A Report to Congress

October 1, 1999 – March 31, 2000

Pursuant to Public Law 95-452

Semiannual

Report of the

Inspector

General
Foreword

Semiannual Report March 2000 i

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

October 1, 1999, to March 31, 2000.

We have adopted a new format for this report to tell our story more effectively. The first chapter (Significant

Activities and Management Challenges) summarizes OIG activities in the five strategic focus areas identified

in our new strategic plan: financial management systems, information systems and computer security, lender

oversight, other selected high risk issues, and new Agency initiatives. Included in this section is a discussion of

the current top 10 management challenges we have identified for the Small Business Administration (SBA).

The second major chapter of the report (OIG Activities) describes other OIG activities that are significant

because of their proactive nature, value to SBA program managers, interest to Congress, or other factors. This

section is organized by SBA program area for ease of reference. Finally, the charts, tables, appendices, and

other background information have been revised to provide information in a more clear and concise way.

This new reporting approach reflects the changes we are making in our planning and budget processes. We

must continue to direct more of our limited resources to issues that are strategically important if we are to add

value to policy discussions and contribute to the accomplishment of SBA’s mission. I believe that this

comprehensive approach will make it easier for decision-makers and stakeholders to understand the OIG’s

views on the key challenges facing SBA. I welcome your comments on any aspect of this approach, as we will

be continuously refining our reports and plans. Please e-mail us at oig@sba.gov.

And what did we accomplish over the past 6 months? I invite you to take a look at our new report for a concise

answer presented in the context of our strategic plan. In terms of the traditional productivity measures for OIG

activities, we see that the Office issued reports on 15 audits; 3 inspections are well underway and should be

completed by year end. OIG investigations resulted in 29 indictments and 20 convictions for criminal

violations. The Office brought its collective experience to bear in reviewing 178 legislative, regulatory, policy,

and procedural proposals concerning SBA and Governmentwide programs. Overall, OIG dollar

accomplishments from all activities totaled more than $21 million. All of this was achieved under an FY 2000

appropriation of $11.5 million and an average staff level of 110.

Finally, because we do not work in a vacuum, I would like to express my deep appreciation for the ongoing

support and interest of the Administrator, Deputy Administrator, and SBA’s senior staff. Without their

willingness to assist us and take action on our recommendations, we would not be effective. We are also

grateful for the full cooperation we have received from SBA employees and for their willingness to refer

matters to us. I look forward to continuing these professional and productive relationships.

Phyllis K. Fong

Inspector General

Table of Contents

Semiannual Report March 2000 ii

 Chapter Page

SBA Overview iii

Significant Activities and Management Challenges 1

OIG Profile 8

OIG Activities 10

Statistical Highlights 26

Inspector General Act Statutory Reporting Requirements 28

Table of Appendices 29
SBA Overview

Semiannual Report March 2000 iii

Administrator

Deputy Administrator

Office of Inspector General

Office of

Congressional & Legislative Affairs

Office of Equal Employment

Opportunity & Civil Rights Compliance

Office of Hearings & Appeals

Office of Disaster Assistance

Office of General Counsel

Chief Operating Officer

Ombudsman

Chief of Staff

Counselor to the Administrator

Office of Advocacy

Office of Field Operations

Regional Administrators

Office of Communications &

Public Liaison

Office of the Chief Financial Officer

Associate Deputy Administrator

for Capital Access

Associate Deputy Administrator

for Entrepreneurial Development

Associate Deputy Administrator

for Management & Administration

Associate Deputy Administrator for Government

Contracting & Minority Enterprise Development

Office of Financial Assistance

Investment Division

Office of Surety Guarantees

Office of International Trade

Office of Business Initiatives

Office of Small Business

Development Centers

Office of Women's Business Ownership

Office of Veterans' Affairs

Office of Native American Affairs

Office of the

Chief Information Officer

Office of Human Resources

Office of Administration

Office of Government Contracting

Office of Minority Enterprise

Development

Office of Technology

Office of Size Standards

United States Small Business Administration

27JAN99

Office of Small

Disadvantaged Business

Certification & Eligibility

Office of Lender Oversight

Office of HUBZone

Empowerment Contracting

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

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

Americans recover from disasters. SBA offers many services to new entrepreneurs, including developing a

business plan, obtaining financing, marketing products and services, and addressing management issues.

The Office of Capital Access has several loan programs that assist small businesses. The primary business loan

program is the Section 7(a) program that guarantees 75 percent of loans up to a maximum guarantee of $750,000

and 80 percent up to $80,000 if loans are $100,000 or less. Through the Section 7(a) authority, SBA also offers the

Certified and Preferred Lenders programs, Low Documentation Loan Program (LowDoc), SBAExpress, PreQualification Loan Program, CAPLines, Defense Loan and Technical Assistance, Community Adjustment and

Investment Loans, Export Working Capital Program, International Trade Loans, Energy and Conservation Loans,

Pollution Control Loans, MicroLoans, and Section 504 Loans. All of the specialized business loan programs were

established to provide small business entrepreneurs the assistance that is needed to be successful. In FY 2000, the

Office of Lender Oversight was established to effectively coordinate oversight of these programs.
SBA Overview

 iv Semiannual Report March 2000

The Office of Entrepreneurial Development administers programs which offer counseling and assistance through

its many resource partners, such as Service Corps of Retired Executives, Small Business Development Centers,

Business Information Centers, USEACS, and One Stop Capital Shops. These resource partners provide guidance

and expertise to new entrepreneurs.

The Office of Government Contracting and Minority Enterprise Development administers programs that assist

small businesses with Federal procurement opportunities. The Office of Minority Enterprise Development provides

technical and procurement assistance to eligible businesses through two principal programs: (1) Business

Development, which encompasses the Section 8(a) program and the Mentor-Protégé program, and

(2) Management and Technical Assistance. The Office of Technology expands the competitiveness of small high

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

Innovation Research and Small Business Technology Transfer. The Office of Size Standards reviews and

establishes industry size standards. The HUBZone Empowerment Contracting Program is designed to stimulate

economic development and create jobs in urban and rural communities by providing contracting preferences to

small businesses located in historically underutilized business zones. The Office of Small Disadvantaged Business

Certification and Eligibility (SDBC&E) certifies companies applying as small disadvantaged businesses (SDB);

oversees a nationwide network of selected private certifiers who help process applications; and maintains a public

on-line registry of certified SDBs for access by contracting officers and the general public.

In the wake of hurricanes, floods, earthquakes, wildfires, tornados and other physical disasters, SBA plays a major

role. SBA's disaster loans are the primary form of Federal assistance for nonfarm, private sector disaster losses.

SBA is authorized by the Small Business Act to make two types of disaster loans: (1) physical disaster loans

provide a primary source of funding for permanent rebuilding and replacement of uninsured disaster damages to

homeowners, renters, nonfarm businesses of all sizes, and nonprofit organizations; and (2) economic injury disaster

loans provide business with necessary working capital until normal operations resume after a physical disaster.

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

businesses. SBA delivers disaster loans through four specialized Disaster Area Offices located in Niagara Falls,

NY; Atlanta, GA, Ft. Worth, TX, and Sacramento, CA.

SBA programs are delivered in every state, the District of Columbia, the Virgin Islands, Guam, and Puerto Rico.

SBA has a FY 2000 appropriation of $873.7 million and has 4,626 employees (including Disaster Assistance and

OIG).
Significant Activities and Management Challenges

Semiannual Report March 2000 1

 The Office of Inspector General (OIG) recently revised its strategic plan to

more clearly articulate its vision to improve SBA’s programs by identifying key

issues facing the Agency, ensuring that corrective actions are taken, and

promoting a high level of integrity. OIG will focus on serving the needs of our

customers and stakeholders and on safeguarding SBA resources from waste,

fraud, and abuse. We will also provide a work environment in OIG that is

conducive to excellent performance by our employees. The vision was

translated into a new Strategic Plan for fiscal years 2001-2006 and a companion

FY 2001 Annual Performance Plan that expands on the goals and objectives in

the Strategic Plan. There are three goals in the Strategic Plan that broadly

define our mission as stated in the IG Act of 1978, as amended. In addition, we

identified five cross-cutting areas in which we will focus our work: (1)

financial management systems, (2) information systems and computer security,

(3) lender oversight, (4) other selected high-risk issues, and (5) new agency

initiatives. A summary of our strategic plan is provided on the inside cover of

this report.

In response to a request from Chairmen of the House and Senate

Government Affairs and Budget Committees, and the House Majority Leader in

December 1999, OIG developed a list of ten serious management challenges

currently facing SBA. OIG is continuing to work with Agency officials to

implement the recommended actions that would resolve these issues, and is

monitoring the Agency’s progress. A full discussion of these issues can be

found on OIG’s website, www/sba.gov/ig/topten.

1. SBA needs to develop and implement a program-based cost accounting

system.

2. SBA needs to improve its information system controls.

3. SBA district offices do not consistently apply guarantee purchase

requirements.

4. SBA needs to improve loan monitoring.

5. SBA needs an effective oversight process for Small Business Lending

Corporations.

6. More participating companies need to obtain contracting opportunities in

the Section 8(a) program.

7. Participants who become wealthy are allowed to remain in the Section 8(a)

Program and be considered economically disadvantaged.

8. SBA does not enforce its rules to limit pass-through procurement activity to

non-Section 8(a) Program participants.

OIG Strategic Plan

Focus #1

Financial Management

Focus #2

Information Systems

Focus #3

Lender Oversight

Focus #4

High Risk

Top Ten List
Significant Activities and Management Challenges

 2 Semiannual Report March 2000

9. SBA needs to put more emphasis on preventing loan agent fraud.

10. Borrowers in SBA’s business loan program need to have criminal

background checks.

