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-10-108 October 23, 2009The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2007, the Small Business Administration (SBA) reported $4 billion in governmentwide sole source and set aside 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 our fraud hotline. GAO defined a case as one or more affiliated firms who 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.
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 identified in this report received approximately $100 million from SDVOSB contracts through fraud or 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 SDVOSB companies used as a pass-through 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. GAO found that the government does not have effective fraud-prevention controls in place for the SDVOSB program. Specifically, SBA and agencies awarding SDVOSB contracts do not have processes in place to validate a firm's eligibility for the program prior to bid submission. SBA and contracting agencies also currently do not have a database of individuals that are service-disabled veterans, a key eligibility requirement for the program. According to VA, it is developing a database, called VetBiz, of validated SDVOSBs, but currently it is only used for contracting by the VA. SBA's bid-protest process is the only governmentwide control over the SDVOSB program. However, although ineligible firms have been identified through bid protests, firms found ineligible do not face real consequences, can be allowed to complete the contracts received, and are not suspended or debarred.
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Director: Team: Phone:GAO-10-108, 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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Report to the Chairwoman, Committee on Small Business, House of
Representatives:
United States Government Accountability Office:
GAO:
October 2009:
Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain
Millions of Dollars in Contracts:
GAO-10-108:
GAO Highlights:
Highlights of GAO-10-108, a report to the Chairwoman, Committee on
Small Business, 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 2007, the Small Business Administration (SBA)
reported $4 billion in governmentwide sole source and set aside 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 our fraud hotline. GAO
defined a case as one or more affiliated firms who 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.
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
identified in this report received approximately $100 million from
SDVOSB contracts through fraud or 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 SDVOSB companies used as a pass-through 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 for 3 of the 10 cases.
Table: Details of 3 Ineligible SDVOSB Cases:
Industry: Maintenance and repair;
Award”agency: $7.5 million”Federal Emergency Management Agency (FEMA);
Notes: Firm is not eligible because majority owner is not a service-
disabled veteran. Firm‘s ineligibility was determined by SBA during a
bid protest. Company continues to receive tens of millions in non-
SDVOSB contracts.
Industry: Construction and janitorial services;
Award”agency: $5 million”VA, U.S. Fish and Wildlife Service,
Agricultural Research Service, U.S. Forest Service;
Notes: Firm is ineligible because it does not perform any work and
subcontracts 100 percent of the work to non-SDVOSB firms. Our
investigation found 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.
Industry: Septic tank and related services;
Award”agency: $200,000”Army;
Notes: Firm and its SDVOSB joint ventures are ineligible for the
program because a non-SDVOSB firm performs all contract work. After
being found ineligible for the program by SBA, the firm used another
SDVOSB joint venture to continue to receive SDVOSB contracts. Service-
disabled veteran used to qualify for current contracts lives over 1,800
miles from contract performance location.
Source: GAO.
[End of table]
GAO found that the government does not have effective fraud-prevention
controls in place for the SDVOSB program. Specifically, SBA and
agencies awarding SDVOSB contracts do not have processes in place to
validate a firm‘s eligibility for the program prior to bid submission.
SBA and contracting agencies also currently do not have a database of
individuals that are service-disabled veterans, a key eligibility
requirement for the program. According to VA, it is developing a
database, called VetBiz, of validated SDVOSBs, but currently it is only
used for contracting by the VA. SBA‘s bid-protest process is the only
governmentwide control over the SDVOSB program. However, although
ineligible firms have been identified through bid protests, firms found
ineligible do not face real consequences, can be allowed to complete
the contracts received, and are not suspended or debarred.
What GAO Recommends:
Congress should consider providing VA authority and resources to expand
its SDVOSB eligibility process governmentwide. GAO also recommends that
SBA and VA explore the feasibility of governmentwide use of the VA
VetBiz verified database for SDVSOB contractors. SBA and VA generally
agreed with the recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-108] or key
components. For more information, contact Gregory Kutz at (202) 512-
6722 or kutzg@gao.gov.
[End of section]
Contents:
Letter:
Ineligible Firms Obtain Millions of Dollars in SDVOSB Contracts:
SDVOSB Program Does Not Have Governmentwide Fraud-Prevention Controls:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Small Business Administration:
Appendix III: Comments from the Department of Veterans Affairs:
Appendix IV: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Case-Study Firm Details:
Figures:
Figure 1: Case Study 5 Firm's Portable Toilets and Hand-Wash Stations
with Non-SDVOSB Name and Phone Number:
Figure 2: Business Mailing Address and Physical Address for Case-Study
10 Firm:
Figure 3: Fraud-Prevention Model:
Abbreviations:
CCR: Central Contractor Registration:
EPA: Environmental Protection Agency:
FAR: Federal Acquisition Regulation:
FEMA: Federal Emergency Management Agency:
FPDS-NG: Federal Procurement Data System-Next Generation:
HUBZone: Historically Underutilized Business Zone:
NAICS: North American Industry Classification System:
OFPP: Office of Federal Procurement Policy:
ORCA: Online Representations and Certifications Application:
SBA: Small Business Administration:
SDO: Suspension and Debarment Official:
SDVOSB: Service-Disabled Veteran-Owned Small Business:
USDA: United States Department of Agriculture:
VOSB: Veteran-Owned Small Business:
VA: Department of Veterans Affairs:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 23, 2009:
The Honorable Nydia M. Velazquez:
Chairwoman:
Committee on Small Business:
House of Representatives:
Dear Madam Chairwoman:
The federal government's long-standing policy has been to use its
buying power--the billions of dollars it spends through contracting
each year--to maximize procurement opportunities for small businesses.
The Service-Disabled Veteran-Owned Small Business (SDVOSB) procurement
program is an extension of this policy. It also is intended to honor
the extraordinary service rendered to the United States by veterans
with disabilities incurred or aggravated in the line of duty during
active service with the armed forces. The Veterans Benefits Act of
2003,[Footnote 1] which established the program, permits contracting
officers to award set-aside and sole-source contracts to any small
business concern owned and controlled by one or more service-disabled
veterans. Executive Order 13360 also requires federal procurement
officials and prime contractors to provide opportunities for these
firms to increase their federal contracting and subcontracting. The
statutorily-mandated prime and sub contracting goal[Footnote 2] for
SDVOSB participation is not less than 3 percent of all federal contract
dollars.
In order to be eligible for a set-aside or sole-source SDVOSB contract,
a firm must meet certain criteria. It must be majority-owned[Footnote
3] by one or more service-disabled veterans who manage and control
[Footnote 4] daily business operations. The term "veteran" means a
person who served in the active military, naval, or air service, and
who was discharged or released under conditions other than
dishonorable. Service-disabled means that the disability occurred or
became aggravated during the line of duty in the active military,
naval, or air service.[Footnote 5] A firm also must qualify as a small
business under the North American Industry Classification System
(NAICS)[Footnote 6] industry-size standards. Firm officials are allowed
to self-certify themselves as being an SDVOSB by attesting that they
meet the criteria.
