A job well done...

Celebrating SuccessThe OIG proudly recognizes the accomplishments of its Y2K auditteam. The team’s cooperative efforts with the Corporation over a3-year period to address the technological challenges posed by thecentury date change helped ensure a successful transition to themillennium. Congratulations to the following individuals:

Front row left to right: Mike Silagyi, Monte Galvin, Denise Douglas,Leo Gallagher. Back row left to right: Scott Miller, Julie King, JimSommers, Peter Sheridan.

Federal Deposit Insurance CorporationOffice of Inspector GeneralSemiannual

Report

to the Congress

Including theOIG‘s 1999Performance ReportOctober 1, 1999 - March 31, 2000

selves in trouble with little warning.In her recent State of the Corporationspeech, the Chairman of the FDICannounced her three most recentcorporate priorities, one of which wasdeposit insurance reform. Shestressed the need for the Corporationto reexamine its current “one size fitsall” approach to insurance premiumsin light of the increased risks thatsome of these very large institutionspose.

Although there have been relativelyfew bank failures over the past sev-

eral years, the Chairman noted thatone-half of the banks that havefailed since April 1998--that is, 6 of12 institutions--were involved in sub-prime lending activities. The lossassociated with a failure involvingsubprime lending is generally fivetimes greater than that of other fail-ures. And thus, a second priorityissue for the FDIC is to look at suchlending practices and the risks theypose to the insurance funds.

Always alert to protecting con-sumers, a third priority issue for theChairman is predatory lending. Such

The Corporation’s efforts to addressthe century date change over thepast 3 years helped maintain the sta-bility of and public confidence in thenation’s financial system. The Officeof Inspector General (OIG) waspleased to have played a part in help-ing to ensure a successful transitionto the millennium, and we congratu-late the FDIC on its success. We areespecially proud of the OIG staff whoparticipated on the Y2K team.

Since January 1, the FDIC has had lit-tle time to rest. Challenges that mayhave been slightly eclipsed by Y2Kare now in the forefront and comingat the Corporation head-on. Considersome of the significant changesoccurring around us.

On November 12, 1999, the Gramm-Leach-Bliley Act was enacted. Thislegislation has created the mostsweeping changes in banking lawsince the 1930s. It allows affiliationsbetween insured banks and financialcompanies, including securities andinsurance firms, in new types of enti-ties known as “financial holding com-panies.” The Act also allows nationalbanks to form financial subsidiariesthat could engage in financial activi-ties that, in general, do not includeinsurance or real estate develop-ment/investment. It also requiresfinancial institutions to establish pri-vacy policies to protect the confiden-tiality of customer information. Wewill all soon experience some of theimpacts of these changes.

Many of us can vividly recall our firstexperiences banking in small home-town banks. But more recently, asinstitutions have been consolidating,huge conglomerates, often called“megabanks,” have been created.With passage of the Gramm-Leach-Bliley Act, these megabanks and theservices they provide will likelybecome increasingly complex. Alongwith them come new risks and chal-lenges for the FDIC. Recent fluctua-tions in the stock market remind ushow volatile the economy can be andthat large institutions can find them-

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lending practices often occur in poorneighborhoods and frequently targetelderly or minority homeowners. TheCorporation will be developing guid-ance to ensure banks do not unwit-tingly support predatory practices.

Underlying and at the same timeforming a backdrop for all of thesechallenges is the amazing informationtechnology revolution. The institu-tions supervised by the FDIC rely onand use thousands of technicallycomplex systems as they conducttheir business activities. The FDICitself has embraced technology as aninvaluable and powerful tool for con-ducting its work. Along with theadvantages of such a tool come risksand threats both to the safety andsoundness of institutions supervisedand to the security of theCorporation‘s own information andsystems. News stories have featuredincidents of hackers intruding and dis-rupting the business operations ofboth major corporations and federalagencies. Tough issues relating toprotecting individual privacy in anelectronic age arise as well. TheCorporation needs to safeguard itssystems and protect consumer rightsin the industry it supervises and alsoguard the privacy of the Corporation‘sown employees.

Another very drastic change has beenoccurring in the FDIC workforce overthe past 8 years. As previous semian-nual reports have highlighted, down-sizing, retirements, and other attritionhave reduced the size of the FDIC‘sworkforce dramatically--from a high ofabout 15,600 employees in mid-1992,the Corporation currently operateswith less than half that number ofstaff: 7,177. By the end of 2000, theCorporation predicts a workforce of6,549. Given the new challenges inthe industry environment and thoseassociated with the new technology,the Corporation needs to address anumber of “human capital” issues.Its employees are its greatest asset;the Corporation will need to ensurethat it has a sufficient number of staffand align and prepare its workforce to

“Washington DC —On the first day of the

Year 2000, thenation’s banks,

thrifts, and creditunions are conduct-

ing business asusual…No significantdisruptions resulting

from the century datechange have been

detected.”

FDIC Press ReleaseJanuary 1, 2000

Inspector General’s Statement

On a positive note, the Corporationhas welcomed several new seniormanagers over the past months. TheChairman has appointed a Chief ofStaff and named permanent Directorsfor two important units--the Divisionof Resolutions and Receiverships andthe Office of the Ombudsman.

With respect to leadership, I wouldalso like to acknowledge the recentretirement of my Principal Deputy,James R. Renick, during the reportingperiod. Jim retired after more than23 years of federal service, and hiscolleagues and I greatly appreciatethe role he played at the FDIC OIG.We wish him well in every futureendeavor.

In closing, I am reminded of a quota-tion to the effect that we are living ata time in history where change is soquick that we begin to see the pre-sent only when it is already disap-pearing. We can‘t let that happen.We‘re excited about the current chal-lenges we face. We want to addressthem, keep pace, and be fully readyfor the next ones. We look forward toworking in partnership with corporatemanagement on how best to handlesuch daunting changes and chal-lenges. And that‘s a very compellingreason for all of us to come to workeach day and serve the Americanpeople.

We appreciate the support of theCorporation and the Congress overthe past 6 months and are commit-ted to continuing to pursue theInspector General mission with greatenthusiasm and pride.

Gaston L. Gianni, Jr.

Inspector General

April 30, 2000

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successfully address the challengesdiscussed above and new ones thatit may not even anticipate at thismoment.

In addressing such challenges, theCorporation needs to be innovativeand flexible in its approaches andremain open to new ways of operat-ing and managing resources, particu-larly its human resources. This isespecially true in a nation with ahealthy economy and stiff competi-tion for qualified personnel withneeded expertise. From our vantagepoint, the Corporation is thoughtfullyidentifying those areas where itneeds to focus, planning itsapproach, and acting aggressively toaddress the challenges. It has alreadyconducted or planned a number ofpublic forums that are bringingtogether industry experts, govern-ment policy makers, consumer advo-cates, and congressional staff to dis-cuss solutions to problems and chal-lenges--much like it did when itaddressed the Y2K challenge.Through many of its diversity-relatedinitiatives, it is also placing greatemphasis on developing its humanresources, providing professionaldevelopment opportunities, and try-ing to ensure that its workforce isfully prepared to deal with newissues and challenges.

What is the OIG‘s role amidst suchcircumstances? I believe an indepen-dent OIG has valuable perspectivesto add as the Corporation deals withthese issues, and we will be workingwith corporate management inaddressing the Chairman‘s priorities.To make sure we can add the mostpossible value to the Corporation, wehave looked at ourselves in the mirrorin a number of ways. For instance,we have conducted two client sur-veys over the past 2 years. Throughour Learning Organization initiativewe have taken a very critical look atour processes, products, and workingrelationships. We are preparing aworkforce plan to guide us into thefuture. We have studied best prac-tices from the General Accounting

Office, the private sector, and theOIG community.

As a result of all of these initiatives,we too are changing. We realize thatto be successful and stay relevant,we cannot be satisfied with the sta-tus quo, but rather must strivealways to do things better. And werealize we must develop and prepareevery one of our staff to meet thechallenges involved in accomplishingour own mission that is inextricablylinked to the Corporation‘s. We haveworked hard to strengthen partner-ships with the Corporation and arecommitted to being accountable forproducing results.

In that regard, this reporting periodand for the first time we are includingas an integral part of this semiannualreport the results of our 1999Performance Report (see pages 40-55). It is our hope that in conjunctionwith the semiannual report, whichpresents our results for a given 6-month period, readers can also exam-ine our performance against goals wehave set for ourselves over a longertime frame. Reporting our results inthe spirit of the GovernmentPerformance and Results Act is anevolutionary process. We continueworking to refine our performancegoals and establish more meaningfulmeasures of success--both quantita-tive and qualitative.

In my last two semiannual reportstatements, I talked about the needfor strong, sustained leadership at theFDIC. In particular, I had been con-cerned that the position of Directoron the FDIC Board has been leftvacant since September 1998. ThePresident has nominated an individualand is awaiting congressional confir-mation of the appointment.Confirmation hearings are scheduledbefore the Senate Committee onBanking, Housing, and Urban Affairson May 11, 2000. In light of the manypressing issues currently facing theCorporation, I reiterate my hope thatthe position will soon be filled so thatthe Board can operate at full strength.

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Table of Contents

Inspector General’s Statement 2

Overview 6

Highlights 8

Major Issues 10

Investigations 26

OIG Organization 32

OIG's 1999 Performance Report 40

Reporting Terms and Requirements 56

Appendix I: Statistical Information Required by the

Inspector General Act of 1978, as amended 58

Appendix II: Reports Issued by the Office of Congressional

Relations and Evaluations 66

Tables

Table 1: Significant OIG Achievements 37

Table 2: Nonmonetary Recommendations 37

Table 3: OIG Review of Proposed or Existing Legislation

and Regulations 38

Figures

Figure 1: Products Issued and Investigations Closed 38

Figure 2: Questioned Costs/Funds Put to Better Use 39

Figure 3: Fines, Restitution, and Monetary Recoveries Resulting

from OIG Investigations 39

Abbreviations 67

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Major Issues

The Major Issues section of ourreport focuses on key challenges theFDIC faces as it works to accomplishits mission. Having successfully ush-ered in Y2K, the Corporation mustcontinue to address other risks to theinsurance funds in a banking industryenvironment of changing andexpanding services. At the sametime, the Corporation must continueto effectively supervise the financialinstitutions it regulates and protectconsumers’ rights. With respect tomanaging and liquidating assets, theCorporation must always seek tomaximize recoveries; it needs to beparticularly vigilant regarding pro-grams where large sums of moneyare at stake and where the FDICdoes not control the entire manage-ment and disposition process. TheCorporation must also continue itsefforts to pursue court-ordered resti-tution and other debts that it isowed. In conducting its informationtechnology (IT) activities, theCorporation must give priority tostrategically planning for its ITresources to maximize its effective-ness. It also needs to follow soundsystem development life cycle proce-dures and ensure adequate systemsecurity. Strong controls and effec-tive oversight of the FDIC’s contract-ing activities are also essential to theCorporation’s success. Contractingfor much needed IT services mustbe done in the most cost-effectivemanner.

Major downsizing over the past 5years and natural attrition havegreatly impacted the FDIC work-place. The loss of human resourceshas resulted in corresponding lossesof leadership and, in some cases,expertise and historical knowledge.The Corporation’s diversity efforts areintended to help restore some of thatlost talent and skill. The FDIC mustbuild on ongoing initiatives and

Overview

Major Issues

Investigations

OIG Organization

OIG’s 1999 Performance Report

Appendixes

OIG’s 1999 PerformanceReport

We are pleased to include in thisdocument our 1999 PerformanceReport as a separate but integralcomponent of our SemiannualReport to the Congress. Our perfor-mance report summarizes ourprogress against our annual plan,which contained 38 specific goalscaptured under the following threeareas: Audits, Evaluations, andInvestigations Add Value;Professional Advice Assists theCorporation; and OIG CommunicatesEffectively With Clients/Stakeholders.Our performance report assessesthose areas where we have madesubstantial progress, performed rea-sonably well, or need to substantiallyimprove. In that our strategic plan-ning efforts continue to evolve, italso addresses those areas wherewe need to focus attention for 2000and beyond. It is our hope that bypresenting this report along with oursemiannual report, the Congress andother readers will have a more com-plete picture of the FDIC OIG’s over-all performance and accountability(see pages 40 - 55).

Appendixes

We list the Inspector General Actreporting requirements and definesome key terms in this section. Theappendixes also contain much of thestatistical data required under the Actand other information related to ourwork this period (see pages 56 - 66).

develop a comprehensive, integratedapproach to human capital issues.Finally, under the provisions of theGovernment Performance andResults Act, for all of these majorissues, the Corporation must estab-lish goals, measure performance,and report on accomplishments.

Our Major Issues section also dis-cusses the OIG’s ongoing andplanned work to help theCorporation achieve success inconfronting these major issues andtheir associated challenges. Wediscuss areas where we identifiedopportunities for cost savings andrecoveries or other improvementsand the recommendations wemade in those areas. Questionedcosts and funds put to better usefor the period total $3.5 million.We made 68 nonmonetary recom-mendations. Our work targets allaspects of corporate operationsand includes a number of proactiveapproaches and cooperative effortswith management to add value tothe FDIC (see pages 10 - 25).

Investigations

The operations and activities of theOIG’s Office of Investigations aredescribed beginning on page 26 ofthis report. As detailed in theInvestigations section, the Office ofInvestigations is reporting fines,restitution, and recoveries totalingapproximately $16 million. Casesleading to those results includeinvestigations of conspiring toobstruct a bank examination, bankfraud, and theft of public funds.Some of the investigations describedreflect work we have undertaken inpartnership with other law enforce-ment agencies and with the coopera-tion and assistance of the FDIC’sDivision of Supervision and Divisionof Resolutions and Receiverships. Toensure continued success, the OIGwill continue to work collaboratively

with FDIC management, U.S.Attorneys’ Offices, the FederalBureau of Investigation, and a num-ber of other law enforcement agen-cies (see pages 26 - 31).

OIG Organization

The OIG Organization section of ourreport highlights several key internalinitiatives from the reporting period.These include developing a long-term audit strategy, pursuing our vari-ous office components’ action plans,and re-surveying our corporate cus-tomers. Recognizing that OIGemployees are our greatest asset,we are also focusing increased atten-tion on our own human capital con-cerns. Additionally, the sectionincludes a discussion of some of thekey activities of the President’sCouncil on Integrity and Efficiency onwhich the Inspector General servesas Vice Chair. This section also refer-ences some of the assistance wehave provided to management dur-ing the reporting period, includingassisting the Corporation during theY2K rollover weekend, working fur-ther to establish communicationsbetween the Division of Supervisionand the OIG regarding open financialinstitution criminal investigations, andmaking presentations at corporateconferences and meetings. We pre-sent a listing of laws and regulationsreviewed during the past 6 monthsand also capture some of our otherinternal initiatives this reportingperiod, including the implementationof feedback mechanisms to measurethe success of audit and evaluationreviews and reports, creating aninternal diversity Web site, and con-tinuing our electronic workpaper pro-ject. In keeping with our goal ofmeasuring and monitoring ourprogress, we visually depict signifi-cant results over the past five report-ing periods (see pages 32 - 39).

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The Office of Audits and Office of Congressional Relations andEvaluations issue a total of 23 reports and 15 audit- or evaluation-related correspondence. The reports identify questioned costs of$1.34 million and funds put to better use of $2.18 million.Management disallows $577,512 of costs questioned.

OIG reports include 68 nonmonetary recommendations toimprove corporate operations. Among these are recommenda-tions to carry forward a number of Y2K-related initiatives toenhance the Corporation‘s overall information technology pro-gram, better identify and account for receivership assets, improvelong-range information technology strategic planning and perfor-mance measurement, and enhance data integrity controls in cer-tain critical systems.

OIG investigations result in 5 arrests; 9 convictions; 12 indict-ments/informations; and about $16 million in total fines, restitu-tion, and monetary recoveries.

The OIG successfully coordinates Y2K work with the Division ofSupervision, Division of Information Resources Management,Division of Resolutions and Receiverships (DRR), and Division ofInsurance as Year 2000 arrives. OIG staff observe “rollover” week-end of December 31, 1999 - January 2, 2000. The OIG issues itsSpecial Report on the FDIC's Year 2000 Efforts.

The OIG‘s review of the FDIC‘s voice and video contract with MCIresults in a contract modification wherein we estimate the FDICwill save $2.18 million over the remaining 21 months of thecontract, a program savings of 47 percent.

The OIG participates in a multi-agency investigation with specialagents of the Federal Bureau of Investigation, Internal RevenueService, U.S. Postal Inspection Service, and Department of theTreasury OIG. Efforts result in the indictment of two bank officialsof the failed First National Bank of Keystone, Keystone, WestVirginia, on charges of conspiracy to obstruct a bank examination.

The OIG reviews 9 proposed or existing federal regulations andlegislation and 12 proposed FDIC policies and responds to 18requests and appeals under the Freedom of Information Act andPrivacy Act.

Inspector’s General StatementHighlights

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The OIG continues efforts with DRR to pursue court-orderedrestitution. Since October 1999, the OIG has opened 13 newcases that are being coordinated with DRR and involve a total ofover $87 million in outstanding restitution orders or other typesof debt. As of the end of the reporting period, 64 such investiga-tions were ongoing.

The OIG and U.S. General Accounting Office continue their jointeffort to audit the Corporation‘s financial statements. The OIGplays an increasingly greater role and assumes audit responsibil-ity for major portions of the audit.

The OIG coordinates with and assists management on a numberof projects, including participating on task groups such as theChairman‘s Diversity Council and the Alternative DisputeResolution Steering Committee; meeting to share informationregarding our ongoing investigation of the failure of KeystoneNational Bank, Keystone, West Virginia; and presenting remarksat corporate conferences and meetings.

The OIG submits Fiscal Year 2001 Appropriation Request for$33.7 million to the House and Senate Subcommittees on VA,HUD, and Independent Agencies, Committee on Appropriations.

The OIG provides a written Statement for the Record in responseto a request from the Committee on Banking and FinancialServices, U.S. House of Representatives, for views on H.R. 3374.This proposed legislation would strengthen the FDIC‘s ability tomonitor and assess risk in financial institutions for which the FDICis not the primary federal regulator.

The OIG undertakes a number of internal office initiatives, includ-ing completing a second external customer survey; launching ourDiversity Web site; issuing our 2000 Audit Plan, AnnualPerformance Plan, and Internal Resource ManagementPerformance Plan for 2000; implementing a rotational assignmentprogram; and furthering use of customer feedback mechanismsfor audits and evaluations.

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Under the Inspector General Act, theFDIC OIG is charged with promotingthe economy, efficiency, and effec-tiveness of FDIC programs and oper-ations and protecting against fraud,waste, and abuse that can harm orhinder the Corporation’s success. Inthat regard, the OIG has identified anumber of major issues facing theCorporation. The results of our workover the past 6 months are pre-sented in the context of theseissues. The major issues are closelyrelated to the Corporation’s mission:to contribute to the stability and pub-lic confidence in the nation’s financialsystem by insuring deposits,examining and supervising finan-cial institutions, and managingreceiverships. Our work over thepast 6 months addresses thesemajor issues and supports the corpo-rate mission.

Addressing Risks to theInsurance Funds

Y2K SuccessAs Y2K loomed on the horizon, theFDIC Chairman characterized theyear 2000 date change as the FDIC‘s“number one safety and soundnesspriority.” We are pleased to reportthat the FDIC successfully met theY2K challenge and did its part to pro-tect the American public from pre-eminent risks to the banking opera-tions and services posed by the cal-endar change to the year 2000.

Preparing for the year 2000 was amajor endeavor for the Corporation.As we have reported in past semian-nual reports, the Corporation‘s over-all approach was to follow the five-phase, structured approach and rigor-ous program management processdeveloped by the U.S. GeneralAccounting Office and other recog-nized information technology (IT)experts. The phases covered theawareness, assessment, renovation,validation, and implementation of theFDIC‘s Y2K program. The FDIC, inpartnership with the other membersof the Federal Financial Institutions

Examination Council, developed asimilar methodology to ensure thatthe financial institutions it superviseswere prepared for the century datechange.

