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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 

NOVEMBER 18, 2009 

Small Business Committee Document Number 111-055 

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 

W. 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 

W. 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, North Carolina, 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 

Mills, Hon. Karen, Administrator, U.S. Small Business Administration ........... 4 

Kutz, Mr. Gregory, Managing Director, Forensics Audits and Special Investigations, U.S. Government Accountability Office ............................................. 6 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 27 

Graves, Hon. Sam .................................................................................................... 29 

Mills, Hon. Karen, Administrator, U.S. Small Business Administration ........... 31 

Kutz, Mr. Gregory, Managing Director, Forensics Audits and Special Investigations, U.S. Government Accountability Office ............................................. 33 

Statements for the Record: 

Government Accountability Office, Report on Service-Disabled Veteran-Owned 

Small Business Program ..................................................................................... 48 

U.S. Small Business Administration, Recovery Act Report Card, October 

2009 ....................................................................................................................... 87 

Small Business Administration Response to Questions for the Record .............. 91 

(V) 

(1) 

FULL COMMITTEE HEARING ON 

OVERSIGHT OF THE SMALL BUSINESS 

ADMINISTRATION AND ITS PROGRAMS 

Thursday, November 19, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

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

2360 Rayburn House Office Building, Hon. Nydia Vela ́zquez [chairman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Dahlkemper, Schrader, Nye, 

Altmire, Ellsworth, Graves, Bartlett, Akin, King, Fallin, Buchanan, 

Luetkemeyer, Thompson and Coffman. 

Chairwoman VELA ́ ZQUEZ. This hearing is now called to order. 

In the 111th Congress, the House has made an unprecedented 

commitment to transparency. Under the Speaker’s direction, the 

House has adopted Rule 11 which requires quarterly hearings on 

fraud, waste, abuse, and mismanagement of programs under committee jurisdiction. 

I am proud to say that the Small Business Committee has gone 

above and beyond that requirement. Since January, we have conducted no fewer than 16 oversight hearings. Today’s discussion 

marks the third in a series we have held with GAO and SBA this 

year and give us an opportunity to gauge the state of the agency’s 

program. 

These hearings are an important took for measuring progress 

and gathering information. In the past, they have been enormously 

useful not just for spotting SBA problem areas, but also for solving 

them. 

In July, we met to examine disaster loans, a program that has 

been mired in controversy sine Hurricane Katrina. That discussion 

generated a number of recommendations for improvement and, importantly, was the impetus behind the Small Business Disaster 

Readiness and Reform Act introduced by Representative Parker 

Griffith. 

SBA programs have always been a lifeline for struggling small 

firms. In light of the current downturn, they are more important 

than ever. These are initiatives that encourage greater competition 

in the marketplace and yield significant returns on the taxpayer 

dollar. 

Even more importantly they help create jobs. Small firms generate roughly 70 percent of new positions, and investment in these 

ventures is a downpayment for job growth. That is why it is so important for SBA’s program to be running at full capacity. 

2 

In past oversight hearings, however, GAO has shed light on some 

struggling areas in the agency’s contracting portfolio. At our oversight hearing in May, GAO helped us identify considerable fraud 

within the HUBZONE program. In some cases, big businesses had 

gamed the system to win small business contracts. In other instances, firms in wealthy neighborhoods had posed as struggling 

ventures with HUBZONE addresses. 

In all cases, we knew just what we were looking at: the fleecing 

of America’s entrepreneurs. And, unfortunately, it seems to be happening to some of our most vulnerable instances. Fraud within the 

federal marketplace is never an acceptable thing, but it is particularly troubling when it comes at the expense of our veterans. The 

Disabled Veterans Contracting Program was established as a 

means of empowering these men and women. 

With unemployment for severely disabled soldiers at 85 percent, 

it is particularly important today. Entrepreneurship offers a kind 

of financial independence that other livelihoods cannot. We need to 

be sure it remains a viable option for our veterans, the men and 

women who have served our country so well. These brave Americans have more than earned their shot at entrepreneurship. 

And yet we know we now have reason to believe that disabled 

veterans program is being exploited by an unscrupulous few dishonest businesses that have cheated out veterans of countless opportunities. This sort of abuse is more than a simple injustice. It 

is criminal, and it needs to be addressed immediately, not weeks 

or months down the road. 

The Committee is not only going to look for ways to support the 

disabled veterans contracting program, but to hold these individuals accountable who have sought to game the system at the expense of our nation’s veterans. 

In times of economic turmoil, small firms have always relied on 

the SBA. Even if it means tremendous uncertainty, the agency has 

stood as a beacon of stability. It is critical that it continue to play 

that stabilizing role. Just as our economy is counting on small businesses to lead the recovery, small businesses are counting on SBA 

for strength and support. We cannot afford to let them down. 

I would like to thank our witnesses, including Administrator 

Mills, for being here this morning, and I would also like to recognize Mr. Kutz for helping to compile today’s reporter. GAO has 

been an invaluable resource to this Committee in the past, and I 

am grateful for their hard work and dedication to transparency. 

With that I will yield to Ranking Member Graves for his opening 

statement. 

Mr. GRAVES. Thank you, Madam Chair, and thank you for holding this hearing today on oversight of small business, the SBA and 

its programs, and I look forward to hearing the insight of all the 

witnesses today. 

Thank you, Administrator, for coming in. I appreciate it. 

The Small Business Administration oversees a variety of programs, including procurement initiatives designed to increase 

growth of small businesses. This Committee has a responsibility to 

insure that these programs operate to the benefit of small businesses, including the ones directed at specific groups, such as the 

service disabled veterans. 

3 

The Small Business Act requires that small businesses receive 

their fair share of opportunities to provide goods and services in 

the $434 billion federal contracting marketplace. Congress then decided that within this segment of small businesses, those owned by 

service disabled veterans deserve extra assistance for the sacrifices 

that they have made to defend this country. No one can deny that 

this assistance is deserved. 

It is then troubling to find out that the program is subject to 

fraud. The investigation that will be discussed at this hearing reveals that some firms are not performing the contracts. Instead, 

they are having the goods and services supplied by large businesses. 

In other cases, businesses are not owned by service disabled veterans. The underlying problem, as it was with the HUBZONE program is the ability of small businesses to self-certify eligibility for 

the program without any independent checks by the SBA. 

By itself the fraud would be problematic. However, it is more 

troubling that firms ineligible for the program then deny firms that 

are eligible for contracts. The firms denied contracts are those 

owned by individuals who made significant sacrifices in defending 

this country, and it is simply unacceptable. 

I look forward to hearing the testimony today and learning about 

the steps that are being taken to address this problem when it 

comes to the fraud. If those actions do not prove successful in insuring that service disabled small business owners benefit from the 

program, then I would like to see aggressive legislative action 

taken to do so. 

Again, Madam Chairman, I appreciate you having this hearing, 

and I look forward to the testimony 

Chairwoman VELA ́ ZQUEZ. I now yield to Mr. Nye. He is the chairman of the Contracting and Technology Subcommittee. 

Mr. NYE. Thank you. 

I would like to thank Chairwoman Vela ́zquez and Ranking Member Graves for holding this important hearing today. Administrator 

Mills and Mr. Kutz, I would like to thank you both for being here 

as well. I know you have been extremely busy. 

Administrator Mills, you just came on to lead the SBA this 

spring, and unfortunately it seems you have stepped into a mess 

of fraudulent contracting and abuse of federal American taxpayer 

funds. I hope you will take on this issue as a top priority and that 

this hearing will be helpful for all of us to move forward on finding 

a solution to this problem. 

It is my priority as chairman of the Contracting and Technology 

Subcommittee to insure that contracts, especially those set aside 

for our service disabled veterans who have served and sacrificed for 

our country, are in fact given to small business owners. 

At the first hearing I held in my Subcommittee in March of this 

year, before you were the Administrator, I addressed the federal 

agencies on the issue of meeting their contracting goals for service 

disabled veterans with recovery act funds. You and I spoke a few 

weeks ago, Administrator Mills, in my office, and you showed me 

a very promising report card on the progress toward meeting our 

federal agency contracting goals, and according to those numbers, 

it looked like the goal of three percent for our service disabled vetVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
4 

eran companies was being exceeded by nearly a full percentage 

point. 

