Semiannual Report

of the Inspector General

 U.S. Small Business Administration

Spring 2002

 A Report to Congress

 October 1, 2001 – March 31, 2002

 Pursuant to Public Law 95-452
.

ii
Foreword

Semiannual Report March 2002 

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

October 1, 2001, to March 31, 2002.

This has again been a productive period. Looking at the standard productivity measures for OIG

activities, we see that the Office issued 16 reports on efficiency and effectiveness activities, primarily

based on OIG audit and inspection activities. OIG investigations resulted in 21 indictments and 29

convictions for criminal violations. The Office brought its collective experience to bear in reviewing

116 legislative, regulatory, policy, and procedural proposals concerning SBA and Government-wide

programs. Overall, OIG dollar accomplishments from all activities totaled more than $41 million. All of

this was accomplished with an appropriation of $11.9 million and an average staff level of 107. I am truly

proud of the accomplishments of OIG’s dedicated and professional staff.

We continued to focus our efforts on several key areas identified in our current strategic plan: financial

management, information systems and computer security, lender oversight, high-risk issues, and new

SBA initiatives. Discussion of our efforts in these areas can be found in the body of the report. Perhaps

the most significant report we issued during this period was our updated assessment of the 10 most

significant management challenges facing SBA. The challenges we identify are virtually identical to

those contained in last year’s list and cover a broad range of SBA activities – from strategic planning and

financial management to program specific issues such as lender oversight and the Section 8(a) business

development program. While progress has been made towards addressing these issues, more can be done.

We in OIG will continue to look for ways to work with Agency managers to add value to this process and

to identify potential solutions.

Looking towards the future, OIG has been engaged in reviewing our strategic direction and rearticulating

our plans and goals in light of our rapidly changing environment. We seek to maximize our relevance and

value to SBA and the Congress by ensuring that we direct our resources to the most critical priorities. To

that end, we are nearing completion of a year-long effort to revise our strategic plan. We will emphasize

prevention and deterrence, early identification of risks and management challenges, and a more integrated

approach within and across our audit, investigation, and evaluation functions. I am excited by this

approach and look forward to sharing this in more detail with our stakeholders and customers over the

coming months.

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

Administrator Barreto and the Agency’s senior staff. Without their willingness to assist us and take

action on our recommendations, we would not be effective. We look forward to continuing our

partnership with SBA’s leaders so that we can make a positive difference in the way Agency programs are

being delivered to our customers, the small business men and women of America.

Phyllis K. Fong

Inspector General

Table of Contents

Semiannual Report March 2002 i

 Chapter Page

SBA Overview 1

Significant Activities and Management Challenges 3

OIG Profile 11

OIG Activities 13

Statistical Highlights 32

Inspector General Act Statutory Reporting Requirements 34

Table of Appendices 35

SBA Overview

Semiannual Report March 2002 1

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

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

succeed and recover from disasters. SBA offers many services to entrepreneurs, including assistance with

developing a business plan, obtaining financing, marketing products and services, and addressing management

issues. SBA programs are delivered by a network of field offices in every state, the District of Columbia, the

Virgin Islands, Guam, American Samoa, and Puerto Rico. SBA has an FY 2002 appropriation of $768.5 million

and has 4,045 employees, including Disaster Assistance and Office of Inspector General (OIG).

The Office of Capital Access has several loan and other programs that assist small businesses. The Section 7(a)

program is the largest business loan program. Currently, the Agency is authorized to guarantee up to $1 million

of a small business loan on a loan up to $2 million. The maximum guarantees are 75 percent for loans more than

$150,000, and 85 percent for loans of $150,000 or less except for Export Working Capital program (EWCP)

loans, which have a 90 percent guarantee. Under Section 7(a) of the Small Business Act (Act), SBA is authorized

to offer a variety of specialized products and processes including the Certified and Preferred Lender (CLP and

Administrator

Deputy Administrator

Chief of Staff

Counselor to

Administrator

Chief Operating

Officer

Office of the National

Ombudsman

Office of Inspector General Office of Advocacy

Associate Deputy

Administrator for

Capital Access

Associate Deputy

Administrator for

Entrepreneurial

Development

Associate Deputy

Administrator for

Management &

Administration

Associate Deputy

Administrator for

Government Contracting &

Business Development

Investment Division

Office of Financial Assistance

Office of Surety Guarantees

Office of International Trade

Office of Lender Oversight

Office of Business and Community

Initiatives

Office of Small Business Development

Centers

Office of Women’s Business Ownership

Office of Native American Affairs

Office of Chief Information Officer

Office of Human Resources

Office of Administration

Office of Government Contracting

Office of HUBZone Empowerment

Contracting

Office of Business Development

Office of Policy Planning & Liaison

Office of Congressional & Legislative

Affairs

Office of Hearings and Appeals

Office of Disaster Assistance

Office of General Counsel

Office of Veterans Business

Development

Office of Field Operations

Regional Administrators

Office of Equal Employment

Opportunity & Civil Rights Compliance

Office of Communications

& Public Liaison

Office of the Chief

Financial Officer
SBA Overview

2 Semiannual Report March 2002

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

Loan and Technical Assistance (DELTA), Community Adjustment and Investment Loan, EWCP, International

Trade Loan, Energy and Conservation Loan, and Pollution Control Loan programs. In addition, Section 7(m) of

the Act authorizes SBA to provide loans and grants to not-for-profit organizations that use these funds to provide

small loans (currently up to $35,000) and technical assistance to small businesses. The Small Business

Investment Act authorizes SBA to guarantee debentures used to fund long term fixed asset purchases for

developing small businesses. The Small Business Investment Company (SBIC) program provides supplemental

funding to licensed SBICs who make equity-type investments in small business. All of the specialized business

loan programs are intended to provide entrepreneurs with the financing vehicles needed to help them start or grow

their small business. The Office of Lender Oversight (OLO) was established to coordinate oversight of the

Agency’s lending programs. In addition to financial assistance programs, the Office of Capital Access (OCA)

oversees the Surety Guarantee (SG) program, the International Trade program, and the Program for Investment in

Microentrepreneurs (PRIME). OCA is also responsible for servicing all disaster loans and administering SBA’s

Asset Sales program.

The Office of Entrepreneurial Development administers programs that offer information, counseling, and

management assistance through SBA’s many resource partners and district offices. Resource partners include

Service Corps of Retired Executives (SCORE), Small Business Development Centers (SBDC), Business

Information Centers (BIC), Tribal Business Information Centers (TBIC), and Women’s Business Centers (WBC).

These resource partners provide guidance and expertise to new entrepreneurs.

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

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

technical and procurement assistance to eligible businesses through two principal programs: (1) BD, which

encompasses the Section 8(a) program and the Mentor-Protégé program; and (2) Management and Technical

Assistance. BD also includes the Office of Small Disadvantaged Business Certification and Eligibility

(SDBC&E), which certifies companies applying as small disadvantaged businesses. The Office of Policy,

Planning, and Liaison (OPPL) provides policy support for all of the Agency’s procurement assistance programs.

OPPL also includes the Office of Technology, which expands the competitiveness of small high technology

research and development businesses in the Federal marketplace through two programs: Small Business

Innovation Research and Small Business Technology Transfer. OPPL also includes the Office of Size Standards,

which reviews and establishes industry size standards. The HUBZone Empowerment Contracting (HUBZone)

program is designed to stimulate economic development and create jobs in urban and rural communities by

providing contracting preferences to small businesses located in historically underutilized business zones. The

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

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

identifies opportunities for all categories of small businesses.

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

tornadoes, and other physical disasters. SBA's disaster loans are the primary form of Federal assistance for nonfarm, private sector disaster losses. SBA is authorized by the Small Business Act to make three types of disaster

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

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

nonprofit organizations; (2) economic injury disaster loans, which provide businesses with necessary working

capital until normal operations resume after a physical disaster; and (3) pre-disaster mitigation loans. The disaster

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

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

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

Semiannual Report March 2002 3

OIG Strategic Plan

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

SBA’s programs by identifying key issues facing the Agency, ensuring that

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

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

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

provide a work environment in OIG that is conducive to excellent performance

by our employees. The three goals in the current Strategic Plan are to:

(1) improve the economy, efficiency, and effectiveness of SBA programs;

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

and operations; and (3) ensure the economical, efficient, and effective operation

of OIG. These goals provide the broad framework of our mission from which

we further concentrate our work in the following five cross-cutting areas of

strategic focus: (1) financial management systems; (2) information systems and

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

(5) new Agency initiatives. In FY 2001, OIG began work on reevaluating its

Strategic Plan. During FY 2002, a main concern of OIG has been to refocus

and redefine the priorities of the Office. We anticipate completing the process

in the 3rd Quarter of FY 2002.

Top 10 Management Challenges

In accordance with the Reports Consolidation Act of 2000, OIG issued its

report on the most serious management challenges facing SBA in FY 2002. To

reach a common understanding on what is needed to address the challenges, we

developed them with substantial input from SBA officials. The Agency’s

comments helped us ensure all points of view were carefully considered and

that the narrative discussions are accurate. A full discussion of the challenges

and how OIG developed them can be found at the OIG website:

http://www.sba.gov/IG/igreadingroom.html.

The management challenges report was issued on January 16, 2002. The

progress reported below is as of that date. The 10 challenges identified for

FY 2002 are essentially the same as the challenges in the FY 2001 list. The

focus of the managing for results challenge for FY 2002 has shifted to

implementing and using the guidance developed in FY 2001. Limited progress

on this challenge has been made. The Agency appears to be making some

progress on five other challenges. These include improving information

security controls, modernizing information systems, implementing human

capital management strategies, business loan guarantee purchase controls, and

improving lender oversight. There has been no measurable progress in

addressing the challenge on preventing loan agent and borrower fraud, or on the

three Section 8(a) Business Development (BD) Program challenges—access to

business development and contracts, clearer standards for economic

disadvantage, and pass-through procurement activity. Except for some

OIG Strategic Plan

OIG continues to report

on the Agency’s Top 10

Management Challenges

and to track the Agency’s

progress in correcting

them.
Significant Activities and Management Challenges

4 Semiannual Report March 2002

updating and clarification, the Section 8(a)BD challenges remain essentially the

same as in previous years.

The FY 2002 challenges are as follows.

Agency-wide Issues

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

produce reliable performance data.

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

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

Agency has taken steps to identify more program outcomes, improve

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

implement the agency-wide guidance issued in July 2001, for preparing more

effective performance goals and indicators, and ensuring that standards and

procedures for data verification, validation, client surveys, and other methods to

obtain outcome information are fully implemented.

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

monitoring and financial management systems.

SBA implemented the Joint Accounting and Administrative Management

System (JAAMS) on October 9, 2001. JAAMS is a software acquisition project

intended to improve SBA’s financial management systems. The previous

accounting and financial management system used by SBA was becoming

obsolete, and the service provider was planning to shut down the system. SBA

also had plans to modernize and update its Loan Monitoring System (LMS).

LMS was initially planned to include a new loan financial tracking system as a

replacement to SBA’s Loan Accounting System, as well as a loan monitoring,

portfolio analysis, and lender oversight system. LMS is on hold awaiting

decisions on its future. SBA has made some progress, but needs to formulate

and implement sound procedures for system development and software

acquisition for all its systems under development.

