SEMIANNUAL REPORT TO CONGRESS

OFFICE OF INSPECTOR GENERAL

U.S. SMALL BUSINESS ADMINISTRATION

PERIOD: OCTOBER 1, 1998 TO MARCH 31, 1999

.
Semiannual Report March 1999 i

Foreword

Pursuant to Public Law 95-452, the U.S. Small Business Administration's (SBA) Office of

Inspector General (OIG) is required to prepare a Semiannual Report of its activities for the

Congress of the United States. This report covers the full range of SBA/OIG activities from

October 1, 1998 to March 31, 1999.

SBA has been given an important mission by Congress – to help small businesses, a major sector

of the U.S. economy, grow and thrive. The OIG plays a critical role in ensuring that SBA

programs are delivered effectively to their intended beneficiaries and in keeping the Congress

and the Administration informed as to the results of those programs. As I begin my term as

Inspector General, I look forward to working closely with Administrator Alvarez and the

Congress to make SBA’s programs and operations even more effective and responsive to the

needs of the small business community.

SBA has indeed been fortunate to have had four IGs (James Hoobler, Charles Gillum, Mary

Wieseman, and Paul Boucher) who have been strong, fair, and innovative leaders dedicated to

the public good. My goal will be to continue this tradition of personal integrity, excellence, and

professionalism in the office.

This semiannual report reflects the OIG’s accomplishments under the leadership of Karen Lee,

who served as Acting Inspector General from November 1997 through this reporting period. She

did an outstanding job in completing many ongoing projects and in moving the OIG forward on

key initiatives. The entire OIG staff also deserves recognition for continuing to carry out the

important business of the office in a highly effective and professional way. They have truly kept

the public trust and provided SBA managers with the quality oversight and assistance they have

come to expect from the OIG. Finally, because the OIG does not work in a vacuum, I would like

to express the OIG’s appreciation for the ongoing support and interest of SBA’s senior staff. I

look forward to continuing this professional cooperative relationship.

Phyllis K. Fong

Inspector General

Table of Contents
Semiannual Report March 1999 1

Title Page

Table of Contents.....................................................................................................................ii

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

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

Disaster Loan Program........................................................................................................... 19

Small Business Investment Companies .................................................................................. 27

Surety Bond Guarantees. ....................................................................................................... 31

Government Contracting Programs........................................................................................ 34

8(a) Business Development.................................................................................................... 36

Entrepreneurial Development (Business Education and Training) .......................................... 38

Agency Management and Financial Activities........................................................................ 40

Organization, Resources, and Management Initiatives............................................................ 46

Profile of Operating Results. ..................................................... ............................................ 51

FY 1999 Productivity Statistics................................................. ............................................ 54

Statutory Reporting Requirements.......................................................................................... 55

Table of Appendices .............................................................................................................. 56
2 Semiannual Report March 1999

Executive Summary

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

the Small Business Administration (SBA) is submitted pursuant to

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

1978, as amended. It summarizes OIG activities for the 6-month period

from October 1, 1998 to March 31, 1999.

Summary of Accomplishments

OIG audits, inspections, and investigations

over the last 6 months achieved $21,924,572

in potential dollar results, 25 indictments,

and 27 convictions. The dollar results

consist of $2,934,063 in potential recoveries,

including judicially awarded fines and

restitution; $16,258,765 in management

avoidances; $883,316 in disallowed costs

agreed to by SBA’s management; and

$1,848,428 in management commitments to

use funds more efficiently.

The OIG alone could not have achieved the

accomplishments set forth in this report to

the Congress. The results for this reporting

period reflect the cooperation and support of

other audit, inspection, and investigative

organizations such as: the Federal Bureau

of Investigation (FBI); U.S. Marshals

Service; Internal Revenue Service (IRS);

Immigration and Naturalization Service

(INS); Bureau of Alcohol, Tobacco and

Firearms (ATF); other Federal OIGs;

Department of Justice (DOJ) prosecutors;

state and local law enforcement agencies;

and most importantly, the actions of SBA

program managers and employees. Indeed,

much of our success is due to referrals made

by conscientious SBA employees.

Highlights of the Past Six Months

Efforts to Improve SBA Program

Management

Audits of Section 7(a) Lending Find

Lender Non-Compliance with Required

Procedures

A nationwide audit of Section 7(a) business

loans neared conclusion in this period.

Reports on North Carolina and Colorado

loans were issued, leaving Kansas City as

the eighth and last district in the sample to

be completed. After the Kansas City report

is issued, a summary report on systemic

issues identified in the eight audits will be

prepared in the second half of fiscal year

(FY) 1999.

The purpose of the audit is to determine if

Section 7(a) loans are originated, disbursed,

and used in accordance with 22 key

procedures. The eight districts were

randomly selected, and 30 loans in each

district were randomly picked for

examination.

Results in North Carolina and Colorado

were similar to results in the preceding five

reports, with 26 of 60 loans having at least
Semiannual Report March 1999 3

one noncompliance with the 22 procedures.

Typical lender errors are lack of IRS tax

verification, failure to verify use of

proceeds, and failure to verify equity

injections. Recommendations are being

made to each district office.

Audit of Northridge Disaster Early

Defaults Finds Improvements Needed in

Loan Origination and Liquidation

An audit of defaulted loans from the 1994

Northridge, California, earthquake disaster

found that SBA needed to improve loan

origination and the review of defaulted

loans.

Based on sample results that 19 of 75

defaulting borrowers had poor credit or cash

flow at loan origination, the auditors

estimated that 2,316 Northridge loans

totaling $90 million could have had the

same problem and should not have been

made.

The auditors also identified 21 defaulting

borrowers who had assets and income

available for repayment that had not been

identified by SBA. Another 15 borrowers in

the sample had assets and income that SBA

had already identified. The auditors

estimated that borrowers on 2,560 defaulted

Northridge loans totaling $80 million could

have had unidentified assets and income that

could be used to repay loans.

SBA made 124,000 loans totaling more than

$4 billion after the Northridge earthquake.

By December 1997, there were 9,144 loans

totaling $286 million in default; the audit

sample came from the defaulted loans.

Audits of Three Surety Bond Companies

Found Inappropriate Claims

Audit reports were issued on three sureties

this period, with all three audits finding

significant noncompliance with SBA

procedures. More than half of 51 bonds at

one surety had deficiencies, which resulted

in $1.3 million owed to SBA. Another

surety did not follow proper procedures in

11 of 24 bonds reviewed, with a finding that

$803,926 of loss claims were unallowable

because of improper allocation of expenses

and unallowable expenditures for claims

settlement.

In addition to claims issues, sureties were

cited for issuing bonds after project starts

and splitting bonds to stay under the dollar

maximum for SBA guarantees.

The Top Ten Management Issues Facing

SBA Identified by the OIG

In response to separate requests from the

Senate Committee on Governmental Affairs,

the House Majority Leader, and the House

Committee on Government Reform and

Oversight, the OIG identified what it

considered to be the top 10 management

issues facing SBA. The issues identified

were derived from recent audit oversight

activities, as well as other program

vulnerabilities identified through investigations conducted over the last few years. The

OIG also recommended actions that would

in its view resolve these issues. The issues

identified are the following:

• SBA needs to hold lenders more

accountable for errors in loan processing

and servicing.

• Borrowers need to be held accountable

for misuse of funds.
4 Semiannual Report March 1999

• SBA is not maximizing recoveries in

servicing and liquidation.

• Fraud deterrence and detection requires

continued emphasis.

• Contract dollars are too concentrated

among relatively few 8(a) companies

whose owners remain in the program

after amassing substantial wealth.

• SBA does not adequately enforce its

rules precluding excessive subcontracting.

• SBA should more closely monitor 8(a)

companies.

• SBA needs to develop and implement a

program-based, cost accounting system.

• SBA needs to improve its information

system controls.

• The Paperwork Reduction Act and the

Privacy Act need to be rationalized with

the Government Performance and

Results Act (GPRA) to permit effective

measurement of performance outcomes.

GPRA Activities

The OIG has expanded its efforts to assist

SBA in implementing GPRA. In addition to

providing consultative advice on the

development of SBA's GPRA plans, the

Auditing and Inspection and Evaluation

Divisions have begun to address implementation issues. In FY 1999 the OIG plans to

initiate GPRA audits of five SBA programs

and to include GPRA components in all OIG

inspections. Finally, the OIG is currently

developing a new OIG strategic plan for FY

2001- 2006.

Activities to Enhance Fraud

Detection and Deterrence

Results of False Tax Return Cases

Increase

Over the last 8 years, the OIG has received

434 allegations that false tax returns were

submitted in support of SBA business or

disaster loan applications. These fraud

referrals now involve loan applications

totaling $126 million that have been

submitted to 51 SBA district offices. To

date, 131 individuals have been indicted on

criminal charges: 127 have been adjudicated guilty; 3 indictments were dismissed;

and 1 other has not yet gone to trial.

Affirmative Civil Enforcement Program

The OIG continues to produce results from

its participation in the DOJ’s Affirmative

Civil Enforcement (ACE) program. This

program, which is implemented by U.S.

Attorney offices around the country, targets

cases which might not be prosecuted

criminally because of the minimal dollar

amounts involved, absence of financial loss

to the Government, or because other facts of

the case might not support a criminal

prosecution.

During the 6 years that the OIG has been

involved with the ACE program, we have

had a total of 110 successful cases, resulting

in $3,021,820 in civil penalties and

$5,009,126 in recoveries by SBA. These

successes come from actions in 20 states and

the Commonwealth of Puerto Rico. During

this reporting period, the OIG had two

successful ACE outcomes. One was a

$375,000 payment from the former owners
Semiannual Report March 1999 5

of a Section 8(a) company, and the other

was a $260,286 payment from a participating lender bank.

California Loan Broker at Center of

Fraud Scheme Pleads Guilty

The Inglewood, California, loan broker at

the center of a fraud scheme was charged

with and pled guilty to five felonies,

bringing the number of individuals charged

with crimes in the wake of the investigation

to 14. All 14 have entered guilty pleas, and

with 6 defendants sentenced, total courtordered restitution thus far has exceeded $1

million in this case revolving around loan

packages submitted to a now-defunct

participating lender bank. The brokerage

firm’s portfolio at the bank totaled

approximately 160 loans, originally valued

at some $60 million. During the last 6

months, the following results occurred.

• The principal owner of the loan

brokerage was charged with and pled

guilty to four counts of making false

statements to a Federally insured

lender and one count of subscribing to

a false statement on a tax return. The

man assisted in the submission of

applications for a number of SBAguaranteed loans containing altered tax

returns. The charges address the preparation of false documents in four loan

application packages which resulted in

the approval of SBA-guaranteed loans

totaling $2,460,000 and producing losses

to SBA and the participating lender bank

of more than $2,300,000.

• Three borrowers pled guilty to making

false statements to a Federally insured

lender, and another three were sentenced to confinement and restitution

totaling approximately $750,000. All

these actions related to the borrowers’

SBA-guaranteed loans and resulted from

an extensive investigation by the OIG,

conducted jointly with the FBI and the

IRS, based on allegations from an

anonymous complainant. Partially as a

result of the default rate of these allegedly fraudulent loans, the Office of the

Comptroller of the Currency closed the

bank in 1994.

Leaders of New York Village Convicted

of Conspiracy, Embezzlement, Fraud,

and Money Laundering

A Federal jury convicted four leaders of a

village in Rockland County, New York, on

the 21 counts on which they had been

indicted. Shortly thereafter, a board member

of a Specialized Small Business Investment

Company (SSBIC) in that community was

arrested by Israeli police based on his 1997

U.S. indictment. The board member and two

other co-defendants (who have not yet been

apprehended) became fugitives from the

charges against them. The seven men had

been charged with conspiracy, embezzlement of Federal program funds, making

material false statements, mail fraud, and

wire fraud, mortgage fraud, and money

laundering. The 5-year investigation

disclosed that the defendants had participated in a number of fraudulent schemes to

obtain tens of millions of dollars through the

SSBIC program and other Federal and state

grant, loan, and subsidy programs.

Two from Massachusetts Trade

Association Plead Guilty in LoanPackaging Scheme

Two persons associated with a now-defunct

trade association in Canton, Massachusetts,
6 Semiannual Report March 1999

pled guilty to crimes in connection with loan

applications submitted on behalf of a

number of interstate truckers who received

SBA-guaranteed loans to purchase their

trucks and insurance. The organizer of the

trade association, who admitted engaging in

a scheme to defraud the truckers, pled guilty

to one count each of conspiracy and wire

fraud and nine counts of making false

statements to a Federally insured

financial institution. He was sentenced to

15 months incarceration, 3 years probation,

and $215,546 restitution. The office

manager of the association pled guilty to one

count of theft of money from a bank. She

was sentenced to 1 year probation.
Semiannual Report March 1999 7

Business Loan Program

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

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

Under the Section 7(a) Guaranteed Loan Program, SBA guarantees loans to small businesses

that are unable to obtain private financing. These loans must be of such merit, or be so secured,

as to reasonably ensure repayment to the lending institution. No loan may be made unless the

financial assistance is not otherwise available on reasonable terms from elsewhere in the credit

market. Under the guarantee program, SBA agrees to purchase the guaranteed portion of the

loan upon default by the small business. SBA's guarantee share of loans by private lenders

averages about 75 percent.