However, on the basis of this report and today’s testimony, I am 

deeply concerned that those promising numbers could come with a 

very large asterisk, and I am looking forward to hearing both of 

your testimony today and to getting to the bottom of this serious 

problem. 

I yield back, Madam Chairwoman. 

Chairwoman VELA ́ ZQUEZ. Is there any member from the minority 

side that wishes to make an opening statement? If not, we are 

going to proceed with the witnesses. 

And it is my pleasure to welcome the Honorable Karen Mills. She 

was sworn in April 6, 2009, as the 23rd Administrator of the U.S. 

Small Business Administration. 

Prior to being confirmed as SBA Administrator, Ms. Mills most 

recently served as the President of MMP Group in Brunswick, 

Maine. 

The SBA helps small business owners and entrepreneurs secure 

financing, technical assistance, training and fair contracts. And because we have only two witnesses, I am going to be flexible with 

the five minute rule. So welcome. 

STATEMENT OF THE HONORABLE KAREN MILLS 

Ms. MILLS. Thank you, Madam Chair. 

Chairwoman Vela ́zquez, Ranking Member Graves, distinguished 

members of the Committee, again, it is an honor to testify before 

you. Thank you for your continued efforts to help America’s small 

businesses survive, grow, and lead us out of this recession. 

I want to thank the Chairwoman for speaking at yesterday’s 

Small Business Financing Forum--that we held with Secretary 

Geithner at the Treasury. You said two things at that meeting that 

I really found resonated. First, you said access to capital equals access to opportunity. That statement rings true given our efforts to 

help small businesses find the credit that they need to create job. 

And you also said at this conference that this conference proved 

that small business is not an afterthought. I think this is true not 

only for you, but for all the members of the Committee and the administration. With the help of this Committee, we are insuring that 

SBA programs provide maximum value to small business owners. 

At the same time, and this is really the subject that we are here 

on today, we are committed to insuring that taxpayer dollars are 

spent wisely, transparently, and effectively, with proper risk management and oversight. 

The Recovery Act is a strong example as a result of the 90 percent guarantee and the lowered fees in our two flagship programs, 

we have engineered a turnaround in SBA lending. Briefly, the SBA 

has supported more than $14 billion in lending to small business 

since the Recovery Act was passed, with recent months at levels 

that we have not seen since 2007. We are above the 2008 mark. 

Weekly loan volumes have risen 75 percent compared to the 

weeks before the Recovery Act was passed, and we have here in the 

back this report card what we describe as these numbers. Most importantly, we have 1,250 lenders offering SBA loans who had not 

made a loan since October of 2008, and about half of them had not 

5 

made a loan since 2007. This means more points of access to capital for our small businesses, which is an important priority for us. 

So I want to thank the Committee for all that you did to pass 

the Recovery Act. Our feedback from entrepreneurs, from small 

business owners, the lending community has been extremely positive. As the Chairwoman may have heard yesterday, the lenders 

said that these loan enhancements help provide a critical lifeline 

for small businesses that are having trouble finding credit. We are 

going to continue to monitor these programs using a robust risk 

management framework that we established under the rules of the 

Recovery Act. 

More broadly, the team at the SBA continues to address outstanding and emerging areas of risk in a systematic way, and we 

are focusing on the very helpful recommendations of the GAO and 

of our IG. I am pleased to say one of the things I committed to you 

last time is that we are going to take all of those recommendations 

and work through them. We have reduced open findings from our 

Inspector General by 47 percent over the past 18 months, and in 

the past quarter alone we have reduced the number of overdue 

open recommendation from 97 to 53, I am taking this very seriously. 

We are pleased also to have our new Inspector General on board, 

Peggy Gustafson. Her work will help to continue to insure that the 

SBA is transparent, it is efficient, and it is meeting the needs of 

America’s small business. 

In addition, the SBA remains committed to strengthening our 

lender oversight activities to eliminate fraud, waste, abuse and 

mismanagement. Given the exposures our loan guarantees represent to the taxpayers, my team’s goal is to insure that we have 

robust credit risk management system that includes oversight and 

portfolio monitoring. 

On the subject that the Chairwoman and Ranking Member 

Graves raised today, and I know we’re going to talk about, the SBA 

is acutely aware that America is fighting two wars. Thousands of 

our veterans are returning home. I want to thank GAO for the report that they just released. We must make sure that service disabled veterans have ample opportunities to start and grow a business, including the opportunity to access federal contracting. 

Since I first came on board in April, we have begun an new collaboration with the Veterans Administration leadership on the critical issue of access to accurate and transparent data regarding who 

is a service disabled veteran. Both the SBA and the Veterans Administration have made this a top priority. 

Second, we are working to make sure there is accountability in 

this program. It is a subject we are going to talk about today. The 

ten businesses described in this report have already been referred 

to our IG. Make no mistake, if they are found to be noncompliant, 

they will be debarred. 

Overall we will continue to work with the VA to insure that we 

have a system that works for veterans and is responsible to taxpayers. 

Finally, per the Chair’s interest at our last hearing, I just want 

to mention that we sent three reports to Congress regarding our efforts with disaster preparedness and assistance: the disaster recovVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
6 

ery plan, the 2009 annual report on disaster assistance, and the reports on federal contracts awarded as a result of major disasters. 

I should also mention that we have held two disaster trainings 

for our field staff, and on a related note, we released and heavily 

promoted--and I personally spent a long time promoting--an H1N1 

flu preparedness guide. It has been very well received by thousands 

of small business owners. It describes how they make a plan for 

their businesses in case they have an issue with H1N1. 

Overall my vision is that the SBA will continue to operate in a 

way that will meet the expectations of Congress, small businesses, 

and the American taxpayer. I look forward to working with the distinguished members of this Committee to make that happen. I welcome any questions, concerns, and comments about any of our programs or efforts. 

Thank you. 

[The prepared statement of Ms. Mills is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Mills. 

Our next witness is Mr. Greg Kutz. He is the Managing Director 

of Forensics Audits and Special Investigations 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, sir. 

STATEMENT OF GREGORY KUTZ 

Mr. KUTZ. Madam Chairwoman and members of the Committee, 

thank you for the opportunity to discuss the service disabled, veteran-owned small business program. This program honors service 

disabled veterans for their incredible service and sacrifice by providing contracting opportunities. Today’s testimony highlights the 

results of our investigation into allegations of fraud and abuse in 

this program. 

My testimony has two parts. First, I will discuss cases of fraud 

and abuse, and second, I will discuss fraud prevention controls. 

First, we received over 100 allegations of fraud and abuse for 

this program, and I will note that we stopped counting at 100. 

From these allegations we investigated ten cases which often included a number of affiliated firms and joint ventures. For these 

ten cases, we found that they received $100 million of service disabled sole source and set-aside contracts using various fraudulent 

schemes. 

These case studies also received over $300 million of 8(a), 

HUBZONE, and other federal contracts. 

Key program eligibility requirements include, first, firms must be 

at least 51 percent owned by one or more service disabled veterans. 

Second, the firm’s day-to-day operations must be controlled by 

the service disabled veteran or their caregiver. 

Third, the firms must perform 15 to 50 percent of the work. 

And, fourth, the firm must be a small business. 

Examples of what we found include, first, a firm whose owner 

was not a service disabled veteran. This firm fraudulently received 

7 

$7.5 million of FEMA contracts for Hurricane Katrina and Rita 

trailer maintenance. 

Second, a firm that subcontracted 100 percent of its work to an 

international corporation headquartered in Denmark with annual 

revenues of $12 billion. That is right, 12 billion with a B. 

Third, a construction firm with no assets and no employees passing through work to an ineligible firm. The owner of this shell company lived 80 miles away and managed a restaurant in another 

city. 

And, fourth, another shell company with, again, no assets and no employees passed through a $900,000 contract to an ineligible firm 

that delivered and installed the furniture. The monitor shows the 

Shell company address which is the owner’s home. The owner of 

this company was actually a full-time contract employee at MacDill 

Air Force Base, which awarded him this contract. 

