Subscribe to Inc. magazine
GROW

SBA Awards $66 Million to Ineligible Businesses

Among other missteps, the SBA approved a bogus HUBZone application for a company that listed the Alamo as its address, according to a government audit.

Daniel Schwen

The Alamo in San Antonio, Texas, USA

Advertisement

Wondering why you didn't get that government contract? Federal auditors suggest it may have gone to a business that didn't actually qualify for it.

A new Government Accountability Office report says it's shockingly easy to get the Small Business Administration to grant HUBZone certification, making a business eligible for the billions of federal contract dollars awarded to firms in Historically Underutilized Business Zones. Investigators submitted bogus applications to the 13-year-old program meant for companies in economically distressed areas and no one batted an eyelid – even though one of the companies, the fictitious Crockett & Associates, listed its address as the Alamo fort in Texas. 

On top of that, the government last year awarded $66 million in federal contracts to 29 companies identified in previous audits as wrongly participating in the program. To qualify for the program, companies must be located in a distressed or disadvantaged neighborhood, and must meet the government's definition of a small business, which varies by industry. In addition, 35 percent of the company's employees must live in the zone. Last year nearly $3 billion in contracts was awarded to companies participating in the program.

"We saw a lot of fraud in the program," Matt Valenta, the GAO's assistant director for Forensic Audits and Special Investigations, told the Los Angeles Times.

This is the third year in a row Valenta and his team have submitted fake applications to the SBA. (This year they submitted four). The agency approved all but one of these fake applications; the SBA repeatedly lost the documentation for the one failed application, forcing the "company" to abandon its bid for funding.

GAO auditors also found that the SBA now takes at least seven months to approve an application when the process used to take about two weeks.  However, "SBA's increased processing times failed to prevent our fraudulent firms from being certified," the report notes. The other two companies whose applications were approved listed their addresses as in a Texas city hall and a Florida public storage facility."

Joseph Jordan, the SBA's associate administrator of government contracting and business development, said the agency has been working to improve its fraud detection since problems first were identified in 2008. Site visits to see if a company really is located where it says it is have increased. By the end of this year, officials will have visited 1,000 of the some 10,000 companies participating in the program, Jordan said. Not all of the visits are unannounced, though.

Jordan labelled the GAO report unfair, saying the bogus applications were "expert forgeries." (The report says investigators used publicly-available software to fabricate supporting documents, such as copies of tax returns for the bogus companies, copies of leases, and a recent utility bill. It also points out that a simple Internet search would have uncovered that the Alamo address, in particular, was false.)

The agency's fraud problems "are not going to be fixed overnight," Jordan said. "We're working hard on this."

SBA administrator Karen Mills said the agency would begin punishing fraudulent companies, including civil fraud actions and false claims actions with the Justice Department. She also said that when a company signs a HUBZone contract it's under penalty of perjury and the contract must be notarized.

"If we don't punish the bad actors, people will not be deterred," Mills said. "We have aggressively added staff to the HUBZone oversight function. We have a position and specific actions that have been implemented that we will not tolerate fraud and abuse."

Last updated: Aug 11, 2010

COURTNEY RUBIN

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: