8(a) Program
Fourteen Ineligible Firms Received $325 Million in Sole-Source and Set-Aside Contracts Gao ID: GAO-10-425 March 30, 2010The Small Business Administration (SBA) helps socially and economically disadvantaged small businesses gain access to federal contracting opportunities through its 8(a) program. To participate, firms must be at least 51 percent owned and controlled by an individual who meets SBA's criteria of socially and economically disadvantaged. The firm must also qualify as a small business. Once certified, 8(a) firms are eligible to receive sole-source and set-aside contracts for up to 9 years. GAO was asked to (1) determine whether ineligible firms are participating in the 8(a) program, (2) proactively test SBA's controls over the 8(a) application process, and (3) determine what vulnerabilities, if any, exist in SBA's fraud prevention system. To identify cases, GAO reviewed SBA data and complaints to GAO's fraud hotline. To perform its proactive testing, GAO created four bogus businesses and applied for 8(a) certification. GAO did not attempt to project the extent of fraud and abuse in the program.
GAO identified $325 million in set-aside and sole-source contracts given to firms not eligible for the 8(a) program. Most were obtained through fraudulent schemes. In the 14 cases GAO investigated, numerous instances were found where 8(a) firm presidents made false statements, such as underreporting income or assets, to either qualify for the program or retain certification. For example, one firm president who is not socially disadvantaged misrepresented her ethnicity to SBA. GAO also found cases where ineligible companies used certified firms to secure 8(a) work. For instance, a West Virginia company that graduated from the program in 2001 used a series of three certified companies as pass-throughs to continue obtaining set-aside and sole-source contracts. In some cases, SBA did not detect the false statements and misrepresentations made by certified firms. In others, SBA became aware of the firms' ineligibility but failed to take action. GAO's proactive testing found several strengths in SBA's 8(a) application process that helped prevent three bogus applicants from being certified for the program. Examples of the strengths included validation of data with third-party credit bureaus and the Excluded Parties List System. These controls and effective review appropriately raised questions about income and assets of GAO's bogus applicants that would have made them ineligible. However, GAO obtained 8(a) certification for one bogus firm using fabricated documentation and owner information. Certification of GAO's bogus firm shows vulnerabilities in the process such as the lack of any face to face contact that could allow ineligible individuals or pass through companies to enter the program. Although we were unable to determine whether all 14 cases were ineligible at application, these cases show substantial vulnerabilities in SBA's monitoring of eligibility for individuals and firms already in the program. The lack of a consistent enforcement strategy or any real consequences for fraud and abuse is a further weakness in SBA's fraud prevention program.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Gregory D. Kutz Team: Government Accountability Office: Forensic Audits and Special Investigations Phone: (202) 512-9505GAO-10-425, 8(a) Program: Fourteen Ineligible Firms Received $325 Million in Sole-Source and Set-Aside Contracts
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Report to the Chairwoman, Committee on Small Business, House of
Representatives:
United States Government Accountability Office:
GAO:
March 2010:
8(a) Program:
Fourteen Ineligible Firms Received $325 Million in Sole-Source and Set-
Aside Contracts:
GAO-10-425:
GAO Highlights:
Highlights of GAO10-425, a report to the Chairwoman, Committee on
Small Business, House of Representatives.
Why GAO Did This Study:
The Small Business Administration (SBA) helps socially and
economically disadvantaged small businesses gain access to federal
contracting opportunities through its 8(a) program. To participate,
firms must be at least 51 percent owned and controlled by an
individual who meets SBA‘s criteria of socially and economically
disadvantaged. The firm must also qualify as a small business. Once
certified, 8(a) firms are eligible to receive sole-source and set-
aside contracts for up to 9 years.
GAO was asked to (1) determine whether ineligible firms are
participating in the 8(a) program, (2) proactively test SBA‘s controls
over the 8(a) application process, and (3) determine what
vulnerabilities, if any, exist in SBA‘s fraud prevention system. To
identify cases, GAO reviewed SBA data and complaints to GAO‘s fraud
hotline. To perform its proactive testing, GAO created four bogus
businesses and applied for 8(a) certification. GAO did not attempt to
project the extent of fraud and abuse in the program.
What GAO Found:
GAO identified $325 million in set-aside and sole-source contracts
given to firms not eligible for the 8(a) program. Most were obtained
through fraudulent schemes. In the 14 cases GAO investigated, numerous
instances were found where 8(a) firm presidents made false statements,
such as underreporting income or assets, to either qualify for the
program or retain certification. For example, one firm president who
is not socially disadvantaged misrepresented her ethnicity to SBA. GAO
also found cases where ineligible companies used certified firms to
secure 8(a) work. For instance, a West Virginia company that graduated
from the program in 2001 used a series of three certified companies as
pass-throughs to continue obtaining set-aside and sole-source
contracts. In some cases, SBA did not detect the false statements and
misrepresentations made by certified firms. In others, SBA became
aware of the firms‘ ineligibility but failed to take action. The table
below shows details on 3 of the 14 case studies.
Table: Selected Case Studies of Fraud and Abuse in the 8(a) Program:
Industry: Roofing/construction;
Ineligible 8(a) awards/awarding department: $48.3 million-”
Agriculture, Commerce, Defense, Interior, EPA, GSA, SSA;
Case details: This firm is ineligible because it operated as a pass-
through for a graduated company”both firms were being run by the same
white, father-and-son team at the time of our investigation.
Industry: Construction;
Ineligible 8(a) awards/awarding department: $11.2 million-”Defense,
Homeland Security;
Case details: This firm is ineligible because the president
fraudulently reported his adjusted net worth to be $217,000 on his
application when it was actually at least $806,000”an amount clearly
exceeding the allowable $250,000 threshold. We estimate his current
adjusted net worth to be at least $1.7 million dollars”nearly double
the allowable $750,000.
Industry: Landscaping/janitorial;
Ineligible 8(a) awards/awarding department: $13.8 million”-Defense;
Case details: This firm is ineligible because it operated as an
extension of a graduated 8(a) firm run by the same father-and-son team
that owned the previous firm”effectively giving them an extra 9 years
of eligibility.
Source: GAO.
[End of table]
GAO‘s proactive testing found several strengths in SBA‘s 8(a)
application process that helped prevent three bogus applicants from
being certified for the program. Examples of the strengths included
validation of data with third-party credit bureaus and the Excluded
Parties List System. These controls and effective review appropriately
raised questions about income and assets of GAO‘s bogus applicants
that would have made them ineligible. However, GAO obtained 8(a)
certification for one bogus firm using fabricated documentation and
owner information. Certification of GAO‘s bogus firm shows
vulnerabilities in the process such as the lack of any face to face
contact that could allow ineligible individuals or pass through
companies to enter the program. Although we were unable to determine
whether all 14 cases were ineligible at application, these cases show
substantial vulnerabilities in SBA‘s monitoring of eligibility for
individuals and firms already in the program. The lack of a consistent
enforcement strategy or any real consequences for fraud and abuse is a
further weakness in SBA‘s fraud prevention program.
What GAO Recommends:
GAO makes six recommendations to improve SBA‘s ability to screen and
monitor fraud and abuse within the 8(a) program. SBA agreed with five
recommendations and stated that it would evaluate our recommendation
related to how family members‘ assets are included in the assets of
the 8(a) participant based upon the comments received as a result of
the proposed 8(a) rule change.
View [hyperlink, http://www.gao.gov/products/GAO-10-425] or key
components. For more information, contact Gregory Kutz at (202) 512-
6722 or kutzg@gao.gov.
[End of section]
Contents:
Letter:
Background:
Selected Case Studies of Fraud and Abuse in the 8(a) Program:
Our Proactive Testing Identified Strengths and Vulnerabilities in
SBA's 8(a) Application Process:
8(a) Program Has Inadequate Controls to Prevent Fraud and Abuse:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Small Business Administration:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Selected Cases of Fraud and Abuse in the 8(a) Program:
Table 2: President's Adjusted Net Worth in November 2007 at the Time
of Application:
Table 3: President's Adjusted Net Worth in May 2009 about the Time of
the Firm's First Annual Review:
Table 4: Chronology of Firms:
Table 5: Timeline of Approved Fictitious Application:
Figures:
Figure 1: SBA Certification Letter for Our Bogus 8(a) Firm:
Figure 2: Fraud-Prevention Model:
Abbreviations:
AGI: Adjusted Gross Income:
BDS: Business Development Specialists:
CAIVRS: Credit Alert Interactive Voice Response System:
DSBS: Dynamic Small Business Search:
EIN: Employer Identification Numbers:
FPDS-NG: Federal Procurement Database System-Next Generation:
HUD: U.S. Department of Housing and Urban Development:
IRA: Individual Retirement Account:
IRS: Internal Revenue Service:
LLC: Limited Liability Company:
SBA: Small Business Administration:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 30, 2010:
The Honorable Nydia M. Velázquez:
Chairwoman:
Committee on Small Business:
House of Representatives:
Dear Madam Chairwoman:
The 8(a) Business Development Program, administered by the Small
Business Administration (SBA), is one of the federal government's
primary vehicles for nurturing small businesses owned by socially and
economically disadvantaged individuals. To participate in the program,
a firm must be certified as meeting several criteria, including: be a
small business as defined by SBA; be unconditionally owned and
controlled by one or more socially and economically disadvantaged
individuals who are of good character and citizens of the United
States; and show potential for success. Upon certification, firms can
obtain federal contracts without competing fully and openly for the
work. For example, agencies are permitted to enter into sole-source
contracts after soliciting and negotiating with only one 8(a) company.
They also can participate in restricted competitions for federal
contracts, known as set asides, open to only 8(a) companies. According
to SBA, in fiscal year 2008, there were a total of 9,462 firms
certified to participate in the program--about half of which had at
least one active 8(a) sole-source or set-aside contract.[Footnote 1]
In fiscal year 2008, according to the Federal Procurement Database
System-Next Generation (FPDS-NG), federal agencies awarded $15.2
billion in 8(a) sole-source and set-aside contracts.
SBA's Office of Business Development administers the 8(a) program. The
office's Business Development Specialists (BDS) work directly with
8(a) firms and are located in 68 district offices throughout the
nation. They perform a variety of functions: help firms prepare a
business plan, conduct annual reviews of the firms' progress in
implementing these plans, review firms' continued eligibility, and
provide technical assistance. Once approved for the program,
participant firms must continue to meet all eligibility criteria and
submit documentation to SBA to complete mandatory annual reviews. For
instance, each year, as part of the annual review, participants must
provide SBA with a certification that they continue to meet
eligibility requirements as well as year-end financial statements,
income tax returns, and a report on all non-8(a) contracts.
Given your interest in whether the 8(a) program has sufficient
controls in place to detect fraud and abuse, you asked us to (1)
determine whether ineligible firms are participating in the 8(a)
program, (2) proactively test SBA's controls over the 8(a) application
process, and (3) use case studies and proactive testing to determine
what vulnerabilities, if any, exist in SBA's fraud prevention system.
To determine whether firms are participating in the 8(a) program
through fraudulent misrepresentation, we used a risk-based approach to
identify firms that exhibited signs that they were not qualified for
the program. For example, we used data from the FPDS-NG to determine
which firms in the Washington, D.C., area received the most 8(a)
contracts in 2006 and 2007. Next, we used data from SBA's Dynamic
Small Business Search (DSBS) Web site to identify current 8(a) firms
in the Washington, D.C., area that were operating at the address of a
graduated 8(a) firm. We limited our work to the Washington, D.C., area
because there are significantly more firms located there than in any
other area in the country. We used information about 8(a) firms
provided by SBA to data mine for potentially fraudulent activity. We
also reviewed allegations of fraud and abuse sent to our email address
established to receive reports about small business contracting
programs. We received about 30 allegations related to 8(a) fraud and
abuse--more than we were able to investigate. In addition, we pursued
leads found during the course of our other work on the Service
Disabled Veteran Owned Small Business and HUBZone programs. From these
sources, we selected 14 cases for further investigation based on a
variety of factors,[Footnote 2] including facts and evidence provided
in allegations, and whether a firm received 8(a) contracts. For the
firms we selected for further investigation, we reviewed documentation
available from SBA in the firms' official 8(a) files maintained in
district offices. We worked with SBA's audit liaison to request this
documentation; in some instances we received information directly from
officials in SBA district offices and other times information was
transmitted through this liaison. We conducted both unannounced and
announced site visits and interviewed firm employees and executives.