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

approximately 42 percent of these loans are being made by participants in the Agency's

Certified Lender Program (CLP) or its Preferred Lender Program (PLP).

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

can participate through the CLP. Over 1,000 participating lenders, approved for the CLP

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

servicing, and liquidating loans. As a result, SBA can process loan guarantee applications in 3

days, rather than the 2 weeks that it may take for a thorough analysis by Agency staff. About 8

percent of all business loan guarantees are made through the CLP process.

As permitted by Section 5(b)(7) of the Small Business Act, SBA delegates even wider authority

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

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

reduces processing time on strong credit applications and uses the resources of SBA's best

lenders to the maximum. About 34 percent of all business loan guarantees are made through the

PLP process.

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

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

expansion of business or modernizing facilities. Typically, 504 loan proceeds are provided as

follows: 50 percent by an unguaranteed first mortgage bank loan, 40 percent by an SBAguaranteed debenture, and 10 percent by the small business customer. The maximum SBA

debenture is $1 million.

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

are now able to use their own internal loan application documents, plus a single page, two-sided
8 Semiannual Report March 1999

SBA form to apply for an SBA guarantee on a loan of $150,000 or less. The demand for this

program continues to exceed 25 percent of all Section 7(a) loan approvals.

The SBAExpress Loan Program allows lenders to use their own loan analyses, procedures and

documentation to originate loans of $150,000 or less with a 50 percent SBA guarantee. Lenders

can thus use their own application forms, internal credit memoranda, notes and documentation

pertaining to loan collateral, servicing, and liquidation. This pilot program minimizes the use of

Government mandated forms and procedures while reducing the cost of originating smaller, less

complex SBA loans.

Summary of OIG Activity / Business Loan Program

Audit Reports Issued 3

Audits Underway 5

Indictments Resulting from Investigations 14

Convictions Resulting from Investigations 13

Investigations Closed / Canceled / Remaining Inventory 22 / 3 /181

Investigations: Restitutions / Fines / Other Recoveries $1,395,016/ $127,427/ $0

Investigations: Declination of Loans Due to Name Checks $15,154,030

Investigations: Cases Referred to Other Agencies 1

Inspections Underway 1

Reviews of Proposed Regulations 2

Reviews of Standard Operating Procedures 2

Reviews of Other Issuances 19
Semiannual Report March 1999 9

Figure 1

Efforts to Improve SBA Program

Management

Two More Reports Released in Nationwide Section 7(a) Audit

As part of a nationwide audit, the OIG

issued two reports on the processing,

disbursing, and use of Section 7(a) business

loans. North Carolina and Colorado are two

of eight districts included in the on going

audit. After all eight audits are completed in

FY 1999, a summary report on systemic

issues will be prepared.

In each of the eight audits, 30 randomly

selected loans were audited to determine if

22 SBA procedures designed to reduce risk

were followed.

In North Carolina, the auditors found

that at least 1 of the 22 procedures was

not followed in 14 of the 30 loans. Noncompliances included: approval of a $71,000

loan to an ineligible applicant for an

ineligible purpose; lack of IRS tax

verification (two loans); lack of verification

of use of proceeds (seven loans); lack of

equity injection verification (two loans);

failure to obtain a Statement of Personal

History (two loans); missing settlement

sheets (two loans); and lack of compensation

agreements detailing professional fees (two

loans). These non-compliances led to three

loans with deficiencies; one loan was

ineligible, one loan's proceeds were not

spent as approved, and one loan needed to

complete the IRS verification process. The

auditors made recommendations to correct

deficiencies (the ineligible loan was

knowingly approved by SBA and therefore

cannot be corrected) and remind lenders and

SBA employees of proper procedures. The

Outstanding Guaranteed SBA

Business Loans

$24,811,582,381

$26,547,087,185

$29,340,744,471

$30,514,622,689

$30,338,994,971 

15.0 20.0 25.0 30.0 35.0

9/30/95

9/30/97

3/31/99

Billions of Dollars
10 Semiannual Report March 1999

District Director agreed.

In Colorado, the auditors found that 12 of

30 loans had at least one non-compliance

with SBA procedures. The noncompliances included weaknesses in credit

or repayment ability, use of proceeds for

ineligible purposes, lack of verification of

cash injections, lack of verification of

financial information with the IRS, lack of

verification of use of proceeds, incomplete

settlement sheets, and lack of joint payee

checks for disbursements. These noncompliances resulted in eight loans with

actual deficiencies, ranging from incomplete

equity injections to ineligible loans. The

District Director and the Assistant

Administrator for Financial Assistance

agreed with the auditors' recommendations

for corrective action.

Audit of Early Defaulted Loan Finds

Lender Complied with SBA Regulations

A $280,000 loan to a Washington State

company was selected for audit in a

continuing review of early defaulting loans.

Although the loan defaulted within 12

months of origination and caused a loss to

SBA after liquidation of $163,070, no

significant noncompliances were found in

the loan processing and servicing. The

lender did not document the equity injection

of $250,000 required by the loan agreement,

but the auditors determined that the

borrower made at least 92 percent of the

required injection.

Guide for Monitoring Preferred Lenders

Reviewed

The OIG reviewed a proposed Review

Guide, which Agency personnel planned to

use to review and monitor lenders

participating in the PLP. Based upon past

audits finding that lenders do not always

submit tax verification forms to the IRS, the

OIG recommended that the PLP review

process should always include a determination that: (1) the lender obtained a

completed IRS Form 4506, Request for

Copy or Transcript of Tax Form, from the

applicant/borrower; (2) the lender submitted

the form to the IRS; and (3) the lender used

the results to verify the validity of the tax

return information or other credit

information submitted by the applicant/borrower, prior to disbursement. The

OIG, also recommended that the review

should indicate whether a referral was made

to the OIG as a result of any discrepancies

found by the tax verification process.

Inspection of Section 504 Loan Program

Underway

The OIG is conducting an inspection of the

Section 504 Loan Program, with a focus on

SBA’s oversight of the Certified Development Companies. We expect to issue the

report in August 1999.

Activities to Enhance Fraud

Detection and Deterrence

Latest Result from Affirmative Civil

Enforcement Program

During this reporting period, the OIG’s

participation in the DOJ’s Affirmative Civil

Enforcement (ACE) program produced one

successful business loan case, resulting in a

$149,284 recovery by SBA and $111,002 in
Semiannual Report March 1999 11

civil penalties. The case, described on page

12, involved settlement of a lawsuit against

a Missouri participating lender.

OIG Briefs Members of Resource Partner

Community

The investigation staff continued its practice

of making presentations to groups of

SBA’s resource partners. The acting

Special Agent in Charge of the OIG’s Los

Angeles field office gave a presentation to

35 attendees at a meeting sponsored by

SBA’s Los Angeles District Office. The

presentation highlighted the benefits to be

gained from cooperation between

participants (in the Section 7(a) prequalification pilot loan program, in this

case) and the OIG in combating waste,

fraud, and abuse in SBA’s lending

programs.

President of Washington Rehabilitation

Clinic Arrested for Alleged Fraud

The president of an injury rehabilitation

clinic in Seattle, Washington, was arrested

by agents of the OIG, the FBI, and the INS,

based on an arrest warrant issued in 1984 by

the U.S. District Court, District of Kansas.

He was subsequently indicted on two counts

of bank fraud, one count of making

material false statements to SBA, one

count of making a false claim of

citizenship, and three counts of making

false statements to a Federally insured

lender. In 1994, he had received an

$80,000 SBA-guaranteed loan to purchase

chiropractic equipment for his clinic. He

subsequently defaulted on the loan. The

OIG’s joint investigation with the FBI found

that the man had made false statements to

obtain the loan and later converted loan

proceeds to his personal use. In addition,

the investigation found that, on his SBA

loan application and on applications to

obtain three Federally guaranteed student

loans, he falsely claimed to be a U.S. citizen.

The outstanding arrest warrant did not

appear during a check of the man’s criminal

history, but was discovered in his INS file.

The arrest warrant was based on a five-count

1984 indictment of the man for; false

representation as a U.S. citizen; false

statements to obtain a Social Security card;

fraud and misuse of visas, permits, and other

documents; false statements to the U.S.

Department of Education; and misuse of a

Social Security number.

California Restaurateur Pleads Guilty to

Making False Statement to Federally

Insured Financial Institution

The owner of a restaurant in Palm Springs,

California, pled guilty to one count of

making a false statement to a Federally

insured financial institution. He was

sentenced to 1 year of probation and a

$2,000 fine. No restitution was ordered

because the loan is current. The OIG

initiated the investigation based on an

allegation from a confidential source that the

owner had submitted altered copies of tax

returns to support his application for an

SBA-guaranteed business loan. The

investigation revealed large discrepancies

between the tax returns provided to the

participating lender bank and those

submitted to the IRS. Based on information

in the IRS tax returns, SBA’s Santa Ana

District Office determined that the restaurant

would not have qualified for the $870,000

loan.

Owners of Virgin Islands Construction

Company Indicted on Conspiracy,

Bank Fraud, Making False Statements,
12 Semiannual Report March 1999

and Money Laundering Charges

Co-owners of a now-defunct U.S. Virgin

Islands construction company were indicted

on charges of conspiracy, bank fraud,

making false statements, and money

laundering. In July 1992, in applying for

an SBA-guaranteed loan through the

participating bank lender, the co-owners

allegedly submitted a fraudulent business

proposal and other documents listing

$420,000 as the value of machinery to be

purchased with the loan funds, when the

actual cost of the machinery was only

$120,000. The machinery, manufactured by

an Ohio company, was for the construction

of poly-block building materials used in

hurricane-resistant residential home

construction. As part of the alleged

fraudulent scheme, one of the owners

opened a checking account in Las Vegas,

Nevada, in the name of the proposed Ohio

supplier of the machinery. Through the Las

Vegas account, he was able to fraudulently

receive the disbursements that were intended

for the Ohio vendor. After relocating the

company to Fort Lauderdale, Florida,

without authorization from either the bank

or SBA, the co-owners spent the majority of

the loan funds on unauthorized expenses.

The business failed in 1995 with a loss to

SBA of more than $400,000. The

investigation originated from a referral by

SBA’s Puerto Rico and Virgin Islands

District Office and is being conducted

jointly with the FBI.

President of Kansas Electronic Game

Maker Indicted on Charges of Making

False Statements to Federally Insured

Financial Institution and to SBA

The former president of a Kansas City,

Kansas, manufacturer of an electronic

baseball game was indicted on one count

each of making a false statement to a

Federally insured financial institution and

making a material false statement to SBA.

The man allegedly overstated accounts

receivable in his application to the

participating lender and to SBA in order to

qualify for a $375,000 SBA-guaranteed

loan. The company defaulted after making

only two payments on the loan, and SBA

purchased its 80 percent guaranteed share

for $299,194. After receiving the allegation,

the OIG initially referred this matter to the

FBI due to workload considerations. Two

years later, however, the OIG joined the FBI

in this investigation at the request of the

U.S. Attorney’s Office for the Western

District of Missouri.

Montana Restaurateur Indicted on

Charge of Making Material False

Statement to SBA

The owner of a Cut Bank, Montana,

restaurant was indicted on one count of

making a material false statement to SBA.

The OIG’s joint investigation with the FBI

determined that when the man obtained a

$54,000 SBA-guaranteed loan from a

participating lender bank, he failed to

disclose an extensive criminal record.

Records showed that the man had been

arrested more than 20 times for various

alleged financial crimes. At the time of his

indictment, he was already in custody for

prior offenses. The investigation was

initiated based on a referral from SBA’s

Montana District Office.

Missouri Banker Indicted for Making

False Statements and Claims

An officer of a participating lender bank in

Springfield, Missouri, was indicted on one
Semiannual Report March 1999 13

count each of making false statements to

SBA, making false entries in the records

of a Federally insured bank, and making a

false claim against the United States. All

the charges related to the banker’s actions

on a $155,000 SBA-guaranteed loan issued

in 1995 to a music retailer. After the

borrower defaulted on the loan and filed

bankruptcy, SBA paid the bank $117,002 on

its guarantee. According to the indictment,

the bank officer filed a false application for

the SBA-guaranteed loan, stating that certain

outstanding bank loans to the borrower were

current, when, in fact, they were delinquent.

It was further alleged that the banker made

false entries in the bank’s records by stating

that the SBA-guaranteed loan proceeds

would be used to pay down delinquent trade

accounts. In fact, a substantial portion of the

loan proceeds was used to bring existing

bank loans current. Finally, the indictment

charged that, after the borrower defaulted,

the banker made a false claim against SBA

for payment of the full guarantee on this

loan when she knew the guarantee was

unenforceable because it had been obtained

by means of a false application. The OIG

initiated this joint investigation with the FBI

based on a referral from SBA’s Springfield,

Missouri, Branch Office.

Missouri Lender Pays $260,000 to Settle

Civil Fraud Case

A civil fraud complaint was filed against a

Springfield, Missouri, participating lender

bank. The bank settled the matter on that

same date by agreeing to pay the Government $244,000, plus $16,286 as reimbursement for Federal investigative costs. The

complaint charged the bank with making a

false claim in connection with a $155,000

SBA-guaranteed loan to a music retailer.

The complaint detailed alleged fraudulent

actions by a bank officer (see above) and

also named another bank officer for

allowing the false information to be

submitted to SBA. In July 1998, the former

president of the borrower pled guilty to

making false statements to SBA by

misrepresenting on the loan application that

loans from the lender were current.

