"The topic today is an adversary that poses a threat, a serious threat, to the security of the United States of America. This adversary is one of the world’s last bastions of central planning. It governs by dictating five-year plans. From a single capital, it attempts to impose its demands across time zones, continents, oceans and beyond. With brutal consistency, it stifles free thought and crushes new ideas. It disrupts the defense of the United States and places the lives of men and women in uniform at risk. Perhaps this adversary sounds like the former Soviet Union, but that enemy is gone: our foes are more subtle and implacable today. You may think I’m describing one of the last decrepit dictators of the world. But their day, too, is almost past, and they cannot match the strength and size of this adversary. The adversary’s closer to home. It’s the Pentagon bureaucracy. "

"The proposal should be junked. It would have an overwhelmingly bad impact on the breadth of small business contracting, contrary to the intent of the small business laws. If the rule proponents start over, they should look for alternatives to minimize this impact. They should spare aspects and sectors like Federal Supply Schedules, Simplified Acquisition contracting, and IT contracting."

“The bottom line is that there is a real societal cost when ineligible companies improperly profit from preferential contracting through fraud and illegal conduct…. This fraud thwarts congressional intent behind these programs and deprives legitimate small businesses of contracting opportunities.” “Thus, the problem is that SBA and the contracting agency are failing in their duties to police the arrangements made by small businesses with large businesses and/or after graduation. SBA and the agency are failing to demand recertifications, and failing to take action in the absence of valid certifications of continuing small size.” “The figure of $1.1 trillion as the total amount that should be used for the 23% goal has been put forth in the media. Without breaking down the specific numbers, it should be evident that if all these categories currently excluded were included, the total funding for which to apply that 23% goal could reach that figure.”

"To the extent that contraction in small business lending reflects a shortfall of demand rather than of supply, any supply-side solution will fail to gain traction." "Because small businesses play such a critical role in the American economy, there is little doubt that they must be a part of any sustainable recovery. It remains unclear, however, whether Treasury's programs can or will play a major role in putting small businesses on the path to growth." "Supply-side solutions that rely on bank balance sheets, such as the CPP [Capital Purchase Program] and the SBLF [Small Business Lending Fund], may not increase lending. Even if Treasury succeeds in increasing the supply of credit, its efforts may still come to naught if the demand for credit fails to keep pace." “The largest TARP program, the Capital Purchase Program (CPP), provided hundreds of billions of dollars in new capital to banks, but Treasury did not require recipients to use the money to improve credit access. In fact, after receiving the money, most recipients decreased their lending.”

"In some cases, SBA did not detect the false statements and misrepresentations made by certified firms. In others, SBA became aware of the firms' ineligibility but failed to take action." "Certification of GAO's bogus firm shows vulnerabilities in the process such as the lack of any face to face contact that could allow ineligible individuals or pass through companies to enter the program. Although we were unable to determine whether all 14 cases were ineligible at application, these cases show substantial vulnerabilities in SBA's monitoring of eligibility for individuals and firms already in the program. The lack of a consistent enforcement strategy or any real consequences for fraud and abuse is a further weakness in SBA's fraud prevention program."

"Since SBA contract actions in FPDS contain information not matching the data in the contract files, inaccurate information is being made available to Congress and the public on SBA contracting activities, including potential Recovery Act actions. Also, SBA's Goaling Report may contain inaccurate information concerning the extent to which the Agency met its small business goals." "We found that SBA certified to the accuracy of its FY 2008 contracting data, although 92 percent of the contract actions in our sample contained one or more inaccurate or incomplete data elements in FPDS. While SBA had developed a data quality plan for FY 2008, it did not fully implement the plan, which contributed to the errors identified." "Finally, while the accuracy of some data elements improved in FY 2009, overall there was a higher rate of error in the FY 2009 data. Approximately 97 percent of the contract actions in our sample contained one or more inaccurate or incomplete data elements, indicating again that SBA contracting personnel were not properly reviewing data entries."

"The prime contractor Boeing, has implemented initiatives to improve small business participation in Secure Border Initiative Network subcontracts to achieve its subcontracting goals. Despite these initiatives, the contractor has not achieved the established goals for small business participation since the reporting period ended September 2007." "Nonetheless, overall small business participation has not met established goals."

"Since the SDVOSB program began, the government has not met its annual mandated goal of 3 percent." "Fraud and abuse in the SDVOSB program allowed ineligible firms to improperly receive millions of dollars in set-aside and sole-source SDVOSB contracts, potentially denying legitimate service-disabled veterans and their firms the benefits of this program." "In the case of a pass-through, a firm or joint venture lists a service-disabled veteran as the majority owner, but contrary to program requirements, all work is performed and managed by a non-service-disabled person or a separate firm."

