A federal audit says American Samoa may not be fully positioned to provide credit support to small businesses under the U.S. Treasury’s State Small Business Credit Initiative (SSBCI) program, through which the territory was awarded $10.5 million two years ago.

Released last week, the U.S. Treasury’s Office of Inspector General audit cited findings and recommendations on actions the U.S. Treasury should take, including terminating the SSBCI program in the territory.

American Samoa’s response is that the new Lolo administration is in a position to administer the SSBCI, with a revised plan submitted late last year, but pending final federal approval.

(The governor met with the US Treasury department on American Samoa’s SSBCI proposal when he was in Washington D.C., in February this year, prior to falling ill. At the meeting, he was told the application was still pending, and that American Samoa would be held to the same accountability as the States to ensure that full compliance with the criteria is met.)

According to OIG, the audit was conducted between September last year and January 2014, and because no funds had been used for credit support, the audit looked at, among other things, whether the territory was fully positioned to extend credit, and whether the territory was in compliance with the program’s reporting and certification requirements.

After the territory’s application was approved in January 2012, it was awarded $10.5 million and in the same month, the required ‘Allocation Agreement’ between the territory and U.S. Treasury was signed. Thereafter, the first allocation of approximately $3.5 million was disbursed but as of January this year, none of the money has been “obligated or spent” for credit support programs, except for $49,100 for administrative expenses, the audit says.

According to the audit, administration of the program went through three changes between 2012 and this year.

It began at the Governor’s Office of Federal Programs (OFP), and when the Lolo Administration took office in January last year, the SSBCI was transferred three separate times — with the final transfer done last July when the local Commerce Department director became the administrator and point of contact, while the ASG Treasury oversees money distribution.

Last August, American Samoa informed U.S. Treasury that it would submit a “formal program modification to replace its collateral support program with a venture capital program,” the auditors said, adding that American Samoa submitted last December a revised modification, which had not been approved yet by the feds as of January this year.

According to SSBCI documents, neither of the two local banks were willing to participate in the collateral support program, telling lawmakers in late 2012 that it was too risky for them. This in turn prompted the previous administration to look outside of American Samoa for other lending institutions.

In the OIG audit report, the auditors say American Samoa was in violation of its Allocation Agreement for failing to seek prior approval from the U.S. Treasury before changing the administrator of the program.

“With three changes in the entity designated to manage the program, it is unclear whether the Territory is fully positioned to operate a viable program or able to effectively oversee the administration of SSBCI funds,” auditors said.

NOT IN A POSITION TO PROVIDE SSBCI

A provision of the Allocation Agreement requires the Territory to be fully positioned within 90 days after the January 26, 2012, date of its agreement, “to act on providing the type of credit support that the Approved State Program was established to provide using the allocated funds.”

U.S. Treasury considers a state or territory to be “fully positioned” if it possesses all necessary staff, has executed all necessary contracts, has made all required forms available to the public, and is marketing the program to lenders and investors, auditors said.

The audit report also noted that on Mar. 11, 2013, U.S Treasury sent a letter to American Samoa noting the Territory had not committed or disbursed any funds to small business borrowers or investees, and gave it until March 25, 2013, to provide records showing that it was fully positioned to provide credit support.

The letter cautioned that a failure to provide the evidence could result in U.S Treasury again declaring a general event of default, auditors said, adding that American Samoa provided some of the requested records on March 26, 2013, which enabled Treasury to review the program structure, relationships between proposed implementing entities, and qualifications of the staff members.

As of February this year, “[U.S] Treasury officials told us they still lack sufficient evidence to determine whether American Samoa is fully positioned to provide credit support to small businesses,” auditors said.

Therefore, the auditors say, the U.S. Treasury should consider whether the Territory has again defaulted on its Allocation Agreement for not being fully positioned to provide credit assistance, and whether future disbursements should be reduced, suspended, or terminated.

ANNUAL REPORTS

Auditors also cited discrepancies in the certification of quarterly reports, as well as the timely submission of reports, a requirement under the Allocation Agreement. It says American Samoa did not certify the accuracy of three quarterly reports, and incorrectly certified the accuracy of two others.

CONCLUSION

In conclusion, auditors say that American Samoa has violated several key terms of its Allocation Agreement with the U.S. Treasury, which has already declared a general event of default of the Allocation Agreement for late filing of financial reports.

“While Treasury is allowed to merely withhold disbursements until the Territory corrects the default, all of the noncompliance issues, taken collectively, suggest that U.S. Treasury should terminate SSBCI funding to the Territory,” the auditors says.

However, U.S Treasury “has been slow to hold American Samoa accountable for its noncompliance and recently stated it plans to review American Samoa’s participation in June 2015,” the report says.

“We believe U.S. Treasury has more than sufficient information to make a determination now to terminate the Territory’s funding,” it says

OIG recommended that the U.S. Treasury immediately determine whether American Samoa has again defaulted on its Allocation Agreement for: not being fully positioned to provide credit support, not seeking Treasury’s prior approval for changes in management of its SSBCI program, or not making accurate and complete reporting certifications.

“If such an event or events have occurred and have not been adequately cured, determine whether a reduction, suspension, or termination of future funding to the Territory is warranted,” it says.

Another recommendation is that if American Samoa’s SSBCI funding is not terminated, then require that the Territory first comply with the terms of its Allocation Agreement, and approve the agreement modifications, before disbursing additional funds.

In the response, U.S. Treasury agreed with the audit findings and recommendations, saying that it will determine whether American Samoa has again defaulted on its Allocation Agreement for the reasons cited in the audit report and whether to reduce, suspend, or terminate future funding to the Territory.

U.S. Treasury also agreed that if it does not find that American Samoa has again defaulted, it should require the Territory to comply with the terms of its Allocation Agreement before disbursing additional funds. “We believe Treasury’s planned actions to be fully responsive to the recommendations,” the auditors say.

BACKGROUND

In addressing the venture capital program, SSBCI documents say that the program provides investment capital to create and grow start-up and early-stage businesses.

Venture Capital Programs often take one of two forms: a state-run venture capital fund (which may include other private investors) that invest directly into businesses; or a fund of funds, which is a fund that invests in other venture capital funds that in turn invest in individual businesses.

In tomorrow’s edition, Samoa News will report on details of ASG’s reply.