Semiannual Report 

of the Inspector General

 U.S. Small Business Administration 

Fall 2002 

 A Report to Congress 

 April 1, 2002 - September 30, 2002

 Pursuant to Public Law 95-452 
. 

ii 
Foreword 

Semiannual Report September 2002 

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

April 1, 2002, to September 30, 2002. 

This will be the last Semiannual Report that I prepare as SBA IG. Over the past several years, OIG has 

successfully carried out its mission to address fraud and to promote effectiveness in SBA programs. This 

reporting period is no exception. The Office issued 19 reports on efficiency and effectiveness activities, 

primarily based on OIG audit and inspection activities. OIG investigations resulted in 19 indictments and 

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

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

programs. Overall, OIG dollar accomplishments from all activities totaled more than $39 million. All of 

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

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

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

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

SBA initiatives. Discussion of our work in these areas can be found in the body of the report. We also 

completed a new strategic plan for FY 2003-2007, which will guide the Office’s work for the next several 

years. The plan emphasizes prevention and deterrence, early identification of risks and management 

challenges, and a more integrated approach within and across our audit, investigation, and evaluation 

functions. I anticipate that future semiannual reports will discuss OIG accomplishments within the 

context of the new plan’s goals. 

It has been a privilege to serve at SBA over the past several years, and I look forward to continuing to 

serve the President, the Congress, and the American people at the Department of Agriculture. Any 

success that this OIG has had would not have been possible without the active support and interest of 

Administrator Barreto and the Agency’s senior staff, and of our oversight Committees in the Congress. 

I truly appreciate all you have done to support our work. While SBA continues to face many challenges 

ahead, I am confident that OIG will continue to provide independent and expert advice. I leave SBA 

knowing that the Office has a clear direction, capable professional leadership, and a bright future. 

Phyllis K. Fong 

Inspector General 

Table of Contents 

Semiannual Report September 2002 i 

 Chapter Page

 SBA Overview 1 

 Significant Activities and Management Challenges 3 

 OIG Profile 11 

 OIG Activities 13 

 Statistical Highlights 36 

 Inspector General Act Statutory Reporting Requirements 40 

 Table of Appendices 41 

SBA Overview 

Semiannual Report September 2002 1 

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

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

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

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

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

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

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

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

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

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

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

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

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

Administrator 

Deputy Administrator 

Chief of Staff 

Counselor to 

Administrator

Chief Operating 

Officer

Office of the National

Ombudsman 

Office of Inspector General Office of Advocacy 

Associate Deputy 

Administrator for 

Capital Access 

Associate Deputy 

Administrator for 

Entrepreneurial 

Development 

Associate Deputy 

Administrator for 

Management & 

Administration 

Associate Deputy 

Administrator for 

Government Contracting & 

Business Development 

Investment Division 

Office of Financial Assistance 

Office of Surety Guarantees 

Office of International Trade 

Office of Lender Oversight 

Office of Business and Community 

Initiatives 

Office of Small Business Development 

Centers 

Office of Women’s Business Ownership 

Office of Native American Affairs 

Office of Chief Information Officer 

Office of Human Resources 

Office of Administration 

Office of Government Contracting 

Office of HUBZone Empowerment 

Contracting

Office of Business Development 

Office of Policy Planning & Liaison 

Office of Congressional & Legislative 

Affairs 

Office of Hearings and Appeals 

Office of Disaster Assistance 

Office of General Counsel 

Office of Veterans Business 

Development 

Office of Field Operations

Regional Administrators 

Office of Equal Employment 

Opportunity & Civil Rights Compliance 

Office of Communications 

& Public Liaison 

Office of the Chief 

Financial Officer
SBA Overview 

2 Semiannual Report September 2002 

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

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

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

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

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

Investment Company (SBIC) program provides equity capital, long-term loans, debt-equity investments, and 

management assistance to small businesses, particularly during their growth stages. All of the specialized 

business loan programs are intended to provide entrepreneurs with the financing vehicles needed to help them 

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

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

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

Investment in Microentrepreneurs (PRIME). OCA is also responsible for servicing all disaster loans and 

administering SBA’s Asset Sales program. 

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

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

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

Information Centers (BIC), and Women’s Business Centers (WBC). These resource partners provide guidance 

and expertise to new entrepreneurs. 

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

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

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

encompasses the Section 8(a) program and the Mentor-Protégé program; and (2) the Section 7(j) Management 

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

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

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

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

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

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

Standards, which reviews and establishes industry size standards. The HUBZone Empowerment Contracting 

(HUBZone) program is designed to stimulate economic development and create jobs in urban and rural 

communities by providing contracting preferences to small businesses located in historically underutilized 

business zones. The Office of Government Contracting (GC) works with Federal agencies to establish and 

achieve goals for small business participation in Federal contracting. Through its field structure, GC reviews 

proposed procurements and identifies opportunities for all categories of small businesses. 

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

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

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

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

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

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

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

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

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

Semiannual Report September 2002 3 

OIG Strategic Plan 

 OIG’s vision is to improve SBA programs by identifying key issues 

facing the Agency, ensuring that corrective actions were taken, and promoting a 

high level of integrity. OIG continues to focus on serving the needs of our 

customers and stakeholders and on safeguarding SBA resources from, waste, 

fraud, and abuse. The goals we sought to achieve under the current strategic 

plan were to: (1) improve the economy, efficiency, and effectiveness of SBA 

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

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

operation of OIG. These goals provided the broad framework of our mission 

from which we further concentrated our work in the following five cross-cutting 

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

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

issues; and (5) new Agency initiatives. During this reporting period OIG 

completed its work to develop a new strategic plan for FY 2003 – FY 2007. 

After consultation with stakeholders, OIG will implement this plan in FY 2003 

and will subsequently report our activities against the new goals and objectives. 

 The following section details significant OIG accomplishments as they 

relate to the strategic foci in the current strategic plan. 

Financial Management Systems

SBA’s FY 2001 Financial Statement Management Letter 

As part of the SBA FY 2001 annual financial statement audit, OIG 

issued the independent auditor’s management letter. It identified issues related 

to: (1) personal property and equipment; (2) foreclosed property records and 

valuation; (3) loan accounting records and servicing; (4) analysis of account 

balances and transactions; (5) credit card use; (6) sensitive loan sale 

information; (7) new transaction codes; (8) Master Reserve Fund (MRF) 

reporting; and (9) disaster loan cash flows. The conditions were identified 

during the SBA FY 2001 financial statement audit, but were not required to be 

included in the report on internal control. The first two issues were presented to 

document SBA’s completion of remedial activity and to close the two 

recommendations. The Chief Financial Officer (CFO), Assistant Administrator 

for Administration (AA/A), and Chief Information Officer (CIO) generally 

agreed with the auditor’s findings and recommendations. 

SBA’s Georgia District Office’s Sponsorship Activities 

OIG issued a report on the Georgia District Office’s sponsorship 

activities at the request of the former Deputy Associate Administrator for Field 

OIG Strategic Plan

The SBA FY 2001 

Financial Statement 

Management Letter 

identifies nine 

additional issues not 

noted in the FY 2001 

Financial Statement 

audit. 
Significant Activities and Management Challenges 

4 Semiannual Report September 2002 

 

Operations. OIG reviewed the Office’s compliance with SBA’s policies and 

procedures for co-sponsorships and SBA gift authority. The audit revealed that 

the Office: (1) solicited and accepted gifts from prohibited sources and from a 

source requiring a conflict of interest determination; (2) did not deposit gift 

funds into the Business Assistance Trust (BAT) Fund; (3) used gift funds for 

prohibited purposes; (4) inappropriately expended excess funds; (5) collected 

and used registration fees without authority; and (6) did not have adequate 

controls in place to ensure proper accountability of funds. OIG concluded that 

these noncompliances occurred because senior District Office management did 

not believe the requirements of Standard Operating Procedure 90 75 2 were 

applicable to any of the Office’s events and because oversight by regional and 

Headquarters personnel was not adequate. 

OIG recommended that the Associate Administrator for Field Operations 

(AA/FO) provide better guidance to field office staff and improve its oversight 

over field office SBA-sponsored and cosponsored activities. The recommended 

guidance should address: (1) the distinction between the types of events and the 

appropriate procedures for planning and conducting cosponsored and SBAsponsored events; (2) the appropriate sources from whom to solicit and accept 

gifts; (3) the requirement to obtain conflict of interest case-by-case determinations; (4) the proper procedures for disbursing excess gift funds; (5) the 

remission of gift funds to the BAT Fund at the U.S. Treasury; (6) the proper 

accountability of event funds; and (7) the appropriateness of charging fees. The 

General Counsel and AA/FO generally agreed with the final recommendations. 

SBA Faces Significant Issues in Financial Management and 

Implementation of its New Accounting System 

During this reporting period, a number of significant issues were 

identified affecting SBA’s financial management activities relating to the 

accounting treatment for loan assets sales, oversight of the MRF for the 

secondary loan market, and implementing its new administrative accounting 

system. The loan asset sales accounting issues have been identified by the 

General Accounting Office (GAO) and GAO will be issuing their report shortly 

detailing those issues. In addition, OIG has work in progress relating to SBA’s 

accounting and oversight of the fiscal health of the MRF, including adherence 

to U.S. Treasury fund requirements identified in a prior OIG audit. OIG is also 

conducting an audit of the implementation of the Joint Accounting and 

Administrative Management System (JAAMS) to determine how well SBA 

followed a structured approach and methodology in acquiring the system and 

whether users are satisfied with the utility and information available to manage 

administrative funds. JAAMS is an off-the-shelf software package that 

provides the basis for an integrated financial management solution for Federal 

agencies. GAO and OIG expect to issue reports during the first half of FY 

2003. 

 

OIG highlights several 

noncompliances with 

Agency policy regarding 

sponsorship activities in 

a district office. 
Significant Activities and Management Challenges 

Semiannual Report September 2002 5 

OIG, through its independent public accountant, is currently auditing SBA’s 

FY 2002 financial statements. The audited financial statements are due to the 

Office of Management and Budget (OMB) on January 31, 2003. The financial 

statement audit will need to consider the impact of these issues on SBA’s 

financial statements. 

 

Information Systems and Computer Security

SBA’s Information Systems Controls – Fiscal Year 2001 

OIG issued an independent auditor’s report on information systems 

controls for FY 2001 as part of the SBA annual financial statement audit. The 

auditors reviewed general controls over SBA’s financial management systems 

to determine compliance with various Federal requirements. General controls 

are the policies and procedures that apply to all or a large segment of an entity’s 

information systems to help ensure their proper operation. While the auditors 

concluded, as they did in FY 2000, that SBA made progress toward 

implementing an Agency-wide systems security program, improvements are 

still needed. 

The report identified areas of weakness and provided recommendations for 

strengthening controls in the following areas: (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; 

(6) service continuity controls; and (7) review of mainframe operations. The 

CIO and CFO generally agreed with 15 of the 24 recommendations in the draft 

report; they did, however, disagree with 8 recommendations and did not 

comment on 1 recommendation. An overriding concern of the Agency was that 

the report did not give enough recognition to the progress SBA has made over 

the past several years toward achieving its goals of control and security over its 

information systems. The independent auditors agreed that SBA has made 

significant improvements and modified the report appropriately to reflect those 

improvements. The Associate Administrator for Disaster Assistance agreed 

with the findings and provided comments on the recommendations affecting his 

office. 

SBA’s Information Security Program

The Government Information Security Reform Act (GISRA) requires 

OIG to perform an independent evaluation of SBA’s information security 

program. In September 2002, OIG issued a report presenting the results of its 

evaluation. The auditors found that generally SBA’s information security 

program continues to improve for high priority financial management and 

general support systems. Vulnerabilities continue to exist, however, in 

computer security program monitoring, computer incident response reporting, 

OIG finds that SBA’s 

information security 

program generally 

continues to improve. 
Significant Activities and Management Challenges 

6 Semiannual Report September 2002 

 

system access controls, computer security system testing, and disaster recovery 

and contingency planning. OIG agreed with the Agency’s assessment of the 

material weaknesses in these areas. 

Lender Oversight

Review of SBA Loan Processing 

OIG has completed a series of audits of SBA-guaranteed loans 

originated by a former Preferred Lender Program (PLP) lender. The audits 

covered loans that were purchased by SBA between January 1996 and 

February 2000. The objective of the audit was to determine if the PLP lender 

processed and serviced the loans in accordance with SBA rules and regulations. 

Through September 30, 2002, OIG completed audit reports on eight loans that 

were not processed by the lender in material compliance with SBA rules and 

regulations. The deficiencies involved lender actions related to: repayment 

ability, equity injection, use of proceeds, creditworthiness, collateral, eligibility, 

Internal Revenue Service (IRS) verifications, working capital, and appraisals. 

The eight final audit reports have a combined recommended recovery of 

$1.3 million for erroneous guaranty payments and have gained the attention of 

the SBA lending community and SBA program offices. The shortcomings of 

the guaranty purchase process have been one of the OIG top 10 management 

challenge. Other audits of this lender’s loans are in progress. 

An example of the problems disclosed follows: 

• The lender approved a loan to a borrower that did not have repayment 

ability. According to SBA procedures, the ability to repay a loan from the 

cash flow of the business is the most important consideration in the loan 

making process and absence of repayment ability dictates the decline of the 

loan. The lender relied on the projected earnings of the business to 

determine repayment ability, but the lender’s analysis did not include 

several expenses, such as an increase in the lease expense, owner salaries, 

and payments on a loan to the stockholders. When these expenses are 

added to the lender’s repayment calculation, the result was a negative cash 

flow. The lender also did not verify equity, did not exercise prudent 

controls over the use of loan proceeds, and did not obtain IRS verification 

as required. As a result of these deficiencies, the lender agreed to repay 

$197,751 to SBA which represented the full amount paid on the guaranty. 

