Pursuant to Public Law 95-452, the Office of Inspector General (OIG) is required to prepare a Semiannual Report of its activities for the Congress of the United States. This Semiannual Report, transmitted to the Congress by the Administrator of the Small Business Administration (SBA), covers the full range of OIG activities from October 1, 1995, to March 31, 1996.
Over the reporting period, the OIG closed 56 investigative cases and obtained 36 indictments and 25 convictions. The office also issued 12 audit reports, completed 1 inspection report, and identified $54 million in potential recoveries and fines, management avoidances due to investigative activities, disallowed costs agreed to by management, and recommendations that funds be put to better use. These OIG accomplishments enabled the Agency to make more funds available to qualified small businessmen and businesswomen who are eligible for SBA financial assistance.
SBA's loan portfolio continues to grow at a remarkable pace and is currently projected to reach $42 billion by the end of FY 1997. Unless the Congress acts to correct the OIG's current resource deficiencies, its ability to provide sufficient oversight of this growth will continue to be severely constrained. For example, the OIG's current inventory of SBA cases referred to other law enforcement agencies stands at 122 and involves $22 million in Government funds at risk. The rate of subsequent indictments and convictions in these referred cases is, however, only 10% of the rate achieved in OIG-managed cases. When juxtaposed with the OIG's investigative performance, the efficiency and effectiveness of the referral process clearly pales in comparison. In short, the OIG is not receiving an optimal measure of deterrence from these referrals, nor is the Government realizing as much revenue, in terms of fines and recoveries, as it could.
Whether the customer is the Congress, the SBA Administrator, Agency program personnel, or the American taxpayer, the OIG is not able to be as responsive as it should be. While the office's investigative inventory carries 328 active cases, which translates into some 1,298 subjects under investigation and represents about $355 million of Government funds at risk, large areas of the country are not being covered at all, or inadequately at best, because of the limited numbers of OIG investigative and audit personnel available to the Inspector General. Similarly, the shortage of both audit and inspection personnel in the Nation's capital means that many of the performance audits and inspections being requested by senior program managers must also go unaddressed.
Specifically, what is not being done? Where are the significant gaps in coverage? In my professional judgment, the OIG should be providing the SBA Administrator and the Congress with periodic assessments of how efficiently the Agency's field offices are being managed and how effectively their programs are meeting the needs of the small business communities they serve. Unfortunately, such labor-intensive reviews are not being done. Second, the OIG should be monitoring the SBA's administrative-support functions to ensure the integrity of the Agency's financial activities and the effectiveness of its general support to both its central office and field operations. Again, little or no oversight of the SBA's information systems, procurement and contract management activities, or other critical management functions has been done. The OIG should also be providing at least a modicum of oversight to a number of other SBA programs, i.e., business initiatives, technology, international trade, veterans and Native American affairs, women's business ownership, etc.; however, due to their relatively limited funding exposure, these programs have largely escaped OIG scrutiny. Finally, from an investigative perspective, OIG investigators continue to be concerned about their limited or lack of presence in New England, the Northwest, and the Southwest areas of the country and, like their audit and inspection colleagues, they are troubled by their inability to provide adequate coverage of the full range of SBA programs. Equally important, because of the time expended reacting to events, there is little time left for the investigators to provide a sufficient number of integrity and fraud awareness briefings to either the SBA's employees or its resource partners. Given its limited resources, the OIG has no alternative but to establish its priorities carefully for those oversight requests it can honor and the types of cases it will pursue. This means that the SBA's business loan and disaster assistance programs, because of their large dollar volume, and its minority enterprise development [8(a)] activities, due to public interest, will continue to receive the lion's share of the OIG's attention. Unfortunately, the balance of the Agency's programs will continue to receive little or no independent oversight from the OIG. Finally, on a more positive note, cooperation received from SBA's policy officials, senior executives, program managers, and employees during the conduct of OIG audits, inspections, and investigations has been excellent. The OIG's working hypothesis has proven itself once again: the more OIG employees work with program managers to improve the performance of the Agency during these times of downsizing and fiscal constraint, the more quickly the SBA will achieve its goal of becoming an efficient and effective agency in support of the Nation's small business community. Allowing for resource constraints, I trust the results reflected in this Semiannual Report to the Congress offer strong evidence that the OIG is meeting its responsibilities to the best of its ability.
James F. Hoobler
Inspector General
This report on the activities of the Office of Inspector General (OIG) of the Small Business Administration (SBA) is submitted pursuant to Section 5(b) of P.L. 95-452, the Inspector General Act of 1978, as amended. It summarizes OIG activities for the 6-month period from October 1, 1995, to March 31, 1996.