Challenge 3. Information systems security needs improvement.

SBA operations depend heavily on the Agency’s information systems, and the

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

commitment of resources for enhancing computer security, providing technical

staff support, and developing security training. SBA needs to fully implement

its agency-wide systems security program to include assessing risks,

establishing and updating policies and controls, promoting awareness, and

evaluating security effectiveness.
Significant Activities and Management Challenges

Semiannual Report March 2002 5

Challenge 4. Maximizing program performance requires that SBA fully

develop and implement its human capital management strategies.

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

different set of skills in the Agency's workforce. SBA has begun to take the

steps necessary to better manage its human capital activities, but needs to do

more. The Agency must define what the future SBA will look like. The Office

of Human Resources, in partnership with the program and district offices,

should then develop a comprehensive human capital strategy that will identify

SBA’s current and future human capital needs, including the size of the

workforce and skill gaps; its deployment across the organization; the

knowledge, skills, and abilities needed for the Agency to pursue its missions;

and an effective succession planning process.

Loan Programs

Challenge 5. SBA needs better controls over the business loan purchase

process.

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

Agency requirements when purchasing guarantees from lenders after loan

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

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

has instituted a guaranty purchase review (GPR) process, implemented a

guaranty repair tracking system, established an early warning system, and is in

the process of improving procedures and training. The Agency needs to ensure

that the guaranty is denied or reduced when a lender fails to comply with SBA

requirements by continuing to update and implement changes to improve the

guaranty purchase process based on the results of the guaranty purchase

reviews. Responsibility for taking actions to improve the purchase process is

shared by the Office of Financial Assistance (OFA) and the Office of Field

Operations (OFO) with the assistance of the Office of General Counsel (OGC).

Challenge 6. SBA needs to continue improving lender oversight.

An effective lender oversight program is critical for ensuring lender activities

serve Agency objectives and comply with all rules and procedures. The

Agency established an Office of Lender Oversight (OLO), completed the thirdcycle Preferred Lender Program (PLP) reviews, started the fourth-cycle of PLP

reviews, initiated reviews of selected non-PLP lenders, completed the third

cycle of safety and soundness examinations of the non-depository Small

Business Lending Companies (SBLC), and implemented a review process that

ensures all lenders are reviewed periodically and consistently. Congress

stopped additional funding and froze existing funds available for the

development of a loan monitoring system because of significant changes in

scope and dramatic cost increases in the systems modernization initiative.

There are four main foci

of the Top 10

Management Challenges:

agency-wide issues, loan

programs, Section 8(a)

BD, and fraud deterrence

and detection.
Significant Activities and Management Challenges

6 Semiannual Report March 2002

To have an effective oversight program, the Agency needs to develop and

implement the loan monitoring system.

Section 8(a) Business Development

Challenge 7. More participating companies need access to business

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

The Agency needs to give greater emphasis to business development assistance

and ensure a more equitable distribution of contracting opportunities to program

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

relatively small number of companies in the program.

Challenge 8. SBA needs clearer standards to determine economic

disadvantage.

New standards for determining economic disadvantage should be established to

effectively measure diminished capital and credit opportunities–the definition

included in the law. The Agency should: (1) redefine "economic disadvantage"

using objective, quantitative, qualitative, and other criteria that effectively

measure capital and credit opportunities; and (2) provide sufficient training to

SBA staff responsible for evaluating companies.

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

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

firms.

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

firm may pass through to a non-Section 8(a) firm, allow many non-participating

companies to receive substantial financial benefit. SBA intends to include

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

Industry Classification System. SBA needs to tighten the definition of

“manufacturing” to preclude the pass-through practice of making only minor

modifications to the products of other manufacturers.

Fraud Deterrence and Detection

Challenge 10. Preventing loan fraud requires additional measures, including

new regulations and funding.

OIG studies have demonstrated that fraud in the business loan program could be

reduced by obtaining criminal background information on prospective

borrowers and on loan packagers and other for-fee agents. Specific statutory

authority exists to perform background checks on prospective borrowers. OIG

believes that the statutory framework already exists for SBA to require

background checks of loan packagers and other for-fee agents.
Significant Activities and Management Challenges

Semiannual Report March 2002 7

OIG’s Areas of Strategic Focus

The next section of this chapter details significant OIG accomplishments

in the areas of strategic focus under OIG’s current strategic plan.

Financial Management Systems

FY 2001 Financial Statements Audit

The independent auditors determined that SBA’s FY 2001 financial

statements presented fairly, in all material respects, the financial position of

SBA as of September 30, 2001, and 2000, and its net costs for the years then

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

the year ended September 30, 2001, in conformity with generally accepted

accounting principles.

There were four reportable conditions involving SBA’s internal control and its

operation. The reportable condition that related to the financial reporting

process was deemed a material weakness, as SBA continued to experience

difficulties in producing complete, accurate, and timely financial statements.

The other three reportable conditions were: (1) SBA’s cash flow models used

for determining subsidy re-estimates continued to contain errors that remain

undetected by SBA; (2) SBA used a small non-representative sample to

estimate the amount of excess of the Master Reserve Fund investment earnings

over payments to certificate holders from those earnings; and (3) SBA’s

information system control environment continued to contain areas for

improvements. OIG made recommendations to correct these reportable

conditions. Further, the auditors determined that SBA’s financial management

systems did not substantially comply with the Federal Financial Management

Improvement Act because: (1) SBA’s core financial system was not able to

provide complete, reliable, timely, and consistent financial management

information for external reporting and managing current information; and

(2) significant errors and misstatements were made in SBA’s initial financial

statements. SBA management generally agreed with the findings and

recommendations.

Lender Oversight

Review of an SBA Lender

OIG audited an SBA lender to determine whether the bank was

processing and servicing loans in accordance with SBA policies and

SBA’s FY 2001

financial statements

received an unqualified

opinion for the sixth

consecutive year.

OIG continues to focus

on lender oversight as a

main element of its

strategic plan.
Significant Activities and Management Challenges

8 Semiannual Report March 2002

procedures. To that end, OIG reviewed 12 loans processed and serviced by the

bank. The auditors determined that the bank did not process and service the

loans in compliance with SBA’s policies and procedures. Improvements were

needed in the areas of: (1) equity injections; (2) use of loan proceeds; and

(3) compensation of packagers, loan service providers, and outside agents. The

South Florida District Office agreed with the recommendations and notified the

bank to implement corrective action.

Review of SBA Loan Processing

OIG is continuing an audit of all defaulted SBA-guaranteed loans

originated by a lender in primarily two offices of the country, purchased by

SBA between January 1996, and February 2000. The objective of the audit was

to determine if the lender processed the loans correctly. The audit has

identified multiple loans that were originated, serviced, and/or liquidated in

material non-compliance with SBA rules and regulations. This reporting

period, OIG issued audit reports on four separate loans.

The first audit report showed that the lender did not secure a loan with all

available collateral as required by SBA. According to Agency policy, when

there is a shortfall of business assets, the lender must secure worthwhile

available assets owned by the principals. The loan was under secured by

$74,202. The principal, however, had personal assets with an estimated

liquidation value of $83,202 that could have reduced SBA’s loss. OIG

recommended that the Fresno District Office seek recovery of SBA’s guaranty

percentage of $62,401. The district office agreed with the recommendation and

suggested a repair to the guarantee by the amount recommended. The lender

did not provide comments to the draft report in time for inclusion in the final

report.

The second audit report disclosed that the lender approved a loan to an

ineligible borrower. Pursuant to SBA policy when the loan was made, a lender

should have verified the resident alien status of an applicant to ensure that the

principal was authorized to remain in the U.S. for at least half of the maturity of

an approved loan. According to the lender’s loan file, the principal was only

authorized to remain in the U.S. for 2 months after loan approval, instead of the

11 years required for the 22-year maturity. OIG recommended that the Illinois

District Office seek recovery of $308,228. The district office agreed with the

recommendation and stated that action would be taken to recover the amount

from the lender. The lender did not agree with the finding because the

principal’s resident alien status did not cause the business to fail. OIG does not

agree with the lender’s position. The lender had ample information that the

applicant was not eligible for the loan. By obligating SBA to guarantee an

ineligible loan, the lender inappropriately placed SBA at unnecessary risk.

The third audit report revealed that the lender did not exercise reasonable care

in protecting SBA’s financial interest by using unsupported information to
Significant Activities and Management Challenges

Semiannual Report March 2002 9

evaluate the borrower’s repayment ability. According to SBA guidance, the

ability to repay a loan from the cash flow of the business is the most important

consideration in the loan-making process. The lender did not take prudent

measures to ensure that the borrower injected equity of $43,329 into the

business as required. OIG recommended that the Dallas/Fort Worth District

Office seek recovery of $116,772, less any subsequent recoveries for the loan in

question. The district office agreed with the recommendation.

The fourth audit report showed that the lender did not ensure that the borrower

injected the required amount of equity into the project. The lender was

required to obtain evidence that the principal injected $255,000 of equity into

the business prior to the first loan disbursement. The borrower submitted an

accounting of equity injection expenditures for the project of $447,331. A

review of the documentation in the lender’s loan file showed that only

$191,503 of the expenditures qualified as equity injection. As a result of

eliminating the unqualified expenditures, the equity injection shortfall was

$63,497. OIG recommended that the Colorado District Office seek recovery of

$63,497 on the guaranty paid, less any subsequent recoveries. The district

office agreed with the recommendation.

Other Selected High-Risk Issues

OIG Participates in National Law Enforcement Response to Terrorism

OIG made significant contributions to the national law enforcement

response to the terrorist acts on our Country on September 11, 2001. Our

contribution during the past 6 months included the following.

• Nearly 500 hours of criminal investigator work on the Federal Bureau of

Investigation (FBI)-led New York City task force.

• Detail of a criminal investigator to serve as an interim air marshal while the

Federal Aviation Administration was expanding its permanent cadre.

• Coordination with FBI offices as to available information on known or

suspected terrorist accomplices, focusing on proactive steps to prevent the

use of SBA loans to fund terrorist-related organizations.

• Assisting the SBA Disaster Assistance response to small businesses harmed

by the events, by instituting a variety of fraud deterrence activities. OIG is

planning to devote additional resources, pending funding, to oversight of

the Disaster Assistance program as physical and economic injury disaster

loan volume increases.

OIG continues its

commitment to

supporting the national

law enforcement

response to the

September 11, 2001,

terrorist attacks on our

Country.
Significant Activities and Management Challenges

10 Semiannual Report March 2002

Agency Initiatives

Asset Sales Audit

OIG issued an audit advisory memorandum detailing the results of a

certified public accountant (CPA) firm’s review of one of the Agency’s asset

sale contracts. SBA hired the CPA firm to verify the billings of the contract.

OIG reviewed the CPA's work and brought to management's attention two

situations where the CPA’s work was not adequate. Specifically, OIG noted that

the CPA used computer-generated data provided by the contractor to support its

review results without performing tests to ensure data reliability. Additionally,

OIG noted that the CPA's conclusion that the contractor over-billed by

$620,996 was in error because the CPA had made miscalculations when

checking the billings. OIG recommended that the Associate Administrator

(AA)/OFA ensure that the contractor’s database be validated and transaction

testing be accomplished to ensure data accuracy and reliability prior to reaching

a negotiated settlement with the contractor on the reviewed asset sale. The

contract review process is on-going.

