report on exim bank’s local cost policy and … of inspector general export-import bank of the...

Office of Inspector General

Export-Import Bank

of the United States

Report on EXIM Bank’s Local Cost Policy and

Procedures

September 29, 2017

OIG-EV-17-06

EXPORT‐IMPORTBANK– OFFICEOF INSPECTORGENERAL

The Export‐Import Bank of the United States (EXIM Bank) is the official export credit agency of the United States. EXIM Bank is an independent, self‐sustaining executive agency and a wholly‐owned U.S. government corporation. EXIM Bank’s mission is to support jobs in the United States by facilitating the export of U.S. goods and services. EXIM Bank provides competitive export financing and ensures a level playing field for U.S. exports in the global marketplace.

The Office of Inspector General, an independent office within EXIM Bank, was statutorily created in 2002 and organized in 2007. The mission of the EXIM Bank Office of Inspector General is to conduct and supervise audits, investigations, inspections, and evaluations related to agency programs and operations; provide leadership and coordination as well as recommend policies that will promote economy, efficiency, and effectiveness in such programs and operations; and prevent and detect fraud, waste, abuse, and mismanagement.

This evaluation was conducted in accordance with the 2012 Quality Standards for Inspection and Evaluation as defined by the Council of Inspectors General on Integrity and Efficiency. This report does not constitute a Government audit and therefore, it was not conducted following the Generally Accepted Government Auditing Standards (GAGAS).

EVALUATIONREPORTOIG‐EV‐17‐06

Office of Inspector General

To: DavidSena,SVP&ChiefFinancialOfficerKennethTinsley,SVP&ChiefRiskOfficer

From: MarkThorumAssistantInspectorGeneral,Inspections&Evaluations

Subject: ReportonEXIMBank’sLocalCostPolicyandProcedures

Date: September29,2017

Attachedpleasefindthe finalevaluationReportonEXIMBank’s Local CostPolicy andProcedures.Thereportoutlines sixrecommendationsforcorrectiveaction.OnSeptember22,2017,EXIMBankprovideditsmanagementresponsetoadraft ofthisreport,agreeingwithalloftherecommendations. Weconsidermanagement’scorrectiveactionstoberesponsive.Therecommendations willbecloseduponcompletion andverificationoftheimplementationofthoseactions.

Weappreciatethecourtesiesandcooperationextendedto usduringtheevaluation.Ifyouhaveanyquestionsorcommentsregardingthedraftreport,pleasecontactMarkThorumat(202)565‐3939.

cc: CharlesJ.Hall,ChairmanoftheBoardofDirectors&President(Acting)JeffreyGoettman,EVP&ChiefOperatingOfficerTerrySettle,ActingInspectorGeneralTroyFuhriman,ActingSVP&GeneralCounselInciTonguch‐Murray,DeputyCFOJenniferFain,DeputyAIGIELilithSanchez,SeniorInspectorParisaSalehi,Counsel,OIGCristopolisDieguez,Director,InternalControlsandComplianceGodaMcEachern,BusinessComplianceAnalystLawrenceWielinski,InspectorKemiRiley‐Telfort,Paralegal

Attachment:DraftEvaluationReportonEXIMBank’sLocalCostPolicyandProcedures,OIG‐EV‐17‐06,September2017


EvaluationReportLocalCostEXECUTIVE SUMMARY OIG‐EV‐17‐06,September2017

Why We Did This Evaluation

Wecompletedan evaluationofEXIMBank’slocal costpolicyandprocedures.Weinitiatedthereview aspartofourannualreviewplan.The primaryobjectiveoftheOffice ofInspector General’s(OIG)evaluationwas toascertainthe adequacyofEXIMBank’sinternal controls,documentationrequirements,verificationmechanism andcompliancewithpoliciesandproceduresrelatedtolocalcosts.

What We Recommend

ToimproveEXIM Bank’s administrationoflocalcostsandfurtherstrengthenrelatedinternalcontrolactivities,OIGrecommendsthefollowingenhancements:(1)issue detailedprocedures andguidelinesforreviewandapprovalof localcost goodsand services,providers,andamounts usingtheAL;(2)provideenhancedguidanceandtrainingonlocal costsandrelatedrequirementstotheBorrowerandthoseresponsibleforpreparation and submissionofreimbursementrequests;(3)updateprocedures andguidelinestorequire,atminimum,submissionof informationthat describes in sufficient detailthe goodsorservicesbeinginvoiced creating averifiableaudittrail;(4)establishatransparent and documented processbywhichBankstaffreview andapproveinvoicessubmittedinaforeignlanguage;(5)updateproceduresandguidelinesforthemaintenanceandretentionofdocumentationrelatedtoallinternalcontrolaspectsoflocal cost;and(6)updatethe procedures andguidelinesforlocalcosttoclarifyhowtotreatverticallyintegratedcompaniesandtheiraffiliatesthatprovidelocalcostgoodsorservicesasaprimaryproviderorsub‐contractor.

What We Found

EXIMBank’slocal costpolicy operatesonthepremisethatsomeamountoflocallaborand rawmaterial isnecessarytoefficientlybuildorassembletheend‐productof theU.S.export.The policy permitsthefinancingofupto30percent ofthevalueof theU.S.exports forlocally originatedand/ormanufacturedgoodsandservices.Thissupport isinadditiontothemaximum supportofupto85percentoftheU.S.netcontractprice.Werevieweda judgmental sampleofseventransactionswithlocalcost components and 14 relateddisbursements.

WefoundthatEXIMBankwasgenerallycompliantinitsfinancingof localcosts forthe seven transactionsreviewed.Wenotednoexceptionsinour testingoftwomedium‐termtransactions.However,our reviewoffivelong‐termtransactionsidentifiedasufficientnumberofinconsistenciestoindicate weaknesses ininternalcontrolsrelatingtolocalcosts.Specifically,wedeterminedthattheBank’sproceduresandguidelinesrelated to thelocalcostpolicyas implementedarenotsufficiently clearasto thetreatmentoftheAcquisitionList(AL).Nordotheyspecify what constitutes anappropriatelevelof detailfordescribinglocalcosts onthe AL.Forthefivelong‐termtransactions,weobservedinconsistenciesinthedescription oflocalcosts,the identificationoflocalcostproviders,andthe documenting oftheEngineer’s reviewandapprovalof theAL.Theseinconsistencies makeitdifficulttoconfirmthatthelocalcostprovider andrelated localgoodsandservicespresentedinadisbursementrequestarethoseapprovedbytheBank.

Finally,we determined thatEXIMBankcanstrengthenothercontrolactivitiesforlocalcosttominimizereputationalandoperational risksuchas thereviewandreconciliationofdisbursementdocuments,managementand maintenance of records,andtreatmentofsubsidiaryandaffiliatecompaniestofurthermitigateopportunitiesfor fraudandabuse.

For additional information, contact the Office of Inspector General at (202) 565-3908 or visit www.exim.gov/about/oig

http://www.exim.gov/about/oig


TABLE OF CONTENTS EXECUTIVE SUMMARY......................................................................................................................i

TABLE OF CONTENTS .......................................................................................................................ii

LIST OF TABLES ................................................................................................................................iii

ABBREVIATIONS AND GLOSSARY .................................................................................................... iv

INTRODUCTION............................................................................................................................... 1

SCOPE AND METHODOLOGY .......................................................................................................... 1

BACKGROUND ................................................................................................................................. 2

PRINCIPAL FINDINGS AND RECOMMENDATIONS .......................................................................... 7

CONCLUSION ................................................................................................................................. 18

APPENDIXES .................................................................................................................................. 19

Appendix A: Management Response and OIG Evaluation ...................................................... 19

Appendix B: Transactions and Disbursements Reviewed ....................................................... 27

Appendix C: Transactions Reviewed – Narratives .................................................................. 29

Appendix D: Local Cost – Disbursement Support and Submission Requirements ................. 31

ACKNOWLEDGEMENTS ................................................................................................................. 33


ii


LIST OF TABLES

Table 1: EXIM Bank’s Local Cost Eligibility Requirements .............................................................. 4

Table 2: Summary of Management’s Comments on the Recommendations .............................. 25

Table 3: Transactions Reviewed ................................................................................................... 27

Table 4: Disbursements Reviewed ................................................................................................ 28

Table 5: Disbursement Support – Documentation Submission Requirements ............................ 31


iii


ABBREVIATIONS AND GLOSSARY

Term DescriptionAPS ApplicationProcessingSystem AL AcquisitionListBankorEXIMBank

Export‐ImportBank oftheUnited States

BGEnergy BGEnergyHoldings.The BGEnergy transaction(AP085833XX) isoneofseven transactions withalocalcostcomponentselectedby theOIGfor review.

Board The EXIM BankBoard,whichisresponsibleforapprovingallmedium‐andlong‐termtransactionsgenerallyover$10millionorexceedingseven years repayment.

BoardMemo Amemorandumsubmittedtothe EXIMBankBoard aspartoftheprocessfor approving a transaction for Bank support.

BuyerorBorrower

A foreign buyerofU.S.capitalgoodsand/orservices.

Coverage CoveragereferstocreditrisksassumedbyEXIMBankthroughitsextension ofaloan,guarantee,orinsurancepolicytosupportanexporttransaction.

CRC CreditReviewandComplianceDivision,EXIMBankCreditAdministration

Agroupwithinthe EXIM BankOMR Division.The CreditAdministrationgroupis responsiblefortheevaluationof requestsforutilizationunderoperativeloan andguarantee agreements.

CreditAgreement

Alegalcontract generally between alender and borrowerthatsetsforththetermsandconditionsofthecreditinadditiontothosecontained in thepromissorynote,anysecurityagreement,andany otherrelated financedocument. TheCredit Agreement’sprovisionsusuallyincludethe lender’s commitment tolend,repayment and noteterms,the conditions precedent fordisbursementofthe loan, representationsandwarranties,affirmative andnegativecovenants,andeventsofdefault.

CRTI Character,Reputational and TransactionIntegrity.CRTI duediligence isaprocessinitiatedbyEXIMBanktovettransactionparticipants, whichconsistsof analysesofcompanies andindividualstoidentify potentialfraud,corruptionandintegrityrisksassociatedwithpartiestoatransaction.

Dhuruma DhurumaElectricityCompany.The Dhurumatransaction(AP084344XX) is one ofseven transactionswithalocalcost component selectedbytheOIG for review.

ECA ExportCreditAgency. AnECA isaprivateorquasi‐governmentalinstitutionthatactsas anintermediarybetween nationalgovernmentsandexporterstoissueexportfinancing.

ECP Electronic Compliance Program. The ECP is a web‐basedcertificationsystem utilized by EXIM Bank for the approval ofdisbursements and guaranteeissuance.

E&E Engineering and Environment Division,EXIM BankERS EXIM Bank ReportingSystem EOL EXIM Online Eskom The Eskom Limitedtransaction (AP085292XX)is one of seven transactionswith

alocal cost component selected by the OIG forreview. Exporter An individualor entity thatsellsgoodsorservices toapurchaserinanother

country.


iv


Term DescriptionFacilityAgent Generally,afinancial institutionthat actsasan agentfora lenderorlendersin

administeringafacility.Inthe case of an EXIM Bankguaranteed loan,the facility agentactsas theagent forthe EXIM Bank facilitylenders,whichprovidefinancingtotheborrowerforthepurchaseandexportofU.S.goodsandservicestothe borrower’scountry.In thecase ofan EXIM Bankdirect loan,the facilityagentwillserve asfacilityagentforthebenefit,andonbehalfofEXIMBankinconnectionwithadministrationof the creditagreementandotherfinance documents.

