Enterprise Funds: Egypt and Tunisia Funds Are Established; Additional Steps Would Strengthen Compliance with USAID Grant Agreements and Other Requirements
Released: 2015-02-02T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: In the wake of the economic and political transitions associated with the “Arab Spring,” Congress authorized the creation of enterprise funds for Egypt and Tunisia in 2011. EAEF and TAEF aim to develop the private sectors in these countries, particularly SMEs, through instruments such as loans, equity investments, and technical assistance. USAID signed grant agreements with both Funds in 2013 and has thus far obligated $120 million to EAEF and $60 million to TAEF. In this report, GAO examines (1) the status of the Funds' investments, (2) the Funds' progress in establishing key management structures to support their missions and operations, and (3) the extent to which the Funds have complied with requirements in the grant agreements. To address these objectives, GAO reviewed USAID and Fund documents, such as EAEF and TAEF grant agreements, policies and procedures, and the Funds' boards of directors meeting minutes. GAO also interviewed USAID and Fund officials.

section_title: What GAO Found
paragraphs: The Egyptian-American Enterprise Fund (EAEF) has not yet made any investments in Egypt, and the Tunisian-American Enterprise Fund (TAEF) has made an over $2.4 million investment in Tunisia. EAEF has not made any investments in Egypt as its initial investment did not proceed as planned. EAEF's attempt to purchase a bank in Egypt that would lend money to small and medium-sized enterprises (SME) was rejected by the Egyptian Central Bank. EAEF is now considering other options, such as investments in the food and beverage sector. TAEF's investment strategy is to invest in four different areas: (1) a private equity fund investing in SMEs, (2) direct investments in SMEs smaller than those targeted by the private equity fund, (3) microfinance institutions, and (4) start-ups. In June 2014, TAEF made an over $2.4 million investment in a private equity fund that invests in and finances Tunisian SMEs.

EAEF and TAEF (the Funds) have made progress in establishing key management structures to support their mission and operations, with additional actions under way. In terms of administrative structures, both Funds have hired initial staff. Regarding their corporate governance, EAEF and TAEF both have boards of directors that have met regularly, adopted by-laws, and developed corporate policies and procedures. Both Funds plan to develop and implement additional management structures in the future, such as audits of their 2013 and 2014 financial statements.

While TAEF and EAEF have generally fulfilled the requirements of the grant agreements, GAO found three gaps in the Funds' implementation and one gap in the U.S. Agency for International Development's (USAID) implementation. First, the Funds have not yet submitted their performance monitoring plans as required by the grant agreements. Second, EAEF has not implemented the provisions in its grant agreement related to public communications, such as development of its own logo. Third, the Funds' corporate policies do not include procedures to implement vetting requirements designed to prevent illicit use of the funds, the presence of which was expected by USAID. USAID has also not tracked the Funds' use of cash in a way that allows the agency to monitor whether EAEF and TAEF are spending it in a timely manner. Collectively, these gaps in implementation pose challenges for USAID's oversight of the Funds.

section_title: What GAO Recommends
paragraphs: GAO recommends that USAID take steps to further enhance its oversight of the Funds' compliance with the grant agreements and other requirements by establishing a process to better manage cash advances to the Funds; ensuring that the Funds comply with the grant agreement requirements related to performance monitoring and public communications; and ensuring that the Funds' corporate policies include vetting requirements. USAID concurred with our recommendations.

section_title: Letter
paragraphs: In 2011, in response to the political and economic transitions in the  Middle East known as the Arab Spring, Congress authorized the  establishment of enterprise funds to develop the private sector in Egypt,  Jordan, and Tunisia. In 2013, the U.S. Agency for International  Development (USAID) signed grant agreements with the Egyptian- American Enterprise Fund (EAEF) and the Tunisian-American Enterprise   The purpose of the Funds is to promote the  Fund (TAEF) (the Funds).development of Egyptian and Tunisian private sectors through activities  such as investments in small and medium-sized enterprises (SME).  USAID has awarded $120 million for EAEF and $60 million for TAEF to  date. USAID grant agreements with EAEF and TAEF, as well as the  authorizing legislation, require the Funds to fulfill several requirements  related to financial management and public reporting, among other things.  Each Fund has an independent board of directors, led by a chairman.  USAID is responsible for monitoring the Funds’ activities.

Conferees of the fiscal year 2012 Consolidated Appropriations Act, Public  Law 112-74, requested that we examine the management and oversight  of the Funds. In this report, we examine (1) the status of EAEF’s and  TAEF’s investments, (2) EAEF’s and TAEF’s progress in establishing key  management structures to support their missions and operations, and (3)  the extent to which EAEF and TAEF have complied with the requirements  of the USAID grant agreements.

