[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
NOVEMBER 18, 2009
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 111-055
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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 W. 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 W. 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, North Carolina, 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
Mills, Hon. Karen, Administrator, U.S. Small Business
Administration................................................. 4
Kutz, Mr. Gregory, Managing Director, Forensics Audits and
Special Investigations, U.S. Government Accountability Office.. 6
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 27
Graves, Hon. Sam................................................. 29
Mills, Hon. Karen, Administrator, U.S. Small Business
Administration................................................. 31
Kutz, Mr. Gregory, Managing Director, Forensics Audits and
Special Investigations, U.S. Government Accountability Office.. 33
Statements for the Record:
Government Accountability Office, Report on Service-Disabled
Veteran-Owned Small Business Program........................... 48
U.S. Small Business Administration, Recovery Act Report Card,
October 2009................................................... 87
Small Business Administration Response to Questions for the
Record......................................................... 91
(v)
FULL COMMITTEE HEARING ON
OVERSIGHT OF THE SMALL BUSINESS
ADMINISTRATION AND ITS PROGRAMS
Thursday, November 19, 2009
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360 Rayburn House Office Building, Hon. Nydia Velazquez
[chairman of the Committee] presiding.
Present: Representatives Velazquez, Dahlkemper, Schrader,
Nye, Altmire, Ellsworth, Graves, Bartlett, Akin, King, Fallin,
Buchanan, Luetkemeyer, Thompson and Coffman.
Chairwoman Velazquez. This hearing is now called to order.
In the 111th Congress, the House has made an unprecedented
commitment to transparency. Under the Speaker's direction, the
House has adopted Rule 11 which requires quarterly hearings on
fraud, waste, abuse, and mismanagement of programs under
committee jurisdiction.
I am proud to say that the Small Business Committee has
gone above and beyond that requirement. Since January, we have
conducted no fewer than 16 oversight hearings. Today's
discussion marks the third in a series we have held with GAO
and SBA this year and give us an opportunity to gauge the state
of the agency's program.
These hearings are an important took for measuring progress
and gathering information. In the past, they have been
enormously useful not just for spotting SBA problem areas, but
also for solving them.
In July, we met to examine disaster loans, a program that
has been mired in controversy sine Hurricane Katrina. That
discussion generated a number of recommendations for
improvement and, importantly, was the impetus behind the Small
Business Disaster Readiness and Reform Act introduced by
Representative Parker Griffith.
SBA programs have always been a lifeline for struggling
small firms. In light of the current downturn, they are more
important than ever. These are initiatives that encourage
greater competition in the marketplace and yield significant
returns on the taxpayer dollar.
Even more importantly they help create jobs. Small firms
generate roughly 70 percent of new positions, and investment in
these ventures is a downpayment for job growth. That is why it
is so important for SBA's program to be running at full
capacity.
In past oversight hearings, however, GAO has shed light on
some struggling areas in the agency's contracting portfolio. At
our oversight hearing in May, GAO helped us identify
considerable fraud within the HUBZONE program. In some cases,
big businesses had gamed the system to win small business
contracts. In other instances, firms in wealthy neighborhoods
had posed as struggling ventures with HUBZONE addresses.
In all cases, we knew just what we were looking at: the
fleecing of America's entrepreneurs. And, unfortunately, it
seems to be happening to some of our most vulnerable instances.
Fraud within the federal marketplace is never an acceptable
thing, but it is particularly troubling when it comes at the
expense of our veterans. The Disabled Veterans Contracting
Program was established as a means of empowering these men and
women.
With unemployment for severely disabled soldiers at 85
percent, it is particularly important today. Entrepreneurship
offers a kind of financial independence that other livelihoods
cannot. We need to be sure it remains a viable option for our
veterans, the men and women who have served our country so
well. These brave Americans have more than earned their shot at
entrepreneurship.
And yet we know we now have reason to believe that disabled
veterans program is being exploited by an unscrupulous few
dishonest businesses that have cheated out veterans of
countless opportunities. This sort of abuse is more than a
simple injustice. It is criminal, and it needs to be addressed
immediately, not weeks or months down the road.
The Committee is not only going to look for ways to support
the disabled veterans contracting program, but to hold these
individuals accountable who have sought to game the system at
the expense of our nation's veterans.
In times of economic turmoil, small firms have always
relied on the SBA. Even if it means tremendous uncertainty, the
agency has stood as a beacon of stability. It is critical that
it continue to play that stabilizing role. Just as our economy
is counting on small businesses to lead the recovery, small
businesses are counting on SBA for strength and support. We
cannot afford to let them down.
I would like to thank our witnesses, including
Administrator Mills, for being here this morning, and I would
also like to recognize Mr. Kutz for helping to compile today's
reporter. GAO has been an invaluable resource to this Committee
in the past, and I am grateful for their hard work and
dedication to transparency.
With that I will yield to Ranking Member Graves for his
opening statement.
Mr. Graves. Thank you, Madam Chair, and thank you for
holding this hearing today on oversight of small business, the
SBA and its programs, and I look forward to hearing the insight
of all the witnesses today.
Thank you, Administrator, for coming in. I appreciate it.
The Small Business Administration oversees a variety of
programs, including procurement initiatives designed to
increase growth of small businesses. This Committee has a
responsibility to insure that these programs operate to the
benefit of small businesses, including the ones directed at
specific groups, such as the service disabled veterans.
The Small Business Act requires that small businesses
receive their fair share of opportunities to provide goods and
services in the $434 billion federal contracting marketplace.
Congress then decided that within this segment of small
businesses, those owned by service disabled veterans deserve
extra assistance for the sacrifices that they have made to
defend this country. No one can deny that this assistance is
deserved.
It is then troubling to find out that the program is
subject to fraud. The investigation that will be discussed at
this hearing reveals that some firms are not performing the
contracts. Instead, they are having the goods and services
supplied by large businesses.
In other cases, businesses are not owned by service
disabled veterans. The underlying problem, as it was with the
HUBZONE program is the ability of small businesses to self-
certify eligibility for the program without any independent
checks by the SBA.
By itself the fraud would be problematic. However, it is
more troubling that firms ineligible for the program then deny
firms that are eligible for contracts. The firms denied
contracts are those owned by individuals who made significant
sacrifices in defending this country, and it is simply
unacceptable.
I look forward to hearing the testimony today and learning
about the steps that are being taken to address this problem
when it comes to the fraud. If those actions do not prove
successful in insuring that service disabled small business
owners benefit from the program, then I would like to see
aggressive legislative action taken to do so.
Again, Madam Chairman, I appreciate you having this
hearing, and I look forward to the testimony
Chairwoman Velazquez. I now yield to Mr. Nye. He is the
chairman of the Contracting and Technology Subcommittee.
Mr. Nye. Thank you.
I would like to thank Chairwoman Velazquez and Ranking
Member Graves for holding this important hearing today.
Administrator Mills and Mr. Kutz, I would like to thank you
both for being here as well. I know you have been extremely
busy.
Administrator Mills, you just came on to lead the SBA this
spring, and unfortunately it seems you have stepped into a mess
of fraudulent contracting and abuse of federal American
taxpayer funds. I hope you will take on this issue as a top
priority and that this hearing will be helpful for all of us to
move forward on finding a solution to this problem.
It is my priority as chairman of the Contracting and
Technology Subcommittee to insure that contracts, especially
those set aside for our service disabled veterans who have
served and sacrificed for our country, are in fact given to
small business owners.
At the first hearing I held in my Subcommittee in March of
this year, before you were the Administrator, I addressed the
federal agencies on the issue of meeting their contracting
goals for service disabled veterans with recovery act funds.
You and I spoke a few weeks ago, Administrator Mills, in my
office, and you showed me a very promising report card on the
progress toward meeting our federal agency contracting goals,
and according to those numbers, it looked like the goal of
three percent for our service disabled veteran companies was
being exceeded by nearly a full percentage point.
