SBA Addresses Fraud Allegations in GAO Report


SBA Addresses Fraud Allegations in GAO Report

By Jeanette Mulvey
Business News Daily
August 11, 2010

The Small Business Administration (SBA) has instituted several new programs to address instances of ineligible companies being granted government contracts through its HUBZone program.

The new efforts to more effectively manage HUBZone, under which government contracts are awarded to historically underutilized business zones in economically distressed communities, are a result of a Government Accountability Office (GAO) report last month in which the SBA was found to have allowed ineligible firms to participate in the HUBZone program. It was the most recent of several reports by the GAO issued during an ongoing investigation of the SBA’s HUBZone certification process.

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“The SBA continues to struggle with reducing fraud risks in its HUBZone certification process, although SBA has taken steps to bolster SBA’s controls,” Gregory Kutz, Managing Director Forensic Audits and Special Investigations for the Government Accountability Office said in his statement to the House of Representatives’ Committee on Small Business on July 28.

The SBA said $12.4 billion in federal contracts were granted through HUBZone in fiscal year 2009.

“In our previous investigations, we found that many of the firms in the 29 cases fraudulently used ‘virtual offices’ and fake business locations as their principal offices to qualify for HUBZone status,” Kutz said. “Our testing revealed that the SBA still does not adequately authenticate self-reported information — especially principal office locations — to ensure program eligibility.”

SBA Administrator Karen Mills also gave testimony at the hearing, saying the SBA had reviewed the eligibility of the 29 firms previously identified by the GAO as ineligible to participate in HUBZone.

“After reviewing the facts, 16 were decertified, eight voluntarily decertified, and five, in fact, remained eligible for HUBZone,” Mills told the committee.

“We’re also pursuing HUBZone fraud cases with the Department of Justice and the Inspector General, and we continue to suspend and debar firms suspected of fraud,” Mills told the committee in her July 28 testimony. “In fact, just yesterday we suspended four more firms and two individuals.”
Specifically, the SBA has increased its monitoring of HUBZone certified firms, increasing site visits from 100 in 2008 to more than 800 in 2009. It expects to conduct more than 1,000 site visits in 2010, Mills told the committee.

Site visits are also now more in-depth, according to Jonathan Swain, Assistant Administrator for Communications at the SBA.

“We’re doing more than driving by the building or checking that the address exists,” Swain told BusinessNewsDaily.  He said the SBA inspectors require businesses to produce documents while on site to show that the firm qualifies. Many of the visits are unannounced, Swain said.

In addition, the SBA has reengineered the HUBZone certification process to require more documentation and is now requiring HUBZone firms to verify under penalty of perjury that all of the information provided is true and verifiable, Swain said.

The SBA also has plans to debut a small business contract web site requested by President Obama in April as part of the establishment of an Interagency Task Force on Federal Contracting Opportunities for Small Businesses, which was announced by Obama in late April. The website will illustrate the participation of small businesses, including those owned by women, minorities, socially and economically disadvantaged individuals, and service-disabled veterans of our Armed Forces, in Federal contracting, according to the White House.

It is intended to foster greater accountability and transparency in, and allow oversight of, the federal government's progress, and encourage improved collection, verification, and availability of federal procurement data, plus provide accurate data on the federal government's progress in ensuring that all small businesses have a fair chance to participate in federal contracting opportunities, the White House said in a prepared statement.

Swain said the SBA plans to debut the web site in a few weeks.

The SBA’s efforts are not enough, however, to satisfy its harshest critics.

“We need an agency to help small businesses,” said Lloyd Chapman, a long-time critic of the SBA, whose American Small Business League has been critical of the SBA through both Republican and Democratic administrations. The ASBL issued a press release last week to highlight the GAO’s most recent findings.

“The SBA doesn’t need to be shut down. Instead, we need to get it back on track and do what it was supposed to do when it was founded,” Chapman said in a phone interview. “The agency needs to be overhauled.”

"The SBA was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation," according to the SBA web site.

"We recognize that small business is critical to our economic recovery and strength, to building America's future, and to helping the United States compete in today's global marketplace. Although SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same," the web site says.

Mills’ statement to the House of Representatives indicates that an overhaul, of sorts, is already underway.

“We’ll soon provide formal recommendations, including some that will help equip our agency partners with tools they need to help in the shared mission of reducing fraud, waste and abuse,” Mill said. “At the same time, we’re committed to working more closely with Congress to make sure small businesses can continue to grow and create the jobs we need now.”