We used a variety of investigative methods, such as analyzing firm
payroll data, verifying the value of assets, and reviewing information
from investigative databases to gather information about the firms and
to determine whether the firms or their principals met 8(a) program
criteria. In some cases, we also met with SBA staff responsible for
annually recertifying these firms for the 8(a) program. Although 8(a)
firms must meet several eligibility criteria to enter and remain in
the program, we did not test all criteria. Generally our
investigations focused on whether firms' presidents were economically
disadvantaged, and whether they managed the day-to-day operations of
the firm because we felt these eligibility criteria posed the highest
risk of being misrepresented to the SBA.
To proactively test whether SBA's 8(a) application process and
controls were sufficient to prevent ineligible firms from entering
into the program, we established four bogus businesses, and submitted
falsified applications and supporting documentation to SBA. For each
application, we created substantial information on the business
management experience and technical expertise of the firm's
disadvantaged owner, the firm's ability to obtain the resources
necessary to perform contracts, the firm's access to capital, and the
firm's record of contract performance. To the extent possible, we
developed scenarios to test various controls related to the firm's
management and the owner's adjusted net worth. For one scenario, we
also hired a for-profit certification firm to assist in the
development of our application package. As part of SBA's application
process, agency officials request copies of personal and business tax
transcripts from the applicant as well as directly from the Internal
Revenue Service (IRS). Therefore, in order to proactively test SBA's
program application process, we used Employer Identification Numbers
(EIN) and undercover Social Security numbers to file real tax returns
with the IRS for our four bogus individuals. In order to minimize our
costs associated with paying taxes, we created tax scenarios in which
our firms reflected net business losses over multiple tax years. While
these income scenarios minimized costs to GAO, they also limited our
testing scenarios to firms that were not profitable, and thus
decreased the likelihood that our firms would meet SBA's criteria that
firms show reasonable potential for success.
To determine what vulnerabilities, if any, existed in SBA's fraud
prevention system, we made observations based on our case studies and
proactive testing. Furthermore, we compared current controls in the
8(a) program to a fraud-prevention model we developed and utilized in
prior small business contracting investigations. Our work was not
designed to identify all fraud and abuse in the 8(a) program or
estimate its full extent for the entire population of 8(a) firms. In
addition, our 14 case studies cannot be projected to the overall
population of 8(a) firms. This investigative work complements our
other work on the internal controls SBA has implemented to ensure that
only eligible firms participate in the 8(a) program.[Footnote 3]
We conducted our audit work and investigation from October 2008
through January 2010 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). A detailed discussion of our scope
and methodology is presented in appendix 1.
Background:
SBA's 8(a) program, named for a section of the Small Business Act, is
a development program created to help small, disadvantaged businesses
compete in the American economy and access the federal procurement
market. To qualify for the 8(a) program, a firm must be at least 51
percent owned and controlled by an individual or individuals who meet
SBA's definition of socially and economically disadvantaged and are of
good character and citizens of the United States. The firm must also
be a small business, as defined by SBA, and show a reasonable
potential for success.
According to SBA regulations, at least 51 percent of the 8(a) firm
must be owned and controlled by one or more disadvantaged individuals.
Ownership requirements vary depending on whether the firm is a sole
proprietorship, partnership, limited liability company (LLC), or a
corporation. However, SBA makes a clear distinction between ownership
of an 8(a) firm, and control of an 8(a) firm. To be in control of an
8(a) firm the disadvantaged individual or individuals must control
both the strategic policy setting and the day-to-day management and
administration of business operations. For example, SBA may find that
nondisadvantaged individuals actually control an 8(a) firm if the firm
cannot exercise independent business judgment without great economic
risk.
Socially disadvantaged individuals include, but are not restricted to,
members of designated groups, such as blacks or Hispanics,[Footnote 4]
or any individuals who have been subjugated to racial, ethnic, or
cultural bias because of their identities as members of groups without
regard for their individual qualities. Others, who may not be members
of these groups, can be considered for the 8(a) program if they are
able to provide substantial evidence and documentation that they have
been subjected to chronic racial prejudice, cultural bias, or similar
circumstances beyond their control. Economically disadvantaged
individuals are defined by SBA regulations as those who at the time of
application have a personal net worth of $250,000 or less, adjusted to
exclude personal residence and business assets. Once certified to
participate in the 8(a) program, the individual's adjusted net worth
must not exceed $750,000 according to regulation. In addition, if an
individual's income or total assets exceed certain standards, SBA may
determine that the individual is not economically disadvantaged.
[Footnote 5] Applicants must also be of good character and citizens of
the United States.
The firm must further qualify as a small business under the size
standard that corresponds with its primary industry classification.
SBA defines a small business concern as one that is independently
owned and operated, is organized for profit, is not dominant in its
field, has a place of business in the United States, and either
operates primarily within the United States or makes a significant
contribution to the U.S. economy. Depending on the industry, size
standard eligibility is based on the average number of employees for
the preceding 12 months or on sales volume averaged over a 3-year
period. In addition, a firm must demonstrate its potential for success
by documenting revenues in its primary industry for at least 2 years;
however, a waiver of this requirement may be granted if a firm meets
certain criteria. SBA also considers a firm's access to credit and
capital, as well as the technical and managerial experience of the
firm's managers.
To help clarify eligibility criteria and address other issues, SBA
recently proposed changes to its Small Business Size and 8(a) Business
Development Regulations.[Footnote 6] Among other things, the proposed
rules would introduce more detailed guidance for specific thresholds
for personal assets, compensation, and exceeding size standards. The
proposed changes would also limit the participation of firms with a
family member that is a previous participant of the 8(a) program. The
public comment period for these proposed regulations closed in January
2010, and according to an SBA official, the comments are expected to
be finalized by the end of fiscal year 2010.
Firms in the 8(a) program are eligible to receive set-aside and sole-
source contracts. Set-aside contracts can be awarded to 8(a) firms if
there is a reasonable expectation that at least two 8(a) firms will
submit offers and the award can be made at a fair price. Sole-source
contracts can be awarded when the dollar thresholds are $5.5 million
or less for acquisitions involving manufacturing and $3.5 million or
less for all other acquisitions.[Footnote 7] In addition, once a firm
receives an 8(a) contract, the firm is required to abide by certain
subcontracting limitations based on the type of contract. For example,
in the case of a contract for services, the 8(a) firm must perform at
least 50 percent of the cost of the contract incurred for personnel
with its own employees. In the case of general construction contracts,
the 8(a) firm must perform at least 15 percent of the cost of the
contract with its own employees (not including the costs of materials).
Firms can remain in the program for up to 9 years provided that they
maintain their eligibility. At the end of this term, SBA considers the
firm to have "graduated" from the program. SBA can also remove a
firm's 8(a) status by graduating it early if the agency determines
that it no longer meets the criteria for assistance. Examples of such
eligibility changes include the following: meeting the goals and
objectives set forth in a firm's business plan; demonstrating the
ability to compete in the marketplace without assistance from the 8(a)
program; or the qualified owners of a firm are determined to be no
longer economically disadvantaged. Firms are required to inform SBA of
any changes that would adversely affect program eligibility while they
are participating in the 8(a) program. SBA may also terminate a firm
from the 8(a) program for good cause, such as submission of false
information or failure to maintain eligibility requirements. Firms may
also voluntarily remove themselves from the program. Once a firm
graduates from the 8(a) program it cannot reapply, even if it changes
its name or comes under new management. The disadvantaged individual
upon whom eligibility was based is no longer eligible to qualify
another firm. Federal law states that any person who misrepresents a
firm's status as an 8(a) participant, or makes any other false
statement in order to influence the certification process in any way
or to obtain a contract awarded under the 8(a) program shall be: (1)
subject to fines and imprisonment; (2) subject to civil and
administrative remedies, including suspension and debarment; and (3)
ineligible for participation in programs conducted under the authority
of the Small Business Act.
Selected Case Studies of Fraud and Abuse in the 8(a) Program:
We identified 14 firms that received set-aside or sole-source 8(a)
contracts worth $325 million through fraud or abuse.[Footnote 8] These
14 firms received another $1.2 billion in other federal obligations
since entering the 8(a) program,[Footnote 9] including $17 million in
awards through the American Recovery and Reinvestment Act of 2009. We
found evidence that shows officials at 13 of these firms
misrepresented their eligibility for the program to fraudulently
acquire or maintain 8(a) status and obtain federal contracts awarded
with limited or no competition. Examples include underreporting
adjusted net worth and serving as a "pass-through" for non-8(a)
companies. In the case of a pass-through, an 8(a) firm receives the
sole-source or set-aside contract, but contrary to program
requirements, work is performed and managed by a non-8(a) company. We
also determined that SBA staff responsible for annually assessing firm
eligibility allowed 3 firms to remain in the 8(a) program and receive
contracts despite clear evidence provided by company officials during
annual reviews that showed they were no longer eligible. For example,
SBA allowed a firm to remain certified even though the president
reported a salary which substantially exceeded the threshold.
Permitting ineligible firms to obtain 8(a) contracts undermines the
intent of the program and deprives qualified firms from receiving
targeted contracting opportunities.
Table 1 highlights the case studies we developed on these 14 firms.
More detailed information on 5 of these cases follows the table. We
will be referring all 14 cases to SBA and the agency's Office of
Inspector General for further investigation.
Table 1: Selected Cases of Fraud and Abuse in the 8(a) Program:
Case: 1;
Industry/business location: Construction; Toms River, NJ;
8(a) obligations since firm was not eligible and awarding
department[A]: $11.2 million--Department of Defense, Department of
Homeland Security;
Case details:
* This firm was ineligible because the president fraudulently reported
his adjusted net worth to be $217,000 on his application when it was
actually at least $806,000--an amount clearly exceeding the allowable
$250,000 threshold. We estimate his current adjusted net worth to be
at least $1.7 million dollars--more than double the allowable $750,000;
* The president underreported the value of investment properties, an
Individual Retirement Account, and other assets. He also failed to
report the ownership of multiple properties held in a LLC registered
to his wife, but under his control;
* The president made numerous false statements during the application
process to hide his relationship with a previous employer that was a
graduated 8(a) company;
* The firm contacted us in September 2009 to state that it had decided
to voluntarily withdraw from the 8(a) program as a result of our
investigation. SBA agreed to remove the firm from the program.
Case: 2;
Industry/business location: Landscaping, janitorial, and painting;
Wharton, NJ;
8(a) obligations since firm was not eligible and awarding
department[A]: $13.8 million--Department of Defense;
Case details:
* This firm is ineligible because it is operating as an extension of a
graduated 8(a) firm owned by the same father-and-son team. The
arrangement effectively gave the team an extra 9 years of eligibility
to receive 8(a) sole-source and set-aside contracts;
* Four months after the father's landscaping and janitorial firm
graduated from the program, the son applied to the program under a
different company name and received certification about a month later;
* The current 8(a) firm and the graduated company share workers and
equipment to perform contract work;
* We requested a number of documents to verify the net worth of the
current 8(a) president and establish whether the two firms were
affiliated but were denied access by company officials--a material
breach of the firm's program agreement;
* The firm is slated to graduate in September 2015.
Case: 3;
Industry/business location: Roofing and construction; Hyattsville, MD;
8(a) obligations since firm was not eligible and awarding
department[A]: $48.3 million--Department of Agriculture, Department of
Commerce, Department of Defense, Department of the Interior,
Environmental Protection Agency, General Services Administration,
Social Security Administration;
Case details:
* The firm is ineligible because it operated as a pass-through for a
graduated company--both of which were being run by the same white,
father-and-son team at the time of our investigation;
* The two businesses share top executives, staff, administrative
offices, and warehouse space. As such, we determined that they were
essentially operating as one company;
* The father and son never applied to SBA to be considered as
disadvantaged, yet they controlled and managed the daily operations of
the currently certified firm. For example, the white vice-president
disclosed much of the operational knowledge of the firm during the
site visit, while the black president rarely spoke. The white
executives both work out of large suites while the black president
sits in a small room located at the back of the building;
* The firm is slated to graduate in April 2011.
Case: 4;
Industry/business location: Security consulting; Arlington, VA;
8(a) obligations since firm was not eligible and awarding
department[A]: $6.7 million--Department of Defense, Department of
Homeland Security, National Aeronautics and Space Administration,
Nuclear Regulatory Commission;
Case details:
* This firm is ineligible because the president is not socially
disadvantaged and it relied, at the time of application, on a
graduated company for operational resources. The firm fraudulently
obtained contracts by making false statements to SBA about these
matters;
* The president attested to being Hispanic on her 8(a) application,
but she stated on her Maryland driver's license application that she
was not. In addition, her previous employer stated that the woman had
misrepresented herself as socially disadvantaged;
* The firm is slated to graduate in August 2013.