However, on the basis of this report and today's testimony,
I am deeply concerned that those promising numbers could come
with a very large asterisk, and I am looking forward to hearing
both of your testimony today and to getting to the bottom of
this serious problem.
I yield back, Madam Chairwoman.
Chairwoman Velazquez. Is there any member from the minority
side that wishes to make an opening statement? If not, we are
going to proceed with the witnesses.
And it is my pleasure to welcome the Honorable Karen Mills.
She was sworn in April 6, 2009, as the 23rd Administrator of
the U.S. Small Business Administration.
Prior to being confirmed as SBA Administrator, Ms. Mills
most recently served as the President of MMP Group in
Brunswick, Maine.
The SBA helps small business owners and entrepreneurs
secure financing, technical assistance, training and fair
contracts. And because we have only two witnesses, I am going
to be flexible with the five minute rule. So welcome.
STATEMENT OF THE HONORABLE KAREN MILLS
Ms. Mills. Thank you, Madam Chair.
Chairwoman Velazquez, Ranking Member Graves, distinguished
members of the Committee, again, it is an honor to testify
before you. Thank you for your continued efforts to help
America's small businesses survive, grow, and lead us out of
this recession.
I want to thank the Chairwoman for speaking at yesterday's
Small Business Financing Forum--that we held with Secretary
Geithner at the Treasury. You said two things at that meeting
that I really found resonated. First, you said access to
capital equals access to opportunity. That statement rings true
given our efforts to help small businesses find the credit that
they need to create job.
And you also said at this conference that this conference
proved that small business is not an afterthought. I think this
is true not only for you, but for all the members of the
Committee and the administration. With the help of this
Committee, we are insuring that SBA programs provide maximum
value to small business owners.
At the same time, and this is really the subject that we
are here on today, we are committed to insuring that taxpayer
dollars are spent wisely, transparently, and effectively, with
proper risk management and oversight.
The Recovery Act is a strong example as a result of the 90
percent guarantee and the lowered fees in our two flagship
programs, we have engineered a turnaround in SBA lending.
Briefly, the SBA has supported more than $14 billion in lending
to small business since the Recovery Act was passed, with
recent months at levels that we have not seen since 2007. We
are above the 2008 mark.
Weekly loan volumes have risen 75 percent compared to the
weeks before the Recovery Act was passed, and we have here in
the back this report card what we describe as these numbers.
Most importantly, we have 1,250 lenders offering SBA loans who
had not made a loan since October of 2008, and about half of
them had not made a loan since 2007. This means more points of
access to capital for our small businesses, which is an
important priority for us.
So I want to thank the Committee for all that you did to
pass the Recovery Act. Our feedback from entrepreneurs, from
small business owners, the lending community has been extremely
positive. As the Chairwoman may have heard yesterday, the
lenders said that these loan enhancements help provide a
critical lifeline for small businesses that are having trouble
finding credit. We are going to continue to monitor these
programs using a robust risk management framework that we
established under the rules of the Recovery Act.
More broadly, the team at the SBA continues to address
outstanding and emerging areas of risk in a systematic way, and
we are focusing on the very helpful recommendations of the GAO
and of our IG. I am pleased to say one of the things I
committed to you last time is that we are going to take all of
those recommendations and work through them. We have reduced
open findings from our Inspector General by 47 percent over the
past 18 months, and in the past quarter alone we have reduced
the number of overdue open recommendation from 97 to 53, I am
taking this very seriously.
We are pleased also to have our new Inspector General on
board, Peggy Gustafson. Her work will help to continue to
insure that the SBA is transparent, it is efficient, and it is
meeting the needs of America's small business.
In addition, the SBA remains committed to strengthening our
lender oversight activities to eliminate fraud, waste, abuse
and mismanagement. Given the exposures our loan guarantees
represent to the taxpayers, my team's goal is to insure that we
have robust credit risk management system that includes
oversight and portfolio monitoring.
On the subject that the Chairwoman and Ranking Member
Graves raised today, and I know we're going to talk about, the
SBA is acutely aware that America is fighting two wars.
Thousands of our veterans are returning home. I want to thank
GAO for the report that they just released. We must make sure
that service disabled veterans have ample opportunities to
start and grow a business, including the opportunity to access
federal contracting.
Since I first came on board in April, we have begun an new
collaboration with the Veterans Administration leadership on
the critical issue of access to accurate and transparent data
regarding who is a service disabled veteran. Both the SBA and
the Veterans Administration have made this a top priority.
Second, we are working to make sure there is accountability
in this program. It is a subject we are going to talk about
today. The ten businesses described in this report have already
been referred to our IG. Make no mistake, if they are found to
be noncompliant, they will be debarred.
Overall we will continue to work with the VA to insure that
we have a system that works for veterans and is responsible to
taxpayers.
Finally, per the Chair's interest at our last hearing, I
just want to mention that we sent three reports to Congress
regarding our efforts with disaster preparedness and
assistance: the disaster recovery plan, the 2009 annual report
on disaster assistance, and the reports on federal contracts
awarded as a result of major disasters.
I should also mention that we have held two disaster
trainings for our field staff, and on a related note, we
released and heavily promoted--and I personally spent a long
time promoting--an H1N1 flu preparedness guide. It has been
very well received by thousands of small business owners. It
describes how they make a plan for their businesses in case
they have an issue with H1N1.
Overall my vision is that the SBA will continue to operate
in a way that will meet the expectations of Congress, small
businesses, and the American taxpayer. I look forward to
working with the distinguished members of this Committee to
make that happen. I welcome any questions, concerns, and
comments about any of our programs or efforts.
Thank you.
[The prepared statement of Ms. Mills is included in the
appendix.]
Chairwoman Velazquez. Thank you, Ms. Mills.
Our next witness is Mr. Greg Kutz. He is the Managing
Director of Forensics 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, sir.
STATEMENT OF GREGORY KUTZ
Mr. Kutz. Madam Chairwoman and members of the Committee,
thank you for the opportunity to discuss the service disabled,
veteran-owned small business program. This program honors
service disabled veterans for their incredible service and
sacrifice by providing contracting opportunities. Today's
testimony highlights the results of our investigation into
allegations of fraud and abuse in this program.
My testimony has two parts. First, I will discuss cases of
fraud and abuse, and second, I will discuss fraud prevention
controls.
First, we received over 100 allegations of fraud and abuse
for this program, and I will note that we stopped counting at
100. From these allegations we investigated ten cases which
often included a number of affiliated firms and joint ventures.
For these ten cases, we found that they received $100 million
of service disabled sole source and set-aside contracts using
various fraudulent schemes.
These case studies also received over $300 million of 8(a),
HUBZONE, and other federal contracts.
Key program eligibility requirements include, first, firms
must be at least 51 percent owned by one or more service
disabled veterans.
Second, the firm's day-to-day operations must be controlled
by the service disabled veteran or their caregiver.
Third, the firms must perform 15 to 50 percent of the work.
And, fourth, the firm must be a small business.
Examples of what we found include, first, a firm whose
owner was not a service disabled veteran. This firm
fraudulently received $7.5 million of FEMA contracts for
Hurricane Katrina and Rita trailer maintenance.
Second, a firm that subcontracted 100 percent of its work
to an international corporation headquartered in Denmark with
annual revenues of $12 billion. That is right, 12 billion with
a B.
Third, a construction firm with no assets and no employees
passing through work to an ineligible firm. The owner of this
shell company lived 80 miles away and managed a restaurant in
another city.
And, fourth, another shell company with, again, no assets
and no employees passed through a $900,000 contract to an
ineligible firm that delivered and installed the furniture. The
monitor shows the Shell company address which is the owner's
home. The owner of this company was actually a full-time
contract employee at MacDill Air Force Base, which awarded him
this contract.