The Small Business Administration (SBA), which, along with federal
procuring activities, administers the SDVOSB program and tracks the
government's progress towards meeting its 3 percent goal,[Footnote 7]
reported in fiscal year 2007 that $4 billion[Footnote 8] in federal
contracts were awarded to firms who self-certified themselves as
SDVOSBs. Government contracts to SDVOSBs accounted for only 1 percent
of all government contract dollars paid in fiscal year 2007. Since the
SDVOSB program began, the government has not met its annual mandated
goal. 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 9]
requires the Department of Veterans Affairs (VA) to maintain a database
of SDVOSBs and Veteran-Owned Small Businesses (VOSB) so contractor
eligibility can be verified, and requires VA to determine the
eligibility of firms bidding 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 and 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.
Given the billions of dollars of federal contracts being awarded to
SDVOSB firms and the committee's concern that ineligible firms are
receiving SDVOSB set-aside and sole-source contracts instead of
legitimate SDVOSB firms, you requested that we perform an investigation
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 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 programs
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
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. For the purposes of our investigation, we defined a case as
one or more affiliated firms or joint ventures that obtained an SDVOSB
contract. These cases include multiple firms owned by an individual or
multiple firms affiliated through joint ventures and other types of
partner agreements. 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 Federal
Procurement Data System-Next Generation (FPDS-NG) for years 2003
through 2009[Footnote 10] 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
11] 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 over the program and controls currently in place to
prevent or detect fraud and abuse.
Our work was not designed to identify all firms that misrepresent
themselves as SDVOSBs or commit fraudulent or abusive activity in the
SDVOSB program. Our work also did not attempt to identify fraud and
abuse in SDVOSB subcontracts. Our work focused on determining whether
selected firms met program eligibility requirements. In addition, our
10 case study examples cannot be projected to the overall population of
SDVOSB firms.
We conducted our audit work and investigation from October 2008 through
July 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 (CIGIE). Additional details on our scope and methodology are
included in appendix I.
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, received approximately $100 million in SDVOSB
contracts, and over $300 million in additional dollars of 8(a),
HUBZone, and non-SDVOSB federal government contracts. SBA found four of
the firms ineligible for the SDVOSB program through the agency's bid
protest process.[Footnote 12] 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, we identified six 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
contract federal employee at MacDill Air Force Base, and firms that
served as a "pass-through" 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. As stated above, SDVOSB eligibility regulations mandate that
a firm must be a small business[Footnote 13] and at least 51[Footnote
14] percent-owned by one or more service-disabled veterans[Footnote 15]
who control the management[Footnote 16] 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 Federal Acquisition
Regulation (FAR) requires all prospective contractors to update ORCA to
state whether their firm qualifies as an SDVOSB under specific NAICS
codes. Pursuant to 15 U.S.C. § 657 f(d), firms that knowingly making
false statements or misrepresentations in certifying SDVOSB status are
subject to penalties. Of the 10 cases we identify in this report, all
10 of them represented to be SDVOSBs in the Central Contractor
Registration (CCR)[Footnote 17]. 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 plan to
refer 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 business location: Maintenance/repair; North Las Vegas, Nev.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $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 of 2007;
* After the SBA protest, in July of 2007 FEMA sent the firm a letter
providing approximately 30-days to vacate SDVOSB contract awards;
* Company continues to receive tens of millions in non-SDVOSB
contracts;
* SBA determined the firm was ineligible: however, the firm has not
been suspended or debarred from receiving federal contracts.
Case: 2;
Industry business location: Construction and janitorial services Chico,
Calif.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $5
million--VA, U.S. Fish and Wildlife Service, Agricultural Research
Service, 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 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;
* Received over 20 SDVOSB contracts since 2008.
Case: 3;
Industry business location: Construction/maintenance/repair Carnegie,
Pa.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $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 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;
* 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 the firm was ineligible: however, the firm has not
been suspended or debarred from receiving federal contracts.
Case: 4;
Industry business location: Construction/environmental/defense
technology/maintenance San Diego, Calif.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $12.2
million--Environmental Protection Agency (EPA), 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 business location: Septic tank and related services/
facilities support services/rental and leasing services;
Austin, Tex.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency:
$200,000--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 the firm was ineligible: however, the firm has not
been suspended or debarred from receiving federal contracts.
Case: 6;
Industry business location: Construction/maintenance/repair/medical and
surgical equipment;
Burlington, N.J.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $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 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 business location: Construction/roofing;
Boise, Idaho;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $3.9
million--VA, Public Buildings Service, 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 business location: Construction/specialty trade contracting;
Leominster, Mass.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $13.8
million--VA, Coast Guard, Army, Public Buildings Service, 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 IT 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 IRS 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 business location: Construction/maintenance/repair;
Luthersville, Ga.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency: $2.8
million--VA, US Coast Guard, USDA, and 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, SDVOSB firm continued to receive
approximately $1.8 million in new SDVOSB contracts;
* SBA determined the firm was ineligible: however, the firm has not
been suspended or debarred from receiving federal contracts.
Case: 10;
Industry business location: Furniture/merchant wholesaler;
Tampa, Fla.;
SDVOSB contracts[A] for years 2003-2009,[B] and awarding agency:
$900,000--Air Force;
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's service-disabled veteran
owner works full-time as a DOD 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, who passed the work to a furniture
manufacturer who designed, delivered, and installed the furniture;
* Manufacturer performed planning, design, and installation of
contracted goods;
* This manufacturer is also on the GSA 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 mail-box 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.
Source: GAO analysis of FPDS, ORCA, CCR, 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]
Case 1: This firm fraudulently certified itself as an SDVOSB in CCR so
it could compete for over $200 million in SDVOSB contract awards that
FEMA set aside for site maintenance for trailers provided to Hurricane
Katrina and Rita victims in Louisiana. In May 2006, the same month as
the FEMA request for proposals were posted, the majority owner of the
SDVOSB applied for the first time to VA for service-connected
disability compensation related to claimed injuries incurred during
military service in the mid-1970s. In July 2006, VA requested that the
SDVOSB's owner provide evidence of his/her service-connected
disability. The owner never responded. In December 2006, the VA denied
the owner's application for compensation and status as a service-
disabled veteran. Six months later, SBA issued a decision, in response
to an SDVOSB status protest, stating that the owner of the firm was not
a service-disabled veteran. In its decision, the SBA concluded the
SDVOSB firm and its joint venture did not qualify for SDVOSB contracts.
Based on this decision, in July 2007, FEMA sent a letter terminating
any future task orders for the firm and the joint venture and giving
them until the end of August 2007 to cease all operations under both
contract awards. In the end, the firm received approximately $7.5
million dollars from FEMA's SDVOSB set-aside contracts prior to
termination. The firm received no other punishments or sanctions for
the fraudulent misrepresentation and has not been suspended or debarred
from receiving future government contracts.