Overall, the FDIC expended over$105 million in personnel, hardware,software, and contracted coststhrough January 31, 2000 to ensurethe Y2K readiness of its internal sys-tems and operations and the financialinstitutions that it supervises. Over a3-year period, the OIG devoted over2,200 staff days reviewing and provid-ing feedback on the Corporation‘sactivities in an effort to ensure overallY2K success. As a result of theFDIC‘s commitment to this endeavor,the financial institutions generallyexperienced business as usual duringand after the rollover, with only minorproblems that were quickly corrected.In addition, the public‘s confidence inthe banking system was maintained.On the internal side, the FDIC‘sinvestments resulted in a successfulchange to the year 2000 for theCorporation‘s IT resources and otherbenefits that will extend into futureoperations. These benefits includeaccurate hardware, software, anddata exchange inventories andenhanced IT policies and proceduresthat, if continued for all relatedDivision of Information ResourcesManagement operations, can improvethe FDIC‘s overall IT program.

The OIG‘s Y2K EffortsBeginning in February 1997, the OIGengaged in a comprehensive assess-ment of the FDIC‘s efforts to ensureY2K readiness of both the financialinstitutions that it supervises and itsinternal systems. Subsequent to therollover weekend leading into 2000,the OIG issued a special report sum-marizing both the Corporation‘s Y2Kactions and the OIG‘s work to helpensure a successful transition to thenew millennium (Special Report onFDIC's Year 2000 Efforts, AuditReport No. 00 -12).

The OIG believes that theCorporation would be well served if

Inspector’s General Statement

10

many of the initiatives implementedto address Y2K are carried forwardand transferred to other aspects ofcorporate activities that impactseveral different FDIC divisionsand offices. Our final reportemphasized that view and offeredrecommendations to that end.

During our audit effort, we proactivelyprovided management with sugges-tions for process improvements. Onthe supervisory side, we provided sug-gestions for (1) ensuring the consis-tency of Y2K assessment ratings,including issuing clarifying guidanceand requiring examiners to fullydevelop and document assessmentconclusions; (2) improving informationcontained in the Division ofSupervision’s (DOS) Y2K tracking sys-tem; (3) communicating Y2K assess-ment results in a timely manner;(4) following up with institutions toensure that they had completed test-ing; (5) ensuring that institutions hadcompleted their contingency plans;and (6) implementing an independentreview process for the Y2K assess-ment reports and related work papers.

With respect to the Corporation‘sinternal systems, we suggested(1) updating IT inventories to identifyduplicative hardware and software,(2) improving the mission-criticalapplication contingency planningprocess, (3) expanding the processused to certify applications for Y2Kcompliance, (4) implementing certaincontrol procedures for all computerplatforms, (5) developing a businesscontinuity and contingency plan,(6) finalizing and formalizing testingpolicies and procedures, and (7) cor-recting specific date-related issuesdiscovered during our independentverification validation testing.

Following the successful transition to2000, the Corporation summarizedlessons learned, benefits derived,and next steps or initiatives thatcould be incorporated into the FDIC‘snormal business processes in a doc-ument entitled Y2K - A RetrospectiveLook dated January 21, 2000. This

Major Issues

document is an interdivisional look atthe FDIC's Y2K efforts and containsour input from an audit perspective.The issues identified by our officeand the Corporation that provide thegreatest opportunity for continuedimprovements include the following:

• Maintaining and periodically updating DOS‘s database of service providers, software vendors, and affiliated banks to facilitate solutions in the event an institution experiences prob--lems with a servicer or vendor-supplied product;

• Stressing to supervised institutions the importance of maintaining adequate business resumption and contingency plans and monitoring their maintenance of such plans;

• Ensuring that internal manuals and procedures that provide opera-tional guidance remain current;

• Maintaining accurate and complete IT inventories for the FDIC‘s hard-ware, software, and telecommuni-cations resources;

• Maintaining up-to-date and com-prehensive operating procedures for FDIC buildings;

• Maintaining a repository contain-ing information on the FDIC‘s external data exchange partners, including points of contact, data formats, and frequencies of exchange;

• Maintaining an up-to-date corpo-rate-wide business continuity and contingency plan;

• Maintaining and periodically vali-dating the accuracy and complete-ness of contingency plans for mis-sion-critical application systems;

• Adopting and updating the expanded Y2K configuration management and version control program for all IT platforms;

• Incorporating the testing policies and procedures developed for Y2K into continuing FDIC policy; and

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As noted in our last semiannualreport, on September 1, 1999, theOffice of the Comptroller of theCurrency closed the First NationalBank of Keystone, Keystone, WestVirginia. Keystone was a $1.1 billioninstitution closed after evidence ofapparent fraud was found thatresulted in the depletion of thebank‘s capital. The FDIC was namedreceiver and the resulting loss to theinsurance fund was estimated to bebetween $750 million and $850 mil-lion as of December 31, 1999. Failureof a megabank could take an evenhigher toll on the insurance funds.

Banking activities related to cyber-banking, electronic cash, and otherhighly technical financial delivery sys-tems also pose increasing risks tothe safety and soundness of thebanking industry and, consequently,the deposit insurance funds.Additionally, personal bankruptcies,syndicated lending, securitizations,international investments, predatorylending, subprime lending, and creditcard lending are areas whereadverse trends could cause losses tothe FDIC and the banking industry.The Corporation must guard againstthese risks and continue to ensurethat consumers have fair and equalaccess to financial services.Protecting customers‘ privacy in arapidly growing information market-place is also an issue of concern.Consumer advocates, governmentpolicymakers, congressional staff,bankers, and policy analystsexplored the issue of the privacy ofconsumer financial information in anelectronic age at an interagency pub-lic forum hosted by the FDIC onMarch 23, 2000.

The Chairman has identified bothpredatory lending and subprimelending as priority issues that theFDIC will be addressing aggres-sively. Predatory lending practicesfrequently occur in poor neighbor-hoods and often target elderly orminority homeowners. TheCorporation will be developing guid-

• Enhancing DOS‘s quality assur-ance review program through anindependent review of examina-tion reports and supporting documentation to validate examination conclusions.

The OIG received full agreementfrom corporate officials on therecommendations we made toimplement or sustain all of thesepractices.

Other Risks Require VigilanceNotwithstanding the alleviation of theY2K threats, the Corporation mustremain alert to emerging risks andadapt to a rapidly changing financialservices marketplace. In terms ofsize, complexity, and sensitivity tothe global economy, banks haveundergone tremendous changes.The FDIC is working aggressively tokeep pace with the increasing num-ber of large institutions, the busi-nesses they conduct, and the risksthey pose. In light of impendingrisks, two questions arise: (1) Howwould the Corporation deal with a“megabank” that is in trouble orfails? and (2) What expanded bankactivities should be covered by theFDIC‘s “safety net”?

The issue of megabanks is signifi-cant. In recent years, major bankshave been rapidly developing intoenormous and complex financial con-glomerates. The total value of bankmergers in 1998 alone, $233 billion,exceeded the combined total fromthe previous 6 years. The industryhas undergone widespread consoli-dation, and, as of September 30,1999, the 39 largest banking organi-zations in the United States con-trolled assets totaling $4 trillion inFDIC-insured institutions. The trendtoward consolidation continues indramatic fashion and will continue toplace increasing risks on the depositinsurance funds. As of September30, 1999, there were 39 megabanksin the country--that is, 39 banks with$25 billion or more in total assets.

ance for its supervised institutionsand examiners to ensure that banksdo not unwittingly support predatorylenders. Protecting consumers is akey priority.

With respect to subprime lending, theChairman reported in her recent Stateof the Corporation speech that one-fifth of the banks on the FDIC‘s prob-lem list are involved in subprime lend-ing. One-half of the banks that havefailed since April 1998 -- that is, 6 of12 institutions -- engaged in suchlending. The loss associated with afailure involving subprime lending isgenerally five times greater than thatof other failures. As such, theCorporation will continue to addressthe risks of subprime lending byfocusing on loan loss reserves and byraising capital standards for somesubprime lenders whose capital isinadequate for the risks they pose.

The Corporation must also ensurethat the premium system reflectswhat the risk-focused supervisoryprocess indicates. The Corporationhas been working to identify institu-tions that pose the greatest risks andis asking if a “one size fits all”approach to insurance makes sensegiven these risks. A key question isdetermining whether the systemunnecessarily allows some institu-tions to increase risks to the insur-ance funds without paying additionalcosts. Another issue to address iswhether the insurance systemshould treat smaller institutions dif-ferently than it treats larger, morecomplex institutions.

In addition to the above-discussedrisk areas in the banking industry, onNovember 12, 1999, the Gramm-Leach-Bliley Act was enacted. Thislegislation allows, under certain cir-cumstances, affiliations between andamong commercial banks, insurancecompanies, securities firms, andother financial services providers.The legislation provides a frameworkfor significant restructuring within thefinancial services industry, generally,and will open many new business

OIG Addresses Emerging Risk

Privacy has been and continues to be of significantconcern to the public and the Congress. Privacy con-cerns are defined to impact the acquisition, use, anddisclosure of personal information. Information pri-vacy recognizes that personal information can beused improperly, unfairly, or for purposes other thanthose intended by an individual. The Corporationmust be sensitive to privacy issues on several levels:as a government agency, in its capacity as a regulatorof financial institutions, and as an employer. Giventhe continued level of concern related to protectingprivacy, the OIG initiated work in this area.

At the onset of our review, we recognized that privacywas an issue that cut across all of the Corporation’sorganizational boundaries. To focus our resourcesand address the areas of highest concern and risk, wesolicited the views of all FDIC Division and OfficeDirectors and identified three areas for a series ofreviews related to privacy: (1) FDIC’s Web SitePrivacy Policy, (2) FDIC’s Efforts to Protect ItsEmployees’ Privacy, and (3) FDIC’s Efforts to ProtectConsumers’ Right to Financial Privacy.

The content and visibility of privacy and security pol-icy statements for federal Web sites is an emergingissue area. Given the heightened concerns aboutonline privacy and, in particular, the disclosures madeabout information collected from visitors to websites, we decided to focus our first review on theFDIC’s policies and practices for handling such infor-mation. We expect to discuss the results of thisreview, as well as the remaining reviews, in futuresemiannual reports.

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scope of the FDIC‘s backup examina-tion, thus reducing the benefit of thesecondary level of review. The OIGbelieves that requiring concurrenceby the primary federal regulator mayimpair the FDIC‘s independence,limit the value of the secondary levelof review, and could be viewed as anorganizational conflict of interest.Requiring approval by the FDIC‘sBoard of Directors on a case-by-casebasis could delay the FDIC‘s exami-nation in potentially critical situationsand the start of enforcement actionbased on examination results.

To ensure that the additional level ofreview intended by the special exam-ination provision operates as pro-vided by law and that the FDIC takesthe most effective approach to moni-toring risks to the deposit insurancefunds, the OIG believes that theFDIC needs to be given expandedauthority to conduct special examina-tions. A delegation from the FDICBoard to the FDIC Chairman wouldallow the FDIC to make an indepen-dent decision to initiate special exam-ination activities based on criteria ofincreased or unusual risk to thefunds and not require case-by-caseconcurrence by the primary federalregulator or the Board‘s approval.Both of these current requirementscan delay the initiation of a processthat needs to be expeditious.

Accordingly, in our audit memoran-dum we suggested that theChairman request delegated author-ity from the FDIC Board of Directorsgiving the Chairman authority to initi-ate special examinations of insuredinstitutions without having to securethe concurrence of the primary fed-eral regulator or the approval of theBoard. Alternatively, we suggestedthat the Chairman seek a legislativechange to vest this authority in theChairman.

At a hearing on Recent Bank Failuresand Regulatory Initiatives held onFebruary 8, 2000 by the HouseCommittee on Banking and FinancialServices, Chairman Tanoue stated

activities to the banking industry inparticular. Such restructuring posesadditional, significant challenges tobank regulators and could createnew and very different risks to thedeposit insurance funds.

OIG Work to Address RisksThe OIG has conducted andplanned a number of reviews toaddress the risks faced by theCorporation in its role as regulatorof a dynamic industry. Our workaddresses such issues as back-upexamination authority, megabanks,Internet banking, and the risk-focused examination process.

Backup Authority/Megabanks

As referenced in our last semiannualreport, the OIG conducted a reviewfocusing on the FDIC‘s efforts tomonitor risk at insured institutions forwhich the FDIC is not the primaryfederal regulator. Our review focusedon the “backup” examinationprocess for insured thrifts, nationalbanks, and state member banks. Wealso looked at DOS‘s efforts to moni-tor risks associated with the nation‘slargest and most complex financialinstitutions, often referred to as“megabanks,” as discussed above.

During the reporting period, weissued an audit memorandum to theFDIC Chairman communicating theresults of our review. We also sub-mitted a statement for the record tothe House Committee on Bankingand Financial Services in connectionwith H.R. 3374--proposed legislationdesigned to strengthen the FDIC‘sability to monitor and assess risk inthose financial institutions for whichthe FDIC is not the primary federalregulator. That statement reinforcedthe views we communicated first tothe Chairman.

The following discussion summarizesthe ideas we expressed in thosecommunications.

The FDIC Needs Expanded Special

Examination Authority

In reviewing the FDIC‘s participationin safety and soundness examina-

tions in its backup capacity, wefocused on assessing the level ofcooperation DOS has received fromthe other federal bank regulators--theOffice of the Comptroller of theCurrency (OCC), the Board ofGovernors of the Federal ReserveSystem (FRB), and the Office ofThrift Supervision (OTS). Under thecurrent delegation from the FDICBoard, FDIC examiners must obtainthe concurrence of the primary fed-eral regulator or approval of theBoard before conducting bankingexamination activities.

For the 42-month period endingMarch 31, 1999, we identified90 instances of backup examinationactivity. Overall, we found that DOSregional managers believe that theyhave good working relationships withthe other federal regulators, and thatwhen dealing with small- andmedium-sized institutions, therehave been few substantive problemsin sharing information and gainingaccess to banks. However, welearned of several instances duringthe period reviewed where DOS pro-posed to join another federal bankregulator in a safety and soundnessexamination and was initially deniedpermission. In all instances, the otherregulators eventually reversed theirinitial positions, and DOS was able toresolve the matters before takingthese cases to the Board. The mostnotable instance occurred when theOCC initially denied DOS permissionto participate in the 1998 examina-tion of The First National Bank ofKeystone, Keystone, West Virginia(Keystone), and then limited theextent of FDIC involvement in thatexamination. As noted above,Keystone‘s failure in 1999 hascaused estimated losses to the BankInsurance Fund ranging from $750million to $850 million.

As demonstrated in the case ofKeystone, the restrictions imposedby the current delegation can allowthe primary federal regulator to sig-nificantly influence the timing and

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In our audit memorandum, we sug-gested that the Chairman have DOSwork toward developing agreementswith the other bank regulatory agen-cies that would allow for the provi-sion of a consistent, minimum levelof information/access for all FDICcase managers.

On December 16, 1999, the Directorof DOS and the Director of theDivision of Insurance issued a memo-randum to the FDIC Chairman‘sWorking Group discussing the typesof information about large banks thatthe FDIC needs to carry out itsresponsibilities and setting forthsome specific proposals for consider-ation by the primary federal regula-tors. Included in that memorandumwere several references to the OIG‘swork and related concerns, as dis-cussed above. We will continue tomonitor the Corporation‘s efforts as itseeks to fully understand the opera-tions of large banks and the possibleimpact that a single insured institutionor group of insured institutions canhave on the deposit insurance funds.

During the hearings on H.R. 3374,the federal regulators promisedrenewed efforts to ensure improvedcooperation among the regulators.We understand the bill was referredto the House Subcommittee onFinancial Institutions and ConsumerCredit, Committee on Banking andFinancial Services, on December 2,1999.

Internet Banking

The banking industry is rapidlyexpanding into the area of Internetbanking. These banks are also assist-ing other corporations and busi-nesses in initiating transactions overthe Internet. The principal benefits ofInternet banking--its global reach andaccessibility--present significant secu-rity and other risks. DOS‘s challengeis to ensure that it effectively evalu-ates Internet banking practices atFDIC-insured institutions during itssafety and soundness examinationprocess.

the following: “H.R. 3374 wouldgive the Chairman of the FDIC,rather than the FDIC Board, theauthority to authorize a specialexamination of an insured institutionwhen such action is necessary todetermine the condition of the insti-tution for insurance purposes.”

The FDIC Needs Complete and

Timely Information to Effectively

Monitor Megabanks

As of September 30, 1999, the 39largest banking organizations in theUnited States, often referred to as“megabanks,” controlled assets total-ing $4 trillion in FDIC-insured institu-tions. This amount represents 60 per-cent of the total assets of the approx-imately 10,300 FDIC-insured institu-tions. The FDIC is the primary federalregulator for only $101 billion in threeof these institutions. The OCC, FRB,and OTS regulate the remaining 36institutions. Because the FDIC has apresence in only 3 of the 39 largestinstitutions, it is heavily dependent onthe other federal regulators to pro-vide the FDIC with the information itneeds to monitor megabank activi-ties. As referenced earlier, with thepotential of even more consolidationsas a result of the Gramm-Leach-BlileyAct, the FDIC‘s need for informationis even more critical.

The DOS case managers responsiblefor monitoring the megabanksdescribe the level of cooperation theyreceive from their regulatory counter-parts as satisfactory. However, muchof the information that is provided toDOS is dated and/or does not containsufficient detail to assess insurancerisk. Additionally, the case managersare not sure of the universe of avail-able information maintained by theprimary regulators, nor are theyaware of the full range of a mega-bank‘s off-balance sheet activitiessuch as unfunded commitments, let-ters of credit, and trust operations.Equally important, the case managersare generally not permitted to attendmeetings between the primary regu-lators and bank management during

which examination findings andsupervisory concerns are discussedand are thus prevented from gainingvaluable insights into an institution‘soperations and risks. Although DOShas the information necessary to lookback and evaluate where a bank hasbeen, its case managers are notbeing provided the opportunity toscrutinize a bank‘s current andplanned operations and activities on atimely basis. The effect of the condi-tions under which the case managersoperate is that DOS may not have atimely or comprehensive understand-ing of the emerging risks that couldbe developing in the largest banks.

Although the FDIC is not the primaryregulator for most of the megabanks,it would be called on to resolve thefailure of a megabank. Thus, theCorporation has a compelling need tobecome more familiar with the activi-ties of these institutions and with thedevelopment of any potential risks tothe insurance funds. Because it isnot feasible or prudent for the FDICto duplicate the efforts of the otherregulators, nor would the law permitsuch duplication, we believe theCorporation needs to develop closerties to its regulatory counterparts andwork toward obtaining real-timeinformation relative to megabankfinancial activities.

In today‘s rapidly changing financialenvironment, the economic condi-tions faced by the largest banks canchange direction with very littlewarning. The near collapse of Long-Term Capital Management inSeptember 1998 and the failure ofKeystone underscore the dangersthat exist and highlight the need forbanking regulators to work closelywith each other and share informa-tion. We believe that developingdetailed formal agreements with theother regulators would significantlyimprove the FDIC‘s ability to carryout its responsibility to monitor itsinsurance risk.

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The environment in which financialinstitutions operate is evolvingrapidly, particularly with the accelera-tion of interstate banking, new bank-ing products, electronic banking, andconsolidations that may occur amongthe banking, insurance, and securi-ties industries resulting from theenactment of the Gramm-Leach-Bliley Act. Further, due to the publicinterest aspect of consumer protec-tions and potential consumer expo-sures, the FDIC has a strong incen-tive for the early detection and cor-rection of problems in institutions,promoting compliance with con-sumer protection laws and regula-tions, and increasing public under-standing of and confidence in thedeposit insurance system. TheDivision of Compliance andConsumer Affairs (DCA) is currentlyreassessing its compliance and CRAworkload in consideration of theextended CRA examination cyclesrequired by the Gramm-Leach-BlileyAct. DCA functions also includeresponding to consumer complaintsand inquiries. The volume of thesecomplaints and inquiries is expectedto decrease from 175,000 in 2000 toa range of 140,000 to 160,000 withinthe next 4 years.

