SBA takes HUBZone firms on faith

GAO finds that agency does little to verify contractor claims in applications

Although faith-based contracting doesn't bring
out the best in people, the Small Business
Administration appears to be taking that
approach with its Historically Underutilized Business Zone program.

Designed to provide federal contracting
opportunities to businesses in low-income
areas, the HUBZone program is vulnerable to
unscrupulous business owners ? or crafty
auditors.

During a recent investigation, Government
Accountability Office auditors found numerous
examples of SBA accepting ineligible companies
into the HUBZone program.

SBA's attitude appears to be "sit back and
hope and pray the company we're doing business
with isn't ripping us off too badly," said
Bruce Causseaux, GAO senior-level specialist
for forensic audits and special investigations.
For example, auditors uncovered at least 10
small businesses in the Washington metropolitan
area that have been certified but don't
belong in the HUBZone program. Since 2006,
agencies have awarded more than $105 million
to those companies for work as prime contractors
on federal contracts, according to GAO.

Investigators also ran a sting operation in
which SBA certified four fake companies as
HUBZone firms.

In addition to concerns about cheating
companies, GAO officials are alarmed that
SBA doesn't make more effort to verify applicants'
eligibility. Investigators used common
data-mining technology to uncover the 10
Washington companies.

"Any system that's predicated
on self-certified information
with verification and validation
is highly susceptible to fraud, particularly
when millions ? if not billions ? of federal
dollars are at stake," Causseaux said.

LIE TO QUALIFY

To qualify for the program, a small business
must certify that the office where the majority
of its employees work is
located in an SBA-designated
HUBZone and that
at least 35 percent of its employees live in a
HUBZone.

But investigators said ineligible applicants
can rent mailboxes or set up virtual offices in
HUBZones, as GAO did for its investigation.
For one of GAO's fake companies, officials
used the address of a Starbucks coffee shop.

"If SBA had performed a simple Internet
search on the address, it would have been
alerted to this fact," said Gregory Kutz, GAO
managing director of forensic audits and special
investigations.

After officials turned in the bogus companies'
applications for certification, SBA officials
contacted them to resolve minor discrepancies.
They asked no in-depth questions and
didn't check the addresses provided. In as little
as two weeks, SBA sent letters approving
the applications, according to GAO.

DATA OUT OF DATE

Jovita Carranza, SBA's acting administrator,
told the House Small Business Committee
July 17 that SBA officials discovered the problems
earlier this year when they sought to
answer a question from Congress.
Lawmakers had asked whether a specific
area qualified as a HUBZone. Initially, the
program's managers said it did. Days later,
after further review, they determined that the
area did not qualify as a HUBZone.

When senior managers attempted to determine
how the mistake had occurred, Carranza
said they discovered that the agency had not
updated the map of HUBZone-qualified areas in a year and half.
Causseaux and Kutz blamed SBA's poor program
management.

Carranza said a combination of factors led
to the problems. Rather than visiting applicant
offices and collecting information, as SBA
rules require, agency employees relied on
automated systems to gather information and
paid little attention to details about the data.
Managers also trusted self-certified information
from applicants, even though data was
insufficient, she said.

She added that the program didn't
adequately verify and validate companies'
information, which allowed loopholes and
fraud.

DETERRENTS NEEDED

Reforms will lead to suspensions and debarments,
particularly for the 10 fraudulent companies
in Washington, Carranza said.

Until recently, such deterrents were ineffective
because no one was afraid of getting
caught and facing prosecution, Causseaux
said.

Carranza said she is requiring site visits for
firms that have received HUBZone contracts.
Officials also intend to make better use of
tools such as Google Earth to check business
locations. Also, SBA will institute suspension
and debarment proceedings against firms
that have intentionally lied about their
status.

To help fix the program, SBA hired more
employees to assist in clearing the backlog of
more than 4,000 HUBZone business recertifications
by the end of fiscal 2008, she said.

SBA officials plan to issue an updated
HUBZone map by Aug. 29. They also drafted
an application processing manual, which gives
instructions for collecting supporting documentation
from applicants.

Rep. Nydia Velázquez (D-N.Y.), chairwoman
of the Small Business Committee,
noted that the House has passed legislation to
require SBA to do more detailed checks on
HUBZone applications.

The Small Business Contracting Program
Improvements Act (H.R. 3867) would
require on-site visits to a HUBZone-certified
small business before it's awarded a second
contract. The House passed the bill in
October, but the Senate has not acted on its
version of the legislation.

Matthew Weigelt [mweigelt@1105govinfo.com] is a
senior reporter for Federal Computer Week.

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