What is discouraging about many of these cases is that contracting officials were actively involved. For example, for the 

MacDill Air Force Base furniture case, contracting officials were 

aware of the shell company and that the owner was actually a fulltime contract employee at the base. The base Director of Business 

Operations also told us that MacDill had about $14 million of service disabled sole source and set-aside contracts in 2008, and that 

90 percent of the firms that received these contracts were front 

companies for large businesses. 

Other contracting officials were not quite so candid. The monitor 

shows a picture of portable toilets at Fort Irwin in Texas. As you 

can see, the name of the non-service disabled firm is blocked off 

from the picture. However, it is clear that in cases like this, contracting officials know exactly who is providing the service. 

Moving on to my second point, there are no fraud prevention controls in place for this program, and as our case studies show, even 

individuals that lie about whether they are service disabled veterans can receive millions of dollars of contracts. The only thing resembling a control for this program is the SBA bid protest process. 

In fact, for four of our ten case studies, SBA determined that 

these firms were ineligible for the program. However, these firms 

were not only allowed to continue the contracts they received 

fraudulently, but they also received new service disabled, set-aside, 

and sole source contracts. And in no cases did we see anybody, including SBA or any other agencies, that have suspended or 

debarred anybody for fraud and abuse in this program. 

We are encouraged by the Veterans Administration’s efforts to 

set up a process to validate the eligibility of firms doing business 

with the VA. We recommended that SBA, VA and OMB look at the 

feasibility of expanding this validation process government wide. 

In conclusion, for just ten cases we identified $100 million of 

fraud and abuse. This multi-billion dollar small business program 

has no controls and no consequences for the few that are caught 

cheating. Unfortunately the victims of this fraud are legitimate 

service disabled veterans that play by the rules. 

Madam Chairwoman, I applaud you and this Committee for supporting veterans today, and I look forward to working with all of 

you to help eliminate fraud and abuse from this important program. 

8 

That ends my statement, and I look forward to all of your questions. 

[The prepared statement of Mr. Kutz is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Kutz. 

Imagine being a veteran who is injured in Iraq or Afghanistan, 

yet despite your injuries you still manage to launch your own business. Then imagine finding out that you are losing out on contracts 

designated for veterans because a big company found out how to 

get around the rules. 

What kind of message does that send to veterans in this country? 

They have got to stop. So, Mr. Kutz, I know that you talk about 

the fact that no fraud prevention controls exist for this program at 

SBA. Can you tell us a brief outline of what are some of the key 

elements of an effective fraud prevention program? 

Mr. KUTZ. Yes, and I will give a highlight of it. There should be 

prevention controls at the beginning to make sure the people getting into the program are eligible. There should be monitoring controls that once you are in the program that front companies or 

shell companies are not passing through work, for example, to 

large businesses. And at the end of the day, those caught cheating 

need to have consequences: suspension, debarment, and prosecution. 

So you need all three of those elements working together for an 

effective fraud program. 

Chairwoman VELA ́ ZQUEZ. Administrator Mills, based on what we 

just heard from GAO and recognizing the fraud that already exists 

in this program, would you develop a process to certify service disabled veteran owned small business? 

Ms. MILLS. Madam Chair, I want to thank the GAO for this report. I think we completely agree and take with great concern this 

particular report and this entire area of fraud, waste and abuse. 

But particularly in this area of service disabled veterans, there are 

300,000 of these veterans coming home from these two wars over 

the next several months. Twenty percent of them are unemployed 

after two years. These veterans over-index in entrepreneurship because they have great leadership. 

Chairwoman VELA ́ ZQUEZ. Ms. Mills. 

Ms. MILLS. Yes. 

Chairwoman VELA ́ ZQUEZ. I just would like for you to answer my 

questions. Would you develop a process to certify? 

Ms. MILLS. So, therefore, we are looking at the three approaches 

that Mr. Kutz just described. First, we need to make sure that we 

have the eligibility right, and I think that was your first point. So 

the eligibility has two prongs. One is are you a service disabled veteran? The second is are you a qualified small business? 

We look at the qualified small business. We are partnering with 

the VA because the Veterans Administration holds the database 

that says whether or not they are service disabled veterans. They 

are the ones who do the first prong of the eligibility. So we are 

going to work with them to make sure we have a combined program that services the two pieces of the eligibility. 

9 

Then Mr. Kutz had a point about accountability, and that is the 

other piece that we are committed to. As I said, these ten particular examples cited by GAO have already been referred to the 

IG. We are committed to making sure we hold everybody accountable, and that has not been true in the past. That is a change, and 

we will commit to go after anybody who is noncompliant, and if 

they are not compliant, we will debar them. 

Chairwoman VELA ́ ZQUEZ. So, in essence, what you are saying to 

this Committee today is that SBA is going to develop a certified 

process, a process to certify disabled veterans. 

Ms. MILLS. The SBA is going to provide a process to make sure 

we have the up front piece right in terms of eligibility and work 

with our partners to make sure we have the right input from the 

Veterans Administration. We’re going to go after this accountability 

issue. 

Chairwoman VELA ́ ZQUEZ. Okay. Mr. Nye in his opening statement made reference to the fact that you had a meeting with him 

and was quite excited about the fact that the contracting goals for 

disabled veterans were achieved. So in light of this report, do you 

think that the SBA data could be overstated now? 

Ms. MILLS. Right now the number is as Congressman Nye said. 

Our goal is three percent. Our achievement in the recovery act contracts is 3.8 percent. We are very pleased with that number, but 

we share, given this data, the exact same concern. We need to get 

to the bottom of this issue of fraud, waste, and abuse, and we need 

to make sure that we have a real achievement of three percent or 

greater. 

Chairwoman VELA ́ ZQUEZ. Yes. Mr. Kutz, what are your views on 

the matter of the contracting goals for disabled veterans being 

overstated as a result of the investigation? 

Mr. KUTZ. I think they are overstated. I mean, for example, the 

pass-through to the company in Denmark would have counted as 

a success. 

Chairwoman VELA ́ ZQUEZ. Ms. Mills, the economic downturn is 

hitting Iraq and Afghanistan veterans particularly hard. There is, 

as you mentioned, an unemployment rate above 11 percent, and 

Congress never intended the SBA service disabled veterans program to award contracts to non-veteran companies who are less 

likely to hire veterans. 

Given how high the veteran unemployment rate is, why hasn’t 

the agency done a better job to make sure these contracts actually 

got to veterans? 

Ms. MILLS.I just want to understand your question. 

Chairwoman VELA ́ ZQUEZ. In light of the report and given the fact 

that job creation is a challenge for our economy and given the fact 

that thousands of veterans are coming back from Iraq and Afghanistan, that there is a high unemployment rate, that you need to do 

a better job to make sure that the tools that we put in place, this 

Committee, the Congress, to address the issue of entrepreneurship 

among veterans coming back from Iraq and Afghanistan is 

achieved. This report reflects quite poorly in terms of making sure 

that those contracts that are awarded really go to the people that 

they were intended to. 

10 

Ms. MILLS. On the service disabled veteran contract piece, as I 

said, this is a very important and helpful report, but you are exactly right. These findings are unacceptable. We have to make sure 

that the eligibility--that businesses are eligible and that we hold 

them accountable if they are not. 

In addition, we actually have a number of other programs specifically for service disabled veterans. One I want to highlight we announced last week. We are funding an expansion in our entrepreneurial area of a boot camp for service disabled veterans. It is built 

on a model that was done at Syracuse, an extraordinary program. 

We’re expanding it to Florida State, to the University of Connecticut, to Purdue, to Texas A&M, and UCLA in the next year. 

And one of the things we will be able to do with these boot camps 

and the veterans that we are working with is make sure they get 

into this pipeline of contracts and ensure they receive access to 

capital. 

Mr. KUTZ. Madam Chair, could I comment on that real briefly? 

Chairwoman VELA ́ ZQUEZ. Sure. 

Mr. KUTZ. I think one of the issues that you were getting at here 

is that these veteran firms are not getting the business. They are 

passing it through to either international corporations or large 

businesses who are not going to hire veterans. There is evidence to 

suggest that veteran owned firms hire veterans. 