Efforts to Identify and Reduce Level of Erroneous Payments

The Senate Committee on Governmental Affairs requested agencies and

their OIGs to assess their efforts in identifying and reducing the level of

erroneous payments. In its response, the Agency acknowledged that it does not

have estimates of the amount of improper payments made in the last 2 years in

the Section 7(a) Business Loan, Section 504 Certified Development Company,

Small Business Investment Company (SBIC), and Disaster Assistance

Programs. OIG concurred with this assessment and made a commitment to

work with the Agency to develop processes to identify such estimates.

In response to a

Congressional request,

OIG assesses the Agency’s

efforts to reduce erroneous

payments.
OIG Profile

Semiannual Report March 2002 11

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

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

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

together to perform the missions mandated by Congress.

• Auditing Division provides comprehensive audit coverage of SBA’s

operations through program performance reviews, internal control

assessments, and financial and mandated audits to promote the

economical, efficient, and effective operation of SBA programs.

Audits give SBA managers an objective and systematic assessment of

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

Financial audits examine the presentation of financial information,

internal controls, and adherence to financial requirements. Performance

audits assess operations in terms of economical and effective use of

resources.

• Investigations Division manages a nationwide program to prevent and

detect illegal and/or improper activities involving SBA programs,

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

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

2 years) executing 22 arrest warrants, 5 search warrants, and 2 electronic

monitorings. The security operations staff ensures that all Agency

employees have the appropriate background investigations and security

clearances for their duties. The name check program provides SBA

officials with character-eligibility information on loan applicants and

other potential program participants.

• Inspection and Evaluation Division conducts assessments of the

effectiveness of SBA programs and activities, analyses of critical

program issues, best practices studies, and research on matters

concerning SBA performance.

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

and assistance to all OIG components, represents OIG in litigation

arising out of or affecting OIG operations, processes Freedom of

Information and Privacy Act requests, and manages OIG legislative and

regulatory review functions.

• Management and Policy Division provides planning, information

systems, budgetary, administrative, personnel, and communications

services.

There are five divisions

of SBA/OIG.
OIG Profile

 Semiannual Report March 2002

12

OIG is headquartered in Washington, DC, and has field audit and

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

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

Seattle, and Syracuse.

As of March 31, 2002, OIG’s on-board strength was 107. The OIG

FY 2002 appropriation was $11.5 million, with a $500,000 transfer for

disaster assistance oversight activities.

SBA/OIG has offices

nationwide.

SBA/OIG resources.

OFFICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

 KANSAS CITY

INSPECTOR GENERAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

WASH., DC CHICAGO

SEATTLE

HOUSTON

PHILADELPHIA FRANCISCO

AUDITING DIVISION

 BUSINESS DEVELOPMENT

 PROGRAMS GROUP

WASH., DC WASH., DC

ATLANTA

DALLAS

LOS ANGELES

MANAGEMENT AND

POLICY DIVISION

 SAN JUAN
OIG Activities

Semiannual Report March 2002 13

This chapter includes details and results of audits, investigations,

inspections, and other significant OIG activities that do not fall under the

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

major SBA program area. Many of the audits, inspections, and other

materials discussed in this section can be found at

http://www.sba.gov/IG/igreadingroom.html.

Business Loan Programs

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

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

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

(2) fraud involving loan agents; and (3) fraud involving false tax returns.

The first two trends are reflected in SBA’s Management Challenge 10.

OIG is reporting more than $19 million in cost avoidances this 6-month

period; $10.3 million of these avoidances were in the loan programs and

resulted from six investigations in four SBA districts. They fall into two

categories: (1) loans under investigation, where the lender notified SBA that

it would not submit claims for guarantees; and (2) loans that were not

disbursed because of adverse information OIG was able to document

quickly.

Fraud Involving Borrowers Who Do Not Disclose Criminal Histories

During this period, OIG investigations of criminal record fraud in

connection with SBA’s business loan programs yielded four indictments,

one conviction, and $83,203 in court-ordered restitution to SBA and a

participating lender. Summaries of some of OIG’s criminal history fraud

investigations involving SBA loan programs are listed below.

• Four Illinois men (a restaurateur and three attorneys) and a defunct

Illinois corporation were indicted on charges including two conspiracies,

mail fraud, wire fraud, bankruptcy fraud, making material false

statements, and obstruction of justice in connection with the sale of an

Antioch, Illinois, restaurant/bar financed, in part, with an SBAguaranteed loan. The restaurateur was charged with making material

false statements to SBA in his loan application regarding his citizenship

status, criminal history, and pending felony charges. OIG initiated the

investigation based on referrals from SBA’s Illinois District Office and

an anonymous caller.

• A California produce business owner whose Los Angeles, California,

business had received a $225,000 SBA-guaranteed bank loan was

arrested by OIG special agents and Los Angeles Police Department

OIG continues to monitor

three types of fraud in

SBA’s loan programs.
OIG Activities

 Semiannual Report March 2002

14

officers. He had been a fugitive since 1984, wanted on a Nevada felony

warrant for leaving the scene of an automobile accident. The defendant

pled guilty to that charge (in return, his “driving under the influence”

charge was dropped) but, facing a 1- to 6-year prison term, fled prior to

his sentencing. His SBA-guaranteed loan came under scrutiny in the

spring of 2001. A criminal history check, processed by OIG’s Office of

Security Operations (OSO) in support of the investigation, disclosed his

lengthy criminal record. The Immigration and Naturalization Service

denied his application for permanent resident status in 1993, because of

his criminal record. In applying for his SBA-guaranteed loan, OIG’s

investigation found that he falsely declared he was a U.S. citizen and

falsely answered “No” to the criminal history questions on SBA Form

912. Believing that the owner of the produce business was the fugitive

from the Nevada felony warrant, OIG contacted the Clark County

(Nevada) District Attorney’s office, which provided confirming booking

photos and fingerprints and committed to prosecute him if he were

arrested and extradited. Both of those events have happened and OIG’s

investigation is continuing.

• The president of a pet store in Stow, Ohio, was convicted on one count

of bank fraud and one count of making false statements to SBA in

connection with his $100,000 LowDoc loan. He was sentenced to

14 months imprisonment, 3 years supervised release, and $83,203

restitution. The jury found that he concealed both an outstanding

promissory note and information regarding his criminal history. The

outstanding balance of the promissory note at the time he applied for the

SBA-guaranteed loan was approximately $200,000. OIG initiated this

investigation based on a referral from SBA’s Cleveland District Office.

Fraud Involving Loan Agents

Loan agents provide referral and loan application services to

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

packagers, have been involved in a variety of fraudulent schemes that have

resulted in financial losses to SBA and, ultimately, the taxpayers. During

this reporting period, OIG investigations of loan agent fraud resulted in two

convictions and $46,500 in restitution to SBA. The following cases

illustrate OIG investigations of fraud involving business loan agents.

• An Arizona couple pled guilty to one count of money laundering and

making material false statements, respectively. As part of their plea

agreements, the Government agreed to dismiss the other 14 felony

charges and the forfeiture count in their indictment. The investigation,

based on a referral from SBA’s Arizona District Office, showed that the

couple, operating as a business brokerage firm in Phoenix submitted

fraudulent documents to private lenders in order to obtain financing for

Pet store owner convicted

of bank fraud and making

false statements in

connection with a

$100,000 LowDoc loan.
OIG Activities

Semiannual Report March 2002 15

clients seeking business acquisition loans guaranteed by SBA.

The couple allegedly came up with a “no money down” plan for clients

interested in purchasing a business at 100 percent financing who would

have otherwise not qualified for the loan or lacked the funds for a down

payment and cash injection as required for approval of the SBAguaranteed loans. The investigation found approximately $2.9 million

in loans brokered by the couple to small-business owners in Arizona. At

present, approximately $2.5 million may not be collectible, and SBA

expects losses as a result.

• A licensed real estate agent and business broker in the Cleveland, Ohio,

area was sentenced to 2 years imprisonment, 2 years probation, and

$46,500 restitution to SBA. A jury previously found her guilty of

making false statements to SBA and conspiracy to defraud the

Government. She and three others had been indicted in connection with

a scheme to facilitate a $326,000 SBA-guaranteed loan to a man for the

purchase of a forklift sales and service business in Parma, Ohio, from a

married couple. The scheme to fraudulently provide the purchaser with

the funds for his required capital injection prior to the loan closing

enabled all the defendants to benefit from the completion of the

transaction. It essentially provided him with 100 percent financing and

resulted in inflation of the contract sales price, thereby exposing SBA

and the participating lender to additional loss and reduced recovery

potential. The benefit to the couple was the sale of their business; the

benefit to the real estate agent/business broker was her commission.

This scheme to defraud SBA and the participating lender was also

facilitated by each of the subjects’ concealment of the transfer of funds

from the couple to the purchaser, and their supporting false statements to

the participating lender and SBA. OIG initiated its investigation based

on a referral from SBA’s Cleveland District Office.

Fraud Involving False Tax Returns

Over the last 11 1⁄2 years, OIG has received more than 525 allegations

that false tax returns were submitted in support of SBA applications (more

than 98 percent for business or disaster loans). These fraud referrals

involved applications totaling approximately $130 million that were

submitted to 59 SBA offices. To date, 170 individuals have been indicted

on criminal charges, 151 have been adjudicated guilty, 7 indictments were

dismissed, 1 defendant was acquitted, and 11 others have not yet gone to

trial. Restitution and fines from those adjudicated guilty total nearly

$28.2 million. Because of the implicit credibility of Federal tax returns,

SBA has traditionally relied heavily on information they contain in making

its credit-related decisions, so falsification of “copies” of returns can have a

significant impact on SBA’s consideration of those applications. During the

last 6 months, OIG investigations of tax-return fraud generated one

indictment, two convictions, and more than $1.6 million in savings and

restitution.

In the past 11 1⁄2 years,

OIG investigations have

resulted in $28.2 million

recovered in restitution

and fines.

at as

be

will
OIG Activities

 Semiannual Report March 2002

16

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

tax returns.

• The president of a Middletown, Pennsylvania, business that makes and

sells Civil War era clothing was indicted on one count of making a

material false statement to SBA. In 2000, she applied for a

$243,000 SBA-guaranteed loan to purchase land. She allegedly

submitted false Federal tax returns for 1997, through 1999. This was

discovered when the lender bank found discrepancies between the

copies submitted and those on file with the Internal Revenue Service

(IRS). The lender cancelled the loan before it made any disbursements.

OIG initiated this investigation based on information received from the

bank.

• The owner of an auto service center in Irving, Texas, was sentenced to

2 years incarceration followed by 3 years supervised release. Six

months earlier, a jury had found her guilty on one count of conspiracy

and five counts of making material false statements to induce a nonbank participating lender and SBA to fund a $156,000 SBA-guaranteed

loan. She had submitted 3 years of falsified tax returns and IRS tax

return verifications, along with fraudulent documentation of the required

capital injections and equipment purchases. Proceeds of the loan were

used for personal expenditures not related to the business.

