oversight

Treasury Continues to Implement Its Oversight System for Addressing TARP Conflicts of Interest

Published by the Government Accountability Office on 2012-09-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States Government Accountability Office
Washington, DC 20548



           September 18, 2012


           Congressional Addressees


           Subject: Treasury Continues to Implement Its Oversight System for Addressing TARP
           Conflicts of Interest

           The Emergency Economic Stabilization Act of 2008 (EESA) initially authorized $700 billion
           to assist financial institutions and markets, businesses, homeowners, and consumers
           through the Troubled Asset Relief Program (TARP). 1 The $700 billion ceiling was never
           reached, and in July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act
           reduced the amount to $475 billion. 2 The program was intended to address the greatest
           threat the financial markets and economy had faced since the Great Depression. The
           Department of the Treasury (Treasury) established the Office of Financial Stability (OFS) to
           carry out TARP activities, which included injecting capital into key financial institutions,
           providing assistance to the automobile industry, and offering incentives to lenders for
           modifying residential mortgages, among other activities.


           Since the inception of TARP in October 2008, Treasury has continued to rely on private
           sector sources to support TARP administration and operations. Through June 2012,
           Treasury has obligated over $900 million on contracts and financial agency agreements with
           private sector entities. 3 Treasury’s reliance on private sector entities to implement TARP
           underscores the importance of addressing and managing conflicts of interest that may arise
           with entities seeking or performing work under TARP. 4 A key focus for the program is
           identifying possible conflicts of interest (personal and organizational) involving private sector
           entities and mitigating those conflicts.


           As required by EESA, we have provided oversight of TARP activities since they began in
           2008. 5 This report assesses the extent to which Treasury has (1) established policies and
           processes regarding conflicts of interest, and (2) implemented its policies and processes for
           addressing potential conflicts. To address the first objective, we analyzed TARP conflicts of

           1
             EESA, Pub. L. No. 110-343, 122 Stat. 3765 (codified at 12 U.S.C. §§ 5201-5261).
           2
             Pub. L. No. 111-203, § 1302(1)(A) (2010).
           3
             EESA authorizes Treasury to use financial institutions as “financial agents” of the federal government to perform
           duties needed to carry out TARP.
           4
             Employees of Treasury’s contractors and financial agents are not subject to conflict of interest laws and
           regulations that govern the conduct of government employees. The Federal Acquisition Regulation requires
           contractors to promptly disclose credible evidence of fraud and conflicts of interest to the appropriate inspector
           general and contracting officer. 73 Fed. Reg. 67064 (Nov. 12, 2008) (codified at 48 C.F.R. § 52.203-13(b)(3)).
           5
             We have issued a TARP report at least every 60 days as required by EESA in Section 116 (codified at 12
           U.S.C. § 5226).


                                                                                                              GAO-12-984R
interest regulations, policies, and procedures. To determine how the conflicts of interest
regulation and processes are implemented, we interviewed OFS officials. We also reviewed
documentation on the largest financial agency agreement and the largest contract, based on
obligated value, and discussed key components of the processes with OFS officials. This
documentation included initial and amended conflicts of interest mitigation plans,
certifications, and quarterly feedback reports. Furthermore, we analyzed conflicts of interest
inquiries from OFS’s database for tracking conflicts of interest activities. In doing so, we
reviewed inquiries associated with the selected entities in more detail, as well as inquiries
that were coded as waivers for all retained entities in the OFS database. We determined
that the data in OFS’s conflicts of interest database were sufficiently reliable for the
purposes of this report. Finally, we analyzed and discussed with OFS officials the on-site
reviews they have conducted of contractors’ and financial agents’ policies, procedures, and
controls for detecting and mitigating conflicts of interest. We did not assess conflicts of
interest procedures and controls established by individual contractors and financial agents,
nor did we assess the existence or absence of conflicts of interest involving any of these
entities.


We conducted this performance audit from February 2012 to September 2012 in
accordance with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.


