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Report to the Chairwoman, Committee on Small Business, House of 
Representatives: 

United States Government Accountability Office: 
GAO: 

June 2010: 

Small Business Administration: 

Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and 
Abuse: 

GAO-10-759: 

GAO Highlights: 

Highlights of GAO-10-759, a report to the Chairwoman, Committee on 
Small Business, House of Representatives. 

Why GAO Did This Study: 

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 and 
March 2009, GAO reported on substantial vulnerabilities to fraud and 
abuse in the HUBZone application and monitoring process. GAO also 
found 10 HUBZone firms in the Washington, D.C., area and 19 firms in 
four other metropolitan areas in Alabama, California, and Texas that 
made fraudulent or inaccurate representations to get into or remain in 
the HUBZone program. 

Given the Committee’s continued concern over fraud and abuse in the 
HUBZone program, GAO (1) performed additional proactive testing of SBA’
s HUBZone certification process, and (2) determined whether SBA has 
taken any actions against the 29 case study firms GAO identified in 
its prior work. Using publicly available resources to fabricate 
documents, GAO proactively tested SBA’s application process by 
applying for HUBZone certification for four bogus businesses with 
fictitious owners and employees. GAO also interviewed SBA officials 
and reviewed SBA data about the 29 case study firms. GAO did not 
attempt to project the extent of fraud and abuse in the program nor 
systematically assess HUBZone program controls. 

GAO makes no recommendations in this report. 

What GAO Found: 

The HUBZone program remains vulnerable to fraud and abuse. Using 
falsified documents and employee information, GAO obtained HUBZone 
certification for three bogus firms using the addresses of the Alamo 
in Texas, a public storage facility in Florida, and a city hall in 
Texas as principal office locations. A simple Internet search by SBA 
could have revealed these as phony applications. While the agency has 
required more documentation in its application process since GAO’s 
July 2008 report, GAO’s testing shows that SBA does not adequately 
authenticate self-reported information and, for these cases, did not 
perform site visits to validate the addresses. Further, the changes 
have significantly increased the time it takes SBA to process 
applications. Specifically, SBA took 7 or more months to process each 
of the bogus applications—at least 6 months longer than for GAO’s 
previous investigations. SBA continually lost documentation for GAO’s 
fourth application, and eventually withdrew it after GAO failed to 
resubmit the same materials for the fourth time. On its Web site, SBA 
reported that applicants are experiencing delays during the 
application process. 

Figure: National Historic Landmark Address (The Alamo) Used by GAO as 
Principal Office Location for a Bogus HUBZone Firm: 

[Refer to PDF for image: photograph] 

Source: GAO. 

[End of figure] 
 
SBA has taken some action on most of the 29 firms that GAO previously 
reported did not meet HUBZone program requirements. The SBA 
decertified 16 firms from the HUBZone program, and another 8 firms 
voluntarily withdrew. While GAO maintains all 29 firms did not meet 
requirements at the time of its review, SBA stated that the other 5 
firms were in compliance at the time of its own review and so remain 
certified. Since GAO’s March 2009 report, 17 of the 29 companies have 
received more than $66 million in federal obligations for new 
contracts. GAO recently reported that one firm has also defrauded the 
SBA 8(a) program. Because the SBA did not promptly debar the firm from 
federal contracts, it was able to fraudulently receive an additional 
$600,000 in noncompetitive 8(a) federal contracts since GAO’s last 
report. SBA recently proposed debarring this firm. 

View [hyperlink, http://www.gao.gov/products/GAO-10-759] or key 
components. For more information, contact Gregory Kutz at (202) 512-
6722 or kutzg@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

SBA's HUBZone Certification Process Remains Vulnerable to Fraud and 
Abuse: 

SBA Has Taken Some Actions on the 29 HUBZone Firms Previously 
Investigated by GAO: 

Corrective Action Briefing: 

Tables: 

Table 1: SBA Actions on 10 Firms GAO Reported as Ineligible for the 
HUBZone Program in July 2008: 

Table 2: SBA Actions on 19 Firms GAO Reported as Ineligible for the 
HUBZone Program in March 2009: 

