[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                    SMALL BUSINESS ADMINISTRATION'S 
                     CONTRACTING PROGRAMS AND GAO'S 
                     EXAMINATION OF THOSE PROGRAMS 

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             JULY 17, 2008

                               __________

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                               

            Small Business Committee Document Number 110-106
Available via the GPO Website: http://www.access.gpo.gov/congress/house

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)


           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLES GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  
















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Carranza, Hon. Jovita, Acting Administrator, Small Business 
  Administration.................................................     4
Shear, Mr. William; Director, Financial Markets and Community 
  Investment, U.S. General Accountability Office.................     6
Kutz, Mr. Gregory, Managing director, forensic Audits and Special 
  Investigations, U.S. General Accountability Office.............     8

                                APPENDIX


PREPARED STATEMENTS:
Velazquez, Hon. Nydia M..........................................    37
Chabot, Hon. Steve...............................................    39
Altmire, Rep. Jason..............................................    40
Carranza, Hon. Jovita, Acting Administrator, Small Business 
  Administration.................................................    41
Shear, Mr. William; Director, Financial Markets and Community 
  Investment, U.S. General Accountability Office.................    45
Kutz, Mr. Gregory, Managing director, forensic Audits and Special 
  Investigations, U.S. General Accountability Office.............    67

STATEMENT SUBMITTED FOR THE RECORD:
Associated General Contractors...................................    95

                                  (v)

  


                    SMALL BUSINESS ADMINISTRATION'S
                     CONTRACTING PROGRAMS AND GAO'S
                     EXAMINATION OF THOSE PROGRAMS

                              ----------                              


                        Thursday, July 17, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:06 a.m., inRoom 
1539, Longworth House Office Building, Hon. Nydia M. Velazquez 
[Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Shuler, Cuellar, 
Braley, Ellsworth, Chabot, Bartlett, Akin, and Fallin.
    Chairwoman Velazquez. Good morning. I call this hearing of 
the House Small Business Committee to order.

 STATEMENT OF THE HONORABLE NYDIA VELAZQUEZ, CHAIRWOMAN OF THE 
                  COMMITTEE ON SMALL BUSINESS

    The economy is still mired in a recession. In addition to 6 
straight months of job losses, we are now facing considerable 
drop-offs in consumer spending and exports. Meanwhile, 
inflation continues to climb, and it seems no financial sector 
has been left out or left untouched. Just this week, news of 
the crumbling Freddie Mac and Fannie Mae prove that the housing 
crisis is far from over.
    Amidst this otherwise weak economy, one bright spot 
continues to shine. The Federal marketplace is booming. Last 
year alone, this industry grew by more than 9 percent. But 
while it should hold great potential for entrepreneurs, small 
firms are still fighting to break into the Government sector.
    During the past 8 years, the Bush administration has missed 
every single one of its small-business goals. In 2005 alone, 
entrepreneurs lost $4.5 billion in contracting opportunities.
    A broad array of programs exist to help small firms enter 
the Federal marketplace. These programs seek to give 
opportunities to the most important sector of our economy, 
small businesses. Entrepreneurs not only create greater 
economic diversity and competition, but they also offer the 
best value for the taxpayers' dollar.
    Today we are going to look at one such program, which, 
while having very commendable goals, has ultimately failed our 
entrepreneurs and our taxpayers. HUBZones were originally 
designed to help small businesses in low-income communities. 
Today the program has fallen short of that mission. As a result 
of insufficient controls by the SBA and inherent flaws in the 
underlying program, we now have widespread fraud.
    This Committee has long been concerned about the potential 
for HUBZone fraud. After a preliminary investigation confirmed 
these fears, we asked the GAO to conduct an investigation. 
Their results were nothing short of appalling.
    In their review, investigators found that a majority of 
HUBZone businesses failed to meet program criteria. And, yet, 
these firms still managed to collect over $100 million in 
Federal contracts; 24 million of those dollars came directly 
out of HUBZone funds--funds that should have gone to low-income 
communities.
    These numbers are high, but they are not surprising. As 
noted in prior reports, SBA is notorious for failing to vet its 
programs. In fact, it conducts annual examinations on a mere 5 
percent of certified HUBZones. When it comes to the businesses 
themselves, only 36 percent of applicants are asked to show any 
form of documentation. It is so easy to break into the HUBZone 
program that investigators using fake addresses and forged 
credentials were able to do so in a matter of weeks. The entire 
process was easier than getting a library card.
    Perhaps not surprisingly, con artists have little trouble 
gaming SBA's broken system. Countless unqualified corporations 
have applied for and been awarded millions of dollars in 
Government contracts. Meanwhile, entrepreneurs looking for an 
honest break have been pushed to the margin.
    Earlier this year, the House passed several provisions in 
attempts to stem this fraud. But the administration opposed 
these steps, including requirements for onsite inspections. 
President Bush went so far as to argue that, and I quote, "This 
provision will create a large burden on the Small Business 
Administration." It seems the President prefers burdens of the 
multimillion-dollar fraud variety, the kind of burden we 
unfortunately face today.
    Small-business contract programs are important, and we need 
them. But if not adequately funded and properly managed, they 
turn into what we have today. Rather than lifting up 
underprivileged firms, HUBZones are lining the pockets of big 
corporations and otherwise fraudulent businesses. And they are 
doing so on the taxpayers' dime.
    Today's hearing will be an important part of understanding 
the fraud and figuring out the next steps towards overhauling 
the SBA. It will not be an easy process, but we owe this review 
to our taxpayers and we owe it to our small businesses.
    I thank today's witnesses in advance for their testimony.
    And, with that, I now yield to Ranking Member Chabot for 
his opening statement.
    Mr. Chabot. Thank you, Madam Chairwoman.

STATEMENT OF THE HONORABLE STEVE CHABOT, RANKING MEMBER OF THE 
                  COMMITTEE ON SMALL BUSINESS

    And good morning. And I thank all of you for being here 
this morning to examine the Small Business Administration's 
HUBZone, or Historically Underutilized Business Zone, program. 
I would also like to thank the chairwoman for holding this 
important hearing.
    As early as World War II, Congress recognized that a strong 
economy and industrial base requires a robust small-business 
economy. At the end of the Korean conflict, the Small Business 
Administration was created to provide assistance to small 
businesses.
    One aspect of that policy is the requirement that small 
businesses be awarded a fair proportion of contracts for the 
purchase of goods and services by the Federal Government. That 
policy not only ensures that the Federal Government will have a 
diverse set of contractors from which it can obtain goods and 
services, it also provides an important tool to help grow small 
businesses.
    Last session, the Committee examined all of the SBA 
Government contracting programs. Today we are specifically 
focusing on the HUBZone program in response to two separate 
assessments done by the GAO. I have been briefed on the 
studies, and the results are troubling, as the chairwoman 
indicated, to say the least.
    I am a strong supporter of the HUBZone program, because I 
believe that Federal procurement can be used not just to 
purchase goods and services or even grow small businesses, but 
to provide needed assistance in the economic revitalization of 
poor urban and rural communities.
    However, if firms not actually located in HUBZones are 
taking contracts away from legitimate HUBZone firms, it defeats 
the purpose of the program. I will be interested in hearing 
from the SBA the steps the agency will take to ensure that only 
legitimate HUBZone firms are awarded contracts.
    The HUBZone program is designed to provide economic 
development in poor areas. According to a study by the Office 
of Advocacy, some HUBZone contractors are generating as much as 
an additional $100 per person in additional income in 
particular areas. Of course, when it costs that much to fill 
your car's gas tank, the benefits of the HUBZone contracting 
program are dissipated. Revitalization requires not only 
building businesses in these areas but providing the people 
with affordable fuel. This requires increasing the supply of 
petroleum produced in this country.
    Although I recognize that this hearing is primarily about 
SBA's management of the HUBZone program, I would be remiss not 
to mention that there are Members on both sides of the aisle 
whose constituents are severely affected by recent floods, for 
example, in the Midwest. I suspect that the Acting 
Administrator may receive some questions on this issue, and we 
would be very interested in hearing about the agency's response 
in that area as well.
    Again, I want to thank the chairwoman for holding this 
important hearing, and look forward to working with her and the 
SBA to make necessary improvements to the HUBZone program so 
that it can truly assist in the economic revitalization of our 
poor urban and rural communities.
    And, again, I thank the chairwoman for holding this 
hearing, and yield back my time.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    And now I welcome the Honorable Jovita Carranza. Ms. 
Carranza is the Acting Administrator of the Small Business 
Administration. She was nominated by President Bush and sworn 
in on December 15, 2006, as Deputy Administrator of SBA.
    Ms. Carranza, I just want to say, thank you for agreeing to 
testify today. I really appreciate your willingness to come 
before our Committee. I realize that you have been at SBA just 
18 months and that many of these HUBZone program problems 
predate you joining the agency. But today you are sitting in 
the hot seat, and so thank you for being here.