And I think your point is does this affect employment of veterans, and the answer in my view is yes. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Kutz, you mentioned that four of the ten case studies in your 

report were protested through the SBA bid process and found to be 

ineligible. What happened to these firms after they were found to 

be ineligible by SBA? 

Mr. KUTZ. They continued with the contracts that they had been 

awarded through fraud and in several of the cases they continued 

to get new service disabled, sole source, and set-aside contracts. 

Chairwoman VELA ́ ZQUEZ. Were any of these firms recommended 

for suspension or debarment? 

Mr. KUTZ. No. 

Chairwoman VELA ́ ZQUEZ. In your opinion, if there is enough evidence that will warrant such debarment or suspension? 

Mr. KUTZ. Certainly suspension since the bar is much lower for 

suspension. Debarment is a very lengthy process, and it requires 

a lot of due diligence. Suspension, yes, if SBA themselves determined that someone was ineligible, one could assume that there 

was a chance they could suspend them at least for a period of time, 

and the point is to protect the rest of the government from the 

fraudsters. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

And I will come back with more. 

Mr. GRAVES. The examples that have been identified, has anything been done to any of those firms? 

Ms. MILLS. Yes. All of those firms have been referred to our IG. 

We are recommending that they be investigated and if they are not 

eligible, that they be debarred. This is the highest standard-- 

debarrement. 

Chairwoman VELA ́ ZQUEZ. Would you yield? 

11 

But how many of those ten that were found to be ineligible, Mr. 

Kutz, have gotten more contracts? 

Mr. KUTZ. Virtually all of them, and some of them service disabled veteran owned contracts. 

Chairwoman VELA ́ ZQUEZ. So while the IAG, you refer them, and 

thank you for yielding, there is any action by SBA to prevent 

awards going to these companies that are ineligible? 

Ms. MILLS. Madam Chair, you hit exactly on the right note, 

which is that this is the piece of it that we must prevent. The contracts come out of the various agencies, and they are let by these 

contract agents. We are determined to set a pattern where if they 

have been proven or referred to be ineligible, that there is accountability, and that clearly has not been the case in these, and that 

is unacceptable. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Mr. GRAVES. Just to finish up with that, as far as at least with 

these examples, let’s just use these examples right now. Are you 

letting other agencies know, you know, whether it is Defense Department or whoever the case may be, about these agencies and 

the problems obviously? 

Are you doing that or is SBA taking the steps to make sure that 

the other agencies are aware of this and you are obviously investigating them and what is going on? 

Mr. KUTZ. We have, yes. We sent letters not only to SBA but all 

of the affected agencies so they are aware of that, and our evidence 

and work support is available to SBA and the Defense Department, 

VA, whoever else was contracting with these people. 

Mr. GRAVES. Is it a situation where they have to take the initiative to look at it? Are you making sure that they see that? 

Mr. KUTZ. Well, we cannot force them to do anything. I mean, 

we send them the evidence, and it is their decision how aggressively they want to pursue it, and that is something you could potentially help us with. 

Mr. GRAVES. All right. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Ellsworth. 

Mr. ELLSWORTH. Thank you, Madam Chair. I thank the witnesses for coming in. 

Ms. Mills, I have heard you say ‘‘disbar’’ three or four times as 

the goal. I heard Mr. Kutz say ‘‘prosecution.’’ Do you have an aversion to prosecuting these bad actors, or I have not heard you mention that word? Are you willing to go after and prosecute the bad 

actors in this? 

Ms. MILLS. We are absolutely willing to go after the bad actors 

in any way within our power. Generally prosecution is handled by 

the Justice, but we are working very closely with the IG to go after 

them in any way within our power and collaborate with the GAO 

as well. 

Mr. ELLSWORTH. I guess I am sitting here thinking about a book 

I read in college about the hot stove theory, that if you touch a 

stove it burns. It burns every time, and it burns hot. If some of 

these people, I suppose, just change the name of the company, go 

on and do something, another porta potty company and change the 

name and redo the thing over, a couple of people get some pretty 

12 

big fines and/or spend a little time in a camp or a federal prison, 

maybe they would think twice about doing that. 

Mr. Kutz, who does it right? Who, in your opinion? You have 

done this a long time. You and I have had a lot of meetings together on this exact same subject. Is there anybody of the federal 

agencies that is doing it right, that has got the right screening policy, that has the right measures in place that you could point to 

and say, ‘‘These are the guys that get it. Everybody else needs to 

watch them’’? 

Mr. KUTZ. Well, I will use FEMA as an example, and in the 

Katrina and Rita disasters we did extensive testing and identified 

22,000 case of fraud and abuse just for one program. 

So we gave FEMA a whole series of recommendations and they 

implemented many of them. We went back and tested them again 

for Ike and Gustav, and they did much better. Now, they were not 

on apples and apples because they were much smaller disasters, 

but FEMA made significant improvements in their screening eligibility process to make sure if you gave them a bogus Social Security number, whether it was by Internet or by phone, they were not 

going to let you into the system. They were actually checking to see 

that the address you used was in a disaster zone, that you actually 

lived there before the disaster hit. They weren’t doing that for 

Katrina and Rita. 

So that’s an example of oversight. We had numerous hearings on 

both the House and Senate side, and after several years positive 

improvements were made. So I think this is something that is not 

going to happen overnight, but we are certainly willing to work 

with you and the SBA to make this happen over a period of time. 

Mr. ELLSWORTH. And the dollar figure I cannot remember. What 

was the billion dollar figure that you used that this added up to 

in small business? 

Mr. KUTZ. Well, $100 million for these ten companies of just 

service disabled, but another three to $400 million of 8(a), 

HUBZONE, and other federal contracts, and so this is fairly significant just for these ten cases. 

Mr. ELLSWORTH. Okay. So hundreds of millions stolen from us in 

these disabled veterans. Let’s call it what it is. They’ve stolen it 

from us. What do you need, Ms. Mills? Do we need more detectives? Do we need more attorneys, more judges? 

Because we can probably afford for those hundreds of millions of 

dollars, we can afford more of whatever we need to do this. If we 

need more investigators, I would rather cut the budget on that, add 

it if it is manpower and stop it. It hurts our veterans, but they are 

being stolen from anyway. 

So what do we need? Is it people? Is it clerks? 

Ms. MILLS. Yes. We are looking at all of our programs overall in 

terms of risk management because this has been a pervasive issue 

that no one has gone after these issues in a period of time, and as 

I testified the last time, it is not acceptable. We are not going to 

be the agency of fraud, waste, abuse and mismanagement. 

So this requires a systematic approach across all of these programs that we are implementing. We have begun to collaborate 

with other agencies on a much more aggressive basis in order to 

make sure things like this eligibility that we need from the VetVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
13 

erans Administration is available to us. That is a brand new collaboration. 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield? 

Mr. ELLSWORTH. Yes, ma’am. 

Chairwoman VELA ́ ZQUEZ. Thank you. In its FY 2010 budget, you request $32 million for the administration of contracting programs. How much of this money will go 

to the oversight and management of the service disabled veteran 

owned small business program. 

Ms. MILLS. I would like to get back to you with an exact number, 

but I think it is an important and relevant question. 

Chairwoman VELA ́ ZQUEZ. Thank you for yielding. 

Mr. ELLSWORTH. Absolutely. And I would just close by saying 

and thanks for that figure of 32 million. We here in Congress get 

asked to vote on pretty large numbers of budgets across the board, 

but the last thing, and I don’t think it’s just my history in law enforcement, that makes me think twice when people out there, good 

taxpayers paying good dollars, we are voting on this and then it is 

basically being stolen. 

That does not set well with me and I know the rest of the pane 

either. So thank you, Mr. Kutz. Thank you, Ms. Mills. Do everything you can, and if you need anything, just come to us. I think 

everybody feels the same. 

Thank you. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Bartlett. 

Mr. BARTLETT. Thank you very much. 

I just want to first express my pleasure at the different attitude 

at this hearing than at a similar hearing on HUBZONEs where it 

was look at those bad guys. That is, therefore a bad program, and 

let’s kill the program. 

We recognize that this is not a bad program. It is a very good 

program. There are some bad guys in it. Let’s make sure that the 

bad guys do not stay in the program, and I am very pleased at that 

different attitude. 

