Small Business Administration
Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and Abuse Gao ID: GAO-10-759 June 25, 2010The Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. In July 2008 and March 2009, GAO reported on substantial vulnerabilities to fraud and abuse in the HUBZone application and monitoring process. GAO also found 10 HUBZone firms in the Washington, D.C., area and 19 firms in four other metropolitan areas in Alabama, California, and Texas that made fraudulent or inaccurate representations to get into or remain in the HUBZone program. Given the Committee's continued concern over fraud and abuse in the HUBZone program, GAO (1) performed additional proactive testing of SBA's HUBZone certification process, and (2) determined whether SBA has taken any actions against the 29 case study firms GAO identified in its prior work. Using publicly available resources to fabricate documents, GAO proactively tested SBA's application process by applying for HUBZone certification for four bogus businesses with fictitious owners and employees. GAO also interviewed SBA officials and reviewed SBA data about the 29 case study firms. GAO did not attempt to project the extent of fraud and abuse in the program nor systematically assess HUBZone program controls.
The HUBZone program remains vulnerable to fraud and abuse. Using falsified documents and employee information, GAO obtained HUBZone certification for three bogus firms using the addresses of the Alamo in Texas, a public storage facility in Florida, and a city hall in Texas as principle office locations. A simple Internet search by SBA could have revealed these as phony applications. While the agency has required more documentation in its application process since GAO's July 2008 report, GAO's testing shows that SBA does not adequately authenticate self-reported information and, for these cases, did not perform site visits to validate the addresses. Further, the changes have significantly increased the time it takes SBA to process applications. Specifically, SBA took 7 or more months to process each of the bogus applications--at least 6 months longer than for GAO's previous investigations. SBA continually lost documentation for GAO's fourth application, and eventually withdrew it after GAO failed to resubmit the same materials for the fourth time. On its Web site, SBA reported that applicants are experiencing delays during the application process. SBA has taken some action on most of the 29 firms that GAO previously reported did not meet HUBZone program requirements. The SBA decertified 16 firms from the HUBZone program, and another 8 firms voluntarily withdrew. While GAO maintains all 29 firms did not meet requirements at the time of its review, SBA stated that the other 5 firms were in compliance at the time of its own review and so remain certified. Since GAO's March 2009 report, 17 of the 29 companies have received more than $66 million in federal obligations for new contracts. GAO recently reported that one firm has also defrauded the SBA 8(a) program. Because the SBA did not promptly debar the firm from federal contracts, it was able to fraudulently receive an additional $600,000 in noncompetitive 8(a) federal contracts since GAO's last report. SBA recently proposed debarring this firm. National Historic Landmark Address (The Alamo) Used by GAO as Principle
GAO-10-759, Small Business Administration: Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and Abuse
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Report to the Chairwoman, Committee on Small Business, House of
Representatives:
United States Government Accountability Office:
GAO:
June 2010:
Small Business Administration:
Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and
Abuse:
GAO-10-759:
GAO Highlights:
Highlights of GAO-10-759, a report to the Chairwoman, Committee on
Small Business, House of Representatives.
Why GAO Did This Study:
The Small Business Administration‘s (SBA) Historically Underutilized
Business Zone (HUBZone) program provides federal contracting
assistance to small firms located in economically distressed areas,
with the intent of stimulating economic development. In July 2008 and
March 2009, GAO reported on substantial vulnerabilities to fraud and
abuse in the HUBZone application and monitoring process. GAO also
found 10 HUBZone firms in the Washington, D.C., area and 19 firms in
four other metropolitan areas in Alabama, California, and Texas that
made fraudulent or inaccurate representations to get into or remain in
the HUBZone program.
Given the Committee‘s continued concern over fraud and abuse in the
HUBZone program, GAO (1) performed additional proactive testing of SBA‘
s HUBZone certification process, and (2) determined whether SBA has
taken any actions against the 29 case study firms GAO identified in
its prior work. Using publicly available resources to fabricate
documents, GAO proactively tested SBA‘s application process by
applying for HUBZone certification for four bogus businesses with
fictitious owners and employees. GAO also interviewed SBA officials
and reviewed SBA data about the 29 case study firms. GAO did not
attempt to project the extent of fraud and abuse in the program nor
systematically assess HUBZone program controls.
GAO makes no recommendations in this report.
