There are always at least two sides to every story. In this case, one side is what the law says or means or how it is applied. The other side is yours — what you did or are doing. Sometimes you were right, sometimes wrong — but to the OIG it doesn’t make any difference what your side is because the OIG is always right.

      I’m going to cover the OIG response to the 1996 initial equity skimming law, a brief overview of one OIG report which was referred for investigation, and the Agency commitment to support the OIG in its major effort to ferret out fraud, waste and abuse.

OIG Response to the Initial Equity Skimming Law

      Someone once said that when all you have is a hammer, the whole world looks like a nail. In August 1996, the first Equity Skimming Penalty was enacted. It read:

Whoever, as an owner, agent, or manager, or who is otherwise in custody, control, or possession of property that is security for a loan made or insured under this section willfully uses, or authorizes the use, of any part of the rents, assets, proceeds, income, or other funds derived from such property, for any purpose other than to meet actual or necessary expenses of the property, or for any other purpose not authorized by this title or the regulations adopted pursuant to this title, shall be fined not more than $250,000 or imprisoned for not more than 5 years, or both.

      What a hammer! OIG went to work and issued the March 1999 monumental Report entitled “Rural Rental Housing Program: Uncovering Program Fraud and Threats to Tenant Health and Safety.” Richard Price talked about this the other year. One of the statements in the Report’s Executive Summary is that:

The Inspector General and the Undersecretary for Rural Development for Rural Development undertook this Initiative to curb program abuse and provide a road map for future efforts to ensure integrity in the RRH program.

      Out of 32 high risk owners and management agents covered in the Report, 16 were referred for investigation, with 10 then being under investigation.

      Brief overview of one OIG report on a borrower which resulted in a referral for investigation — an example of the Road Map.

      While we can’t go with the IG on an audit or evaluation, their Report can be useful for showing their road trip — what they set out to do, what they did, and what they found.

      A little background is that I worked with an owner/manager to address a number of issues raised by OIG during what we thought was an audit. OIG had camped in his office for a few months and had long lists of expenses which they questioned. OIG gave him the long lists which they identified by check number — which is a good way to nail down an audit trail. I didn’t get a copy of the Report until two years later. I’ll intertwine the Report with what we did to address the issues raised by OIG.

      As part of the effort to document fraud, the IG undertook and issued an Evaluation Report on an identity of interest owner/manager dated December 1998. It stated:

Purpose. We evaluated the management operations of [name deleted], Inc. (the “management company”), to determine if it had accurately reported expenses related to the operation and maintenance of its XX Rural Rental Housing (RRH) Program projects and had properly maintained the physical condition of those projects. This evaluation was part of a nationwide review of RRH owner/managers and management companies. The objective of the review was to identify and refer for investigation those owner/managers and management companies that had misused RRH funds.

      In the words of the Evaluation Report:

      Recent amendments to the Housing Act allow OIG and RHS to take aggressive action to identify and refer for prosecution those who misuse project funds, commonly known as “equity skimming,” while neglecting the physical condition of projects.
      Thus, OIG, RHS, and RD State offices have undertaken a nationwide joint effort to identify and refer for prosecution those owner/managers and management companies that have misused funds while neglecting the physical condition of projects. The management companies included in this review were selected based on size, physical condition, and the existence of an identity of interest relationship between the owner and the management company.

      In this case, RD had identified the owner as someone they thought (or knew) was abusing the program. There was no love lost between the owner and the Agency. In addition to the bad relationship, the Agency probably fingered the owner because it believed that the management company had allowed the physical condition of a number of projects to deteriorate.

      The OIG Evaluation Report stated:

Our objectives were to determine if the management company had accurately reported expenses related to the operation and maintenance of RRH projects and properly maintained the physical condition of those projects.

      Who can oppose this objective? It’s our tax money that can be abused in a 515 operation. We don’t support fraud, waste and abuse — there’s no constituency for that. That would be like rooting for the bank robbers in every robbery of a bank. We want and support a clean program.

      So the report found:

Physical Condition of Projects Had Deteriorated. The management company had allowed the 16 projects we visited to deteriorate. Five projects had serious deterioration; one of the five and one other project had safety concerns. These conditions needed immediate attention to ensure the safety of tenants and to protect the Government’s security interest.

      Aha! OIG and the Agency went out with a hammer and found a nail sticking up:

Some of the common types of deterioration we observed included:
      1) Damaged screens and storm windows;
      2) aluminum or vinyl siding that was dented, had holes, was missing, or was moldy;
      3) broken gutters and downspouts;
      4) cracked stoops, sidewalks, driveways, and parking lots;
      5) rusted stair railings and rotted stair landings; and
      6) missing and broken shutters.
      Another common problem was that the trim and siding of most buildings needed paint or stain. In many instances, wood trim was severely worn, moldy, or rotted.

      Of course, there were some other, serious conditions as well, so the findings were not totally off base. In terms of your operations, it is likely that you have at least one project that has problems in the list.

      The Report did state:

We noted the reserve account balances of the projects we visited were generally very low and not sufficient for the repairs needed by many of the projects.