You know, you could have predicted when this program was set 

up that we were going to be here today with this hearing, and it 

is partly our fault. When I come to that part of the Lord’s Prayer 

that says, ‘‘Lead us not into temptation,’’ I cringe because what we 

did, we set up this program. We gave SBA nowhere near enough 

money to monitor this. They had in place no adequate program for 

monitoring. There is no certification, no review, no site review, and 

so forth. 

And so you know, we are partly at fault. So I am very pleased 

at this hearing, Madam Chairman. We are doing the right thing, 

but you know, we could have predicted we were going to be here 

because, you know, people are human, and you know, when they 

see an opportunity to take advantage from them, they take advantage of it. 

One other thing I want to point out, too, is that sometimes the 

government contractors are complicit in this because we lean on 

them for a goal. They have got to have so much percent go to this 

and that and the other thing, and they are very happy with these 

pass-throughs because they know that the service is going to be 

provided if it is a pass-through. 

14 

If they have a new company they have never heard of with a person that had no prior business experience, you know, how are they 

going to perform? 

And the contracting officer is graded on the performance of people whom they give the contract. So it is a wink and a nod. They 

are not unhappy with this pass-through because they know if it is 

a pass-through to a reputable company that they have been doing 

business with before or is well known as a competent business, 

that the job is going to get done. 

One of the things I have pleaded for is that we somehow give 

your contracting officers the goal of reaching out further, casting a 

wider net. You know, they have been giving contracts to Joe and 

he does a good job. They have got an RFP out and responses are 

in, and Sam looks like he has a better proposal. I do not know who 

Sam is. He may perform and he may not perform, but Joe always 

performs for me. He is not really good, but he is adequate, and I 

do not get scored down because of Joe’s performance. I am going 

to give the contract to Joe. 

I do not know how to reward our people for failure, but if you 

do not have a failure once as a while as a contracting officer, you 

are not reaching out far enough, are you? You are not casting a 

wide enough net. 

Now, I do not know how to structure that. I do not know how 

to reward people, but I just think that they need to be told that 

we expect them to push the envelope. The creativity and entrepreneurship out there in the small business world is just incredible. 

I came from that world. I ended up with 20 patents, and I know 

that the environment in which you work is very essential to how 

creative you are going to be. 

And so I am appreciative of this hearing. I am really appreciative 

of the different attitude today. This is a really good program. We 

have some bad actors in it. Let’s make sure we do not have them 

in there in the future. 

Thank you all very much for your contribution to this. 

Chairwoman VELA ́ ZQUEZ. Mr. Nye. 

Mr. NYE. Thank you, Madam Chairwoman. 

I have to admit I am, as I know all of us on the Committee are, 

shocked and dismayed to hear from you, Mr. Kutz, that you had 

100 allegations that you chose to choose the ten from and you 

stopped at 100. You had received 100, but there were more coming 

in, but you stopped because that is all you could process at the 

time. 

Clearly, the scope of the problem is large, and this is something 

that runs deep. It sheds a lot of doubt on our efforts to date. Obviously something is not going right, and we need to fix this problem, 

and what I want to make sure that we going head avoid is simply 

taking punitive action on these ten particular fraudulent businesses and then moving on and not fixing the system. 

So we have got a big responsibility that we all share now to get 

this right going forward. Administrator Mills, I mentioned in my 

opening statement you just started this spring. This problem has 

obviously been endemic in the system before you came in, but you 

own the SBA portion of the response now. What I would like to 

make sure that I understand is what you see the SBA’s role in inVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
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suring that short of a GAO study we have mechanisms in place to 

find out when companies are defrauding our veteran business owners earlier in the process rather than reacting at this stage in the 

game. 

And I just want to make sure I kind of understand your view of 

the SBA’s role vis-a-vis the contracting agencies who actually go 

out in the field and do the day-to-day contracting, and how do you 

see the SBA fitting in with those contracting officers in practicing 

the oversight to make sure that going forward we have ways to 

solve this problem? 

Ms. MILLS. Thank you, Congressman Nye. 

There are a number of pieces to this question that you just 

asked. First of all, overall on the specifics of this program, the first 

piece of it is to make sure we get the two nodes of the eligibility 

right. Pretty confident that we can get our node of it right, but we 

need to be able to have access to accurate data from the Veterans 

Administration. I think we have made good inroads in making a 

collaboration and having them push that up their priority scale. 

Partnership is good, and we are going to make sure that stays 

top of mind. 

Overall, we also work with all of the different agencies, and this 

is a bigger problem. We just heard Representative Bartlett also 

speak to some of this question about how do you make sure that 

the purchasing agents who are actually contracting are doing the 

right things, are aggressively, as he said, casting a wider net and, 

as you said, making sure that they let these contracts to people 

who they know are small businesses and are service disabled or 

meet various criteria? 

We are highly focused on that issue, and the Recovery Act has 

allowed us really much greater force and impetus in our relationships with each of the different other agencies. That is one of the 

reasons why we are exceeding our goals. 

So now that we have these very strong foundations with everyone from the VA to the Department of Defense that are working 

with us, we are able to do more training, set expectations, deliver 

consequences, work on going after and making examples of those 

who do not comply. 

So there are a series of activities that will be required to make 

sure this entire contracting activity delivers full accountable, transparent and correct contracts to those who are eligible. 

Mr. NYE. Okay. Well, I think what I am hearing is you see the 

SBA’s role as being extremely proactive in terms of dealing with 

the federal agencies on their small business contract and to help 

insure that this kind of problem does not happen. 

What I want to avoid, and I intend to hold additional hearings 

in my subcommittee on this particular topic about our service disabled veterans in business; what I want to avoid is the situation 

where we look back a year from now, recognize that we had a problem a year ago, and still find ourselves pointing fingers at the other 

saying, well, it was really kind of more their responsibility than 

ours and, you know, they are the one that did not do their job. 

And I think clearly the SBA is in a position, I think, to take a 

leadership role here and help us solve this problem. So I am lookVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
16 

ing forward to being at the position a year from now where we look 

back and can say we did it right and we really fixed this problem. 

So I want to thank you for your comments. 

Mr. Kutz, I just wanted to ask you. I noted in your report that 

contracting officers from some federal agencies seem to suggest and 

acknowledge that they really did not care much about the details 

of the execution of contracting to service disabled veteran owned 

companies, and that they were really just more concerned with 

making sure the contracting got done expediently. 

I would like to know what your thoughts are how we can solve 

that problem. Is this a training issue with the contracting officers? 

How can we change that culture? 

Because to my mind this problem can largely be solved with professional contracting officers that buy into the reason behind why 

we have these targets for contracting to our service disabled owned 

veterans. I think you have heard from all the members of this 

Committee how much we care about the mission and from our panelists today, but where the rubber meets the road out in the field, 

the contracting officers doing the day-to-day contracting, if they do 

not care about this program and if they do not care about the effect 

on employment for veterans, it is going to be very hard for us to 

get this right. 

And so I would like to have your ideas about how we can fix that 

part of the problem. 

Mr. KUTZ. Well, I think Mr. Bartlett made some very insightful 

comments on that. The contracting officers have kind of a perverse 

set of incentives out there. They are trying to reach these requirements. They want to get the work done with companies they already know. If a new company shows up that is a service disabled 

vet company, you know, they are not necessarily as comfortable 

with that. 

So they have a lot of competing interests in this. So it is going 

to be a difficult issue to solve, and maybe we have to work on not 

just the goaling requirements, but they should also be held accountable for making sure you do not have fraud in this program. 

Right now there seems to be no incentive for them to call it like 

that. There is much more incentive for them to say, ‘‘Hey, that is 

a service disabled veteran contract. I get a click. I get a score towards my performance measures,‘‘ and if it is a big company doing 

the work, there seems to be no consequences in place. 

It is a combination of they may not care, they may have the 

wrong set of incentives, and you know, they are really not involved 

with enforcement. 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield? 

Mr. NYE. Yes, ma’am. 

Chairwoman VELA ́ ZQUEZ. I think that we have got a problem 

here where you find, you know, the contracting officer saying, 

‘‘Well, that is not my responsibility. It is SBA’s responsibility to call 

for accountability and oversight.’’ 

