender bank with a "copy" of

his firm's 1994 income tax return which had

been altered to show taxable income of

$49,281. In reality, the business had

sustained a loss of $161,998, as reported on

the return filed with the IRS. No loan

proceeds were disbursed; the loan
Semiannual Report September 1998 15

application was withdrawn after SBA’s tax

verification program detected discrepancies.

The case was based upon a referral from

SBA's Philadelphia District Office.

Results of Previously Reported

Investigations

! The number of individuals charged

with crimes in the wake of the investigation

of an Inglewood, California, loan brokerage

firm has more than doubled, to 13. In

addition, the number who have entered

guilty pleas has grown to 10, and the first 3

defendants have been sentenced.

• The former owner of a gas station

in Compton, California, pled guilty to

one count of making false statements

to a Federally-insured lender. He

was sentenced to 15 months

incarceration, 3 years supervised

release, and $225,000 restitution (80

percent to SBA).

• The owner of a Manhattan Beach,

California, gas station was sentenced

to 5 months in a halfway house, 5

months home detention, 5 years

supervised release, and $30,000

restitution. He previously pled guilty

to one count of making false

statements to a Federally-insured

lender.

• The former owner of a Burbank,

California, gas station was sentenced

to 4 months home detention, 3 years

supervised release, and $10,200

restitution. He previously pled guilty

to one count of making false

statements to a Federally-insured

lender.

• The former owner of a gas station

in San Bernardino, California, pled

guilty to three counts of making false

statements to a Federally-insured

lender by submitting altered

individual income tax returns for 1988-

90 with her application for a $300,000

SBA-guaranteed loan.

• The owner of a car wash in Lomita,

California, pled guilty to one count of

making a false statement to a

Federally-insured lender by

submitting altered individual income

tax returns for 1987-89 with his

application for a $1,000,000 SBAguaranteed loan.

• A Harbor City, California, tax

preparer was charged with and pled

guilty to three counts of aiding and

abetting the making of false

statements to a Federally-insured

lender. The man assisted principals of

the loan brokerage firm by preparing

fraudulent tax returns (some fictitious,

others altered), fraudulent personal

financial statements, fictitious profit

and loss statements, and other false

documentation for their clients.

• A Los Angeles, California,

plumbing contractor was charged with

and pled guilty to one count of

making a false statement to a

Federally-insured lender by

submitting altered individual income

tax returns as part of his application

for a $500,000 SBA-guaranteed loan.

• The owner of an oriental rug firm

in Beverly Hills, California, was

charged with and pled guilty to one

count of fraudulent receipt of money

from a bank transaction for falsely

representing the purpose of his $1

million SBA-guaranteed loan.
16 Semiannual Report September 1998

• The former co-owner of a West

Covina, California, gas station was

charged with and pled guilty to one

count of making false statements to

influence a Federally-insured lender

for submitting altered individual

income tax returns with his application

for a $1 million SBA-guaranteed loan.

A married couple, the former coowners (with the man discussed in

the preceding paragraph) of a West

Covina, California, gas station, was

indicted on four counts of making

false statements to influence a

Federally-insured lender. They

allegedly submitted altered income

tax returns with their application for a

$1 million SBA-guaranteed loan.

• The former owner of a gas station

in Fontana, California, was indicted on

six counts of making false statements

to a Federally-insured lender for

allegedly submitting a false Source of

Cash Injection letter, a false personal

financial statement, a false SBA

settlement sheet, and altered

individual income tax returns with his

application for a $1 million SBAguaranteed loan.

This investigation focused on loans

submitted to a California bank by the

brokerage firm. The firm’s portfolio at the

bank totaled approximately 170 loans,

originally valued at more than $60 million.

Partially as a result of the default rate of

these allegedly fraudulent loans, the Office

of the Comptroller of the Currency closed

the bank in April 1994. The investigation

has focused on a sample of these loans and

is continuing.

! The owner of a now-defunct tractor

dealership in Shubuta, Mississippi, was

convicted on one count of making a

material false statement to obtain a

$150,000 SBA-guaranteed loan. The trial

jury found that he represented on a Schedule

of Collateral (SBA Form 4, Schedule A) that

he already owned, and would grant the

participating lender bank a first security

interest in, inventory worth $99,373 when,

in fact, he had no such inventory.

! A co-owner of a school for automotive

machinists in Houston, Texas, pled guilty to

one count of conspiracy to make false

statements to a Federally-insured financial

institution. He was sentenced to 1 year

probation, $25,000 restitution, and a $5,000

fine. He was also ordered to make monthly

loan payments to SBA. As part of the plea

agreement, the Government agreed to

dismissal of all the other charges on which

he and his wife/co-owner had been indicted.

! A trial jury found the former owner of a

retail furniture store in Garden Grove,

California, guilty on five counts of making

false statements to influence a Federallyinsured financial institution. The woman

was the fifth individual convicted as a result

of an extensive investigation of a southern

California loan packager and his clients.

! A married couple who formerly owned a

convenience store in San Antonio, Texas,

was charged, in a superseding indictment,

with conspiracy to defraud SBA. This new

count was in addition to two previous counts

of making false statements in their

application to SBA for a $131,100

handicapped-assistance business loan with

which the couple had originally been
Semiannual Report September 1998 17

charged. They were charged with devising a

scheme to conceal facts that, if known by

SBA, would have resulted in the declination

of their loan application.

! A business consultant in Menomonee

Falls, Wisconsin, was sentenced to 4 months

home confinement with electronic

monitoring, 2 years probation, and $38,944

restitution. She previously pled guilty to one

count of making a material false statement

to SBA to obtain a $25,000 SBA-guaranteed

loan.

! The OIG’s investigation of a $155,000

SBA-guaranteed loan made for one grocery

retailer to buy another has led to two recent

results.

• The owner and president of a

grocery retailer in Kennesaw,

Georgia, was sentenced to 4 months

incarceration, 4 months home

detention, 1 year supervised release,

and $133,000 restitution to SBA. He

previously pled guilty to one count

of making a material false

statement in an SBA-related matter.

• The owner and chief executive

officer of the firm which had

brokered the sale of the second

grocery retailer was convicted of one

count of conspiracy, three counts of

making material false statements to

SBA, and three counts of making

false statements to a Federallyinsured bank. The man was found to

have conspired with the purchaser and

others to conceal the true purchase

price from the participating lender

bank and SBA.

! The former owner of a Seaside Heights,

New Jersey, bar and restaurant was

sentenced to 5 months imprisonment and 5

months of home confinement. He was also

ordered to pay restitution in an amount not

yet determined. The man had pled guilty to

making material false statements in

applying for, and accounting for the use of

proceeds of, a $616,000 SBA-guaranteed

loan to his business.

! A loan applicant on behalf of a

Neodesha, Kansas, building materials

manufacturer pled guilty to making a

material false statement to SBA by

signing an SBA loan agreement as president

of the company. He was sentenced to 21

months imprisonment, 3 years supervised

release, and $479,740 restitution.

! The former president and the former

secretary (his wife) of a wood-pellet

manufacturing company in Erie, Kansas,

pled guilty to two counts and one count,

respectively, of making material false

statements to SBA regarding the

company's application for a $147,650 SBAguaranteed loan. As part of the plea

agreements, the Government agreed to

dismissal of all the other charges on which

the couple had been indicted. The husband

was sentenced to 4 months in a halfway

house and 2 years supervised release, the

first 4 months in home confinement; the

wife was sentenced to 28 months probation,

the first 4 months in home confinement.

They were sentenced jointly to pay $97,874

restitution.

! The president of a Quincy,

Massachusetts, wholesaler of specialty

coffees and related items pled guilty to five

counts of making false statements on loan

applications to a Federally-insured

financial institution.
18 Semiannual Report September 1998

! The president of a now-defunct wastepaper recycling company in Washington,

D.C., was convicted on one count each of

making false statements in a loan

application to a Federally-insured bank,

making false statements to SBA, and

perjury.
Semiannual Report September 1998 19

Disaster Loan Program

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

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

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

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

and non-profit organizations to rebuild. SBA's disaster loans are also a critical source of

economic stimulation in disaster-ravaged communities, helping to energize employment and

stabilize tax bases.

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

SBA program helps to defray Federal costs. When victims need to borrow to repair uninsured

damages, the low interest rates and the long terms available from SBA make recovery more

affordable. Because SBA tailors the repayment of each disaster loan to each borrower's

capability, unnecessary interest subsidies paid by the taxpayers are avoided.

The need for SBA disaster loans is unpredictable. During FY 1998, SBA approved 30,154

loans. Since the inception of the program, SBA has approved more than 1,416,000 disaster

loans valued at some $26 billion. As of the end of FY 1998, the SBA disaster loan portfolio

included more than 277,000 loans worth over $6.9 billion.

