OF

FI C

E O

F I N S P E C T O R GE

NE

RA

L

OFFICE OF INSPECTOR GENERALEXPORT-IMPORT BANK

of the UNITED STATES

EVALUATION OF EXPORT-IMPORT BANK OF THE UNITED STATES’

COMPLIANCE WITH THE IMPROPER PAYMENTS ELIMINATION

AND RECOVERY ACT OF 2010

Evaluation Report March 12, 2012

OIG-EV-12-01

OFFICE OF INSPECTOR GENERAL EXPORT-IMPORT BANK of the U N I T E D STATES

To: Fred P. Hochberg Chairman and President

Joseph Sorbera Vice President - Controller

From: Osvaldo L. Gratacc Inspector General

Subject: Evaluation of Export-Import Bank of the U.S.' Compliance with the Improper Payments Elimination and Recovery Act of 2010

Date: March 12, 2012

This memorandum transmits Evaluation Report OIG-EV-12-01, Evaluation of Export-Import Bank of the U.S.' (Ex-lm Bank) Compliance with the Improper Payments Elimination and Recovery Act (IPERA) of 2010. This evaluation was initiated by the Office of Inspector General of the Ex-lm Bank to determine whether Ex-lm Bank is in compliance with the requirements of the IPERA of 2010.

The evaluation found that Ex-lm Bank properly determined whether payments were proper or improper in their risk assessment. In addition, Ex-lm Bank completed the "Improper Payment Risk Assessment Questionnaire for FY 2010" as part of their risk assessment as well as issued a summary documenting the internal controls encompassing improper payments. While Ex-lm Bank's efforts were positive, in our opinion, improvements are needed to better comply with the IPERA of 2010. We made two recommendations to address these findings. Management did not concur with the first finding and recommendation and wi l l seek OMB feedback on the methodology. Management concurred with the second finding and recommendation.

We appreciate the courtesies and cooperation extended to us during the evaluation. If you have any questions or comments regarding the report, please contact me at (202) 565-3992 or Christine Staley at (202) 565-3996.

Attachment

cc: Alice Albright, Senior Vice President and Chief Operating Officer Audit Committee David Sena, Senior Vice President and Chief Financial Officer Patricia Wolf, Supervisor, Financial Reporting

811 Vermont Avenue, NW Washington, D.C. 20571

 

 

 

 

  

 

  

 

 

 

Table of Contents

ExecutiveSummary.........................................................................................................2

Background .........................................................................................................................4

Objective...............................................................................................................................7

EvaluationResults............................................................................................................8

A. ClaimPaymentsRelatingtoFraudulentActivitiesNeededtobeIncludedintheImproperPaymentRiskAssessment............................8

Recommendation1...............................................................................................9

B. AFormal PolicyfortheImproperPaymentsRiskAssessmentisNeeded........................................................................................................................9

Recommendation2...............................................................................................9

ScopeandMethodology.............................................................................................. 11

Acronyms .......................................................................................................................... 12

AppendixA ....................................................................................................................... 13

EXECUTIVE SUMMARY

TheOfficeofInspectorGeneral (OIG)conductedanevaluationtodeterminewhethertheExport‐ImportBankoftheUnited States(Ex‐Im Bank)isincompliancewiththerequirements oftheImproperPaymentsEliminationand RecoveryAct(IPERA)of2010.

UnderIPERA,anagency isrequiredtoreviewallprogramsandactivities andidentifythoseprogramsthatare susceptibletosignificantimproper paymentsandpublishimproperpayment estimatesin their annualPerformance andAccountabilityReport(PAR)orAnnualFinancialReport(AFR).

OfficeofManagementandBudget Memorandum11‐16(OMBM‐ll‐16), whichprovidesguidanceon theimplementationofIPERA,definesimproperpaymentinaloanguaranteeprogram,suchasthoseadministeredbyEx‐ImBank,asincluding"disbursements tointermediaries, third‐partiesfordefault,delinquencies,interest...thatarebasedonincomplete,inaccurate,orfraudulentinformation [emphasisadded]...[or]thatarenotincompliancewithlaw,programregulations,oragencypolicy."