FinalCommitment

Anauthorizationof financingby EXIM Bank.

ForeignContent Thecostof goodsandservicesproducedoutsideoftheU.S.and outsidethecountryofthebuyer.

Gasmart The Gasmart Comercializadora,S.A.De C.V.transaction(583803)isoneofseven transactions withalocalcostcomponentselectedby theOIGfor review.

GC Guarantee Certificate. TheGC isEXIMBank’scertificateof guaranteewith respecttothe disbursementsmadeinaccordancewithaCreditAgreement.UndertheECP,EXIMBankelectronicallydocumentsitsdisbursement approvalandguaranteein the Bank’sEOL systemthatisaccessibletothelender.

GlobalFoundries TheGlobalFoundries Inc. transaction (AP086105XX)isoneofseven transactions withalocalcostcomponentselectedby theOIGfor review.

GuaranteedLender

The lenderthat makescreditavailableto a foreign bankor buyerand EXIM Bank guaranteestherepaymentoftheforeign bank or buyer’sobligations.

Guarantor The Guarantorguarantees tothe lenderand EXIM Bank thepayment ofprincipal andinterestonthecreditwhen due,includinganyadditionalamounts payable under a Credit Agreement or each note.

Liviero TheLivieroGroup (Pty) Ltd. transaction(541862)is one of seven transactions withalocalcostcomponentselectedbytheOIG for review.

’Loan Manual EXIMBank s Loan,Guarantee andInsurance Manual,whichsetsforth thepolicies and procedures for due diligence,structuringandmonitoringof Bank transactions.

LocalCost Localcostsareproject‐relatedcostsofgoodsandservicesthatoriginatefrom the buyer’s country.

MGA Master Guarantee AgreementOIG OfficeofInspectorGeneral,EXIMBankOMR OperationsandManagementReporting Division,EXIM Bank Operative Date The datethatEXIMBank determines that all conditions precedent(i.e.,all

conditions andagreements)fora transaction are satisfied and thetransactionis available for disbursement.

ParticipationAgreement

Anumbrellaagreementbetweenall partiestothetransactionthat specifies eachparticipant’s roleinthetransaction andtheconditionsnecessary for theirinvolvement.Themainprovisions of thisagreementmay include funding and noticemechanics,the conditionsprecedentfor thedisbursement of theloan, refinancingprovisions,theindemnitiesandthe representations and warranties.

SFD StructuredandProjectFinance Division, EXIM BankTD TransportationDivision,EXIMBankTFID Trade Finance and Insurance Division, EXIM BankTransnet Transnet SOCLimited.TheTransnettransaction (AP088827XX)is one of seven

transactions with a localcostcomponentselected by the OIG forreview.


v


EVALUATION REPORT ON EXIM BANK’S LOCAL COST POLICY AND PROCEDURES

INTRODUCTION

forreview,withatotalnetauthorizedlocalcostamountof ,andtotalexposurelocalcostamountof asofJuly30,2017.1 Theseventransactions(twomedium‐termandfivelong‐term) were authorizedbytheBankduringfiscalyears2010to2014.To testcompliancewiththe Bank’slocalcostdisbursement requirements fortheseventransactions,we reviewed a judgmentalsampleof14disbursements,totaling

therelated narratives.

(b) (4)(b) (4)

(b) (4)

Wecompletedan evaluationoftheExport‐ImportBankoftheUnitedStates(EXIMBankorBank)localcostpolicyandprocedures.Weinitiatedthe review aspartofourannualreviewplan.Theprimaryobjective oftheOffice ofInspectorGeneral’s(OIG)evaluationwas toascertaintheadequacyofthe Bank’sinternalcontrols,documentationrequirements,verificationmechanismandcompliancewith policiesandproceduresforlocal costs.

SCOPE AND METHODOLOGY

ToevaluateEXIMBank’slocalcostpolicyand procedures, weemployedacombination ofqualitative techniques anddocumentreviews. Wejudgmentallyselectedseventransactions

SeeAppendixesBandCfor alistoftransactionsand disbursements reviewedand

Inconductingourevaluation,we reviewedapplicablepolicies andprocedures,legal,financialandtradedocuments,andrelatedinternalBank reportsandcorrespondence; interviewedBankmanagement andstaff,includingrepresentativesfromCreditAdministration,agroupwithinthe OperationsandManagementReportingDivision(OMR),theCreditReviewand ComplianceDivision(CRC),theEngineeringandEnvironmentDivision (E&E),theOfficeofthe ChiefFinancialOfficer(OCFO),theStructuredandProjectFinanceDivision(SPFD),theTradeFinance andInsuranceDivision(TFID),andtheTransportationDivision(TD);and revieweddisbursement requests,supportingschedules,andotherdocumentsrequiredassupportfordisbursements.See AppendixDfor alistofdocumentssubmittedfordisbursementrequests.

Tofacilitatetheevaluation,OIGengagedtheservicesofErnst andYoungLLP(EY)throughcontractto conductanexternalindependent reviewof theBank’slocalcostpolicyandprocedures andrelated legal,financialand tradedocumentsfor thefivelong‐term transactions.EYalsoparticipated ininterviewsofBank staff andmanagement. Theresultsoftheirworkhavebeen incorporatedintothis report.The evaluation wasperformedatEXIMBank’smainlocationinWashington,DC.

1 The total Net Authorized Local Cost amount reflects transferred and cancelled authorization amounts.


1


Points of Inquiry

Thefollowingtwopointsofinquirydirectedourfocusandguidedourevaluation:

POINT OF INQUIRY 1: Did EXIM Bank finance local costs in accordance with established policies and procedures?

POINT OF INQUIRY 2: Are EXIM Bank’s current policies and procedures for financing local costs sufficient to safeguard against fraud, waste and abuse?

TheOIGconductedthisevaluationduring fiscalyear2017in accordancewiththe Quality Standards for Inspection and Evaluation issuedbytheCouncilof InspectorsGeneralonIntegrityandEfficiency.2 Thosestandardsrequirethatwe planandperformtheevaluation toobtainsufficient,appropriate evidencetoprovideareasonablebasisforourfindingsandconclusionsbasedonourevaluationobjective.Webelievethat the evidenceobtainedprovidesa reasonablebasisforour findings andconclusions.

BACKGROUND

Established in1934throughExecutive Order, andsubsequentlymadean independent agencyoftheUnitedStates(U.S.)throughcongressional Charterin 1945,EXIM Bankisawholly‐ownedgovernmentcorporationwhose fundamentalmissionistoaidinthefinancingandtofacilitatetheexportofU.S.goodsandservices, and tocontributetotheemploymentofU.S.workers.EXIM Bank’sCharter,through itsenabling legislation,establishes theBank’s operations andprogramsandisreauthorizedonaperiodicbasis.Withthepassageofthe Export‐Import Bank Reform and Reauthorization Act of 2015,theauthorizationoftheBank’sCharterwasextendedthroughSeptember30,2019.3

TheBank’s corefinancingprogramsincludedirectloansandguaranteesto foreignbuyers,exportcreditinsuranceforexportersand foreignbuyers, andworkingcapitalfinancetoU.S.smallbusinessexporters. The Charterrequires“reasonable assuranceof repayment” forallBank transactions,which arebackedbythefullfaithandcreditof theU.S.government.4 EXIMBankhasfunctionedonaself‐sustainingbasissincefiscalyear2008,coveringitsoperationalcostsand provisioningforexpectedlossesthroughloanlossreserves,fundedbyfeesandinterestitchargesitscustomers.5

2 For moreinformation on the Quality Standards of Inspection and Evaluation, seehttps://www.ignet.gov/sites/default/files/files/committees/inspect‐eval/iestds12r.pdf.

3 See the Export‐Import Bank Reform and Reauthorization Act of 2015,includedin“DivisionE—Export‐Import BankoftheUnitedStates” of the “FAST Act,” whichbecamepubliclawonDecember4,2015 (Pub.L. No.114‐94)at https://www.congress.gov/114/bills/hr22/BILLS‐114hr22enr.pdf.

4 See the Charter of the Export‐Import Bank of the United States at http://www.exim.gov/sites/default/files/2015_Charter_‐_Final_As_Codified_‐_02‐29‐2016.pdf.

5 See the Export‐Import Bank of the United States Annual Report 2015 at http://www.exim.gov/sites/default/files/reports/annual/EXIM‐2015‐AR.pdf.


2

http://www.exim.gov/sites/default/files/reports/annual/EXIM-2015-AR.pdf

http://www.exim.gov/sites/default/files/2015_Charter_-_Final_As_Codified_‐_02‐29‐2016.pdf

https://www.congress.gov/114/bills/hr22/BILLS-114hr22enr.pdf.

https://www.ignet.gov/sites/default/files/files/committees/inspect-eval/iestds12r.pdf.

http://www.exim.gov/sites/default/files/2015_Charter_-_Final_As_Codified_‐_02‐29‐2016.pdf

http://www.exim.gov/sites/default/files/reports/annual/EXIM-2015-AR.pdf


Local Cost Policy

Whenfinancingloans, guarantees ormedium‐terminsuranceinsupportofU.S.exports,EXIMBankmayprovidefinancing forlocalcostsincurred forgoodsandservices that originated and/orwere manufacturedinthe buyer’scountry.The Bank’slocalcostpolicyapprovedbytheBoard operatesonthepremisethatsomeamount oflocallabor andrawmaterialis necessarytoefficientlybuildorassembletheend productoftheU.S. export.Thepolicypermitsthefinancingof upto30percentofthevalueoftheU.S. exportsfor locallyoriginated and/ormanufactured goodsandservices.Thissupport isinaddition tothemaximumsupportofupto85percentof theU.S.netcontractprice.

In2001,EXIMBankreviseditslocalcostpolicytodistinguish betweenprojectfinancetransactions(limitedrecourse)andnon‐projectfinance transactions(non‐limitedrecourse).Thepolicyforlimitedrecoursetransactionspermittedthe approvaloflocalcostsupportifthecostsweredeemed withinthescopeoftheunderlying project.Fornon‐limitedrecoursetransactions, the policypermittedtheapprovaloflocalcostsifthecostsweredeemedfunctionallyconnectedtotheU.S.exporter’ssupplycontractandcertifiedbytheexporter.OvertimeastheBankmovedtomoreofahybridstructuredfinanceapproachtotransactions,administration ofthetwoseparatepoliciesforlong‐termtransactionsbecamedifficultandthe rationale fortheirdistinction nolonger existed.

InMarch2011,EXIMBankupdatedthelocalcostpolicytoaddressinternalinefficienciesandtoreduceexporter andborrowerissues associatedwiththe localcostfeatureforlong‐termtransactions.The harmonizationofthe twopoliciesresultedin asingle policythattreatsalltransactionsforlong‐term coverwithintheprinciplesoflimitedrecourseprojectfinance,witheligibility subjecttoreviewandapprovalbyE&E.6 Inaddition, the certificationrequirementswere aligned,requiringonlytheborrowertocertify fortheamountandcontentofsupportedlocalcosts.Underthepriorthelocalcostpolicy,non‐limitedrecourseprojectfinance transactions requiredboththe exporter andborrower to makethecertificationsforsupportedlocalcosts.Finally,the policyupdaterequiredanadditional Borrowercertification thatthelocalcostcoverage wasnotappliedtoproductsthatcouldreasonablybepurchasedintheU.S.