To examine the status of the Funds’ investments, we reviewed the Funds’  strategic planning documents and interviewed the EAEF and TAEF  Chairmen and senior management. To examine EAEF’s and TAEF’s  progress in establishing key management structures to support their  missions and operations, we reviewed Fund documents, such as their  statements of corporate policies and procedures (corporate policies),  reports to external parties, boards of directors meeting minutes, financial  and personnel information, and organizational charts. We used an  internal control evaluation tool developed in 2013 by the Committee of  Sponsoring Organizations of the Treadway Commission (COSO) as a  framework for obtaining and analyzing information on the Funds’ progress  in establishing key management structures. Although our analysis  included gaining an understanding of EAEF’s and TAEF’s actions related  to establishing internal control mechanisms, we did not evaluate the  implementation of internal control at the Funds. To assess the extent of  Fund compliance with certain grant agreement requirements, we  identified 22 requirements established by the agreements and then  determined the extent to which the Funds had met those requirements by  reviewing relevant documentation, such as the Funds’ corporate policies.

We conducted this performance audit from March 2014 to February 2015  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 a detailed  explanation of our objectives, scope, and methodology.
subsections: section_title: Background
subsections: section_title: Enterprise Funds: Definition and History
paragraphs: A U.S. government–funded enterprise fund is an organization that is  designed to promote the expansion of the private sector in developing  and transitioning countries by providing financing and technical  assistance to locally owned small and medium-sized enterprises. The  U.S. government provides initial capital to an enterprise fund through a  grant; the fund may then seek additional capital from the private sector to  invest alongside the enterprise fund. Enterprise funds are modeled on  investment management in the venture capital industry, in which venture  capital is invested primarily in small companies during early stages of  their development with the investors monitoring, advising, and following  up on operational results. It is expected that some investments will fail,  but successful ventures are intended to offset the losses over the long  term.

The U.S. government initially funded enterprise funds in the early 1990s  to promote the development of the private sector in Eastern and Central  European countries following the breakup of the former Soviet Union in  December 1991. USAID invested $1.2 billion to establish 10 enterprise  funds, covering 19 countries in Central and Eastern Europe and the  former Soviet Union. In September 2013, USAID issued a lessons- learned report that documented the successes and challenges faced by  the Eastern and Central European enterprise funds.concluded that while enterprise funds have demonstrated that they can  be a successful tool in achieving positive financial returns and  developmental objectives, results to date have been mixed, based upon  the economic and political environment in which they operate along with  the overall investment strategy and the specific investment decisions  made by each fund’s board and management team. The report also  stated that, in many cases, the enterprise funds in Europe and Eurasia  took up to 2 years before they were ready to make their first investments.

section_title: EAEF and TAEF: Establishment, Purpose, and Requirements
paragraphs: In early 2011, the events characterized as the Arab Spring renewed  interest in the potential use of the enterprise fund model in the Middle  East region as well as in other countries undergoing economic and  political transition. EAEF and TAEF were thus modeled after the  enterprise funds in Eastern and Central Europe. EAEF was incorporated  in October 2012 and funded in March 2013, when the grant agreement  between USAID and EAEF was signed. TAEF was incorporated in  February 2013 and funded in July 2013, when the grant agreement  between USAID and TAEF was signed.

The Funds’ authorizing legislation allows them to achieve their goals  through the use of loans, microloans, equity investments, insurance,  guarantees, grants, feasibility studies, technical assistance, training for  businesses receiving investment capital, and other measures. The Funds  have a dual mandate, or “double bottom line,” in that they are intended to  achieve a positive return on investment while also achieving a positive  development effect. The authority of the Funds to provide assistance  expires on December 31, 2025.

section_title: EAEF and TAEF: Organizational Structures
paragraphs: The Funds are established as nonprofit corporations that do not have  shareholders and do not distribute dividends. The authorizing legislation  states that each Fund shall have a board of directors that is composed of  six private U.S. citizens and three private host-country citizens. The  authorizing legislation further requires that board members have  international business careers and demonstrated expertise in  international and emerging markets investment activities. According to a  September 2013 lessons-learned report by USAID on past enterprise  funds, identifying and recruiting the most experienced individuals to serve  on the fund’s board of directors is the single most important element in  achieving the fund’s long-term development goals and financial  profitability.

