[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SMALL BUSINESS ADMINISTRATION'S
CONTRACTING PROGRAMS AND GAO'S
EXAMINATION OF THOSE PROGRAMS
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JULY 17, 2008
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 110-106
Available via the GPO Website: http://www.access.gpo.gov/congress/house
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
.........................................................
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
______
Subcommittee on Rural and Urban Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLES GONZALEZ, Texas MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
Carranza, Hon. Jovita, Acting Administrator, Small Business
Administration................................................. 4
Shear, Mr. William; Director, Financial Markets and Community
Investment, U.S. General Accountability Office................. 6
Kutz, Mr. Gregory, Managing director, forensic Audits and Special
Investigations, U.S. General Accountability Office............. 8
APPENDIX
PREPARED STATEMENTS:
Velazquez, Hon. Nydia M.......................................... 37
Chabot, Hon. Steve............................................... 39
Altmire, Rep. Jason.............................................. 40
Carranza, Hon. Jovita, Acting Administrator, Small Business
Administration................................................. 41
Shear, Mr. William; Director, Financial Markets and Community
Investment, U.S. General Accountability Office................. 45
Kutz, Mr. Gregory, Managing director, forensic Audits and Special
Investigations, U.S. General Accountability Office............. 67
STATEMENT SUBMITTED FOR THE RECORD:
Associated General Contractors................................... 95
(v)
SMALL BUSINESS ADMINISTRATION'S
CONTRACTING PROGRAMS AND GAO'S
EXAMINATION OF THOSE PROGRAMS
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Thursday, July 17, 2008
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:06 a.m., inRoom
1539, Longworth House Office Building, Hon. Nydia M. Velazquez
[Chair of the Committee] Presiding.
Present: Representatives Velazquez, Shuler, Cuellar,
Braley, Ellsworth, Chabot, Bartlett, Akin, and Fallin.
Chairwoman Velazquez. Good morning. I call this hearing of
the House Small Business Committee to order.
STATEMENT OF THE HONORABLE NYDIA VELAZQUEZ, CHAIRWOMAN OF THE
COMMITTEE ON SMALL BUSINESS
The economy is still mired in a recession. In addition to 6
straight months of job losses, we are now facing considerable
drop-offs in consumer spending and exports. Meanwhile,
inflation continues to climb, and it seems no financial sector
has been left out or left untouched. Just this week, news of
the crumbling Freddie Mac and Fannie Mae prove that the housing
crisis is far from over.
Amidst this otherwise weak economy, one bright spot
continues to shine. The Federal marketplace is booming. Last
year alone, this industry grew by more than 9 percent. But
while it should hold great potential for entrepreneurs, small
firms are still fighting to break into the Government sector.
During the past 8 years, the Bush administration has missed
every single one of its small-business goals. In 2005 alone,
entrepreneurs lost $4.5 billion in contracting opportunities.
A broad array of programs exist to help small firms enter
the Federal marketplace. These programs seek to give
opportunities to the most important sector of our economy,
small businesses. Entrepreneurs not only create greater
economic diversity and competition, but they also offer the
best value for the taxpayers' dollar.
Today we are going to look at one such program, which,
while having very commendable goals, has ultimately failed our
entrepreneurs and our taxpayers. HUBZones were originally
designed to help small businesses in low-income communities.
Today the program has fallen short of that mission. As a result
of insufficient controls by the SBA and inherent flaws in the
underlying program, we now have widespread fraud.
This Committee has long been concerned about the potential
for HUBZone fraud. After a preliminary investigation confirmed
these fears, we asked the GAO to conduct an investigation.
Their results were nothing short of appalling.
In their review, investigators found that a majority of
HUBZone businesses failed to meet program criteria. And, yet,
these firms still managed to collect over $100 million in
Federal contracts; 24 million of those dollars came directly
out of HUBZone funds--funds that should have gone to low-income
communities.