Figures: 

Figure 1: HUBZone Certification Letter from SBA for Our Bogus Firm: 

Figure 2: Timeline of HUBZone application (Crockett & Associates): 

Abbreviations: 

DOJ: Department of Justice: 

HUBZone: Historically Underutilized Business Zone: 

ISDC: Interagency Suspension and Debarment Committee: 

ORCA: Online Representations and Certifications Application: 

SBA: Small Business Administration: 

SDO: SBA's Suspension and Debarment Official: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

June 25, 2010: 

The Honorable Nydia M. Velázquez: 
Chairwoman: 
Committee on Small Business: 
House of Representatives: 

Dear Madam Chairwoman: 

In fiscal year 2009, federal agencies obligated nearly $3 billion in 
sole source or set-aside contracts to firms participating in the 
Historically Underutilized Business Zone (HUBZone) program, which we 
have shown to be vulnerable to fraud and abuse.[Footnote 1] 
Administered by the Small Business Administration (SBA), this program 
is meant to spur economic growth in underdeveloped areas by helping 
qualified small businesses secure federal contracts. Qualified 
businesses located in HUBZones--economically distressed areas with low 
income levels or high unemployment rates--are eligible to bid on 
federal prime contracts and subcontracts available exclusively to 
program participants, in addition to benefiting from other contracting 
preferences. The SBA must certify that a small business meets the 
following criteria to qualify for the program: the firm must be owned 
and controlled by one or more U.S. citizens; at least 35 percent of 
full-time (or full-time equivalent) employees live in a HUBZone; and 
the principal office, where most qualifying employees work, must be in 
a HUBZone. According to the SBA's Dynamic Small Business Web site, as 
of March 2010, 9,300 firms were participating in the program. 

In July 2008, we testified that the SBA's lack of an effective fraud 
prevention program meant its application process could not provide 
reasonable assurance that only eligible firms were being certified to 
participate in the program. Using fictitious employee and owner 
information and fabricated documentation, we easily obtained HUBZone 
certification for four bogus firms. We also identified 10 firms from 
the Washington, D.C., metro area that participated in the program even 
though they did not meet eligibility criteria. In March 2009, we 
reported on 19 additional HUBZone firms from Alabama, California, and 
Texas that were not eligible for the program. 

Because you expressed concerns about continued fraud and abuse in the 
program, we (1) performed additional proactive testing of the SBA's 
HUBZone certification process and (2) determined what actions, if any, 
the SBA has taken against the 29 case study firms we identified in our 
prior work. 

To proactively test the SBA's HUBZone certification process, we 
created four new bogus firms and applied for HUBZone certification 
using false information and fabricated documents to meet the SBA's 
certification requirements. Our applications contained fictitious 
employee information and bogus principal office addresses. We used 
publicly available guidance provided by the SBA to create the 
applications. When necessary, we fabricated documents to support our 
applications using commercially available hardware, software, and 
materials. To determine what actions, if any, the SBA has taken 
against the 29 firms that we found misrepresented their HUBZone 
status, we made inquiries on our referrals with SBA officials from the 
HUBZone Program Office, and the SBA's Suspension and Debarment 
Official (SDO). To identify federal obligations received by the firms 
subsequent to our referral to SBA, we analyzed data from the Federal 
Procurement Data System-Next Generation. We also reviewed the SBA's 
Dynamic Small Business Web site to determine the current HUBZone 
status of the 29 firms. To identify firms that represented themselves 
as HUBZone certified, where they may possibly receive benefits from 
improperly being associated with the program, even after they were 
decertified by the SBA, we reviewed the Web sites of all 29 firms. We 
did not review SBA records to confirm actions on the 29 firms or the 
firms' actions to comply with HUBZone requirements. 

Our work was not designed to systematically assess HUBZone program 
controls or to determine the legal sufficiency of any actions SBA took 
against the selected firms we referred for investigation. We conducted 
our investigation from October 2008 through June 2010 in accordance 
with quality standards for investigations as set forth by the Council 
of the Inspectors General on Integrity and Efficiency. 

