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VA slow to clean up broken veterans preference contracting mess

By Mark Flatten
Washington Examiner
August 7, 2013

Part three of a five-part series. To see all the stories and see video, documents and interactive graphics, click here.

Preventing fraud in the preference program aimed at helping small businesses owned by disabled veterans is finally a priority at the Department of Veterans Affairs.

It took several rewrites of the law and years of prodding by federal investigators. But VA is now verifying the qualifications of those claiming to be operators of Service-Disabled, Veteran-Owned Small Businesses.

Well, maybe VA is doing that.

Recent studies by the Government Accountability Office and the VA's inspector general question the agency's claims that it has rooted out hucksters who lie about their service records or control of businesses to win lucrative federal set-aside and sole-source contracts.

As recently as August 2012, GAO found VA's SDVOSB program "remains vulnerable to fraud and abuse" because agency officials could not give straight answers on how many firms had been verified under the rigorous standards passed by Congress in 2010.

Legitimately disabled veteran entrepreneurs are the real victims when fraud occurs, said Rep. Bill Johnson, R-Ohio, a retired Air Force officer who chaired a House Veterans Affairs subcommittee hearing on the issue last year.

They are the ones who miss out when unscrupulous competitors lie about their credentials to win the federal contracts, he said.

"To have someone intentionally misrepresent themselves as one of these great warriors and heroes in order to gain an advantage, that's about the tantamount of fraud that you can get," Johnson told the Washington Examiner.

VA awarded almost $3.4 billion last year to SDVOSBs under the law that requires agencies to ensure those firms get top priority when granting government contracts.

That is about 28 percent of all federal contracts given to businesses owned by individuals claiming to be veterans with service-connected disabilities, based on value.

But a 2011 investigation by the VA IG found three-quarters of the veteran-owned firms it reviewed did not qualify for the bidding preferences they received.

The IG estimated that unless VA did a more thorough job of screening applicants, it would award at least $500 million annually to ineligible companies.

Bidding preferences in place since 2003 allow federal agencies to reserve some contracts as "set-asides" for which only SDVOSBs can bid. Sole-source contracts are also permitted if only one SDVOSB can provide the product or service.

In 2006, a new law required VA to make SDVOSBs its top priority in awarding contracts. The 2006 law also required VA to at least check whether the listed owner of a firm seeking a preference was a service-disabled veteran. The new requirements applied only to VA.

But the 2006 verification procedures proved ineffective, little better than the "self-certification" that had been used previously by VA, and remains in place today at other federal agencies.

The law was changed again in 2010, requiring VA to do more thorough document checks of corporate and tax records, as well as to make site visits to ensure the disabled veterans listed as owners are actually who running day-to-day operations.

The new rules are effective if implemented correctly, according to both GAO and the VA IG. However, GAO reported last year that VA was slow to verify SDVOSB firms in its database under the enhanced procedures of the 2010 law.

GAO officials testified in August 2012 that of the 6,079 companies then listed in the VA database of SDVOSBs and veteran-owned businesses more than a third had only been checked under the loose standards of the 2006 law.

"The presence of firms that have only been subjected to the less-stringent process that VA previously used represents a continuing vulnerability," Richard Hillman of GAO told the House subcommittee chaired by Johnson.

Making matters worse, VA was unable to give a firm number of how many businesses had been checked under the newer standards. At one point, VA gave GAO seven different estimates of how many businesses had been re-verified under the 2010 rules, including two different figures in the same letter.

GAO concluded the shifting numbers indicated VA may not know how many firms had actually been verified.

VA officials told the Examiner in a written statement that all 5,918 veteran-owned and SDVOSBs now authorized to claim the bidding preference in agency contracts have been verified under the 2010 rules. Since late 2011, VA has overhauled its office that checks the qualifications of firms seeking SDVOSB status.

About 70 percent of the people working in the unit have backgrounds in auditing or as investigators in inspector general offices, according to VA. The unit also has six certified fraud examiners.

"VA acknowledges that there is no way to entirely eliminate fraud in any program, but believes that the steps taken have reduced VA's risk of awarding contracts to fraudulent companies," the VA statement said.

VA administrators declined to be interviewed for this series.

GAO and VA IG officials say they have not checked VA's verification procedures recently to determine whether all of the SDVOSBs doing business with the agency have been reviewed under the 2010 rules.

An IG spokeswoman said VA has yet to fully implement one of the two major recommendations from its 2011 audit of the SDVOSB program, which called for enhanced training of contracting officers.