      And how did these conditions come about? According to the Report:

Management Company Charged Unallowable and Unsupported Costs to Projects.

      The report listed a number of items, several of which are interesting. First:

The management company also allocated a $1,050 software license fee to all XX of its projects. The owner stated that since they used the software to account for project costs, it should be an allowable project expense. However, regulations issued by RD on purchases of computer software prohibit charges for software purchased by a management company.
      [note RD Administrative Notice
      2842 (1930-C), dated August 2, 1993.]

      Now, the way Reports are processed is that OIG sends a draft to the Agency, generally the State Office, for comment. The Agency can offer critical comments such as saying the OIG doesn’t understand something or misinterprets an Instruction or AN. Or the Agency can sign off, saying, “It looks good to me. We’ll do whatever you tell us to do.” In this case, the Agency agreed with the conclusion that Mitch Copman’s Tenant Certification program licensing fees are not allowable project costs, and the Agency probably supplied the AN in support of their position.

      Because we knew the fees were an issue, the owner/manager and I had written that the August 1996 $50 check for a certain project for the expense of the software license should not have been determined to be “unallowable.” We pointed out that:

RD AN No. 3356 dated August 18, 1997 provides in Attachment D, last three paragraphs beginning on the bottom of page 1:

. . . . (T)he guidance articulated in AN 2842 (1930-C) dated August 2, 1993, still applies.

That AN stated:

. . . . MFH borrowers are encouraged to use automated system to manage MFH projects and to prepare and process paperwork associated with project management. Where economically feasible, computer applications can improve management efficiency and reduce errors and omissions. . . .
      . . . . The cost may be prorated over several projects owned by the same borrower entity. . . . .

      We explained in a letter to OIG that:

      The software license is a cost of doing business to support the software purchased. Not to maintain the software would make this orphan software with the loss of the ability to prepare and process project paperwork. For example, the Form 1944-8 Tenant Certification was Revised (and reissued) on 4-97 and 4-96, following revisions in 11-93 and previous dates. Without updates to the software, the software would have become outdated and the Tenant Certifications unacceptable to the Agency. Accordingly, we believe this fee is allowable.

      So there we were, with the Agency and OIG having selected one part of the AN to hit on the owner, and we selected another part in defense of the borrower. At the time we made the response, we had not seen the Evaluation Report.

      It should be of concern to all of us here that the Agency had not contested the issue of the license fees and had not pointed out that they were allowable project costs. All I can guess is that the Agency was so convinced that the owner was ripping off the projects that they made it all part of a package. The Agency might also have believed in OIG so strongly (or been so relieved that they weren’t named) that they deferred to the better judgment of the IG. Or, as I’ll go into shortly, they are on the side of the OIG, having been enrolled in the fight against fraud, waste, and abuse.

Unsupported Costs

      Second, the Evaluation Report dinged the guy on his identity of interest maintenance company. The Report stated:

Unsupported Costs.   The management company was unable to provide receipts and invoices to support $11,589 in expenses charged to the four projects. Our review disclosed payments for maintenance labor, supplies, and caretaker travel that were not supported by invoices, employee time cards, or purchase receipts. Supporting documentation is required to substantiate that work was actually performed or that materials and supplies were actually purchased for the project’s use. Further, RD regulations require borrowers to maintain records in order to conduct their operations and make those records available for review. We made repeated requests for supporting documentation; however, the management company never provided evidence to substantiate the charges.
     [note 6 RD Instruction 1930-C,
      paragraph 1930.122, dated August 30, 1993.]

      The OIG read the 1930-C Instructions and, even before the December 2000 legislation was passed, determined that there should be standards for record keeping. They seized upon about the only handle they could find, which is only an admonition to Agency staff, and not a hard requirement on borrowers:

Section 1930.122. Borrower accounting methods, management reporting and audits. It is the objective of FmHA that borrowers will maintain accounts and records necessary to conduct their operation successfully and from which they may accurately report operational results to FmHA for review, and otherwise comply with the terms of their loan agreements with the Agency. Borrower accounts and records will be kept or made available in a location within reasonable access for inspection, review, and copying by representatives of FmHA or other agencies of the U.S. Department of Agriculture authorized by the Department.

The issues on record keeping for the projects focused on documentation. The responses to OIG ranged from locating the time sheets for each employee and relating them to the work orders to identifying items used in maintenance on specific dates.

      For example, there was a questioned June 1997 project check, #2196, to the Management Agent in the amount of $569.17; the check was reimbursement from the project to the Agent. OIG disallowed the check as being unsupported. We responded that:

     Invoice #475 details the items being billed, with the charges for maintenance for 13.5 hours being disallowed in the amount of $213.44.
      Enclosed is a Time Sheet indicating a total of 13.5 hours maintenance on the project by the Maintenance Staff on June 2, 3, 5, and the details of the work performed.
      The work directly benefited the project and is supported and allowable.

      OIG had seen the records and made extensive copies. For whatever reason, they hadn’t closed the connections between the time sheet, the invoice, and the check. We, of course, believe the time sheets and invoice together supported the check.

