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Fraud Rampant in Veterans Preference Contracts

By Mark Flatten
Washington Examiner
August 5, 2013

First of a five-part series.

Warren Parker parlayed a heroic war record into millions of dollars in federal contracts, cashing in on a preference program that limits or eliminates competition for small businesses owned by service-disabled veterans.

Parker's resume included three Silver Stars, three Purple Hearts and a slew of other decorations for heroism. He even kept a diary of his "sniper kills" in Vietnam.

It was all a scam.

Parker never went to Vietnam or saw combat. During his five years in the Missouri National Guard, he never left the state.

But none of that kept Parker's company, Silver Star Construction, from winning more than $7 million in federal contracts as a Service-Disabled, Veteran-Owned Small Business.

A tip from a private citizen triggered the investigation of Parker's military credentials. He pleaded guilty to fraud and in November 2012 was sentenced to more than seven years in prison.

The SDVOSB program is supposed to help veterans with service-connected disabilities by giving them a preference in bidding for federal contracts. But lax verification requirements make it "highly vulnerable to fraud and abuse," according multiple investigations by the Government Accountability Office and agency inspectors general.

An estimated $12.3 billion in federal contracts went to firms last year that received the preference because the owner claimed to be a service-disabled veteran.

Recent studies by federal investigators show hundreds of millions of dollars are paid every year to companies that do not qualify. The actual total lost to fraud and misrepresentation could run into the billions of dollars annually.

Most federal agencies let businesses "self certify" in a name-it-and-claim-it process that grants special treatment whenever an owner claims to be a service-disabled veteran and in control of a company.

"Self-certification is essentially 'trust me,'" Stephen Lord, director of audits and investigative services for GAO, told the Washington Examiner in a recent interview.

Only one agency - the Department of Veterans Affairs - is required to verify the claims made in the paperwork when a business owner seeks SDVOSB status. The rest do not even check the applicant's qualifications unless a protest is filed, typically by an unsuccessful competitor.

"The program is vulnerable to fraud and abuse," GAO said in an August 2012 report, which echoed three years of the congressional watchdog agency's prior findings.

"The government-wide program remains particularly vulnerable since it relies on an honor-system-like process whereby firms self-certify their eligibility.

"These problems have resulted in thousands of potentially ineligible SDVOSBs receiving millions of dollars in sole-source and set-aside contracting obligations," GAO said.

The SDVOSB program was created in 1999 to make it easier for small businesses owned and operated by disabled veterans to get federal contracts.

It set a goal that at least 3 percent of every agency's outside contracting should go to small businesses owned by veterans who have a service-connected disability, as determined by either the VA or Department of Defense. Any level of disability caused by military service is enough to qualify.

The veteran must own more than half of the company and control its day-to-day operations. There also are limits on how much of the company's work can be subcontracted to other firms and minimum levels of control in joint ventures.

Bidding preferences were added in 2003.

To meet the 3 percent goal, agencies limit competition for certain contracts, either by requiring a firm be a SDVOSB to bid or by awarding sole-source contracts to a selected firm without any competition. The most common scam is a pass which larger firm cannot qualify for program works with a SDVOSB that turns in wins contract and passes all of work on to the unqualified contractor.

Usually the disabled veteran's company takes a cut of the profits but does little or no work beyond securing the job.

Another common tactic is creation of a "rent-a-vet" company, in which the disabled veteran is merely a name on the paperwork, and has nothing to do with running the business.

Federal investigations have found instances in which the owners of firms receiving SDVOSB contracts had no disabilities related to their military service, or were not even veterans. Yet they received the preference and won millions of dollars in federal contracts because no one checked the claims made in their paperwork.

The VA inspector general found in July 2011 that about three-fourths of the firms it studied in a statistically significant sample did not qualify and should not have received contracts with a veterans' preference.

As a result, the IG projected that VA alone was allocating at least $500 million per year to ineligible firms. The actual amount could be as much as $2.6 billion annually.

A separate 2012 investigation by the Department of Defense inspector general found that in less than a year, more than $342 million in contracts set aside for SDVOSBs went to potentially ineligible firms.

Although the VA has been required to perform more rigorous reviews since the law was changed in 2010, all other federal agencies still operate under the self-certification.

VA only certifies firms it does business with. So if a company is disqualified in a VA review, it can still claim SDVOSB status and get set-aside and sole-source contracts from other agencies, the GAO found.

And VA awards less than 30 percent of all federal SDVOSB contracts, based on value.

"You couldn't have written a program better to have it misused and abused, and it certainly has been," said Rep. Phil Roe, R-Tenn., a former Army surgeon and now a member of the House Committee on Veterans' Affairs.

"We can certainly do better than three out of four that are dishonest. If you can't do better than that you should close the program down."