By Keith Girard
August 5, 2010
More than two years ago, government investigators got their first inkling of widespread fraud in one of the Small Business Administration's flagship programs for economically distressed communities, known as the "Historically Underutilized Business Zone," or HubZone program.
Although the study was limited to programs in the Washington, D.C., area, disturbing instances of abuse, mismanagement and fraud were uncovered nationwide in a follow-up study by the government's watchdog agency, the Government Accountability Office (GAO).
The SBA's ineptitude in this and other programs gave rise to the derisive term "cookie jar capitalism," because firms could make a fraudulent grab for taxpayer funds with seeming impunity.
But that occurred during a different time and under an administration that had starved the SBA of funding and staffing for more than eight years. Things were supposed to have changed when President Barack Obama took office and appointed a savvy business executive to run the troubled agency.
But if you think significant changes have been made after 18 months under the Obama administration, you would be wrong. In a scathing follow-up investigation released late last month amid little fanfare, the GAO found that many of the same problems still exist in the program.
"In our previous investigations, we found that many of the firms in the 29 cases [studied] fraudulently used "virtual offices" and fake business locations as their principal offices to qualify for HUBZone status," Gregory Kutz, Managing Director Forensic Audits and Special Investigations at the GAO, testified at a recent hearing.
But the latest follow-up examination "revealed that the SBA still does not adequately authenticate self-reported information -- especially principal office locations -- to ensure program eligibility," he told the House Small Business Committee.
In its preceding report in March 2009, the GAO examined a representative sampling of 36 firms in three states and discovered that 19 of them "clearly" did not meet program requirements. Over fiscal years 2006 and 2007, the 19 firms received nearly $30 million in HUBZone contracts and $187 million in federal contracts overall.
The GAO concluded that "likely hundreds and possibly thousands of firms" are taking advantage of lax SBA oversight and administration to cash in on the program.
The firms routinely ignored two cornerstone requirements of the program?? -- to locate their principal office in the economically distressed neighborhoods, and hire local residents to fill at least 35 percent of jobs created by any given contract. The companies were able to create fake "storefront" offices, fabricate documents and skirt hiring requirements with no oversight or sanction by the SBA.
To test whether the agency had cleaned up its act and implemented numerous GAO recommendations to improve the program, investigators created "four bogus businesses with fictitious owners and employees," and applied for HubZone certification, said Kutz.
For all four bogus businesses, the GAO used publicly available resources to fabricate documents. In other words, the SBA merely had to go on the Internet to validate or disprove the claims of the companies.
"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," Kutz said.
Well, at least that means the SBA was able to bust one of the firms. Not quite.
"The SBA lost application materials for the fourth firm on multiple occasions, forcing us to abandon our application," Kutz added.
Firms caught ripping off the program under previous investigations at least tried to be clever about picking bogus locations to conceal their fraud. The GAO tried to make it easy for the SBA by picking obviously phony sites like the historic Alamo in Texas, a public storage facility in Florida and city hall in the town where the HubZone was located. The SBA missed them all.
The SBA could have easily verified the addresses by a site visit or simply by searching on the Internet. The SBA's failure to do so, Kutz said, leaves the program open to continued fraud and abuse.
Of the 29 firms found to be operating outside the program's guidelines by the two previous GAO studies, the SBA, to its credit, cracked down on them. The SBA decertified 16 firms, eight voluntarily withdrew from the HubZone program and five were able to meet the guidelines and remain certified.
Even so, the SBA did not ban any of the firms from continuing to receive government contracts through other programs. To date, all 29 firms continue to do government work and have received a collective $66 million in federal obligations for new contracts, the probe found. In short, they received a slap on the wrist.
To her credit, SBA Administrator Karen Mills personally appeared before the committee to defend her agency's efforts.
She said the SBA has reengineered the certification process, requiring more stringent documentation under penalty of perjury, "dramatically" increased monitoring -- from less than 100 site visits in 2008 to more than 800 last year and up to 1,000 visits this year. Also, the agency is removing ineligible firms, she said.
She also assured the committee that the SBA is pursuing HUBZone fraud cases in conjunction with the Justice Department and the SBA's Inspector General and the agency is actively disbarring firms it catches.
"An environment of integrity across all of our contracting programs is crucial. The president included more funds in [the] SBA's proposed budget exactly for this purpose," she said.
President Obama also has created an Interagency Task Force, led by Office of Management and Budget, SBA and the Department of Commerce to make formal recommendations to help reduce fraud, waste and abuse.
Those steps are important, but it's taken more than two years to get this far and clearly the agency hasn't gone far enough, according to the GAO report. It's bad enough that likely untold millions of dollars in taxpayer funds have been squandered because of fraud and abuse.
The SBA's failure to move more swiftly to correct the cynical exploitation of its programs puts the credibility of the administration on the line. President Obama ran for office pledging to make sweeping changes in Washington that are sorely needed. But at this point, cookie jar capitalism still reigns at the SBA.