Criteria for Support

Localcostsupportissubjectto twotypesofcriteriaforapproval:(1)theavailabilityforobtaininglocalcostsupport,and(2)eligibility requirements forthelocalcosts’inclusionintheBank’sfinancingpackage.The availability criteriadiffer formediumandlong‐termtransactions.Formedium‐termtransactions,EXIMBankmayprovide financing if the U.S. exportercanproveeither:(i)the availability ofofficialexportcreditsupportforthelocal cost;or(ii)hardshipin obtainingprivatesector financing of localcostsforthetransaction.Foralllong‐termandselectmedium‐termtransactions,localcostfinancingisavailablesubjecttotheBank’sapproval.7 Inaddition,automaticlocalcostsupportisofferedbythe

6 EXIMBank’s localcostpolicy treatsamedium‐termlimitedrecourse project finance transaction as ifit were long‐term.

7 Ibid.


3


Bankforenvironmentalexports, medicalexports,transportation security exports, projectfinance transactions(includingmedium‐termtransactions),and exportsthat fallundertheengineering multiplierprogramtransactions. TheBank’s requirementsforeligibilityformediumandlong‐termtransactionsaredetailedin Table 1below.

Table 1: EXIM Bank’s Local Cost Eligibility Requirements Medium‐Term Transaction Long‐Term Transaction

Localcost mustbe: Localcost mustbe: “functionally”connectedtocoststheU.S.exporterneedstoincurtocompletethe beneficialtotheproject;contractualobligationsofitsexport; certifiedbytheU.S.exporter inthe certifiedbytheBorrower; Exporter’sCertificate; detailedinthecredit approval;and detailedintheAcquisitionList;and

originated/manufacturedint hehostcountry.

originated/manufacturedin thehostcountry.

Source: EXIM Bank’s Local Cost Policy (July 2012) and Loan Manual

Administration and Implementation

WithinEXIMBank,E&Ehasprimary responsibilityfor administeringthelocalcostpolicy.TheassignedEngineerforatransactionapprovesalllocalcostsassociatedwithatransaction andis responsiblefor reviewingandapprovingthe contentsof the AcquisitionList(AL)andanypost‐authorizationrelatedamendments.TheEngineer isalsoresponsible forensuringthatlocalcostproviders identifiedafter authorizationare vetted throughthe Bank’sCharacter,Reputationaland Transaction Integrity(CRTI) processandproviding guidanceonlocalcost‐relatedissues.

Additional Bankstaff involvedintheimplementationof thelocalcostpolicyincludesthe LoanOfficer,PortfolioManager, andCreditAdministrationOfficer(CAO)asdescribedbelow.TheLoanOfficerwithinSPFD,TFIDor TDwhoisresponsibleforunderwritingthe transaction,ensuringlocalcost providersidentifiedprior to authorizationarevettedthroughtheCRTIprocess,andprocessingamendmentspriortooperativestatus. ThePortfolioManagerwithinthe Asset ManagementDivision (AMD)or theTransportationPortfolioMonitoringDivision(TPMD)isresponsiblefor monitoring, processingamendmentsand ensuring repaymentonce a transaction isoperative.

TheassignedCAOwithinOMRisresponsibleforthereviewandprocessingofdisbursementsforlocal cost.As needed,theEngineerassiststhe CAOin“understandingdocumentationandcorrelating itemscontainedin thedisbursementrequestswithitemsinthetransaction’s…”approvedAL(e.g.,goodslistedontheinvoice).8 CRCisresponsibleformonitoring compliancewithCRTI transaction andenhancedduediligenceproceduresandevaluating compliancewiththelocalcostpolicythroughrandom post‐disbursementreviews.

8 EXIMBank E&EStaff Memorandum13‐1,datedJuly31,2013.


4


AsofJuly31,2017, thereare127transactions (91long‐termand36medium‐term)inEXIMBank’sportfoliowithexposuretolocalcost.Thetransactions represent anaggregate

.Thetotalaggregate disbursedandundisbursed (b) (4)

amountswereapproximately

totalnetauthorizedlocalcost amountofapproximately (b) (4)

(b) (4)

andtotalexposureamountofapproximately

,respectively.

Prior Reviews of EXIM Bank’s Local Cost Policy and Procedures

Thisisthe first evaluationof EXIMBank’slocalcostpolicyandproceduresbytheOIG.Priortothisevaluation,the OIGconductedtwoinspectionsof structuredfinancings withlocalcostcomponents.Inconductingthe reviews, OIGobservedcertaindeficiencies andmaderecommendations toaddressidentifiedvulnerabilities.

EXIM Bank OIG Report (OIG‐INS‐13‐01)

Infiscalyear2013, OIG inspectedEXIMBank’s$419.6millionprojectfinancingofanundergroundcopperminelocated inBajaCalifornia,Mexico.9 OurinspectionrevealedthattheBank’scurrentpoliciesandproceduresrelatedto the reimbursementoflocalcostswere notsufficientlydeveloped toguardagainstfraud,wasteandabusebylocalsuppliers.Moreover, wefoundthattheBank lackedtheinfrastructureand resourcestoeffectively processthehighvolumeoflocal costdisbursements.Our report madethree recommendations tostrengthen the Bank’slocalcostpolicyand procedures.As ofthedateofthisreport,allthree recommendations areclosed.

EXIM Bank OIG Report (OIG‐INS‐14‐01)

Infiscalyear2014, OIG inspectedEXIMBank’s$3.0billionprojectfinancingofavertically‐integratedliquefied naturalgasprojectin PapuaNewGuinea.10 Inconductingthereview, OIGwasnotabletovalidatecompliance withtheBank’slocalcostpolicyduetoinsufficientinformation providedtotheBank underitsCredit Agreement.Moreover,we foundthatlocalcosteligibilitycriteria werenotappliedconsistentlytogoodsandservices. Finally,OIGfoundthatalthoughthecredit documentationpermittedthe BanktoreasonablyrequestinformationfromtheBorrower,itsrighttoinspectand audittherelevantbooksandrecordstovalidatecompliancewiththelocalcostpolicywaslimitedtotheoccurrenceofanevent ofdefault.Toaddresstheidentifiedvulnerabilities relatedtolocalcosts,OIGmadearecommendationtoenhancetransparencyinthe financing oflocalcosts. Asofthe dateof this report,the recommendation isclosed.

9 For moreinformation, see EXIMBankOIG’s Report on Minera y Metalurica del Boleo S.A. (OIG‐INS‐13‐01, datedSeptember30,2013)availableat https://www.exim.gov/sites/default/files//oig/reports/REDACTED‐Report‐on‐Minera‐y‐Metalurica‐del‐Boleo‐SA‐Report‐Final‐OIG‐INS‐13‐01‐130930.pdf.

10 For moreinformation,seeEXIMBankOIG’s Report on PNG LNG Project Financing (OIG‐INS‐14‐01, dated June18,2014) availableat https://www.exim.gov/sites/default/files/oig/reports/PNG‐LNG‐INSPECTION‐REPORT‐508‐Final‐Redacted.pdf.


5

https://www.exim.gov/sites/default/files/oig/reports/PNG‐LNGINSPECTION‐REPORT‐508‐Final‐Redacted.pdf

https://www.exim.gov/sites/default/files//oig/reports/REDACTED‐Report‐on‐Minera‐y‐Metalurica‐del‐Boleo‐SA‐Report‐Final‐OIG‐INS‐13‐01‐130930.pdf

https://www.exim.gov/sites/default/files//oig/reports/REDACTED‐Report‐on‐Minera‐y‐Metalurica‐del‐Boleo‐SA‐Report‐Final‐OIG‐INS‐13‐01‐130930.pdf

https://www.exim.gov/sites/default/files/oig/reports/PNG‐LNGINSPECTION‐REPORT‐508‐Final‐Redacted.pdf


EXIM Bank Local Cost Reviews

.Ingeneral,thevendors foundthat thetransactionscompliedwithEXIMBank’slocal costrequirementswithnoevidenceoffraud,wasteorabuse.Thelocalcostproviders thatsuppliedgoodsand/orserviceshadastrong presenceinthehostcountryandeachhad avalidlocalbusinessregistration. TheEPCs’procedures werewellconsideredandeffectiveandpersonnelweredeemedknowledgeableaboutthem.Therewasnoreasontobelievethattheworkinvoicedby localproviders wasnotdulyperformedorperformedinanycountry otherthan thebuyer’scountry.Asofthedateofthisreport,theBank isin theprocessofcompletinga secondroundofassessments.OIGunderstandsthatupdatesmaybe madetoEXIMBank’slocalcost policyframeworkusingthevendors’ feedbackasaresource.

InresponsetoOIG‐INS‐13‐01,EXIM Bankthroughcontractengaged three independentvendorstoconductlocalcostreviews.Thescopeofworkwasto performduediligence andprovideinformationto theBankon theexistence,ability toperform, viabilityof goingconcern,andareasonableexpectationthatthe contract workbetweenaproject andthe in‐countrysuppliershadbeenperformed.Todatethevendorshave completedreviewsoffourtransactionsinvolvinglocalEngineering,Procurementand Construction(EPC)companies thatwere responsiblefortheprocurementofgoodsandservices:RefineriadeCartagena, S.A.;AustraliaPacificLNG;SadaraChemicalCompany;andSamalkotPowerlimited,whichrepresentedapproximately42percentofthe

(b) (4)totalauthorizedamountin

localcostfinancingof


6


PRINCIPAL FINDINGS AND RECOMMENDATIONS

Point of Inquiry 1: Did EXIM Bank finance local costs in accordance with established policies and procedures?

Applicable Standards, Terms and Conditions

OIGreviewedvariousApplicableStandards, Termsand Conditions andfocusedonthefollowing:

1. Procedures forthefinancingoflocalcostsoutlined in Chapter 8 Standard Credit Structure,Chapter14 Project Finance,andAppendix24‐1 CRTI Transaction and Enhanced Due Diligence Guidelines ofChapter 24 Credit Review and Compliance Division ofEXIMBank’sLoan,Guarantee and Insurance Manual(LoanManual),dated April 2015andMay2017,respectively;

2. Policyfor Local Cost outlined intheBank’sPolicyHandbook(PolicyHandbook),datedJuly2012;

3. Change in the Application of Local Costs in Long‐Term Transactions outlinedinaMemorandumtotheBoardofDirectors(Memorandum),datedMarch 21,2011 andapproved March29,2011;

4. Instructions for Administering EXIM Bank’s Local Cost Policy outlinedinE&E’sStaffMemorandum13‐1(E&EMemorandum),datedJuly31,2013;

5. Procedures forprocessingdisbursementsoutlinedintheBank’s Operations and Data Quality Division Manual, Credit Administration: Guarantees and Loans(DisbursementsManual),Updated throughAugust2010andJanuary 2016,respectively;

6. EXIMBank’s Frequently Asked Questions for Loans and Guarantees (FAQs);11

7. TermsandconditionsoftherespectiveMasterGuaranteeAgreement (MGA),CreditAgreementand/orParticipationAgreementfor thesevenjudgmentallyselected transactions;and

8. Federalguidanceon internalcontrolsandpoliciesforcreditprogramsoutlinedintheGeneral AccountabilityOffice’s(GAO’s) Standards for Internal Controls for the Federal Government andtheOffice ofManagementandBudget’s(OMB)CircularA‐123, Management’s Responsibility for Internal Controls andCircularA‐129,Policiesfor Policies for Federal Credit Programs and Non‐Tax Receivables.

11 For moreinformation,see“CreditAdministrationFact Sheets” at http://www.exim.gov/tools‐for‐exporters/credit‐administration‐and‐operations.TheBankhasFAQs forInvoices,Evidenceof Payment, EvidenceofExport and Exporter’sCertificate.