In October 2002, SBA issued a Policy Notice on the guaranty purchase process 

to improve the quality, consistency, and timeliness of guaranty purchase 

decisions. The Policy Notice provides general guidance and instructions for 

SBA’s review of a guaranty purchase request and addresses specific purchase 

issues. Implementation of the new guidance should help improve some of the 

problems noted by our prior audits with the guaranty purchase decision process. 

OIG continues its 

ongoing audit of 

defaulted loans to 

identify trends in lender 

processing that may 

help the Agency save or 

recover funds.
Significant Activities and Management Challenges 

Semiannual Report September 2002 7 

An on-going OIG audit of the guaranty purchase process scheduled for 

completion during the first quarter of FY 2003, will address any remaining 

weaknesses of the purchase process and the anticipated impact of the policy 

notice on guaranty purchase decisions. 

Investigative Work in the Area of Lender Oversight 

OIG continues to work fraud cases that relate to loan agents and loan 

packagers. OIG has noted a trend of increased fraud among these groups. 

Several ongoing joint investigations with the Federal Bureau of Investigation 

(FBI) and the Department of Treasury Inspector General for Tax 

Administration (TIGTA), were initiated as a result of fraudulent schemes to 

obtain millions in SBA-guaranteed business loans to finance the purchase of gas 

station/convenience stores in Texas. The schemes involved: 1) false capital 

injections; 2) false tax returns; 3) false tax return verifications; 4) inflated 

selling prices; and 5) false appraisals which resulted in properties being 

purchased and resold in a short period of time with the value inflated each time 

(flipped). All transactions were financed by SBA-guaranteed business loans. 

The schemes involved dual escrow closings where loan proceeds from one 

closing were used as capital injection for another loan, as well as third parties 

(investors) providing, for a fee, the capital injection until closing, straw buyers, 

and sellers. Amended tax returns with increased profits were filed with IRS and 

after IRS verification were amended back to the reduced profits. There were 

only slight variations to the schemes, all of which involved loan packagers, loan 

brokers (who find buyers and sellers), IRS verification personnel, title company 

officials, appraisers, and bank loan officers. To date, these investigations have 

yielded 30 indictments, 13 convictions, more than $12.7 million in recoveries, 

and more than $15.7 million in cost avoidances.

Selected High Risk Issues

FY 2002 Top 10 Management Challenges and Progress Made 

 

In accordance with the Reports Consolidation Act of 2000, in 

January 2002, OIG issued its report identifying and rating the most serious 

management challenges facing SBA in FY 2002. A full discussion of the 

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

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

Using unverified information submitted by SBA management in July 2002, 

OIG provided the Agency with a mid-year assessment of SBA progress in 

resolving the FY 2002 management challenges. The Agency’s record of 

progress in resolving the challenges was mixed. Moreover, we still found few 

progress reports that contained targets or milestones for achieving progress. 

FY02 Management Challenges 

Agency-wide Issues

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

produce reliable performance 

data. 

2. SBA faces significant challenges 

in modernizing its major loan 

monitoring and financial 

management systems. 

3. Information systems security 

needs improvement. 

4. Maximizing program 

performance requires that SBA 

fully develop and implement its 

human capital management 

strategies. 

Loan Programs

5. SBA needs better controls over 

the business loan purchase 

process. 

6. SBA needs to continue improving 

lender oversight. 

Section 8(a) Business Development 

7. More participating companies 

need access to business 

development and contracts in the 

Section 8(a)BD program. 

8. SBA needs clearer standards to 

determine economic 

disadvantage. 

9. SBA needs to clarify its rules 

intended to deter Section 8(a)BD 

participants from passing 

through procurement activity to 

non-Section 8(a)BD firms. 

Fraud Deterrence and Detection

10. Preventing loan fraud requires 

additional measures, including 

new regulations and funding. 
Significant Activities and Management Challenges 

8 Semiannual Report September 2002 

 

In January, when the FY 2002 challenges were published, the Agency appeared 

to be making some progress on five challenges. These included modernizing 

information systems, improving information systems security, implementing 

human capital management strategies, business loan guarantee purchase 

controls, and improving lender oversight. 

By June, some additional substantive progress had been noted regarding 

modernizing financial management information systems, business loan 

guarantee purchase controls, and improving lender oversight. Based on an ongoing audit, however, OIG noted that there had been some weakening in small 

business investment company (SBIC) oversight. Moreover, the development of 

the original loan monitoring system had been put on hold and the Office of 

Lender Oversight was developing preliminary information to identify loan 

monitoring requirements. 

Incremental progress continued to be made in improving information systems 

security and in implementing human capital management strategies; however, it 

was not sufficient to warrant a change in project status. 

No progress was reported on the managing for results challenge. There was 

also still no measurable progress on preventing loan agent and borrower fraud. 

While no decisions had been made, a SBA task force was exploring approaches 

to address two of the three Section 8(a) Business Development (BD) program 

challenges—access to business development and contracts and clearer standards 

to define “economic disadvantage.” SBA had made progress in the area of 

Section 8(a) pass-through procurement activity. 

Fraud Detection and Deterrence

In FY 2002, OIG focused significant resources on fraud detection and 

deterrence in SBA programs. The Office gave 18 fraud awareness briefings to 

approximately 925 people from SBA, other Federal agencies, and private sector 

partners. OIG handled 66 security clearances and performed name checks on 

nearly 2,400 entities which resulted in OIG recommending that more than 

$35.7 million in loans not be awarded. Being potential high risk loans, this 

represents a significant cost-avoidance for the Agency. 

Section 7(j) Management and Technical Assistance Program Cooperative 

Agreement Administration Activities 

OIG issued a report on SBA’s Section 7(j) Management and Technical 

Assistance program cooperative agreement administration activities. The 

Section 7(j) program provides management and technical assistance to Section 

8(a) certified firms, small disadvantaged businesses, businesses operating in 

areas of high unemployment or low income, and firms owned by low income 

individuals. Funding for the program was $3.6 million in FY 2000 and 

OIG conducts an audit to 

determine if the pre and 

post award process for the 

Section 7(j) program 

cooperative agreement 

awards was conducted 

appropriately. 
Significant Activities and Management Challenges 

Semiannual Report September 2002 9 

FY 2001. The objective of the audit was to determine whether pre- and postaward processes associated with Section 7(j) program cooperative agreement 

awards were carried out in accordance with applicable policies and procedures 

to ensure the effective use of program funds. OIG found that: (1) SBA's 

reliance on unsolicited proposals limited its ability to effectively plan, process, 

and approve project awards; (2) documentation associated with proposal and 

financial reviews was incomplete; (3) award recommendations were not 

properly supported; (4) legal sufficiency review issues were not resolved prior 

to award; and (5) project reporting and monitoring required improvement. The 

extent of SBA's failure to follow established policies and procedures indicates a 

potential material weakness in the Section 7(j) program. OIG made 12 

recommendations to the Associate Deputy Administrator for Government 

Contracting and Business Development (ADA/GC&BD) and the AA/A that are 

expected to be addressed during the follow-up and resolution process. 

New Agency Initiatives

Modernizing Human Capital Management 

OIG issued a report on modernizing human capital management. The 

purpose of the report was to provide SBA management with recommendations 

to assist in repositioning the Human Resources (HR) office and its functions. 

However, the report’s research and conclusions are broad-based and may have 

value for other government entities facing these challenges. The inspection 

focused primarily on: (1) delivery systems (especially automation); (2) HR 

metrics; and (3) office structure. To identify “best practices” in these areas, 

OIG staff visited agencies that are moving ahead in HR automation, advisory 

services, and building metrics. 

OIG made several recommendations. First, that SBA review the business case 

for its HR information system in light of other agencies’ implementation 

experiences and the Administration’s new HR initiatives, and consider available 

short-term alternatives. Second, that the SBA HR office develop business case 

metrics to determine the cost effectiveness of implementing appropriate 

functional automation software and/or outsourcing or cross-servicing certain 

HR functions. Third, that the SBA HR office work with SBA management to 

develop a measurement system that conforms to the Office of Personnel 

Management’s (OPM) Standards of HR Management Accountability and 

includes: (1) financial measures, such as cost per employee hired; (2) customer 

satisfaction measures, such as those associated with responsiveness and quality; 

(3) workforce capacity measures, such as employee satisfaction and education; 

and (4) process effectiveness, such as cycle time and productivity. Fourth, that 

the Assistant Administrator for HR ensure that: (1) relevant SBA HR activities, 

such as strategic advisory services, are incorporated into office operations, and 

the office plays a key role in the Agency’s workforce planning and restructuring 

effort; (2) a process is in place for working closely with line management; 

OIG makes 

recommendations to the 

Agency for improving 

its human capital 

management initiative. 
Significant Activities and Management Challenges 

10 Semiannual Report September 2002 

 

(3) individual planning, policy, and operational responsibilities within the office 

are well-defined; and (4) HR activities, metrics, and results are publicized to all 

concerned HR staff, line managers, and the workforce. The Deputy Associate 

Deputy Administrator for Management and Administration agreed with the 

recommendations.
OIG Profile 

Semiannual Report September 2002 11

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

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

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

together to perform the missions mandated by Congress. 

• Auditing Division provides comprehensive audit coverage of SBA’s 

operations through program performance reviews, internal control 

assessments, and financial and mandated audits to promote the 

economical, efficient, and effective operation of SBA programs. 

Audits give SBA managers an objective and systematic assessment of 

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

Financial audits examine the presentation of financial information, 

internal controls, and adherence to financial requirements. Performance 

audits assess operations in terms of economical and effective use of 

resources. 

• Investigations Division manages a nationwide program to prevent and 

detect illegal and/or improper activities involving SBA programs, 

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

full range of traditional law enforcement functions. The security 

operations staff ensures that all Agency employees have the appropriate 

background investigations and security clearances for their duties. The 

name check program provides SBA officials with character-eligibility 

information on loan applicants and other potential program participants. 

• Inspection and Evaluation Division conducts assessments of the 

effectiveness of SBA programs and activities, analyses of critical 

program issues, best practices studies, and research on matters 

concerning SBA performance. 

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

and assistance to all OIG components, represents OIG in litigation 

arising out of or affecting OIG operations, and processes Freedom of 

Information and Privacy Act requests. 

• Management and Policy Division is responsible for developing, 

managing, and executing the OIG budget; developing and supporting 

information systems and hardware; developing OIG HR policy and 

providing a full-service HR program to OIG; providing support services 

to headquarters (HQ) OIG employees; managing a nationwide facilities 

management function; providing communications services; authoring 

and publishing semi-annual reports, OIG strategic and operating plans 

and reports, and OIG annual plans and reports.

There are five divisions 

of SBA/OIG. 
OIG Profile 

12 Semiannual Report September 2002 

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

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

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

Seattle, and Syracuse. 

As of September 30, 2002, OIG’s on-board strength was 107. The 

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

disaster assistance oversight activities, and a $5,568 rescission.

 

SBA/OIG has offices 

nationwide. 

SBA/OIG resources. 

OFFICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

 KANSAS CITY

INSPECTOR GENERAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

WASH., DC CHICAGO

SEATTLE

HOUSTON

PHILADELPHIA FRANCISCO

AUDITING DIVISION

 BUSINESS DEVELOPMENT

 PROGRAMS GROUP

WASH., DC WASH., DC

ATLANTA

DALLAS

LOS ANGELES

MANAGEMENT AND

POLICY DIVISION

 SAN JUAN
OIG Activities 

Semiannual Report September 2002 13

This chapter includes details and results of audits, investigations, 

inspections, and other significant OIG activities. The material in this 

chapter is organized by major SBA program area. Many of the audits, 

inspections, and other materials discussed in this section can be found at 

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

Business Loan Programs

As was discussed in the Significant Activities and Management 

Challenges section, OIG has conducted a series of audits of SBA-guaranteed 

loans by a former PLP. Below are illustrations of these audits and their 

results. 

• An applicant for one approved loan submitted false and misleading 

financial information to the lender. The financial documentation 

submitted by the borrower was modified and altered in a manner that 

should have been detected by the lender. The wage information 

reported on the applicant’s Wage and Tax Statement (Form W-2) was 

clearly altered from $23,909 to $84,093. The applicant’s Federal tax 

return was also modified to match the altered amount shown on the 

Form W-2. Finally, the business income statement for the most recent 

year of operation was an exact copy of the prior year’s income statement 

with the exception of the dates. The lender did not obtain an IRS 

transcript to verify the financial data submitted by the borrower. The 

failure of the lender to identify the falsified information and obtain an 

IRS verification reflect lack of due care during the review and 

evaluations of the loan application. This loan was subject to denial 

based on the applicant’s poor character and questionable repayment 

ability. The District Director (DD) agreed with the recommendation to 

seek recovery of $93,689 from the lender. 