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

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

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

all sizes, and non-profit organizations and (2) economic injury disaster loans which provide

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

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

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

Worth, Texas (Area 3); and Sacramento, California (Area 4).
20 Semiannual Report September 1998

Summary of OIG Activity / Disaster Loan Program

Audit Reports Issued 1

Audits Underway 2

Indictments Resulting from Investigations 15

Convictions Resulting from Investigations 5

Investigations Closed / Remaining Inventory 10 / 75

Investigations : Restitutions / Fines / Other Recoveries $412,228 / $4,383 / $0

Investigations: Declination of Loans Due to Name Checks $548,227

Reviews of Proposed Regulations 2

Reviews of Other Issuances 2

Figure 2

3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50

Billions of Dollars

9/30/93

9/30/94

9/30/95

9/30/96

9/30/97

9/30/98

SBA Disaster Portfolio

$6,747,768,714

$5,444,272,458

$6,969,759,194

$3.9 bil.

$6,915,620,234

$7,155,135,998
Semiannual Report September 1998 21

Efforts to Improve SBA Program

Management

Audit of Declined Disaster Loans Finds

Loan Decisions Consistent with

Regulations

An audit of declined disaster loans found

that decisions to decline loan applications

were generally consistent with

regulations. The audit was requested by the

Associate Administrator for Disaster

Assistance (AA/DA) to determine whether

the decline rate was higher than necessary

due to inappropriate eligibility decisions

made by SBA disaster employees. A review

of 97 declined applications identified only 1

for which the declination was questionable.

The application was declined because the

loan officer decided that the applicant’s

available cash was not sufficient to service

the disaster loan. The audit also found that

the Agency’s decline rate could have been

reduced if unqualified applicants were

declined during the initial screening process.

In the sample, immediate decline procedures

were not used for 10 of 97 applications that

did not meet minimum household income

levels. This test is usually applied by the

Federal Emergency Management Agency in

the course of teleregistration. In addition to

lowering the decline rate for accepted

applications, the use of immediate decline

procedures may save money and reduce loan

officer workload. Applications accepted for

processing, even if later declined, cost a

minimum of $121 per application for

disaster loss verification.

The audit recommended that the AA/DA

summarily decline home loan applications at

intake when applicants do not meet the

minimum income test. The AA/DA agreed

with this recommendation.

OIG Sends Report to Capitol Hill

Outlining Disaster Oversight

Accomplishments

In an effort to keep the Congress fully

informed of critical issues, the OIG sent a

report to its Congressional oversight and

appropriations committees on May 29, 1998,

outlining the OIG's accomplishments in

the area of disaster oversight since 1994.

Special no-year funding was made available

to the OIG in that year to bolster its

oversight efforts in this burgeoning, highrisk program area. Together with some

additional funding in subsequent years,

almost $4 million in total will have been

spent on this initiative by the end of FY

1998. The letter outlined the following

accomplishments:

• Issuance of 6 audit reports with

significant recommendations

concerning loan processing, disasterfunded loan servicing personnel,

electronic disbursement of disaster

loan funds, disaster loan origination

and servicing, use of the Credit Alert

Interactive Voice Response System,

and disaster home loan processing.

• Initiation of 3 more audits

concerning disaster loan approval

rates, disaster home loan servicing,

and early defaulted disaster loans.

• Closure of 92 investigations,

with 92 indictments and 85

convictions.

• Dollar results totaling $15.6

million, for a return on investment of

about $4.5 for every $1 spent.

Activities to Enhance Fraud
22 Semiannual Report September 1998

Detection and Deterrence

Southeastern Businessmen Indicted on

Host of Charges Related to Sale of

Airplane

A Valdosta, Georgia, businessman and the

owner of a Miami, Florida, air charter and

air cargo company were indicted on one

count of conspiracy, two counts of mail

fraud, and two counts of making material

false statements to influence SBA to

disburse a $288,500 disaster loan to the

Florida firm. The amount of the loan was

based on representations to SBA as to what

it would cost the firm to replace an airplane

destroyed by Hurricane Andrew. The

Georgia businessman, who purportedly sold

the Florida firm a replacement airplane,

allegedly participated with the Florida man

in a scheme to deceive SBA through the use

of such falsified documents as a purchase

contract and a bill of sale. They represented

that the value of the aircraft was $290,000;

however, the OIG’s investigation found it

was only worth $46,000. The OIG initiated

this investigation, which is continuing,

based on a referral from the FBI.

California Physician Pleads Guilty to

Making False Statements

A Beverly Hills, California, medical doctor

who had received home and business

disaster loans was indicted on and pled

guilty to two counts of making a false

statement to SBA. He claimed to have

incurred both personal and real property

damage at his residence following the 1994

Northridge earthquake, when in fact the

property was a rental and the personal

property damage was actually incurred by

his tenant. Also, the doctor submitted an

invoice that overstated the extent of real

property damage incurred at the rental. The

OIG conducted this investigation at the

request of the U.S. Attorney's Office after a

Medicare fraud investigation uncovered

indications that the doctor may have made a

false statement to obtain his SBA loans. He

was indicted in February 1998 for allegedly

overbilling Medicare by more than $216,000

and was freed on $250,000 bail. The U.S.

Attorney's Office subsequently learned that,

after he was advised that his second

indictment (on the SBA violations) was

imminent, the doctor withdrew $2.39

million from his savings account. In

anticipation of his potential flight, a criminal

complaint based on the SBA violations was

issued, and he was arrested the same day.

During a search incident to the arrest, the

$2.39 million was seized as evidence of his

intent to flee. His bail was revoked and he

remains in custody pending sentencing.

Ohio Contractor Indicted for Grand

Theft

The president of a Coal Grove, Ohio,

concrete contractor was indicted on two

felony counts, grand theft by deception

and grand theft, in the Lawrence County,

Ohio, Court of Common Pleas. The firm had

obtained disaster loans totaling $60,300 for

damage resulting from a February 1997

flood. The OIG’s joint investigation with

the Coal Grove Police Department disclosed

that, between November 1997 and January

1998, the firm's owner requested and

obtained $27,700 of additional disaster loan

proceeds by falsely stating that he had a

water well damaged beyond repair by the

flooding and that consequently he was

paying excessive utility bills. The

investigation earlier found that he had

illegally obtained more than $5,000 worth of

water from the Village of Coal Grove

without its consent. He had allegedly

constructed a series of water pipes and
Semiannual Report September 1998 23

valves to bypass the water meter owned by

the Village of Coal Grove. When questioned

about how a concrete contractor could go

without using any village water for more

than a year, the man reportedly explained

that he had been getting water from the well

(which he had told SBA had been damaged

beyond repair a year earlier).

Los Angeles Resident Indicted for

Making False Statements

A resident of Los Angeles, California, was

indicted on 11 counts of making material

false statements to SBA and other Federal

agencies and 3 counts of making false

statements to a Federally-insured

financial institution. The OIG’s joint

investigation with the IRS revealed that the

woman submitted fictitious Federal tax

returns and altered and forged IRS tax

transcripts in support of applications for

loans, including a $153,000 disaster home

loan approved by SBA following the

Northridge earthquake. The OIG initiated

the investigation based on a referral from

SBA’s Disaster Assistance Area 4 Office,

which detected discrepancies associated

with the tax verification documents she

submitted after the first $25,000 was

disbursed. Subsequent investigation

determined that she had submitted similar

fictitious tax returns to obtain a loan

guaranteed by the Department of Housing

and Urban Development and to obtain a

home mortgage from a Federally-insured

lender.

Illinois Construction Company Owner

Indicted for Making False Statements

The president and owner of a construction

company in Moline, Illinois, was indicted on

four counts of making material false

statements in connection with a $151,000

SBA physical damage disaster loan made to

an Orion, Illinois, campground after the

Midwest flood of 1993. The man allegedly

caused the omission of his name (he was an

officer of the company which owned the

campground and had a controlling interest in

it) on the loan application question asking

for the names of the applicant’s managers

and officers, so as to avoid having to

disclose that he had been convicted of and

imprisoned for fraud and was still on

supervised release. After the loan was

approved but before SBA had disbursed any

funds, a construction agreement was

submitted outlining the terms under which

the construction company would replace and

repair the campground's disaster-damaged

property. The OIG’s investigation

determined that he caused that document to

be falsified in order for the construction

company to realize $70,000 more in profit.

Also, according to the indictment, he falsely

represented that the loan proceeds would be

used solely to rehabilitate and replace

disaster damage suffered by the

campground, and then used disaster loan

proceeds to pay off its pre-existing debt, an

ineligible use. This investigation was

initiated based on a referral from SBA’s

Disaster Assistance Area 4 Office.

California Loan Packager Pleads Guilty

to Making False Statement

A Los Angeles, California, loan packager

was charged with and pled guilty to one

count of making a false statement to

influence a Federally-insured lending

institution. The OIG’s investigation of the

packager, conducted jointly with the U.S.

Secret Service, was initiated based on

information developed during the

investigation of a fashion retailer whose

sentencing is described below on page 27.

The investigation showed that the packager
24 Semiannual Report September 1998

provided the taxable income figures,

submitted with altered Federal tax returns,

that qualified that borrower for an SBAguaranteed bank loan and two disaster loans.

The borrower subsequently defaulted on all

three of his SBA loans, which resulted in a

loss to SBA of $160,000. Pursuant to the

packager’s plea agreement, however, she

was only charged with the $83,000 loss

attributable to his SBA-guaranteed loan.