Case 2: This firm, functioning as a pass-through for non-SDVOSB firms,
improperly received over $5 million in SDVOSB contracts. Our
investigation revealed that this firm, located in Chico, California,
improperly subcontracted 100 percent of the work from an SDVOSB
contract to a corporation headquartered in Europe that reported almost
$12 billion dollars in revenue in 2008. The firm consists of two owners
and three full-time employees. While the majority owner listed on
company documents is a service-disabled veteran, neither the owner nor
the firm's employees perform any of the work related to SDVOSB
contracts the firm receives. SDVOSB janitorial service contracts
require that at least half of the personnel costs are incurred by
employees of either the firm or another SDVOSB. When we interviewed the
firm's service-disabled veteran owner, he/she acknowledged that he/she
subcontracted all of the firm's work to other non-SDVOSB firms. The
owner said the company's business model is to (1) use Federal Business
Opportunities (FedBizOps)[Footnote 18] to search for SDVOSB set-asides
that the firm can find a subcontractor to complete; then (2) take over
a portion of the subcontractor's payroll to meet the percentage
requirement for completing the work. The owner stated this process was
used for the firm's $3.5 million contract for janitorial services at a
VA hospital in California, where the SDVOSB firm functioned as a pass-
through for a non-SDVOSB foreign-based corporation, which is one of the
world's largest facility-service groups, with operations in 50
countries and almost $12 billion in annual revenue in 2008. For this
contract, all employees performing the janitorial services were from
the foreign-based corporation. The firm--with two owners and only three
employees--has secured 21 SDVOSB contracts in nine different states for
janitorial, construction, and other services. The work that is passed
through to non-SDVOSB firms is valued at $5 million.
Case 5: Our investigation found that a non-SDVOSB company used two
SDVOSB firms as pass-throughs to obtain over $3 million in SDVOSB
contracts. It did not have the SDVOSB firms perform the majority of the
contract work as required. The company located in Austin, Texas, formed
joint ventures with the two SDVOSB firms to receive contracts for
septic-tank and related services from the Army at Fort Drum, New York,
and Fort Irwin, California. The Fort Drum set-aside contract was
protested in June 2008 through the SBA bid-protest process, which
determined that the service-disabled veteran owner was not in control
of the business. The SBA disqualified both the non-SDVOSB company and
its joint venture from the SDVOSB program and deemed them ineligible to
bid on such contracts in the future; however, SBA did not process
either the company or the SDVOSB firm for suspension or debarment,
which would generally exclude the firms from doing business with the
federal government. Furthermore, SBA's ruling did not result in the
Army's termination of its contracts with the joint ventures that were
the subject of the protest because there are no requirements to
terminate contracts awarded to firms ineligible for SDVOSB set-aside or
sole-source contracts. The company that used the SDVOSB as a pass-
through was allowed to continue to provide septic-tank and related
services at Fort Drum through 2013 for a total value of up to $1.1
million.
In 2009 the same non-SDVOSB company from Texas partnered with a
different SDVOSB firm to receive a contract at Fort Irwin valued at up
to $3 million for septic-tank and related services. Based on our case
analysis, the SDVOSB owner does not control the SDVOSB firm. The SDVOSB
owner is a former employee of the joint venture "partner" from Texas,
as are 8 out of 10 employees. The SDVOSB owner also works 3 days each
week at his brother's bar in Illinois--located 1,800 miles away from
the project site in California. In addition, the SDVOSB owner does not
have control over payments received from the work performed at Fort
Irwin. The non-SDVOSB company's accountant, who is located in San
Antonio, Texas, manages the SDVOSB firm's bank accounts. Furthermore, a
visit to the work site at Fort Irwin in June 2009 also revealed, as
shown in figure 1 below, that the portable toilets and hand-wash
stations on site all displayed the name and phone number of the non-
SDVOSB company.
Figure 1: Case Study 5 Firm's Portable Toilets and Hand-Wash Stations
with Non-SDVOSB Name and Phone Number:
[Refer to PDF for image: photograph]
Source: GAO.
[End of figure]
In June of 2009 we visited the contract performance site at Fort Irwin,
with the intention of inspecting the site unannounced. However, a Fort
Irwin contracting officer notified the SDVOSB firm in advance of our
site visit. Prior to our arrival it appeared that the SDVOSB owner had
made an effort to conceal the true management and control over the
contract. Specifically, upon arrival, the SDVOSB owner from Illinois
was present on site to greet us, despite the fact that he lived over
1,800 miles away. In addition, a service truck displaying the SDVOSB
firm's logo was prominently displayed at the contract location. Further
investigation revealed that the truck's registration had been
transferred the day of our visit from the non-SDVOSB company from Texas
to the SDVOSB firm. However, the registration address remains in Texas
at the office of the accountant for both businesses.
Case 10: This case-study firm, functioning as a pass-through for a non-
SDVOSB company, received approximately $900,000 for an SDVOSB contract.
Our investigation found that the owner of the SDVOSB passed through all
of the work for this furniture design and installation contract to a
furniture dealer that his wife worked for, who then passed the work to
a furniture manufacturer that actually designed and installed the
furniture. When we interviewed the SDVOSB firm owner, he admitted that
he had no experience in the furniture business. In addition, the SDVOSB
owner works full-time at MacDill Air Force base--the same location as
the contract award. This award is questionable on three counts: the
SDVOSB owner's full-time job with another employer should make it
impossible for him to manage and control daily business operations on a
large SDVOSB contract; the contract work was passed through to the
manufacturer; and the owner's daily interactions with Air Force
personnel on base create the perception of preferential treatment. In
addition, as shown in figure 2 below, the legitimacy of the SDVOSB firm
is also in question because the firm's physical address is the owner's
home and its mailing address is a mail-box rental store.
Figure 2: Business Mailing Address and Physical Address for Case-Study
10 Firm:
[Refer to PDF for image: two photographs]
Source: GAO.
[End of figure]
When questioned, contracting officials at the base stated that they
were aware that the SDVOSB firm owner was also a DOD contract employee
and that he would likely not perform a majority of the work on the
contract. Nevertheless, they felt the contract was awarded
appropriately.
MacDill Air Force Base awarded the firm, which has no employees, an
SDVOSB set-aside contract for approximately $900,000 for furniture
layout design, delivery, and installation. The SDVOSB firm owner has
worked at the base for over 20 years as a telecommunications contract
employee. The base director of contracting and the legal counsel who
approved the award had prior working relationships with the SDVOSB
owner on the base. Contracting officials told us that during the
decision process for the award of the furniture contract, heavy
emphasis was placed on past performance rather than price; however, the
SDVOSB firm had no past-performance history. Contracting officials at
the base instead allowed the SDVOSB firm to use past performance
ratings of the furniture dealer, where the owner's wife worked to meet
the past-performance requirement.
In addition, contracting officials were aware of the SDVOSB owner's
limited involvement in performing the contract. They even stated that
the service-disabled veteran would likely not show up until it was time
to collect his check. The military personnel in charge of overseeing
the furniture layout design, delivery, and installation stated that the
manufacturer was more involved than the SDVOSB or its affiliate dealer.
We observed the delivery and installation of some of the furniture
related to this contract. The manufacturer was the only company present
to lead the installation process, with the plans they designed in-hand
and their logo clearly printed on them. Despite the fact that this
SDVOSB award clearly functioned as a pass-through for a non-SDVOSB
firm, base officials did not consider the award to be improper. In
fact, the Director of Contracting at the base stated that he estimates
90 percent of SDVOSB contracts are pass-throughs for non-SDVOSB
companies.
