Export-Import Bank: EXIM Should Explore Using Available Data to Identify Applicants with Delinquent Federal Debt

As the export credit agency of the United States, EXIM's mission is to help support U.S. jobs by facilitating the export of U.S. goods and services through direct loans, loan guarantees, working capital guarantees, and credit insurance. In September 2018, the total outstanding and undisbursed amount of these products and unrecovered default claims was about $60.5 billion, according to EXIM.

The Export-Import Bank Reform Reauthorization Act of 2015 included a provision for GAO to review EXIM's antifraud controls. This report (1) describes key antifraud controls EXIM says it has for mitigating fraud risks identified by GAO, and describes EXIM's efforts to perform a fraud risk assessment that considers these fraud risks; and (2) identifies EXIM's procedures to detect delinquent federal debt owed by applicants and participants, and assesses additional opportunities to use readily available data to do so. GAO analyzed 44 EXIM-associated court cases of fraud adjudicated from calendar years 2012 through 2017, examined EXIM transaction data, and interviewed EXIM and GSA officials. GAO also analyzed data identifying delinquent federal debt as well as EXIM's procedures for doing so.

The Export-Import Bank of the United States (EXIM) reported having antifraud controls in place for mitigating the fraud risks that GAO identified and communicated to EXIM officials. GAO reviewed 44 EXIM-associated court cases involving fraud and identified fraud risks involving the four fraud risk factors illustrated in the figure below. GAO communicated these fraud risks to EXIM officials, and they provided examples of antifraud controls they use to help mitigate these fraud risks for their major financing products. In February 2019, EXIM also provided documentation reflecting its efforts to conduct a fraud risk assessment that considered various fraud risks affecting its major financing product lines, including fraud risks GAO identified during this review.

EXIM has procedures to identify applicants and participants with delinquent federal debt, such as obtaining applicants' credit reports that may indicate these debts when they apply to EXIM's financing programs. However, EXIM is missing additional opportunities to use readily available data containing delinquent federal debt indicators from the General Services Administration's (GSA) System for Award Management (SAM) to detect applicants and participants that may have delinquent federal debt. Federal law states that applicants who are delinquent on federal nontax debts may not receive federal direct loans, loan guarantees, or loan insurance until the delinquent debt is satisfactorily resolved. Using data from SAM, GAO found that, from calendar years 2014 through 2016, EXIM authorized transactions that had an aggregate authorization value of about $1.7 billion and were associated with 32 U.S.-based companies that had a delinquent federal debt indicator in SAM in the same month EXIM authorized these transactions . While these results alone do not mean EXIM should have suspended these transactions, they do indicate that there is a practical opportunity to use SAM data to help determine applicants' eligibility. Without assessing the practicality of pursuing such readily available data, EXIM is potentially forgoing opportunities to perform additional due diligence that would help inform its decisions about applicants' and participants' program eligibility and fraud risks.

GAO is recommending that EXIM assess the practicality of using available SAM data and data-analytical approaches to detect applicants and participants with potential delinquent federal debt. EXIM concurred with GAO's recommendations.

The mission of the Export-Import Bank of the United States (EXIM) is to  help support American jobs by facilitating the export of U.S. goods and  services. EXIM is a wholly-owned government corporation that serves as  the export credit agency of the United States, and, according to EXIM, it  is intended to serve as a financier of last resort for U.S. companies that  seek to sell and export their goods or services to foreign buyers and that  cannot obtain private financing for their deals. Thus, EXIM is intended to  assume the credit and country risks that the private sector is unable or  unwilling to accept.

To support U.S. exports, EXIM offers four financing programs (also  known as financing products)—direct loans, loan guarantees, working  capital loan guarantees, and export-credit insurance. In accordance with  federal law, applicants for these financing programs who are delinquent  on certain federal debts may not receive federal financial assistance from  EXIM until they satisfactorily resolve the delinquency or are granted a  waiver. According to EXIM officials, the agency’s financing programs  support tens of thousands of American jobs and enable billions of dollars  in U.S. export sales annually. EXIM is backed by the full faith and credit of  the U.S. government, which means taxpayers could be responsible for  losses arising from EXIM’s operations, including losses due to fraud.  Total actual outstanding exposure, as of September 2018, was $60.5  billion, according to EXIM.

EXIM requires periodic reauthorization from Congress. Congress last did  so in 2015, after a debate that included discussion of fraud risks at  EXIM. As part of its 2015 reauthorization, Congress included a provision  in statute for us to review the adequacy of the design and effectiveness of  EXIM’s antifraud controls, and review a sample of EXIM transactions,  within 4 years of reauthorization. This review is the second of two that  we conducted to meet this congressional mandate prior to the expiration  of EXIM’s current authorization in September 2019.

In our first report, issued in July 2018, we assessed EXIM’s fraud risk  management practices against leading practices of GAO’s A Framework  for Managing Fraud Risks in Federal Programs (Fraud Risk Framework).  We found that EXIM, in managing its vulnerability to fraud, had adopted  some of the leading practices called for in the Fraud Risk Framework. For  example, EXIM had identified a dedicated entity within the agency to lead  fraud risk management, which is one of the leading practices of the  framework. However, we found that EXIM was not planning and  conducting regular fraud risk assessments as called for in the Fraud Risk  Framework. At the time, EXIM officials told us they planned to implement  the framework, but did not provide us documentation describing in detail  how they would ensure that their planned fraud risk assessment was  consistent with leading practices of the framework. As a result, we  recommended, among other things, that EXIM should ensure that its fraud risk assessments and fraud risk profile address known methods of  fraud and other inherent fraud risks. EXIM agreed with this  recommendation. In February 2019, EXIM provided documentation  reflecting its efforts to implement the recommendations from our July  2018 report. GAO requested additional documentation from EXIM to  evaluate the extent to which EXIM has implemented these  recommendations and will continue to monitor EXIM’s progress in  implementing these recommendations.

In this second report, we (1) describe key antifraud controls EXIM says it  has for mitigating fraud risks we identified in closed cases of fraud, and  describe EXIM’s efforts to perform a fraud risk assessment that considers  these fraud risks; and (2) identify EXIM’s procedures for detecting  delinquent federal debt owed by applicants and participants, and assess  additional opportunities to use readily available data to do so.

To describe key antifraud controls EXIM says it has for mitigating fraud  risks identified in closed cases of fraud, we first identified closed cases of  alleged fraud associated with EXIM’s programs that were adjudicated  from calendar years 2012 through 2017. We identified 44 cases that fit  our selection criteria. These cases were identified by reviewing press  releases from EXIM’s Office of the Inspector General; press releases  from the U.S. Department of Justice; and court documents. We examined  the closed cases to determine the fraud risks associated with each.  Although we examined all known adjudicated fraud cases from calendar  years 2012 through 2017, these cases are not necessarily representative  of the extent or the types of presently undiscovered fraud or fraud risks  that may exist across all EXIM financing products. In this report, we do  not disclose the specific fraud risks we identified so that potential  perpetrators of fraud do not become aware of their existence. Instead,  this report generally describes the “fraud risk factors” that potentially  presented an opportunity for the fraud risk to occur. See appendix I for  the results of our analysis of the 44 closed cases of alleged fraud.

