Semiannual Report March 1996 i

SEMIANNUAL REPORT OF THE INSPECTOR 

GENERAL 

FOR THE PERIOD 

October 1, 1995, To March 31, 1996 

FOREWORD

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

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

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

(SBA), covers the full range of OIG activities from October 1, 1995, to March 31, 1996. 

Over the reporting period, the OIG closed 56 investigative cases and obtained 36 indictments 

and 25 convictions. The office also issued 12 audit reports, completed 1 inspection report, and 

identified $54 million in potential recoveries and fines, management avoidances due to 

investigative activities, disallowed costs agreed to by management, and recommendations that 

funds be put to better use. These OIG accomplishments enabled the Agency to make more funds 

available to qualified small businessmen and businesswomen who are eligible for SBA financial 

assistance. 

SBA's loan portfolio continues to grow at a remarkable pace and is currently projected to reach 

$42 billion by the end of FY 1997. Unless the Congress acts to correct the OIG's current 

resource deficiencies, its ability to provide sufficient oversight of this growth will continue to be 

severely constrained. For example, the OIG's current inventory of SBA cases referred to other 

law enforcement agencies stands at 122 and involves $22 million in Government funds at risk. 

The rate of subsequent indictments and convictions in these referred cases is, however, only 10% 

of the rate achieved in OIG-managed cases. When juxtaposed with the OIG's investigative 

performance, the efficiency and effectiveness of the referral process clearly pales in comparison. 

 In short, the OIG is not receiving an optimal measure of deterrence from these referrals, nor is 

the Government realizing as much revenue, in terms of fines and recoveries, as it could. 

Whether the customer is the Congress, the SBA Administrator, Agency program personnel, or 

the American taxpayer, the OIG is not able to be as responsive as it should be. While the office's 
ii Semiannual Report March 1996

investigative inventory carries 328 active cases, which translates into some 1,298 subjects under 

investigation and represents about $355 million of Government funds at risk, large areas of the 

country are not being covered at all, or inadequately at best, because of the limited numbers of 

OIG investigative and audit personnel available to the Inspector General. Similarly, the shortage 

of both audit and inspection personnel in the Nation's capital means that many of the 

performance audits and inspections being requested by senior program managers must also go 

unaddressed. 

Specifically, what is not being done? Where are the significant gaps in coverage? In my 

professional judgment, the OIG should be providing the SBA Administrator and the Congress 

with periodic assessments of how efficiently the Agency's field offices are being managed and 

how effectively their programs are meeting the needs of the small business communities they 

serve. Unfortunately, such labor-intensive reviews are not being done. Second, the OIG should 

be monitoring the SBA's administrative-support functions to ensure the integrity of the Agency's 

financial activities and the effectiveness of its general support to both its central office and field 

operations. Again, little or no oversight of the SBA's information systems, procurement and 

contract management activities, or other critical management functions has been done. The OIG 

should also be providing at least a modicum of oversight to a number of other SBA programs, 

i.e., business initiatives, technology, international trade, veterans and Native American affairs, 

women's business ownership, etc.; however, due to their relatively limited funding exposure, 

these programs have largely escaped OIG scrutiny. Finally, from an investigative perspective, 

OIG investigators continue to be concerned about their limited or lack of presence in New 

England, the Northwest, and the Southwest areas of the country and, like their audit and 

inspection colleagues, they are troubled by their inability to provide adequate coverage of the 

full range of SBA programs. Equally important, because of the time expended reacting to 

events, there is little time left for the investigators to provide a sufficient number of integrity and 

fraud awareness briefings to either the SBA's employees or its resource partners. 

 

Given its limited resources, the OIG has no alternative but to establish its priorities carefully for 

those oversight requests it can honor and the types of cases it will pursue. This means that the 

SBA's business loan and disaster assistance programs, because of their large dollar volume, and 

its minority enterprise development [8(a)] activities, due to public interest, will continue to 

receive the lion's share of the OIG's attention. Unfortunately, the balance of the Agency's 

programs will continue to receive little or no independent oversight from the OIG. 

 

Finally, on a more positive note, cooperation received from SBA's policy officials, senior 

executives, program managers, and employees during the conduct of OIG audits, inspections, 

and investigations has been excellent. The OIG's working hypothesis has proven itself once 

again: the more OIG employees work with program managers to improve the performance of 

the Agency during these times of downsizing and fiscal constraint, the more quickly the SBA 

will achieve its goal of becoming an efficient and effective agency in support of the Nation's 

small business community. Allowing for resource constraints, I trust the results reflected in this 

Semiannual Report to the Congress offer strong evidence that the OIG is meeting its 
Semiannual Report March 1996 iii

responsibilities to the best of its ability. 

James F. Hoobler 

Inspector General
iv Semiannual Report March 1996

TABLE OF CONTENTS

Title Page

Foreword.......................................................................................................................................... i 

Table of Contents........................................................................................................................... iii 

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

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

Disaster Loan Program ..................................................................................................................20 

Small Business Investment Companies .........................................................................................29 

Surety Bond Guarantees ................................................................................................................32 

Government Contracting Programs ...............................................................................................35 

Minority Enterprise Development .................................................................................................38 

Economic Development.................................................................................................................44 

Agency Management and Financial Activities..............................................................................46 

Organization, Resources, and Management Initiatives .................................................................54 

Profile of Operating Results ..........................................................................................................60 

FY 1996 Productivity Statistics .....................................................................................................64 

Statutory Reporting Requirements.................................................................................................65 

Table of Appendices ......................................................................................................................66 
Semiannual Report March 1996 1

Executive Summary

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

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

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

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

October 1, 1995, to March 31, 1996. 

Summary of Accomplishments

OIG audits, inspections, and investigations 

during this 6-month period achieved 

$54,326,049 in potential dollar results, 36 

indictments, and 25 convictions. The dollar 

results consist of (1) $18,425,315 in 

potential recoveries, including 

judicially-awarded fines and restitution; (2) 

$27,207,418 in management avoidances; (3) 

$1,120,894 in disallowed costs agreed to by 

SBA's management; (4) $6,472,422 in 

management commitments to use funds 

more efficiently; and (5) a one-time 

settlement of $1,100,000 based on an OIG 

quality review of a CPA’s report. 

As noted in previous Semiannual Reports, 

the OIG alone could not have achieved the 

accomplishments set forth in this report to 

the Congress. The results for this period 

reflect the cooperation and support of other 

Federal audit, inspection, and investigative 

organizations such as the Federal Bureau of 

Investigation (FBI); U.S. Secret Service; 

Bureau of Alcohol, Tobacco and Firearms 

(BATF); Postal Inspection Service; Internal 

Revenue Service (IRS); Office of the 

Comptroller of the Currency; Air Force 

Office of Special Investigations; Federal 

Protective Service; other Federal OIGs; 

Department of Justice (DOJ) prosecutors; 

and, most importantly, the actions of SBA 

program managers and employees. Indeed, 

much of our success is due to referrals made 

by conscientious Agency employees. 

 OIG Mission for FY 1996

For the balance of FY 1996, the OIG will 

continue to focus its attention on SBA’s two 

largest programs--Business Loans and 

Disaster Assistance. Their respective 

growth, as discussed extensively in the text 

of this report, has been tremendous over the 

last few years. While the number of dollars 

at risk in these two programs continues to 

grow, both the Agency and the OIG face a 

reduction in resources for management and 

oversight activities, respectively. 

Both the Congress and the Office of 

Management and Budget (OMB) 
2 Semiannual Report March 1996

demonstrated their concern over the Disaster 

Assistance program in 1994, when they 

made $3 million available to the OIG for the 

purpose of disaster-related oversight. The 

OIG subsequently developed a strategy to 

guide disaster-related oversight activity and 

to make optimal use of these funds. 

Increased temporary staffing, located near 

disaster sites, now provides needed 

personnel to meet the oversight goals of the 

OIG's disaster plan. Planning is already 

underway to devise a strategy for continuing 

disaster-related oversight when the 

temporary funding runs out in mid-1997. 

The OIG continues to build greater 

awareness of its mission with SBA 

employees, the Agency's customers, and its 

resource partners. The OIG’s information 

dissemination activities have had a 

significant deterrent effect on fraud, while 

raising SBA program managers' interest in 

management improvement. The office 

continues to pursue this dual goal through 

attendance at SBA-sponsored events, the 

development and use of educational 

presentations, more creative use of key OIG 

reports and activities, and staff involvement 

in other initiatives designed to make the 

OIG more visible within the Agency and its 

client groups. One such example is the 

OIG’s use of IGNet, an Internet-based 

forum for the inspector general community. 

Summaries of audit and inspection reports 

are being made available to the general 

public on IGNet, which is coordinated for 

the inspector general community by the 

SBA/OIG. These are relatively economical 

methods of reporting our work and they are 

having a substantial impact on the 

accomplishment of our mission and goals. 

The OIG is also becoming progressively 

more visible to SBA’s resource partners 

through the appearance of the Inspector 

General and other key OIG officials before 

the National Association of Guaranteed 

Government Lenders (NAGGL), the 

Intergovernmental Audit Forum, and other 

professional and trade organizations. 

Highlights of the Past Six 

Months 

Efforts to Improve SBA Program 

Management 

Deputy Inspector General (DIG) Testifies 

Concerning Loan Packager Problems. The 

DIG testified before the Subcommittee on 

Government Programs of the Committee on 

Small Business of the United States House 

of Representatives on October 12, 1995. 

She discussed loan packager problems 

identified by the OIG and offered 

recommendations for alleviating certain 

recurring problems. She also discussed 

lender service providers and OIG efforts to 

detect and deter fraud generally in the 

business loan and disaster assistance loan 

programs. 

DIG Testifies Concerning Problems in the 

Minority Enterprise Development Program. 

 The DIG also testified before the House 

Committee on Small Business on December 

13, 1995. She identified systemic 

weaknesses in the Section 8(a) program, 

offered proposed solutions, and enumerated 

the steps taken by program managers to 

address the issues identified. 

OIG Assists SBA Streamlining Initiative. 

The OIG played an active role in the 

Agency’s initiative to update, streamline, 

and rewrite its regulations in “plain 
Semiannual Report March 1996 3

English.” This effort was a part of the 

administration’s Government-wide 

regulation simplification and streamlining 

effort. In addition to redrafting those 

portions of the Agency’s regulations that 

pertain to OIG activities, the OIG reviewed 

39 drafts of regulatory revisions at various 

stages of the process and offered extensive 

comments. Details of specific 

recommendations are reported in the 

program area chapters. The OIG will play 

an equally active role in the Agency’s 

planned updating of all its Standard 

Operating Procedures during the balance of 

FY 1996. 

Review of CPA Firm’s Practices Yields 

Substantial Monetary Settlement. A 

certified public accounting (CPA) firm paid 

SBA $1.1 million to settle a dispute over the 

quality of the firm’s audits of a Small 

Business Investment Company (SBIC) 

which failed. After an OIG quality review 

of the responsible CPA’s audit working 

papers, SBA’s General Counsel and the 

Department of Justice negotiated the 

settlement agreement with the CPA firm. 

Potential Bank Fraud Case Uncovered by 

Audit. A Section 7(a) lender agreed to pay 

SBA $1.56 million to resolve allegations of 

fraud in the origination of a guaranteed loan. 

 The issue was identified in an OIG audit 

and was investigated by the OIG’s 

Investigations Division before being 

referred to the Justice Department. 

Audits Find Pattern of Eligibility Problems 

in Section 8(a) Program. The Auditing 

Division continued to find problems with 

the eligibility of companies in the Section 

8(a) program. Findings in four audit reports 

issued in the past 6 months included the 

improper brokering of products 

manufactured by large firms and the 

questionable “disadvantaged” status claimed 

by a millionaire. Each of these audits was 

requested by SBA program officials. 

Inspection Assists SBA in Downsizing 

Government Contracting Program. At the 

request of the Agency, the Inspection and 

Evaluation Division examined the impact of 

declining Federal procurements, new 

acquisition legislation, and major reductions 

in field staff on SBA’s prime contracts and 

subcontracting programs. The report’s 

findings and recommendations concerning 

the deployment of field staff and the 

placement of program management controls 

were instrumental in the Agency’s decisions 

on the reorganization of these important 

functions. 

Activities to Enhance Fraud 

Detection and Deterrence 

Inspector General Addresses National 

Association of Government Guaranteed 

Lenders Conference. The Inspector General 

(IG) addressed the annual conference of the 

National Association of Government 

Guaranteed Lenders (NAGGL) in Coronado, 

California. On October 26, 1995, he 

discussed the role of the OIG in the 

Agency's loan programs and solicited the 

NAGGL membership’s assistance in 

reducing fraud in SBA's business loan 

programs. Topics discussed included the 

OIG’s character background checks, the tax 

verification program, the character of recent 

criminal investigations, fraud training, and 

the general results of OIG investigations and 

audits. 

Results of False Tax Return Cases Increase. 
4 Semiannual Report March 1996

 Over the last 5 years, the OIG has received 

239 allegations that false tax returns were 

submitted in support of SBA business or 

disaster loan applications. These fraud 

referrals now involve loan applications 

submitted to 38 SBA district offices, totaling 

$107 million and involving 930 individual 

subjects. To date, 61 individuals have been 

indicted on criminal charges: 51 have been 

found guilty, 1 indictment was dismissed in 

the negotiation of a defendant’s guilty plea, 

and 9 others have not yet gone to trial. 

Affirmative Civil Enforcement Program. 

The OIG continues to expand the scope of 

its efforts to make optimal use of the 

Department of Justice's Affirmative Civil 

Enforcement (ACE) program. This U.S. 

Attorney program targets cases which might 

not be prosecuted criminally because of the 

minimal dollar amounts involved, absence 

of financial loss to the Government, or 

because other facts of the case might not 

support a criminal prosecution. Heretofore, 

our success with the ACE program was 

focused in nine states; however, during this 

reporting period, the OIG realized its first 

ACE results in Oregon. 

During the approximately 33 months the 

OIG has been involved with the ACE 

program, we have had a total of 44 

successful cases, resulting in $2,334,377 in 

civil penalties and $718,258 in recoveries by 

SBA. Individual ACE outcomes are 

reported in the program area chapters, as 

appropriate. 

Section 8(a) Case Yields Tenth Guilty Plea 

and Restitutions of Nearly $12 Million. The 

former vice president of an engineering and 

design company with offices in Culver City, 

California, and Houston, Texas, pled guilty 

to making a false statement to SBA to obtain 

Section 7(j) cooperative agreements in the 

San Diego, California, area. The company 

provided graphic designs and illustrations to 

a prime contractor for the Space Shuttle 

program. 

In a further development, the investigation 

also substantiated that the company’s chief 

executive officer (CEO) used a family trust 

and three associated corporations to bill 

inflated rents and other expenses to NASA 

subcontracts, including a Section 8(a) 

contract initiated in 1981 for $4.4 million 

and extended through December 1989 with 

additional charges of $6.4 million. Also 

included in the alleged conspiracy were a 

series of materially false statements made to 

secure and maintain Section 7(j) cooperative 

agreements totaling more than $60,000, 

including repeated assertions that the 

company had an office in San Diego from 

which it continuously did business. 

The vice president’s guilty plea was the 

tenth resulting from this investigation, 

which included the SBA/OIG, the 

NASA/OIG, the IRS, the FBI, the Postal 

Inspection Service, and the Departments of 

Defense and Labor. The company executive 

was sentenced to 1 year probation. 

Five other sentences resulting from this 

Federal task force investigation were handed 

down during the reporting period. The CEO 

of the Section 8(a) company was sentenced 

to 2 years imprisonment, 3 years supervised 

release, $4,472,900 restitution, and fines and 

special assessments totaling $23,950. He 

had pled guilty to 180 charges including 

conspiracy, mail fraud, false claims, money 

laundering, theft from programs receiving 

Federal funds, embezzlement from an 
Semiannual Report March 1996 5

employee benefit plan, interstate 

transportation of stolen money, and 

obstruction of a Federal audit. The Section 

8(a) company also pled guilty and was 

sentenced to pay $7,496,455 restitution. 

Three defunct businesses also owned by the 

CEO had pled guilty to conspiracy and paid 

nominal fines. 
6 Semiannual Report March 1996

Business Loan Program

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

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

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

small businesses that are unable to obtain private financing. These loans must be of such 

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

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

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

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

loans by private lenders averages about 80 percent. 

