[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                       FULL COMMITTEE HEARING ON 
    OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION AND ITS PROGRAMS 

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             MARCH 25, 2009

                               __________

                 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            Small Business Committee Document Number 111-012
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

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

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

                                  (ii)

  


                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama

                                 (iii)

  


               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia, 
PARKER GRIFFITH, Alabama             Ranking
MELISSA BEAN, Illinois               STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                  HEATH SHULER, Pennsylvania, Chairman


MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri, 
BOBBY BRIGHT, Alabama                Ranking
KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                  (iv)

  




















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

Hairston, Mr, Darryl, Acting Administrator, U.S. Small Business 
  Administration.................................................     3
Shear, Mr. William, Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office..............     5
Kutz, Mr. Gregory, Managing Director, Forensics Audits and 
  Special Investigations, U.S. Government Accountability Office..     7

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    28
Graves, Hon. Sam.................................................    30
Hairston, Mr, Darryl, Acting Administrator, U.S. Small Business 
  Administration.................................................    32
Shear, Mr. William, Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office..............    39
Kutz, Mr. Gregory, Managing Director, Forensics Audits and 
  Special Investigations, U.S. Government Accountability Office..    51

Statements for the Record:
GAO: Hubzone Program Fraud and Abuse Identified in Four 
  Metropolitan Areas.............................................    63
SBA Letter to Small Business Committee on Authority to Suspend 
  HUBZone Businesses Identified in GAO-08-694T...................   101
GAO Response Letter to SBA.......................................   105
Small Business Committee Response Letter to SBA..................   107
Hubzone Contractors National Council.............................   108

                                  (v)

  


                       FULL COMMITTEE HEARING ON
    OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION AND ITS PROGRAMS

                              ----------                              


                       Wednesday, March 25, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2:18 p.m., in Room 
2360, Rayburn House Office Building, Hon. Nydia M. Vela 
AE1zquez [Chair of the Committee] presiding.
    Present: Representatives Velazquez, Dahlkemper, Altmire, 
Clarke, Bright, Halvorson, Graves, Bartlett, Luetkemeyer, 
Thompson, and Coffman.
    Chairwoman Velazquez. I call this hearing of the Small 
Business Committee to order.
    As Supreme Court Justice Brandeis famously said, Sunshine 
is the best disinfectant. To make sure oversight is a priority, 
the House has adopted Rule 11 which requires hearings on waste, 
fraud, abuse and mismanagement of programs under the 
committee's jurisdiction.
    Accountability is critical to the legislative process, and 
it is something that our committee has consistently worked to 
promote. In the last 2 years alone, we have held several 
oversight hearings on issues ranging from the Katrina disaster 
assistance to fraud in contracting. That is a track record we 
are going to continue in the new Congress, starting with 
today's review of GAO's HUBZone investigation.
    When first introduced, the HUBZone program promised to 
create opportunities for small businesses in low-income 
communities. It was designed to do this by helping 
entrepreneurs access the Federal marketplace. In theory, the 
benefits will be twofold; HUBZones will not only bolster the 
small business community, but will also breathe new life into 
struggling neighborhoods.
    However, the program has been undermined by chronic 
underfunding, inherent program flaws and sloppy management. 
Instead of being incubators for growth and development, 
HUBZones have become breeding grounds for fraud and abuse. This 
afternoon's hearing will focus on a new GAO report on the 
HUBZone program, the findings of which are nothing short of 
appalling.
    Unfortunately, HUBZone fraud is nothing new. Last Congress 
concerns on the part of both this committee and the business 
community prompted a General Accounting Office audit, an 
investigation. What GAO found was that the majority of the 
HUBZone businesses it reviewed in the D.C. area were ineligible 
and yet somehow these companies managed to collect over $100 
million in Federal contracts. Those are funds that should have 
gone to deserving small businesses.
    During last year's hearing on the matter, it quickly became 
clear that the HUBZone program was not only dysfunctional, it 
was riddled with fraud. Apologists claim these incidents were 
isolated. They argued that most HUBZone businesses played by 
the rules and said the program shouldn't be blamed for a few 
bad apples. To see if this was, in fact, the case, we requested 
a broader investigation.
    The review which was carried out in four different regions 
across the country found that HUBZone abuse is not unique to 
Washington; rather, it is systemic. Today we will hear from GAO 
that the majority of the reviewed businesses were not even 
HUBZone eligible, and yet they received $30 million from the 
program.
    Eight months after our first HUBZone hearing, SBA still has 
no control over the initiative. As a result, tens of millions 
of dollars in HUBZone contracts have gone to unqualified 
businesses. That includes $27 million that went to businesses 
GAO has already identified as ineligible in its report of July. 
Because SBA failed to act, those companies continued to receive 
contracts that were never rightfully theirs.
    Abuse of a Federal program is never a good thing. Today, in 
light of the billions of stimulus dollars about to enter the 
Federal marketplace, we need to be more vigilant than ever. It 
is critical that small businesses have a level playing field 
and that taxpayer money gets the most bang for the buck. As 
important as it is to provide expanded opportunities to 
entrepreneurs, we just cannot allow a program so vitally flawed 
to continue.
    It is time for SBA to make a decision, either overhaul the 
program or scrap it completely. This committee is no longer 
going to tolerate the excuse, "We are working on it," while 
hardworking small businesses who have played by the rules are 
being cheated out of opportunities.
    I would like to thank all of the witnesses in advance for 
their testimony.
    And, with that, I yield to Ranking Member Graves for his 
opening statement.
    Mr. Graves. Good afternoon, and thank you for participating 
in this hearing--oversight hearing of the Small Business 
Administration's programs. And as always, Madam Chair, I 
appreciate your holding this important hearing.
    One of the primary goals of the Small Business Act was to 
ensure that small businesses receive a fair portion of 
contracts offered by the Federal Government. This is important 
because small businesses have lower overhead; they can provide 
goods and services to the Federal Government as efficiently, if 
not more so, than larger competitors. In addition, providing 
small businesses with their fair share of Federal contracting 
opportunities will hasten the economic recovery. However, time 
and again, the government fails to reach its contracting goals.
    The government continues to bundle contracts that only 
large businesses can obtain, and we find that various 
contracting programs open themselves up to abuse and the 
possibility of fraud.
    We need to focus efforts on improving the government 
contracting process. This includes preventing inappropriate 
contract bundling and eliminating the potential for fraud and 
abuse, including the HUBZone program.
    As we all know, the HUBZone program was created to 
stimulate the economies of economically depressed areas by 
awarding qualified HUBZone participants with Federal contracts. 
However, recent investigations by the Government Accountability 
Office demonstrate that the program is susceptible to abuse and 
the possibility of widespread fraud. The studies are alarming 
and the SBA's response has been inadequate.
    What is worse is that contracts given to firms ineligible 
for the program undermine the ability for legitimate HUBZone 
firms to win contracts. In turn, this diminishes the 
effectiveness of the program and revitalizing the economically 
depressed areas.
    I look forward to hearing the testimony today from our 
witnesses. I want to learn a whole lot more about the progress 
they have made in addressing these problems; and if I don't 
feel like enough is being done, I can assure you that I will 
take a much more aggressive approach to righting this ship.
    Again, I want to thank you, Madam Chair, for holding this 
hearing and I look forward to working with you and other 
Members of Congress, the GAO and the SBA to rid the HUBZone 
program of the abuse.
    Chairwoman Velazquez. Thank you, Mr. Graves.
    Chairwoman Velazquez. And I welcome the first witness. Mr. 
Darryl Hairston. He is the Acting Administrator of the Small 
Business Administration. He has served the Agency over the past 
30 years in a variety of senior executive positions.
    The SBA was created in 1953 as an independent agency of the 
Federal Government to aid, counsel, assist and address small 
business concerns.
    Welcome.