Results in Brief
Treasury has taken a number of actions since 2008, in part in response to recommendations
we made, to establish a structured system to manage potential conflicts of interest involving
its contractors and financial agents. The system is based on a formal regulation Treasury
issued in interim form in 2009 and final form in 2011, which prohibits organizational or
personal conflicts of interest unless they have been waived or mitigated under a Treasury-
approved plan. The regulation sets forth requirements to address actual and potential
conflicts that may arise, establishes responsibilities for contractors and financial agents in
preventing conflicts from occurring, and outlines Treasury’s process for reviewing and
addressing conflicts. Treasury has developed a multifaceted process to manage and
oversee potential conflicts of interest, which is managed by OFS’s Office of the Chief
Compliance Officer. The process includes reviewing proposed contracts and financial
agency agreements, approving contractor and financial agent mitigation plans, addressing
conflicts of interest inquiries, reviewing conflicts of interest certifications, and preparing
feedback reports for contractors and financial agents. In addition, because the monitoring of
conflicts of interest was based to some degree on self-reported information submitted by
contractors and financial agents, Treasury began conducting on-site design and compliance
reviews in 2011 to evaluate the effectiveness of its contractors’ and financial agents’ internal
controls and procedures for conflicts of interest. Treasury has also established an internal
database to document and track financial agent and contractor conflicts of interest
certifications, inquiries, and requests for waivers.


Treasury continues to implement its conflicts of interest requirements and processes.
Specifically, Treasury reviews and approves conflicts of interest mitigation plans, verifies
that contractors and financial agents are regularly certifying that they are preventing or
properly mitigating actual or potential conflicts of interest, and responds to inquiries about



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conflicts of interest from contractors and financial agents in a timely manner. Treasury also
monitors compliance by administering quarterly feedback reports on contractors and
financial agents, and preparing summary scorecards that provide a snapshot of how each
contractor and financial agent is performing with respect to conflicts of interest requirements.
In addition, since early 2011 Treasury has conducted 11 on-site design reviews and 11 on-
site compliance reviews to evaluate internal controls and procedures at selected contractors
and financial agents, permitting Treasury officials to identify and address specific issues or
instances of non-compliance in a timely manner.


Background
The passage of EESA resulted in the creation of a variety of programs supported with TARP
funding, as shown in table 1. Some TARP programs are in various stages of winding down
while other programs, notably those that focus on the foreclosure crisis, remain active.


Table 1: Programs Supported by TARP Funding
Program                              Program description
American International Group, Inc.   To provide stability in financial markets and avoid disruptions to the
(AIG) Investment Program             markets from the deterioration of AIG’s financial condition.



Asset Guarantee Program              To provide federal government assurances for assets held by financial
                                     institutions that were viewed as critical to the functioning of the nation’s
                                     financial system.
Automotive Industry Financing        To prevent a significant disruption of the American automotive industry.
Program
Capital Assessment Program           Created to provide capital to institutions not able to raise it privately to
                                     meet Supervisory Capital Assessment Program—or “stress test”—
                                     requirements. This program was never used.
Capital Purchase Program             To provide capital to viable banks through the purchase of preferred
                                     shares and subordinated debentures.
Consumer and Business Lending        To provide capital to certain financial institutions or liquidity to
Initiative programs                  secondary markets for small business loans and other asset classes,
                                     and thereby improve access to credit for consumers and businesses.
TARP-funded housing programs         To offer assistance to homeowners at risk of foreclosure.


Public-Private Investment Program    To address the challenge of “legacy assets” by partnering with
                                     investors to purchase certain residential and commercial mortgage-
                                     backed securities.
Targeted Investment Program          To foster market stability and strengthen the economy by making case-
                                     by-case investments in institutions that Treasury deemed critical to the
                                     functioning of the financial system.
Source: GAO.



