oversight

Employee Financial Disclosure: Farm Credit Administration System Is Generally Operating Effectively

Published by the Government Accountability Office on 1990-09-27.

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

                   United   States   General   Accounting   Office
                   Report to the Chairman, Subcommittee
GAO                on Nutrition and Investigations,
                   Committee on Agriculture, Nutrition,
                   and Forestry, U.S. Senate

September   1990
                   EMPLOYEEFINANCIAL
                   DISCLOSURE
                   Farm Credit
                   Administration SystemIs
                   Generdly Operating
                   Effectively
United States
General Accounting Office
Washington, D.C. 20548
-
General Government   Division

B-240225

September 27, 1990

The Honorable Tom Ilarkin
Chairman, Subcommittee on Nutrition
  and Investigations
Committee on Agriculture, Nutrition,
  and Forestry
1Jnited States Senate

Dear Mr. Chairman:

This report, the secoitd in response to your request, evaluates the imple-
mentation of ethics laws and regulations that govern the conduct and
responsibilities of employees of the Farm Credit Administration (FCA),
an independent executive branch agency.’ Because of the Subcom-
mittee’s concern for the integrity, public image, and administrative
duties of federal employees. you asked us to determine if FU’S financial
disclosure system reasonably safeguards against conflicts between FCA
employees’ financial intc:rest,s and their federal duties.


To review FCA’S system for preventing and resolving conflicts of interest,
we focused on whether the system conforms with (1) the requirements
of the Ethics in Government Act of 1978, as amended; (2) related execu-
tive orders; and (3) implementing regulations. The Office of Government
Ethics (OGE) reported on FU’S ethics program in 1985; we reviewed that
report to determine whether PU has since corrected financial disclosure
system weaknesses reported at that time. We reviewed the procedures
and practices that KA used to (1) identify employees required to file
public and confidential disclosure reports, (2) obtain reports from these
employees by required dates. (3) review the reports within prescribed
time periods, and (4 1rexolvc conflicts of interest.

Our review was made bet ween September 1989 and April 1990 at FCA
headquarters in Mel ,ca~‘, V;I. WC made our review in accordance with
generally accepted government auditing standards. Details on the objec-
tive, scope, and methodology of our review are contained in appendix I.




‘Our first report was on the iiS Department of Agriculture (USDA) and entitled Financial Diilcmm:
USDA’s Systems Limited by Insufficmt
                             -.. --     Top Management Support (GAO/GGD-90-100        , July 13,
1990).




Page 1                                   GAO/GGIH@-116      Employee   Finandal   Disdmure   at PC4
                        B-240226




                        Associations, Production Credit Associations, Banks for Cooperatives,
                        and other FC4 chartered and supervised institutions.

                        Until 1986, FCA participated in the day-to-day management of the Fcs
                        and was responsible for regulating, supervising, and examining FCS
                        banks and associations, FCA’S close working relationship with FCS
                        changed with the enactment of the Farm Credit Amendments Act of
                        1985 (Public Law 99205). Provisions of this act that were designed to
                        provide assistance to troubled institutions and more effectively regulate
                        their activities took effect January 23, 1986. It established FCA as an
                        “arm’s-length” regulator of the FCS by restructuring FCA and giving it
                        broader power and authority similar to other federal regulatory
                        agencies.

                        In addition to the 3-member Board, FCAhad about 560 employees in Jan-
                        uary 1990. FCA board members, executives, and certain other high-level
                        employees must comply with public reporting requirements of the act of
                         1978, as amended, and with OGEregulations. FcA-designated employees,
                        including examiners at the GS-9 level and above, must comply with con-
                        fidential reporting requirements of Executive Order 11222 dated May 8,
                         1965, and Office of Personnel Management (OPM) regulations3 FCA has
                        issued regulations and reporting instructions to implement the above
                        act, executive order, and regulations.

                         Agency ethics officials are required to review the interests reported on
                         public and confidential disclosure reports to ensure that employees do
                         not hold financial interests that conflict with their duties. OGE regula-
                         tions (5 C.F.R. 2638) assign specific ethics program responsibilities to
                         agency heads and designated agency ethics officials (DAEO), such as to
                         allocate sufficient resources for an effective ethics program and periodi-
                         cally evaluate the program. The Chairman of the FC.4 Board appointed
                         the Chief of Human Resources-who reports to the Board-as DAEO.
                         Appendix II contains additional background information on FCA’S
                         responsibilities and governmentwide financial disclosure requirements.


                         EU has made significant improvements in the administration of its
Disclosure System Has    financial disclosure system since CKXlast reported on the FCAethics pro-
Been Improved            gram. In its January 1985 report, OGErecommended to the DAEC that FCA

                         ‘@GE was under OPM untd Octobc~ I, 1989, when OGE became an independent federal agency.
                         (Public Law 100.598, Nov. 3, 198x.) In this report, we refer to regulations on confidential disclosure
                         issued in September 1968 a? OPM regulations and other regulations issued after OGE was created as
                         OGE regulations.




                         Page 3                                    GAO/GGDS&115        Employee   Financial   Disclomue   at FC4
                          B-240226




                          reviewing all authorized personnel action forms before they are
                          processed. As part of this review, he is required to verify the appropri-
                          ateness of the financial disclosure reporting codes. This information is
                          entered in the FCApersonnel system database and retrieved when the
                          Alternate DAEO needs a list of designated filers.