What GAO Found:
The HUBZone program remains vulnerable to fraud and abuse. Using
falsified documents and employee information, GAO obtained HUBZone
certification for three bogus firms using the addresses of the Alamo
in Texas, a public storage facility in Florida, and a city hall in
Texas as principal office locations. A simple Internet search by SBA
could have revealed these as phony applications. While the agency has
required more documentation in its application process since GAO‘s
July 2008 report, GAO‘s testing shows that SBA does not adequately
authenticate self-reported information and, for these cases, did not
perform site visits to validate the addresses. Further, the changes
have significantly increased the time it takes SBA to process
applications. Specifically, SBA took 7 or more months to process each
of the bogus applications”at least 6 months longer than for GAO‘s
previous investigations. SBA continually lost documentation for GAO‘s
fourth application, and eventually withdrew it after GAO failed to
resubmit the same materials for the fourth time. On its Web site, SBA
reported that applicants are experiencing delays during the
application process.
Figure: National Historic Landmark Address (The Alamo) Used by GAO as
Principal Office Location for a Bogus HUBZone Firm:
[Refer to PDF for image: photograph]
Source: GAO.
[End of figure]
SBA has taken some action on most of the 29 firms that GAO previously
reported did not meet HUBZone program requirements. The SBA
decertified 16 firms from the HUBZone program, and another 8 firms
voluntarily withdrew. While GAO maintains all 29 firms did not meet
requirements at the time of its review, SBA stated that the other 5
firms were in compliance at the time of its own review and so remain
certified. Since GAO‘s March 2009 report, 17 of the 29 companies have
received more than $66 million in federal obligations for new
contracts. GAO recently reported that one firm has also defrauded the
SBA 8(a) program. Because the SBA did not promptly debar the firm from
federal contracts, it was able to fraudulently receive an additional
$600,000 in noncompetitive 8(a) federal contracts since GAO‘s last
report. SBA recently proposed debarring this firm.
View [hyperlink, http://www.gao.gov/products/GAO-10-759] or key
components. For more information, contact Gregory Kutz at (202) 512-
6722 or kutzg@gao.gov.
[End of section]
Contents:
Letter:
Background:
SBA's HUBZone Certification Process Remains Vulnerable to Fraud and
Abuse:
SBA Has Taken Some Actions on the 29 HUBZone Firms Previously
Investigated by GAO:
Corrective Action Briefing:
Tables:
Table 1: SBA Actions on 10 Firms GAO Reported as Ineligible for the
HUBZone Program in July 2008:
Table 2: SBA Actions on 19 Firms GAO Reported as Ineligible for the
HUBZone Program in March 2009:
Figures:
Figure 1: HUBZone Certification Letter from SBA for Our Bogus Firm:
Figure 2: Timeline of HUBZone application (Crockett & Associates):
Abbreviations:
DOJ: Department of Justice:
HUBZone: Historically Underutilized Business Zone:
ISDC: Interagency Suspension and Debarment Committee:
ORCA: Online Representations and Certifications Application:
SBA: Small Business Administration:
SDO: SBA's Suspension and Debarment Official:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 25, 2010:
The Honorable Nydia M. Velázquez:
Chairwoman:
Committee on Small Business:
House of Representatives:
Dear Madam Chairwoman:
In fiscal year 2009, federal agencies obligated nearly $3 billion in
sole source or set-aside contracts to firms participating in the
Historically Underutilized Business Zone (HUBZone) program, which we
have shown to be vulnerable to fraud and abuse.[Footnote 1]
Administered by the Small Business Administration (SBA), this program
is meant to spur economic growth in underdeveloped areas by helping
qualified small businesses secure federal contracts. Qualified
businesses located in HUBZones--economically distressed areas with low
income levels or high unemployment rates--are eligible to bid on
federal prime contracts and subcontracts available exclusively to
program participants, in addition to benefiting from other contracting
preferences. The SBA must certify that a small business meets the
following criteria to qualify for the program: the firm must be owned
and controlled by one or more U.S. citizens; at least 35 percent of
full-time (or full-time equivalent) employees live in a HUBZone; and
the principal office, where most qualifying employees work, must be in
a HUBZone. According to the SBA's Dynamic Small Business Web site, as
of March 2010, 9,300 firms were participating in the program.