Since TARP was established in 2008, Treasury has relied on private sector sources to assist
OFS with TARP administration and operations. Treasury engages with private sector firms
through: (1) financial agency agreements and (2) contracts and blanket purchase




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agreements. 6 According to OFS procedures, financial agency agreements are used for
services that cannot be provided with existing Treasury or contractor resources. Specifically,
Treasury has relied on financial agents for asset management, transaction structuring,
disposition services, custodial services, and administration and compliance support for the
TARP housing assistance programs. Treasury has awarded 19 financial agency
agreements, 13 of which remained active as of June 30, 2012. Treasury uses TARP
contracts for a variety of legal, investment consulting, accounting, and other services and
supplies. As of June 30, 2012, Treasury has awarded or used 128 contracts and blanket
purchase agreements, and about 43 percent of them remain active. As shown in table 2, the
obligated value of the financial agency agreements and contracts has totaled more than
$900 million, with most of the funding going for financial agency agreements. The increase
in obligations since 2010 is largely due to Treasury’s reliance on financial agents to support
the oversight of TARP assets and the continued implementation of the housing programs
over the last couple of years.


Table 2: Cumulative Value of Contracts and Financial Agency Agreements in Support
of TARP
                                   Obligated value                Obligated value             Obligated value
                           through fiscal year 2010       through fiscal year 2011          through 6/30/2012


Financial agency                       $327,355,188                    $547,487,042              $723,486,937
agreements
Contracts                                108,907,207                    154,934,812               180,386,781

Totals                                 $436,262,395                    $702,421,854              $903,873,718

Source: GAO analysis of Treasury data.


The vast majority of the financial agency agreement obligations shown above,
approximately $527 million, went to the Federal National Mortgage Association (commonly
known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (commonly
known as Freddie Mac), which provide administrative and compliance services, respectively,
for the TARP housing programs. 7 The two largest contracts are $35 million with
PricewaterhouseCoopers, LLP for internal control services and $17 million with Cadwalader,
Wickersham & Taft, LLP for legal services.


As we have previously reported, when Treasury began to quickly implement TARP initiatives
in 2008, OFS had not finalized its procurement oversight procedures and lacked
comprehensive internal controls for contractors and financial agents. 8 We made a series of
recommendations in 2008 and 2009 to strengthen Treasury’s management and oversight of
its vendors and improve the transparency of contracted operations. 9 In 2011, we reported
that 1 year after implementation, Treasury had taken steps to put in place an appropriate
6
  A blanket purchase agreement is a method of filling anticipated repetitive needs for supplies or services through
qualified sources of supply. The agreement contains the basic terms and conditions governing the types of
services the firms will provide. As specific needs arise, blanket purchase agreements allow Treasury to issue
task orders to the firms describing the specific services required, establishing time frames, and setting pricing
arrangements.
7
  Congress established Fannie Mae and Freddie Mac as government entities, chartering them as for-profit,
shareholder-owned corporations to stabilize and assist the U.S. secondary mortgage market and facilitate the
flow of mortgage credit.
8
  GAO, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and
Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008).
9
  GAO-09-161 and Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability
Issues, GAO-09-296 (Washington, D.C.: Jan. 30, 2009).


Page 4                                                                                             GAO-12-984R
infrastructure to manage and monitor its network of financial agents and contractors. 10 By
the end of fiscal year 2010, OFS had
     •   defined organizational roles and responsibilities and established written policies and
         procedures for the management and oversight of TARP financial agents and
         contractors;
     •   taken action to ensure that sufficient personnel were assigned and properly trained
         to oversee the performance of financial agents and contractors;
     •   issued written procedures on measuring the performance of financial agents and
         begun implementing performance assessments; and
     •   developed a contract record system for tracking information related to contracts and
         financial agency agreements.


