[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
SUBCOMMITTEE ON CONTRACTING AND
TECHNOLOGY FIELD HEARING IN NORFOLK, VA
ON VETERAN CONTRACTING: PREVENTING FRAUD
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MAY 24, 2010
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 111-069
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
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)
SUBCOMMITTEE ON CONTRACTING AND TECHNOLOGY
______
GLENN NYE, Virginia, Chairman
YVETTE CLARKE, New York AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
(iii)
C O N T E N T S
__________
OPENING STATEMENTS
Page
Nye, Hon. Glenn.................................................. 1
WITNESSES
Kutz, Mr. Gregory, Managing Director, Forensics Audits and
special Investigations, U.S. Government Accountability Office.. 4
Cavolt, Ms. Janice., Owner, JBC Corp, Virginia Beach, Virginia,
On behalf of The American Legion............................... 6
Walters, Ms. Cindy M., Director, Hampton Roads Procurement
Assistance Center, Old Dominion University Business Gateway,
Norfolk, VA.................................................... 8
Roller, Mr. Elton, Greenland Enterprises, Inc., Hampton, VA...... 10
Armbruster, Mr. George, Co-Owner, Fleet Services and
Installation, LLC, Portsmouth, VA.............................. 12
APPENDIX
Prepared Statements:
Kutz, Mr. Gregory, Managing Director, Forensics Audits and
special Investigations, U.S. Government Accountability Office.. 31
Cavolt, Ms. Janice., Owner, JBC Corp, Virginia Beach, Virginia,
On behalf of The American Legion............................... 46
Walters, Ms. Cindy M., Director, Hampton Roads Procurement
Assistance Center, Old Dominion University Business Gateway,
Norfolk, VA.................................................... 49
Roller, Mr. Elton, Greenland Enterprises, Inc., Hampton, VA...... 52
Armbruster, Mr. George, Co-Owner, Fleet Services and
Installation, LLC, Portsmouth, VA.............................. 54
(v)
SUBCOMMITTEE ON CONTRACTING AND
TECHNOLOGY FIELD HEARING IN
NORFOLK, VA ON VETERAN CONTRACTING:
PREVENTING FRAUD
----------
Monday, May 24, 2010
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 9:30 a.m., at
Ted Constant Convocation Center, 4320 Hampton Boulevard,
Norfolk, Virginia, Hon. Glenn Nye [chairman of the
Subcommittee] presiding.
Present: Representative Nye.
Chairman Nye. I will now call this hearing to order. First
of all, thank you all for joining us this morning. I appreciate
you making your time available to us to talk about this
important issue and sharing your insights and thoughts with us.
This is a field hearing of the House Small Business
Committee Subcommittee on Contracting and Technology. I want to
make a special thanks to the Small Business Committee staff
also for traveling to be with us today to address this
important issue, protecting service-disabled veteran business
owners from fraud.
First and foremost, I view my role as Chairman of the
Contracting Subcommittee as one that supports the economic
security of our returning service members. As more of our men
and women return home from conflicts in Iraq and Afghanistan
Congress must adopt policies that offer them a chance to
succeed as business owners. As we do so there is no better
place to look for guidance than right here on Hampton Roads.
I have the honor to represent Virginia's 2nd District which
is home to the largest concentration of veterans, military
personnel, and military families anywhere in the country. In
fact, more than 100,000 veterans reside here in Hampton Roads.
We know firsthand that out community is stronger because of the
service of our military personnel and the contributions of our
veteran community.
The same drive and dedication that leads brave men and
women from Hampton Roads to serve our country in uniform also
leads many of them to take on the challenges of
entrepreneurship. Like small businesses all across the country
veteran-owned small businesses are a crucial part of our
economy helping to create jobs and spur economic development.
It is no secret why they are successful.
Their skills and training that our veterans learn in the
military are incredibly valuable in the private sector.
However, even our most successful entrepreneurs are
hindered from success when fraud and abuse prohibit their
businesses from contracting with the world's largest consumer,
the U.S. government.
The government buys everything from paper clips to computer
systems so if a small firm sells it, the government likely buys
it. For many entrepreneurs working with the federal government
as a prime or a subcontractor has been a valuable business
experience and has helped them launch countless successful
ventures.
In fact, while much of the economy struggled over the past
year the federal market place grew by nine percent. Last fiscal
year alone $3 billion in federal contracts flowed to our region
and $93 million of that went to service-disabled veteran-owned
businesses last year.
It is more important than ever that veteran-owned
businesses are able to access this expanding market place.
Veteran-owned businesses are particularly well equipped to
compete for these contracts. Having spent time in the military
these business owners are often acquainted with the procurement
process. Sometimes they have specialized skill sets that serve
particular government needs. Veteran security clearances make
them candidates for defense-related work and other sensitive
projects. For all these reasons I have made veteran small
business issues a priority.
Earlier this year the House of Representatives passed
legislation I authored, the Veterans Business Center Act, which
will offer enhanced training and technical assistance to
veterans interested in launching new businesses. Despite their
valuable experiences in the military, many veterans retire
without the resources to translate their skills to the
challenges of starting and running a business.
The creation of a nationwide network of veteran business
centers will provide counseling and business training, assist
veterans in accessing capital and securing loans and credit,
and will help veterans navigate the procurement process to
compete more effectively in the federal market place.
But removing barriers and creating opportunities for
veterans only works when these programs are run properly. Our
outdated and under-resourced contracting policies have led to a
great amount of fraud and outright abuse of this system.
As many of you are aware, this past November the GAO
uncovered nearly $100 million of fraud in the SDVOSB
contracting program. It is disgraceful that unscrupulous
businesses have been allowed to profit from taxpayer dollars
intended for our veteran business owners.
The GAO identified cases of large multi-national companies
gaming the system to cheat veteran-owned businesses out of
federal contracts. In other instances firms subcontracted all
of their work out to large companies that are not veteran-owned
and do not have veteran employees. I believe two problems have
led us to this situation.
One, there has been limited to no accountability in the
system. The GAO report revealed that if someone had taken the
time to look into these contracts, it would have been quickly
realized these contracts were fraudulent. Two, there is no
recourse and no penalties in place to disincentivize these
abuses. If red flags are waived or complaints are filed, there
are no consequences. The contracts and money remain in the
hands of the fraudulent business owners. We need better
policing in the contracting system.
Rightly so Congress created a set-aside program to repay
veterans by providing them an avenue to gain economic security
when they return home from the battlefield. The businesses
responsible for defrauding the Service-Disabled Veteran
Contracting Program are not only defrauding the U.S. Government
and the taxpayer. They are defrauding our veterans. They are
profiting at the expense of those who are willing to sacrifice
everything for our country's prosperity.
If we are truly sincere about our commitment to our
veterans, then the Service-Disabled Veteran Contracting Program
must be more than an empty promise. The goals must be clear.
The rules must be enforced and there must be consequences for
those who would defraud our nation's veterans.
I am committed to the goal of eradicating fraud in the
federal contracting system and I have taken the first steps to
fix this problem. I recently introduced the Service-Disabled
Veteran-Owned Small Business Procurement Reform Act. This act
will finally put in place punitive consequences for those who
attempt to circumvent the law at the expense of our veterans.I
intend to continue to put strong measures in place to ensure
that the agencies which contract to veteran businesses are held
accountable and that all federal veteran business programs are
properly resources.
There is another reason why this is important. In light of
the fraud recently uncovered in the Service-Disabled Veteran
Program it is difficult to talk about contracting goals being
met because the data may be flawed. Even when disregarding the
existence of fraud and abuse in the system the federal agencies
have not had a favorable history of meeting their contracting
goals. Agencies' perpetual struggle to meet their contracting
goals often results in shortfalls as experienced in the
Service-Disabled Veterans Small Business Program.
In 2008 service-disabled veteran businesses received only
1.5 percent of government contracts when they are required to
receive at least 3 percent. Moreover, the total number of
veteran owned businesses only received 3.2 percent of
government contracts. Add to these dismal numbers the GAO
report on fraud and the Service-Disabled Veteran Small Business
Program it is clear that we must focus our efforts to fix
unnecessary barriers in the contracting process.
In the coming weeks the Small Business Committee will be
developing legislation to overall all of the SBA's federal
contracting initiatives. The Contracting and Technology
Subcommittee will take the lead in formulating that legislation
and I intend to ensure veteran's needs are considered
throughout that process.
Ultimately honoring our commitment to our veterans takes
more than just saying the right words or even passing the right
laws. It requires enforcing those laws and ensuring real
accountability. That is what this hearing is about and that is
my commitment to our returning service members as they make the
transition from defending our national security abroad to
building our nation's economy here at home.
Now I would like to turn to our witnesses and hear their
testimony today. We are going to be operating on the five-
minute clock. You will see some lights in front of you on the
table. It will start out green, it will turn yellow when there
is a minute left, and then it will turn red when your time is
up. We can be a little bit lenient with the time so if you have
a few more things to say and it turns red, don't panic. I will
give you a little bit of extra time if you need it so don't
worry too much about that. We just want to make sure everybody
has an opportunity to be heard.