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

Currently, approximately 29 percent of these loans are being made by participants in the 

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

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

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

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

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

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

Agency staff. About 11 percent of all business loan guarantees are made through the CLP

process. 

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

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

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

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

SBA's best lenders to the maximum. About 18 percent of all business loan guarantees are 

made through the PLP process. 

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

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

equipment for expansion of business or modernizing facilities. Typically, 504 loan proceeds 

are provided as follows: 50 percent by an unguaranteed bank loan, 40 percent by an SBA-
Semiannual Report March 1996 7

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

debenture is $1 million. 

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

lenders are now able to use their own internal loan application documents, plus a single, twosided SBA form to apply for an SBA guarantee on a loan of $100,000 or less. The demand 

for this program is unprecedented; 49 percent of all SBA loan guarantee applications are 

now submitted through the LowDoc application process. 

Summary of OIG Activity 

The following summarizes OIG activities 

relating to SBA's business loan programs 

over the reporting period: 

• Two audit reports were 

issued and seven audits were 

underway. 

• Two program inspections are 

 in progress. 

• Business loan investigations 

resulted in 19 indictments 

and 18 convictions. 

• Business loan investigations 

produced $1,405,578 in 

court-ordered restitution, 

$393,568 in other recoveries 

by SBA, and $636,350 in 

civil penalties and fines. 

• Office of Security Operations 

name check activity resulted 

in the declination of 19 

business loans totaling 

$4,208,650. 

• Thirty business loan 

investigations were closed, 

leaving an inventory of 190 

active cases. Due to 

workload demands, another 

19 business loan cases were 

referred to other law 

enforcement agencies for 

investigation, giving us a 

total of 82 business loan 

referrals to monitor. 

• Nine proposed regulations 

were reviewed. 
8 Semiannual Report March 1996

Figure 1

Efforts to Improve SBA Program 

Management 

Pennsylvania Bank Allows Loan 

Applicant to Conceal Information to 

Circumvent SBA's "Credit Elsewhere" 

Rule 

An OIG audit revealed that a Reading, 

Pennsylvania, bank allowed a borrower to 

conceal the ownership position and 

management involvement of two wealthy 

backers to qualify for a $1 million 

SBA-guaranteed loan. The loan defaulted 

and SBA honored its $750,000 guarantee 

and experienced a net $558,000 loss after 

the sale of collateral which had secured the 

loan. 

A 46 percent owner of the applicant firm 

had $6.5 million in personal liquid assets, 

which should have made the firm ineligible 

for a loan guarantee under the "credit 

elsewhere" rule. When the bank identified 

the owner's wealth as a bar to an SBA loan, 

he reduced his shareholder's stake on paper 

to 14.7 percent, just 2 days before the loan 

closed. Two weeks later, however, he 

restored his ownership position to the 

original 46 percent. In collusion with 

another 20 percent partner, he also made 

personal guarantees on a side loan (not an 

SBA-guaranteed loan), which created a 

prohibited preference in favor of the bank, 

by pledging available collateral to the side 

loan and not the SBA-guaranteed loan. 

Finally, the firm failed to report the 
Semiannual Report March 1996 9

existence of another owner's share in the 

applicant firm to the SBA. 

The audit report recommended that SBA 

deny liability on the loan and rescind the 

bank's Preferred Lender status. SBA's 

Philadelphia District Office proposed 

allowing the bank to transfer to SBA its 

interest in an insurance policy on the 

borrower's president and renewing the 

bank's status for 1 year instead of 2, with 

closer monitoring by SBA during the year. 

The OIG’s Auditing Division considered 

this settlement proposal unacceptable and 

referred the case to the OIG’s Investigations 

Division. 

The ensuing investigation confirmed the 

findings of the audit and developed 

additional evidence. Subsequent to the 

investigation, the bank agreed to pay the 

Government $1.56 million to settle 

allegations (without admitting guilt) of 

fraud in the bank’s application for the SBA 

loan guarantee. Approximately $950,000 

will reimburse SBA for its payment and 

interest on the guarantee. The balance of the 

settlement (over $600,000) will constitute a 

civil penalty, the proceeds of which will go 

to the U.S. Treasury. As another condition 

of the settlement, the bank has agreed to 

implement a compliance program to 

preclude similar problems in the future. The 

issue of the bank’s Preferred Lender status 

has yet to be resolved by SBA. 

New York Borrower Used Loan Proceeds 

Inappropriately and Defaulted

An OIG audit found that, contrary to SBA 

regulations, a New York borrower 

inappropriately used $181,000 in 

proceeds from a $700,000 SBA loan to 

repay a shareholder and to retire unsecured 

debt. These payments contributed to a cash 

shortage and a default on the loan and 

forced SBA to pay a loan guarantee of 

$556,683. The audit also found that the 

participating lender bank knew of the 

inappropriate use of funds some 4 months 

before notifying SBA. The auditors 

recommended that SBA admonish the lender 

for the late notification. Program 

management officials concurred, and a letter 

of admonishment was sent to the bank. 

This audit was part of a larger review of 

early-defaulting loans. An OIG report 

discussing systemic issues associated with 

early defaults will be released at a later date. 

Lender Practices Inspection

The OIG is conducting an inspection of 

credit risk management methods to assist 

SBA in (1) identifying Section 7(a) lenders 

whose practices are likely to pose a higher 

risk of loan defaults and (2) improving 

Section 7(a) lenders’ credit risk management 

systems. The inspection team is examining 

the best practices of various oversight 

agencies and of a number of lenders in 

managing both SBA and non-SBA loans. 

The OIG expects to issue its report in June 

1996. 

Loss Rate Inspection

At the request of the SBA’s Administrator, 

the OIG is also performing an inspection to 

determine whether the current methods used 

by SBA for calculating loss rates for Section 

7(a) loans are valid. The inspection also 

examines the comparability of SBA’s 

commercial loss rate to the loss rate of the 

private banking industry. The OIG expects 
10 Semiannual Report March 1996

to issue its report in May 1996. 

Loan Packager and Lender Service 

Provider Regulations Reviewed 

As part of SBA's initiative to revise and 

streamline its regulations, the OIG reviewed 

13 C.F.R. Part 103, which contains 

standards for persons conducting business 

with SBA. The review generally supported 

the proposed inclusion of loan packagers 

and lender service providers within the 

regulation's coverage, but the OIG made 

several recommendations concerning 

coverage of limited liability companies, 

suspension and revocation of agents, and 

disclosure of fees paid to agents. 

Business Loan Program Regulations 

Reviewed

The OIG reviewed the proposed extensive 

revisions to 13 C.F.R. Part 120, which 

consolidated several regulations into one 

comprehensive Part governing all SBA loan 

programs. Based on this review, 

recommendations were made concerning the 

application of "prudent lending standards" to 

guaranteed and conventional loans, 

reporting requirements for Section 503 

companies, good character requirements for 

borrowers, use of a borrower's available 

personal resources, and inclusion of a 

business plan and personal financial 

statements in a business loan application. 

Size Standards Regulations Reviewed

The OIG reviewed the proposed changes to 

SBA regulations governing size standards 

(13 C.F.R. Part 121) and made 

recommendations concerning the affiliation 

rules, determinations of a concern's "primary 

industry," certifications as to size, 

corrections of incorrect Standard Industry 

Classification (SIC) code designations, 

prevention of brokering, application of 

standards for the timber program, and 

clarification of protest procedures. 

Activities to Enhance Fraud 

Detection and Deterrence 

Latest Results from Affirmative Civil 

Enforcement (ACE) Program

Over this reporting period, the OIG's 

participation in the Department of Justice's 

ACE program produced five successful 

business loan cases, resulting in $955,000 in 

recoveries and $627,500 in civil penalties. 

The four smaller cases involved fraudulent 

representations in applications for loans that 

were stopped before funds were disbursed. 

Two of those cases involved applications to 

a Federally-insured lender, and represent the 

OIG's first ACE results in Oregon. The fifth 

and largest case, which involved a Preferred 

Lender whose actions improperly caused 

SBA to honor a $750,000 loan guarantee, 

was discussed earlier in this chapter. 

OIG Briefs Members of Lender 

Community

In addition to investigating complaints of 

waste, fraud, and abuse involving SBA 

programs, the OIG’s investigations staff 

made two presentations to groups of 

participating lenders. The Assistant IG for 

Investigations addressed approximately 250 

lenders at the first annual SBA Texas 

Lenders Conference, and the Special Agent 

in Charge (Chicago) spoke to 35 attendees at 

a Denver, Colorado, meeting of the National 

Association of Government Guaranteed 
Semiannual Report March 1996 11

Lenders. Both highlighted the benefits to be 

gained from enhanced cooperation between 

lenders and the OIG in combating waste, 

fraud, and abuse in the SBA’s guaranteed 

loan programs. 

California Landscaper Pleads Guilty to 

Making False Statements and Filing False 

Tax Returns

The owner of a landscape maintenance 

company in Anaheim, California, pled guilty 

to a criminal information charging him with 

two counts of making false statements in 

loan applications to Federally-insured 

financial institutions and two counts of 

filing false tax returns. These charges 

stemmed from the second of two 

investigations. The first investigation also 

resulted in a guilty plea to a felony charge 

for fraudulently applying for a $400,000 

SBA-guaranteed loan. Suspecting that this 

was not the first time the businessman had 

used false documents to obtain bank loans, 

the prosecutor asked the OIG to examine the 

files of the business owner's other loans. 

This review identified two other bank loans 

which were obtained with tax returns 

containing false information; it also 

disclosed that the owner was under 

investigation by the IRS for other suspected 

crimes. The OIG then joined forces with the 

IRS in the second investigation, which 

resulted in the more recent charges and 

guilty plea. 

Missouri Businessman Pleads Guilty to 

Mail Fraud 

A couple who were the president and 

secretary, respectively, of a water bottling 

company in New Bloomfield, Missouri, 

were indicted on three counts of mail fraud

against SBA. The husband subsequently 

pled guilty to one count of mail fraud; in 

return, the Government agreed to the 

dismissal of the other charges on which he 

and his wife had been indicted. The 

investigation showed that they made false 

statements to obtain a $150,000 SBAguaranteed loan, subsequently diverted loan 

proceeds to their own use, and sold or traded 

collateral after the business failed. The 

company made only one payment before 

defaulting on the loan. The OIG initiated 

this investigation based on a referral from 

SBA’s St. Louis District Office. 

Texas Restaurant Owner Sentenced for 

Making a False Statement 

An owner of an El Paso, Texas, restaurant 

pled guilty to one count of making a false 

statement to SBA. In return, the other four 

felony counts on which he had been indicted 

were dismissed by the court. He was 

sentenced to 5 months confinement in a 

halfway house, 3 years supervised 

probation, and $98,951 restitution. A joint 

investigation with the FBI revealed that the 

owner had submitted false documents to 

both the participating bank and SBA to 

obtain a $120,000 SBA-guaranteed loan. As 

part of the fraud scheme, he allegedly 

concealed his receipt of a 15 percent share 

in the small business as a fee for his 

preparation of the loan package. After the 

loan went into default, the man also 

provided false information in support of an 

"offer in compromise" to induce SBA to 

settle his liability for an unrealistically low 

amount. As a result of his actions, SBA and 

the participant bank face losses of about 

$122,600 and $11,400, respectively. The El 

Paso District Office referred these 

allegations to the OIG. 
12 Semiannual Report March 1996

Investigation of Southern California Loan 

Packager Yields More Results 

One more borrower has been sentenced, and 

three additional borrowers have been 

indicted, as the latest results of the OIG's 

ongoing investigation of a southern 

California packager of SBA-guaranteed 

loans: 

• The former owner of a small Asian 

grocery store in Long Beach, 

California, was sentenced to 15 

months imprisonment, 5 years 

probation, and full restitution of 

$397,188 to the participating lender 

bank and SBA. He was also ordered 

to assist a special law enforcement 

task force in Florida, where he 

currently resides. This sentence was 

the result of a guilty plea to two 

counts of making false statements 

to a Federally-insured financial 

institution in support of his loan 

application. He had received a loan 

in the amount of $405,000. 

• The former owner of a Paramount, 

California, marble and tile company 

and his wife were charged in an 11-

count indictment. Seven counts 

charged the man with making false 

statements on a loan application to 

a Federally-insured financial 

institution, in connection with his 

$300,000 SBA-guaranteed business 

loan. The four other counts charged 

both the husband and the wife with 

mail fraud in connection with 

residential loans for $600,000 and 

$256,000. The investigation found 

that the two operated a mortgage 

company and used their positions to 

improperly obtain the two residential 

mortgages. 

• The former owner of a retail jewelry 

company in Garden Grove, 

California, was indicted on one 

count of making a false statement 

on a loan application to a 

Federally-insured financial 

institution in connection with his 

$100,000 SBA-guaranteed business 

loan. The investigation revealed that 

the store owner submitted false tax 

returns for the years 1987 through 

1989, all of which significantly 

inflated his income. 

These defendants were all identified in one 

of an ongoing series of joint OIG/FBI 

investigations examining the submission of 

false tax returns and false invoices as part of 

applications submitted to SBA's 

participating lenders by loan packagers. The 

OIG initiated this investigation based on a 

referral from SBA's Los Angeles District 

Office. The loan packager in this case has 

pled guilty for his part in the scheme. 

Two Georgia Businessmen Convicted for 

Conspiracy and Related Crimes 

Two LaGrange, Georgia, businessmen were 

convicted on six and three felony counts, 

respectively. The first businessman, a 

restaurant owner, was convicted on one 

count of conspiracy, four counts of making 

false statements to SBA, and one count of 

forging a security of an organization; the 

second was convicted on two counts of 

making false statements to SBA and one 

count of conspiracy. The restaurant owner 

had received a $400,000 SBA-guaranteed 
Semiannual Report March 1996 13

loan for his restaurant from a non-bank 

lender in 1990. The investigation disclosed 

that he submitted several documents falsely 

claiming he was purchasing restaurant 

equipment when he had in fact already 

leased the equipment. This, consequently, 

left the SBA loan without a security interest 

in the equipment. The owner also forged an 

endorsement and negotiated a joint-payee 

loan disbursement check. 

The second businessman's corporation sold 

land and a building for use as a site for the 

restaurant. The investigation found that the 

two men fabricated documentation of a 

capital injection into the restaurant, a 

requirement for SBA to guarantee the 

underlying loan. The restaurant owner was 

acquitted of three felony counts that charged 

him with setting fire to the restaurant and 

defrauding the company that insured it. 

In another outcome of this investigation, the 

attorney for the real estate transaction 

admitted complicity in the scheme and pled 

guilty to one misdemeanor count of theft of 

property from a Federally-insured 

financial institution. The OIG began this 

investigation based on a referral from SBA's 

Atlanta District Office; the Bureau of 

Alcohol, Tobacco and Firearms joined the 

investigation after the possibility of arson 

was raised. 

New York Bank Executives Indicted on 

Conspiracy, Bank Fraud, and Other 

Charges 

The former president and chairman of the 

board of an SBA participating lender bank 

headquartered in Watertown, New York, 

and the bank’s counsel were indicted on 

charges of conspiracy, bank fraud, and the 

acceptance and payment of money as an 

inducement and reward for bank 

transactions. The investigation revealed 

that the president had agreed to refer the 

bank’s legal work to the counsel’s law firm 

in return for one-sixth of the legal fees 

collected. The president received more than 

$332,000 from the scheme. In furtherance 

of the conspiracy, he caused the bank to 

make loans totaling $1,879,500 to the 

bank’s counsel and his associates, allowed 

other individuals to borrow money from the 

bank for transfer to the counsel, and 

permitted the counsel to represent both 

parties in connection with most of these 

loans. As a consequence of these 

arrangements, the loans, several of which 

were guaranteed by SBA, were not properly 

secured and not repaid. Having lost $13 

million in bad loans, the bank, which had 

been a major community lender to small 

business, was declared insolvent and seized 

by the Office of the Comptroller of the 

Currency (OCC) in 1993. 

In a related development, an earlier guilty 

plea by a former vice president of the bank 

to charges of bank fraud and illegal 

participation in bank transactions was 

unsealed. The former bank officer admitted 

causing the bank to lend $196,000 to a 

construction company which he and his wife 

owned. He also authorized other loans to 

customers of the company so they could 

purchase modular homes from the firm. 