"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud." "The 10 case study firms identified in this report received approximately $100 million from SDVOSB contracts through fraud or abuse of the program, or both. For example, contracts for Hurricane Katrina trailer maintenance were awarded to a firm whose owner was not a service-disabled veteran. GAO also found SDVOSB companies used as a pass-through for large, sometimes multinational corporations." "GAO found that the government does not have effective fraud-prevention controls in place for the SDVOSB program. Specifically, SBA and agencies awarding SDVOSB contracts do not have processes in place to validate a firm's eligibility for the program prior to bid submission."

"Step 6: Give maximum practicable consideration to small businesses, including minority businesses, and businesses owned by women and veterans." "Small businesses provide creativity, innovation, and technical expertise to support a wide range of agency requirements at good prices, but are sometimes overlooked as suppliers." "…requirements were grouped inconsistent with the way services are commonly performed or provided by industry, or otherwise bundled to make it difficult for small businesses to compete."

"Office of Inspector General (OIG) audits and other governmental studies have shown widespread misreporting by procuring agencies; many contract awards recorded as going to small firms have actually been performed by larger companies." "SBA needs to do more to ensure that contracting personnel are adequately trained on small business procurement procedures and are reviewing ORCA data prior to awarding contracts." "The Agency also needs to address a loophole within General Services Administration Multiple Awards Schedule (MAS) contracts that contain multiple industrial codes. Currently, a company awarded such a contract can identify itself as small on individual task orders awarded under that contract even though it does not meet the size criteria for the applicable task. Thus, agencies may obtain small business credit for using a firm classified as small, when the firm is not small for specific orders under such a MAS contract."

"We have identified weaknesses in three contracting data systems through our past audit work. These weaknesses fall generally into three categories: poor data quality, limited data submission, and inadequate system capabilities."

“…these cases provide important information about the features of the SBIR program that are most vulnerable to waste, fraud, and abuse.” "When he was asked about SBIR fraud, NSF Deputy Inspector General, Philip Sunshine, told the Committee that, 'compared to other programs at the agency, there is more fraud in the SBIR program than any other program.' " "Companies have misrepresented the qualifications of their researchers, presented plagiarized data as their own, and forged signatures on proposals in order to win grants or contracts. As a general matter, the awarding agencies rely on companies' self-certification that the information in their proposals is accurate and truthful. A federal appeals court recently noted that 'the DOD generally does not verify all of the information submitted in a proposal, and it depends heavily on the integrity of SBIR applicants.'"

"The analysis finds that Alaska Native Corporations are multi-million or billion dollar corporations that are now among the largest federal contractors. Although ANCs provide some benefits to their shareholders, those benefits may not be in proportion to the potential for waste, fraud, and abuse created by the ANCs' contracting preferences." "Alaska Native Corporations are big businesses. The majority of the Alaska Native Corporations surveyed by the Subcommittee exceed the size requirements applicable to other 8(a) companies. 11 out of the 19 companies - Afognak, Ahtna, Arctic Slope, Bristol Bay, Chenega, Chugach, the Cook Inlet Region, Inc. (CIRI), Doyon, Koniag, NANA, and Sealaska - have had annual revenues higher than the Small Business Administration's limit since 2002." "In 2008, approximately 80% of the contract dollars awarded to ANCs was performed outside of Alaska. In 2004, 2006, 2007, and 2008, more contracts were performed in Virginia than Alaska."

"Office of Inspector General (OIG) audits and other governmental studies have shown widespread misreporting by procuring agencies; many contract awards recorded as going to small firms have actually been performed by larger companies." "While some contractors may misrepresent or erroneously calculate their size, most incorrect reporting results from errors made by government contracting personnel. Noted errors include acceptance of questionable size self-certifications and misapplication of small business contracting rules." "…the Small Business Administration (SBA) should strive to ensure that only small firms obtain small business awards and that procuring agencies accurately report contracts awarded to small businesses when representing its progress in meeting small business contracting goals."

"We recently studied the prevalence of venture capital financing among companies on the Inc. 500 list of the fastest-growing private companies in the United States. Looking across ten years of that list-roughly 900 unique companies from 1997-2007-we found that approximately 16 percent of the companies had venture capital backing. In other words, even among the fastest growing and most successful companies in the U.S., less than one-in-five companies had venture investors."

