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FULL COMMITTEE HEARING ON 

OVERSIGHT OF THE SMALL BUSINESS 

ADMINISTRATION AND ITS PROGRAMS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MARCH 25, 2009 

Small Business Committee Document Number 111-012 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

PARKER GRIFFITH, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

STANDING SUBCOMMITTEES 

Subcommittee on Contracting and Technology 

GLENN NYE, Virginia, Chairman 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

KURT SCHRADER, Oregon 

DEBORAH HALVORSON, Illinois 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

PARKER GRIFFITH, Alabama 

AARON SCHOCK, Illinois, Ranking 

ROSCOE BARTLETT, Maryland 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

GLENN THOMPSON, Pennsylvania 

Subcommittee on Finance and Tax 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

PARKER GRIFFITH, Alabama 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

Subcommittee on Regulations and Healthcare 

KATHY DAHLKEMPER, Pennsylvania, Chairwoman 

DAN LIPINSKI, Illinois 

PARKER GRIFFITH, Alabama 

MELISSA BEAN, Illinois 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

LYNN WESTMORELAND, Georgia, Ranking 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

Subcommittee on Rural Development, Entrepreneurship and Trade 

HEATH SHULER, Pennsylvania, Chairman 

MICHAEL MICHAUD, Maine 

BOBBY BRIGHT, Alabama 

KATHY DAHLKEMPER, Pennsylvania 

ANN KIRKPATRICK, Arizona 

YVETTE CLARKE, New York 

BLAINE LUETKEMEYER, Missouri, Ranking 

STEVE KING, Iowa 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

(IV) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1 

Graves, Hon. Sam .................................................................................................... 2 

WITNESSES 

Hairston, Mr, Darryl, Acting Administrator, U.S. Small Business Administration ........................................................................................................................ 3 

Shear, Mr. William, Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 5 

Kutz, Mr. Gregory, Managing Director, Forensics Audits and Special Investigations, U.S. Government Accountability Office ............................................. 7 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 28 

Graves, Hon. Sam .................................................................................................... 30 

Hairston, Mr, Darryl, Acting Administrator, U.S. Small Business Administration ........................................................................................................................ 32

Shear, Mr. William, Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 39 

Kutz, Mr. Gregory, Managing Director, Forensics Audits and Special Investigations, U.S. Government Accountability Office ............................................. 51 

Statements for the Record: 

GAO: Hubzone Program Fraud and Abuse Identified in Four Metropolitan 

Areas ..................................................................................................................... 63 

SBA Letter to Small Business Committee on Authority to Suspend HUBZone 

Businesses Identified in GAO-08-694T .............................................................. 101 

GAO Response Letter to SBA ................................................................................. 105 

Small Business Committee Response Letter to SBA ............................................ 107 

Hubzone Contractors National Council ................................................................. 108 

(V) 

(1) 

FULL COMMITTEE HEARING ON 

OVERSIGHT OF THE SMALL BUSINESS 

ADMINISTRATION AND ITS PROGRAMS 

Wednesday, March 25, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 2:18 p.m., in Room 

2360, Rayburn House Office Building, Hon. Nydia M. Vela 

AE1zquez [Chair of the Committee] presiding. 

Present: Representatives Vela ́zquez, Dahlkemper, Altmire, 

Clarke, Bright, Halvorson, Graves, Bartlett, Luetkemeyer, Thompson, and Coffman. 

Chairwoman VELA ́ ZQUEZ. I call this hearing of the Small Business Committee to order. 

As Supreme Court Justice Brandeis famously said, Sunshine is 

the best disinfectant. To make sure oversight is a priority, the 

House has adopted Rule 11 which requires hearings on waste, 

fraud, abuse and mismanagement of programs under the committee’s jurisdiction. 

Accountability is critical to the legislative process, and it is something that our committee has consistently worked to promote. In 

the last 2 years alone, we have held several oversight hearings on 

issues ranging from the Katrina disaster assistance to fraud in contracting. That is a track record we are going to continue in the new 

Congress, starting with today’s review of GAO’s HUBZone investigation. 

When first introduced, the HUBZone program promised to create 

opportunities for small businesses in low-income communities. It 

was designed to do this by helping entrepreneurs access the Federal marketplace. In theory, the benefits will be twofold; HUBZones 

will not only bolster the small business community, but will also 

breathe new life into struggling neighborhoods. 

However, the program has been undermined by chronic underfunding, inherent program flaws and sloppy management. Instead 

of being incubators for growth and development, HUBZones have 

become breeding grounds for fraud and abuse. This afternoon’s 

hearing will focus on a new GAO report on the HUBZone program, 

the findings of which are nothing short of appalling. 

Unfortunately, HUBZone fraud is nothing new. Last Congress 

concerns on the part of both this committee and the business community prompted a General Accounting Office audit, an investigation. What GAO found was that the majority of the HUBZone busiVerDate Aug 31 2005 14:45 Apr 24, 2009 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\48124.TXT DARIEN
2 

nesses it reviewed in the D.C. area were ineligible and yet somehow these companies managed to collect over $100 million in Federal contracts. Those are funds that should have gone to deserving 

small businesses. 

During last year’s hearing on the matter, it quickly became clear 

that the HUBZone program was not only dysfunctional, it was riddled with fraud. Apologists claim these incidents were isolated. 

They argued that most HUBZone businesses played by the rules 

and said the program shouldn’t be blamed for a few bad apples. To 

see if this was, in fact, the case, we requested a broader investigation. 

The review which was carried out in four different regions across 

the country found that HUBZone abuse is not unique to Washington; rather, it is systemic. Today we will hear from GAO that 

the majority of the reviewed businesses were not even HUBZone eligible, and yet they received $30 million from the program. 

Eight months after our first HUBZone hearing, SBA still has no 

control over the initiative. As a result, tens of millions of dollars 

in HUBZone contracts have gone to unqualified businesses. That 

includes $27 million that went to businesses GAO has already 

identified as ineligible in its report of July. Because SBA failed to 

act, those companies continued to receive contracts that were never 

rightfully theirs. 

Abuse of a Federal program is never a good thing. Today, in light 

of the billions of stimulus dollars about to enter the Federal marketplace, we need to be more vigilant than ever. It is critical that 

small businesses have a level playing field and that taxpayer 

money gets the most bang for the buck. As important as it is to 

provide expanded opportunities to entrepreneurs, we just cannot 

allow a program so vitally flawed to continue. 

It is time for SBA to make a decision, either overhaul the program or scrap it completely. This committee is no longer going to 

tolerate the excuse, ′′We are working on it,′′ while hardworking 

small businesses who have played by the rules are being cheated 

out of opportunities. 

I would like to thank all of the witnesses in advance for their testimony. 

And, with that, I yield to Ranking Member Graves for his opening statement. 

Mr. GRAVES. Good afternoon, and thank you for participating in 

this hearing—oversight hearing of the Small Business Administration’s programs. And as always, Madam Chair, I appreciate your 

holding this important hearing. 

One of the primary goals of the Small Business Act was to ensure that small businesses receive a fair portion of contracts offered 

by the Federal Government. This is important because small businesses have lower overhead; they can provide goods and services to 

the Federal Government as efficiently, if not more so, than larger 

competitors. In addition, providing small businesses with their fair 

share of Federal contracting opportunities will hasten the economic 

recovery. However, time and again, the government fails to reach 

its contracting goals. 

3 

The government continues to bundle contracts that only large 

businesses can obtain, and we find that various contracting programs open themselves up to abuse and the possibility of fraud. 

We need to focus efforts on improving the government contracting process. This includes preventing inappropriate contract 

bundling and eliminating the potential for fraud and abuse, including the HUBZone program. 

As we all know, the HUBZone program was created to stimulate 

the economies of economically depressed areas by awarding qualified HUBZone participants with Federal contracts. However, recent 

investigations by the Government Accountability Office demonstrate that the program is susceptible to abuse and the possibility of widespread fraud. The studies are alarming and the SBA’s 

response has been inadequate. 

What is worse is that contracts given to firms ineligible for the 

program undermine the ability for legitimate HUBZone firms to 

win contracts. In turn, this diminishes the effectiveness of the program and revitalizing the economically depressed areas. 

I look forward to hearing the testimony today from our witnesses. I want to learn a whole lot more about the progress they 

have made in addressing these problems; and if I don’t feel like 

enough is being done, I can assure you that I will take a much 

more aggressive approach to righting this ship. 

Again, I want to thank you, Madam Chair, for holding this hearing and I look forward to working with you and other Members of 

Congress, the GAO and the SBA to rid the HUBZone program of 

the abuse. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Graves. 

Chairwoman VELA ́ ZQUEZ. And I welcome the first witness. Mr. 