Treasury Has Established a Structured System for Addressing TARP Conflicts of
Interest
Treasury has taken a number of actions since 2008 to establish a structured system for
addressing potential conflicts of interest involving its contractors and financial agents. EESA
authorized the Secretary of the Treasury to issue regulations or guidelines to address
conflicts of interest that may arise in connection with the administration of the TARP
programs. Accordingly, Treasury’s January 2009 interim regulation established standards to
manage or prohibit conflicts of interest, establishing responsibilities for contractors and
financial agents to monitor and report conflicts should they arise during the performance of a
contract or agreement, and outlining Treasury’s process for reviewing and addressing
conflicts of interest. 11 Treasury issued its final regulation in 2011. 12


The final regulation defines two types of conflicts of interest that may arise with contracts
and financial agency agreements—organizational and personal conflicts. According to the
regulation, an organizational conflict of interest would occur if an entity has a business
relationship that is inconsistent with the entity’s obligations to Treasury or that calls into
question the entity’s objectivity or judgment. For example, an organizational conflict would
arise if a retained entity is, or represents, a party in litigation against the Treasury relating to
activities under TARP. A personal conflict of interest would be triggered by business or
financial interests, such as stock ownership by an individual or certain immediate family
members, which could adversely affect that person’s objectivity or judgment in performing
under a contract or financial agency agreement.


10
   GAO, Troubled Asset Relief Program: Status of Programs and Implementation of GAO Recommendations,
GAO-11-74 (Washington, D.C.: Jan. 12, 2011).
11
   Treasury issued an interim TARP conflicts of interest regulation in January 2009 (effective January 21, 2009).
74 Fed. Reg. 3431 (Jan. 21, 2009).
12
   Treasury issued the final TARP conflicts of interest regulation in October 2011 (effective November 2, 2011).
The final regulation contained the same elements as the interim regulation but clarified and revised the
requirements in some cases. For example, the final rule incorporated specific references to the appearance of
conflicts of interest to clarify that facts or situations that give rise to the appearance of a conflict of interest are
also considered potential conflicts. The rule also provided a monetary value—$20 or less per gift or $50 total per
calendar year—for gifts or items that can be accepted. The final regulation also deleted coverage of
management officials, instead limiting its application to those individuals who are “personally and substantially”
involved in providing services under an arrangement with Treasury. Management officials who perform a
substantive role continue to be covered as key individuals. Treasury did not believe that the final regulation
would substantially change the obligations of OFS’s financial agents or contractors other than in connection with
management officials that are not also key individuals. 31 C.F.R. Part 31.



Page 5                                                                                                  GAO-12-984R
The regulation establishes a continuing obligation for contractors and financial agents,
collectively referred to as retained entities, to monitor and report conflicts of interest and
outlines Treasury’s process for reviewing and managing conflicts of interest. Among various
other issues, the regulation addresses:
   •     limitations on the conduct of entities retained by Treasury, which include restrictions
         on giving and accepting gifts, making unauthorized promises, and improper uses of
         government property;
   •     obligation to keep nonpublic information confidential;
   •     applicability of conflicts of interest requirements to subcontractors;
   •     limitations on entities engaging in certain market activities while concurrently
         providing services to Treasury;
   •     the granting of waivers when a conflict cannot be adequately mitigated and a waiver
         is in the government’s interest; and
   •     measures available to Treasury to enforce the regulation, including default
         terminations, debarments, and referrals for criminal prosecution.


Treasury established a multifaceted process for managing potential conflicts of interest,
which is described in written procedures established by OFS in 2009 and managed by its
Office of the Chief Compliance Officer. The process begins at the inception of a contract or
financial agency agreement, when OFS officials have an opportunity to review the scope of
work and to provide conflicts of interest provisions to be included in the contract solicitation,
task order, or the financial agency agreement. Each potential contractor or financial agent is
required to identify existing or potential conflicts of interest as well as plans to mitigate them.
If there is an existing or potential conflict of interest, Treasury officials are supposed to
review and discuss the mitigation plans and, if necessary, ask the entity to provide additional
information or a revised mitigation plan. The selected contractor or financial agent is to
certify the completeness and accuracy of its mitigation plan. The agreed mitigation plan
becomes a part of the final financial agency agreement but is not incorporated into the
contract. Treasury officials stated that throughout the course of the contract or financial
agency agreement, contractors and financial agents are required to regularly certify—
annually and quarterly, respectively—that they have no conflicts of interest or describe
actions they have taken to mitigate any new conflicts of interest that have arisen.