With the enactment of the Gramm-Leach-Bliley Act, the FDIC, alongwith other financial institution regula-tors, must implement regulationsrequiring the institutions to developprograms to ensure the privacy ofcustomer information. The Act limitsthe instances in which a financialinstitution may disclose nonpublicpersonal information about a cus-tomer to nonaffiliated third partiesand requires a financial institution todisclose to its customers the institu-tion’s privacy policies and practiceswith respect to information sharingwith both affiliates and nonaffiliatedthird parties. The Act further requiresfinancial institutions to allow cus-tomers to opt out of such informa-tion sharing and requires that allnotices to customers be clear and

During the reporting period weissued results of an audit survey thatlooked at this issue. We found thatDOS‘s procedures generally providea sound framework for evaluatingInternet banking practices. However,we identified several opportunities toenhance supervisory activitiesrelated to this type of banking.

We recommended that examinersbe required to use the Internet andFDIC Intranet during examinationplanning and that such efforts bedocumented. Additionally, electronicbanking examination training shouldemphasize these steps.

DOS‘s Risk-Focused Examination

Process

We are also nearing completion ofour follow-up review of DOS‘s risk-focused examination process. Since1997, the FDIC has used a risk-focused examination approach.Rather than following a standardexamination program requiring thereview of a large sample of loans,this approach requires the examinerto first identify and test controlswithin a bank and then modify sam-ple selections accordingly. This tar-geted examination approach shouldfocus examination resources on thegreatest areas of risk in a bank, thusincreasing effectiveness withoutrequiring additional time. The OIGfirst audited the process in 1998 andmade recommendations for improve-ments to management. Our follow-up audit is determining whether cor-rective actions have been imple-mented and the process is workingas management intended.

Supervising InsuredInstitutions andProtecting ConsumerInterests

As of December 31, 1999, the FDICwas the primary federal regulator forapproximately 5,700 financial institu-tions that have assets totaling nearly$1.3 trillion. In addition, the FDIC pro-vides supervisory oversight, though

not as the primary regulator, forabout 4,430 financial institutions withtotal assets over $5.4 trillion.Although a steady decline in thenumber of insured institutions is pro-jected over the next several years,total assets are projected toincrease. The challenge to theCorporation is to ensure that its sys-tem of supervisory controls will iden-tify and effectively address financialinstitution activities that are unsafe,unsound, illegal, or improper beforethe activities become a drain on thedeposit insurance funds.

In accordance with statutory require-ments and corporate policy, DOSprojects starting almost 2,800 safetyand soundness examinations in2000. DOS also provides off-sitemonitoring for all insured institu-tions, including those for which it isnot the primary federal regulator.This monitoring includes reviewingOCC, OTS, and FRB examinationsand Securities and ExchangeCommission filings. DOS alsoprocesses applications for numerousbank activities such as new bankproposals, mergers, and change ofcontrol requests. Furthermore, DOSinitiates formal enforcement actionsand informal corrective programs asa result of its examinations.

Protecting Consumers‘ RightsIn addition to safety and soundnessissues, the Corporation must dealwith matters related to bank compli-ance with laws pertaining to con-sumer protections and civil rights thatare equally important in today‘s bank-ing environment. A key considerationin this regard is the CommunityReinvestment Act (CRA), a 1977 lawintended to encourage insured banksand thrifts to meet local credit needs,including those of low- and moderate-income neighborhoods, in a mannerconsistent with safe and sound oper-ations. The Congress has mandatedthat the bank regulatory agenciesevaluate institutions‘ CRA perfor-mance and that these evaluations bedisclosed to the public.

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and disposition.

As of March 31, 2000, the FDIC heldassets for liquidation that totaledapproximately $1.8 billion in bookvalue. Although the current and pro-jected asset workload is far belowthe $165 billion held by the FDIC andResolution Trust Corporation (RTC) in1992, effectively managing assets toensure their timely, efficient resolu-tion at the least cost to the insurancefund continues to be one of theFDIC’s priorities.

OIG Finds DRR‘s SubsidiariesInventory IncompleteAs a result of our audit of theDivision of Resolutions andReceiverships‘ (DRR) NortheastService Center’s (NESC) subsidiariesinventory, we concluded that NESCdid not have a full accounting of allFDIC subsidiaries owned by failedinstitutions in its geographic area ofresponsibility. These subsidiaries con-sisted of subsidiaries of failed institu-tions as well as partnerships andjoint ventures in which those sub-sidiaries had an ownership interest.

Specifically, since the start of theaudit the OIG and NESC identified731 subsidiaries that were notincluded in the FDIC’s system ofrecord for subsidiaries. Without acomplete inventory, the FDIC cannotbe assured that all financial institu-tions’ receivership assets have beenproperly identified and thus appropri-ately managed or that the disposi-tions of subsidiaries have been prop-erly accounted for and recorded.Furthermore, we could not deter-mine whether NESC always per-formed asset searches before dis-solving subsidiaries.

Our recommendations included thatNESC should input the 429 sub-sidiaries identified by our audit in itstracking system and perform assetsearches for the 731 subsidiariesmentioned above. In addition, werecommended that NESC coordinatewith the Division of Finance’s FieldFinance Center in Dallas to identifyand recover unclaimed accounts held

conspicuous. On February 2, 2000,the bank regulators issued a jointnotice of proposed rulemaking toimplement these requirements. Theagencies are currently evaluating themore than 6,000 comments and willbe promulgating the final rules nolater than May 12, 2000, as requiredunder the Act.

OIG Work Looks at Supervision and

Consumer Protection Issues

The OIG has several audits ongoingto address matters of supervisionand consumer interests, the fullresults of which will be reported inour next semiannual report.

We are nearing completion of amaterial loss review of a bank failurethat occurred during the reportingperiod, that of Pacific Thrift and LoanCompany (PTL), Woodland Hills,California. PTL was closed onNovember 19, 1999 with total assetsof $117.6 million. At the time of clo-sure, the FDIC estimated that theBank Insurance Fund would incur aloss of $49.9 million. The estimatedloss was raised to $52 million as ofDecember 31, 1999.

The OIG is conducting this audit inaccordance with section 38(k) of theFederal Deposit Insurance Act,which provides that if a depositinsurance fund incurs a material losswith respect to an insured depositoryinstitution on or after July 1, 1993,the Inspector General of the appro-priate federal banking agency shallprepare a report to that agencyreviewing the causes of the bank‘sfailure and the agency‘s supervisionof the institution. A loss is consid-ered material if it exceeds $25 mil-lion and 2 percent of the institution‘stotal assets.

PTL was an industrial loan company.Our review is examining PTL‘sinvolvement in its principal businessactivity--the securitization of sub-prime mortgage loans that wereeither generated through one of itsmany loan production offices or pur-chased through other financial inter-

mediaries or brokers. Our attention isfocusing on activities relating to thevaluation of “interest-only residualreceivables”-- a by-product of thesecuritization of the subprime loans.Additionally, we will report on theCorporation‘s supervision efforts andregulatory oversight in addressingthe risks associated with theinterest-only receivables.

With respect to protecting consumerinterests, we have another audit inprocess. We performed an audit todetermine whether DCA consistentlyapplies CRA examination procedureswithin and among its regional officesand whether these procedures areapplied in a manner that ensures thatresulting ratings provide an accuratemeasure of the bank‘s performance.

Finally, during the reporting periodwe completed an evaluation ofDCA’s reporting of compliance andcommunity affairs and outreachactivities under the GovernmentPerformance and Results Act of1993. Because this review ismore closely linked to the majorissue of “Establishing Goals andMeasuring Results,” we report ourresults in that section of this semi-annual report.

Maximizing Returnsfrom Failed Institutions

One of the FDIC’s main goals is tominimize the negative financialeffects of failing and failed insureddepository institutions in its receiver-ship management program. To dothis, the Corporation concentrates onfour areas: resolving institutions atthe least cost to the insurance funds,managing and marketing failed insti-tutions’ assets to maximize return,pursuing monies due to the failedinstitutions, and resolving debts ofthe institutions fairly. Because of ourcurrent strong economy and theCorporation’s concentrated efforts onpreventing financial institutions’ fail-ures, the focus of the FDIC’s atten-tion has moved from resolving failedinstitutions to asset management

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factorily under the various agree-ments.

At the RTC‘s sunset date, the FDICinherited a total of 72 securitizationtransactions with an initial creditreserve balance of $7.8 billion. As ofMarch 25, 2000, the FDIC reportedthat 39 active securitizations (adecrease of approximately 9 percentfrom September 25, 1999) with acredit reserve balance of $1.9 billion(down about 18 percent also fromSeptember 25, 1999) remained in itsinventory. A securitization involvesselling securities that are primarilycollateralized by various types of realestate loans to investors. To selllarge amounts of loans most effi-ciently and obtain the greatest finan-cial benefit, receivership loans arepooled together as collateral to backsecurities sold to investors in thesecondary market. This processresults in mortgage-backed securi-ties, or pass-through certificates.

The FDIC assumed 42 equity partner-ships (which does not include theJudgments, Deficiencies, andCharge-offs Program) with assetshaving an original book value of$9 billion from the RTC. As ofFebruary 29, 2000, the FDIC reportedthat 35 equity partnership agree-ments with assets having a bookvalue of about $422 million remainedin its inventory. Underlying assetsinclude sub- and non-performingmortgage loans and owned realestate. The Corporation has a limitedownership interest in the equity part-nerships, which are set up so thatthe private-sector party that holds thegeneral ownership interest is respon-sible for disposing of the assets.

During the current reporting periodwe completed five audits thatfocused on the roles, responsibilities,and effectiveness of servicers,trustees, and the FDIC in equity part-nerships. These audits resulted inquestioned costs of $1.2 million.

by states’ unclaimed property officesthat belong to subsidiaries of FDICreceiverships managed by the NESC(see feature on Update onUnclaimed Assets).

Although DRR believed there wasnot adequate business justification tofully pursue several of our recom-mendations, we continue to believethat a system of record shouldinclude all entities it is designed totrack and that asset searches shouldbe routinely performed to ensurethat all subsidiary assets are properlyaccounted for.

The FDIC Audit Committee hasrequested additional informationrelated to these matters from theOIG. Such information will be pro-vided at an upcoming AuditCommittee meeting.

FDIC‘s Position inSecuritizations and EquityPartnerships RemainsSubstantialThe OIG helps ensure that theFDIC’s interests in securitizationsand equity partnerships are ade-quately protected and that therelated entities are performing satis-

Update on Unclaimed Assets

On August 27, 1999, we issued an audit report enti-tled Audit of Abandoned Assets Held by States’Unclaimed Property Agencies that identified 3,945accounts totaling about $3.3 million belonging to theFDIC or its receiverships being held by California andFlorida’s unclaimed property agencies. The OIG rec-ommended that the FDIC pursue recovery of theseitems as well as identify and recover FDIC assets thatmay be held in other states’ unclaimed property agen-cies. Since then, the Division of Finance reported thatas of April 4, 2000, they have identified about 10,000potentially claimable items valued at between $5 mil-lion and $6 million. Although some states have beenslow in responding to claims, the Division of Financehas collected approximately $1 million thus far.

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these efforts and better support theCorporation and its customers.

The Strategic Plan contains six keygoals in the IT area: ImproveCustomer Satisfaction withApplication Systems; ReduceCorporate Costs Through the Use ofTechnology; Manage Information forthe Corporation; Provide an ITInfrastructure That WorksEverywhere, All the Time; Improvethe Efficiency and Effectiveness of ITManagement; and Fix the Year 2000Problem. Accomplishing these goalsefficiently and effectively requiressignificant expenditures of funds andwise decision-making and oversighton the part of FDIC managers. Asdiscussed earlier in this report, theCorporation can take great pride inhaving successfully achieved the lastof these--fixing the Y2K problem. Itcontinues to devote resources to theother five goals. The Corporationinvested approximately $217 millionin IT resources during calendar year1999. The FDIC‘s IT budget for 2000is approximately $204 million.

OIG‘s Information TechnologyWorkThe OIG‘s work in the IT area is con-ducted with a view toward the goalsthe Corporation is trying to achieve.As discussed earlier, a principal focusof our work related to IT over thepast 3 years was in connection withthe Corporation‘s Y2K efforts. Ourother IT work generally focuses onsystems development efforts; spe-cific application reviews; computerservices and security; and planning,procurement, and administration.During the reporting period weissued the results of work in severalof these areas, as described below.

IT Strategic Planning

The OIG analyzed the Corporation‘sIT strategic planning carried out in1999 and issued a comprehensivereport that evaluated the effective-ness of the planning process andpractices related to acquiring, devel-oping, and managing IT resources.

Audits of Equity Partnership Servicer

AMRESCO Result in over $1 Million

in Questioned Costs

We conducted three audits thissemiannual period of AMRESCOManagement’s servicing of RTCMortgage Trusts 1993-N3, 1994-N1,and 1994-N2 (Trusts). We concludedthat AMRESCO accuratelyaccounted for and reported theTrusts’ income. However, we ques-tioned fees paid to affiliates, servic-ing fees, investor expenses, and mis-cellaneous expenses that AMRESCOcharged to the Trust. As a result, wequestioned costs of $1.1 million,which represents the FDIC’s 51-per-cent partnership share of unallow-able expenses that we identified.

Prior to these three audits, weissued one other report onAMRESCO in August 1999 wherewe questioned an additional $1.2 mil-lion. In total, we have identified $2.4million (rounded) in questioned costsfor AMRESCO’s servicing activities.

Future audit areas will include theclaims review process for securi-tized transactions and whether theFDIC has received its share of resid-ual interest payments under the set-tlement and workout asset teamprogram. As discussed later in thisreport, in keeping with the spirit ofthe Government Performance andResults Act, current and future OIGwork is intended to aid DRR inaccomplishing its goals, such asstrengthening its oversight of secu-ritization transactions, as outlined inits strategic plan.

OIG Work Results in JointInvestigative Cases That MayRecover Millions of Dollars The OIG continued to coordinateclosely with DRR both at headquar-ters and the field offices on investi-gations of suspected criminal activityinvolving court-ordered restitutionand other debts that are owed to theFDIC as a result of the takeover offailed banks and thrifts. As noted inprevious semiannual reports, the

court-ordered restitution is the resultof criminal convictions stemmingfrom schemes to defraud federallyinsured institutions that haveresulted in losses to the FDIC. As ofMarch 31, 2000, a total of $1.1 billionis due as a result of outstandingcriminal restitution orders.

Additionally, the FDIC is continuingto attempt to collect debts it isowed as a result of loans originatedby financial institutions prior to theirfailure. The OIG’s investigative workin these cases is undertaken if thereare indications that the debtors mayhave engaged in criminal activity intheir interactions with the FDIC.Some of these cases involve falsestatements and elaborate schemesto conceal assets, including illegaltransfers to others. By pursuingcriminal prosecution of these individ-uals, we can help maximize recover-ies for the FDIC.

Since October 1999, the OIG hasopened 13 new cases that are beingcoordinated with DRR and involve atotal of over $87 million in outstand-ing restitution orders or other typesof debt. At the end of the period wehad 64 such investigations that wereongoing. The subject of one of theseinvestigations was indicted duringthe period and two subjects ofanother investigation who had previ-ously claimed to be insolvent repaidthe FDIC over $6.5 million in indebt-edness (see Investigations sectionof this report).

Managing InformationTechnology

According to the Corporation‘sInformation Technology Strategic Planfor 1998-2003, IT is critical to theFDIC‘s success and can be leveragedto support its business goals. TheCorporation is focusing its efforts onkey business processes that are mostfundamental to the Corporation‘s suc-cess and is working to improve theseprocesses. At the same time it isseeking to identify where and howtechnology can be used to support

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until the time that the employeeleaves the Corporation. It includesestablishing policies and proceduresrelated to the recruitment, employ-ment, classification, training, man-agement, promotion, and retirementof personnel. Human resourcesadministration also includes the col-lection and maintenance of the datarelated to the employment process.

During the reporting period we com-pleted an audit of the initial planningand procurement phases of theCorporate Human ResourcesInformation System (CHRIS) develop-ment project. The CHRIS project wasinitiated to develop an integrated,automated system that would sup-port core human resources businessfunctions performed by the Divisionof Administration‘s (DOA) PersonnelServices Branch. The cost estimatefor CHRIS development as ofMarch 31, 2000 was $15.7 million.The FDIC expects to fully implementCHRIS by the fourth quarter of 2003to consolidate the FDIC‘s humanresources information systems.

Throughout the project‘s develop-ment, the OIG will continue to pro-vide proactive audit coverage andprovide FDIC management with sug-gestions and recommendationsregarding the project. Our overallaudit objectives are to determinewhether (1) CHRIS development isadhering to established and generallyaccepted system development lifecycle procedures and (2) systemdeliverables satisfy user require-ments in a cost-effective and timelymanner. Our first audit reportfocused on the project‘s early devel-opment activities, including initial pro-ject planning and the award of soft-ware and services contracts to sup-port CHRIS. Our audit results werevery positive.

The CHRIS project team determinedthat the current human resourcessystems were cumbersome, techno-logically outdated, and unable to sup-port the integration of the large vol-ume of data needed to manage the

The FDIC‘s IT strategic planningprocess has been evolving andimproving since 1996 when theCorporation established the planningstructure and process currently inuse. The FDIC continued to imple-ment significant improvements to itsstrategic IT planning process andpractices during 1999. For the firsttime since its establishment in 1996,the Technical Committee was suc-cessful in developing a proposed ITbudget that prioritized discretionaryspending from a corporate perspec-tive. That is, rather than each pro-gram office performing IT planningfrom a divisional or office perspec-tive, the Technical Committeefocused on prioritizing projects froma corporate perspective. PrioritizingIT investments has been recognizedas a best practice of leading organi-zations and is a key tenet of recentIT legislation. The TechnicalCommittee also developed a formalstrategic IT direction with each FDICdivision and began using a post-implementation review program toassess the quality of its systemdevelopment projects and improveoverall IT management.

Although the FDIC has made meaning-ful progress in selecting, managing,and evaluating its IT investments froma corporate perspective, our reviewidentified opportunities for furtherimprovement. Specifically, we proposethat more attention to long-rangestrategic planning would allow theTechnical Committee to consider alter-native solutions to the FDIC‘s IT needsand result in a more substantive evalu-ation of IT spending. We acknowl-edged that planned control improve-ments to better control IT resourcereallocations would help ensure that ITspending is based on corporate, ratherthan divisional, priorities.

In addition, we suggested thatimprovements in how the Division ofInformation Resources Management(DIRM) categorizes its IT invest-ments would result in a more strate-gically focused IT budget that

ensures IT spending is prioritizedfrom a corporate perspective.Providing the Technical Committeewith additional time and informationduring the planning process can alsoimprove planning and evaluation of ITinvestments categorized as “OtherDevelopment.” Approximately $12million budgeted for OtherDevelopment initiatives for 2000were not evaluated by the TechnicalCommittee.

While the FDIC established formalstrategic IT goals and objectives inthe FDIC IT Strategic Plan, it neededto better measure its performance inaccomplishing such goals and objec-tives. DIRM had not developed anongoing mechanism for reportingoverall IT performance information tothe IT Council or TechnicalCommittee. In addition, the FDICwas not tracking or reporting totallife cycle costs on individual IT pro-jects. Accordingly, it was not possi-ble for the FDIC to compare actualcosts and benefits with those esti-mated at the time a project wasapproved. Measuring performanceagainst established goals and objec-tives is a fundamental principle of theGovernment Performance andResults Act. Performance measure-ment information is critical for deter-mining whether the FDIC‘s IT invest-ments deliver promised benefits andmeet the business goals and objec-tives of the Corporation. Performancemeasurement information can alsoserve as an early indicator of poten-tial problems and encourages man-agerial accountability by linking infor-mation about program outcomes toestablished goals.

Finally, we identified several opportu-nities for the FDIC to improve itspost-implementation review process.

Corporate Human Resources

Information System

Human resources administrationencompasses a wide range of func-tions related to the management ofpersonnel from the time a prospec-tive employee applies for a position

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tion pertaining to assets of failedinstitutions controlled and servicedby the FDIC.