SDVOSB Program Does Not Have Governmentwide Fraud-Prevention Controls:
The 10 case studies discussed above show that significant control
weaknesses in the SDVOSB program allow 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. The SDVOSB
program is essentially an eligibility-based program. However, neither
the SBA, except when responding to a protest, nor contracting officials
are currently verifying the eligibility of firms claiming to be
SDVOSBs. For example, currently the SBA and contracting agencies do not
have a process in place to access the VA service-disabled veteran's
database listing individuals that are valid service-disabled veterans.
In addition, contracting officers are not required to validate that a
firm's owner is a service-disabled veteran prior to award. Unlike other
small business contracting programs, such as the HUBZone and 8(a)
programs, there also are no documentation submissions to substantiate
eligibility for the program or application process associated with the
SDVOSB program. This lack of controls substantially increases the risk
for fraud and abuse in the SDVOSB program.
The only process in place to detect fraud in the SDVOSB program
involves a formal bid protest process at the SBA, whereby interested
parties to a contract award can protest if they feel a firm
misrepresented its small business size or SDVOSB eligibility in its bid
submission. However, as shown by our case studies, this self-policing
process does not prevent ineligible firms from receiving SDVOSB
contracts. For example, bid-protest decisions do not always result in
the termination of contracts with ineligible firms, even when
termination costs would be minimal in cases where contract work had not
begun. As some of our case studies show, even when firms are found
ineligible to receive a contract, they can still retain it because
current regulations do not require that the contracting agency
terminate the contract. In addition, none of the firms found ineligible
by the SBA through SDVOSB-status protests were suspended or debarred
from receiving SDVOSB and other government contracts. When asked about
its bid protest process, SBA officials stated that the bid protest
process focuses on determining the eligibility of a firm for a specific
contract and providing details on why a firm was found to be eligible
or ineligible. SBA officials also stated that bid protest decisions do
not include recommendations for suspension or debarment. Recently, in
response to the Veterans Benefits, Health Care, and Information
Technology Act,[Footnote 19] VA has taken steps to develop a validation
program for contracts it awards to SDVOSBs and Veteran-Owned Small
Businesses (VOSB). While not yet fully implemented,[Footnote 20] this
validation program includes steps to verify a firm's eligibility for
the program including validating an owner's SDV status and his/her
control of day-to-day operations. The VA program also includes plans
for site visits to firms seeking VA certification as an SDVOSB or VOSB.
Lack of Governmentwide Fraud-Prevention Controls Leaves the Government
Vulnerable to Fraud and Abuse:
Our 10 case studies clearly show that fraud and abuse exist within the
SDVOSB program. Without preventive controls our case studies show that
millions of dollars of SDVOSB set-aside and sole-source contracts are
being awarded to ineligible firms. Fraud prevention requires a system
of rules which, in their aggregate, minimize the likelihood of fraud
occurring while maximizing the possibility of detecting any fraudulent
activity at a reasonable cost. Fraud-prevention systems set forth what
actions constitute fraudulent conduct and specifically spell out who in
the organization handles fraud matters under varying circumstances. The
potential of being caught and disciplined can, in some cases, persuade
likely perpetrators not to commit the fraud. Because of this principle,
the existence of a thorough fraud-prevention system is essential to
fraud prevention and detection.[Footnote 21] However, as shown by our
case studies, there are at times no consequences for firms that
fraudulently misrepresent their status as SDVOSBs or otherwise abuse
the current system. 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 cases where contracted work had
not begun. In addition, ineligible firms in some instances continue
bidding on SDVOSB contracts without consequences.
As of July 2009, the federal government does not have in place the key
elements of an effective fraud-prevention system for the SDVOSB
program. As shown in figure 3 below, 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 to include suspension and debarment, or
requirement to terminate the contract. In addition, as shown in figure
3, the organization should also use "lessons learned" from its
detection and monitoring controls and investigations and prosecutions
to design more-effective preventive controls.
Figure 3: Fraud-Prevention Model:
[Refer to PDF for image: illustration]
Potential fraud, waste, and abuse:
Implementation of Prevention controls: leads to:
Smaller amount of Potential fraud, waste, and abuse:
Implementation of detection and monitoring (lessons learned influence
future use of prevention controls): leads to:
Smaller amount of Potential fraud, waste, and abuse:
Implementation of investigations and prosecutions (lessons learned
influence future use of prevention controls).
Source: GAO.
[End of figure]
Preventive Controls:
Currently the SDVOSB program has no preventive controls in place to
prevent fraud and abuse in the program. In addition, the SBA and
agencies awarding contracts do not have access to a database listing
individuals that are valid service-disabled veterans. We have
previously reported that fraud prevention is the most efficient and
effective means to minimize fraud, waste, and abuse.[Footnote 22] This
is especially important in a program like the SDVOSB program where even
firms identified as receiving contracts through fraud or abuse face no
real consequences as discussed below. Thus, controls that prevent
fraudulent firms and individuals from entering the program in the first
place are the most important element in an effective fraud-prevention
program. The most crucial element of effective fraud-prevention
controls is a focus on substantially diminishing the opportunity for
fraudulent access into the system through front-end controls. Currently
there are no preventive controls in place for the SDVOSB program. The
SDVOSB program is essentially an eligibility-based program. However
neither the SBA or contracting officials are required to verify the
eligibility of firms claiming to be SDVOSBs. This lack of controls
substantially increases the risk for fraud and abuse in the SDVOSB
program.
Detection and Monitoring:
Although preventive controls are the most effective way to minimize
fraud and abuse, continual monitoring is an important component in
detecting and deterring fraud. Monitoring and detection within a fraud-
prevention program involve actions such as data mining for fraudulent
and suspicious applicants and evaluating firms to provide reasonable
assurance that they continue to meet program requirements. Currently,
the only process in place that can detect fraud and abuse in this
program is the bid-protest process administered by SBA. Through the bid-
protest process, interested parties self-police the SDVOSB program by
exercising their right to challenge an SDVOSB award that is suspected
to have been awarded to an ineligible firm. SBA will determine the
eligibility of the firm, and if ruled ineligible, the SBA protest
decision will state that the firm is supposed to be ineligible for
additional SDVOSB awards. However, based on our case studies this
process does not prevent the firms from bidding on SDVOSB contracts,
because SBA protest decisions are not listed in CCR or ORCA, and
therefore contracting officials may not be aware of protest decisions.
Officials from the Inspector General offices within SBA and VA stated
that they will respond to allegations of fraud and abuse within the
SDVOSB program, but they do not actively monitor the program for fraud
and abuse. Without continual monitoring of the program, the risk for
persistent fraud and abuse increases.
