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74–304 2012

MISREPRESENTATION AND FRAUD: BAD ACTORS 

IN THE SMALL BUSINESS PROCUREMENT 

PROGAMS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS, 

OVERSIGHT AND REGULATIONS 

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

OCTOBER 27, 2011 

Small Business Committee Document Number 112–042 

Available via the GPO Website: www.fdsys.gov 


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C O N T E N T S 

OPENING STATEMENTS 

Page 

Coffman, Hon. Mike ................................................................................................. 1 

WITNESSES 

Peggy E. Gustafson, Inspector General, US Small Business Administration, 

Washington, DC ................................................................................................... 2 

Brian Miller, Inspector General, US General Services Administration, Washington, DC ............................................................................................................. 4 

APPENDIX 

Prepared Statements: 

Brian Miller, Inspector General, US General Services Administration, 

Washington, DC ............................................................................................ 14 

Peggy E. Gustafson, Inspector General, US Small Business Administration, Washington, DC ................................................................................... 19 

Questions for the Record: 

Chairman Coffman Questions for Inspector General Gustafson .................. 28 

Chairman Coffman Questions for Inspector General Miller ......................... 31 

Answers for the Record: 

Inspector General Gustafson Response to Chairman Coffman Questions 

for the Record ................................................................................................ 34 

Inspector General Miller Response to Chairman Coffman Questions for 

the Record ...................................................................................................... 44 


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MISREPRESENTATION AND FRAUD: BAD ACTORS IN THE SMALL BUSINESS PROCUREMENT PROGRAMS 

THURSDAY, OCTOBER 27, 2011 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INVESTIGATIONS, 

OVERSIGHT AND REGULATIONS, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Mike Coffman (chairman of the subcommittee) presiding. 

Present: Representatives Coffman and West. 

Chairman COFFMAN. The federal government has a goal of 

awarding 23 percent of prime contract dollars to small businesses, 

and subzones for the HUBZone, women-owned, service-disabled 

veterans-owned, and small disadvantaged small businesses. Congress created these programs out of a belief that small business 

contracting benefits us all. Small business contracting reduces 

prices by encouraging competition, promotes innovation, strengthens the industrial base, and creates jobs. These programs do create 

real opportunities. 

Last year, the small businesses won over $109 billion in prime 

contracts, which is about 20.3 percent of the $538 billion in prime 

contracts awarded last year. However, just as we all benefit from 

small business prime contracting, we all suffer when fraud rears its 

ugly head. Legitimate small businesses lose the ability to perform 

when contracts go to firms that did not qualify for or who are not 

following the rules associated with small business contracting programs. The government suffers from this fraud because bad actors 

give all small businesses a bad name. So contracting officers are 

more reluctant to use the small business programs, which in turn 

results in less competition and a less vibrant industrial base. 

Finally, the American people suffer. Small businesses create two 

out of every three new jobs, so when contracts go to false small 

businesses, fewer jobs are created. 

We are here today to learn about the depth and scope of fraud 

in the small business programs and how we can better ensure compliance. One need only pick up a newspaper to read about scandals 

in the procurement system. The Inspector General and Government Accountability Office reports enumerate the lack of controls 

in oversight in these programs and the reluctant—and the result 


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and abuse of these programs. Sadly, fraud in the small business 

program often seems to go unpunished and unprosecuted. 

We have with us today the inspectors general from the Small 

Business Administration, which is charged with maintaining the 

integrity of the small business programs and the General Services 

Administration, which has contracting as its primary mission. 

Given their expertise, I believe they will help us understand how 

we can do a better job protecting opportunities for legitimate small 

businesses by catching and prosecuting those that seek to exploit 

these programs. 

I now yield—well, the ranking member is not here. 

[The information follows:] 

STATEMENTS OF THE HONORABLE PEGGY E. GUSTAFSON, INSPECTOR GENERAL, U.S. SMALL BUSINESS ADMINISTRATION; THE HONORABLE BRIAN MILLER, INSPECTOR GENERAL, UNITED STATES SMALL BUSINESS ADMINISTRATION 

Chairman COFFMAN. Let us see. What is the order? The Honorable Peggy Gustafson. Did I pronounce it right? 