I am going to start by introducing our first witness, Mr.
Kutz, the Managing Director of Forensics Audits & Special
Investigations at the GAO. The FSI unit investigates waste,
fraud, and abuse related to government programs. The FSI has
investigated abuses of Hurricane Katrina relief dollars, border
security, and federal contracting programs. Mr. Kutz testified
before the full Small Business Committee recently and has some
updates to share with us today.
Mr. Kutz, thank you for joining us.
STATEMENT OF GREGORY KUTZ
Mr. Kutz. Mr. Chairman, thank you for the opportunity to
discuss the Service-Disabled Veteran-Owned Small Business
Program. Today's testimony highlights the key elements
necessary to prevent fraud and abuse in this important program.
As you mentioned, last November I testified before the full
Committee on details related to 10 firms responsible for $100
million of fraud and abuse in this program. According to small
business owners fraud and abuse in this program has been wide
spread since its inception. This should not be a surprise.
Multi-billion dollar self-certification programs serve as an
invitation to fraudsters across the country to take advantage
of our government.
Let me start by saying that there is no system of controls
that can eliminate fraud and abuse in any program. However, the
monitor, and in your packet, Mr. Chairman, shows the three key
elements necessary for an effective fraud prevention program. I
will discuss these elements from left to right starting with
prevention.
Our work across the government has shown that prevention is
the most efficient and effective way to minimize fraud and
abuse. For this program prevention means an effective
certification process to validate the eligibility of firms
before they enter the program. Key components of this include
ensuring that owners are, in fact, service-disabled veterans
verifying self-reported contractor data against third-party
sources and determining who is controlling and operating the
firm.
One method that we use that SBA and VA should consider is
the unannounced site visit. These surprise visits can reveal
things such as shell companies or who is actually controlling
and operating the firm on a daily basis. Further, a properly
managed and staff certification program should not result in a
large backlog of legitimate firms waiting to be certified.
Please refer back to the monitor and your slide to the
second element, detection and monitoring. Here the focus should
be on risk-based reviews. This should include looking at firms
that have received sole source and set-aside contracts. One key
indicator of fraud is firms with a small number of employees
and a large number of contracts.
Firms are required to perform 15 to 50 percent of the work
with their own employees. However, one of the firms that we
investigated had only five employees, yet they received 33
service-disabled contracts across the country for over $7
million.
Back to the monitor and the final element of an effective
program is consequences for those that commit fraud and abuse
in the program. We are encouraged that there has been activity
related to the 10 cases that we investigated and I testified on
last November.
However, history shows that it is unlikely that anyone will
be prosecuted for this fraud. Why? Because U.S. attorneys and
agencies believe that there is no loss to the government. I
happen to disagree with this view. I believe that when a
fraudulent firm receives a contract that the entire amount of
that contract is fraud. This fraud also robs legitimate firms
not only of the opportunity to do the business but also the
chance to hire veterans.
Will anybody be suspended or debarred? Will anybody have
their contract taken away that they received through fraudulent
schemes? History shows this is highly unlikely. Until the
government gets serious about making some poster children of
those that commitment fraud and abuse in this program, then
widespread fraud will continue.
In conclusion, Mr. Chairman, we continue to receive
numerous allegations of fraud and abuse in this program. We owe
it to legitimate service-disabled veteran entrepreneurs to make
sure that they get the benefits of this important program. I
look forward to working with you and this Subcommittee, VA,
SBA, and veterans across the country to bring integrity to this
important program.
I applaud you today, Mr. Chairman, for your support for
veterans. That ends my statement and I look forward to your
questions.
Chairman Nye. Thank you very much and I appreciate your
work in uncovering this fraud and the follow-up that you've
done and being with us here today. I look forward to in the
question and answer session talking to you in a little bit more
detail about your recommendations for how we can move forward
to solve this problem so I appreciate you being here.
Mr. Kutz. Thank you.
Chairman Nye. I would now like to introduce Ms. Janice
Cavolt. Ms. Janice Cavolt is a minority owner of JBC Corp. in
Virginia Beach. She established the business together with her
husband Brian who is a service-disabled veteran.
JBC Corp. provides customized medical trauma kits to
members of the military and others. Ms. Cavolt is testifying on
behalf of The American Legion as well, the nation's largest
veteran service organization.
Thank you for being with us.
[The statement of Mr. Kutz is included in the appendix.]
STATEMENT OF JANICE CAVOLT
Ms. Cavolt. Thank you, Chairman Nye. I do appreciate the
opportunity to be here. I am here today as a member of the
National Small Business Task Force of the American Legion. It
is an honor to be here under their cover. As everybody knows,
the American Legion is the loudest voice a veteran can have on
their side. If you do not belong, I urge you to do that now.
Join. Thank you again.
I am grateful for this opportunity to express my opinion on
preventing veteran contracting fraud and I'm thankful that the
government has taken notice and is proposing action to remedy
the issues that impede the success and growth of service-
disabled veteran-owned businesses.
I am the wife of a 100 percent rated service-disabled
veteran. My husband Brian Cavolt served as a Navy Seal and
Corpsman and retired after 29 years active duty service.
Together we own and operate JBC Corp., a service-disabled
veteran-owned small business located in Virginia Beach,
Virginia. JBC Corp. provides customized medical kits for
members of the military which are carried and used in all parts
of the world.
The findings by the GAO investigation of November 2009 were
discouraging. However, it did not come as a complete surprise
to many veteran business owners. The tremendous competition for
few opportunities cause SDVOSBs to work in the trenches where
we have a peripheral view of what goes on in federal
procurement. Awards to eligible firms who are not even having
the opportunity to bid is one part of the problem. The other is
the government's blind eye that doesn't see how poorly the
contracting system is working and the need for an overall.
In my opinion, the federal contracting system as it
operates now is wasteful, inefficient, and rewards big business
at the expense of small business, the taxpayer, and the
government. It is a system riddled with rules and procedures to
keep SDVOSBs and other small businesses from competing for
awards often for their own products or within their field of
expertise.
Perhaps the dynamic that is most difficult to comprehend is
that currently misrepresenting yourself when doing business
with the government carries no penalty. In fact, under the
federal acquisition regulations a contracting officer may allow
continuation of performance if a valid contract still exist. In
other words, obtaining an award under false pretenses does not
invalidate the contract. It is encouraging to know that
Congressman Nye is taking action to introduce legislation to
address this issue and criminalize the behavior.
During recent testimony to the Veteran's Affairs
Subcommittee on Economic Opportunity Joseph Sharpe from the
American Legion offered the Legion's opinion whereby the VA and
SBA should develop a comprehensive partnership to assist
veterans who are interested in participating in federal
procurement with each department utilizing their resources to
ensure proper implementation.
Mr. Sharpe points out that the Center for Veteran
Enterprise, a program of the VA, currently maintains the
veteran information pages database. The VIP database has
established itself as a premier database for veterans in the
country and is the only federal database focusing strictly on
veteran businesses.
Under this recommendation the VA, or the CVE, should
maintain the database and verify accurate veteran and service-
disabled veteran status and the SBA should retain the
responsibility for validating the business ownership, size,
standards, and structural integrity of the business.
Mr. Sharpe's statement is referenced here and I urge
everyone in this room to read his statement in its entirety.
I believe the ability of these two agencies to share
accurate information that is accessible for verification would
be the greatest step in addressing the problem of fraudulent
representation. However, I believe that we must go a step
further by instituting enforcement at the procurement level.
Contracting officers should be required to verify the
status and eligibility of every bidder on any set-aside
solicitation. Proposals from those who do not qualify should be
immediately removed from consideration. Misrepresentation
should be reported to the SBA so that appropriate remedial
action is taken.
In summary, I believe the approach to the problem needs to
be two-fold. First, verification and validation in accordance
with the guidelines recommended by American Legion and, second,
there must be enforcement at the point of entry; that is, the
submission of the bid.
It is important to recognize the two separate parts of this
problem. To not segregate the two processes would be like
asking the U.S. Department of State to be accountable for
someone who is using a fake passport as identification to get
through security at the airport. The burden should be on the
party granting access, not the agency granting legal passports.
In conclusion, the need to protect business opportunities
for SDVOSBs is critical to ensure the success and growth of
their businesses. Although establishing a check and balance
system will cause an extra step to be taken by SDVOSBs it is
the only way that set-aside solicitations can be protected.
However, having said that, caution must be exercised when
implementing the solution. It is important that the process is
adapted to protect the service-disabled veteran contracting
opportunities do not become obstacles that get in the way of
veterans doing business. Instead, let us make it difficult for
ineligible businesses to compete. Remember, the veterans who go
through a process of validation are not the ones breaking the
rules.
Thank you very much. I appreciate this opportunity.
Chairman Nye. Thank you for your testimony.
I would now like to introduce Cindy Walters, the Director
of the Hampton Roads Procurement Assistance Center at Old
Dominion University Business Gateway. The center assist local
businesses in establishing themselves to bid competitively on
federal, state, and local government contracts.