Darryl Hairston. He is the Acting Administrator of the Small Business Administration. He has served the Agency over the past 30 

years in a variety of senior executive positions. 

The SBA was created in 1953 as an independent agency of the 

Federal Government to aid, counsel, assist and address small business concerns. 

Welcome. 

STATEMENT OF DARRYL HAIRSTON, ACTING ADMINISTRATOR, 

U.S. SMALL BUSINESS ADMINISTRATION 

Mr. HAIRSTON. Thank you, Chairwoman Vela ́zquez, Ranking 

Member Graves and other distinguished members of the committee. I appreciate the opportunity to testify today in connection 

with the committee’s hearing on waste, fraud and abuse in government programs. 

As a Federal agency with an $88 billion loan portfolio, the principles of stewardship, transparency and accountability are essential 

to the integrity of the programs and the operations of the Small 

Business Administration. With the recent passage of the American 

Recovery and Reinvestment Act, as well as the fiscal year 2009 

Omnibus Appropriations Act, Federal agencies will be held accountable not only for developing effective and efficient strategies 

for implementing the new statutory provisions, but also for the 

prudent stewardship of taxpayer dollars used for funding the programs authorized under these acts. 

4 

The SBA takes its ongoing responsibility to guard against and to 

prevent waste, fraud and abuse in its programs very seriously. Ensuring the proper controls are in place is crucial to the Agency’s 

ability to implement and administer its programs in an environment that inhibits fraud, waste and abuse. 

Madam Chairwoman, our management team recognizes that 

there is always a need for improvement in the way we conduct our 

business and the way we intend to address properly the recommendations contained in the GAO report released today. I am 

pleased to tell the committee that our commitment to better serving small businesses and aspiring entrepreneurs via our HUBZone 

program remains strong. We are continuing our thorough review 

and testing evaluation of all aspects of the program. 

Where applicable, we have established new internal operating 

procedures. These revised controls, as well as the establishment of 

new ones, I believe provide that level of accountability and transparency that Americans expect of their government and which all 

of us here at SBA are committed to achieving. 

All of us at SBA recognize the important oversight role provided 

by the Office of the Inspector General and the Government Accountability Office in identifying waste, fraud and abuse in government programs. I want to assure you and the members of the committee that we are working diligently to implement recommendations contained in the GAO and IG reports that identified waste, 

fraud and abuse in SBA programs. 

Let me briefly provide you with a summary of important actions 

taken today. With respect to SBA’s HUBZone program, the GAO 

issued a report in June entitled Additional Actions Are Needed to 

Certify and Monitor HUBZone Businesses and Assess Program Results. The report identified potential waste, fraud and abuse by 

identifying firms participating in the HUBZone program that may 

not have met program eligibility requirements. 

Over the last 8 months since the report was issued, SBA has developed new procedures for evaluating all applications, re-certifications and program examinations. SBA is collecting supporting 

documentation from all firms that seek HUBZone certification or 

wish to maintain their HUBZone status. 

While these procedures have impacted our processing times, we 

believe they are helping to reduce incorrectly certified firms. For 

example, from July 2008 to March 2009 only 22 percent of the applications submitted were certified while 77 percent were withdrawn or declined. During the same period a year ago, 66 percent 

of the applications submitted were certified while 33 percent were 

withdrawn or declined. 

SBA is also in the process of reviewing its current program regulations to determine whether changes can be made to further 

strengthen its certification procedures to help mitigate waste, fraud 

and abuse as well as reduce accidental mistakes. In addition, if the 

HUBZone program office believes it has sufficient evidence that 

any firm willfully attempted to misrepresent its HUBZone status, 

the program will forward those firms to the SBA’s suspension and 

debarment official and to the IG, as appropriate. 

Regarding the issue of keeping the HUBZone maps current, SBA 

has developed a specific timetable and procedure to ensure that 

5 

HUBZone maps remain current. The SBA’s HUBZone maps were 

last updated on September 13. The SBA intends to update the 

maps again by April as a result of new data it has received. 

On July 17, SBA testified that it was beginning a process of reviewing possible suspension and debarment of 10 firms originally 

identified by the GAO report entitled SBA’s Control Weaknesses 

Expose the Government to Fraud and Abuse. GAO originally referred 10 firms to SBA’s IG. In September, SBA’s IG forwarded the 

files to the HUBZone program office so that they could begin its examination process. Investigations of these 10 firms revealed that at 

least three of the firms that GAO believed to be ineligible for the 

program were, in fact, eligible; of the remaining seven firms, only 

three are still in the program and are currently undergoing program examinations for possible decertification. 

All firms noted by the GAO have been investigated and examined by the SBA or are currently being investigated and examined, 

keeping in mind that there are due process considerations for firms 

under examination. The firms that have been referred to SBA suspension and debarment officials are also being investigated by that 

office. 

Upon receipt of the GAO’s files of its most recent investigation, 

SBA will take appropriate enforcement action on the firms we find 

to violate HUBZone program requirements. These enforcement actions will include, where applicable, removal, decertification from 

the program and coordination with SBA’s Inspector General and 

the SBA’s suspension and debarment official. 

Chairwoman Vela ́zquez and other distinguished members of this 

committee, thank you again for your opportunity to testify today in 

connection with the committee’s hearing on waste, fraud and abuse 

in government programs. I am happy to answer any questions you 

may have. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Hairston. 

[The statement of Mr. Hairston is included in the appendix at 

page 32.] 

Chairwoman VELA ́ ZQUEZ. Our next witness, Mr. Bill Shear, is the 

Director of the GAO’s Office of Financial Markets and Community 

Investment. The Financial Markets and Community Investment 

team works to improve effectiveness of regulatory oversight in financial and housing markets. It also oversees the management of 

community development programs. 

Welcome, sir. 

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. SHEAR. Thank you. Madam Chairwoman, Representative 

Graves, and members of the committee, it is a pleasure to be here 

today to discuss our work on the HUBZone program. My statement 

today is based on work we performed to update the recommendations we made in our June 2008 report and reiterated in our July 

2008 testimony before this committee. 

SBA has recently initiated some steps as part of a reengineering 

effort to address the HUBZone program’s deficiencies and impleVerDate Aug 31 2005 14:45 Apr 24, 2009 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\48124.TXT DARIEN
6 

ment our recommendations. I will summarize these steps for each 

recommendation we made in our June report. 

First, SBA’s HUBZone map used to determine firms eligibility 

was inaccurate, and we recommended that the Agency fix the inadequacies and ensure that the map remains accurate. SBA updated 

its map in September 2008; however, SBA does not have a process 

to ensure that the map remains accurate. 

Second, we stated that SBA’s mechanisms for certifying and 

monitoring firms provided limited assurance that only eligible 

firms are participating in the program. We recommended that SBA 

develop and implement guidance to more routinely and consistently 

obtain supporting documentation and conduct more frequent site 

visits to ensure that firms are eligible. 

SBA issued a guide for analysts to use when reviewing applications. And since July 2008 SBA has requested supporting documentation from each new applicant. However, SBA has not conducted more frequent site visits to verify the information received 

from firms. As of March 2009, SBA has conducted seven site visits 

this fiscal year. 

Third, SBA has not followed its policy of recertifying firms every 

3 years. As a result, there was a backlog of more than 4,600 firms 

that had went unmonitored for more than 3 years. We recommended that the Agency eliminate the backlog and take the necessary steps to ensure recertifications are completed in a more 

timely fashion. 

In September 2008, SBA used additional staff to eliminate the 

backlog of recertifications, but it has yet to implement necessary 

procedures to ensure that future recertifications are completed in 

a timely fashion. 

Fourth, we found that SBA lacked a formal policy and time 

frames for decertifying firms. And many firms were not decertified 

within the informal goal of 60 days. We recommended that SBA 

formalize its 60-day goal and adhere to it. 

In December 2008, SBA issued a procedural notice that formalized a 60-day time frame for processing firms for decertification. 

We do not yet know whether staff are adhering to this policy. 

Finally, we also found that SBA had not implemented plans to 

assess the effectiveness of the HUBZone program, and we recommended that the Agency develop performance measures and implement plans to assess its effectiveness. 

In August 2008, SBA issued a notice of methodology in the Federal Register for measuring the impact of the program. The methodology was not well developed, and we do not believe that the effort was a useful process to address our recommendation. 

Because the Agency has not evaluated the HUBZone program’s 

benefits, SBA continues to lack key information that could help it 

better manage the program and inform the Congress of its results. 

It is a pleasure to present our work before this committee. I 

would be glad to answer any questions. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Shear. 

