SERVICE-DISABLED 

VETERAN-OWNED SMALL 

BUSINESS PROGRAM

Vulnerability to Fraud and 

Abuse Remains

Statement of Richard J. Hillman, Managing Director 

Forensic Audits and Investigative Service

Testimony 

Before the Subcommittees on Economic 

Opportunity and Oversight and 

Investigations, Committee on Veterans’ 

Affairs, House of Representatives

For Release on Delivery 

Expected at 10:00 a.m. EDT

Thursday, August 2, 2012

GAO-12-967T

United States Government Accountability Office

GAO
 

Page 1 GAO-12-967T 

Chairmen Stutzman and Johnson, Ranking Members Braley and 

Donnelly, and Members of the Subcommittees:

I am pleased to be here as you examine the Service-Disabled VeteranOwned Small Business (SDVOSB) Program’s vulnerabilities to fraud and 

abuse. My remarks today are based on our report, Service-Disabled 

Veteran-Owned Small Business Program: Vulnerability to Fraud and 

Abuse Remains, recently issued.

1

SBA administers the government-wide SDVOSB program but does not 

verify firms’ eligibility, stating that its only statutory obligation is to report 

other agencies’ success in meeting contracting goals. In addition to SBA’s 

statutory authority over the government-wide program, the Department of 

Veterans Affairs (VA) has separate authority over issues related to its 

own SDVOSB program. VA awarded $3.2 billion in SDVOSB contracts in 

fiscal year 2010—about 30 percent of government-wide SDVOSB 

awards. Unlike SBA, VA is bound by the Veterans Benefits, Health Care, 

and Information Technology Act of 2006 (2006 Act) to verify firms’ 

eligibility. Since 2009, we have issued 10 reports and testimonies 

detailing how the government-wide and VA SDVOSB programs are 

vulnerable to fraud and abuse, making numerous recommendations to 

strengthen fraud-prevention controls.

In fiscal year 2010, federal agencies 

awarded $10.8 billion in small-business obligations to firms participating 

in the SDVOSB program, according to the Small Business Administration 

(SBA). The program is intended to honor business-owning veterans who 

incurred or aggravated disabilities in the line of duty by providing their 

firms with sole-source and set-aside contracting opportunities. Firms must 

meet several requirements to be eligible to participate in the program, 

such as being majority-owned by one or more service-disabled veterans 

who manage and control daily business operations.

2

 

1

In October 2010, Congress also 

passed the Veterans Small Business Verification Act (2010 Act), part of 

the Veterans’ Benefits Act of 2010, to require VA among other things to 

more-thoroughly validate firms’ eligibility before listing them in VetBiz, 

VA’s database of eligible firms. In July 2011, we reported that both SBA 

and VA had taken positive steps in response to our findings and 

recommendations, but that vulnerabilities remained.

GAO-12-697 (Washington, D.C.: Aug. 1, 2012).

2

See “Related GAO Products” in GAO-12-697. 

 
 

Page 2 GAO-12-967T 

You requested that we again update our prior work and report the status 

of our recommendations. Our report assesses (1) VA’s progress in 

addressing remaining vulnerabilities to fraud and abuse in its SDVOSB 

program and (2) actions taken by SBA or other federal agencies since our 

previous reports to improve government-wide SDVOSB fraud-prevention 

controls. To do so, we reviewed agency documentation and interviewed 

agency officials. We investigated new allegations from informants 

regarding firms that received SDVOSB contracts through fraudulent or 

abusive eligibility misrepresentation and highlighted 5 examples. Our 

examples cannot be projected to the overall population of SDVOSB firms. 

We also reviewed the status of 10 case studies from our prior work. We 

did not project the extent of fraud and abuse in the program. We 

conducted this performance audit from January 2011 to July 2012 in 

accordance with generally accepted government auditing standards.3

In summary, VA’s SDVOSB program remains vulnerable to fraud and 

abuse. VA has made inconsistent statements about its progress in

verifying firms listed in VetBiz using the new, more-thorough process the 

agency implemented in response to the 2010 Act. In one communication, 

VA stated that as of February 2011, all new verifications would use the 

2010 Act process going forward. According to the most-recent information 

provided by VA, there are 6,079 SDVOSBs and veteran-owned small 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. We performed our 

investigative work from January 2011 to July 2012 in accordance with the 

standards prescribed by the Council of the Inspectors General on Integrity 

and Efficiency.

