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




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

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             JULY 28, 2010

                               __________






            Small Business Committee Document Number 111-076
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

                        MARK CRITZ, Pennsylvania

                         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)







                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


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

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


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

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


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

                                 (iii)









              Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


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

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                 HEATH SHULER, North Carolina, Chairman


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

                                  (iv)










                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

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

                               WITNESSES

Mills, Hon. Karen, Administrator, U.S. Small Business 
  Administration.................................................     3
Kutz, Managing Director, Forensics Audits & Special 
  Investigations, U.S. Government Accountability Office..........     4

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    26
Graves, Hon. Sam.................................................    28
Mills, Hon. Karen, Administrator, U.S. Small Business 
  Administration.................................................    30
Kutz, Managing Director, Forensics Audits & Special 
  Investigations, U.S. Government Accountability Office..........    32

Statements for the Record:
Clarke, Hon. Yvette..............................................    45
GAO Report: Undercover Tests Show HUBZone Program Remains 
  Vulnerable to Fraud and Abuse..................................    47

                                  (v)

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

                              ----------                              


                        Wednesday, July 28, 2010

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Moore, Dahlkemper, 
Schrader, Nye, Critz, Bean, Altmire, Bright, Graves, 
Luetkemeyer.
    Chairwoman Velazquez. Good afternoon. This hearing is now 
called to order. House Resolution 40, which was passed at the 
beginning of this Congress, amended Clause 2(n) of House Rule 
XI by requiring that committees undertake intensive and regular 
examination of executive branch activities. Such actions are 
necessary to not only safeguard taxpayer dollars, but to also 
improve the operations of federal agencies.
    This Committee has taken this role very seriously. We have 
exceeded the quarterly requirement and held ten hearings on the 
Small Business Administration and its programs. This has 
included four GAO investigations, all of which were requested 
by this Committee.
    With 3,500 employees, 84 district and regional offices, and 
a broad range of programs, congressional oversight is essential 
to the operation of the SBA. This ensures that resources are 
directed more efficiently and effectively to small businesses.
    We have examined every area of the agency, including its 
access to capital, entrepreneurial development, and contracting 
initiatives. The Committee has convened hearings on the 
agency's lending programs and how they are meeting the needs of 
small firms in today's economy. In addition, we worked with the 
GAO to oversee the disaster program so that businesses are 
better able to secure the funds they need to rebuild after a 
catastrophe.
    A main focus of the Committee's oversight work has been the 
agency's procurement programs. With large businesses receiving 
small business contracts and fraud regularly being uncovered, 
it is critical that the Committee examine these programs. We 
will continue our investigations until the agency fully 
resolves these issues.
    Finally, the Committee has held hearings about the agency's 
entrepreneurial development and innovation programs. This has 
included testimony from a wide range of experts that allowed us 
to consider how the agency's resources can be improved without 
unnecessarily increasing taxpayer expense.
    Today's hearing continues the Committee's strong commitment 
to thorough oversight. Doing so provides a basis for not only 
taxpayer savings, but also the long-term modernization of the 
agency. This is critical because small businesses are counting 
on the SBA, its staff, and its programs more than at any other 
time in the past decade.
    The agency has risen to the task before and I know-- with 
all of the resources it has at its disposal--that it will 
again. And I would like to take this opportunity to applaud 
your efforts to hold the free fall of small business lending. 
By doing so, we will allow entrepreneurs to do what they do 
best, create the ideas and the jobs that our economy needs to 
move forward.
    I want to take also this opportunity to thank the witnesses 
for your presence here this afternoon. And I now recognize 
Ranking Member Graves for his opening statement.
    Mr. Graves. Thank you, Madam Chair, and thank you for 
holding this important hearing today regarding the oversight of 
the Small Business Administration and its programs and I look 
forward to hearing from the Administrator and the GAO on some 
very important issues concerning the management of the agency 
and particularly its inability to root out fraud and abuse in 
the government contract programs.
    Since I've been on this Committee, the challenges facing 
the agency have never been resolved, nor do they seem to 
change. When I first joined the Committee, the SBA's 
contracting databases were riddled with inaccuracies and today 
their same contracting databases remain full of errors 
concerning the eligibility of firms for the agency's government 
contracting programs. Even before I was elected to Congress, 
there were problems with the loan management accounting system 
and here it is a decade later and those problems still exist.
    Five years ago, there was an obvious lack of coordination 
in responding to disasters. And today, there appears to be an 
absence of coordination between SBA and BP concerning the 
compensation to victims of the oil spill in the Gulf. Quite 
frankly, the litany of problems facing the SBA does not involve 
rocket science.
    The SBA does not seem to take an aggressive approach to 
fixing the problems identified by Congress, by the GAO, and the 
Inspector General. Instead, it spends scarce resources studying 
these problems. For example, the agency issued a contract that 
examined, among other things, what value-added benefits the 
agency will obtain from moving to a new loan management 
accounting system. The SBA doesn't need any more studies. It 
needs action. And if it is incapable of taking necessary 
corrective action, then it might be time to examine whether a 
complete overhaul of the SBA is needed to separate its 
regulatory functions from its mission to promote small 
businesses.
    Congress cannot tolerate and the taxpayer can ill afford 
the status quo at the SBA.
    Again, I want to thank you, Madam Chair, for holding this 
important hearing and I look forward to the recommendations 
from the witnesses of actions that the agency is going to take 
to move in the right direction. I appreciate it.
    Chairwoman Velazquez. And it is my pleasure to welcome the 
Honorable Karen Mills who was sworn in April 6, 2009 as the 
twenty-third Administrator of the U.S. Small Business 
Administration. The SBA helps small business owners and 
entrepreneurs secure financing, technical assistance, training, 
and fill our contracts. Welcome.

  STATEMENT OF THE HONORABLE KAREN MILLS, ADMINISTRATOR, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Ms. Mills. Thank you very much Chairwoman Velazquez, 
Ranking Member Graves, Members of the Committee. It's an honor 
to be with you again. Thank you for working closely with us to 
improve oversight and reduce risk, while removing fraud, waste, 
and abuse.
    The SBA has a three-pronged risk-management framework for 
our contracting and business development programs: upfront 
certification, robust monitoring, and pursuing and removing 
ineligible firms.
    HUBZone is a great example.
    First, we have reengineered our certification process, 
requiring more stringent documentation. We now require a 
statement under penalty of perjury that both applicants and 
renewing firms are eligible.
    Second, we dramatically increased monitoring: from less 
than 100 site visits in 2008, to over 800 in 2009, to more than 
1,000 slated for this year.
    Third, we're removing ineligible firms. For example, we 
investigated the 29 firms the GAO identified. After reviewing 
the facts, 16 were decertified, 8 voluntarily decertified, and 
5, in fact, remained eligible for HUBZone.
    We're also pursuing HUBZone fraud cases with the Department 
of Justice and the Inspector General, and we continue to 
suspend and debar firms suspected of fraud. In fact, just 
yesterday we suspended four more firms and two individuals.
    An environment of integrity across all of our contracting 
programs is crucial.
    The President included more funds in SBA's proposed budget 
exactly for this purpose. He also created an Interagency Task 
Force, led by OMB, SBA and Commerce. We'll soon provide formal 
recommendations, including some that will help equip our agency 
partners with tools they need to help in the shared mission of 
reducing fraud, waste and abuse.At the same time, we're 
committed to working more closely with Congress to make sure 
small businesses can continue to grow and create the jobs we 
need now.
    Two examples: This Administration supports parity, or equal 
treatment, through small business contracting and business 
development programs: 8(a), HUBZone, service-disabled veterans, 
and women-owned. But a recent court decision interpreted the 
law to give a preference to HUBZone. Without clarity on this 
issue, billions of dollars could be redirected away from 
programs like 8(a), which help thousands of minority-owned 
small businesses.
    Already, we fear that the current confusion is causing a 
chilling effect in small business contracting.
    We support bipartisan legislation co-sponsored by 12 
Members of this Committee to provide a fix for this problem at 
this crucial time.
    Second, there's still a credit gap. Too many good small 
businesses still can't find access to capital. The increased 
guarantee and reduced fees from the Recovery Act have put more 
than $30 billion in the hands of small businesses at a cost of 
only about $680 million. Taxpayers got a big bang for the buck, 
but we ran out of funds two months ago. As a result, SBA 
lending has plummeted down 60 percent.
    Yesterday, I was at a service-disabled-veteran and 
minority-owned small business in Jacksonville. Andy Harold got 
a Recovery Act loan to support a contract for electronics work 
on a simulator that trains our troops whose vehicles get 
flipped over on the battlefield. He hired 10 people because of 
that loan.
    Now is not the time to pull back. We need to continue 
helping firm's like Andy's that create jobs and so much 
more.Overall, we will continue to be vigilant in reducing 
fraud, waste, and abuse in all of our programs. To do that, we 
are committed to transparency and a strong, ongoing partnership 
with GAO, our IG, and this Committee.
    I welcome any questions and comments about our efforts in 
any of the areas I've mentioned today. Thank you.
    [The statement of Ms. Mills is included in the appendix.]