      STATEMENT OF THE HONORABLE JOVITA CARRANZA, ACTING 
    ADMINISTRATOR OF THE U.S. SMALL BUSINESS ADMINISTRATION

    Ms. Carranza. Thank you.
    Mr. Chabot. That is due warning, I think.
    Ms. Carranza. It has been hot since I arrived here.
    Good morning, Chairwoman Velazquez, and thank you very much 
for the invitation, and also Ranking Member Mr. Chabot. Once 
again, good morning, and thank you for the opportunity to 
testify today.
    While I am proud of the reforms I have made in my time at 
SBA, more work remains. As other panelists will describe, the 
administration of our HUBZone program leaves considerable room 
for improvement. In fact, in September 2007, I testified about 
our concerns over flaws that needed attention. But the more 
work we identified to fix these problems, the more we 
uncovered.
    Mr. Chabot. Could you possibly pull the mike a little bit 
closer?
    Ms. Carranza. Certainly.
    We welcome the GAO's report and work. And as our response 
to their audit makes clear, we agree with their assessment. In 
fact, GAO's conclusions only confirm what we had already 
uncovered. Now we are working so that this program will better 
accomplish its goals, and I would like to describe our specific 
actions.
    First, GAO recommended immediate steps to correct the 
HUBZone map. Further, they recommended that we ensure it is 
frequently updated with the most recent data.
    Problems with the map were, in fact, what uncovered the 
program's serious mismanagement. In response to a congressional 
inquiry about whether a specific county qualified, the HUBZone 
program determined that it did. Then, several days later, SBA 
found that it was, in fact, not qualified.
    In determining how much a mistake was made, senior managers 
learned the initial determination was done manually. This 
pointed to the fact that the map hadn't been updated for more 
than 18 months. This, in turn, set off a cascading series of 
revelations.
    In getting to the bottom of these issues, a process that 
accelerated as time went on, the extent of the program's 
problems became increasingly clear. It also became increasingly 
clear that the program needed new leadership. We have brought 
on new program management who are committed to our reform.
    Completing an objective that predates GAO's call to fix the 
map, on July 3rd a new contract was executed. This contract 
provides strict timetables and procedures so that, going 
forward, the map remains current. The new map will be available 
August 29th.
    In its second recommendation, GAO urged more consistently 
obtaining supporting documents in the application process. 
Also, they recommended more frequent site visits to ensure 
eligibility. In response, a draft of our new application 
processing manual was completed July 2nd. It establishes guides 
about supporting documents, what is required, and how to handle 
these requests. It also includes instructions regarding site 
visits.
    We believe that by more effectively marshalling our 
district office resources, we can quickly accomplish this 
objective. And HUBZone is working with the field operations to 
produce clear procedures. Presently, this draft is being 
reviewed and finalized. This process will be completed by 
September.
    The third GAO recommendation was to eliminate the 
recertifications backlog and, going forward, to stay current. 
In response, SBA hired contract employees to assist. Our goal 
is to clear the backlog by the end of fiscal year 2008, and we 
are on track to meet this benchmark.
    HUBZone's new leadership is implementing reforms so that, 
with the backlog cleared, recertifications will be timely. I 
can assure you that SBA senior staff will oversee this task.
    The fourth GAO recommendation was to formalize time frames 
for processing proposed decertifications. In response, SBA is 
adding explicit timelines to the applicable SOP. This process 
will be completed by the end of August.
    The fifth and final recommendation was to develop ways to 
assess HUBZone's overall effectiveness, and this largely 
mirrors a similar finding by SBA's Office of Advocacy. In 
response, SBA is developing an assessment methodology to 
measure HUBZone's economic benefits. This is being done by the 
senior economist in our Office of Policy and Strategic 
Planning. Once completed, this will allow HUBZone to issue 
regular public reports. The methodologies development is well 
under way, and the final product is expected by August.
    To ensure the participation of all stakeholders, SBA will 
publish this methodology for public comment. I encourage the 
Committee and all interested parties to examine the work and 
make suggestions about how we can better assess HUBZone's 
impact. After evaluating the comments, SBA will publish a final 
methodology detailing the measures that will be used.
    In response to GAO's forensic investigation, I have taken 
immediate steps to require site visits for those firms with 
HUBZone contracts. Additionally, we will pursue suspension and 
debarment proceedings against firms that have intentionally 
misrepresented their status. For example, we will begin the 
process to suspend and debar the 10 firms that GAO has 
discovered. SBA has already pursued firms for false 
certification, and we take very seriously the responsibility to 
ensure that the Government's contracting partners are 
trustworthy.
    As I acknowledged earlier, HUBZone faces many challenges. 
Please know that I am committed to solving them, and I believe 
that integrity and transparency are crucial. This commitment 
has brought dramatic gains to other SBA programs, and I look 
forward to applying these lessons to HUBZone.
    For example, by month's end, we will roll out our new 
Business Development Management Information System, which 
permits electronic 8(a) and small disadvantaged business 
certifications and annual reviews. This is a major upgrade to 
more effectively manage this vital program.
    Last month, we released our third procurement scorecard, 
this one focused on meeting contracting goals. Improving the 
integrity of contracting data and tightening the rules to 
qualify are other examples. SBA's tough-minded work has reduced 
the miscoding errors in contracts that had a cumulative value 
of more than $10 billion. The result is a more accurate, more 
useful and more transparent measure of small-business 
contracts.
    While these efforts have taught us valuable lessons, the 
reform process for HUBZone especially reminds me of the earlier 
need to re-engineer SBA's Disaster Assistance program. Disaster 
Assistance, like HUBZone today, had obvious needs. But while 
facing problems head-on can be difficult, the dividends are 
also obvious.
    Because of our reforms, SBA was able to respond quickly and 
professionally to help victims of the recent Midwest flooding 
and tornadoes. Personally, I have been to the Midwest three 
times since the flooding, and I have seen these reforms in 
action.
    So while it pains me to have to describe these problems 
with our HUBZone program, I am also confident that we can solve 
them and ensure that HUBZone accomplishes the noble purpose for 
which it was established.
    Thank you. And I would be pleased to answer any questions.
    [The prepared statement of Ms. Carranza can be found in the 
appendix at page X.]
    Chairwoman Velazquez. Thank you, Ms. Carranza.
    Our next witness is Mr. Bill Shear. He is the director of 
the GAO's Office of Financial Markets and Community Investment. 
The Financial Markets and Community Investment team works to 
improve effectiveness of regulatory oversight in financial and 
housing markets. He also oversees the management of community 
development programs by examining the effectiveness of specific 
programs and administrative functions. To do so, the office 
evaluates programs at several agencies, including SBA.
    Welcome, sir.

 STATEMENT OF MR. WILLIAM SHEAR, DIRECTOR OF FINANCIAL MARKETS 
AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Shear. Thank you very much. Madam Chairwoman, 
Representative Chabot and members of the Committee, it is a 
pleasure to be here this morning to discuss our program audit 
of SBA's HUBZone program.
    My testimony is based on a report which is being released 
today that addresses, first, the criteria and process that SBA 
uses to identify and map HUBZone areas; second, SBA mechanisms 
to ensure that only eligible small businesses participate in 
the HUBZone program; and, third, steps SBA has taken to assess 
the results of the program and the extent to which Federal 
agencies have met their HUBZone contracting goals.
    In summary, first, because SBA relies on Federal law to 
identify qualified HUBZone areas, recent statutory changes have 
resulted in an increase in the number and types of HUBZone 
areas, changes that could diffuse the economic benefits of the 
program.
    Further, the map that SBA uses to help firms interested in 
participating in the program to help determine if they are 
located in a HUBZone area is inaccurate. Specifically, the map 
incorrectly includes 50 metropolitan counties as difficult 
development areas. In addition, 27 non-metropolitan counties 
that are eligible based on their unemployment rates were 
excluded, because SBA has not updated its maps since August 
2006. As a result, ineligible businesses participated in the 
program and eligible businesses have not been able to 
participate. We recommended that SBA take steps to correct the 
map and to update the map on a more frequent basis.
    Second, the mechanisms that SBA uses to certify and monitor 
HUBZone firms provide limited assurance that only eligible 
firms participate in the program. For certification and 
recertification, firms self-report information on their 
applications. However, we found that SBA requested 
documentation or conducted site visits of firms to validate the 
self-reported data in only limited instances.
    Our analysis of the 125 applications submitted in September 
2007 show that SBA requested supporting documentation for 36 
percent of the applications and conducted one site visit. While 
SBA's policies and procedures require program examinations, the 
one process that consistently includes review of supporting 
documentation, the agency conducts them on 5 percent of 
certified HUBZone firms each year.
    We also identified deficiencies in SBA's recertification 
and decertification processes. As a result of a lack of 
controls and weaknesses in the application and monitoring-
related processes, SBA lacks assurances that only eligible 
firms participate in the program. We made recommendations to 
SBA to address these deficiencies.
    Finally, SBA has taken limited steps to assess the 
effectiveness of the HUBZone program. SBA tracks the number of 
firms certified or recertified, the annual value of contracts 
awarded to HUBZone firms, and the number of program 
examinations completed annually, but has not devoted resources 
to completing an evaluation of the program.
    Consequently, SBA lacks key information that could help it 
better manage and assess the results of the program and provide 
information to this Committee and the Congress. We recommended 
that SBA further assess the effectiveness of the program.
    It is a pleasure to present our work before this Committee. 
I would be happy to answer any questions you may have.
    [The statement of Mr. Shear can be found in the appendix at 
page X.]
    Chairwoman Velazquez. Thank you, Mr. Shear.
    Our next witness is Mr. Greg Kutz. He is the managing 
director of Forensic Audits and Special Investigations at GAO. 
The FSI unit investigates waste, fraud and abuse related to 
Government programs and taxpayers' dollars. FSI has recently 
investigated abuses of Hurricane Katrina relief dollars, border 
security, and overtime and minimum wage complaints, among other 
topics.
    Also sitting with the panel from GAO's FSI unit is Mr. 
Bruce Causseaux, a senior-level specialist who participated in 
the HUBZone investigation. Although Mr. Causseaux will not be 
offering testimony, he will be available to answer questions 
about FSI's findings.
    Thank you, and welcome.

 STATEMENT OF MR. GREGORY KUTZ, MANAGING DIRECTOR OF FORENSICS 
      AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE.

