[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
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                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

                              ----------                              

                           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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