    Chairwoman Velazquez. Thank you. It's now my pleasure to 
welcome back Mr. Gregory Kutz. He's the Managing Director of 
Forensic Audits and Special Investigations at GAO. FSAI Unit 
investigates waste, fraud, and abuse related to government 
programs and taxpayers' dollars. FSAI has investigated abuses 
of Hurricane Katrina relief dollars, border security and 
overtime and minimum wage complaints, among other topics.
    Welcome.

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

    Mr. Kutz. Madam Chairwoman and Members of the Committee, 
thank you for the opportunity to discuss theHUBZone program. 
Today's testimony highlights the results of our most recent 
investigation.
    My testimony has two parts. First, I will discuss the 
results of our undercover testing, and second, I will discuss 
the actions SBA has taken against the 29 firms identified in 
our past investigations.
    First, the HUBZone program remains vulnerable to fraud and 
abuse. Specifically, SBA's validation controls failed as three 
of our four bogus firms were certified. As you know, to qualify 
for this program, a firm's principal office must be located in 
a HUBZone. Our past investigations show that fraud and abuse 
related to the principal office were a significant problem.
    The monitor shows a picture of the address of our first 
bogus company, Crocket and Associates. You may recognize the 
site of our principal office. This is the Alamo in San Antonio. 
Madam Chairwoman, we thought that SBA would catch this one. In 
fact, at your hearing in June of 2008 on HUBZone, SBA 
represented that they were going to be using Internet searches 
to validate the principal office.
    The next picture on the monitor shows what a Google search 
using the address from our bogus company shows. These links 
lead you to the next picture on the monitor which as you can 
see again is the Alamo. It took us seven months and the 
submission of numerous counterfeit documents to be certified 
for this bogus company. However, these pictures clearly show 
that a one or two minute Internet search would have at least 
raised suspicions about the validity of this application.
    For our second application, we used the address of a rental 
storage unit in Florida as our principal office. The 
certification of this company took about 14 months.
    For our third application, we used a city hall in Texas as 
our principal office. The certification of this firm took seven 
months.
    We decided to abandon our fourth application, but only 
after SBA lost the documentation that we submitted several 
times.
    To go to my second point, SBA has taken action on some of 
the 29 firms identified in our first two investigations. As the 
Administrator said, 16 were decertified, 8 voluntarily withdrew 
from the program, and 5 were determined to be in compliance 
with the program. For those five, we continue to believe at the 
time we looked at them that they were not in compliance.
    Since our March 2009 report, 17 of these firms have 
received $66 million of new government contracts. Of the 29 
companies before yesterday, and there's been more suspensions, 
only 1 was currently suspended and proposed for debarment, 
which brings me to the importance again of the consequences for 
fraud and abuse. And I'm going to use Case Study 2 from our 
current report to make that point.
    In my June 2008 testimony, we determined that this 
construction firm fraudulently received $4 million of HUBZone 
contracts. Madam Chairwoman, this firm also fraudulently 
received $48 million of 8(a) set-aside contracts. Because this 
firm was not suspended or debarred in 2008, they received $10 
million of new stimulus contracts. We understand that in March 
of this year, this firm was suspended and proposed for 
debarment.
    In addition, the SBA IG has taken some of the 29 cases to 
U.S. Attorneys. We understand that in certain instances, U.S. 
Attorneys are declining these cases because they believe there 
is no loss to the government. We believe when a firm 
fraudulently receives one of these contracts that the entire 
amount of that contract is fraud and the victims are not only 
the taxpayers, but the legitimate HUBZone firms.
    In conclusion, our work continues to show that SBA is not 
very good at fraud prevention and enforcement. We understand 
it's very difficult to be an advocate for small business and at 
the same time to be the enforcer. However, to be an effective 
advocate you need to have an effective fraud prevention system 
and make examples of the bad actors.
    I believe that fraud and abuse in small business programs 
such as HUBZone, 8(a) and service-disabled-veteran contracting 
is widespread. I encourage this Committee to continue making 
oversight of program integrity a priority.
    Madam Chairman, that ends my statement and I look forward 
to your questions.
    [The statement of Mr. Kutz is included in the appendix.]