    Mr. Kutz. Madam Chairwoman and members of the Committee, 
thank you for the opportunity to discuss the HUBZone program.
    Today's testimony highlights the results of our 
investigation of this program. My testimony has two parts. 
First, I will discuss our covert testing of the application 
process, and second, I will discuss several cases that we 
investigated.
    First, our covert testing shows that SBA does not have an 
effective fraud-prevention program.
    To test the application process, we created several bogus 
companies with fictitious officers and employees. Over the 
course of several months, we submitted four HUBZone 
applications. In all four cases, SBA approved our applications 
and certified our bogus companies. The picture on the wall 
shows an example of one of the letters we received from SBA 
that approved our bogus company.
    The entire application process was online. We never had to 
speak to any SBA officials. For our first application, SBA 
requested several documents by e-mail. In response, we created 
bogus documents, using publicly available hardware and 
software, and then we faxed the information to SBA. For our 
other three applications, SBA did not request any supporting 
documentation. It appears that SBA did nothing to validate any 
of the information that we provided.
    To participate in this program, the office where the 
greatest number of employees work, which is referred to as the 
principal office, must be located in a HUBZone. The most 
sophisticated principal office that we established was a 
virtual office that we never visited except to sign the 
original lease agreement and to collect the mail. Two of our 
HUBZone companies were actually mailboxes that we rented for 
less than $25 a month. The picture on the monitors shows our 
fourth HUBZone principal office, which is a Starbucks coffee 
shop.
    Moving on to my second point, given SBA's ineffective 
fraud-prevention controls, it is not surprising that we were 
able to easily identify 10 HUBZone companies that are clearly 
not eligible for this program. Six of these companies failed to 
meet the principal office test. The other criteria we tested 
requires that 35 percent of the company's employees live in a 
HUBZone. None of these 10 companies met this requirement.
    Here are some of the more egregious examples.
    First, the picture on the wall shows, on the left, the 
supposed principal office for one of our case studies. The 
owner of this building told us that no one had been there in 
some time. As it turns out, the picture on the right represents 
the real principal office for this company, located in McLean, 
Virginia.
    In another case, the company's supposed principal office 
was actually a rundown duplex in Landover, Maryland. The vice 
president of this company admitted to us that nobody actually 
worked at this location. Two other companies had supposed 
principal offices located in HUBZones. However, nobody actually 
worked at these locations. The real principal offices for these 
two companies were in Hyattsville, Maryland, and, once again, 
in McLean, Virginia.
    And finally, the four companies that passed the principal 
office test clearly failed the 35 percent employee test. The 
actual percentage of employees living in a HUBZone for these 
companies was 17, 15, 6 and 0.
    In conclusion, our work clearly shows that anybody with a 
computer and a mailbox that is willing to lie to the SBA can 
become a HUBZone company. Most of the companies that we 
investigated made false representations to stay in this 
program.
    These companies have been awarded tens of millions of 
dollars as prime contractors using their HUBZone status. 
However, rather than stimulating economically distressed areas, 
these HUBZone contract dollars are stimulating areas such as 
McLean, Virginia, one of the richest areas in the country.
    Madam Chairwoman, this ends my statement. Mr. Causseaux and 
I look forward to your questions.
    [The statement of Mr. Kutz can be found in the appendix at 
page X.]
    Chairwoman Velazquez. Thank you very much, Mr. Kutz.
    Mr. Shear, to tell you the truth, I don't know where I 
should start. But let me try.
    Mr. Shear. Okay.
    Chairwoman Velazquez. GAO analysis of the 125 HUBZone 
applications showed that SBA requested supporting documentation 
for only 36 percent and conducted only one visit. In addition, 
the agency conducted program examinations on only 5 percent of 
certified HUBZone program firms each year.
    It appears that SBA has virtually no control over who is 
participating in this program. Is this the case?
    Mr. Shear. We say that there is limited assurance, based on 
our program evaluation, there is only limited assurance that 
only eligible firms are participating.
    We did identify it as a program that is susceptible to 
fraud. And that was one reason it led us to say there should be 
a fraud investigation.
    What we look for when we look at internal controls is some 
finding of reasonable assurance. And here we clearly do not see 
it for this program.
    Chairwoman Velazquez. Okay. Do you believe that the 
agency's current approach to implementing the HUBZone program 
is conducive to promoting effective internal controls?
    Mr. Shear. No, it is not. It relies too heavily on self-
reported information without verification and a lack of site 
visits. It relies too much on self-policing by the companies 
themselves and if self-policing going to occur it is difficult 
to do, given the information requirements.
    So the current approach just does not provide what we would 
consider reasonable assurance.
    Chairwoman Velazquez. Ms. Carranza, given the potential 
that billions of dollars of taxpayer funds are at risk, will 
you make a commitment to not certify any new HUBZone companies 
until SBA implements the improvements you lay out in your 
testimony?
    Ms. Carranza. Chairwoman Velazquez, I would appreciate the 
opportunity to expound on the controls that we have put in 
place immediately after we reviewed the GAO audit. And with the 
five recommendations we have expanded--
    Chairwoman Velazquez. Ms. Carranza, with all due respect, I 
asked you a question and I need an answer.
    Given the fact that there is a potential that billions of 
dollars of taxpayers' funds are at risk, will you make a 
commitment not to certify any company, any HUBZone company, 
until you have in place internal controls that will guarantee 
taxpayers in this country that it is fraud-free?
    Ms. Carranza. I would like to emphasize again and respond 
to your question with a level of confidence, Chairwoman 
Velazquez, that we have addressed the applications that have 
been received. We have also addressed a thousand applications, 
firms that received Government contracts, and we have taken the 
position of validating all of the information that has been 
submitted on those applications much more aggressively than we 
have in the past.
    Chairwoman Velazquez. Your answer to my question is a no. 
And so you would allow for fraud to continue. And what we are 
saying to Federal agencies here today is that they shouldn't be 
using this program because you are opening your agency to 
fraud. So SBA has a responsibility to give these Federal 
agencies assurances that the HUBZone program is free of fraud. 
It is not today.
    Ms. Carranza, SBA has come before this Committee several 
times in recent years, and I often take the opportunity to 
voice my concern regarding fraud in the HUBZone program. I 
would like to take a minute to read to you some of the most 
recent responses I have had from your agency.
    The first response, and I quote, "I am not aware of any 
fraud involved in the program," Anthony Martoccia, Associate 
Deputy Administrator, Office of Government Contracting and 
Business Development, March 30, 2006.
    Another response, and I quote, "We have recognized the 
flaws. We have actually taken the position we are going to 
implement, if not 90 percent, approximately 100 percent of the 
SBA IG recommendations to address problems in the HUBZone 
program," Jovita Carranza, Deputy Administrator, September 19, 
2007.
    Another response, "We have taken many actions that we think 
significantly tighten up the process around HUBZones. And I 
should also mention that we have met with our IG, and we are in 
concurrence and acting on every single one of those 
recommendations," Steven Preston, Administrator, October 4, 
2007.
    And finally, I most recently asked Mr. Preston on February 
7, 2008, the following question, just 5 months ago: "I want to 
ask you--and I want a 'yes' or 'no' answer--do you believe that 
the HUBZone program has sufficient internal controls to prevent 
fraud?" He replied, "I think we have sufficient internal 
resources to address this issue."
    So, Ms. Carranza, when you say that you will solve these 
problems, I cannot help but think that we have heard this 
before, and yet clearly nothing has changed.
    How is today any different from the last four times that I 
have asked the SBA about the program and we were told that it 
was under control? Why should this Committee believe that you 
will actually do something this time, rather than just give us 
lip service?
    Ms. Carranza. Chairwoman Velazquez, it has gone beyond 
speculation or an assumption. There is hard data from the GAO 
assessment of the vulnerabilities that we have. I am just as 
frustrated, and I was shocked to learn the depth of the issues 
that we have, both on data accuracy with the mapping a weak 
maintenance or management of our contractor.
    As a result of that, we have reassigned management 
personnel. We are recruiting additional staff with different 
skill-sets who will be totally focused on the reform agenda 
that we have for the Government Contracting Office. We have 
made significant progress in various divisions in Government 
contracting. Not only are we addressing resources that are in 
play as we speak, but we are also identifying the contractors' 
problem areas and we have developed a new contract agreement 
with stringent timelines, with deliverables within 30 and 60 
days.
    So there is tangible evidence of the changes that we have 
instituted, with timelines that we are prepared to report to 
your office, as well as to work closely with Bill and his 
staff.
    Chairwoman Velazquez. You will?
    Ms. Carranza. Yes.
    Chairwoman Velazquez. Thank you.
    Mr. Kutz, GAO was four out of four in gaining fraudulent 
access to the HUBZone program. Without getting into specifics 
of other GAO investigations, can you tell us how susceptible 
the HUBZone program is to fraud, as compared to other programs 
GAO has reviewed for similar programs?
    Mr. Kutz. Clearly, it is very susceptible to fraud. There 
is no question about that. They do not really have, from what 
we saw, a fraud-prevention program, which has many elements to 
it.
    And it is interesting, one of the charts you have put up 
there, that they have tightened their controls, well, what we 
tested was the tightened controls, obviously. So I would hate 
to see what they were before that.
    But, clearly, this opens the door to billions of dollars of 
contracts. That is why people will lie to get into a program 
like this, because there is a lot of money at stake.
    Chairwoman Velazquez. Let me ask you, how does the 
potential for fraud in the HUBZone program compare to what you 
saw in Katrina-related disaster payments?
    Mr. Kutz. It is substantially worse. We looked at the 
individual assistance program, which has eligibility controls. 
To get individual payments for Katrina, people had to actually 
live in the disaster area at the time that Katrina or Rita hit. 
And so FEMA did not have effective fraud-prevention controls in 
that program, although they did have some validation. Here we 
saw little or none, so this is as bad or worse.
    Chairwoman Velazquez. In your estimation, do you believe 
that self-policing is a valuable policy for reducing fraud in 
the program?
    Mr. Kutz. Not in and of itself, certainly. If you look at a 
broad fraud-prevention program, it is an element of it, but it 
is, by far, one of the less significant elements, in my view.
    Chairwoman Velazquez. What makes the program so susceptible 
to fraud?
    Mr. Kutz. Well, again, the lack of fraud-prevention 
controls. I would say this, if you are going to put your money 
into anything for this program, it has to be at the application 
process. Here you have a situation where anybody can get in, 
basically, that wants to. And, again, hopefully, most people 
are honest.
    But you not only have that problem now and you want to cut 
them off at the beginning, I have heard in your questioning 
here, but you also have the bigger problem of 10,000 or more 
companies already in there and how you deal with that situation 
at this point.
    Chairwoman Velazquez. Let me ask you a final question here. 
What potential actions would you recommend or suggest to SBA to 
rectify this problem?
    Mr. Kutz. Well, a fraud-prevention program consists of 
three things: people, processes and technology. They need to 
have the right people, the right training, the right outlook.
    They need to have strong processes, for example, random, 
unannounced site visits, with technology behind that, where, 
before they do the site visit, they have the research tools to 
determine whether or not people own the businesses, whether 
they were renting them, or whatever the case may be.
    So it is a combination of those three areas.
    Chairwoman Velazquez. Thank you.
    And I recognize Mr. Chabot.
    And I have tons of other questions. We will stay here until 
I am able to get all those questions out.
    Mr. Chabot?
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Kutz, let me ask you, first of all, if I can, of the 
firms that received contracts through the HUBZone program in 
the DC metropolitan area that you referred to this morning, how 
did you select the 17 for detailed investigation?
    Mr. Kutz. We did data-mining. It was not a random sample, 
so we cannot project this to the population. So we used data-
mining for various types of characteristics of a company.
    And even the 17 is not all. We looked at the virtual 
offices. I don't know if you saw part of this, too. We data-
mined, in that case, for people where there was a suite with 10 
HUBZone companies using the same suite, which is a high 
indicator of fraud. So, various characteristics like that.
    Mr. Chabot. Thank you. So there are indications that 
indicate that there may be problems, there may be a reason to 
go further.
    Mr. Kutz. That is correct. And those are some of the tools 