      One of my observations on the Time Sheets I reviewed was that Maintenance Staff are not good record keepers. They misdated some work order completion notes, such as having done the work on June 4, and then showed their Time Sheet as having been at the project on June 3rd rather than the 4th.

      Perhaps in response to this particular case, the OIG drafted the new provisions in the legislation for “Improper Documentation:”

(aa) DOUBLE DAMAGES FOR UNAUTHORIZED USE OF HOUSING PROJECTS ASSETS AND INCOME —
      (1) ACTION TO RECOVER ASSETS OR INCOME —
      (B) IMPROPER DOCUMENTATION — For purposes of this subsection, a use of assets or income in violation of the applicable loan, loan guarantee, statute, or regulation shall include any use for which the documentation in the books and accounts does not establish that the use was made for a reasonable operating expense or necessary repair of the project or for which the documentation has not been maintained in accordance with the requirements of the Secretary and in reasonable condition for proper audit.

      The only safe harbor is if the Agency defines what documentation is acceptable and necessary, and what constitutes “reasonable condition for proper audit,” whatever “reasonable condition” means. There is about a zero likelihood that the Agency will touch this — they’ll do everything they can to duck it. As Richard Price has put it in the past, this will criminalize stupidity.

      Where all this stands with my owner is, apparently, that the case was referred to the U.S. Attorney for indictment. The Evaluation Report itself stated:

As a result of the above conditions, we have referred these matters for criminal investigation. Therefore, we are not recommending that any administrative actions be taken or that any unsupported or unallowable charges be collected from the management company at this time.

Agency Commitment to Support the OIG

      In its monumental March 1999 Report entitled “Rural Rental Housing Program: Uncovering Program Fraud and Threats to Tenant Health and Safety,” the OIG outlined some of what it and the Agency were going to do about combating all this waste, fraud and abuse:

RHS Plans to Make Prosecution More Likely
      To promote a greater acceptance of these cases for criminal prosecution in the future, RHS plans to incorporate stricter language into its regulations that will prohibit common unallowable charges and practices, including the unauthorized use of reserve funds, and clearer definition of unallowable costs, such as those related to tax preparation fees. RHS will also require owners and management agents to certify that management agreements are in compliance with program regulations.
      RHS further plans to provide extensive training on these revised regulations and on the approvals of management agreements. The training effort will include RHS National Office and State office staff, as well as owners, and management agents.

      OIG has not dropped the ball on fighting the waste, fraud and abuse — that’s their livelihood. They don’t get paid to report only that all is well. The Inspector General testified before the House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies on February 17, 2000 about the Multifamily Housing Enforcement Program:

      OIG and RHS recently combined forces to develop a team approach for review of borrowers and management agents at high risk of defrauding or abusing the multifamily rural housing program. Our report, issued in March 1999, described a high-risk profile which we used to identify over $4.2 million in misused funds, as well as health and safety hazards posing an immediate danger to the tenants.
      Historically, OIG has responded vigorously when indications of fraud and abuse are identified. However, as our resources are stretched, almost to the breaking point, we are frequently unable to respond to requests for audit assistance. As a result, some who abuse the RRH program can continue to do so with impunity –???? at least until additional staffing and resources become available.
      We have worked closely with RHS to develop proposed legislation to improve the integrity of the multifamily housing program. The draft bill would authorize a broad range of criminal and civil authorities which could be brought to bear against persons or entities who misuse RHS housing programs. Specifically, the proposed legislation would:
      (1) establish civil sanctions for equity skimming,
      (2) establish civil monetary penalties for persons or entities who violate agreements and contracts,
      (3) authorize the Secretary to withhold the renewal or extension of loan or assistance agreements and request judicial intervention to enforce compliance with an administrative decision,
      (4) provide sanctions for money laundering and provide civil fines for obstruction of Federal audits, and,
      (5) authorize the Secretary to impose civil penalties when project accounting records are found to be in unsuitable condition for audit.
      These provisions will strengthen our ability to audit and prosecute cases of program fraud and abuse, significantly improve program controls, and facilitate the effective administration of rural housing programs.

      In March 2000, the USDA Undersecretary sent a letter on the “RHS Multi-Family Housing Enforcement Program.” It said, in part:

      As discussed with you during the recent Rural Development State Director policy meeting, the Rural Housing Service (RHS) Multi-Family Housing (MFH) programs are subject to vulnerabilities from program fraud and abuse. The RHS/Office of Inspector General (OIG) Task Force that developed a team approach to reviewing program participants was beneficial in using the best of each Agency’s abilities to further the goal of detecting fraud and abuse.
      We are building upon that success by improving cooperation and coordination between agencies and departments involved in the detection and enforcement process.
      Additionally, we will provide for a standing team of staff members trained and able to review complex problem or multi-state program(s) participants, or to assist states that may lack the expertise in enforcement matters.
      Our six point MFH Enforcement Program:
      1. Coordinate more closely with the OIG Audit and Investigation.
      2. Establish a team of National and Field Office RHS staff.
      3. Establish a liaison with the Washington office of the Department of Justice.
      4. Develop coordination with HUD’s Office of Enforcement.
      5. Pursue statutory changes.
      6. Develop training for field staff.

