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JULY 2022
Annual Report of the
Council of Inspectors General
on Financial Oversight
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Message from the Chair
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Message from the Chair
In 2020 and 2021, the Federal Government enacted unprecedented levels of financial assistance and
stimulus programs to provide much needed relief to individuals, families, and businesses in response to
the Coronavirus Disease 2019 (COVID-19) pandemic. In keeping with its mission, the Council of Inspectors
General on Financial Oversight (CIGFO), which is authorized to oversee Financial Stability Oversight Council
(FSOC) operations, continues to monitor the ongoing response of FSOC and its member agencies related
to the public health and financial crisis.
We are also mindful of new and evolving risks and challenges that could cause stress to the stability of the
U.S. financial system. This past year, FSOC issued its report on climate-related financial risk in response to
Executive Order 14030, Climate-related Financial Risk, and a report on digital assets required by Executive
Order 14067, Ensuring Responsible Development of Digital Assets is expected in the fall of 2022. Meanwhile,
the war in Ukraine has the potential to pose new challenges to financial stability that warrant monitoring
by FSOC and its member agencies.
To accomplish CIGFO’s oversight and monitoring activities, it has, since 2011, established working groups
that are comprised of staff from the CIGFO member Inspector General offices to conduct reviews of FSOC
operations. CIGFO relies on these working groups to fulfill its mission. In 2020, CIGFO approved a working
group to compile forward-looking guidance for FSOC and its members to consider in preparing for a
crisis. This project is expected to be completed in the summer of 2022. In 2021, CIGFO approved another
working group to review FSOC’s response to Executive Order 14030, Climate-related Financial Risk, which is
expected to be completed in the fall of 2022.
CIGFO’s monitoring activities also include sharing financial regulatory information which enhance the
knowledge and insight of its members about specific issues related to members’ current and future
work. For example, during its quarterly meetings, CIGFO members discussed FinTech companies and the
regulatory challenges these companies pose to federal regulators; Executive Orders 14030 and 14067; as
well as legislative activities that could impact the financial regulatory system.
In the coming year, CIGFO members will continue, through their individual and joint work, to help
strengthen the financial system by oversight of FSOC and its Federal member agencies.
/s /
Rich Delmar
Acting Chair, Council of Inspectors General on Financial Oversight
Deputy Inspector General, Department of the Treasury
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Table of Contents
Council of Inspectors General on Financial Oversight. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Council of Inspectors General on Financial Oversight Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Office of Inspector General Board of Governors of the Federal Reserve System
and Bureau of Consumer Financial Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Office of Inspector General Commodity Futures Trading Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Office of Inspector General Federal Deposit Insurance Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Office of Inspector General Federal Housing Finance Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Office of Inspector General U.S. Department of Housing and Urban Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Office of Inspector General National Credit Union Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Office of Inspector General U.S. Securities and Exchange Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Special Inspector General for the Troubled Asset Relief Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Office of Inspector General Department of the Treasury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
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Council of Inspectors General on Financial Oversight
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Council of Inspectors General on Financial Oversight
The Council of Inspectors General on Financial Oversight (CIGFO) was established by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), and meets on a quarterly basis to facilitate the sharing of
information among Inspectors General. The CIGFO members discuss the ongoing work of each Inspector General
who is a member of the Council, with a focus on concerns that may apply to the broader financial sector, and
exchange ideas about ways to improve financial oversight. The CIGFO publishes an annual report that includes
separate sections within the exclusive editorial control of each Inspector General. Those sections describe the
concerns and recommendations of each Inspector General and a discussion of ongoing and completed work.
During the course of the year, the CIGFO continued to monitor coordination efforts among and between Financial
Stability Oversight Council (FSOC) members. Specifically, CIGFO members were briefed on and/or discussed the
following:
•
Financial Technology (FinTech) companies and recent developments regarding bank charters and regulatory
challenges
•
Office of the Comptroller of the Currency – current priorities and key issues which may have broader
implications within CIGFO’s lines of oversight
•
Intelligence Community Inspector General – results of an audit of the implementation of the Cybersecurity
Information Sharing Act of 2015
•
Legislative matters of interest, including budget resolution and statutory debt limit constraints
•
Executive Order 14030 – Climate-related Financial Risk and A Roadmap to Build a Climate-Resilient Economy
•
FSOC’s report on Climate-related Financial Risk
•
Executive Order 14067 – Ensuring Responsible Development of Digital Assets
The Council of Inspectors General on Financial Oversight Reports
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
The Council of Inspectors General on Financial
Oversight Reports
The Dodd-Frank Act authorizes CIGFO to convene a working group, by a majority vote, for the purpose of evaluating
the effectiveness and internal operations of the FSOC.
To date, CIGFO has issued the following reports—
•
2012 - Audit of the Financial Stability Oversight Council’s Controls over Non-public Information
•
2013 - Audit of the Financial Stability Oversight Council’s Designation of Financial Market Utilities
•
2014 - Audit of the Financial Stability Oversight Council’s Compliance with Its Transparency Policy
•
2015 - Audit of the Financial Stability Oversight Council’s Monitoring of Interest Rate Risk to the Financial System
•
2017 - Audit of the Financial Stability Oversight Council’s Efforts to Promote Market Discipline
•
2017 - Corrective Action Verification of FSOC’s Implementation of CIGFO’s Audit Recommendations in the 2013
Audit of FSOC’s Financial Market Utility Designation Process
•
2018 - Top Management and Performance Challenges Facing Financial Regulatory Organizations
•
2019 - Audit of the Financial Stability Oversight Council’s Monitoring of International Financial Regulatory
Proposals and Developments
•
2019 - Top Management and Performance Challenges Facing Financial-Sector Regulatory Organizations
•
2020 - Survey of FSOC and its Federal Member Agencies’ Efforts to Implement the Cybersecurity Act of 2015
•
2020 - Council of Inspectors General on Financial Oversight Presidential Transition Handbook
The corrective actions described by FSOC, with respect to the audits listed above, met the intent of our
recommendations, and may be subject to verification in future CIGFO working group reviews.
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Office of Inspector General Board of Governors of the Federal Reserve System and Bureau of Consumer Financial Protection
Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General
Board of Governors of the Federal Reserve System and
Bureau of Consumer Financial Protection
We provide independent oversight by conducting audits, inspections, evaluations, investigations, and other reviews of the
programs and operations of the Board of Governors of the Federal Reserve System and the Bureau of Consumer Financial
Protection and demonstrate leadership by making recommendations to improve economy, efficiency, and effectiveness, and by
preventing and detecting fraud, waste, and abuse.
Background
Congress established our office as an independent oversight authority for the Board, the government agency
component of the broader Federal Reserve System, and the Bureau.
Under the authority of the Inspector General Act of 1978, as amended (IG Act), we conduct independent and
objective audits, inspections, evaluations, investigations, and other reviews related to the programs and operations of
the Board and the Bureau.
•
We make recommendations to improve economy, efficiency, and effectiveness, and we prevent and detect
fraud, waste, and abuse.
•
We share our findings and make corrective action recommendations to the Board and the Bureau; we do
not manage agency programs or implement changes.
•
We keep the Board chair, the Bureau director, and Congress fully informed of our findings and corrective
action recommendations, as well as the agencies’ progress in implementing corrective action.
In addition to the duties set forth in the IG Act, Congress has mandated additional responsibilities for our office.
Section 38(k) of the Federal Deposit Insurance Act (FDI Act) requires us to review failed financial institutions
supervised by the Board that result in a material loss to the Deposit Insurance Fund (DIF) and produce a report within
6 months. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 38(k) of the FDI Act
by raising the materiality threshold and requiring us to report on the results of any nonmaterial losses to the DIF that
exhibit unusual circumstances warranting an in-depth review.
Section 211(f) of the Dodd-Frank Act also requires us to review the Board’s supervision of any covered financial
company that is placed into receivership under title II of the act and produce a report that evaluates the effectiveness
of the Board’s supervision, identifies any acts or omissions by the Board that contributed to or could have prevented
the company’s receivership status, and recommends appropriate administrative or legislative action.
Office of Inspector General Board of Governors of the Federal Reserve System and Bureau of Consumer Financial Protection
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
The Federal Information Security Modernization Act of 2014 (FISMA) established a legislative mandate for ensuring
the effectiveness of information security controls over resources that support federal operations and assets. In a
manner consistent with FISMA requirements, we perform annual independent reviews of the Board’s and the Bureau’s
information security programs and practices, including testing the effectiveness of security controls and techniques
for selected information systems.
Section 15010 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act established the Pandemic Response
Accountability Committee (PRAC) within the Council of the Inspectors General on Integrity and Efficiency (CIGIE).
PRAC is required to conduct and coordinate oversight of covered funds and the coronavirus response in order to
detect and prevent fraud, waste, abuse, and mismanagement and identify major risks that cut across programs and
agency boundaries. PRAC is also required to submit reports related to its oversight work to relevant federal agencies,
the president, and appropriate congressional committees. The CIGIE chair named our inspector general as a member
of PRAC, and as such, we participate in PRAC meetings, conduct PRAC oversight activities, and contribute to PRAC
reporting responsibilities.
The economic disruptions caused by the COVID-19 pandemic resulted in an abrupt shock to financial markets and
affected many credit channels relied on by households, businesses, and state and local governments. In response,
the Board took steps to support the flow of credit to U.S. households and businesses. Notably, the Board used its
emergency lending authority under section 13(3) of the Federal Reserve Act to create lending programs that ensure
liquidity in financial markets and provide lending support to various sectors of the economy. In addition, the Bureau
has continued to play a vital role throughout the pandemic by enforcing federal consumer protection laws and
protecting consumers from abuse.
OIG Reports and Other Products Related to the Broader Financial Sector
In accordance with section 989E(a)(2)(B) of the Dodd-Frank Act, the following highlights the completed and ongoing
work of our office, with a focus on issues that may apply to the broader financial sector.
COMPLETED WORK
Major Management Challenges for the Board and the Bureau
Although not required by statute, we biennially report on the major management challenges facing the Board and
the Bureau. These challenges identify the areas that, if not addressed, are most likely to hamper the Board’s and the
Bureau’s accomplishment of their strategic objectives.
Among other items, we identified four major management challenges for the Board that apply to the financial sector
in 2021:
•
Designing and Operationalizing Emergency Lending Programs to Address the Economic Effects of the
COVID-19 Pandemic
•
Enhancing Organizational Governance and Risk Management
•
Enhancing Oversight of Cybersecurity at Supervised Financial Institutions
•
Remaining Adaptable to External Developments While Supervising Financial Institutions
Among other items, we identified two major management challenges for the Bureau that apply to the financial sector
in 2021:
•
Remaining Adaptable to External Developments While Continuing to Refine the Supervision and
Enforcement Strategy
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
•
Managing Consumer Complaints
Results of Analytical Testing of the Board’s Publicly Reported Data for the Main Street Lending Program,
April 14, 2021
In response to the economic effects of the COVID-19 pandemic, the Board established several emergency lending
programs and facilities to provide loans to employers, certain businesses, and communities across the country. The
Board established the Main Street Lending Program (MSLP) to support lending to small and medium-sized for-profit
businesses and nonprofit organizations that were unable to access the Paycheck Protection Program (PPP) or that
required additional financial support after receiving a PPP loan. The MSLP ended on January 8, 2021.
In February 2021, we announced an evaluation of third-party cybersecurity risk management processes for vendors
supporting the MSLP and the Secondary Market Corporate Credit Facility (SMCCF). During our planning work for this
evaluation, we checked the accuracy and completeness of specific demographic data to identify invalid city-state
combinations. We also determined the accuracy of specific MSLP transaction disclosure data.
We identified several inaccurate city and state data points affecting a limited number of published loan transactions
for the MSLP. After informing Board and System officials of these inaccuracies, they took immediate steps to address
them and to update the Board’s public reporting.
Results of Analytical Testing of the Board’s Publicly Reported Data for the Secondary Market Corporate
Credit Facility, July 14, 2021
In response to the economic effects of the COVID-19 pandemic, the Board established several emergency lending
programs and facilities to provide loans to employers, certain businesses, and communities across the country. The
Board established two facilities to support credit to large employers: the Primary Market Corporate Credit Facility
for new bond and loan issuance and the SMCCF to provide liquidity for outstanding corporate bonds. The Board
designed the SMCCF to create a portfolio that tracked a broad, diversified market index of U.S. corporate bonds.
In February 2021, we announced an evaluation of third-party cybersecurity risk management processes for vendors
supporting the MSLP and the SMCCF. During our planning work for this evaluation, we identified transactions that
appeared to have been documented twice in each of the SMCCF transaction-specific disclosures published from
January through April 2021. In addition, we identified instances in each of the publicly reported transaction-specific
disclosures published from January through April 2021 in which transactions for partial bond redemptions were not
clearly labeled and did not include redemption amounts.
After informing Board and Federal Reserve Bank of New York (FRB New York) officials of these duplicate entries, they
took immediate steps to strengthen internal review processes to ensure that these transactions are appropriately
recorded in the SMCCF public disclosure data.
The Board Can Improve the Efficiency and Effectiveness of Certain Aspects of Its Consumer Compliance
Examination and Enforcement Action Issuance Processes, OIG Report 2021-SR-B-012, October 6, 2021
The Board delegates to each Federal Reserve Bank the authority to supervise certain financial institutions located
within the Reserve Bank’s district. Reserve Bank consumer compliance examination staff help execute the Board’s
consumer compliance supervision program, and the Board’s Division of Consumer and Community Affairs (DCCA)
oversees these delegated responsibilities. DCCA’s Consumer Compliance Handbook describes Unfair or Deceptive
Acts or Practices (UDAP) and fair lending as two of the most significant consumer compliance risk areas for financial
institutions. We assessed the efficiency and effectiveness of the Board’s and the Reserve Banks’ consumer compliance
examination and enforcement action issuance processes, including the processes pertaining to UDAP and fair
lending matters.
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DCCA can improve the efficiency and effectiveness of the UDAP review processes by developing formal performance
goals and target time frames, establishing criteria for when DCCA must review a potential UDAP matter, and
providing guidance and training to Reserve Bank consumer compliance supervision personnel. Although DCCA has
recently made efforts to improve the timeliness of the fair lending review processes by establishing new performance
measures and targets as well as refining the criteria for delegating certain fair lending reviews to the Reserve Banks,
DCCA can further enhance these processes by developing additional training to help acclimate Reserve Bank staff
and examiners to their newly delegated roles and responsibilities. In addition, DCCA should assess the staffing
structure and approach of its Fair Lending Enforcement and UDAP Enforcement sections. Finally, DCCA can enhance
transparency in the UDAP and fair lending examination and enforcement action issuance processes by clarifying
expectations for communicating with key stakeholders.
Our report contains recommendations designed to enhance the efficiency and effectiveness of the Board’s and the
Reserve Banks’ consumer compliance examination and enforcement action issuance processes for UDAP and fair
lending matters. The Board concurred with our recommendations.
The Board Has Effective Processes to Collect, Aggregate, Validate, and Report CARES Act Lending Program
Data, OIG Report 2022-FMIC-B-004, February 28, 2022
The COVID-19 pandemic disrupted economic activity in the United States, which affected many sectors of the
financial system. In response to the pandemic, the Board established lending programs under the CARES Act to
support state and local governments and businesses of all sizes. The Board is required by statute to report on any
outstanding loan or guarantee programs once every 30 days. We assessed the Board’s processes for collecting,
aggregating, validating, and reporting data related to its CARES Act lending programs.
The Board meets its CARES Act reporting requirements; voluntarily reports transaction-specific data; and publishes
complete and accurate data, with the exception of some immaterial inaccuracies. Although the Board established
and documented processes for collecting, aggregating, validating, and reporting CARES Act lending program data,
it can improve the documentation of a key decision related to how it gains assurance that the publicly reported
transaction-specific data are accurate and complete.
While the Board’s decision to publish transaction-specific data exceeded applicable statutory requirements for
publishing aggregate-level data on the lending programs, we identified additional opportunities to enhance
transparency and reduce the potential to report immaterial inaccuracies in the supplemental data, which would
further the Board’s long-term objective to increase the public’s understanding of its activities.
Our report contains recommendations designed to help the Board quickly establish processes for reporting on
lending programs under similar future circumstances. The Board concurred with our recommendations, and one
recommendation was closed, based on actions taken by the Board, upon issuance of this report.
The Bureau Can Improve Aspects of Its Quality Management Program for Supervision Activities, OIG
Report 2021-SR-C-016, November 1, 2021
Within the Bureau’s Division of Supervision, Enforcement and Fair Lending (SEFL), the Office of Supervision
Examinations (OSE) is responsible for supervising and examining institutions’ compliance with federal consumer
financial laws. OSE’s Oversight team is responsible for developing and supporting the supervision program
and manages the Quality Management Program (QMP) for supervision activities. We assessed the design and
effectiveness of SEFL’s QMP for supervision activities.
SEFL can improve the effectiveness of its QMP for supervision activities by finalizing the updates to existing and
draft QMP policies, procedures, and guidance and considering increasing SEFL leadership involvement in formal
program oversight. Additionally, OSE should enhance aspects of the QMP’s quality control review processes, assess
the program’s current staffing level and structure, formalize its training program, and enhance the reporting and
distribution of its quality assurance results.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Our report contains recommendations designed to enhance the effectiveness of SEFL’s QMP for supervision activities.
The Bureau concurred with our recommendations.
The Bureau Can Further Enhance Certain Aspects of Its Approach to Supervising Nondepository
Institutions, OIG Report 2021-SR-C-017, December 8, 2021
The Bureau’s SEFL is responsible for ensuring compliance with federal consumer financial laws by supervising
market participants and initiating enforcement actions when appropriate. The Dodd-Frank Act authorizes the
Bureau to supervise depository institutions and their affiliates with more than $10 billion in total assets and certain
nondepository institutions. We assessed SEFL’s approach to supervising nondepository institutions.
SEFL applies consistent examination procedures to depository and nondepository institutions and uses the same
approach to follow up on Matters Requiring Attention. These approaches help to ensure that the Bureau consistently
supervises these two types of financial institutions. SEFL can, however, further improve its approach to supervising
nondepository institutions. Specifically, SEFL has issued consumer compliance ratings to nondepository institutions
less frequently than to depository institutions and faces challenges gathering information to identify the total
population of nondepository institutions within the Bureau’s jurisdiction. We also found that limited staffing levels
in SEFL’s OSE constrain the Bureau’s ability to examine nondepository institutions. Lastly, SEFL’s guidance lacked
definitions for tracking certain examination data, and we identified inconsistent and missing data in SEFL’s system of
record.
Our report contains recommendations designed to further enhance the Bureau’s approach to supervising
nondepository institutions. The Bureau concurred with our recommendations.
ONGOING WORK
Evaluation of the Board’s Processes for Reviewing and Approving Supervisory Proposals
The Board plays a significant role in supervising and regulating U.S. financial institutions. Through its oversight,
the Board seeks to ensure that the institutions it supervises operate in a safe and sound manner and comply with
applicable federal laws and regulations. Key aspects of the Board Division of Supervision and Regulation’s mission
include developing and implementing effective supervisory policy and guidance for supervised financial institutions.
Board governors may be involved in reviewing and approving supervisory proposals addressing various matters, such
as certain supervisory policy and guidance and aspects of the supervisory stress testing program. We are assessing
the effectiveness of the Board’s processes for reviewing and approving supervisory proposals. Our focus is on the
Board’s practices for determining which supervisory proposals and activities warrant consultation and approval by the
governors. Our scope includes proposals related to supervisory policy and guidance as well as the supervisory stress
testing program.
Monitoring of the Federal Reserve’s Lending Programs
In response to the economic effects of the COVID-19 pandemic, the Federal Reserve created new lending programs
to provide loans to employers, certain businesses, and communities across the country to support the U.S. economy.
Specifically, the following programs have been created: the MSLP, the Paycheck Protection Program Liquidity Facility,
the Municipal Liquidity Facility, the Primary Market Corporate Credit Facility, and the SMCCF. We initiated an active
monitoring effort of these programs to gain an understanding of the operational, governance, reputational, and
financial matters associated with them. Through this monitoring effort, we will refine our focus on the programs and
identify areas for future audits or evaluations. Some of the topics we are considering include the design, operation,
governance, and oversight of the lending programs; data collection and reporting associated with the programs; and
the effect of the programs on the Board’s supervision and regulation activities.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Evaluation of the Board’s Statistical Assessment of Bank Risk and Bank Exams Tailored to Risk Processes
The Board uses various models to inform risk-based examination decisions. The Board’s Statistical Assessment of Bank
Risk (SABR) surveillance models and processes inform the agency’s watch list, which highlights state member banks
and holding companies with emerging financial weaknesses and flags institutions in the initial phases of financial
deterioration. The Board uses the Bank Exams Tailored to Risk (BETR) processes to assess the level of risk at a state
member bank, which allows supervisory personnel to tailor examination procedures to the size, complexity, and risk
profile of the institution. We are assessing the effectiveness of the model risk management processes pertaining to
SABR and BETR.
Evaluation of the Board’s and the Federal Reserve Banks’ Ethics Programs Pertaining to Personal
Investment and Trading Activities
As the central bank of the United States, the Board must maintain impartiality and avoid even the appearance of
conflicts of interest to inspire public trust in the nation’s financial system. The Board recently announced a broad set
of new investment and trading rules that, among other things, will prohibit the purchase of individual securities,
restrict active trading, and increase the timeliness of reporting and public disclosure. We are assessing the design
and effectiveness of these new rules as well as the Board’s and the Reserve Banks’ approach to monitoring personal
investment and trading activities for possible conflicts of interest.
Evaluation of the Board’s Oversight of FRB New York’s Vendor Selection and Management Processes
Related to Its Emergency Lending Facilities
As part of its emergency lending program, FRB New York operated six emergency lending facilities, five of which were
supported by multiple vendor contracts. FRB New York awarded some of its emergency lending program–related
contracts noncompetitively because of the exigent circumstances, and other contracts pose potential conflict-
of-interest risks to the System. FRB New York’s reliance on vendors highlights the importance of its monitoring of
vendor performance. We are assessing the Board’s and FRB New York’s processes related to vendor selection and
management for FRB New York’s emergency lending programs.
Evaluation of the Federal Reserve System’s Loan Purchases and Administration for Its MSLP
In response to the COVID-19 pandemic, the System established the MSLP—composed of five different lending
facilities—to facilitate lending to small and medium-sized for-profit and nonprofit organizations. Through the MSLP,
the Federal Reserve Bank of Boston (FRB Boston) purchased 1,830 loans amounting to approximately $17.5 billion
from lenders; the majority of these loans were purchased during the last 2 months of the program. Following the
purchase of the loans, FRB Boston is now responsible for administering the loans, including assessing overall credit
risk and identifying substandard loans. FRB Boston leveraged third-party vendors to support both loan purchases and
loan administration. We are assessing the MSLP’s processes for loan purchases and loan administration, including the
design, implementation, and operating effectiveness of internal controls.
Evaluation of Third-Party Cybersecurity Risk Management Processes for Vendors Supporting the Main
Street Lending Program (MSLP) and the Secondary Market Corporate Credit
Facility (SMCCF)
In response to the economic effects of the COVID-19 pandemic, the Board created new lending programs and
facilities to provide loans to employers, certain businesses, and communities across the country to support the
U.S. economy. To support the implementation of specific programs and facilities, the Federal Reserve Banks have
contracted with third-party vendors for various services, such as administrative, custodial, legal, design, and
investment management services. These vendors provide data generated from the operations and management of
the facilities to the Reserve Banks, who then provide the data to the Board. We are evaluating the effectiveness of the
risk management processes designed to ensure that effective information security and data integrity controls are
implemented by third parties supporting the administration of the MSLP and the SMCCF.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General
Commodity Futures Trading Commission
The CFTC OIG acts as an independent Office within the CFTC that conducts audits, investigations, reviews, inspections, and
other activities designed to identify fraud, waste and abuse in connection with CFTC programs and operations, and makes
recommendations and referrals as appropriate.