that we would recommend SBA consider as part of a fraud-
prevention program.
    Mr. Chabot. How many was that out of, approximately, in 
that particular HUBZone area? How many firms are we talking 
about?
    Mr. Causseaux. In DC, I think there are about 280-some, but 
we also looked in suburban Maryland and northern Virginia. The 
actual 17 we looked at, HUBZone companies that had received a 
HUBZone sole source set-aside or price-preference award, not 
just that they were a HUBZone company. We selected companies 
that had received, with only one exception, at least $450,000 
in those HUBZone-specific contracts in 2006 and 2007, 
obligations on those contracts.
    Mr. Chabot. Thank you.
    Now, of those where you did determine that there is clear 
evidence of fraud, will you turn this over to another agency in 
order to pursue this criminally?
    Mr. Causseaux. We have referred the 10 case examples to the 
SBA IG for further investigation, yes, sir.
    Mr. Chabot. And, Ms. Carranza, is that what your agency 
will do?
    Ms. Carranza. Congressman Chabot, we have also assigned 
what we call a suspension and debarment official who will 
address the 10 companies once we have a list of them and assess 
whether we should suspend or debar, and up to and including 
prosecution, as we have done so successfully in Kentucky with 
the support of Department of Justice.
    So there are memorandums that are out already for public 
review. We believe not only in detection, because, as GAO staff 
has informed me, detection is just one part of the solution. We 
need to look at deterrence.
    There is reference to the application and the validation of 
information. I am here not to deny that it was lax. I am here 
to compel you to learn adequately, concisely, that we are now 
expanding not only the validation and verification but also the 
search engines that were not previously utilized to verify the 
information on the application. And that is all to prevent 
fraud or misrepresentation of information.
    Mr. Chabot. It is my understanding that back some years 
ago, maybe it was 2002-2003 approximately, that the SBA's 
Inspector General did an inspection, I believe it was in Idaho, 
and I think they found two-thirds or so of those that were on 
the rolls were ineligible, as well.
    I see some nodding of heads. Would anybody want to touch on 
that?
    Mr. Shear. Yes. Over the years, the IG has done a number of 
examinations looking at control issues. And while ours was more 
current and might have been more expansive, we basically come 
to a very similar place in that there is a very big problem up 
front with the certification process and the problem is also 
there for the recertification process, that there isn't 
validation. This is where the biggest problems occur, through 
the front door.
    And then what we see is that, in those instances where SBA 
looks very closely at all, asks for verification of 
information, you see a large number of decertifications, which 
is, rather than saying that shows that they are on top of the 
situation, because they are only looking at a few firms 
closely, it shows that when there is a close look, there is a 
problem.
    So our results are very consistent with what the IG has 
found over time.
    Mr. Chabot. And for the record, Ms. Carranza, if you are 
aware, or whoever is, approximately how many HUBZones are there 
nationwide? I don't need an exact number but just 
approximately.
    Ms. Carranza. There are approximately 14,000.
    Mr. Chabot. 14,000 HUBZones. Now, the one that is at issue 
today and then the one that I mentioned in Idaho are just two 
of literally 14,000. Is it reasonable to assume, if you have 
looked very closely at these and found real problems, that it 
is reasonable to assume that there are problems in other areas 
throughout the country?
    Ms. Carranza. I would like to answer that question on the 
affirmative. And that is why we have taken some very aggressive 
measures to train the district personnel who are currently 
performing site visits to physically go out and perform the 
site visits.
    And Chairwoman Velazquez had mentioned that at one of our 
previous hearings, and we went back and looked at assessing how 
many we could accomplish. And we referred to the IG audit, 
where we came to an agreement that if we could adequately 
perform 5 percent, that that would be a good measure for us to 
detect any issues. It is quite evident that we did not comply 
effectively to that commitment.
    Mr. Chabot. And obviously one of the reasons that this is 
so disturbing is that the HUBZone goal of the program is to 
help areas that are economically challenged, whether they are 
in an urban area--I have many of those types of areas in my 
district, in the city of Cincinnati, and there are also rural 
areas that have these same challenges. And there are limited 
tax dollars available to help start up and grow small 
businesses to hopefully improve those communities and create 
jobs for people. And if those dollars are being essentially 
ripped off by those participating in these fraudulent 
situations, certainly that is unacceptable.
    And so I would be pleased to join the chairwoman in 
reforming and improving this program so that it is doing what 
its intended purposes were.
    Let me just conclude by, one more time, Ms. Carranza, when 
did you receive the report?
    Ms. Carranza. Last Thursday.
    Mr. Chabot. Just last Thursday.
    Ms. Carranza. Yes. And it was a verbal report, not a 
written report, Congressman.
    Mr. Chabot. All right. So it would probably be unrealistic 
to expect to you have a whole list of things that have already 
been implemented and a timetable and that sort of thing. But I 
would assume that this would be a high priority, in reforming 
the program and making sure that these things are dealt with 
very quickly and very thoroughly.
    And, again, I would be pleased to--
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Chabot. I would be happy to yield.
    Chairwoman Velazquez. Ms. Carranza, isn't it a fact that 
you had a draft of the report months ago from the GAO?
    Ms. Carranza. The first time that was--
    Chairwoman Velazquez. From Mr. Shear's report.
    Ms. Carranza. The first time that we sat down and reviewed 
the particulars of the fraud investigation with Mr. Shear and 
Mr. Causseaux was on Thursday, was given an overview, one-on-
one with a couple of the staff members. At that time, I knew 
the depth and breadth of the issues.
    Chairwoman Velazquez. Mr. Shear, for the record, when did 
you provide a draft to the SBA?
    Mr. Shear. It was, I believe, during the month of May that 
we gave a draft report. And, as you will see in the report that 
is released today, that SBA's comment letter is included. I 
think the comment letter was from the first week in June, 
responding to the recommendations of our program audit.
    Chairwoman Velazquez. I yield back.
    Mr. Chabot. All right. Thank you very much, Madam Chairman, 
for clearing that up.
    So then would you, just once again--I am not asking for a 
long, detailed report--but tell us what has occurred since that 
time and where you intend to head with this in the future?
    Ms. Carranza. The time that I learned the details of the 
exposures or problems, serious problems with the program, was 
last week. I immediately assembled the top management in the 
agency. At that point, I was quite determined to fix the 
problem immediately and address contractors who could deal with 
improving and correcting and updating the data, the map data. 
They had already started a couple months prior, but we put some 
very strict guidelines and timelines. So, by August 29th, that 
should be completed.
    We identified a couple of other contractors; first one to 
look at the overall HUBZone processes, so that they can assess 
not only the impact that the program has on economic 
development and job creation but also the overall impact of our 
procedures, which either we failed to comply with, adhere, or 
are insufficient to ensure the impact of the HUBZone program.
    In addition to the resources and developing some 
accountability tools, we also have looked at new enforcement 
rules so from new leadership to new processes, including more 
compelling enforcement on any discrepancies that we may find 
either in the eligibility or the recertification process which 
would involve up to and including suspension and debarment, as 
well as, subject to legal grounds, prosecution.
    Mr. Chabot. Thank you.
    Madam Chair, I yield back.
    Chairwoman Velazquez. Thank you.
    Mr. Ellsworth?
    Mr. Ellsworth. Thank you, Madam Chairwoman.
    Thank you all for being here.
    Mr. Shear, whose request--was it this Committee's request 
to do this audit, go in and do this study or this operation?
    Mr. Shear. We began our--I am making a distinction between 
the program audit and the investigation--we began this program 
audit at the request of Chairwoman Velazquez.
    Mr. Ellsworth. And to your knowledge, is this the first 
time this type of an audit has been done of this, the HUBZone 
program?
    Mr. Shear. I am not quite sure what you mean by "this type 
of audit," because, as I responded to Mr. Chabot, the IG has 
done, some work evaluating the HUBZone program. We have, 
further back in the beginning years of the program, before my 
time doing small-business work, there were some evaluations of 
the HUBZone program.
    So I think that there have been evaluations. It is just a 
question of, what we did is more recent, and we looked at a 
different set of questions than what some of the other 
evaluations did.
    Mr. Ellsworth. Do you think that these methods of 
defrauding our Government and our people, are they anything 
new? Are using a different storefront, doing it online, are 
these all just brand-new things that you all, in your 
experience, have never seen before or the IG may have seen? Or 
is this--I mean, that is not a rocket-science way of doing this 
new technology of being a criminal, I don't think.
    Mr. Kutz. No, there is not a whole lot of sophistication 
necessary to beat this program, at this point. I mean, it just 
isn't really significant.
    Mr. Ellsworth. So, Ms. Carranza, in your experience--and I 
know you came from UPS.
    Ms. Carranza. Yes.
    Mr. Ellsworth. And thank you. And I know that company is a 
wonderful company. But I also know they build in--they pay so 
much attention to detail. I was visiting a hub not too long 
ago, and they even talked about they don't take left turns to 
build efficiencies and check their system to reduce accidents 
and to cut down on time. So I know their security system is 
also very sophisticated.
    Was there a time in your--and I know your tenure is short 
as the director--was there a time when you brought these or 
anyone brought concerns to the previous director?
    And I would go back to this. It seems like the heads of 
agencies change about maybe every 8 or 9 months, and then there 
is always that, "I have only been here this long." And I am not 
accusing you of that, because I respect what you did, and I 
think we can always borrow from the private agency.
    But were there times when you brought these concerns to 
your predecessor and they fell on deaf ears? And I saw the 
testimony of Chairwoman Velazquez about the previous answers, 
that you were frustrated because you didn't get cooperation on 
these things.
    Ms. Carranza. I would like to address that question about 
my previous experience of the attention to detail. And you can 
appreciate why I was so frustrated to learn from Mr. Shear and 
others that the attention to detail, the management of not only 
data but procedures, was not adhered to in the HUBZone program 
office.
    We spoke adamantly, I believe, Mr. Shear, about how this 
could actually occur with very senior management in play and 
very highly automated systems where you can capture a lot of 
data.
    What I believe has occurred is that we have a combination 
of factors that caused this problem. One, the management became 
totally reliant on technology to perform their tasks. Second, 
for the validation of information, since it is a self-
certifying process, they took the applicants on full face 
value. Based on a couple of documents to validate certain 
information, that was sufficient to get into the program.
    Thirdly, the site visits were desktop visits in the 
district offices which is not sufficient to capture what we 
have just seen on screen. You do an onsite, you verify.
    I cannot sit here and tell you that none of those have 
occurred, because I just met with the region administrators 
this week, yesterday, along with the district directors. It is 
an advisory field group that we have. And I challenged them on 
the procedure or process that they manage on these site visits 
and learned very quickly that they did desktops, but when they 
had an inclination or a flag that they should pursue an onsite 
visit, they would perform that too.
    And I asked, what resulted from your interaction? And they 
indicated, typically it resulted in decertification.
    Mr. Ellsworth. Mr. Shear, Mr. Kutz, from what you heard of 
Ms. Carranza's original 5-minute testimony, will the plan that 
she intended to implement solve some of these things?
    And let me go on.
    And then, Mr. Kutz, would you explain your background 
before you went to GAO; and would it then not be prudent for 
possibly SBA to hire people that maybe are of an investigative 
background, maybe that are a little more suspicious minded? Not 
that we don't trust people, but that could look into these 
things on a full-time basis, as opposed to when a committee has 
to call for an investigation?
    So will what she says works, work? And why do we have to 
wait so long for these things to get investigated?
    Mr. Kutz. Well, it is too early to tell whether it is going 
to work.
    And I don't want to minimize the problem. This problem 
developed potentially over a long period of time. And so you 
have again the issue of preventing new people from getting in 
the program that shouldn't be. And how do you clean up the mess 
you have got with maybe hundreds or thousands in there now that 
shouldn't be, who are taking business away from legitimate 
HUBZone companies?
    My background is, everybody in my unit is a certified fraud 
examiner. I am a Certified Public Accountant. We have criminal 
investigators with 20, 30, 40 years of law enforcement 
experience from around the executive branch. We have tremendous 
data, analysis, and technology tools available; and we use 
many, many processes, including covert testing which we do for 
many congressional committees, which gives you an inside look 