U.S. board members serve on a volunteer basis, while the Egyptian and  Tunisian citizen board members are permitted to receive compensation  for their time and services. The Funds’ boards are responsible for establishing their own operating and investment policies and directing  their corporate affairs in accordance with applicable law and the grant  agreements.

section_title: EAEF Has Not Made Any Investments in Egypt While TAEF Has Invested $2.4 Million in Tunisia
subsections: section_title: EAEF Has Not Made Any Investments in Egypt as Its Initial Investment Did Not Proceed as Planned
paragraphs: EAEF has not made any investments in Egypt, as its first investment, to  purchase an Egyptian bank, did not come to fruition. EAEF’s investment  strategy had been to purchase a bank that would lend money to small  and medium-sized enterprises in Egypt. According to the EAEF  Chairman, EAEF envisioned that it would have a greater impact on the  Egyptian economy by making one large investment rather than a series of  smaller investments. In August 2013, EAEF made plans to purchase a  small bank in Egypt and subsequently conducted due diligence on the  bank by hiring a large U.S. accounting firm to review the bank’s financial  situation, among other things. In June 2014, the EAEF Board of Directors  approved a decision to acquire the bank. However, according to the  EAEF Chairman, the Egyptian Central Bank rejected EAEF’s application  to purchase the bank.

As of December 2014, EAEF was considering other investment options.  According to EAEF officials, the Fund is now conducting due diligence on  potential investments in the food and beverage, healthcare, and  consumer finance sectors. The Chairman stated that he anticipates  investing $60 million to $90 million in these three areas. Additionally, the  EAEF Chairman told us that EAEF plans to consider investments in firms  varying in size from SMEs to larger firms.

USAID has obligated $120 million to EAEF, of which approximately  $588,000 has been disbursed. Costs associated with performing the  due diligence review constituted the majority of EAEF’s expenditures  through 2014. Specific categories of EAEF’s expenditures include  professional (e.g., legal) fees and travel expenses. Thus far, EAEF has  spent less on administrative expenses than the approximately $3 million  estimated for the first year in its preliminary budget.

section_title: TAEF Has Made a $2.4 Million Investment in Tunisia
paragraphs: USAID has obligated $60 million to TAEF, of which TAEF has disbursed  approximately $1.6 million, for administrative expenses and  investments. TAEF plans to promote private sector development in  Tunisia by investing in (1) a private equity fund that supports SMEs, (2)  direct investments in SMEs smaller than those targeted by the private  equity fund, (3) microfinance institutions, and (4) start-ups. In 2013,  TAEF established a subsidiary company in Tunisia—the TAEF Advisory  Company—that directly oversees TAEF’s efforts in these four areas.

In June 2014, TAEF committed to its first investment of over $2.4 million  in a private equity fund that invests in SMEs in a variety of industries,  such as telecommunications, agribusiness, and renewable energy.

TAEF is one of several investors in the private equity fund; other investors  include foreign donors. According to the TAEF Chairman, aggregate  investments in the Fund from all sources total approximately $20 million.  TAEF officials told us that the Fund will have representation on the equity  fund’s advisory committee.

According to TAEF officials, the Fund has not yet made any investments  in the remaining areas of direct investments in SMEs smaller than those  targeted by the private equity fund, microfinance institutions, and start- ups. According to the TAEF Chairman, TAEF is in the process of  conducting due diligence on two microfinance entities. Thus far, TAEF  has spent less on administrative expenses than the approximately  $900,000 estimated for the first year in its preliminary budget.

section_title: EAEF and TAEF Have Established Key Management Structures, with Additional Actions Under Way
paragraphs: Since their inception, EAEF and TAEF have made progress in  establishing key administrative infrastructures necessary to support their  investment operations. The Committee of Sponsoring Organizations of  the Treadway Commission’s (COSO) 2013 internal control evaluation tool  establishes a framework for assessing management structures. As  shown in table 1, EAEF and TAEF have made progress in establishing  structures for administrative infrastructure, corporate governance, internal  control, and human capital management in line with key elements of the  COSO framework.
subsections: section_title: Administrative Infrastructures
paragraphs: Administrative infrastructure  Administrative infrastructure refers to the  basic systems and resources needed to set  up and support organizations’ operations— which also contribute to developing a culture  of accountability and control.

Since being funded in 2013, EAEF and TAEF have focused on  establishing essential administrative infrastructures. EAEF set up its  headquarters in New York City, New York. In July 2014, EAEF hired its  first employee to occupy the position of Chief of Staff and Director of  Policy Planning. According to the EAEF Chairman, EAEF plans to hire an  investment manager and a chief financial officer in the future.

