Service-Disabled Veteran-Owned Small Business Program
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts Gao ID: GAO-10-306T December 16, 2009The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2008, the Small Business Administration (SBA) reported $6.5 billion in governmentwide sole-source, set-aside, and other SDVOSB contract awards. Given the amount of federal contract dollars being awarded to SDVOSB firms, GAO was asked to determine (1) whether cases of fraud and abuse exist within the SDVOSB program and (2) whether the program has effective fraud prevention controls in place. To identify whether cases exist, GAO reviewed SDVOSB contract awards and protests since 2003 and complaints sent to GAO's fraud hotline. GAO defined case-study firms as one or more affiliated firms that were awarded one or more SDVOSB contracts. To assess fraud prevention controls, GAO reviewed laws and regulations and conducted interviews with SBA and Department of Veterans Affairs (VA) officials. GAO did not attempt to project the extent of fraud and abuse in the program. In addition, GAO did not attempt to assess the overall effectiveness of VA's validation process to prevent or address fraud and abuse in VA SDVOSB contracts.
GAO found that the SDVOSB program is vulnerable to fraud and abuse, which could result in legitimate service-disabled veterans' firms losing contracts to ineligible firms. The 10 case-study firms that GAO investigated received approximately $100 million in SDVOSB sole-source and set-aside contracts through fraud, abuse of the program, or both. For example, contracts for Hurricane Katrina trailer maintenance were awarded to a firm whose owner was not a service-disabled veteran. GAO also found that SDVOSB companies were used as pass-throughs for large, sometimes multinational corporations. In another case a full-time federal contract employee at MacDill Air Force Base set up a SDVOSB company that passed a $900,000 furniture contract on to a company where his wife worked, which passed the work to a furniture manufacturer that actually delivered and installed the furniture. The table below provides details on 3 of the 10 cases, all of which included fraud and abuse related to VA sole source or set aside SDVOSB contracts. GAO found that the government does not have effective fraud prevention controls in place for the SDVOSB program. However, in response to the Veterans Benefits, Health Care, and Information Technology Act of 2006, VA is developing a certification processes for SDVOSB firms, but currently the certification will only be used for contracting by VA. VA officials stated that the certification process could include reviews of documents, validation of the owner's service-disabled veteran status, and potential site visits to SDVOSB firms. To be effective, VA's processes will need to include preventive controls, detection and monitoring of validated firms, and investigations and prosecutions of those found to be abusing the program. In a report GAO issued in October 2009, GAO suggested Congress consider providing VA with additional authority necessary to expand its SDVOSB verification process governmentwide.
GAO-10-306T, Service-Disabled Veteran-Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts
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Testimony:
Before the Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Wednesday, December 16, 2009:
Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain
Millions of Dollars in Contracts:
Statement of Gregory D. Kutz, Managing Director:
Forensic Audits and Special Investigations:
GAO-10-306T:
GAO Highlights:
Highlights of GAO-10-306T, a testimony before the Subcommittee on
Oversight and Investigations, Committee on Veterans‘ Affairs, House of
Representatives.
Why GAO Did This Study:
The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is
intended to provide federal contracting opportunities to qualified
firms. In fiscal year 2008, the Small Business Administration (SBA)
reported $6.5 billion in governmentwide sole-source, set-aside, and
other SDVOSB contract awards. Given the amount of federal contract
dollars being awarded to SDVOSB firms, GAO was asked to determine (1)
whether cases of fraud and abuse exist within the SDVOSB program and
(2) whether the program has effective fraud prevention controls in
place.
To identify whether cases exist, GAO reviewed SDVOSB contract awards
and protests since 2003 and complaints sent to GAO‘s fraud hotline. GAO
defined case-study firms as one or more affiliated firms that were
awarded one or more SDVOSB contracts. To assess fraud prevention
controls, GAO reviewed laws and regulations and conducted interviews
with SBA and Department of Veterans Affairs (VA) officials. GAO did not
attempt to project the extent of fraud and abuse in the program. In
addition, GAO did not attempt to assess the overall effectiveness of VA‘
s validation process to prevent or address fraud and abuse in VA SDVOSB
contracts.
What GAO Found:
GAO found that the SDVOSB program is vulnerable to fraud and abuse,
which could result in legitimate service-disabled veterans‘ firms
losing contracts to ineligible firms. The 10 case-study firms that GAO
investigated received approximately $100 million in SDVOSB sole-source
and set-aside contracts through fraud, abuse of the program, or both.