    Chairwoman Velazquez. Thank you. Mr. Kutz, Crocket and 
Associates at the Alamo; what are you going to try next, 
Franklin and Sons at Independence Hall?
    Could you please outline for the Committee what type of 
sophisticated method GAO employed to bypass all of the SBA's 
new security controls?
    Mr. Kutz. As we do in all of our testing, we use publicly-
available hardware, software, and materials. In this particular 
case, we set up websites for these companies. We had computers, 
email, and we stole the address, as you see, effectively. We 
used addresses of companies or the Alamo in the one case to 
really test this. So I would say it was not a highly-
sophisticated operation, basic software and computers, emails, 
and back-up phone numbers.
    Chairwoman Velazquez. Administrator Mills, SBA has come 
before this Committee several times in the past years and said 
that there is either no problem or it's been fixed. Let me take 
a minute to read to you some of the SBA responses over the 
years.
    On March 25, 2009, Acting Administrator Darrel Hairston 
testified that ``SBA has undertaken aggressive procedures. They 
are undergoing right now business process reengineering where 
they are looking at all of the elements of the program and 
they're establishing the necessary corrections.''
    Administrator Mills, on July 29, 2009, you testified that 
``we have tightened it up. We require more documentation 
already, but we are also going to do a business process 
reengineering of it. We did the extra 600 visits.''
    Administrator Mills, on November 18, 2009, testified, ``We 
actually have changed our certification process. We now ask for 
extensive documentation and are working through how to make 
sure we get the right documentation up front.''
    And finally, Administrator Mills, on April 20, 2010, 
``we're working to ensure that only legitimate, eligible firms 
are benefiting from the HUBZone program.''
    So as you can see, there is a web of double talk here. SBA 
comes before the Committee and says that they're doing one 
thing, but GAO is finding that you're doing another. So what 
are you going to do differently this time to make sure that we 
are not having the same conversation three months from now?
    Ms. Mills. Well, thank you, Madam Chair, for raising this 
issue because these are shared goals. We agree with the GAO and 
with this Committee that it's very difficult to have integrity 
in the program when firms that are ineligible are getting into 
it.
    So we perceive this as a process of continuous improvement. 
This has been a program that, as you point out, has had many of 
these issues over time. As I described, we have developed a 
three-pronged approach. The four firms that the GAO just 
described really fall into the first category which is the 
issue is certification. Why can a firm which is not an eligible 
firm get into the program? And that is something that we have, 
as I described earlier, created a new set of criteria that had 
not existed before where we are asking our companies to submit 
extensive documentation. And we actually, I think, distributed 
to the Committee in our report to Congress, exactly what that 
documentation includes.
    I can talk about some of it, if it's of interest. But we 
are taking that specific documentation now in a much more 
rigorous oversight process.
    We have not yet seen the GAO report with the details of how 
this got through the process. But what--
    Chairwoman Velazquez. How do you think that Crocket-- what 
is the name--and Associates at the Alamo.
    Ms. Mills. Exactly. We're going to find out. And we're 
going to find the facts.
    Chairwoman Velazquez. Last time you said you would be using 
Google Earth, right? You said do an Internet search and that 
you will use any kind of tools to validate HUBZone addresses.
    Ms. Mills. Right.
    Chairwoman Velazquez. Here, you have this one, not only 
for--so last time you said this is just so simple, do you know 
how many firms are participating in the HUBZone program right 
now? Nine thousand. How much will it take to Google the address 
of--30 seconds. So it will take at least 77.5 hours of man 
hours to determine whether or not those are bogus addresses.
    Ms. Mills. In fact, we are currently using tools such as 
Google Earth to find out the addresses and principal locations 
of the workers who are reported to be in the HUBZone.
    One of the suggestions, I believe, that Mr. Kutz may 
suggest is that we use Google Maps to Google these addresses. 
And in fact, we've already discussed this recommendation given 
these preliminary findings.
    Chairwoman Velazquez. Okay. I'm going to switch to another 
topic and that is the oil spill.
    Recently, Kenneth Feinberg testified before our Committee--
and another time I understand that he and the SBA have now 
talked.
    Now, I understand that that has changed. And my question 
concerns how SBA treats BP claim payments for those seeking 
disaster loans? To this point, it is important that the SBA 
recognize BP claims payment as income, not as compensation for 
losses. Are you taking steps to ensure that this will happen?
    Ms. Mills. Thank you for your interest and your help with 
the BP claims process coordinating with the SBA. In fact, as 
you and I talked, we did make contact right after that hearing 
with Ken Feinberg. He called in return to my phone call. We had 
several conversations and meetings and consultations because 
what the people in the Gulf need is a BP claims process that 
works.
    We are currently in the Gulf in 27 locations. We have 178 
people, but we believe and we are giving--we are doing two 
things. We're giving economic injury disaster loans and we are 
deferring existing disaster loans because sometimes that's all 
a small business needs is to defer it.
    Chairwoman Velazquez. I hear all that, but I would like for 
you to answer my question and that is if SBA is going to 
recognize BP claims payment as income, not as compensation for 
losses, and are you taking steps to ensure that this will 
happen?
    Ms. Mills. Well, that's actually a very good question and 
I'm going to get back to you on whether we are. Because at the 
moment, the primary focus is to have people get their first 
claim from BP. So in our actual claim places, we are helping 
people fill out BP paperwork, referring them to the proper BP 
claims place, because it's better for them to get their proper 
compensation.
    Chairwoman Velazquez. I would like to share with you that 
the chair of the Senate Committee agreed with me that BP claims 
payment should be considered income and not as compensation for 
losses.
    Administrator Mills, in 2003, Diamond Ventures brought a 
lawsuit against the SBA alleging racial discrimination in the 
SBIC program. Earlier this year, a federal judge denied SBA's 
motion for a summary judgment and subsequently ordered 
mediation in this case.
    I understand that the court-ordered mediation recently came 
to a close without a settlement. Why haven't you been able to 
resolve this issue?
    Ms. Mills. I will get back to you on that issue and we'll 
see why.
    Chairwoman Velazquez. Well, I just want to make clear that 
your own statistics, SBA's own statistics show that less that 
four percent of all SBIC investment dollars went to minority-
owned firms and less than 1.5 percent went to women-owned 
business.
    And at the time of Diamond's lawsuit, there were only a 
handful of minority investment firms in the program. So I hope 
that you're paying attention to that, because I don't think 
that it needs for someone to bring a lawsuit for you to realize 
that this disparity is taking place among SBIC companies.
    Ms. Mills. Thank you. We agree. I'll look at it, too.
    Chairwoman Velazquez. Mr. Kutz. In your opinion, are the 
enforcement mechanisms implemented by SBA to punish those that 
violate eligibility standards for the HUBZone sufficient?
    Mr. Kutz. I would say no. I think we're better off than we 
were two years ago, because as you've heard, 24 of the 29 firms 
we looked at are no longer in the program. We validated that 
they're no longer in the system. They're not in the system. 
They cannot get HUBZone contracts. And it sounds like there's 
been additional suspension. So--but are we where we need to be? 
No. I believe more quick, aggressive action. I think the 
example I used in my opening statement of the firm that 
committed 8(a) fraud also and they received $10 million of 
stimulus contracts, it's still never too late. They still get 
suspended. It's never too late to make it right, protect the 
government, but it should have been done earlier.
    So I think it's still, on a scale of 1 to 10, maybe a 3 is 
where we are at this point.
    Chairwoman Velazquez. Administrator Mills, what kind of 
message do you think this sends to individuals looking to game 
the system that only 1 out of 29 with exception of the 4 that 
you just mentioned that happened yesterday maybe because we 
were having this hearing today?
    Ms. Mills. Madam Chair, you're exactly right. If we don't 
punish the bad actors, people will not be deterred. So we have, 
as our third prong, made a concerted change in terms of going 
after bad actors.
    So to that extent we actually have a whole series of tools 
that we're employing: suspension, debarment, collaboration with 
the Inspector General, civil fraud actions with the Department 
of Justice, and false claims actions with the Department of 
Justice.
    In addition, now when you sign the HUBZone contract, it's 
under penalty of perjury and it has to be notarized. So all of 
these activities should give us more basis to do what you so 
rightly urge us to do which is to go after bad actors.
    Chairwoman Velazquez. Mr. Kutz, you have been working at 
the HUBZone program for a number of years now. Why is this 
program so vulnerable to fraud?
    Mr. Kutz. I think it's a combination of the inherent nature 
of maintaining the 35 percent, perhaps. In some areas like 
Washington, where you've got slivers of HUBZone locations and 
those places it's difficult to perhaps police and look over. So 
