Service-Disabled Veteran-Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts
Published: 2009-10-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2007, the Small Business Administration (SBA) reported $4 billion in governmentwide sole source and set aside SDVOSB contract awards. Given the amount of federal contract dollars being awarded to SDVOSB firms, GAO was asked to determine (1) whether cases of fraud and abuse exist within the SDVOSB program, and (2) whether the program has effective fraud-prevention controls in place. To identify whether cases exist, GAO reviewed SDVOSB contract awards and protests since 2003, and complaints sent to our fraud hotline. GAO defined a case as one or more affiliated firms who were awarded one or more SDVOSB contracts. To assess fraud-prevention controls, GAO reviewed laws and regulations and conducted interviews with SBA and Department of Veterans Affairs (VA) officials. GAO did not attempt to project the extent of fraud and abuse in the program.
section_title: What GAO Found
paragraphs: GAO found that the SDVOSB program is vulnerable to fraud and abuse, which could result in legitimate service-disabled veterans' firms losing contracts to ineligible firms. The 10 case-study firms identified in this report received approximately $100 million from SDVOSB contracts through fraud or abuse of the program, or both. For example, contracts for Hurricane Katrina trailer maintenance were awarded to a firm whose owner was not a service-disabled veteran. GAO also found SDVOSB companies used as a pass-through for large, sometimes multinational corporations. In another case a full-time federal contract employee at MacDill Air Force Base set up a SDVOSB company that passed a $900,000 furniture contract on to a company where his wife worked, which passed the work to a furniture manufacturer that actually delivered and installed the furniture. GAO found that the government does not have effective fraud-prevention controls in place for the SDVOSB program. Specifically, SBA and agencies awarding SDVOSB contracts do not have processes in place to validate a firm's eligibility for the program prior to bid submission. SBA and contracting agencies also currently do not have a database of individuals that are service-disabled veterans, a key eligibility requirement for the program. According to VA, it is developing a database, called VetBiz, of validated SDVOSBs, but currently it is only used for contracting by the VA. SBA's bid-protest process is the only governmentwide control over the SDVOSB program. However, although ineligible firms have been identified through bid protests, firms found ineligible do not face real consequences, can be allowed to complete the contracts received, and are not suspended or debarred.

section_title: Letter
paragraphs: The federal government’s long-standing policy has been to use its buying  power—the billions of dollars it spends through contracting each year—to  maximize procurement opportunities for small businesses. The Service- Disabled Veteran-Owned Small Business (SDVOSB) procurement program  is an extension of this policy. It also is intended to honor the extraordinary  service rendered to the United States by veterans with disabilities incurred  or aggravated in the line of duty during active service with the armed  forces. The Veterans Benefits Act of 2003, which established the program,  permits contracting officers to award set-aside and sole-source contracts  to any small business concern owned and controlled by one or more  service-disabled veterans. Executive Order 13360 also requires federal  procurement officials and prime contractors to provide opportunities for  these firms to increase their federal contracting and subcontracting. The  statutorily-mandated prime and sub contracting goal for SDVOSB  participation is not less than 3 percent of all federal contract dollars.
In order to be eligible for a set-aside or sole-source SDVOSB contract, a  firm must meet certain criteria. It must be majority-owned by one or more  service-disabled veterans who manage and control daily business  operations. The term “veteran” means a person who served in the active  military, naval, or air service, and who was discharged or released under  conditions other than dishonorable. Service-disabled means that the  disability occurred or became aggravated during the line of duty in the  active military, naval, or air service. A firm also must qualify as a small  business under the North American Industry Classification System  (NAICS) industry-size standards. Firm officials are allowed to self-certify  themselves as being an SDVOSB by attesting that they meet the criteria.
The Small Business Administration (SBA), which, along with federal  procuring activities, administers the SDVOSB program and tracks the  government’s progress towards meeting its 3 percent goal, reported in  fiscal year 2007 that $4 billion in federal contracts were awarded to firms  who self-certified themselves as SDVOSBs. Government contracts to  SDVOSBs accounted for only 1 percent of all government contract dollars  paid in fiscal year 2007. Since the SDVOSB program began, the  government has not met its annual mandated goal. In addition to SBA’s  statutory authority over administration of the SDVOSB program, several  other government agencies have separate authority over issues related to  the SDVOSB program. The Veterans Benefits, Health Care, and  Information Technology Act requires the Department of Veterans Affairs  (VA) to maintain a database of SDVOSBs and Veteran-Owned Small  Businesses (VOSB) so contractor eligibility can be verified, and requires  VA to determine the eligibility of firms bidding on VA SDVOSB and VOSB  contracts. In addition, The Office of Federal Procurement Policy (OFPP),  within the Office of Management and Budget, provides overall direction  for governmentwide procurement policies, regulations, and procedures  and to promote economy, efficiency, and effectiveness in the acquisition  processes. The Office’s primary focus is on the Federal Acquisition  Regulation (FAR), the governmentwide regulation governing agency  acquisitions of goods and services, including SDVOSB set-aside and sole- source contract actions.