      Recent Accomplishments:
      • In October of 1999, National Office MFH program and OIG Audit staff, along with an Assistant United States Attorney (AUSA) experienced in working with the Agency, made a presentation to a national gathering of Alternative Civil Enforcement AUSAs. The presentation described the RHS MFH programs, the joint RHS/OIG initiative, and a successful case study of the criminal and civil prosecution of a RHS MFH borrower in Washington State. The purpose of the presentation was to familiarize the AUSAs with the MFH program and to encourage them to accept more cases for action when presented by OIG and RHS.
      • National Office MFH program staff have met with representatives of HUD’s Office of Enforcement to discuss mutual issues. In particular, the possibility of joint action against a nation-wide management agent/borrower operating in both RHS and HUD programs was discussed.

      Next Steps:
      • Establish the Field and National Office Review Teams to begin audit and reviews of potential problem cases.
      • Work with OGC to establish a system to develop quality criminal and civil cases, working in conjunction with the Department of Justice.
      • Continue coordination efforts with both HUD’s Office of Enforcement and the Department of Justice. We encourage you to provide the MFH program staff with those situations that you believe warrant a more detailed review so that such cases may be considered for review by the teams.
      Let me assure you that referrals of perceived problems will not be considered a negative, and in fact would reflect that you are taking proactive steps to improve your MFH program performance.

      As taxpayers and as participants in the 515 program, we have to support this. And the Agency employees are supportive — I think they’re in a payback mood, so this fits well.

      OIG has fixed on this innovative team approach and is publicizing this effort to the OIG community. In a magazine aimed at OIG types, Public Inquiry, in the Special Edition Fall / Winter 2000, the OIG described its efforts:

The Rural Rental Housing Program is vulnerable to program fraud and abuse because of the large cash flows involved. The USDA OIG has worked with the Rural Housing Service to detect fraud and abuse and remove from participation those who abuse the program, and has taken a team approach to identifying and acting on the worst offenders. Additional efforts to improve the RRH Program will result in better program regulations to develop a loan classification system to identify and prioritize “at risk” properties as well as identity-of-interest relationships.

      And, on March 14, 2001, before the House Committee on Appropriations the USDA Inspector General testified before the House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies:

I am pleased to have this opportunity to visit with you today to discuss the activities of the Office of Inspector General (OIG) and to provide you with information on our audits and investigations of some of the major programs and operations of the U.S. Department of Agriculture (USDA).
      The Department’s Rural Housing Program is another effort which will continue to need attention by the Department. The American Homeownership and Economic Opportunity Act of 2000 was signed into law on December 27, 2000. It strengthened the ability of Rural Development to seek prosecution of individuals, both civilly and criminally, who abuse and defraud the Multi-Family Housing Program. Many of the reforms enacted will directly address the problems found in our nationwide initiative with the Rural Housing Service that identified and documented significant abuse and fraud in the Multi-Family Housing Program.
      We are continuing substantial audit and investigative efforts in this area to include cooperative efforts with DOJ to encourage acceptance of these cases for prosecution. The passage of the new legislative authority significantly increases the chances for successful prosecution.
      We are proud of our record and accomplishments at OIG. We continually assess where the risks for waste, fraud, and abuse are in the Department and direct our limited resources to those we judge to be at the highest risk. The question is, do we have sufficient resources to address all or even the majority of those areas that are vulnerable and at risk? As I have indicated today, the answer is clearly, no.

      In the past five years, OIG got an Equity Skimming statute, geared up and reported major fraud, waste and abuse in the March 1999 Report, with a large number of referrals for investigation. The Report for one referral included disputed expenses, and particularly expenses that the OIG thought were unsupported. Following the Report, OIG and the Agency drafted the new legislation which provides civil and criminal penalties for owning and managing 515 projects. And the Agency agreed to work closely with OIG.

      Will the OIG and the Agency use this new tool — this legislation? Kind of a silly question. Of course they will. Keep in mind that they have a new hammer, and all of the program looks like a nail. Once they got the initial Equity Skimming statute, they took it for a major test drive, and reported good results.

      In the interim, you can at least seek to leave a trail of requesting rent increases to cover the real needs (the short-term and long-term needs) of the project. Let the Agency tell you that the rents would be too high to fund the need for capital improvements as well as the maintenance in the current operating expenses. Have your CPA review the audit trail generated by the management of the projects and even the maintenance of the units. If you use a third-party manager, there may even be the issue of record keeping and documentation.

      Additionally, while we wait for the 1930-C revision to come out in the 3560, keep in mind that the Agency told OIG in that March 1999 Report what 3560 will accomplish:

      • Perform yearly physical inspections of all RRH apartment complexes.
      • Develop and implement quality standards for RRH apartment complexes.
      • Coordinate with State and local authorities concerning health and safety hazards and seriously deferred maintenance.
      • Require owners to certify, under penalties of law, to the accuracy of financial data submitted to RHS.
      • Focus independent audit requirements to emphasize high-risk areas.
      • Revise regulatory citations to require the approval of identity-of-interest companies by RHS.
      • Develop regulatory citations prohibiting specific charges to RRH apartment complexes.