7

https://www.exim.gov/tools-for-exporters/credit-administrations-and-operations

https://www.exim.gov/tools-for-exporters/credit-administrations-and-operations


EXIM Bank Policies, Procedures and Guidelines

Thebasicfeatures,processing and underwritingrequirementsforthefinancingoflocalcostareoutlinedinEXIMBank’s LoanManual. Otherrequirementsforlocalcostsareoutlinedin theBank’s PolicyHandbookandrelatedmemoranda,whichdefinetheparametersandrationaleforlocalcost,andadministration.Additionalguidelinescanbefoundinthe Bank’sDisbursementsManual,andon‐lineFAQsfor loansandguarantees.

Thetermsandconditionsforlocalcostspecifictoatransaction isoutlined intherespective MGA,Credit Agreement orParticipation Agreement(the“Agreements”)between theBorrower,thelender,and/orEXIM Bank.TheAgreementsinclude a scheduleorannexthat outlinestheutilization procedures forfundsdisbursements,including reimbursementprocedures. Theseproceduresincludetherequirementsforreimbursementdocumentsandrelated forms(e.g.,Exporter’s Certificate, Requestfor LocalCostReimbursement,ItemizedStatementof Payments‐LocalCosts(ISP),Anti‐Lobbying Certificate,Acquisition List,and invoices).12

Federal Guidance on Internal Controls and Policies for Credit Programs

Asprescribedin OMBCircularA‐123, Management’s Responsibility for Internal Control,EXIMBankmanagementhasa“fundamental responsibilitytodevelopandmaintaineffectiveinternalcontrol.”13 Internal controlisaprocesseffectedbyEXIMBank’sBoardof Directors andmanagement,designedtoprovidereasonableassuranceabouttheachievementoftheBank’smission andobjectivesinregardtoeffectiveness and efficiencyofoperations,reliabilityoffinancialreporting, andcompliance withlaws and regulations. AsstatedintheGAO’s Standards for Internal Control in the Federal Government, “controlactivitiesarethepolicies,procedures,techniques,andmechanismsthatenforcemanagement’sdirectivestoachievetheentity’sobjectivesand addressrelatedrisks.”14

Managementisresponsiblefordesigningcontrolactivitiestoachieve an entity’s objectivesandtorespondtorisksinitsoperations. Commoncontrolactivitiesidentifiedin theGAO standardsinclude“segregationofduties,”and “appropriatedocumentation oftransactions andinternalcontrol.”15 Forsegregationofduties,“Managementdivides orsegregateskey dutiesandresponsibilitiesamong differentpeopletoreducetheriskoferror,misuse,or fraud.This includesseparating the responsibilities forauthorizing transactions,processingandrecordingthem,reviewing thetransactions,andhandlinganyrelatedassetssothatno oneindividualcontrolsallkey aspectsofa transaction or event.”16 Inregards to

12 SeeAppendix Dfor details onthe documents tobe submittedfor local cost disbursement requests.

13 For moreinformation,see https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/a123/a123_rev.pdf and https://obamawhitehouse.archives.gov/ sites/default/files/omb/memoranda/2016/m‐16‐17.pdf.

14 For moreinformation,see http://www.gao.gov/assets/80/76455.pdf andhttp://www.gao.gov/assets/670/665712.pdf.

15 Ibid.

16 Ibid.


8

http://www.gao.gov/assets/670/665712.pdf.

http://www.gao.gov/assets/80/76455.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/memoranda/2016/m‐16‐17.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/a123/a123_rev.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/a123/a123_rev.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/memoranda/2016/m‐16‐17.pdf


documentation,“Managementclearlydocumentsinternal controlandalltransactionsandothersignificant events,inamannerthat allowsthedocument tobe readilyavailableforexamination.Thedocumentation mayappear inmanagementdirectives,administrativepolicies,oroperatingmanuals, in eitherpaperorelectronicform.Documentationandrecordsare properlymanagedandmaintained.”17 BoththeOMBCircularA‐123and GAO standardsprescribeseparate and ongoing evaluationsofinternalcontrolactivitiesaspartofmonitoringbyfederalagencies.

OMBCircularA‐129, Policies for Federal Credit Programs and Non‐Tax Receivables,requiresdepartmentsandagenciesto“[o]perate eachcreditprogramundera robustmanagementandoversightstructure,withclear andaccountablelines ofauthorityandresponsibilitiesforadministeringprogramsandindependent riskmanagement functions;monitoringprogramsintermsofprogrammaticgoalsand performancewithin acceptableriskthresholds;andtakingactionto improveormaintainefficiency andeffectiveness.”18

Finding 1: EXIM Bank was generally compliant in its financing of local costs for the seven transactions reviewed.

Overall,EXIMBankadministered thefinancingoflocalcostsfortheseven transactions reviewed in accordancewithestablishedpoliciesandprocedures.In assessingthejudgmentalsampleofseven transactionsforcompliance,wefoundthattheBankgenerallyfollowedproceduresfor thereviewandapprovaloflocalcostduring origination anddisbursement.Withfewexceptions,thedisbursement filescontainedtherequireddocumentsandsupportforlocalcostdisbursements.Weobserved evidencethatdisbursementdocumentshadbeen previously reviewedbyBankstaffforcompliance.Forexample,documentscontained tick marks,highlightsand/ornotations.19 Wealsofoundthatalllocalcostswereinvoicedonorafter theinitialeligibilitydate forthetransactions. Wenoted noexceptions inourtestingof themedium‐termtransactions.However, weidentifiedcertaincontrolweaknessesin theBank’simplementationofthelocalcostpolicy,andrelated procedures andguidelinesfor thefivelong‐termtransactionsasdetailedbelow underPointofInquiry2.

RECOMMENDATIONS

OIGdoesnotmakeanyrecommendationsrelatedto thisfinding.

17 Ibid.

18 For moreinformation,see https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/a129/rev_2013/pdf/a‐129_main.pdf.

19 For example, invoicesincluded tickmarks/highlightsnear typical components (e.g.,buyerand seller names,invoice number,date(s) and amounts) and notations(e.g., “no‐deductions”); ISPsincluded tick marks and notations (e.g., “accepted” or “noteligible”); and a supplementaryscheduleprovided byaBorrowerincludea column addedby Bank staff to documentquestionsor comments (e.g.,adjustments for reachback andineligible expenses).


9

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/a129/rev_2013/pdf/a‐129_main.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/a129/rev_2013/pdf/a‐129_main.pdf


Point of Inquiry 2: Are EXIM Bank’s current policies and procedures for financing local costs sufficient to safeguard against fraud, waste and abuse?

Applicable Standards, Terms and Conditions

OIGreviewedvariousApplicableStandards, Termsand Conditions andfocusedonthefollowing:

1. Procedures forthefinancingoflocalcostsoutlined in Chapter 8 Standard Credit Structure,Chapter14 Project Finance,andAppendix24‐1 CRTI Transaction and Enhanced Due Diligence Guidelines ofChapter 24 Credit Review and Compliance Division ofEXIMBank’sLoan,Guarantee and Insurance Manual(LoanManual),dated April 2015andMay2017,respectively;

2. Policyfor Local Cost outlined intheBank’sPolicyHandbook(PolicyHandbook),datedJuly2012;

3. Change in the Application of Local Costs in Long‐Term Transactions outlinedinaMemorandumtotheBoardofDirectors(Memorandum),datedMarch 21,2011 andapproved March29,2011;

4. Instructions for Administering EXIM Bank’s Local Cost Policy outlinedinE&E’sStaffMemorandum13‐1(E&EMemorandum),datedJuly31,2013;

5. Procedures forprocessingdisbursementsoutlinedintheBank’s Operations and Data Quality Division Manual, Credit Administration: Guarantees and Loans(DisbursementsManual),Updated throughAugust2010andJanuary 2016,respectively;

6. EXIMBank’s Frequently Asked Questions for Loans and Guarantees (FAQs);20

7. TermsandconditionsoftherespectiveMasterGuaranteeAgreement (MGA),CreditAgreementand/orParticipationAgreementfor thesevenjudgmentallyselected transactions;and

8. Federalguidanceon internalcontrolsandpoliciesforcreditprogramsoutlinedintheGeneral AccountabilityOffice’s(GAO’s) Standards for Internal Controls for the Federal Government andtheOffice ofManagementandBudget’s(OMB)CircularA‐123, Management’s Responsibility for Internal Controls andCircularA‐129,Policiesfor Policies for Federal Credit Programs and Non‐Tax Receivables.

EXIM Bank Policies, Procedures and Guidelines

SeePointofInquiry1abovefor asummaryofthesepolicies,proceduresandguidelines.

20 For moreinformation,see“CreditAdministrationFact Sheets” at http://www.exim.gov/tools‐for‐exporters/credit‐administration‐and‐operations.TheBankhasFAQs forInvoices,Evidenceof Payment, EvidenceofExport and Exporter’sCertificate.


10

http://www.exim.gov/tools‐for-exporters/credit‐administration‐and‐operations

http://www.exim.gov/tools‐for-exporters/credit‐administration‐and‐operations


Finding 2: Although EXIM Bank was generally compliant in the financing of local costs, certain control weaknesses were identified.

Forthefive long‐termtransactions reviewed, therewerea sufficient numberofinconsistenciesidentifiedtoindicateweaknessesin internalcontrolsforthepropermanagementand financingoflocalcosts.Weidentifiedcontrol weaknessesin the administrationand implementationoftheBank’slocalcostpolicyandproceduresusedtoensurethat localgoodsorservicesprovidedarethosetheBank approvedforfinancing.Theseweaknessesdecrease theeffectiveness ofinternalcontrolsforlocalcosttominimizetherisk thaterrorsorirregularitiesmayoccur ornotbedetected.Wedidnotfindanyevidenceoffraudinour reviewofthetransactions.However,theBank’slocalcost policyandproceduresasimplementedmaynotbeadequateto protectthe Bankfrom potentialfraudorabuse.21

Finding 2A: Management and implementation of the Acquisition List for local costs needs improvement.

Inassessinginternalcontrolsovertheadministration andfinancingoflocalcosts,wedetermined thattheAcquisition List(AL)servesasoneofthe primarycontroldocumentsfortheimplementation ofEXIMBank’slocalcostpolicythroughoutthelifecycleofatransaction—fromoriginationto disbursementforlong‐termtransactions.AccordingtoCreditAdministration staff,the BankreliesontheBorrowerto distinguishbetween U.S.andlocalcostsand toensurethat disbursementrequests comply withlocalcostrequirements.Thisreliancemay increase the Bank’sexposureto reputationaland operational riskshouldanineligiblegoodorservicebefinancedorfraudulenteventoccur.TheALservesastheBank’spreventivecontrol tohelpmitigate thoserisks.22

Asaconditionprecedentforthe firstutilizationofalong‐termcredit,theBorrowerisrequiredtosubmitanALtoEXIM Bankandthefacilityagentin theformsetforthintherespective CreditAgreement orParticipationAgreement.23 TheALprovidesanitemizationofallBankapprovedandsupportedlocalcostgoodsandservices,identifiesthe namesoflocalcostproviders,detailsthecostforeachapproveditem, andprovidesthe totalassociatedlocalcostamount.Theadministrationofthe AL isappropriatelysegregatedbetweentheBank’sassignedEngineerandCAO.TheEngineerisresponsiblefor reviewingandapprovingthecontentsof theALsubmittedbytheBorrower, includingany

21 OIGnotes that apriorinspectionreport (OIG‐INS‐13‐01)producedsimilarfindingsasitrelates tothepotential for fraud or abuse. Supra note9.

22 GAO’s Standards for InternalControldefinesa preventivecontrol as “an activity thatis designed topreventan entity from failing toachievean objectiveoraddressing a risk.” Supra note14.