Background: 

The HUBZone program was established by the HUBZone Act of 1997 to 
stimulate economic development by providing federal contracting 
preferences to small businesses operating in economically distressed 
communities known as HUBZones. The SBA is responsible for 
administering the program and certifying applicant firms that meet 
HUBZone program requirements. To be certified, in general, firms must 
meet the following criteria: 1) the company must be small by SBA size 
standards;[Footnote 2] 2) the company's principal office--where the 
greatest number of employees perform their work--must be located in a 
HUBZone; 3) the company must be at least 51 percent owned and 
controlled by U.S. citizens; and 4) at least 35 percent of the 
company's full-time (or full-time equivalent) employees must reside in 
a HUBZone.[Footnote 3] As of March 2010, approximately 9,300 firms 
were listed in the SBA's Dynamic Small Business database as 
participating in the HUBZone program. 

A certified HUBZone firm is eligible for a variety of federal 
contracting benefits, such as sole source contracts and set-aside 
contracts[Footnote 4]. Contracting officers may award a sole source 
contract to a HUBZone firm if, among other things, the officer does 
not have a reasonable expectation that two or more qualified HUBZone 
firms will submit offers and the anticipated award price of the 
proposed contract, including options, will not exceed $5.5 million for 
manufacturing contracts or $3.5 million for all other contracts. Once 
a qualified firm receives a HUBZone contract, the firm is required to 
spend at least 50 percent of the personnel costs of the contract on 
its own employee[Footnote 5]s. The company must also represent, as 
provided in the application, that it will "attempt to maintain" having 
35 percent of its employees reside in a HUBZone during the performance 
of any HUBZone contract it receives.[Footnote 6] 

The SBA must ensure that both applicant and participant firms meet and 
maintain eligibility criteria at the time of application and, if they 
are granted certification, throughout their tenure in the program. 
During the application process, firms attest to the authenticity of 
the information that they submit to the SBA regarding their 
eligibility. Subsequent to certification, SBA regulations require 
firms to immediately notify the agency if any material changes occur 
that affect their eligibility, such as changes to the number of 
employees residing in a HUBZone or the location of the firm's 
principal office.[Footnote 7] Moreover, certified HUBZone firms 
competing for government contracts must verify in the government's 
Online Representations and Certifications Application (ORCA)[Footnote 
8] that there have been "no material changes in ownership and control, 
principal office, or the percentage of employee's living in a HUBZone 
since it was certified by the SBA." Firms and individuals who 
misrepresent their eligibility during the application process or while 
participating in the program are subject to civil and criminal 
penalties; decertification from the HUBZone program; or debarment from 
all federal contracts.[Footnote 9] 

SBA's HUBZone Certification Process Remains Vulnerable to Fraud and 
Abuse: 

The SBA continues to struggle with reducing fraud risks in its HUBZone 
certification process despite reportedly taking steps to bolster its 
controls. The agency certified three of our four bogus firms based on 
fraudulent information, including fabricated explanations and 
supporting documentation. The SBA lost documentation for our fourth 
application on multiple occasions, forcing us to abandon our 
application. Our testing revealed that the SBA does not adequately 
authenticate self-reported information--especially as it pertains to 
information regarding whether a firm's principal office location meets 
program requirements. For example, for our successful firms, we used 
the addresses of the Alamo, a public storage facility in Florida, and 
a city hall in Texas as our principal office locations--locations that 
a simple Internet search could have revealed as ineligible for the 
program. While ensuring that a HUBZone applicant's principal office is 
legitimately located in a HUBZone is a complicated process, the SBA's 
failure to verify principal office locations leaves the program 
vulnerable to firms misrepresenting the locations of their principal 
offices and thus, benefits of the program not going to areas that are 
economically disadvantaged. Figure 1 below shows one of the acceptance 
letters we received. 

Figure 1: HUBZone Certification Letter from SBA for Our Bogus Firm: 

[Refer to PDF for image: illustration] 

Letter depicts the following statement: 

“...your application for certification as a ‘qualified HUBZone small 
business concern (SBC)’ has been approved.” 

Source: SBA. 