it's the inherent nature and in addition to that just some of 
the lack of fraud prevention controls and consequences in the 
past.
    I mean most companies look at this and say, hey, if I 
cheat, I get to keep the contract. If I get caught, I might get 
decertified. Chances of going to jail are zero and I might not 
get suspended or debarred.
    Now that's changing here, hopefully. And I appreciate the 
oversight here and the efforts SBA is making. So we need to 
move more aggressively to get where we need to be.
    Chairwoman Velazquez. Okay. Mr. Graves.
    Mr. Graves. Thank you, Madam Chair. How important do you 
think it is, Mr. Kutz, as far as how important a role is the 
possibility of punishment play in a good anti-fraud program? 
And we've kind of danced around that, but a strong punishment 
program has to be--it has to be out there.
    Mr. Kutz. I think it's enormous. I mean if you look across 
the government, we look at programs across the government, 
those programs that there are no consequences and no one is 
ever held accountable through prosecution or in suspension 
debarment, those are the ones that are most vulnerable to 
something happening. So I believe it's critical.
    Mr. Graves. What steps would you take to ensure that only 
qualified applicants, I mean beyond what some of the things 
we've already talked about?
    Mr. Kutz. I think that the Internet searches we're talking 
about as the Chairwoman said, if you did it for all several 
thousand, that's an achievable thing. They take several 
minutes. It may not catch everything, but certain obvious 
indicators would come out.
    And I'm a proponent of at least unannounced site visits to 
these locations. I think that's a good practice. Our experience 
is when you show up unannounced, you get a very different view 
than when you tell them you're coming. So those are my two 
primary prevention techniques here.
    Mr. Graves. And you may have already answered this, but 
given your background, how would you rate the SBA's 
aggressiveness in suspending federal debarment?
    Mr. Kutz. I think it was at zero before we started this and 
I think it's moved towards two and today it may be three--
suspended firms and two more individuals, maybe three. But it's 
not quite where we need to be.
    Mr. Graves. It's a long ways where we need to be.
    Chairwoman Velazquez. Mr. Critz?
    Mr. Critz. I just have one question. Thank you, Madam 
Chair. You know, we talk about that it's been a while since 
we--or since your audit showed that there were problems and I'm 
just curious to hear from the Administrator, how aggressively 
you are addressing these issues.
    Is this a training issue? Is it that the staff that exists 
don't have the training that they need to follow through on 
this? And I'm just curious to hear what the plan is going 
forward.
    Ms. Mills. Thank you. I think Mr. Critz spoke earlier and 
we have aggressively added staff to the HUBZone oversight 
function. And we have re-engineered it.
    So he is correct, that we were starting at a place that was 
about zero, that there was not firm action against bad actors 
and there was no plan or program for how we went after 
oversight on this program and getting rid of fraud, waste, and 
abuse.
    And in fact, there was not even a statement that we would 
not tolerate fraud, waste and abuse. Now we have a position and 
specific actions that have been implemented. On the front end, 
we did the certifications. In the middle end, we increased the 
site visits. There were seven in the six months before I came. 
There will be a thousand this year, the majority of which will 
be unannounced.
    In the back end, we're working very hard, making progress 
on going after the bad actors. And once again, we're using a 
lot of tools in the tool kit, including going after them with 
the Department of Justice on multiple fronts.
    Chairwoman Velazquez. Mr. Critz, will you yield for a 
second?
    How many of the 29 firms that were ineligible continue to 
receive federal contracts?
    Ms. Mills. This is one of the most troubling findings of 
the GAO. And we have not--
    Chairwoman Velazquez. Mr. Kutz, do you know?
    Mr. Kutz. Seventeen.
    Chairwoman Velazquez. Seventeen.
    Ms. Mills. Seventeen. Thank you.
    Chairwoman Velazquez. Do you know the total amount of 
money?
    Mr. Kutz. The total amount is $200 million. The amount of 
new contracts is $66 million since your last hearing in 2009 on 
HUBZone.
    Chairwoman Velazquez. Thank you. Thank you for yielding.
    Mr. Critz. I appreciate your answer and I'm from a school 
of thought that there's benchmarks, there's goals, there's 
timing.
    I would like to hear an answer from both of you as to is 
this something that you feel that the staffing level that you 
have or the plan for staffing, the training level that you have 
and the plan for training that this is something that will be 
resolved within six months that you'll be at some artificial 
number, 95 percent assurance that HUBZone, 8(a), and small 
business or the veteran classifications will be running at a 
level that you feel comfortable that you're really catching all 
the bad actors?
    Ms. Mills. At this time, we are making significant progress 
in each of the pieces. But as I said, it's really in the 
continuous improvement. And we think that we've got now a good 
partnership with the GAO. We have a lot of ways that people 
have in the past been able to come into this program that have 
been ineligible. We've blocked up some of the holes. We've got 
some more work to do. And this involved a complete 
reengineering of our department and the addition of enormous 
resources. In the President's budget, there are additional 
resources for us which will be very valuable.
    Mr. Kutz. I would say there's progress, certainly. There's 
a long ways to go, but when you consider where we were two 
years ago when the first hearing was held, I think that what 
they've done and the oversight you've done here have made a 
difference.
    With respect to people, it's interesting. It's two pieces 
to it. It's not only the number of people, it's the type of 
people and I think you know we've seen SBA has been in 
traditionally more of an advocacy organization than 
enforcement. That's a difficult transition. And I mentioned 
that in my opening statement.
    I think the Ranking Member mentioned the same thing. That's 
an important aspect to make sure that they have the right 
people doing this.
    Mr. Critz. I appreciate your answer and from my 
perspective, I'm looking at the numbers that $680 million worth 
of investment yield $30 billion worth of loans or activity 
economically. And certainly, these kind of backwards movements, 
it's hard to measure what the true impact is, but I appreciate 
your testimony and I yield back.
    Chairwoman Velazquez. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chair.
    Ms. Mills and Mr. Kutz, as I've sat here over the last year 
and a half and watched this play out, are there any tools that 
you need? You mentioned tools a minute ago to be able to do 
your job.
    Are there any additional tools or things that you need that 
we can help you with that you see right now?
    Ms. Mills. To be honest with you, this oversight is 
actually extremely helpful. And we see this as a partnership. 
It's difficult to make progress, but we have changed the view I 
think now in partnership, that this is a valid concern, that we 
do do oversight and that we don't tolerate fraud, waste, and 
abuse and that we have to have integrity in the programs.
    We are trying to use our resources as effectively as 
possible. We do appreciate the help that many have given us in 
terms of going after bad actors.
    Mr. Luetkemeyer. Okay. Do you need anything else? Have you 
got what you need?
    Ms. Mills. Yes, I think we would very much like to have the 
budget--
    Mr. Luetkemeyer. I apologize for cutting you off. I've just 
got five minutes.
    Mr. Kutz?
    Mr. Kutz. Two things. There may be some software or other 
law enforcement-type tools they don't have access to what we 
have, in some cases other law enforcement that they could use. 
But I think the big one here is getting the Department of 
Justice and U.S. Attorneys interested in taking these cases. 
Because if you don't get U.S. Attorneys interested in taking 
the cases, you're going to get a declination as I mentioned in 
my opening statement.
    So this Committee perhaps could work with the Department of 
Justice and SBA and the whole IG investigative community to try 
to make at least a couple examples a year of these firms and 
maybe each program, 8(a), service-disabled-veterans, HUBZone, 
etcetera. Because if the U.S. Attorney won't take the case, 
you're out of luck. If they say this isn't interesting, there's 
no loss to the government by these frauds, then they're not 
going to do anything. And you won't get any prosecutions.
    Mr. Luetkemeyer. That is always a problem with law. We can 
make all the laws here in the world, all the great laws, but if 
there's no enforcement of them we've just wasted our time and 
wasted a lot of trees. So think enforcement is a key provision 
here.
    The next question of you, Mr. Kutz, are you working with 
SBA with recommendations regularly in your oversight to explain 
to them what you see, where weaknesses are, what your 
recommendations are, instead of playing a game of gotcha?
    Mr. Kutz. Right. After the undercover, under our protocols, 
we have to first of all brief the requestor, which is the 
Chairwoman. And then we brief the Agency on what we've done. 
And we've provided past recommendations.
    I don't know if we've had any new recommendations. Just 
some of the things like using the Internet tools. I think the 
Administrator said they've staffed up to 20 people. I don't 
know how well-trained they are, but the training and type of 
backgrounds they have are important. And so we're always 
available.
    And two years ago, or a year and a half ago, I sat down for 
an hour, an hour and a half with their consultant and kind of 