Given the billions of dollars of federal contracts being awarded to  SDVOSB firms and the committee’s concern that ineligible firms are  receiving SDVOSB set-aside and sole-source contracts instead of  legitimate SDVOSB firms, you requested that we perform an investigation  to determine (1) whether cases of fraud and abuse exist within the  SDVOSB program, and (2) whether the program has effective fraud- prevention controls in place.
To identify examples of firms that received SDVOSB contracts through  fraudulent or abusive eligibility misrepresentations, we reviewed SDVOSB  contract awards and protests filed with SBA since the programs inception  in 2003. We also reviewed allegations of fraud and abuse sent to our fraud  hotline, FraudNET. In addition, we posted inquiries on our Web page and  on several veteran advocacy-group Web pages and newsletters seeking  information on fraud or abuse of the SDVOSB program. We received over  100 allegations of fraud and abuse in the SDVOSB program. From these  sources, we selected 10 cases for further investigation based on a variety  of factors, including facts and evidence provided in protests and  allegations, whether a firm received multiple SDVOSB contracts, and  whether a firm received other non-SDVOSB contracts. For the purposes of  our investigation, we defined a case as one or more affiliated firms or joint  ventures that obtained an SDVOSB contract. These cases include multiple  firms owned by an individual or multiple firms affiliated through joint  ventures and other types of partner agreements. To investigate these case  studies, we interviewed firm owners and managers and reviewed relevant  documentation, such as business filings and tax returns, to determine if  SDVOSB eligibility requirements had been met. We also analyzed data  from Federal Procurement Data System–Next Generation (FPDS-NG) for  years 2003 through 2009 to identify SDVOSB contracts received by the  firms since the program’s inception. Furthermore, we reviewed  certifications made by firms, such as certifications about a firm’s size,  SDVOSB status, and line of business, in the federal government’s Online  Representations and Certifications Application (ORCA). To determine  whether the program has effective fraud-prevention controls in place, we  reviewed relevant laws and regulations governing the SDVOSB program.  We also interviewed agency officials about their responsibility over the  program and controls currently in place to prevent or detect fraud and  abuse.
Our work was not designed to identify all firms that misrepresent  themselves as SDVOSBs or commit fraudulent or abusive activity in the  SDVOSB program. Our work also did not attempt to identify fraud and  abuse in SDVOSB subcontracts. Our work focused on determining  whether selected firms met program eligibility requirements. In addition,  our 10 case study examples cannot be projected to the overall population  of SDVOSB firms.
We conducted our audit work and investigation from October 2008  through July 2009 in accordance with U.S. generally accepted government  auditing standards. 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 objectives. We performed our  investigative work in accordance with the standards prescribed by the  Council of the Inspectors General on Integrity and Efficiency (CIGIE).  Additional details on our scope and methodology are included in appendix  I.
subsections: section_title: Ineligible Firms Obtain Millions of Dollars in SDVOSB Contracts
paragraphs: Fraud and abuse in the SDVOSB program allowed ineligible firms to  improperly receive millions of dollars in set-aside and sole-source  SDVOSB contracts, potentially denying legitimate service-disabled  veterans and their firms the benefits of this program. We identified 10  case-study examples of firms that did not meet SDVOSB program  eligibility requirements, received approximately $100 million in SDVOSB  contracts, and over $300 million in additional dollars of 8(a), HUBZone,  and non-SDVOSB federal government contracts. SBA found four of the  firms ineligible for the SDVOSB program through the agency’s bid protest  process. Nevertheless, because there are no requirements to terminate  contracts when firms are found ineligible, several contracting agencies  allowed the ineligible firms to continue their work. In addition, we  identified six other case-study firms that were not eligible for the SDVOSB  program. The misrepresentations case-study firms made included a firm  whose owner was not a service-disabled veteran, a serviced-disabled  veteran who did not control the firm’s day-to-day operations, a service- disabled veteran who was a full-time contract federal employee at MacDill  Air Force Base, and firms that served as a “pass-through” for large and  sometimes foreign-based corporations. In the case of a pass-through, a  firm or joint venture lists a service-disabled veteran as the majority owner,  but contrary to program requirements, all work is performed and managed  by a non-service-disabled person or a separate firm.
Federal regulations set requirements for a small business to qualify as an  SDVOSB. As stated above, SDVOSB eligibility regulations mandate that a  firm must be a small business and at least 51 percent–owned by one or  more service-disabled veterans who control the management and daily  business operations of the firm. In addition, SDVOSB regulations also  place restrictions on the amount of work that can be subcontracted.  Specifically, regulations require the SDVOSB to incur a mandatory  percentage of the cost of the contract performance that can range from 15  percent to 50 percent, depending on the type of goods or services. The  Federal Acquisition Regulation (FAR) requires all prospective contractors  to update ORCA to state whether their firm qualifies as an SDVOSB under  specific NAICS codes. Pursuant to 15 U.S.C. § 657 f(d), firms that  knowingly making false statements or misrepresentations in certifying  SDVOSB status are subject to penalties. Of the 10 cases we identify in this  report, all 10 of them represented to be SDVOSBs in the Central  Contractor Registration (CCR). Table 1 provides details on our 10 case- study firms that fraudulently or abusively misrepresented material facts  related to their eligibility for the SDVOSB program. We plan to refer all 10  firms to appropriate agencies for further investigation and consideration  for removal from the program.