      Believe it or not, the Agency is working toward these as we speak through their training, conversations and Administrative Notices.

      Just a few weeks ago, on March 28, 2001, the Acting Deputy Under Secretary for Natural Resources and Environment and Rural Development advised the Inspector General that OIG:

      . . . specifically cited RHS’s management challenge of fraud and abuse in its rural rental housing program. RHS has taken many positive actions to eliminate fraud and abuse in this program including requiring routine physical inspection of each property to determine the extent of health and safety, routine maintenance and fiscal problems. RHS has in place a loan classification system to categorize borrowers according to the quality of their performance. In addition, RHS can pursue successful prosecution of program abusers through criminal and civil actions as a result of recently enacted legislation. It is the opinion of RHS that oversight and management of the rural rental housing program at the present time is sufficient to keep fraud and abuse at a minimum, if not eliminate abuse entirely.

If RHS is thinking they can eliminate abuse, much less minimize it, then it’ll be through nailing hides to the wall for all to see. Keep in mind, the Agency and OIG have a neat new hammer, and all the borrowers look like nails sticking up.

      Just last month, in May 2001, the Agency discussed the Multi-Family Housing Enforcement Team (which just begs for an acronym such as MHET pronounced as MEAT) by stating:

      The team’s mission is to ensure quality rental housing opportunities for rural residents while protecting the government’s investments. This will be done by assisting in investigations and providing technical assistance and training to agency staff for timely resolution of complex MFH servicing situations.
      Team members assist with reviews of problem properties, coordinate multi-state reviews of problem owners/agents, and recommend enforcement actions.
      The team’s first case was in September 2000. Two members, joined by an OIG auditor, started a review of a problem borrower’s projects and operations. The team currently consists of 8 members, enabling them to conduct more than one review or training session at a time.

Summary

      In summary, I can’t tell you what the Agency and OIG are going to do with the new law against equity skimming, but they’re geared up to do something. They will use problem projects (classified as D projects) as jumping off points. It is up to you to do anything you can to resolve the problems. And with OIG hungry to do its job, you as owners and managers are just fodder for the machine.

      Good luck.

       I don’t know of anyone here that isn’t in this group. If you’re not, you can go to another session now. You can look at this and see the extensiveness of the statute — it is extraordinary in its comprehensiveness:

. . . [who] willfully uses, or authorizes the use, of any part of the rents, assets, proceeds, income, or other funds derived from such property, .  .   .   .

. . . for any purpose other than to meet actual, reasonable, and necessary expenses of the property, or for any other purpose not authorized by this title or the regulations adopted pursuant to this title. . . .

       Again, this is extremely broad. Essentially, if as a result of an Audit, money is going out without a reason (even if it doesn’t necessarily come into your pocket), that may be sufficient to come under this part of the Statute. We have had situations where owners have not been able to document expenses, such as John talked about, and we have seen threats of Equity Skimming. Not necessarily Criminal Equity Skimming, because I don’t think they could demonstrate the willful component. The fact is, they were showing payments for various checks without having the documentation to support them. That’s where you begin to get in trouble, and that’s when the Agency will begin to raise these issues.

. . . shall be fined under title 18, United States Code, or imprisoned not more than 5 years, or both.

       These Title 18 fines are the multi-hundred-thousand-dollar fines that the Criminal statute permits. In my experience, I have not seen anyone actually threatened with a jail term, but I have seen the Criminal statute used for very large fines.

       The Civil provisions have a somewhat narrower, but still expansive, scope in what they cover:

An entity or individual who as an owner, operator, employee, or manager, or who acts as an agent for a property. . . .

       Again, I think this would cover most of the people in this room. And this covers the issues of the misuse of project funds:

. . . that is security for a loan made or guaranteed under this title where any part of the rents, assets, proceeds, income, or other funds derived from such property are used for any purpose other than to meet actual, reasonable, and necessary expenses of the property, or for any other purpose not authorized by this title or the regulations adopted pursuant to this title, shall be subject to a fine of not more than $25,000 per violation. The sanctions provided in this paragraph may be imposed in addition to any other civil sanctions or civil monetary penalties authorized by law.

        I’m going to take you through the provisions one by one. And then I’ll make some comments about what they mean. I do want to point the language out so you will have a number of issues floating in the air.

       Question from the floor:     Is it important that the civil penalties are not “willful?”

       Kelly: This is very meaningful. This means an accidental failure to keep your records properly or a false receipt. If they find that you’re not properly keeping your books and records, that may be sufficient for these purposes to trigger the Equity Skimming statute. If they find evidence of willfulness in your conduct, that is when they will seek Criminal prosecution. If they don’t find willfulness, they will still get you on the Civil provisions.

       The next big section of the statute is in some respects even more troubling. This is the Civil Monetary Penalties. Significantly, they do give you an option for a Notice and Hearing. That is important; John and I agree that the National Appeals Division (NAD) for USDA, at least right now, is the entity that will be dealing with this. It isn’t yet clear that they will do this.