[End of figure] 

In contrast to our last test of the HUBZone certification process, the 
SBA considerably increased the amount of documentation it requested to 
support each application and its attempts to contact and communicate 
with the owners we represented in our applications.[Footnote 10] 
However, the SBA also increased the amount of time it takes to certify 
firms and, by all indications, suspended the use of agency processing 
time guidelines as indicated by an e-mail that we received from an SBA 
official and information that the agency posted on its Web site. 
[Footnote 11] The SBA took at least 7 months to process each of the 
three applications from our bogus companies that it certified. In our 
previous test, the SBA certified our firms in as little as 2 weeks, 
with minimal requests for documentary evidence. SBA's increased 
processing times failed to prevent our fraudulent firms from being 
certified. 

As we indicated in our March 2009 report, the SBA initiated a process 
of reengineering the HUBZone program in response to our findings and 
recommendations. Though we did not assess the effectiveness of the 
actions that the SBA undertook to strengthen its internal controls, we 
were still able to exploit those weaknesses in order to obtain program 
certification for our bogus firms. 

Specific details about each of our fraudulent applications are 
reported below. 

Fictitious Application 1: We received HUBZone certification about 7 
months after submitting this application to the SBA. For the principal 
office location, we used the address of the Alamo, a National Historic 
Landmark in Texas. We claimed that both the firm's employees were 
HUBZone residents. Nearly 3 months after submission, we received an e- 
mail from the SBA requesting a copy of the HUBZone maps that we used 
to verify the residency of our employees, birth certificates, copies 
of tax returns for the last 3 years, corporate documents, and a copy 
of our firm's rental agreement and a recent utility bill. We 
fabricated these documents using publicly available materials and 
software and submitted them to the SBA. The SBA then requested a copy 
of the firm's most recent official payroll records and sought 
clarification between the number of employees who worked at our firm's 
principal office and those who worked off site. We were also required 
to provide additional payroll records and corresponding banking 
statements with the line-by-line transactions that supported the 
payments that we claimed to make to our fictitious employees. After 
all of the requested information was provided, we were approved for 
HUBZone certification. Figure 2 provides a timeline highlighting the 
major interactions that occurred with the SBA during the processing of 
this application. 

Figure 2: Timeline of HUBZone Application: 

[Refer to PDF for image: timeline] 

December 2008: 
GAO submits HUBZone application. 

February 2009: 
SBA requests business and personal documentation. 

March 2009: 
GAO submits fake business and personal documentation. 

May 2009: 
SBA requests personnel records. 

May 2009: 
GAO submits fake personnel records. 

June 2009: 
SBA requests operating agreement, personnel records, payroll 
information, and banking statement. 

June 2009: 
GAO submits fake operating agreement, personnel records, payroll 
information, and banking statement. 

July 2009: 
GAO firm receives SBA HUBZone certification. 

Source: GAO analysis. 

[End of figure] 

Fictitious Application 2: The SBA certified this bogus company 14 
months after our investigators applied for HUBZone certification. The 
address we used for our principal office was the same as a rental 
storage unit in Florida. We claimed the firm was a partnership that 
employed two individuals who both resided in a HUBZone. To 
substantiate our firm's principal address, the agency requested that 
we submit a lease, a recent utility and telephone bill, and a copy of 
our firm's business registration. To verify the firm's business 
activity and ownership, the SBA requested copies of our firm's federal 
business income tax returns for the last 3 years and birth 
certificates of the two owners, and a copy of our firm's partnership 
agreement. To verify employee information, the SBA requested copies of 
each of the HUBZone resident employees' driver's licenses or voter 
registration cards, a copy of our firm's quarterly unemployment tax 
filings, and certified copies of the firm's quarterly payroll. SBA 
also requested tax information and a copy of our firm's most recent 
payroll documents, which we fabricated and provided to the SBA. 
Several months thereafter, our bogus firm was granted HUBZone 
certification. 