Loans were also made to yet another 

company he owned, from which he received 

$57,000 of the proceeds. The OIG 

investigation was conducted jointly with the 

OCC, the Resolution Trust Corporation, and 

the FBI and was based on a referral from the 

SBA’s Syracuse District Office. 
14 Semiannual Report March 1996

New York Bank Executive Convicted for 

Soliciting Illegal Commissions 

A former vice president of the New York 

City branch of an Argentine bank was 

convicted of three counts of soliciting 

commissions for procuring loans 

guaranteed by SBA. The $20,000 in 

commissions were paid by 3 loan applicants 

in return for his assistance in obtaining loan 

approvals totaling $930,000. The 

investigation, conducted jointly with the 

FBI, grew out of another OIG investigation. 

California Clothiers Sentenced for 

Making False Statements 

A Los Angeles, California, clothing 

manufacturer/retailer and his wife were 

sentenced for making false statements to 

Federally-insured lenders. He was 

sentenced to 30 months imprisonment, 5 

years supervised release, and restitution 

totaling $652,043 to 5 banks, including 

$400,500 for SBA’s share of the remaining 

balance of the SBA-guaranteed loan for his 

sportswear business. His wife was 

sentenced to 6 months home detention, 5 

years probation, and $109,075 restitution to 

the bank that financed the purchase of her 

business--a shoe store in Culver City, 

California. These sentences were the latest 

results of a joint OIG/FBI investigation of 

the inclusion of false tax returns in 

applications submitted to SBA's 

participating lenders by loan packagers. The 

investigation, which disclosed that all of the 

couple’s loan applications contained false 

tax returns, began in response to a referral 

from SBA's Commercial Loan Servicing 

Center in Fresno, California. 

Three Ohio Businessmen Sentenced for 

Bank Fraud Scheme 

All 3 defendants in an OIG/FBI 

investigation of a $400,000 SBA-guaranteed 

loan to a motor-manufacturing company in 

Mentor, Ohio, have been sentenced. Two of 

the men were personal guarantors of the 

loan. The first was sentenced to 4 months 

imprisonment, 3 years supervised release, 

and $10,000 restitution; the second was 

sentenced to 1 day imprisonment, 3 years 

supervised release, $32,500 restitution, and 

a $250 fine. Both had pled guilty to bank 

fraud. The company’s president was 

sentenced to 1 day imprisonment, 3 years 

supervised release, and a $2,500 fine; he had 

pled guilty to making a false statement in 

a loan application to a Federally-insured 

financial institution. The investigation 

revealed that, over a period of nearly 3 

years, the 2 investors carried out a scheme to 

defraud an SBA participating lender bank in 

Cleveland, Ohio. The businessmen 

submitted, as part of their SBA loan 

application, falsified individual tax returns 

and financial statements which overstated 

their adjusted gross income and personal net 

worth. The company’s president 

participated in defrauding the bank by 

signing the Authorization and Loan 

Agreement, thereby representing that the use 

of the loan proceeds would be limited to the 

purchase of machinery, equipment, 

furniture, and fixtures, when he knew that 

the proceeds were actually being diverted to 

him and his co-defendants. The OIG 

initiated the investigation based on a referral 

from SBA's Cleveland District Office. 

Pennsylvania Restaurant Owner and 

Associate Plead Guilty to Conspiracy and 

Making False Statements 
Semiannual Report March 1996 15

A Downingtown, Pennsylvania, restaurant 

owner and his associate each pled guilty to 

one count of conspiracy and two counts of

making false statements in connection with 

an application for a $65,000 SBAguaranteed loan. The OIG investigation 

found that the associate prepared and the 

owner signed and submitted false Federal 

income tax returns to the participating bank. 

 The returns showed a net profit of more 

than $40,000 for each of the years 1993 and 

1994; however, the restaurant actually 

incurred losses in both years. On learning 

that the tax returns submitted as part of the 

application differed significantly from those 

on file with the IRS, SBA canceled the loan 

before any proceeds were disbursed. The 

discrepancies, which were detected by 

SBA’s tax return verification program, were 

referred to the OIG by SBA’s Philadelphia 

District Office. 

Pennsylvania Manufacturing Company 

Owner Sentenced for Mail Fraud 

OIG investigators presented evidence to the 

U.S. Attorney’s Office for the Eastern 

District of Pennsylvania just prior to the 

sentencing of the owner of a Morton, 

Pennsylvania, tool and die manufacturer 

which contributed to his receiving a 

sentence of 1 year in prison. The owner had 

pled guilty to two counts of mail fraud in 

connection with a scheme to defraud the 

U.S. military through one of his companies. 

 He had purchased the company in 1986 

with a $460,000 SBA-guaranteed loan, on 

which he defaulted in 1992. After receiving 

a target of investigation letter from an 

Assistant U.S. Attorney (AUSA) regarding 

the defense contract fraud, the businessman 

obtained a $23,500 SBA-guaranteed loan in 

July 1994 for the tool and die manufacturing 

company. In applying for the second loan, 

the owner submitted a false financial 

statement to the participating bank and 

failed to disclose that he had obtained and 

defaulted on the $460,000 loan. As soon as 

the first payment came due, he defaulted on 

the new loan as well. When the OIG 

brought these facts to the attention of the 

AUSA prosecuting the contract fraud, it was 

decided that, although the Government 

could indict the man for the SBA fraud, the 

AUSA would arrange to include information 

about this second charge in the sentencing 

deliberation instead. The inclusion of the 

new scheme enabled the AUSA to 

recommend the maximum sentence under 

the applicable guidelines. This matter was 

referred to the OIG by SBA's Philadelphia 

District Office. 

New York Therapy Center Business 

Manager Pleads Guilty to Conspiracy 

The business manager of an East Islip, New 

York, chiropractic and physical therapy 

center pled guilty to a criminal information 

charging him with two counts of 

conspiracy. The man conspired with others 

to forward, to a nonbank participant in 

SBA's Section 7(a) program, two fraudulent 

financial statements for the purpose of 

obtaining a $750,000 SBA-guaranteed loan 

for the clinic. He also participated in 

another fraudulent scheme involving the 

mailing of reimbursement claim forms to 

three large insurance companies for physical 

therapy never provided to the clinic’s 

patients. The investigation had previously 

resulted in a guilty plea by the owner of the 

clinic to two counts of conspiracy. 

Between 1988 and 1994 (when OIG and FBI 

agents executed search warrants at his office 

and storage facility), the owner had 
16 Semiannual Report March 1996

conspired to misrepresent that a licensed 

physical therapist or physician was 

rendering or overseeing patients’ care. 

Because his loan was never disbursed, SBA 

incurred no loss. The OIG investigation was 

conducted jointly with the FBI and was 

initiated as a result of information provided 

by a private citizen. 

Washington Fundraiser Pleads Guilty to 

Conversion of Collateral 

The former president of a fund-raising 

service company in Bellevue, Washington, 

was charged with and pled guilty to 

conversion of collateral pledged for a 

$750,000 SBA-guaranteed business loan. 

The investigation revealed that he sold over 

$360,000 of the company’s accounts 

receivables pledged as collateral on the loan, 

and converted the proceeds to personal use. 

The OIG investigation was based on a 

referral from the Seattle District Office and 

was conducted jointly with the FBI. 

New York Computer Store Owner 

Indicted for Bank Fraud and Making 

False Statements 

The owner of a corporation which once 

operated a chain of retail computer stores in 

upstate New York was indicted on nine 

counts of bank fraud and one count of 

making false statements to SBA. The 

investigation revealed that, to forestall the 

participating lender and SBA from calling 

his delinquent $450,000 SBA-guaranteed 

loan, the businessman had grossly inflated 

the value of assets in a listing he submitted. 

He also allegedly defrauded another bank 

and a Federal credit union by processing 

more than $40,000 in unauthorized charges 

against his customers’ credit card accounts, 

as well as to his personal credit cards, and 

depositing the resulting funds to his 

accounts at these lending institutions. The 

OIG and the FBI joined the investigation 

initiated by the Secret Service. 

Washington Restaurant Owner Sentenced 

for Making False Statements 

The former owner of a restaurant in Sequim, 

Washington, was sentenced to 4 months 

home confinement, 3 years probation, a 

$1,000 fine, and $43,821 restitution to SBA. 

 He had pled guilty to making false 

statements to SBA. The investigation 

disclosed that he had made numerous false 

statements to induce SBA to approve and 

disburse a $45,000 Vietnam-Era Veteran 

direct loan. This matter was referred to the 

OIG by a loan officer in SBA's Seattle 

District Office. 

South Dakota Rancher Indicted for 

Making False Statements and Witness 

Tampering 

An Eagle Butte, South Dakota, rancher was 

indicted on six charges of making a false 

statement to SBA and making a false 

statement to a Federally-insured lender, 

all to obtain a $150,000 SBA-guaranteed 

loan. The SBA/OIG's joint investigation 

with the Department of the Interior (DOI) 

OIG determined that he did not disclose to 

SBA and the participating bank that he had 

failed to repay a previous $30,000 loan 

guaranteed by DOI's Bureau of Indian 

Affairs (BIA). He also falsely stated that he 

had received a $50,000 BIA grant. The man 

was also indicted on one count of 

tampering with a witness for attempting to 

persuade the participating bank's loan 

officer to remove the fraudulent BIA 
Semiannual Report March 1996 17

document from his file. The rancher had 

recently been living in Canada, but after his 

indictment, he returned to the United States 

to face the charges. The DOI/OIG asked the 

SBA/OIG to join the investigation. 

Pennsylvania Dog Groomer Charged with 

Bank Fraud and Making False 

Statements 

The owner of a dog grooming business in 

Allentown, Pennsylvania, was charged in a 

three-count criminal information with bank 

fraud, making a false statement to SBA, 

and making a false statement to a 

Federally-insured lender. The charges 

relate to her scheme to defraud SBA, a small 

business lending corporation (SBLC), and a 

bank in Emmaus, Pennsylvania, by 

submitting fictitious Federal income tax 

returns as part of her loan applications. The 

woman first applied to the SBLC for a 

$107,000 SBA-guaranteed loan, which was 

initially approved but subsequently canceled 

due to discrepancies between the tax return 

information she submitted and that on file 

with the IRS. In an interview with an 

SBA/OIG special agent, she admitted that 

she then went to the bank and, using the 

same fictitious tax returns, applied for and 

received two non-guaranteed loans totaling 

$100,000. This matter was referred to the 

OIG by the Financing Division of SBA’s 

Philadelphia District Office. 

California Food Supply Company Owner 

Charged with Making False Statements 

The former owner of a food supply company 

in Garden Grove, California, was charged in 

a criminal information with one count of 

making false statements to a Federallyinsured lender. The joint OIG/FBI 

investigation disclosed that she submitted 

false tax returns and a false equipment 

purchase contract to obtain SBA-guaranteed 

loans totaling $420,000. Information 

provided by SBA's Santa Ana District 

Office in 1990, concerning fraudulent loan 

applications prepared by a southern 

California loan packager, led to this 

investigation. 

California Restaurant Owner Sentenced 

for Making a False Statement 

An owner of a San Jose, California, 

restaurant was sentenced to 4 months home 

detention, 5 years probation, 100 hours 

community service, and $60,000 restitution 

to a savings and loan. He had pled guilty to 

one count of making a false statement to a 

Federally-insured lender. The OIG's 

investigation, which revealed that the man 

submitted false tax returns as part of his 

SBA loan application, was based on a 

referral from the San Jose Financial Crimes 

Task Force, a multi-agency investigative 

unit examining a loan fraud scheme 

involving a number of individuals who 

purchased homes in the same housing 

development. The task force notified the 

SBA/OIG when it discovered that the 

business owner had failed to disclose his 

SBA-guaranteed business loan on his 

application for a home mortgage. 

Missouri Novelty Company Owner 

Sentenced for Making False Statements 

A former partner in a Branson, Missouri, 

novelty company was sentenced to 15 

months imprisonment, 3 years supervised 

release, and a $50 special assessment. He 

had pled guilty to making false statements 

to a Federally-insured lender. The 
18 Semiannual Report March 1996

company designed and produced novelty 

items such as T-shirts, glassware, and cedar 

products. The man overvalued his 

company's inventory and accounts 

receivable by more than $240,000 each to 

obtain a $1,250,000 line of credit and a 

$775,000 SBA-guaranteed loan. The 

company made no payments on these loans 

before they defaulted. This investigation 

was conducted jointly by the FBI and the 

SBA/OIG. The case was based on a referral 

from SBA's Springfield Branch Office. 

Former Missouri Bank Owner Sentenced 

for Making False Entries in Bank 

Records 

A former banker and business owner was 

sentenced to 3 years probation and a $5,050 

fine. He had pled guilty to making or 

causing false entries in the records of a 

bank in Mountain Grove, Missouri, of which 

he was an owner. The investigation showed 

that he used bank funds to pay 

approximately $76,000 in expenses incurred 

by another bank, of which he was also an 

owner. The man then had these payments 

falsely recorded as expenses of the 

Mountain Grove bank. This investigation 

was conducted jointly with the FBI and 

included an inquiry into SBA-guaranteed 

loans involving this particular banker. The 

OIG initiated its investigation in response to 

a referral from SBA's Kansas City District 

Office. 

Connecticut Manufacturers Indicted for 

Bank Fraud and Wire Fraud 

Two brothers, officers of a Chester, 

Connecticut, manufacturer of bent wire 

products, were indicted on charges of bank 

fraud and wire fraud in connection with 

loans obtained through several Connecticut 

financial institutions. The investigation 

found that the brothers obtained a $300,000 

SBA-guaranteed loan by submitting false 

information in their loan application. 

Among other things, they allegedly did not 

disclose the existence of previous loans and 

falsely listed certain items of machinery and 

equipment as collateral. Having misstated 

their equity in certain assets, the brothers 

were also charged with using an interstate 

wire transfer as part of a scheme to defraud 

another bank of $150,000. Finally, the 

indictment alleged that one brother 

fraudulently obtained $150,000 from a third 

bank by submitting a forged letter stating 

that $850,000 in equity funding had been 

arranged for their corporation. The joint 

OIG/FBI investigation was based on a 

referral from SBA's Hartford District Office. 

Washington Auto Parts Executive 

Indicted for False Tax Returns 

The president of a Yakima, Washington, 

auto parts company was indicted on one 

count of bank fraud and one count of 

making false statements to SBA on an 

application for an $80,500 SBA-guaranteed 

business loan. The OIG investigation found 

that, in support of his application, the 

businessman submitted tax returns that 

overstated his company's 1992 and 1993 

income by $114,391 and $112,877, 

respectively. In addition, he included a 

1994 tax return with his loan application 

which showed income of $43,980, even 

though the company's 1994 tax return had 

not been filed with the IRS as of the date of 

the application. Although SBA canceled the 

loan before any funds were disbursed, the 

U.S. Attorney's Office pursued the 

prosecution because of the large 
Semiannual Report March 1996 19

discrepancies between income information 

the loan applicant filed with the IRS and 

income information he reported to the 

participating bank. The OIG initiated the 

investigation based on a referral from the 

LowDoc Loan Division of SBA's Seattle 

District Office. 
20 Semiannual Report March 1996

Disaster Loan Program

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

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

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

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

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

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

employment and stabilize tax bases. 

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

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

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

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

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

unnecessary interest subsidies paid by the taxpayers are avoided. 

The need for SBA disaster loans is unpredictable. During FY 1995, SBA approved 45,041 

loans for $1.21 billion. During FY 1994, in the aftermath of the Northridge earthquake, 

Tropical Storm Alberto, the Great Midwest Floods, and other disasters, SBA approved 

125,861 loans for an all-time record amount of $4.16 billion. For the first 6 months of FY 

1996, SBA approved 21,618 loans for $611 million. Since the inception of the program, 

SBA has approved more than 1,320,000 disaster loans for more than $23.5 billion. As of the 

end of FY 1995, the SBA disaster loan portfolio included more than 272,000 loans valued at 

over $6.8 billion. The total available for FY 1996 disaster loans, including carryover and 

contingency funds, is approximately $568 million. 

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

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

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

all sizes, and non-profit organizations; and (2) economic injury disaster loans (available by 

law only to small businesses), which provide necessary working capital until normal 

operations can resume after a physical disaster. SBA delivers disaster loans through four 

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

Worth, Texas; and Sacramento, California. 