• For a loan made under the LowDoc pilot loan program, the lender did 

not follow prudent lending practices in assessing the applicant’s 

repayment ability and securing collateral. The lender based repayment 

on the projected earnings of the business, which was based on two 

pending distribution contracts. However, the lender did not take prudent 

measures to ensure that the contracts were in effect before disbursing the 

loans proceeds. The business failed after making just five payments 

because the distribution contracts never materialized. The lender also 

did not take prudent measures to protect the collateral that was taken to 

secure the loan. Soon after the loan was disbursed, the borrower began 

showing signs of trouble by missing payments and making interest only 

payments. During a 2-month period, the borrower issued 4 checks that 

bounced due to lack of funds. In accordance with SBA procedures, a 

lender is required to perform a site visit within 10 days of knowledge of 

conditions that create an in-liquidation situation. There was no evidence 

OIG continues audits of 

SBA-guaranteed loans 

made by a former PLP. 
OIG Activities 

14 Semiannual Report September 2002 

that the lender performed a site visit until after learning from the 

borrower’s landlord, 2 years after the loan was disbursed, that the 

borrower had vacated the premises and taken all the collateral. The 

collateral was never located. While the DD disagreed with the 

recommendation to seek recovery of $84,911 and stated that liability on 

the loan should not be denied based on credit that was approved by 

SBA, there was no evidence found or provided to support that SBA 

pre-approved the credit decision on this loan. 

• The lender disbursed an SBA loan for $493,747 to refinance ineligible 

loans. SBA procedures provide that loan proceeds may be used to 

refinance debt when the terms of the debt are unreasonable and 

refinancing will provide substantial benefit to the small business in the 

form of increased cash flow. The lender must also certify in writing that 

the debt refinanced is and always has been current. The only 

documentation found in support of the loans was a manually prepared 

schedule that did not provide enough information to evaluate if the loans 

met refinancing requirements. Furthermore, the schedule indicated that 

2 of the loans may have been delinquent for 9 months and 2 years. 

Consequently, because there was no evidence that the loans were 

eligible for refinancing with SBA-guaranteed loan proceeds, SBA was 

not obligated to honor the guaranty portion of the loan used to refinance 

$493,747 of borrower debt. The lender also did not verify the use of 

proceeds intended to pay off the balance on a purchase contract for 

vending machines that were also taken as collateral on the loan. Under 

the agreement, the proceeds were to be disbursed via a joint payee check 

and title of the vending machines would transfer to the borrower upon 

evidence that the check was deposited into the vendor’s bank account. 

However, the lender did not take prudent measures to ensure that 

proceeds were properly disbursed and instead made the check out in the 

name of the borrower only who deposited it into his bank account. 

There was no evidence that the borrower ever paid off the balance on the 

purchase contract or took title or possession of the vending equipment. 

The DD agreed with the audit recommendation to seek recovery of 

$450,599 from the lender and had collected $370,309 by the time the 

audit report was issued. 

Borrowers with Prior Loan Defaults 

OIG issued a report on borrowers with prior loan defaults. The 

objective of the audit was to determine if Section 7(a) loans were 

inappropriately guaranteed for applicants who had previously defaulted on 

guaranteed loans resulting in a loss to the Government. OIG performed the 

audit using a sample of 47 loans obtained from SBA’s loan database by 

matching loans made between October 1995 and April 2001, to all 

purchased and liquidated loans. The audit identified that 166 of the loans 

were made to applicants with prior loan losses. Of those 166, OIG can 

OIG recommends that 

the Agency develop 

new procedures to 

safeguard against loans 

being issued to 

borrowers with prior 

defaults. 
OIG Activities 

Semiannual Report September 2002 15

confirm 42 applicants that caused prior losses to the Government received 

new loan guarantees. OIG could not verify that the remaining 124 loans 

were made to applicants with prior losses because the prior loan files no 

longer exist. OIG found that district offices were not adhering to the 10-year 

retention requirement for charged-off loan files. OIG identified 30 files 

destroyed between 3.4 years and 9 years after being charged-off. As a result 

of the ineligible loans, SBA was at risk for guarantees totaling about $20.1 

million and had honored guarantees totaling about $2.3 million to borrowers 

with prior defaults. Additionally, one of the sample loans defaulted after the 

draft report was issued and is estimated to result in a loss of about $667,500 

to SBA. Based on the audit findings, the loan was referred to the 

Investigations Division and is being considered for investigation. 

 

OIG recommended that the Office of Financial Assistance (OFA) establish 

procedures to require loan officers to identify applicants with prior loan 

losses and to allow lenders to use the SBA database to identify applicants 

with prior loan losses, seek recovery from existing borrowers who failed to 

disclose their prior loan losses, annotate loan files to identify borrowers with 

current loans who failed to disclose prior losses, and reiterate to district 

offices the requirements for retention of charged-off loan files. 

 

OFA did not believe that the cited condition was significant enough to 

warrant new procedures and was concerned that lender access to the SBA 

database would raise Privacy Act issues. OFA agreed to seek recovery from 

borrowers whose current loans default and who failed to disclose prior 

losses, to annotate the loan database to alert SBA personnel of existing 

borrowers who failed to disclose prior losses, and to issue guidelines to field 

offices about retention of charged-off loans. 

Two Early Defaulted Loans 

OIG issued a report on two early defaulted loans originated by the 

same lender. The first loan was $1.56 million to borrower #1 and the second 

loan was $1.58 million borrower #2. The loans were selected as part of 

OIG’s on-going program to audit SBA-guaranteed loans charged-off or 

transferred to liquidation status within 36 months of approval. The objective 

of the audit was to determine if the early loan defaults were caused by lender 

or borrower noncompliance with SBA’s requirements. 

OIG found that the lender did not comply with SBA’s policies and 

procedures for the two related loans. The lender did not ensure that 

borrower #1 complied with SBA regulations and material conditions of the 

loan authorization. Borrower #1 used loan proceeds for unauthorized and 

unsupported purposes, and the lender did not ensure that the borrower 

obtained lien waivers, a valid surety bond, and had the ability to pay 

additional construction expenses. These noncompliances reduced the 

amount of funds available to complete the project and contributed to the loan 

default. The lender became aware of the noncompliances and, in lieu of 

OIG recommends that the 

SBA recover $747,308 

plus interest and expenses 

paid for a defaulted loan, 

suspend the lender’s 

preferred status, and 

pursue civil enforcement. 
OIG Activities 

16 Semiannual Report September 2002 

submitting the defaulted loan for SBA to honor the guarantee, attempted to 

complete the project and remedy the default by making a subsequent loan to 

borrower #2. Borrower #2 was formed by two of borrower #1’s partners. 

The loan to borrower #2 did not meet SBA’s eligibility criteria for change of 

ownership, was improperly made using preferred lending procedures, and 

did not include the required equity injection. Additionally, the loan did not 

meet refinancing criteria. The effect of the subsequent loan was to transfer 

the lender’s loss to SBA. SBA paid approximately $747,000 to honor the 

guarantee. 

OIG recommended that the SBA Georgia District Office deny liability for 

the loan to borrower #2 and seek recovery from the lender of principal 

totaling $747,308 plus interest and expenses paid by SBA. OIG also 

recommended that the lender’s preferred lender program status be suspended 

and that SBA pursue civil enforcement remedies against the lender under the 

False Claims Act. The District Director agreed with our recommendations. 

SBA’s Experience with Defaulted Franchise Loans 

OIG issued a report on SBA’s experience with defaulted franchise 

loans. The inspection examined the franchise loan portfolio’s potential 

exposure, purchase rates, and specific lenders’ performance. Despite SBA’s 

public view that franchisees are generally more successful than 

nonfranchisees, SBA’s experience with defaulted loans and some outside 

studies do not support this. OIG recommended that the Agency’s printed 

and electronic information no longer state this view. In addition, SBA’s 

loan databases inaccurately identified some loans to nonfranchisees as 

franchise loans, thus hampering the monitoring of potential franchisor 

control over franchisees. Despite this, the databases may still be useful 

because the control issue could apply to any situation in which a large entity 

allows the use of its brand name. OIG also recommended that SBA define 

what constitutes either a franchise loan or loans to small businesses that use 

a larger firm’s brand name, communicate the definition(s), and recategorize 

its loan data. Finally, although most of the large defaulted loans examined 

in depth exhibited early warning signs, any deficiencies in credit analysis 

cannot be attributed solely to lender bias in favor of franchise loans or their 

equivalents. OFA agreed with OIG’s recommendations. 

Investigative Accomplishments in the Business Loan Programs 

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

have identified various types of fraud. Two major trends in recent years are: 

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

OIG is reporting more than $8.5 million in cost avoidances this 6-month 

period; $7.8 million of these avoidances were in the SBA loan programs and 

resulted from four investigations in two SBA district offices. They fall into 

OIG accomplishes 

more than $8.5 million 

in cost avoidances 

during the reporting 

period. 
OIG Activities 

Semiannual Report September 2002 17

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

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

disbursed because of adverse information OIG was able to document. 

Fraud Involving Loan Agents 

Loan agents provide referral and loan application services to 

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

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

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

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

indictments, one conviction, and $172,000 in restitution to SBA. The 

following cases illustrate OIG investigations of fraud involving business 

loan agents. 

• A Phoenix, Arizona, business executive was sentenced to 90 days of 

community confinement in a halfway house, 90 days home detention, 

and 3 years of supervised release, and was ordered to pay a $5,000 fine 

and $172,000 in restitution to SBA. He had pled guilty to one count of 

making a material false statement to obtain a $900,000 SBA-guaranteed 

loan for the purchase of six fast food franchises. The investigation 

disclosed that, at the direction of his business brokerage firm, the 

defendant claimed on his “Personal Financial Statement” form that he 

had $140,000 worth of stock in restaurants and that he had $471,949 in 

“earned fees.” The investigation revealed that although he knew about 

SBA’s cash injection requirement, he did not have the cash necessary to 

close the loan. As a result, he agreed to allow his business brokerage 

firm to obtain a temporary cash-injection from a third party. In order for 

the scheme to work, the defendant arranged to obtain a real estate sales 

license so that he could receive a commission for the sale of the six 

franchises he purchased through the business brokerage firm. The 

defendant knew that a portion of the commission would be used to repay 

the third party that made his cash injection. The case was a joint 

investigation with FBI and was based on a referral from the SBA 

Arizona District Office. 

• A Houston, Texas, loan broker and three of his clients who applied for a 

$2 million SBA-guaranteed loan to purchase a motel were indicted. The 

indictment charged all four on one count of conspiracy, three counts of 

mail fraud, and one count of wire fraud. According to the indictment, 

the defendants submitted a loan application package with fraudulent 

personal financial statements and a false purchase contract that inflated 

the price of the motel from $2 million to $2.7 million. To satisfy the 

closing requirements, the defendants submitted fraudulent copies of 

cashier’s checks as proof of their required equity injection. Three 

defendants were arrested following the closing conference at the title 

company, prior to loan funding and the fourth was arrested at a later 
OIG Activities 

18 Semiannual Report September 2002 

date. This case was a joint investigation with FBI and was initiated 

based on a referral from the SBA Houston District Office. 

Fraud Involving False Tax Returns

Over the last 12 years, OIG has received more than 536 allegations 

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

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

involved applications totaling approximately $130 million that were 

submitted to 57 SBA offices. To date, 172 individuals have been indicted 

on criminal charges, 154 adjudicated guilty, 7 indictments were dismissed, 

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

Restitution and fines from those adjudicated guilty total nearly $30 million. 

Because of the implicit credibility of Federal tax returns, SBA has 

traditionally relied heavily on information they contain in making its creditrelated decisions, so falsification of “copies” of returns can have a 

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

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

indictments, three convictions, and more than $2.2 million in savings. 

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

tax returns. 

• Two former business owners of two gas stations and a dry cleaning 

business in Houston, Texas, agreed to pre-trial diversions. They were 

previously indicted on 1 count of conspiracy and 25 counts of making 

material false statements to SBA. The two were indicted along with a 

certified public accountant for fraudulently inducing a non-bank 

participating lender and SBA into funding a $355,000 SBA-guaranteed 

loan for a service station. The principals allegedly falsified nine Federal 

income tax returns and six IRS tax return verifications, forged two fuel 

company leases, and falsified their $85,000 capital injection. While 

awaiting trial, one of the owners conspired with three other individuals 

by submitting two additional fraudulent SBA loan guaranty applications 

to two Federal Deposit Insurance Corporation (FDIC) insured banks for 

a total of almost $2.2 million. At the instruction of the U.S. Attorney’s 

Office, OIG notified the participant lenders that the defendant was 

apparently involved in a second scheme and the lenders declined the 

loans. OIG continues to conduct this investigation jointly with TIGTA. 

• A Chicago, Illinois, real estate attorney pled guilty to two counts of 

conspiracy in connection with his participation in schemes to defraud 

SBA and a non-participating lender and to obstruct and impede justice. 

Additionally, a Chicago, Illinois, SBA loan packager and business 

broker was indicted for allegedly aiding the preparation and filing of 

fraudulent income tax returns with the IRS. This fourth superseding 

Restitution and fines 

resulting from tax fraud 

referrals total nearly $30 

million. 

Three Illinois men 

indicted for fraudulently 

inducing a non-bank 

participating lender and 

SBA into funding a 

$355,000 SBAguaranteed loan. 
OIG Activities 

Semiannual Report September 2002 19

indictment added the defendant’s name to those previously charged, 

including a restaurateur, the real estate attorney and two other attorneys, 

and a defunct Illinois corporation. The plea and charges were in 

connection with the purchase of a defunct Antioch, Illinois, restaurant. 

The scheme included a false capital injection by the borrower that 

enabled him to obtain a 100 percent financed $1.25 million business 

loan and resulted in fraudulent inflation of the sales price, exposing SBA 

and the non-bank participating lender to additional loss and reduced 

recovery potential. As part of the alleged conspiracy, the packager 

participated in preparing and submitting a loan package to the non-bank 

participating lender that contained false and exaggerated claims of work 

and management experience, and included false income and personal 

financial statements. The packager also hired an accountant (a now 

deceased friend) to prepare allegedly bogus tax returns for the borrower 

that were used in the SBA loan package and later submitted to IRS. 