 

3

Some of the work in this report is based on prior GAO products issued in 2012, 2011, 

and 2009. GAO, Service-Disabled Veteran-Owned Small Business Program: 

Governmentwide Fraud Prevention Control Weaknesses Leave Program Vulnerable to 

Fraud and Abuse, but VA Has Made Progress in Improving Its Verification Process, 

GAO-12-443T (Washington, D.C.: Feb. 7, 2012); Service-Disabled Veteran-Owned Small 

Business Program: Additional Improvements to Fraud Prevention Controls Are Needed, 

GAO-12-205T (Washington, D.C.: Nov. 30, 2011); Service-Disabled Veteran-Owned 

Small Business Program: Preliminary Information on Actions Taken by Agencies to 

Address Fraud and Abuse and Remaining Vulnerabilities, GAO-11-589T (Washington, 

D.C.: July 28, 2011); and Service-Disabled Veteran-Owned Small Business Program: 

Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars 

in Contracts, GAO-10-108 (Washington, D.C.: Oct. 23, 2009). 
 

Page 3 GAO-12-967T 

businesses (VOSB) listed in VetBiz. Of these, 3,724 were verified under 

the more-through process implemented under the 2010 Act, and 2,355—

over 38 percent—were verified under the less-rigorous 2006 Act process. 

The presence of firms that have only been subjected to the less-stringent 

process that VA previously used represents a continuing vulnerability.4

VA has taken some positive action to enhance its fraud-prevention efforts. 

VA generally concurred with recommendations we issued in October 

2011 and has established processes in response to 6 of the 13 

recommendations (fig. 1). VA has also begun action on some remaining 

recommendations, such as providing fraud-awareness training and 

removing contracts from ineligible firms, though these procedures need to 

be finalized.

 In 

2011, VA’s Office of Inspector General (OIG) issued a report finding that 

VA’s document review process under the 2006 Act “in many cases was 

insufficient to establish control and ownership ... [and] in effect allowed 

businesses to self-certify as a veteran-owned or service-disabled veteranowned small business with little supporting documentation.” 

 

4

On June 27, 2012, VA implemented an interim rule that extends the eligibility of verified 

firms to 2 years. VA told us it interprets “verified” to include any firms that have been 

verified under either the 2006 Act or 2010 Act processes. Consequently, implementation 

of this rule means that thousands of firms will continue to be eligible for contracts even 

though they have not undergone the more-thorough 2010 Act process.
 

Page 4 GAO-12-967T 

Figure 1: Status of GAO’s Previous Recommendations

a

VA’s Center for Veterans Enterprise (CVE) is responsible for maintaining VetBiz and implementing 

VA’s verification program.
 

Page 5 GAO-12-967T 

b

The North American Industry Classification System (NAICS) is the standard used by federal 

statistical agencies in classifying business establishments for the purpose of collecting, analyzing, 

and publishing statistical data related to the U.S. business economy. 

c

Regarding the government-wide SDVOSB program, no action has been 

taken by agencies to improve fraud-prevention controls. Relying almost 

solely on firms’ self-certification, the program continues to lack controls to 

prevent fraud and abuse. For example, the Department of Defense (DOD) 

OIG reported in 2012 that DOD provided $340 million to firms that 

potentially misstated their SDVOSB status. SBA does not verify firms’ 

eligibility status, nor does it require that they submit supporting 

documentation. While SBA is under no statutory obligation to create a 

verification process, five new cases of potentially ineligible firms highlight 

the danger of taking no action. These firms, discussed below, received 

approximately $190 million in SDVOSB set-aside and sole-source 

contract obligations.

VA’s Debarment Committee was instituted in September 2010 specifically to debar firms that had 

violated SDVOSB regulations.

• Non-SDVOSB joint venture. An SDVOSB entered a joint venture with 

a non-SDVOSB firm and received about $16 million in governmentwide SDVOSB set-aside contract obligations. However, the owner, a 

service-disabled veteran, admitted to our investigators that his 

SDVOSB firm did not manage the joint venture. 