Background
The CFTC OIG was created in 1989 in accordance with the 1988 amendments to the Inspector General Act of 1978
(P.L. 95-452). OIG was established as an independent unit to:
•
Promote economy, efficiency and effectiveness in the administration of CFTC programs and operations and
detect and prevent fraud, waste and abuse in such programs and operations;
•
Conduct and supervise audits and, where necessary, investigations relating to the administration of CFTC
programs and operations;
•
Review existing and proposed legislation, regulations and exchange rules and make recommendations
concerning their impact on the economy and efficiency of CFTC programs and operations or the prevention
and detection of fraud and abuse;
•
Recommend policies for, and conduct, supervise, or coordinate other activities carried out or financed
by such establishment for the purpose of promoting economy and efficiency in the administration of, or
preventing and detecting fraud and abuse in, its programs and operations; and
•
Keep the Commission and Congress fully informed about any problems or deficiencies in the administration
of CFTC programs and operations and provide recommendations for correction of these problems or
deficiencies.
CFTC OIG operates independently of the Agency and has not experienced interference from the CFTC Chairman in
connection with the conduct of any investigation, inspection, evaluation, review, or audit, and our investigations have
been pursued regardless of the rank or party affiliation of the target.1 The CFTC OIG consists of the Inspector General,
the Deputy Inspector General/Chief Counsel, the Assistant Inspector General for Auditing, the Assistant Inspector
General for Investigations (vacant), two Attorney-Advisors, two Auditors, and one Senior Program Analyst. The CFTC
OIG obtains additional audit, investigative, and administrative assistance through contracts and agreements.
1
The Inspector General Act of 1978, as amended, states: “Neither the head of the establishment nor the officer next in rank below such head shall
prevent or prohibit the Inspector General from initiating, carrying out, or completing any audit or investigation….” 5 U.S.C. App. 3 sec. 3(a).
Office of Inspector General Commodity Futures Trading Commission
Office of Inspector General Commodity Futures Trading Commission
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Role in Financial Oversight
The CFTC OIG has no direct statutory duties related to oversight of the futures, swaps and derivatives markets; rather,
the CFTC OIG acts as an independent Office within the CFTC that conducts audits, investigations, reviews, inspections,
and other activities designed to identify fraud, waste, and abuse in connection with CFTC programs and operations,
and makes recommendations and referrals as appropriate. The CFTC’s yearly financial statement and Customer
Protection Fund audits are conducted by an independent public accounting firm, with OIG oversight.
Recent, Current or Ongoing Work in Financial Oversight
In addition to our work on CIGFO projects described elsewhere in this report, and our detail of a senior OIG Program
Analyst to the U.S. Department of the Treasury to assist development of an interagency committee to address
Household Resilience to Climate Change, CFTC OIG started the following projects during the past year:
2021-I-4 Pay Protection Program Proactive Investigation
In May 2021, OIG began a proactive investigation (2021-I-4) in coordination with CIGIE’s Pandemic Response
Accountability Committee (PRAC), CIGIE’s Pandemic Analytics Center for Excellence, and the Small Business
Administration, involving multiple phases. The first Phase identified CFTC employees who had obtained PPP loans and
whether proper authorization for outside business activities had been obtained. CFTC OIG made recommendations
to the Agency to improve the business processes and disclosures concerning outside business activities. Phase II and
Phase III involve potential oversight issues. The Phase II and Phase III objectives are to:
•
Identify CFTC registrants who have received PPP loans, with the potential goal of recommending that
CFTC increase oversight efforts to assure CFTC’s no-action relief is followed properly, if warranted, as well as
other potential recommendations with regard to the oversight of registrants who have received PPP loans
(including issues, if any, indicating potential systemic impact), and indicia of fraud in connection with the
PPP loans identified.
•
Identify CFTC contractors who obtained PPP loans to identify any indicia of fraud or potential reputational
risks to the Agency.
OIG contracted with a third-party vendor to provide analytic support to examine the millions of records received in
this investigation. OIG has shared its findings and has collaborated with other CIGFO OIGs on investigative methods
to maximize the value of this investigation to the oversight community.
White Paper Evaluating CFTC Experience with Digital Assets
Digital assets—including, among other things, cryptocurrency—have been widely adopted and used by both
market participants and ordinary consumers. The CFTC has played an active role in the digital asset space, offering
information to the public in the form of education and guidance as well as prosecuting digital asset-related conduct
that violates the Commodity Exchange Act. This white paper will provide a general background of the digital asset
market, the CFTC’s participation in the digital asset market, an overview of CFTC staff views and experience with
digital assets, and potential recommendations for future CFTC engagement. This project began during the Summer
of 2021.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General Federal Deposit Insurance Corporation
Office of Inspector General
Federal Deposit Insurance Corporation
The FDIC OIG mission is to prevent, deter, and detect fraud, waste, abuse, and misconduct in FDIC programs and operations;
and to promote economy, efficiency, and effectiveness at the Agency.
Background
The Federal Deposit Insurance Corporation (FDIC) was created by the Congress in 1933 as an independent Agency to
maintain stability in the Nation’s banking system by insuring deposits and independently regulating state-chartered,
non-member banks. The FDIC insures $9.73 trillion in deposits at about 4,840 banks and savings associations, and
promotes the safety and soundness of these institutions by identifying, monitoring, and addressing risks to which
they are exposed. The Deposit Insurance Fund balance totaled $123.1 billion as of December 31, 2021.
The FDIC is the primary Federal regulator for approximately 3,120 of the insured institutions. An equally important role
for the FDIC is as Receiver for failed institutions; the FDIC is responsible for resolving the institution and managing and
disposing of its remaining assets.
The Office of Inspector General (OIG) at the FDIC is an independent and objective oversight unit established under
the Inspector General (IG) Act of 1978, as amended. Our mission is to prevent, deter, and detect fraud, waste, abuse,
and misconduct in FDIC programs and operations; and to promote economy, efficiency, and effectiveness at the
Agency. We pursued audits, evaluations, and other reviews throughout the year in carrying out this mission. Of
particular interest for this CIGFO report, our audit and evaluation work covered topics such as Sharing of Threat
Information, Terminations of Bank Secrecy Act/Anti-Money Laundering Consent Orders, and Supply Chain Risk
Management.
Importantly, and in connection with matters affecting the financial sector, in February 2022, our Office also published
its assessment of the Top Management and Performance Challenges Facing the FDIC. Our Top Management and
Performance Challenges document summarizes the most serious challenges facing the FDIC and briefly assesses
the Agency’s progress to address them, in accordance with the Reports Consolidation Act of 2000 and Office of
Management and Budget Circular A-136 (revised August 10, 2021).
In addition to the above activities related to the broader financial sector, our Office conducted significant
investigations into criminal and administrative matters involving sophisticated, complex multi-million-dollar frauds.
These schemes involve bank fraud, embezzlement, money laundering, currency exchange manipulation, and other
crimes involving banks, executives, directors, officials, insiders, and financial professionals. We are also working
to detect and investigate cyber-criminal cases that threaten the banks and banking sector. Our cases reflect the
cooperative efforts of other OIGs, U.S. Attorneys’ Offices, FDIC Divisions and Offices, and others in the law enforcement
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
community throughout the country. These working partnerships contribute to ensuring the continued safety and
soundness of the Nation’s banks and help ensure integrity in the FDIC’s programs and activities.
Our Office also continues to play a key role in the investigation of individuals and organized groups perpetrating
fraud through the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act) and American Rescue Plan (ARP). To date, we have opened 169 cases associated with fraud in the
CARES Act and ARP programs. We strongly support the Pandemic Response Accountability Committee’s Fraud Task
Force and the Department of Justice’s COVID-19 Fraud Enforcement Task Force. We will continue to work in close
collaboration with our law enforcement partners.
The FDIC OIG also played a key role over the past year as Co-Lead of the CIGFO Working Group that developed
forward-looking guidance for the Financial Stability Oversight Council and its member agencies to consider in
preparing for and managing future crises. (Guidance in Preparing for and Managing Crises.)
FDIC OIG Audits and Evaluations Made Significant Recommendations for Improvements to the FDIC
During the 12-month period ending March 31, 2022, the FDIC OIG issued 11 audit and evaluation products and made
89 recommendations to strengthen controls in FDIC programs and operations. In the write-ups below, we discuss
three significant reviews, as they cover issues relevant to the broader financial sector.
Sharing of Threat Information to Guide the Supervision of Financial Institutions
Banks face a wide range of threats to their operations, including cyber attacks, money laundering, terrorist financing,
pandemics, and natural disasters. The consequences of these threats may significantly affect the safety and
soundness of numerous financial institutions -- as well as the stability of the Nation’s financial system.
Therefore, it is important that the FDIC develop policies, processes, and procedures to ensure that vital threat
information is shared with its personnel – such as FDIC policymakers, bank examiners, supervisory personnel, and
Regional Office staff – so that the data may be used in an actionable and timely manner. Our Office conducted a
review to determine whether the FDIC had established effective and efficient processes to share threat information
with its personnel. We identified several weaknesses in the FDIC’s sharing of threat information and reported on those
during the reporting period.
We found that the FDIC did not establish effective governance processes to acquire, analyze, disseminate, and use
relevant and actionable threat information to guide the supervision of financial institutions. Specifically, the FDIC:
•
Did not establish a written governance structure to guide its threat information sharing activities;
•
Did not complete, approve, and implement a governance Charter to establish a common understanding of
the role for the FDIC’s Intelligence Support Program, or to define an overall strategy and its requirements;
•
Did not develop goals, objectives, or measures to guide the performance of its Intelligence Support
Program;
•
Did not establish adequate policies and procedures that defined roles and responsibilities for key
stakeholders involved in the threat information sharing program and activities; and
•
Did not fully consider threat information sharing in its Enterprise Risk Inventory and Risk Profile.
Further, we identified additional gaps in the FDIC’s processes for acquiring, analyzing, and disseminating threat
information, and in how the use of threat information could be improved. For example, the FDIC:
•
Did not develop written procedures for determining its threat information requirements;
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
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Did not engage all relevant stakeholders when it developed its threat information needs;
•
Did not establish procedures to guide its analysis of threat information; instead, the FDIC relied solely on the
discretionary judgment of certain individuals to determine the extent to which threat information should be
analyzed to support business and supervisory needs;
•
Did not develop procedures for disseminating threat information;
•
Had not established an infrastructure that would allow for the secure handling of classified information to
certain senior FDIC officials; and
•
Did not establish a procedure to obtain feedback from recipients of threat information to assess its utility
and effectiveness.
We also found numerous gaps in the FDIC’s management of threat information sharing, including: not having backup
personnel for its Senior Intelligence Officer nor plans for an absence or departure; not establishing minimum training
requirements for the Senior Intelligence Officer position; not obtaining required security clearance for certain senior
FDIC officials; and not properly categorizing unclassified threat information.
We made 25 recommendations to the FDIC to strengthen its governance processes for acquiring, analyzing,
disseminating, and using relevant and actionable threat information to guide the supervision of financial institutions.
Special Note on Banks’ Cyber Incident Reporting Requirements: In April 2020, as part of our ongoing Threat
Information Sharing review, the OIG identified an issue--that the banks were not required to report significant cyber
incidents to the FDIC in a timely manner. After identifying this issue, we submitted a memorandum recommending
that financial institutions be required to notify the FDIC of cyber incidents. As a result, in December 2020, the FDIC,
the Federal Reserve Board, and the Office of the Comptroller of the Currency announced a proposed new regulation
that would require all financial institutions and their service providers to promptly notify their primary Federal
regulator if they experience a destructive cyber incident. This rule was made final in November 2021 and requires that
a banking organization notify its financial regulator of a significant computer-security incident no later than 36 hours
after a cyber incident has occurred. This final rule reflects the great work and contributions of our OIG team, as well as
the value and significance of the OIG’s work in identifying critical issues for the FDIC and the broader financial sector.
Termination of Bank Secrecy Act/Anti-Money Laundering Consent Orders
Money laundering is a serious crime that aims to conceal or disguise the illicit proceeds of another unlawful activity.
The Bank Secrecy Act (BSA) has established recordkeeping and reporting requirements for financial institutions to
implement -- in order to detect and prevent money laundering. The FDIC’s examinations of banks for compliance
with these requirements are essential elements in identifying potential weaknesses in a bank’s BSA/Anti-Money
Laundering (AML) program.
When a financial institution is not in compliance with such requirements, the FDIC may issue a Consent Order—
which is a formal enforcement action against a bank. A BSA/AML Consent Order often contains several provisions
for improvements to the bank’s program, and FDIC examiners review a bank’s progress in addressing these Consent
Order provisions.
Our Office conducted an evaluation to determine whether the FDIC considered factors similar to other Federal bank
regulators in terminating BSA/AML Consent Orders; terminated BSA/AML Consent Orders in accordance with FDIC-
established guidance; monitored FDIC Regional Office termination decision-making to ensure consistency across the
Regions; and documented its actions.
We found that the factors considered by the FDIC to terminate Consent Orders differed from the factors used by
the Federal Reserve Board and the Office of the Comptroller of the Currency. When Consent Orders are issued, all
provisions requiring correction are published on the FDIC website; however informal actions are not issued publicly.
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In some cases, the FDIC may terminate a Consent Order when provisions are in “substantial compliance” or “partially
met.” Therefore, in terminating an FDIC Consent Order, it will be removed from the website – even if not all of the
provisions have been corrected. As a result, these website postings make it appear to the public, bank customers, and
bank investors that all Order provisions have been corrected, although some previously-publicized Order provisions
may not have been met.
We further found that the FDIC did not provide guidance to its examiners in how to apply the terms, “substantial
compliance” and “partially met,” as a basis for terminating a Consent Order. The term, “partially met,” provides extremely
wide latitude to terminate a Consent Order when any portion of it is met. As a result, the FDIC could not be certain
that some Consent Orders were terminated using a consistent interpretation of these terms.
In addition, we found that:
•
Termination decisions were not centrally monitored, which would serve as an important internal control.
•
The FDIC did not consistently prepare and maintain documentation in its systems of record to support the
monitoring and termination decisions for BSA/AML Consent Orders.
Incorrect documentation of Consent Order terminations caused the FDIC to provide nine incorrect reports to the
FDIC Board of Directors concerning enforcement actions; and caused the FDIC not to report three BSA/AML Consent
Order terminations to the Financial Crimes Enforcement Network (FinCEN) in the Department of the Treasury.
We made 10 recommendations to enhance the FDIC’s BSA/AML Consent Order termination guidance and
procedures.
The FDIC’s Implementation of Supply Chain Risk Management
The FDIC awarded more than $2 billion via 483 contracts in 2021, procuring products and services from many
types of vendors, contractors, and subcontractors. The supply chain for each vendor, contractor, or subcontractor
may present unique risks to the FDIC, including the installation of counterfeit hardware and software in the FDIC
environment, or reliance on a malicious or unqualified provider. Supply chain threats could compromise the FDIC’s
Information Technology and data on its information systems and provide adversaries a means to exfiltrate sensitive
information such as confidential bank examination information.
Therefore, the FDIC must implement a robust Supply Chain Risk Management (SCRM) Program to identify and
mitigate supply chain risks that threaten its ability to fulfill its mission, goals, and objectives; protect its sensitive
and nonpublic information; and maintain the integrity of its operations. We conducted an evaluation to determine
whether the FDIC developed and implemented its SCRM Program in alignment with the Agency’s objectives and best
practices.
We found that the FDIC had not implemented several objectives outlined in its SCRM Implementation Project Charter
(November 2019) and was not conducting supply chain risk assessments in accordance with best practices. For
example, the FDIC had not:
1.
Identified and documented known risks to the Agency’s supply chain;
2.
Defined a risk management framework to evaluate risks to non-Information Technology procurements; or
3.
Established metrics and indicators related to continuous monitoring and evaluation of supply chain risks.
We also found that the FDIC did not conduct supply chain risk assessments during its procurement process for Chief
Information Officer Organization and other Division and Office contracts. In addition, the FDIC had not ensured that
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
its Enterprise Risk Management processes fully captured supply chain risks. Further, FDIC Contracting Officers did not
maintain contract documents in the Contract Electronic File system, as required.
We made nine recommendations to the FDIC to address the findings in our report and strengthen its SCRM Program.
FDIC OIG Assessed the Top Management and Performance Challenges Facing the FDIC
Our assessment of the Top Challenges facing the FDIC is based on the OIG’s experience and observations from our
oversight work, reports by other oversight bodies, review of academic and relevant literature, perspectives from
Government agencies and officials, and information from private-sector entities.
We identified nine Top Challenges facing the FDIC, as follows:
The FDIC’s Readiness for Crises. The FDIC must be prepared for all crises, because of its unique role in overseeing
and administering the DIF, which insures the bank accounts of millions of depositors and consumers. The FDIC
faces Challenges in fully developing its plans to respond to an unfolding crisis. Further, the FDIC should consider
climate-related risks with respect to the report issued by the Financial Stability Oversight Council, and whether it will
take actions in response to the report’s recommendations in preparing its supervisory and examination processes.
The FDIC should also be ready to respond to evolving risks associated with the current pandemic and other crises,
including supervising and examining Government-guaranteed loans at banks and related fraud risks.
Cybersecurity for Banks and Third-Party Service Providers. Cybersecurity has been identified as the most
significant threat to the banking sector and the critical infrastructure of the United States. The FDIC faces Challenges
to ensure that examiners have the appropriate skillsets and knowledge to conduct information technology
examinations that adequately identify and mitigate cybersecurity risks at banks and their third-party service providers.
Further, the FDIC should establish a process to receive, analyze, and act on reports of significant cyber incidents at
banks in order to adjust supervisory strategies, policies, and training for bank examiners; to warn other banks of such
threats; and to prepare for potential bank failures. Mitigating cybersecurity risk is critical as a cyber incident at one
bank or third-party service provider has the potential to cause contagion within the financial sector. The FDIC also
should assess the risks to banks presented by crypto assets, particularly with respect to the anonymous nature of
these assets and the increased risk of money laundering and other wrongdoing.
Supporting Underserved Communities in Banking. The FDIC should ensure that its programs – including those
that support Minority Depository Institutions and Community Development Financial Institutions -- are effectively
designed to foster financial inclusion and reduce the number of unbanked and underbanked individuals. Further,
the FDIC’s examinations should continue to ensure that banks are in compliance with regulations that combat
discriminatory lending practices against low-income borrowers and minority populations. The FDIC also should
ensure that its examiners have the skills, capabilities, and procedures to assess the effect of banks’ use of artificial
intelligence in decision-making and minimize any undue bias related to the algorithms or historical data used.
Organizational Governance at the FDIC. Effective governance allows FDIC Board members and senior FDIC
officials to manage the affairs of the Agency and its risks, formulate regulatory policy, and provide clear guidance to
banks and FDIC Regional Offices. Through these processes, the FDIC can allocate resources, prioritize and improve the
flow of risk information to decision-makers, and work towards achieving the FDIC’s mission. The FDIC faces Challenges
in providing clarity concerning the submission of motions presented to the Board of Directors for consideration and
approval. Further, the FDIC should ensure that the Board, through its Audit Committee, can oversee and manage the
risks identified and monitored through its Enterprise Risk Management Program. The FDIC also should clarify under
what circumstances and which portions or provisions of Executive Branch policies or guidance are to be followed.
In addition, the FDIC should ensure that weaknesses in FDIC programs are corrected and recommendations are
addressed in a timely manner. FDIC rulemaking and guidance should also be aligned with other regulators to ensure
that banks are not treated differently depending upon their primary regulator. FDIC internal guidance also should be
clearly defined to ensure consistent application of FDIC program requirements. In addition, FDIC rulemaking should
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
be a transparent process that analyzes the need for safety and soundness regulations and the compliance burden
placed on banks.
Information Technology (IT) Security at the FDIC. The FDIC relies on its IT systems for day-to-day activities and
especially during crises. The FDIC continues to face Challenges to ensure that it has strong information security
processes to guard against persistent and increasing cyber threats against Federal agencies. Security control
weaknesses of FDIC systems limit the effectiveness of FDIC controls, which places the confidentiality, integrity, and
availability of FDIC systems and data at risk. The FDIC should address its outstanding corrective actions related to IT
security controls, management of privileged Administrative Accounts, and oversight and monitoring of information
systems. Further, the FDIC should ensure that it establishes effective security controls for its mobile devices and for
the automated systems that monitor and control critical building services at facilities.
Security and Privacy at the FDIC. The FDIC employs a workforce of approximately 5,800 employees and 1,600
contract personnel at 92 FDIC facilities throughout the country, and it is custodian of 76 IT systems and voluminous
hard-copy records. The FDIC should continue to manage risks associated with its personnel security and suitability
processes to ensure that employees and contractors undergo appropriate and timely investigations and re-
investigations commensurate with their positions. As well, the FDIC should maintain its risk-based physical security
program and ensure that its policies promote an FDIC work environment that is free from discrimination, harassment,
and retaliation. Further, the FDIC should have effective programs to safeguard all forms of sensitive and Personally
Identifiable Information in its possession.
The FDIC’s Collection, Analysis, and Use of Data. Data and information can enhance capabilities to mitigate
threats against banks and the U.S. financial system. The FDIC faces Challenges in establishing effective processes to
govern its sharing of threat information to guide the supervision of financial institutions. Effective sharing of threat
information helps the FDIC to protect the DIF and the financial system by building situational awareness; supporting
risk-informed decision-making; and influencing supervisory strategies, policies, and training.
The FDIC should establish a written governance structure and implement a Charter to establish a common
understanding of its Threat Information Sharing program and define an overall strategy and requirements for it.
Further, the FDIC should develop goals, objectives, and measures to guide the performance of its Intelligence Support
Program, and it should establish adequate policies and procedures to define roles and responsibilities. The FDIC faces
Challenges in the four component functions of Threat Information Sharing – acquisition, analysis, dissemination, and
feedback. Further, the FDIC should improve the reliability of its internal data to ensure that the FDIC Board and senior
officials can depend upon the data to assess program effectiveness throughout the organization.
Contracting and Supply Chain Management at the FDIC. The FDIC awarded over $2 billion in contracts for
goods and services in 2021 in support of its mission. The FDIC faces Challenges to establish an effective contract
management program that ensures the FDIC receives goods and services according to contract terms, price, and
timeframes. Further, the FDIC should have processes in place to identify and ensure heightened monitoring of
contracts for Critical Functions, so that the Agency maintains control of its mission functions and prevents over-
reliance on contractors. The FDIC also should have programs in place to manage and mitigate security risks associated
with the supply chains for contracted goods and services. Further, the FDIC should ensure notifications to contractors
and sub-contractor personnel, so that they are advised about and aware of their whistleblower rights and protections,
and that they know how to report allegations of misconduct, violations, and gross mismanagement.
Human Resources at the FDIC. The FDIC relies on the talents and skills of its employees to achieve its mission,
and it faces Challenges in managing its human capital lifecycle. At the present time, nearly 25 percent of the FDIC
workforce is eligible to retire, and this figure climbs to nearly 40 percent by 2026. These figures include personnel
in key divisions supporting the FDIC mission – including the Division of Resolutions and Receiverships (over 59
percent by 2026); Division of Finance (over 55 percent by 2026); Legal Division (over 51 percent by 2026); and Division
of Administration (about 49 percent by 2026). Further, the FDIC should continue to improve its program for the
retention of employees, as well as the collection and analysis of relevant personnel data. In addition, the FDIC should
continue to ensure diversity and inclusion among its workforce. Absent effective human capital management, the
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FDIC may lose valuable knowledge and leadership skill sets upon the departure of experienced examiners, managers,
and executives. Meeting these Challenges is especially important as the FDIC shifts its operations to a hybrid work
environment.