Following our identification of the fraud risks from the closed cases, we  then identified key antifraud controls EXIM reported having in place by  reviewing the practices, policies, and procedures that EXIM currently  uses to mitigate the fraud risks. To describe EXIM’s efforts to perform a  fraud risk assessment that considers these fraud risks, we interviewed  appropriate EXIM management responsible for antifraud activities to  inquire about such plans and reviewed documentation supporting EXIM’s  efforts in this regard. These interviews included EXIM’s chief operating  officer; assistant general counsel for litigation, fraud and compliance; and  the vice president of the Credit Review and Compliance Division.

To identify EXIM’s procedures for detecting delinquent federal debt owed  by applicants and participants, we reviewed EXIM’s Loan Guarantee and  Insurance Manual and program financing applications. Additionally, we  interviewed and received written responses from appropriate senior EXIM  management, including EXIM’s chief operating officer; vice president and  deputy chief operating officer; chief information officer; and senior vice  president for strategy and performance. In assessing opportunities for  EXIM to use readily available data to detect delinquent federal debt owed  by applicants and participants, we requested and combined selected  EXIM participant and transaction data and matched these data, using  participants’ unique Tax Identification Numbers and Data Universal  Numbering System numbers, to a limited data set of entity registrants  from the General Services Administration’s (GSA) System for Award  Management (SAM). SAM is a government-wide acquisition and award  support system intended to make the process of doing business with the  federal government more efficient. Federal agencies can also use SAM  to search entities’ financial information, including financial information  pertaining to an entity’s “Debt Subject to Offset” status, which could  indicate that the entity has delinquent federal tax or nontax debt. Our  analysis included the same entities that EXIM officials told us EXIM  includes in its underwriting approach. For example, as mentioned above,  our analysis included buyers, borrowers, exporters, and guaranteed  lenders applying to EXIM’s financing programs, because EXIM officials  told us that the agency applies the 31 U.S.C. § 3720B restrictions to  these applicants. We did not include suppliers, because EXIM officials  told us EXIM does not apply the 31 U.S.C. § 3720B restrictions to these  entities. On the basis of our discussions with EXIM and GSA officials and  our own testing of the data, we concluded that the data elements used for  this work were sufficiently reliable for the purposes of this report.

We conducted this performance audit from October 2017 to April 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

As described in figure 1, to support U.S. exports, EXIM offers four major  types of financing products: direct loans, loan guarantees, export-credit  insurance, and working capital guarantees. Regardless of type, EXIM’s  financing products generally have one of three maturity periods: Short- term transactions are for less than 1 year; medium-term transactions are  from 1 to 7 years long; and long-term transactions are more than 7 years.

As we reported in July 2018, for all financing types, EXIM currently  conducts a number of preauthorization and postauthorization antifraud  activities. See the examples shown in figure 2.

Fraud and “fraud risk” are distinct concepts. Fraud—obtaining something  of value through willful misrepresentation—can be challenging to detect  and adjudicate because of its deceptive nature. Fraud risk exists when  individuals have an opportunity to engage in fraudulent activity, have an  incentive or are under pressure (e.g., financial pressures) to commit  fraud, or are able to rationalize committing fraud. When fraud risks can be  identified and mitigated, fraud may be less likely to occur. Although the  occurrence of fraud indicates there is a fraud risk, a fraud risk can exist  even if actual fraud has not yet been identified or adjudicated.

According to the Standards for Internal Control in the Federal  Government, executive-branch agency managers are responsible for  managing fraud risks and implementing practices for combating those  risks. Specifically, federal internal control standards call for agency  management officials to assess the internal and external risks (including  fraud risks) their entities face as they seek to achieve their objectives.  The standards state that as part of this overall assessment, management  should consider the potential for fraud when identifying, analyzing, and  responding to risks. Risk management is a formal and disciplined  practice for addressing risk and reducing it to an acceptable level.

The leading practices in the Fraud Risk Framework call for agencies to  identify inherent fraud risks affecting the program, examine the suitability  of existing fraud controls, and then prioritize mitigating “residual” fraud  risks—that is, risks remaining after antifraud controls are adopted.  Specifically, according to the assess component of the Fraud Risk  Framework, managers who effectively assess fraud risks attempt to fully  consider the specific fraud risks the agency or program faces, analyze the  potential likelihood and impact of fraud schemes, and then ultimately  document prioritized fraud risks. Moreover, managers can use the fraud  risk assessment process to determine the extent to which controls may  no longer be relevant or cost-effective. Leading practices that are  consistent with this component include  conducting quantitative or qualitative fraud risk assessments at  regular intervals, or both, of the likelihood and impact of inherent risks  on the program’s objectives, and determining the agency’s risk  tolerance for the inherent fraud risks;  identifying specific sources for gathering information about fraud risks,  including information on fraud schemes that are reflected in  adjudicated cases of fraud; examining the suitability of existing fraud controls for preventing fraud  and mitigating fraud risks identified; and documenting in the program’s fraud risk profile the analysis of the  types of inherent fraud risks assessed, their perceived likelihood and  impact, managers’ risk tolerance, and the prioritization of the inherent  fraud risks and any residual fraud risks.

As we reported in July 2018, the Fraud Reduction and Data Analytics Act  of 2015 requires the Office of Management and Budget (OMB) to  establish guidelines that incorporate the leading practices of GAO’s Fraud  Risk Framework. The act also requires federal agencies to submit to  Congress a progress report each year, for 3 consecutive years, on  implementation of the risk management and internal controls established  under the OMB guidelines. OMB published guidance under OMB  Circular A-123 in 2016 affirming that federal managers should adhere to  the leading practices identified in the Fraud Risk Framework. As we  reported in December 2018, EXIM identifies itself as subject to the act,  and, as such, follows it. The Fraud Risk Framework is also aligned with  federal internal control standards, specifically Principle 8 (“Assess Fraud  Risk”) of the Green Book.

Federal internal control standards also state that excessive pressures,  such as financial pressures (e.g., delinquent federal debt), can pose a  fraud risk factor to agency programs as these pressures can provide an  incentive or motive to commit fraud. Although the existence of financial  pressure alone does not necessarily indicate that fraud exists or will  occur, financial pressure is often present when fraud does occur.

