Export-Import Bank: Enhancements Needed in Loan Guarantee Underwriting Procedures and for Documenting Fraud Processes
Published: 2014-09-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Ex-Im serves as the official export credit agency of the United States, providing a range of financial products to support the export of U.S. goods and services. Following the 2007-2009 financial crisis, increased demand for Ex-Im support resulted in significant increases in Ex-Im's outstanding financial commitments and risk exposure, which heightened interest in ensuring that Ex-Im has procedures in place to minimize financial risks.
GAO was mandated by the Export-Import Bank Reauthorization Act of 2012 to review the extent to which Ex-Im (1) adequately designed and implemented procedures to reasonably assure compliance with its underwriting process requirements for loan guarantee transactions and consistency with federal guidance and (2) adequately designed procedures to prevent, detect, and investigate fraudulent applications for loan guarantees. To address these objectives, GAO (1) reviewed Ex-Im's relevant procedures and federal guidance; (2) conducted tests on statistically random samples of loan guarantees authorized between October 1, 2011, and March 31, 2013; and (3) interviewed Ex-Im officials.
section_title: What GAO Found
paragraphs: The Export-Import Bank's (Ex-Im) Loan, Guarantee, and Insurance Manual (Manual) describes Ex-Im's underwriting procedures and generally provides loan officers with a framework to implement its underwriting process requirements for loan guarantee transactions. GAO's review of a statistical sample of loan guarantees indicated that Ex-Im implemented many key aspects of the underwriting process as required by the Manual. However, the Manual did not (1) include certain procedures or sufficiently detailed instructions to verify compliance with Ex-Im's requirements and consistency with federal guidance, such as a procedure to verify that loan guarantee transaction applicants did not have delinquent federal debt; (2) include instructions for loan officers to use credit reports and for the inclusion of all required documents and analyses in the loan file prior to approval; and (3) call for assessments of collateral, as required by federal guidance, for certain loan guarantee transactions prior to approval. Further, Ex-Im did not have mechanisms to verify compliance with certain established procedures, including documenting certain loan guarantee eligibility procedures. In addition, Ex-Im's current risk-based approach for scheduling examinations to monitor lenders with delegated authority to approve guaranteed loans was not documented. Improvements in these areas help enhance the assessment of transaction participant eligibility and the reasonable assurance of repayment, as well as help prevent fraud.
While Ex-Im has processes to prevent, detect, and investigate fraud, Ex-Im has not documented its overall processes for doing so. Such documentation is recommended by several authoritative auditing and antifraud organizations as a key step in evaluating and updating these processes. The processes Ex-Im used to prevent and detect fraud were part of its underwriting and monitoring of loan guarantees. A number of divisions within Ex-Im, as well as lenders, played a role in preventing fraudulent applications from being approved and monitoring activity that could help detect potential fraud. If a guaranteed loan defaults and an indicator of fraud existed, staff would work with Ex-Im's Office of Inspector General to leverage its investigative resources to pursue involved parties.
section_title: What GAO Recommends
paragraphs: GAO is making a number of recommendations to Ex-Im to enhance its loan guarantee underwriting process with additional procedures for ensuring compliance with Ex-Im and federal requirements, as well as for documenting fraud processes. In commenting on GAO's draft report, Ex-Im concurred with GAO's recommendations.

section_title: Letter
paragraphs: The Export-Import Bank of the United States (Ex-Im) serves as the official  export credit agency of the United States. It provides a range of financial  products, including direct loans, loan guarantees, and insurance for  foreign customers of U.S. companies to support the export of U.S. goods  and services, thereby supporting U.S. jobs. Following the financial crisis  of 2007-2009, increased demand for Ex-Im credit authorizations—caused  by a retreat of private sector lenders from the market—led to rapid  increases in the size of Ex-Im’s portfolio. From 2008 to 2013, Ex-Im’s  outstanding financial commitments—and by extension its exposure— grew from about $59 billion to about $114 billion, primarily in its long-term  loans and loan guarantees. Also, since 2008, Ex-Im has been “self- sustaining” for budgetary purposes by financing its operations, including  administrative costs and actual and expected losses on its risk exposure,  from actual and expected interest and fees charged to its customers.  But, because Ex-Im’s portfolio contains a large volume of recent  transactions, the long-term impact of this business on the federal budget  is not yet known. Ex-Im must operate within the parameters and limits  authorized by law. The Export-Import Bank Reauthorization Act of 2012,among other things, increased the agency’s exposure limit—that is, the  total outstanding value of all direct loans, loan guarantees, and insurance  policies that Ex-Im cannot exceed—from $100 billion in 2011 to as much  as $140 billion in 2014.
Ex-Im’s charter requires the transactions the agency authorizes to have a  reasonable assurance of repayment. To comply with this requirement,  Ex-Im must manage the wide variety of risks associated with providing  export financing, including credit, political, and operational risks. Ex-Im  uses a number of risk-management techniques throughout the different  stages of a transaction, including underwriting, legal review and  documentation, monitoring and restructuring, and claims and recovery.  The recent growth in Ex-Im’s exposure has heightened interest in  ensuring that Ex-Im has proper procedures in place to minimize these  risks while meeting the needs of U.S. exporters.
The Export-Import Bank Reauthorization Act of 2012 mandated that GAO,  among other things, evaluate Ex-Im’s underwriting process and fraud  procedures for its loan and loan guarantee transactions. Since Ex-Im’s  Office of Inspector General (IG) recently analyzed the underwriting of  direct loans, we limited our review to loan guarantee transactions. This  report discusses the extent to which Ex-Im has (1) adequately designed  and implemented procedures to reasonably assure compliance with its  underwriting process requirements for loan guarantee transactions and  consistency with federal guidance and (2) adequately designed  procedures to prevent, detect, and investigate fraudulent applications for  loan guarantees.
To evaluate Ex-Im’s procedures related to underwriting loan guarantee  transactions, we reviewed Ex-Im’s Loan, Guarantee and Insurance  Manual, which describes, among other things, Ex-Im’s procedures to  assess loan guarantee applications and prepare loan agreements. We  also reviewed other relevant Ex-Im documents, including the Ex-Im  charter, performance reports, and other policies and procedures.  Additionally, we interviewed Ex-Im officials about the underwriting  process. We also reviewed IG and GAO reports relevant to Ex-Im’s  underwriting process. We identified criteria from the Office of  Management and Budget (OMB) and Department of the Treasury  (Treasury) guidance on managing loan guarantee programs, as well as  from Standards for Internal Control in the Federal Government. We  conducted tests on statistically random samples of loan guarantees  authorized from October 1, 2011, to March 31, 2013, and reviewed loan  files for documentation of the underwriting process and projected the  results of our statistical samples. We tested two samples representing  (1) short-term loan guarantees and (2) medium- and long-term loan  guarantees. The results from our samples apply to the universe of loan  guarantees authorized from October 1, 2011 to March 31, 2013. We also  reviewed Ex-Im’s delegated authority lender examination reports for  certain lenders of short-term loan guarantees. To assess the reliability of  the data we used, we analyzed information related to data quality  controls, reviewed the data for obvious errors in accuracy and  completeness, compared data to published documents, and interviewed  knowledgeable officials about the data. We concluded that the data  elements we used were sufficiently reliable for purposes of selecting  samples of transactions to review and describing Ex-Im’s loan guarantee  balances.
To evaluate Ex-Im’s procedures to prevent, detect, and investigate  fraudulent applications for loan guarantees, we reviewed previous GAO  and Ex-Im IG reports and relevant Ex-Im documents; the Ex-Im charter;  and other plans, performance reports, policies, and procedures. We  interviewed Ex-Im and IG officials knowledgeable about procedures to  prevent, detect, and investigate fraud and spoke with lenders to identify  steps Ex-Im has taken to strengthen lender procedures related to  potential fraud. Using the statistically random samples described above,  we tested documentation of fraud prevention processes. We also  reviewed documentation of cases illustrating how Ex-Im detected  potential fraud under a variety of circumstances.
We conducted this performance audit from March 2013 to September  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. Appendix I provides more  information on our scope and methodology.
subsections: section_title: Background
paragraphs: Ex-Im is an independent agency operating under the Export-Import Bank  Act of 1945, as amended. Its mission is to support the export of U.S.  goods and services, thereby supporting U.S. jobs. Ex-Im’s charter states  that it should not compete with the private sector. Rather, Ex-Im’s role is  to assume the credit and country risks that the private sector is unable or  unwilling to accept, while still maintaining a reasonable assurance of  repayment. Ex-Im must operate within the parameters and limits  authorized by law, including, for example, statutory mandates that it  support small business and promote sub-Saharan African and  environmentally beneficial exports. In addition, Ex-Im must provide  financing on a competitive basis with other export credit agencies and  minimize competition in government-supported export financing and must  submit annual reports to Congress on its actions.
subsections: section_title: Ex-Im’s Functional Areas and Products
paragraphs: Ex-Im operates in several functional areas under the leadership of its  President who also serves as Chairman of Ex-Im’s Board of Directors.Functional areas include the Office of the Chief Financial Officer, Office of  General Counsel, Office of Resource Management, and Export Finance  Group. The Export Finance Group is subdivided into business divisions  that are responsible for underwriting related to loan guarantees, including  processing applications, evaluating compliance of transactions with credit  and other policies, performing financial analysis, negotiating financing  terms, coordinating and synthesizing input to credit recommendations  from other divisions, and presenting credit recommendations for  approvals.