Treasury also established an internal reporting database in 2009 to document and track all
conflicts of interest activities. The database is intended to store documents related to
conflicts of interest reviews of solicitations, task orders, and proposed financial agency
agreements. The database also tracks financial agent and contractor conflicts of interest
certifications, inquiries, and requests for waivers. Contractors and financial agents are
required to search for and report any potential conflicts of interest on a continuing basis, and
submit written inquiries for Treasury’s review. The database facilitates monitoring of
potential conflicts of interest and management of conflicts of interest certifications and
inquiries, including waiver requests.


To strengthen its oversight system, Treasury introduced several additional actions in 2011.
For example, OFS began preparing quarterly conflicts of interest feedback reports for
contractors and financial agents. These reports are intended to describe and rate
contractors’ and financial agents’ performance during the quarter in identifying, mitigating,
and disclosing conflicts of interest to the Treasury; submitting adequate conflicts of interest


Page 6                                                                               GAO-12-984R
certifications in a timely manner; and expeditiously responding to requests for additional
information, among other things. Treasury also put in place a formal requirement that all
new contractors and financial agents, as well as Contracting Officer’s Representatives 13 and
Office of Financial Agents 14 personnel with similar responsibilities, receive conflicts of
interest training. The training materials used were similar to those used before 2011, but the
information presented became more consistent across all the training. The training covers
sources of conflicts of interest requirements, such as the TARP conflicts of interest
regulation; definitions of terms, such as organizational conflict of interest; and when
Treasury should be contacted.


In addition, because the monitoring of conflicts of interest was based to some degree on
self-reported information submitted by contractors and financial agents, Treasury began
conducting two types of on-site reviews—design reviews and compliance reviews. The
purpose of these on-site reviews is to test internal controls and procedures for mitigating
conflicts of interest at contractors and financial agents. Design reviews ideally occur shortly
after a financial agency agreement or contract is signed. An OFS official said that these are
brief informal reviews used to determine whether financial agents’ and contractors’ policies
and procedures are properly designed to detect and mitigate conflicts of interest.
Compliance reviews, on the other hand, are meant to be in-depth reviews used to verify
whether contractors’ and financial agents’ internal controls and procedures are being
followed and are working effectively.


Treasury Continues to Implement Its TARP Conflicts of Interest Requirements and
Procedures
Our discussions with OFS officials and review of supporting documentation and data
revealed that Treasury continues to implement its compliance system for conflicts of interest
requirements. We found that OFS generally followed the process outlined above for
monitoring and managing conflicts of interest throughout the life cycle of the largest contract
with PricewaterhouseCoopers and the largest financial agency agreement with Fannie Mae.
Specifically


•    The selected contract and financial agency agreement contained initial mitigation plans
     to address actual or potential conflicts of interest. Both entities later amended their
     mitigation plans to reflect changing regulatory requirements and improved understanding
     of conflicts of interest in their organization and internal controls. In addition, the financial
     agent submitted initial certifications regarding organizational and personal conflicts of
     interest immediately after signing the financial agency agreement with Treasury, and
     later revised them to conform with the certification template that Treasury began using.
     The contractor submitted initial certifications when it amended its initial mitigation plan,
     as agreed with OFS, to reflect new regulatory requirements.
•    OFS officials ensured that both entities regularly certify that their mitigation plans are
     effective and describe the actions they have taken and plan to take to mitigate any
     conflicts.



13
   Contracting Officer’s Representatives act as the contracting officer’s technical experts and representatives in
the administration and monitoring of contracts.
14
   The Office of Financial Agents, in support of the Office of the Fiscal Assistant Secretary, is responsible for the
administration, day-to-day management and oversight of the financial agents supporting the implementation of
EESA.