The next section of this chapter details the significant OIG

Accomplishments in the five areas of strategic focus. Many of the following

articles provide an overview of our accomplishments with additional details or

examples in the later chapter entitled, OIG Activities.

Financial Management Systems

Financial Statement Audits

• SBA’s FY 1999 financial statements received an unqualified opinion for

the fourth straight year from the independent auditors. The unqualified

opinion means that the auditors found SBA’s principal financial statements

to be presented fairly in all material respects in accordance with OMB

guidelines and SBA accounting policies. The results of the audit were

transmitted to the Chief Financial Officer (CFO) by OIG. The auditors did,

however, find two problems that were considered material weaknesses in

the internal control structure: (1) SBA’s financial reporting process did not

ensure that its financial statements were free of material misstatements, and

(2) significant general control deficiencies in its information systems

continued to exist. OIG will issue separate reports on each of the material

weaknesses that will include recommendations for improvement. The CFO

agreed with OIG’s findings.

• OIG issued a Management Letter describing three conditions identified

during the audit of SBA’s FY 1999 financial statements. These internal

control weaknesses were not included in the audit report on the financial

statements because they were not material with respect to the statements.

The first condition involved errors in the subsidy rate modeling and

reestimating process. This condition was reported in the FY 1998

Management Letter and, while much improved, was not completely

eliminated. The second condition was that SBA did not properly control

computer equipment. The third condition involved duplicate payments

made to Small Business Development Centers. In response to the

Management Letter, the CFO indicated that action had already begun to

eliminate the three conditions for FY 2000.

SBA receives fourth

unqualified Financial

Statement Opinion.

Focus #4

High Risk
Significant Activities and Management Challenges

Semiannual Report March 2000 3

Collection of Loan Fees

OIG issued an audit report on Section 7(a) fee collections. Under the

Section 7(a) loan program, SBA guarantees loans made to small businesses by

participating lenders. For loans approved after October 1995, lenders are

required to pay SBA a yearly service fee equal to 0.5 percent of the outstanding

balance of the guaranteed portion of each loan. The audit objective was to

determine if SBA collected the Section 7(a) loan service fees it was due for the

period October 1995 through April 1999. Overall, the audit showed that SBA

collected the appropriate fees for 95.5 percent of the 140,165 loans approved

after October 1995, but that it may not have collected as much as $4.1 million

for the remaining 4.5 percent of those loans. In addition, errors in SBA records

precluded accurate calculation of fees due and collected, incorrectly indicating

fee overpayments on 5.5 percent of the loans. SBA was not able to ensure the

collection of fees due for all loans and the accuracy of its records, because it did

not have procedures in place to calculate amounts due for comparison with

amounts collected, or to follow up with lenders on loans with significant

differences. It did, however, have the information necessary to implement such

procedures. OIG recommended that SBA establish receivable accounts and

improve the processing management of Section 7(a) loan servicing fees. SBA

generally agreed with OIG’s recommendations.

Information Systems and Computer Security

OIG issued an audit report on SBA’s proposed Systems Development

Methodology (SDM). SBA’s strategic goals depend heavily on the

development of new information systems. In the past, however, SBA has been

criticized for inadequate planning and poor systems development procedures.

The Office of the Chief Information Officer (CIO) is, therefore, developing

SDM to help accomplish its strategic goals and address those criticisms. SDM

is a set of procedures and quality controls intended to reduce risks in the

development of new systems and ensure that systems function as intended.

The auditors found that the proposed SDM (1) is generally consistent with

government and industry standards; and (2) will help ensure that new

information systems are developed on time, within budget, and with the

intended functionality. OIG recommended minor changes to the plan and

that the CIO establish SDM as official Agency policy for system development

projects. The report also contained a recommendation that milestones and

responsibilities be established to ensure the completion of related standards and

procedures. The Agency agreed with the recommendations in the audit report.

SBA’s strategic goals

depend heavily on the

development of new

information systems.
Significant Activities and Management Challenges

 4 Semiannual Report March 2000

Lender Oversight

Section 7(a) Loan Processing

OIG issued an audit report that evaluated the level of compliance with

SBA’s Section 7(a) Loan Program processing requirements. This was a

summary report compiling results obtained from audits of 240 loans in eight

district offices. The purpose of this audit was to: (1) determine whether loans

were processed, disbursed, and used in accordance with SBA requirements; and

(2) compare the audit results to previous similar audits of the LowDoc Loan

Program. The auditors evaluated 22 procedures considered material to the loan

approval process to determine whether noncompliance with these procedures

resulted in deficiencies that affected the loan guarantee or required other action

to protect the Government's interests. The auditors concluded that 11 percent of

the Section 7(a) loans had deficiencies in this category. Another 38 percent had

noncompliances for which the impact could not be determined during the audit,

or had noncompliances that did not result in deficiencies. In the report, OIG

recommended that goals and measures be set for lender loan processing

performance, that the purchase process be centralized for loans with

deficiencies, and that a procedure for district offices to track repairs and report

the results be established.

The Associate Administrator for Financial Assistance (AA/FA) generally

agreed with the recommendations in the report. To address the

recommendations, the AA/FA is: (1) developing a Risk Management

System that benchmarks lender performance and compares it to baseline loan

portfolio performance goals and allows for comparisons among lenders; and

(2) centralizing the quality review process for the purchase of loans with

material deficiencies. The Associate Administrator for Field Operations agreed

with our recommendation to establish a procedure to track repairs and report the

results to the AA/FA.

Early Default Audits

OIG has an ongoing program to audit early defaulted SBA-guaranteed

loans. An early default is a loan that is charged off or transferred to liquidation

within 36 months of origination. Six early default audit reports were issued

from September 1999 through March 31, 2000 (four during this reporting

period). Of the six reports issued, five identified loans that were not originated

in accordance with SBA rules and regulations or prudent lending practices. The

lenders neither evaluated nor validated required elements before approving the

loans. These six loans caused a loss to SBA in excess of $1.4 million. After

the facts were revealed in one audit report, SBA’s obligation of the entire

guarantee was relieved. In two other situations, in response to the

recommendations in the reports, the cognizant district office issued demand

Using its partnerships

and business resource

partners more

extensively, SBA is

moving further away

from the direct

delivery of products

and services,

increasing the overall

financial risk.

Certified lenders

receive a partial SBA

delegation of authority

to approve loans.

Preferred lenders

receive full delegation

of lending authority.

Eleven percent of the

240 loans had

deficiencies that affected

the SBA guarantee or

required other action to

protect the

Government’s

interests.
Significant Activities and Management Challenges

Semiannual Report March 2000 5

letters to the lenders requesting money back or reevaluating SBA’s guarantee

amount. In all instances, the Agency concurred with our findings and is

currently implementing corrective actions to address the recommendations.

The four most recent audits are described in the chapter, OIG Activities.

Preferred Lender Program

OIG is conducting an inspection to determine whether the Agency’s formal

review process for the Preferred Lender Program (PLP) is effective as an

oversight tool. The inspection is focused on the usefulness of the process for

monitoring the activities of preferred lenders. It will also review relevant

performance measures designated for Government Performance and Results

Act reporting. We expect to issue the report in the fourth quarter of FY 2000.

Other Selected High-Risk Issues

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

identified trends or types of fraud. Three major trends in recent years are:

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

(3) fraud involving borrowers who do not disclose criminal histories.

Fraud Involving Loan Agents

Loan agents provide referral and loan application services to prospective

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

been involved in a variety of fraudulent schemes, such as submitting false tax

returns or other financial data, charging the borrower excessive fees, using

fictitious names on SBA forms, exaggerating their ability to gain loan approval,

acting in illegal collusion with officials of lending institutions, conspiring with

borrowers to submit false loan packages, and performing other illegal acts.

These schemes, which have been copied from one fraudulent agent to another,

have resulted in loan purchases by SBA and, ultimately, the taxpayers.

During this reporting period, OIG investigations of this type of fraud resulted in

six indictments, two convictions, and $568,379 in restitution and fines. Details

of the cases are described in the chapter, OIG Activities.

Fraud Involving False Tax Returns

Over the last 91⁄2 years, OIG has received nearly 500 allegations that false

tax returns were submitted in support of SBA business or disaster loan

applications. These fraud referrals involved loan applications totaling

approximately $130 million that were submitted to more than 50 SBA offices.

To date, 150 individuals have been indicted on criminal charges, 136 have been

adjudicated guilty, 3 indictments were dismissed, and 11 others have not yet

OIG focuses on areas

of recurrent fraud.
Significant Activities and Management Challenges

 6 Semiannual Report March 2000

gone to trial. Because of the implicit credibility of Federal tax returns, SBA has

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

negative impact on SBA’s consideration of those applications.

Significant results of investigations of this type of fraud include seven

indictments and one conviction during the last 6 months. Summaries of OIG

investigations related to the use of altered or fictitious tax returns can be found

in the next section, OIG Activities.

Fraud Involving Borrowers Who Do Not Disclose Criminal Histories

Borrowers who do not disclose criminal histories have higher rates of default on

SBA loans than those who either disclose their records or have no criminal

histories. To address this problem and reduce the loss to the Government, SBA

has requested legislative language strengthening the Agency’s authority to

require the information needed to run background checks on all loan applicants.

During this period OIG investigations for criminal-record fraud in connection

with SBA’s programs yielded the following significant results: six indictments,

six convictions, and $357,220 in restitution and fines. Details of these

accomplishments can be found in the chapter, OIG Activities.