To better ensure data integrity, werecommended that DRR establishmore effective controls, includingdetailed data integrity criteria for theNPS and other critical DRR systemsof record. DRR can also improvedata integrity by developing andcommunicating a more comprehen-sive definition of data stewardresponsibilities and ensuring effec-tive oversight for the data stewardself-certification process. In addi-tion, implementing better error pre-vention and correction strategieswould serve to improve DRR data.

Ensuring Sound Controlsand Oversight ofContracting Activities

The FDIC contracts with the privatesector as necessary to accomplishits mission. The Corporation isresponsible for ensuring that it isreceiving the goods and services itis paying for and that it has suffi-cient controls over contractorbillings to help prevent fraud andabuse. To accomplish this, theCorporation must be diligent in itscontract oversight so that it can pur-sue claims against contractors,which can be impaired if the FDIC isfound to be at fault for lapses in itsown oversight of the contractors’activities.

Contractors assist the FDIC in manyareas including legal matters, prop-erty management, loan servicing,asset management, IT, and financialservices. Projections of year 2000non-legal contract awards and pur-chases total 3,000 actions valued atapproximately $230 million. One ofthe most active areas of contractingin the Corporation regards IT. As ofMarch 31, 2000, there were morethan 375 active informationresources management contractsvalued at approximately $420 millionthat had been awarded in headquar-ters. Approximately $220 million of

Corporation‘s workforce. The CHRISteam developed a cost-benefit analy-sis to determine the most cost-bene-ficial course of action for the FDIC indeveloping an integrated CHRIS. Ourreview supports the CHRIS projectteam‘s recommendation to acquirecommercial off-the-shelf software tosupport its human resources busi-ness functions as a reasonable andvalid decision resulting from thecost-benefit analysis process.Further, the solicitation and awardprocess for the implementation ofCHRIS was well supported and fol-lowed FDIC procurement policies.

OIG Reviews DOS Tracking Systems

The OIG completed a review ofDOS‘s tracking systems for examina-tion scheduling and completion, rat-ings, and examination results. DOSofficials requested the OIG‘s assis-tance in determining whether thesesystems were addressing the needsof headquarters, regional, and fieldpersonnel; determining the extentand impact of regional and fielddevelopment of supplemental sys-tems on DOS‘s national systems;and identifying experiences gainedthrough such development thatcould benefit development ofnational systems, such as theredesign of the Banking InformationTracking System.

Our review determined that currentsystems generally meet DOS head-quarters needs but that field person-nel needed supplemental systems toeffectively perform their mission. Wedid not identify any significant dupli-cation of field system development,nor had field systems negativelyimpacted data accuracy or complete-ness of national systems data. Inaddition, the field systems identifiedgenerally met the needs of users.We did, however, identify opportuni-ties to further enhance the develop-ment, operation, and maintenance ofDOS field systems. We recom-mended that DOS develop a charterfor its regional office managementinformation group to ensure effective

communication regarding current andplanned systems and initiatives. Inaddition, we recommended that fieldoffices be represented at regionaloffice management informationgroup meetings. We also recom-mended that DOS regional and fieldpersonnel communicate with theirDivision of Information ResourcesManagement counterparts during theplanning and development of applica-tion systems to ensure that devel-oped products are compatible withthe FDIC‘s system architecture.Finally, in the interest of ensuringdata integrity, we recommended thatDOS data stewards identify andreview undefined data codes con-tained in DOS tracking systems.

Data Integrity Controls for Selected

DRR Systems

The FDIC‘s DRR is responsible forthe management and disposition ofassets acquired from failed insuredfinancial institutions. As discussedin the previous Major Issue, assetlevels have been reduced signifi-cantly in each of the past 4 years.This can be attributed in large partto DRR‘s effective disposal programand to the health of the bankingindustry, which has resulted in veryfew assets being added to DRR‘sinventory of assets in liquidation.

The OIG conducted a review thatfocused on data integrity controlsfor selected systems used by DRRto manage assets of failed institu-tions, including owned real estate,loans, and subsidiaries. These sys-tems are used by the Corporation tomeasure performance under theGovernment Performance andResults Act.

Systems supporting DRR functionsinclude the National ProcessingSystem (NPS), Credit NotationSystem, Owned Real EstateSystem, and the SubsidiariesManagement Information Network.NPS, a mainframe-based system, isjointly owned by DRR and theDivision of Finance and is the sys-tem of record for financial informa-

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this expenditure authority for activecontracts had been spent and $200million remained to be used.

The OIG has continued to focus onauditing contracts and agreementsand is focusing considerable auditattention on the Corporation‘s IT ser-vice contracts. The OIG currently hasfive ongoing audits of almost$107 million in billings paid to IT ser-vice contractors. The purpose ofthese audits is to determine whetherbillings were allowable and support-able. For four of the five contractorsunder audit, the FDIC procured ITservices from vendors that were pre-qualified under the General ServicesAdministration Federal SupplyService’s IT Multiple AwardSchedule program.

Evaluation of MCI Voice andVideo Contract Results in$2.2 Million in Funds Put toBetter UseIn light of increasing competition inthe telecommunications industry, theOIG initiated a series of reviews ofthe Corporation’s contract with MCIWorldCom (MCI) for voice and videoservices to determine if the FDICwas obtaining the best possible com-petitive price. These reviews include(1) an evaluation of the contract pricewarranty clause, (2) participation ininterdivisional task force initiatives toanalyze voice and data pricing, (3) anevaluation of historical contract com-pliance, and (4) an evaluation of theefficiency and effectiveness of theFDIC‘s contract monitoring efforts.These last two reviews are ongoing.

The FDIC awarded the voice andvideo contract to MCI in late 1996.The contract included a price war-ranty clause that required MCI toadjust contract pricing each optionyear to match pricing offered toother MCI customers underGeneral Services Administration(GSA) contracts. The Corporationwas entering option year 3 of thecontract at the outset of ourreview.

OIG/OICM Brief DOA on Contracting Oversight

On March 29, 2000, the OIG and the Office ofInternal Control Management (OICM) co-presented abriefing to the Division of Administration (DOA)regarding contracting oversight, which has been thefocus of 64 percent (18 out of 28) of the DOA auditsover the last 2 years. Messages from both the OIGand OICM were similar on many issues, such as theneed for improving the process of obtaining back-ground investigations for contractors and clarifyingstatements of work to define tasks, requirements,and contract deliverables.

Other items discussed included the OIG’s work in theinformation technology service contract area, animportant focus at present. Related issues includedthe use of unauthorized subcontractors, rate vari-ances with the General Services Administration (GSA)schedule (the FDIC often uses delivery orders underGSA contracts to obtain its information technologyservice contracts), and employees who did not meetminimum GSA and FDIC experience qualifications.

Update on the OIG‘s Evaluation of theFDIC Headquarters CopierAdministration Program

The Corporation’s Acquisition and CorporateServices Branch (ACSB) expects savings of$1.25 million in 2000 from copier program changes.Our study predicted 5-year savings of between $6.1and $6.5 million. ACSB has estimated that actual5-year savings will approach $6.3 million. We raisedsimilar issues for two regional offices. The SanFrancisco Regional Office is in the process ofreassessing its copier program as part of its effortsto lease new office space, and the Dallas RegionalOffice also intends to reassess its copier program inthe near future.

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• Enhancing the internal and external selection processes,

• Addressing benefits and work-place issues, and

• Monitoring progress in establishing accountability.

Focusing on the Corporation‘sMost Important AssetThe Corporation’s circumstances aresomewhat reflective of conditionsgovernment-wide. ComptrollerGeneral David Walker from the U.S.General Accounting Office is cham-pioning the concept of “human capi-tal,” stating at a September 1999conference sponsored by theNational Academy of PublicAdministration in Washington, D.C.:“The key competitive difference inthe 21st century will be people. Itwill not be process. It will not betechnology. It will be people. Thestakes are high.” In short, accordingto Walker, the government cannotmaximize its resources and account-ability without focusing on its mostimportant asset: employees. Walkeris urging all agency leaders to takesteps to improve their human capitalpractices.

As a first step, the U.S. GeneralAccounting Office proposes a five-part self-assessment framework:

• Strategic planning to establish agency mission, vision, core values, goals, and strategies.

• Organizational alignment to integrate human capital strategies with core business processes.

• Leadership to foster committed leadership and give continuity through succession planning.

• Talent to recruit, hire, develop, and keep appropriately skilled staff.

• Performance culture to enable and motivate performance while maintaining accountability and fair-ness for all employees.

To implement this framework, organi-zations need information systems

In September 1999, MCI certifiedthat its pricing was in compliancewith the terms of the price warranty.During our review of the contract,we found that MCI’s long distancevoice prices proposed for option year3 of the contract did not comply withthe price warranty in that MCI’s pric-ing for the FDIC was not competitivewith prices offered to other MCI cus-tomers under the GSA contract. Wealso discussed with DOA the reason-ableness of a surcharge that MCIwas billing for intrastate calls. OnMarch 13, 2000, MCI and the FDICexecuted a modification to the con-tract wherein MCI agreed to provideGSA-contract pricing for outbound,inbound, and calling card calls.Further, MCI agreed to eliminate thesurcharge for intrastate calls. Byeffecting these changes, we esti-mated that the FDIC would save$2.18 million over the remaining21 months of the contract, aprogram savings of 47 percent.

We also participated in two interdivi-sional task forces that included DOA,DIRM, and the OIG to evaluate voiceand data pricing under the GSA con-tract. We presented this informationto DOA for its use in negotiatingnew pricing with MCI.

Addressing HumanCapital Issues

In past semiannual reports we havecited the changing environment atthe FDIC as a major issue facing theCorporation. We have noted thatsince 1994, as the work emanatingfrom the banking and thrift crises hasdeclined and continued consolidationof the financial services industry hasoccurred, the FDIC has accordinglyreduced its workforce substantially.The workforce has fallen from a highof about 15,600 in mid-1992 to 7,177as of March 31, 2000. FDIC staffingis expected to decline to approxi-mately 6,549 positions by the end of2000, down from the 7,265 positionsauthorized for the end of 1999. Inaddition to reductions in the size of

the workforce, as the Corporation’sneeds have changed, employeeshave been relocated to best servethose changing needs.

The FDIC has faced staffing short-ages in certain critical skill areasowing to the loss of such a highnumber of staff and strict prohibi-tions on hiring from 1992 through1997. Additionally, through the useof employee buyouts, early retire-ments, and other downsizing activi-ties, the Corporation has lost a num-ber of highly experienced managersand senior technical experts. TheCorporation predicts that approxi-mately one of every six remainingFDIC employees will be eligible toretire by year-end 2003. TheCorporation has been challenged toconserve and replenish the institu-tional knowledge and expertise thathas guided the organization over thepast years.

The Corporation has included devel-oping a strategy to ensure that thenext generation of managers andsenior professionals is prepared toassume future leadership positions inthe FDIC as a 2000 corporate annualperformance goal. Additionally, theCorporation’s Diversity Strategic Planhas been designed to directlyaddress the challenge of “institu-tional knowledge and expertise.”

During 1999, the focus was on com-municating the message of theDiversity Strategic Plan corporate-wideand developing a framework for imple-mentation of the plan. In 2000, theCorporation’s focus will be on the ini-tial implementation of the plan’sstrategies and measuring their effec-tiveness.

The diversity plan includes proposedactions in six areas:

• Building commitment and devel-oping awareness,

• Enhancing the corporate recruitingprogram,

• Creating developmental opportunities,

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Institutions Are Safe and Sound,(3) Consumers’ Rights Are Protectedand FDIC-Supervised InstitutionsInvest in Their Communities, and(4) Recovery to Creditors ofReceiverships Is Achieved. Throughits annual performance reports, theFDIC will be accountable for report-ing actual performance and achievingthese strategic results, which areclosely linked to the major issues dis-cussed in this semiannual report.

The Corporation has made significantprogress in implementing theResults Act and will continue toaddress the challenges of developingmore outcome-oriented performancemeasures, linking performance goalsand budgetary resources, and estab-lishing processes to verify and vali-date reported performance data. TheFDIC is committed to fulfilling boththe requirements of the Results Actand congressional expectations thatthe plans clearly inform theCongress and the public of the per-formance goals for the FDIC’s majorprograms and activities, includinghow the agency will accomplish itsgoals and measure the results.

OIG Formulates Results ActReview PlanOn October 7, 1998, theCongressional House Leadershipsent a letter to the InspectorsGeneral of 24 executive agenciesrequesting that they develop andimplement a plan for reviewing theiragencies‘ Results Act activities. TheResults Act review plan would besubmitted as part of the OIG’s semi-annual reports to the Congress (andupdated at least annually thereafter)and would examine (1) agencyefforts to develop and use perfor-mance measures for determiningprogress toward achieving perfor-mance goals and program outcomesdescribed in their annual perfor-mance plan and (2) verification andvalidation of selected data sourcesand information collection andaccounting systems that supportResults Act plans and reports.

that allow managers to identify skillsimbalances and project future needs.Also of importance is that the humancapital strategy and workforce plan-ning system are directly linked to theorganization’s overall strategic andperformance plans.

As discussed earlier in this section,to address the changing environ-ment at the FDIC, the Corporationhas begun taking a closer look at itsapproach to doing business. Withthis approach, the Corporation islooking upon human capital as acorporate-wide issue and is workingto design associated strategies andpractices to directly support theachievement of its mission, strate-gic goals, and core values. TheFDIC, as well as other federal agen-cies, may find it necessary to mod-ernize its human capital policies andpractices by placing additional focuson employees and aligning its “peo-ple policies.” Designing, imple-menting, and maintaining effectivehuman capital strategies are seenas critical to improving performanceand accountability. With that inmind, over the next few monthsthe OIG will initiate work in thisarea to assist the Corporation inidentifying and addressing itshuman capital concerns.

OIG Review of Controls overConfidential InformationDuring the reporting period we com-pleted an evaluation review thattouched on a human capital-relatedissue. At the request of corporatemanagement, we examined internalcontrols over confidential informationcollected and generated during theapplication process in the PersonnelServices Branch in Washington. Weidentified control techniques in placeand being implemented that providereasonable assurance that the confi-dentiality of information collectedand generated during the applicationprocess is maintained. In addition tothe control techniques already inplace, the Corporation took stepsduring our review to improve the

security over confidential information.

We did, however, identify possiblesituations that could have an adverseimpact on the Corporation’s ability tokeep information confidential. To bet-ter ensure security over confidentialinformation, we made a number ofrecommendations related to securitywalk-throughs, employee reminders,written procedures, system controls,and access to confidential applicantinformation. Management agreedwith all of our suggestions. The posi-tive response we received to ourdraft report is indicative of manage-ment’s support and commitment tothe implementation of internal con-trols that will help protect confiden-tial information.

Establishing Goals andMeasuring Results

The Government Performance andResults Act (Results Act) of 1993was enacted to improve the effi-ciency, effectiveness, and account-ability of federal programs by estab-lishing a system for setting goals,measuring performance, and report-ing on accomplishments. Specifically,the Results Act requires most fed-eral agencies, including the FDIC, toprepare a strategic plan that broadlydefines the agencies’ mission andvision, an annual performance planthat translates the vision and goals ofthe strategic plan into measurableobjectives, and an annual perfor-mance report that compares actualresults against planned goals.

The Corporation’s strategic plan andannual performance plan lay out theagency’s mission and vision andarticulate goals and objectives for theFDIC’s three major program areas:Insurance, Supervision, andReceivership Management. Theplans focus on four strategic resultsthat define desired outcomes identi-fied for each program area. The fourstrategic results are: (1) InsuredDepositors Are Protected from LossWithout Recourse to TaxpayerFunding, (2) Insured Depository

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had also identified the system andinformation sources used to validateand verify performance data asrequired by the Results Act. DCAused the “Bank Start Date” in theCompliance Statistical System todetermine whether its targeted per-formance levels for compliance andCRA examinations were achievedduring each of the quarters in 1998.We provided assurance that theBank Start Date data element in theCompliance Statistical System was areliable source for reporting examina-tion activities in the FDIC‘s quarterlyperformance reports.

With regard to the community affairsand outreach goals, we found differ-ences between the number ofevents and activities reported byheadquarters in the quarterly perfor-mance reports and those reported bythe regional community affairs offi-cers. We found that most of thecommunity affairs and outreach activ-ities reported in 1998 were sup-ported by an ample amount of docu-mentation. However, the numbers ofparticipants in the activities and theresults of the events were notalways sufficiently supported. Wemade four recommendations relatedto maintaining adequate documenta-tion and accurate reporting toaddress these concerns.

The Director, DCA, agreed with threeof our four recommendations. Forthe fourth, we believe existing con-trols will serve to effectively addressour concern.

OIG Reviews Corporate

Performance Plans

During this reporting period, the OIGalso reviewed and provided advisorycomments to management on theFDIC’s 2000 Performance Plan. Wealso reviewed and provided com-ments on the FDIC’s initial annualProgram Performance Report cover-ing calendar year 1999 that, underthe Results Act, was submitted tothe President and the Congress onMarch 31, 2000. For future annualcycles, the OIG will continue to

Findings and recommendationsfrom Results Act reviews would beincluded in each subsequent semi-annual report. The Congressattaches great importance to effec-tive implementation of the ResultsAct and believes that InspectorsGeneral have an important role toplay in informing agency heads andthe Congress on a wide range ofissues concerning efforts to imple-ment the Results Act.

OIG’s Results Act Review Plan

The FDIC OIG is fully committed totaking an active role in theCorporation’s implementation of theResults Act. We have developed aResults Act review plan to helpensure that the Corporation satisfiesthe requirements of the Results Actand maintains systems to reliablymeasure progress toward achievingits strategic and annual performancegoals. Our review plan consists of thefollowing three integrated strategies:

• Linking Planned Reviews to the Results Act. We will link planned reviews to corporate strategic goals and annual performance goals and provide appropriate Results Act coverage through audits and evaluations. As part of this strategy, the OIG has estab-lished specific goals in its own annual performance plan to demonstrate how the OIG reviewslink to corporate strategic goals.

• Targeted Verification Reviews.We will maintain a program of independent reviews to evaluate the adequacy and reliability of selected information systems and data supporting FDIC performancereports. The OIG has developed a standard work program to conduct these evaluations.

• Advisory Comments. We will continue our practice of providing advisory comments to the Corporation regarding their update or cyclical preparation of strategic and annual performance plans and reports.

Several examples of OIG resultsduring the reporting period that arelinked to Results Act issues andconcepts follow:

• In our work on the FDIC’s strategic planning for IT resources, we underscored the need for the Corporation’s IT investments to directly support the accomplish-ment of its goals under the ResultsAct and made several recommen-dations related to better measuringand reporting such information.

• Our review of data integrity con-trols for DRR systems recom-mended that the division establish more effective controls for its systems of record that are relied upon for reporting results against the Corporation’s performance plan.

• As part of our audit work in the area of the FDIC’s accounts payable operations, we determinedthat the FDIC had taken steps to prepare for the necessary Results Act reporting requirements related to accounts payable activities to bereported in March 2000.

Targeted Verification Review of the

Division of Compliance and

Consumer Affairs’ Reporting of

Performance Results

We completed an evaluation of theDCA‘s reporting of compliance andCRA examinations and communityaffairs and outreach activities underthe Results Act. The objective ofour review was to determine theadequacy and reliability of the infor-mation system and data supportingDCA’s performance reporting ofcompliance and CRA examinationsand community affairs and out-reach activities.

We found that DCA had establishedgoals, targets, and performance indi-cators for compliance and CRAexaminations and community affairsand outreach activities. Further, DCAhad included information in theCorporation’s quarterly performancereports to show its progress in meet-ing these goals and objectives. DCA

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GAO Continues to Convey FDIC Financial StatementAudit Work to OIG

The process of transferring full responsibility for the FDIC annualfinancial statement audit from the U.S. General Accounting Office(GAO) to the FDIC OIG continued this reporting period. Within theOIG, this task is shared between the Washington and Dallasoffices. Whereas the OIG Washington staff is responsible for cash,investments, and expenses, the OIG Dallas staff has assumed com-plete responsibility for auditing net receivables from failed banksand thrifts, FDIC’s loan loss reserve process, the methodology andprocess for the valuation of receivership assets, internal controlsover receivership receipts and disbursements, and FDIC’s oversightof contractors who manage and dispose of receivership assets forthe FDIC. The GAO currently relies on the OIG’s work for theabove-mentioned portions of the FDIC’s financial statement audit,and the OIG remains committed to working toward its goal ofobtaining sole responsibility for this audit. The OIG will continueto work with the GAO to seek the legislative change necessary toaccomplish this shift in responsibility.

