    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                         EXAMINING FRAUD, WASTE, AND ABUSE AT THE
                                      EXPORT-IMPORT BANK

    =======================================================================

                                    HEARING

                                   BEFORE THE

                          SUBCOMMITTEE ON HEALTH CARE,
                       BENEFITS AND ADMINISTRATIVE RULES

                                     OF THE

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 11, 2015

                                   __________

                               Serial No. 114-46

                                   __________

    Printed for the use of the Committee on Oversight and Government Reform

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             Available via the World Wide Web: http://www.fdsys.gov
                          http://www.house.gov/reform

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                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                         JASON CHAFFETZ, Utah, Chairman
    JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland,
    MICHAEL R. TURNER, Ohio                  Ranking Minority Member
    JOHN J. DUNCAN, Jr., Tennessee       CAROLYN B. MALONEY, New York
    JIM JORDAN, Ohio                     ELEANOR HOLMES NORTON, District of
    TIM WALBERG, Michigan                    Columbia
    JUSTIN AMASH, Michigan               WM. LACY CLAY, Missouri
    PAUL A. GOSAR, Arizona               STEPHEN F. LYNCH, Massachusetts
    SCOTT DesJARLAIS, Tennessee          JIM COOPER, Tennessee
    TREY GOWDY, South Carolina           GERALD E. CONNOLLY, Virginia
    BLAKE FARENTHOLD, Texas              MATT CARTWRIGHT, Pennsylvania
    CYNTHIA M. LUMMIS, Wyoming           TAMMY DUCKWORTH, Illinois
    THOMAS MASSIE, Kentucky              ROBIN L. KELLY, Illinois
    MARK MEADOWS, North Carolina         BRENDA L. LAWRENCE, Michigan
    RON DeSANTIS, Florida                TED LIEU, California
    MICK MULVANEY, South Carolina        BONNIE WATSON COLEMAN, New Jersey
    KEN BUCK, Colorado                   STACEY E. PLASKETT, Virgin Islands
    MARK WALKER, North Carolina          MARK DeSAULNIER, California
    ROD BLUM, Iowa                       BRENDAN F. BOYLE, Pennsylvania
    JODY B. HICE, Georgia                PETER WELCH, Vermont
    STEVE RUSSELL, Oklahoma              MICHELLE LUJAN GRISHAM, New Mexico
    EARL L. ``BUDDY'' CARTER, Georgia
    GLENN GROTHMAN, Wisconsin
    WILL HURD, Texas
    GARY J. PALMER, Alabama

                        Sean McLaughlin, Staff Director
                     David Rapallo, Minority Staff Director
                               Sarah Vance, Clerk
         Subcommittee on Health Care, Benefits and Administrative Rules

                        JIM JORDAN, Jr., Ohio, Chairman
    TIM WALBERG, Michigan,               MATT CARTWRIGHT, Pennsylvania,
    SCOTT DesJARLAIS, Tennessee              Ranking Member
    TREY GOWDY, South Carolina           ELEANOR HOLMES NORTON, Distict of
    CYNTHIA M. LUMMIS, Wyoming               Columbia
    MARK MEADOWS, North Carolina         BONNIE WATSON COLEMAN, New Jersey
    RON DeSANTIS, Florida                MARK DeSAULNIER, California
    MICK MULVANEY, South Carolina Vice   BRENDAN F. BOYLE, Pennsylvania
        Chair                            JIM COOPER, Tennessee
    MARK WALKER, North Carolina          MICHELLE LUJAN GRISHAM, New Mexico
    JODY B, HICE, Georgia                Vacancy
    EARL L. ``BUDDY'' CARTER, Georgia

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 11, 2015....................................     1

                                   WITNESSES

    Mr. Michael T. McCarthy, Deputy Inspector General, Export-Import
      Bank of the U.S
        Oral Statement...............................................     4
        Written Statement............................................     6

                                    APPENDIX

    Email from Brendan Rudd on June 27, 2014 Regarding Allegations...    38
    Letter from Michael T. McCarthy to Chairman Jim Jordan...........    43

          EXAMINING FRAUD, WASTE, AND ABUSE AT THE EXPORT-IMPORT BANK

                                  ----------

                            Thursday, June 11, 2015

                      House of Representatives,
             Subcommittee on Health Care, Benefits and
                                   Administrative Rules
                  Committee on Oversight and Government Reform,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 1:00 p.m., in
    Room 2154, Rayburn House Office Building, Hon. Jim Jordan
    [chairman of the subcommittee] presiding.
        Present: Representatives Jordan, Walberg, DesJarlais,
    Meadows, Mulvaney, Walker, Hice, Carter, Chaffetz, Cartwright,
    Norton, and DeSaulnier.
        Mr. Jordan. The committee will come to order.
        We will start with opening statements like we do, swear the
    witness in, and then get right to testimony and questions.
        Today's hearing continues the committee's important work
    examining the Export-Import Bank. In just 19 days, the Bank's
    charter is set to expire. When this happens, the sky will not
    fall; seas will not rise. In fact, in my view and the view of
    many economists, quite the opposite will happen. The expiration
    of the Bank's charter will mean that companies doing business
    overseas will reorient themselves away from Washington and
    toward market signals. The Bank's absence will make our economy
    stronger.
        Besides the economic rationale, there are also serious
    problems with the manner in which the Bank has operated that
    make its continued existence untenable.
        In just the past couple months, one former Export-Import
    Bank loan officer was indicted and pled guilty for accepting
    over $78,000 in bribes, and we learned that the Inspector
    General's Office, who we have with us today, has dozens of
    other investigations open that may yield more indictments.
        Over its history, the Bank has been plagued by scandal and
    systemic corruption. Many people forgot--excuse me--forget that
    the $90,000 in cash found in former Representative William
    Jefferson's freezer related directly to a bribe taken to help a
    company secure financing from the Export-Import Bank.
        Recently another scandal has emerged. NewSat, an Australian
    satellite company that received over $300 million in direct
    loans from Ex-Im, defaulted on its payments and declared
    bankruptcy. It is now clear that there were significant
    problems at NewSat. Had the Bank done proper due diligence, it
    almost certainly would have been aware of these issues before
    putting taxpayer dollars at risk.
        Even more troubling is that NewSat's disgraced CEO appears
    to have had a cozy relationship with Ex-Im Chairman Hochberg.
        These kinds of revelations have become all too common at
    the Export-Import Bank, and it is another reason that I am glad
    it appears my colleagues will finally let the Bank expire.
        This is a no-brainer for Congress. Like ending earmarks
    after the bridge to nowhere, the problems at the Bank are so
    awful that they should be a wake-up call not just about Ex-Im
    but about the problems with corporate welfare across the
    Federal Government.
        At the end of June, the Bank will not fire all of its
    employees. It will not lock its doors. Won't board up its
    windows. The Bank will be allowed to continue servicing
    existing loans and go through an orderly wind-down. The stories
    of calamity are overstated, and no one outside of the few major
    corporations benefiting from its finance will even notice. Many
    will make a push to revive the Bank after its charter lapses,
    but much like Dr. Frankenstein and his monster, the world would
    be much better off letting the Bank remain dead after it
    expires at the end of the month.
        It's now time to show the Bank the door. The chairmen of
    all the relevant committees, Chairman Ryan of Ways and Means,
    Chairman Chaffetz at Oversight, Chairman Price with Budget, and
    Chairman Hensarling at Financial Services, support ending the
    Bank. Majority Leader McCarthy, Majority Whip Scalise have both
    expressed opposition publicly. And as I mentioned at our last
    hearing, the best part about this is that all we need to do is
    nothing. Something the American people think Congress is pretty
    darn good at.
        And, with that, I'd yield to the ranking member, gentleman
    from Pennsylvania.
        Mr. Cartwright. Thank you, Mr. Chairman.
        And welcome to our witness this afternoon. I look forward
    to your testimony.
        Here we are again for another hearing on the Export-Import
    Bank, this time to examine the Bank's efforts in dealing with
    waste, fraud, and abuse. There are, as the chairman mentioned,
    nine legislative days left until the Bank's charter expires.
    This is nine legislative days before the country stands to
    start to lose the billions of dollars of exports that Ex-Im
    Bank is responsible for; nine legislative days before we start
    to jeopardize the hundreds of thousands of American jobs that
    the work of this Bank supports; nine legislative days before
    the shutdown crowd gets their way and closes an institution
    with a default rate of only 0.0167 percent as of this March, an
    institution that returns money to the United States Treasury,
    so something taxpayers ought to cheer and applaud and be proud
    of, not shut down.
        When I look at the Bank, I see a patriotic institution. An
    institution that supports American-made products and American
    jobs. The kind of things that we ought to be proud of.
        You know, earlier this week, I had the pleasure of speaking
    with Mr. Bill Weller. Bill Weller is the vice president of
    marketing and sales of Space Systems/Loral, also known as SSL.
    SSL is a world leader in commercial GEO satellites, and they
    have more communications capacity in orbit than any other
    manufacturer in the world. We ought to be proud of SSL. They
    employ approximately 2,800 people domestically building
    satellites for companies such as Dish Network and DirecTV. SSL
    has customers in 15 countries, and their exports account for 60
    percent of their sales.
        But SSL faces stiff competition from manufacturers in
    France, China, Israel, and Japan. Companies in those countries
    compete with SSL using attractive government financing terms.
    And to simply help level the playing field, SSL works with the
    Ex-Im Bank to obtain crucial financing and guaranties. Without
    the Bank's financing, SSL would lose contracts to our foreign
    competitors and be forced to cut their work force. It's not
    just SSL, remember, that benefits. It's the over 1,600 U.S.
    suppliers in 47 States that benefit from it.
        Given all of this, I ask: When are we going to start to be
    proud of the efforts and the work of the Ex-Im Bank.
        Many of my friends on the other side of the aisle contend
    that the Bank is rife with fraud and corruption, and in his
    semiannual report to Congress, Deputy Inspector General Mike
    McCarthy identified 31 cases of fraud, waste, or abuse that his
    office was investigating. And, Mr. McCarthy, I think you'll
    reaffirm that only three of those involve allegations of
    employee misconduct.
        To quote Fred Hochberg, chairman and president of the Bank,
    who testified repeatedly before this committee and testified
    before the Financial Services Committee on June 3, ``There will
    always be outsiders who attempt to defraud the government.''
    How agencies respond to those attempts is what we should be
    focusing on. The Bank has responded quite well.
        In addition, it's clear from the deputy IG's report that
    the Bank has fully cooperated with the IG's Office in rooting
    out cases of employee and outside misconduct and is dealing
    with these individuals appropriately. The report also cites a
    number of instances of investigative successes. Moreover, there
    has been only one indictment of a Bank employee. The other
    incidents were dealt with by administrative action or found to
    be groundless. Exactly how the system ought to work.
        Now, there are always instances of waste, fraud, and abuse
    in government. In fact, the United States Army is rife with
    waste, fraud, and abuse. So are all of our armed services, and
    they always have been. But that's not a reason to shut them
    down. We're proud of our Army. We're proud of our Navy. And
    we'll continue to combat waste, fraud, and abuse that will
    always be there. But they're not reasons to shut down the
    operation.
        We have nine legislative days to renew the Bank's charter.
    And we shouldn't be wasting this time playing political and
    ideological games. I hope today's hearing will highlight the
    good work the Bank does in assisting businesses, will resolve
    any questions concerning the IG's report, and provide
    additional support for this Bank's continuing reauthorization.
        It's time at long last, Mr. Chairman, that we are proud of
    American exports and the help that the Ex-Im Bank assists in
    those exports.
        Thank you, Mr. Chairman, and I yield back.
        Mr. Jordan. I thank the gentleman.
        We'll hold the record open for 5 legislative days for any
    member or members who would like to submit a written statement.
        Without objection, the chair is authorized to declare a
    recess at any time.
        We now turn to our witness. Again, Mr. McCarthy, thank you.
    This is the second time I think in front of the Oversight
    Committee on this issue you have been here. We appreciate you
    coming back.
        So I'm pleased to welcome Mr. Michael McCarthy, who is
    currently acting inspector general of the Export-Import Bank of
    the United States.
        And you know how this works, Mr. McCarthy. You have 5
    minutes for your testimony, and we look forward to that, and
    then we'll get right to questions. Gentleman is recognized.
        Oh, we got to swear you in. Yeah. Forgot. We always do
    that.
        Please stand and raise your right hand. Thank you.
        Do you solemnly swear or affirm that the testimony you are
    about to give will be the truth, the whole truth, and nothing
    but the truth, so help you God?
        Let the record reflect that the gentleman answered in the
    affirmative.
        You got 5 minutes, Mr. McCarthy, and you're recognized,