Delinquent Federal Debt and EXIM Financing Programs

Applicants for EXIM programs who have delinquent federal debt may not  be able to obtain certain types of financing until they resolve their debts.  Specifically, under 31 U.S.C. § 3720B, applicants who are delinquent on  federal nontax debts may not receive federal financial assistance,  including such assistance provided by EXIM, until they satisfactorily  resolve the delinquency (e.g., pay in full or negotiate a new repayment  plan). However, 31 U.S.C. § 3720B also provides that an agency head  may waive this restriction. Additionally, OMB’s Circular No. A-129,  Policies for Federal Credit Programs and Non-Tax Receivables,  prescribes to agencies the policies, procedures, and standards for  screening program participants to determine whether they are delinquent  on any federal debt when applying to federal credit programs.

EXIM Reported Antifraud Controls for Mitigating Fraud Risks Identified and a Fraud Risk Assessment That Considered Those Risks Closed Cases of Fraud Generally Involve Four Fraud Risk Factors

We identified fraud risks—generally involving four overall fraud risk  factors—by examining EXIM-associated court cases of fraud adjudicated  from calendar year 2012 through calendar year 2017. We then  communicated these fraud risks to EXIM, and EXIM officials reported  examples of existing controls it uses to help detect and mitigate these  fraud risks. EXIM also provided documentation reflecting its efforts to  conduct a fraud risk assessment that considered various fraud risks  affecting its major financing product lines, including fraud risks we  identified during this review.

We identified fraud risks—generally involving four overall fraud risk  factors—by examining 44 EXIM-associated closed court cases of fraud  adjudicated from calendar year 2012 through calendar year 2017.  Specifically, the various fraud risks we identified overall involved one or  more of the fraud risk factors illustrated in figure 3 below: opportunities to falsify self-reported information on applications or  financial pressures that potentially incentivized participants or  employees to commit fraud; opportunities to circumvent or take advantage of EXIM or lender opportunities to circumvent the intent of EXIM’s programs by diverting  loan proceeds and other EXIM financing for personal use or benefit  instead of for the export of U.S. goods.

See appendix I for a summary of these 44 cases we reviewed.

These 44 cases illustrate the financial risks associated with fraud against  EXIM. Federal and state courts combined have ordered restitution of  $82.4 million in the 44 adjudicated cases, but much of that restitution has  not yet been paid. For example, as of October 2018, the total remaining  unpaid restitution amount is $71.6 million, or over 80 percent. In one fraud  case we reviewed, which was adjudicated in 2013, a federal court  ordered a convicted U.S. exporter to pay EXIM $8.6 million in restitution  for the fraud that he committed in a loan guarantee program. Since 2013,  the participant has paid back $25.00 of this amount.

EXIM Reported Antifraud Controls for Mitigating Fraud Risks Identified in Closed Cases

EXIM reported having existing antifraud controls to mitigate the fraud  risks we identified. Specifically, we communicated to EXIM the fraud risks  we identified from our review of the 44 adjudicated cases. In response,  EXIM officials described general antifraud controls the agency currently  uses to help detect and mitigate each of the fraud risks we identified. The  officials stated that EXIM has experience with all the fraud risks we  identified and stated that they were generally confident that EXIM’s  antifraud controls were appropriate for mitigating the risks. EXIM officials  consider many of the fraud risks that we identified as risks that could  impact any of the agency’s financing programs (i.e., credit insurance, loan  guarantees, direct loans, or working capital guarantee programs).

EXIM officials provided examples of the general antifraud controls that  they said EXIM uses to mitigate the fraud risks we identified across all  agency financing products. According to EXIM officials and as illustrated  in figure 4 below, these controls include: fraud prevention and detection  procedures; due diligence standards; and a list of “red flags” that EXIM  staff should be aware of and is used to identify indicators of potential  fraud and corruption that may appear on EXIM transaction documents.  Officials said that their confidence in the controls stems from seeing a  reduction in fraud cases since the early 2000s after these antifraud  controls were put in place.

EXIM officials clarified that this confidence does not stem from completing  a comprehensive fraud risk assessment of fraud risks impacting all of its  financing products consistent with the leading practices in the Fraud Risk  Framework.

EXIM’s Fraud Risk Assessment Considered Fraud Risks Identified

EXIM also provided documentation reflecting its efforts to conduct a fraud  risk assessment that considered various fraud risks affecting its major  financing product lines, including fraud risks we identified during this  review. EXIM officials said that the fraud risks we identified were  generally already known to EXIM as they relate to or are very similar to  those fraud risk factors contained in EXIM’s list of red flags. EXIM officials  acknowledged that assessing its fraud risks and evaluating the agency’s  existing antifraud controls may indicate opportunities for EXIM to further  adapt EXIM’s antifraud controls to mitigate any residual fraud risks within  its tolerance level. Such assessments can further help EXIM mitigate  fraud and the resulting effects across all product lines before they occur,  which includes the length of time it can take for EXIM to fully recover from  restitution losses after fraud has been perpetrated, as illustrated in the 44  cases presented in appendix I.

EXIM Has Procedures for Detecting Delinquent Federal Debt Owed by Applicants and Participants but Is Missing Additional Opportunities to Use Readily Available SAM Data to Do So

EXIM has procedures for detecting delinquent federal debt owed by EXIM  applicants and participants. However, EXIM is missing additional  opportunities to use readily available SAM data to identify ineligible  applicants or participants that may have delinquent federal debt, and to  use such data to determine eligibility or assess repayment fraud risk.

EXIM Has Procedures to Detect Delinquent Federal Debt Owed by Applicants and Participants

EXIM has procedures to detect delinquent federal debt owed by  applicants and participants that include reviewing their credit reports and  requiring applicants to certify that they and other participants do not have  such delinquent debt. Under 31 U.S.C. § 3720B, applicants who are  delinquent on federal nontax debts may not receive federal financial  assistance, including direct loans, loan guarantees, or loan insurance until  they satisfactorily resolve the delinquency (e.g., pay in full or negotiate a  new repayment plan). 31 U.S.C. § 3720B does not address delinquent  federal tax debt; however, such delinquent federal debt may also pose a  fraud risk or repayment fraud risk to EXIM’s financing programs.  Additionally, OMB Circular No. A-129 prescribes to agencies the policies,  procedures, and standards for screening program participants to  determine whether they are delinquent on any federal debt when applying  to federal credit programs, including  recommending that agencies ask applicants to self-certify on their  applications that they have no delinquencies;  requiring agencies to obtain and review applicants’ credit reports; and encouraging agencies to use appropriate databases, such as the  Department of the Treasury’s Do Not Pay portal sources to identify  delinquent federal debtors during the application screening process.

