News From the
Committee on Small Business
Nydia M. Velázquez, Chairwoman


For Immediate Release                                                       CONTACT:  Alex Haurek; Duncan Neasham
March 25, 2009                                                                                                              (202) 226-3636

Multi-Billion Dollar Contracting Program Plagued by Fraud

WASHINGTON, D.C. — Investigators with the Government Accountability Office (GAO) today told lawmakers the Small Business Administration’s (SBA) failure to police the Historically Underutilized Business Zone (HUBZone) program has led to widespread fraud in the $8 billion government program.  In a House Small Business Committee hearing, GAO testified that the SBA’s failure to remove fraudulent companies exposed in a previous investigation resulted in another $7.2 million in HUBZone contracts being awarded to those same firms.  SBA officials vowed at that time to fix the program, but according to a GAO report released at the hearing, the SBA has failed to take steps to adequately improve the process. 

“The widespread fraud that the GAO unearthed in the HUBZone program is disturbing enough,” said Rep. Nydia M. Velázquez (D-NY), Chairwoman of the House Small Business Committee.  “But, equally disconcerting, firms that the GAO identified as fraudulent in July have not been taken out of the HUBZone program and, in some cases, have even continued to receive millions of dollars in federal contracts.”

In its investigation, the GAO reviewed 36 firms awarded government contracts in four cities with HUBZones:  Huntsville, Alabama; Dallas, Texas; San Antonio, Texas; and San Diego, California.  The results of the audit found that 19 of those firms — more than half — failed to qualify for the program while still collecting $30 million in HUBZone contracts and $187 million in federal contracts. 

“When these companies take advantage the HUBZone program, they don’t just deprive economically depressed communities of employment opportunities, they cheat the taxpayer and undercut honest, hardworking small business owners who lose the chance to compete for contracts,” said Velázquez. 

In one instance, federal investigators looked into a company that had a HUBZone contract with the Army.  In searching for the company’s office, GAO investigators found themselves knocking on the door of a residential trailer in Jacksonville, Alabama.  The trailer’s resident had no connection with the company that claimed the trailer was an office “suite.”  When investigators found and questioned the company’s president some 90 miles away, he produced what was described as a “dubious” rental agreement for the trailer.  Later federal investigators documented that after interviewing the company president, they found a newly installed mailbox in the trailer park bearing the company’s name. 

“In July, the SBA told us they had these problems under control,” Velázquez said.  “But, now, GAO finds dishonest companies deceiving SBA with techniques that an ambitious college intern could detect using Google Earth.   No wonder so many contractors view the HUBZone program as a ‘contract cash cow’ and see SBA’s enforcement efforts as laughable.”    

Lawmakers at today’s hearing said that the influx of new contracts that will be generated by the recently enacted American Recovery and Reinvestment Act would make it all the more important that contacting fraud be addressed.  By some calculations, the HUBZone program could see $3 billion in additional contracts from the economic recovery bill.  

“The economic recovery bill is going to mean an historic amount of federal contracts for important public works project,” said Velázquez.  “However, if we don’t address problems in the HUBZone program, we will also see an historic amount of waste and abuse.”

In July, the GAO found fraud and abuse in the Washington, D.C. area HUBZone program.  At that time, SBA suggested the problems with HUBZone were localized to the D.C. area.  Wednesday’s GAO report, requested by Velázquez, demonstrates that the fraud is nationwide and that the SBA has not taken meaningful steps to prevent fraud in the HUBZone program or even adequately pursue those companies identified in the July report.

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Click here for the GAO report.

Click here for video from today’s hearing.