OMBM‐ll‐16furtherdefinessignificantimproperpayments"...asgrossannualimproperpayments in theprogram exceeding(a)both2.5percent ofprogramoutlaysand $10,000,000ofallprogramoractivitypaymentsmadeduringtheFiscalYear(FY)reportedor (b)$100,000,000regardlessofthe improperpayment percentage oftotalprogramoutlays."

Ex‐ImBankreviewedallprograms andactivitiesand identified three programsthatweresusceptibletosignificantimproperpaymentsinFY2010: AdministrativeExpenses(7,683transactions totaling$26.8 million),ClaimPayments(242transactionstotaling$231million),andLoan Disbursements(27 transactions totaling$2.1billion). Ex‐ImBankidentified 84improperpayment transactions totalingapproximately $1.39millionduringFY2010. Ex‐ImBankassessedtheriskof improperpaymentsassociatedwiththesethreeareasto be"low"duetotheinternalcontrolsinplaceand the natureof thesedisbursements.

However,withregards totheir risk assessmentin ClaimPayments,wefoundthatEx‐ImBankdidnotincludeintheir improperpayment risk assessmenttheclaimpaymentsthatwerelaterfoundtohavebeenbasedonfraudulent information.TheOIG‐Office ofInvestigations(OI)identified31fraudulenttransactions totalingapproximately$11.2millioninclaimpayments underEx‐ImBank guarantee programsinFY2010. HadEx‐ImBankincludedthese claimpaymentsintheir assessment, theimproperpayment totalsforthe ClaimPayments area wouldhavebeen4.8percentoftheprogram outlaysexceedingthe threshold establishedbyIPERA. This,inturn,wouldhave requiredEx‐ImBanktoconductfurtherstepsto identifyand implementaplantoreduceimproperpayments.

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Finally,we foundthat even thoughEx‐ImBankcompletedthe"Improper PaymentRiskAssessmentQuestionnaireforFY2010"andissueda summary oftheirriskassessmentdocumentingtheinternalcontrolsencompassingimproper payments,Ex‐ImBankdoesnothaveinplaceaformalpolicydefiningthe proceduralrequirementsthatmust beperformedinorder tocomplywiththe IPERA. Thelackofformalpolicyandprocessincreasesthepotentialforinconsistenciesbystaffuponrepeating theprocessinlater cyclesand comparing resultstohistorical baselinedata.

WerecommendtheOffice ofController(OC]includeclaimpaymentsbasedon fraudulent information inthe improperpaymentriskassessment and determinewhetheradditionalstepsshould betakeninaccordance withOMB M‐ll‐16. WealsorecommendtheOCdevelopandadoptaformalwrittenpolicy thatprovides the proceduralrequirementstoensureconsistencyinfuturereviews andtocomplywithalloftheapplicableIPERAprovisions. Managementdid notconcurwiththe firstfinding andrecommendation andwillprovideOMB theirmethodologyfor review. Managementconcurredwiththesecondfindingandrecommendation(seeAppendixA formanagement’sresponse).

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BACKGROUND

TheImproperPaymentsEliminationandRecoveryAct(IPERA)of2010(P.L.No.111‐204)requiresthatanagency reviewallprogramsandactivities andidentifythoseprogramsthataresusceptibletosignificantimproperpaymentsandpublishimproperpayment estimatesin theirannualPerformanceandAccountabilityReport(PAR)orAnnualFinancial Report(AFR).