[The statement of Mr. Shear is included in the appendix at page 

39.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Mr. Greg Kutz. He 

is the Managing Director of Forensic Audits and Special InvestigaVerDate Aug 31 2005 14:45 Apr 24, 2009 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\48124.TXT DARIEN
7 

tions at GAO. The FSI unit investigates waste, fraud and abuse related to government programs and taxpayers’ dollars. FSI has investigated abuses of Hurricane Katrina relief dollars, border security, and overtime and minimum wage complaints among other topics. 

Welcome. 

STATEMENT OF GREGORY KUTZ, MANAGING DIRECTOR, 

FORENSICS AUDITS & SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. KUTZ. Madam Chairwoman, members of the committee, 

thank you for the opportunity to discuss the HUBZone program. 

Last year I testified that this program was highly vulnerable to 

fraud and abuse, citing 10 cases here in the Washington, D.C., 

area. My testimony today has two parts. First, I will discuss our 

investigation of cases outside of the D.C. area, and second, I will 

discuss SBA’s actions to address fraud and abuse. 

First, we identified 19 additional cases of HUBZone fraud in Alabama, California and Texas. These firms received $30 million of 

HUBZone contracts. In all 19 cases, these firms recently made false 

statements regarding their program eligibility. 

The following three cases give you a flavor for the types of fraud 

that we identified. First, one Alabama contractor listed their principal office as being in a HUBZone, which, as you know, is a key 

program requirement. However, as shown on the monitor, this office was actually a residential trailer reported to SBA as being 

′′Suite No. 19.′′ The person actually living in this trailer had no apparent relationship to this company. The real principal office for 

this company was 90 miles away and not in a HUBZone. 

Second, a Texas HUBZone firm was being used as a front for 

large companies. This services firm was required to perform at 

least 50 percent of the work using HUBZone employees. However, 

our work showed that between 71 and 89 percent of the work was 

actually being subcontracted out. The owner told us that HUBZone 

firms like hers are used by large companies as contracting vehicles. 

And third, only 5 of 38, or 13 percent, of a California company’s 

employees lived in a HUBZone. This firm falsely represented that 

it met the requirement that 35 percent of its employees live in a 

HUBZone. 

I can’t project these 19 cases to all HUBZone firms. However, 

these 19 cases, along with the 10 from my testimony last year, 

clearly show that the potential for fraud in this program is substantial. As of January 2009, there were 9,300 firms listed as being 

eligible for this program. It is not hard to imagine that hundreds 

or perhaps thousands of these firms are not eligible for this program. 

Moving on to my second point. SBA does not have an effective 

fraud prevention program. The good news is that SBA recognizes 

this and is taking steps to implement an effective program. The 

bad news is that they are closer to the beginning than the end of 

this process. An effective fraud prevention program includes prevention, monitoring and investigations with consequences. Prevention is clearly the most important element of the program. SBA has 

recognized this and, as was mentioned by the other witness, has 

8 

an interim process in place to screen applications. However, this 

process was not adequately field tested and, thus, has had some 

unintended consequences. 

Due at least in part to the lack of staffing, this process has resulted in a backlog of about 800 applications as of January 2009. 

I would describe this as a growing pain of moving from what was 

in essence a self-certification process to what hopefully will be an 

effective fraud prevention program. 

In addition to the recommendations we made last year, we are 

making four new recommendations in a report we are releasing 

today. One of the key recommendations is for SBA to use unannounced site visits. As we have developed our 29 fraud cases over 

the last year, it is clear that for site visits, the element of surprise 

is critical. 

For example, in the case I just described, our surprise visit revealed that no company employees actually worked in trailer No. 

19. The picture on the monitor shows the row of mailboxes outside 

of this trailer as they appeared during our site visit. The next picture on the monitor shows the shiny new mailbox that appeared 

with the company name on it shortly after our surprise visit. According to the United States Postal Service, this mailbox is not a 

deliverable address. 

This case clearly shows the kind of deception that owners will 

use and the value of a surprise site visit. 

In conclusion, as was mentioned, it appears that fraud and abuse 

in this program exists across the country. The victims of this fraud 

include the American taxpayer, legitimate HUBZone firms, and the 

communities that were supposed to benefit from this program. 

Perhaps the most troubling fraud scheme is the use of HUBZone 

firms as a front to funnel money to large companies. 

Madam Chairwoman, I want to commend you and the committee 

for taking steps today to clean up this program. 

That ends my statement. I look forward to your questions 

Chairwoman VELA ́ ZQUEZ. Thank you Mr. Kutz. 

[The statement of Mr. Kutz is included in the appendix at page 

51.] 

Chairman VELA ́ ZQUEZ. I would like to start by asking my first 

question to Mr. Hairston. 

Mr. Hairston, at the last hearing I asked whether the level of 

fraud warranted the suspension of the HUBZone program. Administrator Carranza’s answer at the time was ′′no′′ and that steps will 

be taken to eliminate fraud. 

Today, we have found out that several companies identified last 

year are still in the program and have since then received $25 million in new HUBZone set-aside contracts. Added to this, the fraud 

in the program now appears national in scope. 

I am going to ask this question to you, and I am going to ask 

this question again. Will you make a commitment to suspend the 

HUBZone program until fraud controls are in place and all companies with a HUBZone contract can be verified? 

Mr. HAIRSTON. Madam Chairwoman I don’t have the authority to 

make the decision to suspend the HUBZone program. What I can 

do today is to commit to you that we will take the proper steps to 

9 

make sure that we have the proper risk management framework 

in place to mitigate fraud, waste and abuse in the program. 

But the decision to suspend the program is one that would be a 

decision that would certainly— 

Chairwoman VELA ́ ZQUEZ. That is enough. That is enough, Mr. 

Hairston. 

Mr. Shear, the SBA testified in July that they will take several 

steps to fix the problems with the HUBZone program as identified 

by the GAO. As this chart shows, very little has been accomplished. 

Why is that? 

Mr. SHEAR. I would say that the Agency did not recognize the 

commitment that was necessary to address these very serious deficiencies and to implement our recommendations. 

Chairwoman VELA ́ ZQUEZ. Mr. Kutz, during last July’s hearing, 

SBA testified that its goal was to perform site visits on 5 percent 

of the HUBZone programs, firms. Today, we hear that the SBA is 

performing 1.8 site visits per month and has done only 7 this year. 

That is less than a quarter of 1 percent of the 10,000 firms in the 

program. 

Is that a sufficient deterrent to fraud? 

Mr. KUTZ. No. 

Chairwoman VELA ́ ZQUEZ. Administrator Hairston, why is the 

SBA doing less than what the Agency promised back in July? 

Mr. HAIRSTON. Well, I am not clear on what the Agency promised 

at that time. But I can tell you that the office is working aggressively to put in place new procedures— 

Chairwoman VELA ́ ZQUEZ. Did you review—excuse me one second. 

I guess that if I was you sitting at the chair, and I know that 

I have to come and testify before this committee, I would review 

the congressional records of last year in July when this issue was 

discussed in the hearing, whether the administrator made a commitment to this committee and then you will assess whether or not 

steps have been taken to make the corrections. 

Mr. HAIRSTON. Well, I did, in fact, review the record, and I don’t 

recall seeing anything regarding—specifically regarding a commitment on site visits. And she very well may have made that commitment, but I am saying I did not actually see it myself. 

But I do know that they have undertaken aggressive procedures. 

They have implemented—they are undergoing right now a business 

process—reengineering process where they are looking at all of the 

elements of the program and they are establishing the necessary 

corrections, the necessary improvements to mitigate the fraud and 

abuse in the program. 

We take this very seriously. We take the notion of prudent stewardship over the program very seriously, and we are approaching 

this matter very seriously 

Chairwoman VELA ́ ZQUEZ. Mr. Kutz, what type of site visits 

should SBA be performing and how often? 

Mr. KUTZ. They should perform site visits, first of all, in the application process, at least on a risk basis, if you will. And they 

should be unannounced; they should not tell them they are coming. 

If we had told the company with the shiny new mailbox we were 

coming, the mailbox would have been there before we showed up, 

rather than after we showed up. 

10 

If you show up on a surprise basis, mail is stuffed under the 

door, you talk to the neighbors, no one has been here in months. 

That is what you get with the unannounced site visits. If you tell 

them you are coming, then you have a problem. 

In the program examination, I think you have the same situation. Once they get in the program, again on a risk basis, unannounced, randomly you should be actually going out and checking 

what is really going on. 

Chairwoman VELA ́ ZQUEZ. Of the HUBZone businesses that you 

spoke to, it seems many were not worried about meeting eligibility 

requirements. 

The silver mailbox you alluded to is symptomatic of a cavalier attitude. Do you think these businesses’ attitudes reflect an awareness that punishment by SBA is a remote, if nonexistent, possibility? 

Mr. KUTZ. No, I don’t think they think that there is a serious enforcement at this point. Some of them admitted to us what they 

did. They are not going to say they committed fraud, but effectively 

they did. 

