USDA OIG Scores Agency on Investments

December 3, 1999

An audit by USDA's office of inspector general finds that the Alternative Agricultural Research and Commercialization Corporation had only "minimal assurance" that its funds were properly expended and its $27 million investment portfolio was protected adequately from loss. Applicants displayed no "reasonable basis for prospective success," says Inspector General Roger C. Viadero.

The AARCC was established in 1992 to expedite the development and marketing of industrial products made from agricultural and forestry materials and animal by-products. It was supposed to provide funding to start-up firms seeking to introduce and make effective innovative enterprises to use agricultural products and create employment. The main form of funding was through equity investments in which AARCC would take an ownership position through the purchase of the entity's stock.

However, the audit found that the process used by AARCC to select firms for investment "was not adequate, because the applicants had not displayed any reasonable basis for prospective success." In addition, AARCC's monitoring of the operations to ensure compliance with the agreements was "virtually nonexistent."

Of particular concern were various "transgressions" by the companies that AARCC took no action to preclude or rectify, Viadero says. "Six of these firms are under review by OIG's investigations office because of the possible misuse of government funds."

In one case, AARCC invested $450,000 in one firm for the development, manufacture and marketing or headbands made from starch absorbents. In return, AARCC was to receive royalties on sales and an equity interest in the firm.

"Immediately upon receiving the funding from AARCC and after procuring the specialized equipment to manufacture the headbands, the firm realized that no market existed for the headbands," says Viadero. "However, they discovered there was substantial demand (about $80,000 a month) for incontinence pads which could be made with the same equipment using sawdust."

The firm held that AARCC had no claim to the revenues from the manufacture of the pads because the product had changed. The agreement, however, prohibited the use of the equipment for alternative production.

"AARCC subsequently became aware of the impropriety and attempted to renegotiate the terms. The investee rebuffed this arrangement, leaving the government's interest unprotected," says Viadero.

In another case, "with informal approval from AARCC," an individual used $344,000 or the $450,000 investment to pay off personal debts. "This was also contrary to the agreement with USDA, and the company is no defunct," Viadero says. Congress did not provide any funding for AARCC for fiscal year 2000.