As in previous years, the Inspectors General, including the FDIC’sInspector General, will certify the accuracy of their agency’s fiscalyear financial data included in the government’s consolidated finan-cial audit.

FDIC‘s Energy Management and Conservation Efforts at Its Headquarters Facilities

Since the mid-1970s, energy management and conservation have been prioritiesin the federal sector as a result of escalating energy costs. In recent months, theClinton administration announced its intent to have government agencies focusattention on this area. To assist the Corporation in its energy conservationendeavors, the OIG initiated a review to assess the Corporation‘s energy man-agement and conservation efforts at the Corporation’s owned headquartersbuildings.

We found that the Corporation had implemented a number of capital improve-ments since at least 1989 to enhance energy management and conservation atheadquarters buildings that it owns. These improvements have resulted inincreased energy efficiency and water conservation. Management is continuingits improvements and has new projects in process, including further facilitiesenhancements and a new recycling directive. Our review provided thefollowing additional ideas:

1. Create an energy management and conservation vision at the FDIC,2. Foster employee awareness, 3. Budget and measure enhancements, 4. Plan for energy efficiency, 5. Lease energy-efficient buildings, and 6. Assess recycling efforts.

Management’s response to our report indicated that it is committed to develop-ing a model Energy Management Program. Already, the Corporation has(1) established a performance goal in its Annual Performance Plan for implemen-tation of an Energy Conservation Program and (2) taken steps to obtain theassistance of the Department of Energy‘s Federal Energy Management Program.

advise management regarding theCorporation‘s Results Act plans andreports undergoing development orrevision.

The OIG will continue to developand refine its integrated oversightstrategy so that the OIG‘s ResultsAct-related efforts fully conform tothe spirit and intent of the Act. TheOIG will also continue to monitorand review legislation proposed inthe Congress to amend the ResultsAct and will actively participatethrough the President’s Council onIntegrity and Efficiency and theinteragency groups it sponsors torefine appropriate OIG Results Actroles, responsibilities, and activities.

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JusticeLaw enforcement

The Office of Investigations (OI) isresponsible for carrying out theinvestigative mission of the OIG.Staffed with agents in Washington;D.C.; Atlanta; Dallas; Chicago; andSan Francisco; OI conducts investiga-tions of alleged criminal or otherwiseprohibited activities impacting theFDIC and its programs. As is thecase with most OIG offices, OIagents exercise full law enforcementpowers as special deputy marshalsunder a blanket deputation agree-ment with the Department ofJustice. OI’s main focus is on investi-gating criminal activity that mayharm, or threaten to harm, the opera-tions or the integrity of the FDIC andits programs. In pursuing thesecases, our goal, in part, is to bring ahalt to the fraudulent conduct underinvestigation, protect the FDIC andother victims from further harm, andassist the FDIC in the recovery of itslosses. Another consideration in ded-icating resources to these cases isthe need to pursue appropriate crimi-nal penalties not only to punish theoffender but also to deter othersfrom participating in similar crimes.

Joint Efforts

The OIG works closely with U.S.Attorneys‘ Offices throughout thecountry in attempting to bring to jus-tice individuals who have defraudedthe FDIC. The prosecutive skills andoutstanding direction provided by theAssistant U.S. Attorneys with whomwe work are critical to our success.The results we are reporting for thelast 6 months reflect the efforts ofU.S. Attorneys’ Offices in the Districtof Massachusetts, the NorthernDistrict of Illinois, the SouthernDistrict of Ohio, the Southern Districtof West Virginia, the Middle Districtof North Carolina, the NorthernDistrict of Georgia, the NorthernDistrict of Texas, and the SouthernDistrict of Texas.

The support and cooperation amongother law enforcement agencies arealso key ingredients for success in

Inspector’s General Statement

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Investigations

Investigative Statistics

Judicial ActionsArrests 5

Indictments/Informations 12Convictions 9

Actions Involving FDIC Employees as a Result of Investigations

Reprimand 1

Suspensions 2

Warnings 6

Actions Involving FDIC Contractors as a Result of Investigations

Debarment 1

OIG Investigations Resulted in Fines of $ 1,212,820

Restitution of 8,328,366

Monetary Recoveries of 6,540,272

Total $16,081,458

Cases Referred to the Department of Justice (U.S. Attorney) 57

Referrals to FDIC Management 8

OIG Cases Conducted Jointly withOther Agencies 47

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These charges stem from an investi-gation by a multi-agency task forcecomprised of Special Agents of theFBI, FDIC OIG, IRS, U.S. PostalInspection Service, and U.S.Department of the Treasury OIG.Among many issues beingaddressed by the task force is miss-ing bank records. Prior to the indict-ment, investigators executed asearch warrant on property ownedby the former senior executive vicepresident and her husband. Thesearch resulted in the recovery ofburied bank records that filled 370file boxes.

Two Former Executives of Famed

Kentucky Horse Farm Found Guilty

of Offering $1.1 Million in Bribes to

Bank Director

The former president and the formerchief financial officer of CalumetFarm, a famed Lexington, Kentucky,thoroughbred horse farm, werefound guilty of four counts of falsestatements, bribery, conspiracy, andbank fraud. The two defendantswere convicted of offering $1.1 mil-lion in bribes to the vice chairmanand a director of First CityBancorporation, a failed financial insti-tution, to obtain $65 million in loansfor the financially troubled farm. Thecharges against the two defendantsstemmed from an ongoing jointFBI/OIG investigation into the bank’sfailure. The U.S. Attorney’s Office forthe Southern District of Texas prose-cuted the case.

As previously reported, an indictmentof the two defendants was returnedby a Houston, Texas, grand jury inDecember 1998 but not unsealeduntil March 1999. The indictmentalleged, among other things, that thevice chairman of the bank used hisposition to facilitate the approval ofdisbursements of loan proceeds andextensions of credit to Calumet andto frustrate and impede bank offi-cers’ attempts to collect from thefarm. The vice chairman of the bankcontinues serving a 22-year prisonsentence that was imposed after

the investigative community. We fre-quently “partner” with the FederalBureau of Investigation (FBI), InternalRevenue Service (IRS), SecretService, and other law enforcementagencies in conducting investigationsof joint interest.

Results

Over the last 6 months, OI opened37 new cases and closed 32 cases,leaving 162 cases underway at theend of the period. Our work duringthe period led to either indictmentsor criminal charges against 12 indi-viduals. Nine defendants were con-victed during the period, and criminalcharges remained pending against12 individuals as of the end of thereporting period. Also, fines, restitu-tion, and monetary recoveries stem-ming from our cases totaled over$16 million. Our investigations involv-ing FDIC employees resulted in sus-pensions of two employees, the rep-rimand of one employee, and warn-ings to six employees. In addition,one FDIC contractor was debarred.The following are highlights of someof the results from our investigativeactivity over the last 6 months.

Fraud Arising at or ImpactingFinancial Institutions

Two Bank Officials Charged with

Conspiracy to Obstruct a Bank

Examination

The former senior executive vicepresident of the now defunct FirstNational Bank of Keystone, Keystone,West Virginia, and the former execu-tive vice president of KeystoneMortgage Company, a subsidiary ofthe bank, were indicted on chargesof Conspiracy to Corruptly Obstructand Attempt to Obstruct theExamination of a Financial Institutionby an Agency of the United States.The charges are based on allegedactions by the officials taken after theOffice of the Comptroller of theCurrency began an examination ofthe bank that culminated in its clo-sure on September 1, 1999.

FDIC OIG is part of a multi-agency task force thatrecovered buried bank records related to the nowdefunct First National Bank of Keystone, Keystone,West Virginia.

pany, which became indebted tothe FDIC on a nonperforming notethat the Corporation acquired as aresult of the failure of the Bank ofNew England.

Among the false statements thedefendant is alleged to have madewere that he (1) owned his homewhen, in fact, he had transferred hisinterest in his home to his wife;(2) had salary, bonuses, and commis-sions of $280,000 in 1989 when, infact, he had no such income thatyear; and (3) had received no divi-dends from a partnership in the prior2 years when, in fact, he hadreceived over $11,000 in dividendsduring that period.

The defendant is also charged withconcealing and failing to disclose thathe had (1) withdrawn over $200,000from the accounts of the hotel inweekly checks of $1,500 payable tothe trust; (2) deposited over $160,000in tax refunds and bonus checks intoan investment account in his wife'sname; (3) borrowed $300,000 from apersonal friend; and (4) borrowed,with a partner, $300,000 fromanother friend in connection with thepurchase of a mall.

This case was jointly investigated bythe FBI and OIG and is being prose-cuted by the U.S. Attorney’s Office ofthe District of Massachusetts.

Three North Carolina Men Plead

Guilty and Are Ordered to Pay Fines

and Restitution Totaling over

$7.5 Million

Following their entry of plea agree-ments with the U.S. Attorney for theMiddle District of North Carolina inNovember 1999, three North Carolinadevelopers were sentenced to payfines totaling $212,820 and restitutiontotaling $7,243,220. Payment of therestitution was split with $1.5 milliongoing to the FDIC and the remaining$5.7 million going to the IRS to resolvetax problems. Additionally, each of thethree was sentenced to 24 months’probation and ordered to perform 400hours of community service.

to have submitted loan applicationsto the bank branch employee thatcontained certain false informationincluding personal informationregarding the applicants, credit refer-ences, and social security numbers.The defendants are also chargedwith falsely inflating the purchaseprice of automobiles for the purposeof deceiving the bank about theamount of the down payment, if any,made by applicants. In fact, a major-ity of the cars were actually 100-per-cent financed. Additionally, the threedefendants are charged with retain-ing down payments for personal usein cases where such payments were,in fact, made by loan applicants.

Georgia Resident Pleads Guilty to

Bank Fraud for Depositing

Counterfeit Checks Totaling $190,000

and Later Withdrawing the Funds

Following an indictment onNovember 26, 1999, a resident ofGeorgia and a customer of SecurityState Bank, an open FDIC-insuredbank in Canton, Georgia, pleadedguilty to bank fraud on March 3,2000. Aided and abetted by others,the defendant had deposited two$95,000 checks that he knew to becounterfeit into an account at thebank and later withdrew the funds.This case was jointly investigated bythe OIG and FBI and is being prose-cuted by the U.S. Attorney‘s Officefor the Northern District of Georgia.

Management and Dispositionof Assets of Failed FinancialInstitutions

Individual Charged with Making

False Statements and Material

Omissions to Banks and the FDIC

An individual was charged with mak-ing false statements and materialomissions to five banks and the FDICin connection with various loans.One of the loans was a $6.25 millionloan from the Bank of New Englandto finance the purchase of a hotel inSalem, Massachusetts. The defen-dant and another individual are own-ers of the hotel through a trust com-

two federal trials in 1994 and 1996.Also prosecuted as part of this casewas a stable groom who worked forCalumet farms. The stable groomwas convicted and sentenced to 5months in prison for making falsestatements to a Houston federalgrand jury investigating whether thefamous thoroughbred stallion, Alydar,was intentionally injured so the horsefarm could collect over $36 million ininsurance proceeds.

Three Dallas, Texas, Residents

Indicted for Conspiracy to Defraud

Comerica Bank

On February 24, 2000, a federalgrand jury in Dallas, Texas, returnedan indictment against three Dallasresidents for conspiracy to defraudthe FDIC-insured Comerica Bank.Two of the individuals wereemployed as salesmen at an automo-bile dealership, and the third wasemployed at a branch of ComericaBank. This case was jointly investi-gated by the OIG and the FBI and isbeing prosecuted by the U.S.Attorney’s Office for the NorthernDistrict of Texas.

The indictment charges that thethree defendants conspired todefraud Comerica Bank by both caus-ing to be submitted and submittingfalse information to influence thebank to approve car loans under theCommunity Reinvestment ActAutomobile Purchase Loan Program.The program was instituted to helplow to moderate income individualswith little or no established credit his-tories obtain automobile financing.The three defendants are alleged tohave falsely represented loan appli-cants’ social security numbers toComerica Bank and supplied fictitiouscredit references with the intent todeceive the bank concerning theapplicants’ credit histories. Asdescribed in the indictment, the carsalesmen told individuals with poorcredit histories that they could obtainfinancing from Comerica Bank if theywould purchase automobiles throughthem. The salesmen also are alleged

28

$1 million after earlier pleading guiltyto charges of embezzlement and aid-ing and abetting. The former presi-dent at Advance Bank, F.S.B., awholly owned subsidiary of AdvanceBancorp, Inc., was sentenced to25 months of incarceration and36 months of probation and orderedto make restitution of $1 million as aresult of her guilty plea on charges ofmail fraud and filing a false federalincome tax return.

As previously reported, some of thecharges in this case resulted from aninvestigation that we conducted inconcert with the FBI regarding fraud-ulent conduct against the formerRTC. Advance Bank was organized inMay 1990 to acquire the depositsand selected assets of ConcordiaFederal Bank for Savings from thethen-RTC. Advance Bank previouslywas fined $1.5 million and ordered topay $500,000 in restitution.

FDIC Debtors Pay Off FDIC

Indebtedness

Following the initiation of an OIGinvestigation and the issuance of OIGsubpoenas for records, two FDICdebtors who had previously claimedto be insolvent made payments tothe FDIC for the full principal balanceof their indebtedness, which totaledover $6.5 million. The investigationregarding the financial informationpreviously submitted by the debtorsis continuing.

Other Cases

Texas Architect Sentenced for Theft

of Public Funds–FDIC Check of over

$85,000

A Houston, Texas, architect/interiordesigner was sentenced for theftof public funds–specifically, anFDIC check for $85,146. The defen-dant was sentenced to 5 years ofprobation and ordered to pay resti-tution of $85,146 and a specialassessment of $100. This case wasinvestigated by the OIG and prose-cuted by the U.S. Attorney’s Officefor the Southern District of Texas,Houston Division.

The plea agreement was the resultof a joint FDIC/IRS investigation intoallegations that the developers com-mitted tax fraud and provided falsefinancial statements to the formerResolution Trust Corporation (RTC)and an RTC contractor in connectionwith two nonperforming loans thethree had with a failed thrift. Ourinvestigation found the developerswere guarantors on two loans total-ing $15.9 million from Empire ofAmerica Realty Funding Corporation,a subsidiary of Empire of AmericaFederal Savings Bank, Buffalo, NewYork. The loans originated in 1988and 1989 and were to be used forthe construction of two apartmentcomplexes.

In 1990, the RTC was appointed con-servator of Empire and acquired thetwo delinquent loans. In early 1991,the developers requested loan modi-fications that the RTC denied. In late1991, the developers repurchasedtheir loans for $9 million from theRTC using a “straw buyer,” which isa person or party used to purchaseproperty for another to conceal theidentity of the real purchaser. Thesale resulted in a loss of over $6 mil-lion. The developers subsequentlysold the apartment complexes at aprofit of $8 million and failed toreport the gain to the IRS.

The investigation revealed that thedevelopers submitted false financialstatements to the RTC that the RTCcontractor relied on as a basis for itsdecision not to pursue the develop-ers’ guaranty. The financial state-ments represented that the develop-ers’ net worth was insufficient torecover on the guaranties.

Former FDIC Loan Servicer Pleads

Guilty to Bank Fraud and Agrees to

Make Restitution of Almost $700,000

On January 13, 2000, a former loanservicer for the FDIC pleaded guiltyto one count of bank fraud andagreed to make restitution of$693,869. The action was the resultof an investigation initiated by the

OIG, and the case is being prose-cuted by the U.S. Attorney‘s Officefor the Southern District of Ohio.

The defendant was a loan servicerfor a portfolio of mortgage loansmade by the former Alpine Savings,Steamboat Springs, Colorado. Priorto being placed into receivership bythe RTC in 1990, Alpine had sold90 percent of its ownership in theloans to six FDIC-insured financialinstitutions but retained the remain-ing 10 percent of ownership, includ-ing servicing rights. FollowingAlpine’s receivership, the defendantcollected monthly mortgage pay-ments directly from borrowers; heforwarded 90 percent of the pay-ments to the six financial institutionsand the remaining 10 percent to FirstNationwide Mortgage, a master ser-vicer for the FDIC, and providedreports to all seven entities.

Relative to 15 mortgage loans, theinvestigation disclosed that thedefendant failed to forward $693,869in loan payoff proceeds he had col-lected. He covered the theft by con-tinuing to submit monthly paymentsand reports to the 90-percent own-ers as if the loans that had been paidoff were still active. The OIG investi-gated the loans at five of the finan-cial institutions; the FBI investigatedthe loans at the sixth. Although all sixinstitutions are located in differentjudicial districts and the investigationwas coordinated with the U.S.Attorneys‘ Offices of those districts,it was agreed that the defendantwould be charged only in Ohio.

Final Sentencing of Subjects in Bank

Fraud Case

During this period two principalsrelated to Advance Bank, F.S.B.,Lansing, Illinois, were sentenced,bringing to a conclusion an investiga-tion and prosecution that we previ-ously reported when they were origi-nally charged in 1998. The formerchairman of the board at AdvanceBancorp, Inc., was sentenced to18 months of incarceration,24 months of probation, and fined

29

The January 2000 sentencing fol-lowed an indictment in April 1999and guilty plea in November 1999.According to the indictment, thecheck in question was intended tobe a settlement check from theCorporation to an individual. Thecheck was drawn on an FDICaccount by the Federal Home LoanBank and made payable to the indi-vidual’s company. The OIG investiga-tion was prompted by allegationsthat the defendant, after moving intothe individual’s former businesspremises, intercepted the check,altered its issuance date, anddeposited it into an account he hadestablished at NationsBank. A prelim-inary review revealed that he thenremoved the funds from the accountthrough a series of withdrawals.

30

Keystone, West Virginia

Arial view of location where recovered bankrecords were buried. Watch for more investigativedevelopments related to the First National Bank ofKeystone’s failure in future semiannual reports.

31

other potential areas for evaluations.In addition, a new System forTracking Audits and Reports wasfully implemented to improve ourability to track audit progress andmeet project deadlines. By institutingthese new tracking and communica-tion vehicles, we hope to initiate adialogue and improve relationshipsacross the Corporation regarding ourcommitment to timeliness andimproving the overall quality of theaudit and evaluation processes.

In response to our earlier surveys,we also increased our communica-tive efforts to clarify the OIG role andmission as well as our planned work.During this reporting period, theInspector General met with top FDICofficials on several occasions. OtherOIG executives and managers havealso continued meeting with FDICdivision heads to explain the OIG’smission and approach and to gaininput for future work. OIG staff metwith the FDIC’s Chief FinancialOfficer to discuss our audit plan andwith other FDIC division heads to fur-ther discuss how our audit planrelates to each division. Along withthe Director of the Office of InternalControl Management (OICM), theDeputy Inspector General for Auditsalso recently met with contractingofficers throughout the Corporation.He provided both a historical per-spective on the OIG’s work in thecontracting area and a focus onongoing projects and current issuesthat the OIG believes warrant con-tracting officers‘ attention and over-sight. We welcome these opportuni-ties to clarify and communicate ourrole and the work we plan to do withthe Corporation. In this manner wehope to ensure that our work is rele-vant and adds value to how the FDICdoes its business.

Resurvey of CorporateCustomersFollowing several months of makingchanges based on our assessmentsand action plans, we resurveyed ourcorporate customers in January 2000

OIG Continues Self-Assessment and theProcess of Change

The OIG remains committed to con-tinuously examining our products,services, processes, operations,and working relationships. Duringthis period we evaluated ourprogress in meeting action plansthat were based on issues we iden-tified through earlier customer sur-veys of corporate officials (i.e.,adding value to the Corporation,defining success and accountability,building trust, improving communi-cation, clarifying the OIG’s role andmessage, and increasing flexibility).We then resurveyed our corporatecustomers in January 2000 toassess the impact of our actions oncustomer satisfaction.

