[Senate Hearing 111-392]
[From the U.S. Government Publishing Office]
S. Hrg. 111-392
WASTE, FRAUD, AND ABUSE
IN THE SBIR PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
AUGUST 6, 2009
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri DAVID VITTER, Louisiana
AMY KLOBUCHAR, Minnesota SAM BROWNBACK, Kansas
TOM UDALL, New Mexico MEL MARTINEZ, Florida
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Christine D. Kurth, Republican Staff Director and General Counsel
Brian M. Hendricks, Republican Chief Counsel
C O N T E N T S
----------
Page
Hearing held on August 6, 2009................................... 1
Statement of Senator Rockefeller................................. 1
Prepared statement........................................... 24
Statement of Senator McCaskill................................... 25
Witnesses
Alfred J. Longhi, Jr., Former Vice President, Lithium Power
Technologies................................................... 1
Prepared statement........................................... 3
Thomas J. Howard, Acting Inspector General, NASA................. 5
Prepared statement........................................... 6
Allison C. Lerner, Inspector General, National Science Foundation 11
Prepared statement........................................... 13
Patricia A. Dalton, Managing Director, Natural Resources and
Environment, U.S. Government Accountability Office............. 16
Prepared statement........................................... 18
Appendix
Report from Senate Commerce Committee Staff on ``Cases of SBIR
Waste, Fraud and Abuse''....................................... 39
Response to written questions submitted by Hon. Tom Udall to
Thomas J. Howard and Allison C. Lerner......................... 44
WASTE, FRAUD, AND ABUSE
IN THE SBIR PROGRAM
----------
THURSDAY, AUGUST 6, 2009
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:30 p.m. in room
SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
The Chairman. This hearing will come to order. I should
point out that we have a vote on our new nominee for Supreme
Court at 3 p.m., which absolutely messes all of your schedules
up, but we'll make it work.
What I'm going to do, and I'll suggest to the Ranking
Member when she--when she comes, that we forego our opening
statements, in which I try to set the scene, and go directly to
you so that you don't feel left out in the cold while we're
speaking and you're sitting, and then we leave, and then
wondering if you'll ever see us again. You will. We'll go down
and vote. We have to vote from our seats because it's a very
formal-type vote.
And, so, I would start out with you, sir, Mr. Longhi.
STATEMENT OF ALFRED J. LONGHI, JR.,
FORMER VICE PRESIDENT, LITHIUM POWER TECHNOLOGIES
Mr. Longhi. Thank you. Good afternoon, Chairman Rockefeller
and distinguished Committee Members. It is both an honor and
privilege to be able to make a statement today to the Senate
Committee regarding the ease with which fraud can be conducted
against the Small Business Innovation Research Program.
The Chairman. I have so many nice things to say about you,
and I just hate waiting. But, I'll just have to.
Mr. Longhi. Thank you. Thank you for your kind words.
My name is Alfred J. Longhi, Jr., and I'm the former Vice
President of Lithium Power Technologies and a witness to SBIR
fraud. Due to being a father, a husband, and a patriotic
citizen, I had no choice but to lead by example and reveal this
fraud, even though there may have been and still may be severe
consequences for my family.
I began documenting fraud by my employer, brought it to the
government, and at the government's request, worn an undercover
wire to record conversations. These actions and others placed
my family at physical and financial risk, but were necessary to
reinforce the teachings to our children by my wife and I, on
love of country, and always striving to do the right thing.
In 2002, I filed a False Claims Act qui tam case in the
Southern District of Texas, where working closely with the
government, we obtained a summary judgment of a little bit over
$5 million against Lithium Power. This judgment was recently
affirmed in entirety by the Fifth Circuit of Appeals.
To date, 8 years of my life have been dedicated to shining
the light on SBIR fraud, with the Department of Justice and the
Federal Court System as my ally.
I personally witnessed over 12 different types of technical
research fraud against the United States Army, NASA, the United
States Air Force, the Bureau of Missile Defense, the Office of
the Secretary of Defense, and similar allegations involving the
National Institute of Standards and Technologies and the
Department of Energy.
Lithium Power Technologies, referred to as LPT, was founded
by Dr. Mohammed Zafar Munshi in 1998, with the goal of
developing and manufacturing the holy grail of lithium
batteries. Dr. Munshi persuasively convinced a group of
investors, myself included, that he had the technology to
revolutionize the battery industry. As a true believer in Dr.
Munshi's ability, I willingly invested an amount of money that,
given my personal net worth, was a massive investment for my
family, and myself, and even involved a mortgage on my home.
Buoyed by Dr. Munshi's success with obtaining 6 different SBIR
grants within the first 20 months of business, it totalling
over $2 million. I resigned from my long-term employer and
moved from New York to Texas to join LPT to help grow the
business.
During the next 30 months of my employment, Dr. Munshi
quickly acquired additional SBIR contracts and three, related
NASA and NIST contracts that totaled just shy of $7.5 million.
This grand total of 26 government research contracts--23 of
these were SBIR grants--coupled with Dr. Munshi's smoke and
mirrors research, became the recipe for turning LPT into an
SBIR mill that methodically stole government funds. Just one
morally bankrupt man that had quickly learned how to scam the
system in just his first 24 months of business was responsible
for this shocking fraud.
To certain types of individuals, the ease that research
fraud can be conducted with SBIR funds becomes an addictive
alternative to the hard work of commercializing actual
research. Submitted with this testimony is Federal court
documentation that shows how Dr. Munshi fraudulently induced
SBIR reviewers to grant phase one and phase two proposals. I
also allege many other types of SBIR fraud that the court was
asked not to rule on because the fraudulent inducement judgment
won by the government was sufficient to put Dr. Munshi and LPT
out of business.
A few of these other areas of fraud were a duplication of
phase one and phase two proposals, duplication in phase one and
phase two contracts after funding within the performance
reports, different guidelines used by the various SBIR agencies
to fund the proposals.
Of particular note, is the attached deposition by former
MDA SBIR director, Jeff Bond. He did not think it was relevant
or material for funding that Lithium Power lied to the
government in its SBIR proposals.
Another was subcontracting SBIR work out to another company
without the government's knowledge. It would get the contract,
and then hire another firm to do it, and then pass it on as its
own cross-charging labor and materials used to complete
commercial work to SBIR contracts.
This brings me to my purpose for testifying here today.
In the last eight years, I lost a lot of money and a lot of
time in trying to highlight the weaknesses within the SBIR
Funding System. I implore you to change SBIR Oversight Systems
in ways to prevent these kinds of frauds from happening in the
future. At the very least, outsourcing a company to mine data
for research duplication within incoming phase one and phase
two proposals. And within funded final reports of proposals. I
truly believe in the concept of SBIR Program, to see it
potentially groom new research to yield technology that will
eventually be commercialized.
Technological advances in energy, medical, defense, and
many other areas have been and always will be one of the
fundamental strengths of our country. The answer is not to cut
back on SBIR funding, but to create policies, oversight and
management systems, and outsource technical fraud detection to
ensure that funding is not fraudulently obtained or used.
Implementing these corrective steps now will save our country
hundreds of millions of dollars in the future.
So, in closing, thank you for your time. I would be happy
to answer questions and work with the Committee to reduce the
program's exposure to this type of technical research fraud.
[The prepared statement of Mr. Longhi follows:]
Prepared Statement of Alfred J. Longhi, Jr., Former Vice President,
Lithium Power Technologies
Good afternoon Chairman Rockefeller and distinguished Committee
Members. It is both an honor and a privilege to be able to present a
statement today to the Senate Committee on Commerce, Science, and
Transportation, regarding the ease with which fraud can be conducted
against the $2 billion a year Small Business Innovation Research
Program.
My name is Alfred Longhi Jr, and I am the former Vice President of
Lithium Power Technologies and a witness to SBIR Fraud. Due to being a
father, husband, and patriotic citizen, I had no choice but to lead by
example and reveal this fraud even though there may have been, and
still be, severe consequences for my family. I began documenting fraud
by my employer, reported it to the government and, at the government's
request, wore an undercover wire to record conversations. These actions
and others, placed my family at physical and financial risk, but were
necessary to reinforce the teachings to our children by my wife and I
on love of country and always striving to ``do the right thing.'' In
2002, I filed a False Claims Act qui tam case in the Southern District
of Texas, where working closely with the government, we obtained a
summary judgment of over $5 million, a judgment that was recently
affirmed in its entirety by the Fifth Circuit Court of Appeals. To
date, 8 years of my life have been dedicated to shining the light on
SBIR fraud with the Department of Justice and Federal Court System as
my ally.
I witnessed over a dozen different ways in which technical research
fraud was used to acquire funds from the United States ARMY, NASA,
United States Air Force, Ballistic Missile Defense Organization
(Formerly the BMDO now the MDA), and the Office of the Secretary of
Defense (OSD), along with allegations of the same involving NIST
(National Institute of Standards and Technology) and the Department of
Energy (DOE).
Lithium Power Technologies, referred to as LPT, was founded by Dr.
Mohammed Zafar Munshi in 1998 with the goal of developing and
manufacturing the ``Holy Grail'' of lithium batteries. Dr. Munshi
persuasively convinced a group of investors, myself included, that he
had the technology to revolutionize the battery industry. As a true
believer in Dr. Munshi's ability, I willingly invested an amount of
money that, given my personal net worth, was a massive investment for
myself and my family, even involving a mortgage on my home. Buoyed by
Dr. Munshi's success with obtaining six different SBIR grants, totaling
over $2 million dollars in just the first 20 months of business, I
resigned from my long-term employer and moved from New York to Texas to
join L PT to help grow the business.
During the next 30 months of my employment, Dr. Munshi quickly
acquired additional SBIR contracts and three related NASA and NIST
grants that totaled almost $7.5 million dollars. This grand total of 26
Government Research Contracts (23 of them SBIR), coupled with Dr.
Munshi's ``smoke and mirrors'' research; became the recipe for turning
LPT into a ``SBIR Mill'' that methodically stole Government funds. A
single morally bankrupt man that had quickly learned how to ``scam''
the SBIR system in just his first 24 months of business conducted this
shocking fraud! To certain types of individuals, the ease that research
fraud can be conducted with SBIR Funds becomes addictive and an
alternative to the hard work of commercializing actual research.
Submitted with this testimony is Federal Court documentation that
shows how Dr. Mohammed Munshi fraudulently induced SBIR reviewers in a
variety of ways to grant the Phase I and Phase II Awards. In addition,
I also alleged many other types of SBIR fraud that the court was asked
not to rule on because the fraudulent inducement judgment won by the
Government was sufficient to put D r. Munshi and L PT out of business.
Specifically these other areas were:
Duplication in Phase I and Phase II proposals PRIOR to
funding.
Duplication in Phase I and Phase II Contracts AFTER Funding
within performance reports.
Invoicing the Government for the same equipment and
materials under different SBIR grants.
Different Guidelines used to Grant awards by the various
SBIR Agencies. Of particular note here is the attached
deposition by the former MDA SBI R Director Jeff Bond who did
not think it was relevant or material that Lithium Power lied
to the government in its SBIR proposals!
Lack of communication between different SBIR Agencies on
similar research topics awarded to the same company.
Time Sheet Fraud.
Subcontracting SBIR work out to another company--without the
Government's knowledge.
Cross charging labor and materials used to complete
commercial work to government-funded SBIR contracts.
Steering new SBIR research topics toward topics previously
funded and granted by other SBIR agencies to facilitate
research recycling.
Lack of government oversight--government seldom tested or
verified reported research performance claims.
So this brings me to my purpose for testifying here today. In the
last 8 years, I lost a lot of money and lot of time in always trying to
highlight the weaknesses within the SBIR funding system. I implore you
to change SBIR oversight systems in ways to prevent these kinds of
frauds from happening in the future. At the very least, outsource a
company to ``mine'' data for research duplication within incoming Phase
I & II proposals, along with the final technical reports for funded
proposals.
I truly believe in the concept of the SBIR program to seed and
potentially groom new research to yield technology that will eventually
be commercialized. Technological advances in energy, medical, defense
and many other areas have been and will continue to be one of the
fundamental strengths of our country. The answer is not to cut back on
SBIR funding, but to create policies, oversight management systems, and
outsource technical fraud detection to insure that funding is not
fraudulently obtained or used. Implementing these corrective steps now
will save our country hundreds of millions dollars in the future.
Thank you for the chance to present this statement. I would be
happy to answer questions and participate with the Committee staff to
reduce the SBIR Program's exposure to this type of technical research
fraud.
The Chairman. Thank you, sir, very, very much.
And now, Mr. Thomas Howard, who is the Acting Inspector
General of NASA.
And, might I just say, I don't see a lot of people up here
on the dais. I think what's happened is that they know there's
a 3 p.m. vote, which is, as I say, a very formal vote.
Everybody in their seat on time, then you stand up to vote. You
know, it's very--very formal. My guess is they just figured
that we wouldn't proceed with the hearing, but one thing I'll
guarantee you: they've all read your testimony. They have all
read your testimony.
Mr. Longhi. Thank you.
The Chairman. In fact, you didn't even have--you were sort
of--you were just giving it.
Please, sir.
STATEMENT OF THOMAS J. HOWARD,
ACTING INSPECTOR GENERAL, NASA
Mr. Howard. Thank you, Mr. Chairman.
To those of us in the IG community, people like Mr. Longhi
are critical to our ability to be able to do our work, and we
appreciate what he's done.
Thanks for the opportunity to talk about our work on the
SBIR Program. NASA's is one of the largest programs in the
Federal Government, averaging about $105 million annually over
the last 5 years. It's popular and it's competitive. Last year,
NASA awarded about 500 contracts. It had over 1,600 proposals,
so, less than 1 in 3 of those who were interested in obtaining
contracts did so.
Our office has been involved in audit and oversight
activity of the SBIR Program since its inception. We've
identified instances of fraud, waste, and abuse, and we've
identified opportunities to improve the internal control
structure.
Currently, we have five, ongoing investigations. We've
closed eight investigations that have resulted in a conviction,
a civil judgment, or some other corrective action. Both our
ongoing and completed work has shown a pattern of program
participants who have provided duplicate deliverables to
multiple agencies, participants who have offered proposals to
do separate work, but then provided identical deliverables to
multiple Federal agencies, and we've had a variety of
misrepresentations by program participants, particularly
dealing with the role of the principal investigator, who was to
conduct the research.
Some examples of fraudulent cases involve one where a U.S.
District Court ordered a contractor to pay $5 million in
damages for making false representations.
Another investigation confirmed that a contractor submitted
research that was recycled or used on previous contracts. The
company's president was sentenced to one year home confinement,
5 years probation, and agreed to pay a $1.4 million settlement.
In some of our ongoing cases, we have misrepresentations of
eligibility.
In one case, a contractor allegedly purported to be an
American-owned company, when it was not.
In another case, a company purported that it had the
capability to do in-house research, when it did not.
And, in the last case, a company purported to be a small
business, when it was not.
These examples of cases that we've been involved in only
touch on the surface of our work.
As early as 1992, we reported on similar violations in the
SBIR Program, and we made recommendations for NASA to take
corrective action to ensure that it was in compliance with
program requirements.
More recently, in 2004 and 2005, we alerted NASA that the
program remained vulnerable to fraud, waste, and abuse. We made
specific recommendations to tighten contractor certification
requirements and to improve the Agency's oversight process.
NASA has been receptive to our recommendations and has, in
fact, implemented corrective action. Yet, in the cases that we
are conducting today, we still see the same violations that we
saw as early as 1992.
We believe that strong controls are critical to improving
the SBIR Program, so, we have initiated a comprehensive audit
of NASA's management of the program. We will focus specifically
on assessing the adequacy of the internal control structure for
evaluating and selecting proposals, for making contract awards,
and for conducting oversight. We also intend to assess the
extent of fraud, waste, and abuse in the program using data
mining techniques.
We expect that our work will lead to recommendations to
improve the policies governing NASA's program and to improve
its internal controls. We will also continue to work with the
Department of Justice to hold accountable those who would do
harm to NASA through fraud, waste, or abuse.
This concludes my remarks, and I'm available to answer any
questions you have. Thank you.
[The prepared statement of Mr. Howard follows:]
Prepared Statement of Thomas J. Howard, Acting Inspector General, NASA
Chairman Rockefeller and Members of the Committee:
Thank you for the opportunity to discuss the Office of Inspector
General's work addressing fraud, waste, and abuse in the Small Business
Innovation Research (SBIR) Program of the National Aeronautics and
Space Administration (NASA).
Over the last 5 years, with an average of more than $105 million in
annual awards, NASA's SBIR Program is one of the largest in the Federal
Government, providing substantial support for small business
participation in research and development activities. A recent
assessment by the National Research Council of the National Academies
concluded, ``The NASA SBIR Program is making significant progress in
achieving the congressional goals for the Program.''
