GAO: Small Firms Collected Tens of Millions From False Claims

Companies collected tens of millions of dollars in government contracts by claiming to have main offices in poor neighborhoods that were actually empty duplexes, part-time offices and other ineligible locations, congressional investigators charge.

Billions more remain at risk because the Small Business Administration doesn't usually check paperwork, rarely conducts audits and is slow to kick out firms that are no longer eligible for the $8 billion in special contract set-asides for small businesses, the Government Accountability Office said.

A pair of GAO reports, obtained Wednesday by The Associated Press, examined SBA's Historically Underutilized Business Zone (HUBZone) program, which was created in 1997 to help thousands of small firms in distressed areas.

To be eligible, companies fill out applications attesting to the fact that their principal office -- where the greatest number of employees work -- is in a designated HUBZone and that at least 35 percent of the firm's full-time employees live in that area.

The GAO's review of 125 applications submitted in September 2007 found the SBA asked for supporting evidence of a firm's eligibility claims only one-third of the time; the agency conducted a site visit only once to verify whether an office actually existed.

In all, SBA conducted audits on 5 percent of the total 13,000 HUBZone firms from 2004-2007; when it did conduct an audit, more than half of the firms on average were deemed ineligible.

In the Washington D.C., area, the GAO found 10 out of 17 certified HUBZone firms it investigated failed to maintain minimum employee requirements or falsely claimed principal locations in places such as a dentist's office. Those firms, providing services from engineering to information technology, were awarded $105 million in preferential contracts in 2006-2007 from the Pentagon, Veterans Affairs and Health and Human Services -- based at least in part on their HUBZone status.

Also improperly certified were four bogus firms set up by the GAO claiming fake principal locations in HUBZone areas that were actually a Starbucks coffee shop, ineligible P.O. box addresses, or "virtual offices" consisting of part-time space.

SBA approved each of the four firms with few questions within two to five weeks.

"You have to wonder about the Bush administration and its commitment to disadvantaged communities, when all it takes for wealthy individuals to access billions of dollars in federal contracts is a $10 P.O. Box and a bottle of Wite-out," said Rep. Nydia M. VelDazquez, D-N.Y., who chairs the House Committee on Small Business and requested the reports.

Her committee plans to hold a hearing Thursday examining the HUBZone program.

Responding, the SBA agreed with the GAO's findings and said it was undergoing a complete review of its HUBZone program to identify ineligible companies and suspend those that falsely represented themselves. For example, the agency was asking staff to take a second look at all HUBZone firms that won government contracts and to conduct on-site visits as necessary.

Companies are being sent letters notifying them that they may be subject to random checks to recertify status. SBA also will now be requiring firms when they apply for HUBZone status to submit supporting documentation, Fay E. Ott, SBA's associate administrator of government contracting, said in a telephone interview.

Ott said the agency would adopt new staff guidance as to when to seek supporting paperwork, hire more people to help conduct checks and conduct a nationwide audit to determine if ineligible firms outside the D.C. area improperly received contracts.

"We're holding our staff accountable and holding HUBZone firms accountable," she said.

The GAO said it had referred the 10 cases it found ineligible to the SBA's inspector general. Among those cited by the investigators:

--Quantum Dynamics Inc.: Army contract worth up to $40 million, $3.9 million obligated so far. Company claimed a principal D.C. address in HUBZone application that was a small room on the upper floor of a dentist's office where no more than two people could work comfortably; the building owner said nobody had worked there "for some time." The company's Web site said its headquarters is in McLean, Va., described by the GAO as one of the wealthiest areas in the U.S.; most of the firm's officers and half the employees worked there.

--Platinum One Contracting Inc.: Various government contracts, including the Air Force, worth $12.2 million. Company claimed HUBZone address in Landover, Md., that was one-half of a residential duplex; no employees were found during normal business hours. Only four of its 34 employees, or 12 percent, lived in a HUBZone. Firm declared itself "HUBZone certified" on its Web site even after an officer acknowledged to investigators the firm didn't meet requirements. Main office is actually in Capitol Heights, Md., which isn't a HUBZone.

"We found that all 10 of these case-study firms continued to represent themselves ... as eligible to participate in the HUBZone program. Because the 10 case-study examples clearly are not eligible, we consider each firm's continued representation indicative of fraud," investigators wrote.

Several phone and e-mail messages left at Quantum Dynamics and Platinum One were not immediately returned Wednesday.

The GAO reports are the latest to document problems in the award of contracts and government aid to small businesses

Previous audits have highlighted problems in which large companies receiving contracts were improperly coded as small firms, skewing government statistics to suggest a better outcome. A report by the SBA inspector general as early as 2003, meanwhile, reported that the agency's internal controls were inadequate to ensure that only eligible firms were allowed to participate in the HUBZone program.