Investigation and Prosecution:
The final element of an effective fraud prevention system is the
aggressive investigation and prosecution of individuals who commit
fraud against the federal government. The SBA, through the bid-protest
process, makes determinations of eligibility status in the SDVOSB
program. However, there is not an effective process for prosecution,
suspension, or debarment of program abusers. Without consequences, the
bid-protest process is not an effective control for preventing future
abuse. As mentioned in case studies above, firms determined to be
ineligible for SDVOSB awards are not required to terminate those
awards. In one case, a joint venture was determined to be a pass-
through--it completed the contract and created another pass-through
with a different service-disabled veteran to win another SDVOSB
contract. Furthermore, although SBA's regulations[Footnote 23] state
that firms misrepresenting themselves as SDVOSB concerns may be
suspended or debarred from government contracting and may suffer civil
and criminal penalties for knowingly making false statements to the
SBA, to-date, the SBA program office has never referred any firms for
debarment or suspension proceedings, or both, based on SBA findings
from its program-eligibility reviews. When asked about its bid protest
process, SBA officials stated that the bid protest process focuses on
determining the eligibility of a firm for a specific contract and
providing details on why a firm was found to be eligible or ineligible.
SBA officials also stated that bid protest decisions do not include
recommendations for suspension and debarment. By failing to hold firms
accountable, SBA and contracting agencies have sent a message to the
contracting community that there is no punishment or consequences for
committing fraud or abusing the intent of the SDVOSB program.
VA Is Developing Controls for Its SDVOSB Contracts:
The Veterans Benefits, Health Care, and Information Technology Act
[Footnote 24]--which took effect in June 2007--requires VA to maintain
a database of SDVOSBs and Veteran Owned Small Businesses (VOSB) so
contractor eligibility can be verified. It also requires the VA to
determine whether SDVOSBs and VOSBs are indeed owned and controlled by
veterans or service-disabled veterans in order to bid and receive VA
contracts. Lastly, it requires VA set-aside and sole-source awards be
made only to firms that have had their eligibility verified. Currently
these controls are being developed to validate eligibility for awarding
VA contracts only.
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. VA began accepting applications to validate eligibility for the
SDVOSB program from firms registered in the database in May 2008, after
it published guidelines for the verification program in an interim
final rule.[Footnote 25] To date, VA's validation process has focused
on cross-referencing information submitted by owners with the agency's
own data to confirm majority ownership by veterans or service-disabled
veterans. VA also expects to pilot procedures for more detailed reviews
of selected firms to verify day-to-day control by a service-disabled or
other veteran. According to VA officials, the agency will begin
requiring its contracting officers to use the set-aside and sole-source
award authorities only with verified SDVOSBs and VOSBs after the agency
finalizes rule making related to implementation of these authorities.
As of March 2009, these program controls have not been implemented.
Until this new program becomes operational, existing VA policy states
that firms only have to be registered in VA's database to receive set-
aside or sole-source awards. Currently there are no plans to implement
these controls governmentwide.
Additional controls that VA plans to develop include its own
certification process for prospective SDVOSB businesses. The process is
to include a review of documents, validation of the owner's status as a
service-disabled veteran, and potential site visits to businesses
bidding on VA SDVOSB contracts. 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 the VA's database and service-
disabled veteran participation in the business through an unannounced
site visit. Verification of service-disabled veteran status by using
the 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 have to be certified.
Conclusions:
The SDVOSB program does not have effective governmentwide fraud-
prevention controls in place and is vulnerable to fraud and abuse. In
just the 10 cases we show in this report, the consequences of this lack
of control include approximately $100 million of sole source and set
aside SDVOSB contracts to companies that have figured out how to
manipulate the current system. Even the few companies identified as
ineligible through the bid-protest system face no real consequences, in
times being allowed by the government to complete the contract they
obtained through fraudulent representations. Victims of the fraud and
abuse in this program are the legitimate service-disabled veterans and
their firms. SBA's only requirement is a "self-certification" process,
whereby SDVOSB concerns self-certify their eligibility. However, VA has
begun to develop a process for certifying the eligibility of SDVOSB
firms prior to contract award, but that process currently only relates
to firms bidding on VA SDVOSB contracts. To address governmentwide
vulnerabilities we identified, an effective governmentwide process is
necessary to certify the eligibility of all firms bidding on SDVOSB
contracts. To be effective, this process should include coordination
between the different agencies with the authority to improve program
controls, and some form of punishment, such as prosecution, suspension,
and debarment of fraudulent individuals and their companies.
Matter for Congressional Consideration:
Our work documents numerous cases where the current governmentwide self-
certification system over the SDVOSB program has allowed ineligible
firms to receive millions of dollars in federal contracts. However,
through the Veterans Benefits, Health Care, and Information Technology
Act of 2007, Congress required VA to maintain a database of SDVOSBs,
determine whether SDVOSBs are indeed owned and controlled by service-
disabled veterans, and required VA set-aside and sole-source awards be
made only to firms that have had their eligibility verified. Currently,
the only efforts to put fraud prevention controls in place are at VA
through their VetBiz program, which applies only to VA contracts. Given
that outside of VA there is no verification program in place for SDVOSB
contracting, Congress should consider providing VA with the authority
and resources necessary to expand its SDVOSB eligibility verification
process to all contractors seeking to bid on SDVOSB contracts
governmentwide.
Recommendations for Executive Action:
In an effort to minimize the potential for fraud and abuse in the
Service-Disabled Veteran-Owned Small Business (SDVOSB) program and to
assure that legitimate service-disabled veterans and their firms reap
the benefits of this program, we recommend that the Administrator of
the Small Business Administration (SBA) and the Secretary of the
Veterans Affairs (VA) coordinate with the Office of Federal Procurement
Policy (OFPP) to explore the feasibility of:
* expanding the use of the VA VetBiz "verified" database governmentwide
for purposes of validating all SDVOSB eligible firms for contracting
and,
* requiring that all contractors who knowingly misrepresent their
status as an SDVOSB be debarred for a reasonable period of time.
In addition, we recommend the Administrator of SBA refer all SDVOSB
firms that submit misrepresentations of their status to SBA's Office of
Inspector General for review and further investigation.
Agency Comments and Our Evaluation:
SBA and VA provided general observations and technical comments in
response to a draft of this report. They also responded directly to our
recommendations. Their responses are included in appendixes II and III.
We have made revisions based on the observations and technical comments
where appropriate. In response to our recommendations, 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. We recognize that
additional authority may be required for other federal agencies to rely
on certifications made in VA's VetBiz database, and have raised this
issue in our matter for congressional consideration. In addition, VA
stated that governmentwide applicability of authority for federal
agencies, other than VA, to initiate debarment actions related to
acquisitions for any firms that misrepresent information on the status
of that firm as a small business owned and controlled by veterans or
service-disabled veterans would require OFPP to seek a revision to the
Federal Acquisition Regulation to add SDVOSB status misrepresentation
as a cause for debarment. Our recommendation concerning coordination
between VA, SBA, and OFPP addresses this concern.
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 they have limited
responsibilities over the SDVOSB program and questioned the efficacy of
one of our recommendations. Specifically, SBA stated that agency
contracting officers bear the primarily the responsibility for ensuring
only eligible SDVOSB firms perform SDVOSB set aside and sole source
contracts. SBA also stated 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.