These numbers are high, but they are not surprising. As
noted in prior reports, SBA is notorious for failing to vet its
programs. In fact, it conducts annual examinations on a mere 5
percent of certified HUBZones. When it comes to the businesses
themselves, only 36 percent of applicants are asked to show any
form of documentation. It is so easy to break into the HUBZone
program that investigators using fake addresses and forged
credentials were able to do so in a matter of weeks. The entire
process was easier than getting a library card.
Perhaps not surprisingly, con artists have little trouble
gaming SBA's broken system. Countless unqualified corporations
have applied for and been awarded millions of dollars in
Government contracts. Meanwhile, entrepreneurs looking for an
honest break have been pushed to the margin.
Earlier this year, the House passed several provisions in
attempts to stem this fraud. But the administration opposed
these steps, including requirements for onsite inspections.
President Bush went so far as to argue that, and I quote, "This
provision will create a large burden on the Small Business
Administration." It seems the President prefers burdens of the
multimillion-dollar fraud variety, the kind of burden we
unfortunately face today.
Small-business contract programs are important, and we need
them. But if not adequately funded and properly managed, they
turn into what we have today. Rather than lifting up
underprivileged firms, HUBZones are lining the pockets of big
corporations and otherwise fraudulent businesses. And they are
doing so on the taxpayers' dime.
Today's hearing will be an important part of understanding
the fraud and figuring out the next steps towards overhauling
the SBA. It will not be an easy process, but we owe this review
to our taxpayers and we owe it to our small businesses.
I thank today's witnesses in advance for their testimony.
And, with that, I now yield to Ranking Member Chabot for
his opening statement.
Mr. Chabot. Thank you, Madam Chairwoman.
STATEMENT OF THE HONORABLE STEVE CHABOT, RANKING MEMBER OF THE
COMMITTEE ON SMALL BUSINESS
And good morning. And I thank all of you for being here
this morning to examine the Small Business Administration's
HUBZone, or Historically Underutilized Business Zone, program.
I would also like to thank the chairwoman for holding this
important hearing.
As early as World War II, Congress recognized that a strong
economy and industrial base requires a robust small-business
economy. At the end of the Korean conflict, the Small Business
Administration was created to provide assistance to small
businesses.
One aspect of that policy is the requirement that small
businesses be awarded a fair proportion of contracts for the
purchase of goods and services by the Federal Government. That
policy not only ensures that the Federal Government will have a
diverse set of contractors from which it can obtain goods and
services, it also provides an important tool to help grow small
businesses.
Last session, the Committee examined all of the SBA
Government contracting programs. Today we are specifically
focusing on the HUBZone program in response to two separate
assessments done by the GAO. I have been briefed on the
studies, and the results are troubling, as the chairwoman
indicated, to say the least.
I am a strong supporter of the HUBZone program, because I
believe that Federal procurement can be used not just to
purchase goods and services or even grow small businesses, but
to provide needed assistance in the economic revitalization of
poor urban and rural communities.
However, if firms not actually located in HUBZones are
taking contracts away from legitimate HUBZone firms, it defeats
the purpose of the program. I will be interested in hearing
from the SBA the steps the agency will take to ensure that only
legitimate HUBZone firms are awarded contracts.
The HUBZone program is designed to provide economic
development in poor areas. According to a study by the Office
of Advocacy, some HUBZone contractors are generating as much as
an additional $100 per person in additional income in
particular areas. Of course, when it costs that much to fill
your car's gas tank, the benefits of the HUBZone contracting
program are dissipated. Revitalization requires not only
building businesses in these areas but providing the people
with affordable fuel. This requires increasing the supply of
petroleum produced in this country.
Although I recognize that this hearing is primarily about
SBA's management of the HUBZone program, I would be remiss not
to mention that there are Members on both sides of the aisle
whose constituents are severely affected by recent floods, for
example, in the Midwest. I suspect that the Acting
Administrator may receive some questions on this issue, and we
would be very interested in hearing about the agency's response
in that area as well.
Again, I want to thank the chairwoman for holding this
important hearing, and look forward to working with her and the
SBA to make necessary improvements to the HUBZone program so
that it can truly assist in the economic revitalization of our
poor urban and rural communities.
And, again, I thank the chairwoman for holding this
hearing, and yield back my time.