Ex-Im offers export financing through direct loans, loan guarantees, and  insurance. Ex-Im’s loan guarantees cover the repayment risk on the  foreign buyer’s loan obligations incurred to purchase U.S. exports. Loan  guarantees are classified as short, medium, or long term. Figure 1  highlights the basic differences between the three loan guarantee types.  Further, while Ex-Im relies on the value of U.S. content as a proxy to  evidence support for U.S. jobs, it also considers exporter-supplied data  on jobs created or preserved. Because foreign content and local costs  represent amounts that do not directly benefit the U.S. economy or U.S.  employment, Ex-Im developed requirements that limit the extent to which   Specifically, Ex-Im’s content  such amounts are covered by its financing.policy includes criteria for identifying exports eligible for Ex-Im support  based on the amount of foreign labor, materials, and overhead included in  the production of the exported goods or services. Eligibility criteria and  the amount of financing Ex-Im will provide based on content value  depends on the terms of the financing requested and, for short-term  transactions, whether the exporter is a small business. Ex-Im’s content  policy is self-imposed and establishes (1) the level of financing available  depending on the content of exported goods and services and terms of  the transaction and (2) procedures for exporters to report content  information to Ex-Im and for Ex-Im to assess the reasonableness of such  information. When a loan guarantee transaction is approved, exporters  are required to complete and provide an Exporter’s Certificate in which  they certify the amount of foreign and domestic content included in the  goods or services financed by Ex-Im. The certificate warns exporters of  the federal penalties for making false statements.
Short-term loan guarantees: Ex-Im’s short-term loan guarantee  product is focused on working capital financing (hereinafter referred to  as working capital loan guarantees). Working capital loan guarantees  may be approved for a single transaction or a revolving line of credit  that can be extended up to 3 years. In general, if the financed eligible  product contains more than 50 percent U.S. content, then the entire  transaction value is eligible for an Ex-Im working capital loan  guarantee. Generally, Ex-Im guarantees 90 percent of the loan’s  principal and interest if the borrower defaults. Therefore, the lender  maintains the risk of the remaining 10 percent. Ex-Im’s payment of  working capital claims is conditional upon the guaranteed lenders’  compliance with Ex-Im requirements, such as underwriting policies,  deadlines for filing claims, payment of premiums and fees, and  submission of proper documentation. Ex-Im has reported that over 80  percent of its working capital guarantee transactions are approved by  lenders with delegated authority, which means that commercial  lenders approve the guaranteed loans in accordance with agreed- upon underwriting requirements without first obtaining Ex-Im approval.  If a lender does not have delegated authority, Ex-Im performs its own  underwriting procedures and approves the guaranteed loans.
Medium- and long-term loan guarantees: Financing eligibility for  Ex-Im’s medium- and long-term loan guarantee support is limited to  the lesser of (1) 85 percent of eligible goods and services in the U.S.  export contract or (2) 100 percent of the U.S. content. Ex-Im’s  medium- and long-term loan guarantees generally cover 100 percent  of the loan’s principal and interest if the buyer defaults. Ex-Im’s  guarantee to the lender is transferable, carrying the full faith and credit  of the U.S. government, and is unconditional, meaning that Ex-Im  must pay submitted claims regardless of the cause of default, as long  as the claim is filed timely and no amendments were made without  Ex-Im’s consent. The underwriting of medium-term loan guarantees is  generally performed by Ex-Im and approved by certain Ex-Im officers  with delegated authority. For about 3 percent of medium-term loan  guarantee transactions, Ex-Im has provided certain lenders delegated  authority to underwrite and approve these guarantees. The  underwriting of long-term loan guarantees is performed by Ex-Im and  approved by the Ex-Im Board of Directors.
Ex-Im’s annual authorizations for direct loans, loan guarantees, and  insurance increased from about $12 billion in 2006 to over $27 billion in  2013, an increase of about 125 percent. Over the same period, Ex-Im’s  staff level, as measured by full-time employees, increased from 376 to  403, about 7 percent (see fig. 2).
Of the annual authorizations for all Ex-Im financing products, as shown in  figure 3, Ex-Im’s number of authorized transactions for working capital  and long-term loan guarantees fluctuated from 2006 to 2013. However,  the number of medium-term loan guarantee transactions decreased from  2006 to 2013. There were 533 working capital, 68 medium-term, and 73  long-term loan guarantee authorizations that totaled $14.9 billion, or 55  percent, of Ex-Im’s total annual authorizations in 2013.
Although the number of working capital loan guarantees greatly exceeds  the number of medium- and long-term loan guarantees, long-term loan  guarantees account for the greatest dollar value of loan guarantees (see  fig. 4). During the period 2006 through 2013, reported claim payments on  defaulted loan guarantees have fluctuated and averaged $76.5 million.  Such claim payments ranged from a high of $176.5 million in 2010 to lows  of $19.3 million and $28.4 million in 2012 and 2013, respectively.
section_title: Overview of Ex-Im’s Underwriting Process
paragraphs: Ex-Im’s Loan, Guarantee and Insurance Manual (Manual), which was  updated in January 2013, February 2014, and March 2014, describes,  among other things, Ex-Im’s underwriting procedures for long-term,  medium-term, and working capital loan guarantees. The Manual  describes the responsibilities of Ex-Im’s divisions (e.g., Transportation or  Working Capital Finance) involved in the credit process, including  application processing activities shown in figure 5. The underwriting of  loans guaranteed by Ex-Im is performed by either Ex-Im loan officers or  qualified lenders with delegated authority, which allows a lender to  authorize a loan guaranteed by Ex-Im in accordance with agreed-upon  underwriting requirements without first obtaining Ex-Im approval. All of the  underwriting for long-term loan guarantees is performed by Ex-Im loan  officers. According to Ex-Im officials, the underwriting process is essential  to helping to prevent fraud because of the due diligence performed over  the transactions and the transaction participants.
Application intake. When an application is initially received, it is  screened for basic completeness; follow-up on incomplete or  unacceptable applications is performed; and once considered complete, it  is assigned to a processing division.
Application screening. After an application is determined to be  complete, it is assigned to the applicable Ex-Im division that oversees the  type of transaction. For example, an application for the purchase of an  aircraft would be assigned to the Transportation Division. Once assigned,  a loan officer in that division is to assess the eligibility of the transaction,   and eligibility of the  including eligibility of the export item, additionality,country where goods are to be shipped. To ensure compliance with laws  and regulations, the loan officer is to obtain and assess various  certifications from transaction participants, such as Iran Sanctions  Certifications and antilobbying statements.required to submit the corporate and individual names and addresses of  lenders, borrowers, guarantors, and other transaction participants to the  Ex-Im Library. Library staff are then to conduct a Character, Reputational,  and Transaction Integrity review—a procedure designed to, among other  things, provide due diligence over various risks and to help prevent fraud  by checking loan participants’ information with approximately 20  databases. Databases include various U.S. government and international  debarment and sanction lists, as well as lists maintained by international  financial institutions, the World Bank, and the Inter-American  Development Bank. These lists contain the names and addresses of  individuals and organizations that have been debarred or placed on a  sanctions list by major international financial institutions because of their  involvement in irregular, fraudulent, or corrupt acts.
A credit report is a document created by a credit reporting agency that summarizes the  financial history of a party (a person or a business). Examples of information found in a  credit report include the amount of credit available to a party, how much of its credit limit a  party tends to rely on for purchases, whether the party has a history of paying its bills on  time, and whether a party has previously gone through bankruptcy. long-term loan guarantee transactions, except when the primary source of  repayment is another government or a financial institution. If there are any  exceptions to credit information requirements, credit standards, or Ex-Im  policy, the loan officer is required to document the rationale for  exceptional treatment. As needed, the loan officer obtains input from  other Ex-Im staff, such as attorneys, economists, or engineers, to reach a  conclusion regarding the legal, technical, or country risks and the level of  environmental or social impacts of the proposed transaction. In addition,  Ex-Im may utilize external financial, legal, and technical advisors to assist  in the due diligence process. With the assistance from these other Ex-Im  staff and external advisors, as needed, the loan officer is in a position to  confirm the eligibility of exports for financing and the eligibility of the U.S.   Ex-Im has established  and foreign content included in the transaction.detailed policy on the amount of foreign content it will finance. Based on  this due diligence, the loan officer is to assess the transaction for risk and  assign an overall risk rating to the transaction. This rating is used, in part,  to determine the exposure fee Ex-Im will charge the borrower for  guaranteeing the transaction. Greater risks result in higher fees.