New Agency Initiatives

GPRA Audits

OIG is focusing considerable attention on the Agency’s implementation of

the Government Performance and Results Act (GPRA). The Auditing Division

has four audits in progress covering GPRA implementation for the Section 7(a)

Loan, Surety Bond Guarantee, Disaster Loan, and Small Business Investment

Company (SBIC) Programs. An additional audit covering the Section 8(a)

Program is scheduled for later this fiscal year. The objectives of the audits are

to determine whether the GPRA goals for the programs reflect the statutory

missions, are consistent with the strategic plan, include efficiency and

effectiveness measures, have measurable performance measures, and are

supported by reliable data. To fulfill these objectives, we sought answers to

three basic questions. Do the program's goals and performance indicators align

with its mission? Do the performance indicators show the results of the

program in terms of efficiency and effectiveness? How reliable is the

supporting data? The results of the four audits in process will be included in the

next Semiannual Report.

GPRA Audits

Underway:

• Section 7(a)

Loans

• Disaster

Assistance

• SBIC

• Surety Bond

Guarantee
Significant Activities and Management Challenges

Semiannual Report March 2000 7

Entrepreneurial Development Inspection

OIG is performing an inspection to assess how well SBA’s various

entrepreneurial development initiatives are being coordinated in the field. The

inspection is focused on possible duplication, overlap, or undercoverage of

SBA services designed to assist small businesses in planning, funding, startup,

technical development, and management. We expect to issue the report in

FY 2000.

Small Disadvantaged Business Audit

OIG is nearing completion of its audit of Small Disadvantaged Business

(SDB) Certification program obligations and expenditures. The objective of the

audit was to determine whether SBA used the funds received under the program

for their intended purpose. The SDB program provides Federal procurement

benefits to small disadvantaged businesses bidding on Federal contracts by

giving them up to a 10 percent price preference on their bids. SBA was

approved to certify all SDBs bidding for Federal contracts beginning in

FY 1998 and receives reimbursement for the cost of certification from the top

20 agencies utilizing SDBs. The results of the audit will be included in the next

Semiannual Report.

Small Disadvantaged

Business Certification

Program audit in

progress.
OIG Profile

 8 Semiannual Report March 2000

SBA OIG was established in 1978 under the IG Act. OIG provides

nationwide coverage of SBA’s programs and activities. In addition to the

Immediate Office, OIG’s five divisions work together to perform the

missions mandated by the Congress.

• Auditing Division, which provides comprehensive audit coverage of

SBA’s operations through program performance reviews, internal

controls assessments, and financial and mandated audits to promote the

economical, efficient, and effective operation of SBA programs. Audits

give SBA managers an objective and systematic assessment of how well

their offices are carrying out their programs and operations. Financial

audits examine the presentation of financial information, internal

controls, and adherence to financial requirements. Performance audits

assess operations in terms of economical use of resources.

• Investigations Division, an investigative unit that manages a nationwide

program to prevent and detect illegal and/or improper activities

involving SBA programs, operations, and personnel. The criminalinvestigative staff carriesout a full range of traditional law enforcement

functions, including (in the last 2 years) executing 23 arrest warrants,

9 search warrants, and 13 electronic monitorings. The security

operations staff ensures that all Agency employees have the appropriate

background investigations and security clearances for their duties. The

name check program provides SBA officials with character-eligibility

information on loan applicants and other potential program participants.

• Inspection and Evaluation Division, which conducts assessments of

the effectiveness of SBA programs and activities, analyses of critical

program issues, best practices studies, and research on matters

concerning SBA performance.

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

assistance to all OIG components, represents OIG in litigation arising

out of or affecting OIG operations, processes requests for information,

and manages OIG legislative/regulatory review functions.

• Management and Policy Division, which provides planning,

information systems, budgetary, administrative, personnel, and

communications services.

OIG is headquartered in Washington, D.C. Field audit and investigation

offices are maintained in Atlanta, Chicago, Dallas, Denver, Houston, Kansas

City, Los Angeles, Philadelphia, New York, San Francisco, Seattle, and

Syracuse.

As of March 31, 2000, our on-board strength was 110. The OIG FY 2000

appropriation was $11.5 million (less a .8274% rescission of $95,000).

Organization

Office Locations

Staffing and Budget
OIG Profile

Semiannual Report March 2000 9

OFFICE OF INSPECTOR GENERAL

INSPECTION AND

EVALUATION DIVISION

INVESTIGATIONS

DIVISION

NEW YORK

SYRACUSE

ATLANTA

DALLAS

LOS ANGELES

SAN DENVER

KANSAS CITY

INSPECTOR GENERAL

SMALL BUSINESS ADMINISTRATION

DEPUTY

INSPECTOR GENERAL

CREDIT PROGRAMS

GROUP

COUNSEL DIVISION

WASH., DC CHICAGO

SEATTLE

HOUSTON

PHILADELPHIA FRANCISCO

AUDITING DIVISION

BUSINESS DEVELOPMENT

PROGRAMS GROUP

WASH., DC WASH ., DC

ATLANTA

DALLAS

LOS ANGELES

MANAGEMENT AND

POLICY DIVISION

PUERTO RICO
OIG Activities

 10 Semiannual Report March 2000

This chapter includes details of audits and investigations summarized in

the Significant Activities and Management Challenges chapter, as well as

other significant OIG activities that do not fall under the strategic plan’s five

focus points. The material in this chapter is organized by major SBA

program area.

Business Loan Program

Early Default Audits

 A synopsis of the results of OIG’s ongoing program to audit SBAguaranteed loans charged off or transferred to liquidation within 36 months

of origination (early default) follows. The four audits described below

found that the loans were not originated in accordance with SBA rules and

regulations or prudent lending practices. Other lender deficiencies were also

identified.

• The lender neither evaluated nor notified SBA of a known discrepancy

between the tax returns submitted by the borrower in support of his

$965,000 loan application and a verification response from the Internal

Revenue Service (IRS). The IRS verification showed that the tax

returns submitted with the application had not been filed. SBA

inappropriately paid $485,051 to honor the guarantee of a loan that

should not have been made. The Atlanta District Office concurred with

OIG’s findings and recommendation to issue a demand letter to the

lender to repay SBA the loan loss.

• The lender neither verified the borrower’s equity injection or personal

financial information nor validated the financial information on a

$300,000 loan that defaulted in June 1998. The lender could not

Provide documentation that loan proceeds were used for the purposes

designated by the loan agreement. When these facts were brought to the

lender’s attention, the lender relieved SBA of its obligation to honor a

$204,866 guarantee on this loan.

• The lender approved a $350,000 loan to a borrower that lacked the

ability to repay the loan, was not creditworthy at the time of loan

origination, and lacked the financial assets to survive. The loan

proceeds were used for the payment of delinquent taxes, which is an

ineligible purpose. Consequently, SBA inappropriately paid the lender

$266,311 to purchase the loan guarantee. The San Francisco District

Office agreed with the audit findings and the recommendation to issue a

letter to the lender requesting a guarantee adjustment.

Early defaulted loan

audits identify the

need for adherence to

SBA requirements.

Under the Section 7 (a)

Loan Program, SBA

guarantees loans to

small businesses that

are unable to obtain

private financing.
OIG Activities

Semiannual Report March 2000 11

• The lender did not adequately secure a $628,000 loan although the

guarantor had sufficient assets for full collateralization. The lender also

reimbursed the borrower for unallowable expenses. The audit also

reported that the borrower made an inaccurate statement on the loan

application and submitted invoices for personal expenses to support the

loan disbursements. As a result, SBA lost $479,890 when the defaulted

loan was purchased. The Santa Ana District Office has issued a demand

letter to the lender to repay SBA the loan loss.

The following cases illustrate OIG investigations of fraud involving

loan agents.

• Two more defendants have been sentenced in a case in which all

18 individuals criminally charged pled guilty, including the owner of

the Inglewood, California, loan packaging firm, his colleague, and a tax

preparer. In this period, two brothers who had obtained $1 million in

SBA-guaranteed loans for their car washes in Hemet and Palmdale,

California, were sentenced to 2 months in a halfway house, 5 years

of supervised probation, and restitution to SBA of $259,071 and

$164,206, respectively. Each man previously pled guilty to making

false statements to a federally insured lender for submitting altered

individual income tax returns in support of their separate applications.

With 15 defendants sentenced so far, court-ordered restitution and fines

in this case total more than $2.6 million. OIG began the investigation

based on allegations from an anonymous complainant.

• A real estate/business/SBA-loan broker from Upland, California, and

five others were charged with making false statements to a federally

insured financial institution by submitting altered copies of tax returns in

support of applications for SBA-guaranteed loans from a now-defunct

southern California bank.

The broker was charged in a criminal information with two counts

in connection with loans of $700,000 and $550,000.

A former accountant from Alta Loma, California, and another

businessman were indicted on nine counts. The accountant was

charged with preparing altered tax returns submitted with four loan

applications. The businessman, who owned a mini-mart in

California City, California, was charged in connection with his

$550,000 loan and with aiding the accountant’s alleged crimes.

The owners of gasoline stations in La Quinta and Hemet, California,

respectively, each were charged with and pled guilty to one count,

the former for a $700,000 loan and the latter for a $320,000 loan.

The owner of a gasoline station in Hesperia, California, was charged

OIG began its

investigation of this

case based on a

referral from SBA’s

Los Angeles District

Office.
OIG Activities

 12 Semiannual Report March 2000

in a criminal information in connection with his application for a

$450,000 loan.

These four loan applications totaled $2,722,500. OIG began its

investigation based on a referral from SBA’s Los Angeles District

Office.

• The former owner of a furniture store in Garden Grove, California, was

sentenced to 2 years in prison, 5 years of supervised release, and

$145,000 in restitution to SBA. A trial jury previously found her guilty

of five counts of making false statements to influence a federally

Insured financial institution. She was the last of the five defendants

(a Garden Grove loan packager and four of his clients) to be sentenced

as a result of an investigation that found that the store owner obtained a

$250,000 SBA-guaranteed loan for her business by providing “copies”

of income tax returns altered to substantially overstate her income.

