U.S. Small Business Administration 

Office of Inspector General 

_________________________________ 

Semiannual Report to Congress 

Fall 2004

S 

April 1, 2004 – September 30, 2004
Inspector General Act Statutory Reporting Requirements 

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

Inspector General Act Amendments of 1988, are listed below. 

Source Page

Section 4(a)(2 ) Review of Legislation and Regulations 19, 22 & 24 

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 3-21 

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

 and Deficiencies 37-41 

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 34-36 

Section 5(a)(4) Matters Referred to Prosecutive Authorities 42-47 

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

 and 6(b)(2) 

Section 5(a)(6) Listing of OIG Reports 26-27 

Section 5(a)(7) Summary of Significant Audits & Other Reports 3-21 

Section 5(a)(8) Audit Reports with Questioned Costs 28 

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

 Better Use 28 

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

 Where No Management Decision Was Made 30 

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

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

 the OIG Disagreed None 
A Message From The Inspector General 

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

Semiannual Report summarizing activities from April 1, 2004, through September 30, 2004. 

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

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

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

security management. During this reporting period, we issued 27 reports with significant 

recommendations for improving Agency operations, reducing fraud and unnecessary losses, and 

recovering funds. OIG investigations led to 58 indictments and 17 convictions of subjects who defrauded 

the Federal Government. In addition, the Office collectively reviewed 151 legislative, regulatory, policy, 

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

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

This reporting period has been one of continued transition for the Agency and the OIG. To improve our 

ability to address the rapid changes taking place in the Agency, the OIG responded to the recent 

centralization of the loan guaranty purchase and liquidation processes by assigning four of our audit staff 

to SBA’s new National Guaranty Purchase Center (Center) in Herndon, Virginia. This move will 

enhance our ability to provide the Agency with timely information, observations, and recommendations 

on systemic issues. We have already published a key report addressing problems with the Agency’s 

planning process for the Center. 

Further, during this reporting period, our Investigations Division and subject matter experts in the 

Auditing Division have worked closely to identify significant fraud—especially in 9/11 disaster loans. 

We also made significant strides in addressing fraud by borrowers who falsely claim to be United States 

citizens. The OIG has also targeted loan agent fraud, and recently, a loan agent pled guilty to conspiracy 

and fraud in a scheme involving at least $28 million in loans. 

During the past 6 months, we issued reports focusing on a number of SBA’s major management 

challenges, particularly in the areas of loan guaranty purchases, information security, financial 

management, and business development. While much remains to be done, SBA is making progress on a 

number of its challenges. Meanwhile, we continue to work closely with SBA to help resolve these issues. 

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

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

measurable results. 

Harold Damelin 

Inspector General 
Table of Contents 

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

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

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

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

 and Management Information............................................................................................. 10 

 Goal: Assist SBA in Improving its Small Business Development and 

 Government Contracting Programs...................................................................................... 13 

 Goal: Assist SBA Management in Identifying and Resolving Persistent 

 and Emerging Management Issues....................................................................................... 17 

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

 Significant SBA Issues......................................................................................................... 20 

Statistical Highlights................................................................................................................................... 22 

Appendix 

 I. OIG Reports Issued ................................................................................................................. 26 

 II. OIG Reports with Questioned Costs ....................................................................................... 28

 III. OIG Reports with Recommendations that Funds Be Put to Better Use .................................. 28 

 IV. OIG Reports with Non-Monetary Recommendations............................................................. 29 

 V. OIG Reports From Prior Semiannual Periods with Overdue Management 

 Decisions as of September 30, 2004........................................................................................ 30 

 VI. OIG Reports Without Final Action as of September 30, 2004................................................ 31 

 VII. Significant Recommendations From Prior Semiannual Reporting Periods 

 Without Final Action as of September 30, 2004 ..................................................................... 34 

 VIII. 6-Month Significant Recommendations Summary as of September 30, 2004........................ 37 

 IX. 6-Month Legal Actions Summary........................................................................................... 42

 X. Office of Inspector General Organizational Chart .................................................................. 48 
1

Overview of the SBA and the OIG 

The Small Business Administration 

The Small Business Administration (SBA) was established in 1953 to assist small businesses from startup 

through the many stages of growth. The SBA’s two major goals are to help small businesses succeed and 

to assist victims in recovering from disasters. The SBA offers many services to entrepreneurs through its 

Offices of Capital Access, Entrepreneurial Development, Government Contracting and Business 

Development, and Disaster Assistance. Services include providing (1) assistance with developing 

business plans through counseling services and resource partners, (2) financing through the Agency’s 

various business and disaster lending programs, (3) marketing products and services, and (4) access to 

Federal procurement opportunities. The SBA’s programs are delivered by a network of field offices in 

every state, the District of Columbia, the U.S. Virgin Islands, Guam, American Samoa, and Puerto Rico. 

The SBA had an FY 2004 appropriation of $756 million, and, as of September 30, 2004, had 2,467 

employees (this number includes Office of Inspector General (OIG) personnel but excludes disasterfunded employees). 

The Office of Inspector General 

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

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

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

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

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

• The Investigations Division manages a program to prevent and detect illegal and/or improper 

activities involving SBA programs, operations, and personnel. The criminal investigative staff 

carries out a full range of traditional law enforcement functions. The security operations staff 

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

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

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

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

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

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

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

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

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

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

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

Challenges and develops OIG strategic and performance plans. 
2

Overview of the SBA and the OIG 

The OIG is headquartered in Washington, DC, and has field audit and investigation staff located in 

Atlanta, Chicago, Dallas, Denver, Houston, Kansas City, Los Angeles, Philadelphia, New York, and 

Seattle. An organization chart for the OIG is located in Appendix X. 

As of September 30, 2004, the OIG had 96 staff on-board. The OIG’s FY 2004 appropriation was 

$13.358 million, including a $495,000 transfer for disaster assistance oversight activities (net of 

rescissions). 

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

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

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

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

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

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

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

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

significant SBA issues. 

OIG efforts and accomplishments during the second half of Fiscal Year (FY) 2004 are summarized in the 

following pages. All audits and reports for this reporting period are listed in Appendix I. All 

investigative actions are summarized in Appendix IX. 
3

Significant OIG Activities 

Goal: Prevent Fraud and Unnecessary Losses in SBA Programs

The SBA has a wide range of programs designed to help small businesses gain access to capital, 

participate in the Federal procurement market, and better plan and manage their operations. The majority 

of SBA’s resources are devoted to providing financial assistance to qualified small businesses. With 

more than 5,000 lenders authorized to make SBA loans, the Section 7(a) Guarantied Loan Program is the 

SBA’s largest lending program and the principal vehicle for providing small businesses with access to 

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

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

transactions. Additionally, during the past 12 years, SBA has increasingly delegated more authority to its 

lenders. The number of loans originated under this delegated authority has grown from approximately 20 

percent of SBA's loan volume in 1992 to over 75 percent today. As SBA has moved away from 

approving individual loans and placed more responsibility and independence on its lenders, the 

importance of OIG oversight has increased significantly. 

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

assistance for non-farm private sector disaster losses. This highly visible program is particularly 

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

quick relief to disaster victims. 

Because all SBA programs have some vulnerability, either because of insufficient internal controls or 

dishonest program participants who seek to take advantage of the program, the OIG devotes 

approximately half of its budget to prevent fraud and unnecessary losses in SBA programs. 

SBA Centralizes 7(a) Business Loan Guaranty Purchases and Liquidations Without 

Adequate Planning 

One of SBA’s management challenges is to strengthen the loan guaranty payment (referred to as 

purchase) process, which is the primary tool for assessing lender compliance on a loan-by-loan basis and 

protecting against improper (erroneous) guaranty purchase payments. Over the years, the OIG has 

conducted numerous audits of the guaranty purchase process and made recommendations for 

improvement, including centralization of this function. As part of its transformation effort, in January 

2004, SBA established the National Guaranty Purchase Center (Center) in Herndon, Virginia, to 

centralize the 7(a) guaranty purchase process. In FY 2003, over $700 million in loan guaranty and 

liquidation actions were processed by 266 employees located at 76 district offices. As a result of 

centralization, SBA reduced the number of loan officers assigned to process guaranty purchase requests 

and liquidation activities by 83 percent (from 266 to approximately 46 authorized staff as of May 2004). 
4

Significant OIG Activities 

While the OIG fully supports centralization of the 7(a) business loan guaranty 

purchase process as a way to improve the quality and consistency of purchase 

decisions, we concluded that additional actions were needed to strengthen the 

process. A recent OIG review which was conducted, in part, because of 

concerns that the Center was unable to meet the demand for purchase request 

and liquidation actions, found that a lack of 

planning led to several missteps in the transformation process. The 

Agency did not perform the necessary analysis to determine the 

appropriate staffing level needed to meet demand for purchase and 

liquidation actions, conduct a risk assessment to identify potential 

weaknesses, or adequately plan for the receipt and control of loan files. As a result, the Center was 

understaffed when it began operations in January 2004, and could not effectively process purchase 

requests and liquidation actions during the first months of operations. 

SBA projected that each loan officer would be able to perform an average of two purchase reviews per 

day. Although, as of September 2004, the Center reported that it was meeting current demand for 

purchase decisions, SBA was not able to assess the quality of the reviews to 

determine if material lender errors and noncompliances were being properly 

identified. Based on OIG audits, reviews, and investigations conducted over 

the past several years, we do not believe that the Center has sufficient staff 

to meet demand while maintaining the quality level necessary to protect the 

Agency from making improper payments. 

The OIG recommended that SBA determine the appropriate number of 

employees needed to perform guaranty purchase reviews and liquidation 

actions by (1) establishing the quality elements for purchase and liquidation actions, (2) determining the 

amount of time needed to complete a quality purchase and liquidation action, and (3) computing the staff 

levels needed to complete the estimated annual purchase and liquidation actions at an acceptable level of 

quality. 

Citizenship Fraud Remains a Persistent Problem 

Investigations by the OIG and other law enforcement agencies continue to find a pattern of borrowers 

falsely claiming to be U.S. citizens in order to obtain SBA-guarantied loans. (Under certain 

circumstances, non-citizens can legitimately obtain SBA financing.) Millions of dollars are at risk, with 

some individual loans at least $1 million in size. Investigations have disclosed that borrowers and loan 

agents are participating in well-organized, multi-loan schemes in which misrepresentations of citizenship 

are made and loans default quickly. As more loans are guaranteed by SBA using expedited processing, 

this problem is expected to increase significantly. 

...additional actions 

were needed to 

strengthen the 

process.

...we do not believe that 

the Center has sufficient 

staff to meet demand 

while maintaining the 

quality level 

necessary...

...a lack of planning led to 

several missteps in the

transformation process.
5

Significant OIG Activities 

For example, during this reporting period, 12 SBA loan recipients in just one part of Texas were indicted 

for making false claims of U.S. citizenship in connection with loans totaling over $7.1 million. The 

investigation leading to these indictments was conducted jointly with the Department of Homeland 

Security, a county-level organized crime task force, the Social 

Security Administration, and the Texas Alcoholic Beverage 

Commission. It was part of an ongoing effort among local, state, and 

Federal agencies to (1) disrupt organized criminal enterprises that 

coordinate similar financial violations across the U.S., and (2) 

identify the final destinations of monetary proceeds. Another 16 

individuals were indicted or pled guilty to crimes related to 

citizenship fraud during this semi-annual period. 

Joint Effort Detects Fraud in Wake of 9/11 Tragedy 

SBA’s disaster assistance program provides the victims of disasters with 

low-interest loans. In response to the September 11, 2001, terrorist 

attacks on the United States, the program approved over 11,000 loans 

valued at over $1 billion. As of August 2004, more than 10 percent 

(1,446) of these 9/11 loans, totaling over $200 million, had defaulted. 