Chairwoman Velazquez. Thank you, Mr. Chabot.
And now I welcome the Honorable Jovita Carranza. Ms.
Carranza is the Acting Administrator of the Small Business
Administration. She was nominated by President Bush and sworn
in on December 15, 2006, as Deputy Administrator of SBA.
Ms. Carranza, I just want to say, thank you for agreeing to
testify today. I really appreciate your willingness to come
before our Committee. I realize that you have been at SBA just
18 months and that many of these HUBZone program problems
predate you joining the agency. But today you are sitting in
the hot seat, and so thank you for being here.
STATEMENT OF THE HONORABLE JOVITA CARRANZA, ACTING
ADMINISTRATOR OF THE U.S. SMALL BUSINESS ADMINISTRATION
Ms. Carranza. Thank you.
Mr. Chabot. That is due warning, I think.
Ms. Carranza. It has been hot since I arrived here.
Good morning, Chairwoman Velazquez, and thank you very much
for the invitation, and also Ranking Member Mr. Chabot. Once
again, good morning, and thank you for the opportunity to
testify today.
While I am proud of the reforms I have made in my time at
SBA, more work remains. As other panelists will describe, the
administration of our HUBZone program leaves considerable room
for improvement. In fact, in September 2007, I testified about
our concerns over flaws that needed attention. But the more
work we identified to fix these problems, the more we
uncovered.
Mr. Chabot. Could you possibly pull the mike a little bit
closer?
Ms. Carranza. Certainly.
We welcome the GAO's report and work. And as our response
to their audit makes clear, we agree with their assessment. In
fact, GAO's conclusions only confirm what we had already
uncovered. Now we are working so that this program will better
accomplish its goals, and I would like to describe our specific
actions.
First, GAO recommended immediate steps to correct the
HUBZone map. Further, they recommended that we ensure it is
frequently updated with the most recent data.
Problems with the map were, in fact, what uncovered the
program's serious mismanagement. In response to a congressional
inquiry about whether a specific county qualified, the HUBZone
program determined that it did. Then, several days later, SBA
found that it was, in fact, not qualified.
In determining how much a mistake was made, senior managers
learned the initial determination was done manually. This
pointed to the fact that the map hadn't been updated for more
than 18 months. This, in turn, set off a cascading series of
revelations.
In getting to the bottom of these issues, a process that
accelerated as time went on, the extent of the program's
problems became increasingly clear. It also became increasingly
clear that the program needed new leadership. We have brought
on new program management who are committed to our reform.
Completing an objective that predates GAO's call to fix the
map, on July 3rd a new contract was executed. This contract
provides strict timetables and procedures so that, going
forward, the map remains current. The new map will be available
August 29th.
In its second recommendation, GAO urged more consistently
obtaining supporting documents in the application process.
Also, they recommended more frequent site visits to ensure
eligibility. In response, a draft of our new application
processing manual was completed July 2nd. It establishes guides
about supporting documents, what is required, and how to handle
these requests. It also includes instructions regarding site
visits.
We believe that by more effectively marshalling our
district office resources, we can quickly accomplish this
objective. And HUBZone is working with the field operations to
produce clear procedures. Presently, this draft is being
reviewed and finalized. This process will be completed by
September.
The third GAO recommendation was to eliminate the
recertifications backlog and, going forward, to stay current.
In response, SBA hired contract employees to assist. Our goal
is to clear the backlog by the end of fiscal year 2008, and we
are on track to meet this benchmark.
HUBZone's new leadership is implementing reforms so that,
with the backlog cleared, recertifications will be timely. I
can assure you that SBA senior staff will oversee this task.
The fourth GAO recommendation was to formalize time frames
for processing proposed decertifications. In response, SBA is
adding explicit timelines to the applicable SOP. This process
will be completed by the end of August.
The fifth and final recommendation was to develop ways to
assess HUBZone's overall effectiveness, and this largely
mirrors a similar finding by SBA's Office of Advocacy. In
response, SBA is developing an assessment methodology to
measure HUBZone's economic benefits. This is being done by the
senior economist in our Office of Policy and Strategic
Planning. Once completed, this will allow HUBZone to issue
regular public reports. The methodologies development is well
under way, and the final product is expected by August.