FDIC OIG Investigations Helped Ensure Integrity in the Banking Sector and Addressed Fraud in the
Federal Pandemic Response
Our Office is committed to partnerships with other OIGs, the Department of Justice (DOJ), and other state and local
law enforcement agencies in pursuing criminal acts affecting banks and in helping to deter fraud, waste, abuse, and
misconduct. The OIG also actively participates in many financial fraud and cyber working groups nationwide to keep
current with new threats and fraudulent schemes that can undermine the integrity of the FDIC’s operations and the
financial services industry as a whole.
Our investigative results over the 12 months ending March 31, 2022, included the following: 148 indictments; 135
convictions; 109 arrests; and potential monetary recoveries (fines, restitution, and asset forfeitures) of nearly $1.3
billion.
As illustrated in the case examples that follow, we continue to identify emerging financial fraud schemes that
affect FDIC-supervised and insured institutions. We also partner with other agencies, including the Small Business
Administration (SBA), to identify fraud in the guaranteed loan portfolios of FDIC-supervised institutions. These
investigations are important, as large-scale fraud schemes can significantly affect the financial industry and the
financial condition of FDIC-insured institutions. In this regard, and as illustrated below, we continue to investigate
Paycheck Protection Program (PPP) cases of individuals defrauding the Government guaranteed-loan program
intended to help those most in need during the pandemic crisis. Examples of our investigative work follow.
DC Solar Owner Sentenced to 30 Years in Prison for a Billion Dollar Ponzi Scheme
On November 9, 2021, Jeff Carpoff, owner of DC Solar, was sentenced to 30 years in prison and ordered to pay
restitution of $790 million. Between 2011 and 2018, DC Solar manufactured mobile solar generator (MSG) units, which
were solar generators that were mounted on trailers and were promoted as being able to provide emergency power
to cellphone towers and lighting at sporting events. A significant incentive for investors was generous federal tax
credits due to the solar nature of the MSGs.
The conspirators carried out an accounting and lease revenue fraud using Ponzi-like circular payments. Carpoff and
others lied to investors about the market demand for DC Solar’s MSGs and its revenue from leasing to third parties,
then covered up these lies with techniques including false financial statements and fake lease contracts. Their fraud
concealed a circular payment structure where Carpoff and others were simply using new investors’ money to pay
older investors the purported lease revenue that investors were expecting.
As DC Solar lost vast sums of money with this fraudulent model, Carpoff and other conspirators stopped building the
MSGs altogether, selling thousands of MSGs that did not even exist to investors. To carry out this part of the fraud,
Carpoff and others made it appear that MSGs existed in locations that they did not, swapped vehicle identification
number stickers on MSGs that had been built earlier, and attempted to deceive certain investors during equipment
inspections. In reality, at least half of the approximately 17,000 mobile solar generators claimed to have been
manufactured by DC Solar did not exist. The fraud scheme resulted in investor losses totaling approximately $1 billion.
Source: USAO, Eastern District of California.
Responsible Agencies: FDIC OIG, Federal Bureau of Investigation (FBI), and Internal Revenue Service-Criminal investigation
(IRS-CI). Prosecuted by the USAO, Eastern District of California, Sacramento.
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Jury Convicts Five Former Officers and Employees of Banc-Serv Partners in $5 Million Scheme to Defraud
the Small Business Administration
On August 5, 2021, a Federal jury convicted five former officers and employees of Banc-Serv Partners LLP in a 13-year
conspiracy to defraud the SBA in connection with its programs to guarantee loans made to small businesses.
According to the evidence presented at trial, the defendants — Kerri Agee, of Noblesville, Indiana, former president,
chief executive officer and founder of Banc-Serv; Kelly Isley, of Westfield, Indiana, Banc-Serv’s former chief operating
officer; Nicole Smith, of Indianapolis, Indiana, a former Banc-Serv employee; Chad Griffin, of Carmel, Indiana, Banc-
Serv’s former chief marketing officer; and Matthew Smith, of Westfield, Indiana, Banc-Serv’s co-founder and a former
director of a lending institution that originated loans with Banc-Serv — fraudulently obtained SBA-guaranteed loans
on behalf of their clients, knowing that the loans did not meet SBA’s guidelines and requirements for the guarantees.
The evidence at trial proved that from approximately 2004 until October 2017, the defendants helped originate
SBA loans on behalf of various financial institutions and other lenders and, on multiple occasions, fraudulently
obtained guarantees for loans that the SBA had deemed ineligible. They did so by, among other things, knowingly
misrepresenting what the loans would be used for and unlawfully diverting previously denied loan applications into
expedited approval channels at the SBA. When the fraudulently guaranteed loans defaulted, the defendants caused
the submission of the reimbursement requests to the SBA to purchase the defaulted loans from investors and lending
institutions, thereby shifting some of the losses on the ineligible loans to the SBA. The fraudulent loans presented at
trial totaled approximately $5 million in guaranteed disbursements, which were not eligible for SBA guarantees.
Agee was convicted of one count of conspiracy to commit wire fraud affecting a financial institution and four
counts of wire fraud affecting a financial institution. Isley was convicted of one count of conspiracy to commit wire
fraud affecting a financial institution and two counts of wire fraud affecting a financial institution. Nicole Smith was
convicted of one count of conspiracy to commit wire fraud affecting a financial institution and two counts of wire
fraud affecting a financial institution. Griffin was convicted of one count of conspiracy to commit wire fraud affecting
a financial institution. Matthew Smith was convicted of one count of conspiracy to commit wire fraud.
These individuals were subsequently sentenced, as follows: Kerri Agee, was sentenced to 68 months in prison; Kelly
Isley was sentenced to 57 months; Chad Griffin, was sentenced to 28 months; Matthew Smith, was sentenced to 46
months; and Nicole Smith, was sentenced to 30 months.
In addition to their prison sentences, all five defendants were ordered to pay restitution to the SBA. Agee, Isley, and
Nicole Smith were each ordered to pay $2,289,681; Griffin was ordered to pay $685,022; and Matthew Smith was
ordered to pay 1,651,450.
Source: SBA OIG.
Responsible Agencies: FDIC OIG, SBA OIG, Department of Housing and Urban Development OIG, and FBI. Prosecuted by
the DOJ Fraud Section in the Southern District of Indiana.
First Person Charged for Fraudulently Seeking COVID-Relief Business Loans is Sentenced
On October 7, 2021, David Adler Staveley was sentenced to serve 56 months in Federal prison followed by 3 years of
supervised release after pleading guilty to conspiracy to commit bank fraud and failure to appear in court. Staveley
was the first person in the country charged with fraudulently seeking forgivable pandemic relief small business loans
guaranteed by the SBA under the CARES Act. Staveley fled from prosecution after removing his electronic monitoring
device and attempted to stage a suicide 3 weeks after being charged and appearing in U.S. District Court in May
2020. In order to further his ruse, Staveley left suicide notes with associates and left his wallet in his unlocked car that
he parked along the ocean in Massachusetts. Further investigation determined that between May 26 and July 23,
2020, Staveley traveled to various states using false identities and stolen license plates. He was apprehended by the
United States Marshals Service in Alpharetta, GA, on July 23, 2020.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Staveley and David Butziger conspired to file four fraudulent CARES Act PPP forgivable loan applications with a Rhode
Island bank, falsely claiming they owned businesses with large monthly payrolls when, in fact, they did not own the
businesses. Staveley admitted that as part of the scheme, he and Butziger filed fraudulent loan applications seeking
$185,570 to pay employees at Top of the Bay restaurant in Warwick, RI; $144,050 for Remington House Inn restaurant
in Warwick, RI; $108,777 for On The Trax restaurant in Berlin, MA; and $105,381 to pay employees at Dock Wireless,
an unincorporated business. Staveley had no ownership interest in Top of the Bay, Remington House Inn, or On The
Trax, which were closed at the time the loan applications were submitted and remain closed. Dock Wireless had no
employees and no wages were ever paid by the business.
Source: USAO District of Rhode Island.
Responsible Agencies: FDIC OIG, FBI, IRS-CI, and SBA OIG. Prosecuted by USAO, District of Rhode Island.
***
Learn more about the FDIC OIG at www.fdicoig.gov or follow us on Twitter at FDIC_OIG.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General Federal Housing Finance Agency
Office of Inspector General
Federal Housing Finance Agency
The Federal Housing Finance Agency (FHFA) Office of Inspector General (OIG) conducts audits, evaluations, investigations, and
other activities relating to the programs and operations of FHFA. OIG promotes economy, efficiency, effectiveness, ethics, and
equity and helps protect FHFA and the entities it regulates against fraud, waste, and abuse, contributing to the liquidity and
stability of the nation’s housing finance system.
Background
Established by the Housing and Economic Recovery Act of 2008 (HERA), FHFA supervises and regulates: the Federal
National Mortgage Association (Fannie Mae); the Federal Home Loan Mortgage Corporation (Freddie Mac) (together,
the Enterprises); Common Securitization Solutions, LLC (CSS, an affiliate of each Enterprise); and the Federal Home
Loan Bank System – which includes 11 Federal Home Loan Banks (FHLBanks) and the Office of Finance. FHFA’s mission
is to ensure that Fannie Mae, Freddie Mac, the FHLBanks (collectively, the regulated entities), and any entity-affiliated
party operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing
finance and community investment through the economic cycle. For the first quarter of 2022, the Enterprises
collectively reported more than $7.3 trillion in assets and the FHLBanks reported more than $762 billion in assets.
Since September 2008, FHFA has also served as conservator of the Enterprises. The Agency’s dual roles as supervisor
for the Enterprises and the FHLBanks and as conservator of the Enterprises present unique challenges for OIG.
Consequently, OIG structures its oversight program to rigorously examine FHFA’s exercise of its dual responsibilities,
which differ significantly from the typical federal financial regulator.
We outline our fiscal year priorities in an Annual Plan. On an annual basis, we also assess and report to the FHFA
Director FHFA’s most serious management and performance challenges which, if not addressed, could adversely
affect FHFA’s accomplishment of its mission. We focus much of our oversight activities on identifying vulnerabilities in
these areas and recommending positive, meaningful actions that the Agency could take to mitigate these risks and
remediate identified deficiencies. The management and performance challenges are:
Supervision of the Regulated Entities
As HERA recognizes, FHFA’s supervision of the Enterprises is of paramount importance to their safe and sound
operation. History has shown that a precipitous decline in the Enterprises’ safety and soundness contributed to
a severe crisis in the national economy and required nearly $200 billion in taxpayer support to keep them afloat.
For these reasons, we have deemed FHFA’s supervision of the Enterprises – via the Agency’s Division of Enterprise
Regulation (DER) – to be one of four critical risks on which we have focused our oversight efforts. We have issued
multiple reports which, taken collectively, detailed numerous deficiencies in the supervision program itself, as well as
in its execution.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Notable Report: FHFA Must Resolve the Conflicts in its Guidance for Examinations of the Enterprises to Meet its
Commitment to Develop and Maintain a World Class Supervision Program (OIG-2021-003, September 1, 2021)
In prior reports, we found that FHFA’s guidance for examination of the Enterprises was far more flexible and less
prescriptive than the guidance of other federal financial regulators. As a result of that substantial flexibility, we
reported that examiners in the Agency’s Division of Enterprise Regulation (DER) have significant discretion in
conducting examinations, which has resulted in inconsistent examination practices. In a 2019 evaluation (EVL-
2019-003, Sept. 10, 2019), we found that FHFA had not finalized many of its supplemental examination modules for
examinations of the Enterprises and that many of them remained in “field test” status for more than five years. We
recommended, and FHFA agreed, that FHFA establish and communicate clear expectations for use of revised and
new examination modules by DER examiners. DER’s failure to implement this recommendation was the basis for this
management advisory.
According to DER, its 2020 Operating Procedures Bulletin (OPB) on targeted examinations implemented our 2019
recommendation and was intended to foster greater consistency in the application of examination standards
across the examination teams. In fact, the 2020 OPB vested significant discretion in DER examiners to structure their
examination procedures and failed to establish clearer expectations for examiners than the guidance in place in
September 2019. DER adopted an Enterprise-specific Examination Manual that contained more prescriptive guidance
in its Examination Work Programs than the corresponding language in the OPB, but it considered the less specific
language in the OPB to control. FHFA agreed with our recommendations that it (1) revise the 2020 OPB to establish
specific guidance with respect to the circumstances under which DER expects examiners to follow examination
procedures in the Work Programs, and (2) align the guidance in the governing OPB with the guidance in the Work
Programs.
Conservator Operations
As conservator, FHFA is vested with express authority under HERA to operate the Enterprises, including expansive
authority over trillions of dollars in assets and billions of dollars in revenue. FHFA also makes business and policy
decisions that influence the entire mortgage finance industry. Given the taxpayers’ enormous investment in the
Enterprises, the conservatorships’ unknown duration, the Enterprises’ critical role in the secondary mortgage
market, and their unknown ability to sustain future profitability, OIG determined that FHFA’s administration of the
conservatorships has been, and continues to be, a critical risk. For reasons of efficiency, concordant goals with the
Enterprises, and operational savings, FHFA has delegated authority for general corporate governance and day-to-
day matters to the Enterprises’ boards of directors and executive management. FHFA, as conservator, delegated to
each Enterprise’s board of directors a significant portion of day-to-day management and risk controls responsibilities.
FHFA’s regulations also authorize the boards to delegate execution of day-to-day operations to Enterprise employees.
As conservator, FHFA has retained authority to decide specific issues and can, at any time, revoke previously
delegated authority.
Notable Report: Oversight of Multifamily Borrowers’ Compliance with CARES Act and Freddie Mac Tenant
Protections and Freddie Mac’s Response to the Potential Financial Impact of COVID-19 (OIG-2022-003, March
24, 2022)
In March 2020, the onset of the COVID-19 pandemic prompted Congress, FHFA, and Freddie Mac to act to protect
the interests of tenants in multifamily properties financed by federally backed multifamily mortgage loans. Congress
enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which imposed a 120-day moratorium
that prohibited all borrowers with federally backed multifamily loans from filing legal actions to recover possession
of a covered dwelling unit from a tenant solely due to the nonpayment of rent or other fees or charges. Freddie
Mac’s forbearance program also provided tenants with protection against eviction during the forbearance period
(a temporary period during which a mortgage borrower may pause mortgage payments); required multifamily
borrowers in forbearance to notify eligible tenants in writing and inform them of the available protections; and
required those borrowers to allow tenants to pay back missed rent payments over a “reasonable time,” rather than in
one lump-sum payment at the end of the forbearance period.
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We undertook this special project, in part, to determine how Freddie Mac monitored multifamily servicers’ and
borrowers’ compliance with the CARES Act’s and Freddie Mac’s forbearance program tenant protections. We
concluded that Freddie Mac did not actively monitor its borrowers’ compliance with the tenant protections of the
CARES Act or its forbearance agreements. Freddie Mac stated that it does not have the authority or ability to directly
enforce the CARES Act and it relies on servicers to administer its forbearance agreements. FHFA shared this view.
Freddie Mac also relies on its servicers to conduct the investigations into allegations of borrower noncompliance with
the CARES Act or its forbearance agreements. Freddie Mac emphasized that borrowers are obligated under the loan
documents to comply with applicable law. In limited circumstances, borrowers are required to supply certifications of
their compliance and servicers collect them on Freddie Mac’s behalf. Freddie Mac asserted that it plans to audit the
servicers’ processes for doing so.
We also undertook this special project to assess how Freddie Mac forecasts evictions and estimates their potential
financial impact on the Enterprise and its lender counterparties. Freddie Mac explained that it does not forecast evictions
directly because of the limited amount of data. Instead, it prepares forecasts using third-party occupancy and vacancy
data, which incorporate evictions, to assess the strengths and weaknesses of the multifamily market, and Freddie Mac
monitors its multifamily properties’ income and vacancy levels through financial reports. As part of its risk management,
Freddie Mac temporarily imposed debt service reserve requirements on borrowers for certain loans to ensure that they
had funds available to make principal (if applicable) and interest payments should the property experience economic
stress due to the pandemic. Freddie Mac also increased its multifamily loan loss reserves during 2020. FHFA stated that it
is confident that Freddie Mac’s multifamily portfolio is “not seeing significant credit risk at this time.”
Information Security
FHFA’s regulated entities are central components of the U.S. financial system and are interconnected with other large
financial institutions. As part of their processes to guarantee or purchase mortgage loans, the Enterprises receive,
store, and transmit highly sensitive private information about borrowers, including financial data and personally
identifiable information. Both the Enterprises and the FHLBanks have been the targets of cyber attacks.
Cybersecurity is also a pressing concern for the federal government. FHFA has computer networks that are part of
the nation’s critical financial infrastructure, and FHFA is required to design information security programs to protect
them. Computer networks maintained by federal government agencies have been proven to be a tempting target for
disgruntled employees, hackers, and other intruders. Over the past few years, cyber attacks against federal agencies
have increased in frequency and severity. As cyber attacks continue to evolve and become more sophisticated and
harder to detect, they pose an ongoing challenge for virtually every federal agency.
Notable Report: FHFA Did Not Record, Track, or Report All Security Incidents to US-CERT; 38% of Sampled FHFA
Users Did Not Report a Suspicious Phone Call Made to Test User Awareness of its Rules of Behavior (AUD-2021-
009, June 25, 2021)
The Federal Information Security Modernization Act of 2014 defines “incident” as “an occurrence that (1) actually or
imminently jeopardizes, without lawful authority, the integrity, confidentiality, or availability of information or an
information system; or (2) constitutes a violation or imminent threat of violation of law, security policies, security
procedures, or acceptable use policies.” We conducted this audit to assess FHFA’s incident detection and response
controls during Fiscal Years 2019 and 2020 against standards and guidelines established by FHFA and the federal
government. While FHFA established and maintained an Incident Response Plan and used its Security Information
and Event Management tool, we found that it did not record, track, or report all security incidents to the United States
Computer Emergency Readiness Team (US-CERT) or contemporaneously document the results of a table-top exercise
of those controls. In addition, 38% of sampled FHFA users did not report a suspicious phone call we made to test user
compliance with a reporting requirement in FHFA’s Rules of Behavior. To address the identified shortcomings, we
recommended that FHFA: (1) develop and implement written procedures that define: (a) the pertinent information
that needs to be recorded, tracked, and reported for all security incidents and (b) the controls to ensure the accuracy
and completeness of the security incident records; (2) ensure that minutes documenting future incident response
tabletop exercises are prepared timely; and (3) continue to emphasize to employees and contractors the need to
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
report suspicious activities, including phone calls, to the Help Desk in accordance with FHFA’s Rules of Behavior.
FHFA disagreed with our first recommendation and it was closed as rejected. FHFA agreed with our second and third
recommendations.
Counterparties and Third Parties
The Enterprises rely on institutional counterparties such as sellers and servicers, mortgage insurers, clearinghouses,
and other counterparties to provide services that are critical to their business. By doing so, they must account for and
mitigate potential counterparty credit risk, which is the risk associated with the inability or failure of a counterparty
to meet its contractual obligations. The Enterprises and FHFA recognize that such risk is significant. If an institutional
counterparty defaults on its obligations, it could negatively impact an Enterprise’s ability to operate. Our criminal
investigations include alleged fraud by different types of counterparties, including real estate brokers and agents,
builders and developers, loan officers and mortgage brokers, and title and escrow companies. The Enterprises and
FHFA also recognize that third parties that provide operational support for a wide array of professional services
could also negatively impact an Enterprise’s ability to operate. FHFA lacks the statutory authority to directly examine
the Enterprises’ counterparties and third parties, so it has communicated to the Enterprises its expectations of their
oversight of those entities.
Notable Report: FHFA’s Division of Enterprise Regulation Did Not Follow or Train to its Procedures for
Information Sharing of Enterprise Counterparty Performance Issues (AUD-2021-014, September 28, 2021)
In the course of their operations, the Enterprises rely on counterparties to provide services that are critical to their
business such as mortgage servicing, mortgage insurance, single-family mortgage-backed security issuance and
administration, and technology functions. FHFA’s DER, in support of its supervisory activities, issued an OPB in
August 2013 titled Information Sharing of Counterparty Performance Issues; that same OPB was reissued in February
2020 without content change. This OPB sets forth the expectations and establishes the protocol to follow regarding
when critical information about one Enterprise is to be shared, how it is to be shared, and what the responsibilities
of the examination team(s) will be upon receipt of the information, including documentation requirements. We
conducted this audit to determine whether DER followed its guidance when a counterparty performance issue was
identified at an Enterprise. We found that DER did not follow the procedures in the OPB when it shared information
on counterparty performance issues; DER officials told us while examiners had shared such information, they were
unaware of the OPB and had not been trained to it. Further, adherence to the OPB and its reissuance in February
2020 was not subjected to DER’s quality control process. We also found that FHFA’s Office of General Counsel was
reviewing the OPB for possible recasting as an Agency-wide policy and procedures document for information sharing
of counterparty performance issues. FHFA agreed with our recommendations that it expedite the recasting of DER’s
OPB on information sharing of counterparty performance issues as an Agency-wide policy and procedure document,
and ensure that the OPB was implemented with proper training.
OIG Investigative Accomplishments
OIG’s investigative mission is to prevent and detect fraud, waste, and abuse in the programs and operations of
FHFA and its regulated entities. OIG’s Office of Investigations (OI) executes its mission by investigating allegations
of significant criminal and civil wrongdoing that affect the Agency and its regulated entities. OI’s investigations are
conducted in accordance with professional guidelines established by the Attorney General of the United States and
CIGIE’s Quality Standards for Investigations.
OI is comprised of highly-trained law enforcement officers, investigative counsels, analysts, and attorney advisors. We
maximize the impact of our criminal and civil law enforcement efforts by working closely with federal, state, and local
law enforcement agencies nationwide.
OI is the primary federal law enforcement organization that specializes in deterring and detecting fraud perpetrated
against the Enterprises. OI also investigates cases involving the 11 regional FHLBanks and, in some instances, cases
involving banks that are members of the FHLBanks.
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Notable Criminal Cases
Business Owner Sentenced to Over 12 Years in Prison in Real Estate Fraud Scheme, California
On August 2, 2021, in the Central District of California, Patrick Soria was sentenced to 152 months in prison and three
years supervised release for orchestrating a real estate fraud scheme that victimized more than 2,000 homeowners,
involved fraudulent filings that affected the title to properties across the country, and caused more than $7 million in
losses. Soria had previously pleaded guilty to conspiracy to commit wire fraud and contempt of court.
According to court documents, Soria stole money from homeowners and prospective home buyers and also
victimized numerous lenders through a two-pronged fraud scheme. Soria owned and operated a business using
various company names. Participants in the scheme identified properties with mortgage liens on the title, the owners
of those properties, and potential purchasers. Soria and others would market properties for sale as though one of
the Soria-controlled business entities held title to the properties when, in fact, neither Soria nor a Soria-controlled
business entity had any ownership interest in the properties or any claim to or right, title, or interest in the mortgage
loan securing the property. Rather, Soria and others had filed fraudulent documents on the title to the properties to
create the false appearance that Soria-controlled business entities held title. Soria and others in this way would take
over title through fictitious filings. Soria never owned the homes, and he instead used the victims’ “purchase” money
for his own personal expenses, including escort services, stays at luxury hotels, and Bentley and Lamborghini car
rentals.
