CON SEMIANNUAL REPORT TO THEGRESS - FDIC OIG · 2019-03-03 · $48 million from the failed Oakwood Deposit Bank Company, Oakwood, Ohio. As an organization, we have also been working

OFFICE OF INSPECTOR GENERAL

FEDERAL DEPOSIT INSURANCE CORPORATION

SEMIANNUAL REPORT TO THE

CONGRESSOctober 1, 2003 – March 31, 2004

History of the FDIC OIG■ 1974: The Office of Management Systems and

Financial Audits was headed by RobertBarnett—who later became Chairman of theFDIC. This office conducted IT operationsand all audits for the Corporation. The Finan-cial Audits Branch of the office consisted ofeight people. No Audit Committee existedand staff did not work under the AmericanInstitute of Certified Public Accountants, U.S.General Accounting Office, or Institute ofInternal Auditors standards.

■ By October 1975, this office had become theOffice of Corporate Audits, and by 1979, theoffice began developing an Investigativefunction.

■ In a Board Resolution dated December 6,1982, the responsibilities of the Office of Cor-porate Audits were redefined and the name ofthe office was changed to Office of CorporateAudits and Internal Investigations (OCAII).The office reported to the Appointive Direc-tor (that is—the Director representing thepolitical party out of power) and the Budgetand Management Committee—comprised ofDivision and Office heads from theCorporation.

■ A resolution dated May 18, 1984, establishedthat OCAII would report to the Chairmanand laid out responsibilities of the first AuditCommittee.

■ On March 14, 1989, a Board resolution wassigned—the provisions of which were to be

effective on April 17, 1989. This resolutionrecognized that the IG Act Amendments of1988 required the Corporation to establish anOIG with an IG who functions under the gen-eral supervision of the Chairman. OCAII wasredesignated the Office of Inspector General.The position of Director of OCAII becameInspector General and the incumbent Direc-tor Robert Hoffman was designated Acting IGfor several months and then IG.

■ In October 1989 the Federal Home LoanBank Board OIG became a part of the FDICOIG and the office doubled in size.

■ Robert Hoffman retired in 1993 and JamesRenick was then selected by Acting ChairmanAndrew Hove to serve as Inspector General.

■ Congress amended the IG Act in 1993 to des-ignate the IG position at the FDIC a Presiden-tial appointment; James Renick was namedActing Inspector General when the amend-ment became effective.

■ The Resolution Trust Corporation’s (RTC)sunset in December 1995 led to a number ofRTC OIG staff merging into the FDIC OIG,effective January 1, 1996.

■ April 29, 1996: Gaston L. Gianni, Jr. becamethe FDIC’s first Inspector General appointedby the President.

■ April 17, 2004: Happy 15th Anniversary tothe FDIC OIG!

SEMIANNUAL REPORT TO THE

CONGRESSOctober 1, 2003 – March 31, 2004

OFFICE OF INSPECTOR GENERAL

FEDERAL DEPOSIT INSURANCE CORPORATION

Contents

Inspector General’s Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Management and Performance Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Investigations—Making an Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

OIG Organization—Pursuing OIG Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Reporting Terms and Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Statistical Information Required by the Inspector General Act of 1978, as amended . . . . . . . . . . . . . . . 55

Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

OIG Congratulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

TablesTable 1: Significant OIG Achievements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Table 2: Nonmonetary Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

FiguresFigure 1: Products Issued and Investigations Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Figure 2: Questioned Costs/Funds Put to Better Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Figure 3: Fines, Restitution, and Monetary Recoveries Resulting from OIG Investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Management and Performance Challenges iii

emphasized the OIG’s cooperative relationshipwith the FDIC. I indicated that both the Chair-man and Vice Chairman of the FDIC provide avery supportive “tone at the top” that enables usto carry out our statutory responsibilities. Myoffice appreciates and is committed to continu-ing that relationship into the future.

This semiannual report discusses our audit andevaluation work over the past 6 months toaddress the management and performance chal-lenges that we identified and communicated tothe Chief Financial Officer in December 2003 forinclusion in the Corporation’s annual report.Several significant audits during the reportingperiod focused on the challenge of Managementand Analysis of Risks to the Insurance Funds,including our audit resulting in a report entitledObservations from OIG Material Loss ReviewsConducted 1993 through 2003. That reportaddresses recurring and root causes of the fail-ures of 10 financial institutions and reports onthe common stages of such failures. We alsoissued a report during the period on the Corpo-ration’s follow-up of Bank Secrecy Act (BSA)violations in which we reported that the FDICneeds to strengthen its follow-up process for BSAviolations to ensure to the greatest extent possi-ble that institutions comply with Department ofthe Treasury and FDIC anti-money launderingrequirements.

Equally important is our body of work in theinformation technology area, much of which will

Management and Performance Challenges 1

Inspector General’sStatement

When I wrote my last semiannual report state-ment in October 2003, the Inspector General(IG) community was in the midst of commemo-rating the 25th anniversary of the IG Act of 1978,and that important event was fittingly acknowl-edged throughout the community. As Vice Chairof the President’s Council on Integrity and Effi-ciency, I thank all who contributed to the successof that anniversary. And now, even closer tohome, another milestone occurs. On April 17,2004, my office proudly marked its 15th anniver-sary. The Federal Deposit Insurance Corporation(FDIC) Office of Inspector General (OIG) wasestablished in 1989, pursuant to the IG ActAmendments of 1988. The Congress amendedthe IG Act in 1993 to designate the IG position atthe FDIC as a Presidential appointment. SinceApril 29, 1996, I have served as the first FDIC IGappointed by the President. Thus, I have justconcluded my 8th year as IG at the FDIC.

The role of an OIG in any agency is unique. Atthe FDIC, although we are an integral part of theCorporation, unlike any other FDIC division oroffice, our legislative underpinning requires us tooperate as an independent and objective unit atthe same time—an organizational placementthat is potentially problematic. The FDIC OIG isfortunate, however, in that over the past years, wehave established an excellent working relation-ship with the Corporation. When I testified at aMarch 2004 hearing on Oversight of the FDIC,held by the House Financial Services Committee,Subcommittee on Oversight and Investigations, I

support our 2004 work under the Federal Infor-mation Security Management Act of 2002. Inthat connection, I wish to highlight the impres-sive and well-deserved achievement of our Assis-tant Inspector General for Audits, Russell Rau,who was honored with a Federal 100 Award dur-ing the reporting period by Federal ComputerWeek. These awards recognize individuals in gov-ernment, industry, and academia for their contri-butions to the development, acquisition, andmanagement of federal information technology.Rus was cited for his vision, leadership, and pio-neering efforts in the information technologyaudit and evaluation program at the FDIC andfor coordinating Federal Information SecurityManagement Act activities among OIGs and oth-ers governmentwide.

The investigations featured in this semiannualreport show that our work continues to focus oncases of fraud arising at or impacting financialinstitutions, restitution and other debt owed tothe FDIC, and misrepresentations regardingFDIC insurance or affiliation, as we seek toensure integrity in FDIC and banking industryoperations and activities. Of special note duringthe reporting period, John Crawford, one of theSpecial Agents from our Atlanta office, received aletter of commendation from the Director of theFederal Bureau of Investigation (FBI) for hisexceptional work in the joint investigation withthe FBI and Internal Revenue Service-CriminalInvestigations of the embezzlement of over$48 million from the failed Oakwood DepositBank Company, Oakwood, Ohio.

As an organization, we have also been workingaggressively in pursuit of the goals outlined inour recently issued Strategic Plan for 2004–2008,as evidenced in the many activities and initiativesoutlined in the OIG Organization section of thisreport. We have engaged in efforts to add valueand make an impact on the Corporation’s pur-suit of its mission. We have taken advantage ofmultiple opportunities for communication andoutreach to the Chairman, the Congress, OIGemployees, and other stakeholders. In thatregard, we are preparing for our sixth externalclient survey, an important communication vehi-cle, to obtain feedback from corporate manage-ment. Additionally, aligning our humanresources to support the OIG mission and work-ing to effectively and efficiently manageresources and enhance the quality of our efforts

has been a principal focus over the past 6 months.We have submitted our budget requests for 2004and 2005, and each marks a decrease from theprevious year. In fact, fiscal year 2005 will markthe ninth consecutive year of such a decrease. Weare also undertaking our first OIG employee sur-vey and expect to gain helpful insights from ourstaff on how we might improve our operations,working conditions, and overall effectiveness.

Looking ahead, we will continue to emphasizeinformation technology and related security atthe Corporation. The new Chief InformationOfficer (CIO) is now in place and we are partici-pating in an advisory capacity at meetings of theCIO Council. We also have advisory participa-tion on the Audit Committee’s InformationTechnology Security Subcommittee, and with theDivision of Information Resources Manage-ment’s Transformation Advisory Group. Theseare clear indications of coordination with man-agement on matters of mutual interest, and weappreciate the opportunity for input. Addition-ally, the Corporation’s Office of Internal ControlManagement recently became the Office ofEnterprise Risk Management (OERM), represen-tative of that office’s intent to adopt a moreproactive and enterprise-wide approach to inter-nal risk management activities. This is anotherpositive step, and we look forward to continuingto work closely with OERM and sharing infor-mation as that office sets out in a new direction.

I close by thanking all who have supported me inthe past 8 years as I have served as InspectorGeneral at the FDIC—the Chairmen and ViceChairmen of the FDIC, Members of the Con-gress, the FDIC Board of Directors, the AuditCommittee, FDIC corporate management, oth-ers in the IG community, the leadership of theOffice of Management and Budget, individualsfrom other private and public sector agenciesand organizations, and especially the members ofthe FDIC OIG, past and present, who haveworked with such dedication to the mission ofboth the OIG and the FDIC.

Gaston L. Gianni, Jr.Inspector GeneralApril 30, 2004

2 SEMIANNUAL REPORT TO THE CONGRESS

6. Management and Security of InformationTechnology Resources

7. Security of Critical Infrastructure

8. Management of Major Projects

9. Assessment of Corporate Performance

10. Cost Containment and ProcurementIntegrity

OIG work conducted to address these areas dur-ing the current reporting period includes17 audit and evaluation reviews containing ques-tioned costs of nearly $4.3 million and 51 non-monetary recommendations; comments andinput to the Corporation’s draft policies in sig-nificant operational areas; participation at meet-ings, symposia, conferences, and other forums tojointly address issues of concern to the Corpora-tion and the OIG; and assistance provided to theCorporation in such areas as concealment ofassets cases and review of the Corporation’s draftStrategic Plan, Annual Performance Plan, andAnnual Report. (See pages 9–27.)

InvestigationsIn the Investigations section of our report, wefeature the results of work performed by OIGagents in Washington, D.C., Atlanta, Dallas, andChicago who conduct investigations of allegedcriminal or otherwise prohibited activitiesimpacting the FDIC and its programs. In con-


Overview

Management and Performance Challenges The Management and Performance Challengessection of our report presents OIG results ofaudits, evaluations, and other reviews carried outduring the reporting period in the context of theOIG’s view of the most significant managementand performance challenges currently facing theCorporation. We identified the following10 management and performance challenges,and, in the spirit of the Reports ConsolidationAct of 2000, we presented our assessment ofthem to the Chief Financial Officer of the FDICin December 2003. The Act calls for these chal-lenges to be presented in the FDIC’s consolidatedperformance and accountability report. TheFDIC included such reporting as part of its2003 Annual Report. Our work has been andcontinues to be largely designed to address thesechallenges and thereby help ensure the FDIC’ssuccessful accomplishment of its mission.

1. Adequacy of Corporate Governance inInsured Depository Institutions

2. Protection of Consumer Interests

3. Management and Analysis of Risks to theInsurance Funds

4. Effectiveness of Resolution and ReceivershipActivities

5. Management of Human Capital

ducting investigations, the OIG works closelywith U.S. Attorneys’ Offices throughout thecountry in attempting to bring to justice indi-viduals who have defrauded the FDIC. The legalskills and outstanding direction provided byAssistant United States Attorneys with whom wework are critical to our success. The results weare reporting for the last 6 months reflect theefforts of U.S. Attorneys’ Offices throughout theUnited States. Our write-ups also reflect ourpartnering with the Federal Bureau of Investiga-tion, the Internal Revenue Service, and other lawenforcement agencies in conducting investiga-tions of joint interest. Additionally, we acknowl-edge the invaluable assistance of the FDIC’sDivisions and Offices with whom we workclosely to bring about successful investigations.

Investigative work during the period led toindictments or criminal charges against 15 indi-viduals and convictions of 9 defendants. Crimi-nal charges remained pending against33 individuals as of the end of the reportingperiod. Fines, restitution, and recoveries stem-ming from our cases totaled about $1.7 million.This section of our report also includes anupdate of the work of our Electronic CrimesTeam and acknowledges an award given to one

of our Special Agents by the Director of the Fed-eral Bureau of Investigation and several gesturesof appreciation extended by the OIG to FDICstaff and law enforcement officials who havehelped bring about successful investigations.(See pages 29–40.)

OIG Organization In the Organization section of our report, wenote many significant activities and initiativesthat the FDIC OIG has pursued over the past6 months in furtherance of our four main strate-gic goals and corresponding objectives. Theseactivities complement and support the audit,evaluation, and investigative work discussed inthe earlier sections of our semiannual report.Activities of OIG Counsel and cumulative OIGresults covering the past five reporting periodsare also shown in this section. (See pages 41–51.)

Statistical Tables RequiredUnder the Inspector General ActThe statistical tables required under the Inspec-tor General Act, as amended, are included here.(See pages 55–59.)


Manage-ment and Performance Challenges 5

Highlights

■ The Office of Audits issues 17 reports contain-ing total questioned costs of $4,288,198.

■ OIG reports include 51 nonmonetary recom-mendations to improve corporate operationsand activities. Among these are recommenda-tions to improve the effectiveness of informa-tion technology security controls, amendworking agreements with state bankingdepartments, strengthen the Corporation’shuman capital program, enhance the supervi-sory safety and soundness rating appealsprocess, and improve documentation sup-porting rates charged to receiverships.

■ OIG investigations result in 15 indictments/informations; 9 convictions; and approxi-mately $1.7 million in total fines, restitution,and other monetary recoveries.

■ The OIG aggressively pursues its strategicgoals and related objectives in pursuit of theOIG mission. Numerous activities and initia-tives are carried out to add value and achieveimpact; communicate effectively with theChairman, the Congress, OIG employees andother stakeholders; align our human capitalwith the OIG mission; and effectively manageOIG resources.

■ The OIG provides the Chief Financial Officerwith the OIG’s assessment of the most signifi-cant management and performance chal-lenges facing the Corporation, in the spirit of

the Reports Consolidation Act of 2000. Man-agement of major projects is a newly identi-fied challenge. The Corporation includes alisting describing the challenges in its AnnualReport for 2003.

■ The OIG provides briefing materials to thenewest FDIC Director, Thomas J. Curry, con-firmed by the U.S. Senate on December 9,2003, to familiarize him with the mission andwork of the OIG at the FDIC.

■ The Inspector General testifies before theHouse Financial Services Committee, Sub-committee on Oversight and Investigations, ata hearing related to Oversight of the FDIC. TheInspector General speaks to the role of theOIG and our relationship with the Corpora-tion, fiscal year 2003 OIG accomplishments,and the management and performance chal-lenges facing the Corporation. Subsequent tothe hearing, the Inspector General (IG) isasked by the Subcommittee Chairman, theHonorable Sue Kelly, to respond to questionsfor the hearing record.

■ The OIG issues its report on SupervisoryActions Taken for Bank Secrecy Act Violations,reporting that the FDIC needs to strengthenits follow-up process for Bank Secrecy Act vio-lations to ensure to the greatest extent possiblethat institutions comply with Department ofthe Treasury and FDIC anti-money launder-ing requirements.

■ The OIG’s investigation with the TreasuryOIG, Federal Bureau of Investigation, andInternal Revenue Service Criminal Investiga-tion leads to the indictment of a former ownerand board member of Sinclair National Bank,charging the owner in a fraud scheme thatallegedly led to the bank’s failure. A contractorwho sold and serviced sub-prime loans toSinclair was also charged. The indictmentincludes a forfeiture count seeking $15 millioneach from the defendants.

■ Assistant Inspector General for Audits, RussellRau is named the recipient of a Federal 100award from Federal Computer Week. Mr. Rauwas recognized for his vision, leadership, andpioneering efforts in (1) spearheading theinformation technology audit and evaluationprogram at the FDIC OIG and (2) coordinat-ing critical Federal Information Security Man-agement Act of 2002 (FISMA) activitiesamong IG offices and others governmentwide.

■ The OIG’s fiscal year 2004 appropriation,totaling $30.1 million, is signed into law bythe President on January 23, 2004, Public Law108-199. This budget supports a reducedauthorized staffing level of 168, or 22 fewerstaff than authorized in fiscal year 2003. Theproposed fiscal year 2005 OIG budget of$29.9 million was included in the President’sbudget that was transmitted to the Congresson February 2, 2004. The budget will supportan authorized staffing level of 160, a furtherreduction of 8 authorized staff (5 percent)from fiscal year 2004. Fiscal year 2005 willbecome the ninth consecutive year OIG budg-ets have decreased after adjusting for inflation.

■ The OIG holds an OIG-wide conference, thetheme of which is “What’s Next” to focus onthe OIG’s priorities and efforts in carrying outits audit, evaluation, investigative, and otherwork to help ensure the successful accom-plishment of the Corporation’s mission.Corporate executives and the FDIC ViceChairman participate at the conference andshare perspectives to help ensure the OIGadds maximum value and impact to all FDICprograms and activities.

■ The OIG continues to implement aspects ofits Human Capital Strategic Plan for

2002–2006, studying the OIG’s employee feed-back approach, staff training histories, and apossible mentoring program for the OIG.

■ The OIG sponsors a FISMA meeting, bringingtogether representatives of more than 40 fed-eral agencies, including the U.S. GeneralAccounting Office and the Office of Manage-ment and Budget to share information, ideas,and best practices related to implementationof FISMA governmentwide.

■ OIG Counsel’s Office provides advice andcounsel on a number of issues, includingclosed bank matters and bank supervision, theBank Secrecy Act, security practices forreceiverships, investigative matters, contractinterpretations, and various ethics matters.Counsel is involved in 22 litigation mattersthat are awaiting further action by the partiesor rulings by the court or other adjudicatorybodies.

■ The OIG reviews and comments on 1 pro-posed formal FDIC regulation, 14 proposeddirectives, and responds to 5 requests underthe Freedom of Information Act. Substantivecomments are provided to the Corporationrelated to proposed policies on various aspectsof personnel, corporate leave, and wirelesstechnology matters.

■ The OIG issues a report on Observations fromOIG Material Loss Reviews Conducted 1993through 2003, which addresses recurring androot causes of failure for the 10 FDIC-supervised institutions that caused materiallosses to the Bank Insurance Fund during thepast 10 years. Major causes of failure identifiedare: inadequate corporate governance, poorrisk management, and lack of diversification.Four common stages of failure identified are:often risky strategies led by dominant individ-uals, rapid growth with poor risk managementand inadequate diversification, deteriorationwith resistance to supervisory concerns, andmassive losses leading to failure.

