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SBA Addresses Fraud Allegations in GAO Report

The Small Business Administration (SBA) has instituted several new programs to address instances of ineligible companies being granted government contracts through its HUBZone program.

The new efforts to more effectively manage HUBZone, under which government contracts are awarded to historically underutilized business zones in economically distressed communities, are a result of a Government Accountability Office (GAO) report last month in which the SBA was found to have allowed ineligible firms to participate in the HUBZone program. It was the most recent of several reports by the GAO issued during an ongoing investigation of the SBA’s HUBZone certification process.

“The SBA continues to struggle with reducing fraud risks in its HUBZone certification process, although SBA has taken steps to bolster SBA’s controls,” Gregory Kutz, Managing Director Forensic Audits and Special Investigations for the Government Accountability Office said in his statement to the House of Representatives’ Committee on Small Business on July 28.

The SBA said $12.4 billion in federal contracts were granted through HUBZone in fiscal year 2009.

“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,” Kutz said. “Our testing revealed that the SBA still does not adequately authenticate self-reported information — especially principal office locations — to ensure program eligibility.”

SBA Administrator Karen Mills also gave testimony at the hearing, saying the SBA had reviewed the eligibility of the 29 firms previously identified by the GAO as ineligible to participate in HUBZone.

“After reviewing the facts, 16 were decertified, eight voluntarily decertified, and five, in fact, remained eligible for HUBZone,” Mills told the committee.

“We’re also pursuing HUBZone fraud cases with the Department of Justice and the Inspector General, and we continue to suspend and debar firms suspected of fraud,” Mills told the committee in her July 28 testimony. “In fact, just yesterday we suspended four more firms and two individuals.”
Specifically, the SBA has increased its monitoring of HUBZone certified firms, increasing site visits from 100 in 2008 to more than 800 in 2009. It expects to conduct more than 1,000 site visits in 2010, Mills told the committee.

Site visits are also now more in-depth, according to Jonathan Swain, Assistant Administrator for Communications at the SBA.

“We’re doing more than driving by the building or checking that the address exists,” Swain told BusinessNewsDaily.  He said the SBA inspectors require businesses to produce documents while on site to show that the firm qualifies. Many of the visits are unannounced, Swain said.

In addition, the SBA has reengineered the HUBZone certification process to require more documentation and is now requiring HUBZone firms to verify under penalty of perjury that all of the information provided is true and verifiable, Swain said.

The SBA also has plans to debut a small business contract web site requested by President Obama in April as part of the establishment of an Interagency Task Force on Federal Contracting Opportunities for Small Businesses, which was announced by Obama in late April. The website will illustrate the participation of small businesses, including those owned by women, minorities, socially and economically disadvantaged individuals, and service-disabled veterans of our Armed Forces, in Federal contracting, according to the White House.

It is intended to foster greater accountability and transparency in, and allow oversight of, the federal government's progress, and encourage improved collection, verification, and availability of federal procurement data, plus provide accurate data on the federal government's progress in ensuring that all small businesses have a fair chance to participate in federal contracting opportunities, the White House said in a prepared statement.

Swain said the SBA plans to debut the web site in a few weeks.

The SBA’s efforts are not enough, however, to satisfy its harshest critics.

“We need an agency to help small businesses,” said Lloyd Chapman, a long-time critic of the SBA, whose American Small Business League has been critical of the SBA through both Republican and Democratic administrations. The ASBL issued a press release last week to highlight the GAO’s most recent findings.

“The SBA doesn’t need to be shut down. Instead, we need to get it back on track and do what it was supposed to do when it was founded,” Chapman said in a phone interview. “The agency needs to be overhauled.”

"The SBA was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation," according to the SBA web site.

"We recognize that small business is critical to our economic recovery and strength, to building America's future, and to helping the United States compete in today's global marketplace. Although SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same," the web site says.

Mills’ statement to the House of Representatives indicates that an overhaul, of sorts, is already underway.

“We’ll soon provide formal recommendations, including some that will help equip our agency partners with tools they need to help in the shared mission of reducing fraud, waste and abuse,” Mill said. “At the same time, we’re committed to working more closely with Congress to make sure small businesses can continue to grow and create the jobs we need now.”

Jeanette Mulvey
Jeanette Mulvey

Jeanette has been writing about business for more than 20 years. She has written about every kind of entrepreneur from hardware store owners to fashion designers. Previously she was a manager of internal communications for Home Depot. Her journalism career began in local newspapers. She has a degree in American Studies from Rutgers University. Follow her on Twitter @jeanettebnd.