                          According to the Alternate DAEO, FCA sends a notification letter and dis-
                          closure form each year to each incumbent employee required to file a
                          public or confidential disclosure report. He said that when he receives
                          the reports he matches the names of the filers with those on the mailing
                          list to determine who has filed and who should be notified again to file.
                          He said he uses information from the personnel system to identify new,
                          promoted, and reassigned employees and notify them of their reporting
                          requirements so they can file within the required 30 days.

                          FC4  gave employees time to prepare and file reports by sending notifica-
                          tion letters to them more than a month before the reports were due in
                          1989. The notification letter advising employees to file their 1989 public
                          reports by May 10 was dated April 5, 1989. The notification letter sent
                          to confidential filers was dated June 7 and informed them to file by July
                           14.


Public and Confidential   In contrast to OGE’S findings reported in 1985, all 24 employees who
                          were required to file public reports in 1989 did SO.~Of the 354
Reports Were Generally    employees designated to file 1989 confidential reports, 345 employees
Filed on Time in 1989     (97 percent) filed reports.

                          The public and confidential reports were generally filed on or before the
                          required due dates. Specifically, 21 of the 24 public reports were filed
                          by the due dates, as required.” Two of the other three were filed 8 and
                          25 days after that date. The third employee was required to file by Feb-
                          ruary 6, 1989-30 days after terminating FCAemployment-and          filed
                          86 days late. The Alternate DAEO said FCAemployees generally submit
                          their reports on time but occasionally he encounters difficulty obtaining




                           40GE’s 1985 report on FCA’s ethics program was based on work done in November        1984.

                           6Eiecause FC4 did not document the receipt dates of reports, we used the filii  employees’ signature
                           dates on the reports to provide an indication of whether the reports were filed by required dates and
                           reviewed within required time periods.




                           Psge 5                                    GAO/GGDsOlM        Employee   Financial   Diacl-     at FCA
                        B-240226




                        Although FCAhad generally obtained and reviewed disclosure reports in
FCA Can Further         a timely manner, it still needs to (1) more closely monitor the filing and
Improve Its Financial   review of financial disclosure reports and (2) more fully implement
                        requirements of the 1978 act and OGE regulations.
Disclosure System

Filing and Review of    In our examination of the filing and review of certain public reports and
Reports Need Closer     confidential reports, we found problems that indicated a need for closer
                        monitoring of the disclosure system. For example, in June 1990, FCA still
Monitoring              had not received 9 confidential disclosure reports that were due in 1989.
                        The Alternate DAEO had not sent follow-up notifications to the
                        employees or taken other steps to obtain the reports, and FCAdid not
                        require the Alternate DAEO to periodically review and report on the
                        status of required reports.

                        In addition, FCAhad not made complete reviews of all the 1989 public
                        and confidential reports that it received. We reviewed the adequacy of
                        EU’S reviews and conflict-of-interest determinations for 54 of the
                        reports-24 public reports and a sample of 30 confidential reports. The
                        reviews of 45 reports were thorough and conflict-of-interest determina-
                        tions were adequately supported by information in the reports and
                        related files. For the remaining nine reports-all  public-Fc.4 did not (1)
                        fully resolve a standard-of-conduct violation disclosed in one report, and
                        (2) did not obtain complete reports from eight employees, as detailed
                        below.

                        One FCA employee filed a public report in 1989 showing receipt of an
                        airline ticket, meals, and lodging valued at $800. The expenses were
                        paid by an export trade group to cover educational tour costs for the
                        employee. Because of the DAEO'S concern about a standard-of-conduct
                        violation, he declined to sign the employee’s disclosure report. He said
                        administrative action had not been taken on the employee’s acceptance
                        of a gift because she had left her RX position. We believe that the
                        employee’s acceptance of this gift might have violated FCA'S standards-
                        of-conduct regulations that prohibit employees from accepting gifts that
                        are not of nominal value. The fact that the employee had left FCA did not
                        preclude FCA from referring the case to its Inspector General for investi-
                        gation of the employee’s relationship with the export trade group, nor
                        did it preclude taking appropriate action, such as issuing a letter of
                        admonishment or reprimand, if the investigation results warranted.




                        page1
Report Receipt Dates Need   Contrary to requirements of the 1978 act, FCAregulations did not
                            require receipt dates to be recorded for public reports. The 1978 act and
to Be Recorded              OGE regulations require these dates to be recorded and agencies to com-
                            plete certain actions within specified dates after receiving reports. For
                            example, reviews are to be completed within 60 days after receipt, and
                            the reports are to be made available to the public within 15 days after
                            receipt. Because FCAdid not record receipt dates, it could not readily
                            determine whether employees met these requirements.

                            The act and regulations do not contain similar requirements for confi-
                            dential disclosure reports. Although FCAgenerally reviewed confidential
                            reports within the time standard that applies to public reports (60
                            days), it had no time limit for completing confidential report reviews.
                            Further, OGE has proposed a 60-day initial review period in draft regula-
                            tions issued in December 1986 on confidential disclosure in the execu-
                            tive branch. We believe FC~should require confidential reports to be
                            reviewed within 60 days after they are received and, to monitor compli-
                            ance, should require the receipt dates for confidential reports to be
                            recorded.


