The misrepresentations case-study firms made included a firm  whose owner was not a service-disabled veteran, a serviced-disabled  veteran who did not control the firm’s day-to-day operations, a service- disabled veteran who was a full-time contract federal employee at MacDill  Air Force Base, and firms that served as a “pass-through” for large and  sometimes foreign-based corporations. Our investigation found that the owner of the SDVOSB passed  through all of the work for this furniture design and installation contract  to a furniture dealer that his wife worked for, who then passed the work to  a furniture manufacturer that actually designed and installed the furniture. The lack of effective fraud-prevention  controls by SBA and agencies awarding contracts allowed these ineligible  firms to receive approximately $100 million of sole-source or set-aside  SDVOSB contracts over the last several years. The only process in place to detect fraud in the SDVOSB program involves  a formal bid protest process at the SBA, whereby interested parties to a  contract award can protest if they feel a firm misrepresented its small  business size or SDVOSB eligibility in its bid submission. For example, bid- protest decisions do not always result in the termination of contracts with  ineligible firms, even when termination costs would be minimal in cases  where contract work had not begun. Lack of Governmentwide Fraud-Prevention Controls Leaves the Government Vulnerable to Fraud and Abuse

Our 10 case studies clearly show that fraud and abuse exist within the  SDVOSB program. In addition, the SBA and agencies  awarding contracts do not have access to a database listing individuals  that are valid service-disabled veterans. This is especially important in a program like the  SDVOSB program where even firms identified as receiving contracts  through fraud or abuse face no real consequences as discussed below. Recommendations for Executive Action

In an effort to minimize the potential for fraud and abuse in the Service- Disabled Veteran-Owned Small Business (SDVOSB) program and to assure  that legitimate service-disabled veterans and their firms reap the benefits  of this program, we recommend that the Administrator of the Small  Business Administration (SBA) and the Secretary of the Veterans Affairs  (VA) coordinate with the Office of Federal Procurement Policy (OFPP) to  explore the feasibility of  expanding the use of the VA VetBiz “verified” database  governmentwide for purposes of validating all SDVOSB eligible firms  for contracting and,  requiring that all contractors who knowingly misrepresent their status  as an SDVOSB be debarred for a reasonable period of time. While we acknowledge that there are shared responsibilities between SBA  and agency contracting officers when attempting to prevent fraud in the  SDVOSB program, we do not agree that SBA does not have responsibility  or authority to develop and implement a process to provide reasonable  assurance that only eligible SDVOSB firms are awarded set aside and sole  source SDVOSB contracts. We also reviewed allegations of fraud and  abuse sent to our fraud hotline, FraudNET. For the purposes of our investigation, we defined a  case as one or more affiliated firms or joint ventures that obtained an  SDVOSB contract. To assess overall  program vulnerabilities, we reviewed relevant laws and regulations  governing the SDVOSB program. To determine whether the program has effective fraud-prevention controls  in place, we interviewed agency officials from SBA, the Department of  Veterans Affairs (VA), and various agency contracting officials about their  responsibility over the program and controls currently in place to prevent,  detect, and monitor fraud and abuse.
Why GAO Did This Study

The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2007, the Small Business Administration (SBA) reported $4 billion in governmentwide sole source and set aside SDVOSB contract awards. Given the amount of federal contract dollars being awarded to SDVOSB firms, GAO was asked to determine (1) whether cases of fraud and abuse exist within the SDVOSB program, and (2) whether the program has effective fraud-prevention controls in place. To identify whether cases exist, GAO reviewed SDVOSB contract awards and protests since 2003, and complaints sent to our fraud hotline. GAO defined a case as one or more affiliated firms who were awarded one or more SDVOSB contracts. To assess fraud-prevention controls, GAO reviewed laws and regulations and conducted interviews with SBA and Department of Veterans Affairs (VA) officials. GAO did not attempt to project the extent of fraud and abuse in the program.

What GAO Found

GAO found that the SDVOSB program is vulnerable to fraud and abuse, which could result in legitimate service-disabled veterans' firms losing contracts to ineligible firms. The 10 case-study firms identified in this report received approximately $100 million from SDVOSB contracts through fraud or abuse of the program, or both. For example, contracts for Hurricane Katrina trailer maintenance were awarded to a firm whose owner was not a service-disabled veteran. GAO also found SDVOSB companies used as a pass-through for large, sometimes multinational corporations. In another case a full-time federal contract employee at MacDill Air Force Base set up a SDVOSB company that passed a $900,000 furniture contract on to a company where his wife worked, which passed the work to a furniture manufacturer that actually delivered and installed the furniture. GAO found that the government does not have effective fraud-prevention controls in place for the SDVOSB program. Specifically, SBA and agencies awarding SDVOSB contracts do not have processes in place to validate a firm's eligibility for the program prior to bid submission. SBA and contracting agencies also currently do not have a database of individuals that are service-disabled veterans, a key eligibility requirement for the program. According to VA, it is developing a database, called VetBiz, of validated SDVOSBs, but currently it is only used for contracting by the VA. SBA's bid-protest process is the only governmentwide control over the SDVOSB program. However, although ineligible firms have been identified through bid protests, firms found ineligible do not face real consequences, can be allowed to complete the contracts received, and are not suspended or debarred.