Defaulted loans are loans that are more than 60 days past due, have been 

charged off, or are in liquidation. Inevitably, some of these loans involved fraud because, in disaster 

relief, there is seldom enough time to exercise sufficient due diligence. 

To identify and prosecute those individuals who have taken advantage of this national tragedy, the OIG 

Auditing and Investigations Divisions are working together to identify indicators of fraud in a sample of 

defaulted 9/11 loans. These loans are then examined further by investigators 

and may ultimately result in criminal prosecutions and fraud convictions. A 

secondary purpose of this effort is to identify loan origination and servicing 

problems, which are referred to appropriate SBA program offices for action. 

Thus far, out of a judgmental sample of 125 defaulted loans, 23 of the loans 

(with a total value of $11.6 million) contained possible fraud indicators and 

have been referred to the Investigations Division. 

In a case resulting from a SBA field office referral, the president and the managing partner of a business 

were sentenced to incarceration and ordered to pay a combined total of $618,000 in restitution. After the 

terrorist attacks, they had received an SBA disaster assistance loan by falsely claiming that their company 

had been located at the World Trade Center. In fact, their business was not located at the World Trade 

Center on September 11, 2001, and the individuals were salaried employees of another company at the 

time. 

...during this reporting period, 

12 SBA loan recipients in just 

one part of Texas were 

indicted for making false 

claims of U.S. citizenship in 

connection with loans totaling 

over $7.1 million.

As of August 2004, more 

than 10 percent (1,446) of 

these 9/11 loans had 

defaulted—totaling over 

$200 million.

...the OIG Auditing and 

Investigations Divisions 

are working together to 

identify indicators of 

fraud in a sample of 

defaulted 9/11 loans.
6

Significant OIG Activities 

Loan Agent Fraud is Likely to Increase 

A loan agent is employed and compensated by an applicant or lender to prepare an SBA loan application 

and/or refer the applicant to a lender (or vice versa). Although honest loan agents can help small 

businesses gain access to capital, some have perpetrated fraudulent schemes involving hundreds of 

millions of dollars in loans. These fraudulent loans often default for non-payment, and SBA is forced to 

purchase the guarantied portions of the loans. Because SBA currently has a limited ability to prevent and 

detect loan agent fraud, this is an Agency management challenge. 

Three aspects of the loan agent issue are particularly troubling. First, it takes only a handful of dishonest 

loan agents to be involved with a large dollar amount of loans. In a multi-state 

area covered by just one OIG field office, from 1996 to the present, seven 

dishonest loan agents were involved with 260 loans totaling over $205 million. 

During this reporting period, in one scheme involving at least $28 million in 

loans, a loan agent pled guilty to conspiracy and fraud. He had caused 

prospective borrowers to sign false application documents and made it appear 

that the borrowers had provided the required capital injections or down 

payments. 

A second problem is that no one knows how many loan agents are involved 

with SBA loans. Until the Agency fully implements a reliable electronic 

database containing information on loan agents, the universe of loan agents 

will remain unknown. 

Finally, as SBA continues to centralize loan processing and liquidation, general oversight of these loans is 

being shifted to the lenders. As a result, the quality of oversight is likely to vary significantly, and loan 

agent fraud schemes are likely to increase. 

Early Defaults of 7(a) Program Loans Result in Unnecessary Losses 

Prior OIG audits of early defaulted Section 7(a) business loans have shown a high incidence of 

noncompliance and abuse by lenders and borrowers. For example, audits have uncovered early defaults 

resulting from borrower misrepresentation of material facts in applying for a loan, lenders allowing loan 

proceeds and business assets to be used for unauthorized purposes, and lenders not properly evaluating 

borrower creditworthiness or repayment ability. 

During this reporting period, the OIG issued 10 audit reports pertaining to early defaulted loans that were 

originated by four lenders. The reports identified borrowers with questionable character and delinquent 

Federal debt, as well as one borrower who could not legally remain in the country long enough to repay 

the loan. Lenders further allowed loan proceeds to be used for inappropriate purposes, such as 

refinancing of ineligible debts, and did not account for the use of the loan proceeds as required by SBA 

rules. Lenders also did not properly evaluate equity injections or verify the borrower’s creditworthiness 

...it takes only a 

handful of dishonest 

loan agents to be 

involved with a

large dollar amount 

of loans.

...no one knows how 

many loan agents are 

involved with SBA 

loans.
7

Significant OIG Activities 

or repayment ability. These 10 audits of 7(a) loans that defaulted early 

identified improper payments of over $2.9 million due to noncompliance 

with SBA requirements. The OIG recommended recovery from the lenders 

of $2,934,692 in guaranty purchases that had previously been paid by SBA. 

For two of the reports, SBA has agreed with the recommendations to recover 

the funds. For the other eight reports, SBA either partially agreed with the 

recommendations to recover the funds, or was still reviewing the 

circumstances. 

Analysis of Industry Code Loan Data Can Assist SBA in Managing Risk of Section 7(a) 

Loan Program 

The Office of Lender Oversight (OLO) has responsibility for monitoring Section 7(a) business loans to 

identify and analyze risk through lender reviews and analysis of lender and loan data. The SBA uses 

industry codes to classify each loan and maintains this 

information in its loan accounting database. Prior to March 

2003, SBA did not include routine analysis of the loan portfolio 

by industry codes in its risk assessments. The OIG reviewed, by 

industry code, all loans guaranteed during the period October 

1996 to June 2003 to demonstrate the value of this method of 

risk analysis. For example, we found that one district office and 

one lender were responsible for most of the charge-offs and 

liquidations for two industry 

codes, and that early defaulted 

loans comprised more than 45 percent of the dollars charged off for the two 

industry codes. The finding demonstrates that this type of analysis can 

identify risk not only at the industry code level, but also at the regional, 

district office, and lender levels. In addition, SBA could combine the 

industry code analysis with other data elements to identify risk levels in 

specific types of loans or borrowers. Subsequent to our review, industry 

code analysis was incorporated in SBA’s oversight activities and is now an 

integral part of the new loan monitoring system. 

OIG Continues to Provide Substantial Resources to Counter Business Loan Fraud 

Approximately half of the OIG’s FY 2005 budget request is 

allocated to preventing fraud and unnecessary losses in SBA 

programs, with business loan fraud mitigation accounting for a 

major portion. The workload in this area is substantial and 

complex, as criminals use a variety of schemes to defraud SBA 

loan programs. Perpetrators typically submit false and fraudulent 

documents such as phony invoices, claim assets that do not exist, 

fail to disclose other SBA loans for the same business, or misuse 

loan proceeds. 

...we found that one district office 

and one lender were responsible for 

most of the charge-offs and 

liquidations for two of the industry 

codes, and that early defaulted 

loans comprised more than 45 

percent of the dollars charged off 

for the two industry codes.

Subsequent to our 

review, industry code 

analysis was 

incorporated in SBA’s 

oversight activities and 

is now an integral part 

of the new loan 

monitoring system.

Approximately half of the OIG’s 

FY 2005 budget request is 

allocated to preventing fraud and 

unnecessary losses in SBA

programs, with business loan 

fraud mitigation accounting for a 

major portion. 

...audits of 7(a) loans 

that defaulted early 

identified improper 

payments of over $2.9 

million due to noncompliance with SBA 

requirements.
8

Significant OIG Activities 

As a result of a joint investigation with the FBI, four Texas men were recently indicted in connection with 

falsely obtaining nine SBA-guarantied convenience store loans totaling $9.5 million. SBA’s guarantied 

portion was nearly $6.6 million. Among other things, the men allegedly recruited individuals to apply for 

the loans, submitted false and fraudulent documents, artificially inflated checking account deposits, and 

concealed the fact that down payments were funded by loan proceeds. In addition, one of the men 

allegedly used his position of trust as a commercial real estate escrow agent to facilitate the scheme and 

defraud a bank. 

In California, 16 individuals and two corporations were among those recently indicted in connection with 

a complex scheme to falsely obtain SBA loans. Two of the individuals controlled 60 convenience stores. 

They used fraudulent borrowers to obtain the loans, concealed their financial interests in the businesses 

and the source of cash injection, and laundered each loan’s proceeds. They applied for approximately $20 

million in loans, with $8 million having been approved and disbursed. The SBA OIG continues to 

conduct this investigation jointly with the FBI, IRS, Immigration and Customs Enforcement, Department 

of Agriculture, and California’s Alcohol and Beverage Control. 

Character Screening Reduces the Likelihood of Program Abuse 

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

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

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

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

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

processed a total of 1,565 external name check requests for the above programs. 

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

connection with the FBI’s Machine Readable Data system. The OIG refers applicants who appear to be 

ineligible to program officials for adjudication. During the last 6 months, OIG referrals resulted in SBA 

business loan program managers declining 56 applications, and disaster 

loan program officials declining eight applications, totaling 

$19,139,000 and $673,150, respectively. Denials of loans based on 

character eligibility determinations make credit available to other 

applicants who have no such issues. Nearly $263 million in loans have 

been declined during the last 10 years due to character eligibility 

issues. 

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

applications for admission to the program and the Surety Bond Guarantee Program declined two 

applications. The OIG also coordinates background investigations for Agency employees and certain 

contractor personnel. During this reporting period, the OIG initiated 79 background investigations and 

issued 23 security clearances. The OIG also adjudicated 76 background investigative reports and ensured 

that SBA’s Office of Disaster Assistance adjudicated 20 derogatory background investigative reports that 

were forwarded to it for action. Finally, the OIG processed 3,051 internal name check requests for 

various Agency activities such as success stories, Small Business Person of the Year nominees, and 

disaster assistance new hires. 

Denials of loans based on 

character eligibility 

determinations make credit 

available to other applicants 

who have no such issues.
9

Significant OIG Activities 

Fraud Awareness Briefings 

As part of its mission to heighten awareness of waste, fraud, and abuse, during this reporting period, the 

OIG conducted six briefings for 91 SBA employees. 

OIG Emphasizes Debarments 

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

to debar parties from conducting business with the Federal Government that have a history of fraud or 

otherwise lack business integrity. In the past 6 months, the OIG has intensified its efforts in making 

debarment recommendations to the SBA, as well as to other Federal 

agencies with respect to debarments of parties participating in SBA 

programs. In an effort to facilitate the Agency’s review of OIGproposed debarments, the OIG prepares a detailed proposal 

describing why a party should be debarred, supplies pertinent 

evidence and documentation supporting the debarment, and prepares 

drafts of the initial Notices of Proposed Debarments for 

transmission to the party in the event the Agency agrees that 

debarment is appropriate. 

For example, in May 2004, the OIG proposed the debarment of a previously convicted employee of a 

lender participating in the 7(a) loan program. In seeking to induce SBA to pay the 80 percent loan 

guaranty on a defaulted 7(a) loan, the employee submitted a forged authorization document purporting to 

have been issued by an SBA official. In response to the OIG recommendation that the employee be 

debarred for three years, the Agency issued a notice of proposed debarment, and is considering the party’s 

response. A summary of OIG debarment referrals and Agency debarment actions over the past 6 months 

is located in the Statistical Highlights. 

...it is in the public interest to 

debar parties from conducting 

business with the Federal 

Government that have a history 

of fraud or otherwise lack 

business integrity.
10

Significant OIG Activities 

Goal: Improve the Security Over and the Accuracy of SBA

Accounting and Management Information

The SBA depends on a complex information technology (IT) environment, which includes 38 mission 

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

difficulty producing reliable and timely financial and management information to support its operations, 

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

new Disaster Credit Management system to modernize and improve its disaster loan-making activities. 

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

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

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

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

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

financial management activities, including providing financial statements and financial performance 

information in a timelier manner. For the past few years, SBA’s external auditor has been critical of the 

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

Approximately 20 percent of the OIG budget is devoted to information security and financial 

management work. 