While SBIR plays an important role in NASA's research activities,
our work has identified instances of fraud, waste, and abuse by Program
participants that bring into question the effectiveness of the
Program's internal controls. Specifically, of the SBIR 46
investigations we have closed since 2001, eight or 17 percent have
resulted in criminal convictions, civil judgments, or administrative
corrective action. Currently, we have five open investigations
involving allegations of potential fraud, waste, or abuse in the SBIR
Program.
Our investigative and audit work has shown that some SBIR
contractors
submitted duplicate proposals to different Federal agencies
and received multiple awards for essentially the same work,
submitted different proposals to multiple Federal agencies
but provided duplicate deliverables based on the same research,
failed to comply with subcontracting limitations, and
identified principal investigators who were not primarily
employed by the small business concern or who failed to perform
a substantial portion of the research work contracted by NASA.
We identified many of these violations as early as 1992, and while
NASA has taken corrective action to improve internal controls in the
SBIR Program, we continue to identify the same violations in recent and
ongoing investigations. Accordingly, we are initiating a comprehensive
audit of NASA's management of the SBIR Program. We will focus
specifically on assessing the adequacy and implementation of the
Program's internal controls and the extent of fraud, waste, and abuse
by Program participants.
We anticipate that our work will identify opportunities to improve
SBIR policies and enhance the Program's internal control structure. We
will also continue to work with the Department of Justice to hold
accountable those SBIR Program participants who attempt to harm NASA
through fraud, waste, and abuse.
Background of SBIR Program
In 1982, Congress established the SBIR Program to provide increased
opportunities for small businesses to participate in research and
development (R&D), to increase employment, and to improve U.S.
competitiveness. The Program's specific objectives were to: (1)
stimulate U.S. technological innovation, (2) use small businesses to
meet Federal R&D needs, (3) increase private-sector commercialization
of innovations derived from Federal R&D, and (4) foster participation
by socially disadvantaged businesses.
NASA's SBIR Program receives overall policy direction from the
Office of Innovative Partnerships Program. The SBIR Program Management
Office at the Ames Research Center manages the Program using staff from
NASA Mission Directorates and Centers. All NASA Centers actively
participate in the SBIR Program to support the objective of infusing
SBIR technology into Center programs and projects.
NASA allocates 2.5 percent of its annual extramural R&D budget for
SBIR awards. NASA's annual solicitation for proposals includes R&D
topics that NASA's Mission Directorates have identified as high
priority needs for their programs and projects. For 2008, NASA received
1,662 proposals and selected 493 proposals for SBIR contracts.
NASA Office of Inspector General (OIG) Oversight of the SBIR Program
NASA OIG has been actively involved in investigative and audit work
relating to NASA's SBIR Program, which resulted in criminal penalties,
civil recoveries, and detailed program recommendations to improve
NASA's internal controls over the Program. We currently have five open
investigations involving allegations of potential fraud, waste, or
abuse in the SBIR Program and are also initiating a comprehensive audit
of the Program.
Since 2001, we have closed 46 investigations relating to the SBIR
Program. Of those closed cases, 38 involved matters where the
allegations were unsubstantiated or the facts we developed were
declined for prosecution. The other eight closed investigations--17
percent--identified problems that resulted in criminal convictions,
civil judgments, or administrative corrective action. The following
closed cases generally illustrate the types of activity we found:
NASA SBIR contractors improperly submitted the same or
related proposals to multiple Federal agencies, resulting in
multiple payments for that same proposal. In one case, the 5th
Circuit Court of Appeals recently affirmed a U.S. District
Court decision, under the False Claims Act, ordering Lithium
Power Technologies, Inc., to pay approximately $5 million in
damages for making numerous false SBIR representations,
including nondisclosure of related proposals to another agency,
in the proposal phase of four Federal SBIR contracts. Lithium
Power Technologies, Inc., has also been debarred from
Government contracts until March 2018. In a separate case,
Lasergenics, Inc., agreed to pay $25,000 in a Federal civil
settlement in response to allegations of submitting identical
SBIR proposals to NASA and the National Science Foundation.
NASA SBIR contractors provided duplicate deliverables to
multiple agencies, resulting in the contractors receiving
multiple payments for the same work product. For example, a
NASA OIG investigation revealed that ML Energia, Inc., used the
SBIR Program to defraud a number of Federal agencies by
submitting false certifications in SBIR proposals, to include
representations that the company would not duplicate its
research. The investigation also confirmed that ML Energia
submitted research that was ``recycled'' or performed under
previous contracts. A U.S. District Court convicted the
president of ML Energia of mail fraud and tax evasion,
sentencing him to 12-months home confinement and 5 years
probation. He was also ordered to pay a civil payment of $1.4
million and a $20,000 fine. In a separate case, we investigated
allegations that Luna Innovations, Inc., submitted duplicate
reports and proposals to various Federal agencies, including
NASA. After negotiations with the Department of Justice, Luna
agreed to a civil settlement in which it agreed to pay $165,333
to resolve claims regarding SBIR without admission of
liability.
One NASA SBIR contractor misrepresented the role of its
principal investigator. Under the SBIR Program, the principal
investigator is the person designated by the applicant to
provide the scientific and technical direction to a project
supported by the funding agreement. Our investigation of
Glimmerglass Science and Technology found multiple SBIR Program
violations because its principal investigator was not primarily
employed by the contractor and he also failed to perform a
substantial portion of the research work.
NASA SBIR contractors mischarged their SBIR contracts. For
example, a NASA OIG investigation of Nanomaterials Research
Corporation found that the company willfully diverted,
concealed, and illegally used various SBIR funds from multiple
Federal agencies. The corporation pled guilty in U.S. District
Court to making false statements about their SB I R contract.
The Court sentenced the corporation to pay a fine of $10,000,
probation for 36 months, and pay restitution of $540,000. In a
separate cost-mischarging case, ISX Corporation was alleged to
have applied cost overruns on SBIR fixed-priced contracts to a
NASA cost-plus contract. The ISX Corporation agreed to pay
$100,000 as an administrative settlement of its unallowable
costs. Finally, a NASA OIG investigation found that Arnav
Systems, Inc., did not provide accurate labor rates in its
proposed labor costs for a SBIR contract award. Ultimately,
Arnav agreed to pay $93,970 to settle the matter, without
admission of liability.
The five open investigations involve similar issues:
In one investigation, a NASA SBIR contractor is alleged to
have submitted duplicate SBIR proposals and deliverables to
multiple agencies. Further, the contractor allegedly submitted
false certifications that the company possessed the required
research capability, performed the research effort, and
achieved the results delivered to the Government.
In three other investigations, NASA contractors allegedly
violated their SBIR requirements by submitting false
certifications as to their SBIR eligibility. In one case, a
contractor may have falsely certified that it was an American-
owned company when it was not. In another case, a contractor
may have falsely certified that it was performing in-house
research when it did not have that capability. In the third
case, a contractor may have falsely certified that it met the
SBIR requirements for a small business classification when it
did not.
In February 2009, NASA OIG and the Federal Bureau of
Investigation executed Federal seizure warrants at a major
university as well as at the home and offices of a NASA SBIR
contractor, New Era Technology (NETECH). These warrants were
based on probable cause that a university professor, who also
was a principal NETECH officer, along with his family members,
submitted multiple fraudulent SBIR proposals to NASA in order
to receive the maximum SBIR funding for proposed research
contracts. Further, the evidence indicates that NETECH may have
submitted false invoices to NASA in order to conceal the
improper use of SBIR funds, which allegedly included improper
diversion of SBIR funds into the personal bank accounts of the
professor and his family members. Documents in the public
record indicate that those involved may have violated a variety
of Federal statutes, to include theft of public money, mail or
wire fraud, and money laundering.
These investigations illustrate only part of our longstanding work
in this area. Our Office of Audits has also focused attention on the
Program, which resulted in specific recommendations to improve NASA's
oversight of the SBIR Program.
In a very early audit of the SBIR Program (HQ-91-009, September 8,
1992), we identified several weaknesses within the SBIR Program's
policies and procedures. Specifically, we found that there was
insufficient monitoring and tracking of SBIR awards; we also found that
NASA and other agencies were providing duplicate funding for the same
R&D efforts. Additionally, we found that principal investigators were
not primarily employed by the small business concern, in violation of
Program requirements, and that SBIR projects did not always meet SBA-
established time frames.
In April 2004, our Offices of Audits and Investigations issued a
``Management Alert--Concerns Relating to NASA SBIR Contracts.'' The
report informed NASA senior management of SBIR-related problems with
multiple awards for the same work, duplicate deliverables under
multiple contracts, and violations of SBIR Program limits on contract
effort by subcontractors and principal investigators. The report
attributed the problems to weak contractor certification requirements
and ineffective contract oversight.
In response to the Conference Report (House Report 108-792) that
accompanied the Fiscal Year (FY) 2005 Consolidated Appropriations Act,
2005, Public Law 108-44, we reported that our audit and investigative
work uncovered a number of trouble areas in NASA's acquisition and
contracting processes. As detailed in our December 5, 2005, report,
these areas of weakness included
lack of a reliable financial management system to track
contract spending,
inadequate control over Government property held by
contractors,
single-bidder contracts with undefined and changing contract
requirements,
lack of transparency to subcontractors working on NASA
programs,
procurement process abuses by NASA employees and
contractors, and
significant cost overruns in some Agency programs.
In addition to identifying the above weaknesses, we reiterated that
the vulnerabilities within the SBIR Program identified in our April
2004 report were unresolved leaving the Agency vulnerable to fraud,
waste, and abuse. Both reports recommended that
prior to making final payment to SBIR contractors, NASA
should require contractors to complete and submit a
recertification of compliance with Program requirements, and
NASA's Office of Procurement should issue periodic notices
to the SBIR procurement and technical community to emphasize
the importance of effective administration and technical
oversight of the Agency's SBIR contracts.
NASA concurred with our recommendations and revised the NASA
Federal Acquisition Regulation Supplement in October 2006 to require
that, prior to receiving final payment, SBIR contractors must recertify
that work performed had not been proposed for funding to another
Federal agency; no other Federal funding has been received for
equivalent work; deliverables submitted have not been submitted as
deliverables under another Federal award; subcontracting limitations
had not been exceeded; and the primary employment of the principal
investigator was with the contractor. The Agency also agreed to issue
periodic notices to the NASA SBIR procurement and technical community
to emphasize the importance of effective administration and technical
oversight of the Agency's SBIR contracts.
SBIR Program Issues Identified by Other Agencies
Past reports and testimony by the Government Accountability Office
(GAO) and Department of Energy indicate similar issues with other
agencies' SBIR Programs. GAO reported in ``Federal Research: Interim
Report on the Small Business Innovation Research Program'' (GAO/RCED95-
59, March 8, 1995) that contractors received duplicate funding for
similar SBIR research proposals. GAO attributed duplicate funding to
false contractor certifications, lack of a consistent definition for
``similar'' research, and lack of interagency sharing of data on SBIR
awards. GAO recommended that the Small Business Administration take
corrective action to improve interagency coordination and to reduce the
risk of funding duplicate research. GAO also provided congressional
testimony on June 28, 2005,\1\ ``Federal Research: Observations on the
SBIR Program'' (GAO-05-86'T), highlighting the challenge of assessing
the performance of the SBIR Program.
---------------------------------------------------------------------------
\1\ GAO provided testimony to the Subcommittee on Environment,
Technology, and Standards, Committee on Science, House of
Representatives.
---------------------------------------------------------------------------
Energy's OIG reported in ``Management Controls over Monitoring and
Closeout of SBIR Phase II Grants'' (OAS-M-08-09, July 2008) that agency
officials gave insufficient attention to SBIR costs during post-award
reviews. The report identified nearly $800,000 in questionable or
unsupported costs charged to SBIR awards that officials had not
verified. Energy's OIG attributed the problems to infrequent post-award
desk reviews or audits of SBIR costs. The report recommended that
agency officials randomly select SBIR Phase II awards for post-award
audit.
Internal Controls and NASA OIG's Current Audit of NASA's SBIR Program
Over the last decade, we have been involved in a number of
activities to assess the overall internal control systems NASA has in
place to ensure effective oversight of its contractors. We believe
there is much to be gained through these activities, in terms of
developing safeguards and improving policies. In particular, we have
been involved in initiatives to implement Office of Management and
Budget Circular A-123, ``Management's Responsibility for Internal
Control,'' and to address fraud against NASA.
For example, NASA established the Acquisition Integrity Program
(AIP) in December 2006. The Program is a collaborative effort among
NASA's Offices of General Counsel, Chief Financial Officer,
Procurement, and the OIG. AIP provides a centralized and coordinated
approach to address fraud and corruption throughout the acquisition
process and to ensure the Agency integrity and public trust. The vision
of AIP is to promote transparency, accountability, and integrity
throughout the NASA acquisition process. The Program serves as a
mechanism to identify irresponsible contractors for suspension,
debarment, or pursuit of remediation. The Program also minimizes
vulnerabilities through increased understanding of fraud, waste, and
abuse in the contracting environment by implementing a comprehensive
``fraud awareness'' training program at all NASA Centers and at NASA
Headquarters. The most recent training phase (Spring 2009), which
included OIG personnel as presenters, targeted NASA's contracting
officers and contracting officer's technical representatives.
While NASA is working to improve its internal control environment
and fraud awareness, the OIG remains vigilant in our mandate to
identify and prevent fraud, waste, and abuse. Notably, the issues we
identified in our work as early as 1992, and more recently in 2004 to
2005, are essentially the same violations underpinning the five
investigations we are conducting in 2009. Strong controls are essential
to reducing the risk of improper activity within NASA's SBIR Program;
therefore, we are initiating a comprehensive review of NASA's internal
controls for the SBIR Program.
Specifically, we will determine whether management developed and
implemented effective internal controls to evaluate and select
proposals, award contracts, and perform post-award administration.
Additionally, we will assess the extent of fraud, waste, and abuse in
the Program. Our methodology will be to
1. gain a thorough understanding of the SBIR Program's
organization, operation, and relevant system of internal
control;
2. based on that understanding, and any needed additional
review and analysis, make a preliminary assessment of the
adequacy of the design of the system of internal control;
3. test the effectiveness of internal control using statistical
sampling; and
4. use data mining to detect instances of potentially
fraudulent, improper, or abusive transactions to illustrate the
effects of breakdowns in internal control.
We anticipate that our work will identify opportunities to improve
SBIR policies and enhance the Program's internal control structure. We
will also continue to work with the Department of Justice to hold
accountable those SBIR Program participants who attempt to harm NASA
through fraud, waste, and abuse.
Thank you for the opportunity to participate in this important
dialogue. I would be happy to answer any questions you may have.
The Chairman. Thank you very much, Mr. Howard.
I'm not going to take the chance. Well, Allison Lerner, you
just have to forgive me for the moment. I will be back. It
doesn't take very long to vote, but then they have to tally the
vote and they have to give it, obviously, and, so, I just don't
want to take the chance of letting you start and then having to
walk out.
Ms. Lerner. Not a problem.
The Chairman. You're not offended?
Ms. Lerner. Not at all.
The Chairman. We'll come back.
Ms. Lerner. You have to have a thick skin in my line of
work.
The Chairman. OK, all right. All right, well, we're
temporarily in recess then.
Ms. Lerner. Thank you.
[Recess.]
The Chairman. Senator McCaskill, when--oh, we resume.
What we did, we started at 2:30, and it was my feeling that
most people wouldn't feel that--but I didn't want to keep them
waiting, so, I asked them to give their statements, two of
them, and we're now going to start the third. And then I will
give my opening statements, and then you may have some comments
you want to make.
All right. Allison Lerner, are you still there?
Ms. Lerner. I'm still here.
The Chairman. Alert?
Ms. Lerner. Here.
The Chairman. You're the Inspector General of the National
Science Foundation.
Ms. Lerner. Yes.
The Chairman. One of my favorite government agencies.
Ms. Lerner. I'm glad to hear that. One of mine, too.
STATEMENT OF ALLISON C. LERNER, INSPECTOR GENERAL,
NATIONAL SCIENCE FOUNDATION
Ms. Lerner. Mr. Chairman and Members of the Committee, I
appreciate the opportunity to discuss my office's work related
to the SBIR Program at NSF.
Since 1990, NSF has awarded more than 6,600 phase one and
phase two SBIR awards, totaling more than $1.1 billion. The
vast majority of companies receiving these awards spend the
funds properly and report results accurately to the agency.
However, since the program began, my office has opened 64
investigations involving SBIR companies. Of those cases, 16
have resulted in criminal, civil, or administrative action, and
5 are still open.
While these numbers are not large, it's likely that they do
not reflect the full extent of fraud due to underreporting and
other issues that I'll discuss.
I want to emphasize that NSF's SBIR Program staff strongly
supports my office's efforts to prevent, detect, and prosecute
fraud. SBIR Program officers regularly inform us when they
receive allegations of wrongdoing or become aware of
information that indicates a possible problem, and these
valuable leads have been the source of many of our successful
investigations.
