U.S. Small Business Administration 

Office of Inspector General 

_________________________________ 

Semiannual Report to Congress 

Spring 2005

S 

October 1, 2004 – March 31, 2005 
Inspector General Act Statutory Reporting Requirements 

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 Page

Section 4(a)(2) Review of Legislation and Regulations 20, 23 

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 3-22 

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

 and Deficiencies 37-40 

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 32-36 

Section 5(a)(4) Matters Referred to Prosecutive Authorities 44-49 

Section 5(a)(5) Summary of Instances Where Information Was Refused None 

 and 6(b)(2) 

Section 5(a)(6) Listing of OIG Reports 25 

Section 5(a)(7) Summary of Significant Audits & Other Reports 3-22 

Section 5(a)(8) Audit Reports with Questioned Costs 26 

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

 Better Use 26 

Section 5(a)(10) Summary of Reports From Prior Semiannual Reports 

 Where No Management Decision Was Made 28 

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

Section 5(a)(12) Significant Management Decisions with Which 

 the OIG Disagreed None 

Section 5(a)(13) Information Described Under Section 05(b) of the Federal Financial N/A 

 Management Improvement Act of 1996 
A Message From The Inspector General 

I am pleased to present the Small Business Administration (SBA), Office of Inspector General (OIG), 

Semiannual Report summarizing activities from October 1, 2004, through March 31, 2005. On behalf of 

the OIG staff, I would also like to thank Harry Damelin who, as the Inspector General during this 

reporting period, provided the support and leadership that made these accomplishments possible. Harry 

was sworn in as the Inspector General of the Treasury Department on April 4, 2005.

As an independent, objective reviewer and evaluator of the operations and activities of the SBA, the OIG 

seeks to target potential financial vulnerabilities and fraud in SBA programs, promote effective program 

management, ensure sound Agency financial and management information, and improve information 

security management. During this reporting period, we issued 18 reports with recommendations for 

improving Agency operations, reducing fraud and unnecessary losses, and recovering funds. In addition, 

OIG investigations led to 24 indictments and 19 convictions of subjects who defrauded the Federal 

Government. In addition, the Office collectively reviewed 79 legislative, regulatory, policy, procedural, 

and other proposals concerning the SBA and Government-wide programs. With a staff of approximately 

100, the OIG continues to produce sizeable savings and important program improvements. 

SBA has substantially changed its methods for delivering services and loan products by streamlining its 

operations. The Agency has moved away from the direct delivery of products and services and toward 

using partnerships and business resource partners more extensively. SBA has also reorganized field staff, 

centralized certain functions, and reduced staff. The Agency’s transformation to a “New SBA,” however, 

entails substantial risk for fraud and abuse. Lack of direct involvement in lending and servicing functions 

weakens SBA’s ability to prevent and detect fraud in its loan programs. SBA’s need to monitor the 

activities of its lenders and the importance of OIG oversight has increased significantly. 

During the past 6 months, we have focused much of our effort on working with the Agency to resolve the 

most important Management Challenges facing SBA. While much remains to be done, SBA is making 

progress on a number of its challenges. In this reporting period, we issued the FY 2005 Management 

Challenges, began discussions with program officials to revise the Challenges—where appropriate—to 

keep them forward-looking, and published a new Challenge on Government Contracting. 

While the OIG continues to identify financial management as a major Challenge for the Agency, SBA has 

made significant progress in improving its financial statement opinion. SBA’s most important 

accomplishments have been improved models for estimating the Agency’s subsidy costs and improved 

controls over financial statement preparation. These improvements contributed significantly to permitting 

the external auditor to render a qualified opinion on the SBA’s FY 2004 Financial Statements. 

I would like to thank Administrator Barreto for his support of the OIG’s work. We will remain vigilant in 

protecting the interests of American taxpayers as we work with SBA and the Congress to achieve 

measurable results. 

 Peter L. McClintock 

 Acting Inspector General 
Table of Contents 

Overview of the SBA and the OIG ............................................................................................................... 1 

Significant OIG Activities ............................................................................................................................ 3 

 Goal: Prevent Fraud and Unnecessary Losses in SBA Programs .................................................... 3 

 

 Goal: Improve the Security Over and the Accuracy of SBA Accounting 

 and Management Information............................................................................................. 11 

 Goal: Assist SBA in Improving its Small Business Development and 

 Government Contracting Programs...................................................................................... 14 

 Goal: Assist SBA Management in Identifying and Resolving Persistent 

 and Emerging Management Issues....................................................................................... 18 

Goal: Strengthen our Ability to Identify and Have Major Impact on the Most 

 Significant SBA Issues......................................................................................................... 21 

Statistical Highlights................................................................................................................................... 23 

Appendix 

 I. OIG Reports Issued ................................................................................................................. 25 

 II. OIG Reports with Questioned Costs ....................................................................................... 26

 III. OIG Reports with Recommendations that Funds Be Put to Better Use .................................. 26 

 IV. OIG Reports with Non-Monetary Recommendations............................................................. 27 

 V. OIG Reports From Prior Semiannual Periods with Overdue Management 

 Decisions as of March 31, 2005 .............................................................................................. 28

 VI. OIG Reports Without Final Action as of March 31, 2005 ...................................................... 29 

 VII. Significant Recommendations From Prior Semiannual Reporting Periods 

 Without Final Action as of March 31, 2005............................................................................ 32 

 VIII. 6-Month Significant Recommendations Summary as of March 31, 2005 .............................. 37 

 IX. List of Events/Activities Where SBA Used its Cosponsorship Authority 

 Over the Last 6 Months........................................................................................................... 41 

 X. 6-Month Legal Actions Summary........................................................................................... 44 

XI. Office of Inspector General Organizational Chart .................................................................. 50 
Table of Contents 

Additional Semiannual Legislative Reporting Requirements from the Small Business Act, as Amended 

 SBA Cosponsorship and Fee-Based Administration-Sponsored Events—Small 

 Business Act, Section 4(h) ................................................................................................ 16, 41 

 SBDC Surveys—Small Business Act, Section 21(a)(7) ......................................................... 16 

 SBA Gift Authority—Small Business Act, Section 4(g)(2).................................................... 19 
1 

Overview of the SBA and the OIG 

The Small Business Administration 

The Small Business Administration (SBA) was established in 1953 to assist small businesses from startup through the many stages of growth. The Agency’s two major goals are to help small businesses 

succeed and to assist victims in recovering from disasters. The SBA offers many services to 

entrepreneurs through its Offices of Capital Access, Entrepreneurial Development, Government 

Contracting and Business Development, and Disaster Assistance. Services include providing 

(1) assistance with developing business plans through counseling services and resource partners, 

(2) financing through the Agency’s various business and disaster lending programs, (3) marketing 

products and services, and (4) access to Federal procurement opportunities. The SBA’s programs are 

delivered by a network of field offices in every state, the District of Columbia, the U.S. Virgin Islands, 

Guam, American Samoa, and Puerto Rico. The SBA had an FY 2005 appropriation of $611.2 million 

(excluding $929 million from the disaster supplemental), and, as of March 31, 2005, had 2,413 employees 

(including Office of Inspector General (OIG) personnel but excluding disaster-funded employees). 

The Office of Inspector General 

The SBA OIG was established by the Inspector General (IG) Act of 1978. Pursuant to this authority, 

through its four divisions, the OIG performs the following functions nationwide. 

• The Auditing Division performs program performance reviews, internal control assessments, and 

financial, information technology and mandated audits, and oversees audits by contractors to 

promote the economical, efficient, and effective operation of SBA programs. 

• The Investigations Division manages a program to detect and deter 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. The security operations staff 

ensures that all Agency employees have the appropriate background investigations and security 

clearances for their duties and conducts the name check program, which provides SBA officials 

with character-eligibility information on loan applicants and other potential program participants. 

• The Counsel Division provides legal and ethics advice to all OIG components, represents the 

OIG in litigation arising out of or affecting OIG operations, assists with the prosecution of civil 

enforcement matters, processes subpoenas and Freedom of Information and Privacy Act requests, 

and reviews and comments on proposed Agency policies, regulations, legislation and procedures. 

• The Management and Policy Division provides business support (e.g., budget/financial 

management, human resources, information technology, and procurement) for the various OIG 

functions, and coordinates legislative, regulatory, policy, and procedural review and analysis. It 

also prepares the Semiannual Report to Congress and the Report on SBA’s Management 

Challenges, and develops OIG strategic and performance plans. 
2 

Overview of the SBA and the OIG 

The OIG is headquartered in Washington, DC, and has field audit staff in Atlanta, Chicago, Dallas, and 

Los Angeles. Investigative field staff are located in Atlanta, Chicago, Dallas, Denver, Houston, Kansas 

City, Los Angeles, New York, Philadelphia, Seattle, and Washington, DC. An organization chart for the 

OIG is located in Appendix XI. 

As of March 31, 2005, the OIG had 94 staff on-board. The OIG’s FY 2005 appropriation was $13.3 

million, including a $493,000 transfer for disaster assistance oversight activities (net of rescissions). 

The OIG’s responsibility is to improve SBA programs by identifying key issues facing the Agency, 

ensuring that corrective actions are taken, and promoting a high level of integrity. We continue to focus 

on serving the needs of our customers and stakeholders and on safeguarding SBA resources from waste, 

fraud, and abuse. The five strategic goals we seek to achieve are to: (1) prevent fraud and unnecessary 

losses in SBA programs, (2) improve the security over and the accuracy of SBA accounting and 

management information, (3) assist SBA in improving its small business development and Government 

contracting programs, (4) assist SBA management in identifying and resolving persistent and emerging 

management issues, and (5) strengthen our ability to identify and have maximum impact on the most 

significant SBA issues. 

OIG efforts and accomplishments during the first half of Fiscal Year (FY) 2005 are summarized in the 

following pages. All audit and other reports issued during this reporting period are listed in Appendix I. 

All investigative actions are summarized in Appendix X. 
3 

Investigations have found borrowers 

and loan agents participating in wellorganized, multi-loan schemes in which 

misrepresentations of citizenship are 

made and loans quickly default. 

Millions of dollars are at risk with some 

individual loans at least $1 million in 

size.

Significant OIG Activities 

Goal: Prevent Fraud and Unnecessary Losses in SBA Programs

The SBA has a financial assistance portfolio of small business loans and financings exceeding $55 

billion. With more than 5,000 lenders authorized to make SBA loans, the Section 7(a) Loan Guaranty 

Program is SBA’s largest lending program and the principal vehicle for providing small businesses with 

access to credit they cannot obtain elsewhere. This program is vulnerable to fraud and unnecessary losses 

because it relies on numerous parties (including borrowers, loan agents, lenders, and SBA) to complete 

loan transactions. Additionally, SBA has increasingly delegated more authority to its lenders, centralized 

many backroom loan functions, and reduced staff. As SBA has placed more responsibility and 

independence on its lenders, the importance of OIG oversight has increased significantly. 

The Disaster Loan Program is another key SBA lending program, which provides direct Federal 

assistance for non-farm private sector disaster losses. This highly visible program is also vulnerable to 

fraud and unnecessary losses because loan transactions are expedited in order to provide quick relief to 

disaster victims. 

A Pattern of Citizenship Fraud Persists 

The OIG and other law enforcement agencies continue to find a pattern of borrowers falsely claiming to 

be United States (U.S.) citizens in order to obtain SBAguarantied loans in violation of Agency regulations. 

Investigations have found borrowers and loan agents 

participating in well-organized, multi-loan schemes in 

which misrepresentations of citizenship are made and loans 

quickly default. Millions of dollars are at risk, with some 

individual loans at least $1 million in size. Moreover, loans 

to ineligible borrowers mean that some honest borrowers 

may not have access to SBA-guarantied credit. As SBA 

increasingly depends on lenders to administer its loan programs, this problem is expected to increase 

significantly. 

For example, a Texas businessman applied for and received a $1 million SBA loan. However, 

Department of Homeland Security (DHS) records indicated that he was not a citizen. During this 

reporting period he was sentenced in connection with making a false claim to U.S. citizenship. The legal 

action resulted from a joint investigation involving SBA OIG, DHS, a county-level organized crime task 

force, the Social Security Administration, and the Texas Alcoholic Beverage Commission. 

Citizenship fraud often occurs in tandem with other crimes. In a different case, a Texas business owner 

and another individual were indicted on fraud charges, and the owner 

was also charged with making a false claim to U.S. citizenship. 

According to the indictment, the owner fraudulently obtained a $1 

million SBA loan and a $390,000 companion loan. Not only did he 

falsely claim U.S. citizenship, but he misrepresented that he used over 

$307,000 in personal assets to purchase commercial real estate. 

Citizenship fraud often 

occurs in tandem with other 

crimes. 
4 

In response to the September 11, 2001, terrorist 

attacks on the U.S., SBA disbursed over $1 

billion in disaster loans. Over $208 million of 

these 9/11 disaster loans have defaulted, i.e., are 

more than 60 days past due, have been charged 

off, or are in liquidation. 

Significant OIG Activities 

9/11 and Other Disaster Loans Remain Susceptible to Fraud 

SBA’s disaster assistance program provides low-interest loans to disaster victims. Some unscrupulous 

applicants attempt to defraud this program, taking advantage of the fact that the loans are made in 

emergency situations requiring immediate assistance. 

In response to the September 11, 2001, terrorist attacks on the U.S., SBA disbursed over $1 billion in 

disaster loans. Over $208 million of these 9/11 

disaster loans have defaulted, i.e., are more than 60 

days past due, have been charged off, or are in 

liquidation. Because repayment of these loans was 

typically deferred for several years after the loan 

was made, many of these problems have only 

recently come to light. The OIG has placed an 

increased focus on analyzing these loans for fraud 

in an effort to prosecute those who have made false statements to SBA. For example, the president of two 

New York telecommunications firms was charged with making false statements in connection with nearly 

$300,000 in 9/11 disaster loans. He claimed that his companies were located at the World Trade Center 

and suffered both physical and economic injury. However, the joint SBA OIG and U.S. Postal Inspection 

Service investigation revealed that both firms had moved out before the terrorist attacks. 