In July 2008, we testified that the SBA's lack of an effective fraud
prevention program meant its application process could not provide
reasonable assurance that only eligible firms were being certified to
participate in the program. Using fictitious employee and owner
information and fabricated documentation, we easily obtained HUBZone
certification for four bogus firms. We also identified 10 firms from
the Washington, D.C., metro area that participated in the program even
though they did not meet eligibility criteria. In March 2009, we
reported on 19 additional HUBZone firms from Alabama, California, and
Texas that were not eligible for the program.
Because you expressed concerns about continued fraud and abuse in the
program, we (1) performed additional proactive testing of the SBA's
HUBZone certification process and (2) determined what actions, if any,
the SBA has taken against the 29 case study firms we identified in our
prior work.
To proactively test the SBA's HUBZone certification process, we
created four new bogus firms and applied for HUBZone certification
using false information and fabricated documents to meet the SBA's
certification requirements. Our applications contained fictitious
employee information and bogus principal office addresses. We used
publicly available guidance provided by the SBA to create the
applications. When necessary, we fabricated documents to support our
applications using commercially available hardware, software, and
materials. To determine what actions, if any, the SBA has taken
against the 29 firms that we found misrepresented their HUBZone
status, we made inquiries on our referrals with SBA officials from the
HUBZone Program Office, and the SBA's Suspension and Debarment
Official (SDO). To identify federal obligations received by the firms
subsequent to our referral to SBA, we analyzed data from the Federal
Procurement Data System-Next Generation. We also reviewed the SBA's
Dynamic Small Business Web site to determine the current HUBZone
status of the 29 firms. To identify firms that represented themselves
as HUBZone certified, where they may possibly receive benefits from
improperly being associated with the program, even after they were
decertified by the SBA, we reviewed the Web sites of all 29 firms. We
did not review SBA records to confirm actions on the 29 firms or the
firms' actions to comply with HUBZone requirements.
Our work was not designed to systematically assess HUBZone program
controls or to determine the legal sufficiency of any actions SBA took
against the selected firms we referred for investigation. We conducted
our investigation from October 2008 through June 2010 in accordance
with quality standards for investigations as set forth by the Council
of the Inspectors General on Integrity and Efficiency.
Background:
The HUBZone program was established by the HUBZone Act of 1997 to
stimulate economic development by providing federal contracting
preferences to small businesses operating in economically distressed
communities known as HUBZones. The SBA is responsible for
administering the program and certifying applicant firms that meet
HUBZone program requirements. To be certified, in general, firms must
meet the following criteria: 1) the company must be small by SBA size
standards;[Footnote 2] 2) the company's principal office--where the
greatest number of employees perform their work--must be located in a
HUBZone; 3) the company must be at least 51 percent owned and
controlled by U.S. citizens; and 4) at least 35 percent of the
company's full-time (or full-time equivalent) employees must reside in
a HUBZone.[Footnote 3] As of March 2010, approximately 9,300 firms
were listed in the SBA's Dynamic Small Business database as
participating in the HUBZone program.
A certified HUBZone firm is eligible for a variety of federal
contracting benefits, such as sole source contracts and set-aside
contracts[Footnote 4]. Contracting officers may award a sole source
contract to a HUBZone firm if, among other things, the officer does
not have a reasonable expectation that two or more qualified HUBZone
firms will submit offers and the anticipated award price of the
proposed contract, including options, will not exceed $5.5 million for
manufacturing contracts or $3.5 million for all other contracts. Once
a qualified firm receives a HUBZone contract, the firm is required to
spend at least 50 percent of the personnel costs of the contract on
its own employee[Footnote 5]s. The company must also represent, as
provided in the application, that it will "attempt to maintain" having
35 percent of its employees reside in a HUBZone during the performance
of any HUBZone contract it receives.[Footnote 6]
The SBA must ensure that both applicant and participant firms meet and
maintain eligibility criteria at the time of application and, if they
are granted certification, throughout their tenure in the program.