Previously, the five defendants were charged in an eight count 

indictment with one count of conspiracy, aiding and abetting, mail fraud, 

and wire fraud. The indictment also charged the real estate attorney 

with one count of obstruction of justice and a second count of 

conspiracy in connection with allegedly fabricated documents produced 

to OIG by the real estate attorney and others in response to grand jury 

subpoenas. OIG initiated this investigation based on referrals from 

SBA’s Illinois District Office. 

Other Types of Fraud 

The following cases illustrate OIG investigations involving fraud to 

obtain business loans. 

• The former president of a contracting company in Aurora, Illinois, was 

sentenced to a prison term of 12 months and 1 day with a 2-year term of 

supervised release. The defendant was ordered to make complete 

restitution in the amount of $345,820. She previously pled guilty to one 

count of making a material false statement. The plea agreement resulted 

from a criminal-information that was filed earlier and relates to a 

$400,000 SBA-guaranteed loan that was obtained by the defendant’s 

company through an SBA participating lender. The purpose of the loan 

was to obtain working capital for her company. During the loan 

application process, she signed an affidavit stating that she was 

individually, and as a corporation, current on all Federal and state 

taxes. According to information gathered by the SBA Illinois District 

Office, at the time she signed this affidavit, she and the company had tax 

debt totaling more than $1 million. This investigation was worked 

jointly with FBI and was initiated based on a referral from the SBA 

Illinois District Office. 

Former contracting 

company president in 

Illinois sentenced to 

12 months and 1 day in 

prison and a 2-year term 

of supervised release. 
OIG Activities 

20 Semiannual Report September 2002 

• A Portland, Oregon, businessman and guarantor of an SBA-guaranteed 

loan made to a restaurant was indicted on six felony counts. The 

indictment charged that he made material false statements on business 

loan applications to the SBA-participating lender in support of a loan for 

$697,200, and a second loan for $168,995. The indictment also charged 

that he made material false statements on a loan application to another 

SBA participating lender for a $169,500 SBA-guaranteed loan, and that 

he made material false statements on a second loan application for 

$196,875 to the first lender for the purchase of his residence. Additional 

counts of the indictment charged that he used false Social Security 

numbers (SSN) to obtain the loans and that he failed to disclose prior 

bankruptcies, judgments, other business interests, and previous criminal 

history. This case was a joint investigation with FBI and was initiated 

based on a referral from the SBA Oregon District Office. 

• The owner of a commercial painting company in Berthoud, Colorado, 

was sentenced to 1 day of incarceration, 120 days of home detention, 

5 years of supervised release, and 150 hours of community service. In 

addition, she must pay $83,423 in restitution and seek psychological 

treatment. She previously pled guilty to one count of making a false 

statement to a federally-insured financial institution and one count of 

bankruptcy fraud. OIG’s joint investigation with FBI determined that 

the defendant failed to disclose approximately $250,000 in business debt 

and two pending lawsuits on her $100,000 LowDoc loan application. In 

addition, she used part of the loan proceeds for personal expenses, while 

failing to pay business debts. OIG initiated this investigation based on a 

referral from SBA’s Colorado District Office. 

 

• The former president of a mergers and acquisition company in 

Cary, Illinois, was charged in an information on one count of making 

false statements to SBA, in connection with a $954,000 SBA-guaranteed 

loan. The purpose of the loan was to purchase a restaurant maintenance 

and repair business. As part of the loan application, he submitted an 

SBA Personal Financial Statement that failed to disclose a significant 

number of liabilities, including approximately $87,000 in debt to a bank 

and a $30,000 personal loan from his brother-in-law. The case was a 

joint investigation with FBI and was initiated based on a referral from 

the public. 

The following cases illustrate OIG investigations involving acts after 

business loans were approved. 

• A Columbus, Ohio, businessman pled guilty to one count of making 

false statements to an FDIC-insured financial institution. The man was 

previously charged in an information with one count of making false 

statements to a federally-insured financial institution in connection with 
OIG Activities 

Semiannual Report September 2002 21

a $337,500 SBA-guaranteed loan to a graphic arts and book binding 

business he owned. SBA loan proceeds were to be used to purchase 

machinery and equipment for the business. However, OIG’s 

investigation revealed that he intentionally prepared and submitted false 

invoices to the participating lender bank and SBA to obtain the loan, and 

used loan proceeds to pay for unauthorized business and personal debts. 

OIG initiated this investigation based on a referral from the bank and 

SBA’s Columbus District Office. 

• A Plano, Texas, businessman was sentenced to 4 months incarceration, 

4 months home confinement, and 5 years supervised release. He was 

also ordered to pay $99,191 in restitution to a bank in Oklahoma. He 

had pled guilty to a one-count charge of bank fraud for fraudulently 

influencing the bank to fund $105,340 in proceeds from an SBAguaranteed loan. The investigation revealed that he presented 

documents to the bank representing that his company had purchased 

equipment for $131,675, when in fact no such purchase was made. The 

case was a joint investigation with FBI and was initiated based on a 

referral from the SBA Oklahoma District Office. 

• The co-owner of a bed and breakfast in Sidney, Ohio, pled guilty to one 

count of conversion of collateral pledged to SBA. The owners, a 

husband and wife, were each indicted on one felony count of conversion 

of collateral pledged to the SBA. The indictment related to a 

$200,000 SBA-guaranteed loan secured by the couple. The purpose of 

the loan was to purchase a house in Sidney, Ohio, that was to be 

converted to a bed and breakfast business. The SBA loan agreement 

collateral provisions specifically stated the borrower would provide as 

collateral the land and the buildings, including their inventory. The 

investigation revealed that after the couple defaulted on the SBA loan 

and filed for bankruptcy, they signed a contract to have the interior 

woodwork (trim, doors, and casings), an elaborate wood fireplace 

mantel, and a spiral staircase removed from the home and sold for 

$10,000. This investigation was initiated based on a referral from the 

SBA Columbus District Office. 

 

• The part-owner of a vitamin and herb production and packaging 

company in Provo, Utah, was charged in an information by the Utah 

County Attorney’s Office with one count of pattern of unlawful activity, 

one count of forgery, eight counts of theft by deception, and eight counts 

of money laundering. OIG’s joint investigation with the Utah County 

Sheriff’s Office determined that the part-owner obtained a $905,000 

SBA-guaranteed loan in the name of a laboratory by falsely representing 

that he had authorization from the board of directors of that lab and that 

the board members were guaranteeing the loan. The defendant used the 

loan to purchase a building in his name and then represented to the 

board that they would be leasing a new building for their expansion 

from a disinterested third party. He then began collecting excessive 

SBA works with FBI to 

investigate a Texas 

businessman who 

committed bank fraud by 

influencing a bank to fund 

$105,340 in proceeds 

from an SBA-guaranteed 

loan.
OIG Activities 

22 Semiannual Report September 2002 

lease payments from the lab under a fabricated name using a post office 

box. In addition, the Utah County Sheriff’s Office investigation 

determined that he diverted over $1.5 million in company funds under 

false pretenses and used the funds for unauthorized personal expenses. 

Information provided by OIG was instrumental in developing Utah 

County’s already open investigation and securing the prosecution of the 

defendant. The case was initiated based on a referral from the SBA 

Utah District Office. 

The following case illustrates an OIG investigation involving fraud 

by a business lender. 

• The president of a Kansas bank, individually and as president, signed 

Compromise and Settlement Agreements agreeing that the bank would 

pay the U.S. $250,000, release SBA from approximately $570,505 in 

liability on nine outstanding SBA-guaranteed loans, and neither the 

president nor the bank would participate in any SBA loan program for 

5 years. The president and the bank were charged in a civil fraud 

complaint that alleged false statements as well as breach of contract 

regarding an SBA-guaranteed loan the bank made to a foam core panel 

manufacturing plant. The plant defaulted on this loan and SBA paid the 

bank $474,587 under the guaranty agreement. A joint investigation with 

the U.S. Secret Service resulted in indictments of two plant officials for 

making false statements about their ownership and officer positions. 

One of the officials pled guilty and the other died prior to trial. The 

related civil fraud suit was then filed charging that the bank president 

and the bank: 1) submitted a falsely redacted appraisal to SBA; 

2) claimed the borrowers had excellent credit history when they had 

failed to obtain or review any credit report; and 3) falsely certified there 

had been no substantial adverse change in the financial condition of the 

borrower when, in fact, upon learning that the borrower would not be 

receiving a $500,000 grant (the application for which was never 

disclosed to SBA), they demanded additional security for the SBA loan. 

Finally, the lawsuit alleged that the president and bank certified the 

lender had not received any Certificates of Deposit (CDs) in connection 

with this SBA loan, when in fact they had obtained undisclosed CDs 

totaling $55,000. This civil fraud suit was litigated by the 

U.S. Attorney’s Office in Wichita, Kansas. This case was initiated 

based on a referral from the SBA Kansas City District Office. 

The following articles demonstrate OIG investigations where 

improper loans were made by business lenders. 

• An SBA preferred lender agreed to release SBA of guaranty obligations 

on nine defaulted business loans totaling more than $6.5 million. The 

loans in question were identified in an alleged fraudulent “flipping” 
OIG Activities 

Semiannual Report September 2002 23

scheme. The scheme involved individuals purportedly submitting 

fraudulent SBA loan applications, which inflated the value of gas 

stations, to obtain financing for 100 percent of the inflated purchase 

price. The Agency cost savings was the result of the joint FBI and OIG 

investigation, diligent efforts of the SBA Houston District Office, and 

the lender’s decision to release SBA’s liability. 

• An SBA preferred lender agreed to cancel SBA’s guaranty obligation on 

an SBAExpress loan made to a café owner. The defendant and her 

husband were each indicted on one count of insurance fraud by a 

District Court Grand Jury in Harris County, Texas. The investigation 

determined that the husband disclosed his criminal history in the loan 

application that should have made the loan ineligible under the 

SBAExpress loan program. The outstanding principal balance of the 

loan in liquidation was $122,648. The bank’s decision to release SBA 

of its 50 percent liability has resulted in a cost savings of $61,324 to the 

Agency. The charges arose out of a fraudulent property insurance 

policy that the couple purchased to satisfy the closing requirements for a 

$150,000 SBA-guaranteed loan. A fire destroyed the restaurant 3 days 

after the bank approved the loan. The couple concealed the extent of the 

fire from the bank and obtained disbursement of the loan. At the 

closing, the wife signed a general security agreement that required her to 

maintain collateral insurance at the restaurant premises. After proof of 

insurance was provided, the bank disbursed the loan proceeds, unaware 

that the couple was no longer operating the restaurant. Subsequently, 

the wife allegedly filed a fraudulent claim on the insurance policy and 

defaulted on the loan. Initially, the husband applied for the loan; 

however, his name was removed from the application because of his 

criminal history. OIG conducted this investigation jointly with the 

Bureau of Alcohol, Tobacco, and Firearms. 

Proposed Agency Policy on Section 7(a) Guaranty Purchases 

OIG reviewed and commented on the Agency’s proposed Policy 

Notice on Section 7(a) guaranty purchases. The Agency developed the 

Notice in response to OIG’s recommendations that stemmed from its ongoing review of SBA-guaranteed loans and loan processing. OIG 

recommended that language be inserted stating that “a purchase review is a 

process that serves to minimize erroneous payments by ensuring only loans 

that were originated, closed, serviced, and liquidated in accordance with 

SBA policy, procedures, and regulations are purchased.” OIG 

recommended that lenders be required to submit their credit memoranda and 

all supporting documentation for the memoranda as part of any purchase 

request to determine if the lender reasonably used its judgment to evaluate 

and document repayment ability. OIG further recommended that SBA 

obtain the lender’s complete loan file, including an SBA Form 912, 

Statement of Personal History, for payment requests on all loans that default 

SBA preferred lender 

agrees to release SBA of 

guarantee obligations 

totaling more than 

$6.5 million based on OIG 

and FBI investigation. 
OIG Activities 

24 Semiannual Report September 2002 

within 18 months of approval. Program officials adopted many of OIG’s 

comments and are still considering others. 

Disaster Loan Program

Review of Out-of-Sequence Payments 

OIG issued a report that found SBA procedures for repaying agencies 

for advances needed improvement. To illustrate, OIG reviewed four North 

Carolina disaster home loans and found that borrowers previously received 

Individual Family Grant Program (IFGP) funds from the Federal Emergency 

Management Agency (FEMA). During loan origination, SBA determined 

that three borrowers were not eligible for the IFGP funds, since they were 

eligible for the entire disaster loan with SBA. To correct this duplication, 

SBA loan checks were prepared as co-payable to the borrowers and to the 

IFGP of North Carolina. The borrowers were supposed to forward these 

checks to FEMA to reimburse erroneous IFGP payments. However, two of 

the three borrowers who received co-payment checks totaling $19,800 

cashed the checks instead of repaying their IFGP payments. The Associate 

Administrator for Disaster Assistance was briefed on the report and agreed 

to take action to implement OIG’s recommendations to: develop a more 

effective method of returning disaster loan proceeds to agencies that make 

“out-of-sequence” payments, provide FEMA with information concerning 

the two identified SBA disaster borrowers who have not returned the 

$19,800 of incorrect disbursements, and in coordination with FEMA, 

provide information on similar co-payment checks to SBA borrowers 

receiving IFGP funds. This review was limited to ten borrowers, two of 

which did not return “out-of-sequence” payments 

The following cases illustrate OIG investigations of fraud to obtain 

disaster loans. 