While we acknowledge that there are shared responsibilities between SBA
and agency contracting officers when attempting to prevent fraud in the
SDVOSB program, we do not agree that SBA does not have responsibility
or authority to develop and implement a process to provide reasonable
assurance that only eligible SDVOSB firms are awarded set aside and
sole source SDVOSB contracts. Specifically, its statutory
responsibilities date back to December 2003, when the Veterans Benefits
Act of 2003 amended the Small Business Act to provide that "rules
similar to the rules of paragraphs (5) and (6) of Section 8(m)" shall
apply to the SDVOSB program.[Footnote 26] Indeed, in an interim final
rule implementing that section of the act, SBA acknowledged that it is
statutorily authorized to administer the SDVOSB program.[Footnote 27]
Classified to section 637 of Title 15 of the United States Code, the
provisions in section 8(m) of the Small Business Act specifically
require the Administrator of SBA to establish procedures relating to
the "filing, investigation, and disposition of any challenge of the
eligibility of a small business concern — and the verification — of the
accuracy of any certification made or information provided to the
Administrator by a small business."[Footnote 28] To implement these
verification procedures, SBA is authorized to conduct program
examinations, including random examinations, of any certification made
or information provided to the Administrator.[Footnote 29] To carry out
its verification responsibilities, SBA is authorized to obtain
information from any federal agency or department that the
Administrator determines is necessary.[Footnote 30] In the event that
the Administrator determines that an entity has misrepresented its
status, that entity is subject to certain penalties.[Footnote 31] Given
this specific legislative authority and responsibility, we believe
that, contrary to its assertion, SBA has an obligation to assist in
development and implementation of a verification process for the SDVOSB
program to provide reasonable assurance that sole source and set aside
SDVOSB contracting opportunities are only provided to eligible SDVOSB
firms.
In response to our first recommendation, SBA questioned the efficacy of
expanding the use of VA's VetBiz verified database governmentwide to
verify the eligibility of SDVOSB firms for the program because of the
self-certification nature of the program. We believe that the expansion
of VA's verification process to all SDVOSB contractors attempting to
bid on federal contracts would provide assurances that only eligible
SDVOSB firms receive the benefits of the special contract opportunities
established by the SDVOSB program. We believe this verification is
especially important given that the current set of controls over the
SDVOSB program consist primarily of self-certifications made by
contractors, as SBA represented in their response to a draft of this
report. In SBA's other response to our first recommendation, SBA stated
that it is the contracting officer's responsibility to enforce or
pursue suggested penalties for firms who knowingly misrepresent their
status as an SDVOSB firm. As stated above, we agree that there is a
shared responsibility for prevention, detection, and punishment of
fraud and abuse in the program between agency contracting officers and
the SBA.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the date of this letter. We will then send copies of this report
to interested congressional committees, the Administrator of SBA, the
Secretary of VA, and other interested parties. The report will also be
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff members have any questions about this report,
please contact me 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 report. GAO staff who made major
contributions to this report are listed in appendix IV.
Sincerely Yours,
Signed by:
Gregory D. Kutz:
Managing Director Forensic Audits and Special Investigations:
[End of section]
Appendix I: Scope and Methodology:
To identify examples of firms that received Service-Disabled Veteran
Owned Small Business (SDVOSB) contracts through fraudulent or abusive
eligibility misrepresentations, we reviewed SDVOSB contract awards and
protests filed with the Small Business Administration (SBA) since the
programs 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 various veteran advocacy-groups' Web
pages and 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. For the purposes of our investigation, we defined
a case as one or more affiliated firms or joint ventures that obtained
an SDVOSB contract. These cases include multiple firms owned by an
individual or multiple firms affiliated through joint ventures and
other types of partner agreements. 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 Federal Procurement Data System-Next Generation (FPDS-NG) for
years 2003 through 2009 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). To assess
overall program vulnerabilities, we reviewed relevant laws and
regulations governing the SDVOSB program. Our work was not designed to
identify all firms that misrepresent themselves as SDVOSBs or commit
fraudulent or abusive activity in the SDVOSB program. Our work also did
not attempt to identify fraud and abuse in SDVOSB subcontracts. Our
work focused on determining whether selected firms met program
eligibility requirements. In addition, our 10 case-study examples
cannot be projected to the overall population of SDVOSB firms.
To determine whether the program has effective fraud-prevention
controls in place, we interviewed agency officials from SBA, the
Department of Veterans Affairs (VA), and various agency contracting
officials about their responsibility over the program and controls
currently in place to prevent, detect, and monitor fraud and abuse. We
also reviewed information from the Federal Register--The President's
Executive Order, the Federal Acquisition Regulation (FAR), United
States Code, and SBA guidance on government contracting programs to
determine the extent to which SBA and awarding agencies are required to
verify contractor eligibility for SDVOSB contracts. Furthermore, we
compared current controls in the SDVOSB program to a fraud-prevention
model developed by GAO and utilized in prior small business contracting
investigations.
[End of section]
Appendix II: Comments from the Small Business Administration:
Note: Page numbers in the draft report may differ from those in this
report.
U.S. Small Business Administration:
Washington, D.C. 20416:
August 20, 2009:
Mr. Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
U.S. Government Accountability Office:
441 G. Street, N.W.
Washington, DC 20548:
Dear Mr. Kutz,
The U.S. Small Business Administration (SBA) appreciates the
opportunity to provide comments on the Government Accountability
Office's (GAO) draft report entitled "Service Disabled Veteran Owned
Small Business (SDVOSB) Program: Cases Show Fraud and Abuse Allowed
Ineligible Firms to Obtain Millions of Dollars in Contracts (GAO-09-
929)."
The SDVOSB Program is an important procurement program that helps to
achieve the Government's goal of distributing federal contract dollars
to small businesses. Further, it honors the extraordinary service
rendered to the United States by veterans with disabilities incurred or
aggravated in the line of duty. In FY 2007, $4 billion in federal
contracts were awarded to SDVOSB qualified firms.
The SBA is dedicated to providing the highest quality service,
transparency, and accountability. In the same vein, we would like to
acknowledge our duty and commitment to eliminate fraud, waste and abuse
in any of our programs. That said, we believe the draft report includes
some misrepresentations of the SBA's responsibilities with regard to
the program as well as some technical errors. We would like to submit
the following observations/recommendations:
General Observation:
While the SBA shares responsibility with other Agencies (e.g. Veteran
Administration) for ensuring the integrity of the overall program, it
is ultimately the federal agency's Contracting Officers who administer
the individual contracts and have the primary accountability for
ensuring that only bona-fide SDVOSB firms perform these contracts.
The SBA's responsibility lies in the formal bid protest process,
whereby interested parties to a contract award can protest if they have
credible evidence that a firm misrepresented its SDVOSB eligibility. If
a firm is deemed not eligible via this process, the Contracting Officer
then becomes responsible for halting contract disbursements and taking
any further action against the firm. Moreover, the statute and
regulations related to the SDVOSB program allow for self-certification.
The SBA is only authorized to perform eligibility reviews in a protest
situation, including those cases where the SBA itself has reason to
believe that a firm has misrepresented its SDVOSB status. In this area,
the SBA believes it has been diligent and responsible as all protest
determinations have been provided to the appropriate Contracting
Officer in a timely manner. The statutes and regulations dictate that
it is then incumbent upon the Contracting Officer to take appropriate
action when notified by the SBA subsequent to a protest that a firm is
not eligible to claim status as an SDVOSB.
