[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
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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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