• A former Pasadena, California, tax preparer whose clients included SBA

loan applicants was sentenced to serve 8 months in prison and to pay a

$2,000 fine and $600,000 in back taxes to IRS. He had pled guilty in

1999, to one count of conspiracy to defraud IRS and eight counts of tax

evasion. In 1996, OIG was asked to join a criminal investigation which

suggested that the defendant was responsible for the preparation of

altered tax returns submitted to financial institutions and to SBA on

behalf of southern California clients who had received SBA-guaranteed

loans. Two of those borrowers, whose SBA-guaranteed loans totaled

more than $1 million, each pled guilty to bank fraud in 1998. The

investigation had confirmed that “copies” of their Federal tax returns,

submitted to participating lender banks with their loan applications, had

been altered from those submitted to IRS to substantially overstate their

incomes. These discrepancies formed the basis for a search warrant that

was executed on the tax preparer’s business. The charges on which he

was sentenced were a direct result of the evidence gathered during the

search.
OIG Activities

Semiannual Report March 2002 17

Other Types of Fraud

The following cases illustrate OIG investigations involving fraud to

obtain business loans.

• A Virginia Beach, Virginia, chiropractor was sentenced to 5 years

probation (the first 6 months under home confinement with electronic

monitoring) and $136,617 restitution. He previously pled guilty to one

count of making a false statement under oath in bankruptcy. He had

submitted false equipment invoices and a false building lease in support

of his application for a 1996 SBA-guaranteed loan of $337,000 to

purchase equipment. Upon receiving the two-payee disbursement

checks for the loan, he forged the endorsement of the equipment

company and deposited the checks into his personal account. He

subsequently defaulted on the $136,617 balance of the loan. His scheme

was revealed when he filed bankruptcy in 1999. OIG’s investigation

was based on a referral from the U.S. Bankruptcy Trustee in

Norfolk, Virginia.

• The former co-owner of a dry cleaning business in Southington,

Connecticut, pled guilty to one count of making a false statement to a

bank. She was sentenced to 3 years probation and $100,000 restitution.

The business obtained a $100,000 SBA-guaranteed loan through a

Connecticut bank. The defendant stated to the bank that she and her coowner had previously purchased $98,000 of new equipment using their

own funds and needed the $100,000 for working capital. The

investigation revealed that the defendant submitted false documents to

the bank, representing their capital injection into the business. Further,

1 month prior to obtaining the SBA loan, the defendant and her coowner had obtained an $85,000 loan through a private lender using a

different company name with which they purchased various pieces of

equipment. The private lender was given first lien position on the

collateral, but the business did not disclose this debt relationship in its

SBA loan application. It then pledged the same equipment to the bank.

When the business defaulted on the SBA loan, neither the bank nor SBA

were able to recover any of their losses because the private lender had

obtained and sold the equipment. OIG initiated the investigation as a

result of a referral from SBA’s Connecticut District Office.

The following cases illustrate OIG investigations involving acts after

business loans were approved.

• The president and owner of a now-defunct wholesale meat distribution

company in Cumming, Iowa, was convicted on four of five felony

counts. He was sentenced to 63 months in prison, 5 years on probation,

and $1.23 million restitution to SBA’s participating lender bank.

on

and

d

nths

3
OIG Activities

 Semiannual Report March 2002

18

The jury found him guilty of concealing a material fact from SBA, bank

fraud, embezzlement, and money laundering. In connection with a

$1.4 million SBA-guaranteed loan he received from a bank in 1997, to

purchase the company, the defendant wrote an insufficient-funds check

and perpetrated a “check-kite” to make it appear he had made a required

$300,000 equity injection. In 1998, he converted vehicles pledged to the

successor to the original lending bank on this same loan. In 1999, he

embezzled $483,486 from the pension plan of another meat distribution

business he owned. Then he laundered the money he had embezzled.

The jury acquitted him on the count alleging that in 1998, he transported

monetary instruments of more than $10,000 outside the U.S. without

filing a Report of International Transportation of Currency. Following

the verdict, the judge found that the $486,486 that he feloniously

obtained from the second meat distribution company’s pension plan was

subject to forfeiture to the U.S. Both companies failed and he defaulted

on his SBA-guaranteed loan, leaving an unpaid balance of about

$1.25 million. OIG initiated this investigation based on a referral from

SBA’s Iowa District Office.

• The president of a roadside construction company in Louisville,

Kentucky, his brother, and a guarantor were indicted on one count of

conspiracy to defraud the Government with respect to claims. The

president and the guarantor were also charged with five counts of

fraudulent claims and five counts of conversion of Government

property. The brother was additionally charged with one count of

misappropriation of SBA collateral. The president subsequently pled

guilty to one count of conspiracy to defraud the Government with

respect to claims; his brother most recently pled guilty to one

misdemeanor count of misappropriation of SBA collateral. As part of

their plea agreements, the Government will dismiss the other counts on

which they were indicted. In 1997, the president and the guarantor

obtained $250,000 in SBA-guaranteed bank loans. The three allegedly

conspired to defraud SBA by submitting fraudulent invoices to induce

disbursement of the loans. Allegedly, the guarantor and the president

submitted five fraudulent invoices claiming that they purchased office

furniture, computer equipment, and a backhoe. In fact, they falsified

invoices using employee names as merchants and then falsely negotiated

the joint payee loan checks. In addition, the guarantor and the president

allegedly allowed a company vehicle to be individually titled to the

brother and proceeds from sale of the vehicle to be retained for personal

use. OIG initiated this investigation based on information received from

SBA’s Kentucky District Office.

• The president of a defunct Bensalem, Pennsylvania, ship repair business

and a shipbuilding business in Guam, honored a settlement agreement

by paying a participating lender bank almost $2 million. The ship repair

business, an SBA-certified Section 8(a) firm, had a revolving line of
OIG Activities

Semiannual Report March 2002 19

credit loan agreement with the bank totaling approximately $7.5 million.

This business also obtained a $650,000 SBA-guaranteed loan through

the bank in 1997. It defaulted on both loans and filed for bankruptcy in

1999. The bank referred the matter to the U.S. Attorney’s Office,

Eastern District of Pennsylvania, at whose request OIG joined the

resulting investigation. The investigation revealed that proceeds from

the line of credit and the SBA-guaranteed loan were transferred to the

ship building company without the knowledge and permission of the

bank or SBA. At the settlement closing, releases were executed and the

president then provided the bank with an almost $2 million cashier’s

check. The bank applied $80,000 of these proceeds to reduce the SBAguaranteed loan amount. Based on the president’s settlement agreement

with the bank and SBA, the U.S. Attorney’s Office declined

prosecution.

The following case illustrates OIG investigations involving fraud by

business lenders.

• The former executive director of a microlender of SBA funds in

Manchester, New Hampshire, pled guilty to one count of submitting

material false statements. In accordance with his plea agreement, the

Government dismissed the other counts of submitting material false

statements and conversion of funds on which he had also been indicted.

He was sentenced to 4 years probation, 150 hours community service,

and $28,336 restitution to SBA. This is the first conviction in the

10-year history of SBA’s Microloan Program, which provides shortterm small loans to entrepreneurs via SBA-approved, nonprofit

intermediaries known as microlenders. As the executive director, the

defendant was required to report to SBA on a quarterly basis the

balances of the bank accounts established to manage the microloan

funds. SBA uses these reports to monitor the microlender’s

performance and liquidity. According to his indictment, between

November 1996, and March 1997, he knowingly submitted material

false statements to SBA by vastly overstating the actual balances of the

microloan accounts. The indictment also charged that from December

1995, to December 1996, he converted to his personal use $13,042 in

microloan funds. In June 1997, the microlender became insolvent and

SBA took over administration of its loan portfolio. OIG initiated this

investigation based on information provided by SBA’s OFA and SBA’s

New Hampshire District Office.

a

e
OIG Activities

 Semiannual Report March 2002

20

Disaster Loan Program

Early Defaulted Disaster Loan Audits

OIG issued two audit reports on early defaulted disaster loans. The

objective of the reviews was to determine whether the loans defaulted due to

SBA non-compliance with its policies and procedures, borrower noncompliance with the loan agreement, or borrower misrepresentations.

The first report was on a disaster loan that defaulted soon after approval.

OIG identified four issues warranting management's attention:

(1) unverified information relied on to determine borrower benefits;

(2) use of loan proceeds for unauthorized purposes; (3) lack of support for

80 percent of funds received; and (4) false statements by the borrower that

were not referred to OIG. OIG requested that the program office maintain

documentation of any actions taken for future OIG review and follow-up.

The second report was on a disaster loan that defaulted because of a lack of

repayment ability. This occurred because an SBA loan officer miscalculated

a portion of the borrower’s wages and there was a discrepancy in financial

information reported on the application that was not reconciled with wages

shown on the Federal tax return. Consequently, the wages used to calculate

repayment ability were overstated. OIG recommended that SBA

periodically remind disaster loan officers of the importance of following all

established SBA loan-making procedures.

The following cases illustrate OIG investigations of fraud to obtain

disaster loans.

• An Albuquerque, New Mexico, woman was found guilty on all

23 counts charged in her October 2001 indictment: 7 counts of money

laundering, 5 counts of wire fraud, 6 counts of mail fraud, 2 counts of

impersonation of a Federal employee, 1 count of filing false claims,

1 count of making material false statements, and 1 count of false

representation of a Social Security number (SSN). The charges relate to

her schemes attempting to obtain post-disaster assistance, including the

application that resulted in her $40,000 SBA disaster home loan. The

defendant, using the name and SSN of a deceased acquaintance, applied

for disaster assistance from SBA and the Federal Emergency

Management Agency (FEMA) under the Cerro Grande Fire Assistance

Act. The defendant submitted numerous false documents in support of

her damage claim; she also attempted to obtain information about her

claim and investigation by posing as a representative of the U.S.

Attorney’s Office. The investigation determined that neither she nor her

deceased acquaintance ever resided at the address claimed in the disaster

t

ans.

tion.
OIG Activities

Semiannual Report March 2002 21

assistance application. FEMA/OIG asked SBA/OIG to assist in the

investigation.

• A North Haven, New York, man pled guilty to a criminal information

charging him with one count of wire fraud and two counts of bank fraud.

The charges related to a scheme to defraud SBA of disaster loan funds.

He had assisted a physician practicing in California, who rented a

New York City apartment from him, with the care of her elderly mother

during 1999, and 2000. When the elderly lady’s home in Cortland

Manor, New York, was damaged by a hurricane in late 1999, she

applied with the help of her daughter for an SBA disaster loan. The

defendant became involved in the details of the loan when the physician

had to return to California. He submitted altered invoices for work

purportedly performed on the elderly woman’s home. His false

statements led SBA to lend the elderly woman $78,300. He then

fraudulently wrote and endorsed checks from the elderly woman’s bank

account and used loan proceeds to pay for repairs at his residences and

other personal expenses. The investigation was initiated based on a

complaint by a member of the public.

• A Paradise Valley, Arizona, couple was sentenced, the husband to

18 months in prison and the wife to 5 months in prison followed by

5 months of home detention. They were ordered to pay SBA $40,000

within 120 days and $1,000 per month thereafter until the loan balance

of $203,500 is repaid. The husband was previously convicted on one

count of mail fraud; his wife had pled guilty to four counts of mail fraud.