       The Section states:

The Secretary may, after notice and opportunity for a hearing, impose a civil monetary penalty in accordance with this subsection against any individual or entity, including its owners, officers, directors, general partners, limited partners, or employees . . . .

       I don’t know if any of you are actually Limited Partners. I assume many of you are Management Agents or General Partners. This is really rather extraordinary, to find a statute which confers liability on Limited Partners. Presumably the reason people become Limited Partners is to avoid the kind of liability this kind of statute wants to thrust upon them. If I were a Limited Partner, I would be very concerned about this because of the next part of the sentence:

. . . who knowingly and materially violate, or participate in the violation of, the provisions of this title, the regulations issued by the Secretary pursuant to this title, or agreements made in accordance with this title, by— . . . .

       Well, that’s fine. But let me ask what it means to “participate in the violation” of the failure to do something? I realize that you’re not lawyers, but even for those of us that do this every day, our head begins to spin, when we begin to think about a knowing participation in a failure to act. I’m not exactly sure what that means logically.

       I’m afraid that what it means, for example, is that if you are a Limited Partner and you get a Financial Statement or some other information from your General Partner on the finances of the property, and there is an item which doesn’t make sense or it looks like there is money going to the wrong place or improperly accounted for, you may have participated in the violation of this statute. You are now aware of something. You now have knowledge, even though you are a Limited Partner.

       I think it is a very unfair burden to put on Limited Partners because what do you do then? You’re a Limited Partner, you don’t have control of the partnership, you really don’t an ability to act, unless you call up the U.S. Attorney and tell him that your General Partner is bad. I suppose you could begin proceedings to remove the General Partner.

        You can see where there is a lot of uncertainty and ambiguity in this statute and a lot of matters which will take some time to resolve. If I were a Limited Partner, I would be very concerned about the potential liabilities this imposes upon me. Consequently, if I were a General Partner, I would also be concerned because I might get calls and further scrutiny from the Limited Partners because they don’t want to be caught up in the statute.

       What strikes me about the list of bad things Civil Monetary Penalties can be used to sanction is that some of them are very scary:

• (A) submitting information to the Secretary that is false;

       The information submitted might not necessarily be fraudulent, but simply false. If you say my property is in very good condition, thank you very much and give me my next Rental Assistance check, and it really isn’t in that condition, that’s a false statement. That is an untrue statement. And you’ll have just violated this law.

• (B) providing the Secretary with false certifications;

        This is the same sort of thing.

• (C) failing to submit information requested by the Secretary in a timely manner;

       We don’t know what “information” this is. We don’t know what “timely” means under this statute. But presumably there is a tremendous amount of information to share with the Agency, and if you violate deadlines, fall behind or you’re not “timely” (whatever that means — is that a day, week, overnight, instantaneously by E-mail?), you may be violating the statute.

• (D) failing to maintain the property subject to loans made or guaranteed under this title in good repair and condition, as determined by the Secretary;

       Is that a crack in the sidewalk? A crack in the window? A chip in the paint on the window sill? Whatever the Agency determines it to be? These are all matters which I think are explosive. I don’t know what to tell you. I don’t know what the Agency will do with this, but it gives the Agency an enormous amount of leverage and latitude. I am concerned that so far the Courts have not been too sympathetic to owners in these situations. The Courts have said, essentially, we’ll let the Agency figure this out because they are the experts and they know what their law says.

       The penalties are significant:

• (A) IN GENERAL- The amount of a civil monetary penalty imposed under this subsection shall not exceed the greater of—

(i) twice the damages the Department of Agriculture, the guaranteed lender, or the project that is secured for a loan under this section suffered or would have suffered as a result of the violation; or

(ii) $50,000 per violation.

       Trying to figure out exactly how to work through these things is somewhat difficult. Presumably, if money isn’t where it is supposed to be, it is twice the amount of money that OIG finds. There is another consideration you need to be aware of that can be used to determine the amount of penalty. It appears that these can be used to reduce the amount of the penalty so you may not have to pay as much if you fall on the right side:

• (B) DETERMINATION - In determining the amount of a civil monetary penalty under this subsection, the Secretary shall take into consideration—

(i) the gravity of the offense;

(ii) any history of prior offenses by the violator (including offenses occurring prior to the enactment of this section);

(iii) the ability of the violator to pay the penalty;

(iv) any injury to tenants;

(v) any injury to the public;

(vi) any benefits received by the violator as a result of the violation;

(vii) deterrence of future violations; and

(viii) such other factors as the Secretary may establish by regulation.

       Some of these are clearly things that — if the Agency acts as HUD has — will only be used to say “here’s our justification for going to the mat,” such as to deter future violations, injury to public, injury to tenants. They may conclude any failure to be diligent is a violation constituting injury to the public. If you don’t turn over necessary information, you restrict their ability to audit things, and that’s going to be support for the harsh penalties they can impose.