Case 1: This firm fraudulently certified itself as an SDVOSB in CCR so it  could compete for over $200 million in SDVOSB contract awards that  FEMA set aside for site maintenance for trailers provided to Hurricane  Katrina and Rita victims in Louisiana. In May 2006, the same month as the  FEMA request for proposals were posted, the majority owner of the  SDVOSB applied for the first time to VA for service-connected disability  compensation related to claimed injuries incurred during military service  in the mid-1970s. In July 2006, VA requested that the SDVOSB’s owner  provide evidence of his/her service-connected disability. The owner never  responded. In December 2006, the VA denied the owner’s application for  compensation and status as a service-disabled veteran. Six months later,  SBA issued a decision, in response to an SDVOSB status protest, stating  that the owner of the firm was not a service-disabled veteran. In its  decision, the SBA concluded the SDVOSB firm and its joint venture did not  qualify for SDVOSB contracts. Based on this decision, in July 2007, FEMA  sent a letter terminating any future task orders for the firm and the joint  venture and giving them until the end of August 2007 to cease all  operations under both contract awards. In the end, the firm received  approximately $7.5 million dollars from FEMA’s SDVOSB set-aside  contracts prior to termination. The firm received no other punishments or  sanctions for the fraudulent misrepresentation and has not been  suspended or debarred from receiving future government contracts.
Case 2: This firm, functioning as a pass-through for non-SDVOSB firms,  improperly received over $5 million in SDVOSB contracts. Our  investigation revealed that this firm, located in Chico, California,  improperly subcontracted 100 percent of the work from an SDVOSB  contract to a corporation headquartered in Europe that reported almost  $12 billion dollars in revenue in 2008. The firm consists of two owners and  three full-time employees. While the majority owner listed on company  documents is a service-disabled veteran, neither the owner nor the firm’s  employees perform any of the work related to SDVOSB contracts the firm  receives. SDVOSB janitorial service contracts require that at least half of  the personnel costs are incurred by employees of either the firm or  another SDVOSB. When we interviewed the firm’s service-disabled veteran  owner, he/she acknowledged that he/she subcontracted all of the firm’s  work to other non-SDVOSB firms. The owner said the company’s business  model is to (1) use Federal Business Opportunities (FedBizOps) to search  for SDVOSB set-asides that the firm can find a subcontractor to complete;  then (2) take over a portion of the subcontractor’s payroll to meet the  percentage requirement for completing the work. The owner stated this  process was used for the firm’s $3.5 million contract for janitorial services  at a VA hospital in California, where the SDVOSB firm functioned as a  pass-through for a non-SDVOSB foreign-based corporation, which is one  of the world’s largest facility-service groups, with operations in 50  countries and almost $12 billion in annual revenue in 2008. For this  contract, all employees performing the janitorial services were from the  foreign-based corporation. The firm—with two owners and only three  employees—has secured 21 SDVOSB contracts in nine different states for  janitorial, construction, and other services. The work that is passed  through to non-SDVOSB firms is valued at $5 million.
Case 5: Our investigation found that a non-SDVOSB company used two  SDVOSB firms as pass-throughs to obtain over $3 million in SDVOSB  contracts. It did not have the SDVOSB firms perform the majority of the  contract work as required. The company located in Austin, Texas, formed  joint ventures with the two SDVOSB firms to receive contracts for septic- tank and related services from the Army at Fort Drum, New York, and Fort  Irwin, California. The Fort Drum set-aside contract was protested in June  2008 through the SBA bid-protest process, which determined that the  service-disabled veteran owner was not in control of the business. The  SBA disqualified both the non-SDVOSB company and its joint venture  from the SDVOSB program and deemed them ineligible to bid on such  contracts in the future; however, SBA did not process either the company  or the SDVOSB firm for suspension or debarment, which would generally  exclude the firms from doing business with the federal government.  Furthermore, SBA’s ruling did not result in the Army’s termination of its  contracts with the joint ventures that were the subject of the protest  because there are no requirements to terminate contracts awarded to  firms ineligible for SDVOSB set-aside or sole-source contracts. The  company that used the SDVOSB as a pass-through was allowed to  continue to provide septic-tank and related services at Fort Drum through  2013 for a total value of up to $1.1 million.
In 2009 the same non-SDVOSB company from Texas partnered with a  different SDVOSB firm to receive a contract at Fort Irwin valued at up to  $3 million for septic-tank and related services. Based on our case analysis,  the SDVOSB owner does not control the SDVOSB firm. The SDVOSB  owner is a former employee of the joint venture “partner” from Texas, as  are 8 out of 10 employees. The SDVOSB owner also works 3 days each  week at his brother’s bar in Illinois—located 1,800 miles away from the  project site in California. In addition, the SDVOSB owner does not have  control over payments received from the work performed at Fort Irwin.  The non-SDVOSB company’s accountant, who is located in San Antonio,  Texas, manages the SDVOSB firm’s bank accounts. Furthermore, a visit to  the work site at Fort Irwin in June 2009 also revealed, as shown in figure 1  below, that the portable toilets and hand-wash stations on site all  displayed the name and phone number of the non-SDVOSB company.