So whose responsibility is it to make sure that the program is 

accomplishing the goals in the way that was intended by the statute? 

17 

Mr. KUTZ. Well, as of now nobody, and that is the whole problem. 

So I know what the SBA is talking about here is looking forward. 

If you look back, the answer is nobody. 

Chairwoman VELA ́ ZQUEZ. And looking forward, the responsibility 

then lies—pardon? 

Ms. MILLS. We take on that responsibility. 

Chairwoman VELA ́ ZQUEZ. Okay. Thank you for yielding. 

Mr. NYE. Well, I appreciate your ideas. Again, it is disheartening 

to realize the depth of this problem, but again, thank you for doing 

the job of putting this report together to highlight the challenges 

we face and the fact that we have got to start today on solving this 

major problem. 

We have service disabled veterans who have put on for the country this uniform and put their life on the line overseas for us, returned home, made the decision to again take a risk to get into 

starting a small business applying their skills, and playing by the 

rules, doing the best they can to compete honestly for contracts, 

getting put on the sidelines because there are those who decided 

to take advantage of the system, and we have not done enough to 

catch them and prevent them from being able to sideline our vets. 

Clearly, I think we understand the scope of the problem. We 

know we have got marching orders going forward. I want to make 

sure that today marks the beginning of the end of this problem. I 

will be very disappointed if we look back a year from now and do 

not say that we achieved that goal. 

Chairwoman VELA ́ ZQUEZ. The time has expired. 

Mr. NYE. So I thank you. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Coffman. 

Mr. COFFMAN. Thank you, Madam Chairman. 

I am obviously concerned as a combat veteran myself about what 

is going on in the SBA, but I want to speak to the Veterans Administration for a second and get Mr. Kutz’s view on this because I 

have found such an extraordinary level of incompetence in terms 

of their own record keeping referencing eligibility that I have requested from the VA, after finding out that they had folks with the 

designation of prisoner of war that greatly exceeded the numbers 

by the Defense Department who had that status under the Veterans Administration from the Gulf War, from Vietnam right up to 

the present day. 

They have yet to respond to me, and I think I gave them that 

question six months ago, and they do not know. So I think there 

is a lot of self-reporting that is not audited, that they do not corroborate the information with the Department of Defense. It is easy 

to create a DD-214, the discharge certificate. 

So how would you evaluate that? The SBA has to rely on the VA 

in terms of that certification process, but could you speak to the VA 

certification process for eligibility? 

Mr. KUTZ. A little bit. It is in its infancy, I would say. They have 

set it up. They are moving forward with it, and it is encouraging 

to have a good attitude, and they have some good ideas, but the 

reality is, and I will use Case Study No. 2, the company that 

passed through the work to the international firm from Denmark 

is a VA validated small business, service disabled veteran owned 

18 

company, and they are continuing to get service disabled contracts 

as we speak. 

So they have gone through the validation process at VA and 

somehow VA said they were okay, and we are saying that they are 

not. So that is not a good sign, and so that means that there is 

probably a lot of work to do with their validation process here. 

Mr. COFFMAN. It would seem to me that the Department of Defense has the records, and I know that there have been problems 

with the records in the past, you know, obviously before they have 

gone to electronic records, but at least now certainly for the younger generation of veterans where we have the means to communicate electronically between the Department of Defense and the 

Veterans Administration, they ought to be able to do that. 

It hurts those of us that have served in this country in combat, 

particularly those who are disabled, when we are giving benefits to 

those who have not earned them, taking from those who have 

earned them. 

But the Veterans Administration has got to do a better job in 

that process. 

Madam Chairman, I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Schrader. 

Mr. SCHRADER. Thank you, Madam Chair. 

I am looking for reassurance, Director. I would like to go back 

to the HUBZONE issues. You know, there are a lot of recommendations from the GAO on specific actions to take, and I guess I will 

feel better about the veterans program if I know that there have 

actually been changes in the front end controls, fraud detection is, 

you know, now a part of the culture of the agency, and that you 

are interested in doing suspensions, you know, decertifications, this 

sort of thing very proactively. 

Could you tell me what actions you have done to improve things? 

Ms. MILLS. Yes. In HUBZONES, we have now done about 1,000 

site visits, 750 completed documentations through our process. 

Compared to a year ago the annual number was seven. So we are 

continuing to take those site visits and then use that understanding to reengineer our up front documentation process. So, 

number one, extensive site visits. 

Number two, business process engineering of the documentation 

up front. 

Number three, we actually have changed our certification process. We now ask for extensive documentation and are working 

through how to make sure we get the right documentation up front 

so that we can identify the particular issues that were causing the 

firms to be in there who should have not been in there. 

Mr. SCHRADER. Were those announced or unannounced site visits? 

Ms. MILLS. In the site visits, the way they do them is the unannounced portion is the verification of the location. So we do not tell 

them that we are coming. We go and make sure the location is 

there. 

The second piece of the site visit— 

Mr. SCHRADER. But they know that you are in the process of 

doing an investigation. 

19 

Ms. MILLS. No, they do not know anything. So totally unannounced to make sure that the HUBZONE office is in the 

HUBZONE. That is number one, unannounced. 

Part 2, we give them between 24 and 48 hours to produce the 

paperwork that is required to make sure that 35 percent of their 

employee are employed within the HUB zone. So that is— 

Mr. SCHRADER. What happens to them if they do not produce 

that work? 

Ms. MILLS. They cannot be a HUBZONE person. 

Mr. SCHRADER. Mr. Kutz, what is your view of what we just 

heard and how the program is working at this stage? 

Mr. KUTZ. When we first looked at the HUBZONE program for 

this Committee, it was essentially a glorified self-certification program. Anybody and their brother could get in, and at this point, 

there is more due diligence done, and we have done some testing 

for you, and we will be reporting back to you on that whenever you 

would like us to. 

But I would say there has been progress, but it is probably not 

where it needs to be. 

Mr. SCHRADER. Back in February or whenever, out of the ten 

firms that were investigated, seven were still getting contracts. 

Have they been terminated now at this point, Director? 

Ms. MILLS. I am sorry. Are we talking HUBZONES or are we 

talking— 

Mr. SCHRADER. HUBZONES. 

Ms. MILLS. Of this, yes. We have referred all of those dozens 

more. 

Mr. SCHRADER. I am asking with the contracts, has their ability 

to get money from the federal government been terminated for all 

of the ten firms that were investigated by GAO last year? 

Ms. MILLS. All of them have been referred to disbarment or prosecution, whatever relevant category, and many more. 

Mr. SCHRADER. I just want the answer. I guess maybe I am misunderstanding you. 

Ms. MILLS. Yes. 

Mr. SCHRADER. I just want to know are they still getting federal 

money at this point. 

Ms. MILLS. No, I do not believe so, and I am happy to report back 

on those for the record. 

Mr. SCHRADER. Okay. Thank you. 

So I am sorry. Just to follow up here, you know, this is a big 

deal. I mean, this is a big, big deal. We are trying to get businesses 

back on track, small businesses in particular. We would like the 

Small Business Administration to be part of that effort. These 

types of things make it very difficult for us to showcase the agency 

as one that can help solve problems when these types of issues are 

going on. 

And I disagree with the fact they just need more money. I do not 

think that is the answer. If I had a dollar for every agency that 

told me in my legislative career they needed more money to solve 

the problem, I would be a wealthy man, but I think this is stuff 

that you should be doing already. 

So to the point on it takes a while to do the debarments and complete decertification, shouldn’t we be suspending these programs 

20 

when the GAO has already done the work? Why do we have to wait 

for the IG and your department to do the same work, if you will? 

I understand for the debarment, yes, that is necessary, but for 

the suspension, why can’t the agency just go off of that? 

And then the last question is what other investigations has SBA 

done beyond what the GAO talked about or pointed out, those 

firms that the GAO identified? What other firms have you identified in the HUBZONE program since they did their work that are 

fraudulent and misusing taxpayer dollars? 

Ms. MILLS. So we identified 1,000 first that we visited. We have 

cleared 750 of those, and of those, we have a number of them who 

did not comply, and we have excluded them from the program. 

Mr. SCHRADER. Two hundred and fifty firms are excluded? 