Case: 5;
Industry/business location: Health and human services consulting;
Rockville, MD; Fairfax, VA; Atlanta, GA;
8(a) obligations since firm was not eligible and awarding
department[A]: $12.6 million--Department of Health and Human Services,
Office of Personnel Management;
Case details:
* This firm is ineligible because the president of the firm is no
longer economically disadvantaged;
* The president withdrew about $600,000 from the firm for an equity
loan--double what SBA regulations allow;
* The president provided corporate tax returns during annual reviews
which showed she drew a salary in excess of $1 million for several
years--exceeding the cap for adjusted gross income (AGI) established
by SBA case law and placing her in the top 1 percent of American
taxpayers;
* In March 2009 we pointed out these violations to SBA staff
responsible for assessing firm eligibility; however, no action was
taken to graduate the firm. Subsequently, the firm received a $3.3
million set-aside contract;
* The firm is slated to graduate in May 2010.
Case: 6;
Industry/business location: Roofing; Emmett, ID;
8(a) obligations since firm was not eligible and awarding
department[A]: $400,000--Department of the Interior;
Case details:
* This firm is ineligible because it is a shell company dependent upon
the resources of a large construction firm managed by a
nondisadvantaged individual[B];
* The president worked for the nondisadvantaged individual's firm--but
was not compensated for this work--while in the 8(a) program. The 8(a)
firm did not have any employees and used employees of the
nondisadvantaged individual's firm to perform work;
* The president stated that her firm was located on land owned by the
same nondisadvantaged individual;
* The large construction firm provided bonding for work performed by
the 8(a) company and the president of this firm told the SBA that he
was compensated for providing this support;
* Both SBA district office staff and the State of Idaho found evidence
that the firm was affiliated with a nondisadvantaged individual;
* The firm is slated to graduate in October 2014.
Case: 7;
Industry/business location: IT consulting; Fairfax, VA;
8(a) obligations since firm was not eligible and awarding
department[A]: $9.9 million--Department of Defense, Department of
State, Peace Corps;
Case details:
* The firm was ineligible because the president failed to report the
ownership of significant assets to SBA, which would have disqualified
it from the program;
* The president failed to declare joint ownership of $4.2 million in
properties located in Virginia, Maryland, and Nevada, including a
$900,000 home in Las Vegas--which would have been included in SBA's
calculation of adjusted net worth;
* When we inquired about these purchases, the president could not
provide evidence substantiating her claim that the properties were
purchased with monies inherited by her husband;
* We brought the unreported assets to the attention of SBA;
however, once SBA learned that the firm was scheduled to graduate in 8
months, it no longer wanted to investigate the firm's actions. Eleven
days later, the firm was awarded a $1.7 million dollar contract;
* The firm graduated in September 2009.
Case: 8;
Industry/business location: Construction; Fort Dix, NJ;
8(a) obligations since firm was not eligible and awarding
department[A]: $2 million--Department of Defense;
Case details:
* This firm is ineligible because it is a shell company that is
economically dependent upon a large, privately-owned construction
company in Brooklyn, NY, and subcontracts all of its work to other
businesses;
* The firm operates out of a regional office for the Brooklyn company.
A founding owner also works for the Brooklyn company, as does its
general manager. Interrelated relationships such as these have been
found by SBA to disqualify a business from being considered small;
* The firm also has only four employees, including the president--too
few to complete contract work on its own, so it subcontracts all of
its 8(a) work to other businesses. SBA regulations require 8(a) firms
to perform at least 15 percent of the work on construction contracts
with its own employees;
* The firm is slated to graduate in May 2017.
Case: 9;
Industry/business location: Human resources; Alexandria, VA;
8(a) obligations since firm was not eligible and awarding
department[A]: $117 million--Department of Agriculture, Department of
Commerce, Department of Defense, Department of Health and Human
Services, Department of Homeland Security, Department of Labor,
Department of Transportation;
Case details:
* The firm fraudulently obtained 8(a) contracts after the president
failed to report a $450,000 down payment made towards the purchase of
a $3.7 million dollar home which would have caused the president's
adjusted net worth to exceed program limits;
* SBA allowed this firm to remain 8(a) certified for 5 years even
after the president of the firm reported receiving a salary which,
according to SBA case law, indicated that the president was no longer
economically disadvantaged. She reported a salary ranging from
$525,000 to $730,000 during this time;
* Moreover, the firm was determined to be ineligible by SBA because it
had exceeded small-business size standards, but was allowed to "ride
out the program" for 21 months. During this period, the firm received
an 8(a) sole-source contract worth $554,000 for which it was no longer
eligible. We asked SBA why it approved a contract to an ineligible
firm, but were told by the audit liaison that SBA had no records
related to this contract;
* The firm graduated in November 2008.
Case: 10;
Industry/business location: IT consulting; Bethesda, MD;
8(a) obligations since firm was not eligible and awarding
department[A]: $12.6 million--Department of Agriculture, Department of
the Interior, Department of Transportation, Department of Veterans
Affairs;
Case details:
* The firm was ineligible because the president misrepresented that he
used proceeds from the sale of a $236,000 Miami condominium to
purchase his home, but instead transferred the property into his
wife's name;
* The president also exhibited signs that he is not economically
disadvantaged. For example, he owns a $2.5 million house on a private
island in Miami, FL, a $450,000 yacht, and a $200,000 Lamborghini. The
president's wife owns a $1 million house in Bethesda, MD, but SBA
regulations do not require a spouse's assets to be included in an
owner's adjusted net worth;
* The firm graduated in March 2010.
Case: 11;
Industry/business location: Construction; Weirton, WV;
8(a) obligations since firm was not eligible and awarding
department[A]: $70.8 million--Department of Agriculture, Department of
Defense, Department of Energy, Department of Health and Human
Services, Department of Homeland Security, Department of the Interior,
Department of Justice, Department of Veterans Affairs, General
Services Administration;
Case details:
* The firm fraudulently received 8(a) contracts because it graduated
from the program in 2001 and used a series of three certified
companies as pass-throughs to continue obtaining 8(a) contracts. In
addition, all four businesses are currently being controlled by two
white men who never applied to SBA to be considered as disadvantaged;
* The three pass-through companies effectively operated as extensions
of the graduated firm because they all shared facilities and employees
to perform contract work;
* There is evidence that two white men controlled the businesses: (1)
they maintained offices at headquarters where the daily operations
were conducted, while the black presidents worked about a mile away in
a satellite office, and (2) they also earned more money than the black
executives do;
* One pass-through graduated in September 2007. The other two are
slated to graduate in October 2013 and May 2014 respectively.
Case: 12;
Industry/business location: Consulting; Alexandria, VA;
8(a) obligations since firm was not eligible and awarding
department[A]: $2.5 million--Department of Defense, Environmental
Protection Agency;
Case details:
* The firm was ineligible because the president failed to disclose
over $1 million in reportable property, including an ocean-front
condominium in Florida and two townhouses in Virginia;
* The firm graduated in December 2009.
Case: 13;
Industry/business location: Manufacturing rubber products; Mansfield,
TX;
8(a) obligations since firm was not eligible and awarding
department[A]: $15.5 million--Department of Defense, General Services
Administration;
Case details:
* The firm was ineligible because the president underreported his
salary to SBA, stating in 2001 that he earned a salary of $100,000;
tax documents showed he received an income of $1.6 million that year;
* The president reported income on an annual review in excess of $1.9
million for 2003--exceeding the cap for AGI and placing him in the top
1 percent of American taxpayers, which does not demonstrate economic
disadvantage;
* The firm graduated in June 2006.
Case: 14;
Industry/business location: Janitorial, carpet cleaning, grounds
maintenance; Baltimore, MD;
8(a) obligations since firm was not eligible and awarding
department[A]: $600,000--Department of Defense;
Case details:
* This firm was not eligible to obtain 8(a) contracts after the
president passed away and his wife failed to report this to SBA for 2
years;
* After the president of the firm passed away, his wife continued to
submit documentation to SBA falsely indicating that he was the
president;
* Approximately 2 years after his death, SBA staff responsible for
assessing firm eligibility was able to determine that the president of
this firm had died and in September of 2009 filed paperwork to
terminate the firm from the program. At the time of this report, in
March of 2010, the termination was still being processed.
Source: GAO Analysis.
[A] This figure represents the amount of obligations that 8(a) firms
received from the date at which we determined that the firm was no
longer eligible to participate in the program. We found that some
firms were ineligible for participation prior to their certification,
while others became ineligible at some time during the course of their
participation in the 8(a) program. Obligation amounts are rounded to
the nearest $100,000.
[B] A shell company is defined as a business that has no independent
assets or operations of its own, but is used by its owners to conduct
specific business dealings or maintain control of other companies.
[End of table]
The following provides a more detailed description of five of the
cases in table 1.
Case Study 1:
The president of this New Jersey construction firm fraudulently
obtained $11.2 million in 8(a) set-aside and sole-source contracts by
misrepresenting his qualifications for the program. This firm was
never eligible because the president's adjusted net worth was at least
$806,000--more than triple what he reported on his application in late
2007 and what SBA regulations allow. As of May 2009, after a year in
the program, his adjusted net worth had grown to at least $1.7 million-
-more than double the $750,000 cap set by SBA regulations to retain
8(a) status. We found evidence the president hid his relationship with
a graduated 8(a) company in order to obtain certification for his own
firm. In addition, we also were told by Navy job-site inspectors that
the firm was subcontracting most, if not all, of the work on the $2.3
million sole-source demolition contract it received from the
Department of the Navy. After we began questioning the president's
qualifications and the firm's contracts, the president withdrew his
company from the 8(a) program. SBA agreed to remove the firm from the
program in November of 2009.
The president of this firm attested to an adjusted net worth of
$217,370 at the time of application, which was about $32,000 below the
cap for being considered economically disadvantaged. However, using
public records and documents provided by the president, our
investigation found that the president's actual adjusted net worth at
that time was at least $806,527, which is triple the allowable limit.
The difference results in part from the president underreporting the
value of his individual retirement account (IRA) and two investment
properties. SBA took no steps to verify the value of these assets. The
president also failed to report a third investment property entirely.
Later in this report we describe the steps that SBA takes to verify
information during the application and subsequent annual review
processes. Table 2 summarizes the discrepancies we found between the
asset values the president submitted to SBA and the ones we determined
to be accurate based on public records and documentation, such as bank
statements, provided by the president.
Table 2: President's Adjusted Net Worth in November 2007 at the Time
of Application:
Cash;
President's claimed value of assets: $7,080;
GAO's estimated value of assets: $14,202.
IRA or other retirement account;
President's claimed value of assets: $40,000;
GAO's estimated value of assets: $99,913.
Stocks and bonds (other than ownership in 8(a) firm);
President's claimed value of assets: $72,000;
GAO's estimated value of assets: $152,122.
Real estate (excluding personal residence): Investment property 1;
(Ulster, NY);
President's claimed value of assets: $10,000;
GAO's estimated value of assets: $24,000.
Real estate (excluding personal residence): Investment property 2;
(Manchester Township, NJ);
President's claimed value of assets: $70,000;
GAO's estimated value of assets: $278,000.
Real estate (excluding personal residence): Investment property 3;
(Seaside Heights, NJ);
President's claimed value of assets: Not reported;
GAO's estimated value of assets: $220,000.
Other assets and personal property[A];
President's claimed value of assets: $40,618;
GAO's estimated value of assets: $40,618.
Total assets;
President's claimed value of assets: $239,698;
GAO's estimated value of assets: $828,855.
Debt (excluding mortgage for personal residence)[A];
President's claimed value of assets: $22,328;
GAO's estimated value of assets: $22,328.
Total net worth;
President's claimed value of assets: $217,370;
GAO's estimated value of assets: $806,527.
Source: SBA documents, public records, and documents provided to GAO
by the president.
[A] GAO did not attempt to verify the accuracy of these figures.
[End of table]
For the undervalued investment property in Manchester Township, the
president submitted a market analysis produced by a real estate agent
with whom he had a prior business relationship showing the vacant land
to be worth less than a quarter of what public records state he
actually paid for it. In addition, an LLC that lists the president's
wife as its registered agent and manager---but evidence indicates is
controlled by the president himself---paid $220,000 in cash for an
investment property 10 days after the president applied to the 8(a)
program.