Then she diverted loan proceeds for the purchase of a personal residence

and subsequently defaulted on the SBA loan. Of 32 packaged loans

examined, 20 had defaulted by the time the packager was sentenced,

resulting in more than $3.2 million in losses to SBA and the

participating lender banks. OIG began its investigation based on a

referral from SBA’s Santa Ana District Office.

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

Returns.

• Three persons associated with an automotive repair business in Irving,

Texas, were indicted on 1 count of conspiracy and 11 counts of making

material false statements to induce SBA and a nonbank participating

lender to fund a $156,000 SBA-guaranteed loan. The firm’s proprietor

and his daughter, who is an employee, allegedly submitted 3 years of

falsified “copies” of tax returns and forged IRS tax return verifications.

The part owner of a Grand Prairie, Texas, business that sells automotive

repair equipment allegedly provided his coconspirators with bogus sales

invoices and other bogus documentation of their required capital

injection and equipment purchases.

• The president of a St. Louis, Missouri, realty firm was indicted on one

count of money laundering and one count of bank fraud. He allegedly

made false statements to both SBA and a participating lender bank to

obtain a $70,000 LowDoc business loan, submitting documents,

including his SBA loan application and fictitious tax returns, that

contained a false Social Security number (SSN). In addition, a former

Missouri accountant was indicted on one count of bank fraud in

connection with the loan to the realty company, his former employer.

The investigation revealed that the accountant generated false
OIG Activities

Semiannual Report March 2000 13

documents and submitted them to both SBA and the bank to obtain the

$70,000 loan. These documents included the SBA loan application and

fictitious tax returns that contained a false SSN. SBA/OIG initiated its

investigation based on a referral from the Department of Housing and

Urban Development (HUD) OIG.

• The president of a Glen Burnie, Maryland, realty firm was indicted on

one count of making a false statement to SBA, two counts of making

material false statements, and two counts of mail fraud in connection

with a $260,000 SBA-guaranteed loan. OIG’s investigation established

that, on SBA loan-related documents, including “copies” of income tax

returns, he listed the name, date of birth, and SSN of his son in place of

his own. He used the fraudulent documents to obtain the loan from a

nonbank participating lender in order to buy two parcels of commercial

real estate. The indictment also charges that the father failed to disclose

that he owed approximately $3 million to IRS and others at the time he

applied for the loan. OIG initiated the investigation based on a referral

from SBA’s Office of General Counsel.

• The owner of a pork packing plant in Herscher, Illinois, was charged

with and pled guilty to one count of making false statements to a

federally insured financial institution, in connection with a $490,000

SBA-guaranteed loan. The investigation revealed that he submitted

altered tax returns to the participating lender bank and SBA to obtain the

loan, failed to make the promised $150,000 capital injection, and sold a

majority of the farmland pledged as collateral. OIG initiated this

investigation based on a referral from the bank through SBA’s Illinois

District Office.

Summaries of some criminal-history fraud investigations involving

SBA loan programs are listed below.

• The former owner of a Seattle, Washington, chiropractic clinic pled

guilty to one count of bank fraud. He was sentenced to 30 months

In prison and 5 years of supervised release. He was also ordered to

pay restitution of $21,098 to the participating lender bank and

$54,795 to SBA. In 1994, the businessman had received an

$80,000 SBA-guaranteed loan to purchase chiropractic equipment for

his clinic. The investigation found that he made false statements to

obtain the loan, including representing that he had no criminal record

when he was actually a fugitive from a Federal arrest warrant. On his

applications for the SBA loan and for federally guaranteed student loans,

He falsely claimed he was a U.S. citizen, and he later converted loan

Proceeds to his personal use. OIG joined the Federal Bureau of

Investigation’s ongoing investigation.

Concealment of

criminal history –

business loan

programs.
OIG Activities

 14 Semiannual Report March 2000

• The president and secretary of a residential real estate company in

Santa Fe Springs, California, were indicted on five counts of making

material false statements. The firm had obtained a $550,000 SBAguaranteed loan allegedly by using a false SSN, fraudulent checks,

submitting false financial statements, and omitting a criminal record

from the SBA application. The businessmen also were charged with a

scheme involving $4.5 million in fraudulent Federal Housing

Administration-insured loans and with conspiracy, wire fraud, money

laundering, and aiding and abetting. OIG joined the investigation at the

request of the U.S. Attorney’s Office.

• The president of a Kansas City, Missouri, child care business pled guilty

to one count of making false statements to SBA in connection with a

$387,000 guaranteed loan she received in 1998 from a nonbank

participating lender. According to her indictment, she failed to disclose

on her application and related documents that she owed delinquent taxes

and had a prior arrest for passing a bad check. The businesswoman

also was charged with making numerous false statements to document

her required $111,000 cash injection. In her plea agreement she

admitted submitting false documents to the lender at closing, requesting

$12,690 to partially fund the purchase of 50 new computers. SBA/OIG

initiated this investigation based on information received from the

Department of Treasury Inspector General for Tax Administration.

 Two basic areas of lenders’ vulnerability to borrowers are the misuse

ofLoan proceeds and the absence of the collateral that was pledged to the

lender. Misuse of loan proceeds occurs when the borrower expends funds

not in accordance with the terms of the loan; often the authorized uses are

consequently going unmet. The borrower fraudulently pledges collateral,

something of value pledged to the lender in case the loan is not repaid, when

it doesn’t exist or has a lesser value than stated. The following cases involve

misuse of loan funds, fraudulent pledging of collateral, or both.

• A businessman who had owned a now-defunct St. Croix, Virgin Islands,

construction company pled guilty to one count of conspiracy to commit

money laundering and agreed to make full restitution to SBA and the

participating lender bank. His 1998 indictment charged that, in applying

for an SBA-guaranteed loan in 1992, he had 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. Prior to the first loan disbursement,

the owner opened a checking account in the name of the proposed

machinery supplier. Through this account, he was able to fraudulently

receive the disbursements that were intended for the vendor. After the

company relocated to Fort Lauderdale, Florida, the majority of the loan

Cases involving

misuse of loan funds,

fraudulent pledging of

collateral, or both.
OIG Activities

Semiannual Report March 2000 15

funds were spent on expenses not authorized by either the bank or SBA.

The company failed in 1995, causing a loss to SBA and the bank of

more than $400,000. This investigation originated from a referral from

SBA’s Puerto Rico and Virgin Islands District Office.

• An upstate New York dentist pled guilty to a felony and was sentenced

to 4 months monitored home confinement and $147,222 in restitution. He

had obtained a $150,000 SBA-guaranteed loan although he had leased,

not purchased, equipment that he pledged as collateral on the loan. He

instead used loan proceeds to buy personal items.

 The following case involves alleged forgery and other fraud in

connection with repayment of a loan from a Section 504 lender.

• A Montgomery County, Ohio, grand jury indicted a local real estate

salesman and businessman. One count of the 40-count indictment

charged him with aggravated theft by deception in connection with a

$439,000 SBA-guaranteed loan. The man allegedly deposited funds

associated with a $5 million bad check to an escrow account at a

title company. He allegedly induced the title company to issue a

$427,074 check from the escrow account, in the name of a Section 504

certified development company, based on his representations that these

funds were designated for paying down the outstanding balance on the

SBA loan. Allegedly, he forged an endorsement on the check and

deposited the money to his business account instead. The prosecutor’s

request that OIG join the investigation came via SBA’s Columbus

District Office.

Disaster Loan Program

The following case involves alleged SBA-related identity theft.

• A complaint filed by the Los Angeles County, California, District

Attorney’s Office charged a man with eight felony counts: three of

perjury, three of filing false information with the California Department

of Motor Vehicles, one of identity theft, and one of grand theft

against SBA. The investigation documented that the man obtained a

$137,300 disaster home loan following the Northridge earthquake using

the name and SSN of his brother. The defendant also quitclaimed his

disaster-damaged Los Angeles property to his brother’s name so the

ownership and title vesting of the property would match his forged

identity. Lastly, he forged pay stubs and W2 forms with his brother’s

name, SSN, and income to match the IRS verifications used by SBA to

confirm applicants’ income. The investigation showed that the man had

SBA’s Disaster Loan

Program helps

homeowners, renters,

businesses of all sizes,

and nonprofit

organizations to

rebuild after a physical

disaster.

The Section 504 Loan

Program provides

long-term, fixed rate

financing through

Certified Development

Companies to small

businesses to acquire

real estate and

equipment for

expansion of a

business. 40 percent

of a Section 504 loan

is secured by an SBA–

guaranteed debenture.
OIG Activities

 16 Semiannual Report March 2000

California driver’s licenses (bearing his photograph) concurrently in his

own name/date of birth and in his brother’s name/date of birth. OIG

initiated the investigation based on a referral from SBA’s Santa Ana

Loan Servicing and Liquidation Office.

The following case resulted from a criminal-record fraud investigation

Involving the SBA Disaster Loan Program.

• The president of a Silvis, Illinois, construction company was sentenced

to 46 months incarceration, 3 years supervised release, and

$128,593 restitution to SBA. He was previously convicted on four

counts of making material false statements to SBA in connection with a

$151,000 physical-damage disaster loan made to an Orion, Illinois,

campground and golf course after the Midwest flood of 1993. The

businessman, who at the time of the disaster, was an officer of the

campground and had a controlling interest in it. However, he did not

include his name on the loan application as a manager or officer of the

campground to avoid disclosing that he had been convicted of and

imprisoned for credit card fraud and was still on supervised release,

which made the campground potentially ineligible for SBA disaster

assistance. OIG’s investigation determined that the man falsified a

construction agreement so that the construction company would realize

$70,000 more in profit. Also, he falsely represented that the loan

proceeds would be used solely to rehabilitate the campground. Instead,

he used disaster loan proceeds improperly to fund preexisting debt, his

wife’s real property management firm expenses, a trip to Myrtle Beach,

South Carolina, and gambling debts. OIG initiated this investigation

based on a referral from SBA’s Disaster Assistance Area 2 Office.