" Our work on the HUBZone program to date has shown that numerous ineligible firms have taken advantage of the opportunity to commit fraud against the federal government." "SBA's failure to promptly remove firms from the HUBZone program and examine some of the most egregious cases from GAO's July 2008 testimony has resulted in an additional $7.2 million in HUBZone obligations and about $25 million in HUBZone contracts to these firms. For example, a construction firm from the July 2008 testimony admitted that it did not meet HUBZone requirements and was featured in several national publications by name. It has continually represented itself as HUBZone certified and has received $2 million in HUBZone obligations and a $23 million HUBZone setaside contract since the July 2008 testimony." "Of the 19 firms that did not meet HUBZone eligibility requirements, we found that all of them continued to represent themselves as eligible HUBZone interests to SBA. Because the 19 case examples clearly are not eligible, we consider each firm's continued representation indicative of fraud and/or abuse related to this program." "To date, other than the firms identified by our prior investigation, the SBA program office has never referred any firms for debarment and/or suspension proceedings based on their findings from their program eligibility reviews. By failing to hold firms accountable, SBA has sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the HUBZone program."

“We confirmed allegations that businesses and individuals that were excluded for egregious offenses were continuing to improperly receive federal contracts.” “GAO also found several agencies that did not enter exclusions and others that did not check EPLS prior to making awards. Finally, GAO found that excluded parties were still listed on GSA’s Federal Supply Schedule, which can result in agencies purchasing items from unscrupulous companies.” "In July 2005, GAO reported that the data in EPLS were insufficient to enable agencies to determine with confidence that a prospective vendor was not currently excluded. In response, GSA agreed to modify EPLS's data requirements to include a mandatory provision that agencies enter a Data Universal Numbering System (DUNS) number to facilitate the identification of excluded contractors. Despite this modification, recent allegations indicate that businesses or individuals that have been excluded for egregious offenses have been able to "resurface" under the same or a different business name or identity in order to continue to receive federal contracts and other funds."

“Delays in terminating firms also could result in noncompliant firms obtaining contracts…in 2006, the SBA IG recommended that SBA regularly conduct surveillance reviews for the 8(a) program. However, SBA has not yet implemented this recommendation. As a result, SBA has reduced assurances that agencies have complied with monitoring requirements for the 8(a) program.” “Resource constraints have limited the ability of SBA staff to carry out core responsibilities…Years of SBA downsizing and budget reductions significantly reduced the resources available for these agency functions, including contracting review and monitoring.” “Of the 24 agencies rated, half received the lowest rating (for failing to meet at least two contracting goals and other criteria).” “For fiscal year 2006, the SBA IG reported that CMRs [commercial market representatives] monitored less than half of the 2,200 large prime contractors. These resource constraints reduced assurances that SBA can monitor contracting effectively.”

“…some district offices told us that it can sometimes be a challenge to meet goals and carry out SBA’s mission, given limited staffing resources…District office employees also said that they have to take on multiple responsibilities for which they do not necessarily receive training due to decreased staffing levels.” “However, we found that budget constraints impeded work on this initiative [small business outreach] and could continue to do so. We also found that the agency’s budget requests for transformation were inconsistent and lacked a detailed plan that showed priorities and linked resources to desired results.” “SBA's workforce has declined significantly since the 1990s. During the restructuring in the 1990s, SBA's workforce decreased from over 3,800 employees to about 3,100 employees - a decrease of about 19 percent. Between 2000 and 2007, when additional restructuring occurred, SBA's workforce decreased further by about 26 percent. As of September 2007, SBA had 2,166 employees.”

"Companies Owned by Non-Native Individuals Were Paid Millions of Dollars from 8(a) Revenues Through Unapproved Agreements" "After being admitted into the 8(a) program, APM and Goldbelt did not seek SBA's approval of agreements with companies owned by non-native individuals that purchased ownership in the 8(a) firms and provided management or other services associated with the performance of APM's and Goldbelt's 8(a) contracts. Under these agreements, APM and Goldbelt paid or were obligated to pay more than $23 million of 8(a) revenues to these companies over a 3-year period." "In making a size determination, SBA's regulations state that the revenues or employees of all of a firm's affiliates must be considered collectively in determining whether the firm meets the applicable size standard…However, because neither APM nor Goldbelt obtained SBA approval of these agreements, the Agency was precluded from considering the impact that these relationships had on the eligibility of the two participants for approximately $833 million in awards."