For example, contracts for Hurricane Katrina trailer maintenance were
awarded to a firm whose owner was not a service-disabled veteran. GAO
also found that SDVOSB companies were used as pass-throughs for large,
sometimes multinational corporations. In another case a full-time
federal contract employee at MacDill Air Force Base set up a SDVOSB
company that passed a $900,000 furniture contract on to a company where
his wife worked, which passed the work to a furniture manufacturer that
actually delivered and installed the furniture. The table below
provides details on 3 of the 10 cases, all of which included fraud and
abuse related to VA sole source or set aside SDVOSB contracts.
Table: Details of Three Ineligible SDVOSB Cases:
Industry: Construction, maintenance, and repair;
Award”agencies: $39.4 million”VA;
Notes: SBA determined the firm was ineligible because a non-service-
disabled veteran manages daily operations. Service-disabled veteran
owned and managed a restaurant in another city 80 miles away when the
contract was awarded. Despite being ineligible, VA allowed the firm to
continue multiple SDVOSB contracts.
Industry: Construction and janitorial services;
Award”agencies: $5 million”VA, U.S. Fish and Wildlife Service,
Agricultural Research Service, and U.S. Forest Service;
Notes: Firm is ineligible because it subcontracts 100 percent of the
work to non-SDVOSB firms. Our investigation found that the SDVOSB firm
utilizes employees from a large non-SDVOSB foreign-based corporation,
which reported almost $12 billion in annual revenue in 2008, to perform
contracts. Firm is currently listed in VA database of verified SDVOSB
firms.
Industry: Construction, maintenance, and medical equipment;
Award”agencies: $8.1 million”VA;
Notes: Firm is ineligible because the service-disabled veteran owner is
a full time New Jersey state employee and does not manage day-to-day
operations. Our investigation found that the firm‘s 49 percent non-
service-disabled veteran owner owns five additional construction firms
at the same address as the SDVOSB firm receiving contracts.
Source: GAO analysis of FPDS-NG, ORCA, CCR, and contractor data and
interviews.
[End of table]
GAO found that the government does not have effective fraud prevention
controls in place for the SDVOSB program. However, in response to the
Veterans Benefits, Health Care, and Information Technology Act of 2006,
VA is developing a certification processes for SDVOSB firms, but
currently the certification will only be used for contracting by VA. VA
officials stated that the certification process could include reviews
of documents, validation of the owner‘s service-disabled veteran
status, and potential site visits to SDVOSB firms. To be effective, VA‘
s processes will need to include preventive controls, detection and
monitoring of validated firms, and investigations and prosecutions of
those found to be abusing the program. In a report GAO issued in
October 2009, GAO suggested Congress consider providing VA with
additional authority necessary to expand its SDVOSB verification
process governmentwide.
View [hyperlink, http://www.gao.gov/products/GAO-10-306T] or key
components. For more information, contact Gregory Kutz at (202) 512-
6722 or kutzg@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
The Small Business Administration (SBA), which, along with federal
procuring agencies, administers the Service-Disabled Veteran-Owned
Small Business (SDVOSB) program, reported in fiscal year 2008 that $6.5
billion[Footnote 1] in federal contracts were awarded to firms that
self-certified themselves as SDVOSBs. Government contracts to SDVOSBs
accounted for only 1.5 percent of all government contract dollars paid
in fiscal year 2008. Since the SDVOSB program began, the government has
not met its annual mandated goal of 3 percent.[Footnote 2] However, in
fiscal year 2008 the Department of Veterans Affairs' (VA) SDVOSB
contracts accounted for $1.7 billion, or 12 percent, of all VA small
business eligible contracting dollars. In addition to SBA's statutory
authority over administration of the SDVOSB program, several other
government agencies have separate authority over issues related to the
SDVOSB program. The Veterans Benefits, Health Care, and Information
Technology Act[Footnote 3] requires VA, among other things, to maintain
a database of SDVOSBs and Veteran-Owned Small Businesses (VOSB) so
contractor eligibility can be verified on VA SDVOSB and VOSB contracts.
In addition, the Office of Federal Procurement Policy (OFPP), within
the Office of Management and Budget, provides overall direction for
governmentwide procurement policies, regulations, and procedures to
promote economy, efficiency, and effectiveness in the acquisition
processes. The office's primary focus is on the Federal Acquisition
Regulation (FAR), the governmentwide regulation governing agency
acquisitions of goods and services, including SDVOSB set-aside and sole-
source contract actions.