TAEF has a U.S. office located in Washington, D.C., and a Tunisian office  located in Tunis, Tunisia, both of which are led by a managing director.  TAEF plans to hire two investment officers in the future. EAEF and TAEF  administrative expenses thus far have mostly consisted of professional  fees (e.g., expenses for legal and consulting services), travel expenses,  and so forth.

section_title: Corporate Governance
paragraphs: Corporate governance  Corporate governance can be viewed as the  formation and execution of collective policies  and oversight mechanisms to establish and  maintain a sustainable and accountable  organization while achieving its mission and  demonstrating stewardship over its resources.  Generally, an organization’s board of directors  has a key role in corporate governance  through its oversight of executive  management; corporate strategies; and risk  management, audit, and assurance  processes.

The Funds have established bylaws and other rules for corporate  governance. The bylaws cover the purpose of the Funds, voting rules,  and the duties and responsibilities of corporate officers. The boards of  both Funds have met regularly since their inceptions. In addition, the  Funds have established corporate policies and procedures, which USAID  has approved. In November 2014, the EAEF Board of Directors  established several committees, including an investment committee, a  governance and nominating committee, an external relations committee,  and an audit committee. EAEF and TAEF each have to fill two vacant  board member positions, one for a U.S. citizen and the other for a host  country citizen. EAEF and TAEF are currently considering potential  candidates to fill the vacant positions.

section_title: Internal Controls
paragraphs: EAEF and TAEF have established a variety of internal controls in the  areas of control environment, risk assessment, control activities,  information and communication, and monitoring, with additional actions  under way.

Internal control  Internal control provides reasonable  assurance that key management objectives— efficiency and effectiveness of operations,  reliability of financial reporting, and  compliance with applicable laws and  regulations—are being achieved. Areas of  internal control include control environment,  risk assessment, control activities, information  and communication, and monitoring.

Control environment. The Funds have established directives on  ethical business practices and detailed conflict-of-interest policies. In  addition, each Fund has a policy on disciplinary sanctions that states  that any violation of the Fund’s laws or ethical guidelines could subject  an individual to potential disciplinary sanctions, such as probation or  reduction in pay.

Risk assessment. EAEF conducted a due diligence review for its first  potential investment, the purchase of a bank. Among other things,  EAEF hired a large accounting firm to review a sample of the bank’s  loans. TAEF established due diligence procedures in which it  examined the governance, financial, operations, and legal status of its  first investment. Before funding its first investment, TAEF carried out  its due diligence procedures and determined that there were no  significant issues (e.g., financial or legal issues) that would impede  TAEF from making the investment. The meeting minutes of the board  investment committee indicate that the board discussed the results of  the due diligence assessment, including the extent of risk involved,  and that the board unanimously approved the fund’s first investment.

Control activities. EAEF and TAEF have established several financial  and cash management–related controls, including the following:

Financial statements will be prepared on a quarterly basis and  sent to the audit committees of the board of directors to review the  performance of the Funds on a timely basis.

Each Fund will, to the extent practicable, prepare an annual  budget detailing its estimated operational requirements. The  budget will be approved by the president and audit committee of  the board of directors before the beginning of the Fund’s fiscal  year (January 1).financial reports that compare the actual results to the budgeted  amounts.

Quarterly, the board of directors will receive

Expenses in excess of a certain amount must be approved in  advance by the Chairman of the Board or the President (or their  designees) and one other Director.

All available periodic financial statements and (if prepared) audits  for all entities in which the Fund has invested shall also be  maintained for audit review and project monitoring.

Information and communication. EAEF and TAEF corporate policies  state that each Fund will maintain an investment database that lists all  of its investments and will include information such as company  name, amount of investment, and industry. The Funds have met with  several external organizations to discuss their mission and activities,  including U.S. government agencies, foreign governments,  international organizations, and host country businesses.

Monitoring. EAEF and TAEF have reported to external parties,  including Congress, USAID, and the public, on their use of resources,  with additional accountability actions under way. For example, both  Funds submitted reports to Congress that detailed their administrative  expenses for 2013, and both Funds have submitted quarterly financial  reports to USAID for its review. With regard to performance planning  and reporting, EAEF officials said that the Fund is in the process of  developing its required performance monitoring plan. In November  2014, TAEF developed a solicitation for firms based in Tunisia to  develop its performance monitoring plan. In terms of audits, the Funds  are responsible for appointing independent certified or licensed public  accountants, approved by USAID, to complete annual audits of the  Fund’s financial statements. According to the grant agreements, the  audits will be conducted within the scope of U.S. generally accepted  auditing standards. According to USAID officials, the Funds plan to  have their 2013 and 2014 financial statements audited.

section_title: Human Capital Management
paragraphs: Human capital management  Cornerstones of human capital management  include leadership; acquiring, developing, and  retaining talent; and building a results- oriented culture.