Five Indicted for Conspiracy and Making

False Statements in North Dakota

Business School Fraud

Five individuals were indicted on nine

counts, including conspiracy to defraud

SBA, in a scheme to obtain a $122,900

disaster loan for a private business school in

Grand Forks, North Dakota. The female

defendant, who at the time owned five other

private business schools, was operating and

in the process of purchasing the subject

school (although that transaction was never

completed) when the Red River flooded it in

April 1997. Another defendant, who was

then her husband, was employed as her data

processing manager and an instructor and

was the corporate secretary for certain

corporations she owned. A third defendant

was the controller for certain corporations.

A fourth defendant was her brother and the

director of the subject school. The fifth

defendant was a salesman for a computer

store in Fargo. In addition to conspiracy, the

indictment charged the couple and the third

and fourth defendants with making false

statements to SBA regarding withholding

taxes payable and computers purportedly

purchased for the subject school. The

subject school and all the schools actually

owned by the female defendant were closed

by January 1998, and the borrower made no

payments on the disaster loan it received

from SBA. The investigation leading to this

indictment was a joint effort by the

SBA/OIG, the U.S. Department of

Education’s OIG, and the IRS Criminal

Investigations Division. It was initiated

based on a referral from SBA’s Disaster

Assistance Area 3 Office through SBA’s

Fargo District Office.

California Model Agency Owner Indicted

for Making False Statements and Bank

Fraud

The owner of a model and talent agency in

Los Angeles, California, was indicted on

seven counts of making material false

statements to SBA. He obtained a $42,700

disaster loan for his business following the

1992 civil unrest. He also was approved for

a $50,700 disaster home loan following the

1994 Northridge earthquake, but only

$35,000 was disbursed before SBA received

a Notice of Foreclosure on the property. The

OIG’s investigation, initiated based on

information provided by SBA’s Disaster

Assistance Area 4 Office, found that the

talent agency was not looted during the civil

unrest as the owner had claimed on his

disaster loan application. In addition, he

allegedly provided SBA with false invoices

for inventory he claimed to have purchased

to replace the inventory he claimed had been

stolen at gunpoint during the civil unrest and

for repair work to his property which he

knew was soon to be lost due to foreclosure.

The investigation also revealed that he

allegedly submitted copies of altered tax

returns to obtain approval of his disaster

home loan application. Based on subsequent

investigation by the OIG, the businessman

was indicted on four counts of bank fraud.

The bank fraud investigation was initiated

after it was discovered that he allegedly had

misused a portion of the proceeds of his

disaster home loan to purchase real property.
Semiannual Report September 1998 25

The investigation also revealed that he had

applied for a $315,000 residential loan,

allegedly falsely representing that he did not

have an ownership interest in real property

within the 3-year period prior to the date of

the loan application. The investigation

further revealed that he allegedly provided a

fictitious W-2 Wage & Tax Statement Form

to obtain approval of the loan. In addition,

the businessman obtained a $25,000 Title I

property improvement loan, administered

and guaranteed by the U.S. Department of

Housing and Urban Development (HUD).

The investigation showed that he failed to

disclose on his application for the Title I

loan his indebtedness to SBA for his disaster

loans and provided altered tax returns to

obtain approval of the loan. This portion of

the investigation was conducted jointly with

HUD’s OIG.

Results of Previously Reported

Investigations

! The former owner of a Los Angeles,

California, lighting company was sentenced

to 27 months imprisonment, 3 years

supervised release, and $4,033 in fines. He

previously pled guilty to one count of

making false statements to SBA and one

count of making a false statement on a

bankruptcy petition. 

! The owner of a Los Angeles, California,

mini-market pled guilty to one count of

making false statements to SBA. He was

sentenced to 4 months home confinement, 5

years probation, and $22,500 restitution.

! A Culver City, California, resident was

sentenced to 5 months incarceration, 5

months in a halfway house, and $22,037

restitution to SBA. He previously pled guilty

to one count of making material false

statements to SBA and one count of misuse

of a Social Security number.

! A resident of Surf City, North Carolina,

was sentenced to 1 year incarceration, 3

years supervised release, $6,300 restitution,

and a $100 special assessment. He

previously pled guilty to one count of

stealing Federal property.

! The owner of a nurse registry in Los

Angeles, California was sentenced to 15

months incarceration, 5 years supervised

probation, and restitution of $161,691 to

SBA and of $50,000 to a southern California

bank. He previously pled guilty to one

count of filing a false claim with SBA and

one count of making a false statement to a

Federally-insured lender.

! The owner of an arcade game

distributor in Roanoke, Virginia, pled guilty

to one count of making false statements to

SBA. He was sentenced to the 72 days he

had been incarcerated since his arrest, 5

years probation, $104,700 restitution, and a

$50 special assessment.

! A husband and wife who owned an auto

parts franchise in New Hebron, Mississippi,

were sentenced. The husband was sentenced

to 18 months incarceration and 3 years

supervised release; the wife was sentenced

to 6 months home confinement and 3 years

supervised release. In addition, they were

sentenced jointly to pay $157,736

restitution. They previously pled guilty to

one count of conspiracy to defraud the

Government.

! The former co-owner of a fashion

retailer in Los Angeles, California, was

sentenced to 3 years probation and $25,000

restitution to SBA. He previously pled guilty
26 Semiannual Report September 1998

to one count of making a material false

statement to SBA.

! A Decatur, Georgia, school teacher who

had applied for a $23,000 disaster loan for

losses to four rental units she owned on St.

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

2 years probation and a $100 special

assessment. She was previously found

guilty on two counts of making false

statements to SBA by providing altered

“copies” of tax returns for the years 1993-94

with the loan application she submitted

following Hurricane Marilyn.

Small Business Investment Companies

The primary purpose of the Small Business Investment Company Program is to provide a source

of long-term debt and equity capital to new or expanding small businesses. Small Business

Investment Companies (SBICs) are independently-owned and managed, profit-making

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

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

companies they finance.

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

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

their capital. Such financing, termed "leverage," is provided through either debentures or

participating securities issued by the SBIC. The participating security was created by the Small

Business Equity Enhancement Act of 1992 to serve the needs of SBICs investing principally in

equity securities, which do not generate sufficient income to cover the interest on debenture

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

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

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

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

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

certificates.

As of the end of FY 1998, there were 321 licensed and active SBICs, with a total capitalization

of $9.0 billion (private capital of $6.3 billion and committed leverage of $2.7 billion). Included

are 75 Specialized SBICs (SSBICs) which were licensed under Section 301(d) of the Small

Business Investment (SBI) Act to invest only in small businesses owned and managed by

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

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

1998 there were 128 SBICs in liquidation owing SBA approximately $198 million. While the
Semiannual Report September 1998 27

SBIC program level in FY 1998 was $1.16 billion, the FY 1999 program level is projected to be

$1.5 billion, signaling a continuing expansion of the program.

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

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

Business Opportunity Enhancement Act of 1992 transferred the responsibility for examining

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

is now responsible for these examinations, the OIG continues to have authority to audit the SBIC

program pursuant to its responsibility to oversee all Agency programs and activities.
28 Semiannual Report September 1998

Summary of OIG Activity / Small Business Investment Companies

Indictments Resulting from Investigations 1

Investigations Closed / Remaining Inventory 1 / 12

Investigations: Restitutions / Fines / Other

Recoveries

$0 / $162,550 / $0

Figure 3

Activities to Enhance Fraud

Detection and Deterrence

Florida Financial Consultant Charged

with Fraud

A West Palm Beach, Florida, man who was

a consultant to the officers of a now-failed

small business investment company (SBIC)

in New York City was arrested based on a

subsequently unsealed indictment charging

him with one count of financial institution

fraud. Between February 1991 and May

1992 the man, without SBA‘s approval,

allegedly acquired control over the day-today operations of the SBIC, a financial

institution licensed by SBA, and executed a

scheme to defraud it. The indictment

charges that his scheme involved

misappropriating and embezzling funds and

other assets intended for or belonging to the

SBIC and guaranteed by SBA. In

furtherance of the alleged scheme, he

opened accounts at three banks in a

corporate name deceptively similar to the

name of the SBIC. The man allegedly

controlled the deceptively named entity and

its various accounts and deposited checks

1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00 2.10 2.20 

Billions of Dollars

9/30/95

9/30/96

9/30/97

9/30/98

Outstanding SBIC Financings

 $1,782,899,088

 $1,839,871,565

$2,079,711,887

 $1,329,944,348
Semiannual Report September 1998 29

made payable to the SBIC into the bogus

accounts and converted the proceeds. Over

$1 million was allegedly misappropriated in

this fashion. In May 1992 the SBIC failed

and was placed in receivership. SBA,

honoring its guaranty, was obligated to pay

$4.7 million to the bank that issued the

Federally-guaranteed debentures. The OIG’s

joint investigation with the FBI was based

on a referral from SBA’s Office of General

Counsel.

Results of Previously Reported

Investigations

! An officer and director of a specialized

small business investment company

(SSBIC) in Farmington Hills, Michigan, was

ordered, jointly with another SSBIC officer,

to pay $325,000 to the Government. The

two men had each pled guilty to

misdemeanor counts of misapplying funds

of a financial institution and failing to file

a required Currency Transaction Report.

(The other SSBIC officer was sentenced

earlier.)