In June of 2009 we visited the contract performance site at Fort Irwin, with  the intention of inspecting the site unannounced. However, a Fort Irwin  contracting officer notified the SDVOSB firm in advance of our site visit.  Prior to our arrival it appeared that the SDVOSB owner had made an effort  to conceal the true management and control over the contract.  Specifically, upon arrival, the SDVOSB owner from Illinois was present on  site to greet us, despite the fact that he lived over 1,800 miles away. In  addition, a service truck displaying the SDVOSB firm’s logo was  prominently displayed at the contract location. Further investigation  revealed that the truck’s registration had been transferred the day of our  visit from the non-SDVOSB company from Texas to the SDVOSB firm.  However, the registration address remains in Texas at the office of the  accountant for both businesses.
Case 10: This case-study firm, functioning as a pass-through for a non- SDVOSB company, received approximately $900,000 for an SDVOSB  contract. Our investigation found that the owner of the SDVOSB passed  through all of the work for this furniture design and installation contract  to a furniture dealer that his wife worked for, who then passed the work to  a furniture manufacturer that actually designed and installed the furniture.  When we interviewed the SDVOSB firm owner, he admitted that he had no  experience in the furniture business. In addition, the SDVOSB owner  works full-time at MacDill Air Force base—the same location as the  contract award. This award is questionable on three counts: the SDVOSB  owner’s full-time job with another employer should make it impossible for  him to manage and control daily business operations on a large SDVOSB  contract; the contract work was passed through to the manufacturer; and  the owner’s daily interactions with Air Force personnel on base create the  perception of preferential treatment. In addition, as shown in figure 2  below, the legitimacy of the SDVOSB firm is also in question because the  firm’s physical address is the owner’s home and its mailing address is a  mail-box rental store.
When questioned, contracting officials at the base stated that they were  aware that the SDVOSB firm owner was also a DOD contract employee  and that he would likely not perform a majority of the work on the  contract. Nevertheless, they felt the contract was awarded appropriately.
MacDill Air Force Base awarded the firm, which has no employees, an  SDVOSB set-aside contract for approximately $900,000 for furniture layout  design, delivery, and installation. The SDVOSB firm owner has worked at  the base for over 20 years as a telecommunications contract employee.  The base director of contracting and the legal counsel who approved the  award had prior working relationships with the SDVOSB owner on the  base. Contracting officials told us that during the decision process for the  award of the furniture contract, heavy emphasis was placed on past  performance rather than price; however, the SDVOSB firm had no past- performance history. Contracting officials at the base instead allowed the  SDVOSB firm to use past performance ratings of the furniture dealer,  where the owner’s wife worked to meet the past-performance  requirement.
In addition, contracting officials were aware of the SDVOSB owner’s  limited involvement in performing the contract. They even stated that the  service-disabled veteran would likely not show up until it was time to  collect his check. The military personnel in charge of overseeing the  furniture layout design, delivery, and installation stated that the  manufacturer was more involved than the SDVOSB or its affiliate dealer.  We observed the delivery and installation of some of the furniture related  to this contract. The manufacturer was the only company present to lead  the installation process, with the plans they designed in-hand and their  logo clearly printed on them. Despite the fact that this SDVOSB award  clearly functioned as a pass-through for a non-SDVOSB firm, base officials  did not consider the award to be improper. In fact, the Director of  Contracting at the base stated that he estimates 90 percent of SDVOSB  contracts are pass-throughs for non-SDVOSB companies.
section_title: SDVOSB Program Does Not Have Governmentwide Fraud-Prevention Controls
paragraphs: The 10 case studies discussed above show that significant control  weaknesses in the SDVOSB program allow ineligible firms to receive  millions in SDVOSB contracts. The lack of effective fraud-prevention  controls by SBA and agencies awarding contracts allowed these ineligible  firms to receive approximately $100 million of sole-source or set-aside  SDVOSB contracts over the last several years. The SDVOSB program is  essentially an eligibility-based program. However, neither the SBA, except  when responding to a protest, nor contracting officials are currently  verifying the eligibility of firms claiming to be SDVOSBs. For example,  currently the SBA and contracting agencies do not have a process in place  to access the VA service-disabled veteran’s database listing individuals  that are valid service-disabled veterans. In addition, contracting officers  are not required to validate that a firm’s owner is a service-disabled  veteran prior to award. Unlike other small business contracting programs,  such as the HUBZone and 8(a) programs, there also are no documentation  submissions to substantiate eligibility for the program or application  process associated with the SDVOSB program. This lack of controls  substantially increases the risk for fraud and abuse in the SDVOSB  program.
