The HUBZone program was established by the HUBZone Act of 1997 to stimulate economic development through increased employment and capital investment by providing federal contracting preferences to small businesses in economically distressed communities. These areas, which are designated based on certain economic and census data, are known as HUBZones. As of January 2009, there were approximately 9,300 firms listed in the Central Contractor Registration database as participating in the HUBZone program. To ensure HUBZone areas receive the economic benefit from the program, SBA is responsible for determining whether firms meet HUBZone program requirements. To participate in the HUBZone program, small business firms generally must meet certain criteria established by the SBA, most notably: (1) the firm must be at least 51 percent owned and controlled by one or more U.S. citizens; (2) at least 35 percent of its employees must live in a HUBZone; (3) the principal office (i.e., the location where the greatest number of qualifying employees perform their work) must be located in a HUBZone; and (4) the firm must qualify as a small business under the size standard that corresponds with its primary industry classification. In addition, once a firm receives a HUBZone contract, the firm is required to abide by certain subcontracting limitations, which for most firms is to expend at least 50 percent of the personnel costs of a contract on their own employees or employees of other qualified HUBZone small business concerns. The SBA is legally responsible for ensuring that program participants meet program requirements. If a HUBZone firm does not meet program requirements or fails to notify the SBA of material changes that affect the firm’s HUBZone eligibility, the SBA may use a variety of enforcement tools against the firm. Depending on the severity of the infraction, SBA can (1) decertify and remove the firm from the list of qualified HUBZone firms, (2) suspend and/or debar the firm from all federal contracts, and/or (3) refer the firm to the Department of Justice for civil and/or criminal prosecution. In July 2008, we testified that SBA’s lack of controls over the HUBZone program exposed the government to fraud and abuse. Specifically, we identified substantial vulnerabilities in SBA’s application and monitoring process by demonstrating the ease of obtaining HUBZone certification. For example, by using fictitious employee information and fabricated documentation, we easily obtained HUBZone certification for four bogus firms. In addition, we also identified 10 firms from the Washington, D.C., metro area that were participating in the HUBZone program even though they clearly did not meet eligibility requirements. In June 2008, we reported that the Small Business Administration needed to take additional actions to certify and monitor HUBZone firms as well as to assess the results of the HUBZone program. Specifically, we found that the map SBA used to publicize qualified HUBZone areas was inaccurate. In addition, we found that the mechanisms that SBA used to certify and monitor HUBZone firms did not meet federal internal control standards and provided limited assurance that only eligible firms participated in the program. For example, SBA verified the information reported by firms on their application or during recertification—its process for monitoring firms—in limited instances and did not follow its own policy of recertifying all firms every 3 years. In the report, we made five recommendations designed to improve SBA’s administration and oversight of the HUBZone program. We recommended that SBA correct and update its HUBZone map, develop and implement guidance to ensure more routine verification of application data, eliminate its backlog of recertifications, formalize and adhere to a specific time frame for decertifying ineligible firms, and further assess the effectiveness of the program. In responding to a draft of this report, SBA agreed with these recommendations and outlined steps that it plans to take to address them. HUBZone program fraud and abuse continues to be problematic for the federal government. We identified 19 firms in the states of Texas, Alabama, and California participating in the HUBZone program even though they clearly do not meet program requirements. Although we cannot conclude whether this is a systemic problem based on these cases, as shown in figure 1 below, the issue of misrepresentation clearly extends beyond the Washington, D.C., metropolitan area. In fiscal years 2006 and 2007, federal agencies had obligated a total of nearly $30 million to these firms for performance as the prime contractor on federal HUBZone contracts. HUBZone regulations also place restrictions on the amount of work that can be subcontracted to non-HUBZone firms. Specifically, HUBZone regulations generally require firms to expend at least 50 percent of the personnel costs of a contract on its own employees. As part of our investigative work, we found examples of service firms that subcontracted a substantial majority of HUBZone contract work to other non-HUBZone firms and thus did not meet this program requirement. When a firm subcontracts the majority of its work to other non-HUBZone firms it is undermining the HUBZone program’s stated purpose of stimulating development in the economically distressed areas, as well as evading eligibility requirements for principal office and 35 percent residency requirement. According to HUBZone regulations, persons or firms are subject to criminal penalties for knowingly making false statements or misrepresentations in connection with the HUBZone program including failure to correct “continuing representations” that are no longer true. During the application process, applicants are not only reminded of the program eligibility requirements, but are required to agree to the statement that anyone failing to correct “continuing representations” shall be subject to fines, imprisonment, and penalties. Further, the Federal Acquisition Regulation (FAR) requires all prospective contractors to update the government’s Online Representations and Certifications Application (ORCA), which includes a statement certifying whether the firm is currently a HUBZone firm and that there have been “no material changes in ownership and control, principal office, or HUBZone employee percentage since it was certified by the SBA.” Of the 19 firms that did not meet HUBZone eligibility requirements, we found that all of them continued to represent themselves as eligible HUBZone interests to SBA. Because the 19 case examples clearly are not eligible, we consider each firm’s continued representation indicative of fraud and/or abuse related to this program. Table 1 highlights 10 firms that we found to be egregiously out of compliance with HUBZone program requirements. Appendix I pro vides details on the other 9 cases that we examined. We will be referring all 19firms to SBA for further investigation and consideration for removal from the program. The following is a more detailed description of fraud and abuse from 3 of the cases that we investigated. Case Study 1: Our investigation clearly showed that this firm was being used as a front company because it was subcontracting the majority of its work to other firms. This firm is located in Fort Worth, Texas, and violated HUBZone program requirements because it did not expend at least 50 percent of personnel costs on its own employees or by using the personnel of other HUBZone firms as required by federal regulations. This firm, which consists of 8 employees, has obtained millions of dollars in HUBZone contracts to provide environmental consulting services. At the time of our investigation, company documents showed that the company was subcontracting between 71 and 89 percent of its total contract obligations to other non-HUBZone firms—in some cases, large firms. The principal admitted that her firm was not meeting contract performance requirements required by HUBZone regulations. Further, the principal stated that the firm made bids on HUBZone contracts knowing that the company would have to subcontract work to other firms after the award. The principal added that other large firms use HUBZone firms in this manner, referring to these HUBZone firms as “contract vehicles.” By subcontracting the majority of its HUBZone work to non-HUBZone firms, this firm is clearly abusing its HUBZone designation and undermining the HUBZone program’s stated purpose of stimulating small business development in economically distressed areas. Likewise, because the subcontracting is being conducted by non-HUBZone firms this firm is also evading eligibility requirements for principal office and the 35 percent residency requirement. This firm has been obligated over $2.3 million in HUBZone set-asides during fiscal years 2006 and 2007. Case Study 2: Our investigation demonstrated that this firm continued to misrepresent itself as HUBZone-eligible while failing to meet HUBZone requirements. This firm, which is a two-person—father and son—ground maintenance services company located in Jacksonville, Alabama, did not meet the principal office requirement, failed the 35 percent residency requirement, and served as a front company—subcontracting most of its HUBZone work to non-HUBZone firms. Our investigation found that the purported principal office was in fact a residential trailer in a trailer park. As shown in figure 2 below, the “suite number” of the principal office provided to SBA was actually the trailer number. The president of the company claimed that the trailer is the principal office and that an employee lived at that trailer. However, our investigation found that the president knowingly misrepresented and concealed material facts to a GAO investigator. We found that both employees live in non-HUBZone areas that are located about 90 miles from the trailer. Additionally, we verified that the trailer is occupied by someone not associated with the company. Further, our investigation found that neither employee lived in, nor worked at, the residential trailer since August 2007. Specifically, the U.S. Postal Service provided us a copy of the change of address form dated August 2007 that instructed the Postal Service to forward all mail from the trailer to another office in Birmingham, Alabama, which is not located in a HUBZone area.