Credit structure. After the risk assessment and due diligence is  performed, the loan officer determines the financing terms and conditions  to be recommended. The loan officer is generally required to structure the  transaction to include a security interest (collateral) in the financed goods  or other assets of the borrower. If it is determined that collateral is not  necessary, the loan officer is to document the explanation and other  mitigating factors to indicate this is acceptable to Ex-Im (e.g., Ex-Im  support is small relative to borrower’s size). For all aircraft transactions,  the loan officer is required to perform an assessment and loan-to-value  analysis of the collateral,requirements for the borrower to maintain the ownership and condition of  collateral.   and the financing terms must include  Credit decision. The loan officer is to document the due diligence  performed, including any analyses performed by external advisors, in a  credit or board memo, which also contains the loan officer’s  recommendation to approve or decline the transaction. These memos  and applicable supporting documentation are then to be forwarded to the  approving party. The credit memo applicable to working capital or  medium-term transactions is to be provided to Ex-Im officials with  individual delegated authority to approve transactions of $10 million and   Board memos for long-term transactions or transactions greater  under.than $10 million or those within certain sensitive sectors (e.g., steel) are  to be presented to the Ex-Im Board of Directors for consideration and  approval.
section_title: Underwriting Delegated Authority Transactions
paragraphs: When the underwriting and credit decision is delegated to preapproved  lenders, Ex-Im does not perform the underwriting procedures. However,  Ex-Im’s established procedures call for delegated authority lender  examinations to be performed at least annually to assess lenders’  compliance with Ex-Im’s underwriting standards. To conduct these  examinations, an Ex-Im examiner selects a sample of the lender’s  outstanding Ex-Im guaranteed loans to analyze.assess the lender’s credit underwriting practices to ensure they meet Ex- Im’s requirements and include due diligence and financial analyses. The  examiner is required to review a loan’s application, authorization notice,  credit memo, and loan agreement. Any exceptions to Ex-Im standards are  to be noted in the examination report. Based on the seriousness of any  exception(s), the lender receives either a Pass, Pass with Qualification, or  Fail rating. Pass ratings indicate substantial compliance with only minor  weaknesses; Pass with Qualification indicates overall adequate  compliance except within a limited area of concern; Fail indicates a lack  of compliance. A Pass with Qualification rating requires subsequent  corrective action, while a Fail rating requires immediate suspension of  delegated authority.
section_title: Management of Loan Guarantee Programs
paragraphs: Government-wide guidance for federal agencies to follow for the  management and operation of a loan guarantee program include the  following:
OMB Circular No. A-129, Policies for Federal Credit Programs and  Non-Tax Receivables, revised in January 2013, prescribes policies  and procedures for designing and managing federal credit programs,  including requirements for applicant screening, assessing  creditworthiness, loan documentation, and collateral.
Treasury’s Bureau of the Fiscal Service’s Managing Federal  Receivables provides federal agencies with a general overview of  standards, guidance, and procedures for successful management of  credit activities, including requirements for evaluating and  documenting loan applications.
section_title: Underwriting Guidance Was Established, but It Did Not Reasonably Assure Consistent Implementation and Compliance with Certain Requirements
paragraphs: The Manual, which describes Ex-Im’s loan guarantee underwriting  procedures, provided a framework for Ex-Im officials to implement Ex- Im’s underwriting process requirements for loan guarantee transactions,  and Ex-Im implemented many key aspects of its underwriting process as  required by the Manual. For example, Ex-Im consistently documented   (1) transaction participant information, (2) due diligence over borrower  creditworthiness and eligibility of costs, (3) loan guarantee terms and  conditions, and (4) loan guarantee transaction approvals. However, the  Manual did not adequately address the underwriting process in the  following four areas: (1) application screening, (2) risk assessment and  due diligence, (3) credit structure, and (4) credit decision. Specifically, the  Manual did not include certain procedures that should be performed, or  sufficiently detailed instructions on how certain procedures should be  performed and documented, to reasonably assure compliance with Ex- Im’s requirements and consistency with federal guidance prior to loan  guarantee approval. Further, Ex-Im did not have mechanisms to verify  compliance with certain established procedures related to loan guarantee  transactions prior to approval. In addition, while Ex-Im’s process for  scheduling its delegated authority lender examinations was consistent  with federal guidance, it was not documented or consistent with its  established procedures.
subsections: section_title: Certain Application Screening Procedures Were Not Fully Consistent with Federal Guidance or Consistently Implemented
paragraphs: Ex-Im’s Manual generally provided loan officers guidance to screen  application documentation and verify that loan guarantee transactions  met certain eligibility criteria consistent with federal guidance. However,  the Manual did not address the federal requirement that applicants must  not be delinquent on federal debt to be eligible for financing. Further, the  Manual did not include mechanisms to verify that certain application  screening procedures were documented prior to loan guarantee approval,  such as obtaining credit reports and documenting certain other eligibility  procedures.
subsections: section_title: Application Screening Documentation
paragraphs: We estimated that Ex-Im documented transaction participants, such as  the applicant, borrower, guarantor, buyer, lender, end user, exporter,  supplier, and guaranteed lender, for 100 percent of the medium- and  long-term loan guarantee transactions. In addition, Ex-Im generally  obtained from applicants and documented in the loan files the  antilobbying statements, environmental screening documents, and Iran  Sanctions Certifications, where applicable.
section_title: Delinquent Federal Debt
paragraphs: The Department of Housing and Urban Development’s Credit Alert Verification  Reporting System was developed in June 1987 as a shared database of defaulted federal  debtors, and enables processors of applications for federal credit to identify individuals  who are in default or have had claims paid on direct or guaranteed federal loans or are  delinquent on other debts owed to federal agencies. The Do Not Pay List is a web-based  single-entry access portal that federal agencies can use to gain access to several  databases to assist in determining whether an individual or entity is ineligible, in part  because of delinquent federal debt, to receive federal payments or engage in federal  contracts or grants. verify that transaction applicants are not delinquent on federal debt helps  assure applicant eligibility is consistent with federal guidance.
section_title: Credit Reports
paragraphs: Ex-Im did not consistently follow its established procedures for obtaining  credit reports or did not document why the credit reports were not  applicable. Specifically, we estimated that credit reports were not  obtained, and Ex-Im did not document why they would not be applicable,  for 61 percent of the medium- and long-term loan guarantees. Ex-Im  officials told us that they did not always enforce the requirement to obtain  credit reports because information in such reports could be stale or  erroneous and did not heavily influence the overall eligibility  determination. Additionally, loan officers told us that credit reports were  not needed for aircraft transactions because of the extensive financial  analyses performed during the underwriting of these transactions as well  as the prior approvals of the applicants’ creditworthiness for previous  transactions.longer-term financing, the applicant must provide 3 years of audited  financial statements, as well as a thorough explanation of its business  plan. Ex-Im officials stated that a loan officer’s due diligence provides  information that is more extensive than that obtained through a review of  a credit report. Nevertheless, Ex-Im did not have a mechanism to verify  that credit reports were obtained in accordance with established  procedures or that reasons for credit reports not being applicable were  documented prior to loan guarantee approval. Obtaining credit reports for  transaction participants, when available, could provide additional  information to further enhance the loan officers’ knowledge about the  financial condition of the transaction borrower and the risk associated with  the proposed transaction.
section_title: Other Eligibility Procedures
paragraphs: Ex-Im loan officers did not consistently implement established procedures  for documenting the determination of certain other eligibility related  information for loan guarantee transactions.
Character, Reputational, and Transaction Integrity reviews. We  estimated that Ex-Im documented its Character, Reputational, and  Transaction Integrity reviews, including any identified issues and how  they were resolved, as called for by Ex-Im’s established procedures,  for 100 percent of the working capital loan guarantees. However, we  estimated that about 4 percent of the medium- and long-term loan  guarantee transactions did not include all documentation related to  these reviews being performed.
Export item eligibility and country eligibility. According to Ex-Im’s  Manual, export item eligibility and country eligibility should be  determined and documented during the loan guarantee application  screening process as part of Ex-Im’s minimum eligibility requirements.  However, while loan files we reviewed documented the export item  and country involved in the transaction, we estimated that 39 percent  of the medium- and long-term loan guarantee transactions did not  have specific statements regarding the determination of export item,  and we estimated that 41 percent of the medium- and long-term loan  guarantee transactions did not have specific statements regarding the  determination of country eligibility.
GAO/AIMD-00-21.3.1. overreliance on this institutional knowledge could create inconsistencies  in the underwriting process and could lead to transactions not being  documented in accordance with established procedures. Further, when  institutional knowledge is a part of the basis for loan guarantee approval,  there is a risk that such knowledge could be lost if employee turnover  takes place. Ex-Im did not have a mechanism in place to verify that these  procedures related to eligibility requirements were performed and  documented prior to loan guarantee approval. Consistently performing  and documenting eligibility determinations helps ensure transaction and  applicant eligibility.
