Export-Import Bank:

Enhancements Needed in Loan Guarantee Underwriting Procedures and for Documenting Fraud Processes

GAO-14-574: Published: Sep 9, 2014. Publicly Released: Sep 9, 2014.

Additional Materials:

Contact:

Stephen M. Lord
(202) 512-4379
lords@gao.gov

 

Gary T. Engel
(202) 512-3406
engelg@gao.gov

 

Office of Public Affairs
(202) 512-4800
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What GAO Found

The Export-Import Bank's (Ex-Im) Loan, Guarantee, and Insurance Manual (Manual) describes Ex-Im's underwriting procedures and generally provides loan officers with a framework to implement its underwriting process requirements for loan guarantee transactions. GAO's review of a statistical sample of loan guarantees indicated that Ex-Im implemented many key aspects of the underwriting process as required by the Manual. However, the Manual did not (1) include certain procedures or sufficiently detailed instructions to verify compliance with Ex-Im's requirements and consistency with federal guidance, such as a procedure to verify that loan guarantee transaction applicants did not have delinquent federal debt; (2) include instructions for loan officers to use credit reports and for the inclusion of all required documents and analyses in the loan file prior to approval; and (3) call for assessments of collateral, as required by federal guidance, for certain loan guarantee transactions prior to approval. Further, Ex-Im did not have mechanisms to verify compliance with certain established procedures, including documenting certain loan guarantee eligibility procedures. In addition, Ex-Im's current risk-based approach for scheduling examinations to monitor lenders with delegated authority to approve guaranteed loans was not documented. Improvements in these areas help enhance the assessment of transaction participant eligibility and the reasonable assurance of repayment, as well as help prevent fraud.

While Ex-Im has processes to prevent, detect, and investigate fraud, Ex-Im has not documented its overall processes for doing so. Such documentation is recommended by several authoritative auditing and antifraud organizations as a key step in evaluating and updating these processes. The processes Ex-Im used to prevent and detect fraud were part of its underwriting and monitoring of loan guarantees. A number of divisions within Ex-Im, as well as lenders, played a role in preventing fraudulent applications from being approved and monitoring activity that could help detect potential fraud. If a guaranteed loan defaults and an indicator of fraud existed, staff would work with Ex-Im's Office of Inspector General to leverage its investigative resources to pursue involved parties.

Key Aspects of Export-Import Bank's Fraud Processes

Key Aspects of Export-Import Bank's Fraud Processes

Why GAO Did This Study

Ex-Im serves as the official export credit agency of the United States, providing a range of financial products to support the export of U.S. goods and services. Following the 2007-2009 financial crisis, increased demand for Ex-Im support resulted in significant increases in Ex-Im's outstanding financial commitments and risk exposure, which heightened interest in ensuring that Ex-Im has procedures in place to minimize financial risks.

GAO was mandated by the Export-Import Bank Reauthorization Act of 2012 to review the extent to which Ex-Im (1) adequately designed and implemented procedures to reasonably assure compliance with its underwriting process requirements for loan guarantee transactions and consistency with federal guidance and (2) adequately designed procedures to prevent, detect, and investigate fraudulent applications for loan guarantees. To address these objectives, GAO (1) reviewed Ex-Im's relevant procedures and federal guidance; (2) conducted tests on statistically random samples of loan guarantees authorized between October 1, 2011, and March 31, 2013; and (3) interviewed Ex-Im officials.

What GAO Recommends

GAO is making a number of recommendations to Ex-Im to enhance its loan guarantee underwriting process with additional procedures for ensuring compliance with Ex-Im and federal requirements, as well as for documenting fraud processes. In commenting on GAO's draft report, Ex-Im concurred with GAO's recommendations.

For more information, contact Steve Lord at (202) 512-4379 or lords@gao.gov or Gary Engel at (202) 512-3406 or engelg@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Ex-Im updated its Loan, Guarantee, and Insurance Manual (Manual) to address this recommendation. Specifically, the Manual was updated to clearly indicate when credit reports for various transactions participants should be obtained. The Manual was also updated to clarify how to document the determination of eligibility procedures and the analysis of country exposure prior to loan guarantee approval.

    Recommendation: The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to establish mechanisms to oversee compliance with Ex-Im's existing procedures, prior to loan guarantee approval, for (1) obtaining credit reports for transaction borrowers or documenting why they were not applicable; (2) documenting certain eligibility procedures, including the Character, Reputational, and Transaction Integrity reviews for medium- and long-term loan guarantee transactions, export item eligibility, and country eligibility; and (3) documenting the analysis of country exposure.