Action PlansBased on their action plans, severaloffices further pursued customer-ori-ented initiatives. The OIG‘s Counselresurveyed OIG staff to ensure thatservices provided fully met theneeds of the staff. The Office ofAudits and Office of CongressionalRelations and Evaluations made sev-eral changes in work processes toimprove effectiveness, client satis-faction, and communication. Thesechanges included implementing theuse of client satisfaction feedbackinstruments. Feedback forms arenow provided to the auditee or evalu-atee at the beginning of the surveyor audit/evaluation engagement andwith the final audit or evaluationreports. The auditee is asked to ratethe OIG on the conduct of thereviews and the quality of reportsand to offer comments and sugges-tions so that we can improve andstrengthen our performance in thefuture. Preliminary response to usingthe feedback instrument has beenpositive. To ensure we meet specificcorporate needs, the Office ofCongressional Relations andEvaluations is expanding the functionof entrance conferences to identify

During this reporting period, the OIGfocused on strategies to better alignour work with the Corporation’s prior-ities. To this end we began develop-ing a long-range audit strategy thatwill result in audits better linked tothe Corporation’s major programgoals and continued an ongoingperiod of self-assessment of ourinternal work processes, products,and working relationships. We alsobegan new initiatives to develop ourhuman capital to ensure that we willhave well trained resources with thediversity of skills needed to keeppace with the changing corporateand industry environment. Further,we are ensuring we have the tech-nological tools necessary to achieveour goals. Declaring the OIG to be a“learning organization” and adoptinga continuous process of self-assess-ment and change provides the flexi-bility needed to assist theCorporation in addressing its priori-ties and in confronting emergingrisks and issues brought on by arapidly changing industry.

Aligning the OIG withCorporate Priorities

In an effort to more closely align theOIG’s work with corporate concernsand priorities, we have begun to criti-cally reexamine our audit universeand reorganize our work where nec-essary. The OIG‘s 2000 Audit Plancurrently targets seven distinct auditareas. We are exploring a possiblerealignment of those audit areas andresources to better link our efforts tothe FDIC‘s stated goals and objec-tives. The resulting long-range plan-ning document will assist us in bet-ter allocating our audit resources toprovide optimum coverage of theCorporation‘s most important pro-grams and functions.

32

OIG Organization

mentoring programs, and newleader, and aspiring leader programs,and through our intern program, sev-eral interns are working part-time.We are also seeking to establishmore developmental opportunitiesfor our administrative professionalstaff. Further, we are examining howour resources are allocated and haveinitiated a study to examine our train-ing processes and needs. We arealso using available technology toboth develop new tools and enhanceexisting tools to help us do our work.

Also, during this period we used ourstudy of OIG workplace diversityissues and the Corporation’s diversityplan to develop an OIG diversitystatement and a related action plan.In the OIG’s diversity statement, theInspector General endorsed the cor-porate plan and supported theChairman’s initiative for enhancingthe diverse nature of our workforcethrough the various goals establishedunder the FDIC‘s Diversity StrategicPlan. Further, he stated a full com-mitment to implementing within theOIG the Corporation’s strategies orsimilar strategies, where appropriate,for achieving the FDIC‘s vision andmission on diversity. The OIGDiversity Action Plan relates eachOIG action item to both the relatedFDIC Diversity Plan strategic areaand four issues resulting from con-cerns identified in our own diversitystudy, which was sent to the HouseAppropriations Subcommittee on VA,HUD, and Independent Agenciesduring our last semiannual reportingperiod. These issues include: (1)developing strategies to overcomeracial and gender imbalances wherethey exist, (2) fostering opportunitiesto obtain and share knowledge andincrease sensitivity about diversegroups, (3) working toward the con-sistent application of standards, and(4) improving communication amongOIG staff.

33

OIG Internal Activities

Highlights of the OIG‘s internal activi-ties during the reporting periodinclude the following:

• Completed second external customer survey in January 2000 regarding satisfaction with OIG operations and processes.

• Monitored OIG computer systems,facsimile machines, and other equipment during the FDIC’s Y2K “rollover” weekend.

• Submitted Fiscal Year 2001 budgetto the House and Senate Subcommittees on VA, HUD, and Independent Agencies, Committeeon Appropriations.

• Issued a summary report on the first OIG-wide conference. As reported in our last semiannual report, the conference theme was OIG 2000–Destination: Excellence.Building on the OIG’s Learning Organization initiative, the confer-ence focused on the OIG’s improvement plans for its work products, work processes, and interpersonal relations.

• Launched OIG Diversity Web site to articulate and make readily accessible OIG views of diversity and to call attention to various other diversity issues. The page is linked to the Corporation’s Web page and other diversity sites.

• Issued the OIG’s 1999 Performance Report.

• Issued the OIG’s Annual Performance Plan and Internal Resource Management Performance Plan for 2000, which contains 35 specific annual goals that directly link to the OIG’s four strategic goals and related objec-tives. The goals focus on the core audit, evaluation, and investigative activities; professional advisory ser-vices; and external communica-tions with the Chairman, the Congress, and other stakeholders.

to determine the current level of sat-isfaction with OIG operations andcommunication. The resurveyrevealed that the OIG’s efforts overthe last months to partner andimprove its communications withthe FDIC have paid rich dividends.OIG customers reported a greatersense of collaboration and partner-ship with the OIG and a betterunderstanding of the mission, role,and function of the OIG. We attrib-uted these improvements directly tothe increased opportunities to com-municate the OIG’s role and missionand explain how our work interfaceswith the Corporation’s priorities. Theresurvey also served as a vehicle toidentify new issues as well as oldissues that need further attention.The OIG will continue to use thissurvey process to help identify areasfor change and improvement in itsoperations and communications withthe Corporation.

OIG Attention to HumanCapital

Just as we are highlighting to theCorporation the importance of itshuman capital, we are making similarefforts to examine and value ourown human capital. We are lookingat how best to develop and use ourstaff resources. In addition, we areworking on a number of initiatives toensure we have the right mix of staffand expertise necessary to have ahigh quality OIG and to respond to arapidly changing banking environ-ment. We plan to focus even moreon the issue of human capital as wego forward with our self-assessmentwork related to our LearningOrganization initiative.

A pilot program has been imple-mented to develop OIG staff throughinter-OIG office rotation. These rota-tions expose OIG staff to varyingapproaches to reviews and providemaximum flexibility to use resourcesin the areas needed. In addition, sev-eral staff have been nominated ornamed to participate in the FDIC’s

• Continued Electronic Workpaper project to assist us in more efficient and effective maintenanceand use of workpapers.

• Issued OIG-wide awards policy.

• The Corporation honored several OIG staff for Y2K contributions.

• Coordinated with the Department of the Treasury and the Federal Reserve Board OIGs to discuss common areas of interest for year 2000 audits as well as specific audits either planned or in progress. Areas of common interest included implementation of the Bank Secrecy Act, under-writing practices, Government Performance and Results Act reporting, and Community Reinvestment Act examinations.

• Office of Audits staff coordinated with General Accounting Office staff to publish an article in the PCIE Journal of Public Inquiry on their unique partnership in conduct-ing the FDIC Financial Statement Audit work.

OIG Coordination withand Assistance to FDICManagement

Coordinating with management andproviding assistance are importantpriorities for the OIG. Our work overthe past 6-month period in thisregard is as follows:

• Participated on a task force with the Division of Administration and the Division of Information Resources Management (DIRM) tohelp negotiate option year pricing

feedback sessions with supervisors, development of individual development plans, and possible career development opportunities.

• Implemented use of feedback mechanisms to gain input on audit processes and products from the auditee and evaluatee during OIG audits and evaluations.

• The Inspector General initiated multiple meetings with senior FDIC officials to increase corpo-rate understanding of the OIG’s role and mission.

• OIG executives and managers initiated meetings with corporate officials to discuss the OIG’s 2000 Audit Plan and other related reviews.

• In November 1999, OIG staff attended the Federal Audit Executive Council’s annual conference to exchange ideas relating to audit issues in the millennium with senior audit executives from the Inspector General community and elsewherein the federal government.

• Attended the 2000 Joint Financial Management Improvement Program annual conference, which addressed various challenges facing the federal financial management community, including responding to ever- changing technology, developing a new generation of governmentmanagers, and investing in human capital.

• Issued the OIG 2000 Audit Plan, outlining planned audits in seven strategic areas: Supervision and Consumer Affairs; Resolutions and Receiverships; Award Administration, and Oversight of Contracts and Agreements; Financial Accountability and Internal Controls; Financial and Management Information Systems; Deposit Insurance; and Corporate Activities and Administration. In formulating the plan, we solicited suggestions from the Audit Committee and each division and office head.

• Completed a quality assurance review of the Office of Investigations and initiated a quality assurance review of the Office of Management and Policy.

• Coordinated the preparation and revision of management control plans for the OIG’s accountability units under the Corporation’s internal control program.

• Continued OIG participation in interagency Government Performance and Results Act Interest Groups sponsored by the President‘s Council on Integrity and Efficiency (PCIE) and the U.S. Office of Personnel Management to share ideas and best practices on Results Act implementation.

• Implemented pilot rotational assignments for audit and evaluation staff.

• Initiated an assessment of the changing role of OIG administrativesupport staff, which will lead to

34

• Participated on corporate working groups, such as the Chairman‘s Diversity Council and the Alternative Dispute Resolution Steering Committee.

• Met with DOS and Division of Resolutions and Receiverships (DRR) officials to provide updates and share necessary information pertaining to our ongoing investiga-tion of the failure of the First National Bank of Keystone. As a part of these briefings, OIG agents shared their observations from the Keystone investigation relating to potential indicators of fraud and obstruction,for future reference during FDIC examina-tions and closings.

• Continued our efforts to coordinatewith DRR in connection with our criminal investigations of fraud and concealment of assets involving court-ordered restitution and other debts that are owed to the FDIC asa result of the takeover of failed banks and thrifts. Since October 1999, opened 13 new cases in coordination with DRR involving a total of over $87 million in out-standing restitution orders and other types of debt.

• Initiated an annual review of the Corporation’s Internal Control and Risk Management Program.

• Participated with OICM in a joint presentation to contracting officerssharing views on contracting risks and proper controls to guard against those risks.

with MCI and assess whether a `particular General Services Administration contracting vehicle would be appropriate for the Corporation’s future telecommuni-cation needs. The task force vali-dated the FDIC’s contract decision.

• Continued comprehensive, proac-tive monitoring and advisory ser-vices for all phases of the Corporation’s Y2K activities, both internal and external, to help ensure a successful transition to Year 2000.

• OIG Y2K staff were recognized in DIRM’s 1999 “Yearbook,” which isa publication DIRM prepares each year to highlight its major accom-plishments and goals. DIRM recognized that the cooperative effort between the OIG audit teamand DIRM served to ensure the successful completion of the FDIC’s Internal Year 2000 Project with no corporate impact when theyear 2000 arrived. DIRM also recognized the long-term positive benefits resulting from the project.

• Participated in the FDIC’s Y2K rollover activities.

• In October 1999, issued joint memorandum with the Division of Supervision (DOS) and Legal Division that establishes a broad framework within which the OIG and DOS will cooperate in the OIG’s current and future investiga-tions of certain criminal activity in open financial institutions regulatedby the FDIC. The memorandum ensures OIG access to the information necessary to discharge

the OIG’s responsibility to detect and prevent waste, fraud, and abuse relating to the programs andoperations of the FDIC, while respecting the regulatory functionsof DOS. Since October 1999, the OIG has been meeting with DOS to establish communications and the coordination of procedures.

• In December 1999, participated inthe DOS Regional Director/AssistantRegional Director Conference at Virginia Square, where we dis-cussed important issues of mutual interest, including: providing an overview of our audit activities in DOS and presenting our new audit engagement agreements and feed-back forms. The Counsel to the Inspector General and staff from theOffice of Investigations, DOS, and the Legal Division addressed the joint memorandum, discussed above, regarding OIG investigations of open bank activities.

• Initiated a follow-up review with OICM to an issue reported in 1998on the Office of Diversity and Economic Opportunity’s (ODEO) complaint processing. The review will assist the Corporation in reviewing issues presented in pastChief Financial Officer Act reports and determining the progress made by ODEO in taking corrective actions.

• Provided advisory comments to management on the FDIC’s 1999 Program Performance Report and 2000 Performance Plan.

35

The OIG played a major part in the following activi-ties in support of the Inspector General‘s role as ViceChair of the President’s Council on Integrity andEfficiency (PCIE):

• Directed the development of a comprehensive Strategic Plan containing

goals, objectives, and strategies for the work of the PCIE and the Executive

Council on Integrity and Efficiency (ECIE).

• Coordinated a working group to redesign the Inspector General Web site to

include more PCIE/ECIE-related business information.

• Attended the Inspectors General retreat addressing “The Evolving Role of the

Inspector General in the New Millennium.”

• Issued reports or surveys related to Non-tax Delinquent Debt, Inspections

and Evaluations Offices within the Inspector General community, and Audit

and Management Best Practices.

• Coordinated PCIE responses to issues such as the Webster Report on Law

Enforcement and the Association of Government Accountants‘ Oversight

Survey.

• Provided comments and information on issues affecting the PCIE/ECIE such

as law enforcement authority, training academy funding and support,

independence of OIGs, and other matters.

• Submitted requests, coordinated meetings, and obtained information from

the OIGs to respond to several congressional requests for information.

36

Table 1

Table 2

Audit Reports Issued 19Audit-Related Memorandums Issued * 11Evaluation Reports Issued 4Evaluation-Related Correspondence

Issued * 4Questioned Costs and Funds

Put to Better Use from Audit and Evaluation Reports $3.5 million

Congressional Testimony Submitted for the Record 2

Investigations Opened 37Investigations Closed 32OIG Subpoenas Issued 19Convictions 9Fines, Restitution, and

Monetary Recoveries $16 millionHotline Allegations Referred 22Allegations Substantiated 15Allegations Closed 36Proposed or Existing Regulations

and Legislation Reviewed 9Proposed FDIC Policies Reviewed 12Responses to Requests and Appeals

Under the Freedom of Information Act and Privacy Act 18

Table 1: Significant OIG AchievementsOctober 1999 – March 2000

*These memorandums andother correspondencerelate to OIG work that didnot result in formally issuedaudit or evaluation reports.

April 1997 – September 1997 110October 1997 – March 1998 52April 1998 – September 1998 77October 1998 – March 1999 133April 1999 – September 1999 66October 1999 – March 2000 68

Table 2: Nonmonetary Recommendations

37

Table 3

Figure 1

OIG Counsel has monitored the progress of major banking legislation, specifically, the Gramm-Leach-Bliley Act, which was enacted November 12, 1999. This law has created the mostsweeping changes in banking law since the 1930s. Specifically, the law allows affiliationsbetween insured banks and any financial company, including securities and insurance firms,in new types of bank holding companies, known as “financial holding companies.” In addition,the Act requires financial institutions to establish privacy policies to protect the confidentialityof customer information. Counsel’s office convened a task group within the OIG to review thelegislation and any regulatory initiatives associated with the Act. The Office of Counselexpects to review numerous regulatory changes as a result of this legislation.OIG Counsel reviewed and commented upon the following legislation and regulations:Legislation

S. 1993 – Government Information Security Act of 1999

H.R. 1827 – Government Waste Corrections Act of 1999

H.R. 436 – Government Waste, Fraud, and Error Reduction Act of 1999

H.R. 3374 – Proposed; would strengthen the FDIC‘s ability to monitor and assess risk in financial institutions for which the FDIC is not the primary federal regulator.

Draft – Common Passenger Carrier Use Efficiency Act of 2000

Draft – Inspector General Law Enforcement AuthoritiesRegulations

Part 325 – Recourse and Direct Credit Substitutes

Part 332 – Privacy of Consumer Financial Information

Note: OIG Counsel also reviewed a draft Statement of Policy on Applications for Deposit Insurance. The policy was later issued as a General Counsel’s opinion.

Table 3: OIG Review of Proposed or Existing Legislation and RegulationsOctober 1, 1999 – March 31, 2000

Figure 1: Products Issued and Investigations Closed

20010016080

12060804040200

Legend• Oct 97–Mar 98• Apr 98–Sep 98• Oct 98–Mar 99• Apr 99–Sep 99*• Oct 99–Mar 00*

Audits and Evaluations Investigations

* Includes audit- and evaluation-related correspondence.

38

Figure 2

Figure 3

Figure 2: Questioned Costs/Funds Put to Better Use (in millions)

20025

16020

1201580104050

Legend• Oct 97–Mar 98• Apr 98–Sep 98• Oct 98–Mar 99• Apr 99–Sep 99• Oct 99–Mar 00

Audits and Evaluations

Figure 3: Fines, Restitution, and Monetary Recoveries Resulting fromOIG Investigations (in millions)

20025

16020

1201580104050

Legend• Oct 97–Mar 98• Apr 98–Sep 98• Oct 98–Mar 99• Apr 99–Sep 99• Oct 99–Mar 00

39

Overview

OIG 1999 Performance Report

40

1999 Perform

Introduction 41

Nature and Purpose of Annual Performance Report

Relationship to FDIC’s Annual Program Performance Report

Relationship to OIG’s Semiannual Report to the Congress

Statistical Summary of Performance Against Annual Goals 42

Inspector General’s Overall Assessment of Performance 42

What Next? 43

Performance by Strategic Objective Areas 44

Audits, Evaluations, and Investigations Add Value

Client Satisfaction

Relevance

Quality

Impact/Results

Productivity

Timeliness

OIG Professional Advice Assists the Corporation

Emerging Issues and Task Forces

Advising on Vulnerabilities and Risks

OIG Communicates Effectively with Clients

Ensuring Clients Are Informed of OIG Role, Mission, Issues

Responsive to Inquiries and Requests

Working with PCIE and Other Government Agencies

Resource Management Goals 52

Detail Listing of Annual Performance Goal Accomplishment 53

1999 Perform

OIG 1999 Performance Report

41

mance Report

Introduction

Nature and Purpose of Annual Performance ReportThe Office of Inspector General has developed its own independent Strategic Plan and 1999 Annual Performance Plan.These plans were designed to establish goals to measure performance consistent with the principles of theGovernment Performance and Results Act (Results Act). This report presents our performance against our 1999Annual Performance Plan focusing on the most meaningful annual measures related to achieving our strategic goalsand objectives.

Relationship to FDIC’s Annual Program Performance ReportThe FDIC issued its 1999 Program Performance Report on March 30, 2000, presenting its performance against 31annual goals. The Corporation’s annual goals addressed the Corporation’s mission to “Contribute to the stability andpublic confidence in the nation’s financial system” in four strategic results areas: (1) Insured depositors are protectedfrom loss without recourse to taxpayer funding; (2) Insured depository institutions are safe and sound; (3) Consumers’rights are protected and FDIC-supervised institutions invest in their communities; and (4) Recovery to creditors ofreceiverships is achieved.

We believe that accomplishing the OIG’s strategic and annual goals and objectives contributes to the Corporation’sachievement of its mission and goals and objectives.

The requirement for an annual performance report under the Results Act applies to the agency as a whole rather thanto the OIG as a separate component. However, because of the unique mission and independent nature of InspectorsGeneral under the Inspector General Act, we have prepared separate strategic and annual plans and reports, rather thanintegrating OIG goals and results into the Corporation’s plans and reports. The FDIC’s 1999 Program PerformanceReport references our annual report.

Relationship to OIG Semiannual Report to the CongressAnnual performance reports of OIGs prepared under the Results Act differ from semiannual reports of OIGs preparedunder the Inspector General Act. The two reports differ with respect to the time periods covered and some of the spe-cific reporting requirements. However, because both types of reports present OIG accomplishments to the Congress,we have included the Annual Performance Report for calendar year 1999 as a separate but integral component of thisSemiannual Report to the Congress, which covers the period October 1, 1999 to March 31, 2000. Notwithstandingthese reporting time period differences, we believe integrating the reports to the Congress under these two statutesfacilitates congressional consideration of the results of OIG activities.

mance Report

Statistical Summary of Performance Against Annual Goals

The following table summarizes our collective performance against the annual performance goals as they relate to ourstrategic goals and objectives. A detail listing of goal accomplishment containing all of the annual performance goals isprovided on page 53..