Ms. GUSTAFSON. It is Gustafson, Mr. Chairman. 

Chairman COFFMAN. Gustafson. 

Ms. GUSTAFSON. Yes, thank you. 

Chairman COFFMAN. Okay, close. Who has served as SBA inspector general since October 2, 2009. She also presently serves as the 

Legislation Committee chair for the Council of Inspectors General 

on Integrity and Efficiency and is a member of CIGIE, again, the 

Council of Inspectors General on Integrity and Efficiency, the Executive Council. Inspector General Gustafson—get it closer?—— 

Ms. GUSTAFSON. Yes. 

Chairman COFFMAN [continuing]. Has considerable experience 

rooting out fraud, waste, and abuse, having served as general counsel in the Missouri State Auditor’s Office as an assistant prosecuting attorney for Jackson County, Missouri; as chair of the Insurance Fraud Task Force; and as an assistant county counselor for 

Jackson County. Ms. Gustafson. 

STATEMENT OF PEGGY E. GUSTAFSON 

Ms. GUSTAFSON. Thank you, Chairman Coffman. Thank you very 

much. And thank you for the opportunity to be here today and for 

your continued support of the work of my office. I am proud to represent the dedicated men and women of the Small Business Administration Office of Inspector General. 

SBA plays a crucial role in ensuring that small businesses gain 

access to federal contracting opportunities. The agency is responsible for ensuring that the government-wide goal for participation 

of small business concerns is established annually and for reporting 

the agency’s achievements relative to that goal. As you know, the 

current goal for the federal government is that 23 percent of prime 

contract dollars be awarded to small businesses. 

My office’s reviews continue to identify procurement flaws that 

allow large firms to obtain small business awards. In fact, this 

issue is identified by my office as a top management challenge for 

the agency and has been for several years. Our audits and other 

studies have shown significant misreporting by procuring agencies 


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with many contract awards reported as going to small firms while 

actually being performed by larger companies. The SBA itself is not 

immune from such activity. 

My written statement provides a summary account of a significant sole source 8(a) IT contract that was awarded by SBA to a 

small business but which basically served as a pass-through to buy 

the products of large businesses. The audit found that SBA did not 

adequately plan the procurement, they split the procurement to circumvent sole source limits, inaccurately reported the contract data 

to FPDS (Federal Procurement Data System), and awarded the 

contract on a sole source basis even though it did not qualify as an 

8(a) procurement to be ordered sole source. 

These misrepresentations I think should not be viewed as insignificant occurrences because our work continues to show that these 

signs are often the tip of the iceberg. 

Several weeks ago an investigation conducted by my office with 

several interagency partners, including the FBI, resulted in the arrest of four individuals. These individuals have been implicated in 

what has been described by Department of Justice officials as one 

of the most brazen corruption schemes in the history of federal contracting. This investigation actually began as an investigation into 

another business’ misrepresentation of HUBZone status and of 

being a service-disabled veteran-owned small business, and it led 

to the discovery of an alleged bribery, kickback, and money laundering scheme that has resulted in the arrests of two U.S. Army 

Corps of Engineers and two co-conspirators on October 4th of this 

month. They have been charged in an indictment that accuses 

them of taking part in a conspiracy involving at least $20 million 

in bribes and kickback payments and the planned steering of a 

$780 million government contract to a favored contractor who participates in the 8(a) program. 

The indictment details schemes to defraud two major federal con- tracts which have a combined value of about $1.78 billion. The first 

contract is a U.S. Army Corps of Engineers TIGER contract, which 

is what is known as an indefinitely quantity—pardon me—indefinite delivery, indefinite quantity contract, which I will call IDIQ 

from now on because it is easier. Over the five-year term the total 

award of orders placed against this TIGER contract is authorized 

to exceed a billion dollars. EyakTek, an Alaska Native-owned small 

business based in Dulles, Virginia, was the prime contract for the 

TIGER contract and subcontracted many of the orders from this to 

other businesses. 