My statement summarizes our report issued in October 2009.[Footnote 4]
This testimony discusses (1) whether cases of fraud and abuse exist
within the SDVOSB program and (2) whether the program has effective
fraud prevention controls in place.
To identify examples of firms that received SDVOSB contracts through
fraudulent or abusive eligibility misrepresentations, we reviewed
SDVOSB contract awards and protests filed with SBA since the program's
inception in 2003. We also reviewed allegations of fraud and abuse sent
to our fraud hotline, FraudNET. In addition, we posted inquiries on our
Web page and on several veteran advocacy group Web pages and in
newsletters seeking information on fraud or abuse of the SDVOSB
program. We received over 100 allegations of fraud and abuse in the
SDVOSB program. From these sources, we selected 10 cases for further
investigation based on a variety of factors, including facts and
evidence provided in protests and allegations, whether a firm received
multiple SDVOSB contracts, and whether a firm received other non-SDVOSB
contracts. To investigate these case studies, we interviewed firm
owners and managers and reviewed relevant documentation, such as
business filings and tax returns, to determine if SDVOSB eligibility
requirements had been met. We also analyzed data from the Federal
Procurement Data System-Next Generation (FPDS-NG) for 2003 through
2009[Footnote 5] to identify SDVOSB contracts received by the firms
since the program's inception. Furthermore, we reviewed certifications
made by firms, such as certifications about a firm's size, SDVOSB
status, and line of business, in the federal government's Online
Representations and Certifications Application (ORCA).[Footnote 6] To
determine whether the program has effective fraud prevention controls
in place, we reviewed relevant laws and regulations governing the
SDVOSB program. We also interviewed agency officials about their
responsibility for the program and controls currently in place to
prevent or detect fraud and abuse. We did not attempt to project the
extent of fraud and abuse in the program. In addition, we did not
attempt to assess the overall effectiveness of VA's validation process
to prevent or address fraud and abuse in VA SDVOSB contracts.
Additional details on our scope and methodology can be found in our
report issued in October 2009.[Footnote 7]
We conducted our audit work and investigation from October 2008 through
December 2009 in accordance with U.S. generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our objectives. We
performed our investigative work in accordance with the standards
prescribed by the Council of the Inspectors General on Integrity and
Efficiency.
Ineligible Firms Obtain Millions of Dollars in SDVOSB Contracts:
Fraud and abuse in the SDVOSB program allowed ineligible firms to
improperly receive millions of dollars in set-aside and sole-source
SDVOSB contracts, potentially denying legitimate service-disabled
veterans and their firms the benefits of this program. We identified 10
case-study examples of firms that did not meet SDVOSB program
eligibility requirements but received approximately $100 million in
SDVOSB contracts, and over $300 million in additional 8(a), HUBZone,
and non-SDVOSB federal government contracts. Six of these 10 case
studies were awarded one or more sole-source or set-aside SDVOSB
contracts by VA. For example, 1 firm was awarded a $3.5 million
contract by VA for janitorial services at a VA hospital, but
subcontracted 100 percent of the work to an international firm. SBA
found 4 of the 10 firms, including 2 firms that were awarded VA
contracts, ineligible for the SDVOSB program through the agency's bid
protest process.[Footnote 8] Nevertheless, because there are no
requirements to terminate contracts when firms are found ineligible,
several contracting agencies allowed the ineligible firms to continue
their work. In addition to the 4 firms SBA found to be ineligible, we
identified 6 other case-study firms that were not eligible for the
SDVOSB program. The misrepresentations case-study firms made included a
firm whose owner was not a service-disabled veteran, a serviced-
disabled veteran who did not control the firm's day-to-day operations,
a service-disabled veteran who was a full-time federal contract
employee at MacDill Air Force Base, and firms that served as "pass-
throughs" for large and sometimes foreign-based corporations. In the
case of a pass-through, a firm or joint venture lists a service-
disabled veteran as the majority owner, but contrary to program
requirements, all work is performed and managed by a non-service-
disabled person or a separate firm.