California Tax Preparer Pleads Guilty to

Conspiracy to Defraud IRS and Tax

Evasion

A tax preparer in Pasadena, California, was

charged with and pled guilty to one count of

conspiracy to defraud the IRS and eight

counts of tax evasion. The OIG had been

asked to join a criminal investigation already

underway by the IRS and the FBI, based

upon information that the tax preparer may

have been responsible for the preparation of

altered tax returns submitted to financial

institutions and to SBA on behalf of clients

who had received SBA-guaranteed loans.

The OIG reported the criminal prosecutions

of two of these clients last year. The

investigation confirmed that the “copies” of

their Federal tax returns, submitted to the

participating bank with their SBA loan

applications totaling more than $1,060,000,

had been altered from those submitted to the

IRS to substantially overstate their incomes.

These discrepancies formed the basis for a

search warrant that was executed on the tax

preparer’s business. The charges just filed

against him were a direct result of the

evidence gathered during the search.

Colorado Saloon and Dance Hall

Operator Indicted for Making False

Statements

The former president of a saloon and dance

hall in Durango, Colorado, was indicted on

one count of making false statements to a
14 Semiannual Report March 1999

Federally insured bank and one count of

making false statements to SBA. The

charges, resulting from the OIG’s joint

investigation with the FBI, involved two

SBA-guaranteed loans, totaling $780,000,

which his business received from the

participating bank lender in 1996. The

investigation determined that the man failed

to disclose to the bank or SBA that he owed

his father and two realtors a total of about

$240,000 in connection with his purchase

and sale of a prior business in southern

California. He defaulted on the SBAguaranteed loans after making only a few

payments, and has since filed for both

personal and corporate bankruptcy. This

investigation was initiated based on a

Suspicious Activity Report filed by the

lender.

President of Washington Credit Exchange

Indicted on Fraud Charges

The president of a credit exchange in

Kennewick, Washington, was indicted on

one count of making false statements to

SBA and one count of bank fraud. The

charges stemmed from fraudulent statements

she allegedly made to SBA and the

participating lender to obtain a $56,000

SBA-guaranteed LowDoc loan in January

1996. The investigation found that the

businesswoman failed to disclose that her

firm owed more than $12,100 in Federal

payroll taxes at the time she applied for the

loan. In addition, when the loan funds were

disbursed, she certified that “... all taxes,

whether federal, state or local, business or

personal, are now current....” Had the

unpaid taxes been disclosed, the loan would

not have been made. Due to the default of

this loan, SBA incurred a loss of $35,285

and the bank incurred a loss of $19,319.

Officers of the SBA/OIG and the U.S.

Marshals Service subsequently arrested the

businesswoman. This investigation was

based on a referral from SBA’s Spokane

District Office.

President of Washington Construction

Company Charged with Making False

Statements on Loan Application

The former president of a construction

company in Des Moines, Washington, was

charged in an information with making

false statements on a loan application.

The OIG investigation found that the

businessman provided false financial

statements and made false statements

regarding his prior criminal history and

lawsuits that were pending against him and

his company at the time he applied for a

$200,000 SBA-guaranteed loan and various

other loans from the participating lender.

The investigation also found that the man

had provided the same false information to

SBA in order to get a SBA-guaranteed

surety bond and certification as a Section

8(a) contractor. The surety bond was

declined and the businessman is no longer in

the Section 8(a) program. During the

investigation, OIG special agents executed

search warrants on the business premises, a

storage unit, and his personal residence.

The searches confirmed the investigative

findings and revealed additional evidence

that the man made (or caused to be made)

false statements to the IRS and state taxing

authorities via mail and facsimile. The total

loss to SBA was $134,906, the loss to the

lender was $309,195, and the loss to state

and Federal taxing authorities was $73,555.
Semiannual Report March 1999 15

This case was referred to the OIG by SBA’s

Seattle District Office.

Owner of Pennsylvania Beauty Supply

Company Charged with Making False

Statements on Loan Application

The owner of a beauty supply company in

Philadelphia, Pennsylvania, was charged in

an information with two counts of making

material false statements in an unsuccessful 1994 attempt to obtain a $60,000 SBAguaranteed bank loan. The businessman

allegedly had failed to disclose a 1978

Delaware State criminal conviction in

applying for the loan. The information also

charged that he had submitted copies of

Federal tax returns for 1991 and 1993 that

he knew had been altered to show higher

gross receipts and net profits than those

actually filed with the IRS. The loan

commitment was canceled when the tax

return discrepancies were discovered, and

further investigation revealed the businessman’s criminal history. The OIG

investigation was based upon a referral from

SBA’s Philadelphia District Office.

Results of Previously Reported

Investigations

California Loan Broker at Center of

Fraud Scheme Pleads Guilty

The Inglewood, California, loan broker at

the center of a fraud scheme was charged

with and pled guilty to five felonies,

bringing the number of individuals charged

with crimes in the wake of the 6-year

investigation to 14. All 14 have entered

guilty pleas, and with the number of

defendants sentenced having doubled to 6,

total court-ordered restitution has exceeded

$1 million. This case revolves around loan

packages submitted to a participating lender

bank that, partially as a result of the default

rate of the allegedly fraudulent loans, the

Office of the Comptroller of the Currency

closed in 1994.

• The firm’s principal owner was charged

with and pled guilty to four counts of

making false statements to a Federally

insured financial institution and one

count of subscribing to a false statement on a tax return. He admitted his

role in the submission of four SBAguaranteed loan applications containing

altered tax returns. The loans totaled

$2,460,000, and losses to SBA and the

participating lender bank exceeded

$2,300,000. The owner also admitted

failing to report the firm’s gross receipts,

for 1991 and 1992, resulting in a total

tax loss of approximately $520,000. The

firm specialized in financing the purchase of gas stations through one participating lender bank. The OIG examination of loan files disclosed evidence of

such fraudulent activities as false

personal financial statements, false tax

returns, and manipulation of documents

to falsely show that the borrowers made

substantial initial cash injections.

• The owner of an Oriental rug firm in

Beverly Hills, California, was sentenced

to 4 months incarceration, 4 months

home detention, 5 years supervised

release, and $677,000 restitution to SBA.

He previously pled guilty to one count of

fraudulent receipt of money from a

bank transaction for falsely representing the purpose of his $1 million SBAguaranteed loan.

• The owner of a car wash in Lomita,

California, was sentenced to 5 months in
16 Semiannual Report March 1999

prison, 5 months home detention, 5 years

supervised probation, and $70,000

restitution (of which 75 percent comes to

SBA). He previously pled guilty to

making a false statement to a Federally insured lender by submitting

altered individual income tax returns

with his application for a $1 million

SBA-guaranteed loan.

• A married couple who were former

owners of a West Covina, California, gas

station pled guilty to four counts of

making false statements to a Federally

insured financial institution by

submitting altered Federal income tax

returns with their application for a $1

million SBA-guaranteed loan.

• The former owner of a gas station in

Fontana, California, pled guilty to three

counts of making false statements to a

Federally insured lender for submitting

false documents with his application for

a $1 million SBA-guaranteed loan.

• A Los Angeles, California, plumbing

contractor was sentenced to $2,880

restitution to SBA and 3 years probation,

with the first 8 months to be served in

halfway house detention and home

detention. He had pled guilty to one

count of making a false statement to a

Federally insured lender by submitting

altered income tax returns as part of his

application for a $500,000 SBAguaranteed loan.

(Updated from September 1998 and March

1998 Semiannual Reports.)

Florida Couple Sentenced For Making

False Statements and Converting Loan

Collateral

A couple who owned a crafts and fashion

manufacturer/wholesaler/import firm in

Longwood, Florida, was sentenced for their

crimes in connection with the company’s

$75,000 SBA-guaranteed LowDoc loan.

The company’s vice president, who

previously pled guilty to four counts of

making a material false statement to SBA,

making a false statement to influence a

Federally insured financial institution,

and converting SBA collateral, was

sentenced to 5 months incarceration, 5

months home detention, and 5 years

supervised release. Further, if deported, the

man will not be allowed to return to the

United States without permission from the

Attorney General. His wife (the company’s

president), who previously pled guilty to one

count of making a false statement to SBA,

was sentenced to 5 years probation. In

addition, each was ordered to perform 150

hours community service and to pay

(jointly) $49,006 restitution. (Updated from

September 1998 Semiannual Report.)

Massachusetts Trade Association

Officials Plead Guilty in Loan-Packaging

Scheme

Two persons associated with a now-defunct

trade association in Canton, Massachusetts,

pled guilty on the second day of trial to

crimes in connection with loan applications

submitted on behalf of interstate truckers.

The organizer of the association admitted

engaging in a scheme to defraud a number

of truckers who received SBA-guaranteed

loans to purchase their trucks and insurance.

The organizer pled guilty to one count each

of conspiracy and wire fraud and nine

counts of making false statements to a

Federally insured financial institution.

The court had previously dismissed two
Semiannual Report March 1999 17

counts of mail fraud. The organizer was

sentenced to 15 months incarceration, 3

years probation, and $215,546 restitution.

The office manager of the association, who

was originally charged with the same 13

counts, pled guilty to one count of theft of

money from a bank. The manager was

sentenced to 1 year probation. (Updated

from September 1997 Semiannual Report.)

New York Businessmen Sentenced for

Mail Fraud and Conspiracy

Three Long Island, New York, businessmen

who had each pled guilty to one count of

mail fraud and one count of conspiracy

were sentenced. The business manager of

an East Islip, New York, chiropractic and

physical therapy center was sentenced to 5

months imprisonment; the chief financial

officer of an affiliated therapy provider was

sentenced to 3 months imprisonment and a

$5,000 fine; and the owner of both

companies and of another therapy provider

was sentenced to 6 months imprisonment.

Each defendant was also sentenced to 3

years supervised release. The men

conspired to forward fraudulent financial

statements to a non-bank participating

lender in an unsuccessful attempt to obtain a

$750,000 SBA-guaranteed loan. They also

participated in a scheme to mail reimbursement claims to insurance companies for

physical therapy that was never provided to

patients. (Updated from March 1996

Semiannual Report.)

Georgia Business Broker Sentenced for

Conspiracy and Making False Statements

to SBA

The owner and chief executive officer of a

business brokerage in Kennesaw, Georgia,

was sentenced to 5 years incarceration, 5

years supervised release, 100 hours

community service, and approximately

$141,000 restitution. He was previously

found guilty of one count of conspiracy,

three counts of making material false

statements to SBA, and three counts of

making false statements to a Federally

insured bank. The OIG’s investigation of a

$155,000 SBA-guaranteed loan to buy a

food distributor revealed that the man, who

brokered the sale, conspired with the buyer’s

president and others to conceal the true

purchase price from the participating lender

bank and SBA. (Updated from September

1998 and March 1998 Semiannual Reports.)

Pennsylvania Manufacturer Sentenced

for Misappropriating SBA Collateral

The owner of a Luzerne County, Pennsylvania, manufacturer of ambulances, fire trucks,

and paramedic units was sentenced to 4

months home confinement, 3 years

probation, 150 hours community service,

and $5,000 restitution. He previously pled

guilty to one misdemeanor count of

misappropriation of SBA collateral. In

the plea agreement, he acknowledged that,

to secure a $171,842 loan, he fraudulently

pledged as collateral a $55,842 ambulance

that he also sold to a volunteer fire company

without SBA’s knowledge or permission.

(Updated from September 1998 Semiannual

Report.)

Pennsylvania Restaurateur Sentenced for

Making Material False Statement

The president of a restaurant in Bethlehem,

Pennsylvania, was sentenced to 3 years

probation, 100 hours community service,

and a $5,100 fine. He previously pled guilty

to one count of making a material false

statement to influence SBA to approve a
18 Semiannual Report March 1999

$170,000 guaranteed loan to his business.

(Updated from September 1998 Semiannual

Report.)

Mississippi Tractor Dealer Sentenced for

Making Material False Statement to

Obtain Loan

The owner of a now-defunct tractor

dealership in Shubuta, Mississippi, was

sentenced to 5 years probation, a $1,000

fine, and $12,000 restitution. He was

previously convicted on one count of

knowingly making a material false

statement to obtain a $150,000 SBAguaranteed loan. (Updated from September

1998 and March 1998 Semiannual Reports.)

Pennsylvania Businessman Sentenced for

Making Material False Statements to

SBA

The president of two automobile-related

businesses in Philadelphia, Pennsylvania,

was sentenced to 3 years probation and

$3,300 in fines. The man previously pled

guilty to three counts of making material

false statements to SBA. As part of his

application for a $252,000 SBA-guaranteed

loan, he submitted altered copies of his tax

returns. Additionally, he failed to disclose

his 1992 arrest for kidnapping and assault.

(Updated from September 1998 Semiannual

Report.)

Mississippi Truck-Accessories Business

Owner Pleads Guilty to Bank Fraud

The owner of a trucking accessories

business in Long Beach, Mississippi, pled

guilty to one count of bank fraud in

connection with a $100,000 LowDoc loan.

He double-billed customers’ credit cards,

issued checks to several banks without

sufficient funds to cover them, forged

signatures to cash checks, and deposited

closed account checks, producing a total

bank fraud loss of $49,077. (Updated from

September 1998 Semiannual Report.)