I think—if you let me read a few examples for you, I think you 

will see the pattern here. One of our cases admitted to bidding and 

accepting large HUBZone contracts, the firm couldn’t perform without significant subcontracting. 

Another one admitted subcontracting the majority of their work 

to other firms or individuals. This was a services firm. 

Another one admitted noncompliance with the principal office requirement. Another one admitted they listed the principal office for 

proposal writing and nobody actually worked in the office except 

one person. And another one admitted that they kept a listed principal office only to meet the HUBZone requirement. 

And so I think you see the kind of attitude out there. I don’t 

think they think they will ever get caught; and if they get caught, 

as we have seen, there is no serious punishment. 

Chairwoman VELA ́ ZQUEZ. Based on your investigations, can you 

provide this committee with an estimate of the number or percentage of fraudulent firms operating in the HUBZone nationwide? 

Mr. KUTZ. Only with the ones we have looked at. We have only 

really looked at the principal office and 35 percent residency requirements. Of the ones we have looked at, again, they were based 

upon data mining and certain characteristics of certain cities, such 

as Washington, San Diego and San Antonio, that it was over 50 

percent of the ones we looked at. 

The 50 percent subcontractor requirement, we weren’t looking for 

that, but it actually popped out with several of the cases we had 

where it was very clear that the work was being done not by a 

HUBZone company, but by large, in many cases multinational, 

firms that were doing well over half the work. 

Chairwoman VELA ́ ZQUEZ. I am going to recognize Mr. Graves. 

And then we will come to a second round where we will continue 

to pose questions. 

Mr. GRAVES. Thank you, Madam Chair. 

Mr. Hairston, last summer I contacted the SBA, and it was to inquire about the status of a petition, a protest that was filed by a 

11 

constituent of mine, and it was regarding a HUBZone contract; and 

I have yet to hear back from the SBA. That was last summer. 

I was just curious how long it typically takes to investigate a 

HUBZone firm when a protest has been made. And I would like for 

you all to get back with me on that. 

Mr. HAIRSTON. Typically, a protest should be handled within a 

very short period of time, within a matter of several days. Generally, a protest procedure takes place in about 7 days, so you 

should have received a response. 

There is no defense for you not receiving a response regarding a 

protest or at least an acknowledgement of the outcome of the examination of the protest. 

Mr. GRAVES. Well, it was last summer. I actually followed up 

with the—after the constituent made the protest. And like I say, 

it is not them necessarily that hasn’t heard, because they haven’t 

either; but I was a little surprised that I haven’t heard from the 

SBA on it. That was a little alarming, particularly given, you know, 

some of the things that I have heard. 

Another question is, you know, is there any evidence that suggests that the HUBZone program is meeting its objectives of economic development? 

Mr. HAIRSTON. From the metrics—from the metrics that we are 

actually maintaining, it would appear that there are, in fact, some 

jobs being created as a consequence of the program and that some 

legitimate HUBZone firms are, in fact, receiving contracting activity. 

When we look at the contracting activity for 2008, our records 

show that there were approximately $10.4 billion of awards that 

were labeled HUBZone. Of that amount, it was only 12 percent 

that were actually awarded through the HUBZone vehicle, which 

was about $1.8 billion. 

The remaining awards were actually agencies’ multiple counting 

of awards where awards may have gone either on a competitive 

basis or awards may have gone through the Section 8(a) program. 

But based on those awards they were counting them—because the 

firm was both an 8(a) firm or a HUBZone firm, they were, in fact, 

counting them in both categories. So the main indicator we have 

right now is job creation. 

We recognize that we need much better metrics. And we are, in 

fact, in the process of developing much better metrics to determine, 

to be able to better report on whether the firms and the program 

are actually accomplishing the intent of the statute. 

Mr. GRAVES. Mr. Shear, I would ask you the same question. 

Mr. SHEAR. There are metrics to measure the benefits of the program. The performance measures used are things such as applications processed, examinations performed. So let me take the first 

one, applications processed. 

You can see with what we observe here, it is especially of concern 

because it is saying, every application that gets through the gate 

is something that adds to the metric. The effort to try to develop 

metrics--it really wasn’t a useful process; and the Agency is basically starting over. 

12 

They stated that they have hired an economist to work on developing metrics, and we have encouraged them to reach out to us and 

to others. And we told them that should happen soon. 

Mr. GRAVES. Last question. In last summer’s GAO report, it is 

suggested that the HUBZone maps were inaccurate; and I would 

ask what steps have been taken to improve this and how regularly 

are they updated? 

Mr. HAIRSTON. We are actually working right now to put a contract in place to ensure that the maps are updated on a regular 

basis. We update the maps once we receive information from the 

various agencies that provide information to us that impact the 

maps. 

Those agencies include the Department of Housing and Urban 

Development, the Department of Defense, the Department of Interior, the Office of Management and Budget, and several other agencies that provide information that actually have an impact on designating HUBZones. And we are putting a vehicle in place to make 

certain that as that information flows in, those maps will be updated. 

And we just recently received information from the Department 

of Housing and Urban Development and OMB; and as a consequence of that, we will be updating the maps again in April. 

Mr. GRAVES. Okay. 

Well, I would appreciate it if you have whoever on your staff 

handles the inquiries, at least from congressional offices, and you 

get back with me on last year’s— 

Mr. HAIRSTON. I can assure you, I will follow up on that one. 

Chairwoman VELA ́ ZQUEZ. Mr. Bright. 

Mr. BRIGHT. It is really not a question, just amazement at what 

I am hearing here today. And I don’t know how to resolve the problem. I am a new Member, by the way, for the people here giving 

us testimony. 

But we are experiencing tremendous waste in our government, 

fraud and abuse today. And to me, this is a prime example of what 

we need to do as a Small Business Committee to alleviate this and 

not a year down the road. We need to do it ASAP. 

So I appreciate your testimony today. And Mr. Hairston, I appreciate your testimony, but I think you are the one that we are all 

looking at today to hear what you are going to do immediately before we take some type of drastic vote up here to alleviate or to reduce or to seriously curtail this program. 

So I just ask you—I mean, what is your take on what I have 

heard here? And you really don’t have to say anything else. I am 

astounded. I feel very much like I felt the other day when I heard 

these tremendous bonuses being given out to the AIG people. 

So, Mr. Hairston, what can you say to give me a little comfort 

today that you are doing whatever you possibly can to alleviate this 

fraud and misuse and abuse of taxpayers’ dollars out there? 

You know, the small businesses make up 70 to 80 percent of our 

jobs out there. Sometimes we get focused on the huge corporate 

projects out there, and we lose focus on our small business. 

But SBA could be the stabilizing factor for our economy; and for 

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13 

appointed. It is another, I guess, burden that we have to see on 

taxpayers out there, that we have got to put a stop to. 

So, Mr. Hairston, I would like to hear what you feel—as a result 

of letting me, as a new Member of this Congress and this committee, how can you appease and satisfy me that we should not 

today take a vote to terminate this program right away? 

Mr. HAIRSTON. Well, as I indicated before, we take this matter 

very seriously. 

Mr. BRIGHT. You should. I hope you would. 

Mr. HAIRSTON. We don’t disagree with the majority of the findings of the GAO report. We recognize that there is a lack of a real 

risk management structure around that program. 

But we also recognize that it is something that we can’t put all 

the fixes in place overnight. But we know it is necessary that we 

take aggressive steps and that we do it in an urgent manner to put 

the proper risk management framework in place. 

Mr. BRIGHT. Let me interrupt you and just ask you—I mean, this 

has been going on for a year at least, I can see. I am not hearing 

from these gentlemen over here that you have taken any drastic 

action to curtail this abuse and this waste. 

Mr. HAIRSTON. Well, we have actually taken some steps. We 

have taken some preliminary steps; but we don’t want to rush into 

trying to fix a problem and actually waste more resources and more 

time not appropriately fixing the problem. 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield? 

Mr. BRIGHT. Yes, I will. 

Chairwoman VELA ́ ZQUEZ. Wasn’t it recommended that onsite visits is a quite effective tool for deterrence? How many visits have 

you conducted in fiscal year 2009? Out of 10,000 firms, how many? 

Mr. HAIRSTON. I think the number that was stated earlier was 

seven, and that is the number that was reported to me also. 

Chairwoman VELA ́ ZQUEZ. Seven. 

Mr. HAIRSTON. And that is one of the courses of action that are 

being planned, that we will be conducting more onsite visits. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Mr. BRIGHT. Are you attempting in any form or fashion at looking at criminal prosecution or even civil fraud against these agencies who are taking the money? 