Ms. MILLS. Pardon? No. Seven hundred and fifty have passed 

and a number of them have not passed, and we can get you the 

pertinent information, but anybody who did not pass that inspection cannot participate in the HUBZONE programs. 

Chairwoman VELA ́ ZQUEZ. Time expired. 

Mr. King. 

Mr. KING. Thank you, Madam Chair. I appreciate you holding 

this hearing and having an opportunity to review the testimony 

that is before this Small Business Committee. 

I would turn my first question to Administrator Mills. And as I 

look at the data that has been produced by the GAO, my question, 

and there have been many other questions asked that have to do 

with facts and functionality, but mine is in my business life, there 

were times when I thought working with people that were cheaper 

was a better business deal, and what I came to the conclusion was 

I have to work with honorable people, people that I can trust, people that have a culture within their company of having the integrity of knowing where the lines are and not crossing the lines. 

And that is something that I am certainly confident I would pass 

on to the next generation, always to work with ethical people. So 

there is something within the culture of individuals and companies 

that tells them that somehow they can rationalize or justify a false 

presentation to gain an advantage from I am going to say the taxpayers, as is the case here; an advantage against disabled veterans, 

as we heard from Mr. Coffman. 

And so I would ask you if you have any introspective comments 

you would like to make to this Committee about what you see within the underlying cultures in these companies that you have discovered were in violation of these standards. 

Ms. MILLS. Well, thank you for your insights on this issue 

around procurement, and I have to agree that that is a critical 

value. We believe that contracting with small businesses provides 

great benefits not only for small businesses, but also for the taxpayer and the federal agency because these are some of the most 

valuable, innovative companies, and you get the attention of the 

CEO. 

Mr. KING. But did you think about the cultures in the companies? 

Ms. MILLS. Yes. So your point is, you k now, there are some bad 

actors in this. I do want to point out that there are many, many 

thousands of these companies, and there are many, many good acVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
21 

tors in this, and I think your issue is well taken. These are things 

that I think we can address proactively in our procurement officer 

training, and I think we would like to think about your insights 

that you provided today. 

Mr. KING. Well, thank you. 

Let me make another point here, and that is in a different subject and a different Committee. There was a GAO investigation. It 

actually might have been IG, but it showed up that within one category there was 100 percent fraud in a single category. 

And when I confronted the agency with that, they said, ‘‘Well, we 

are not analysts. We would have to be analysts to know what this 

is, what caused it and what to do about it.’’ 

Is that your position, that you are not analysts? Because I think 

that it is pretty simple. It is right up front, and I would think that 

the culture of the SBA should be if people are found to be in violation of these standards, there should be an immediate severance of 

the contract if you have the legal authority to do so. 

So the second question is what about the culture of the SBA? 

What kind of people are looking over the shoulders of those who 

are, let’s say, jumping the fences that are set in place by statute? 

Ms. MILLS. The culture of the SBA is that we will not be the 

agency of fraud, waste, and abuse and mismanagement. We have 

an aggressive, high, new attitude towards this. It is explicit in one 

of our priorities. 

Mr. KING. Thank you. 

I would turn to Mr. Kutz and ask if you would just like to comment on the questions that I have asked Ms. Mills. 

Mr. KUTZ. Yes, I would. On the first one your point being if these 

first will lie to us about whether they are service disabled vet firms 

are you going to have other issues, and the answer is yes. In fact, 

two of these ten cases we have come across in other fraudulent 

schemes. For example, one of them was doing trailer maintenance 

for Katrina in Louisiana and Mississippi, and we came across them 

potentially doing false billings for trailer inspections. 

And so we referred those cases to another organization who raided their office in March of this year. Had they been suspended or 

debarred, they would not have continued to be allowed to get government contracts. So it is important when they lie to us and they 

cheat that we do something about it. 

I agree with Representative Schrader that you can suspend 

someone without going through a lengthy three-year process of debarment. And back to the HUBZONE, none of the 29 companies we 

have identified that I am aware of have been debarred yet, none. 

Now, there has been processes taking place, but it just goes to 

show you how long that process takes. With respect to SBA, I think 

SBA has good people. I think the history of SBA has been as an 

advocacy organization, not an enforcement organization, and therefore, you are not going to have the kind of people necessarily that 

are very good at this. 

But I would argue that if you are going to be an advocate for 

small business you need to deal with the integrity of the program, 

and today’s nearing is a good start. 

Mr. KING. And to reinforce your point, and to briefly do so, I 

would like to think that in the operations that I run today and the 

22 

operations I have run in my business lifetime that I have people 

in place that would identify that at the most local level and send 

that up the chain with the strongest recommendation that there is 

the authority there to sever the contracts by the basis of the violation, and that would make it as far up the chain as it needed to 

deal with this problem, and they should be the ones exposing this, 

not having to go in with the GAO. 

That is my point. I look at the culture, and that is the only thing 

that can fix it. We cannot write enough rules to fix it otherwise, 

but I thank both of the witnesses and I appreciate it, Madam 

Chair, and I yield back. 

Chairwoman VELA ́ ZQUEZ. Ms. Dahlkemper. 

Ms. DAHLKEMPER. Thank you, Madam Chair, for bringing forward this very important hearing. 

I appreciate both Mr. Kutz and Ms. Mills for being here today. 

You know, first of all, of course, greed is an extremely motivating 

factor for many people in terms of finding holes in a program, and 

I want to ask, I guess, a little bit about the self-certification that 

we know was a problem in HUBZONE and it appears to be a problem here again. I guess I have a couple of questions. 

First of all, how many companies are in this program? Do you 

know how many companies? 

Mr. KUTZ. It is interesting. I do not think anybody knows for 

sure, but it is a self-certification program. There are at least 16,000 

according to some evidence that we have seen, and, again, all you 

have to do to be in the program is to go to the central contract registry and say you are a service disabled veteran owned small business. 

Some of the bogus companies that we have set up for this committee are also service disabled veteran owned small businesses. 

All you have to do is go in the system and say you are. 

Ms. DAHLKEMPER. That is all you have to do. 

Mr. KUTZ. That is all you have to do. 

Ms. DAHLKEMPER. And then it just depends on somebody blowing 

the whistle on you. 

Mr. KUTZ. A contracting officer taking a look there and saying, 

yes, that firm is in the system as being qualified. That is why you 

need this validation process, because right now the only place to go 

is a central contract registry, and anybody can go in there and say 

they are a service disabled vet. 

Ms. DAHLKEMPER. Okay. So how would this program with the VA 

operate? 

Ms. MILLS. Well, as I said earlier, there are two nodes of eligibility, and one of them we can provide, but the other one has to 

be provided by the VA, and as you heard earlier, they are working 

very hard on some systems issues that they have. They have 

agreed to up this in the priority chain. They know how important 

this is to us. This is a helpful moment to underline that importance, but they are being extremely cooperative in working through 

their systems issues. 

Ms. DAHLKEMPER. And would all veterans businesses have to 

register before being eligible? 

Mr. KUTZ. Right now only ones doing business with the Veterans 

Administration have to go through the process. That is why we had 

23 

suggested that, you know, either they work together to do it or you 

potentially legislate or do something else to encourage this to be 

more of a government-wide system. Because I think any program 

in place is going to have to have SBA and VA involved here. They 

are both going to have to be part of the solution. 

Ms. DAHLKEMPER. Yes. I guess I am just wondering how many 

this would prevent from having the pass-throughs once we got the 

system in place. Do you see that that would really make a difference in these pass-throughs that we are seeing? 

Mr. KUTZ. It depends on the processes. I think Representative 

Ellsworth said, you know, you have got human capital. That is one 

piece. Having good processes is another piece, and having good 

technology is a third piece. For example, if the address is a mailbox, there are ways to figure that out if you have got technology. 

So it is a combination of all three of those things that will need 

to be done. So I think the jury is still out on what VA has done 

so far, whether it is an effective process. 

Ms. DAHLKEMPER. Of course, we need a solution to this, and I 

think that is what we all want here because it is a good program. 

It is a program that can certainly help all of our men and women 

who have served our country and come back and want to make a 

good living for themselves and their families. 