did a brain dump of everything we could think of that they 
could do. So we have and will always be available to help them.
    Mr. Luetkemeyer. Ms. Mills, with regards to that, can you 
give me a percentage of the stuff they've given you that you've 
implemented at this point?
    Ms. Mills. Well, in the past recommendations, particularly 
on 8(a) they gave us 12 distinct recommendations. They were 
really excellent. They were like a roadmap. And we've done all 
12.
    We're in the process of doing the last five, but we've 
accepted all 12 and we've implemented the majority.
    Mr. Luetkemeyer. Okay, Mr. Kutz, with regards to other 
programs that SBA has implemented, how much oversight--how much 
investigation have you done in those and are there problems in 
other areas?
    Mr. Kutz. 8(a) definitely. We issued a report to the 
Chairwoman on that and we found 14 firms with $325 million of 
fraud and as she mentioned, there's been some recommendations 
and certainly progress. The one that's probably the most 
troubling, I think Representative Nye and I had a field hearing 
I attended on service-disabled veteran-owned small business and 
that's a joint effort with SBA and VA. That's very troubling. 
We continue to get dozens and dozens of allegations of fraud in 
that program. I believe that there is significant fraud still.
    Mr. Luetkemeyer. One of the problems that I see is the fact 
that you--I've served in the private sector and I've also 
served in the public sector.
    In the public sector, you're dealing with lifetime 
bureaucrats. And it's difficult with their mindset to sometimes 
change which is what you're trying to do, to change them to 
become a different type of organization, to look at things in a 
different light. This is the way they've done it for the 
lifetime. They've been there 20 to 30 years. You're not going 
to tell me anything different. I'm going to outlast you, 
because you're going to be gone with the next administration. 
All I've got to do is bide my time and we'll deal with the next 
Administrator. That's a problem.
    And I think in fairness to you, Ms. Mills, I think that the 
inherent problem with bureaucracy and trying to change their 
attitudes is a difficult thing. And I admire--I certainly 
understand your task, although obviously we've got to do it. 
We've got to change it because obviously we've got some 
problems here that we've been looking at for a long, long time.
    With that, I yield back, Madam Chair.
    Chairwoman Velazquez. Thank you. Ms. Bean.
    Ms. Bean. Thank you, Madam Chairwoman. And thank you to 
both of our witnesses for your testimony here today.
    A couple questions for Administrator Mills. Welcome back. 
My first question is just in follow up to what's going on 
relative to contracts being awarded to some of those who 
shouldn't have been eligible in the first place, you talked 
about a new certification process. Are you in the process of 
creating a new decertification process to once and for all take 
that those bad actors out?
    Ms. Mills. Well, many of those have been decertified. I 
think our decertification process at this point works. The 
question is getting to it quickly. And then making sure that 
those who are decertified don't get back in the system and that 
they come out of the system. And that's the place. We're 
looking forward to working with GAO on exactly what happened in 
these cases and then fixing.
    Ms. Bean. My next question is relative to Recovery Act 
provisions. I think you painted a striking picture of how 
important it is to providing many small businesses that you 
speak to and that we speak to in our districts in terms of 
small business lending in the secondary market.
    The recent decline in loan approvals is very disconcerting, 
having followed the success that you had had in increasing it 
so drastically in helping address the credit gap.
    I guess my question is what do you think we need to be 
doing further? I have a lot of small business forums in my 
district with businesses and I hear from many who shared 
successes from the Recovery Act loans that they've received 
through the 7(a) or 504 programs. And then I'm also hearing 
from others who may not have even applied to SBA, but just have 
access to capital issues which is so critical.
    Obviously, we've passed a number of initiatives through the 
House. We're waiting for the Senate to act and I would assume 
you'd want to see not only an extension of the Recovery Act 
provisions that just expired in May and have led to this 
downfall in lending, but the small business lending fund, maybe 
the 504, to address the commercial real estate markets.
    What other things would you like to see us act on or the 
Administration act on in support of access to capital improving 
to address that gap?
    Ms. Mills. First of all, I want to thank this Committee and 
the House for passing the extensions several times actually, 
for the Recovery Act. We believe that we've been very effective 
putting the $30 billion in. We are very, very, very concerned 
about the drop off that occurred when the authority and the 
money ran out. We're down 60 percent. We're hearing from small 
businesses and all over the country that the freeze is back on.
    We have over 600 in the Recovery Act queue, so as soon as 
that passes, we can fund them. And this bill is on the floor of 
the Senate at this moment and we are very, very hopeful. The 
Administration, the President is very clear in urging the 
Senate to pass this bill.
    Ms. Bean. We're glad to see them to closure which is always 
a big feat over there. And I know we're helpful that that 
happens because there is such leverage potential to take that 
$30 billion and put essentially $300 billion of lending out 
into the small business community.
    My last question for you is regarding the recent recovery 
report card that showed that 32 percent of the Recovery Act 
federal contracts went to small businesses. And I commend your 
efforts and the Administration's on improving the level of 
contracts that are awarded to small businesses.
    To what would you attribute that relatively high increase 
and what could we learn from it that we could apply to other 
federal contracting efforts?
    Ms. Mills. Well, first, in the Recovery Act there actually 
weren't goals, the Vice President announced that he was going 
to consider that all the small business goals did exist. And we 
beat them all. And we did that by a joint effort with the 
Department of Commerce where we conducted over 300 match-making 
events to make sure small businesses and minority-owned 
businesses and woman-owned businesses got access to Recovery 
Act contracts.
    The lessons there were so strong that the President has 
asked us to form a task force, and we have, to implement, not 
just to study, but to implement the best practices from that 
Recovery Act success to make our numbers in our entire program. 
And we are in the process of doing that.
    Ms. Bean. Thank you very much, and I yield back.
    Chairwoman Velazquez. Mr. Bright.
    Mr. Bright. Yes, ma'am. Thank you, Madam Chairman.Let me 
thank the witnesses first for being here today and giving us 
the testimony.
    Administrator Mills, like every member of this Committee, I 
am a strong supporter of American small businesses and I 
believe Congress and the SBA should do everything in their 
power to support businesses across the nation.
    Hearings like this provide us with an opportunity to 
evaluate how that process is working. Ask questions and share 
any concerns we may have.
    And I am disappointed to have to say this, but I have 
serious concerns about the SBA's ability to carry out some of 
its most basic responsibilities.
    Far too often I hear complaints from small businesses in my 
district that are having difficulty working with the SBA. When 
the situation calls for it, my office has made efforts to help 
these businesses navigate the red tape individuals encounter 
any time they deal with the Federal Government.
    Most of the time we find ourselves sharing the frustration 
felt by my constituents. This is particularly troubling because 
the SBA, like every other agency, has a constitutional or a 
congressional affairs staff that helps answer Members' 
inquiries. If a Member can't get the attention of the SBA, I 
can only imagine how hard it is for an average business owner 
to get answers.
    While this has been my experience on a number of complaints 
that have been shared with my office, let me remind you of a 
specific case that has concerned me, one that I brought to your 
attention the last time we spoke which was about a month ago.
    Last year, the Defense Department awarded a contract to 
build MI-17 helicopter simulators to a business in 
Pennsylvania. In November 2009, a company in my district filed 
a protest that the company that won the bid didn't qualify 
under the SBA guidelines.
    I wrote you a month later asking that the SBA conduct a 
fair and rigorous review of that protest. Unfortunately, that 
didn't happen. SBA ruled that this company met SBA requirements 
in February of this year. But when it was sent back by your own 
office of Appeals and Hearings in May, the Judge in that case 
found numerous errors in the determination. He wrote a scathing 
report and remanded the decision back to SBA to do it over 
again.
    So nearly nine months later, we find ourselves right back 
at square one with no review of that evaluation. Now I know the 
Judge in this case can't make the determination himself, nor do 
I want him to try.
    What I do expect, however, is that the SBA should be able 
to conduct a fair and rigorous review and get it done in a 
timely fashion. Instead, my letters on this issue have been 
returned with non-answers and my staff has been given the 
runaround when they ask for information.
    What should have been done months ago remains in SBA limbo 
with no assurances from anyone from your office that this would 
be done and done soon.
    Let me be clear. I can accept this when businesses in my 
district don't win a contract. It happens and that's okay. 
