Lawmakers weigh ending fraud-riddled HUBZone program

House lawmakers on Wednesday said they would consider shutting down a Small Business Administration program to help companies in low-income regions win federal contracts if widespread cases of fraud are not addressed immediately.

The threats came after the Government Accountability Office reported for the second time in less than a year that ineligible firms are taking advantage of the Historically Underutilized Business Zone program.

"As important as it is to provide expanded opportunities to entrepreneurs, we just can't allow a program so fatally flawed to continue," said Rep. Nydia Velázquez, D-N.Y., chairwoman of the House Small Business Committee, during a hearing on Wednesday. "It's time for SBA to make a decision -- either overhaul the program, or scrap it completely. This committee is no longer going to tolerate the excuse 'We're working on it' while hardworking small businesses who have played by the rules are being cheated out of opportunities."

GAO found (GAO-09-440) that 19 ineligible firms had received $30 million through the HUBZone program in fiscal 2006 and fiscal 2007 combined. To qualify for the program, firms must be located in an economically distressed region and at least 35 percent of their full-time employees must live within the zone.

"It appears that fraud and abuse in this program exist across the country," said Gregory Kutz, managing director of forensic audits and special investigations at GAO. "The victims of this fraud include the American taxpayer, legitimate HUBZone businesses and the communities that were supposed to benefit from this program."

GAO reviewed 36 contracts in four regions with a high concentration of large HUBZone awards: Dallas; Huntsville, Ala.; San Antonio; and San Diego. The investigation, conducted between September 2008 and March 2009, found problems in each area.

For example, an Alabama ground maintenance services company that won $900,000 in HUBZone set-aside contracts in fiscal 2006 and fiscal 2007 listed an address that was in a qualifying area. But a visit revealed that the office -- described as Suite 19 -- was Trailer 19 in a trailer park, and the occupant had no association with the company. The firm's two employees, a father and a son, lived about 90 miles from the trailer park, outside the HUBZone.

In another violation of program policies, the firm -- like several others examined by GAO -- subcontracted the majority of its work to companies that were not participating in the program. HUBZone regulations require businesses to spend at least half of a contract's personnel allowance on their own employees.

"When a firm subcontracts the majority of its work to other non-HUBZone firms, it is undermining the HUBZone program's stated purpose of stimulating development in economically distressed areas," the report stated.

Furthermore, only four of 10 Washington metropolitan area firms identified as abusing the program in a July 2008 GAO report have been removed, and none have been suspended, debarred or prosecuted for fraud, Darryl Hairston, SBA's acting administrator, told lawmakers.

Agencies awarded several of these firms an additional $25 million in HUBZone set-aside or price preference contracts. This included a $23 million award to a construction firm that admitted to GAO in 2008 that it was not eligible for the program.

"There are due process considerations for the firms being investigated, and before any action can be taken the SBA must complete the program examinations already under way, propose the firms for decertification if appropriate and allow them an opportunity to respond," Hairston told lawmakers.

Investigators said SBA could reduce fraud by making more unannounced site visits. Since the beginning of 2009, agency officials have visited seven HUBZone companies -- less than 0.25 percent of all participants. Hairston said the agency will step up those visits in the coming months but that such a process could require additional resources.

Another loophole is that companies can get into the program with very little documentation of residency. SBA is beginning to collect supporting documents from all firms seeking new HUBZone certification or permission to remain in the program, Hairston said.

"All of these fixes will not be put in overnight," he said.

Lawmakers and investigators also emphasized the need for enforcement. They agreed that the best way to deter future fraud is to make an example of a handful of companies by referring cases to the Justice Department for criminal prosecution.

"They don't think there is any serious enforcement at this time," Kutz said. "If they get caught, they know there will be no punishment."