[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.
---------------------------------------------------------------------------
    \1\ Pub. L. No. 97-219 (1982).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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:
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \14\ GAO-06-565.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \15\ GAO-06-565.
---------------------------------------------------------------------------
    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) .
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    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\
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    \18\ Id.
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    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\
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    \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.
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                                 ______
                                 
     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.

                                  
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