Progress Being Made but Vulnerabilities and Risks Exist in SBA’s Information Systems 

Security Program 

The SBA has identified 38 major systems that it is dependent on in carrying out its day-to-day operations, 

and is implementing changes and new systems as it moves to satisfy the expectations of the President’s egov initiative. One of SBA’s most significant challenges is to improve its financial management and 

performance, which are affected by the Loan Accounting System

(LAS). LAS, which has been in use since the 1970s, comprises 

approximately nine subsystems and is programmed in COmmon 

Business Oriented Language (COBOL) computer language. The 

SBA relies on LAS to account for, and report on, different aspects of 

its loan portfolio. The Agency incurs substantial risk relating to the 

continued use of LAS because the system is close to the end of its 

useful life and SBA faces the loss of contractor support for LAS 

within the next few years. 

While SBA continues to make progress in implementing its computer security program, additional 

improvements are needed to achieve compliance with evolving Federal laws, regulations and related 

standards. Specifically, SBA needs to (1) increase emphasis on the follow-up and resolution of 

weaknesses and vulnerabilities identified in audits and risk assessments, (2) strengthen its control 

environment so managers make security of information systems, which are the cornerstone of support for 

their day-to-day operations, a priority, and (3) establish standard configurations for its general support 

computer operating systems and infrastructure components to ensure secure operations. 

One of SBA’s most significant 

challenges is to improve its 

financial management and 

performance, which are 

affected by the Loan 

Accounting System...
11

Significant OIG Activities

Improvements are needed in general and application controls related to 

financial information general support systems. Our independent auditor’s 

FY 2003 review of general and application controls related to SBA’s 

financial information systems was issued during this reporting period. 

This audit followed guidance provided in the Government Accountability 

Office’s (GAO) Federal Information System Controls Audit Manual 

(FISCAM) and concluded, as it did for FY 2002, that SBA needs to 

improve (1) entity-wide security program controls, (2) access controls, (3) application software 

development and program change controls, (4) system software controls, (5) segregation of duty controls, 

and (6) service continuity controls. 

Audits issued during this reporting period relating to the security of general support systems for e-mail 

found that SBA did not follow a standard system configuration when the 

e-mail system was implemented. Changes to system configurations were 

also not made in a controlled manner. Moreover, SBA’s e-mail system is 

vulnerable to possible security exploits that could lead to SBA’s e-mail 

being compromised or becoming unavailable. The SBA also needs to 

identify the types of data that could be transmitted via e-mail, and identify 

the safeguards needed to more securely transmit sensitive e-mail. Due to 

the technical nature of the findings, these reports were issued under 

limited distribution. 

A recent review of SBA’s Loan Application Tracking System (LATS) found problems. LATS is a 

subsystem of SBA’s LAS. LATS was internally designed over 20 years ago using COBOL. LATS 

supports LAS by providing a data entry system for SBA’s loan application 

tracking process. The audit of LATS identified that (1) computer desktop 

access to the LATS transaction screens is not secure, and (2) the Chief 

Financial Officer was incorrectly designated as the sole owner of the LATS. 

As a result, there is a risk that SBA loan data could be changed or corrupted 

without detection. Additionally, guarantor information protected under the 

Privacy Act could be viewed or disclosed without permission. 

The OIG recommended establishment of a “Configuration Control Board” representing all the offices that 

have partial ownership of LAS to ensure that the needs of SBA’s different offices are fully represented. 

The SBA generally agreed with this recommendation and has taken aggressive action to address some 

findings. As the IT front is fraught with continuing threats, continued vigilance is needed to fulfill the 

requirement for a secure computer environment with reduced risks to operations. 

Financial Management is a Major Challenge for SBA 

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

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

and SBA’s external auditor noted significant internal control weaknesses that resulted in the Agency 

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

statements and the results of past loan asset sales. As a result, the external auditor has been unable to 

Improvements are needed 

in general and application 

controls related to 

financial information 

general support systems. 

...SBA’s e-mail system is 

vulnerable to possible 

security exploits that could 

lead to SBA’s e-mail being 

compromised or becoming 

unavailable.

A recent review of 

SBA’s Loan Application 

Tracking System 

(LATS) found problems.
12

Significant OIG Activities

render an opinion on SBA’s financial statements since FY 2000. For FY 2004, SBA has the added 

challenge of addressing financial management issues while accelerating their financial reporting process 

by 21⁄2 months and preparing new special purpose financial statements to support the financial report of 

the United States. 

The OIG has identified financial management as one of the Agency’s top management challenges and has 

devoted substantial resources to SBA’s annual financial statement audit to ensure a timely and thorough 

review of SBA’s actions. This has included additional resources to provide subcontractor support to the 

external auditor’s review of SBA’s new subsidy models and subsidy cost estimates, as well as increased 

funding to enable the external auditor to perform additional work needed to meet accelerated reporting 

dates and new audit requirements. 

SBA’s Administrator has made improving financial management one of 

the Agency’s top priorities. Steps to improve Agency financial 

management and reporting have focused primarily on improving the 

Agency’s models for estimating subsidy costs, improving controls over 

financial statement preparation, and correcting accounting errors related 

to loan sales and subsidy cost allowances. FY 2004 is the first full 

reporting cycle with these improvements in place. While preliminary reviews indicate that significant 

progress has been made, SBA’s actions have yet to be fully placed into operation and evaluated. 

In response to the external auditor’s FY 2002 finding that SBA’s assurance statement on the Agency’s 

internal controls was not consistent with the external auditor’s internal 

control findings, in this reporting period the OIG issued an audit report on 

the process that SBA developed to comply with Federal Managers' 

Financial Integrity Act (FMFIA) requirements. Although we did not audit 

SBA’s internal controls, we determined that SBA has not established and 

maintained an effective process for ensuring compliance with FMFIA's 

annual internal control assessment and reporting requirements. SBA 

management partially agreed with our findings and is taking steps to 

improve the critical process of evaluating and reporting on internal 

controls. 

SBA’s Administrator has 

made improving financial 

management one of the 

Agency’s top priorities. 

...SBA has not 

established and 

maintained an effective 

process for ensuring 

compliance with 

FMFIA's annual internal 

control assessment and 

reporting requirements.
13

Significant OIG Activities

Goal: Assist SBA in Improving its Small Business Development and

Government Contracting Programs

The SBA provides assistance to existing and prospective small businesses through a variety of counseling 

and training services offered by Agency partner organizations. Among these are Small Business 

Development Centers (SBDCs), the Service Corps of Retired Executives (SCORE), and Women’s 

Business Centers (WBCs). Through its broader Government contracting program, the SBA works with 

Federal agencies to establish and implement procurement goals for contracting with small, smalldisadvantaged, women-owned, service-disabled veteran-owned, and historically underutilized business 

zone (HUBZone) small businesses. The SBA also manages the Section 8(a) Business Development 

program (8(a) program), which was established to provide business development assistance to small 

businesses owned by socially and economically disadvantaged individuals and to help them access the 

$277 billion Federal procurement market. These programs demand effective and efficient management, 

outreach, and service delivery. Determining whether business development and Government contracting 

programs meet these demands depends on reliable internal and external data for effective monitoring and 

oversight. 

8(a) Program Lacks a Systematic Approach to Providing Business Development Assistance 

For years the GAO and the OIG have expressed concerns about several aspects of the 8(a) program. The 

program has been one of the Agency’s top management challenges since the inception of the OIG 

challenges report. The OIG is concerned that the program does not (1) place adequate emphasis on 

business development to enhance 8(a) firms’ ability to compete, (2) adequately ensure that only 8(a) firms 

with economically disadvantaged owners in need of business development remain in the program, 

(3) promote the equitable distribution of contracting opportunities among 8(a) participants, and (4) have a 

database that contains the information needed to successfully manage the program. 

During this reporting period, the OIG completed an audit survey that determined SBA has not established 

criteria for delivering and tracking 8(a) business development services. Due to the lack of guidance, 

individual district offices developed and delivered varying types of assistance. 

This unstructured strategy may have resulted in program participants not 

receiving the full benefits the program is intended to offer. Participants also may 

not have been treated equally in obtaining business development services. 

Because business development activities are not tracked, SBA is unable to 

determine whether it is fulfilling its mission as outlined in the Small Business Act, 

or if it is efficiently and effectively utilizing Government resources to deliver 

services. The SBA has now committed to issuing in-depth guidance on business 

development activities by June 1, 2005. Further, a new electronic annual review 

process—planned to debut in 2005—will implement procedures for collecting the 

required data. 

...SBA has not 

established criteria 

for delivering and 

tracking 8(a) 

business 

development 

services.
14

Significant OIG Activities

Illegal Schemes Continue in 8(a) Program 

Over the years, the 8(a) program has been subject to fraudulent—and sometimes elaborate—schemes 

designed to misrepresent the true status of a business. During this reporting period, the president of a 

defunct construction company was sentenced to seven years in jail, 

ordered to pay nearly $6.5 million in restitution, and assessed other 

penalties for defrauding the 8(a) program. The subject had 

improperly transferred $495,000 from his construction business 

account to his personal offshore account in the Bahamas to hide 

money from creditors, while closing the business and abandoning its 

contracts and subcontractors. He also falsely represented that he 

had relocated his personal residence to Pennsylvania (the location of 

his Section 8(a) certified business) and that he controlled the firm’s day-to-day operations. Moreover, he 

and another individual submitted false financial statements to obtain bonding for the construction firm’s 

bids and contracts. The president also falsely certified to the Department of Veterans Affairs (VA) that he 

was paying and intended to pay his subcontractors on a timely basis from the proceeds of a VA Medical 

Center contract. We conducted this investigation jointly with the Naval Criminal Investigative Service, 

VA OIG, and the Defense Criminal Investigative Service. 

Improvements Needed in Oversight of SBA-Sponsored and Co-Sponsored Activities 

In order to promote and better fulfill the Agency’s mission to help small businesses succeed, over time 

SBA has shifted the focus of the district offices—involving them more in outreach activities with public 

and private entities. The Small Business Act gives SBA statutory authority to sponsor solely, or in 

conjunction with other entities, a wide variety of training and counseling programs to assist small 

businesses. Events planned and conducted solely by SBA are considered SBA-sponsored events. Events 

planned or conducted jointly with public or private entities are considered co-sponsored events. SBA has 

statutory authority to accept cash and other types of gifts for use in conducting events that provide 

technical and managerial assistance to small businesses and for other uses in carrying out the purpose of 

the Small Business Act. 

In September 2004, the OIG issued a summary audit report of SBA-sponsored and co-sponsored events 

conducted by district offices. The report summarized the results of 

audits done in FYs 2002 and 2003 of SBA-sponsored and cosponsored activities of three district offices. It also included 

information gathered about the same type of activities of six other 

district offices. We found that, between May 1999 and November 

2002, nine district offices conducted 49 SBA-sponsored and cosponsored events that were not in compliance with Federal laws or 

SBA’s policies and procedures. 

Over the years, the 8(a) 

program has been subject to 

fraudulent—and sometimes

elaborate—schemes designed to 

misrepresent the true status of a 

business. 

...between May 1999 and 

November 2002, nine district 

offices conducted 49 SBAsponsored and co-sponsored 

events that were not in

compliance with Federal laws or 

SBA’s policies and procedures.
15

Significant OIG Activities

We summarized noncompliances into 19 categories. There were three especially common areas of 

noncompliance. First, in eight district offices, gift funds to the Federal Government were not deposited 

into SBA’s Business Assistance Trust (BAT) Fund as required by 

law. Second, eight district offices collected registration and vendor 

fees during SBA-sponsored and not-for-profit co-sponsored events 

without having the appropriate authorization. Third, seven district 

offices solicited and accepted gift funds from parties having a 

business relationship with SBA without conducting conflict of 

interest determinations. Some of the donors were participants in 

SBA’s lending programs who had actions pending with the district 

offices shortly before or after the donations. 