TheOfficeofManagementandBudget(OMB)issuedagovernment‐wideguidanceontheimplementationofIPERA(OMBM‐ll‐16,dated April 14,2011). The guidance explainsthat, underIPERA,agencies must:

(1) Review allprogramsandactivitiesandidentifythosethatare susceptible tosignificantimproperpayment. "Significantimproperpayments"are defined asgrossannual improper payments in theprogramexceeding(a)both2.5percentofprogramoutlaysand$10,000,000of allprogramoractivitypaymentsmade during theFiscalYear(FY)reportedor (b)$100,000,000regardlessoftheimproperpaymentpercentage oftotal programoutlays;

(2) Iftheprogramsandactivities identifiedreachthesignificant improperpaymentthreshold,obtainastatisticallyvalid estimateof the annualamountofimproperpaymentsinprogramsandactivities fprogramsthatare identifiedassusceptibleto significant i

orthose mproper

payments;

(3) Implementaplantoreduce improperpayments;and

(4) Reportestimatesoftheannualamountofimproperpaymentsinprogramsandactivitiesandprogressin reducingthem.

OMBguidancehasdefinedanimproperpaymentasanypaymentthatshouldnothavebeenmadeorthatwasmadein anincorrectamountunderstatutory,contractual, administrative,or otherlegallyapplicablerequirements. Theterm "payment" means"any paymentortransferofFederalfunds(includingacommitmentfor futurepayment,suchascash,securities,loans, loanguarantees,andinsurancesubsidies)toanynon‐Federalpersonorentitythatismade byaFederalagency..."

Forpurposesofaloan guaranteeprogram,suchasthoseadministeredbyExportImportBankoftheUnitedStates (Ex‐ImBank),animproperpayment"mayincludedisbursementstointermediaries, third‐partiesfordefault,delinquencies,interestandothersubsidies,or otherpaymentsthat arebasedonincomplete,inaccurate,or fraudulent information [emphasisadded]...[or]thatarenotin compliancewithlaw, programregulations,oragencypolicy."

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Ex‐ImBankidentifiedthefollowingthreeprogramareas assusceptibletosignificant improperpayments inFY2010: Administrative Expenses, ClaimPayments, andLoanDisbursements.Theseprogramsare described below.

Administrative Expenses

Ex‐ImBankhasdefinedthreecategoriesofadministrative disbursements: compensationandbenefits,rental payments(headquartersbuilding)and otheradministrativepayments. Compensationandbenefitsare processed outsideoftheBankbyGeneralServicesAdministration's Kansas City, MOpayrollprocessingcenter,andrentalpaymentsarehandledthroughtheintra‐governmentpaymentsystem. Theremainderof administrativepaymentstotaled$26.8millionin FY2010with7,683transactions.

ClaimPayments

Ex‐ImBankloanguaranteescover therepaymentrisksontheforeignbuyer'sdebtobligationsincurredtopurchaseU.S.exports.Ex‐ImBank guaranteestoalenderthat,inthe eventofa paymentdefaultbytheborrower,itwillpaytothelendertheoutstandingprincipalandinterestontheloan.

Ex‐ImBank'sExportCreditInsuranceProgramhelpsU.S.exporters selltheirgoodsoverseasbyprotectingthemagainsttheriskof foreign‐buyerorotherforeign‐debtordefaultforpoliticalorcommercialreasons,allowingthemtoextendcredittotheirinternationalcustomers.

Ex‐ImBankdisbursed242transactionsinclaimpaymentsduring FY2010totaling$231million. TheClaimsandRecoveriesSectionofthe Office oftheTreasurerisresponsibleforprocessingrequestsfordisbursementswhen payingclaims,expensesrelating topayingclaims,andaparticipant's shareof recoveries orrelatedexpenses.

LoanDisbursements

Ex‐ImBankoffersfixed‐rateloans directly toforeignbuyersofU.S.goodsandservices. Therewere27transactionsdesignatedas loan disbursements for FY2010totaling$2.1billion.Once a transaction becomeslegallyoperative, theOperations&Data QualityDivision(Operations)reviewsthe supportingdocumentationpriorto approving adisbursementrequestinLoan and Guarantee Accounting System(LGA). Afteritsreview, Operationssignsthe disbursementapproval andsendsthesigneddocumenttoProgram Accounting andServicing(PAS)alongwiththeborrower'srequestprovidingpaymentaccountinformation. The PASstaffinitiatesthe disbursementinLGA,appliestheexposurefee,printsthedisbursementvoucher, andsubmitsthevouchertoacertifyingofficerwhosignsthevoucherandforwardsittotheCashControlDivisionforremittanceofthe funds. Theactualcash disbursementisreducedbytheamountoffinancedfee.