Ms. Walters, thank you for being here. We understand how
challenging sometimes navigating the procurement system can be
so we know how valuable your advice is to our local business
community. I appreciate you taking the time to be with us and
we are looking forward to hearing your testimony.
[The statement of Ms. Cavolt is included in the appendix.]
STATEMENT OF CINDY M. WALTERS
Ms. Walters. First, let me thank you, Congressman Nye, and
the Committee for doing these investigations, having these
hearings and doing things to assist our service-disabled
veteran and veteran-owned small business community. We very
much appreciate that.
What the GAO report uncovered most importantly in its
findings was the unacceptable and criminal behavior of those
who would opportunistically take advantage of service-disabled
veterans and programs legislated specifically to assist them in
achieving procurement opportunities with the federal government
and also in defrauding the taxpayer.
As long as there are procurement set-aside programs whether
they be small business, minority, 8(a), veteran, SDVOSB,
HubZone, or woman-owned business programs with money to be
gained, there will always be those who are determined to game
the system.
Even in the most heavily certified and managed business
development procurement program, the SBA 8(a) program, there
are still cases of fraud. We should continue to brace ourselves
for interest by criminally minded persons and creating
companies to gather money to them as each federal agency tries
to increase its goals by billions of dollars to turn those red
blocks to green blocks on the score card.
I've been associated with these programs for the majority
of my career in some form assisting businesses and the
government to create compliant, successful, federal contracting
industry partners. I work directly on an almost daily basis
with veteran and service-disabled veteran-owned small business
owners.
Their questions about government procurement, and
specifically their ability to access acquisitions set aside for
them are many and varied and illustrate some of the
complexities that when misused by non-veterans and those
unscrupulous people make the veteran and service-disabled
veteran-owned small business very vulnerable.
Eligibility issues come up frequently such as the
following. ``I have a service connected disability but have no
letter from the VA.`` ``I have a letter from the VA but do not
own the majority of my company.'' ``I have another company who
has the capital or past performance to help me to compete. Can
I team with them or do a joint venture?''
These are the scenarios in which a veteran can become
caught up unintentionally in what may turn out to be a
fraudulently executed or awarded federal contract. In these
instances the veteran may also be the victim as well as the
government. Then, on the other hand, we have the issue where no
veteran was involved and the entirety of the process was set up
to defraud.
I am not a proponent of another large scale certification
process management and policing program to add to the very full
basket of SBA. I do, however, suggest that we could have a
positive impact on the set-aside program for our veterans by
perhaps implementing some of these changes I'm going to suggest
either legislatively or culturally.
First, those persons and firms who are not veterans and
fraudulently claim to be so when preparing their certifications
and reps for federal contracting when found to be doing so by
any notification or source should be debarred and criminally
prosecuted. Most likely these persons have intentionally gained
several other government programs such as those set aside for
women, minorities, and may also be preying on veteran-owned
businesses as well at the time.
These persons and firms may not be new to federal
contracting and may have in many cases fraudulently worked the
system for years. For those firms where persons that certify
themselves as service-disabled veteran-owned small businesses
but, in fact, are just veterans, they may be referred to the
appropriate agency like the Center for Veteran's Enterprise for
training, counseling investigation.
In those instances we don't want to take veterans who may
have made a mistake and criminalize them.
Secondly, and most important, is the federal contracting
work force should always use its authority to request a pre-
award survey be conducted for each service-disabled veteran-
owned small business set-aside award. Currently a federal
acquisition regulation, FAR Part 19.1403 the only requirement
is that each of the service-disabled veteran-owned small
businesses certify themselves through the certs and reps to be
such. We should require, and I believe it would be where the
rubber meets the road, if the contracting officer would utilize
their authority to request a pre-award survey.
In this process they should use DCAA and DCMA as needed to
conduct reviews of control and management documentation. That
includes eligibility letters, organizing documents, stock
ledgers, etc., to ensure before the award is made that the firm
is owned and controlled by that member.
Thirdly, recognize and respect the skills that the veteran
business community has in terms of policing their own. Quite
often times the service-disabled veteran-owned small business
community will know if another company has reached out or is
proposing on a contract and know that they are not veteran-
owned or service-disabled veteran-owned.
If we simply have a way like a form up on the SBA site
where a veteran can go and report what they believe that they
are seeing happening, or a resource partner like the PTAC or
the SBDC can go and report that, then we have a database or a
place where we are listening to our veteran community and
letting them and recognizing their skill and policing their
own.
And then fourth, and last but not least, we need to
continue to utilize our network of federal and federally funded
resources to include the acquisition workforce to continue to
educate the veteran community on the program, the nuances of
the program and the requirements of the program.
As we bring more and more visibility to these programs by
these types of hearings and by educating the community, the
more visibility the less cases of fraud that I believe we will
have. We can't eradicate fraud but we can reduce the amount of
instances.
In my conclusion, thank you again for having these hearings
and thank you for allowing me to testify.
Chairman Nye. I appreciate you being with us and look
forward to following up on some more detail with you after we
hear all the testimony.
I would now like to introduce Mr. Elton Roller of Greenland
Enterprises, Inc. based in Hampton, Virginia. Mr. Roller is a
decorated veteran who served in the U.S. Air Force for nearly
10 years. In 2008 he founded Greenland Enterprises which
specializes in design-built mechanical and general construction
projects.
Mr. Roller, thanks again for your time this morning and we
are looking forward to hearing your testimony.
[The statement of Ms. Walters is included in the appendix.]
STATEMENT OF ELTON ROLLER
Mr. Roller. Thank you, Chairman Nye. Chairman Nye and
distinguished members of this Committee, it is an honor to
speak on behalf of veteran business owners about ways we can
work together to strengthen the SDVOSB procurement program and
ways of preventing fraud.
As a small business owner and nine-year veteran of the U.S.
Air Force I am proud that our federal government has found ways
to keep veterans serving through entrepreneurial opportunities.
It is no secret that veteran business owners share a fierce
allegiance to fellow veterans and often extend employment
opportunities ahead of their needs.
In some cases positions are created and extended to
candidates requiring significant investments and training and
time. Veteran business owners view this as an inherent duty to
those who have served. Simply said, veterans hire veterans.
Procurement strategies like the SDVOSB set-asides
effectively ensure that veteran entrepreneurs continue this
culture of offering opportunities, hiring, training, and
growing the next group of veteran business owners. Recently
tough economic times and the promise of winning government
contracts has taken those opportunities from veterans and
placed them in the hands of fraudulent businesses.
As most of you know, a recent GAO report sampled 10 SDVOSBs
and found all 10 lacking the requirements to be eligible to
participate in the program. This ignorance of the law and
worse-case example of fraudulent activity can only be
attributed to several factors including the lack of private
sector opportunity, oversight of the program by any one agency
and, most importantly, an absence of significant financial or
criminal penalties.
A little bit of background. After serving my country and
working for two large HVAC manufacturers my entrepreneurial
passion could only be satisfied by going out on my own. With
the unwavering support of my family my partner and I
established Greenland Enterprises in February of 2008. Our
business became a CVE, Center for Veteran Enterprises, verified
SDVOSB in July of 2008.
From the onset we knew that any business venture comes with
inherent risk but coupled with the worst economic decline since
the great depression, an uncertain economic future, dwindling
equity and personal assets, and a banking industry on hold we
were specially anxious.
Fortunately for us luck, prayers, and experience prevailed
as we were awarded several private projects in our first
federal SDVOSB set-aside contract at the Richmond VA Medical
Center in September of 2008.
Some of the challenges we've experienced since then: From
those anxious moments in 2008 Greenland Enterprises has
experienced steady growth fueled primarily through federal
procurements under the SDVOSB program. These opportunities have
allowed us to establish deep roots in the local and regional
market place. They have also allowed us to hire veterans both
as employees and subcontractors and they have enabled us to
give back to the veteran community.
The same SDVOSB program that allows a well-managed small
disabled veteran owned business with good core values to become
a success story also serves as a haven for fraudulent
businesses with poor decision making. We experienced this first
hand in 2009 when a number of commercial contracting firms
flooded the SDVOSB program with shell companies masquerading as
small SDVO owned and controlled businesses.
In our particular instance evidence presented to a
contracting officer at the time of award clearly established
affiliation between the awarded SDV and a large business both
having common ownership.
Our complaint was summarily dismissed by the contracting
officer and we were referred to the area SBA representative for
determination of the alleged offender. The SBA agreed with our
position but referred the matter back to the awarding
contracting officer.
We were advised that we had an opportunity to protest the
award and ultimately take on a large business to prove what was
already established is a clear and blatant affiliation between
parties. With consideration of our financial position,
uncertainty in getting the award and the backlash that might
ensue we reluctantly declined.
After observing other awards made to the same contractor on
other SDV set-asides I took up the matter with the GAO and they
referred me to the Inspector General's Office of the
departmental agency. To date I have not received an update on
my complaint but did find satisfaction that the Director of
Government Contracting with the SBA on their own accord found
that same contractor to be other than small in a protest on an
unrelated award.