A little more than a year after entering the program, the president's
adjusted net worth had grown to at least about $1.7 million--more than
double the cap set by SBA regulations to remain eligible. However, the
president again understated his assets to SBA in May 2009, which
resulted in SBA calculating his adjusted net worth as $119,434. Table
3 summarizes the discrepancies we found between the asset values the
president submitted to SBA as part of his annual review and the ones
we determined to be accurate based on public records and documentation
provided by the president.
Table 3: President's Adjusted Net Worth in May 2009 about the Time of
the Firm's First Annual Review:
Cash;
President's reported value of assets: $21,555;
GAO's estimated value of assets: $21,499.
IRA or other retirement account;
President's reported value of assets: $48,164;
GAO's estimated value of assets: $77,788.
Stocks and bonds (other than ownership in 8(a) firm);
President's reported value of assets: $15,842;
GAO's estimated value of assets: $31,685.
Real estate (excluding personal residence): Investment property 1;
(Ulster, NY);
President's reported value of assets: $10,000;
GAO's estimated value of assets: $24,000.
Real estate (excluding personal residence): Investment property 2;
(Manchester Township, NJ);
President's reported value of assets: $70,000;
GAO's estimated value of assets: $838,700.
Real estate (excluding personal residence): Investment property 3;
(Seaside Heights, NJ);
President's reported value of assets: Not reported;
GAO's estimated value of assets: $336,000.
Real estate (excluding personal residence): Investment property 4;
(Lacey Township, NJ);
President's reported value of assets: Not reported;
GAO's estimated value of assets: $451,500.
Other assets and personal property[A];
President's reported value of assets: $93,175;
GAO's estimated value of assets: $93,175.
Total assets;
President's reported value of assets: $230,434;
GAO's estimated value of assets: $1,930,947.
Debt (excluding mortgage for personal residence)[A];
President's reported value of assets: $139,302;
GAO's estimated value of assets: $139,302.
Total net worth;
President's reported value of assets: $119,434;
GAO's estimated value of assets: $1,735,145.
Source: SBA documents, public records, and documents provided to GAO
by the president.
[A] GAO did not attempt to verify the accuracy of these figures.
[End of table]
The president continued to understate the value of his Manchester
Township property, despite the tripling of its assessed taxable value.
He maintained in an interview that the vacant land was worthless, but
public records and interviews with Township officials indicate he
spent 2 years and over $30,000 to connect it to public utilities. In
addition, the same LLC mentioned above purchased a nearly $500,000
waterfront home in Lacey Township, New Jersey, with cash in January
2009--4 months before the firm's first annual review.
Case Study 2:
A landscaping and janitorial firm in New Jersey fraudulently obtained
$13.8 million in 8(a) contracts because it was operating as an
extension of a graduated 8(a) firm owned by the same family. The
father's company--also a landscaping and janitorial company--entered
the program in 1997, but its certification for 8(a) contracts ended
after the 9-year eligibility term expired. Four months after the
father's company graduated, the son applied to the program in 2006
under a different firm name and was certified about a month later.
[Footnote 10] Our investigation found the two businesses operated out
of the same location, employed the same workers, and shared the same
equipment. This effectively gave the family an extra 9 years of
eligibility to receive sole-source and set-aside 8(a) contracts.
We determined that the current 8(a) firm is operating as the graduated
8(a) firm with little more than a name change.[Footnote 11] First, an
undercover site visit and postal records revealed that the two firms
are operating out of the same unmarked administrative office. They
also share an email address. Second, we found that, according to tax
records, the two firms shared 16 employees in 2008. We interviewed 6
people who worked for the current 8(a) firm, each of whom indicated
that the graduated company and 8(a) firm were operating as the same
business, but used different names depending on where work was being
performed. One employee stated that he applied for a job at the
graduated company, but that he received most of his paychecks from the
current 8(a) firm--despite never having filled out tax forms for the
current firm. Another told us that employees often do not know which
job site at which they are working until the morning when they are
told where to go by a foreman who oversees employees working for both
businesses. In addition, the son once worked as the vice-president for
operations and marketing for his father at the graduated company.
Third, several employees stated that the two companies share
equipment, such as trucks. Lastly, a former consultant for the
graduated company told us that the current 8(a) firm was created for
the sole purpose of remaining in the program after the 9-year
eligibility term expired.
We requested a number of documents to verify the adjusted net worth of
the current 8(a) president and establish whether the two firms were
affiliated but were denied access by company officials--a material
breach of the firm's program agreement.[Footnote 12] We asked the two
firms for a list of all equipment owned or leased, including
identifying information such as serial numbers or Vehicle
Identification Numbers. We also requested personal financial
information from the president, such as investment account statements.
We notified SBA program officials about our inability to obtain these
documents; however, SBA officials told us that they would not request
information on our behalf. Breach of the program agreement is a basis
for 8(a) termination.[Footnote 13] According to the SBA, the firm is
slated to graduate from the program in September 2015.
Case Study 3:
We found that this Hyattsville, Maryland, construction firm
fraudulently obtained $48.3 million in 8(a) set-aside and sole-source
contracts by operating as a pass-through for a graduated company--both
of which were being run by nondisadvantaged individuals at the time of
our investigation. We determined that the two businesses were
essentially operating as one because they shared the work on
contracts, top executives, staff, administrative offices, and
warehouse space. We also found that a father and son--two white
executives from the graduated company who never applied to SBA as
disadvantaged--actually control and manage the daily operations of the
currently certified firm. One of the white men told us that in order
to receive federal contracts, a person needed to "create" other
companies because it was difficult to compete without some type of
preference. He referred to this process as "succession planning." We
did not determine who controlled the graduated company while it was
active in the program.
The president of the currently certified firm received 8(a) status in
April 2002--about a month after the graduated company left the
program. The president's firm works in the same line of business as
that of his former employer--roofing, sheet metal, and other
commercial construction.
The firm uses about 6,000 square feet of office space and
approximately 13,000 square feet of warehouse space leased by the
president's former employer. In addition, about a third of the firm's
29 staff were hired from the president's former employer after the
graduated company left the 8(a) program. The father initially served
as the firm's senior vice-president, according to the business's Web
site, but is now listed as a mentor and advisor; at the graduated
company, he worked as vice-president. The son, meanwhile, acts as one
of the firm's vice-presidents and was operations manager at the
graduated company. The father said that he formed the currently
certified firm with the president before his company left the program.
His son joined the currently certified firm the same year that it
received its 8(a) certification.
Evidence that the currently certified firm is being controlled by two
white men includes subcontracts that the 8(a) firm awarded to both the
graduated company and a woman-owned construction firm that was closely
tied to these men. We concluded that this woman-owned construction
firm was closely tied to these men after one of them told us they
created the firm to prepare the graduated 8(a) firm for an expected
increase in government contracts to woman-owned businesses. He called
this "pre-positioning". The president of the woman-owned firm is a
former employee of the two white men and operates from the same
address as the graduated 8(a) firm. Additionally, the domain name for
the woman-owned firm's website is registered to the graduated 8(a)
firm. Other evidence of control over the current 8(a) firm includes
the operational knowledge of the white men and the size and location
of the black president's office. When we interviewed the men about the
firm's business operations, the white vice-president answered most of
the questions while the black president rarely spoke. SBA officials
told us that they consider a key indicator of control to be who
discloses much of the operational knowledge during site visits.
Finally, the white vice-president worked in a large executive suite.
The black president, meanwhile, sat in a small room located at the
back of the building. SBA considers the relative size of offices given
to disadvantaged and nondisadvantaged individuals to be a key
indicator of control. We visited the currently certified firm's
headquarters as part of our fraud investigation of the HUBZone
program--also administered by SBA--which allows sole-source and set-
aside contracts to be awarded to firms located in economically
depressed areas. The firm also had been granted HUBZone certification
and as a result received an additional $15.3 million in noncompetitive
federal contracts. Our investigation found, however, that the firm was
not actually located in a HUBZone. SBA subsequently revoked this
certification. According to SBA, the firm is slated to graduate from
the 8(a) program in April 2011.
Case Study 8:
A construction firm in Fort Dix, New Jersey, fraudulently obtained
$2.2 million in 8(a) sole-source and set-aside contracts because it is
economically dependent upon a large, privately-owned construction
company in Brooklyn, New York, and subcontracts all of its work.
First, the Fort Dix firm operates out of a regional office for the
Brooklyn company. In addition, a founding owner of the firm works for
the Brooklyn company, as does its general manager. A business's close
affiliation with a large company through the sharing of facilities,
employees, and economic interests has been found by SBA to disqualify
a business from being considered small.[Footnote 14] Second, the Fort
Dix firm possesses only four employees, including the president--too
few to complete the contract work on its own. It subcontracts all of
its 8(a) work to other businesses. SBA regulations require 8(a) firms
completing general construction contracts perform at least 15 percent
of the cost of the contract with their own employees (not including
the costs of materials). Third, we found evidence indicating that a
previous 8(a) participant in Jersey City, New Jersey, had an
interrelated relationship with the Brooklyn company while in the
program. The Jersey City business also had ties to the Fort Dix firm,
such as a common employee and nearly identical business plans.
However, the Jersey City firm did not provide us with all of the
documents we requested, so we could not determine whether it was
economically independent.
Case Study 11:
A graduated 8(a) firm currently controlled by two white men
fraudulently obtained $70.8 million in 8(a) set-aside and sole-source
contracts by using a series of three construction companies as pass-
throughs to obtain the awards. The graduated firm--founded by one
black man as president and two white men as fellow executives--gained
certification in 1992 and completed the program in 2001 after its
eligibility term expired. A succession of certified companies
subsequently operated as an extension of the graduated firm because
they all shared facilities and employees to perform contract work. In
addition, two of the top executives of the successor companies, both
disadvantaged individuals, were personally tied to the graduated
firm's president. For example, the president of the second successor
company was the sister of the graduated firm's president, while the
president of the third successor company was his cousin. After
graduating from the program, the graduated firm's president received a
salary from the first and second successor companies. We could not
determine who controlled the graduated firm during its participation
in the program, but we believe that the two white men--neither of whom
ever applied to SBA as disadvantaged individuals--currently oversee
all of the firms' daily operations. The use of the successor companies
effectively gave the two men an extra 13 years of eligibility to
receive sole-source and set-aside 8(a) contracts.[Footnote 15]
Table 4: Chronology of Firms:
Graduated firm;
SBA 8(a) entrance date: September 1992;
Date of first 8(a) obligation: April 1996;
SBA 8(a) graduation date: September 2001;
8(a) obligations: $17,355,321.
Successor 1;
SBA 8(a) entrance date: September 1998;
Date of first 8(a) obligation: November 2002;
SBA 8(a) graduation date: September 2007;
8(a) obligations: $9,401,780.
Successor 2;
SBA 8(a) entrance date: October 2004;
Date of first 8(a) obligation: June 2005;
SBA 8(a) graduation date: October 2013;
8(a) obligations: $57,321,506.
Successor 3;
SBA 8(a) entrance date: May 2005;
Date of first 8(a) obligation: September 2006;
SBA 8(a) graduation date: May 2014;
8(a) obligations: $4,085,870.
Source: SBA and FPDS-NG.
[End of table]
The graduated firm controls the three successor companies because it
shares its facility and employees with the other businesses--a
relationship that SBA regulations and case law consider indicative of
which entity is actually in power. The graduated firm's headquarters,
located in Weirton, West Virginia, effectively serves as the
operations center for the successor companies. We conducted a surprise
visit to this location and found on-site clerical staff and project
managers conducting day-to-day operations for all four businesses. The
payroll clerk also told us that the graduated firm pays the rent for
this facility. In addition, the resumes of three job site
superintendents at the first and second successor company show that
they once worked for the graduated firm. The wage and tax statements
from when the graduated firm was in the program were destroyed in a
2004 flood. We were able to obtain the wage and tax statements from
the graduated firm and its three successor companies for 2006 and
2007. These documents show the companies paid the same employees in
the same calendar year. For example, in 2006, 82 employees received a
paycheck from two or more of the businesses. In 2007, 37 employees
received a paycheck from each of the four businesses. The on-site
payroll clerk at headquarters told our investigators that an employee
earns the same salary each year regardless of which business pays the
employee. The clerk said she never had a problem issuing paychecks
from multiple businesses because they all use the same bank.