Our efforts resulted in SBA (1) issuing more detailed guidance concerning outreach activities, (2) revising 

existing and developing new standard operating procedures for SBA-sponsored and co-sponsored 

activities, (3) providing training for SBA personnel, and (4) establishing the Office of Strategic Alliances 

to oversee all outreach activities. 

Another recent co-sponsorship-related audit identified problems with the collection of program income 

and a procurement action by the Silicon Valley Small Business Development Center (SVSBDC). The cosponsorship agreement executed in the San Francisco District Office documented a relationship in which 

SBA, in conjunction with other entities, would provide training 

and counseling programs to assist small businesses. Through 

the Entrepreneur Center (E-Center), the SVSBDC offered small 

businesses and entrepreneurs one facility where they could 

obtain assistance with their business needs. The audit 

concluded that (1) $57,645 of program income for the SVSBDC 

was inappropriately collected, commingled with unrelated 

funds, and disbursed by the San Jose Service Corps of Retired 

Executives (SCORE) office, and (2) $225,000 was paid for 

contractor services that were not acquired in accordance with established guidelines. These conditions 

occurred because the district office improperly implemented procedures for handling funds of the ECenter and its co-sponsors that were contrary to the SBDC Cooperative and Co-sponsorship Agreement, 

and influenced the sole source selection of the SVSBDC-Technical Assistance Program Director in 

possible violation of ethics and employee standards of conduct rules. As a result, the SVSBDC was 

unable to collect and use $57,645 in program income, and authorized $225,000 for contracted services 

that did not comply with the competitive procurement requirements of the co-sponsorship agreement. 

OIG Responds to Complaint Regarding a Small Business Set-Aside Contract

Under the Small Business Act, Federal agencies can enter into procurements by using “small business setasides” (i.e., procurements reserved exclusively for small businesses). In addition, to promote an 

equitable Federal procurement policy, the Federal Government has established Government-wide small 

business goals. Currently, the goal is to provide 23 percent of the Federal Government’s procurement 

expenditures to small businesses. SBA, as the proponent of small business, should make every effort to 

ensure that only eligible small businesses receive these set-asides. Further, in order to effectively 

Some of the donors were 

participants in SBA’s lending 

programs who had actions 

pending with the district offices 

shortly before or after the 

donations. 

Another recent co-sponsorshiprelated audit identified problems

with the collection program income 

and a procurement action by the 

Silicon Valley Small Business 

Development Center...
16

Significant OIG Activities 

evaluate the support the Federal Government provides to small businesses, the percentage of Government 

procurements going to small businesses must be accurately recorded. 

The OIG conducted a review based on a complaint we received concerning the award of a small business 

set-aside. Prior to the audit, SBA’s Office of Government Contracting reviewed a protest to this award 

and issued a size determination that, in essence, stated that the company 

was a small business. The OIG determined that the small business 

recipient was ineligible to receive the set-aside because it actually 

supplied the product of a large business. The product manufacturer was 

considered large based on its affiliation with a large business. The 

Agency implemented our recommendations to (1) advise the procuring 

agency that the contract should not be counted as a small business 

contract, and (2) provide guidance to SBA size determination officials to 

increase awareness of the need to consider affiliation issues. 

...the small business 

recipient was ineligible to 

receive the set-aside because 

it actually supplied the 

product of a large business. 
17

Significant OIG Activities 

Goal: Assist SBA Management in Identifying and Resolving

Persistent and Emerging Management Issues

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

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

have been designated as major management challenges. 

Top Management Challenges 

In May 1997, OIG issued a report on “Critical Management Issues Facing SBA.” Since then we have 

responded to congressional requests and the Reports Consolidation Act of 2000 by refining these issues 

into reports on the most serious management challenges confronting the Agency each fiscal year. The list 

of challenges represents areas identified as being particularly vulnerable to fraud, waste, abuse, or 

mismanagement, or that otherwise pose significant risk. The challenges generally have been the subject 

of one or more OIG or GAO reports, have been confirmed by OIG investigations of fraud or abuse, and/or 

have resulted from our general knowledge of Agency management issues. 

The most serious Management Challenges that faced SBA at the beginning of FY 2004 were as follows: 

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

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

to provide reliable, timely and accurate financial information. 

• Information systems security needs improvement. 

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

a human capital management/transformation strategy. 

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

• SBA needs to continue improving lender/participant oversight. 

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

companies receive access to business development and standards for determining economic 

disadvantage are clear and objective, so that more eligible companies receive 8(a) contracts. 

• SBA needs to clarify its rules intended to deter Section 8(a) Business Development participants 

from passing through procurement activity to non-Section 8(a) Business Development firms. 

• Preventing loan agent fraud requires additional measures. 

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

operations. 
18

Significant OIG Activities 

For each management challenge, we provide the Agency with recommended remedial actions together 

with our assessment of Agency progress on each item during the 

preceding fiscal year. During this reporting period, at the 

Administrator’s direction, the Agency focused more attention on the 

challenges by, among other things, placing them on the Management 

Board agenda and assigning responsibility for overseeing the Agency 

response to the management challenges to the Chief Operating 

Officer. As a result, SBA has made progress on many of the challenges, especially on the managing for 

results challenge. While this is encouraging, much more remains to be done. By their nature, these 

challenges require continued long-term commitment and effort by the Agency. 

For more information on the OIG’s assessment of the SBA’s FY 2004 Management Challenges, please 

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

Small Business Investment Company (SBIC) Program Poses Significant Risk to Taxpayer 

Money 

As a result of a 2003 OIG audit of the Agency’s oversight of the SBIC program and the conclusions of 

the FY 2003 financial statement audit, in May 2004 the OIG issued a new management challenge on the 

SBIC program. One of the most important challenges facing SBA today is that the current structure and 

oversight practices of the SBIC program place too much risk on taxpayer money. 

SBIC program officials have estimated that, given the rapidly mounting losses in the portfolio, the 

cumulative cost of the SBIC program to the Federal Government is projected to be almost $2 billion on 

an outstanding portfolio of $5 billion. The problem areas 

relating to program structure and oversight that we identified 

included (1) SBA’s “profits” were not proportional to the 

investment that the Agency makes in SBICs, (2) insufficient 

incentives exist to encourage SBICs to pay back principal 

debt to SBA as quickly as possible, 

(3) SBA’s policy of allowing extensive time for financially 

troubled SBICs to attempt rehabilitation has allowed SBIC 

assets to decrease, thereby reducing the potential for recovery, and (4) the vast majority of capitally 

impaired participating securities SBICs that have been transferred to liquidation were not being liquidated 

or were not being liquidated in compliance with Agency procedures. In addition, the subsidy model had 

underestimated the cost of the program, with the technical assumptions more optimistic than actual 

performance. Program officials are taking actions, including pursuing new legislation that will strengthen 

the assessment and management of financial and regulatory risks inherent in the SBIC program. 

In accordance with the Reports Consolidation Act of 2000, this challenge is being incorporated with other 

Agency challenges in our Report on the Most Serious Management Challenges Facing the Small Business 

Administration in FY 2005. The complete FY 2005 report will be included in SBA’s annual Performance 

and Accountability Report this fall. 

...given the rapidly mounting losses in 

the portfolio, the cumulative cost of the 

SBIC program to the Federal 

Government is projected to be almost 

$2 billion on an outstanding portfolio 

of $5 billion.

During this reporting period, at 

the Administrator’s direction, 

the Agency focused more 

attention on the challenges...
19

Significant OIG Activities

Other Significant Management Issues 

OIG Promotes Improved Management Through Reviews of Agency Proposals 

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

issues through reviews of proposed legislation and regulations affecting SBA, as well as internal standard 

operating procedures (SOPs), agency procedural and policy notices, and other internal agency documents. 

From March 1, 2004, through September 30, 2004, the OIG reviewed approximately 95 proposed 

legislative and regulatory changes and approximately 56 internal SBA SOPs, notices, and other 

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

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

For example, both the GAO and the OIG have expressed concerns in the past about the lack of 

independence of the Office of Lender Oversight (OLO) from the Office of Capital Access (OCA). Due to 

the fact that OCA’s mission, in part, is to promote SBA business loans, 

the GAO and OIG believed that OCA may have a conflict of interest 

that could prevent OLO from effectively performing its lender oversight 

functions. The OIG raised a number of concerns in response to an 

Agency proposal to restructure OLO’s responsibilities. As a result, the 

OIG was able to obtain agreement from the Agency to make several 

fundamental revisions in the proposed restructuring of OLO functions to 

promote independence, including giving greater authority to an Agency 

committee to oversee OLO. 

Decrease in Reports with Overdue Management Decisions

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

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

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

decisions on all findings and recommendations within a maximum of 6 

months of report issuance. As of September 30, 2004, management 

decisions on 18 OIG reports were overdue (See Appendix V). This is a 

decrease from the 21 reports with overdue management decisions 

mentioned in the previous semiannual period. We are optimistic that this 

trend will continue as we work with the Agency to resolve these issues. 

The OIG was able to obtain 

agreement from the Agency 

to make several 

fundamental revisions in 

the proposed restructuring 

of OLO functions...

As of September 30, 

2004, management 

decisions on 18 OIG 

reports were overdue...
20

Significant OIG Activities

Goal: Strengthen our ability to identify and have maximum impact on

the most significant SBA issues

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

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

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

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

OIG Auditors Are Assigned to National Guaranty Purchase Center 

In January 2004, SBA centralized the Section 7(a) business loan guaranty purchase and liquidation 

processes at the National Guaranty Purchase Center (Center). The purpose of this action was to improve 

the quality and consistency of guaranty purchase decisions and liquidation actions and reduce the number 

of employees that perform these tasks. The action to centralize this function responds to the OIG 

management challenge on guaranty purchases. In May 2004, four auditors from the OIG Credit Programs 

Group were assigned to the Center to perform audits of the guarantied loan program and provide 

oversight. 

The OIG has conducted numerous audits of the 7(a) loan program throughout the years and made many 

recommendations to improve the process, including centralization. 

Before the Center was established, the auditors had to either travel 

to the district offices to review the loan files or arrange to have the 

files sent to the auditors’ location. This not only delayed the audit 

process but, in some cases, placed a burden on the district offices 

when active loan files were requested for audit. With the 

centralization of the purchase process and the assignment of several 

OIG auditors to the Center, access to loan files should be easier, 

quicker, and less disruptive to the Agency. 

During the last 6 months, the OIG completed a major review of the transfer of operations from the district 

offices to the Center and initiated a follow up audit on the guaranty purchase process. For a discussion of 

the audit, see the first goal in this Semiannual Report. 

OIG Issues SOP on Telework Policy 

Section 359 of the FY 2001 Department of Transportation and Related Agencies Appropriations Act, 

Public Law 106-346, states, "Each executive agency shall establish a policy under which eligible 

employees of the agency may participate in telecommuting to the maximum extent possible without 

diminishing employee performance." Although SBA has a Telecommuting SOP in place, the OIG 

believed it was important to issue its own telework policy. 

With the centralization of the 

purchase process and the 

assignment of several OIG 

auditors to the Center, access to 

loan files should be easier, 

quicker, and less disruptive to 

the Agency.
21

Significant OIG Activities 

There are many beneficial aspects to the OIG's Teleworking policy—both direct and indirect. Direct 

benefits to the OIG include: a reduction in payments for commuter benefits; a built-in incentive for 

recruitment and retention of high-caliber candidates; flexibilities to 

provide for employees with short-term or long-term health 

conditions; and improved work quality, productivity, and 

effectiveness. Important indirect benefits to the OIG include 

improved employee morale and communication between employee 

and supervisor. The benefits to employees are equally important—

less cost and time commuting. 