Mr. Chairman, as requested by the Committee, I'll summarize
the primary types of fraud we have found in NSF's SBIR Program,
and I'll discuss the processes that my offices and NSF have
developed, which have enabled us to prevent and, when
necessary, prosecute SBIR fraud. I'll conclude by noting some
problems we've encountered in investigating this type of fraud.
The primary type of fraudulent activity we find involves
duplicative funding in which companies obtain multiple SBIR
awards from multiple SBIR agencies for the same or overlapping
work. At NSF, companies must disclose multiple SBIR submissions
and the agency's proposal preparation guidance makes it clear
to potential recipients that receiving duplicate funding for
the same or overlapping research is prohibited. We've
investigated approximately 34 cases of alleged duplicative
funding and substantiated the charge in 10 instances.
Examples include a case in which a recipient used SBIR
funds to pay for renovations to his home and to overpay vendors
so he could pocket the reimbursements. Ultimately, that
individual pled guilty to mail fraud and tax evasion, and paid
$1.4 million in restitution, civil damages, taxes, and
penalties.
We've also investigated cases involving research misconduct
in which data results for phase one awards were fabricated,
falsified, or plagiarized in order to obtain phase two funding.
In one such case, a professor plagiarized a phase one
report in order to receive a phase two award for a non-existent
company. He pled guilty to false statements, and paid $214,000
in restitution and fines.
As a result of our investigations, my office has identified
two best practices that are valuable tools in preventing and
prosecuting SBIR fraud--required certifications and disclosures
and mandatory attendance at awardee briefings.
In 1994, as a result of problems we'd noted in our
investigations at that point of SBIR recipients, we made a
number of recommendations to NSF to strengthen SBIR disclosures
and certifications. As a result of those recommendations, which
NSF accepted, the agency now requires proposers and awardees to
make enhanced disclosures and certifications throughout the
lifecycle of each SBIR award. This process helps prevent fraud
in the first place and enhances our ability to prosecute it
when it does occur, and we would recommend it to all SBIR
agencies.
NSF also requires companies that receive phase one awards
to attend a workshop to help them comply with the NSF
requirements, and, for over 10 years, this workshop has
included a briefing by my office that makes it clear to
awardees that violations of program requirements constitute
wrongdoing that can result in significant criminal, civil, and
administrative consequences.
In fact, when I spoke with a program officer at NSF before
coming here, she indicated that when my staffer gives that
briefing, you can hear a pin drop because people really do pay
attention and listen to understand the ramifications of false
certifications.
These briefings also facilitate prosecution, as they make
it quite difficult for an awardee to plead ignorance of NSF's
SBIR requirements and the consequences of violating them.
In addition to these best practices, we've identified two
challenges to investing SBIR fraud--deficiencies in databases
of SBIR awards and the lack of strong disclosures and
certifications at some Federal agencies.
With regard to the first, NSF maintains comprehensive,
internal databases from which program officers and my staff can
easily obtain complete information about proposals submitted
and awards made. Unfortunately, there's currently no efficient
means for us to obtain such information from other SBIR
agencies, and this lack of access to that information poses a
programmatic and investigative challenge to determining whether
you have instances of duplicative funding.
With regard to the second investigative challenge, not all
SBIR agencies require the number and frequency of disclosures
and certifications that NSF does, and their absence can impair
those agencies' ability to prosecute fraud.
In closing, Mr. Chairman, with the support of NSF, my
office has instituted processes that enhance our ability to
prevent, detect, and prosecute SBIR fraud, and we will continue
to work with the agency to prevent unscrupulous companies from
defrauding this valuable program.
Thank you, and I'd be happy to answer any questions.
[The prepared statement of Ms. Lerner follows:]
Prepared Statement of Allison C. Lerner, Inspector General,
National Science Foundation
Mr. Chairman and Members of the Committee, I appreciate this
opportunity to discuss my office's work related to the Small Business
Innovation Research (SBIR) program at the National Science Foundation.
Background
The Small Business Innovation Development Act of 1982 created the
Small Business Innovation Research (SBIR) program to stimulate
technological innovation; use small businesses to meet Federal research
and development needs; foster and encourage participation by minority
and disadvantaged persons in technological innovation; and increase
private sector commercialization innovations derived from Federal
research and development. Under the SBIR program, the National Science
Foundation (NSF) and ten other Federal agencies currently allocate 2.5
percent of their extramural R&D budgets for awards to small businesses.
Each SBIR agency uses the program to address the unique needs of
its mission. At NSF, the primary objective of the SBIR program is to
increase the incentive and opportunity for small firms to undertake
cutting-edge, high-risk, high-quality scientific, engineering, or
education research that would have a high potential economic payoff if
the research is successful. The SBIR program is part of NSF's
Engineering Directorate, and the ultimate goal of each project is a
commercially viable product, process, device, or system. The program is
funded by the government in two phases, followed by a privately-funded
third phase. Phase I is a 6-month grant to assess an idea's
feasibility, currently supported by NSF up to $150,000. If the Phase I
project is successful, the company can apply for a Phase II award,
which runs for up to 2 years and is funded up to $750,000.
Since 1990, NSF has awarded more than 6,600 Phase I and Phase II
SBIR awards totaling more than $1.1 billion. The vast majority of the
companies receiving SBIR awards spend their SBIR funds properly to
carry out the research they proposed to do, and they report accurately
to the agency about the results they obtained under the SBIR award.
However, since my office's inception, we have conducted a number of
investigations of companies that have allegedly committed fraud
involving their SBIR awards.
Specifically, since 1989 we have opened 64 cases involving SBIR
companies. Of those 64 cases, 16 have resulted in significant criminal,
civil, or administrative action to date, and 5 are currently under
investigation. While these numbers are not large, it is likely that
they do not reflect the full extent of fraud in the program due to
under-reporting and other issues which I will discuss later in my
statement.
It is important to note that NSF's SBIR program staff has strongly
supported my office's efforts to prevent, detect, and prosecute fraud
in the SBIR program. SBIR program officers regularly inform my office
when they receive allegations of wrongdoing or become aware of
information that indicates a possible problem within the program, and
those valuable leads have been the source of many of our successful
investigations.
As requested by the Committee, the following summarizes the types
of fraudulent activity our office has found in NSF's SBIR program. I
will also discuss processes that my office has developed and NSF has
implemented that have enabled us to prevent and, if necessary,
prosecute fraud in the SBIR program. Finally, I will conclude by noting
some problems my office has encountered in investigating this type of
fraud.
Types of Fraudulent Activity in the National Science Foundation's SBIR
Program
The primary type of fraudulent activity we encounter in the SBIR
program involves duplicative funding, which results in false
statements, false claims, and criminal misuse of grant funds. We have
also investigated cases in which research misconduct has resulted in
fraud against the SBIR program. I will briefly describe our work in
these areas.
Duplicative Funding
Duplicative funding, in which companies obtain payments from
multiple SBIR agencies for the same work, is the most frequent
violation we have found in NSF's SBIR program. This problem arises
because, in order to maximize their opportunities for receiving SBIR
funding for their proposals, companies may submit the same proposal to
more than one of the eleven Federal agencies that have SBIR programs.
At NSF, these multiple submissions must be disclosed, and it is a
violation of program policy for companies to accept funding from
multiple agencies for the same work. NSF's proposal preparation
guidance makes it clear to potential recipients that receiving
duplicate SBIR funding for the same or overlapping research is
prohibited, and the NSF program announcement clearly states that:
NSF will not make awards that duplicate research funded or
expected to be funded by other agencies. . . . If a proposer
fails to disclose equivalent or overlapping proposals . . .,
the proposer could be liable for administrative, civil or
criminal sanctions.
Since its inception, my office has investigated approximately 34
cases of alleged duplicative funding. We have substantiated the charge
in 10 cases. Examples of our work in this area include a case in which,
in addition to receiving duplicate funding from NSF's and other
agencies' SBIR programs, the recipient used the SBIR funds to pay for
renovations to his home and to overpay vendors so he could pocket the
reimbursements. Ultimately, he paid $1.4 million in restitution, civil
damages, taxes, and penalties, and pled guilty to mail fraud and tax
evasion to resolve these charges.
A second such case involved two companies with the same owner that
received duplicate SBIR awards from several agencies for the same work.
The companies paid $3.45 million in restitution and civil damages, and
open SBIR awards to the companies totaling $909,000 were terminated.
Finally, we also investigated a case in which the company received
funding from NSF and other Federal agencies for duplicate research. The
defendants were accused of knowingly and repeatedly applying for and
receiving SBIR grants from agencies for research that had already been
completed under grants awarded to other agencies. They were also
accused of charging the government for the cost of engineering work
that was not performed. As a result of our investigation, $530,000 of
the company's and the owner's bank accounts and assets, which had been
frozen during the investigation, were paid to the Federal Government,
and $1.4 million in open SBIR awards were terminated.
Research Misconduct
We have also encountered situations where research misconduct under
some of NSF's SBIR awards resulted in the program being defrauded.
Research misconduct occurs when data or results are fabricated,
falsified, or plagiarized. We have found some instances where companies
fabricated, falsified, or plagiarized their Phase I final reports in
order to obtain Phase II funding. Such misconduct in research amounts
to fraud against the SBIR program because in order to obtain Phase II
funding, the company's Phase I project must be successful.
In one such case we investigated, a university professor obtained
an NSF Phase I award for a proposal he submitted in his wife's name on
behalf of a non-existent company she allegedly owned. The professor
converted all of the Phase I funds to his personal use, and then
plagiarized the final Phase I report from a former student's thesis. On
the basis of that report, the nonexistent company received a Phase II
award. As a result of our investigation, the professor pled guilty to
making false statements, and he and his wife paid $214,000 in
restitution and fines.
Best Practices
As a result of our investigations involving SBIR program fraud, my
office has identified two best practices that are valuable tools in
preventing and prosecuting such fraud. A summary of these practices--
required disclosures and certifications and mandatory attendance at
awardee briefings--follows.
Required Disclosures and Certifications
In 1994, as a result of problems we had noted in our investigations
involving SBIR recipients, our office made several recommendations
intended to improve administration of NSF's SBIR program. The majority
of those recommendations focused on strengthening existing disclosures
and certifications, and on adding such disclosures and associated
certifications in areas that had previously had no such coverage. NSF
accepted all of these recommendations, and the resulting disclosures
and certifications have helped the agency deter fraud at the outset, by
making clear what the agency's expectations are. They have also helped
us prosecute cases of fraud, as they make it clear to recipients that
the provision of false information is a criminal offense.
Pursuant to our recommendations, NSF requires proposers seeking
SBIR funding to disclose if the proposal has been submitted to another
agency and to state that: (1) the company is a small business; (2) the
company will perform at least two-thirds of the work under Phase I or
at least half under Phase II ; and (3) the Principal Investigator will
be primarily employed by the company during the term of the award. The
authorized organizational representative is then required to sign the
following certification (referred to as a ``1001 certification''):
I understand that the willful provision of false information or
concealing a material fact in this report or any other
communication submitted to NSF is a criminal offense (U.S.
Code, Title 18, Section 1001).
When an SBIR proposal is awarded, before the company can receive
its first payment, NSF requires SBIR recipients to disclose whether:
1. the principal investigator and the small business firm have
accepted funding for the same or overlapping work except as
stated in the underlying proposal,
2. all proposals describing the same or overlapping work have
been withdrawn from other agencies,
3. the primary employment of the principal investigator is with
the firm at the time of the award and will continue during the
conduct of the research, and
4. the grantee is a small business.
After making these disclosures, the authorized company officer is
required to sign a 1001 certification.
Finally, SBIR awardees are required to submit reports to NSF about
their projects' accomplishments to receive interim and final payments.
Phase I awardees submit a final report when the project is over, and
Phase II awardees submit interim reports every 6 months and a final
report at the end. NSF requires SBIR recipients submitting such reports
to disclose whether: (1) the Principal Investigator is primarily
employed by the company; (2) the work under the project has not been
submitted for funding to another Federal agency and has not been funded
under any other Federal award; (3) the work for which payment is
requested was performed in accordance with the award terms and
conditions; (4) the statements in the report (excluding scientific
hypotheses and scientific opinions) are true and complete; and (5) the
text and graphics in the report are the original work of the company
followed by a 1001 certification.
In all instances, the disclosures and certifications relate to
requirements of NSF's SBIR program. If the company fails to make these
disclosures or provide the required certifications, it will not receive
an award or be paid. If the certifications are false, the company and
its officers can more readily be prosecuted for providing material
false information to the Federal Government because, as previously
noted, the company has attested that it is aware that providing such
false information is a violation of Federal law.
Mandatory Attendance at Awardee Briefings
NSF requires all companies that receive Phase I awards to attend an
SBIR Phase I workshop, which includes presentations on a variety of
topics to help awardees comply with NSF requirements and successfully
commercialize the results of their research. All Phase I award
recipients must attend these workshops, and NSF retains attendance
records.
More than a decade ago, the NSF SBIR program invited my office to
join in the workshop and give a presentation on the work we do. The
briefing presented by my staff makes it clear to awardees that
violations of SBIR program requirements constitute wrongdoing, and
outlines the specific criminal, civil, and administrative consequences
of such wrongdoing. Further, we describe specific cases involving SBIR
recipients we have investigated and that have been prosecuted. U.S.
Attorneys who have prosecuted cases of fraud against SBIR have cited
these briefings as an asset in prosecutive decisions. These briefings
and the documentation of awardees' attendance at them help ensure that
no SBIR awardee can claim ignorance of NSF's SBIR requirements and/or
the consequences of violating these requirements.
Programmatic and Investigative Challenges
In addition to identifying best practices to deter and prevent SBIR
program violations, my office has also identified two challenges to
investigating such violations. Following is a summary of these
challenges-deficiencies in databases of SBIR awards and lack of strong
certifications by some Federal agencies.
Deficiencies in Databases
NSF maintains comprehensive internal databases on its SBIR program
from which NSF program officers and my office can easily obtain
complete information about all SBIR proposals submitted to and awards
issued by NSF. However, while we have full access to NSF SBIR proposal
and award information, there is currently no convenient means for
obtaining detailed information about SBIR proposals submitted to and
awards received by companies from the other SBIR agencies. This lack of
access presents a programmatic and investigative challenge to
determining whether more than one Federal agency has paid for the same
research.
Currently, two Internet databases list SBIR awards to companies--
USAspending.gov and SBA TECH-net. However, neither of these databases
is complete, and neither provides sufficient detail to enable NSF's
SBIR program to determine whether another agency's program had already
paid for the same project. These limitations also make it more
difficult for us, and other OIGs, to investigate SBIR cases, because of
the significant effort required to obtain SBIR proposals and reports
from other agencies. Ensuring that all SBIR agencies and their OIGs
have electronic access to other agencies' SBIR proposals and awards
would facilitate efforts to prevent, detect, and prosecute fraud.
Insufficient Disclosures and Certifications
As previously noted, NSF requires SBIR proposers and awardees to
certify to the accuracy of required disclosures and clearly informs
those entities that providing false information via those disclosures
is a crime. Not all SBIR funding agencies require the number and
frequency of disclosures and certifications that NSF does, and their
absence can impair the government's ability to prosecute fraud in those
programs. In one case our office investigated, the final report
submitted to NSF contained fifteen tables and figures, twelve of which
had been submitted as accomplishments in twenty previous reports to
seven other SBIR agencies. However, since none of the other agencies
required certifications about overlapping or duplicative work, defense
counsel was able to argue persuasively that only the NSF funding should
be repaid.
Conclusion
The SBIR program at NSF is a valuable tool for providing funds to
small, high-tech businesses conducting innovative research to advance
NSF's mission and to possibly lead to commercialization of new
technologies. NSF has supported our office's efforts to prevent and
detect fraud in its SBIR program, and in conjunction with our office
has instituted processes that enhance both its ability to prevent fraud
and our office's ability to prosecute fraud when it occurs. My office
will continue to work in partnership with NSF to prevent unscrupulous
companies from fraudulently obtaining SBIR funds and to investigate
allegations of duplicative funding, research misconduct, and other
fraud against this important program. Additionally, we will continue to
recommend practices to strengthen the integrity of the SBIR program.
This concludes my statement. I would be pleased to answer any
questions you or other members may have.
The Chairman. Thank you very much, Ms. Lerner.
Ms. Dalton?
STATEMENT OF PATRICIA A. DALTON, MANAGING DIRECTOR,
NATURAL RESOURCES AND ENVIRONMENT,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Dalton. Thank you, Mr. Chairman, Members of the
Committee. I'm pleased to be here today to discuss the SBIR
Program.
Over the life of the program, GAO has reviewed and reported
on program implementation many times. We have generally found
that the SBIR Program is achieving its goals, and agencies and
companies have generally rated the program highly. However,
we've also identified areas of serious weakness, and made
recommendations that could strengthen the program.