Our investigation also found that the two white men who were among the
founders of the graduated firm control all four businesses. First,
both white men have offices at headquarters where the daily operations
of the four businesses are located, while the black presidents work
about a mile away in a satellite office.[Footnote 16] Second, both
white men also earn more money than the black executives do.[Footnote
17] In 2009, the highest-paid black president received only $53,000 in
compensation compared to the $125,000 the two white men told our
investigators that they each earned. The two white men received this
income from more than one company. Both earn a paycheck from multiple
companies and both receive a portion of the money that the graduated
firm charges the second successor company for equipment leases. One of
the white men also received income from monthly fees as the accountant
for the second successor company. In addition, the two white men told
our investigators that one or more of the companies pays for their
personal vehicles. Both men agreed with our investigators that they
were managing all four businesses but told investigators, "We don't do
[the third successor company] as a steady diet. We do [the second
one]."According to SBA, the second and third successor companies--the
only ones with current 8(a) certification--are slated to graduate in
October, 2013 and May, 2014 respectively.
Our Proactive Testing Identified Strengths and Vulnerabilities in
SBA's 8(a) Application Process:
Our proactive testing found strengths in SBA's 8(a) application
process that allowed the agency to correctly determine firms' lack of
qualifications. We also identified vulnerabilities that demonstrate
weaknesses ineligible firms could exploit to fraudulently receive
program certification. We were unsuccessful in gaining certification
for three bogus firms. In the first unsuccessful application, SBA
stated that it denied our application because the firm lacked the
financial capacity to perform 8(a) contracts. In the other two of
these cases, SBA raised concerns about our eligibility based on the
presidents' adjusted net worth. The agency also questioned control of
one of these firms. SBA provided us with such thorough comments that
we determined we could not overcome the deficiencies and eligibility
issues identified in both applications, so we abandoned them. However,
we obtained 8(a) certification for one bogus firm using fabricated
documentation and fictitious owner information. We consider this a
vulnerability because unscrupulous firms could do the same to create
front companies and funnel 8(a) contracts to themselves, circumventing
eligibility requirements. In contrast to our 2008 test of SBA's
HUBZone program--in which we were quickly and easily able to obtain
certification for four fictitious firms--the agency demanded we
overcome more rigorous controls, such as verification of critical
business information contained in IRS tax returns with third-party
sources.
We prepared all but one of these applications to reflect scenarios in
which the individual or the firm would not be eligible for the
program, such as a firm president with an adjusted net worth in excess
of program limits. SBA identified many of the eligibility issues that
we included in our applications and requested substantial documentary
evidence and clarification for claims and statements that we made. We
reviewed the approved application to obtain details on why it was
certified, and determined that SBA performed independent verifications
of some of the information we provided. However, we do not know what
verifications SBA performed on our other three firms. Communications
and submissions were conducted primarily through the Internet, by
mail, and by fax. For the accepted firm, we conducted limited real-
time telephone conversations with SBA staff responsible for processing
our application. SBA staff also left several voice messages for all
but one of our firms. At no time during the application process for
the four bogus firms were we required to conduct face-to-face
meetings.[Footnote 18] By all indications, SBA's review focused on our
firms' potential for success and the technical and administrative
completeness of our applications. This is a necessary and reasonable
focus; however, SBA did not question the legitimacy of the documents
we submitted and, as a result, we were able to gain 8(a) certification
for a company that only existed on paper. This successful application
shows that SBA is vulnerable to certifying firms based upon fraudulent
application information. We provide specific details on each of our
four applications below.
Unapproved Fictitious Applications:
Fictitious Application 1: SBA denied this application after a 4-month
review because the firm appeared to lack the financial capacity to
execute contracts in the 8(a) program. We prepared this application to
appear as if a nondisadvantaged individual had the potential to
control the applicant. In addition, the personal financial statement
of the applicant included a substantial degree of debt that was
unsustainable because the owner had limited wage income and the firm
had not generated any measurable profit in the past. To appear as if
another individual could potentially control our disadvantaged
individual, we created another fictitious identity and added his name
as a signatory on a bogus bank signature card that we submitted to
SBA. We also incorporated this name in various documents throughout
our application, such as in bank statements, loan agreements, and
leases, without including him as a partial owner of the firm, naming
him as an employee, or providing any information on his identity. SBA
requested that we provide evidence from our bank listing the names of
all individuals with access to our business account. To meet this
request, we provided a bogus story to explain why the individual was a
signatory on our account and then indicated that he was removed. To
back up our claim, we provided a phony bank letter indicating that our
firm's owner was the sole signatory on the account.
Fictitious Application 2: SBA's requests for evidence and documents to
support the claims and explanations we made about control and adjusted
net worth were so extensive that we abandoned this application after 3
months, determining that we could not overcome the agency's concerns.
SBA identified almost all of the "red flags" that we included in this
application, except for indications that our bogus applicant could be
involved in money laundering. For example, SBA identified the fact
that we underreported the value of a high-end sports car and luxury
motorcycle that were included in our statement of assets and
subsequently determined that the adjusted net worth of our bogus
applicant exceeded $250,000, because of the value of the vehicles. In
contrast, SBA did not question us about the information we provided
that suggested money laundering. For instance, we provided SBA with
fake bank statements that included numerous banking transactions that
were split into sums that fell just below the $10,000 identification
and reporting threshold. The bank statements reflected substantial
transfers that originated from countries identified as tax havens with
no association with our business activity. They also reflected large
deposits that were immediately followed by cash withdrawals of an
equal sum or a wire transfer to another financial institution or
individual. While SBA requested copies of contracts, invoices, and
other information related to any business that our bogus firm may have
conducted outside of the United States, there was no indication that
its staff became suspicious of the illicit activities that are
generally associated with the information we included in our bank
statement.
Fictitious Application 3: SBA determined that this firm had
significant eligibility issues and that it could not accept our 8(a)
application for processing, after 4 months of correspondence, and
despite the hiring of a private company to help us obtain
certification. Specifically, SBA determined that the fictitious firm
had limited potential for success because we reported that we did not
receive any W-2 income or wages on both our 2007 and 2008 income
taxes. Additionally, our firm's application reflected significant
business debts and liabilities, ownership of real estate assets, and
personal and business lines of credit that could not be reconciled or
sustained with the fact that we reported no wages and or income. For
this fictitious firm, we employed the services of a private company
that offered "8(a) Certification Services" to determine if such
businesses offer the advantage that they advertised. We selected this
particular firm because it described itself as deft at helping
individuals who are not generally classified as disadvantaged obtain
8(a) certification for their firms. We signed a contract and paid the
private company almost $4,000. The company stated that it would advise
us if we were not eligible for the program. However, it did not
identify any of the eligibility issues that we planted in the
application. In fact, the company told us that our firm's application
was as "good as any it had ever seen" and "had as good a chance as any
firm of being certified." SBA returned our application, citing a
number of eligibility issues, such as our limited potential for
success and our net worth exceeding the cap. The private company
neither provided continuous guidance in addressing SBA's concerns
throughout the process, nor did it follow up with us to determine the
status of our application after resubmission. While we did not
systematically test these private companies, as a result of our
testing, we are concerned that they are marketing and advertising
themselves as capable of improving an 8(a) applicant's chances of
getting certified when they may not offer the advantages they claim.
Approved Fictitious Application:
Figure 1: SBA Certification Letter for Our Bogus 8(a) Firm:
[Refer to PDF for image: illustration]
"...Congratulations! Your firm has been Certified as a Participant in
the U.S. Small Business Administration‘s (SBA) 8(a) Business
Development Program."
U.S. Small Business Administration:
Washington, D.C. 20416:
August 11, 2009:
[Name and address redacted]
Dear Mr. [redacted]:
Congratulations! Your firm has been certified as a Participant in the
U.S. Small Business Administration's (SBA) 8(a) Business Development
Program. Your nine (9) year program term begins on the date of this
letter.
During participation in the 8(a) Business Development Program, you
will receive business development assistance from an assigned Business
Development Specialist in the Baltimore, Maryland District Office
located at 10 S. Howard Street, Suite 6220. The phone number is 410-
962-6195.
Your firm will become eligible to receive 8(a) Business Development
contracts after you submit a business plan using SBA Form 1010C and
receive SBA's approval of the plan. We are sending a copy of this
certification letter to the SBA Baltimore, Maryland District Office.
That office will send you the business plan form.
SBA requires that the 8(a) participant s President or Chief Executive
Officer sign a Participation Agreement to show that he or she
understands the conditions of 8(a) program participation. Please...
Source: SBA.
[End of figure]
Fictitious Application 4: SBA approved this fictitious application for
8(a) certification after conducting a 5-month review. We did not
intentionally prepare this application with any specific eligibility
issues, but SBA identified several discrepancies and missing items in
our application during its review. For example, SBA found a
significant eligibility issue regarding our firm's business experience
since it had less than the minimum 2 years required.[Footnote 19] To
overcome this issue, we crafted a request for a business waiver
including detailed information that demonstrated our firm's potential
for success. Table 5 below provides details on the timeline and
interactions that occurred with SBA during the processing of this
application. It shows that SBA's certification process was lengthy--
requiring our bogus firm to submit substantial documentation.
Table 5: Timeline of Approved Fictitious Application:
Date: March 9, 2009;
Actions of SBA: SBA confirms receipt of signed 8(a) application via
email.
Date: March 18, 2009;
Actions of SBA: SBA sends a letter via email indicating application
deficiencies;
namely, our firm did not meet its 2 years in business requirement. To
continue processing, SBA notes that our firm would have to submit
documents demonstrating that we met business waiver requirements.
SBA also requested the following:
* copies of all contracts with corresponding customer payments,
invoices, and bank statements equaling revenues reflected in financial
statements;
* copies of personal taxes stamped by IRS;
* evidence of payment for taxes owed; and;
* clarification of information provided in our financial statements,
among other things.
Date: April 13, 2009;
Actions of fictitious 8(a) firm: Mailed requested items to SBA.
Date: May 12, 2009;
Actions of SBA: SBA sends an email indicating that our application
required follow-up. Items requested include:
* additional documentation that supports revenue and evidence of
annual personal income;
* a front and back photocopy of several bank-deposited checks, and
evidence of available credit;
* explanation of a promissory note; and;
* updated income statement and balance sheets.
Date: May 27, 2009;
Actions of fictitious 8(a) firm: Emailed requested items to SBA.
Date: June 8, 2009;
Actions of SBA: SBA requests evidence of payment for 2008 taxes, and
that we certify that there have been no changes with our firm since
the submission of our application.
Date: July 16, 2009;
Actions of fictitious 8(a) firm: Emailed requested items to SBA.
Date: July 21, 2009;
Actions of SBA: SBA runs a credit report on our firm.
Date: July 28, 2009;
Actions of SBA: SBA leaves a voice mail requesting a copy of our
firm's business insurance.
Date: July 30, 2009;
Actions of fictitious 8(a) firm: Emailed copy of business insurance to
SBA.
Date: August 11, 2009;
Actions of SBA: Received SBA letter stating that our firm was
certified as a participant in the 8(a) Business Development Program.
Source: GAO analysis.
[End of table]
In some instances, SBA failed to adequately follow up on issues that
it identified as potential concerns. For example, SBA discovered that
the firm represented in this application shared the same home and
business addresses as the firm represented in our third application.
While SBA requested information from the owner represented in our
third application to determine if the two firms operated separate
concerns, no such information was requested from the owner represented
in this application. Additionally, when we prepared this application,
we submitted a bogus military service record and represented that the
owner of our firm had over 20 years of active-duty military service.
While SBA requested evidence of all compensation, including a military
pension, the agency did not inquire as to why an honorably discharged
veteran with over 20 years of military service did not report or
receive any military pension after we failed to provide any
information on this pay on our income tax returns. Moreover, because
this firm had been in business for less than 2 years, SBA requested
that we provide documentation to prove that the president had
substantial business management experience. We were also required to
document that the firm had the technical experience to carry out its
business plan; adequate capital to sustain operations; a record of
successful performance on contracts; and the ability to obtain
personnel, facilities, and equipment to perform on contracts if
admitted to the program. SBA did not independently verify any of the
information that we submitted was true. SBA did not verify that we
actually performed work on any of the contracts we stated we had
previously obtained, nor did it confirm if we had the office space
that we represented as our firm's bona fide place of business. If SBA
had verified any of the information in the documents that we submitted
for this waiver, it would have discovered that none of it was true.
