[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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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
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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.]
APPENDIX
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