• Both a Carolina Beach, North Carolina, music company and its owner 

pled guilty to one count of money laundering. The defendant, who was 

the former North Carolina Transportation Secretary, acting as attorney 

in fact for his father, obtained two disaster loans totaling $617,200 for 

damages associated with Hurricanes Bonnie (1998) and Floyd (1999). 

The defendant’s guilty plea was the result of a previous indictment on 

one count of mail fraud and six counts of wire fraud. The investigation 

disclosed that the principals, through the company, were operating an 

illegal gambling business that made it ineligible for disaster loans. The 

defendant also falsely claimed that equipment was damaged by the 

storms. Further investigation disclosed that loan proceeds were used to 

pay pre-disaster debt that violated the loan authorization agreements, 

and that the loan proceeds were either mailed or electronically 

OIG finds that disaster 

assistance recipients were 

paid duplicate benefits 

from FEMA and SBA. 
OIG Activities 

Semiannual Report September 2002 25

transferred to the account of his father. The defendant’s son also pled 

guilty to a one-count criminal-information for money laundering and 

agreed to testify against his father and grandfather in lieu of being 

indicted. Although the defendant’s father was actively involved, he was 

not indicted due to the onset of Alzheimer’s disease. The music 

company and the defendant also agreed to forfeit $750,000 seized during 

this investigation. The indictment also included 268 counts associated 

with money laundering and illegal gambling pertaining to the FBI’s part 

of the case. OIG initiated this investigation based on a request by the 

FBI and the U.S. Attorney’s Office. 

• A California physician attempting to start a practice in New York was 

indicted on three counts of false statements and one count of conspiracy. 

The charges were filed in connection with applications she submitted to 

FEMA and SBA for disaster funding pursuant to Hurricane Floyd, 

which allegedly damaged her mother’s home in Cortland Manor, New 

York. The physician submitted an application to FEMA on behalf of her 

mother claiming that the Cortland Manor residence was their primary 

residence, when in fact they were living at an apartment rented in New 

York City. After receiving a grant of $1,308, the mother falsely claimed 

to FEMA in an appeal for more funding that her daughter’s (the 

physician) $7,000 medical data scope was stored in the house and 

destroyed by the storm. The physician herself also applied for a 

business disaster loan from SBA in her own name for her medical 

practice, and she represented to SBA that she had approximately 

$70,000 worth of medical equipment stored at the Cortland Manor 

residence that was ruined by the storm. The physician also claimed that 

she had opened a medical practice in Westchester, New York, and 

submitted a fraudulent lease to that effect. She was then approved for an 

$88,400 loan, of which she received only $10,000 due to her inability to 

keep the scheme going. The investigation revealed that there never was 

any medical equipment stored in the house, and that in fact the major 

item, a $50,000 anesthesia machine, was damaged while it was being 

shipped to New York weeks before the hurricane. The physician was 

also charged with conspiring with her landlord to defraud SBA in 

connection with her mother’s $78,300 loan for the Cortland Manor 

residence after it was revealed that much of the damage to the house was 

pre-existing, and that the physician directed the landlord to alter 

invoices, which he then submitted to SBA to inflate the disaster loan 

disbursements. The physician was the second individual who was 

criminally prosecuted on this matter. The landlord previously pled 

guilty to a criminal-information charging him with wire fraud and two 

counts of bank fraud. The investigation was initiated based on a 

complaint by a member of the public. 
OIG Activities 

26 Semiannual Report September 2002 

Small Business Investment Companies 

The following narrative illustrates OIG investigations involving fraud 

in connection with SBICs. 

• The former pension plan manager for a New York City area utilities 

company was arrested by special agents of SBA and the U.S. 

Department of Labor (DOL/OIG) OIGs. The arrest was based on a 

sealed complaint charging him with embezzlement of employee benefit 

plan funds. According to the now-unsealed complaint, the defendant 

had misused a corporate credit card on more than 60 occasions. He 

double and sometimes triple billed for expenses and sought 

reimbursement for the same expenses from two or more sources, 

including the utility company and the plan brokers, thus defrauding the 

company pension plan. The defendant admitted using the money for 

personal expenses. He was responsible for recommending investments 

of the utility company pension funds made through various venture 

capital firms, including a New York City SBIC presently in 

receivership. The U.S. Attorney’s Office, Eastern District of New York, 

asked OIG to join DOL/OIG in its ongoing investigation. 

Surety Guarantees

Loss Adjustment Expenses Incurred on a Bonding Company 

OIG issued a report on the loss adjustment expenses (LAE) incurred 

on a bonding company. The audit was conducted based on a complaint from 

the contractor, who believed the surety was charging his company 

unreasonable legal fees. OIG found that 98 percent of the LAEs claimed by 

the surety company for the SBA-guaranteed bonds were allocable, 

allowable, and reasonable. The surety company incurred and was 

reimbursed its guaranteed percentage by SBA for only $1,547 of LAEs that 

were not specifically allocable to a claim for loss resulting from the breach 

of the terms of the bonded contract. The audit also disclosed that SBA did 

not give the surety company permission to close its files in a timely manner. 

As a result, the auditors made recommendations to the Acting Associate 

Administrator, Office of Surety Guarantees ((A)AA/OSG), to recover the 

Federal share of $1,392 from the surety company for the unallowable LAEs 

and ensure file closures are approved expediently. The (A)AA/OSG agreed 

with the recommendations. Final action was completed on one of the two 

recommendations in this report on August 20, 2002. OSG agreed to take 

expedient action to approve file closures on requests from sureties to 

discontinue pursuit of recovery and the office revised SBA’s policies and 

Former pension plan 

manager arrested for 

embezzlement of 

employee benefit plan 

funds. 
OIG Activities 

Semiannual Report September 2002 27

procedures accordingly to avoid incurrence of unnecessary LAEs in the 

future. 

Entrepreneurial Development Programs

The following case is an example of fraud involving an 

Entrepreneurial Development program. 

• An SBA grant to a drug testing company in Pinellas Park, Florida, was 

terminated after an OIG investigation discovered addressed allegations 

that the company had made material false statements on its grant 

proposal. In the proposal, the president certified that none of the 

principals of the drug testing company had been convicted of a fraudrelated crime in the past 3 years. The investigation disclosed, however, 

that the vice president had been convicted in Florida of a felony scheme 

with intent to defraud in August 1999. Pursuant to OIG’s findings, the 

director of the grant program terminated the $234,063 grant prior to the 

disbursement of any of the funds. The drug testing company 

subsequently submitted a request for reimbursement of $122,764 for 

expenses it reportedly incurred during the first quarter of its grant 

period. Based on an OIG review of the documents the company 

provided to support its claim, SBA advised the company that its 

documentation was questionable and it would not be reimbursed without 

verifiable documentation. The company failed to respond and the 

program director advised OIG that none of the grant funds would be 

disbursed, resulting in a $234,063 cost savings. 

Government Contracting and Business

Development Program

As a result of OIG investigations during this reporting period, a 

Section 8(a) Government contractor agreed to a permanent injunction 

barring him and/or any entity in which he might have a financial interest 

from doing business as a general contractor, subcontractor, vendor, or 

supplier with the Government. A second Section 8(a) Government 

contractor was suspended from receiving all Government contracts with the 

U.S. Department of Defense as a result of a joint investigation with 

DOL/OIG and FBI. 

The following case illustrates OIG investigations of fraud in 

connection with the Section 8(a)BD program. 

• Both the president of a Raleigh, North Carolina, construction company 

and the company pled guilty to a one-count charge of mail fraud. In 

Grant for drug testing 

company in Florida 

terminated based on 

OIG investigation which 

disclosed a felony 

scheme. 
OIG Activities 

28 Semiannual Report September 2002 

order to induce disbursements of contract funds, the defendant submitted 

false payment certification requests under various Army, Navy, Postal 

Service, and U.S. Department of Veterans Affairs (VA) Section 8(a) 

contracts, stating that all subcontractors and vendors were paid. Under 

the plea agreement, the defendant acknowledged responsibility for the 

false statements that resulted in total losses of almost $1.3 million on 

10 separate Government contracts (3-Army; 2-VA; 4-Navy; 1-Postal 

Service). The Government lost an additional $700,000, as a result of 

having to re-issue numerous task orders on several contracts that were 

not completed by the company. In addition, he and the company agreed 

to a permanent injunction (debarment) barring him and/or any entity in 

which he might have a financial interest from doing business as a 

general contractor, subcontractor, vendor, or supplier with the 

Government. OIG initiated this investigation based on a referral from 

Army Criminal Investigation Division in Raleigh, North Carolina. 

Agency Management

Former Regional Administrator’s Travel 

OIG issued a report on the travel of a former SBA regional 

administrator (RA). The audit was performed at the request of the Chairman 

of the Senate Small Business Committee at the time, and found that the 

former RA’s travel did not always comply with travel regulations. The audit 

also identified erroneous payments totaling $9,653.34, consisting of $828.41 

for excess travel costs due to indirect travel through his home town and 

$8,824.34 for other unallowable travel payments. Since SBA allowed RAs 

to authorize their own travel and the documentation did not always establish 

whether the travel was essential, OIG concluded that SBA did not 

appropriately control such travel. 

The former RA self-authorized travel for 258 duty days during a 2 1⁄2 year 

period. During this timeframe, out of a possible 128 weekends, he traveled 

to, from, or through his home town on 52 weekends. On 20 of these 

weekends, the former RA’s Travel Authorizations and/or Requests for 

Reimbursement noted he was conducting official SBA business in his home 

town, rather than solely traveling from or to his home town. While there is 

no prohibition against taking an indirect route while traveling, the travel 

regulations are clear that any excess cost must be borne by the traveler as a 

personal expense and the original trip must have an official Government 

purpose. The combination of the frequency of trips involving his home 

town, the inability to reconstruct satisfactory justification for some trips 

from travel documentation, the use of allowed self-authorization and selfapproval of many of these trips, and the identification of instances of excess 

costs relating to trips through his home town gives the appearance that 

official Government travel was not appropriately controlled by SBA. 

OIG audits former SBA toplevel executive’s travel 

authorizations and requests 

for reimbursements and 

finds erroneous payments 

totaling $9,653.34. 
OIG Activities 

Semiannual Report September 2002 29

Accordingly, OIG recommended that safeguards must be implemented to 

ensure that SBA has control over official Government travel and eliminate 

the appearance of, and possible actual, travel abuse. The report contained 

three recommendations to obtain reimbursement from the former RA for the 

unallowable travel payments and preclude this situation from recurring. The 

CFO and AA/FO agreed with the recommendations and SBA has taken steps 

to preclude this situation from recurring in the future. The former RA 

disagreed with most of the questioned costs. 

SBA’s Controls Over the Access, Disclosure, and Use of Social Security 

Numbers by Third Parties 

OIG issued a report on SBA’s controls over the access, disclosure, 

and use of SSNs by third parties. The audit was part of a collaborative 

Government-wide Presidential Council on Integrity and Efficiency (PCIE) 

initiative to assess controls over the use and protection of the SSNs that 

agencies collect from individuals. Specific objectives were to determine 

whether SBA: (1) makes legal and informed disclosures of SSNs to third 

parties; (2) has appropriate controls over other entities’ access to and use of 

the SSNs that SBA has collected from individuals; (3) has adequate controls 

over access to individuals’ SSNs maintained in its databases; and (4) has 

appropriate controls over contractors’ access to and use of SSNs that SBA 

has collected from individuals. 

The audit found that SBA: (1) makes legal and informed disclosures of 

SSNs to third parties; (2) has appropriate controls over other entities’ access 

to and use of SSNs that SBA has collected from individuals; and (3) has 

adequate controls over access to individuals’ SSNs maintained in its 

databases. SBA does not, however, have appropriate controls over 

contractors’ access to and use of SSNs collected from individuals. 

Accordingly, additional steps are needed to limit the risks of unauthorized 

disclosure of SSN information. OIG made a recommendation to the AA/A to 

correct this deficiency. The AA/A responded that she generally agreed with 

OIG’s recommendations. 

Internal Controls Over Colson Services Corporation’s Contract as 

Central Servicing Agent (CSA) for SBA’s Certified Development 

Company (CDC) Loan Program 

OIG issued an independent auditor’s report on internal controls over 

Colson Services Corporation’s contract as CSA for SBA’s CDC Loan 

program. The auditors performed testing and reconciliation procedures over 

transaction data for calendar year 2000 and found that controls were 

generally in place and effective. The audit identified areas where 

improvements can be made such as: (1) reconciliation procedures between 

Colson and SBA’s Loan Accounting System (LAS) were not effective (SBA 

did not record $22.7 million in CDC loans funded in May 2000); and 

OIG audit finds that while 

SBA is safeguarding and 

has adequate control over 

access to SSNs collected 

from individuals, 

contractor access needs to 

be controlled. 
OIG Activities 

30 Semiannual Report September 2002 

(2) increased oversight of Colson’s compliance with various contract terms 

is needed. There were several instances in which Colson did not adhere to 

contract terms and SBA was unaware of the noncompliance. These 

instances of noncompliance may have cost SBA and the CDC’s thousands of 

dollars in lost interest earnings. 

The report contains recommendations to the CFO and the Associate Deputy 

Administrator for Capital Access (ADA/CA). These recommendations were 

for improvements in reconciliations and increased oversight of the CSA. 

The CFO agreed with the recommendations directed to him. The Associate 

Administrator for Financial Assistance (AA/FA) responded on behalf of the 

ADA/CA. The AA/FA generally agreed that Colson was not complying 

with all contract terms and stated that the noncompliance was primarily 

because the contractual terms conflicted with banking regulations. The 

AA/FA disagreed that SBA should monitor contract compliance directly or 

modify the contract to require Colson to obtain an independent evaluation of 

contract compliance. This issue will be resolved during the audit resolution 

process. 