at what is really happening with a program like the HUBZone 
program. Because how else can you get that unless you actually 
go out and try to commit the fraud yourself?
    And so, again, the first question would be, do they have 
the right people to put an effective fraud prevention program 
in place? That is doubtful at this point. That requires people 
with certain types of skill sets.
    Again, could they do better than they can with the people 
they have got? Probably. Do they need different types of 
people? Possibly. And additional training? I expect so.
    Mr. Ellsworth. I would steal him, Ms. Carranza.
    Chairwoman Velazquez. Mr. Akin.
    Mr. Akin. Thank you, Madam Chair.
    I guess the first thing that occurred to me, and I listened 
to your audit on what happened after Katrina, and I was mad for 
about 3 weeks afterwards--particularly one of your closing 
comments.
    I said, Of all these different people outlined, there are 
tens of thousands of people that have defrauded the government 
and my taxpayers. I said, What is going to happen to them? And 
you said, Candidly, you really want to know? And I said, Yeah. 
And you said, Nothing.
    And in this situation, I assume that what happens is that 
you have got somebody over in the Department of Justice that 
has prosecutors. The prosecutors are going after people that 
are shopping cocaine and doing all these other sort of high-
tech, more spectacular things. And the guys that are just 
ripping off the taxpayer on a daily basis, making an honest 
living ripping off taxpayers, are probably going to be ignored 
just the same as they were in Katrina.
    So I guess my first question is, does that suggest that you 
would almost put some law enforcement people in the SBA, or 
something, so that you have at least a dedicated resource of 
people going out? Because if you let all these people know that 
if you lie, you get busted, that is going to clean up an awful 
lot of stuff right there.
    I have always thought we should do that on voter fraud. 
Nobody ever gets prosecuted for that, and it gets worse and 
worse, or at least it stays bad.
    Is that something? That is my first question. Let me start 
with that.
    Mr. Kutz. Well, certainly investigators and forensic 
auditors and things like that would be best in this type of 
environment.
    And it is interesting, the experience on Katrina; and that 
is even the best case. We set up a Katrina fraud task force, as 
you may be aware, we referred 22,000 cases to them of potential 
fraud. And that is what we identified, and as you said, it is 
probably tens of thousands more.
    Mr. Akin. Those are just the dumb people that photocopied 
their drivers license living in Minnesota saying they got hit 
by Katrina. These aren't really bright criminals exactly.
    Mr. Kutz. Exactly. And out of 22,000, at least 50 or 60 of 
them have been indicted. So that is not a high percentage, and 
that is kind of predicted, what probably would happen.
    So here, though, I do think it is important that there are 
consequences to people who do lie about this program and who 
take away business from legitimate HUBZone companies. So we 
would certainly support SBA and anything this committee can do 
to help them--working with U.S. Attorneys, for example, on 
making some examples of these. Because I would predict, if you 
make examples of people and you publicize it, you will have a 
lot of people coming forth during an amnesty program that are 
going to decertify themselves before they get a chance to lose 
all their other government business.
    Mr. Akin. From a structural point of view, would it just 
mess everything up to have a couple prosecutor types attached 
specifically to a program like this?
    Maybe I don't understand the structure of the 
administration, but do you have anybody that you can go to, Ms. 
Carranza, where they are going to work on your cases for you 
and make sure people get busted? Or are you at the mercy of the 
Justice Department?
    Ms. Carranza. Congressman Akin, we have a couple of avenues 
that we have addressed already. One is working closely with the 
IG. They have the appropriate skill sets to support us, and we 
can partner in that aspect.
    Mr. Akin. Do you have the resources there, though, to go 
after some of these people?
    Ms. Carranza. Yes. I believe, as you stated earlier, that 
if we make an example of one or two, or follow through with the 
suspension--
    Mr. Akin. I understood that. But can you get the people to 
get on these things and start dealing with it or not? Do you 
have the power in your position? Or do you know yet?
    Ms. Carranza. Yes, I have the authority. I have already 
deployed not only IG support, but also the district directors; 
and they are knowledgeable of the need to do more, and things 
better on the site visits and the recertifications process.
    Mr. Akin. So you do think you have the resources to do 
that--
    Ms. Carranza. Oh, yes.
    Mr. Akin. --to make sure people, if somebody breaks the 
law, you can both criminally prosecute them and debar them from 
government contracts?
    Ms. Carranza. Yes. We have an attorney who is actually our 
suspension and debarment officer.
    Mr. Akin. Let me just cross-examine then.
    What is your sense, Mr. Kutz? Does she have the resources 
to go after some of these people, do you think? Or not? Because 
you have been around longer than she has.
    Mr. Kutz. Well, I don't know. I haven't looked at her human 
capital. But I suspect she doesn't necessarily have the right 
people. She may have people, but they may not be the right 
people. I don't know.
    I think the other issue of actually prosecuting and 
something is not an easy issue. If you look at suspension and 
debarment in the government, typically people don't get 
suspended and debarred unless they are proven to be guilty of a 
crime. But the law says you can actually suspend or potentially 
debar without having to prove someone is criminally 
responsible.
    So if they can prove some of these cases, that people are 
the in the program inappropriately, they can still potentially 
suspend and debar without going through the prosecution, I 
believe.
    Mr. Akin. I guess the other question I have--a couple of 
them--and that is, my understanding is, working in the 
administration is even more frustrating than being in Congress. 
And our job is like watching glacier races many days.
    But do you--because of all of the different union things 
with government employees, if you have got a bunch of 
incompetent people who are currently working for you, can you 
get rid of them and move people around? Or does it take you a 
year and a half to build a case to get rid of somebody who is 
basically some toad that is doing nothing?
    Ms. Carranza. I will address that from an operator's 
perspective, because I have 30 years as an operations manager, 
working with thousands of employees. Recognizing many times 
that you didn't have top performers, you have an A team, B 
team, C team, you look at their strengths or capacity.
    What we have done in the agency, because we have employees 
with limited capacity or lack of focus or perhaps not the skill 
sets, we have trained in the past 2 years over 1,500 employees 
to look at the quality controls, quality improvements. We look 
at metrics, we look at employee relations, and we also look at 
the importance of auditing.
    Chairwoman Velazquez. Time has expired.
    Mr. Akin. Thank you, Madam Chairwoman.
    Chairwoman Velazquez. Mr. Shuler.
    Mr. Shuler. Thank you, Madam Chair.
    Mr. Kutz and the gentleman from the GAO, I want to commend 
you for your work.
    Mr. Kutz, in your testimony you talked about the firms who 
had gained fraudulent access to the HUBZones. When you had the 
conversation and confronted them, what was their response?
    Mr. Kutz. I will let Mr. Causseaux answer that.
    Mr. Causseaux. In many cases, they were sort of, well, this 
is how the game is played. They didn't seem to have any fear, 
if you will, of any consequences, whether it was prosecution or 
suspension or debarment. It was: It is easy to get in the 
program, there is lots of money that is out there, and nobody 
is going to come after me.
    Mr. Shuler. Ms. Carranza, if you suspend someone or debar 
someone, the debarment is, what, a 1-year? A suspension that 
could be a 1 year?
    Mr. Causseaux. Suspension is typically 12 months; that can 
be extended for 6 months and actually can be extended beyond 
that for various reasons. They both have the same effect.
    Debarment, the typical is 3 years. However, the suspension 
and debarment official has the prerogative, based on the 
gravity of the circumstances, to make it longer than that.
    But the effect of suspension and debarment is the same: It 
precludes that entity from doing business with the Federal 
Government in contracting, receiving Federal loans, receiving 
Federal grants or any other Federal monies.
    Mr. Shuler. And that is what I understand that you have 
looked at, is doing the suspension and debarments?
    Ms. Carranza. Yes.
    Mr. Shuler. Will the SBA go after criminal indictment of 
these 10 people? Because I have not heard you say anything 
about criminal indictment yet. Do they actually go criminally 
after these folks?
    Ms. Carranza. Congressman Shuler, once we assess the 
severity of the issues, our immediate action would be to follow 
the same pattern we did with the firm in Kentucky. That was not 
only heard in court; it wasn't strictly a suspension or 
debarment; it was prosecution, so he will have his day in 
court. And that is what we expect to do with not only those 10 
companies, but other companies that we may come across. We are 
very determined, focused, to work through that as soon as we 
have the specific companies.
    Mr. Shuler. If we are looking at just these 10 companies, 
what was the amount of contracts--dollars?
    Mr. Causseaux. In 2006 and 2007, the amount of Federal 
contracts received, obligations now, was $105 million. One of 
the companies had a $40 million HUBZone set-aside contract. It 
is a--that is the ceiling amount. They haven't been--that much 
money has not been obligated yet.
    We estimated something over $24 million of that $105 
million was in actual HUBZone type of contracts. But many, many 
companies get a HUBZone certification, and then they may or may 
not get a HUBZone prime contract. They may be getting 
subcontracts using that certification, or it may make them more 
attractive to contracting officers because, as you may know, 
companies that have multiple certifications, that receive a 
contract, get credit against those--each individual entity--for 
the small business goaling requirements.
    Mr. Shuler. So, theoretically, we could be talking billions 
of dollars in fraud?
    Mr. Causseaux. Theoretically, yes.
    Mr. Shuler. Those are our tax dollars.
    Madam Chair, you know, the SBA, the former director, the 
good thing about the SBA, he is no longer with the SBA, 
correct? The former administrator?
    Ms. Carranza. The administrator has been assigned as 
Secretary of HUD.
    Mr. Shuler. So he is with HUD now, correct?
    Ms. Carranza. Yes.
    Mr. Shuler. And with our housing crisis that we have, now 
he is administrating HUD. So we are talking about a guy that--
essentially, despite his lack of oversight of billions of 
dollars; and is now with HUD with the housing crisis that we 
have now.
    Madam Chair, I think there needs to be extensive and more 
investigation going on because these are our tax dollars. These 
are people, their hard-paying tax dollars that are going to 
these programs, and we have got a crisis on our hands.
    I want to thank you and the ranking member for having this 
hearing and the good work that the whole committee and the 
staff has done. I yield back.
    Chairwoman Velazquez. Thank you.
    Mr. Bartlett.
    Mr. Bartlett. Thank you very much.
    How big was the universe from which these 17 companies were 
selected?
    Mr. Causseaux. Total HUBZone firms in the United States, 
13,000.
    Mr. Bartlett. 13,000, 14,000. Did you mine the whole 
universe of 14,000 to find?
    Mr. Causseaux. No, sir. We focused on the Washington, D.C., 
metropolitan area.
    Mr. Bartlett. I understand. But what was the universe from 
which these--
    Mr. Causseaux. There were several hundred. But, again, we 
selected the companies, only those who had received HUBZone 
contracts of at least--
    Mr. Bartlett. How big is that universe?
    See, to get some idea as to how significant these findings 
were, we have to know how big the universe was.
    Mr. Causseaux. It was at least dozens in the D.C. Metro 
area, and then we drilled down.
    Mr. Bartlett. If you could make that available to us for 
the record, we would be very pleased, because in evaluating the 
significance of this, we have to know how big the universe was 
from which you chose this.
    [The following information was provided to the Committee by 
the SBA: "The 17 HUBZone firms discussed in the testimony were 
selected from a population of 44 HUBZone firms in the greater 
Washington, DC metropolitan area that met certain criteria.
    Specifically, with one exception, each of the 44 had 
received at least $450,000 in obligations related to HUBZone 
set-aside, HUBZone sole source, or 8(a) with HUBZone price 
preference contracts in fiscal years 2006 and 2007.
    The one exception was a HUBZone firm that was included in 
the population and our selection due to allegations received 
via the GAO FraudNet."]
    Mr. Bartlett. I would like to first say a couple words 
about the HUBZone program in general. I have a lot of HUBZones 
in my district. One is a whole county.
    One of the HUBZone contractors in that county has done two 
very admirable things. He has brought jobs to that county where 
the base pay is four times the average income of that area. 
That obviously is going to be a huge economic lift.
    The other thing he has done is a really big benefit to 
taxpayers. The same contractor has similar work that--he works 
for NSA; that is not in a HUBZone. And he had an employee come 
to him, and he had two different positions the employee could 
have gone to. One was in Howard County for $100,000, the other 
was in Garrett County for $70,000. He wisely chose to go to 
Garrett County in my district for $70,000, because you live 
better with $70,000 in Garrett County than you do with $100,000 
in Howard County.
    What this means is that if all of NSA's work was done in 
Garrett County, they, for the same amount of money, could hire 
50 percent more people.
    So the HUBZone program is not only a very good program for 