23 Section1.01DefinedTermsand Section6ConditionsPrecedent of theCreditAgreementandSection 4 ConditionsPrecedentofthe ParticipationAgreement forthetransactionsreviewed. Theprescribedform oftheALisfoundintheannexesof theCredit Agreement orParticipationAgreement. Afillableversionof the AL form isavailable at https://www.exim.gov/sites/default/files//forms/ebd‐m‐59.pdf.


11

https://www.exim.gov/sites/default/files//forms/ebd-m-59.pdf.


amendments,toensurethesubjectgoodsand/orservicesarerelatedtothescopeoftheoverallprojectortheU.S.exporter’s scopeofwork.24 TheCAOisresponsibleforreviewingdocumentationforlong‐termcreditssubmittedintheRequestforLocalCostReimbursementfor accuracy,such asinvoicesforlocalcoststhatthe Borrower certifiesare ontheALapprovedbytheEngineer,andprocessingdisbursements.25

WhiletheinternalcontrolframeworkcreatedbytheALappears adequatetomitigatetheriskof fraudorabuse,theBank’s procedures andguidelinesrelatedtothelocalcostpolicyasimplemented are notsufficientlyclearasto theapplication of the AL.Nordotheyspecify whatconstitutesan appropriatelevelofdetail fordescribing localcostsontheAL. Inourreviewof theALsforthefivelong‐termtransactions,weobservedinconsistenciesinthedescriptionoflocalcosts,the identificationoflocalcostproviders, and thedocumentingoftheEngineer’sreviewandapproval.Forexample,OIGfoundthat for onetransaction,thedescriptionoflocalcostgoods and servicesin SectionBoftheALwas blank.Foranothertransaction, multipleversionsof theALwereissuedusing the samedatewithoutevidencetoconfirmE&E’sreviewandapprovalofthelocalcostproviders.Forathirdtransaction,theALcontainednoevidence suchasinitialsordate toconfirmthatitwasreviewedand approvedbyE&E.

Whenthereareinconsistenciesinthemanagementandusageof theAL,theabilitytoconfirmthatthelocalcostproviderandrelatedlocalgoodsandservicespresentedintherequestfor reimbursementarethoseapprovedbyEXIMBankisdifficult.Insufficient focusontheALcouldleadtotheBank financingineligiblegoodsand services.Clarifyingrequirementsforthe ALandthereforestrengthening this controlwillhelptoimprovetheBank’sreviewandapprovalofwhatandtowhomitisfinancing forlocalcostsandcreates aclearer audittrailforthedisbursementprocess.

Finding 2B: Other control activities relating to the review and approval of local cost disbursements should be strengthened to protect the Bank from potential fraud, reputational and operational risk.

TheorganizationalstructurecreatedbyEXIMBankmanagementto sustain effective internalcontrolaroundlocalcostsappearssound.Forexample, theadministrationand implementationofthe localcost policyforatransaction isappropriatelysegregatedbetweentheEngineer, theLoanOfficer, theCAO,and thePortfolioManagerwherenooneindividualcontrolsallkeysaspects ofatransactionor event. However,someoftheprocedures andmechanismsinplacetominimizereputationaland operationalrisksuchas thereview andreconciliationof disbursement documents,managementandmaintenance

24 Part C of theOperative Memorandum appliesto theEngineer,whocertifiestohis/herexaminationand acceptance of the finalor preliminary/partialAcquisition List submittedbytheBorrower.TheAL contains a placefor theEngineertoinitial and date, confirminghis/her reviewand approvalof the list.

25 For long‐term guarantees, theGuaranteedLenderis responsible for reviewingdocuments submittedin theRequestforLocalCostReimbursementprior to submission to EXIMBank.


12


ofrecords,andtreatmentofsubsidiary andaffiliatecompanies canbeimproved tofurther mitigateopportunities forfraudandabuse.

Review and Reconciliation of Disbursement Documents

Ourreview ofthefivelong‐term transactionsidentifieda numberofinconsistenciesinthedocumentationreviewedand approvedbyEXIMBankstaffforlocalcostdisbursementsthatillustrateaneedfor improvedinternalcontrolsonpartoftheBank.AlthoughweobservedevidencethatBankstaff revieweddisbursement documentsforcompliance,therewere instanceswhere wewereunabletoconfirmthelocalgoods orservicesdescribedoninvoiceswereconsistentwiththe approvedgoodsorservicesdescribedonthe approvedALortheISPasillustratedinthecasesbelow.Theseinconsistencies makeitdifficulttoreviewand reconciledisbursement documents(e.g.,invoicesto theAL orISP)toconfirmtheaccuracyofthedocuments,appropriatenessofthedisbursement, andcompliancewiththepolicies andproceduresrelatingtolocalcost.Thefollowingexamplesillustratesomeoftheinconsistenciesobserved.

disbursementamount, only (includesexposurefee of )wasidentified aseligiblelocalcost.Additionallocalcostinvoiceswereto besubmittedbytheBorrowerassupportforthe differenceof approximately$158.3million.

)fordisbursementforlocallabor.Thedisbursementrepresented themaximum amountauthorizedforlocalcostunder this transaction.TheBorrower relied onthebreakdownoftheinvoicesbetweenU.S.,localandthirdcountrycostsprovided bythelocalcostprovider,Black&Veatch International(B&V).Duringanon‐site monitoring visit inlate September 2013,theBank’sassignedEngineerlearned thatB&VmisunderstoodwhatqualifiedaslocalcostandcategorizedamajorityofU.S.services aslocalcosts.Thelocal

services.TheBankrequiredB&Vto reconcile itsinvoicesandreallocatethedisbursedbetween U.S.,localandthird countrycosts. Ofthe original

ngon‐site at theproject constituted local costproviderbelieved U.S.employeeswork(b) (4)

(b) (4) (b) (4)

i

EskomLimited(Eskom).OnApril 22,2013,EXIMBankapprovedtheBorrower’slocal(b) (4) (b) (4)costreimbursementrequestof (includesexposure feeof

)as substitute,resulting ina(b) (4)

finaltotallocalcostdisbursementamountforthistransaction of(includesexposurefeeof

Althoughweobserved evidence thatBankstaffreviewed disbursementdocumentsforcompliance(e.g.,invoicenumbers,dates andamountsmatchedto theISP)andmadeadjustmentsforineligiblecosts (e.g.,expenses relatingto B&Vpersonnel’sfamily),theCAO’sreviewofdisbursementdocumentsdid notidentify themisallocationofcostsbyB&V.ThisoccurredbecausetheBankreliedonthelocalcostprovider,whodidnotfullyunderstandtheBank’sU.S.contentandlocalcostpolicy,todistinguishbetween U.S.,local,andthirdcountrycostsand theBorrower’scertification. Thedisbursement reconciliationscheduleandinvoicessubmittedforreimbursementdidnotcontainsufficientdetailtovalidatethe localcostprovider’sdetermination.Underthecurrentprocedures, there islimited assurancethat theBankwouldhave caughtthemisallocationwithouttheEngineer’son‐sitemonitoringvisit, whichisnotarequirementfordisbursement. TheBorrower wasableto submitanadditional(b) (4) (b) (4)

(b) (4)ininvoices(includesexposurefeeof

(b) (4) ).


13


reimbursedwasfortheinstallation ofequipmentassociatedwithsemiconductor

GlobalFoundriesInc.(Global). OnDecember5,2013 and September 8,2014,EXIM

inlocalcosts(b) (4)BankapprovedtheBorrower’slocalcostreimbursement requests for

(b) (4) (b) (4)and ,respectively, fordisbursement.The

fabrication bytwolocalcostproviders,M&W Integrated SolutionsGmbhandScholppMontagetechnicGmbH.Inreviewingthedisbursementdocuments,we observedevidence thatBankstaffreviewedtheinvoices forconfirmation oftypicalcomponents(e.g.,invoicedates,numbersand paymentamounts)andadjustmentsweremadetotheISPforone localcostprovider (e.g.,removedreachbackamounts).However,we wereunabletoverifythelocalservices describedon theinvoiceswereconsistentwith the approvedlocalcostservicesfor thetransaction becausesomeoftheinvoiceswereinGermanandtheALsprovided didnotincludelocalcosts.26 Asanalternative,Bankstaffprovided emailcorrespondence fromtheassignedEngineerthatincludedtwoschedulesusedbythe BorrowertoaccountforEXIMBankdraws andafinalALforU.S.costs.Inan interview, E&Estaffimpliedthat theALwas misplacedandexplainedforlargerprojectsthattheymayreceivean ALaccompanied byasupplementalspreadsheetthatprovidesmoredetails.Thoughnotinthe form prescribedfortheALintheCredit Agreement,accordingto Bankstaff,thespreadsheets submittedbytheBorrower wereconsidered acceptablebytheEngineer. Thischangeinpractice ofacceptingspreadsheetsasasubstituteforthe ALhasyettobe formalizedinEXIMBankprocedures andguidance.Bankstaffexplained thatalthoughthe localcostinvoices were inGerman,there wassufficientEnglishon theinvoicesto determinethat thetypes ofinvoiced servicesmatchedthemoredetailed description oflocalcostsonthespreadsheetforthelocalcostproviders.Further,accordingto Bankstaff,theISPdescribedtheseitemsunderthegeneralheadingof“hookupvarioustools”andthelocalcostproviders’evidenceofpaymentlettersconfirmedthat the invoiceswerefor “hookupvarioustools.”Thedisbursementdocumentation didnot contain anyexplanation astohowBankstaffreviewingtherequest fordisbursementwasabletoreconciletheinvoicedescriptions tothedescriptionofapprovedservicesonthe AL. Lastly,therewasinsufficientdetail inthe invoicestodetermineexactlywhatlocal goodsorserviceswere beingprovided(e.g.,“IndirectkeKosten”).

EXIMBank’sproceduresandguidelinesforlocalcostdonotexplicitlyaddresshowtotreatinvoicesin aforeignlanguage.However, section 13.11of the Credit Agreement for thistransactionrequiresthatalldocumentsdeliveredbyanyparty pursuanttothe termsofthe agreementbeprovidedinEnglishoraccompaniedby anEnglishtranslation.AccordingtotheLoanOfficer, this isstandard languageincludedintheCreditAgreement,meanttospeed upthereviewofdocumentation.Inaninterview,Bankstaff explained thatsection13.11doesnotapplytolocal costprovidersontheunderstandingthat theyare notofficiallyparty totheCredit Agreement.TheBank’sLoanManualrequires thatcertain documents,ifnot inEnglish, beaccompaniedbyanEnglishtranslation,suchasthe exportcontract,financialstatements, andstandard

26 Approximately83percent of thesampledinvoicesreviewedfrom the firstand seconddisbursement wereinGerman. Infra note32.


14


documentationforreimbursement comprisedofinvototaling inlocalcosts.However,thereimbursementrequestedonly totaled (orincludingtheISPandProofofPaymentconfirmedonlythatthis amountcorresponded toeligiblelocalcosts.

(b) (4)(b) (4) (b) (4)

conditions precedent. However,thereisnoexplicitmentionof disbursementdocumentsforlocalcostsinthe LoanManual. Further,whereas theDisbursementsManualacknowledges thatan invoiceforlocal costmaybeissuedbythelocalcostprovider in alanguage andcurrencyoftheBorrower’scountry, theonlyguidance provided is referraltotherespectiveCreditAgreement forproceduresonconvertinglocalcurrencytoU.S.dollars. Inabriefing,EXIM Bankstaff indicatedthatithadcontemplatedand acceptedtheriskofallowinginvoicesinaforeignlanguage to besubmitted.Bankstaff emphasizedtherisk is mitigatedbytheBorrower’scertifications,whicharelegallyenforceable.

