Audit 400229

(3) Findings and Questioned Costs Relating to Federal Awards Finding No. 2024 002 Loan Origination Involving Fraudulent Documentation Program Name: EDA Revolving Loan Fund Program Capital Allocation - New York Contractor Loans (a non-major program) Federal Department/Agency: U.S. Department of Commerce Economic Development Administration Assistance Listing Number: 11.307 Federal Award Year: January 1, 2024 December 31, 2024 Grant Number Award #01-79-15074 Compliance Requirements: Activities Allowed and Unallowed and Allowable Costs Criteria Federal regulations and the Organization’s own policies require effective internal controls to ensure that loans, including those funded by federal programs, are made only to eligible, legitimate recipients and are properly authorized and documented. Specifically, 2 CFR §200.303 (Internal Controls) mandates that recipients of federal funds establish effective controls to safeguard assets and ensure proper use of federal awards. 2 CFR Part 200 establishes cost principles for determining costs applicable to federal awards with nonprofit organizations. The Uniform Guidance (2 CFR 200.403) requires that costs charged to federal awards be necessary, reasonable, allocable, adequately documented, and in compliance with the terms and conditions of the federal award. The Organization’s Contractor Mobilization Loan Program guidelines also require verification of each subcontractor’s legitimacy and confirmation of their engagement by a general contractor before loan disbursement. Condition and context In 2025, management conducted an internal review that uncovered several instances of fraud within the Organization’s Contractor Mobilization Loan Program. One of the loans, valued at $410,000, was funded using a grant provided by a U.S. Department of Commerce Economic Development Administration (EDA). The Schedule of Expenditures of Federal Awards includes approximately $3.3 million in federal expenditures related to EDA grants. The internal review determined that the borrower was not a legitimate subcontractor and did not hold contractual relationships or involvement with the general contractor identified in the loan applications; consequently, the loan was determined to be fraudulent. Furthermore, during the approval process, the employee responsible for verifying subcontractor eligibility misrepresented to the Organization’s underwriters that appropriate due diligence, including confirmation of existence and project participation from general contractor had been completed. However, those verifications were not performed, resulting in the loan being issued based on inaccurate information. Cause The primary cause of this finding was a gap in internal controls and oversight that allowed required due diligence procedures to be bypassed. The designated loan officer responsible for verifying subcontractors’ legitimacy failed to perform the mandated verification steps and misrepresented to underwriters that all requisite due diligence had been completed including claims of general contractor confirmation. This misrepresentation was possible due to a lack of segregation of duties in the loan approval process which enabled the loan officer to circumvent controls without detection. The Organization relied on a single designated individual to verify subcontractor legitimacy and project approval without sufficient independent checks or supervisory review. Effect This gap in the control resulted in the disbursement of $410,000 from a U.S. Department of Commerce Economic Development Administration grant to a an illegitimate subcontractor who did not hold contractual relationships or involvement with the general contractor. This lack of proper segregation of duties represents a material weakness in internal control over financial reporting and material noncompliance with federal award requirements. Questioned Costs $410,000. Statistical Sample Not applicable Repeat Finding A similar finding was not reported in the prior year. Recommendation We recommend that the Organization’s management design and implement enhanced internal control procedures over the subcontractor verification process that include considerations regarding segregation of duties, independent verification of general contractors, enhanced communication protocols and employee training. Views of Responsible Officials Management acknowledges the questioned cost and the need for improved controls as highlighted in this audit finding. However, the borrower referenced in this finding was a registered business whose corporate credentials and credit history were verified through standard underwriting procedures at the time of origination. The issue pertains specifically to documentation intended to demonstrate subcontractor engagement with general contractors, which was subsequently found to be invalid following further examination. In response, management has implemented several corrective actions including the adoption of a Know Your Customer (KYC) Policy, a Fraud and Suspicious Activity Reporting Policy and a Mandatory Leave Policy. Collectively, these policies introduce enhanced verification procedures, multiple and independent contractor confirmation requirements, comprehensive IRS tax transcript reviews, new fraud and suspicious activity reporting protocols, site visits, annual borrower review requirements and mandatory leave for employees in sensitive positions. Additionally, an independent Internal Audit function will be established in the third quarter of 2026. The matter referenced in this finding is currently the subject of a criminal investigation, and all characterizations of employee conduct remain alleged until the investigation concludes. Subsequent to year-end and prior to the issuance of this report, TruFund received instructions from the EDA to replenish the EDA Revolving Loan Fund with the $410,000 question cost and complied with those instructions.