SBA Employee Conduct Cases 

• An SBA HQ employee was suspended for 15 days for: (1) being under 

the influence of alcohol on SBA premises; (2) knowledge of theft of 

Government property; (3) making false statements in an official matter; 

and (4) improper use of his Government identification and access card. 

The investigation that led to the suspension resulted from a referral to 

OIG that two computer monitors had been taken from SBA HQ. The 

Federal Protective Service, which had primary jurisdiction, conducted 

an investigation into the matter. Investigative results including Facscard 

records and the building security log showed that the employee and a 

companion entered SBA in the early morning on September 2, 2000, and 

left the building with two boxes. A security guard working at SBA HQ 

found a computer monitor on the sidewalk in front of the building. OIG 

special agents subsequently interviewed the employee and he admitted 

that his companion stole the monitors, but he denied any involvement in 

the theft. 

• An SBA employee resigned while under investigation by OIG for 

making false statements during his hiring process and security 

background interview. The employee was permitted to resign after 

being advised that he was going to be terminated during his probationary 

period. In an effort to qualify for a higher starting salary, he falsely 

reported earning a salary in excess of $100,000 at his prior employment 

with an internet start-up company. The investigation confirmed that he 

never received any compensation from this company. Based on his false 

statement, he was hired as a GS-13, step 10, rather than a GS-13, step 1. 

The investigation also revealed that he may have made false statements 
OIG Activities 

Semiannual Report September 2002 31

to obtain unemployment benefits from the District of Columbia 

Department of Employment Services. These matters have been referred 

to the U.S. Attorney’s Office, District of Columbia, Superior Court, for 

prosecutorial consideration. 

Data Quality Guidelines 

OIG reviewed SBA’s proposed data quality guidelines issued 

pursuant to the requirements of the Treasury and General Government 

Appropriations Act for Fiscal Year 2001 (the Data Quality Act) and OMB’s 

Guidelines for Ensuring and Maximizing the Quality, Objectivity, Utility, 

and Integrity of Information Disseminated by Federal Agencies. OIG 

believes that SBA’s initial definition of “SBA initiated or sponsored 

distribution” excluded information disseminated through or pursuant to an 

SBA-sponsored activity. We believed this exclusion was unwarranted 

because information prepared by an outside party and disseminated by SBA 

in a manner that reasonably suggests that SBA agrees with the information 

or information that SBA directs an outside party to disseminate on its behalf 

would seem to be the type of information distribution that SBA engages in 

through its cosponsorship activity. Moreover, SBA’s standard operating 

procedure for cosponsorships already requires SBA to review and approve 

cosponsorship material, so it has already undertaken the duty of ensuring the 

quality and integrity of such information prior to its dissemination. Program 

officials agreed with our comments and included information disseminated 

through or pursuant to SBA-cosponsored activity within the coverage of its 

Data Quality Guidelines. 

Proposed Legislation: General Services Administration Draft Bill on 

Meritorious Travel Claims 

OIG reviewed and indicated its support for a draft bill that would 

provide the Administrator of General Services Administration (GSA) with 

permanent authority to settle claims by Federal employees stemming from 

travel while on official duty. Under current law, if a Federal employee has a 

travel claim that cannot be paid under existing law but GSA’s Board of 

Contract Appeals believes the claim should be paid for equitable reasons, the 

only way for the employee to be paid is for the GSA Administrator to notify 

Congress and request a private relief bill. If enacted, the proposed 

legislation would give authority to the GSA Administrator to order payment 

in such cases. Congress authorized a pilot program, which apparently 

worked well but is expiring. Permanent authority to approve travel claims 

on equitable grounds would benefit Federal employees, eliminate the costs 

to agencies from having to spend time drafting legislation, and save 

Congress’ time in considering private relief bills; thus, ultimately the 

taxpayer would benefit from these cost savings. 
OIG Activities 

32 Semiannual Report September 2002 

Office of Inspector General

New Strategic, Operating, and Workforce Transformation Plans 

During the second half of FY 2002, OIG invested a significant 

amount of time and resources refocusing and redefining its priorities and 

developing a new strategic plan. The Office first redrafted its vision 

statement to assert itself as an effective catalyst to help SBA achieve the 

goal of having efficient, effective, results-oriented, integrity-based programs 

that maximize the use of safe and secure information technology in its 

operations, and have minimal losses from fraud, abuse, erroneous payments, 

and inadequate processes. In an effort to further integrate budget and 

performance measures, as well as meet the challenges of a changing small 

business environment, OIG also completed work on a new strategic plan. 

The new plan, covering FY 2003 – 2007, will help guide the Office to 

fulfillment of our vision and ultimately our mission. 

SBA operates in a dynamic environment. OIG’s ability to maximize its 

relevance and value to SBA is closely linked to how well the Office adapts 

its work within that changing environment and OIG’s ability to affect 

change. Based on the Office’s analysis of the key issues facing SBA and a 

review of OIG’s own internal operations, OIG established the following five 

strategic goals. 

1. Prevent fraud and unnecessary losses in SBA programs. 

2. Improve the security over and the accuracy of SBA accounting and 

management information, including performance data. 

3. Assist SBA in improving its small business development programs. 

4. Assist SBA management in identifying and resolving persistent and 

emerging management issues. 

5. Strengthen our ability to identify and have maximum impact on the most 

significant SBA issues. 

OIG’s strategic plan continues to emphasize prevention and deterrence of 

waste, fraud, and abuse, but now has a new focus on early identification of 

risks and management challenges, and a more integrated approach within 

and across all five of OIG’s divisions. 

OIG also devoted resources toward implementing a workforce 

transformation plan that focuses on aligning our human capital with our 

strategic goals. Both plans were transmitted to OMB and other OIG 

stakeholders in June and July 2002. As part of the restructuring and 

OIG develops a new 

strategic, operating, and 

workforce transformation 

plan during FY 2002. 
OIG Activities 

Semiannual Report September 2002 33

refocusing of the office, OIG has shifted to a biennial office-wide operating 

plan and reporting process. 

OIG-Wide Annual Training Conference 

In May 2002, OIG held its annual OIG-wide training conference. 

OIG provided training in areas such as: the Office of Special Counsel 

Whistleblower program; professional liability; diversity and positive work 

environments; quantitative methods in inspections; bankruptcy fraud; issues 

in SBA purchased denials of Section 7(a) guaranteed loans; suspension and 

debarment; effective communication and briefing techniques; OMB’s 

erroneous payments’ initiative; blood borne pathogens; and post-incident 

procedures and the legal and liability issues. 

Office of Security Operations 

Pursuant to provisions of the Small Business Act and the Small 

Business Investment Act, SBA requires applicants for assistance to meet 

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

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

ensure that Agency program participants meet the standards by processing 

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

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

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

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

makes referrals to program officials for adjudication. During this reporting 

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

managers declining 73 applications and disaster loan program officials 

declining 13 applications, totaling more than $21.8 million and nearly $.95 

million respectively, for character reasons. Those declinations made 

available that amount of credit for applicants in whom SBA can have 

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

surety bond programs declined, respectively, 13 applications for certification 

and 3 applications for guaranty. Almost $242 million in loans have been 

declined during the last 10 years due to character eligibility. 

OSO also performs background checks to comply with Federal regulations 

that require Agency employees to have security clearances appropriate for 

their positions. During this reporting period, OSO initiated 64 background 

investigations and issued 41 security clearances. OSO also reviewed and 

adjudicated 92 background investigative reports in accordance with 

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

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

34 derogatory background investigative reports forwarded for review and 

appropriate action. 

OIG holds office-wide 

training conference. 
OIG Activities 

34 Semiannual Report September 2002 

OIG Fraud Awareness Briefings 

During the reporting period, OIG conducted 13 briefings to more than 

550 SBA employees, lenders, and other resource partners as part of its 

mission to educate its customers on identifying waste, fraud, and abuse. 

During this reporting period (as the chart below indicates) nearly 55 percent 

of the investigations initiated by OIG originated from within the Agency in 

the form of referrals either from program heads or other SBA employees. 

This cooperation indicates the strong commitment of SBA employees to 

reducing waste, fraud, and abuse in Agency programs and improving the 

Agency’s management and control of its programs. The shift in SBA’s role 

from primarily reviewing and processing loans to increasingly providing 

oversight of lending practices, has caused OIG to change its briefing 

strategy. Because continued success will depend increasingly on lender 

referrals, OIG has expanded its integrity-awareness briefing program to 

include participating lenders and other interested parties. 

Sources of Investigations from 

April 1 through September 30, 2002

54.4%

7.5%

17.5%

7.5%

13.1%

SBA

Other Federal

Agencies

Private

Citizens

Lenders

Other
OIG Activities 

Semiannual Report September 2002 35

Direct Investigation Time by Program Area 

April 1 through September 30, 2002 

Program Area Direct Time % Number of Investigations*

 Closed** In Progress 

Capital Access 75% 30 219 

Disaster Assistance 11% 42 68 

Government Contracting and 

Business Development 

11% 7 28 

Agency Management 3% 10 15 

Entrepreneurial Development *** 0 2 

Total 100% 89 332 

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

Direct Audit Time by Program Area 

April 1 through September 30, 2002 

Program Area Direct Time % Number of Audits

 Issued In Progress 

Capital Access 45% 9 10 

Disaster Assistance 7% 1 1 

Government Contracting and 

Business Development 

10% 1 1 

Agency Management 35% 5 9 

Entrepreneurial Development 3% 1 6 

Total 100% 17 27 
Statistical Highlights 

36 Semiannual Report September 2002 

FY 2002 6-Month Productivity Statistics 

April 1 through September 30, 2002 

Office-wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines......................................................... $8,179,179.00 

B. Loans Not Made as Result of Investigations and Name Checks .......................... $31,329,290.00 

C. Disallowed Costs Agreed to by Management ............................................................. $13,882.35 

D. Recommendations that Funds Be Put to Better 

 Use Agreed to by Management......................................................................... $371,970.97

Total $39,894,322.32

Efficiency and Effectiveness Activities

A. Reports Issued ........................................................................................................................... 19 

B. Recommendations Issued .......................................................................................................... 86 

C. Dollar Value of Costs Questioned............................................................................... $11,045.34 

D. Dollar Value of Recommendations that Funds 

Be Put to Better Use ...................................................................................... $2,261,519.15 

Follow-up Activities

A. Recommendations Closed ........................................................................................................ 51 

B. Disallowed Costs Agreed to by Management ............................................................ $13,882.35 

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

 Agreed to by Management................................................................................ $371,970.97 

D. Unresolved Recommendations.................................................................................................84 

Legislation/Regulations/SOPs/Other Reviews 

A. Legislation Reviewed................................................................................................................ 69 

B. Regulations Reviewed ............................................................................................................... 23 

C. Standard Operating Procedures Reviewed ................................................................................ 12 

D. Other Issuances Reviewed* .................................................................................................... 125 

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

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

Semiannual Report September 2002 37

Fraud Deterrence Activities

A. Total Cases ..............................................................................................................................421 

B. Closed Cases..............................................................................................................................89 

C. Pending Cases............................................................................................................................16 

D. Open Cases..............................................................................................................................316 

E. Subjects Currently Under Investigation................................................................................1,709 

F. Cases Referred to FBI or Other Agencies for Investigation. .....................................................14 

Summary of Indictments and Convictions

A. Indictments from OIG Cases.....................................................................................................19

B. Convictions from OIG Cases.....................................................................................................15 

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of 

 OIG Investigations ......................................................................................... $8,179,179.00 

B. Loans/Contracts Not Approved as a Result of OIG Investigations........................ $8,582,697.00 

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

 Check Program............................................................................................. $22,746,593.00

Total: ..................................................................................................................... $39,508,469.00

SBA Personnel Actions Taken as a Result of Investigations

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

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

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

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

Program Actions Taken as a Result of Investigations 

A. Suspensions .................................................................................................................................1 

B. Debarments..................................................................................................................................1 

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters .............................................................................................1,110 

B. Total Calls/Letters Referred to Investigations Division ............................................................11 

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

 Investigative Agencies ......................................................................................................51

D. Total Calls/Letters with no Action Appropriate...................................................................1,048 
Statistical Highlights 

38 Semiannual Report September 2002 

FY 2002 Full Year Productivity Statistics 

October 1, 2001 through September 30, 2002 

Office-wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines....................................................... $17,571,031.00 

B. Loans Not Made as Result of Investigations and Name Checks .......................... $63,420,121.00 

C. Disallowed Costs Agreed to by Management ........................................................... $102,312.36 

D. Recommendations that Funds Be Put to Better 

 Use Agreed to by Management......................................................................... $742,600.47

Total $81,836,064.83

Efficiency and Effectiveness Activities

A. Reports Issued ........................................................................................................................... 35 

B. Recommendations Issued ........................................................................................................ 121 

C. Dollar Value of Costs Questioned............................................................................... $13,882.35 

D. Dollar Value of Recommendations that Funds 

Be Put to Better Use ...................................................................................... $2,812,367.65 

Follow-up Activities

A. Recommendations Closed ...................................................................................................... 131 

B. Disallowed Costs Agreed to by Management .......................................................... $102,312.36 

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

 Agreed to by Management................................................................................ $742,600.47 

D. Unresolved Recommendations............................................................................................... 124 

Legislation/Regulations/SOPs/Other Reviews 

A. Legislation Reviewed................................................................................................................ 76 

B. Regulations Reviewed ............................................................................................................... 37 

C. Standard Operating Procedures Reviewed ................................................................................ 23 

D. Other Issuances Reviewed* .................................................................................................... 209 

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

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

Semiannual Report September 2002 39

Fraud Deterrence Activities

A. Total Cases ............................................................................................................................*489 

B. Closed Cases............................................................................................................................157 

C. Pending Cases............................................................................................................................16 

D. Open Cases..............................................................................................................................316 

E. Subjects Currently Under Investigation................................................................................1,709 

F. Cases Referred to FBI or Other Agencies for Investigation. .....................................................17 

* OIG converted to a new Investigations MIS system. Based on numbers generated by this system, there is a discrepancy in the total cases for the full-year. 