STATEMENT OF DARRYL HAIRSTON, ACTING ADMINISTRATOR, U.S. SMALL 
                    BUSINESS ADMINISTRATION

    Mr. Hairston. Thank you, Chairwoman Velazquez, Ranking 
Member Graves and other distinguished members of the committee. 
I appreciate the opportunity to testify today in connection 
with the committee's hearing on waste, fraud and abuse in 
government programs.
    As a Federal agency with an $88 billion loan portfolio, the 
principles of stewardship, transparency and accountability are 
essential to the integrity of the programs and the operations 
of the Small Business Administration. With the recent passage 
of the American Recovery and Reinvestment Act, as well as the 
fiscal year 2009 Omnibus Appropriations Act, Federal agencies 
will be held accountable not only for developing effective and 
efficient strategies for implementing the new statutory 
provisions, but also for the prudent stewardship of taxpayer 
dollars used for funding the programs authorized under these 
acts.
    The SBA takes its ongoing responsibility to guard against 
and to prevent waste, fraud and abuse in its programs very 
seriously. Ensuring the proper controls are in place is crucial 
to the Agency's ability to implement and administer its 
programs in an environment that inhibits fraud, waste and 
abuse.
    Madam Chairwoman, our management team recognizes that there 
is always a need for improvement in the way we conduct our 
business and the way we intend to address properly the 
recommendations contained in the GAO report released today. I 
am pleased to tell the committee that our commitment to better 
serving small businesses and aspiring entrepreneurs via our 
HUBZone program remains strong. We are continuing our thorough 
review and testing evaluation of all aspects of the program.
    Where applicable, we have established new internal 
operating procedures. These revised controls, as well as the 
establishment of new ones, I believe provide that level of 
accountability and transparency that Americans expect of their 
government and which all of us here at SBA are committed to 
achieving.
    All of us at SBA recognize the important oversight role 
provided by the Office of the Inspector General and the 
Government Accountability Office in identifying waste, fraud 
and abuse in government programs. I want to assure you and the 
members of the committee that we are working diligently to 
implement recommendations contained in the GAO and IG reports 
that identified waste, fraud and abuse in SBA programs.
    Let me briefly provide you with a summary of important 
actions taken today. With respect to SBA's HUBZone program, the 
GAO issued a report in June entitled Additional Actions Are 
Needed to Certify and Monitor HUBZone Businesses and Assess 
Program Results. The report identified potential waste, fraud 
and abuse by identifying firms participating in the HUBZone 
program that may not have met program eligibility requirements.
    Over the last 8 months since the report was issued, SBA has 
developed new procedures for evaluating all applications, re-
certifications and program examinations. SBA is collecting 
supporting documentation from all firms that seek HUBZone 
certification or wish to maintain their HUBZone status.
    While these procedures have impacted our processing times, 
we believe they are helping to reduce incorrectly certified 
firms. For example, from July 2008 to March 2009 only 22 
percent of the applications submitted were certified while 77 
percent were withdrawn or declined. During the same period a 
year ago, 66 percent of the applications submitted were 
certified while 33 percent were withdrawn or declined.
    SBA is also in the process of reviewing its current program 
regulations to determine whether changes can be made to further 
strengthen its certification procedures to help mitigate waste, 
fraud and abuse as well as reduce accidental mistakes. In 
addition, if the HUBZone program office believes it has 
sufficient evidence that any firm willfully attempted to 
misrepresent its HUBZone status, the program will forward those 
firms to the SBA's suspension and debarment official and to the 
IG, as appropriate.
    Regarding the issue of keeping the HUBZone maps current, 
SBA has developed a specific timetable and procedure to ensure 
that HUBZone maps remain current. The SBA's HUBZone maps were 
last updated on September 13. The SBA intends to update the 
maps again by April as a result of new data it has received.
    On July 17, SBA testified that it was beginning a process 
of reviewing possible suspension and debarment of 10 firms 
originally identified by the GAO report entitled SBA's Control 
Weaknesses Expose the Government to Fraud and Abuse. GAO 
originally referred 10 firms to SBA's IG. In September, SBA's 
IG forwarded the files to the HUBZone program office so that 
they could begin its examination process. Investigations of 
these 10 firms revealed that at least three of the firms that 
GAO believed to be ineligible for the program were, in fact, 
eligible; of the remaining seven firms, only three are still in 
the program and are currently undergoing program examinations 
for possible decertification.
    All firms noted by the GAO have been investigated and 
examined by the SBA or are currently being investigated and 
examined, keeping in mind that there are due process 
considerations for firms under examination. The firms that have 
been referred to SBA suspension and debarment officials are 
also being investigated by that office.
    Upon receipt of the GAO's files of its most recent 
investigation, SBA will take appropriate enforcement action on 
the firms we find to violate HUBZone program requirements. 
These enforcement actions will include, where applicable, 
removal, decertification from the program and coordination with 
SBA's Inspector General and the SBA's suspension and debarment 
official.
    Chairwoman Velazquez and other distinguished members of 
this committee, thank you again for your opportunity to testify 
today in connection with the committee's hearing on waste, 
fraud and abuse in government programs. I am happy to answer 
any questions you may have.
    Chairwoman Velazquez. Thank you, Mr. Hairston.
    [The statement of Mr. Hairston is included in the appendix 
at page 32.]
    Chairwoman Velazquez. Our next witness, Mr. Bill Shear, 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. It also oversees 
the management of community development programs.
    Welcome, sir.

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

    Mr. Shear. Thank you. Madam Chairwoman, Representative 
Graves, and members of the committee, it is a pleasure to be 
here today to discuss our work on the HUBZone program. My 
statement today is based on work we performed to update the 
recommendations we made in our June 2008 report and reiterated 
in our July 2008 testimony before this committee.
    SBA has recently initiated some steps as part of a 
reengineering effort to address the HUBZone program's 
deficiencies and implement our recommendations. I will 
summarize these steps for each recommendation we made in our 
June report.
    First, SBA's HUBZone map used to determine firms 
eligibility was inaccurate, and we recommended that the Agency 
fix the inadequacies and ensure that the map remains accurate. 
SBA updated its map in September 2008; however, SBA does not 
have a process to ensure that the map remains accurate.
    Second, we stated that SBA's mechanisms for certifying and 
monitoring firms provided limited assurance that only eligible 
firms are participating in the program. We recommended that SBA 
develop and implement guidance to more routinely and 
consistently obtain supporting documentation and conduct more 
frequent site visits to ensure that firms are eligible.
    SBA issued a guide for analysts to use when reviewing 
applications. And since July 2008 SBA has requested supporting 
documentation from each new applicant. However, SBA has not 
conducted more frequent site visits to verify the information 
received from firms. As of March 2009, SBA has conducted seven 
site visits this fiscal year.
    Third, SBA has not followed its policy of recertifying 
firms every 3 years. As a result, there was a backlog of more 
than 4,600 firms that had went unmonitored for more than 3 
years. We recommended that the Agency eliminate the backlog and 
take the necessary steps to ensure recertifications are 
completed in a more timely fashion.
    In September 2008, SBA used additional staff to eliminate 
the backlog of recertifications, but it has yet to implement 
necessary procedures to ensure that future recertifications are 
completed in a timely fashion.
    Fourth, we found that SBA lacked a formal policy and time 
frames for decertifying firms. And many firms were not 
decertified within the informal goal of 60 days. We recommended 
that SBA formalize its 60-day goal and adhere to it.
    In December 2008, SBA issued a procedural notice that 
formalized a 60-day time frame for processing firms for 
decertification. We do not yet know whether staff are adhering 
to this policy.
    Finally, we also found that SBA had not implemented plans 
to assess the effectiveness of the HUBZone program, and we 
recommended that the Agency develop performance measures and 
implement plans to assess its effectiveness.
    In August 2008, SBA issued a notice of methodology in the 
Federal Register for measuring the impact of the program. The 
methodology was not well developed, and we do not believe that 
the effort was a useful process to address our recommendation.
    Because the Agency has not evaluated the HUBZone program's 
benefits, SBA continues to lack key information that could help 
it better manage the program and inform the Congress of its 
results.
    It is a pleasure to present our work before this committee. 
I would be glad to answer any questions.
    Chairwoman Velazquez. Thank you, Mr. Shear.
    [The statement of Mr. Shear is included in the appendix at 
page 39.]
    Chairwoman Velazquez. 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 investigated abuses of Hurricane Katrina 
relief dollars, border security, and overtime and minimum wage 
complaints among other topics.
    Welcome.