Noncompliance Situations    While FCAdid publish information on general prohibitions, it did not
Need to Be Publicized       publish more specific information on circumstances that could result in
                            conflicts of interest, as is required by OGE regulations (5 C.F.R. 2638).
                            This information could help FXXemployees avoid financial interests,
                            employment, and outside activities that conflict with their duties. Spe-
                            cifically, these regulations require the MECI in each agency to ensure
                            that

                            “A list of those circumstances or situations which have resulted or may result in
                            noncompliance with ethics laws and regulations is developed, maintained, and pub-
                            lished within the agency     ”

                            m made decisions about conflict-of-interest situations informally and
                            did not document the issues involved, the rationale for the decisions,
                            and the agency’s decisions. IU examiners and other employees interact
                            regularly with FCSinstitutions. Recording and publicizing information on
                            how ethics and conflictof-interest laws and related regulations are
                            applied in the FCAwork environment could help these employees comply
                            with these laws and regulations. If done systematically, it could also




                            Page s                            GAO/GGD@WlS    Employee   Ihancial   Disclosure   at FC4
I%240225




The major contributors to this report are listed in appendix III. Please
contact me on 275-5074 if you or your staff have any questions.

Sincerely yours,




Bernard L. Ungar
Director, Federal Human Resource
  Management Issues




 Page 11                       GAO/GGD-gIM   16 Em@oyee   -Discl-atFc4
Page 13   GAO/GGDgo-115   Employee   FImamhl   Didoeure   at FC4
Appendix     I
Objective,    Scope, and Methodology




We evaluated whether FCA ethics officials had (1) thoroughly reviewed
the financial interests that employees reported and (2) identified any
interests that conflicted with employees’ duties. In doing so, we
examined all 24 public disclosure reports and a nonrepresentative
sample (30 of 345) of confidential reports filed in 1989. We scanned the
confidential reports and selected 20 of them for review because of indi-
cations that they were either not filed or not reviewed according to OPM
and FCA regulations. We selected the remaining 10 reports randomly
 from the universe of confidential reports filed in 1989. We reviewed FCA
files supporting its conflict-of-interest determinations for these reports
 and discussed with the Alternate DAEXI all questions that we had about
the financial interests these employees reported.




 Page 16                               GAO/GGEW@-116 Employee   Financial   Dbxlosure   at FG4
                       AppendlxU
                       Farm Credit Administration  Responeibilitks
                       and Financial Disclosure Requirements




                       orders, civil penalties, placement of institutions into receivership or con-
                       servatorship, and removal of institution officers and directors.

                       FCAhas an Inspector General who is appointed by and reports directly to
                       the Chairman of the Board. The Office of the Inspector General began
                       operations in January 1989. According to a draft FCApolicy statement,
                       the Inspector General’s review responsibility will include the ethics
                       program.


                       FCAboard members, executives, and other designated employees must
Financial Disclosure   comply with public or confidential financial disclosure requirements
Requirements           contained in the Ethics in Government Act of 1978, as amended; execu-
                       tive orders; and implementing regulations.


Public Disclosure      Title II of the 1978 act prescribes requirements for public disclosure in
                       the executive branch. Individuals who must file public disclosure
                       reports include (1) those nominated by the president; (2) members of the
                       Senior Executive Service; and (3) employees classified or paid at GS-16
                       or above, including special government employees who work in the fed-
                       eral government more than 60 days in a calendar year.

                       Individuals nominated by the president must file within 6 days of trans-
                       mittal of the nomination to the Senate for confirmation. Other persons
                       required to file public reports must do so within 30 days after assuming
                       the position or leaving office unless the person has fulfilled filing obliga-
                       tions in a prior government position. Incumbents (those who worked
                       more than 60 days in a prior calendar year) must file on or before May
                       15. Created by title IV of the 1978 act, OGE developed regulations
                       (5 C.F.R. 2634) to implement the public disclosure requirements of
                       title II.

                       OGE  issued a standard form (SF-278) and instructions for use in filing
                       disclosure reports. The form and instructions specify that information
                       required by the act is to be reported by employees in seven categories as
                       follows: assets and income sources; transactions; gifts, reimbursements,
                       and travel expenses; liabilities; agreements and arrangements for future
                       compensation, employment, or benefits; positions held outside the fed-
                       eral government; and compensation in excess of $5,000 paid by one
                       source. Within these categories, information such as the nature of the
                       assets and transactions, the asset and income category of value, type of
                       debt owed, and type of outside position held is required. The act


                        Page 17                                 GAO/GGD90.116   Employee   Finandal   Diaclmm   at FC4
                            Appendix II
                            Farm Credit Administration  Responsibilities
                            and Financial Disclosure Requirements




                            In December 1986, OGE proposed regulations in the Federal Register to
                            revise regulations issued by OPM in September 1968 on confidential dis-
                            closure. As of August 1990, OGE had not issued the regulations in final
                            form. Meanwhile, executive branch agencies have continued to cite
                            Executive Order 11222 and the September 1968 OPM regulations as
                            authority for requiring confidential disclosure reports.