That's not the point of my discussion or my comments today. 
What I cannot accept is a series of errors and potentially 
allow a business to win a contract that they are ineligible to 
receive and I say potentially because the sad fact is we're 
still waiting on SBA to settle the matter over nine months 
later. That's entirely too long. The contract will be completed 
by the time the review has been completed by your office.
    So Chairperson, Madam Chairman, I'm sorry to have to spend 
my time focusing on such a specific issue, but I remain 
concerned about the case that I believe is my responsibility to 
raise the issue in whatever venue necessary so that we can get 
this matter righted.
    So Madam Administrator Mills, I have one question for you 
and one question only. Can I get your commitment today, to 
direct your folks and your office to take this issue more 
seriously and try to come to a conclusion as quickly as 
possible so we can right a significant wrong out there?
    Ms. Mills. Yes, absolutely. You have my commitment. And we 
apologize for this distress that you described.
    Mr. Bright. Thank you. I yield back the remainder of my 
time.
    Chairwoman Velazquez. Mr. Schrader.
    Mr. Schrader. Thank you, Madam Chair. I have a question for 
Administrator Mills.
    You've obviously made huge strides in what you've done I 
think since coming to the office, previous administration, 
seven site visits, you're up over a thousand, and I think you 
deserve some congratulations for that.
    These are tough questions, but we're trying to help you do 
a little bit better going forward. But I appreciate your 
leadership and taking the GAO's counsel to heart.
    The question I guess I have is some basic stuff here. Mr. 
Kutz talked about the Internet search to come up with some 
pretty obvious--that the Alamo is not exactly the place where a 
new business starts up. And yet at the same time, your 
organization, some of your staff members, it was taking like 7 
to 14 months to certify these folks. Why the 7 to 14 months 
versus a few minutes on the Internet?
    Ms. Mills. Well, thank you very much for your support. We 
do think we're making progress.
    This is a very tough task and we are getting after it 
aggressively and getting some achievements because we have some 
great people working on it. Specifically, we created a quite 
rigorous front-end requirements on HUBZone which had not 
existed. Appendix Table 1 of our report describes it. I'd love 
to read it, but I won't.
    That created a backlog, because when we switched to a much 
more rigorous up-front progress, it created a lengthy delay in 
getting all the applications through until we re-engineered the 
process and began to process more applications. We have gone 
over that bump and are pushing, making great process in 
reducing the time, but it was unacceptably long.
    We also brought on new staff, trained new staff. Re-
engineered the process. Greatly enhanced the amount of 
documentation that was required so we had to then take it 
seriously and go over it. We're now going to also add and 
continue to refine that set so that we find the thing that will 
help us be able to get out the bad actors.
    Mr. Schrader. I just hope that there will be some 
prioritization of obvious things that you would do first, you 
know, for maximum value of minimal amount of effort or 
expenditure of human resources and capital.
    I would take Mr. Critz' suggestions to heart. Develop some 
performance metrics. I mean that helps you, when you come 
before us show the fact that perhaps you have made substantial 
progress and you do have a target date for 95 percent 
compliance as opposed to the other.
    If we've got 29 firms with $66 million in new federal 
contracts, it probably shouldn't have them or that's 29 out of 
how many contracts? I mean, unfortunately we're talking 
probably billions and billions of dollars here.
    The other, I guess, concern I have is the one where the 
documents are actually lost. Mr. Kutz talked about four firms 
and one firm, they had to stop pursuing their investigation 
because the documents are lost. Isn't that sort of 
unacceptable?
    Ms. Mills. Yes. We are going to look into that when we get 
the full report.
    Mr. Schrader. Would it be advisable to maybe reduce the 
overall funding for this program down to something where you 
guys can kind of match your resources on the enforcement side 
to the contracting resources on the other side to show 
yourselves to advantage?
    Ms. Mills. I'm not sure I understand the question.
    Mr. Schrader. Well, I'm concerned that we've got a lot of 
money going out the door, but we don't have the personnel in 
place obviously to make sure that we're getting adequate bang 
for the buck if you will.
    Ms. Mills. We have a goal to meet of three percent of the 
contracts. The only cost is in the oversight and the 
interactions with the agencies to make sure there's access.
    Mr. Schrader. I'm just suggesting that we want to balance 
our resources within the agency. It takes a while to change the 
culture of the agency and perhaps less money for the HUBZone 
program. We have the Supreme Court decision to deal with. We've 
got obvious fraud and abuse that's going on. So I'm just a 
little concerned.
    Ms. Mills. Just to clarify, there is no money, funding for 
the HUBZone program except for in the oversight and promotion 
of the program.
    Mr. Schrader. Well, then I'm even more concerned a little 
bit. Thank you. I yield back.
    Chairwoman Velazquez. Ms. Dahlkemper.
    Ms. Dahlkemper. Thank you, Madam Chair. Thank you to the 
witnesses.
    Ms. Mills, I wanted to ask you about a different subject, a 
women-owned small business contracting program. I know you've 
been a champion for the implementation of this program and that 
the proposed rules for this program were put out earlier this 
year, but where do we stand now on putting out the final rule 
and finally implementing this program?
    Ms. Mills. As I have mentioned before here, this is one of 
the things that we feel very proud of. A rule that came about 
in the year 2000 had never been implemented for women's 
contracting. We were able to get this rule out for public 
comment. We received a thousand public comments that closed on 
May 3rd. We have dealt with each and every one of them. Some 
were extremely helpful and valuable to rewrite the rules, based 
on the input. And that rule is going through final clearance.
    We expect to have this program operational by the end of 
the year.
    Ms. Dahlkemper. That's great. That's obviously great news 
for many women in my district who have talked to me and I know 
some have talked to you about this very important program.
    As we're looking at some of these other programs and the 
fraud that we've seen in these programs, what kind of 
mechanisms are being put in place to ensure that fraud that 
we've seen these other programs don't occur in this small 
business program?
    Ms. Mills. We're taking the same three-pronged approach. In 
the women's rule, it's likely to be both self-certification and 
external certification. So we need to make sure that we have a 
process to make sure that only the qualified people get in.
    Then in the middle, we will have oversight which will be 
program exams, some unannounced. And in the final part, we will 
have the same kind of emphasis on enforcement that we're trying 
to bring at an accelerated level to all of the programs.
    Ms. Dahlkemper. So this three-pronged approach you're 
bringing to every program that's coming out of SBA at this 
point?
    Ms. Mills. That's correct.
    Ms. Dahlkemper. Mr. Kutz, can you comment on if you think 
this is all adequate as we bring out another new program?
    Mr. Kutz. I did look at the report that they put out 
yesterday. I just got it yesterday. And they did talk about 
something similar to what we call the fraud prevention model 
where you've got the prevention, the monitoring and the 
enforcement involved. And if they do some of the things they're 
talking about that's certainly a large step in the right 
direction.
    Ms. Dahlkemper. Thank you very much. I yield back, Madam 
Chair.
    Chairwoman Velazquez. Mr. Nye.
    Mr. Nye. Thank you, Madam Chair.
    Mr. Kutz, you mentioned in an earlier answer to a question 
that you had taken part in a field hearing that I held in my 
district in Virginia earlier this year in May. That field 
hearing was a follow-up on a full Committee hearing that 
Chairwoman Velazquez held last November here where we discussed 
a GAO report on fraud in the service-disabled-veteran small 
business program.
    You mentioned again in your answer earlier today that you 
felt that that was still a problem area and I agree with you on 
that.
    I wanted to ask you just a couple of quick follow-up 
questions to establish kind of a baseline of where we started 
back in November and where we are today.
    The report came out in November, at least in one of the 
particular cases, you told us about a firm that was ineligible, 
you had discovered, because it didn't perform any of the actual 
work and it subcontracted 100 percent of the job to a Denmark-
based firm that had reported over $12 billion in 2008 revenues, 
so clearly not a small business.
    After the report came out, that firm's partner admitted the 
contract award was improper and they would withdraw as soon as 
another contractor was found. Can you tell us, if you know, if 
any action had been taken against that particular firm in that 
case?
    Mr. Kutz. As of today, they have not been suspended or 
debarred, although I know that the SBA IG, the VA IG, and the 
FBI are involved in a criminal investigation and that one is 
such a clear case. If we don't get debarment and prosecution 
for that one, we may as well give up.
    Mr. Nye. I appreciate that answer. What about the other 
nine cases that you mentioned in your--that you had found fraud 
in the report that you released last November?Have any of those 
companies involved in suspension or debarment to your 
knowledge?