Former Law Enforcement Official Pleads

Guilty to Franchise-Loan Fraud

The former Chief Deputy Sheriff of Carver

County, Minnesota, pled guilty in Colorado

to one count of wire fraud and one count of

bank fraud. He had personally guaranteed

a $100,000 SBA loan through a participating

non-bank lender for a mail-handling

franchise in Denver to be owned by his wife.

A check disbursing $80,000 of the loan

proceeds was issued for the purchase of this

franchise. The OIG’s investigation

revealed, however, that the man forged an

endorsement on the check and used the

funds for his personal benefit, and that he

submitted a falsified Personal Financial

Statement. (Updated from September 1998

Semiannual Report.)
Semiannual Report March 1999 19

Disaster Loan Program

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

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

Moreover, the Disaster Loan Program is the only form of SBA assistance not limited to small

businesses. Disaster loans from SBA also help homeowners, renters, businesses of all sizes,

and non-profit organizations to rebuild. SBA's disaster loans are also a critical source of

economic stimulation in disaster-ravaged communities, helping to energize employment and

stabilize tax bases.

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

SBA program helps to defray Federal costs. When victims need to borrow to repair uninsured

damages, the low interest rates and the long terms available from SBA make recovery more

affordable. Because SBA tailors the repayment of each disaster loan to each borrower's

capability, unnecessary interest subsidies paid by the taxpayers are avoided.

The need for SBA disaster loans is unpredictable. During FY 1998, SBA approved 30,154

loans. Since the inception of the program, SBA has approved more than 1,416,000 disaster

loans valued at some $26 billion. As of the end of FY 1998, the SBA disaster loan portfolio

included more than 277,000 loans worth over $6.9 billion.

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

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

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

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

necessary working capital to small businesses until normal operations can be resumed after a

physical disaster. SBA delivers its disaster loans through four specialized Disaster Assistance

Area Offices located in Niagara Falls, New York (Area 1); Atlanta, Georgia (Area 2); Fort

Worth, Texas (Area 3); and Sacramento, California (Area 4).
20 Semiannual Report March 1999

Summary of OIG Activity / Disaster Loan Program

Audit Reports Issued 1

Audits Underway 2

Indictments Resulting from Investigations 9

Convictions Resulting from Investigations 9

Investigations Closed / Canceled / Remaining Inventory 19 / 6 / 148

Investigations: Restitutions / Fines / Other Recoveries $71,117 / $2,050 / $0

Investigations: Declination of Loans Due to Name Checks $1,104,735

Investigations: Cases Referred to Other Agencies 3

Reviews of Standard Operating Procedures 1

Reviews of Other Issuances 2

Figure 2

SBA Disaster Portfolio

$6,907,727,301

$6,915,620,234

$7,155,135,998

$6,969,759,194

$6,747,768,714

3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

9/30/95

9/30/96

9/30/97

9/30/98

3/31/99

Billions of Dollars
Semiannual Report March 1999 21

Efforts to Improve SBA Program

Management

Audit Finds Improvement Needed in

Loan Origination and Liquidation

An audit of 1994 Northridge, California,

earthquake disaster defaulted loans revealed

that loan losses could be reduced by

improvements in loan origination and

loan liquidation.

SBA made 124,000 loans totaling more than

$4 billion after the Northridge earthquake.

By December 1997, there were 9,144 loans

totaling $286 million in default.

In a random sample of 75 of the defaulted

loans, the auditors found that 59 loans

defaulted because the borrowers had

unsatisfactory credit or insufficient cash

flow. In 40 of the 59 loans, the problems

arose after the loan was made. In the other

19, however, the problems existed at loan

origination and the loans should not have

been made. Based on these results, an

estimated 2,316 defaulted loans totaling $90

million were made to Northridge borrowers

with unsatisfactory credit or insufficient

cash flow at origination. The Associate

Administrator for Disaster Assistance and

the Disaster Area 4 director agreed with the

finding and said that actions already initiated

before the audit would correct the problems.

These actions include annual quality

assurance reviews of disaster assistance area

offices, new automated reports for loan

officers, a standardized training manual, and

plans to develop a modified form of credit

scoring to ensure credit bureau reports will

be taken into account. The OIG agreed

these actions are responsive to the audit

finding.

For 21 of the defaulted loans totaling

$682,251, the auditors found that the

borrowers had assets or income available to

make payments. After SBA followed up on

the audit information, 14 of these borrowers

made payments totaling $58,000 during the

audit. Based on the sample results, the

auditors estimated that borrowers on 2,560

defaulted loans totaling $80 million had

unidentified assets and income that could be

used to repay loans. (In another 15 loans in

the sample, SBA had identified borrowers'

assets and income prior to the audit.) The

Associate Administrator for Financial

Assistance and the director of the Santa Ana

Loan Servicing and Liquidation Office

generally agreed with the finding, but said

staffing shortages and other priorities

prevented better identification of defaulted

borrower assets and income. Staffing had

increased from 6 employees to 26 as of

October 1997. Other priorities identified

were to protect SBA’s collateral and lien

position by reviewing bankruptcy notices,

notices of default, notices of trustee sales,

and probate notices and filing appropriate

documents. With adequate staffing and

effective asset/income identification

techniques, program managers believe much

of the funds on delinquent loans could be

recovered.

Activities to Enhance Fraud

Detection and Deterrence

Virgin Islands Businessman Pleads Guilty

to Making False Statement to SBA

The owner of a feed store in St. Croix, U.S.

Virgin Islands, pled guilty to a charge of

making false statements to SBA in

connection with two disaster loan

applications, totaling $215,900, which he
22 Semiannual Report March 1999

had submitted for his business and for his

home. The man admitted providing SBA

with grossly overstated revenue figures in

comparison to the tax data filed with the

Islands Revenue Bureau for 1993. Both

applications were withdrawn from

consideration when the discrepancies were

discovered. A criminal complaint was filed

and an arrest warrant was issued for him in

1996; he was placed in fugitive status after

the OIG learned that he had fled to Jordan to

avoid arrest. The owner was arrested in

October 1998 after attempting to re-enter the

Virgin Islands. The Disaster Assistance

Area 1 Office referred the case to the OIG.

Colorado Telemarketer Indicted on Two

Counts of Making False Statements to

SBA

The owner of a telemarketing company in

Denver, Colorado, was indicted on two

counts of making false statements to SBA.

The owner obtained a $1.5 million SBA

disaster loan after his company sustained

damage from the Northridge, California,

earthquake. He relocated his business to

Denver and falsely reported (submitted

invoices and other documents to SBA as

“proof”) that he used $1.2 million of the

loan proceeds to purchase new equipment

from another company. The OIG’s

investigation found that most of the

equipment listed on the company’s invoices

was salvaged out of the earthquake-damaged

building in California or was already owned

by him or his other companies. The OIG

initiated this investigation based on an

anonymous telephone call.

California Shopping Center Owner

Pleads Guilty to Grand Theft and

Insurance Fraud

The owner of a shopping center in Los

Angeles, California, pled guilty in Los

Angeles County Superior Court to one count

of grand theft and one count of insurance

fraud. Both charges are violations of the

California Penal Code. The OIG initiated its

investigation based on a referral from a Los

Angeles City Fire Department arson

investigator and an auditor from the ATF.

They had learned that, after the shopping

center was looted during the 1992 civil

unrest in Los Angeles, the owner obtained a

$281,800 disaster loan from SBA. In

reviewing the owner’s SBA loan file during

the arson/insurance fraud investigation, the

ATF auditor suspected that the man had

submitted tax returns that had been altered

to significantly overstate his income. The

SBA portion of the investigation confirmed

that the tax returns were altered and that the

loan would not have been approved had

SBA known his true income. The case was

prosecuted by the Los Angeles County

District Attorney’s Office pursuant to a

declination from the U.S. Attorney’s Office

because the Federal statute of limitations

had expired before the crime was

discovered. The OIG conducted the

investigation jointly with agents from the

ATF and the California State Department of

Insurance.

Two Former SBA Loss Verifiers Charged

with Making Material False Statement

Felony charges of making a material false

statement were brought against two former

loss verifiers in SBA’s Disaster Assistance

Area 4 Office. In separate criminal
Semiannual Report March 1999 23

informations, one man was charged with one

count and the second man was charged with

two counts. Following the January 1995

flooding in the Sacramento, California, area,

the second man had applied to both SBA and

the Federal Emergency Management Agency

(FEMA) for disaster assistance in connection

with damage to his home. During March

1996, he allegedly submitted false contracts,

invoices, and checks purportedly evidencing

repairs by and payments to the first man, who

was an SBA employee at the time and a

licensed contractor, to obtain a $57,400 SBA

disaster loan. The second man allegedly also

submitted some of these false documents to

FEMA in January 1997 as proof that the first

man had repaired the 1995 disaster damage

and that any damage observed in 1997

resulted from the 1997 flooding of the same

area. The first man was charged with making

false statements to SBA and FEMA

investigators by fraudulently misrepresenting

that he had performed and been paid for the

disaster repairs. The case resulted from a

referral from the FEMA/OIG and was

conducted jointly.

Canadian Football League Player

Indicted for Mail Fraud

A Canadian Football League player was

indicted on seven counts of mail fraud.

Following the January 1994 Northridge

earthquake, he had obtained a total of

$396,100 in SBA disaster loans (one for

physical damage, the other for economic

injury) for his Artesia, California, computer

business. The investigation revealed his

business suffered no loss of any inventory

and the man diverted loan funds to his

personal use, which included the purchase of

another business. In addition, he allegedly

failed to disclose to SBA that the computer

business had closed in September 1994, 1

month prior to his last loan disbursement of

$96,200. Upon learning that a warrant for

his arrest had been issued, the man fled to

Canada. He was recently arrested in Canada

on immigration-violation charges and is

currently awaiting a hearing with Canadian

immigration authorities to determine if he

will be extradited to the United States. The

OIG initiated this investigation based on a

referral from SBA’s Disaster Assistance

Area 4 Office.

California Businessman Indicted for

Making Material False Statement

A Canoga Park, California, businessman

was indicted on two counts of making

material false statements. After the

Northridge earthquake, the man had

obtained SBA disaster loans (for physical

damage and for economic injury) totaling

$55,700 for his businesses. (One was a

printing business; the other was a four-unit

apartment complex.) He also received a

$12,000 SBA disaster home loan for real

estate and personal property losses to one of

the Canoga Park units, where he resided

during the earthquake. The investigation

revealed that he failed to disclose to SBA

that he had filed for bankruptcy in 1989 and

1990 under a different name and Social

Security number. The man also failed to

inform SBA that he was on probation at the

time he applied for the disaster loans. The

OIG joined the investigation, which was

initiated by the ATF as an inquiry into

possible arson. The investigation also

expanded to include the Social Security

Administration OIG.

California Businessman Charged with

Making False Statement to Federally

Insured Financial Institution
24 Semiannual Report March 1999

A Canoga Park, California, man was

charged with one count of making a false

statement to a federally insured financial

institution. Following the 1994 Northridge

earthquake, the man had received a $48,000

disaster home loan from SBA for damage to

his personal property and condominium.

Later in 1994 he received a $255,950 SBAguaranteed loan for the purchase of a

laundromat in Huntington Park, California.

The OIG initiated its investigation based on

a referral from SBA’s Disaster Assistance

Area 4 Office. The investigation disclosed

that, in applying for the business loan, the

man submitted false statements to the

participating lender bank. He claimed to be

employed at a salary of $52,000; in fact, he

was unemployed at the time and had never

been employed by the named employer. He

also did not disclose to the bank that, in

violation of the requirement to use nonborrowed funds, he had used proceeds from

the disaster loan as the source of the down

payment for the purchase of the laundromat.

The investigation further revealed that the

man had submitted false information to SBA

to support the loss of personal property in

the disaster home loan. The investigation

showed that most of the personal property

claimed as damaged had actually been

moved to another site. SBA loss verifiers

were shown only minor broken items and

were told that the rest had been cleared away

prior to their visit. Both loan balances were

charged off after his subsequent Chapter 7

bankruptcy discharge; the total loss to SBA

was approximately $245,000.

California Woman Charged with Making

False Statement to SBA

A woman from southern California was

charged in an information with one count of

making a material false statement to SBA

for falsely claiming that her personal

belongings were destroyed in an apartment

complex she did not live at during the

January 17, 1994, Northridge earthquake.

She had previously been arrested in

Indianapolis, Indiana, by special agents from

the OIGs of SBA and FEMA and Deputy

U.S. Marshals, based on a complaint

alleging disaster fraud against both SBA and

FEMA. The SBA/OIG’s investigation

showed that the woman had applied for an

SBA disaster home loan for personal

property that she claimed belonged to her

and was destroyed during the earthquake.

SBA had declined the application based on

her adverse credit history. The woman

subsequently submitted a new SBA disaster

home loan application using an alias and a

false Social Security number. Relying on

the false Social Security number and a false

receipt she submitted from the Southern

California Gas Company, SBA approved the

second application for $20,200 and fully

disbursed it. The SBA/OIG asked

FEMA/OIG special agents to join the

investigation after learning that the woman

had also received a disaster grant from

FEMA for the same location where she

falsely claimed to have lived during the

earthquake. The SBA/OIG initiated its

investigation based on a referral from SBA’s

Disaster Assistance Area 4 Office.