According to EXIM officials, the agency employs procedures to ensure its  policies and processes meet these requirements for applicable financing  products. Specifically, and as illustrated in figure 5 below, these  procedures include reviewing the following:

Self-certifications: EXIM applications for relevant financing programs  include a self-certification by the applicant that the applicant does not  have delinquent federal debt. However, as we have reported in the  past, relying on applicants to self-report adverse actions on their  applications, instead of verifying such information, could cause an  agency to miss opportunities to develop a more-complete picture of  the applicants.

Credit reports: EXIM obtains credit reports for applicants and  participants in some financing products. In particular, EXIM’s  internal Loan Guarantee and Credit Insurance Manual of 2015  communicates the 31 U.S.C. § 3720B restriction to loan officers and  instructs them to review the borrower’s credit report to check whether  the borrower is delinquent on any federal debt. If the loan officer finds  that the credit report reflects such delinquent federal debt, the manual  further instructs the loan officer to advise and request guidance from  EXIM’s Trade Finance Director and the Office of General Counsel.  However, as we have reported in the past, some delinquent federal  tax debt may not appear on the credit reports unless the Internal  Revenue Service has filed a lien on the delinquent federal tax debt.

World Check: EXIM, through the assistance of a third-party vendor,  also makes use of some data sources listed in the Do Not Pay  sources as part of its prescreening application process and possibly  during postauthorization risk-based reviews. Specifically, EXIM  officials told us that EXIM uses Thomson Reuters’s World Check  database to identify federal debts owed by applicants as part of its  Character, Reputational, and Transaction Integrity (CRTI) review  process that is managed by EXIM’s Credit Review and Compliance  Division. The World Check database currently checks over 20  different watch lists and other databases, including lists of entities  excluded from doing business with the federal government maintained  in GSA’s SAM. According to EXIM, other sources in the World  Check database that reveal such federal debts could also lead  indirectly to the discovery of delinquent federal debt. However, as  discussed below, this check of SAM does not involve a check of  delinquent federal debt. This CRTI review process is conducted  during the underwriting (i.e., the preauthorization review) phase and  may occur throughout the life cycle of transactions, such as during  EXIM’s postauthorization risk-based reviews. EXIM officials told us  that, as part of this process, loan officers or other EXIM officials send  the names of applicants to EXIM librarians, who perform a manual  search of the World Check database, review results, and return  relevant results to EXIM officials for their consideration. EXIM officials  noted that this process can be challenging, particularly when librarians  perform searches on applicants with common names, which produce  many results that are not useful.

EXIM officials told us that EXIM does not track information on instances in  which an applicant’s delinquent federal debt prevents a transaction from  moving forward or prevents a specific applicant’s participation in a  transaction. Consequently, EXIM officials told us that EXIM has no  records of this happening. However as described in greater detail below,  EXIM does not make use of readily available SAM data to identify  delinquent federal debts owed by applicants and participants, which could  limit its ability to detect instances in which applicants and participants owe  these debts.

EXIM Is Missing Additional Opportunities to Use Readily Available SAM Data to Detect Applicants and Participants That May Have Delinquent Federal Debt

EXIM is missing additional opportunities to use readily available SAM  registration data to identify potentially ineligible applicants and  participants that may have delinquent federal debt or may otherwise  pose a repayment fraud risk. Specifically, while EXIM employs  procedures that may reveal applicants’ delinquent federal debts, as  described above, EXIM’s procedures for identifying applicants and  participants with delinquent federal debt do not include a search of a  specific data element in the SAM database that can be used to detect  delinquent federal debtors. The data element we refer to here is the Debt  Subject to Offset flag, which may reflect both nontax and tax delinquent  federal debts owed. As mentioned previously, SAM is a government-wide  information system that federal agencies can use to obtain information on  businesses that do business with the federal government, including an  entity’s Debt Subject to Offset status. The Debt Subject to Offset data  element in SAM indicates that the entity potentially has a delinquent  federal debt subject to collection under the Treasury Offset Program.

The GSA officials who maintain the SAM database told us that all federal  agencies have the legal authority to use the SAM registration database  free of charge. Specifically, all federal agencies can use this database to  manually search by an entity’s name, Data Universal Numbering System  number, or Tax Identification Number for the purpose of detecting  whether the entity potentially has delinquent federal debt, such as by  identifying whether an entity’s SAM record contains the Debt Subject to  Offset flag. Further, GSA officials also told us that all federal agencies  are able to request batches of SAM registration data free of charge, for  the purpose of matching these data to agency data by entities’ names,  Data Universal Numbering System numbers, or Tax Identification Numbers for the purpose of identifying entities that may have the Debt  Subject to Offset flag in SAM, among other available data.

Performing data analytics, such as batch matching, on available data is  a leading practice cited in the Fraud Risk Framework that we have  reported can help improve agency efforts to combat fraud. In particular,  we have found in prior work that using available data to verify that EXIM’s  transaction applicants are not delinquent on federal debt can help EXIM  assure applicant eligibility is consistent with federal guidance, provide  reasonable assurance of repayment, and help prevent fraud. We have  also found that using available data to independently verify self-reported  delinquent federal debt information, such as self-reported information on  delinquent federal tax debt owed, is a key detection and monitoring  component of fraud prevention.

We identified additional opportunities for EXIM to manually use SAM’s  online database or data-matching approaches to identify applicants or  participants with potential delinquent federal debt. Specifically, we  registered in SAM to conduct several manual searches (by entities’ Data  Universal Numbering System numbers, Tax Identification Numbers, and  names) and confirmed that it can be used to conduct such searches  without incurring any external costs charged by GSA. For example, we  conducted two Data Universal Numbering System number searches and  found two active EXIM participants appearing in SAM’s registration  database with a Debt Subject to Offset flag. We also obtained historical  SAM data from GSA and EXIM transaction data and confirmed that these data sources could be used to identify EXIM applicants and participants  with potentially delinquent federal debt in a batch match (rather than  manual, case-by-case searches). As illustrated in our batch-matching  results below, we found this data-matching process can provide an  opportunity to match these data sets using the Tax Identification Numbers  and Data Universal Numbering System numbers for the entities in both  data sets.

Our batch-matching analyses indicated that, from calendar year 2014  through calendar year 2016, EXIM authorized transactions that had an  aggregate authorization value of approximately $34.3 billion. Of that  amount, we found the following:

An aggregate authorization value of about $1.7 billion was associated  with 32 U.S.-based companies that had a delinquent federal debt  indicator in SAM in the same month that these transactions were  authorized. The transactions mostly involved U.S.-based applicants  and exporters. As mentioned above, associated parties we reviewed  included not only the applicant, but also participants involved,  including the borrower, buyer, and exporter, which may or may not be  the applicant. While the results of this analysis do not mean that EXIM  should have suspended these transactions in accordance with 31  U.S.C. § 3720B, these results nonetheless indicate that the data in  SAM that indicate delinquent federal debt could provide an  opportunity for EXIM to identify important indicators of applicants or  other transaction participants with potential delinquent federal debt  when determining their program eligibility and assessing any related  fraud risks or repayment risks they present during EXIM’s  preauthorization CRTI reviews. Because the Debt Subject to Offset  flag may indicate either nontax debts or tax debts, it is possible that  some of these entities owed delinquent federal nontax debts that are  applicable under 31 U.S.C. § 3720B, indicating EXIM should have  considered suspending these transactions. However, it is also  possible that some of these entities owed delinquent federal tax debts  that are not applicable under 31 U.S.C. § 3720B, but that may pose a  fraud risk or repayment risk nonetheless. By using the Debt Subject to  Offset flag as an indicator of these delinquent federal debts and  gathering additional information on the specific facts and  circumstances of each case, EXIM would be better positioned to  assess the relevant compliance, fraud, and repayment risks an  applicant’s or participant’s delinquent federal debt may pose.