                           WITNESS STATEMENT

                    STATEMENT OF MICHAEL T. MCCARTHY

        Mr. McCarthy. Well, thank you, Chairman Jordan, Ranking
    Member Cartwright, and members of the subcommittee. I'm pleased
    to be back here to discuss the work of the Ex-Im Bank Office of
    Inspector General.
        The committee already has my written testimony, which
    highlights the work that our professional auditors, inspectors,
    and special agents have done to promote efficiency and detect
    and deter fraud at Ex-Im Bank.
        The committee has asked me to discuss instances of fraud,
    waste, and abuse at the Bank, and steps taken to address
    deficiencies in management and internal controls.
        So let me briefly cover a few highlights.
        Since 2009, OIG investigations into fraud schemes that
    target Ex-Im Bank have yielded 84 criminal indictments and
    informations, 50 convictions, and $255 million in judgments and
    repayments. The most common fraud schemes that we have
    encountered involve outside parties obtaining loans or
    guarantees through false representations and submissions of
    false documents.
        We work closely with the Bank's Asset Management Division,
    which makes referrals of transactions or claims with indicators
    of fraud. We currently have 29 open investigations, and nearly
    all of them address persons committing fraud against the Bank
    and have no indication of Ex-Im employee involvement.
        However, as the chairman and ranking member noted, one of
    those fraud cases involves former Ex-Im loan officer Johnny
    Gutierrez, who pleaded guilty to one count of bribery of a
    public official. Mr. Gutierrez admitted accepting more than
    $78,000 in bribes in return for recommending the approval of
    unqualified loan applications to the Bank, among other
    misconduct. This case remains an active fraud investigation as
    to other parties.
        We have closed other employee integrity cases in the past
    year that led to findings of misconduct and personnel being
    separated from employment at the Bank but no criminal charges.
        As I have previously testified, our open investigations are
    at various stages, and working with the Department of Justice,
    some of those cases may result in more prosecutions for bank
    fraud and money laundering. At this time, I would not expect
    charges against any Ex-Im Bank employees from our current
    caseload.
        As to our recommendations from audits and inspections, we
    have 48 open and unresolved recommendations; 24 from the
    current fiscal year and 24 from prior fiscal years.
        The written testimony summarizes recent audit work on
    internal controls. Our independent audit of the Bank's
    financial statements found that they were fairly presented in
    all material respects and had no material weaknesses. Our
    audits also found substantial compliance with the cybersecurity
    requirements of FISMA and that internal controls for the short-
    term multibuyer insurance program provided reasonable assurance
    of compliance.
        A recent annual audit found noncompliance with the Improper
    Payments Act, and we recommended changes to the risk-assessment
    process which the Bank is implementing. And the required risk
    assessment of the purchase card and travel card programs at the
    Bank found them to be low risk.
        Every year, we review our work and identify the top
    management challenges facing the Bank. Last fall, the OIG
    reported that the top challenge was managing risk, specifically
    managing the Bank's core business activities to reduce the risk
    of loss to the Treasury and, by extension, the taxpayer. To
    manage that risk, we have recommended the Bank design an
    agencywide risk management framework so that in addition to
    rating the risk of any individual transaction, the Bank is also
    evaluating and mitigating the risks generated by the overall
    composition of the portfolio and any outsized exposures the
    Bank has in certain regions, industry sectors, or single
    companies. To accomplish this, we have recommended a chief risk
    officer which the Bank has established. The Bank has also
    conducted stress testing and monitoring of exposure levels.
        We hope the Bank will build on these steps by developing
    and implementing key risk policies covering both credit and
    noncredit risks.
        We have also recommended improvements to due diligence and
    know-your-customer policies, and the Bank has deployed
    improvements in those areas.
        Finally, we have previously reported that internal policies
    providing clear guidance to staff had not been prevalent at Ex-
    Im Bank. So we recommended that the Bank rely more on clear
    policies, controls, and documentation and less on institutional
    knowledge. Many of our recommendations have been for specific
    internal control policies, which the Bank is working on
    implementing.
        Mr. Chairman, this concludes my statement. I'm happy to
    answer the members' questions.
        [Prepared statement of Mr. McCarthy follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Mr. Jordan. I thank the gentleman.
        We now recognize the gentleman from South Carolina, Mr.
    Mulvaney.
        Mr. Mulvaney. Thank you, Mr. Chairman.
        Thank you, Mr. McCarthy, for coming back again.
        I want to focus on--move away a little bit from the waste,
    fraud, and abuse part of the hearing and more on the
    deficiencies in management, if any, for the internal controls
    that--you've been here a couple times before, and I think
    you've either been on panels or were here when we had
    discussions regarding the 2012 reauthorization bill. And I want
    to focus for a few minutes on one part of the 2012
    reauthorization bill, which was a--which required the Bank to
    start taking steps to get out of the long-haul aircraft
    business.
        Are you familiar with those reforms, sir, from the 2012
    act?
        Mr. McCarthy. I'm familiar with those provisions, yes.
        Mr. Mulvaney. And let me just ask you, have you had a
    chance to investigate whether or not steps are being taken in
    order to bring the Bank into compliance with the 2012 law?
        Mr. McCarthy. So that portion of the 2012 reauthorization,
    that was a responsibility to assign to the Secretary of the
    Treasury. So we--our office within Ex-Im Bank wouldn't
    necessarily have jurisdiction. So I--we haven't done specific
    work in that area.
        Mr. Mulvaney. Does it ever come up?
        Mr. McCarthy. Not in the work that we've been doing.
        Mr. Mulvaney. Okay. So you've not had a chance to talk to
    Mr. Hochberg about it.
        Mr. McCarthy. Just to the extent that--the same information
    you've received.
        Mr. Mulvaney. The 2012 reform is essentially--are you
    familiar, Mr. McCarthy, with the home market rule?
        Mr. McCarthy. No. I'm not.
        Mr. Mulvaney. It's a gentlemen's agreement between the
    American Export-Import Bank and the European export credit
    facilities----
        Mr. McCarthy. Regarding aircraft.
        Mr. Mulvaney. Sorry?
        Mr. McCarthy. Regarding aircraft.
        Mr. Mulvaney. Regarding aircraft. You are familiar it,
    then, a little bit?
        Mr. McCarthy. Yes.
        Mr. Mulvaney. It strikes me that the 2012 reforms are very
    similar to that, or at least not similar, an extension of that.
    Right now, there's an agreement, for folks who aren't familiar
    with it, there's an agreement, a gentlemen's agreement, ladies'
    agreement, between Ex-Im and the European export credit
    facilities that we won't offer export/import financing to
    British, French and German air carriers for airplanes, and the
    European facilities won't offer it to American carriers.
        Is that your basic understanding, Mr. McCarthy, of the----
        Mr. McCarthy. That's my understanding. Yes.
        Mr. Mulvaney. Okay. So I guess my question to you is this:
    In your work, have you seen any erosion of that home market
    rule in the last couple of years?
        Mr. McCarthy. I don't believe that we've looked into that
    or seen that in the aircraft sector.
        Mr. Mulvaney. What other sector would there be?
        Mr. McCarthy. Well, so is the question, is that being
    expanded to other sectors?
        Mr. Mulvaney. No. My question is, is it still in place? Are
    you still seeing it respected? I guess what I'm getting at is
    have you seen any circumstances where we've used Export-Import
    financing to allow British, French, or German air carriers to
    buy American-made airplanes?
        Mr. McCarthy. Well, I don't think we've looked at that
    specifically, but I'm not aware of any.
        Mr. Mulvaney. Okay. And I guess you would be aware of it if
    it happened. Right?
        Mr. McCarthy. I would hope so.
        Mr. Mulvaney. Yeah. Any examples, Mr. McCarthy, of British,
    French, or German airlines--excuse me--of American airlines
    receiving European export credit facility assistance in buying
    Airbus airplanes?
        Mr. McCarthy. Not that I'm aware of.
        Mr. Mulvaney. Okay. So, to the best of your knowledge,
    there's been no erosion in that home market rule in the last
    couple years?
        Mr. McCarthy. To the best of my knowledge.
        Mr. Mulvaney. Okay.
        I've got some more questions, Mr. Chairman, but I won't be
    able to get to them in 2 minutes. I hope maybe we'll stick
    around.
        Thank you very much, Mr. McCarthy.
        Mr. Jordan. With that, I recognize the ranking member.
        Mr. Cartwright. Well, thank you, Mr. Chairman.
        Mr. McCarthy, according to your most recent semiannual
