Bush Leaves Legacy of Fraud and Abuse At Small Business Administration


Bush Leaves Legacy of Fraud and Abuse At Small Business Administration

By Nick Baumann
Mother Jones
March 27, 2009

It's been a rough decade for the Small Business Administration. The Bush administration slashed its budget by more than half, and many of its most experienced and knowledgeable employees were let go. To make matters worse, multiple investigations have found evidence of waste, fraud, and abuse at the agency, which is supposed to help small businesses drive economic growth. On Wednesday, the embattled agency was dealt another blow when the Government Accountability Office revealed that the SBA's $8 billion program designed to funnel government contracts to small businesses in poor areas gave millions to companies that did not meet the legal requirements, including one that was "headquartered" in a trailer home occupied by someone unrelated to the company. Some of the owners of the "small businesses" in question admitted straight-out to the GAO that they were defrauding the SBA's HUBZone program by funnelling money to big businesses or businesses outside the zones.


In total, the GAO found 19 businesses that did not meet the HUBZone requirements received some $30 million in federal contracts despite their non-compliance. One firm that collected $900,000 was particularly egregious in its rulebreaking:

[O]ur investigation found that the purported principal office was in fact a residential trailer occupied by someone not associated with the company. The company had represented its office as located in “suite 19,” when in reality, the address was associated with trailer 19 in a residential trailer park. The two employees of the firm—a father and a son—lived in non- HUBZone areas that are located about 90 miles from the trailer park. This firm also subcontracted most of its HUBZone work to non-HUBZone firms.

Chris Gunn, a spokesman for the American Small Business League, has been bird-dogging the SBA for years. He says that since the underfunded and overwhelmed agency was gutted by the Bush administration, "it's not necessarily surprising that we see this amount of fraud and abuse."

Rep. Nydia Velasquez (D-NY), the chair of the House small business committee, has talked of shutting down the HUBZone program entirely. But Gunn says far more drastic measures need to be taken. "If the best they can come up with is to end the program then we're all in trouble," Gunn says. His organization is working on legislation with Rep. Hank Johnson (D-Ga.) to preclude publicly-traded companies from being counted towards the government's small business procurement goals. That move that would keep companies like Raytheon, Honda and 3M (and their subsidiaries), which have received federal small business contracts in the past, from receiving them in the future.

SBA Needs Thorough Overhaul in Wake of HUBZone Scandal


SBA Needs Thorough Overhaul in Wake of HUBZone Scandal

By Keith Girard
March 26, 2009

In an agency that has become a symbol of widespread waste, mismanagement and fraud, a new government investigation has uncovered one of the biggest scandals yet, involving the cynical nationwide rip-off of a program intended to aid the poorest areas of the country.

Lawmakers got an inkling of the problems last summer when a Government Accountability Office (GAO) probe of the Small Business Administration’s (SBA) "Historically Underutilized Business Zone" program in Washington, D.C. discovered disturbing instances of abuse, mismanagement and fraud. But as feared, the findings were a drop in the bucket.

A new GAO investigation has concluded that mismanagement and fraud in the so-called HubZone program extends nationwide and is costing the government tens of millions of tax dollars. Even a government investigative agency known for drawing cautious conclusions stated that "likely hundreds and possibly thousands of firms" are taking advantage of lax SBA oversight and administration to cash in on the program.

The report’s details were unveiled at a hearing before the House Small Business committee and provoked outrage among lawmakers. "We’re talking here about millions of dollars. It’s outrageous that money is going to companies that don’t qualify to be in the program," said Committee chairwoman Nydia Vel?zquez, D-N.Y.

Val?zquez said she plans to urge the SBA to shut down the program until it can fix the problems. But at this stage of the game, the SBA needs to do far more than overhaul its HubZone program. All of its contracting programs need a thorough revamping.

The American Small Business League (ASBL) was quick to jump on the report and issued yet another press release calling attention to the widespread diversion of federal small business contracts to large corporations, and rightly so. The ASBL has been banging that drum for more than five years, and the SBA has stonewalled every effort by the group to get to the bottom of the problem.

Now the ASBL claims that some $16 billion in federal small business contracts have been diverted to Fortune 500 firms since President Barack Obama took office in January. By the end of President Obama’s first year in office, the ASBL says that figure will top $100 billion. Given the findings of the latest HUBZone investigation, how can the SBA possibly dispute that?

The GAO looked at select HUBZones in Dallas, San Antonio, Tex., San Diego, and Huntsville, Ala, based on size and concentration of contracts. It selected 36 firms to investigate and discovered that 19 firms (53 percent) across all three states "clearly" did not meet program requirements. Over fiscal years 2006 and 2007, the 19 firms received nearly $30 million in HUBZone contracts and $187 million in federal contracts overall.

The firms routinely ignored two cornerstone requirements of the program: to locate their principal office in the economically distressed neighborhood, and hire local residents to fill at least 35 percent of jobs created by the contract.