Important indirect benefits to 

the OIG include improved 

employee morale and 

communication between 

employee and supervisor.
22

Statistical Highlights 

FY 2004 6-Month Productivity Statistics 

April 1, 2004, through September 30, 2004 

Office-wide Dollar Accomplishments Totals 

A. Potential Investigative Recoveries and Fines......................................................................... $11,751,411 

B. Loans Not Made as Result of Investigations and Name Checks............................................ $21,831,550 

C. Disallowed Costs Agreed to by Management .......................................................................... $2,244,110

D. Recommendations that Funds Be Put to Better 

 Use Agreed to by Management........................................................................................... $300,069

Total ........................................................................................................................................... $36,127,140

Efficiency and Effectiveness Activities

A. Reports Issued........................................................................................................................................ 27 

B. Recommendations Issued..................................................................................................................... 140 

C. Dollar Value of Costs Questioned............................................................................................ $3,114,730 

D. Dollar Value of Recommendations that Funds 

Be Put to Better Use............................................................................................................ $671,380 

E. Collections as a Result of Questioned Costs ............................................................................... $24,000* 

Follow-up Activities

A. Recommendations Closed.................................................................................................................... 151 

B. Disallowed Costs Agreed to by Management ......................................................................... $2, 244,110

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

 Agreed to by Management.................................................................................................. $300,069 

D. Unresolved Recommendations............................................................................................................. 173 

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

A. Legislation Reviewed............................................................................................................................. 89 

B. Regulations Reviewed.............................................................................................................................. 6 

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

D. Other Issuances Reviewed**................................................................................................................. 45 

*To be collected in installments. 

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

communications, which frequently involve the implementation of new programs and policies. 
23

Statistical Highlights

Summary of Indictments, Convictions, and Case Activity

A. Indictments from OIG Cases................................................................................................................ 58* 

B. Convictions from OIG Cases ................................................................................................................. 17 

C. Cases Opened ......................................................................................................................................... 59 

D. Cases Closed .......................................................................................................................................... 65 

*Includes eight indictments that occurred in the last Semiannual reporting period but were not reported. 

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of 

 OIG Investigations......................................................................................................... $11,751,411 

B. Loans/Contracts Not Approved as a Result of OIG Investigations.......................................... $2,019,400 

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

 Check Program .............................................................................................................. $19,812,150

Total ........................................................................................................................................... $33,582,961

SBA Personnel Actions Taken as a Result of Investigations

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

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

C. Suspensions .............................................................................................................................................. 1

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

E. Other......................................................................................................................................................... 1 

Program Actions Taken as a Result of Investigations 

A. Debarments Recommended to the Agency .............................................................................................. 4 

B. Debarments pending at the Agency.......................................................................................................... 4 

C. Proposed Debarments issued by the Agency ........................................................................................... 1 

D. Final Debarments issued by the Agency.................................................................................................. 0 

Summary of OIG Hotline Operation

A. Total Fraud Line Calls/Letters ............................................................................................................. 112 

B. Total Calls/Letters Referred to Investigations Division......................................................................... 26 

C. Total Calls/Letters Referred to SBA or Other Federal Agencies ........................................................... 72 

D. Total Calls/Letters Needing No Action.................................................................................................. 14 
24

Statistical Highlights 

FY 2004 Full Year Productivity Statistics 

October 1, 2003, through September 30, 2004 

Office-wide Dollar Accomplishments 

A. Potential Investigative Recoveries and Fines......................................................................... $17,887,395 

B. Loans Not Made as Result of Investigations and Name Checks............................................ $35,367,934 

C. Disallowed Costs Agreed to by Management .......................................................................... $3,255,810

D. Recommendations that Funds Be Put to Better 

 Use Agreed to by Management........................................................................................... $835,539

Total ........................................................................................................................................... $57,346,678

Efficiency and Effectiveness Activities

A. Reports Issued........................................................................................................................................ 45 

B. Recommendations Issued..................................................................................................................... 261 

C. Dollar Value of Costs Questioned............................................................................................ $7,724,603 

D. Dollar Value of Recommendations that Funds 

Be Put to Better Use............................................................................................................ $678,380 

E. Collections as a Result of Questioned Costs ............................................................................ $1,422,692 

Follow-up Activities

A. Recommendations Closed.................................................................................................................... 201 

B. Disallowed Costs Agreed to by Management .......................................................................... $3,255,810

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

 Agreed to by Management.................................................................................................. $835,539 

D. Unresolved Recommendations............................................................................................................. 366 

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

A. Legislation Reviewed........................................................................................................................... 131 

B. Regulations Reviewed............................................................................................................................ 17 

C. Standard Operating Procedures Reviewed ............................................................................................. 21 

D. Other Issuances Reviewed*................................................................................................................... 54 

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

communications, which frequently involve the implementation of new programs and policies. 
25

Statistical Highlights 

Summary of Indictments, Convictions, and Case Activity

A. Indictments from OIG Cases.................................................................................................................. 75 

B. Convictions from OIG Cases ................................................................................................................. 30 

C. Cases opened........................................................................................................................................ 109 

D. Cases closed ......................................................................................................................................... 127 

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of 

 OIG Investigations......................................................................................................... $17,887,395 

B. Loans/Contracts Not Approved as a Result of OIG Investigations.......................................... $5,031,292 

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

 Check Program .............................................................................................................. $30,336,642

Total ........................................................................................................................................... $53,255,329

SBA Personnel Actions Taken as a Result of Investigations

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

B. Resignations/Retirements......................................................................................................................... 3 

C. Suspensions .............................................................................................................................................. 1

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

E. Other......................................................................................................................................................... 1 

Program Actions Taken as a Result of Investigations 

A. Debarments Recommended to the Agency .............................................................................................. 4 

B. Debarments pending at the Agency.......................................................................................................... 4 

C. Proposed Debarments issued by the Agency ........................................................................................... 1 

D. Final Debarments issued by the Agency.................................................................................................. 0 

Summary of OIG Hotline Operation

A. Total Fraud Line Calls/Letters ........................................................................................................... 308* 

B. Total Calls/Letters Referred to Investigations Division......................................................................... 45 

C. Total Calls/Letters Referred to SBA or Other Federal Agencies ......................................................... 135 

D. Total Calls/Letters Needing No Action................................................................................................ 128 

*Total no longer includes hang-ups. 
26

Appendix 

Appendix I 

OIG Reports Issued 

April 1, 2004, through September 30, 2004 

Title Report 

Number 

Issue 

Date 

Questioned 

Costs 

Funds for 

Better Use 

Capital Access

The SBIC Program: At Significant Risk for Losses 4-21 5/24/2004 

Audit of SBA Guarantied Loan 4-25 6/22/2004 $177,166.00 

Audit of an Early Defaulted Loan 4-26 6/22/2004 $235,008.00 

Audit of SBA Guarantied Loan 4-28 7/9/2004 $142,549.00 

Audit of an Early Defaulted Loan 4-29 7/12/2004 $373,760.00 

Audit of SBA Guarantied Loan 4-32 7/29/2004 $542,663.00 

Audit of SBA Guarantied Loan 4-33 7/30/2004 $362,207.00 

Audit of an Early Defaulted Loan 4-36 8/10/2004 $740,000.00 

Memorandum Report – Survey of Risk Management by 

Industry Code 

4-37 8/11/2004 

Audit of SBA Guarantied Loan 4-38 8/24/2004 $83,576.00 

Management Advisory Report on the Transfer of 

Operations to the National Guaranty Purchase Center 

4-39 8/31/2004 

Audit of SBA Guarantied Loan 4-40 9/13/2004 $246,460.00 

Audit of an Early Defaulted Loan 4-43 9/17/2004 $293,823.00 

Program Subtotal 13 Reports $2,525,832.00 $671,380.00 

Agency Management 

Audit of SBA’s Loan Application Tracking System 4-18 4/5/2004 

Audit of SBA’s Information Systems Controls Fiscal 

Year 2003 

4-19 4/29/2004 

Single Audit of Federal Financial Assistance Programs 

Service Corps of Retired Executives (SCORE) 

4-30 7/13/2004 

Audit of SBA’s Process for Complying with the Federal 

Managers’ Financial Integrity Act Reporting 

Requirements 

4-34 7/29/2004 

Single Audit of Federal Financial Assistance Programs 

Bronx Museum of the Arts 

4-35 8/3/2004 $256,407.00 

Audit of Selected SBA computer General Support 

Systems 

4-41 9/10/2004 

Audit of SBA’s Email System 4-42 9/10/2004 

Single Audit of the University of the Virgin Islands 4-23 6/15/2004 

Single Audit of Federal Financial Assistance Programs 

Greenpoint Manufacturing and Design Center 

4-24 6/15/2004 $331,489.00 

Program Subtotal 9 Reports $587,896.00 

Government Contracting and 

Business Development

 

Audit Report of Small Business Set-Aside Contract to 

Measurement Instruments 

4-20 5/18/2004 

Business Development provided by SBA’s 8(a) 

Development Program 

4-22 6/2/2004 

Audit of San Francisco District Office Administrative 

Activities Related to the Silicon Valley Small Business 

Development Center 

4-27 6/29/2004 
27

Appendix

Appendix I (cont.) 

OIG Reports Issued 

April 1, 2004, through September 30, 2004 

Title Report 

Number 

Issue 

Date 

Questioned 

Costs 

Funds for 

Better Use 

Audit of Expenses for Meals and Refreshments Incurred 

by the Latino Coalition Foundation on SBA 7(j) 

Cooperative Agreement 

4-31 7/19/2004 $1,001.80 

Audit Report – Summary Audit of SBA-Sponsored and 

Cosponsored Events Conducted by District Offices 

4-44 9/24/2004 

Program Subtotal 5 Reports $1,001.80 $0 

TOTALS (all programs) 27 Reports $3,114,729.80 $671,380.00 
28

Appendix

Appendix II 

OIG Reports with Questioned Costs 

Reports Recs* Questioned 

Costs** 

Unsupported 

Costs**

A. For which no management decision 

had been made by March 31, 2004 8 17 $6,339,311.10 $2,557,231.00 

B. Which were issued during the period 10 11 $3,114,729.80 $0 

Subtotals (A + B) 18 28 $9,454,040.90 $2,557,231.00 

C. For which a management decision 

was made during the reporting period 6 6 $3,368,410.00 $376,106.00 

(i) Disallowed costs 3 3 $2,244,110.00 $376,106.00 

(ii) Costs not disallowed 3 3 $1,124,300.00 $0 

D. For which no management decision 

had been made by September 30, 2004 12 22 $6,085,630.90 $2,181,125.00 

* Recommendations: reports may have more than one recommendation. 

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

Appendix III 

OIG Reports with Recommendations that Funds Be Put to Better Use 

 Reports Recs* Recommended Funds 

For Better Use

A. For which no management decision had 

been made by March 31, 2004 4 4 $833,250.00 

B. Which were issued during the period 3 3 $671,380.00 

Subtotals (A + B) 7 7 $1,504,630.00 

C. For which a management decision was 

made during the reporting period 2 2 $300,069.00 

(i) Recommendations agreed to by 

SBA management 0 0 $0 

(ii) Recommendations not agreed to 

by SBA management 2 2 $300,069.00 

D. For which no management decision had 

been made by September 30, 2004 5 5 $1,204,561.00 

* Recommendations; reports may have more than one recommendation. 
29

Appendix 

Appendix IV 

OIG Reports with Non-Monetary Recommendations 

 Reports Recommendations 

A. For which no management decision had been made by 

March 31, 2004 27 163 

B. Which were issued during the period 14 126 

Subtotals (A + B) 41 289 

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

least one recommendation in the report) during the 

reporting period 24 143 

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

recommendation in the report) had been made by 

September 30, 2004 31* 146 

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

recommendations that fall under both C&D. 
30

Appendix

Appendix V 

OIG Reports From Prior Semiannual Periods 

with Overdue Management Decisions 

as of September 30, 2004 

Title Number Issued Status 

Georgia District Office Sponsorship 

Activities 

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

recommendation 1.A. 

Impact of Loan Splitting on Borrowers and 

SBA 

2-31 9/30/02 Awaiting management decision on two 

recommendations. 