It should also be noted that after a contract has been awarded, it is
the Contracting Officer's responsibility to ensure that the firm is
complying with the applicable limitations on subcontracting provisions.
If the Contracting Officer suspects that the firm may not comply with
these provisions prior to the award, only then would the SBA get
involved via the certificate of competency program.
Technical Observations/Recommendations:
Incorporating the above general observation, we recommend the following
changes to the draft report:
Highlight Page:
* Draft Report: Specifically, SBA and agencies awarding SDVOSB
contracts do not have processes in place to validate a firm's
eligibility for the program.
SBA's recommendation: Specifically, SBA and agencies awarding SDVOSB
contracts do not have processes in place to validate a firm's
eligibility for the program prior to bid submission.
Page 1:
* Draft Report: The statutorily-mandated prime contracting goal for
SDVOSB participation is 3 percent of all federal contract dollars.
SBA's recommendation: The statutorily-mandated prime and sub
contracting goal for SDVOSB participation is not less than 3 percent of
all federal contract dollars.
Page 2:
* Draft Report: The statutorily-mandated prime contracting goal for
SDVOSB participation is 3 percent of all federal contract dollars.
SBA's recommendation: The statutorily-mandated prime and sub
contracting goal for SDVOSB participation is not less than 3 percent of
all federal contract dollars.
The draft report states the SBA administers the SDVOSB program. This is
incorrect. Instead, each procuring activity administers the SDVOSN
program. The Veterans Benefits Act of 2003 (Pub. L. No. 108-183) gives
SBA no more power to oversee the SDVOSB program than any other agency.
We recommend either removing this statement or changing it to read
"...which, along with all federal procuring activities, administers the
SDVOSB."
* The draft report states that "...the government has not met its
annual mandated goal" with regard to the percentage of federal
procurement opportunities being awarded to SDVOSBs. While it is true
that the government as a whole has not met the 3% minimum requirement,
several individual agencies have met this goal.
Page 6:
* The draft report discusses abuses whereby firms act as "pass
throughs" for large and sometimes foreign corporations. After a
contract award is made to an SDVOSB firm as the result of a sole source
or set-aside award, it is the federal agency's Contracting Officer's
responsibility for ensuring that the firm is complying with the
applicable Limitations on Subcontracting (LOS) provisions.
Page 8:
* In discussing Case 1, the report states that the firm didn't receive
any other punishments/sanctions for its fraudulent actions and notes
that the firm has not been suspended or debarred from receiving future
government contracts. Although it's noted in the report table, the case
write-up should mention that the firm was determined ineligible by the
SBA in a protest action. At this point it then becomes the FEMA
Contracting Officer's responsibility to propose the firm for debarment
or suspension as that agency was 'harmed' by the firm's actions. This
rationale is also applicable for the case details of Case 3, Case 5 and
Case 9.
* In Case 2, GAO's investigation determined that the firm improperly
subcontracted 100% of the work to an international corporation. Again,
contract administration is the responsibility of the Agency and the
Contracting Officer responsible for that contract. This rationale is
also applicable for the case details of Case 4, Case 7, Case 8 and Case
l0.
Page l7 & 18:
* The GAO draft report faults SBA for demonstrating a lack of effective
fraud prevention controls. However, changes made to the Small Business
Act by the Veterans Benefits Act of 2003 do not reference any fraud
prevention authority or responsibility on SBA. The SBA's only statutory
obligation with regard to the SDVOSB program is our duty to report on
other agencies success toward meeting the 3% minimum requirement for
contracting with SDVOSBs.
It should be noted, however, that the SBA, acting on its own
initiative, instituted the SDVOSB bid protest process for the following
reason as stated in the preamble to the publication of the Agency's
SDVOSB regulations:
Because SDVOSBs will be attesting to their eligibility at the time of
offer, and not through a certification process established by the SBA,
it is important to have some mechanism to check eligibility for the
receipt of a contract issued as a sole source or set-aside for SDVOSBs.
[Small Business Size Regulations; Government Contracting Programs, 69
Fed. Reg. 25,264 (May 5, 2004)]
SBA was under no legal obligation to create a protest process for SDVOSB
procurements. As the Agency observed in the regulatory preamble, unlike
the statutes that created the HUBZone and 8(a) Business Development
programs, the Veterans Benefits Act of 2003 did not include any
discussion of program certification. [Id. at 25,265] Moreover, SBA
receives no funding from either Congress or other agencies to cover the
considerable cost that would be incurred for administering a SDVOSB
certification process. However, because the Agency was concerned about
the potential that existed for fraud on the part of firms improperly
claiming SDVOSB status, SBA voluntarily stepped into the regulatory
void and created the bid protest process in order to avoid having this
procurement process go entirely un-policed.
* Further we would suggest changing the sentence: Draft Report:
However, neither the SBA nor contracting officials are currently
verifying the eligibility of firms claiming to be SDVOSBs.
SBA's recommendation: However, neither the SBA, except when responding
to a protest, or contracting officials are currently verifying the
eligibility of firms claiming to be SDVOSBs.
With regards to the draft reports two recommendations for executive
action, the SBA is submitting the following responses:
Recommendation #1:
The Administrator of the Small Business Administration (SBA) and the
Secretary of the Veterans Affairs (VA) coordinate with the Office of
Federal Procurement Policy (OFPP) to explore the feasibility of:
* Expanding the use of the VA VetBiz "verified" database government-
wide for purposes of validating all SDVOSB eligible firms for
contracting and,
* Requiring that all contractors who knowingly misrepresent their
status as an SDVOSB be debarred for a reasonable period of time.
Response:
The SBA generally agrees that coordination among itself, VA and OFPP
should occur to address the issues of fraud and abuse associated with
the SDVOSB program. However, given the self-certification nature of the
program, we question the efficacy of expanding the VA VetBiz database
government-wide for verification purposes in detecting fraud, waste and
abuse.
In response to the second bullet point, the SBA agrees that firms that
knowingly misrepresent their status as an SDVOSB, and were found to do
so via the bid protest process, should face consequences. As such, the
SBA will submit a recommendation to the IAE to identify the penalties
for such an infraction. However, it is the responsibility of the
Contracting Officer to enforce or pursue those suggested penalties.
Recommendation #2:
The Administrator of the SBA refers all SDVOSB firms that submit
misrepresentations of their status to the Office of Inspector General
for review and further investigation.
Response:
The SBA agrees that when the Agency determines via the protest process
that a firm knowingly has misrepresented its SDVOSB status with the
intent to fraudulently obtain a federal contract, SBA should continue
its longstanding practice of referring the firm to the Office of
Inspector General for review and further investigation.
If you have any questions, please do not hesitate to contact us.