Justice was eventually served but many verified SDVs were
denied opportunity through the action of this fraudulent
company. With the lack of opportunity in the private sector
more firms will continue to migrate to the federal sector and
with that the potential for fraud will increase. Until the
price for noncompliance outweighs the price of compliance, the
SBA, the GAO, and lawmakers will continue to hear examples like
this.
We believe the tool to prevent such actions has already
been established with the Center for Veteran Enterprises
verification process and that the timeline for implementation,
currently 2011, is not soon enough. With the verification
process in place contracting officers can quickly confirm the
legitimacy of SDV firms thus making the process of awards more
efficient.
Protest of such awards will be reduced and the stigma of
the GAO report and fraud in the SDV program will diminish.
Chairman, thank you for the opportunity to share the
experiences of Greenland Enterprises. I would like to
personally thank you and this Committee for your commitment to
veterans and small business. I would also like to take the
opportunity to remind your colleagues in Congress that small
business is the lifeline of this country and capitalism. We
must continue to foster opportunities, have an open dialogue
such as this with law makers, and take the necessary action to
put veterans and Americans back to work. Thank you for your
time and dedicated service to our country.
Chairman Nye. Thank you, Mr. Roller, and I appreciate your
comments and appreciate you sharing your personal business
story with us today.
I would now like to introduce Mr. George Armbruster and Mr.
Duke Ingraham, our final witnesses, co-owners of Fleet Services
and Installation, LLC based in Portsmouth, Virginia. Mr.
Ingraham graduated from the U.S. Naval Academy and is a
disabled veteran who served the U.S. Navy for five years. The
company specializes in the procurement and the installation of
building materials.
Mr. Armbruster graduated from the Virginia Military
Institute. Both started the firm in 2008.
I'll recognize you each in the order that you're sitting
here but I recognize you may have individual comments to make.
We'll start with Mr. Ingraham if you would like.
Mr. Ingraham. He's going to start.
Chairman Nye. Okay. Mr. Armbruster will start.
[The statement of Mr. Roller is included in the appendix.]
STATEMENT OF GEORGE ARMBRUSTER
Mr. Armbruster.Congressman Nye, thank you for allowing me
to speak on behalf of owners and members of service-disabled
veteran-owned small businesses throughout the United States.
This testimony will describe to the Committee the challenges
service-disabled veteran-owned small businesses are facing due
to the lack of an enforceable plan and accountability for the
Executive Order 13360.
We started Fleet Imports in 2008 and in 2009 we started
bidding work as a subcontractor to large general contractors
working on federal construction projects. We bid over 100
projects to larger GCs but to this date we have only received
three subcontracts. We know that Executive Order 13360 a 3
percent goal is in place for prime contracts and subcontracts
for all SDVOSBs.
The whole process begins when a large construction project
is solicited. Very large general contractors are interested in
pursuing a project. They develop a small business plan that
they feel will win favor of the contracting officer. These
large businesses reach out to the small business community
through Small Business Outreach fairs and take our information.
Next these general contractors ask us for a price on
certain scopes of work. They submit their proposals to the
contracting officers. During the evaluation period a
contracting officer looks over the proposal and also checks to
see if a proper small business plan was developed and a general
contractor is then selected.
At this point the general contractor finishes up their
design drawings, the final step in buying out scopes of work or
subcontracting is the next phase. This is where the problems
occur. The general contractor will look for the absolute lowest
price when buying out scopes with little to no regard to
SDVOSBs.
Once the project is completed the general contractor will
have to explain to the contracting officer why they did not
meet their goals. Time and time again they tell contracting
officers that they gave it their best effort to find SDVOSBs to
participate. All these practices are allowed because there is
no oversight, no accountability, no penalties, and no program.
We have found that if our price is not the absolute lowest
bid we will not receive a subcontract to work on government
projects. For example, last year we bid on a ceramic tile
subcontract for a large federal hospital near Washington, D.C.
We were recommended by the GC to the Army Corps of Engineers.
The Army Corps of Engineers decided that our price was not the
absolute lowest for the ceramic tile and gave the contract to
the lowest bidder. We later found out that our subcontract
price was only 1 percent higher than the lowest bidder, a large
business.
The SDVOSB set-aside appears to be totally irrelevant to
contracting officers and larger general contractors working on
federal construction projects. This is because there is
absolutely no oversight or accountability. As the system stands
now the SDVOSB set-aside program in relation to subcontracting
is an honor program which very few honor.
Another frustrating experience was when we tried to work
for general contractors on foreign embassies for the U.S. State
Department overseas building operations. We traveled out to
Alabama to meet with the two largest general contractors
priming the largest percentage of the foreign embassy projects.
We were interested in natural stone cladding scopes of work on
these projects.
We were told by these GCs that they purchased natural stone
materials from overseas suppliers and that they used overseas
labor for installation of cladding. They follow these practices
because of low foreign labor costs as compared to using
qualified United States labor. Companies here in the U.S. have
to follow the Davis Bacon Wage Scale on projects here in the
United States. They don't have to follow these same labor rules
while working on foreign embassies.
One of the general contractors working on a foreign embassy
project told me that we would have to significantly beat their
current supplier and labor cost to gain their business. After
the meeting I spoke with the U.S. State Department over seas
building operations representative and asked if they were
required to meet any SDVOSB goals. The representative informed
me that since the projects were overseas, general contractors
have no goal requirements for using SDVOSBs as subcontractors.
This is maddening when you consider that we have 25 percent
unemployment in the United States construction field. Tax
dollars are being used on these projects without SDVOSB
participation. Foreigners are being used to install natural
stone building cladding on United States embassies.
Senator John Kerry introduced legislation to advance U.S.
embassies and consulate design on April 16, 2010. Senator
Kerry's legislation stated, ``The legislation recognizes United
States embassies are an important reflection of American values
of openness, ingenuity, innovation and should reflect the best
of the U.S. design, architecture, sustainability and technology
while maintaining security as a top priority. Why are we
denying our veteran-owned small business the opportunity to
participate in the construction and security of our
embassies?''
To combat the multitude of problems described herein other
service-disabled veteran firms that have been in the commercial
business for several years have advised us to give up bidding
on subcontracts. They claim we should focus on priming jobs
directly to the federal government.
Our problem with this advice is that we are emerging into
the commercial market with valuable experience but still need
to hone our skills, build a financial base and develop bonding
capacity prior to taking on a prime contract. There are many
veterans and service-disabled veterans that will be entering
the job market in the near future. If any of these individuals
decides to pursue a career as a entrepreneur in the
construction field, they will need to gain financial backing,
bonding, and experience before priming a federal job on their
own.
Subcontracting to larger general contractors on federal
projects will give these veteran business owners opportunities
to develop into prime contractors. Oversight and accountability
is critical in any program. Congress needs to end the facade
and support service-disabled veteran-owned entrepreneurs
growing small businesses. Congress needs to require all SDVOSB
firms to become certified through a program instead of self-
certification to avoid fraud.
Congress needs to require general contractors working on
federal construction projects to provide the names of qualified
SDVOSBs that they will be using up front. The responsible
contracting officer should ensure that stated goals will be met
before awarding any contract. Additionally, substantial
penalties should be given on all awarded contracts for
companies that do not meet these required goals.
Congressman Nye, we greatly appreciate what you are doing
for service-disabled veteran-owned business owners and members
of these companies.
[The statement of Mr. Armbruster is included in the
appendix.]
Chairman Nye. Thank you for your testimony. Actually, if
you don't mind, I'm going to start with you, Mr. Armbruster on
the questions because you've raised some interesting topics and
I wanted to follow up immediately with you on a couple of these
things.
It's very clear to me that this is a multi-level problem
that goes from the point of application or certification all
the way through the contracting process with various issues
with the contracting process. There is the fraud element which
we've got to route out and attack. There is also just the
question of how contracting officers are approaching these
contracts.
What I wanted to ask you was specifically about your
question about overseas contracting. Can you talk us through a
little bit? There are some suggestions, I think, we hear that
smaller firms just aren't able to produce the work and get
involved in the overseas contracting. Can you help us dispel
some of the mythology there and just talk us through what the
capabilities are for small firms who do that kind of work?
Mr. Armbruster. Sure. Two years ago when we formed the
company, Duke and I, we import granite and marble and from
overseas currently. We approached the two largest general
contractors in Alabama and wanted to see if we could
subcontract on these foreign embassies. These guys were blatant
and right in front of us said, ``We use foreign companies
because of the labor cost and the supply cost.''
I pursued it again two years later to try and get in front
of these guys. I don't want to name names. I don't know if you
want me to name names of these two companies but we submitted
bids as a subcontract for the cladding of these embassies and
couldn't get any response back from them. I finally got hold of
the guys and one of the companies told me that they partnered
with another company in Turkey.
If we wanted our bid to even be looked at, that I needed to
touch base with this company called Inca out of Turkey. I was
just astounded at the fact that they are not using U.S. labor.
They are not even interested in talking to us. We spent money
and effort in putting these proposals together and we're
getting kicked under the bus so a Turkish company can be
utilized not only to purchase the materials but also install
the materials.
