Small Business Administration
Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and Abuse
Gao ID: GAO-10-920T July 28, 2010
This testimony discusses the results of our investigation of the Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program. In fiscal year 2009, federal agencies obligated nearly $3 billion in sole source or set-aside contracts to firms participating in the HUBZone program. Created in 1997, the program provides federal contracting assistance to small businesses located in HUBZones--economically distressed areas with low income levels or high unemployment rates. Qualified businesses in these areas 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 employees must 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 July 2010, 9,300 firms were participating in the program. Over the last 2 years, we have reported on fraud and abuse and other concerns with the HUBZone 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. This testimony summarizes our most recent report regarding the HUBZone program. Our report and this statement responds to Congress request that we (1) perform additional proactive testing of the SBA's HUBZone certification process and (2) determine what actions, if any, the SBA has taken against the 29 case study firms we identified in our prior work. In conducting our work, we proactively tested SBA's application process by applying for HUBZone certification for four bogus businesses with fictitious owners and employees. For all four bogus businesses, we used publicly available resources to fabricate documents. To determine what actions, if any, the SBA has taken against the 29 case study firms, we made inquiries with SBA officials. We also analyzed data from the Federal Procurement Data System-Next Generation. We did not attempt to project the extent of fraud and abuse in the program nor systematically assess HUBZone program controls. Our work was done in accordance with quality standards for investigations as set forth by the Council of the Inspectors General on Integrity and Efficiency.
The SBA continues to struggle with reducing fraud risks in its HUBZone certification process, although SBA has taken steps to bolster SBA's controls. In our previous investigations, we found that many of the firms in the 29 cases fraudulently used "virtual offices" and fake business locations as their principal offices to qualify for HUBZone status. Our testing revealed that the SBA still does not adequately authenticate self-reported information--especially principal office locations--to ensure program eligibility. Specifically, the agency certified three of our four bogus firms based on fraudulent information. We used fabricated explanations, fraudulent documentation, and borrowed addresses or principal offices, including the Alamo, a public storage facility in Florida, and a city hall in Texas. The SBA lost application materials for our fourth firm on multiple occasions, forcing us to abandon our application. The SBA's failure to verify principal office locations--even through a simple Internet search--leaves the program vulnerable to firms misrepresenting their eligibility, preventing program benefits from going to intended targets. As of March 2010, the SBA has reviewed the status of all 29 firms we referred to it from our prior HUBZone investigations. 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. Although SBA indicated that firms sometimes come in and out of compliance while in the program, we maintain that the five firms SBA determined to meet HUBZone program requirements were out of compliance at the time of our initial 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. Since our March 2009 report, the 29 firms we identified 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.
GAO-10-920T, Small Business Administration: Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and Abuse
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Testimony:
Before the Committee on Small Business, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 1:00 p.m. EDT:
Wednesday, July 28, 2010:
Small Business Administration:
Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and
Abuse:
Statement of Gregory Kutz, Managing Director:
Forensic Audits and Special Investigations:
GAO-10-920T:
Madam Chairwoman and Members of the Committee:
Thank you for the opportunity to discuss the results of our
investigation of the Small Business Administration's (SBA)
Historically Underutilized Business Zone (HUBZone) program. In fiscal
year 2009, federal agencies obligated nearly $3 billion in sole source
or set-aside contracts to firms participating in the HUBZone program.
Created in 1997, the program provides federal contracting assistance
to small businesses located in HUBZones--economically distressed areas
with low income levels or high unemployment rates. Qualified
businesses in these areas 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 employees must 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 July 2010, 9,300
firms were participating in the program.
Over the last 2 years, we have reported on fraud and abuse and other
concerns with the HUBZone program.[Footnote 1] 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.