Some of the issues that we have identified include the
following: First, risk of duplicate funding for similar or
identical research projects by more than one agency.
In 1995, we identified factors that could contribute to
this risk, including potential fraudulent evasion by companies
applying for awards, the lack of a consistent definition for
key terms, such as similar research, and the lack of
interagency sharing of information on awards. Inconsistent
interpretations of how to calculate extramural research budgets
was also an issue.
In 1998, we found that, while agency officials adhere to
the SBIR Program and statutory funding requirements, they use
different interpretations of how to calculate their extramural
research budgets. As a result, some agencies were
inappropriately including some expenses or excluding other
expenses.
Geographic concentration of awards was also an issue we
identified.
In 1999, we reported that companies in a small number of
states had submitted the most proposals and won the majority of
awards.
In 2006, when we looked at the geographic concentration of
awards made by DoD and NIH, we found that the SBIR awards
continued to be concentrated in a handful of states, and about
a third of the awards were made to firms in California and
Massachusetts.
Assessing the results of the SBIR Program was also an
issue, particularly in assessing commercialization and the
other SBIR goals.
In several reviews, we have reported that assessing the
performance of the program continues to be a challenge because
of insufficient information on commercialization and other
outcomes of funded projects.
Another concern we have identified relates to how agencies
determine and share information on a firm's eligibility for
SBIR.
Since its inception, the program has relied primarily on
self-certification by applicants to ensure that they meet the
program's eligibility requirements.
In 2006, when we reviewed the processes used by SBA, DOD,
and NIH, we found that this is still the case, and that the
agency's eligibility determinations focused primarily on the
firm's ownership, for profit status, and number of employees.
When agency officials were unable to ensure the accuracy of
an applicant's information, they referred the matter to SBA. We
found that after SBA makes the eligibility determination, it
made information about ineligible firms available on its Web
Site, but did not necessarily tie it to the SBIR Program.
In addition, we found that once agencies received SBA's
decision, they may or may not have a process to share this
information across their agencies.
Many of the concerns we've identified with the program can
be resolved in part through the collection of better data and
the establishment of an interagency database. Such efforts
would allow SBA and participating agencies to share information
more effectively and enhance the efforts to monitor and
evaluate the program.
Recognizing the importance of such data collection efforts,
in 2000, the Congress mandated that SBA collect data from all
participating agencies and develop a government use database by
2001. However, when we looked at it in 2006, we reported that
SBA was 5 years behind schedule in developing such a database,
and the information it was collecting was incomplete and
consistent, thereby limiting the usefulness for program
evaluations. But the database did not actually become
operational until October of last year.
According to an SBA official, the database has 2 years of
new data in it. According to this official, the database also
only accepts correctly-formatted information, and, therefore,
it should address our concerns about inconsistency of
information.
However, we remain concerned about the completeness and
accuracy of the historical data that are in the database. SBA
told us in 2006 that they were not planning to correct the data
that they had already received from agencies.
Also, in recently looking at the government use portion of
this database, which became operational last October, we could
only find award information, not proposal information. Further,
it did not contain information on commercialization and all the
results of the program.
In conclusion, Mr. Chairman, while the SBIR Program is
generally recognized as successful, it has continued to suffer
from longstanding evaluation and monitoring issues that are
made more difficult because of insufficient, inaccurate,
reliable, and comprehensive information about awards and
applicants. While we are encouraged that SBA has developed a
government use database, we remain concerned about the quality
of the information in it.
Mr. Chairman, this concludes my prepared remarks. I'd be
happy to answer any questions of you and the Members of the
Committee.
[The prepared statement of Ms. Dalton follows:]
Prepared Statement of Patricia A. Dalton, Managing Director, Natural
Resources and Environment, U.S. Government Accountability Office
Mr. Chairman and Members of the Committee:
We are pleased to be here today to testify on our past work on the
Small Business Innovation Research (SBIR) program. As you know, to be
competitive in the global economy, the United States relies heavily on
innovation through research and development (R&D). Recognizing the
potential of small businesses to be a source of significant innovation,
the Congress passed the Small Business Innovation Development Act of
1982.\1\ The act established the SBIR program to stimulate
technological innovation, use small businesses to meet Federal R&D
needs, foster and encourage participation by minority and disadvantaged
persons in technological innovation, and increase private sector
commercialization of innovations derived from Federal R&D. The act
provided for a three-phased program: phase I to determine the
feasibility and scientific and technical merit of a proposed research
idea; phase II to further develop the idea; and phase III to
commercialize the resulting product or process with no further SBIR
funding.
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\1\ Pub. L. No. 97-219 (1982).
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Federal agencies that have budgets of $100 million for research
conducted by others, called extramural research, are required to use
2.5 percent of these budgets to establish and operate an SBIR program.
Currently, 11 Federal agencies participate in the SBIR program. Each
agency manages its own program, including targeting research areas,
reviewing proposed projects, and making research awards through grants,
contracts, or cooperative agreements. The Small Business Administration
(SBA) plays a central administrative role by, for example, issuing
policy directives to the participating Federal agencies, collecting
data from participating agencies on awards and recipients, and
reporting program results annually to the Congress. In 2005 awards from
three agencies--the Department of Defense (DOD), National Institutes of
Health (NIH), and National Aeronautics and Space Agency (NASA)--
accounted for the majority of SBIR funds. From its inception in Fiscal
Year 1983 through Fiscal Year 2004, Federal agencies had awarded over
$17 billion for more than 82,000 projects.
Since it was established in 1982, the SBIR program has been
reauthorized and modified by the Congress at various times. For
example, the Small Business Research and Development Enhancement Act of
1992 directed SBA and participating agencies to, among other things,
emphasize the goal of increasing commercialization of research results
and to improve the government's dissemination of program-related
data.\2\ As a result, agencies were required to include
commercialization potential as a criterion for selecting award
recipients. During this same period, SBA began to develop a publicly
available database, known as Tech-Net, that contained information on
all awards made through the SBIR program. The Tech-Net database is
intended to be, among other things, an electronic gateway of technology
information and resources for researchers, scientists, and government
officials about federally funded, leading edge technology research. The
Small Business Innovation Research Program Reauthorization Act of 2000
formalized this database by requiring SBA to develop, maintain, and
make available to the public a searchable, up-to-date, electronic
database that contained SBIR award information.\3\ The 2000
reauthorization act also required SBA to develop and maintain another
restricted government database that would contain additional
information on commercialization not contained in the public Tech-Net
database, thereby allowing better evaluations of the SBIR program on an
ongoing basis.\4\ This database was to be established by mid-2001 and
made available only to government agencies and certain other authorized
users. SBA has established, through a policy directive, a series of
data elements for all the agencies to submit for its public Tech-Net
database.\5\ The SBIR program is currently being considered by the
Congress for reauthorization, and both the House and Senate have
recently passed bills to reauthorize the program.
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\2\ Pub. L. No. 102-564 (1992).
\3\ Pub. L. No. 106-554, App. I, Tit. I (2000).
\4\ Throughout this statement we refer to this database as the
government-use database.
\5\ 67 Fed. Reg. 60,072 (Sept. 24, 2002).
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In this context, you asked us to summarize the successes and
challenges that our past work has identified about the SBIR program,
summarize the concerns we have previously identified on SBA's efforts
to establish an interagency database that includes information on SBIR
applicants and awards, and describe the process that agencies use to
determine the eligibility of SBIR applicants for the program. This
statement is based largely on our prior reviews of the SBIR program and
contacts with SBA officials. Our work on the prior reviews was
conducted in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audits
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence we obtained for those reviews provided a
reasonable basis for our findings and conclusions based on our audit
objectives.
Summary
Over the life of the SBIR program, we have reviewed and reported on
its implementation many times. For example, between July 1985 and June
1999, we found that that the SBIR program is achieving its goals to
enhance the role of small businesses in Federal R&D, stimulate
commercialization of research results, and support the participation of
small businesses owned by women and/or disadvantaged persons.\6\
Participating agencies and companies that we surveyed during our
reviews generally rated the program highly. We also identified areas of
weakness and made recommendations that could strengthen the program
further. Many of our recommendations for program improvements have been
either fully or partially addressed by the Congress when it
reauthorized the program or by the agencies themselves. For example, in
2005, we noted one issue that continued to remain somewhat unresolved
after almost two decades of program implementation--how to assess SBIR
program's performance--and we identified data and information gaps that
make an assessment of the SBIR program a challenge. In 2006, we
conducted two reviews of the SBIR program.\7\ The first review
described how DOD, NIH, and SBA, verify the eligibility of SBIR
applicants; and the second examined SBA's and eight participating
agencies' efforts to collect data and establish a government-use
database that would facilitate monitoring and evaluation of the
program. In summary, we found the following:
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\6\ GAO, Federal Research: Observations on the Small Business
Innovation Research Program, GAO-05-861T (Washington, D.C.: June 28,
2005).
\7\ GAO, Small Business Innovation Research: Information on Awards
Made by NIH and DoD in Fiscal Years 2001 through 2004, GAO-06-565
(Washington, D.C.; April 14, 2006) and GAO, Small Business Innovation
Research: Agencies Need to Strengthen Efforts to Improve the
Completeness, Consistency, and Accuracy of Awards Data, GAO-07-38
(Washington, D.C.; October 19, 2006).
SBA had not met the congressional mandate to develop and
implement, by June 2001, a government-use database for
monitoring and evaluating the SBIR program. SBA officials told
us that they had been unable to meet the requirement to
implement such a database by 2001 because of management changes
that had occurred at the agency and because of budgetary
constraints, but expected to have it operational by early in
Fiscal Year 2007. However, this database did not become
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operational until October 2008, according to an SBA official.
Although Federal agencies participating in the SBIR program
annually submit a wide range of descriptive information to SBA
about each award they make, they were not consistently
providing the full range of required data elements. As a
result, certain sections of the Tech-Net database needed for
comprehensive program evaluation were incomplete. Agencies
cited a variety of reasons for not providing all of the data
elements, including frequent changes in SBA's data requirements
and differences in the types of data agencies collect versus
the types of data that SBA outlined in its policy directive.
Some participating agencies are not submitting SBIR award
data in the standard format established in SBA's policy
directive. For example, almost a quarter of the data provided
by five participating agencies in 2004 and 2005 did not comply
with SBA's formatting guidance. In light of the problems we
identified with the Tech-Net database and the implications for
these errors to limit evaluations of the SBIR program, we
recommended that SBA work with participating agencies to
strengthen efforts to improve the quality of the data.
According to an SBA official, as of October 2008, agencies can
directly enter SBIR-related data into the Tech-Net database
over the Internet in a way that does not accept incorrectly
formatted data.
To determine a firm's eligibility for the SBIR program, DOD,
NIH, and SBA focus primarily on criteria relating to ownership,
for-profit status, and the number of employees. The agencies
primarily rely on the applicants' self-certification of
eligibility, although in some cases they may take additional
steps to verify this information. When agency officials are
unable to ensure the accuracy of an applicant's information,
they refer the matter to SBA. After SBA makes an eligibility
determination, it makes information about ineligible firms
available on its website, but it does not always indicate that
the determination was for SBIR purposes. Once agencies receive
SBA's determination of eligibility, they may or may not have a
process to share this information across the agency.
Successes and Challenges of the SBIR Program
Our reviews of the SBIR program between 1985 and 1999 found
numerous examples of program successes such as the following:
Funding high-quality research. Throughout the life of the
program, awards have been based on technical merit and are
generally of good quality.
Encouraging widespread competition. The SBIR program
successfully attracts many qualified companies, has had a high
level of competition, consistently has had a high number of
first-time participants, and attracts hundreds of new companies
annually.
Providing effective outreach. SBIR agencies consistently
reach out to foster participation by women-owned or socially
and economically disadvantaged small businesses by
participating in regional small business conferences and
workshops targeting these types of small businesses.
Increasing successful commercialization. At various points
in the life of the program we have reported that SBIR has
succeeded in increasing private sector commercialization of
innovations.
Helping to serve mission needs. SBIR has helped serve
agencies' missions and R&D needs, although we found that
agencies differ in the emphasis they place on funding research
to support their mission versus more generalized research.
Our reviews of the SBIR program during that time have also
identified a number of areas of weakness that, over time, have been
either fully or partially addressed by the Congress in reauthorizing
the program or by the agencies themselves. For example,
Duplicate funding. In 1995,\8\ we identified duplicate
funding for similar, or even identical, research projects by
more than one agency. A few companies received funding for the
same proposals two, three, and even five times before agencies
became aware of the duplication. Contributing factors included
the fraudulent evasion of disclosure by companies applying for
awards, the lack of a consistent definition for key terms such
as ``similar research,'' and the lack of interagency sharing of
data on awards. To address these concerns, we recommended that
SBA take three actions: (1) determine if the certification form
needed to be improved and make any necessary revisions, (2)
develop definitions and guidelines for what constitutes
``duplicative'' research, and (3) provide interagency access to
current information regarding SBIR awards In response to our
recommendations, SBA strengthened the language agencies use in
their application packages to clearly warn applicants about the
illegality of entering into multiple agreements for essentially
the same effort. In addition, SBA planned to develop Internet
capabilities to provide SBIR data access for all of the
agencies.
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\8\ GAO, Federal Research: Interim Report on the Small Business
Innovation Research Program, GAO/RCED-95-59 (Washington, D.C.; March 8,
1995).
1Inconsistent interpretations of extramural research
budgets. In 1998,\9\ we found that while agency officials
adhered to SBIR's program and statutory funding requirements,
they used differing interpretations of how to calculate their
``extramural research budgets.'' As a result, some agencies
were inappropriately including or excluding some types of
expenses. We recommended that SBA provide additional guidance
on how participating agencies were to calculate their
extramural research budgets. The Congress addressed this
program weakness in 2000, when it required that the agencies
report annually to SBA on the methods used to calculate their
extramural research budgets.
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\9\ GAO, Federal Research: Observations on the Small Business
Innovation Research Program, GAO/RCED-98-132 (Washington, D.C.; April
17, 1998).
Geographical concentration of awards. In 1999,\10\ in
response to Congressional concerns about the geographical
concentration of SBIR awards, we reported that companies in a
small number of states, especially California and
Massachusetts, had submitted the most proposals and won the
majority of awards. The distribution of awards generally
followed the pattern of distribution of non-SBIR expenditures
for R&D, venture capital investments, and academic research
funds. We reported that some agencies had undertaken efforts to
broaden the geographic distribution of awards. In the 2000
reauthorization of the program, the Congress directed the SBA
Administrator to establish the Federal and State Technology
(FAST) Partnership Program to help strengthen the technological
competitiveness of small businesses, especially in those states
that receive fewer SBIR grants. The FAST Program was not
reauthorized when it expired in 2005. In 2006, when we looked
at the geographical concentration of awards made by DOD and
NIH, we found that while a firm in every state received at
least one SBIR award from both agencies, SBIR awards continued
to be concentrated in a handful of states and about one third
of awards had been made to firms in California and
Massachusetts.\11\
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\10\ GAO, Federal Research: Evaluation of Small Business Innovation
Research Can be Strengthened, GAO/RCED99-114 (Washington, D.C.; June 4,
1999).
\11\ GAO-06-565.
Clarification on commercialization and other SBIR goals.
Finally, in 2000, the Congress directed the SBA Administrator
to require companies applying for a phase II award to include a
commercialization plan with their SBIR proposals. This
addressed our continuing concern that clarification was needed
on the relative emphasis that agencies should give to a
company's commercialization record and SBIR's other goals when
evaluating proposals. In addition, in 2001, SBA initiated
efforts to develop standard criteria for measuring commercial
and other outcomes of the SBIR program and incorporate these
criteria into its Tech-Net database. In Fiscal Year 2002, SBA
further enhanced the reporting system to include
commercialization results that would help establish an initial
baseline rate of commercialization. In addition, small business
firms participating in the SBIR program are required to provide
information annually on sales and investments associated with
their SBIR projects.
SBIR Tech-Net Data base Limitations
Many of the solutions cited above to improve and strengthen the
SBIR program relied to some extent on the collection of data or the
establishment of a government-use database, so that SBA and
participating agencies could share information and enhance their
efforts to monitor and evaluate the program. However, in 2006,\12\ we
reported that SBA was 5 years behind schedule in complying with the
congressional mandate to develop a government database that could
facilitate agencies' monitoring and evaluation of the program. We also
reported that the information SBA was collecting for the database was
incomplete and inconsistent, thereby limiting its usefulness for
program evaluations. Specifically, we identified the following concerns
with SBA's data- gathering efforts:
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\12\ GAO-07-38.