OIG 1999 Performance Report

Strategic Objectives

Areas

Strategic Goals

Areas

Annual Goal Accomplishment

(Number of Goals)

Fully Met Substantially

Complete

Unmet Total

Audits, Evaluations,

and Investigations

Add Value

Professional Advice

Assists the Corporation

OIG Communicates

Effectively with

Clients/Shareholders

Inspector GeneralRole/Activities; InquiryResponse;Interagency Issues 7 2 1 10

Client Satisfaction

Relevance

Quality

Impact/Results

Productivity

Timeliness

3

3

2

1

1

1

2

1

1

2

1

2

2

2

3

5

2

5

4

5

Advise on EmergingIssues and Vulnerabilities 4 4

Total 21 9 8 38

24%55% 21% 100%Percentage

The table indicates that we fully met 55 percent of our goals, and considering those goals substantially met, our overalllevel of goal achievement is 79 percent. We recognize the considerable shortcomings of attempting to evaluate perfor-mance based solely on a statistical summary of measures – given that all measures are not equal in weight and thequality of measures is still evolving. Nevertheless, the numbers provide a rough overall indicator of performance.Considering these overall indicators, along with other factors, the next section of the report presents an overallassessment of our progress in achieving our strategic goals and objectives.

Inspector General’s Overall Assessment of Performance

In addition to a consideration of the statistical results presented in the previous section, an honest overall assessmentof performance must factor in more subjective judgments of the relative quality and weight of the measures and perfor-mance against the measures. Conclusions based on this assessment are presented below.

Strategic Goal Area: Audit, Evaluations, and Investigations Add ValueThe OIG’s strategic objectives address six components of audit, evaluation, and investigative value (client satisfaction,relevance, quality, impact, productivity, and timeliness). In assessing our performance in these six areas,

We have made substantial progress in:

• increasing the level of client satisfaction.

42

OIG 1999 Performance Report

We have performed reasonably well against our existing measures and goals in the following areas; however, deter-mining appropriate measures and goals continues to be a challenge and we need to make more progress in ourability to better measure

• the relevance of work,

• the quality of work, and

• the impact of our work.

Finally, we need to substantially improve

• our productivity and

• the timeliness of work products.

Strategic Goal Areas: Professional Advice and Communication We have made substantial progress in

• providing professional advice on vulnerabilities and emerging issues and

• improving our overall communications with clients and stakeholders.

Strategic and annual performance measurement is an evolutionary process. In this stage of the process, we realizethat many of our measures are activity- or output-oriented rather than outcome- or results-oriented. While we believewe have made substantial progress in measuring performance, we acknowledge that our measures do not yet providea clear and complete picture of our progress toward achieving our strategic goals and objectives. What we now needto do to continue this process is discussed in the next section.

What Next?

Considerable learning has occurred from the process of setting strategic and annual goals, reporting against thesegoals, and stepping back to assess what it all means. Initiatives to help us continue this process include the following.

Short-term adjustment of 2000 goals. Major adjustments to significantly improve measures is not practicable for2000. However, for our existing measures, we are reassessing specific goals and adjusting them as necessary tomake sure they continue to stretch and challenge us in the direction of improved performance and results.

Reassess the quality of performance measures and strategic alignment. For 2001 and beyond, we will continueto work to identify better outcome-oriented measures of the value and impact of our work. Strategic goals andobjectives will be reevaluated to ensure appropriate strategic alignment. In this process, we need to consider (1) theinterrelationship of existing measures; (2) the potential for streamlining external reporting measures; (3) the potentialfor improved alignment between strategic and annual plans and the related plans of the OIG operating components;and (4) the potential for better alignment with the Corporation’s strategic plan.

Continue to work on the improvement of internal processes. A number of initiatives are underway to continue toimprove our internal operating processes with the view to improve the timeliness and productivity of our work products.

Consider adequacy of underlying measurement systems. As we develop and refine measures, we will continu-ally reevaluate the adequacy of our underlying systems and processes to capture the necessary data and ensuredata reliability.

Build on the potential of human capital. We have underway a number of initiatives (see Resource ManagementPlan section) that recognize the tremendous value and potential of human capital and the need to ensure that weleverage this potential to improve our organizational performance. These initiatives include employee surveys, diver-sity initiatives, training needs assessment, communication strategy development, and continuing to build a learningorganization through these and other activities.

Continue to assess the integration and consolidation of Inspector General accountability. Including this firstOIG Annual Performance Report under the Results Act as a companion report with our Semiannual Report to the

43

Congress serves to emphasize the value of both reports in accounting for the results of OIG work. It also representsan important first step in consolidating Inspector General accountability into a single document. We will continue toevaluate the value of this approach and other ways to make these reports more valuable to the Congress andChairman of the FDIC.

In the following section, we present performance results for each of our strategic objective areas. We also brieflydiscuss our resource management goals.

Performance by Strategic Objective Areas

Audits, Evaluations, and Investigations Add Value

Client Satisfaction – Meeting Clients‘ Needs and Expectations

All three client satisfaction goals were met.

Follow-up client surveys of senior management executives in 1999, conducted by an independent consultant, reflectedsubstantial progress and improvement from the 1998 survey for all three OIG core functions – audits, evaluations, andinvestigations. For audits, the overall quantitative rating increased, and executives with direct experience of the auditprocess reported a more collaborative relationship and regarded the audit process as adding value to their work. Theevaluations and investigations functions received high ratings, which is particularly significant given that senior execu-tives were unable to rate these functions in 1998 due to a lack of knowledge or awareness of the operations.

Client satisfaction is closely interrelated to the other five measurement components of value identified in our strategicobjectives and has provided useful feedback on our success in the other measurement areas.

While the client survey results were generally positive, they also show opportunities to improve the focus of our workon matters of the most importance to senior management (relevance) and continued opportunities to improve the time-liness of our work.

Relevance – Targeting High-Risk Areas and Corporate Strategic Priorities

Four of five goals were met or substantially met (quantitative goals were considered substantially met if performancewas achieved within 10 percent of the goal).

OIG 1999 Performance Report

Client Satisfaction Rating

4

3

2

1

0

Legend• 1998• 1999

Audits Evaluations Investigations

2.73 2.74

0

3.58

0

3.20

Note: No client satisfaction rating was given for evaluations and investigations in 1998.

44

OIG 1999 Performance Report

Percentage of Initiated Audits andEvaluations Relating to High-Risk Areas1

100%

80%

60%

40%

20%

0%

Legend• 1998 Target• 1999 Actual

Audits Evaluations

60% 64%60% 55%

Percentage of “Relevant” Audits andEvaluations1

100%

80%

60%

40%

20%

0%

Legend• 1998 Target• 1999 Actual

Audits Evaluations

75% 56%

73%70%

Percentage of New Investigative CasesRelating to High-Risk Areas

50%

40%

30%

20%

10%

0%

Legend• 1998 Target• 1999 Actual

44%40%1The determination of high-risk areas is made by OIG. Auditswere considered relevant if they were initiated under theOIG’s Audit Plan and related directly to an FDIC strategicgoal or annual performance goal. Evaluations initiated dur-ing 1999 were considered relevant if they related directly toa corporate strategic objective, Chairman’s request, or con-gressional inquiry.

45

The goal for relevant audits was not met because audits in certain administrative areas (contracting and informationtechnology), including some audits requested by management, were not directly related to corporate strategic goalsand therefore were not counted toward the goal. We have adjusted our 2000 goal to include requested audits in therelevance count.

Measuring the relevance and importance of our work continues to be a challenge. Client surveys have suggested thatour work needs to focus more on issues of the greatest importance to top FDIC management. As a result, we areworking with our clients more closely in the planning process. We will continue to explore ways to better measure therelevance of our work.

Quality - Complying with Professional Standards

We have substantially met both of our quality goals.

• We initiated a program to quantitatively rate the quality of all audit and evaluation reports issued based on (1) an Inspector General assessment of each issued report using established quality criteria and (2) use of client feedback forms for each report. Quantitative quality baselines will be established and future quality targets established.

• We substantially completed an internal quality assurance review of investigative activities identifying opportunities to improve quality.

Determining and fairly measuring all the dimensions of quality is a substantial challenge. The components of quality arelinked to our other strategic objective areas (relevance, timeliness, client satisfaction, impact) related to adding value.We believe our new initiatives for audits and evaluations described above move us in the right direction. We will evalu-ate data received under these initiatives to ensure we are measuring the right things in the right manner so that we areable to establish reasonable future targets to ensure the highest quality work. As necessary, we will adjust our mea-sures for future years.

Impact/Results – Products Achieve Significant Impact or Results

Three of five impact goals were met or substantially met as shown in the following graphs.

OIG 1999 Performance Report

Percentage of Recommendations Agreedto by Management Within 180 Days of

Report Issuance

100%

80%

60%

40%

20%

0%

Legend• 1998 Target• 1999 Actual

Audits Evaluations

95% 95% 100%95%

Percentage of Closed Cases Resulting inCriminal, Civil, or Administrative Actions

50%

40%

30%

20%

10%

0%

Legend• 1998 Target• 1999 Actual

34%35%

46

OIG 1999 Performance Report

Audit Reports Issued

100

80

60

40

20

0 Legend • 1999 Target • 1999 Actual

47 79

Evaluation Reports Issued

10

8

6

4

2

0Legend • 1999 Target • 1999 Actual

810

Num

ber o

f Rep

orts

Num

ber o

f Rep

orts

However, we did not meet two goals related to developing and testing new methodologies for measuring the impact ofour audit, evaluation, and investigative work. While we have made progress in establishing measures related to thevalue and impact of our work (including those discussed under “Client Satisfaction” and “Quality”), we believe weneed to seek better ways of measuring impact.

The primary reason we have not made more progress in this area is the inherent difficulty in measuring the impact ofaudit, evaluation, and investigative work as a bottom-line measure of value. These challenges include: accuratelymeasuring cost savings from work; quantifying the impact of various OIG prevention activities, including the valueof improved internal controls resulting from OIG work; and measuring the deterrent value of OIG investigative work.

We will continue to explore better measures of impact including research to evaluate the merits of measurement prac-tices and models that exist in other audit and law enforcement organizations.

Although our impact measures have not been refined, we believe the results of various OIG projects, as reported in oursemiannual reports covering calendar year 1999, have demonstrated results that have had a significant positive impacton the operations of the FDIC. The semiannual reports present various measures specified in the Inspector GeneralAct including questioned costs and funds put to better use; fines, restitution, and monetary recoveries resulting fromOIG investigations; and nonmonetary recommendations. (See pages 37-39 in this semiannual report.)

Productivity – Managing Resources to Maximize Productivity

Two of four productivity goals were met or substantially met.

Percentage of Preliminary Cases Closedor Converted Within 90 Days of Opening

100%

80%

60%

40%

20%

0%Legend • 1999 Target • 1999 Actual

63%65%

Number of Completed Cases PerInvestigator

5.0

4.0

3.0

2.0

1.0

0.0Legend • 1999 Target • 1999 Actual

2.62.0

47

The goals related to the number of audit and evaluation reports issued were not met. A number of circumstances con-tributed to the level of report issuance being below the original target. For example, the scope of work exceeded origi-nal plans in some cases. Further, several projects were communicated by memoranda rather than formal reports. Ifthese were counted, there were 71 audit products (within 10 percent of goal) and 13 evaluation products (exceedinggoal).

Timeliness – Issuing reports timely

Three of five timeliness goals were met or substantially met

OIG 1999 Performance Report

Percentage of Pending InvestigativeCases Less than 2 Years Old

100%

80%

60%

40%

20%

0%Legend • 1999 Target • 1999 Actual

73%

Percentage of Reports Issued WithinEstablished Timeframes

100%

80%

60%

40%

20%

0%

Legend• 1998 Target• 1999 Actual

Audits Evaluations Investigations

80% 77%80% 63%

90% 81%

48

OIG 1999 Performance Report

As shown in the first graph on page 48, the goal that 80 percent of evaluation reports be issued within 180 days wasnot met. It should be noted, however, that the median timeframe for issuing all eight evaluation reports was 162 days.The scope of three products required more time than the 180-day target. The goal for 2000 has been revised to focusprimarily on meeting timeframes agreed upon with management.

A fifth goal (not shown in the graphs) regarding communications of investigative milestones was not met. The goalspecified notifying the Corporation 90 percent of the time within 10 working days of attainment of a major investigativemilestone. A determination was made that it was neither feasible nor necessary to measure this activity. Instead webegan new alternative practices designed to keep management informed of investigative work, including quarterlymeetings and reports with management and other communication activities. This goal will be discontinued.

Although the goal that audit reports be issued within an established 320-day timeframe was substantially met, webelieve the opportunity exists to further improve the timeliness of audits. Client surveys have expressed a continuingconcern in this area. As a result, we have lowered the target audit timeframe to 260 days and are implementing newinternal operating initiatives designed to improve timeliness.

OIG Professional Advice Assists Corporation

All four performance goals in this strategic goal area were met. Two goals related to emerging issues and task forcesand two goals related to vulnerabilities and risks.

Emerging Issues and Task Forces

Emerging Issues – The performance goal was met by OIG providing timely “front-end” assessments of emergingissues, new systems, significant programs, and related issues. Emerging issues in which the OIG was activelyinvolved in partnership with the Corporation included: high priority Year 2000 initiatives; system development and appli-cation enhancement projects, including public key infrastructure and website security; corporate contingency planning;Division of Supervision program assessments; and various quick response reviews.

Task Forces – The OIG met its performance goal regarding participation in FDIC task forces. OIG staff participated in awide array of Corporation group efforts to develop and improve corporate systems; resolve pressing issues in a timelymanner; and improve significant processes, programs, and policies. Cooperative efforts included such areas as: AssetLoss Reserve strategic planning; investigating bank fraud at open institutions; restitution cases involving fraud; diversityand equal employment opportunity activities; Alternative Dispute Resolution activities; the Corporation’s FinancialAnalysis Project; Internal Control Liaison Council activities, and Customer Service Committee activities.

Advising on Vulnerabilities and Risks

Regulatory and Legislative Proposals and Corporate Policies – The OIG is committed to reviewing and analyzing regula-tory or legislative proposals and proposed corporate policies and providing advisory comments to management.

Percentage of Policies Reviewed andLegislative Proposals Analyzed Within

Requested Timeframes

100%

80%

60%

40%

20%

0%

Legend• 1998 Target• 1999 Actual

Policies Legislation

95% 98% 95% 100%

49

Corporate Internal Control Process – We also met our goal to review and report timely on the adequacy of theCorporation’s annual internal control evaluation and reporting process.

Communicating Effectively With the Chairman, the Congress, and Other Stakeholders

We met or substantially met 9 of 10 goals relating to informing clients of the OIG’s role, mission, and activities;responding to client requests and inquiries; and working with other agencies on cross-cutting issues.

Ensuring Clients Are Informed of OIG Role, Mission, Activities, Issues, and Deficiencies

Client Satisfaction – The goal to increase the client satisfaction rating above the 1998 baseline was met. Surveys ofsenior FDIC executives acknowledged a substantial increase in OIG communication efforts during 1999. The surveysindicated that executive management has a better understanding of the mission, role, and function of the OIG and hasexperienced a greater sense of collaboration and partnership with the OIG.

Providing Information to Clients – Three goals related to providing the following reports and information to clients weremet: Semiannual Report to the Congress; Annual Performance Plan; Audit Plan; and Weekly Highlights reports.

Responsive to Congressional, Employee, and Public Inquiries and Requests

Hotline Complaints and Freedom of Information Act and Privacy Act (FOIA/PA) Requests – The OIG’s goal regarding itsaverage referral time for hotline complaints was met. Our goal for timely response to FOIA/PA requests wassubstantially met.

OIG 1999 Performance Report

OIG Communication Efforts

4

3

2

1

0Legend • 1998 • 1999

2.881.29

Level of Understanding of OIG

5

4

3

2

1Legend • 1998 • 1999

3.743.01

Cust

omer

Sat

isfa

ctio

nRa

ting

(sca

le 1

-5)

Cust

omer

Sat

isfa

ctio

nRa

ting

(sca

le 0

-4)

Hotline Complaints Referral Time

25

20

15

10

5

0

Legend • 1999 Goal=15 days or less • 1999 Actual

915

Percentage of FOIA/PA RequestsResponded to Within 20 Days of Receipt

100%

90%

80%

70%

60%

50%

Legend • 1999 Target • 1999 Actual

91%100%

Num

ber o

f Day

s

50

OIG 1999 Performance Report

Chairman and Congressional Requests – The OIG tracked the resolution of all requests from the Chairman’s Office orfrom the Congress. However, the OIG did not meet its goal to acknowledge all such requests within 10 business days.Four of eight requests were acknowledged within 10 days. Of the remaining four requests, three were both acknowl-edged and closed within an average of 27 days, and one required 38 days to allow for coordination within the InspectorGeneral community. Overall, the median response time for the 8 requests was 13 days. We believe our responsetimes will decrease as we improve our procedures.

Access to Reports – Our goal to provide access to audit reports, evaluation reports, and press releases was substan-tially met. All of our 1999 audit and evaluation reports and press releases were provided to the FDIC Public InformationCenter and the OIG Webmaster in a timely manner under our OIG policy. In some cases, however, technical issuescontributed to moderate delays in the availability of some of these documents on the OIG Homepage Web site. Weare working to eliminate these delays.

Working with PCIE and Other Government Agencies to Address Crosscutting Issues

The OIG met both of its performance goals to actively support the activities of the President’s Council on Integrity andEfficiency (PCIE) and our goal to share information with the FDIC and other agencies. Significantly, the FDIC InspectorGeneral was appointed PCIE Vice Chair in May 1999 and, in this capacity, provided leadership on a wide variety of inter-agency activities. Other significant OIG activities in 1999 included: leading a successful joint audit of the FederalFinancial Institutions Examination Council's training activities; providing coordination for the Department of the TreasuryInspector General in obtaining the information needed from the FDIC on a Material Loss Review of the First NationalBank of Keystone, Keystone, West Virginia; and making presentations at a variety of training conferences attended byauditing, law enforcement, banking, and regulatory officials.

Percentage of Chairman andCongressional Requests Acknowledged

Within 10 Days of Receipt

100%

75%

50%

25%

0%

Legend • 1999 Target • 1999 Actual

50%

100%

51

RelevanceImpact

Quality

Resource Management Goals

In addition to the strategic goals, the OIG has adopted an operating principle that commits the OIG to the effectivemanagement of resources related to staffing; information technology; professional standards and internal controls; com-munications; legal advice; and administrative services.

• We conducted a diversity study of all OIG employees, and have issued an organization-wide Action Plan.

• In initiating a project to build the OIG into a learning organization, we used a consultant to perform an internal self-assessment to identify issues and are implementing Action Plans to address the issues, including the results of internal and external customer surveys.

• OIG employees were surveyed regarding their satisfaction with the OIG’s internal legal services; quality assurance program; internal control and risk management program; and computer equipment, software, and systems. The feedback gained was used in improving performance in these functions.

• We ensured Y2K compliance for OIG computer equipment, software, and systems. DIRM performed Y2K compliance tests of all OIG systems. The OIG did not have any equipment, software, or systems problems caused by the century change.

• The OIG surveyed staff views on computer training and took steps to utilize additional training programs to develop necessary skills.

• We developed and implemented two major nationwide OIG information systems by year-end.

• We substantially completed an internal quality assurance review of the OIG investigation function.