Recent Ethics Legislation   The Ethics Reform Act of 1989 (Public Law 101-194, Nov. 30,1989)
                            amended certain provisions of the 1978 act on financial disclosure in the
                            three branches of government.’ Financial disclosure provisions of the
                            Reform Act took effect on January I, 1990, and are applicable to reports
                            filed after January 1. 199 1.

                            The Office of Government Ethics Reauthorization Act of 1988 (Public
                            Law 100-598, Nov. 3,1988) amended the 1978 act and assigned OGE spe-
                            cific responsibilities for ensuring that (1) executive agencies establish
                            written procedures for obtaining, reviewing, and evaluating disclosure
                            reports, and, if applicable, making them publicly available and (2) the
                            procedures conform with relevant laws, rules, regulations, and execu-
                            tive orders. OGE published regulations, effective February 20, 1990, out-
                            lining procedures OGE will use for issuing notices of deficiency and
                            corrective orders to agency heads and issuing reports of noncompliance
                            to the president and Congress when agencies’ ethics programs do not
                            fully comply with relevant laws and regulations.”


Agencies’ Ethics Program    Agency heads and certain key officials known as DAEOS and alternate
                            DAEOS have specific ethics program responsibilities under the 1978 act,
Responsibilities            as amended; executive orders; and OGE regulations. For example, the OGE
                            regulations (5 C.F.R. 2638) require agency heads to exercise personal
                            leadership in establishing and carrying out agency ethics programs and
                            to provide sufficient resources to enable the agency to effectively
                            administer its ethics program.

                             The act and regulations require each Secretary or DAEO concerned to sign
                             public disclosure reports if, on the basis of information presented in the

                              ‘The Ethics Act of 1978 prescribed requmments for fiiancial disclosure in separate titles for the
                             legislative, executive, and judi, ial branches. The Reform Act of 1989 revised certain of these require
                             ments for all three brmches arld mnbincd the requirements in a single title.

                             %Xerim regulations were publwht~d in J;muzy 1990. 55 Fed. Reg. 1,665 (Jan. 18, 1990). Final regula-
                             tams were effective May 30, I!lRO 55 Fed. Reg. 21,845.




                             Page 19                                    GAO/GGLHKL1l6       Rmployee    Pimuwhl    Discloam    at PC4
                          Appendix II
                          Farm Credit Admini~tr.xtion Responsibilities
                          and Financial Disclosure Requirements




FCA Prohibitions and      FCAemployees are prohibited by the Farm Credit Act of 1971 from
                          holding certain financial interests in the FCS. Under this act, FCAofficers
Disclosure Requirements   and examiners are prohibited from (1) accepting loans or negotiating
                          extensions of credit from an FCSinstitution; (2) owning securities issued
                          by the FCS$(3) negotiating or arranging for prospective employment
                          with certain FCSinstitutions; and (4) purchasing assets-real property,
                          equipment, automobiles, or trucks-from       an FCS institution, stockholder,
                          director, officer, or institution borrower unless the assets are sold at a
                          public auction. These prohibitions, for the most part, also extend to the
                          members of the employee’s household-the         spouse, minor children,
                          and/or blood relatives who reside with the employee.

                          These prohibitions apply to FCAemployees who must file public or confi-
                          dential disclosure reports. FCA has instructed its employees to report any
                          business relationships with any employee of or borrower from an FCS
                          institution. The statutory prohibitions on employees’ outside financial
                          interest is a primary concern of FCA’S financial disclosure report
                          reviewers.

                          FCAissued regulations (12 C.F.R. 601) to implement the public and confi-
                          dential financial disclosure requirements discussed above. FCA’S regula-
                          tions and policy on public disclosure establish essentially the same
                          requirements as contained in (GE regulations (5 C.F.R. 2634).

                          FCA’Sregulations require incumbent employees to file annual confiden-
                          tial disclosure reports. In 1989, FCA required employees to file reports by
                          July 14 and disclose their financial interests as of June 30, 1989. New
                          hires and employees promoted or reassigned must file their confidential
                          reports within 30 days after they enter covered positions.

                          FCA’Sregulations allow confidential report filers to annually disclose all
                          outside financial interests that meet the reporting criteria or, if they
                          have filed previously, to disclose just the changes in or additions to
                          those interests since filing the last report. If there were no changes in
                          the interests previously reported, the employee is required to indicate
                          this in each applicable section of the supplemental report. In addition,
                          filers reporting changes only must disclose financial interests acquired
                          and disposed of since the last reporting period, if the interests would be
                          reportable if still held


                          3Fmn Credit Administration    -Pohrm   and Procedures Manual defies     secutitles as stocks, bonds,
                          debentures, and notes.




                          Page 21                                   GAO/GGDW-115       Employee     Financial   Di.wlosure   at FC4
    Ordering   Information

    The fit   five copies of each GAO report are free. Additional copies
    are $2 each. Orders should be sent to the following address, accom-
    panied by a check or money order made out to the Superintendent
    of Documents, when necessary. Orders for 166 or more copies to be
    mailed to a single address are discounted 26 percent.

    U.S. General Accounting Office
    P.O. Box 6016
    Gaithersburg, MD 26677
                                                                           i
    Orders may also be placed by calliug   (202) 2756241.