The couple had obtained a $231,300 disaster home loan after the 1994

Northridge, California, earthquake. OIG’s investigation revealed that

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

various contractors had done work when in fact they had not. The

couple also received two loan payment deferments from SBA. Both

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

revealed that the couple owned five properties in the Phoenix, Arizona,

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

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

Small Business Investment Companies

The following narratives illustrate OIG investigations involving fraud

by principals of SBICs.

• The former president of a now-defunct New York City SBIC was

sentenced to 2 months incarceration and 3 years supervised release (the

first 6 months under home confinement). He was also ordered to pay

$953,274 in restitution to SBA. He previously pled guilty to one count

of embezzlement of SBIC assets. The count to which he pled guilty

involved an illegal transfer of a New York property valued at

uilty

his

BA

ds.
OIG Activities

 Semiannual Report March 2002

22

$361,296 from the SBIC without consideration to another company

wholly owned by him. This and other actions of the defendant caused a

loss to SBA of more than $1 million. This investigation originated from

a referral from SBA’s OGC.

• A former board member of a defunct specialized SBIC in Rockland

County, New York, pled guilty to one count each of conspiracy and mail

fraud. The charges relate to his participation in schemes to defraud the

Government of tens of millions of dollars from various Federal

programs, including SBA’s SBIC program. The plea resolved his 1997

indictment (along with six other defendants including his son) on

21 counts of conspiracy, embezzlement of Federal program funds,

making material false statements, mail fraud, wire fraud, mortgage

fraud, and money laundering. As a board member of the specialized

SBIC, the board member misappropriated SBA funds by extending

loans to small businesses affiliated with the SBIC’s officers and

directors and concealed these improper loans by submitting fraudulent

documents to SBA. He also loaned SBA funds to enterprises that were

not independently controlled by private business owners but instead

were affiliated with a religious school, a not-for-profit entity ineligible

to receive SBA funds. The SBIC also made loans to small businesses

that, in turn, improperly paid a portion of the loan proceeds to the

religious school or to related entities. When he failed to appear in court

to face the charges in his 1997 indictment, a warrant was issued for his

arrest. He was located in Israel, where he had obtained Israeli

citizenship, and was arrested by Israeli police in February 1999, in

response to a formal request submitted by the U.S. Department of

Justice. After extensive legal proceedings, the Supreme Court of Israel

ordered his extradition, and he was returned to the U.S. in November

2001. He was one of the first fugitives to be extradited to the U.S. under

an Israeli law enacted in April 1999, which permits the extradition of

Israeli citizens. SBA/OIG’s investigation was based on information

received from IRS.

• The former owner of an SBIC in Washington, DC, and his wife signed a

settlement agreement to pay SBA $490,000. The former owner made

the first payment of $50,000 on that day and agreed to pay the remainder

in two installments. If he does not adhere to the terms of the agreement,

he will forfeit the $50,000 already paid to SBA, and an earlier judgment

will be enforced against him. The joint efforts of OIG and the SBA

Investment Division resulted in the settlement described above.

Proposed Rule Amending Regulations for the New Markets Venture

Capital Program OIG reviewed a proposed rule amending the regulations for the New

ne

toU.S. wgraeli dant the
OIG Activities

Semiannual Report March 2002 23

Market Venture Capital (NMVC) program. While generally supportive of

the proposal, OIG was concerned that a proposed change would allow noncash capital contributions to be included in the definition of regulatory

capital. By accepting non-cash items as regulatory capital, SBA increases

the capital base of a licensee when computing capital impairment. This

could be a significant factor if the ratio of the non-cash capital to cash

capital is material. OIG suggested that the NMVC program consider

establishing a limit on the dollar amount of non-cash contributions allowed

to be included as regulatory capital. Such a limit should ensure that the noncash items would not significantly impact the impairment calculations.

Program officials addressed OIG comments by narrowing the proposed rule

to allow only organizational and management expenses paid on behalf of a

NMVC company before it achieves final approval to be included in the

definition of regulatory capital.

Surety Guarantees

Preferred Surety Bond Company Audits

OIG issued two audit reports on preferred surety bond companies.

Both audits found that the surety correctly calculated and timely remitted

fees to SBA and that the surety did not always comply with SBA regulations

for underwriting and servicing bonds and processing claims. In the case of

the first company audited, OIG found that it: (1) did not request and

maintain status reports for one bond; and (2) made a duplicate claim

payment on one bond that was reimbursed by SBA. In the case of the

second, OIG found that it did not: (1) maintain copies of required SBA

forms for one bond; and (2) notify SBA of default for one bond in a timely

manner. For the first company, OIG recommended that SBA take

appropriate actions to recover $2,837.01. For both companies, OIG

suggested that SBA advise the company to implement, review, revise, and

adhere to policies and procedures to correct the deficiencies. The Associate

Administrator for Surety Guarantees agreed to implement the

recommendations of both reports upon completion of the audit.

The following narrative illustrates OIG investigations of fraud to

obtain surety bond guarantees.

• The president of a Birmingham, Alabama, construction company was

convicted on one count of making a material false statement to

fraudulently influence SBA to guarantee five surety bonds totaling

nearly $1.2 million from an insurance company in Cincinnati, Ohio.

(Before his conviction, the judge dismissed the two counts of making

false statements to SBA on which he was also indicted.) On the SBA

application, the defendant denied having a criminal history. The

investigation documented that he had been charged with, arrested for,

at

.01
OIG Activities

 Semiannual Report March 2002

24

and/or convicted of at least 29 criminal offenses. The dismissed counts

alleged that he submitted a financial statement fraudulently indicating

ownership of two pieces of real estate with a total value of $450,000.

His company failed to complete any of the bonded contracts, and the

insurance company paid $324,170 on these bonds. The insurance

company is in SBA’s preferred surety program, and the bonds issued for

the defendant were guaranteed at 70 percent. This investigation was

based on findings of a surety bond audit by OIG’s Auditing Division.

Entrepreneurial Development Programs

Women’s Business Center Advisory Memorandum

OIG issued an advisory memorandum on SBA’s evaluation and

monitoring of a women’s business center in Vermont, based on issues

identified during a previous audit of the center. The audit disclosed

deficiencies that could be applicable to all women’s business centers in the

areas of: (1) reviewing proposed budget and cost information; (2) reviewing

staffing roles and experiences; and (3) monitoring the financial and

performance aspects of the award. For this reason, the auditors made eight

recommendations to the AA/Office of Women’s Business Ownership

(OWBO) and three recommendations to the Assistant Administrator for

Administration to help strengthen the administration of the Women’s

Business Center Program. OWBO agreed with all of the recommendations

addressed to them. The Office of Administration agreed with one of the

recommendations addressed to them and provided a rebuttal with supporting

documentation for the other two. The auditors analyzed the rebuttal and

supporting documentation and determined that the recommendations should

remain.

Government Contracting and Business

Development Program

OIG reported more than $19 million in cost avoidances this period,

$8.7 million of which were a result of investigative work in connection with

the Section 8(a)BD program. The amount reflects military construction

contracts that were cancelled and other contracts that were in line to be

awarded but were denied based on OIG’s investigative findings.

The following cases illustrate OIG investigations of fraud in

connection with the Section 8(a)BD program.

• The president of a former Section 8(a) contractor was sentenced to serve

r

on,

97
OIG Activities

Semiannual Report March 2002 25

6 months in home detention and 3 years on probation. He was also fined

$2 million and ordered to pay $963,197 in outstanding fines relating to a

1993 bribery conviction. (The defendant paid the $2 million fine before

his sentencing.) He previously pled guilty to one count of obstruction of

a Federal audit. He admitted that, from 1993, to 1995, he had directed

his staff to obstruct Environmental Protection Agency (EPA) auditors

attempting to determine the appropriateness of the company’s billings

under EPA contracts. He and five associates had been indicted on

charges of racketeering, racketeering conspiracy, money laundering,

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

prosecution under the Racketeer Influenced and Corrupt Organizations

Act involves allegations that a group of persons formed an “enterprise”

which then engaged in a series of corrupt or illegal activities. In this

case, he initially entered SBA’s Section 8(a) program in Ohio in 1980,

as primary owner of the company, a hazardous-waste cleanup

contractor. The indictment alleged that in the late 1980s, shortly after

the company was “graduated” from the program, he obtained (in the

name of his son and codefendant to conceal his role) Section 8(a) status

in Kentucky, and later in California, for another company he controlled.

The indictment further alleged that another waste cleanup company

purportedly headed by the defendant’s other son and codefendant

fraudulently obtained Section 8(a) status in Kentucky. As of the date of

the indictment, these Section 8(a) companies had been awarded Federal

contracts totaling more than $150 million. Pursuant to the defendant’s

plea agreement, at his sentencing the Government dismissed all the other

charges of the indictment against him and his codefendants.

• A Poplar Bluff, Missouri, Section 8(a) company and its president pled

guilty to three counts each of mail fraud. They were previously charged

in a 12-count felony indictment that also included counts of major fraud

against the U.S., obtaining illegal kickbacks, and making material false

statements. In the plea agreement, the president admitted to devising a

scheme to fraudulently obtain money from insurance companies that

insured the company’s property and equipment. As part of the plea, the

president and his company agreed to make restitution totaling $13,101 to

two insurance companies and to repay $669 that he wrongfully withheld

from two of his employees. He also agreed to pay fines totaling

$250,000. In exchange for the Government’s promise to dismiss the

remaining counts of the indictment, the president and his company

further agreed to voluntarily withdraw and forever be barred from

participation in SBA’s Section 8(a) and other programs, including all

SBA certifications, assistance, and resources. The company also agreed

to surrender all surplus property obtained as a result of their certification

in the Section 8(a) program. The Army suspended both the company

and its president from future contracting with any executive branch

Federal agency. The Army also suspended both the president and the

company from non-procurement Government assistance. Debarment

proceedings are pending against them. As a result of the suspensions,
OIG Activities

 Semiannual Report March 2002

26

military-service procurement offices cancelled Section 8(a) contracts

that had already been approved for the company by SBA and were

valued at a total of more than $3.75 million. SBA’s St. Louis District

Office has taken action to deny the company its latest Section 8(a)

contracts, also from the military, valued at as much as $4.9 million.

• The president of a defunct Hunting Valley, Pennsylvania, construction

company was indicted on one count of making a material false statement

to SBA. He allegedly represented in his SBA Section 8(a) Annual

Update form and attachments that he had relocated to Pennsylvania

along with his Section 8(a) certified business and that he controlled the

day-to-day operations of the company. The indictment charges that he

never relocated to Pennsylvania from Michigan and that he had a friend

run the daily affairs of the business. The identity and role of his friend

were not made known to SBA. The friend who controlled the business

was not eligible to participate in the Section 8(a) program because he

had already graduated from the program and would not be considered

disadvantaged. This investigation was referred by the Veteran’s

Administration OIG and is continuing.

Proposed Rule to Amend the Regulations for the Historically

Underutilized Business Zone Program

OIG reviewed a proposed rule addressing changes in the Historically

Underutilized Business Zone Empowerment Contracting (HUBZone)

program. The proposed rule sought to clarify certain regulations and make

some technical changes. OIG was concerned with a proposed provision that

would enable the Agency to utilize different percentages of prime contractor

performance requirements (limitations on subcontracting) if the

Administrator determines that such action is necessary to reflect:

“conventional industry practices among small business concerns that are

below the numerical size standard for businesses in that industry . . .

