“Faith-based contracting” doesn’t bring out the best in people. In those situations, “we sit back and hope and pray the company we’re doing business with isn’t ripping us off too badly,” said Bruce Causseaux, a senior-level specialist for forensic audits and special investigations at the Government Accountability Office.

Causseaux said the Small Business Administration appears to be taking that approach with its Historically Underutilized Business Zone program, which is designed to provide federal contracting opportunities to businesses in low-income areas.

During a recent investigation, GAO auditors found numerous examples of ineligible companies being accepted into the HUBZone program.

For example, they uncovered at least 10 small businesses in the Washington, D.C., metropolitan area that have been certified, but don’t belong in the HUBZone program. Since 2006, agencies have obligated more than $105 million to those firms for work as prime contractors on federal contracts, according to GAO.
Investigators also ran a sting operation in which they got SBA to certify four fake companies as HUBZone firms.

Beyond their concerns about companies cheating, GAO officials are alarmed that SBA doesn’t make more effort to verify applicants’ eligibility. Investigators used simple data-mining technology to uncover the 10 Washington companies.

“Any system that’s predicated on self-certified information with verification and validation is highly susceptible to fraud, particularly when millions — if not billions — of federal dollars are at stake,” Causseaux said.

Easy scams

To qualify for the program, a small business must certify that the office where the majority of its employees work is located in an SBA-designated HUBZone and that at least 35 percent of the firm’s employees live in a HUBZone.

But investigators said ineligible applicants can simply rent mailboxes or set up virtual offices in HUBZones, as GAO did for its investigation. For one of GAO’s fake companies, officials used the address of a Starbucks coffee shop.

“If SBA had performed a simple Internet search on the address, it would have been alerted to this fact,” said Gregory Kutz, managing director of forensic audits and special investigations at GAO.

After officials turned in the bogus companies’ applications for certification, SBA officials contacted them to resolve minor discrepancies. They asked no in-depth questions and didn’t check on the addresses. In as little as two weeks, SBA sent congratulatory letters approving the applications, according to GAO.

Jovita Carranza, SBA’s acting administrator, told the House Small Business Committee on July 17 that SBA officials discovered the problems earlier this year when they sought to answer a question from Congress.

Lawmakers had asked whether a specific area qualified as a HUBZone. Initially, the program’s managers said it did. Days later, after further review, they determined that the area did not qualify as a HUBZone. When senior managers attempted to determine how the mistake had occurred, Carranza said they discovered that the map of HUBZone-qualified areas hadn’t been updated in a year and half.
Causseaux and Kutz blamed SBA’s poor program management.

Carranza said a combination of factors led to the problems. Rather than visiting applicant offices and collecting information, as SBA rules require, agency employees relied on automated systems to gather information and paid little attention to details about the data. Managers also took self-certified information from applicants at face value, even though data was insufficient, she said.

She added that the program didn’t adequately verify and validate companies’ information, which allowed loopholes and ultim tely fraud.

Reforms will lead to suspensions and debarments, particularly for the 10 fraudulent companies in Washington, Carranza said.

Until recently, such deterrents were ineffective because no one was afraid of getting caught and facing prosecution, Causseaux said.

“In many cases, they said, ‘This is how the game is played,’ ” he said. “‘It’s easy to get in the program, there’s lots of money that’s out there, and no one is going to come after me.’”

“Until people start going to prison for violating the law, nothing is going to happen,” said Lloyd Chapman, president of the American Small Business League. “We have seen people commit willful and intentional felony contracting fraud, and yet no punishments have been levied against the offending parties.”

Carranza said she is requiring site visits for firms that have received HUBZone contracts. Officials also intend to make better use of tools such as Google Earth to check business locations. Also, SBA will institute suspension and debarment proceedings against firms that have intentionally lied about their status.

“We take very seriously the responsibility to ensure that the federal government’s contracting partners are trustworthy,” Carranza said. “Deterrence is more effective than detection, but deterrence only works when participants know there are serious consequences for malfeasance.”

To help fix the program, SBA hired more employees to assist in clearing the backlog of more than 4,000 HUBZone business recertifications by the end of fiscal 2008, she said.

SBA officials plan to issue an updated HUBZone map by Aug. 29. They also drafted an application processing manual, which gives instructions for collecting supporting documentation from applicants.
Rep. Nydia Velázquez (D-N.Y.), chairwoman of the Small Business Committee, noted that the House has passed legislation to require SBA to do more detailed checks on HUBZone applications.

The Small Business Contracting Program Improvements Act (H.R. 3867) would require on-site visits to a HUBZone-certified small business before it’s awarded a second contract. The House passed the bill in October, but the Senate has not acted on its version of the legislation.

Velázquez said entrepreneurs looking for an honest break into federal contracting have been pushed to the margin while countless unqualified companies have been awarded millions of dollars in government contracts.

“It’s tougher to get a library card than it is to get into the HUBZone program,” she said.