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

    Mr. Kutz. Madam Chairwoman, members of the committee, thank 
you for the opportunity to discuss the HUBZone program.
    Last year I testified that this program was highly 
vulnerable to fraud and abuse, citing 10 cases here in the 
Washington, D.C., area. My testimony today has two parts. 
First, I will discuss our investigation of cases outside of the 
D.C. area, and second, I will discuss SBA's actions to address 
fraud and abuse.
    First, we identified 19 additional cases of HUBZone fraud 
in Alabama, California and Texas. These firms received $30 
million of HUBZone contracts. In all 19 cases, these firms 
recently made false statements regarding their program 
eligibility.
    The following three cases give you a flavor for the types 
of fraud that we identified. First, one Alabama contractor 
listed their principal office as being in a HUBZone, which, as 
you know, is a key program requirement. However, as shown on 
the monitor, this office was actually a residential trailer 
reported to SBA as being "Suite No. 19." The person actually 
living in this trailer had no apparent relationship to this 
company. The real principal office for this company was 90 
miles away and not in a HUBZone.
    Second, a Texas HUBZone firm was being used as a front for 
large companies. This services firm was required to perform at 
least 50 percent of the work using HUBZone employees. However, 
our work showed that between 71 and 89 percent of the work was 
actually being subcontracted out. The owner told us that 
HUBZone firms like hers are used by large companies as 
contracting vehicles.
    And third, only 5 of 38, or 13 percent, of a California 
company's employees lived in a HUBZone. This firm falsely 
represented that it met the requirement that 35 percent of its 
employees live in a HUBZone.
    I can't project these 19 cases to all HUBZone firms. 
However, these 19 cases, along with the 10 from my testimony 
last year, clearly show that the potential for fraud in this 
program is substantial. As of January 2009, there were 9,300 
firms listed as being eligible for this program. It is not hard 
to imagine that hundreds or perhaps thousands of these firms 
are not eligible for this program.
    Moving on to my second point. SBA does not have an 
effective fraud prevention program. The good news is that SBA 
recognizes this and is taking steps to implement an effective 
program. The bad news is that they are closer to the beginning 
than the end of this process. An effective fraud prevention 
program includes prevention, monitoring and investigations with 
consequences. Prevention is clearly the most important element 
of the program. SBA has recognized this and, as was mentioned 
by the other witness, has an interim process in place to screen 
applications. However, this process was not adequately field 
tested and, thus, has had some unintended consequences.
    Due at least in part to the lack of staffing, this process 
has resulted in a backlog of about 800 applications as of 
January 2009. I would describe this as a growing pain of moving 
from what was in essence a self-certification process to what 
hopefully will be an effective fraud prevention program.
    In addition to the recommendations we made last year, we 
are making four new recommendations in a report we are 
releasing today. One of the key recommendations is for SBA to 
use unannounced site visits. As we have developed our 29 fraud 
cases over the last year, it is clear that for site visits, the 
element of surprise is critical.
    For example, in the case I just described, our surprise 
visit revealed that no company employees actually worked in 
trailer No. 19. The picture on the monitor shows the row of 
mailboxes outside of this trailer as they appeared during our 
site visit. The next picture on the monitor shows the shiny new 
mailbox that appeared with the company name on it shortly after 
our surprise visit. According to the United States Postal 
Service, this mailbox is not a deliverable address.
    This case clearly shows the kind of deception that owners 
will use and the value of a surprise site visit.
    In conclusion, as was mentioned, it appears that fraud and 
abuse in this program exists across the country. The victims of 
this fraud include the American taxpayer, legitimate HUBZone 
firms, and the communities that were supposed to benefit from 
this program.
    Perhaps the most troubling fraud scheme is the use of 
HUBZone firms as a front to funnel money to large companies.
    Madam Chairwoman, I want to commend you and the committee 
for taking steps today to clean up this program.
    That ends my statement. I look forward to your questions
    Chairwoman Velazquez. Thank you Mr. Kutz.
    [The statement of Mr. Kutz is included in the appendix at 
page 51.]
    Chairman Velazquez. I would like to start by asking my 
first question to Mr. Hairston.
    Mr. Hairston, at the last hearing I asked whether the level 
of fraud warranted the suspension of the HUBZone program. 
Administrator Carranza's answer at the time was "no" and that 
steps will be taken to eliminate fraud.
    Today, we have found out that several companies identified 
last year are still in the program and have since then received 
$25 million in new HUBZone set-aside contracts. Added to this, 
the fraud in the program now appears national in scope.
    I am going to ask this question to you, and I am going to 
ask this question again. Will you make a commitment to suspend 
the HUBZone program until fraud controls are in place and all 
companies with a HUBZone contract can be verified?
    Mr. Hairston. Madam Chairwoman I don't have the authority 
to make the decision to suspend the HUBZone program. What I can 
do today is to commit to you that we will take the proper steps 
to make sure that we have the proper risk management framework 
in place to mitigate fraud, waste and abuse in the program.
    But the decision to suspend the program is one that would 
be a decision that would certainly--
    Chairwoman Velazquez. That is enough. That is enough, Mr. 
Hairston.
    Mr. Shear, the SBA testified in July that they will take 
several steps to fix the problems with the HUBZone program as 
identified by the GAO. As this chart shows, very little has 
been accomplished. Why is that?
    Mr. Shear. I would say that the Agency did not recognize 
the commitment that was necessary to address these very serious 
deficiencies and to implement our recommendations.
    Chairwoman Velazquez. Mr. Kutz, during last July's hearing, 
SBA testified that its goal was to perform site visits on 5 
percent of the HUBZone programs, firms. Today, we hear that the 
SBA is performing 1.8 site visits per month and has done only 7 
this year. That is less than a quarter of 1 percent of the 
10,000 firms in the program.
    Is that a sufficient deterrent to fraud?
    Mr. Kutz. No.
    Chairwoman Velazquez. Administrator Hairston, why is the 
SBA doing less than what the Agency promised back in July?
    Mr. Hairston. Well, I am not clear on what the Agency 
promised at that time. But I can tell you that the office is 
working aggressively to put in place new procedures--
    Chairwoman Velazquez. Did you review--excuse me one second.
    I guess that if I was you sitting at the chair, and I know 
that I have to come and testify before this committee, I would 
review the congressional records of last year in July when this 
issue was discussed in the hearing, whether the administrator 
made a commitment to this committee and then you will assess 
whether or not steps have been taken to make the corrections.
    Mr. Hairston. Well, I did, in fact, review the record, and 
I don't recall seeing anything regarding--specifically 
regarding a commitment on site visits. And she very well may 
have made that commitment, but I am saying I did not actually 
see it myself.
    But I do know that they have undertaken aggressive 
procedures. They have implemented--they are undergoing right 
now a business process--reengineering process where they are 
looking at all of the elements of the program and they are 
establishing the necessary corrections, the necessary 
improvements to mitigate the fraud and abuse in the program.
    We take this very seriously. We take the notion of prudent 
stewardship over the program very seriously, and we are 
approaching this matter very seriously
    Chairwoman Velazquez. Mr. Kutz, what type of site visits 
should SBA be performing and how often?
    Mr. Kutz. They should perform site visits, first of all, in 
the application process, at least on a risk basis, if you will. 
And they should be unannounced; they should not tell them they 
are coming. If we had told the company with the shiny new 
mailbox we were coming, the mailbox would have been there 
before we showed up, rather than after we showed up.
    If you show up on a surprise basis, mail is stuffed under 
the door, you talk to the neighbors, no one has been here in 
months. That is what you get with the unannounced site visits. 
If you tell them you are coming, then you have a problem.
    In the program examination, I think you have the same 
situation. Once they get in the program, again on a risk basis, 
unannounced, randomly you should be actually going out and 
checking what is really going on.
    Chairwoman Velazquez. Of the HUBZone businesses that you 
spoke to, it seems many were not worried about meeting 
eligibility requirements.
    The silver mailbox you alluded to is symptomatic of a 
cavalier attitude. Do you think these businesses' attitudes 
reflect an awareness that punishment by SBA is a remote, if 
nonexistent, possibility?
    Mr. Kutz. No, I don't think they think that there is a 
serious enforcement at this point. Some of them admitted to us 
what they did. They are not going to say they committed fraud, 
but effectively they did.
    I think--if you let me read a few examples for you, I think 
you will see the pattern here. One of our cases admitted to 
bidding and accepting large HUBZone contracts, the firm 
couldn't perform without significant subcontracting.
    Another one admitted subcontracting the majority of their 