Federal regulations set requirements for a small business to qualify as
an SDVOSB. Specifically, SDVOSB eligibility regulations mandate that a
firm must be a small business[Footnote 9] and at least 51[Footnote 10]
percent owned by one or more service-disabled veterans[Footnote 11] who
control the management[Footnote 12] and daily business operations of
the firm. In addition, SDVOSB regulations also place restrictions on
the amount of work that can be subcontracted. Specifically, regulations
require the SDVOSB to incur a mandatory percentage of the cost of the
contract performance that can range from 15 percent to 50 percent,
depending on the type of goods or services. The FAR requires each
prospective contractor to update ORCA to state whether the firm
qualifies as an SDVOSB under specific North American Industry
Classification System codes. Pursuant to 15 U.S.C. § 657 f(d), firms
that knowingly make false statements or misrepresentations in
certifying SDVOSB status are subject to penalties. Of the 10 cases we
identify, all 10 of them represented to be SDVOSBs in the Central
Contractor Registration (CCR).[Footnote 13] Table 1 provides details on
our 10 case-study firms that fraudulently or abusively misrepresented
material facts related to their eligibility for the SDVOSB program. We
have referred all 10 firms to appropriate agencies for further
investigation and consideration for removal from the program.
Table 1: Case-Study Firm Details:
Case: 1;
Industry and location: Maintenance/repair; North Las Vegas, Nevada;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies: $7.5
million--Federal Emergency Management Agency (FEMA);
Case details:
* Firm is ineligible because majority owner is not a service-disabled
veteran;
* Firm's ineligibility was determined by SBA during a bid protest in
June 2007;
* After the SBA protest, in July of 2007 FEMA sent the firm a letter
providing it approximately 30 days to vacate SDVOSB contract awards;
* Company continues to receive tens of millions in non-SDVOSB
contracts;
* SBA determined that the firm was ineligible; however, the firm has
not been suspended or debarred from receiving federal contracts.
Case: 2;
Industry and location: Construction and janitorial services; Chico,
California;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies: $5
million--VA, U.S. Fish and Wildlife Service, Agricultural Research
Service, and U.S. Forest Service;
Case details:
* Firm is ineligible because it does not perform any work and
subcontracts 100 percent of the work to non-SDVOSB firms;
* Our investigation found that the firm employs three full-time workers
and performs SDVOSB contract work with employees from a large
international-based corporation that reported almost $12 billion in
annual revenue in 2008;
* Firm received over 20 SDVOSB contracts since 2008;
* Firm is currently listed in VA's database of verified SDVSOB firms.
Case: 3;
Industry and location: Construction/maintenance/repair; Carnegie, Pa.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies:
$39.4 million--VA;
Case details:
* Firm is ineligible because a non-service-disabled veteran manages and
controls the firm's daily operations;
* Firm's ineligibility was determined by SBA during a bid protest;
* Despite the firm's being determined ineligible, VA allowed the firm
to continue multiple SDVOSB contracts because there are no requirements
for agencies to terminate contracts awarded to ineligible firms;
* A non-SDVOSB construction company, located at the same address,
manages and performs the SDVOSB contract work;
* Service-disabled veteran owned and managed a restaurant in another
city over 80 miles away when the contract was awarded;
* SBA determined that the firm was ineligible; however, the firm has
not been suspended or debarred from receiving federal contracts.
Case: 4;
Industry and location: Construction/environmental/defense
technology/maintenance; San Diego, California;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies:
$12.2 million--Environmental Protection Agency and FEMA;
Case details:
* Firm is ineligible because it is not a small business;
* Our investigation determined that federal agencies have obligated
approximately $171 million for payment to the firm during fiscal years
2003 to 2009 exceeding SBA size standards for average annual receipts;
* Firm is also ineligible because it has formed at least five SDVOSB
joint ventures violating SBA joint-venture rules;
* Firm uses the employees from the large firm in the joint ventures to
perform the SDVOSB contract work.
Case: 5;
Industry and location: Septic tank and related services/facilities
support services/rental and leasing services; Austin, Texas;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies:
$200,000--U.S. Army;
Case details:
* Firm and its SDVOSB joint ventures are ineligible for the program
because a non-SDVOSB firm performs the work;
* Firm and first joint venture were determined ineligible during an SBA
bid protest;
* After the SBA determination, the non-SDVOSB firm used another SDVOSB
joint venture to continue to receive SDVOSB contracts;
* Over $5 million in federal contracts has been obligated to the firm
and its SDVOSB joint ventures since SBA ruled the firm and its first
SDVOSB joint venture ineligible for the program;
* Service-disabled veteran used to qualify for current contracts lives
over 1,800 miles from contract performance location;
* SBA determined that the firm was ineligible; however, the firm has
not been suspended or debarred from receiving federal contracts.
