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Office of Inspector General
Small Business Administration
July 1997 Update
Business Loans activity at four SBA District Offices
(Atlanta, Dallas, Santa Ana, and
Review of Subsidy Rate Calculation Error Washington). In the earlier review,
Identifies Internal Control Weaknesses. auditors concluded that 7 of 70 sampled
In June 1997, the General Accounting loans should not have been made
Office (GAO) uncovered an error in because of loan origination deficiencies.
SBA’s formula for calculating its loan In the four follow-up audits, a total of 13
subsidy rate. This rate is critical in of 120 sampled loans were judge d
determining the Agency’s lending levels deficient enough that they shoul d
and budget requests. SBA Administrator not have been made . The four District
Alvarez asked the Office of Inspector Office reports were issued in July 1997.
General (OIG) to investigate the source The OIG’s Assistant Inspector General
of the error and to recommend future for Auditing will issue a summary report
safeguards. The OIG’s study concluded in August.
that the initial error had resulted from an
incorrect formula entry in an SBA spread New York Bank Employee Pleads Guilty
sheet cell made by an OMB budget to Witness Tampering. A former
examiner. Also, there had been a administrator and assistant to the general
subsequent failure by SBA to adequately manager at a participating lender bank in
review all changes made to the New York City pled guilty on July 2, 1997,
spreadsheet when it was returned to the to witness tampering , in connection
Agency for review. The OIG’s with a joint OIG and FBI investigation into
recommendations included establishment kickbacks and fraud involving the bank’s
of documentation for changes made to SBA loan division. According to her plea,
the spreadsheet, protection of critical the woman attempted to dissuade and
cells to prevent errors, and the prevent a witness in a grand jury
development of a check list to ensure proceeding from testifying. She asked
adequate review of all future the witness to make false statements to
amendments. and conceal information from the grand
jury concerning the nature of a $5,000
Follow-up Audits of LowDoc Loans in payment he made to the bank officer who
Four District Offices Yield Results Similar headed the bank’s’s SBA loan division.
to Previous National Sample. In a follow- The man was ultimately convicted of
up to an audit of a national sample of receiving kickbacks from SBA borrowers,
LowDoc loans, the OIG audited LowDoc and the bank paid a $1,260,033 civil
settlement and released SBA from Federal debts. A computer match of
guaranties totaling more than $4.4 million. 44,047 disaster loans approved in FY
1995 found only 192 loans (0.4 percent)
Pennsylvania Business Loan Applicant with a CAIVRS record on the borrower.
Pleads Guilty to Making False A random sample of 30 of the matches
Statements. A Lansdale, Pennsylvania, found that 11 (37 percent) were invalid
loan applicant pled guilty on July 8, 1997, because of bad data on either SBA’s or
to making false statements t o the reporting agency's part. Only one of
influence SBA to approve a $200,000 the other 19 matches in the FY 1995
guaranteed loan to his company. In sample was identified in commercial
applying for the loan, the man had credit bureau reports.
submitted a 1991 tax return altered to
substantially overstate his income and The Debt Collection Improvement Act of
fictitious returns for 1992 and 1993. The 1996 requires Federal agencies to report
loan proceeds were to be used to delinquent debt to commercial credit
purchase a tavern, but the loan was bureaus. The audit tested 600 disaster
canceled when the tax return loan applications involving 945 borrowers
discrepancies were confirmed by the in process during April and May 1997 and
IRS. The case was based on a referral found 10 borrowers with a record in
from SBA's Philadelphia District Office. CAIVRS. Eight of these were also found
in commercial credit reports, which
******* appeared to confirm the favorable impact
of the Act.
Disaster Assistance The audit found that borrowers are not
consistently reporting delinquent Federal
Audit Finds that SBA Does Not Use debt, but the application forms are not
Automated System to Check Loan clear regarding loan guarantees and
Applicants, and that System is Inefficient. business debt. The audit concluded that
The Credit Alert Interactive Voice SBA should continue its reliance on
Response System (CAIVRS), a required commercial credit bureaus, but should
system for checking delinquen t revise the application forms to clarify that
Federal debt, is not used for SB A reporting of any delinquent debt is
disaster loans, but it is no longe r required, including loan guarantees and
needed in the current Federal lending business debt. The Associate
environment, an audit report issued in Administrator for Disaster Assistance
July concludes. Although SBA policy concurred.