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Ex‐ImBankidentified 84improper paymenttransactionstotaling approximately $1.39millionduringFY 2010. Ex‐ImBankassessedtheriskof improperpaymentsassociated withthese threeareasto belowduetothe internalcontrols inplaceandthenatureofthesedisbursements.

AccordingtoOMBM‐ll‐16,theannualestimatesofimproperpaymentsreported inthePARor AFRshouldcoincidewiththefiscal yearbeing reported, to theextent possible. Agenciesmayutilize a different 12‐monthreporting period ifithasbeenapprovedbyOMB. Forexample,agenciesmayreportbasedonthe previousfiscalyear'sdataifithasbeenapproved byOMB(e.g.,fortheFY 2011PAR orAFRreporting,agenciesmayreporton FY2010dataifapprovedbyOMB). Ex‐Im Bank hasreceivedanapprovalfromOMBtoreport improperpayments informationone year inarrearsand thereforereportedonFY 2010datainFY2011.

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OBJECTIVE

Theobjectiveofthis evaluation wastodeterminewhetherEx‐Im Bankisincompliancewiththerequirements oftheIPERA.

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EVALUATION RESULTS

A. CLAIM PAYMENTS RELATING TO FRAUDULENT ACTIVITIES NEEDED TO BE INCLUDED IN

THE IMPROPER PAYMENT RISK ASSESSMENT

Basedonourreviewof thetransactionssampled,Ex‐ImBankproperlydeterminedwhetherpaymentswereproperor improperintheir risk assessment. Our review, however,foundthatEx‐ImBankdidnotincludeintheirimproperpaymentriskassessmenttheclaimpayments thatwerelaterfoundtobebased onfraudulentinformation. Assuch,thetotal numberandvalueofimproperpaymentsreportedbyEx‐ImBankforFY 2010wasunderstated.

OMBM‐ll‐16statesthatunder"a loanguaranteeprogram,animproperpaymentmayincludedisbursementstointermediaries,third‐parties for defaults, delinquencies,interest andothersubsidies,or otherpayments that arebasedonincomplete, inaccurate, orfraudulentinformation."

Wesoughtclarification fromOMB onthisissueandconfirmedthatclaimpaymentsthatwerelaterfound tohavebeen basedonfraudulentinformationunderlyingthe transaction shouldhavebeenconsideredas improperpaymentsfor reporting purposes.

WecontactedOfficeof Inspector General[OIG] ‐OfficeofInvestigations(OI)forinformation onclaimpaymentsrelating tofraudulentactivities.OI identified31transactionstotalingapproximately$11.2millionin fraudulent claimpaymentsinFY2010. HadEx‐ImBankincludedtheseclaimpaymentsintheir assessment, theimproperpayment totalsforthe ClaimPaymentsareawouldhave been4.8percentoftheprogramoutlays. Therefore,Ex‐ImBankwouldhaveexceededthethresholdestablished byOMBM‐ll‐16,whichissetat"both2.5 percentofprogramoutlaysand $10,000,000ofallprogramoractivitypaymentsmadeduringthe fiscalyear reported."

Exceedingthisthresholdwouldhaverequired Ex‐ImBanktoconductadditional stepstocomplywithguidanceprovided inOMBM‐ll‐16. Someof theadditional stepslisted inthe OMBM‐ll‐16are:obtainastatisticallyvalidestimateoftheannualamountofimproperpayments,identifyreasonsforwhytheprogram oractivity isatriskofimproperpayments,andputinplaceacorrectiveaction planto reducethem.

BasedonourdiscussionwithOfficeofthe Controller(OC) staff,theomissionwas duetoadifferentunderstanding ofwhatconstitutedanimproperpaymentOC staff didnotbelieveclaimpayments foraguaranteeneededtobeconsideredasimpropersinceaguaranteedtransactionrepresentedabusiness relationshipbetweenEx‐ImBankandthefinancialinstitution,andnot with theborrower.