Soria also marketed loan relief and modification services to owner-borrower victims. Soria and others would
communicate to victims that an attempt would be made with their lender to renegotiate their mortgage and if
renegotiation was not possible, Soria and one of his business entities would take over the loans from the victims’
lenders. After the victims would execute paperwork provided by Soria and others, mortgage payments would be
made to Soria-controlled business entities. Soria lulled victims into doing nothing to protect themselves when they
started receiving foreclosure and eviction notices. Many homeowners targeted in the scheme lost their homes. Soria,
his business entities, or conspirators had no lawful interest in any of these mortgage loans or the right to collect
mortgage payments.
The Enterprises were investors in several loans associated with this scheme.
Eight Conspirators Sentenced in Large Scale Multimillion-Dollar COVID Relief Fraud Scheme; Three
Become Fugitives, California
On June 25, 2021, a federal jury in the Central District of California convicted four conspirators for a scheme, involving
eight participants, where more than 150 fraudulent loan applications were submitted seeking nearly $22 million in
COVID relief funds through the Paycheck Protection Program (PPP) and Economic Injury Disaster (EIDL) Relief Program
under the CARES Act. According to the evidence presented at trial, the defendants used fictitious, stolen, or synthetic
identities to submit fraudulent applications for PPP and EIDL loans. Prior to the trial, four other scheme participants
pleaded guilty to criminal charges in the case. In support of these applications, the defendants also submitted false
and fictitious documents to lenders and the SBA, including fabricated identity documents, tax documents, and
payroll records. Several FHLBank member banks were targets of the fraudulent applications.
The conspirators obtained more than $18 million in COVID relief funds. The defendants then used the fraudulently
obtained loan proceeds for down payments on luxury homes. They also used the illicit funds to buy gold coins,
diamonds, jewelry, luxury watches, fine imported furnishings, designer handbags, clothing, and a Harley-Davidson
motorcycle.
From September 2021 through January 2022, the scheme participants were sentenced to the following:
•
Richard Ayvazyan, fraud ringleader (Fugitive) - 17 years in prison, five years supervised release, and ordered
to pay over $17 million in restitution, jointly and severally.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
•
Marietta Terabelian (Fugitive) - 72 months in prison, five years supervised release, and ordered to pay over
$17 million in restitution, jointly and severally.
•
Tamara Dadyan (Fugitive) - 130 months in prison, five years supervised release, and ordered to pay over $17
million in restitution, jointly and severally.
•
Artur Ayvazyan - 60 months in prison, five years supervised release, and ordered to pay over $17 million in
restitution, jointly and severally.
•
Vahe Dadyan - One year and a day in prison, three years supervised release, and ordered to pay over $10
million in restitution.
•
Manuk Grigoryan - 72 months in prison, four years supervised release, and ordered to pay over $2.6 million in
restitution.
•
Edvard Paronyan - 30 months in prison, three years supervised release, and ordered to pay $430,177 in
restitution.
•
Arman Hayrapetyan - Ten months of probation, including seven and one-half months of home confinement.
After being convicted Richard Ayvazyan and Marietta Terabelian removed their bracelet monitors and absconded. It
was revealed that the husband and wife left their three teenage children to be cared for by their grandparents along
with a typewritten letter explaining they had to flee. Further, Richard Ayvazyan’s sister in-law, Tamara Dadyan, who
pleaded guilty for her role in the scheme, failed to appear to serve her sentence and became a fugitive.
In February 2022, Ayvazyan, Terabelian, and Dadyan were arrested in Montenegro. Extradition is being sought.
Former President of First Mortgage Company Sentenced to Serve 104 Months in Federal Prison and Pay
More than $51.8 Million in Restitution to Victims, Oklahoma
On November 29, 2021, in the Western District of Oklahoma, Ronald McCord was sentenced to 104 months in prison,
three years supervised release, and ordered to pay over $51 million in restitution, including over $8.5 million to Fannie
Mae, and over $28 million in forfeiture for his role in defrauding two FHLBank member banks, Fannie Mae, and others.
McCord had previously pleaded guilty to bank fraud, making a false statement to a financial institution, and money
laundering.
McCord was the former President of First Mortgage Company, LLC, an Oklahoma City-based mortgage lending and
loan servicing company. McCord defrauded two FHLBank member banks, Spirit Bank and Citizens State Bank, and
their residential mortgage subsidiaries. According to court documentation, McCord defrauded Spirit and Citizens by
misusing lines of credit, as well as selling loans funded by the banks, many to Fannie Mae, without paying off the lines
of credit, leaving the Spirit and Citizens banks’ debts out of trust.
Additionally, McCord defrauded Fannie Mae by diverting escrow monies intended to pay homeowners’ taxes,
insurance, principal, and interest, to cover First Mortgage’s operating expenses. As a result, First Mortgage lacked
sufficient funds to pay borrowers’ real estate tax payments. McCord also used the diverted escrow monies to write
himself checks as well as to pay more than half the purchase price of his son’s nearly $1 million home and build
himself a custom vacation home in Colorado.
Business Owner Sentenced in Decade-Long $60 Million Fraud Scheme, New Jersey
On March 30, 2022, in the District of New Jersey, Seth Levine was sentenced to 97 months in prison, five years
supervised release, and ordered to pay $65 million in forfeiture for orchestrating long-running bank fraud and
securities fraud schemes, which exposed the Enterprises to significant risk and led to large-scale losses for financial
institutions and investors. Levine previously pleaded guilty to conspiracy to commit bank fraud, and securities fraud.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
According to court documentation, Levine, founding partner, owner, and managing member of Norse Holdings,
directed a scheme to fraudulently refinance multifamily properties by providing materially false information to
financial institutions about the rents collected, the number of apartments leased, the expenses, and the true owners
of the properties. Levine and others provided lenders fabricated documents, including falsified leases that created the
appearance that vacant spaces were occupied and that overstated the rent paid by tenants; false personal financial
statements; and fictitious expense documents and operating agreements that misrepresented ownership interests
in the multifamily properties. Levine also forged signatures on some of the fraudulent documents. The fraudulent
refinances resulted in cash payouts from the lenders, which Levine and others used for their own enrichment and to
continue the fraud scheme.
Levine also defrauded investors by soliciting investments used to purchase the multifamily properties based on
false statements. After the properties were acquired, Levine sold off portions of his ownership interests, brought in
additional investors, and refinanced the properties without the investors’ consent.
Many of the approved mortgages based on the false statements were sold to the Enterprises. Since the refinances
were obtained with fraudulent data regarding the properties’ income and expenses, the multifamily properties
were overvalued and rents and other income from the properties did not cover the mortgage payments and other
expenses associated with the properties. To cover the shortfalls, Levine obtained additional cash-out refinances
or additional investors, thereby increasing his total debt incurred. In total, Levine controlled at least 70 multifamily
properties, comprising approximately 2,500 apartments.
At the time the fraud was discovered, the outstanding balance of the fraudulently obtained mortgages on the
multifamily properties was more than $150 million, including 40 mortgages held by Freddie Mac with an outstanding
loan balance of approximately $103 million. The bank fraud conspiracy resulted in losses to victim lenders of at least
$47 million.
Business Owner Sentenced in Connection with Obtaining More Than $6 Million in COVID Relief Fraud
Scheme, Georgia
On January 4, 2022, in the Northern District of Georgia, Hunter VanPelt was sentenced to 41 months in prison, five
years supervised release, and ordered to pay over $7 million in restitution and more than $2 million in forfeiture for a
fraud scheme. Multiple FHLBank member banks were targets in the scheme that resulted in more than $6 million in
PPP loans being disbursed. VanPelt previously pleaded guilty to bank fraud.
According to court documentation, VanPelt, aka Ellen Corkum, submitted six fraudulent PPP loan applications, using
both names, for VanPelt owned or controlled business entities seeking over $7.9 million in total. Over $6 million was
disbursed to VanPelt; $2.1 million of the fraudulent proceeds was seized from VanPelt.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
In each PPP loan application, VanPelt falsely represented the average monthly payroll and the number of employees
working for the relevant company. She also submitted fabricated IRS records, false bank statements, and fictitious
payroll reports in connection with those applications. The PPP loan proceeds received were not used for authorized
PPP business expenses.
Office of Inspector General
U.S. Department of Housing and Urban Development
The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General (OIG), safeguards HUD’s programs
from fraud, waste, and abuse and identifies opportunities for HUD programs to progress and succeed.
Background
HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is
working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality
affordable rental homes; use housing as a platform for improving quality of life; and build inclusive and sustainable
communities free from discrimination. Its programs are funded through roughly $60 billion in annual congressional
appropriations. While organizationally located within HUD, HUD OIG provides independent oversight of HUD
programs and operations.
HUD has two component entities that have a major impact on the Nation’s financial system: the Federal Housing
Administration (FHA) and the Government National Mortgage Association (Ginnie Mae). As one of the largest
providers of mortgage insurance in the world, FHA provides lenders with protection against losses when
homeowners and owners of multifamily properties and healthcare facilities default on their loans. FHA has insured
more than 50.8 million single-family and roughly 68,000 multifamily and healthcare facility mortgages since its
inception in 1934. FHA reported that in fiscal year 2021 it helped 716,000 single-family home buyers purchase a
home using an FHA-insured mortgage, made over 400 new insurance commitments for residential care facilities and
hospitals, and insured more than 1,500 multifamily mortgages. As of December 2021, FHA had a combined insurance
portfolio valued at $1.4 trillion.2 FHA receives limited congressional funding and is primarily self-funded through
mortgage insurance premiums.
Ginnie Mae is a self-financing, U.S. Government corporation in HUD. It approves lenders (known to Ginnie Mae as
issuers) to issue mortgage-backed securities (MBS) secured by pools of government-backed home loans. These loans
are insured or guaranteed by FHA, HUD’s Office of Public and Indian Housing (PIH), the U.S. Department of Veterans
Affairs (VA), and the U.S. Department of Agriculture. Ginnie Mae guarantees investors the timely payment of principal
and interest on MBS backed by the full faith and credit of the United States government. If an issuer of an MBS fails to
make the required pass-through payment of principal and interest to investors, Ginnie Mae is required to advance the
payment as part of its guarantee and, in the instances of issuer default, will assume control of the issuer’s MBS pools
and the servicing of the loans in those pools. The purchasing, packaging, and reselling of mortgages in a security
form frees up funds that lenders use to originate more loans. In fiscal year 2021, Ginnie Mae issued nearly $934 billion
MBSs, pushing the total MBS outstanding to over $2.17 trillion.
2
https://www.hud.gov/sites/dfiles/Housing/documents/FHAFY2021ANNUALMGMNTRPT.pdf
Office of Inspector General U.S. Department of Housing and Urban Development
Office of Inspector General U.S. Department of Housing and Urban Development
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HUD OIG Oversight Relating to Financial Matters
HUD OIG strives to influence positive outcomes for HUD programs and operations through timely and relevant
oversight, while safeguarding HUD’s programs from fraud, waste, and abuse. HUD OIG’s oversight efforts focus on
identifying and addressing HUD’s most significant management challenges, including through our Top Management
Challenges for Fiscal Year 2022 report.3 Some of the top challenges that HUD faces are affected by the pandemic and
HUD’s relief programs and funds. Ultimately, HUD OIG uses the top challenges we identified to drive our oversight
efforts, including in the following areas most related to the financial sector:
Mitigating Counterparty Risks in Mortgage Programs – Through FHA and Ginnie Mae, HUD supports
sustainable homeownership and encouraging investment in affordable rental housing. It does so through a two-
pronged approach: by insuring mortgage loans lenders provide to traditionally underserved home buyers and to
owners of various affordable rental housing and by guaranteeing payments to investors who purchase securities
collateralized by government-insured loans, providing liquidity in this market. HUD must continue to take steps to
address counterparty risks faced by FHA and Ginnie Mae to protect taxpayer funds.
Fraud Risk Management - Beyond the monetary loss of taxpayer funds, fraud against HUD’s programs negatively
impacts the most vulnerable populations with critical housing needs. Dollars lost to fraud are dollars that cannot
assist those in need, and ineligible participants take spots away from others who need access. HUD is challenged
to use all available tools, such as training, outreach, monitoring, and enterprise risk management, to safeguard its
program funds from fraud, especially in light of the billions of dollars to provide housing to those impacted by the
pandemic. HUD also faces challenges in protecting its programs and limited funds and resources from fraud through
risk assessments and improper payment reviews.
Sustaining Progress in Financial Management - HUD sustained progress during FY 2021 in addressing its
remaining financial management weaknesses. However, several weaknesses in HUD’s internal control framework and
its financial management systems remain. HUD needs to be able to continue sustaining the improvements it has
made in financial management so that HUD and its components can operate at a level that will consistently produce
reliable and timely financial reports and ensure continuity during challenging times, such as those brought on by the
COVID-19 pandemic.
Recent HUD OIG Oversight Related to the Financial Sector
During the 1-year period ending March 31, 2022, HUD OIG issued 41 audits, evaluations, and other reviews to
strengthen the programs and operations of HUD. Key oversight reports and investigations related the broader
financial sector are summarized below.
FHA Borrowers Did Not Always Properly Receive COVID-19 Forbearances From Their Loan Servicers4
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided a mortgage payment forbearance
option for all borrowers who suffered a financial hardship due to the COVID-19 national emergency. We audited
FHA’s oversight of this COVID-19 forbearance option. Several media reports and complaints filed with the Consumer
Finance Protection Bureau indicated instances when servicers did not properly administer or offer COVID-19
forbearance. In addition, OIG’s Office of Evaluation previously identified issues with the forbearance information
3
Top Management Challenges Facing the U.S. Department of Housing and Urban Development for Fiscal Year 2022, issued Nov. 12, 2021 (available
at https://www.hudoig.gov/sites/default/files/2021-11/Top%20Management%20Challenges%20Facing%20HUD%20in%20FY%202022_0.pdf)
4
HUD OIG Audit Report 2022-KC-0001, issued Dec. 15, 2021 (available at: https://hudoig.gov/reports-publications/report/fha-borrowers-did-not-
always-properly-receive-covid-19-forbearances)
Office of Inspector General U.S. Department of Housing and Urban Development
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
available on servicers’ websites.5 Our audit aimed to determine whether FHA-insured borrowers properly received the
COVID-19- related forbearance.
We found that borrowers were not always made aware of their right to a COVID-19 forbearance under the CARES
Act. Based on a statistical sample, at least one-third of the nearly 335,000 borrowers who were delinquent on their
FHA-insured loans and not on forbearance in November 2020, were either not informed or misinformed about
the COVID-19 forbearance. As a result, any of these borrowers experiencing a hardship due to COVID-19 did not
benefit from the COVID-19 forbearance. Further, we found that servicers did not always properly administer the
COVID-19 forbearance. Based on a statistical sample, servicers improperly administered the forbearance for at least
one-sixth of the nearly 815,000 borrowers on forbearance plans in November 2020, with the most common errors
being unnecessary document requirements, improper periods for forbearance, and credit reporting. Servicers also
performed excessive communication and collection efforts for borrowers who were already in forbearance. As a
result, these borrowers experienced additional burdens from improperly administered forbearance.
We recommended that FHA identify borrowers who are delinquent and did not fully benefit from the COVID-19
forbearance and ensure that information about the CARES Act and COVID-19 forbearance is distributed to these
borrowers. Notably, FHA issued letters to delinquent borrowers in June 2021 informing them about the COVID-19
forbearance. We also recommended that FHA review the 21 loans in our statistical sample with improperly
administered forbearance to ensure that the borrowers were assisted by the servicers, if possible, and ensure that
these servicers updated their forbearance procedures to prevent future noncompliance; ensure that the issues
found during our audit are incorporated into servicing monitoring reviews to deter future noncompliance and
prevent potential loss to the FHA fund; and provide additional guidance to the servicers so that they limit their
communication and collection efforts for the borrowers in forbearance.
Delays in FHA Catalyst’s Development6
In March 2021, HUD OIG became aware of potential project changes and shifting schedules on FHA Catalyst. FHA
Catalyst is FHA’s IT modernization initiative, and is the foundation on which FHA will plan to use new and innovative
ways to fulfill its mission throughout its technology transformation. In response to these concerns, OIG evaluated (1)
why HUD paused work on the FHA Catalyst, (2) what caused that pause, (3) whether and to what extent HUD is back
working on FHA Catalyst, and (4) the revised dates for completion of FHA Catalyst.
Our evaluation found that in February 2021, the Office of the Chief Information Officer (OCIO) identified funding
risks with the development contract under which HUD contracted for FHA Catalyst’s development. In response, HUD
officials took steps to slow FHA Catalyst spending on the contract while awaiting approval for additional contract
funds. Despite efforts to slow project spending, it was not enough to prevent funding shortfalls before the contract’s
base year end. Poor contract oversight enabled OCIO to exhaust funds before the end of the base year, which
stopped work on FHA Catalyst. Additionally, several issues hindered FHA Catalyst development activities. As of August
2021, HUD had resumed FHA Catalyst development work at limited capacity. As of October 2021, HUD estimated that
it would complete FHA Catalyst development in March 2025, which is later than originally planned.
Approximately 31,500 FHA-Insured Loans Did Not Maintain the Required Flood Insurance Coverage in 20207
In March 2022, we issued an audit of FHA-insured loans serviced in calendar year 2020 to determine whether
borrowers maintained proper flood insurance coverage. FHA’s current rules regarding the requirement to maintain
5
Evaluation Memorandum, Some Mortgage Loan Servicers’ Websites Offer Information about CARES Act Loan Forbearance That Is Incomplete,
Inconsistent, Dated, and Unclear, issued April 27, 2020 (available at: https://www.hudoig.gov/sites/default/files/2020-04/Single%20Family%20
Mortgage%20Forbearance%20Brief.pdf); Evaluation Memorandum, Some Mortgage Loan Servicers’ Websites Continue To Offer Information
about CARES Act Loan Forbearance That Could Mislead or Confuse Borrowers, or Provide Little or no Information at all, issued September 30, 2020
(available at: https://www.hudoig.gov/sites/default/files/2020-10/Single%20Family%20Mortgage%20Forbearance.pdf)
6
HUD OIG Evaluation Report 2021-OE-0003a, issued November 77, 2021 (available at: https://www.hudoig.gov/reports-publications/
memorandum/delays-federal-housing-administration-catalysts-development)
7
HUD OIG Audit Report 2022-KC-0002, issued March 22, 2022 (available at: https://www.hudoig.gov/reports-publications/report/approximately-
31500-fha-insured-loans-did-not-maintain-required-flood)
Office of Inspector General U.S. Department of Housing and Urban Development
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
flood insurance coverage on property located in an SFHA do not permit private flood insurance as an option to satisfy
purchase requirement. We compared location data from FHA-insured loans to Federal Emergency Management
Agency flood maps to identify a targeted universe of properties that appeared to be located in special flood hazard
areas (SFHA).
We found FHA insurance remained outstanding on an estimated 31,500 loans for properties in SFHA flood zones that
did not have the required flood insurance during calendar year 2020. We found loans that had private flood insurance
instead of the required NFIP coverage, NFIP coverage that did not meet the minimum required amount, or no
coverage during calendar year 2020. This condition occurred because FHA did not have adequate controls to detect
loans that did not maintain the required flood insurance and its handbooks did not adequately guide servicers on the
flood insurance requirements. As a result, the FHA insurance fund was potentially exposed to greater risk from at least
$4.5 billion in loans that did not maintain adequate NFIP coverage.
As a result, we recommended that FHA take steps to address the 21 loans in our statistical sample that appeared to
not have appropriate flood insurance coverage, develop a control to detect loans that did not maintain the required
flood insurance to avoid potential future costs to the FHA insurance fund from inadequately insured properties, and
consult with HUD’s Office of General Counsel to review the language in the statutes, regulations, and handbooks and
make any necessary adjustments to the forward mortgage and Home Equity Conversation Mortgage handbooks.
COVID-19 Forbearance Data in HUD’s Single Family Default Monitoring System Generally Agreed With
Information Maintained by Loan Servicers Reviewed8
We audited lender reporting of COVID-19 forbearances for FHA- insured loans in the Single Family Default Monitoring
System (SFDMS). We compared default reporting data from SFDMS to loan data provided by five sampled servicing
lenders that serviced a third of the FHA single-family portfolio. We initiated this audit to determine whether COVID-19
forbearance data available in SFDMS were consistent with the information maintained by loan servicers.
We found that COVID-19 forbearance data available in SFDMS were generally consistent with the information
maintained by loan servicers reviewed. Nearly 90 percent of the loans in forbearance, according to the servicer
records reviewed, were reported as such by the servicers in SFDMS. The remaining 10 percent of loans in forbearance,
according to servicer records but not reported as forbearances in SFDMS, were properly accounted for. In addition,
key metrics showed that servicers generally complied with HUD’s forbearance reporting requirements.
HUD Did Not Have Adequate Controls in Place to Track, Monitor, and Issue FHA Refunds Owed to
Homeowners9
We audited HUD oversight of FHA refunds based on a hotline complaint alleging that HUD was trying to make it
difficult for claimants to obtain refunds or discourage them from pursuing the refunds, which are due to eligible
homeowners from the unearned portion of the upfront mortgage insurance premium paid. Our audit objective
was to determine whether HUD appropriately tracked, monitored, and issued FHA refunds due to homeowners of
terminated loans.
Our audit revealed that HUD did not have adequate controls in place to ensure that refunds were appropriately
tracked, monitored, and issued. Specifically, HUD (1) did not ensure that the homeowner information for at least
23,579 loans with unpaid refunds totaling approximately $15.8 million was included in its public listing of unpaid
refunds, (2) did not adequately track the status of refunds, (3) lacked policies and procedures for various stages
of the refund process, (4) did not fully implement procedures it developed requiring additional documents from
homeowners, and (5) did not follow the requirements of the Paperwork Reduction Act. We found HUD did not
emphasize reviewing or monitoring the refund process to identify weaknesses and focused primarily on sending
8
HUD OIG Audit Report 2021-KC-0005, issued Aug. 16, 2021 (available at: https://www.hudoig.gov/reports-publications/report/covid-19-
forbearance-data-huds-single-family-default-monitoring-system)
9
HUD OIG Audit Report 2022-LA-0001, issued January 7, 2022 (available at: https://www.hudoig.gov/reports-publications/report/hud-did-not-
have-adequate-controls-place-track-monitor-and-issue-fha)
Office of Inspector General U.S. Department of Housing and Urban Development
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
refund applications and issuing refunds to homeowners who returned the applications. As a result, HUD could not
ensure that it implemented a consistent refund process, and homeowners and third-party tracers were not able to
search for all refunds HUD owed, which may have reduced the chance for homeowners for at least 23,579 loans to
obtain approximately $15.8 million in refunds. We made several recommends that HUD develop and improve its
policies and processes to improve the FHA refund process.
Investigative Activity and Outcomes
OIG also helps protect HUD from counterparty risk by conducting investigations of alleged fraud negatively affecting
the FHA insurance funds and securing recoveries. For the period April 1, 2021, through March 31, 2022, HUD OIG
completed 97 single-family investigations of fraud against the FHA insurance fund. Many of the investigations
focused on loan origination fraud involving forward mortgages. Recoveries from these cases totaled over $57 million
(criminal, civil, and administrative recoveries). For example:
Father and Son Collectively Sentenced to 58 Months Incarceration10
A former majority owner of an Alzheimer’s assisted living facility, and his son, the facility administrator, were
collectively sentenced in U.S. District Court to 58 months incarceration and 4 years supervised release. The assisted
living facility was financed with an FHA Section 232-insured loan, which provided a favorable interest rate and
did not require the owners of the facility to take personal responsibility for the loan when it went into default. The
facility agreed to be bound by a regulatory agreement with HUD that prohibited distributing property funds to an
owner when a property is in default or a non-surplus case position. HUD suffered the financial loss when the facility
defaulted on the loan and the property went into foreclosure. Instead of paying the loan, and in violation of the
regulatory agreement, the two took hundreds of thousands of dollars from the facility. The facility administrator
was sentenced in connection with his earlier guilty plea to equity skimming and was ordered to pay $2 million in
restitution to HUD. The former majority owner was sentenced in connection with his earlier guilty plea to fraud
against HUD and was ordered to pay jointly and severally with the facility administrator more than $3.6 million in
restitution to HUD.