[however,] SBA will generally not consider requests from anyone other than

a representative of a national trade or industry group.” OIG was uncertain

as to the meaning of “generally not consider” in this context. Conceivably,

this could lead to charges of special treatment where some entities, but not

others, are given different percentages. It could also open the door to SBA

being inundated with requests for different treatment. Limiting such

requests to national trade or industry groups would ensure that the Agency

would be truly considering national interests, as opposed to solely one entity

seeking special treatment. HUBZone program officials agreed with our

concern and changed the proposed rule to limit any requests to national trade

or industry groups.

fy

one

he

d

m.
OIG Activities

Semiannual Report March 2002 27

Agency Management

Proposed Legislation: S. 1499, and H.R. 3073, each entitled the

“American Small Business Emergency Relief and Recovery

Act of 2001”

OIG reviewed S. 1499 and H.R. 3073, both entitled the “American

Small Business Emergency Relief and Recovery Act of 2001,” which would

provide emergency relief to those small business concerns that suffered

economic injury as a result of the terrorist attacks on September 11, 2001.

OIG supported the proposed legislation, but recommended several

clarifications. For instance, the bills provided for disaster loans “to a small

business concern that has been directly affected and suffered, or that is likely

to suffer, substantial economic injury as the result of the terrorist attacks on

September 11, 2001.” We found the “likely to suffer, substantial economic

injury” language to be a very vague standard and recommended that it be

further defined, so that SBA could hold applicants accountable to a

quantifiable and qualifiable economic injury. The bills also proposed

unlimited discretionary authority to the Administrator of SBA to increase or

waive otherwise applicable size standards. Potentially, this authority could

open the door to disaster loan assistance to a business of any size. This

would create a lack of accountability and raise the potential for abuse of the

program. We recommended that this provision be changed to provide some

established criteria to increase or waive a standard. For example,

discretionary authority could be provided to the Administrator to increase or

waive the size standard up to 150 percent or 200 percent of the established

size standard on a case-by-case basis.

Revision to SOP 00 02, Internal Controls

OIG commented on the Agency’s proposed update to its standard

operating procedure (SOP) for internal controls. Among its comments, OIG

suggested that the SOP emphasize that all Agency employees are

responsible for implementing and adhering to internal controls. OIG also

commented that the draft should be changed to reflect General Accounting

Office’s (GAO) Standards of Internal Controls in the Federal Government

as SBA’s primary authority for internal controls --- not the guidance of the

Committee of Sponsoring Organizations of the Treadway Commission

(COSO). GAO provides the standards of internal control for the Federal

Government, whereas COSO’s framework is directed toward the private

sector. In addition, GAO standards explicitly reference COSO’s Internal

Control – Integrated Framework and incorporate appropriate provisions of

it. OIG also recommended including SBA’s Chief Information Officer on

the list of senior managers that have primary responsibility for establishing

and reporting on internal controls. OIG further suggested some language
OIG Activities

 Semiannual Report March 2002

28

that expanded the discussion of responsible monitoring of internal controls.

SBA’s CFO agreed with our comments and made appropriate changes. Office of Inspector General

Office of Security Operations Pursuant to provisions of the Small Business Act and the Small

Business Investment Act, SBA requires applicants for assistance to meet

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

Office of Security Operations (OSO) provides a vital service to help SBA

ensure that Agency program participants meet the standards by processing

name checks and, where appropriate, fingerprint checks on applicants. To

make character eligibility determinations, OSO makes use of its on-line

connection with FBI’s Machine Readable Data system. When program

applicants appear to be ineligible for assistance based on character, OSO

makes referrals to program officials for adjudication. During this reporting

period, OSO made referrals that resulted in SBA’s business loan program

managers declining 36 applications and disaster loan program officials

declining 18 applications, totaling over $9.9 million and almost $3.1 million

respectively, for character reasons. Those declinations made available that

amount of credit for applicants in whom SBA can have confidence of

repayment. In addition, officials of SBA’s Section 8(a) and surety bond

programs declined, respectively, three applications for certification and one

application for guaranty. Almost $219 million in loans have been declined

during the last 10 years due to character eligibility.

OSO also performs background checks to comply with Federal regulations

that require Agency employees to have security clearances appropriate for

their positions. During this reporting period, OSO initiated 66 background

investigations and issued 25 security clearances. OSO also reviewed and

adjudicated 70 background investigative reports in accordance with

Executive Order 10450 and OMB Circular A-130, and coordinated with

SBA’s Office of Disaster Assistance to ensure the timely adjudication of

109 derogatory background investigative reports forwarded for review and

appropriate action.

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

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

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

chart below indicates) nearly 55 percent of the investigations initiated by

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

program heads or other SBA employees. This cooperation indicates the

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

enndr
OIG Activities

Semiannual Report March 2002 29

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

of its programs. The shift in SBA’s role from primarily reviewing and

processing loans to increasingly providing oversight of lending practices,

has caused OIG to change its briefing strategy. Because continued success

will depend increasingly on lender referrals, OIG has expanded its integrityawareness briefing program to include participating lenders and other

interested parties. During this reporting period we conducted the following

briefings:

• A presentation to 75 attendees at a lenders training session in

Seattle, Washington;

• A presentation to 33 attendees at a disaster-fraud awareness training

session for State and local law enforcement officers in

Oakland, California;

• A presentation to 25 SBA Disaster Loss Verifiers in

New York, New York;

• A presentation to 250 SBA Disaster Program employees in

Niagara Falls, New York; and

• A presentation to the Affirmative Civil Enforcement Coordinator,

U.S. Attorney’s Office, District of Maryland.

Sources of Investigations from 

ctober 1, 2002, to March 31, 2002

54.8%

.1%

SBA

Other Federal

Agencies

Private

Citizens

Lenders

Other
OIG Activities

 Semiannual Report March 2002

30

Direct Investigation Time by Program Area

October 1, 2001, to March 31, 2002

Program Area Direct Time % Number of Investigations*

Closed** In Progress

Capital Access 75% 35 306

Disaster Assistance 11% 9 121

Government Contracting and

Business Development

8% 12 37

Agency Management 6% 12 23

Entrepreneurial Development *** 0 4

Total

100% 68 491

* Includes civil cases ** Includes cases canceled *** Less than 1⁄2 percent

Direct Audit Time by Program Area

October 1, 2001, to March 31, 2002

Program Area Direct Time % Number of Audits

Issued In Progress

Capital Access 49% 9 7

Disaster Assistance 12% 2 1

Government Contracting and

Business Development

2% 0 2

Agency Management 22% 4 8

Entrepreneurial Development 15% 1 3

Total

100% 16 21
OIG Activities

Semiannual Report March 2002 31

Direct Counsel Time by Program Area

October 1, 2001, to March 31, 2002

Program Area Direct Time % Number Reviewed*

Capital Access 28% 33

Disaster Assistance 4% 5

Government Contracting and

Business Development

15% 17

Agency Management 41% 48

Entrepreneurial Development 3% 3

OIG Community-wide 9% 10

Total 100% 116

* This number reflects proposed legislation, regulations, standard operating procedures, and other issuances, such as

policy and procedural notices, Administrator’s memos, and other communications that frequently involve the

implementation of new programs and policies.
Statistical Highlights

 Semiannual Report March 2002

32

FY 2002 6-Month Productivity Statistics

October 1, 2001, through March 31, 2002

Office-wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines......................................................... $9,391,852.00

B. Loans Not Made as Result of Investigations and Name Checks.......................... $32,090,831.00

C. Disallowed Costs Agreed to by Management............................................................. $88,430.01

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ................................................................................ $370,629.50

Total $41,941,742.51

Efficiency and Effectiveness Activities

A. Reports Issued........................................................................................................................... 16

B. Recommendations Issued.......................................................................................................... 35

C. Dollar Value of Costs Questioned................................................................................. $2,837.01

D. Dollar Value of Recommendations that Funds

Be Put to Better Use ........................................................................................ $550,848.50

Follow-up Activities

A. Recommendations Closed........................................................................................................ 80

B. Disallowed Costs Agreed to by Management............................................................ $88,430.01

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

Agreed to by Management ............................................................................... $370,629.50

D. Unresolved Recommendations ................................................................................................ 40

Legislation/Regulations/SOPs/Other Reviews

A. Legislation Reviewed ................................................................................................................. 7

B. Regulations Reviewed............................................................................................................... 14

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

D. Other Issuances Reviewed* ...................................................................................................... 84

* This includes policy notices, procedural notices, Administrator’s action memoranda, and other communications, which

frequently involve the implementation of new programs and policies.
Statistical Highlights

Semiannual Report March 2002 33

Fraud Deterence Activities

A. Total Cases.............................................................................................................................. 559

B. Closed Cases ............................................................................................................................. 68

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

D. Open Cases ............................................................................................................................. 465

E. Subjects Currently Under Investigation ............................................................................... 1,763

F. Cases Referred to FBI or Other Agencies for Investigation........................................................ 3

Summary of Indictments and Convictions

A. Indictments from OIG Cases .................................................................................................... 21

B. Convictions from OIG Cases .................................................................................................... 29

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations......................................................................................... $9,391,852.00

B. Loans/Contracts Not Approved as a Result of OIG Investigations...................... $19,075,972.00

C. Loans/Contracts Not Approved as a Result of the Name

 Check Program ............................................................................................ $13,014,859.00

Total: ..................................................................................................................... $41,482,683.00

SBA Personnel Actions Taken as a Result of Investigations

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

B. Resignations/Retirements............................................................................................................ 2

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

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

Program Actions Taken as a Result of Investigations

A. Suspensions................................................................................................................................. 3

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................................................................................................ 645

B. Total Calls/Letters Referred to Investigations Division for Evaluation...................................... 4

C. Total Calls/Letters Referred to Program Offices or Other Federal

Investigative Agencies...................................................................................................... 50

D. Total Other Calls/Letters ........................................................................................................ 591
Inspector General Act Statutory Reporting Requirements

 Semiannual Report March 2002

34

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

Inspector General Act Amendments of 1988, are listed below.