The other contract in this scheme is called the CORES contract, 

and it was envisioned as an alternative or potential replacement 

for the TIGER contract. The CORES contract, had it gone through, 

would have been a five-year contract with a task order ceiling of 

$780 million. The indictment alleges that the four defendants 

worked with a chief technology officer of a company known as Company A, which is also an 8(a) firm, to devise a scheme to steer the 

award of this CORES contract to Company A. The intent was to 

use this contract as a way for Company A to funnel federal money 

and other things of value directly and indirectly to the defendants 

and other co-conspirators. Although the investigation is ongoing, 

the arrests to date have effectively dismantled the group responVerDate Mar 15 2010 03:57 Jun 16, 2012 Jkt 074304 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HR\OC\A304.XXX A304

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sible for perpetuating this fraud against American taxpayers. And 

my understanding is actions to seek appropriate suspension or debarment for the parties responsible for this conspiracy are underway. 

I want to assure you that my office intends to join our partners 

and evaluate the internal controls and regulations involved in the 

contracts that are at issue here and make any necessary recommendations to our agencies or to Congress to prevent such fraud 

schemes from being successful in the future. 

Again, thank you very much for inviting me to speak with you 

today, and I am looking forward to your questions. 

[The statement of Ms. Gustafson follows:] 

Chairman COFFMAN. Thank you. Our second witness is The Honorable Brian Miller, who has served as the General Services Administration’ s Inspector General since 2005. He previously spent 

15 years with the Department of Justice, including time as the Assistant U.S. Attorney for the Eastern District of Virginia, where he 

had considerable experience with procurement and grant fraud. 

Mr. Miller has received notable recognition for his service as inspector general, having been recognized by—okay, there we go— 

Ethisphere Magazine, as the 12th Most Influential Personal in 

Business Ethics by a worldwide panel of experts. 

I want to thank you both for being here today. Mr. Miller, go 

ahead with your testimony, please. 

STATEMENT OF BRIAN MILLER 

Mr. MILLER. Thank you, Mr. Chairman. 

Good morning, Chairman Coffman and distinguished members. 

Thank you for inviting me here to testify this morning. 

Let me acknowledge from the outset that I am not an expert in 

small business matters, but my office plays a role in investigating 

small business fraud in the programs administrated by the General 

Services Administration. 

From our investigations we have seen two major types of 

schemes to obtain small business contracts. First, individuals falsely claim to meet small business eligibility requirements, such as 

size. Second, they fraudulently use an eligible small business as a 

pass-through or front so that an ineligible company can perform 

the work and collect most of the taxpayer dollars, usually kicking 

back a small percentage to the eligible small business. 

My office is currently investigating a case jointly with the IG 

from the Small Business Administration and the IG from the Veterans Administration. The indictment alleges that the defendants 

made false statements to meet service-disabled veteran-owned 

small business eligibility requirements. The defendants obtained 

more than $6 million in federal contracts as a service-disabled veteran small business. When the VA began to verify self-certifications, the defendant allegedly created and submitted documents 

that said that the veteran completed three tours in Vietnam and 

received numerous medals and citations. But according to federal 

records, the individual was never classified as a service-disabled 

veteran and was honorably discharged in 1968 after serving as an 

engineer mechanic for five years in the National Guard during 

which time he never left the state on active duty. 


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This kind of fraud derails small business programs. Unfortunately, it is not always possible to find a civil or criminal remedy. 

Prosecutors usually look to loss to the United States. When the 

government has received goods and services, even from an ineligible company, it is very difficult to prove a monetary loss to the 

government. After all, the government did receive goods and services and an adequate product. But there is real loss and real damage to the integrity of the small business programs and lost opportunities underlying those programs, starting with the legitimate 

small business that did not get the contract. 

This harms small businesses and it harms all of us because small 

businesses create jobs. Almost two out of every three new jobs are 

created by small businesses. Because fraudulent self-certifications 

are difficult to detect, dishonest companies expect to get away with 

it. And so a strong penalty is needed to deter those who might be 

tempted to falsely self-certify. The greater the temptation to commit a crime and the smaller the chance of detection, the more severe the penalty must be. A strong penalty will take the profit out 

of crime, which is an idea behind our forfeiture laws and our fraud 

laws. 

