Service-Disabled Veteran-Owned Small Business Program: Vulnerability to Fraud and Abuse Remains

Published by the Government Accountability Office on 2012-08-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Testimony
                             Before the Subcommittees on Economic
                             Opportunity and Oversight and
                             Investigations, Committee on Veterans’
                             Affairs, House of Representatives
For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, August 2, 2012

                             VETERAN-OWNED SMALL
                             BUSINESS PROGRAM
                             Vulnerability to Fraud and
                             Abuse Remains
                             Statement of Richard J. Hillman, Managing Director
                             Forensic Audits and Investigative Service

Chairmen Stutzman and Johnson, Ranking Members Braley and
Donnelly, and Members of the Subcommittees:

I am pleased to be here as you examine the Service-Disabled Veteran-
Owned Small Business (SDVOSB) Program’s vulnerabilities to fraud and
abuse. My remarks today are based on our report, Service-Disabled
Veteran-Owned Small Business Program: Vulnerability to Fraud and
Abuse Remains, recently issued. 1 In fiscal year 2010, federal agencies
awarded $10.8 billion in small-business obligations to firms participating
in the SDVOSB program, according to the Small Business Administration
(SBA). The program is intended to honor business-owning veterans who
incurred or aggravated disabilities in the line of duty by providing their
firms with sole-source and set-aside contracting opportunities. Firms must
meet several requirements to be eligible to participate in the program,
such as being majority-owned by one or more service-disabled veterans
who manage and control daily business operations.

SBA administers the government-wide SDVOSB program but does not
verify firms’ eligibility, stating that its only statutory obligation is to report
other agencies’ success in meeting contracting goals. In addition to SBA’s
statutory authority over the government-wide program, the Department of
Veterans Affairs (VA) has separate authority over issues related to its
own SDVOSB program. VA awarded $3.2 billion in SDVOSB contracts in
fiscal year 2010—about 30 percent of government-wide SDVOSB
awards. Unlike SBA, VA is bound by the Veterans Benefits, Health Care,
and Information Technology Act of 2006 (2006 Act) to verify firms’
eligibility. Since 2009, we have issued 10 reports and testimonies
detailing how the government-wide and VA SDVOSB programs are
vulnerable to fraud and abuse, making numerous recommendations to
strengthen fraud-prevention controls. 2 In October 2010, Congress also
passed the Veterans Small Business Verification Act (2010 Act), part of
the Veterans’ Benefits Act of 2010, to require VA among other things to
more-thoroughly validate firms’ eligibility before listing them in VetBiz,
VA’s database of eligible firms. In July 2011, we reported that both SBA
and VA had taken positive steps in response to our findings and
recommendations, but that vulnerabilities remained.

GAO-12-697 (Washington, D.C.: Aug. 1, 2012).
See “Related GAO Products” in GAO-12-697.

Page 1                                                                GAO-12-967T
You requested that we again update our prior work and report the status
of our recommendations. Our report assesses (1) VA’s progress in
addressing remaining vulnerabilities to fraud and abuse in its SDVOSB
program and (2) actions taken by SBA or other federal agencies since our
previous reports to improve government-wide SDVOSB fraud-prevention
controls. To do so, we reviewed agency documentation and interviewed
agency officials. We investigated new allegations from informants
regarding firms that received SDVOSB contracts through fraudulent or
abusive eligibility misrepresentation and highlighted 5 examples. Our
examples cannot be projected to the overall population of SDVOSB firms.
We also reviewed the status of 10 case studies from our prior work. We
did not project the extent of fraud and abuse in the program. We
conducted this performance audit from January 2011 to July 2012 in
accordance with generally accepted government auditing standards. 3
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. We performed our
investigative work from January 2011 to July 2012 in accordance with the
standards prescribed by the Council of the Inspectors General on Integrity
and Efficiency.