In one instance, an Alabama firm received more than $900,000 in HUBZone set-aside obligations and listed an office suite in the HUBZone as its principal office. But the "suite" turned out to be a trailer in a residential trailer park. The occupant had no connection with the firm. The firm’s two employees -- a father and son -- lived more than 90 miles away.

To limit subcontracting, at least 50 percent of the contract’s value also had to be spent on a firm’s own employees. But one company owner told investigators that HUBZone firms were being used as "contract vehicles" for large companies. One company outsourced as much as 89 percent of the work under the program to other, larger firms outside the HUBZone. It received more than $2.3 million in contracts.

Companies used various other dodges to get around other program requirements. One firm that had received a $350,000 contract had only one employee -- the company president -- who claimed he "leased" employees to do the work required. The program, however, prohibits such arrangements.

And where was the SBA’s oversight when all this was going on? "Although SBA has initiated steps to address internal control deficiencies we identified in our June 2008 report, SBA has not yet incorporated effective controls for preventing, detecting, and investigating fraud and abuse within the HUBZone program," the report concluded.

In fact, of the 10 companies investigated in the Washington, D.C. area, two of the firms had been removed from the program and two others were in the process of being barred. "However, SBA’s failure to examine some of the most egregious cases we previously identified has resulted in an additional $7.2 million in HUBZone obligations and about $25 million in HUBZone set-aside or price preference contracts [going] to these firms," the report states. In short, it’s still business as usual.

"To date, other than the firms identified by our prior investigation, the SBA program office has never referred any firms for debarment and/or suspension proceedings based on findings from its program eligibility reviews," the report states.

"By failing to hold firms accountable, SBA has sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the HUBZone program," it concludes.

The Obama administration may be in office, but eight years of Bush administration neglect, budget cuts and devastatingly low employee morale are still taking their toll on an agency that should be helping to lead the nation out of the economic downturn. Cleaning up the HUBZone program may be a good place to start, but a thorough overhaul of the entire agency is sorely needed. 

GAO Report Indicates SBA Program Plagued With Fraud


GAO Report Indicates SBA Program Plagued With Fraud

By Rob Kuznia
March 26, 2009

A Congressional investigation has revealed that a federal program meant to benefit small businesses in economically distressed areas is plagued with "fraud and abuse."

In a report released Wednesday, the Government Accountability Office said the HUBZone program, which is meant to bring assistance to businesses in "Historically Underutilized Business Zones," includes at least 19 firms that should not be there.

In 2006 and 2007, those firms received a total of nearly $30 million in contracts from the U.S. Army, Air Force, Navy and other agencies.

The report from the GAO -- an investigative arm of Congress -- lays much of the blame at the feet of the federal Small Business Administration, the government agency responsible for not only conferring HUBZone status, but also detecting fraud.

The GAO also held the firms accountable, saying many appeared determined to game the system, setting up dummy offices in economically challenged locations while conducting the bulk of their work in areas that do not qualify. Many of the 19 firms -- which were located in Alabama, Texas and California -- also broke the rules by outsourcing the bulk of the work.

The report did not name the companies, but did say that continuous offenders are subject to fines, penalties and imprisonment.

One of the more egregious examples involved a father-son maintenance-services company that claimed to be based in Jacksonville, Alabama. The GAO traced the stated headquarters address to a residential trailer that neither man had lived or worked in for more than a year.

Instead, they operated from a location outside the HUBZone, 90 miles away. After the GAO's initial visit, the men replaced their mailbox with one bearing the company name, to give the appearance they were working from the trailer, the report said.

In addition, the company, which received $920,000 in contracts from the U.S. Army, outsourced most of the work to subcontractors.

In another example, an environmental consulting firm in Fort Worth, Texas, subcontracted the vast majority of the $2.3 million it received in Army contracts to other companies, some of them large firms. This is a double no-no, since jobs made possible through approval from the Small Business Administration by definition must be performed by small businesses.

The report did credit the Small Business Administration for making some positive steps toward reform, but said the efforts haven't been enough. For instance, an earlier GAO report in July 2008 mentioned 10 other firms that gamed the system in a way similar to the 19 featured in the latest report. By January of 2009, the Small Business Administration had decertified two of the 10 companies. However, other firms continued to receive millions of dollars in contracts, the GAO report says.

"For example, a construction firm identified in our July 2008 testimony admitted that it did not meet HUBZone requirements and was featured in several national publications by name," the report said. Nonetheless, the company has continually represented itself as HUBZone certified and, since the testimony, received $25 million HUBZone obligations and set-aside contracts, the report said.

On Thursday the report drew a strong reaction from a watchdog group called the American Small Business League, which has been beating the drum on alleged mismanagement within the Small Business Administration since 2003.

"I believe this is the 16th or 17th investigation into these various programs since 2003, all of which have found things I think are shocking," Christopher Gunn, the league's communications director, told HispanicBusiness.com Thursday. Still, he said, Congress has failed to pass policies that would crack down on the fraud.

Gunn added that the lion's share of the mismanagement took root under the Bush administration, which cut the budget of the Small Business Administration in half.

Asked to comment on the report, Small Business Administration spokesman Michael Stamler on Thursday emailed a written statement to HispanicBusiness.com.