“We found about $5.7 million in awards [from a sample of 0.3% of the total] to large businesses for which DOI received small business credit for fiscal years 2006-2007. Several of those businesses are obviously large, such as Home Depot, John Deere, Dell, Sherwin Williams, Starwood Hotels and Waste Management. These awards were included in the accomplishments reported by DOI’s Office of Small and Disadvantaged Business Utilization and in the SBA Small Business Goaling Reports for fiscal years 2006 and 2007.”

“…GAO's work shows that these vulnerabilities exist because SBA does not have an effective fraud-prevention program in place. Using fictitious employee information and fabricated documentation, GAO easily obtained HUBZone certification for four bogus firms…We were also able to identify 10 firms from the Washington, D.C., metro area that were participating in the HUBZone program even though they clearly did not meet eligibility requirements. Since 2006, federal agencies have obligated a total of more than $105 million to these 10 firms for performance as the prime contractor on federal contracts.”

"Large companies improperly obtain small business contracts due to a variety of problems. Some contractors obtain small business contracts for which they are not eligible by misrepresenting their size or by not diligently verifying whether they meet size criteria. In other cases, improper awards result from errors by contracting personnel, such as accepting questionable size self certifications or possible unfamiliarity with small business contracting procedures." "SBA needs to do more to promote contractor accuracy, ensure that government contracting personnel receive adequate training on small business procurement procedures, and encourage greater accuracy in Federal agency small business contracting reports."

"SBA also needs to work to close regulatory loopholes that allow agencies to take credit for meeting their small business procurement goals even though contracts are performed by large firms. For example, multiple award contracts, such as the General Services Administration Multiple Awards Schedule (MAS) Program and Government Wide Acquisition Contracts (GWACs), are structured so that a company's size is only relevant when admitted to the initial contract, not for the task orders issued under the contract. Task orders can be issued under these contracts for many years after the contract is awarded." "In 2003, SBA proposed a regulation requiring companies to certify as to their size on an annual basis, but it now appears that a rule with a one-year certification requirement will not be issued. If this is the case, the OIG will reevaluate the matter to assess whether the Agency should take other steps to address this problem." "The Agency also needs to address another loophole with MAS contracts that contain multiple industrial codes. In being awarded such a contract, a company can identify itself as small even though it does not meet the size criteria for every industrial code. Thus, agencies may obtain small business credit for using a firm classified as small even if the firm is not small for the specific goods or services procured through a particular task order under such a MAS contract."

“. . .the Army awarded noncompetitive 8(a) contracts to two ANC firms; these firms in turn subcontracted with large security guard companies.” “. . .significant improvements are needed in SBA's oversight of the program. Without stronger oversight, there is potential for abuse and unintended consequences.” “The officials noted that the goal of ANCs—economic development for Alaska Natives from a community standpoint—can be in conflict with the primary purpose of the 8(a) program, which is business development for individual small, disadvantaged businesses.”

“We found that many of the 55 COMMITS NexGen contractors have grown significantly or have been acquired by larger businesses and may no longer meet small business size standards. In addition, small business accomplishments might be overstated since specific small business size standards are not identified for each task order. We also found that a significant portion of the task orders intended for the smallest contractors were issued to larger, incumbent contractors.”

“Examples where SBA's oversight has fallen short include not . . . adhering to a legislative and regulatory requirement to ascertain whether 8(a) ANC firms have, or are likely to obtain, a substantial unfair competitive advantage within an industry . . .” “Areas where SBA’s oversight has fallen short include: determining whether more than one subsidiary of the same ANC is generating a majority of its revenue in the same primary industry, consistently determining whether awards to 8(a) ANC firms have resulted in other small businesses losing contract opportunities, and ensuring that the partnerships between 8(a) ANC firms and large firms are functioning in the way they were intended.”

“CCR has two sections that reflect a company's size information and the information in one section can mistakenly contradict the information in the other section. Contracting Officers and other government officials may use incorrect size information to justify a small business procurement . . .” “FEMA reported that the contract was awarded to a small business in FPDS - NG even though the contractor appeared to be other than small.” “There are no checks in CCR to ensure that there is consistency between data concerning a company’s size in the “Corporate Information” and “Small Business Types” sections. Because of this inconsistency, Contracting Officers are more likely to access incorrect information on the size of businesses.”