       The “Remedies for Non-Compliance” section in the statute are significant in two respects. This is the point, where according to the statute:

• (A) JUDICIAL INTERVENTION - If a person or entity fails to comply with a final determination by the Secretary imposing a civil monetary penalty under this subsection, the Secretary may request the Attorney General of the United States to bring an action in an appropriate United States district court to obtain a monetary judgment against such individual or entity and such other relief as may be available. The monetary judgment may, in the court's discretion, include the attorney's fees and other expenses incurred by the United States in connection with the action.

       In other words, all the rest of this is presumably done through an administrative hearing. If you fail to comply with a final determination, but from the statute it isn’t clear what this final determination is, then it can be referred to the U.S. Attorney for action. This is a little bit different from the Equity Skimming Statute in HUD cases because the Department of Justice has original jurisdiction there. I don’t know whether failure to comply means you didn’t pay or you didn’t respond to whatever they allege the misconduct was. I think it could be both, and you need to be aware of that.

       The real catch is the following paragraph, and this is a real extraordinary piece of language:

• (B) REVIEWABILITY OF DETERMINATION - In an action under this paragraph, the validity and appropriateness of a determination by the Secretary imposing the penalty shall not be subject to review. . . .

       Presumably, the “action” is the action the Department of Justice will bring to enforce the penalty. This “not subject to review” is the deprivation of your ability to challenge the Agency determination. There are very few times Congress has ever said to the Courts, “Hands off, you may not address this.” That’s what Congress did in this statute. There’s no legislative history and very little explanation. I find it really extraordinary. There are scholars that think Congress can basically define jurisdiction of the U.S. District Courts any way it wishes to. But it is extraordinary because very rarely does Congress ever say something is off limits.

       There is something you can do in a situation like this. This withdrawal of jurisdiction applies to the Civil action brought by the Department of Justice. What that means is that before the matter is sent to Justice, you’d better have your attorney on the phone and tell him to file an action under the Administrative Procedures Act. As far as I can see, this was not intended to withdraw the Administrative Procedures Act. These are two separate matters. In other words, you can’t defend, once you get into District Court, that the action was invalid. I would argue that this new language does not terminate the Administrative Procedures Act and that you still have the right to go to court, but you’d better go to court before the Agency does.

       As additional arm-twisting, RHS may now condition extension of the Rental Assistance contract on the agreement to comply with the terms. There are additional Criminal amendments made such that the Equity Skimming provisions are now included in the Money Laundering statute and subject to the penalties there. And it is also now a violation of the Criminal law to obstruct audits related to a property.

       Let me make a suggestion to those of you who do not have current audits. You may want to go to an attorney and have the attorney call up an accountant to perhaps run through your books and records at the attorney’s request and under the attorney’s supervision. You want the accountant to see whether there are problems with your books and records. The accountant is not necessarily to do an audit, but just to find if your records are in an auditable condition because it is now a criminal penalty if your records could be deemed to in such bad condition as to obstruct a Federal audit. It may be a good thing to hire an accountant just to make sure that if the OIG ever comes, they can do what they need to do. It is possible that if all this stuff is thrown in — they don’t just get you for Equity Skimming, they get you for Equity Skimming and a Civil monetary penalty and obstruction of the audit — you’d at least like to be in a position where you know that if someone does come in, your records are in good condition. Do it through your attorney because the report prepared by the accountant will be subject to attorney-client privilege and will not be producible in any subsequent proceeding.

       These provisions parallel what HUD has done in the past. The idea is that, on the one hand, the Equity Skimming statute focuses on income; on the other hand, the Civil Penalties statute focuses on conduct. If they can’t get you on conduct, if you haven’t done one of the bad things listed in the statute, but you nevertheless have done something they don’t like, they can probably get you for having received money, for having paid money, or for having spent money outside of what the Loan Agreement or Instructions allow you to do. It’s kind of like Al Capone — they didn’t get him for running gin or killing people, they got him for tax evasion. So if they can’t get you on conduct, they’ll get you on the money.

       The idea is to follow the money. That’s why this is sort of a two-way street.

       Why is this similar to what we’ve seen with HUD? Basically, the Agency knows you don’t have the resources it has. It can devote more effort to penalizing you. Even if you think you’re right and even if you think you have good defenses, they can wear you down. Most owners, rather than go to the mat and actually defend and go all the way through the proceeding and risk the consequence of being found wrong, would rather settle things on an early basis. I don’t deny the efficacy of that. If you can get out with your nose relatively clean, you’d better do it.

       As to the HUD experience, Courts have given the Agency a great deal of latitude. Even though we believe the HUD Enforcement Center operates in a way which begins to violate the constitutional and administrative rights of owners, the Courts have not been receptive to these arguments. They let the Agency interpret the statutes wrongly and have not found that the administrative mechanisms violate the law or constitutional rights.

       It seems as though RHS program staff and OIG staff are fairly cooperative in working together. But in the HUD experience, we have seen tremendous antagonism and rivalry between the program side and OIG side, with the consequence that each side tries to prove it’s tougher than the other. It is the owners, of course, who get it in the neck. I’m not sure that OIG and the RHS staff will not develop the same kind of antagonism. They seem right now to be cordial to one another and trying to be cooperative, but I think they’ll get to the same point and try to demonstrate who can be toughest.