    Mr. Kutz. None as of today. I do believe there are on-going 
criminal investigations on several. There is even a Grand Jury 
involved I believe on one. So there is some hope that we'll get 
one of these first prosecutions hopefully here, but again, 
there's nothing imminent that I'm aware of.
    Mr. Nye. Can you tell us about those ten companies if any 
of them have received additional contracts subsequent to the 
report that you issued back in November of 2009?
    Mr. Kutz. Right, and my data is a little bit old, but 
they've got $5 million of service-disabled sole source and set-
aside. They've got $10 million of other contracts and they've 
got millions of dollars of stimulus contracts. Just those.
    Mr. Nye. Okay. So thank you for helping us establish what 
is to my mind a bleak picture of what's going on in the 
service-disabled-veteran business program.
    You came to my district in May where you gave us an update 
on, and some of these figures, we talked to some local 
businesses, service-disabled business owners about their 
impressions of the program and what they thought about it.
    We've talked a lot today about penalties and how important 
it is to have consequences when firms commit fraud in order to 
deter other firms from doing exactly the same thing and 
continuing to create the same kind of problems that we've 
already seen revealed.
    I held a hearing of my Subcommittee here on July 15th where 
we visited with folks from the SBA, but also from a lot of the 
agencies that had specifically been involved in doing the 
contracting of those ten cases that we talked about in your 
report that had been found to be fraudulent.
    And to be honest, I was very disappointed to hear the 
responses from the agencies in terms of what action they have 
taken since the nine months have passed since they knew about 
these particular cases of fraud.
    Administrator Mills, I wanted to ask you, you had Associate 
Administrator Joe Jordan with us at that hearing and he 
mentioned that out of those cases that we discussed, only one 
of them has been referred to the Inspector General of the SBA 
for suspension or debarment. And it was decided at the end of 
the day not to pursue a debarment or any penalty whatsoever as 
far as we could tell.
    What I wanted to ask you is can you comment on why none of 
those cases have gone on to the penalty phase where we have 
been able to see at least a suspension that we can show our 
other veteran firms that we're taking action on these things?
    Ms. Mills. Well, first, I want to thank you for your 
leadership in this area. This is a shared goal, because as you 
said, if we don't have the enforcement action, people won't 
believe there's a real consequence to misbehaving.
    And, as I understand it, there are nine firms still being 
investigated by the IG. And we hope that there will be action 
taken as you said. There seems to be--we're trying every tool 
in the tool kit. We're trying to bring new ones in and we're 
trying to find a way to do things more quickly for 
consequences.
    And we appreciate your continued focus.
    Mr. Nye. One quick follow-up and I note that my time is 
getting short, but Associate Administrator Jordan mentioned 
that the SBA and the VA have formed a task force on these 
particular types of fraud issues. Can you talk about exactly 
what it is that you foresee that task force doing and how far 
along they've gotten in their work?
    Ms. Mills. I'm happy to tell you about the overall task 
force. The President has asked myself and General Shinseki to 
form a task force on small business veteran activities.
    We have loans, small business veteran loans. We have 
government contracting and we also have entrepreneurial 
development and counseling programs.
    And the task force will deal with all of the--specifically 
in this area, we're working very hard with them on their 
computer systems to identify small business, small businesses 
that are owned by service-disabled veterans. Who is a service-
disabled veterans is something they work in their computer 
systems. And on any other specifics, I'm happy to have Mr. 
Jordan come back to you.
    Mr. Nye. I would appreciate and as I told the folks that 
were participating in my hearing, we intend to continually 
follow up on this issue.
    It's been nine months since the first report came out. My 
feeling is that having talked to a lot of folks representing 
many different executive agencies, there's a big focus on 
process here, task forces and committees and other things.
    But at the end of the day the folks that pay the bills, the 
taxpayers, want to see some results here, and I think we owe it 
to them to show them results. And results mean consequences on 
the businesses and so while I appreciate the fact that we're 
making progress in the sense of setting up procedures, we need 
to get to the consequence phase in some way that we can report 
openly and honestly to the taxpayers that we've pursued fraud 
and we've rooted it out.
    There's a reason why I have written a bill that provides 
for criminal penalties for those who would defraud this program 
because I think it's important that they see a real result when 
they try to defraud our veterans and our taxpayers and we're 
counting on you and the other agencies to show us some results 
from your work as well. Thank you very much.
    Chairwoman Velazquez. Mr. Moore.
    Mr. Moore. Thank you, Madam Chair. Ms. Mills, I want to ask 
a question concerning the question of pass-through fraud which 
can occur in the federal contracting process.
    As I understand it, a pass-through is an arrangement where 
a large corporation sets up a shell company known as a pass 
through to obtain federal contracts which are to be set aside 
for small businesses.
    Each year since 2006, the SBA's Inspector General has 
listed pass throughs as the top challenge facing your agency. 
To combat this problem, some in Congress have suggested passing 
legislation which would direct the SBA to more specifically 
define pass throughs and would permit the Agency to penalize 
pass throughs with defined prison terms.
    Do you agree that some legislation is necessary to combat 
this type of fraud. If so, what would you like to see? If not, 
what other measures are currently being taken or should be 
taken in the future to combat pass through fraud?
    Ms. Mills. The issue of a big business masquerading as a 
small business with a shell corporation or something else is 
highly problematic for us. We agree with you, that we want to 
go after this. I believe, but I'll get you the details that the 
8(a) regulation reform that went out for public comment and is 
going to be final does help address that issue and we're happy 
to get you those details and see if you have further 
suggestions.
    Mr. Moore. I would like to see those details because 
obviously if the law is not being complied with as a former 
prosecutor, I want to see that happen. Thank you very much and 
Madam Chair, I yield back my time.
    Chairwoman Velazquez. Thank you.
    Mr. Kutz. Can I mention one more thing about that, Madam 
Chairwoman?
    Chairwoman Velazquez. Sure.
    Mr. Kutz. The issue of having this--the numbers you get on 
these goaling requirements and stuff, those pass throughs help 
misstate those numbers. In other words, if you are given a 
number, Congressman Nye and I talked about, there was a pass 
through to a company in Denmark with $12 billion of revenue. 
That was scored a service-disabled-veteran-owned small business 
contract in the reports that you get.
    So the other impact of the pass through, is that you're 
getting misleading information on how much money is actually 
going to small businesses, that's an important point. I just 
want to make sure that you all understand.
    Chairwoman Velazquez. Mr. Graves.
    Mr. Graves. Thanks, Madam Chair. Administrator Mills, the 
data concerning firms that are found to be ineligible for all 
the special contracting programs, is it being submitted to the 
new federal warranty performance and integrity information 
system?
    Ms. Mills. If I could get back to you on the answer to 
that, because I'm not familiar with the specific system that 
you just mentioned.
    Mr. Graves. All right, if you could do that this week, it 
wold be great.
    Chairwoman Velazquez. I do have some more questions.
    Ms. Mill, GAO has recommended that SBA conduct unannounced 
site visits on HUBZone applicants such as the one at 30 Alamo 
Plaza, right?
    What percentage of companies do you currently visit, 
unannounced and in person and how do you decide which firms to 
visit?
    Ms. Mills. This year, we're going to visit a thousand 
firms.
    Chairwoman Velazquez. You are?
    Ms. Mills. We have visited so far 711 and by Fiscal Year 
end one thousand. My understanding is that the majority of 
those are unannounced.
    I don't know--
    Chairwoman Velazquez. Can you corroborate that information 
for the Committee?
    Ms. Mills. And we'll find out how we decide.
    Chairwoman Velazquez. Mr. Kutz, can you explain to the 
Committee and the SBA why unannounced visits are different from 
announced visits and what the value-added for such unannounced 
visits?
    Mr. Kutz. The element of surprise is always important.
    Our unannounced visits have revealed things like mail stuck 
under the door and the neighbor saying no one has been there 
for six months. You would not get that with an announced visit.
    We had one where we did an unannounced visit and I showed 
this at one of your hearings where the next time we showed up 
they had actually nailed in a shiny new mailbox, I don't know 
if you recall that, where the next time we came they made it 
appear as if they were there.
    So that's one of the issues that SBA is waiting six or nine 
months to go after the companies we identified. By then, they 
may have doctored it up and made it look like it is a qualified 
firm. So yes, it's very, very important.
    Chairwoman Velazquez. SBA has previously indicated that 
they do not have the resources to perform site visits for all 