Summary of Indictments and Convictions

A. Indictments from OIG Cases...................................................................................................*42

B. Convictions from OIG Cases.....................................................................................................47 

*OIG obtained 2 indictments during the first half of the reporting period that were not reported in the March 2002 SAR. 

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of 

 OIG Investigations ....................................................................................... $17,571,031.00 

B. Loans/Contracts Not Approved as a Result of OIG Investigations...................... $27,658,669.00 

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

 Check Program........................................................................................... *$34,732,914.00

Total: ..................................................................................................................... $80,991,152.00

*The 6-month statistic reported in the Spring SAR was incorrect. 

SBA Personnel Actions Taken as a Result of Investigations

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

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

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

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

Program Actions Taken as a Result of Investigations 

A. Suspensions .................................................................................................................................4 

B. Debarments..................................................................................................................................1 

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters .............................................................................................1,755 

B. Total Calls/Letters Referred to Investigations Division ............................................................15 

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

 Investigative Agencies ....................................................................................................101 

D. Total Calls/Letters with no Action Appropriate...................................................................1,639 
Inspector General Act Statutory Reporting Requirements 

40 Semiannual Report September 2002 

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

Inspector General Act Amendments of 1988, are listed below. 

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 23-24, 31 

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 3-33 

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

 And Deficiencies 3-34 

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 45 

Section 5(a)(4) Matters Referred to Prosecutive Authorities 46-52 

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 42 

Section 5(a)(7) Summary of Significant Audits 3-30 

Section 5(a)(8) Audit Reports with Questioned Costs 43 

Section 5(a)(9) Audit Reports with Recommendations that Funds Be Put to Better Use 43 

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 44 

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

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

 

 

41

TABLE OF APPENDICES 

Appendix Page

Appendix I – Audit Reports Issued.............................................................................................42 

Appendix II 

 Part A – Inspector General-Issued Audit Reports 

 With Questioned Costs.................................................................................................43 

 Part B – Inspector General-Issued Audit Reports 

 With Recommendations that Funds Be Put to Better Use ...........................................43 

 Part C – Inspector General-Issued Audit Reports 

 With Non-Monetary Recommendations ......................................................................44 

 Part D – Inspector General-Issued Audit Reports 

 With Overdue Management Decision..........................................................................44 

 Part E – Significant Audit Reports 

 Without Final Action ...................................................................................................45 

Appendix III – Six Month Arrested/Indicted/Convicted Summary............................................46 

Appendix IV – Six Month Sentencing Summary .......................................................................49 
42 Semiannual Report September 2002 

APPENDIX I 

Audit and Other OIG Reports Issued 

April 1 through September 30, 2002

TITLE NUMBER ISSUE 

DATE

QUESTIONED 

COSTS

FUNDS FOR 

BETTER 

USE

Capital Access 

Audit of Borrowers with Prior Defaulted Loans 2-19 5/28/02 $667,500.00 

Audit of SBA-Guaranteed Loan 2-21 8/5/02 $93,689.00 

Audit of SBA-Guaranteed Loan to RSC Enterprises, 

Inc. 

2-23 8/7/02 $197,751.97 

Audit of LAEs on Quality Trust, Inc. 2-24 8/19/02 $1,392.00 

SBA’s Experience with Defaulted Franchise Loans 2-27 9/16/02 

Audit of Internal Control Over Colson Services 

Corporation’s Contract as Central Servicing Agent 

for SBA’s Certified Development Company Loan 

Program 

2-29 9/16/02 

SBA-Guaranteed Loan to Earth Treasures, Inc. 2-30 9/24/02 $84,911.18 

Impact of Loan Splitting on Borrowers and SBA 2-31 9/30/02 

Audit of SBA-Guaranteed Loan 2-32 9/30/02 $450,559.00 

Audit of Early Defaulted Loans 2-35 9/30/02 $747,308.00 

Program sub-total 10 reports $1,392.00 $2,241,719.15 

Disaster Assistance 

Review of Out-of-Sequence Payments 2-26 9/3/02 $19,800.00 

Program sub-total 1 report $0 $19,800.00 

Government Contracting and Business 

Development 

7(j) Management and Technical Assistance Program 2-33 9/30/02 

Program sub-total 1 report $0 $0 

Entrepreneurial Development 

Georgia District Office Sponsorship Activities 2-25 8/26/02 

Program sub-total 1 report $0 $0 

Agency Management 

FY 2001 Financial Statements Management Letter 2-17 4/12/02 

FISCAM 2-18 5/6/02 

Modernizing Human Capital Management 2-20 5/29/02 

Travel of Former Regional Administrator 2-22 8/7/02 $9,653.34 

SBA’s Information Security Program 2-28 9/12/02 

Use of Social Security Numbers 2-34 9/30/02 

Program sub-total 6 reports $9,653.34 $0 

TOTALS (all programs) 19 reports $11,045.34 $2,261,519.15 
Semiannual Report September 2002 

 

 

43

APPENDIX II - Part A

Audit Reports with Questioned Costs 

April 1 through September 30, 2002 

 REPORTS RECs* COSTS** 

 QUESTIONED UNSUPPORTED 

A. For which no management decision had 

been made by March 31, 2002 

1 1 $2,837.01 $0 

B. Which were issued during the period 2 2 $11,045.34 $0 

Subtotals (A + B) 3 3 $13,882.35 $0 

C. For which a management decision was 

made during the reporting period 

3 3 $13,882.35 $0 

(i) Disallowed costs 3 3 $13,882.35 $0 

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

D. For which no management decision had 

been made by September 30, 2002 

0 0 $0 $0 

* Recommendations 

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

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use 

April 1 through September 30, 2002

 REPORTS RECs* RECOMMENDED 

 FUNDS FOR 

BETTER USE 

 

A. For which no management decision 

had been made by March 31, 2002 

2 2 $180,219.00

B. Which were issued during the period 7 7 $2,261,519.15

Subtotals (A + B) 9 9 $2,441,738.15

C. For which a management decision was 

made during the reporting period 

3 3 $377,970.97

(i) Recommendations agreed to 

by SBA management 

3 3 $371,970.97

(ii) Recommendations not agreed 

to by SBA management 

0 0 $5,400.00

D. For which no management decision 

had been made by September 30, 2002 

6 6 $2,063,767.18

* Recommendations
44 Semiannual Report September 2002 

APPENDIX II - Part C

Audit Reports with Non-Monetary Recommendations 

April 1 through September 30, 2002 

 

 REPORTS RECOMMENDATIONS 

 

A. For which no management decision had been 

made by March 31, 2002 

7* 34* 

B. Which were issued during the period 12 71 

Subtotals (A + B) 19 105 

C. For which a management decision was made (for 

at least one recommendation in the report) during 

the reporting period 

10 38 

D. For which no management decision (for at least 

one recommendation in the report) had been made 

by September 30, 2002 

13 67 

 * Adjusted to reflect 8 recommendations (audit report 2-12) which were not included in the Spring 2002 SAR and 5 recommendations 

(audit report 1-19) where management decisions had been made on 2/16/02. 

APPENDIX II – Part D 

Issued Audit Reports with Overdue Management Decisions 

September 30, 2002 

TITLE NUMBER ISSUED STATUS 

PLP Oversight Process 1-19 9/27/01 Negotiating with program officials. 

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

SBA officials are working with outside contractor 

to determine appropriate management response. 

 
Semiannual Report September 2002 

 

 

45

APPENDIX II - Part E 

Significant Audit Reports Described in Prior Semiannual Reports 

Without Final Action as of September 30, 2002 

Report 

Number 

Title Date 

Issued 

Date of 

Management 

Decision 

Final 

Action 

Target 

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

87H002017 NOAA Computer Contracts 6/18/98 11/19/01 7/31/02 

9-23 Survey of Electronic Records Management 9/15/99 11/30/99 4/15/03 

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

0-15 SBA’s Proposed Systems Development Methodology 3/30/00 9/29/00 9/20/02 

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

0-25 GPRA - SBIC Program 9/7/00 12/27/00 11/1/02 

0-26 GPRA - Surety Bond Guarantee Program 9/25/00 1/30/01 10/31/02 

0-28 Rhode Island District Advisory Council 9/29/00 *** 5/31/02 

0-29 MBELDEF Cosponsorship 9/30/00 *** 9/30/02 

0-30 SBA Administration of MBELDEF 9/30/00 3/26/01 ** 

0-31 Boscart Construction, Inc. 9/30/00 *** ** 

1-01 GPRA - 7(a) Business Loan Program 12/4/00 *** 12/31/02 

1-09 SBA’s Planning and Assessment for Implementing PDD 63 3/26/01 9/27/01 10/30/02 

1-11 GPRA – MSB/COD Program 3/27/01 9/28/01 ** 

1-12 SBA’s Information Systems Controls – FY2000 3/27/01 *** ** 

1-14 Paper Report Production 8/3/01 12/21/01 11/30/02 

1-15 FY 2000 Financial Statements – Management Letter 8/15/01 10/1/01 9/14/02 

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 12/31/02 

A1-05 SBA’s Use of Government Cars and Hired Car Services 9/27/01 1/15/02 8/30/02 

1-20 Agreed-upon Procedures Report on Sensitive Payments 9/28/01 12/18/01 ** 

1-21 SBA’s UNIX Operating Systems 9/28/01 1/28/02 6/30/03 

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

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

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

** Target dates vary with different recommendations. *** Management decision dates vary with different recommendations.
APPENDIX III 

Six Month Arrested/Indicted/Convicted Summary 

46 Semiannual Report September 2002 

State Program Alleged Violation(s) Prosecuted Arrested/ 

Indicted/ 

Convicted/ 

Investigated 

Jointly 

With. . . 

CA DL A physician practicing in California, attempting to start a practice in 

New York, was indicted on three counts of false statements and one 

count of conspiracy. The charges were filed in connection with false 

applications that she submitted to FEMA and SBA for $88,400 in 

disaster relief funding pursuant to Hurricane Floyd. * 

Medical 

physician 

indicted 

None 

IL BL To obtain a $1.25 million SBA-guaranteed bank loan, an SBA loan 

packager and business broker aided the preparation and filing of 

fraudulent income tax returns which were used in the SBA loan 

package and later with the IRS. * 

SBA loan 

packager and 

business broker 

indicted 

None 

IL BL Another defendant in above case fabricated documents produced to 

SBA/OIG by the attorney and others in response to grand jury 

subpoenas. 

Real estate 

attorney pled 

guilty 

None 

IL BL To obtain a $400,000 SBA-guaranteed loan a businesswoman signed 

an affidavit stating that she was individually, and as a corporation, 

current on all Federal and state taxes, when she and the company had 

a tax debt totaling more than $1 million. 

Businesswoman 

pled guilty 

FBI 

IL BL Former president of a mergers and acquisition company submitted an 

SBA Personal Financial Statement, in connection with a $954,000 

SBA-guaranteed loan, that failed to disclose a significant number of 

liabilities. * 

Businessman 

charged 

FBI 

KY BL A company vehicle was individually titled to the businessman, with 

the proceeds from the sale of the vehicle retained for his personal 

use. The guarantor along with the president submitted fraudulent 

invoices, to obtain a $250,000 SBA-guaranteed loan, claiming that 

they purchased equipment. 

Businessman 

and guarantor 

pled guilty 

None 

NY SBIC Former pension plan manager for a utilities company embezzled 

employee benefit plan funds for personal expenses. He was 

responsible for recommending investments of a utility company’s 

pension funds made through various venture capital firms, including 

a New York City small business investment company in 

receivership. * 

Pension plan 

manager 

arrested 

DOL/OIG 

NC DL A music company and its owner pled guilty to one count of money 

laundering. The defendant, acting as attorney for his father, obtained 

two disaster loans totaling $617,200 for damages associated with 

Hurricanes Bonnie and Floyd. The guilty plea was the result of a 

previous indictment on one count of mail fraud and six counts of 

wire fraud. The investigation disclosed that during this time period, 

the principals, through the company, were operating an illegal 

gambling business that made it ineligible for the disaster loans. The 

defendant also fraudulently claimed that machinery and equipment 

were damaged by the storms and misused loan proceeds to pay off 

pre-disaster debt. * 

Business owner 

pled guilty 

FBI 
APPENDIX III 

Six Month Arrested/Indicted/Convicted Summary 

April 1 through September 30, 2002

Semiannual Report September 2002 

 

 

47

State Program Alleged Violation(s) Prosecuted Arrested/ 

Indicted/ 

Convicted/ 

Investigated 

Jointly 

With. . . 

NC 8(a)BD Construction company and its president pled guilty to a one-count 

charge of mail fraud and acknowledged responsibility for submission 

of false payment certifications (false statements) that resulted in total 

losses of almost $1.3 million on 10 separate Government contracts. 