.
Appendix III

Major Contributors to This Report


                        James T. Campbell, Assistant Director, Federal Human Resource
General Government        Management Issues
Division, Washington,   Helen D. Fauntleroy, Senior Evaluator
                        Marion Abner, Secretary
D.C.
                        Michael Volpe, Assistant General Counsel
Office of the General
Counsel, Washington,
D.C.




 (966427)                Page 22                     GAO/GGD&O.llS   Employee   Financial   Discloeure   at Fo9
    Appendix II
    Farm Credit Administration Uespomsibillties
    and Financial Diaclomre Requirements




    reports, the Secretary or DAEObelieves the employees filing the reports
    are in compliance with applicable laws and regulations. Neither the act
    nor the regulations require the reports to be audited to determine if the
    disclosures are correct. Rather, as provided in the CGE regulations, they
    are to be taken at face value unless (1) there is an obvious omission or
    ambiguity or (2) the reviewing official has independent knowledge
    outside of the report.

    Each agency head must appoint a DAFKIand an alternate DAEKIand report
    their names and position titles to 0GE. The responsibilities of the DAECI
    and alternate DAFLI include administering a system of periodic evalua-
    tions of the ethics program. Their responsibilities also include ensuring
    that

l an effective system is developed and properly administered for filing,
  reviewing, and, when applicable, public inspection of disclosure reports
  as required by the act of 1978 and other applicable laws and
  regulations;
l all disclosure reports are properly maintained and are effectively and
  consistently reviewed;
l ethics counseling for current and departing agency employees is
  undertaken;
. employees are trained to understand and implement the agency’s ethics
  program;
. prompt and effective remedies are undertaken to avoid conflicts of
  interest or the appearance of conflicts of interest, and administrative
  actions and sanctions are applied as appropriate;
l a list of circumstances or situations that have resulted or may result in
  conflicts of interest is maintained and published for the benefit of all
  employees; and
. agency standards of conduct are updated when internal or external
  audits indicate changes are necessary.

    In April 1989, the President issued Executive Order 12674 emphasizing
    agency heads’ ethics program responsibilities. Among other things, the
    order assigned specific responsibilities to agencies for providing manda-
    tory annual briefings on ethics and for ensuring that DAEOShave the
    rank, authority, staffing, and resources necessary for effective agency
    ethics programs.




    Page 20                                 GAO/GGDB@116   Employee   Fhmhl   L&cl-   at FU
                          Appendix U
                          Farm Credit Admb&tration    Responsibilities
                          and Finandal Disclosu~   Requirements




                          requires that certain financial interests of relatives, such as spouses and
                          dependent children, be disclosed in the employee’s reports.

                          The OGE regulations authorize agency officials to grant time extensions
                          for good cause totaling not more than 45 calendar days for filing public
                          disclosure reports. OGE for good cause may grant extensions for up to 45
                          additional calendar days. The act requires the reports to be reviewed
                          within 60 days after receipt. The act provides that the Attorney General
                          may bring a civil action against any employee required to file a report
                          who knowingly and willfully fails to file or falsifies the report.


Confidential Disclosure   The 1978 act does not contain similar detailed requirements for confi-
                          dential disclosure. Rather, requirements for confidential disclosure in
                          the executive branch are contained in Executive Order 11222, issued in
                          May 1965, and OPM regulations (5 C.F.R. 735) issued in September 1968.
                          The 1978 act, as amended in December 1985, authorizes the president to
                          establish a confidential financial disclosure system for the executive
                          branch. By Executive Order 12565 of September 1986, which amends
                          Executive Order 11222, President Reagan prescribed a comprehensive
                          system of public and confidential financial disclosure for executive
                          branch officers and employees.

                          Executive Order 12565 assigned responsibility to WE for (1) developing,
                          in consultation with the Attorney General and OPM, regulations to pro-
                          vide guidance and criteria for designation of positions subject to confi-
                          dential disclosure, the type of information to be obtained, and the time
                          and place for submission of the reports; (2) ensuring that agencies desig-
                          nate positions for financial disclosure; and (3) ensuring that agencies
                          properly administer their implementing regulations. The order also
                          stated that confidential disclosure reports filed under Executive Order
                           11222, OPMregulation 5 C.F.R. 735, and individual agency regulations
                          would continue to be held in confidence.

                           The OPM regulation requires agencies to issue oPM-approved regulations
                           on employee responsibilities and conduct. The regulations issued by the
                           various agencies are to establish systems for review of confidential dis-
                           closure reports and resolution of potential conflicts of interest. Like the
                           public reports, confidential reports must include information on finan-
                           cial interests of certain relatives.




                           Page 18                                  GAO/GGD9@116   Employee   Financial   Disclosure   at FC4
Appendix II

Farm Credit Administration Responsibilities and
Financial Disclosure Requirements

                The Farm Credit Act of 1971 (Public Law 92-181) established FCAto
                administer the Farm Credit System of Farm Credit Banks, Federal Land
                Bank Associations, Production Credit Associations, Banks for Coopera-
                tives, and other institutions chartered by and subject to the supervision
                of FCA.This system provides American agriculture with a dependable
                source of credit at competitive rates.

                In 1989, the $60 billion FCS network provided approximately one-third
                of the total credit used by American farmers, ranchers, and their coop-
                eratives. Eligible borrowers may obtain a variety of financial assistance,
                including operating and real estate loans, mortgage loans for rural
                homes, crop or credit-related life insurance, and financial planning
                advice.