    report, in addition to trainings and briefings with the Ex-Im
    Bank, your office also conducted briefings on fraud scenarios
    and money-laundering patterns for private sector banks ranging
    from the Royal Bank of Scotland right on down to JPMorgan
    Chase. Am I correct in that?
        Mr. McCarthy. That's correct.
        Mr. Cartwright. So would you agree with me that fraud is an
    industrywide problem in banking, not just one that is unique to
    the Export-Import Bank of the United States. Right?
        Mr. McCarthy. I would agree with that. The frauds that we
    see are often when we have transactions that involve the
    private sector and the Ex-Im Bank. Both are being defrauded at
    the same time.
        Mr. Cartwright. Okay. In fact, isn't it true that in a
    number of your fraud investigations, it's not just Ex-Im Bank
    that's defrauded, but it's also commercial banks that are
    defrauded hand in hand?
        Mr. McCarthy. Yes. That's correct. Especially in these
    guaranty programs where there is a commercial bank making a
    loan and Ex-Im guaranteeing, both will be the targets of the
    fraud.
        Mr. Cartwright. Okay. So it would seem, then, that the only
    sure-fire way for any bank, not just the Export-Import Bank, to
    obtain a zero-percent fraud rate on any loan would be to stop
    lending money. Is that it?
        Mr. McCarthy. Well, the goal is always to minimize fraud.
    Getting it all the way to zero is a challenge for everybody.
        Mr. Cartwright. Okay. Well, since I really can't imagine
    members of our committee wanting to end the banking industry as
    we know it, I would like briefly to examine with you how
    successful this Bank has been at detecting and decreasing
    fraud.
        First, are you familiar with the Bank's medium-term
    program?
        Mr. McCarthy. Yes.
        Mr. Cartwright. And could you briefly describe what that
    is?
        Mr. McCarthy. Well, in 2009, when the OIG started its law
    enforcement operations, one of the key areas we focused on was
    the medium-term program, which had a much higher fraud rate and
    a much higher loss rate than the Bank's other programs. So when
    we started looking into that, we found a fairly high fraud rate
    in there, and a lot of our investigations stemmed from that
    program. And at that point in time in 2009, I think that
    program was experiencing somewhat close to $100 million in
    claims filed every year. We had an audit report that we issued
    that found deficiencies in internal controls, and we also
    investigated the fraud cases that resulted from those
    deficiencies.
        Mr. Cartwright. Okay. Now, in fiscal year 2009, this
    program paid out $100 million in fraudulent claims. Is that
    correct?
        Mr. McCarthy. It paid $100 million in claims. Not all of
    them were due to fraud.
        Mr. Cartwright. Okay. And now, as a result of that number,
    your offices became very involved in attempting to address the
    high fraud rates in the medium-term program. Am I correct in
    that?
        Mr. McCarthy. Yes. That's correct.
        Mr. Cartwright. Now, fast forward to fiscal year 2012. The
    number of fraudulent claims in the medium-term program had
    declined to approximately $15 million. Am I correct in that?
        Mr. McCarthy. I believe that's the number we reported. The
    number of claims, not all of them. Again, not all of them were
    due to fraud.
        Mr. Cartwright. And that number dropped again in fiscal
    year 2013 down to $9 million. Am I correct in that?
        Mr. McCarthy. Yes. I believe that's correct.
        Mr. Cartwright. All right. And for fiscal year 2014, the
    number dropped yet again to $6 million. Am I correct in that?
        Mr. McCarthy. Yes. That's correct.
        Mr. Cartwright. So please feel free to correct my
    arithmetic, but I believe that with respect to the medium-term
    program, that's a decrease in the fraud rate of 94 percent in
    the past 5 years. Am I correct in that?
        Mr. McCarthy. It's a decrease in the claims, right, in that
    program.
        Mr. Cartwright. So, based on these numbers, it would seem
    that anybody who characterizes this Bank as one that does not
    take fraud seriously is simply not paying attention.
        I also want to address with you individual failings--
    instances of failures of Bank customers to repay their loans.
    All of those, no matter where they are or no matter how much
    money they failed to pay back, all of those are included in the
    default rate. Am I correct in that?
        Mr. McCarthy. Yes. That's correct.
        Mr. Cartwright. So that any company that defaults, you can
    talk about how much they defaulted on. That's all already built
    in and included in the Bank's default rate. Right?
        Mr. McCarthy. That's right. In the loss rate that the Bank
    reports.
        Mr. Cartwright. And am I correct when I say, as of March
    this year, that default rate was 0.0167 percent?
        Mr. McCarthy. Yes. That's the default rate that's reported
    under the methodology the Congress put in place in the 2012
    reauthorization.
        Mr. Cartwright. Thank you, Mr. McCarthy.
        I yield back.
        Mr. Jordan. I thank the gentleman.
        We have got votes on the floor. So we're going to do one
    more round with the gentleman from Michigan. We'll do 5
    minutes.
        And then, Mr. McCarthy, we'll have to take a recess, and
    we'll be back. But it should be a fairly long vote series. It
    may be 45 minutes to an hour, and I apologize, but nothing we
    can do about it.
        Mr. Walberg's recognized.
        Mr. Walberg. Thank you, Mr. Chairman.
        And thank you, Mr. McCarthy, for being here.
        Mr. McCarthy, according to your latest semiannual report,
    of the 139 recommendations issued by your office in the past
    few years, 48--over one-third--remain open or unresolved, if my
    records are accurate. Some of those open items go back to 2010.
    Can you tell us why the Bank still has not closed these
    recommendations that you've given?
        Mr. McCarthy. I can't specifically speak to why the Bank
    hasn't closed all the recommendations. We've been working with
    them to try to close out more recommendations, and we've made
    some progress in the past.
        In my opening statement, I divided that 48 into
    recommendations that were issued in the current fiscal year,
    which are half of them, and recommendations that were issued in
    prior fiscal years.
        For the current fiscal year, things take time, policies
    need to be put in place, et cetera. So there's going to be some
    lag time.
        The ones that you identified, ones from 2010, 2010 to 2014,
    we would like to see more progress made on those
    recommendations.
        Mr. Walberg. So it's not good enough, at least with those
    items, for them to still be working?
        Mr. McCarthy. Well, on those, we have back and forth on the
    recommendations at some times. On some of them, they've given
    us interim steps that they've taken, and we requested more
    information. Some of them we think we're closer on resolving,
    that they've actually taken action on. Others that we're not
    satisfied that they've implemented those recommendations that
    they've agreed to implement.
        Mr. Walberg. Have any of those open recommendations at
    least given rise to potential increased fraud or abuse?
        Mr. McCarthy. I think in general our recommendations are
    designed to improve the internal control environment so that
    when they're put in place, there'll be less risk at the Bank.
        Mr. Walberg. In the first of our series of hearings with
    the Bank, Mr. Hochberg told the committee that he was
    completely unaware of reports that nearly $2 million of Export-
    Import loans intended to bring electricity to 1,200 communities
    in Ghana was instead used to buy luxury automobiles, foreign
    government officials. Are you aware of that transaction?
        Mr. McCarthy. I'm aware of some of the press reports on
    that transaction. We did do some work in Ghana that was
    published in the report. We did not cover that specific
    transaction in that report, but it's something that we're aware
    of.
        Mr. Walberg. Have you--are you planning on following up and
    reviewing that transaction?
        Mr. McCarthy. We're looking into it. We're looking into it,
    but I don't have additional information at this time. It's
    something that caught our attention as well, those reports.
        Mr. Walberg. So, at this point, you can't explain as to why
    taxpayer funds were used to purchase 38 luxury vehicles,
    including Lexus SUVs and Chrysler 300s, one of which my wife
    would enjoy having because she's told me.
        I guess the question would be, does this type of abuse
    warrant aggressive oversight from your office?
        Mr. McCarthy. It's something that we're aware of and
    something that we're looking into.
        Generally, one of the recommendations that we've made
    across a number of our reports is that the Bank should improve
    monitoring of how funds are being disbursed, and once the
    transactions are approved and originated and underwritten,
    that's one step in the process. But then there's another step
    in the process. And once things are in the approval pipeline,
    there needs to be monitoring of what exactly the funds are
    being used for.
        Mr. Walberg. So it is difficult to monitor the disbursement
    of the moneys and where they go once they are disbursed?
        Mr. McCarthy. Well, once the funds are disbursed, the Bank
    needs to continue monitoring to make sure that the items that
    are purchased are appropriate, that it's supporting U.S.
    exports.