OIG audits, inspections, and investigations during this 6-month period achieved $54,326,049 in potential dollar results, 36 indictments, and 25 convictions. The dollar results consist of (1) $18,425,315 in potential recoveries, including judicially-awarded fines and restitution; (2) $27,207,418 in management avoidances; (3) $1,120,894 in disallowed costs agreed to by SBA's management; (4) $6,472,422 in management commitments to use funds more efficiently; and (5) a one-time settlement of $1,100,000 based on an OIG quality review of a CPA's report.
As noted in previous Semiannual Reports, the OIG alone could not have achieved the accomplishments set forth in this report to the Congress. The results for this period reflect the cooperation and support of other Federal audit, inspection, and investigative organizations such as the Federal Bureau of Investigation (FBI); U.S. Secret Service; Bureau of Alcohol, Tobacco and Firearms (BATF); Postal Inspection Service; Internal Revenue Service (IRS); Office of the Comptroller of the Currency; Air Force Office of Special Investigations; Federal Protective Service; other Federal OIGs; Department of Justice (DOJ) prosecutors; and, most importantly, the actions of SBA program managers and employees. Indeed, much of our success is due to referrals made by conscientious Agency employees.
For the balance of FY 1996, the OIG will continue to focus its attention on SBA's two largest programs--Business Loans and Disaster Assistance. Their respective growth, as discussed extensively in the text of this report, has been tremendous over the last few years. While the number of dollars at risk in these two programs continues to grow, both the Agency and the OIG face a reduction in resources for management and oversight activities, respectively. Both the Congress and the Office of Management and Budget (OMB) demonstrated their concern over the Disaster Assistance program in 1994, when they made $3 million available to the OIG for the purpose of disaster-related oversight. The OIG subsequently developed a strategy to guide disaster-related oversight activity and to make optimal use of these funds. Increased temporary staffing, located near disaster sites, now provides needed personnel to meet the oversight goals of the OIG's disaster plan. Planning is already underway to devise a strategy for continuing disaster-related oversight when the temporary funding runs out in mid-1997.
The OIG continues to build greater awareness of its mission with SBA employees, the Agency's customers, and its resource partners. The OIG's information dissemination activities have had a significant deterrent effect on fraud, while raising SBA program managers' interest in management improvement. The office continues to pursue this dual goal through attendance at SBA-sponsored events, the development and use of educational presentations, more creative use of key OIG reports and activities, and staff involvement in other initiatives designed to make the OIG more visible within the Agency and its client groups. One such example is the OIG's use of IGNet, an Internet-based forum for the inspector general community. Summaries of audit and inspection reports are being made available to the general public on IGNet, which is coordinated for the inspector general community by the SBA/OIG. These are relatively economical methods of reporting our work and they are having a substantial impact on the accomplishment of our mission and goals. The OIG is also becoming progressively more visible to SBA's resource partners through the appearance of the Inspector General and other key OIG officials before the National Association of Guaranteed Government Lenders (NAGGL), the Intergovernmental Audit Forum, and other professional and trade organizations.
Deputy Inspector General (DIG) Testifies Concerning Loan Packager Problems. The DIG testified before the Subcommittee on Government Programs of the Committee on Small Business of the United States House of Representatives on October 12, 1995. She discussed loan packager problems identified by the OIG and offered recommendations for alleviating certain recurring problems. She also discussed lender service providers and OIG efforts to detect and deter fraud generally in the business loan and disaster assistance loan programs.
DIG Testifies Concerning Problems in the Minority Enterprise Development Program. The DIG also testified before the House Committee on Small Business on December 13, 1995. She identified systemic weaknesses in the Section 8(a) program, offered proposed solutions, and enumerated the steps taken by program managers to address the issues identified.
OIG Assists SBA Streamlining Initiative. The OIG played an active role in the Agency's initiative to update, streamline, and rewrite its regulations in "plain English." This effort was a part of the administration's Government-wide regulation simplification and streamlining effort. In addition to redrafting those portions of the Agency's regulations that pertain to OIG activities, the OIG reviewed 39 drafts of regulatory revisions at various stages of the process and offered extensive comments. Details of specific recommendations are reported in the program area chapters. The OIG will play an equally active role in the Agency's planned updating of all its Standard Operating Procedures during the balance of FY 1996.
Review of CPA Firm's Practices Yields Substantial Monetary Settlement. A certified public accounting (CPA) firm paid SBA $1.1 million to settle a dispute over the quality of the firm's audits of a Small Business Investment Company (SBIC) which failed. After an OIG quality review of the responsible CPA's audit working papers, SBA's General Counsel and the Department of Justice negotiated the settlement agreement with the CPA firm.