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 22, 26-27

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 3-31

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

 And Deficiencies 3-31

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 39

Section 5(a)(4) Matters Referred to Prosecutive Authorities 40-46

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 36

Section 5(a)(7) Summary of Significant Audits 3-24

Section 5(a)(8) Audit Reports with Questioned Costs 37

Section 5(a)(9) Audit Reports with Recommendations that Funds Be Put to Better Use 37

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 38

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
Semiannual Report March 2002 35

TABLE OF APPENDICES

Appendix Page

Appendix I – Audit Reports Issued ............................................................................................ 36

Appendix II

 Part A – Inspector General-Issued Audit Reports

 With Questioned Costs ................................................................................................ 37

 Part B – Inspector General-Issued Audit Reports

 With Recommendations that Funds Be Put to Better Use........................................... 37

 Part C – Inspector General-Issued Audit Reports

 With Non-Monetary Recommendations...................................................................... 38

 Part D – Inspector General-Issued Audit Reports

 With Overdue Management Decision ......................................................................... 38

 Part E – Significant Audit Reports

 Without Final Action................................................................................................... 39

Appendix III – Six Month Arrested/Indicted/Convicted Summary............................................ 40

Appendix IV – Six Month Sentencing Summary ....................................................................... 44
 Semiannual Report March 2002

36

APPENDIX I

Audit and Other OIG Reports Issued

October 1, 2001, to March 31, 2002

TITLE NUMB

ER

ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER

USE

Capital Access

Net 1st Bank 2-01 10/29/01

Darshan’s Paradise Inn 2-03 2/27/02 $62,401.50

Danbart Corporation 2-05 2/27/02 $308,228.00

C N A Surety Company 2-06 2/28/02 $2,837.01

Safeco/First National Insurance Company 2-07 2/28/02

SBLC Oversight Process 2-12 3/20/02

CFM Bracket 2-13 3/21/02 $116,722.00

Colorado Taco Corporation 2-15 3/29/02 $63,497.00

Asset Sale Due Diligence Contract 2-16 3/29/02

Program sub-total 9 reports $2,837.01 $550,848.50

Disaster Assistance

Disaster Loan 2-10 3/20/02

Disaster Loan 2-14 3/26/02

Program sub-total 2 reports

Entrepreneurial Development

Women’s Business Center 2-11 3/19/02

Program sub-total 1 report $0 $0

Agency Management

FY 2002 Top 10 Management Challenges 2-02 1/16/02

SBA’s FY 2001 Financial Statements Audit 2-04 2/27/02

Agreed Upon Procedures Report on FACTS 2-08 3/4/02

Agreed Upon Procedures Report on Intragovernmental Activity on Balance Data2-09 3/4/02

Program sub-total 3 reports $0 $0

TOTALS (all programs) 16 reports $2,837.01 $550,848.50
Semiannual Report March 2002 37

APPENDIX II - Part A

Audit Reports with Questioned Costs

October 1, 2001, to March 31, 2002

REPORTS RECs* COSTS**

QUESTIONED UNSUPPORTED

A. For which no management decision had

been made by September 30, 2001

3 4 ***$88,430.01 $68,699.86

B. Which were issued during the period 1 1 $2,837.01 $0

Subtotals (A + B) 4 5 $91,267.02 $68,699.86

C. For which a management decision was

made during the reporting period

3 4 $88,430.01 $68,699.86

(i) Disallowed costs 2 2 $88,430.01 $68,699.86

(ii) Costs not disallowed 1 1 $0 $0

D. For which no management decision had

been made by March 31, 2002

1 1 $2,837.01 $0

* Recommendations

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

*** The beginning balance is different than the ending balance of the last SAR because $485,051 in questioned costs reflected in the last SAR was

from a previous reporting period.

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

October 1, 2001, to March 31, 2002

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management decision

had been made by September 30, 2001

0 0 $0

B. Which were issued during the period 4 4 $550,848.50

Subtotals (A + B) 4 4 $550,848.50

C. For which a management decision was

made during the reporting period

2 2 $370,629.50

(i) Recommendations agreed to

by SBA management

2 2 $370,629.50

(ii) Recommendations not agreed

to by SBA management

0 0 $0

D. For which no management decision

had been made by March 31, 2002

2 2 $180,219.00

* Recommendations
 Semiannual Report March 2002

38

APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

October 1, 2001, to March 31, 2002

REPORTS RECOMMENDATIONS

A. For which no management decision had

been made by September 30, 2001

9 75

B. Which were issued during the period 6 30

Subtotals (A + B) 15 105

C. For which a management decision was

made (for at least one recommendation in

the report) during the reporting period

10 74

D. For which no management decision (for at

least one recommendation in the report)

had been made by March 31, 2002

6 31

APPENDIX II – Part D

Issued Audit Reports with Overdue Management Decisions

March 31, 2002

TITLE NUMBER ISSUED STATUS

PLP Oversight Process 1-19 9/27/01 Negotiating with program officials.
Semiannual Report March 2002 39

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of March 31, 2002

Report

Number

Title Date

Issued

Date of

Management

Decision

Final

Action

Target

43H006021 8(a) Continuing Eligibility 9/30/94 *** 3/31/02

87H002017 NOAA Computer Contracts 6/18/98 11/19/01 3/31/02

9-15 Disaster Home Loan Servicing Centers 8/3/99 *** 5/31/02

9-23 Survey of Electronic Records Management 9/15/99 11/30/99 8/31/02

0-14 7(a) Service Fee Collection 3/30/00 8/22/00 10/31/02

0-15 SBA’s Proposed Systems Development Methodology 3/30/00 9/29/00 9/20/02

0-19 SDB Certification Program Obligations & Expenditures 6/30/00 *** 3/31/02

0-25 GPRA - SBIC Program 9/7/00 *** **

0-26 GPRA - Surety Bond Guarantee Program 9/25/00 *** 7/31/02

0-28 Rhode Island District Advisory Council 9/29/00 *** 5/31/02

0-29 MBELDEF Cosponsorship 9/30/00 *** **

0-30 SBA Administration of MBELDEF 9/30/00 *** **

0-31 Boscart Construction, Inc. 9/30/00 *** **

1-01 GPRA - 7(a) Business Loan Program 12/4/00 *** 9/30/02

1-06 GPRA - Disaster Assistance Program 2/15/01 *** 7/31/02

1-09 SBA’s Planning and Assessment for Implementing PDD 63 3/26/01 9/27/01 10/30/02

1-11 GPRA – MSB/COD Program 3/27/01 9/28/01 9/30/02

1-12 SBA’s Information Systems Controls – FY2000 3/27/01 *** **

1-14 Paper Report Production 8/3/01 12/21/01 **

1-15 FY 2000 Financial Statements – Management Letter 8/15/01 *** **

1-16 SBA’s Follow-up On SBLC Examinations 8/17/01 9/25/01 6/30/02

1-17 Vermont Women’s Business Center 9/19/01 *** **

1-18 Farmington Casualty Company 9/21/01 11/8/01 4/12/02

A1-05 SBA’s Use of Government Cars and Hired Car Services 9/27/01 1/15/02 4/30/02

1-20 Agreed-upon Procedures Report on Sensitive Payments 9/28/01 12/18/01 4/30/02

1-21 SBA’s UNIX Operating Systems 9/28/01 *** **

A1-06 Evaluation of SBA’s Computer Security Program 9/28/01 *** **

2-03 SBA Loan to Darshan’s Paradise Inn 2/27/02 3/21/02 4/27/02

2-05 SBA Loan to Danbart Corp 2/27/02 3/21/02 5/31/02

* At least one recommendation remains open. ** Target dates vary with different recommendations.

*** Management decision dates vary with different recommendations.
 Semiannual Report March 2002

40

APPENDIX III

Six Month Arrested/Indicted/Convicted Summary

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 AL SBG Construction executive fraudulently influenced SBA to guarantee five

surety bonds totaling $1.17 million. On SBA application, he denied

having criminal history; in fact, he had been charged with, arrested

for, and/or convicted of 29 criminal offenses. He also reported

ownership of two pieces of real estate with total value of $450,000.

He did not own these properties, and their combined actual value was

less than $50,000. His company failed to complete any of bonded

contracts, and SBA preferred surety insurance company paid

$324,170 on these bonds. *

Executive

convicted

None

 AZ BL In connection with $1 million SBA-guaranteed loan to buy two fastfood restaurants, friend helped create fraudulent promissory note for

bogus $400,000 loan from him to indicate that two SBA borrowers

had greater debts, requiring larger loan. Prior to loan closing,

additional fraudulent documentation was created to show that note

had been paid down to about $206,000 and that remaining debt could

be paid with $150,000 in SBA-guaranteed loan proceeds and about

$56,000 in personal funds. Friend never received $56,000 but, at loan

closing, $150,000 check was issued from SBA loan proceeds as his

payoff on fraudulent note. He in turn endorsed check to one borrower

and never received any benefit for his role in fraudulent note.

Defendants used $150,000 for personal and business benefit.

Borrowers

pled guilty

FBI

 AZ BL Business brokers submitted fraudulent documents to private lenders to

obtain 100-percent financing for clients seeking business acquisition

loans guaranteed by SBA; inflated purchase price to cover actual

selling price plus cash injection; arranged for buyer to obtain real

estate license and listed as asset commission that borrower would earn

for sale of business; arranged for third party injectors to loan required

down payment as cash injection; and received inflated commission

and arranged for portion of commission that was loaned by third party

injectors (plus fee) to be wired back to third party. *

Brokers pled

guilty

FBI

 CA BL To obtain $90,000 LowDoc loan, businessman submitted fraudulent

documents, including invoice for leasehold improvements by nonexistent construction company; actually, borrower’s cousin (not

licensed contractor) had made some improvements worth far less.

Businessman

indicted

None

 CA BL Produce business owner who had received $225,000 SBA-guaranteed

loan was arrested on felony warrant that had not been disclosed in

loan application. *

Businessman

arrested

Local law

enforcement

agencies
Semiannual Report March 2002 41

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 CO BL To obtain $100,000 LowDoc loan, painting company owner failed to

disclose $250,000 in business debts and two pending lawsuits; used

some loan proceeds for personal purchases instead of authorized

business debts; and failed to list numerous assets during bankruptcy.

Businesswoma

n pled guilty

FBI

 CT BL About 3 weeks after obtaining $450,000 SBA-guaranteed bank loan,

printing company owner filed for personal bankruptcy, concealing his

ownership of borrower and two other companies; also concealed his

personal guaranty of loan and his personal assets.

Businessman

indicted

None

 IL BL To obtain $1.25 million SBA-guaranteed loan, restaurateur and three

attorneys conspired to inflate purchase price by $180,000; falsified

$398,938 capital injection; and created bogus $215,000 second

mortgage. Two attorneys conspired to obstruct justice by fabricating

notes in response to grand jury subpoenas. In his loan application,

restaurateur lied regarding his citizenship and criminal history. *

Restaurateur,

corporation

and three

attorneys

indicted

FBI

 IL BL To obtain $400,000 SBA-guaranteed loan, president of contracting

business signed affidavit that she and company were current on all

taxes, when they actually owed more than $1 million.

Businesswoma

n charged

FBI

 KY BL Conspiring to fraudulently obtain $250,000 in SBA-guaranteed loans,

president of roadside construction company, his brother, and

guarantor submitted falsified invoices for machinery, equipment, and

furniture, then falsely negotiated joint-payee loan checks and allowed

company vehicle to be titled in brother’s name and sold. *

Businessman,

brother, and

guarantor

indicted;

businessman

and brother

pled guilty

None

 MO BL To obtain $340,000 SBA-guaranteed loan, boat-propeller

manufacturer’s president failed to disclose numerous personal and

corporate liabilities; subsequently submitted other fraudulent

documents; bilked investors in another of his corporations; and

laundered funds.

Businessman

indicted

IRS, state

attorney

general

 NJ BL To obtain $500,000 SBA-guaranteed loan, plating/finishing company

and three principal officers failed to purchase machinery and fixtures

as required in loan agreement, provided forged landlord waiver, and

passed three forged checks to. Same four defendants plus second

plating/finishing company and its owner committed environmental

crimes.