    Agency Affected: Export-Import Bank of the United States

  2. Status: Closed - Implemented

    Comments: Ex-Im updated its Loan, Guarantee, and Insurance Manual (Manual) to clarify how credit reports should be used to determine that applicants are not delinquent on federal debt, and what steps loan officers should take if delinquent federal debt is discovered. The Manual was also revised to state that evaluating the contract, which identifies the collateral, will be used as the appropriate assessment of collateral for nonaircraft medium- and long-term loan guarantee transactions prior to approval.

    Recommendation: The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to develop and implement procedures, prior to loan guarantee approval, for (1) verifying that transaction applicants are not delinquent on federal debt, including using credit reports to make such a determination, and (2) performing assessments of collateral for nonaircraft medium- and long-term loan guarantee transactions.

    Agency Affected: Export-Import Bank of the United States

  3. Status: Closed - Implemented

    Comments: Ex-Im updated its Loan, Guarantee, and Insurance Manual to include a list of required documentation and analysis to be performed prior to loan guarantee approval to ensure loan files are complete. The Manual was also updated to clearly indicate when credit reports should be received and reviewed during the loan application assessment.

    Recommendation: The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to develop and implement detailed instructions, prior to loan guarantee approval, for (1) preparing and including all required documents or analyses in the loan file and (2) using credit reports in the risk assessment and due diligence process.

    Agency Affected: Export-Import Bank of the United States

  4. Status: Closed - Implemented

    Comments: The EX-IM OIG recently reported that in reviewing the Ex-Im Bank's information and processes related to the Do Not Pay Initiative, the OIG concluded that the Bank complied with the intent of the Do Not Pay Initiative. In order to avoid fraudulent and improper payments, the bank relies on a series of preventive controls at the pre-award stage of a contract, which includes checks of some of the databases listed in the Do Not Pay Initiative, such as the Excluded Parties List System and the List of Excluded Individuals and Entities. With respect to its credit programs, one of the requirements in the credit approval due diligence process consists of becoming familiar with the parties involved in the transaction, including payment beneficiaries. As part of the Character, Reputational, and Transaction Integrity (CRTI) review, the Bank checks over 20 different watch lists by using a solution developed by Thompson Reuters called World-Check. There is some overlap between the portals used by World-Check and the Do Not Pay Initiative. However, the Bank had determined the World Check solution to be better suited to the international nature of its business, as it checks both national and international databases. The Bank has deemed the portals listed in the Do Not Pay Initiative to not be meaningful or significant to its business model. In addition, the Bank has evaluated its databases and has reviewed and revised its CRTI process. The revised CRTI process was presented to and approved by the Enterprise Risk Committee in December 2014. In addition, the Bank revised its Loan, Guarantee, and Insurance Manual to enhance its use of credit reports to check for federal debt by U.S. participants. Ex-Im's actions address the intent of this recommendation.

    Recommendation: The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to update the Character, Reputational, and Transaction Integrity review process to include the search of databases to help identify transaction applicants with delinquent federal debt that would then not be eligible for loan guarantees.

    Agency Affected: Export-Import Bank of the United States

  5. Status: Closed - Implemented

    Comments: Ex-Im revised its Loan, Guarantee, and Insurance Manual to update its guidelines for scheduling delegated authority lender examinations based on lender risk. In addition, the Manual now defines the annual interval for these exams to be between 10 and 16 months. If extensions are granted beyond this annual interval, the Manual requires documentation of the justification for the extension.

    Recommendation: The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to document Ex-Im's current risk-based approach for scheduling delegated authority lender examinations.

    Agency Affected: Export-Import Bank of the United States

  6. Status: Closed - Implemented

    Comments: Ex-Im documented its overall fraud process, including describing the roles and responsibilities of Ex-Im divisions and officials that are key participants in Ex-Im's fraud prevention, detection, and investigation processes. The documentation specifies that Ex-Im's primary protection against fraud is its underwriting process, which includes requirements for loan officers to run the names of transaction participants through various databases to protect Ex-Im from approving transactions in which participants are known bad actors. Loan officers are also required to take periodic fraud training sessions offered by the Bank and to be aware of indicators of fraud in loan documents submitted for review. Operations will also review submitted documents for potential anomalies, and transactions face additional monitoring once they are disbursed. The documentation also lists the roles and responsibilities for Ex-Im's various divisions, such as the Credit Review and Compliance Division, the Office of the General Counsel and its Inspector General. Any suspicion of fraud should be promptly reported to General Counsel and the Inspector General. The documentation also details how privacy concerns are to be managed once the Bank begins an investigation into a suspicion of fraud.

    Recommendation: The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to document Ex-Im's overall fraud process, including describing the roles and responsibilities of Ex-Im divisions and officials that are key participants in Ex-Im's fraud processes.

    Agency Affected: Export-Import Bank of the United States

 

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