What is discouraging about many of these cases is that
contracting officials were actively involved. For example, for
the MacDill Air Force Base furniture case, contracting
officials were aware of the shell company and that the owner
was actually a full-time contract employee at the base. The
base Director of Business Operations also told us that MacDill
had about $14 million of service disabled sole source and set-
aside contracts in 2008, and that 90 percent of the firms that
received these contracts were front companies for large
businesses.
Other contracting officials were not quite so candid. The
monitor shows a picture of portable toilets at Fort Irwin in
Texas. As you can see, the name of the non-service disabled
firm is blocked off from the picture. However, it is clear that
in cases like this, contracting officials know exactly who is
providing the service.
Moving on to my second point, there are no fraud prevention
controls in place for this program, and as our case studies
show, even individuals that lie about whether they are service
disabled veterans can receive millions of dollars of contracts.
The only thing resembling a control for this program is the SBA
bid protest process.
In fact, for four of our ten case studies, SBA determined
that these firms were ineligible for the program. However,
these firms were not only allowed to continue the contracts
they received fraudulently, but they also received new service
disabled, set-aside, and sole source contracts. And in no cases
did we see anybody, including SBA or any other agencies, that
have suspended or debarred anybody for fraud and abuse in this
program.
We are encouraged by the Veterans Administration's efforts
to set up a process to validate the eligibility of firms doing
business with the VA. We recommended that SBA, VA and OMB look
at the feasibility of expanding this validation process
government wide.
In conclusion, for just ten cases we identified $100
million of fraud and abuse. This multi-billion dollar small
business program has no controls and no consequences for the
few that are caught cheating. Unfortunately the victims of this
fraud are legitimate service disabled veterans that play by the
rules.
Madam Chairwoman, I applaud you and this Committee for
supporting veterans today, and I look forward to working with
all of you to help eliminate fraud and abuse from this
important program.
That ends my statement, and I look forward to all of your
questions.
[The prepared statement of Mr. Kutz is included in the
appendix.]
Chairwoman Velazquez. Thank you, Mr. Kutz.
Imagine being a veteran who is injured in Iraq or
Afghanistan, yet despite your injuries you still manage to
launch your own business. Then imagine finding out that you are
losing out on contracts designated for veterans because a big
company found out how to get around the rules.
What kind of message does that send to veterans in this
country? They have got to stop. So, Mr. Kutz, I know that you
talk about the fact that no fraud prevention controls exist for
this program at SBA. Can you tell us a brief outline of what
are some of the key elements of an effective fraud prevention
program?
Mr. Kutz. Yes, and I will give a highlight of it. There
should be prevention controls at the beginning to make sure the
people getting into the program are eligible. There should be
monitoring controls that once you are in the program that front
companies or shell companies are not passing through work, for
example, to large businesses. And at the end of the day, those
caught cheating need to have consequences: suspension,
debarment, and prosecution.
So you need all three of those elements working together
for an effective fraud program.
Chairwoman Velazquez. Administrator Mills, based on what we
just heard from GAO and recognizing the fraud that already
exists in this program, would you develop a process to certify
service disabled veteran owned small business?
Ms. Mills. Madam Chair, I want to thank the GAO for this
report. I think we completely agree and take with great concern
this particular report and this entire area of fraud, waste and
abuse. But particularly in this area of service disabled
veterans, there are 300,000 of these veterans coming home from
these two wars over the next several months. Twenty percent of
them are unemployed after two years. These veterans over-index
in entrepreneurship because they have great leadership.
Chairwoman Velazquez. Ms. Mills.
Ms. Mills. Yes.
Chairwoman Velazquez. I just would like for you to answer
my questions. Would you develop a process to certify?
Ms. Mills. So, therefore, we are looking at the three
approaches that Mr. Kutz just described. First, we need to make
sure that we have the eligibility right, and I think that was
your first point. So the eligibility has two prongs. One is are
you a service disabled veteran? The second is are you a
qualified small business?
We look at the qualified small business. We are partnering
with the VA because the Veterans Administration holds the
database that says whether or not they are service disabled
veterans. They are the ones who do the first prong of the
eligibility. So we are going to work with them to make sure we
have a combined program that services the two pieces of the
eligibility.
Then Mr. Kutz had a point about accountability, and that is
the other piece that we are committed to. As I said, these ten
particular examples cited by GAO have already been referred to
the IG. We are committed to making sure we hold everybody
accountable, and that has not been true in the past. That is a
change, and we will commit to go after anybody who is
noncompliant, and if they are not compliant, we will debar
them.
Chairwoman Velazquez. So, in essence, what you are saying
to this Committee today is that SBA is going to develop a
certified process, a process to certify disabled veterans.
Ms. Mills. The SBA is going to provide a process to make
sure we have the up front piece right in terms of eligibility
and work with our partners to make sure we have the right input
from the Veterans Administration. We're going to go after this
accountability issue.
Chairwoman Velazquez. Okay. Mr. Nye in his opening
statement made reference to the fact that you had a meeting
with him and was quite excited about the fact that the
contracting goals for disabled veterans were achieved. So in
light of this report, do you think that the SBA data could be
overstated now?
Ms. Mills. Right now the number is as Congressman Nye said.
Our goal is three percent. Our achievement in the recovery act
contracts is 3.8 percent. We are very pleased with that number,
but we share, given this data, the exact same concern. We need
to get to the bottom of this issue of fraud, waste, and abuse,
and we need to make sure that we have a real achievement of
three percent or greater.
Chairwoman Velazquez. Yes. Mr. Kutz, what are your views on
the matter of the contracting goals for disabled veterans being
overstated as a result of the investigation?
Mr. Kutz. I think they are overstated. I mean, for example,
the pass-through to the company in Denmark would have counted
as a success.
Chairwoman Velazquez. Ms. Mills, the economic downturn is
hitting Iraq and Afghanistan veterans particularly hard. There
is, as you mentioned, an unemployment rate above 11 percent,
and Congress never intended the SBA service disabled veterans
program to award contracts to non-veteran companies who are
less likely to hire veterans.
Given how high the veteran unemployment rate is, why hasn't
the agency done a better job to make sure these contracts
actually got to veterans?
Ms. Mills.I just want to understand your question.
Chairwoman Velazquez. In light of the report and given the
fact that job creation is a challenge for our economy and given
the fact that thousands of veterans are coming back from Iraq
and Afghanistan, that there is a high unemployment rate, that
you need to do a better job to make sure that the tools that we
put in place, this Committee, the Congress, to address the
issue of entrepreneurship among veterans coming back from Iraq
and Afghanistan is achieved. This report reflects quite poorly
in terms of making sure that those contracts that are awarded
really go to the people that they were intended to.
Ms. Mills. On the service disabled veteran contract piece,
as I said, this is a very important and helpful report, but you
are exactly right. These findings are unacceptable. We have to
make sure that the eligibility--that businesses are eligible
and that we hold them accountable if they are not.
In addition, we actually have a number of other programs
specifically for service disabled veterans. One I want to
highlight we announced last week. We are funding an expansion
in our entrepreneurial area of a boot camp for service disabled
veterans. It is built on a model that was done at Syracuse, an
extraordinary program. We're expanding it to Florida State, to
the University of Connecticut, to Purdue, to Texas A&M, and
UCLA in the next year.
And one of the things we will be able to do with these boot
camps and the veterans that we are working with is make sure
they get into this pipeline of contracts and ensure they
receive access to capital.
Mr. Kutz. Madam Chair, could I comment on that real
briefly?
Chairwoman Velazquez. Sure.
Mr. Kutz. I think one of the issues that you were getting
at here is that these veteran firms are not getting the
business. They are passing it through to either international
corporations or large businesses who are not going to hire
veterans. There is evidence to suggest that veteran owned firms
hire veterans.