work to other firms or individuals. This was a services firm.
    Another one admitted noncompliance with the principal 
office requirement. Another one admitted they listed the 
principal office for proposal writing and nobody actually 
worked in the office except one person. And another one 
admitted that they kept a listed principal office only to meet 
the HUBZone requirement.
    And so I think you see the kind of attitude out there. I 
don't think they think they will ever get caught; and if they 
get caught, as we have seen, there is no serious punishment.
    Chairwoman Velazquez. Based on your investigations, can you 
provide this committee with an estimate of the number or 
percentage of fraudulent firms operating in the HUBZone 
nationwide?
    Mr. Kutz. Only with the ones we have looked at. We have 
only really looked at the principal office and 35 percent 
residency requirements. Of the ones we have looked at, again, 
they were based upon data mining and certain characteristics of 
certain cities, such as Washington, San Diego and San Antonio, 
that it was over 50 percent of the ones we looked at.
    The 50 percent subcontractor requirement, we weren't 
looking for that, but it actually popped out with several of 
the cases we had where it was very clear that the work was 
being done not by a HUBZone company, but by large, in many 
cases multinational, firms that were doing well over half the 
work.
    Chairwoman Velazquez. I am going to recognize Mr. Graves. 
And then we will come to a second round where we will continue 
to pose questions.
    Mr. Graves. Thank you, Madam Chair.
    Mr. Hairston, last summer I contacted the SBA, and it was 
to inquire about the status of a petition, a protest that was 
filed by a constituent of mine, and it was regarding a HUBZone 
contract; and I have yet to hear back from the SBA. That was 
last summer.
    I was just curious how long it typically takes to 
investigate a HUBZone firm when a protest has been made. And I 
would like for you all to get back with me on that.
    Mr. Hairston. Typically, a protest should be handled within 
a very short period of time, within a matter of several days. 
Generally, a protest procedure takes place in about 7 days, so 
you should have received a response.
    There is no defense for you not receiving a response 
regarding a protest or at least an acknowledgement of the 
outcome of the examination of the protest.
    Mr. Graves. Well, it was last summer. I actually followed 
up with the--after the constituent made the protest. And like I 
say, it is not them necessarily that hasn't heard, because they 
haven't either; but I was a little surprised that I haven't 
heard from the SBA on it. That was a little alarming, 
particularly given, you know, some of the things that I have 
heard.
    Another question is, you know, is there any evidence that 
suggests that the HUBZone program is meeting its objectives of 
economic development?
    Mr. Hairston. From the metrics--from the metrics that we 
are actually maintaining, it would appear that there are, in 
fact, some jobs being created as a consequence of the program 
and that some legitimate HUBZone firms are, in fact, receiving 
contracting activity.
    When we look at the contracting activity for 2008, our 
records show that there were approximately $10.4 billion of 
awards that were labeled HUBZone. Of that amount, it was only 
12 percent that were actually awarded through the HUBZone 
vehicle, which was about $1.8 billion.
    The remaining awards were actually agencies' multiple 
counting of awards where awards may have gone either on a 
competitive basis or awards may have gone through the Section 
8(a) program. But based on those awards they were counting 
them--because the firm was both an 8(a) firm or a HUBZone firm, 
they were, in fact, counting them in both categories. So the 
main indicator we have right now is job creation.
    We recognize that we need much better metrics. And we are, 
in fact, in the process of developing much better metrics to 
determine, to be able to better report on whether the firms and 
the program are actually accomplishing the intent of the 
statute.
    Mr. Graves. Mr. Shear, I would ask you the same question.
    Mr. Shear. There are metrics to measure the benefits of the 
program. The performance measures used are things such as 
applications processed, examinations performed. So let me take 
the first one, applications processed.
    You can see with what we observe here, it is especially of 
concern because it is saying, every application that gets 
through the gate is something that adds to the metric. The 
effort to try to develop metrics--it really wasn't a useful 
process; and the Agency is basically starting over.
    They stated that they have hired an economist to work on 
developing metrics, and we have encouraged them to reach out to 
us and to others. And we told them that should happen soon.
    Mr. Graves. Last question. In last summer's GAO report, it 
is suggested that the HUBZone maps were inaccurate; and I would 
ask what steps have been taken to improve this and how 
regularly are they updated?
    Mr. Hairston. We are actually working right now to put a 
contract in place to ensure that the maps are updated on a 
regular basis. We update the maps once we receive information 
from the various agencies that provide information to us that 
impact the maps.
    Those agencies include the Department of Housing and Urban 
Development, the Department of Defense, the Department of 
Interior, the Office of Management and Budget, and several 
other agencies that provide information that actually have an 
impact on designating HUBZones. And we are putting a vehicle in 
place to make certain that as that information flows in, those 
maps will be updated.
    And we just recently received information from the 
Department of Housing and Urban Development and OMB; and as a 
consequence of that, we will be updating the maps again in 
April.
    Mr. Graves. Okay.
    Well, I would appreciate it if you have whoever on your 
staff handles the inquiries, at least from congressional 
offices, and you get back with me on last year's--
    Mr. Hairston. I can assure you, I will follow up on that 
one.
    Chairwoman Velazquez. Mr. Bright.
    Mr. Bright. It is really not a question, just amazement at 
what I am hearing here today. And I don't know how to resolve 
the problem. I am a new Member, by the way, for the people here 
giving us testimony.
    But we are experiencing tremendous waste in our government, 
fraud and abuse today. And to me, this is a prime example of 
what we need to do as a Small Business Committee to alleviate 
this and not a year down the road. We need to do it ASAP.
    So I appreciate your testimony today. And Mr. Hairston, I 
appreciate your testimony, but I think you are the one that we 
are all looking at today to hear what you are going to do 
immediately before we take some type of drastic vote up here to 
alleviate or to reduce or to seriously curtail this program.
    So I just ask you--I mean, what is your take on what I have 
heard here? And you really don't have to say anything else. I 
am astounded. I feel very much like I felt the other day when I 
heard these tremendous bonuses being given out to the AIG 
people.
    So, Mr. Hairston, what can you say to give me a little 
comfort today that you are doing whatever you possibly can to 
alleviate this fraud and misuse and abuse of taxpayers' dollars 
out there?
    You know, the small businesses make up 70 to 80 percent of 
our jobs out there. Sometimes we get focused on the huge 
corporate projects out there, and we lose focus on our small 
business.
    But SBA could be the stabilizing factor for our economy; 
and for me to hear this, I am floored, I am astonished, I am 
very disappointed. It is another, I guess, burden that we have 
to see on taxpayers out there, that we have got to put a stop 
to.
    So, Mr. Hairston, I would like to hear what you feel--as a 
result of letting me, as a new Member of this Congress and this 
committee, how can you appease and satisfy me that we should 
not today take a vote to terminate this program right away?
    Mr. Hairston. Well, as I indicated before, we take this 
matter very seriously.
    Mr. Bright. You should. I hope you would.
    Mr. Hairston. We don't disagree with the majority of the 
findings of the GAO report. We recognize that there is a lack 
of a real risk management structure around that program.
    But we also recognize that it is something that we can't 
put all the fixes in place overnight. But we know it is 
necessary that we take aggressive steps and that we do it in an 
urgent manner to put the proper risk management framework in 
place.
    Mr. Bright. Let me interrupt you and just ask you--I mean, 
this has been going on for a year at least, I can see. I am not 
hearing from these gentlemen over here that you have taken any 
drastic action to curtail this abuse and this waste.
    Mr. Hairston. Well, we have actually taken some steps. We 
have taken some preliminary steps; but we don't want to rush 
into trying to fix a problem and actually waste more resources 
and more time not appropriately fixing the problem.
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Bright. Yes, I will.
    Chairwoman Velazquez. Wasn't it recommended that onsite 
visits is a quite effective tool for deterrence? How many 
visits have you conducted in fiscal year 2009? Out of 10,000 
firms, how many?
    Mr. Hairston. I think the number that was stated earlier 
was seven, and that is the number that was reported to me also.
    Chairwoman Velazquez. Seven.
    Mr. Hairston. And that is one of the courses of action that 
are being planned, that we will be conducting more onsite 
visits.
    Chairwoman Velazquez. Thank you for yielding.
    Mr. Bright. Are you attempting in any form or fashion at 
looking at criminal prosecution or even civil fraud against 
these agencies who are taking the money?
    Mr. Hairston. Well, in the cases that we are reviewing 
where we find that that seems to be an appropriate step, we are 
following the proper course. We are referring those cases to 
our Office of Inspector General.