SBA had not met its obligation to implement a restricted
government-use database that would allow SBIR program
evaluation as directed by the 2000 SBIR reauthorization act. As
outlined in the legislation, SBA, in consultation with Federal
agencies participating in the SBIR program, was to develop a
secure database by June 2001 and maintain it for program
evaluation purposes by the Federal Government and certain other
entities. SBA planned to meet this requirement by expanding the
existing Tech-Net database to include a restricted government-
use section that would be accessible only to government
agencies and other authorized users. In constructing the
government-use section of the database, SBA planned to
supplement data already gathered for the public-use section of
the Tech- Net database with information from SBIR recipients
and from participating agencies on commercialization outcomes
for phase II SBIR awards. However, according to SBA officials,
the agency was unable to meet the statutory requirement,
primarily because of increased security and other information
technology project requirements, agency management changes, and
budgetary constraints. When we reported on this lack of
compliance with the database mandate, SBA told us that it
anticipated having the government-use section of the Tech-Net
database operational early in Fiscal Year 2007. However,
according to an SBA official, the database became operational
in October 2008, and agencies have begun to provide data on
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their SBIR programs using the Internet.
While Federal agencies participating in the SBIR program
submitted a wide range of descriptive award information to SBA
annually, these agencies did not consistently provide all of
the required data elements. As outlined in SBA's policy
directive, each year, SBIR participating agencies are required
to collect and maintain information from recipients and provide
it to SBA so that it can be included in the Tech-Net database.
Specifically, the policy directive established over 40 data
elements for participating agencies to report for each SBIR
award they make; a number of these elements are required. These
data include award-specific information, such as the date and
amount of the award, an abstract of the project funded by the
award, and a unique tracking number for each award.
Participating agencies are also required to provide data about
the award recipient, such as gender and socio-economic status,
and information about the type of firms that received the
awards, such as the number of employees and geographic
location. Much of the data participating agencies collected are
provided by the SBIR applicants when they apply for an award.
Agencies provide additional information, such as the grant/
contract number and the dollar amount of the award, after the
award is made. For the most part, all of the agencies we
reviewed in 2006 provided the majority of the data elements
outlined in the policy directive. However, some of the agencies
were not providing the full range of required data elements. As
a result, SBA did not have complete information on the
characteristics of all SBIR awards made by the agencies. SBA
officials told us that agencies did not routinely provide all
of the data elements outlined in the policy directive because
either they did not capture the information in their agency
databases or they were not requesting the information from the
SBIR applicants. Officials at the participating agencies cited
additional reasons for the incomplete data they provided to
SBA. For example, some officials noted that SBA's Tech-Net
annual reporting requirements often change and others said that
if the company or contact information changes and the SBIR
recipient fails to provide updated information to the agency,
the agency cannot provide this information to SBA.
Participating agencies were providing some data that are
inconsistent with SBA's formatting guidance, and while some of
these inconsistencies were corrected by SBA's quality assurance
processes, others were not. In 2006,\13\ we determined that
almost a quarter of the data provided by five of the eight
agencies we reviewed was incorrectly formatted for one or more
fields in the Tech-Net database. As a result, we concluded that
these inconsistent or inaccurate data elements compromised the
value of the database for program evaluation purposes. SBA's
quality assurance efforts focus on obtaining complete and
accurate data for those fields essential to tracking specific
awards, such as the tracking number and award amount, rather
than on those fields that contain demographic information about
the award recipient. We found that SBA electronically checked
the data submitted by the participating agencies to locate and
reformat inconsistencies, but it did not take steps to ensure
that all agency-provided data were accurate and complete. We
also determined that inconsistencies or inaccuracies could
arise in certain data fields because SBA interpreted the
absence of certain data elements as a negative entry without
confirming the accuracy of such an interpretation with the
agency. As we reported in 2006, such inaccuracies and
inconsistencies were a concern because information in the Tech-
Net database would be used to populate the government-use
section of the database that SBA was developing (as discussed
above) to support SBIR program evaluations. However, at the
time of our review, SBA had no plans to correct any of the
errors or inconsistencies in the database that related to the
historical data already collected. As a result, we concluded
that the errors in the existing database would migrate to the
government-use section of the database and would compromise the
usefulness of the government-use database for program
evaluation and monitoring purposes.
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\13\ GAO-07-38.
To address the concerns that we identified with regard to the
quality of the data that SBA was collecting for the Tech-Net database,
we recommended in our 2006 report that SBA work with the participating
agencies to strengthen the completeness, accuracy, and consistency of
its data collection efforts. According to an SBA official, the database
is currently operational and some agencies have entered data for Fiscal
Years 2007 and 2008 over the Internet. Moreover, according to this
official, the system is set up in such a way that it does not accept
incorrectly formatted data.
Agencies Focus on Select Awardee Eligibility Criteria
In 2006,\14\ we also found that SBA and some participating agencies
focused on a few select criteria for determining applicants'
eligibility for SBIR awards. Specifically, we reviewed DOD's, NIH's,
and SBA's processes to determine eligibility of applicants for the SBIR
program and found that they focused largely on three SBIR criteria in
their eligibility reviews--ownership, size in terms of the number of
employees, and for-profit status of SBIR applicants. Although agency
officials also told us that they consider information on the full range
of criteria, such as whether the principal investigator is employed
primarily by the applying firm, and the extent to which work on the
project will be performed by others.
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\14\ GAO-06-565.
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Moreover, we found that both NIH and DOD largely relied on
applicants to self-certify that they met all of the SBIR eligibility
criteria as part of their SBIR applications. For example, at NIH,
applicants certified that they met the eligibility criteria by
completing a verification statement when NIH notified them that their
application had been selected for funding but before NIH made the
award. The verification statement directs applicants to respond to a
series of questions relating to for-profit status, ownership, number of
employees, where the work would be performed, and the primary
employment of the principal investigator, among others. Similarly,
DOD's cover sheet for each SBIR application directs applicants to
certify that they met the program's eligibility criteria. NIH and DOD
would not fund applications if the questions on their agency's
verification statement or cover sheet were not answered. Both NIH and
DOD also warned applicants of the civil and criminal penalties for
making false, fictitious, or fraudulent statements. In some cases the
agencies made additional efforts to ensure the accuracy of the
information applicants provided when they observed certain
discrepancies in the applications.
In 2006,\15\ we reported that when officials at the agencies had
unresolved concerns about the accuracy of an applicant's eligibility
information, they referred the matter to SBA to make an eligibility
determination. We found that when SBA received a letter from the agency
detailing its concerns, SBA officials contacted the applicants and
asked them to re-certify their eligibility status and might request
additional documentation on the criteria of concern. Upon making a
determination of eligibility, SBA then notified the official at the
inquiring agency, and the applicant, of its decision.
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\15\ GAO-06-565.
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Although, SBA made the information about firms it found ineligible
publicly available on its Website so that all participating agencies
and the public could access the information, we found that it did not
consistently include information on the Website identifying whether or
not the determination was for the SBIR program. An SBA official told us
the agency planned to include such information on its Website more
systematically before the end of Fiscal Year 2006. Once the agencies
received information about applicants' eligibility they also had
different approaches for retaining and sharing this information. For
example, while both NIH and DOD noted the determination of
ineligibility in the applicant's file, NIH also centrally tracked
ineligible firms and made this information available to all of its
institutes and centers that make SBIR awards. In contrast, DOD did not
have a centralized process to share the information across its awarding
components, although DOD officials told us it was common practice for
awarding components to share such information electronically.
In conclusion, Mr. Chairman, while the SBIR program is generally
recognized as a successful program that has encouraged innovation and
helped Federal agencies achieve their R&D goals, it has continued to
suffer from some long-standing evaluation and monitoring issues that
are made more difficult because of a lack of accurate, reliable, and
comprehensive information on SBIR applicants and awards. The Congress
recognized the need for a comprehensive database in 2000 when it
mandated that SBA develop a government-use database. Although SBA did
not meet its statutorily mandated deadline of June 2001, the database
has been operational since October 2008, and contains limited new
information but may also contain inaccurate historical data.
Mr. Chairman, this concludes my prepared statement. I would be
happy to respond to any questions that you or other members of the
Committee may have.
The Chairman. Thank you very much, Ms. Dalton.
I've changed my mind. Actually, I'm going to put my
statement in the record.
[The prepared statement of The Chairman follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
One of my top priorities as chairman of the Commerce Committee is
maintaining our country's role as the global leader in technological
innovation.
It's no secret that to maintain our leadership in the global
economy, we must continually invest in new ideas. And our investment
dollars have to come from both the private and public sectors.
One of the Federal Government's successful technology innovation
programs is called the Small Business Innovation Research (SBIR)
program, which supports scientists and entrepreneurs who have great
ideas, but haven't been able to develop their ideas far enough to
attract the attention of private investors.
This program has a good track record. A NASA SBIR contract led to
the development of the water filtration system used on space missions.
Another SBIR-funded project helped develop the de-icing systems used
today on many of our aircraft. There are many more examples of
innovative products and technologies that started as SBIR research
proposals.
I want to make it clear: I firmly believe that programs like SBIR
are crucial to our country's national security and our ability to
compete in the global economy. I support investing in basic research
and working with the private sector to develop new technologies.
But here's what I don't support. I don't support handing over
Federal research dollars to businesses that have lied to the government
about their qualifications or their research capabilities. And I don't
support funding businesses that are willing to accept taxpayer dollars
for research they haven't actually done.
Unfortunately, today we are going to hear stories about this kind
of conduct. We are going to hear that some of the businesses that won
these awards didn't do the work they promised. They committed fraud
against the government plain and simple.
We don't expect that every research project we support will lead to
the next breakthrough technology. But we do expect the people who
receive these funds to use them carefully and honestly. It is that
simple.
The Federal Government's scientific research dollars are scarce and
precious. And so funding research is a zero-sum game: Every time NASA,
or the Department of Defense, or the National Science Foundation awards
money to a dishonest business, those agencies miss an opportunity to
support an honest man or woman with an idea that might make our country
safer or our economy stronger.
I want to welcome our witnesses and thank them for testifying
today. I am looking forward to hearing from Mr. Al Longhi, a
businessman who found himself involved in a small technology company
that was ripping off the government. He did the right thing, not the
easy thing, and he's going to tell us his story.
I would like to read one sentence from Mr. Longhi's testimony,
because I think it explains why today's hearing is so important. He
says: ``Technological advances in energy, medical, defense and many
other areas have been and will continue to be one of the fundamental
strengths of our country.''
I couldn't agree with you more, Mr. Longhi. And so every research
dollar we lose to waste, fraud and abuse turns one of our country's
great strengths into an enormous weakness. We can't let it happen.
I yield back the balance of my time.
The Chairman. But simply want to--so that we can get to
questioning. Senator McCaskill is still free to make a
statement if she wants to. But I--I did want to say that a
large part of that statement, Mr. Longhi, was in praise of you.
Mr. Longhi. Thank you.
The Chairman. I don't think most Americans have any idea. I
mean, they read it in the newspapers, and somebody's a
whistleblower, and this is something that took place in 2002,
when you first had to start dealing with this, and it has been
a long time since then. You and your family--you indicated that
you had mortgaged your house in order to be a part of this.
Mr. Longhi. Yes.
The Chairman. Unfortunate adventure, but that was because
you believed in something, and you believe in strengthening our
country through technology and all the rest of it.
So, I just--it just needs to be made very, very clear that
people like you are not always commonly before us, and when you
do come before us in the Congress, you make an enormous
difference. And, so, all the nice things that could be said
about you and just congratulating your courage need to be said.
Mr. Longhi. Thank you very much, sir.
The Chairman. Senator McCaskill?
STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. Thank you, Mr. Chairman. I--I will not
put a statement on the record at this time. I do have
questions.
I will just say that there's something terribly wrong that
so much of the accountability that happens in our government
happens through whistleblowers. If it weren't for
whistleblowers and IGs, I can't even imagine the stuff that
would go on. And sometimes I get so discouraged because it
feels like we are just chipping away at the tip of the iceberg.
And I think we've got an iceberg here, and I think we've got to
do more than chip away at it.
And the most frustrating thing for me, Mr. Chairman, is
this is not hard. This is just basic A, B, Cs of
accountability. Check to make sure that they're not turning in
more than one application, and check when it's over, and make
sure you got what you paid for. This is not hard. And it's very
frustrating.
So, as my 17-year-old would say, Mr. Longhi, I heart
whistleblowers.
[Laughter.]
Senator McCaskill. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Mr. Longhi, it was in 2002, I believe, that you alerted the
Federal Government that the company you worked for, Lithium
Power Technologies, was defrauding the SBIR Program, and that's
correct, I assume.
Mr. Longhi. That is correct.
The Chairman. What would have happened if you had not come
forward with this information?
Mr. Longhi. The fraud would have gone undetected. The
founder, Dr. Munshi, was fairly sophisticated, and he was
clever in changing titles, changing a few things, even though
if you really dug, if you had the ability between different
SBIR agencies to compare documents, you would have found it,
but that ability does not exist. And the fraud would have gone
undetected.
The Chairman. Why do you think it was that the Federal
Government was unable to discover this? I mean, after all, you
went to them in 2002. Why do you think the Federal Government
has not reacted to this to the extent that is necessary?
Mr. Longhi. There's very little communication between the
different SBIR agencies. The United States Army does not know
the extent of the projects that the United States Air Force is
working on. The Ballistic Missile Defense Organization doesn't
know what the Army and the Air Force details are. Likewise,
with NASA, you know, they all want in this case portable power.
It's key to--given the missile defense systems, any--any type
of weapon system, you need better portable power, and they
wanted it for their own, and I think there's a little bit of, I
don't know, envy. If they learned that Dr. Munshi was working
with the Army, they didn't want to miss out, and they wanted in
on it, too, but for their own specific needs.
So, I think it came--comes back to communication. There is
no mechanism. The contracting officers that oversee the--the
grants, would--would surely want to stop the fraud. There's--
there's no doubt about that. But they don't have the time nor
the tools or the resources to do that.
The Chairman. I thank you, and I am reminded that I
should--that we're going to include the Committee's report,
which is entitled ``Cases of SBIR Waste, Fraud, and Abuse''
into the Committee record, and that will be done without
objection.
You worked with many people, and I have two questions.
A lot more folks that worked there than just you had to
know something was wrong.
Why didn't they do something? What were the pressures?
And, second, why did Mr. Munshi believe that he could get
away with this, other than the fact that he was, which probably
answers my question, but I--I'd like to hear you phrase it.
Mr. Longhi. Both very good questions. I'm not sure I have
the answers to either one.
Other people did know of the duplication and fraud that was
going on. There was one scientist that had stood up, Dr.
Krishnan Menon, and confronted Dr. Munshi on that, and he was
terminated.
All the employees have families, they--during that time,
2001, 2002, was a very difficult job market in--in America.
They felt that if they lost this employment, that it'd probably
be difficult to find other employment. And I think that played
a lot--a big part in them remaining quiet. You know, after they
saw someone being terminated in front of their eyes for raising
the issues.
In regards to Dr. Munshi, I--I don't know. I don't know why
he chose this route other than I know he enjoyed it.
We--we have him on tape laughing about the Air Force
Contracting Officer, Dr. David Ryan, not knowing about the
duplicative NASA research. You know, this was--in some ways,
he--he took pleasure from putting one over on the government,
but I don't know if that was the--you know, the sincere or the
original motivation for it.
The Chairman. My time is pretty much up, and I want to go
on with you and others, but just to give you some sense that
you're not all alone in this, although maybe what I'm saying is
that you are all alone, we are spending virtually all of our--
at least I'm spending virtually all of my time in something
called healthcare reform debates, and health care is 20 percent
of the economy of the United States, which would be quite a lot
of money. And there are--experts agree that there are about
$700 billion that are being lost to or being spent in the
health care system through waste, fraud, or abuse. And, so, as
I listen to you, I wonder where all of those folks are.
Senator McCaskill?
Senator McCaskill. Thank you, Mr. Chairman.
I was--Mr. Longhi, I--I have the documents that we will
make part of the record, if there is no objection, Mr.
Chairman, from your company, where, on May 1, 2002 and May 2,
2002, essentially, the same proposals were submitted to two
different agencies for the same funding.