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Recommendation 1

TheOCshouldincludeclaimpaymentsbased onfraudulentinformationin theimproperpayment risk assessmentanddeterminewhetheradditionalstepsshould betakenin accordance withOMBM‐ll‐16.

Management Response

Managementdidnotconcurwiththisfinding andrecommendation. Ex‐Im Bank guarantees provideunconditional coverageintheeventofdefault. Under the termofthe guarantee agreement, Ex‐ImBankisrequiredtomake theclaimpayment eveniftheborrowerobtainedtheunderlyingcreditfromtheguaranteedlenderbyprovidingfraudulentinformationand/ordocumentation tothelender.ManagementwillprovideOMBtheir methodologyforcalculatingimproperpaymentstoobtainOMBconcurrence. Any changessuggestedbyOMBwillbereviewed andincorporated intoOCprocedures.

OIG Comment

Wewillworkwiththe OConce theOCreceivesOMB’sfeedbackon themethodology.

B. A FORMAL POLICY FOR THE IMPROPER PAYMENTS RISK ASSESSMENT IS NEEDED

Ex‐ImBankcompletedthe"ImproperPaymentRiskAssessmentQuestionnaireforFY2010"as partoftheirriskassessment. ThequestionnairewasbuiltbasedonarecommendationfromtheEx‐ImBankinternalauditorinaFY2008review.Ex‐ImBankalsoissuedasummaryoftheir riskassessmentdocumentingtheinternalcontrolsencompassingimproperpayments. However,Ex‐ImBankdoes nothave in placeaformalpolicydefiningtheproceduralrequirementsthatmustbeperformedinordertocomplywithIPERA.

Thelackof formalpolicyandprocessincreasesthepotential forinconsistenciesbystaffuponrepeating theprocessin latercycles andcomparing results tohistorical baselinedata. Further,GovernmentAccountabilityOffice(GAO)'s"Standards forInternal Controlin the FederalGovernment,"datedNovember1999, identified ControlEnvironmentasoneofthe five standardsforinternalcontrol. GAOstated"...agoodinternalcontrolenvironmentrequiresthat the agency'sorganizationalstructureclearlydefinekeyareasofauthority andresponsibilityand establishappropriatelinesofreporting. Theenvironmentisalsoaffectedby themanner inwhichtheagencydelegatesauthorityand responsibility throughoutthe organization. Thisdelegation coversauthorityandresponsibility foroperating activities,reportingrelationships, andauthorizationprotocols."

Recommendation 2

TheOCshoulddevelopandadopt aformalwrittenpolicy thatprovidestheproceduralrequirementstoensureconsistencyinfuturereviews andtocomplywithalloftheapplicableIPERAprovisions.

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Management Response

Managementconcurredwiththis recommendationandwilldevelop writtenprocedures byMay31, 2012.

OIG Comment

Whenaccomplished,theaboveactionshouldsatisfythis recommendation.

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SCOPE AND METHODOLOGY

ThescopeoftheevaluationfocusedonEx‐ImBank'srisk assessmentandcomplianceoverIPERAforFY2010.

Weselected10of84 improperpaymenttransactions todetermine whether these transactions werecorrectlyclassifiedbyEx‐ImBankasimproper.

Wealsoselected15ofallother paymentstodeterminewhether thesetransactionswerecorrectlyclassifiedbyEx‐ImBankasproper.

WeinterviewedkeyEx‐ImBankstafffromtheOCtoobtainrelevantinformation/documentationpertinentto thisevaluation. Wealsocontactedthe OMBofficial residingin theOfficeof FederalFinancialManagementwhowasresponsiblefortheOMBM‐ll‐16 guidancetoclarify therequirements.

WeanalyzeddataobtainedfromtheOCstaff,aswellasotherinformationavailablesuchasclaimpaymentsinformationfromtheOIG–OI,IPERAof 2010,andOMBM‐ll‐16.