BGEnergy HoldingsLimited(BGEnergy).On December15,2015,EXIMBankapproved

Thelocalcostsreimbursedwere forconstructionandprojectmanagementservices,(b) (4)theBorrower’slocalcostreimbursementrequestfor fordisbursement.

andcivilworksprovidedbylocalcostprovider,Bechtel AustraliaLimited(BechtelAustralia),andtwolocalsub‐contractors,TheissPtyLtd.and JohnHollandPtyLtd.Inreviewingthedisbursementdocuments,we foundthattheBorrowersubmitted

icesfromBechtelAustralia

)andsupporting documentation,

Toarriveatthelocalcostamount,BechtelAustraliaincluded aContinuationSheetforProgressPaymentClaimInvoices (ContinuationSheet)thatlisted thetotalof eachinvoicealongwitha tablethat simplyrecreatedtheapprovedlocalcostALandtranslated amountsfromAUDtoUSD.AccordingtoBank staff,approvalofthedisbursementwasbasedoninformation includedin theISPandthe Continuation SheetandtheyworkedinadvanceofthedisbursementwiththeBorroweranditsconsultanttounderstandtheprocessforcommercialinvoicingandrelating localcostprogressinvoicesto BechtelAustralia. The CAOpre‐reviewedand approvedtheaccompanying invoicecertificationletterand ContinuationSheet.However,thisapproachandevidencesupportingthepre‐reviewandapprovalwasnot partof thedisbursement file.Further,ourreviewof thesedocumentsdid notfind sufficient evidencetoreconcileclearlytheinvoices and ISPtothelocalcostamountortothe descriptionofgoodsand serviceson theapprovedAL.For example,theContinuationSheetdidnotidentify

(b) (4)whichoftheinvoiceswerebeing usedtosupportthe requestforlocalcostreimbursement.

Weobservedevidencet hatBankstaffrev iewedinvoicesforconfirmationoftypic alcomponents(e.g.,invoicedates,n umbersanda mounts),checkedtotalamountsonthe ISPandinv oiceamountsontheContinuationsheet.How ever,t he disbursementdocumentationdidnot containanyexplanationastohowBankstaffreviewingthe requestfordisbursementwereab le toreconciletheinvoicedescriptionstothedescriptionofapprovedgoodsorservicesontheAL.Further,therew asinsufficientdetailintheinvoicestodeterm ineexactlywha t localserviceswer ebeingprovided(e.g., “AnticipatedProgress”).

TheBank’s practiceof acceptingtheBorrower’scertificationoflocalcostswithoutanapparentmatchbetweentheunderlying invoicesandthe amounts anddescriptionsonthe


15


ALcreates anopportunity forfraudandabuse.Thepresenceof the inconsistenciesdiscussedabovewherelocalcostdisbursementswereapprovedby the Bankillustratethatthecurrent procedures andguidelinesrelatingtothelocalcostpolicyasimplementedmaynotadequatelyprotect theBankfromreputationalandoperationalrisk.Asaresult,EXIMBankhaslimitedassurancethatthe localcostgoodsandservicesprovided andsubmittedforreimbursementwerethoseapprovedbythe Bank.

Management and Maintenance of Records

Inreviewingthefivelong‐termtransactions, wefoundthatEXIMBank’spracticesinregardstothemanagementandmaintenance ofaccurate andup‐to‐daterecordsforlocalcostshouldbeimproved.WefoundthattheBank’sfiles generallycontainedtherequireddocumentsandsupportforlocalcostdisbursementsoutlined in the respective CreditAgreementorParticipationAgreement.However,we observedinconsistencies inthe managementandmaintenanceof recordsrelatingto CRTI results and ALs.

Forexample,theBank’sfilesdidnotcontainevidencetosupportwhichlocalcostproviders were includedin CRTIscreening orconfirmationthatlocalcost providerssubjecttoscreeninghadbeencleared(i.e.,“hitornohit”).Thismakes itdifficulttodeterminewhohasbeenvettedandto confirmtheoutcome.Inaddition,wefoundinconsistenciesin thedocumentingofE&E’sreviewandapprovalofALs.AlthoughtheALformcontains aplaceforsign‐off evidencing reviewandapprovalbytheEngineer,we observedformsthatwere notsigned. According to E&Estaff, thecurrent processistouseemailstodocumentthereviewand approvalof theAL.This changehas yettobeformalizedin E&E’sinstructionalmemoranda.Thepropermanagement andmaintenanceofrecordsprovides evidencetoconfirmthattheappropriateprocessesandcontrolsareinplaceto preventthedisbursementoffunds forineligiblegoodsorservices.

Treatment of Subsidiary and Affiliate Companies

EXIMBank’sproceduresandguidelinesrelatedtotheimplementation ofthelocalcostpolicydonotprovidesufficientguidanceonhowtotreat parentcompanies, theiraffiliatesorsubsidiarieswithrespecttotheAL,CRTIscreening,andthe reviewandapprovaloflocal costdisbursements.Further,the ALdoesnot differentiate betweenthelocalcost provider,sub‐contractor,subsidiaryoraffiliatecompanies.Although reviewandapprovaloflocalcostsandlocalcostprovidersbytheEngineer priortoachievingoperative statusisanimportant andvaluablecontrolactivity,accuratelyidentifying thespecificentityprovidinglocalcostgoodsorservicesandtheirparents orsubsidiaries relevanttotheprojectwillprovidea greaterlevel ofprotectiontotheBankin terms ofriskrelatedto fraudand misuseoflocalcostfinancing.

RECOMMENDATIONS

OIGrecommendsthatEXIMBankundertakethe following enhancementswithrespecttotheAcquisitionListrequired forlong‐term transactions:

1. Issuedetailedproceduresandguidelinesonitscurrentprocess forreviewingandapprovinglocalcostgoodsandservices,providersandamountsusingthe AcquisitionList.Thisw ouldincludedeterminingwhethert hecurrentdefinitionofwhatconstitutes“sufficientdetail”isadequat eandclarifying therolesand


16


responsibilitiesofBankstaff, timelineandrequirementsforadministeringt he AcquisitionList.

OIG recommends that EXIM Bank undertakethefollowingenhancements tostrengtheninternalcontrolactivities:

2. ProvideenhancedguidanceandtrainingonlocalcostsandrelatedrequirementstotheBorrowerandthoserespons ibleforthepreparationa ndsubmissionofreimbursementrequests.ThiswouldincludeprovidingacleardelineationbetweenU.S.andlocalcostgoodsandservices.

3. Forreimbursementrequests,updatethe proceduresandguideline sforlocalcost torequire,atminimum,thesubmissionofin formationthatdescrib esi nsufficient detailthegoodsorservicesbeinginvoic edforconfirmat ionwiththea pproved AcquisitionList;ther efore,creatingaverifiableaudittrail.

4. Intheeventthatinvoicesaresubmittedinafo reignlanguage, theBankshouldestablishatransparentanddocu mentedprocessbywhichBankstaffrevi ewandapprovethoseinvoices.

5. Updateproceduresandguidelinesforthemaintenanceandretent ionofdocumentationrelated toallinternalcontrola spectsoflocal cost.Thisshouldincludeensuringthata llupdatesandchangestotheAcquisitio nList,CRTIscreening support(e.g.,requests, notificationsofclearanceandhits), andBankstaffcorrespondenceareretainedintheappropriat eBankfiles.

6. Updateproceduresandguidelinesforlocalcosttoclarifyhow totreatverticallyintegratedcompaniesandtheiraffiliateswithrespecttotheAcquisitionListandCRTIscreeningwhenthosesubsidiariesoraffiliatefirmsareprovidinglocalcostgoodsorservicesasaprimaryproviderorsub‐contractor.Thiswo uldinclude updatingthe AcquisitionListtodistinguishbetweenthesp ecificentity providing localcostgoodsorservices.

Management Response:

Pleasesee AppendixA,ManagementResponseand OIGEvaluation.


17


CONCLUSION

OurevaluationfoundthatEXIMBankwasgenerallycompliantin itsfinancingoflocalcostsfortheseventransactionsreviewed.Wenoted noexceptionsin ourtestingoftwomedium‐termtransactions.However,our reviewof five long‐termtransactions identified asufficient numberofinconsistenciestoindicateweaknessesin internalcontrolsrelatingtolocalcosts. Specifically,wedeterminedthattheBank’smanagementandusageoftheALforlocalcostsneeds improvement. TheBank’sproceduresandguidelinesrelatedtothelocalcostpolicyasimplemented are notsufficientlyclearasto the applicationoftheAL.Nordotheyspecify whatconstitutesan appropriatelevelofdetail fordescribinglocalcostsonthe AL.Forthefive long‐termtransactions,weobservedinconsistencies inthedescriptionoflocalcosts,theidentificationof localcostproviders, andthedocumentingofthe Engineer’sreviewand approvalof theAL.Theseinconsistenciesmake itdifficulttoconfirmthatthelocalcostproviderand related localgoodsandservicespresented in a disbursementrequestare thoseapprovedbythe Bank.

Finally,wedeterminedthatEXIMBankcanstrengthenothercontrolactivitiesfor localcosttominimizereputationalandoperationalrisksuchasthereviewand reconciliationofdisbursementdocuments,managementandmaintenanceofrecords, andtreatmentofsubsidiary andaffiliatecompanies tofurther mitigateopportunities forfraudandabuse.


18

EXIMEXPORT-IMPORT BANK OF THE UNITED STATES

Reducing Risk. Unleashing Opportunity.

September 22, 2017

Terry SettleActing Inspector General Office of the Inspector General Export-Import Bank of the United States 811 Vermont Avenue, NW Washington, DC 20571

Dear Ms. Settle,

Thank you for providing the Export-Import Bank of the United States (“EXIM Bank” or “the Bank”) management with the Office of the Inspector General’s (“OIG”) evaluation “Report on EXIM Bank’s Local Cost Policies and Procedures”, OIG-EV-17-06, dated September, 2017 (the “Local Cost report”). Management continues to support the OIG’s work which complements the Bank’s efforts to continually improve its processes. EXIM Bank is proud of the strong and cooperative relationship it has with the OIG.

EXIM Bank appreciates the OIG’s acknowledgment that “EXIM Bank administered the financing of local costs for the seven transactions reviewed in accordance with established policies and procedures.”

Further, EXIM values the OIG’s finding that it “did not find any evidence of fraud in our review of the transactions.”

Additionally, the Bank values OIG’s determination that “the Bank generally followed procedures for the review and approval of local cost during origination and disbursement” and that for the medium-term transactions selected for this review OIG “noted no exceptions in our testing.”

Lastly, EXIM appreciates that OIG “observed evidence that disbursement documents had been previously reviewed by Bank staff for compliance.”

The Bank continuously strives to improve its policies and practices and agrees to all six OIG recommendations in this report.

811 Vermont Avenue, NWWashington, DC 20571Main: 202 565 3946Fax: 202 565 3380

exim.gov1


APPENDIXES

Appendix A: Management Response and OIG Evaluation


19

http://www.exim.gov

Recommendation 1: that EXIM Bank undertake the following enhancements with respect to the Acquisition List required for long-term transactions:

Issue detailed procedures and guidelines on its current process for reviewing and approving local cost goods and services, providers and amounts using the Acquisition List. This would include determining whether the current definition of what constitutes “sufficient detail” is adequate and clarifying the roles and responsibilities of Bank staff, timeline and requirements for administering the Acquisition List.

Management response: Management agrees with this recommendation. EXIM Bank will issue detailed procedures and guidelines on its current process for reviewing and approving local cost goods and services, providers and amounts using the Acquisition List, to include determining whether the current definition of what constitutes “sufficient detail” is adequate and clarifying the roles and responsibilities of Bank staff, timeline and requirements for administering the Acquisition List.