Results of Previously Reported

Investigations

Owner of California Modeling Agency

Pleads Guilty to Falsely Claiming

Damage

The owner of a modeling agency in Los

Angeles, California, pled guilty to two

counts of making material false statements to SBA. The remaining five counts
Semiannual Report March 1999 25

of making material false statements to

SBA and four counts of bank fraud on

which the man had been indicted were

dismissed as part of the plea agreement. He

was sentenced to 5 years probation, 2,000

hours community service, and $68,117

restitution to SBA. (Updated from

September 1998 Semiannual Report.)

California Physician Sentenced for Fraud

Against SBA and Medicare

A physician in Beverly Hills, California, a

recipient of SBA home and business disaster

loans, was sentenced to serve 2 years

imprisonment and 2 years supervised

release. He was also ordered to pay

$311,000 in restitution to the U. S.

Department of Health and Human Services

and a $600 special assessment fee. He

previously pled guilty to 2 counts of making

a material false statement to SBA and 10

counts of mail fraud against the Medicare

program. The physician claimed to have

incurred both personal and real property

damage at his residence following the

Northridge earthquake, when in fact the

property was a rental unit and the personal

property damage was actually incurred by

his tenant. Also, the physician had

submitted an invoice that overstated the

extent of real property damage incurred at

the rental. (Updated from September 1998

Semiannual Report.)

Four Indicted in North Dakota FloodLoan Negotiate Guilty Pleas

Four people who were previously indicted

on charges related to a fraudulently obtained

$122,900 SBA disaster loan to a private

business school in Grand Forks, North

Dakota, entered guilty pleas. The former

corporate secretary and the former controller

of the school each pled guilty to one count

of conspiracy to defraud SBA. Each was

sentenced to 6 months home confinement, 3

years probation, and 100 hours community

service. A salesman for a computer store in

Fargo, North Dakota, pled guilty to one

count of mail fraud, and was sentenced to 2

years probation, 50 hours community

service, and a $1,000 fine. The fourth

defendant was indicted on ten counts (wire

fraud, money laundering, making

material false statements, and failure to

refund unearned Federal student aid

funds) in addition to the three counts

(conspiracy and making false statements

to SBA) on which she had previously been

indicted. In return for her subsequent guilty

plea to one student-loan refund count, the

Government dismissed all the other charges

against her. (Updated from September 1998

Semiannual Report.)

Florida Air Charter Owner Sentenced for

Hurricane-Loan Fraud Scheme

The owner of a Miami, Florida, air charter

and air cargo transport company was

sentenced to 6 months home confinement

with electronic monitoring, 3 years

probation, 250 hours community service,

and a $150 assessment. He previously pled

guilty to one count of conspiracy and two

counts of making material false statements to influence SBA to disburse a

$288,500 disaster loan to the company.

(Updated from September 1998 Semiannual

Report.)
26 Semiannual Report March 1999

Small Business Investment Companies

The primary purpose of the Small Business Investment Company Program is to provide a source

of long-term debt and equity capital to new or expanding small businesses. Small Business

Investment Companies (SBICs) are independently owned and managed, profit-making

investment companies licensed by SBA to finance small businesses through long-term loans and

investments in their equity securities. SBICs often also provide management assistance to the

companies they finance.

The role of SBA is to (a) determine which SBICs to license, (b) oversee and regulate those

licensees, and (c) arrange for Government-guaranteed financing from private sources to add to

their capital. Such financing, termed "leverage," is provided through either debentures or

participating securities issued by the SBIC. The participating security was created by the Small

Business Equity Enhancement Act of 1992 to serve the needs of SBICs investing principally in

equity securities, which do not generate sufficient income to cover the interest on debenture

leverage. They represent a limited partnership interest in the SBIC, whereby SBA advances the

cost of the leverage until profits have been generated from the SBIC's investments. In

consideration, SBA participates in approximately 10 percent of the SBIC's profits. The Agency

arranges periodic public offerings of trust certificates backed by pools of SBIC debentures or

participating securities. SBA guarantees the payment of principal and interest on the trust

certificates.

As of March 31, 1999, there were 330 licensed and active SBICs, with a total capitalization of

$9.9 billion (private capital of $6.7 billion and committed leverage of $3.2 billion). Included are

71 Specialized SBICs (SSBICs) which were licensed under Section 301(d) of the Small Business

Investment (SBI) Act to invest only in small businesses owned and managed by socially or

economically disadvantaged persons. (Section 301(d) was repealed in 1996, but existing SSBICs

were "grandfathered" and continue to operate as before.) While the SBIC program level utilized

in FY 1998 was $1.16 billion, authorization ceilings allow for $1.5 billion in the FY 1999

program level, signaling a continuing expansion of the program. As of March 31, 1999, $682

million of the FY 1999 program level was committed.

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

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

Business Opportunity Enhancement Act of 1992 transferred the responsibility for examining

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

is now responsible for these examinations, the OIG continues to have authority to audit the SBIC

program pursuant to its responsibility to oversee all Agency programs and activities.
Semiannual Report March 1999 27

Summary of OIG Activity / Small Business Investment Companies

Indictments Resulting from Investigations 1

Convictions Resulting from Investigations 5

Investigations Closed / Remaining Inventory 1 / 11

Investigations: Restitutions / Fines / Other

Recoveries

$100,000 / $10,000 /

$843,453

Reviews of Regulations 2

Reviews of Standard Operating Procedures 1

Reviews of Other Issuances 3

Figure 3

Activities to Enhance Fraud

Detection and Deterrence

President of New York Small Business

Investment Company Indicted for Bank

Fraud, Misapplication of SBIC Funds,

and Making Material False Statements

The president of a New York, New York,

SBIC was indicted on charges of bank

fraud, misapplication of SBIC funds, and

making material false statements. The

indictment charged that, from March 1996

through February 1997, the man

fraudulently obtained over $750,000 in loans

from the SBIC, as well as over $250,000 in

salary advances. According to the

indictment, he caused the SBIC’s vice

president to co-sign the salary advance and

loan checks by falsely representing that the

loans were permissible under SBA

regulations. The man claimed that the funds

were to be used to purchase his estranged

wife’s interest in the SBIC, in order to

prevent her from gaining control of the

company. He then allegedly used the

SBIC Program Financing to Small Businesses

$1,630,371,036

$3,239,439,081

$2,368,968,139

$1,616,010,647

$1,249,011,021

0.75 0.90 1.05 1.20 1.35 1.50 1.65 1.80 1.95 2.10 2.25 2.40

9/30/95

9/30/96

9/30/97

9/30/98

3/31/99

B illions of Dollars
28 Semiannual Report March 1999

fraudulently obtained funds for unauthorized

purposes, including repayment of his

personal gambling debts and personal debts

to the two other members of the SBIC’s loan

committee. His actions caused SBIC a loss

of over $900,000 and forced the Agency to

liquidate the SBIC in 1997. This

investigation, conducted jointly with the

FBI, originated from a referral by SBA’s

Office of SBIC Operations.

Results of Previously Reported

Investigations

Board Chairman of California SSBIC

Sentenced for Fund-Misapplication

Scheme

The chairman of the board of a now-defunct

SSBIC in Westminster, California, was

sentenced to 1 day in custody, 5 years

supervised release, a $100,000 fine, and 300

hours community service. He previously

pled guilty to one count of conspiracy and

three counts of willful misapplication of

funds belonging to the SSBIC. His

sentencing is the culmination of an extensive

investigation initiated in 1992, based on

information provided by SBA’s Investment

Division shortly after $1 million in SBA

funds were advanced to the SSBIC. In 1997

he repaid $927,000 of the $1 million he

fraudulently obtained from SBA. (Updated

from March 1998 Semiannual Report.)

Leaders of New York Village Convicted

of Conspiracy, Embezzlement, Fraud,

and Money Laundering

A Federal jury convicted four leaders of an

incorporated community in Rockland

County, New York, on the 21 counts on

which they had been indicted. Shortly

thereafter, Israeli police arrested a board

member of an SSBIC in that community

based on his 1997 U.S. indictment. The

board member and two of his co-defendants

(who have not yet been apprehended)

became fugitives from the charges against

them. The seven men had been charged

with conspiracy, embezzlement of Federal

program funds, making material false

statements, mail fraud, and wire fraud,

mortgage fraud, and money laundering.

The 5-year investigation disclosed that the

defendants had participated in a number of

fraudulent schemes to obtain tens of millions

of dollars through the SSBIC program and

other Federal and state grant, loan, and

subsidy programs. SBA’s liquidation of the

SSBIC concluded more than 1 year ago; the

SSBIC repaid SBA $1.1 million of the $1.2

million of leverage funding provided by

SBA. The Government of Israel is

considering the U.S. Government’s request

for the arrested man’s extradition. (Updated

from September 1997 Semiannual Report.)

Rhode Island Banker Negotiates Plea in

SBIC Funds-Diversion Case

A former bank official pled no contest in

Rhode Island Superior Court to one count of

filing a false document and agreed to

voluntarily contribute $10,000 to the Rhode

Island Violent Crimes Indemnity Fund. He

was indicted in 1994 on charges that he

engaged in a racketeering enterprise and

obtained money under false pretenses.

The OIG’s joint investigation with the

Rhode Island State Police disclosed that the

man had borrowed a total of $300,000 from

two SBICs under the pretense that the loan

proceeds were to be used by a Newport,
Semiannual Report March 1999 29

Rhode Island, shipyard he owned. (Updated

from September 1994 Semiannual Report.)
30 Semiannual Report March 1999

Surety Bond Guarantees

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

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

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

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

business concern.

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

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

fiscal years do not exceed $5 million. A contract bond is generally eligible for SBA’s

guarantee if the bond is covered by the Contract Bonds section of the Current Manual of

Rules, Procedures and Classifications of the Surety Association of America; required by the

invitation to bid or by the contract; and executed by a surety company that is determined by

SBA to be eligible to participate in the program and certified acceptable by the Department

of the Treasury.

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

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

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

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

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

L. 100-590 also requires an annual audit of each surety participating in this program.

SBA can guarantee bonds for contracts with a face value of up to $1.25 million. In FY 1998,

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

program, was $414 million. The appropriated guarantee authority level for FY 1998 surety

bond guarantees was $1.672 billion; in FY 1999, it remains at $1.672 billion.
Semiannual Report March 1999 31

Summary of OIG Activity / Surety Bond Guarantees

Audit Reports Issued 3

Audits Underway 2

Investigations Closed / Remaining Inventory 1 / 2

Investigations: Declinations Due to Name Checks 2

Investigations: Cases Referred to Other Agencies 1

Reviews of Other Issuances 1

Figure 4

Efforts to Improve SBA Program

Management

Audits of Three Surety Bond Companies

Found Noncompliance with SBA

Procedures

Audit reports were issued by the OIG on

three sureties located in Chicago, Baltimore

and Seattle. All three audits found

significant noncompliance with SBA

procedures. More than half of 51 bonds at

one surety had deficiencies, which resulted

in $1.3 million owed to SBA. Another

surety did not follow proper procedures in

11 of 24 bonds reviewed, with a finding that

$803,926 of loss claims were unallowable

because of improper allocation of expenses

and unallowable expenditures for claims

settlement. The third audit identified

$26,303 in claims for ineligible legal costs,

as well as two cases where two bonds were

issued for the same project, thereby

exceeding the $1.25 million limit of

guaranteed bonds on one project.

In addition to claims issues, the sureties

were cited for issuing bonds after project

starts and splitting bonds to stay under the

Surety Bond G uaran tees

SBA 's C o n t i ngent L i a b ilit y

$413,877,315

$614,876,018

$724,596,082

$964,889,948

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

9 /30/95

9 /30/96

9 /30/97

9 /30/98

Share for:

M illi ons of D o l l ars
32 Semiannual Report March 1999

dollar maximum for SBA guarantees. The

reports recommended that the Associate

Administrator for Surety Guarantees

(AA/SG) seek reimbursement on ineligible

bonds, deny payment on any future claims

on the remaining ineligible bonds, and direct

the sureties to revise policies and procedures. The AA/SG concurred with the

findings and recommendations on two of the

three audits. The AA/SG generally agreed

with the findings and recommendations of

the third audit, but stated that the recommendations required legal interpretation

prior to implementation.
Semiannual Report March 1999 33

Government Contracting Programs

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

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

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

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

Subcontracting Assistance, Certificate of Competency, Natural Resources Sales

Assistance, and the Procurement Marketing Access Network (PRO-Net).

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

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

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

procurement center representatives assigned to major Federal acquisition activities.

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

the Government’s large prime contractors. This program objective is carried out by

commercial market representatives who monitor the procurement activities of the large prime

contractors.

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

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

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

lowest bidder on a contract but is found to be non-responsible in its ability to fulfill the

contract’s requirements, it can appeal to SBA. After reviewing a firm's capabilities, SBA can

issue a COC that requires the contracting officer to award the contract to that business.

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

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

leases, and other mineral leases.

PRO-Net is SBA's Internet-based inventory of U.S. small businesses that are interested in

Federal procurement opportunities, either directly with the Government or with prime

contractors. Federal agencies, large prime contractors, state and local governments use PRONet as a resource in identifying small businesses for procurement opportunities. Small

businesses use this interactive mechanism to market their products and services.