The following cases involve misuse of loan funds, fraudulent pledging

of collateral, or both in connection with SBA’s Disaster Loan Program.

• The owner of a Denver, Colorado, telemarketing company was

sentenced to 2 1⁄2 years in prison, 2 years on supervised release, and

$1.5 million in restitution. He was previously convicted on two counts

of making false statements to SBA. The businessman 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 (submitting invoices and other documents

to SBA as “proof”) that he used $1.2 million of the loan proceeds to

purchase new equipment from a supplier. OIG’s investigation found

that he controlled the supplier and that most of the equipment listed on

its invoices was salvaged from the earthquake-damaged building in

California or was already owned by the man or his other companies.

OIG initiated the investigation based on an anonymous telephone call.

Construction president

sentenced to 46

months incarceration

and $128,593 in

restitution to SBA.
OIG Activities

Semiannual Report March 2000 17

Small Business Investment Companies

The following case involves improper loans made by an SBIC.

• Four men who were officials of an incorporated Rockland County,

New York, community which has been the recipient of millions of

dollars in benefits from Federal programs including SBA’s specialized

small business investment company (SSBIC) program, were sentenced.

The first was sentenced to 78 months incarceration, 3 years probation,

and $11,179,513 in restitution to defrauded Government entities,

including $100,000 to SBA. The second man was sentenced to

70 months incarceration, 3 years probation, and $10,118,182 in

restitution. The third man was sentenced to 57 months incarceration,

2 years probation, and $11,089,721 in restitution. The fourth man

was sentenced to 30 months incarceration, 2 years probation, and

$522,977 in restitution. The men had previously been convicted on

21 counts of conspiracy, embezzlement of Federal program funds,

making material false statements, mail fraud, wire fraud, mortgage

fraud, and money laundering. They had been indicted in 1997 along with

the fourth man’s father, who was one of the community’s founders, and

the son of its mayor. Those two defendants fled the United States after

being indicted. The investigation disclosed that the defendants had

participated in a number of fraudulent schemes to obtain millions of

dollars through SBA’s SSBIC program and other Federal and state

grant, loan, and subsidy programs. The fourth man’s father, a board

member of the SSBIC, allegedly misappropriated SBA funds through

the SSBIC, to which SBA had provided $1.2 million of leverage

funding. (SBA’s liquidation of the SSBIC had already resulted in

repayment of $1.1 million of that total.) In violation of Federal

regulations, he participated in extending loans to small businesses

affiliated with the SSBIC’s officers and directors, and concealed these

improper loans by submitting fraudulent documents to SBA. He also

loaned SBA funds to enterprises that were not independently controlled

by private business owners but affiliated with a religious school in the

village, a nonprofit entity ineligible to receive SBA funds. The SSBIC

also made loans to small businesses that, in turn, improperly paid a

portion of the loan proceeds to the religious school or related entities.

The other defendants conspired to facilitate these illegal transactions.

The U.S. Attorney’s Office asked OIG to join its ongoing investigation.

Small Business

Investment Companies

(SBIC), are

independently owned

and managed, profitmaking investment

companies licensed by

SBA to finance small

business through longterm loans and

investments in their

equity securities.
OIG Activities

 18 Semiannual Report March 2000

Surety Bond Guarantees

The case below describes the results of a criminal-record fraud

Investigation involving the SBA Surety Bond Guarantee Program.

• The president of an Austin, Texas, pipe-installation contractor was

indicted on one count of making material false statements to

fraudulently influence SBA to guarantee a $510,000 surety bond. On

the SBA application, he allegedly answered “No” to questions as to

whether he had ever been arrested or convicted of a crime. The

investigation documented that he had been charged with, arrested for,

and/or convicted of at least nine criminal offenses. His company

completed only a fraction of its bonded contract with a Department of

Veterans Affairs hospital before defaulting. OIG initiated the

investigation based on information forwarded by its Office of Security

Operations concerning the results of a surety bond audit.

Minority Enterprise Development Program

The following articles describe the result of a criminal-record fraud

Investigation involving the SBA Minority Enterprise Development Program.

• A defunct Philadelphia, Pennsylvania, construction company and its

president and vice president were indicted on charges including 1 count

of conspiracy to defraud the Government, 12 counts of false claims,

1 count of major fraud against the United States, and 3 counts of making

a material false statement in connection with alleged schemes to defraud

SBA and two other Federal agencies. Two false statement counts relate

to the vice president denying in his SBA Section 8(a) application that he

had a criminal history. The investigation disclosed that he had seven

prior arrests and three convictions. One count of making a false

statement relates to the president representing his assets at $40,000

to SBA on the same day that he represented his assets at more than

$1.6 million to a bonding company. The Naval Criminal Investigative

Service invited OIG to join the ongoing investigation. Following

indictment of the two corporate officers, warrants for their arrests were

issued; the businessmen thereafter surrendered to Federal authorities.

The following case involves alleged fraud in connection with bonds on

Section 8(a) contracts.

The project manager of a construction company in Long Island City,

New York, was arrested by OIG on one count of altering, forging, or

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.

SBA guarantees a

portion of the losses

sustained by a surety

company.

The Minority

Enterprise

Development Program

promotes greater

access to the free

enterprise system for

socially

and economically

disadvantaged

individuals.
OIG Activities

Semiannual Report March 2000 19

counterfeiting a bond to defraud the Government. The underlying

criminal complaint states that the company entered into a

$379,079 Section 8(a) contract with the Federal Bureau of Prisons

(BOP). As a condition of the contract, the company was required to

obtain payment and performance bonds to cover any cost resulting from

its failure to perform adequately and/or pay its subcontractor. The

project manager submitted a bond purportedly issued to the construction

company by an insurance company. The investigation produced

evidence that the insurance company never issued the bond and the

signatures on it were forged. The construction company did not pay its

subcontractor. The president of the company previously pled guilty to

conspiracy for his role in the company’s submission of fraudulent

payment and performance bonds. He stated that the project manager

was responsible for obtaining bonding and insurance for company

contracts. OIG initiated the case based on a referral from BOP.

Entrepreneurial Development

Women’s Business Ownership Program

 An audit of a Women’s Business Development Center identified

$167,448 of claimed costs that were unallowable. The audit also found that

the grantee used grant funds to purchase equipment and supplies and entered

into consulting agreements with board members. In addition, the grant

period had expired and there were unexpended Federal funds totaling

$60,007. Of the amount identified as unallowable, $142,779 was attributed

to lack of documentation to support the expenditures. The cooperative

agreement required the grantee to maintain complete and accurate records,

including supporting documentation. Furthermore, the grantee did not meet

the cash match requirements. The audit recommended reimbursement for

the unallowable cost. Since the project had ended, no recommendation was

necessary to address the conflicts of interest. The Assistant Administrator

for Administration agreed with the findings and recommendations.

Small Business Development Center Program

An audit of a Small Business Development Center (SBDC) identified

$31,892 of claimed costs that were unallowable under program guidelines.

The costs included an improper travel reimbursement and unsupported

in-kind contributions and payments to consultants. No repayment to SBA

was necessary because the SBDC had provided more than the required

50 percent match of Federal funds. The audit report also noted that the

SBDC: (1) Overstated training and counseling accomplishments; (2) did

not perform client followup within the required time frame; (3) made

various errors in reporting program income; and (4) did not maintain

Audit of SBDC

identifies unallowable

costs and several

procedural findings.

Audit of a Women’s

Development Center

identifies unallowable

costs.
OIG Activities

 20 Semiannual Report March 2000

complete records for training activities, revenue deposits, and conference

room rental agreements. The Idaho District Director agreed with all five

findings identified in the audit and is currently taking corrective action.

Agency Management and Financial Activities

OIG issued the FY 1998 Management Letter to SBA outlining the

two conditions identified during the audit of SBA’s Fiscal Year 1998

financial statements but were not required to be included in the Auditor’s

Report as they were nonmaterial weaknesses. The first condition involved

inappropriate transfer of SBDC funds between fiscal years. SBA did, upon

questioning by the auditors, reverse the accounting transaction. The second

condition identified was that SBA did not conduct periodic inventories of

their capitalized equipment. SBA agreed with the findings and

recommendations in the Management Letter.

The following cases involve criminal conduct by SBA employees.

• A former voucher examiner in the Denver, Colorado, Finance Center of

SBA’s Office of Chief Financial Officer (OCFO) was sentenced to

6 months of home detention, 5 years on probation, and $21,284 in

restitution to SBA. She previously pled guilty to one felony count of

embezzlement. OIG’s investigation determined that the voucher

examiner fraudulently obtained more than $21,000 in SBA funds by

means of false electronic travel vouchers and false electronic vendor

invoices. Her scheme involved entering false information via her work

computer in order to have Government funds electronically deposited

into her bank account. After being contacted by OIG, she resigned from

her position at SBA. An internal review by OCFO of their procedures

following OIG’s investigation revealed that substantially more funds

were embezzled than OCFO was initially aware of. OIG initiated this

investigation based on a referral from OCFO’s Denver Finance Center.

• A former economic development specialist in SBA’s Sacramento

District Office pled guilty to one count of knowingly possessing visual

depictions of minors engaged in sexually explicit conduct and was

immediately taken into custody by deputy U.S. marshals. The man had

retired just after being indicted. OIG initiated the investigation after

receiving complaints that he was accessing pornographic sites using the

computer SBA had assigned him. OIG and FBI agents arrested the man

at SBA’s Sacramento District Office in FY 1999.