I think I express what I think most of us or I am sure all of us 

feel here, is that whatever we can do here on this end to move this 

forward so that we do not have the same problems recurring over 

and over again, we want to see a change. I certainly would support 

suspension of certainly these ten companies that are listed here, 

probably the 100 or so that have come in. 

My last question, I guess: is there a way once there is a whistle 

blower come in to sort of suspend while there is some initial investigation done to see if this company is involved in fraud and abuse? 

Secretary Mills. 

Ms. MILLS. Let me get back to you with exactly what the process 

is, but at this point we have and will refer anybody that we find 

that is not eligible. We will put them right in the process and go 

after that aggressively. 

Ms. DAHLKEMPER. So if you get somebody reporting in as you did 

over 100 businesses, I mean, what is the process today? 

Mr. KUTZ. Well, can I say I will tell you what we did? We set 

up our own hotline because GAO has a hotline for fraud government-wide. We set up our own Small Biz Gov hotline. So we have 

a separate hotline, and we reached out to veterans organizations, 

and they posted that hotline throughout the networks of veterans 

that they had. 

So a lot of our allegations came from veterans. So we had veterans organizations working with us to feed those allegations into 

our hotline. They have separate hotline processes. 

Ms. DAHLKEMPER. So once you get it in your hotline, what do you 

do with it? 

Mr. KUTZ. We will investigate it if it is valid. Especially we had 

the open investigation for this Committee. So we actually 

proactively went after those cases because those cases took some 

time to investigate. We did field visits. We did unannounced site 

visits, interviewed individuals, the allagators, the actual compaVerDate Aug 31 2005 14:45 Dec 17, 2009 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\53450.TXT DARIEN
24 

nies, other contracting officers, to come up with these cases. So it 

does take some investigative work, but these were allegations specific about fraud. 

An eligibility program might have more of a randomness to the 

unannounced site visits. It might have more of a risk-based approached. 

Ms. DAHLKEMPER. Do you talk to teach other? I mean, when you 

get these allegations, do you refer back to the agency? 

Mr. KUTZ. Yes, we will send them to the IG and we will share 

them with management also, and as I mentioned, we also shared 

these with the agencies that were doing the contracting. There is 

a ton of agencies that we are actually contracting with these. So 

I sent out—we sent out 15 or 20 letters. 

Ms. DAHLKEMPER. And then what happens on your end when the 

SBA gets it? 

Ms. MILLS. Well, these have gone to the IG, and we cooperate 

with the IG. 

Ms. DAHLKEMPER. Okay. My time has expired. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Altmire. 

Mr. ALTMIRE. No questions. 

Chairwoman VELA ́ ZQUEZ. Well, I do have some questions. Mr. 

Kutz, you noted that the VA is only now working to develop a database for the limited number of disabled veterans contracts that 

they award. Is it going to include whether or not the business is 

small? 

Mr. KUTZ. I believe it would. I do not know for sure. It is in the 

early stages of the process, but it should, and again, it only relates 

to veterans contracting at this point. It would not relate to someone 

doing business with the Department of Defense, but for VA, I am 

assuming that the process goes beyond simply a service disabled 

vet. 

Chairwoman VELA ́ ZQUEZ. Okay. Given the fact that the VA contributed six out of the ten cases that you investigated, shouldn’t we 

be considering other alternatives to address this problem? 

Mr. KUTZ. Well, certainly you should be concerned, as I mentioned. Our Case Study Number 2 went through their validation 

process. It got a green light, and it was the one that passed 

through the business to the firm in Denmark, and so that is a firm 

that has issues. And how it got through the process I do not know, 

but that is something that does raise questions about how effective 

their process is. 

Chairwoman VELA ́ ZQUEZ. I am going to read some comments that 

were included as part of your response to GAO regarding the accountability and authority issue because you said that from now on 

you will be responsible if there is fraud committed or making sure 

that those who claim to be disabled veterans company are, in fact, 

disabled veterans small companies. 

In your response to GAO on this investigation, you said, ‘‘It is ultimately up to the federal agency’s contracting officers who have 

primary accountability for insuring only bona fide disabled veterans contracting firms perform these contracts.‘‘ You go on to say, 

‘‘SBA’s responsibility lies in the formal bid protest process.‘‘ And finally, ‘‘the SBA is only authorized to perform eligibility reviews in 

protest situations.‘‘ 

25 

So in SBA’s view, the contract officer then becomes responsible 

for halting contract disbursement and taking further action against 

the firm. Does that accurately reflect SBA’s position? 

Ms. MILLS. I think in answer to the question was who is responsible for making sure that three percent of all government contracts go to the service disabled veterans. That is our responsibility, and we have a series of procedures that you just described 

that create, you know, a pathway, some of which we have direct 

authority on, others of which we are just working across all agencies to make sure that we do better training, that we make it explicitly clear that if somebody violates this that they should no 

longer be in the program. 

Chairwoman VELA ́ ZQUEZ. Mr. Kutz, do you have any comment? 

Mr. KUTZ. Yes. The letter to us said that the only responsibility 

they have is to report going toward the three percent, that they 

had no responsibility for fraud prevention, no real responsibility for 

monitoring, and no real responsibility for debarment. So the position you heard in her testimony is different than the letter we got. 

Chairwoman VELA ́ ZQUEZ. So where are you today? 

Ms. MILLS. From statute, the responsibilities in the report are as 

described in the response. Overall we are responsible for making 

sure that three percent of these go to service disabled veterans, and 

in all of our contracting, I think I have made it pretty clear that 

we are not going to be the agency of fraud, waste, abuse and mismanagement. And that means that we have to go after it throughout the whole system, some places where we have full authority to 

do it and others where we are just going to try and take our best 

leadership role. 

Chairwoman VELA ́ ZQUEZ. Okay. Mr. Kutz, can you comment on 

their assessment of responsibility and authority? 

Mr. KUTZ. Well, our view, our attorney’s view was that they have 

the authority, but they have not exercised that authority. They 

have chosen not to exercise the authority looking backward. You 

have heard a different story of looking forward, I see. 

Chairwoman VELA ́ ZQUEZ. You know, we are here today reviewing 

all of the GAO report and you are saying you are going to do this 

and that, and that hopefully nothing will happen. But when there 

is a situation where the agency is saying that you do not have the 

authority and then it is the responsibility of the contracting officer 

of the agency that awards the contract and then the contracting officer is saying, ‘‘Well, that is not my responsibility. My responsibility is to make sure that we get the best bang for the buck and 

to procure the good, get the best price, and that they meet their 

time frame.’’ So why do you claim that you do not have the authority? 

Ms. MILLS. I think what Mr. Kutz said is that in the past the 

agency has said that they do not have the authority and that they 

do not want to undertake this. I think we have said, and I think 

Mr. Kutz just mentioned this, that looking forward we believe that 

this cannot be a process that is imbued with fraud, waste and 

abuse. We cannot be effective in helping small businesses, I think, 

as has been pointed out here, unless we take this on full face. And 

we are doing that. 

26 

Chairwoman VELA ́ ZQUEZ. So I am a little bit confused based on 

the response and the letter that you sent to GAO. Aren’t you, in 

terms of what SBA— 

Mr. KUTZ. Well, I consider there have been two stories, but that 

is the importance of having congressional oversight hearings. 

Chairwoman VELA ́ ZQUEZ. Well, I just want to make sure that 

SBA admits and conducts their business in light of the authority 

that they have because this really contradicts the position that you 

are taking here today, and I just want to make sure that there is 

no room here for the contracting officer to say, ‘‘Well, it is not my 

responsibility,’’ and for the agency to say, ‘‘Well, it is not ours. It 

is theirs, the contracting officer.’’ 

Ms. MILLS. I think we have been clear that we take this seriously. We are going to do everything in our power to make sure 

that we go after these issues. We are very appreciative of— 

Chairwoman VELA ́ ZQUEZ. And this is light of the authority provided to you under the statute? 

Ms. MILLS. I think we are— 

Chairwoman VELA ́ ZQUEZ. I just want to make sure. 

Well, thank you very much for your cooperation and your presence here today. 

I ask unanimous consent that members will have five days to 

submit a statement and supporting materials for the record. Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:29 a.m., the Committee meeting was adjourned.] 

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