An aggregate authorization value of about $4.1 billion was associated  with 97 U.S.-based companies that had a delinquent federal debt  indicator in SAM during the transaction maturity period (i.e., after the  month they were approved, but before the transactions’ maturity  date). These transactions mostly involved U.S.-based applicants  and exporters. As mentioned above, associated parties we reviewed  included not only the applicant, but also participants involved,  including the borrower, buyer, and exporter, which may or may not be  the applicant. 31 U.S.C. § 3720B may prevent applicants with federal  financial debts from obtaining loans, guarantees, and insurance; thus,  it does not apply to any delinquent federal debt accrued after loan  approval. However, we looked at potential delinquent debt accrued  after approval because delinquent debt accrued after approval and  during the transaction maturity period might affect EXIM’s view of a  financing product’s repayment risk. Further, EXIM already conducts  similar postauthorization monitoring to identify such risks through its  use of World Check as part of its CRTI process described above.  Thus, these results nonetheless illustrate that EXIM can use SAM  data during EXIM’s postauthorization CRTI reviews to identify  transaction participants with potential delinquent federal debt and  determine the extent to which they may pose a repayment fraud risk.

Prior to sharing our results with EXIM, EXIM officials told us that they  have access to SAM entity registration records, but they believe  searching the SAM registration database is a time-consuming process  that should be reserved for rare circumstances. Further, EXIM officials  also told us that using the SAM registration database to identify  applicants or participants that have the Debt Subject to Offset flag in SAM  would yield few results because the vast majority of their financing  program participants are foreign-based entities, and thus would not also  be contractors for the U.S. government and registered in SAM.  However, we identified many U.S.-based entities that had a delinquent  federal debt indicator either in the month a transaction was approved, or  during the transaction’s maturity period, by searching in the SAM  database and analyzing SAM data for EXIM applicant and participants, as  described above. Further, it is not clear whether performing manual  searches or batch matches with SAM data to identify delinquent federal  debtors would be any more time-consuming than EXIM’s current  procedures for doing so, which include manual searches of World Check  and obtaining and reviewing credit reports, as described above.

When we met with EXIM officials to communicate our batch-matching  results above, they expressed concern that these results could imply that  EXIM is doing business with applicants or participants with delinquent  federal debt. They then indicated that they were interested in obtaining  SAM registration data so that they could determine whether it would be  feasible for them to perform the same type of analysis that we performed.  In a subsequent meeting, EXIM officials informed us that they were also  able to obtain current SAM registration data, analyze the SAM data  against active EXIM participant data, and find dozens of active EXIM  participants with the Debt Subject to Offset flag in SAM.

The results of our analyses, as well as EXIM’s own experience with the  SAM data, suggest EXIM also has an additional and practical opportunity  to incorporate searches of SAM entity registration data as part of its  postapproval monitoring of transactions to enhance its monitoring of and  response to risks in ongoing transactions. Standards for Internal Control  in the Federal Government state that management should use quality  data to achieve agency objectives. For example, this could include  agencies obtaining relevant operational, financial, or compliance-related  data from reliable internal and external sources in a timely manner based  on identified information requirements, and then using such data to make  informed decisions and evaluate performance in achieving program  objectives and addressing risks.

Without also pursuing available debt data in SAM’s registration database,  as an additional layer of due diligence, to identify applicants with  delinquent federal debt during underwriting and compliance reviews,  EXIM is potentially forgoing practical opportunities to use such data when  determining applicants’ program eligibility and to adopt leading practices  for managing repayment fraud risks across EXIM’s financing programs. In  particular, such available SAM data can provide opportunities to  verify independently the applicants’ self-certification of delinquent  federal debts they owe and assess whether the applicants may have  misrepresented their delinquent federal debt status on their  applications, which is a fraud risk in the application process; detect potential delinquent federal debts that are not apparent in credit make informed eligibility decisions during preauthorization CRTI  reviews and assess repayment fraud risk during postauthorization  CRTI reviews.

EXIM assumes the credit and country risks that the private sector is  unable or unwilling to accept, including the risk of losses due to fraud.  EXIM’s financing products face various fraud risks, and EXIM has begun  to take steps to consider these fraud risks as part of a full fraud risk  assessment, as we recommended in July 2018. However, because it  remains unclear whether EXIM’s actions fully respond to the  recommendations of our July 2018 report, we will continue to monitor  EXIM’s progress in fully assessing its fraud risks. EXIM also employs  procedures to detect delinquent federal debt owed by EXIM applicants  and participants. However, EXIM is missing opportunities to use readily  available SAM data to identify applicants or participants that may  misrepresent their delinquent federal debt status and pose a repayment  fraud risk to EXIM financing programs. Applicants or participants with  delinquent federal debt could be one of many repayment fraud risks that  could indicate an increased risk of nonrepayment and incentives to  commit fraud against EXIM. EXIM officials believe searching SAM is a  time-consuming process that would yield few results. However, manually  searching SAM’s online registration database for the purpose of  determining whether an applicant or participant may have a Debt Subject  to Offset flag may not be any more time-consuming than what EXIM  currently performs through its preauthorization or postauthorization CRTI  reviews. Nevertheless, we demonstrate in this report the practicality and  illustrate results of using such data through multiple approaches, such as  batch matching, without incurring any external costs charged by GSA. By  assessing the practicality of searching SAM data, EXIM may determine  that this source of data provides an additional tool for combating fraud.  Implementing these antifraud activities could further help EXIM verify  program eligibility, identify repayment fraud risk, and provide EXIM with  reasonable assurance that it is effectively and efficiently carrying out its  mission of supporting U.S. jobs and the export of U.S. goods.