The Small Business Jobs Act requires the Small Business Administration to issue regulations that protect innocent individuals 

and small businesses from liability in cases of unintentional errors, 

technical malfunctions, and other blunders. We believe this is very 

important. Given the complexities of many of the rules governing 

eligibility for preferential contracting programs, companies should 

not be punished for innocent mistakes. Our experience, however, 

has shown that we need a significant penalty to deter companies 

that might willfully misrepresent their status in order to obtain 

federal contracts intended for true small businesses. 

Thank you for inviting me here this morning. I would be pleased 

to answer any questions. Thank you. 

[The statement of Mr. Miller follows:] 

Chairman COFFMAN. I want to thank you both again for coming 

today. Let me just start out that when a small business presents 

itself in terms of being eligible for one of these categories like you 

just mentioned, disabled veterans, is there a vetting process whereby the—whether it is GSA or the respective government agency 

checks this information out? Because I know, for instance, a DE214 

is very easy to forge. And so is there some corresponding communication with the Veterans Administration, Department of Defense 

or whatever to see whether the information is accurate in terms of 

eligibility, Mr. Miller and then Ms. Gustafson? 

Mr. MILLER. Well, generally in the federal government, the federal government tends to rely on self-certifications. In the General 

Services Administration, for example, we rely a lot on self-certification by vendors and contractors. And unfortunately, many times 

those self-certifications are not accurate. We did a survey recently, 

our Forensic Auditing Unit looked at self-certifications of products 

that were listed on a GSA schedule that claimed to be environmentally friendly. They had a green seal certificate. Well, we 

checked with the certifying company or organization and we found 

out that 84 percent of those self-certifications were inaccurate. And 

so we let GSA know. They are taking steps to correct it. They are 


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going to try and get the certifications directly from the organization. 

But unfortunately, the federal government does not have—we do 

have limited resources and it is hard to check all the self-certifications. In the case of the service-disabled veteran, the veteranowned small business, the government does rely on self-certifications but the Veterans Administration started to verify those 

self-certifications. And when they went to verify it they did catch 

some misrepresentations, including the one I mentioned in my 

opening statement. But unfortunately, when we are dealing with 

dishonest individuals and companies, when the federal government—whether it is VA or SBA or GSA—when they go back and 

try and verify, a dishonest individual or company may submit 

phony documents as this company did in the case I mentioned. 

They phonied—well, allegedly phonied documents relating to tours 

in Vietnam and medals received and the like. 

Chairman COFFMAN. Ms. Gustafson. 

Ms. GUSTAFSON. Yeah. I think one of the difficulties for even an 

honest small businessman, quite frankly, when it comes to the programs that SBA administers is, you know, you have four major programs. You have the 8(a), women-owned, service-disabled veteran, 

HUBZone. Each one is a different process to get into the program. 

Each one has a different level of vetting being done by the government before you are actually allowed to say I am an 8(a) firm, I 

am a women-owned small business firm. I will tell you that in general the trend is the older the program—for example, 8(a) which 

has been around a long time—it generally seems to be harder to 

get in if you are not honest with that program because the government does do a more stringent kind of review of this stuff that you 

are presenting before they say yes, you can certify as an 8(a). And 

it kind of is a downward trend to the women-owned small business 

program, which is the newest iteration of that program where one 

of the things you can do is submit to a third-party depository the 

documents that you believe would certify you as a women-owned 

small business. Or you could give a pile of documents to a contracting officer who would then have to kind of do the vetting and 

see if really you are accurate. 

And I guess I would suggest to you that that is a very complicated system. And I think it has been found especially through 

the GAO reports. There have been, of course, a series of GAO reports about these programs, not women-owned but the other programs. 

Again, in general, it has been found to be—it is easier to get into 

the programs, as Mr. Miller said, with the self-certifications where 

really the government is relying on the businesses to say yes, I am 

in a HUBZone. Yes, I am trying to keep as many employees in the 

HUBZone as is required. I think that they tend to be easier to get 

into and are harder to detect than the programs where the government had a greater role. But it is a very complicated system. 

And I would add that I do, as the inspector general for the Small 

Business Administration, we certainly think that we, as a government, can do a better job of the vetting and provide better training 

both to the procuring agencies and to the agencies and to the gatekeepers to make sure that they understand these rules, are doing 


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the vetting, and are referring the bad actors for criminal prosecution. I think there is definitely more than can be done. 

