On September 30, 2003, the OIG issued Audit Evaluation Report 3-43, Inspection of Insufficient Proof of Citizenship Status for SBA Loans. The Office of Inspector General (OIG) initiated this inspection after OIG investigations revealed misrepresentations of citizenship eligibility. Moreover, anti-terrorism legislation and regulations impacted the types of customer identification required by financial institutions. The focus of this inspection was to identify the requirements for determining citizenship eligibility as well as potential vulnerabilities to fraud and misrepresentation in SBA business loan programs.
The OIG examined the USA PATRIOT Act, related legislation, applicable regulations, SOPs, and other directives. The OIG also analyzed published studies, articles, and Congressional testimony on identity verification for citizens and foreign nationals that included identity fraud, eligibility corroboration for Federal programs, tax identification and Social Security number integrity, and terrorist financial networks. Officials from the SBA and Federal banking agencies were interviewed, as were OIG investigators. Finally, various other materials were analyzed, such as bank examination manuals, U.S. Department of Justice notices, and press releases related to the USA PATRIOT Act and banking industry changes. The inspection was conducted in accordance with the Quality Standards for Inspections issued in March 1993 by the President's Council on Integrity and Efficiency.
The inspection found that the SBA and its lenders have little assurance that prospective borrowers truthfully disclose their citizenship status. Further, the SBA cannot be reasonably certain that its loan programs benefit only eligible citizens or legal aliens since it relies upon the prospective borrowers' honesty on the SBA Form 912 (Statement of Personal History). In addition, the SBA and its lenders have concerns related to delays in loan origination, the appearance of discriminatory practices, and lack of a definitive national identification system for foreign nationals.
Nonetheless, the SBA and its lending partners can have a reasonable assurance of correctly identifying borrowers and their citizenship status if they: (1) emphasize "redundant" or more than one type of verification to provide reasonable—but not absolute—assurance that a financial institution knows a customer's identity; (2) hold SBA lending partners to similar, if not identical, verification standards, and (3) keep expectations realistic and do not expect perfection.
The OIG made two recommendations:
- The SBA should issue an interim directive instructing SBA lenders to verify the identities of new customers involved with SBA programs, consistent with the Patriot Act. The SOP should: apply to all SBA lenders; mandate that a non-bank lender require two forms of verifiable identification or one form of identification with type of non-documentary verification, which includes, for each new customer , his or her name, date of birth, address, and identification number (taxpayer identification number for US Citizens); require a non-bank lender to periodically compare any government-provided list of terrorists to its list of customers, and require that the results of verifications of customers’ identities be part of the lender’s records for future inspection.
- The SBA should collect citizenship status data so it can readily track which loans go to citizens and which to aliens.