        Mr. Walberg. But you've given them recommendations on how
    they can upgrade their ability to monitor?
        Mr. McCarthy. Yes. We've made some specific recommendations
    on monitoring, and we've also recommended they increase the
    resources--the human resources that are assigned to that
    function, and they have done so. They're adding personnel in
    that area.
        Mr. Walberg. How do they work it now? What tools do they
    use in monitoring and following up, especially with foreign
    countries?
        Mr. McCarthy. Well, there's a number of different tools.
    There are generally reporting requirements in these
    transactions. So making sure that those reports are coming in
    when they're due. Reading them, reviewing them, looking for
    discrepancies, asking for additional documentation. There are--
    also site visits are an important part of monitoring. Sometimes
    you need to go someplace and look at what's actually going on
    on the ground and talk to people who are there to determine
    whether the funds are being used----
        Mr. Walberg. Any penalties that are available to them with
    these foreign countries if they're not following the rules and
    the plans of reporting?
        Mr. McCarthy. Well, if there are--generally these are
    covenants in the loan transactions for this type of reporting,
    and if they're not being met, the Bank would have options of
    either calling the loan in or cutting off further financing,
    considering that in additional applications.
        Mr. Walberg. My time is expired. Thank you.
        Mr. Jordan. Thank the gentleman.
        We will reconvene upon the conclusion of the last vote.
        The subcommittee stands in recess.
        [Recess.]
        Mr. Jordan. The committee is back in order.
        Gentlelady from the District is recognized, Ms. Norton.
        Ms. Norton. Thank you, Mr. Chairman.
        It would be pretty reckless to leave the United States the
    only advanced nation without an Export-Import Bank, and I don't
    think the entire majority is with this subcommittee on that
    score.
        But the determination to shut down the Bank I suppose is
    exemplified by the fact that we're into the fourth hearing
    aimed to do precisely that, even though the IG has previously
    reported that there's no evidence of widespread employee
    misconduct or systemic involvement in the Bank in fraud. So I'm
    not sure what more the IG has to tell us.
        But I do want to ask about the only thing I could think to
    ask about that would assure members who had anything
    approaching an open mind on this issue would be to ask about
    internal controls as they exist now. So I'm interested in your
    findings on internal controls, assuming that the Bank can be
    reauthorized and we won't be left an orphan in the advanced
    world.
        Let me ask you if there are any aspects of the Bank's
    internal controls where you still believe improvement is
    needed, and what those areas might be.
        Mr. McCarthy. We've made several recommendations as far as
    internal controls go, starting from some of our original work
    back in 2009, 2010, looking at the medium-term program, and we
    did find deficiencies at that time. A lot of those deficiencies
    have been corrected.
        What we've reported back to the committee on the
    outstanding recommendations that we believe are most important
    and which I touched on in my opening statement is that we
    believe that the senior management and the Board of Directors
    of the Bank should play more of a role in the overall
    enterprise risk management. So with the board of directors----
        Ms. Norton. As opposed to who plays that role now?
        Mr. McCarthy. Well, right now, it's really just a function
    of the employees of the Bank. And the Board of Directors, who
    are the Presidential appointees, Senate-confirmed, five people,
    who are supposed to be in charge of the Bank, their role is
    really to serve as more of a credit committee and approve
    individual transaction. We believe if they had more of a role
    in looking at enterprise risk, that that would be a better
    governance structure for the Bank.
        Ms. Norton. Have they agreed to do so?
        Mr. McCarthy. No, they have not agreed. That's one of our
    unresolved recommendations. Some of the legislation does
    contemplate that.
        Ms. Norton. Does that need to be--do they believe that
    needs to be in legislation? And it is often that--there is
    often a line on who can do what in such an enterprise.
        Mr. McCarthy. Right. I think that there's a difference in
    terms of policy and in terms of how it's accomplished.
        Ms. Norton. Have you seen the bill? You say it is in the
    bill.
        Mr. McCarthy. Yes, I believe it's in all of the form
    proposals.
        Ms. Norton. Overall, have you seen improvements in the
    Bank's internal controls when they have been brought to their
    attention by the IG?
        Mr. McCarthy. Yes, we have seen improvements. There were
    problems that we've identified in the past years. They've
    improved many of them, put a lot more internal controls in
    place, updated their policy manual to put things in writing and
    have clear policies that employees can follow. So we've seen
    significant improvement in that area.
        We do have outstanding recommendations that we believe that
    there are further improvements that would help reduce risk at
    the Bank.
        Ms. Norton. And you've testified it takes time to implement
    those recommendations?
        Mr. McCarthy. With recommendations, it will generally take
    some period of time to fully implement them.
        Ms. Norton. Thank you very much. I appreciate your
    testimony, Mr. McCarthy.
        Mr. Jordan. I thank the gentlelady.
        Is the gentleman from Georgia prepared to ask questions, or
    does he want the chair to go?
        Are you comfortable, Mr. Hice? Are you ready to go?
        Mr. Hice. I can be.
        Mr. Jordan. I yield to the--or the gentleman from Georgia
    is recognized.
        Mr. Hice. Thank you. Thank you, Mr. Chairman.
        Thank you for joining us today, Mr. McCarthy. I appreciate
    your willingness to come back. A couple of questions that come
    to my mind on the green type things. Are you aware that when
    Ex-Im made a $32-plus million loan to LM Wind Power that that
    company, at the time the loan was made, was about to make some
    huge layoffs here in the United States?
        Mr. McCarthy. I'm not familiar with that particular
    transaction.
        We did look at a wind project that had similar issues,
    whereas a wind project in India and the exporter of the--or
    excuse me, this wasn't wind. It was solar, but in the green
    energy space--that there were issues with the exporter going
    bankrupt at the time that it was shipping the products overseas
    that were being supported by Ex-Im.
        Mr. Hice. Right. I'm familiar with that one too. You know,
    there's cases like this particular one, LM Wind Power had
    branches in both Arkansas and North Dakota, as I--as I--if I'm
    correct. And they laid off hundreds after a loan was made, $32
    million. And is that a normal practice to you? Does Ex-Im check
    in to those type of things before making a loan? Do you inspect
    the company in their, as you mentioned, if they're on the verge
    of bankruptcy or if they're on the verge of making a decision
    that's going to impact U.S. jobs? Do you all look into that?
        Mr. McCarthy. Well, that's an issue, that we encountered in
    the solar project in India that we looked at and did an
    inspection on. The Bank makes a loan to the foreign company
    that's purchasing the equipment from the U.S. company. And so
    as the--as part of the due diligence process, they're doing due
    diligence and looking at the credit profile of the company
    that's buying the product.
        We suggested that the due diligence needs to be expanded to
    include all of the parties in the transaction because, for
    example, if the U.S. exporter is shipping equipment to a
    specific project, if that U.S. exporter isn't going to be able
    to fulfill the terms of the contract or isn't going to be able
    to fulfill the warranties, that's a risk in making a loan to
    the company that's making the purchase.
        So we did identify that issue and recommended that the Bank
    expand its due diligence into the U.S. exporter, and their
    financial state and----
        Mr. Hice. Okay. I'm not talking about financial state. I'm
    talking about U.S. jobs. I mean, that's part of the goal of the
    Bank as well, to secure U.S. jobs. When something like that
    happens, are there any consequences for companies that you give
    huge loans to and then they lay off U.S. workers? Are there any
    consequences, or are loans ever revoked or anything along those
    lines?
        Mr. McCarthy. Well, because the loans are generally to the
    foreigner purchasers of those products, I don't believe that
    they would be reversed because of problems at the U.S. company.
        Mr. Hice. Okay. Well, there was a similar one in Canada, a
    project, First Solar, $455 million loan to them. And that
    particular company and ended up with their solar panels or
    whatever, they bought them from themselves. Are you familiar
    with that scenario?
        Mr. McCarthy. I don't believe I'm familiar with that
    particular case.
        Mr. Hice. Okay. Well, they received Ex-Im financing to
    export to themselves, $455 million. You're not familiar with
    that?
        Mr. McCarthy. Not with that transaction.
        Mr. Hice. Does that type of thing happen very often? Are