Sincerely,
Signed by:
Joseph G. Jordan:
Associate Administrator for Government Contracting and Business
Development:
[End of section]
Appendix III: Comments from the Department of Veterans Affairs:
Department of Veterans Affairs:
Office of the Secretary:
August 27, 2009:
Mr. Greg Kutz:
Managing Director, Forensic Audits and Special Investigations:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Kutz:
The Department of Veterans Affairs (VA) has reviewed the Government
Accountability Office's (GAO) draft report, Service Disabled Veteran
Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed
Ineligible Firms to Obtain Millions of Dollars in Contracts (GAO-09-
929) and generally agrees with GAO's conclusions and concurs with GAO's
recommendations to the Department.
The enclosure specifically addresses GAO's recommendations. VA
appreciates the opportunity to comment on your draft report.
Sincerely,
Signed by:
John R. Gingrich:
Chief of Staff:
Enclosure:
[End of letter]
Enclosure:
Department Of Veterans Affairs (VA) Comments To GAO Draft Report,
Service Disabled Veteran Owned Small Business Program: Case Studies
Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of
Dollars in Contracts (GAO-09-929):
GAO recommendation: In an effort to minimize the potential for fraud
and abuse in the Service-Disabled Veteran-Owned Small Business (SDVOSB)
program and to assure that legitimate service-disabled veterans and
their firms reap the benefits of this program, we recommend that the
Administrator of the Small Business Administration (SBA) and the
Secretary of Veterans Affairs (VA) coordinate with the Office of
Federal Procurement Policy (OFPP) to explore the feasibility of:
Recommendation 1: expanding the use of VetBiz "verified" database
governmentwide for purposes of validating all SDVOSB eligible firms for
contracting.
VA comments to the draft report: Concur. VA will work with SBA and with
OFPP to explore the feasibility in expanding the use of VetBiz. VA
agrees that it may be effective for the Department to expand use of the
VetBiz database to help identify firms eligible for the SDVOSB program
and minimize the likelihood of fraud. However, specific authority would
be required for other agencies to be able to rely on the Department's
VetBiz database and exclude firms from acquisitions not so "verified."
OFPP and SBA would have to determine whether that could be effectuated
by amendment to the Federal Acquisition Regulation or whether a new
statutory provision would be required.
Recommendation 2: requiring that all contractors who knowingly
misrepresent their status as an SDVOSB be debarred for a reasonable
period of time.
VA comments to the draft report: Concur in principle. The Department
has specific authority to initiate debarment actions related to VA
acquisitions for any company that misrepresents information on the
status of that concern as a small business owned and controlled by
Veterans or service-disabled Veterans at 38 U.S.C. 8127(g). Also, the
VA's Verification Program regulation, 38 CFR 74.2(c), requires VA's
Center for Veterans Enterprise to refer applicants determined to have
submitted false information to VA's Office of Inspector General for
review and to request that debarment proceedings be initiated by the
Department against the concern. Governmentwide applicability of such
authority would require, at a minimum, OFPP to seek a revision to the
Federal Acquisition Regulation (48 CFR 9.406-2, Causes for debarment)
to add SDVOSB status misrepresentation as a cause for debarment.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gregory D. Kutz, Managing Director, (202) 512-6722, kutzg@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Gary Bianchi, Bruce
Causseaux, Randy Cole, Victoria De Leon, Ken Hill, John Ledford, Deanna
Lee, Barbara Lewis, Vicki McClure, Jonathan Meyer, Andrew O'Connell,
George Ogilvie, Gloria Proa, Barry Shillito, and Abby Volk also
provided assistance on this report.
[End of section]
Footnotes:
[1] Pub. L. No. 108-183, § 308, 117 Stat, 2651, 2662 (2003).
[2] Veteran Entrepreneurship Act of 1999, Pub. L. No. 106-50, § 502,
113 Stat. 233, 247 (1999).
[3] If the business is publicly owned, at least 51 percent of the stock
must be held by one or more service-disabled veterans.
[4] In the case of a veteran with permanent and severe disability, the
spouse or permanent caregiver of such veteran may control the business.
[5] 38 U.S.C. § 101(2).
[6] The North American Industry Classification System (NAICS) is the
standard used by Federal statistical agencies in classifying business
establishments for the purpose of collecting, analyzing, and publishing
statistical data related to the U.S. business economy.
[7] SBA's Small Business Procurement Scorecards report the annual
percentage share of SDVOSB awards.
[8] SBA calculates its SDVOSB total by including all dollars awarded to
SDVOSBs, not just those received through set-aside or sole-source
contracts.
[9] Veterans Benefits, Heath Care, and Information Act of 2006, Pub. L.
No. 109-461, 120 Stat. 3433 (2006).
[10] The 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 amount 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.
[11] ORCA was established as part of the Business Partner Network, an
element of the Integrated Acquisition Environment, which is implemented
under the auspices of White House Office of Management and Budget,
Office of Federal Procurement Policy, and the Chief Acquisition
Officers Council. ORCA is the primary government repository for
contractor-submitted representations and certifications required for
the conduct of business with the government.
[12] 15 U.S.C. §631 et seq. 13 CFR Parts 125 and 134.
[13] The criteria for a small business are defined in 13 CFR Part 121.
[14] For any publicly owned business, not less than 51 percent of the
stock must be owned by one or more service-disabled veterans.
[15] 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.
[16] In the case of a veteran with permanent and severe disability, the
spouse or permanent caregiver of such veteran may control the business.
[17] Central Contractor Registration (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.
[18] [hyperlink, http://www.FedBizOpps.gov] is the U.S. government's
Web page for commercial vendors and government buyers to post, search,
monitor, and retrieve opportunities solicited by the federal
contracting community.
[19] Veterans Benefits, Heath Care, and Information Act of 2006, Pub.
L. No. 109-461, 120 Stat. 3433 (2006).
[20] 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).
[21] Association of Certified Fraud Examiners, Fraud Examiners Manual,
U.S. Edition (2007).
[22] GAO, HUBZone Program: Fraud and Abuse Identified in Four
Metropolitan Areas, GAO-09-440 (Washington, D.C.: Mar. 25, 2009);
Hurricanes Katrina and Rita Disaster Relief: Prevention Is the Key to
Minimizing Fraud, Waste and Abuse in Recovery Efforts, [hyperlink,
http://www.gao.gov/products/GAO-07-418T] (Washington, D.C.: Jan. 29,
2007); and Individual Disaster Assistance Programs: Framework for Fraud
Prevention, Detection, and Prosecution, [hyperlink,
http://www.gao.gov/products/GAO-06-954T] (Washington, D.C.: July 12,
2006).
[23] 13 CFR § 125.29.
[24] Veterans Benefits, Heath Care, and Information Act of 2006, Pub.
L. No. 109-461, 120 Stat. 3433 (2006).
[25] 73 Fed. Reg. 29024 (May 19, 2008).
[26] Pub. L. No. 108-183, § 308, 117 Stat. 2651, 2662 (2003), 15 U.S.C.
§ 657f.
[27] Small Business Size Regulations; Government Contracting Programs,
69 Fed. Reg. 25,262, 25,265 (May 4, 2004).
[28] 15 U.S.C. § 637(m)(5)(A).
[29] 15 U.S.C. §637(m)(5)(B).
[30] 15 U.S.C. §637(m)(6).
[31] 15 U.S.C. § 637(m) (5) (C).
[End of section]
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