We are making the following two recommendations to EXIM:  EXIM’s chief operating officer should direct EXIM’s Credit Review and  Compliance Division to assess and document the practicality of  incorporating into its preauthorization CRTI reviews searches of data  elements in SAM that indicate delinquent federal debts owed by  applicants, and, if practical, implement relevant approaches—such as  manual searches or batch matching. (Recommendation 1)

EXIM’s chief operating officer should direct EXIM’s Credit Review and  Compliance Division to assess and document the practicality of  incorporating into its postauthorization CRTI reviews searches of data  elements in SAM that indicate delinquent federal debts owed by  applicants and participants, and, if practical, implement relevant  approaches—such as manual searches or batch matching.  (Recommendation 2)

We provided a draft of this report to EXIM for review and comment. In its  written comments, reproduced in appendix II, EXIM concurred with our  recommendations and stated that it will move forward to implement them.  EXIM also provided technical comments, which we incorporated as  appropriate.

In its written comments, EXIM noted a number of points it referred to as  “key concerns.” These points do not disagree with our findings,  conclusions, or recommendations. Specifically, EXIM stated that the 44  cases we reviewed involved transactions that were approved between  2002 and 2012 and that it will continue to work with the Department of  Justice to collect restitution payments. Additionally, EXIM stated that it is  in full compliance with 31 U.S.C. § 3720B and the related provisions of  OMB Circular A-129 guidance regarding restrictions on doing business  with delinquent federal debtors. However, assessing EXIM’s compliance  with 31 U.S.C. § 3720B or OMB Circular A-129 was outside the scope of  this report.

Finally, for the purpose of implementing our recommendations, EXIM  requested the data pertaining to the U.S.-based companies that we found  to have a delinquent federal debt indicator in SAM. To identify those  companies, we used (1) an extract of data that EXIM provided to us, and  (2) GSA SAM data, which EXIM told us it can and has already obtained  directly from GSA. We will provide EXIM with a copy of the EXIM data it  requested. However, we believe EXIM will be better positioned to assess  the practicality of checking the SAM delinquent federal debt flag by  continuing to obtain the SAM data directly from GSA.

We are sending copies of this report to the appropriate congressional  committees, the president and board chairman of EXIM, and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact  me at (202) 512-6722 or bagdoyans@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

Appendix I: Summary of GAO Review of 44 Cases Adjudicated from Calendar Years 2012 through 2017

The table below summarizes the information we reviewed during our  review of the 44 Export-Import Bank of the United States (EXIM)- associated cases of alleged fraud that we were able to identify and  determine were adjudicated from calendar years 2012 through 2017.  Such information includes financing product types, dates adjudicated,  fraud schemes, fraud risk factors involved, and the amount of EXIM  restitution owed and paid to EXIM. As mentioned earlier, the fraud risks  we identified in these 44 cases related to one or more of the following four  fraud risk factors: (1) opportunities to falsify self-reported information on  applications or transaction documents, (2) financial pressures that  potentially incentivized participants or employees to commit fraud, (3)  opportunities to circumvent or take advantage of EXIM or lender controls,  or (4) opportunities to circumvent the intent of EXIM’s financing programs  by diverting loan proceeds and other EXIM financing for personal use or  benefit instead of for the export of U.S. goods.

Appendix II: Comments from the Export- Import Bank of the United States

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Jonathon Oldmixon (Assistant  Director), Flavio Martinez (Analyst in Charge), Mason Calhoun, Marcus  Corbin, Anthony Costulas, Adam Cowles, David Dornisch, Heather  Dunahoo, Paulissa Earl, Colin Fallon, Dennis Fauber, Jennifer Felder,  Dragan Matic, Maria McMullen, Christopher H. Schmitt, Albert Sim,  Sabrina Streagle, and Steve Westley made key contributions to this  report.

The Export-Import Bank (EXIM) of the United States provides financing to support U.S. jobs and companies selling U.S. goods and services abroad.

EXIM requires companies applying for certain financing to self-certify that they do not have delinquent federal debt. Financial pressures that stem from such debt can tempt companies to fraudulently apply for financing.

However, after analyzing federal data, we identified billions of dollars in authorized EXIM transactions associated with dozens of companies that potentially had such debt.

We recommended EXIM explore opportunities to use federal data when verifying companies' program eligibility.


Small Business Administration: Export Promotion Grant Program Should Better Ensure Compliance with Law and Help States Make Full Use of Funds

The Small Business Administration's (SBA) management of the State Trade Expansion Program (STEP) does not provide reasonable assurance of compliance with some legal requirements. Specifically, the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) requirements for STEP include:

Proportional distribution requirement. SBA's Office of International Trade (OIT) must distribute grant funds so that the total amount awarded to the 10 states with the highest percentage of eligible small businesses does not exceed 40 percent of the program's appropriation that year.

Total match requirement. States must provide a 25 or 35 percent non-federal match to the federal grant amount.

Cash match requirement. A state's match cannot be less than 50 percent cash.

GAO found that, while OIT has a process to meet the distribution requirement, it does not have a process for documenting that states have met the total match requirement before grant closeout, and does not have a process to determine whether states are meeting the cash match requirement. Without such processes, SBA cannot be reasonably assured that states are contributing per the law's requirements.

GAO found that, while OIT has made changes to STEP in response to states' feedback, officials from states with low grant use described ongoing challenges with the program that affect their ability to fully use funds. These challenges include compressed application and award timelines, administrative burden, and poor communication. SBA has not adequately assessed risks to the program, including the risk to achieving program goals posed by some states' low grant fund use rates. Without such an assessment, OIT's ability to support U.S. exporters may be diminished. Further, SBA has not effectively facilitated sharing best practices among states. By doing this, SBA could help states make full use of funds to achieve the program's goals.

I am pleased to be here today to discuss the Small Business  Administration’s (SBA) State Trade Expansion Program (STEP).  Congress established STEP in 2010 and reauthorized the program in  2016 to provide funding for state programs that facilitate export  opportunities for small businesses. According to SBA officials, the goals  of the program are increasing (1) the number of small businesses  exporting, (2) the number of small businesses exploring significant new  trade opportunities, and (3) the value of exports for small businesses  already engaged in international trade. In the years since STEP was first  authorized, SBA has awarded about 300 STEP grants, and these grants  have provided about $139 million of support to almost every U.S. state as  well as several territories. Many states report that STEP is important to  their export promotion operations; however, concerns have been raised  related to the management of the program, including SBA’s processes for  administering and monitoring grants and the effectiveness of the program  in reaching its goals.

My testimony today is based on our report, which is also being released  today. Our report examines the extent to which (1) SBA’s STEP grants  management process provides reasonable assurance of compliance with  selected requirements of applicable law, and (2) SBA has taken steps to  address challenges states report in using grant funds to achieve program  goals.