    you aware of companies that take loans from Ex-Im and then just
    use it themselves rather than for what it was intended to be
    used?
        Mr. McCarthy. Well, I think the issue is that the loans
    have to have U.S. products going overseas. If there are
    related-party transactions, if they're a U.S. company and a
    foreign subsidiary, there may be related-party transactions,
    but the goods still have to leave the United States to be
    qualified for export support.
        Mr. Hice. All right. Well, you mentioned the one in India.
    That's a similar type deal. Ex-Im awarded that particular loan
    some $400 million, and their credit rating was not very good.
    Was that just a fluke? Or, I mean, you were referring to that a
    little bit a while ago.
        Mr. McCarthy. Right. What we identified with that
    particular project, we did review that transaction. Their
    transaction at this time is performing and is in repayment. The
    main issue that we identified is that because the U.S. exporter
    had gone bankrupt, that there were issues that the warranty of
    the solar panels that were shipped was no longer valid, and so
    it could create potential problems in the future. If that
    project isn't able to generate enough energy to repay the loans
    that have been given to the project, that puts Ex-Im in a
    vulnerable position.
        Mr. Hice. Do you know how many jobs were lost when they
    went bankrupt?
        Mr. McCarthy. I do not.
        Mr. Hice. Okay.
        Thank you, Mr. Chairman.
        Mr. Jordan. I thank the gentleman from Georgia.
        Mr. McCarthy, about a year ago, former Ex-Im employee
    Johnny Gutierrez sat at that table and took the Fifth Amendment
    when we were attempting to question him about some of his
    activities at the Ex-Im Bank. About 6 weeks ago, you sat right
    where you're sitting today and told us that Mr. Gutierrez had
    been indicted by the Justice Department just 2 days before that
    particular hearing, and then about a week later Mr. Gutierrez
    pled guilty to bribery and fraud charges.
        You also indicated that day that there may be more
    indictments coming in the Gutierrez case. And you said there
    are 31 open fraud investigations, and there may be indictments
    in some of those. Has any of that changed? Is that still the
    number, 31? Or is it a bigger number today? Or is it a smaller
    number? Has there been more indictments? Where are we at?
        Mr. McCarthy. Our current number, I think, is 29 open
    investigations.
        Mr. Jordan. Twenty-nine, okay.
        Mr. McCarthy. Right. As of today.
        Mr. Jordan. What about the indictment issue?
        Mr. McCarthy. The indictments, I believe that we've had--we
    have had some new cases that we've reported and it's still the
    same. When we have cases that we investigate, the fact that
    we're investigating that matter means that there is a
    possibility the charges will----
        Mr. Jordan. When you say new cases you've reported, does
    that mean there are new referrals for indictment? Because you
    told me last time you work closely with Justice Department.
    These fraud investigations are both the inspector general and
    the Justice Department working together. So have there been
    indictments--additional indictments to the--in addition to Mr.
    Gutierrez?
        Mr. McCarthy. Not in the Gutierrez matter.
        Mr. Jordan. And the other 31? Other 29?
        Mr. McCarthy. I would need to check as to the timing as to
    when I last testified. I believe we've had other indictments,
    guilty pleas that I've reported to you.
        Mr. Jordan. Do you have an idea how many?
        Mr. McCarthy. A handful.
        Mr. Jordan. A handful in just the past 6 weeks? More
    indictments? More guilty pleas?
        Mr. McCarthy. I need to check on the records for that. For
    example, we are with someone----
        Mr. Jordan. Are they in the Gutierrez case you said or
    other cases?
        Mr. McCarthy. They are other cases.
        Mr. Jordan. So we have Mr. Gutierrez who has been indicted
    and pled guilty, and in the last 6 weeks, you've had other
    indictments and guilty pleas with employees in those 29 open
    fraud investigations?
        Mr. McCarthy. Not with employees.
        Mr. Jordan. Not with employees?
        Mr. McCarthy. Not with employees. These are--we have cases
    that are at various stages.
        Mr. Jordan. I understand.
        Mr. McCarthy. So there are people who have been indicted
    who have pled guilty recently. There are people who have
    previously been arrested who have pled guilty. There are people
    who have previously pled guilty who have been sentenced.
        Mr. Jordan. And so these aren't employees, but they're
    people from the public sector or the private sector trying to
    get the financing from the Ex-Im Bank?
        Mr. McCarthy. That's correct.
        Mr. Jordan. Okay. And have they received financing, or was
    it while they were trying to get financing?
        Mr. McCarthy. In these particular matters, it was they had
    already received financing.
        Mr. Jordan. They had already gotten the taxpayer money?
        Mr. McCarthy. Yes.
        Mr. Jordan. Okay. So now, are you familiar with the company
    NewSat?
        Mr. McCarthy. Yes.
        Mr. Jordan. And did Ex-Im loan them some money?
        Mr. McCarthy. Yes, they did.
        Mr. Jordan. Was it a direct loan?
        Mr. McCarthy. I believe so.
        Mr. Jordan. Yeah. Do you know how many millions of dollars?
        Mr. McCarthy. I believe it was north of a $200 million
    commitment, although it hasn't been all disbursed at this
    point.
        Mr. Jordan. North of $200 million?
        And were you the largest financier of NewSat when they were
    seeking financing for the business?
        Mr. McCarthy. I believe the U.S. Ex-Im Bank is the lead
    financier on that transaction.
        Mr. Jordan. You were the lead financier. And isn't it true
    that NewSat now went bankrupt?
        Mr. McCarthy. That's correct.
        Mr. Jordan. And how much are the taxpayers on the hook for?
        Mr. McCarthy. I believe at this point it's around $150
    million, but there's potential for recoveries in that matter
    that could reduce that amount.
        Mr. Jordan. Potentially $150 million of north of $200
    million debt the Ex-Im loaned to this company.
        A review commissioned by independent NewSat directors
    reported: ``Appalling corporate behavior, complete lack of
    control at NewSat, including opulent $10,000 dinners, extensive
    overseas travel, millions in executive bonuses and raises, tax
    evasion, and $400,000 in undisclosed payments to a yacht
    company owned by NewSat's former CEO.''
        Pretty bad stuff going on. How did this all fly under the
    Bank's radar?
        Mr. McCarthy. We've announced--this transaction has been on
    our radar screen for some time, since last summer. We've
    announced that we're going to conduct an inspection of this
    transaction. We're currently in the process of gathering
    documents, so we're going to be speaking with people. And I
    know that----
        Mr. Jordan. Since last summer, my understanding is they
    were still getting money as late as last summer. So----
        Mr. McCarthy. I believe that there were issues that were
    raised by an independent auditor in the Australian securities
    regulators last summer. At that point, I believe, Ex-Im stopped
    disbursing on that commitment.
        Mr. Jordan. I would ask--like to place in the record a copy
    of a report which includes some limited redactions by the
    Financial Services Committee based on concerns over certain
    business and personal information those redactions are. But
    this is the Rudd Report. Are you familiar with this, Mr.
    McCarthy, the Rudd Report?
        Mr. McCarthy. I'm familiar with it, yes. It was requested
    by the Financial Services Committee.
        Mr. Jordan. Without objection, so entered.
        Mr. Jordan. So you're familiar with this, Mr. McCarthy?
        Mr. McCarthy. I'm familiar with the existence of the
    report. I'm not familiar with its contents, personally.
        Mr. Jordan. Let me read a little bit to you. This is from
    Mr. Rudd himself. Again, these are part of the independent
    directors here at NewSat who commissioned this report: ``Within
    2 hours of commencing''--let me back up.
        ``I've been at NewSat for 6 weeks now.'' In the report. One
    of the confidential documents--documents. Not confidential. It
    has been redacted. ``Within 2 hours of commencing, I realized
    the company had some serious performance issues and that there
    was a total disconnect between what the lenders were expecting
    in terms of financial outcomes and what was actually happening.
    Of course, this often resulted in the earnings downgrade
    announcement into the market but has also led me to look into
    past activities.'' Much of this information was fed in to
    directors.
        So, within 2 hours, this guy comes in--this is clear back
    in early summer last year--within 2 hours of being there, he
    says, there are big problems. So what we want to know is, how
    in the world did the Bank miss this?
        Mr. McCarthy. As part of our inspection, we're going to be
    looking into the due diligence that the Bank conducted or did
    not conduct into that transaction, but I don't have that
    information at this time.
        Mr. Jordan. So you mentioned 29 ongoing, open fraud
    investigations. Is this one of the 29?
        Mr. McCarthy. Right now what we've announced is that we're
    going to conduct an inspection, which is different than an
    investigation. It's more in the nature of an audit where we go