Management Letter

identified nonmaterial

weaknesses.

SBA employee

integrity cases.
OIG Activities

Semiannual Report March 2000 21

 OIG reviewed and commented on a revised version of H.R. 1827, the

“Government Waste Corrections Act of 1999.” As it had in earlier

comments, OIG recommended that the terminology “recovery audits” be

changed to avoid confusion with the statutory audit function of Inspectors

General (IGs) pursuant to the Inspector General Act. OIG suggested

substituting terminology such as “recovery examinations,” “recovery

reviews,” or “payment matching review” to distinguish between the

differing roles and functions. OIG also advocated that language be added

requiring department or agency officials or contractors performingrecovery

reviews to immediately report to the IG any indication of fraud or other

criminal activity discovered during the course of reviews.

 OIG reviewed and commented on two bills dealing with safeguarding

Government information: H.R. 2413, the “Computer Security Enhancement

Act of 1999” and S. 1993, the “Government Information Security Act of

1999.” Regarding H.R. 2413, which deals with the security of unclassified

(but perhaps sensitive) information in Federal computer systems and would

require a study of Public Key Infrastructures (PKI), OIG recommended that

any study also consider whether there are more effective alternatives to PKI,

such as biometric identification methods. Any study should also take into

account that many Federal electronic transactions are likely to be routine

matters that do not require the most sophisticated security. S. 1993 deals

with Governmentwide information security controls and annual independent

evaluations of agencies' information security practices. OIG commented

that, while this bill should greatly improve overall Government efficiency

and effectiveness, any legislation should recognize that future information

may be stored on devices we cannot even envision today and should focus

on the value of the information itself, regardless of what equipment stores

the information. It is the information that must be protected, not necessarily

the hardware. In contrast to H.R. 2413, S. 1993 provides for unified

Governmentwide controls including national security systems. Lastly, OIG

recommended that Congress determine if the imposition of Governmentwide

controls also means that the entire Government must adopt the same

technology and whether national security systems will be handled in the

same manner as other systems.

 After reviewing the draft of the Agency’s first Accountability Report

that included its audited financial statements and program and financial

information for FY 1999, OIG had several comments. OIG recommended

that the Report discuss problems identified in OIG’s previously issued Top

Ten Management Challenges, such as those related to guaranty purchase

procedures, lender oversight, and performance by Small Business Lending

Companies. Additionally, OIG recommended that the discussion of the

development of internal control tools such as a Management Assessment

Process be revised to report the results from using the tool. In the OIG’s

Legislation reviewed.
OIG Activities

 22 Semiannual Report March 2000

view, a discussion of the results achieved from the use of the tool would be a

more useful discussion in an accountability report than development of the

tools used. Lastly, OIG recommended that the amount of the income

realized from the sale of loan assets was not accurate as stated in the Report

because it reflected the excess of a discounted present value, not the amount

that would have been reflected if held by SBA to maturity. The CFO agreed

with most of OIG’s recommendations and revised the Report.

Office of Inspector General

 In December, OIG hosted a briefing for staff of our congressional

oversight committees to review OIG’s Strategic Plan for FY 2001-2006 and

the FY 2001 Annual Performance Plan. The discussion also highlighted

significant FY 1999 accomplishments and planned FY 2000 activities,

including Agency GPRA reviews and lender oversight.

OIG Fraud Awareness Briefings

OIG conducted several briefings for SBA’s employees, lenders, and

other resource partners as part of its mission to educate its customers on

identifying waste, fraud, and abuse. During this reporting period, SBA

employee contributions to the OIG mission were significant. As the chart

below illustrates, nearly 50 percent of the investigations initiated by OIG

originated with referrals from within the Agency in the form of referrals

either from program heads or other SBA employees. This cooperation

indicates the strong commitment of SBA employees to reducing waste,

fraud, and abuse in Agency programs and improving the Agency’s

management and control of its programs. However, we have recognized the

shift in SBA’s role from primarily reviewing and processing loans to

increasingly providing oversight of lending practices; accordingly, we have

changed our briefing strategy. Much of our past success resulted from

referrals from conscientious SBA employees; our continued successes will

depend more on lender referrals. The Investigations Division has now

expanded our integrity-awareness briefing program to include participating

lenders and other interested parties, as well as SBA employees. During this

reporting period we conducted the following briefings.

• OIG staff gave a presentation to 20 attendees at a meeting of PLP

participants sponsored by SBA’s Phoenix District Office.

• OIG staff gave four presentations, to a total of 108 attendees in Georgia

and New Jersey, at disaster-fraud awareness meetings conducted jointly

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 led to nearly

50 percent of all

investigative referrals.

Congressional

briefing.
OIG Activities

Semiannual Report March 2000 23

with special agents from the Federal Emergency Management Agency

for State and local law enforcement officers.

• OIG staff presented integrity awareness briefings to approximately

180 Agency employees in three cities.

Sources of Referrals in OIG Investigations

October 1, 1999, to March 31, 2000

Office of Security Operations

Pursuant to provisions of the Small Business Act and the Small Business

Investment Act of 1958, SBA requires applicants for assistance to meet

certain character standards before participating in Agency programs. OIG’s

Office of Security Operations (OSO) provides a vital service to help SBA

ensure that Agency program participants meet the standards by processing

name checks and, where appropriate, fingerprint checks on applicants. To

make character eligibility determinations, OSO makes use of its on-line

connection with the Federal Bureau of Investigation’s Machine Readable

Other Federal 

Agencies

10%

Private 

Citizens

10%

SBA Program 

Heads and 

Employees

46%

Other

34%
OIG Activities

 24 Semiannual Report March 2000

Data system. When program applicants appear to be ineligible for assistance

based on character, OSO makes referrals to program officials for

adjudication. During this reporting period, OSO made referrals that resulted

in officials of SBA’s business loan program declining 43 applications and

disaster loan program declining 10 applications, totaling $17,189,061 and

$243,389, respectively, for character reasons. Those declinations made

available that amount of credit for applicants in whom SBA can have

confidence of repayment. In addition, officials of SBA’s Section 8(a)

program declined seven applications for certification. Almost $160 million

in loans have been declined during the last 10 years due to character

ineligibility.

OSO also performs the background checks to meet the Federal regulations

that require Agency employees to have security clearances appropriate for

their positions. During this reporting period, OSO initiated 28 background

investigations, and issued 15 security clearances. OSO also reviewed and

adjudicated 53 background investigative reports in accordance with

Executive Order 10450 and OMB Circular A-130, and coordinated with

SBA’s Office of Disaster Assistance to ensure the timely adjudication of the

82 derogatory background investigative reports forwarded for review and

appropriate action.

Government Performance and Results Act

OIG’s Strategic Plan for FY 2001-2006 and the FY 2001 Annual

Performance Plan were finalized, and the planning team developed

definitions and calculation methods for the performance measures. We

briefed congressional staff on the Strategic Plan and continued to support

GPRA implementation within the IG community and through interagency

efforts coordinated by the National Academy of Public Administration.
OIG Activities

Semiannual Report March 2000 25

Direct Audit Time by Program Area

October 1, 1999, to March 31, 2000

Program Area Direct Time % Number of Audits

Issued In Progress

Business Loans 44.0% 9 12

Disaster Loans 10.0% 0 1

Surety Bond Guarantees 9.9% 0 3

Government Contracting* 8.3% 0 1

Minority Enterprise Development 13.3% 0 5

Entrepreneurial Development 1.9% 1 0

Agency Management and Financial 12.6% 5 3

Total

100.0% 15 25

Direct Investigation Time by Program Area

October 1, 1999, to March 31, 2000

Program Area Direct Time % Number of Investigations**

Closed*** In Progress

Business Loans 57.4% 18 213

Disaster Loans 19.6% 12 148

SBIC 1.9% 1 10

Surety Bond Guarantees 2.1% 0 3

Government Contracting* 6.5% 2 5

Minority Enterprise Development 7.5% 1 30

Entrepreneurial Development **** 0 1

Agency Management and Financial 5.0% 4 13

Total

100.0% 38 423

* Includes Small Disadvantaged Business **** Less than 1⁄2 percent

** Includes civil cases

*** Includes cases canceled
Statistical Highlights

 26 Semiannual Report March 2000

FY 2000 Productivity Statistics

First Six Months

Officewide Dollar Accomplishments Totals

A. Potential Investigative Recoveries and Fines......................................................... $3,020,813

B. Loans Not Made as Result of Investigations and Name Checks ............................ $17,432,450

C. Disallowed Costs Agreed to by Management............................................................$272,858

D. Recommendations that Funds Be Put to Better

 Use Agreed to by Management ...............................................................................$581,523

Total $21,307,644

Auditing Division Activities

A. Audit Reports Issued........................................................................................................15

B. Audit Recommendations Issued.........................................................................................53

C. Dollar Value of Costs Questioned............................................................................$485,051

D. Dollar Value of Recommendations that Funds

Be Put to Better Use .................................................................................... $1,926,622

Audit Followup Activities

A. Audit Recommendations Closed.......................................................................................51

B. Disallowed Costs Agreed to by Management...........................................................$272,858

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

Agreed to by Management...............................................................................$581,523

D. Unresolved Audit Recommendations................................................................................49

Inspection and Evaluation Division Activities

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

Legislation/Regulations/SOP/Other Review

A. Legislation Reviewed.......................................................................................................19

B. Regulations Review..........................................................................................................15

C. Standard Operating Procedures Reviewed............................................................................5

D. Other Issuances Reviewed**........................................................................................... 139

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

communications, which frequently involve the implementation of new programs and polices.
Statistical Highlights

Semiannual Report March 2000 27

Investigations Division Activities

A. Total Cases.................................................................................................................... 461

B. Closed Cases....................................................................................................................38

C. Pending Cases..................................................................................................................14

D. Open Cases.................................................................................................................... 409

E. Subjects Under Investigation........................................................................................ 1,332

F. Cases Referred to FBI or Other Agencies for Investigation. .................................................15

Summary of Indictments and Convictions

A. Indictments from OIG Cases.............................................................................................29

B. Convictions from OIG Cases.............................................................................................20

Summary of Recoveries and Management Avoidances

A. Potential Recoveries and Fines as a Result of

OIG Investigations....................................................................................... $3,020,813

B. Loans Not Approved as a Result of OIG Investigations.......................................................$0

C. Loans Not Approved as a Result of the Name

 Check Program.......................................................................................... $17,432,450

Total: ................................................................................................................ $20, 453,263

SBA Personnel Actions Taken as a Result of Investigations

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

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

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

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

Program Actions Taken as a Result of Investigations

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

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

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

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

Summary of OIG Fraud Line Operation

A. Total Fraud Line Calls/Letters...................................................................................... 1,258

B. Total Calls/Letters Referred to Investigations Division for Evaluation..................................21

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

Investigative Agencies..............................................................................................53

D. Total Other Calls/Letters.............................................................................................. 1,184
Inspector General Act Statutory Reporting Requirements

 28 Semiannual Report March 2000

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

Inspector General Act Amendments of 1988, are listed below.