Potential Bank Fraud Case Uncovered by Audit. A Section 7(a) lender agreed to pay SBA $1.56 million to resolve allegations of fraud in the origination of a guaranteed loan. The issue was identified in an OIG audit and was investigated by the OIG's Investigations Division before being referred to the Justice Department.
Audits Find Pattern of Eligibility Problems in Section 8(a) Program. The Auditing Division continued to find problems with the eligibility of companies in the Section 8(a) program. Findings in four audit reports issued in the past 6 months included the improper brokering of products manufactured by large firms and the questionable "disadvantaged" status claimed by a millionaire. Each of these audits was requested by SBA program officials.
Inspection Assists SBA in Downsizing Government Contracting Program. At the request of the Agency, the Inspection and Evaluation Division examined the impact of declining Federal procurements, new acquisition legislation, and major reductions in field staff on SBA's prime contracts and subcontracting programs. The report's findings and recommendations concerning the deployment of field staff and the placement of program management controls were instrumental in the Agency's decisions on the reorganization of these important functions.
Inspector General Addresses National Association of Government Guaranteed Lenders Conference. The Inspector General (IG) addressed the annual conference of the National Association of Government Guaranteed Lenders (NAGGL) in Coronado, California. On October 26, 1995, he discussed the role of the OIG in the Agency's loan programs and solicited the NAGGL membership's assistance in reducing fraud in SBA's business loan programs. Topics discussed included the OIG's character background checks, the tax verification program, the character of recent criminal investigations, fraud training, and the general results of OIG investigations and audits.
Results of False Tax Return Cases Increase. Over the last 5 years, the OIG has received 239 allegations that false tax returns were submitted in support of SBA business or disaster loan applications. These fraud referrals now involve loan applications submitted to 38 SBA district offices, totaling $107 million and involving 930 individual subjects. To date, 61 individuals have been indicted on criminal charges: 51 have been found guilty, 1 indictment was dismissed in the negotiation of a defendant's guilty plea, and 9 others have not yet gone to trial.
Affirmative Civil Enforcement Program. The OIG continues to expand the scope of its efforts to make optimal use of the Department of Justice's Affirmative Civil Enforcement (ACE) program. This U.S. Attorney program targets cases which might not be prosecuted criminally because of the minimal dollar amounts involved, absence of financial loss to the Government, or because other facts of the case might not support a criminal prosecution. Heretofore, our success with the ACE program was focused in nine states; however, during this reporting period, the OIG realized its first ACE results in Oregon.
During the approximately 33 months the OIG has been involved with the ACE program, we have had a total of 44 successful cases, resulting in $2,334,377 in civil penalties and $718,258 in recoveries by SBA. Individual ACE outcomes are reported in the program area chapters, as appropriate.
Section 8(a) Case Yields Tenth Guilty Plea and Restitutions of Nearly $12 Million. The former vice president of an engineering and design company with offices in Culver City, California, and Houston, Texas, pled guilty to making a false statement to SBA to obtain Section 7(j) cooperative agreements in the San Diego, California, area. The company provided graphic designs and illustrations to a prime contractor for the Space Shuttle program.
In a further development, the investigation also substantiated that the company's chief executive officer (CEO) used a family trust and three associated corporations to bill inflated rents and other expenses to NASA subcontracts, including a Section 8(a) contract initiated in 1981 for $4.4 million and extended through December 1989 with additional charges of $6.4 million. Also included in the alleged conspiracy were a series of materially false statements made to secure and maintain Section 7(j) cooperative agreements totaling more than $60,000, including repeated assertions that the company had an office in San Diego from which it continuously did business.
The vice president's guilty plea was the tenth resulting from this investigation, which included the SBA/OIG, the NASA/OIG, the IRS, the FBI, the Postal Inspection Service, and the Departments of Defense and Labor. The company executive was sentenced to 1 year probation.
Five other sentences resulting from this Federal task force investigation were handed down during the reporting period. The CEO of the Section 8(a) company was sentenced to 2 years imprisonment, 3 years supervised release, $4,472,900 restitution, and fines and special assessments totaling $23,950. He had pled guilty to 180 charges including conspiracy, mail fraud, false claims, money laundering, theft from programs receiving Federal funds, embezzlement from an employee benefit plan, interstate transportation of stolen money, and obstruction of a Federal audit. The Section 8(a) company also pled guilty and was sentenced to pay $7,496,455 restitution. Three defunct businesses also owned by the CEO had pled guilty to conspiracy and paid nominal fines.
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