The HUBZone Empowerment Contracting Program encourages economic development

in historically underutilized business zones – “HUBZones” – through the establishment of

Federal contract awards preferences for small businesses located in such areas. After

determining eligibility, the SBA lists qualified businesses in its PRO-NET database.
34 Semiannual Report March 1999

The Small Disadvantage Business (SDB) Certification Program ensures that small

businesses owned and controlled by individuals claiming to be socially and economically

disadvantaged meet the eligibility criteria. Once certified, the businesses are eligible to

receive price evaluation credits when bidding on Federal contracts.

Summary of OIG Activity / Government Contracting

Investigations Closed /Remaining Inventory 0 / 6*

Reviews of Proposed Regulations 2

Reviews of Other Issuances 4

*Two of these are cases involving the SDB Contracting Program

Efforts to Improve SBA Program

Management

HUBZone Implementation Reviewed

The OIG reviewed revisions to the

regulations and internal Agency procedural

notices implementing the HUBZone

program. Additionally, the OIG worked in a

consultative capacity with staff of the

HUBZone Empowerment Contracting

Program to develop an application form for

participants in the program. The new

prospective form addresses both the

information-gathering needs of the Agency

and the fraud deterrence concerns of the

OIG. This application was adopted and is

now in use by the Program.
Semiannual Report March 1999 35

8(a) Business Development

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

Capital Ownership Development Program, recently renamed the 8(a) Business

Development Program, for the purpose of promoting greater access to the free enterprise

system for socially and economically disadvantaged individuals. Under the Act, SBA

provides business development assistance to small business concerns that are at least 51

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

economically disadvantaged individuals and also meets other program eligibility requirements. Such companies may participate in the program for a maximum of 9 years and must

enhance their competitiveness during this period so as to prepare for commercial sector

competition upon graduation from the program.

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

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

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

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

September 30, 1998, based on preliminary data pending the final Federal Procurement Data

System report, there were 4,941 approved program participants. In FY 1998, active Section

8(a) program participants received 4,276 contracts and 22,036 modifications with an

aggregate value of $5.2 billion. Generally, Section 8(a) contracts with estimated values,

including all options, of more than $5 million (manufacturing) or $3 million (all other

industries) must be competed among eligible Section 8(a) program participants. The vast

majority of the contracts awarded under the program, however, have estimated values below

these two thresholds and are awarded on a sole-source basis.

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

in the Office of 8(a) Business Development, SBA provides specialized training, professional

consultant assistance, and executive development to certified Section 8(a) firms, socially and

economically disadvantaged individuals whose firms are not participants in the Section 8(a)

program, low-income individuals, and small businesses located in areas of low income or

high unemployment.

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

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

other Government agencies' portfolios; therefore, their values are not included in the OIG’s

$35 billion audit, inspection, and investigation universe.
36 Semiannual Report March 1999

Summary of OIG Activity / 8(a) Business Development

Audits Underway 1

Investigations Closed /Canceled/ Remaining

Inventory

2 / 3 / 27

Investigations: Restitution / Fines / Other Recoveries $375,000 / $0 / $0

Investigations: Declinations Due to Name Checks 11

Investigations: Cases Referred to Other Agencies 1

Reviews of Other Issuances 11

Activities to Enhance Fraud

Detection and Deterrence

Latest Result from Affirmative Civil

Enforcement Program

During this reporting period, the OIG’s

participation in the DOJ’s Affirmative Civil

Enforcement (ACE) program produced one

successful Section 8(a) business development case.

The former owners of a Section 8(a)

company denied liability but agreed to pay

the Government $375,000 to settle findings

that they violated the False Claims Act. The

firm had applied to participate in the Section

8(a) program in 1993 and was approved in

1994. Allegations were subsequently

received that one of the owners had lied

about his personal financial condition. An

SBA/OIG audit revealed that one of the

owners exceeded the Section 8(a) personal

net worth limit. The OIG’s investigation

confirmed that the owner had submitted

false statements to SBA and

misrepresented his personal financial

condition when he reported investment

property as his personal residence. To have

accurately reported the property would have

disqualified him as an Section 8(a)

participant. In February 1998, the matter

was presented to the Civil Division of the

U.S. Attorney’s Office with jurisdiction over

the matter. In December 1998, an Assistant

U.S. Attorney sent the owner’s attorneys a

demand letter and a draft complaint for

relief for the alleged violations. The

$610,000 sought was triple the estimated

amount of profits earned on the firm’s

Section 8(a) contracts in 1995-97, plus a

$10,000 penalty. The owners sold the firm

in March 1998 and voluntarily withdrew

from the Section 8(a) program.
Semiannual Report March 1999 37

Entrepreneurial Development (Business Education and Training)

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

through a variety of counseling and training programs housed under its Office of Entrepreneurial Development.

SBA established the Small Business Development Center (SBDC) program to make

management assistance and counseling widely available. SBDCs offer “one-stop” assistance

to small businesses by providing a wide variety of information and guidance in easily

accessible locations. The program is a partnership between the private sector, the educational

community and Federal, State, and local governments. There are SBDCs in all 50 states, the

District of Columbia, Puerto Rico, the Virgin Islands, and Guam, with approximately 1,000

subcenters or service locations located at chambers of commerce, economic development

corporations, institutions of higher learning, or in downtown storefronts. In FY 1998,

SBDCs provided counseling and training to over 547,000 clients.

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

development resource partners of SBA. Composed of approximately 12,400 volunteers

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

business persons. In addition, this year SCORE began providing assistance by e-mail from

their website (www.score.org). On-site sessions are free to the public, and formal training is

provided at a low cost. In FY 1998, SCORE conducted more than 350,000 client sessions.

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

training, counseling, and the provision of management information materials occur through

outreach efforts with external organizations. Co-sponsorship arrangements, authorized under

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

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

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

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

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

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

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

business start-up and growth issues encountered by small business owners and provide access

to computer applications and the internet. There are currently 56 BICs in operation.

The Women’s Business Center (WBC) program provides training and counseling

specifically tailored to the needs of the vastly underserved market of women entrepreneurs.

This program includes 35 currently funded sites and additional graduated sites that touch

nearly every state in the Union. One of the currently funded sites is a virtual WBC

(www.onlinewbc.org) that receives nearly 1 million hits per month from over 100 countries.
38 Semiannual Report March 1999

SBA’ s 18 One-Stop Capital Shops (OSCS) provide centralized access to the full range of a

community’s small business resources, including entrepreneurial development, access to

capital, and procurement of government contracts. The program cuts across and combines a

variety of SBA’s technical assistance resources. Clients can access small business information resources (through the BICs), receive counseling (from SCORE volunteers) and training

(from a local SBDC chapter), learn to develop a business plan or mend damaged credit (from

non-governmental resource partners), as well as apply for financing (traditionally with

microloan intermediaries). An OSCS is a partnership between the Federal Government, led

by SBA, and a local community designed to offer small business assistance from a single,

easy to access, retail location.

Beginning in 1997, SBA began an aggressive Welfare to Work (W2W) initiative that cuts

across SBA’s technical assistance programs to increase small business access to hiring new

employees. Since 1998, using a combination of the SBA toll free number (1-800 U ASK

SBA), the SBA webpage (www.sba.gov/welfare) and a local contact in over 70 district-based

offices, the SBA W2W initiative has informed business on the benefits of W2W programs

and connected them to local contacts. SBDCs, SCORE, and the WBC programs have targeted

training and resources to aid the W2W initiative and find effective business solutions

involving W2W.

Summary of OIG Activity / Entrepreneurial Development

Audits Underway 1

Reviews of Other Issuances 10
Semiannual Report March 1999 39

Agency Management and Financial Activities

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

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

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

reviewing their operations for efficiency and effectiveness. The audits of SBA’s financial

statements, as required by the Chief Financial Officers Act, review the Agency’s cash

management and integrity assurance activities.

SBA’s management and financial activities are supported by the Agency’s $819.9 million in

operating funds, partially provided by FY 1999 appropriations enacted in P.L. 105-119. Of

the $819.9 million available, which includes carry-overs and estimated recoveries, $288.3

million funds Salaries and Expenses, $30.9 million is for disaster loan servicing, and $85.3

million is for disaster loan making. In addition, $224.2 million is available for business loans,

$147.3 million for disaster loans, and $3.8 million for the Surety Bond Guarantee program.

Summary of OIG Activity / Agency Management and Financial

Audit Reports Issued 3

Audits Underway 5

Indictments Resulting from Investigations 1

Investigations Closed / Canceled / Remaining Inventory 3 / 1 / 14

Investigations: Restitutions / Fines / Other Recoveries $0 / $10,000 / $0

Inspections Underway 1

Reviews of Proposed Legislation 4

Reviews of Proposed Regulations 4

Reviews of Standard Operating Procedures 5

Reviews of Other Issuances 54
40 Semiannual Report March 1999

Figure 5

Efforts to Improve SBA Program

Management

Grantee Failed to Follow SBA

 Requirement

Auditors questioned $101,061 in

expenditures out of a $1,000,000 special

appropriation grant for a small business

development institute in Philadelphia,

Pennsylvania. The questioned costs

included excess Federal salary sharing for

the director ($25,219), duplicate or

unexpended reimbursement claims

($69,831), and unallowable fund raising

expenses ($6,011).

The auditors also found that the grantee had

not obtained title to the land on which the

center was built, did not use competitive

bids to select a general contractor, and did

not require the contractor to obtain surety

bonds, all violations of the grant agreement.

The auditors recommended that the Director

of the Office of Procurement and Grants

Management (OPGM) recover the

questioned costs and freeze payments to the

grantee until title to the land is obtained.

The Director of OPGM agreed with the

findings and recommendations

Audit Finds Online Women’s Business

Center Inappropriately Used SBA Grant

Funds

An audit disclosed that an online

women’s business center in Dallas, Texas,

inappropriately used SBA grant funds to

buy a computer and purchase office

supplies and airline tickets from

companies owned by board members.

The audit recommended that the center

reimburse SBA for the cost of the equipment

purchase ($3,822) and cease purchases from

companies where a conflict of interest

exists. The Director of OPGM verbally

concurred with all findings and agreed to

implement the recommendations.

SBA App ropriations

$.939 

$.814 

$.852 

$.802

$.702 

0.0 0.2 0.4 0.6 0.8 1.0 1.2

FY 1995

FY 1996

FY 1997

FY 1998

FY 1999

Billions of Dollars
Semiannual Report March 1999 41

Audit of Two SBA Grants Found

Inappropriate Expenses

The OIG issued an audit by the Department

of Commerce Office OIG for two SBA

grants. The audit found that unallowable

expenses were included in indirect costs.

Specifically, the grantee did not separate

affiliate services as a cost center. Expenses

related to affiliate services were inappropriately accumulated as part of the indirect cost

pool. This resulted in overcharges to SBA

totaling $18,966.

The Auditing Division issued the report to

the Assistant Administrator for Administration with a recommendation to disallow the

costs. The Assistant Administrator agreed

to disallow the costs.

Inspection of Paperless Environment

Underway

The OIG is conducting an inspection of

management issues that could arise in a

paperless environment. It is intended to

assist SBA managers and private-sector

partners who are planning to convert

existing program procedures, such as the

processing of loan applications, from a

paper-based system to an electronic process.

We expect the report to be issued in May

1999.

Proposed Federal Managers Financial

Integrity Act Annual

Report Reviewed

The OIG reviewed several drafts of the

Agency’s proposed Federal Managers

Financial Integrity Act (FMFIA) Annual

Report and had concerns with the designated

material program weaknesses and the basis

for the Administrator’s statement of

assurance. In past years, it has been the

Administrator’s practice to require all

program heads to assess the internal controls

within their own operations to determine

whether high-risk areas or material

weaknesses exist. This was an effective way

to ensure that all Agency programs and

operations were reviewed as part of the

Agency’s annual certification process. It did

not appear that this process, or any similar

procedure involving program heads, was

followed this year. Moreover, the proposed

report and transmittal letter did not clearly

state the basis for the Administrator’s

statement of reasonable assurance and report

on material weaknesses. For the past 2

years, the OIG has been asked by the

Congress to identify the top 10 management

problems facing the Agency. The OIG was

concerned that it did not appear that any of

these OIG-identified issues were considered

in developing the proposed FMFIA Report.

Proposed Legislation Reviewed:

Paperwork Reduction

The OIG reviewed and commented on a

draft of H.R.___, The Small Business

Paperwork Compliance Relief Act of 1999.

While this proposed bill addressed many of

the concerns we reported previously

regarding H.R. 3310, The Small Business

Paperwork Reduction Act of 1998, the OIG

had some concerns with the proposed

legislation. Unlike its predecessor, the

proposed bill does not define the term

“small business.” The OIG recommended

that language be added to ensure that, for

purposes of the proposed legislation, “small

business” would have the same meaning as

set forth in the Small Business Act.

Section 2(b) of the draft bill requires each

agency to establish one point of contact to
42 Semiannual Report March 1999

act as a liaison between the agency and

small businesses with respect to the

collection of information. The OIG is

concerned that a requirement to coordinate

the collection of information necessary to

further the mission of an agency’s OIG

conflicts with the Inspector General Act of

1978 (IG Act), as amended, which provides

for independence in the conduct of OIG

audits, investigations, and inspections.

Section 2(c) deals with the suspension of

penalties for a first-time violation of a

requirement regarding the collection of

information. The OIG recommended that

the language of the draft bill be amended to

exempt from suspension of the penalties

those instances that cause or threaten to

cause significant harm. The OIG also

recommended that Section 2(c) be amended

to prohibit the suspension of penalties where

there is evidence of criminal wrongdoing.