Eligibility of 15 HUBZone Companies and a 

Review of the HUBZone Empowerment 

Contracting Program’s Internal Controls 

3-05 1/22/03 Awaiting management decision on outstanding 

recommendation; expected by 10/31/04. 

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

recommendation 1.A. 

Asset Sales Program 3-19 3/31/03 Recommendations are in management resolution 

process. 

SBA’s Information System Controls for FY 

2002 

3-20 3/31/03 Awaiting management decisions on one 

outstanding recommendation; expected by 

11/30/04. 

Equity Injection in the SBA 7(a) Loan 

Guaranty Program 

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

resolution. 

The Microloan Program: Moving Toward 

Performance Management (Inspection) 

3-26 5/13/03 Two recommendations are in management 

resolution. 

Early Defaulted Loan to 2B Systems, Inc. 3-30 6/19/03 One recommendation in management resolution.

SBA’s Acquisition, Development and 

Implementation of the Joint Accounting and 

Administrative Management System 

3-32 6/20/03 Awaiting management decision on two 

outstanding recommendations; expected by 

11/30/04. 

SBIC Oversight 3-33 7/1/03 One recommendation in management resolution. 

Audit of the National Women’s Advisory 

Council 

3-35 7/28/03 Awaiting management decision on one 

outstanding recommendation; eight 

recommendations are in management resolution.

Insufficient Proof of Citizenship Status for 

SBA Loans (Inspection) 

3-43 9/30/03 Awaiting management decision on one 

outstanding recommendation. 

SBA’s Federal and State Technology 

Partnership (FAST) Program 

4-05 12/30/03 Awaiting management decision on outstanding 

recommendations; expected by 10/31/04. 

Puerto Rico & US Virgin Island DO 

Cosponsorship and SBA-Sponsored 

Activities 

4-07 1/20/04 Awaiting management decision. 

Enforcement of SBA’s IT Enterprise 

Architecture During the Development of the 

Disaster Credit Management System 

4-14 3/2/04 Awaiting management decision on one 

outstanding recommendation. 

SBA’s Administration of the Procurement 

Activities of Asset Sale Due Diligence 

Contracts and Task Orders 

4-16 3/17/04 Awaiting management decision on outstanding 

recommendations; expected by 10/31/04. 

SBA’s FY 2003 Financial Statements – 

Management Letter 

4-17 3/23/04 One recommendation in management resolution. 
31

Appendix

Appendix VI 

OIG Reports Without Final Action as of September 30, 2004

Report 

Number 

Title Date 

Issued 

Date of 

Management 

Decision 

Final 

Action 

Target 

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

87H002017 NOAA Computer Workstation Contracts 6/18/98 3/01/99 3/31/02 

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

0-14 7(a) Service Fee Collections 3/30/00 8/22/00 9/30/03 

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

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

0-31 Boscart Construction, Inc. 9/30/00 2/26/01 10/22/04 

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

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

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

1-16 SBA’s Follow-up on SBLC Examinations 8/17/01 9/25/01 12/31/03 

1-19 PLP Oversight Process 9/27/01 8/27/02 12/31/03 

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

1-20 Agreed-Upon Procedures Report on Sensitive Payments 9/28/01 12/18/01 11/30/03 

2-12 Improvements in the SBLC Oversight Process 3/20/02 8/27/02 ** 

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

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

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

2-27 SBA’s Experience with Defaulted Franchise Loans 9/16/02 12/19/02 6/30/03 

2-29 Internal Control Over Colson Services Corporation’s 

Contract as Central Servicing Agent for SBA’s CDC 

Program 

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

2-31 Impact of Loan Splitting on Borrowers and SBA 9/30/02 7/12/04 10/9/04 

2-34 SBA’s Controls over the Access, Disclosure and Use of 

Social Security Numbers by Third Parties 

9/30/02 7/23/03 9/15/03 

3-02 Performance Measurement in the Federal and State 

Technology (FAST) Program 1/3/003 9/30/03 12/1/03 

3-05 Eligibility of 15 HUBZone Companies and a Review of the 

HUBZone Empowerment Program’s Internal Controls 1/22/03 7/10/03 7/21/03 

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

Loan Program 

1/30/03 *** ** 

3-10 504 Loan Program Oversight 2/6/03 10/1/03 12/31/03 

3-13 Economic Injury Disaster Loans 3/14/03 *** ** 

3-14 TEP Consulting, Inc. 3/14/03 4/10/03 12/31/03 
32

Appendix

Appendix VI (cont.) 

OIG Reports Without Final Action as of September 30, 2004

Report 

Number

Title Date 

Issued

Date of 

Management 

Decision

Final 

Action 

Target

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

Enterprise 3/20/03 6/04/03 10/15/03 

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

3-21 Equity Injection in the SBA 7(a) Loan Guaranty Program 3/31/03 5/27/04 12/30/04 

3-23 Service Corps of Retired Executives Program 4/11/03 9/30/03 6/30/04 

3-24 SBA’s FY 2002 Financial Statements – Management Letter 4/14/03 *** ** 

3-26 Microloan Program: Moving Toward Performance 

Management 5/13/03 8/28/03 ** 

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

the Joint Accounting and Administrative Management 

System 

6/30/03 *** ** 

3-33 SBIC Oversight 7/1/03 10/6/03 ** 

3-34 SBA’s Compliance with JFMIP Property Management 

System Requirements 7/23/03 9/11/03 ** 

3-35 National Women’s Business Council 7/28/03 9/11/03 ** 

3-36 Audit of an Early Defaulted Loan 8/19/03 10/1/03 9/30/04 

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

Management System 9/24/03 12/11/03 ** 

3-41 SBA Guarantied Loan to Concrete Transport, Inc. 9/29/03 4/22/04 8/31/04 

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

4-02 Early Defaulted Loan to Flower Mound Conoco 11/24/03 8/10/04 11/30/04 

4-09 Review of SBA Purchase Cards 1/26/04 8/24/04 12/31/04 

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

4-13 Early Defaulted Loan to Ocumed Group, Inc. 3/2/04 4/6/04 10/31/04 

4-14 Enforcement of SBA’s IT Enterprise Architecture During 

the Development of the Disaster Credit Management 

System 

3/2/04 7/12/04 8/31/04 

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

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

Asset Sale Due Diligence Contracts and Task Orders 3/17/04 5/12/04 ** 

4-17 SBA’s FY 2003 Financial Statements – Management Letter 3/23/04 5/14/04 ** 

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

4-19 SBA’s Information Systems Controls FY 2003 4/29/04 *** ** 

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

Development Program 

6/2/04 7/14/04 ** 
33

Appendix

Appendix VI (cont.) 

OIG Reports Without Final Action as of September 30, 2004

Report 

Number

Title Date 

Issued

Date of 

Management 

Decision

Final 

Action 

Target

4-25 SBA Guarantied Loan 6/22/04 7/1/04 12/31/04 

4-26 Early Defaulted to Northwest Conoco 6/22/04 7/1/04 12/31/04 

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

Requirements 7/29/04 9/9/04 ** 

** Target dates vary with different recommendations. 

*** Management decision dates vary with different recommendations 
34

Appendix 

Appendix VII 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of September 30, 2004* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

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

participants should no longer be considered economically 

disadvantaged based on their ownership interest in their 

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

residence, and the net worth of their spouses.

12/21/01 10/30/02

98-03-01 3/31/98 Establish a loan agent monitoring system. 7/21/98 9/30/99 

87H002017 6/18/98 Provide definitive guidance and definitions to evaluate the 

manufacturing criteria shown in regulations. 

11/19/01 3/31/03 

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

determining how effectively and efficiently the Section 

8(a) program is operating. 

9/28/01 7/31/03 

1-19 9/27/01 Revise the scoring for the annual review process to ensure 

the volume and weighting of point values of other 

questions does not offset low scores for eligibility and 

credit quality. 

3/27/02 12/31/03 

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

and enforcement actions. 

8/27/02 12/31/03 

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

implement the policies, procedures and practices for the 

following: (1) full integration of the information security 

approach and implementation process; (2) coordination 

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

guidance to the program office to implement information 

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

effectiveness of each part of information technology 

security. 

6/28/02 11/17/03 

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

agent (FTA) activities and terminate the existing contract 

with the FTA when a new contract can be enacted. 

12/10/03 3/31/06 

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

and services. Report these contract costs in proposed 

Master Reserve Fund (MRF) financial statements so future 

FTA contracts will have historical cost data for comparison 

purposes.

10/15/03 11/17/03

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

to address financial risk, address the specific requirements 

of the Section 504 loan program, and incorporate a 

performance-driven scoring system. 

10/01/03 12/31/03 

3-26 5/13/03 Develop a comprehensive Microloan Program SOP and a 

systematic approach to disseminate guidance. 

8/28/03 12/31/04 

*These are a subset of the universe of recommendations without final actions. 
35

Appendix 

Appendix VII (cont.) 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2004* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

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

(SBICs) to ensure it includes requirements to perform 

quarterly risk assessments for capitally impaired SBICs, 

include an analysis of potential for repayment of 

outstanding leverage, and determine what criteria should be 

used to recommend an SBIC be transferred to liquidation. 

10/6/03 12/28/03 

3-35 7/28/03 That NWBC Executive Director require FEW to provide 

justification for receiving $579,368 from the Silicon Valley 

I and II, New England, New York and Mid-West Forums 

base on estimated expenses incurred. After reviewing the 

justification, determine whether any income in excess of 

expenses should be recovered. If a determination to seek 

recovery is made, ensure that the CFO recovers the funds 

from the responsible party or parties. 

9/3/03 6/30/04 

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

less any subsequent recoveries, for loan number 343 767 

4004. 

10/1/03 9/30/04 

3-39 9/24/03 That the Chief Information Officer formulate a strategy to 

provide for more proactive project oversight and system 

planning efforts to ensure that the SDM is followed by SBA 

sponsoring offices for large-scale systems development 

projects. 

12/11/03 12/31/04 

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

153-313-4007. 

4/22/04 8/31/04 

4-02 11/24/03 Seek recovery of $376,106 plus interest and fees from the 

lender for loan number 375-199-4004. 

8/10/04 11/30/04 

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

SOP detailing the subsidy reestimate process, including 

related internal controls, that reflects SBA's current 

reestimate preparation processes and any proposed 

improvements. The new SOP should be updated at least 

annually to capture significant changes such that it reflects 

the current operating process. 

7/16/04 3/31/05 

4-10 1/30/04 That the Administrator, in conjunction with the CFO, assess 

whether SBA has developed sufficient and qualified 

resources to adequately address its current financial 

reporting shortcomings and determine if the current process 

is in need of re-engineering, to meet accelerated financial 

reporting deadlines in future years. 

7/16/04 8/20/04 
36

Appendix

Appendix VII (cont.) 

Significant Recommendations 

From Prior Semiannual Reporting Periods 

Without Final Action as of March 31, 2004* 

Report 

Number

Date 

Issued

Recommendation Management 

Decision Date

Final Action 

Target

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

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

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

4008. 

7/12/04 10/31/04 

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

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

amounts overcharged by referring the overcharging matter 

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

for appropriate action. 

5/12/04 12/31/04 

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

representative samples if necessary, to verify the 

completeness and accuracy of performance measure data 

reported by program offices. 

5/14/04 10/22/04 

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

accurate reporting and reconciliation of intragovernmental 

amounts. These procedures should include establishing 

timelines for resolving differences with non-fiduciary 

trading partners, as well as quality assurance reviews to 

ensure the accuracy of both amounts confirmed and 

amounts reported. 