To ensure the participation of all stakeholders, SBA will
publish this methodology for public comment. I encourage the
Committee and all interested parties to examine the work and
make suggestions about how we can better assess HUBZone's
impact. After evaluating the comments, SBA will publish a final
methodology detailing the measures that will be used.
In response to GAO's forensic investigation, I have taken
immediate steps to require site visits for those firms with
HUBZone contracts. Additionally, we will pursue suspension and
debarment proceedings against firms that have intentionally
misrepresented their status. For example, we will begin the
process to suspend and debar the 10 firms that GAO has
discovered. SBA has already pursued firms for false
certification, and we take very seriously the responsibility to
ensure that the Government's contracting partners are
trustworthy.
As I acknowledged earlier, HUBZone faces many challenges.
Please know that I am committed to solving them, and I believe
that integrity and transparency are crucial. This commitment
has brought dramatic gains to other SBA programs, and I look
forward to applying these lessons to HUBZone.
For example, by month's end, we will roll out our new
Business Development Management Information System, which
permits electronic 8(a) and small disadvantaged business
certifications and annual reviews. This is a major upgrade to
more effectively manage this vital program.
Last month, we released our third procurement scorecard,
this one focused on meeting contracting goals. Improving the
integrity of contracting data and tightening the rules to
qualify are other examples. SBA's tough-minded work has reduced
the miscoding errors in contracts that had a cumulative value
of more than $10 billion. The result is a more accurate, more
useful and more transparent measure of small-business
contracts.
While these efforts have taught us valuable lessons, the
reform process for HUBZone especially reminds me of the earlier
need to re-engineer SBA's Disaster Assistance program. Disaster
Assistance, like HUBZone today, had obvious needs. But while
facing problems head-on can be difficult, the dividends are
also obvious.
Because of our reforms, SBA was able to respond quickly and
professionally to help victims of the recent Midwest flooding
and tornadoes. Personally, I have been to the Midwest three
times since the flooding, and I have seen these reforms in
action.
So while it pains me to have to describe these problems
with our HUBZone program, I am also confident that we can solve
them and ensure that HUBZone accomplishes the noble purpose for
which it was established.
Thank you. And I would be pleased to answer any questions.
[The prepared statement of Ms. Carranza can be found in the
appendix at page X.]
Chairwoman Velazquez. Thank you, Ms. Carranza.
Our next witness is Mr. Bill Shear. He is the director of
the GAO's Office of Financial Markets and Community Investment.
The Financial Markets and Community Investment team works to
improve effectiveness of regulatory oversight in financial and
housing markets. He also oversees the management of community
development programs by examining the effectiveness of specific
programs and administrative functions. To do so, the office
evaluates programs at several agencies, including SBA.
Welcome, sir.
STATEMENT OF MR. WILLIAM SHEAR, DIRECTOR OF FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Shear. Thank you very much. Madam Chairwoman,
Representative Chabot and members of the Committee, it is a
pleasure to be here this morning to discuss our program audit
of SBA's HUBZone program.
My testimony is based on a report which is being released
today that addresses, first, the criteria and process that SBA
uses to identify and map HUBZone areas; second, SBA mechanisms
to ensure that only eligible small businesses participate in
the HUBZone program; and, third, steps SBA has taken to assess
the results of the program and the extent to which Federal
agencies have met their HUBZone contracting goals.
In summary, first, because SBA relies on Federal law to
identify qualified HUBZone areas, recent statutory changes have
resulted in an increase in the number and types of HUBZone
areas, changes that could diffuse the economic benefits of the
program.
Further, the map that SBA uses to help firms interested in
participating in the program to help determine if they are
located in a HUBZone area is inaccurate. Specifically, the map
incorrectly includes 50 metropolitan counties as difficult
development areas. In addition, 27 non-metropolitan counties
that are eligible based on their unemployment rates were
excluded, because SBA has not updated its maps since August
2006. As a result, ineligible businesses participated in the
program and eligible businesses have not been able to
participate. We recommended that SBA take steps to correct the
map and to update the map on a more frequent basis.
