Investigations and Audit Accomplishments for July 2012
Date Issued: Friday, August 17, 2012
Report Number: July 2012

Summary

The following details OIG activities for the period covering July  2012 as they relate to  Business Loans, Disaster Loans, Government Contracting & Business Development, and Agency Management.

 

Business Loans

Florida Man to Pay the SBA $410,000 in Civil Settlement

On June 29, 2012, the U.S. Department of Justice, acting on behalf of the SBA in a civil action, reached a settlement agreement in which a Florida man agreed to pay the SBA $410,000.  The investigation revealed that the man sold another subject a combined gas station and convenience store for $1.33 million.  The transaction required a $600,000 equity injection that the purchaser did not have.  The defendant orchestrated a scheme to make it appear that the purchaser had the full equity injection by providing an additional $180,000 loan to him.  The loan was channeled through a third party with a false “gift letter” making the loan appear as a gift from a friend. 

 

Three Maryland Men Indicted in $52 Million SBA Fraud Scheme

On July 10, 2012, three Maryland men were indicted for their alleged participation in a scheme to fraudulently obtain SBA-guaranteed business loans that resulted in losses of approximately $52 million.  Two men were each indicted on one count of conspiracy to commit bank fraud, one count of bank fraud, one count of aiding and abetting, and one count of criminal forfeiture.  A third individual was indicted on the same charges and two additional counts of bank fraud.  The indictment alleges that the first two men altered numerous bank statements and cashier's checks and knowingly submitted them to lenders in connection with SBA-guaranteed loans.  The third subject, an internal accountant, allegedly prepared false interim financial statements, cashier's checks, and IRS tax forms for businesses applying for SBA-guaranteed loans.  This is a joint case with the Federal Bureau of Investigation (FBI). 

 

New Jersey man Sentenced on Fraud Charges

On July 10, 2012, a New Jersey man was sentenced to 36 months probation, and ordered to pay a $3,500 fine and a special assessment of $100.  He previously pled guilty on March 20, 2012,    to an Information charging one count of fraud and related activity in connection with identification documents, authentication features, and information.  The investigation revealed that an organized group of individuals was obtaining credit cards and loans from various lending institutions using false identities, documents, and business names.  Loan officers at various banks were also involved in the scheme.  Many of the loans were SBA-guaranteed.  This is a joint investigation with the IRS-CID, the Englewood New Jersey Police Department, and the Bergen County Prosecutors’ Office.

 

Indiana Entrepreneur Sentenced to 18 Months

On July 23, 2012, an Indianapolis entrepreneur pled guilty to one count of submitting false information to a financial institution and was sentenced to 18 months in prison followed by 3 years of supervised release.  The entrepreneur was also ordered to pay restitution of approximately $315,076 to the SBA and a bank.  The investigation confirmed that beginning in July 2007, the subject obtained SBA-guaranteed bank loans and other forms of credit for his company.  At the time of his loan application, the entrepreneur reported he had no criminal history and concealed numerous arrests and felony convictions in order to obtain financing.  The subject defaulted on these debts and filed for bankruptcy. 

 

Alabama Woman Pleads Guilty to Loan Fraud

On July 26, 2012, an Alabama woman pled guilty to a one-count Information filed on July 20, 2012, charging her with loan fraud.  The investigation revealed that the woman obtained an SBA-guaranteed loan of $1,529,000 to purchase a business for which the seller provided the $260,000 required equity injection.  Both the woman and the seller falsely represented that the equity injection was a gift to buyer from her grandmother.  The SBA OIG Early Fraud Detection Working Group provided information toward the initiation and development of this case.  

 

Disaster Loans

The OIG Issues Audit Report 12-14

On July 9, 2012, the OIG issued Audit Report 12-14, Advisory Memorandum:  The SBA did not Maximize Recovery for $171.1 Million in Delinquent Disaster Loans in Liquidation.  The OIG determined that the National Disaster Loan Resolution Center (NDLRC) did not comply with the Debt Collection Improvement Act (DCIA) of 1996, which requires all Federal agencies to transfer debts delinquent over 180 days to Treasury for cross servicing and offset.  The audit results indicated the NDLRC had not transferred 1,553 of 3,958 disaster loans in liquidation status (as of December 31, 2011) to Treasury, as required.  The principal balances for these loans totaled approximately $171.1 million.  Since the loans did not meet exemption criteria (such as litigation, foreclosure, active repayment workout, or otherwise), the NDLRC should have charged off the loans and transferred them to Treasury to initiate collection action against the delinquent borrowers. 

The OIG recommended that the SBA immediately charge off all disaster loans in liquidation status—not secured by collateral, or specifically exempt from referral—that are delinquent over 180 days to Treasury.  The OIG also recommended that the SBA update the Standard Operating Procedures, train staff on the guidelines of the DCIA, and evaluate disaster loans in liquidation status over 180 days. 

 

Former Louisiana Pastor Sentenced to 10 Years for Theft of Government Funds

On July 12, 2012, the former pastor of a Louisiana church was sentenced to 120 months in prison, 3 years supervised release, and restitution of $963,900 to the SBA.  His prison time was set to run consecutively with his other federal charges that he is currently serving.  On January 26, 2012, the former pastor pled guilty to one count of mail fraud and one count of theft of government funds.  The subject applied for an SBA disaster loan on behalf of the church where he was the pastor at the time.  The initial loan amount of $500,000 was for replacement of equipment and rebuilding of the church, which sustained severe damage and flooding as a result of Hurricane Katrina.  The former pastor later requested a loan increase due to increased construction costs for rebuilding the church.  A $463,900 loan increase was approved by the SBA, bringing the total loan amount to $963,900.  The investigation revealed that the subject did not use the loan funds in accordance with the Loan Authorization and Agreement, which stated that the funds be used explicitly to reconstruct real estate and rehabilitate or replace property that was damaged by Hurricane Katrina.  Furthermore, it was determined that the subject used the SBA disaster loan funds to purchase two luxury vehicles, two pieces of real estate, certificates of deposit, designer clothing, fine jewelry, and other items for his personal use.  The U.S. Secret Service is assisting with this investigation.