Case: 6;
Industry and location: Construction/maintenance/repair/medical and
surgical equipment; Burlington, N.J;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies: $8.1
million--VA;
Case details:
* Firm is ineligible because the service-disabled veteran owner is a
full-time New Jersey state employee and does not manage the firm's day-
to-day operations;
* Our investigation also found that the firm's 49 percent owner, who is
not a service-disabled veteran, owns five additional non-SDVOSB
construction firms at the same address as the SDVOSB firm receiving
contracts;
* SBA bid protest initially determined that the SDVOSB firm was
ineligible because the service-disabled veteran did not own at least 51
percent of the firm. SBA later reversed its decision when the firm
submitted revised paperwork.
Case: 7;
Industry and location: Construction/roofing; Boise, Idaho;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies: $3.9
million--VA, Public Buildings Service, and U.S. Army;
Case details:
* Firm is ineligible because a non-service-disabled veteran manages and
controls the firm's daily operations;
* Our investigation found that the service-disabled veteran is an
employee of the firm performing the contract work;
* Joint venture was established as a pass-through for a non-SDVOSB
roofing firm;
* SDVOSB joint venture and non-SDVOSB firm share employees and adjust
payrolls to meet program percentage of work requirements;
* Service-disabled veteran received only 26 percent of the joint
venture's profits.
Case: 8;
Industry and location: Construction/specialty trade contracting;
Leominster, Mass.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies:
$13.8 million--VA, U.S. Coast Guard, U.S. Army, Public Buildings
Service, and National Park Service;
Case details:
* Firm is ineligible because a non-service-disabled veteran manages and
controls the firm's daily operations;
* During our investigation, firm executives admitted that the service-
disabled veteran is not involved with SDVOSB construction contracts;
* Service-disabled veteran is an information technology specialist who
currently works from home on nongovernment contracts;
* All the company construction contracts are managed by the non-service-
disabled partner of the firm;
* The service-disabled veteran does not receive a salary from the
company and received less in Internal Revenue Service 1099
distributions than the 10 percent minority owner of the firm;
* Ten percent minority owner of the SDVOSB firm is also the president
of another construction company located at the same address as the
SDVOSB firm.
Case: 9;
Industry and location: Construction/maintenance/repair; Luthersville,
Georgia;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies: $2.8
million--VA, U.S. Coast Guard, Department of Agriculture, and U.S.
Army;
Case details:
* Firm is ineligible because a non-service-disabled veteran manages and
controls the firm's day-to-day operations and because the SDVOSB firm
is a pass-through for a non-SDVOSB firm;
* Firm was determined ineligible through an SBA bid protest;
* Through interviews and our review of documents submitted by the firm,
we found that the SDVOSB firm only has four employees and the owner of
a non-SDVOSB firm is responsible for day-to-day operations of SDVOSB
contracts;
* The SDVOSB firm submitted 10 joint-venture bids within a 5-month
period, violating federal regulations;
* After being found ineligible by SBA, the firm continued to receive
approximately $1.8 million in new SDVOSB contracts;
* SBA determined that the firm was ineligible;
however, the firm has not been suspended or debarred from receiving
federal contracts.
Case: 10;
Industry and location: Furniture/merchant wholesaler; Tampa, Florida;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agencies:
$900,000--U.S. Air Force;
Case details:
* Firm is ineligible because it does not perform any work; it
subcontracts 100 percent of the work to non-SDVOSB firms;
* Our investigation found that the firm's service-disabled veteran
owner works full-time as a Department of Defense contract employee at
MacDill Air Force Base--the same location as the contract award;
* SDVOSB firm served as a pass-through to a company where the service-
disabled veteran's wife works, which passed the work to a furniture
manufacturer that designed, delivered, and installed the furniture;
* Manufacturer performed planning, design, and installation of
contracted goods;
* This manufacturer is also on the General Services Administration
schedule and could have provided the contracted goods at a
significantly lower price;
* The firm's physical address is the owner's home and its mailing
address is a mailbox rental store;
* Contracting officials at MacDill Air Force Base were aware of the
pass-through structure of the firm and approved the award knowing that
the SDVOSB would not perform the required percentage of work;
* Firm is currently listed in VA's database of verified SDVSOB firms.
