Census  tracts and nonmetropolitan counties that lose their designation begin a 3- year “redesignation” period during which firms in those areas can  continue to apply to and participate in the program and receive  contracting preferences. After the 3 years,  firms in these areas lose their certified status and the associated federal  contracting award preferences. SBA recertifies firms (that is, determines that firms continue to meet  HUBZone eligibility requirements to participate in the program) every 3  years. SBA Has Made Some Improvements in Response to Identified Weaknesses

Since 2008, GAO has reported on weaknesses in the HUBZone program  and SBA’s efforts to address those vulnerabilities. GAO made 11  recommendations intended to address identified problems associated  with the program’s certification and recertification processes,  communication with firms, and the program’s susceptibility to fraud and  abuse (see app. Certification Process

We reported in June 2008 that, for its certification process, SBA relied on  data that firms entered in the online application system and performed  limited verification of the self-reported information. Consequently  we recommended that SBA develop and implement guidance to more  routinely and consistently obtain supporting documentation upon  application. In response to that recommendation, SBA revised its certification  process, and since 2009 has required firms to provide documentation,  which SBA officials review to determine the firms’ eligibility for the  HUBZone program. For  example, in July 2008 we testified that 10 HUBZone firms in the  Washington, D.C., area had made fraudulent or inaccurate  representations to get into or remain in the HUBZone program, and in a  March 2009 report we found that another 19 firms in four other  metropolitan areas had made fraudulent representations. In March 2016, we found that SBA had not yet implemented additional  controls (such as guidance for when to request supporting documents) for  the recertification process because SBA officials believed that any  potential risk of fraud would be mitigated by site visits to firms. Based on data that SBA  provided, the agency visited about 10 percent of certified firms each year  during fiscal years 2013–2015. According to SBA officials, as of February 2017 this change has not yet  eliminated the backlog. Notification to Firms

We subsequently reported in February 2015 that while HUBZone  designations can change with some frequency, SBA’s communications to  firms about programmatic changes (including redesignation) generally  had not been targeted or specific to firms that would be affected by the  changes. However, we found in March 2016 that SBA had not yet implemented changes to better ensure that all currently certified firms  would be notified of changes that could affect their program eligibility. As of February 2017, SBA had begun to improve its notifications to all  firms. We will continue to monitor SBA’s implementation of  this activity. We plan to continue to evaluate elements of the HUBZone program. We classify each recommendation as partially implemented (the agency took steps to implement the  recommendation but more work remains); open (the agency has not taken steps to implement the  closed, not implemented (the agency decided not to take action to  implement the recommendation). GAO recommendations  Small Business Contracting: Opportunities Exist to Further Improve HUBZone Oversight: GAO-15-234, February 12, 2015  Establish a mechanism to better ensure that firms are notified of changes to HUBZone designations that  may affect their participation in the program, such as ensuring that all certified firms and newly certified firms  are signed up for the broadcast e-mail system or including more specific information in certification letters  about how location in a redesignated area can affect their participation in the program  Conduct an assessment of the recertification process and implement additional controls, such as developing  criteria and guidance on using a risk-based approach to requesting and verifying firm information, allowing  firms to initiate the recertification process, and ensuring that sufficient staff will be dedicated to the effort so  that a significant backlog in recertifications does not recur.
Why GAO Did This Study

The purpose of the HUBZone program is to stimulate economic development in economically distressed areas designated as HUBZones. SBA certifies small business firms located in HUBZones to participate in the HUBZone program—that is, determines they are eligible for federal contracting preferences under the program, such as awards of sole-source and set-aside contracts. HUBZone areas lose their designations when they no longer meet applicable criteria on economic conditions and enter a 3-year transitional period (“redesignation”) during which HUBZone firms can continue to apply to and participate in the program. HUBZone firms had almost $6.6 billion in obligations on active federal contracts for calendar year 2015.
This testimony discusses, among other things, areas of weaknesses that GAO previously identified in reviews and fraud investigations of the program, related recommendations, and SBA's actions to address them. This statement is based on GAO's body of work issued between June 2008 and September 2016. GAO also met with SBA officials in February 2017 to discuss the status of open recommendations.
Since 2008, GAO has made 11 recommendations to improve the HUBZone program. SBA has implemented seven of these recommendations, not implemented two and is in the process of implementing the other two.

What GAO Found

The Small Business Administration (SBA) designates economically distressed areas as Historically Underutilized Business Zones (HUBZones), based on data such as unemployment and poverty rates. Since 2008, GAO has issued several products that identified weaknesses in the HUBZone program and made recommendations to SBA to address them. While weaknesses remain, SBA has taken some steps to enhance program processes to varying extents. For example,
Certification process. In 2008, GAO found that SBA performed limited verification of the information firms reported on applications. In response to GAO's recommendation to develop and implement guidance for the certification process, SBA has taken steps to improve its processes to verify the eligibility of firms applying to the program. Since fiscal year 2009, SBA has required firms to provide supporting documentation for applications that the agency then reviews.
Susceptibility to fraud and abuse. In 2008 and 2009, GAO's investigations found 29 HUBZone firms in five metropolitan areas made fraudulent or inaccurate representations, which allowed them to get into or remain in the program. In response to GAO's recommendations to address potential fraud, SBA increased its documentation requirements. But in 2010, GAO still was able to obtain HUBZone certification using bogus addresses. Subsequently, according to SBA officials, in fiscal year 2010 SBA began conducting site visits to 10 percent of certified firms.
Recertification process. Firms wishing to remain in the program must recertify their continued eligibility to SBA every 3 years. However, in 2015, GAO found that SBA had not required firms seeking recertification to submit any information to verify continued eligibility and instead simply relied on their attestations of continued eligibility. GAO recommended that SBA reassess its recertification process and add additional controls. As of February 2017, SBA had not yet implemented this recommendation.
Communications with firms about designations. GAO found in 2015 that SBA's communications to firms about programmatic changes (including redesignation) generally were not specific to affected firms and thus some firms might not have been informed they would lose eligibility. GAO recommended that SBA establish a better notification mechanism. In response, SBA revised its letters to newly certified firms to inform them of the consequences of redesignation, and as of February 2017, SBA was implementing additional steps to ensure that all currently certified firms would be notified of changes that could affect their program eligibility.