                During the farm crisis of the mid-1980s, the Farm Credit Amendments
                Act of 1985 (Public Law 99-205) was passed to restructure FCAand give
                it more regulatory authority over the FCS.Before this restructuring, the
                FCABoard consisted of 13 members. One member was appointed by the
                Secretary of Agriculture. The other 12 members, representing each of
                the 12 farm credit districts, were appointed by the President with the
                advice and consent of the Senate. Unless the Secretary’s appointee was a
                full-time federal employee, all Board members were appointed to part-
                time positions. The 1985 act established the current full-time FCA
                Board-a chairman and two members-who are appointed by the Presi-
                dent to serve g-year terms with the advice and consent of the Senate.
                The current chairman began his term in October 1989.

                FCAis responsible for issuing regulations to implement the Farm Credit
                Act and other applicable laws designed to promote the safety and
                soundness of FCS.FCA’Sregulatory actions are designed to provide ade-
                quate disclosure of institutions’ financial conditions and protect the
                financial interests of FCS stockholders, including investors who buy and
                sell the securities of member institutions.

                FcA has statutory responsibility to examine FCS institutions. FcA had
                about 560 employees as of January 1990; about two-thirds of these
                employees were examiners. Their responsibilities include reviewing the
                policies, procedures, financial reports, and loan portfolios of member
                institutions to validate their financial soundness. FC4 is authorized to
                take appropriate enforcement actions when it discovers that a member
                institution has violated relevant laws or regulations or is operating in an
                unsafe manner. These enforcement actions can include cease and desist



                Page 16                        GAO/GGDSlXllS   Employee   Nnmciel   Disflonure   at PC4
Appendix I

Objective, Scope,and Methodology


               As agreed with the Subcommittee, the overall objective of our review
               was to determine whether FCA’Sdisclosure system reasonably ensures
               that conflicts of interest will be detected and resolved. To accomplish
               this objective, we examined U’S administration of its financial disclo-
               sure system to determine if ethics officials (1) identified employees
               required to file disclosure reports, (2) obtained timely and complete
               reports from these employees, (3) thoroughly reviewed the financial
               interests employees reported, and (4) ensured that employees did not
               hold financial interests that conflict with their duties.

               The scope of our review encompassed both public and confidential
               financial disclosure requirements. (See app. II.) We reviewed the design
               and operation of FCA'S disclosure system as well as legal and regulatory
               requirements for agency disclosure systems contained in the Ethics in
               Government Act of 1978, as amended; Executive Order 11222 dated
               May 8, 1965; OGE regulations on public disclosure (5 C.F.R. 2634) and
               ethics officials’ responsibilities (5 C.F.R. 2638); and OPM regulations on
               confidential disclosure (5 C.F.R. 735). We also interviewed OGE officials
               concerning FCA'S system and reviewed OGE'S 1985 report on FCA. We
               reviewed FCA’S regulation on financial disclosure (12 C.F.R. 601) and its
               implementing instructions on financial disclosure and interviewed the
               DAEO, Alternate DAEO, and Inspector General to better understand the
               operation of the disclosure system.

               To determine if FCA ethics officials identified employees who should
               have filed public and confidential disclosure reports, we discussed with
               the Alternate DAK) the procedures FC4 used in 1989 to identify those
               employees. We compared FCA’Slist of public filers for 1989 with its
               organization chart and personnel roster to verify that all appointees to
               and members of the Board, SFS members, and other employees at the pay
               rate of GS-16 and above had been identified as required to file public
               reports. We determined whether FCA had applied criteria for identifying
               required confidential report filers as specified in the OPM regulations
               mentioned above.

               To determine if FCA ethics officials obtained timely financial disclosure
               reports from employees required to file annual public or confidential
               reports, we compared the 1989 public and confidential financial disclo-
               sure reports FCAhad on file with FCA'S mailing list of employees required
               to file reports. Where there were no reports from employees who should
               have filed, we determined why the employees had not filed. We used the
               filers’ signature dates to determine whether reports were submitted by
               the due dates and were reviewed within the required time period.


               Page 14                        GAO/GGD-so-115   Employee   Financial   Disclosure   at FC4
contents



Appendix I
Objective, Scope,and
Methodology
Appendix II                                                                                               16
Farm Credit             Financial Disclosure Requirements                                                 17
Administration
Responsibilities and
Financial Disclosure
Requirements
Appendix III                                                                                              22
Major Contributors to
This Report




                        Abbreviations

                        DAEO      designated agency ethics official
                        FCA       Farm Credit Administration
                        ITS       Farm Credit System
                        OGE       Office of Government Ethics
                        OPM       Office of Personnel Management
                        SES       Senior Executive Service
                        USDA      United States Department of Agriculture


                        Page 12                       GAO/GGD@&115   Employee   Financial   Dimzloeure at FC~
                  Ea.240225




                  provide FCAethics officials with a ready source of information about
                  their past decisions that could be useful in (1) making future conflict-of-
                  interest decisions and (2) developing ethics guidance and instructions
                  for all FcA employees.