    in and try to figure out what happened in the transaction.
    Depending on what evidence develops, it could be converted or
    referred into an investigation, but it's not an investigation
    at this time.
        Mr. Jordan. And what kicks it to the investigation level? I
    mean, if the fact that the taxpayers are on the hook for $150
    million, you've got this guy figuring it out within 2 hours,
    you were the lead financier in this deal, what kicks it up to a
    real investigation?
        Mr. McCarthy. It would be evidence of fraud or
    misrepresentations that were made to the Ex-Im Bank as opposed
    to bad business practices.
        Mr. Jordan. Wow, this sure seems--sure looks like fraud to
    me. I think it would look like fraud to the American taxpayer,
    and something, obviously, we need to get to the bottom of.
        My time is over. I apologize. I will give an extra few
    minutes on the second--we'll do a quick second round, and then
    I know we have all got pressing things.
        Well, wait a minute. The gentleman from North Carolina is
    still first round, so the gentleman from North Carolina is
    recognized, and then we'll go to Mr. Cartwright.
        Mr. Meadows. I'll be very brief.
        Thank you, Mr. Chairman, for leading the way.
        Mr. McCarthy, you are not new to the inspector general's
    role, just new at this particular role, having dealt in a
    number of other areas. I guess the troubling thing is, the
    chairman was just talking about, with regards to an inspection
    versus an investigation. Have we not seen enough of a pattern
    here of perhaps corruption that we could go ahead and go to
    that investigative mode?
        Because what I've found with inspector generals is they do
    their inspection and then there's a long period of time and
    then they do the investigation after it. Why are you making
    that choice here?
        Mr. McCarthy. I don't anticipate that there would be a long
    period of time, but what we need to do is that some of these--
    there are a lot of press reports on this. There are--there's
    information from people in Australia. When we need to do an
    analysis of the documentation and speak to some people to
    discover--to learn more information about whether there's
    evidence that there are crimes committed or frauds that are
    committed against Ex-Im Bank.
        There are certainly irregularities in this transaction, but
    as far as our jurisdiction goes, that's what we're looking for.
    If we develop that evidence, we'll convert it into an
    investigation.
        The issue is that, I know Congress always wants a lot of
    information. When we're doing inspections and audits, that's
    one thing. If something is converted into an investigation,
    then information will not be as accessible.
        Mr. Meadows. All right. So we have a number--Mr. Hice, from
    Georgia, mentioned a couple of issues. The chairman has
    mentioned a couple of issues. As we start to look at this, I
    mean, we're talking about real dollars, taxpayer dollars in
    terms of the amount of money that has been fraudulently, in
    many cases, obtained, or at least disposed of. How would you
    characterize the reforms that the Ex-Im Bank has embarked on?
        Because here's my concern is, is we reauthorized this just
    a few years ago, and with that came a series of reforms to try
    to make sure that the accountability is not there. And now
    we're being asked again to reauthorize it. And would you say
    that there is a culture of corruption in and around much of the
    Import-Export transactions?
        Mr. McCarthy. I wouldn't characterize it that way. As far
    as the internal controls and the improvements that need to be
    made at the Bank, there have been significant improvements that
    have been made in the past--over the past several years. But as
    our reports show and as our open recommendations show and as
    our continuing fraud cases show that there are more things that
    need to be done to try to detect and deter these frauds to
    prevent them from happening in the first place.
        But I do see some progress. So one of the questions that
    the chairman had was, were these people caught after they stole
    the money or before? I mean, we do have, just last week, we got
    a referral on the Bank on something that was stopped before it
    happened. And then we're looking into that now to see what
    further action that we might take on that.
        So we are seeing progress in some of these areas. But as
    you recognize, these are large dollar amounts, and no amount of
    fraud is acceptable against the United States.
        Mr. Meadows. So what you're saying is that you're
    characterizing this that import-export is just like every other
    Federal program? Because that's not what I'm seeing. I mean, so
    are you saying it's no worse than some of the other loan
    programs that we have?
        Mr. McCarthy. Well, I don't have specific data that I can
    make those comparisons, but----
        Mr. Meadows. Well, but you've been around the IRS and a
    number of other agencies throughout your career with the
    Federal Government. So you have some institutional knowledge.
    So are you saying that this is better or worse?
        Mr. McCarthy. I don't think that the problems with fraud
    that Ex-Im is encountering are unique to Ex-Im. I think their
    problems are----
        Mr. Meadows. I'm looking for you to give me a qualitative,
    not necessarily, you know, how you responded. But is it better
    or worse than some of the other institutions that you're
    familiar with or have worked with?
        Mr. McCarthy. I think that it's--on the fraud question?
        Mr. Meadows. Yes.
        Mr. McCarthy. I think that it's comparable. I don't think
    that it's worse than other agencies. So, for example, like the
    SBA, they've had 30 convictions in their last 6-month period
    for similar types of fraud schemes.
        Mr. Meadows. Yeah, the difference is the dollar amount with
    SBA.
        Mr. McCarthy. In some instances. But most of the frauds
    that we're seeing are generally in the, you know, $1 million to
    $5 million space, which is where SBA is operating as well.
        Mr. Meadows. Right. Okay.
        Mr. Chairman, I yield back.
        Mr. Jordan. I thank the gentleman.
        Gentleman from Pennsylvania is recognized, and then we'll
    go to Mr. Hice.
        Mr. Cartwright. Thank you, Mr. Chairman.
        Well, Mr. McCarthy, my dear friend Mr. Meadows just asked
    you flat out whether there was a culture of corruption at the
    Ex-Im Bank. And that's a fair question. And you said you would
    not characterize it that way, didn't you?
        Mr. McCarthy. That's what I said. And I think that--what
    you made reference to, what I discussed last summer, is that
    there are cases of serious employee misconduct that we've
    discovered at the Bank. There are four employees who have
    committed either criminal or fireable offenses within the past
    few years. On the other hand, there are more than 400 employees
    who work at this Bank.
        I know that the chairman of this committee and others have
    generally said 99 percent of Federal employees are doing a good
    job and that those numbers, those types of statistics, would
    indicate that the Ex-Im Bank was more common in that area. I
    certainly don't mean to minimize the very serious issues of Mr.
    Gutierrez and the other employees, but we're talking about a
    small number of employees at this point. We are concerned----
        Mr. Cartwright. I don't mean to cut you off, but here's
    the--suppose somebody just walked into this hearing room or
    maybe just clicked on the television if it's on TV someplace,
    they might think you're kind of sticking up for the Ex-Im Bank,
    that you're kind of in with it. Maybe you're an employee of the
    Ex-Im Bank, and I think maybe one thing you and I ought to make
    clear to everybody is what your role is. You are the acting
    inspector general. Does that mean you're an employee of the Ex-
    Im Bank?
        Mr. McCarthy. It means that I'm an employee of the Bank,
    but we are independent from the Bank's management.
        Mr. Cartwright. And does that mean you need to be sticking
    up for the Ex-Im Bank no matter what?
        Mr. McCarthy. The goal of my--my goal and the goal of my
    office, and I've conveyed this to everyone on our staff is that
    Congress is having a policy dispute about how to handle the Ex-
    Im Bank. Our goal is to provide facts. So I can give you
    information and tell you, these are the number of employees,
    this is what we know about the cases that we have.
        Mr. Cartwright. Are you independent, Mr. McCarthy?
        Mr. McCarthy. Yes, we are an independent office.
        Mr. Cartwright. That's the point I'm trying to establish.
        Mr. McCarthy. We have our own budget. We don't----
        Mr. Cartwright. You're not here to stick up for the Ex-Im
    Bank no matter what. You're an independent voice, and that's
    why you're kind of the auditor, aren't you?
        Mr. McCarthy. We have an arm's length relationship from the
    Bank so that we can be independent in conducting audits and
    investigations.
        Mr. Cartwright. So when you disagree that there was a
    culture of corruption at the Ex-Im Bank, you don't do so as
    somebody that is going to stick up for the Ex-Im Bank no matter
    what. You do so as an independent observer. Is that correct?
        Mr. McCarthy. Well, I'm trying to not--rather than doing
    characterizations, I'm trying to present Congress with all the
    facts and let you make your own determinations about culture
    and those types of issues.
        Mr. Cartwright. All right. Now, we talked about the Johnny