The only process in place to detect fraud in the SDVOSB program involves  a formal bid protest process at the SBA, whereby interested parties to a  contract award can protest if they feel a firm misrepresented its small  business size or SDVOSB eligibility in its bid submission. However, as  shown by our case studies, this self-policing process does not prevent  ineligible firms from receiving SDVOSB contracts. For example, bid- protest decisions do not always result in the termination of contracts with  ineligible firms, even when termination costs would be minimal in cases  where contract work had not begun. As some of our case studies show,  even when firms are found ineligible to receive a contract, they can still  retain it because current regulations do not require that the contracting  agency terminate the contract. In addition, none of the firms found  ineligible by the SBA through SDVOSB-status protests were suspended or  debarred from receiving SDVOSB and other government contracts. When  asked about its bid protest process, SBA officials stated that the bid  protest process focuses on determining the eligibility of a firm for a  specific contract and providing details on why a firm was found to be  eligible or ineligible. SBA officials also stated that bid protest decisions do  not include recommendations for suspension or debarment. Recently, in  response to the Veterans Benefits, Health Care, and Information  Technology Act, VA has taken steps to develop a validation program for  contracts it awards to SDVOSBs and Veteran-Owned Small Businesses  (VOSB). While not yet fully implemented, this validation program  includes steps to verify a firm’s eligibility for the program including  validating an owner’s SDV status and his/her control of day-to-day  operations. The VA program also includes plans for site visits to firms  seeking VA certification as an SDVOSB or VOSB.
subsections: section_title: Lack of Governmentwide Fraud-Prevention Controls Leaves the Government Vulnerable to Fraud and Abuse
paragraphs: Our 10 case studies clearly show that fraud and abuse exist within the  SDVOSB program. Without preventive controls our case studies show that  millions of dollars of SDVOSB set-aside and sole-source contracts are  being awarded to ineligible firms. Fraud prevention requires a system of  rules which, in their aggregate, minimize the likelihood of fraud occurring  while maximizing the possibility of detecting any fraudulent activity at a  reasonable cost. Fraud-prevention systems set forth what actions  constitute fraudulent conduct and specifically spell out who in the  organization handles fraud matters under varying circumstances. The  potential of being caught and disciplined can, in some cases, persuade  likely perpetrators not to commit the fraud. Because of this principle, the  existence of a thorough fraud-prevention system is essential to fraud  prevention and detection. However, as shown by our case studies, there  are at times no consequences for firms that fraudulently misrepresent their  status as SDVOSBs or otherwise abuse the current system. Not only are  firms not prosecuted, suspended, or debarred, but in many cases, because  there is no requirement for agencies to terminate contracts awarded to  ineligible firms, the firms are allowed to continue performing contracts,  even when contract termination costs would be minimal in cases where  contracted work had not begun. In addition, ineligible firms in some  instances continue bidding on SDVOSB contracts without consequences.
As of July 2009, the federal government does not have in place the key  elements of an effective fraud-prevention system for the SDVOSB  program. As shown in figure 3 below, a well-designed fraud-prevention  system should consist of three crucial elements: (1) up-front preventive  controls, (2) detection and monitoring, and (3) investigations and  prosecutions. For the SDVOSB program this would mean (1) front-end  controls over program eligibility prior to contract award, (2) fraud  detection and monitoring of firms already receiving SDVOSB contracts,  and (3) the aggressive pursuit and prosecution of individuals committing  fraud to include suspension and debarment, or requirement to terminate  the contract. In addition, as shown in figure 3, the organization should also  use “lessons learned” from its detection and monitoring controls and  investigations and prosecutions to design more-effective preventive  controls.
subsections: section_title: Preventive Controls
paragraphs: Currently the SDVOSB program has no preventive controls in place to  prevent fraud and abuse in the program. In addition, the SBA and agencies  awarding contracts do not have access to a database listing individuals  that are valid service-disabled veterans. We have previously reported that  fraud prevention is the most efficient and effective means to minimize  fraud, waste, and abuse. This is especially important in a program like the  SDVOSB program where even firms identified as receiving contracts  through fraud or abuse face no real consequences as discussed below.  Thus, controls that prevent fraudulent firms and individuals from entering  the program in the first place are the most important element in an  effective fraud-prevention program. The most crucial element of effective  fraud-prevention controls is a focus on substantially diminishing the  opportunity for fraudulent access into the system through front-end  controls. Currently there are no preventive controls in place for the  SDVOSB program. The SDVOSB program is essentially an eligibility-based  program. However neither the SBA or contracting officials are required to  verify the eligibility of firms claiming to be SDVOSBs. This lack of controls  substantially increases the risk for fraud and abuse in the SDVOSB  program.
section_title: Detection and Monitoring
paragraphs: Although preventive controls are the most effective way to minimize fraud  and abuse, continual monitoring is an important component in detecting  and deterring fraud. Monitoring and detection within a fraud-prevention  program involve actions such as data mining for fraudulent and suspicious  applicants and evaluating firms to provide reasonable assurance that they  continue to meet program requirements. Currently, the only process in  place that can detect fraud and abuse in this program is the bid-protest  process administered by SBA. Through the bid-protest process, interested  parties self-police the SDVOSB program by exercising their right to  challenge an SDVOSB award that is suspected to have been awarded to an  ineligible firm. SBA will determine the eligibility of the firm, and if ruled  ineligible, the SBA protest decision will state that the firm is supposed to  be ineligible for additional SDVOSB awards. However, based on our case  studies this process does not prevent the firms from bidding on SDVOSB  contracts, because SBA protest decisions are not listed in CCR or ORCA,  and therefore contracting officials may not be aware of protest decisions.  Officials from the Inspector General offices within SBA and VA stated that  they will respond to allegations of fraud and abuse within the SDVOSB  program, but they do not actively monitor the program for fraud and  abuse. Without continual monitoring of the program, the risk for persistent  fraud and abuse increases.
