GAO finds extensive fraud in disabled veteran-owned small biz program

The Government Accountability Office audited a handful of service-disabled veteran-owned small business contracts, and might have discovered the tip of a large iceberg of fraud.

Of more than 100 allegations of fraud and abuse, GAO audited 10 firms between October 2008 and November 2009 and found that ineligible companies improperly received millions of dollars in set-aside and sole source SDVOSB contracts. The audited firms received approximately $100 million in SDVOSB contracts and another $300 million through other small business programs such as the 8(a) program for disadvantaged minority groups and the HUBZone program for firms located in historically underutilized business zones.

According to the Small Business Administration, $6.5 billion in federal contracts were awarded to service-disabled veteran-owned small businesses in fiscal 2008.

The firms GAO studied committed the fraud in several ways. One company owner was not a service-disabled veteran, another was owned by a service-disabled veteran, but he did not control the firm's daily operations, and several SDVOSBs were serving as pass-throughs for large and sometimes foreign corporations. In the case of a pass-through, a firm or team listed a service-disabled veteran as the majority owner, but all work was performed and managed by a nonservice disabled person or firm, in violation of program requirements.

Gregory Kutz, GAO managing director of forensic audits and special investigations, told the House Small Business Committee on Thursday that the case studies show "significant control weaknesses" in the program, including effective fraud prevention by the Small Business Administration.

"The SDVOSB program is essentially an eligibility-based program," Kutz said. "However, neither the SBA, except when responding to a protest, nor contracting officials are currently verifying the eligibility of firms claiming to be SDVOSBs."

Neither SBA nor contracting agencies have processes in place to access Veterans Affairs Department records listing individuals who are valid service-disabled veterans, Kutz said. Contracting officers also are not required to validate a firm's eligibility before an award. And unlike the 8(a) or HUBZone programs, firms professing eligibility are not required to submit documents substantiating this claim.

Perhaps most discouraging, Kutz said, was that in many fraud cases, federal contracting officials were "actively involved" in and aware of the misrepresentation. He cited an example of a contract for furniture at MacDill Air Force Base in Tampa, Fla., where the contract was awarded to a firm -- essentially a shell company -- owned by a full-time contract employee on the base. "The base director of business operations also told us that MacDill had about $14 million in service-disabled veteran-owned small business sole source and set-aside contracts in 2008, and 90 percent of firms that received these contracts were front companies for large businesses," Kutz told lawmakers.

Committee members of both parties expressed outrage and disgust at the misuse of a program designed to help injured veterans.

"Imagine being a veteran who is injured in Iraq or Afghanistan, yet despite your injuries you still manage to launch your own business. Then imagine finding out that you are losing out on contracts designated for veterans because a big company found out how to get around the rules," said Rep. Nydia Velazquez, D-N.Y. "What kind of message does that send to veterans in this country? We've got to stop it."

Rep. Sam Graves, R-Mo., said fraud alone would be problematic, but in this case it shuts out deserving individuals and firms from crucial opportunities.

"The firms denied contracts are those owned by individuals who made a significant sacrifice in defending our country," Graves said. "That is simply unacceptable."

Lawmakers and GAO both said at the hearing that there must be greater and swifter penalties for those violating the SDVOSB program. While Mills said SBA has recommended that the 10 firms GAO studied be investigated by the SBA inspector general, Kutz said many, if not all, could still be eligible to receive federal dollars.

"It's important when they lie to us and cheat that we do something about it," Kutz said. "You can suspend someone without going through a lengthy three-year process of debarment."

Administrator Karen Mills said SBA was working closely with Veterans Affairs to strengthen oversight of the program, but that primarily SBA is responsible for ensuring SDVOSBs were in fact small businesses, and VA is responsible for ensuring the owners are service-disabled veterans.

"The culture of the SBA is that we will not be the agency of fraud, waste, abuse and mismanagement," Mills said. "We have an aggressive, new attitude towards this; it is explicitly one of our priorities."

Kutz echoed the idea that this priority is relatively new for SBA.

"SBA is good people, but the history of SBA has been as an advocacy organization, not an enforcement organization," he said. "Therefore, you're not going to have the right kind of people, necessarily, that are very good at this. But I would argue that if you're going to be an advocate for small businesses, you need to deal with the integrity of the programs, and today's hearing is a good start."

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