The Funds are meeting their initial human capital needs through hiring of  a limited number of personnel to occupy key positions, such as a  managing director. According to the EAEF and TAEF Chairmen, they  envision their organizations as having a small number of personnel.  Accordingly, both Funds have recruited a limited number of employees to  support their administrative operations and initial investment planning.  Specifically, EAEF has hired one employee as its Chief of Staff and  Director of Policy Planning. TAEF has hired three employees to include a  Managing Director based in Washington, D.C.; a Chief Operating Officer  and Managing Director based in Tunis, Tunisia; and an Executive  Assistant based in Tunis. The Funds took steps to recruit and hire their  initial staff, such as by interviewing potential candidates and reviewing  their resumes. The Funds have generally outsourced their accounting and  legal functions. Both Funds have created job descriptions for their  employees.

To build a results-oriented culture, the Funds have established guidelines  for providing compensation to their employees. For example, contingent  upon USAID approval of a compensation framework, the Funds may  enter into bonus or incentive compensation arrangements with their  employees. The EAEF and TAEF grant agreements state that the salaries  and other compensation of any of the directors, officers, and employees  of the Funds shall be set at reasonable levels consistent with the  nonprofit and public interest nature of the Funds. EAEF hired companies  to do an executive compensation study and to administer its human  capital policies, including terms of recruitment, hiring, and employee  benefits.

section_title: EAEF and TAEF Have Generally Met Grant Agreement Requirements but Some Gaps Remain
paragraphs: While the Funds have generally met their obligations under the grant  agreements, neither Fund has submitted the performance monitoring  plans required under the grant agreements. USAID has also not tracked  the Funds’ use of cash in a way that allows the agency to monitor  whether EAEF and TAEF are spending it in a timely manner. Further,  EAEF has not implemented those provisions under the grant agreement  related to marking and public communications. Last, the Funds’  corporate policies do not include key vetting procedures to prevent the  illicit use of funds, the presence of which was expected by USAID.
subsections: section_title: EAEF and TAEF Have Generally Met the Requirements in the Grant Agreements
paragraphs: EAEF and TAEF have to date generally complied with the requirements in  the grant agreements. The grant agreements contain 22 discrete  requirements with which each of the Funds must comply, such as  submission of quarterly financial reports to USAID and annual reports to  Congress on administrative expenses. As of December 2014, TAEF had  fully complied with 21 of the 22 requirements, and EAEF had fully  complied with 17 of the 22, as shown in table 2.submitted the required annual reports on administrative expenses.  Additionally, both Funds submitted the required quarterly financial  statements.

section_title: EAEF and TAEF Have Not Submitted Performance Monitoring Plans Required by the Grants
paragraphs: EAEF and TAEF have not yet submitted performance monitoring plans as  required by the grant agreements. Specifically, the grant agreements  require the Funds to develop performance monitoring plans in  consultation with USAID within 120 days after the grant agreement enters  into force. However, as of February 2015, EAEF and TAEF performance  monitoring plans were approximately 19 months and 15 months overdue,  respectively.

The performance monitoring plans are intended to allow external  stakeholders and, for the purposes of oversight, USAID to monitor the  Funds’ progress toward meeting their goals. The grant agreements also  require that the performance monitoring plans include performance  indicators, which must include return on investment for U.S. capital  invested in Egypt and Tunisia through the Funds and the number of  SMEs in Egypt and Tunisia benefitting from Fund activities. USAID and  the Funds are to review the performance monitoring plans and associated  indicators during the semiannual meetings with USAID to assess  progress. Without performance monitoring plans, USAID and other  stakeholders cannot assess progress toward agreed-upon goals and  indicators during the semiannual reviews.

USAID referred the Funds to monitoring and evaluation experts to assist  the Funds in developing their performance monitoring plans, according to  USAID officials. The EAEF and TAEF Chairmen told us that it would have  been premature to submit a performance monitoring plan before finalizing  investment strategies. TAEF and EAEF officials told us that they are  currently seeking contractors to develop and implement performance  monitoring plans. In November 2014, TAEF issued a scope of work that  envisioned a performance monitoring plan being presented to USAID 60  days after the Fund had selected and engaged a contractor. According to  EAEF officials, EAEF plans to submit a performance monitoring plan to  USAID in early 2015.