section_title: Investigation and Prosecution
paragraphs: The final element of an effective fraud prevention system is the aggressive  investigation and prosecution of individuals who commit fraud against the  federal government. The SBA, through the bid-protest process, makes  determinations of eligibility status in the SDVOSB program. However,  there is not an effective process for prosecution, suspension, or debarment  of program abusers. Without consequences, the bid-protest process is not  an effective control for preventing future abuse. As mentioned in case  studies above, firms determined to be ineligible for SDVOSB awards are  not required to terminate those awards. In one case, a joint venture was  determined to be a pass-through—it completed the contract and created  another pass-through with a different service-disabled veteran to win  another SDVOSB contract. Furthermore, although SBA’s regulations state  that firms misrepresenting themselves as SDVOSB concerns may be  suspended or debarred from government contracting and may suffer civil  and criminal penalties for knowingly making false statements to the SBA,  to-date, the SBA program office has never referred any firms for  debarment or suspension proceedings, or both, based on SBA findings  from its program-eligibility reviews. When asked about its bid protest  process, SBA officials stated that the bid protest process focuses on  determining the eligibility of a firm for a specific contract and providing  details on why a firm was found to be eligible or ineligible. SBA officials  also stated that bid protest decisions do not include recommendations for  suspension and debarment. By failing to hold firms accountable, SBA and  contracting agencies have sent a message to the contracting community  that there is no punishment or consequences for committing fraud or  abusing the intent of the SDVOSB program.
section_title: VA Is Developing Controls for Its SDVOSB Contracts
paragraphs: The Veterans Benefits, Health Care, and Information Technology Act— which took effect in June 2007—requires VA to maintain a database of  SDVOSBs and Veteran Owned Small Businesses (VOSB) so contractor  eligibility can be verified. It also requires the VA to determine whether  SDVOSBs and VOSBs are indeed owned and controlled by veterans or  service-disabled veterans in order to bid and receive VA contracts. Lastly,  it requires VA set-aside and sole-source awards be made only to firms that  have had their eligibility verified. Currently these controls are being  developed to validate eligibility for awarding VA contracts only.
At the time the act took effect, VA already maintained an online database,  VetBiz Vendor Information Pages, referred to as VA’s VetBiz database, in  which nearly 16,500 firms had self-certified as SDVOSBs or VOSBs. VA  began accepting applications to validate eligibility for the SDVOSB  program from firms registered in the database in May 2008, after it  published guidelines for the verification program in an interim final rule.  To date, VA’s validation process has focused on cross-referencing  information submitted by owners with the agency’s own data to confirm  majority ownership by veterans or service-disabled veterans. VA also  expects to pilot procedures for more detailed reviews of selected firms to  verify day-to-day control by a service-disabled or other veteran. According  to VA officials, the agency will begin requiring its contracting officers to  use the set-aside and sole-source award authorities only with verified  SDVOSBs and VOSBs after the agency finalizes rule making related to  implementation of these authorities. As of March 2009, these program  controls have not been implemented. Until this new program becomes  operational, existing VA policy states that firms only have to be registered  in VA’s database to receive set-aside or sole-source awards. Currently  there are no plans to implement these controls governmentwide.
Additional controls that VA plans to develop include its own certification  process for prospective SDVOSB businesses. The process is to include a  review of documents, validation of the owner’s status as a service-disabled  veteran, and potential site visits to businesses bidding on VA SDVOSB  contracts. Requiring submission of documents to demonstrate ownership  and control of an SDVOSB has some value as a deterrent—ownership  documents could have prevented instances demonstrated in our case  studies where the service-disabled veteran was receiving less than 51  percent of the profits. The most effective preventive controls involve the  verification of information, such as verifying service-disabled status with  the VA’s database and service-disabled veteran participation in the  business through an unannounced site visit. Verification of service- disabled veteran status by using the VA’s database could have prevented  the most egregious example of fraud where the owner was not even a  service-disabled veteran. Although VA’s proposed system was not intended  for governmentwide use, once the certification system is in place, all  SDVOSBs wishing to do business with VA will have to be certified.
section_title: Conclusions
paragraphs: The SDVOSB program does not have effective governmentwide fraud- prevention controls in place and is vulnerable to fraud and abuse. In just  the 10 cases we show in this report, the consequences of this lack of  control include approximately $100 million of sole source and set aside  SDVOSB contracts to companies that have figured out how to manipulate  the current system. Even the few companies identified as ineligible  through the bid-protest system face no real consequences, in times being  allowed by the government to complete the contract they obtained  through fraudulent representations. Victims of the fraud and abuse in this  program are the legitimate service-disabled veterans and their firms. SBA’s  only requirement is a “self-certification” process, whereby SDVOSB  concerns self-certify their eligibility. However, VA has begun to develop a  process for certifying the eligibility of SDVOSB firms prior to contract  award, but that process currently only relates to firms bidding on VA  SDVOSB contracts. To address governmentwide vulnerabilities we  identified, an effective governmentwide process is necessary to certify the  eligibility of all firms bidding on SDVOSB contracts. To be effective, this  process should include coordination between the different agencies with  the authority to improve program controls, and some form of punishment,  such as prosecution, suspension, and debarment of fraudulent individuals  and their companies.