■ The OIG coordinates with and assists manage-ment on a number of initiatives, includingserving in an advisory capacity on the AuditCommittee’s Information Technology Security


Subcommittee and the Chief InformationOfficer Council; participating on the SteeringCommittee for the Corporation’s Comprehen-sive Human Resources Information System;Office of Investigations and Office of AuditsExecutives’ participation at the Division ofSupervision and Consumer Protection FieldOffice Supervisor and other meetings; Officeof Investigations’ Electronic Crimes Team’scoordination with the Division of InformationResources Management (DIRM), Division ofResolutions and Receiverships, and the LegalDivision; and Office of Audits’ coordinationwith the Corporation’s New Financial Envi-ronment, Asset Servicing TechnologyEnhancement Project, Central Data Reposi-tory, and DIRM Transformation projects.

■ The OIG provides advisory comments to theDivision of Finance on drafts of the FDICStrategic Plan and 2004 Annual PerformancePlan. We acknowledge continuing efforts toimprove the plans and offer observations andsuggestions.

■ The OIG’s legislative proposal to provide theFDIC with enforcement tools to limit misrep-resentations regarding FDIC insurance cover-age, included in H.R. 1375: Financial ServicesRegulatory Relief Act of 2003, is passed by theHouse of Representatives on March 24, 2004,and referred to the Senate.

■ The OIG responds to the Chief Financial Offi-cer’s request for comments on a draft of the

FDIC’s 2003 Annual Report. OIG commentsare advisory in nature and include suggestionsregarding the presentation of information inthe report that we deemed would be helpful toreaders.

■ OIG Special Agent John Crawford receives aletter of commendation from the Director ofthe Federal Bureau of Investigation. The com-mendation recognizes Special Agent Crawfordfor exceptional work on the joint investigationwith the Federal Bureau of Investigation andInternal Revenue Service of an embezzlementof over $48 million from Oakwood DepositBank Company, Oakwood, Ohio.

■ The OIG acknowledges the efforts of FDICexamination staff and law enforcement offi-cials who have helped the OIG bring aboutsuccessful investigations.

■ As Vice Chair of the President’s Council onIntegrity and Efficiency, the Inspector Generalleads the Inspector General community’s25th anniversary activities and testifies beforethe House Government Reform Subcommit-tee on Government Efficiency and FinancialManagement to offer commentary on the25th anniversary and identify possible legisla-tive changes. He also participates as a presen-ter at numerous professional conferences andother forums, and shares information andbest practices with a delegation of foreign visi-tors from African countries.

Highlights 7

Management andPerformanceChallenges

In prior semiannual reports, we have identifiedour view of the most significant issues facing theCorporation as it carried out its mission. Overthe past 7 years, we have reported our work inthe context of these major issues in our semi-annual reports, largely in response to the requestof various congressional Committees that OIGsidentify these issues across the government. Inour more recent semiannual reports, in the spiritof the Reports Consolidation Act of 2000, wepresent our work in the context of “the most sig-nificant management and performance chal-lenges” facing the Corporation.

In December 2003 we updated our assessment ofthese challenges and provided them to the Cor-poration. The 10 challenges we have identifiedare listed below in priority order and fall undertwo categories. The first category, which includeschallenges 1 through 4, relates to rather broadcorporate and industry issues, and the secondcategory, which includes challenges 5 through 10,relates to more specific operational issues at theFDIC. Of note, the challenge of transitioning to anew financial environment was expanded toinclude the management of other major projectsas well. Also, given progress made in the chal-lenge involving organizational leadership, thatchallenge focuses more now on managinghuman capital.


The Federal Deposit Insurance Corpora-

tion (FDIC) is an independent agency

created by the Congress to maintain

stability and confidence in the nation’s

banking system by insuring deposits,

examining and supervising financial

institutions, and managing receiver-

ships. Approximately 5,300 individuals

within seven specialized operating divi-

sions and other offices carry out the

FDIC mission throughout the country.

According to the Corporation’s Letter to

Stakeholders, issued for the 4th Quarter

2003, the FDIC insured $3,451 trillion in

deposits for 9,196 institutions, of which

the FDIC supervised 5,313. The Corpora-

tion held insurance funds of $46 billion

to ensure depositors are safeguarded.

The FDIC had $671 million in assets in

liquidation in 34 Bank Insurance Fund

and Savings Association Insurance

Fund receiverships.

We identified the following challenges, and theCorporation included them in its 2003 AnnualReport:

1. Adequacy of Corporate Governance inInsured Depository Institutions

2. Protection of Consumer Interests


4. Effectiveness of Resolution and Receiver-ship Activities

5. Management of Human Capital


7. Security of Critical Infrastructure

8. Management of Major Projects

9. Assessment of Corporate Performance

10. Cost Containment and ProcurementIntegrity

We also note that some issues envisioned in ouraudit and evaluation work for fiscal year 2005relate to internal governance issues within theCorporation, so that our first listed challenge—adequacy of corporate governance in insureddepository institutions—may be broadened inthe future to include, for example, the Corpora-tion’s many efforts to assess and manage risk. Weplan to continue and perhaps expand our workexamining the Corporation’s processes for man-aging risk going forward to help ensure the Cor-poration’s success in accomplishing its goals.

We will continue to pursue audits, evaluations,investigations, and other reviews that address themanagement and performance challenges weidentified. Our work during the reporting periodcan be linked directly to these challenges and ispresented as such in the sections that follow. Wewill continue to work with corporate officials tosuccessfully address all challenges identified.

1. Adequacy of CorporateGovernance in InsuredDepository Institutions

Corporate governance is generally defined as thefulfillment of the broad stewardship responsibili-ties entrusted to the Board of Directors, Officers,and external and internal auditors of a corpora-tion. A number of well-publicized announce-ments of business failures, including financialinstitution failures, have raised questions aboutthe credibility of accounting practices and over-sight in the United States. These recent eventshave increased public concern regarding the ade-quacy of corporate governance and, in part,prompted passage of the Sarbanes-Oxley Act of2002. The public’s confidence in the nation’sfinancial system can be shaken by deficiencies inthe adequacy of corporate governance in insureddepository institutions. For example, the failureof senior management, boards of directors, andauditors to effectively conduct their duties hascontributed to some recent financial institutionfailures. In certain cases, board members andsenior management engaged in high-risk activi-ties without proper risk management processes,did not maintain adequate loan policies and pro-cedures, and circumvented or disregarded vari-ous laws and banking regulations. In other cases,independent public accounting firms renderedclean opinions on the institutions’ financialstatements when, in fact, the statements werematerially misstated. To the extent that financialreporting is not reliable, the regulatory processesand FDIC mission achievement (that is, ensuringthe safety and soundness of the nation’s financialsystem) can be adversely affected. For example,essential research and analysis used to achieve thesupervision and insurance missions of the Cor-poration can be complicated and potentiallycompromised by poor quality financial reportsand audits. The insurance funds could beaffected by financial institution and other busi-ness failures involving financial reporting prob-lems. In the worst case, illegal and otherwiseimproper activity by management of financialinstitutions or their boards of directors can beconcealed, resulting in potential significant lossesto the FDIC insurance funds.


The FDIC has initiated various measuresdesigned to mitigate the risk posed by these con-cerns, such as reviewing the bank’s boardactivities and ethics policies and practices andreviewing auditor independence requirements.In addition, the FDIC reviews the financial dis-closure and reporting obligations of publiclytraded state non-member institutions. The FDICalso reviews their compliance with Securities andExchange Commission regulations and the Fed-eral Financial Institutions Examination Council(FFIEC)-approved and recommended policies tohelp ensure accurate and reliable financialreporting through an effective external auditingprogram and on-site FDIC examination.

The Corporation reports that in response toquestions about the applicability of theSarbanes-Oxley Act to insured depository insti-tutions that are not public companies, it issuedcomprehensive guidance in March 2003, describ-ing significant provisions of the Act and relatedrules of implementation adopted by the Securi-ties and Exchange Commission. The guidanceexplained how adopting sound corporate gover-nance practices outlined in the Act may benefitbanking organizations, including those that arenot public companies, and how several of theAct’s requirements mirror existing bankingagency policy guidance related to corporate gov-ernance. We have an active program of coveragerelated to corporate governance within the bank-ing industry that will include a review of theimplementation of the Sarbanes-Oxley Act andrelated banking regulations this year.

Other corporate governance initiatives includethe FDIC’s issuing Financial Institution Letters,allowing bank directors to participate in regularmeetings between examiners and bank officers,maintaining a “Directors’ Corner” on the FDICWeb site, and the expansion of the Corporation’s“Directors’ College” program. Also, the Chair-man has established leadership challenges forFDIC managers that strive to promote externalconfidence in the FDIC and the confidence ofFDIC staff in addressing the strategic goals of theCorporation. While the FDIC has taken signifi-cant strides, corporate governance issues are akey concern.

Also, pursuant to the Economic Growth andRegulatory Reduction Act of 1996, the FDIC,along with the other members of the FFIEC, isengaged in reviewing regulations in order toidentify outdated or otherwise unnecessary regu-latory requirements imposed on insured deposi-tory institutions. The OIG supports prudentopportunities to reduce regulatory burdens oninsured depository institutions along with con-sideration to the impact on the FDIC’s ability toadequately supervise the institutions.

OIG Audit and Investigative WorkAddresses Corporate Governance IssuesDuring the reporting period, we issued a reportentitled Observations from FDIC OIG MaterialLoss Reviews Conducted 1993 through 2003(Report No. 04-004, January 22, 2004), a reportthat attests to the significance of the issue of cor-porate governance. In this report, we addressrecurring and root causes of failure for the10 FDIC-supervised institutions that causedmaterial losses to the Bank Insurance Fund dur-ing the past 10 years. Estimated losses to theBank Insurance Fund from these 10 failures totalover $584 million. We concluded that the majorcauses of failure were inadequate corporate gov-ernance, poor risk management, and lack of riskdiversification. Additional details of our findingsare in the section of the semiannual report enti-tled Management and Analysis of Risks to theInsurance Funds.

Our investigative work also addresses corporategovernance issues. In a number of cases, financialinstitution fraud is a principal contributing fac-tor to an institution’s failure. Unfortunately, theprincipals of some of these institutions—that is,those most expected to ensure safe and soundcorporate governance—are at times the partiesperpetrating the fraud. Our Office of Investiga-tions plays a critical role in investigating suchactivity. (See the Investigations section of thisreport for specific examples of bank fraud casesinvolving corporate governance weaknesses.)

2. Protection ofConsumer Interests

The FDIC’s mission is to maintain public confi-dence in the Nation’s financial system. The avail-


ability of deposit insurance to protect consumerinterests is a very visible way in which the FDICaccomplishes this mission. Additionally, as a reg-ulator, the FDIC oversees a variety of statutoryand regulatory requirements aimed at protectingconsumers from unfair and unscrupulous bank-ing practices. The FDIC, together with other pri-mary Federal regulators, has responsibility tohelp ensure bank compliance with statutory andregulatory requirements related to consumerprotection, civil rights, and community reinvest-ment. Some of the more prominent laws and reg-ulations related to this area include the Truth inLending Act, Fair Credit Reporting Act, RealEstate Settlement Procedures Act, Fair HousingAct, Home Mortgage Disclosure Act, EqualCredit Opportunity Act, Community Reinvest-ment Act of 1977, and Gramm-Leach-Bliley Act.

The Corporation accomplishes its missionrelated to fair lending and other consumer pro-tection laws and regulations by conducting com-pliance examinations, taking enforcementactions to address compliance violations, encour-aging public involvement in the communityreinvestment process, assisting financial institu-tions with fair lending and consumer compliancethrough education and guidance, and providingassistance to various parties within and outsideof the FDIC.

The FDIC’s examination and evaluation pro-grams must assess how well the institutionsunder its supervision manage compliance withconsumer protection and fair lending laws andregulations and meet the credit needs of theircommunities, including low- and moderate-income neighborhoods. The FDIC must alsowork to issue regulations that implement federalconsumer protection statutes both on its owninitiative and together with the other federalfinancial institution regulatory agencies.

The Corporation’s community affairs programprovides technical assistance to help banks meettheir responsibilities under the CommunityReinvestment Act. One of the FDIC’s currentareas of emphasis is financial literacy, aimedspecifically at low- and moderate-income indi-viduals who may not have had previous bankingrelationships. The Corporation’s “Money Smart”initiative is a key outreach effort. The FDIC must

also continue efforts to maintain a ConsumerAffairs program by investigating consumer com-plaints about FDIC-supervised institutions,answering consumer inquiries regarding con-sumer protection laws and banking practices,and providing data to assist the examinationfunction.

The continued expansion of electronic bankingpresents a challenge for ensuring consumers areprotected. The number of reported instances ofidentity theft has also ballooned in recent years.The Corporation will need to remain vigilant inconducting comprehensive, risk-based compli-ance examinations, analyzing and respondingappropriately to consumer complaints, and edu-cating individuals on money management topics,including identity protection.

The Corporation’s deposit insurance programpromotes public understanding of the federaldeposit insurance system and seeks to ensure thatdepositors and bankers have ready access toinformation about the rules for FDIC insurancecoverage. Informing bankers and depositorsabout the rules for deposit insurance coveragefosters public confidence in the banking systemby helping depositors to ensure that their fundsare fully protected.

OIG Efforts to Address Consumer Protection IssuesWe did not issue reports in the area of ConsumerProtection during the reporting period; however,we are planning an assignment to address theCorporation’s risk-focused compliance examina-tion program and will report the results of thatreview in an upcoming semiannual report.

The OIG’s involvement with Consumer Protec-tion matters includes our investigative casesregarding misrepresentations of FDIC insuranceor affiliation to unsuspecting consumers.Recently our Office of Investigations’ ElectronicCrimes Team has been involved in investigatingemerging e-mail “phishing” identity theftschemes that have used the FDIC’s name in anattempt to obtain personal data from unsuspect-ing consumers who receive the emails. Our inves-tigations have also uncovered multiple schemesto defraud depositors by offering them mislead-


ing rates of returns on deposits. These abuses areeffected through the misuse of the FDIC’s name,logo, abbreviation, or other indicators suggestingthat the products are fully insured deposits. Suchmisrepresentations induce the targets of schemesto invest on the strength of FDIC insurance whilemisleading them as to the true nature of theinvestments being offered. These depositors, whoare often elderly and dependent on insuredsavings, have lost millions of dollars in suchschemes. In one case, $9.1 million worth of cer-tificates of deposit were misrepresented to about90 investors, most of whom were elderly. Abusesof this nature not only harm innocent victimsbut may also erode public confidence in federaldeposit insurance.

Our experience with such cases prompted us onMarch 4, 2003, to submit to the House FinancialServices Committee Chairman, Michael Oxley, alegislative proposal to prevent misuse of the Cor-poration’s guarantee of insurance. This proposalwas incorporated in H.R. 1375: Financial Ser-vices Regulatory Relief Act of 2003. On March24, 2004, H.R. 1375 was passed by the House ofRepresentatives and referred to the U.S. Senate.Section 615 of H.R. 1375, as we suggested, wouldprovide the FDIC with enforcement tools to limitmisrepresentations regarding FDIC depositinsurance coverage. We appreciate the Congres-sional support of this proposal.


The FDIC seeks to ensure that failed financialinstitutions are and continue to be resolvedwithin the amounts available in the insurancefunds and without recourse to the U.S. Treasuryfor additional funds. Achieving this goal is a sig-nificant challenge because the insurance fundsgenerally average just over 1.25 percent ofinsured deposits and the FDIC supervises only aportion of the insured institutions. In fact, thepreponderance of insured institution assets arein institutions supervised by other federal regula-tors. Therefore, the FDIC has established strate-gic relationships with the other regulatorssurrounding their shared responsibility of help-

ing to ensure the safety and soundness of thenation’s financial system. The FDIC engages inan ongoing process of proactively identifyingrisks to the deposit insurance funds and adjust-ing the risk-based deposit insurance premiumscharged to the institutions. One of the key toolsused by the FDIC is its safety and soundnessexamination process which, when combinedwith off-site monitoring and extensive industryrisk analysis, generally provides an early warningand corrective action process for emerging risksto the funds.

Recent trends and events continue to pose risksto the funds. From January 1, 2002 to March 31,2004, 17 insured financial institutions failed, andthe potential exists for additional failures. Whilesome failures may be attributable primarily or inpart to economic factors, as previously men-tioned, bank mismanagement and apparentfraud have also been factors in the most recentfailures. The environment in which financialinstitutions operate is evolving rapidly, particu-larly with the acceleration of interstate banking,new banking products and complex asset struc-tures, and electronic banking. The industry’sgrowing reliance on technologies, particularlythe Internet, has changed the risk profile ofbanking. Continuing threats to the U.S. financialinfrastructure have made business continuityplanning an essential ingredient to sound riskmanagement programs. The consolidations thatmay occur among banks, securities firms,


IG Gianni with Chairman Sue Kelly, House Financial Ser-vices Committee, Subcommittee on Oversight andInvestigations after March 4, 2004 hearing.

insurance companies, and other financial serv-ices providers resulting from the Gramm-Leach-Bliley Act pose additional risks to the FDIC’sinsurance funds. Also, institutions face challengesin managing interest rate risks in an environmentof historically low interest rates. The Corpora-tion’s supervisory approach, including risk-focused examinations, must operate to identifyand mitigate these risks and their real or poten-tial impact on financial institutions to precludeadverse consequences to the insurance funds.

The FDIC employs a number of supervisoryapproaches, several of which are described below,to identify and mitigate institution risk and faceschallenges in ensuring that each meets itsintended purpose.

Supervisory Strategies for Large Banks: Withregard to the risks associated with “megabanks”or “large banks” (generally defined as institutionswith assets of over $25 billion) for which theFDIC is the insurer but is not the primary federalregulator, in 2002, the FDIC initiated the Dedi-cated Examiner Program for the eight largestbanks in the U.S. Senior examiners are dedicatedto those institutions to participate in targetedreviews and attend management meetings. Also,case managers closely monitor such institutionsthrough the Large Insured Depository Institu-tions Program’s quarterly analysis and executivesummaries. Additionally, case managers consis-tently remain in communication with theircounterparts at the other regulatory agencies,frequently attending pre-examination meetings,post-examination meetings, and exit boardmeetings.

Maximum Efficiency, Risk-focused, InstitutionTargeted (MERIT) Examinations Program:This program was introduced in March 2002 andis designed to improve the efficiency and effec-tiveness of bank examinations by maximizing theuse of risk-focused examination procedures inwell-managed banks in sound financial condi-tion. As of December 31, 2003, over 4,600 ofapproximately 5,300 FDIC-supervised institu-tions were MERIT-eligible based on asset size(less than $1 billion) and composite rating (of1 or 2). DSC has reported that the MERIT pro-gram has reduced the average time spent con-ducting safety and soundness examinations of

small, low-risk institutions by well over the20 percent target in qualifying institutions.

Relationship Manager Program: Still in itsearly, pilot stage, under this approach, commis-sioned examiners are assigned a portfolio ofbanks and are designated the “RelationshipManager” or primary point of contact for thesebanks. As such, relationship managers will con-duct comprehensive risk assessments of the banksin their portfolios and in consultation with otherexperts prepare a risk-focused supervisory plan.Off-site and on-site activities will be conducted asneeded throughout the examination cycle ratherthan the current “point-in-time” approach. Theemphasis is on scheduling off-site and on-sitereviews during the examination cycle to betterleverage external sources of information.

