OIG audits, inspections, and investigations during this 6-month period achieved $19,664,764 in potential dollar results, 46 indictments, and 51 convictions. The dollar results consist of: (1) $3,934,195 in potential recoveries, including judicially-awarded fines and restitution; (2) $14,091,360 in management avoidances; (3) $11,750 in disallowed costs agreed to by SBA's management; and (4) $1,627,459 in management commitments to use funds more efficiently.
As has been stated in previous Semiannual Reports, the OIG alone could not have achieved these accomplishments. The results for this period reflect the cooperation and support of other audit and investigative organizations such as the Federal Bureau of Investigation, the U.S. Secret Service, and other Offices of Inspector General; the support of Department of Justice prosecutors; and, most importantly, the actions of key SBA program managers and employees. Indeed, much of our success is due to referrals made by conscientious Agency employees.
The continuing challenge in FY 1995 is focusing OIG resources on those activities which have the highest potential for improving the management of the SBA and preventing and detecting the loss of the Federal Government's substantial investment in SBA programs. To meet this challenge, the OIG has shifted resources away from traditional oversight activities, such as compliance or mandated audits with minimal impact and criminal investigations with limited deterrent impact. Instead, we have concentrated our limited resources on efforts which will produce greater dollar savings, maximum deterrence and prevention of fraud, and definitive improvement in SBA program efficiency and effectiveness.
To ensure that the OIG's own operations are as efficient and effective as possible, we initiated a comprehensive review, in 1994, of the OIG's organizational and field structure. The objective was to streamline operations and free up resources for more direct support of our mission. The resulting structure of our organization is presented in the "Organization, Resources, and Management Initiatives" chapter of this report.
The OIG's mission over the next several years will include a special focus on the SBA's Disaster Assistance program. Congress and the Office of Management and Budget (OMB) made $3 million available to the OIG, in late 1994, specifically for disaster-related oversight. The OIG subsequently developed a strategy to guide disaster-related activity and to make optimal use of these funds. Increased temporary staffing in existing OIG offices near disaster sites will contribute needed manpower to achieve the goals of the OIG's disaster plan.
We continue to build greater awareness of the OIG mission with both SBA employees and the Agency's customers. As the OIG improves its public relations and information dissemination activities, it also increases its deterrent effect on fraud and raises SBA program managers' interest in management improvement. We continue to pursue this goal through attendance at SBA-sponsored events, the development and use of more educational presentations, more creative use of key OIG reports and activities, and OIG staff involvement in other initiatives designed to make the OIG more visible with Agency and clientele groups. One such example is IGNet, an Internet-based forum for Federal IGs. Audit and inspection reports are being made available to the general public on IGNet, which is coordinated by the SBA/OIG. These are relatively economical methods which are having a substantial impact on our success in accomplishing our mission and goals.
Disaster Assistance Study Prepared. At the request of the SBA Administrator, the Auditing Division reviewed the validity of disaster loan applications submitted 10 months after the Northridge earthquake occurred in Los Angeles. The issue was whether applications submitted many months after the event were legitimate. The report concluded that the applicants who did not file their applications until well after the disaster did, nevertheless, have physical damage to support their applications.
Section 8(a) Recommendations Submitted to SBA Administrator. A 15-point proposal for reforming the Section 8(a) program was presented to the Administrator in response to his request. The proposal, which addressed abuses and weaknesses revealed in OIG audits, was developed by the OIG in consultation with the Office of Minority Enterprise Development. The proposal included such issues as eligibility of wealthy owners, excessive subcontracting, development of competitive business mix, abuse of sole source contracting limits, and excessive cash withdrawals from firms.
Obstacles to Focusing Section 7(a) Loans on Job Creation Identified. Given the widespread political and economic attention to job creation, we conducted an inspection on the feasibility of establishing a job creation focus in the loan guarantee program, identifying high job-growth industries in advance, and measuring the Section 7(a) program's contribution to job creation. Because only a small percentage of firms in any given industry appear to account for most of its job growth, focusing on selected industries may not result in significant job creation. Moreover, predicting which firms will be the relatively few to experience high growth is complicated by a variety of uncontrollable factors, i.e., the high volatility of businesses and the employment they may create. Any serious effort to measure progress in job creation would require potentially costly monitoring procedures, because existing data collection methods have serious flaws. Finally, directly attributing jobs created to specific Section 7(a) loans is likely to be misleading due to the many other variables, including local economic conditions, that can significantly influence the job creation process.