the applications that they receive.
    In your opinion, what kind of resources will SBA need to 
perform this site visit?
    Mr. Kutz. I think that they've moved toward 20. That's the 
report I read yesterday said, from single digits when what 
first started this, so that's a large step. You can do a lot 
with 20 people. My unit only has 55 people and we do 
investigations across the government. I think with leveraging 
technology, the Internet searches, other vehicles they've got, 
whether that means they can do 10 percent or 50 percent site 
visits I don't know that, but again, the threat that there is a 
site visit of these firms, either entering the program or 
they're in the program is an important element of a control 
system.
    Chairwoman Velazquez. The ten percent that SBA is doing 
right now, do you think that is adequate?
    Mr. Kutz. It depends. If it's done on a risk basis and is 
done appropriately, it's better than what we had before. I 
would say, again, I believe, they're doing it mostly--my 
understanding is for people who have already gotten contracts. 
It's just as important to do it for people who haven't gotten 
them yet. Because as we've seen here, once someone has 
fraudulently gotten a contract, very little has been done in 
the past. So I think it should be done on both and ideally more 
than ten percent would be better.
    Chairwoman Velazquez. Mr. Kutz, in your last report, you 
mentioned that the three parts of a good fraud prevention 
program are prevention, monitoring, investigation with 
consequences.
    How does this concept apply to the HUBZone program with 
respect to prevention, monitoring investigations and 
prosecution?
    Mr. Kutz. We've talked about several of the prevention 
methods with respect to the unannounced site visits. One of the 
other things I would mention is they're asking for lots of 
documents now. The one thing we didn't see is validation of 
those documents. In other words, we sent in utility bills which 
is one of the things they get for support, for example, as to 
whether or not someone is in a HUBZone. You can doctor those up 
in about a minute or two. But maybe randomly calling the 
utility company and saying yeah, does this company actually 
live there or work there, the site visit.
    So the front end is the site visits, the Internet research 
and other document reviews. The monitoring is what I think they 
call the recertifications and it's important. We're looking at 
moving from every three years to every year to do those. That 
would certainly be more effective.
    And the investigations serve not only as a consequence for 
people, but actually it's a prevention also. When people know 
there's a chance of getting caught, there's a better chance 
they're not going to try. So I think we've touched on many of 
the things.
    The key thing we hadn't talked about until your question 
here was the validation of documents. They should do some 
independent validation of documents in some instances.
    Chairwoman Velazquez. And have you made those 
recommendations?
    Mr. Kutz. I don't know if we've done the validation of 
documents. I have to go back and look at our recommendations. 
But the other ones I think are part of all of our 
recommendations.
    Chairwoman Velazquez. Mr. Altmire?
    Mr. Altmire. Thank you, Madam Chair. Mr. Kutz, GAO found in 
one case that a firm continued to benefit from another SBA 
program even though it had misrepresented its HUBZone 
eligibility and had been decertified. When GAO did further 
investigation on this company, it was discovered that the firm 
had also misrepresented its status in the 8(a) program as well.
    So my question is how could this happen and when SBA finds 
that a firm is ineligible for one program, do they cross check 
with another? What's the process?
    Mr. Kutz. It doesn't appear that they did in this 
particular case until they got our 8(a) report and they found 
it was with the same firm we had found in the HUBZone program. 
So I have to ask the Administrator. I don't think in that case 
they did. That is a good practice. We have definitely suggested 
to that to them in our corrective action briefings, not just 
8(a) but all their other programs. Because again, if people are 
inclined to commit fraud, they're not going to do it in just 
one area. We found that with tax cheats and a lot of other 
types of places. You don't just do it once. You typically are a 
repeat offender.
    Administrator Mills, do you want to comment on that?
    Ms. Mills. In fact, I don't know if it was a specific 
recommendation that you have, but it's something that has been 
discussed and we're looking at the computer compatibility 
because it's quite obvious that you'd want to do this.
    Mr. Altmire. How about sort of the opposite scenario, 
hypothetically, when one firm that does business with the SBA 
qualifies legitimately in one program, but misrepresents itself 
in another program, what are the consequences to that? What's 
being done to prevent that? What happens in the program that 
they're legitimately qualifying for? So far, we haven't seen 
anything as a consequence. I don't know if going forward 
they're looking at doing that.
    Ms. Mills. I think that's a good question and one of the 
issues is coming down to the facts which is in what way did 
they get disqualified? Is it a foot fault or is it a fraud?
    Mr. Altmire. Right. And for Administrator Mills, as you 
know, in the 2008 report, GAO recommended that SBA formalize a 
specific time frame for decertifying HUBZones. As indicated in 
the previous reports, SBA had an informal time frame for 
decertification of 60 days.
    I was wondering, has a formal time frame been implemented 
yet and if so, what is that time frame?
    Ms. Mills. I'm happy to get back to you about that.
    Mr. Altmire. Okay, thank you. Do you know what's being done 
at SBA to ensure that those contractors that are in the process 
of being decertified are not receiving HUBZone contracts while 
that's taking place, while they're in the process of 
decertification, that they're not still qualifying for HUBZone 
contracts?
    Ms. Mills. Our process is that we turn them over for 
investigation. There is a fact finding and as we know, 
sometimes we have found that, in fact, they were put up for 
decertification, but they are eligible. And so we do presume 
that they're innocent until we find the facts and then we go 
after them.
    Mr. Altmire. My final question for Administrator Mills, GAO 
has found that five of the firms that had been decertified were 
still continuing to claim on their websites that they were 
HUBZone certified. What does the SBA do to prevent this type of 
misrepresentation?
    Ms. Mills. Well, we would not necessarily know what's on 
their website. But we do believe that in some areas, for 
instance, service-disabled veterans, we are now requiring them 
to take themselves off the Federal Register. If they don't take 
themselves off, we take them off.
    Mr. Altmire. Mr. Kutz?
    Mr. Kutz. We'd be happy to make sure--if they don't know 
who those ones are that still have HUBZones up, we will let you 
know that, so maybe you can send them a little email message.
    Ms. Mills. I'd be happy to do that.
    Mr. Altmire. So how does that work? Is there someone that 
searches to make sure that those people that have been 
decertified have not continued to claim or is it something that 
would have to be brought to your attention?
    Mr. Kutz. That's something we did as part of our 
investigation. We wanted to see once they were decertified if 
they still held themselves out as being HUBZone firms.
    Mr. Altmire. Is that something that will be done going 
forward?
    Mr. Kutz. We wouldn't do that. That would be something SBA 
could consider certainly.
    Mr. Altmire. Maybe give that some consideration. Thank you 
both for your testimony.
    Chairwoman Velazquez. Thank you. Mr. Kutz, this is my last 
question for you today. If you were put in charge of the 
HUBZone program tomorrow, what is the one thing that you would 
change in an effort to prevent fraud, waste, and abuse?
    Mr. Kutz. Well, normally I would talk about--and we do 
fraud across the government. I always talk about the front end. 
But in this particular case, I would probably look at the back 
end and really make an effort to get some poster children 
prosecuted, debarred, so that the message is out there to 
people that hey, if you do something wrong here, we're going to 
be serious about it. Don't even think about it. You might get 
caught. And if you get caught, something serious will happen.
    So usually I would say the front end, but given where we 
are today, I would say the back end.
    Chairwoman Velazquez. Administrator Mills, after hearing 
and listening to all the questions and comments made, I want to 
ask you and I would like a yes or no answer, do you believe 
that the HUBZone program has sufficient internal controls to 
prevent fraud?
    Ms. Mills. This is--I know you want a yes or no answer, but 
of course, the answer is it's process. We're better than we 
were, but we're not good enough yet. We're making progress. We 
need to make more.
    Chairwoman Velazquez. So you're not there yet?
    Ms. Mills. Not there yet.
    Chairwoman Velazquez. Well, I hope that three months from 
now we will not come back and hear or find that four bogus 
companies are still on the certification list or getting 
contracts. This is serious business because in the process, not 
only taxpayers are losing, but those legitimate small 
businesses who today are suffering and they're playing by the 
rules. So it is up to you to have an oversight process in 
place, internal controls, to make it happen.
    So with that, I want to thank all of you for being here 
today and I ask unanimous consent that Members will have five 
days to submit a statement and supporting materials for the 
record. Without objection, so ordered. This hearing is now 
adjourned.
    [Whereupon, at 2:23 p.m., the Committee was adjourned.]



    
                                 
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