Many other challenges also exist as the Corpora-tion seeks to protect and ensure the continuedstrength of the insurance funds, as discussedbelow:

Merging the Insurance Funds: Because of bankmergers and acquisitions, many institutions holddeposits insured by both the Bank InsuranceFund (BIF) and Savings Association InsuranceFund (SAIF), obscuring the difference betweenthe funds. There is ongoing consideration ofmerging the two insurance funds with the per-ceived outcome being that the merged fundwould not only be stronger and better diversifiedbut would also eliminate the concern about adeposit insurance premium disparity betweenthe BIF and the SAIF. The prospect of differentpremium rates for identical deposit insurancecoverage would be eliminated. Also, insuredinstitutions would no longer have to track theirBIF and SAIF deposits separately, resulting incost savings for the industry. Assessments in themerged fund would be based on the risk thatinstitutions pose to that fund. The Corporationhas worked hard to bring about deposit insur-ance reform, and the OIG supports the FDIC’scontinued work with the banking communityand the Congress in the interest of eventual pas-sage of reform legislation.

The Designated Reserve Ratio: If the BIF ratiois below 1.25 percent, in accordance with theFederal Deposit Insurance Act, the FDIC Board


of Directors must charge premiums to banks thatare sufficient to restore the ratio to the statutorilymandated designated reserve ratio within 1 year.As of March 31, 2002, the BIF reserve ratio was at1.23 percent, the first time since 1995 that theratio had fallen below 1.25 percent. By June 30,2002, the BIF reserve ratio was at 1.25 percent,precisely at the minimum mandated level.According to the Chairman’s Letter to Stakehold-ers, the BIF ratio reported for 4th Quarter 2003was 1.32 percent. The Corporation must main-tain or exceed the designated reserve ratio, asrequired by statute.

Setting Deposit Insurance Premiums: Insur-ance premiums are generally assessed based onthe funding requirements of the insurance fundsindependent of the financial risk to the funds forinstitutions that pose safety and soundness con-cerns. This approach has the impact of assessingpremiums during economic downturns whenbanks are failing and are likely not in the bestposition to afford the premiums. Also, numerousinstitutions have benefited from being able tosharply increase insured deposits without contri-butions to the insurance funds commensuratewith this increased risk. This situation can occurbecause the designated reserve ratio is notbreached, thereby triggering across-the-boardpremiums. Current deposit insurance reformproposals include provisions for risk-based pre-miums to be assessed on a more frequentlyscheduled basis than would occur using the exist-ing approach. Risk-based premiums can providethe ability to better match premiums charged toinstitutions with related risk to the insurancefunds.

Adoption of the Proposed Basel Committee IICapital Accord: Adoption of the accord poses apotential additional threat to the insurance fundsdue to the prospect of lower minimum capitalrequirements for large institutions. The initialBasel Capital Accord only took credit risks intoaccount; Basel II will require that banks evaluateand measure other forms of risk, including oper-ational risk. Banks will have to make capital pro-visions to effectively act as a contingency fund, tocover the direct and indirect losses that emergentoperational risks could cause. The failure of at-risk institutions to fully adhere to this proposedcontingency funding mechanism in place of

higher minimum capital requirements consti-tutes a threat of increased insurance losses to thefunds.

Risk Management: Internally, the Corporationis currently operating under an internal controlpolicy that predates many developments towardproactive risk management. Since the Corpora-tion issued its internal control policy in February1998, the U.S. General Accounting Office (GAO)has issued Standards for Internal Control in theFederal Government (GAO/AIMD-00-21.3.1,November 1999), which discusses five compo-nents of internal control and provides an overallframework for identifying and addressing majorperformance challenges and areas of greatest riskfor fraud, waste, abuse, and mismanagement.Also, many organizations in the insurance indus-try and other organizations have begun using anEnterprise Risk Management (ERM) approach tomanaging not only financial risks, but all busi-ness and compliance risks. ERM is a process thatincorporates the five components of internalcontrol and provides: (1) the mechanisms to helpstaff understand risk in the context of the entity’sobjectives and (2) assurance that the organiza-tion will be able to execute its business strategyand achieve its objectives. The Committee ofSponsoring Organizations of the Treadway Com-mission recently issued a draft document thatexplains essential concepts and the interrelation-ship between ERM and internal control. (Note:On April 2, 2004, the Corporation renamed itsOffice of Internal Control Management to theOffice of Enterprise Risk Management to stress amore proactive and enterprise-wide approach tointernal risk management.)

OIG Report Examines Causes and Stages ofBank Failures As mentioned previously, our analysis of materialloss reviews conducted during 1993–2003 for 10failed banks disclosed that the major causes offailure were inadequate corporate governance,poor risk management, and lack of risk diversifi-cation. Bank management—that is, the Board ofDirectors and Executive officers—took risks thatwere not mitigated by systems to adequatelyidentify, measure, monitor, and most impor-tantly, control the risks. As a result, bank man-agement did not adequately fulfill its


responsibility to ensure that the banks operatedin a safe and sound manner. Although economicconditions may have contributed to bank failuresand the resulting material losses, the economywas not the sole cause of failure. In fact, thefinancial condition of the majority of the banksbecame dependent on the economy as a result ofbank management decisions.

Our report points out that the failed banks typi-cally went through four stages:

1. Strategy—the banks typically underwent achange in philosophy and developed aggres-sive business plans usually in a high-risk lend-ing niche. Characteristics of a bank in thisstage included emergence of a dominant per-son, lack of expertise in the niche area, andhigh-risk lending with liberal underwritingand weak internal controls.

2. Growth—the banks appeared financiallystrong due to rapid growth in their nichearea. High levels of fee income were reported,but bank portfolios were not sufficiently agedto show losses resulting from poor lendingdecisions and weak credit administration.Violations of laws and regulations and insiderabuse occurred, and examiners’ concernswere not fully addressed. Poor risk manage-ment and inadequate diversification wereevident.

3. Deterioration—the banks’ overall financialcondition declined. Characteristics of a bankin this stage included resistance to supervisoryconcerns, overvaluation of assets, a plateau ordecline in earnings, inadequate allowance forloan and lease losses, impaired capital, signifi-cant concentrations of credit, and loan prob-lems that were exacerbated when the economydeclined.

4. Failing—massive loan losses occurred,allowance for loan and lease losses wasseverely deficient, significant capital depletionoccurred, enforcement actions were issued bythe FDIC, and key management officialsdeparted. A massive capital infusion wasneeded for the bank to survive.

We also made the following observations:

■ Failed banks often exhibited warning signswhen they appeared financially strong.

■ Financial condition was no guarantee offuture performance.

■ Failed banks frequently assumed more riskthan bank management was capable ofhandling.

■ An inattentive or passive board of directorswas a precursor to problems.

■ Banks reached a point at which problemsbecame intractable and supervisory actionswere of limited use.

The observations discussed in this report under-score one of the more difficult challenges facingbank regulators today—limiting risk assumed bybanks when their profits and capital ratios makethem appear financially strong. A critical aspectof limiting risk is early corrective action by bankregulators in response to bank examinations thatidentify potential problems and effects on abank’s condition. For example, if a bank is expe-riencing rapid growth, the effects of poor under-writing in commercial real estate loans may notappear on the bank’s financial statements untilseveral months or even years after the loans aremade. Left uncorrected, poor underwritingcould result in the serious and intractable prob-lems experienced by the banks we reviewed.

The FDIC has taken a number of steps to addressthese challenges through risk-focused examina-tion programs and risk-based capital require-ments. Nevertheless, we recognize that bankfailures may never be eliminated and, in a freeeconomy, might even be necessary to cull theindustry of marginal performers and excesscapacity.

The Corporation’s Follow-up of BankSecrecy Act ViolationsThe Bank Secrecy Act of 1970 (BSA) requiresfinancial institutions to maintain appropriaterecords and to file certain reports that are used incriminal, tax, or regulatory investigations or pro-ceedings. The Congress enacted the BSA to pre-vent banks and other financial service providers


from being used as intermediaries for or to hidethe transfer or deposit of money derived fromcriminal activity. A report that we issued thisreporting period addressed whether DSC ade-quately follows up on reported BSA violations toensure that institutions take appropriate correc-tive action. We reviewed supervisory actions thatDSC has taken to ensure BSA compliance,including efforts to follow up with bank manage-ment after examinations and the use of regula-tory actions to prompt management action. Weconcluded that the FDIC needs to strengthen itsfollow-up process for BSA violations and has ini-tiatives underway to reassess and update its BSApolicies and procedures.

From the sample of 41 institutions we selected toreview, 27 had repeat violations. Of those27 institutions, 17 (63 percent) were not subjectto regulatory action for their repeat violations,although other supervisory efforts may havebeen in progress. For the 41 banks in our sample,we reviewed 82 reports that cited apparent andoften multiple BSA violations. For 25 (30 per-cent) of those 82 reports, DSC waited until thenext examination to follow up on some or all ofthe BSA violations. In addition, we noted thatnot all BSA deficiencies described in DSC’sexamination reports were cited in the violationssection of the reports.

We also observed that DSC offices took variousapproaches to referring bank violations to theTreasury Department and exercised wide discre-tion in deciding whether and when to follow upon the violations or to take regulatory action. Insome cases, more than 1 to 5 years passed beforeeither bank management took corrective actionand the action was effective in preventing repeatviolations or DSC applied regulatory actions toaddress continuing violations. Additionally,although the FDIC typically alternates examina-tions with state banking authorities, state exami-nations usually did not cover BSA compliance. Asa result, 2 to 3 years could elapse until the nextFDIC examination without any follow-up onBSA violations.

As a result of these conditions, the FDIC’s super-visory actions have not ensured to the greatestextent possible that institutions are in compli-ance with both the Department of the Treasury’s

and the FDIC’s anti-money laundering require-ments. In responding to our observations, DSCofficials explained that they focused their effortson BSA compliance based on the division’sassessment of the risk of money launderingactivity for FDIC-supervised institutions.

We made three recommendations to strengthenDSC’s monitoring and follow-up efforts for BSAviolations, update guidance for referring institu-tion violations to the Treasury Department, andprovide alternative coverage when state examina-tions do not cover BSA compliance. DSC man-agement concurred with the recommendationsand plans to take corrective actions.

DSC’s response provided detailed analyses andcomments on several issues that relate to DSC’soverall BSA program. Because our audit focusedon supervisory actions taken in response to BSAviolations, not DSC’s overall BSA program, wedid not respond to these comments in our finalreport. However, in reviewing DSC’s other com-ments that relate generally to our audit andspecifically to our audit results and scope, therewere several issues that warranted further discus-sion and clarification which are addressed indetail in our final report. (Report No. 04-017,March 31, 2004.)

Results of Other Examination Process-Related ReviewsDSC’s Supervisory Appeals Process: Wereported on the FDIC’s process to review safetyand soundness ratings questioned and appealedby FDIC-supervised institutions. We concludedthat with respect to an allegation we hadreceived, the FDIC complied with proceduresrelated to upgrading preliminary componentexamination ratings and that the RegionalDirector acted within delegated authority whenchanging the institution’s preliminary compo-nent rating. However, we noted that certainareas of the appeals process needed improve-ment and recommended actions to enhanceguidance on necessary documentation forappeals, improve communication with stateregulatory authorities, and clarify that theappeal and review processes should be limitedto the facts and conditions prior to or at thetime the material supervisory determination ismade. DSC generally concurred with the


report’s findings and agreed to take actionsregarding the recommendations. (Report No.04-015, March 29, 2004.)

Reliance on State Examinations: The FederalDeposit Insurance Act requires all FDIC-insuredinstitutions to undergo on-site examinations by afederal regulator every 12 or 18 months, depend-ing on asset size and bank performance. In accor-dance with the Act, the FDIC may alternate bankexaminations with state banking regulators if theFDIC determines that the state examination is anacceptable substitute. We issued a report on theprocess the FDIC uses to rely on safety andsoundness examinations performed by statebanking departments. Overall, we determinedthat the FDIC’s process is adequate for relying onthese examinations. However, we identified sev-eral opportunities for improvement and recom-mended that the Director, DSC, in cooperationwith state banking departments, amend workingagreements, based on a model agreement, toaddress, among other things: current examina-tion frequency requirements, workpaper sharing,coordinating examination programs and super-visory actions, and encouraging the mutual sup-port of efforts to maintain quality controlprograms. DSC generally concurred with thereport’s findings and agreed to take responsiveaction. (Report No. 04-013, March 26, 2004.)

4. Effectiveness of Resolutionand Receivership Activities

One of the FDIC’s corporate responsibilities isplanning and efficiently handling the franchise

marketing of failing FDIC-insured institutionsand providing prompt, responsive, and efficientresolution of failed financial institutions. Theseactivities maintain confidence and stability inour financial system. Notably, since the FDIC’sinception over 70 years ago, no depositor hasever experienced a loss of insured deposits at anFDIC-insured institution due to a failure.

During 2003 and the first quarter of 2004, theFDIC resolved six financial institution failures.These failed institutions had a total of $1.2 billionin assets and $1 billion in deposits. Within 1 busi-ness day after each failure, the FDIC had issuedpayout checks to insured depositors, or workedwith open institutions to ensure that depositorshad access to their insured funds. In addition, theFDIC continues to manage over $671 million inassets in liquidation in 34 BIF and SAIF receiver-ships. The FDIC initiated a number of projects in2003 to better manage and leverage its resourcesto meet potential challenges in the resolution offuture financial institution failures. These projectsinclude the Corporate Readiness Plan, the AssetServicing Technology Enhancement Project, a les-sons learned from bank failures symposium, anda Web site to provide instant access to the mostcurrent information available to institutions viathe Internet.

The FDIC has outlined primary goals for threebusiness lines that are relevant to the three majorphases of its work: Pre-Closing, Closing, and


DRR’s Jim Wigand with Office of Audits’ Steve Beard and BruceGimbel.

Assistant IG for Investigations Sam Holland, DRR DeputyDirector for Field Operations Stan Ivie, and Office ofAudits’ Craig Russell at OIG’s Dallas Open House eventfor the 25th anniversary of the IG Act.

Post-Closing of failing or failed institutions. Eachis accompanied by significant challenges:

Deposit Insurance. The FDIC must provide cus-tomers of failed financial institutions with timelyaccess to their insured funds and financial serv-ices. A significant challenge in this area is toensure that FDIC deposit insurance claims andpayment processes are prepared to handle largeinstitution failures.

Resolutions. As the FDIC seeks to resolve failedinstitutions in the least costly manner, its chal-lenges include ensuring the efficiency of contin-gency planning for institution failures andeffective internal FDIC communication andcoordination as well as communication with theother primary federal regulators. Such steps helpensure timely access to records and optimal reso-lution strategies.

Receivership Management. The FDIC’s goal is tomanage receiverships to maximize net returntoward an orderly and timely termination andprovide customers of failed institutions and thepublic with timely and responsive information.Related challenges include ensuring the efficiencyof the receivership termination process, effectiveclaims processing, continual assessment of recov-ery strategies, sound investigative activities, col-lection of restitution orders, and accuratecharging of receiverships for services performedunder the Receivership Management Program.

Receivership Management Reports The two following reports that we issued duringthe reporting period addressed receivershipmanagement issues:

FDIC’s 2003 Service Line Rates: The FDIC usesa Service Costing System to ensure that FDIC-established receiverships are properly billed fortheir fair share of indirect expenses. In the10-month period ended October 31, 2003, theFDIC billed 120 receiverships over $33 million.We found that during 2003, the FDIC process forbilling receiverships had improved. However, weidentified opportunities to enhance the FDIC’sability to document that established rates werefair and reasonable. The Corporation will beimproving analyses, enhancing reports and cost

data, and conducting training to provide greaterassurance that receiverships are properly billed.(Report No. 04-002, January 15, 2004.)

Limited Partnership Review: We conducted anaudit of a partnership in which the FDIC is alimited partner. The Division of Resolutionsand Receiverships (DRR), which is responsiblefor the oversight of the partnership, requestedthat we conduct the audit because of concernsDRR had relating to payments of developmentand accounting fees to an affiliate, questionablecharitable donations made by the General Part-ner, and other potentially improper charges.Our work showed that the General Partnercharged the Partnership $232,867 for expensesthat were either unallowable or unsupported,and we recommended that the Director, DRR,recover the questionable expenses on behalf ofthe partnership. We also determined that theGeneral Partner sold an asset to a charitableorganization for $425,000 less than its reportedfair market value and in doing so, realized a taxbenefit. This transaction was not in the bestinterest of the FDIC, and we recommended thatthe Corporation evaluate the transaction fur-ther and pursue recovery of all or part of thisamount on behalf of the Partnership. The Cor-poration’s response to our recommendations isexpected in mid-May 2004. (Report No. 04-012,March 16, 2004.)

Cases Involving Concealment of AssetsAs referenced earlier, the OIG’s Office of Investi-gations coordinates closely with the FDIC’s DRRand with the Legal Division regarding ongoinginvestigations involving fraud at failed institu-tions, fraud by FDIC debtors, and fraud in thesale or management of FDIC assets. In particular,investigators coordinate closely with the Corpora-tion to address issues arising in connection withthe prosecution of individuals who have illegallyconcealed assets in an attempt to avoid paymentof criminal restitution to the FDIC. As ofMarch 31, 2004, the FDIC was owed more than$1.17 billion in criminal restitution. In mostcases, the convicts subject to restitution orders donot have the means to pay. We focus our investi-gations on those individuals who do have themeans to pay but hide their assets from and/or lieabout their ability to pay. Details of some such


investigative cases are contained in the Investiga-tions section of this semiannual report.

5. Management ofHuman Capital

Human capital issues pose significant elementsof risk that interweave all the management andperformance challenges facing the FDIC. TheFDIC has been in a downsizing mode for thepast 10 years as the workload from the bankingand thrift crises of the late l980s and 1990s hasbeen accomplished. A number of division merg-ers and reorganizations took place, and the Cor-poration concluded its major buyout/retirementincentive programs. In total, over the past 11+years, the workforce (combined from the FDICand the Resolution Trust Corporation) hasdecreased from approximately 23,000 in 1992 toapproximately 5,300 currently. The Corporationhas also predicted that about 20 percent of FDICemployees will be eligible to retire within thenext 5 years.

As the FDIC continues to move past an era thathas been so characterized by continual down-sizing, the demands placed on the Corporationby a rapidly changing external environmentrequire a dynamic and strategic approach tomanaging the Corporation’s human capital. TheFDIC must remain flexible in managingchanges in the Corporation’s workload andbusiness processes that may have an impact onthe size and skill composition of its workforce,whether these changes are planned or unantici-pated. It is incumbent on all executives andmanagers in the FDIC to continually assess thegoals and objectives, workload, and staffing oftheir organizations and to take appropriatesteps to ensure that they have a workforce withthe right experience and skills to fulfill theirmission. It is imperative that the Corporation’sbusiness planning and human resourcesprocesses incorporate effective means to man-age such changes in the size and skill composi-tion of the workforce, in order to promoteefficiency and productivity and diminish thepossibility of a future reduction-in-force.