Loan Servicing Weaknesses Identified. An audit team found that SBA s servicing of its $300 million portfolio of delinquent loans was inadequate. Management tools already called for by Agency policies--site visits, credit reports, and delinquency notices--were not being used effectively at the five SBA offices visited by OIG auditors. While SBA managers are taking steps to make improvements, they have indicated that they have insufficient personnel to implement all of the applicable policies and procedures.
Special Appropriations Projects Prone to Waste and Abuse. Audits of SBA s special appropriations or so-called pork barrel projects are showing that they are prone to waste and abuse. Because the special appropriations do not go through the regular budget justification process, they often lack definition of their purpose, making it more difficult for Agency personnel to administer them. One audit of a special appropriations project was completed during the reporting period; it revealed that executives of the grantee received excessive compensation and awarded a contract where there was a conflict of interest.
Tax Return Verification Program Proceeds Smoothly. The implementation of the OIG- recommended tax return verification program in early October 1994, has proceeded smoothly in most areas of the country. Since January 1, 1995, over $3 million in loans have been denied to 16 individuals, as a result of the program, because they submitted questionable financial data in support of their SBA loan applications. Over the last 3 years, 44 individuals have been indicted for submitting false tax returns with their loan applications. Both the IRS and SBA are reviewing ways to expedite the procedure and make the process simpler for the SBA and its lenders.
Affirmative Civil Enforcement Program. The OIG is expanding efforts to make optimal use of the Department of Justice's Affirmative Civil Enforcement (ACE) program. This program targets cases which would not be prosecuted criminally because of the amount of money involved, including those cases with no loss to the Government, or because other facts of the case would not support a criminal prosecution. Heretofore, our ACE results had come from only four states, and from three SBA programs (Business Loan, Government Contracting, Minority Enterprise Development). During this reporting period, we obtained our first ACE results in Florida, New York, and Oklahoma. The Disaster Loan program also produced its first successful ACE outcome.
During the approximately 21 months we have been involved with the ACE program, we have had a total of 22 successful cases, resulting in $1,276,653 in civil penalties and $220,312 in recoveries by SBA. Individual ACE outcomes are reported in the program- area chapters.
Massive Disaster Fraud Scheme Foiled. Two loan packagers and 14 disaster loan applicants were charged with submitting false claims. The packagers were also charged with conspiracy to defraud the United States in connection with three southern California disasters--the 1994 Northridge earthquake, the 1993 Malibu fires, and the 1992 Los Angeles civil disturbances. Eleven of the applicants have pled guilty to all the charges against them. The defendants submitted applications for SBA business disaster loans totaling more than $7 million. The charges were based on the submission of fraudulent financial documents, primarily tax returns. The defendants received approximately $1.9 million before the scheme was referred to the OIG by SBA Disaster Assistance Area 4 loan officers and a tip from a concerned citizen. The losses falsely claimed by the defendants were primarily for economic injury.
These charges resulted from an intensive joint investigation by the OIG and the U.S. Secret Service. The investigation was opened following receipt of an anonymous complaint that a West Los Angeles businessman had been boasting about filing a false application for $1.5 million in disaster assistance. Our initial inquiry into the loan application, from a businessman who falsely claimed to be the sole owner of a Calabasas, California, gas station, led to an investigation of the loan packagers who assisted him.
Through our coordination with officials of the Disaster Assistance Area 4 Office, we learned that SBA officials were in the process of preparing a referral to the OIG concerning a pattern they had uncovered linking a number of similar loan files. The investigation is continuing, with additional criminal charges expected in the future.
Auditing Division Successfully Completes Peer Review. The Office of Inspector General at the Resolution Trust Corporation (RTC) gave the Auditing Division passing marks in the triennial peer review required by the Inspector General Act and Government Auditing Standards. The RTC report concluded that the division has an appropriate internal quality control system and is following established policies, procedures, and auditing standards.
Inspector General Community Resource Allocation Model Developed. In response to discussions with the Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies of the House Appropriations Committee, the OIG developed a model for allocating resources across the inspector general community which takes into account the variable Risk to the Government. The model identifies two risk factors, funds risk and employee integrity risk; categorizes risk as high, medium, or low; and applies a weighting methodology to determine resource allocation. The model was applied to five agencies within the Subcommittee's jurisdiction: the Departments of Commerce, State, and Justice; the Small Business Administration; and the U.S. Information Agency.
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