Summary of OIG Activity 
Semiannual Report March 1996 21

The following summarizes OIG activities 

relating to SBA's disaster loan programs 

during the reporting period: 

• One audit report was issued during 

the reporting period and six audits 

were underway. 

• Disaster loan investigations resulted 

in 14 indictments and 4 convictions. 

• Disaster loan investigations 

produced $1,225,999 in Federal 

court-ordered restitution to SBA, 

$130,289 in other recoveries by 

SBA, and $64,000 in fines and 

special assessments. 

• Office of Security Operations name 

checks resulted in the declination of 

11 disaster loans totaling $498,768. 

• Ten disaster loan investigations were 

closed, leaving an inventory of 84 

active cases. Due to workload 

demands, another 6 disaster loan 

cases were referred to other law 

enforcement agencies for 

investigation, resulting in a total of 

18 disaster loan referrals to monitor 

for performance. 

• Two proposed regulations and one 

SOP were reviewed. 

Figure 2

 

Efforts to Improve SBA Program Management 
22 Semiannual Report March 1996

Fraud Referrals Made by the California 

Audit Field Office

The OIG Auditing Division’s field office in 

Los Angeles, California, was the first 

SBA/OIG audit office staffed using special 

funding for disaster-related oversight. The 

funding was made available in the wake of 

the Northridge earthquake. One important 

function of this office is to refer instances of 

suspected fraud and abuse to the OIG’s 

Investigations Division. In the course of 

assigned audits, Los Angeles auditors are 

particularly aware of their responsibility for 

identifying evidence of fraud. 

The OIG audit staff has referred seven 

borrowers to the Investigations Division in 

Los Angeles to date. These borrowers had 

14 disaster loans totaling $1.2 million. 

Situations that caused the referrals included: 

• alteration of invoices to 

support progress payments, 

• discrepancies between loan applications 

filed with the SBA and information filed 

with the IRS, 

• inaccurate statements regarding 

collateral, 

• closing of businesses and moving out of 

state after receiving disaster loans, 

• diversion of loan proceeds to buy 

different properties, 

• non-payment of invoices used to support 

progress payments, 

• submission of “tax return” information 

not actually filed with the IRS, 

• misrepresentation of personal income, 

• misstatements of ownership and control 

information, and 

• transfer of collateral to third parties after 

loans are approved. 

Audit Finds Disaster-Funded SBA 

Employees Assigned to Non-Disaster 

Duties

An audit conducted at SBA’s Los Angeles 

District Office (LADO) revealed that about 

half of the office’s disaster-funded loan 

servicing personnel were assigned primarily 

or exclusively to non-disaster duties in 

1995. This finding was based on an OIG 

survey of 30 LADO employees. SBA’s 

District Director responded to the audit 

finding by stating that the LADO was 

severely understaffed, and that the office 

was complying with an earlier policy that 

only required disaster-funded loan servicing 

employees to spend more than 50 percent of 

their time in support of disaster loan 

servicing. Since the adoption of disaster 

staffing standards in 1994, however, the 50 

percent rule is no longer in effect. As a 

result of the audit, the Office of Financial 

Assistance clarified its guidance to specify 

that 40 hours of disaster loan servicing 

should be provided for every 40 hours worth 

of disaster funds used. In addition, the 

LADO revised its staffing assignments to 

conform to the guidance. 

Disaster Loan Program Regulations 

Reviewed
Semiannual Report March 1996 23

The OIG reviewed SBA's proposals to 

simplify and reorganize 13 C.F.R. Part 123, 

the regulations governing the disaster loan 

program. Based on the review, the OIG 

made several recommendations concerning 

disaster declarations, eligibility for home 

disaster loans, eligible refinancings, and 

mitigation provisions. 

Activities to Enhance Fraud 

Detection and Deterrence 

Continuing Results from Southern 

California Disaster Loan Packager Fraud 

Case 

The joint OIG/Secret Service investigation 

of false disaster loan applications prepared 

by two southern California brothers acting 

as loan packagers has yielded five more 

sentencings, a guilty plea from the packager 

ringleader, and charges against three 

additional defendants: 

• A Beverly Hills, California, resident 

pled guilty to eight felony counts; in 

return, the Government agreed to 

dismissal of the other counts on 

which he had been indicted. In 

pleading guilty, the loan packager 

admitted that he participated in 

causing false documents to be 

submitted to a Government agency

by assisting others in the submission 

of false tax returns as part of six 

SBA disaster business loan 

applications totaling more than $3.9 

million. The disaster loan 

applications included claims of both 

physical and economic injury and 

spanned three Los Angeles-area 

disasters: the 1992 civil disturbance, 

the 1993 fires, and the 1994 

Northridge earthquake. In addition, 

he admitted making false 

statements to Federally-insured 

financial institutions by submitting 

false tax returns with applications for 

four bank loans totaling 

approximately $11.4 million. He 

and his fugitive brother were 

responsible for the submission of 

numerous false documents to SBA in 

disaster loan applications they 

packaged. 

• A Los Angeles, California, resident 

was sentenced to 5 years probation, 

1,500 hours of community service, 

and a $2,500 fine. He was also 

ordered to make full restitution of 

$46,900 to SBA before the end of his 

probation. 

Following the 1992 civil disturbance 

in Los Angeles, he had applied for a 

$126,000 economic injury disaster 

loan and received a total of $46,900. 

 The investigation showed that, as 

part of his application, the man 

submitted a false tax return reporting 

income from the alleged business. In 

fact, the return had never been filed 

with the IRS, and the loan funds 

were actually used to start the 

business; consequently, he pled 

guilty to filing a false claim with 

SBA for his (then nonexistent) 

business. The application was 

prepared by the applicant's cousins--

the two California loan packagers 

who are the main subjects of the 

investigation. 

• Two brothers and business partners 

in a Van Nuys, California, carpet 

store were each sentenced to 4 years 
24 Semiannual Report March 1996

probation, 800 hours of community 

service, and a $5,000 fine; they are 

also jointly liable for full restitution 

to SBA of $218,800. Each had 

previously pled guilty to one count 

of filing a $225,000 false claim

through the submission of false 

corporate and individual tax returns 

to SBA for an economic injury 

disaster loan. An SBA Disaster 

Assistance Area 4 loan officer had 

identified the brothers' loan 

application as being similar to those 

prepared by the loan packagers who 

remain at the center of the 

investigation. The OIG investigation 

showed, however, that while these 

applicants learned the process from 

the main subjects of the 

investigation, they had prepared their 

own false documents. 

• A southern California gas station 

owner was sentenced to 5 years 

probation, 500 hours community 

service, and a $50,000 fine. He had 

pled guilty to one count of making 

false statements to SBA in his 

applications for disaster assistance 

following the Northridge earthquake. 

 The man applied for disaster loans 

totaling $1.5 million for a gas station 

and mini-market in Calabasas, 

California. The OIG investigation 

revealed that, while company tax 

returns and financial statements 

included with the loan applications 

indicated gross sales totaling 

approximately $7 million for each of 

the past 3 years, the returns filed 

with the IRS reported only a small 

fraction of that amount. In addition, 

while he claimed to SBA to be the 

sole owner of the business, the 

investigation uncovered that the 

business was owned by a corporation 

in which he was only a minority 

shareholder. 

• A Santa Monica, California, resident 

was sentenced to 18 months 

imprisonment, 3 years supervised 

release, and restitution of $896,579 

to a bank and $58,600 to SBA. She 

had pled guilty to filing a false 

claim with SBA in connection with 

her application for a disaster loan 

and to making false statements to 

Federally-insured lenders by 

submitting bogus tax return 

information in loan applications to 

two California financial institutions. 

 The woman had applied for a 

$300,000 economic injury disaster 

loan for her non-existent clothing 

business, purportedly located in Los 

Angeles, California. She obtained 

only $58,600 of the proceeds of the 

disaster loan, which went into 

default without a single repayment 

being made. 

• A Northridge, California, man was 

charged in a criminal information 

with one count of making a false 

statement to a Federally-insured 

lender. To facilitate the approval of 

a $241,500 home loan to his wife, 

the man submitted a false 

employment verification form, 

claiming that his wife was employed 

at a salary in excess of $100,000 per 

year when, in fact, she was 

unemployed. The couple became 

subjects of the investigation after the 

Disaster Assistance Area 4 Office 
Semiannual Report March 1996 25

questioned their application for a 

$300,000 economic injury disaster 

loan for her fashion business 

following the 1992 Los Angeles civil 

unrest. SBA declined the 

application, and the OIG 

investigation later established that 

the business did not exist. 

• Two owners of Los Angeles, 

California, clothing manufacturers 

were charged in criminal 

informations filed in connection with 

their applications for economic 

injury disaster loans following the 

1992 Los Angeles civil unrest. One 

was charged with knowingly 

converting SBA disaster loan 

proceeds to his own use and the 

use of others. This charge emanated 

from his fraudulent application for a 

$180,000 loan for his business. 

Because he applied for a loan for 

which he knew he was ineligible, his 

expenditure of the proceeds 

constituted conversion. The other 

owner was charged with making a 

false statement to SBA. In his 

application for a $360,000 loan, he 

claimed to be the sole owner of the 

company when he actually owned 

only 65 percent. He concealed the 

minority owner's interest from SBA 

due to that owner's poor credit 

history. 

The OIG opened the original investigation 

as a result of a tip from a concerned citizen 

and a referral from the Disaster Assistance 

Area 4 Office. 

Three Indicted in Mississippi Fraud 

Conspiracy 

The proprietor of a tree farm and timber 

company in Hattiesburg, Mississippi, his 

wife, and his attorney were indicted on 

charges of conspiracy and making material 

false statements to influence SBA. All the 

charges relate to a $222,400 economic 

injury disaster loan the owner received in 

1993. Both he and his attorney were 

specifically charged with submitting, as part 

of the loan application, a personal financial 

statement falsely representing that the tree 

farmer owned certain real and personal 

property. That property, however, had 

previously been foreclosed upon and seized 

by creditors. The three defendants were also 

charged with submitting title documents 

falsified to support the fiction that the 

couple was mortgaging the 80-acre real 

property to SBA. Finally, the indictment 

alleged that the couple improperly 

negotiated joint-payee Treasury checks 

representing $124,900 of the disaster loan 

proceeds. Evidence developed by the OIG's 

investigation also resulted in the owner’s 

indictment by a Lamar County, Mississippi, 

grand jury on one count of false pretense

for improperly negotiating one of the jointpayee Treasury checks. The OIG initiated 

the investigation based on a referral from 

SBA's Gulfport Branch Office. 

Santa Barbara Resident Sentenced for 

Making False Claims 

A resident of Santa Barbara, California, was 

sentenced to 15 months imprisonment, 3 

years supervised release, and $3,600 

restitution to a Federal credit union in 

California. He had pled guilty to 3 counts of 

an 11-count felony indictment: making a 

false claim to SBA, misuse of a Social 

Security number, and making a false 
26 Semiannual Report March 1996

statement to a Federally-insured lender. 

In return, the Department of Justice agreed 

to dismissal of the other counts. The man 

claimed to have lost an Isuzu Trooper 

containing valuable tools in the California 

floods of January 1995. The investigation, 

conducted jointly with the FEMA/OIG, 

disclosed that the vehicle had been 

repossessed more than a year before the 

disaster. The investigation further 

established that the borrower had used five 

bogus Social Security numbers and a variety 

of spellings of his name to apply for four 

loans. The man had been in Federal custody 

since his arrest. This matter was referred to 

the SBA/OIG by the Disaster Assistance 

Area 4 Office. 

California Attorney Pleads Guilty to 

Bankruptcy Fraud and Misappropriation 

of SBA Collateral 

An attorney from Sylmar, California, pled 

guilty to a two-count criminal information 

charging him with bankruptcy fraud and 

misappropriation of SBA collateral. He 

subsequently resigned from the California 

bar and was sentenced to 4 months home 

confinement, 5 years probation, 200 hours 

of community service, and a $1,000 fine. 

He admitted that he fraudulently transferred 

and concealed property pledged as collateral 

to SBA in anticipation of filing a bankruptcy 

petition on behalf of his client--the owner of 

a printing company in Valencia, California. 

The OIG initiated the investigation in 

response to a complaint made by the owner, 

who cooperated with the OIG throughout 

the investigation. During pre-bankruptcy 

meetings with her, the attorney proposed 

and ultimately executed a scheme whereby 

he took possession of some of the 

company’s business assets, specifically large 

printing presses and related machinery and 

inventory. In exchange, he paid the owner 

$2,500 for the equipment, which she had 

pledged as collateral for the company’s 

$63,000 disaster loan. He anticipated 

substituting inferior printing equipment to 

meet the collateral requirement and intended 

to convert the exchanged property to his 

personal use. The illegally transferred 

property was subsequently recovered by 

SBA/OIG special agents following the 

execution of three search warrants. 

California Resident Sentenced for Theft 

of Government Funds 

A resident of Anaheim, California, was 

sentenced to 3 years probation, $1,520 

restitution to FEMA, and a $500 fine. She 

had pled guilty to one count of theft of 

Government funds. The woman received 

funds from FEMA based on her claim that 

she lived in an apartment where she suffered 

personal property damage from floods. The 

investigation revealed, however, that at the 

time of the floods she had occupied a 

different apartment which did not sustain 

any damage. She submitted a similar claim 

to SBA which was appropriately rejected by 

a disaster assistance program official. The 

SBA/OIG initiated this investigation, which 

was conducted jointly with the FEMA/OIG 

and the Postal Inspection Service, after 

being contacted by a concerned citizen. 

Florida Veterinarian and Wife Indicted 

for Conspiracy and Making False 

Statements 

The president and owner of a corporation 

which operated veterinary clinics in 

Homestead and Miami, Florida, was 

indicted on one count of conspiracy and 
Semiannual Report March 1996 27

two counts of making false statements to 

SBA. His wife was also indicted on the 

same counts. The company had received a 

$106,100 loan to repair or replace 

machinery, equipment, inventory, and real 

property damaged by Hurricane Andrew. 

The SBA/OIG investigation disclosed that 

the couple submitted to SBA fictitious 

receipts, invoices, and copies of checks as 

documentation of expenditures they had not 

made and did not intend to make. The 

investigation was based on a referral from 

the FEMA/OIG. 

Florida Businessman Pleads Guilty to 

Making False Statements 

The president of a sports entertainment 

business in Belleair Beach, Florida, pled 

guilty to a one-count criminal information 

charging him with making false statements

to SBA. The man had submitted Borrower's 

Progress Certifications to SBA which 

contained a number of false statements 

designed to induce disbursement of 

$190,400 in business physical disaster loan 

proceeds. He had also submitted fraudulent 

copies of invoices, proposals, checks, and 

other documents purportedly corroborating 

his certification that he had replaced 

damaged video equipment for his business. 

In 1995, after being interviewed by an OIG 

special agent, the businessman voluntarily 

repaid the $95,609 balance of the 

fraudulently obtained loan, as well as the 

$19,393 balance of his economic injury 

disaster loan and the $40,837 balance of his 

disaster home loan. This investigation was 

based on a referral from the Disaster 

Assistance Area 2 Office. 

Arizona Company Owner Indicted for 

Pursuing Fraudulent Schemes and 

Artifices 

The owner of a machinery company in 

Buckeye, Arizona, was indicted by a 

Maricopa County, Arizona, grand jury on 

two counts of pursuing fraudulent 

schemes and artifices. The investigation 

revealed that, in an effort to obtain a 

$56,100 business physical disaster loan and 

a $327,600 economic injury disaster loan 

from SBA, the man had forged his 

estranged wife's signature on numerous loan 

documents. These charges were brought by 

the Arizona State Attorney General's Office 

after Federal prosecution was declined. The 

joint OIG/Secret Service investigation was 

initiated based on a referral by SBA’s 

Phoenix District Office. 