Second, the mechanisms that SBA uses to certify and monitor
HUBZone firms provide limited assurance that only eligible
firms participate in the program. For certification and
recertification, firms self-report information on their
applications. However, we found that SBA requested
documentation or conducted site visits of firms to validate the
self-reported data in only limited instances.
Our analysis of the 125 applications submitted in September
2007 show that SBA requested supporting documentation for 36
percent of the applications and conducted one site visit. While
SBA's policies and procedures require program examinations, the
one process that consistently includes review of supporting
documentation, the agency conducts them on 5 percent of
certified HUBZone firms each year.
We also identified deficiencies in SBA's recertification
and decertification processes. As a result of a lack of
controls and weaknesses in the application and monitoring-
related processes, SBA lacks assurances that only eligible
firms participate in the program. We made recommendations to
SBA to address these deficiencies.
Finally, SBA has taken limited steps to assess the
effectiveness of the HUBZone program. SBA tracks the number of
firms certified or recertified, the annual value of contracts
awarded to HUBZone firms, and the number of program
examinations completed annually, but has not devoted resources
to completing an evaluation of the program.
Consequently, SBA lacks key information that could help it
better manage and assess the results of the program and provide
information to this Committee and the Congress. We recommended
that SBA further assess the effectiveness of the program.
It is a pleasure to present our work before this Committee.
I would be happy to answer any questions you may have.
[The statement of Mr. Shear can be found in the appendix at
page X.]
Chairwoman Velazquez. Thank you, Mr. Shear.
Our next witness is Mr. Greg Kutz. He is the managing
director of Forensic Audits and Special Investigations at GAO.
The FSI unit investigates waste, fraud and abuse related to
Government programs and taxpayers' dollars. FSI has recently
investigated abuses of Hurricane Katrina relief dollars, border
security, and overtime and minimum wage complaints, among other
topics.
Also sitting with the panel from GAO's FSI unit is Mr.
Bruce Causseaux, a senior-level specialist who participated in
the HUBZone investigation. Although Mr. Causseaux will not be
offering testimony, he will be available to answer questions
about FSI's findings.
Thank you, and welcome.
STATEMENT OF MR. GREGORY KUTZ, MANAGING DIRECTOR OF FORENSICS
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE.
Mr. Kutz. Madam Chairwoman and members of the Committee,
thank you for the opportunity to discuss the HUBZone program.
Today's testimony highlights the results of our
investigation of this program. My testimony has two parts.
First, I will discuss our covert testing of the application
process, and second, I will discuss several cases that we
investigated.
First, our covert testing shows that SBA does not have an
effective fraud-prevention program.
To test the application process, we created several bogus
companies with fictitious officers and employees. Over the
course of several months, we submitted four HUBZone
applications. In all four cases, SBA approved our applications
and certified our bogus companies. The picture on the wall
shows an example of one of the letters we received from SBA
that approved our bogus company.
The entire application process was online. We never had to
speak to any SBA officials. For our first application, SBA
requested several documents by e-mail. In response, we created
bogus documents, using publicly available hardware and
software, and then we faxed the information to SBA. For our
other three applications, SBA did not request any supporting
documentation. It appears that SBA did nothing to validate any
of the information that we provided.
To participate in this program, the office where the
greatest number of employees work, which is referred to as the
principal office, must be located in a HUBZone. The most
sophisticated principal office that we established was a
virtual office that we never visited except to sign the
original lease agreement and to collect the mail. Two of our
HUBZone companies were actually mailboxes that we rented for
less than $25 a month. The picture on the monitors shows our
fourth HUBZone principal office, which is a Starbucks coffee
shop.
Moving on to my second point, given SBA's ineffective
fraud-prevention controls, it is not surprising that we were
able to easily identify 10 HUBZone companies that are clearly
not eligible for this program. Six of these companies failed to
meet the principal office test. The other criteria we tested
requires that 35 percent of the company's employees live in a
HUBZone. None of these 10 companies met this requirement.
Here are some of the more egregious examples.