! The former owner of a restaurant in La

Mesa, California, was convicted of two

counts of bank fraud and acquitted of a

third bank fraud count. He was convicted

on two counts of fraudulently obtaining

loans from two southern California financial

institutions. He was acquitted on the count

involving a $465,000 loan from a nowdefunct SSBIC.
30 Semiannual Report September 1998

Surety Bond Guarantees

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

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

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

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

business concern.

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

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

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

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

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

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

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

of the Treasury.

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

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

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

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

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

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

SBA can guarantee bonds for contracts with a face value of up to $1.25 million. In FY 1998,

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

program, was $414 million. The appropriated guarantee authority level for FY 1998 surety

bond guarantees was $1.672 billion; in FY 1999, it is expected to be $1.672 billion.

Summary of OIG Activity / Surety Bond Guarantees

Audit Reports Issued 4

Audits Underway 4

Investigations Closed / Remaining Inventory 0 / 3

Investigations: Declinations Due to Name Checks 4

Reviews of Other Issuances 1
Semiannual Report September 1998 31

Figure 4

Efforts to Improve SBA Program

Management

Audit of Surety Bond Guarantees Finds

Inappropriate Fee Refunds Caused by

Conversion to New System

An audit of 48 bonds showed that in FY 97,

19 bonds had inappropriate fee refunds

totaling $99,330. The inappropriate

refunds occurred because of system

conversion problems, data entry errors

related to conversion to a new computer

system, and lack of controls for

preventing and detecting data entry

errors.

The data entry errors that caused

inappropriate refunds included duplicate

recording of fee collections, creation of

duplicate bond records, entry of incorrect

premium amounts, cancellation of the wrong

bonds, and a duplicate cancellation. The

Surety Bond Guarantees (SBG) system did

not have edit checks to ensure correct surety

premium amounts were entered, and there

were no warning flags to identify

cancellation dates that were an unreasonable

period of time after bond approval dates.

The SBG system did not have controls to

detect refund errors such as reports to

identify abnormal conditions.

The audit recommended that the Associate

Administrator, Office of Surety Guarantees

(AA/SG) recover the $87,325 still due SBA

out of the inappropriate fee refunds of

$99,330. Other audit recommendations

included developing data entry edit checks

for the SBG system and developing reports

to identify bonds with negative liability

accounts balances or unreasonable fee

revenues. The AA/SG stated that many of

the inappropriate fee refunds cited occurred

shortly after the conversion to the new

computer system. As those problems have

been identified, SBG and the Office of Chief

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

Millions of Dollars

Surety Bond Guarantees

SBA's Contingent Liability

SBA share for 1996 : $724,596,082

SBA share for 1995: $964,889,948

SBA share for 1997 : $614,876,018

SBA share for 1998 : $413,877,315
32 Semiannual Report September 1998

Information Officer have made changes to

correct them. The AA/SG, however, agreed

with the recommendations and has taken

further steps to ensure that fee refunds are

valid and fee discrepancies are promptly

reconciled.

Audits of Three Preferred Surety Bond

Companies Found Inappropriate Bond

Guarantees and Claims

The OIG issued three contract audits of

claims submitted to SBA by surety

companies in Calabasas, California;

Philadelphia, Pennsylvania; and Seattle,

Washington. The audits were requested and

funded by the AA/SG. The audits found that

the sureties did not always comply with

SBA’s policies and procedures for

underwriting; claimed unallowable

expenses; and calculated fees accurately,

but did not remit them to SBA in a timely

manner. pecifically, the sureties issued

bonds after work had commenced, issued

bonds after the principal had defaulted on

prior bond, failed to obtain a general

indemnity agreement, issued bonds for a

single project that exceeded the statutory

limit, misallocated a loss between two

bonds, did not maintain all required

documentation, and did not remit recoveries

and surety fees to SBA in a timely manner.

The audits identified inappropriate claims of

$687,639, inappropriately obtained SBA

bond guarantees of $934,967, and

unremitted fees of $274,724.

The reports recommended that the AA/SG

seek reimbursement on ineligible bonds,

deny payment on any future claims on the

remaining ineligible bonds, direct the

sureties to revise policies and procedures,

and obtain surety fees owed to SBA. The

AA/SG concurred with the finding and

recommendations on two of the three audits.

The AA/SG generally agreed with the

findings and recommendations of the third

audit, but stated that the recommendations

may require legal interpretation prior to

implementation.
Semiannual Report September 1998 33

Government Contracting

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

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

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

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

Subcontracting Assistance, Certificate of Competency, Natural Resources Sales

Assistance, and the Procurement Marketing Access Network (PRO-Net).

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

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

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

procurement center representatives assigned to major Federal acquisition activities.

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

the Government’s large prime contractors. This program objective is carried out by

commercial market representatives who monitor the procurement activities of the large prime

contractors.

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

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

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

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

contract’s requirements, it can appeal to SBA. After reviewing a firm's capabilities, SBA can

issue a COC that requires the contracting officer to award the contract to that business.

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

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

leases, and other mineral leases.

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

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

contractors. Federal agencies and large prime contractors both use PRO-Net as a resource in

identifying small businesses for procurement opportunities. Small businesses use this

interactive mechanism to market their products and services.
34 Semiannual Report September 1998

Summary of OIG Activity / Government Contracting

Investigations Closed / Remaining Inventory 0 / 4

Reviews of Proposed Regulations 4

Reviews of Other Issuances 5

Efforts to Improve SBA Program

Management

Final HUBZone Regulations Reviewed

The OIG reviewed and commented on a

draft of the final regulations implementing

the new HUBZone program established by

Title VI of the Small Business

Reauthorization Act of 1997, P. L. 105-135,

enacted December 2, 1997. The HUBZone

program provides Federal contracting

assistance to small businesses located in

“historically underutilized business zones

(HUBZones).”

The OIG recommended several changes to

reduce potential program abuse or

inefficiencies, including strengthening the

“non-manufacturing” rule to preclude

HUBZone companies from making minor

modifications to non-HUBZone

manufactured products and then selling the

product as a HUBZone product; eliminating

the double price evaluation preferences for

small and disadvantaged businesses located

in HUBZones; and requiring the HUBZone

companies to retain documents for six years

rather than the proposed four years so as to

preserve evidence and not interfere with

prosecution or litigation under various

criminal and civil statutes of limitations.

The Agency changed the final regulations to

incorporate a significant number of the

OIG’s recommendations prior to their

publication.

Small and Disadvantaged Business (SDB)

Regulations Reviewed

The OIG reviewed a draft of proposed final

amendments to 13 CFR Part 124, governing

the SDB program, and provided numerous

comments to the Agency for its

consideration in developing new regulations.

The OIG’s comments focused on such issues

as determinations of disadvantaged status,

character determination and tax verification

as part of SDB certification, limits on the

number of joint ventures, qualification

standards and tenure rights of private

certifiers, certifier fees, self-certification, the

presumption of eligibility of former Section

8(a) firms for SDB certification, and protests

of SDB status.
Semiannual Report September 1998 35

Minority Enterprise Development

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

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

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

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

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

economically disadvantaged individuals and also meet other program eligibility

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

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

sector competition upon graduation from the program.

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

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

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

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

September 30, 1998, based on preliminary data pending the final Federal Procurement Data

System report, there were 4,941 approved program participants. In FY 1998, active Section

8(a) program participants received 4,276 contracts and 22,036 modifications with an

aggregate value of $5.2 billion. Generally, Section 8(a) contracts with estimated values,

including all options, of more than $5 million (manufacturing) or $3 million (all other

industries) must be competed among eligible Section 8(a) program participants. The vast

majority of the contracts awarded under the program, however, have estimated values below

these two thresholds and are awarded on a sole-source basis.

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

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

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

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

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

income or high unemployment.

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

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

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

$35 billion audit, inspection, and investigation universe.
36 Semiannual Report September 1998

Summary of OIG Activity / Minority Enterprise Development

Audit Reports Issued 2

Investigations Closed / Remaining Inventory 1 / 21

Investigations: Declinations Due to Name Checks 4

Investigations: Cases Referred to Other Agencies 1

Review of Proposed Regulations 1

Reviews of Other Issuances 13

Efforts to Improve SBA Program

Management

Audit Finds Ineligible 8(a) Sole Source

IDIQ Contracts Awarded Under GSA’s

Federal Acquisition Services for

Information Technology (FAST) Program

A limited review of 157 sole source

Indefinite Delivery/Indefinite Quantity

(IDIQ) Section 8(a) contracts awarded by

the Federal Telecommunications Service of

the General Services Administration, Kansas

City, found that GSA should not have

awarded, and SBA should not have

accepted, the contracts into the Section 8(a)

Program. Specifically, the contracts did

not meet Federal Acquisition Regulation

requirements for IDIQ contracts, did not

comply with SBA’s regulations that 8(a)

contracts have a requirement, and may

have provided a loophole whereby

procuring offices could circumvent the

competitive requirement by dividing one

requirement into multiple contracts. As

of March 2, 1998, the OIG estimated that

GSA could potentially place approximately

$400 million in orders against the 157

contracts. During the audit, two additional

offers were made to SBA’s Washington

District Office with a cumulative value not

to exceed $6 million. After discussions with

the auditor, those offers were not accepted

into the 8(a) Program.

