To participate in the  HUBZone program, small business firms generally must meet certain  criteria established by the SBA, most notably: (1) the firm must be at least  51 percent owned and controlled by one or more U.S. citizens; (2) at least  35 percent of its employees must live in a HUBZone; (3) the principal  office (i.e., the location where the greatest number of qualifying employees  perform their work) must be located in a HUBZone; and (4) the firm must  qualify as a small business under the size standard that corresponds with  its primary industry classification. In July 2008, we testified that SBA’s lack of controls over the HUBZone  program exposed the government to fraud and abuse. Specifically, we  identified substantial vulnerabilities in SBA’s application and monitoring  process by demonstrating the ease of obtaining HUBZone certification. In addition, we also identified 10 firms from the Washington, D.C.,  metro area that were participating in the HUBZone program even though  they clearly did not meet eligibility requirements. Selected Case Studies of Fraud and Abuse Outside the Washington, D.C., Metro Area

HUBZone program fraud and abuse continues to be problematic for the  federal government. We identified 19 firms in the states of Texas, Alabama,  and California participating in the HUBZone program even though they  clearly do not meet program requirements. In fiscal years 2006 and 2007, federal  agencies had obligated a total of nearly $30 million to these firms for  performance as the prime contractor on federal HUBZone contracts. Our investigation found that the  purported principal office was in fact a residential trailer in a trailer park. For the HUBZone program this would  mean (1) front-end controls at the application stage, (2) fraud detection  and monitoring of firms already in the program, and (3) the aggressive  pursuit and prosecution of individuals committing fraud. Further, SBA did not adequately field test its interim process for  processing applications. If it had done so, SBA would have known that it  did not have the resources to effectively carry out its review of  applications in a timely manner. As a result, SBA had a backlog of about  800 HUBZone applications as of January 2009. At that time, SBA officials  stated that it would take about 6 months to process each HUBZone  application—well over the 1 month goal set forth in SBA regulations. SBA Has Initiated Some Enforcement Actions Against 10 HUBZone Firms Previously Investigated by GAO

SBA has taken some enforcement steps on the 10 firms that we found did  not meet HUBZone program requirements as of July 2008. However,  SBA’s failure to examine some of the most egregious cases we previously  identified has resulted in an additional $7.2 million in HUBZone  obligations and about $25 million in HUBZone set-aside or price  preference contracts to these firms. For example, a construction firm  identified in our July 2008 testimony admitted that it did not meet  HUBZone requirements and was featured in several national publications  by name. It has continually represented itself as HUBZone certified and  has received $2 million in HUBZone obligations and a $23 million  HUBZone set-aside contract since our testimony. Table 2 highlights the 10 firms  that we noted at the July 2008 hearing that clearly did not meet the  HUBZone program requirements, new HUBZone obligations and contracts  these firms received, as well as the actions the SBA has taken against  these firms as of January 2009.
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, GAO identified substantial vulnerabilities in SBA's application and monitoring process that demonstrated the HUBZone program is vulnerable to fraud and abuse. GAO also investigated 10 case studies of HUBZone firms in the Washington, D.C., area that misrepresented their eligibility. GAO was asked to determine (1) whether additional cases of fraud and abuse exist outside of the Washington, D.C., area; (2) what actions, if any, SBA has taken to establish an effective fraud prevention program for the HUBZone program; and (3) what actions, if any, SBA took against the 10 case study firms in GAO's July 2008 testimony. To meet these objectives, GAO identified selected HUBZone firms based on certain criteria, such as magnitude of HUBZone contracts and firm location. GAO also interviewed SBA officials and reviewed SBA data.

What GAO Found

GAO found that fraud and abuse in the HUBZone program extends beyond the Washington, D.C., area. GAO identified 19 firms in Texas, Alabama, and California participating in the HUBZone program that clearly do not meet program requirements (i.e., principal office location or percentage of employees in HUBZone and subcontracting limitations). For example, one Alabama firm listed its principal office as "Suite 19," but when GAO investigators performed a site visit they found the office was in fact trailer 19 in a residential trailer park. The individual living in the trailer had no relationship to the HUBZone firm. In fiscal years 2006 and 2007, federal agencies obligated nearly $30 million to these 19 firms for performance as the prime contractor on HUBZone contracts and a total of $187 million on all federal contracts. Although SBA has initiated steps in strengthening its internal controls as a result of GAO's 2008 testimonies and report, substantial work remains for incorporating a fraud prevention system that includes effective fraud controls consisting of (1) front-end controls at the application stage, (2) fraud detection and monitoring of firms already in the program, and (3) the aggressive pursuit and prosecution of individuals committing fraud. In addition, SBA did not adequately field test its interim process for processing applications. If it had done so, SBA would have known that it did not have the resources to effectively carry out its review of applications in a timely manner. As a result, SBA had a backlog of about 800 HUBZone applications as of January 2009. At that time, SBA's interim application process was taking about 6 months--well over its 1-month goal set forth in SBA regulations. SBA has taken some enforcement steps on the 10 firms previously identified by GAO that knowingly did not meet HUBZone program requirements. However, SBA's failure to promptly remove firms from the HUBZone program and examine some of the most egregious cases from GAO's July 2008 testimony has resulted in an additional $7.2 million in HUBZone obligations and about $25 million in HUBZone contracts to these firms. For example, a construction firm from the July 2008 testimony admitted that it did not meet HUBZone requirements and was featured in several national publications by name. It has continually represented itself as HUBZone certified and has received $2 million in HUBZone obligations and a $23 million HUBZone set-aside contract since the July 2008 testimony.