Proposed Legislation Reviewed;

Government Waste, Fraud, and Error

Reduction Act of 1998

The OIG reviewed H.R. 436, Government

Waste, Fraud, and Error Reduction Act of

1999. This bill, which is essentially the

same as H.R. 4243, Government Waste,

Fraud, and Error Reduction Act of 1998,

which was reported on previously, proposes

to improve Federal agency financial and

travel management and debt collection

practices. The OIG raised the same

concerns regarding H.R. 436, that it raised a

year earlier regarding its predecessor.

Comments focused on such issues as

ensuring that any systems for electronic

payments or travel reservations be

sufficiently secure to deter fraud and to

preserve all evidence (for prosecution

purposes) should fraud still occur, requiring

contractors to perform background checks

on all individuals who would perform debt

collection services, establishing a simple

mechanism to allow Federal agencies to

obtain information about delinquent debtors

from other Federal agencies in a timely

manner, specifying the circumstances or

criteria under which the head of a Federal

agency could waive the general prohibition

against providing a benefit to a delinquent

debtor, obtaining authorization to retain a

share of all forfeited assets pertaining to

high value non-tax debts to support agency

law enforcement efforts, ensuring that a

provision that would require agencies to sell

each loan within 6 months of the loan

disbursement would not thwart future efforts

to prosecute all types of criminal activity

pertaining to those loans, and expanding the

definition of “federal benefit” to ensure that

persons with a delinquent outstanding debt

would not be eligible for business disaster

loans, rental housing assistance, grants, and

participation in Federal programs, such as

the Section 8(a) minority set-aside program.
Semiannual Report March 1999 43

Activities to Enhance Fraud

Detection and Deterrence

OIG Conducts Employee Awareness

Briefings

In addition to investigating complaints of

waste, fraud, and abuse involving SBA

programs, OIG Investigations Division staff

presented integrity awareness briefings to

a total of 439 Agency employees in seven

cities. Of particular note, a special agent

who is bilingual made presentations, one in

English and one in Spanish, to a total of 289

employees at the Disaster Assistance Area 1

Office in Niagara Falls, New York. The

involvement and cooperation of all SBA

employees in combating waste, fraud, and

abuse is critical to an effective OIG

investigations program and to the Agency’s

overall productivity and efficiency.

During the reporting period, employee

contributions to our mission were

significant. As Figure 6 shows, more than 49

percent of the investigations initiated by the

OIG originated with referrals from within

the Agency. 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.

Former SBA Employee Indicted for

Felony Theft

A former Office Automation Assistant in

SBA’s Cleveland District Office was

indicted in Cuyahoga County, Ohio, on one

count of felony theft, a violation of the Ohio

Revised Code. The charge was based on her

alleged theft of cash from the district

office’s imprest fund. When an unannounced verification by district office

managers found a shortage of almost $1,100,

they referred the matter to the OIG. The

joint OIG and Cleveland Police Department

investigation found that the employee had

removed the cash due to personal financial

difficulties. (SBA’s net loss from her

actions turned out to be $845.) The

employee resigned from her employment

with SBA.

Results of Previously Reported

Investigations

Former Arizona District Director

Sentenced for Bribery and Conspiracy

The former District Director of SBA’s

Arizona District Office was sentenced to 5

years probation (with the first year to be

served in home detention) and a $10,000

fine. A trial jury previously found him

guilty on one count of conspiracy and two

counts of bribery. (Updated from

September 1998 Semiannual Report.)
44 Semiannual Report March 1999

Figure 6

SBA Job Applicant Debarred from

Federal Employment

A man who had applied for employment

with SBA was debarred for 4 years from

competing for or accepting any position with

the Government. He previously pled guilty

to one misdemeanor count of making a

fraudulent demand for wages by making

false statements in the application he

submitted to SBA. (Updated from

September 1998 Semiannual Report.)

Sources of OIG Investigations

October 1, 1998 to March 31, 1999

SBA Program Heads 

and Employees

49.1%

Other Federal 

Agencies

23.6%

Private Citizens

7.3%

Other

20.0%
Semiannual Report March 1999 45

Organization, Resources, and Management Initiatives

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

Agency and to detect and deter fraud in SBA's programs. Mission goals and objectives are

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

oversight of the Agency's portfolio, programs, and supporting operations. This chapter

provides an overview of the OIG's organizational structure and its personnel and financial

resources. It also summarizes key internal management initiatives designed to use available

resources as effectively as possible.

Summary of OIG Activity / Org. Resources & Mgmt. Initiatives

Inspections Underway 1

Reviews of Proposed Legislation 1

Organization

The SBA/OIG is organized into four

divisions as follows:

• Auditing Division

• Investigations Division

• Inspection and Evaluation Division

• Management and Legal Counsel

Division

The Auditing and Investigations Divisions

each administer their field activities through

field offices and resident offices around the

country. The Auditing Division has offices

located in Atlanta, Chicago, Dallas, Los

Angeles, and Washington. The Investigations Division has offices in those cities as

well as in Denver, Houston, Kansas City,

New York, Philadelphia, San Francisco,

Seattle, and Syracuse. The Investigations

Division’s Office of Security Operations is

located in Washington, D.C. Both the

Inspection and Evaluation Division and the

Management and Legal Counsel Division

operate out of Washington, D.C. A current

OIG organization chart can be found on the

following page.

Resources

In FY 1999, funding for the OIG consists of

$10.8 million for operating costs and an

additional $500,000 for disaster oversight, a

total of $11.3 million. The authorized

personnel ceiling increased from 114 in FY

1998 to 122 full-time equivalent (FTE)

positions for FY 1999. While this level of

funding represents a modest increase from

the number of dollars appropriated in FY

1998, it provides only a minimal level of

oversight to SBA programs and program

dollars at risk. Congressionally mandated

law enforcement availability pay, annual
46 Semiannual Report March 1999

Figure 7

cost of living increases, and various locality

pay adjustments are still not fully funded by

the OIG’s authorized spending levels. In FY

1999, 12 temporary appointments supported

by disaster funding were converted to

permanent status to retain expertise and

experience in disaster assistance oversight.

In FY 1994, the OIG received $3 million in

supplemental “no year” disaster funds to be

used for activities related to the Agency’s

expanding disaster assistance program.

These funds will remain available until

expended. At this time, the OIG projects

that these “no year” funds will be expended

by the end of FY 1999.

Additionally, in the FY 1997, 1998, and

1999 appropriations, Congress directed the

Agency to transfer $500,000 from its

disaster assistance account to the OIG for

disaster program oversight. With the no

year funds expended and the unknown status

of any disaster oversight appropriations for

FY 2000, the SBA/OIG may be forced to

curtail its vigorous oversight of disaster

activities.

The relatively static level of resources over

the past 5 years remains a concern. As

depicted in both Figures 1 and 2 (pages 8

and 20, respectively), the dynamics of the

Agency’s portfolio and the President’s New

Markets Initiative, designed to reach more

distressed rural and urban areas of the

country, would suggest that the OIG’s

resources must be increased to ensure an

adequate level of program oversight. While

the increase in resources from FY 1998 to

FY 1999 ($10.5 million to $11.3 million)

has been helpful, it did not allow the OIG to

“catch up” to its expenses after years of

chronic underfunding, and still does not

allow the OIG to fully address SBA’s

increasing portfolio and programs. The OIG

continues to experience difficulty in

carrying out its mandate to provide

meaningful oversight of the Agency’s

programs and supporting activities and to

safeguard the Government’s investment in

SBA’s extensive credit programs. As is

OFFICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

KANSAS CITY

INSPECTOR GENERAL

MANAGEMENT & LEGAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

CHICAGO HEADQUARTERS

OPERATIONS

WASH., DC

OPERATIONAL

SUPPORT

SEATTLE

PHILADELPHIA HOUSTON

FRANCISCO

AUDITING DIVISION

BUSINESS DEVELOPMENT

PROGRAMS GROUP

WASH., DC WASH., DC

ATLANTA

DALLAS

LOS ANGELES
Semiannual Report March 1999 47

apparent from the accompanying narrative,

some SBA programs received only modest

oversight while others virtually went

without oversight.

As the table on page 50 illustrates, the

business and disaster loan programs

consume most of the OIG’s direct

investigation and auditing time (81 and 58

percent, respectively). Because these two

programs represent the greatest risk of

financial loss to the taxpayer, the OIG has

made a conscious decision to devote a

substantial amount of its limited resources to

these programs. Business loan and disaster

loan frauds are the two largest areas for

investigative activity. As the table also

illustrates, however, this emphasis on these

critical areas results in only minimal or no

audit and investigative coverage of other

program areas.

For FY 2000, the President has requested

Congress to appropriate $11.0 million for

the OIG; unlike the past 3 years, this amount

does not include any disaster assistance

oversight funds. Although the OIG expects

to be funded by SBA for 6 FTE for

oversight of the Small and Disadvantaged

Business program, the OIG budget will be

unable to completely absorb the combined

cost-of-living and locality pay raises of an

estimated 4.6 percent in FY 2000.

Management Initiatives

GPRA Activities

The OIG has expanded its efforts to assist

SBA in implementing the Government

Performance and Results Act (GPRA).

Within the Agency, the OIG GPRA

coordinator participated in SBA's GPRA

Credit Measures Task Force, which

developed a separate credit measures

appendix for the FY 2000 annual plan.

Outside of SBA, the OIG has continued to

play an active role both in the IG community

and with other agencies through participation in the National Academy of Public

Administration's GPRA Performance

Consortium.

Internally, we are developing a new OIG

strategic plan for FY 2001-2006. The OIG's

GPRA plan represents a portion of the OIG's

proposed activities for FYs 1999 and 2000.

It is designed to be a targeted approach that

will provide useful information to the

Congress and maximum benefit to SBA

while providing the OIG with the ability to

fulfill other critical statutorily mandated and

discretionary oversight responsibilities.

We have also begun planning how we will

address SBA’s GPRA implementation. The

Auditing and Inspection and Evaluation

Divisions have included GPRA implementation as a part of their regular review

activities for FY 1999. GPRA related audits

to be initiated in FY 1999 will include—

ÿ 8(a) Business Development Program

ÿ SBIC

ÿ Disaster Assistance Program

ÿ Surety Bond Guarantee Program

ÿ Government Contracting Program

These SBA programs were chosen as the

first GPRA audits because they are key

programs, several of which the OIG has

done little work on in prior years. The

objective of the audits will be to determine if

SBA's GPRA goals for those programs:

1. Reflect the statutory mission;
48 Semiannual Report March 1999

2. Are consistent with SBA's

 strategic plan;

3. Include efficiency and effectiveness measures;,

4. Have measurable performance

indicators, and

5. Are supported by reliable data.

The Inspection and Evaluation Division will

include a GPRA component in appropriate

inspections planned for FY 1999. For

example, an inspection of SBA oversight of

the Section 504 Loan Program (Certified

Development Company) will focus on

implementation of GPRA in that program.

In FY 2000, the OIG plans to review

selected aspects of SBA’s first GPRA

annual performance report to be submitted

to the President and to the Congress on

March 31, 2000.
Semiannual Report March 1999 49

Direct Investigation Time by Program Area

October 1, 1998 to March 31, 1999

Program Area Direct Time % Number of Investigations*

Closed** In Progress

Business Loans 56% 25 181

Disaster Loans 25% 25 148

SBIC 3% 1 11

Surety Bond Guarantees 2% 1 2

Government Contracting 1% 0 4

Minority Enterprise Development 9% 5 27

Small Disadvantaged Business *** 0 2

Entrepreneurial Development *** 0 0

Agency Management and Financial 5% 4 14

 Total 101%**** 61 389

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

**Includes cases canceled **** Total exceeds 100% due to rounding

Direct Auditing Time by Program Area

October 1, 1998 to March 31, 1999

Program Area Direct Time % Number of Audits

Issued In Progress

Business Loans 39 % 3 5

Disaster Loans 19 % 1 2

SBIC 0 0 0

Surety Bond Guarantees 11 % 3 2

Government Contracting 0 0 0

Minority Enterprise Development 2 % 0 1

Small Disadvantaged Business 0 0 0

Entrepreneurial Development 7 % 0 1

Agency Management and Financial 22 % 3 5

Total 100% 10 16
50 Semiannual Report March 1999

Profile of Operating Results

October 1, 1998 to March 31, 1999

Audit Activities Totals

A. Reports Issued...............................................................................................................10

B. Audit Recommendations Issued.....................................................................................55

C. Dollar Value of Costs Questioned.................................................................... $1,952,516

D. Dollar Value of Recommendations that Funds

Be Put to Better Use ..........................................................................................$270,458

E. Recommended Revenue Enhancements* ....................................................... $80,300,000

Audit Follow-Up Activities

A. Audit Recommendations Closed....................................................................................59

B. Disallowed Costs Agreed to by Management......................................................$883,316

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

Agreed to by Management .............................................................................. $1,848,428

D. Unresolved Audit Recommendations.............................................................................73

E. Dollar Value of Unresolved Audit Recommendations.................................... $21,150,247

Inspection Activities

A. Reports Issued................................................................................................................ 0

Legislation/Regulation/SOP/Other Reviews

A. Legislation Reviewed ..................................................................................................... 5

B. Regulations Reviewed...................................................................................................10

C. Standard Operating Procedures Reviewed ...................................................................... 9

D. Other Issuances Reviewed** .......................................................................................104

* Assets and income that could be used to repay Northridge earthquake disaster loans.