In September 2013, the IG reported, based on its review of Ex-Im’s  underwriting of direct loans, that Ex-Im lacked documented support for  statements regarding additionality (the justification for Ex-Im support). We  observed a similar issue during our review of a sample of working capital  and medium- and long-term loan guarantee transactions. In its  September 2013 report, the IG recommended that Ex-Im update  procedures for loan officers to maintain detailed documentation regarding  the need for Ex-Im support. Ex-Im agreed with the IG recommendation  and stated that the Ex-Im Manual would be updated to require loan  officers to maintain detailed documentation regarding the need for Ex-Im  support. As of July 2014, Ex-Im had updated the Manual for verification  procedures over additionality for long-term transactions and Ex-Im  officials stated that they are considering ways to further document  additionality statements for working capital and medium-term  transactions.
section_title: Ex-Im Performed Risk and Due Diligence Analyses, but Certain Necessary Steps Were Either Not Documented or Not Required
paragraphs: We estimated that Ex-Im documented 100 percent of its financial analysis  of the applicants’ creditworthiness, the eligibility of costs, the value of U.S.  and foreign content, the budget-cost level, the engineering report, and  environmental analyses, where applicable, for the working capital and  medium- and long-term loan guarantee transactions. In addition, Ex-Im  also documented in the loan files the economic impact analysis required  by the Manual, where applicable. We also estimated that Ex-Im  documented 100 percent of its due diligence for country risk, sovereign  risk, political risk, financial institution risk, and nonfinancial institution risk  factors for medium- and long-term loan guarantee transactions. Further,  for 19 out of 19 aircraft loan guarantee transactions that we reviewed, Ex- Im documented the credit and legal strengths, weaknesses, and  uncertainties related to the proposed transaction. Moreover, for 11 out of  11 medium-term loan guarantee transactions in excess of $1 million that  we reviewed, Ex-Im documented the transaction risk classification in the  loan file, as required by the Manual. However, loan officers did not  document the analysis of country exposure, as required by Ex-Im’s  established procedures, for an estimated 11 percent of the medium- and  long-term loan guarantee transactions.
Further, as noted above, credit reports were required for certain loan  guarantee transactions. Also, Ex-Im’s Manual called for loan officers to  document any mitigating factors for issues identified during the risk  assessment and due diligence process. However, the Manual did not  include detailed instructions for loan officers to use information in credit  reports to enhance their financial analysis of transaction participants’  creditworthiness during the risk assessment and due diligence process.  During our review of a sample of loan files, we noted that certain  approved transaction participants’ credit reports contained issues, such  as outstanding liens and poor credit history, yet the loan files did not  contain documentation that these issues were identified by the loan  officers or how these issues were mitigated. We inquired with Ex-Im loan  officers about how these issues were mitigated, and they provided  reasonable explanations.
OMB Circular No. A-129 states that loan origination files should contain  credit reports and credit analyses. Further, internal control standards  require that controls and transactions be clearly documented and  documentation be readily available for examination. However, Ex-Im did  not have a mechanism in place to verify that the country exposure and  information in credit reports were considered and documented during the  risk assessment and due diligence process prior to loan guarantee  approval. Ex-Im officials stated that the Credit Review and Compliance  Division (CRC) directly monitors loan guarantee transactions by selecting  and reviewing a random sample of loan guarantee transactions for  compliance with Ex-Im’s established procedures. However, these reviews  occur after the loan guarantees have been approved by Ex-Im and the  funds have been disbursed by the lenders. Consistently performing and  documenting reviews and key decisions related to risk assessments and  due diligence helps ensure that Ex-Im’s financing is provided to  applicants representing reasonable assurance of repayment.
To be eligible for Ex-Im financing, exported goods and services must  meet Ex-Im’s content requirements intended to ensure that U.S. jobs  benefit from Ex-Im programs. In December 2013, the Ex-Im IG reported  that only long-term loan guarantee transactions were subjected to  procedures that could identify content-related discrepancies. Further, the IG reported that because of the lack of verification efforts and  identified concerns regarding exporter certifications of content value, Ex- Im had limited assurance that content requirements are met and therefore  that (1) Ex-Im finances only eligible exports and (2) its financing activities  effectively achieve the agency’s mission of maintaining or increasing U.S.  employment. The IG also noted that Ex-Im relied on criminal penalty  warnings to deter exporters from making false statements instead of  confirming foreign and domestic content for working capital and medium- term transactions. We also found that Ex-Im relied on exporter self- certifications of each export’s foreign and U.S. content information when  performing its due diligence process for working capital and medium-term  loan guarantee transactions. In its December 2013 report, the IG  recommended that Ex-Im implement procedures to verify the accuracy of  exporter self-certifications of content information for a representative  sample of transactions each fiscal year. Ex-Im agreed with the  recommendation, and in June 2014, procedures to verify a representative  sample of exporters’ self-certifications each fiscal year were approved for  use. Ex-Im officials stated that they are now in the process of  implementing the procedures.
section_title: Ex-Im Documented Credit Structure Terms and Conditions, but Certain Collateral Requirements Were Not Consistent with Federal Guidance
paragraphs: Generally, Ex-Im’s Manual provided loan officers with detailed guidance  for determining and documenting key credit structure components— financing terms and conditions, including collateral requirements—of a  loan guarantee transaction. We estimated that Ex-Im implemented  established procedures and documented 100 percent of certain credit  structure components of the loan guarantee transactions, such as  transaction participants, financed amount, repayment terms, and  exposure fee. In addition, while Ex-Im generally identified collateral  associated with its transactions, it did not consistently document an  assessment of collateral prior to loan guarantee approval. Specifically,  Ex-Im’s established procedures for nonaircraft medium- and long-term  loan guarantees did not call for assessments of collateral prior to approval  of the transactions as recommended by federal guidance, including OMB  Circular No. A-129. We estimated that 37 percent of the medium- and  long-term loan guarantee transactions did not have documentation to  show that the identified collateral was assessed prior to loan guarantee  approval.
As stated in OMB Circular No. A-129, the government can reduce its risk  of default and potential losses through well-managed collateral  requirements for many types of loans during the application screening  process. Collateral requirements were clearly defined in Ex-Im’s Manual  for aircraft and working capital loan guarantee transactions, but these  requirements were not clearly defined in Ex-Im’s Manual for nonaircraft  medium- and long-term loan guarantee transactions. For example,  procedures specific to aircraft transactions require an analysis of  collateral and require that the ownership and condition of the collateral be  maintained. Ex-Im documented detailed assessments of collateral for all  long-term aircraft transactions we reviewed. Further, the procedures  specific to working capital loan guarantee transactions state that the  transactions must be fully collateralized at all times. The collateral for  these transactions typically consists of export-related inventory, export- related accounts receivable, and export-related general intangibles.
In February 2014, Ex-Im updated its procedures for collateral  requirements. This additional guidance contained more details related to  the identification of collateral; however, it did not include steps for an  assessment of collateral as recommended by federal guidance. Ex-Im  officials stated that lenders are usually required to provide evidence of  obtained collateral in financed goods, which is to be reviewed by Ex-Im  staff. However, this documentation was not maintained with underwriting  documents, and loan officers generally told us that they did not rely on  collateral during the underwriting process because it contributes to  recoveries in the event of a default rather than to determining the  reasonable assurance of repayment. Further, Ex-Im officials stated that  since collateral is often negotiated and documented after loan approval, it  may not be possible to assess collateral prior to approval. Ex-Im officials  stated that the loan guarantees (including collateral) are monitored by Ex- Im’s Asset Management Division (AMD) once the loan guarantees  become operative (approved by Ex-Im). However, having procedures for  documenting an assessment of collateral prior to loan guarantee approval  helps in the assessment of the overall financial risk of the proposed loan  guarantee transaction.
section_title: Approvals Were Documented, but Some Credit Decisions Were Made without Ensuring Loan Documentation Completeness
paragraphs: Ex-Im’s Manual described the tasks that need to be performed during the  underwriting process and included credit memo templates to support a  decision for various types of guarantees. However, the Manual did not  include detailed instructions for preparation and inclusion of all required  documents or analyses in a loan file prior to loan guarantee approval.