To address these objectives, we analyzed relevant data on award and  matching fund amounts. We reviewed the Small Business Jobs Act of  2010 and the Trade Facilitation and Trade Enforcement Act of 2015  (TFTEA), the statutes that established and reauthorized STEP,  respectively. We also reviewed the Office of Management and Budget’s  (OMB) federal grant guidance, Uniform Administrative Requirements,  Cost Principles, and Audit Requirements for Federal Awards (Uniform  Guidance), and the Standards for Internal Control in the Federal  Government. In addition, we analyzed SBA program documents, and  standard operating procedures for managing SBA grants. We also  interviewed officials from SBA’s Office of International Trade (OIT), which  is responsible for making the awards and administering the program; the  Office of Grants Management (OGM), which is responsible for managing  grants across SBA.

To identify the states’ challenges to fully using the grant funds, we spoke  with officials from 12 of the 40 states that received a grant in fiscal year  2015, the most recent year for which complete grant expenditure data  were available when we began this work. We selected these states  because they used 75 percent or less of their award in that year. This  group of 12 states constitutes a nongeneralizable sample, and as such,  the challenges that these states reported may not be common to all  states receiving a STEP grant. We conducted the work on which this  statement is based in accordance with generally accepted government  auditing standards. More details on our methodology can be found in the  report being released today.

SBA awards STEP funds annually to state governments through a  competitive application process. According to SBA, the annual STEP  cycle begins with the funding opportunity announcement that SBA posts  on www.grants.gov. This announcement indicates that the grant  application is open and includes objectives, deadlines, eligibility, and  requirements. When a state trade office applies for a STEP grant, its  application outlines any intended activities and establishes performance  targets within each of the activities for the fiscal year or period of the  grant. OIT selects grant recipients and notifies states of their award  status in September. If a state receives a STEP grant, its trade office  provides the funds to local small businesses through an application  process. Once small businesses receive STEP funding, they can use the  money for a variety of export-related purposes. These purposes are  outlined in TFTEA, and include participation in foreign trade missions;  subscriptions to Department of Commerce services; participation in trade  shows, and; training.

SBA’s STEP Grants Management Process Does Not Provide Reasonable Assurance of Compliance with Some Requirements of Applicable Law

Our report found that SBA’s STEP grants management process does not  provide reasonable assurance that STEP grant recipients meet two of the  three TFTEA requirements we reviewed before the grant is closed out.  TFTEA contains specific requirements for STEP, including:

Proportional distribution requirement. SBA must distribute grant  funds in a way that caps the amount of grant funds distributed to the  10 states with the largest numbers of eligible small businesses at 40  percent of the total amount awarded each year. This requirement  ensures that states with fewer eligible small businesses receive  funding, and is known as the “proportion of amounts” clause in the  law.

Total match requirement. States must provide either a 25 percent or  35 percent nonfederal total match to the federal grant amount.

Cash match requirement. A state’s match cannot be less than 50  percent cash.

SBA’s Process Provides Reasonable Assurance of Compliance with TFTEA’s Proportional Distribution Requirement

First, we found that OIT has established a process for ensuring  compliance with the TFTEA requirement outlined in the “proportion of  amounts” clause of the statute. OIT officials told us they review data from  the Department of Commerce’s Census Bureau that show the number of  exporting small and medium-sized businesses in each state, and then  use these data to determine the top 10 states. According to OIT officials,  they use the most recent data available, with an approximately 2- to 3- year lag. OIT officials told us that they planned to use available 2016  Census data to determine the top 10 states for the fiscal year 2018 award  cycle and then, after receiving applications, determine award amounts  that would comply with this requirement.

SBA’s Review Process Did Not Document that States Met TFTEA’s Total Match Requirement before Grant Closeout

Second, we found SBA’s process did not document that states met  TFTEA’s total match requirement before grant closeout. TFTEA requires  that states provide matching funds, and the total match is typically 25  percent of the combined state-federal amount. At least half of the total  match must be cash. Matching share requirements are often intended to  ensure local financial participation, and may serve to hold down federal  costs. If SBA determines that a state is not providing sufficient matching  funds, it can withhold reimbursement for expenses incurred under the  grant. Figure 1 illustrates the STEP funding proportions described above.

In our report, we identified four instances where, according to OIT’s  documentation, states reported insufficient total matches—one in fiscal  year 2015 and three in fiscal year 2016. OIT’s documentation showed  that these four states failed to meet the required total matching funds by  about $76,000 combined over these 2 years of the program. SBA told us  they nevertheless had closed these grants.

OIT officials provided several explanations for their actions. First, OIT  officials told us that of these four states, two submitted additional  information after the grant had closed, indicating that the states had met  the matching requirement. OIT officials stated that they did not verify the  accuracy of the total match information before grant closure because of  OIT staff error. With respect to the other two states, OIT initially stated  that it was working with OGM to verify that the total match requirement  had not been met, and how best to recover the funds. Subsequently, OIT  reported OGM’s determination that one state had in fact met the match  requirement, but that the other had not. In the case of the state that did  not meet the requirement, OGM determined that SBA had overpaid  federal funds to that state by about $19,600. However, after contacting  the state and looking into the matter further, OGM conducted a review of  quarterly reporting documentation for this state, and determined that the  state had in fact exceeded its required match by about $3,800.

Though all four of the states initially identified were eventually determined  to have met the total match requirement, SBA did not have an adequate  process in place to ensure documentation of a full match before grant  closeout. Federal internal control standards state that management  should design control activities. By designing and executing appropriate  control activities, management helps fulfill its responsibilities and address  identified risks in the internal control system. Without a process for  effectively documenting that the total match requirement has been met  and reviewing this documentation before grant closeout, SBA does not  have reasonable assurance that states have complied with TFTEA’s total  match requirement, and risks overpayment of federal funds.

SBA Does Not Monitor States’ Compliance with TFTEA’s Cash Match Requirement

Third, we found that OIT’s process does not provide reasonable  assurance that states have complied with the TFTEA cash match  requirement. As previously noted, TFTEA requires that states provide at  least half of their total match in the form of cash. TFTEA allows for the  remaining half to be any mixture of cash, in-kind contributions, and  indirect costs. OIT collects information about the types of expended  matching funds, including the proportion provided in cash; however, OIT  does not have a process in place to use this information to monitor states’  compliance with this requirement.

OIT documents show that while proposed cash match amounts are  recorded, OIT does not track or analyze states’ expended cash matching  funds during or at the close of the grant cycle. OIT officials told us that  this information is included in the states’ quarterly detailed expenditure  worksheets, and therefore can be reviewed for compliance on a case-by- case basis. However, OIT program officials told us that they do not  regularly analyze this information to determine what proportion of the total  match the cash portion constitutes. The program’s authorizing legislation  does not define “cash,” and neither does the Uniform Guidance. OIT  considers the salaries of state trade office staff who work on  administering the grant to be a form of cash and, according to OIT  officials, most states use state staff salaries as their total match, including  the required cash portion.