"Over the last several months, we have taken significant steps towards addressing the concerns the GAO raised in their June 2008 report, including:
New procedures for evaluating applications, recertifications and program examinations. As a result, we are conducting unannounced site visits and plan to strengthen those efforts going forward. . . . Once we've obtained information on the firms included in the most recent GAO report, we (will) move quickly to take the appropriate actions."

Source:  http://www.hispanicbusiness.com/news/2009/3/26/gao_report_indicates_sba_program_plagued.htm

More Investigations Find Fraud in SBA Managed Programs

Press Release

More Investigations Find Fraud in SBA Managed Programs

March 26, 2009

Petaluma, Calif. – On Wednesday, the Government Accountability Office (GAO) released yet another investigation which found widespread fraud in the Small Business Administration's (SBA) HUBZone program.  This most recent GAO investigation represents just the latest in a series of federal investigations over the last seven years which have found fraud, abuse, loopholes and a lack of oversight in SBA programs.

Since 2003, approximately 15 federal investigations have found widespread fraud and abuse in federal small business contracting programs administered by the SBA.  Several investigations found outright fraud was responsible for large corporations receiving federal small business contracts.

Report 5-16 from the SBA Office of Inspector General (OIG) found that some large businesses had committed fraud to illegally receive federal small business contracts. (http://www.sba.gov/IG/05-16.pdf

In 2002, the SBA Office of Advocacy released a report which found that "vendor deception" was responsible for large firms receiving small business contracts. (https://www.asbl.com/documents/eagkeeye_report%202002.pdf

The American Small Business League (ASBL) estimates that the SBA, the Department of Defense and a number of other federal agencies are responsible for the diversion of over $100 billion a year in federal small business contracts to Fortune 500 firms and thousands of other large businesses.

Although the first investigation into small business contracting was the subject of a hearing by the House Committee on Small Businesses in 2003, neither the House, nor the Senate Committee on Small Business and Entrepreneurship have ever proposed legislation to stop large corporations from receiving federal small business contracts.

In Report 5-15, the SBA OIG referred to the diversion of federal small business contracts to large corporations as, "One of the most important challenges facing the Small Business Administration and the entire Federal government today."  (http://www.sba.gov/IG/05-15.pdf) 

President Obama recognized the magnitude of the problem during his campaign when he released the statement, "It is time to end the diversion of federal small business contracts to corporate giants." (http://www.barackobama.com/2008/02/26/the_american_small_business_le.php)

"It has been seven years since the first federal investigation into this issue, and yet the SBA still maintains that it is a myth. It is time for the FBI to investigate the SBA’s handling of these matters.  As our country slides deeper, and deeper towards the worst economic disaster in its history, it is time for President Obama and Congress to act now, and enact legislation and policy to stop the diversion of government small business contracts to corporate giants," ASBL President Lloyd Chapman said.  "It is time for President Obama to do what he said he would do during the campaign, and stop the diversion of federal small business contracts to corporate giants.  If President Obama were to address this issue it would do more to create jobs and stimulate the economy than everything else he has done combined."


Obama Giving Federal Small Business Money to Fortune 500 Firms

Press Release

Obama Giving Federal Small Business Money to Fortune 500 Firms

March 25, 2009

Petaluma, Calif. – Since President Barack Obama took office in January, over $16 billion in federal small business contracts have been diverted to Fortune 500 firms. By the end of President Obama's first year in office, the American Small Business League (ASBL) estimates that number will top $100 billion.

Over a dozen federal investigations have found the Bush Administration allowed billions of dollars in federal small business contracts to be diverted to many of the largest firms in America. Several of the investigations concluded that outright fraud was one of the reasons large businesses were receiving federal small business contracts.

In March of 2005, the Small Business Administration (SBA) Office of Inspector General referred to the abuses as, "One of the most important challenges facing the Small Business Administration and the entire Federal government today…" (http://www.sba.gov/IG/05-15.pdf

During his campaign, President Obama promised small business owners he would end the abuses if he were elected. In February of 2008, he released the statement, "It is time to end the diversion of federal small business contracts to corporate giants." (http://www.barackobama.com/2008/02/26/the_american_small_business_le.php

Small business owners around the country are understandably outraged that President Obama has gone back on his campaign promise and has consistently refused to support any legislation or policy to end the diversion of federal small business contracts to Fortune 500 firms and thousands of other large businesses.

U.S. Census data shows firms with 100 employees or less make up 98 percent of all American firms and are responsible for over 98 percent of all new jobs. These firms employ over 50 percent of all private sector workers.

Small business owners and advocates agree that bringing an end to the fraud and abuses that are pulling over $100 billion a year out of the middle class economy would create more jobs and stimulate the economy more than any of the policies President Obama has proposed so far.

The American Small Business League (ASBL) has won five federal lawsuits under the Freedom of Information Act (FOIA) against the Bush Administration to expose the abuses. The group plans to continue to file lawsuits against the Obama Administration until President Obama keeps his campaign promise to, "end the diversion of federal small business contracts to corporate giants."