8(a) Program Has Inadequate Controls to Prevent Fraud and Abuse:
The 14 case studies of ineligible firms discussed above and the
certification of a bogus firm show that weaknesses exist in SBA's
controls for preventing, detecting, monitoring, and investigating
fraud and abuse in the 8(a) program. We did not systematically test
SBA's fraud prevention controls, but the awarding of over $325 million
in sole-source and set-aside 8(a) contracts to just 14 ineligible
firms illustrates the need for improving them. Fraud prevention
requires a system of controls which, in their aggregate, minimize the
likelihood of fraud occurring while maximizing the possibility of
detecting any fraudulent activity that may transpire. 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 can also
deter likely perpetrators from committing fraud.
No system of internal control can provide absolute assurance against
fraud. While the complete elimination of fraud risk is unlikely,
agencies can take constructive steps to reduce their exposure. As
shown in figure 4 below, a well-designed fraud prevention system
(which can also be used to prevent waste and abuse) should consist of
three crucial elements: (1) upfront preventive controls, (2) detection
and monitoring, and (3) investigations and prosecutions. For the 8(a)
program this would mean (1) front-end controls at the application
stage, (2) fraud detection and monitoring of firms already in the
program, and (3) the aggressive prosecution or suspension and
debarment of individuals committing fraud. In addition, as shown in
figure 4, the organization should use "lessons learned" from its
detection and monitoring controls and investigations and prosecutions
to design more effective preventive controls.
Figure 2: 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:
We found weaknesses and strengths in SBA's fraud prevention controls
for the 8(a) program. Controls that keep ineligible firms and
individuals from entering a federal program in the first place are the
most efficient and effective means to minimize fraud, waste, and
abuse. Three examples of preventive controls are validating data used
in decision making against other government or third-party sources,
inspecting whenever possible to confirm information, and training
staff on fraud awareness.
Data Validation: SBA relied heavily on self-reported information from
the firms during the initial certification and annual reviews,
particularly in evaluating an individual's adjusted net worth and
total assets, with limited data validation performed after firms enter
the program. At the time of application, and for each year of their 9-
year term, SBA requires 8(a) firm presidents to complete a "Personal
Financial Statement." This statement is the primary document used to
calculate the individuals' assets and liabilities. SBA uses the
information disclosed in it to determine whether an applicant's
adjusted net worth is under $250,000 at the time of application and
under $750,000 during the 9-year program period. SBA's 8(a) standard
operating procedures require agency staff to verify the completeness
of all information provided to them by program participants. However,
officials in the 8(a) program office told us that the only document
routinely used to "cross-check" the value of assets and liabilities
disclosed in the statement is the president's annual tax return. While
the information found in a tax return can corroborate the income
component of a president's adjusted net worth, it would not allow SBA
to confirm the value of assets, such as the president's retirement
account or other stocks and bonds being held. It also would not
confirm how much equity a president has in an investment property,
among other things. While, a president's spouse is also required by
regulation to submit separate financial information to SBA, recent
Office of Hearings and Appeals (OHA) decisions have interpreted the
regulation to exclude consideration of a spouse's assets in the
calculation.[Footnote 20] Regulations do not specifically prohibit SBA
from taking a spouse's assets or income into consideration. On the
basis of our work, there is evidence that 8(a) firm presidents are
using this loophole to "hide" assets by transferring or holding them
in a spouse's name, as illustrated in Cases 1 and 10.
We found SBA applied some effective validation controls during the
processing of our successful application. We requested to review this
firm's file without alerting SBA to the fact that the firm was our
bogus applicant. On the basis of this review, we documented that SBA
verified (1) business information through Dun and Bradstreet; (2)
credit and loan information through the Credit Bureaus; (3) federal
loan delinquency status through the U.S. Department of Housing and
Urban Development's (HUD) Credit Alert Interactive Voice Response
System (CAIVRS); and (4) suspension and debarment status through the
Excluded Parties List System. Nevertheless, these controls did not
allow SBA to identify the bogus documents we submitted. Although SBA
guidance requires the request of income tax transcripts from the IRS
in order to validate tax returns submitted by applicants, in the case
of our bogus firm that was certified, SBA did not request a tax
transcript. SBA's data validation controls are strongest during the
initial certification phase, but are less rigorous during subsequent
annual reviews. For example, according to the program's standard
operating procedures, SBA does not routinely request tax transcripts
from the IRS once a firm has been certified to participate in the
program. Instead program staff is advised by internal procedures to
request the tax transcript "as needed."
Inspection: As we reported in 2008, SBA staff stated that emphasis on
ensuring the completion of 100 percent of 8(a) firm annual reviews, an
inefficient termination process, and resource constraints, limited the
amount of time available for staff to conduct site visits of 8(a)
firms.[Footnote 21] There is neither a requirement that SBA conduct a
site visit of a firm prior to certification, nor must the applicant
meet anyone from SBA in person prior to entering the program. We
conducted unannounced site visits and found instances of firms in
violation of 8(a) program regulations. For example, when the president
of the firm highlighted in Case 1 applied for initial certification,
SBA raised several questions and concerns about the president's
affiliation with his previous employer, a recently graduated 8(a)
firm. However, officials in the New Jersey district office stated that
they had not been able to conduct a site visit on any firm in their
portfolio in several years. Our site visit verified that the president
had made numerous misrepresentations on his application.
Staff Training: SBA staff responsible for annually recertifying firms
for program participation told us that they are provided with limited
fraud detection training. As a result, these staff may not be
adequately trained to detect the occurrence of fraud in the 8(a)
program.
Detection and Monitoring:
Although preventive controls are the most effective way to minimize
fraud, 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 in order to provide
reasonable assurance that they continue to meet program requirements.
Although SBA requires that 8(a) firms are annually recertified for
participation, evidence based on our investigation of 14 firms
indicates that SBA needs to strengthen its controls in order to
provide reasonable assurance that only eligible firms remain in the
program. For example, SBA was not able to identify properties
purchased by 8(a) participants that were not reported during the
annual review. Moreover as noted in our related report,[Footnote 22]
SBA failed to complete some required annual review procedure 55
percent of the time.[Footnote 23]
While SBA is required to conduct a review of 100 percent of 8(a) firms
annually, SBA does not use data-mining techniques or other means in
order to identify "red flags;" such techniques could identify firms
that might warrant further investigation. For example, data-mining
techniques could be used to detect applicant firms that are operating
at the same address as a graduated 8(a) firm. When we asked 8(a)
program office officials whether the agency took this step during the
initial application process, they told us that their current systems
did not provide them with the capability to determine if firms in
their own database share a common address. They also said that they
did not feel a new 8(a) firm operating at the same address as a
previous participant was a concern unless they have reason to believe
a relationship exists that would cause them to question ownership and
control, or the two companies exceed small-business size standards
because of their affiliation. However, we found that when 8(a) firms
were operating at the same address as a previous participant, the
companies were affiliated or had commingled resources.
From our limited review, there is indication that SBA staff
responsible for assessing firms' continued eligibility do not always
follow established program criteria during the annual review process.
As mentioned previously, some of the 14 firms described in table 1
were determined to be ineligible after our investigators confirmed
information that was concealed from SBA by firm presidents. In other
cases, our review of SBA's files clearly indicated that these firms
were not eligible for the 8(a) program, yet SBA failed to terminate or
graduate these firms from the program, as the following examples
illustrate.
* In our review of SBA's file of Case 6, we found that SBA received
strong indications that a nondisadvantaged individual influenced the
management and operations of the current 8(a) firm, yet took no action
to investigate further or to terminate the firm from the program. In
January 2006, SBA received a decision letter from the Idaho Department
of Transportation Certification Committee on its decision to deny the
8(a) firm's application for certification as a Disadvantaged Business
Enterprise.[Footnote 24] The state's denial was based on concerns it
found regarding the ownership and control of the firm. SBA staff told
us that such a letter should raise a red flag, but acknowledged that
no action was taken to review or investigate the state's findings.
Then, in March 2006, SBA denied the firm's request for a
mentor/protégé relationship with the nondisadvantaged individual--
deeming such a relationship as "merely a vehicle to enable a non-8(a)
participant to receive contracts." One month later, SBA wrote a letter
to the 8(a) firm's owner about the completion of her annual review. In
that letter, SBA indicated that the firm's annual revenues increased
by nearly 1,300 percent over a 1-year period. It also attributed the
growth to management and technical assistance the firm had received
from the nondisadvantaged individual. SBA acknowledged that for the
8(a) firm to sustain such growth, it would have to depend upon the
future assistance of said individual. SBA took no action to address
concerns that the firm was affiliated with a nondisadvantaged
individual in either of the aforementioned instances, or under the
totality of the circumstances.
* For Case 4, SBA initiated termination proceedings against the 8(a)
firm after conducting a site visit and determining that a
nondisadvantaged individual exercised control over the 8(a) firm. It
determined that the president of the 8(a) firm operated her business
from the same office as her previous employer. In an attempt to
convince SBA that her former employer no longer exercised control over
her firm and that its efforts to terminate her from the program should
cease, the 8(a) president provided SBA with a lease showing that she
had relocated to an adjacent office. SBA accepted this document as
evidence and dropped its termination proceedings. The agency did not
take any other steps to determine whether the former employer
exercised control over the 8(a) firm from within the same building.
* In Case 9, SBA staff responsible for annual reviews allowed an
ineligible firm to remain in the program for 21 months past the date
at which SBA staff determined that it was no longer eligible. Notes in
the firm file indicate that the president had exceeded salary
limitations and that the firm had exceeded all applicable size
standards and was no longer "small" by federal standards. The SBA
supervisor of the agency specialist responsible for the firm noted
that the firm should be graduated and profiled as a success story.
During the 21-month period, the firm received a contract extension
worth $554,418 that it would no longer have been eligible for. We
asked SBA why it awarded this contract to an ineligible firm, but were
told by the audit liaison that SBA had no records related to this
contract.
In a number of instances, our staff brought eligibility violations to
the attention of the relevant specialist in SBA's district office. In
none of these instances did the agency take any action to remove these
firms from the program, even after acknowledging to our staff that the
issues we raised ought to be "red flags" or cause for termination from
the program. For three of the cases we investigated, 8(a) firm
presidents' earned salaries that placed them in the top 1 percent of
American taxpayers--a level at which SBA OHA has determined an
individual is no longer economically disadvantaged. SBA regulations do
set eligibility caps for adjusted net worth, but not for income and
total assets. Agency staff are expected to rely on case law when
determining whether program participants are economically
disadvantaged for these last two criteria. However, agency staff
follow case law inconsistently. These three 8(a) firm presidents
received salaries which indicated they were no longer economically
disadvantaged; however, SBA officials failed to graduate these firms.
As we noted in our related report,[Footnote 25] a file review in five
SBA district offices found that for about seven percent of the 123
firms we reviewed there was no evidence that SBA reviewed the
president's net worth, or SBA retained the firms despite a net worth
that exceeded program limits.[Footnote 26] SBA is currently
considering changing the regulations to explicitly set caps for salary
and total assets.
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. However, SBA currently does not
have an effective process for investigating fraud and abuse within the
8(a) program. Through the course of our interviews, we found that SBA
staff responsible for annually assessing the eligibility of
participants were not actively looking for fraud and abuse in the
program. For example, we raised questions about the eligibility of one
firm, and were told by the SBA employee responsible for monitoring the
firm's eligibility that the firm was one of the 8(a) program's best
success stories and that we would be unlikely to find any problems
with the firm's operations. In another case, we provided evidence
showing a participant withheld information that should have been
reported and were told that if the president failed to report the
purchase of several pieces of property, it was by mistake. Another
official told us that they recommended the termination of a number of
firms, but were overruled by their supervisors or the OHA.
In a small number of cases, SBA's Office of Inspector General (SBA
OIG) has worked in collaboration with other criminal investigative
units at agencies such as the Department of Defense, IRS, and the
Federal Bureau of Investigation to prosecute cases of 8(a) eligibility
fraud. In the last several years, the SBA OIG has recommended that SBA
debar only two firms and their presidents. In one case, the firm was
recommended for debarment because the financial and managerial
involvement of a nondisadvantaged individual was not disclosed.