Two Alabama Businessmen Indicted for 

Mail Fraud 

The owner of a real estate company in 

Enterprise, Alabama, and his accomplice 

were indicted on 12 counts and 1 count of 

mail fraud, respectively, in a scheme to 

obtain a $186,800 SBA business physical 

disaster loan. The OIG's investigation found 

that, following a 1990 flood, the real estate 

company owner applied for the loan and 

fraudulently listed damaged properties that 

he did not own. While misusing the loan 

proceeds, he allegedly mailed claims and 

receipts showing that these assets were 

repaired or replaced. His accomplice’s 

alleged part in the scheme involved 

falsifying repair receipts to justify SBA’s 

issuance of a $12,800 joint-payee Treasury 

check; the accomplice subsequently 

endorsed and negotiated the check but the 

co-payee never received any of the 

proceeds. The investigation was based on a 

referral from SBA's Birmingham District 
28 Semiannual Report March 1996

Office. 
Semiannual Report March 1996 29

Small Business Investment Companies

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

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

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

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

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

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

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

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

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

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

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

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

FY 1995, there were 277 licensed, active SBICs, including 90 SSBICs, with private capital 

of $3.5 billion and leverage of $1.07 billion for total capital of $4.57 billion. In addition, 

there were 186 SBICs in liquidation owing SBA over $480.8 million. In FY 1995, the 

program level for investment companies, including participating securities, was $355.4 

million. 

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

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

and Business Enhancement Opportunity Act of 1992 transferred the responsibility for 

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

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

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

programs and activities. 

Summary of OIG Activity 

The following summarizes OIG activities 

relating to the SBIC program during the 

reporting period: 

• SBIC investigations produced 

$886,208 in recoveries by SBA. 

• Three SBIC investigations were 

closed, leaving an inventory of 13 

active cases. Three SBIC cases 

which, due to workload demands, 

had previously been referred to other 

law enforcement agencies for 
30 Semiannual Report March 1996

investigation, continued to be 

monitored. 

• Three proposed regulations were 

reviewed during the period. 

Figure 3

Efforts to Improve SBA Program 

Management 

SBA Receives $1.1 Million from CPA 

Firm to Settle Dispute over Audit Quality

A certified public accounting (CPA) firm 

paid SBA $1.1 million to settle a dispute 

over the quality of audits it conducted on a 

Small Business Investment Company 

(SBIC) for the 2 years prior to the SBIC’s 

failure. 

The SBIC failed when many of its 

investments lost substantial value, and the 

resulting decrease in asset value was not 

reflected in the financial statements audited 

by the CPA firm. The OIG’s Auditing 

Division conducted a quality review of the 

CPA working papers and concluded that 

there was substandard work, especially in 

portfolio valuation. The CPA firm relied 

wholly on subjective portfolio valuations by 

the SBIC and permitted troubled debt to be 

carried at original value, contrary to SBA 

regulations. An independent expert retained 

by SBA concurred in the OIG’s finding of 

substandard audit work. 

Based on the OIG review, SBA’s Office of 

General Counsel (OGC) requested the 

Department of Justice to review the case for 
Semiannual Report March 1996 31

negligence and for possible False Claims 

Act violations by both the SBIC and its CPA 

firm. The settlement agreement was 

negotiated by OGC, the Department of 

Justice, and the CPA firm to avoid possibly 

protracted litigation.

SBIC Regulations

As part of SBA’s initiative to update and 

streamline its regulations, the OIG reviewed 

the proposed changes to SBA regulations 

governing the SBIC program (13 C.F.R. Part 

107). Recommendations concerning a good 

character requirement for officers and 

directors were made; a fingerprint card 

requirement was also suggested for certain 

SBIC owners. 

Activities to Enhance Fraud 

Detection and Deterrence 

Minnesota SBIC President Settles Civil 

Suit with SBA 

The former president of a Minneapolis, 

Minnesota, SBIC agreed to pay $500,000 to 

settle a civil suit. After SBA, acting as 

receiver for the company, found indications 

that the man had diverted approximately 

$440,000 of the SBIC's assets, OGC asked 

the OIG to investigate the matter. The OGC 

found that the OIG investigation, which 

documented that the executive had 

misapplied even more of the company's 

assets than originally suspected, 

". . . contributed in large measure to the 

successful resolution of the civil case." 
32 Semiannual Report March 1996

Surety Bond Guarantees

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

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

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

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

business concern. 

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

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

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

bond is covered by the Contract Bonds section of the Surety Association of America Rating 

Manual, required by the invitation to bid or by the contract, and executed by a surety 

company that is determined by SBA to be eligible to participate in the program and certified 

acceptable by the U.S. Treasury. 

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

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

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

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

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

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

program. 

SBA can guarantee bonds for contracts with a face value of up to $1.25 million. In FY 1995, 

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

program, was $965 million. The appropriated guarantee authority level for FY 1995 surety 

bond guarantees was $1.767 billion; in FY 1996 it is $1.8 billion. In the first half of FY 

1996, SBA contingent liability was $350 million. 

Summary of OIG Activity 

The following summarizes OIG activities 

relating to SBA's surety bond guarantee 

program during the reporting period: 

• One surety bond investigation 

remained active at the end of the 

reporting period. 

• One surety bond investigation 
Semiannual Report March 1996 33

continued to be monitored. Due to 

workload constraints, it had 

previously been referred to another 

law enforcement agency for 

investigation. 

• Three proposed regulations were 

reviewed. 

Efforts to Improve SBA Program 

Management 

SBA Legislative Proposal

The OIG reviewed SBA's proposed 

legislative package for FY 1997 and 

recommended inclusion of the OIG's 

legislative proposal concerning audits of 

preferred surety bond companies. Briefly, 

this proposal would amend Section 

411(g)(3) of the Small Business 

Investment Act to 

replace the present requirement for an 

annual audit of participating sureties with 

an annual review. This would relieve the 

OIG of the requirement to conduct such 

audits, while allowing the Office of Surety 

Guarantees to conduct appropriate 

management reviews commensurate with 

the level of activity and risk posed by each 

surety. The OIG would retain its authority 

under the Inspector General Act to perform 

both internal audits of the surety bond 

guarantee program and external audits of 

participating sureties on its own initiative or 

in response to requests from program 

officials. The expected result of these 

proposed changes would be better utilization 

of limited OIG audit resources, as well as 

more effective annual review of 

participating sureties' activities. If enacted, 

this proposal would enable both the OIG and 

the program office to concentrate on those 

sureties with the most activity and/or risk. 

Figure 4
34 Semiannual Report March 1996

 Surety Bond Regulations 

The OIG reviewed SBA’s proposals to 

simplify and reorganize 13 C.F.R. Part 115, 

the regulations governing the surety bond 

program. Based on our review, we made 

several recommendations concerning 

brokering and subcontracting, as well as 

retention of claims records for audit and 

investigative purposes. 
Semiannual Report March 1996 35

Government Contracting Programs

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

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

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

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

Subcontracting Assistance, Certificate of Competency, Natural Resources Sales 

Assistance, and the Procurement Automated Source System.

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

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

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

procurement center representatives assigned to major Federal acquisition activities. 

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

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

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

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

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

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

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

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

award the contract to that business. 

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

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

leases, and other mineral leases. 

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

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

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

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

opportunities. 
36 Semiannual Report March 1996

Summary of OIG Activity 

The following summarizes OIG activities 

relating to SBA's Government contracting 

programs during the reporting period: 

• One inspection report was issued. 

• Government contracting 

investigations produced a $162,500 

recovery by SBA. 

• No Government contracting 

investigations were closed; six 

remain active. 

• Due to workload constraints, one 

additional Government contracting 

case was referred to another law 

enforcement agency for 

investigation, giving the OIG a total 

of two referrals to monitor. 

• Five proposed regulations were 

reviewed, as were six SOPs. 

Efforts to Improve SBA Program 

Management 

SBA's Government Contracting 

Programs Must Adjust to Federal 

Procurement Changes and Limited 

Resources

An OIG inspection found that dramatic 

changes resulting from declining Federal 

procurements, reductions in Federal 

contracting staff, and new acquisition 

legislation make the future of SBA's prime 

contracts and subcontracting functions 

increasingly uncertain. Moreover, the 

programs are becoming more national in 

scope at a time when SBA program staff is 

being reduced markedly. While this OIG 

inspection was in progress, SBA began to 

streamline the two programs and reduce the 

prime contracts field staff by almost 40 

percent. Recognizing the Agency's 

commitment to streamlining its contracting 

programs, we issued this report to provide 

assistance to SBA's management. The 

inspection report includes: (1) an 

examination of external constraints affecting 

program performance, (2) a review of the 

deployment of field personnel, and (3) ways 

in which SBA's Office of Government 

Contracting (GC) might maximize program 

performance with reduced resources. 

To adjust quickly to the changing 

procurement environment, the OIG 

recommended that GC exercise central 

oversight of the prime contracts and 

subcontracting programs. Under the SBA 

proposals pending at the time, district 

directors would have been made responsible 

for managing the field staff. Because these 

programs, which help small businesses 

obtain their fair share of Government 

contracts, are national in scope, we 

expressed concern about the district 

directors’ ability to adopt and adhere to 

national goals. The Agency subsequently 

decided to retain central control of the prime 

contracts and subcontracting programs. 

Other recommendations include suggestions 

for focusing SBA's reviews of prime 

contractors' achievement of subcontracting 

goals more effectively and expanding 

current efforts to integrate all reporting 

software. 

Very Small Business Size Standard 

Reviewed
Semiannual Report March 1996 37

The OIG reviewed SBA's proposed final 

rule and internal procedural notice 

implementing the new very small business 

size standard (13 C.F.R. Part 121) and 

concurred with its publication. The review 

made one substantive recommendation on 

this proposal. Section 121.413(a)(1) of the 

proposed regulation defines an eligible 

concern as one that, among other things, ". . 

. has average annual receipts for its 

preceding three fiscal years that total not 

more than $1,000,000." This seems to 

require that a small business have an 

average annual income of less than 

$333,333. Section 304(j)(4)(B) of the 

statute, however, provides that a concern is 

eligible if it ". . . has average annual receipts 

that total not more than $1,000,000." The 

OIG therefore recommended that the 

regulation be revised to state that a business 

must have "average annual receipts, for each 

of its preceding three fiscal years, that total 

not more than $1,000,000." (New language 

underscored.) Based on the OIG’s 

comments, GC revised its rule to clarify that 

an eligible concern shall have “average 

annual receipts of not more than 

$1,000,000.” This new language is 

consistent with Section 121.104(b)(1), that 

specifies the period of measurement for 

determining annual receipts. 

Activities to Enhance Fraud 

Detection and Deterrence 

Largest Government Contracting Result 

from Affirmative Civil Enforcement 

(ACE) Program

During this period, the OIG's participation 

in the Department of Justice's ACE program 

produced the largest result to date in the 

Government contracting program. An OIG 

investigation documented that a 

Government contractor falsely certified 

that the company was a small business to 

receive three awards under procurements 

reserved for small businesses. While 

denying any allegation that it knowingly 

submitted a false size certification, the 

company agreed to pay the Government 

$162,500 to resolve its potential liability 

under the False Claims Act. The OIG joined 

the investigation at the request of one of the 

procuring agencies for the awards. 

 
38 Semiannual Report March 1996

Minority Enterprise Development

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

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

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

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

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

economically disadvantaged individuals and that meet other eligibility requirements. Firms 

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

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

graduation from the program. 

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

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

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

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

September 30, 1995, there were more than 5,900 approved program participants. In FY 

1995, Section 8(a) program participants received approximately 6,600 contracts and over 

25,000 modifications with an aggregate value in excess of $5.8 billion. Generally, Section 

8(a) contracts with estimated values, including all options, of more than $5 million 

(manufacturing) or $3 million (all other industries) must be competed among eligible Section 

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

however, have estimated values below these thresholds and are awarded on a sole-source 

basis. 

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

in the Office of Minority Enterprise Development, SBA funds services by private or public 

organizations to provide a broad range of management and technical assistance to certified 

Section 8(a) firms, socially and economically disadvantaged individuals whose firms are not 

participants in the Section 8(a) program, low-income individuals, and small businesses 

located in areas of low income or high unemployment. The Section 7(j) program uses 

cooperative agreements with private sector organizations and institutions of higher learning 

to deliver assistance in three categories: (1) Task Order Services are used to provide one-onone assistance to eligible companies in accounting, marketing, and industry-specific services; 

this is the largest Section 7(j) assistance category. (2) On-going Services provide seminars 

and 
Semiannual Report March 1996 39

workshops in management and technical assistance. (3) The Minority Business Executive 

Program provides executive development training opportunities in an academic setting to 

selected executives of Section 8(a) companies. Due to a reduction in FY 1996 Section 7(j) 

funding, however, SBA expects that these services will be limited. 

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

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

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

$35 billion audit, inspection, and investigation universe. 

Summary of OIG Activity 

The following summarizes OIG activities 

relating to SBA's minority enterprise 

development programs during the reporting 

period: 

• Four audit reports were issued in this 

program area; two audits were in 

progress. 

• Minority enterprise development 

investigations resulted in two 

indictments and one conviction. 

• Minority enterprise development 

investigations produced $11,969,355 

in court-ordered restitution, $24,575 

in fines and special assessments, and 

$22,500,000 reduction in financial 

risk. 

• Office of Security Operations name 

checks resulted in the declination of 

nine applications for the Section 8(a) 

program. 

• Two minority enterprise 

development investigations were 

closed, leaving an inventory of 16 

active cases. Due to workload 

demands, 1 other minority enterprise 

development case was referred to 

another law enforcement agency for 

investigation, and, at the end of the 

reporting period, we still had 12 

minority enterprise development 

referrals to monitor. 

• Two proposed regulations were 

reviewed. 

Efforts to Improve SBA Program 

Management 

OIG Deputy Inspector General Testifies 

on Section 8(a) Issues Before the House 

Committee on Small Business

The OIG’s Deputy Inspector General (DIG) 

 testified before the House Committee on 

Small Business on December 13, 1995. The 

testimony addressed major systemic 

problems in the Minority Enterprise 

Development (Section 8(a)) program, which 
40 Semiannual Report March 1996

the OIG had identified in its investigations 

and audits, and offered proposed remedies. 

In cases of participant fraud, the DIG 

reported that due diligence on the part of 

responsible SBA employees would 

frequently have prevented the fraud, or 

would have contributed to discovery sooner. 

 Unfortunately, some fraud referrals have 

been declined by the Department of Justice 

because the Agency knowingly permitted 

violations of its own policies and 

regulations. 

In the audit area, the OIG has identified 

three problem areas demonstrating major 

systemic weaknesses: eligibility, 

competition, and brokering. An audit of 50 

larger companies serviced by five SBA 

offices around the country concluded that 

participants remained in the program even 

though they had accumulated substantial 

wealth or had overcome impediments to 

obtaining access to financing, markets, and 

resources. The failure to graduate those 

Section 8(a) companies that are successful is 

a contributing factor to the concentration in 

the award of contracts. As of December 

1995, the largest 200 companies, out of 

approximately 5,700 participating in the 

program, commanded 50.4 percent of the 

contracts in terms of dollar value, with an 

average of $70 million for each of the 200 

companies. The DIG stated that the single 

most important measure that could be taken 

to minimize eligibility abuse, simplify 

program administration, and reduce 

concentration would be to establish a ceiling 

on the dollar amount of contracts that a 

participating company could receive. 

OIG audits have also found excessive 

subcontracting/brokering. In contracts 

awarded under Standard Industrial 

Classification (SIC) codes for services, 

Section 8(a) contractors provided significant 

amounts of equipment. These Section 8(a) 

contractors, however, were neither 

manufacturers nor regular dealers in the 

equipment, as required by SBA's 

regulations. Other improper subcontracting 

practices uncovered included lack of 

notification to SBA for increasing 

subcontracting subsequent to contract 

award, lack of monitoring of excessive 

subcontracting, and difficulty in measuring 

whether a company had subcontracted too 

much. A cap on the dollar amount of 

contracts that a Section 8(a) company could 

receive would alleviate many of these 

subcontracting problems. 

The DIG also testified that the SBA has 

closed one major loophole, i.e., the use of 

indefinite delivery/indefinite quantity 

contracts, and that current Section 8(a) 

program managers recognize the problems 

identified by the OIG and are formulating 

solutions to them. 

Audit Discloses Washington, D.C., 

Section 8(a) Firm Did Not Meet “Regular 

Dealer” Test

At the request of a New Jersey member of 

Congress, the OIG conducted an audit of a 

Section 8(a) company in Washington, D.C., 

to determine whether the company operated 

as a "regular dealer" of office supplies in 

accordance with the Government’s 

requirements. A regular dealer is one who 

makes very substantial sales from stock 

maintained on hand, rather than one who 

serves merely as an intermediary for items 

supplied by other businesses or suppliers. 