And I think your point is does this affect employment of
veterans, and the answer in my view is yes.
Chairwoman Velazquez. Thank you.
Mr. Kutz, you mentioned that four of the ten case studies
in your report were protested through the SBA bid process and
found to be ineligible. What happened to these firms after they
were found to be ineligible by SBA?
Mr. Kutz. They continued with the contracts that they had
been awarded through fraud and in several of the cases they
continued to get new service disabled, sole source, and set-
aside contracts.
Chairwoman Velazquez. Were any of these firms recommended
for suspension or debarment?
Mr. Kutz. No.
Chairwoman Velazquez. In your opinion, if there is enough
evidence that will warrant such debarment or suspension?
Mr. Kutz. Certainly suspension since the bar is much lower
for suspension. Debarment is a very lengthy process, and it
requires a lot of due diligence. Suspension, yes, if SBA
themselves determined that someone was ineligible, one could
assume that there was a chance they could suspend them at least
for a period of time, and the point is to protect the rest of
the government from the fraudsters.
Chairwoman Velazquez. Mr. Graves.
And I will come back with more.
Mr. Graves. The examples that have been identified, has
anything been done to any of those firms?
Ms. Mills. Yes. All of those firms have been referred to
our IG. We are recommending that they be investigated and if
they are not eligible, that they be debarred. This is the
highest standard--debarrement.
Chairwoman Velazquez. Would you yield?
But how many of those ten that were found to be ineligible,
Mr. Kutz, have gotten more contracts?
Mr. Kutz. Virtually all of them, and some of them service
disabled veteran owned contracts.
Chairwoman Velazquez. So while the IAG, you refer them, and
thank you for yielding, there is any action by SBA to prevent
awards going to these companies that are ineligible?
Ms. Mills. Madam Chair, you hit exactly on the right note,
which is that this is the piece of it that we must prevent. The
contracts come out of the various agencies, and they are let by
these contract agents. We are determined to set a pattern where
if they have been proven or referred to be ineligible, that
there is accountability, and that clearly has not been the case
in these, and that is unacceptable.
Chairwoman Velazquez. Thank you for yielding.
Mr. Graves. Just to finish up with that, as far as at least
with these examples, let's just use these examples right now.
Are you letting other agencies know, you know, whether it is
Defense Department or whoever the case may be, about these
agencies and the problems obviously?
Are you doing that or is SBA taking the steps to make sure
that the other agencies are aware of this and you are obviously
investigating them and what is going on?
Mr. Kutz. We have, yes. We sent letters not only to SBA but
all of the affected agencies so they are aware of that, and our
evidence and work support is available to SBA and the Defense
Department, VA, whoever else was contracting with these people.
Mr. Graves. Is it a situation where they have to take the
initiative to look at it? Are you making sure that they see
that?
Mr. Kutz. Well, we cannot force them to do anything. I
mean, we send them the evidence, and it is their decision how
aggressively they want to pursue it, and that is something you
could potentially help us with.
Mr. Graves. All right. Thank you, Madam Chair.
Chairwoman Velazquez. Mr. Ellsworth.
Mr. Ellsworth. Thank you, Madam Chair. I thank the
witnesses for coming in.
Ms. Mills, I have heard you say ``disbar'' three or four
times as the goal. I heard Mr. Kutz say ``prosecution.'' Do you
have an aversion to prosecuting these bad actors, or I have not
heard you mention that word? Are you willing to go after and
prosecute the bad actors in this?
Ms. Mills. We are absolutely willing to go after the bad
actors in any way within our power. Generally prosecution is
handled by the Justice, but we are working very closely with
the IG to go after them in any way within our power and
collaborate with the GAO as well.
Mr. Ellsworth. I guess I am sitting here thinking about a
book I read in college about the hot stove theory, that if you
touch a stove it burns. It burns every time, and it burns hot.
If some of these people, I suppose, just change the name of the
company, go on and do something, another porta potty company
and change the name and redo the thing over, a couple of people
get some pretty big fines and/or spend a little time in a camp
or a federal prison, maybe they would think twice about doing
that.
Mr. Kutz, who does it right? Who, in your opinion? You have
done this a long time. You and I have had a lot of meetings
together on this exact same subject. Is there anybody of the
federal agencies that is doing it right, that has got the right
screening policy, that has the right measures in place that you
could point to and say, ``These are the guys that get it.
Everybody else needs to watch them''?
Mr. Kutz. Well, I will use FEMA as an example, and in the
Katrina and Rita disasters we did extensive testing and
identified 22,000 case of fraud and abuse just for one program.
So we gave FEMA a whole series of recommendations and they
implemented many of them. We went back and tested them again
for Ike and Gustav, and they did much better. Now, they were
not on apples and apples because they were much smaller
disasters, but FEMA made significant improvements in their
screening eligibility process to make sure if you gave them a
bogus Social Security number, whether it was by Internet or by
phone, they were not going to let you into the system. They
were actually checking to see that the address you used was in
a disaster zone, that you actually lived there before the
disaster hit. They weren't doing that for Katrina and Rita.
So that's an example of oversight. We had numerous hearings
on both the House and Senate side, and after several years
positive improvements were made. So I think this is something
that is not going to happen overnight, but we are certainly
willing to work with you and the SBA to make this happen over a
period of time.
Mr. Ellsworth. And the dollar figure I cannot remember.
What was the billion dollar figure that you used that this
added up to in small business?
Mr. Kutz. Well, $100 million for these ten companies of
just service disabled, but another three to $400 million of
8(a), HUBZONE, and other federal contracts, and so this is
fairly significant just for these ten cases.
Mr. Ellsworth. Okay. So hundreds of millions stolen from us
in these disabled veterans. Let's call it what it is. They've
stolen it from us. What do you need, Ms. Mills? Do we need more
detectives? Do we need more attorneys, more judges?
Because we can probably afford for those hundreds of
millions of dollars, we can afford more of whatever we need to
do this. If we need more investigators, I would rather cut the
budget on that, add it if it is manpower and stop it. It hurts
our veterans, but they are being stolen from anyway.
So what do we need? Is it people? Is it clerks?
Ms. Mills. Yes. We are looking at all of our programs
overall in terms of risk management because this has been a
pervasive issue that no one has gone after these issues in a
period of time, and as I testified the last time, it is not
acceptable. We are not going to be the agency of fraud, waste,
abuse and mismanagement.
So this requires a systematic approach across all of these
programs that we are implementing. We have begun to collaborate
with other agencies on a much more aggressive basis in order to
make sure things like this eligibility that we need from the
Veterans Administration is available to us. That is a brand new
collaboration.
Chairwoman Velazquez. Would the gentleman yield?
Mr. Ellsworth. Yes, ma'am.
Chairwoman Velazquez. Thank you.
In its FY 2010 budget, you request $32 million for the
administration of contracting programs. How much of this money
will go to the oversight and management of the service disabled
veteran owned small business program.
Ms. Mills. I would like to get back to you with an exact
number, but I think it is an important and relevant question.
Chairwoman Velazquez. Thank you for yielding.
Mr. Ellsworth. Absolutely. And I would just close by saying
and thanks for that figure of 32 million. We here in Congress
get asked to vote on pretty large numbers of budgets across the
board, but the last thing, and I don't think it's just my
history in law enforcement, that makes me think twice when
people out there, good taxpayers paying good dollars, we are
voting on this and then it is basically being stolen.
That does not set well with me and I know the rest of the
pane either. So thank you, Mr. Kutz. Thank you, Ms. Mills. Do
everything you can, and if you need anything, just come to us.
I think everybody feels the same.
Thank you. I yield back.
Chairwoman Velazquez. Mr. Bartlett.
Mr. Bartlett. Thank you very much.