       Are there any saving graces? So far, we know that RHS has established an Enforcement Team. This is a small team of only eight or ten people according to the Agency. But it is intended to centralize, formalize and professionalize the enforcement mechanism. Right now its role is to support field offices in their enforcement actions.

       On the HUD side, we’ve seen this become a real enforcement monster. It develops charges, investigates, and prosecutes, and one of the attorneys there serves as the hearing officer to adjudicate. If you can imagine, very seldom will that hearing officer not agree with the charges his colleagues bring. It may be that, because USDA has the National Appeals Division with the adjudicatory function separate from the Agency enforcement function, you may have a better chance of avoiding the worst consequences of what HUD does now.

       Again, this RHS enforcement role is growing and since they don’t like having a neutral adjudicator get in the way of enforcement actions, it wouldn’t surprise me if at some point in the future RHS also tries to bring enforcement adjudication inside its own enforcement center.

       I hope this gives you a chance to learn a little bit about the statute and be more prepared when OIG comes to call.

        Question:    Is there a particular area of enforcement that RHS will be going after? Is there something on the table that they’re concerned about? I’ve heard things about fee splitting being an issue. I know it is an issue on the HUD side.

       Kelly:    I haven’t seen their cheat sheet of what they’re going to look for. They’re probably going to be looking for evidence of Equity Skimming. I think they’re going to be looking for evidence of fee splitting. They’re going to be trying to see if there is any other way they can try and shoehorn your conduct into something in the statute that violates the law. If as a result of their visit, the worst they conclude is that you’re perhaps you’re not fitting the neediest families into the largest apartments, consider yourself lucky. But they do have axes to grind and I think what I would expect to see is evidence of fee splitting, evidence of undocumented use of cash, and other evidence that in their mind constitutes equity skimming. Those are the things that are high on their list.

        Meyers:     I agree. I think most immediate is the physical condition of your projects, Classification D. Identity of Interest will be co-equal. I would especially raise a warning if you are Identity of Interest over several states and if you’re a mid-size borrower, say 30 and up projects. Fee splitting is not really on the horizon — it surfaced one time with the IG at USDA, and it will come back. I don’t think they’ve figured out what to do about it, and I think it’s going to be a mixed bag. I’d say fee splitting won’t be another issue for probably 18 months.

        Kelly:     So you have time to get your records in order.

        Question:     I’ve been involved in discussions or debates on what may be considered fee splitting. A lot of the arguments are presented by certain Management Agents or Borrowers who take the position of “Why can someone tell me what to do with my profits?” Is there a distinct difference between fee splitting and profit splitting?

        Meyers:     Nixon Peabody has probably done more litigation on fee splitting and is state of the art on the HUD side.

        Kelly:     I think the problem you get into, and I assume everyone knows what we’re talking about with fee splitting. No? Well, that’s the problem: I don’t think the Agency does either, but they think that they do.

        Meyers:     A quick example: I’m a GP and I want out. I offer my General Partner interest for sale. Someone offers me twice management fees because, of course, with the GP interest you get to name the Management Agent. That’s Part One. Part Two is that you say it’ll be a three pay or four pay. I think that you have all the elements of fee splitting right there.

        Kelly:     It could come up in any number of contexts. We have had people who have entered into contracts with third parties to provide a service and get a discount: If you sign up for this particular service for umpteen number of properties, we’ll give a discount. Whose pocket that discount shows up in is a different matter. That discount can be deemed to be a way of improperly giving a contract to a third party which does not provide the maximum benefit to the property, but arguably may go to provide more income or shelter some income for the Management Agent or for the GP. The Agency is going to come by and say that on that contract, you split the fee — you got essentially some sort of a kickback for giving that contract to a third party. That’s where the statute’s Equity Skimming language kicks in:

. . . where any part of the rents, assets, proceeds, income, or other funds derived from such property are used for any purpose other than to meet actual, reasonable, and necessary expenses of the property. . . .

        You fall into some trouble there. And, obviously, with respect to the certifications and the other bad things the Civil Monetary Penalties are intended to catch, they can shoehorn the fee splitting into those matters as well. I thinks it’s a serious problem just because the law is so vague. There is a Fraud Alert which was put out about two years ago by the HUD OIG in the form of a Federal Register Notice on May 4, 1999. It’s essentially a warning to the regulated public. It says if we catch you doing this, we’re going to consider these sort of kickback arrangements (whether they are or are not kickbacks, I’m going to use the term) as a form of fee splitting and we’re going to hold you liable. The idea was to put everyone on notice. Those of you who aren’t familiar with it need to look at it. I think they have the ammunition from a regulatory enforcement point of view to go after this. Whether it’s 18 months from now or two months from now, the point is it will be out there. You need to be aware of it.

        Thank you very much. We hope if you have any questions, call John or me. These are important matters and you’ll be doing yourself, your tenants, and anyone you work for a lot of good if you raise your awareness of these things and act proactively to avoid the kind of consequences so many people are suffering from.