Contract Mess: Bogus Firms Qualify for Federal Program
Investigators qualified for contracts using fake firms, phony addresses.
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.
Each time, the applications were certified as HUBZone eligible by the SBA—with little or no questions asked.
Velazquez, who has been calling for HUBZone reform for two years without seeing any results, said the HUBZone fraud is likely taking place across the country and the problem must be fixed immediately.
Last year, the House passed legislation to require on-site visits and other means of confirming compliance with HUBZone guidelines, but the Senate has yet to act on the bill.
President Bush has opposed the bill aggressively. The White House Office of Management and Budget said in a statement last year that the bill's elements would be "burdensome and undesirable."
Velazquez said it's time the Bush Administration stops pretending fraud isn't rampant in this program.
"The American people know better. Tax-payers, and the small businesses that drive our economy, deserve no less," she said.
The SBA said at yesterday's hearing that they agree with the GAO investigators that more regulation needs to be put in place and said they will work towards that goal.
"Today the HUBZone program faces many challenges. However, please know that I am committed to solving them, and I believe that integrity and transparency must guide all of our actions at SBA," said SBA Acting Administrator Jovita Carranza.
"This commitment has allowed us to make dramatic gains in other SBA programs, and I look forward to applying these lessons to the HUBZone," she said.
Though similar words have been heard before from the SBA on this issue. At a Congressional hearing in September of last year Carranza, then Deputy Administrator, said "we have recognized the flaws, we have actually taken the position where we are going to implement, if not 90 percent, approximately 100 percent [of the SBA IG recommendations to address problems in the HUBZone program]."