I just want to first express my pleasure at the different
attitude at this hearing than at a similar hearing on HUBZONEs
where it was look at those bad guys. That is, therefore a bad
program, and let's kill the program.
We recognize that this is not a bad program. It is a very
good program. There are some bad guys in it. Let's make sure
that the bad guys do not stay in the program, and I am very
pleased at that different attitude.
You know, you could have predicted when this program was
set up that we were going to be here today with this hearing,
and it is partly our fault. When I come to that part of the
Lord's Prayer that says, ``Lead us not into temptation,'' I
cringe because what we did, we set up this program. We gave SBA
nowhere near enough money to monitor this. They had in place no
adequate program for monitoring. There is no certification, no
review, no site review, and so forth.
And so you know, we are partly at fault. So I am very
pleased at this hearing, Madam Chairman. We are doing the right
thing, but you know, we could have predicted we were going to
be here because, you know, people are human, and you know, when
they see an opportunity to take advantage from them, they take
advantage of it.
One other thing I want to point out, too, is that sometimes
the government contractors are complicit in this because we
lean on them for a goal. They have got to have so much percent
go to this and that and the other thing, and they are very
happy with these pass-throughs because they know that the
service is going to be provided if it is a pass-through.
If they have a new company they have never heard of with a
person that had no prior business experience, you know, how are
they going to perform?
And the contracting officer is graded on the performance of
people whom they give the contract. So it is a wink and a nod.
They are not unhappy with this pass-through because they know
if it is a pass-through to a reputable company that they have
been doing business with before or is well known as a competent
business, that the job is going to get done.
One of the things I have pleaded for is that we somehow
give your contracting officers the goal of reaching out
further, casting a wider net. You know, they have been giving
contracts to Joe and he does a good job. They have got an RFP
out and responses are in, and Sam looks like he has a better
proposal. I do not know who Sam is. He may perform and he may
not perform, but Joe always performs for me. He is not really
good, but he is adequate, and I do not get scored down because
of Joe's performance. I am going to give the contract to Joe.
I do not know how to reward our people for failure, but if
you do not have a failure once as a while as a contracting
officer, you are not reaching out far enough, are you? You are
not casting a wide enough net.
Now, I do not know how to structure that. I do not know how
to reward people, but I just think that they need to be told
that we expect them to push the envelope. The creativity and
entrepreneurship out there in the small business world is just
incredible. I came from that world. I ended up with 20 patents,
and I know that the environment in which you work is very
essential to how creative you are going to be.
And so I am appreciative of this hearing. I am really
appreciative of the different attitude today. This is a really
good program. We have some bad actors in it. Let's make sure we
do not have them in there in the future.
Thank you all very much for your contribution to this.
Chairwoman Velazquez. Mr. Nye.
Mr. Nye. Thank you, Madam Chairwoman.
I have to admit I am, as I know all of us on the Committee
are, shocked and dismayed to hear from you, Mr. Kutz, that you
had 100 allegations that you chose to choose the ten from and
you stopped at 100. You had received 100, but there were more
coming in, but you stopped because that is all you could
process at the time.
Clearly, the scope of the problem is large, and this is
something that runs deep. It sheds a lot of doubt on our
efforts to date. Obviously something is not going right, and we
need to fix this problem, and what I want to make sure that we
going head avoid is simply taking punitive action on these ten
particular fraudulent businesses and then moving on and not
fixing the system.
So we have got a big responsibility that we all share now
to get this right going forward. Administrator Mills, I
mentioned in my opening statement you just started this spring.
This problem has obviously been endemic in the system before
you came in, but you own the SBA portion of the response now.
What I would like to make sure that I understand is what you
see the SBA's role in insuring that short of a GAO study we
have mechanisms in place to find out when companies are
defrauding our veteran business owners earlier in the process
rather than reacting at this stage in the game.
And I just want to make sure I kind of understand your view
of the SBA's role vis-a-vis the contracting agencies who
actually go out in the field and do the day-to-day contracting,
and how do you see the SBA fitting in with those contracting
officers in practicing the oversight to make sure that going
forward we have ways to solve this problem?
Ms. Mills. Thank you, Congressman Nye.
There are a number of pieces to this question that you just
asked. First of all, overall on the specifics of this program,
the first piece of it is to make sure we get the two nodes of
the eligibility right. Pretty confident that we can get our
node of it right, but we need to be able to have access to
accurate data from the Veterans Administration. I think we have
made good inroads in making a collaboration and having them
push that up their priority scale.
Partnership is good, and we are going to make sure that
stays top of mind.
Overall, we also work with all of the different agencies,
and this is a bigger problem. We just heard Representative
Bartlett also speak to some of this question about how do you
make sure that the purchasing agents who are actually
contracting are doing the right things, are aggressively, as he
said, casting a wider net and, as you said, making sure that
they let these contracts to people who they know are small
businesses and are service disabled or meet various criteria?
We are highly focused on that issue, and the Recovery Act
has allowed us really much greater force and impetus in our
relationships with each of the different other agencies. That
is one of the reasons why we are exceeding our goals.
So now that we have these very strong foundations with
everyone from the VA to the Department of Defense that are
working with us, we are able to do more training, set
expectations, deliver consequences, work on going after and
making examples of those who do not comply.
So there are a series of activities that will be required
to make sure this entire contracting activity delivers full
accountable, transparent and correct contracts to those who are
eligible.
Mr. Nye. Okay. Well, I think what I am hearing is you see
the SBA's role as being extremely proactive in terms of dealing
with the federal agencies on their small business contract and
to help insure that this kind of problem does not happen.
What I want to avoid, and I intend to hold additional
hearings in my subcommittee on this particular topic about our
service disabled veterans in business; what I want to avoid is
the situation where we look back a year from now, recognize
that we had a problem a year ago, and still find ourselves
pointing fingers at the other saying, well, it was really kind
of more their responsibility than ours and, you know, they are
the one that did not do their job.
And I think clearly the SBA is in a position, I think, to
take a leadership role here and help us solve this problem. So
I am looking forward to being at the position a year from now
where we look back and can say we did it right and we really
fixed this problem.
So I want to thank you for your comments.
Mr. Kutz, I just wanted to ask you. I noted in your report
that contracting officers from some federal agencies seem to
suggest and acknowledge that they really did not care much
about the details of the execution of contracting to service
disabled veteran owned companies, and that they were really
just more concerned with making sure the contracting got done
expediently.
I would like to know what your thoughts are how we can
solve that problem. Is this a training issue with the
contracting officers? How can we change that culture?
Because to my mind this problem can largely be solved with
professional contracting officers that buy into the reason
behind why we have these targets for contracting to our service
disabled owned veterans. I think you have heard from all the
members of this Committee how much we care about the mission
and from our panelists today, but where the rubber meets the
road out in the field, the contracting officers doing the day-
to-day contracting, if they do not care about this program and
if they do not care about the effect on employment for
veterans, it is going to be very hard for us to get this right.
And so I would like to have your ideas about how we can fix
that part of the problem.
Mr. Kutz. Well, I think Mr. Bartlett made some very
insightful comments on that. The contracting officers have kind
of a perverse set of incentives out there. They are trying to
reach these requirements. They want to get the work done with
companies they already know. If a new company shows up that is
a service disabled vet company, you know, they are not
necessarily as comfortable with that.
So they have a lot of competing interests in this. So it is
going to be a difficult issue to solve, and maybe we have to
work on not just the goaling requirements, but they should also
be held accountable for making sure you do not have fraud in
this program.
Right now there seems to be no incentive for them to call
it like that. There is much more incentive for them to say,
``Hey, that is a service disabled veteran contract. I get a
click. I get a score towards my performance measures,`` and if
it is a big company doing the work, there seems to be no
consequences in place.
It is a combination of they may not care, they may have the
wrong set of incentives, and you know, they are really not
involved with enforcement.