We estimated that Ex-Im documented the approvals of 100 percent of all  loan guarantee transactions with signatures on various loan guarantee  documents. In addition, when lenders with delegated authority  performed the underwriting for working capital loan guarantee  transactions, we estimated that Ex-Im officials completed and signed the  delegated authority checklist for 100 percent of the transactions. These  checklists included transaction information such as the lender, borrower,  loan amount, type of facility, letters of credit, warranties, disbursement  date, primary and secondary collateral, and the terms of the loan.  Although Ex-Im’s Manual described the tasks that needed to be  performed during the underwriting process, it was not clear as to what  documentation needed to be included in the loan file or when certain  documentation was not required. Both OMB Circular No. A-129 and  Treasury guidance state that loan origination files should contain loan  applications, credit reports, credit analyses, loan contracts, and other  documents necessary to conform to private sector standards for that type  of loan. In addition, internal control standards state that all transactions  and other significant events need to be clearly documented, and the  documentation should be readily available for examination. Further, the  standards state that all documentation and records should be properly  managed and maintained. Detailed instructions help to reasonably  assure that complete documentation is included in the loan file prior to  loan guarantee approval, providing further support for the final credit  decision.
In September 2013, the IG reported on Ex-Im’s underwriting of direct  loans and found that loan officers did not always complete various  checklists intended to reasonably assure that (1) all required commitment  documents are obtained prior to loan guarantee approval, (2) borrowers  are eligible, and (3) loan applications are complete and comply with Ex-Im  credit policies and standards. The IG found that loan officers generally  relied on their institutional knowledge of Ex-Im operations when  underwriting loans. We found a similar condition with regard to the  underwriting of loan guarantee transactions. In its September 2013 report,  the IG recommended that Ex-Im develop a systematic quality control  review program or other mechanism(s) necessary to prevent, detect, and  correct Ex-Im staff noncompliance with federal and agency credit program  policy. Ex-Im agreed with the recommendation and stated that it would  expand the scope of postauthorization reviews to assess compliance with  federal and Ex-Im credit program policies. As of July 2014, Ex-Im had  updated the Manual to include transaction assessments that call for  standardized audits to evaluate transaction compliance with federal and  Ex-Im credit program policies.
In its September 2013 report, the IG also noted that Ex-Im’s record- keeping practices were inadequate.  The IG noted that while the stated  goal of Ex-Im’s Records Management Policy is the efficient and effective  management of records and access, it did not address “how, where and  by whom” loan documentation is to be maintained. Examples included  records maintained by various individuals and divisions, requested files  that could not be easily located, and disagreement on when and what  files were to be transferred to Ex-Im’s central records facility. The IG  noted that the lack of access to certain files hindered its ability to assess  Ex-Im’s operations. We were similarly hindered in our testing of loan  guarantee transactions. For example, we estimate that in 57 percent of  the medium- and long-term loan guarantee transactions, all loan  documentation was not kept in the loan file.report, the IG recommended that Ex-Im evaluate its record-keeping  practices to identify operational risks and to develop and implement a  plan to address deficiencies. Ex-Im agreed with the recommendation and  stated that it would evaluate its record-keeping practices and implement  improvements in this area to address any deficiencies and operational   In its September 2013  risks. As of July 2014, Ex-Im officials stated that Ex-Im is in the process of  developing an electronic application to address this recommendation.
section_title: Process for Scheduling Delegated Authority Lender Examinations Was Consistent with Federal Guidance but Was Not Documented
paragraphs: Ex-Im used a risk-based approach to schedule delegated authority lender  examinations to verify that approvals made under delegated authority  were done according to Ex-Im standards. However, this risk-based  approach for scheduling these examinations was not documented. Ex- Im’s written procedures require examinations of its delegated authority  lenders for working capital guarantee transactions at least yearly or more  frequently if follow-up examinations are required to verify that corrective  action is taken by the lender on any weaknesses found during the annual  examination. However, Ex-Im officials stated that because of a lack of  needed staff and resources, Ex-Im was using a risk-based approach to  schedule the examinations, which was in accordance with OMB Circular  No. A-129. Under this risk-based approach, lenders with less risk and  less volume may have their examinations extended past the 12-month  period. For example, for the 18 lenders that approved working capital loan  guarantees in our review, Ex-Im performed annual examinations for 4  lenders, performed less frequent examinations for 12 lenders, and did not  perform examinations for 2 of the lenders. Internal control standards call   Documenting the risk- for internal controls to be clearly documented.based approach helps ensure consistent scheduling of the delegated  authority lender examinations.
section_title: While Ex-Im Has Taken Steps to Prevent, Detect, and Investigate Fraud, It Has Not Documented Its Overall Fraud Processes
paragraphs: While Ex-Im has taken steps to prevent, detect, and investigate fraud and  officials could describe the steps they use, Ex-Im has not documented its  overall fraud process, which is recommended by several authoritative  auditing and antifraud organizations as a key step in evaluating and  updating these processes. According to Ex-Im officials, the underwriting  process is essential to helping to prevent fraud because Ex-Im loan  officers undertake a series of assessments to evaluate transaction risk.  Detecting fraud is a potential outcome of the processes Ex-Im uses to  monitor guaranteed loans as well as the steps it uses in its claims and  recoveries process once a loan defaults. Lenders also play a role in  detecting fraud and are required to communicate information to Ex-Im  about significant changes in the risk of a loan guarantee. When Ex-Im  employees suspect fraud in a loan guarantee, they are to contact Ex-Im’s  General Counsel (GC) or the IG with these concerns. Ex-Im’s GC  compiles relevant information and evidence from sources within Ex-Im  and, as appropriate, makes a formal referral to the IG, which is  responsible for investigating allegations of potential fraud in Ex-Im’s  portfolio of loan guarantees (see fig. 6 for an overview of Ex-Im’s fraud  prevention, detection, and investigation processes).
subsections: section_title: Ex-Im Has Not Documented Its Overall Fraud Process
paragraphs: Ex-Im has not documented its overall process for fraud prevention,  detection, and investigation, including mapping out the respective roles  and responsibilities of Ex-Im divisions and lenders that are key  participants in Ex-Im’s efforts in these areas. Auditing and antifraud  organizations recommend documenting an organization’s fraud policy in  part because clearly defined roles and responsibilities help an  organization more coherently respond to the risk of fraud. In addition,  according to these organizations, documenting an overall antifraud policy  is also a key step in enabling an agency to evaluate and test its antifraud  processes for effectiveness and to update these processes as  appropriate. Furthermore, if an organization publicly communicates  certain aspects of its fraud detection policy, it can create a deterrent  effect. Likewise, internal control standards call for internal controls to be  clearly documented and communicated to employees.
As shown in figure 6 and discussed below, Ex-Im uses a variety of  organizational divisions in its efforts to prevent, detect, and investigate  fraud, as well as lenders and the IG. Ex-Im officials told us that Ex-Im had  not yet documented its overall approach to fraud, including clearly  describing the processes and roles and responsibilities of divisions within  Ex-Im. These officials explained that after a large fraud scheme involving  the San Antonio Trade Group was uncovered in 2008, Ex-Im focused on improving awareness of fraud across all of the divisions in Ex-Im so that  its staff developed and exercised professional skepticism to stay aware of  fraud indicators. Creating a strong control environment in which staff are  aware of and committed to fraud prevention and detection is a best  practice recommended by audit and fraud examination associations.  Documenting the antifraud process, including the respective roles and  responsibilities of various organizational units involved in the process,  helps to create a sound control environment and to update the approach  based on changes in technology, processes, and organization. In  addition, documenting the roles and responsibilities of the organizational  units helps to identify aspects of the process that could be strengthened.
section_title: Ex-Im Considers Its Underwriting Process Essential to Helping Prevent Fraudulent Applications from Being Approved
paragraphs: A key principle in any organization’s approach to proactively managing  fraud risk is to develop effective fraud prevention techniques because  preventing dollars from being paid fraudulently is more effective and  efficient than attempting to recover these dollars once they have been  paid.to helping to prevent fraud because Ex-Im loan officers undertake a  series of assessments to evaluate risk and identify potential fraud  indicators by reviewing financial, legal, and other documentation on key  parties to a proposed loan guarantee. (See fig. 7 for an overview of fraud  prevention processes.) Because the underwriting process involves loan  officers reviewing applicant documentation, Ex-Im officials stated that the  loan officers sometimes prevent fraudulent applications from being  approved when they identify falsified documentation. For example, in one  case, an Ex-Im loan officer noticed that the signatures on a new  application were identical to the signatures on a previous application as  were the submitted financials (for instance, the amount of reported rent  was identical to that on a previous application). Ex-Im officials stated that  if issues are identified during underwriting, the primary recourse is to deny  the application, but loan officers can also report the problem to Ex-Im’s  GC for further review and follow-up or to the IG for investigation.
Ex-Im officials indicated that the underwriting process is essential  Character, Reputational, and Transaction Integrity review is designed  to identify, among other things, potential risks related to the possibility  that parties to the transaction are not legitimate or have been involved  with fraud, corruption, or other suspect practices. Before  recommending approval of a loan guarantee, loan officers are  required to submit the corporate and individual names and addresses  of lenders, borrowers, guarantors, and other transaction participants  to the Ex-Im Library. As noted earlier, library staff search a series of  20 databases that include various U.S. government and international  debarment and sanction lists for any red flags. This practice is similar  to searching major international financial institutions’ debarment  lists—an approach recommended by the Organisation for Economic  Co-operation and Development for export credit agencies.