Mr. HAIRSTON. Well, in the cases that we are reviewing where 

we find that that seems to be an appropriate step, we are following 

the proper course. We are referring those cases to our Office of Inspector General. 

Mr. BRIGHT. Have you any number to give us today of people you 

have done that to? 

Mr. HAIRSTON. Actually, I think we have—I am not certain how 

many, in fact, were referred to the Office of the Inspector General. 

I think all of the cases have been reviewed by the Office of the 

Inspector General. I know we have referred seven for a potential 

debarment, suspension and debarment through the normal suspension and debarment process. 

Mr. KUTZ. Congressman, I think they got declinations on all 10 

from U.S. attorneys. So they are not going to get prosecutions; they 

are looking at civil. And, of course, only four of these so far have 

been decertified by SBA. 

14 

Mr. BRIGHT. Wow. Thank you. 

Mr. HAIRSTON. And I think of three we found to be eligible. 

Mr. BRIGHT. I will close with the last few moments I have here 

and say this: Something needs to be done. It needs to be done right 

away. This is another case of waste, fraud and abuse that needs 

to be terminated ASAP. 

And, Madam Chairman, I will yield back the remainder of my 

time. But I am very, very concerned about what I have heard here 

in the last 30 minutes. 

Chairwoman VELA ́ ZQUEZ. Using your time, Mr. Bright, if you will 

yield before—I would like to ask Mr. Kutz, how many people have 

been referred for prosecution from GAO as a result of an investigation? 

Mr. KUTZ. Well, we sent the 10 last year to the IG and they got 

a declaration. 

Chairwoman VELA ́ ZQUEZ. How many have been initiated independently from that investigation by SBA? 

Mr. KUTZ. From suspension and debarment, none, we understand. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Clarke. 

Ms. CLARKE. Thank you very much, Madam Chairwoman. 

Chairwoman VELA ́ ZQUEZ. Oh, I am sorry. I am sorry. 

I am sorry, Mr. Bartlett. 

Mr. BARTLETT. I think the gentleman to my right was here before 

I was. 

Chairwoman VELA ́ ZQUEZ. Mr. Thompson. 

Mr. THOMPSON. Thank you, Madam Chairman. And thank you, 

Ranking Member Graves, for holding this important hearing today 

in terms of oversight of the SBA and its programs. 

You know, we have been tasked with ensuring that the small 

businesses of America, our national economic engine, receive a fair 

portion of Federal procurement programs in order to purchase 

goods and services and keep government and military in day-to-day 

operations. Certainly now, more than ever, during this time of fiscal constraints, we as a committee need to be vigilant of the taxpayers’ dollars that fuel the SBA procurement programs. 

With that said, we must be equally concerned with the proper 

oversight that is in place with the additional stimulus funds that 

are leaving the Treasury. And also we need to make sure that 

these funds are used in a way that will benefit the small business 

operators and are done in a timely manner. 

We need to ensure the small businesses are actually recipients 

of the funding designated for small businesses. I am alarmed, as 

my colleagues have indicated, to learn that the SBA does not check 

to make sure that a business actually qualifies for status as a 

HUBZone firm. In turn, this keeps contract officers from having 

the tools to verify the contractors’ status. 

The HUBZone program was designated to provide Federal contracting opportunities for qualified small businesses located in distressed areas; and the last thing our government agencies need to 

be doing is further assisting the misappropriation of funds that are 

designated for these distressed areas and creating further impediments to the true intent and mission of the HUBZones. 

15 

With that said, Mr. Hairston, several questions to start with. 

Why only 1.8 visits per month? Why only 7? What were the barriers? What was the decision-making that—when this was obviously a recommendation that had come from this committee previously? 

Mr. HAIRSTON. It is just a matter of implementing the process 

and identifying the resources to complete the task. 

Mr. THOMPSON. What resources were missing to— 

Mr. HAIRSTON. Well, what we are doing is, we are—as a plan of 

action, we are engaging our field staff to help us to actually conduct field visits. 

The review process of the application actually takes place in our 

headquarters location here in Washington, D.C. And obviously 

most of these firms are located out among the States where our 

field offices are located. And using our field staff to actually go out 

and conduct site visits for us. 

And you will see an increase in those site visits, a substantial increase. 

Mr. THOMPSON. Does the SBA contact contracting officers and 

agencies when questionable behavior in the HUBZone program is 

reported, so that the contracting officers can take appropriate action? 

Mr. HAIRSTON. We would only contact a contracting officer if— 

in the event there was—in fact, there was a formal action taken. 

If the firm were to be debarred or suspended, then the contracting 

community would be put on notice. Conversely, if a contracting officer were to become aware of some fraudulent activity, particularly 

with respect to the failure to comply with the 50 percent subcontracting limitation requirement, then we would expect that they 

would contact us to notify us that a firm was not, in fact, complying with that particular requirement. And we would certainly 

hope that they would do that. 

Mr. THOMPSON. Madam Chairwoman, I will yield back my time 

at this point 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Clarke. 

Ms. CLARKE. Thank you very much, Madam Chairwoman and 

Ranking Member Graves. Thank you for holding this oversight 

hearing on the HUBZone program. 

In the last Congress you had a similar hearing that discovered 

many problems with this program. And I applaud your vigilance of 

this critical issue. 

As we are all aware, the HUBZone program encourages small 

businesses to locate in and hire from the Nation’s most distressed 

communities. And it is hard to get firms to locate in distressed 

areas with low incomes and high unemployment. The HUBZone 

program offers an incentive to make it worthwhile to take a chance 

on rejuvenating a distressed area. 

If properly implemented, the program has the possibility to create thousands of new jobs in the locations needing jobs the most. 

This is extremely important during these tough economic times. 

So once again, I commend you, Madam Chair, for holding this 

hearing today to see how we can prevent future fraud, waste and 

16 

abuse in a program that can be beneficial not only to my district, 

but many other districts across this Nation. 

Mr. Hairston, this first question is for you. Since the SBA has 

failed to recertify more than 40 percent of the firms that have been 

in the program for more than 3 years, according to last year’s GAO 

report, the SBA noted that the HUBZone program had obtained additional staff and that the pending backlog of recertifications would 

be completed by September 30, 2008. 

Can you let this committee know today how you intend to prevent future recertification backlogs and make sure that it happens 

in a timely manner? And do you have any assessment process in 

place to identify any future backlogs? 

Mr. HAIRSTON. In fact that is a process that is under way now 

as part of our business process reengineering. We recognize now 

that it is going to take us longer to process applications than we 

were processing them before. 

We were trying to process applications within a 30-day time 

frame; and we recognize that that just opens us up to too many 

possibilities of abuse of the program, that we will have to spend 

more time in terms of the certification process. 

And, again, with the recertification process, that will become a 

priority of the program that recertifications are absolutely necessary; and it will have to establish guidelines and time frames to 

make sure that they are done and that they are done appropriately. We expect to have that process completed by the end of 

this fiscal year. And hopefully we will have that framework in 

place sooner rather than later so that we can move forward in a 

prudent manner and with respect to the oversight of the program. 

Ms. CLARKE. So you don’t really have a concrete time frame in 

place as of yet? 

Mr. HAIRSTON. At this point, we are actually working with a contractor; and we plan to work with GAO and we plan to work with 

our Inspector General to make sure that we are putting the proper 

procedures in place. We are hoping to do that as quickly as we possibly can. We don’t have a time frame at this point to say when 

it will actually be completed. 

Ms. CLARKE. Would you get back to this committee as soon as 

you sort of have a good sense of that? Because, of course, you know 

that a recertification is very important to many of these companies 

that are trying to do right by our communities. And it could be 

quite interruptive for them if unanticipated delays pop up. So I 

hope that you will get back to us on that. 

Ms. CLARKE. I would also like to touch upon the 8(a) program. 

In your written testimony you stated that the Office of Business 

Development created an online tutorial to ensure that potential applicants understood and understand the 8(a) participation requirements. But according to Mr. Shear’s GAO report, released in November of 2008, he recommended that for 8(a) applicants to fully 

understand their realistic expectations, there needs to be an education requirement such as a seminar or an assessment tool. 

Do you intend to take further steps to ensure that firms applying 

for the program understand the 8(a) program requirements and 

have realistic expectations for participation, as the report suggested? 

17 

Mr. HAIRSTON. Those education seminars are conducted routinely 

throughout the country by our district offices. That is an ongoing 

process. 

Ms. CLARKE. So you are not relying solely on these online tutorials? 

Mr. HAIRSTON. No. 

Ms. CLARKE. Thank you very much, Madam Chair. I yield back 

the balance of my time 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And we are going to be in recess until the end of this set of votes. 

We have three votes. 

[Recess.][3:36 p.m.] 

Chairwoman VELA ́ ZQUEZ. The Committee is called back to order. 