    Mr. Bright. Have you any number to give us today of people 
you have done that to?
    Mr. Hairston. Actually, I think we have--I am not certain 
how many, in fact, were referred to the Office of the Inspector 
General.
    I think all of the cases have been reviewed by the Office 
of the Inspector General. I know we have referred seven for a 
potential debarment, suspension and debarment through the 
normal suspension and debarment process.
    Mr. Kutz. Congressman, I think they got declinations on all 
10 from U.S. attorneys. So they are not going to get 
prosecutions; they are looking at civil. And, of course, only 
four of these so far have been decertified by SBA.
    Mr. Bright. Wow. Thank you.
    Mr. Hairston. And I think of three we found to be eligible.
    Mr. Bright. I will close with the last few moments I have 
here and say this: Something needs to be done. It needs to be 
done right away. This is another case of waste, fraud and abuse 
that needs to be terminated ASAP.
    And, Madam Chairman, I will yield back the remainder of my 
time. But I am very, very concerned about what I have heard 
here in the last 30 minutes.
    Chairwoman Velazquez. Using your time, Mr. Bright, if you 
will yield before--I would like to ask Mr. Kutz, how many 
people have been referred for prosecution from GAO as a result 
of an investigation?
    Mr. Kutz. Well, we sent the 10 last year to the IG and they 
got a declaration.
    Chairwoman Velazquez. How many have been initiated 
independently from that investigation by SBA?
    Mr. Kutz. From suspension and debarment, none, we 
understand.
    Chairwoman Velazquez. Thank you.
    Ms. Clarke.
    Ms. Clarke. Thank you very much, Madam Chairwoman.
    Chairwoman Velazquez. Oh, I am sorry. I am sorry.
    I am sorry, Mr. Bartlett.
    Mr. Bartlett. I think the gentleman to my right was here 
before I was.
    Chairwoman Velazquez. Mr. Thompson.
    Mr. Thompson. Thank you, Madam Chairman. And thank you, 
Ranking Member Graves, for holding this important hearing today 
in terms of oversight of the SBA and its programs.
    You know, we have been tasked with ensuring that the small 
businesses of America, our national economic engine, receive a 
fair portion of Federal procurement programs in order to 
purchase goods and services and keep government and military in 
day-to-day operations. Certainly now, more than ever, during 
this time of fiscal constraints, we as a committee need to be 
vigilant of the taxpayers' dollars that fuel the SBA 
procurement programs.
    With that said, we must be equally concerned with the 
proper oversight that is in place with the additional stimulus 
funds that are leaving the Treasury. And also we need to make 
sure that these funds are used in a way that will benefit the 
small business operators and are done in a timely manner.
    We need to ensure the small businesses are actually 
recipients of the funding designated for small businesses. I am 
alarmed, as my colleagues have indicated, to learn that the SBA 
does not check to make sure that a business actually qualifies 
for status as a HUBZone firm. In turn, this keeps contract 
officers from having the tools to verify the contractors' 
status.
    The HUBZone program was designated to provide Federal 
contracting opportunities for qualified small businesses 
located in distressed areas; and the last thing our government 
agencies need to be doing is further assisting the 
misappropriation of funds that are designated for these 
distressed areas and creating further impediments to the true 
intent and mission of the HUBZones.
    With that said, Mr. Hairston, several questions to start 
with. Why only 1.8 visits per month? Why only 7? What were the 
barriers? What was the decision-making that--when this was 
obviously a recommendation that had come from this committee 
previously?
    Mr. Hairston. It is just a matter of implementing the 
process and identifying the resources to complete the task.
    Mr. Thompson. What resources were missing to--
    Mr. Hairston. Well, what we are doing is, we are--as a plan 
of action, we are engaging our field staff to help us to 
actually conduct field visits.
    The review process of the application actually takes place 
in our headquarters location here in Washington, D.C. And 
obviously most of these firms are located out among the States 
where our field offices are located. And using our field staff 
to actually go out and conduct site visits for us.
    And you will see an increase in those site visits, a 
substantial increase.
    Mr. Thompson. Does the SBA contact contracting officers and 
agencies when questionable behavior in the HUBZone program is 
reported, so that the contracting officers can take appropriate 
action?
    Mr. Hairston. We would only contact a contracting officer 
if--in the event there was--in fact, there was a formal action 
taken. If the firm were to be debarred or suspended, then the 
contracting community would be put on notice. Conversely, if a 
contracting officer were to become aware of some fraudulent 
activity, particularly with respect to the failure to comply 
with the 50 percent subcontracting limitation requirement, then 
we would expect that they would contact us to notify us that a 
firm was not, in fact, complying with that particular 
requirement. And we would certainly hope that they would do 
that.
    Mr. Thompson. Madam Chairwoman, I will yield back my time 
at this point
    Chairwoman Velazquez. Thank you.
    Ms. Clarke.
    Ms. Clarke. Thank you very much, Madam Chairwoman and 
Ranking Member Graves. Thank you for holding this oversight 
hearing on the HUBZone program.
    In the last Congress you had a similar hearing that 
discovered many problems with this program. And I applaud your 
vigilance of this critical issue.
    As we are all aware, the HUBZone program encourages small 
businesses to locate in and hire from the Nation's most 
distressed communities. And it is hard to get firms to locate 
in distressed areas with low incomes and high unemployment. The 
HUBZone program offers an incentive to make it worthwhile to 
take a chance on rejuvenating a distressed area.
    If properly implemented, the program has the possibility to 
create thousands of new jobs in the locations needing jobs the 
most. This is extremely important during these tough economic 
times.
    So once again, I commend you, Madam Chair, for holding this 
hearing today to see how we can prevent future fraud, waste and 
abuse in a program that can be beneficial not only to my 
district, but many other districts across this Nation.
    Mr. Hairston, this first question is for you. Since the SBA 
has failed to recertify more than 40 percent of the firms that 
have been in the program for more than 3 years, according to 
last year's GAO report, the SBA noted that the HUBZone program 
had obtained additional staff and that the pending backlog of 
recertifications would be completed by September 30, 2008.
    Can you let this committee know today how you intend to 
prevent future recertification backlogs and make sure that it 
happens in a timely manner? And do you have any assessment 
process in place to identify any future backlogs?
    Mr. Hairston. In fact that is a process that is under way 
now as part of our business process reengineering. We recognize 
now that it is going to take us longer to process applications 
than we were processing them before.
    We were trying to process applications within a 30-day time 
frame; and we recognize that that just opens us up to too many 
possibilities of abuse of the program, that we will have to 
spend more time in terms of the certification process.
    And, again, with the recertification process, that will 
become a priority of the program that recertifications are 
absolutely necessary; and it will have to establish guidelines 
and time frames to make sure that they are done and that they 
are done appropriately. We expect to have that process 
completed by the end of this fiscal year. And hopefully we will 
have that framework in place sooner rather than later so that 
we can move forward in a prudent manner and with respect to the 
oversight of the program.
    Ms. Clarke. So you don't really have a concrete time frame 
in place as of yet?
    Mr. Hairston. At this point, we are actually working with a 
contractor; and we plan to work with GAO and we plan to work 
with our Inspector General to make sure that we are putting the 
proper procedures in place. We are hoping to do that as quickly 
as we possibly can. We don't have a time frame at this point to 
say when it will actually be completed.
    Ms. Clarke. Would you get back to this committee as soon as 
you sort of have a good sense of that? Because, of course, you 
know that a recertification is very important to many of these 
companies that are trying to do right by our communities. And 
it could be quite interruptive for them if unanticipated delays 
pop up. So I hope that you will get back to us on that.
    Ms. Clarke. I would also like to touch upon the 8(a) 
program. In your written testimony you stated that the Office 
of Business Development created an online tutorial to ensure 
that potential applicants understood and understand the 8(a) 
participation requirements. But according to Mr. Shear's GAO 
report, released in November of 2008, he recommended that for 
8(a) applicants to fully understand their realistic 
expectations, there needs to be an education requirement such 
as a seminar or an assessment tool.
    Do you intend to take further steps to ensure that firms 
applying for the program understand the 8(a) program 
requirements and have realistic expectations for participation, 
as the report suggested?
    Mr. Hairston. Those education seminars are conducted 
routinely throughout the country by our district offices. That 
is an ongoing process.
    Ms. Clarke. So you are not relying solely on these online 
tutorials?
    Mr. Hairston. No.
    Ms. Clarke. Thank you very much, Madam Chair. I yield back 
the balance of my time
    Chairwoman Velazquez. Thank you.
    And we are going to be in recess until the end of this set 
of votes. We have three votes.
    [Recess.][3:36 p.m.]