The Corporation continues to carry out otherfeatures of its comprehensive downsizing pro-

gram such as solicitations of interest, reassign-ments, retraining, and outplacement assistance.It is also in the process of revamping its compen-sation program to place greater emphasis onperformance-based incentives. Other challengesfor the Corporation include working to fill keyvacancies in a timely manner, engaging in carefulsuccession planning, and continuing to conserveand replenish the institutional knowledge andexpertise that has guided the organization overthe past years. A need for additional outsourcingmay arise, and hiring and retaining new talentwill be important. Hiring and retention policiesthat are fair and inclusive must remain a signifi-cant component of the corporate diversity plan.Designing, implementing, and maintaining effec-tive human capital strategies are critical prioritiesand must be the focus of centralized, sustainedcorporate attention. The Corporation’s HumanResources Committee and negotiations with theNational Treasury Employees Union play a keyrole in such efforts.

Of note, the FDIC has undertaken a significanteffort to address skill levels and maintain thepreservation of institutional knowledge by creat-ing the FDIC Corporate University. The Corpo-rate University is comprised of the following fiveSchools: (1) Supervision and Consumer Pro-tection, (2) Resolutions and Receiverships,(3) Insurance, (4) Leadership Development, and(5) Corporate Operations. Also the Division ofAdministration’s Human Resources Branch con-tains a Center for Career and Educational Ser-vices that strives to prepare employees to moreeffectively manage their careers by offering devel-opmental programs, career counseling, forums,workshops, and seminars.

The Division of Information Resources Manage-ment (DIRM) initiated a priority project calledthe Comprehensive Information TechnologyProgram Review. One aspect of this effort is anassessment of human capital needs and a plan toidentify and address any shortfalls in staffresources or skills mix for the information tech-nology security program. Until an assessment isperformed, and a human capital plan developedand tracked, the FDIC is at risk of not having theappropriate staffing resources to manage the ITsecurity program.


OIG Reviews the FDIC’s Strategic Alignmentof Human CapitalDuring the reporting period, we completed anevaluation in which we concluded that the Cor-poration’s human capital framework addressesthe underlying human capital concepts that theOffice of Personnel Management, Office of Man-agement and Budget, and the U.S. GeneralAccounting Office consider vital to successfulhuman capital management. We did, however,recommend and the FDIC agreed to strengthenits human capital program by institutionalizingthe Human Resources Committee, an element ofits human capital framework, and developing ahuman capital blueprint. Taking these actionswill sustain the FDIC’s long-term commitmentand focus on strategic human capital manage-ment and will maintain transparency in thedevelopment, implementation, and monitoringof human capital initiatives. (EVAL ReportNo. 04-005, January 23, 2004.) We have a seriesof reviews planned to address the various com-ponents of the Corporation’s human capital pro-gram, and we have an ongoing evaluation relatedto strategic workforce planning.


Information technology (IT) continues to playan increasingly greater role in every aspect of theFDIC mission. As corporate employees carry outthe FDIC’s principal business lines of insuringdeposits, examining and supervising financial

institutions, and managing receiverships, theemployees rely on information and correspon-ding technology as an essential resource. Infor-mation and analysis on banking, financialservices, and the economy form the basis for thedevelopment of public policies and promotepublic understanding and confidence in thenation’s financial system. IT is a critical resourcethat must be safeguarded.

Accomplishing IT goals efficiently and effectivelyrequires sound IT planning and investment con-trol processes. The Corporation’s 2004 IT budgetis approximately $219.3 million. The Corpora-tion must constantly evaluate technologicaladvances to ensure that its operations continueto be efficient and cost-effective and that it isproperly positioned to carry out its mission.While doing so, the Corporation must continueto respond to the impact of laws and regulationson its operations. Management of IT resourcesand IT security have been the focus of several


FDIC OIG sponsors governmentwide FISMA Symposium to address issues of common interest. Shown presenting areRus Rau and OMB’s Kamela White.

OIG’s Rus Rau receives Federal 100 award for his work on FDIC ITissues and governmental FISMA activities.

laws, such as the Paperwork Reduction Act, theGovernment Information Security Reform Act,and the Federal Information Security Manage-ment Act of 2002 (FISMA). Under FISMA, eachagency is required to report on the adequacy andeffectiveness of information security policies,procedures, and practices and compliance withinformation security requirements.

Our work required under FISMA has shown thatthe Corporation has worked hard to implementmany sound information system controls to helpensure adequate security. However, dauntingchallenges remain due to the ever-increasingthreat posed by hackers and other illegal activity.We have urged the FDIC to stay the course indeveloping an enterprise-wide IT architecturethat maps the current and “to be” states of busi-ness processes and the supporting informationsystems and data architecture. Additionally, wehave emphasized completing system certifica-tion and accreditation processes to test the secu-rity of deployed IT assets. We have completedand ongoing assignments covering the IT capitalplanning and investment control process toassist the Corporation in this area. Finally, weare pleased that the Corporation has appointed apermanent Chief Information Officer to guideits IT efforts, particularly from a strategic stand-point, but many key IT security positionsremain to be filled, and the Corporation’s DIRMis in the midst of an internal transformation ini-tiative aimed at improving the skill mix of its ITpersonnel and business processes. Our 2004FISMA work will address these issues.

The Corporation’s Approach to DataSensitivity for Legacy ApplicationsWe initiated an evaluation in response to FDICprogram office management’s concerns overwhether a plan designed to determine the sensi-tivity of data within selected FDIC legacy appli-cations was appropriate. Concerns had beenraised given the significant costs for the plan’simplementation, continuing costs to maintaindata classifications, and potential disruption toprogram operations. Generally, our report con-cluded that the FDIC’s approach to identifyingand protecting sensitive data resident in legacyapplications was consistent with applicable fed-eral standards for categorizing information andinformation systems. Further, DIRM has actions

underway to more closely align its existing guid-ance and methodology for determining the sen-sitivity of data and information systems withapplicable federal standards. (EVAL Report No.04-011, February 27, 2004.)

Two Reviews Recommend Strengthening ITSecurity ControlsThe OIG engaged IBM Business Consulting Ser-vices (IBM), an independent professional serv-ices firm, in support of OIG efforts to satisfyreporting requirements related to FISMA. IBMconducted the following two reviews in theinformation security area:

Intrusion Detection and Incident Response:The scope of the review was specifically designedto focus on (1) intrusion identification anddetection, (2) incident tracking and externalreporting, and (3) incident investigation. IBMconcluded that the FDIC had made improve-ments in the incident response area, but addi-tional work was needed to strengthen the FDIC’scontrols for identifying and monitoring securityincidents. IBM made multiple recommendationsto improve the intrusion detection and incidentresponse capability at the FDIC. The FDIC’sresponse adequately addressed all the conditionsdiscussed in the report. (Report No. 04-009, Feb-ruary 13, 2004.)

FDIC’s Personnel Security Program: IBMconcluded that the FDIC’s Division of Adminis-tration has made improvements in the Corpo-ration’s personnel security program, butadditional work was needed to strengthen con-trols over data used to manage the program. IBMmade multiple recommendations to improve theaccuracy of the data used to manage the FDIC’spersonnel security program. The Division ofAdministration’s response adequately addressedall of the conditions discussed in the report.(Report No. 04-016, March 30, 2004.)

7. Security of CriticalInfrastructure

The adequate security of our nation’s criticalinfrastructures has been at the forefront of thefederal government’s agenda for many years.


Specifically, the President’s Commission on Crit-ical Infrastructure Protection (established in July1996) was tasked to formulate a comprehensivenational strategy for protecting the nation’s criti-cal infrastructure from physical and “cyber”threats. Included among the limited number ofsystems whose incapacity or destruction weredeemed to have a debilitating impact on thedefense or economic security of the nation wasthe banking and finance system. With theincreased consolidation and connectivity of thebanking industry in the years since 1996, andwith the new awareness of the nation’s vulnera-bilities to terrorist attacks since September 11,2001, the security of the critical infrastructure inthe banking industry is even more important.

On May 22, 1998, Presidential Decision Directive(PDD) 63 Title 5 was signed. The directive calledfor a national effort to ensure the security of thenation’s critical infrastructures. PDD 63 definedthe critical infrastructure as the “physical andcyber-based systems essential to the minimumoperations of the economy and government.”The President declared that securing our criticalinfrastructure is essential to our economic andnational security and issued two ExecutiveOrders (EO 13228, The Office of HomelandSecurity and the Homeland Security Council,and EO 23231, Critical Infrastructure Protectionin the Information Age) to improve the federalgovernment’s critical infrastructure protectionprogram in the context of PDD 63.

The intent of PDD 63 was to ensure that the fed-eral government maintained the capability todeliver services essential to the nation’s securityand economy and to the health and safety of itscitizens in the event of a cyber- or physical-baseddisruption. Much of the nation’s critical infra-structure historically has been physically andlogically separate systems that had little interde-pendence. However, as a result of technology, theinfrastructure has increasingly become auto-mated and interconnected. These same advanceshave created new vulnerabilities to equipmentfailures, human error, natural disasters, terror-ism, and cyber-attacks.

On December 17, 2003, the President issuedHomeland Security Presidential Directive(HSPD) 7, which established a national policy

for federal agencies to identify and prioritize thenation’s critical infrastructure and key resourcesand to protect them from terrorist attacks. ThisDirective supersedes PDD 63. Included in thisdirective is a requirement for agencies to submitfor OMB’s approval their plans for protectingtheir critical physical and cyber infrastructureand to submit progress reports to OMB. As agovernment Corporation, the FDIC falls underthis directive.

To effectively protect critical infrastructure, theFDIC’s challenge is to implement measures tomitigate risks, plan for and manage emergenciesthrough effective contingency and continuityplanning, coordinate protective measures withother agencies, determine resource and organi-zation requirements, and engage in educationand awareness activities. The FDIC will need tocontinue to work with the Department of Home-land Security and the Finance and BankingInformation Infrastructure Committee, createdby Executive Order 23231 and chaired by theDepartment of the Treasury, on efforts toimprove security of the critical infrastructure ofthe nation’s financial system. To address this risk,the FDIC is sponsoring 24 outreach conferencesfor the Financial and Banking Information Infra-structure Committee and Financial Services Sec-tor Coordinating Council through 2005, whichwill address protecting the financial sector. TheCorporation will also need to be attentive to thenew requirements of HSPD 7.

Evaluation of FDIC’s Unix Systems SecurityA third review conducted by IBM on the OIG’sbehalf addressed issues associated with the Cor-poration’s Unix operating system. The scope ofthe evaluation was specifically designed to focuson Unix security policies, standards, and proce-dures; configuration management; and technicalcontrols as part of the assessment of the Networkand Mainframe Security area. IBM found a num-ber of good security practices being applied inthe Unix system environment but identifiedimprovements that could be made. Most signifi-cantly, IBM recommended that administration ofthe Unix servers be centralized to improve theconsistency and uniformity of security controlsand practices applied to the servers. The Corpo-ration has agreed to pursue corrective actions to


address all of the report’s recommendations.(Report No. 04-008, February 13, 2004.)

8. Management of MajorProjects

Project management is the defining, planning,scheduling, and controlling of the tasks thatmust be completed to reach a goal and the allo-cation of the resources to perform those tasks.The FDIC has engaged in several multi-milliondollar projects, such as the New Financial Envi-ronment (NFE), Central Data Repository (CDR),and Virginia Square Phase II Construction.Without effective project management, the FDICruns the risk that corporate requirements anduser needs may not be met in a timely, cost-effec-tive manner. We have done several reviews ofthese projects and identified the need forimproved defining, planning, scheduling, andcontrolling of resources and tasks to reach goalsand milestones. The Corporation has included aproject management initiative in its 2004 per-formance goals and established a programmanagement office to address the risks and chal-lenges that these kinds of projects pose.

In September 2002, the FDIC executed a multi-year contract to replace its core financial systemsand applications with a commercial-off-the-shelfsoftware package. NFE is a major corporate ini-tiative to enhance the FDIC’s ability to meet cur-rent and future financial management andinformation needs. At the time the Board casewas approved, the FDIC estimated the total life-cycle cost of NFE, including FDIC staff time, tobe approximately $62.5 million over 8 years. NFEoffers the FDIC significant benefits and presentssignificant challenges. These challenges will testthe Corporation’s ability to (1) maintain unqual-ified opinions on the FDIC’s annual financialstatements through the system implementationand associated business process reengineering;(2) manage contractor resources, schedules, andcosts; and (3) coordinate with planned andongoing system development projects related toNFE. We have reported on several NFE mattersin the past and are currently monitoring the Cor-poration’s ongoing NFE efforts.

The Call Report Processing Modernization proj-ect is a collaborative effort by the FDIC, the Fed-

eral Reserve Board, and the Office of the Comp-troller of the Currency to improve the processesand systems used to collect, validate, store, anddistribute Call Report information. The projectresulted in a CDR approach to managing bankCall Report Information. The agencies developeda consensus vision for a new Call Report process-ing business model that incorporates open datastandards, uses a common reporting language,and offers tools to enable banks to submit betterreports.

In March 2002, the Board of Directors approvedconstruction of a new nine-story building at theFDIC’s Virginia Square in Northern Virginia.Known as Virginia Square Phase II, the buildingwill house FDIC staffers (about 1,100) for themost part now working in leased space. Theexpansion will cost approximately $111 million.The building is expected to be finished in 2006.Completing construction activities and movingstaff from leased to owned space within theplanned time and cost budgets presents consid-erable challenges for FDIC management.

The Corporation must ensure that employeesfrom all divisions and offices properly safeguardthe Bank Insurance and Savings AssociationInsurance Funds. It is critically important thatbudgets for the major projects discussed aboveand all others be established and closely moni-tored to prevent significant cost overruns.

XBAT Contracting and Project ManagementOne of our reports during the reporting periodaddressed an aspect of the Call Report ProcessingModernization project, and the CDR, in particu-lar. FDIC executives expressed concerns that theExtensible Business Reporting Language Busi-ness Analyst Tool (XBAT) delivered to the CDRcontractor was not fully functional and asked usto identify lessons learned in contract adminis-tration and project management that could beapplied to the larger CDR effort. The OIG con-ducted a joint review with the Office of Enter-prise Risk Management to address theseconcerns.

We concluded that the FDIC received some valuefrom the XBAT procurement. However, thedevelopment of the XBAT software was not suc-


cessful. The FDIC determined that XBAT lackedthe functionality to successfully manage CallReport taxonomies. (Taxonomies contain com-mon terms, definitions, and relationships for CallReport data items.) The FDIC did not always fol-low established acquisition procedures, prudentproject management practices, or System Devel-opment Life Cycle guidance. As a result, theFDIC paid for software that did not meet all cor-porate needs or expectations. Moreover, the con-ditions exposed the FDIC to risks for potentialdelays in the CDR project and to reputation riskin the eyes of the CDR contractor, other bankingagencies, and FDIC-insured institutions. TheFDIC issued a change order to the CDR contractfor the development of an alternative tool thatwill replace XBAT. According to the CDR con-tractor, development of the alternative toolshould not impact the overall milestones forimplementing the CDR.

We did not make recommendations in thisreport, but we identified a number of lessonslearned related to contracting and project man-agement that we shared with FDIC divisionsinvolved in the project. (EVAL Report No. 04-014, March 26, 2004.)

9. Assessment ofCorporate Performance

Assessing corporate performance is a key chal-lenge because good intentions and good begin-

nings are not the measure of success. What mat-ters in the end is completion: performance andresults. To that end, the Government Performanceand Results Act (Results Act) of 1993 was enacted.This Act requires most federal agencies, includingthe FDIC, to prepare a strategic plan that broadlydefines each agency’s mission, vision, and strategicgoals and objectives; an annual performance planthat translates the vision and goals of the strategicplan into measurable annual goals; and an annualperformance report that compares actual resultsagainst planned goals.

The current administration has raised the barfurther in this area. Specifically, OMB is using anExecutive Branch Management Scorecard totrack how well departments and agencies are exe-cuting the management initiatives, and wherethey stand at a given point in time against theoverall standards for success. OMB has alsointroduced the Program Assessment Rating Tool(PART) to evaluate program performance, deter-mine the causes for strong or weak performance,and take action to remedy deficiencies andachieve better results.

The Corporation’s strategic plan and annual per-formance plan lay out the agency’s mission andvision and articulate goals and objectives for theFDIC’s three major program areas: Insurance,Supervision, and Receivership Management. Theplans focus on four strategic goals that definedesired outcomes identified for each programarea: (1) Insured Depositors Are Protected fromLoss Without Recourse to Taxpayer Funding,(2) FDIC-Supervised Institutions Are Safe andSound, (3) Consumers’ Rights Are Protected andFDIC-Supervised Institutions Invest in TheirCommunities, and (4) Recovery to Creditors ofReceiverships Is Achieved. Through its annualperformance report, the FDIC is accountable forreporting actual performance and achieving thesestrategic goals. In addition to the Corporation’sstrategic and annual goals and objectives estab-lished under the Results Act, the Chairman main-tains a comprehensive set of objectives used forinternal management which are summarized interms of Stability, Sound Policy, and Stewardship.

The Corporation has made significant progressin implementing the Results Act, with which it isrequired to comply. Over the years, it has devel-


The OIG is monitoring project management of the con-struction of the Corporation’s new Virginia Squarefacility.

oped more outcome-oriented performancemeasures, better linked performance goals andbudgetary resources, and improved processes forverifying and validating reported performance.While the FDIC is not included on the Manage-ment Scorecard nor required to submit a PARTto the OMB, some of the Corporation’s divisionshave begun using a “scorecard” approach tomonitoring and evaluating performance, and weencourage broader use of these tools.

My office has played an active role in evaluatingthe Corporation’s efforts in this area. We haveconducted reviews of the processes used forverifying and validating data and made recom-mendations that the Corporation adopted. Wehave also evaluated the Corporation’s budgetand planning process and are doing so againbecause significant changes have been made tobring down the cost of formulating and execut-ing the budget and more effectively link it toperformance goals. Finally, as part of the Cor-poration’s overall planning process, we provideinput and our perspective annually on theFDIC’s strategic goals and objectives. In doingso, we have pointed to the need to better alignthe strategic and annual planning process underthe Results Act with the separate process used todevelop detailed annual corporate performanceobjectives and initiatives designed to accom-plish the Chairman’s priorities. During thereporting period we provided the followingadvisory comments on the FDIC’s Results Act-related efforts:

Draft FDIC Strategic and Annual Plans: Weprovided advisory comments to the Division ofFinance on drafts of the FDIC Strategic Plan and2004 Annual Performance Plan. We acknowl-edged continuing efforts to improve the plansand offered observations and suggestions. Theseincluded (1) considering improving the linkageof the Results Act annual goal-setting process tothe separate Corporate Performance Objectivesprocess and the FDIC’s activities related to thegovernmentwide initiatives in the President’sManagement Agenda; (2) updating the strategicplan section on “FDIC and the Banking Indus-try” to reflect additional events warranting inclu-sion; and (3) improving the performance plan byincluding specific performance goals for key cor-

porate initiatives in human capital, corporatecost efficiencies, and information technology andsecurity issues.

Draft 2003 Annual Report: We responded to theChief Financial Officer’s request for commentson a draft of the FDIC’s 2003 Annual Report.Our comments were advisory in nature andincluded suggestions for the report regarding(1) recognition of the OIG evaluation function;(2) presentation of management and perform-ance challenges; and (3) information in the per-formance and controls sections of the report.

10. Cost Containment andProcurement Integrity

Stewardship of resources has been a focus of theFDIC’s current Chairman. As steward for theinsurance funds, the Chairman has embarked on acampaign to identify and implement measures tocontain and reduce costs, either through morecareful spending or assessing and making changesto business processes to increase efficiency.