My statement today summarizes our most recent report, which we are
releasing today, regarding the HUBZone program.[Footnote 2] Our report
and my statement responds to your request that we (1) perform
additional proactive testing of the SBA's HUBZone certification
process and (2) determine what actions, if any, the SBA has taken
against the 29 case study firms we identified in our prior work. In
conducting our work, we proactively tested SBA's application process
by applying for HUBZone certification for four bogus businesses with
fictitious owners and employees. For all four bogus businesses, we
used publicly available resources to fabricate documents. To determine
what actions, if any, the SBA has taken against the 29 case study
firms, we made inquiries with SBA officials. We also analyzed data
from the Federal Procurement Data System-Next Generation. We did not
attempt to project the extent of fraud and abuse in the program nor
systematically assess HUBZone program controls. Our work was done in
accordance with quality standards for investigations as set forth by
the Council of the Inspectors General on Integrity and Efficiency.
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, although SBA has taken steps to bolster SBA's
controls. In our previous investigations, we found that many of the
firms in the 29 cases fraudulently used "virtual offices" and fake
business locations as their principal offices to qualify for HUBZone
status. Our testing revealed that the SBA still does not adequately
authenticate self-reported information--especially principal office
locations--to ensure program eligibility. Specifically, the agency
certified three of our four bogus firms based on fraudulent
information. We used fabricated explanations, fraudulent
documentation, and borrowed addresses or principal offices, including
the Alamo, a public storage facility in Florida, and a city hall in
Texas. The SBA lost application materials for our fourth firm on
multiple occasions, forcing us to abandon our application. The SBA's
failure to verify principal office locations--even through a simple
Internet search--leaves the program vulnerable to firms
misrepresenting their eligibility, preventing program benefits from
going to intended targets.
As we stated in our March 2009 report, SBA began to take actions
intended to strengthen the program's internal controls.[Footnote 3]
However, we were still able to obtain certification for our bogus
firms, and the certification process became considerably longer. The
SBA took at least 7 months to process each of the three applications
that it certified from our bogus companies. In our previous test, the
SBA certified our firms in as little as 2 weeks, though this occurred
with minimal requests for documentary evidence. SBA's increased
processing times failed to prevent our bogus firms from becoming
certified.
In response to our proactive testing, SBA officials stated that it was
unreasonable to expect them to have identified our fictitious firms
because of 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. However,
while the threat of prosecution is an important deterrent, it does not
help to identify firms that attempt to commit fraud, as our testing
shows. 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, SBA is responsible for ensuring that only
eligible firms participate in the HUBZone program.
We indicated that if the 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 because of resource constraints, they primarily conduct
site visits on certified firms that receive large prime HUBZone
contracts. However, we believe that such reviews are too late in the
process. We also suggested that the SBA conduct Internet searches on
the addresses of applicant firms to help validate principal office
locations. Such searches would have minimal impact on resources.
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. 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. Although SBA indicated that firms sometimes come in
and out of compliance while in the program, we maintain that the five
firms SBA determined to meet HUBZone program requirements were out of
compliance at the time of our initial 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.
Since our March 2009 report, the 29 firms we identified 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. For example, 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 4] also had been 8(a) certified while in
the HUBZone program.[Footnote 5] 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 SBA did not promptly suspend or debar the firm,
this firm received nearly $600,000 in additional noncompetitive 8(a)
contracts since our last report and nearly $10 million in additional
contracts from the federal government. According to SBA officials, the
agency has recently proposed debarment for this firm and, as a result,
the firm is generally ineligible for additional federal government
contracts at this time.
Madam Chairwoman, this concludes my statement. I would be pleased to
answer any questions that you or other members of the committee may
have at this time.
Contact and Staff Acknowledgments:
For further information regarding this testimony, please contact Greg
Kutz at (202) 512-6722 or kutzg@gao.gov. In addition, contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this statement. Individuals who made key
contributions to this testimony are 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.
[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). 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] GAO, Small Business Administration: Undercover Tests Show HUBZone
Program Remains Vulnerable to Fraud and Abuse, [hyperlink,
http://www.gao.gov/products/GAO-10-759] (Washington, D.C.: June 25,
2010).
[3] In the March 2009 report, we reported that SBA officials stated
that they have begun a process of reengineering the HUBZone program.
SBA officials stated that this process is intended to make
improvements to the program that are necessary for making the program
more effective while also minimizing fraud and abuse.
[4] 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).
[5] This firm is represented as GAO case 2 in Table 1 GAO-10-759.
[End of section]
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