Chairwoman Velazquez. Would the gentleman yield?
Mr. Nye. Yes, ma'am.
Chairwoman Velazquez. I think that we have got a problem
here where you find, you know, the contracting officer saying,
``Well, that is not my responsibility. It is SBA's
responsibility to call for accountability and oversight.''
So whose responsibility is it to make sure that the program
is accomplishing the goals in the way that was intended by the
statute?
Mr. Kutz. Well, as of now nobody, and that is the whole
problem. So I know what the SBA is talking about here is
looking forward. If you look back, the answer is nobody.
Chairwoman Velazquez. And looking forward, the
responsibility then lies--pardon?
Ms. Mills. We take on that responsibility.
Chairwoman Velazquez. Okay. Thank you for yielding.
Mr. Nye. Well, I appreciate your ideas. Again, it is
disheartening to realize the depth of this problem, but again,
thank you for doing the job of putting this report together to
highlight the challenges we face and the fact that we have got
to start today on solving this major problem.
We have service disabled veterans who have put on for the
country this uniform and put their life on the line overseas
for us, returned home, made the decision to again take a risk
to get into starting a small business applying their skills,
and playing by the rules, doing the best they can to compete
honestly for contracts, getting put on the sidelines because
there are those who decided to take advantage of the system,
and we have not done enough to catch them and prevent them from
being able to sideline our vets.
Clearly, I think we understand the scope of the problem. We
know we have got marching orders going forward. I want to make
sure that today marks the beginning of the end of this problem.
I will be very disappointed if we look back a year from now and
do not say that we achieved that goal.
Chairwoman Velazquez. The time has expired.
Mr. Nye. So I thank you. I yield back.
Chairwoman Velazquez. Mr. Coffman.
Mr. Coffman. Thank you, Madam Chairman.
I am obviously concerned as a combat veteran myself about
what is going on in the SBA, but I want to speak to the
Veterans Administration for a second and get Mr. Kutz's view on
this because I have found such an extraordinary level of
incompetence in terms of their own record keeping referencing
eligibility that I have requested from the VA, after finding
out that they had folks with the designation of prisoner of war
that greatly exceeded the numbers by the Defense Department who
had that status under the Veterans Administration from the Gulf
War, from Vietnam right up to the present day.
They have yet to respond to me, and I think I gave them
that question six months ago, and they do not know. So I think
there is a lot of self-reporting that is not audited, that they
do not corroborate the information with the Department of
Defense. It is easy to create a DD-214, the discharge
certificate.
So how would you evaluate that? The SBA has to rely on the
VA in terms of that certification process, but could you speak
to the VA certification process for eligibility?
Mr. Kutz. A little bit. It is in its infancy, I would say.
They have set it up. They are moving forward with it, and it is
encouraging to have a good attitude, and they have some good
ideas, but the reality is, and I will use Case Study No. 2, the
company that passed through the work to the international firm
from Denmark is a VA validated small business, service disabled
veteran owned company, and they are continuing to get service
disabled contracts as we speak.
So they have gone through the validation process at VA and
somehow VA said they were okay, and we are saying that they are
not. So that is not a good sign, and so that means that there
is probably a lot of work to do with their validation process
here.
Mr. Coffman. It would seem to me that the Department of
Defense has the records, and I know that there have been
problems with the records in the past, you know, obviously
before they have gone to electronic records, but at least now
certainly for the younger generation of veterans where we have
the means to communicate electronically between the Department
of Defense and the Veterans Administration, they ought to be
able to do that.
It hurts those of us that have served in this country in
combat, particularly those who are disabled, when we are giving
benefits to those who have not earned them, taking from those
who have earned them.
But the Veterans Administration has got to do a better job
in that process.
Madam Chairman, I yield back.
Chairwoman Velazquez. Mr. Schrader.
Mr. Schrader. Thank you, Madam Chair.
I am looking for reassurance, Director. I would like to go
back to the HUBZONE issues. You know, there are a lot of
recommendations from the GAO on specific actions to take, and I
guess I will feel better about the veterans program if I know
that there have actually been changes in the front end
controls, fraud detection is, you know, now a part of the
culture of the agency, and that you are interested in doing
suspensions, you know, decertifications, this sort of thing
very proactively.
Could you tell me what actions you have done to improve
things?
Ms. Mills. Yes. In HUBZONES, we have now done about 1,000
site visits, 750 completed documentations through our process.
Compared to a year ago the annual number was seven. So we are
continuing to take those site visits and then use that
understanding to reengineer our up front documentation process.
So, number one, extensive site visits.
Number two, business process engineering of the
documentation up front.
Number three, we actually have changed our certification
process. We now ask for extensive documentation and are working
through how to make sure we get the right documentation up
front so that we can identify the particular issues that were
causing the firms to be in there who should have not been in
there.
Mr. Schrader. Were those announced or unannounced site
visits?
Ms. Mills. In the site visits, the way they do them is the
unannounced portion is the verification of the location. So we
do not tell them that we are coming. We go and make sure the
location is there.
The second piece of the site visit--
Mr. Schrader. But they know that you are in the process of
doing an investigation.
Ms. Mills. No, they do not know anything. So totally
unannounced to make sure that the HUBZONE office is in the
HUBZONE. That is number one, unannounced.
Part 2, we give them between 24 and 48 hours to produce the
paperwork that is required to make sure that 35 percent of
their employee are employed within the HUB zone. So that is--
Mr. Schrader. What happens to them if they do not produce
that work?
Ms. Mills. They cannot be a HUBZONE person.
Mr. Schrader. Mr. Kutz, what is your view of what we just
heard and how the program is working at this stage?
Mr. Kutz. When we first looked at the HUBZONE program for
this Committee, it was essentially a glorified self-
certification program. Anybody and their brother could get in,
and at this point, there is more due diligence done, and we
have done some testing for you, and we will be reporting back
to you on that whenever you would like us to.
But I would say there has been progress, but it is probably
not where it needs to be.
Mr. Schrader. Back in February or whenever, out of the ten
firms that were investigated, seven were still getting
contracts. Have they been terminated now at this point,
Director?
Ms. Mills. I am sorry. Are we talking HUBZONES or are we
talking--
Mr. Schrader. HUBZONES.
Ms. Mills. Of this, yes. We have referred all of those
dozens more.
Mr. Schrader. I am asking with the contracts, has their
ability to get money from the federal government been
terminated for all of the ten firms that were investigated by
GAO last year?
Ms. Mills. All of them have been referred to disbarment or
prosecution, whatever relevant category, and many more.
Mr. Schrader. I just want the answer. I guess maybe I am
misunderstanding you.
Ms. Mills. Yes.
Mr. Schrader. I just want to know are they still getting
federal money at this point.
Ms. Mills. No, I do not believe so, and I am happy to
report back on those for the record.
Mr. Schrader. Okay. Thank you.
So I am sorry. Just to follow up here, you know, this is a
big deal. I mean, this is a big, big deal. We are trying to get
businesses back on track, small businesses in particular. We
would like the Small Business Administration to be part of that
effort. These types of things make it very difficult for us to
showcase the agency as one that can help solve problems when
these types of issues are going on.
And I disagree with the fact they just need more money. I
do not think that is the answer. If I had a dollar for every
agency that told me in my legislative career they needed more
money to solve the problem, I would be a wealthy man, but I
think this is stuff that you should be doing already.
So to the point on it takes a while to do the debarments
and complete decertification, shouldn't we be suspending these
programs when the GAO has already done the work? Why do we have
to wait for the IG and your department to do the same work, if
you will?
I understand for the debarment, yes, that is necessary, but
for the suspension, why can't the agency just go off of that?
And then the last question is what other investigations has
SBA done beyond what the GAO talked about or pointed out, those
firms that the GAO identified? What other firms have you
identified in the HUBZONE program since they did their work
that are fraudulent and misusing taxpayer dollars?