 

The OIG Issues Audit Report 12-17

On July 31, 2012, the OIG issued Audit Report 12-17, Advisory Memorandum:  The SBA Risks Loss of Collateral on four Disaster Loans totaling $5.6 Million.  The overall objective of the audit was to assess the NDLRC’s effectiveness in managing disaster loans in liquidation to maximize debt recovery and minimize losses.  During the audit, the OIG reviewed a random statistical sample of 65 disaster loans charged off by the Santa Ana NDLRC.  The sample included four loans the SBA approved for a Florida condominium complex.  Two of those loans were current, while the other two were in default.  The OIG also discovered that the Uniform Commercial Code (UCC) financing statement had lapsed for one loan that was in servicing at the Birmingham Disaster Loan Servicing Center.  This loan had an unpaid a principal balance of approximately $1.3 million.  Another of the four loans remains in servicing; however, the NDLRC has already charged off the remaining two defaulted loans it granted to the condominium complex.  Each of the defaulted disaster loans had an unpaid principal balance of $1.5 million.

 

Government Contracting and Business Development

Indictment of Boise Roofing Company Owner Unsealed

On July 5, 2012, the indictment of the owner of a Boise roofing company was unsealed.  The indictment, originally filed on February 14, 2012, charged the owner with four counts of wire fraud, four counts of mail fraud, four counts of false statements, and two counts of money laundering.  The charges against the subject were in connection with fraud in SBA’s Service-Disabled Veteran-Owned Small Business (SDVOSB) and Historically Underutilized Business Zone (HUBZone) programs; the Veteran Affairs’ (VA) SDVOSB Program; and the General Service Administration’s (GSA) Surplus Property Program, through which SBA-certified 8(a) companies can obtain surplus property.  The subject is alleged to have established shell corporations to financially benefit from SBA set-aside programs and government surplus property programs, in which he was not otherwise entitled to participate. This is a joint investigation with the Internal Revenue Service - Criminal Investigations (IRS-CI), VA OIG, GSA OIG, U.S. Department of Agriculture (USDA) OIG, Department of Interior (DOI) OIG, Air Force Office of Special Investigations (AFOSI), and the Defense Criminal Investigative Service (DCIS).

 

Boise Construction Firm Sentenced

On July 16, 2012, a Boise roofing and construction firm was sentenced to 36 months probation, and ordered to pay a $5,000 fine and a $400 administrative fee.  The president of the firm pled guilty on behalf of the corporation to one count of wire fraud in connection with fraud in the SBA HUBZone Program on March 15, 2012.  The firm submitted a fraudulent HUBZone application to the SBA stating that its principal place of business was located in a HUBZone and that it had two employees who resided in a HUBZone.  The investigation revealed neither of these representations to be true.  The investigation also found that the firm self-certified as a SDVOSB even though the vice president controlled the firm and was not a service-disabled veteran.  This is a joint investigation with the IRS-CI, VA-OIG, GSA-OIG, USDA-OIG, DOI-OIG, AFOSI, and DCIS.
 

Owner of Tech Firm Pleads Guilty to Bribery of a Public Official

On July 24, 2012, in U.S. District Court for the District of Columbia, the owner of a technology firm pled guilty to a one-count Information, filed on July 2, 2012, charging him with bribery of a public official.  The investigation revealed that the subject and others enriched themselves through awards made by the U.S. Army Corps of Engineers (USACE) to his firm.  Specifically, he gave $290,000 to a public official employed at USACE in return for receiving approval for the award of contracts and subcontracts to his firm, an SBA-certified 8(a) program participant.  This is a joint investigation with the FBI, IRS-CI, U.S. Army-Criminal Investigation Division, and DCIS.

 

Agency Management

The OIG Issues Audit Report 12-15

On July 16, 2012, the OIG issued Audit Report 12-15, Advisory Memorandum:  Weaknesses Identified during FY 2011 FISMA Review.  The OIG contracted with an Independent Public Accountant (IPA) to perform the audit procedures relating to FISMA review.  The OIG monitored the IPA’s work and reported the SBA’s compliance with the Agency FISMA filings on November 4, 2011.  The OIG performed additional fieldwork between November 2011 and March 2012 to further clarify issues and recommend corrective actions. The OIG found that the Office of Chief Information Officer (OCIO) needed to prioritize remediation of IT security vulnerabilities identified in prior audits.  The OCIO also needed to perform recertification reviews of its general support system’s end users and monitor remote access logs for unauthorized activity.  Finally, the OIG found SBA had a number of tasks in its IT security assistance contract that were not being performed.  The OIG made three recommendations on remediating OIG recommendations in a more timely fashion, recertifying network users, and reviewing remote access audit logs.  Lastly, the OIG re-issued a prior year recommendation related to the OCIO’s oversight of its IT Security Contractor.  The CIO agreed to the accuracy of the current and prior year recommendations, provided updates on statuses, and adjusted closure dates.