5/14/04 11/30/04 

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

Appendix

Appendix VIII 

6-Month Significant Recommendations Summary* 

as of September 30, 2004 

Report 

Number 

Title Date 

Issued 

Recommendation 

4-18 Audit of SBA’s Loan Application 

Tracking System 

4/5/2004 That the Chief Information Officer identify and require 

all SBA program offices with partial ownership of LAS 

and its subsystems to properly accredit or authorize the 

LAS for production for the next system accreditation. 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the SBA Administrator ensure that sufficient 

resources are provided to enable OCIO to meet its 

responsibilities under the Clinger Cohen Act, FISMA, 

and OMB Circulars A-50, A-127, and A-130. 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Information Officer revise and enhance 

existing policies and procedures to ensure: control 

weaknesses identified in certification and accreditation 

reviews and audit reports are resolved in a timely 

manner and ensure senior management is provided 

timely information regarding the progress towards 

implementing corrective actions; OCIO monitoring 

controls are effective to preclude reoccurrence of 

previously noted weaknesses; technical personnel are 

provided technical training to enable personnel to 

successfully carry out their duties and responsibilities; 

that technical skills are sufficient to meet new technical 

requirements prior to implementing new hardware and 

software; and OCIO effectively participates in all 

phases of system development in a timely manner so 

that system controls are properly designed and 

developed to provide adequate security, and reliability, 

completeness, and accuracy for all significant system 

initiatives both within and outside of OCIO. 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Information Officer, in conjunction with 

system owners: develop policies and procedures to 

require system owners to provide plans of action to 

OCIO for correcting weaknesses identified from audits, 

management reviews, and certification and 

accreditation reviews; ensure that plans adequately 

address management actions to resolve or minimize 

weaknesses in the short term while implementing 

longer term system corrective actions; develop 

reporting processes to follow-up on system owner 

corrective action plans; and ensure that sufficient 

resources are made available to monitor system owner 

corrective action plans. 

*The OIG has not included some significant recommendations from limited distribution reports because of their sensitive nature. 
38

Appendix 

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of September 30, 2004 

Report 

Number 

Title Date 

Issued 

Recommendation 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Information Officer: implement 

procedures to ensure compliance with Procedural 

Notice 9000-1406 "Removal of Old Computer User 

Accounts;" require network security administrators to 

review all current network accounts to identify and 

eliminate unnecessary accounts and require periodic 

documented reviews of all generic network accounts to 

ensure that they are authorized and needed; provide 

resources sufficient to monitor and assess network 

administration activities to ensure compliance with 

federal laws and regulations, SBA policies and 

procedures, National Institute of Standards and 

Technology guidance, and industry best practices; and 

in coordination with program directors, develop 

procedures for controlling contractor personnel access 

to the network and applications. Procedures should 

also be established to: require Contracting Officers' 

Technical Representatives (COTRs) to notify security 

administrators in writing of each contractor personnel 

needing a network and application account along with 

privileges to assign to the account; and require all 

network and application accounts established for 

contractor personnel to be established with a renewal 

or termination date not to exceed one year or the length 

of the contract, whichever is less. In coordination with 

the Office of Human Capital Management, procedures 

should be developed for network and application 

security administrators to receive notification of 

termination of SBA employees. 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Financial Officer instruct the Director of 

Denver Finance Center to establish adequate physical 

security for routers by either moving routers to a 

restricted area where access is limited to only 

authorized individuals, such as the server room, or 

develop compensating controls, such as constructing a 

security cage. 
39

Appendix 

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of September 30, 2004 

Report 

Number 

Title Date 

Issued 

Recommendation 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Information Officer: reduce the number 

of network accounts assigned "Domain Admin" 

privileges to only those individuals with a specific need 

within Network Integration Branch; create new 

network accounts for non-headquarter network 

administrators with limited domain administrative 

privileges to add and delete users and add, delete, and 

modify objects within office Organization Units; and 

develop and implement procedures to perform periodic 

reviews of highly-privileged accounts to assess the 

continuing need for accounts and privileges. 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Information Officer: develop procedures 

to ensure that network system administrators: assess 

vulnerabilities in the current network configuration; 

make appropriate changes to the Windows 2000 

operating system to address the vulnerabilities 

identified; develop an action plan to address the 

vulnerabilities; provide status reports on actions taken, 

Document a standard Domain Controller configuration 

and standard domain policy configurations; and 

provide technical training to network system 

administrators in line with NSA, NIST, and best 

business practices for securing Windows 2000. 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

4/29/2004 That the Chief Information Officer: develop network 

administration policies and procedures to assure that 

vendor patches and security hot-fixes are installed 

timely; develop standards in conformance with 

government standards and industry best practices to 

properly configure the platforms residing on the 

network; develop procedures to periodically perform 

self-assessments using the SANS Top Twenty 

vulnerabilities and establish an internal goal of 

reducing SBA's vulnerability rating; require network 

administrators to develop a corrective action plan to 

address each weakness identified in the table at the end 

of this attachment with milestones for resolving each 

weakness; and require network administrators to 

provide monthly status reports to the Chief Information 

Officer. 
40

Appendix

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of September 30, 2004 

Report 

Number 

Title Date 

Issued 

Recommendation 

4-19 Audit of SBA’s Information 

Systems Controls Fiscal Year 2003 

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

OHCM, develop procedures for escalating 

administrative consequences for personnel identified as 

not compliant, such as: advise first-time offenders to 

immediately change their passwords to conform to the 

policy; temporarily disable accounts for a second 

offense, and notify the account owner and immediate 

supervisor; and suspend accounts for a third offense, 

and send a request for adverse personnel action to the 

office director OHCM, and the account holder. 

4-25 Audit of an SBA Guarantied Loan 6/22/2004 Seek recovery of $177,166 from the lender, less any 

subsequent recoveries. 

4-26 Audit of an Early Defaulted Loan 6/22/2004 Request the Associate Administrator to seek recovery 

of the SBA guaranty repair of $235,008. 

4-28 Audit of an SBA Guarantied Loan 7/9/2004 Seek recovery of $142,549 from the lender. 

4-29 Audit of an Early Defaulted Loan 7/12/2004 Request the Associate Administrator to seek recovery 

of the SBA guaranty repair of $373,760. 

4-30 Single Audit of Federal Financial 

Assistance Programs Service Corps 

of Retired Executives (SCORE) 

7/13/2004 That the Associate Administrator for Business and 

Community Initiatives (AA/OBCI) determine if 

SCORE implemented adequate written control 

procedures for monitoring and testing of the accuracy 

of the Chapters financial reporting. 

4-32 Audit of an SBA Guarantied Loan 7/29/2004 Seek recovery of $542,663 from the lender. 

4-33 Audit of an SBA Guarantied Loan 7/30/2004 That SBA recover $362,207 from the lender. 

4-34 Audit of SBA’s Process for 

Complying with the Federal 

Managers’ Financial Integrity Act 

Reporting Requirements 

7/29/2004 That the Chief Financial Officer develop policies and 

procedures for SBA managers that explain FMFIA and 

their responsibilities regarding FMFIA. The policies 

and procedures should establish guidelines for the 

evaluation by Agency managers of their systems of 

internal accounting and administrative controls. 

4-34 Audit of SBA’s Process for 

Complying with the Federal 

Managers’ Financial Integrity Act 

Reporting Requirements 

7/29/2004 That the Chief Financial Officer provide detailed 

guidance to the oversight, program and district offices 

to explain how and when they are to perform and 

document a complete risk assessment according to 

GAO Standards. 

4-34 Audit of SBA’s Process for 

Complying with the Federal 

Managers’ Financial Integrity Act 

Reporting Requirements 

7/29/2004 That the Chief Financial Officer report the deficiencies 

related to the internal control assessment and FMFIA 

reporting process identified by the OIG as a material 

weakness in the annual assurance statement that is 

released in SBA's Performance and Accountability 

Report for FY 2004, unless all recommendations 

included in this report are addressed before that time. 
41

Appendix

Appendix VIII (cont.) 

6-Month Significant Recommendations Summary 

as of September 30, 2004 

Report 

Number 

Title Date 

Issued 

Recommendation 

4-36 Audit of an Early Defaulted Loan 8/10/2004 Request the Associate Administrator to seek recovery 

of the SBA guaranty repair of $740,000. 

4-37 Memorandum Report – Survey of 

Risk Management by Industry Code 

8/11/2004 Include an analysis of industry codes as a part of the 

loan and lender monitoring system to identify potential 

areas of financial risk and to better focus limited 

oversight resources. 

4-38 Audit of an SBA Guarantied Loan 8/24/2004 That the Associate Administrator for Financial 

Assistance seek recovery of $83,576, less any prior 

recoveries, from the lender. 

4-39 Management Advisory Report on 

the Transfer of Operations to the 

National Guaranty Purchase Center 

8/31/2004 That the Associate Deputy Administrator for Capital 

Access, in coordination with the General Counsel, 

determine the appropriate number of loan officers, 

supervisors, and attorneys to be assigned to the Center 

by (i) establishing the elements of quality for the 

purchase and liquidation action review process, (ii) 

determining how much time it takes to complete a 

quality review at each level (loan officer, supervisor 

and attorney), and (iii) computing the staff levels 

needed to complete the estimated annual purchase and 

liquidation action workloads at an acceptable level of 

quality. 

4-40 Audit of an SBA Guarantied Loan 9/13/2004 Take the necessary action to Recover $246,460 paid to 

purchase the guaranty from the secondary market. 

4-43 Audit of an SBA Guarantied Loan 9/17/2004 Request the Associate Administrator to seek recovery 

of the SBA guaranty repair of $293,823. 
42

Appendix

Appendix IX 

6-Month Legal Actions Summary 

April 1, 2004, through September 30, 2004 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

AZ BL The owner of a telecommunications business provided false 

statements and claims to a financial institution during the 

financing of his business through the SBA 504 program. 

Owner signed 

settlement 

agreement in the 

amount of $22,000. 

None 

CA BL Seventeen business loan recipients and/or convenience store 

owners, along with two corporations, participated in a scheme 

to falsely obtain SBA guarantied business loans. Two of the 

individuals owned or controlled 60 convenience stores. The 

owners used straw borrowers and nominee borrowers to apply 

for and obtain loans guaranteed by SBA, various banks, and 

non-bank lenders. The owners falsely concealed their 

financial interests in the individual businesses, along with the 

source of the cash injection for each SBA loan, and laundered 

the proceeds of each SBA loan through the use of wires and 

checks. As a result of the scheme, loans totaling $20 million 

were applied for and loans totaling at least $8 million were 

approved and received. 

Seventeen 

individuals and 

two corporations 

indicted. 

FBI, IRS, 

ICE, USDA, 

State of 

California 

Alcohol and 

Beverage 

Control 

CO 8(a) A computer equipment business owner, while an officer of the 

company, declared personal bankruptcy and received a 

discharge of approximately $135,000 in debts. He directed 

company employees to divert approximately $690,000 of his 

company income to several bogus companies, which he 

created in order to avoid paying creditors. The owner failed 

to disclose his income, assets, and control of the company to 

the bankruptcy court and SBA. 

Owner pled guilty; 

received 24 months 

incarceration; 

2 years supervised 

release; a $6,000 

fine; ordered to pay 

$39,197. 

IRS, FBI, 

DCIS 

FL BL The owner of an automotive repair business obtained a 

$560,000 SBA guarantied loan to purchase land. The 

business owner conspired with the property owner to 

represent to the lender that the capital injection had been 

made. In reality, they entered into an $80,000 mortgage 

agreement, which they concealed from the lender, in lieu of 

the capital injection. 

Property owner 

and auto repair 

business owner 

both pled guilty. 

None 

IL BL At the request of an SBA loan applicant, a graphic artist 

agreed to create a counterfeit U.S. Certificate of 

Naturalization, showing that the applicant, an illegal alien, 

was a U.S. citizen. The applicant later presented the 

counterfeit certificate along with $2,500 cash (of an agreed 

upon $5,000 bribe) to an SBA official in order to influence an 

official act. As was previously reported, the applicant and his 

spouse were each indicted for conspiracy and attempted loan 

fraud. 

Graphic artist 

arrested and 

subsequently 

indicted. 

None 
43

Appendix

Appendix IX (cont.) 