GAO blasts SBA, says some programs riddled with fraud


GAO blasts SBA, says some programs riddled with fraud

By Doug Caldwell
Central Valley Business Times
August 9, 2010

•  Says there are some controls, but more are needed

•  ‘Most were obtained through fraudulent schemes’

American taxpayers have given $325 million in set-aside and sole-source contracts to firms not eligible for the Small Business Administration’s “Historically Underutilized Business Zone” (HUBZone) programs, the Government Accountability Office says.

“Most were obtained through fraudulent schemes,” the GAO says.

In the 14 cases investigated by the government’s watchdog agency, “numerous instances” were found of false statements, such as underreporting income or assets, to either qualify for the program or retain certification, the GAO says.

GAO also found cases where ineligible companies used certified firms to secure set-aside and sole-source contract work. For instance, a West Virginia company that graduated from the program in 2001 used a series of three certified companies as pass-throughs to continue obtaining the government money.

“In some cases, SBA did not detect the false statements and misrepresentations made by certified firms. In others, SBA became aware of the firms’ ineligibility but failed to take action,” the GAO says.

Not all was bad, the inspectors say.

GAO’s proactive testing found several strengths in SBA’s 8(a) application process that helped prevent three bogus applicants from being certified for the program. Examples of the strengths included validation of data with third-party credit bureaus and the Excluded Parties List System.

“These controls and effective review appropriately raised questions about income and assets of GAO’s bogus applicants that would have made them ineligible,” it says.

However, GAO says it obtained certification for one bogus firm using fabricated documentation and owner information. Certification of GAO’s bogus firm shows vulnerabilities in the process such as the lack of any face to face contact that could allow ineligible individuals or pass through companies to enter the program.

“Although we were unable to determine whether all 14 cases were ineligible at application, these cases show substantial vulnerabilities in SBA’s monitoring of eligibility for individuals and firms already in the program. The lack of a consistent enforcement strategy or any real consequences for fraud and abuse is a further weakness in SBA’s fraud prevention program,” the GAO says.

“This latest investigation stands as another example of a complete lack of oversight over small business programs by the SBA,” says the American Small Business League of Petaluma.

“Despite the fact that small businesses create nearly 100 percent of net new jobs, they have received virtually none of the stimulus money and the Obama Administration has turned a blind eye to billions of dollars in fraud in small business programs,” says ASBL President Lloyd Chapman.


New Investigation Uncovers More Fraud in SBA Managed Programs

Press Release

New Investigation Uncovers More Fraud in SBA Managed Programs

August 9, 2010

Petaluma, Calif. – The U.S. Government Accountability Office (U.S. GAO) has released another investigation in a long series of investigations which have uncovered widespread fraud and abuse in federal programs managed by the Small Business Administration (SBA).  (  

In its latest investigation, the GAO conducted a supplemental review of the SBA’s Historically Underutilized Business Zone (HUBZone) program and found that the SBA failed to identify companies attempting to register for the program using blatantly fraudulent information.  As part of its investigation, the GAO was able to successfully register three bogus companies for participation in the program using such false business locations as the Alamo in Texas, a public storage facility in Florida, and a city hall in Texas, according to the report.

This latest investigation stands as another example of a complete lack of oversight over small business programs by the SBA.

Since 2003, more than 25 federal investigations by the GAO, the SBA Office of Inspector General (SBA IG) and Inspectors General for federal agencies like the U.S. Department of Interior (DOI) have all found a complete lack of oversight in SBA administered small business programs. (  

In one such investigation conducted by the GAO into the veteran owned small business contracting program, the agency reported, “By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the SDVOSB program." (

To date, the Obama Administration has failed to adopt any legislation or policy to halt the abuses.  The American Small Business League (ASBL) has estimated that every year more than $100 billion in federal small business contracts are diverted to Fortune 500 firms and other large businesses.

According to the most recent information released by the Obama Administration, some of the firms that have received small business contracts include Lockheed Martin, Textron, Boeing, Raytheon, Dell Computer, Thales Communications, British Aerospace (BAE), Ssangyong Corporation headquartered in South Korea, and Italian firm Finmeccanica SpA. (  

“Despite the fact that small businesses create nearly 100 percent of net new jobs, they have received virtually none of the stimulus money and the Obama Administration has turned a blind eye to billions of dollars in fraud in small business programs,” ASBL President Lloyd Chapman said.  “If President Obama is serious about wanting to stimulate the economy, he needs to stop these abuses by passing H.R. 2568, the Fairness and Transparency in Contracting Act.”