Recommendation 2: that EXIM Bank undertake the following enhancements to strengthen internal control activities:

Provide enhanced guidance and training on local costs and related requirements to the Borrower and those responsible for the preparation and submission of reimbursement requests. This would include providing a clear delineation between U.S. and local cost goods and services.

Management response: Management agrees with this recommendation. EXIM Bank works closely with the Borrowers to ensure that their knowledge and understanding of EXIM’s policies and procedures is current. In order to provide a clear delineation between U.S. and local cost goods and services, EXIM will provide enhanced guidance and training on local costs and related requirements to the Borrower and those responsible for the preparation and submission of reimbursement requests.


For reimbursement requests, update the procedures and guidelines for local cost to require, at minimum, the submission of information that describes in sufficient detail the goods or services being invoiced for confirmation with the approved Acquisition List; therefore, creating a verifiable audit trail.

Management response: Management agrees with this recommendation. EXIM Bank has implemented robust internal controls to confirm that the invoiced local cost goods and services are on the approved Acquisition List. First, the EXIM Bank engineer reviews and approves the Local Cost Acquisition List including vetting the local cost providers and their supply contracts. Second, the borrower under long-term transactions certifies in their disbursement request as to the origin and use of the local cost goods and services presented for reimbursement attaching a detailed Itemized Statement of Payment for each local cost provider listing invoices, contract numbers and Acquisition List reference information. Such certifications are legally binding.



20

Credit Review and Compliance (CRC) division is conducting an extensive review of the local cost program and to date has uncovered no issues of fraud, waste or abuse in this area. At the conclusion of this review, EXIM Bank will review CRC’s findings and detennine what, if any, additional internal controls are needed to ensure that the submission of information that describes in sufficient detail the goods or services being invoiced for confirmation with the approved Acquisition List.


In the event that invoices are submitted in a foreign language, the Bank should establish a transparent and documented process by which Bank staff review and approve those invoices.

Management response: Management agrees with this recommendation. EXIM Bank, for foreign language invoices, will establish a transparent and documented process by which Bank staff review and approve those invoices.


Update procedures and guidelines for the maintenance and retention of documentation related to all internal control aspects of local cost. This should include ensuring that all updates and changes to the Acquisition List, CRTI screening support (e.g., requests, notifications of clearance and hits), and Bank staff correspondence are retained in the appropriate Bank files.

Management response: Management agrees with this recommendation. EXIM Bank will update its procedures and guidelines for the maintenance and retention of documentation related to all internal control aspects of local cost. The Bank’s CRTI Transaction and Enhanced Due Diligence Guidelines require that CRTI requests, Library’s response, hit or no hit, and other detailed information resulting from the search, is filed by staff. EXIM will communicate the importance of this requirement during mandatory CRTI training of EXIM staff.


Update procedures and guidelines for local cost to clarify how to treat vertically integrated companies and their affiliates with respect to the Acquisition List and CRTI screening when those subsidiaries or affiliate firms are providing local cost goods or services as a primary provider or sub-contractor. This would include updating the Acquisition List to distinguish between the specific entity providing local cost goods or services.

Management response: Management agrees with this recommendation. EXIM Bank will update procedures and guidelines for local cost to clarify how to treat vertically integrated companies and their affiliates with respect to the Acquisition List and CRTI screening when those subsidiaries or affiliate firms are providing local cost goods or services as a primary provider or sub-contractor.



21

We thank the OIG for your efforts to ensure the Bank’s policies and procedures continue to improve, as well as the work you do with us to protect EXIM funds from fraud, waste, and abuse. We look forward to strengthening our working relationship and continuing to work closely with the Office of the Inspector General.

Sincerely,

Charles J. HallChairman of the Board of Directors and President (acting)



22


OIG Evaluation

OnSeptember22,2017,EXIMBank provideditsmanagementresponsetoadraftof thisreport,agreeing withall sixof the OIG’srecommendations.The responseidentifiedtheBank’sactionstoaddresstherecommendations.OIGconsiders theBank’sactions sufficienttoresolvethereported recommendations, whichwillremainopen untilOIGdeterminesthattheagreeduponcorrectiveactionsarecompletedandresponsivetothereportedrecommendations.

TheBank’s managementresponsetothereportedrecommendations andOIG’sassessmentoftheresponseareas follows:

RECOMMENDATION 1

Recommendation 1: Issuedetailed procedures andguidelinesonitscurrentprocess forreviewingandapprovinglocalcostgoodsand services,providers and amountsusingtheAcquisition List.Thiswouldincludedeterminingwhether thecurrentdefinitionof whatconstitutes “sufficient detail” isadequateandclarifying the rolesandresponsibilitiesofBankstaff,timeline and requirementsfor administering theAcquisitionList.

Management Response: Managementagrees withthis recommendation.EXIMBankwillissuedetailedproceduresandguidelinesonitscurrentprocess forreviewingandapprovinglocalcostgoodsandservices,providersandamounts usingtheAcquisitionList,toincludedetermining whetherthe current definitionof whatconstitutes“sufficientdetail” isadequate andclarifyingtheroles andresponsibilitiesof Bankstaff,timeline and requirementsforadministeringthe AcquisitionList.

Evaluation of Management’s Response: Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.

RECOMMENDATION 2

Recommendation 2: Provideenhancedguidanceand trainingonlocalcostsand relatedrequirementstotheBorrower and thoseresponsibleforthepreparationandsubmissionofreimbursementrequests.ThiswouldincludeprovidingacleardelineationbetweenU.S.andlocalcostgoodsandservices.

Management Response: Managementagrees withthisrecommendation.EXIMBankworkscloselywithBorrowers toensure thattheir knowledgeand understandingofEXIM’s policiesand procedures iscurrent.In order toprovide aclear delineationbetween U.S.andlocalcostgoodsandservices,EXIMwillprovidedenhancedguidance andtrainingonlocalcostsandrelatedrequirements totheBorrowerandthose responsibleforthepreparationandsubmissionofreimbursement requests.



23


RECOMMENDATION 3

Recommendation 3: Forreimbursementrequests,update theproceduresandguidelinesforlocalcosttorequire,atminimum,thesubmissionofinformationthat describes insufficient detailthegoodsorservicesbeing invoicedfor confirmationwiththeapprovedAcquisition List;therefore,creatingaverifiableaudittrail.

Management Response: Managementagrees withthis recommendation.EXIMBankhasimplementedrobustinternalcontrolstoconfirmthat theinvoicedlocalcostgoodsand servicesare ontheapprovedAcquisitionList. First,theEXIM Bankengineerreviewsand approvesthe LocalCostAcquisitionListincludingvettingthe localcost providersandtheirsupplycontracts.Second,theborrowerunderlong‐termtransactions certifiesin theirdisbursementrequest astotheoriginanduseofthelocalcost goodsandservicespresented forreimbursement attachingadetailedItemizedStatementofPaymentfor eachlocalcostproviderlistinginvoices,contractnumbersandAcquisition Listreferenceinformation. Suchcertificationsare legallybinding. Credit Review and Compliance(CRC) divisionisconductinganextensive reviewof thelocalcostprogramandtodatehasuncovered noissuesoffraud,wasteorabuseinthisarea.Attheconclusionofthisreview,EXIMBankwillreview CRC’sfindingsanddeterminewhat,ifany,additionalinternalcontrolsareneededtoensurethatthesubmissionofinformation that describes insufficientdetailthegoodsorservicesbeing invoicedforconfirmation withtheapproved Acquisition List.


RECOMMENDATION 4

Recommendation 4: Intheeventthatinvoices aresubmittedin aforeignlanguage, theBankshouldestablishatransparentanddocumentedprocessbywhich Bankstaffreviewandapprovethoseinvoices.

Management Response: Managementagrees withthisrecommendation.EXIMBank,forforeignlanguageinvoices,willestablishatransparentand documentedprocessbywhichBankstaffreviewand approvethoseinvoices.


RECOMMENDATION 5

Recommendation 5: Updateproceduresandguidelinesfor themaintenanceand retention ofdocumentation relatedtoall internalcontrolaspectsoflocalcost.Thisshould includeensuringthatallupdatesandchangestothe AcquisitionList, CRTIscreeningsupport(e.g.,requests,notifications ofclearanceandhits),andBankstaff correspondence are retainedin theappropriateBank files.

Management Response: Managementagrees withthis recommendation.EXIMBankwillupdateitsproceduresandguidelinesforthemaintenanceandretentionofdocumentationrelatedtoall internalcontrol aspectsoflocalcost.TheBank’sCRTITransactionand


24


EnhancedDueDiligence GuidelinesrequirethatCRTIrequests,Library’sresponse,hitornohit,and otherdetailedinformationresulting fromthesearch,isfiledbystaff.EXIMwill communicatethe importance ofthisrequirementduring mandatory CRTItrainingofEXIMstaff.


RECOMMENDATION 6

Recommendation 6: Updateproceduresandguidelines for localcosttoclarifyhow totreat verticallyintegratedcompaniesand theiraffiliateswithrespecttotheAcquisition Listand CRTIscreeningwhenthosesubsidiariesoraffiliatefirmsareprovidinglocalcostgoodsorservicesas aprimaryproviderorsub‐contractor.ThiswouldincludeupdatingtheAcquisition Listtodistinguishbetween thespecificentity providinglocalcostgoodsor services.

Management Response: Managementagrees withthis recommendation.EXIMBankwillupdateproceduresandguidelines forlocalcosttoclarifyhow totreatverticallyintegrated companies andtheiraffiliateswith respectto theAcquisition Listand CRTIscreeningwhen thosesubsidiariesoraffiliate firms areprovidinglocalcost goodsorservicesasa primaryprovideror sub‐contractor.


Rec. No.

Table 2: Summary of Management’s Comments on the Recommendations

Corrective Action: Taken or Planned

Expected Completion

Date27

Resolved: Yes or No28

Open or Closed

29

1. EXIMBankwillissuedetailedproceduresandguidanceonitscurrentprocessforusingtheAcquisitionList(AL),assessthecurrentdefinitionof“sufficient detail,”andclarify roles,responsibilities,timelineandrequirements for administeringtheAL.

NoTargetCompletionDate

Yes Open

2. The Bank willenhancelocalcost NoTarget Yes Open

27 EXIMBank OIG hasrequestedtarget completiondates foreach of the outstandingrecommendations.

28 “Resolved” means that (1)Managementconcurswiththerecommendation, and theplanned, ongoing,and completed corrective action is consistentwith the recommendation;or(2)Management doesnot concurwith therecommendation,butalternate actionmeetsthe intentoftherecommendation.

29 Upon determination bythe EXIM Bank OIGthattheagreed‐uponcorrectiveactionhas beencompleted andis responsiveto therecommendation, therecommendationcan beclosed.


25


Rec. No.

Table 2: Summary of Management’s Comments on the Recommendations

Corrective Action: Taken or Planned

Expected Completion

Date27

Resolved: Yes or No28

Open or Closed

29

relatedguidanceandtrainingtotheBorrowerandthoseinvolvedinpreparingandsubmittingreimbursement requests.

CompletionDate

3. UponcompletionofCRC’sreview,EXIMBankwillconsiderwhetheradditionalcontrolsareneededtoensureinformationsubmittedforconfirmation withtheapprovedALsufficientlydetailsgoodsorservicesbeinginvoiced.

NoTargetCompletion

Date

Yes Open

4. The Bank willestablish atransparentanddocumentedprocessofstaffreview andapproval of invoices submittedin a foreign language.