The audit found that the firm’s Section 8(a) 

and non-8(a) sales from stock were not 
Semiannual Report March 1996 41

substantial, as only about .75 percent of the 

total office supply sales during the audited 

period were from stock on hand. The 

company’s principal method of operation 

was to obtain orders and then purchase the 

items called for from either a manufacturer 

or a retailer for a commission or a markup 

on cost. The OIG recommended that SBA’s 

Washington District Director not accept any 

current or future offerings for office supplies 

from the company until the company 

qualifies as a regular dealer. The 

Washington District Director disagreed with 

the finding and recommendation because he 

believes that recent legislation repealed the 

regular dealer requirement, and that the 

company’s sales from stock could be 

considered substantial. Because the regular 

dealer requirement existed at the time of the 

violations, and other regulations still contain 

these requirements, the disagreement will be 

addressed through the Agency’s audit 

resolution process. 

Business Owner Should Not Have Been 

Admitted to Section 8(a) Program

The owner of a Section 8(a) company 

should not have been admitted to the 8(a) 

program because his prior business success 

demonstrated his ability to accumulate 

substantial wealth and overcome 

impediments to obtaining access to 

financing, markets, and resources. The 

Section 8(a) program is not intended to 

assist such companies. Prior to entering the 

Section 8(a) program, the owner 

accumulated and lost, due to business 

reasons, substantial wealth. Based on the 

owner’s claimed net worth, he was, at one 

point, a multimillionaire. Also, prior to 

entering the Section 8(a) program, the owner 

held a significant percentage of stock of a 

bank holding company in which he was a 

director. He also was Chairman of the 

Executive Committee of the bank. The 

auditors concluded that the firm should be 

terminated from the Section 8(a) program. 

The Agency has not yet responded to the 

recommendation. 

Minority Enterprise Development/Small 

Disadvantaged Business Status 

Regulations Reviewed

The OIG reviewed the Agency's proposed 

changes to 13 C.F.R. Part 124, governing 

the Section 8(a) program, and made several 

recommendations. Our recommendations 

focused on tax verification requirements, 

good character requirements, awards of 

Section 8(a) contracts to wholesalers, SIC 

code designations, eligibility criteria, and 

program benefits. 

Activities to Enhance Fraud 

Detection and Deterrence 

Colorado Construction Company SetAside Contract Rescinded 

The award of a $22.5 million Small 

Disadvantaged Business (SDB) set-aside 

contract to a Denver, Colorado, construction 

company was rescinded because of an OIG 

investigation report. The company, a 

Section 8(a) participant, had been awarded 

this contract by Luke Air Force Base, 

Arizona. Shortly thereafter, a complaint 

was received that the owner was not 

disadvantaged, as he had claimed. At the 

time of this protest, the OIG and the FBI 

were investigating the man on a separate 

contracting-related allegation. The 

investigation determined that the company 
42 Semiannual Report March 1996

owner submitted false documents to SBA, 

representing that he was born in Bombay, 

India, and was, therefore, presumed to be 

disadvantaged. Documents obtained during 

the investigation disclosed that he was born 

in Iran, a country of origin to which the 

presumption of disadvantage has not been 

accorded. Based on the investigation report, 

SBA determined that the construction 

company was ineligible for SDB set-aside 

contracts. SBA has further notified the 

company of the Agency’s intent to terminate 

it from the Section 8(a) program. 

Maryland Computer Service Company 

Owner Convicted on a Variety of Fraud 

Charges 

The owner of a computer support contractor 

in Landover, Maryland, was convicted in the 

District of Columbia of bank fraud, wire 

fraud, making false statements to SBA, 

and misuse of Social Security numbers. 

She was sentenced to 37 months 

imprisonment, 3 years probation, and 

$700,000 restitution to the Treasury 

Department and to two financial institutions. 

 To obtain her company’s admission to the 

Section 8(a) program, the woman concealed 

two prior bankruptcies from SBA, used false 

Social Security numbers, and submitted 

bogus tax returns to SBA, i.e., returns which 

had not been filed with the IRS. She also 

inflated costs on Government contracts and 

used the extra funds for personal expenses. 

Additionally, she converted to her own use 

monies deducted from employees' 

paychecks for taxes, Social Security, and 

Medicare. The company owner also 

submitted false documents to a Federallyinsured financial institution to obtain 

$755,850 in loans to purchase land and build 

a home. SBA terminated the company from 

the Section 8(a) program. Following a 

referral from SBA’s Washington District 

Office, the SBA/OIG joined the Treasury 

Department OIG’s ongoing investigation of 

the company. 

Space Shuttle Contractor Case Yields 

Tenth Guilty Plea and Sentences of 

Nearly $12 Million 

The former vice president of an engineering 

and design company with offices in Culver 

City, California, and Houston, Texas, pled 

guilty to a one-count criminal information 

for making a false statement to SBA to 

obtain Section 7(j) cooperative agreements 

in the San Diego, California, area. The 

company provided graphic designs and 

illustrations to a prime contractor for the 

Space Shuttle program. 

The investigation also substantiated that the 

company’s chief executive officer used a 

family trust and three associated 

corporations to bill inflated rents and other 

expenses to NASA subcontracts, including a 

Section 8(a) contract initiated in 1981 for 

$4.4 million and extended through 

December 1989 for $6.4 million. Also 

included in the alleged conspiracy were a 

series of materially false statements made to 

secure and maintain Section 7(j) cooperative 

agreements totaling more than $60,000, 

including repeated assertions that the 

company had an office in San Diego from 

which it continuously did business. 

The vice president’s guilty plea is the tenth 

one resulting from this investigation, which 

included the SBA/OIG, the NASA/OIG, the 

IRS, the FBI, the Postal Inspection Service, 

and the Departments of Defense and Labor. 
Semiannual Report March 1996 43

He was sentenced to 1 year probation, a 

sentence mitigated by his substantial 

cooperation with the investigation. In return 

for his guilty plea, the court dismissed the 

conspiracy charge on which he was 

originally indicted. 

In a further development, five other 

sentences resulting from this Federal task 

force investigation were handed down. The 

chief executive officer of the company was 

sentenced to 2 years imprisonment, 3 years 

supervised release, $4,472,900 restitution, 

and fines and special assessments totaling 

$23,950. He had pled guilty to 180 charges 

including conspiracy, mail fraud, false 

claims, money laundering, theft from 

programs receiving Federal funds, 

embezzlement from an employee benefit

plan, interstate transportation of stolen 

money, and obstruction of a Federal 

audit. Three of his other defunct businesses 

were charged special assessment fees of 

$200 each, and the Section 8(a) company 

was sentenced to pay $7,496,455 restitution. 

 Each of the four corporations had pled 

guilty to conspiracy. 

Two Illinois Brothers Charged with 

Conspiracy to Defraud the Government 

and Obstruction of Justice 

Two brothers, the president of a Section 8(a) 

construction company in Villa Park, Illinois, 

and the principal accountant for the 

company, respectively, were charged in a 

criminal information with conspiracy to 

defraud the Government and obstruction 

of justice. The OIG's joint investigation 

with the Air Force Office of Special 

Investigations (AF/OSI) revealed that, from 

about August 22, 1990, through January 7, 

1991, the brothers submitted fraudulent 

claims to SBA and the Air Force pertaining 

to a Section 8(a) contract for landscaping on 

the Air Force Reserve Facility at O'Hare 

International Airport. During the course of 

the subsequent investigation, the brothers 

provided false testimony to a Federal grand 

jury and attempted to tamper with witnesses 

whose testimony was to be presented to the 

grand jury. The AF/OSI asked the 

SBA/OIG to join the investigation. 

Section 8(a) Owner Gives Gratuities, 

Withdraws from Program

The chairman of a Section 8(a) firm, whose 

termination SBA had proposed, voluntarily 

withdrew from the Section 8(a) program. 

An OIG investigation found that the 

executive had provided a series of gratuities

to an SBA employee who was responsible 

for providing Section 8(a) contract support 

to his corporation. A piece of equipment 

which was one of the gratuities was 

surrendered and became SBA property; the 

SBA’s business opportunity specialist who 

had received the gratuities retired. 
44 Semiannual Report March 1996

 
Semiannual Report March 1996 45

 Economic Development

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

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

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

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

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

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

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

the Virgin Islands, and Guam, with over 950 subcenters or service locations located at 

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

corporations, or downtown storefronts. In FY 1995, SBDCs provided counseling and 

training to nearly 570,000 clients. 

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

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

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

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

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

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

training, counseling, and providing management information materials occur through 

outreach efforts with external organizations. Cosponsorship arrangements, authorized under 

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

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

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

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

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

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

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

start-up and growth issues encountered by small business owners. There are currently 29 

BICs in operation, with a total of 45 planned by the end of FY 1996. 

Summary of OIG Activity 
46 Semiannual Report March 1996

The following summarizes OIG activities 

relating to SBA's economic development 

programs during the reporting period: 

• One audit report was issued in the 

economic development program 

area; two were in progress. 

• One economic development 

investigation remained active at the 

end of the reporting period. 

• One economic development 

investigation continued to be 

monitored. Due to workload 

constraints, it had previously been 

referred to another law enforcement 

agency for investigation. 

Efforts to Improve SBA Program 

Management 

Management Problems Identified in 

California Small Business Development 

Center Audit

Program management and fund control 

problems were identified in an audit of the 

California Small Business Development 

Center (SBDC). The program, which has 24 

subcenters, receives $5 million per year 

from SBA. Program management problems 

included reporting of inaccurate 

management information, lack of an 

advisory board, unfilled staff positions, and 

inadequate subcenter monitoring. As of 

January 1995, the SBDC had improperly 

retained $1.3 million in Federal funds for 

the 1991-1993 period. The SBDC had not 

reported line item cost overruns to SBA. 

Program income reporting was found to be 

inaccurate and inconsistent. The audit 

recommended a number of corrective 

actions, all of which have been agreed to by 

both the SBDC and SBA’s Associate 

Administrator for Small Business 

Development Centers. The SBDC has also 

deobligated most of the funds that were 

improperly encumbered. 

Agency Management and Financial Activities

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

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

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

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

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

integrity assurance activities. 

SBA's management and financial activities, represented by the Agency's total appropriation, 
Semiannual Report March 1996 47

involved almost $1.893 billion in FY 1994*. SBA's FY 1995 actual appropriation used was 

$798 million, including Section 7(a) and disaster carryover funds and released disaster 

contingency funds. FY 1995 appropriations available, including contingency funds, were 

$939.5 million. Because final Agency appropriations have not been enacted for FY 1996, 

SBA has been operating at the Congressional conference level of $590.6 million. This 

drastic reduction in funding reflects downsizing in accordance with the Administration’s 

Reinventing Government efforts. 

* The unusually high level of funding in FY 1994 is attributable to the extraordinary cost of the Northridge 

 earthquake.

Summary of OIG Activity 

The following summarizes OIG activities 

relating to SBA's administration and 

financial management activities during the 

reporting period: 

• Four audits of Agency activities 

were issued; one other audit was 

underway. 

• Integrity assurance investigations 

resulted in one indictment, one 

conviction, and $1,526,893 in courtordered restitution. 

• Eleven integrity assurance 

investigations were closed, leaving 

an inventory of 17 active cases. 

• Three integrity assurance 

investigations continued to be 

monitored. Due to workload 

constraints, they had previously been 

referred to other law enforcement 

agencies for investigation. 

• Three proposed pieces of legislation, 

15 proposed regulations, and 10 

proposed SOPs were reviewed. 
48 Semiannual Report March 1996

Figure 5

Efforts to Improve SBA Program 

Management 

New York Project Officer Awards His 

Own Company Sole Source Contracts

An audit disclosed that the owner of a New 

York company awarded his own company 

contracts while working as a temporary 

project officer for an SBA grantee located in 

Pennsylvania. The research firm initially 

had a contract to provide the grantee with a 

project officer. While working as the 

grantee’s project officer, the owner of the 

research company prepared the 

specifications and administered two sole 

source contracts awarded to his own firm for 

software and training services. Because of 

the conflict of interest, the auditors 

concluded that the company’s profit of 

$105,431 represented unjust enrichment. 

The audit report recommended that the 

grantee refund this amount to SBA. Agency 

management officials have not yet made a 

final decision on the recommendation. 

Audit Confirms Duplicate Payments 

Made to Virginia Computer Equipment 

Supplier

An audit, conducted at the request of SBA’s 

Assistant Administrator for Administration, 

confirmed that duplicate payments totaling 

$261,277 were made by SBA to a computer 

equipment supplier for computer equipment 

and services. The payments were part of 

$4.9 million paid to the company in 1991 

and 1992 on a firm, fixed price, indefinite 

quantity contract. The company agreed that 

it had received the duplicate payments, but 

contended that it was underpaid $26,253 on 

other company invoices that were adjusted 
Semiannual Report March 1996 49

downward by SBA without explanation. 

Because SBA had no documentation to 

support these billing reductions, the auditors 

recommended that they be restored. The net 

owed by the equipment supplier, according 

to the audit, is $235,024. If the company 

does not reimburse SBA, the audit report 

recommends that SBA initiate debarment of 

the company from Federal contracts.

Program Vulnerability Memorandum 

Issued on Close-Out Letters in Employee 

Investigations

During this reporting period, the Inspector 

General (IG) issued a program vulnerability 

memorandum (PVM) to the Assistant 

Administrator for Human Resources 

(AA/HR). The PVM cited a recent OIG 

investigation of alleged misconduct by an 

Agency employee. After the investigation 

disproved the allegation, the employee 

asked for a formal Agency acknowledgment 

that he had been cleared. When the OIG 

determined that SBA had no formal policy 

for notifying employees when completed 

investigations of their alleged misconduct 

would result in no disciplinary action, the 

IG recommended that SBA establish such a 

policy. The OIG provided, for the AA/HR's 

consideration, a sample Clearance Letter 

and Closed Without Action Letter (which of 

the two is issued depends on the findings of 

the investigation) used by the IRS. 

The AA/HR responded that her office has a 

practice of notifying employees of the 

outcome of investigations of their alleged 

misconduct. She remained unconvinced, 

however, that a formal policy of written 

notification in every case would be 

beneficial. 

Accounting Standardization Act of 1995 

The OIG reviewed a Revised Congressional 

Draft Bill on the Accounting 

Standardization Act of 1995 and had several 

serious concerns with it as drafted. First, 

the review questioned the need for such a 

stringent measure at this time. While there 

may be a need for some uniformity of 

accounting systems and a higher degree of 

compliance with requirements for auditable 

financial statements among Federal entities, 

the OIG does not believe that an additional 

legislative enactment is necessary. Further, 

the OIG recommends that the Congress wait 

a reasonable period of time to let such 

measures as the Government Performance 

and Results Act and the Chief Financial 

Officers Act take full effect across the 

Government. Congress can then assess 

whether additional legislative initiatives are 

necessary to address any remaining 

problems with the Executive Branch’s 

execution. 

Second, there was concern with certain 

provisions of this bill as drafted. Section 

3(c), for example, provides that if the 

auditor performing the annual financial 

statement audit for an agency finds that 

agency financial systems do not 

substantially comply with this Act, the 

auditor must identify the officer or 

employee "responsible" for this failure. 

Section 3(g) then provides that an employee 

who knowingly "commits, permits, or 

authorizes" deviation from the Act may be 

subject to disciplinary action, including 

removal from office. As a practical matter, 

these provisions are ill-advised. Attempting 

to identify the "responsible" employee will 

only result in finger-pointing; ultimately, it 

is the head of the agency and his/her 

management team who are responsible for 
50 Semiannual Report March 1996

the agency's financial systems. It is also 

unnecessary to include a special provision 

for disciplinary action for failure to comply 

with this Act; failure to comply with the 

provisions of any law already constitutes 

potential grounds for discipline. Finally, 

these provisions, taken together, will make it 

difficult to recruit and retain top candidates 

for Chief Financial Officer (CFO) positions 

in agencies. 

The OIG also objected to Section 3(e), 

which provides that, if the Controller of the 

Office of Federal Financial Management 

concludes that an agency's systems do not 

substantially comply with this Act, he/she 

may transfer up to 2 percent of the agency's 

appropriations for priority financial 

management system improvements. 