    Chairwoman Velazquez. The Committee is called back to 
order.
    Mr. Bartlett.
    Mr. Bartlett. Thank you very much.
    I am pleased you are going to have a second round of 
questions and comments, because I want to participate further 
than just this one brief 5 minutes.
    Clearly, there is inadequate supervision of this program 
and inadequate punishment when bad guys sin. We need to have a 
punishment that will discourage--there is a $500 fine for 
riding in the HOV. Not very many people ride in the HOV, 
because there is a huge punishment for that. We need to have a 
harsh punishment for this. We are not going to do it, but if 
you hung the first person who did it, nobody else would ever do 
it, would they? And we need to have a punishment that just 
discourages people from doing it.
    These aren't stupid people. These are opportunists that are 
taking advantage of the system, and we not to encourage them 
not to do that.
    I am very familiar with the HUBZone program because the 
first HUBZone contract ever was in my district. It was Garrett 
Container in Garrett County. Don Morin runs it, a great young 
entrepreneur; and they provide a lot of very good jobs there 
doing very important work for the government.
    But there is another one of my companies that I want to 
talk about which I think is exemplary of what HUBZones ought to 
do, and this is Sycamore Associates. A great name. Who is the 
Bible character that went up a sycamore tree and came down a 
Christian? Went up there a heathen and came down a Christian.
    So he is a very ethical person. He started in a little 
HUBZone in Frederick. It wasn't big enough. He had to grow. So 
he moved out to Garrett County.
    I have three counties in Appalachia, 14 percent 
unemployment when I came to office. Really Appalachia. And 
great business out there. His people out there get three times 
the average salary out there, and he pays his people out there 
two-thirds as much as he pays them--they do contract work for 
NSA. NSA is very, very fond of them.
    He pays his people out there two-thirds as much as he pays 
them in Howard County when they live near NSA. So he can now 
hire three people out there to do the same work that two people 
are doing in Howard County because it is just a whole lot 
cheaper place to use.
    So this is exemplary of what HUBZones ought to do, and I am 
really angry that these people are abusing the system. Because 
every one of these cheaters takes money away from a great 
company like Sycamore Associates and Kurt Heckman who runs that 
company that are providing really good jobs and really 
uplifting the area.
    All of Garrett County is a HUBZone because they have, as I 
said, 14 percent unemployment when I came to office and very 
low salaries. His people make at least three times the average 
salary. So this is doing exactly what HUBZones are supposed to 
do.
    Does SBA not adequately manage just because you don't have 
the resources?
    Mr. Hairston. Well, let me say, first and foremost, that I 
agree with you wholeheartedly that we should be about 
eradicating that bad element from the program. We 
wholeheartedly agree that a lack of enforcement leads to 
further abuse. We are approaching that issue from that 
perspective, and I hope everyone understands that we recognize 
the types of steps that need to be taken.
    Mr. Bartlett. But you are not taking them because you just 
don't have the resources?
    Mr. Hairston. I was going to finish. I was going to say we 
recognize what needs to be done, and we know the type of proper 
oversight and the types of things we need to put in place. But 
we also recognize--and that is why we are going through this 
planning process--that it is going to add a substantial burden 
in terms of cost to how we conduct oversight over this program 
and the costs associated with doing that.
    Mr. Bartlett. So it is partly our fault because we didn't 
give you the money to grow your staff so that you could have 
the--
    Now, my understanding is that the initial surveillance of 
this program is supposed to be self-policing. I know one small 
businessperson who is sitting in the audience who has done a 
really great job of self-policing. He understood that that is 
what was expected. Nobody knows better who the cheater is than 
the good guy who lost because the winner was a cheater. And we 
expected that they would come forward as self-policing. That 
costs the taxpayer nothing. But I don't think we did a very 
good job of telling the HUBZone community that that is what we 
expected, did we?
    Mr. Hairston. I am not certain that it works very well in 
this environment. We find that, while self-policing has worked 
in other programs that allow for self-certifications of a sort, 
we have found that, more recently, firms are afraid of 
offending contract officials by filing protests.
    Mr. Bartlett. See, that is our fault. We need to tell them 
that they are going to be applauded for filing a protest when 
it is a legitimate protest, not going to be punished for it. We 
just didn't properly advertise that.
    We have got to do one of two things. Either the community 
know that we really expect self-policing and they are not going 
to be punished for it, they are going to be rewarded for it. We 
have to give you enough money so you can police the program, 
right?
    Mr. Hairston. Yes, sir.
    Mr. Bartlett. Thank you very much, Madam Chairman.
    Chairwoman Velazquez. Mrs. Dahlkemper.
    Mrs. Dahlkemper. Thank you, Madam Chair, and I want to 
thank you for bringing this really important hearing before us 
today.
    As Mr. Bright said earlier, I am a new Member of Congress, 
and I have never been in elected office before. I am out there 
in the private sector running my business and knowing that not 
everybody plays by the rules. But in my business, we do. And 
thinking that the government, whether it is Federal, State or 
local, is there protecting my interest, both as a 
businessperson and as a citizen, to make sure that those who 
are not playing by the rules are somehow punished for this and 
that our taxpayer dollars are not being used fraudulently, as 
obviously they are.
    I have so many questions here, but I am sure my outrage is 
felt by many others, including those businesses who are doing 
the right thing and who are using this program for the right 
reasons who may end up losing that privilege to use this 
program because of those people who have been cheating.
    I guess my question, Mr. Kutz and Mr. Shear, do you have 
any idea how much money of the taxpayer dollars has been lost 
since we had the first hearing?
    Mr. Kutz. There is at least $25 million that was awarded to 
some of the 10 contractors we identified last July, including 
one of the most egregious cases that got a $23 million award 
subsequent to the July, 2008, hearing. So I would consider that 
to be additional fraud by those same companies.
    Mrs. Dahlkemper. And what percentage--I know you have kind 
of talked about this before, but you have only touched a few 
companies and the percentage of fraud that you think might be 
going on within this company.
    Mr. Kutz. I don't know that. I mean, we did not necessarily 
randomly sample. We actually picked certain areas that were 
vulnerable to the principal office and the 35 percent rule, 
although we weren't looking for the other thing about the 
subcontracting. So 50 plus percent of what we looked at so far. 
I don't believe that is the likely majority of the companies 
are not eligible.
    However, it appears that there has been no real oversight 
for quite some time. And I think we have an admitted self-
certification process for the first X number of years of this 
program; and they are trying to move from self-certification 
now to actually putting a program in place, which is why you 
have difficulty going from advocacy to enforcement.
    Mrs. Dahlkemper. I think that number would be very 
interesting, but it would probably be so scary I am not so sure 
we want to know, but sitting here listening, I just wonder what 
that figure is, what that figure is over the course of this 
program and how much money of the taxpayer dollars has been 
fraudulently taken from us.
    I guess my concern, Mr. Hairston, as we go forward here--
first of all, it has really become clear that the SBA did not 
do their due diligence from the last hearing to today. As we go 
forward, we also are looking at a fair amount of money going 
out from the recovery package to the SBA. And, obviously, as a 
new Member who voted for that package, who believes in that 
package, I am very, very concerned about your ability--your 
agency's ability to monitor that money. Can you give me any 
reassurance about that?
    Mr. Hairston. Well, I think we are, in fact, doing our due 
diligence now as we go forward. We have done our due diligence 
on the cases that have been referred. We fully intend to 
aggressively do our due diligence on the cases that are being 
referred by the report that is released today.
    We expect that we will be meeting with the GAO and our IG 
and our general counsel within the next week or so to get the 
names of those companies so that we can start that process; 
and, going forward, we will continue to implement procedures to 
further mitigate risk in the program.
    As I said before, we recognize that there is a huge risk 
here. We also recognize that putting the proper protocols in 
place to address that will be an additional cost burden for 
this program, and we need to plan how we need to do that and 
what those resources really are.
    Mrs. Dahlkemper. What kind of transparency are you going to 
have for us, for the American public?
    Mr. Hairston. Transparency for the American public in terms 
of--
    Mrs. Dahlkemper. I would like to see transparency in this 
program. Certainly as we go forward in terms of the recovery 
package. But I would like to see some transparency so that we 
can--
    Mr. Hairston. That is something we can certainly consider 
in this process, how we can be very transparent and how we go 
about conducting ourselves in this matter.
    Mrs. Dahlkemper. I yield back. Thank you.
    Chairwoman Velazquez. Mr. Bartlett, do you still have some 