Mr. Bartlett. 

Mr. BARTLETT. Thank you very much. 

I am pleased you are going to have a second round of questions 

and comments, because I want to participate further than just this 

one brief 5 minutes. 

Clearly, there is inadequate supervision of this program and inadequate punishment when bad guys sin. We need to have a punishment that will discourage—there is a $500 fine for riding in the 

HOV. Not very many people ride in the HOV, because there is a 

huge punishment for that. We need to have a harsh punishment 

for this. We are not going to do it, but if you hung the first person 

who did it, nobody else would ever do it, would they? And we need 

to have a punishment that just discourages people from doing it. 

These aren’t stupid people. These are opportunists that are taking advantage of the system, and we not to encourage them not to 

do that. 

I am very familiar with the HUBZone program because the first 

HUBZone contract ever was in my district. It was Garrett Container in Garrett County. Don Morin runs it, a great young entrepreneur; and they provide a lot of very good jobs there doing very 

important work for the government. 

But there is another one of my companies that I want to talk 

about which I think is exemplary of what HUBZones ought to do, 

and this is Sycamore Associates. A great name. Who is the Bible 

character that went up a sycamore tree and came down a Christian? Went up there a heathen and came down a Christian. 

So he is a very ethical person. He started in a little HUBZone 

in Frederick. It wasn’t big enough. He had to grow. So he moved 

out to Garrett County. 

I have three counties in Appalachia, 14 percent unemployment 

when I came to office. Really Appalachia. And great business out 

there. His people out there get three times the average salary out 

there, and he pays his people out there two-thirds as much as he 

pays them—they do contract work for NSA. NSA is very, very fond 

of them. 

He pays his people out there two-thirds as much as he pays them 

in Howard County when they live near NSA. So he can now hire 

three people out there to do the same work that two people are 

doing in Howard County because it is just a whole lot cheaper 

place to use. 

18 

So this is exemplary of what HUBZones ought to do, and I am 

really angry that these people are abusing the system. Because 

every one of these cheaters takes money away from a great company like Sycamore Associates and Kurt Heckman who runs that 

company that are providing really good jobs and really uplifting the 

area. 

All of Garrett County is a HUBZone because they have, as I said, 

14 percent unemployment when I came to office and very low salaries. His people make at least three times the average salary. So 

this is doing exactly what HUBZones are supposed to do. 

Does SBA not adequately manage just because you don’t have 

the resources? 

Mr. HAIRSTON. Well, let me say, first and foremost, that I agree 

with you wholeheartedly that we should be about eradicating that 

bad element from the program. We wholeheartedly agree that a 

lack of enforcement leads to further abuse. We are approaching 

that issue from that perspective, and I hope everyone understands 

that we recognize the types of steps that need to be taken. 

Mr. BARTLETT. But you are not taking them because you just 

don’t have the resources? 

Mr. HAIRSTON. I was going to finish. I was going to say we recognize what needs to be done, and we know the type of proper oversight and the types of things we need to put in place. But we also 

recognize—and that is why we are going through this planning 

process—that it is going to add a substantial burden in terms of 

cost to how we conduct oversight over this program and the costs 

associated with doing that. 

Mr. BARTLETT. So it is partly our fault because we didn’t give you 

the money to grow your staff so that you could have the— 

Now, my understanding is that the initial surveillance of this 

program is supposed to be self-policing. I know one small 

businessperson who is sitting in the audience who has done a really great job of self-policing. He understood that that is what was 

expected. Nobody knows better who the cheater is than the good 

guy who lost because the winner was a cheater. And we expected 

that they would come forward as self-policing. That costs the taxpayer nothing. But I don’t think we did a very good job of telling 

the HUBZone community that that is what we expected, did we? 

Mr. HAIRSTON. I am not certain that it works very well in this 

environment. We find that, while self-policing has worked in other 

programs that allow for self-certifications of a sort, we have found 

that, more recently, firms are afraid of offending contract officials 

by filing protests. 

Mr. BARTLETT. See, that is our fault. We need to tell them that 

they are going to be applauded for filing a protest when it is a legitimate protest, not going to be punished for it. We just didn’t 

properly advertise that. 

We have got to do one of two things. Either the community know 

that we really expect self-policing and they are not going to be punished for it, they are going to be rewarded for it. We have to give 

you enough money so you can police the program, right? 

Mr. HAIRSTON. Yes, sir. 

Mr. BARTLETT. Thank you very much, Madam Chairman. 

Chairwoman VELA ́ ZQUEZ. Mrs. Dahlkemper. 

19 

Mrs. DAHLKEMPER. Thank you, Madam Chair, and I want to 

thank you for bringing this really important hearing before us 

today. 

As Mr. Bright said earlier, I am a new Member of Congress, and 

I have never been in elected office before. I am out there in the private sector running my business and knowing that not everybody 

plays by the rules. But in my business, we do. And thinking that 

the government, whether it is Federal, State or local, is there protecting my interest, both as a businessperson and as a citizen, to 

make sure that those who are not playing by the rules are somehow punished for this and that our taxpayer dollars are not being 

used fraudulently, as obviously they are. 

I have so many questions here, but I am sure my outrage is felt 

by many others, including those businesses who are doing the right 

thing and who are using this program for the right reasons who 

may end up losing that privilege to use this program because of 

those people who have been cheating. 

I guess my question, Mr. Kutz and Mr. Shear, do you have any 

idea how much money of the taxpayer dollars has been lost since 

we had the first hearing? 

Mr. KUTZ. There is at least $25 million that was awarded to 

some of the 10 contractors we identified last July, including one of 

the most egregious cases that got a $23 million award subsequent 

to the July, 2008, hearing. So I would consider that to be additional 

fraud by those same companies. 

Mrs. DAHLKEMPER. And what percentage—I know you have kind 

of talked about this before, but you have only touched a few companies and the percentage of fraud that you think might be going on 

within this company. 

Mr. KUTZ. I don’t know that. I mean, we did not necessarily randomly sample. We actually picked certain areas that were vulnerable to the principal office and the 35 percent rule, although we 

weren’t looking for the other thing about the subcontracting. So 50 

plus percent of what we looked at so far. I don’t believe that is the 

likely majority of the companies are not eligible. 

However, it appears that there has been no real oversight for 

quite some time. And I think we have an admitted self-certification 

process for the first X number of years of this program; and they 

are trying to move from self-certification now to actually putting a 

program in place, which is why you have difficulty going from advocacy to enforcement. 

Mrs. DAHLKEMPER. I think that number would be very interesting, but it would probably be so scary I am not so sure we want 

to know, but sitting here listening, I just wonder what that figure 

is, what that figure is over the course of this program and how 

much money of the taxpayer dollars has been fraudulently taken 

from us. 

I guess my concern, Mr. Hairston, as we go forward here—first 

of all, it has really become clear that the SBA did not do their due 

diligence from the last hearing to today. As we go forward, we also 

are looking at a fair amount of money going out from the recovery 

package to the SBA. And, obviously, as a new Member who voted 

for that package, who believes in that package, I am very, very conVerDate Aug 31 2005 14:45 Apr 24, 2009 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\48124.TXT DARIEN
20 

cerned about your ability—your agency’s ability to monitor that 

money. Can you give me any reassurance about that? 

Mr. HAIRSTON. Well, I think we are, in fact, doing our due diligence now as we go forward. We have done our due diligence on 

the cases that have been referred. We fully intend to aggressively 

do our due diligence on the cases that are being referred by the report that is released today. 

We expect that we will be meeting with the GAO and our IG and 

our general counsel within the next week or so to get the names 

of those companies so that we can start that process; and, going 

forward, we will continue to implement procedures to further mitigate risk in the program. 

As I said before, we recognize that there is a huge risk here. We 

also recognize that putting the proper protocols in place to address 

that will be an additional cost burden for this program, and we 

need to plan how we need to do that and what those resources really are. 

Mrs. DAHLKEMPER. What kind of transparency are you going to 

have for us, for the American public? 

Mr. HAIRSTON. Transparency for the American public in terms 

of— 

Mrs. DAHLKEMPER. I would like to see transparency in this program. Certainly as we go forward in terms of the recovery package. 

But I would like to see some transparency so that we can— 

Mr. HAIRSTON. That is something we can certainly consider in 

this process, how we can be very transparent and how we go about 

conducting ourselves in this matter. 

Mrs. DAHLKEMPER. I yield back. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Bartlett, do you still have some 

questions? 

Mr. BARTLETT. After you, Madam Chair. You wanted a second 

round. 

Chairwoman VELA ́ ZQUEZ. I do. Yes. Thank you. 

Mr. Kutz—oh, sorry. Mrs. Halvorson. 

Mrs. HALVORSON. I know I am sitting way over here in my seat. 

