	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 Texas, Alabama, and  California participating in the HUBZone program even though they clearly  do not meet program requirements (i.e., principal office location or  percentage of employees residing in the HUBZone and subcontracting  limitations). Although we cannot conclude whether this is a systemic  problem based on these cases, the issue of misrepresentation clearly  extends beyond the Washington, D.C., metropolitan area where we  conducted our initial investigation. In fiscal years 2006 and 2007, federal  agencies had obligated nearly $30 million to these 19 firms for  performance as the prime contractor on federal HUBZone contracts. When a firm subcontracts the majority  of its work to other non-HUBZone firms, it is undermining the HUBZone  program’s stated purpose of stimulating development in economically  distressed areas, as well as evading eligibility requirements for principal  office and 35 percent residency requirement. In addition, our  investigation found that no employees were located at the location listed  as a principal office. SBA Has Not Incorporated Effective Fraud Controls

Our June 2008 report and July 2008 testimony clearly showed that SBA  did not have effective internal controls related to the HUBZone program. To that end, SBA has hired business consultants and  reached out to GAO in an attempt to identify control weaknesses in the  HUBZone program and to strengthen its fraud prevention controls. As of  the end of our fieldwork, SBA did not have in place the key elements of an  effective fraud prevention system. 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) decertification from the program of ineligible firms  and the aggressive pursuit and prosecution of individuals committing  fraud. Detection and monitoring. We reported in June 2008 that  the mechanisms SBA used to monitor HUBZone firms provided limited  assurance that only eligible firms participate in the program. Investigation and prosecution. 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. In the written statement for the July 2008 hearing, the Acting  Administrator of SBA stated that SBA would take “immediate steps to  require site visits for those HUBZone firms that have received HUBZone  contracts and will be instituting suspension and debarment proceedings  against firms that have intentionally misrepresented their HUBZone  status.” However, as of February 2009, according to SBA’s Dynamic Small  Business Web site, 7 of the 10 firms that we investigated were still  HUBZone certified. SBA officials stated that no  action will be taken on 3 firms because SBA’s program evaluations  concluded that these firms met all the eligibility requirements of the  HUBZone program.
Why GAO Did This Study

Created in 1997, the HUBZone program provides federal contracting assistance to small businesses in economically distressed communities, or HUBZone areas, with the intent of stimulating economic development in those areas. On July 17, 2008, we testified before Congress that SBA's lack of controls over the HUBZone program exposed the government to fraud and abuse and that SBA's mechanisms to certify and monitor HUBZone firms provide limited assurance that only eligible firms participate in the program. In our testimony, we identified 10 firms from the Washington, D.C., metropolitan area that were participating in the HUBZone program even though they clearly did not meet eligibility requirements. Of the 10 firms, 6 did not meet both principal office and employee residency requirements while 4 met the principal office requirement but significantly failed the employee residency requirement. We reported in our July 2008 testimony that federal agencies had obligated a total of nearly $26 million in HUBZone contract obligations to these 10 firms since 2006. After the hearing, Congress requested that we perform a follow-on investigation. We describe the results of this investigation and further background about the HUBZone program in a companion report that is being made public today. This testimony will summarize our overall findings. Specifically, this testimony will address (1) whether cases of fraud and abuse in the program exist outside of the Washington, D.C., metro area; (2) what actions, if any, SBA has taken to establish an effective fraud prevention system for the HUBZone program; and (3) what actions, if any, SBA has taken on the 10 firms that we found misrepresented their HUBZone status in July 2008.

What GAO Found

In summary, we found that fraud and abuse in the HUBZone program extends beyond the Washington, D.C., area. We 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). 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 to strengthen its internal controls as a result of our 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. SBA has taken some enforcement steps on the 10 firms previously identified by GAO that knowingly did not meet HUBZone program requirements. However, as of February 2009, according to SBA's Dynamic Small Business Web site, 7 of the 10 firms that we investigated were still HUBZone certified. SBA's failure to promptly remove firms from the HUBZone program and examine some of the most egregious cases from our testimony has resulted in an additional $7.2 million in HUBZone obligations and about $25 million in HUBZone contracts to these firms.