the disadvantaged areas it serves, it is a very good program 
for the taxpayer, because you get the work done much more 
economically there.
    I was disappointed, but not surprised by your results 
because I know human nature, I have been watching it for 82 
years now. And what the HUBZone program relied on was self-
reporting and self-certification. This requires honest people, 
and what it also required was peer policing. And I am 
distressed that we have so many dishonest people that took 
advantage, that gamed the system.
    I am also distressed that the peer policing isn't working 
as well as it should, because the companies that have tried 
that get punished. And I know one of them, particularly, who 
has been punished because he has availed himself of this 
opportunity for peer policing.
    I think that if you could assure your contractors that they 
were not going to be punished for peer policing, that they 
would do a better job than you could do, Madam Secretary, 
because there are a whole lot of them out there and they are 
really smart and they know what is going on in their 
communities.
    I am distressed that we are going to have to take on more 
manpower and spend more money in supervising this program 
because there are too many dishonest people out there who want 
to game the system, and because we have not made it 
advantageous for peers to police the system because when they 
police the system, they get punished.
    How can we change? We can't change the honesty of people. 
How can we change the peer policing so that it works?
    Ms. Carranza. Congressman Bartlett, we can and we have and 
we will continue improving the controls, the internal stringent 
controls that are very necessary and that have been pointed out 
by GAO and the IG.
    And I want to assure you that it is not the SBA personnel, 
strictly, who are going to have oversight in this area. Our 
associate administrator of our government contracting office 
has already drafted a memorandum to share with the 24 large 
agencies, government agencies, so that we can alert them to our 
areas of concern and the exposures of this audit.
    Also, I have personally spoken to the key government 
contracting leaders, in a separate meeting, to share with them 
the vulnerabilities of our program and that we are going to 
need their support.
    So there is a memorandum. I have met with them personally, 
and I have plans to continue to communicate so that it is a 
contracting community obligation to ensure that the noble 
mission of this HUBZone program is kept intact. Because, as was 
stated earlier, it is all about job creation and it is all 
about economic development in the most challenged areas of our 
community.
    Mr. Bartlett. When we know of peers being punished for 
policing, can we come to you for help?
    Ms. Carranza. Absolutely.
    Mr. Bartlett. Thank you.
    Chairwoman Velazquez. Ms. Carranza, GAO was able to 
perpetrate fraud with a photocopier and whiteout.
    Why are your internal controls so weak that such an 
unsophisticated scam is able to defraud the Federal Government? 
I need to understand why.
    Ms. Carranza. Chairwoman Velazquez, it has been noted a 
couple times that this is a self-certifying process--program. 
And so, as noted also, we relied on the integrity of the 
applicant. And because we did not have sufficient validation 
and verification of the information that is supplied, it 
allowed loopholes. As a deterrent, we don't want to continue 
with the lax processes that would enable someone to defraud or 
misrepresent the information.
    So it is a matter of tightening the controls, monitoring 
those controls for adherence and compliance, and documenting it 
in our SOP. Our SOP, as we speak, is being modified to 
incorporate those new procedures.
    Chairwoman Velazquez. You are telling us today you are 
going to have internal controls in place and you are going to 
have oversight?
    Ms. Carranza. Better controls and greater oversight, yes.
    Chairwoman Velazquez. In trying to understand the magnitude 
and if any structural changes are later needed to take place, I 
am going to ask you the following question:
    Fraud seems to be something you hear mentioned regularly in 
conjunction with SBA. Last year, the Department of Justice and 
Secret Service uncovered massive fraud in the SBA loan 
programs; and now, GAO has found similar, if not greater, fraud 
in SBA's contracting programs.
    We have also heard about problems with Katrina, a former 
Bush administration official being awarded work in the 7j 
program, and big businesses getting small businesses' 
contracts.
    Ms. Carranza, what has occurred over the last few years 
that has made your agency so susceptible to fraud?
    Ms. Carranza. I can explain very--
    Chairwoman Velazquez. Is it the reduced budget, 40 percent 
in the last 7 years? Have the agency buyouts forced out more 
experienced staff? Is it because there has been high turnover 
in the administrative portion? What is it?
    Ms. Carranza. Congresswoman Chairman, to delineate every 
one of them would take greater than 5 minutes. But I will 
explain that we have addressed every one of those areas and 
have put in place--I can answer for the past 2 years that I 
have been here--with Secretary Preston a reform agenda that not 
only looked at simplifying processes, developing the skill sets 
of the existing workforce.
    We have actually added employees, over 100, since we were 
addressing the resource allocation or alignment. We have also 
put significant controls in our ODA, Office Disaster 
Assistance. In our Office of Capital Access, as you know, we 
are addressing oversight.
    Chairwoman Velazquez. But we are here today. Thank you Ms. 
Carranza.
    Ms. Fallin.
    Ms. Fallin. Thank you, Madam Chairman.
    I appreciate you coming today, all of you, to testify on a 
very important subject; and it is certainly very disturbing, 
some of the information that we have heard.
    And I know, Madam Administrator, you are relatively new to 
this job and new to this position, so I appreciate what you are 
trying to do with your agency and some of the steps that you 
have been taking to identify the challenges, map out an 
appropriate course of action to remedy some of these issues 
that have been revealed by the various other government 
entities.
    I want to ask you a question. Do you think the HUBZone 
program is worth keeping?
    Ms. Carranza. What I can--
    Ms. Fallin. Is it beneficial to our economy, beneficial to 
small business?
    Ms. Carranza. Yes, Congresswoman Fallin. The noble mission 
of HUBZone is about job creation and economic development and 
in the most challenging areas. As I explained earlier, to 
suspend a program that meets the needs of so many - this is not 
about a program problem, this is about a program management 
problem.
    And it is my responsibility to ensure that we put in the 
controls and address all those efficiencies so a program such 
as HUBZone and others are not negatively impacted by the loose 
controls that we have and are then accessible to fraud or 
misrepresentation or the eligibility of the applicants.
    Ms. Fallin. That is good to hear. And let me ask you 
something else.
    What would happen, and I will ask maybe all of you, if we 
had an announcement--and maybe you have already done this--but 
an announcement by all of you that said we are not going to 
tolerate fraud and abuse of government taxpayer dollars, 
especially as it deals with HUBZones or any other program 
within the SBA, and here are some cases we identified that are 
going to be prosecuted promptly; we are going to take care of 
them, and we are going to give everybody in the Nation a 
warning, who may be taking advantage improperly of this 
program, that we are going to crack down, and you'd better get 
ready?
    Ms. Carranza. Congresswoman Fallin, I believe we have 
accomplished that already by being named collectively with GAO 
and IG on a press release that just went out. That is just the 
beginning, because the proof is in the suspensions and the 
debarment activity, as well as making sure that we communicate 
this in the forums that we participate in.
    As you know, we attend government contracting matchmaking 
events, summits, conferences, and that is our platform to make 
sure that we articulate this stringent observation.
    Ms. Fallin. Did you want to say something here?
    Mr. Kutz. I think you are on a target.
    Advertising that people are being held accountable and 
giving people an opportunity under an amnesty program to come 
forth and decertify themselves, I think would have an effect. 
The suspension and debarment, as Mr. Causseaux said, that 
pretty much takes you out of the government business for a 
year, 2 years, 3 years; plus, you can't get government grants 
and other types of payments.
    So that is a real consequence; and if people knew that 
their lifeline was at stake, basically, from a business 
perspective, they would come forth.
    Ms. Fallin. Let me ask you this. After hearing the plan of 
action that she has laid forth--and it takes a long time to 
change government at times; it is unfortunate, but it just 
does. It is hard to work through. People have been in 
government for a long time, and even the red tape and the 
bureaucracy itself.
    But do you feel like the plan that the Administrator has 
laid forth with the time lines, with the procedures and what 
her agency hopes to do with restructuring and the goals that 
they have in place, is moving in the right direction?
    Mr. Kutz. Let me talk about fraud, and Mr. Shear can talk 
about from a performance standpoint.
    But from the fraud standpoint, we haven't seen a fraud 
prevention plan yet, so I am not aware of one. They are working 
towards one, it sounds like. They just heard from us last week.
    When we do covert testing, we don't tell them we are 
coming. We don't tell them until we are done. So it is going to 
take some time to see.
    But you have a mess on your hands, effectively. I mean, you 
have got to fix the application process, to put fraud 
prevention controls in place.
    And then you have to figure out what you are going to do 
with 10,000-plus companies in the system. You can't audit all 
10,000 of them. So that is why your idea of publicizing some 
poster children-type cases could potentially do some of your 
work for you in the early stages.
    So that is kind of where we are with the fraud side.
    Mr. Shear. When we make recommendations to an agency--and 
in this case, it is a program where we have what I will call--
we identified "very severe deficiencies" in this program and 
recommended corrective action. We are always glad when the 
agency agrees with us and states that they are going to take 
action.
    This is the concern I would raise here for Administrator 
Carranza and for this committee, that the response we received 
at the beginning of June to our program audit in terms of 
agency comments and the response today, I think there might not 
be a recognition of the size of the task that is involved.
    Some things can be done fairly easily to try to get a 
handle on the issue, which could be using data smarter, to try 
to identify the virtual offices, the locations where you have 
multiple HUBZone firms, and the like. But some of these things, 
especially verification of employees, all these other types of 
actions we recommended, are more difficult.
    So I do have--we have a concern as far as the ability to do 
this quickly. At a minimum, we would like to see a process in 
place so that it could lead to success down the road.
    And as far as the specific plans, such as developing 
regulations and policies and procedures around certification 
and recertification, it is in the draft stage. It hasn't been 
shared with us yet. We would be glad to work constructively 
with the agency as they move forward, but we don't know what 
the plan is.
    Ms. Fallin. Let me ask, are you willing to work with him as 
they move forward on these plans?
    Ms. Carranza. Last week when we met--to answer your 
question, Congresswoman Fallin, 30 days from now. I am not 
supposed to give exact dates, but 30 days from now I invited 
him back to the office, so we can look at our strategy and 
evaluate whether it is sufficient or not.
    Chairwoman Velazquez. Mr. Kutz, can you please explain to 
this committee, how are taxpayers affected if a company 
fraudulently gains access to the program and receives a 
contract or a price evaluation preference?
    Mr. Kutz. Well, certainly from the standpoint of this whole 
issue we are talking about here, they are ripped off from the 
standpoint of the wrong areas are being stimulated.
    I mentioned McLean, Virginia. McLean doesn't need any 
stimulation. McLean is a very wealthy area, as some of you may 
know, the Tyson's Corner area where some of these companies 
were.
    The other thing we haven't talked a lot about here is the 
legitimate HUBZone companies, like in Garrett County, Maryland, 
for example, may be losing out on business to fraudsters who 
are taking the business away from them.
    And from a price standpoint, in some cases you might be 
paying more because you are limiting the competition, you are 
setting aside to a limited number of companies or you are doing 
sole-sourcing. So these things.
    So there are a number of reasons where taxpayers are not 
getting what they paid for.
    Chairwoman Velazquez. Thank you.
    Ms. Carranza, last year, the House passed H.R. 3867. And in 
this legislation, we included a provision to require onsite 
verification of HUBZone status prior to the award of a second 
contract. The administration voiced their opposition to this 
provision, and I quote, "This provision will create a large 
burden on the Small Business Administration. The firms are 
already required to certify their status prior to award of a 
contract."
    Given the GAO's investigation and the evidence of 
substantial fraud in regard to the HUBZone program, do you 
still feel that this will put such a burden on the SBA? And 
will you continue to oppose onsite verification?
    Ms. Carranza. What I am committing to you, Chairwoman 
Velazquez, is to further assess that situation with the new 
information that we received up to and including having a 
contractor come in and conduct an assessment of what it would 
take to ensure that recertification is accomplished.
    Chairwoman Velazquez. Let me remind you also that that 
legislation passed overwhelmingly, bipartisan support, over 300 
votes.
    Mr. Kutz, to get a library card from the local library a 
person is generally required to bring identification, as well 
as a recent bill with a local address on it, to prove 