• VA-denied firm. Though VA denied this firm SDVOSB status in 2010 

because the firm was not controlled by a service-disabled veteran 

owner, it continued to self-certify in the Central Contractor 

Registration (CCR).5

• Multiple firms not veteran-controlled. Two firms and a joint venture 

firm received over $91 million in SDVOSB set-aside and sole-source 

contract obligations from VA and the Department of Health and 

Human Services. However, VA determined they were ineligible 

because they were not controlled by the service-disabled veteran who 

The firm had received $21 million in SDVOSB 

set-aside and sole-source contracts from multiple agencies, and was 

awarded about $860,000 by the General Services Administration and 

the Department of the Interior (DOI) after it was denied by VA.

 

5

CCR is the primary registrant database for the U.S. federal government. CCR collects, 

validates, stores, and disseminates data in support of agency acquisition missions, 

including federal agency contract and assistance awards.
 

Page 6 GAO-12-967T 

owned one of the firms. The firms have not been removed from the 

government-wide SDVOSB list.

• Not service-disabled veteran-controlled. This firm was ineligible for the 

SDVOSB program because the veteran did not control daily 

operations—he lived 500 miles away and received only a $12,000 

salary. This firm received about $37 million in SDVOSB set-aside 

contract obligations from DOD and DOI. SBA has since debarred the 

firm from the program. 

• Service-disabled veteran otherwise employed. The firm may be 

ineligible because the service-disabled veteran owner worked as an 

attorney at a legal services organization Monday through Friday about 

40 hours a week. This raises questions about his ability to also 

manage the day-to-day proceedings of the SDVOSB firm, which 

received about $25 million in SDVOSB set-aside and sole-source 

contract obligations from VA and the Department of Transportation.

The firms in our previous 10 case studies that we reported in October 

2009 have been or are under investigation by the SBA OIG. The SBA 

OIG has joined forces with other agency OIGs to pursue several cases. 

For example, enforcement actions have been taken against 3 of the 10 

cases. Specifically, two individuals related to our cases have been 

charged with wire fraud in relation to their misrepresentation as an 

SDVOSB and another firm pled guilty to wire fraud in relation to another 

small-business program.

To address vulnerabilities in the government-wide program, we previously 

suggested that Congress consider providing VA with the authority 

necessary to expand its SDVOSB eligibility-verification process 

government-wide. Such an action is supported by the fact that VA 

maintains the database identifying which individuals are service-disabled 

veterans and is consistent with VA’s mission of service to veterans. 

However, as shown by our current work, VA’s program remains 

vulnerable to fraud and abuse because the agency has been unable to 

accurately track the status of its efforts and because potentially ineligible 

firms remain listed in VetBiz. Consequently, VA’s ability to show that its 

process is successful in reducing the SDVOSB program’s vulnerability to 

fraud and abuse remains an important factor in any consideration about 

the potential expansion of VA’s eligibility verification process governmentwide.
 

Page 7 GAO-12-967T 

To minimize potential fraud and abuse in VA’s SDVOSB program and 

provide reasonable assurance that legitimate SDVOSB firms obtain the 

benefits of this program, we recommend in our newly issued report that 

the Secretary of Veterans Affairs ensure that all firms within VetBiz have 

undergone the 2010 Act verification process. Specifically, this should 

include consideration of the following three actions: (1) inventory firms 

listed in VetBiz to establish a reliable beginning point for the verification 

status of each firm; (2) establish procedures to maintain the accuracy of 

the status of all firms listed in VetBiz, including which verification process 

they have undergone; and (3) expeditiously verify all current VetBiz firms 

and new applicants under the more-thorough 2010 Act verification 

procedures.

VA generally concurred with our recommendations but expressed 

concern about how specific report language characterized its program. 

GAO made some changes to the report as appropriate but continues to 

believe that the program remains vulnerable to fraud and abuse. In 

written comments, SBA stated that it is committed to eliminating fraud, 

waste, and abuse in all of its programs including the government-wide 

SDVOSB program. 

Mr. Chairmen, Ranking Minority Members, and Members of the 

Subcommittees, this concludes my prepared remarks. I would be happy 

to answer any questions that you or other members of the subcommittees 

may have.

For additional information about this testimony, please contact Richard J. 

Hillman at (202) 512-6722 or hillmanr@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this statement. Other key contributors to this statement 

include Jennifer Costello, Assistant Director; Arturo Cornejo; Gloria Proa; 

Abby Volk; and Timothy Walker.

(192414)
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