Although this provision does state that the 

agency head must concur, its overall effect 

is to restrict an agency head's discretion to 

manage an agency. This appears to be an 

unnecessary infringement on an agency 

head's ability to deliver agency programs 

and carry out other Congressionallymandated initiatives. 

Finally, while we understand that there may 

be a need to address certain problems 

currently existing in the executive branch's 

financial systems, a better solution exists. If 

Congress finds that agencies are not 

addressing deficiencies brought to their 

attention in the annual financial statement 

audits, the appropriate vehicle to address 

these problems is through more active 

oversight by the substantive oversight 

committees. Holding hearings and 

requesting explanations and corrective 

action from the head of an agency would 

most likely result in more immediate and 

responsive actions. 

Information Technology Management 

Reform Act of 1996

The OIG reviewed the Office of 

Management and Budget's (OMB’s) draft 

memorandum on the implementation of the 

Information Technology Management 

Reform Act of 1996 (ITMRA). While the 

goal of promoting the responsible use of 

information technology throughout the 

Government is laudable, we were concerned 

that some of the changes in ITMRA and the 

draft memorandum implementing the act 

have the potential to seriously erode the 

independence of Inspectors General (IGs) 

throughout the Government. 

Our first concern involved the interaction 

between the ITMRA and the Paperwork 

Reduction Act of 1995 (PRA). In an earlier 

review of the PRA and its implementing 

regulations, we noted that under the PRA, 

the agency head or a designated senior 

official would have the authority to impede 

certain types of IG audits and inspections of 

agency programs and operations; namely, 

audits or inspections that focus on a 

category of individuals or entities (such as a 

class of licensees or an entire industry) and 

that involve a survey or collection of 

information from ten or more persons. This 

would directly contravene Section 3(a) of 

the Inspector General Act of 1978, as 

amended, which provides that each IG 

reports to and is under the general 

supervision of the agency head, but the 

agency head does not have the authority to 

prevent or prohibit the IG from initiating, or 

completing any audit or investigation. 

Under the PRA and its implementing 

regulations, an agency head or designated 

senior official would review the proposed 
Semiannual Report March 1996 51

survey to evaluate whether it should be 

approved by OMB, and provide the public 

with 60 days to review and comment on the 

survey. The agency head or designated 

senior official would then certify that the 

information collection meets certain 

standards and forward the survey to OMB 

for final clearance. While this authority will 

now lie with the agency head or the Chief 

Information Officer (CIO) under ITMRA 

and the draft memorandum, instead of an 

unspecified designated senior official, the 

results will be the same in terms of the 

independence of OIG activities. 

The IG is the individual best qualified to 

identify the information necessary to carry 

out his or her mission, as well as the best 

means of collecting the needed information. 

 To allow the agency head or CIO to review 

and approve (or disapprove) the questions 

the IG may ask gives the agency head or 

CIO the authority, in effect, to prohibit or 

prevent the IG from completing an audit or 

inspection--an authority specifically 

prohibited by the IG Act. 

We also expressed concern about the CIO's 

implementation of performance-based 

management and its effect on the 

independence of IGs. Under ITMRA, 

before investing in new information 

technology systems and equipment, the 

agency is required to determine whether the 

function to be performed should be effected 

or supported by the private sector. Agencies 

are further required to analyze their missions 

and restructure mission related processes 

before making significant information 

technology purchases. While these 

requirements may promote efficiency and 

economy, the OIG is concerned about the 

role of the CIO in this process with respect 

to OIG initiatives. It is unclear in the draft 

memorandum whether the CIO serves in an 

advisory capacity or whether he/she has 

decision making authority in this area. 

While we do not find a CIO's role as an 

advisor, i.e., a resource to draw upon when 

making such decisions, to be objectionable, 

any greater role with respect to OIG 

activities would usurp the IGs' independent 

procurement authority and, in addition, 

could prevent or prohibit the IG from 

initiating or completing any audit or 

investigation. 

Furthermore, pursuant to Section 5125 (c) of 

the ITMRA, the CIO has the authority to 

monitor and evaluate the performance of 

information technology programs and to 

recommend that the head of the agency 

continue, modify, or terminate a given 

program or project. Once again, with 

respect to OIG activities, the IG is the 

individual best qualified to identify the 

information necessary to carry out his/her 

mission, as well as the best means of 

collecting the needed information. To allow 

the agency head or CIO to review and 

approve or disapprove the programs and 

projects established by the IG would give 

the agency head or CIO the authority, in 

effect, to prohibit or prevent the IG from 

completing an audit, investigation, or 

inspection. 

Finally, the CIO has the authority under the 

ITMRA to assess agency requirements 

regarding the knowledge and skill of 

personnel in information resources 

management and to assess the extent to 

which the personnel in executive and 

management level positions meet those 

requirements. Again, with respect to OIG 

activities and staff resources, the IG is the 
52 Semiannual Report March 1996

individual best qualified to identify his/her 

needs and to hire and retain individuals with 

the skills necessary to meet those needs. To 

allow the CIO to assess the needs of the IG 

and the qualifications of his/her employees, 

as well as to develop specific plans for the 

hiring, training, and professional 

development of the IG's employees, would 

usurp the IG's personnel authority as set 

forth in Section 6(a)(6) of the Inspector 

General Act of 1978, as amended. 

For all of the reasons set forth above, we 

recommended that the OIG be exempted 

from the scope of authority given to the 

CIO. At a minimum, we suggested that 

OMB guidance make clear that the CIO 

should serve only in an advisory or 

consultative mode with respect to OIG 

activities. 

Small Business Regulatory Enforcement 

Fairness Act of 1996 (S. 942)

The OIG reviewed the Small Business 

Regulatory Enforcement Fairness Act of 

1996 and had two substantive objections to 

the ombudsman provisions of S. 942 as 

drafted. Title II of the bill would create a 

Small Business and Agriculture Regulatory 

Enforcement Ombudsman to receive and 

address comments from small businesses 

that are subject to audit, inspection, 

compliance assistance, or other enforcement 

actions by Federal agencies with regulatory 

authority over small businesses. 

First, the purpose of this provision was to 

give small businesses an avenue to resolve 

comments or complaints they may have 

concerning an agency's exercise of its 

regulatory authority. The proposal was 

drafted in language so broad, however, that 

it could apply to the audit, investigation, and 

inspection activities of OIGs in those 

Federal agencies that regulate small 

businesses. It would subject OIG activities 

to oversight by an ombudsman within SBA 

who may not be a Presidential appointee and 

subject to the Senate confirmation process. 

These provisions would directly contravene 

the independence provided by the IG Act of 

1978; specifically Section 3, which provides 

that the IG shall report to and be under the 

general supervision of the head (or the 

officer next in rank) of the host agency. 

Second, Section 30(b)(2)(B) provided that 

the ombudsman shall provide confidentiality 

(to the same degree as that provided by 

Section 7 of the IG Act) to small businesses 

that make comments concerning agency 

employees engaged in compliance or 

enforcement activities. Section 7 of the IG 

Act provides that, in OIG investigations, the 

IG cannot release the identity of an 

employee without his/her consent unless the 

IG determines that the ". . . disclosure is 

unavoidable during the course of the 

investigation." Applying this language to 

the proposed legislation, the ombudsman 

would not be able to release the identity of a 

nonconsenting complainant unless it is 

"unavoidable” during the resolution of a 

particular complaint. The ombudsman 

would not, therefore, as a matter of law be 

able to refer any allegations involving 

misconduct by SBA employees to the OIG 

for investigation. This would directly 

contravene Sections 3 and 4 of the IG Act, 

which place the responsibility with the OIG 

for investigating allegations of misconduct 

relating to host agency programs. 

The OIG did not believe that there was a 

demonstrated need to establish an 
Semiannual Report March 1996 53

ombudsman position such as that proposed. 

Complaints of misconduct or improper 

actions by agency employees can be 

directed to the OIG or appropriate program 

officials of the host agency. If, however, 

this provision must be retained, the 

SBA/OIG made the following 

recommendations: 

• The language of Title II should 

be redrafted to clarify that the 

ombudsman's jurisdiction 

extends only to comments on 

activities conducted by agency 

program offices. The 

ombudsman should not have 

jurisdiction to accept or resolve 

comments concerning OIG 

audits, inspections, or other 

enforcement activities. 

• Section 30(b)(2)(B) should be 

expanded to include language 

that specifically requires the 

ombudsman to refer allegations 

of misconduct by agency 

employees to the OIG for 

appropriate action. 

• A new Section 30(b)(3) should 

be added to clearly state that 

this provision does not 

supersede the provisions of the 

IG Act of 1978, as amended. 

Activities to Enhance Fraud 

Detection and Deterrence 

Employee Awareness Briefings

In addition to investigating complaints of 

waste, fraud, and abuse involving SBA 

programs, our investigations staff presented 

six Standards of Conduct briefings to a total 

of 135 Agency employees. The 

involvement and cooperation of all SBA 

employees in combating waste, fraud, and 

abuse is critical to an effective OIG 

investigations program and to the Agency's 

overall productivity and efficiency. 

During the reporting period, employee 

contributions to our mission were 

significant. As Figure 6 illustrates, more 

than 65 percent of all investigative referrals 

originated from within the Agency in the 

form of referrals from program heads or 

directly from other SBA employees. This 

cooperation indicates the strong 

commitment of SBA employees to reducing 

waste, fraud, and abuse in Agency activities 

and improving the Agency's management 

and control of its programs. 

Pennsylvania Tax Return Preparer 

Sentenced for Mail Fraud 

A Riegelsville, Pennsylvania, tax return 

preparer was sentenced to 33 months 

incarceration--the maximum time allowed 

by law for his crime--and 3 years supervised 

probation. The judge also ordered the man 

to pay $1,526,893 in restitution to the 

individuals whom he had defrauded. He had 

pled guilty to one count of mail fraud in 

connection with his scheme to defraud 

investors by selling them approximately 

$1,143,000 of bogus tax-free municipal 

bonds purportedly guaranteed by SBA. The 

OIG's joint investigation with the Postal 

Inspection Service documented that he 

designed the bonds, devised a fictitious 

name (the Upper Bucks County Industrial 

Development Authority), and falsely stated 

on the bonds that they were guaranteed by 

SBA. He convinced clients and prospective 
54 Semiannual Report March 1996

clients of his business to purchase the bonds 

as a viable investment and a means of 

reducing their income tax liability. The 

bonds were sold between 1985 and 1993 to 

approximately 50 investors, many of them 

elderly. The investigation was predicated 

on information supplied by SBA's 

Philadelphia District Office. 

Former Disaster Clerk Pleads Guilty to 

Misusing Government Vehicle 

A former clerk with SBA's Disaster 

Assistance Area 4 Office pled guilty to one 

count of converting Government property to 

his own use. A joint OIG/Federal Protective 

Service investigation of the clerk was 

initiated based on information provided by 

the Area 4 Office. The investigation 

determined that, without authorization, the 

clerk obtained a rented automobile, paid for 

by SBA, and used it exclusively for personal 

business. Area 4 officials became aware of 

the problem when the employee was 

involved in an accident with the vehicle.

Figure 6
Semiannual Report March 1996 55

Organization, Resources, and Management Initiatives

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

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

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

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

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

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

Organization

The OIG is organized into four operating 

divisions as follows: 

z Auditing Division 

z Investigations Division 

z Inspection and Evaluation Division 

z Management and Legal Counsel 

Division 

The Auditing and Investigations Divisions 

each administer their field activities through 

field offices and resident offices around the 

country. The Auditing Division has offices 

located in Atlanta, Dallas, Los Angeles, and 

Washington. In addition to these cities, the 

Investigations Division has offices in 

Denver, Kansas City, Seattle, Chicago, 

Houston, New York City, Philadelphia, San 

Francisco, and Syracuse. The Investigations 

Division’s Office of Security Operations is 

located in Washington, D.C. 

Both the Inspection and Evaluation Division 

and the Management and Legal Counsel 

Division operate out of Washington, D.C. A 

current OIG organization chart can be found 

at Figure 7. 

Resources

In FY 1996, the OIG is operating under a 

series of congressional Continuing 

Resolutions (CR) at an annualized funding 

level of $8.5 million and an authorized 

personnel ceiling of 102 full-time equivalent 

(FTE) positions. While this level of funding 

represents the same number of dollars as the 

FY 1995 appropriation, it will not support 

OIG activity at the same level which was 

possible in FY 1995. Congressionallymandated law enforcement availability pay, 

the annual cost of living increase, and 

various locality pay adjustments were not 

reflected in the CR spending levels. Also, 

the OIG was required to reduce its personnel 

resources from the FY 1995 level of 104 

FTE positions. This reduction was executed 

in response to the President's FTE guidance. 

 
56 Semiannual Report March 1996

Figure 7

At the end of the current reporting period, 

the OIG had 97 employees on board. 

In FY 1994, the OIG also received $3 

million in supplemental disaster funds to be 

used for activities related to the Agency's 

vastly expanded disaster assistance program. 

 These “no-year” funds remain available 

until expended. By the end of the current 

reporting period, six auditors and five 

investigators had been hired on temporary 

appointments using disaster funding. 

Operating at the CR funding level of $8.5 

million, the OIG will be unable to 

completely absorb the cost of implementing 

the Law Enforcement Availability Pay Act 

(mandated by the Congress last year). This 

law provides all criminal investigators with 

a 25 percent increase to their base salary to 

compensate for a 25 percent increase in their 

duty hours. The OIG budget will also be 

unable to completely absorb the combined 

cost-of-living and locality pay raises of an 
Semiannual Report March 1996 57

estimated 3.6 percent. 

The continuing reduction in OIG FTE 

resources (104 FTE in FY 1995, and 102 

FTE in FY 1996) remains troubling. As 

depicted in Figures 1 and 2, the expanding 

nature of the Agency's portfolio and its 

concomitant demand for OIG oversight 

would suggest that resources be increased to 

ensure adequate oversight. In recognition of 

this need, the President has requested $9.985 

million for the OIG for FY 1997. Without 

these additional resources, the OIG will not 

be able to carry out its mandate to provide 

oversight to the Agency's programs and 

activities and to safeguard the Government's 

investment in the extensive programs of the 

Agency. 

The OIG continues to be concerned with the 

strong demand for investigations of fraud in 

Agency programs. As evidenced by the 

table on page 59, business loan fraud 

continues to be our major area of 

concentration, in terms of both number of 

active cases carried and time expended on 

those cases. Disaster loan fraud qualifies as 

the second largest area for investigative 

activity, in terms of both number of cases 

and time expended. This reporting period 

set a new record for the share of 

investigative time (83.6 percent) expended 

on business and disaster loan fraud cases. 

With 1995 having been the busiest hurricane 

season in more than a generation, and with 

demand for SBA business loans remaining 

high, we expect that our investigative efforts 

will continue to be consumed by those two 

programs and our resources stretched 

severely. The table on page 59 also 

illustrates the Auditing Division's emphasis 

on the business loan and disaster assistance 

programs. This is demonstrated by the 

Auditing Division's effort in the disaster 

assistance program, which has gone from 3 

percent to 10 percent to 25 percent to 29 

percent, respectively, over the last 4 

reporting periods. 

Management Initiatives

ADP Equipment Upgrade Initiative 

An ongoing OIG initiative to procure new 

personal computers to replace obsolete ADP 

equipment is a continuing OIG priority. The 

new equipment is capable of meeting 

Agency standards for connectivity and 

software. Training for the recently 

announced Agency-supported software suite 

will assure that OIG personnel obtain 

maximum effectiveness with the new 

computers. 

SBA/OIG Brochure Published

A single-page, tri-fold brochure, entitled “A 

Brief Overview of the Office of Inspector 

General,” has been published and is 

available for distribution. The publication 

gives a brief history of the OIG and 

describes its basic functions, and provides 

information on how to report suspected 

waste, mismanagement, or abuse in SBA 

programs. The brochure will be used as 

background material for briefings and for 

recruitment. 

OIG Moves People and Resources to 

Meet Workload Demands

In an effort to make optimal use of its 

people and resources, the OIG has moved 

some of those resources and has placed them 

near to where they are most needed. The 

Investigations Division has opened a 
58 Semiannual Report March 1996

resident office in Houston and staffed it with 

one employee from Atlanta. Also, to 

accommodate the growing disaster-funded 

staff in the Los Angeles Field Office, the 

OIG has moved that staff to larger quarters. 