Source: GAO analysis of FPDS-NG, ORCA, CCR, and contractor data and
interviews.
[A] Obligation amounts are rounded to the nearest $100,000.
[B] Year 2009 amounts are through July 2009.
[End of table]
VA Plans to Develop Fraud Prevention Controls for VA SDVOSB
Contractors:
We found that the federal government does not have an effective fraud
prevention system in place for the SDVOSB program. The 10 case studies
discussed above show the impact of the significant control weaknesses
in the governmentwide SDVOSB program, which allowed ineligible firms to
receive millions in SDVOSB contracts. The lack of effective fraud
prevention controls by SBA and agencies awarding contracts allowed
these ineligible firms to receive approximately $100 million of sole-
source or set-aside SDVOSB contracts over the last several years.
Recently, VA has taken steps to develop a validation program for
contracts it awards to SDVOSBs and VOSBs. According to VA officials,
these controls are being developed to validate eligibility for awarding
VA contracts only. However, currently the VA validation program is not
fully implemented.
A well-designed fraud prevention system should consist of three crucial
elements: (1) up-front preventive controls, (2) detection and
monitoring, and (3) investigations and prosecutions. For the SDVOSB
program this would mean (1) front-end controls over program eligibility
prior to contract award, (2) fraud detection and monitoring of firms
already receiving SDVOSB contracts, and (3) the aggressive pursuit and
prosecution of individuals committing fraud, including suspension and
debarment and, if appropriate, termination of the contract. In
addition, agency officials should also use "lessons learned" from
detection and monitoring controls and investigations and prosecutions
to design more effective preventive controls.
VA's proposed validation program is encouraging in that it attempts to
address at least the first of the three essential elements of a fraud
prevention framework. The Veterans Benefits, Health Care, and
Information Technology Act[Footnote 14]--which took effect in June
2007--requires VA, among other things, to maintain a database of
SDVOSBs and VOSBs so that contractor eligibility can be verified. It
also requires VA to determine whether SDVOSBs and VOSBs are indeed
owned and controlled by veterans or service-disabled veterans in order
to bid on and receive VA contracts. Lastly, it requires that VA set-
aside and sole-source awards be made only to firms that have had their
eligibility verified. At the time the act took effect, VA already
maintained an online database, VetBiz Vendor Information Pages,
referred to as VA's VetBiz database, in which nearly 16,500 firms had
self-certified as SDVOSBs or VOSBs. While not yet fully
implemented,[Footnote 15] VA's planned validation program includes
steps to verify a firm's eligibility for the program, including
validating the service-disabled status claimed by an owner and his/her
control of day-to-day operations. The VA program also includes plans
for document reviews and site visits to firms seeking VA certification
as SDVOSBs or VOSBs. Requiring submission of documents to demonstrate
ownership and control of an SDVOSB has some value as a deterrent--
ownership documents could have prevented instances demonstrated in our
case studies where the service-disabled veteran was receiving less than
51 percent of the profits. The most effective preventive controls
involve the verification of information, such as verifying service-
disabled status with VA's database and service-disabled veteran
participation in the business through an unannounced site visit.
Verification of service-disabled veteran status through VA's database
could have prevented the most egregious example of fraud where the
owner was not even a service-disabled veteran. Although VA's proposed
system was not intended for governmentwide use, once the certification
system is in place, all SDVOSBs wishing to do business with VA will
eventually have to be certified.
Although preventive controls are the most effective way to minimize
fraud and abuse, to be effective, VA's process will need to include the
remaining two elements of the fraud prevention model. The second
element, monitoring and detection, involves actions such as data mining
for fraudulent and suspicious applicants and evaluation of firms by
contracting officers and program officials to provide reasonable
assurance that contractors continue to meet program requirements. The
final element of an effective fraud prevention system is the aggressive
investigation and prosecution of individuals who commit fraud against
the federal government. In a report we issued in October 2009, we
suggested that Congress consider providing VA with the additional
authority necessary to expand its SDVOSB eligibility verification
process to all contractors seeking to bid on SDVOSB contracts
government wide. In addition, we recommended that the Administrator of
SBA and the Secretary of Veterans Affairs coordinate with OFPP to
explore the feasibility of requiring that all contractors that
knowingly misrepresent their status as an SDVOSB be debarred for a
reasonable period of time.