section_title: Matter for Congressional Consideration
paragraphs: Our work documents numerous cases where the current governmentwide  self-certification system over the SDVOSB program has allowed ineligible  firms to receive millions of dollars in federal contracts. However, through  the Veterans Benefits, Health Care, and Information Technology Act of  2007, Congress required VA to maintain a database of SDVOSBs, determine  whether SDVOSBs are indeed owned and controlled by service-disabled  veterans, and required VA set-aside and sole-source awards be made only  to firms that have had their eligibility verified. Currently, the only efforts to  put fraud prevention controls in place are at VA through their VetBiz  program, which applies only to VA contracts. Given that outside of VA  there is no verification program in place for SDVOSB contracting,  Congress should consider providing VA with the authority and resources  necessary to expand its SDVOSB eligibility verification process to all  contractors seeking to bid on SDVOSB contracts governmentwide.
section_title: Recommendations for Executive Action
paragraphs: In an effort to minimize the potential for fraud and abuse in the Service- Disabled Veteran-Owned Small Business (SDVOSB) program and to assure  that legitimate service-disabled veterans and their firms reap the benefits  of this program, we recommend that the Administrator of the Small  Business Administration (SBA) and the Secretary of the Veterans Affairs  (VA) coordinate with the Office of Federal Procurement Policy (OFPP) to  explore the feasibility of  expanding the use of the VA VetBiz “verified” database  governmentwide for purposes of validating all SDVOSB eligible firms  for contracting and,  requiring that all contractors who knowingly misrepresent their status  as an SDVOSB be debarred for a reasonable period of time.
In addition, we recommend the Administrator of SBA refer all SDVOSB  firms that submit misrepresentations of their status to SBA’s Office of  Inspector General for review and further investigation.
section_title: Agency Comments and Our Evaluation
paragraphs: SBA and VA provided general observations and technical comments in  response to a draft of this report. They also responded directly to our  recommendations. Their responses are included in appendixes II and III.  We have made revisions based on the observations and technical  comments where appropriate. In response to our recommendations, VA  generally agreed with our two recommendations. In its response VA  expressed that specific authority would be required for other agencies to  be able to rely on the department’s VetBiz database and exclude firms  from acquisitions if not “verified” in this database. We recognize that  additional authority may be required for other federal agencies to rely on  certifications made in VA’s VetBiz database, and have raised this issue in  our matter for congressional consideration. In addition, VA stated that  governmentwide applicability of authority for federal agencies, other than  VA, to initiate debarment actions related to acquisitions for any firms that  misrepresent information on the status of that firm as a small business  owned and controlled by veterans or service-disabled veterans would  require OFPP to seek a revision to the Federal Acquisition Regulation to  add SDVOSB status misrepresentation as a cause for debarment. Our  recommendation concerning coordination between VA, SBA, and OFPP  addresses this concern.
SBA’s response, provided by the Associate Administrator for Government  Contracting and Business Development, generally agreed with our  recommendations; however, in its general observations and specific  responses to our recommendations, SBA stated that they have limited  responsibilities over the SDVOSB program and questioned the efficacy of  one of our recommendations. Specifically, SBA stated that agency  contracting officers bear the primarily the responsibility for ensuring only  eligible SDVOSB firms perform SDVOSB set aside and sole source  contracts. SBA also stated it is only authorized to perform eligibility  reviews in a bid protest situation, and contracting officers, not SBA, are  responsible for taking appropriate action after a bid protest decision is  made. The Associate Administrator maintained that SBA was under no  legal obligation to create a protest process for the SDVOSB program, and  that its only statutory obligation is to report on other agencies’ success in  meeting SDVOSB contracting goals. In addition, SBA expressed that it was  not obligated to institute any type of fraud prevention controls within the  SDVOSB program.
While we acknowledge that there are shared responsibilities between SBA  and agency contracting officers when attempting to prevent fraud in the  SDVOSB program, we do not agree that SBA does not have responsibility  or authority to develop and implement a process to provide reasonable  assurance that only eligible SDVOSB firms are awarded set aside and sole  source SDVOSB contracts. Specifically, its statutory responsibilities date  back to December 2003, when the Veterans Benefits Act of 2003 amended  the Small Business Act to provide that “ules similar to the rules of  paragraphs (5) and (6) of Section 8(m)” shall apply to the SDVOSB  program. Indeed, in an interim final rule implementing that section of the  act, SBA acknowledged that it is statutorily authorized to administer the  SDVOSB program. Classified to section 637 of Title 15 of the United  States Code, the provisions in section 8(m) of the Small Business Act  specifically require the Administrator of SBA to establish procedures  relating to the “filing, investigation, and disposition of any challenge of the  eligibility of a small business concern … and the verification … of the  accuracy of any certification made or information provided to the  Administrator by a small business.” To implement these verification  procedures, SBA is authorized to conduct program examinations,  including random examinations, of any certification made or information  provided to the Administrator. To carry out its verification  responsibilities, SBA is authorized to obtain information from any federal  agency or department that the Administrator determines is necessary. In  the event that the Administrator determines that an entity has  misrepresented its status, that entity is subject to certain penalties. Given  this specific legislative authority and responsibility, we believe that,  contrary to its assertion, SBA has an obligation to assist in development  and implementation of a verification process for the SDVOSB program to  provide reasonable assurance that sole source and set aside SDVOSB  contracting opportunities are only provided to eligible SDVOSB firms.