[The information referred to follows:]
SBIR Air Force Report, Page 5--Submitted May 1, 2002
Table 2.--E-beam Deposition of Lithium Using Different Source Crucibles
------------------------------------------------------------------------
Run VVN1.380.1 VVN1.380.2 VVN1.381.1 VVN1.381.2
------------------------------------------------------------------------
Evaporation E-beam E-beam E-beam E-beam
Technique
Source Crucible/ Baffle box Molybdenum Molybdenum Molybdenum
liner boat boat boat
Substrate Cu foil. Cu foil Cu foil Cufoil
Substrate 19 19 19 19
Thickness, um
Substrate Width 55 55 55 55
Test Duration, <1.00 1.30 4.29 6.20
Min.s
Density 1.06 1.06 1.06 1.06
z-ratio 3.999 3.999 3.999 3.999
Tooling Factor, % 110 110 110 110
Deposition 0.112 1.071 2.043 13.50
Thickness kA
Deposition rate A/ N/a 11.9 7.59 35.5
s
Ion Gauge N/a N/a N/a N/a
Pressure, torr
------------------------------------------------------------------------
SBIR NASA Report, Page 11--Submitted May 1, 2002
Table 1.--E-beam Deposition of Lithium Using Different Source Crucibles
----------------------------------------------------------------------------------------------------------------
Run VVN1.380.1 VVN1.380.2 VVN1.381.1 VVN1.381.2
----------------------------------------------------------------------------------------------------------------
Evaporation E-beam E-beam E-beam E-beam
Technique
Source Crucible/ Baffle box Molybdenum Molybdenum Molybdenum
liner boat boat boat
Substrate Cu foil Cu foil Cu foil Cu foil
Substrate 19 19 19 19
Thickness, um
Substrate 55 55 55 55
Width
Test Duration, <1.00 1.30 4.29 6.20
Min.s
Density 1.06 1.06 1.06 1.06
z-ratio 3.999 3.999 3.999 3.999
Tooling 110 110 110 110
Factor, %
Deposition 0.112 1.071 2.043 13.50
Thickness kA
Deposition Rate N/a 11.9 7.59 35.5
A/s
Ion Gauge N/a N/a N/a N/a
Pressure, torr
----------------------------------------------------------------------------------------------------------------
Lithium Power Technologies, Inc.
SBIR Air Force Report, Page 5--Submitted May 1, 2002
These three runs produced films that had total thickness of 16.61
kilo-angstroms of lithium. These films were dried for 24 hours in a
vacuum oven. The films were then punched into 12.5 mm plates and were
put back into the vacuum oven for additional drying. These plates would
have been used for half-cell testing, but after 48 hours in the oven,
the plates had a black tarnish coating. It was clear that the plates
were reacting with some elements in the vacuum oven. The conclusion was
that the lithium plates were reacting with the solvent, specifically
NMP, given off from the drying of the coated cathode and anode
materials. Thus for future runs, the lithium plates should be isolated.
SBIR NASA Report, Page 12--Submitted May 2, 2002
These three runs produced films that had total thickness of 16.61
kilo-angstroms of lithium. These films were dried for 24 hours in a
vacuum oven. The films were then punched into 12.5 mm plates and were
put back into the vacuum oven for additional drying. These plates would
have been used for half-cell testing, but after 48 hours in the oven,
the plates had a black tarnish coating. It was clear that the plates
were reacting with some elements in the vacuum oven. The conclusion was
that the lithium plates were reacting with the solvent, specifically
NMP, given off from the drying of the coated cathode and anode
materials. Thus for future runs, the lithium plates should be isolate.
Senator McCaskill. Did you--at the point in time this
happened, did--you actually confronted the boss, Mr. Munshi,
about this?
Mr. Longhi. No, I had not.
Senator McCaskill. OK, and, at some point in time, did you
confront him that--that this was going on?
Mr. Longhi. No, I knew better. I--I would have been
terminated. It--it's--and to give you a little bit of
background on that, he had earlier on in 2001, tried to conduct
some workmen's compensation insurance fraud, and I confronted
him on that, and I was nearly terminated.
Senator McCaskill. Has--has he gone to jail yet?
Mr. Longhi. No.
Senator McCaskill. Has he been prosecuted by anyone for
either the worker's compensation fraud or for this fraud?
Mr. Longhi. Only civilly on the SBIR fraud.
Senator McCaskill. Let me ask the IGs. You know, I've read
the Committee's report, which, by the way, Mr. Chairman, is
excellent work. Congratulations to your staff. It is--it would
make any prosecutor proud, this report. Except for I want to
hear all the results of this report that people are going to
jail.
You know, we spend a lot of money in this country putting
people in jail that steal cars, and, you know, you can walk in
a 7-11 and steal 5 sandwiches for your family and know that
you're going to--at least going to go to Municipal Court and be
held accountable for what you do.
These are really good thieves. Is they're preying upon the
incompetence of government to steal millions and millions of
dollars from the taxpayer.
Are you all aware, the IGs that have testified today, of
people who have spent time behind bars for doing this?
Mr. Howard. Behind bars, I'm not actually sure.
Certainly, we have--one of the cases that I talked about
earlier was a contractor that had recycled previous
deliverables. He was convicted for tax evasion and wire fraud.
He was sentenced to 12 months home confinement and 5 years
probation. And, in addition, he agreed to pay a civil
settlement of $1.4 million.
Senator McCaskill. How about you, Ms. Lerner? Are you aware
of anybody----
Ms. Lerner. I'm not aware----
Senator McCaskill.--who's gone to jail?
Ms. Lerner.--of anyone serving any actual jail time,
although, we have had successful civil recoveries along the
lines that were mentioned by the gentleman from NASA.
Senator McCaskill. You know, that's part of the problem, is
that there's a sense that if you do things like this, you can
pay people back, and you won't be separated from your families,
and you won't go to prison, and it breaks my heart when I--I
have some very extensive knowledge about the people who go to
prison, and, you know, people who live in certain neighborhoods
and who engage in certain illegal activity, their chances of
going to prison are pretty darn good. People who put on a fake
title or claim fake university affiliation and try to rip off
the government for research dollars, their chances to go to
prison are way too slim, and that's one of the reasons why have
a cavalier attitude about how easy it is to get away with this.
Let me drill down just for a minute and see if either one
of you or--or any of you on the panel can tell me, it's my
understanding that this problem was uncovered awhile ago, and
that there was a great deal of sound and fury about these
grants and--and possible fraud and waste and abuse in this
program, and at that point in time, there was a requirement
that SBA do a database that would allow everyone just to do
something basic like hey, is he trying to--are they trying to
get the same money out of you that they're trying to get out of
us? We're not talking about 100,000 programs here; we're
talking about a manageable database.
I mean, we're going to do a hearing on databases in the
government because, you know, talk about databases gone wild,
we've got databases gone wild in the U.S. Government. But this
would be pretty straightforward and simple, and easily
searchable, and it hasn't been done.
Now, I know that was at SBA that it was supposed to have
been done, but do either of you have any input as to what has
been the problem?
I think that was a decade ago. Mr. Chairman, I think that
Congress instructed them to do this.
Mr. Howard. Close to it. I believe it was 2000, ma'am.
Senator McCaskill. Yes, so, we've--we've gone 9 years, and
now we're back at another hearing, and nothing's happened.
Is--is--has there been any progress made that you're aware
of any type of just basic, you know, before you send out an
award, you better check and make sure that they aren't double-
dipping?
Mr. Howard. I'm told by my staff that both the NASA people
who attempt to use the database and our staff, as well, find
that it's not useful and that they're unable to do the kinds of
things that were intended to be done with the database.
Ms. Lerner. I hear the same thing. It contains a certain
amount of information, but the critical information that we
need, information as basic as if we find that they've received
an award from another SBIR agency, who's the agency contact, so
that we can call them and get access to the proposals. It
doesn't have proposal information, it doesn't have an agency
contact information, and, so, we have to rely on backdoor
channels to try and ferret out, how to get at the basic
information that we need, and program officers face the same
challenge in order to determine if we have duplicate funding.
Senator McCaskill. Well, I--I--you know, it--it--I
understand that it may not contain all the information needed,
but it would seem to me that if you came across another
proposal from the same entity, that we ought to be able to
figure out how to pick up the phone and call someone and
double-check it's not the same proposal.
Ms. Dalton. Senator, we looked at the government-use
database that SBA claimed was operational. Going through that
in preparation for this hearing, what we were finding was award
information, but not proposal information. And that's a key
piece of information to know what these companies are proposing
to and to see whether or not there are any similarities between
them.
We also found that it would contain the name of the
company, but those names may not be unique. You know, you could
have a company listed several times, but they used
abbreviations, so, it would be identified separately as opposed
to using a unique identifier, like a DUNS number or an EIN,
which should be in the government-use database, not in the
public-use database. It's the government-use database that
really needs to be accessible and easy to use and searchable so
that all the agencies that are participating in this program
can look at and use it before they make awards.
Senator McCaskill. Well, I'm going to see if we can't
continue to put a lot of attention in this area at SBA and see
if we can't get that fixed. And I do think that there is merit
in this program.
I'm aware that there are a couple of awards that have
recently been given to two entities in Missouri that are both
doing important research on alternative energy. In fact, a lot
of the progress we had made on alternative energy--up until
this presidency, we weren't spending a significant amount of
resources on our alternative energy; we are now, but a lot of
the work, the early work that it was done on, biomass and many
other things, to say nothing of what was going on with DoD and
NASA has come through this program, so, I think it's worth
saving, but, Lord knows, we can do better than we're doing.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator McCaskill.
I--you know, there are all kinds of EPSCoR, if you're
familiar with the National Science Foundation, are fantastic
programs, and they were developed to help smaller universities
so that Harvard, Yale, Stanford, and Princeton didn't get all
the money. And, to that, I really say so what, I'm glad that's
going on. That's simply a matter of a legislator--a couple of
legislators sitting down and, with the head of NSF, which
happened to be Erich Bloch at the time, who didn't like the
idea because he thought that if it wasn't at Harvard, Yale,
Stanford, or Princeton, there probably wasn't going to be a
result. But, anyway, we made him change his mind, and it's been
unbelievable the success that's come from that.
But what disturbs me a little bit in listening to--the
three of--the last three of you--in front of me, not you, Mr.
Longhi, is that there--that there are bits and pieces of
reasons that you couldn't do something.
Now, I understand. I serve on the Intelligence Committee. I
understand what stovepiping in is. What I have come to
understand much more effectively is that stovepiping is--is not
as frequent in the Intelligence Committee as it is in--in the
government itself at large. That somehow you talk about, well,
there was a little thing about radiation or--or people didn't
call each other or whatever.
Data communication is--is just a part of what we do these
days, it's what's going to--one of the things that will surely
pass in the--in the healthcare bill. I sense a--to be honest
with you, a little bit of ennui in your answers. That what will
be, will be, what is, is what is. We deal with this as best as
we can.
So, I need to ask you: Do you have insufficient people to
do what it is that you're meant to be doing? Do you have
insufficient money to do what it is? That you have bosses who
are against you're doing what you're meant to be doing? Or
what--what's--what's the deal on this? I don't just mourn this
problem; I'm profoundly upset by it. Obviously, particularly
because it's the government, it's people's money. People I
represent in West Virginia don't have a lot of money to throw
around on waste, fraud, and abuse or anything else. What--what
is the reason? What's at root for this? How much have you three
spoken up?
Mr. Howard. I'll go first, Senator.
We have spoken up over the years.
The Chairman. You gave an example.
Mr. Howard. Well, 1992, 2004, 2005, we've alerted the
Agency to vulnerabilities of this program to fraud, waste, and
abuse, and we've made recommendations to improve it.
The Chairman. You made recommendations to improve it.
Have you followed up to see what happened?
Mr. Howard. Yes, sir, we have, and the Agency has
implemented our recommendations.
The Chairman. OK, so, how come it's only 2009, you know, 2
years into the last century, 2002, 2004, 2005, et cetera? I
mean, this is going on every day all the time?
Mr. Howard. Yes, Senator.
The Chairman. You just aren't aware of it?
Mr. Howard. Well, I think we're aware of what's been
brought to our attention, and we have certainly investigated
the cases that have been brought to our attention.
We've had 50 cases brought to our attention since about
2001. We've investigated those. We've had eight that have been
closed with a conviction or a civil settlement, and we have
five currently in process.
We're not a substitute for the Agency's internal control
process, sir, and I think that's where the breakdowns are.
The Chairman. Well, you're--you're the Acting Inspector
General of NASA. Allison Lerner, you're the Inspector General
of the NSF.
Ms. Lerner. Correct.
The Chairman. And, Patricia Dalton, you're the Managing
Director of Government Accountability Office section.
Do you--do you have to wait until things come to you? Do
you have anybody that goes around and pokes--pokes into these
situations?
Ms. Lerner. We do poke, but, our efforts to poke are
stymied, to a certain extent, by the limitations of the
databases that exist. I will say I've been at NSF in the IG
position only since the end of April, but in the dealings that
I've had with our investigative staff, they love these types of
cases. They take them seriously, more seriously than perhaps
some other people within the OIG community. But, they are
difficult cases to work because of the difficulty in obtaining
the information that will enable you to understand if you have
an actual instance of duplicate funding or not.
We do take them seriously. We have. And as I indicated,
we've had 64 investigations since the program began at NSF, and
we've had some significant outcomes as a result. We have five
ongoing cases right now that we are taking seriously and that
we are working.
We got the attention of NSF management back in the early
90s and got them to institute some strong disclosures and
certifications that really help us in instances where there is
fraud to have successful prosecutions or outcomes.
The relationship that we've developed with the program
staff and the presentations given by our staff to awardees that
walk them through the ramifications of fraud, and show them the
actual checks that we've been given by people to pay back and
the pictures of Federal prisons where they could go, not that
they have been, but where they could go if they defraud, have
an impact. I know we don't catch every instance of fraud, but I
think we're doing our level best to prevent it, and when it's
detected, to pursue a strong, positive outcome.
The Chairman. Why am I dissatisfied?
Ms. Dalton. I would think, Senator, it's because these
problems have been identified for many, many years. GAO has
identified these for the Congress since the early 90s, and
Congress has acted and asked for things to be done, and they
have not been completed on time, and even, as I reported, it's
not where it should be now.
The Chairman. If somebody is labeled an ``inspector
general,'' doesn't that mean that you spend all of your waking
hours pursuing? In other words, isn't it your job to assume
that waste, fraud, abuse, and corruption is going on? That, in
other words, you--you don't accept that----
Ms. Dalton. Yes.
The Chairman. You hope not to run into any, you assume that
it's going on? Because it's--it's the nature of--of what
happens in this country. I don't hear passion. I don't hear
anger.
I mean, you talked about, Mr. Howard, somebody getting a--
as though he was trampled, paying $1,100,000, but got to stay
at home, and--and I heard that, and I almost--I almost
interrupted Senator McCaskill in outrage that--that this would
somehow be acceptable to you. I mean, when people do things
like this, I mean, shouldn't they be fired, stripped, go to--go
to prison?
Mr. Howard. Sir, I agree. We don't get to make those
decisions.
The Chairman. Now, what do you mean ``we don't?'' You're
an--you're an Inspector General.
Mr. Howard. But, sir, I'm not a judge or a jury.
The Chairman. Well, that--so, that means that--that the
person above you decided this was not worth pursuing.
Who is the person above you?
Mr. Howard. Department of Justice, sir. That is who we work
with on these cases with the Federal prosecutor.
The Chairman. Well, what about--what about NASA itself?
Mr. Howard. Sir, there is no one in NASA that influences
what I do.
The Chairman. I'm not suggesting that, but there's
obviously nobody in NASA that wanted to follow up what you were
doing. The Department of Justice didn't.
Why are you an inspector general? Why--why do you hold the
position? What--what is your----
How do you--how do you get out of bed every morning?
Mr. Howard. To prevent and deter fraud, waste, and abuse,
and to improve the Agency's operations and programs. And I
think we've been fairly successful at that, sir.
The Chairman. Ms. Lerner?
Ms. Lerner. It is a frustration when you are an Inspector
General that you can't be everywhere at every time and fight
every instance of fraud that occurs in the agency that you
oversee, and if passion isn't coming across, I'm sorry; it
should. I've spent my entire Federal career in this type of
work, and I believe passionately in the mission of what we do.
But as has been noted, we can't be everywhere at every
time, and we have many different programs with fraud that we
have to oversee, many different areas that we have to pursue,
and we do find ourselves spread very thin in attempting to
cover all of the fronts in which the fraud can occur and is
occurring.
I do think that at NSF, we've done our level best at
tackling every allegation of fraud in the SBIR Program that's
come our way, and when we've been able to substantiate the
charge to pursue it as far as we can. We are limited because we
investigate, but the Department of Justice makes decisions
about prosecution.
The Chairman. Well, what would happen if you decide that
you couldn't prosecute, but that you had done the investigation
and you just held a press conference saying what you turned up
and then turned it over to the Department of Justice? Would
that get you fired? Would that embarrass you? I mean, compare
yourself to--to Mr. Longhi. Look what he did. Why can't you
hold a press conference?
Ms. Lerner. That's a strategy I haven't considered, but I
think in most instances where we've substantiated the charge,
we have been able to follow the case through and receive some
sort of positive outcome, whether it's administrative in that
it's opened--or it's terminated so that no further funds could
be abused--civil awards wherein we could recover--potentially
double or triple damages back to the program. Unfortunately, no
real criminal outcomes, but we pushed it as far as we can.
The Chairman. Were there criminal activities?
Ms. Lerner. You know, when you have tax evasion,
potential----
The Chairman. Isn't that a criminal activity?
Ms. Lerner. Yes, but----
The Chairman. So, when they--when it came back far short of
that from the Department of Justice and----
Ms. Lerner. Well, when settlement agreements are reached,
that's part of the settlement and it can be that jail time is
avoided, but----
The Chairman. Well, give me an example of a settlement
agreement that was reached.