    Gutierrez case, brazen bribery scheme at the Bank. At the time
    that you--last summer, when members of this committee asked you
    when you testified about the case involving Mr. Gutierrez, you
    indicated you could not discuss it because it was an ongoing
    investigation. That makes sense. Your written testimony today
    indicates you are now in a position to discuss the matter in
    light of recent proceedings concerning Mr. Gutierrez in court.
        According to your testimony, on April 22 this year, Mr.
    Gutierrez pled guilty to bribery for accepting over $78,000 in
    bribes from June 2006 to December 2013 in exchange for
    recommending the approval of loans to applicants who were
    basically unqualified during the course of his employment. Is
    that correct?
        Mr. McCarthy. That's all correct.
        Mr. Cartwright. All right.
        Now, even before Mr. Gutierrez had pleaded guilty to the
    bribery, can you tell us what action, if any, the Bank took
    against Mr. Gutierrez?
        Mr. McCarthy. So Mr. Gutierrez' involvement in the scheme
    was discovered in the course of a fraud investigation. When we
    developed the evidence that Mr. Gutierrez was involved, we
    developed documentary evidence. And, at one point, we consulted
    with the Bank and we--our agents confronted Mr. Gutierrez and
    interviewed him about that, about his involvement. At that
    point, he was placed on administrative leave, and termination
    proceedings were begun against him, and eventually he was
    removed from his position at the Bank while the investigation
    was pending.
        Mr. Cartwright. I only have so much time.
        Were any other employees implicated in the Gutierrez case?
        Mr. McCarthy. Yes, there is another employee who was also
    removed from his position.
        Mr. Cartwright. He was removed from his position.
        Now, beyond that, what other employee--has your office
    uncovered any evidence that the bribery scheme involving Mr.
    Gutierrez and this other employee was widespread among other
    employees at the Bank?
        Mr. McCarthy. We have not developed evidence of that.
        Mr. Cartwright. No evidence of other employees involved in
    this scheme. I'm pleased to hear it. I also want to know how
    the matter involving Mr. Gutierrez was first brought to the
    attention of the OIG. How did your office first find out about
    it?
        Mr. McCarthy. We received a referral about suspicious
    claims activity in the transactions, and then in the course of
    looking into fraud in those transactions, we discovered
    evidence pointing us to Mr. Gutierrez.
        Mr. Cartwright. Was it the Bank's own employees that
    reported it to you?
        Mr. McCarthy. Yes.
        Mr. Cartwright. All right. So, in the course of your
    investigation, did you uncover any evidence that anyone in the
    Bank's senior management was involved in that misconduct?
        Mr. McCarthy. We did not.
        Mr. Cartwright. What about with respect to any political
    appointees at the Ex-Im Bank?
        Mr. McCarthy. No.
        Mr. Cartwright. Okay. No evidence of any involvement in
    that scheme?
        Mr. McCarthy. No evidence.
        Mr. Cartwright. All right. Well, now, in your assessment,
    did the Gutierrez bribery scheme go undetected for a long time
    due to deficiencies in the Bank's internal controls at the
    time?
        Mr. McCarthy. Yes. The fact that he was able to perpetrate
    the scheme for a period of time suggests deficiencies in the
    internal controls.
        Mr. Cartwright. And that's one of your jobs, to make
    recommendations about internal controls, right?
        Mr. McCarthy. That's correct.
        Mr. Cartwright. Did you make recommendations?
        Mr. McCarthy. Following the Gutierrez scheme, we made some
    additional recommendations about internal controls.
        Mr. Cartwright. What were they?
        Mr. McCarthy. Well, one of the things that the Bank has
    done in response, one of the ways that Mr. Gutierrez was able
    to thwart the system and to circumvent controls was that he
    concealed information about previous credit histories of people
    applying for new applications. So now the Bank requires
    documentation of the previous experience of those companies be
    attached to the documents that go up to the decisionmakers.
        Mr. Cartwright. So that's a control that you recommended
    and the Bank accepted. Is that correct?
        Mr. McCarthy. I don't know that we recommended that control
    specifically. I know that they put that control into place, and
    we've recommended more checks and balances generally for things
    like individual delegated authority program. Some of our
    recommendations have been that you need to have cross checking
    and more than one employee looking at these transactions and
    doing cross checks so that you can't have one employee
    exploiting the system.
        Mr. Cartwright. All right. Last question.
        Mr. McCarthy, as acting IG, do you continue to keep an eye
    on the Ex-Im Bank? Do you continue to serve as the watchdog for
    that organization?
        Mr. McCarthy. That's the role of our office.
        Mr. Cartwright. Thank you, sir. Thanks for your testimony.
        I yield back.
        Mr. Jordan. I thank the gentleman.
        Mr. McCarthy, I want to go back to a question I asked
    earlier. So employees and folks at NewSat smell trouble. They
    hire an outside consultant to come in and look at it. Within 2
    hours, he says, Whoa, this thing's mess. This is Mr. Rudd. He
    issues this report. Have you seen the report?
        Mr. McCarthy. I personally haven't read the report.
        Mr. Jordan. And is there a reason you haven't read the
    report?
        Mr. McCarthy. We generally have our inspectors who are
    working on that project.
        Mr. Jordan. So is anyone at the inspector general in your
    office read the report?
        Mr. McCarthy. I don't know.
        Mr. Jordan. Have you asked--do you have the report in your
    possession?
        Mr. McCarthy. I don't know.
        Mr. Jordan. Have you asked Mr. Hochberg for the report?
        Mr. McCarthy. We've made document requests surrounding the
    transaction. I would assume that it was included, that that
    report would have been included in that.
        Mr. Jordan. Wait. Wait. You've got to tell me exactly. Have
    you asked for the Rudd Report or haven't you?
        Mr. McCarthy. We've asked for a number of different
    documents in a number of different categories. I believe the
    Rudd Report would be included in that standard request that we
    have, but I can't confirm that we've asked for that
    specifically.
        Mr. Jordan. Well, okay. So you believe you've asked for it.
    Have they given it to you?
        Mr. McCarthy. I don't know what the current document
    production status is on that at this time.
        Mr. Jordan. Well, it's pretty important. I mean, within 2
    hours, they know there's a mess there. The Financial Services
    Committee gets it. We want to know if you've got it. You
    think--well, you tell me you don't have it. You think you've
    asked for it. What I want to know is, why hasn't the Export-
    Import Bank given it to you?
        Mr. McCarthy. We will get from the Export-Import Bank all
    of the documents. That's our goal. That will be one of the key
    documents that we'll look at. But we want to get all of the
    documents that are relevant to the----
        Mr. Jordan. Do you think--Mr. McCarthy, do you think you
    have it in your possession now, you being the Inspector
    General's Office at the Export-Import Bank, do you think you
    have this in your possession right now?
        Mr. McCarthy. I don't know.
        Mr. Jordan. You do not know?
        Mr. McCarthy. I don't know.
        Mr. Jordan. And you didn't think to check on this before
    you came here, knowing how important this was, how, you know,
    damning this information was and this report was of what went
    on with the NewSat deal?
        Mr. McCarthy. We have a number of different transactions
    that we're looking at at any given time.
        Mr. Jordan. Yeah, but you don't have anywhere--you know
    you're on the hook--the taxpayers are on the hook for $150
    million, right? That's pretty big. And based on what you're
    telling me is you believe you've asked for it, but they haven't
    given it to you. And I want to know why. Why won't Mr. Hochberg
    and the Bank give you this information?
        Mr. McCarthy. I don't know that we've received it yet.
        Mr. Jordan. You said you--when did you start your audit,
    which we hope gets pumped up and jumped up to an
    investigation--when did you start the audit of the NewSat deal?
        Mr. McCarthy. I believe we announced the audit within the
    past month.
        Mr. Jordan. I mean, 20 days ago? 30 days ago?
        Mr. McCarthy. I don't know. I can get you the exact date.
        Mr. Jordan. Sometime in May?
        Mr. McCarthy. I don't know.
        Mr. Jordan. And you believe you've asked for it, and they
    haven't given it to you?
        Mr. McCarthy. I don't know if they've given it to us or
    not. I don't keep tabs on every individual document that we----
        Mr. Jordan. Okay. So here's what we want you to do. Here's
    what we want you to do. We want to go back and we want you to
    confirm you've actually asked for it.
        Mr. McCarthy. Yes.
        Mr. Jordan. And then we want you to let us know if they've
    given it to you.
        Mr. McCarthy. Okay.
        Mr. Jordan. If they've already given it to you.
        Mr. McCarthy. Okay.
        Mr. Jordan. If they haven't given it to you and they give
    it to you tomorrow, that doesn't count.