Page 7                                                                                                GAO-12-984R
•   Treasury officials have been timely in recording, responding to, and resolving conflicts of
    interest inquiries from the selected entities—50 from PricewaterhouseCoopers and 200
    from Fannie Mae.
•   Treasury officials have provided quarterly feedback reports to assess the status of these
    entities. These reports reveal that the entities have improved certain aspects of
    managing their conflicts of interest efforts over time. For instance, one of the early
    reports remarked that one entity was very slow in providing its past due annual
    certifications and had not met its regulatory obligations in a timely manner. However,
    Treasury officials worked with this entity and improved this deficiency.
•   Treasury conducted an on-site compliance review for both entities, although one review
    was conducted only recently and the report was not completed and ready for our review.
    We saw evidence that Treasury officials followed up to ensure the entity implemented
    the recommendations provided in the other review.
Further, we found that OFS has operated a comprehensive system for receiving and
responding to various types of inquiries from contractors and financial agents, program
officials, and other agency sources. OFS classifies inquiries in its database as
communications, notifications, conflict inquiries, requests for waiver, requests for extension,
or general information. An inquiry may be approved, denied, or withdrawn by the retained
entity, or in limited circumstances, OFS may take no action, depending on the type of
inquiry. Table 3 describes and provides examples of the conflicts of interest inquiry types.




Page 8                                                                            GAO-12-984R
Table 3: Conflicts of Interest Inquiry Types, Descriptions, and Examples
Conflicts of interest   Description                        Example
inquiry type
Communication           Communication occurs               OFS conducted its quarterly call with an entity to review
                        between Treasury and an            its certification and address any conflicts of interest
                        entity.                            questions or issues.
Notification            Entity is supplying OFS with       An entity notified Treasury that an employee was
                        information that does not          transitioning to a new role and would no longer manage
                        require an OFS response.           a TARP program.
Conflict                The entity is asking about an      •   Vendor request—An entity requested the approval
                        issue concerning a conflict            of a vendor.
                        of interest, which could be a
                        vendor request, a personal         •   Personal conflict of interest/inquiry—An entity
                        conflict of interest/inquiry, or       requested the approval of a personal mitigation
                        an organizational conflict of          plan.
                        interest.                          •   Organizational conflict of interest—An entity
                                                               inquired about work it would like to perform for
                                                               another entity that has received TARP funds.
Waiver                  Inquiry relates to a waiver to     •   Regulatory waiver—An entity requested a waiver of
                        the conflicts of interest              the TARP conflicts of interest regulation regarding
                        regulation or to a contract.           accepting gifts from an entity seeking official
                                                               Treasury action.
                                                           •   Contractual waiver—A contractor requested a
                                                               waiver of the cooling off period for a contractor
                                                               employee to move from a TARP project to a non-
                                                               TARP assignment.
Extension               Inquiry is a request for           An entity requested an extension of time to file its
                        extension of a time period         conflicts of interest certification.
                        for the submission of
                        documentation.
General                 This category is used for          An entity requested Treasury’s confirmation that
                        inquiries that do not fit into     services related to a potential transaction with an
                        one of the other categories.       automotive supplier were appropriately treated in its
                                                           mitigation plan.
Source: GAO analysis of Treasury data.



Since 2009, OFS has reviewed and responded to over 1,570 conflicts of interest inquiries
with all financial agents and contractors, as shown in table 4. In reviewing receipt and
response dates in the inquiry database, we found that inquiries were handled in a timely
manner and usually resolved in a matter of days.




Page 9                                                                                                GAO-12-984R
Table 4: Inquiries since the Beginning of TARP and Number Denied Through
March 31, 2012
Conflicts of interest                  Contractor        Financial agent                 Total             Denied
inquiry type
Communication                                   37                    148                  185
Notification                                    14                    142                  156
Conflict                                       279                    730                1,009                  27
Waiver                                          11                     28                   39
Extension                                                              19                   19
General                                         47                    117                  164                      2
Other inquiry (not coded)                                                2                   2
Total                                          388                  1,186                1,574                  29
Source: GAO analysis of Treasury data.