Obama Administration Will Bury Small Business Contracting Data

Press Release

Obama Administration Will Bury Small Business Contracting Data

August 6, 2010

Any day now the Obama Administration will release the federal government's small business contracting data for fiscal year (FY) 2009. FY 2009 ended over ten months ago at the end of September.

I have several predictions/facts about the latest small business contracting data that will be released by the Obama Administration. First, virtually everything the Obama Administration will claim about the data will be false. They won't claim to have achieved the Congressionally mandated 23 percent small business contracting goal, but they will claim to have come really, really close. I believe that the Obama Administration will claim to have awarded between 21 and 23 percent of the governments purchases to small businesses.

The Obama Administration will also try to cover-up the diversion of billions of dollars in federal small business contracts to corporate giants. They will without question dramatically overstate the true percentage of federal contracts and subcontracts that were awarded to small businesses in FY 2009 in multiple ways.

First, they will under report the actual federal acquisition budget by 50 percent to make the percentage look up to twice as high as it actually is. The actual total federal acquisition budget for FY 2009 is over one trillion dollars including all classified and unclassified projects. Federal law clearly states 23 percent of the "total value" of all federal contracts shall be awarded to small businesses. Obama officials will likely claim the government's acquisition budget is less than $500 billion which is less than half of what is actually is. To make matters worse, the federal government will exclude an additional $100 billion in federal contracts from its calculations with the justification that those contracts are not, "small business eligible." This exclusion serves as a means of falsifying compliance with the federal government's 23 percent small business goal. The SBA term "small business eligible" is in direct conflict with the Small Business Act and has no justification in the law.

Next, the volume of contracts the government will claim to have awarded to small businesses will be dramatically inflated by including thousands of large businesses in its small business contracting statistics. A recent report of the government's FY 2009 small business contracting data released by the American Small Business League (ASBL) found that of the top 100 recipients of federal small business contracts, 60 were actually large businesses. Contracts to a slew of Fortune 500 firms have also been included in the Obama Administration's small business contracting data.

Anyone that challenges the accuracy of the data or the inclusion of large businesses in the Obama Administration's small business data will receive the same overworked excuse the Small Business Administration (SBA) has used since 2002 to explain the diversion of billons of dollars a month in federal small business funds to corporate giants around the world. "Miscoding," "computer glitches," and the latest "simple human error," will be blamed for the diversion of over a trillion dollars in federal small business contracts to corporate giants since 2000. To date, no journalist has ever asked any federal official why these supposedly random errors that occur thousands of times a day, every day, for over ten years, always result in contracts awarded to corporate giants being reported as small business awards. If the reporting errors were actually random, then approximately 50 percent of the time contracts to large businesses would be reported as small business awards and 50 percent of the time contracts awarded to small businesses would be reported as large business awards. The two would cancel each other out. This blatant hole in the SBA's excuse has never been mentioned in any of the hundreds of stories that have been written about the rampant abuses in federal small business contracting programs.

Lastly, there will be no White House press conference announcing the release of the data. It is highly unlikely President Obama will mention his Administration's latest small business contracting data in any way. The Obama Administration's press release announcing their latest small business contracting data will most likely be quietly released late on a Friday afternoon. I am guessing they will be so desperate to avoid any press coverage of the embarrassing and fabricated data they may even wait until late Friday afternoon on September 3rd, just before Labor Day weekend, to release the data.

America is still in the midst of its worst economic catastrophe in 80 years. Small businesses are responsible for the overwhelming majority of net new jobs in America. Despite this fact, the Obama Administration continues to allow over $100 billion a year in federal funds, that by law should be allocated to our nation's 27 million small businesses, to be diverted to clearly large businesses.

In February of 2008 President Obama stated, "It is time to end the diversion of federal small business contracts to corporate giants." It is time for President Obama to honor that promise.

Two Years of 'Cookie Jar Capitalism' Still Rules in SBA HUBZone Program


Two Years of 'Cookie Jar Capitalism' Still Rules in SBA HUBZone Program

By Keith Girard
August 5, 2010

More than two years ago, government investigators got their first inkling of widespread fraud in one of the Small Business Administration's flagship programs for economically distressed communities, known as the "Historically Underutilized Business Zone," or HubZone program.

Although the study was limited to programs in the Washington, D.C., area, disturbing instances of abuse, mismanagement and fraud were uncovered nationwide in a follow-up study by the government's watchdog agency, the Government Accountability Office (GAO).