Chairman COFFMAN. Well, let me refer this time to Mr. West 

from Florida. 

Mr. WEST. Thank you, Mr. Chairman. Thank you both for being 

here today. 

I am really concerned about the veterans’ thing, being a veteran 

myself and the district that I represent down in South Florida having a lot of veterans. You know, we had the recent decision out of 

the Circuit Court of California where the Stolen Valor Act was 

deemed within someone’s First Amendment rights to go out and 

wear whatever medals and things of that that they wish. And so 

I think that there is this pervasive atmosphere out there of people 

being able to masquerade as veterans and use this program. 

So my concern is you talked about how you work with the Veterans Administration. Are there other databases that you could use 

that help you? Because, you know, self-certification, as the chairman brought up, DD214 is very easy to forget and we see that lots 

of times. Even, you know, the retired ID cards are very easy to 

forge. Are there other databases other than the VA that you could 

use to assist you? 

Mr. MILLER. There are other databases that we do use regularly. 

We have a number of databases in the General Services Administration that we check regularly and we will check against records 

from other agencies against those databases, too. 

Mr. WEST. Do you flag someone? I mean, you know, even if there 

is not, you know, an immediate penalty or criminal prosecution, is 

there a means by which you can flag someone so that if they are 

trying to do this in Georgia then the next thing you know they 

move and they try to do it in South Carolina, North Carolina? 

Mr. MILLER. There is. And, in fact, I have developed an interactive map of the United States with the databases of debarred 

contractors for each state. Now, we do not have links to every state 

because states differ in whether they have a consolidated database 

for debarred contractors or whether they are organized by city. But 

we have links to the states that we can have links to. And we do 

have one for Georgia. 

If you go on the map, and we have it up on our website. If you 

go on the map you can click on Georgia, for example, and that will 

link you into the state debarment database. And I have been pushing this for a number of years because we have come across cases 

where contractors have been debarred in, for example, a highway 

guardrail company was debarred in the state of New Jersey in 

2005 for making defective guardrails, something that is pretty important. After it was debarred in New Jersey, the state of Delaware 

entered into contracts with that company, and then the federal government entered into contracts in Pennsylvania with the same 

company. We caught up with them and in 2007 the CEO and the 

company pled guilty to wire fraud. And even then it took us a year 

to get them on the excluded parties list for the federal database— 

debarment database. So after we came across that case we developed this interactive map and we tried to make it known to as 

many people as we can, including city officials in Atlanta, because 

we had investigated a case in California where a couple of individVerDate Mar 15 2010 03:57 Jun 16, 2012 Jkt 074304 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A304.XXX A304

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uals were selling defective counterfeit smoke alarms. And they 

would get a piece of tape and say certified by Underwriters Laboratory and put it on the back. GSA bought about 20,000 of these. 

They were debarred. They were caught, convicted, debarred. Sometime after that but before they went into the federal prison system 

they sold 15,000 to the Atlanta Fire Department, and they gave 

them out to disadvantaged neighborhoods to have smoke alarms 

and they did not work. They had to do the recall. And I understand 

now they have changed the procurement law for the City of Atlanta 

to require them to check the federal department database and they 

do have our interactive map as well. So checking database is a very 

important—I am sorry to go on about that. 

Mr. WEST. Well, you bring up another—if I may have a little 

more time. What is the gamut, the minimum-maximum of penalty 

or punishment? I mean, that is an impotent deterrent. So, I mean, 

when people come in and let us say I am coming in to apply for 

a service-disabled veteran-owned small business, does someone tell 

me right up front, you know, if you are found out to be defrauding 

the government this is the minimum you can receive? Maximum 

that you can receive? 

Ms. GUSTAFSON. I will give Inspector General Miller a break and 

I will try to address your question. 

There is no question. When you are trying to enter a government 

program and you are making affirmative statements that if true 

were to allow you to be in the program, you are certainly certifying 

to the accuracy of that and subjecting yourself to federal and civil 

penalties. I believe that there is verbiage to some extent on the 

forms that, you know, like a normal legal firm I hereby affirm and, 

you know, know that I could be subject to these penalties. 