Credit review: Once a transaction is considered eligible for Ex-Im  support, the loan officer reviews the creditworthiness of the borrowers  involved in the proposed loan guarantee transaction, which can help  prevent opportunities for fraud, according to Ex-Im officials.
Collateral requirements: Ex-Im requires collateral for medium-term  loan guarantee transactions, which officials told us was in response to  higher levels of fraud in this type of loan guarantee. Since this  requirement was introduced, officials told us they have seen a  decrease in the frequency of fraud within medium-term loan  guarantee transactions, which they believe can be attributed at least  in part to the collateral requirements.
Oversight of delegated authority lenders: Since Ex-Im does not  perform underwriting for loan guarantees that fall under delegated  authority, Ex-Im’s fraud prevention activities rely on the delegated  authority lenders and Ex-Im’s oversight of these lenders. Ex-Im  accomplishes this oversight through the delegated authority lender  examinations.
Fraud awareness training: In accordance with best practices from  auditing and antifraud organizations, having a strong training program  is another element of an effective fraud prevention strategy. Ex-Im  officials reported providing fraud training to their staff using several  different sources. Officials stated that the IG generally conducts fraud  training for Ex-Im staff about every 18 months. For example, officials  reported that the IG provided fraud awareness training to Ex-Im’s  AMD in November 2013 on lessons learned through fraud  investigations, money laundering trends, and economic and trade  finance schemes. Ex-Im also leverages its internal knowledge of fraud  by having its CRC provide agency-wide training on fraud tricks to be  aware of. It also supplemented the training with a fraud tips and tricks  memo—which lists common fraud indicators and their potential  significance—that it provided to Ex-Im staff. Ex-Im staff also told us  that a vendor was awarded a 5-year contract to offer formalized fraud  training to include two classes each year for Ex-Im staff. This training  occurred in January and June 2014.
section_title: Ex-Im’s Processes to Monitor Risk and Collect Claims Have Occasionally Detected Fraud
paragraphs: Ex-Im’s fraud detection process is a part of its overall monitoring of risk in  its loan guarantee portfolio and the steps it uses during its claims and  recovery process (see fig. 8).
Ex-Im officials stated that once a loan guarantee is active, they use the  following processes to monitor risk in Ex-Im’s portfolio and that these risk  monitoring processes sometimes help officials detect fraud.
Ex-Im’s CRC directly monitors loan guarantee transactions by  selecting and reviewing a random sample of loan guarantee  transactions for compliance with internal Ex-Im policies and  procedures and ensures that the transactions occurred as outlined in  the terms of the loans. According to Ex-Im officials, these reviews  occur after the guarantees have been approved by Ex-Im and the  funds have been disbursed by the lenders. Officials stated that these  reviews have the potential to uncover irregularities and indicators of  potential fraud—such as goods not being delivered or inappropriate  documentation—which would result in staff communicating their  concerns to Ex-Im’s GC or making a referral to the IG for further  investigation.
Ex-Im’s AMD monitors the credit and restructuring of medium- and  long-term loan guarantees by annually reviewing each loan guarantee  to determine if any changes in the risk rating are necessary. Officials  stated that this review can create an opportunity to detect potential  fraud. According to Ex-Im’s IG, which tracks the sources of referrals  it receives, AMD has referred 64 cases of potential fraud to the IG for  investigation since 2007.
subsections: section_title: Reporting Requirements for Lenders
paragraphs: Ex-Im also tracks the status and probability of repayment of the loans it  guarantees through lender reporting requirements, which Ex-Im officials  noted provide another mechanism for Ex-Im to possibly detect fraud.  Lender reporting requirements are outlined in the terms of a Master  Guarantee Agreement—a document signed by Ex-Im and the lender to  describe the responsibilities of each party. Specifically, lenders are  required to inform Ex-Im of “material changes” in a guaranteed loan,  meaning any changes a lender reasonably determines could materially  and adversely affect the borrower’s ability to repay its debt, and that can  stem from a poor business climate or potential fraud. For example, one  lender contacted Ex-Im officials when a random audit, which the lender  performed in 2006 as part of its own monitoring activities, found  suspicious invoices for the sale of over $1 million of heavy equipment.  Specifically, the lender found that an exporter provided false bills of  lading—including one on which the vessel listed had never traveled to the  port indicated. Also, the buyers listed on the false bills of lading claimed  they never placed orders for the equipment. According to IG officials, this  case was investigated by the IG, and in 2010, the owner of the export  company was convicted of mail fraud.
In addition, lenders indicated that they communicate with Ex-Im about  changes to a loan guarantee that did not constitute material changes but  represent causes for concern. For example, officials from one lender  informed Ex-Im when they learned that an equipment company appeared  to have a partial ownership in the exporter that the equipment company  used to ship its product—a situation that can facilitate collusion by  producing false shipping documents for products that were paid for  through an Ex-Im guaranteed loan but were never actually shipped.
section_title: Claims and Recovery Process
paragraphs: When a guaranteed loan defaults, the guaranteed lender or exporter will  typically file a claim with Ex-Im. As part of the claims process, Ex-Im’s  Claims and Recovery Group typically drafts and sends a “demand for  payment” letter to the delinquent borrower, and these letters sometimes  elicit suspicious responses that may indicate defaults because of fraud.  For instance, in response to a demand for payment letter, a borrower  disputed Ex-Im’s claim and provided documentation that it had made  timely payment to the lender through a wire transfer. Claims officials also  discovered that the exporter had submitted three other claims for  reimbursement to Ex-Im around the same time. Given the payment made  by the buyer, Ex-Im officials concluded it was likely that the exporter  submitted a fraudulent claim to Ex-Im and referred the exporter to Ex-Im’s  IG for further investigation, which was ongoing as of July 2014.
Ex-Im officials stated that the recovery process, in which Ex-Im  determines the best options for maximizing the amount the defaulted  party repays the lender, is the most common way that Ex-Im detects  fraud. Because the recovery process involves activities such as physical  reviews of the borrower’s assets and recovery officials going on-site to  meet with the parties involved with the transaction, Ex-Im officials said  that this process provides the most definitive opportunities to uncover  discrepancies that indicate fraud. For example, in one case Ex-Im’s  recovery officials determined that the exporter and buyer of a defaulted  loan guarantee were family members and business-related  documentation showed a likely relationship between the companies, such  as having the same address for the borrower and exporter on bills of  lading and websites.
section_title: Monitoring Trends and Patterns
paragraphs: Ex-Im officials stated that the Claims and Recovery Group observes  trends and patterns in claims that can aid Ex-Im in detecting fraud. For  example, Claims and Recovery staff may observe a concentration of  claims by certain buyers, exporters, or lenders or in certain geographic  areas and industries (e.g., farming equipment, energy projects, or  agricultural products such as seed). Officials described two instances in  which country-based fraud patterns were identified by their staff. In the  first instance, the staff reviewing claims realized that there was an  increase in claims from the Philippines. Officials noted that the pattern  was not immediately apparent because a number of different parties were  involved in the claims but they considered the increase in claims from a  single country to be a potential fraud indicator, and claims staff referred  these claims to Ex-Im’s GC for investigation. In another case, claims staff  noticed a spike in claims from a single lender for loans to buyers in a  single country. Further review by staff from CRC uncovered other  anomalies involving this lender. The reviews by both claims staff and  CRC led to uncovering a fraud scheme involving the lender’s staff in that  foreign country.
section_title: Role of Ex-Im General Counsel
paragraphs: According to Ex-Im officials, Ex-Im’s GC plays a role in fraud detection by  collecting additional information on fraud concerns reported to GC by Ex- Im staff and developing formal referrals to Ex-Im’s IG when additional  information indicates that such action is warranted.explained that if a preliminary assessment suggests that a crime may  have occurred, they will make a formal referral to the IG. If the concerns  do not rise to that level, GC will make an informal referral to share  information with the IG. According to the IG, since 2007, Ex-Im’s GC has  made 104 referrals for investigation to the IG of information that Ex-Im  employees believed indicated potential fraud.
section_title: When a Loan Guarantee Defaults and Fraud Is Suspected, Ex-Im Refers the Case for Investigation
paragraphs: If Ex-Im staff determined that fraud may be the underlying cause of a  default, Ex-Im can work with the IG to leverage the IG’s investigative  resources to pursue involved parties (see fig. 9). officials, determining whether a default occurred because of fraud can be  complex—there is no single formula for determining whether a  guaranteed loan defaulted because of fraud or for another reason, and  this determination can take time. IG officials stated that many of the  guaranteed loans that defaulted because of fraud may not be flagged until  6 months after a loan was disbursed, depending on the terms of the loan,  because some loans do not require an initial payment for 6 months or  longer. In addition, IG officials stated that sometimes parties that obtained  financing through fraudulent means that were not detected during the  underwriting process will actually make an initial payment or two in order  to seem more legitimate and put additional time and space between them  and a default and investigation. When a guaranteed loan defaults within 6  to 12 months between the first advance and first payment in the loan  term, Ex-Im officials said that they generally consider the default to be a  potential fraud situation because it is less likely that a loan would make it  through the underwriting process and be extended only to have its  business condition deteriorate so quickly that it would default early in the  life of the guaranteed loan.