The OIG investigated a 9/11 disaster loan for $124,300 which was made to a business despite undisclosed 

ownership irregularities, a Federal tax delinquency, and pre-existing legal judgments. Prosecution was 

not feasible, however, in part because of deficiencies in the language in the SBA loan application form. 

As a result, the OIG issued an advisory memorandum to the program office to help prevent similar 

situations in the future. 

Lender Does Not Comply with the Policies of SBA’s Preferred Lender Program (PLP) 

A review of selected loans originated by a Small Business Lending Company demonstrated that they were 

not originated in accordance with SBA policies regarding the 

PLP program. The lender did not comply with SBA’s PLP 

processing restrictions for paying off existing SBA debt in 

seven separate change-of-ownership transactions. Two 

transactions involved guaranty purchases for two defaulted 

loans totaling almost $1.5 million. The lender has repaid the 

guaranty purchase amount on one of the loans. We 

recommended recovery of the guaranty purchase amount paid 

for the second defaulted loan. The other five transactions 

involved same institution debt, whereby the lender paid off its 

existing SBA loans. Although the loans were current as of December 31, 2004, the OIG recommended 

flagging the current loans. In the event of default, guaranty purchase decisions should take into account 

the restrictions that made these loans ineligible for PLP processing. 

The lender did not comply with 

SBA’s PLP processing restrictions 

for paying off existing SBA debt in 

seven separate change-of-ownership 

transactions. Two transactions 

involved guaranty purchases for two 

defaulted loans totaling almost $1.5 

million.
5 

It takes only a few dishonest loan 

agents to be involved with large dollar 

amounts of loans.

Sometimes loan agents 

combine forces with 

other professionals to 

commit crimes.

Because SBA has little information on 

loan agents involved with SBA loans, the 

Agency needs to systematically identify 

all loan agents and track their 

association with individual loans. 

...without a reliable database 

and related monitoring, the 

Agency’s business loan 

programs remain highly 

vulnerable to loan agent fraud. 

Significant OIG Activities 

SBA Is Increasingly Vulnerable to Loan Agent Fraud 

Because fraud by loan agents remains a serious problem, the OIG continues to identify it as a 

Management Challenge for the Agency. A loan agent is employed and compensated by an applicant or 

lender to prepare an SBA loan application and/or refer the applicant to a lender (or vice versa). Although 

honest loan agents can help small businesses gain access to capital, some have perpetrated fraudulent 

schemes involving hundreds of millions of dollars in loans. These fraudulent loans often default for nonpayment, and SBA is forced to use taxpayers’ funds to purchase the guarantied portions of the loans. 

It takes only a few dishonest loan agents to be involved with 

large dollar amounts of loans. In one scheme involving over 

$28 million in loans, a loan agent manipulated the Section 7(a) 

loan process by simultaneously acting as an agent of the sellers 

of businesses, the prospective borrowers, and the lenders. 

Among other things, he caused prospective borrowers to sign false application documents and made it 

appear that the borrowers had provided the required down payments. As a result of an OIG investigation, 

he was sentenced to 9 years in prison with no parole, and ordered to pay over $14 million in restitution to 

SBA certified lenders and forfeit more than $2 million to the U.S. Treasury. 

Sometimes loan agents combine forces with other professionals to commit crimes. In another scheme, 

loan agents and an escrow attorney falsely obtained $9.5 million in SBAguarantied loans for convenience stores. Thus far, this has resulted in 

convictions for conspiracy, bank fraud, and money laundering. The 

convictions also included a provision to forfeit up to nearly $10 million in 

illegally-derived property. 

During this semiannual reporting period, the OIG issued its FY 2005 report on Management Challenges, 

which included a discussion of the measures required to 

prevent loan agent fraud. Because SBA has little 

information on loan agents involved with SBA loans, the 

Agency needs to systematically identify all loan agents and 

track their association with individual loans. Their 

identification is especially critical as SBA continues to 

centralize loan processing and liquidation and shift general oversight of loans to lenders, who are likely to 

vary significantly in the quality of their oversight. 

Since the issuance of the FY 2005 Management Challenges report, the OIG has worked with the Agency 

to remove impediments to preventing such fraud and abuse, 

including discussing the possibility of requiring loan agents to 

provide personal identifiers other than Social Security numbers. 

Nonetheless, the basic premise remains the same: without a reliable 

database and related monitoring, the Agency’s business loan 

programs remain highly vulnerable to loan agent fraud. 
6 

Because an SBA borrower may not have all the 

collateral or proven cash flow normally 

required by a lender, the Agency may require its 

borrowers to inject their own assets into the 

project being financed. 

A pre-demand letter is the 

final notice before the 

referral of a delinquent loan 

to liquidation.

SBA had no record of letters being sent to 13 

borrowers although the loans had been 

delinquent for an average of 279 days. 

Significant OIG Activities

Agency Did Not Send Pre-demand Letters to Disaster Loan Recipients 

As of September 30, 2004, 1,495 of SBA’s 9/11 loans valued at $208.8 million were delinquent. OIG 

reviewed 37 delinquent 9/11 disaster loans and concluded that predemand or demand letters should have been sent to borrowers of 17 

loans. A pre-demand letter is the final notice before the referral of a 

delinquent loan to liquidation. It outlines the collections actions SBA 

can use if the borrower does not cure the delinquency, including 

foreclosure on collateral, referral to the U.S. Treasury for collection, and 

referral to a U.S. Attorney for enforcement action. 

SBA had no record of letters being sent to 13 borrowers although the loans had been delinquent for an 

average of 279 days. Demand letters were not needed 

for the remaining 20 loans because of bankruptcy, 

offers-in-compromise or legal actions, or for those 

under 90 days delinquent. We recommended that the 

Associate Administrator, Office of Financial 

Assistance (OFA), revise the appropriate Standard Operating Procedure (SOP) to direct servicing centers 

to send timely pre-demand and demand letters to delinquent borrowers, maintain the letters in the loan 

file, and ensure that sufficient staff resources are devoted to this activity. OFA agreed to revise the SOP. 

Equity Injection Fraud Places SBA Loans at Risk 

Because an SBA borrower may not have all the collateral or proven cash flow normally required by a 

lender, the Agency may require its borrowers to 

inject their own assets into the project being 

financed. The practice of placing some of the 

borrower’s money at risk is called equity injection. 

OIG investigations continue to find borrowers who 

falsely claim to have made equity injections into their 

businesses. For example, a New Jersey attorney, a business 

owner, and the purchaser of the business entered guilty pleas in 

connection with a $1.75 million SBA-guarantied loan made on 

the condition that the purchaser of the business inject $700,000 

into the business. The investigation revealed that the injection never occurred and that the loan applicant 

conspired with the attorney and the business owner to falsely represent to the lender that the injection was 

made. The loan immediately went into default. 

In another case, the former owner of a Missouri business was sentenced to 5 years probation, a special 

assessment, and nearly $172,000 in restitution to a financial institution because she falsely claimed to 

have injected about $171,000 into the company before a $727,000 SBA-guarantied loan was disbursed. 

She made only a few interest-only payments before the company went out of business. 

OIG investigations continue to find 

borrowers who falsely claim to have 

made equity injections into their 

businesses. 
7 

Significant OIG Activities 

The OIG-Identified Management Challenge on SBICs Continues with Revisions 

The Small Business Investment Company (SBIC) program was designed to stimulate and supplement the 

flow of private equity capital and long-term debt to small concerns. In FY 2004 the OIG issued a 

Management Challenge on the SBIC program stating that The current structure and oversight practices of 

the SBIC program place too much risk on taxpayer money. Program officials have estimated that the 

cumulative cost of the program to the Federal Government is projected to be about $2 billion on an 

outstanding portfolio of $5 billion. 

The OIG reissued the SBIC program Management Challenge in FY 2005. The Challenge is currently 

undergoing revisions due to recent changes in the SBA 

reauthorization legislation, corrective actions taken by the 

Agency, and the results of an on-going OIG audit of the 

SBIC liquidation process. For example, due to legislative 

changes, no new participating security SBICs will be 

licensed. In order to resolve this Challenge, management 

needs to (1) implement an improved methodology for 

estimating losses to be incurred in the program; (2) set 

capital impairment percentages based on documented analyses; (3) issue the revised SOPs on operations 

and the liquidation process; and (4) address requirements for documenting quarterly risk assessments of 

SBICs, procedures for restrictive operations, systematic and timely criteria for transferring SBICs to 

liquidation status, and defining the term SBA-investor. Management also needs to establish better goals 

and performance indicators to show how effectively and efficiently SBICs are liquidated, and to develop 

operating procedures for monitoring the liquidation of SBICs in receiverships. 

SBIC Theft Resulted from Manipulation of Records 

SBA licenses SBICs and supplements their capital with government-guaranteed securities so that the 

SBICs in turn can provide assistance to small businesses, 

particularly during growth stages. During this reporting period, 

as a result of a joint effort by the SBA OIG and the Federal 

Bureau of Investigation (FBI), the part owner of a New Jersey 

SBIC responsible for lending money to start-up technology 

businesses pled guilty in connection with her role in stealing 

over $1.9 million from the SBIC. This individual and others 

issued checks, wire transfers, and other payments for their own 

personal benefit to and through another firm, which also was partly owned by the defendant. They 

concealed the thefts by falsifying the second firm’s records to make it appear that the payments were for 

salary or shareholder distributions. 

The Challenge is currently undergoing 

revisions due to recent changes in the 

SBA reauthorization legislation, 

corrective actions taken by the Agency, 

and the results of an on-going OIG audit 

of the liquidation process. 

...the part owner of a New Jersey 

SBIC responsible for lending money

to start-up technology businesses 

pled guilty in connection with her 

role in stealing over $1.9 million 

from the SBIC.
8 

Significant OIG Activities 

Focus of Lender Oversight Management Challenge is Shifting to Implementation 

SBA has substantially changed its methods for delivering services and loan products and is attempting to 

streamline operations. The Agency has (1) moved away from the direct delivery of products and services 

and toward using partnerships and business resource partners more extensively, (2) reorganized field 

staff, and (3) centralized certain functions and reduced staff. As a consequence, based on the increasing 

need for SBA to monitor the activities of its lenders, the OIG reissued the lender oversight Management 

Challenge for FY 2005. 

The Challenge has focused on the development of loan monitoring controls, including policies and 

procedures governing the operation of the lender oversight 

program. The re-issuance of this Challenge in October 2004 

reflects the progress made by SBA in establishing a loan 

monitoring system. Now the OIG is revising the Challenge 

to focus on the use and implementation of the system. In 

order to fully resolve the Challenge, management needs to 

implement standard operating procedures and regulations 

that address the plan for lender oversight and guidance for 

lender/participant reviews and performance, and implement uniform procedures for periodic evaluations 

of participants. Also, management needs to ensure that there is effective communication among SBA’s 

internal units, and to implement a tracking system for the results of lender/participant reviews and 

recommendations. 

General Business Loan Fraud Remains a Major Concern 

Some borrowers submit false and fraudulent documents, claim assets that do not exist, fail to disclose 

other SBA loans for the same business, misuse loan proceeds, and manipulate property values. For 

example, as a result of a joint effort by the SBA OIG and the FBI, a Texas business owner was indicted in 

connection with fraudulently obtaining two SBA-guarantied 

loans and a line of credit totaling nearly $1.1 million. He 

allegedly inflated property values and net worth to influence 

lenders to approve the loans. He then used the loan proceeds 

for personal expenses. 

In another case, a Missouri businessman was sentenced to 9 

years in prison followed by 5 years probation and was 

ordered to pay over $2.4 million to his victims, including an SBA lender, a non-SBA lender, the Internal 

Revenue Service (IRS), and various individuals. A joint SBA OIG investigation with the IRS found that 

he made false statements to financial institutions to obtain a $340,000 SBA loan. He defaulted on the 

loan, resulting in a $224,000 loss. In a related scheme, he bilked investors out of about $1.6 million. 

The re-issuance of this Challenge in 

October 2004 reflects the progress 

made by SBA in establishing a loan 

monitoring system. Now the OIG is 

revising the Challenge to focus on the 

use and implementation of the system. 

Some borrowers submit false and 

fraudulent documents, claim assets that 

do not exist, fail to disclose other SBA 

loans for the same business, misuse 

loan proceeds, and manipulate property 

values. 
9 

Character screenings made credit 

available to other applicants who had 

no character eligibility issues. Over 

$248 million in loans have been 

declined during the last 10 years due to 

character eligibility issues.

Significant OIG Activities 

Character Screening Reduces the Likelihood of Program Abuse 

SBA requires applicants for assistance to meet certain character standards before participating in 

programs involving business loans, disaster assistance loans, Section 8(a) certifications, surety bond 

guaranties, small business investment companies, and certified development companies. The OIG’s 

Office of Security Operations ensures that program participants meet these standards by processing name 

checks and, where appropriate, fingerprint checks on applicants. During this semiannual period, the OIG 

processed a total of 1,457 external name check requests for the above programs. 

The OIG also assisted the Agency in making character eligibility determinations through its on-line 

connection with the FBI’s Machine Readable Data system 

by referring applicants who appear to be ineligible to 

program officials for adjudication. During this 6-month 

reporting period, OIG referrals resulted in SBA business 

loan program managers declining 28 applications, and 

disaster loan program officials declining 17 applications, 

totaling $9,512,050 and $495,970, respectively. Character 

screenings made credit available to other applicants who 

had no character eligibility issues. Over $248 million in loans have been declined during the last 10 years 

due to character eligibility issues. 

In addition, based on OIG character eligibility information, the Section 8(a) program declined three 

applications for admission to the program. The OIG also 

coordinates background investigations for Agency 

employees and contractor personnel required to have 

employment/security clearances. During this reporting 

period, the OIG initiated 87 background investigations 

and issued 27 security clearances. The OIG also 

adjudicated 54 background investigative reports and 

coordinated with SBA’s Office of Disaster Assistance to adjudicate 388 derogatory background 

investigative reports forwarded for review and appropriate action. Finally, the OIG processed 3,780 

internal name check requests for various Agency activities such as success stories, Small Business Person 

of the Year nominees, and new disaster assistance hires. 

