Phony firm at historic landmark makes the cut for small biz program
Site of the Alamo is among the far-fetched addresses investigators were able sneak through a seven-month HUBZone certification process.
Remember the Alamo. Or at the very least, check its address.
As part of its latest undercover operation, the Government Accountability Office obtained certification in the Historically Underutilized Business Zone program for three phony firms using fictitious employee and ownership information. Among the applicants was Crockett and Associates, located at the Alamo in San Antonio.
"It took us seven months in the submission of numerous counterfeit documents to be certified for this bogus company," Gregory Kutz, managing director of forensics audits and special investigations at GAO, told the House Small Business Committee during a hearing on Wednesday. "But, a one- or two-minute Internet search would have at least raised suspicion about the validity of this application."
And, it's not just national landmarks that are finding their way into the HUBZone program, which is designed to help businesses in poor neighborhoods win government work. The watchdog also received HUBZone approval using the address of a rental storage facility in Florida and a city hall in Texas, according to a report released on Wednesday.
A fourth application might have been on a path for approval but the Small Business Administration repeatedly lost the firm's documentation and GAO eventually withdrew its application.
"Our work shows that SBA is not very good at fraud prevention and enforcement," Kutz said.
SBA officials told GAO it was unreasonable to expect them to have identified the fictitious firms because of the bogus documentation included in the applications.
But Administrator Karen Mills conceded on Wednesday the findings were valid and must be addressed. The agency now is demanding significantly more documentation from small business applicants. Mills could not explain how the phony companies slipped into the program or why agency officials had not conducted an Internet search of the addresses.
SBA took at least seven months to process the three applications GAO submitted and requested documentation for all, including tax returns and payroll information. In previous tests the watchdog conducted, SBA certified bogus GAO firms in as little as two weeks, with minimal requests for documentary evidence, Kutz said.
The agency also has increased its monitoring of the program. More than 1,000 HUBZone participants are expected to receive a site visit this year, compared to less than 100 in 2008, Mills said. About 9,300 firms participate in the program.
"We do think we are making progress," Mills told the committee. "It's a very tough task and we are going after it very aggressively."
Weaknesses in the HUBZone certification process are not new. In July 2008, GAO used similar tactics -- fictitious employee and owner information and fabricated documentation -- to obtain certification for four bogus companies.
And, in two recent reports, the watchdog identified a combined 29 companies that had gained access to the program without meeting eligibility requirements. SBA has decertified 16 of those firms, eight voluntarily withdrew and five remain eligible, Mills said.
And, while several of the 29 firms and individuals now have been suspended, none has faced criminal prosecution. The Justice Department, Kutz said, has shown no interest in pursuing the cases because prosecutors do not believe there is a victim.
Delays in removing many of the companies from the program led to 17 contractors winning an additional $66 million in federal work, the report said. One of the firms also was cited recently for defrauding the SBA 8(a) Business Development program. SBA proposed debarring this construction firm but not before the firm won a $600,000 sole-source 8(a) contract, Kutz said.
Lawmakers suggested little will change in the HUBZone program without stiff punishments for rule breakers.
"While I appreciate that we are making process in setting up procedures, we need to get to the consequence phase where we can report openly and honestly to the taxpayers that we pursued fraud and rooted it out," said Rep. Glenn Nye, D-Va., chairman of the panel's Subcommittee on Contracting and Technology.