questions?
    Mr. Bartlett. After you, Madam Chair. You wanted a second 
round.
    Chairwoman Velazquez. I do. Yes. Thank you.
    Mr. Kutz--oh, sorry. Mrs. Halvorson.
    Mrs. Halvorson. I know I am sitting way over here in my 
seat. But thank you, Madam Chairman. I do have a couple of 
questions.
    But, first of all, I would like to follow up on what 
Congressman Bartlett's question was; and this is for Mr. Shear 
and Mr. Kutz. Do you believe that the SBA has the staff levels 
and the funding that is going to be required to implement some 
of the reforms that have been suggested? Because as I hear and 
I work with a lot of the different committees, I am hearing the 
same things over: We need help. We don't have enough funding. 
We are doing what we can.
    What is going on? And what is it that you suggest? And do 
we have enough staffing levels to do what we need to have done?
    Mr. Kutz. I would say--I will let Mr. Shear add, too--it is 
not just people. I think it is better processes and better use 
of technology. It is a combination of all three factors.
    I have met with SBA officials in January for over an hour, 
with their consultants, to give them kind of a brain dump of 
the kinds of things they should consider. But the kind of 
processes we have talked about here, the random, unannounced 
site visits; and they are still not doing those. And that is 
something they should be able to do fairly quickly. We did 36 
of those as part of this investigation ourselves with several 
people. So we did 36 ourselves.
    The technology issue is, do they have the kind of tools 
technology-wise to do some of the actual kinds of preliminary 
work that you would do before you actually go out and do a site 
visit or to help you with your risk assessment?
    So our recommendations to them include all three elements 
of that.
    Chairwoman Velazquez. Would the gentlelady yield for a 
second?
    Mrs. Halvorson. Yes.
    Chairwoman Velazquez. I understand that the SBA program was 
shut down, was closed; and you moved 12 people from that 
program to the HUBZone. Have you seen this--this happened last 
September.
    Mr. Hairston. Yes, I believe so.
    Chairwoman Velazquez. Did you see any progress regarding 
on-site visits or an acceleration of processes?
    Mr. Kutz. I can't answer on the program examination side. 
Apparently, they have made progress on program examinations.
    But, on site visits, if they have only done seven this 
fiscal year, we did 36 for our investigation. So I don't think 
seven is enough. And I don't know how many people they have at 
this point. But if they have seven people, they should be able 
to do more than one a month, for example.
    Chairwoman Velazquez. Mr. Hairston, I will give you more 
time, but I just cannot allow for this to go and not being able 
to ask you, what will it take? This is taxpayer's money. So 
with much less manpower, they have conducted many more visits. 
Yet you put 12 people added to the program and still--what is 
the problem?
    Mr. Hairston. I would assume, first and foremost, that, 
from a manpower standpoint and from the standpoint of the 
prioritization of their resources, that is their job. That is 
what they do. That is what they are in business to do, is to go 
out and do that type of forensic investigation.
    From our perspective, I don't know that the HUBZone office 
set its priorities to support that type of an activity. That is 
something that needs to be looked at, and that is something 
that needs to be corrected.
    Chairwoman Velazquez. But aren't you concerned that this 
Committee and the administration, that we are going to put 
pressure to close down this program?
    Mr. Hairston. Obviously, I am concerned. I am concerned 
about the program.
    Chairwoman Velazquez. For the record, let me read to you 
from the congressional hearing that we conducted last 
September. You came here. I asked you specifically about Ms. 
Carranza's, the former Administrator, commitment to do on-site 
visits. And you said, well, I am not aware that she made such a 
commitment. So let me read to you what she said to this 
Committee:
    In response to the findings of the GAO forensic 
investigation, which we learned about last week, I have taken 
many steps to require site visits for those HUBZone firms that 
have received HUBZone contracts.
    I yield back. Thank you.
    Mrs. Halvorson. Thank you, Madam Chairman. And just to 
reiterate--and I appreciate the conversation. I represent a 
district that probably could all use the HUBZone funding, low 
income, high poverty rate, high unemployment. Parts of my 
district have 14 percent unemployment rates, and I would hate 
to see that people that don't qualify get this kind of funding 
when we don't even have people in these towns that probably 
know even how to apply for this. So I am going to work hard, my 
staff and I, to help them.
    And I just don't want to see that there are people who are 
abusing the system. And what I found in my short amount of time 
in this body and 12 years prior in Illinois was I think we have 
enough laws, we have enough programs, but we don't have enough 
funding and staff to enforce what we have. This is our life, 
and I would hope that you would take it seriously as we go back 
to do what it is that we all agreed to do. Because the people 
are not benefiting. The wrong people are.
    So I would help wherever I can. I offer myself and my staff 
to make sure that whatever it is we are doing that we do in the 
right way. Because the people that live in my district in 
Illinois are suffering because they are not getting this kind 
of funding, and they are the ones that truly should. Because in 
some parts of my district, they don't even have blacktop roads. 
They have gravel and sand and propane. They don't even have 
natural gas. So I would really get frustrated if I knew that 
people in the wrong places were getting this kind of funding.
    I yield back. Thank you.
    Chairwoman Velazquez. Mr. Kutz, last year GAO's fraud 
investigators created four phantom companies, including two 
with mailboxes as a principal office and a third with a 
Starbucks as the principal office. Are these four companies 
still listed as eligible HUBZone firms?
    Mr. Kutz. As of 8:00 a.m. this morning, yes.
    Chairwoman Velazquez. Administrator Hairston, why was the 
SBA unable to even find the phony HUBZone firm at a Starbucks? 
Why weren't you able to?
    Mr. Hairston. Well, I am sure if, in fact, those firms are 
in the system now, that there is a process ongoing to remove 
them. There is a decertification process. I would hope that 
that process is under way. I can get that information back to 
you.
    Mr. Kutz. But they are not being decertified. No. I mean, 
we would have gotten notice. We haven't heard anything from SBA 
at this point.
    Chairwoman Velazquez. Isn't this firm the same one that was 
found to be ineligible last July?
    Mr. Kutz. No. Those are our four fake firms that we are 
talking about versus the one that actually got $23 million in 
new contracts. Our bogus firms are still in the system. 
Although we haven't competed for contracts, we are not willing 
to go that far with it at this point.
    Mr. Hairston. Yeah. And I would agree that they should not 
be there.
    Chairwoman Velazquez. Really? Ten cases were brought to 
your attention last year. Only two have been officially removed 
from the program, and none have been debarred today. I have 
read your testimony and your explanation for this. Given the 
seriousness of the violations, why did the SBA not choose to 
suspend these companies during the debarment process?
    Mr. Hairston. Because we don't have the authority under our 
regulations to suspend prior to a formal action. Differing from 
our 8-A program, under the regulations in our section--
    Chairwoman Velazquez. Is that correct?
    Mr. Kutz. No, that is not correct. You can suspend a 
company before there is a prosecution, an indictment, if you 
have sufficient evidence.
    Chairwoman Velazquez. And do you believe that there is 
sufficient evidence?
    Mr. Hairston. I would actually disagree with that. I would 
disagree with that, and our counsel would disagree with that. 
We don't have the authority. It is not specific in our 
regulations that we could actually suspend prior to a formal 
determination.
    We can do that in the 8-A program. We have specific 
requirements under our regulations in the 8-A program that 
allow us to do that, to preclude a firm from receiving benefits 
for which it is not eligible.
    Chairwoman Velazquez. I want your counsel to put that in 
writing for the record and send it to this Committee.
    Mr. Kutz. Madam Chair, I am talking about suspensions, not 
debarments. Debarments require a much longer process, but 
suspensions can be done without as much evidence. I mean, there 
is enough evidence in this case to decertify. Our position 
would be that they could be suspended.
    Mr. Hairston. We rely on our counsel who says that--
    Chairwoman Velazquez. That they cannot be suspended?
    Mr. Hairston. That there is an evidentiary procedure and 
standard that has to be met and that there is a due process 
afforded in that process. That is why I was explaining the 
difference between the authority we have under our 8-A program 
that differs from the authority we have under our HUBZone 
program. But we will provide you what you are asking for.
    [The information is included in the appendix at page 101.]
    Chairwoman Velazquez. Mr. Kutz, why do you believe that 
there have been so few referrals for either suspension or 
debarment?
    Mr. Kutz. As I mentioned before, because I think before you 
had more of a self-certification process. So, hopefully, if 
they are putting more stringent front-end controls in place, 
they will identify more cases that actually they would refer to 
the IG and that they would consider for suspension and 
debarment. So, hopefully, if you move from an environment of 
self-certification to one where you have got effective controls 
in place, you will come up with more examples.
    I would just say for the record, too, here--and I think Mr. 