WeconductedourfieldworkfromJanuary5, 2012,toFebruary8, 2012.

WeperformedthisevaluationbecauseOMBM‐ll‐16requiresthat eachagency'sInspectorGeneralreviewtheimproperpaymentreportinginthe agency'sPARorAFR,andaccompanyingmaterials, todetermineiftheagencyis incompliancewith therequirements.

Weconductedthisevaluationin accordancewiththe"QualityStandardsforInspection andEvaluation,"dated January2011,issuedbytheCounciloftheInspectors Generalon IntegrityandEfficiency.

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ACRONYMS

AFR AnnualFinancialReport

Ex‐ImBankortheBank ExportImportBankoftheUnitedStates

FY FiscalYear

GAO GovernmentAccountabilityOffice

IPERA ImproperPaymentsEliminationandRecoveryActof2010

LGA LoanandGuaranteeAccountingSystem

OC OfficeoftheController

OI OfficeofInvestigations

OIG OfficeofInspectorGeneral

OMB OfficeofManagementandBudget

Operations Operations andData QualityDivision

PAR Performanceand Accountability Report

PAS ProgramAccountingand Servicing

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APPENDIX A

ManagementResponseDatedMarch9,2012

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MEMORANDUM March 9, 2012

To: Christine Staley Senior Auditor

From: Joseph SorberV Controller 0

Subject: Draft Report on the Evaluation of Compliance with the Improper Payments Elimination and Recovery Act of20l0 - Response to Recommendations

Following are responses to the recommendations made in the above referenced report.

Recommendation 1 The OC should include claim payments based on fraudulent information in the improper payment risk assessment and determine whether additional steps should be taken in accordance

with OMB M-II-16.

Response Ex-1m's medium term guarantees provide unconditional coverage in the event of default. Except in certain instances of noncompliance with the terms of the guarantee agreement between Ex-Im and the guaranteed party, Ex-Im cannot deny payment of the claim. Under the terms of the guarantee agreement Ex-1m is required to make the claim payment even if the borrower obtained

the underlying credit from the guaranteed lender by providing fraudulent information and/or

documentation to the lender.

The IPERA defines an improper payment as: (A) ... any payment that should not have been made or that was made in an incorrect

amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements; and

(B) includes any payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment for a good or service not received (except for such payments where authorized by law), and any payment that does not account for credit for applicable discounts.

Payment of a claim in accordance with the guarantee agreement, even if fraud was involved in obtaining the credit, does not fit the IPERA definition of an improper payment. The IPERA is describing an improper payment as a payment where a mistake is made in the payment process. In the claim scenario described above, there is no mistake. The claim payment is contractually required, it is for the correct amount, it is made to the correct eligible recipient, and is therefore

not improper. In fact, the failure of Ex-Im to pay the claim would likely result in the guaranteed party taking legal action against Ex-Im.

When it is determined that fraud is involved in a transaction, recovery action is taken against the party that perpetrated the fraud (the borrower or exporter), not the guaranteed lender who received Ex-Im's claim payment. Ex-Im has no legal basis to seek recovery from the guaranteed lender, further confirmation that the payment to the guaranteed lender was not improper.

Management believes that claim payments made in accordance with the credit agreement, even if fraud was involved when the borrower obtained the credit from the lender, is not an improper payment. Ex-Im will provide OMB our methodology for calculating improper payments to obtain their concurrence. Any changes suggested by OMB will be reviewed and incorporated into our procedures. Ex-Im will provide the IG's office a copy of the fmalized procedures with

OMB concurrence.

Recommendation 2 The OC should develop and adopt a formal written policy that provides the procedural requirements to ensure consistency in future reviews and to comply with all of the applicable

IPERA provisions.

Response We agree with the recommendation and will develop written procedures by May 31, 2012.

cc: Alice Albright

David Sena Patricia Wolf

Office of Inspector GeneralExport-Import Bank of the United States811 Vermont Avenue, NWWashington, DC 20571202-565-3908www.exim.gov/oig