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'Trust me' is Federal Policy on Policing Preference Fraud

By Mark Flatten
Washington Examiner
August 6, 2013

Part two of a five-part series. To see the complete series, including videos, documents and interactive graphics, click here.

Lying won't get you banned from a federal program that gives preferential treatment in government contracting to companies owned by veterans with service-connected disabilities.

If one agency catches you misrepresenting your qualifications, you can simply move on to the next one, which is unlikely to check your history.

Chances are you will continue to qualify for lucrative contracts with little or no competition as the owner of a Service-Disabled, Veteran-Owned Small Business.

The agency that caught you cheating in the first place will probably let you finish the contracts you already have. It may even give you new ones if you make minor changes to your company's paperwork.

Being banned from the program is rare. Being prosecuted is even rarer. Of the thousands of small businesses that get preferred bidding status as an SDVOSB, only 15 have been barred from receiving federal contracts since 2008.

The Government Accountability Office, the investigative arm of Congress, and multiple agency inspectors general have warned at least a dozen times since 2009 that the lack of enforcement and consequences in SDVOSB contracting results in massive fraud.

That is potentially costing taxpayers billions of dollars in improper payments annually, while depriving legitimate veteran-owned businesses the program is intended to help.

"There are at times no consequences for firms that fraudulently misrepresent their status as SDVOSBs or otherwise abuse the current system," the GAO said in a series of reports, the most recent of which was issued in January 2013.

"Not only are firms not prosecuted, suspended, or debarred, but in many cases, because there is no requirement for agencies to terminate contracts awarded to ineligible firms, the firms are allowed to continue performing contracts, even when contract termination costs would be minimal. In addition, ineligible firms in some instances continue bidding on SDVOSB contracts without consequences," the GAO report said.

Little has changed since that first warning was issued four years ago, said Stephen Lord, director of audits and investigative services for GAO. Federal investigators continue to find companies that misrepresent their qualifications yet continue getting new set-aside and sole-source contracts from the federal government.

Part of the problem is agencies awarding the contracts do not take responsibility for preventing fraud throughout the SDVOSB program. The Department of Veterans Affairs is the only exception.

VA is required by law to verify the eligibility of firms seeking contract set-asides, and maintain a list of qualified firms. But VA only checks those companies seeking VA contracts.

Businesses can avoid the heightened scrutiny by claiming SDVOSB status and getting contracts from other federal agencies.

For instance, a 2012 Department of Defense IG investigation found six companies that received $11.5 million in SDVOSB contracts from the military after being denied certification by VA.

A 2009 GAO study identified 10 firms that improperly received about $100 million in federal contracts from various agencies by misrepresenting their qualifications as SDVOSBs.

Even after the GAO report was published, those businesses secured $100 million in new federal contracts, including $16 million they won using the SDVOSB preference.

Outside of VA, federal agencies allow businesses seeking contracts under the program to "self-certify." That means all an unscrupulous business owner has to do to qualify for the contract is claim in the paperwork to be a service-disabled veteran who owns and controls the company seeking the work.

The information is rarely checked unless a protest is filed with the Small Business Administration, the agency that is most responsible for running the program government-wide.

Unless there is a protest, neither the SBA, nor the agency issuing the contract will investigate the credentials of a firm claiming SDVOSB status. Agencies do not even check the names of business owners with VA to determine if they are disabled veterans.

There is no government-wide list of qualified SDVOSB vendors. Companies can bid on individual contracts, so there is no fixed number of SDVOSBs at any given time.

SBA makes no apologies for its failure to police the SDVOSB program. The law does not require the agency to do it, and Congress has not provided funding or people to do the work, said Kenneth Dodds, director of government contracting for SBA.

"A certification program takes a lot of resources, money, people," Dodds said. "We just haven't been given direct statutory direction to start a program to certify all firms before they participate."

GAO does not buy the argument, noting in its reports that SBA is authorized to develop anti-fraud controls and conduct its own reviews to ensure the integrity of the program.

"Anytime there are sums of money involved, you want to ensure they are spent as intended," Lord, of GAO, said. "So it's difficult to argue you should be absolved of all responsibility if you are the one responsible for managing the program."

It cost VA about $12 million to run its SDVOSB certification program in 2012, a year in which it issued $3.4 billion in contracts to eligible firms.