The IG consists of both auditors, who review Ex-Im’s internal activities, and criminal  investigators and analysts, who follow up on allegations of waste, fraud, and abuse. As of  July 2014, the IG’s Office of Investigation was staffed with the Assistant Inspector General  for Investigations, the Deputy Assistant Inspector General for Investigations, two special  agents, an investigative analyst, and a financial analyst.
section_title: Conclusions
paragraphs: Ex-Im’s Manual for underwriting provided a framework for loan officers to  determine that only qualified applicants representing reasonable  assurance of repayment were provided loan guarantees. While loan  officers documented many key aspects of the underwriting process as  required by the Manual, the process could be enhanced if certain  procedures to be performed and sufficiently detailed instructions on how  certain procedures should be performed and documented were included  in the Manual. For example, the Manual did not include procedures for  verifying that loan guarantee transaction applicants were not delinquent  on federal debt, or for performing assessments of collateral for nonaircraft  medium- and long-term loan guarantee transactions. In addition,  mechanisms to oversee compliance with Ex-Im’s established procedures,  including those related to documenting the determination of export item  and country eligibility and documenting the analysis of country exposure,  did not exist. Furthermore, while Ex-Im implemented a risk-based  approach to delegated authority lender examinations, the approach was  not documented. Improvements in these areas could help enhance the  assessment of transaction participant eligibility and the reasonable  assurance of repayment and the oversight of lenders, as well as help  prevent fraud.
Ex-Im also has not documented its overall process for preventing,  detecting, and investigating fraud, including describing the roles and  responsibilities of the divisions and officials within Ex-Im and of key  participants in these processes. Doing so would aid in codifying  institutional knowledge of these processes and facilitate communication  about fraud for employees or lenders who may be new to Ex-Im. In  addition, documenting these processes may be particularly important for  Ex-Im because a number of divisions are involved in preventing,  detecting, and investigating fraud, including but not limited to its AMD,  Claims and Recovery Group, GC, and key participants such as Ex-Im’s  lenders. Documenting the current fraud process is a key step in  facilitating evaluations and testing the effectiveness of these processes.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Chairman of the Export-Import Bank of the  United States direct the appropriate officials to take the following six  actions:
Develop and implement procedures, prior to loan guarantee approval,  for (1) verifying that transaction applicants are not delinquent on  federal debt, including using credit reports to make such a  determination, and (2) performing assessments of collateral for  nonaircraft medium- and long-term loan guarantee transactions.
Establish mechanisms to oversee compliance with Ex-Im’s existing  procedures, prior to loan guarantee approval, for (1) obtaining credit  reports for transaction borrowers or documenting why they were not  applicable; (2) documenting certain eligibility procedures, including the  Character, Reputational, and Transaction Integrity reviews for  medium- and long-term loan guarantee transactions, export item  eligibility, and country eligibility; and (3) documenting the analysis of  country exposure.
Develop and implement detailed instructions, prior to loan guarantee  approval, for (1) preparing and including all required documents or  analyses in the loan file and (2) using credit reports in the risk  assessment and due diligence process.
Update the Character, Reputational, and Transaction Integrity review  process to include the search of databases to help identify transaction  applicants with delinquent federal debt that would then not be eligible  for loan guarantees.
Document Ex-Im’s current risk-based approach for scheduling  delegated authority lender examinations.
Document Ex-Im’s overall fraud process, including describing the  roles and responsibilities of Ex-Im divisions and officials that are key  participants in Ex-Im’s fraud processes.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Ex-Im for review and comment. In  written comments on a draft of this report, which are reprinted in appendix  II, Ex-Im concurred with our six recommendations. Ex-Im also provided  technical comments that we incorporated into the final report, as  appropriate.
In its written comments, Ex-Im described planned actions to address our  recommendations. For example, Ex-Im stated that it will develop and  implement procedures for verifying that transaction applicants are not  delinquent on federal debt. Ex-Im also stated that management is  reviewing its current Character, Reputational, and Transaction Integrity  process to assess the inclusion of the Do Not Pay List database.  Additionally, Ex-Im stated that it would update its Manual to include  current practices related to collateral assessments of nonaircraft medium-  and long-term loan guarantee transactions, as well as potential  enhancements. Further, Ex-Im stated that it will develop and implement  instructions for loan officers regarding the preparation and inclusion of all  required documents in a loan file and mechanisms to oversee compliance  with Ex-Im’s existing procedures prior to loan guarantee approval. Ex-Im  also stated that it would document its risk-based approach for scheduling  delegated authority lender examinations and its fraud process, including a  description of roles and responsibilities. If implemented effectively, Ex- Im’s planned actions should address the intent of our recommendations.
We are sending copies of this report to appropriate congressional  committees, the Chairman of the U.S. Export-Import Bank of the United  States, and the Ex-Im Inspector General. The report is also available at  no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Steve Lord at (202) 512-6722 or lords@gao.gov or Gary Engel at (202)  512-3406 or engelg@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page   of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine the extent to which the Export-Import  Bank of the United States (Ex-Im) (1) adequately designed and  implemented procedures to reasonably assure compliance with its  underwriting process requirements for loan guarantee transactions and  consistency with federal guidance and (2) adequately designed  procedures to prevent, detect, and investigate fraudulent applications for  loan guarantees.
To assess Ex-Im’s design of procedures related to underwriting loan  guarantee transactions, we reviewed relevant requirements and  guidance, including the Office of Management and Budget’s Circular No.  A-129, Policies for Federal Credit Programs and Non-Tax Receivables;  the Department of the Treasury Bureau of the Fiscal Service’s Managing  Federal Receivables: A Guide for Managing Loans and Administrative  Debt; GAO’s Standards for Internal Control in the Federal Government;  and the Bureau of Industry and Security’s “Know Your Customer” Lending  Guidance. We also examined Ex-Im’s charter, credit framework, content  policy, and other due diligence procedures. We compared the various  requirements and guidance to Ex-Im’s Loan, Guarantee and Insurance  Manual (Manual), which describes, among other things, Ex-Im’s  procedures for assessing loan guarantee applications and preparing loan  agreements. In addition, we reviewed Ex-Im’s Office of Inspector  General (IG) reports since 2009 related to underwriting issues, various  laws applicable to Ex-Im, and GAO reports related to Ex-Im. We also  discussed underwriting requirements and the due diligence process with  Ex-Im officials. For the implementation of the underwriting process, we  identified key procedures from Ex-Im’s Manual. We also reviewed Ex-Im’s  loan files used to document procedures performed during the  underwriting process and Ex-Im’s financial statements from 2011 through  2013 along with other reports summarizing loan guarantee amounts.
To select loan files to review, we obtained Ex-Im’s population of all  authorized loan guarantee transactions from October 1, 2011, to   March 31, 2013, which included data such as borrower, authorization  amount and date, lender name, and product type. The total loan  guarantee population contained 275 medium- and long-term loan  guarantees totaling $21.9 billion and 792 working capital loan guarantees  totaling $4.0 billion, which were authorized by Ex-Im from October 1,  2011, to March 31, 2013. To assess the reliability of data provided by Ex- Im, we analyzed information related to data elements and controls,  reviewed the data for obvious errors in accuracy and completeness,  compared data to published documents, and interviewed knowledgeable  Ex-Im officials about the data. We concluded that the data elements we  used were sufficiently reliable for purposes of selecting samples of loan  guarantee transactions to review and for describing Ex-Im’s loan  guarantee balances.
Because of the differences in the underwriting process between the  working capital loan guarantees and the medium- and long-term loan  guarantees, we divided the population into two groups. The medium- and  long-term guarantees were combined in one group while the working  capital loan guarantees were placed in another group. For each sample,  we made estimates for an attribute measure at the 95 percent level of  confidence. From the sample design, we were able to conclude that the  population error rate was less than 5 percent at the 95 percent level of  confidence when no control violations were discovered in the sample. The  final samples for the medium- and long-term transactions and the working  capital transactions were 54 and 58, respectively.
Because we followed a probability procedure based on random  selections, each of our samples is only one of a large number of samples  that we might have drawn. Since each sample could have provided  different estimates, we express our confidence in the precision of our  particular sample’s results as a 95 percent confidence interval (e.g., plus  or minus 7 percentage points). This is the interval that would contain the  actual population value for 95 percent of the samples we could have  drawn. Confidence intervals are provided along with each sample  estimate in the report. The results from our samples apply to the universe  of loan guarantees authorized from October 1, 2011, to March 31, 2013.