President's Council on Integrity and 

Efficiency

The Inspector General (IG) is a member of 

the President's Council on Integrity and 

Efficiency (PCIE) and serves as chairman of 

the PCIE's Committee on Inspection and 

Evaluation. He participates in PCIE 

initiatives to reduce fraud and improve the 

management of Federal programs on a 

Government-wide basis. During the 

reporting period, the IG and his staff have 

contributed to several key PCIE initiatives: 

z The IG, in his role as Chairman of the 

Committee on Inspection and 

Evaluation, was requested by the PCIE 

to conduct, jointly with the Chair of 

the Auditing Committee, a survey of 

IG involvement in the Government 

Performance and Results Act (GPRA). 

 The survey will determine the extent 

of IG involvement in the development 

and implementation of GPRA both in 

their host agencies and within their 

own offices. The survey findings will 

also be used to prepare guidelines for 

IGs on their role in GPRA. 

z The Inspection and Evaluation 

Division coordinated a series of 

meetings with newly appointed IGs 

who were considering developing or 

revising inspection and evaluation 

functions within their offices. The 

teams were composed of 

representatives from various IG 

offices. 

As Chairman of the PCIE Committee on 

Inspection and Evaluation, the IG 

commissioned the Inspections Round Table 

to conduct two additional initiatives: 

z A report on the methods currently 

used by the inspector general 

community to provide accountability 

in block grants and similar programs. 

z A compilation of successful 

inspections and evaluations 

performed by inspector general 

offices. The Round Table will keep 

this data base current and issue 

periodic summaries. 

Furloughs and Winter Storm Affect the 

Work of the OIG

Twenty days of Government shutdown 

occasioned by the budget impasse in 

November, December, and January and four 

more days brought on by the “Blizzard of 

‘96" in the Nation’s northeast, conspired to 

challenge the productivity of the OIG’s 

workforce. Although employees deemed to 

be non-emergency were forced to stay 

home, a modicum of oversight of Agency 

programs was accomplished by the OIG’s 

disaster-funded employees (not funded by 

annual appropriations), investigators 

involved with cases in active litigation, and 

selected supervisory personnel. While 

statistics for the current reporting are very 

positive despite the shutdowns, it should be 

noted that statistical results presented for 

this reporting period reflect many OIG 

activities initiated much earlier; the real 

impact of the Government’s shutdowns may 

not be felt until the next reporting period, or 
Semiannual Report March 1996 59

beyond. 
60 Semiannual Report March 1996

Direct Investigation Time by Program Area 

October 1, 1995 to March 31, 1996 

Program Area Direct Time % Number of Investigations

Closed In Progress

Business Loans 51% 30 190 

Disaster Loans 32% 10 84 

SBIC 2% 3 13 

Surety Bond Guarantees 1% 0 1 

Government Contracting 3% 0 6 

Minority Enterprise Development 4% 2 16 

Economic Development 3% 0 1 

Agency Management and Financial 4% 11 17 

Total 100% 56 328 

Direct Auditing Time by Program Area 

October 1, 1995 to March 31, 1996

Program Area Direct Time % Number of Audits

Issued In Progress

Business Loans 48% 2 7 

Disaster Loans 29% 1 6 

SBIC * 0 0 

Surety Bond Guarantees * 0 0 

Government Contracting * 0 0 

Minority Enterprise Development 13% 4 2 

Economic Development 6% 1 2 

Agency Management and Financial 4% 4 1 

Total 100% 12 18 

* less than 1⁄2 percent
Semiannual Report March 1996 61

Profile of Operating Results

October 1, 1995 to March 31, 1996

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

A. Reports Issued....................................................................................................................12 

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

C. Audit Recommendations Issued.........................................................................................18 

D. Dollar Value of Costs Questioned ..........................................................................$887,292 

E. Dollar Value of Recommendations that Funds Be Put to Better Use ................................$0 

Audit Followup Activities

F. Audit Recommendations Closed ........................................................................................62 

G. Disallowed Costs Agreed to by Management......................................................$1,120,894 

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

 Agreed to by Management...................................................................................$6,472,422 

I. Unresolved Audit Recommendations.................................................................................37 

J. Dollar Value of Unresolved Audit Recommendations.......................................$21,298,723 

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

Inspection Activities

A. Reports Issued......................................................................................................................1 

Legislation/Regulation/SOP/Other Reviews

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

B. Regulations Reviewed........................................................................................................39 

C. Standard Operating Procedures Reviewed.........................................................................17 

D. Other Issuances Reviewed* ...............................................................................................50 

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

communications which frequently involve the implementation of new programs and policies. 
62 Semiannual Report March 1996

Status of Investigations as of March 31, 1996 Totals 

A. Total Cases........................................................................................................................384 

B. Closed Cases .......................................................................................................................56 

C. Pending Cases .....................................................................................................................36 

D. Open Cases........................................................................................................................292 

Summary of Indictments and Convictions

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

B. Convictions from OIG Cases ..............................................................................................25 

Summary of Recoveries and Reductions of Risk

A. Potential Recoveries and Fines as a Result of OIG Investigations.....................$18,425,315 

B. Reductions of Financial Risk as a Result of OIG Investigations........................$22,500,000 

C. Reductions of Financial Risk as a Result of the Name Check Program ...............$4,707,418

 Total:.....................................................................................................................$45,632,733

SBA Personnel Actions Taken as a Result of Investigations

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

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

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

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

Program Actions Taken as a Result of Investigations

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

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

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

D. Other Program Actions .........................................................................................................1 

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters .......................................................................................1,343 

B. Total Calls/Letters Referred to Offices Outside the OIG...............................................1,305 

C. Total Calls/Letters Referred to Investigations Division for Evaluation .............................38 
Semiannual Report March 1996 63

Investigations Activities - Referral Program

A. Cases Referred to FBI.........................................................................................................24 

B. Referred to Other Agencies (Excluding FBI) .......................................................................3 

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

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

E. Potential Recoveries and Fines as a Result of Referral Program..........................$2,013,000 

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

 Office of Inspector General 

 Staffing as of March 31, 1996

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

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

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

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

 

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

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

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

 

D. Inspection and Evaluation Division .....................................................................................7 

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

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

 

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

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

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

 OIG Total..........................................................................................................................97

Additional Temporary Disaster Staffing 

Funded from Supplemental Appropriations

A. Auditing Division.................................................................................................................6 

B. Investigations Division.........................................................................................................5 

 OIG Disaster Total..............................................................................................................11
Semiannual Report March 1996 65

FY 1996 Productivity Statistics

First Six Months

Office-Wide Dollar Accomplishments Totals 

A. Potential Investigative Recoveries and Fines...................................................................$18,425,315 

B. Management Avoidances as Result of Investigations ......................................................$27,207,418 

C. Disallowed Costs Agreed to by Management.....................................................................$1,120,894 

D. Recommendations that Funds Be Put to Better 

 Use Agreed to by Management .........................................................................................$6,472,422 

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

Total ......................................................................................................................................$54,326,049

Auditing Division Activities

A. Reports Issued................................................................................................................................. 12 

B. Disallowed Costs Agreed to by Management.....................................................................$1,120,894 

C. Recommendation that Funds Be Put to Better 

 Use Agreed to by Management ........................................................................................$6,472,422 

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

Inspection and Evaluation Division Activities

A. Reports Issued....................................................................................................................................1 

Investigations Division Activities

A. Cases Closed ...................................................................................................................................56 

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

C. Convictions.......................................................................................................................................25 

D. Potential Investigative Recoveries and Fines...................................................................$18,425,315 

E. Management Avoidances ...............................................................................................$27,207,418 

 - Investigation Cases......................................................................................................$22,500,000 

 - Name Check Program ...................................................................................................$4,707,418 

 
66 Semiannual Report March 1996

Statutory Reporting Requirements

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

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

Source Location in this Report

Section 4(a)(2 ) Review of Legislation and Regulations Pages 6 to 54 

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies Pages 6 to 54 

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

Problems, Abuses, and Deficiencies Pages 6 to 54 

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented Page 72 

Section 5(a)(4) Matters Referred to Prosecutive Authorities Pages 6 to 54 

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports Page 67 

Section 5(a)(7) Summary of Significant Audits Pages 6 to 54 

Section 5(a)(8) Audit Reports Containing Questioned Costs Page 68 

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use Page 69 

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made Page 71 

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

Section 5(a)(12) Significant Management Decisions With Which OIG Disagreed None 
Semiannual Report March 1996 67

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued ................................................................................................67 

Appendix II 

 Part A - Inspector General-Issued Audit Reports 

 with Questioned Costs ..................................................................................................................68 

 Part B - Inspector General-Issued Audit Reports 

 with Recommendations that Funds Be Put 

 to Better Use .................................................................................................................................69 

 Part C - Inspector General-Issued Audit Reports 

 with Non-Monetary Recommendations........................................................................................70 

 Part D - Inspector General-Issued Audit Reports 

 with No Management Decision ....................................................................................................71 

 Part E - Significant Audit Reports 

 Without Final Action ....................................................................................................................72 
68 Semiannual Report March 1996

APPENDIX I

Audit Reports Issued 

October 1, 1995 to March 31, 1996

TITLE NUMBER ISSUE 

DATE 

QUESTIONED 

COSTS 

FUNDS FOR 

BETTER USE 

Business Loans

Meridian Bank 6-4-E-001-001 10/18/95 $557,742 

Home Federal Savings 

Bank 

6-4-E-001-002 11/20/95 

Disaster Loan Program

Work Assignments of 

Disaster-Funded Personnel 

6-5-F-007-008 2/6/96 

Minority Enterprise Development

S.W. Day Construction 

Corp. 

6-5-H-001-007 1/30/96 

J.W. Collins & Associates 6-5-H-006-010 3/11/96 

Government Micro 

Resources, Inc. 

6-5-H-013-012 3/29/96 $235,024 

Naing International 

Enterprises, Ltd. 

6-5-H-014-009 2/23/96 

Economic Development

California SBDC 6-4-W-008-003 1/11/96 

Agency Management and Financial

Jack Faucett Associates 6-2-S-918-004 1/17/96 

Correa, Duarte & Co. 6-5-S-918-005 1/24/96 

Daniel Dennis & Co. 6-5-S-918-006 1/24/96 

GeoDemographics, Ltd. 6-6-H-002-011 3/29/96 $94,526 
Semiannual Report March 1996 69

APPENDIX II - Part A

Audit Reports with Questioned Costs 

October 1, 1995 to March 31, 1996 

REPORTS RECs* 

DOLLAR VALUES 

QUESTIONED UNSUPPORTED 

A. For which no management 

decision had been made by 

September 30, 1995 

7 16 $2,368,601 

B. Which were issued during 

the period 

3 3 $887,292 

Subtotals (A + B) 10 19 $3,255,893 

C. For which a management 

decision was made during 

the reporting period 

5 11 $1,349,803 

(i) Disallowed costs 4 9 **$1,120,894 

(a) Due SBA 4 9 **$1,120,894 

(b) Due program 

participant 

(ii) Costs not disallowed 2 ***3 $421,167 

D. For which no management 

decision had been made by 

March 31, 1996 

5 8 $1,906,090 

 * Recommendations 

 ** Costs disallowed on one management decision ($750,000) exceeded costs questioned ($557,742) by 

 $192,258. As a result, the amount reflected on line C is less than the sum of lines C(i) and C(ii). 

 *** One recommendation was partially agreed to by management. It therefore appears in both C(i) and C(ii), but is n
70 Semiannual Report March 1996

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use 

October 1, 1995 to March 31, 1996

REPORTS RECs* RECOMMENDED 

 FUNDS FOR 

BETTER USE 

A. For which no management 

decision had been made by 

September 30, 1995 

5 8 $25,865,055 

B. Which were issued during 

the period 

0 0 $0 

Subtotals (A + B) 5 8 $25,865,055 

C. For which a management 

decision was made during 

the reporting period 

3 3 $6,472,422 

(i) Recommendations 

agreed to by SBA 

management 

3 3 $6,472,422 

(a) SBA level 3 3 $6,472,422 

(b) Program participant 

level 

0 0 $0 

(ii) Recommendations not 

agreed to by SBA 

management 

0 0 $0 

D. For which no management 

decision had been made by 

March 31, 1996 

3 5 $19,392,633 

 

* Recommendations 
Semiannual Report March 1996 71

APPENDIX II - Part C 

Audit Reports with Non-Monetary Recommendations 

October 1, 1995 to March 31, 1996

REPORTS RECOMMENDATIONS 

A. For which no management decision 

had been made by September 30, 

1995 

13 57 

B. Which were issued during the 

period 

7 15 

Subtotals (A + B) 20 72 

C. For which a management decision 

was made during the reporting 

period 

13 48 

D. For which no management decision 

had been made by March 31, 1996 

9 24 
72 Semiannual Report March 1996

APPENDIX II - Part D

Overdue Management Decisions 

March 31, 1996

AUDITEE REPORT 

NUMBER

ISSUED STATUS

Colson Services Corp. 3-2-S-401-014 12/3/92 In negotiation. 

SBA Loan Servicing and Debt 

Collection Activity 

5-3-H-004-006 3/31/95 Most recommendations 

closed; others being 

negotiated. 

Population and Marketing 

Analysis Center 

5-4-H-008-008 3/31/95 In negotiation. 

University of Puerto Rico SBDC 5-4-H-005-013 6/6/95 Most recommendations 

closed; others being 

negotiated. 

Indiana Lumbermens Mutual 

Insurance Co. 

5-4-W-001-009 3/31/95 In litigation. 
Semiannual Report March 1996 73

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports 

Without Final Action as of March 31, 1996 

REPORT 

NUMBER

TITLE DATE 

ISSUED

DATE OF 

MANAGEMENT 

DECISION

FINAL 

ACTION 

TARGET

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

2-2-W-400-065 Integon Indemnity Corp. 03/31/92 09/30/92 03/31/95 

2-2-S-401-078 Residual Service Fee 05/26/92 08/19/92 09/30/93 

3-2-S-401-014 Colson Service Corp. 12/03/92 * * 

3-3-T-001-024 Energy Management 02/25/93 09/30/93 11/30/93 

3-3-E-002-025 Controls over Advisory and 

Assistance Services 

03/01/93 03/10/93 03/31/93 

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

3-2-H-007-036 SBA’s Oversight of Colson 

Services Corp. 

06/16/93 03/31/95 09/30/95 

4-3-H-011-016 SBA’s Award of 8(a) Contracts 

to ASCI 

05/16/94 12/30/94 06/30/95 

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

4-4-E-005-024 Brokering of 8(a) Contracts 09/30/94 03/21/95 None 

4-3-H-012-020 SBA FY 1993 Financial 

Statements 

08/31/94 10/18/95 9/30/96 

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

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

Collection Activities 

03/31/95 * * 

5-4-W-001-009 Indiana Lumbermens Mutual 

Insurance Co. 

03/31/95 * * 

5-4-H-008-008 Population and Marketing 

Analysis Center 

03/31/95 * * 

5-5-H-007-003 SBA FY 1993 Financial 

Statements 

12/13/94 09/30/95 10/31/95 

 
74 Semiannual Report March 1996

REPORT 

NUMBER

TITLE DATE 

ISSUED

DATE OF 

MANAGEMENT 

DECISION

FINAL 

ACTION 

TARGET

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

5-5-H-004-015 Cordoba Corporation - 

Guaranteed Loan 

08/10/95 09/29/95 08/02/95 

5-5-H-004-016 Administration of $825,000 Line 

of Credit 

08/18/95 03/29/96 06/30/96 

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

5-4-H-005-013 University of Puerto Rico SBDC 06/30/95 * * 

5-5-H-012-017 Puerto Rico District Monitoring of 

SBDC 

08/31/95 03/29/96 06/30/96 

5-4-H-009-012 FY 1994 Financial Statements - 

Management Letter 

06/28/95 09/30/95 09/30/96 

5-4-H-009-010 FY 1994 Financial Statements 06/01/95 08/09/95 09/30/97 

5-4-H-003-014 National Education Center for 

Women in Business 

08/04/95 02/15/96 09/11/95 

5-5-H-008-019 National Center for Genome 

Resources 

09/29/95 03/29/96 06/30/96 

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