The SBA's ineptitude in this and other programs gave rise to the derisive term "cookie jar capitalism," because firms could make a fraudulent grab for taxpayer funds with seeming impunity.

But that occurred during a different time and under an administration that had starved the SBA of funding and staffing for more than eight years. Things were supposed to have changed when President Barack Obama took office and appointed a savvy business executive to run the troubled agency.

But if you think significant changes have been made after 18 months under the Obama administration, you would be wrong. In a scathing follow-up investigation released late last month amid little fanfare, the GAO found that many of the same problems still exist in the program.

"In our previous investigations, we found that many of the firms in the 29 cases [studied] fraudulently used "virtual offices" and fake business locations as their principal offices to qualify for HUBZone status," Gregory Kutz, Managing Director Forensic Audits and Special Investigations at the GAO, testified at a recent hearing.

But the latest follow-up examination "revealed that the SBA still does not adequately authenticate self-reported information -- especially principal office locations -- to ensure program eligibility," he told the House Small Business Committee.

In its preceding report in March 2009, the GAO examined a representative sampling of 36 firms in three states and discovered that 19 of them "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 GAO concluded that "likely hundreds and possibly thousands of firms" are taking advantage of lax SBA oversight and administration to cash in on the program.

The firms routinely ignored two cornerstone requirements of the program?? -- to locate their principal office in the economically distressed neighborhoods, and hire local residents to fill at least 35 percent of jobs created by any given contract. The companies were able to create fake "storefront" offices, fabricate documents and skirt hiring requirements with no oversight or sanction by the SBA.

To test whether the agency had cleaned up its act and implemented numerous GAO recommendations to improve the program, investigators created "four bogus businesses with fictitious owners and employees," and applied for HubZone certification, said Kutz.

For all four bogus businesses, the GAO used publicly available resources to fabricate documents. In other words, the SBA merely had to go on the Internet to validate or disprove the claims of the companies.

"Our testing revealed that the SBA still does not adequately authenticate self-reported information -- especially principal office locations -- to ensure program eligibility. Specifically, the agency certified three of our four bogus firms based on fraudulent information," Kutz said.

Well, at least that means the SBA was able to bust one of the firms. Not quite.

"The SBA lost application materials for the fourth firm on multiple occasions, forcing us to abandon our application," Kutz added.

Firms caught ripping off the program under previous investigations at least tried to be clever about picking bogus locations to conceal their fraud. The GAO tried to make it easy for the SBA by picking obviously phony sites like the historic Alamo in Texas, a public storage facility in Florida and city hall in the town where the HubZone was located. The SBA missed them all.

The SBA could have easily verified the addresses by a site visit or simply by searching on the Internet. The SBA's failure to do so, Kutz said, leaves the program open to continued fraud and abuse.

Of the 29 firms found to be operating outside the program's guidelines by the two previous GAO studies, the SBA, to its credit, cracked down on them. The SBA decertified 16 firms, eight voluntarily withdrew from the HubZone program and five were able to meet the guidelines and remain certified.

Even so, the SBA did not ban any of the firms from continuing to receive government contracts through other programs. To date, all 29 firms continue to do government work and have received a collective $66 million in federal obligations for new contracts, the probe found. In short, they received a slap on the wrist.

To her credit, SBA Administrator Karen Mills personally appeared before the committee to defend her agency's efforts.

She said the SBA has reengineered the certification process, requiring more stringent documentation under penalty of perjury, "dramatically" increased monitoring -- from less than 100 site visits in 2008 to more than 800 last year and up to 1,000 visits this year. Also, the agency is removing ineligible firms, she said.

She also assured the committee that the SBA is pursuing HUBZone fraud cases in conjunction with the Justice Department and the SBA's Inspector General and the agency is actively disbarring firms it catches.

"An environment of integrity across all of our contracting programs is crucial. The president included more funds in [the] SBA's proposed budget exactly for this purpose," she said.

President Obama also has created an Interagency Task Force, led by Office of Management and Budget, SBA and the Department of Commerce to make formal recommendations to help reduce fraud, waste and abuse.

Those steps are important, but it's taken more than two years to get this far and clearly the agency hasn't gone far enough, according to the GAO report. It's bad enough that likely untold millions of dollars in taxpayer funds have been squandered because of fraud and abuse.

The SBA's failure to move more swiftly to correct the cynical exploitation of its programs puts the credibility of the administration on the line. President Obama ran for office pledging to make sweeping changes in Washington that are sorely needed. But at this point, cookie jar capitalism still reigns at the SBA.