OIG Uses Debarments to Deter Fraud 

Historically, SBA has undertaken few debarment actions. The OIG believes that it is in the public interest 

to debar parties from conducting business with the 

Federal Government that have a history of fraud or 

otherwise lack business integrity. In the past year, the 

OIG has stepped up its efforts in making 

recommendations to the SBA with respect to the 

debarment of parties participating in SBA programs. In 

an effort to facilitate the Agency’s review of OIG-proposed debarments, the OIG prepares a detailed 

proposal describing why a party should be debarred, supplies pertinent evidence and documentation 

Character screenings made credit 

available to other applicants who had no 

character eligibility issues. Over $248 

million in loans have been declined during 

the last 10 years due to character eligibility 

issues.

In the past year, the OIG has stepped up its 

efforts in making recommendations to the 

SBA with respect to the debarment of 

parties participating in SBA programs. 
10 

Significant OIG Activities 

supporting the debarment, and prepares drafts of initial Notices of Proposed Debarments for transmission 

to the party in the event the Agency agrees that debarment is appropriate. 

For example, as a result of a recommendation from the OIG, the Agency debarred a former loan agent for 

3 years from all Federal procurement and non-procurement activities. A federal investigation found that 

the agent had obtained fraudulent loans from a lender on behalf of six people, all without their knowledge 

and consent, causing a loss to the bank in excess of $500,000. Although these false applications were not 

submitted under any SBA loan program, the agent had submitted to lenders numerous applications for 

SBA-guarantied loans containing allegedly fraudulent information on behalf of small business clients. 

However, because the lenders had declined the applications, no charges were filed. Based on the agent’s 

guilty plea, the OIG recommended that the Agency debar the agent and, on January 24, 2005, the Agency 

debarred him for 3 years, and placed his name on the Excluded Parties List System (which can be found 

at http://epls.arnet.gov/). 
11 

Significant OIG Activities 

Goal: Improve the Security Over and the Accuracy of SBA

Accounting and Management Information

The SBA depends on a complex information technology (IT) environment, which includes a number of 

mission critical systems running on a mix of legacy mainframe, client-server, and minicomputers. The 

SBA has had difficulty producing reliable and timely financial and management information to support its 

operations, primarily because of reliance on outdated IT systems that are not integrated. The SBA is 

developing a new Disaster Credit Management system to modernize and improve its disaster loan-making 

activities. The SBA is also implementing a Lender and Loan Monitoring System to monitor its business 

loan portfolio. These efforts are critical to SBA’s successful future operations. However, these efforts do 

not impact SBA’s Loan Accounting System, which is outdated and in need of replacement. 

The Chief Financial Officers Act of 1990 requires each Federal agency to have annual audited financial 

statements. A key Office of Management and Budget (OMB) initiative is to have agencies improve their 

financial management activities, including providing financial statements and financial performance 

information in a timelier manner. For several years, our independent auditor has been critical of the 

Agency’s reporting process and its ability to provide accurate, complete, and reliable financial data. 

SBA’s Information Systems Controls Need Improvement 

The confidentiality, integrity, and availability of SBA’s information systems are vital to the continued 

successful operation of the Agency. The SBA’s effort to improve its computer security program during 

the past year has shown mixed results. SBA achieved a major milestone in certifying and accrediting all 

of its major systems within the past year and recently upgraded 

its Oracle Accounting Software financial application package. 

However, recent OIG and external auditor reviews showed the 

need for continued focus and improvement in Information 

System Controls. As a result of these audit results, OIG is 

currently updating the information security Management 

Challenge to reflect the additional improvements needed for 

SBA to overcome this Challenge. 

The SBA’s Information Security Program, as required for the Federal Information Security Management 

Act (FISMA) for FY 2004, showed that SBA has not been able to sufficiently address 248 system risk 

assessment vulnerabilities and OIG audit findings. A 

subsequent limited scope assessment of SBA’s Plan 

of Action and Milestone (POA&M) process showed 

that the SBA has improved the manner in which it 

developed, planned and managed its POA&M 

process. Improvements continue to be needed in general 

and application controls in SBA’s Information Technology 

(IT) general support systems and major application 

systems. 

SBA achieved a major milestone in 

certifying and accrediting all of its 

major systems within the past year

and recently upgraded its Oracle 

Accounting Software financial 

application package.

The SBA’s Information Security 

Program, as required for the Federal 

Information Security Management Act 

(FISMA) for FY 2004, showed that SBA 

has not been able to sufficiently address 

248 system risk assessment vulnerabilities 

and OIG audit findings. 
12 

Significant OIG Activities 

Our independent auditor’s FY 2004 review of general and application controls was issued during this 

reporting period. This audit followed guidance provided in the Government Accountability Office’s 

(GAO) Federal Information System Controls Audit Manual (FISCAM) and concluded, as it did for FY 

2003, that SBA needs to improve (1) entity-wide security program controls, (2) access controls, (3) 

application software development and program change controls, (4) system software controls, (5) 

segregation of duty controls, and (6) service continuity controls. Our independent auditor made 23 

recommendations and specifically identified 8 unimplemented recommendations from previous audit 

reports which significantly put the integrity of the Agency’s information security program at risk. 

SBA’s Continuity of Operations Plan (COOP) is Not Adequate 

A recent audit found that the SBA COOP did not have an adequate chain-of-command, oversight, and 

funding. In addition, SBA has not adequately tested its 

COOP and all the program, disaster and field office 

Business Recovery Plans (BRP) that would be needed to 

resume office functions during emergency or disaster 

events. Among other deficiencies, SBA’s COOP and 

individual BRPs did not contain all necessary information to ensure that the plans were viable and that the 

Agency or its individual offices could utilize the plans in the event of an emergency. SBA has also not 

implemented an effective review and approval program for its COOP and BRPs. The SBA Headquarters 

COOP did not adequately identify essential functions performed by the Agency or which functions must 

be continued under all circumstances. Further, SBA did not have adequate System Disaster Recovery 

Plans (SDRP) to ensure the recovery of critical IT systems supporting the Agency’s essential functions. 

The OIG made 15 recommendations to strengthen its 

COOP and SDRP process. Some of these 

recommendations have been incorporated in the 

information security Management Challenge. 

SBA Makes Significant Progress in Improving its Financial Statement Opinion 

Various laws and regulations place significant responsibilities on Federal financial managers to assess 

whether they are effectively and efficiently managing public resources. In recent years, the OIG, GAO, 

and SBA’s independent auditor all noted significant internal control weaknesses that resulted in the 

Agency being unable to produce reliable, timely, and accurate financial information, including its annual 

financial statements. As a result, SBA’s independent auditors were unable to render an opinion on SBA’s 

financial statements in FY 2000 through FY 2003. SBA received a qualified opinion on its FY 2004 

statements. Thus, the OIG continues to identify financial management as one of the Agency’s top 

Management Challenges. 

A recent audit found that the SBA COOP 

did not have an adequate chain-ofcommand, oversight, and funding. 

... SBA has not adequately tested its COOP 

and all the program, disaster and field 

office Business Recovery Plans (BRP) that 

would be needed to resume office functions 

during emergency or disaster events.
13 

SBA’s most important accomplishments 

have been improved models for estimating 

the Agency’s subsidy costs and improved 

controls over financial statement 

preparation. 

Significant OIG Activities 

Recognizing the importance of sound financial management, SBA’s Administrator has made improving 

financial management one of the Agency’s top priorities. SBA has worked diligently to identify and 

address the underlying causes of its financial management issues and the Agency has made 

significant progress towards improvements. SBA’s most important accomplishments have been 

improved models for estimating the Agency’s subsidy 

costs and improved controls over financial statement 

preparation. SBA also corrected material accounting 

errors from previous reporting cycles. These 

improvements contributed significantly to permitting 

the independent auditor to render a qualified opinion on 

the SBA’s FY 2004 Financial Statements. 

Despite the improvements, however, financial management issues continue to be a major Challenge for 

SBA. The FY 2004 qualified opinion, although better than SBA has received in prior audits, was reached 

by the independent auditors because they could not 

determine if certain material amounts in SBA’s 

financial statements were reasonable. The independent 

auditor also noted in its related FY 2004 Independent 

Auditors’ Report on Internal Control that material 

weaknesses still exist in the areas of financial 

management and reporting and credit reform modeling. 

Additionally, the Management Letter based on the FY 

2004 financial statement audit repeats several non-reportable conditions that remain despite the Agency’s 

efforts to improve financial management. 

The OIG is currently updating the financial Management Challenge to reflect the progress made and to 

emphasize the additional steps needed for SBA to resolve this Challenge. To be successful, SBA will 

need to further improve financial controls, enhance 

quality assurance procedures over financial 

reporting, refine subsidy cost estimation techniques, 

obtain an unqualified opinion on the Agency’s 

financial statements, and demonstrate it can 

accomplish these while implementing new reporting 

and internal control requirements in an effective and 

timely manner. The OIG continues to monitor 

SBA’s progress by increasing the resources devoted 

to the Agency’s annual financial statement audit, 

and by working closely with SBA to ensure the 

Agency incorporates into its financial reporting plans those actions identified by the OIG and the 

independent auditor as necessary to overcome the Agency’s financial management weaknesses. 

The FY 2004 qualified opinion, although 

better than SBA has received in prior 

audits, was reached by the independent 

auditors because they could not determine if 

certain material amounts in SBA’s financial 

statements were reasonable.

...SBA will need to further improve financial 

controls, enhance quality assurance procedures 

over financial reporting, refine subsidy cost 

estimation techniques, obtain an unqualified 

opinion on the Agency’s financial statements, 

and demonstrate it can accomplish these while 

implementing new reporting and internal 

control requirements in an effective and timely 

manner. 
14 

Significant OIG Activities 

Goal: Assist SBA in Improving its Small Business Development and

Government Contracting Programs

Through its Government contracting programs, the SBA works to create an environment for maximum 

participation by small, disadvantaged, and women-owned businesses in Federal Government contract 

awards. These programs include, among others, the HUBZone Empowerment Contracting Program and 

the Small Disadvantaged Business (SDB) Certification Program. The SBA also negotiates with Federal 

agencies to establish procurement goals for contracting with small, small disadvantaged, women-owned, 

service-disabled veteran-owned, and HUBZone small businesses. The current Government-wide small 

business goal is 23 percent of the total value of all prime contract awards for each fiscal year. 

The SBA also manages the Section 8(a) Business Development program (8(a) program), which was 

established to provide business development assistance to small businesses owned by socially and 

economically disadvantaged individuals and to help them access the multi-billion dollar Federal 

procurement market. In addition, SBA provides assistance to existing and prospective small businesses 

through a variety of counseling and training services offered by Agency partner organizations. Among 

these are Small Business Development Centers (SBDCs), the Service Corps of Retired Executives 

(SCORE), and Women’s Business Centers (WBCs). Most of these are grant programs. All demand 

effective and efficient management, outreach, and service delivery. Determining whether business 

development and Government contracting programs meet these demands depends on reliable internal and 

external data for effective monitoring and oversight. 

SBA Faces a Major Management Challenge to Prevent Large Companies from Receiving 

Small Business Contracts 

During this reporting period, the OIG identified as one of the Agency’s top Management Challenges 

flaws in the Federal procurement process that allow (1) 

large companies to receive small business awards and 

(2) agencies to receive credit towards their small 

business goals for these awards. As the advocate for 

small business, the SBA should strive to ensure that 

only small companies obtain these awards and Federal 

agencies only receive small business credit for contracts 

performed by small companies. 

Studies by the OIG, the GAO, and SBA’s Office of Advocacy have found that agencies are classifying 

awards made to large companies as small business awards and are counting these awards towards their 

small business procurement goals. During this reporting period, the OIG completed two reviews on this 

issue. The first review found that SBA, by utilizing multiple award contracts (MAC) and not asking 

contractors for updated size certifications, awarded task orders to large companies but claimed credit for 

these contracts towards meeting SBA’s small business procurement goals. The review also identified 

several problems with purchasing from small businesses on the General Services Administration’s (GSA) 

As the advocate for small business, the SBA 

should strive to ensure that only small 

companies obtain these awards and Federal 

agencies only receive small business credit 

for contracts performed by small 

companies. 
15 

Significant OIG Activities 

Schedules. First, when responding to a contract solicitation, a company certifies whether it is small or 

not. For Schedules contracts and other GSA MACs, a small business certification is valid until contract 

renewal (i.e., up to 5 years), even if the company 

outgrows its small business status. The second problem 

with the Schedules is that GSA classifies contractors as 

small for the entire schedule contract if the contractor is 

small for some but not all of the goods or services they 

provide on that contract. Thus, agencies may obtain 

small business credit for using a contractor that is 

considered “small” for some of the procured goods and 

services, but not all of the goods and services procured. This is contrary to SBA regulations, which 

require that a contractor meet the size standard for each product or service for which it submits an offer. 

The second OIG review stemmed from complaints made by a member of the small business community 

that large businesses were receiving small business 

contracts. The OIG identified three instances where 

large businesses received small business contracts 

because they either improperly or falsely certified 

themselves as small businesses. These matters are 

under review. 

The SBA is attempting to address the situation—for example, the SBA issued a proposed rule on April 

25, 2003, requiring firms with MACs to annually re-certify their size. The Agency also plans to address 

with GSA its Multiple Award Schedule (MAS) Program small 

business certifications. While these are steps in the right 

direction, more actions are needed to address this Management 

Challenge. 