Landlord Enters Into $805,000 Settlement Agreement With HUD11
The owner of a mixed-use residential and commercial property, entered into a settlement agreement and agreed to
pay $805,000 to HUD to resolve allegations that he made improper payments to his family trusts while disregarding
his obligation to make payments on the FHA-insured mortgage obtained in 2010 to finance the construction of
the property. The owner also submitted a false statement to FHA related to those payments, in violation of the civil
equity skimming statute and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. For more than
2 years, the company stopped paying its mortgage but continued to transfer money to family trusts, causing the
mortgage to go into default. To prevent foreclosure, FHA agreed to pay down a substantial portion of the mortgage
after the owner falsely stated that, while the mortgage was in default, the company paid to its lender all net cash
remaining after project expenses had been paid.
Nine Swindlers Collectively Sentenced to 16 Years Incarceration12
Nine individuals – a real estate agent and business owner, two paralegals, several employees of a company, notaries,
and a credit repair specialist – were collectively sentenced in Superior Court of California to 16 years incarceration,
10 years probation, 11 years supervised release, and ordered to pay $606,815 restitution to various victims, of which
$598,335 was ordered jointly and severally. For over 7 years, the co-conspirators participated in an advance fee
mortgage relief scheme that resulted in the foreclosure delays of over 200 properties, impacting 15 FHA-insured
mortgages. The co-conspirators submitted false deeds and petitions in support of bankruptcies filed with the courts
to delay the foreclosures.
10
https://www.justice.gov/usao-edtx/pr/former-administrator-texarkana-assisted-living-facility-sentenced-federal-violations
11
https://www.justice.gov/usao-ndny/pr/owner-malta-s-ellsworth-commons-agrees-pay-805000-and-permanent-exclusion-federal
12
https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-arrests-and-indictments-alleged-6-million
Office of Inspector General U.S. Department of Housing and Urban Development
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Real Estate Professionals Sentenced to 48 Months Incarceration
A former real estate broker and owner of a realty company, and a former real estate salesperson and branch manager
for a mortgage company, were collectively sentenced in Federal court to 48 months and 1 day incarceration and 6
years supervised release. For more than 2 years, the two individuals orchestrated a short sale scheme by fraudulently
misrepresenting borrowers’ primary residences as rental properties and inflating the market value of the primary
residences on the borrowers’ loan applications to obtain FHA-insured or conventional loans for the purchase of new
homes. The two individuals then falsely submitted short sale requests for the borrowers’ primary residences, based
on purported financial hardships, and improperly collected profits, commissions, fees, and kickbacks as part of this
scheme. The former real estate salesperson and branch manager was sentenced to bank fraud and was ordered to
pay, jointly and severally, with the former real estate broker $253,013 restitution to Freddie Mac and various financial
institutions. The former real estate broker was sentenced in connection with his earlier guilty plea to bank fraud and
money laundering and was ordered to pay an additional $4,875,691 restitution to Freddie Mac and Fannie Mae.
Former Public Housing Agency Finance Officer Ordered To Pay Nearly $5.3 Million in Restitution13
A former finance officer for a public housing authority (PHA) was sentenced in Federal court in connection with
her earlier guilty plea to wire fraud. For more than 3 years, the former finance officer used a variety of schemes to
embezzle $6.9 million in public money, including by diverting PHA funds in connection with the purchase of land
and preparing and submitted false invoices to the PHA by making them appear as if the purchases were from an
outside vendor. The former finance officer was sentenced to 51 months incarceration and 3 years supervised release
and ordered to pay nearly $5.3 million in restitution, of which more than $4.2 million will be paid to the PHA.
13
https://www.justice.gov/usao-wdwa/pr/former-low-income-housing-executive-sentenced-prison-embezzling-nearly-7-million
Office of Inspector General National Credit Union Administration
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General
National Credit Union Administration
The National Credit Union Administration (NCUA) Office of Inspector General (OIG) promotes the economy, efficiency, and
effectiveness of NCUA programs and operations and detects and deters fraud, waste and abuse, thereby supporting the NCUA’s
mission of providing, through regulation and supervision, a safe and sound credit union system that promotes confidence in
the national system of cooperative credit.
Agency Overview
The NCUA is responsible for chartering, insuring, and supervising federal credit unions and administering the National
Credit Union Share Insurance Fund (Share Insurance Fund). The agency also manages the Operating Fund,14 the
Community Development Revolving Loan Fund,15 and the Central Liquidity Facility.16
Credit unions are member-owned, not-for-profit cooperative financial institutions formed to permit members to
save, borrow, and obtain related financial services. NCUA charters and supervises federal credit unions and insures
accounts in federal and most state-chartered credit unions across the country through the Share Insurance Fund, a
federal fund backed by the full faith and credit of the United States government.
The NCUA’s mission is to provide through regulation and supervision, a safe and sound credit union system that
promotes confidence in the national system of cooperative credit and its vision is to protect consumer rights
and member deposits. The NCUA further states that it is dedicated to upholding the integrity, objectivity, and
independence of credit union oversight. The agency implements initiatives designed to meet these goals.
Major NCUA Programs
Supervision
The NCUA supervises credit unions through examinations, regulatory enforcement, providing guidance in regulations
and letters, and taking supervisory and administrative actions as necessary.
The agency’s Office of National Examinations and Supervision oversees examination and supervision issues related
to consumer credit unions with assets greater than $10 billion (a recent proposal would raise this threshold to $15
14
The Operating Fund was created by the Federal Credit Union Act of 1934. It was established as a revolving fund in the United States Treasury under the management
of the NCUA Board for the purpose of providing administration and service to the federal credit union system. A significant majority of the Operating Fund’s revenue is
comprised of operating fees paid by federal credit unions. Each federal credit union is required to pay this fee based on its prior year asset balances and rates set by the
NCUA Board.
15
The NCUA’s Community Development Revolving Loan Fund, which was established by Congress, makes loans and Technical Assistance Grants to low-income
designated credit unions.
16
The Central Liquidity Facility is a mixed-ownership government corporation the purpose of which is to supply emergency loans to member credit unions.
Office of Inspector General National Credit Union Administration
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
billion) and all corporate credit unions, which provide services to consumer credit unions. Due to the relative size of
their insured share base, these very large credit unions are deemed systemically important to the Share Insurance
Fund.
In addition to the NCUA’s authority, the Consumer Financial Protection Bureau (CFPB) has the authority under the
Dodd-Frank Act to examine compliance with certain consumer laws and regulations by credit unions with assets over
$10 billion.
Insurance
The NCUA administers the Share Insurance Fund, which is funded by credit unions and provides insurance for
deposits held at federally insured credit unions nationwide. The insurance limit is $250,000 per depositor.
Credit Union Resources and Expansion
The NCUA’s Office of Credit Union Resources and Expansion (CURE) supports credit union growth and development,
including providing support to low-income, minority, and any credit union seeking assistance with chartering, charter
conversions, by-law amendments, field of membership expansion requests, and low-income designations. CURE
also provides access to online training and resources, grants and loans, and a program for preserving and growing
minority institutions.
Consumer Protection
The NCUA’s Office of Consumer Financial Protection (OCFP) is responsible for consumer protection in the areas of fair
lending examinations, member complaints, and financial literacy. OCFP consults with the CFPB, which has supervisory
authority over credit unions with assets of $10 billion or more. CFPB also can request to accompany the NCUA on
examinations of other credit unions.
Asset Management
The NCUA’s Asset Management and Assistance Center (AMAC) conducts credit union liquidations and management
and recovery of assets to minimize costs to the Share Insurance Fund and to credit union members. AMAC assists
agency regional offices with the review of large complex loan portfolios and actual or potential bond claims. AMAC
also participates extensively in the operational phases of conservatorships and records reconstruction.
Office of Minority and Women Inclusion
The NCUA’s Office of Minority and Women Inclusion, in accordance with the Dodd-Frank Act, is responsible for
measuring, monitoring, and establishing policies for diversity in the agency’s management, employment, and
business activities, and with respect to credit unions, excluding the enforcement of statutes, regulations, and
executive orders pertaining to civil rights.
Office of Continuity and Security Management
The Office of Continuity and Security Management evaluates and manages security and continuity programs across
the NCUA and its regional offices. The office is responsible for continuity of operations, emergency planning and
response, critical infrastructure and resource protection, cyber threat and intelligence analysis, insider threats and
counterintelligence, facility security, and personnel security.
Office of Inspector General National Credit Union Administration
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
The NCUA Office of Inspector General
The 1988 amendments to the Inspector General Act of 1978 (IG Act) established IGs in 33 designated federal
entities, including the NCUA.17 The NCUA Inspector General (IG) is appointed by, reports to, and is under the general
supervision of a three-member presidentially appointed Board. OIG staff consists of ten employees: the IG, the Deputy
IG, the Counsel to the IG/Assistant IG for Investigations, the Director of Investigations, five auditors, and an office
manager. The OIG promotes the economy, efficiency, and effectiveness of agency programs and operations, and
detects and deters fraud, waste, and abuse, thereby supporting the NCUA’s mission of facilitating the availability of
credit union services to all eligible consumers through a regulatory environment that fosters a safe and sound credit
union system. The OIG supports this mission by conducting independent audits, investigations, and other activities,
and by keeping the NCUA Board and the Congress fully and currently informed of its work.
Recent Work
We conducted an audit regarding the NCUA’s governance of information technology (IT) initiatives that could be
instructive for the broader financial sector. Our audit, which we issued on September 28, 2021, determined that
overall, the NCUA had an effective process for identifying, controlling, prioritizing, and implementing IT initiatives.
However, we recommended that the NCUA publish policies and procedures that included definitions, roles,
responsibilities, and processes for IT governance and selecting, controlling, and evaluating IT investments. We
also recommended that the NCUA make clearer the authorities, responsibilities, and functions of its Information
Technology Oversight Council (ITOC) and require the ITOC to provide a rated and ranked listing of proposed IT
projects to the NCUA Board, highlighting those that are legally required, and provide ITOC meeting minutes to the
Board.
We also participated in two CIGFO working groups that worked on the report titled Guidance in Preparing for
and Managing Crises, and the audit of FSOC’s response to the May 20, 2021, Executive Order on Climate-Related
Financial Risk. We also continued to participate in a CIGFO working group designed to coordinate investigative efforts
combating fraud associated with CARES Act stimulus programs.
17
5 U.S.C. app. § 8G.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General U.S. Securities and Exchange Commission
Office of Inspector General
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC or agency) Office of Inspector General (OIG) pro
motes the integrity, efficiency, and effectiveness of the critical programs and operations of the SEC and
operates independently of the agency to help prevent and detect fraud, waste, and abuse in those
programs and operations, through audits, evaluations, investigations, and other reviews.
I.
Background
The SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
The SEC strives to promote capital markets that inspire public confidence and provide a diverse array of financial
opportunities to retail and institutional investors, entrepreneurs, public companies, and other market participants.
Its core values consist of integrity, excellence, accountability, teamwork, fairness, and effectiveness. The SEC’s goals
are focusing on the long-term interests of Main Street investors; recognizing significant developments and trends
in evolving capital markets and adjusting agency efforts to ensure the SEC is effectively allocating its resources; and
elevating the SEC’s performance by enhancing its analytical capabilities and human capital development.
The SEC is responsible for overseeing the nation’s securities markets and certain primary participants, including
broker-dealers, investment companies, investment advisers, clearing agencies, transfer agents, credit rating
agencies, and securities exchanges, as well as organizations such as the Financial Industry Regulatory Authority,
Municipal Securities Rulemaking Board, Public Company Accounting Oversight Board, Securities Investor Protection
Corporation, and the Financial Accounting Standard Board. Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank), the agency’s jurisdiction was expanded to include certain participants in the
derivatives markets, private fund advisers, and municipal advisors.
The SEC’s headquarters are in Washington, DC, and the agency has 11 regional offices located throughout the
country. The agency’s functional responsibilities are organized into 6 divisions and 25 offices, and the regional offices
are primarily responsible for investigating and litigating potential violations of the securities laws. The regional offices
also have examination staff to inspect regulated entities such as investment advisers, investment companies, and
broker-dealers. As of March 2022, the SEC employed 4,477 full-time equivalents.
The SEC OIG was established as an independent office within the SEC in 1989 under the Inspector General Act of
1978, as amended (IG Act). The SEC OIG’s mission is to promote the integrity, efficiency, and effectiveness of the
SEC’s critical programs and operations. The SEC OIG prevents and detects fraud, waste, and abuse through audits,
evaluations, investigations, and other reviews related to SEC programs and operations.
Office of Inspector General U.S. Securities and Exchange Commission
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
The SEC OIG Office of Audits conducts, coordinates, and supervises independent audits and evaluations of the SEC’s
programs and operations at its headquarters and 11 regional offices. These audits and evaluations are based on risk
and materiality, known or perceived vulnerabilities and inefficiencies, and information received from the Congress,
SEC staff, the U.S. Government Accountability Office, and the public.
The SEC OIG Office of Investigations performs investigations into allegations of criminal, civil, and administrative
violations involving SEC programs and operations by SEC employees, contractors, and outside entities. These
investigations may result in criminal prosecutions, fines, civil penalties, administrative sanctions, and personnel
actions. The Office of Investigations also identifies vulnerabilities, deficiencies, and wrongdoing that could negatively
impact the SEC’s programs and operations.
In addition to the responsibilities set forth in the IG Act, Section 966 of Dodd-Frank required the SEC OIG to establish a
suggestion program for SEC employees. The SEC OIG established its SEC Employee Suggestion Program in September
2010. Under this program, the OIG receives, reviews and considers, and recommends appropriate action with
respect to such suggestions or allegations from agency employees for improvements in the SEC’s work efficiency,
effectiveness, and productivity, and use of its resources, as well as allegations by employees of waste, abuse,
misconduct, or mismanagement within the SEC.
II. SEC OIG Work Related to the Broader Financial Sector
In accordance with Section 989E(a)(2)(B)(i) of Dodd-Frank, below is a discussion of the SEC OIG’s completed and
ongoing work, focusing on issues that may apply to the broader financial sector.
Completed Work
Registered Investment Adviser Examinations: EXAMS Has Made Progress To Assess Risk and Optimize
Limited Resources, But Could Further Improve Controls Over Some Processes: Report No. 571; January 25,
2022
Within the SEC’s Division of Examinations (EXAMS), the investment adviser/investment company (IA/IC) examination
program assesses whether, among other things, registered investment advisers (RIAs) and investment companies
comply with federal securities laws. RIAs are among the variety of financial professionals that provide services to
help individuals manage their investments. Generally, RIAs include firms or individuals that, for compensation,
advise others as to the value of securities, or as to the advisability of investing in, purchasing, or selling securities.
RIAs represent the largest portion of the registered firm population overseen by EXAMS, and the majority of EXAMS’
examinations are of RIAs.
We conducted this audit to determine whether EXAMS has established effective controls over its RIA examination
planning processes to foster compliance with federal securities laws and ensure efficient allocation of its limited
RIA examination resources. We also followed up on the implementation of corrective actions in response to
recommendations from our 2016 evaluation.
We verified that, in response to two recommendations from the prior OIG evaluation (Office of Compliance Inspections
and Examinations’ Management of Investment Adviser Examination Coverage Goals; OIG Report No. 533; March 10,
2016), EXAMS worked to optimize its limited resources and increase its efficiency and effectiveness, improve its
IA/IC examination program’s examination candidate selection processes, and implement the U.S. Government
Accountability Office’s risk-management framework, specifically, within the IA/IC examination program. OIG Report
No. 533 noted that, in fiscal year (FY) 2015, the average number of IA/IC examinations completed per examiner
was about three. That number nearly doubled in FY 2021. Additionally, in FY 2015, EXAMS met its annual goal of
examining 10 percent of RIAs. Notably, the percentage of RIAs examined improved to 15 percent in FY 2020 and 16
percent in FY 2021.
Office of Inspector General U.S. Securities and Exchange Commission
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
We selected and reviewed a non-statistical, random sample of 501 RIA examinations from the audit universe of
4,993 RIA examinations that were approved and closed between FY 2019 and FY 2021, quarter 2. For each sample
item, we tested key examination planning processes and controls and found that, although 23 of 26 operated
effectively, controls over the remaining RIA examination planning processes need improvement. For example, for
81 of the 501 RIA examinations we reviewed (or about 16 percent), staff commenced substantive RIA examination
procedures before management reviewed and approved key examination planning and scoping processes as part
of the examination pre-fieldwork phase. In some cases, staff failed to first request management’s approval before
commencing substantive examination procedures. In other cases, management failed to provide timely approval
when requested. As a result, pre-fieldwork approval—a primary control for ensuring, among other things, that staff
execute examinations in accordance with Division policies and procedures—occurred between 1 and 391 days late
(or an average of 54 days late) for the 81 RIA examinations in question. Additionally, for 70 of the 501 RIA examinations
we reviewed (or about 14 percent), staff either did not (1) ensure the EXAMS system of record included evidence
of required communications with examined registrants, or (2) maintain documents in the Communications section
of the system, as required. Inconsistent documentation of examination communications may lead to difficulties in
reviewing and supervising examinations.
Lastly, we identified a matter that did not warrant a recommendation but was discussed with agency management
for their consideration. Specifically, 8 of the 501 examinations we reviewed included non-EXAMS staff participation.
However, we were unable to find evidence that an examination supervisor notified registrants of non-EXAMS staff
participation for seven of these eight RIA examinations.
We issued our final report on January 25, 2022, and made three recommendations to further strengthen the SEC’s IA/
IC examination program. Because this report contains nonpublic information about the SEC’s examination program,
we released a redacted version on our website at https://www.sec.gov/files/Registered-Invst-Adviser-EXAMS-
Made-Prog-Assess-Risk-Optimize-Limited-Resources-Could-Further-Imp-Controls-Over-Some-Processes-Rpt-571.
pdf.
DERA Staff Research and Publications Support the SEC’s Mission, But Related Controls and Agency-wide
Communication and Coordination Could Be Improved (Report No. 567); September 17, 2021
Staff from the SEC’s Division of Economic and Risk Analysis (DERA) develop and implement novel research on a variety
of topics germane to the SEC’s mission and publish the results of that research in a wide range of academic and
practitioner journals, conference volumes, and scholarly books. Staff may complete research products as part of their
official work or during their personal time. According to agency officials, between FY 2018 and FY 2020, DERA staff
submitted 116 working papers and items of personal research for review and clearance for public release.
We conducted this evaluation to evaluate the role DERA staff’s research and publications—including working papers,
academic publications, and other published research—play in furthering the mission of the SEC; and to determine
whether effective controls exist to (a) review and approve staff research and publications, and (b) safeguard SEC
nonpublic or other sensitive information used for such activities.
DERA provides, among other things, insights from scientific research in support of the SEC’s mission, including its
rulemaking, enforcement, and examinations functions. As such, management has recognized the importance of staff
research and publication activities, and established procedures to address common issues that arise, including issues
related to data usage and outside activities. Nonetheless, management can improve its internal control over staff’s
research and publication activities. Specifically, we found that DERA does not:
•
formally track working papers and refereed reports, or how staff research and publications advance a
subpart of the SEC’s mission;
•
review working papers and personal research before staff submit them to the SEC Office of Ethics Counsel
for the Office of General Counsel’s review and clearance for public release; or
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•
centrally maintain records related to staff research and publication activities.
Implementing these or similar control activities would provide the organization with greater assurance that
it is achieving its objectives in this area and effectively mitigating related risks. Without such control activities,
management may not have a complete picture of how organizational resources are used (when applicable), how
staff research advances a subpart of the SEC’s mission, and whether research is addressing agency needs across
mission areas. In addition, management may lack assurance that working papers, personal research, and supporting
documents submitted to the SEC’s Office of Ethics Counsel and reviewed by the Office of General Counsel are
complete, accurate, and ready for review and clearance. Finally, the lack of complete, centralized records could
present challenges over time, particularly if key personnel have separated from the agency.
Additionally, to ensure other SEC divisions and offices are aware of research in progress and to obtain information
on any relevant rulemaking or pending litigation, DERA e-mails various SEC management and staff a quarterly
communication known as DERA’s Research Pipeline. We surveyed personnel from 13 SEC divisions and offices that
received the Research Pipeline, and they generally found DERA’s research to be useful and an effective recruitment
tool for hiring economists. However, a third of respondents felt that DERA could better communicate and coordinate
staff research and publication activities. Specifically, we found DERA has not clearly identified and communicated its
expectations to other divisions and offices. In addition, DERA has not established controls to ensure (1) all pending
staff research and publications are timely listed in DERA’s Research Pipeline before research is made public; (2) the
quarterly e-mails are released timely and consistently; and (3) stakeholders in other divisions or offices have sufficient
information to understand the significance of the research that is included. Through improved communication and
coordination, SEC divisions and offices could better assess and comment on DERA staff research in progress, thereby
better meeting the needs of all divisions and offices, including DERA.
We issued our final report on September 17, 2021, and made four recommendations to further strengthen internal
controls over staff research and publications activities, as well as communication and coordination with internal
stakeholders. The report is available on our website at https://www.sec.gov/files/DERA-Staff-Research-and-
Publications-Support-SECs-Mission-Report-no-567.pdf.
Ongoing Work
Evaluation of the Division of Enforcement’s Efforts and Goals To Expedite Investigations
The Division of Enforcement (Enforcement) is critical to the Commission’s ability to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation. Specifically, Enforcement uncovers misconduct and
advances the Commission’s mission each year by investigating and bringing hundreds of actions against individuals
and entities for fraud and other misconduct, and by securing remedies that protect investors and the markets. As
stated in Enforcement’s 2020 annual report, “[Enforcement’s] actions have the greatest impact when filed as close in
time to the conduct as possible.”
The SEC OIG has initiated an evaluation to (1) assess Enforcement’s efforts to expedite investigations, where
possible and appropriate, and (2) review Enforcement’s performance goal-setting and monitoring processes related
to the pace of investigations. The evaluation scope period will include Enforcement time-to-file data and goal-
setting processes covering FYs 2016 through 2021, and associated efforts and actions to meet established goals in
accordance with applicable criteria.
We expect to issue a report summarizing our findings during the next reporting period.
Audit of the U.S. Securities and Exchange Commission’s Whistleblower Program
FY 2020 marked both the 10-year anniversary of the inception of the SEC’s whistleblower program under Dodd-
Frank, as well as numerous record-breaking whistleblower program accomplishments in terms of individuals and
dollars awarded, claims processed, and tips received. In FY 2020, the SEC processed more claims than in any other
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
year of the program, and the SEC issued the largest number of Final Orders resolving whistleblower award claims
in a FY, including both award and denial orders. According to the SEC’s public website, this record-breaking trend
continued into early FY 2021, when the SEC issued an individual award of $114 million, eclipsing the previous record
of $50 million set months prior in FY 2020. Overall, from its inception through the end of FY 2020, the whistleblower
program received more than 40,000 tips, and awarded approximately $562 million to 106 individuals.