NoTargetCompletion

Date

Yes Open

5. EXIMBankwillupdateproceduresandguidelinesfor documentationmaintenanceandretentionrelating tolocalcost.Further,theBankplans tocommunicatetostafftheimportance ofretainingCRTIscreeningsupportandotherinformation.

NoTargetCompletion

Date

Yes Open

6. EXIM Bank willupdatelocalcostproceduresandguidelinesandclarifythetreatmentofverticallyintegratedcompaniesandtheiraffiliates;particularlyforsubsidiariesoraffiliatefirmsthatareprovidinglocalcostgoodsor servicesasaprimaryproviderorsub‐contractor.

NoTargetCompletion

Date

Yes Open


26


Appendix B: Transactions and Disbursements Reviewed (b) (4), (b) (5)

30 TheNetAuthorized Local Cost amounts reflect transfers and cancellations of authorizedamounts.

31 EXIMBank approved thed isbursementof thet otalneta uthorizedlocalcost amount of (b) (4) .TheBank subsequentlydiscoveredthat theU.S.exporterandlocal cost providermisunderstood what qualifiedaslocalc ostan dca tegorizedam ajorityo fU.S.se rvicesaslocalcosts.Thisresultedina reallocationof the(b) (4) localcost disbursement betweenU.S.,loc aland thirdcountrycosts.In total,only(b) (4) was disbursedaseligiblelocalcosts,wit htheremaindersupportedasU.S. costsusingsu bstituteU.S.costinvoices.


27


Table 4: Disbursements Reviewed (b) (4), (b) (5)

32 Fortheseventransactions,wesubmitteda requesttotheBank for the disbursementfiles onApril11, 2017.At that time,14requests forlocalreimbursementshadbeenreviewedand approved fordisbursement bytheBank. For two of the transactions (Eskom and Transnet), additional disbursementsoccurredinJuly2017.However,thesedisbursementswerenot reviewedaspartofthisevaluation.With theexceptionof GlobalFoundries,wereviewed100percent oftheinvoicesincludedinthe14 disbursement files.For GlobalFoundries, whichhad twolocal costdisbursements,wereviewed100 percent of the invoices for the firstdisbursementbutchose a systematicrandomsamplefromthe 620invoicesincludedin thesecond disbursement.Usinga 5.7percentmarginoferrorand95percentconfidencelevel,wedrewa statisticalsampleof 203giving an intervalof 620/206=2.98,whichweroundedto3.Using theitemized invoice listas a sampleframe anda randomnumbergenerator between1‐10 to identifyourstarting point(inthis case3),wereviewedeverythird invoiceinthe setto arriveat a totalreviewof 203invoices.

33 “Amount”reflects the total amountinvoicedadjustedby theBank for ineligiblecontent,etc.

34 Theexposure feeforGlobal Foundriesand BG Energyisbeingchargedas anAnnualExposurePremium.


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Appendix C: Transactions Reviewed – Narratives

Medium‐Term Transactions

Liviero Group (Pty) Ltd. (Liviero) – 541862 (Loan Guarantee)

Underindividualdelegatedauthority,EXIMBankapprovedaloan guaranteetoLivieroGroup(PTY)Ltd.for$5.3milliononOctober15,2012.T hepurposeoftheloanguaranteewastosupportthepurchaseofnewtractors fro mU.S.exporter Caterpillar,Inc.for useata coalminelocatedinVanggatfortein,SouthAfrica.Theloanguaranteeincludedlocalcostsupportof(b) (4) fortheservicingofthetractorsandvalueaddedtaxes.EXIMBank’s guaranteewasneeded toaddress thelimited availabil ityo fprivatefinancing.Thelocalcostcomponentisfullydisbursed.AsofJuly30,2017,theBank’sexposureforlocalcostwas (b) (4)

Gasmart Comercializadora, S.A. De C.V. (Gasmart) – 583803 (Loan Guarantee)

Underindividualdelegatedauthority,EXIMBankapprovedaloan guaranteeforGasmartComercializadora,S.A.D eC.V.for$ 10.3milliononMarch10,2 014,whichwassubsequentlyamendedto$10.1million.Thepurposeoft heloanguarant eewastosupport thepurchaseofequipmentandaccessoriesfromU.S.exporterGrupoPetroGasLlc.fortheconstruction ofgasstationslocatedinMexico.Theloanguaranteein cludedlocalcost supportof(b) (4) tocovereq uipmentinstallationbyloca lcontractors.EXIMBank’s guaranteewasneeded toaddress thelimited availabil ityo fprivatefinancing.Thelocalcostcomponentisfullydisbursed.AsofJuly30,2017,theBank’sexposureforlocalcostwas(b) (4) .

Long‐Term Transactions

Dhuruma Electric Company (Dhuruma) –AP084344XX (Direct Loan)

OnJuly8,2010,EXIMBank’sBoardapproveda directloantoDhurumaElectricC ompanyfor$381.5million,whichwassu bsequentlyamendedto$367.0mi llion,insupportofthepurchaseofcombustionturbines, spare parts and related servicesprimarilyfrom U.S. exporterGeneralElectricforthe RiyadhPP11IndependentPowerP roject located in SaudiArabia.The directloanincluded localcostsupportof(b) (4) for theinstallationoftheU.S.equipmentandc ivilworks.EXIMBankfinancingwasneededtoaddress competitionfromforeignsuppliersandexportcreditagencies(ECA),andtheavailabilityoflong‐term,privateforeigncapital.Thelocalcostcomponentis fullydisbursed.AsofJuly30,2017,theBank’sexposureforlocalcostwas(b) (4) .

Eskom Limited (Eskom) – AP085292XX (Direct Loan)

OnMay26,2011,EXIM Bank’sBoardapprovedadirectloantoEs komLimitedfor$805.6million,whichwassubsequently amendedto$799.1million,ins upportofthepurchaseofengineering andconstructionmanagementservicesf romU.S.exporterBlack&VeatchfortheconstructionoftheKusilePow erStationlocated100 kmfromJohannesburg,SouthAfrica.Thedirectloanincluded localcostsupportof(b) (4) for locallabor,which wasamendedto(b) (4) .EXIMBankfinancingwasneededtoaddress thelimited availabilityo flong‐termdebtfinancinga ndECAcompetition.Thet otalamountdisbursed


29


forlocalcostswas(b) (4) .AsofJuly30,2017,theBank’sexposureforlocalcost was(b) (4) .35

Global Foundries Inc. (Global Foundries) – AP086105XX (Direct Loan)

OnDecember13,2012,EXIMBank’s Boardapprovedadirectloan toGlobalFoundries,Inc.for$1.0billioninsupportofthepurchaseofsemiconductormanufacturingequipment fromsevenU .S.exportersforuseatitssilicon waferfabr icationfacilityinDr esden, Germany.T hedirectloanincludedlocalcostsupportof(b) (4) forinstallationoftheequipment,whichwassubsequentlyamendedto (b) (4) .EXIMBankfinancing wasneededtoaddressthelimited availabil ityo fcommercialfinancingandECAcompetition.Thelocalcostcomponentisfully disbursed.AsofJuly30,2017, t heBank’s exposurefor localcostwas(b) (4) .

BG Energy Holdings Limited (BG Energy) – AP085833XX (Direct Loan)

OnDecember27,2012,EXIMBank’s Boardapprovedadirectloan to BGEnergy Holdingsfor$1.8billioninsupportofthee xportofU.S.goodsandser vicesundertheBechtelEPCcontractfortheconstructionof theQueenslandCurtisLNGplantlocatedonCurtisIslandin Queensland,Australia.Thedir ectloanincludedlocalcostsupportof(b) (4) forconstruction andprojectmanagementservices,andcivil works,whichwassubsequently reducedto(b) (4) .EXIMBankfinancingwasneededtoaddresstheavailabilityof long‐termdebtfinancingandECA competition.Thelocalcostco mponentisfullydisbursed. AsofJuly30,2017,t heBank’sexposureforlocalcostwas(b) (4) .

Transnet SOC Limited (Transnet) – AP088827XX (Loan Guarantee)

OnJuly31,2014,EXIMBank’sBoardapprovedaloanguarantee t oTransnetSOC Ltd.for$563.5million,subsequentlyamendedto$365.6million,insupportoftheexportof(b) locomotivekitsbyU.S.exporter GeneralElectricforfinalassemblyby TransnetRail(4)

EngineeringinPretoria,SouthAfrica.Theloanguaranteeincludedlocalcostsupportof(b) (4) forlocallabor,whichwassubsequentlyamendedto (b) (4) .EXIMBank’sguaranteewasn eededt odiversifyfund ingsourcesandto addressforeigncompetitionbackedbynon‐OECDg overnment‐sponsoredfinancingp rogramssuchasChina.A sofJuly30,2017,forlocalcost,(b) (4) hadbeendisbursedwithat otal exposureof(b) (4) .

35 Supra note31.


30


Appendix D: Local Cost – Disbursement Support and Submission Requirements

Fortheseventransactionsreviewed,theutilizationprocedures are outlined in the respective annexesoftheMGAforthemedium‐termguarantees, CreditAgreement forthelong‐termdirectloans, andParticipationAgreement forthelong‐term guarantee.Thestandarddocumentsrequiredassupportforlocalcostdisbursements are:

1. Commercialinvoice.

2. Proofofpayment.

a. Paidstamponinvoicesignedbythelocalcostprovider,

b. Copyofacommercialbank’sadviceofpaymenttothelocalcost provider,

c. Copyofbothsidesofacancelledcheckmadepayabletothelocalcostprovider,or

d. Letterfrom thelocalcostproviderconfirmingpayment.

3. Exporter’s Certificate (formedium‐termtransactionsonly).

4. Borrower’s certificationsin the RequestforLocalCostReimbursement(forlong‐termtransactionsonly).

5. Anti‐lobbyingCertificate(directloantransactionsonly).

Table 5: Disbursement Support – Documentation Submission Requirements Deal No. and Borrower

Borrower to Guaranteed Lender Guaranteed Lender to EXIM Bank

Medium‐Term Guarantees541862–Liviero

Invoices ProofofPayment Exporter’sCertificate

EOLRequest forDisbursementApproval(ECPChecklist)

583803–Gasmart

Long‐Term Guarantees

AP088827XX–Transnet

RequestforLocalCostReimbursement

ItemizedStatementofPayments–LocalCost

Invoices ProofofPayment

EOLRequest forReimbursement CertificateAuthorizing

Reimbursement RequestforLocalCost

Reimbursement ItemizedStatementofPayments–

LocalCost Invoices ProofofPayment


31


Table 5: Disbursement Support – Documentation Submission Requirements Borrower to Facility Agent and Facility Agent to EXIM Bank

Long‐Term Direct Loans AP084344XX–Dhuruma

RequestforLocalCostReimbursement ItemizedStatementofPayments–LocalCost ProofofPayment Anti‐lobbyingCertificate Invoices

AP085292XX‐Eskom

AP086105XX–GlobalFoundries

AP085833XX–BGEnergy

Source: Annexes of the respective MGA, Credit Agreement or Participation Agreement; EXIM Bank’s Disbursement Manual, and disbursement documents; and EXIM Bank Interviews


32


ACKNOWLEDGEMENTS Thisreportwaspreparedbythe Officeof Inspections and Evaluations,OfficeofInspectorGeneralfor theExport‐ImportBankoftheUnitedStates.Severalindividualscontributedtothisreport includingLilithSanchez, SeniorInspector,LawrenceWielinski,Inspector,KemiRiley‐Telfort,Paralegaland JenniferFain,DeputyAIGIE.


33

Office of Inspector General Export-Import Bank of the United States 811 Vermont Avenue, NW Washington, DC 20571 202-565-3908 www.exim.gov/about/oig

http://www.exim.gov/about/oig