In summary, VA’s SDVOSB program remains vulnerable to fraud and
abuse. VA has made inconsistent statements about its progress in
verifying firms listed in VetBiz using the new, more-thorough process the
agency implemented in response to the 2010 Act. In one communication,
VA stated that as of February 2011, all new verifications would use the
2010 Act process going forward. According to the most-recent information
provided by VA, there are 6,079 SDVOSBs and veteran-owned small

 Some of the work in this report is based on prior GAO products issued in 2012, 2011,
and 2009. GAO, Service-Disabled Veteran-Owned Small Business Program:
Governmentwide Fraud Prevention Control Weaknesses Leave Program Vulnerable to
Fraud and Abuse, but VA Has Made Progress in Improving Its Verification Process,
GAO-12-443T (Washington, D.C.: Feb. 7, 2012); Service-Disabled Veteran-Owned Small
Business Program: Additional Improvements to Fraud Prevention Controls Are Needed,
GAO-12-205T (Washington, D.C.: Nov. 30, 2011); Service-Disabled Veteran-Owned
Small Business Program: Preliminary Information on Actions Taken by Agencies to
Address Fraud and Abuse and Remaining Vulnerabilities, GAO-11-589T (Washington,
D.C.: July 28, 2011); and Service-Disabled Veteran-Owned Small Business Program:
Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars
in Contracts, GAO-10-108 (Washington, D.C.: Oct. 23, 2009).

Page 2                                                                     GAO-12-967T
businesses (VOSB) listed in VetBiz. Of these, 3,724 were verified under
the more-through process implemented under the 2010 Act, and 2,355—
over 38 percent—were verified under the less-rigorous 2006 Act process.
The presence of firms that have only been subjected to the less-stringent
process that VA previously used represents a continuing vulnerability. 4 In
2011, VA’s Office of Inspector General (OIG) issued a report finding that
VA’s document review process under the 2006 Act “in many cases was
insufficient to establish control and ownership … [and] in effect allowed
businesses to self-certify as a veteran-owned or service-disabled veteran-
owned small business with little supporting documentation.”

VA has taken some positive action to enhance its fraud-prevention efforts.
VA generally concurred with recommendations we issued in October
2011 and has established processes in response to 6 of the 13
recommendations (fig. 1). VA has also begun action on some remaining
recommendations, such as providing fraud-awareness training and
removing contracts from ineligible firms, though these procedures need to
be finalized.

  On June 27, 2012, VA implemented an interim rule that extends the eligibility of verified
firms to 2 years. VA told us it interprets “verified” to include any firms that have been
verified under either the 2006 Act or 2010 Act processes. Consequently, implementation
of this rule means that thousands of firms will continue to be eligible for contracts even
though they have not undergone the more-thorough 2010 Act process.

Page 3                                                                          GAO-12-967T
Figure 1: Status of GAO’s Previous Recommendations

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

                                      Page 4                                                                               GAO-12-967T
 The North American Industry Classification System (NAICS) is the standard used by federal
statistical agencies in classifying business establishments for the purpose of collecting, analyzing,
and publishing statistical data related to the U.S. business economy.
 VA’s Debarment Committee was instituted in September 2010 specifically to debar firms that had
violated SDVOSB regulations.

Regarding the government-wide SDVOSB program, no action has been
taken by agencies to improve fraud-prevention controls. Relying almost
solely on firms’ self-certification, the program continues to lack controls to
prevent fraud and abuse. For example, the Department of Defense (DOD)
OIG reported in 2012 that DOD provided $340 million to firms that
potentially misstated their SDVOSB status. SBA does not verify firms’
eligibility status, nor does it require that they submit supporting
documentation. While SBA is under no statutory obligation to create a
verification process, five new cases of potentially ineligible firms highlight
the danger of taking no action. These firms, discussed below, received
approximately $190 million in SDVOSB set-aside and sole-source
contract obligations.

•    Non-SDVOSB joint venture. An SDVOSB entered a joint venture with
     a non-SDVOSB firm and received about $16 million in government-
     wide SDVOSB set-aside contract obligations. However, the owner, a
     service-disabled veteran, admitted to our investigators that his
     SDVOSB firm did not manage the joint venture.

•    VA-denied firm. Though VA denied this firm SDVOSB status in 2010
     because the firm was not controlled by a service-disabled veteran
     owner, it continued to self-certify in the Central Contractor
     Registration (CCR). 5 The firm had received $21 million in SDVOSB
     set-aside and sole-source contracts from multiple agencies, and was
     awarded about $860,000 by the General Services Administration and
     the Department of the Interior (DOI) after it was denied by VA.