Fictitious Application 3: After 7 months of processing, SBA approved 
this bogus firm for HUBZone participation. The address of this firm's 
principal office was a city hall in Texas. We indicated that two of 
the firm's employees who worked for the bogus firm lived in a HUBZone. 
Several months after processing our application, the SBA requested 
documentary evidence of the firm's location, business activity, 
ownership, and employee information. After the SBA deemed the 
fabricated information that we submitted regarding payroll as 
insufficient to determine our employee information, the agency put our 
application on hold until we provided further documentation. We then 
provided SBA with a sworn statement to support information regarding 
payroll. SBA requested clarification about the frequency that our 
bogus employees worked from the principal office and granted HUBZone 
certification soon after. 

Fictitious Application 4: After 4 months of processing, the SBA 
withdrew this application after we abandoned it. We abandoned this 
application because the SBA claimed that it did not receive 
supplementary documentation that we repeatedly provided. Two months 
after the initial submission of this application, we followed up with 
the SBA to inquire about its status. At the point of inquiry, SBA 
indicated that our application was being assigned to an analyst for 
processing. Two months after our inquiry, we received a request for 
supporting documentation that was similar to those we received in our 
previous applications. We provided the requested information 3 days 
after receiving the request. Two weeks later, we followed up to 
confirm receipt of our documents. The SBA indicated that it did not 
receive the information that we provided, so we resent the information 
and requested that the agency confirm receipt. Three weeks later, 
after failing to receive confirmation on the receipt of our 
documentation, we inquired about the status of our application. Again, 
the agency told us that it did not receive the documentation and 
subsequently gave us one day to resubmit it. If not provided, the 
agency indicated, our application would be withdrawn. We decided to 
abandon the application and our application was withdrawn from the 
program. 

SBA Has Taken Some Actions on the 29 HUBZone Firms Previously 
Investigated by GAO: 

As of March 2010, the SBA has reviewed the status of all 29 firms we 
referred to it from our prior HUBZone investigations. Since our March 
2009 report, these firms have received more than $66 million in 
federal obligations for new contracts. Not all of these obligations 
are necessarily improper, and some do not relate to HUBZone contracts. 
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. We 
did not attempt to verify SBA's work. And although SBA indicated that 
firms sometimes come in and out of compliance while in the program, we 
maintain that the firms represented in the cases that the SBA reviewed 
and determined to meet HUBZone program requirements were out of 
compliance at the time of our review. In addition, we found that five 
decertified firms continued to market themselves, through their Web 
sites, as HUBZone certified even after the SBA removed them from the 
HUBZone program. Tables 1 and 2 below show the results of the SBA's 
review of the 29 firms we referred from our July 2008 testimony and 
March 2009 report. 

Table 1: SBA Actions on 10 Firms GAO Reported as Ineligible for the 
HUBZone Program in July 2008: 

GAO case: 1; 
Primary product or service: Information technology (IT), engineering, 
business management; 
Violations found by GAO, December 2007: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed firm from HUBZone 
program in June 2009; 
* SBA Suspension and Debarment Official is coordinating with 
Department of Justice (DOJ) and Interagency Suspension and Debarment 
Committee (ISDC) to determine whether debarment is appropriate action 
and, if so, whether SBA should be the lead agency; 
* Since our March 2009 report, this firm has received $9.4 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 2; 
Primary product or service: Construction; 
Violations found by GAO, December 2007: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed firm from HUBZone 
program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $9.6 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 3; 
Primary product or service: Design and installation of fire alarm 
systems; 
Violations found by GAO, December 2007: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed firm from HUBZone 
program on November 2008; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $3.4 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 4; 
Primary product or service: Engineering and construction management; 
Violations found by GAO, December 2007: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed firm from HUBZone 
program on May 2009; 
* SBA SDO is coordinating with DOJ and ISDC to determine whether 
debarment is appropriate action and, if so, whether SBA should be the 
lead agency; 
HUBZone status, March 2010: Decertified. 