section_title: USAID’s Financial Management Office Has Not Been Tracking Funds’ Cash Management Practices
paragraphs: USAID’s grant agreements with EAEF and TAEF state that they may  request funds for anticipated expenditures for up to a 90-day period from  the date of the request. In addition, USAID guidance on advance  payments states that, generally, advance payments or any portion of an  advance payment not liquidated within 150 days is considered  delinquent.documented rationale from the agreement officer and approved by  USAID’s financial management office. EAEF and TAEF have not  liquidated some of their advances within 150 days of payment, and the  advances were therefore delinquent. After we shared our preliminary  findings with USAID, program officials sought and obtained the necessary  approvals. As of November 2014, EAEF had an outstanding balance of   Any exception to this general rule must be supported by a  approximately $247,000, and TAEF had an outstanding advance balance  of approximately $477,000. The Funds reported their liquidation of their  advance payments through quarterly financial reports that are sent only to  the USAID program representative. However, USAID’s financial  management office is responsible for monitoring whether the Funds’  advances are outstanding. Because USAID’s financial management office  was not receiving the quarterly financial reports, it was unable to ensure  that the Funds were not maintaining USAID funds in excess of their  immediate disbursement needs. In commenting on a draft of this report,  USAID stated that although not strictly required by agency policy, the  program representative is now sharing all quarterly financial information  with the financial management office to facilitate oversight.

section_title: EAEF Has Not Implemented Provisions Related to Marking and Public Communications
paragraphs: EAEF has not implemented the provisions in its grant agreement related  to marking and public communications. Those provisions require the  Fund to develop a logo in addition to using the USAID logo, to  acknowledge USAID’s role in the provision of foreign assistance, and to  use a general disclaimer in those instances where it is unable to obtain  USAID’s approval in advance of a public communication. We have  reported in the past that marking can raise awareness about the source of  assistance with individuals who come into contact with the assistance  sites or materials. According to USAID and EAEF officials, the two  organizations are working together to see that the Fund implements these  provisions.

section_title: EAEF and TAEF Corporate Policies Do Not Include Key Vetting Procedures to Prevent Illicit Use of Funds
paragraphs: The grant agreements aim to prevent the contribution of U.S. funds (1) to  certain individuals (e.g., individuals and organizations associated with  terrorism) by conducting appropriate vetting, (2) for certain purposes  (e.g., funds may not be used toward the purchase of gambling  equipment), (3) to political organizations not committed to democracy,  and (4) to the military of another government.direct organizations to establish control activities such as policies and  procedures that enforce management directives and help ensure that   Internal control standards  actions are taken to address risks. We found that the Funds have  accounted in their corporate policies for three out of the four prohibitions  related to preventing the contribution of EAEF or TAEF funds to illicit  transactions or purposes. While USAID grant agreements with the funds  establish procedures designed to prevent transactions with individuals  and organizations associated with terrorism, and the Chairmen of both  Funds have committed to mitigate any risk of illicit use of U.S. funds,  neither Funds’ corporate policies contain specific vetting provisions.  Specifically, they lack provisions related to vetting potential investees and  the requirement that any investee planning to lend U.S. funds in excess of  $25,000 onward to another business or invest in another entity certify to  the Funds that it will conduct certain due diligence activities to prevent  their illicit use. While USAID approved the Funds’ corporate policies,  USAID officials subsequently indicated that they expected this prohibition  related to vetting potential investees and onward lending to be included in  the Funds’ corporate policies.

Since the Funds have made only one investment to date—TAEF’s $2.4  million investment—there has been only one instance where vetting was  necessary. In commenting on a draft of this report, the TAEF Chairman  emphasized that the Fund carried out all required due diligence with  respect to vetting and assured itself of the appropriateness of the  investee’s procedures. For example, TAEF provided us with  documentation of TAEF’s efforts to screen the investee’s primary officials  against the required vetting lists as well as the investee’s policy for  verifying the credentials of individuals and firms. In addition, in November  2014, TAEF signed a side letter with the investee in which the investee  agreed to screen all future recipients against lists of proscribed parties.

section_title: Conclusions
paragraphs: Since their inception in 2013, EAEF and TAEF have been awarded $180  million by USAID and have made progress in establishing their  administrative infrastructures, internal controls, corporate governance  mechanisms, and investment strategies. To date, the Funds have  disbursed approximately $2 million of the $180 million awarded to them  and thus have a significant amount of U.S. funding available for future  investments. The Funds have generally complied with the requirements in  their grant agreements with USAID. For example, the Funds have  submitted required financial reports to USAID and Congress. In addition,  USAID and the Funds continue to take steps to improve oversight and  compliance with the grant agreements. However, they have not yet  completed actions to further strengthen oversight and compliance in  several areas. In the area of cash management, USAID is exploring ways  to ensure that it has all necessary financial information from the Funds,  but it has not yet ensured that the Funds liquidate cash advances in a  timely manner. In addition, while both Funds are hiring contractors to  develop performance monitoring plans—for which both Funds required an  extension of the original submission deadline—neither Fund has  completed its performance monitoring plan. Further, EAEF has not yet  complied with the provisions in the grant agreement related to public  communications, such as those requiring EAEF to acknowledge the U.S.  government’s financial contribution. While both Funds have demonstrated  their commitment to ensuring that U.S. funds are not used for prohibited  purposes, neither Fund has incorporated vetting requirements for  individuals and organizations into its corporate policies. Taking steps to  address these remaining items would strengthen USAID oversight and  the Funds’ compliance with the grant agreements, which will be  particularly important as the Funds’ investments grow in number and size.