•    Multiple firms not veteran-controlled. Two firms and a joint venture
     firm received over $91 million in SDVOSB set-aside and sole-source
     contract obligations from VA and the Department of Health and
     Human Services. However, VA determined they were ineligible
     because they were not controlled by the service-disabled veteran who

 CCR is the primary registrant database for the U.S. federal government. CCR collects,
validates, stores, and disseminates data in support of agency acquisition missions,
including federal agency contract and assistance awards.

Page 5                                                                                    GAO-12-967T
    owned one of the firms. The firms have not been removed from the
    government-wide SDVOSB list.

•   Not service-disabled veteran-controlled. This firm was ineligible for the
    SDVOSB program because the veteran did not control daily
    operations—he lived 500 miles away and received only a $12,000
    salary. This firm received about $37 million in SDVOSB set-aside
    contract obligations from DOD and DOI. SBA has since debarred the
    firm from the program.

•   Service-disabled veteran otherwise employed. The firm may be
    ineligible because the service-disabled veteran owner worked as an
    attorney at a legal services organization Monday through Friday about
    40 hours a week. This raises questions about his ability to also
    manage the day-to-day proceedings of the SDVOSB firm, which
    received about $25 million in SDVOSB set-aside and sole-source
    contract obligations from VA and the Department of Transportation.

The firms in our previous 10 case studies that we reported in October
2009 have been or are under investigation by the SBA OIG. The SBA
OIG has joined forces with other agency OIGs to pursue several cases.
For example, enforcement actions have been taken against 3 of the 10
cases. Specifically, two individuals related to our cases have been
charged with wire fraud in relation to their misrepresentation as an
SDVOSB and another firm pled guilty to wire fraud in relation to another
small-business program.

To address vulnerabilities in the government-wide program, we previously
suggested that Congress consider providing VA with the authority
necessary to expand its SDVOSB eligibility-verification process
government-wide. Such an action is supported by the fact that VA
maintains the database identifying which individuals are service-disabled
veterans and is consistent with VA’s mission of service to veterans.
However, as shown by our current work, VA’s program remains
vulnerable to fraud and abuse because the agency has been unable to
accurately track the status of its efforts and because potentially ineligible
firms remain listed in VetBiz. Consequently, VA’s ability to show that its
process is successful in reducing the SDVOSB program’s vulnerability to
fraud and abuse remains an important factor in any consideration about
the potential expansion of VA’s eligibility verification process government-

Page 6                                                            GAO-12-967T
           To minimize potential fraud and abuse in VA’s SDVOSB program and
           provide reasonable assurance that legitimate SDVOSB firms obtain the
           benefits of this program, we recommend in our newly issued report that
           the Secretary of Veterans Affairs ensure that all firms within VetBiz have
           undergone the 2010 Act verification process. Specifically, this should
           include consideration of the following three actions: (1) inventory firms
           listed in VetBiz to establish a reliable beginning point for the verification
           status of each firm; (2) establish procedures to maintain the accuracy of
           the status of all firms listed in VetBiz, including which verification process
           they have undergone; and (3) expeditiously verify all current VetBiz firms
           and new applicants under the more-thorough 2010 Act verification

           VA generally concurred with our recommendations but expressed
           concern about how specific report language characterized its program.
           GAO made some changes to the report as appropriate but continues to
           believe that the program remains vulnerable to fraud and abuse. In
           written comments, SBA stated that it is committed to eliminating fraud,
           waste, and abuse in all of its programs including the government-wide
           SDVOSB program.

           Mr. Chairmen, Ranking Minority Members, and Members of the
           Subcommittees, this concludes my prepared remarks. I would be happy
           to answer any questions that you or other members of the subcommittees
           may have.

           For additional information about this testimony, please contact Richard J.
           Hillman at (202) 512-6722 or hillmanr@gao.gov. Contact points for our
           Offices of Congressional Relations and Public Affairs may be found on
           the last page of this statement. Other key contributors to this statement
           include Jennifer Costello, Assistant Director; Arturo Cornejo; Gloria Proa;
           Abby Volk; and Timothy Walker.

           Page 7                                                              GAO-12-967T
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