Over $1 Million in Unsupported HP Small Business Foundation Expenses Questioned by 

Auditors 

In 2003 SBA negotiated a $2.24 million Cooperative Agreement with the HP Small Business Foundation 

to conduct business matchmaking events. The recipient 

did not, however, have an acceptable accounting system 

for contracting with the Federal Government. As a 

result, an interim audit identified the following problems: 

(1) the recipient submitted over $1 million dollars in 

expenses which were either incurred prior to the subject cooperative agreement, not properly supported, 

or lacked approval by SBA; (2) written procedures for screening and allocating costs were inadequate; (3) 

costs were misclassified; (4) vendor expenses were not addressed to the recipient; (5) contracting actions 

were not supported by written agreements; and (6) the recipient may have sub-granted the project to a 

third party in violation of the cooperative agreement. We recommended that the Office of Government 

Contracting and Business Development require the recipient to develop a financial management system 

that meets OMB requirements. We also recommended that the Office of Procurement and Grants 

The OIG identified three instances where large 

businesses received small business contracts 

because they either improperly or falsely 

certified themselves as small businesses. 

The SBA is attempting to address 

the situation... 

...SBA, by utilizing multiple award 

contracts and not asking contractors for 

updated size certifications, awarded task 

orders to large companies but claimed credit 

for these contracts towards meeting SBA’s 

small business procurement goal. 

The recipient did not, however, have an 

acceptable accounting system for 

contracting with the Federal Government.
16 

From December 7, 2004 through 

March 31, 2005, there were 21 

cosponsorships...

Significant OIG Activities 

Management request a legal opinion as to whether the arrangement between the recipient and a third party 

violated the terms of the cooperative agreement regarding sub-granting. SBA agreed to implement the 

recommendations. 

SDB Certification Program Applicant Evaluation Processes Are Inadequate 

The SBA certifies small businesses as small disadvantaged businesses through the Small Disadvantaged 

Business (SDB) Certification Program if they meet specific social disadvantage, economic disadvantage, 

ownership, control, and size eligibility criteria. SDBs are 

afforded procurement benefits such as price evaluation 

adjustments and evaluation credits. During this reporting 

period, the OIG completed an audit survey of the SDB 

Certification Program that found significant problems 

with the SDB certification process. Specifically, 

program eligibility reviewers did not adequately consider 

whether owners of companies applying for SDB 

certification were economically disadvantaged; they also certified companies when their owners had 

defaulted on Government obligations. Additionally, we found (1) data integrity problems with an SDB 

application tracking system and (2) inadequacies in file safekeeping. The SBA agreed to most of the 

OIG’s recommendations. 

New Legislation Requires OIG Reporting on Cosponsorships and Fee-Based 

Administration-Sponsored Events 

SBA’s most recent reauthorization provided several new reporting requirements for the OIG. Section 

4(h) of the Small Business Act requires the OIG to report to Congress on a semi-annual basis regarding 

the Agency’s use of its authority in connection with 

cosponsorships and fee-based Administration-sponsored events. 

SBA’s Office of Strategic Alliance (OSA) provided key 

information to the OIG related to cosponsorships including the 

name, dates, and locations of the cosponsorships and names of cosponsors. From December 7, 2004, 

when the legislation was signed into law, through March 31, 2005, there were 19 cosponsorships as 

shown in Appendix IX. SBA reports that it has not conducted any fee-based Administration-sponsored 

events since the passage of the legislation. 

Small Business Development Center (SBDC) Surveys Now Require OIG Approval 

Section 21(a)(7) of the Small Business Act as amended by SBA’s most recent reauthorization imposes 

restrictions on the disclosure of information regarding individuals or small businesses that have received 

assistance from an SBDC, and further restricts the Agency’s use of such information. The provision also 

requires the Agency to issue regulations regarding disclosures of such information for the performance of 

...program eligibility reviewers did not 

adequately consider whether owners of 

companies applying for SDB certification 

were economically disadvantaged; they 

also certified companies when their 

owners had defaulted on Government 

obligations.
17 

We have not received any 

approval requests during 

this reporting period.

Significant OIG Activities 

financial audits and SBDC client surveys. In addition, paragraph 21(a)(7)(C)(iii) states that, until the 

issuance of such regulations, any client survey and the use of such information shall be approved by the 

Inspector General who shall include such approval in the OIG’s semi-annual report. 

The OIG informed appropriate Agency officials of the above-mentioned 

requirements regarding OIG approval of client surveys and the use of 

such information. We have not received any approval requests during 

this reporting period. Agency officials report that they have begun work 

on the required regulations regarding disclosures of client information for financial audits and client 

surveys. 

OIG Focuses on Single Audits as a Monitoring Tool 

The Single Audit Act, as amended, is intended to promote sound financial management, including 

effective internal controls, over Federal grant awards. 

In the past, when more than one Federal agency 

provided grant funding to an entity, multiple audit 

organizations often made detailed reviews of a single 

entity. The concept of the single audit was created to replace multiple grant audits of an entity with one 

single audit. 

Based on our experience in performing desk reviews of single audit reports received from the Federal 

Audit Clearinghouse (FAC), there are at least six SBA programs for which Federal financial assistance 

generally exceeds the threshold ($300,000 prior to 

December 31, 2003, and $500,000 after that period) 

for requiring a single audit. Federal funding 

authorized for those programs was approximately 

$4.6 billion in FY 2004. Because single audits 

include questioned costs and other non-compliance 

findings, the OIG is placing additional emphasis on using them as a practical monitoring tool for 

grants. 

The concept of the single audit was created to 

replace multiple grant audits of an entity with 

one single audit. 

Because single audits include questioned costs 

and other non-compliance findings, the OIG is 

placing additional emphasis on using them as a 

practical monitoring tool for grants. 
18 

Significant OIG Activities 

Goal: Assist SBA Management in Identifying and Resolving

Persistent and Emerging Management Issues

A key objective of OIG work has been to identify emerging and persistent programmatic and operational 

problems that may hamper SBA’s ability to effectively support small business. Many of these problems 

have been designated as major Management Challenges. The OIG believes that it is important that the 

Challenges be updated regularly so that they accurately reflect the current challenges facing the Agency. 

The OIG Keeps the Top Management Challenges Up-to-Date 

In accordance with the Reports Consolidation Act of 2000, for each fiscal year the OIG identifies the 

most important management and performance Challenges facing the Agency for inclusion in SBA’s 

consolidated Performance and Accountability Report. The list of Challenges represents areas identified 

as being particularly vulnerable to fraud, waste, abuse, or mismanagement, or that otherwise pose 

significant risk to the Agency, its operations, or its credibility. Each Challenge generally has been the 

subject of one or more OIG or GAO reports, has been confirmed by OIG investigations of fraud or abuse, 

and/or have resulted from our general knowledge of Agency management issues. 

For each Management Challenge, we provide the Agency with recommended remedial actions together 

with our assessment of Agency progress on each item 

during the preceding fiscal year. The Agency has 

increasingly focused more attention on the 

Challenges by, among other things, placing them on 

the Management Board agenda and assigning 

responsibility for overseeing the Agency response to 

the Management Challenges to the Chief Operating 

Officer. 

The most serious Management Challenges that faced SBA at the beginning of FY 2005 were as follows: 

• SBA needs to improve its managing for results processes and performance data. 

• SBA faces significant challenges in financial management and reporting which affects its ability 

to provide reliable, timely and accurate financial information. 

• Information systems security needs improvement. 

• Maximizing program performance requires that SBA fully develop, communicate, and implement 

a human capital management/transformation strategy. 

• SBA needs better controls over the business loan purchase process. 

• SBA needs to continue improving lender/participant oversight. 

• The Section 8(a) Business Development program needs to be modified so more firms receive 

access to business development, standards for determining economic disadvantage are clear and 

objective, and more eligible companies receive 8(a) contracts. 

The Agency has increasingly focused more 

attention on the Challenges by, among other 

things, placing them on the Management 

Board agenda and assigning responsibility for 

overseeing the Agency response to the 

Management Challenges to the Chief 

Operating Officer. 
19 

Significant OIG Activities 

• SBA needs to enforce its rules to deter firms receiving small business set-aside, 8(a), or small 

disadvantaged business (SDB) price evaluation preference contracts from passing through large 

portions of the procurement to other firms. 

• Preventing loan agent fraud requires additional measures. 

• SBA needs to update its system of directives to provide proper guidance and control over its 

operations. 

• The current structure and oversight practices of the Small Business Investment Company (SBIC) 

program place too much risk on taxpayer money. 

The Management Challenge process is evolutionary. In an effort to most effectively develop the FY 2006 

Management Challenges, during this reporting period 

the OIG began to review the current Challenges for any 

revisions needed to keep them forward-looking. Some 

of the revisions being made to the Challenges are 

discussed in the narratives on specific audit and 

investigative work completed during this reporting 

period. Revisions will continue to be made as various 

audits progress and as circumstances change. 

The OIG publishes a new SBA Challenge when sufficient evidence of a problem has been identified. 

During this reporting period, the OIG issued a new 

Management Challenge, stating that Flaws in the 

Federal procurement process allow large 

firms to receive small business awards and 

agencies to receive small business credit for 

contracts performed by large firms. The 

substance of this Challenge is discussed under 

this report’s narrative section on small business development and government contracting. 

While SBA has made progress on many of the Challenges, much more remains to be done. By their 

nature, these Challenges require continued long-term 

commitment and effort by the Agency and we 

continue to work with the Agency to resolve them. 

For more information on the OIG’s assessment of the SBA’s FY 2005 Management Challenges, please 

review the report at http://www.sba.gov/ig/challenges.html. 

Legislative Change Requires Audits Related to the Agency’s Gift Authority 

Section 4(g)(2) of the Small Business Act as amended by SBA’s most recent reauthorization provides that 

any gift, devise, or bequest of cash accepted by the Administrator under Section 4(g) shall be held in a 

separate account and shall be subject to semiannual audits by the Inspector General who shall report his 

findings to the Congress. As of the end of this reporting period, the Agency had not yet finalized its 

procedures for implementing this new legislative requirement. The OIG acknowledges its responsibility 

The Management Challenge process is 

evolutionary. In an effort to most 

effectively develop the FY 2006 

Management Challenges, during this 

reporting period the OIG began to review 

the current Challenges for any revisions 

needed to keep them forward-looking. 

During this reporting period, the OIG issued a 

new Management Challenge, stating that Flaws 

in the Federal procurement process allow large 

firms to receive small business awards and 

agencies to receive small business credit for 

contracts performed by large firms. 

While SBA has made progress on many of 

the Challenges, much more remains to be 

done. 
20 

The OIG provided comments and was 

able to obtain changes on many of these 

items, thereby improving the Agency’s 

ability to deter waste, fraud and abuse in 

its programs.

Significant OIG Activities 

under this authority and has begun preparing a work plan to address the new audit requirement in the next 

semiannual report. Any findings in this area will be reported, as appropriate, in future semiannual reports. 

OIG Reviews Legislation, Regulations, and SOPs to Identify Potential Problem Areas 

The OIG plays an important role in assisting SBA in identifying and resolving emerging management 

issues through review of proposed legislation and 

regulations affecting the Agency, as well as Agency SOPs, 

procedural and policy notices, and other internal 

documents. From October 1, 2004, through March 31, 

2005, the OIG reviewed 37 proposed legislative and 

regulatory changes and 42 internal SBA SOPs, notices and 

other documents. The OIG provided comments and was able to obtain changes on many of these items, 

thereby improving the Agency’s ability to deter waste, fraud and abuse in its programs. 

For example, the Agency proposed issuing a notice to implement its web-based on-line reservation 

program for travel by SBA employees. The Agency’s initial version of the notice required employees to 

provide all nine digits of their Social Security numbers as part of the on-line registration process. 

Concerned about the potential for identity theft, particularly in light of recent news reports of theft from 

data companies and lending institutions, the OIG persuaded the Agency that it was not necessary to 

require employees to provide complete Social Security numbers and that the registration program should 

be implemented without this requirement. 

Percentage of Overdue Management Decisions Remains Steady While the Percent of 

Overdue Final Actions Decreases 

Management decisions on OIG recommendations take several forms. Program officials may agree to a 

recommendation as presented by the OIG, seek to negotiate a compromise agreement with the OIG, or 

disagree with the recommendation. The IG Act requires that Federal agencies make management 

decisions on all findings and recommendations 

within a maximum of six months of report issuance. 

As of March 31, 2005, 47 management decisions on 

recommendations in OIG reports were overdue—

approximately 37 percent of all pending 

management decisions. While this represents a 

decrease in the number of overdue management decisions, it is approximately the same percentage of 

overdue management decisions as at the end of the last semiannual period. The Office of Field 

Operations and the Office of Capital Access were responsible for over 60 percent of these. The 

percentage of recommendations with overdue final actions decreased from 31 to 27 percent of all pending 

final actions. 

The IG Act requires that Federal agencies make 

management decisions on all findings and 

recommendations within a maximum of 6 

months of report issuance. 
21 

Significant OIG Activities 

Goal: Strengthen our ability to identify and have maximum impact

on the most significant SBA issues

To successfully implement our strategic goals, the OIG must ensure the efficiency and effectiveness of 

our internal operations. The OIG must manage its human capital, and other resource allocation processes 

to maximize the impact of our efforts to improve Agency programs and operations. Moreover, we must 

be quick to respond to the changes currently taking place in SBA. 

Proposal Would Revise Certain Criminal Penalty Provisions in Small Business Act 

As part of SBA's legislative package that was submitted to Congress for FY 2006, the OIG proposed the 

revision of certain criminal penalty provisions in the Small Business Act. Currently, the 1958 statute 

provides criminal fines of only $5,000 for the knowing 

overvaluation of any security offered to obtain an SBAguarantied loan and $10,000 for an SBA employee who 

embezzles agency money, makes a false statement to an 

SBA employee or auditor, or receives money or benefit from the Agency's issuance of a loan or execution 

of a contract. The OIG has proposed legislative changes that would increase these fines to $250,000. 