The SEC OIG has initiated an audit to assess the growth of the SEC’s whistleblower program and the functioning
of key program controls, such as those for communicating with stakeholders, reviewing information provided by
whistleblowers, and determining award amounts.
We expect to issue a report summarizing our findings before the end of FY 2022.
Evaluation of the Office of the Advocate for Small Business Capital Formation
The Office of the Advocate for Small Business Capital Formation (OASB) is a newly established, independent office
within the SEC. OASB commenced operations in January 2019 and was established pursuant to the SEC Small
Business Advocate Act of 2016 to advance the interests of small businesses and their investors at the SEC and in the
capital markets. OASB advocates for small businesses and their investors by conducting outreach to solicit views on
relevant capital formation issues, providing assistance to resolve significant problems small businesses may have with
the SEC or self-regulatory organizations, analyzing the potential small business impact of proposed regulations and
rules, and recommending changes to mitigate capital formation issues and promote the interests of small businesses
and their investors.
The SEC OIG has initiated an evaluation to assess the design and implementation of OASB’s operations, policies, and
controls to include, as applicable, coordination and collaboration with other SEC divisions and offices and external
stakeholders, to determine whether OASB has met applicable statutory requirements and strategic goals and
objectives.
We expect to issue a report summarizing our findings during the next reporting period.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Special Inspector General for the Troubled Asset Relief Program
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Special Inspector General for the
Troubled Asset Relief Program
The mission of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) is to prevent and
detect fraud, waste, and abuse in the more than $442 billion appropriated by Congress through the Emergency Economic
Stabilization Act (EESA) and $2 billion funded through the Consolidated Appropriations Act of 2016, and to promote
economy, efficiency, effectiveness, and accountability in these economic stability programs. SIGTARP conducts investigations
of suspected illegal activity in, and independent audits of, these EESA long-term economic stability programs.
Background
EESA has two parts:
(1) Short-term Treasury purchases of “troubled assets,” which led to investments in banks, insurance companies
and automotive companies - these programs have been largely completed, as has SIGTARP’s work in this area;
and
(2) Long-term programs intended to bring economic stability to the financial industry and communities by
protecting home values and preserving homeownership - programs that spent over $1 billion during fiscal
years 2020-2021, and will continue to operate until 2024.
Under these long-term economic stability programs, the Department of Treasury and Fannie Mae (with assistance
from Freddie Mac) run a program that funds incentives to more than 150 financial institutions, including some of the
largest in our nation, to lower mortgage payments to terms that are affordable and sustainable for homeowners at
risk of foreclosure. Treasury also funded grant-like programs administered by housing finance agencies in 19 states.
This included assistance for homeowners unemployed, underemployed, or suffering other hardships due to the
COVID-19 pandemic.
SIGTARP is primarily a federal law enforcement office. SIGTARP investigations have resulted in criminal charges against
467 defendants with a 96% DOJ conviction rate. Courts have sentenced to prison 315 defendants, including 74
bankers. SIGTARP’s investigations have also resulted in DOJ, the SEC, and others bringing enforcement actions against
25 banks or corporations, including some of the largest financial institutions.
More than $11 billion has been recovered from SIGTARP investigations – a cumulative 29 times return on investment.
Already in FY 2022, the government has recovered $144,000 with more projected later in the fiscal year.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
SIGTARP’s Select Audit Results (April 1, 2021 to March 31, 2022)
SIGTARP Announced Three Evaluations, Released Two Evaluation
Reports; One Management Advisory.
Four Evaluations Pertain to the Home Affordable Modification Program (HAMP)
In October and November 2021, SIGTARP announced three new evaluations examining different aspects of HAMP. For
the first two evaluations, SIGTARP will identify key characteristics of homeowners and mortgage servicers in HAMP
using Treasury’s data and other relevant data sources. For the third evaluation, SIGTARP will review Treasury’s oversight
of mortgage servicers participating in HAMP. SIGTARP will examine Treasury’s oversight of HAMP servicers, as well
as oversight conducted on behalf of Treasury by Freddie Mac and Fannie Mae. The results of these evaluations will
provide valuable information to Treasury, Congress, and the public on who is currently benefitting from HAMP and
the servicers participating in the program, and how federal taxpayer dollars are being used.
In August 2021, SIGTARP released an evaluation report, Treasury’s Public Reporting on the Home Affordable
Modification Program, which found that although Treasury provides some transparency to the public on HAMP,
more transparency is needed on active homeowners in the program and the performance of 118 bank and non-bank
mortgage servicers that administer it. This additional transparency would provide greater insight on who is currently
benefitting from HAMP and help the public understand the effectiveness of HAMP in achieving its goals to modify
mortgages to be affordable and sustainable. The added transparency would also bring more accountability and
insight into servicers’ poor performance and violations of Treasury’s rules.
Earlier, in June 2021, SIGTARP issued an evaluation report, Treasury Has Been Effective at Shifting the HHF to Assist
Homeowners Suffering Pandemic-Related Hardships, Efforts That Could Be Further Enhanced. SIGTARP also
issued a Management Advisory Letter the same month, which recommended that Treasury take corrective action to
require an important fraud and waste prevention control in the HHF Blight Elimination Program.
SIGTARP’s Select Investigative Results (April 1, 2021 to March 31, 2022)
Risk of Fraud, Waste, and Abuse by Financial Institutions in the HAMP Program
SIGTARP’s top law enforcement priority is to investigate and bring to justice unlawful conduct by any of the banks
and other financial institutions that received $21.98 billion in HAMP. 18 HAMP modifies mortgages (interest rates,
terms, etc.) for homeowners at risk of foreclosure, to make mortgage payments more affordable and sustainable for
homeowners. There are over 586,000 homeowners participating in all 50 states. California, Florida, New York, and
Illinois each have more than 30,000 homeowners actively in HAMP. In fiscal years 2021-2022, Treasury distributed
$654.3 million under HAMP, including to banks ($47.1 million to Wells Fargo, $31.7 million to JP Morgan Chase, $33.3
million to Bank of America, and $10.3 million to Citigroup), and non-banks (i.e., $183.4 million to Ocwen Financial,
$85.95 million to Nationstar). Treasury’s payment of EESA funds to these financial institutions is not automatic, but
instead requires that the financial institutions comply with the law and rules of the program. SIGTARP has a number of
open, confidential investigations.
Justice for Defendants Convicted of Scamming Homeowners Who Were
Seeking Foreclosure Assistance Through HAMP
SIGTARP has caught 121 scammers who were convicted for defrauding nearly 31,000 homeowners nationwide
seeking foreclosure relief through HAMP. The courts have sentenced 101 scammers to prison.
18
SIGTARP’s March 2022 analysis of Treasury and Fannie Mae’s most recent MHA data; Aggregate Cap Monitor Report - March 2022.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
New York Man Sentenced for Defrauding Hundreds of Victims in Mortgage Modification
Scam
On October 8, 2021, Guy Samuel from Long Island, New York was sentenced to time served in prison, two years
supervised release, ordered to forfeit $425,000, and to pay restitution of $721,000. Samuel pled guilty to wire fraud,
financial institution fraud, conspiracy to commit wire fraud, and filing false statements in connection with a multi-
million-dollar mortgage modification scheme. Over the course of two and a half years, Samuel, along with several
co-conspirators, collected advance fees totaling over $2.3 million from hundreds of struggling homeowners with the
false promise that they would have their mortgages modified under HAMP. This matter was prosecuted by the U.S.
Attorney’s Office in the Southern District of New York.
Federal Court Sentences Man to Prison for Participating in Multimillion-Dollar Fraud
Scheme Against Those Seeking Assistance From HAMP
On August 20, 2021, Mario Alvarenga was sentenced to six months in prison and three years of supervised release,
ordered to forfeit $189,000, and ordered to pay restitution of more than $9.4 million after pleading guilty to
conspiracy to commit fraud, bank fraud, and conspiracy to commit obstruction of justice, for participating in a
scheme to fraudulently induce distressed homeowners to sell their homes to a company associated with defendants,
Launch Development, LLC.
Since at least 2013, Alvarenga and his co-conspirators defrauded distressed homeowners throughout the Bronx,
Brooklyn, and Queens, New York, by falsely representing to these homeowners – some of whom were elderly or in
poor health – that they could assist the homeowners with a loan modification or similar relief from foreclosure that
would allow the homeowners to save their homes. However, rather than assisting these homeowners, the defendants
deceived them into selling their homes at a settlement to Launch Development, a for-profit real estate company also
affiliated with Alvarenga and his co-conspirators. The homeowners did not know that they were selling their homes
to Launch Development for well below market value. One of the co-conspirators went to a homeowner’s home
and demanded that the homeowner vacate the premises or eviction proceedings would commence. This fraud
generated millions of dollars because the houses were then re-sold at enormous profits. SIGTARP was joined in the
investigation by the FBI and the New York State Department of Financial Services. The U.S. Attorney’s Office for the
Southern District of New York prosecuted the case.
California Man Sentenced to More than Four Years in Prison in $2.3 Million Fraud
Scheme Under False Names that Victimized More than 400 Homeowners Related to
HAMP Program
In September 2021, a federal court sentenced Brian Joseph Pacios to 52 months in prison, the fifth defendant
sentenced to prison for a nationwide scheme that defrauded more than 400 homeowners. The court also ordered
Pacios to pay restitution of more than $2.3 million. During 2014 and 2015, Pacios and four co-conspirators operated
under aliases and told homeowners they worked for HOPE Services, later changed to HAMP Services, which sounded
similar to the HAMP program. They falsely told victims they were part of a non-profit, government-affiliated agency,
and that the homeowners were eligible and approved for loan modifications. The homeowners were instructed to
make three trial payments that would be held in a trust account or escrow, but not to inform their lender about the
trial payments. Pacios and co-conspirators fraudulently received at least $2.3 million in trial payments from more
than 400 victims nationwide spanning from their base of operation in California to points as far as Egg Harbor City,
New Jersey, and Mount Airy, Maryland. Instead of using the funds to assist homeowners, the funds were spent on
sales commissions and living expenses of Pacios and the others, as well as trips to Las Vegas. The court previously
sentenced four co-conspirators to prison. Alan Jessie Chance was sentenced to twelve months in prison and three
years supervised release. Chad Caldaronello was sentenced to three years and five months in prison. Michael P.
Paquette was sentenced to one year and three months in prison. Dennis Lake was sentenced to three years probation
and six months home confinement. The FBI and Federal Trade Commission were instrumental in assisting SIGTARP in
this investigation. The United States Attorney’s Office for the Central District of California prosecuted the case.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
DC Woman Charged in 35-Count Indictment Alleging Theft of Over $400,000 in
Government Benefits Intended for Veterans and the Disabled
On November 18, 2021, Rosemary Ogbenna of the District of Columbia was charged with multiple counts of mail
fraud, wire fraud, theft of public funds, aggravated identity theft, representative payee fraud, false statements,
tampering with documents, and first-degree theft. The indictment alleges Ogbenna operated a rooming house
for retired and disabled individuals for over a decade. It also alleges Ogbenna used over $400,000 in government
payments from the Social Security Administration and the Veteran’s Administration for her own benefit that were
intended for the care of elderly, mentally ill, disabled, and veteran beneficiaries. This case is being prosecuted by the
U.S. Attorney’s Office for the District of Columbia.
SIGTARP Uses an Analytical Approach to Find Crime in Financial Institutions
SIGTARP continued its longstanding record of holding financial institutions and bankers accountable. SIGTARP
supports the Justice Department’s prosecutions of individuals and entities investigated by SIGTARP. SIGTARP found
that financial institution fraud had evolved from the insider self-dealing fraud that marked the savings and loan crisis.
Fraud schemes were now designed to escape detection by traditional fraud identification methods of self-reporting
and regulator referrals. As a result, SIGTARP created an analytical approach to discover insider crimes at banks that
previously went undetected. SIGTARP also caught bankers who personally profited from fraudulent loans and used
TARP to hide their fraud. Additionally, SIGTARP uncovered fraudulent sales practices related to residential mortgage
backed securities (RMBS). This includes, TARP’s Public Private Investment Partnership (PPIP) program, discussed below,
which involved the purchase and sale of RMBS.
New Jersey Hotel Owner Sentenced to 63 Months in Prison for Defrauding TARP Bank in
$15 Million Loan Fraud Resulting in $3.6 Million Loss
On April 29, 2021, Mehul Khatiwala, a New Jersey resident who owned various hotels, was sentenced to 63 months
in prison, followed by four years of supervised release, fined $50,000, and ordered to pay restitution of $3.6 million
for his role in defrauding Cecil Bank. In April 2019, Khatiwala was convicted of conspiracy to commit bank fraud and
three counts of bank fraud for defrauding Cecil Bank to obtain loans to purchase hotels and a multifamily residential
property, resulting in losses of $3.6 million. In December 2008, Cecil Bank received an $11.56 million bailout from TARP.
While the bank was in TARP, from 2011 to 2014, Khatiwala defrauded the bank out of $15 million in loans.
The bank suffered $3.6 million in losses on those loans. In June 2017, Cecil Bank filed bankruptcy, resulting in losses to
TARP of more than $10.6 million. U.S. Attorney for the District of Maryland, Robert Hur, whose office prosecuted the
case stated, “The defendant used deceit to steal millions of dollars from the victims, which ended up including not
only the bank but the American taxpayers.” SIGTARP was joined in the investigation by the Federal Housing Finance
Agency Office of Inspector General, the Federal Deposit Insurance Corporation Office of Inspector General, and the
Small Business Administration Office of Inspector General.
Alabama Man and Georgia Man Sentenced in Conspiracy to Defraud a TARP Recipient
Bank; Georgia Woman convicted
On September 8, 2021, Michael Craig Brewster of Huntsville, Alabama, former senior loan officer and Executive Vice
President at TARP recipient River City Bank in Rome, Georgia, pled guilty to a charge of receipt of gifts or commissions
in exchange for procuring loans. He was sentenced on the same day to 12 months home confinement and three
years of supervised release, fined $5,000, and ordered to pay restitution of $46,948.
On September 23, 2021, co-conspirator Edmond Cash pled guilty to a count of bank fraud. On January 7, 2022, Cash
was sentenced to time served, three months home confinement, three years supervised release, and ordered to
pay restitution of $46,948. River City Bank failed to pay nine quarterly dividend payments to Treasury while in TARP,
totaling more than $1 million. Treasury also wrote off $826,721 after auctioning off its preferred shares in a loss.
According to the indictment originally returned in February 2021, Cash was involved in developing and investing
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
in residential neighborhood construction projects, including in the Longbranch Lakes development in Spencer,
Tennessee. Brewster purchased and sold property in the development. Cash was the lead developer for Longbranch
Lakes.
On February 2, 2022, LaDonna Barton also pled guilty to a bank fraud charge in connection with the same
conspiracy. Barton’s sentencing is set for mid-2022. Barton was an employee of Cash’s company and an investor in
the development. Cash and his business partners were past due on several loans taken out from River City Bank. Cash
and Barton falsely applied for a bank loan for Barton to purchase two parcels of property, when the true purpose of
the loan was for Cash to make past due payments on loans that he and his business partners owed to the bank. One
day after the bank disbursed the loan proceeds, Barton and Cash made past due payments on loans owed to the
bank, paid operating costs for Longbranch Lakes, and pocketed the remaining loan proceeds. SIGTARP was joined in
the investigation by the Federal Deposit Insurance Corporation Office of Inspector General. The U.S. Attorney for the
Northern District of Georgia is prosecuting the case.
Two Defendants Convicted, One Sentenced to Prison in Operation Phantom Bank
In conjunction with SIGTARP’s investigation of TARP recipient Saigon National Bank on December 8, 2021, Defendant
Du Truong “Andrew” Nguyen was convicted of all money laundering and money laundering conspiracy charges in a
two-day federal jury trial. Nguyen will be sentenced in 2022.
On September 1, 2021, Diana Huong Nguyen pled guilty and was later sentenced, on February 28, 2022, to time
served in prison and one year of supervised release.
“Operation Phantom Bank” was a long-term money laundering sting operation from 2010 to 2014 investigated by
SIGTARP and its law enforcement partners, the FBI and Internal Revenue Service - Criminal Investigations. This case
resulted in six indictments that charged a total of 25 defendants. Convictions to date include a former shareholder
of Saigon Bank, a high-level Mexican money launderer, an East West Bank Vice President, the former president of the
Chinese Consolidated Benevolent Association and several domestic money launderers with ties to Armenian Power
and Chinese Triads. Fugitives include a Racketeer Influenced and Corrupt Organizations (RICO) defendant in Hong
Kong and a money laundering defendant in Liechtenstein. The case is being prosecuted by the U.S. Attorney’s Office
in the Central District of California.
CEO of Louisiana Federal Credit Union Pleads Guilty to Filing a False Document in
Connection with TARP Program
On December 13, 2021, Helen Godfrey-Smith, former Chief Executive Officer of the Shreveport Federal Credit Union,
pled guilty to a charge of making and using a false document in connection with the TARP funds the Shreveport
Federal Credit Union received from the U.S. Treasury. She was charged with this crime in November 2021. In
December 2016, Godfrey-Smith signed a document stating the credit union was financially healthy, when in fact
the credit union was in dire fiscal condition. Due to its dismal financial condition, the credit union was placed into a
conservatorship in April 2017 and was liquidated in October 2017. Godfrey-Smith was scheduled to be sentenced in
April 2022.19 The U.S. Attorney’s Office for the Western District of Louisiana is responsible for the prosecution of this
case.
Former Supervisor of Residential Mortgage-Backed Securities (RMBS) Trading Desk
Agrees to Enter Pretrial Diversion Program in Connection with Scheme to Overcharge
Customers
On January 11, 2022, Ross Shapiro, former supervisor of the Residential Mortgage-Backed Securities (RMBS)
trading desk at Nomura Securities International (Nomura) in New York admitted that he conspired with others to
misrepresent the prices which the Nomura trading desk had obtained or sold certain RMBS. Shapiro and his co-
19
On April 6, 2022, Godfrey-Smith was sentenced to one year probation and ordered to pay a fine of $5,000.
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
conspirators did this with the intention of deceiving Nomura’s customers to increase Nomura’s profits at the expense
of those customers. At the time, the RMBS desk at Nomura was involved in transacting eligible RMBS that were part
of the U.S. Treasury’s Public Private Investment Partnership (PPIP) program, one of the TARP-funded programs. Shapiro
agreed to enter a pretrial diversion program with the U.S. Attorney’s Office for the District of Connecticut.
Former Chief Executive Officer of New Jersey Bank Sentenced in Conspiracy to Mislead
the Federal Deposit Insurance Corporation (FDIC)
On February 1, 2022, Joseph Natale, the former Chief Executive Officer of First State Bank of New Jersey was
sentenced to five years of probation and ordered to forfeit $359,333 and pay restitution of $715,000 as a result of his
guilty plea in conspiracy to file false entries to deceive the FDIC. First State Bank applied for, but did not receive, TARP
funds in 2008. The FDIC issued the bank a cease-and-desist order in July 2011 and it was closed down by its regulators
in October 2011. Natale and his other co-conspirators deceived bank regulators and the FDIC by using First State
Bank’s own funds to make it appear that outside investors had provided new capital for the bank. They also created
nominee entities and recruited three individuals with close ties to the bank to create the false appearance that they
were legitimate investors in the bank. Fraudulent financial statements were provided to both the FDIC and the bank’s
regulators that inflated the value of the bank, eventually leading to its failure. This matter was prosecuted by the U.S.
Attorney’s Office for the District of New Jersey.
Kansas Father Pleads Guilty; Son is Sentenced Related to a Wire Fraud Conspiracy
Involving a TARP Recipient Bank
K. Kevin James and his son, Charlie James, owned and operated several construction companies in Kansas. These
companies secured a line of credit with Blue Valley Bank, a TARP recipient bank. Beginning in 2009 through 2011, K.
Kevin James and Charlie James participated in a scheme to provide falsified financial statements for the construction
companies to Blue Valley Bank misrepresenting the true financial condition of the construction companies. In May
2011, the James’ construction companies filed for bankruptcy, resulting in a loss of over $3 million to Blue Valley Bank.
On January 14, 2022, K. Kevin James pled guilty to wire fraud and conspiracy charges for his part in this scheme and is
awaiting sentencing. On March 9, 2022, Charlie James was sentenced to 12 months of probation and ordered to pay
restitution of $214,305, after having pled guilty to a conspiracy charge in April 2018. The U.S. Attorney’s Office for the
District of Kansas is prosecuting this case.
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Office of Inspector General Department of the Treasury
Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
Office of Inspector General
Department of the Treasury
The Department of the Treasury (Treasury) Office of Inspector General (OIG) performs independent, objective reviews of
specific Treasury programs and operations with oversight responsibility for one federal banking agency – the Office of the
Comptroller of the Currency (OCC). That federal banking agency supervises approximately 1,200 financial institutions.
Introduction
Treasury OIG was established pursuant to the 1988 amendments to the Inspector General Act of 1978. The Treasury
Inspector General is appointed by the President, with the advice and consent of the Senate. Treasury OIG performs
independent, objective reviews of Treasury programs and operations, except for those of the Internal Revenue Service
(IRS), the Troubled Asset Relief Program (TARP), and those programs and activities under the jurisdictional oversight
of the Special Inspector General for Pandemic Recovery (SIGPR). Treasury OIG also keeps the Secretary of the Treasury
and Congress fully informed of problems, deficiencies, and the need for corrective action. Treasury OIG is comprised
of four divisions: (1) Office of Audit, (2) Office of Investigations, (3) Office of Counsel, and (4) Office of Management.
Treasury OIG is headquartered in Washington, DC.
Treasury OIG has oversight responsibility for OCC, which supervises approximately 797 national banks, 269 federal
savings associations, and 52 federal branches of foreign banks. The total assets under OCC’s supervision are $14.9
trillion. Treasury OIG also oversees four offices created by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank) which are (1) the Office of Financial Research, (2) the Federal Insurance Office, (3) the
Office of Minority and Women Inclusion within Treasury’s Departmental Offices, and (4) the Office of Minority and
Women Inclusion within OCC. Additionally, Treasury OIG oversees Treasury’s role related to the financial solvency of
the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation under the Housing
and Economic Recovery Act of 2008, to include Treasury’s Senior Preferred Stock Purchase Agreements established for
the purpose of maintaining the positive net worth of both entities.
Treasury OIG is also responsible for audit and investigative oversight of Treasury programs providing financial
assistance to address the economic impacts of Coronavirus Disease 2019 (COVID-19). Since March 2020, more than
$645 billion of financial assistance, overseen by Treasury OIG, has been authorized by the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act)20 enacted on March 27, 2020; the Consolidated Appropriations Act, 202121 enacted
on December 27, 2020; and the American Rescue Plan Act22 enacted on March 11, 2021. Through these pieces of
legislation, Treasury provides financial assistance to the transportation industry for the continuation of salaries and
benefits; to all 50 States, units of local government, U.S. territories, and tribal governments to provide economic relief
20
Public Law 116-136 (March 27, 2020).
21
Public Law 116-260 (December 27, 2020)
22
Public Law 117-2 (March 11, 2021)
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
including rental and mortgage assistance and support for small businesses; and to community development financial
institutions to inject emergency capital investment into low-income communities to address the ongoing pandemic.
Treasury established the Office of Recovery Programs to administer the pandemic relief funds. The enormity of these
programs requires continued coordination between the Office of Audit, the Office of Investigations, and the Office of
Counsel to handle complaints concerning hundreds of recipients and sub-recipients that received financial relief.