During the application process, firms attest to the authenticity of
the information that they submit to the SBA regarding their
eligibility. Subsequent to certification, SBA regulations require
firms to immediately notify the agency if any material changes occur
that affect their eligibility, such as changes to the number of
employees residing in a HUBZone or the location of the firm's
principal office.[Footnote 7] Moreover, certified HUBZone firms
competing for government contracts must verify in the government's
Online Representations and Certifications Application (ORCA)[Footnote
8] that there have been "no material changes in ownership and control,
principal office, or the percentage of employee's living in a HUBZone
since it was certified by the SBA." Firms and individuals who
misrepresent their eligibility during the application process or while
participating in the program are subject to civil and criminal
penalties; decertification from the HUBZone program; or debarment from
all federal contracts.[Footnote 9]
SBA's HUBZone Certification Process Remains Vulnerable to Fraud and
Abuse:
The SBA continues to struggle with reducing fraud risks in its HUBZone
certification process despite reportedly taking steps to bolster its
controls. The agency certified three of our four bogus firms based on
fraudulent information, including fabricated explanations and
supporting documentation. The SBA lost documentation for our fourth
application on multiple occasions, forcing us to abandon our
application. Our testing revealed that the SBA does not adequately
authenticate self-reported information--especially as it pertains to
information regarding whether a firm's principal office location meets
program requirements. For example, for our successful firms, we used
the addresses of the Alamo, a public storage facility in Florida, and
a city hall in Texas as our principal office locations--locations that
a simple Internet search could have revealed as ineligible for the
program. While ensuring that a HUBZone applicant's principal office is
legitimately located in a HUBZone is a complicated process, the SBA's
failure to verify principal office locations leaves the program
vulnerable to firms misrepresenting the locations of their principal
offices and thus, benefits of the program not going to areas that are
economically disadvantaged. Figure 1 below shows one of the acceptance
letters we received.
Figure 1: HUBZone Certification Letter from SBA for Our Bogus Firm:
[Refer to PDF for image: illustration]
Letter depicts the following statement:
’...your application for certification as a …qualified HUBZone small
business concern (SBC)‘ has been approved.“
Source: SBA.
[End of figure]
In contrast to our last test of the HUBZone certification process, the
SBA considerably increased the amount of documentation it requested to
support each application and its attempts to contact and communicate
with the owners we represented in our applications.[Footnote 10]
However, the SBA also increased the amount of time it takes to certify
firms and, by all indications, suspended the use of agency processing
time guidelines as indicated by an e-mail that we received from an SBA
official and information that the agency posted on its Web site.
[Footnote 11] The SBA took at least 7 months to process each of the
three applications from our bogus companies that it certified. In our
previous test, the SBA certified our firms in as little as 2 weeks,
with minimal requests for documentary evidence. SBA's increased
processing times failed to prevent our fraudulent firms from being
certified.
As we indicated in our March 2009 report, the SBA initiated a process
of reengineering the HUBZone program in response to our findings and
recommendations. Though we did not assess the effectiveness of the
actions that the SBA undertook to strengthen its internal controls, we
were still able to exploit those weaknesses in order to obtain program
certification for our bogus firms.
Specific details about each of our fraudulent applications are
reported below.
Fictitious Application 1: We received HUBZone certification about 7
months after submitting this application to the SBA. For the principal
office location, we used the address of the Alamo, a National Historic
Landmark in Texas. We claimed that both the firm's employees were
HUBZone residents. Nearly 3 months after submission, we received an e-
mail from the SBA requesting a copy of the HUBZone maps that we used
to verify the residency of our employees, birth certificates, copies
of tax returns for the last 3 years, corporate documents, and a copy
of our firm's rental agreement and a recent utility bill. We
fabricated these documents using publicly available materials and
software and submitted them to the SBA. The SBA then requested a copy
of the firm's most recent official payroll records and sought
clarification between the number of employees who worked at our firm's
principal office and those who worked off site. We were also required
to provide additional payroll records and corresponding banking
statements with the line-by-line transactions that supported the
payments that we claimed to make to our fictitious employees. After
all of the requested information was provided, we were approved for
HUBZone certification. Figure 2 provides a timeline highlighting the
major interactions that occurred with the SBA during the processing of
this application.
Figure 2: Timeline of HUBZone Application:
[Refer to PDF for image: timeline]
December 2008:
GAO submits HUBZone application.
February 2009:
SBA requests business and personal documentation.
March 2009:
GAO submits fake business and personal documentation.
May 2009:
SBA requests personnel records.
May 2009:
GAO submits fake personnel records.
June 2009:
SBA requests operating agreement, personnel records, payroll
information, and banking statement.
June 2009:
GAO submits fake operating agreement, personnel records, payroll
information, and banking statement.
July 2009:
GAO firm receives SBA HUBZone certification.
Source: GAO analysis.