residency.
    In your experience, would you say that it is easier to get 
into the HUBZone contracting program, making one's company 
eligible for millions of dollars of contracts, than to get a 
public library card?
    Mr. Kutz. I don't have a library card, but given what you 
said, and back quite a few decades ago when I actually had a 
library card, showing up and having to prove who you are is 
more than was required for the HUBZone. So under that scenario, 
yes, it would require more diligence to get a library card than 
a HUBZone.
    And that gets into some of the solutions here. Rather than 
this being an entirely Internet/e-mail-driven process, a little 
more like the site visits we are talking about would be a good 
step.
    Chairwoman Velazquez. Ms. Carranza, you spoke about 
electronic annual reviews in your testimony.
    Can you tell me more about this system?
    Ms. Carranza. Yes, Congresswoman Velazquez.
    This is a mechanism that allows individuals, anywhere from 
the headquarters personnel to the district offices, to perform 
reviews, site reviews, firm reviews. And it facilitates and 
simplifies the process.
    As I indicated earlier, we have reassessed that process 
because, again, we have allowed technology to manage the 
process versus the other way around.
    Chairwoman Velazquez. So it is exactly this sort of 
electronic system without verification that has caused the 
problems with the HUBZone program.
    Let me ask, Mr. Causseaux, while you haven't examined this 
program, can you tell us if you will be concerned about the 
potential for fraud using this type of annual reviews?
    Mr. Causseaux. Any system that is predicated on self-
certified information without verification and validation is 
highly susceptible to fraud and abuse, particularly when 
millions, if not billions, of Federal dollars are at stake.
    We sometimes use the term "faith-based contracting," which 
is essentially a process where we kind of simply sit back and 
hope and pray that the company we are doing business with isn't 
ripping us off too badly. This is a situation where, if you 
don't do due diligence and validate that you are getting what 
you are paying for, that those you are paying are the ones that 
purport themselves to be, you are susceptible to fraud.
    So it does take more than the electronic system, yes, 
ma'am.
    Chairwoman Velazquez. Ms. Carranza, I just would like for 
you explain to us what kind of fraud prevention measures will 
be put in place to supplement these electronic reviews, annual 
electronic reviews. Because it, by itself, will be open to 
fraud.
    Ms. Carranza. Congresswoman Velazquez, as indicated by Mr. 
Causseaux and Mr. Kutz, it is about validating and verifying 
the information that is given, that we are now taking a more 
stringent and more aggressive manner in doing. If a drivers 
license was required, or a utility bill for validation or 
verification of address was allowed, now we will ask for copies 
of the office lease, now we will ask for much more in-depth and 
comprehensive documentation to validate and verify the 
information that is electronically shared with us.
    Chairwoman Velazquez. You are telling me that you are not 
going to rely only on annual electronic reviews?
    Ms. Carranza. Exactly.
    Mr. Kutz. Chairwoman, could I comment on that?
    Chairwoman Velazquez. Of course.
    Mr. Kutz. Because verification is more than getting a copy 
of something. When we submitted our first application, they 
asked us for a copy of our lease. We dummied one up, faxed it 
to them, and they bought it. So validation means possibly maybe 
calling the lessor or doing something besides taking a piece of 
paper and saying, yep, I met the item on the checklist.
    So I think when we talk about verify and validate at this 
discussion here, it is more than simply requesting a piece of 
paper.
    Chairwoman Velazquez. And getting the fax machine or e-
mailing.
    Mr. Kutz. Especially by fax. A carbon drivers license by 
fax looks a lot better. With the holograms on a drivers 
license, if you faxed them in, you can't tell if it is a real 
license or not.
    Chairwoman Velazquez. How would you react to Mr. Kutz's 
assessment?
    Ms. Carranza. Congresswoman Velazquez, I actually took a 
couple of addresses and pursued Google Earth. And I believe you 
are very familiar with Google Earth, where it will zoom in and 
catch that storefront Starbucks.
    This is just one of about nine other types of search 
engines that we are expanding to ensure that we narrow down the 
focus of the documentation that has been given to us. So these 
are going to be expanded search engines, they are going to be 
consistently utilized. And, once again, this is just one of 
many that will be utilized to verify the information and 
validate it.
    Chairwoman Velazquez. Mr. Bartlett.
    Mr. Bartlett. I was very pleased, Madam Secretary, that you 
noted that this was not a program problem, it was a program 
management problem.
    I would like to again say something about HUBZone programs 
generically, because I know they are now under attack. Most of 
our other small business programs are very admirable in that 
they help people. You can be an 8(a) contractor and you can get 
a contract in McLean, Virginia, which doesn't need any economic 
help at all. And that is nice that we have programs that will 
help these disadvantaged companies no matter where they are.
    The HUBZone program is one of those things that 
occasionally I note, and such a really creative idea that I say 
to myself, gee, why didn't you think of that? Because this is a 
program that not only helps people, individual companies, but 
it helps whole areas. And we don't have any other program like 
that in the Small Business Administration. It is an absolutely 
unique program.
    The jobs that I mentioned that went to Garrett County, 
except for the HUBZone program they would not have gone there. 
This contractor inconvenienced himself by going to Garrett 
County, and he went there because it was a HUBZone area and 
because he knew that he would have some advantage in getting 
contracts from NSA because they have a checkoff of whether or 
not they are meeting a number of goals of subcontracting, and 
this is just one of them.
    So I did want to appeal to fixing the problem, not putting 
the whole program in jeopardy, because I think this is a really 
unique program, a very worthwhile program. As I said, when I 
first saw it, I said, gee, why didn't you think of that? It is 
such a unique idea.
    And the example I mentioned not only helps Garrett County 
which, when I came to office, had 14 percent unemployment. And 
I went there door-to-door, and I was surprised.
    Most places I went door-to-door, it was very easy, because 
after I rang the doorbell, I filled out the little door hanger 
that said, I was here; and I give the time and the date and I 
hang it on the door, and I'm sorry I missed you. And almost 
nobody came because they were out working.
    When I went to Garrett County, a lot of people came. And 
they were senior people that told me that during their working 
years they had to go to Pittsburgh or Baltimore to make a 
living, but when they would retire, they came back to Garrett 
County. I said, gee, this must be a great place to live; too 
bad that we have 14 percent unemployment here, that our people 
have to go away to Pittsburgh and Baltimore to make a living.
    The HUBZone program is now changing that, and there are 
really good jobs there. As I mentioned, four times the mean 
annual salary is what is paid to these people. And that uplifts 
a whole community when you have that kind of salary.
    So I just want to make an appeal that we need to be 
focusing on fixing this program. And, again, I am very 
disappointed that there are so many people out there that 
would--and the taxpayer maybe gets value from these contracts, 
but what is really hurt is the area that should have gotten the 
contract and didn't get the contract.
    I think that probably pretty good work is done on these 
contracts, but the real tragedy is the area that should have 
got the contract, that should have been uplifted by it 
economically, missed that because it was fraudulently given 
somewhere else.
    So I hope that our focus is on, what do we need to do to 
fix this program, so that it is really a viable, good program 
and not have any hint that the program should be at risk 
because of this.
    This is just human nature that you have unearthed. And 
again, Madam Secretary, we are going to come to you, because we 
want to make sure that people who are trying to self-police, 
peer policing, that they don't get punished for doing that. And 
I know that happens and I know that is a huge detriment to the 
success of this program.
    So thank you for your invitation to come to your office. We 
will be there.
    Ms. Carranza. Thank you, Congressman Bartlett. And if you 
will allow us to visit your office, as we have done in the 
past, we would definitely look forward to giving you a report, 
and Congresswoman Velazquez, on the progress of our plan so 
that we can keep you updated.
    Mr. Bartlett. I would be honored. Thank you.
    Chairwoman Velazquez. Mr. Ellsworth.
    Mr. Ellsworth. Thank you again, Madam Chairwoman.
    I would associate my comments with Mr. Bartlett's and 
agree, this is a good program. It is doing good things.
    But knowing some of the people that I know back home in 
Indiana, they would rather have no program at all than a 
program that is riddled with fraud and abuse, because they are 
the taxpayers that are paying these dollars. And so its 
incumbent upon us to fix it.
    I was just sitting here, thinking out of the box, we want 
to keep government spending down. But contracting, if you offer 
these areas a stipend, even if it is not your agency, another 
Federal agency or even a local agency, to go out and make some 
of these spot visits and train them, there are companies that 
would love a $30,000 a year stipend to go out and make that 
part of their duties. A sheriff's department or police 
department or, like I said, a welfare department, they could do 
this. And there is nothing in replacement.
    Like Mr. Kutz said, you can dummy these things up all day 
long with technology and fax in anything you want, and there is 
nothing like eye-to-eye contact and eyeball, and asking 
questions and seeing who is in and checking a payroll roster. 
There is just no substitute for that.
    And so I think there is--if we think out of the box a 
little bit, we can do that.
    Mr. Shear, we talked about self-policing, and I guess this 
is along that. Is self-policing, to you or Mr. Kutz, an 
effectively tool to monitor HUBZones when--like I said, we just 
discussed it, but is it going to be effective, or do we have to 
go further?
    Mr. Shear. Well, I will address it from the standpoint of 
our program audit. And our program audit focused on SBA because 
it is the agency that is in charge of administering and 
overseeing this program; and we think that agencies that play 
that role have a very important responsibility.
    As Mr. Kutz said a little bit earlier, self-policing, the 
extent to which it occurs among recipients of a program can be 
useful. But the idea that SBA officials stated when conducted 
our program audit, and reference was made to self-policing in 
the program, there is a burden of proof: Is self-policing 
working and can it work?
    And when we started asking questions about self-policing, 
such as self-policing status protest in the HUBZone program, we 
started asking questions, how many times are there status 
protests? And there aren't that many.
    Then when we started asking questions--which is really out 
of fairness to the businesses that participate in this program 
in that many of these contracts, even though they are small 
businesses, they are in HUBZones, they are local businesses 
many times, especially with construction, you are talking about 
contracts that could be in other HUBZone areas and things of 
the like--how is it that a HUBZone concern or somebody with 
skin in the game would know enough information?
    If SBA doesn't know the information, how are different 
participants in a program going to have the information to 
really self-police? And that is where we started getting 
nonanswers.
    So we have a concern about self-policing in this program, 
the degree to which it has been used, the degree to which it 
has worked.
    Now, given our focus on SBA's actions for internal control, 
I will say that what we observed in terms of the high level of 
firms that apply being certified, and then the large number of 
firms that, when anything is looked at very closely and where 
verification is asked for by SBA, for those small numbers of 
firms, the high numbers that end up being decertified, to us 
that is an indication that whatever policing is going on by SBA 
and self-policing is not working.
    Mr. Ellsworth. Thank you very much. I have got about a 
minute left. Any suggestions, as you sit there and think about 
the same things that I was thinking about, short of hiring 
30,000--how many HUBZones across the country, 30,000?
    Ms. Carranza. Fourteen thousand.
    Mr. Ellsworth. Short of hiring 14,000 new government 
employees, any suggestions that you can say that you have all 
been talking around the office and saying, if they would just 
do this, they would get that eyeball-to-eyeball check?
    You know, let them split. Is there another agency? Have you 
all thought of anything?
    Ms. Carranza. Thank you, Congressman Ellsworth.
    We have not only looked at the density of the need to do 
onsite, the density of firms, but we also recognize that we 
have other agencies and other resource partners that can be 
deployed as well to perform some of those physical onsite 
versus site reviews.
    In addition to that, we want to be a deterrent up front. So 
when we look at the application, we are going to ask for a lot 
more information up front and validate that information, and 
then take it personally that after that application is 
completed and the information validated, we zoom in with all of 
the search engines to again verify it, so that no business can 
be disruptive, the job creation can be realized and, of course, 
economic development.
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Ellsworth. Sure.
    Chairwoman Velazquez. Ms. Carranza, it caught my attention 
that you said that you have other partners, and that you will 
use personnel from other agencies to go and do onsite visits.
    How is that possible? That is the sole responsibility of 
