Review Finds Fraud in Contracts Awarded in Disabled Veterans' Program

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Review Finds Fraud in Contracts Awarded in Disabled Veterans' Program

By James Dao
New York Times
November 19, 2009

A program intended to help disabled veterans win government business awarded at least $100 million in contracts to firms that were either ineligible or committed fraud to obtain the work, a federal review has found.

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In one case, a Nevada firm won a $7.5 million contract from the Federal Emergency Management Agency even though its majority owner was not a disabled veteran, the review by the Government Accountability Office said.

In two other cases, businesses that won contracts were owned by disabled veterans who were also full-time state government employees, making them ineligible. And in at least three other cases, companies owned by disabled veterans did little or none of the contracted work, simply passing it on to subcontractors not owned by disabled veterans.

The report concludes that the program lacks procedures to verify that applicant businesses are owned by disabled veterans. And even when fraud is uncovered, usually as a result of protests from competing companies, punishment is rarely meted out, allowing guilty firms to continue receiving federal contracts, the report says.

The report is scheduled to be released on Thursday in time for a hearing on the disabled veterans program before the House Committee on Small Business.

Representative Nydia M. Velázquez, a Democrat from New York who is chairwoman of the committee, said, “Fraud in this program means that honest veterans who own a small business lose out on projects to impostors who, in many cases, aren’t small businesses or even veterans.”

The Small Business Administration, which oversees the program, declined to comment on the report. But in a letter to the accountability office, an agency official asserted that problems with screening applicants and monitoring fraud were the responsibility of the federal agencies that issue the contracts, not the Small Business Administration.

“The S.B.A. is only authorized to perform eligibility reviews in a protest situation,” the official, Joseph G. Jordan, wrote. “In this area, the S.B.A. believes it has been diligent and responsible.”

Both Ms. Velázquez and the accountability office disputed that, saying that federal rules authorize the Small Business Administration to administer the program.

“For these kinds of procurement issues, the Small Business Administration has the appropriate expertise,” Ms. Velázquez said.

The program, created in 2003, permits federal agencies to set aside a portion of their no-bid or sole-source contracts for small businesses owned by disabled veterans. The rules require that veterans who were disabled during active-duty service not only be majority owners, but also manage and control daily business operations.

Congress set a goal of having 3 percent of all federal contract dollars go to small businesses owned by disabled veterans, though that benchmark has not been reached. In 2007, $4 billion in federal contracts were awarded to firms owned by disabled veterans, about 1 percent of the total.

The review focused on 10 cases where fraud or abuse could be documented; none of the companies were named.

The accountability office recommended that Congress enact rules that punish firms that win contracts through fraud, whether through levying fines, suspending contracts or barring them from receiving future contracts.

Currently, no such penalties are in place, the report said. In one case cited, a company based in Nevada fraudulently described itself as owned by a disabled veteran so it could compete for contracts to maintain trailers for hurricane victims in Louisiana. Yet after the fraud was uncovered, the company was not required to repay $7.5 million it had received, and has not been prohibited from receiving future contracts.

In another case, the accountability office found evidence that a veteran-owned business was a shell company for another firm that actually did the work, involving septic tank service at Army posts. Among other things, the investigators found that the disabled owner worked three days a week at his brother’s bar and lived 1,800 miles from the California job site.

But the company that apparently created the shell business has been allowed to continue doing work on a $1.1 million Army contract, the report said.

The report also calls for a centralized program to certify disabled veteran-owned small businesses. Currently only the Department of Veterans Affairs has a database of firms that are verified to be owned by disabled veterans.

But that database is used only by Veterans Affairs for its own contracts; other agencies allow small businesses to “self certify” that they are owned and controlled by disabled veterans. The report recommends that the database be expanded and made available to all federal agencies.

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