Source Pages

Section 4(a)(2 ) Review of Legislation and Regulations 21-22, 26

Section 5(a)(1) Significant Problems, Abuses, and Deficiencies 1-24

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

 And Deficiencies 1-24

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

Section 5(a)(4) Matters Referred to Prosecutive Authorities 36-39

Section 5(a)(5) 

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

Section 5(a)(6) Listing of Audit Reports 30

Section 5(a)(7) Summary of Significant Audits 2-24

Section 5(a)(8) Audit Reports Containing Questioned Costs 31

Section 5(a)(9) Audit Reports Recommending that Funds Be Put to Better Use 32

Section 5(a)(10) Summary of Reports Where No Management Decision Was Made 34

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

Section 5(a)(12) Significant Management Decisions with Which OIG Disagreed None
Semiannual Report March 2000 29

TABLE OF APPENDICES

Appendix Page

Appendix I – Audit Reports Issued......................................................................................30

Appendix II

 Part A – Inspector General-Issued Audit Reports

 With Questioned Costs.........................................................................................31

 Part B – Inspector General-Issued Audit Reports

 With Recommendations that Funds Be Put to Better Use ........................................32

 Part C – Inspector General-Issued Audit Reports

 With Non-Monetary Recommendations .................................................................33

 Part D – Inspector General-Issued Audit Reports

 With Overdue Management Decision.....................................................................34

 Part E – Significant Audit Reports

 Without Final Action............................................................................................34

Appendix III Six Month Arrested/Indicted/Convicted Summary...........................................35

Appendix IV Six Month Sentencing Summary....................................................................38
 30 Semiannual Report March 2000

APPENDIX I

Audit Reports Issued

October 1, 1999, to March 31, 2000

TITLE NUMBER ISSUE

DATE

QUESTIONED

COSTS

FUNDS FOR

BETTER

USE

Business Loans

Section 7(a) Loan Processing Summary 0-03 1/11/00 $00

Whistle Stop Car Wash & Xpress Lube 0-01 12/01/99 $00

Lindsay Food Mart 0-04 1/20/00 $00

Dixieland Events/Tamingo Farms 0-05 2/16/00 $485,051 $247,5000

Jay-Bees, Inc 0-08 3/6/00 $00

GLT Management Company 0-09 3/22/00 $834,0810

Roshni Foods 0-10 3/23/00 $204,8660

NADI Manufacturing, Inc. 0-11 3/28/00 $266,3110

Vincent R. Forshan Medical Corp. 0-12 3/28/00 $621,3640

Program sub-total 9 Reports $ 485,051 $1,926,6220

Agency Management & Financial Activities

FY 1998 SBA Financial Statements –

Management Letter

0-02 12/16/99

FY 1999 SBA Financial Statements 0-06 2/29/00

FY 1999 SBA Financial Statements –

Management Letter

0-13 3/29/00

Section 7(a) Service Fee Collections 0-14 3/30/00

Systems Development Methodology 0-15 3/30/00

Program sub-total 5 Reports

Entrepreneurial Development

Idaho Falls Regional SBDC 0-07 3/2/00

Program sub-total 1 Report

TOTALS (all programs) Reports: 15 $485,051 $1,926,6220
Semiannual Report March 2000 31

APPENDIX II - Part A

Audit Reports with Questioned Costs

October 1, 1999, to March 31, 2000

REPORTS RECs*

COSTS**

QUESTIONED UNSUPPORTED

A. For which no management decision had

been made by September 30, 1999

6 10 $1,792,265 $781,461

B. Which were issued during the period 1 1 $485,051

Subtotals (A + B) 7 11 $2,277,316

C. For which a management decision was

made during the reporting period

5 8 $677,074

(i) Disallowed costs 6 $272,858

(ii) Costs not disallowed 3 $404,216

D. For which no management decision had

been made by March 31, 2000

2 3 $1,600,242 $781,461

* Recommendations.

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

 lack documentation.
 32 Semiannual Report March 2000

APPENDIX II - Part B

Audit Reports with Recommendations that Funds Be Put to Better Use

October 1, 1999, to March 31, 2000

REPORTS RECs* RECOMMENDED

 FUNDS FOR

BETTER USE

A. For which no management

decision had been made by

September 30, 1999

11 20 $10,615,023**

B. Which were issued during the

period

4 4 $1,926,622

Subtotals (A + B) 15 24 $12,541,645

C. For which a management

decision was made during the

reporting period

11 20 $10,615,023

(i) Recommendations

agreed to by SBA

management

2 3 $581,523

(ii) Recommendations

not agreed to by SBA

management

9 17 $10,135,045

D. For which no management

decision had been made by

March 31, 2000

4 4 $1,926,622***

* Recommendations.

** There is one more recommendation in opening balance than in the 9/99 SAR closing balance because Rec 1E of the report

 87F021018 Kansas City Section 7(a) was reopened after the last SAR was published.

*** In Report 9-25, OIG recommended a note receivable be established for $419,971; in the management decision, SBA

 established a note receivable for $521,516.
Semiannual Report March 2000 33

APPENDIX II - Part C

Audits Reports with Non-Monetary Recommendations

October 1, 1999, to March 31, 2000

REPORTS RECOMMENDATIONS

A. For which no management decision had

been made by September 30, 1999

12* 17*

B. Which were issued during the period 15 48

Subtotals (A + B) 27 65

C. For which a management decision was

made (for at least one recommendation in

the report) during the reporting period

14 23

D. For which no management decision (for

at least one recommendation in the

report) had been made by March 31, 2000

10** 42

* Beginning balance corrected to reflect prior period adjustment.

** The recommendations resolved did not address all the recommendations within the reports where they appeared.
 34 Semiannual Report March 2000

APPENDIX II – Part D

Issued Audit Reports with Overdue Management Decisions

March 31, 2000

TITLE NUMBER ISSUED STATUS

Business Loan Guarantee Purchases 7-5-H-011-026 9/20/99

Under review by the Office of

General Counsel

APPENDIX II - Part E

Significant Audit Reports Described in Prior Semiannual Reports

Without Final Action as of March 31, 2000

Report

Number

Title Date

Issued

Date of

Management

Decision

Final

Action

Target

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

Collection Activities

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

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 Users Technology Associates, Inc. 6/06/97 3/26/98 6/5/98

7-5-H-011-026 Business Loan Guarantee Purchases 9/30/97 Some

recommendations

remain open.

3/30/00

8-8-H-006-025 GSA Kansas City Sole Source 8a

IDIQ Contracts

9/29/98 7/23/98 12/31/98

8-7-H-002-017 NOAA Computer Contracts 6/18/98 3/1/99 12/31/99

9-08 Giving of Self Partnership 3/24/99 9/15/99 12/1/99

9-11 Non-Tax Delinquent Debt 7/28/99 8/13/99 12/30/99

9-14 Bank of Castile 7/29/99 9/30/99 12/1/99

9-15 Disaster Home Loan Servicing

Center

8/3/99 9/16/99 12/31/99

9-19 SBA's Information System Controls 9/2/99 9/30/99 1/30/00

9-20 Bankers Insurance Co. SBA

Guaranteed Bonds with Georgia

Coastal Construction Group

9/10/99 10/26/99 10/22/99

9-23 Survey of Electronic Records

Management

9/15/99 11/30/99 11/30/00
Semiannual Report March 2000 35

APPENDIX III

Six Month Arrested/Indicted/Convicted Summary

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 CA BL* Loan broker packaged altered tax returns in applications for

$1,250,000 in loans

Charged in

information

FBI

 CA BL* Gas station owner submitted altered tax returns in application for

$700,000 loan

Charged and

pled guilty

FBI

 CA BL* Gas station owner submitted altered tax returns in application for

$320,000 loan

Charged and

pled guilty

FBI

 CA BL* Gas station owner submitted altered tax returns in application for

$450,000 loan

Charged in

information

FBI

 CA BL In application for $161,500 loan, liquor store owner listed real

estate properties he had transferred to brother

Charged and

pled guilty

None

 CA DL In applying for $67,700 in SBA disaster loans, businessman

failed to disclose he had filed for bankruptcy under different

name and SSN; also failed to inform SBA he was on criminal

probation

Arrested and

found guilty

ATF,

SSA/OIG

 CA IA* Using computer SBA had assigned him, SBA employee

repeatedly accessed Internet pornography sites, including images

of children involved in various sexual acts

Pled guilty FBI

 CA DL* Man obtained $137,300 disaster home loan following Northridge

earthquake using name and SSN of his brother

Charged by

complaint,

arrested

State law

enforcement

agency

 CA BL* Accountant prepared altered tax returns submitted in applications

for $2,020,000 in loans

Indicted FBI

 CA BL* Mini-mart owner submitted altered tax returns in application for

$550,000 loan and abetted accountant

Indicted FBI

 CA BL* Real-estate executive obtained $550,000 SBA-guaranteed loan by

using false SSN, fraudulent checks, and false financial statements

in, and by omitting criminal record from, SBA application

Indicted HUD/OIG,

FBI, IRS

 IL BL* Meatpacking executive submitted altered tax returns to obtain

$490,000 loan, failed to make promised $150,000 capital

injection, sold majority of farmland pledged as collateral

Charged and

pled guilty

FBI

 MD BL* On documents to obtain $260,000 loan, realty firm owner listed

name/date of birth/SSN of his son in place of his own; also failed

to disclose he owed approximately $3 million to IRS and others

Indicted None

.MO BL* To obtain $70,000 loan, accountant generated documents,

including his cousin’s SBA loan application and fictitious tax

returns, that contained false SSN

Indicted HUD/OIG,

SSA/OIG,

IRS, FBI
 36 Semiannual Report March 2000

State Program Alleged Violation(s) Prosecuted Arrested/

Indicted/

Convicted/

Investigated

Jointly

With. . .