6-Month Legal Actions Summary 

April 1, 2004, through September 30, 2004 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

MA BL Four individuals involved with an intermediary participating 

in SBA’s Microloan Program perpetrated a scheme to pay 

themselves more than $300,000 in unauthorized “consulting” 

and “technical assistance” fees. They attempted to hide the 

transactions by paying the fees to two shell companies they 

had created. They also improperly charged the business 

$170,000 in recreational travel, and forged signatures of board 

members on business checks. Two of the four subjects 

previously entered guilty pleas. The accountant and a board 

member were convicted at trial. 

Accountant 

convicted; received 

6 months home 

detention; 4 years 

probation; 300 

hours community 

service; $5,000 

fine; and ordered to 

pay $45,000. The 

board member was 

convicted and 

received 6 months 

home detention; 3 

years probation; 

300 hours 

community 

service; a $5,000 

fine; and ordered to 

pay $19,000. 

FBI, HUD, 

DOC/OIG, 

IRS 

MO BL The former president of a small business made false 

statements to two financial institutions in order to obtain a 

$340,000 SBA guarantied loan. Later, he defaulted on the 

loan, resulting in a principal loss of $224,370. Investigation 

further determined that he bilked investors out of about $1.6 

million by inducing more than 10 individuals to invest money 

with him through a marketing scheme. 

Former president 

arrested and pled 

guilty. 

IRS 

NY BL A disbarred attorney allegedly claimed his firm had been 

located in downtown New York City on September 11, 2001, 

and falsely received a $247,000 SBA disaster loan. The 

investigation revealed that his firm was never located at that 

address. 

Disbarred attorney 

arrested. 

IRS 

NY DL A doctor and a co-subject perpetrated a scheme to defraud the 

SBA in conjunction with an SBA business disaster loan for 

damages to her medical practice caused by Hurricane Floyd. 

The doctor claimed approximately $70,000 worth of medical 

equipment stored in her mother’s residence was destroyed in 

the storm along with the home. The investigation revealed 

that there never was any medical equipment stored in the 

home. Further, the co-subject, with the consent of the doctor, 

submitted altered invoices to the SBA for work performed on 

the home. 

Doctor pled guilty. 

Co-subject pled 

guilty and received 

3 years probation, 

including 6 months 

home confinement, 

and ordered to pay 

$34,356. 

FBI 
44

Appendix

Appendix IX (cont.) 

6-Month Legal Actions Summary 

April 1, 2004, through September 30, 2004 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

NY DL The president/owner and the managing partner of a small 

business received a $228,200 SBA disaster loan claiming 

losses incurred during the September 11 terrorists attacks. 

The pair claimed they were subleasing office space from their 

parent company located in the World Trade Center when, in 

fact, they were salaried employees of another company at the 

time. As previously reported, both individuals were convicted 

at trial. 

President/owner 

received 51 months 

incarceration; 3 

years supervised 

release; and 

ordered to pay 

$373,000. 

Managing partner 

received 33 months 

incarceration; 3 

years supervised 

release; and 

ordered to pay 

$245,000. 

None 

ODA DL The OIG provided information to SBA’s Office of Disaster 

Assistance (ODA) revealing that a sea tow business loan 

applicant was operating with a bogus captain’s license. 

Actions taken by the U.S. Coast Guard will prevent the 

applicant from operating his business. 

ODA cancelled a 

$19,400 disaster 

loan. 

None 

OH BL The general manager of a food manufacturing business and 

his spouse (the president of the company) formed two shell 

corporations for purposes of concealing substandard 

purchases and theft of loan proceeds from a $700,000 SBA 

guarantied loan. The proceeds from these fraudulent sales 

were then laundered through bank accounts held in the names 

of the shell corporations and converted to personal use. 

Both the former 

general manager 

and spouse were 

charged by 

Information. 

None 

OH BL The SBA and a financial institution approved a $99,500 loan 

to a jewelry store president and his wife. The investigation 

disclosed that during the loan application process, the 

president failed to disclose the existence of a $923,718 civil 

judgment filed against him and a company he previously 

owned. Additionally, he concealed his extensive criminal 

history. 

The former 

president pled 

guilty. 

FBI 

OR BL A former loan agent engaged in a scheme to defraud a 

financial institution of more than $500,000. The agent 

submitted false loan applications containing the names and 

personal identity information of six people, fictitious business 

information, and forged signatures. The agent used the 

proceeds of these loans for personal gain, including paying 

debts and gambling. 

The former loan 

agent pled guilty. 

FBI 
45

Appendix

Appendix IX (cont.) 

6-Month Legal Actions Summary 

April 1, 2004, through September 30, 2004 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

PA 8(a) A former SBA 8(a) program participant made false statements 

to the SBA that someone else controlled the SBA certified 

company that he operated. In addition he mailed fictitious 

financial statements, which the bonding company relied upon 

to issue bonding. As a result of the company’s defaults on 

contracts, the bonding company paid more than $2.9 million 

in payment bonds and incurred an additional $3 million in 

losses on performance bonds to have the contracts completed. 

Former 8(a) 

program 

participant 

received 5 years 

probation. He 

must also continue 

to make restitution 

to the bonding 

company pursuant 

to a $500,000 

settlement 

agreement. 

NCIS, DCIS, 

VA/OIG 

PA 8(a) The president of a now defunct construction company 

transferred $495,000 from his construction company account 

to a personal account in the Bahamas and abandoned 

company contracts and subcontractors. He falsely stated in 

his SBA 8(a) Annual Update Form that he had relocated and 

that he controlled the day-to-day operations of the company. 

He also submitted false financial statements to a bank to 

support a $300,000 line of credit and false statements to the 

bonding company. Ultimately the construction company 

defaulted on the contracts, resulting in a loss of almost $6 

million. 

Former president 

received 7 years; 

5 years probation; 

a $2,500 fine, and 

ordered to pay over 

$6.4 million in 

restitution. 

NCIS, 

VA/OIG, 

DCIS. 

PR BL Three businessmen participated in a scheme to falsely obtain 

two SBA guarantied microloans totaling $50,000. A coowner, who had been denied an SBA microloan because of a 

poor credit history, conspired with the other co-owner and the 

office manager, who each received a $25,000 microloan. On 

the applications, they both claimed that the loan was to 

purchase inventory for their respective businesses when the 

monies were actually used for the benefit of the undisclosed 

recipient. 

Three businessmen 

indicted. 

FBI 

TX BL A Texas man received a $420,000 SBA guarantied loan. 

During the loan process, he provided a signed resume and an 

SBA Form 912 on which he falsely claimed U.S. citizenship. 

Subject indicted. DHS, SSA, 

Harris 

County 

Organized 

Crime Task 

Force, Texas 

ABC 
46

Appendix

Appendix IX (cont.) 

6-Month Legal Actions Summary 

April 1, 2004, through September 30, 2004 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

TX BL The proprietor of a convenience store and service station 

falsely represented that he was a U.S. citizen on his SBA 

Form 912, inducing a bank and the SBA into funding a $1.2 

million SBA guarantied loan. 

Business loan 

recipient pled 

guilty and received 

credit for time 

served; 1 year 

supervised release; 

$500 fine; and is 

required to 

surrender to 

Immigration for 

deportation. 

DHS, SSA, 

USDA, 

Texas DPS, 

Texas ABC 

TX BL Business loan agent conspired to commit a wire and bank 

fraud scheme involving at least $28 million in loans 

guarantied by the SBA. For a 2-year period, the loan agent 

brokered loans to individuals interested in purchasing 

convenience stores. On behalf of solicited borrowers, he 

submitted false loan application documents and related 

cashier checks as phony capital injections to the lenders. 

Business loan 

agent pled guilty. 

FBI 

TX BL Eight SBA business loan recipients falsely represented to be 

U.S. citizens on their SBA loan applications and their renewal 

applications for a Texas Alcoholic Beverage Commission 

permits. 

Eight business loan 

recipients indicted. 

DHS, SSA 

USDA, 

Texas DPS, 

Texas ABC 

TX BL Four convenience store proprietors falsely obtained nine 

convenience store SBA guarantied business loans totaling 

$9.5 million. The proprietors solicited individuals to apply 

for SBA guarantied loans; submitted false and fraudulent 

documents; artificially inflated certain checking account 

deposits; and used escrowed loan proceeds to purchase 

cashier checks used as down payments for loans to conceal 

the fact that the down payments were funded by the loan 

proceeds. 

Four convenience 

store proprietors 

indicted. 

FBI 

TX BL Two convenience store proprietors falsely claimed to be U.S. 

citizens on sworn renewal applications for Texas Alcoholic 

Beverage Commission permits. 

Two proprietors 

pled guilty. One 

received 360 days 

incarceration and a 

$2,000 fine. The 

other awaits 

sentencing. 

DHS, SSA, 

USDA, 

Texas DPS, 

Texas ABC 

TX BL A business loan applicant falsely represented to be a U.S. 

citizen on his renewal application for a Texas Alcoholic 

Beverage Commission permit and on his SBA Form 912 

when applying for an SBA guarantied loan. 

Business loan 

applicant indicted 

DHS, SSA, 

USDA, 

Texas DPS, 

Texas ABC 
47

Appendix

Appendix IX (cont.) 

6-Month Legal Actions Summary 

October 1, 2003, through March 31, 2004 

State Program Alleged Violation(s) Prosecuted Legal Action Investigated

Jointly With

TX BL A business loan applicant falsely represented, in a personal 

financial statement, that he had cash assets of $200,000. This 

false statement was made in an attempt to influence the action 

of the SBA in connection with a loan application for 

$2.7 million to purchase a local motel property. 

Business loan 

applicant pled 

guilty and received 

2 years probation; 

$1,000 fine; and 60 

hours community 

service. 

FBI 

TX BL Twelve SBA loan recipients falsely represented to be U.S. 

citizens on their SBA Forms 912. 

Twelve business 

loan recipients 

indicted. 

DHS, SSA, 

Harris 

County 

Organized 

Crime Task 

Force, Texas 

Alcoholic 

Beverage 

Commission 

TX BL The proprietor of a convenience store and service station 

falsely represented to be a U.S. citizen on SBA Form 912. As 

a result of his actions, he falsely induced the SBA and the 

bank into funding an $875,000 SBA guarantied loan. 

Proprietor indicted. DHS, SSA, 

USDA, 

Texas DPS, 

Texas ABC 

TX BL The president of a convenience store and service station 

falsely represented to be a U.S. citizen on a sworn renewal 

application for a Texas Alcoholic Beverage Commission 

permit and on an SBA Form 912. The president’s false 

representation induced a bank and the SBA to fund an SBA 

guarantied loan for over $1.1 million. 

President pled 

guilty and received 

2 years probation. 

None 

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

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

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

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

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

and Urban Development; ICE=Immigration and Customs Enforcement; IRS=Internal Revenue Service; IRSCID=IRS Criminal Investigation Division; NCIS=Naval Criminal Investigative Service; SSA/OIG=Social Security 

Administration OIG; TEXAS-ABC=Texas Alcoholic Beverage Commission; TEXAS-DPS=Texas Department of 

Public Safety; TIGTA=Treasury Inspector General for Tax Administration; USDA/OIG=United States Department 

of Agriculture OIG; VA/OIG=Department of Veterans Affairs OIG.
48

Appendix

Appendix X

Office of Inspector General 

Washington, 

DC 

Credit Los Angeles Atlanta Chicago 

Programs 

Group

Business 

Development 

Programs Group

Atlanta 

Dallas 

Los Angeles 

Washington, DC Philadelphia 

New York

Dallas 

Houston

Denver

Kansas 

City 

Seattle 

Financial 

Management & 

IT Group 

Washington, DC 

Inspector 

General 

Auditing Division 

Deputy 

Inspector 

General 

Counsel Division 

Management and 

Policy Division 

Investigations Division

Chicago 

Washington, DC