Investigations Division Has Been Streamlined 

Based upon the retirement of a Special Agent in Charge (SAC) during the reporting period, the 

Investigations Division reduced the number of SAC 

positions from four to three. One SAC will be 

responsible for the eastern U. S., another will be 

responsible for the central United States, and a third will 

cover the western U. S. To compensate for the loss of 

the fourth SAC position, Senior Special Agents (SSA) 

were appointed to act as senior non-supervisory criminal investigators for each SAC. The SSAs will help 

coordinate and execute complex investigations as well as advise other investigators. Each SSA will also 

act as a principal advisor to his/her SAC. 

In addition, after reviewing potential risk factors for SBA programs in Florida, the OIG plans to locate at 

least one special agent in southern Florida. This 

action will significantly enhance the OIG’s ability 

to identify and prosecute fraudulent activities in 

that state. 

The OIG has proposed legislative changes 

that would increase these fines to $250,000. 

Based upon the retirement of a Special 

Agent in Charge (SAC) during the reporting 

period, the Investigations Division reduced 

the number of SAC positions from four to 

three.

...the OIG plans to locate at least one special 

agent in southern Florida. 
22 

Significant OIG Activities 

OIG Leverages Limited Resources for Fraud Detection and Identification of Program 

Vulnerabilities 

To leverage its limited resources for fighting fraud, the OIG has created an Early Fraud Detection 

Working Group (EFDWG). The EFDWG’s purpose is 

to proactively detect and deter fraud within SBA 

programs by generating investigative leads and 

identifying internal control weaknesses that may lead to 

significant prosecutions, financial recoveries, and/or 

cost savings. To accomplish this, the EFDWG will 

analyze available information, identify possible fraud 

indicators, establish liaisons with other agencies when needed, and use other techniques to address areas 

of underlying program vulnerability to prevent such fraud. Because the EFDWG utilizes staff from both 

the OIG Auditing and Investigations Divisions, it benefits from a combination of skills and experience 

likely to increase the opportunities for identifying systemic fraud and vulnerabilities. 

Agency’s Directive on Auditing is Updated 

An updated Auditing Division Standard Operating Procedures (SOP) was issued on February 9, 2005. 

The SOP now includes a section on attestation 

engagements. The new SOP also elaborates on who 

may perform an audit. The OIG may use public 

accounting firms or other Government auditors to 

perform audits. When requesting an audit, even if the 

Agency foresees that an outside entity may conduct 

the audit, the Agency must request the Auditing 

Division to conduct it. The Auditing Division is 

responsible for determining whether it or an outside 

agency will conduct the audit, and the Division makes all audit arrangements. In addition, the SOP now 

clarifies that not cooperating or being non-responsive to OIG audit requests can lead to criminal 

prosecution and/or disciplinary action. 

The EFDWG’s purpose is to proactively 

detect and deter fraud within SBA programs 

by generating investigative leads and

identifying internal control weaknesses that 

may lead to significant prosecutions, 

financial recoveries, and/or cost savings. 

When requesting an audit, even if the Agency 

foresees that an outside entity may conduct 

the audit, the Agency must request the 

Auditing Division to conduct it. The 

Auditing Division is responsible for 

determining whether it or an outside agency 

will conduct the audit, and the Division 

makes all audit arrangements. 
23 

Statistical Highlights 

FY 2005 6-Month Productivity Statistics 

October 1, 2004, through March 31, 2005 

Office-wide Dollar Accomplishments Totals 

A. Potential Investigative Recoveries and Fines......................................................................... $20,532,780 

B. Loans Not Made as Result of Investigations and Name Checks............................................ $12,503,020 

C. Disallowed Costs Agreed to by Management .......................................................................... $1,656,532

D. Recommendations that Funds Be Put to Better 

 Use Agreed to by Management........................................................................................... $142,549

Total ........................................................................................................................................... $34,834,881

Efficiency and Effectiveness Activities

A. Reports Issued........................................................................................................................................ 18 

B. Recommendations Issued..................................................................................................................... 102 

C. Dollar Value of Costs Questioned............................................................................................ $1,251,921 

D. Dollar Value of Recommendations that Funds 

Be Put to Better Use....................................................................................................................... $0 

E. Collections as a Result of Questioned Costs ............................................................................... $871,864 

Follow-up Activities

A. Recommendations Closed.................................................................................................................... 143 

B. Disallowed Costs Agreed to by Management .......................................................................... $1,656,532

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

 Agreed to by Management.................................................................................................. $142,549 

D. Unresolved Recommendations............................................................................................................. 123 

Legislation/Regulations/Standard Operating Procedures (SOPs)/Other Reviews 

A. Legislation Reviewed............................................................................................................................. 35 

B. Regulations Reviewed.............................................................................................................................. 2 

C. Standard Operating Procedures Reviewed ............................................................................................... 7 

D. Other Issuances Reviewed**................................................................................................................. 35

Total .................................................................................................................................................. ........ 79

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

communications, which frequently involve the implementation of new programs and policies. 
24 

Statistical Highlights

Summary of Indictments, Convictions, and Case Activity

A. Indictments from OIG Cases.................................................................................................................. 24 

B. Convictions from OIG Cases ................................................................................................................. 19 

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of 

 OIG Investigations.................................................................................................... $20,532,780.00 

B. Loans/Contracts Not Approved as a Result of OIG Investigations..................................... $2,495,000.00 

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

 Check Program ......................................................................................................... $10,008,020.00

Total ...................................................................................................................................... $33,035,800.00 

SBA Personnel Actions Taken as a Result of Investigations

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

B. Resignations/Retirements......................................................................................................................... 1 

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

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

E. Other......................................................................................................................................................... 0 

Program Actions Taken as a Result of Investigations 

A. Debarments Recommended to the Agency .............................................................................................. 0 

B. Debarments Pending at the Agency ......................................................................................................... 0 

C. Proposed Debarments issued by the Agency ........................................................................................... 3 

D. Final Debarments issued by the Agency.................................................................................................. 4 

Summary of OIG Hotline Operation

A. Total Fraud Line Calls/Letters ............................................................................................................. 166 

B. Total Calls/Letters Referred to Investigations Division......................................................................... 35 

C. Total Calls/Letters Referred to SBA or Other Federal Investigative Agencies ................................... 123 

D. Total Calls/Letters Needing No Action.................................................................................................. 18 
25 

Appendix

Appendix I 

OIG Reports Issued 

October 1, 2004, through March 31, 2005 

Title Report 

Number 

Issue 

Date 

Questioned 

Costs 

Funds for 

Better Use 

Capital Access

Management Advisory Report – Pre-Demand and 

Demand Letters for Delinquent 9/11 Disaster Loans 

5-09 1/11/05 

Advisory Memorandum – Real Time Traders.com, Inc. 5-10 1/31/05 

Defaulted 9/11 Disaster Loan CP 5-02 

Program Subtotal 3 

Agency Management 

FY 2005 Report on the Most Serious Management 

Challenges Facing the Small Business Administration 

5-01 10/15/04 

Advisory Memorandum Report – Independent 

Evaluation of SBA’s Information Security Program 

5-02 10/7/04 

Review of Indirect Cost Rate of the Walsh Group, P.A. 5-03 10/25/04 

Audit of SBA’s FY 2004 Financial Statements 5-05 11/15/04 

Governmentwide Financial Report System for Fiscal 

Year 2004 

5-06 11/18/04 

Advisory Memorandum Report on SBA’s Federal 

Intragovernmental Activity and Balances Data 

5-07 12/2/04 

Single Audit of the MountainMade Foundation 5-08 1/6/05 $178,206.00 

Audit of SBA’s Information Systems Controls Fiscal 

Year 2004 

5-12 2/24/05 

Audit of SBA’s FY 2004 Financial Statements 

Management Letter 

5-13 2/23/05 

Audit of SBA’s Continuity of Operations Planning 

Program (COOP) 

5-17 3/30/05 

Program Subtotal 10 $178,206.00 

Government Contracting and 

Business Development

 

Review of the Small Disadvantaged Business (SDB) 

Certification Program 

5-04 11/4/04 

Review of a Cooperative Agreement to HP Small 

Business Foundation 

5-11 2/11/05 $1,073,715.37 

SBA Small Business Procurement Awards are not 

Always Going to Small Businesses 

5-14 2/24/05 

New Management Challenge – Large Businesses 

Receive Small Business Awards 

5-15 2/24/05 

Review of Selected Small Business Procurements 5-16 3/8/05 

TOTALS (all programs) 18 Reports $1,251,921.37 $0 
26 

Appendix

Appendix II 

OIG Reports with Questioned Costs 

Reports Recs* Questioned 

Costs** 

Unsupported 

Costs**

A. For which no management decision 

had been made by September 30, 2004 12 22 $6,086,348.75 $2,181,125.00 

B. Which were issued during the period 2 4 $1,251,921.37 $904,952.13 

Universe from which management 

decisions could be made in this 

reporting period - Subtotals 14 26 $7,338,270.12 $3,086,077.13 

C. For which a management decision 

was made during the reporting period 10 19 $3,457,650.02 $0 

(i) Disallowed costs 7 15 $1,656,532.02 $0 

(ii) Costs not disallowed 4 4 $1,801,118.00 $0 

D. For which no management decision 

had been made by March 31, 2005 5 7 $3,880,620.10 $3,086,077.13 

* Recommendations: reports may have more than one recommendation. 

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

Appendix III 

OIG Reports with Recommendations that Funds Be Put to Better Use 

 Reports Recs* Recommended Funds 

For Better Use

A. For which no management decision had 

been made by September 30, 2004 4 4 $537,061.00 

B. Which were issued during the period 0 0 $0 

Universe from which management 

decisions could be made in this reporting 

period - Subtotals 4 4 $537,061.00 

C. For which a management decision was 

made during the reporting period 1 1 $142,549.00 

(i) Recommendations agreed to by 

SBA management 1 1 $142,549.00 

(ii) Recommendations not agreed to 

by SBA management 0 0 $0 

D. For which no management decision 

had been made by March 31, 2005 3 3 $394,512.00 

* Recommendations: reports may have more than one recommendation. 
27 

Appendix 

Appendix IV 

OIG Reports with Non-Monetary Recommendations 

 Reports Recommendations 

A. For which no management decision had been made by 

September 30, 2004 30 145 

B. Which were issued during the period 12 98 

Universe from which management decisions could be 

made in this reporting period - Subtotals 42 243 

C. For which a management decision was made (for at 

least one recommendation in the report) during the 

reporting period 27 123 

D. For which no management decision (for at least one 

recommendation in the report) had been made by 

March 31, 2005 25 120 

*Adding the number of reports for C&D will not result in the subtotal of A&B because any single report may have 

recommendations that fall under both C&D. 
28 

Appendix

Appendix V 

OIG Reports From Prior Semiannual Periods 

with Overdue Management Decisions 

as of March 31, 2005 

Title Number Issued Status 

Georgia District Office Sponsorship 

Activities 

2-25 8/26/02 Awaiting final action by management for 

recommendation 1.A. 

Impact of Loan Splitting on Borrowers and 

SBA 

2-31 9/30/02 Two recommendations are in management 

resolution. 

Guaranty Purchase Process 3-15 3/17/03 Awaiting management decision on 

recommendation 1.A. 

Asset Sales Program 3-19 3/31/03 Four recommendations are in management 

resolution. 

Equity Injection in the SBA 7(a) Loan 

Guaranty Program 

3-21 3/31/03 Three recommendations are in management 

resolution. 

SBA’s Acquisition, Development and 

Implementation of the Joint Accounting and 

Administrative Management System 

3-32 6/20/03 Two recommendations are in management 

resolution. 

Insufficient Proof of Citizenship Status for 

SBA Loans (Inspection) 

3-43 9/30/03 One recommendation is in management 

resolution. 

Puerto Rico & US Virgin Island DO 

Cosponsorship and SBA-Sponsored 

Activities 

4-07 1/20/04 Agency has not responded to the eleven 

recommendations made in the report. 

Audit of SBA’s Information System 

Controls for Fiscal Year 2003 

4-19 4/29/04 Four recommendations are in management 

resolution. 

Audit of San Francisco District Office 

Administrative Activities Related to the 

Silicon Valley Small Business Development 

Center 

4-27 6/29/04 Two recommendations are in management 

resolution. 

Management Advisory Report on the 

Transfer of Operations to the National 

Guaranty Purchase Center 

4-39 8/31/04 One recommendation is in management 

resolution. 

Audit of SBA Guarantied Loan 4-40 9/13/04 One recommendation is in management 

resolution. 

Audit of Selected SBA General Support 

Operating Systems 

4-41 9/10/04 One recommendation is in management 

resolution. 

Audit of SBA’s Email System 4-42 9/10/04 Four recommendations are in management 

resolution. 

Audit of Early Defaulted Loan 4-43 9/17/04 One recommendation is in management 

resolution. 

