SBA Needs Thorough Overhaul in Wake of HUBZone Scandal

In an agency that has become a symbol of widespread waste, mismanagement and fraud, a new government investigation has uncovered one of the biggest scandals yet, involving the cynical nationwide rip-off of a program intended to aid the poorest areas of the country.

Lawmakers got an inkling of the problems last summer when a Government Accountability Office (GAO) probe of the Small Business Administration’s (SBA) "Historically Underutilized Business Zone" program in Washington, D.C. discovered disturbing instances of abuse, mismanagement and fraud. But as feared, the findings were a drop in the bucket.

A new GAO investigation has concluded that mismanagement and fraud in the so-called HubZone program extends nationwide and is costing the government tens of millions of tax dollars. Even a government investigative agency known for drawing cautious conclusions stated that "likely hundreds and possibly thousands of firms" are taking advantage of lax SBA oversight and administration to cash in on the program.

The report’s details were unveiled at a hearing before the House Small Business committee and provoked outrage among lawmakers. "We’re talking here about millions of dollars. It’s outrageous that money is going to companies that don’t qualify to be in the program," said Committee chairwoman Nydia Velazquez, D-N.Y.

Velazquez said she plans to urge the SBA to shut down the program until it can fix the problems. But at this stage of the game, the SBA needs to do far more than overhaul its HubZone program. All of its contracting programs need a thorough revamping.

The American Small Business League (ASBL) was quick to jump on the report and issued yet another press release calling attention to the widespread diversion of federal small business contracts to large corporations, and rightly so. The ASBL has been banging that drum for more than five years, and the SBA has stonewalled every effort by the group to get to the bottom of the problem.

Now the ASBL claims that some $16 billion in federal small business contracts have been diverted to Fortune 500 firms since President Barack Obama took office in January. By the end of President Obama’s first year in office, the ASBL says that figure will top $100 billion. Given the findings of the latest HUBZone investigation, how can the SBA possibly dispute that?

The GAO looked at select HUBZones in Dallas, San Antonio, Tex., San Diego, and Huntsville, Ala., based on size and concentration of contracts. It selected 36 firms to investigate and discovered that 19 firms (53 percent) across all three states "clearly" did not meet program requirements. Over fiscal years 2006 and 2007, the 19 firms received nearly $30 million in HUBZone contracts and $187 million in federal contracts overall.

The firms routinely ignored two cornerstone requirements of the program: to locate their principal office in the economically distressed neighborhood, and hire local residents to fill at least 35 percent of jobs created by the contract.

In one instance, an Alabama firm received more than $900,000 in HUBZone set-aside obligations and listed an office suite in the HUBZone as its principal office. But the "suite" turned out to be a trailer in a residential trailer park. The occupant had no connection with the firm. The firm’s two employees -- a father and son -- lived more than 90 miles away.

To limit subcontracting, at least 50 percent of the contract’s value also had to be spent on a firm’s own employees. But one company owner told investigators that HUBZone firms were being used as "contract vehicles" for large companies. One company outsourced as much as 89 percent of the work under the program to other, larger firms outside the HUBZone. It received more than $2.3 million in contracts.

Companies used various other dodges to get around other program requirements. One firm that had received a $350,000 contract had only one employee -- the company president -- who claimed he "leased" employees to do the work required. The program, however, prohibits such arrangements.

And where was the SBA’s oversight when all this was going on? "Although SBA has initiated steps to address internal control deficiencies we identified in our June 2008 report, SBA has not yet incorporated effective controls for preventing, detecting, and investigating fraud and abuse within the HUBZone program," the report concluded.

In fact, of the 10 companies investigated in the Washington, D.C. area, two of the firms had been removed from the program and two others were in the process of being barred. "However, SBA’s failure to examine some of the most egregious cases we previously identified has resulted in an additional $7.2 million in HUBZone obligations and about $25 million in HUBZone set-aside or price preference contracts [going] to these firms," the report states. In short, it’s still business as usual.

"To date, other than the firms identified by our prior investigation, the SBA program office has never referred any firms for debarment and/or suspension proceedings based on findings from its program eligibility reviews," the report states.

"By failing to hold firms accountable, SBA has sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the HUBZone program," it concludes.

The Obama administration may be in office, but eight years of Bush administration neglect, budget cuts and devastatingly low employee morale are still taking their toll on an agency that should be helping to lead the nation out of the economic downturn. Cleaning up the HUBZone program may be a good place to start, but a thorough overhaul of the entire agency is sorely needed.