Four

individuals

and existing

corporation

pled guilty;

charges

against defunct

corporation

dismissed

EPA/OIG,

state

enforcement

agency

 NJ BL One of defendants from case above, also chief financial officer of

now-defunct electronic imaging company, schemed to illegally divert

funds from $1 million SBA-guaranteed loan.

CFO charged

and pled guilty

EPA/OIG,

state

enforcement

agency
 Semiannual Report March 2002

42

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 NM DL Using name and SSN of deceased acquaintance, woman obtained

post-disaster assistance, including $40,000 SBA home loan;

submitted numerous false documents; also attempted to obtain

information about claim and investigation by posing as representative

of U.S. Attorney’s Office. Neither she nor deceased acquaintance

ever resided at address claimed in disaster-assistance application.

Subsequently charged with additional counts of mail fraud, wire

fraud, and impersonation. *

Woman

convicted

FEMA/OIG

 NY SBIC Village official conspired to misappropriate SBA funds through

specialized SBIC, to which SBA had provided $1.2 million of

leverage funding, by making and concealing of improper loans. *

Village official

(former SBIC

board

member) pled

guilty

ED/OIG,

HUD/OIG,

IRS

 NY DL Caretaker for mentally ill assisted elderly woman including managing

her disaster loan application submission when hurricane damaged her

home. He was arrested on charge of submitting altered invoices for

work purportedly performed on her home; some were actually for

work on properties he owned. His alleged false statements led to

$78,300 being loaned to elderly woman. He personally used much of

loan proceeds to pay for repairs at his residences and to pay down

debts. *

Caretaker

indicted and

pled guilty

FBI

 PA 8aBD To maintain certification in Section 8(a) program, construction

company president represented that he had relocated from Michigan

with, and continued to control, his firm. Actually, he never relocated

but had friend (who was ineligible for Section 8(a)) run firm. *

President

indicted

DCIS, NCIS,

USCS,

VA/OIG

 PA BL President of Civil-War clothing company submitted false Federal tax

returns in unsuccessful effort to obtain $243,000 SBA-guaranteed

loan. *

President

indicted

None

 TX BL President of brake parts company created fraudulent invoices showing

inventory of business as being sold when, in fact, merchandise was

still in his possession. He then filed for both personal and corporate

bankruptcy while using company’s inventory to start second

company. He and his wife executed scheme by “check-kiting” assets

through numerous accounts. SBA loans obtained by them totaled

$500,000.

President pled

guilty

FBI

 TX BL To obtain $105,340 in SBA-guaranteed loan proceeds, construction

company president presented to bank documents falsely representing

his company had purchased $131,675 of equipment from rental

company.

President

charged and

pled guilty

FBI

 TX BL To obtain $77,500 SBA-guaranteed loan, co-owner of dry cleaning

business submitted falsified personal financial statement;

subsequently falsely certified to no substantial adverse change in

financial condition.

Co-owner

indicted

FBI, PIS
Semiannual Report March 2002 43

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 WA BL To obtain draws on various lines of credit, including $1.3 million line

guaranteed by SBA, former owner of evergreen import/export

companies submitted false documents to bank; diverted payments

away from participating lender; diverted proceeds for unauthorized

personal use; and defrauded European taxing agencies.

Former owner

indicted and

arrested

FBI, foreign

government

* This case is further discussed in the narrative section of this report.

Program codes: BL=business loans, DL=disaster loans, 8aBD=Section 8(a) business development, SBG=surety bond guaranties,

SBIC=small business investment companies

Joint-investigation Federal agency acronyms: DCIS=Defense Criminal Investigative Service; ED/OIG=Education Department OIG;

EPA/OIG=Environmental Protection Agency OIG; FBI=Federal Bureau of Investigation; FEMA/OIG=Federal Emergency

Management Agency OIG; HUD/OIG=Housing & Urban Development Department OIG; IRS=Internal Revenue Service;

NCIS=Naval Criminal Investigative Service; PIS=Postal Inspection Service; USCS=Customs Service; VA/OIG=Veterans Affairs

Department OIG
 Semiannual Report March 2002

44

APPENDIX IV

Six Month Sentencing Summary

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 CA DL Couple obtained $231,300 disaster home loan following

Northridge earthquake by submitting false invoices;

received repayment deferments by concealing ownership

of real estate properties. *

Husband: 18 months in

prison Wife: 5 months

incarceration + 5 months

home confinement

Both defendants jointly:

$203,500 restitution

None

 CA BL Tax preparer was responsible for altered “copies” of tax

returns submitted on behalf of clients who consequently

received SBA-guaranteed loans. *

8 months in prison, $2,000

fine + $600,000 in back taxes

to IRS

FBI, IRS

 CT BL To obtain $100,000 SBA-guaranteed loan, former coowner of dry cleaning business falsified capital injection;

pledged as collateral equipment just pledged to another

lender. *

Charged and pled guilty,

$100,000 restitution

None

 DC IC Former owner of SBIC misspent funds of SBIC for

unauthorized and personal uses. *

Signed agreement to pay

$490,000 against civil

judgment, paid first $50,000

None

 IA BL To obtain $1.4 million SBA-guaranteed loan to purchase

business, former president of meat company wrote

insufficient-funds check and perpetrated “check kite” to

make it appear that required equity injection was made;

concealed undisclosed promissory note to seller; converted

vehicles pledged to bank on same loan. Subsequently

charged with unreported international transportation of

currency, embezzlement of $483,486, money laundering. *

63 months in prison,

$1,232,000 restitution +

$468,934 forfeiture

FBI, USCS,

PWBA

 KY 8aBD Former Ohio Section 8(a) contractor participated in

fraudulent conspiracy to circumvent program graduation

rules, using his sons to establish Section 8(a) companies in

other States to surreptitiously maintain his participation in

program. Other conspirators were his wife, nephew, and

former vice president. *

6 months home confinement,

fines totaling $2,963,197

Charges against other five

defendants dismissed

EPA/OIG,

DCIS
Semiannual Report March 2002 45

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 MO 8aBD President of Section 8(a) construction company used

intimidation or threats against two company employees to

obtain part of their compensation during Government

construction project; used U.S. mail to obtain money from

insurance companies by false pretenses; submitted false

statements to SBA to obtain Section 8(a) status and

resulting contracts, falsely claiming to be Cherokee and to

have suffered consequent economic disadvantage. Section

8(a) application also concealed his criminal record for

assault. Company received $1 million in Federal contracts

due to president’s fraudulent representations. *

President and corporation

both pled guilty, both

suspended from executivebranch contracting and nonprocurement assistance,

corporation suspended from

Section 8(a), $3.75 million in

already-approved 8(a)

contracts cancelled, and $4.9

million in pending 8(a)

contracts denied

FBI,

DOL/OIG

 NV DL To obtain $213,600 disaster home loan, man claimed he

was employed 10 months and earned $60,000; actually, he

was employed for 3 months and earned only $2,060.

$25,904 restitution State attorney

general

 NH BL Former executive director of nonprofit microlender greatly

overstated, in reports to SBA, actual balances of microloan

accounts; converted to his personal use $13,042 in

microloan funds. *

Pled guilty, $28,336

restitution

None

 NY SBIC Former president of SBIC charged with: Improperly

negotiating for his personal use $84,400 in checks drawn

on SBIC’s bank account; causing illegal transfer of parcel

of real estate valued at $363,613 from SBIC without

consideration to second company he solely owned;

causing illegal transfer of property valued at $361,296

from SBIC without consideration to third company he

owned; improperly causing $33,869 in loan payments

from borrower to be diverted from SBIC to his solely

owned company and later converted to his own use; and

illegally causing $119,096 in loan payments from another

borrower to be diverted to his solely owned company and

converted to his own use. His actions forced SBA to

liquidate SBIC. *

2 months incarceration, 6

months home confinement,

$953,274 restitution

None

 OH BL Pet store president obtained $100,000 LowDoc loan.

During application process, he concealed about $200,000

in debt and information regarding his criminal history.

Prior to applying for SBA loan, he had been arrested on

multiple offenses, charged with various crimes, and

convicted of felony of carrying concealed weapon. *

Convicted, 14 months in

prison, $83,203 restitution

None

 OH BL Four individuals formed conspiracy to defraud

Government, devised by licensed real estate

agent/business broker to facilitate $325,000 SBAguaranteed loan for purchase of forklift sales/repair

business; fraudulently provided funds for required capital

injection prior to loan closing; inflated contract sales price;

concealed transfer of funds between defendants. Buyer

concealed his substantial criminal history. *

Broker: 2 years in prison,

$46,500 restitution

None
 Semiannual Report March 2002

46

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 PA BL President of defunct ship repair business that had

$7.5 million revolving line of credit and $650,000

SBA-guaranteed loan transferred proceeds to his Guam

shipbuilding company before filing bankruptcy. *

Paid participating lender

$1,985,000 settlement, of

which $80,000 applied to

SBA-guaranteed loan

DCIS, FBI,

NCIS, PWBA

 TX BL To obtain $156,000 SBA-guaranteed loan, owner of auto

service center submitted 3 years of falsified tax returns and

IRS tax return verifications, along with fraudulent

documentation of required capital injections and

equipment purchases. Loan proceeds were used for

personal expenditures. *

2 years in prison TIGTA

 TX BL Sixteen defaulted SBA-guaranteed loans were identified as

part of alleged fraudulent scheme.

Participating lender agreed to

release SBA from guaranty

liability of more than $8.2

million.

FBI

 TX BL Having been indicted on 26 felony counts of fraud in

connection with two fraudulent loans (totaling $555,000),

defendant engaged two individuals to apply for $1 million

SBA-guaranteed loan for sham sale of his business. OIG

notified lender of status of “seller.”

$1 million savings from

declined loan

TIGTA

 VA BL Chiropractor submitted false equipment invoices and false

building lease in support of his application for SBAguaranteed loan of $337,000 to purchase equipment.

Upon receiving two-payee disbursement checks for loan,

he forged endorsement of equipment company and

deposited checks into his personal account. He

subsequently defaulted on $136,617 loan balance. *

6 months home confinement,

$136,617 restitution

FBI

* This case is further discussed in the narrative section of this report.

Program codes: BL=business loans, DL=disaster loans, 8aBD=Section 8(a) business development, SBIC=small business investment

companies

Joint-investigation Federal agency acronyms: DCIS=Defense Criminal Investigative Service; DOL/OIG=Labor Department OIG;

EPA/OIG=Environmental Protection Agency OIG; FBI=Federal Bureau of Investigation; IRS=Internal Revenue Service;

NCIS=Naval Criminal Investigative Service; PWBA=Pension & Welfare Benefits Administration; TIGTA=Treasury Department Tax

Administration OIG; USCS=Customs Service
MAKE A DIFFERENCE

To promote integrity, economy, and efficiency, we encourage

you to report instances of fraud, waste, or mismanagement to the

SBA OIG FRAUD LINE.*

CALL

1-800-767-0385 (Toll Free)

202-205-7151 (Washington, DC, Area)

Write or Visit

U.S. Small Business Administration

Office of Inspector General

Investigations Division

409 Third Street, SW. (5th Floor)

Washington, DC 20416

Or E-mail Us At OIG@SBA.GOV

 *Upon request your name will be held in confidence.