But I want to emphasize a couple of things that are very important I think for this system to work. One is that those penalties 

have to be used. And actually, to Inspector General Miller’s point, 

his work on the databases and information sharing is great, but to 

your point, Representative West, first you have to have somebody 

on those lists, which is to say you have to have taken the step to 

suspend them, for example. It is not enough to just—one of the 

things that concerns me about—both, as was just mentioned, how 

once the government started looking closer a lot of people just left 

the program. A lot of businesses just dropped out. The same thing 

happened with the HUBZone program when there was something 

of a scandal when GAO did some very scathing reports about ineligible firms getting HUBZone contracts. When SBA started doing a 

very thorough review and seeing if everybody belonged in the program, people dropped out in droves and that is great but unless— 

they may have gotten contracts already under that and unless— 

and this would be very time intensive—unless we have gone back 

and seen that that has happened and then taken action against 

them, if they are going now and they are in a different program 

or if they were working with the federal government, dropped out, 

and now are trying to do business with Alabama but it was enough 

that they just dropped out, nobody is going to know that. 

So I think that one of the things that I know that both of us 

spoke about in our written statement is the importance of suspension and debarment as a tool. I will tell you that I think it is genVerDate Mar 15 2010 03:57 Jun 16, 2012 Jkt 074304 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A304.XXX A304

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erally—genuinely or generally acknowledge by all the IGs that the 

federal government does not use that tool nearly enough. And to 

your point, it is a very strong tool to use because if you hit a bad 

actor in his pocketbook, that is going to have an effect. And if the 

procuring—if the bad actors in general know the federal government is going after bad actors, that is going to have a deterrent effect as well. But if you are not doing that, it is not. It becomes a 

cost—— 

Mr. WEST. It is Pavlovian. 

Ms. GUSTAFSON. It is a cost of doing business and an unlikely 

one at that. And that is very problematic. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Chairman COFFMAN. If you have—I will come back to you if you 

have any additional questions. 

So is part of the problem the way that these programs are structured? So you take HUBZone. So you have to have some presence 

in a HUBZone. And then the question is, is it somewhat ambiguous 

as to what that, you know, where is the line between fraud versus 

a legitimate presence? You know, and I know on some of the minority contracting, you know, you have a firm that is kind of a front 

and they are really operating for others. But is the line somewhat 

hard to draw in those instances as to what is legitimate and what 

is fraudulent? 

Ms. GUSTAFSON. It is incredibly difficult to draw. HUBZone is an 

excellent example because you do have that—you are dealing with 

a physical location and you have literally—you just have to have 

an intent to have 35 percent of your employees living in that 

HUBZone. First off, that is difficult—do you tell the employees not 

to move? I mean, you cannot do that anyway. And then how would 

you prove a business owner did not have the intent to keep a 35 

presence? That is an incredibly difficult standard. 

And I will tell you that a lot of the referrals that we had gotten 

from GAO after their reports about these HUBZone issues, they 

were declined criminally for that very reason. I honestly, as a 

former prosecutor, do not know how you go in and prove that beyond a reasonable doubt. I just do not know how you do it. 

I think that—but it also must be acknowledged that the very nature of these programs I think argue against very simple rules. I 

think it would be hard to draw incredibly simple rules because you 

get into who controls the company and that is important to know 

because you should have—in an 8(a) program you should have the 

disadvantaged individual controlling the company. And when those 

are kind of prerequisites to the program, it is hard not to have to 

a certain extent convoluted rules but there is no question that they 

are difficult. And the more difficult it is for the agency to administer, then try explaining that again to a jury. It is hard to do. 

And it is one of the reasons, though not the only reason, I think, 

that we very often have a frustrating time getting cases accepted. 

The ‘‘no loss’’ provision that Inspector General Miller talked about 

is the biggest reason, just so you know, that I would love to discuss, but just the complexity of these programs, again, for the 

small businesses to understand, for the contracting officers to understand, for the AUSAs to understand is considerable. 

Chairman COFFMAN. Mr. Miller. 