GAO case: 5; 
Primary product or service: IT consulting; 
Violations found by GAO, December 2007: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal of firm from 
HUBZone program; 
* Firm voluntarily withdrew from the HUBZone program in May 2009; 
* SBA SDO is coordinating with DOJ and ISDC to determine whether 
debarment is appropriate action and, if so, whether SBA should be the 
lead agency; 
* Since our March 2009 report, this firm has received $500,000 in new 
federal obligations; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 6; 
Primary product or service: Mechanical engineering; 
Violations found by GAO, December 2007: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal from HUBZone 
program; 
* Firm voluntarily withdrew from the HUBZone program in March 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $630,000 in 
federal obligations for new contracts; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 7; 
Primary product or service: Acquisition and project management; 
Violations found by GAO, December 2007: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* Firm voluntarily withdrew from the HUBZone program in November 2008; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $960,000 in 
federal obligations for new contracts; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 8; 
Primary product or service: Construction management; 
Violations found by GAO, December 2007: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA concluded firm met HUBZone program requirements based on an SBA 
program examination[A]; 
* Since our March 2009 report, this firm has received $3.3 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Certified. 

GAO case: 9; 
Primary product or service: IT products and services; 
Violations found by GAO, December 2007: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA concluded firm met HUBZone program requirements based on an SBA 
program examination[A]; 
* Since our March 2009 report, this firm has received $657,000 in 
federal obligations for new contracts; 
HUBZone status, March 2010: Certified. 

GAO case: 10; 
Primary product or service: IT and logistics management; 
Violations found by GAO, December 2007: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA concluded firm met HUBZone program requirements based on an SBA 
program examination[A]; 
* Since our March 2009 report, this firm has received $5.8 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Certified. 

Source: GAO analysis. 

Note: Cases are presented in the same order as reported in GAO-08-964T. 

[A] Although SBA indicated that some firms may come in and out of 
compliance while in the program, we maintain that this firm did not 
comply with HUBZone requirements at the time of our review. 

[End of table] 

Table 2: SBA Actions on 19 Firms GAO Reported as Ineligible for the 
HUBZone Program in March 2009: 

GAO case: 1; 
Primary product or service: Environmental consulting; 
Violations found by GAO, March 2009: 
* Less than 50% of personnel costs for own staff to perform HUBZone 
contracts; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA did not take any action on firm because SBA concluded that firm 
met both the 35% residency and principal office requirement. SBA 
stated that contracting officers are required by the Federal 
Acquisition Regulations to insert such clauses regarding 
subcontracting limitations. We believe that SBA should evaluate 
whether HUBZone firms are meeting the performance-for-work 
requirements; 
HUBZone status, March 2010: Certified. 

GAO case: 2; 
Primary product or service: Grounds maintenance and furniture; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal from HUBZone 
program; 
* Firm voluntarily left HUBZone program in June 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $71,000 in 
federal obligations for new contracts; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 3; 
Primary product or service: General contractor; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal from HUBZone 
program; 
* Firm voluntarily left HUBZone program in June 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 4; 
Primary product or service: Information technology; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal from HUBZone 
program; 
* Firm voluntarily left HUBZone program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $2.9 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 5; 
Primary product or service: Information technology, general 
contracting; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in October 2009; 
* SBA SDO determined that debarment was not warranted based on the 
evidence of the case; 
HUBZone status, March 2010: Decertified. 

GAO case: 6; 
Primary product or service: Janitorial; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in June 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Decertified. 

GAO case: 7; 
Primary product or service: Medical laboratories; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal from HUBZone 
program; 
* Firm voluntarily left HUBZone program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 8; 
Primary product or service: Medical services and support; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and proposed removal from HUBZone 
program; 
* In July 2009, SBA SDO proposed debarment for the firm. At that time, 
the firm was placed on the federal Excluded Parties List System; 
* In response to the proposed debarment, the firm provided evidence 
that it was presently responsible and that it was no longer necessary 
for the firm to be debarred. In October 2009, SBA SDO determined that 
debarment was unnecessary to protect the government's interests and 
the firm was removed from the Excluded Parties List System; 
* SBA SDO did not believe evidence established sufficient grounds for 
debarment; 
* The firm voluntarily withdrew from the HUBZone program in July 2009; 
HUBZone status, March 2010: Voluntarily withdrew. 

GAO case: 9; 
Primary product or service: Military logistics and maintenance; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Decertified. 