He and the company agreed to a permanent injunction barring him 

and/or any entity in which he might have a financial interest from 

doing business with the Government. * 

Construction 

company 

president pled 

guilty 

None 

OH BL Businessman intentionally prepared and submitted false invoices to 

the participating lender bank and SBA to obtain a $337,500 SBAguaranteed loan and used the proceeds to pay for unauthorized 

business and personal debts. * 

Businessman 

charged 

None 

OH BL Husband and wife defaulted on their $200,000 SBA-guaranteed loan 

then had collateral, almost all of the woodwork from the first floor of 

their bed and breakfast, removed, and sold for personal benefit. * 

A couple 

indicted 

None 

OR BL Businessman made false statements on four SBA-guaranteed loans 

with two participating lenders. Additionally, he used false social 

security numbers and failed to disclose prior bankruptcies, 

judgments, other business interests, and previous criminal history. * 

Businessman 

indicted 

FBI 

PA 8(a)BD A former SBA Section 8(a) program participant conspired to making 

material false statements and representations to SBA by falsely 

stating he did not control a Section 8(a) certified construction firm, 

when in fact he ran the company. Additionally, he caused fictitious 

financial statements to be mailed to an insurance company who 

relied on the false financial statements to issue bonding to the 

construction company. As a result of the construction company’s 

defaults on contracts, the insurance company paid over $2.9 million 

to subcontractors and suppliers in payment bonds and incurred an 

additional $3 million in losses on performance bonds to have the 

contracts completed. 

Section 8(a) 

program 

participant 

charged in 

information 

NCIS, 

VA/OIG, 

DCIS, 

USCS 

TX BL Defendants submitted a loan package with fraudulent personal 

financial statements and a false purchase contract that inflated the 

price of the motel from $2 million to $2.7 million. Fraudulent copies 

of cashier’s checks were submitted as proof of their required equity 

injection. * 

Loan broker 

and two clients 

indicted 

FBI 

TX BL In connection with the above case and along with the other 

defendants, another businessman submitted false documents. * 

Businessman 

indicted 

FBI 

TX BL The couple concealed from the lender the extent of a fire that 

destroyed their restaurant 3 days after the bank approved the loan 

and provided a fraudulent property insurance policy to satisfy the 

closing requirements for a $150,000 SBA-guaranteed loan. The 

husband’s name was removed from the application because of his 

criminal history. 

A couple 

indicted 

ATF 

TX BL The principals falsified nine Federal tax returns, six IRS tax return 

verifications, forged two fuel company leases, and falsified their 

$85,000 capital injection in connection with a $355,000 SBAguaranteed loan for a service station. * 

Two 

businessmen 

agreed to pretrial diversions 

TIGTA 
APPENDIX III 

Six Month Arrested/Indicted/Convicted Summary 

48 Semiannual Report September 2002 

State Program Alleged Violation(s) Prosecuted Arrested/ 

Indicted/ 

Convicted/ 

Investigated 

Jointly 

With. . . 

UT BL The part-owner obtained a $905,000 SBA loan to purchase a 

building in the name of a laboratory by falsely representing that he 

had authorization from the board of directors of the lab and that they 

were guaranteeing the loan. The businessman represented to the 

board that they would be leasing a new building from a disinterested 

third party and collected excessive lease payments from the lab 

under a fabricated name via a post office box. * 

Businessman 

charged 

Utah 

County 

Sheriff’s 

Office 

VA BL The president of a defunct soap company had previously made false 

statements to obtain a $290,000 SBA-guaranteed loan and left the 

country. He and his attorney agreed to coordinate his return with the 

U.S. Attorney’s Office and SBA/OIG. 

Company 

president 

arrested 

None 

* This case is further discussed in the narrative section of this report. 

Program codes: BL=business loans, DL=disaster loans, 8(a)BD=Section 8(a) business development, SBIC=small business investment 

companies 

Joint-investigation Federal agency acronyms: ATF=Bureau of Alcohol, Tobacco, and Firearms DCIS=Defense Criminal Investigative 

Service; DOL/OIG=Department of Labor OIG; FBI=Federal Bureau of Investigation; NCIS=Naval Criminal Investigative Service; 

TIGTA=Treasury Inspector General for Tax Administration; USCS=Customs Service; VA/OIG=Veterans Affairs Department OIG 
APPENDIX IV 

Six Month Sentencing Summary 

April 1 through September 30, 2002

Semiannual Report September 2002 

 

 

49

State Program Alleged Violation(s) Prosecuted Confinement Time and 

Dollar Results (Criminal 

Restitution/Fines/Etc.) 

Investigated 

Jointly 

With. . . 

AZ BL President and his partner, along with a friend, created a 

fraudulent $400,000 promissory note, in connection with 

a $1 million SBA-guaranteed loan, to give the impression 

that the president and his partner, individually and 

through the corporation had a greater debt obligation, 

which would justify a larger loan from the lender. The 

friend received a $150,000 check at the closing and then 

endorsed the check to the president. 

President received 5 years 

probation, 11⁄2 years halfway 

house confinement, $906,000 

restitution (jointly with 

secretary-treasurer) 

FBI 

AZ BL Secretary-treasurer of company of above case schemed 

with the company president and a friend to defraud SBA. 

Secretary-treasurer received 

5 years probation, $906,000 

restitution (jointly with 

president) 

FBI 

AZ BL The couple devised a “no money down” plan for clients 

interested in purchasing a business at 100 percent 

financing who would have otherwise not qualified for the 

loan. The scheme inflated the purchase price to cover the 

actual selling price plus the down payment or cash 

injection. The couple also arranged for third party 

injectors to loan the required down payment to the 

borrowers to falsely prove they had the cash injection. 

After closing the couple received an inflated commission 

and arranged for a portion of the commission to be wired 

back to the third party injectors. 

Husband: 70 months in 

prison, 3 years probation 

Wife: 3 years probation 

Both defendants jointly: 

$4.8 million restitution 

FBI 

AZ BL Businessman claimed on his Personal Financial 

Statement that he had $140,000 worth of stock in 

restaurants and that he had $471,949 in earned fees in 

connection with a $900,000 SBA-guaranteed loan to 

purchase six fast food restaurants. He allowed his 

brokerage firm to obtain a temporary cash injection from 

a third party. The defendant obtained a real estate sales 

license so that he could receive a commission for the sale 

of the six franchises he purchased through the business 

brokerage firm. A portion of the commission was to be 

used to repay the third party that made his cash 

injection.* 

90 days community 

confinement in a halfway 

house, 90 days home 

detention, 3 years supervised 

release $5,000 fine, $172,000 

restitution 

FBI 

CO BL Owner failed to disclose approximately $250,000 in 

business debt and two pending lawsuits on her $100,000 

LowDoc loan application. Additionally, part of the loan 

proceeds was used for personal expenses, while failing to 

pay business debts. * 

1 day incarceration, 120 days 

home detention, 5 years 

supervised release, 150 hours 

community service, $83,423 

restitution and seek 

psychological treatment 

FBI 
APPENDIX IV 

Six Month Sentencing Summary 

April 1 through September 30, 2002 

50 Semiannual Report September 2002 

State Program Alleged Violation(s) Prosecuted Confinement Time and 

Dollar Results (Criminal 

Restitution/Fines/Etc.) 

Investigated 

Jointly 

With. . . 

IL BL Contracting company president signed an affidavit, in 

connection with a $400,000 SBA-guaranteed loan, 

whereby she attested that she was individually, and as a 

corporation, current on all Federal and state taxes, when 

at the time both she and the company had a tax debt 

totaling over $1 million. * 

12 months and 1 day in 

prison, 2 year supervised 

release, $345,820 restitution 

FBI 

KS BL Bank president and bank, in connection with an SBAguaranteed loan to a foam core panel manufacturing 

plant, submitted a falsely redacted appraisal to SBA, 

claimed the borrowers had excellent credit history when 

they had failed to obtain or review any credit report, 

falsely certified there had been no substantial adverse 

change in financial condition of the borrower, when upon 

learning that the borrower would not receive a $500,000 

grant, they demanded additional security for the SBA 

loan. * 

Settlement agreement that 

bank would pay $250,000, 

release SBA from guaranty 

liability of approximately 

$570,505, president nor 

would bank participate in any 

SBA loan program for 

5 years 

USSS 

KY BL Former employee of a roadside construction company coowned by his brother, allowed a company vehicle to be 

individually titled to him with the proceeds from the sale 

of the vehicle retained by the former employee for 

personal use. 

Employee received 3 years 

probation 

None 

MO 8(a)BD President and Section 8(a) construction company 

intentionally devised a scheme to defraud and obtain 

money from insurance companies that insured the 

company’s property and equipment. A previous 

indictment charged that the defendants participated in 

illegal kickbacks, mail fraud, false statements to SBA, 

and major contract fraud against the U.S. 

President was placed on 

probation for 3 years, ordered 

to pay a $30,000 fine, 

$108,771.12 in restitution 

($95,000 to SBA), and a 

$300 special assessment. 

Company was placed on 

probation for 5 years, ordered 

to pay a $48,000 fine, 

$90,771.72 in restitution 

($77,000 to SBA), and a 

$600 special assessment. 

All counts other than mail 

fraud were dismissed 

FBI, 

DOL/OIG 
APPENDIX IV 

Six Month Sentencing Summary 

April 1 through September 30, 2002

Semiannual Report September 2002 

 

 

51

State Program Alleged Violation(s) Prosecuted Confinement Time and 

Dollar Results (Criminal 

Restitution/Fines/Etc.) 

Investigated 

Jointly 

With. . . 

NJ BL The defendants failed to purchase machinery and fixtures 

for which the $500,000 SBA-guaranteed loan was 

intended, provided a forged landlord waiver in applying 

for the loan, and passed three forged checks to banks. 

The defendants also discharged chemical and industrial 

wastes associated with the process of metal plating. 

President of original 

company: 18 months 

probation, $4,000 fine, 

$25,000 restitution State of 

New Jersey. Principal of 

original company: 

18 months probation, $3,000 

fine, $75,000 restitution to 

New Jersey. President of 

successor company: 5 years 

probation, $4,000 fine, 

$125,000 restitution to New 

Jersey. Successor company: 

$5,000 fine 

EPA, State 

of New 

JerseyDivision of 

Criminal 

Justice 

NY SBIC Former SSBIC board member misappropriated SBA 

funds by extending loans to small businesses affiliated 

with the SSBIC’s officers and directors; and concealed 

these improper loans by submitting fraudulent documents 

to SBA 

6 years incarceration, 

followed by 3 years 

probation. The defendant 

was also ordered to pay 

$11,659,499 in restitution to 

other Government agencies. 

IRS, 

HUD/OIG, 

ED/OIG 

OK BL Co-borrowers entered into a final settlement agreement 

with the U.S. Attorney’s Office during a pending 

SBA/OIG investigation into the alleged conversion of 

collateral that was pledged. 

Agreement to pay $101,000 

to SBA 

None 

PA 8(a)BD President of a defunct Section 8(a) construction company 

falsely represented to SBA that he was the 100 percent 

owner of the construction company, and submitted false 

progress payment certifications on a $1.6 million 

contract. 

2 months in jail and 5 years 

on probation. He was also 

ordered to pay $60,000 in 

restitution to the bonding 

company and a $200 special 

assessment fee. 

NCIS and 

VA/OIG 

TX BL The husband (co-borrower) disclosed his criminal history 

in the loan application that should have made the loan 

ineligible under the SBAExpress loan program. * 

Preferred lender agreed to 

cancel SBA’s 50 percent 

guaranty obligation on an 

SBAExpress loan with a 

balance of $122,648 

ATF 

TX BL Businessman presented documents to the bank 

representing that his company had purchased equipment 

for $131,675, when no such purchase was made. * 

4 months incarceration, 

4 months home confinement, 

5 years supervised release, 

$99,191 restitution 

FBI 
APPENDIX IV 

Six Month Sentencing Summary 

April 1 through September 30, 2002 

52 Semiannual Report September 2002 

State Program Alleged Violation(s) Prosecuted Confinement Time and 

Dollar Results (Criminal 

Restitution/Fines/Etc.) 

Investigated 

Jointly 

With. . . 

TX BL Nine defaulted SBA-guaranteed loans were identified in 

an alleged fraudulent “flipping” scheme. * 

Preferred lender agreed to 

release SBA from guaranty 

totaling more than 

$6.5 million 

FBI 

TX BL Former business owner repaid balance due on his loan as 

a result of a SBA/OIG investigation 

Repaid $181,351 to SBA and 

the non-bank participating 

lender 

TIGTA 

* This case is further discussed in the narrative section of this report. 

Program codes: BL=business loans, 8(a)BD=Section 8(a) business development, SBIC=small business investment companies 

Joint-investigation Federal agency acronyms: ATF=Bureau of Alcohol, Tobacco, and Firearms; DOL/OIG=Department of Labor 

OIG; ED/OIG= Department of Education OIG; EPA=Environmental Protection Agency; FBI=Federal Bureau of Investigation; 

HUD/OIG= Housing and Urban Development OIG; IRS=Internal Revenue Service; NCIS=Naval Criminal Investigative Service; 

TIGTA=Treasury Inspector General for Tax Administration; USSS=United States Secret Service; VA/OIG=Veterans Affairs 

Department OIG
 

MAKE A DIFFERENCE

To promote integrity, economy, and efficiency, we encourage 

you to report instances of fraud, waste, or mismanagement to the 

SBA OIG FRAUD LINE.* 

CALL

1-800-767-0385 (Toll Free) 

202-205-7151 (Washington, DC, Area) 

Write or Visit

U.S. Small Business Administration 

Office of Inspector General 

Investigations Division 

409 Third Street, SW. (5th Floor) 

Washington, DC 20416 

Or E-mail Us At OIG@SBA.GOV 

 *Upon request your name will be held in confidence.