But thank you, Madam Chairman. I do have a couple of questions. 

But, first of all, I would like to follow up on what Congressman 

Bartlett’s question was; and this is for Mr. Shear and Mr. Kutz. Do 

you believe that the SBA has the staff levels and the funding that 

is going to be required to implement some of the reforms that have 

been suggested? Because as I hear and I work with a lot of the different committees, I am hearing the same things over: We need 

help. We don’t have enough funding. We are doing what we can. 

What is going on? And what is it that you suggest? And do we 

have enough staffing levels to do what we need to have done? 

Mr. KUTZ. I would say—I will let Mr. Shear add, too—it is not 

just people. I think it is better processes and better use of technology. It is a combination of all three factors. 

I have met with SBA officials in January for over an hour, with 

their consultants, to give them kind of a brain dump of the kinds 

of things they should consider. But the kind of processes we have 

talked about here, the random, unannounced site visits; and they 

are still not doing those. And that is something they should be able 

21 

to do fairly quickly. We did 36 of those as part of this investigation 

ourselves with several people. So we did 36 ourselves. 

The technology issue is, do they have the kind of tools technology-wise to do some of the actual kinds of preliminary work that 

you would do before you actually go out and do a site visit or to 

help you with your risk assessment? 

So our recommendations to them include all three elements of 

that. 

Chairwoman VELA ́ ZQUEZ. Would the gentlelady yield for a second? 

Mrs. HALVORSON. Yes. 

Chairwoman VELA ́ ZQUEZ. I understand that the SBA program 

was shut down, was closed; and you moved 12 people from that 

program to the HUBZone. Have you seen this—this happened last 

September. 

Mr. HAIRSTON. Yes, I believe so. 

Chairwoman VELA ́ ZQUEZ. Did you see any progress regarding onsite visits or an acceleration of processes? 

Mr. KUTZ. I can’t answer on the program examination side. Apparently, they have made progress on program examinations. 

But, on site visits, if they have only done seven this fiscal year, 

we did 36 for our investigation. So I don’t think seven is enough. 

And I don’t know how many people they have at this point. But if 

they have seven people, they should be able to do more than one 

a month, for example. 

Chairwoman VELA ́ ZQUEZ. Mr. Hairston, I will give you more 

time, but I just cannot allow for this to go and not being able to 

ask you, what will it take? This is taxpayer’s money. So with much 

less manpower, they have conducted many more visits. Yet you put 

12 people added to the program and still—what is the problem? 

Mr. HAIRSTON. I would assume, first and foremost, that, from a 

manpower standpoint and from the standpoint of the prioritization 

of their resources, that is their job. That is what they do. That is 

what they are in business to do, is to go out and do that type of 

forensic investigation. 

From our perspective, I don’t know that the HUBZone office set 

its priorities to support that type of an activity. That is something 

that needs to be looked at, and that is something that needs to be 

corrected. 

Chairwoman VELA ́ ZQUEZ. But aren’t you concerned that this 

Committee and the administration, that we are going to put pressure to close down this program? 

Mr. HAIRSTON. Obviously, I am concerned. I am concerned about 

the program. 

Chairwoman VELA ́ ZQUEZ. For the record, let me read to you from 

the congressional hearing that we conducted last September. You 

came here. I asked you specifically about Ms. Carranza’s, the 

former Administrator, commitment to do on-site visits. And you 

said, well, I am not aware that she made such a commitment. So 

let me read to you what she said to this Committee: 

In response to the findings of the GAO forensic investigation, 

which we learned about last week, I have taken many steps to require site visits for those HUBZone firms that have received 

HUBZone contracts. 

22 

I yield back. Thank you. 

Mrs. HALVORSON. Thank you, Madam Chairman. And just to reiterate—and I appreciate the conversation. I represent a district 

that probably could all use the HUBZone funding, low income, high 

poverty rate, high unemployment. Parts of my district have 14 percent unemployment rates, and I would hate to see that people that 

don’t qualify get this kind of funding when we don’t even have people in these towns that probably know even how to apply for this. 

So I am going to work hard, my staff and I, to help them. 

And I just don’t want to see that there are people who are abusing the system. And what I found in my short amount of time in 

this body and 12 years prior in Illinois was I think we have enough 

laws, we have enough programs, but we don’t have enough funding 

and staff to enforce what we have. This is our life, and I would 

hope that you would take it seriously as we go back to do what it 

is that we all agreed to do. Because the people are not benefiting. 

The wrong people are. 

So I would help wherever I can. I offer myself and my staff to 

make sure that whatever it is we are doing that we do in the right 

way. Because the people that live in my district in Illinois are suffering because they are not getting this kind of funding, and they 

are the ones that truly should. Because in some parts of my district, they don’t even have blacktop roads. They have gravel and 

sand and propane. They don’t even have natural gas. So I would 

really get frustrated if I knew that people in the wrong places were 

getting this kind of funding. 

I yield back. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Kutz, last year GAO’s fraud investigators created four phantom companies, including two with mailboxes as a principal office and a third with a Starbucks as the principal office. Are these four companies still listed as eligible 

HUBZone firms? 

Mr. KUTZ. As of 8:00 a.m. this morning, yes. 

Chairwoman VELA ́ ZQUEZ. Administrator Hairston, why was the 

SBA unable to even find the phony HUBZone firm at a Starbucks? 

Why weren’t you able to? 

Mr. HAIRSTON. Well, I am sure if, in fact, those firms are in the 

system now, that there is a process ongoing to remove them. There 

is a decertification process. I would hope that that process is under 

way. I can get that information back to you. 

Mr. KUTZ. But they are not being decertified. No. I mean, we 

would have gotten notice. We haven’t heard anything from SBA at 

this point. 

Chairwoman VELA ́ ZQUEZ. Isn’t this firm the same one that was 

found to be ineligible last July? 

Mr. KUTZ. No. Those are our four fake firms that we are talking 

about versus the one that actually got $23 million in new contracts. 

Our bogus firms are still in the system. Although we haven’t competed for contracts, we are not willing to go that far with it at this 

point. 

Mr. HAIRSTON. Yeah. And I would agree that they should not be 

there. 

Chairwoman VELA ́ ZQUEZ. Really? Ten cases were brought to your 

attention last year. Only two have been officially removed from the 

23 

program, and none have been debarred today. I have read your testimony and your explanation for this. Given the seriousness of the 

violations, why did the SBA not choose to suspend these companies 

during the debarment process? 

Mr. HAIRSTON. Because we don’t have the authority under our 

regulations to suspend prior to a formal action. Differing from our 

8-A program, under the regulations in our section— 

Chairwoman VELA ́ ZQUEZ. Is that correct? 

Mr. KUTZ. No, that is not correct. You can suspend a company 

before there is a prosecution, an indictment, if you have sufficient 

evidence. 

Chairwoman VELA ́ ZQUEZ. And do you believe that there is sufficient evidence? 

Mr. HAIRSTON. I would actually disagree with that. I would disagree with that, and our counsel would disagree with that. We 

don’t have the authority. It is not specific in our regulations that 

we could actually suspend prior to a formal determination. 

We can do that in the 8-A program. We have specific requirements under our regulations in the 8-A program that allow us to 

do that, to preclude a firm from receiving benefits for which it is 

not eligible. 

Chairwoman VELA ́ ZQUEZ. I want your counsel to put that in writing for the record and send it to this Committee. 

Mr. KUTZ. Madam Chair, I am talking about suspensions, not 

debarments. Debarments require a much longer process, but suspensions can be done without as much evidence. I mean, there is 

enough evidence in this case to decertify. Our position would be 

that they could be suspended. 

Mr. HAIRSTON. We rely on our counsel who says that— 

Chairwoman VELA ́ ZQUEZ. That they cannot be suspended? 

Mr. HAIRSTON. That there is an evidentiary procedure and standard that has to be met and that there is a due process afforded in 

that process. That is why I was explaining the difference between 

the authority we have under our 8-A program that differs from the 

authority we have under our HUBZone program. But we will provide you what you are asking for. 

[The information is included in the appendix at page 101.] 

Chairwoman VELA ́ ZQUEZ. Mr. Kutz, why do you believe that 

there have been so few referrals for either suspension or debarment? 

Mr. KUTZ. As I mentioned before, because I think before you had 

more of a self-certification process. So, hopefully, if they are putting 

more stringent front-end controls in place, they will identify more 

cases that actually they would refer to the IG and that they would 

consider for suspension and debarment. So, hopefully, if you move 

from an environment of self-certification to one where you have got 

effective controls in place, you will come up with more examples. 

I would just say for the record, too, here—and I think Mr. Bartlett mentioned it, too, I think you have to make some examples of 

people. And if you don’t make some examples of some people here, 

you are not going to have any change. 