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Mr. MILLER. And these are very difficult cases to prove. That is 

why prosecutors do not like them generally. You know, when you 

talk about an 8(a) company and a minority doing 51 percent of the 

work, it is very hard to prove that they were doing less than 51 

percent of the work. But it is very important to go after the cases 

where you can prove it, to send the message, the deterrent message, to stop others from trying to cheat because they know, as I 

said in my opening statement, they know that they may not be detected, that the federal government may not be able to make the 

case against them easily, and they may get away with it. So it is 

important to make a statement with the ones that we do catch and 

make sure the penalty is high enough to send a statement. And 

that is where the measurement of the loss to the government 

comes in because the sentencing guidelines are geared to loss to 

the government. And if there is a very small loss what a judge 

might do is say, well, the federal government got most of what it 

asked for. Sure, it did not get it from the small business, but it got 

a pretty good product. And, you know, I had a case where the product was actually better than if it were done by a small business. 

But that is why as a substantive rule of law, if we say that loss 

to the government equals the value of the contract, then the 

amount of loss is higher and the potential sentence is higher. And 

the same with civil cases, too; cases under the False Claims Act, 

for example. If you have a higher loss to the government, you have 

potentially trouble damages and civil penalties. And then it would 

be worthwhile to bring the cases. 

Chairman COFFMAN. So review with me, both of you, what your 

recommendation in law in terms of the penalties. 

Ms. GUSTAFSON. I think the main recommendation that we 

would both talk about in that was part of a white paper produced 

by the National Procurement Fraud Task Force and has been suggested before is defining what a loss is. I mean, if you tell—if you 

say in law if you are a dishonest actor who should not have gotten 

this 8(a) contract and this was a $20 million contract, that is now 

a $20 million loss to the government because the government has 

lost the benefit of awarding that contract to somebody that they 

were meaning to help by awarding the contract. Some valid 8(a) 

firm out there lost the ability to have a $20 million contract with 

the government because it was awarded to somebody who had committed fraud to get there. If that is the loss, then they are facing 

jail time, serious time. And that is what gets the prosecutors interested. 

And right now that is not the loss because we got our widgets. 

You know, the government got what they bargained for and that, 

most often, and certainly in the cases we are talking about, the 

government got the products. And so the government, right now 

the way the law is, the government is not out that money. That is 

not a loss. But I would argue that it is a loss because then why 

have the program? I mean, the whole point of the program is to 

give it to a legitimate firm. So. 

Mr. MILLER. This is something that I have been recommending 

for a number of years. In 2007, I wrote the white paper for the National Procurement Fraud Task Force and that was one of the recommendations. I would also recommend that it apply not only to 


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the criminal context but also to the civil context, to the False 

Claims Act in particular and also to what they call the Mini False 

Claims Act, the Program Fraud Civil Remedies Act (PFCRA). And 

that way we would have more effective civil remedies as well. 

Chairman COFFMAN. There is one question I have to ask you, 

and that is sometimes I get complaints from the Federal Judiciary 

about the overcriminalization, you know, that it is stacking up in 

their courts. So if we went to the system that you are recommending, what kind of caseload do you think would be added to our 

federal court system? 

Ms. GUSTAFSON. I think I would be living in a fantasy world if 

I thought that they would be knocking down my door for every case 

that I could give them, in all candor, which is to say I doubt that 

we would then displace every kind of juicy drug case or kidnapping 

case or anything that the feds are dealing with now. But I cannot 

give a quantitative answer to that question but I can tell you that 

we would be effectively able to go after people who are illegitimately getting contracts worth tens of millions of dollars. And I 

think that that is something that is important to the federal government and should be. And then obviously, no prosecutor has to 

take any case. No U.S. attorney has to take any case. I still think 

it becomes—obviously, they still have complete discretion on what 

to take. But I think it would give greater visibility and attention 

to these cases. 

And I think especially now, though I think it is always important, but especially now when we are trying to find every dime that 

we can in savings and trying to do the most that we can with the 

money that we have, it is important that the federal government 

have integrity in these programs or we are really throwing money 

away. We may as well just have full and open competition which 

may get us a better price but I do not think small businesses always do as well in that. I mean, I really think if we are trying to 

help small businesses these programs have to have integrity and 

the bad actors have to be gotten out of these programs. 

Chairman COFFMAN. Mr. Miller. 

Mr. MILLER. It would increase the criminal cases but not a whole 

lot because they are still difficult to prove. 