A key challenge to containing costs relates to thecontracting area. To achieve success in this area,the FDIC must ensure that its acquisition frame-work—that is, its policies, procedures, and inter-nal controls—is marked by sound planning;consistent use of competition; fairness; well-structured contracts designed to produce cost-effective, quality performance from contractors;and vigilant contract management to ensure suc-cessful oversight management activities. TheCorporation has taken a number of steps tostrengthen controls and oversight of contracts.However, our work in this area continues toshow further improvement is needed to reducerisks, such as consideration of contractor secu-rity in acquisition planning and oversight of con-tractor security practices. We also have a contractaudit program that looks at the reasonablenessand support for billings on significant Corpora-tion contracts and, as needed, evaluates contractaward processes. Our work in the contractingarea during the reporting period included thefollowing:


Pre-award AuditsWe issued reports of two pre-award audits forcontractor proposals for construction of VirginiaSquare Phase II. The focus of the first was toevaluate the reasonableness and support for thecontractor’s proposed costs for excavation, mobi-lization, and concrete engineering for the project.We questioned $1,329,289 of the contractor’sproposed costs. FDIC management providedadditional information and justification to sup-port the determination that the contractor’s costswere fair and reasonable.

We issued a second report discussing the processby which the FDIC’s Acquisition Services Branch(ASB) and the contractor arrived at a $78 millionnegotiated price and executed a contract modifi-cation for construction of the remaining balanceof the Virginia Square Phase II project. DuringNovember and December 2003, the OIG, ASB,the Corporate Services Branch, and the Corpora-tion’s construction advisors reviewed and evalu-ated several proposals submitted by thecontractor to complete the Virginia Square proj-ect. As a result of the collective input and effortsof all parties involved, ASB was successful innegotiating a $2 million reduction in the con-tractor’s proposed price. Of the OIG questionedcosts of $2,231,547, management disallowed$1,029,649.

Post-award Contract AuditsWe issued two post-award contract audit reportsduring the reporting period. The objectives ofthe post-award audits are to determine whetheramounts charged to FDIC contracts are allow-able, allocable, and reasonable. We reported atotal of $287,133 in monetary benefits as a resultof the post-award audits. As of the end of thereporting period, management decisions werepending for the total amount identified as mone-tary benefits.


IG Gianni thanks OIG staff on the occasion of the 15th anniversary ofthe FDIC OIG.

Investigations—Making an Impact

The Office of Investigations (OI) is responsiblefor carrying out the investigative mission of theOIG. Staffed with agents in Washington, D.C.;Atlanta; Dallas; and Chicago; OI conducts inves-tigations of alleged criminal or otherwise prohib-ited activities that may harm or threaten to harmthe operations or integrity of the FDIC and itsprograms. In addition to its two regional offices,based in Atlanta and Dallas, OI operates an Elec-tronic Crimes Team (ECT) and laboratory inWashington, D.C. The ECT is responsible forconducting computer-related investigationsimpacting the FDIC and providing computerforensic support to OI investigations nationwide.OI also manages the OIG Hotline for employees,contractors, and others to report allegations offraud, waste, abuse, and mismanagement via atoll-free number, regular mail, or e-mail.

OI Cases Target High-Risk AreasOI concentrates its investigative efforts on thosecases of most significance or potential impact tothe FDIC and its programs. OI’s goal, in part, isto bring a halt to the fraudulent conduct underinvestigation, protect the FDIC and other vic-tims from further harm, and assist the FDIC inrecovery of its losses. Another consideration indedicating resources to these cases is the need topursue appropriate criminal penalties not onlyto punish the offender but to deter others fromparticipating in similar crimes.

Currently, the majority of OI’s caseload is com-prised of investigations involving major financialinstitution fraud. OI’s work in this area targetsschemes that resulted in significant losses or vul-nerabilities for the institution(s), and/or involvesinstitution officers or insiders, multiple subjectsand institutions, obstruction of bank examiners;and/or misrepresentation of FDIC-insurance oraffiliation. It also includes investigations of fraudresulting in institution failures. Cases in this areaare highly complex and resource-intensive, oftenrequiring teams of agents and years to complete.


Investigative Statistics

October 1, 2003—March 31, 2004

Judicial Actions:

Indictments/Informations . . . . . . . . . . . . . . . . . . 15Convictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

OIG Investigations Resulted in:

Fines of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000Restitution of . . . . . . . . . . . . . . . . . . . . . . $825,869Other Monetary Recoveries of . . . . . . . . $884,736Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,715,604

Cases Referred to the Department of

Justice (U.S. Attorney) . . . . . . . . . . . . . . . . . . . . . . 17

Referrals to FDIC Management . . . . . . . . . . . . . . . . 1

OIG Cases Conducted Jointly with

Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Despite the resource demands, the OIG’s com-mitment to these investigations is imperative, inlight of their significance and potential impactto the FDIC and the banking industry. Addition-ally, from a cost-benefit perspective, these caseshave brought results that seem to make ourinvestment in them well worth the effort, asillustrated in some of the cases reported for thisperiod. Although it is impossible to put a pricetag on the benefit derived from bringing crimi-nals in these cases to justice, our investigations ofmajor financial institution fraud schemes havebrought increased returns measured by success-ful prosecutions resulting in incarceration,court-ordered fines, restitution to victims, andadministrative actions.

In addition to pursuing financial institution-related cases, the OIG commits significantresources to investigations that target fraud byFDIC debtors seeking to conceal their assetsfrom the FDIC. These cases, which includeinvestigations of individuals who fraudulentlyattempt to avoid payment of court-orderedrestitution to the FDIC, made up 23 percent ofour caseload as of March 31, 2004. These casesare of great significance to the FDIC, which wasowed more than nearly $1.2 billion in criminal

restitution as of March 2004. In most instances,the convicts subject to these restitution ordersdo not have the means to pay. The focus of OIGinvestigations in this area is on those individualswho do have the means to pay but hide theirassets from and/or lie about their ability to pay.The individuals targeted in these investigationshave been previously convicted for engaging infraud schemes that caused major losses to and,in some instances, led to the collapse of federallyinsured financial institutions. After release fromprison, they continue to perpetuate fraud by ille-gally transferring and hiding their assets andmaking false statements to the governmentabout their ability to repay their debt to theFDIC. In many cases, they have continued to livelavish lifestyles, while representing to their Pro-bation Office and to the FDIC that they have noassets. Although successful prosecutions of theseindividuals does not always mean the FDIC willrecover the restitution it is owed; it is imperativethat these individuals be brought to justice andthat other convicts who have defrauded ourfinancial institutions recognize that they face thepossibility of returning to prison if they attemptto hide their assets from the Corporation. Wework closely with the Division of Resolutionsand Receiverships (DRR) and the Legal Divisionin aggressively pursuing investigations of theseindividuals. We believe that a partnershipapproach and commitment to these cases is crit-ical to successfully prosecute those that continueto defraud the FDIC, and to ensure that theFDIC, as the victim, recovers as much of its lossas possible.

Although currently only about 7 percent of ourcaseload, the OIG must always be prepared tocommit resources when necessary to investiga-tions of criminal or serious misconduct on thepart of FDIC employees. These are among themost sensitive of OIG cases and are critical toensure the integrity of and public confidence inFDIC operations. Other consistent areas ofinvestigation for the OIG are those cases involv-ing fraud in the sale or management of FDICassets and fraud by contractors.

Partnering for SuccessThe OIG works closely with U.S. Attorneys’Offices throughout the country in attempting to


Restitution andOther Debt

23%

Other7%

EmployeeActivities

7%

Asset Managementand Sales

7%

Bank/ThriftOperations

56%

Office of Investigations Case Distribution

(as of March 31, 2004)

bring to justice individuals who have defraudedthe FDIC. The prosecutorial skills and outstand-ing direction provided by Assistant U.S. Attor-neys with whom we work are critical to oursuccess. The results we are reporting for the last6 months reflect the efforts of U.S. Attorneys’Offices in the District of Minnesota, NorthernDistrict of Ohio (Western Division), District ofSouth Dakota, District of Oklahoma, NorthernDistrict of Texas, District of Connecticut, North-ern District of Alabama, Central District of Illi-nois, Western District of Louisiana, NorthernDistrict of Georgia, District of New Hampshire,District of Montana, and the Southern Districtof Georgia. In addition to working with localU.S. Attorneys’ Offices, the OIG worked withTrial Attorneys from the Fraud Section of theU.S. Department of Justice and State prosecutorsfrom Missouri and California.

Support and cooperation among other lawenforcement agencies is also a key ingredient forsuccess in the investigative community. We fre-quently “partner” with the Federal Bureau ofInvestigation (FBI), the Internal Revenue ServiceCriminal Investigation (IRS-CI), and other lawenforcement agencies in conducting investiga-tions of joint interest.

Also vital to our success is our partnership withFDIC program offices. We coordinate closelywith the FDIC’s Division of Supervision andConsumer Protection in investigating fraud atfinancial institutions and with DRR and theLegal Division in investigations involving failedinstitutions and fraud by FDIC debtors. OurECT coordinates closely with the Division ofInformation Resources Management in carryingout its mission. The successes highlighted for theperiod would not have been possible without thecollaboration of these offices.

In addition to carrying out its direct investiga-tive responsibilities, the OIG is committed toproviding training and sharing information withFDIC components and other regulators basedon “lessons learned” regarding red flags andfraud schemes identified through our investiga-tions. OI agents provide training and frequentlygive presentations to FDIC staff during regionaland field meetings. We are also called upon bythe Federal Financial Institutions Examination

Council, state banking regulatory agencies, andlaw enforcement agencies to present case studies.Over the last 6 months OI opened 33 new casesand closed 31 cases, leaving 112 cases underwayat the end of the period. Our work during theperiod led to indictments or criminal chargesagainst 15 individuals and convictions of9 defendants. Criminal charges remained pend-ing against 38 individuals as of the end of thereporting period. Fines, restitutions, and recov-eries stemming from our cases totaled$1,715,604.

The following are highlights of some of theresults from our investigative activity over thelast 6 months:

Fraud Arising at or ImpactingFinancial InstitutionsFormer Owners of Sinclair National BankIndicted in Fraud Scheme that AllegedlyLed to the Bank’s Failure On November 20, 2003, a grand jury in the West-ern District of Missouri returned a supersedingindictment against a former owner and boardmember of Sinclair National Bank which failedin September 2001. The indictment charged herwith conspiracy, bank fraud, misapplication ofbank funds, making false statements to the Officeof the Comptroller of the Currency (OCC), ille-gal participation, and obstructing the OCC in theexamination of Sinclair National Bank.

The woman’s ex-husband, who was co-owner ofthe bank and served as its chairman was alsoindicted on November 20, but he died shortlythereafter. A bank contractor, who sold over$24 million in sub-prime loans to SinclairNational Bank, and for a time serviced the loansfor Sinclair National Bank, was also charged withconspiracy, misapplication of bank funds, andobstructing the OCC in the examination of thebank.

As described in the indictments, the formerbank owners allegedly conspired to submit afalse document to the OCC in order to influenceacceptance of their application to purchase Sin-clair National Bank. The indictment also allegedthat the defendants obstructed the OCC exami-

Investigations—Making an Impact 31

nation by creating and submitting false docu-ments to cover up their prior false statements.

The defendants allegedly misapplied SinclairNational Bank funds by causing the bank to pur-chase over $15 million in loans from the bankcontractor’s company while both had a financialinterest in the contractor’s company and withthe bank contractor personally.

In addition, the indictment included a forfeiturecount which seeks $15 million each from thedefendants.

The case was brought to the grand jury by theDepartment of Justice, Main Justice Attorneysfrom the Fraud Section. The case is being inves-tigated by the FDIC OIG (Audit and Investiga-tions), the Treasury OIG, FBI, and IRS-CI.

Two Former Bank Executives and BusinessOwner Charged with Scheme to DivertBank Funds for Personal Benefit On October 29, 2003, a federal grand jury in theNorthern District of Alabama returned a

25-count indictment charging the former chair-man and chief executive officer (CEO) of Com-munity Bank, Blountsville, Alabama, the formervice president of construction and maintenanceof Community Bank, and a bank contractor inconnection with a scheme to divert CommunityBank funds for personal benefit.

The indictment charged the defendants withbank fraud, misapplication of bank funds, falsestatements to a financial institution, and falseentries in the books and records of a financialinstitution. The former Chairman and CEO wasalso charged with money laundering and filingfalse tax returns, and the government is alsoseeking forfeiture of $3.45 million from him.

According to the indictment, the former vicepresident of construction and maintenanceacted as the general contractor and was respon-sible for receiving and approving constructioninvoices on Community Bank projects. Thebank contractor provided construction serviceson commercial and residential constructionprojects, including those of Community Bankand the CEO’s personal projects. The indictment


OI case leads to charges against former bank CEO and others for diverting bank funds for construction of former CEO’shome, shown here.

alleged that the three defendants conspired andused $2.15 million in bank funds for construc-tion work on the former CEO’s personalprojects, including the construction of his17,000-square-foot house, known as HeritageValley Ranch.

The indictment further alleged that the formerCEO obtained more than $5 million in bankloans in order to build the house but used morethan $1.34 million of those funds for otherpurposes.

Community Bank fired the former CEO in lateJanuary 2004, after directors learned that thelongtime CEO had failed to tell them he had filedpersonal bankruptcy. The former CEO remainson the Community Bancshares Board of Direc-tors, a Delaware corporation and holding com-pany for Community Bank, having won anelection of the shareholders to remain as a Boardmember. The former CEO and his family are themajority shareholders of Community Bancshares.

The investigation of suspected fraud involvingCommunity Bank is being conducted by agentsfrom the FDIC OIG, FBI, and IRS-CI. Prose-cution of the case is being handled by TrialAttorneys from the Department of Justice,Washington, D.C., and the U.S. Attorney’s Officefor the Northern District of Alabama.

Commercial Contractor Pleads Guilty toConspiracy to Commit Bank FraudOn October 23, 2003, a commercial contractorwhose company, Riverwoods Development Cor-poration, was a customer of the former Town &Country Bank of Almelund, pleaded guilty toone count of conspiracy to commit bank fraud.The bank failed in July 2000. Our investigationled to the indictment of the commercial contrac-tor and the bank’s former president and chair-man of the board in connection with theirinvolvement in a loan fraud scheme that causedthe bank’s failure and resulted in an original esti-mated loss of $3.4 million to the Bank InsuranceFund. The fraud conspiracy involved creatingover 20 false lines of credit in order to exceedlegal lending limits and funnel bank proceeds tothe contractor’s benefit. Specifically, the co-conspirators used nominee borrowers to conceal

the true purpose of the loans, prepared false loandocuments, forged borrower signatures, andfalsely reported the loans as being repaid.

As previously reported, the bank’s former presi-dent pleaded guilty to one count of conspiracyto commit bank fraud and one count of moneylaundering. On September 10, 2003, a third sub-ject, the former bookkeeper of RiverwoodsDevelopment Corporation, pleaded guilty to onecount of bank fraud.

This case is being investigated jointly by theFDIC OIG, the FBI, and the IRS-CI, and is beingprosecuted by the U.S. Attorney’s Office for theDistrict of Minnesota.

Former Bank Employee Pleads Guilty to Bank FraudOn March 3, 2004, following her earlier indict-ment on related charges, a former employee ofSoy Capital Bank, Decatur, Illinois, pleadedguilty to embezzlement. The investigation lead-ing to her guilty plea found that the employeehad embezzled almost $71,000 in funds. Onmore than 100 occasions over a 11⁄2 year period,she obtained funds from bank tellers by falselyrepresenting that the cash was needed to paycustomers who did not receive the properamount of cash from Soy ATM machines.

The employee also defrauded Citizens Commu-nity Bank, where she obtained a branch managerposition after being terminated from employ-ment at Soy Capital Bank. As a service to its cus-tomers, Citizens Community Bank acceptedcertain telephone and utilities payments at thebank, and customers were assured that such pay-ments would be immediately credited to the cus-tomers’ accounts. The telephone and utilitysystem payments were set up through AmericanPayment Systems (APS). The defendant removed$1,000 in funds paid by customers who intendedto pay telephone and utilities bills, hid her activ-ity by altering the bank’s teller machine ticket forAPS payments, wrote over the figures on theteller tape, or sometimes tore the tape, therebyremoving certain transactions.

This case is being investigated by the FDIC OIGand the FBI. Prosecution is being handled by theU.S. Attorney’s Office for the Central District ofIllinois.


Former President of Farmers Bank & TrustPleads Guilty to Bank FraudOn October 31, 2003, following his earlierindictment, the former president of FarmersBank & Trust, Cheneyville, Louisiana, pleadedguilty to one count of making false statements toa financial institution and one count of makingfalse entries in the books and records of a finan-cial institution.

In his guilty plea, the defendant admitted that hecommitted bank fraud by making false entriesand statements on at least 24 loans and applica-tions for loans. He also admitted to forging doc-umentation that falsely showed that these loanswere secured by Farm Service Agency guaranteesand to making false entries on the books,reports, statements, and records of the bank thatmisrepresented borrowers’ total indebtedness tothe bank. To prevent this bank fraud and otherillegal practices from being detected by an auditconducted by the Louisiana Office of FinancialInstitutions and the FDIC, the defendant madeadditional false entries on the records of thebank. He also falsely applied a portion of all of aborrower’s indebtedness to nominee loans.These and other actions were taken to misrepre-sent the borrower’s total indebtedness and toconceal it from the bank board, the FDIC, andthe state bank examiner.

As a result of the defendant’s actions, the banksuffered a loss of over $3 million. On December17, 2002, Farmers Bank & Trust was closed bybank regulators.

This case is being investigated jointly by theFDIC OIG and the FBI and is being prosecutedby the U.S. Attorney’s Office for the Western Dis-trict of Louisiana.

Accountant Indicted for Bank FraudOn December 2, 2003, a federal grand jury in theDistrict of Minnesota returned a 26-countindictment charging a certified public account-ant from North Mankato, Minnesota, with mailfraud, bank fraud, making false statements,counterfeiting a security, pension plan theft, fal-sification of pension plan records, and bank-ruptcy fraud in connection with a $7 millionPonzi scheme and a $1.6 million bank fraudscheme.

The indictment alleged that the defendant’sactions resulted in more than $1 million inlosses for individuals and businesses and morethan $650,000 in losses for three financial insti-tutions. Those institutions include NorthernStar Bank in Mankato, of which the defendantwas a founder; Merchants State Bank of Lewis-ville, which the indictment claims was forced tosell its assets to Farmers State Bank of Madeliabecause of the defendant’s unpaid loans; andAmericana Community Bank in Chanhassen.

The indictment further alleged that the defen-dant started the Ponzi scheme sometime beforeJanuary 1, 1999, by enticing individuals andorganizations to invest millions of dollars withhim by promising their investments would besafe and claiming they would receive a high rateof return. According to the indictment, thedefendant invested only about 30 percent of themoney he received from the investors. Themajority of the funds were used by him for hispersonal benefit, to pay personal lines of credit,and to make lulling payments to other investors.The defendant allegedly lulled investors intobelieving their investment funds had beeninvested by making payments to them fromfunds obtained from other investors and by pro-viding them with statements that purported toshow the status of their account and the pur-ported rate of return the investor obtained.

The grand jury alleged that it was the defen-dant’s Ponzi-type scheme that helped hide hisfraud until November 2001, when he attemptedto file bankruptcy. Through this scheme, indi-vidual investors and organizations sufferedlosses well in excess of $1 million.

