	Background

The HUBZone program was established by the HUBZone Act of 1997 to  stimulate economic development by providing federal contracting  preferences to small businesses operating in economically distressed  communities known as HUBZones. Moreover, certified HUBZone firms  competing for government contracts must verify in the government’s  Online Representations and Certifications Application (ORCA) that there  have been “no material changes in ownership and control, principal office,  or the percentage of employee’s living in a HUBZone since it was certified  by the SBA.” Firms and individuals who misrepresent their eligibility  during the application process or while participating in the program are  subject to civil and criminal penalties; decertification from the HUBZone  program; or debarment from all federal contracts. SBA’s HUBZone Certification Process Remains Vulnerable to Fraud and Abuse

The SBA continues to struggle with reducing fraud risks in its HUBZone  certification process despite reportedly taking steps to bolster its controls. The SBA lost documentation for our fourth application on  multiple occasions, forcing us to abandon our application. Our testing  revealed that the SBA does not adequately authenticate self-reported  information—especially as it pertains to information regarding whether a  firm’s principal office location meets program requirements. For example,  for our successful firms, we used the addresses of the Alamo, a public  storage facility in Florida, and a city hall in Texas as our principal office  locations—locations that a simple Internet search could have revealed as  ineligible for the program. The SBA took at least  7 months to process each of the three applications from our bogus  companies that it certified. SBA’s increased processing times failed to prevent our fraudulent firms  from being certified. Specific details about each of our fraudulent applications are reported  below. For the principal  office location, we used the address of the Alamo, a National Historic  Landmark in Texas. We fabricated these documents  using publicly available materials and software and submitted them to the  SBA. Fictitious Application 3: After 7 months of processing, SBA approved  this bogus firm for HUBZone participation. Again, the  agency told us that it did not receive the documentation and subsequently  gave us one day to resubmit it. SBA Has Taken Some Actions on the 29 HUBZone Firms Previously Investigated by GAO

As of March 2010, the SBA has reviewed the status of all 29 firms we  referred to it from our prior HUBZone investigations. Since our March  2009 report, these firms have received more than $66 million in federal  obligations for new contracts. Of the 29 firms,  16 were decertified by the SBA, 8 voluntarily withdrew from the HUBZone  program, and 5 were found by the agency to be in compliance with  program requirements and remain certified. We did not attempt to verify  SBA’s work. And although SBA indicated that firms sometimes come in  and out of compliance while in the program, we maintain that the firms  represented in the cases that the SBA reviewed and determined to meet  HUBZone program requirements were out of compliance at the time of our  review. Tables 1 and 2  below show the results of the SBA’s review of the 29 firms we referred  from our July 2008 testimony and March 2009 report. Because the SBA did not promptly suspend or debar the firm, this firm  was able to receive nearly $600,000 in additional noncompetitive 8(a)  contracts since our last report. According to SBA officials, SBA has  recently proposed debarment for this firm. In  addition, this report will also be available at no charge on GAO’s Web site  at http://gao.gov.
Why GAO Did This Study

The Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. In July 2008 and March 2009, GAO reported on substantial vulnerabilities to fraud and abuse in the HUBZone application and monitoring process. GAO also found 10 HUBZone firms in the Washington, D.C., area and 19 firms in four other metropolitan areas in Alabama, California, and Texas that made fraudulent or inaccurate representations to get into or remain in the HUBZone program. Given the Committee's continued concern over fraud and abuse in the HUBZone program, GAO (1) performed additional proactive testing of SBA's HUBZone certification process, and (2) determined whether SBA has taken any actions against the 29 case study firms GAO identified in its prior work. Using publicly available resources to fabricate documents, GAO proactively tested SBA's application process by applying for HUBZone certification for four bogus businesses with fictitious owners and employees. GAO also interviewed SBA officials and reviewed SBA data about the 29 case study firms. GAO did not attempt to project the extent of fraud and abuse in the program nor systematically assess HUBZone program controls.

What GAO Found

The HUBZone program remains vulnerable to fraud and abuse. Using falsified documents and employee information, GAO obtained HUBZone certification for three bogus firms using the addresses of the Alamo in Texas, a public storage facility in Florida, and a city hall in Texas as principle office locations. A simple Internet search by SBA could have revealed these as phony applications. While the agency has required more documentation in its application process since GAO's July 2008 report, GAO's testing shows that SBA does not adequately authenticate self-reported information and, for these cases, did not perform site visits to validate the addresses. Further, the changes have significantly increased the time it takes SBA to process applications. Specifically, SBA took 7 or more months to process each of the bogus applications--at least 6 months longer than for GAO's previous investigations. SBA continually lost documentation for GAO's fourth application, and eventually withdrew it after GAO failed to resubmit the same materials for the fourth time. On its Web site, SBA reported that applicants are experiencing delays during the application process. SBA has taken some action on most of the 29 firms that GAO previously reported did not meet HUBZone program requirements. The SBA decertified 16 firms from the HUBZone program, and another 8 firms voluntarily withdrew. While GAO maintains all 29 firms did not meet requirements at the time of its review, SBA stated that the other 5 firms were in compliance at the time of its own review and so remain certified. Since GAO's March 2009 report, 17 of the 29 companies have received more than $66 million in federal obligations for new contracts. GAO recently reported that one firm has also defrauded the SBA 8(a) program. Because the SBA did not promptly debar the firm from federal contracts, it was able to fraudulently receive an additional $600,000 in noncompetitive 8(a) federal contracts since GAO's last report. SBA recently proposed debarring this firm. National Historic Landmark Address (The Alamo) Used by GAO as Principle