HUBZone Program:

Fraud and Abuse Identified in Four Metropolitan Areas

GAO-09-440: Published: Mar 25, 2009. Publicly Released: Mar 25, 2009.

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The Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. In July 2008, GAO identified substantial vulnerabilities in SBA's application and monitoring process that demonstrated the HUBZone program is vulnerable to fraud and abuse. GAO also investigated 10 case studies of HUBZone firms in the Washington, D.C., area that misrepresented their eligibility. GAO was asked to determine (1) whether additional cases of fraud and abuse exist outside of the Washington, D.C., area; (2) what actions, if any, SBA has taken to establish an effective fraud prevention program for the HUBZone program; and (3) what actions, if any, SBA took against the 10 case study firms in GAO's July 2008 testimony. To meet these objectives, GAO identified selected HUBZone firms based on certain criteria, such as magnitude of HUBZone contracts and firm location. GAO also interviewed SBA officials and reviewed SBA data.

GAO found that fraud and abuse in the HUBZone program extends beyond the Washington, D.C., area. GAO identified 19 firms in Texas, Alabama, and California participating in the HUBZone program that clearly do not meet program requirements (i.e., principal office location or percentage of employees in HUBZone and subcontracting limitations). For example, one Alabama firm listed its principal office as "Suite 19," but when GAO investigators performed a site visit they found the office was in fact trailer 19 in a residential trailer park. The individual living in the trailer had no relationship to the HUBZone firm. In fiscal years 2006 and 2007, federal agencies obligated nearly $30 million to these 19 firms for performance as the prime contractor on HUBZone contracts and a total of $187 million on all federal contracts. Although SBA has initiated steps in strengthening its internal controls as a result of GAO's 2008 testimonies and report, substantial work remains for incorporating a fraud prevention system that includes effective fraud controls consisting of (1) front-end controls at the application stage, (2) fraud detection and monitoring of firms already in the program, and (3) the aggressive pursuit and prosecution of individuals committing fraud. In addition, SBA did not adequately field test its interim process for processing applications. If it had done so, SBA would have known that it did not have the resources to effectively carry out its review of applications in a timely manner. As a result, SBA had a backlog of about 800 HUBZone applications as of January 2009. At that time, SBA's interim application process was taking about 6 months--well over its 1-month goal set forth in SBA regulations. SBA has taken some enforcement steps on the 10 firms previously identified by GAO that knowingly did not meet HUBZone program requirements. However, 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 set-aside contract since the July 2008 testimony.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Consistent with the intent of our recommendation, SBA has created a Suspension and Debarment Taskforce chaired by the SBA General Counsel that works with every SBA program office as well as the SBA IG to promptly identify companies that fraudulently certified that they met hubzone requirements, vigorously pursue them, and expel them from further government business. This will help ensure prompt removal of these firms and help keep program benefits flowing to intended recipients.

    Recommendation: To establish an effective fraud prevention system for the HUBZone program, the Administrator of the Small Business Administration should expeditiously implement the recommendations from our June 2008 report and ensure appropriate policies and procedures are in place for the prompt reporting and referral of fraud and abuse to SBA's Office of Inspector General as well as SBA's Suspension and Debarment Official.

    Agency Affected: Small Business Administration

  2. Status: Closed - Not Implemented

    Comments: SBA stated that although this requirement is included in SBA HUBZone regulations, it is not a criterion for HUBZone program eligibility but rather a mandatory contract term. SBA stated that contracting officers are required by the Federal Acquisition Regulations to insert such clauses regarding subcontracting limitations. If firms submit bids that indicate that they will not meet this requirement or fail to meet this requirement during performance of the contract, the contracting officer has the authority to reject a firm's bid or terminate the contract for default. We continue to believe that since this requirement is included in SBA HUBZone regulations, SBA should consider incorporating policies into SBA's program examinations to evaluate if HUBZone firm is expending at least 50 percent of personnel costs using its own employees. Therefore we are closing this recommendation as not implemented.

    Recommendation: To establish an effective fraud prevention system for the HUBZone program, the Administrator of the Small Business Administration should expeditiously implement the recommendations from our June 2008 report and consider incorporating policies and procedures into SBA's program examinations for evaluating if a HUBZone firm is expending at least 50 percent of the personnel costs of a contract using its own employees.

    Agency Affected: Small Business Administration

  3. Status: Closed - Implemented

    Comments: SBA implemented increased front-end eligibility screening; targeted examinations, reviews, and site visits; re-engineered HUBZone certification process that requires applicants to prove they meet the program requirements; and increased in-person site visits by SBA staff to the physical location of HUBZone principle offices. These increased site visits will help ensure that only qualified, eligible firms participate in the HUBZone program.

    Recommendation: To establish an effective fraud prevention system for the HUBZone program, the Administrator of the Small Business Administration should expeditiously implement the recommendations from our June 2008 report and consider incorporating a risk-based mechanism for conducting unannounced site visits as part of the screening and monitoring process.

    Agency Affected: Small Business Administration

  4. Status: Closed - Implemented

    Comments: SBA has reviewed the status of all 29 firms we referred to it from our prior HUBZone investigations (19 firms from this report and 10 firms from prior 2008 GAO report, GAO-08-964T). Of the 29 firms, 16 were decertified by the SBA, 8 voluntarily withdrew from the HUBZone program, and 5 were found by the agency to be in compliance with program requirements and remain certified.

    Recommendation: To establish an effective fraud prevention system for the HUBZone program, the Administrator of the Small Business Administration should expeditiously implement the recommendations from our June 2008 report and take appropriate enforcement actions on the 19 HUBZone firms we found to violate HUBZone program requirements to include, where applicable, immediate removal or decertification from the program, and coordination with SBA's Office of Inspector General as well as SBA's Suspension and Debarment Official.

    Agency Affected: Small Business Administration

 

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