GAO Report Indicates SBA Program Plagued With Fraud


GAO Report Indicates SBA Program Plagued With Fraud

By Rob Kuznia
March 26, 2009

A Congressional investigation has revealed that a federal program meant to benefit small businesses in economically distressed areas is plagued with "fraud and abuse."

In a report released Wednesday, the Government Accountability Office said the HUBZone program, which is meant to bring assistance to businesses in "Historically Underutilized Business Zones," includes at least 19 firms that should not be there.

In 2006 and 2007, those firms received a total of nearly $30 million in contracts from the U.S. Army, Air Force, Navy and other agencies.

The report from the GAO -- an investigative arm of Congress -- lays much of the blame at the feet of the federal Small Business Administration, the government agency responsible for not only conferring HUBZone status, but also detecting fraud.

The GAO also held the firms accountable, saying many appeared determined to game the system, setting up dummy offices in economically challenged locations while conducting the bulk of their work in areas that do not qualify. Many of the 19 firms -- which were located in Alabama, Texas and California -- also broke the rules by outsourcing the bulk of the work.

The report did not name the companies, but did say that continuous offenders are subject to fines, penalties and imprisonment.

One of the more egregious examples involved a father-son maintenance-services company that claimed to be based in Jacksonville, Alabama. The GAO traced the stated headquarters address to a residential trailer that neither man had lived or worked in for more than a year.

Instead, they operated from a location outside the HUBZone, 90 miles away. After the GAO's initial visit, the men replaced their mailbox with one bearing the company name, to give the appearance they were working from the trailer, the report said.

In addition, the company, which received $920,000 in contracts from the U.S. Army, outsourced most of the work to subcontractors.

In another example, an environmental consulting firm in Fort Worth, Texas, subcontracted the vast majority of the $2.3 million it received in Army contracts to other companies, some of them large firms. This is a double no-no, since jobs made possible through approval from the Small Business Administration by definition must be performed by small businesses.

The report did credit the Small Business Administration for making some positive steps toward reform, but said the efforts haven't been enough. For instance, an earlier GAO report in July 2008 mentioned 10 other firms that gamed the system in a way similar to the 19 featured in the latest report. By January of 2009, the Small Business Administration had decertified two of the 10 companies. However, other firms continued to receive millions of dollars in contracts, the GAO report says.

"For example, a construction firm identified in our July 2008 testimony admitted that it did not meet HUBZone requirements and was featured in several national publications by name," the report said. Nonetheless, the company has continually represented itself as HUBZone certified and, since the testimony, received $25 million HUBZone obligations and set-aside contracts, the report said.

On Thursday the report drew a strong reaction from a watchdog group called the American Small Business League, which has been beating the drum on alleged mismanagement within the Small Business Administration since 2003.

"I believe this is the 16th or 17th investigation into these various programs since 2003, all of which have found things I think are shocking," Christopher Gunn, the league's communications director, told Thursday. Still, he said, Congress has failed to pass policies that would crack down on the fraud.

Gunn added that the lion's share of the mismanagement took root under the Bush administration, which cut the budget of the Small Business Administration in half.

Asked to comment on the report, Small Business Administration spokesman Michael Stamler on Thursday emailed a written statement to

"Over the last several months, we have taken significant steps towards addressing the concerns the GAO raised in their June 2008 report, including:
New procedures for evaluating applications, recertifications and program examinations. As a result, we are conducting unannounced site visits and plan to strengthen those efforts going forward. . . . Once we've obtained information on the firms included in the most recent GAO report, we (will) move quickly to take the appropriate actions."




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