U.S. Small Business Administration Office of Inspector General Investigations Division

2. U.S. Small Business Administration Office of Inspector General Investigations Division Bruno Genrich Special Agent Detroit Field Office Detroit, MI

3. Purpose of the Office of Inspector General Established by Congress under the Inspector General Act of 1978 to investigate fraud, waste, and abuse. Goals: • Increase the effectiveness of the SBA, and promote integrity within it. • Help SBA programs run more efficiently. • Seek to deter crime against the SBA, through publicizing prosecutions and improving regulations and procedures. Investigative findings are used as a basis for criminal and civil actions, administrative actions, and revising regulations.

4. Structure of the Office of Inspector General Auditing- evaluates SBA procedures. The division can audit entire programs, or selected parts of programs in an office. Auditors determine if procedures being followed. Investigations - conducts investigations involving SBA programs, program participants, and SBA personnel. The emphasis is on criminal violations. OIG Special Agents are statutory federal law enforcement officers.

6. OIG Concerns • Increase in Loan purchase rates from 1999 – 2009 involving lenders with 500 or more disbursed 7(a) loans • Out of 82 lenders with 500 or more loans, 13 lenders have loan purchases ranging from 11% to over 25%. • How much is attributed to loan agent/ packager FRAUD?

7. OIG Concerns -Insufficient 7(a) staffing -Herndon backlog/staffing • Less SBA oversight -Office of Lender Oversight/staffing • Greater reliance on Lender oversight and accountability • More opportunities for unscrupulous lending officials, loan agents/packagers

8. FY 2008Enforcement Statistics • $40,083,854 in fines and recoveries • 76 indictments • 59 convictions • $9,751,039 in cost avoidances

9. Indicators of Fraud – Red Flags In your evaluation of a loan package, you may encounter various indicators of fraud. An indicator of fraud is a fact or a set of facts, usually of an irregular nature, which in the light of all other known facts and circumstances, may be reasonably interpreted as being suspicious. There is no stereotyped situation that fits all circumstances to determine if an indication of fraud exists. Rather, the determination must be separately made in each case through application of your professional judgment.

10. 7(a) Cases – False Statements Most common category - false statements - occur on loan applications, financial statements, and supporting documents such as invoices and personal history statements. They include: overstating income overvaluing or phony collateral understating liabilities and debts failure to disclose criminal record ownership of business - not true owner Fictitious invoices False cash/capital injection –MAJOR ISSUE

11. False Equity Injection • Under the OIG Central Regional Office we have seen a high percentage of OIG criminal investigations in the 7(a) loan program involve allegations of false equity injection.

12. False Equity Injection Red Flags • Taxable income does not reflect equity $ amount • Gift letters • False/altered bank statements Cut/Paste – Alignment Font size changes Poor copy • Deposited days before the closing date • Excessive amount of $ shown in checking account

13. False Equity Injection Red Flags • Seller takes a standby agreement • Seller covertly provides cash equity • Purchase price of the business is inflated to cover cash equity • Checks from 3rd party used for equity proof • Forged bank letters to support equity • Checks and cashier checks returned to bank – Not negotiated • Undisclosed loan from seller

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16. Loan Agent/Packager Fraud • The OIG has seen an increase in loan agent/packager fraud cases over the last few years. The dollar loss and adverse impact to the SBA loan program and the lender is significant.

17. Loan Agents/Packagers/Brokers DEFINITION: A person who is compensated by the applicant or lender to prepare the Applicant’s application package for SBA financial assistance, or simply refers applicants to a Lender.

18. Loan Agent Fraud – Red Flags • Pattern of early defaults • Loan agent provides incomplete information – Difficult to obtain information • Loan agent advises you not to talk with the borrower – Agent controls all communication • Loan agent threatens to “shop the loan” to your competitor • High number of qualified borrowers in a relatively short period of time • Loan agent is able to overcome all obstacles

19. Loan Agent Fraud – Red Flags • Steers lenders to specific appraisers and/or title companies • Refer deals which involve the same seller on multiple loans • Recruits family members and associates to apply for loans

20. Red Flags Packagers targeting ethnic groups. Recruiting borrowers Charging high fees for packaging loan. Participating in the closing. Fees paid at closing (first check on Express loan). Borrower is unaware of actual fee.