I feel like we have a capable team to get in there and not
only improve the quality of what's getting done, but also
improve probably the safety of it and security. We are a
service-disabled veteran-owned company and we are going to
approach it the proper way as far as getting the building put
up, the exterior of the building. I feel like I have faced a
brick wall with this one.
Chairman Nye. Okay. You mentioned in your testimony you
feel like the set-asides for service-disabled small businesses
is essentially an honor program that very few honor. Tell me
how do you feel about your reception when you talked to the
primes or to the actual contracting officer about the rules
they are supposed to be following.
Mr. Ingraham. It's frustrating. I mean, the majority of the
companies that are service disabled the people that are doing
it right are at a disadvantage. They have to do either 15 or 50
percent of the labor themselves. These shell companies make it
very difficult for us to compete with that. It is on the honor
system and it needs to be verified.
Chairman Nye. What steps could be take, do you think, that
would be the most effective in providing you the opportunity to
compete most fairly for these contract dollars?
Mr. Armbruster. I mean, I feel like that a system of
verification not only for the prime contracts that GAO did that
study on it and found out that there was 10 of them on the
prime contracts that were fraudulent. But you figure if they
are even trying to hit on the subcontractor it is supposed to
be 3 percent service-disabled vet goals, one, you need to find
out the ones that are being awarded the contract or are they
just a shell company, are they just asked for, ``Hey, give me 3
percent of the contract value and you can use my name.''
Are we competing against that? That would help. I think
setting out specific goals for the contracting officers to say,
``Hey, you have to set aside 3 percent of the work and verify
after the contract has been done is the general contractor
going to use service-disabled veteran companies.'' Out of the
119 jobs that we bid last year, we have gotten three. We are
constantly told that we are not the absolute lowest bidder. I
have a letter here today from a company that says, ``You have
to be the lowest bidder.''
It's just not fair. We can't compete with large business. I
just lost a job two weeks ago to the Naval Academy to two large
businesses and we were the lowest small business in there with
a price but, ``You weren't the ultimate lowest bidder.'' I
think a plan needs to be developed for the contracting officers
and an enforceable plan at that. If there's no penalties, these
guys are going to continue doing the same old things in the
construction field and we're going to die on the vine bottom
line.
Chairman Nye. Okay. I appreciate that.
Mr. Roller, I want to follow up with you on a couple of
things you mentioned in your testimony. I'm particularly
interested to hear in a little bit more detail about your
interactions with the contracting officer who you were
essentially routed back to who had made the decision about the
original award. Can you talk to us about how effective or not
effective it is to have that be the route of your complaint and
what can we do to fix that?
Mr. Roller. I think it comes down to individual contracting
officers. In this particular case we actually sent evidence
directly to the contracting officers. It was basically two
websites that had the two firms who have common ownership. One
was $100 million plus company. The other one was an SDV small
business.
On their websites they actually bragged about the
affiliation between the two parties. This is a branch of this
business and our sister company is the $100 million business.
We sent that directly to the contracting officer which, in my
opinion, was clear evidence that we have a direct affiliation.
The word affiliation was even used on the website pages which
is an absolute no-no. In our opinion that should have dismissed
that bid right away. I mean, it was clear, it was blatant. It's
right there in black and white.
The contracting officer went back to this company and said,
``Hey, here is what's on the table. Produce evidence to the
contrary.'' What essentially happened was two days later both
websites were changed for both companies and the contracting
officer came back to us and said, ``They appear to me to be an
SDV business. If you would like to protest, you may certainly
do so or you can take this up with the area SBA for size
determination of this SDV,'' which is what we did.
Chairman Nye. Okay. And where did that go?
Mr. Roller. After looking at the two websites the SBA said,
``Absolutely this is a problem.'' It took them several days. In
the meantime the website was changed. Both of them were
changed. I even sent another email back to the SBA to say,
``Both websites have been changed. If that is not another
indictment of what is going on, I am not sure what else I can
do here.''
The SBA came back and said, ``Although it looks legitimate
that they are not a small business, we are going to refer this
back to the contracting officer and you need to start there.''
Chairman Nye. You mean they suggested they would refer it
back to the contracting officer in the hopes that there would
be some kind of different outcome this time?
Mr. Roller. I think in the hopes that we would protest. At
that point we could have protested but it was actually five
days after the award. You have five days to protest it. At that
point we have an SDV that is clearly affiliated with a large
business that is $100 million plus. We are a small business
doing, you know, $2 or $3 million a year. Financially our
resources I just didn't have it to pursue a contract in which
we were third in place anyway.
The alleged SDV that was a large business was No. 1. There
was a second company and then there was us. The second company
clearly did not want to get involved in protesting. I had a
direct conversation with the president of that company because
he did not want to create waves with that particular agency
since he had already received a number of contracts from them.
Chairman Nye. Okay. I just want to make sure we highlight
what options you feel like were available to you to resolve
this problem in terms of your being a small business. Can you
describe what kind of a burden does that place on you to have
to be the one to go after them?
Mr. Roller. The cliche is you always hear, ``For the price
of a stamp you can protest this.'' Sure, you can but then there
are other steps to go through after that. Like most legitimate
SDVs we've gone through a lot of financial processes here with
our attorneys and with accountants to make sure we are
legitimate and then we are by the book.
Likewise, if I am going to protest something, I would reach
out to my attorney and say, ``I am getting ready to protest
this thing. I want to make sure the language is right and I
want to make sure I'm not doing anything wrong.'' There is a
cost associated with that. Those are really our options.
Chairman Nye. Do you believe that the SBA took your
complaint seriously and that the mechanism just doesn't exist
for follow-up or where was the breakdown?
Mr. Roller. In my opinion, and I highlighted this in my
testimony, the lack of oversight by any one agency, the SBA
says it is the VA's problem. The VA says it is the SBA's
problem. The GAO says, ``Both of you have a problem.'' Somebody
has got to own it and somebody has got to say, ``We verify SDVs
and the rest of you can use it throughout the federal
procurement community.''
The buck has got to stop with somebody be it the VA or the
SBA, one of the two. Our options in my opinion were to protest,
go through a lengthy process. Some large businesses, as an
example, will not protest contractor awards because they do not
want to reflect badly with the contracting officer. They figure
other opportunities will come up somewhere down the road with
this contracting officer.
In looking at that as a small business when you are out
there trying to develop relationships, you know, your first
impression with a contracting officer you don't want to make it
as protesting an award. That is usually not a good start. In
this case we felt like what we sent the contracting officer was
really helping them out to legitimize who they are getting
ready to make an award to.
Chairman Nye. And they didn't take advantage of that
information.
Mr. Roller. And they did not take advantage.
Chairman Nye. Okay. Well, I can certainly sympathize with
the challenges you face. I think you said quite well in your
testimony that what has to happen is that the price for
noncompliance has to outweigh the benefit for noncompliance and
we found in many cases that is not what is happening right now.
That is a good segue. I want to actually transition over to
Mr. Kutz. I want to talk to you a little bit about some of the
things we have learned since your report came out in November
which highlighted a large degree of fraud within the service-
disabled veteran program and just to reestablish the baseline
here. Can you talk to us about how you collected the pool, how
you narrowed it down of the original complaints and then what
percentage and what do we think that means for the broader
universe of potential fraud in the system.
Mr. Kutz. The pool at that time was over a hundred
allegations we had received through our hotline and others out
there who are in the industry. We only had time really to do
10. These are comprehensive investigations. We did surprise
field visits and other collaboration and corroboration of
information.
At the time I testified before the full Committee back in
November it was 100 plus so we did the 10. Since then we have
received dozens and perhaps even 100 more from various veterans
and others who see the same types of things happening because
there still really is no mechanism to protect legitimate
veteran firms who are trying to be honest and do the right
thing in this program.
That 10 is not a statistical sample. It's not something you
can project but still I think it is fairly representative of
the types of things that are going on in this program as we
speak.
Chairman Nye. Whether it is statistically valid or not
accurate, for measuring purposes it's still a hundred percent
of the ones that you chose to pursue of the complaints
presented revealed that there was fraud of some kind. Is that
correct?
Mr. Kutz. That's correct.
Chairman Nye. Okay. I want to talk a little bit about the
slide that you presented to us and I think that is an
interesting presentation about the various levels of protection
against fraud including a consequence level to try to help us
prevent this in the future. Can you just talk to us a little
bit about where we are currently as opposed to where we ought
to be on this chart. How big is the gap between those things?
Mr. Kutz. Well, if this were a marathon we would be in the
first several miles quite frankly. I think the only place we
have seen any progress is at the Department of Veterans Affairs
where you have the certification program that is still in its
infancy, if you will. They have certified several thousand
firms. Of course, two of the 10 fraud cases had been certified
through that process so that is not encouraging necessarily.
Hopefully they have learned from what we have shown them
about those firms and have taken that into account. SBA is
really no where at this point. There has been a lot of talk.
They still have the bid protest process but in the bid protest
process eight of the 10 companies that we identified as fraud
are still in the central contract registry as being self-
certified as service-disabled veteran-owned small businesses.