[End of figure]
Fictitious Application 2: The SBA certified this bogus company 14
months after our investigators applied for HUBZone certification. The
address we used for our principal office was the same as a rental
storage unit in Florida. We claimed the firm was a partnership that
employed two individuals who both resided in a HUBZone. To
substantiate our firm's principal address, the agency requested that
we submit a lease, a recent utility and telephone bill, and a copy of
our firm's business registration. To verify the firm's business
activity and ownership, the SBA requested copies of our firm's federal
business income tax returns for the last 3 years and birth
certificates of the two owners, and a copy of our firm's partnership
agreement. To verify employee information, the SBA requested copies of
each of the HUBZone resident employees' driver's licenses or voter
registration cards, a copy of our firm's quarterly unemployment tax
filings, and certified copies of the firm's quarterly payroll. SBA
also requested tax information and a copy of our firm's most recent
payroll documents, which we fabricated and provided to the SBA.
Several months thereafter, our bogus firm was granted HUBZone
certification.
Fictitious Application 3: After 7 months of processing, SBA approved
this bogus firm for HUBZone participation. The address of this firm's
principal office was a city hall in Texas. We indicated that two of
the firm's employees who worked for the bogus firm lived in a HUBZone.
Several months after processing our application, the SBA requested
documentary evidence of the firm's location, business activity,
ownership, and employee information. After the SBA deemed the
fabricated information that we submitted regarding payroll as
insufficient to determine our employee information, the agency put our
application on hold until we provided further documentation. We then
provided SBA with a sworn statement to support information regarding
payroll. SBA requested clarification about the frequency that our
bogus employees worked from the principal office and granted HUBZone
certification soon after.
Fictitious Application 4: After 4 months of processing, the SBA
withdrew this application after we abandoned it. We abandoned this
application because the SBA claimed that it did not receive
supplementary documentation that we repeatedly provided. Two months
after the initial submission of this application, we followed up with
the SBA to inquire about its status. At the point of inquiry, SBA
indicated that our application was being assigned to an analyst for
processing. Two months after our inquiry, we received a request for
supporting documentation that was similar to those we received in our
previous applications. We provided the requested information 3 days
after receiving the request. Two weeks later, we followed up to
confirm receipt of our documents. The SBA indicated that it did not
receive the information that we provided, so we resent the information
and requested that the agency confirm receipt. Three weeks later,
after failing to receive confirmation on the receipt of our
documentation, we inquired about the status of our application. Again,
the agency told us that it did not receive the documentation and
subsequently gave us one day to resubmit it. If not provided, the
agency indicated, our application would be withdrawn. We decided to
abandon the application and our application was withdrawn from the
program.
SBA Has Taken Some Actions on the 29 HUBZone Firms Previously
Investigated by GAO:
As of March 2010, the SBA has reviewed the status of all 29 firms we
referred to it from our prior HUBZone investigations. Since our March
2009 report, these firms have received more than $66 million in
federal obligations for new contracts. Not all of these obligations
are necessarily improper, and some do not relate to HUBZone contracts.
Of the 29 firms, 16 were decertified by the SBA, 8 voluntarily
withdrew from the HUBZone program, and 5 were found by the agency to
be in compliance with program requirements and remain certified. We
did not attempt to verify SBA's work. And although SBA indicated that
firms sometimes come in and out of compliance while in the program, we
maintain that the firms represented in the cases that the SBA reviewed
and determined to meet HUBZone program requirements were out of
compliance at the time of our review. In addition, we found that five
decertified firms continued to market themselves, through their Web
sites, as HUBZone certified even after the SBA removed them from the
HUBZone program. Tables 1 and 2 below show the results of the SBA's
review of the 29 firms we referred from our July 2008 testimony and
March 2009 report.
Table 1: SBA Actions on 10 Firms GAO Reported as Ineligible for the
HUBZone Program in July 2008:
GAO case: 1;
Primary product or service: Information technology (IT), engineering,
business management;
Violations found by GAO, December 2007:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed firm from HUBZone
program in June 2009;
* SBA Suspension and Debarment Official is coordinating with
Department of Justice (DOJ) and Interagency Suspension and Debarment
Committee (ISDC) to determine whether debarment is appropriate action
and, if so, whether SBA should be the lead agency;
* Since our March 2009 report, this firm has received $9.4 million in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 2;
Primary product or service: Construction;
Violations found by GAO, December 2007:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed firm from HUBZone
program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $9.6 million in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 3;
Primary product or service: Design and installation of fire alarm
systems;
Violations found by GAO, December 2007:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed firm from HUBZone
program on November 2008;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $3.4 million in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 4;
Primary product or service: Engineering and construction management;
Violations found by GAO, December 2007:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed firm from HUBZone
program on May 2009;
* SBA SDO is coordinating with DOJ and ISDC to determine whether
debarment is appropriate action and, if so, whether SBA should be the
lead agency;
HUBZone status, March 2010: Decertified.