SBA. Are they trained? Who will train them?
    Ms. Carranza. Congresswoman Velazquez, when I say other 
resources and agencies, we have government contracting 
community members, whether it is other agencies that are out in 
the field. We also have our resource partners from the 
Entrepreneurial Development Office.
    We are just looking for other avenues that could 
participate in this scrutiny. We have not locked it in yet; 
this is still going under assessment. But we have opportunities 
to offer the training that is required.
    Again, we are going to first manage it from our office 
before we branch out and commit those resources, but I believe 
that there are other options that we can consider. It may be 
premature to say that at this time, because I haven't fully 
assessed it.
    Chairwoman Velazquez. I hope so. I hope that it is 
premature to say. This is too serious. This is fraud. This is 
about taxpayers' money. This is about hurting legitimate 
companies that are doing their job in our communities.
    So to contract out or to give the responsibility due 
diligence that is your sole responsibility to other partners 
out there who do not have--first, do not understand the 
program; two, do not have the training--that really concerns 
me. So I hope that you will revisit that.
    Ms. Carranza. I will take that under consideration.
    Mr. Ellsworth. I yield back.
    Chairwoman Velazquez. Thank you.
    Mr. Cuellar.
    Mr. Cuellar. Thank you, Madam Chair.
    Taxpayers expect efficient, effective, and accountable 
government. I think that is the basic premise when we talk 
about governance. There are different ways of doing this, and I 
think the gentleman just mentioned this.
    You can go into a policing effort where you go in and say, 
we have a thousand places we have to search or we have to hire 
a thousand people, and that is hard to do with a budget. Or you 
can use more of a red-flag approach, where you look for certain 
areas that will say, hey, there is a red flag, so we need to go 
in and send somebody in there.
    Customs, for example--I am from Laredo, the border area, 
one of the largest inland ports. We get thousands of trucks, 
actually we get about 10,000 trucks going up and down. If 
Customs were to try to stop everybody coming across, they would 
stop the traffic coming in, the international trade. So they 
use specific methods to do spot-checking to go in and look for 
those red flags.
    And I assume you all have some sort of model that we can 
employ or SBA can employ. I would like to have you all submit 
that to us to look at the different models we are looking at, 
because you can't send a thousand people out there, but there 
are ways that you can red-flag those areas and then send them 
in when there is a red flag.
    You know, one of the things, for example--a red flag, for 
example, as Mr. Kutz, I think you mentioned the virtual offices 
in your testimony. Can you elaborate on what that term means 
and how that relates specifically to the HUBZone program?
    Mr. Kutz. Yes. It is an office that you can rent that could 
be a legitimate HUBZone if you were actually having people 
working there part-time and onsite part-time. But we also saw 
the other end of it where there was actually just a mail 
forwarding.
    And the indicator you are talking about in this particular 
case would be, if 10 companies--and this is a real case here--
10 companies using the same suite at the same address are all 
HUBZone companies. Well, that doesn't make much sense. And when 
you actually get behind that, you see that that is one of the 
ways companies can beat the system here.
    So that will be the kind of red flag you are talking about, 
looking for virtual offices. And you can investigate all 10 of 
them by doing one visit in that particular case.
    So that is a way to leverage your resources also. I think 
virtual offices is one thing SBA should build into their fraud 
prevention program.
    Mr. Cuellar. So what does it mean when you have a virtual 
office? Does that mean that there is an intent to commit fraud, 
or does that mean there is some legitimate? And I know the 
answer to that--
    Mr. Kutz. It could be either one.
    Mr. Cuellar. --but how do we use that red flag so we can 
send in individuals to do the personal visits? And how does the 
SBA use that model? I want to see models out there because, 
again, our resources are limited and we know that for a fact. 
But there has to be a system in place to bring in the red 
lights and the red flags to come up.
    Do you all have a model that could be shared with the SBA? 
Could you send that to us, to the committee also?
    Mr. Kutz. We don't. But in this case, it was simply sorting 
the addresses and looking for multiple hits at the exact same 
address; and you can do that with multiple software packages 
out there.
    So one of our fake companies was in a virtual office, and 
we were there in the same office with nine other companies. So 
the other companies there were suspicious.
    So that is a basic software. We don't have a model in this 
particular case that would apply to the SBA situation 
necessarily.
    Mr. Cuellar. Should we have a model?
    Mr. Causseaux. Clearly, the easiest tool in that situation 
is when a company makes an application for HUBZone 
certification, if that address happens to be one that another 
firm or firms is at, that ought to send a flag. In fact, it is 
a fairly clear indicator.
    As we said, in Rockville, Maryland, there is a very small 
HUBZone. There are 17 HUBZone firms in that particular sliver; 
10 of those 17 firms are in the same suite in the same building 
in that one location.
    Mr. Cuellar. So shouldn't that have alerted somebody right 
there? I mean, that is what I am saying. There has got to be 
some sort of systematic approach to addressing this.
    Ms. Carranza, I would ask you. A lot of times people look 
at GAO or any auditing firm as the enemy, but I have always 
looked at it, how do we improve the information that GAO 
provides? How do we use that?
    Instead of saying, oh, my God, they found some weaknesses 
in the program and therefore that is negative. I would ask you 
to just work with them and look for--I am a big believer. I did 
my dissertation on performance-based budgeting. There are 
models that you can set up; there really are models.
    So I would ask GAO to work with Ms. Carranza and look for--
especially in these virtual offices. There should be a system 
in place for your employees to say, there is a problem right 
here; we have got an office and there are 17 different 
companies in the same place.
    Mr. Kutz. If you look at the monitor, that is what Mr. 
Causseaux was talking about. That is the building that has the 
suite.
    Chairwoman Velazquez. How big was the suite?
    Mr. Causseaux. It was about 30 offices that are in this 
suite. It is a shared office arrangement. Some of the firms--or 
at least one of the firms paid $50 a month strictly for mail 
forwarding; and they could rent an office or a conference room 
on an a la carte hourly basis.
    Some firms rented, they paid a couple hundred a month, and 
they received up to 4 hours or 6 hours use of an office on a 
scheduled basis. And there were two firms, I believe, that 
actually had a full-time office there.
    But of the 10 offices, or the 10 HUBZone firms that were 
there, seven of them were on a virtual office situation; and 
those seven had another office that was not in a HUBZone area, 
one of which was in one of the larger--one of our case example 
firms was in McLean, another one in McLean.
    Chairwoman Velazquez. Mr. Kutz, I am so lucky I don't 
suffer from high blood pressure.
    Mr. Causseaux. Me, too.
    Chairwoman Velazquez. Time has expired.
    Mr. Bartlett, do you have any other questions?
    Mr. Bartlett. I just want to verify what I thought I heard 
emphasized in the discussion, is that the two major sins that 
are committed by these people, one is not having the major 
headquarters of the company in the district, and the other is 
not having 35 percent of the people live in the district.
    These are the two main things?
    Mr. Causseaux. That is correct. There are four attributes 
for being a HUBZone: You have to be a small business; you have 
to be 51 percent owned and controlled by U.S. citizens; 35 
percent of your employees have to live in a HUBZone; and the 
principal office where the majority of employees, essentially, 
work has to be in a HUBZone.
    We tested the 35 percent and the principal office 
attributes for our case examples.
    Mr. Bartlett. Well, at least three of those are pretty 
obvious, if you are in the community, aren't they?
    Mr. Causseaux. Yes, sir.
    Mr. Bartlett. Yeah, which would lead me to believe that 
pure policing, if we encouraged it, really would work. Because 
there has to be other HUBZone businesses in that area which are 
really mad when the contract goes to somebody who is cheating. 
Isn't that true?
    Mr. Causseaux. If I could answer that question, I believe 
that is true. However, the problem with the peer policing is 
that it is based on a protest mode. And in order to protest, 
first of all, you have to have been a competitor for that 
particular award or that particular--
    Mr. Bartlett. But can't we change that, sir?
    Mr. Causseaux. I can't. But perhaps you certainly can, yes.
    Mr. Bartlett. Well, if we need to change that, if the 
regulators can't change it, then we need to change it, Madam 
Chairman. We need to not limit who can say, "Gee, that guy is 
cheating." And as far as I am concerned, it can even be 
anonymous. You know, I like a suggestion box, an anonymous 
suggestion box, outside my door.
    I remember a very interesting case when General Shinseki 
wanted to have berets made for all his soldiers. And he was 
enormously embarrassed when he learned that they were going to 
be made in China. And I suggested that he maybe ought to have a 
suggestion box outside his door, because lots of people in that 
line of command knew they were being made in China but nobody 
dared tell the top guy that.
    You know, you just need to be able to get this information. 
This isn't rocket science. These three things are really easy 
to discern. And I would think that if we made it easier and we 
didn't punish these people who were protesting--and it 
shouldn't be just the--if the only person who can signal this 
is the guy who was involved in the bidding process, then you 
really, really have limited--
    Chairwoman Velazquez. Time has expired, Mr. Bartlett.
    Mr. Bartlett. Yeah.
    Can you do something to change that, or do we have to do 
it?
    Ms. Carranza. Congressman Bartlett, at this time, I don't 
believe that we need additional legislation. What we need to do 
is adhere to the procedures we have in place.
    We have referred to flags, red flags. I have a three-page 
description of, when red flags occur, the following should take 
place. And I mentioned earlier, it is program management and 
adherence and comply to procedures.
    Chairwoman Velazquez. The time has expired.
    Mr. Bartlett. Thank you.
    Chairwoman Velazquez. We are ready to wrap up. But before, 
I need to ask three questions for the record to reflect.
    Mr. Shear, we hear talk about the economic benefits of the 
HUBZone program and how good they are. So do you have or saw 
any ways where the benefits are quantifiable? Do you think that 
we can measure the benefits of the program?
    Mr. Shear. We make recommendations in our report for SBA to 
come up with measurement and an evaluative approach to 
determine the benefits of the program. Because, to date, we see 
the benefits of the program tend to be on indicators that don't 
work very well. The indicators SBA has now, it is based on 
anecdotal information, which, while it can be very valuable to 
provide some insight, it isn't systematic looking more broadly 
at benefits.
    Chairwoman Velazquez. Thank you.
    Mr. Shear. And this is a program where we think that such 
an evaluation to guide the Congress and the SBA is very 
important.
    Chairwoman Velazquez. Ms. Carranza, in your testimony you 
mentioned that you are undertaking several projects--hiring 
more staff, requiring site visits to firms that have received 
HUBZone contracts.
    All this is going to cost money. How much was the mapping 
contract?
    Ms. Carranza. I don't have that information, but I would be 
glad to supply that information to you.
    Chairwoman Velazquez. Okay. How much was the contract to 
add additional employees to clear the backlog of 
recertifications?
    Ms. Carranza. We have had a contractor for a couple of 
months. I don't have the exact dollar amount. However, we are 
realigning our workforce because of other backlogs that we have 
worked through so that we can reallocate the resources. So we 
should not be adding additional personnel.
    Oh, the mapping cost is about $30,000.
    Chairwoman Velazquez. $30,000.
    Ms. Carranza. Yes.
    Chairwoman Velazquez. Okay. And I am asking all these 
questions because we know that putting together the plan that 
you lay out is going to cost money. And my concern now is that, 
in trying to fix the fraud issue with a HUBZone program, that 
we might create other problems with other programs, because we 
are going to rob Peter to pay Paul, since the budget of the 
agency for the last 8 years had been reduced by 40 percent.
    So my question to you is, would you request a supplemental 
appropriation to pay for all these measures?
    Ms. Carranza. Congresswoman Velazquez, at this point we 
have the resources in place and space in the contracts that we 
are in--currently. If it required, then we would revisit and 
come back to you. But, at this point, I am not in a position to 
give a dollar amount or if we need additional funds. But we 
would consider that.
    Chairwoman Velazquez. It just brings memories back when we 
all witnessed in our Nation the Katrina debacle, disaster. And 
the Administrator came before us, and I kept asking him, "Do 
you have the resources?" Eighteen months later, we saw that 
people were still waiting for assistance.
    So I hope that, months from now, you don't have to come 
before our committee because some of the other programs are 
having the same concerns and the same issues that we are 
discussing today.
    So, with that, I want to thank all of you for being here.
    I ask unanimous consent that members would have 5 days to 
submit a statement and supporting material for the record.
    Without objection, so ordered.
    This hearing is now adjourned. Thank you.
    [Whereupon, at 12:06 p.m., the Committee was adjourned.]
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