        Mr. McCarthy. Okay.
        Mr. Jordan. Understand?
        Mr. McCarthy. Understood.
        Mr. Jordan. All right. One last question. Where is Mr.
    McCarthy's testimony? So we have four folks who have got some
    problems in the Gutierrez case. And your testimony when you're
    getting near the end, you mention: Another Ex-Im employee was
    separated from employment due to substantiated misconduct in
    this case.
        This is in the Gutierrez case. So what's that mean?
    ``Separated from employment due to substantiated misconduct.''
    I mean, that seems like government speak for ``this person was
    fired.'' Is that what happened?
        Mr. McCarthy. This person no longer works for the Bank.
        Mr. Jordan. Okay. Can you tell me something about this
    person? Are they going to be indicted and plead guilty and then
    when we bring them here take the fifth, or other order, but is
    that all going to happen with this person too?
        Mr. McCarthy. As I've indicated, this still remains an open
    matter. This is an open investigation. This individual is a
    potential witness against other subjects, and therefore, I
    can't provide a lot of information about this employee at this
    time.
        Mr. Jordan. Have the other two--there were four in this
    case. Have the other two been separated from employment due to
    substantiated misconduct? Has that happened with the other two?
        Mr. McCarthy. There were four last summer overall in
    separate cases. Yes, the other two cases, which have been
    reported on, both of those employees have left the Bank.
        Mr. Jordan. Okay. It's real important we get that
    information on the Rudd Report as soon as possible. That should
    be easy to check, Mr. McCarthy. You should be able to get that
    to us hopefully even as early as tomorrow.
        Mr. McCarthy. I'll get back to you promptly.
        Mr. Jordan. I appreciate it.
        The gentleman from Georgia is recognized.
        Mr. Hice. Thank you, Mr. Chairman.
        Mr. McCarthy, does the Bank have any kind of policy
    regarding sending funds to countries that we here in the United
    States have imposed sanctions upon, countries that are known to
    be violating human rights and other abuses?
        Mr. McCarthy. I believe there are charter requirements that
    specifically limit countries that can't or are ineligible to
    receive funds. And, yes, the Bank, as a matter of policy,
    consults with the State Department and has countries that it
    won't do business with for those reasons.
        Mr. Hice. Were you aware that the Bank does provide
    assistance to some of those countries?
        Mr. McCarthy. Specifically?
        Mr. Hice. Yeah. According to the Bank's annual report,
    2014, for example, the Bank has hundreds of billions of
    dollars, of U.S. tax dollar exposures in countries like the
    Democratic Republic of Congo, Sudan, Venezuela, Iraq. $4.5
    billion in China. $1.5 billion in Russia. Are you not aware of
    this? This is your annual report or the Bank's annual report.
        Mr. McCarthy. I believe it's the Bank's annual report.
        Mr. Hice. Yeah, the Bank's.
        Mr. McCarthy. There are--we've looked at some of the
    programs like Iran sanctions and have concluded that the Bank
    is complying with that and haven't found any issues. As far as
    outstanding loans to some of these other countries, I don't
    know the timing of when those loans were issued. It's possible
    that there may have been loans issued previously that are still
    on the books, and subsequent to that, they aren't doing new
    business because of new developments. I just--but I don't know
    the details on that.
        Mr. Hice. Well, do you have any idea how long the Bank has
    had a policy not to do business with countries that we have
    imposed sanctions on for their human rights violations?
        Mr. McCarthy. I don't know the specifics of each one.
        Mr. Hice. Do you have any idea, say, the countries that I
    mentioned, Sudan, Venezuela, any of these countries, are you
    aware of the average labor rates, the wages in those countries?
        Mr. McCarthy. I'm not personally familiar with all that
    information.
        Mr. Hice. Is that something that your office monitors?
        Mr. McCarthy. What we look at is that in some of our
    inspections the Bank has social and environmental policies that
    are conditions of the transactions, and some of our inspections
    we look at compliance with those policies.
        Mr. Hice. So is that a yes or no? Do you all monitor the
    wages in some of these countries?
        Mr. McCarthy. I don't know whether wage--the specifics of
    the wages. There are--whatever the Bank's social and
    environmental policies are, if there are policies that
    specifically address wages, we would look at that.
        Mr. Hice. Do you think that's something that ought to be
    monitored?
        Mr. McCarthy. To the extent that it affects the charter
    requirements and the policies of the United States, it should
    be monitored.
        Mr. Hice. So it should be. Is that correct? Is that what
    your answer is?
        Mr. McCarthy. I'm saying that----
        Mr. Hice. This is your opinion. Is that something that
    should be monitored? I mean, we're talking about countries that
    we have sanctions upon because there are human rights
    violations. I mean, these countries are paying extremely low
    wages. That seems to me it would be a reasonable thing for us
    to monitor if these countries are indeed involved in human
    rights violations.
        Mr. McCarthy. The Bank has policies on those issues, and we
    monitor compliance with those policies.
        Mr. Hice. So you do monitor?
        Mr. McCarthy. We monitor whether the Bank is complying with
    its policies. I don't know the details on that particular
    policy.
        Mr. Hice. All right. Let's look at the Congo, for example.
    As a country that is under U.S. sanctions, a country that was
    recently identified as the third worst human rights offender in
    the world, should that country be benefiting from U.S. tax
    dollars?
        Mr. McCarthy. I believe, if the policy is that countries
    that are under sanctions, that's a determination that's made by
    the Ex-Im Bank and the State Department not to do business with
    that country. If that's the determination that has been made,
    then the Ex-Im Bank should not be doing business with that
    country.
        Mr. Hice. Okay. But you said there is a policy, and here we
    are doing business with hundreds of millions of dollars to the
    third worst country in the world. Why would that be? How in the
    world could something like that just slip through the cracks?
        Mr. McCarthy. I don't know the timing of those transactions
    versus----
        Mr. Hice. Does it matter?
        Mr. McCarthy. Well, if they are previous commitments that
    have been made and longstanding and long-term commitments and
    then sanctions are imposed at a later date, there's a certain
    amount of time that needs--there has to be an unwinding of
    those transactions.
        Mr. Hice. All right. Well, let's go beyond. I feel like
    you're just beating around the bush, quite frankly, on these.
    We're talking about some U.S. sanctions. These are not things
    that are hidden in a closet somewhere. We, as a country, have
    sanctions against these countries that the Ex-Im Bank is doing
    business with. And you don't know what the wages are. You don't
    know anything. You know, it's rather stunning to me.
        Are you aware that we have many deals with sub-Saharan
    African countries in the portfolio where there is tremendously
    low index, if you will, for corruption?
        Mr. McCarthy. Yes, I'm aware of that.
        Mr. Hice. You're aware of that. And you're aware of the
    fact that we're doing business with a lot of these countries.
    Is it concerning that the Bank is involved in facilitating
    businesses in countries where there is great corruption?
        Mr. McCarthy. When the Bank is doing business in countries
    that have corruption problems, there need to be appropriate
    safeguards in place--there's the Foreign Corrupt Practices
    Act--and the due diligence done to ensure that that money isn't
    being diverted to corruption.
        Mr. Hice. So you're saying that you can assure us and
    guarantee us that those countries that money is being loaned to
    through Ex-Im Bank where there is great corruption, you can
    assure us that none of that money is being involved in
    corruptive activity?
        Mr. McCarthy. If the Bank is sending money over there, they
    need to take appropriate steps to ensure compliance with the
    sanctions that the U.S. has in place.
        Mr. Hice. I'm sure they need to, but can you assure us that
    that money is not being used for corruption?
        Mr. McCarthy. We haven't done work specifically in that
    area. I can say the only thing we've looked specifically at is
    compliance with Iran sanctions, and we found the Bank was
    compliant with that.
        Mr. Hice. Thank you, Mr. Chairman. My time is up.
        Mr. Meadows. [presiding.] I thank the gentleman from
    Georgia.
        Mr. McCarthy, thank you for your time, your service to our
    country. Obviously, these are not fun times when you get to
    come and testify. I do appreciate though your expeditious way
    that you've agreed to supply some of those documents to the
    committee. That's duly noted.
        And if there is no further business before the committee,
    without objection, the subcommittee stands adjourned.
        [Whereupon, at 3:53 p.m., the subcommittee was adjourned.]

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