The report recommended that the Acting

Associate Administrator for Minority

Enterprise Development (AA/MED) identify

any other inappropriately awarded sole

source 8(a) IDIQ contracts and develop an

agreement with GSA to ensure that no

additional orders are placed against such

contracts and no options are exercised.

Auditors also recommended that SBA not

accept the two additional GSA offerings for

sole source 8(a) IDIQ contracts made during

the audit. The Acting AA/MED agreed with

the majority of the audit’s recommendations.
Semiannual Report September 1998 37

Audit Recommends Improved Criteria

for 8(a) Manufacturing Contracts

The OIG completed a Section 8(a) audit of

four National Oceanic and Atmospheric

Administration contracts classified as

manufacturing contracts under Standard

Industrial Classification (SIC) code 3571

(Electronic Computers). The audit was

conducted to determine if SBA applied the

criteria in Title 13, Code of Federal

Regulations (CFR) Part 121, Section 406, in

determining whether the four contractors

were qualified to provide the computer

workstations and related equipment as the

manufacturers, because the equipment

supplied bore the trademarks and logos of

large computer manufacturing companies.

The audit found that SBA had not applied

the manufacturing criteria. Further, even

if SBA had applied the criteria, the

regulations allow for subjective judgments

when assessing whether a contractor is a

manufacturer, and SBA had not provided

any interpretative guidance for applying the

regulatory requirements. As a result, SBA

manufacturing regulations may have been

applied inconsistently or not at all, and there

was no assurance that SBA was developing

and assisting small business manufacturers

as intended by the Section 8(a) program. For

example, the audit found that large

businesses supplying the basic computer

system received the majority of contract

funds.

The report recommended that the Associate

Deputy Administrator for Government

Contracting and Minority Enterprise

Development (ADA for GC/MED) provide

definitive guidance and definitions to

evaluate the manufacturing criteria. The

ADA for GC/MED agreed with the

recommendation and plans to solicit

comments from the business community,

particularly businesses in the computer

industry.

Proposed Section 8(a) Regulations

Reviewed

The OIG reviewed and commented on a

draft of proposed final amendments to 13

CFR Parts 121, 124, and 134 that would

amend both eligibility requirements for and

contractual assistance provisions within the

Section 8(a) Business Development (8(a)

BD) program. While the OIG endorsed the

efforts to streamline the operations of the

program and clarify the eligibility

requirements, it raised a number of

substantive concerns, including the criteria

for determining economic disadvantage; the

potential for possible abuse by allowing

SBA to accept a SIC code for a Section 8(a)

firm that is not necessarily the most

reasonable; the need for clarification in

determining when a company should be

graduated; and the need for further criteria

for granting a waiver of the sole source

ceiling in “the best interests of the

Government.”
38 Semiannual Report September 1998

Entrepreneurial Development (Business Education and Training)

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

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

Entrepreneurial Development.

SBA established the Small Business Development Center (SBDC) program to make

management assistance and counseling widely available. SBDCs offer “one-stop” assistance

to small businesses by providing a wide variety of information and guidance in easily

accessible locations. The program is a partnership between the private sector; the educational

community; and Federal, State, and local governments. There are SBDCs in all 50 states, the

District of Columbia, Puerto Rico, the Virgin Islands, and Guam, with approximately 1,000

subcenters or service locations located at chambers of commerce, economic development

corporations, or in downtown storefronts. In FY 1997, SBDCs provided counseling and

training to over 605,700 clients.

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

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

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

business persons. In addition, this year SCORE began providing assistance by e-mail from

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

provided at a low cost. Over 349,000 clients were assisted in FY 1998.

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

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

outreach efforts with external organizations. Cosponsorship arrangements, authorized under

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

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

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

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

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

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

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

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

to computer applications and the internet. There are currently 52 BICs in operation.

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

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

This program includes 34 currently funded sites and 35 additional graduated sites that touch

nearly every state in the Union. One of the currently funded sites is a virtual WBC

(www.onlinewbc.org) that has had more than 1,500,000 hits, representing 100 countries, in
Semiannual Report September 1998 39

just 9 months.

SBA’ s 15 One-Stop Capital Shops (OSCS) provide centralized access to the full range of a

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

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

variety of SBA’s technical assistance resources. Clients can access small business

information resources (through the BIC), receive counseling (from SCORE volunteers) and

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

credit (from non-governmental resource partners), as well as apply for financing

(traditionally with microloan intermediaries). A OSCS is a partnership between the Federal

Government, led by SBA, and a local community designed to offer small business assistance

from a single, easy to access, retail location.

Beginning in 1997, SBA began an aggressive Welfare to Work (W2W) initiative that cuts

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

employees. In 1998, using a combination of the SBA toll free number (1-800 U ASK SBA),

the SBA webpage (www.sba.gov/welfare) and a local contact in over 70 district-based

offices, the SBA W2W initiative works to inform business on the benefits of welfare to work

programs and connects them to local contacts. SBDCs, SCORE, and the WBC programs have

targeted training and resources to aid the W2W initiative and find effective business solutions

involving welfare to work.

Summary of OIG Activity / Entrepreneurial Development

Inspection Reports Issued 1

Reviews of Other Issuances 2

Efforts to Improve SBA Program

Management

Inspection Examines SBDC Performance

Measurement

The OIG issued an inspection report that

assesses performance measurement efforts

in the Small Business Development Center

(SBDC) program. Because the program is

decentralized and involves negotiated

agreements between SBA and the SBDCs,

the OIG looked at performance

measurement from the perspectives of both

SBA and the SBDCs. The inspection

examined SBA’s efforts to gather

performance data, the initiatives of the

individual SBDCs to track economic impact

and customer satisfaction, and outside

studies contracted by SBDCs to measure

outcomes, including the SBDC

Association’s national impact study. The

findings provide guidance to SBA and the

SBDCs on ways to improve current

performance measurement to fulfill

internal management needs and
40 Semiannual Report September 1998

Government Performance and Results

Act requirements.

The review of methods used by SBDCs for

reporting on economic impact and customer

satisfaction revealed significant

inconsistencies not only among the 57

SBDCs, but also within their individual

networks of sub-centers. These differences

create data integrity problems, and

aggregating the impact data for national

reporting becomes virtually impossible. The

report suggests “best practices” that would

promote consistency and ensure that the

SBDCs adhere to sound data collection

principles.

To maximize the use of existing data

sources, SBA has two options for evaluating

the SBDC program’s economic impact and

customer satisfaction. If SBA decides to

continue to use the results of the national

impact study sponsored by the SBDC

Association, the OIG recommended that

SBA (1) validate the study’s methodology

and arrange for it to be conducted annually,

(2) eliminate current requirements for

SBDCs to report impact data directly to

SBA, (3) discontinue the existing method of

collecting client satisfaction evaluations, and

(4) require that a statistical sample of all

SBDC clients be sent the customer

satisfaction portion of the Association’s

national impact survey.

SBA’s second option for evaluating SBDC

performance is to aggregate the impact data

itself and begin collecting the customer

evaluations directly from the individual

SBDCs. If SBA chooses this option, the

OIG recommended that it (1) require only

the data from the SBDCs that it plans to use

for measuring program performance, (2)

provide guidelines to SBDCs, in

consultation with the Association, on how

information is to be collected to ensure data

integrity, and (3) revise the customer

satisfaction questionnaire to ensure that it

meets the feedback needs of both the

Agency and the SBDCs.
Semiannual Report September 1998 41

Agency Management and Financial Activities

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

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

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

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

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

management and integrity assurance activities.

SBA’s management and financial activities are supported by the Agency’s $716.1 million in

operating funds, partially provided by FY 1998 appropriations enacted in P.L. 105-119. Of

the $716.1 million available, which includes carry-overs and estimated recoveries, $254.2

million funds Salaries and Expenses, $25 million is for Disaster loan servicing, and $82.7

million is for Disaster loan making. In addition, $275.2 million is available for Business

Loans, $23.2 million for Disaster loans, and $3.5 million for the Surety Bond Guarantee

program.

Summary of OIG Activity / Agency Management and Financial

Audit Reports Issued 1

Audits Underway 3

Indictments Resulting from Investigations 2

Convictions Resulting from Investigations 3

Investigations Closed / Remaining Inventory 6 / 11

Investigations: Restitutions / Fines / Other

Recoveries

$64,929 / $250 / $0

Inspection Reports Issued 1

Inspections Underway 2

Reviews of Proposed Legislation 2

Reviews of Proposed Regulations 3

Reviews of Standard Operating Procedures 11

Reviews of Other Issuances 56
Figure 6

Efforts to Improve SBA Program

Management

Inspection Surveys Administrative

Officers in Field Offices

The OIG conducted a survey of

administrative officers and regional support

staff on the effectiveness of communications

between SBA headquarters and the field

offices on administrative matters. The

objective was to determine whether

communications problems, including any

confusion regarding lines of authority, might

be preventing field staff from understanding

SBA procedures clearly or from obtaining

timely and accurate responses to inquiries to

headquarters on administrative matters. The

inspection found that the respective roles

of the Offices of Administration, Field

Operations, and Chief Financial Officer

needed clarification; that some offices

should improve the timeliness and

accuracy of their responses to queries

from field personnel; that field

administrative personnel have developed an

internal support network for obtaining

answers to questions and keeping informed

about issues and procedures affecting their

work; and that there is a need for more

training.