GAO case: 5;
Primary product or service: IT consulting;
Violations found by GAO, December 2007:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal of firm from
HUBZone program;
* Firm voluntarily withdrew from the HUBZone program in May 2009;
* SBA SDO is coordinating with DOJ and ISDC to determine whether
debarment is appropriate action and, if so, whether SBA should be the
lead agency;
* Since our March 2009 report, this firm has received $500,000 in new
federal obligations;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 6;
Primary product or service: Mechanical engineering;
Violations found by GAO, December 2007:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal from HUBZone
program;
* Firm voluntarily withdrew from the HUBZone program in March 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $630,000 in
federal obligations for new contracts;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 7;
Primary product or service: Acquisition and project management;
Violations found by GAO, December 2007:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* Firm voluntarily withdrew from the HUBZone program in November 2008;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $960,000 in
federal obligations for new contracts;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 8;
Primary product or service: Construction management;
Violations found by GAO, December 2007:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA concluded firm met HUBZone program requirements based on an SBA
program examination[A];
* Since our March 2009 report, this firm has received $3.3 million in
federal obligations for new contracts;
HUBZone status, March 2010: Certified.
GAO case: 9;
Primary product or service: IT products and services;
Violations found by GAO, December 2007:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA concluded firm met HUBZone program requirements based on an SBA
program examination[A];
* Since our March 2009 report, this firm has received $657,000 in
federal obligations for new contracts;
HUBZone status, March 2010: Certified.
GAO case: 10;
Primary product or service: IT and logistics management;
Violations found by GAO, December 2007:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA concluded firm met HUBZone program requirements based on an SBA
program examination[A];
* Since our March 2009 report, this firm has received $5.8 million in
federal obligations for new contracts;
HUBZone status, March 2010: Certified.
Source: GAO analysis.
Note: Cases are presented in the same order as reported in GAO-08-964T.
[A] Although SBA indicated that some firms may come in and out of
compliance while in the program, we maintain that this firm did not
comply with HUBZone requirements at the time of our review.
[End of table]
Table 2: SBA Actions on 19 Firms GAO Reported as Ineligible for the
HUBZone Program in March 2009:
GAO case: 1;
Primary product or service: Environmental consulting;
Violations found by GAO, March 2009:
* Less than 50% of personnel costs for own staff to perform HUBZone
contracts;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA did not take any action on firm because SBA concluded that firm
met both the 35% residency and principal office requirement. SBA
stated that contracting officers are required by the Federal
Acquisition Regulations to insert such clauses regarding
subcontracting limitations. We believe that SBA should evaluate
whether HUBZone firms are meeting the performance-for-work
requirements;
HUBZone status, March 2010: Certified.
GAO case: 2;
Primary product or service: Grounds maintenance and furniture;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal from HUBZone
program;
* Firm voluntarily left HUBZone program in June 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $71,000 in
federal obligations for new contracts;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 3;
Primary product or service: General contractor;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal from HUBZone
program;
* Firm voluntarily left HUBZone program in June 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 4;
Primary product or service: Information technology;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal from HUBZone
program;
* Firm voluntarily left HUBZone program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $2.9 million in
federal obligations for new contracts;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 5;
Primary product or service: Information technology, general
contracting;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in October 2009;
* SBA SDO determined that debarment was not warranted based on the
evidence of the case;
HUBZone status, March 2010: Decertified.
GAO case: 6;
Primary product or service: Janitorial;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in June 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Decertified.