VA generally agreed with our two recommendations. In its response, VA
expressed that specific authority would be required for other agencies
to be able to rely on the department's VetBiz database and exclude
firms from acquisitions if not "verified" in this database. SBA's
response, provided by the Associate Administrator for Government
Contracting and Business Development, generally agreed with our
recommendations; however, in its general observations and specific
responses to our recommendations, SBA stated that it has limited
responsibility for the SDVOSB program and questioned the efficacy of
one of our recommendations. Specifically, SBA stated that agency
contracting officers bear the primary responsibility for ensuring that
only eligible SDVOSB firms perform SDVOSB set-aside and sole-source
contracts. SBA also stated that it is only authorized to perform
eligibility reviews in a bid protest situation, and contracting
officers, not SBA, are responsible for taking appropriate action after
a bid protest decision is made. The Associate Administrator maintained
that SBA was under no legal obligation to create a protest process for
the SDVOSB program, and that its only statutory obligation is to report
on other agencies' success in meeting SDVOSB contracting goals. In
addition, SBA expressed that it was not obligated to institute any type
of fraud prevention controls within the SDVOSB program.
Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions that you or other Members of the Subcommittee may have at
this time.
Contacts and Acknowledgments:
For additional information about this testimony, please contact Gregory
D. Kutz at (202) 512-6722 or kutzg@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this statement. Jonathan Meyer, Assistant Director;
Gary Bianchi; Bruce Causseaux; Randy Cole; Victoria De Leon; Beth
Faraguna; Ken Hill; John Ledford; Deanna Lee; Barbara Lewis; Vicki
McClure; Andrew O'Connell; George Ogilvie; Gloria Proa; Barry Shillito;
and Abby Volk made key contributions to this testimony.
[End of section]
Footnotes:
[1] SBA calculates its SDVOSB total by including all dollars awarded to
SDVOSBs, not just those received through set-aside or sole-source
contracts.
[2] SBA's Small Business Procurement Scorecards report the annual
percentage share of SDVOSB awards.
[3] Veterans Benefits, Heath Care, and Information Technology Act of
2006, Pub. L. No. 109-461, 120 Stat. 3433 (2006).
[4] GAO, Service-Disabled Veteran-Owned Small Business Program: Case
Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain
Millions of Dollars in Contracts, [hyperlink,
http://www.gao.gov/products/GAO-10-108] (Washington, D.C.: Oct. 23,
2009).
[5] FPDS-NG is the central repository for capturing information on
federal procurement actions. Dollar amounts reported by federal
agencies to FPDS-NG represent the net amounts of funds obligated and
deobligated as a result of procurement actions. Because we did not
obtain disbursement data, we were unable to identify the actual amounts
received by firms.
[6] ORCA was established as part of the Business Partner Network, an
element of the Integrated Acquisition Environment, which was
implemented by the Office of Management and Budget's OFPP and the Chief
Acquisition Officers Council. ORCA is the primary government repository
for contractor-submitted representations and certifications required
for conducting business with the government.
[7] [hyperlink, http://www.gao.gov/products/GAO-10-108].
[8] 15 U.S.C. §631 et seq., 13 C.F.R. Parts 125 and 134.
[9] The criteria for a small business are defined in 13 C.F.R. Part
121.
[10] For any publicly owned business, not less than 51 percent of the
stock must be owned by one or more service-disabled veterans.
[11] The term "veteran" means a person who served in the active
military, naval, or air service, and who was discharged or released
there from under conditions other than dishonorable. 38 U.S.C. §101(2).
Service-disabled means, with respect to disability, that such
disability was incurred or aggravated in line of duty in the active
military, naval, or air service.
[12] In the case of a veteran with permanent and severe disability, the
spouse or permanent caregiver of such veteran may control the business.
[13] CCR is the primary contractor registrant database for the U.S.
federal government. CCR collects, validates, stores, and disseminates
data in support of agency acquisition missions.
[14] Veterans Benefits, Health Care, and Information Act of 2006, Pub.
L. No. 109-461, 120 Stat. 3433 (2006).
[15] See GAO, Department of Veterans Affairs Contracting with Veteran-
Owned Small Businesses, [hyperlink,
http://www.gao.gov/products/GAO-09-391R] (Washington, D.C.: Mar. 19,
2009).
[End of section]
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