“We reviewed awards to five large companies . . .[that] received contracts totaling over $1.1 billion in [FY] 2001, including 460 million reported as small business awards.” “. . .contracting officials were using databases that contained outdated and inaccurate information about the size of the companies we reviewed.” “While these results cannot be projected to all contract actions reported, they raise serious questions about relying on FPDS data to measure federal agencies' effort to meet the government's 23 percent small business goal.” “Neither SBA nor Procuring Agencies Ensured that 8(a) BD Companies Complied with Applicable Regulations when Completing 8(a) BD Contracts.”

"This year's report contains one new Challenge-Challenge #1-that states that 'Flaws in the procurement process allow large firms to receive small business awards and agencies to receive small business credit for contracts performed by large firms.'" "Studies by the Government Accountability Office (GAO), SBA's Office of Inspector General (OIG), and SBA's Office of Advocacy found that agencies are counting contracts performed by large firms towards their small business procurement goals." "Large companies also improperly receive small business contracts due to errors by contracting personnel."

“In June 2005, the OIG recommended that SBA debar a company for misrepresenting that it was a small business concern in obtaining a Government contract which was set-aside for a small business. The OIG's recommendation to the Agency related that the company had exceeded the applicable size standards identified in the relevant solicitation at the time that it bid on the contract.” “An SBA employee allegedly used his position to obtain over $20,000 for his personal benefit from an 8(a) contractor who received over $3 million in contracts.” “After issuing a new Management Challenge during the last reporting period concerning Federal procurement as it relates to small business—“Flaws in the Federal procurement process allow large firms to receive small business awards and agencies to receive small business credit for contracts performed by large firms,”—the OIG conducted additional Federal procurement projects during this reporting period…[which found the] SBA has not taken all the steps needed to be an effective advocate for small business.”

“SBA did not review the majority of reported bundled contracts that we identified, though procuring activities must provide, and SBA must review proposed bundled acquisitions. As a result, 192 contracts identified by procuring agencies as bundled were awarded without SBA's review. If all of these are actually bundled contracts, a minimum of $384 million would be potentially lost to eligible small businesses, based on minimum dollar reporting requirements of $2 million.”

“All of the contractor-reported data incorrectly excluded some large-business subcontracts, beyond what federal reporting guidelines allow. Excluding these subcontracts made the percentage of subcontracted dollars going to small businesses appear larger than it would have, if such subcontracts were not incorrectly excluded.” “…contractor-reported data is not useful to DOE in determining its contractors’ actual small business subcontracting achievements or adequately assessing whether small businesses are receiving maximum practicable subcontracting opportunities.” “DOE has not taken adequate steps to address known problems with the contractor-reported data.”

“The second MAC [small business contract] was awarded based on a false certification that the company was a small business manufacturer and regular dealer.” “…an order placed against a MAC [small business contract] would be reported as a small business award, even if the business was no longer small at the time of the order.” “…and in that instance, the [large] company made an improper small business self-certification to receive the contract.”

“One of the most important challenges facing the Small Business Administration and the entire Federal government today is that large businesses are receiving small business procurement awards and agencies are receiving credit for these awards.” “Recent studies by the Government Accountability Office, SBA’s Office of Inspector General, and SBA’s Office of Advocacy have found that agencies are counting awards made to large firms towards their small business procurement goals.”

“The SBA awarded four of the six high dollar procurements, reported as small business procurements, to large companies at the time of the procurements.” “If SBA had put as much effort into verifying whether the company currently met the award's size standard as it put into trying to find ways to earn credit toward its small business goals, then perhaps the contract action would have been awarded to a company that was legitimately small at the time of the award.”

“Of the top 1,000 small business contractors in FY 2002, Eagle Eye Publishers' analysis found 44 parent companies it identified as either large firms or 'other.' Contracts to these two groups taken together had a total value of $2 billion.” “As a result of this lack of transparency, many awards that should be reserved for small firms . . . go to large firms unchallenged.”

“The primary reason these contract actions were reported as small business awards is because federal regulations generally permit companies to be considered small over the life of a contract—even if the company grows into a large business, merges with another company, or is acquired by a large business. We also found that contracting officials reported some contract actions as small business awards because they relied on databases containing conflicting and incorrect information about the current size of some of the companies we reviewed.” “In fiscal year 2000, the four [large] companies received 1,313 contract actions valued at over $190 million that were reported as small business awards. In fiscal year 2001, these companies received 1,271 contract actions amounting to over $200 million reported as going to small businesses.”

“Over the past few years, the Investigations Division has noted several instances of a particular fraudulent practice: companies that SBA, after sustaining protests against them, had prohibited from representing themselves as small businesses . . .were continuing to falsely certify themselves as eligible for small business set-aside contracts.”