Ms. Mills. So we identified 1,000 first that we visited. We
have cleared 750 of those, and of those, we have a number of
them who did not comply, and we have excluded them from the
program.
Mr. Schrader. Two hundred and fifty firms are excluded?
Ms. Mills. Pardon? No. Seven hundred and fifty have passed
and a number of them have not passed, and we can get you the
pertinent information, but anybody who did not pass that
inspection cannot participate in the HUBZONE programs.
Chairwoman Velazquez. Time expired.
Mr. King.
Mr. King. Thank you, Madam Chair. I appreciate you holding
this hearing and having an opportunity to review the testimony
that is before this Small Business Committee.
I would turn my first question to Administrator Mills. And
as I look at the data that has been produced by the GAO, my
question, and there have been many other questions asked that
have to do with facts and functionality, but mine is in my
business life, there were times when I thought working with
people that were cheaper was a better business deal, and what I
came to the conclusion was I have to work with honorable
people, people that I can trust, people that have a culture
within their company of having the integrity of knowing where
the lines are and not crossing the lines.
And that is something that I am certainly confident I would
pass on to the next generation, always to work with ethical
people. So there is something within the culture of individuals
and companies that tells them that somehow they can rationalize
or justify a false presentation to gain an advantage from I am
going to say the taxpayers, as is the case here; an advantage
against disabled veterans, as we heard from Mr. Coffman.
And so I would ask you if you have any introspective
comments you would like to make to this Committee about what
you see within the underlying cultures in these companies that
you have discovered were in violation of these standards.
Ms. Mills. Well, thank you for your insights on this issue
around procurement, and I have to agree that that is a critical
value. We believe that contracting with small businesses
provides great benefits not only for small businesses, but also
for the taxpayer and the federal agency because these are some
of the most valuable, innovative companies, and you get the
attention of the CEO.
Mr. King. But did you think about the cultures in the
companies?
Ms. Mills. Yes. So your point is, you k now, there are some
bad actors in this. I do want to point out that there are many,
many thousands of these companies, and there are many, many
good actors in this, and I think your issue is well taken.
These are things that I think we can address proactively in our
procurement officer training, and I think we would like to
think about your insights that you provided today.
Mr. King. Well, thank you.
Let me make another point here, and that is in a different
subject and a different Committee. There was a GAO
investigation. It actually might have been IG, but it showed up
that within one category there was 100 percent fraud in a
single category.
And when I confronted the agency with that, they said,
``Well, we are not analysts. We would have to be analysts to
know what this is, what caused it and what to do about it.''
Is that your position, that you are not analysts? Because I
think that it is pretty simple. It is right up front, and I
would think that the culture of the SBA should be if people are
found to be in violation of these standards, there should be an
immediate severance of the contract if you have the legal
authority to do so.
So the second question is what about the culture of the
SBA? What kind of people are looking over the shoulders of
those who are, let's say, jumping the fences that are set in
place by statute?
Ms. Mills. The culture of the SBA is that we will not be
the agency of fraud, waste, and abuse and mismanagement. We
have an aggressive, high, new attitude towards this. It is
explicit in one of our priorities.
Mr. King. Thank you.
I would turn to Mr. Kutz and ask if you would just like to
comment on the questions that I have asked Ms. Mills.
Mr. Kutz. Yes, I would. On the first one your point being
if these first will lie to us about whether they are service
disabled vet firms are you going to have other issues, and the
answer is yes. In fact, two of these ten cases we have come
across in other fraudulent schemes. For example, one of them
was doing trailer maintenance for Katrina in Louisiana and
Mississippi, and we came across them potentially doing false
billings for trailer inspections.
And so we referred those cases to another organization who
raided their office in March of this year. Had they been
suspended or debarred, they would not have continued to be
allowed to get government contracts. So it is important when
they lie to us and they cheat that we do something about it.
I agree with Representative Schrader that you can suspend
someone without going through a lengthy three-year process of
debarment. And back to the HUBZONE, none of the 29 companies we
have identified that I am aware of have been debarred yet,
none.
Now, there has been processes taking place, but it just
goes to show you how long that process takes. With respect to
SBA, I think SBA has good people. I think the history of SBA
has been as an advocacy organization, not an enforcement
organization, and therefore, you are not going to have the kind
of people necessarily that are very good at this.
But I would argue that if you are going to be an advocate
for small business you need to deal with the integrity of the
program, and today's nearing is a good start.
Mr. King. And to reinforce your point, and to briefly do
so, I would like to think that in the operations that I run
today and the operations I have run in my business lifetime
that I have people in place that would identify that at the
most local level and send that up the chain with the strongest
recommendation that there is the authority there to sever the
contracts by the basis of the violation, and that would make it
as far up the chain as it needed to deal with this problem, and
they should be the ones exposing this, not having to go in with
the GAO.
That is my point. I look at the culture, and that is the
only thing that can fix it. We cannot write enough rules to fix
it otherwise, but I thank both of the witnesses and I
appreciate it, Madam Chair, and I yield back.
Chairwoman Velazquez. Ms. Dahlkemper.
Ms. Dahlkemper. Thank you, Madam Chair, for bringing
forward this very important hearing.
I appreciate both Mr. Kutz and Ms. Mills for being here
today.
You know, first of all, of course, greed is an extremely
motivating factor for many people in terms of finding holes in
a program, and I want to ask, I guess, a little bit about the
self-certification that we know was a problem in HUBZONE and it
appears to be a problem here again. I guess I have a couple of
questions.
First of all, how many companies are in this program? Do
you know how many companies?
Mr. Kutz. It is interesting. I do not think anybody knows
for sure, but it is a self-certification program. There are at
least 16,000 according to some evidence that we have seen, and,
again, all you have to do to be in the program is to go to the
central contract registry and say you are a service disabled
veteran owned small business.
Some of the bogus companies that we have set up for this
committee are also service disabled veteran owned small
businesses. All you have to do is go in the system and say you
are.
Ms. Dahlkemper. That is all you have to do.
Mr. Kutz. That is all you have to do.
Ms. Dahlkemper. And then it just depends on somebody
blowing the whistle on you.
Mr. Kutz. A contracting officer taking a look there and
saying, yes, that firm is in the system as being qualified.
That is why you need this validation process, because right now
the only place to go is a central contract registry, and
anybody can go in there and say they are a service disabled
vet.
Ms. Dahlkemper. Okay. So how would this program with the VA
operate?
Ms. Mills. Well, as I said earlier, there are two nodes of
eligibility, and one of them we can provide, but the other one
has to be provided by the VA, and as you heard earlier, they
are working very hard on some systems issues that they have.
They have agreed to up this in the priority chain. They know
how important this is to us. This is a helpful moment to
underline that importance, but they are being extremely
cooperative in working through their systems issues.
Ms. Dahlkemper. And would all veterans businesses have to
register before being eligible?
Mr. Kutz. Right now only ones doing business with the
Veterans Administration have to go through the process. That is
why we had suggested that, you know, either they work together
to do it or you potentially legislate or do something else to
encourage this to be more of a government-wide system. Because
I think any program in place is going to have to have SBA and
VA involved here. They are both going to have to be part of the
solution.
Ms. Dahlkemper. Yes. I guess I am just wondering how many
this would prevent from having the pass-throughs once we got
the system in place. Do you see that that would really make a
difference in these pass-throughs that we are seeing?
Mr. Kutz. It depends on the processes. I think
Representative Ellsworth said, you know, you have got human
capital. That is one piece. Having good processes is another
piece, and having good technology is a third piece. For
example, if the address is a mailbox, there are ways to figure
that out if you have got technology. So it is a combination of
all three of those things that will need to be done. So I think
the jury is still out on what VA has done so far, whether it is
an effective process.