In response to our first recommendation, SBA questioned the efficacy of  expanding the use of VA’s VetBiz verified database governmentwide to  verify the eligibility of SDVOSB firms for the program because of the self- certification nature of the program. We believe that the expansion of VA’s  verification process to all SDVOSB contractors attempting to bid on  federal contracts would provide assurances that only eligible SDVOSB  firms receive the benefits of the special contract opportunities established  by the SDVOSB program. We believe this verification is especially  important given that the current set of controls over the SDVOSB program  consist primarily of self-certifications made by contractors, as SBA  represented in their response to a draft of this report. In SBA’s other  response to our first recommendation, SBA stated that it is the contracting  officer’s responsibility to enforce or pursue suggested penalties for firms  who knowingly misrepresent their status as an SDVOSB firm. As stated  above, we agree that there is a shared responsibility for prevention,  detection, and punishment of fraud and abuse in the program between  agency contracting officers and the SBA.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  date of this letter. We will then send copies of this report to interested  congressional committees, the Administrator of SBA, the Secretary of VA,  and other interested parties. The report will also be available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-6722 or kutzg@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify examples of firms that received Service-Disabled Veteran  Owned Small Business (SDVOSB) contracts through fraudulent or abusive  eligibility misrepresentations, we reviewed SDVOSB contract awards and  protests filed with the Small Business Administration (SBA) since the  programs inception in 2003. We also reviewed allegations of fraud and  abuse sent to our fraud hotline, FraudNET. In addition, we posted  inquiries on our Web page and on various veteran advocacy-groups’ Web  pages and newsletters seeking information on fraud or abuse of the  SDVOSB program. We received over 100 allegations of fraud and abuse in  the SDVOSB program. From these sources, we selected 10 cases for  further investigation based on a variety of factors, including facts and  evidence provided in protests and allegations, whether a firm received  multiple SDVOSB contracts, and whether a firm received other non- SDVOSB contracts. For the purposes of our investigation, we defined a  case as one or more affiliated firms or joint ventures that obtained an  SDVOSB contract. These cases include multiple firms owned by an  individual or multiple firms affiliated through joint ventures and other  types of partner agreements. To investigate these case studies, we  interviewed firm owners and managers and reviewed relevant  documentation, such as business filings and tax returns, to determine if  SDVOSB eligibility requirements had been met. We also analyzed data  from Federal Procurement Data System–Next Generation (FPDS-NG) for  years 2003 through 2009 to identify SDVOSB contracts received by the  firms since the program’s inception. Furthermore, we reviewed  certifications made by firms, such as certifications about a firm’s size,  SDVOSB status, and line of business, in the federal government’s Online  Representations and Certifications Application (ORCA). To assess overall  program vulnerabilities, we reviewed relevant laws and regulations  governing the SDVOSB program. Our work was not designed to identify all  firms that misrepresent themselves as SDVOSBs or commit fraudulent or  abusive activity in the SDVOSB program. Our work also did not attempt to  identify fraud and abuse in SDVOSB subcontracts. Our work focused on  determining whether selected firms met program eligibility requirements.  In addition, our 10 case-study examples cannot be projected to the overall  population of SDVOSB firms.
To determine whether the program has effective fraud-prevention controls  in place, we interviewed agency officials from SBA, the Department of  Veterans Affairs (VA), and various agency contracting officials about their  responsibility over the program and controls currently in place to prevent,  detect, and monitor fraud and abuse. We also reviewed information from  the Federal Register—The President’s Executive Order, the Federal  Acquisition Regulation (FAR), United States Code, and SBA guidance on  government contracting programs to determine the extent to which SBA  and awarding agencies are required to verify contractor eligibility for  SDVOSB contracts. Furthermore, we compared current controls in the  SDVOSB program to a fraud-prevention model developed by GAO and  utilized in prior small business contracting investigations.
section_title: Appendix II: Comments from the Small Business Administration
section_title: Appendix III: Comments from the Department of Veterans Affairs
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Gary Bianchi, Bruce Causseaux,  Randy Cole, Victoria De Leon, Ken Hill, John Ledford, Deanna Lee,  Barbara Lewis, Vicki McClure, Jonathan Meyer, Andrew O’Connell, George  Ogilvie, Gloria Proa, Barry Shillito, and Abby Volk also provided assistance  on this report.