Contract Mess: Bogus Firms Qualify for Federal Program

July 18, 2008— -- Government investigators were able to qualify for a federal program with access to billions of dollars of government contracts designed to give preference to firms that are headquartered in disadvantaged communities by setting up bogus firms with phony addresses.

The HUBZone program, under the direction of the Small Business Administration, doles out $8 billion dollars in government contracts a year and is incredibly easy to game, according to a new Government Accountability Office report.

"It's absolutely shameful," said House Committee on Small Business Chairwoman Nydia M. Velázquez (D-NY) who chaired a hearing on the issue yesterday.

"It's tougher to get a library card than it is to get into the HUBZone program. All you need is a bit of White-out," said Velazquez, referring to a quick change of address that would allow for a company based in a wealthy area to qualify for federal contracts meant for companies located in poorer communities.

GAO's lead investigators told the Congressional panel they had found countless instances of abuse by non-qualifying firms. 

Investigators said they found the SBA is doing almost nothing to verify the information of applicants.  Investigators also said they had extensive evidence of individuals who misrepresent the locations of their companies, knowing the agency will not question them about their applications. 

The GAO review delves into ten randomly-selected firms in the Washington DC metropolitan area.  Many of these companies had set up "virtual offices" or rented mailboxes in poor communities with the sole purpose of gaining a mailing address within HUBZone boundaries.  All ten failed GAO's site inspections, and have been referred to the Inspector General for corrective action. 

Investigators also set up four bogus firms to test SBA's application process.  One of the businesses was listed as occupying a local Starbucks; another a major sports arena.  One had only a P.O. Box address and one listed the address of a "virtual office", which actually was a rented closet within the boundaries of the HUBZone.