 MO BL* To obtain $387,000 loan, child care executive failed to disclose

that she owed delinquent taxes and had prior arrest; also falsely

documented her required $111,000 cash injection; also submitted

false documents as to use of $12,690 of loan funds

Pled guilty TIGTA

 MT BL To obtain $54,000 loan, restaurateur represented on his SBA

application that he had no criminal history; in fact, he had been

arrested more than 20 times

Pled guilty FBI

 NY BL Bridal shop owner used name and SSN of another person to

obtain $100,000 SBA-guaranteed loan

Arrested (by

SSA/OIG)

SSA/OIG

 NY CC* Project manager of construction company forged bond to defraud

Government in connection with $379,079 Section 8(a) contract

Arrested FBI

 OH BL* Real estate salesman forged endorsement on $427,074 check he

had represented was going to repay SBA-guaranteed loan;

deposited funds to his business account instead

Indicted County

prosecutor’s

office

 PA CC* Construction executive conspired to improperly obtain 8(a)

contracts; also denied in his SBA 8(a) application that he had

criminal history; in fact, he had seven prior arrests and three

convictions

Indicted,

surrendered

USDA/OIG,

DOL/OIG,

Navy, Army,

DCIS

 PA CC* Construction executive conspired to improperly obtain 8(a)

contracts; also represented his assets at $40,000 to SBA on same

day that he represented his assets at over $1.6 million to bonding

company

Indicted,

surrendered

USDA/OIG,

DOL/OIG,

Navy, Army,

DCIS

 PA CC* Construction corporation conspired to improperly obtain 8(a)

contracts

Indicted USDA/OIG,

DOL/OIG,

Navy, Army,

DCIS

 TX SB* To obtain $510,000 SBA-guaranteed surety bond, pipeinstallation contractor represented on his application that he had

no criminal history; in fact, he had been

charged/arrested/convicted of at least nine criminal offenses

Indicted None

 TX BL* To obtain $156,000 loan, auto-repair employee submitted altered

tax returns and falsified IRS verifications and falsified invoices

Indicted TIGTA

 TX BL* Supplier falsified invoices in connection with $156,000 loan Indicted TIGTA

 VI DL Woman applied for $34,000 disaster home loan jointly in names

of her and her mother, who had died 9 months before

Charged in

information

SSA/OIG

 VI BL* To obtain $432,000 loan, construction executive submitted

documents listing $420,000 as value of machinery to be

purchased with loan funds, when actual cost of machinery was

only $120,000

Pled guilty FBI
Semiannual Report March 2000 37

APPENDIX IV

Six Month Sentencing Summary

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 CA BL* Car wash owner submitted altered tax returns

in application for $1 million loan

2 months incarceration, $259,121 FBI

 CA BL* Car wash owner submitted altered tax returns

in application for $1 million loan

2 months incarceration, $164,256 FBI

 CA BL* Furniture store owner submitted altered tax

returns in application for $250,000 loan and

diverted loan proceeds to purchase personal

residence

24 months incarceration,

$145,000

FBI

 CO DL* Telemarketing executive submitted false

documents as “proof” of using $1.2 million of

proceeds of $1.5 million physical-damage

loan to purchase new equipment

30 months incarceration,

$1,500,000

None

 CO IA* SBA voucher examiner embezzled more than

$21,000 in SBA travel and purchasing funds

via electronic invoices

6 months at home, $21,284 None

 FL BL Credit-repair executive misrepresented on

SBA Settlement Sheets that she intended to

use disbursements from $80,000 loan to

purchase fixed assets; in fact, she falsely

negotiated joint-payee loan checks when she

purchased equipment from third parties, and

then returned equipment for refunds

Charged and pled guilty,

4 months incarceration (+ 4

months at home), $66,726

None

 FL DL Jewelry store owner submitted altered

estimates as “receipts” documenting use of

$20,400 of her $70,400 physical-damage loan

Pled guilty, $20,400 FBI, IRS

 IA BL Restaurateur made numerous false statements

to SBA regarding his use of proceeds of

$50,000 loan, which were intended to pay for

equipment, remodeling expenses, and

purchase price of his restaurant

4 months at home, $48,287 None

 ID BL

To obtain disbursements on $90,000 SBAguaranteed loan, direct mail advertiser created

false invoices to document purchase of

equipment for $28,872

Charged and pled guilty,

6 months at home, $19,391

FBI
 38 Semiannual Report March 2000

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 IL DL*

Construction executive concealed that he was

controlling officer of applicant for $151,000

loan, to avoid disclosure that he had been

imprisoned for credit card fraud and was still

on supervised release

46 months incarceration,

$128,593

None

 NY IC*

Village official conspired to misappropriate

SBA funds through specialized SBIC, to

which SBA had provided $1.2 million of

leverage funding, by making and concealing

of improper loans

78 months incarceration,

$100,000

ED/OIG,

HUD/OIG, IRS

 NY IC*

Village official conspired to misappropriate

SBA funds through specialized SBIC, to

which SBA had provided $1.2 million of

leverage funding, by making and concealing

of improper loans

70 months incarceration ED/OIG,

HUD/OIG, IRS

 NY IC*

Village official conspired to misappropriate

SBA funds through specialized SBIC, to

which SBA had provided $1.2 million of

leverage funding, by making and concealing

of improper loans

57 months incarceration ED/OIG,

HUD/OIG, IRS

 NY IC*

Village official conspired to misappropriate

SBA funds through specialized SBIC, to

which SBA had provided $1.2 million of

leverage funding, by making and concealing

of improper loans

30 months incarceration ED/OIG,

HUD/OIG, IRS

 NY IC

As SBIC director, approved improper

disbursement of $750,000 in loans from SBIC

to its president

Civil suit settled without

admitting allegations

$41,900 civil

FBI

 NY IC

As SBIC director, approved improper

disbursement of $750,000 in loans from SBIC

to its president

Civil suit settled without

admitting allegations

$13,500 civil

FBI

 NY BL*

Dentist had leased, not purchased, equipment

he pledged as collateral on $150,000 loan,

instead using loan proceeds to buy personal

items; failed to make payments, causing

leasing company to repossess equipment

lender thought was security for loan

Charged and pled guilty,

4 months at home, $147,222

FBI

 OK BL

To obtain $50,000 loan, computer store owner

indicated he had never been arrested or

convicted; in fact, prior to applying for this

loan he had been arrested multiple times for

felony offenses and convicted on multiple

occasions

Pled guilty,

6 months incarceration, $47,691

None

 VA BL To obtain $35,000 loan, taxi owner stated on

her SBA application that she had no criminal

history; in fact, prior to date of her application

she had been arrested in five separate times.

Pled guilty,

6 months at home, $21,713

SSA/OIG
Semiannual Report March 2000 39

State Program Alleged Violation(s) Prosecuted Confinement Time and

Dollar Results (Criminal

Restitution/Fines/Etc.)

Investigated

Jointly

With. . .

 WA BL*

Chiropractic clinic owner made false

statements to obtain $80,000 loan and later

converted loan proceeds to his personal use;

also falsely claimed that he was a U.S. citizen

Pled guilty,

30 months incarceration,

$159,223

FBI, INS

* This matter is discussed in the narrative section of this report.

Program codes: BL=business loans, CC=Section 8(a) business development, DL=disaster loans, IA=Agency management and

financial activities, IC=small business investment companies, SB=surety bond guaranties

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

Investigative Service; DOL/OIG=Labor Department OIG; ED/OIG=Education Department OIG; FBI=Federal Bureau of

Investigation; HUD/OIG=Housing & Urban Development Department OIG; INS=Immigration & Naturalization Service;

IRS=Internal Revenue Service; SSA/OIG=Social Security Administration OIG; TIGTA=Treasury DepartmentTax

Administration OIG; USDA/OIG=Agriculture Department OIG
 40 Semiannual Report March 2000

MAKE A DIFFERENCE

To promote integrity, economy, and efficiency, we encourage

you to report instances of fraud, waste, or mismanagement to

the SBA OIG FRAUD LINE.*

CALL

1-800-767-0385 (Toll Free)

 202-205-7151 (Washington, DC Area)

Write or Visit

U.S. Small Business Administration

Office of Inspector General

Investigations Division

409 Third Street, SW (5th Floor)

Washington, DC 20416

*Upon request, your name will be held in confidence.