In addition to defrauding investors, the indict-ment alleged that the defendant fraudulentlyobtained more than $1.6 million from financialinstitutions, including Northern Star Bank,where he was a director and officer. The defen-dant allegedly misstated his assets and liabilities,substantially overstating his net worth in orderto obtain loans that he used to further his Ponzischeme. Financial institutions suffered losses inexcess of $650,000.

The defendant was also charged with stealingfrom pension plans. The grand jury alleged that


he stole approximately $100,000 from CatalyticCombustion Corporation, Bloomer, Wisconsin,in which he was a 40-percent minority share-holder and the chief financial officer, andapproximately $120,000 from a Mankato archi-tectural firm.

Further, the grand jury alleged that in November2001, when the defendant’s Ponzi scheme was nolonger viable and sustainable, the defendantattempted to declare bankruptcy. The indictmentalso charged him with bankruptcy fraud in con-nection with his November 2001 filing for failingto disclose his repayment of a $500,000 loannearly 5 months prior to his bankruptcy filing.

This case is being investigated jointly by theFDIC OIG, the FBI, and the U.S. Department ofLabor’s Employee Benefits Security Administra-tion, and is being prosecuted by the U.S. Attor-ney’s Office for the District of Minnesota.

Bank Customer Found GuiltyFollowing a 9-day trial in December 2003, a bankcustomer of the First State Bank of Harrah(FSBH), Harrah, Oklahoma, was found guilty onall counts of an indictment charging him withaiding and abetting, conspiracy, and bank fraud.He had been indicted in May 2003 in the WesternDistrict of Oklahoma.

The indictment charged that from September1997 through December 1998, the defendantconspired with the former executive vice presi-dent of FSBH to defraud FSBH by creating aseries of fraudulent nominee loans. The defen-dant recruited nominee borrowers to obtainloans. The loan proceeds from this schemetotaled approximately $800,000 and were

intended to benefit the defendant and the formerexecutive vice president of FSBH.

As previously reported, in August 2002 the for-mer executive vice president of FSBH was sen-tenced in the United States District Court for theWestern District of Oklahoma for his role in thescheme. He was sentenced to serve 5 years’ pro-bation, 180 days’ home confinement, and208 hours of community service; he was alsoordered to pay restitution of $3,529,500.

The investigation of the activities involvingFSBH is being conducted jointly by the FDICOIG and the FBI. The case is being prosecuted bythe U.S. Attorney’s Office, Oklahoma City,Oklahoma.

Bank Customer Pleads Guilty in Check-Kiting SchemeOn December 23, 2003, a Kenton, Ohio, cardealer who was earlier indicted for his role in acheck-kiting scheme at the failed OakwoodDeposit Bank Company of Kenton pleaded guiltyin the Northern District of Ohio to conspiracy tocommit bank fraud and bank fraud. A check-kiteis a fraudulent scheme in which a bank customeruses the time it takes to clear checks to createartificially high balances of non-existent fundsthrough a systemic exchange of checks amongaccounts when, in reality, actual funds do notexist. He further admitted that he engaged in thecheck-kiting scheme in which fictitious balanceswere created in checking accounts and falsecredit was obtained. Over a 3-month period in2001, he wrote approximately $70 million inchecks to a corresponding car dealership. At thesame time, he deposited approximately $72 mil-lion in checks from the corresponding dealer-ship. Losses on the check-kite are currentlyestimated to be over $11 million.

The check-kite investigation is being investigatedby the FDIC OIG and the FBI. Prosecution of thecase is being handled by the U.S. Attorney’sOffice for the Northern District of Ohio, WesternDivision, Toledo.

Loan Officer Pleads Guilty to FraudOn February 6, 2004, a former loan officer at Cit-izens First Bank, Rome, Georgia, pleaded guilty


IG Gianni speaks with members of the IG investigativecommunity at a meeting of the Southwest IG Council inDallas, Texas.

in the U.S. District Court for the Northern Dis-trict of Georgia to a 2-count information charg-ing him with misapplication of bank funds andfalse statements.

In late 1999, the defendant, while serving as aloan officer at Citizens First Bank, misappliedapproximately $300,000 in funds from the line ofcredit of a bank customer to the operatingaccount of another bank customer. During thesame period, the defendant made a false entryinto the records of Citizens First Bank by creatinga fictitious customer and a related $800,000 lineof credit. The defendant continued his scheme ofmisapplying funds from other customer accountsand fictitious accounts to a specific bank cus-tomer and, at one point, exposed the bank toover $7 million in uncollateralized outstandingloans. Eventually the customer, who claimed noknowledge of the defendant’s unauthorizedactions, worked with bank officials to collateral-ize or otherwise pay off his outstanding debt.

This case is being investigated jointly by theFDIC OIG and the FBI and is being prosecutedby the U.S. Attorney’s Office for the NorthernDistrict of Georgia.

Restitution and Other DebtOwed the FDICFormer CEO of Sunbelt Savings Charged in21-Count IndictmentOn February 24, 2004, a federal grand jury in theNorthern District of Texas returned a 21-countindictment charging the former CEO of the nowdefunct Sunbelt Savings and Loan of Dallas,Dallas Texas, with six counts of mail fraud, sevencounts of false statements, seven counts of con-cealing assets from the FDIC, and one count ofmoney laundering. The indictment also includesa $2,019,964 cash forfeiture allegation.

According to the indictment, since July 1993, theformer CEO engaged in a scheme to defraud theFDIC of its payments under a $7.5 million resti-tution order and an $8.5 million civil judgment.The former CEO pleaded guilty in 1990 to fed-eral fraud charges in connection with the col-lapse of Sunbelt, which lost approximately$2 billion during the 1980s. In the criminal case

against him, the former CEO was ordered to payback $7.5 million to the FDIC and $8.5 millionin a civil judgment. His plea agreement requiredhim to relinquish a portion of his income torepay the obligation, with the percentageincreasing as the income increases.

Investigation leading to the indictment devel-oped evidence that the former CEO allegedlycreated a trust that he used to conceal earningsfrom his business; pay his personal expenses,legal and accounting fees; and hide incomepayable to him by causing it to be paid directlyto the trust. The indictment also alleged that theformer CEO made false monthly reports to theU.S. Probation Office to conceal hundreds ofthousands of dollars from the FDIC and avoidthe requirements of the FDIC restitution order.

This case is being investigated by the FDIC OIG.An attorney from the FDIC Legal Division hasbeen designated a Special Assistant U.S. Attor-ney, assigned to the U.S. Attorney’s Office for theNorthern District of Texas, and is prosecutingthe case.

Former Debtor Pleads Guilty to Defrauding the FDICOn October 20, 2003, an FDIC debtor fromConcord, New Hampshire, pleaded guilty in theU.S. District Court for the District of NewHampshire to two counts of providing falsefinancial information to the FDIC for the pur-pose of settling a $4.5 million judgment againsthim. The FDIC obtained the judgment based onthe debtor’s failure to repay two loans from theformer Dartmouth Bank, which failed in 1991.Relying on the personal financial statement thedebtor provided to the FDIC indicating hisinability to repay loans, the FDIC sold the$4.5 million judgment to a third party for$160,000.

In his guilty plea, the debtor admitted he pro-vided false financial statements and a false affi-davit of his financial condition to the FDIC. Healso admitted that he hid several hundred thou-sand dollars worth of assets in companies he hadincorporated in Nevada. The money used by thethird party to purchase the judgment had actu-ally been withdrawn from a bank account of one


of the secret Nevada companies by the debtorhimself.

This investigation was initiated based on a refer-ral from the FDIC Legal Division, and the DRRDallas office is assisting in the preparation of twosentencing hearings. Prosecution of the case isbeing handled by the U.S. Attorney’s Office forthe District of New Hampshire.

FDIC Debtor Returned to Prison AfterViolating Terms of Probation by Concealing AssetsOn October 16, 2003, an FDIC debtor fromDublin, Ohio, was found to have violated twoconditions of his supervised release and wasplaced under arrest. The judge ordered thedefendant to serve two 4-year terms in prison, torun consecutively.

In January 1987, the debtor pleaded guilty tothree counts of mail fraud and extortion relatedto a fraudulent scheme to induce ProgressiveSavings and Loan (Progressive) to loan thedebtor’s company $5.7 million. As part of hissentence, the debtor was ordered to pay Progres-sive, and subsequently the FDIC as receiver, asum of $2 million.

The FDIC investigation found that the debtorowned and operated five businesses that wereinvolved in selling real estate and financing thepurchases. The debtor stated on his monthlyfinancial reports to the U.S. Probation Office thathe had no business holdings or real estate, when,in fact, he reported to a local bank that his enti-ties owned real estate with a combined equity of$1.9 million. The debtor used funds from one ofthese businesses to pay the mortgage on his per-sonal residence. He also declared on his financialreports that he had a monthly income of $628,when, in fact, he transferred at least $200,000during a 3-year period from his businessaccounts to a personal checking account.

In his ruling the judge stated that the debtor hadshrewdly manipulated legal concepts to achieveillegal results and that he had used every deviceavailable to avoid repaying his restitutionobligation.

This case was investigated by the FDIC OIG. Thecase was prosecuted by the U.S. Attorney’s Officefor the Southern District of Georgia.

Misrepresentations RegardingFDIC Insurance or AffiliationBroker Dealers and Former President ofHeritage Savings Bank Charged in 88-CountIndictment On March 24, 2004, a federal grand jury in theNorthern District of Dallas, Dallas, Texas,returned an 88-count superseding indictmentagainst the two co-owners of San Clemente Secu-rities, Inc. (SCS) and United Custodial Corpora-tion (UCC); a supervisory broker at SCS; and theformer President of Heritage Savings Bank (Her-itage), Terrell, Texas.

The 88-count superseding indictment chargedthe defendants from SCS and UCC with conspir-acy, securities fraud, investment advisor fraud,making false statements to financial institutions,wire fraud, mail fraud, bank fraud, and obstruct-ing the examination of a financial institution.The former president of Heritage was chargedwith conspiracy, assisting the bank fraud, makingfalse entries in books and records of a financialinstitution, and obstructing the examination of afinancial institution.

Also, the defendants from SCS and UCC arecharged with operating a Continuing CriminalEnterprise, in violation of 18 U.S.C. 225. Thisstatute, also known as the “Financial KingpinStatute,” states that whoever organizes, manages,or supervises a continuing financial crimesenterprise and receives $5 million or more ingross receipts from such enterprise during a24-month period, shall be fined not more than$10 million and imprisoned for a term of not lessthan 10 years up to a possible sentence of lifeimprisonment. This is the first time a defendantin the Northern District of Texas has beencharged with violating this statute.

This indictment expanded the charges that werefiled in August 2003 by alleging that all fourdefendants operated the conspiracy thatdefrauded numerous financial institutionsthroughout the country, as well as numerous


individual investors, from August 1995 to April2001. Defendants schemed to defraud the vari-ous financial institutions and individualinvestors by inducing them to enter into invest-ment contracts to purchase Certificates ofDeposits (CDs) and other securities issued bythe Federal Home Loan Mortgage Corporationand the Federal National Mortgage Association,which would be held and managed by UCC.

The former president of Heritage, in concertwith the defendants, allegedly defrauded thebank by causing it to purchase investments fromSCS from which they subtracted substantialundisclosed fees and commissions ranging from3 percent to 57 percent. The former presidentalso made false entries into the books andrecords of Heritage with the specific intent todeceive the bank and conceal the fraud.

As part of their scheme, the defendants allegedlyfalsely and fraudulently failed to advise investorsof the following:

■ SCS and UCC would subtract undisclosedfees and commissions from the amountinvested.

■ Only part of their investment in any CD wasfederally insured.

■ The investment confirmations and statementsthey sent to investors were false and inten-tionally misleading.

■ Money paid to investors when they liquidatedan investment prior to maturity was actuallymoney invested by another investment or byother persons.

■ The investors had no ownership in any invest-ment, which would be purchased in UCC’sname.

■ In 1997, SCS, along with its co-owners, hadbeen banned by the National Credit UnionAssociation from doing business with feder-


Electronic Crimes Team

As computers continue to become a major part of the business operational environment,the risk of electronic-related fraud has increased. The OIG is committed to meet the needsof the FDIC and the banking community to combat electronic fraud. As a result, the OIGestablished an Electronic Crimes Team (ECT) and computer forensic laboratory, housed inWashington, D.C., to investigate unauthorized computer intrusions and computer-relatedfraud impacting FDIC operations, and to provide computer forensic support to OIG investi-gations. The ECT is staffed with a Special Agent in Charge, four special agents, and aforensic computer specialist, all of whom have been fully trained as Seized Computer Evi-dence Recovery Specialists.

The ECT coordinates with the Division of Information Resources Management andaffected FDIC program offices in investigating computer-related crimes. In providing com-puter forensic support to OIG investigations, the ECT prepares search warrants for elec-tronic media, provides on-site support for serving such warrants, conducts laboratoryanalysis of the evidentiary content of electronic media seized during criminal investiga-tions, and provides technical advice when computer media are used to perpetrate tradi-tional crimes. The ECT attends all bank closings where fraud is suspected and retrievescomputer media for evidentiary purposes. The ECT has also worked with the Division ofResolutions and Receiverships (DRR) in developing guidelines to be followed at bank clos-ings for the purpose of preserving evidence. The ECT has also been assisting DRR and theLegal Division as they research the feasibility of creating computer forensic capability. ECTagents receive intensive training regarding searching, seizing, and analyzing computersystems and evidence encountered during the course of an investigation and during exe-cution of search warrants. The ECT has made training presentations to FDIC staff at vari-ous conferences and meetings to make them aware of the ECT capabilities and to outlineprocedures that should be followed to preserve computer evidence.

ally insured credit unions because of theirdeceptive practices.

In addition, on December 17, 2003, an SCS bro-ker was indicted by the federal grand jury for theNorthern District of Dallas and charged withone count of false statements. In January 1997the broker allegedly made a false statement toAmarillo Federal Credit Union (Amarillo) inorder to influence the decision to purchase CDsthrough SCS, in that he falsely represented toAmarillo that no fees would be charged againstits invested principal. The fee charged to Ama-rillo was $2,344.

The case is being investigated by the FDIC OIGand the FBI. The case is being prosecuted by theU.S. Attorney’s Office for the Northern Districtof Dallas. The investigation was initiated basedon a referral from the Division of Supervisionand Consumer Protection.

Other HighlightsSioux Falls, South Dakota, ExaminersReceive First OIG AwardsSioux Falls examiners Brian Kerfield and JeffChristensen were recently recognized by theOIG’s Office of Investigations for their work ona case involving the fraudulent acts of two for-mer Minnesota Bank employees. In part becauseof the examiners’ work, the two former bankemployees eventually pleaded guilty to theirwrongdoing and received criminal sentences.

Special Agent John Crawford Receives Letter of Commendation from FBI Director On December 15, 2003, OIG Special Agent JohnCrawford received from the Special Agent-in-Charge J. Mack, Cleveland, Ohio, a letter of com-mendation signed by Robert S. Mueller, III,Director of the FBI. The commendation recog-nizes Special Agent Crawford for his exceptionalwork in the joint investigation with the FBI andIRS-CI of an embezzlement of over $48 millionfrom Oakwood Deposit Bank Company, Oak-wood, Ohio.


(l to r) Kansas City Regional Director Ron Bieker; Sioux Falls Examiner Jeffrey Christensen (award recipient); AssistantIG for Investigations Samuel Holland; Deputy Regional Director Thomas Dujenski; and Sioux Falls Examiner Brian Ker-feld (award recipient).

John Crawford receives commendation from the FBI (l to r: J. Crawford and J. Mack).

OIG Acknowledges Assistance onOakwood Deposit Bank Company CaseAssistant Inspector General Samuel M. Hollandthanked Special Agents from the FBI and IRS-CI, and the Assistant U.S. Attorney ThomasKarol for their outstanding contribution anddedication to the OIG during the investigationof Oakwood Deposit Bank Company.


FBI Special Agent Thomas Bailey receives commenda-tion from Samuel Holland.

IRS-CI Special Agent Jeffrey Paul receives commenda-tion from Samuel Holland.

Assistant U.S. Attorney Thomas Karol receives commen-dation from Samuel Holland.

and approximately $1.7 million in total fines,restitution, and other monetary recoveries.

■ Performed 14 policy analyses on proposedFDIC directives or proposed revisions todirectives. We raised four policy issues regard-ing the draft directives. FDIC accepted oursuggestions for the following: Personnel Suit-ability Program, Corporation Leave Policy, andWireless Telephone and Pager Assignments,Usage, Safeguards, and Asset Management. Wealso offered numerous suggestions tostrengthen or clarify all the draft policies.

■ Met with the House Financial Services Com-mittee, Subcommittee on Oversight andInvestigations and testified at a hearing heldby the Subcommittee on Oversight of theFDIC. In his testimony, the IG addressed therole of the OIG at the FDIC and provided hisassessment of the management and perform-ance challenges facing the Corporation.

■ Hosted a meeting of the Federal InformationSecurity Management Act (FISMA) WorkingGroup. This group emanated from the FederalAudit Executive Council—a council made upof the heads of audit organizations in govern-ment agencies. More than 40 representativesfrom government agencies attended the ses-sion, including representatives from the U.S.General Accounting Office (GAO) and theOffice of Management and Budget (OMB).


OIG Organization—Pursuing OIG Goals

Our office continued to aggressively pursue ourfour main OIG goals and related objectives dur-ing the reporting period. These goals and objec-tives form the blueprint for our work. While theaudit, evaluation, and investigative workdescribed in the earlier sections of this reportdrives our organization and contributes veryfundamentally to the accomplishment of ourgoals, a number of other activities and initiativescomplement and support these efforts andenhance the achievement of our goals.

Value and Impact: OIG products will add value byachieving significant impact related to addressingissues of importance to the Chairman, the Con-gress, and the public. This goal means that wecontribute to ensuring the protection of insureddepositors, safety and soundness of FDIC-supervised institutions, protection of consumerrights, achievement of recovery to creditors ofreceiverships, and effective management of agencyresources. Efforts in support of this goal and relatedobjectives include the following:

■ Issued 17 audit and evaluation reports con-taining questioned costs of $4,288,198 and51 nonmonetary recommendations. As dis-cussed earlier in this report, these reportsaddress the management and performancechallenges facing the Corporation.

■ Conducted investigations that resulted in15 indictments/informations; 9 convictions;

■ Provided to the Chief Financial Officer theOIG’s assessment of the most significantmanagement and performance challengesfacing the Corporation, in the spirit of theReports Consolidation Act of 2000. The Actcalls for these challenges to be included in theFDIC’s 2003 consolidated performance andaccountability report and the Corporationdid so by including them in the Corporation’sAnnual Report.

■ Provided advisory comments to the Divisionof Finance on drafts of the FDIC StrategicPlan and 2004 Annual Performance Plan. Weacknowledged continuing efforts to improvethe plans and offered observations and sug-gestions. These included (1) consideringimproving the linkage of the GovernmentPerformance and Results Act annual goal-setting process to the separate CorporatePerformance Objectives process and theFDIC’s activities related to the government-wide initiatives in the President’s Manage-ment Agenda; (2) updating the strategic plansection on “FDIC and the Banking Industry”to reflect additional events warranting inclu-sion; and (3) including specific performancegoals for key corporate initiatives in humancapital, corporate cost efficiencies, andinformation technology (IT) and securityissues.

