Small Business Administration:

Inadequate Oversight of Capital Management Services, Inc.--an SSBIC

OSI-94-23: Published: Mar 21, 1994. Publicly Released: Mar 21, 1994.

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Pursuant to a congressional request, GAO reviewed the operations of a Small Business Administration (SBA) licensee, focusing on: (1) SBA regulation and oversight of the licensee's operations; (2) the licensee's compliance with SBA regulations in determining the eligibility of the firms it financed and whether its operations were business-like; and (3) the financing provided to an individual and two disadvantaged small businesses.

GAO found that: (1) SBA oversight of the licensee was inadequate and it failed to recognize serious indicators that the licensee was improperly managed, which resulted in a loss of $3.4 million to SBA; (2) SBA has placed the licensee in receivership and its president has been indicted; (3) the licensee made prohibited loans to business associates for real estate purchases, violated SBA regulations, and made questionable loan eligibility determinations; (4) SBA has not provided guidelines for determining socially or economically disadvantaged individuals because it wants to maintain flexibility in eligibility determinations, and it does require that licensees prepare and maintain eligibility profiles for each loan recipient; (5) the licensee only prepared and maintained a few recipient eligibility profiles; and (6) it was unable to fully analyze the loans to the disadvantaged small businesses because of the principals' unavailability and the licensee's incomplete transaction records.

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