On the civil side, I think the cases would increase because you 

would have more False Claims Act cases because currently it is not 

worthwhile for a relator or whistleblower to go into federal court 

because the small business will fold or they will not get enough in 

damages. 

Chairman COFFMAN. Okay. Out of the different categories in 

small business contracting, the different preferences, which one do 

you think is the most abused in terms of fraud? 

Ms. GUSTAFSON. There is absolutely no way I could give you an 

answer to that question because I would have to know the universe 

of fraud and my 31 investigators could not possibly tell that. I 

mean, you have relative sizes of programs but I could not tell you 

which is the most abused. 

Chairman COFFMAN. Is it HUBZone? Is it minority contracting? 

Is it—— 

Ms. GUSTAFSON. I would say it is just abuse of a different type 

depending on the program. 


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Chairman COFFMAN. Okay. 

Mr. MILLER. It is a bit of a catch-22 because right now, unfortunately, we do not devote huge resources to detecting small business 

fraud. We do investigate it and try and detect it. But we devote our 

limited resources to the larger cases. For example, we recovered 

$200 million about two weeks ago from Oracle. And so we devote 

resources to huge cases and we do devote resources to the small 

business fraud cases but not a lot because we know if we develop 

them and spend the resources, they are likely not going to be accepted for prosecution. There is likely not going to be a False 

Claims Act case brought by the Department of Justice, and here we 

have spent all these resources for very little return. And I do not 

think you would be happy with us, for using our resources in that 

way. So it is kind of hard to say which program has the most fraud. 

Once we start looking I will guarantee you we will find fraud because I think it is fraught with fraud, especially when you rely on 

self-certifications without verification. 

Chairman COFFMAN. And final question because I have to go 

vote, and that is what about—do you think that it is just prohibitively costly to put more of a responsibility on the part of the acquisition force of government to vet these applications? To vet the bids 

a little bit better? To say, okay, is this really a disabled veteran? 

Is this really a minority firm? Is this really going to be in the 

HUBZone? I mean, is there more—should there be more responsibility in terms of contracting? 

Ms. GUSTAFSON. I am not sure that the answer is putting a 

greater onus on the acquisition workforce to your point that they 

are already really overburdened. And quite frankly, I will tell you 

from where I sit what concerns me about that is the contracting 

officers have a job to do. They need to get those contracts done. 

They need to meet their goals. They need to be swift about it. And 

I worry about then saying and then, by the way, make sure these 

small business programs are working well. I am not sure that that 

ever gets to be their highest priority. I do not think that they 

should be expected to know the ins and outs of the programs. I 

think it needs to be—I think the government needs to engage in 

a very robust discussion about where that responsibility lies. 

I will tell you that one of the things that worries me is I think 

right now procuring agencies in the Small Business Administration 

are not always clear on who is supposed to be minding the store, 

especially when it comes, for example, to the 8(a) program just as 

far as who is supposed to be looking at the limitations on subcontracting and what is going on. I think that that is a discussion that 

needs to be had within the executive branch and perhaps with 

guidance from Congress, and we make it clear what the roles are. 

I think if we make it clear whose role is what, and I think if we 

make sure that they are adequately trained, which is not happening right now certainly in the acquisition workforce, we do a 

better job. And that, along with, you know, there is a whole protest. You know, businesses who lose out protest and it is amazing 

how much we learn from that because they know. I mean, so the 

system is there. I think we just need to be better about it, better 

trained about it, and make it clear who is expected to do it because 

to Mr. Miller’s point, these procuring agencies have a lot to do. And 


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I think if you were to say and now make sure these small business 

programs, that is 23 percent, have the integrity that they need, I 

think they would say that is not—I just need to get my stuff done. 

Chairman COFFMAN. I am afraid I am going to have to—I have 

three minutes to get over there. 

Mr. MILLER, MS. Gustafson, I just want to thank you so much 

for testifying today. I think that your testimony has been very revealing and certainly I think gives a blueprint to the Congress of 

the United States to take action on what I think is a very critical 

issue. Thank you so much. 

Ms. GUSTAFSON. Thank you. 

Mr. MILLER. Thank you. 

[Whereupon, at 10:44 a.m., the Subcommittee was adjourned.] 


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