Audit Report - Summary Audit of SBASponsored and Cosponsored Events 

Conducted by District Offices 

4-44 9/24/04 Agency has not responded to the seven 

recommendations made in the report. 
29 

Appendix

Appendix VI 

OIG Reports Without Final Action as of March 31, 2005

Report 

Number 

Title Date 

Issued 

Date of 

Management 

Decision 

Final 

Action 

Target 

43H006021 8(a) Continuing Eligibility Reviews 9/30/94 12/30/94 10/30/02 

9-23 Survey of Electronic Records Management 9/15/99 11/30/99 9/30/05 

0-14 7(a) Service Fee Collections 3/30/00 8/22/00 12/31/04 

0-19 SDB Certification Program Obligations and Expenditures 6/30/00 3/30/01 9/30/02 

0-30 SBA’s Administration of MBELEDF Cosponsorship 9/30/00 3/26/01 ** 

1-09 PDD 63 3/26/01 9/27/01 9/15/03 

1-11 GPRA for the MSB&COD Program 3/27/01 9/28/01 7/31/03 

1-12 SBA’s Information Systems Controls – FY 2000 3/27/01 *** ** 

1-16 SBA’s Follow-up on SBLC Examinations 8/17/01 9/25/01 ** 

A1-06 Evaluation of SBA’s Computer Security Program 9/28/01 1/9/02 ** 

1-20 Agreed-Upon Procedures Report on Sensitive Payments 9/28/01 12/18/01 12/31/04 

2-12 Improvements in the SBLC Oversight Process 3/20/02 *** 9/30/05 

2-17 SBA’s FY 2001 Financial Statements – Management Letter 4/12/02 *** ** 

2-18 SBA’s Information Systems Controls FY 2001 5/6/02 *** ** 

2-22 Travel of SBA’s Former Region VI Regional Administrator 8/7/02 9/26/02 ** 

2-27 SBA’s Experience with Defaulted Franchise Loans 9/16/02 12/19/02 6/30/04 

2-29 Internal Control Over Colson Services Corporation’s 

Contract as Central Servicing Agent for SBA’s CDC 

Program 

9/16/02 12/12/02 6/30/05 

3-08 SBA’s Oversight of the Fiscal Transfer Agent for the 7(a) 

Loan Program 

1/30/03 *** ** 

3-10 504 Loan Program Oversight 2/6/03 10/1/03 6/30/05 

3-14 TEP Consulting, Inc. 3/14/03 4/10/03 12/31/03 

3-18 Grants to the Texas Center for women’s Business 

Enterprise 

3/20/03 6/4/03 10/15/03 

3-20 SBA’s Information System Controls for FY 2002 3/31/03 *** ** 

3-21 Equity Injection in the SBA 7(a) Loan Guaranty Program 3/31/03 5/27/04 2/18/05 

3-26 Microloan Program: Moving Toward Performance 

Management 5/13/03 *** ** 

3-30 Audit of an Early Defaulted Loan 6/19/03 12/21/04 10/31/05 

3-32 SBA’s Acquisition, Development and Implementation of 

the Joint Accounting and Administrative Management 

System 

6/30/03 *** ** 

3-33 SBIC Oversight 7/1/03 *** 4/30/05 
30 

Appendix

Appendix VI (cont.) 

OIG Reports Without Final Action as of March 31, 2005

Report 

Number

Title Date 

Issued

Date of 

Management 

Decision

Final 

Action 

Target

3-34 SBA’s Compliance with JFMIP Property Management 

System Requirements 7/23/03 9/11/03 12/30/04 

3-35 National Women’s Business Council 7/28/03 *** ** 

3-36 Audit of an Early Defaulted Loan 8/19/03 10/01/03 9/30/04 

3-39 Monitoring of SBA’s Implementation of the Disaster Credit 

Management System 9/24/03 12/11/03 12/31/04 

3-41 Audit of an Early Defaulted Loan 9/29/03 4/22/04 5/31/05 

3-42 Travel Card and Purchase Card Controls 9/29/03 6/17/04 12/30/04 

4-09 Review of SBA Purchase Cards 1/26/04 8/24/04 3/31/05 

4-10 SBA’s FY 2003 Financial Statements 1/30/04 7/16/04 3/31/05 

4-13 Audit of an Early Defaulted Loan 3/2/04 4/6/04 1/31/05 

4-15 SACS/MEDCOR: Ineffective and Inefficient 3/9/04 5/11/04 9/30/05 

4-16 SBA’s Administration of the Procurement Activities of 

Asset Sale Due Diligence Contracts and Task Orders 3/17/04 *** ** 

4-17 SBA’s FY 2003 Financial Statements – Management Letter 3/23/04 *** ** 

4-18 SBA’s Loan Application Tracking System 4/5/04 *** ** 

4-19 SBA’s Information Systems Controls FY 2003 4/29/05 *** ** 

4-22 Business Development Provided by the 8(a) Business 

Development Program 

6/2/04 7/14/04 ** 

4-26 Audit of an Early Defaulted Loan 6/22/04 7/1/04 3/31/05 

4-28 Audit of SBA Guarantied Loan 7/9/04 10/6/04 3/31/05 

4-29 Audit of an Early Defaulted Loan 7/12/04 10/6/04 3/31/05 

4-31 Audit of Expenses for Meals and Refreshments Incurred by 

the Latino Coalition Foundation on an SBA 7(j) 

Cooperative Agreement 

7/19/04 1/12/05 9/30/05 

4-32 Audit of SBA Guarantied Loan 7/29/04 10/6/04 3/31/05 

4-34 SBA’s Process for Complying with the FMFIA Reporting 

Requirements 7/29/04 *** ** 

4-35 Single Audit of Federal Financial Assistance Program 

Service Corps of Retired Executives (SCORE) 8/03/04 1/12/05 6/30/05 

4-36 Audit of an Early Defaulted Loan 8/10/04 10/6/04 3/31/05 

4-38 Audit of SBA Guarantied Loan 8/24/04 10/6/04 4/7/05 

4-41 Audit of Selected SBA General Support Systems 9/10/04 *** ** 

4-42 Audit of SBA’s Email System 9/10/04 *** ** 
31 

Appendix

Appendix VI (cont.) 

OIG Reports Without Final Action as of March 31, 2005

Report 

Number

Title Date 

Issued

Date of 

Management 

Decision

Final 

Action 

Target

5-02 Advisory Memorandum Report – Independent Evaluation 

of SBA’s Information Security Program 10/7/04 2/4/05 9/30/05 

5-03 Review of Indirect Cost Rate of the Walsh Group, P.A. 10/25/04 1/12/05 6/30/05 

5-05 Audit of SBA’s Fiscal Year 2004 Financial Statements 11/15/04 *** ** 

5-09 Management Advisory Report – Pre-Demand and Demand 

Letters for Delinquent 9/11 Disaster Loans 1/11/05 3/8/05 7/10/05 

5-12 Audit of SBA’s Information Systems Control Fiscal Year 

2004 2/24/05 3/23/05 ** 

** Target dates vary with different recommendations. 

***Management decision dates vary with different recommendations. 
32 

Appendix 

Appendix VII 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2005* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

43H006021 9/30/94 Establish procedures for determining whether Section 8(a) 

participants should no longer be considered economically 

disadvantaged based on their ownership interest in their 

8(a) firm, the equity and market value of their primary 

residence, and the net worth of their spouses.

10/30/94 10/30/02

1-11 3/27/01 Ensure that performance plans include indicators for 

determining how effectively and efficiently the Section 

8(a) program is operating. 

9/28/01 7/31/03 

2-12 3/20/02 Develop a formal policy regarding effective supervisory 

and enforcement actions. 

8/27/02 12/31/03 

2-18 5/6/02 Develop an Agency-wide security plan to establish and 

implement the policies, procedures and practices for the 

following: (1) full integration of the information security 

approach and implementation process; (2) coordination 

among program offices to support their security needs; (3) 

guidance to the program office to implement information 

system security controls; and (4) methods to monitor the 

effectiveness of each part of information technology 

security. 

6/28/02 11/17/03 

3-08 1/30/03 Initiate a new procurement action for fiscal and transfer 

agent (FTA) activities and terminate the existing contract 

with the FTA when a new contract can be enacted. 

12/10/03 3/31/06 

3-08 1/30/03 Review FTA activities and identify contract costs for fees 

and services. Report these contract costs in proposed 

Master Reserve Fund (MRF) financial statements so future 

FTA contracts will have historical cost data for comparison 

purposes.

10/15/03 11/17/03

3-10 2/6/03 Design a review guide to incorporate performance aspects 

to address financial risk, address the specific requirements 

of the Section 504 loan program, and incorporate a 

performance-driven scoring system. 

10/01/03 12/31/03 
33 

Appendix 

Appendix VII (cont.) 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2005* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

3-33 7/1/03 Revise SOP on Small Business Investment Companies 

(SBICs) to ensure it includes requirements to perform 

quarterly risk assessments for capitally impaired SBICs, 

include an analysis of potential for repayment of 

outstanding leverage, and determine what criteria should be 

used to recommend an SBIC be transferred to liquidation. 

10/6/03 4/5/05 

3-36 8/19/03 Seek recovery of $282,447 from First International Bank, 

less any subsequent recoveries, for loan number 343 767 

4004. 

10/1/03 9/30/04 

3-41 9/29/03 Require the lender to repay SBA $273,675 for loan number 

153-313-4007. 

4/22/04 5/31/05 

4-10 1/30/04 That the Chief Financial Officer develop a comprehensive 

SOP detailing the subsidy reestimate process, including 

related internal controls, that reflects SBA's current 

reestimate preparation processes and any proposed 

improvements. The new SOP should be updated at least 

annually to capture significant changes such that it reflects 

the current operating process. 

7/16/04 3/31/05 

4-13 3/2/04 Request the District Director to seek recovery from the 

lender of principal, interest, and expenses totaling $767,049 

paid to First International Bank for Loan number 381-867-

4008. 

4/06/04 1/31/05 

4-16 3/17/04 That the Associate Deputy Administrator for Management 

and Administration seek recovery of at least $1,690,838 for 

amounts overcharged by referring the overcharging matter 

to the GSA contracting officer for FSS 621-3 (now 520-3) 

for appropriate action. 

5/12/04 5/02/05 

4-17 3/23/04 That the CFO develop a methodology, utilizing 

representative samples if necessary, to verify the 

completeness and accuracy of performance measure data 

reported by program offices. 

5/14/04 10/22/04 

4-17 3/23/04 That the CFO implement procedures to ensure timely and 

accurate reporting and reconciliation of intragovernmental 

amounts. These procedures should include establishing 

timelines for resolving differences with non-fiduciary 

trading partners, as well as quality assurance reviews to 

ensure the accuracy of both amounts confirmed and 

amounts reported. 

5/14/04 11/30/04 
34 

Appendix

Appendix VII (cont.) 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2005* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

4-19 4/29/04 That the Chief Information Officer revise and enhance 

existing policies and procedures to ensure: control 

weaknesses identified in certification and accreditation 

reviews and audit reports are resolved in a timely manner 

and ensure senior management is provided timely 

information regarding the progress towards implementing 

corrective actions; OCIO monitoring controls are effective 

to preclude reoccurrence of previously noted weaknesses; 

technical personnel are provided technical training to 

enable personnel to successfully carry out their duties and 

responsibilities; technical skills are sufficient to meet new 

technical requirements prior to implementing new hardware 

and software; and OCIO effectively participates in all 

phases of system development in a timely manner so that 

system controls are properly designed and developed to 

provide adequate security, and reliability, completeness, 

and accuracy for all significant system initiatives both 

within and outside of OCIO. 

8/12/04 1/31/05 

4-19 4/29/04 That the Chief Information Officer, in conjunction with 

system owners: develop policies and procedures to require 

system owners to provide plans of action to OCIO for 

correcting weaknesses identified from audits, management 

reviews, and certification and accreditation reviews; ensure 

that plans adequately address management actions to 

resolve or minimize weaknesses in the short term while 

implementing longer term system corrective actions; 

develop reporting processes to follow-up on system owner 

corrective action plans; and ensure that sufficient resources 

are made available to monitor system owner corrective 

action plans. 

8/13/04 1/31/05 
35 

Appendix

Appendix VII (cont.) 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2005* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

4-19 4/29/04 That the Chief Information Officer: implement procedures 

to ensure compliance with Procedural Notice 9000-1406 

"Removal of Old Computer User Accounts;" require 

network security administrators to review all current 

network accounts to identify and eliminate unnecessary 

accounts; require periodic documented reviews of all 

generic network accounts to ensure that they are authorized 

and needed; provide resources sufficient to monitor and 

assess network administration activities to ensure 

compliance with Federal laws and regulations, SBA 

policies and procedures, National Institute of Standards and 

Technology guidance, and industry best practices; and in 

coordination with program directors, develop procedures 

for controlling contractor personnel access to the network 

and applications. Procedures should also be established to: 

require Contracting Officers' Technical Representatives 

(COTRs) to notify security administrators in writing of each 

contractor personnel needing a network and application 

account along with privileges to assign to the account; and 

require all network and application accounts established for 

contractor personnel to be established with a renewal or 

termination date not to exceed one year or the length of the 

contract, whichever is less. In coordination with the Office 

of Human Capital Management, procedures should be 

developed for network and application security 

administrators to receive notification of termination of SBA 

employees. 

8/4/04 11/30/04 

4-19 4/29/04 That the Chief Information Officer: develop procedures to 

ensure that network system administrators: assess 

vulnerabilities in the current network configuration; make 

appropriate changes to the Windows 2000 operating system 

to address the vulnerabilities identified; develop an action 

plan to address the vulnerabilities; provide status reports on 

actions taken, document a standard Domain Controller 

configuration and standard domain policy configurations; 

and provide technical training to network system 

administrators in line with NSA, NIST, and best business 

practices for securing Windows 2000. 

8/6/04 3/31/05 
36 

Appendix

Appendix VII (cont.) 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2005* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

4-19 4/29/04 That the Chief Information Officer: develop network 

administration policies and procedures to assure that vendor 

patches and security hot-fixes are installed timely; develop 

standards in conformance with government standards and 

industry best practices to properly configure the platforms 

residing on the network; develop procedures to periodically 

perform self-assessments using the SANS Top Twenty 

vulnerabilities and establish an internal goal of reducing 

SBA's vulnerability rating; require network administrators 

to develop a corrective action plan to address each 

weakness identified in the table at the end of this 

attachment with milestones for resolving each weakness; 

and require network administrators to provide monthly 

status reports to the Chief Information Officer. 

8/6/04 3/30/05 

4-19 4/29/2004 That the Chief Information Officer in consultation with 

OHCM, develop procedures for escalating administrative 

consequences for personnel identified as not compliant, 

such as: advise first-time offenders to immediately change 

their passwords to conform to the policy; temporarily 

disable accounts for a second offense, and notify the 

account owner and immediate supervisor; and suspend 

accounts for a third offense, and send a request for adverse 

personnel action to the office director OHCM, and the 

account holder. 

2/04/05 9/30/05 

4-26 6/22/04 Request the Associate Administrator to seek recovery of the 

SBA guaranty repair of $235,008. 

7/01/04 3/31/05 

4-28 7/9/2004 Seek recovery of $142,549 from the lender. 10/06/04 3/31/05 

4-29 7/12/04 Request the Associate Administrator to seek recovery of the 

SBA guaranty repair of $373,760. 