Ms. Dahlkemper. Of course, we need a solution to this, and
I think that is what we all want here because it is a good
program. It is a program that can certainly help all of our men
and women who have served our country and come back and want to
make a good living for themselves and their families.
I think I express what I think most of us or I am sure all
of us feel here, is that whatever we can do here on this end to
move this forward so that we do not have the same problems
recurring over and over again, we want to see a change. I
certainly would support suspension of certainly these ten
companies that are listed here, probably the 100 or so that
have come in.
My last question, I guess: is there a way once there is a
whistle blower come in to sort of suspend while there is some
initial investigation done to see if this company is involved
in fraud and abuse?
Secretary Mills.
Ms. Mills. Let me get back to you with exactly what the
process is, but at this point we have and will refer anybody
that we find that is not eligible. We will put them right in
the process and go after that aggressively.
Ms. Dahlkemper. So if you get somebody reporting in as you
did over 100 businesses, I mean, what is the process today?
Mr. Kutz. Well, can I say I will tell you what we did? We
set up our own hotline because GAO has a hotline for fraud
government-wide. We set up our own Small Biz Gov hotline. So we
have a separate hotline, and we reached out to veterans
organizations, and they posted that hotline throughout the
networks of veterans that they had.
So a lot of our allegations came from veterans. So we had
veterans organizations working with us to feed those
allegations into our hotline. They have separate hotline
processes.
Ms. Dahlkemper. So once you get it in your hotline, what do
you do with it?
Mr. Kutz. We will investigate it if it is valid. Especially
we had the open investigation for this Committee. So we
actually proactively went after those cases because those cases
took some time to investigate. We did field visits. We did
unannounced site visits, interviewed individuals, the
allagators, the actual companies, other contracting officers,
to come up with these cases. So it does take some investigative
work, but these were allegations specific about fraud.
An eligibility program might have more of a randomness to
the unannounced site visits. It might have more of a risk-based
approached.
Ms. Dahlkemper. Do you talk to teach other? I mean, when
you get these allegations, do you refer back to the agency?
Mr. Kutz. Yes, we will send them to the IG and we will
share them with management also, and as I mentioned, we also
shared these with the agencies that were doing the contracting.
There is a ton of agencies that we are actually contracting
with these. So I sent out--we sent out 15 or 20 letters.
Ms. Dahlkemper. And then what happens on your end when the
SBA gets it?
Ms. Mills. Well, these have gone to the IG, and we
cooperate with the IG.
Ms. Dahlkemper. Okay. My time has expired. I yield back.
Chairwoman Velazquez. Mr. Altmire.
Mr. Altmire. No questions.
Chairwoman Velazquez. Well, I do have some questions. Mr.
Kutz, you noted that the VA is only now working to develop a
database for the limited number of disabled veterans contracts
that they award. Is it going to include whether or not the
business is small?
Mr. Kutz. I believe it would. I do not know for sure. It is
in the early stages of the process, but it should, and again,
it only relates to veterans contracting at this point. It would
not relate to someone doing business with the Department of
Defense, but for VA, I am assuming that the process goes beyond
simply a service disabled vet.
Chairwoman Velazquez. Okay. Given the fact that the VA
contributed six out of the ten cases that you investigated,
shouldn't we be considering other alternatives to address this
problem?
Mr. Kutz. Well, certainly you should be concerned, as I
mentioned. Our Case Study Number 2 went through their
validation process. It got a green light, and it was the one
that passed through the business to the firm in Denmark, and so
that is a firm that has issues. And how it got through the
process I do not know, but that is something that does raise
questions about how effective their process is.
Chairwoman Velazquez. I am going to read some comments that
were included as part of your response to GAO regarding the
accountability and authority issue because you said that from
now on you will be responsible if there is fraud committed or
making sure that those who claim to be disabled veterans
company are, in fact, disabled veterans small companies.
In your response to GAO on this investigation, you said,
``It is ultimately up to the federal agency's contracting
officers who have primary accountability for insuring only bona
fide disabled veterans contracting firms perform these
contracts.`` You go on to say, ``SBA's responsibility lies in
the formal bid protest process.`` And finally, ``the SBA is
only authorized to perform eligibility reviews in protest
situations.``
So in SBA's view, the contract officer then becomes
responsible for halting contract disbursement and taking
further action against the firm. Does that accurately reflect
SBA's position?
Ms. Mills. I think in answer to the question was who is
responsible for making sure that three percent of all
government contracts go to the service disabled veterans. That
is our responsibility, and we have a series of procedures that
you just described that create, you know, a pathway, some of
which we have direct authority on, others of which we are just
working across all agencies to make sure that we do better
training, that we make it explicitly clear that if somebody
violates this that they should no longer be in the program.
Chairwoman Velazquez. Mr. Kutz, do you have any comment?
Mr. Kutz. Yes. The letter to us said that the only
responsibility they have is to report going toward the three
percent, that they had no responsibility for fraud prevention,
no real responsibility for monitoring, and no real
responsibility for debarment. So the position you heard in her
testimony is different than the letter we got.
Chairwoman Velazquez. So where are you today?
Ms. Mills. From statute, the responsibilities in the report
are as described in the response. Overall we are responsible
for making sure that three percent of these go to service
disabled veterans, and in all of our contracting, I think I
have made it pretty clear that we are not going to be the
agency of fraud, waste, abuse and mismanagement. And that means
that we have to go after it throughout the whole system, some
places where we have full authority to do it and others where
we are just going to try and take our best leadership role.
Chairwoman Velazquez. Okay. Mr. Kutz, can you comment on
their assessment of responsibility and authority?
Mr. Kutz. Well, our view, our attorney's view was that they
have the authority, but they have not exercised that authority.
They have chosen not to exercise the authority looking
backward. You have heard a different story of looking forward,
I see.
Chairwoman Velazquez. You know, we are here today reviewing
all of the GAO report and you are saying you are going to do
this and that, and that hopefully nothing will happen. But when
there is a situation where the agency is saying that you do not
have the authority and then it is the responsibility of the
contracting officer of the agency that awards the contract and
then the contracting officer is saying, ``Well, that is not my
responsibility. My responsibility is to make sure that we get
the best bang for the buck and to procure the good, get the
best price, and that they meet their time frame.'' So why do
you claim that you do not have the authority?
Ms. Mills. I think what Mr. Kutz said is that in the past
the agency has said that they do not have the authority and
that they do not want to undertake this. I think we have said,
and I think Mr. Kutz just mentioned this, that looking forward
we believe that this cannot be a process that is imbued with
fraud, waste and abuse. We cannot be effective in helping small
businesses, I think, as has been pointed out here, unless we
take this on full face. And we are doing that.
Chairwoman Velazquez. So I am a little bit confused based
on the response and the letter that you sent to GAO. Aren't
you, in terms of what SBA--
Mr. Kutz. Well, I consider there have been two stories, but
that is the importance of having congressional oversight
hearings.
Chairwoman Velazquez. Well, I just want to make sure that
SBA admits and conducts their business in light of the
authority that they have because this really contradicts the
position that you are taking here today, and I just want to
make sure that there is no room here for the contracting
officer to say, ``Well, it is not my responsibility,'' and for
the agency to say, ``Well, it is not ours. It is theirs, the
contracting officer.''
Ms. Mills. I think we have been clear that we take this
seriously. We are going to do everything in our power to make
sure that we go after these issues. We are very appreciative
of--
Chairwoman Velazquez. And this is light of the authority
provided to you under the statute?
Ms. Mills. I think we are--
Chairwoman Velazquez. I just want to make sure.
Well, thank you very much for your cooperation and your
presence here today.
I ask unanimous consent that members will have five days to
submit a statement and supporting materials for the record.
Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 11:29 a.m., the Committee meeting was
adjourned.]
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