The OIG recommended that SBA clearly

identify points of contact in headquarters

who have the expertise, authority, and

resources to respond to administrative

inquiries from the field. The points of

contact could be designated for each of the

three headquarters offices or the role could

be centralized in one or two positions

representing all administrative functions.

The OIG also recommended that the

designated points of contact be held

accountable for responding in a prompt and

effective manner. Finally, SBA was urged to

develop a structured training program for

administrative officers and regional support

staff.

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 

Billions of Dollars

FY 1994

FY 1995

FY 1996

FY 1997

FY 1998

SBA Appropriations

$.814 billion

$.939 billion

 $.702 billion

$.852 billion

$1.893 billion
Semiannual Report September 1998 43

Government Waste, Fraud, and Error

Reduction Act of 1998 Reviewed

The OIG reviewed two drafts of H.R. 4243,

The Government Waste, Fraud, and Error

Reduction Act of 1998, which proposes to

reduce waste, fraud, and error in

Government programs by improving

Federal agency management and debt

collection practices, Federal payment

systems, and Federal Benefit programs.

The OIG recommended that systems for

electronic payments or travel reservations be

sufficiently secure to deter fraud, contractors

be required to perform background checks

on all individuals who would perform debt

collection services, and a mechanism be

established to allow Federal agencies to

obtain information about delinquent debtors

from other Federal agencies in a timely

manner.

The OIG further recommended that the

circumstances or criteria be specified under

which the head of a Federal agency could

waive the general prohibition against

providing a benefit to a delinquent debtor,

and that authorization be included to retain a

share of all forfeited assets pertaining to

high value non-tax debts to support agency

law enforcement efforts. The OIG urged that

a provision requiring agencies to sell each

loan within six months of the loan

disbursement be structured so that future

efforts to prosecute all types of criminal

activity pertaining to those loans would not

be hindered. Expansion of the definition of

“federal benefit” to ensure that persons with

a delinquent outstanding debt would not be

eligible for business disaster loans, rental

housing assistance, grants, and participation

in Federal programs such as the Section 8(a)

minority set-aside program was also

recommended.

The OIG supported the Administration’s

plan to seek amendments to modify or delete

the provisions that would require OIGs to

review all compromises of debt over $1

million and to rate the performance of the

agency head in seeking debt collection. The

OIG also supported the provisions

authorizing tests to improve the verification

of applicants’ eligibility for Federal benefit

and credit programs.

Internal Control Weaknesses in SBA

Accounting System

Internal control issues were identified in

the management letter for the audit of

SBA's 1997 financial statements, issued

May 20, 1998, by the OIG. SBA officials

agreed with the findings and

recommendations and, in some instances,

had already initiated corrective action. The

findings in the management letter were not

material enough to require inclusion in the

auditors’ report on the financial statements.

Most of the issues concerned reconciliation

problems in cash balance with Treasury,

SBIC loan balances, SBDC grant

expenditures, and payroll. The management

letter also discussed weaknesses in valuation

of foreclosed property, deficiencies in

documentation, and receipt procedures by

Collateral Agent Cashiers.
44 Semiannual Report September 1998

Figure 7

Activities to Enhance Fraud

Detection and Deterrence

OIG Conducts Employee Awareness

Briefings

In addition to investigating complaints of

waste, fraud, and abuse involving SBA

programs, the OIG’s Investigations Division

staff presented five integrity awareness

briefings to a total of 118 Agency

employees. The involvement and

cooperation of all SBA employees in

combating waste, fraud, and abuse is critical

to an effective OIG investigations program

and to the Agency’s overall productivity and

efficiency.

During the reporting period, employee

contributions to the OIG mission were

significant. As Figure 7 shows, nearly 57

percent of all investigative referrals

originated from within the Agency in the

form of referrals either from program heads

or from 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.

SBA’s Phoenix District Director Found

Guilty of Conspiracy and Bribery
Semiannual Report September 1998 45

A trial jury found the District Director of

SBA’s Phoenix District Office guilty on one

count of conspiracy and two counts of

bribery. The FBI had conducted an

extensive investigation that found the

Director and an associate conspired to solicit

bribes from a Section 8(a) contractor in a

Phoenix suburb. The pair received two

$2,500 payments. Following the Director’s

May 1997 indictment, the OIG was asked to

provide assistance in his prosecution by the

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

Arizona.

SBA Job Applicant Sentenced for Making

Fraudulent Demand for Wages

A man who had applied for employment

with SBA’s Office of Financial Operations,

Denver, Colorado, was charged with and

pled guilty to one misdemeanor count of

making a fraudulent demand for wages by

making false statements in the application he

submitted to SBA. He was sentenced to one

year probation and a $100 fine. The OIG’s

investigation determined that, in applying

for a Financial Specialist position, the man

had failed to disclose five occasions on

which he had been arrested and/or

imprisoned. In addition, he falsely stated

that he had received two Bachelor of

Science degrees and a Master’s degree and

that he was a Certified Public Accountant.

He also represented that he had not been

fired from a job, when in fact he had been

fired by another Government agency for

submitting a falsified job application. The

OIG initiated the investigation based on a

referral from SBA’s Office of Human

Resources. In the fall of 1997, after the

OIG’s initial inquiries confirmed that certain

statements in his application were false,

SBA withdrew the job offer previously

made.

Results of Previously Reported

Investigations

! A former SBA employee from Van

Nuys, California, was sentenced to 15

months imprisonment, 5 years probation,

$64,929 restitution to SBA, and a $150

special assessment. He previously pled

guilty to two counts of theft of

Government property.
46 Semiannual Report September 1998

Organization, Resources, and Management Initiatives

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

Agency and to detect and deter fraud in SBA's programs. Mission goals and objectives are

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

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

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

resources; it also summarizes key internal management initiatives designed to use available

resources as effectively as possible.

Summary of OIG Activity / Org. Resources & Mgmt. Initiatives

Reviews of Proposed Legislation 1

Organization

The SBA/OIG is organized into four

divisions as follows:

• Auditing Division

• Investigations Division

• Inspection and Evaluation Division

• Management and Legal Counsel

Division

The Auditing and Investigations Divisions

each administer their field activities through

field offices and resident offices around the

country. The Auditing Division has offices

located in Atlanta, Chicago, Dallas, Los

Angeles, and Washington. The

Investigations Division has offices in those

cities as well as in Denver, Houston, Kansas

City, New York, Philadelphia, San

Francisco, Seattle, and Syracuse. The

Investigations Division’s Office of Security

Operations is located in Washington, D.C.

Both the Inspection and Evaluation Division

and the Management and Legal Counsel

Division operate out of Washington, D.C. A

current OIG organization chart can be found

on the following page.

Resources

In FY 1998, the OIG operated with a

funding level of $10 million and an

authorized personnel ceiling of 112 full-time

equivalent (FTE) positions. At this dollar

level, however, the OIG has only been able

to fund an average FTE level of 99. While

this level of funding represents a modest

increase from the number of dollars

appropriated in FY 1997, it provides only a

minimal level of oversight to SBA
Semiannual Report September 1998 47

Office of Inspector General

U.S. Small Business Administration

Management & Legal

Counsel Division

Audit Team A

Audit Team B

Headquarters

 Operations

Chicago

Atlanta

Dallas

Los Angeles

Field

Operations

Operational

Support

Auditing Division Inspection & Evaluation Division

Wash., D.C.

Operational

 Support

Headquarters

 Operations

Syracuse

Philadelphia

New York

Dallas

Houston

Atlanta

Denver

Kansas City

Seattle

Chicago

San Francisco

Los Angeles

Investigations Division

Inspector General

--------------------------------------------

Deputy Inspector General

Figure 8

programs and program dollars at risk.

Congressionally mandated law enforcement

availability pay, annual cost of living

increases, and various locality pay

adjustments are still not fully funded by the

OIG’s authorized spending levels.

In FY 1994, the OIG received $3 million in

supplemental “no year” disaster funds to be

used for activities related to the Agency's

expanding disaster assistance program; these

funds will remain available until expended.

At this time the OIG projects that these no

year funds will be completely expended by

the middle of FY 1999.

In addition, in both the FY 1997 and 1998

appropriations, the Congress directed the

Agency to transfer $500,000 from its

disaster assistance account to the OIG for

disaster program oversight. With the no year

funds and the appropriated funds, the OIG

employed 14.7 FTE in FY 1998 for disaster

program oversight.

The relatively static level of resources over

the past five years remains troubling. As

depicted in both Figures 1 and 2 (pages 8

and 20, respectively), the dynamics of the

Agency's portfolio, and the concomitant

demand for oversight, would suggest that

the OIG’s resources be increased to ensure

an adequate level of program oversight.

While the increase in resources from FY

1997 to FY 1998 ($9 million to $10 million)

has been helpful, it did not allow the OIG to

“catch up” to its expenses after years of

chronic underfunding, and still does not

allow the OIG to fully address SBA’s

portfolio and programs. The OIG continues

to experience difficulty in carrying out its

mandate to provide meaningful oversight of

the Agency's programs and supporting

activities and to safeguard the Government's

investment in SBA’s extensive credit

programs. As is apparent from the

accompanying narrative, some SBA

programs received only modest oversight,
48 Semiannual Report September 1998

while others virtually went without

oversight.