Treasury Management and Performance Challenges Related to Financial
Regulation and Economic Recovery
In accordance with the Reports Consolidation Act of 2000, the Treasury Inspector General annually provides the
Secretary of the Treasury with his perspective on the most serious management and performance challenges
facing the Department. In a memorandum to the Secretary dated October 14, 2021, the Inspector General reported
five management and performance challenges that were directed towards financial regulation and economic
recovery. Those challenges are discussed below and include: Coronavirus Disease 2019 (COVID-19) Pandemic Relief;
Transition of a New Administration; Cyber Threats; Anti-Money Laundering and Terrorist Financing/Bank Secrecy Act
Enforcement; and Efforts to Promote Spending Transparency and to Prevent and Detect Improper Payments.23
COVID-19 Pandemic Relief
The COVID-19 pandemic continues to affect the health and economic stability of communities worldwide.
In the early stages of the COVID-19 outbreak in March 2020, Congress passed three key pieces of legislation
in succession to address the public health crisis and the economic fallout affecting individuals, businesses,
and many industry sectors. The Coronavirus Preparedness and Response Supplemental Appropriation Act of
2020, signed into law on March 6, 2020, authorized $8.3 billion in emergency funding to address health and
medical care.24 Shortly thereafter, the Families First Coronavirus Response Act was enacted on March 18, 2020,
which provided approximately $104 billion to address the financial stress of individuals and households.25
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)26 passed on March 27, 2020. The CARES Act
provided over $2.4 trillion in health and economic relief to hospitals and healthcare providers, individuals and
households, businesses and employees, as well as, states, local and tribal governments, and federal agencies,
among others. As the public health crisis continued into late 2020 and the new year, Congress legislated
additional relief in passing the Consolidated Appropriations Act, 202127 (CAA, 2021) on December 27, 2020, and
the American Rescue Plan Act of 202128 (ARP) on March 11, 2021. These laws provided another $900 billion and
$1.9 trillion of economic stimulus, respectively.
As reported in the October 29, 2020 management and performance challenges memorandum, Treasury has
been instrumental to the implementation of economic relief provisions of the CARES Act. Since then, Treasury’s
responsibilities and workloads have expanded enormously as several CARES Act provisions were extended
under CAA, 2021 and ARP in addition to new programs being established within Treasury. As such, pandemic
recovery programs and provisions of the CARES Act, CAA, 2021, and ARP within the oversight purview of
Treasury OIG are extensive and include programs that support transportation industry workers; renters and
homeowners; and state, local, territorial, and tribal government entities through direct financial assistance.
23
The Treasury Inspector General’s memorandum included one other challenge not directly related to financial regulation and economic recovery: Information
Technology Acquisition and Project Management. The memorandum also discussed concerns about three matters: the coin redemption program at the United States
Mint, managerial cost accounting, and internal control matters at the Bureau of Engraving and Printing.
24
Public Law 116-123 (March 6, 2020)
25
Public Law 116-127 (March 18, 2020)
26
Public Law 116-136 (March 27, 2020)
27
Public Law 116-260 (December 27, 2020)
28
Public Law 117-2 (March 11, 2021)
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Financial Assistance for Air Carrier Worker Support and Other Transportation
Service Providers
Air Carrier Worker Support
To maintain pay and benefits of airline industry workers, Treasury implemented the Air Carrier Worker Support
Program provisions of the CARES Act (hereinafter referred to as the Payroll Support Program) that authorized
direct financial assistance for passenger air carriers, cargo air carriers, and contractors. Financial assistance
is to ensure the continuation of workers’ payroll and benefits with the stipulation that employees are not
involuntarily furloughed and do not receive reductions in pay and benefits. Using existing resources and
contractor support, Treasury quickly stood up the initial CARES Act Payroll Support Program (PSP1). Financial
support for air carrier workers was extended twice by CAA, 2021 and ARP. These extensions became known as
PSP2 and PSP3, respectively. Using the mechanisms to establish PSP1, Treasury implemented PSP2 and PSP3 to
make corresponding payments.
The CARES Act and CAA, 2021 require Treasury OIG to audit the certifications of sworn financial data submitted
to Treasury by passenger and cargo carriers that do not report financial information to the Department of
Transportation (referred to as non-241 carriers) and contractors. Additionally, CAA, 2021 requires Treasury OIG to
audit contractors’ certifications of insufficient funds under the PSP1 to recall employees involuntarily between
March 27, 2020 and January 4, 2021. Treasury OIG will continue audits of PSP1 recipients’ certifications and
initiate audits of certifications submitted by PSP2 recipients in fiscal year 2022. Treasury OIG was not mandated
to audit the applicants’ certifications to receive PSP3 payments authorized under ARP. However, Treasury
disbursed financial assistance to passenger air carriers and contractors based on information submitted by
recipients on their PSP2 certifications. Treasury OIG plans to assess Treasury’s calculation of award amounts
under PSP3 and Treasury’s post-award monitoring of recipients under PSP1, PSP2, and PSP3. It is incumbent
upon the Department to implement and maintain strong internal controls over recipients’ compliance with
signed terms and conditions for receiving financial assistance. That is, Treasury’s compliance monitoring
function is essential to ensuring that recipients use funds for the continuation of salaries and benefits as
intended.
Coronavirus Economic Relief for Transportation Services
Congress expanded financial support to non-air carrier transportation service providers under the Coronavirus
Economic Relief for Transportation Services (CERTS) provisions of CAA, 2021. Treasury established the CERTS
Program that provides non-competitive grants to eligible companies that certify revenue loss of 25 percent
or more due to the COVID-19 pandemic. In consultation with the Department of Transportation, Treasury
provided initial guidelines on May 6, 2021, that included among other things, the priority use of funds must
be for payroll, although operating expenses and debt accrued to maintain payroll are eligible uses. To be a
qualifying transportation provider, an applicant must demonstrate eligibility as a motor coach, school bus,
passenger vessel, or pilotage vessel transportation service. While Treasury has acted swiftly to establish CERTS
Program requirements, ongoing administration of grants and monitoring recipient compliance with grant
agreements will be challenging with an expected recipient pool in the thousands.
Financial Assistance to State, Local, Tribal, and U.S. Territorial Governments
Coronavirus Relief Fund
The $150 billion Coronavirus Relief Fund (CRF), established under Title VI of the Social Security Act, as amended
by Title V of the CARES Act, continues to be a large endeavor for Treasury. The Department disbursed direct
payments to States, units of local government, the District of Columbia, U.S. Territories, and Tribal governments.
Disbursement of funds was a complicated undertaking given the number of recipients at varying levels of
government and other payment requirements of the CARES Act. That is, payments to States and local units of
government were formula-driven and based on the 2019 U.S. Census, while other payments were based on
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
consultations with the Department of the Interior and Tribal governments and other information obtained
by the Department. The CARES Act created a unique challenge in distinguishing between the programmatic
administrative responsibility for payments made from the CRF and the Treasury OIG’s independent oversight.
Although Treasury was authorized to make payments, the CARES Act assigned Treasury OIG with responsibility
for monitoring and oversight of the receipt, disbursement, and use of funds. Additionally, Treasury OIG was
given authority to recoup funds if it is determined that recipients fail to comply with uses of funds for COVID-19
related costs under Section 601 (d), “Uses of Funds,” of the Social Security Act, as amended.29
Given the direct oversight authorities of the Treasury OIG, the Department did not establish an administrative
program to ensure recipient compliance. Recipients were not bound to detailed terms and conditions for
the receipt of funds, which we reported in our first audit of CRF regarding the lack of terms and conditions
and accountability and transparency of funds.30 While this is unusual for a federal agency that administers
financial assistance programs, Treasury officials have committed to supporting our oversight role for ensuring
transparency, accountability, and adherence to all statutory requirements and will continue to collaborate
with us to ensure compliance by recipients. This continued collaboration has been critical for overseeing such
a large and widely dispersed recipient population given the ongoing challenges of defining and interpreting
eligible uses of CRF proceeds. That said, it is crucial that the Department maintain its fundamental role to
clarify its policy31 over the uses of funds when interpretation matters arise. As recipients are still in the process
of finalizing use and closing out the funds, Treasury OIG anticipates that questions will continue to arise that
will require interpretation. Providing as much clarity as possible over allowable uses is essential for ensuring
recipients understand the compliance requirements and are accountable and transparent in how they report
uses of funds. Treasury OIG has received over 200 complaints regarding recipient, and in some instances sub-
recipient, uses of CRF proceeds that require continued collaboration between our offices.
As part of Treasury OIG’s monitoring and oversight function, we established a portal using GrantSolutions32 for
recipients to report their uses of funds on a quarterly basis that started in September 2020. The data received
is reviewed and approved by Treasury OIG prior to being extracted for display on the Pandemic Response
Accountability Committee33 (PRAC) website (https://pandemicoversight.gov).34 CAA, 2021 extended the
covered period for recipients to use CRF payments through December 30, 2021, and now requires funding
agencies under Division A of the CARES Act to report recipient obligation and expenditure data required under
sections 15010 and 15011 of CARES Act Division B. This transferred the CRF recipient reporting responsibility
to Treasury. While the responsibility is Treasury’s, we continue to administer the GrantSolutions portal under an
Economy Act Agreement.
Coronavirus State and Local Fiscal Recovery Funds
While disbursing CRF payments was an enormous undertaking for the Department, the Coronavirus State
and Local Fiscal Recovery Funds provisions of ARP require Treasury to disburse another $362 billion to State,
Local, Territorial, and Tribal governments under the Coronavirus State Fiscal Recovery Fund ($219.8 billion) and
the Coronavirus Local Fiscal Recovery Fund ($130.2 billion) (together referred to as SLFRF), Coronavirus Capital
Projects Fund (CCPF) ($10 billion), and Local Assistance and Tribal Consistency Fund (CTCF) ($2 billion).
To tackle the $350 billion of SLFRF, Treasury established allocation methodologies, and the Final Rule
establishing program requirements to include the uses of funds. Unlike the CRF, recipients may now use funds
for a variety of needs to include revenue replacement. Administering SLFRF will pose challenges given the
29
Section 601 (d), Use of Funds, to cover only those costs of the State, Tribal government, or unit of local government that (1) are necessary expenditures incurred due to
the public health emergency with respect to COVID–19; (2) were not accounted for in the budget most recently approved as of the date of enactment of this section
for the State or government; and (3) were incurred during the period that begins on March 1, 2020, and ends on December 31, 2021, as extended by the CAA, 2021.
30
OIG, Interim Audit Update–Coronavirus Relief Fund Recipient Reporting (OIG-20-036; May 27, 2020)
31
Coronavirus Relief Fund Guidance for State, Territorial, Local, and Tribal Governments Federal Register, Vol. 86, No. 10; January 15, 2021)
32
GrantSolutions is a grant program management Federal Shared service provider under the U.S. Department of Health and Human Services
33
The PRAC, created within the Council of Inspectors General on Integrity and Efficiency, is comprised of Inspectors General of agencies involved in the COVID-19
response to include Treasury OIG, Treasury Inspector General for Tax Administration, and the Special Inspector General for Pandemic Recovery (SIGPR)
34
Of the 939 recipients of CRF payments, 861 recipients meet the threshold for receiving large covered funds of $150,000 or more.
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volume of recipients that Treasury must oversee that include all 50 States, U.S. Territories, Tribal governments,
local government recipients with population sizes of 250,000 or more, and approximately 30,000 non-
entitlement units of local government. Treasury must establish a compliance monitoring function to ensure
recipient compliance with use of funds requirements, as well as mechanisms to capture recipient obligation
and expenditure data.
As of September 2021, Treasury developed allocation methodologies and guidance for distributing up to
$10 billion of CCPF as noncompetitive grants to States, U.S. Territories, and Tribal governments, to address
infrastructure challenges, such as reliable internet that low to moderate income and rural communities
have experienced during the COVID-19 pandemic.35 Treasury also began accepting applications through its
application submission portal from States and U.S. Territories in September 2021 and plans to open the portal
to Tribal governments beginning October 2021. Although Treasury has developed CCPF program requirements
and a means to apply for funds, recipient compliance and reporting requirements are still forthcoming.
Treasury will need to develop these requirements expeditiously so that they are incorporated into the terms
and conditions of CCPF grant agreements.
Under the CTCF, Treasury was appropriated an additional $2 billion for fiscal years 2022 and 2023, for COVID-19
assistance payments to eligible revenue sharing counties and Tribes.36 Eligibility for counties (to include
parishes and boroughs) is based on poverty rates, household income, land values, unemployment rates, and
other economic indicators, over a 20-year period ending September 30, 2021. Tribal government eligibility
is based on economic conditions of each Tribe. Funds under the CTCF may be used for any governmental
purpose other than lobbying.
With the overlap of recipients of CRF, SLFRF, CCPF, and CTCF, we expect that there will be confusion between
the uses of funds requirements, and reporting mechanisms for recipients that may be a challenge going
forward. Given the volume of recipients and varying requirements under these programs, Treasury will need
to ensure that there are sufficient resources for the remaining distribution of funds and ongoing monitoring of
recipient reporting and compliance with terms and conditions for funds received. Furthermore, with the level
of funding under both CRF and SLFRF, Treasury may now have cognizance over many local governments.37
Emergency Rental Assistance Program and Homeowner Assistance Fund
To provide assistance to vulnerable households at risk of housing instability, Congress established two
Emergency Rental Assistance (ERA) Programs and a Homeowner’s Assistance Fund (HAF) availing over
$56 billion to households in need. CAA, 2021, created the initial ERA Program (ERA1) and ARP created a
supplemental ERA Program (ERA2) and HAF.
According to CAA, 2021, Treasury established ERA1 to provide up to $25 billion in assistance to States (including
Washington, DC), US Territories, Tribal governments (with a provision for the Department of Hawaiian Home
Lands), and units of local government with populations of 200,000 or greater. ERA1 funds are to be available
for eligible renter households negatively impacted by the COVID-19 pandemic to pay for rent, utilities,
and other housing-related expenses and arrears. Under ERA1, an eligible household may receive funds
for up to a 12-month period unless the grantee determines an extension is necessary to ensure housing
35
https://www.govinfo.gov/content/pkg/FR-2021-05-17/pdf/2021-10283.pdf
36
Under the American Rescue Plan Act, the term ‘eligible revenue sharing county’ means— (A) a county, parish, or borough—(i) that is independent of any other unit of
local government; and (ii) that, as determined by the Secretary, is the principal provider of government services for the area within its jurisdiction; and (iii) for which,
as determined by the Secretary, there is a negative revenue impact due to implementation of a Federal program or changes to such program; and (B) the District of
Columbia, the Commonwealth of Puerto Rico, Guam, and the United States Virgin Islands.
37
Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, §200.513 Responsibilities (a)(1) Cognizant agency
for audit responsibilities. A non-federal entity expending more than $50 million a year in federal awards must have a cognizant agency for audit. The
designated cognizant agency for audit must be the federal awarding agency that provides the predominant amount of funding directly (direct funding)
(as listed on the Schedule of expenditures of federal awards, see §200.510(b)) to a non-federal entity unless OMB designates a specific cognizant
agency for audit. When the direct funding represents less than 25 percent of the total expenditures (as direct and subawards) by the non-federal entity,
then the federal agency with the predominant amount of total funding is the designated cognizant agency for audit. (https://www.ecfr.gov/cgi-bin/
retrieveECFR?gp=&SID=e78c6acc3819f56b44027416dc151015&mc=true&n=sp2.1.200.f&r=SUBPART&ty=HTML#se2.1.200_1513)
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stability for the household; then funds may be made available for up to 15 total months. Additionally, ARP
extended ERA1 funds’ availability until September 30, 2022. Treasury has sent payments of ERA1 funds to
government recipients, provided guidance on fund usage, and set up a Portal where recipients are to report
on their spending. CAA, 2021 requires that Treasury OIG conducts monitoring and oversight of the receipt,
disbursement, and use of ERA1 funds. Treasury OIG will use the data reported in Treasury’s ERA Portal to inform
our monitoring function; thus, it is imperative that Treasury ensures recipients’ compliance to Treasury ERA
guidance when reporting to Treasury’s ERA Portal.
ARP authorized an additional $21.55 billion of ERA funds to remain available until September 30, 2027, referred
to as ERA2. Similar to ERA1, ERA2 provides funding for eligible renter households’ rent, utilities, and other
housing-related expenses and arrears, but does not include Tribal governments as eligible grantees. Instead,
ERA2 earmarks $2.5 billion specifically for high-need grantees which are eligible grantees in jurisdictions with
a high number of very low-income renter households. ARP designates that an eligible household may receive
ERA for up to 18 total months (this includes ERA1 and ERA2 funding). Treasury has provided ERA2 guidance and
allocated funds for the state, territory, and local government recipients. Treasury OIG is tasked with oversight of
the program and will conduct ERA2 oversight with a similar methodology to ERA1 oversight.
ARP also created HAF, which authorized $9.961 billion to prevent mortgage delinquencies, defaults,
foreclosures, loss of utility services, and displacement by covering mortgage-related expenses, utility expenses,
and arrears for homeowners experiencing financial hardship after January 21, 2020. HAF provides funds for
States (including the District of Columbia and Puerto Rico), Tribal governments (including the Department
of Hawaiian Home Lands), Guam, American Samoa, the U.S. Virgin Islands, and the Commonwealth of the
Northern Mariana Islands. The funds are available until September 30, 2025. Treasury has provided guidance
to HAF participants and allocated funds for each state and territory recipient based on homeowner need. ARP
mandates that Treasury OIG provide oversight of HAF.
Both the ERA programs and HAF require that Treasury provide guidance to supplement the statutes that
created the programs. While Treasury has issued relevant guidance for each of the programs, it is essential its
program offices continue to be responsive to recipients to clarify guidance and to provide insight into the
eligible uses of the funds Treasury distributed. Clear and timely guidance and responsiveness to recipient
questions are also critical in enabling program recipients to administer their programs and disburse funds to
households in need without delay.
State Small Business Credit Initiative
The State Small Business Credit Initiative (SSBCI), which was originally created in the Small Business Jobs Act
of 2010 to increase availability of credit for small businesses, ended in 2017. However, Section 3301 of ARP
reauthorized SSBCI and provided $10 billion in funding for the program. Under SSBCI, participating States,
U.S. Territories, and Tribal governments may obtain funding for programs that partner with private lenders to
extend credit to small businesses. Such programs may include those that finance loan loss reserves, and those
that provide loan insurance, loan guaranties, venture capital funds, and collateral support. States, U.S. Territories,
and Tribal governments who apply for SSBCI must provide Treasury with plans for using their funding
allocations for review and approval and report quarterly and annually on results. Treasury will distribute funds in
three different tranches over 10 years.
Additionally, ARP modified SSBCI in a number of ways including the following set-asides: (1) $500 million in
allocations to Tribal governments in proportions determined appropriate by the Secretary of the Treasury;
(2) $1.5 billion in allocation to States, U.S. Territories, and Tribal governments for business enterprises owned
and controlled by socially and economically-disadvantaged individuals (SEDI); (3) $1 billion to be allocated
as an incentive for States, U.S. Territories, and Tribal governments that demonstrate robust support for SEDI
businesses; (4) $500 million to be allocated to very small businesses with fewer than 10 employees; and
(5) $500 million to provide technical assistance to certain businesses applying for SSBCI or other state or federal
programs that support small businesses.
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Primary oversight of the use of SSBCI funds is the responsibility of the participating State, U.S. Territory or
Tribal government. The participants are responsible for providing Treasury with quarterly assurances that their
programs approved for SSBCI funding are in compliance with program requirements. However, Treasury will
face challenges in holding participants accountable for the proper use of funds as it has not clearly defined the
oversight obligations of the States, U.S. Territories, and Tribal governments or specified minimum standards for
determining whether participants have fulfilled their oversight responsibilities. In the past, Treasury has also
not required participating states to collect and review compliance assurances made by lenders and borrowers
or defined what constitutes a material adverse change in a state’s financial or operational condition that must
be reported to Treasury. As a result, Treasury may have difficulty finding recipients to be in default of program
requirements and holding recipients accountable.
Community Development Investment Programs38
Emergency Capital Investment Program
Authorized under CAA, 2021, Treasury established the Emergency Capital Investment Program (ECIP) to provide
up to $9 billion in capital to low-to-moderate income community financial institutions that support small
businesses and consumers. Under ECIP, certified community development financial institutions (CDFI) and
minority depository institutions may provide loans, grants, and forbearance for small businesses, minority-
owned businesses, and consumers in communities disproportionately impacted by the COVID-19 pandemic.
Treasury opened the application portal on March 4, 2021. Since that time, Treasury has experienced challenges
in fully implementing ECIP. Because of the demands for resources within the Office of Recovery Programs,
Treasury may experience further delays and challenges administering the ECIP.
CDFI Rapid Response Program
CAA, 2021 also authorized $3 billion to the CDFI Fund to deliver immediate assistance to low-income
communities through competitive grants to CDFIs. The CDFI Rapid Response Program (RRP) was established
and awarded $1.25 billion in June 2021. It will be more challenging for the CDFI Fund to establish the
Emergency Support and Minority Lending Program in fiscal year 2022 to deliver the remaining $1.75 billion
reserved for low- or moderate-income minority communities. The program introduces a new requirement to
make $1.2 billion available for awards to minority lending institutions. CDFI Fund officials acknowledged that it
would take time to develop a compliant program. At the same time, the CDFI Fund must monitor the CDFI RRP
award recipients for use of funds compliance, while administering several other non-pandemic grant programs.
Accountability and Transparency
As reported in the October 29, 2020 management and performance challenges memorandum, Treasury
accomplished much in helping to alleviate hardships of families and industry sectors to include delivering more
than $400 billion of Economic Impact Payments under ARP to workers and households through the Internal
Revenue Service (IRS) and Bureau of the Fiscal Service (Fiscal Service). Through the IRS, Treasury helps to protect
workers and jobs through the Employee Retention Tax Credit and Payroll Tax Deferral authorized by the CARES
Act. Treasury also assisted the Small Business Administration in carrying out the Paycheck Protection Program
and the Economic Injury Disaster Loans authorized by the CARES Act to support payroll, benefits, and other
operating costs of small businesses. Under the Emergency Relief and Taxpayer Protections (commonly referred
to as Section 4003), Treasury was authorized to make loans, loan guarantees, and other investments to eligible
businesses, states, and municipalities. The Emergency Relief and Taxpayer Protections provisions also authorized
the establishment of the Special Inspector General for Pandemic Recovery (SIGPR) within Treasury to oversee
loans, loan guarantees, and other investments provided by Treasury. Although some of the aforementioned
38
Treasury OIG is required to submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs
of the Senate, and the Secretary of the Treasury, not less frequently than 2 times per year, a report relating to the oversight provided including any recommendations
for improvements to the Community Development Investment programs
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CARES Act provisions do not fall under the oversight jurisdiction of Treasury OIG, the payment work streams
and mechanisms administered by the Fiscal Service do.
In the context of this overarching challenge, we recognize the breadth and scope of Treasury’s responsibilities
as it impacts programs, operations, and activities regardless of jurisdictional oversight boundaries. Along with
administering and delivering economic relief, Treasury must manage the unprecedented pandemic relief
oversight. In addition to Treasury OIG’s ongoing work on pandemic programs, Treasury is subject to a number
of additional oversight bodies. As mentioned above, SIGPR was created to oversee loans, loan guarantees,
and other investments provided by Treasury39 and must report to congress quarterly on SIGPR’s activities and
Treasury’s loan programs. A Congressional Oversight Commission was established to report to Congress on
Treasury’s and the Federal Reserve Board’s implementation activities under Title IV, Subtitle A, “Coronavirus
Economic Stabilization Act of 2020.” Moreover, the commission is required to report every 30 days on the
use of contractors and administration of loan programs, the impact of programs on the Nation’s financial
wellbeing, whether required disclosures of the CARES Act provide market transparency, and the effectiveness
of maximizing benefits and minimizing costs to taxpayers, among other things.40 Furthermore, the Government
Accountability Office (GAO) has ongoing work evaluating the federal response to the COVID-19 pandemic and
the effects of the pandemic on federal programs and operations.