GAO case: 10; 
Primary product or service: Facility support services; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Decertified. 

GAO case: 11; 
Primary product or service: Construction; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Decertified. 

GAO case: 12; 
Primary product or service: Construction; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in August 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $8.9 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 13; 
Primary product or service: Engineering; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in July 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $4.7 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 14; 
Primary product or service: Engineering and information technology; 
Violations found by GAO, March 2009: 
* Principal office not in HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in February 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
HUBZone status, March 2010: Decertified. 

GAO case: 15; 
Primary product or service: Facilities support services/construction; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in August 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $9.1 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 16; 
Primary product or service: Food service contractors; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in November 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $319,000 in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 17; 
Primary product or service: Information technology; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA concluded firm met HUBZone program requirements based on an SBA 
program examination. [A]; 
* Since our March 2009 report, this firm has received $5.4 million in 
federal obligations for new contracts; 
HUBZone status, March 2010: Certified. 

GAO case: 18; 
Primary product or service: Janitorial; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in August 2009; 
* SBA SDO determined that debarment was unwarranted based on the 
evidence of the case; 
* Since our March 2009 report, this firm has received $76,000 in 
federal obligations for new contracts; 
HUBZone status, March 2010: Decertified. 

GAO case: 19; 
Primary product or service: Temporary help services; 
Violations found by GAO, March 2009: 
* Fewer than 35% of employees live in a HUBZone; 
SBA compliance actions and additional procurement actions through 
March 2010: 
* SBA performed program examination and removed the firm from HUBZone 
program in August 2009; 
* In May 2009, SBA SDO proposed debarment for the firm. At that time, 
the firm was placed on EPLS; 
* In September 2009, SBA SDO determined that firm did not willfully 
misrepresent its status to obtain a HUBZone set-aside contract and 
because of administrative action taken by SBA, that debarment was 
unnecessary to protect the government's interests. The firm was 
removed from EPLS at that time; 
HUBZone status, March 2010: Decertified. 

Source: GAO analysis. 

Note: Cases are presented in the same order as reported in GAO-09-440. 

[A] Although SBA indicated that some firms sometimes come in and out 
of compliance while in the program, we maintain that this firm did not 
comply with HUBZone requirements at the time of our review. 

[End of table] 

We also found that one firm continued to benefit from another SBA 
program even though it misrepresented its eligibility for the HUBZone 
program and was decertified by the SBA. This firm, a construction firm 
that was a part of our recent investigation into fraud and abuse in 
the SBA's 8(a) Business Development Program,[Footnote 12] also had 
been 8(a) certified while in the HUBZone program.[Footnote 13] 
[Footnote 14] During that investigation, we found that the firm 
misrepresented its status as a qualified 8(a) firm because it was 
being controlled by individuals who did not qualify for the program. 
Because the SBA did not promptly suspend or debar the firm, this firm 
was able to receive nearly $600,000 in additional noncompetitive 8(a) 
contracts since our last report. According to SBA officials, SBA has 
recently proposed debarment for this firm. 

Corrective Action Briefing: 

We briefed SBA officials on the results of our investigation on June 
17, 2010. Regarding our proactive testing, SBA officials indicated 
that it was unreasonable to expect them to have identified our 
fictitious firms due to the bogus documentation that we included in 
our applications. For example, SBA officials stated that the 
submission of false affidavits would subject an applicant to 
prosecution. SBA officials also stated that competitors may identify 
fraudulent firms and likely protest if those firms were awarded a 
HUBZone contract. While competitors may identify some ineligible firms 
that were awarded contracts, it is SBA's responsibility to ensure that 
only eligible firms participate in the HUBZone program. We suggested 
that SBA conduct Internet searches on the addresses of applicant firms 
to help validate principal office locations. We also indicated that if 
SBA had conducted site visits at the addresses of the firms 
represented in our applications, those applications would have been 
identified as fraudulent. SBA officials stated that due to resource 
constraints, they primarily conduct site visits on certified firms 
that receive large prime HUBZone contracts. 