So here we are nearly a year later from our hearing last July, 

and we have little or nothing that has happened to the 10 cases 

before. And I would say some of those were egregious fraud cases 

24 

that again I would say for the record could have been suspended 

by now. We are talking about 6 or 8 months after the last hearing. 

The fact that nothing has been done with some of those companies 

and they are still getting government contracts as HUBZone companies is not a good sign. 

Chairwoman VELA ́ ZQUEZ. Any comments to that? 

Mr. HAIRSTON. Out of the 10 cases that were referred, I think I 

indicated that we found three of those firms to be eligible. Two of 

the firms were decertified. 

Chairwoman VELA ́ ZQUEZ. What about the other seven? 

Mr. HAIRSTON. I am explaining that. Two of the firms were decertified, two of the firms withdrew from the program, and three 

are actually still under investigation. And seven have been referred 

for suspension and debarment. 

Chairwoman VELA ́ ZQUEZ. Mr. Kutz, did you get any information 

regarding the three firms that SBA claimed are eligible? 

Mr. KUTZ. No. We have asked for information. The three cases 

were three cases, I believe, that they failed the 35 percent, not the 

principal office requirement. At the time we looked at them, we determined, based upon payroll records that we received, that they 

did not meet the 35 percent. SBA has represented that they now 

do or at some point when they do the investigation they did. We 

asked for support for all three of those cases about 2 months ago, 

and we have not received it yet. 

Chairwoman VELA ́ ZQUEZ. Why is that? 

Mr. HAIRSTON. I will find out. I don’t know the answer to that. 

I wasn’t aware that that request had been made, but I will find out 

why they haven’t gotten the information. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

Mr. Bartlett. 

Mr. BARTLETT. Thank you very much. 

Is the only punishment here debarment? 

Mr. HAIRSTON. Actually, suspension and debarment 

Mr. BARTLETT. That is the only punishment? 

Mr. HAIRSTON. No. Actually, the only other punishment would be 

decertification and then referral for some type of criminal prosecution. 

Mr. BARTLETT. Has that ever happened? 

Mr. HAIRSTON. Not that I am aware of. 

Mr. BARTLETT. This reminds me of the illegal immigrants and 

the border. If all you do is get sent home, why not try again tomorrow? By and by, you will be successful. 

If the only thing you do is debar them, that is not punishment 

enough. Is it our fault that you don’t have harsh enough punishment to dissuade these people? 

Mr. HAIRSTON. No, I think there were cases that were referred 

for criminals, but they were denied. 

Mr. BARTLETT. What is the maximum punishment that could be 

meted out to these people? Can GAO tell us? 

Mr. KUTZ. Well, certainly. These people all made false statements. Title 18, Section 1001. If you can get a U.S. attorney to take 

a case, you could prosecute a case in that particular situation. Now, 

the U.S. Attorney declined the case that Mr. Hairston is talking 

about here. 

25 

Mr. BARTLETT. They have bigger fish to fry? 

Mr. KUTZ. Apparently. 

Mr. BARTLETT. We have got to do something. 

Mr. KUTZ. That is something the Committee could decide to do, 

is work with some U.S. attorneys to see if they could get a few 

poster-children cases to go through the criminal system. And that 

is something—maybe you should consider that. 

Mr. BARTLETT. If we had a few of those, it would stop this thing. 

This is such a valuable program. 

I just want to note again my personal experience with that. The 

first one in the country was Garrett Container out in Garrett County, 14 percent unemployment. And then they have a lot of people 

working there doing a really good job and they make shipping containers for our military. They are doing a doubly good job supporting the military and supporting the economy there. 

And then when Sycamore Associates went out there, wow, that 

really was revolutionary. Because they have a number of people 

there making three times the mean average salary there. But they 

are paying them only two-thirds as much as they would need to 

pay them if they were— 

By the way, they give them a choice. They have a job for them in Howard County for $100,000 or a job for them for 65 or $70,000 

in Garrett County. They take the job in Garrett County because, 

the truth is, you will live better in Garrett County with $65,000 

than you will in Howard County for $100,000. 

So we are saving—now NSA can have three analysts where before they could only have two analysts. So this is really, really good 

for my district, for Garrett County, because they are paying them 

three times as much as the average person who works there. 

Look at all of the people down the line that are better off because 

of that, all of the industries that serve them, the service station, 

the cleaners, the drugstore, the restaurant they go to and so forth. 

All of that. And we are really saving the taxpayer a lot of money 

because—and GSA is very fond of this because now they get three 

employees where before they could only support two employees. 

So this is a great example of what these HUBZone companies 

ought to be doing; and I am just incensed, Madam Chairman, that 

we have these cheaters out there. 

And I know one of our small businesspeople who is here in the 

audience who has been very successful in protesting. He knew that 

is what he was supposed to do. And he had one person that was 

awarded the contract. He had absolutely no capability. All he had 

was a townhouse. And, obviously, you protest that. He couldn’t 

have possibly performed on it, but he was awarded the contract 

anyhow by this government Agency. 

So our small businessperson protested that, and the protest was 

upheld. Then there was a second one, and he protested that, and 

that was upheld. So the system does work, but these small 

businesspeople don’t know that that is what they are supposed to 

do. 

So we now have all these egregious cheaters out there, and we 

need to do a couple of things. Either we need to let the community 

know that they are supposed to self-police, or we need to give you 

enough resources so you can police them. And we sure as heck 

26 

ought to have a punishment that fits the crime so that they are 

dissuaded from do—and we have done none of that. 

Madam Chairman, almost a year ago we sat here. And here we 

are today, and it sounds like Groundhog Day all over again. It is 

the same kind of thing that we were hearing a year ago. 

We need to give you more money, we need to tell the community 

they need to self-police, and we really need to have an adequate 

punishment. We need to have a few examples out there so you 

won’t do it. 

Any argument that we need to do those things? 

Mr. KUTZ. No. Again, I think—as you said, I believe that if you 

have some examples out there of serious punishment that that will 

send a message. 

Mr. BARTLETT. Yeah, some jail time. 

Mr. KUTZ. Yes. 

Mr. BARTLETT. That gets around very quickly, doesn’t it? 

Well, the people who are now offenders, they knew that there 

wasn’t going to be much—it needs to be people that come in and 

offend from now on. You can’t really—it is ex post facto, and it is 

unconstitutional. And the general knowledge was that there wasn’t 

going to be any serious punishment for this. So a huge gain possible, so why not do it? We need to make that very nonproductive 

for them, don’t we? 

Thank you very much. Thank you, Madam Chairman. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

Mr. GRAVES. How often does a business have to recertify if they 

are in a HUBZone? 

Mr. HAIRSTON. Every 3 years. 

Mr. GRAVES. Can’t you just withhold certification, too, if they 

turn out to be fraudulent? 

Mr. HAIRSTON. During the recertification process? Yeah, they 

can— 

Mr. GRAVES. But you would have to actually go check and see if 

they are the real deal? 

Mr. HAIRSTON. We are supposed to, yes. 

Mr. KUTZ. Congressman, can I also add to that? In addition to 

recertifying for a HUBZone, they also recertify certain key facts on 

line annually. So when I mentioned in my opening statement that 

many of these companies—all 19 have made recent false statements. They all certified that they were HUBZone-eligible during 

periods that we determined that they were not. Not the SBA, but 

as part of our on-line overall contracting certification program. 

Chairwoman VELA ́ ZQUEZ. Mr. Bartlett, I just would like to remind the Committee that we passed the HUBZone reform through 

the House with overwhelming support. So we are just not here 

waiting for SBA to do what they are not doing. Let me state— 

Mr. BARTLETT. Madam Chair, did we give them the resources? 

Giving them the responsibility without the resources— 

Chairwoman VELA ́ ZQUEZ. Well, the Committee passed the budget, and we are providing the resources. Yes. 

Mr. BARTLETT. They are telling us they don’t have the resources. 

Chairwoman VELA ́ ZQUEZ. No, no. In the budget that we passed 

here and that the Committee reported out—but, don’t forget, for 

27 

the last 8 years, yes, their budget has been cut by almost 40 percent. We are trying to restore some of the money. 

Mr. BARTLETT. We can’t fault them for what is our fault, if we 

gave them the responsibility and not the resources. 

Chairwoman VELA ́ ZQUEZ. Well, it is a new day in Washington. 

Mr. Hairston, let me just say this. I am extremely, extremely disappointed for the lack of progress. And my message to SBA is clear. 

You have a decision to make, whether or not you are committed to 

this program. And then the Committee has a decision to make regarding the future of the program. 

With that, let me ask unanimous consent that members will 

have 5 days to submit a statement and supporting materials for 

the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 4:06 p.m., the Committee was adjourned.] 

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