■ Responded to the Chief Financial Officer’srequest for comments on a draft of theFDIC’s 2003 Annual Report. Our commentswere advisory in nature and included sug-gestions for the report regarding (1) recog-nition of the OIG evaluation function,(2) presentation of management and per-formance challenges, and (3) information inthe performance and controls sections of thereport.

■ Established involvement with the FDIC’sAsset Servicing Technology EnhancementProject (ASTEP). ASTEP is intended toimplement an integrated solution for meetingthe FDIC’s current and future asset servicingresponsibilities based on industry standards,best practices, and adaptable technology. TheOIG is not part of the ASTEP team, but theDivision of Resolutions and Receiverships


(DRR) is providing us with regular statusinformation throughout the course of theproject. We will monitor ASTEP progress andplan to conduct one or more audits duringthe life of the ASTEP process.

■ Shared the OIG’s perspectives on the Corpora-tion’s risk management program and activitieswith the Office of Enterprise Risk Manage-ment (OERM). We provided briefing materialsfor OERM’s consideration that addressed suchtopics as the definition of enterprise risk man-agement, its benefits, and key steps and chal-lenges in its implementation.

■ Monitored the Corporation’s New FinancialEnvironment (NFE) development efforts byattending NFE Steering Committee meetingsand reviewing copies of NFE risk evaluationreports from OERM.

■ Participated in an advisory capacity at meet-ings of the Audit Committee’s IT SecuritySubcommittee, CIO Council, and the Divi-sion of Information Resources Management(DIRM) Transformation Advisory Group.

■ Coordinated with DIRM and agency officialsto alert them to a rise in cases involving a mis-use of agency computers.

■ Served on the Steering Committee for theComprehensive Human Resources Informa-tion System and for the Corporation’s laptopcomputer replacement project.

Communication and Outreach: Communicationsbetween the OIG and the Chairman, the Congress,employees, and other stakeholders will be effective.We seek to foster effective agency relations andcommunications, congressional relations and com-munications, OIG employee relations and com-munications, and relations and communicationswith other OIG stakeholders. Efforts in support ofthis goal and related objectives include thefollowing:

■ Participated in a President’s Council onIntegrity and Efficiency (PCIE) Roundtablediscussion with other OIGs on the variousmeasures and processes used by OIGs tomeasure their performance. Information on

strategic and annual goals, performance meas-ures and targets for about 10 OIGs were dis-played, distributed, and discussed. GaryGotherman, the Deputy Assistant InspectorGeneral for Quality Assurance, discussedFDIC OIG performance measures. We activelyparticipate in the monthly roundtables,including a presentation by the AssistantInspector General for Quality Assurance andOversight, Robert McGregor, at the NovemberRoundtable, on our client survey process.

■ Met with the Senior Counsel for the HouseFinancial Services Committee and otherCommittee staff members. Among the topicswe discussed were the following: The USAPATRIOT Act, Bank Secrecy Act (BSA), Busi-ness Continuity Planning, Federal FinancialInstitutions Examination Council, Gramm-Leach-Bliley Act, Prompt Corrective Actionprovisions, controls over expenditures relatedto the Goodwill cases, and our 2004 Assign-ment Plan.

■ Testified before the Subcommittee on Govern-ment Efficiency and Financial Management,Committee on Government Reform, U.S.House of Representatives regarding the 25thanniversary of the Inspector General Act. AsVice Chair of the PCIE, Inspector General(IG) Gianni shared a bit of IG history, high-lighted the IG community and its accomplish-ments, and discussed possible legislativechanges that could refine the Act.

■ Hosted a delegation of government officialsfrom 11 African countries who were invited tothe United States under the auspices of theState Department’s International VisitorProgram. Such programs are designed to intro-duce participants to the structure of trans-parency, accountability, and ethical systems ingovernment and to highlight the tools used tocombat corruption. We briefed the delegationon the role and work of the federal IG commu-nity and the FDIC OIG, in particular.

■ Hosted an Open House Outreach for theSenior Executives of the FDIC to celebrate the25th Anniversary of the Inspector General Actof 1978. The Open House allowed us a chanceto celebrate the occasion and an opportunityfor others in the Corporation to better under-stand the role and mission of the FDIC OIG.

OIG Organization—Pursuing OIG Goals 43

OIG Dallas staff Leon Wellons and Rhonda Bunte on left in photo during outreach session with Dallas FDIC corporatestaff.

IG Gianni welcomes representatives from African countries.

■ The OIG provided briefing materials to thenewest FDIC Director, Thomas J. Curry, con-firmed by the U.S. Senate on December 9,2003, to familiarize him with the mission andwork of the OIG at the FDIC.

■ Conducted presentations on strategies foraccelerating financial reporting. Beginningwith the current fiscal year, many federalagencies will be required to complete auditedfinancial statements within 45 days after thefiscal year-end. Previously, the requirementwas about 5 months after fiscal year-end. TheOIG’s Ross Simms is the Chair of the Acceler-ated Financial Reporting Working Group for-mulated by the PCIE’s Federal AuditExecutive Council to assist the audit commu-nity in this initiative. His group worked withthe Chief Financial Officers Council andorganized a governmentwide forum on accel-erated financial reporting challenges andsolutions. Mr. Simms pursued other relatedactivities, including authoring a white paperand making presentations at training forumsto promote accelerated financial reportingbest practices.

■ Spoke at and/or participated in a number ofprofessional meetings and conferences,including the following: Treasury Board ofCanada Conference for the Heads of InternalAudit; National Intergovernmental AuditForum Meeting; the Institute for InternalAuditors (IIA) International CommitteeMeetings; Accountants’ Roundtable; South-western Region Inspectors General CouncilMeeting; IIA Auditing in GovernmentConference: Changing World—ChangingSolutions; Joint Financial ManagementImprovement Program Conference: Improv-ing Performance with Useful Financial Infor-mation; and PCIE/ECIE Inspectors GeneralConference 2004: Returning America’s Invest-ment in the IGs.

■ Attended the FDIC-sponsored outreachmeeting of the Financial and Banking Infor-mation Infrastructure Committee and theFinancial Services Sector Coordinating Coun-cil in Charlotte, North Carolina. AssistantInspector General for Audits, Rus Rau,attended the meeting, the theme of which was

Protecting the Financial Sector—A Public andPrivate Partnership. The sessions examinedvarious aspects of the security of the U.S.financial sector and addressed steps thatbanks can take to protect themselves.

■ Contributed to successful “Groundhog JobShadow Day” event. Members of the OIG’sDallas staff participated in the Groundhog JobShadow Day program, sponsored jointly bythe FDIC and Junior Achievement. This ini-tiative was dedicated to engaging high schoolstudents in the world of work and demon-strating the connection between academicsand careers. Charles Chisolm, a Special Agentin our Dallas Office of Investigations, emceedthe Corporation’s overall program. RhondaBunte from our Office of Audits presented anoverview of the OIG and stressed the impor-tance of education as students prepare forfuture jobs. OIG auditors and investigatorsalso made presentations to a smaller group ofstudents.

■ Collaborated with the GAO on the Comptrol-ler General’s team that is conducting presen-tations on the Government AuditingStandards, commonly referred to as The Yel-low Book. Mr. Ross Simms from the OIG is onthe team that is part of an outreach effort to


OIG’s Ross Simms is collaborating with GAO to shareYellow Book expertise with others in the government.

provide federal, state, and local auditing oraccountability professionals with technicalsupport in applying generally accepted gov-ernment auditing standards. Mr. Simms par-ticipated in a presentation to the Departmentof Interior OIG. Presentations are also sched-uled for conferences and meetings of profes-sional organizations such as the Associationof Government Accountants.

■ Presented information on FISMA issues tothe PCIE’s Information Technology Round-table. At the session, Assistant InspectorGeneral for Audits, Rus Rau, spoke to repre-sentatives from federal Offices of InspectorGeneral, the OMB, the National Institute ofStandards and Technology, and the GAO on“An IG Perspective of the Federal InformationSecurity Management Act.” Mr. Rau alsomade a FISMA presentation to the Washing-ton Chapter of the Information SystemsAudit and Control Association and spoke ofinformation assurance auditing to theInstitute for Defense and GovernmentAdvancement.

■ Attended a PCIE Roundtable meeting focusedon “Examining the OIG Role in the Applica-tion of the OMB Program Assessment RatingTool (PART).” The PART provides a consis-tent approach to rating programs across thefederal government—although it has notbeen applied to the FDIC. It is designed tofocus attention on specific program perform-ance and demonstrates OMB support formoving the theory of the Government Perfor-mance and Results Act to practice.

■ Acknowledged the efforts of FDIC examina-tion staff and law enforcement officials whohave helped us bring about successfulinvestigations.

■ Continued ongoing meetings between theExecutives of the OIG and the FDIC’s Divi-sion and Office Heads in both headquartersand regional offices to foster and sustain suc-cessful cooperation and communication in allaspects of our audit, evaluation, and inves-tigative activities. The Office of Investigationscontinued presentations in lessons learned/

red flags based on its experience with failedinstitutions.

■ Participated in monthly meetings of theInteragency Bank Fraud Working Group.

■ Coordinated with IGs, Assistant InspectorsGeneral for Audits, and Assistant InspectorsGeneral for Investigations of federal financialinstitution regulatory agencies.

■ Continued participation on the Federal AuditExecutive Council, including planning for itsannual conference, chairing the IT SecuritySubcommittee, and participating on the auditissues sub-group.

■ Coordinated with the Corporation’s Office ofLegislative Affairs with respect to the FDICChairman’s and IG’s testimony before theSubcommittee on Oversight and Investiga-tions, House Financial Services Committee,on Oversight of the FDIC.

■ Completed an external peer review of theDepartment of Commerce OIG.

■ Provided a briefing and tour of the OIG’saudit computer lab to other OIGs.

■ Provided weekly highlights reports to theFDIC Chairman to keep him informed of sig-nificant OIG events.

■ Focused multiple efforts on OIG employees:Selected a new diversity coordinator fromamong OIG staff, planned for new membersto serve on the IG’s Employee AdvisoryGroup to provide feedback to the IG on theworking conditions and business processes ofthe office, and worked with a consultant todevelop and administer an OIG employeesurvey instrument.

■ Planned for the OIG’s sixth client survey tosolicit feedback from corporate management.

Human Capital: The OIG will align its humanresources to support the OIG mission. We aim toenhance our workforce analysis and planning,competency investments, leadership development,and the development of a results-oriented, high-



OIG’s Bob McGregor highlights features of the OIG’sStrategic Plan at Fall 2003 OIG conference.

IG acknowledges OIG staff’s federal service. Shown hereJoan Green, Atlanta OIG, with IG Gianni.

OIG staff actively participates in OIG’s Fall 2003 Confer-ence. Seen here top to bottom, Scott Miller, MikeRexrode, Allan Sherman.

has made in adding value and being attentiveto our clients. The Division Directors fromthe Division of Supervision and ConsumerProtection, DRR, and the Division of Insur-ance and Research updated us on the majorinitiatives and issues of their offices andoffered perspectives on corporate challengesgoing forward. A representative from theLegal Division provided our staff with animportant Ethics briefing. Representativesfrom the Corporation also provided informa-tion on the Corporate University and careerdevelopment resources.

performance culture. Efforts in support of this goaland related objectives include the following:

■ Held an office-wide conference in October,the theme of which was “What’s Next.” Staffcame together to discuss the OIG’s mission,vision, core values, and the strategic goals andobjectives designed to realize them. Other ses-sions covered topics of interest in such areasas Communications, Diversity, Career Man-agement, and the OIG’s CompetenciesProject. FDIC Vice Chairman Reich providedinsightful comments on the progress the OIG

■ Issued an exposure draft Guide for Develop-ing OIG Core Competency Skills and com-pleted a study of the trends in OIG training.

■ Developed a strategy for enhancing feedbackmechanisms in the OIG.

■ Held meetings with the FDIC MentoringCoordinator to obtain information and gath-ered information from other governmentagencies with mentoring programs for use ina planned OIG program.

■ Provided our draft Strategic Plan to stake-holders as part of our process to update theOIG Strategic Plan for FY 2004–2008. Weprovided our draft plan to Vice ChairmanReich, Deputies to the Chairman, Divisionand Office Directors, and selected Congres-sional committees. We place great importancein our work being responsive, relevant, andfully aligned with our mission and appreci-ated comments received.

■ Finalized the OIG Strategic Plan for FY2004–2008 and posted it on our Web site athttp://www.fdicig.gov. The OIG Strategic Plansets forth the broad goals and objectives forcarrying out the OIG’s mission of promotingeconomy, efficiency, and effectiveness, and

protecting against fraud, waste, and abuse inFDIC programs and activities. Although pre-pared independently from the Corporation’splanning process, the OIG plan is linked tothe Corporation’s mission and strategic goalsand demonstrates our commitment to apply-ing the principles of the Government Perfor-mance and Results Act to OIG operations.The plan reflects our emphasis on (1) addingvalue by achieving impact on issues of signifi-cance to the Corporation and our otherstakeholders; (2) fostering effective commu-nications with our stakeholders; (3) aligninghuman resources to support the OIG mission;and (4) managing our resources effectively.

■ Issued FY 2004 Performance Plan and postedit on our Web site at http://www.fdicig.gov.The performance plan identifies 41 specificannual performance goals designed to help usachieve our strategic goals and objectives. Inaddition, the plan reflects improved linkagesto the FDIC Strategic Plan, the OIG HumanCapital Strategic Plan, the OIG-identifiedManagement and Performance ChallengesFacing the FDIC, and the OIG Office ofAudits’ Assignment Plan.


Vice Chairman Reich addresses OIG staff at Fall 2003conference.

Student Intern Assists OIGJeanette Staton is a senior at the University of the Dis-trict of Columbia and is majoring in journalism and massmedia. Jeanette contributed to the OIG by assisting theIG with many activities of the PCIE, particularly datacollection and analysis for the Progress Report to thePresident.

■ Engaged in the Corporation’s CorporateManager/Executive Manager program forgrade level 15 OIG staff by redefining theresponsibilities for a number of OIG staff inthose positions. Also undertook hiring effortsto replenish the skills and expertise of depart-ing FDIC OIG employees and infuse the OIGwith new skills and talents to carry out theOIG mission. Sponsored participation of anOIG employee in leadership training held forthe PCIE by the Federal Executive Institute inCharlottesville, Virginia.

Productivity: The OIG will effectively manage itsresources. We have taken steps to contain OIG costsand undertook several initiatives to ensure thatour processes are efficient and that our productsmeet quality standards. Efforts in support of thisgoal and related objectives include the following:

■ Formulated OIG Budgets for Fiscal Years2004–2005. The OIG’s fiscal year 2004 appro-priation, totaling $30.1 million, was signedinto law by the President on January 23, 2004,Public Law 108-199. This budget supports areduced authorized staffing level of 168, or 22fewer staff than authorized in fiscal year 2003.The OIG reached the reduced staffing levelslast year through use of the corporate buyoutprogram, early retirement opportunities, anda reduction-in-force. The proposed fiscal year2005 OIG budget of $29.9 million wasincluded in the President’s budget that wastransmitted to the Congress on February 2,2004. The budget will support an authorizedstaffing level of 160, a further reduction of 8

authorized staff (5 percent) from fiscal year2004. The budget must also absorb higherprojected expenses for salaries, employee ben-efits, and other costs that will increase due toinflation. This will become the ninth consecu-tive year OIG budgets have decreased afteradjusting for inflation.

■ Held Office of Audits training to ensure qual-ity work related to the following: the newGovernment Auditing Standards (YellowBook) issued by the GAO, OIG reporting, andTeamMate—an essential automated worktool used by our auditors and evaluators inconducting their assignments.

■ Redesigned the OIG Web Page http://www.fdicig.gov by adding features that will be help-ful to our FDIC and congressional clients aswell as other users. The new site provides aquick reference to the latest OIG news by fea-turing a regularly updated list of publiclyreleased reports, the semiannual report, andother information. Also, the site has a searchengine that will help users find OIG informa-tion on various topics, including publiclyavailable audit reports dating back to 1998.

■ Continued developing an executive informa-tion system to improve the efficiency of OIGmanagement oversight of internal operationsand drafting an OIG IT Plan to guide internalIT priorities and ensure efficient and secureuse of OIG IT resources.

■ Engaged in a major records managementeffort wherein large quantities of the OIG’saudit and evaluation-related paper files werereplaced with electronic files in the interest ofstreamlining records and facilitating recordstorage.

■ Completed internal quality control reviews oftwo audit/evaluation directorates and theOffice of Audits’ continuing professional edu-cation efforts and noted no material instancesof noncompliance.

■ Revised Office of Investigations policies toupdate and keep current with PCIE guide-lines and recent Department of Justice guid-ance for law enforcement officers.


OIG’s records management initiative transfers thousands of paperfiles to electronic format for increased efficiency. Pictured here left toright: contractor employee Marvin Brown and Office of Audits’ JulioSantos.


OIG Counsel Activities

(October 2003–March 2004)

The Mission of the Office of Counsel

The Office of Counsel provides independent legal advice and assistance to the Inspector General and the staff of the OIG. TheOffice litigates personnel and other cases; provides advice and counsel on matters arising during the course of audits, inves-tigations, and evaluations, including reviewing reports for legal sufficiency; manages the OIG’s Ethics process; reviews, ana-lyzes, and comments on proposed or existing regulations or legislation, including banking legislation and implementingregulations; communicates and negotiates with other entities on behalf of the OIG; responds to Freedom of Information Actand Privacy Act requests and appeals; prepares and enforces subpoenas for issuance by the Inspector General; and coordi-nates with the Legal Division, the Department of Justice, and other agency and governmental authorities. Examples include:

Litigation Counsel’s Office is representing the OIG in hearings before the Equal Employment OpportunityCommission and before the District Court for the District of Columbia. The Office of Counsel iscurrently involved in 22 litigation matters that are awaiting further action by the parties or rul-ings by the court or other adjudicatory bodies.

Advice and Counseling Counsel’s Office provided advice and counseling, including written opinions, on issues involv-ing closed bank matters and bank supervision, the Bank Secrecy Act, OIG Hotline complaints,administrative costs and security practices for receiverships, investigative matters, contractinterpretations, and various ethics-related matters. In addition, Counsel’s Office provided com-ments relative to the legal accuracy and sufficiency of more than eight audit and evaluationreports.

Legislation/Regulation During this reporting period, Counsel’s Office reviewed one proposed formal FDIC regulation. Review The office also commented on six proposed or final directives and various policies.

Subpoenas Counsel’s Office prepared four subpoenas for issuance by the Inspector General during thisreporting period.

Freedom of Information Counsel’s Office responded to five requests under the Freedom of Information Act.and/or Privacy Act

Office of Management

and Congressional Relations

Office of Quality

Assurance and Oversight

Assistant Inspector GeneralRobert L. McGregor

Assistant Inspector GeneralRex Simmons

Counsel to the

Inspector General

Fred W. Gibson

Office of Audits

Assistant Inspector GeneralRussell Rau

Office of Investigations

Assistant Inspector GeneralSamuel M. Holland

Inspector General

Gaston L. Gianni, Jr.