21. Good Lender Gone Bad

22. When Left Unchecked…..

24. Information on HUD 1 Submitted to Lender Buyer: Kassem Faraj d.b.a. Kassey’s Family Restaurant, IncSeller: Imad Deaibes d.b.a. D.I. Investments, Inc. Imad Deaibes d.b.a. D.I. Investments HUD 1 Approved by BLX Wire Transfer from BLX to Title Co. $920,000 Kassem Faraj $41,115.08 to Buyer Contract Sales Price $1,650,000 HUD Prepared and submitted to BLX by Title Company $330,000 Deposit Outside of Closing Kassem Faraj Kassey’s Family Restaurant, Inc. $529,132.90 to Seller Imad Deaibes d.b.a. DFC Inc

25. Relative David Faraj Kassem Faraj David Faraj HUD 1 Approved by BLX Wire Transfer from BLX to Midwest $920,000 $3,678.54 to Ajrouche, Dima Oil $110,000 to Faraj Kassey’s Straw Buyer for David Faraj Actual Disbursements $41,155.080 to Buyer $35,000 to Midwest $0 to Buyer Coconspirator HUD prepared and submitted to BLX by Guthrie Kassem Faraj No deposit ever made Coconspirator $40,000 wire to D.F.C. $88,132.90 paid to D.I. Investments $21,709.26 transferred to Clio account $200,000 wire to Lebanese account Imad Deaibes Cancelled $529,132.90 check to D.I. Investments cancelled.

28. Title company owner prosecuted Dearborn, MI Title Company conspired with loan brokers by facilitating fraudulent loan closings. Title company prepared false HUD-1 Settlement Sheets; Fronted down payments and disguised disbursements.

29. Lender Fraud Iowa banker forged an SBA loan officer’s name to a letter. The letter fraudulently represented that the borrower had increased the required cash equity from $10,000 to $15,000. During the OIG interview, the banker admitted he forged the name. Banker was criminally prosecuted for false statement/forgery. Fired by the bank and now has a felony record.

30. Lender Fraud • Two Missouri bankers allowed a borrower to conceal his prior bank debts from the SBA. Both agreed to a USAO Pre-Trial Diversion and were fired by the bank. The bank paid double damages on the guarantee totaling $250,000. One banker stated she did not believe it was her responsibility to disclose this information to the SBA.

31. Lender Fraud Bank President in Kansas had knowledge that a borrower was concealing adverse information in their SBA loan. USAO filed a civil case against the bank. SBA recovered the guarantee and the bank agreed to release SBA on additional guaranteed loans. The bank also volunteered to a 5 year debarment from the SBA 7(a) program.

32. Lender Fraud • Indiana banker concealed adverse information concerning borrower’s loan application to refinance debt. Civil fraud lawsuit was filed against the bank resulting in a $200,000 recovery.

33. OIG Response to Loan Agent Fraud • Develop an effective partnership with the SBA Lender to reduce Loan Agent fraud in SBA loan programs. • Fraud Awareness presentations to Lenders • Provide information to Lenders on making referrals and develop better ways to work with the OIG

34. Additional OIG Response Work with SBA and Lenders to develop a Loan Agent data base to effectively register and monitor loan agent activity. Develop legislative language to expand criminal statutes from 5 years to 10 years in non-bank loans Strengthen SBA 7(a) oversight procedures

35. Recommendations • Ask for references from other Lenders • Google search on the business • Check for prior bankruptcies • Check business licenses (internet) • Communicate with the borrower. Don’t rely only on the Broker/agent • Document conversations with packager/borrower • Maintain spreadsheet on broker/packager • Use you own appraiser and title company • Loan agent provides EIN, bank account number to send payment, Identifiers (DL, DOB, SSN, citizenship status)

36. Recommendations • When loans go into default set up a review system • Loans coming from same Officer • Loans closed at same title company • Using bad appraisals to justify new loans • What are to borrowers saying???

37. Reporting Fraud Bruno Genrich Special Agent Detroit Field Office Detroit, MI (313) 226-6075 ext 249 www.sba.gov/IG/