                  FU has significantly improved the administration of its financial disclo-
Conclusions       sure system, but it can further strengthen the system’s ability to pre-
                  vent, detect, and resolve conflicts of interest. Such steps should include
                  more closely monitoring the status and disposition of disclosure reports
                  and more fully implementing requirements of the 1978 act and related
                  0ciE regulations.


                  We recommend that the Chairman of the Farm Credit Administration
Recommendations   require the DAEXIand his alternate to (1) obtain and review disclosure
                  reports due in 1989 but not filed or not fully reviewed, and take appro-
                  priate action on all questionable financial interests where necessary; (2)
                  provide periodic status reports to ensure appropriate filing and review
                  of all required disclosure reports; (3) require confidential disclosure
                  reports to be reviewed within 60 days after receipt; (4) use receipt dates
                  to determine the timeliness of filing and review of both public and confi-
                  dential reports; and (5) provide FCAemployees with required informa-
                  tion on situations that have posed or may pose conflicts of interest.


                   As agreed with the Subcommittee, we did not obtain written agency
Agency Views       comments on this report. We did discuss the contents of the report with
                   FCQethics officials and have made changes to the report at the appro-
                   priate places on the basis of their comments. These officials agreed to
                   implement all of our recommendations.


                  As agreed with the Subcommittee, unless you publicly announce its con-
                  tents earlier, we plan no further distribution of this report until 30 days
                  from the date it is issued. At that time, we will send copies to the
                  Chairman of the Farm Credit Administration, congressional committees
                  having an interest in the matters discussed, and other interested parties.




                   Page 10                        GAO/GG~OO.llS   Employee   Flnmdal   LHsclosure at FC4
8240225




We could not determine if financial interest disclosed in the eight other
public reports presented conflicts of interest based on information
employees reported or contained in FCA’Sfiles. These reports showed
that employees did not (1) report asset transaction information and
income category amount or type and (2) fully disclose financial interests
in partnerships and small businesses that are not publicly traded. This
information is required by the 1978 act, OGE regulations, or filing
instructions and was needed to determine if there might be a conflict.

The Alternate DAEO agreed that the necessary written documentation
was missing from these public reports. He said he obtained the required
information from employees but did not document this additional infor-
mation in the files. Employees are required to file complete reports, and
rhe 1978 act outlines steps agencies are to follow when employees file
incomplete reports. When employees are not required to correct incom-
plete reports, they are improperly relieved of the requirement to accu-
rately disclose their outside interests. We believe employees are more
likely to repeat these errors in future reports if they are not told about
them.

Six other employees filed incomplete confidential reports in 1989 that
FG\ had not reviewed and signed as of June 1990. The Alternate DAEXI
had set aside the reports in July 1989 because they were not filled out
according to FCA instructions and had not required the employees to cor-
rect them as of .Junc 1990. Consequently, FU did not have properly com-
plctcd reports for thesc~six employees and had not ensured that they
had no conflicts of in&rest, for almost a year.

 RX did not require any periodic written management reports for use in
 monitoring the filing and reviewing of financial disclosure reports.
 According to the Alternate DAEO, the DAEO and the Chairman are orally
 briefed on the status of these activities as needed. He said that the lack
 of written reports had not been a problem because FU is a small agency
 and the Chairman, [1.413 1,and Alternate DAEO have easy access to one
 another. We believe>that the examples discussed above indicate that
 NLI’S current method of reporting is not adequate. Written status reports
 showing who was rtlquired to file, who did or did not file timely reports,
 when the reports wet’~ reviewed, and how potential conflicts were
 resolved could help K:\ ~111sure   that reporting and review requirements
 ariu met The Ait.crnalc~ 111z~:o agreed that writ.ten reports would be useful.




 Page8
                       Et-240226




                       timely public reports from former FCAemployees.” He said he sometimes
                       has to send such employees a second notification letter before they file,
                       which was the case with the late-filing former employee mentioned
                       above.

                       Of the 345 employees who filed confidential reports in 1989,337 filed
                       on time. Eight employees submitted reports that were 6 to 68 days late.
                       Nine employees, discussed later, did not file required confidential
                       reports for 1989.


Reports Generally      Along with improving filing compliance since 1984, FCA improved the
                       timeliness with which it reviewed public and confidential disclosure
Reviewed in a Timely   reports. The FCAreviewing officials signed 23 of the 24 public reports
Manner                 filed for 1989, indicating that they had reviewed the reports and that no
                       conflicts of interest existed. One report was signed by the Alternate DAEO
                       but not dated. He told us that he reviewed the report but forgot to date
                       his signature after determining that the interests reported presented no
                       conflicts. The Alternate DAEO reviewed another report but did not sign it
                       because he was concerned about a standard of conduct violation, which
                       we discuss later.

                       The Ethics Act of 1978 requires that public reports be reviewed within
                       60 days after receipt. FCAreviewing officials signed 15 of the 22 public
                       reports within 60 days after the signature dates entered by the filing
                       employees, and signed the remaining 7 reports from 61 to 150 days after
                       the filers’ signaturt> dates.

                       Of the 345 confidential reports filed in 1989,339 had been signed, which
                       indicated that all conflicts of interest had been resolved. The remaining
                       six reports were not signed. OPM and FCA regulations do not specify when
                       the review of confidential reports must be completed. However, the
                       Alternate DAEO signed 29 of 30 confidential reports in our sample within
                       60 days of the filers’ signature dates. He signed one report 69 days after
                       the filers’ signatun, da&,.