As the table on page 50 illustrates, the

business and disaster loan programs

consume most of direct investigation and

auditing time - - 85 and 71 percent,

respectively. Because these two programs

represent the greatest risk of financial loss to

the taxpayer, the OIG has made a conscious

decision to devote a substantial amount of

its limited resources to these programs. As

the table also illustrates, however, this

results in only minimal or no audit and

investigative coverage of other program

areas.

For FY 1999, the Congress has appropriated

$10.8 million for the OIG and directed a

transfer of $500,000 to the OIG for disaster

assistance oversight from the Agency’s

disaster loan account. In addition, the OIG

expects to be funded by SBA for 6 FTE for

oversight of the Small and Disadvantaged

Business program.

Management Initiatives

IG Act Amendments of 1998 Reviewed

In celebration of the 20th anniversary of the

Inspector General Act of 1978, the OIG took

a look back over the last 20 years and a look

into the future to determine what, if any,

changes should be recommended to make

OIGs more effective in their mission to

combat fraud, waste, and abuse. As part of

this review, the OIG drafted proposed

revisions to the Inspector General Act of

1978 (IG Act). In addition, the OIG

reviewed a draft of S. 2167, The Inspector

General Act Amendments of 1998. In

general, the OIG concurred with the

language of this bill; however, the OIG

submitted comments on numerous issues

and provided recommendations based on the

OIG’s own proposed revisions of the IG

Act. The OIG comments focused on such

issues as term appointments and removal

only for cause as means to enhance an IG’s

independence, changing from a semiannual

to an annual reporting requirement,

consolidating smaller OIGs with larger ones,

and providing full law enforcement

authority to all establishment OIGs.

The OIG recommended an amendment to

provide explicit statutory authority for an

Inspection and Evaluation Division as a

means of clarifying the important role OIGs

play in evaluating program performance to

determine whether Administration and

Congressional objectives are being attained.

The OIG also recommended expanding IG

subpoena authority to include the authority

to compel testimony to enhance an OIG’s

ability to successfully pursue civil and

administrative remedies, authorizing IGs to

submit their budget requests directly to the

Congress, and amending the Paperwork

Reduction Act (PRA) to exempt OIG

surveys from the PRA notice and approval

requirements so OIGs can conduct timely

reviews of agency performance.

GPRA Implementation at SBA

The OIG is focusing considerable attention

on the Government Performance and Results

Act (GPRA) and is actively assisting the

Agency in its implementation. An Inspection

and Evaluation staff member spent the last

year on detail at the National Academy of

Public Administration assisting in the

establishment of a consortium of Federal

agencies interested in the effective

implementation of GPRA. She continues to

organize discussion forums for the

consortium on GPRA and other

performance-based management initiatives.
Semiannual Report September 1998 49

In addition to representing the OIG on

SBA’s GPRA Team, she also serves on an

ad hoc interagency group that sponsors a

series of dialogues on GPRA issues of

common interest to Inspectors General and

Chief Financial Officers. The OIG further

provides assistance to the Federal Credit

Policy Working Group in its efforts to seek

common performance measures for Federal

credit programs.
50 Semiannual Report September 1998

Direct Investigation Time by Program Area

April 1, 1998 to September 30, 1998

Program Area Direct Time % Number of Investigations

Closed In Progress

Business Loans 56% 20 151

Disaster Loans 29% 10 75

SBIC 4% 1 12

Surety Bond Guarantees 1% 0 3

Government Contracting 1% 0 4

Minority Enterprise Development 5% 1 21

Economic Development * 0 0

Agency Management and Financial 4% 6 11

Total 100% 38 277

Direct Auditing Time by Program Area

April 1, 1998 to September 30, 1998

Program Area Direct Time % Number of Audits

Issued In Progress

Business Loans 44% 9 6

Disaster Loans 27% 1 2

SBIC * 0 0

Surety Bond Guarantees 17% 4 4

Government Contracting * 0 0

Minority Enterprise Development 5% 2 0

Economic Development 1% 0 0

Agency Management and Financial 6% 1 3

Total 100% 17 15

* less than 1⁄2 percent
Semiannual Report September 1998 51

Profile of Operating Results

April 1, 1998 to September 30, 1998

Audit Activities Totals

A. Reports Issued .................................................................................................................. 17

B. Audit Recommendations Issued ....................................................................................... 85

C. Dollar Value of Costs Questioned ...................................................................... $1,265,098

D. Dollar Value of Recommendations that Funds

Be Put to Better Use ........................................................................................ $12,546,236

Audit Follow-Up Activities

A. Audit Recommendations Closed ...................................................................................... 59

B. Disallowed Costs Agreed to by Management........................................................ $393,386

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

Agreed to by Management ................................................................................. $2,943,296

D. Unresolved Audit Recommendations............................................................................... 76

E. Dollar Value of Unresolved Audit Recommendations..................................... $21,945,079

Inspection Activities

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

Legislation/Regulation/SOP/Other Reviews

A. Legislation Reviewed ........................................................................................................3

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

C. Standard Operating Procedures Reviewed ....................................................................... 11

D. Other Issuances Reviewed*............................................................................................ 110

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

communications which frequently involve the implementation of new programs and policies.
52 Semiannual Report September 1998

Status of Investigations as of September 30, 1998

A. Total Cases ..................................................................................................................... 315

B. Closed Cases..................................................................................................................... 38

C. Pending Cases................................................................................................................... 23

D. Open Cases ..................................................................................................................... 254

E. Subjects Under Investigation........................................................................................ 1033

Summary of Indictments and Convictions

A. Indictments from OIG Cases ............................................................................................ 37

B. Convictions from OIG Cases............................................................................................ 31

Summary of Recoveries and Reductions of Risk

A. Potential Recoveries and Fines as a Result of

OIG Investigations.............................................................................................. $2,843,277

B. Reductions of Financial Risk as a Result of OIG Investigations........................... $144,040

C. Reductions of Financial Risk as a Result of the Name

 Check Program ................................................................................................. $12,380,565

 Total: $15,367,882

SBA Personnel Actions Taken as a Result of Investigations

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

B. Resignations/Retirements ................................................................................................... 0

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

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

Program Actions Taken as a Result of Investigations

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

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

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters........................................................................................ 665

B. Total Calls/Letters Referred to Offices Outside the OIG ................................................. 30

C. Total Calls/Letters Referred to Investigations Division for Evaluation ......................... 635
Semiannual Report September 1998 53

Investigations Activities - Referral Program

A. Cases Referred to FBI................................................................................................................. 4

B. Referred to Other Agencies (Excluding FBI) ............................................................................. 1

C. Indictments from Referrals ......................................................................................................... 0

D. Convictions from Referrals......................................................................................................... 1

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

F. Reductions of Financial Risk as a Result of Referral Program ................................................. $0
54 Semiannual Report September 1998

Office of Inspector General

Actual Personnel on Board as of September 30, 1998

A. Immediate Office ....................................................................................................................... 2

B. Auditing Division..................................................................................................................... 41

 Professional............................................................................................................................. 36

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

C. Investigations Division ............................................................................................................ 51

 Professional............................................................................................................................. 42

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

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

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

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

E. Management and Legal Counsel Division ................................................................................. 8

 Professional............................................................................................................................... 6

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

 OIG Total.............................................................................................................................. 110
Semiannual Report September 1998 55

FY 1998 Productivity Statistics

Second Six Months

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines.............................................................. $2,843,277

B. Management Avoidances as Result of Investigations and Name Checks................. $12,524,605

C. Disallowed Costs Agreed to by Management................................................................ $393,386

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management .................................................................................. $2,943,296

Total $18,704,564

Auditing Division Activities

A. Reports Issued........................................................................................................................... 17

B. Disallowed Costs Agreed to by Management................................................................ $393,386

C. Recommendation that Funds Be Put to Better Use Agreed to by Management ........ $2,943,296

Inspection and Evaluation Division Activities

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

Investigations Division Activities

A. Cases Closed............................................................................................................................. 38

B. Indictments................................................................................................................................ 37

C. Convictions ............................................................................................................................... 31

D. Potential Investigative Recoveries and Fines ............................................................. $2,843,277

E. Management Avoidances ......................................................................................... $12,524,605

 - Investigation Cases........................................................................$144,040

 - Name Check Program..................................................................$12,380,565
56 Semiannual Report September 1998

FY 1998 Productivity Statistics

Full Year

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines.............................................................. $7,707,167

B. Management Avoidances as Result of Investigations and Name Checks................. $25,827,235

C. Disallowed Costs Agreed to by Management............................................................. $1,449,206

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management .................................................................................. $2,955,296

Total $37,938,904

Auditing Division Activities

A. Reports Issued........................................................................................................................... 28

B. Disallowed Costs Agreed to by Management............................................................. $1,449,206

C. Recommendation that Funds Be Put to Better Use Agreed to by Management ........ $2,955,296

Inspection and Evaluation Division Activities

A. Reports Issued............................................................................................................................. 5