section_title: Recommendations for Executive Action
paragraphs: To further enhance USAID’s oversight of the Funds and to ensure the  Funds fully implement the grant agreements, we recommend that the  Administrator of USAID take the following four steps:  1.  establish a process to better manage cash advances to the Funds,  2.  make certain that the Funds comply with grant agreement  requirements related to performance monitoring,  3.  ensure that the Funds comply with grant agreement requirements  related to public communications, and  4.  ensure that the Funds’ corporate policies reflect grant agreement  provisions regarding vetting requirements designed to prevent  transactions with prohibited individuals and organizations.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USAID, the Department of State  (State), EAEF, and TAEF for review and comment. USAID and TAEF  provided written comments, which we have reprinted in appendixes II and  III, respectively. State provided technical comments, which we  incorporated as appropriate. In its written comments, reprinted in  appendix II, USAID concurred with our four recommendations and  indicated the steps it was taking to implement each of them. Specifically,  regarding our recommendation to establish a process to better manage  cash advances, USAID stated that going forward the program  representative would share Fund quarterly financial reports with the office  of the Chief Financial Officer. In response to our recommendation  pertaining to performance monitoring, USAID stated that it would work  with each Fund to meet a revised deadline of the first quarter of 2015 to  submit a completed performance monitoring plan. With regard to our  recommendation pertaining to public communications, EAEF confirmed to  USAID that it would meet all related requirements going forward,  including proposing a logo in the first quarter of 2015. Lastly, the  Chairmen of both Funds confirmed to USAID that they would propose  amendments to their corporate policies to include the vetting procedures  to their respective Boards.

In its written comments, reprinted in appendix III, TAEF agreed with our  findings and provided some additional information. For example, TAEF  stated that the delay it requested to implement its performance monitoring  plan would result in more timely and better program evaluation going  forward.

We are sending copies of this report to the appropriate congressional  committees, State, USAID, and EAEF and TAEF.  In addition, the report  is 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  David Gootnick at (202) 512-3149 or GootnickD@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 members who made key  contributions to this report are listed in appendix IV.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Conferees for the bill that would become the Consolidated Appropriations  Act, 2012 (Pub.L. No. 112-74) requested that we examine the  management and oversight of the Egyptian-American Enterprise Fund  (EAEF) and the Tunisian-American Enterprise Fund (TAEF) (the Funds)  to determine if appropriate and sufficient safeguards exist against  financial misconduct. In this report, we examined (1) the status of  EAEF’s and TAEF’s investments, (2) EAEF’s and TAEF’s progress in  establishing key management structures to support their missions and  operations, and (3) the extent to which EAEF and TAEF have complied  with certain requirements of the USAID grant agreements.

To assess the extent to which the Funds have made investments, we  reviewed the Funds’ strategic planning documents and their due diligence  reports. We obtained budget data from the U.S. Agency for International  Development (USAID) on its obligations and disbursements to the Funds  from fiscal years 2013 to 2014. We conducted an assessment of the  reliability of the data by reviewing USAID’s responses to a set of data  reliability questions and by interviewing USAID budget officials. We found  the data to be sufficiently reliable for our purposes. In addition, we  interviewed the Chairmen and senior management of EAEF and TAEF to  discuss their investment strategies, plans, and investment efforts thus far.

To examine what progress the Funds have made in establishing key  management structures, we reviewed EAEF and TAEF documents,  including the Funds’ statements of corporate policies and procedures,  bylaws, employee job descriptions, organization charts, financial and  annual reports, and board of director meeting minutes. We used the  Committee of Sponsoring Organizations of the Treadway Commission’s  (COSO) Internal Control – 2013 Integrated Framework evaluation tool as  a framework for gathering information on the Funds’ management  structures and assessing the extent to which they had established such   Although our analysis included gaining an understanding of  structures.EAEF’s and TAEF’s actions related to establishing internal control  mechanisms, we did not evaluate the implementation of internal control at  the Funds. We also interviewed EAEF and TAEF Chairmen and senior  management to obtain information on the management structures the  Funds had already established or planned to establish.