The 39 cases classified as waivers primarily involved administrative matters. For example,
OFS waived gift and entertainment requirements in the TARP conflicts of interest regulation
after ensuring that the entities’ policies contained essentially the same provisions as the
TARP regulation, according to an OFS official. Additionally, in several cases, OFS waived
the requirement in the interim TARP conflicts of interest regulation that Office of Government
Ethics Form 278 be used to report information about personal, business, and financial
relationships, allowing the use of Form 450 instead. The final TARP conflicts of interest
regulation now expressly permits the use of Form 450.


OFS has been preparing quarterly conflicts of interest feedback reports for contractors and
financial agents since the process was established in 2011. OFS rates contractor and
financial agent conflicts of interest performance on a three-category scoring system—
unsatisfactory, good, and outstanding—and the scores from the feedback reports are
summarized in scorecards that provide a snapshot of how each active contractor and
financial agent is doing in terms of conflicts of interest compliance. In general, most scores
have been in the “good” category, although a few contractors and financial agents have
received unsatisfactory or outstanding scores in one or more quarters. According to an OFS
official, the quarterly conflicts of interest feedback reports for contractors and financial
agents are shared with the Contracting Officer’s Representatives, who are responsible for
the day-to-day monitoring of contracts, and with the Office of Financial Agents, as
appropriate. OFS also provides input on retained entities’ conflicts of interest performance
for the monthly Contract and Agreement Review Board 15 report that evaluates the contractor
for cost control, performance, and business relations. In the event that a contract violation
occurs, OFS could choose to withhold payment or stop or reduce the contractor’s work. For
financial agents, the conflicts of interest scores become a part of a comprehensive
composite score that influences the incentive fees that some of the financial agents have in
their agreements.




15
  OFS’s Contract and Agreement Review Board, which is composed of program and procurement executives,
oversees OFS’s acquisition decisions. The board centralizes decisions regarding the office’s contracting and
financial agency requirements, serving as the deliberative body for determining whether to perform a function in
house or to outsource it. This formalized process was established in March 2009, after the urgency of the initial
stages of the financial crisis had subsided.


Page 10                                                                                            GAO-12-984R
Treasury conducts two types of on-site reviews—design reviews and compliance reviews.
OFS began conducting on-site design reviews in March 2011 to determine whether financial
agents’ and contractors’ policies and procedures are designed to detect and mitigate
conflicts of interest. As of March 31, 2012, OFS had conducted 11 on-site design reviews—
four reviews at financial agents and seven at contractors.
•   Recommendations made to contractors included signing and/or updating non-disclosure
    agreements; limiting access to Treasury documents; providing, updating, or improving
    conflicts of interest training; documenting the results of conflicts checks; receiving annual
    certifications from subcontractors timed to coincide with the contractor’s own annual
    conflicts of interest certification; and taking a more active role in verifying that
    subcontractors have reliable conflicts of interest processes.
•   Recommendations made to financial agents included documenting procedures for
    clearing conflicts and ensuring there are no conflicts, creating a Restricted Persons List,
    and creating formal on-boarding and off-boarding processes.


At the conclusion of the design review, OFS completes a review sheet to document the
review and to identify follow-up items for the entity and for OFS.