When you go outside of the Veterans Affairs Department
where they are competing for contracts they still appear to the
contracting officers to be legitimate firms. Like I said, I
think we are in the first several miles of a marathon and this
is going to require years of Congressional oversight to make
this important program right and to make sure the legitimate
firms are the ones that are getting the work.
Chairman Nye. What do you think the holdups are on the SBA
system? Why is it that firms can still be revealing themselves
in the system if they are under protest without some kind of
flag? Is that a legal question or is that just a question of
the execution of the program under the SBA?
Mr. Kutz. I think one of us mentioned it. The only thing
SBA has going is their bid protest process. Even when they have
found firms to be ineligible, they pretty much said to the
other agencies, ``It is your issue.'' They have not suspended
or debarred anyone. They don't really kick anybody out of the
program because, as I mentioned, eight of the 10 that we found
as fraud are still sitting in CCR as looking like legitimate
service-disabled firms.
SBA has got the bid protest thing. Now, they have said with
bid protest they are now going to tell people they have 30 days
to get out if they have been found to have an ineligible firm
and were ruled against or they will be referred to the IG so
they are trying to put a little bit more teeth in it. For the
most part SBA is at the starting gate really.
Chairman Nye. So the SBA essentially refers to the
enforcement back to the contracting officer as you heard in the
case of the businesses that are here today and lets them make
the decision, the same contracting officer that made the
original award, and essentially puts the onus back on that
person to decide what to do.
Mr. Kutz. That is correct. The only difference now we
understand is they are referring those that don't take
themselves out of the system to the Inspector General at SBA
and that has just happened recently, I believe.
Chairman Nye. Okay. I did ask the Inspector General at the
SBA in a recent Committee hearing about what actions they were
taking and she did testify, I believe, that they were taking
some to prosecution but couldn't comment at the time on the
details because of the process but we will be following up to
find out more about that.
Let us just go back to the contracting officers then
because that seems to be where the onus is constantly
returning. What did you find in your investigations in terms of
the contracting officer's awareness of the law and the problem
and what methods were available for them to solve it?
Mr. Kutz. Well, unfortunately, in the 10 cases they were
well aware of what was going on. In fact, they helped
facilitate what was going on in some of these cases. They would
find a large company they wanted to do the work. They would
help facilitate the front company in some of these cases so
they new exactly what was going on so they not only were not
there to prevent what was going on, they were facilitating it.
I don't think they were always involved in fraud
necessarily. They were looking to get those requirements you
mentioned in your opening statement that are so important to
them that they get the work out and they can score it as a
small business. That means that the reports you are getting
back are saying that a certain amount of small business work is
being done but really there are large international companies.
I mentioned the one at the hearing last November. It was a
company from Copenhagen, Denmark doing the janitorial services
work at a VA hospital in Palo Alto, California. It was an
outrageous case and that would have been shown to you members
of Congress as a successful small business service-disabled
contract.
Chairman Nye. Can you see any elements of effective fraud
prevention that are coming online soon that will be helpful in
moving us towards the goal that you laid out in your slide?
Mr. Kutz. Certainly at VA they are moving forward with
their certification process. There have been several thousand
firms certified but I understand there are many thousands more
waiting in the queue so the other unintended consequence here
of the certification program are potentially legitimate firms
sitting in the queue waiting to be certified for a year or
more. Now what we have is a negative consequence of trying to
do the right thing here with the certification program. It is
just an under-funded program over at the VA.
They don't have enough resources into this. They have done
very few site visits so they are still doing a paper shuffle to
a large extent and I'm not sure they are getting the right
results in all cases but that is the only place we've seen
significant progress. Part of that was because they were
mandated by law to do it. Otherwise there was nothing there.
Really the hearing you had last November spurred them to really
kick-start this into action.
Chairman Nye. Let me follow up on the question about the
backlog and how much of an impetus that is for folks that want
to get involved.
Ms. Walters, can you comment on your experience dealing
with disabled-veteran business owners trying to get into the
process, or generally with the broader small business
community, the backlog now in terms of certification is that
creating a significant problem as far as you have seen?
Ms. Walters. Well, as you had indicated, the only
certification process now is with the VA. It is very
backlogged. I think if you look at SBAs basket of management
and policing activities, historically if you looked at things
like HubZone now created after we looked at that having to go
out and do site visits. There just are not enough resources, I
believe, for SBA to actually pull off by themselves another
certification program for the VA.
I believe you are correct somewhere a thousand of these
certifications have been done. We are starting to see as more
and more veterans are asking to be certified by VA it is
becoming more and more backlogged. I mean, we are looking at
potentially 90 days, 120 days. As you put the onus then on the
folks who are trying to do the right thing, they are losing
opportunities.
Then you add the additional variables and getting back--and
I kind of want to move back to that a little bit and I'm
sorry--getting back to the contracting officers and where they
are looking and the CCR registration. The only requirement that
they have is that a service-disabled veteran-owned small
business certify themselves to the contracting officer that
they are that.
In effect, if they are going to look at CCR and they are
looking at the certs and reps and they have done that, the
contracting officer then by law is only required to accept
that. I think that one of the areas that we really need to push
back on is the area where the contracts are being let at the
contracting officer's point. If we can actually do a better job
of legislating more requirements for the contracting officer to
have to do before these things get awarded, we may be able then
to curtail trying to strategize more policing of these things
after they happen.
I think, like you said, the certification process like any
certification process, the HubZone, the 8(a), it just gets
further and further and further backlogged and it becomes
frustrating for veterans to have to go through certifications
when they are trying to do the right thing.
Chairman Nye. I want to follow up on something you said
during your testimony about not favoring too many policing
functions at the SBA that could tend to slow down the process.
I just want to make sure I understand what you mean about
trying to find the right balance between putting more onus on
the SBA in terms of their enforcement and getting back to the
contracting officer and force to do the job of ensuring that
the contract recipients actually quality. How do we strike the
right balance there?
Ms. Walters. Well, I think if we look historically on the
set-aside programs that SBA has in their basket where they are
trying to do the policing, if you look specifically in the
small business set-aside program, you will see that I would say
nine times out of 10 the only time that we have an issue where
a small business set-aside has been given inadvertently to a
non-small business is when another business protested. It is
not when we are looking at trying to police it.
I don't think that the SBA has enough resources in enough
places to put boots on the ground to do physical site
inspections of HubZone certifications of now a potentially
additional service-disabled veteran and small business
certification.
I don't think that is where we need to keep pushing on that
side of the basket when in my opinion where the contract is let
at the contracting officer who has a tremendous amount of
authority and judgment to award a contract. They have at their
disposal DCAA and DCMA to do some of these surveys before they
let it go out of the door. I think if we push more down into
that area, maybe then we can begin to strike a balance and we
just saw it in this instance.
I don't think only having the contracting officer look at a
self-certification and say, ``That is enough for me. I am going
to award the contract.'' And then when it gets out the door
somebody else can police it. Somebody else can worry about it.
Veterans are losing opportunities. Okay. And then all of a
sudden months later somehow it makes a circle back to the
contracting officer I don't think is the appropriate balance.
Chairman Nye. You mentioned that in some cases there is
unintentional fraud involving a veteran who is making best
efforts to meet the rules. Can you offer some examples of that
and how big of an issue is that?
Ms. Walters. Absolutely. I have actually had clients--well,
first, I can tell you I have large businesses that call me.
Some of the things that people will say to you is absolutely
astounding. I have large businesses that will call me and say,
``I want to do so and so and so and so but I can't. I need a
service-disabled vet-owned business. Can you hook me up with
somebody?''
I have constantly had clients coming and sitting down in my
office, service-disabled veteran-owned businesses, two-men and
five-men size businesses, small shops, who say, ``I have been
working with another company.'' Or, ``I had this company call
me, a large small business call me, and they want to do a
teaming agreement with me so I went ahead and did a teaming
agreement with them.''
Or, ``I went ahead and started the process of doing a joint
venture without a lawyer, without any assistance from anybody
because they said they can bring onboard and help me with my
capital. They can help me with past performance. All I have to
do is go out and find some service-disabled veteran-owned small
set-asides to get involved in.'' I say, ``Can you bring me the
documents that you signed? What did you do?''
When I take a look at this stuff, I realize that they have
been captured exclusively in some agreements that then allow
the execution of fraudulent contracts to them that now 85 or 90
percent of the work is really owned by these other companies.
That is actually, I think, more frequently happening than
people realize. I see a lot of people coming in the door after
they have gotten caught up in something.
Chairman Nye. So, in that case, the veteran-owned business
may be unaware of the problem but there is a business involved
in the transaction that knows what it is doing.
Ms. Walters. Yes. That is when I talk about these are
companies that probably have gamed the system along the way.
They have done this with other companies. They have done it
with minority-owned companies, women-owned companies, wherever
they can find the ability to get a piece of the pie that they
can't get elsewhere.
Now there really are because we do have a focus on
increasing the goals for service-disabled veteran-owned
businesses and getting closer to the goal. There is more and
more money going there. They are now preying on service-
disabled veteran-owned small businesses.