Deputy Inspector General

Patricia M. Black

OIG Organizational Chart


Title Name Telephone Number

Inspector General Gaston L. Gianni, Jr. 202-416-2026

Deputy Inspector General Patricia M. Black 202-416-2474

Counsel to the Inspector General Fred W. Gibson 202-416-2917

Assistant Inspector General for Audits Russell Rau 202-416-2543Deputy Asst. Inspector General Stephen Beard 202-416-4217for AuditsDeputy Asst. Inspector General Sharon Smith 202-416-2430for Audits

Assistant Inspector General for Samuel Holland 202-416-2912Investigations

Assistant Inspector General for Rex Simmons 202-416-2483Management and Congressional Relations

Assistant Inspector General for Quality Robert McGregor 202-416-2501Assurance and Oversight

Table 1: Significant OIG Achievements

(October 2003–March 2004)

Audit and Evaluation Reports Issued 17Questioned Costs and Funds Put to Better Use $4.3 millionInvestigations Opened 33Investigations Closed 31OIG Subpoenas Issued 4Convictions 9Fines, Restitution, and Monetary Recoveries $1.7 millionHotline Allegations Referred 25Proposed Regulations and Legislation Reviewed 1Proposed FDIC Policies Reviewed 14Responses to Requests and Appeals under the

Freedom of Information Act 5

Table 2: Nonmonetary Recommendations

October 2001–March 2002 68

April 2002–September 2002 73


April 2003–September 2003 103


Points of Contact

19

36 36

22

2627

17

20

31

17

0

5

10

15

20

25

30

35

40

Audits and Evaluations Investigations

10/01 – 3/024/02 – 9/0210/02 – 3/034/03 – 9/0310/03 – 3/04

Figure 1: Products Issued and Investigations Closed

1.6

2.1

1.26 1.3

4.3

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0Audits and Evaluations

10/01 – 3/024/02 – 9/0210/02 – 3/034/03 – 9/0310/03 – 3/04

Figure 2: Questioned Costs/Funds Put to Better Use

(in millions)

0

100

200

300

400

500

600

700

800

900

10/01 - 03/02 4/02 - 09/02 10/02 - 03/03 4/03 - 09/03 10/03 - 03/04

536

820

26.268.1

1.7

Figure 3: Fines, Restitution, and Monetary Recoveries

Resulting from OIG Investigations (in millions)


Reporting Terms and Requirements

Index of Reporting Requirements—Inspector General Act of 1978,as amended

Reporting Requirement Page

Section 4(a)(2): Review of legislation and regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Section 5(a)(1): Significant problems, abuses, and deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–27

Section 5(a)(2): Recommendations with respect to significant problems, abuses, and deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–27

Section 5(a)(3): Recommendations described in previous semiannual reports on which corrective action has not been completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Section 5(a)(4): Matters referred to prosecutive authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Section 5(a)(5) and 6(b)(2): Summary of instances where requested information was refused . . . . . . 59

Section 5(a)(6): Listing of audit reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Section 5(a)(7): Summary of particularly significant reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–27

Section 5(a)(8): Statistical table showing the total number of audit reports and the total dollar value of questioned costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Section 5(a)(9): Statistical table showing the total number of audit reports and the total dollar value of recommendations that funds be put to better use . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Section 5(a)(10): Audit recommendations more than 6 months old for which no management decision has been made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Section 5(a)(11): Significant revised management decisions during the current reporting period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Section 5(a)(12): Significant management decisions with which the OIG disagreed . . . . . . . . . . . . . . . 59


Reader’s Guide to InspectorGeneral Act Reporting TermsWhat Happens When Auditors IdentifyMonetary Benefits?Our experience has found that the reporting ter-minology outlined in the Inspector General Actof 1978, as amended, often confuses people. Tolessen such confusion and place these terms inproper context, we present the followingdiscussion:

The Inspector General Act defines the terminol-ogy and establishes the reporting requirementsfor the identification and disposition of ques-tioned costs in audit reports. To understand howthis process works, it is helpful to know the keyterms and how they relate to each other.

The first step in the process is when the auditreport identifying questioned costs1 is issued toFDIC management. Auditors question costsbecause of an alleged violation of a provision of alaw, regulation, contract, grant, cooperativeagreement, or other agreement or documentgoverning the expenditure of funds. In addition,a questioned cost may be a finding in which, atthe time of the audit, a cost is not supported byadequate documentation; or, a finding that theexpenditure of funds for the intended purpose isunnecessary or unreasonable.

The next step in the process is for FDIC manage-ment to make a decision about the questionedcosts. The Inspector General Act describes a“management decision” as the final decisionissued by management after evaluation of thefinding(s) and recommendation(s) included inan audit report, including actions deemed to be

necessary. In the case of questioned costs, thismanagement decision must specifically addressthe questioned costs by either disallowing or notdisallowing these costs. A “disallowed cost,”according to the Inspector General Act, is a ques-tioned cost that management, in a managementdecision, has sustained or agreed should not becharged to the government.

Once management has disallowed a cost and, ineffect, sustained the auditor’s questioned costs,the last step in the process takes place which cul-minates in the “final action.” As defined in theInspector General Act, final action is the comple-tion of all actions that management has deter-mined, via the management decision process, arenecessary to resolve the findings and recommen-dations included in an audit report. In the case ofdisallowed costs, management will typically eval-uate factors beyond the conditions in the auditreport, such as qualitative judgments of valuereceived or the cost to litigate, and decidewhether it is in the Corporation’s best interest topursue recovery of the disallowed costs. TheCorporation is responsible for reporting the dis-position of the disallowed costs, the amountsrecovered, and amounts not recovered.

Except for a few key differences, the process forreports with recommendations that funds be putto better use is generally the same as the processfor reports with questioned costs. The auditreport recommends an action that will result infunds to be used more efficiently rather thanidentifying amounts that may need to be eventu-ally recovered. Consequently, the managementdecisions and final actions address the imple-mentation of the recommended actions and notthe disallowance or recovery of costs.


1 It is important to note that the OIG does not alwaysexpect 100 percent recovery of all costs questioned.

Statistical InformationRequired by theInspector General Actof 1978, as amended

Table I: SignificantRecommendations FromPrevious Semiannual Reports onWhich Corrective Actions HaveNot Been CompletedThis table shows the corrective actions manage-ment has agreed to implement but has not com-pleted, along with associated monetary amounts.In some cases, these corrective actions are differ-ent from the initial recommendations made inthe audit reports. However, the OIG has agreedthat the planned actions meet the intent of theinitial recommendations. The information inthis table is based on (1) information suppliedby the FDIC’s Office of Enterprise Risk Manage-ment (OERM) and (2) the OIG’s determinationof closed recommendations for reports issued

after March 31, 2002. These 27 recommenda-tions from 8 reports involve monetary amountsof over $5.7 million. OERM has categorized thestatus of these recommendations as follows:

Management Action in Process:(8 recommendations from 6 reports)Management is in the process of implementingthe corrective action plan, which may includemodifications to policies, procedures, systems orcontrols; issues involving monetary collection;and settlement negotiations in process.

Litigation: (19 recommendations from 2 reports, $5.7 million)Each case has been filed and is considered “in lit-igation.” The Legal Division will be the finaldeterminant for all items so categorized.



SignificantReport Number, Recommendation Brief Summary of Planned Corrective Actions Title & Date Number and Associated Monetary Amounts

Management Action In ProcessEVAL-01-002 3 Re-designate position sensitivity levels for examiner FDIC’s Background Investigation positions to reflect their public trust responsibilities.Process for Prospective and Current 4* Alert the Security Management Section of all personnel Employees assignments to positions where users have access to August 17, 2001 sensitive computer systems or data.

02-023 3* Discontinue the practice of using shared or office-wide Internal and Security Controls Related passwords when accessing GENESYS to conduct safety to the General Examination System and soundness examinations.(GENESYS)July 31, 2002

02-035 4 Develop the capability of oversight managers to monitor Information Security Management of security practices by providing adequate guidance and FDIC Contractors training on security oversight and security evaluation.September 30, 2002

03-031 1 Develop a human capital staffing plan to identify and FDIC’s Implementation of Its address any shortfalls in staff resources or skill mix for the Information Security Plan IT security program identified in the staffing and skill July 18, 2003 assessment.

03-036 1 Obtain written reports from independent auditors perform-Material Loss Review of the Failure of ing bank audits to bank boards of directors disclosing all Southern Pacific Bank, Torrance, reportable conditions found during audits or confirming California that there were no reportable conditions.August 14, 2003

03-045 1 Conduct a senior management review of the NFE project New Financial Environment (NFE) to establish metrics for measuring progress and projectScope Management Controls re-evaluation criteria if the measures are not achieved.September 29, 2003

2 Direct the NFE Steering Committee to ensure that theproject scope is promptly finalized and that impacts to theschedule are adequately managed.

Litigation96-014 1, 4-16 Recover $4,526,389 of assistance paid to Superior Bank.Superior Bank, F.S.B., Assistance Agreement, Case Number C-389cFebruary 16, 1996

98-026 2, 3, 4, 6 Recover $1,220,470 of assistance paid to Superior Bank.Assistance Agreement Audit of Superior Bank, Case Number C-389c 11 Compute the effect of understated Special Reserve March 9, 1998 Account for Payments in Lieu of Taxes and remit any

amounts due to the FDIC.

Table I: Significant Recommendations From Previous Semiannual Reports on

Which Corrective Actions Have Not Been Completed

*The OIG has not evaluated management’s actions in response to OIG recommendations.

Statistical Information 57

Audit Report Questioned CostsFunds Put to

Number and Date Title Total Unsupported Better Use

Supervision and Insurance04-004 Observations from FDIC OIG Material January 22, 2004 Loss Reviews Conducted 1993

through 2003

04-013 FDIC’s Reliance on State Safety March 26, 2004 and Soundness Examinations

EVAL-04-014 XBAT Contracting and Project March 26, 2004 Management

04-015 Division of Supervision and Consumer March 29, 2004 Protection’s Supervisory Appeals

Process

04-017 Supervisory Actions Taken for Bank March 31, 2004 Secrecy Act Violations

Resolution, Receivership, and Legal Affairs

04-002 FDIC’s 2003 Service Line RatesJanuary 15, 2004

04-012 Audit of Limited Partnership $328,934March 16, 2004

Information Assurance04-008 FDIC’s Unix Systems SecurityFebruary 13, 2004

04-009 FDIC’s Intrusion Detection and February 13, 2004 Incident Response Capability

EVAL-04-011 FDIC’s Approach to Data Sensitivity February 27, 2004 for Legacy Applications

04-016 FDIC’s Personnel Security ProgramMarch 30, 2004

Resources ManagementEVAL-04-005 FDIC’s Strategic Alignment of Human January 23, 2004 Capital

04-007 FDIC-Sponsored Dental Insurance $110,295January 30, 2004 Eligibility and Premium Payments

Post-award Contract Audits04-003 Post-award Contract Audit $112,106January 21, 2004

04-006 Post-award Contract Audit $175,027January 30, 2004

Pre-award Contract Audits04-001 Pre-award Contract Audit $1,330,289December 16, 2003

04-010 Pre-award Contract Audit $2,231,547 $2,231,547February 18, 2004

TOTALS FOR THE PERIOD $4,288,198 $2,231,547 $0

Table II: Audit Reports Issued by Subject Area


Questioned Costs

Number Total Unsupported

A. For which no management decision has been made by the 1 $9,375 $9,375commencement of the reporting period.

B. Which were issued during the reporting period. 6 $4,288,198 $2,231,547

Subtotals of A & B 7 $4,297,573 $2,240,922

C. For which a management decision was made during the 4 $3,681,506 $2,240,922reporting period.(i) dollar value of disallowed costs. 2 $1,139,944 $1,029,649(ii) dollar value of costs not disallowed. 3* $2,541,562 $1,211,273

D. For which no management decision has been made by the 3† $616,067 $0end of the reporting period.

Reports for which no management decision was made 0 $0 $0within 6 months of issuance.

*The one report included on the line for costs not disallowed is also included on the line for costs disallowed, since management did notagree with some of the questioned costs.

†Management response not due until May 17, 2004, for one report with questioned costs totaling $328,934.

Table III: Audit Reports Issued with Questioned Costs

Number Dollar Value

A. For which no management decision has been made by the commencement of 0 0the reporting period.

B. Which were issued during the reporting period. 0 0

Subtotals of A & B 0 0

C. For which a management decision was made during the reporting period. 0 0(i) dollar value of recommendations that were agreed to by management. 0 0

• based on proposed management action. 0 0• based on proposed legislative action. 0 0

(ii) dollar value of recommendations that were not agreed to by management. 0 0

D. For which no management decision has been made by the end of the 0 0reporting period.

Reports for which no management decision was made within 6 months 0 0of issuance.

Table IV: Audit Reports Issued with Recommendations for Better Use of Funds

Statistical Information 59

During this reporting period, there were no recommendations without management decisions.

Table V: Status of OIG Recommendations Without Management Decisions

During this reporting period, there were no significant revised management decisions.

Table VI: Significant Revised Management Decisions

During this reporting period, there were no significant management decisions with which the OIG disagreed.

Table VII: Significant Management Decisions with Which the OIG Disagreed

During this reporting period, there were no instances where information was refused.

Table VIII: Instances Where Information Was Refused


Abbreviations and Acronyms

APS American Payment SystemsASB Acquisition Services BranchASTEP Asset Servicing Technology

Enhancement ProjectBIF Bank Insurance FundBSA Bank Secrecy ActCD Certificates of DepositCDR Central Data RepositoryCEO Chief Executive OfficerDIRM Division of Information Resources

ManagementDRR Division of Resolutions and

ReceivershipsDSC Division of Supervision and

Consumer ProtectionECIE Executive Council on Integrity and

EfficiencyECT Electronic Crimes Team EO Executive OrderERM Enterprise Risk ManagementFBI Federal Bureau of InvestigationFDIC Federal Deposit Insurance

CorporationFFIEC Federal Financial Institutions

Examination CouncilFISMA Federal Information Security

Management Act of 2002FSBH First State Bank of HarrahGENESYS General Examination SystemHSPD Homeland Security Presidential

DirectiveIBM International Business Machines

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OIG Congratulations

Robert AllmangRobert Allmang retired after a federal career ofmore than 17 years. He served the Corporationin the Office of Corporate Audits and InternalInvestigations’ liquidation activities in the late1980s. During that time he displayed a willing-ness to travel extensively and relocated twice toaccommodate the office’s geographical staffingneeds. Later, he volunteered to assist the OIG ona joint effort with the U.S. General AccountingOffice (GAO) to audit the FDIC’s annual finan-cial statements. That OIG/GAO effort receivedfavorable recognition throughout the OIG com-munity as an exemplary model of how agencies

can work together toward greater efficienciesand improved timeliness. During his last fewyears with the OIG, his work on the OIG’s con-tract and internal audits helped ensure that theFDIC effectively managed its programs, activi-ties, and contracts.

David R. MathiasDavid Mathias retired after almost 33 years offederal service. His impressive record included4 years with the U.S. Marine Corps, 16 yearswith the General Accounting Office, and 5 yearsat the Resolution Trust Corporation. He culmi-

OIG retiree Robert Allmang. IG Gianni (left) with retiree David Mathias.

nated his federal career after 8 years of service atthe FDIC. At the FDIC OIG, David ensured thequality of nationwide IT support and technicalassistance for all functions of the OIG. He suc-cessfully developed IT strategic plans, supportedand coordinated development of managementinformation systems, and planned for new hard-ware and software to equip OIG staff with thebest technology available to do their jobs. Heguided all in the OIG through the intricacies oftechnology with patience and good humor andcontributed to the success of countless OIGactivities.

Tom MroczkoTom Mroczko retired after more than 32 years offederal service. His dedication and service to hiscountry was first demonstrated at the start of hisfederal career when he served in the UnitedStates Army. Shortly after his military tour ofduty, he began a distinguished career with thefederal government, beginning with service as anauditor at the U.S. General Accounting Office.From there, he served as an auditor at the Gen-eral Services Administration, the ResolutionTrust Corporation, and finally at the FederalDeposit Insurance Corporation. Since 1992, hewas a key member of the OIG, providing valu-able analysis and insight on numerous OIGaudits and projects. Tom’s experience and tech-nical know-how proved invaluable when hehelped develop and implement the FDIC OIG’scongressionally mandated Material Loss ReviewProgram. His work also served to strengthen thelevel of effectiveness and cooperation among thefederal banking regulators in fulfilling theirresponsibilities to assess risk in the nation’sbanking system and to protect the interests ofdepositors. (Photo unavailable.)


Congratulations for Military ServiceCongratulations to the OIG’s Gloria J. Hill, who receiveda Navy and Marine Corps Achievement medal in January2004 for her work in the U.S. Naval Reserve. As cited inthe award:

Demonstrating exceptional skill, Yeoman FirstClass Hill expertly managed the flow of shipsthrough the European area of responsibility duringthe massive and historic logistic movement in sup-port of Operation Iraqi Freedom. She expertlymaintained the common operating picture for over124 ships loading and discharging equipment in32 ports. Additionally, during the redeploymentphase of operations, she excelled as OperationsDuty Officer responsible for maintaining continuityof operations after working hours. Yeoman FirstClass Hill’s professionalism, personal initiative,and total dedication to duty reflected credit uponherself and were in keeping with the highest tradi-tions of Military Sealift Command and the UnitedStates Naval Service.

Federal OIG Accomplishments for Fiscal Year 2003

The FDIC OIG is proud to be part of the IG community. In A Progress Report to thePresident, the President’s Council on Integrity and Efficiency and the Executive Council onIntegrity and Efficiency report that during fiscal year 2003, the work of more than11,000 employees of the Offices of Inspector General across government producedimpressive results. Thousands of audits, investigations, and other reviews offered recom-mendations that promote economy, efficiency, and effectiveness, as well as prevent anddetect fraud, waste, and abuse in federal programs and operations. These results include:

■ Potential savings of nearly $18 billion■ About 6,600 successful criminal prosecutions■ Suspensions or debarments of about 7,600 individuals or businesses■ Over 2,600 civil or personnel actions■ Over 6,800 indictments and criminal informations■ Nearly 200,000 complaints processed■ More than 83 testimonies before the Congress

These accomplishments reflect the work of the Federal Officesof Inspector General, whose combined FY 2003 budgetstotaled about $1.9 billion.

For more information on the IG community’s mission and

accomplishments, visit http://www.ignet.gov

Federal Deposit Insurance Corporation

Office of Inspector General

801 17th St., NW Washington, D.C. 20434

The Office of Inspector General (OIG) Hotline is a convenient mechanismemployees, contractors, and others can use to report instances of suspected fraud,waste, abuse and mismanagement within the FDIC and its contractor operations.The OIG maintains a toll-free, nationwide Hotline (1-800-964-FDIC), electronicmail address ([email protected]), and postal mailing address. The Hotline isdesigned to make it easy for employees and contractors to join with the OIG in itsefforts to prevent fraud, waste, abuse, and mismanagement that could threaten thesuccess of FDIC programs or operations.

To learn more about the FDIC OIG and for complete copies of audit and evaluation reports discussed in this Semiannual Report, visit ourhomepage: http://www.fdicig.gov

CON SEMIANNUAL REPORT TO THEGRESS - FDIC OIG · 2019-03-03 · $48 million from the failed Oakwood Deposit Bank Company, Oakwood, Ohio. As an organization, we have also been working

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