10/06/04 3/31/05 

4-32 7/29/04 Seek recovery of $542,663 from the lender. 10/06/04 3/31/05 

4-34 7/29/04 That the Chief Financial Officer provide detailed guidance 

to the oversight, program and district offices to explain how 

and when they are to perform and document a complete risk 

assessment according to GAO Standards. 

10/25/04 4/30/05 

4-36 8/10/04 Request the Associate Administrator to seek recovery of the 

SBA guaranty repair of $740,000. 

10/06/04 3/31/05 

4-38 8/24/04 That the Associate Administrator for Financial Assistance 

seek recovery of $83,576, less any prior recoveries, from 

the lender. 

10/06/04 4/15/05 

*These are a subset of the universe of recommendations without final actions. 
37 

Appendix

Appendix VIII 

6-Month Significant Recommendations Summary 

as of March 31, 2005 

Report 

Number 

Title Date 

Issued 

Recommendation 

5-04 Review of the Small Disadvantaged 

Business (SDB) Certification 

Program 

11/4/04 That the Acting Associate Administrator for Business 

Development develop and implement procedures to 

ensure that SDB reviewers properly apply all four 

criteria for determining economic disadvantage, per 13 

CFR 124.104(c), using 8(a) Program thresholds for 

maximum income and total assets, and industry 

financial performance comparisons.

5-04 Review of the Small Disadvantaged 

Business (SDB) Certification 

Program 

11/4/04 That the Acting Associate Administrator for Business 

Development develop and implement procedures to 

ensure that eligibility reviewers recommend denial of 

SDB certification if a firm or any of its principals do 

not comply with 13 CFR 124.108(e). 

5-05 Audit of SBA’s Fiscal Year 2004 

Financial Statements 

11/15/04 That the CFO continue to develop new quality 

assurance review procedures and enhance existing 

procedures to ensure that all financial transactions are 

properly reflected in the financial statements, and that 

footnote disclosures are accurate and logical and 

contain comprehensive information essential to the fair 

presentation of SBA's financial condition. We 

recommend the following: performing additional 

analytical procedures monthly or quarterly; developing 

and completing additional checklists; performing 

studies of best practices; and, having an independent 

review conducted by individuals not associated with 

SBA's daily financial management and reporting 

responsibilities, such as an outside peer reviewer. 

5-05 Audit of SBA’s Fiscal Year 2004 

Financial Statements 

11/15/04 That the CFO strengthen internal controls to ensure 

that all requisite trading partner data are fully captured 

in SBA's accounting system, and that all trading 

partners are contacted quarterly to reconcile 

differences. In addition, we recommend that CFO seek 

assistance from OMB to enhance cooperation from 

non-responsive trading partners. 

5-09 Management Advisory Report – 

Pre-Demand and Demand Letters 

for Delinquent 9/11 Disaster Loans 

1/11/05 Revise Standard Operating Procedure 50 51 2 to direct 

servicing centers to send timely pre-demand and 

demand letters to delinquent borrowers. Such letters 

should be maintained in the loan file.

5-09 Management Advisory Report – 

Pre-Demand and Demand Letters 

for Delinquent 9/11 Disaster Loans 

1/11/05 Ensure that sufficient resources are devoted to Center 

activities to fulfill the timely issuance of pre-demand 

and demand letters as required by OMB A-129 

requirements. 
38 

Appendix

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of March 31, 2005 

Report 

Number 

Title Date 

Issued 

Recommendation 

5-11 Review of a Cooperative 

Agreement to HP Small Business 

Foundation 

2/11/05 Develop a financial management system that meets the 

requirements of OMB Circulars A-110 and A-122. 

The recipient should: (1) establish detailed written 

procedures for identifying, classifying, and eliminating 

costs that are not allowable, allocable, or 

reasonable; (2) develop procedures for contract 

administration with third parties as required by OMB 

Circulars; (3) request approval and provide copies of 

contracts/agreements for all contracting action; and 

(4) require vendors/subcontractors to bill the recipient 

for all work performed under the cooperative 

agreement. 

5-11 Review of a Cooperative 

Agreement to HP Small Business 

Foundation 

2/11/05 Request a legal opinion as to whether the arrangement 

between the recipient and SMA Global violated the 

terms of the cooperative agreement regarding subgranting or awarding the cooperative agreement to a 

sub-recipient. The opinion should address whether the 

activities by the recipient were conducted at arm's 

length given the nature of related party affiliation of the 

principal entities administering the project. The 

organization (the recipient) accepting the award has the 

obligation to honor the terms and conditions of the 

cooperative agreement and comply with applicable 

OMB Circulars. 

5-12 SBA’s Information System 

Controls for FY 2004 

2/24/05 For all SBA internal and contractor supported general 

support systems and major applications, e.g., Egan 

Mainframe, SBA and Corio UNIX, Network and 

Windows 2000; Loan Accounting System, Sybase, 

Mainframe; JAAMS Oracle, and related application 

functions: (1) develop and document policies and 

procedures clearly outlining what activities should be 

logged, who should be responsible for reviewing logs, 

what the logs should be reviewed for, how often logs 

should be reviewed, and how long logs should be 

retained; (2) assign responsibility within OCIO 

Security for the review of application and general 

support system security logs; and (3) retain audit logs 

for a sufficient period of time (at least 90 days). 

5-12 SBA’s Information System 

Controls for FY 2004 

2/24/05 For the Loan Accounting System: (1) provide software 

developers, testers, and IT management with ongoing 

training in software development, testing and 

acceptance procedures; (2) define sufficient 

documentation standards for LAS, and (3) define 

sufficient test standards and procedures for LAS. 
39 

Appendix

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of March 31, 2005 

Report 

Number 

Title Date 

Issued 

Recommendation 

5-12 SBA’s Information System 

Controls for FY 2004 

2/24/05 Develop minimally acceptable baseline configurations 

based on guidance from NSA, NIST, CIS, SANS, and 

industry best practices for Windows 2000 Domain 

Controllers. In addition, these baseline configurations 

should address all the issues identified above based on 

the source used for developing the baselines and the 

settings and policies should be put into place. 

5-12 SBA’s Information System 

Controls for FY 2004 

2/24/05 Develop a system disaster recovery plan for LAS (both 

Egan mainframe and SBA’s Sybase servers) to ensure 

that all facets of LAS can recover if both or either 

aspects of the system are disabled during an 

emergency. 

5-14 SBA Small Business Procurement 

Awards are not Always Going to 

Small Businesses 

2/24/05 That the Associate Deputy Administrator for 

Government Contracting and Business Development 

work with GSA to ensure that small business 

representations in response to GSA Schedules contract 

solicitations are following size eligibility requirements 

for Government procurement, specifically that "if a 

procurement calls for two or more specific end items or 

types of services with different size standards and the 

offeror may submit an offer on any or all end items or 

types of services, the offeror must meet the size 

standard for each end item or service item for which it 

submits an offer" (13 CFR Sec. 121.407). 

5-14 SBA Small Business Procurement 

Awards are not Always Going to 

Small Businesses 

2/24/05 That the Associate Deputy Administrator for 

Government Contracting and Business Development 

work with the FAR Council to require compliance with 

set-aside regulations on multiple award vehicle (i.e., 

schedules and GWACs) purchases when agencies limit 

their requests for quotations to small businesses. 

5-17 Audit of SBA’s Continuity of 

Operations Planning Program 

3/30/05 Assign overall Continuity of Operations Program 

(COOP) Business Resumption Program oversight 

responsibilities to the Office of Chief Operating 

Officer. 

 5-17 Audit of SBA’s Continuity of 

Operations Planning Program 

3/30/05 That the Chief Operating Officer require that personnel 

named in the SBA COOP and BRP participate in plan 

testing so that they understand their duties if plan 

activation is needed. 
40 

Appendix

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of March 31, 2005 

Report 

Number 

Title Date 

Issued 

Recommendation 

5-17 SBA’s Continuity of Operations 

Planning Program 

3/30/05 Annually test the SBA COOP and a percentage of all 

headquarters and field office BRP every year to ensure 

compliance, and therefore determine if the plans tested 

are adequate. Full testing of all SBA program and field 

office BRPs should occur at least every 4 years to 

ensure that all BRPs are sufficient and that program 

and field offices have viable, complete and tested 

BRPs. 

5-17 SBA’s Continuity of Operations 

Planning Program 

3/30/05 Create complete System Disaster Recovery Plans for 

all mission critical information systems that satisfy the 

requirements set in NIST Special Publication 800-34 

and SBA's COOP. 
41 

Appendix

Appendix IX 

List of Events/Activities Where SBA Used its Cosponsorship Authority* 

Small Business Act, Section 4(h) 

December 7, 2004, through March 31, 2005 

Name/Subject 

of Event 

Date 

of 

Event Start 

Date 

of 

Event End 

Location 

of 

Event 

Type of 

Activity 

Names of Cosponsors 

Partnership to 

provide 

entrepreneurial 

training and 

assistance to urban 

small business 

entrepreneurs 

9/30/04 9/30/06 15 National 

Urban League 

locations 

Cosponsorship National Urban League 

Small Business 

Resource Guide 

9/30/04 10/01/06 Utah Cosponsorship Olympus Publishers, 

LC, dba Utah Business 

Magazine (For Profit) 

and State of Utah, 

Division of Business 

and Economic 

Development (DBED) 

Business Resource 

Alliance 

12/04 

 

2/05 

5/05 

7/05 

10/05 

Los Angeles, 

CA 

Cosponsorship Blue Cross of 

California (For Profit) 

Fidelity Brokerage 

Services (Fill in 

Name of Activity) 

11/04 9/30/05 Washington, 

DC and 

Providence, RI 

Cosponsorship Fidelity Brokerage 

Services, LLC 

National Training 

Alliance 

11/04 12/06 Online Cosponsorship National Business 

Association 

Webinars 11/04 02/05 World Wide 

Web 

Cosponsorship Topica 

SBA/Hartford ELearning Center 11/04 12/31/06 Internet Cosponsorship The Hartford Fire 

Insurance Company 

(Hartford) 

Youth 

Entrepreneur 

Webpage 

11/04 10/31/06 World Wide 

Web and JA 

Worldwide 

sites 

throughout the 

U.S. 

Cosponsorship JA Worldwide (Not For 

Profit Organization) 

Internet based “one 

stop clearing 

house” for small 

business 

information on 

Health Savings 

Accounts 

10/04 11/06 Online Cosponsorship America’s Health 

Insurance Plans (A not 

for profit association of 

heath insurance 

providers) 
42 

Appendix

Appendix IX (cont.) 

List of Events/Activities Where SBA Used its Cosponsorship Authority* 

Small Business Act, Section 4(h) 

December 7, 2004, through March 31, 2005 

Name/Subject 

of Event 

Date 

of 

Event Start 

Date 

of 

Event End 

Location 

of 

Event 

Type of 

Activity** 

Names of Cosponsors 

Entrepreneurs on 

the Grow 

3/15/04 12/04 Honolulu, HI Cosponsorship American Savings 

Bank 

Pacific Business News 

Hawaii Women’s 

Business Center 

Plaza Club 

(For Profit) 

Training 

Program/On-line 

tutorial 

5/01/04 5/31/06 World Wide 

Web 

Cosponsorship Roving Software, Inc. 

Conference - The 

Role on 

Entrepreneurship in 

Promoting 

Economic 

Development 

3/7/05 3/7/05 Washington, 

DC 

Cosponsorship Ewing Marion 

Kauffman Foundation, 

Council of State 

Governments, and the 

National Lieutenant 

Governors Association 

(Non-Profit 501 (c) (3)) 

Multicultural Small 

Business Outreach 

Initiative 

3/10/05 3/10/05 San Gabriel, 

CA 

Cosponsorship United States Postal 

Service (USPS) 

Seminar on 

Employment Law 

issues for 

established 

businesses 

3/10/05 3/10/05 Seattle, WA Cosponsorship Ryan Swanson and 

Cleveland PLLC 

Greater Seattle 

Chamber of Commerce 

Seattle Small 

Business Development 

Center (SBDC) SCORE 

Small Business 

Resource Fair 

2/18/05 3/4/05 Granite Falls, 

MN and 

Mahnomen, 

MN 

Cosponsorship Office of U.S. 

Congressman Collin 

Peterson, MN Dept. of 

Employment and 

Economic Dev., MN 

State Community and 

Technical College and 

MN SCORE 

Association 

Minority Leaders 

of Tomorrow: 

Business Forum 

2/2/05 2/2/05 Jacksonville, 

FL 

Cosponsorship National Football 

League (NFL) and 

University of North 

Florida Small Business 

Development Center 

(SBDC) 
43 

Appendix

Appendix IX (cont.) 

List of Events/Activities Where SBA Used its Cosponsorship Authority* 

Small Business Act, Section 4(h) 

December 7, 2004, through March 31, 2005 

Name/Subject 

of Event 

Date 

of 

Event Start 

Date 

of 

Event End 

Location 

of 

Event 

Type of 

Activity 

Names of Cosponsors 

Business Resource 

Alliance 

1/12/05 3/10/05 Springfield, 

VA and 

Gaithersburg, 

MD 

Cosponsorship Best Buy Stores, L.P. 

(For Profit) 

Business Resource 

Alliance 

1/05 1/06 San Diego, 

San Francisco, 

Los Angeles 

and Chicago 

Cosponsorship Best Buy Stores, L.P. 

(For Profit) 

*The Agency provided this information. It has not been verified by the OIG. 
44 

Appendix

Appendix X 

6-Month Legal Actions Summary 

October 1, 2004, through March 31, 2005 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

AZ BL An Arizona woman was the straw borrower on a $462,000 

SBA-guarantied loan. During the application process, she 

provided several false gift letters as part of the equity 

injection. The applicant was also acted as a straw borrower 

for a co-subject, who could not apply for the loans himself 

because of his prior Federal conviction for bribery. 