Chairman Nye. I see what you mean. Do you have contact
through the course of your work with contracting officers
themselves?
Ms. Walters. Absolutely. I talk to contracting officers
quite extensively.
Chairman Nye. And can you describe your feeling about their
level of knowledge and involvement in the problem areas here?
Ms. Walters. I think from the ones that I've talked to they
realize that there is a problem but for a contracting officer
the Federal Acquisition Regulations are the Bible. They go back
to the FAR and what the FAR states is a self-certifying
process. I have had instances where I have advocated to them
that they utilize a pre-award survey.
I have advocated to them that they listen to folks like Mr.
Roller when they come and say, by any means, whether it is a
phone call, a letter, regardless of what time in the process it
is, whether it is the proposal process or months or years after
an award is made, if a veteran comes to you and says, ``I have
a problem and I do not believe that this other company is a
service-disabled veteran-owned business,'' they should act
immediately as any of us who are in any type of a federally-
funded type of program. We should take that information and
really, really investigate it.
Chairman Nye. Let me ask you generally where on the scale
of challenges does this kind of thing fall for you and the
veteran-owned small businesses that you work with and what are
the greatest challenges that they present to you in terms of
asking for your assistance?
Ms. Cavolt, I am going to ask you the same question after
Ms. Walters answers.
Ms. Walters. I think their greatest challenge, the most
questions that I get from them are first off--well, second off,
how do I access the procurement system and how do I prepare a
good proposal. First off is, ``How do I make myself a
legitimate service-disabled veteran-owned small business to do
federal contracting legitimately?'' ``
How do I engage with other businesses legitimately to make
sure that when we go out and we try and garner a set-aside for
us that we have done it in a legitimate way?''
Then, thirdly, I get many that come to me after something
has already happened. ``How do I get out of this joint venture
or this teaming agreement or this thing that I have done with
myself and my business that now appears eight months down the
road that we have done something we shouldn't have done?'' Or,
``They are mistreating me or not giving me the scope of work
that they agreed to in a subcontract so that I can meet a
subcontracting goal for them.'' I think those are the most of
the challenges.
Chairman Nye. Okay. Thank you.
Ms. Cavolt, will you talk about your experience dealing
with veteran small businesses, what their great challenges are,
and what is your experience in this area.
Ms. Cavolt. We have had kind of a dual challenge there. One
is we are manufacturers. We make very specialized products as
you are aware. As I had said earlier, we make medical products
for the military. The military members come to us and they say,
``This is what we need.'' It is life-saving materials and they
say, ``This is what we need.'' We say, ``How do you want to
carry it?''
We design the bag. It is a very long process. We had one
that took a couple of years to actually develop. You know, what
happens, and this is a comment on contracting, but at ECC here
in Norfolk they want our item. We are in Virginia Beach. We can
provide it. They actually will ask us for a bid. We give a bid
and it goes to the contract office. The contract office puts it
out and goes to a company in Florida. It goes somewhere to a
business that doesn't even do what we do and we end up going
through them and it is the only way we can get our products out
there.
First of all, it is costing the government anywhere from 30
to 40 percent on top of what we charge so it is a pretty
expensive administrative fee. We have asked the contracting
officers, ``Can you set it aside? Can you do a set-aside?''
They will say, ``Well, we don't know if we can get a couple
service-disabled veterans in this area.''
Chairman Nye. Is that right?
Ms. Cavolt. You know, come on. As you know, we are the
largest concentration of retirees of veterans. Just getting the
contracting officer to even look at the idea of doing SDVOSBs.
We do have a company here in town who if a contract comes up
they have their avenues. They can pull an 8(a). They can pull a
women-owned business. They can pull SDVs.
I mean, as an example, I saw some of our products on eMall
which is a way that the government can purchase products and I
saw ours. I didn't know who this company was. I also noticed
that they were marked up about 40 percent but they were over
the micro-threshold which is the $3,000 limit so they are
making the sales. The bag is coming from us. It is costing the
government a lot. We are not getting the past performance so we
are still back at square one.
There is a great reluctance of contracting officers. First
of all, I get the attitude that, ``Yeah, we will do it,'' but
then the next thing you know it has been awarded to someone
outside other than a service-disabled veteran-owned small
business.
Interestingly I have done a little research in the FARs and
the requirement is that two businesses, two service-disabled
veteran-owned small businesses, need to bid on a contract for a
set-aside. If only one actually returns a bid, they are
required to award that bid to the one offer. So, you know, it
gets dismissed all the time.
You are familiar with some of the experiences that I have
had just outside of this hearing and I always come back to
contracting. There is a micro-threshold of $3,000 so they are
trying to handle everything from $3,000 to $50 million in
contracting. They are likely to throw a lot of things, you
know, the fastest way that they can manage it.
Like you said, they want to hit their scores so they are
just opening the book, ``Okay, let us pick that one.'' You
know, as Mr. Roller said, he didn't have the resources. I am
sure that included time as well. As a small business you are
working 24/7 it seems and that is just to keep things moving so
it is difficult.
Just one other thing I would like to mention is sometimes
when you do go up against large businesses, you mentioned about
being concerned about getting blackballed, so to speak, within
a contract office. We have had these large businesses come
after us legally and try to sue us for some trumped-up idea and
we always get it thrown--you know, it doesn't get very far but
it is intimidation.
Chairman Nye. Ms. Walters, can you comment on your feelings
on that? We are in a very heavy military area. We have a lot of
military contracting officers in this area that are contracting
out work on a day-to-day basis. Can you talk a little bit about
your work with those contracting officers and how you feel they
approach local businesses and their awareness of the service-
disabled business community here.
Ms. Walters. First let me say that I do believe that the
Federal Acquisition Work Force is under-resourced. The
contracting community over the years has gone through several
different cycles. We went through a time when we had a lot of
bundling of contracts where a contracting officer may be
required to spend time on five contracts.
Then that did not provide enough opportunity for small
businesses so we went through a cycle of unbundling so that
small businesses could receive contracts. You could have a
contracting officer trying to manage 80 to 100 various
contracts.
All of the contracting officers that I have spoken with, or
that I work with, are very well aware of the goals and
requirements of their Department to meet for service-disabled
veteran-owned small businesses. There are several different
councils like the Tidewater Government Industry Council where
actual contracting officers sit with industry representatives
and talk about these type of issues regarding in-sourcing, out-
sourcing.
That is a big issue right now among small businesses. I
think they are very well aware that service-disabled veteran-
owned small businesses exist. It is always astonishing to me
when there is a sources sought put out for service-disabled
veteran-owned small businesses to respond to before a
contracting officer will set aside something to ensure that
there are at least two out there.
I do see a lot of service-disabled veteran-owned small
businesses responding and then when the procurement comes out
it is actually not set aside. I have seen that probably more
often than I would like to see that. Then I never know what
happens behind the scene whether there is a change in the
funding or budget to that agency for the programs, whether or
not they decided that they have met a goal and are now pushing
away from that particular goal onto another one. I don't know
what goes on behind the scenes.
Chairman Nye. Can you just mention--I want to note that the
SBA recently designated your center as a veterans business
outreach center. What does that do in terms of your abilities
and resources for the coming years? What kind of additional
capabilities will you have?
Ms. Walters. We actually are looking at four different
areas that we are going to increase the scope of opportunities.
The first being, and one that is really important to me, is a
mentor protege program. Fortunately our partner, the Hampton
Roads Service-Disabled Veteran-Owned Small Business Council,
which Mr. Roller is part of, as others are here in the room,
they are a large council organization of very reputable
service-disabled veteran-owned small businesses.
They have come on board with the idea to assist in creating
a mentor protege program here in the local area where when we
have folks that come in the door we can then vet them and marry
their companies up with the appropriate person in their
industry and their companies will mentor them. I think that is
something that we would not be capable of doing if we didn't
have the outreach center. That is a number one priority for us.
Chairman Nye. Great. I appreciate you mentioning that. I
wanted to highlight that. I also want to note that I have
heard, not just today, but a number of local small veteran-
owned businesses that we can put a lot of effort into mentoring
and providing resources for help with understanding the
contracting process.
At the end of the day if the process is broken, there is a
big problem that we still need to fix. Thank you for continuing
to do your work on that and for being here to highlight the
challenges that are beyond what you can do in your day-to-day
capacity in terms of being an adviser to our small businesses
and how to approach the system.
Mr. Kutz, I want to actually just get back to another
question that you mentioned, that at the end of the day it
comes down to the consequences side of the equation. If there
are none, clearly that provides a strong lack of disincentive
for businesses and business owners to take advantage of the
system and defraud our veteran-owned small businesses.
I wanted you to tell us a little bit about some
consequences that you think would be useful in terms of
applying here. I want to note also the bill that I mentioned in
my opening statement that I proposed we provide for criminal
prosecution for any business owners that knowingly take
advantage of the system and defraud our veterans but can you
tell us kind of what the range of consequences looks like and
give us kind of a guideline that we could follow.