Based on our review of the Manual and the key procedures we identified,  we developed a data collection instrument for working capital loan  guarantee transactions and another data collection instrument for  medium- and long-term loan guarantee transactions, which we used to  test the two samples extracted from the loan guarantee population.
Working capital loan guarantees. We divided our working capital loan  guarantee data collection instrument into delegated authority and  nondelegated authority transactions. For each nondelegated authority  working capital loan guarantee transaction in our sample, we reviewed  the credit memo to determine if Ex-Im documented the following: credit  reports on individual guarantor(s) or Dunn and Bradstreet reports if the  guarantor was a business, analysis of contract and payment terms,  financial analysis, bank references, collateral, and additionality. We also  tested to see if exporter eligibility; Character, Reputational, and  Transaction Integrity reviews, which included due diligence for Iran  sanctions and other reputational risks; and appropriate signatures for  approval from Ex-Im management were documented. For delegated  authority working capital loan guarantees, we reviewed the selected  transactions for exporter credit reports to determine if Ex-Im addressed  any risks associated with the transaction participants and reviewed Dunn  and Bradstreet reports on the exporter. We tested to see if all required  information and approvals were contained in Ex-Im’s Application  Processing System, including documentation of the type of loan facility, a  product description, primary and secondary collateral, use of proceeds,  export markets, export value, loan amount, additionality, and any  environmental impacts. In addition, we tested to see if the loan amount on  our sample was equal to the loan amount reported in the Application  Processing System and that the transaction was properly classified as a  working capital transaction. We also tested to see if an Ex-Im program  management assistant completed and signed a delegated authority  checklist for the borrower that contained information such as the lender,  borrower, loan amount, type of facility, letters of credit, warranties, final  disbursement date, primary and secondary collateral, and term of the  loan. We also tested to see if an appropriate Ex-Im official signed the  delegated authority checklist. For each of the delegated authority working  capital loan guarantee transactions in our sample, we examined Ex-Im’s  available examination reports for the applicable delegated authority  lenders and tested to see if the approved loan guarantee transaction were  within delegated authority lender levels. We requested the three most  recent examinations conducted for the 18 lenders involved in the  delegated authority transactions from our sample (47 out of the 58 items  in our sample were done under delegated authority). For 12 lenders, we  received three reports; we received one report for 4 of the lenders and no  report for 2 of the lenders.
Medium- and long-term loan guarantees. The key procedures relate to  the following four underwriting activities:  (1) Application screening. For this activity, we evaluated the  documentation of the eligibility of loan guarantee participants and whether  the information contained in the loan guarantee transactions met  minimum eligibility criteria standards. We tested to see if the sample  items contained complete transactional party information, including  applicant, borrower, guarantor, buyer, lender, end user, exporter,  supplier, and guaranteed lender. We determined if the eligibility of the  export item was clearly stated or could be clearly assumed in the sample  documents. We also tested to see if additionality, country eligibility, and  any applicable State Department clearance were recorded. We tested to  see if Ex-Im’s Credit Review and Compliance Division documented the  Character, Reputational, and Transaction Integrity review process prior to  loan guarantee approval which included the full request, the participants  screened list, and the results of the Ex-Im library’s research and  determined if issues identified in this review were resolved by viewing the  board memo for each long-term loan guarantee transaction and the credit  memo for each medium-term loan guarantee transaction. For all board- approved transactions, we also tested to see if the Iran Sanctions  Certification was obtained. For all medium- and long-term loan  guarantee transactions, we tested to see if a credit report, a Dunn and  Bradstreet report, or both dated within 6 months of the application date,  were obtained and maintained or, if not, whether Ex-Im documented why  these reports were not applicable. Further, we tested to see if the loan  guarantee application contained an antilobbying statement and an  Environmental Screening Document.  (2) Risk assessment and due diligence. For this activity, we evaluated  the documentation related to financial risk factors and the commercial  viability of the loan guarantee transaction. We tested to see if the  engineering memo for long-term loan guarantee transactions and the  credit memo for medium-term loan guarantee transactions documented  the eligibility of costs and the value and eligibility of U.S. and foreign  content. For long-term loan guarantee transactions, we tested to see if  Ex-Im documented the environmental impact in the engineering report.  For medium-term loan guarantee transactions, we tested to see if the  Vice President of Ex-Im’s Engineering and Environment Division  conducted an environmental impact analysis. For long-term loan  guarantee transactions that were authorized after May 30, 2012, we  tested to see if a summary of economic impact analysis was included.
We also tested to see if Ex-Im documented its due diligence over certain  applicable risks and the mitigation of those risks. These risks included  country exposure and technical and environmental risk for long-term loan  guarantee transactions. In addition, we tested to see if Ex-Im performed  due diligence for sovereign risk, political risk, financial institution risk, and  nonfinancial institution risk factors for both medium- and long-term loan  guarantee transactions. We also reviewed credit and board memos to  determine if Ex-Im summarized risks included in credit reports and the  mitigating factors for those risks. We further reviewed loan files to  determine if the overall budget cost level for both medium- and long-term  loan guarantee transactions were documented. For aircraft transactions,  we tested to see if the credit and legal strength, weakness, and  uncertainties analyses were completed. For medium-term loan guarantee  transactions in excess of $1 million, we tested to see if the transaction  risk classification was assessed and documented in the loan file. We  tested the appendixes of the credit memo for long-term loan guarantee  transactions to see if the financial assessment, engineering report,  country risk assessment, risk rating summary, economic analysis, and  any special conditions were documented.  (3) Credit structure. For this activity, we evaluated the documentation of  the financing terms and conditions, including collateral to be  recommended for the loan guarantee transaction. For medium- and long- term loan guarantee transactions, we reviewed the loan file to determine  if Ex-Im documented the exposure fee calculator worksheet; the  repayment terms, to ensure that the terms did not exceed the useful life of  the collateral or scope of supply; the long-term action sheet; and the  medium-term decision memo. We tested to see if collateral for the loan  guarantee had been identified and assessed and to see if the loan  agreement included requirements for the borrower to maintain the  collateral, where applicable.  (4) Credit decision. For this activity, we evaluated the approved amount,  proper categorization of the loan guarantee, and the appropriate records  storage for the loan documentation. For long-term and aircraft loan  guarantee transactions, we tested to see if there was approval by an Ex- Im loan officer, an Ex-Im lawyer, and the Vice President of Trade Finance  on the credit memo. For medium-term loan guarantee transactions, we  tested to see if the credit memo was signed by the appropriate official.  For long-term loan guarantee transactions, we tested to see if approval  signatures on the board memo were documented. For all selected loan  guarantee transactions, we tested to see if the actual loan amount per Ex- Im’s Application Processing System was equal to the loan agreement and  equal to or less than the financed amount approved. We also tested to  see if the loan agreement was signed by all applicable parties and that  the transaction was approved by the appropriate authority level. In  addition, we tested to see if the loan was properly categorized as medium  or long term and that the loan documentation was kept in the appropriate  records storage location.
For any unresolved issues found on both the working capital and  medium- and long-term loan guarantee data collection instruments, we  followed up with Ex-Im officials to evaluate any additional supporting  documentation not originally included in the loan files. Additionally, we  interviewed Ex-Im loan officers, directors, and other officials to obtain  further perspective on the underwriting process of loan guarantee  transactions.
To evaluate whether Ex-Im adequately designed procedures to prevent,  detect, and investigate potential fraud in loan guarantee transactions, we  identified key procedures by reviewing Ex-Im’s established procedures  and interviewing officials from the Ex-Im IG. We also interviewed lenders  and Ex-Im officials to identify steps Ex-Im has taken to strengthen lender  fraud procedures. We evaluated the federal standards and, as  appropriate, industry standards and best practices for preventing,  detecting, and investigating fraud. We reviewed Ex-Im’s practices for  verifying that debarred lenders and borrowers have not been authorized  to receive loan guarantees. To assess Ex-Im’s implementation of  procedures to prevent fraudulent applications from being approved, we  reviewed the same sample of loan guarantee transactions described  above to determine whether Ex-Im effectively implemented its  procedures, such as reviewing and evaluating documentation and  implementing its Character, Reputational, and Transaction Integrity  check, to detect and prevent fraudulent applications from being approved  during the underwriting process. To identify and evaluate Ex-Im’s  processes for detecting potential fraud among active loan guarantee  transactions, we interviewed officials about current practices and  reviewed documentation of cases showing how Ex-Im detected potential  fraud under a variety of circumstances.
We conducted this performance audit from March 2013 to September  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for   our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Export- Import Bank of the United States
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Marcia Carlsen (Assistant  Director), Joah Iannotta (Assistant Director), Jeanette Brahame, Michael  Bird, Katy Crosby, Dennis Fauber, Natasha Guerra, Cole Haase, Debra  Hoffman, Dragan Matic, and Carroll Warfield Jr. made key contributions  to this report.