Investigations Division Activities

A. Cases Closed............................................................................................................................. 92

B. Indictments................................................................................................................................ 81

C. Convictions ............................................................................................................................... 58

D. Potential Investigative Recoveries and Fines.............................................................. $7,707,167

E. Management Avoidances ......................................................................................... $25,827,235

 - Investigation Cases ........................................................................$289,640

 - Name Check Program..................................................................$25,537,595
Semiannual Report September 1998 57

Statutory Reporting Requirements

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

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

Source Pages

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

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

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

 and Deficiencies 6 - 45

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

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

Section 5(a)(5) 

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

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

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

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

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

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

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
58 Semiannual Report September 1998

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued .................................................................................59

Appendix II

 Part A - Inspector General-Issued Audit Reports

 with Questioned Costs .....................................................................................61

 Part B - Inspector General-Issued Audit Reports

 with Recommendations that Funds Be Put to Better Use................................62

 Part C - Inspector General-Issued Audit Reports

 with Non-Monetary Recommendations...........................................................63

 Part D – Inspector General-Issued Audit Reports

 with Overdue Management Decision...............................................................64

 Part E – Significant Audit Reports

 without Final Action ........................................................................................65
Semiannual Report September 1998 59

APPENDIX I

Audit Reports Issued

April 1, 1998, to September 30, 1998

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER USE

Business Loans

SBLC Financial Statements 87S001013 4/28/98

7(a) Loan Processing –

Atlanta DO

87F019014 5/13/98 $2,227,909

7(a) Loan Processing –

Buffalo DO

87F021018 7/8/98 $ 625,465

Emergent Business Capital 87F013020 7/13/98 $189,400

IRS Verification

Requirements

87F018021 7/13/98

7(a) Loan Processing –

New Jersey DO

88F003019 7/13/98 $ 549,250

7(a) Loan Processing –

Madison DO

87F020022 7/22/98 $1,260,576

Arkansas Capital

Corporation

86F008023 7/31/98 $ 420,000

7(a) Loan Processing – Los

Angeles DO

88F002028 9/30/98 $ 528,150

Program sub-total: 9 audits $189,400 $5,611,350

Disaster Loans

Declined Disaster Loans 86F005016 6/3/98 $0 $0

Program sub-total: 1 audit $0 $0

Surety Bond Guarantees

AMWEST Surety

Insurance Company

88H003012 4/23/98 $ 502,700 $ 934,886

Reliance Surety Company 88H07024 9/29/98 $ 10,156

SBG Fee Refunds 88H004027 9/30/98 $ 87,325

Safeco/First National

Surety

88H009026 9/30/98 $ 475,517

Program sub-total: 4 audits $1,075,698 $ 934,886
60 Semiannual Report September 1998

Minority Enterprise Development

GSA Kansas City 8(A) Sole

Source IDIQ Contracts

88H006025 9/29/98 $6,000,000

NOAA Computer Contracts 87H002017 6/18/98

Program sub-total: 2 audits $0 $6,000,000

Agency Management and Financial Activities

 SBA’s FY ’97 Financial

Statements – Management

Letter

87H008015 5/20/98

Program sub-total: 1 audit $0 $0

TOTALS (all programs) Reports: 17 $1,265,098 $12,546,236
Semiannual Report September 1998 61

APPENDIX II - Part A

Audit Reports with Questioned Costs

April 1, 1998, to September 30, 1998

REPORTS RECs*

*

COSTS***

QUESTIONED UNSUPPORTED

A. For which no management

decision had been made by

March 31, 1998

3 4 $2,235,264* $781,461

B. Which were issued during

the period

5 11 $1,265,098 $109,314

Subtotals (A + B) 8 15 $3,500,362 $890,775

C. For which a management

decision was made during

the reporting period

1 6 $502,700 $109,314

(i) Disallowed costs 5 $393,386 $0

 (a) Due SBA $393,386 $0

 (b) Due program

participant

$0 $0

(ii) Costs not disallowed 1 1 $0 $109,314

D. For which no management

decision had been made by

September 30, 1998

7 9 $2,997,662 $781,461

* Beginning balance corrected to reflect prior period adjustment.

** Recommendations.

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

 lack documentation.
62 Semiannual Report September 1998

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

October 1, 1998, to March 31, 1998

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

September 30, 1998

14 29 $18,947,417

B. Which were issued during the

period

2 2 $270,458

Subtotals (A + B) 16 31 $19,217,875

C. For which a management

decision was made during the

reporting period

7 11 $2,020,500

(I) Recommendations

agreed to by SBA

management

6 6 $1,848,428***

(ii) Recommendations

not agreed to by SBA

management

2 2 $331,250

D. For which no management

decision had been made by

March 31, 1999

11** 20 $17,197,375

* Recommendations.

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

 appeared.

*** Management agreed to $159,178 more than recommended
Semiannual Report September 1998 63

 APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

April 1, 1998, to September 30, 1998

REPORTS RECOMMENDATIONS

A. For which no management decision

had been made by March 31, 1998

13 39

B. Which were issued during the period 8 28

Subtotals (A + B) 26 67

C. For which a management decision

was made (for at least one

recommendation in the report)

during the reporting period

16 41

D. For which no management decision

(for at least one recommendation in

the report) had been made by

September 30, 1998

14** 26

* Beginning balance corrected to reflect prior period adjustment

**The recommendations resolved did not address all the recommendations within the reports where they appeared.
64 Semiannual Report September 1998

APPENDIX II - Part D

Audit Reports with Overdue Management Decisions

September 30, 1998

Auditee Report Number Date Issue Status

Business Loan Center 65F002019 9/20/96 One of five recommendations

under negotiation with Office of

Financial Assistance

LowDoc Loan Program 65E002022 9/30/96 Two of five recommendations

under negotiation with Office of

Financial Assistance

Grant Proposal,

WVHTCF

77H001014 4/25/97 Under review by Office of

Procurement and Grants

Management. OPGM waiting

DCAA report

Defaulted Loan,

Eastside Bank

77F002016 6/30/97 Under review by District Office

LowDoc Loan Program

– Atlanta

77F006017 7/7/97 Recommendations continue

under review by the District

Office

LowDoc Loan Program

– Santa Ana DO

77F009020 7/8/97 Two recommendations remain

under review by District Office

LowDoc Loan Program

– Dallas

77F008022 7/31/97 Three of five recommendations

under negotiation with District

Office

Business Loan

Guarantee Purchases

75H011026 9/30/97 Three of seven

recommendations under

negotiation

First National Bank of

Coffee County

87F006001 10/31/97 Two recommendations under

review by District Office

The LowDoc Loan

Program Summary

87F005002 11/24/97 Two recommendations under

review by the Office of

Financial Assistance

Loan Liquidation 85F003009 2/27/98 One recommendation under

review by the Office of

Financial Assistance
Semiannual Report September 1998 65

APPENDIX II – Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of September 30, 1998

REPORT

NUMBER

TITLE DATE

ISSUED

DATE OF

MANAGEMENT

DECISION ON

RECOMMENDATION

FINAL

ACTION

TARGET FOR

IMPLEMENTATION

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

Collection Activities

3/31/95 4/30/95 9/30/98

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

6-6-H-002-011 GeoDemographics, Ltd. 3/29/96 9/30/96 4/01/98

65F002019 Business Loan Center 9/20/96 * *

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

6-5-E-002-022 Low Documentation Loan Program 9/30/96 3/31/97 6/30/97

6-6-H-003-023 Virginia SBDC 9/30/96 5/12/97 1/1/98

7-4-E-001-009 Early Default of Guaranteed Loans 2/18/97 10/14/97 12/31/97

7-7-H-001-011 Grant Closeout Procedures 3/26/97 10/20/97 10/20/98

7-6-H-006-015 FY 1996 Financial Statements 4/29/97 9/30/97 4/30/98

7-7-S-918-018 User Technology Associates Inc. 6/06/97 3/26/98 6/05/98

7-7-F-002016 Defaulted Loan, Eastside Bank 6/30/97 * *

7-5-F-002-019 CAIVRS 7/07/97 9/30/97 12/31/97

7-7-F-006-017 LowDoc Program – Atlanta DO 7/7/97 * *

7-7-F-009020 LowDoc Loan Program – Santa

Ana DO

7/8/97 * *

7-7-F-007-021 LowDoc Loan Program –

Washington DO

7/18/97 11/06/97 12/31/97

7-7-F-008-022 LowDoc Loan Program – Dallas

DO

7/31/97 * *

7-6-F-003-023 Approval of Disaster Home Loans 9/04/97 3/17/98 9/30/98

7-5-H-011-026 Business Loan Guarantee Purchases 9/30/97 * *
66 Semiannual Report September 1998

8-7-F-006-001 First National Bank of Coffee

County, GA

10/31/97 * *

8-F-005-002 The LowDoc Loan Program

Summary Report

11/24/97 * *

8-5-F-003-009 Loan Liquidation 2/27/98 * *

8-7-H-008-010 SBA’s FY 1997 Financial

Statements

2/28/97 6/5/98 2/28/99

8-7-H-003-011 Disbursement Processing – C&W

Schedules

3/11/98 7/16/98 9/30/98

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