                        “Unlike public disclosure rcquux’ments, current OPM and OGE regulations do not require employees
                        terminating federal employment to file confidential disclosure reports after leaving their positions.
                        OGE’s proposed regulations on ronfidcntial financial disclosure would require that these reports be
                        submitted.




                        Page 6                                    GAO/GGDsO-116       Employee   Financial   Disclosure   at PC3
                                                                                                     -
                             B240226




                             improve its standards of conduct, ethics training, and financial disclo-
                             sure systems. OGE'S greatest concern was that FCAhad not enforced
                             financial disclosure requirements. OGE concluded that administration of
                             both the public and confidential disclosure systems was inadequate. OGE
                             reported that required public and confidential reports were not always
                             filed or reviewed in 1982, 1983, and 1984. For example, in 1982,71 of
                             the 138 confidential disclosure reports due that year were filed, and
                             only 17 of the 71 reports showed any evidence of having been reviewed.
                             No confidential reports were filed in 1983. In 1984, 21 of the 26 public
                             reports required were filed but I%A ethics officials had completed
                              reviews of only 3 of these reports.


Alternate DAEO Appointed     When OGE reviewed FM'S disclosure system, the Chief of Human
                             Resources, as DAEO, alone collected and reviewed all financial disclosure
                             reports. OGE said in its January 1985 report that the DAEO had devoted
                             “barely any of his time to the ethics program.”

                             The Chairman appointed a personnel specialist in 1984 from the division
                             of human resources as Alternate DAEO.We believe that this appointment
                             improved the administration of the disclosure system. The Alternate
                             DAEO is responsible for the day-to-day tasks associated with adminis-
                             tering the system, i.e., identifying and notifying employees required to
                             file; obtaining and reviewing reports; and resolving conflicts of interest.
                             He said he keeps the DAEO advised of progress and problems. The Alter-
                             nate DAEO estimated that he spends about 10 percent of his time on the
                             ethics program. He reports to the Chief of Human Resources, who as
                             DAEO is in a position to supervise the Alternate DAFB'S ethics and other
                             personnel duties.


Procedures for Identifying    In addition to the Alternate DAEO appointment, FCA improved its proce-
and Obtaining Timely          dures for identifying employees who must file public and confidential
                              disclosure reports. The Alternate ~AEXIassigns a disclosure reporting
Reports Improved              code to each personnel authorization form on the basis of the employee’s
                              grade/pay level and duties. This code indicates who must file a report
                              and the type of financial report the employee must file. According to the
                              Alternate DAEO, these codes not only help FXXto identify incumbents
                              who are required to file annually, but also employees who must file a
                              report within 30 days after they enter a covered position.

                              FCA’Sapproach allows the Alternate DAFB to be aware of all employees
                              required to file disclosure reports. The Alternate DAEO is responsible for
                   5240225




                   In January 1985, OGE reported that FCA’S administration of its financial
Results in Brief   disclosure system was inadequate or nonexistent. FU has corrected this
                   situation. Required public and confidential disclosure reports are gener-
                   ally being filed and reviewed, and usually in a timely manner. The FYX
                   review process generally identifies and resolves potential conflicts of
                   interest.

                   Two reasons account for this turnaround in administration. First, in
                   1984, FCA created a position and appointed an alternate designated
                   ethics official to administer the program’s day-to-day activities. As a
                   result, the program now receives more direct leadership.

                   Second, FCA established procedures for identifying all employees who
                   must file reports. I Jnder the current FYXidentification procedures, an
                   ethics official identifies employees who occupy or who move to and
                   from positions requiring financial reporting. This information is
                   recorded in an automated system, and used to notify employees that
                   they must file financial disclosure reports. FCAidentified 378 employees
                   who were required to file reports in 1989. Of these reports, 24 were
                   public and 354 were confidential2 Of these 378 employees, 358 filed on
                   time, 11 filed late, and 9 had not filed as of June 1990.

                   Generally, FCA had identified and reasonably resolved potential conflicts
                   of interest. However, FU ethics officials had not taken follow-up steps
                   to obtain 9 confidential reports due in 1989 and still not filed in June
                   1990, and had not required employees to correct errors or ensured that
                   all conflicts were resolved for 15 reports (9 public and 6 confidential).
                   Along with better follow-up, FCA should (1) better inform employees
                   about what practices to avoid, by publishing internal decisions about
                   circumstances that may result in conflicts of interest; and (2) accurately
                   reflect timeliness of reporting by using receipt dates rather than filing
                   employees’ signature dates. We have discussed these improvements with
                   FCAofficials, and they have agreed to implement them.


                    The Farm Credit Act of 1971 (Public Law 92-181) established FCA to
Background          administer the Farm Credit System (ES), which provides approximately
                    one-third of all credit used by American farmers, ranchers, and their
                    cooperatives. The K’S offers a variety of financial assistance to its mem-
                    bers through a network of Farm Credit Banks, Federal Land Bank

                    “Public reports are available for public review, whereas confidential   reports are not. Which type an
                    employee must file depends on his or her grade level and duties.




                    Page 2                                     GAO/GGD90-115       Employee    Financial   Disclosure   at FC4