precludes lending to persons delinquent
on Federal debt, the Agency has not Nebraska Loan Guarantor Pleads Guilty
used CAIVRS in the past because of to Making False Statement. A guarantor
problems in CAIVRS and because of the of economic injury and physical damage
speed necessary for disaster loans. disaster loans received by a Plattsmouth,
Nebraska, resort pled guilty on July 7,
The audit confirmed that CAIVRS is not a 1997, to one count of making a fals e
cost-effective tool for identifying other statement to SBA . A joint investigation
Activity Update of the Office of Inspector General July 1997 Page: 2
by the U.S. Secret Service and the submitted with the loan applications
SBA/OIG had shown that the man include a lease, a telephone installation
defrauded SBA by submitting several invoice, and an estimate of the cost of
false invoices and receipts regarding use replacing his business' files. The SBA
of the loan proceeds. He admitted disaster loans went into default after only
submitting one false $24,550 invoice for two payments on each loan were made,
dredging work. The resort, which and SBA charged off both loan balances
featured camping, fishing, and swimming, in 1993. The business owner did not
received SBA disaster loan proceeds make any payments on the interim loan,
totaling $206,400 following the 1993 flood which the bank charged off in 1994.
of the Platte River but has made no
repayment to SBA. This investigation *******
was based on a referral from SBA's
Omaha District Office.
OIG Management
California Nurse Registry Owner Indicted Office of Inspector General Conducts
Annual Training in San Diego. The Office
for Filing False Claim and Making False
Statement. The owner of a nurse registry of Inspector General conducted its
in Los Angeles, California, was indicted annual training conference in San Diego,
California, during the week of July 21,
on July 11, 1997, on one count of filing
1997. SBA Administrator Aida Alvarez
a false claim with SBA and one count of
addressed the attendees during a joint
making a false statement to a
session and highlighted the productive,
Federally-insured lender. The
cooperative, working relationship which
investigation, based on a referral from
has developed between her office and
SBA's Disaster Assistance Area 4 Office,
the OIG. She also discussed new Agency
revealed that the man submitted
initiatives.
fraudulent applications for disaster-
related business loans to a bank and
Training provided to attendees included
SBA. He obtained a $50,000 interim loan
interviewing techniques and defense
from the bank; then he obtained an
tactics/firearms (investigators),
$89,600 economic injury loan and a
quantitative analysis and risk assessment
$72,800 physical damage loan from SBA.
(auditors and inspectors), and courses in
(Of the SBA loan proceeds, $50,000 was
interpersonal skills, ethics, time
to be used to repay the bank loan;
management, and CPR. The Inspector
however, he allegedly diverted that
General’s address to the staff included a
amount.) In each of the loan applications
summary of accomplishments for the
the owner claimed his business was
year, and he, along with the
located in a building damaged by fire
Administrator, presented the OIG’s
during the 1992 civil unrest in Los
annual awards.
Angeles. The investigation disclosed,
however, that his business sustained no
damage because he actually operated *******
the nursing service out of his residence,
which was not affected by the civil unrest.
Allegedly false documents which he
Activity Update of the Office of Inspector General July 1997 Page: 3
Editor’s Notes:
Most of the articles appearing in this issue of
the Update reflect outcomes of OIG The Office of Inspector General notes with
investigative efforts. The Update generally deep sorrow the passing of Michael
reports all intermediate outcomes of criminal Stansberry, supervisory auditor in its
investigations (charges, pleas, court actions, Dallas field office. Mike was respected
convictions) as they occur, as well as final and admired by his many friends and
results (sentencings, settlements). While colleagues in the OIG. We will miss him.
audits and inspections produce equally valuable
results, they tend to take 6 to 9 months of
research, analysis, and production prior to their
publication. Consequently, they do not produce
intermediate results that lend themselves to
monthly reporting. Several audits and
inspections are, however, currently underway
and will be reported in upcoming issues of the
OIG Update.
The Activity Update is produced by the
SBA/OIG, James F. Hoobler, Inspector
The following identifies the use of adjectives in General.
these Updates to describe tax returns
fraudulently submitted in support of loan Comments or questions concerning this
applications: update or requests for copies of OIG audits,
inspections, or other documents should be
Fictitious tax returns: The applicant submits
directed to Johnny Cahn, SBA/OIG, 409
“copies” of tax returns never filed with the IRS.
Third Street, SW, Washington, DC,
20416-4110.
Altered tax returns: The applicant submits
Telephone number: (202) 205-6580
altered copies of tax returns actually submitted
FAX number: (202) 205-7382
to the IRS.
Bogus tax returns: The applicant submits tax If you are aware of suspected waste, fraud, or
returns containing false information to both the abuse in any SBA program, please call the
IRS and SBA. OIG Fraud Line.
OIG FRAUD LINE (202) 205-7151
in Washington, DC metropolitan area
Most audit and inspection reports can be found
on the Internet at: TOLL-FREE FRAUD LINE:
(800) 767-0385
WWW.SBAONLINE.SBA.GOV/IG/REPORTS.HTML
Activity Update of the Office of Inspector General July 1997 Page: 4
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