In addition, we found that OIT does not have a process for ensuring that  states reporting staff salaries as their required cash match are not also  using grant funds from STEP to pay for portions of these same salaries.  As such, SBA cannot consistently determine whether states are meeting  the TFTEA cash match requirement, and risks closing out grants for  which states have not met the cash match requirement. Using part of the  grant to cover the cost of the state’s matching requirement in this way  could have the effect of reducing the match below the thresholds  mandated by TFTEA. In our discussions with officials from 12 low-use  states that received STEP grants in fiscal year 2015, 2 states reported  using the grant to offset state staff salaries. When we asked OIT officials  what process they had in place to determine whether states were using  staff salaries paid for with STEP funds as part of their match amount, OIT  officials told us that they were not aware that STEP grantees had  engaged in this practice, and therefore did not monitor for it.

SBA’s grants management standard operating procedure states that the  agency should monitor grantees for compliance with the terms and  conditions of the awards, which includes compliance with applicable  federal law. Further, according to federal standards for internal control,  management should design and execute control activities, and use quality  information to achieve the entity’s objectives. Management should  process reliable data into quality information to make informed decisions  and evaluate the entity’s performance in achieving key objectives and  addressing risks. Without processes to review whether states are  meeting the cash match requirement, OIT is not implementing its  responsibilities under SBA’s standard operating procedure because it  cannot consistently determine whether states are meeting this  requirement. Without making such a determination, SBA does not have  reasonable assurance that states are contributing to the program as  required by STEP’s authorizing statute.

In our report, we recommended that the SBA Administrator should  establish a process that ensures documentation of states’ compliance  with the total match requirement before grant closeout, and develop a  process to determine states’ compliance with the cash match  requirement. SBA agreed with these recommendations.

Some States Report Challenges to Using Grant Funds and SBA Has Not Adequately Assessed Risk to Program from Low Grant Use

Next, we looked at STEP’s grant use rate. In our report, we found that  nearly 20 percent of grant funds go unused each year, despite OIT  officials stating that they seek 100 percent use of grant funds.  Specifically:

2015. Across all 40 recipient states, combined grant use was 81  percent, leaving 19 percent, or nearly $3.4 million, unused. This  included one state that left 77 percent, or over $432,000, of its funds  unused that year.

2016. Across 41 of the 43 recipient states, combined grant use was  82 percent, leaving 18 percent, or nearly $3.2 million, unused. This  included one state that left nearly 95 percent, or nearly $184,000, of  its funds unused that year.

We found that OIT made some changes to the program that could  improve states’ ability to use all their grant funds. Changes included:  (1) Extending funds usage period to 2 years. This change allows an  additional 4 quarters to conduct program activities, which, in turn, may  help enable states to use the full amount of their grant funding and  achieve performance targets.  (2) Eliminating travel preauthorization requirement. This change may  reduce the administrative burden on state trade office staff and allow  greater flexibility to use grant funds when opportunities that require travel  arise with limited notice.  (3) Reducing the length of the technical proposal. This change may  help to streamline the program’s application paperwork.

Some States Cited Challenges with the Program

We interviewed officials from low-use states to identify the continuing  challenges they faced. We grouped the most commonly reported  challenges into the following categories:  (1) Timing of the application and award processes. State officials  discussed the variable and short application timeframes, and said that the  award announcement happening close to the start of the grant period can  make it difficult to use funds during the 1st quarter of the period.  (2) Administrative burden. State officials described challenges due to  inflexible application requirements, a difficult process for repurposing  funds, and burdensome and changing reporting requirements.  (3) Communication. State officials told us this was a challenge because  of delays and inconsistent communication of requirements from OIT.

SBA Has Not Adequately Assessed Risk to Achieving Program Goals or Effectively Shared Best Practices

In our report, we found that OIT had not assessed and fully addressed the  risk posed by some states’ low use of funds. OIT officials told us that  while they informally collect feedback from states, there is no systematic  process to collect states’ perspectives on challenges with the program,  including obstacles to their ability to use funds. Officials said that they  seek 100 percent use for each state that receives an award, as well as for  the program as a whole. Federal internal control standards specify that  agency leadership should define program objectives clearly to enable the  identification of risks and define risk tolerances in order to meet the goals  of the program’s authorizing legislation.

In addition, OIT has no systematic process to share best practices with  sufficient detail that states struggling to use their STEP funds might apply  those practices to improve their own programs. TFTEA requires SBA to  publish an annual report regarding STEP, including the best practices of  those states that achieve the highest returns on investment and  significant progress in helping eligible small businesses. While 12 states  used 75 percent or less of their grant funds in the fiscal year 2015 cycle,  19 states used all or almost all of their funds. SBA publishes high-level  information on what it deems to be notable state activities in its annual  report to Congress. OIT officials told us that, when possible, they share  best practices with states that may have difficulty accessing external  markets. However, OIT officials told us that they do not formally facilitate  the sharing of best practices among the states, saying that best practices  for promoting exports in one state might not be transferable to another  state because each state is unique.

According to the Uniform Guidance, grant recipients’ performance should  be measured in a way that helps the federal awarding agency and other  nonfederal entities improve program outcomes, share lessons learned,  and spread the adoption of promising practices. We have also  previously reported on the importance of collecting and sharing best  practices, as well as the processes for doing so. By sharing detailed  information with all participating states about the approaches that some  grant recipients are using to successfully achieve STEP’s goals, SBA  could encourage all grant recipients to improve the effectiveness of their state STEP programs, including increasing fund use rates in pursuit of  OIT’s stated aim of 100 percent grant fund use.

In our report, we recommended that the SBA Administrator assess the  risk to achieving program goals posed by some states’ low grant fund use  rates, and that assessing this risk could include examining the challenges  that states reported related to the program’s application and award  processes, administrative burden, and communication. We also  recommended that SBA enhance collection and sharing of best practices  among states that receive STEP grant funds. SBA agreed with these  recommendations.

Chairwoman Finkenauer, Ranking Member Joyce, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

If you or your staff have any questions about this statement, please  contact me at (202) 512-8612 or gianopoulosk@gao.gov. Contacts for our  Offices of Congressional Relations and Public Affairs are on the last page  of this testimony. GAO staff who made key contributions to this statement  are Adam Cowles (Assistant Director), Cristina Ruggiero (Analyst in  Charge), Martin de Alteriis, Mark Dowling, Jesse Elrod, John Hussey, and  Christopher Keblitis.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

The State Trade Expansion Program seeks to help U.S. small businesses export their products to other countries. The Small Business Administration awards the program's funds to state trade offices, which assist with activities like trade show attendance. It has given about $139 million in grants since FY 2011.

The program requires states to provide matching funds and SBA must follow rules designed to spread funding among states.

In the report on which this testimony is based, we recommended, among other things, that SBA

Develop a process to ensure matching fund requirements are met

Evaluate the challenges states face in using their grants