Regarding our 29 referred firms, SBA officials stated that debarment 
has recently been proposed for an additional firm. We suggested that 
if SBA determines that a HUBZone firm is not eligible for the program, 
it should consider conducting a review of that firm's eligibility if 
that firm is also certified in other SBA programs. SBA agreed with our 
suggestion. In addition, SBA provided technical comments which we 
incorporated into our report. 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that time, we will send 
copies of this report to the Administrator of the Small Business 
Administration, interested congressional committees and members, and 
other interested parties. In addition, this report will also be 
available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-6722 or kutzg@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report were 
Andy O'Connell, Assistant Director; Matthew Valenta, Assistant 
Director; Lerone Reid, Analyst-In-Charge; Eric Eskew, Agent-In-Charge; 
Jason Kelly; Barbara Lewis; Jeff McDermott; and Timothy Walker. 

Sincerely yours, 

Signed by: 

Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigations: 

[End of section] 

Footnotes: 

[1] GAO, Small Business Administration: Additional Actions Are Needed 
to Certify and Monitor HUBZone Businesses and Assess Program Results, 
[hyperlink, http://www.gao.gov/products/GAO-08-975T] (Washington, 
D.C.: July 17, 2008): GAO, Small Business Administration: Additional 
Actions Are Needed to Certify and Monitor HUBZone Businesses and 
Assess Program Results, [hyperlink, 
http://www.gao.gov/products/GAO-08-643] (Washington, D.C.: June 17, 
2008): GAO, HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17, 
2008): GAO, HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-440] (Washington, D.C.: Mar. 25, 
2009); and GAO, HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink, 
http://www.gao.gov/products/GAO-09-519T] (Washington, D.C.: Mar. 25, 
2009). 

[2] The Small Business Act, as amended, defines a small business 
generally as one that is "independently owned and operated and that is 
not dominant in its field of operation." 

[3] For service and construction firms, determination of principal 
office excludes employees who perform the majority of their work at 
job site locations to fulfill specific contract commitments. 

[4] Sole source contracts involve a noncompetitive purchase or 
procurement process accomplished after soliciting and negotiating with 
only one source, thus limiting full and open competition. Set-aside 
contracts reserve an acquisition exclusively for participation by 
small business concerns. 

[5] There are exceptions to the 50 percent requirement, depending on 
the type of contract; for example, qualified HUBZone firms may meet 
the 50% labor requirement by using employees of other qualified 
HUBZone firms. 13 C.F.R. § 126.700. 

[6] 15 U.S.C. § 632(p)(5)(A). 

[7] 13 C.F.R. §126.501. 

[8] ORCA was established as part of the Business Partner Network, an 
element of the Integrated Acquisition Environment, which is 
implemented under the auspices of White House Office of Management and 
Budget, Office of Federal Procurement Policy, and the Chief 
Acquisition Officers Council. ORCA is "the primary government 
repository for contractor submitted representations and certifications 
required for the conduct of business with the government." 

[9] If SBA determines at any time that a HUBZone Small Business 
Concern (SBC) is not qualified, SBA may de-certify the HUBZone SBC, 
remove the concern from the list, and/or seek imposition of penalties 
pursuant to §126.900. 13 C.F.R. §126.504. 

[10] GAO, HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17, 
2008). 

[11] According to the SBA, the increase in processing time is 
attributed to its efforts to implement a new, more rigorous 
certification process it started in late 2008 in response to our 
findings of fraud and abuse within the HUBZone program. The SBA also 
stated that this new process, which requires the review of supporting 
documentation to verify a firm's eligibility for the program, is 
significantly more labor intensive than the previous electronic-only 
process that we were able to successfully exploit before. The agency 
further noted that the HUBZone program is experiencing much heavier 
application volume than ever before. 

[12] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325 
Million in Sole-Source and Set-Aside Contracts, [hyperlink, 
http://www.gao.gov/products/GAO-10-425] (Washington, D.C.: March 2010). 

[13] The 8(a) program, also administered by the SBA, is one of the 
federal government's vehicles for developing small businesses that are 
owned by socially and economically disadvantaged individuals. 

[14] This firm is represented as GAO case number 2 in table two above. 

[End of section] 

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