GAO case: 7;
Primary product or service: Medical laboratories;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal from HUBZone
program;
* Firm voluntarily left HUBZone program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 8;
Primary product or service: Medical services and support;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and proposed removal from HUBZone
program;
* In July 2009, SBA SDO proposed debarment for the firm. At that time,
the firm was placed on the federal Excluded Parties List System;
* In response to the proposed debarment, the firm provided evidence
that it was presently responsible and that it was no longer necessary
for the firm to be debarred. In October 2009, SBA SDO determined that
debarment was unnecessary to protect the government's interests and
the firm was removed from the Excluded Parties List System;
* SBA SDO did not believe evidence established sufficient grounds for
debarment;
* The firm voluntarily withdrew from the HUBZone program in July 2009;
HUBZone status, March 2010: Voluntarily withdrew.
GAO case: 9;
Primary product or service: Military logistics and maintenance;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Decertified.
GAO case: 10;
Primary product or service: Facility support services;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Decertified.
GAO case: 11;
Primary product or service: Construction;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Decertified.
GAO case: 12;
Primary product or service: Construction;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in August 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $8.9 million in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 13;
Primary product or service: Engineering;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in July 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $4.7 million in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 14;
Primary product or service: Engineering and information technology;
Violations found by GAO, March 2009:
* Principal office not in HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in February 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
HUBZone status, March 2010: Decertified.
GAO case: 15;
Primary product or service: Facilities support services/construction;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in August 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $9.1 million in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 16;
Primary product or service: Food service contractors;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in November 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $319,000 in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 17;
Primary product or service: Information technology;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA concluded firm met HUBZone program requirements based on an SBA
program examination. [A];
* Since our March 2009 report, this firm has received $5.4 million in
federal obligations for new contracts;
HUBZone status, March 2010: Certified.
GAO case: 18;
Primary product or service: Janitorial;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in August 2009;
* SBA SDO determined that debarment was unwarranted based on the
evidence of the case;
* Since our March 2009 report, this firm has received $76,000 in
federal obligations for new contracts;
HUBZone status, March 2010: Decertified.
GAO case: 19;
Primary product or service: Temporary help services;
Violations found by GAO, March 2009:
* Fewer than 35% of employees live in a HUBZone;
SBA compliance actions and additional procurement actions through
March 2010:
* SBA performed program examination and removed the firm from HUBZone
program in August 2009;
* In May 2009, SBA SDO proposed debarment for the firm. At that time,
the firm was placed on EPLS;
* In September 2009, SBA SDO determined that firm did not willfully
misrepresent its status to obtain a HUBZone set-aside contract and
because of administrative action taken by SBA, that debarment was
unnecessary to protect the government's interests. The firm was
removed from EPLS at that time;
HUBZone status, March 2010: Decertified.
Source: GAO analysis.
Note: Cases are presented in the same order as reported in GAO-09-440.
[A] Although SBA indicated that some firms sometimes come in and out
of compliance while in the program, we maintain that this firm did not
comply with HUBZone requirements at the time of our review.
[End of table]
We also found that one firm continued to benefit from another SBA
program even though it misrepresented its eligibility for the HUBZone
program and was decertified by the SBA. This firm, a construction firm
that was a part of our recent investigation into fraud and abuse in
the SBA's 8(a) Business Development Program,[Footnote 12] also had
been 8(a) certified while in the HUBZone program.[Footnote 13]
[Footnote 14] During that investigation, we found that the firm
misrepresented its status as a qualified 8(a) firm because it was
being controlled by individuals who did not qualify for the program.
Because the SBA did not promptly suspend or debar the firm, this firm
was able to receive nearly $600,000 in additional noncompetitive 8(a)
contracts since our last report. According to SBA officials, SBA has
recently proposed debarment for this firm.
Corrective Action Briefing:
We briefed SBA officials on the results of our investigation on June
17, 2010. Regarding our proactive testing, SBA officials indicated
that it was unreasonable to expect them to have identified our
fictitious firms due to the bogus documentation that we included in
our applications. For example, SBA officials stated that the
submission of false affidavits would subject an applicant to
prosecution. SBA officials also stated that competitors may identify
fraudulent firms and likely protest if those firms were awarded a
HUBZone contract. While competitors may identify some ineligible firms
that were awarded contracts, it is SBA's responsibility to ensure that
only eligible firms participate in the HUBZone program. We suggested
that SBA conduct Internet searches on the addresses of applicant firms
to help validate principal office locations. We also indicated that if
SBA had conducted site visits at the addresses of the firms
represented in our applications, those applications would have been
identified as fraudulent. SBA officials stated that due to resource
constraints, they primarily conduct site visits on certified firms
that receive large prime HUBZone contracts.