[Footnote 27] SBA ultimately suspended both the individual and the
company and will consider debarment upon sentencing. In the other
case, SBA OIG recommended that the 8(a) firm and its president be
debarred for intentionally violating subcontracting limitations. SBA
did not carry out the recommendation. As noted in our related report,
[Footnote 28] SBA lacks a formal mechanism to collect and analyze
complaint data related to 8(a) eligibility. While SBA OIG maintains
general complaint information such as the name of the 8(a) firm and
type of complaint, an SBA OIG official told us that 8(a) complaints
involving a single company generally do not rank high in priority for
a review due to resource limitations and other priorities. We asked
the SBA 8(a) program office if it had ever referred any firms for
debarment or suspension proceedings based on their findings from their
program eligibility reviews. As of the writing of our report, the SBA
liaison had not provided us an answer to the question. Officials in
SBA's program office told us that while the agency annually tracks the
number of firms that are terminated from the program, its records do
not allow the agency to isolate which firms were terminated for fraud
or abuse. While supporting the growth of 8(a) firms is an important
aspect of SBA's mission, investigating those firms that are involved
in fraudulent activity is essential to the integrity of the program.
By failing to hold firms accountable, SBA has sent a message to the
contracting community that there is no punishment or consequences for
committing fraud or abusing the intent of the 8(a) program.
Conclusions:
The 8(a) program needs to strengthen its fraud prevention, detection,
monitoring, and investigative controls to minimize its vulnerability
to fraud and abuse. SBA's prevention controls have some strengths,
such as the validation of certain information with third-party
sources. However, there are substantial vulnerabilities in the
detection, monitoring, and investigation components. The consequences
of these control weaknesses are substantial: in just the 14 cases we
investigated for this report, over $325 million in sole-source and set-
aside 8(a) contracts went to ineligible firms that manipulated the
current system. To a substantial degree, the steps we took to
investigate these firms could be part of an effective fraud detection
program. Victims of the fraud and abuse in this program are legitimate
economically and socially disadvantaged small businesses. To address
the vulnerabilities we identified, an improved fraud prevention
program is necessary. Ineligible firms will continue to participate in
the 8(a) program unless the weaknesses are addressed.
Recommendations for Executive Action:
In order to minimize the potential for fraud and abuse in the 8(a)
program, we recommend that the Administrator of SBA take the following
six actions to improve its fraud prevention program:
* As part of implementing our previous recommendation to assess the
workload of business development specialists, evaluate the feasibility
of using additional third-party data sources and unannounced site
visits, based on random or risk-based criteria, to allow more
independent verification of firm-reported data during both initial
certification and subsequent annual reviews.
* Evaluate the use of fraud detection tools, such as the use of data-
mining techniques (e.g., matching addresses of applicants and previous
participants), and evaluate the use of financial and analytical
training for business opportunity specialists.
* Enact proposed regulation changes that would specify economic
disadvantage with respect to participant's income and asset levels at
the time of application and annual recertification.
* Evaluate changing program regulations to require adjusted net worth
or total asset calculations to include assets held by the spouses of
8(a) participants.
* Enact proposed regulation changes that would limit new firms from
participating in the 8(a) program if an immediate family member is, or
has been, an 8(a) participant in the same line of work.
* Develop a more consistent enforcement strategy, to include the
suspension or debarment of contractors who knowingly misrepresent
themselves to qualify for the 8(a) program.
Agency Comments and Our Evaluation:
We provided a draft of this report to SBA for comment. In response,
the Associate Administrator for the Office of Government Contracting
and Business Development provided written comments. SBA fully endorsed
five of our six recommendations and indicated that it would evaluate
one recommendation based upon the comments it received as a result of
the proposed 8(a) rule change. SBA stated that it looked forward to
resolving the issues outlined in this report and strengthening the
8(a) program. SBA's comments are reprinted in appendix II.
SBA agreed with our recommendation that called for evaluating the
feasibility of using additional third-party data sources and
unannounced site visits. SBA stated that it will evaluate the third-
party data validation sources it currently uses to determine the need
for an independent verification of firm-reported data. The agency also
stated that it will use individualized and group training to re-
emphasize the requirement to conduct unannounced site visits, where
appropriate. SBA agreed with our recommendation to evaluate the use of
fraud detection tools, such as data-mining techniques, and financial
and analytical training. SBA stated that the agency has already begun
this evaluation process and plans to conduct on-going training on
determining 8(a) participant eligibility. SBA agreed with our
recommendations related to specifying economic disadvantage with
respect to an 8(a) participant's income and asset levels, and limiting
new firms from participating in the program if an immediate family
member is, or has been an 8(a) participant in the same line of work.
SBA noted that these changes are included in the proposed 8(a)
regulation changes. SBA agreed with our recommendation to develop a
more consistent enforcement strategy for contractors who knowingly
misrepresent themselves to qualify for the program, and stated that it
would disseminate guidance to all business development personnel
outlining a consistent strategy for recommending immediate enforcement
action for firms that knowingly misrepresent their eligibility.
For the remaining recommendation related to requiring adjusted net
worth and/or total asset calculations to include assets held by the
spouses of 8(a) participants, SBA indicated that it would evaluate
this recommendation based upon the comments it received as a result of
the proposed 8(a) rule change. While we are respectful of the rule-
making process, our investigation found that by not evaluating a
spouse's assets in determining a participant's eligibility there is a
significant loophole that allows 8(a) participants to hide assets by
transferring or holding them in a spouse's name.
As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report until
30 days from the date of this letter. At that time, we will send
copies of this report to interested congressional committees and
members, federal agencies, and other interested parties. In addition,
this report will also be available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov].
If you or your staff 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 contributed to this report
are listed in appendix III.
Sincerely yours,
Signed by:
Gregory Kutz:
Managing Director:
Forensic Audits and Special Investigations:
[End of section]
Appendix I: Scope and Methodology:
To determine whether ineligible firms are participating in the 8(a)
program, we used a risk-based approach to identify firms that
exhibited signs that they were not qualified for the program.[Footnote
29] For example, we used data from the Federal Procurement Database
System-Next Generation (FPDS-NG) to determine which firms in the
Washington, D.C., Metropolitan Statistical Area received the most 8(a)
contracts in 2006 and 2007. Next, we used data from the Small Business
Administration's (SBA) Dynamic Small Business Search (DSBS) Web site
to identify current 8(a) firms that were operating at the address of a
graduated 8(a) firm. We limited this search to Washington, D.C.,
because there are significantly more firms located there than in any
other area in the country. We used information about 8(a) firms
provided by SBA to data mine for potentially fraudulent activity. In
addition, we pursued leads found during the course of our work on the
Service Disabled Veteran Owned Small Business and HUBZone programs.
Finally, we established a new hotline, SmallBizFraud@gao.gov, to
receive allegations of fraud related to SBA contracting programs. We
advertised this hotline on GAO's Web site and in a major newspaper in
the Washington, D.C., region. We received over 30 allegations of fraud
and abuse in the 8(a) program through the hotline--far more than we
were able to investigate given time and resource constraints. Six of
these allegations were substantiated during the course of this work.
From these sources, we selected 14 cases for further investigation
based on a variety of factors, such as facts and evidence provided in
allegations and whether a firm received multiple 8(a) contracts. For
the purposes of our investigation, we defined a case as one or more
affiliated firms or joint ventures that obtained an 8(a) contract. To
investigate these case studies, we reviewed documentation available
from SBA in the firms' official files, including initial application
materials, and documentation required by the annual review process. We
worked with SBA's audit liaison to request this documentation; in some
instances we received information directly from officials in SBA
district offices and other times information was transmitted through
this liaison. In some cases, we conducted both announced and
unannounced site visits and interviewed firm owners, managers, and
previous employees. We requested supporting documentation from some
firms. We used a variety of investigative methods--such as analyzing
firm payroll data, verifying the value of assets, and reviewing
information from investigative databases--to gather information about
the firms and to determine whether the firms' or their principals met
8(a) program criteria. In some cases, we also met with SBA staff
responsible for annually recertifying these firms for the 8(a)
program. Although 8(a) firms must meet several eligibility criteria to
enter and remain in the program, we did not test all criteria.
Generally, our investigations focused on whether firms' presidents
were economically disadvantaged, and whether they managed the day-to-
day operations of the firm because we felt these eligibility criteria
posed the highest risk of being misrepresented to SBA. We did not, for
example, attempt to independently verify whether the presidents of any
8(a) firms were United States citizens. We also analyzed data from
FPDS-NG to identify 8(a) contracts received by the firms during their
participation in the program.
In order to determine whether SBA only certifies firms that are
qualified and capable of meeting the business development objectives
of the 8(a) program, we established four fictitious companies and used
fabricated documentation in our applications. For one firm, we
employed the services of a private company that offered "8(a)
Certification Services" to determine if such businesses offer the
advantage that they advertised. We selected this particular firm
because it described itself as deft at helping individuals who are not
generally classified as disadvantaged obtain 8(a) certification for
their firms. The firms we created were designed to appear as credible
businesses that met basic 8(a) program eligibility criteria. These
criteria require SBA to consider the following factors when screening
applicant firms: (1) technical competence and managerial experience of
the applicant firm's managers; (2) the operating history of the firm;
(3) the firm's record of performance on previous federal and private
sector contracts in the primary industry in which it is seeking 8(a)
certification; (4) its financial capacity; and (5) the requisite
licenses if the firm is engaged in an industry requiring professional
licensing. As part of SBA's application process, agency officials
review financial statements, conduct credit checks, and request copies
of personal and business tax transcripts from the applicant as well as
directly from the Internal Revenue Service (IRS). If SBA requested tax
information associated with our bogus firms from the IRS, no record
would have existed and our firms may have been deemed ineligible.
Because SBA standard operating procedures require verification of tax
information with the IRS, our tests did not focus on whether SBA
carried this step out in any of the four cases. Therefore, to allow us
to proactively test SBA's 8(a) program application process, we used
Employer Identification Numbers (EIN) and undercover Social Security
numbers to file real tax returns with the IRS for our four bogus
individuals. In order to minimize our costs associated with paying
taxes, we created tax scenarios in which our firms reflected net
business losses over multiple tax years. While these income scenarios
minimized our costs, they limited our testing scenarios to firms that
were not profitable, and thus the likelihood that our firms could meet
SBA's definition of success.
To determine what vulnerabilities, if any, existed in SBA's fraud
prevention system, we made observations based on our case studies and
proactive testing. We did not perform a systematic evaluation of the
8(a) program's fraud prevention system. We reviewed relevant
regulations and guidance governing the program. We also interviewed
officials from the Office of Inspector General, 8(a) program office,
and SBA General Counsel about their responsibility over the program
and controls currently in place to prevent, detect, and monitor fraud
and abuse. Furthermore, we compared current controls in the 8(a)
program to a fraud-prevention model developed by GAO and utilized in
prior small-business contracting investigations. Our work was not
designed to identify all fraud and abuse in the 8(a) program or
estimate its full extent for the entire population of 8(a) firms.
We conducted our audit work and investigation from October 2008
through January 2010 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).
[End of section]
Appendix II: Comments from the Small Business Administration:
U.S. Small Business Administration:
Washington, D.C. 20416:
March 8, 2010:
Mr. Gregory Kutz:
Managing Director:
Forensic Audits and Special Investigations:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Kutz:
The U.S. Small Business Administration (SBA) is pleased to provide a
response addressing the issues outlined in your draft Government
Accountability Office (GAO) Report Number: GA0-10-425, entitled, "8(a)
Program ” 14 Ineligible Firms Receive $325 million in Sole Source and
Set Aside Contracts."
Background:
As you are aware, since its inception, the 8(a) Business Development
(BD) Program has significantly enhanced the SBA's mission and
contributed toward the growth of the American economy. Although the
8(a) BD Program has enjoyed numerous successes, we recognize that
there are weaknesses and areas that require increased monitoring and
oversight. In an effort to address these weaknesses, in October 2009,
SBA drafted proposed regulatory revisions aimed at strengthening
opportunities for disadvantaged small businesses to benefit from its
8(a) BD program. The proposed 8(a) regulation changes are the result
of the first comprehensive review of the 8(a) BD program in a number
of years and were published in the Federal Register. The rules cover a
variety of areas of the program, ranging from providing further
clarification on determining economic disadvantage to requirements on
Joint Ventures and the Mentor-Protégé program. The public comment
period was extended to January 28, 2010, in an effort to obtain
comments from our broad customer base as well as other stakeholders.
The 8(a) BD program has a proven track record as an effective program
for helping socially and economically disadvantaged small businesses
gain access to training and contracting opportunities to help them
grow, create jobs and ultimately succeed in the marketplace upon
leaving the program. We believe that the proposed 8(a) changes build
on that foundation of success, and will strengthen the program and
maximize its benefits for eligible small businesses.