OFS started conducting on-site compliance reviews in early 2011 to determine whether
financial agents’ internal controls and procedures for identifying and mitigating conflicts of
interest are effective. As of March 31, 2012, OFS had conducted 11 compliance reviews of
financial agents. It plans to continue conducting reviews at the rate of about one per month.
While the on-site compliance reviews have primarily been of financial agents thus far, OFS
has conducted two reviews of contractors and plans to review additional contractors in the
future, according to an OFS official. In most of the financial agents reviewed, OFS found
reasonable internal controls were in place and that there were no significant problems,
although OFS identified some areas for improvements. However, the review of one financial
agent identified significant weaknesses in its controls and organizational management and
oversight. Subsequently, the relationship with the financial agent was terminated. The
following are some examples of observations that OFS provided to financial agents as a
result of the on-site compliance reviews:
•   The entity certified that key individuals had no personal conflicts of interest before
    receiving employee financial disclosure reports corroborating the assertion.
•   The entity did not physically separate key individuals primarily engaged in supporting
    TARP-related activities from employees engaged in similar transactions that were not
    TARP-related.
•   The entity did not formally document whether and when relevant employees performing
    services under TARP attended conflicts of interest training, or there was no evidence
    that employees/contractors received training, or the training was not timely.
•   Some employee financial holdings reports were submitted late and/or contained errors,
    and reviews of brokerage statements were not timely.
•   Non-disclosure agreements were not signed by employees having access to material
    non-public information, or were late being signed.
•   The entity had no process in place to ensure that mitigation plans for actual or potential
    conflicts of interest are being fully implemented.




Page 11                                                                             GAO-12-984R
When it sends its report on the results of the on-site compliance review to the entity, OFS
requests that the entity provide a written response, including action plans and due dates as
appropriate, within 30 days. Treasury officials told us that they review the responses and
discuss them with the companies after receiving the response, if appropriate, and during
quarterly phone calls. As noted earlier, we saw evidence of this process for Fannie Mae, the
largest financial agent. If necessary, they also conduct a second site visit to ensure the
corrective action plans are in place.


Concluding Observations
Since the inception of TARP, Treasury has made significant progress in establishing a
structured system for addressing conflicts of interest that may arise with its contractors and
financial agents. In addition, the agency continues to implement its system by reviewing and
approving conflicts of interest mitigation plans, monitoring that contractors and financial
agents are regularly certifying that they are preventing or properly mitigating conflicts, and
responding to inquiries about conflicts from contractors and financial agents in a timely
manner. Treasury also conducts on-site reviews to test the internal controls and procedures
contractors and financial agents have established to mitigate conflicts. Although Treasury
has a comprehensive system in place, continuing oversight will be important to avoid
conflicts of interest.


Agency Comments and Our Evaluation
We provided a draft of this report to Treasury for its review and comment. Treasury
concurred with the report and provided written comments that we have reprinted in
enclosure I. Treasury also provided technical comments that we have incorporated as
appropriate.


                                        ----------


We are sending copies of this report to the Financial Stability Oversight Board, Special
Inspector General for TARP, interested congressional committees and members, and
Treasury. In addition, this report will be available at no charge on the GAO website at
http://www.gao.gov.


If you or your staffs have questions about this report, please contact me at (202) 512-4841
or by email at woodsw@gao.gov. Contact points for our Offices of Congressional Relations
and Public Affairs may be found on the last page of this report. Key contributors to this
report were John Oppenheim, Assistant Director; Jess Drucker, Danielle Greene, Julia
Kennon, John Krump, Jeff Sanders, and Erin Schoening.




William T. Woods
Director
Acquisition and Sourcing Management



Page 12                                                                          GAO-12-984R
Enclosures – 1


List of Addressees


The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United State Senate

The Honorable Tim Johnson
Chairman
The Honorable Richard Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Kent Conrad
Chairman
The Honorable Jeff Sessions
Ranking Member
Committee on the Budget
United States Senate

The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate

The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives

The Honorable Paul Ryan
Chairman
The Honorable Chris Van Hollen
Ranking Member
Committee on the Budget
House of Representatives




Page 13                                            GAO-12-984R
The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Dave Camp
Chairman
The Honorable Sandy Levin
Ranking Member
Committee on Ways and Means
House of Representatives




Page 14                           GAO-12-984R
Enclosure I: Comments from the Department of the Treasury




(121055)


Page 15                                                     GAO-12-984R
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