Ms. Lerner. I'm sorry?
The Chairman. Can you give me an example of a settlement
agreement? Give me some context.
Ms. Lerner. I believe our office has turned over copies of
settlement agreements to your staff, and I do have those. I
can't off the top of my head give you specifics from them, but
they do have several examples of----
The Chairman. I'm glad they have several examples. I'd like
to have an example. Can you just plumb your thinking a little
bit and see?
I'll--I'll go to Ms. Dalton and see what she has to say,
and you think about.
Ms. Lerner. OK.
Ms. Dalton. Well, at the Government Accountability Office,
most of our work is done directly at the request of the
Congress, and our work is almost exclusively program evaluation
work.
Since the inception of this program, we have reported
numerous times to the Congress about problems with the program,
including the issue of duplicate awards, and we've been
reporting that since the mid-1990s. We do not do the
investigative work that the inspector generals do.
The Chairman. OK, so, you turned it over to the Congress.
Who--where did you--who did you turn it over to?
Ms. Dalton. It would have been numerous committees of the
Congress. It's whichever Member of Congress or Committee that
has requested the work is who are reports are written to, and
then they're publicly available.
The Chairman. Mr. Longhi, do you understand my frustration?
I assume it's yours, too.
Mr. Longhi. Yes, I do. I--may I add something here?
The Chairman. Please.
Mr. Longhi. I very much wanted to see Dr. Munshi have a
criminal conviction because of everything that went--that
transpired. I wasn't there in the room, but I believe from
input from my lawyer that the--the NASA special agents
aggressively tried to get this case tried criminally. When they
presented the--the evidence to the Department of Justice, the
Criminal Division, it was decided that--not to go forward
because I think, in part, it was so technical that they--they
understood the evidence, but trying to present that to a jury,
they thought it would be a very, very difficult case to try
when you start to get into chemical compounds, and it breaks
down in showing the--the details of the fraud, and they just--
I--I think it came down on that point that the Department of
Justice, the Criminal Division shied away from it because it
would be so hard to try on a technical basis.
The Chairman. Now, I don't want to be--I'm going to seem
political when I say this, but I--I fully understand that--that
in the last 8 years that the Department of Justice was not as
active as it might have been on a number of fronts, but it's--
it's incomprehensible.
Did you ever see the movie ``A Civil Action?''
Mr. Longhi. No, sir.
The Chairman. Any of you see it?
[No response.]
The Chairman. Do you remember--I'm sorry. I'm--I'm really
sorry about that. It's a very good--it's a very good movie, and
it's a story about the case against Grace and Company. It's not
a story, it's a factual account, and Grace and Company paid the
largest amount in the history of litigation in New England
for--for cleanup of toxic waste, which they--which happened
after what you're talking--all of what you're talking about. It
was very technical. And the lawyer who was taking this on
couldn't get a jury to understand, and, more importantly than
that, he couldn't afford to hire the--the different
toxicologists and, you know, all the fancy specialties at
$100,000 a year or--or month or whatever, you know, to pursue
it.
And it was--it came to the attention of the EPA because
three boys who didn't like the man who had owned this, you
know, supremely toxic land had gotten out of it by a weak
judge, they--they were tossing firecrackers and one went into
the river next to this dumping ground, and the river exploded
into fire, and then, you know, a month later, EPA closes down
the company, cleans everything up, and hits Grace and Company
with the largest suit in the history of New England.
So, things happen in different ways. Things are
complicated, but I--I had always thought that, I don't know,
that IGs somehow pushed, they just pushed. And that's the value
of their work.
That a case--and I'm not saying that you don't, and you all
have cases that have come, that have been settled. Well,
sometimes you don't want to settle something. Sometimes, you
don't want to settle something, you want to make a point. And,
so, you just--you just stick with it, and--and then you either
make it or you don't make it. If you--if you don't make it,
then you don't get the settlement money, and bravo for the
person who gets away with a--with a, you know, criminal or
antisocial behavior.
I'm just--I'm perplexed because, you know, you don't have
to go to Iraq; you don't have to go to anything going on in
this country.
There's--we're dealing the other day with some soldiers
from--from Iraq who'd been hit with the same chemical compound
that was sort of like Hexavalent Chromium or something like
that. In other words, it was the worst kind of chromium which
would just eat out your insides and turn you cancerous. And it
was in dust form. They all dealt with it. The Army denied that
there was any problem. And they broke out into rashes and their
marriages broke up, they couldn't read newspapers and they
couldn't keep jobs. And they finally came to us, and some of us
are very, very mad about it, and I suspect you'll see results
from it. And, as far as I'm concerned, results are the only
things that count. Effort is nice, but results are what count.
I'm not lecturing you. I'm--I understand I'm not making any
friends here, and I don't really care. I--I'm just on behalf of
aggrieved people, much less taxpayers, I would--I just--I want
to see hope.
So, let me--so let me just close--let me just close by
asking each of you what you think could be done to ameliorate
the situation and make it more efficient. Starting with you,
Ms. Dalton.
Ms. Dalton. Sure. I think there are a number of things that
could be done. Some of which they already are supposed to be
doing, but I think they can be done better, and there are some
things that they haven't done that they need to do.
I talked about this database. It was supposed to be done in
2001; it still is not where it needs to be by a long shot. It,
as I said, doesn't include the proposal information. That, I
think, is critical because we've been talking about fraud, but
the best way to stop fraud is to prevent it from happening in
the first place, and if we could get proposal information that
all agencies could look at easily and search, it would be much
easier to identify these duplicate awards, and, hopefully, that
they would never occur.
Second, I think that the certification statements could be
improved. All of the agencies have done better, but there are
differences among the agencies in terms of the types of
certifications that each awardee is given. When we were talking
about criminal penalties, one of the these is false statements,
1,001 certification violations. Those can be prosecuted very
easily, but you need a clear certification statement. If we
could get quality certification statements as to what each of
the people at the organizations that are getting awards are
certifying that they are not receiving duplicate awards, et
cetera, I think that would improve the program.
I also think that we should have clearer definitions of
what similar proposals are or identical proposals. Because we
have repeatedly found duplications of awards.
And then, finally, I think that we should have clear, good
information on what we're getting for the money. Have we gotten
technology that can be commercialized? What other outcomes have
come such as the research that the government needs, for
example, to improve our weapon systems or health research.
So, those are four things that I would recommend that we
focus on.
The Chairman. OK. Ms. Lerner?
Ms. Lerner. I'll reiterate what Ms. Dalton said. The single
most important thing that would help us make more cases like
this would be an improved database so that we could proactively
go out and try and find instances of duplicate funding instead
of having to wait for program officers to raise issues to us or
whistleblowers like Mr. Longhi to raise the issue. If we had a
proactive, better database. We have software, we have the
ability to go out and match the proposals and find these things
and could make tremendous progress in that regard.
I do think the certifications that we have are 1001
Certifications. We require them throughout the lifecycle of the
award. We're very well-positioned, and I'd be happy to work
with other Inspectors General, and if we want to convene a
working group and talk about the certifications and how those
could be improved across the community because I think we have
a good example that could be worked from.
I'll turn it over.
Mr. Howard. Thanks. I agree that the working group is a
very good idea. I think there are two things that we could do.
One, in the Inspectors General's Office, we will be
passionate and proactive in finding out why these internal
control weaknesses exist in the Agency's program, and make
definitive recommendations to address them.
Second, we will encourage the Agency while we're doing our
work, to take a look at itself and try to find out why it's not
complying with its own internal control regulations.
The Chairman. Do you know what the first law that was
passed after 9/11 was? Passed by the Congress? Any of you know?
[No response.]
The Chairman. It was a law that required the FBI and the
CIA to be able to talk to each other. FBI did internal, CIA did
external, so, they couldn't talk to each other. Which is one of
the main reasons that 9/11 happened. There were all kinds of
clues to indicate that this was going to happen, and there were
all kinds of clues to indicate exactly how it was being set up
to happen, the 9/11 Commission makes those very clear.
But it--it was interesting because it didn't make--it
didn't make very much difference. The FBI kept on being the
FBI. That means they had long yellow, legal pads, they were
lawyers, and they were only there to arrest criminals. The CIA
was only there to surveil suspects to find out who their
contacts were and trail them. Not to arrest them, but to trail
them in order to learn what the wider situation was. Those two
cultures would not meet, and, to this day, have not met
effectively enough.
Now, why do I mention that? Simply because I'm at a loss
trying to figure out how you get people to talk to each other,
not just to have conferences, but you get hooked up by the--the
IT that you need to be, that what goes across any of your desks
goes across all the rest of your desks and all of your other
folks that Mr. Munshi was ripping off money from. It just seems
to me these things are possible.
Doctor--I mean Mr. Longhi, do you have any suggestions?
Mr. Longhi. Yes, I do. Something very specific.
I agree with my fellow witnesses, but shine the light on
it. Your biggest deterrent would be publicity. Scientists fear
negative publicity. Their reputations are everything. It's
the--the scientific mind. They want to do research; they want
to be known for their research. If you associate negative
publicity with--put these actions out in the open and highlight
them, run them up the flagpole, this will be a tremendous
deterrent. It's just the psyche of the scientist. They will
avoid or try to avoid at all costs negative publicity.
The Chairman. Good idea. I don't mean to appear to be
unfriendly or to be unfriendly. I think this is a very
important hearing, and I think we've made some progress in it.
I'm going to stop it now. I'm going to put all of the
questions which I didn't ask in the record, so, it'll be a part
of the record, and I may send some of those questions to all of
you.
So, despite my dour appearance, I adjourn this hearing.
Thank you.
[Whereupon, at 4:23 p.m., the hearing was adjourned.]
A P P E N D I X
Cases of SBIR Waste, Fraud and Abuse
Compiled by Senate Commerce Committee Staff
Background
In February 2009, it was publicly disclosed that Federal
authorities were investigating a Florida technology engineering
business called New Era Technology (NETECH) for Small Business
Innovation Research (SBIR) Program fraud. In a filing in a Florida
Federal district court, investigators alleged that NETECH's owners
repeatedly submitted fraudulent SBIR proposals and invoices to the
National Aeronautics and Space Administration (NASA) and used the award
money to enrich their children and to purchase personal property for
themselves, including a BMW automobile and a condominium in Ft.
Lauderdale, Florida.\1\
---------------------------------------------------------------------------
\1\ Verified Complaint for Forfeiture in Rem, U.S. v. Real Property
Located at 501 South Moody Ave., Unit 117, Tampa, FL (Feb. 19, 2009)
N.D. Fla. (No. 1:09 cv 41-MP/AK).
---------------------------------------------------------------------------
To learn more about the NETECH case, on March 6, 2009, Chairman
Rockefeller wrote a letter to NASA requesting all documents related to
contracts awarded to the company.\2\ After discovering that NETECH had
won contracts from two other agencies, Chairman Rockefeller made
similar requests to DOD and DOE on May 6, 2009.\3\
---------------------------------------------------------------------------
\2\ Letter from Chairman John D. Rockefeller IV to Acting
Administrator, NASA, Mr. Christopher J. Scolese (Mar. 6, 2009).
\3\ Letter from Chairman John D. Rockefeller IV to Secretary of
Defense Robert Gates (May 5, 2009); Letter from Chairman John D.
Rockefeller IV to Secretary of Energy Steven Chu (May 5, 2009).
---------------------------------------------------------------------------
According to the documents produced through these requests, since
1999, N ETECH has received seven Phase I and five Phase II SBIR or
Small Business Technology Transfer (STTR) Program contracts worth
$3,379,566 from NASA, the Air Force, and the Navy. Federal
investigators allege that NETECH defrauded the government in the course
of performing most of these contracts. NASA Inspector General (IG)
officials recently informed Committee staff that their criminal
investigation of NETECH is ongoing.
In the course of investigating the NETECH case and the SBIR
program, Commerce Committee staff learned of other instances in which
SBIR awardees defrauded the government. Using online searches and case
files produced by the Inspectors General of NASA and NSF, Committee
staff has collected 29 cases of SBIR fraud between 1990 and the
present. These cases involved more than 300 SBIR or STTR contracts
valued at more than $100 million. Information about these cases is
presented in a table in the following pages.
Some of the cases ended in criminal convictions or civil penalties
imposed under the Federal False Claims Act, while others were resolved
administratively within the respective IG offices and never made
public. Based on the facts of each case, the table also estimates the
number and dollar value of SBIR contracts that were at risk for waste,
fraud, and abuse.\4\
---------------------------------------------------------------------------
\4\ For example, based on the allegation of the contractor's
conduct in the NETECH case discussed above, Committee staff determined
that 11 contracts worth $3.3 million are potentially at risk for waste,
fraud and abuse.
----------------------------------------------------------------------------------------------------------------
Awards Year Investigation
Company Name Description at Risk Dollars at Risk Closed
----------------------------------------------------------------------------------------------------------------
8New Era Technologies Company has been accused of improperly 11 $3,309,730 Ongoing0
(NeTech) funneling NASA SBIR grant funds to
personal bank accounts, and submitting
fraudulent grant proposals and
invoices. Search warrants were executed
on February 25, 2009, and an
investigation is ongoing. Company also
received awardsfrom DOD and DOE.
----------------------------------------------------------------------------------------------------------------
Materials and Whistleblower suit, which the U.S. 13 $9,000,000 Ongoing
Electrochemical Department of Justice joined in May
Research Corp. 2008, alleges that company forged
signatures on financing statements for
a number of successful Phase II
proposals submitted to NASA, DOE,and
the Army.
----------------------------------------------------------------------------------------------------------------
8Not Public Company owner made false statements to 2 $599,941 20080
NSF to transfer a Phase II proposal to
a different company than the company
that performed the Phase I proposal.
----------------------------------------------------------------------------------------------------------------
Not Public Submitted two Phase I proposals to NSF 4 $1,477,475 2006
that contained plagiarized text and
figures.
----------------------------------------------------------------------------------------------------------------
8Not Public Submitted proposals to NSF containing 21 $4,315,092 20060
falsified information that led to the
issue of the award for Phase I and II
awards.
----------------------------------------------------------------------------------------------------------------
Not Public Originating from the OIG Hotline, the 2 $159,981 2005
NASA OIG found in a joint investigation
with the DOD OIG, that the company had
submitted multiple duplicate proposals
and reports to DOD, NSF and NASA.
----------------------------------------------------------------------------------------------------------------
8Lithium Power Through a whistleblower lawsuit, Lithium 22 $5,558,969 20050
Technologies, Inc. was found to have submitted false
statements and duplicative proposals to
various DOD components and NASA.
----------------------------------------------------------------------------------------------------------------
M.L. Energia Whistleblower claims led to a mail fraud 17 $2,314,000 2005
conviction for false certifications,
duplicative rewards, and plagiarized
research. Awards came from NASA, NSF,
DOD, DOE, USDA, and US Air Force.
----------------------------------------------------------------------------------------------------------------
8Not Public After allegations that the awardee was 2 $599,701 20040
misusing funds, an NSF OIG audit
identified $34,000 which was
unaccounted for.
----------------------------------------------------------------------------------------------------------------
Nanomaterials A whistleblower alerted DOD that the 50 $19,000,000 2004
Research owner was using awards for personal
Corporation benefit (including a vacation home),
submitting falsified time sheets,
falsifying data, and submitting
duplicative proposals. The company had
received 50 SBIR grants from various
agencies including NASA, NSF and DOD
between 1994 and 1999.
----------------------------------------------------------------------------------------------------------------
8Arnav Systems, Inc. NASA Office of Procurement informed NASA 2 $669,946 20040
OIG that company was inflating its
labor rates for a Phase II project.
----------------------------------------------------------------------------------------------------------------
Not Public Company was accused of mischarging labor 17 $5,769,618 2003
costs on multiple DOD and NASA SBIR
contracts.
----------------------------------------------------------------------------------------------------------------
8Not Public Owner submitted false statements on 4 $400,000 20030
proposals, including names and resumes
of researchers not employed by the
company. Owner overpaid himself
$20,000. Included 3DOE and 1 NSF
awards.
----------------------------------------------------------------------------------------------------------------
LaserGenics Submitted duplicative proposals to NASA 49 $4,734,995 2002
Corporation and NSF, and made 12 false statements
in DOD, NASA, DOE, and NSF proposals.
----------------------------------------------------------------------------------------------------------------
8Not Public Based on an anonymous complaint, the 36 $12,477,805 20020
NASA OIG discovered that the company
had charged NASA $100,000 for
unallowable costs.
----------------------------------------------------------------------------------------------------------------
Not Public NASA OIG received information that 2 $139,982 2002
company made false statements in
proposals related to the principal
investigator, and also forged
signatures on grant applications.
----------------------------------------------------------------------------------------------------------------
8Not Public Company received funding from NSF and 2 $170,000 20020
the Office of Naval Research for same
proposal.