OIG 1999 Performance Report

52

Client Satisfaction

Res

ult

s

AccountabilityTimeliness

Qu

alit

y

Impa

ctRelevance

OIG 1999 Performance Report

53

Client Satisfaction

Increase the average customer satisfaction rating [of audit work] above the baseline level established by a client survey issued in 1998 Met

Increase the average customer satisfaction rating [of evaluation work] above the baseline level established by a client survey issued in 1998 Met

Increase the average customer satisfaction rating [of investigation work] above the level established by the 1998 client survey Met

Relevance

60 percent of initiated audits will relate to corporate activities that the OIG Metdetermines to be areas of high risk or vulnerability, including potential for fraud or abuse

60 percent of initiated evaluations will relate to corporate activities that Substantially Metthe OIG determines to be areas of high risk or vulnerability, including potential for fraud or abuse

At least 75 percent of the audits initiated under the OIG's audit plan will Not Metrelate directly to FDIC‘s strategic goals or annual performance goals

70 percent of evaluation projects will relate directly to a corporatestrategic objective, Chairman’s request, or congressional inquiry Met

40 percent of new cases will be related to criminal restitution and civil judgment, bankruptcy, or suspected fraud in open banks Met

Quality

Develop and test a post-issuance quality scoring methodology and Substantially Metset future targets

Conduct operational reviews every 18 months in each regional office and correct identified issues within 3 months of the review report Substantially Met

Impact/Results

The OIG and FDIC management agree on appropriate management action on 95 percent of audit recommendations within 180 days of report issuance Met

The OIG and FDIC management agree on appropriate management action on95 percent of evaluation recommendations within 180 days of report issuance Met

Analyze baseline data; develop and test a methodology to measure theimpact of audit and evaluation work; and set future targets Not Met

35 percent of closed cases (discretionary type) will result in criminal, civil, or administrative actions Substantially Met

Establish baseline data and develop and test a methodology to better measure impact of investigative work and set future targets Not Met

Annual Performance Goal

(By Strategic Goal Area and Strategic Objective Area)

Annual Goal

Accomplishment

Audits, Evaluations, and Investigations Add Value

Detail Listing of Annual Performance Goal Accomplishment

OIG 1999 Performance Report

Productivity

Issue 79 audit reports Not Met

Issue 10 evaluation reports Not Met

Close or convert 65 percent of preliminary cases toinvestigations within 90 days of opening Substantially Met

The number of cases completed per investigator will be greater than two Met

Timeliness

Issue 80 percent of audit reports within established timeframes(320 calendar days) Substantially Met

Issue 80 percent of evaluation reports within established timeframes (180 days) Not Met

70 percent or more of pending cases will be less than 2 years of age Met

Notify the Corporation 90 percent of the time within 10 working days of attainment of major investigative milestones Not Met

Issue 90 percent of Reports of Investigation within 30 working days after all criminal/civil actions have been taken or after Department of Justice declination Substantially Met

Advise on Emerging Issues and Vulnerabilities

Conduct “front-end” assessments of Y2K and other emerging issues, new systems, or other matters affecting the Corporation, within timeframes that are responsive to corporate needs Met

Participate in FDIC task forces developing new programs/processes, if OIG participation is appropriate and can add value Met

Review proposed corporate internal policies and respond to the Corporation and analyze regulatory/legislative proposals within requested timeframes 95 percent of the time Met

Report within established timeframes on the results of the OIG’s review of the Corporation’s annual Federal Managers Financial Integrity Act internal control review process, a process required for the FDIC by the Chief Financial Officers Act of 1990 Met

Inspector General Role/Activities; Inquiry Response; Interagency Issues

Provide OIG Semiannual Report and other information to and interact with the Congress and corporate officials Met

Brief the Congress on Annual Performance Plan and FDIC management on Annual Audit Plan Met

Annual Performance Goal

(By Strategic Goal Area and Strategic Objective Area)

Annual Goal

Accomplishment

Audits, Evaluations, and Investigations Add Value (continued)

Professional Advice Assists Corporation

Communicate Effectively with Clients/Stakeholders

54

OIG 1999 Performance Report

Produce and communicate weekly highlights report to the Chairman onsignificant OIG activities by the first working day following the week being featured Met

Increase the average customer satisfaction rating of OIG communicationefforts above the baseline level established by the 1998 survey Met

Refer Hotline complaints within an average of 15 working days ofreceipt to appropriate OIG or corporate officials for review and track their resolution Met

Respond to Freedom of Information Act/Privacy Act requests within 20 days of receipt unless deadline is extended in accordance with law, applicable regulation, and OIG policy Substantially Met

Acknowledge Chairman’s Office or congressional requests within10 business days of receipt and track their resolution Not Met

Provide access to audit reports, evaluation reports, and press releases on the OIG Homepage and in the FDIC reading room within 30 days of acceptance or in accordance with policy Substantially Met

Continue to actively participate in and support the activities of the President’s Council on Integrity and Efficiency Met

Share information that could assist the FDIC, other OIGs, and other government agencies in public forums (i.e., professional conferences,round table discussion, training courses, etc.), as requested Met

Annual Performance Goal

(By Strategic Goal Area and Strategic Objective Area)

Annual Goal

Accomplishment

Communicate Effectively with Clients/Stakeholders (continued)

55

56

final action is the completion of allactions that management has deter-mined, via the management decisionprocess, are necessary to resolve thefindings and recommendationsincluded in an audit report. In thecase of disallowed costs, manage-ment will typically evaluate factorsbeyond the conditions in the auditreport, such as qualitative judge-ments of value received or the costto litigate, and decide whether it is inthe Corporation’s best interest to pur-sue recovery of the disallowed costs.The Corporation is responsible forreporting the disposition of the disal-lowed costs, the amounts recovered,and amounts not recovered.

Except for a few key differences, theprocess for reports with recommen-dations that funds be put to betteruse is generally the same as theprocess for reports with questionedcosts. The audit report recommendsan action that will result in funds tobe used more efficiently rather thanidentifying amounts that may need tobe eventually recovered.

Consequently, the management deci-sions and final actions address theimplementation of the recommendedactions and not the disallowance orrecovery of costs.

finding in which, at the time of theaudit, a cost is not supported byadequate documentation; or, afinding that the expenditure offunds for the intended purpose isunnecessary or unreasonable.

The next step in the process is forFDIC management to make a deci-sion about the questioned costs.The IG Act describes a “manage-ment decision” as the final deci-sion issued by management afterevaluation of the finding(s) and rec-ommendation(s) included in an auditreport, including actions deemed tobe necessary. In the case of ques-tioned costs, this management deci-sion must specifically address thequestioned costs by either disallow-ing or not disallowing these costs.A “disallowed cost,” according tothe IG Act, is a questioned cost thatmanagement, in a managementdecision, has sustained or agreedshould not be charged to the gov-ernment.

Once management has disallowed acost and, in effect, sustained theauditor’s questioned costs, the laststep in the process takes placewhich culminates in the “finalaction.” As defined in the IG Act,

Reader’s Guide toInspector General ActReporting Terms

What Happens When AuditorsIdentify Monetary Benefits?Our experience has found that thereporting terminology outlined in theInspector General Act of 1978, asamended, often confuses people. Tolessen such confusion and placethese terms in proper context, wepresent the following discussion:

The Inspector General (IG) Actdefines the terminology and estab-lishes the reporting requirements forthe identification and disposition ofquestioned costs in audit reports. Tounderstand how this process works,it is helpful to know the key termsand how they relate to each other.

The first step in the process iswhen the audit report identifyingquestioned costs▼ is issued toFDIC management. Auditorsquestion costs because of analleged violation of a provision of alaw, regulation, contract, grant,cooperative agreement, or otheragreement or document governingthe expenditure of funds. In addi-tion, a questioned cost may be a

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

Reporting Terms and Requirements

57

Reporting Requirement PageSection 4(a)(2): Review of legislation and regulations 38

Section 5(a)(1): Significant problems, abuses, and deficiencies 10-25

Section 5(a)(2): Recommendations with respect to significant problems, abuses, and deficiencies 10-25

Section 5(a)(3): Recommendations described in previous semiannual reports on which corrective action has not been completed 58-60

Section 5(a)(4): Matters referred to prosecutive authorities 26

Section 5(a)(5) and 6(b)(2): Summary of instances where requested information was refused 65

Section 5(a)(6): Listing of audit reports 61-62

Section 5(a)(7): Summary of particularly significant reports 10-25

Section 5(a)(8): Statistical table showing the total number of audit reports and the total dollar value of questioned costs 63

Section 5(a)(9): Statistical table showing the total number of audit reports and the total dollar value of recommendations that funds be put to better use 64

Section 5(a)(10): Audit recommendations more than 6 months old for which no management decision has been made 65

Section 5(a)(11): Significant revised management decisions during the current reporting period 65

Section 5(a)(12): Significant management decisions with which the OIG disagreed 65

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

Appendix I: StatisticalInformation Required bythe Inspector GeneralAct of 1978, as amended

The following table shows the cor-rective actions management hasagreed to implement but has notcompleted, along with associatedmonetary amounts. In some cases,these corrective actions are differentfrom the initial recommendationsmade in the audit reports. However,the OIG has agreed that the plannedactions meet the intent of the initialrecommendations. The informationin this table is based on informationsupplied by the FDIC’s Office ofInternal Control Management(OICM). These 33 recommendationsfrom 11 reports involve monetaryamounts of over $16.1 million.OICM has categorized the status ofthese recommendations as follows:

Management Action in Process: (12

recommendations from 7 reports)

Management is in the process ofimplementing the corrective actionplan, which may include modifica-tions to policies, procedures, sys-tems or controls; issues involvingmonetary collection; and settlementnegotiations in process.

Litigation: (21 recommendations

from 4 reports)

Each case has been filed and is con-sidered “in litigation.” The LegalDivision will be the final determinantfor all items so categorized.

Appendix I

58

Tabl

e I.

1

✦ Implementation scheduled along with the completion of the Corporate HumanResources Information System.

Table I.1: Significant Recommendations From Previous Semiannual Reports onWhich Corrective Actions Have Not Been Completed

59

Report Number, Significant Brief Summary of Planned

Title, Recommendation Corrective Actions and

and Date Number Associated Monetary Amounts

Management Action In Process

98-083 1 Require documentation from the trustee and servicers that willSecuritization Credit support the withdrawals from the reserve fund.Enhancement Reserve Fund

1992-CHF 2, 3 Disallow $385,727 in supplemental special servicer fees billed early or before any work was performed.

October 2, 1998

98-086 4 Provide a refresher course to field examiners on the use of the Implementation of the Risk- Examiner Laptop Visual Information System software and provide Focused Examination Process clarification on issues that have emerged since the modules

have been instituted.November 5, 1998

98-090 2, 4 Quantify the amount of overstated realized losses, unrecorded Credit Enhancement Reserve Fund proceeds, corporate advances and refunds resulting from for Securitization Transactions 1993-03 accounting errors and request reimbursement from

NationsBanc, as successor to Boatmen.November 24, 1998

10 Perform or contract for on-site reviews of the servicer’s support-ing documentation of the realized losses for the single-family residential loan securitization program.

EVAL 99-004 7 Reassess FDIC headquarters color copying requirements andFDIC Headquarters Copier determine whether FDIC could more economically meet thoseAdministration Program needs by consolidating copiers or installing more appropriate

color copy machines.June 15, 1999

99-027 1 Disallow $331,672 for losses that were incurred and negotiate Limited Scope Audit of Credit a settlement agreement to obtain restitution for the lossesEnhancement Reserve Funds for related to Chapter 11 bankruptcy proceedings.Securitization Transaction

1991-16 and 1992-05

July 6, 1999

99-028 3 Ensure that the system being developed to replace the Personnel Action Processing Personnel Action Request System incorporates the capability toControls and Security preserve a permanent image or record of the original request

for personnel action and provides an audit trail to changes and July 29, 1999 additions made to the request.✦

EVAL 99-007 1 Take actions to more closely align the types and placement ofFDIC Regional Copier Program equipment in the Dallas Regional Office’s and San Francisco

Regional Office’s copier programs with each region’s September 30, 1999 copying demands.

2 Analyze the available convenience copier contract vehicles andscenarios and select the ones that provide the best value for the Dallas Regional Office and San Francisco Regional Office.

Tabl

e I.

1 Report Number, Significant Brief Summary of Planned

Title, Recommendation Corrective Actions and

and Date Number Associated Monetary Amounts

Litigation

95-032 5 Recover $5,259,285 from the association for noncomplianceLocal America Bank, F.S.B., with the tax benefits provisions of the assistance agreement.Assistance Agreement

March 24, 1995

96-014 1, 4-16 Recover $4,526,389 of assistance paid to Superior Bank.Superior Bank, F.S.B., Assistance

Agreement, Case Number C-389c

February 16, 1996

97-080 8 Disallow the improperly paid late fees and special assessmentsFDIC Property Tax Reassessments totaling $4,385,089 and initiate action to prevent future paymentsand Refunds, Western Service Center of such amounts.

July 17, 1997

98-026 2, 3, 4, 6 Recover $1,220,470 of assistance paid to Superior Bank.Assistance Agreement Audit of

Superior Bank, Case Number C-389c

March 9, 199811 Compute the effect of understated Special Reserve Account

for Payments in Lieu of Taxes and remit any amounts due to the FDIC.

60

Tabl

e I.

2 Audit Report Questioned Costs

Number Funds Put to

and Date Total Unsupported Better Use

Supervision and Consumer Affairs

00-002 Management Review of Division of February 23, 2000 Supervision Tracking Systems

Award, Administration, and Oversight of Contracts and Agreements

EVAL-99-009 MCI Voice and Video Contract Price $2,181,984December 20, 2000 Warranty

00-010 Mortgage Project Group’s Billings $58,254March 28, 2000

Asset Servicing and Liquidation

99-044 Loan Processing and Disposition November 24, 1999 Procedures, Southwest Bank, Jennings,

Louisiana

D99-045 Delegations of Authority for Asset November 29, 1999 Dispositions

99-046 RTC Mortgage Trust 1994 S-6 December 16. 1999

00-001 Internal Controls over ReceivershipJanuary 12, 2000 Employee Benefit Plans

00-003 Northeast Service Center’s Subsidiaries March 13, 2000 Inventory

00-004 Industrial Revenue Bond PartnershipMarch 3, 2000 TEJV-1, L.P.

00-005 RTC Mortgage Trust 1993-N3 $349,684 $13,068March 17, 2000

00-006 RTC Mortgage Trust 1994-N1 $366,555 $931March 17, 2000

00-007 RTC Mortgage Trust 1994-N2 $417,294March 17, 2000

00-008 Income, Expenses, and Distributions $151,012 $102,212March 20, 2000 of the Overland National Fund Limited

Partnership, Monrovia, CA al

Title

Table I.2: Audit Reports Issued by Subject Area

61

Tabl

e I.

2 Audit Report Questioned Costs

Number Funds Put to

and Date Total Unsupported Better Use

Financial Accountability and Internal Controls

00-014 Accounts Payable Operations inMarch 31, 2000 Washington, D.C.

Financial and Management Information Systems

99-043 DOA Actions Regarding Internet BankingOctober 27, 1999

99-047 Data Integrity Controls for Selected December 21, 1999 Division of Resolutions and Receiverships

(DRR) Automated Systems

00-011 Acquisition of Software and Services March 30, 2000 to Support the Corporate Human

Resources Information System

00-012 FDIC’s Year 2000 EffortsMarch 24, 2000

00-013 FDIC’s Strategic Planning for Information March 31, 2000 Technology Resources

Corporate Activities and Administration

00-009 Semiannual Report of FDIC Board March 23, 2000 Members’ Travel Voucher Reviews–

September 1999 through February 2000

Totals for the Period $1,342,799 $116,211 $2,181,984

Title

62

Tabl

e I.

3 Questioned Costs

Number

Total Unsupported

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

B. Which were issued during the reporting period. 5 $1,342,799 $116,211

Subtotals of A and B 5 $1,342,799 $116,211

C. For which a management decision was madeduring the reporting period. 5 $1,342,799 $116,211

(i) dollar value of disallowed costs. 4 $577,512 $116,211

(ii) dollar value of costs not disallowed. 4▼ $765,287 0

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

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

▼Three of the four reports included on the line for costs not disallowed are also included in the line for costs disallowed, since management did not agree with some of the questioned costs.

Note: In addition, the FDIC has recovered $26,568 as a result of legal fee bill audit work that did not result in a formally issued report.

Table I.3: Audit Reports Issued with Questioned Costs

63

Tabl

e I.

4 Number Dollar Value

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

B. Which were issued during the reporting period. 1 $2,181,984▼

Subtotals of A and B 1 $2,181,984

C. For which a management decision was made during the reporting period. 1 $2,181,984

(i) dollar value of recommendations that were agreed to 1 $2,181,984by management

- based on proposed management action. 1 $2,181,984

- based on proposed legislative action. 0 0

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

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

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

▼Evaluation report included in this table to reflect funds put to better use amount.

Table I.4: Audit Reports Issued with Recommendations for Better Use of Funds

64

Table I.5Status of OIG Recommendations Without Management Decisions

During this reporting period, there were no recommendations withoutmanagement decisions.

Table I.6Significant Revised Management Decisions

During this reporting period, there were no significant revised managementdecisions.

Table I.7Significant Management Decisions with Which the OIG Disagreed

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

Table I.8Instances Where Information Was Refused

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

Tabl

es I

.5, I

.6, I

.7, &

I.8

65

Appendix II: Reports Issued by the Office of Congressional Relations and Evaluations

Appendix II

Report Number

and Date Title

EVAL-99-009 MCI Voice and Video Contract - Price Warranty

12/20/99

EVAL-00-001 An Assessment of the Corporation’s Efforts to Enhance Energy Efficiency and Reduce Consumption of Natural Resources at Its Headquarters Facilities

1/25/00

EVAL-00-002 The Division of Compliance and Consumer Affairs’ Reporting of Examinations and Activities in FDIC Quarterly Performance Reports

2/24/00

EVAL-00-003 Internal Controls Over Confidential Information Collected and Generated During theApplication Process

3/24/00

App

endi

x II

66

ACSB Acquisition and Corporate Services Branch

CHRIS Corporate Human Resources Information System

CRA Community Reinvestment Act

DCA Division of Compliance and Consumer Affairs

DIRM Division of Information Resources Management

DOA Division of Administration

DOS Division of Supervision

DRR Division of Resolutions and Receiverships

ECIE Executive Council on Integrity and Efficiency

FBI Federal Bureau of Investigation

FDIC Federal Deposit Insurance Corporation

FOIA Freedom of Information Act

FRB Board of Governors of the Federal Reserve System

GAO U.S. General Accounting Office

GSA General Services Administration

IG Inspector General

IRS Internal Revenue Service

IT Information Technology

MCI MCI WorldCom

NESC Northeast Service Center

NPS National Processing System

OCC Office of the Comptroller of the Currency

ODEO Office of Diversity and Economic Opportunity

OI Office of Investigations

OICM Office of Internal Control Management

OIG Office of Inspector General

OTS Office of Thrift Supervision

PA Privacy Act

PCIE President’s Council on Integrity and Efficiency

PTL Pacific Thrift and Loan Company

RTC Resolution Trust Corporation

AbbreviationsA

bbre

viat

ion

s

67

Congratulations!Congratulations to co-authors Jeanette M. Franzel (U.S. GeneralAccounting Office) and Ross E. Simms (FDIC OIG) on the publica-tion of their article “The Buck Stops Here: A Unique Partnership inFederal Financial Auditing” in The Journal of Public Inquiry, a publi-cation of the Inspectors General of the United States, Fall/Winter1999 issue. Their article chronicles a collective effort to conduct thefinancial statement audit for their common client, the FDIC. Thisalliance has become an innovative model for forming partnerships inthe federal government.

Happy RetirementThe OIG bids a fond farewell to James R. Renick, who retired fromthe FDIC after more than 23 years of service. Jim was involved inalmost every aspect of audit and investigative activities at the FDIC.He joined the Corporation in 1976 as Assistant Director of the Office

of Corporate Audits andInvestigations, which in 1989became the Office ofInspector General. At thattime, he became the DeputyInspector General, a positionhe held until then-ActingChairman Andrew Hoveselected him as the FDIC‘sInspector General upon theretirement of Mr. RobertHoffman. When the Congressdesignated the position ofInspector General at the FDIC

a presidential appointment, Jim became the Principal DeputyInspector General but served as Acting Inspector General for2 years until the current Inspector General, Gaston L. Gianni, Jr.,was named Inspector General in April 1996. Jim served as PrincipalDeputy Inspector General since that time.

Family, friends, and colleaguesfrom throughout the FDIC celebrated Jim‘s retirement on March 30, 2000. The OIGthanks and congratulates himfor his distinguished federalcareer. Mr. and Mrs. Renick with

FDIC Chairman Tanoue.

Des

ign

by F

DIC

/DO

A/A

CS

B/D

esig

n &

Prin

ting