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

communications, which frequently involve the implementation of new programs and policies.
Semiannual Report March 1999 51

Status of Investigations as of March 31, 1999

A. Total Cases.................................................................................................................450

B. Closed Cases................................................................................................................ 61

C. Pending Cases.............................................................................................................. 20

D. Open Cases.................................................................................................................369

E. Subjects Under Investigation....................................................................................1,220

F. Cases Referred to FBI or Other Agencies for Investigation.....................................6

Summary of Indictments and Convictions

A. Indictments from OIG Cases........................................................................................ 25

B. Convictions from OIG Cases........................................................................................ 27

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations.......................................................................................... $2,934,063

B. Management Avoidances as a Result of OIG Investigations.......................................... $0

C. Management Avoidances as a Result of the Name

 Check Program ............................................................................................. $16,258,765

 Total:..................................................................................................................... $19,192,828

SBA Personnel Actions Taken as a Result of Investigations

A. Dismissals...................................................................................................................... 1

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

C. Suspensions ................................................................................................................... 2

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

Program Actions Taken as a Result of Investigations

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

B. Debarments*.................................................................................................................. 1

C. Removals from Program................................................................................................. 0

D. Other Program Actions................................................................................................... 0

Summary of OIG Fraud Line Operation

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

B. Total Calls/Letters Referred to Investigations Division for Evaluation .......................... 41

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

Investigative Agencies ................................................................................................. 75

D. Total Other Calls/Letters.............................................................................................192

 *A former SBA job applicant was debarred from applying for Federal jobs.
52 Semiannual Report March 1999

Office of Inspector General

Actual Personnel on Board as of March 31, 1999

A. Immediate Office .................................................................................................................. 2

B. Auditing Division................................................................................................................ 42

 Professional ....................................................................................................................... 37

 Support................................................................................................................................ 5

C. Investigations Division........................................................................................................ 52

 Professional ....................................................................................................................... 43

 Support................................................................................................................................ 9

D. Inspection and Evaluation Division ....................................................................................... 9

 Professional ......................................................................................................................... 8

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

E. Management and Legal Counsel Division ............................................................................ 10

 Professional ......................................................................................................................... 8

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

 OIG Total .........................................................................................................................115
Semiannual Report March 1999 53

FY 1999 Productivity Statistics

First Six Months

Office-Wide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines ........................................................... $2,934,063

B. Management Avoidances as Result of Investigations and Name Checks ................ $16,258,765

C. Disallowed Costs Agreed to by Management..............................................................$883,316

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ............................................................................... $1,848,428

Total $21,924,572

Auditing Division Activities

A. Reports Issued.......................................................................................................................10

B. Disallowed Costs Agreed to by Management..............................................................$883,316

C. Recommendation that Funds Be Put to Better Use

 Agreed to by Management ...................................................................................... $1,848,428

Inspection and Evaluation Division Activities

A. Reports Issued........................................................................................................................ 0

Investigations Division Activities

A. Cases Closed.........................................................................................................................61

B. Indictments ...........................................................................................................................25

C. Convictions...........................................................................................................................27

D. Potential Investigative Recoveries and Fines ........................................................... $2,934,063

E. Management Avoidances...................................................................................... $16,258,765

 - Investigation Cases... .....................................................................................$0

 - Name Check Program.........................................................................$16,258,765
54 Semiannual Report March 1999

Statutory Reporting Requirements

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

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

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 6 - 45

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 6 - 45

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

 and Deficiencies 6 - 45

Section 5(a)(3) Prior Significant Recommendations Not Yet Implemented 65

Section 5(a)(4) Matters Referred to Prosecutive Authorities 6 - 45

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 59

Section 5(a)(7) Summary of Significant Audits 6 - 45

Section 5(a)(8) Audit Reports Containing Questioned Costs 61

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use 62

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 64

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
Semiannual Report March 1999 55

Table of Appendices

Appendix Page

Appendix I - Audit Reports Issued ..............................................................................57

Appendix II

 Part A - Inspector General-Issued Audit Reports

 with Questioned Costs..................................................................................58

 Part B - Inspector General-Issued Audit Reports

 with Recommendations that Funds Be Put to Better Use...............................59

 Part C - Inspector General-Issued Audit Reports

 with Non-Monetary Recommendations.........................................................60

 Part D – Inspector General-Issued Audit Reports

 with Overdue Management Decision ............................................................61

 Part E – Significant Audit Reports

 without Final Action.....................................................................................62
56 Semiannual Report March 1999

APPENDIX I

Audit Reports Issued

October 1, 1998 to March 31, 1999

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER USE

Business Loans

Colorado 7(a) Loans 9-05 2/24/99 $ 394,772 $22,958

Mt. Baker Brewing Co. 9-02 12/3/98

North Carolina 7(a) Loans 9-04 2/10/99 247,500

Program sub-total 3 audits $ 394,772 $ 270,458

Disaster Loans

Northridge Defaulted Loans 9-09 3/31/99

Program sub-total 1 audit $ 0 $ 0

Surety Bond Guarantees

CNA Surety Companies 9-03 1/29/99 $ 803,926

F&D Surety 9-06 3/22/99 489,850

CBIC Surety 9-10 3/31/99 140,119

Program sub-total 3 audits $ 1,433,895 $ 0

Agency Management & Financial Activities

Giving of Self Partnership 9-08 3/24/99 101,061

On-Line Women's Business

Center

9-07 3/22/99 3,822

W.Va. High Tech Foundation 9-01 10/27/98 18,966

Program sub-total 3 audits $ 123,849 $ 0

TOTALS (all programs) Reports: 10 $1,952,516 $ 270,458
Semiannual Report March 1999 57

APPENDIX II - Part A

Audit Reports with Questioned Costs

October 1, 1998 to March 31, 1999

REPORTS RECs*

COSTS***

QUESTIONED UNSUPPORTED

A. For which no management

decision had been made by

September 30, 1998

7 9 $2,997,662 $781,461

B. Which were issued during

the period

7 25 $1,952,516

Subtotals (A + B) 14 34 $4,950,178 $781,461

C. For which a management

decision was made during

the reporting period

5 7 $997,306

(i) Disallowed costs 2 4 $883,316

(ii) Costs not disallowed 3 3 $113,990

D. For which no management

decision had been made by

March 31, 1999

11** 27 $3,952,872 $781,461

* Recommendations.

** The recommendations resolved did not address all the recommendations within the reports where they

 appeared.

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

 lack documentation.
58 Semiannual Report March 1999

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

October 1, 1998 to March 31, 1999

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

September 30, 1998

14 29 $18,947,417

B. Which were issued during the

period

2 2 $270,458

Subtotals (A + B) 16 31 $19,217,875

C. For which a management

decision was made during the

reporting period

7 11 $2,020,500

(i) Recommendations

agreed to by SBA

management

6 9 $1,848,428***

(ii) Recommendations

not agreed to by SBA

management

1 2 $331,250

D. For which no management

decision had been made by

March 31, 1999

11** 20 $17,197,375

* Recommendations.

** The recommendations resolved did not address all the recommendations within the reports where they

 appeared.

*** Management agreed to $159,178 more than recommended.
Semiannual Report March 1999 59

 APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

October 1, 1998 to March 31, 1999

REPORTS RECOMMENDATIONS

A. For which no management decision

had been made by September 30,

1998

18 39*

B. Which were issued during the period 8 28

Subtotals (A + B) 26 67

C. For which a management decision

was made (for at least one

recommendation in the report)

during the reporting period

16 41

D. For which no management decision

(for at least one recommendation in

the report) had been made by March

31, 1999

14** 26

• * Beginning balance corrected to reflect prior period adjustment.

• ** The recommendations resolved did not address all the recommendations within the reports where they

appeared.
60 Semiannual Report March 1999

APPENDIX II - Part D

Audit Reports with Overdue Management Decisions

March 31, 1999

TITLE NUMBER ISSUED STATUS

Business Loan Center 65H002019 9/20/96

1 of 5 recommendations still being

negotiated.

Low Documentation Loan Program 65E002022 9/30/96 OIG will escalate disagreement.

LowDoc Loan Program – Atlanta 77F006017 7/7/97 OIG will escalate disagreement.

LowDoc Loan Program -

Santa Ana DO 77F009020 7/8/97 OIG will escalate disagreement.

LowDoc Loan Program -

Dallas DO 77F008022 7/31/97 OIG will escalate disagreement.

Business Loan Guarantee Purchases 75H011026 9/30/97

3 of 7 recommendations still being

negotiated.

Low Documentation Loan Program

Summary 87F005002 11/24/97 OIG will escalate disagreement.

Loan Liquidation 85W003009 2/27/98

1 of 2 recommendations still being

negotiated.

7(a) Loan Processing -

Atlanta DO 87F019014 5/13/98 OIG will escalate disagreement.

7(a) Loan Processing -

New Jersey DO 88F003019 7/8/98

2 of 7 recommendations still being

negotiated.

7(a) Loan Processing - Buffalo DO 87F021018 7/8/98 OIG will escalate disagreement.

Emergent Business Capital, Inc. 87F013020 7/13/98

2 recommendations still being

negotiated.

7(a) Loan Processing -

Madison DO 87F020022 7/22/98

3 of 7 recommendations still being

negotiated.

7(a) Loan Processing - Los Angeles

DO 88F002028 9/20/98

1 of 8 recommendations still being

negotiated.

SafeCo/First National Surety

Company 88H009026 9/30/98

3 of 7 recommendations are under legal

review.

GSA Kansas City 8(a) Sole Source

IDIQ – FAST 88H006025 9/29/98

4 recommendations still being

negotiated.

Grant Proposal for WVHTCF 77H001014 4/25/97

1 recommendation still being

negotiated.
Semiannual Report March 1999 61

APPENDIX II – Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of March 31, 1999

REPORT

NUMBER

TITLE DATE

ISSUED

DATE OF

MANAGEMENT

DECISION

FINAL

ACTION

TARGET`

5-3-H-004-

006

SBA Loan Servicing and

Debt Collection Activities

3/31/95 4/30/95 9/30/98

6-6-H-002-

011

GeoDemographics, Ltd. 3/29/96 9/30/96 4/01/98

6-5-F-002-

019

Business Loan Center 9/20/96 * 1 * 1

6-5-E-001-

021

Basic Ordering Agreements 9/25/96 2/10/97 9/25/97

6-5-E-002-

022

Low Documentation Loan

Program

9/30/96 * 1 * 1

7-4-E-001-

009

Early Default of Guaranteed

Loans

2/18/97 10/14/97 12/31/97

7-7-H-001-

011

Grant Closeout Procedures 3/26/97 10/20/97 10/20/98

7-6-H-006-

015

FY 1996 Financial

Statements

4/29/97 9/30/97 4/30/99

7-7-S-918-

018

User Technology Associates

Inc.

6/06/97 3/26/98 6/05/98

7-7-F-006-

017

LowDoc Program – Atlanta

DO

7/7/97 * 1 * 1

7-7-F-009020 LowDoc Loan Program –

Santa Ana DO

7/8/97 *1 * 1

7-7-F-007-

021

LowDoc Loan Program –

Washington DO

7/18/97 11/06/97 12/31/97

7-6-F-003-

023

Approval of Disaster Home

Loans

9/04/97 3/17/98 9/30/98

7-5-H-011-

026

Business Loan Guarantee

Purchases

9/30/97 * 1 * 1

8-7-F-005-

002

LowDoc Loan Program

Summary Report

11/24/97 * 1 * 1
62 Semiannual Report March 1999

8-5-F-003-

009

Loan Liquidation 2/27/98 * 1 * 1

8-7-H-008-

010

SBA’s FY 1997 Financial

Statements

2/28/97 6/5/98 2/28/99

8-7-H-003-

011

Disbursement Processing –

C&W Schedules

3/11/98 7/16/98 2/15/99

8-7-F-019-

014

7a Loans – Atlanta 5/13/98 * 1 * 1

8-7-F-021-

018

7a Loans – Buffalo 7/8/98 * 1 * 1

8-7-F-013-

020

Emergent Business Capital 7/13/98 * 1 * 1

8-8-F-003-

019

7a Loans – New Jersey 7/13/98 * 1 * 1

8-7-F-020-

022

7a Loans – Madison 7/22/98 * 1 * 1

8-8-F-002-

028

7a Loans – Los Angeles 9/30/98 * 1 * 1

8-8-H-007-

024

Reliance Surety 9/29/98 2/23/99 3/24/99

8-8-H-004-

027

SBG Fee Refunds 9/30/98 2/25/99 3/31/99

8-8-H-009-

026

Safeco/First National Surety 9/30/98 * 1 * 1

8-8-H-006-

025

GSA Kansas City Sole

Source 8a IDIQ Contracts

9/29/98 * 1 * 1

8-7-H-002-

017

NOAA Computer Contracts 6/18/98 3/1/99 12/31/99

8-7-H-008-

015

SBA FY ’97 Financial

Statements – Management

Letter

5/20/98 7/23/98 12/31/99

8-6-F-008-

023

Arkansas Capital Corporation 7/31/98 3/31/99 3/31/2000

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