Regarding our 29 referred firms, SBA officials stated that debarment
has recently been proposed for an additional firm. We suggested that
if SBA determines that a HUBZone firm is not eligible for the program,
it should consider conducting a review of that firm's eligibility if
that firm is also certified in other SBA programs. SBA agreed with our
suggestion. In addition, SBA provided technical comments which we
incorporated into our report.
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 the Administrator of the Small Business
Administration, interested congressional committees and members, 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. Key contributors to this report were
Andy O'Connell, Assistant Director; Matthew Valenta, Assistant
Director; Lerone Reid, Analyst-In-Charge; Eric Eskew, Agent-In-Charge;
Jason Kelly; Barbara Lewis; Jeff McDermott; and Timothy Walker.
Sincerely yours,
Signed by:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
[End of section]
Footnotes:
[1] GAO, Small Business Administration: Additional Actions Are Needed
to Certify and Monitor HUBZone Businesses and Assess Program Results,
[hyperlink, http://www.gao.gov/products/GAO-08-975T] (Washington,
D.C.: July 17, 2008): GAO, Small Business Administration: Additional
Actions Are Needed to Certify and Monitor HUBZone Businesses and
Assess Program Results, [hyperlink,
http://www.gao.gov/products/GAO-08-643] (Washington, D.C.: June 17,
2008): GAO, HUBZone Program: SBA's Control Weaknesses Exposed the
Government to Fraud and Abuse, [hyperlink,
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17,
2008): GAO, HUBZone Program: Fraud and Abuse Identified in Four
Metropolitan Areas, [hyperlink,
http://www.gao.gov/products/GAO-09-440] (Washington, D.C.: Mar. 25,
2009); and GAO, HUBZone Program: Fraud and Abuse Identified in Four
Metropolitan Areas, [hyperlink,
http://www.gao.gov/products/GAO-09-519T] (Washington, D.C.: Mar. 25,
2009).
[2] The Small Business Act, as amended, defines a small business
generally as one that is "independently owned and operated and that is
not dominant in its field of operation."
[3] For service and construction firms, determination of principal
office excludes employees who perform the majority of their work at
job site locations to fulfill specific contract commitments.
[4] Sole source contracts involve a noncompetitive purchase or
procurement process accomplished after soliciting and negotiating with
only one source, thus limiting full and open competition. Set-aside
contracts reserve an acquisition exclusively for participation by
small business concerns.
[5] There are exceptions to the 50 percent requirement, depending on
the type of contract; for example, qualified HUBZone firms may meet
the 50% labor requirement by using employees of other qualified
HUBZone firms. 13 C.F.R. § 126.700.
[6] 15 U.S.C. § 632(p)(5)(A).
[7] 13 C.F.R. §126.501.
[8] ORCA was established as part of the Business Partner Network, an
element of the Integrated Acquisition Environment, which is
implemented under the auspices of White House Office of Management and
Budget, Office of Federal Procurement Policy, and the Chief
Acquisition Officers Council. ORCA is "the primary government
repository for contractor submitted representations and certifications
required for the conduct of business with the government."
[9] If SBA determines at any time that a HUBZone Small Business
Concern (SBC) is not qualified, SBA may de-certify the HUBZone SBC,
remove the concern from the list, and/or seek imposition of penalties
pursuant to §126.900. 13 C.F.R. §126.504.
[10] GAO, HUBZone Program: SBA's Control Weaknesses Exposed the
Government to Fraud and Abuse, [hyperlink,
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17,
2008).
[11] According to the SBA, the increase in processing time is
attributed to its efforts to implement a new, more rigorous
certification process it started in late 2008 in response to our
findings of fraud and abuse within the HUBZone program. The SBA also
stated that this new process, which requires the review of supporting
documentation to verify a firm's eligibility for the program, is
significantly more labor intensive than the previous electronic-only
process that we were able to successfully exploit before. The agency
further noted that the HUBZone program is experiencing much heavier
application volume than ever before.
[12] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325
Million in Sole-Source and Set-Aside Contracts, [hyperlink,
http://www.gao.gov/products/GAO-10-425] (Washington, D.C.: March 2010).
[13] The 8(a) program, also administered by the SBA, is one of the
federal government's vehicles for developing small businesses that are
owned by socially and economically disadvantaged individuals.
[14] This firm is represented as GAO case number 2 in table two above.
[End of section]
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