Bartlett mentioned it, too, I think you have to make some 
examples of people. And if you don't make some examples of some 
people here, you are not going to have any change.
    So here we are nearly a year later from our hearing last 
July, and we have little or nothing that has happened to the 10 
cases before. And I would say some of those were egregious 
fraud cases that again I would say for the record could have 
been suspended by now. We are talking about 6 or 8 months after 
the last hearing. The fact that nothing has been done with some 
of those companies and they are still getting government 
contracts as HUBZone companies is not a good sign.
    Chairwoman Velazquez. Any comments to that?
    Mr. Hairston. Out of the 10 cases that were referred, I 
think I indicated that we found three of those firms to be 
eligible. Two of the firms were decertified.
    Chairwoman Velazquez. What about the other seven?
    Mr. Hairston. I am explaining that. Two of the firms were 
decertified, two of the firms withdrew from the program, and 
three are actually still under investigation. And seven have 
been referred for suspension and debarment.
    Chairwoman Velazquez. Mr. Kutz, did you get any information 
regarding the three firms that SBA claimed are eligible?
    Mr. Kutz. No. We have asked for information. The three 
cases were three cases, I believe, that they failed the 35 
percent, not the principal office requirement. At the time we 
looked at them, we determined, based upon payroll records that 
we received, that they did not meet the 35 percent. SBA has 
represented that they now do or at some point when they do the 
investigation they did. We asked for support for all three of 
those cases about 2 months ago, and we have not received it 
yet.
    Chairwoman Velazquez. Why is that?
    Mr. Hairston. I will find out. I don't know the answer to 
that. I wasn't aware that that request had been made, but I 
will find out why they haven't gotten the information.
    Chairwoman Velazquez. Mr. Graves.
    Mr. Bartlett.
    Mr. Bartlett. Thank you very much.
    Is the only punishment here debarment?
    Mr. Hairston. Actually, suspension and debarment
    Mr. Bartlett. That is the only punishment?
    Mr. Hairston. No. Actually, the only other punishment would 
be decertification and then referral for some type of criminal 
prosecution.
    Mr. Bartlett. Has that ever happened?
    Mr. Hairston. Not that I am aware of.
    Mr. Bartlett. This reminds me of the illegal immigrants and 
the border. If all you do is get sent home, why not try again 
tomorrow? By and by, you will be successful.
    If the only thing you do is debar them, that is not 
punishment enough. Is it our fault that you don't have harsh 
enough punishment to dissuade these people?
    Mr. Hairston. No, I think there were cases that were 
referred for criminals, but they were denied.
    Mr. Bartlett. What is the maximum punishment that could be 
meted out to these people? Can GAO tell us?
    Mr. Kutz. Well, certainly. These people all made false 
statements. Title 18, Section 1001. If you can get a U.S. 
attorney to take a case, you could prosecute a case in that 
particular situation. Now, the U.S. Attorney declined the case 
that Mr. Hairston is talking about here.
    Mr. Bartlett. They have bigger fish to fry?
    Mr. Kutz. Apparently.
    Mr. Bartlett. We have got to do something.
    Mr. Kutz. That is something the Committee could decide to 
do, is work with some U.S. attorneys to see if they could get a 
few poster-children cases to go through the criminal system. 
And that is something--maybe you should consider that.
    Mr. Bartlett. If we had a few of those, it would stop this 
thing. This is such a valuable program.
    I just want to note again my personal experience with that. 
The first one in the country was Garrett Container out in 
Garrett County, 14 percent unemployment. And then they have a 
lot of people working there doing a really good job and they 
make shipping containers for our military. They are doing a 
doubly good job supporting the military and supporting the 
economy there.
    And then when Sycamore Associates went out there, wow, that 
really was revolutionary. Because they have a number of people 
there making three times the mean average salary there. But 
they are paying them only two-thirds as much as they would need 
to pay them if they were--
    By the way, they give them a choice. They have a job for 
them in Howard County for $100,000 or a job for them for 65 or 
$70,000 in Garrett County. They take the job in Garrett County 
because, the truth is, you will live better in Garrett County 
with $65,000 than you will in Howard County for $100,000.
    So we are saving--now NSA can have three analysts where 
before they could only have two analysts. So this is really, 
really good for my district, for Garrett County, because they 
are paying them three times as much as the average person who 
works there.
    Look at all of the people down the line that are better off 
because of that, all of the industries that serve them, the 
service station, the cleaners, the drugstore, the restaurant 
they go to and so forth. All of that. And we are really saving 
the taxpayer a lot of money because--and GSA is very fond of 
this because now they get three employees where before they 
could only support two employees.
    So this is a great example of what these HUBZone companies 
ought to be doing; and I am just incensed, Madam Chairman, that 
we have these cheaters out there.
    And I know one of our small businesspeople who is here in 
the audience who has been very successful in protesting. He 
knew that is what he was supposed to do. And he had one person 
that was awarded the contract. He had absolutely no capability. 
All he had was a townhouse. And, obviously, you protest that. 
He couldn't have possibly performed on it, but he was awarded 
the contract anyhow by this government Agency.
    So our small businessperson protested that, and the protest 
was upheld. Then there was a second one, and he protested that, 
and that was upheld. So the system does work, but these small 
businesspeople don't know that that is what they are supposed 
to do.
    So we now have all these egregious cheaters out there, and 
we need to do a couple of things. Either we need to let the 
community know that they are supposed to self-police, or we 
need to give you enough resources so you can police them. And 
we sure as heck ought to have a punishment that fits the crime 
so that they are dissuaded from do--and we have done none of 
that.
    Madam Chairman, almost a year ago we sat here. And here we 
are today, and it sounds like Groundhog Day all over again. It 
is the same kind of thing that we were hearing a year ago.
    We need to give you more money, we need to tell the 
community they need to self-police, and we really need to have 
an adequate punishment. We need to have a few examples out 
there so you won't do it.
    Any argument that we need to do those things?
    Mr. Kutz. No. Again, I think--as you said, I believe that 
if you have some examples out there of serious punishment that 
that will send a message.
    Mr. Bartlett. Yeah, some jail time.
    Mr. Kutz. Yes.
    Mr. Bartlett. That gets around very quickly, doesn't it?
    Well, the people who are now offenders, they knew that 
there wasn't going to be much--it needs to be people that come 
in and offend from now on. You can't really--it is ex post 
facto, and it is unconstitutional. And the general knowledge 
was that there wasn't going to be any serious punishment for 
this. So a huge gain possible, so why not do it? We need to 
make that very nonproductive for them, don't we?
    Thank you very much. Thank you, Madam Chairman.
    Chairwoman Velazquez. Mr. Graves.
    Mr. Graves. How often does a business have to recertify if 
they are in a HUBZone?
    Mr. Hairston. Every 3 years.
    Mr. Graves. Can't you just withhold certification, too, if 
they turn out to be fraudulent?
    Mr. Hairston. During the recertification process? Yeah, 
they can--
    Mr. Graves. But you would have to actually go check and see 
if they are the real deal?
    Mr. Hairston. We are supposed to, yes.
    Mr. Kutz. Congressman, can I also add to that? In addition 
to recertifying for a HUBZone, they also recertify certain key 
facts on line annually. So when I mentioned in my opening 
statement that many of these companies--all 19 have made recent 
false statements. They all certified that they were HUBZone-
eligible during periods that we determined that they were not. 
Not the SBA, but as part of our on-line overall contracting 
certification program.
    Chairwoman Velazquez. Mr. Bartlett, I just would like to 
remind the Committee that we passed the HUBZone reform through 
the House with overwhelming support. So we are just not here 
waiting for SBA to do what they are not doing. Let me state--
    Mr. Bartlett. Madam Chair, did we give them the resources? 
Giving them the responsibility without the resources--
    Chairwoman Velazquez. Well, the Committee passed the 
budget, and we are providing the resources. Yes.
    Mr. Bartlett. They are telling us they don't have the 
resources.
    Chairwoman Velazquez. No, no. In the budget that we passed 
here and that the Committee reported out--but, don't forget, 
for the last 8 years, yes, their budget has been cut by almost 
40 percent. We are trying to restore some of the money.
    Mr. Bartlett. We can't fault them for what is our fault, if 
we gave them the responsibility and not the resources.
    Chairwoman Velazquez. Well, it is a new day in Washington.
    Mr. Hairston, let me just say this. I am extremely, 
extremely disappointed for the lack of progress. And my message 
to SBA is clear. You have a decision to make, whether or not 
you are committed to this program. And then the Committee has a 
decision to make regarding the future of the program.
    With that, let me ask unanimous consent that members will 
have 5 days to submit a statement and supporting materials for 
the record.
    Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 4:06 p.m., the Committee was adjourned.]

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