----------------------------------------------------------------------------------------------------------------
Not Public NSF OIG was alerted by the FBI that the 2 $50,000 1999
owner of the company had been accused
of embezzling $1.25 million from a
foreign company. The NSF OIG determined
company had obtained duplicate funding
from NASA and the NSF for Phase I
proposals, and had forged signatures of
the CFO on falsified proposals.
----------------------------------------------------------------------------------------------------------------
8Not Public Received duplicative awards from NSF and 12 $3,864,700 19990
the Air Force for identical Phase I and
Phase II Projects.
----------------------------------------------------------------------------------------------------------------
Not Public Company failed to disclose simultaneous 2 $150,000 1998
pending Phase I proposals to the DOD
and DOE.
----------------------------------------------------------------------------------------------------------------
8GMS Systems Company submitted duplicate proposals to 3 $110,000 19980
the Department of Education and
National Institutes of Health.
----------------------------------------------------------------------------------------------------------------
Not Public Submitted duplicate proposals and 4 $547,000 1998
fraudulently reported research results
to NSF, NASA and DOD from 1991-1998.
NSF SBIR reviewer purchased stock in
company.
----------------------------------------------------------------------------------------------------------------
8Not Public Submitted duplicate proposals to NSF and 27 $6,895,528 19970
NASA, mischarged NASA for work, used
subcontractors for more than \2/3\ of
the work.
----------------------------------------------------------------------------------------------------------------
Electro-Optek Received duplicative awards from NSF, 44 $6,902,814 1996
NASA and DOD. Charged federal agencies
for work that was not performed,
plagiarized research, and
misrepresented qualifications of
researchers.
----------------------------------------------------------------------------------------------------------------
8AKM Associates Submitted identical proposals and 17 $2,204,452 19950
received duplicative awards from NSF,
NASA, the Army and the Air Force.
----------------------------------------------------------------------------------------------------------------
Excel Technology, Submitted at least 36 false statements NA $2,001,573 1995
Inc. about duplicate proposals and rewards,
key personnel and billing to NSF, NASA
and DOD.
----------------------------------------------------------------------------------------------------------------
8Not Public Submitted false claims about principal 4 $391,118 19930
investigator's employment eligibility
and plagiarized data in final report.
----------------------------------------------------------------------------------------------------------------
High Energy Laser Received Phase II NSF funds, but did not 1 $250,00 1990
Associates use them to perform work.
----------------------------------------------------------------------------------------------------------------
8Not Public Anonymous letter alerted NSF OIG to 49 $11,519,521 NA0
plagiarized report data and duplicative
proposals. Company had received grants
from 7 federal agencies and submitted
identical data tables in 20 different
reports to these agencies.
----------------------------------------------------------------------------------------------------------------
TOTAL 300 $105,583,941
----------------------------------------------------------------------------------------------------------------
Committee Staff Analysis
The information presented in the table above represents a group of
individual cases in which Federal investigators and prosecutors
collected evidence, developed facts, and in some cases, brought a civil
suit or filed criminal charges. Viewed collectively, these cases
provide important information about the features of the SBIR program
that are most vulnerable to waste, fraud, and abuse.
Duplicative Proposal Fraud A review of the cases described in the
table shows that the most common type of SBIR fraud appears to be the
submission of so-called ``duplicative'' proposals to SBIR-awarding
agencies. While SBIR regulations allow companies to submit the same
research project to multiple agencies, they prohibit companies from
accepting payment from more than one agency for the same work.\5\ In
spite of this prohibition, there are a number of cases showing that
some SBI R awardees have managed to receive multiple payments from
different SBIR-awarding agencies for the same research project.
---------------------------------------------------------------------------
\5\ Small Business Administration, SBIR Program Policy Directive
7(a)(1)(iii) (online at: http://www.sba.gov/SBIR/SBIR-
PolicyDirective.pdf) (accessed August 4, 2009).
---------------------------------------------------------------------------
The fact that the SBIR program is vulnerable to duplicative
proposal fraud has been a matter of public record since the mid-1990s.
In December 1995, in what the New York Times called, ``the largest case
of fraud involving the main Federal program that steers research money
to small businesses,'' the government settled cases against two
companies for misusing $1.7 million in SBIR awards. Excel Technology of
Hauppauge, NY, agreed to reimburse the government $1.7 million and to
pay $1.6 million in penalties, while ESDI of Bohemia, NY, agreed to
reimburse the government $600,000 and pay penalties of $150,000. The
companies were accused of illegally accepting money from DOD, NASA and
NSF for identical research proposals and for submitting research work
that had already been completed at state universities.\6\
---------------------------------------------------------------------------
\6\ 2 Companies To Repay U.S. in Fraud Case, New York Times
(December 10, 1995) (online at http://www.nytimes.com/1995/12/10/us/2-
companies-to-repay-us-in-fraud-case.html)
---------------------------------------------------------------------------
At about the same time, Congress heard testimony about the
program's vulnerability to duplicative proposal fraud. In March 1995,
the then-Government Accounting Office (GAO) released a study warning,
``the SBIR program is at a growing risk of willful or accidental
financial abuse.'' \7\ The report noted that in some cases, ``a few
companies received funding for the same proposals twice, three times
and even five times before agencies became aware of the duplication.''
\8\ According to GAO, unless informed by a whistleblower of the
duplicative proposals, agencies had a very limited ability to identify
duplicative proposals.\9\
---------------------------------------------------------------------------
\7\ General Accounting Office, Interim Report on the Small Business
Innovation Research Program (March 1995) (GAO RCED-95-59).
\8\ Id.
\9\ Id.
---------------------------------------------------------------------------
The Senate Commerce Committee heard similar testimony about the
vulnerability of the SBIR program to duplicative proposal fraud during
a 1997 hearing examining major management issues at agencies under the
Committee's jurisdiction. When he was asked about SBIR fraud, NSF
Deputy Inspector General, Philip Sunshine, told the Committee that,
``compared to other programs at the agency, there is more fraud in the
SBIR program than any other program . . . it is an ongoing problem and
an issue we're focusing on, I think I can report with confidence that
the agency agrees with us that it is an issue.'' \10\
---------------------------------------------------------------------------
\10\ Senate Committee on Commerce, Science and Transportation, NASA
and NSF Program Efficiency, 105th Congress, (July 24, 1997) (S. Hrg.
105-722).
---------------------------------------------------------------------------
Both GAO and the NSF Inspector General told Congress that the
program was vulnerable to duplication fraud because there was no
program-wide information system that allowed an agency to check if a
company had submitted duplicative proposals to or recently won
duplicative awards from other agencies. As the 1995 GAO report
explained this problem, ``. . . individual agencies maintain records of
recent awards, but this information is generally not available to other
agencies. If an official in one agency wants to obtain information from
another agency about a specific proposal or company, such information
is available only through personal contacts and conversations.'' \11\
---------------------------------------------------------------------------
\11\ General Accounting Office, Interim Report on the Small
Business Innovation Research Program (March 1995) (GAO RCED-95-59).
---------------------------------------------------------------------------
In the 1997 hearing mentioned above, the Senate Commerce Committee
heard similar testimony expressing concern that the lack of information
sharing between SBIR-awarding agencies made the program vulnerable to
duplicative proposal fraud. NSF Deputy Director, Joe Bordogna,
testified that, ``a major problem here is one in which the agencies
don't have a system yet that's quick to use, a computerized system to
check all the input coming i n. We just did a check with some arduous
hand labor on the 208 or so proposals we presently have in hand. We
found 12 overlaps.'' \12\
---------------------------------------------------------------------------
\12\ Senate Committee on Commerce, Science and Transportation, NASA
and NSF Program Efficiency, 105th Congress (July 24, 1997) (S. Hrg.
105-722).
---------------------------------------------------------------------------
When it re-authorized the SBIR program in 2000, Congress ordered
the Small Business Administration (SBA) to create and maintain a public
database containing information about SBIR awards, and a government-
access database containing information about proposals submitted to
SBIR-awarding agencies.\13\ In conversations with Commerce Committee
staff over the past few months, officials responsible for administering
and overseeing SBIR programs have repeatedly stated that a government-
wide database of SBIR proposals would be a valuable tool for reducing
duplicative proposal fraud. While SBA's public ``Tech Net'' website now
contains comprehensive SBIR award information, it still does not
provide the SBIR proposal database mandated in the 2000 statute.
---------------------------------------------------------------------------
\13\ P.L. 106-554, codified at 15 U.S.C. 638(k)(2).
---------------------------------------------------------------------------
False Billing and False Representations The table above also shows
that some companies have won SBIR awards based on proposals containing
false information. Companies have misrepresented the qualifications of
their researchers, presented plagiarized data as their own, and forged
signatures on proposals in order to win grants or contracts. As a
general matter, the awarding agencies rely on companies' self-
certification that the information in their proposals is accurate and
truthful. A Federal appeals court recently noted that ``the DOD
generally does not verify all of the information submitted in a
proposal, and it depends heavily on the integrity of SBIR applicants.''
\14\
---------------------------------------------------------------------------
\14\ U.S., ex rel. Alfred J. Longhi v. Lithium Power Technologies
(5th Cir., July 9, 2009) (WL 1959259).
---------------------------------------------------------------------------
In addition, after the SBIR grant or contract has been awarded,
awardees have sometimes been able to exploit weaknesses in the
program's financial controls to bill the government for work it has not
performed. While SBIR grants and contracts are based on a company's
agreement to perform a specified project for a fixed price, the SBIR
statute requires agencies to make their payments ``on the basis of
progress toward or completion of the funding agreement requirements.''
\15\ In other words, payments to companies are based on their ``level
of effort''--the actual hours and resources they put into the project.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 638(g)(7).
---------------------------------------------------------------------------
Evidence collected by Committee staff during this investigation
indicates that SBIR award recipients can actually work fewer hours than
they propose in their budgets and still receive full award payments.
Companies can submit invoices to agencies for the ``budgeted'' hours
worked and then pocket the difference, because the agencies do not
generally require the awardees to prove they actually worked the number
of hours they proposed in the budget. Without a ``budget-to-actual''
reconciliation process, there is no way to determine if agencies are
overpaying for services performed.\16\
---------------------------------------------------------------------------
\16\ As discussed above, one of the government's principal
allegations in the NETECH case is that ``. . . on multiple occasions,
NETECH submitted fraudulent invoices to NASA on these contracts which
represented labor hours for alleged employees that NETECH claimed to
have paid or for whom NETECH incurred labor costs.'' Verified Complaint
for Forfeiture in Rem, U.S. v. Real Property Located at 501 South Moody
Ave., Unit 117, Tampa, FL (Feb. 19, 2009) N.D. Fla. (No. 1:09 cv 41-MP/
AK).
---------------------------------------------------------------------------
For example, when the Department of Energy Inspector General (DOE
IG) audited its agency's SBIR program in 2001, it identified
significant weaknesses related to the agency's handling of invoiced
costs submitted by program awardees. The IG noted that DOE, ``generally
limited its cost reviews to pre-award evaluations of the costs proposed
in the application submitted by grantees; it did not, as we would have
expected, place sufficient emphasis on post-award reviews of actual
costs.'' \17\
---------------------------------------------------------------------------
\17\ Department of Energy Office of Inspector General,
Administration of Small Business Innovation Research Phase II Grants
(Aug. 2001) (DOE/IG-0521) .
---------------------------------------------------------------------------
According to this report, once an SBIR award was made, there was no
established procedure within the agency to verify that the amount
submitted on an invoice actually matched up to the work performed by an
awardee. In its 2001 audit, the DOE IG did its own cost review by
asking grantees for documentation to support invoiced costs and it
found that DOE reimbursed grantees for questionable costs. In one
example, three awardees did not provide any documented support for $2.4
million in claimed costs. These awardees simply sent invoices to DOE
and were paid without having properly documented the work. The IG
concluded that although it supported the objectives of the SBIR
program, it was concerned, ``. . . that the shortcomings identified in
this audit undermine the viability of the program.'' \18\
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
The DOE IG performed a follow-up audit of the DOE SBIR program in
2008 in order to determine if the previously observed weaknesses in the
agency's program had been corrected. The audit found that the agency,
``had not corrected all previously reported weaknesses in monitoring
and administering the SBIR phase II grants program.'' \19\
Specifically, the report cited that, ``action had not been completed to
resolve about $1.2 million of the approximately $2.4 million of
questionable costs identified in our previous audit,'' \20\ and that
the agency was continuing the practice of, ``not reviewing grant costs
or closing out completed awards in a timely manner.'' \21\
---------------------------------------------------------------------------
\19\ Department of Energy Office of Inspector General, Management
Controls over Monitoring and Closeout of Small Business Innovation
Research Phase II Grants (July 2008) (OAS-M-08-09).
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
______
Response to Written Questions Submitted by Hon. Tom Udall to
Thomas J. Howard and Allison C. Lerner
Question 1. Mr. Howard and Ms. Lerner, like my colleagues, I'm
troubled to hear about the fraud going on with SBIR. It is especially
troubling because we all know that these dollars could and should have
been spent by other hard working and innovative small businesses.
And that's who I'm concerned about--the businesses that have played
by the rules.
I believe we must improve oversight, but in a responsible manner
that doesn't over burden honest applicants. Our program in New Mexico
tells me that they spend about 100 hours preparing each of these
applications. How will you ensure that new oversight efforts do not
overburden honest applicants?
Answer from Mr. Howard. In my testimony, I noted two deficiencies
that make it more difficult for us to detect, investigate, and
prosecute fraud in the SBIR program: (1) the lack of a comprehensive
government database that contains both SBIR proposals, awards, and
reports and information about them, and (2) inconsistencies among the
certifications required of awardees by the SBIR agencies. It is my view
that rectifying these deficiencies will impose no burden on honest
applicants.
To create a comprehensive SBIR database, SBIR would need to
coordinate with the eleven SBIR agencies to ensure that, in addition to
the information that these agencies currently provide to SBA, they also
provide electronic copies of all SBIR proposals, awards, and reports.
There should be a strict timeline for SBA to create and populate this
database in order to ensure that it becomes an effective coordination
portal. Creation of such a database should impose no burden on the SBIR
companies because they are already accustomed to providing SBIR
documentation to the government in electronic format.
With regard to certifications, all of the SBIR agencies already
expect that certain uniform requirements will be adhered to by
applicants and awardees: the company must be a small business; the
principal investigator must be primarily employed by the company; most
of the work must be, carried out by the company; the work must not be
duplicative of work previously or currently funded by another agency;
the SBIR funds must be expended properly on the specific project
covered by the award; the Phase II awardee must be the same company
that received the Phase I award; and all statements in the proposals
and reports must be true. The honest companies are already complying
with all of these requirements, and the NSF awardees already certify on
their proposals, requests for payment, and reports. Reinforcing the
expectation of adherence to these already- extant requirements by
adding certifications to all of the documents submitted by applicants
and awardees to all of the SBIR agencies will impose no perceptible
burden on the honest companies. There is a small chance that having to
read and select yes or no for each of the detailed certifications will
deter some companies tempted to defraud the SBIR program--but there is
certainty that those certifications will facilitate prosecuting
companies that succumb to that temptation.
Answer from Ms. Lerner. While our work has focused on fraud, waste
and abuse, we remain mindful that the program's intent is to provide
increased opportunities for small business participation in research
and development and to help agencies in accomplishing their missions.
As part of our audit of NASA's management of its SBIR Program, we will
assess the adequacy of the Agency's internal control process and will
consider whether those processes provide a reasonable balance between
the requirements levied on program participants and what the Agency
needs to achieve the program's objectives and maintain compliance with
existing laws and regulations.
Question 2. Mr. Howard and Ms. Lerner, as we heard during the
hearing, many small businesses are playing by the rules of the program.
I'm certain that they have ideas about how to improve fraud detection;
after all, fraudulent applicants take dollars that could have gone to
them. Have you reached out to applicants that are following the rules
to get their input on preventing fraud?
Answer from Mr. Howard. As I discussed in my testimony, NSF
requires all companies that receive Phase I awards to attend an SBIR
Phase I workshop, at which a presentation by my staff makes it clear to
awardees that violations of SBIR program requirements constitute
wrongdoing, and outlines the specific criminal, civil, and
administrative consequences of such wrongdoing. That presentation ends
with my staff encouraging audience members to contact our office if
they have evidence of wrongdoing (which some have indeed done).
Similarly NSF's SBIR Solicitation contains warnings about the
consequences of abuse. NSF OIG has an active outreach program to NSF
awardees and is continually seeking input from both NSF and its
awardees. We have not however, solicited specific suggestions for
preventing or detecting fraud from SBIR awardees. The idea is an
excellent one, and I can assure you that we will be seeking such input
beginning with the next such workshop and in future outreach
activities.
Answer from Ms. Lerner. To date, we have not proactively reached
out to applicants who are following the rules to get their views on
preventing fraud but we will consider this as part of our audit of
NASA's SBIR program.