Roles And Responsibilities:
SBA's 8(a) BD program is delivered collaboratively between two
departments of the SBA. The Office of Business Development (OBD) is
responsible for policy formation and the certifications of 8(a)
applications, approval of mentor-protégé applications as well as the
approval of existing 8(a) firms that arc exiting the program (early
graduations, approval of change of ownerships, approval of voluntary
withdrawals, approval of terminations, and suspensions). OBD is also
responsible for the virtual training and relevant policy briefings
provided to SBA staff across the country responsible for executing the
8(a) BD program on an on-going basis throughout the year.
The Office of Field Operations (OFO) is responsible for supporting the
Business Development Specialists (BDS) who are tasked with executing
the 8(a) BD program and are located in 68 District offices across the
country. Selected BDSs will have 8(a) firms assigned to them. The BDSs
work directly with 8(a) firms to help prepare business plans, provide
technical assistance, review continuing eligibility, coordinate with
resource partners that provide counseling, training, loans, and other
assistance to small businesses, and coordinate additional assistance
and training for firms through another SBA program.
The following is SBA's response to the six recommendations made by GAO
regarding SBA's need to minimize the potential for fraud and abuse in
the 8(a) BD program. Some of the responses include corrective measures
already implemented and actions that are planned to be implemented in
the near future.
Government Accountability Office's Recommendations:
Recommendation 1:
As part of implementing our previous recommendation to assess the
workload of business development specialists, evaluate the feasibility
of using additional third-party data sources and unannounced site
visits, based on random or risk-based criteria, to allow more
independent verification of firm-reported data during both initial
certification and subsequent annual reviews.
SBA Response To Recommendation 1:
SBA agrees with the recommendation.
OFO will assess the workload of BDSs to determine the need for
additional staffing resources.
An internal data verification process is currently being conducted by
OBD, In addition, we will evaluate the third party data validation
sources we currently use (IRS transcripts, CAVIRS, and Experian) to
determine the need for an independent verification of firm-reported
data, Through individualized and group training, we will re-emphasize
the requirement to conduct unannounced site visits, where appropriate
in determining a participant's continuing 8(a) BD program eligibility.
Recommendation 2:
Evaluate the use of fraud detection tools, such as the use of data-
mining techniques (e.g. matching addresses of applicants and previous
participants), and financial and analytical training of business
opportunity specialists.
SBA Response To Recommendation 2: SBA agrees with this recommendation.
OBD has already begun this evaluation process. SBA will conduct on-
going training of BD personnel for purposes of determining 8(a)
participant's continuing eligibility. Several staff in OBD are
currently participating in a comprehensive agency-sponsored data
training course which will significantly enhance their data analytical
skills. Also, OBD has developed the course content and format for a
National Training Conference, planned for June 2010, which is intended
to provide in-depth training in the areas of financial and data
analysis.
Recommendation 3:
Enact proposed regulation changes that would specify economic
disadvantage with respect to participant's income and asset levels at
the time of application and annual recertification.
SBA Response To Recommendation #3:
SBA agrees with this recommendation and has included this change in
the proposed regulations.
The proposed changes to the 8(a) regulations specifically address the
area of economic disadvantage. In addition, OBD has revised Chapter 5,
"Participant Review Process" and Chapter 10, "Leaving the 8(a)
Business Development Program" of the 8(a) Standard Operating
Procedures 80 05 3 (SOP) to provide improve the guidance available to
BD personnel related to determining a participant's income and asset
levels as it relates to continuing eligibility. SBA intends to
evaluate whether additional SOP revisions will be required once the
proposed rule making is complete.
Recommendation 4:
Evaluate changing program regulations to require adjusted net worth
and/or total asset calculations to include assets held by the spouses
of 8(a) participants.
SBA Response To Recommendation 4:
SBA will evaluate this recommendation based upon the comments received
as a result of the proposed 8(a) rule change.
The proposed 8(a) regulatory change will evaluate and clearly define
when and how a family member's assets will be included in the assets
of the 8(a) participant. The proposed 8(a) regulations stipulate that
SBA may consider a spouse's financial situation in determining an
individual's access to capital and credit. It is anticipated the
revised 8(a) regulations will be finalized by October 2010.
Recommendation 5:
Enact proposed regulation changes that would limit new firms from
participating in the 8(a) BD program if an immediate family member,
is, or has been an 8(a) participant in the same line of work.
SBA Response To Recommendation 5:
SBA agrees with this recommendation and has included this change in
the proposed regulations.
In order to prevent disadvantaged individuals from using family
members to extend their program terms and to prevent fronts, SBA
proposes to amend 13 C.F.R. § 124.105(g) to provide that an individual
may not use his or her disadvantaged status to qualify a firm if such
individual has an immediate family member who has used his or her
disadvantaged status to qualify another firm for participation in the
8(a) BD program. However, the proposed rule will permit the SBA's
Associate Administrator for Business Development (AA/BD) to waive this
prohibition under certain circumstances.
RECOMMENDATION 6:
Develop a more consistent enforcement strategy, to include the
suspension and/or debarment of contractors who knowingly misrepresent
themselves to qualify for the 8(a) BD program.
SBA Response To Recommendation 6: SBA agrees with this recommendation.
OBD will disseminate guidance to all BD personnel outlining a
consistent strategy for recommending immediate enforcement action for
firms that knowingly misrepresent themselves to obtain 8(a) BD program
certification.
Again, thank you for the opportunity to provide comments on this draft
GAO Report. My staff and I look forward to working with you in
resolving the issues outlined in this draft GAO Report as we seek to
strengthen the SBA's 8(a) Business Development program.
If you have additional questions or comments, please contact me
directly.
Sincerely,
Signed by:
Joseph G. Jordan:
Associate Administrator:
Office of Government Contracting and Business Development:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gregory Kutz, Managing Director, Forensic Audits and Special
Investigations, (202) 512-6722, kutzg@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Cindy Brown Barnes, Eric
Eskew, Dennis Fauber, Grant Fleming, Matthew Harris, Heather Hill, Ken
Hill, Jason Kelly, Julia Kennon, Vicki McClure, Jeffrey McDermott,
Andrew McIntosh, Steve Martin, Lerone Reid, and Kira Self also
provided assistance on this report.
[End of section]
Footnotes:
[1] Active contracts included any contract having a modification in
fiscal year 2008 even if those modifications were non-monetary ones.
[2] We excluded Alaskan Native Corporation (ANC) 8(a) firms from our
investigation due to different qualification standards.
[3] GAO, Small Business Administration: Steps Have Been Taken to
Improve Administration of the 8(a) Program, but Key Controls for
Continued Eligibility Need Strengthening, [hyperlink,
http://www.gao.gov/products/GAO-10-353] (Washington, D.C.: Mar. 30,
2010).
[4] SBA regulations presume that the following individuals are
socially disadvantaged: black Americans; Hispanic Americans; Native
Americans; Asian Pacific Americans; and Subcontinent Asian Americans.
[5] Although not currently spelled out in the 8(a) regulations, SBA
may, in its discretion, deny 8(a) certification or continued
participation to an applicant or participant, respectively, if his or
her Adjusted Gross Income (AGI) for the past 2 years falls within the
top 1 to 2 percentiles of all American taxpayers. An applicant may
also be disqualified because of an excessive amount of total assets.
On December 9, 2009, SBA solicited comment on a proposed rule amending
the 8(a) regulations to explicitly state that an applicant is presumed
not to be economically disadvantaged if their AGI exceeds $200,000
(averaged over the last 2 years). For continued 8(a) participation, an
8(a) participant may not exceed an AGI of $250,000. In addition, the
proposed regulations would disqualify an individual with assets in
excess of $3 million at the time of application and $4 million for
continued 8(a) participation.
[6] Small Business Size Regulations; 8(a) Business Development/Small
Disadvantaged Business Status Determinations, 74 Fed. Reg. 55694
(proposed Oct. 28, 2009) (to be codified at 13 C.F.R. pts. 121 and
124).
[7] However, SBA generally may award a sole-source 8(a) contract to an
8(a) firm owned and controlled by an Indian tribe or an Alaska Native
Corporation where the value of the procurement exceeds the competitive
dollar threshold. If it is a Department of Defense procurement, this
exemption extends to Native Hawaiian Organizations.
[8] The firms are located in Georgia, Idaho, Maryland, New Jersey,
Texas, Virginia, and West Virginia.
[9] This $1.2 billion includes both non-8(a) awards, as well as 8(a)
awards that these firms were eligible to receive.
[10] SBA has proposed changes to the 8(a) regulations that would
prohibit firms from participating in the 8(a) program if the president
has an immediate family member who is a disadvantaged principal of a
former 8(a) firm. This prohibition may be waived by the Associate
Business Development Administrator if there are no connections between
the two firms and if the applicant can demonstrate sufficient
expertise to operate the firm. There is a presumption against the
waiver if the firms are in the same line of business.
[11] SBA has previously disqualified firms that are simply an
extension of a former 8(a) participant, as well as firms in which
there is a "confusion of identities" between the firm and a previous
8(a) participant. Matter of Infotech International, Inc., SBA No. 205
(2004).
[12] All 8(a) participants sign an agreement upon entering the program
which states, among other things, that the firm president agrees to
fully cooperate with any and all requests from authorized government
officials (including auditors and investigators from SBA or other
agencies) for examination of business records and any other
information deemed necessary by such officials for legitimate program
purposes.
[13] 13 C.F.R. § 124.303(a)(19).
[14] See, for example, Size Appeal of Bering Pacific Construction, SBA
No. 4094 (1995).
[15] Eligibility calculated by adding the years since the graduated
firm's eligibility term expired (2001) and the last successive firm's
eligibility term will expire (2014).
[16] SBA regulations require that the disadvantaged principal manage
the day-to-day operations of the firm.
[17] SBA regulations require that employees of 8(a) firms generally
may not receive greater compensation than the disadvantaged principal.
13 C.F.R. § 124.106(e)(3).
[18] The owners of newly certified 8(a) firms are required to attend
an orientation in person. We never attended our required orientation
session.
[19] This application was submitted with less than the necessary 2
years of business experience to avoid tax implications.
[20] The Office of Hearings and Appeals (OHA) is an independent office
of the SBA established in 1983 to provide an independent, quasi-
judicial appeal of certain SBA program decisions.
[21] GAO, Small Business Administration: Agency Should Assess
Resources Devoted to Contracting and Improve Several Processes in the
8(a) Program, [hyperlink, http://www.gao.gov/products/GAO-09-16]
(Washington, D.C.: Nov. 21 2008).
[22] GAO, Small Business Administration: Steps Have Been Taken to
Improve Administration of the 8(a) Program, but Key Controls for
Continued Eligibility Need Strengthening, [hyperlink,
http://www.gao.gov/products/GAO-10-353] (Washington, D.C.: Mar. 30,
2010).
[23] Because these estimates are based on a probability sample, they
are subject to sampling error. The 95 percent confidence interval for
this estimate is (46, 64) percent of the cases, SBA failed to comply
with some annual review procedure.
[24] In general, to be eligible for the Disadvantaged Business
Enterprise program, persons must own 51 percent or more of a "small
business," establish that they are disadvantaged within the meaning of
Idaho Department of Transportation regulations, and prove they control
their business.
[25] GAO, Small Business Administration: Steps Have Been Taken to
Improve Administration of the 8(a) Program, but Key Controls for
Continued Eligibility Need Strengthening, [hyperlink,
http://www.gao.gov/products/GAO-10-353] (Washington, D.C.: Mar. 30,
2010).
[26] Because these estimates are based on a probability sample, they
are subject to sampling error. The 95 percent confidence interval for
this estimate is (3, 13).
[27] During the application process, firms are reminded of the
program's eligibility requirements. The owners sign a document stating
that they understand if they misrepresent the firm's status as an 8(a)
participant, or make any other false statement in order to influence
the certification process in any way, they will be subject to
penalties, such and fines and imprisonment.
[28] GAO, Small Business Administration: Steps Have Been Taken to
Improve Administration of the 8(a) Program, but Key Controls for
Continued Eligibility Need Strengthening, [hyperlink,
http://www.gao.gov/products/GAO-10-353] (Washington, D.C.: Mar. 30,
2010).
[29] We excluded Alaskan Native Corporation (ANC) 8(a) firms from our
investigation due to different qualification standards.
[End of section]
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