Loan applicant 

pled guilty to false 

statements and 

agreed to pay 

$24,000 in 

restitution. 

Sentencing was 

deferred for 5 

years. 

None 

CA SBDC A former high ranking state official, who administered a 

Small Business Development Center program for the SBA 

in California, allegedly engaged in a scheme to defraud 

HUD of more than $600,000. 

Former official 

indicted. 

FBI 

HUD/OIG 

IA BL A former banking associate, who had previously pled 

guilty, was sentenced for making a false statement to SBA 

in an effort to induce the SBA to pay its 80 percent 

guaranty on a defaulted business loan. 

Banking associate 

debarred from 

Federal assistance 

programs and 

procurement 

transactions for 3 

years. 

None 

IL BL A businessman participated in a fraud scheme committed 

against the SBA and a participating lender involving a 

$1.25 million SBA loan to purchase a restaurant. The 

parties to the transaction conspired to provide an 

unqualified borrower (an illegal alien and convicted felon) 

with the funds required for his capital injection. 

Businessman 

settled the 

Government’s civil 

claims against him 

through a $100,000 

cash payment to 

the SBA. 

None 

MD BL The owner of a Maryland seafood business conspired with a 

New Jersey seafood exporter and prepared false invoices 

totaling $73,344 in order to receive a $400,000 SBA loan. 

Owner pled guilty. None 

MD BL The owners of a now-closed restaurant pled guilty to 

charges relating to concealing a previous bankruptcy when 

applying for an SBA-guarantied loan. 

Owners sentenced 

to 3 years 

probation and 

ordered to pay 

$200,000 in 

restitution. 

FBI 

MI BL SBA/OIG received information, including financial records 

and testimony, which directly contradicted information 

previously provided by a borrower/restaurant owner during 

the loan application and approval process for a $650,000 

loan. 

SBA lender 

cancelled loan after 

receiving 

contradicting 

information from 

SBA/OIG. 

None 
45 

Appendix

Appendix X (cont.) 

6-Month Legal Actions Summary 

October 1, 2004, through March 31, 2005 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

MO BL The former owner of a Missouri business falsely claimed to 

have injected at least $241,100 into her business prior to the 

closing of a $727,000 SBA-guarantied loan. The false 

representations included a $100,000 gift letter from her 

father, when this money was actually a loan. 

Former owner was 

sentenced to 5 

years probation and 

ordered to pay 

$171,572 in 

restitution to an 

SBA lender. 

None 

MO BL The former president and secretary of a child care center in 

Missouri falsified the required equity injection in order to 

obtain a $311,000 SBA-guarantied loan. The child care 

center never opened and the loan quickly defaulted, 

resulting in a principal loss of $154,566. A former 

construction company owner assisted in the scheme by 

submitting a false $11,000 invoice as evidence of the 

required equity injection. 

Former president 

and secretary were 

ordered to make 

restitution of 

$154,566 to the 

lender and were 

sentenced to 3 and 

5 years probation 

respectively. The 

former construction 

company owner 

will make 

restitution of 

$11,000 to the 

government and 

provide community 

service. 

None 

MO BL The former president/owner of a boat propeller 

manufacturer made false statements to financial institutions 

in order to obtain a $340,000 SBA-guarantied loan. The 

owner, who is also a disbarred attorney, failed to disclose 

numerous personal and corporate liabilities and submitted a 

false income tax return. 

Owner sentenced 

to 9 years 

incarceration, 5 

years probation and 

ordered to pay over 

$2.4 million in 

restitution. 

IRS 

NJ BL A window manufacturer owner conspired with an attorney 

to obtain a $1,750,000 SBA-guarantied business loan 

through a false capital injection. The terms of the loan 

required a third individual to make a $700,000 capital 

injection. The investigation revealed that the capital 

injection was never made. 

All four subjects 

have pled guilty 

and are awaiting 

sentencing. 

None 

NJ SBIC The part owner of a Small Business Investment Company, 

licensed and funded by SBA to lend money to start-up 

technology businesses, was involved in a scheme to steal 

more than $1.9 million. The business owner and others 

participated in the theft of funds by issuing checks, wire 

transfers, and other payments for their own personal 

benefit. They concealed the thefts by falsifying records to 

make it appear that the payments were for salary or 

shareholder distributions. 

Owner pled guilty. FBI 
46 

Appendix

Appendix X (cont.) 

6-Month Legal Actions Summary 

October 1, 2004, through March 31, 2005 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

NV BL The part owner of four Las Vegas florists allegedly 

participated in a multi-faceted fraud scheme relating to the 

submission of false documentation for six SBA loans 

totaling $300,000. 

Business owner 

Indicted. 

DOS-DSS, 

USSS, Las 

Vegas Metro 

Police 

NY DL The owner of two telecommunication firms is charged with 

providing false information on his SBA disaster loan 

applications. When applying for loans of $216,800 and 

$80,000, the owner provided information that his 

companies were located at the World Trade Center on 9/11 

and suffered physical and economic injury as a result of the 

terrorist attacks. The SBA/OIG investigation disclosed that 

the firms had relocated prior to the 9/11 attacks. 

Owner charged by 

Information for 

making false 

statements. 

USPIS 

NY DL A former attorney, who claimed his firm had been located 

in downtown New York City on September 11, 2001, 

received an SBA Disaster Loan for $247,000. The 

investigation revealed that his firm was never located at that 

address. 

Former attorney 

indicted. 

IRS 

NY DL A resident falsely applied for two disaster loans. In both 

applications, she falsely claimed her apartment and 

automobile were destroyed during the 9/11 terrorist attacks. 

In fact, she never resided at the apartment, and the car was 

repossessed prior to the attacks. She received $1,668 from 

FEMA, but SBA denied her loan application due to poor 

credit history and a lack of repayment ability. 

Applicant indicted. DHS-OIG 

OR BL A former loan broker submitted false loan applications 

containing names and personal identity information of six 

people, fictitious business information, and forged 

signatures. In addition, he opened checking accounts in the 

names of these people and, after the loan funds were 

deposited into these accounts, wrote checks using forged 

signatures. The former loan broker used the proceeds of 

these loans for personal expenses, including paying debts 

and gambling. 

Former loan broker 

was sentenced to 

21 months in 

prison, 5 years 

supervised release, 

and was ordered to 

pay restitution of 

$512,518 to a 

lender. He was 

also debarred by 

the SBA for 3 

years from all 

Federal 

procurement and 

non-procurement 

activities. 

FBI 
47 

Appendix

Appendix X (cont.) 

6-Month Legal Actions Summary 

October 1, 2004, through March 31, 2005 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

PA BL The president of a now-defunct tool business fraudulently 

attempted to conceal $551,000, which he obtained through 

an unrelated stock sale. The purpose of the scheme was to 

induce the SBA to accept a $60,000 payment and forgive 

the remaining loan balance totaling $437,000. 

President sentenced 

to 5 years 

probation; ordered 

to pay $437,000 in 

restitution to SBA. 

None 

PA CC Agency debarred two individuals based upon false 

statements in connection with their participation in the 8(a) 

program. One of the individuals was running the day-to-day 

operations of an 8(a) company in violation of program rules 

because: 1) he had not been identified to SBA as the 

operator, and 2) he had already graduated from the 8(a) 

program. He also created false financial statements in 

order to obtain the bonding necessary for the firm to bid 

and receive contracts. The bonding company lost 

approximately $6 million on the defaulted contracts. The 

second individual, an employee of the 8(a) firm, started a 

second company and wrongfully obtained admission to the 

8(a) program based upon false representations that he 

owned 100 percent of the second concern. 

Two individuals 

debarred from 

participating in the 

SBA 8(a) program 

for 3 years. 

NCIS 

TN BL The president of a pager and cellular telephone retailer 

allegedly induced a bank and SBA to fund a $100,000 

SBA-guarantied loan by submitting false invoices that 

inaccurately represented the value of the equipment and the 

selling price of the business being purchased. 

President indicted. None 

TX BL The owner of a convenience store applied for and received 

a $1 million SBA-guarantied loan. During the loan process, 

he claimed U.S. citizenship; however, Department of 

Homeland Security records indicated that he was not a U.S. 

citizen. 

Owner sentenced 

to 1 year probation 

and 200 hours 

community service. 

DHS, SSA, 

Harris County 

Organized 

Crime Task 

Force, 

TEXAS-ABC 

TX BL The co-owner of a business failed to report a criminal 

conviction on his SBA Form 912 when applying for a SBAguarantied loan. The OIG investigation resulted in a cost 

avoidance of the loan amount, $1,845,000. 

Bank withdrew 

application. 

None 

TX BL The owners of a convenience store and service station were 

charged with tampering with government records in 

connection with an SBA business loan and a renewal 

application for a TABC permit. The couple falsified 

documents inducing a financial institution and SBA to fund 

a $230,000 SBA-guarantied loan. 

Owners sentenced 

to 2 years 

probation, and 

fined $2,000. 

DHS, TEXASDPS, TEXASABC 
48 

Appendix

Appendix X (cont.) 

6-Month Legal Actions Summary 

October 1, 2004, through March 31, 2005 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

TX BL Two proprietors of a convenience store and service station 

allegedly induced a financial institution and the SBA to 

fund a $480,000 SBA-guarantied loan by falsely 

representing themselves as U.S. citizens. 

Convenience store 

owners indicted. 

DHS, SSA, 

USDA, 

TEXAS-DPS, 

TEXAS-ABC 

TX BL A loan broker was involved in a fraudulent scheme 

involving at least $28 million in SBA-guarantied loans. 

The broker admitted that for a 2-year period, he brokered 

loans to individuals interested in purchasing convenience 

stores and caused these individuals to sign loan application 

documents that he knew were false. The broker then 

submitted these false documents to lenders. 

Broker sentenced 

to 9 years in a 

Federal 

correctional facility 

with no parole. He 

was also ordered to 

pay more than $14 

million in 

restitution and 

forfeit $2 million to 

the United States 

Treasury. 

FBI 

TX BL The owner of two restaurants obtained two SBA-guarantied 

loans and a line of credit totaling $1,078,500 by inflating 

personal property values and net worth in order to influence 

financial institutions to approve the loans. The owner used 

the proceeds for personal expenses. 

Restaurant owner 

indicted. 

FBI, IRS 

TX BL The owners of a convenience store conspired to recruit 

individuals to apply for $9.5 million in SBA-guarantied 

loans; submitted false and fraudulent documents, including 

“gift letters;” and concealed the fact that escrowed SBAguarantied loan proceeds were being used as down 

payments for additional loans. 

Owners plead 

guilty. 

FBI 

TX BL The owner of a convenience store and an associate were 

charged with bank fraud and making false statements to a 

financial institution for the purpose of fraudulently 

obtaining a $1 million SBA-guarantied loan and a $390,000 

companion loan. 

Convenience store 

owner and 

associate indicted. 

DHS 

TX BL The owner of an escrow company and a co-conspirator 

falsely obtained nine SBA-guarantied loans totaling 

$9,500,000 for convenience stores. The fraud scheme 

involved submitting false loan application documents and 

using SBA guarantied loan proceeds to falsify the required 

equity injection. 

Owner and coconspirator 

convicted on all 

counts in a jury 

trial. Conviction 

includes a 

provision to forfeit 

any property 

derived from the 

offenses, up to 

$9,975,000. 

FBI 
49 

Appendix

Appendix X (cont.) 

6-Month Legal Actions Summary 

October 1, 2004, through March 31, 2005 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

TX BL During the course of the loan process for an $880,000 SBAguarantied loan, it is alleged that a borrower signed 

fraudulent documents relating to his financial status, the 

required cash injection, and his U.S. citizenship. 

Superseding 

indictment filed. 

DHS, TEXASABC 

VA BL The former owners of a contracting company allegedly used 

loan proceeds for personal items in lieu of purchasing 

equipment that was to serve as collateral for their $100,000 

SBA-guarantied loan. 

Former owners 

indicted.

FBI 

Program codes: BL=Business Loans; DL=Disaster Loans; GC=Government Contracting and Business 

Development/Section 8(a) Business Development; IC = Investment Company 

Joint-investigation Federal agency acronyms: BATF=Bureau of Alcohol, Tobacco, and Firearms; DCIS=Defense 

Criminal Investigative Service; DHS=Department of Homeland Security; DOC/OIG=Department of Commerce OIG; 

DOL/OIG=Department of Labor OIG; FBI=Federal Bureau of Investigation; HUD=Department of Housing and Urban 

Development; ICE=Immigration and Customs Enforcement; IRS=Internal Revenue Service; IRS-CID=IRS Criminal 

Investigation Division; NCIS=Naval Criminal Investigative Service; SSA/OIG=Social Security Administration OIG; 

TEXAS-ABC=Texas Alcoholic Beverage Commission; TEXAS-DPS=Texas Department of Public Safety; 

TIGTA=Treasury Inspector General for Tax Administration; USDA/OIG=United States Department of Agriculture OIG; 

USPIS/OIG=United States Postal Inspection Service; USSS=United States Secret Service; VA/OIG=Department of 

Veterans Affairs OIG. 
50 

Appendix 

Appendix XI 

Small Business Administration 

Office of Inspector General 

 

Inspector 

General 

Auditing Division 

Deputy Inspector 

General 

Counsel Division 

Management and Policy 

Division 

Investigations Division 

Business Development 

Programs Group 

Washington, DC 

Financial 

Management & IT 

Group 

Washington, DC 

Credit Programs 

Group 

Atlanta 

Dallas 

Los Angeles 

Chicago 

Washington, DC 

Los Angeles 

Denver 

Seattle 

Western Region 

Chicago 

Dallas 

Houston 

Kansas City 

Central Region 

Washington, DC

Atlanta 

Philadelphia 

New York 

Eastern Region 
Make A Difference 

To promote integrity, economy, and efficiency, we encourage you to report 

instances of fraud, waste, or mismanagement to the SBA OIG HOTLINE.* 

CALL 

1-800-767-0385 (Toll Free) 

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.