Treasury is also accountable for providing transparency over the expenditure of pandemic relief funds. Many
reporting requirements of sections 15010 and 15011 of the CARES Act were extended under the CAA, 2021,
PRAC amendments. Most notably, Treasury is responsible for reporting obligations and expenditures of large
covered funds (over $150,000) to the PRAC. While Treasury OIG continues to collect and report CRF data to
the PRAC under an agreement with the Department as noted above, Treasury is responsible for reporting
expenditures of its other pandemic relief programs. Furthermore, Treasury must provide public reports
quarterly on the use of funds under its ERA program. The Department must balance its ongoing response to
the financial impacts of the public health emergency with its responsibility to stakeholders for reporting and
transparency.
While the COVID-19 pandemic continues, Treasury must persevere in navigating this challenging time. Treasury
has leveraged its existing workforce, hired contractors, and obtained detailees from other Federal agencies
to address the demands of the new programs created by pandemic legislation. Going forward, Treasury may
experience difficulties in balancing its new responsibilities and workloads while managing several ongoing
challenges as described above.
Transition of New Administration
As characteristic with incoming Presidential Administrations, the Departmental Offices, and Treasury bureaus
and agencies are challenged with filling and transitioning numerous key senior leadership positions, as well
as implementing new executive orders and White House initiatives. As of October 2021, 17 senior leadership
positions were vacant including, among others, the Undersecretary for International Affairs, the Undersecretary
for Terrorism and Financial Intelligence, the Comptroller of the Currency, the General Counsel, and the Inspector
General.
Additionally, the White House introduced EO 14008, Tackling the Climate Crisis at Home and Abroad, to ensure
climate considerations are an essential element of U.S. foreign policy and national security. The Secretary of
State and the Secretary of the Treasury will lead several efforts related to EO 14008 in coordination with the
Special Presidential Envoy for Climate. Furthermore, the White House introduced EO 14030, Climate-Related
Financial Risk which aims to: (a) advance consistent, clear, intelligible, comparable, and accurate disclosure of
climate-related financial risk, including both physical and transition risks; (b) mitigate that risk and its drivers,
while accounting for and addressing disparate impacts on disadvantaged communities and communities of
39
SIGPR terminates five years after enactment of the CARES Act (March 27, 2025)
40
The Congressional Oversight Commission issued its fourteenth report on June 30, 2021 (https://coc.senate.gov/sites/default/files/2021-06/June%20Report%20Final.
pdf)
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Annual Report of the Council of Inspectors General on Financial Oversight • July 2022
color and spurring the creation of well-paying jobs; and (c) achieve the Administration’s target of a net-zero
emissions economy by no later than 2050. The Secretary of the Treasury, as the Chair of the Financial Stability
Oversight Council, will lead several efforts related to EO 14030.
While Treasury continues transitioning key senior leadership positions and implementing these and other new
initiatives and programs going into fiscal year 2022, other previously reported uncertainties have yet to be
resolved. Treasury continues to operate in the repeated cycle of budget and debt ceiling stopgaps. A long-term
solution has yet to be found. Additionally, although not included as a top open recommendation in its June
2021 letter to the Department,41 GAO raised concerns to Congress in its July 2015 report42 with the approach
to managing the federal debt limit and its impact on Treasury’s borrowing costs and the need for alternative
approaches. With that said, Fiscal Service has ongoing communication with the Department, particularly the
Office of Fiscal Projections (OFP). OFP provides Treasury decision-makers with information on current and
predicted cash balances. As the Federal Government’s financial manager, Fiscal Service plays a unique role in
ensuring that OFP has current and accurate federal financial data.
Dealing with the transition of key senior leadership positions, new initiatives, additional workloads, and other
critical matters such as the budget and debt ceiling stopgaps during the COVID-19 pandemic continues to
be more challenging than usual. The impact of this challenge and the uncertainties require the Department
to continue to focus its resources on programs that are in the highest need to citizens and/or where there is a
unique federal role. It is essential that new initiatives, programs, and reforms be managed and communicated
effectively for achieving performance and accountability.
Cyber Threats
Cybersecurity is a long-standing and serious challenge facing the Nation. A reliable critical infrastructure,
including information systems and networks, is vital to our national security and economic stability. Cyber
threats remain a persistent concern as Treasury’s information systems are critical to the core functions of
government and the Nation’s financial infrastructure, along with the financial sector it oversees. The cyber
threats continue to evolve and become more sophisticated, subtle, and easier to perform, which poses
ongoing challenges for Treasury to fortify and safeguard its internal systems and operations while modernizing
and maintaining them. While managing known risks is an ongoing challenge, Treasury must also be ready to
reinforce and/or redirect cybersecurity efforts when unforeseen events occur such as the COVID-19 pandemic
and the SolarWinds attack.43
Attackers frequently exploit vulnerable networks or systems in a string of trusted connections to gain access to
government systems. Organized hacking groups leverage published and unpublished vulnerabilities and vary
their methods to make attacks hard to detect and even harder to prevent. Criminal groups and nation-states
are constantly seeking to steal information; commit fraud; disrupt, degrade, or deny access to information
systems; or infiltrate information systems and maintain a presence to enable future actions. Through cyber
information sharing, federal agencies are better prepared to thwart potential attacks to the cyber infrastructure
of the Federal government and the financial sector that it serves. In its 2021 high-risk list published biennially,
again GAO reported the Nations’ cybersecurity as a government-wide issue.44
Long-standing cyber threats pose increased risks to networks and information systems during the ongoing
COVID-19 global health pandemic as more opportunities are available for bad actors to stage cyber-attacks.
As the tools used to perpetrate cyber-attacks become easier to use and more widespread, less technological
knowledge and fewer resources are needed to launch successful attacks of increasing sophistication. Such
attacks include distributed denial of service, phishing or whaling, fraudulent wire payments, malicious spam
41
GAO, Priority Open Recommendations: Department of the Treasury (June 16, 2021)
42
GAO, Debt Limit: Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches (GAO-15-476; July 9, 2015)
43
The SolarWinds attack, reported in December 2020, was a supply chain attack that used the update mechanism for legitimate software to distribute malicious
software.
44
GAO, High-Risk Series, Dedicated Leadership Needed to Address Limited Progress in Most High-Risk Areas (GAO-21-119SP: March 2020)
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(malspam), ransomware, and compromise of supply chains (both hardware and software). The COVID -19
pandemic has shifted the federal workforce to a primarily telework status which has provided attackers
with more possibilities to disrupt services. Increased network traffic from remote sources provides cover for
attackers to blend in with the federal workforce and launch cyber assaults. Attackers may take advantage of the
increased demand for information on COVID-19 by crafting highly attractive phishing, whaling, and malspam
attacks that are more likely to succeed by luring workers in with promises of information related to COVID-19.
These opportunities may allow hackers to launch a denial of service attack upon a network that can prevent
remote workers from performing their duties and disrupt operations. Furthermore, information systems and its
users are at heightened risk of COVID-19 related exploitation such as stimulus check scams, tax-fraud schemes,
and fraudulent coronavirus testing kit scams, among other things.
There is continuing concern over foreign adversaries creating and exploiting vulnerabilities in the Nation’s
supply chain for information and communication technology and services as evidenced by the SolarWinds
attack that affected many federal agencies and private sector companies. Executive Order 13873 was issued
on May 15, 2019, to secure the supply technology and services chain by banning the import, use, or sale of
technology or services designed, developed, manufactured, or supplied from persons or companies that are
owned or controlled by governments defined as hostile to the United States.45 On May 11, 2021, this Executive
Order was extended again for 1 year.46 There are risks that Treasury’s systems and resources already in use,
including critical infrastructure, contain components from sources that have yet to be designated as threats.
Once a source is designated as such, repairs and/or upgrades of key system components may no longer be
available. Therefore, there is risk of disruption of critical operations. The Department will need to monitor
developments in this area closely and plan for the possibility that its current supply chain may no longer be
available. Furthermore, Executive Order 14028, Improving the Nation’s Cybersecurity, issued on May 12, 2021, calls
for federal agencies to update existing plans to prioritize resources for adoption and use of cloud technology
and to adopt a zero-trust architecture,47 among other things. Treasury management must be mindful that the
efforts to secure Treasury’s supply chain may hamper cloud adoption and the implementation of zero-trust
architecture.
Treasury is looked upon to provide effective leadership to financial institutions in particular, and the financial
sector in general, to strengthen awareness and preparedness against cyber threats to the Nation’s critical
infrastructure. As such, effective public-private coordination is essential to the Nation’s financial and national
security. In this regard, The Office of Cybersecurity and Critical Infrastructure Protection coordinates Treasury’s
efforts to enhance the security and resilience of the financial services sector critical infrastructure and reduce
operational risk including risks associated with cybersecurity. Given the stress that the global COVID-19
pandemic continues to place on financial institutions and the financial sector as a whole, it is important that
the Department monitors cyber risks in these areas. That said, Treasury and other federal agencies have yet to
fully implement the National Institute of Standards and Technology (NIST) guidance to assist federal agencies
in managing cybersecurity risks.48 In 2018, GAO had reported that the extent of adoption of the NIST framework
by critical infrastructure sectors was unknown since agencies were not measuring framework implementation.
With respect to Treasury, GAO had recommended that steps be taken to consult with respective sector
partners to develop methods for determining the level and type of adoption by entities across the financial
services sector. In its June 16, 202149 letter regarding its top open recommendations, GAO noted that Treasury
had established ongoing initiatives such as developing common terminology for cyber terms, but had not
developed methods to determine the level and type of framework adoption; the recommendation remained
open. GAO acknowledged that Treasury had developed a cybersecurity risk management strategy, which
included key elements identified in federal guidance and established a process for conducting an organization-
wide cybersecurity risk assessment.
45
Executive Order 13873, Securing the Information and Communications Technology and Services Supply Chain (May 15, 2019)
46
Notice on the Continuation of the National Emergency with Respect to Securing the Information and Communications Technology and Services Supply Chain (May
11, 2021)
47
Zero-trust architecture is a method of designing a system in which all actions are presumed dangerous until reasonably proven otherwise, thereby reducing the
chance of a successful attack causing further damage.
48
NIST, Framework for Improving Critical Infrastructure Cybersecurity (Version 1.0, February 12, 2014; superseded by Version 1.1; April 16, 2018)
49
GAO, Treasury Priority Recommendations (GAO-21-549PR; June 16, 2021)
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The Department continues to report progress in its risk-based approach to cybersecurity by establishing the
Enterprise Cyber Risk Management program to manage vulnerabilities and threats that can cause disruption
in the delivery of services. In response to our October 2020 memorandum, the Department reported that
it created a centralized Risk Reporting Analytical Cybersecurity System, and developed the Supply Chain
Risk Management program for cybersecurity in fiscal year 2020. Treasury also reported prior progress in risk
management by identifying High Value Assets,50 and examining the security architectures of systems and
performing risk and vulnerability assessments. While addressing increases in cyber threats during the COVID-19
global pandemic, Treasury will need to continue to balance cybersecurity demands while modernizing and
maintaining Information Technology (IT) systems.
Anti-Money Laundering and Terrorist Financing/Bank Secrecy Act Enforcement
Treasury’s Office of Terrorism and Financial Intelligence (TFI) has remained dedicated to countering the ability
of financial networks that support terrorists, organized transnational crime, weapons of mass destruction
proliferators, and other threats to international security through intelligence analysis, sanctions, and
international private-sector cooperation. Identifying, disrupting, and dismantling the financial networks that
support rogue regimes, terrorist organizations, transnational criminal organizations, and other threats to the
national security of the United States and our allies continues to be challenging as TFI’s role to counter these
financial networks and threats has grown because its economic authorities are key tools to carry out U.S.
policy. Additionally, criminals and other bad actors evolve and continue to develop more sophisticated money
laundering methods in an attempt to avoid detection.
TFI’s counter-terrorism designations disrupt the financial networks that support terrorist organizations.
Disrupting terrorist financing depends on a whole-of-government approach and requires collaboration and
coordination within Treasury and with other federal agencies. Collaboration and coordination are key to
successfully identifying and disrupting all of these financial networks and meeting TFI’s mission. This effort
requires effective and efficient working relationships among components within TFI and the Intelligence
Community.
Data security and information sharing are challenges for the Financial Crimes Enforcement Network (FinCEN),
which has experienced unauthorized disclosures of Bank Secrecy Act information. FinCEN is required to
maintain a highly secure database for financial institutions to report suspicious activity. FinCEN has previously
identified that the success of that system depends on the financial sector’s confidence that those reports are
adequately protected, but data breaches threaten to undermine that confidence. FinCEN is also required to
maintain a government-wide data access service to make information available and useful to federal, state,
local, and foreign law enforcement agencies and appropriate regulators and to support intelligence and
counterintelligence activities and anti-money laundering initiatives. The challenge for FinCEN is to ensure the
Bank Secrecy Act data remains secure in order to maintain the confidence of the financial sector while meeting
the access needs of law enforcement, regulatory, and intelligence partners.
Given the criticality of Treasury’s mission and its role to carry out U.S. policy, Treasury OIG continues to consider
anti-money laundering and combating terrorist financing programs and operations as inherently high-risk.
Efforts to Promote Spending Transparency and to Prevent and Detect Improper
Payments
Given the broad implications and critical roles assigned to Treasury by the Digital Accountability and
Transparency Act of 2014 (DATA Act), Treasury OIG notes the renewed challenges facing the Department given
the need to ensure transparency to the taxpayer and other stakeholders on the use of funds distributed under
economic relief packages enacted to address individuals and industry sectors impacted by the COVID-19
50
High Value Assets are assets, information systems information, and data for which an unauthorized access, use, disclosure, disruption, modification, or destruction
could cause a significant impact to the U S.’ national security interests, foreign relations, economy, or to the public confidence, civil liberties, or public health and safety.
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global pandemic. DATA Act reporting is seen as one of the means to ensure transparency into the use of
federal funds related to COVID-19 expenditures. As noted earlier, over the past year, Treasury delivered more
than $400 billion of Economic Impact Payments under ARP to workers and households through IRS and Fiscal
Service. Treasury is also accountable for providing transparency over the expenditure of pandemic relief funds.
Additionally, many reporting requirements of sections 15010 and 15011 of the CARES Act were extended under
the CAA, 2021, PRAC amendments. Treasury must also provide public reports quarterly on the use of funds
under its Emergency Rental Assistance program, among others. With that said, the Department must balance
its ongoing response to the financial impacts of the public health emergency with its responsibility to respond
to oversight bodies and stakeholders.
Completed and In-Progress Work on Financial Oversight
OCC’s Supervision Related to De-risking by Banks (OIG-CA-21-024)
In response to a July 5, 2016, request from the House Financial Services Committee, we initiated an audit to
review OCC’s supervision of Bank Secrecy Act and anti-money laundering regulations, Office of Foreign Assets
Control sanctions, and other applicable laws, particularly relating to the de-risking trend. Our audit objectives
were to determine: (1) whether supervisory, examination, or other staff of OCC had indirectly or directly
caused banks to exit a line of business or to terminate a customer or correspondent account, and (2) under
what authorities OCC planned to limit, through guidance or regulations, the ability of banks to open or close
correspondent or customer accounts, including a review of laws that govern account closings.
Based on work we performed during our review, we concluded that OCC did not indirectly or directly
instruct banks to exit a line of business or to terminate a customer or correspondent account for the purpose
of de-risking. We also found that in order to limit, through guidance, the ability of banks to open or close
correspondent or customer accounts, OCC issued OCC Bulletin 2016-32, Risk Management Guidance on
Periodic Risk Reevaluation of Foreign Correspondent Banking, on October 5, 2016, and OCC National Risk
Committee Supervision Tip 2017-01, on February 14, 2017. Furthermore, in January 2017, OCC’s Compliance
and Community Affairs Division conducted a non-mandatory correspondent banking training for all OCC staff
related to OCC’s position on risk re-evaluation and their supervisory expectations. However, due to the passage
of time from the initiation of the audit, and our findings, we determined that continuing our audit would not
significantly enhance OCC’s supervision of national banks’ compliance with the BSA and other applicable laws
and regulations, particularly as they relate to the trend of de-risking. Accordingly, we terminated this audit.
OCC Human Capital Policies and Planning (OIG-CA-21-026)
In February 2019, we initiated an audit of OCC’s human capital policies and resource planning. The objective
of our audit was to determine whether OCC’s human capital policies and planning align with its mission and
strategic goals.
Given that OCC (1) recently had a human capital review performed by the Office of Personnel Management,
which found that OCC’s human capital programs support its mission effectively and efficiently while complying
with legal requirements and that OCC aligns its human capital goals with its strategic plan and desired
performance outcomes, and (2) that there isn’t a linear relationship between OCC’s number of employees and
number of supervised institutions, we determined that continuing our audit would not significantly enhance
the human capital policies and planning alignment with OCC’s mission and strategic goals. Accordingly, we
terminated this audit.
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OCC’s Supervision of Federal Branches of Foreign Banks (In Progress)
We initiated an audit of OCC’s supervision of federal branches of foreign banks. The objective of this audit is to
assess OCC’s supervision of federal branches and agencies of foreign banking organizations operating in the
United States.
OCC’s Controls over Purchase Cards (In Progress)
We initiated an audit of OCC’s controls over purchase cards. The objective for this audit is to assess the controls
in place over OCC’s purchase card use and identify any potential illegal, improper, or erroneous transactions.
OCC’s Crisis Readiness (In Progress)
We initiated an audit of OCC’s crisis readiness. The objective for this audit is to assess OCC’s readiness to address
crises that could impact OCC’s operations and the institutions it supervises.
Corrective Action Verification (CAV) Material Loss Review of Washington Federal
Bank for Savings (In Progress)
We initiated an audit to assess whether OCC’s management has taken corrective actions in response to the six
recommendations made in the Department of the Treasury (Treasury) Office of Inspector General audit report,
Material Loss Review of Washington Federal Bank for Savings (OIG-19-009, issued November 6, 2018).
Failed Bank Reviews
In 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act amending the Federal
Deposit Insurance Act (FDIA). The amendments require that banking regulators take specified supervisory
actions when they identify unsafe or unsound practices or conditions. Also added was a requirement that
the Inspector General for the primary federal regulator of a failed financial institution conduct a material loss
review when the estimated loss to the Deposit Insurance Fund is “material.” FDIA, as amended by Dodd-Frank,
defines the loss threshold amount to the Deposit Insurance Fund triggering a material loss review as a loss that
exceeds $50 million for 2014 and thereafter (with a provision to temporarily raise the threshold to $75 million
in certain circumstances). The act also requires a review of all bank failures with losses under these threshold
amounts for the purposes of (1) ascertaining the grounds for appointing Federal Deposit Insurance Corporation
(FDIC) as receiver and (2) determining whether any unusual circumstances exist that might warrant a more
in-depth review of the loss. As part of the material loss review, OIG auditors determine the causes of the failure
and assess the supervision of the institution, including the implementation of the prompt corrective action
provisions of the act.51 As appropriate, OIG auditors also make recommendations for preventing any such loss
in the future.
From 2007 through March 2022, FDIC and other banking regulators closed 536 banks and federal savings
associations. One hundred and forty-four (144) of these were Treasury-regulated financial institutions; in total,
the estimated loss to FDIC’s Deposit Insurance Fund for these failures was $36.5 billion. Of the 144 failures, 58
resulted in a material loss to the Deposit Insurance Fund, and our office performed the required reviews of
these failures.
During the period covered by this annual report, we did not perform a material loss review or limited review of
any bank failures.
51
Prompt corrective action is a framework of supervisory actions for insured institutions that are not adequately capitalized. It was intended to ensure that action is
taken when an institution becomes financially troubled in order to prevent a failure or minimize the resulting losses. These actions become increasingly severe as the
institution falls into lower capital categories. The capital categories are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized.
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OIG Investigative Accomplishments
The Office of Investigations, under the leadership of the Assistant Inspector General for Investigations, performs
investigations and conducts initiatives to detect and prevent fraud, waste, and abuse in programs and
operations within Treasury OIG’s jurisdictional boundaries, and investigates threats against Treasury personnel
and assets in designated circumstances as authorized by the Inspector General Act. The Office of Investigations
also manages the Treasury OIG Hotline to facilitate reporting of allegations involving these programs and
operations.
CARES Act Investigations
Departmental Offices Employee Forwarded Sensitive CARES Act Tribal Data to
Another Agency Without Encryption or Confidential Warnings
Our investigation, which was initiated upon receipt of information from Congress and the Department of the
Interior OIG, revealed that unencrypted CARES Act tribal data was emailed, without confidential warnings to
another Government agency, which contributed to a leak of tribal data. Criminal prosecution was presented
and declined by the U.S. Attorney’s Office (USAO) for the District of Columbia. Our office provided a report
of investigation to Departmental Offices (DO), Office of the Assistant Secretary for Management, and to the
concerned members of Congress.
Business Owner Submitted Fraudulent Documents to Receive Coronavirus Relief
Funds
Our investigation revealed that a home healthcare company owner submitted fraudulent documents to the
Louisville, Kentucky government to obtain $17,000 in CARES Act Coronavirus Relief Funds. Criminal prosecution
of the individual was presented and declined by the United States Attorney’s Office (USAO) for the Western
District of Kentucky.
Other Significant Investigations
Debit Card Fraud Conspirators Prosecuted
Our joint investigation with the Federal Bureau of Investigation, Homeland Security Investigations, and U.S.
Postal Inspection Service (USPIS) revealed that five subjects conspired to defraud several financial institutions
in a scheme using fraudulent debit card returns resulting in an initial estimated loss of $1.1 million to those
institutions. The USAO for the Eastern District of Virginia sentenced the subjects to 13 months in prison, 13 years
of probation, and $1.2 million in criminal restitution.
Subject Sentenced for Theft of Government Funds and Defrauding a Financial
Institution
A final subject in our joint investigation with Internal Revenue Service-Criminal Investigation (IRS-CI), and USPIS
was sentenced to 26 months in prison, 96 months of probation, restitution of $283,224, a special assessment of
$200, and forfeiture of $60,619. The subject conspired with others and deposited a stolen Department of the
Treasury (Treasury or the Department) check, in the amount of $993,176, into a bank account opened in the
name of a fictitious business with false identification.
New Jersey Subject Sentenced for Obtaining Funds from a Stolen and Altered
Treasury Check and Paycheck Protection Program Fraud Scheme
Our investigation, initiated upon receipt of information from the Bureau of the Fiscal Service, revealed that
an individual negotiated a stolen and altered Treasury check and submitted fraudulent Paycheck Protection
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Program applications to obtain over $600,000 in program proceeds. After successful prosecution by the USAO
for the District of New Jersey, the individual was sentenced to 30 months in prison, 36 months of probation,
$137,000 in restitution, $484,000 in forfeitures, and a $200 special assessment.
Subjects Sentenced for Theft of Treasury Checks
Our joint investigation with the U.S. Postal Inspection Service, Internal Revenue Service Criminal Investigation,
and Treasury Inspector General for Tax Administration revealed that at least 12 subjects deposited 99 stolen
Treasury checks at various branches of the same bank in Arizona, Colorado, Kansas, and Missouri. The estimated
loss to the bank was over $447,000. The case was prosecuted by the USAO for the Western District of Missouri.
Update: Our joint investigation concluded with eight subjects sentenced to 258 months in prison, 120 months
of probation, 216 months of supervised release, $1.5 million in restitution, and $1,700 in special assessments.