To assess the extent of Fund compliance with certain grant agreement  requirements, we used the EAEF and TAEF grant agreements as our  primary criteria for identifying the requirements to which the Funds are  subject. We identified 22 requirements that the Funds are subject to and  then determined whether the Funds had met these requirements by  collecting relevant USAID and Fund documentation, such as the Funds’  reports to Congress on administrative expenses. We also reviewed the  Funds’ statement of corporate policies and procedures and  documentation related to the Funds’ efforts to develop performance  monitoring plans. In addition, we interviewed the EAEF and TAEF  Chairmen and senior management about their efforts to comply with the  terms and conditions of the grant agreements as well as USAID officials  regarding their efforts to oversee the Funds’ compliance with the grant  agreements. We also examined the process that USAID used to develop  the EAEF and TAEF grant agreements, which entailed reviewing its  agency policies, procedures for deviating from those policies, and the  grant agreements themselves.

We conducted this performance audit from March 2014 to February 2015  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 USAID

section_title: Appendix III: Comments from TAEF

section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jason Bair (Assistant Director),  R. Gifford Howland (Analyst-in-Charge), Debbie Chung, Emily Gupta, and  Jeffrey Isaacs made key contributions to this report. Mark Dowling, Etana  Finkler, Paul Kinney, and Steven Putansu provided additional support.


Question-summary annotations: questions: question: How do the investments made by EAEF and TAEF differ from each other?
answer: The Egyptian-American Enterprise Fund (EAEF) has not yet made any investments in Egypt, and the Tunisian-American Enterprise Fund (TAEF) has made an over $2.4 million investment in Tunisia.
child_questions: question: Why did these differences occur?
answer: EAEF has not made any investments in Egypt as its initial investment did not proceed as planned. EAEF's attempt to purchase a bank in Egypt that would lend money to small and medium-sized enterprises (SME) was rejected by the Egyptian Central Bank.
child_questions: question: What is EAEF considering doing to remedy this issue?
answer: EAEF is now considering other options, such as investments in the food and beverage sector.

question: How does TAEF plan to invest?
answer: TAEF's investment strategy is to invest in four different areas: (1) a private equity fund investing in SMEs, (2) direct investments in SMEs smaller than those targeted by the private equity fund, (3) microfinance institutions, and (4) start-ups.

questions: question: EAEF and TAEF have made progress in doing what?
answer: EAEF and TAEF (the Funds) have made progress in establishing key management structures to support their mission and operations, with additional actions under way.
child_questions: question: What step have the Funds already taken regarding administration?
answer: In terms of administrative structures, both Funds have hired initial staff.

question: What steps have the Funds already taken regarding corporate?
answer: Regarding their corporate governance, EAEF and TAEF both have boards of directors that have met regularly, adopted by-laws, and developed corporate policies and procedures.

question: What have the Funds planned for future development?
answer: Both Funds plan to develop and implement additional management structures in the future, such as audits of their 2013 and 2014 financial statements.

questions: question: What concerns did GAO have regarding the Funds’ implementation?
answer: While TAEF and EAEF have generally fulfilled the requirements of the grant agreements, GAO found three gaps in the Funds' implementation and one gap in the U.S. Agency for International Development's (USAID) implementation.
child_questions: question: What were these gaps?
answer: First, the Funds have not yet submitted their performance monitoring plans as required by the grant agreements. Second, EAEF has not implemented the provisions in its grant agreement related to public communications, such as development of its own logo. Third, the Funds' corporate policies do not include procedures to implement vetting requirements designed to prevent illicit use of the funds, the presence of which was expected by USAID.
child_questions: question: Why can't USAID monitor possible illicit use of funds?
answer: USAID has also not tracked the Funds' use of cash in a way that allows the agency to monitor whether EAEF and TAEF are spending it in a timely manner.

question: Why must these gaps be fixed?
answer: Collectively, these gaps in implementation pose challenges for USAID's oversight of the Funds.

questions: question: How do such enterprise funds seek to develop the private sectors?
answer: EAEF and TAEF aim to develop the private sectors in these countries, particularly SMEs, through instruments such as loans, equity investments, and technical assistance.
child_questions: question: Why were these funds created?
answer: In the wake of the economic and political transitions associated with the “Arab Spring,” Congress authorized the creation of enterprise funds for Egypt and Tunisia in 2011.

question: What does GAO examine in its report?
answer: In this report, GAO examines (1) the status of the Funds' investments, (2) the Funds' progress in establishing key management structures to support their missions and operations, and (3) the extent to which the Funds have complied with requirements in the grant agreements.
child_questions: question: How does GAO plan to address these objectives?
answer: To address these objectives, GAO reviewed USAID and Fund documents, such as EAEF and TAEF grant agreements, policies and procedures, and the Funds' boards of directors meeting minutes. GAO also interviewed USAID and Fund officials.