Mr. Kutz. Right. First of all, the contracts that they get
through fraudulent means should be taken away. Certainly future
options from those should be taken away. Companies should be
decertified or somehow taken out of CCR and any place else that
would give them any level of credibility as a service-disabled
veteran-owned small business, and then up the scale to
suspension meaning that they couldn't get future work,
debarment which is typically a longer term process but can also
result in a longer-term denial of future federal work.
As you mentioned, the prosecution, as I mentioned in my
opening statement, if you don't have any poster children of
people who pay consequences at the end of the day for fraud,
then people will continue to try to game the system because
they don't believe there is any chance of getting caught.
Let me give you an example. One of our cases was the person
wasn't even a service-disabled veteran. They got $7.5 million
of FEMA contracts for Katrina and their attorney advised them
to lie because there was little or no chance of getting caught.
Even if they got caught, nothing would happen. As it turns out
so far, that attorney is correct.
Chairman Nye. Clearly that is something we've got to
change. Can you talk a little bit about other programs and how
does the fraud that you uncovered in the service-disabled
program compare with levels that you might find in 8(a) or
HubZone programs? I'm trying to establish in relative terms how
rampant is the fraud in the service-disabled program.
Mr. Kutz. It is probably more rampant in this than the
other two just because this is a complete self-certification
program, although we can't project that. Based on the
allegations we are getting on our hotline and other indicators
it would seem to be more prevalent. One common thing that we
have talked about, and Michael has talked about with me also,
Michael Day, is this pass-through is common amongst this
program where you have some sort of a front organization and
the work is getting passed through to a large business. We have
seen that happening in the HubZone, 8(a) and service-disabled
veteran. I think from a prevalence standpoint if I were to
guess, and that is all I can do is guess because I don't know
for sure, I expect that the fraud rate is higher in this
program.
Chairman Nye. I want to offer to our businesses testifying
today an opportunity to comment on how they have interacted
with any of the services through the American Legion or the
procurement assistance center here. If you have any experience
with that you would like to share, I would be happy to hear
that at this setting. Or advice for things that you think would
be helpful to us to have locally in the future that could help
businesses like you do better.
I also want as an open-ended opportunity to offer you a
chance to comment on anything you have heard from the other
folks at the table and provide any additional thoughts about
ways we could improve the accountability in this system.
I would also offer an opportunity if you want to comment on
our proposal about prosecution of folks for taking advantage of
the system. Mr. Roller.
Mr. Roller. I would like to start out by saying the
testimony that Ms. Walters gave earlier about legislation at
the contracting officer level, that comes with a two-edged
sword. Putting more responsibility on the contracting officers
is a good step. However, they are already overtaxed with the
amount of work they are doing.
Outside of the Department for Veterans Affairs if you place
more responsibilities, more workload on contracting officers,
they may in turn set fewer projects aside as SDV set-asides
because the amount of workload that goes with that and, in
turn, look at HubZone or 8(a)s which requires a little bit less
work or even large business that requires even less work. I
just want to be careful of that.
As far as locally the Veterans Outreach Center with HRPAC
is absolutely needed in this area. Again, when I started my
business we sought counsel with our attorneys to make sure we
were legitimately putting things together and that we were not
in violation of any regulations. That comes with a cost and on
average that is anywhere from $5,000 to $10,000 to $20,000
depending on what type of business you are getting into.
It is certainly a resource to start off with to say how
would you go about putting together an SDV business. Or, ``I am
an SDV. How can I get my business certified through the program
and what are some of the legal steps I need to take?'' would
certainly save you some money with one of these outreach
programs.
Also, the discussion of bonding, finances, banking, all
those things are needed with small SDVs just getting started
and the resources are limited. A lot of times small SDVs turn
to large business as mentors in helping them get started or
even some other small businesses. Sometimes that is how they
end up with some of these team agreements that don't meet the
Federal Acquisition Regulation guidelines.
The small business SDV owner feels he owes it to somebody
to get some contracts with them because they helped them get
started in the business. I can certainly see how that can come
about. The outreach is definitely the first place to start here
locally.
Chairman Nye. Okay. Thank you.
Mr. Ingraham. I would have to agree 100 percent. The
outreach program and also the Service-Disabled Veteran-Owned
Small Business Council is a nice avenue that is partnering with
Ms. Walters also. I think that is a great step forward for
helping veterans that have an idea that want to take it to the
next step and how they do it properly.
Chairman Nye. Thank you for mentioning that. I want to take
the opportunity also to congratulate the Service-Disabled
Veteran-Owned Small Business Council locally for all the work
that they have been doing. I really appreciate that. I note
that there are some other members of the council here present
in the audience today with us so thank you for everything you
have been doing.
I want to offer the opportunity now for any of the folks at
the table here to add any comments that they would like that I
didn't ask about or if there is any follow-up comments anybody
wants to make sure to add into the record before we close. I
just want to make sure I didn't miss giving everybody the
opportunity to say everything they felt like they wanted to
say.
Mr. Kutz. Mr. Chairman, I have a couple of things I will
mention to you.
Chairman Nye. Yes, Mr. Kutz.
Mr. Kutz. I think your legislation is a good step with
respect to prosecution. I think it wouldn't hurt, too, for the
Committee to work with the Department of Justice to try to make
it a priority for U.S. Attorneys across the country to take at
least a few cases a year. We are hopeful that a couple of these
10 will make it to a U.S. Attorney. We have some hope in Idaho,
for example, one of our cases may make it to grand jury for
indictment.
Just a couple of cases a year even though they may not be
big priorities for DOJ and the U.S. Attorneys would be helpful
just to send a message again and you could help publicize those
cases that this behavior is not something that should be
tolerated and it will not be accepted.
Also, I just want to update you. Of these 10 companies
again subsequent to your hearing in November of last year five
of them have received another $5 million of new obligations
related to new service-disabled set-aside and sole-source
contracts so they are still in there and they are still getting
more contracts fraudulently.
They also got another $10 million of 8(a) and other
contracts subsequent to your hearing. To add insult to injury,
they have received millions of dollars of Recovery Act
contracts so you can see the consequences of not being
suspended or debarred they are going to continue to be out
there and who knows what other kinds of frauds they have
perpetrated against our government related to these various
things.
The last thing I would say to the Subcommittee and the full
Committee is to continue your oversight of these small business
programs because it is important if you are supporters of these
programs you have to be supporters of the integrity of these
programs to make sure that the right people are getting the
business.
I believe taxpayers for the most part will support these
programs but not if the integrity issues that keep coming up
happen. I think they want the business to go to veterans in
these cases. Certainly your continued oversight of this I think
is a positive step to keep the pressure because sunshine on
dark places actually helps.
Chairman Nye. I appreciate that. Thank you, Mr. Kutz and
thank you for taking the effort to look into those 10 cases
that you did. You have revealed to us a level of detail which
is useful to us in terms of making some changes to help prevent
this in the future.
Clearly it is inexcusable that since we brought this to
light through your report last November five other companies
found to have perpetrated fraudulent behavior have continued to
receive contracts. This just underscores the fact that there is
no enforcement mechanism present that actually works.
What we want to get to here at the end of the day is an
accountable system whereby taxpayers can trust that the money
that they have agreed to set aside for our service-disabled
veteran-owned small businesses is actually going to legitimate
service-disabled small businesses for them to be able to do the
work they do.
As Mr. Roller mentioned in his testimony, vets hire vets.
One of the great values of this system is when we make sure
that a certain level of contract dollars go to veteran-owned
businesses we know that they will in turn higher other
veterans. That is a proven benefit to our veteran community, to
those who have served our country in uniform.
It is a benefit that I think taxpayers agree with doing but
we owe it to the taxpayers as members of Congress to make sure
that those taxpayer dollars are being used for the program as
intended. I think we owe it to the service-disabled veteran
community to make sure we do the investigations that shed light
on whether the numbers the agencies are providing us are
accurate or not because when they complain to us that there are
some problems in the system and we go find that the numbers
aren't right, we realize they are absolutely correct in the
complaints that they raise with us.
It is incumbent upon us, of course, to make sure to
continue to practice that oversight and to make the legislative
changes that we need to make to solve the conundrum that Mr.
Roller so aptly described in his testimony today whereby the
price of consequences is so low in terms of perpetrating fraud
that there is no disincentive in the system right now to
prevent unscrupulous business owners from defrauding our
veterans and that is something we are going to change.
I appreciate you taking the time to come be with us, Mr.
Kutz, to the GAO for looking into this.
And Ms. Cavolt and Ms. Walters for the efforts that you do
through your organizations to help our veteran community
approach business issues and help them navigate the often
complicated world of government procurement. And to our
business owners for taking the risk and the effort to go out
there and make things happen in the local economy and do
business and create jobs and economic growth.
We appreciate the challenges you face. We are going to do
what we can to help make this playing field as fair for you as
possible and as transparent as possible. Again, I want to say
thanks to the other members of the audience who came to be with
us today, especially the other members of the small business
community, the service-disabled veteran community particularly
for all the work that they do every day to help grow our local
economy.
With that I want to thank everyone for their testimony and
I will go ahead and adjourn this meeting.
[Whereupon, at 11:11 a.m., the Subcommittee was adjourned.]
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