First, the picture on the wall shows, on the left, the
supposed principal office for one of our case studies. The
owner of this building told us that no one had been there in
some time. As it turns out, the picture on the right represents
the real principal office for this company, located in McLean,
Virginia.
In another case, the company's supposed principal office
was actually a rundown duplex in Landover, Maryland. The vice
president of this company admitted to us that nobody actually
worked at this location. Two other companies had supposed
principal offices located in HUBZones. However, nobody actually
worked at these locations. The real principal offices for these
two companies were in Hyattsville, Maryland, and, once again,
in McLean, Virginia.
And finally, the four companies that passed the principal
office test clearly failed the 35 percent employee test. The
actual percentage of employees living in a HUBZone for these
companies was 17, 15, 6 and 0.
In conclusion, our work clearly shows that anybody with a
computer and a mailbox that is willing to lie to the SBA can
become a HUBZone company. Most of the companies that we
investigated made false representations to stay in this
program.
These companies have been awarded tens of millions of
dollars as prime contractors using their HUBZone status.
However, rather than stimulating economically distressed areas,
these HUBZone contract dollars are stimulating areas such as
McLean, Virginia, one of the richest areas in the country.
Madam Chairwoman, this ends my statement. Mr. Causseaux and
I look forward to your questions.
[The statement of Mr. Kutz can be found in the appendix at
page X.]
Chairwoman Velazquez. Thank you very much, Mr. Kutz.
Mr. Shear, to tell you the truth, I don't know where I
should start. But let me try.
Mr. Shear. Okay.
Chairwoman Velazquez. GAO analysis of the 125 HUBZone
applications showed that SBA requested supporting documentation
for only 36 percent and conducted only one visit. In addition,
the agency conducted program examinations on only 5 percent of
certified HUBZone program firms each year.
It appears that SBA has virtually no control over who is
participating in this program. Is this the case?
Mr. Shear. We say that there is limited assurance, based on
our program evaluation, there is only limited assurance that
only eligible firms are participating.
We did identify it as a program that is susceptible to
fraud. And that was one reason it led us to say there should be
a fraud investigation.
What we look for when we look at internal controls is some
finding of reasonable assurance. And here we clearly do not see
it for this program.
Chairwoman Velazquez. Okay. Do you believe that the
agency's current approach to implementing the HUBZone program
is conducive to promoting effective internal controls?
Mr. Shear. No, it is not. It relies too heavily on self-
reported information without verification and a lack of site
visits. It relies too much on self-policing by the companies
themselves and if self-policing going to occur it is difficult
to do, given the information requirements.
So the current approach just does not provide what we would
consider reasonable assurance.
Chairwoman Velazquez. Ms. Carranza, given the potential
that billions of dollars of taxpayer funds are at risk, will
you make a commitment to not certify any new HUBZone companies
until SBA implements the improvements you lay out in your
testimony?
Ms. Carranza. Chairwoman Velazquez, I would appreciate the
opportunity to expound on the controls that we have put in
place immediately after we reviewed the GAO audit. And with the
five recommendations we have expanded--
Chairwoman Velazquez. Ms. Carranza, with all due respect, I
asked you a question and I need an answer.
Given the fact that there is a potential that billions of
dollars of taxpayers' funds are at risk, will you make a
commitment not to certify any company, any HUBZone company,
until you have in place internal controls that will guarantee
taxpayers in this country that it is fraud-free?
Ms. Carranza. I would like to emphasize again and respond
to your question with a level of confidence, Chairwoman
Velazquez, that we have addressed the applications that have
been received. We have also addressed a thousand applications,
firms that received Government contracts, and we have taken the
position of validating all of the information that has been
submitted on those applications much more aggressively than we
have in the past.
Chairwoman Velazquez. Your answer to my question is a no.
And so you would allow for fraud to continue. And what we are
saying to Federal agencies here today is that they shouldn't be
using this program because you are opening your agency to
fraud. So SBA has a responsibility to give these Federal
agencies assurances that the HUBZone program is free of fraud.
It is not today.
Ms. Carranza, SBA has come before this Committee several
times in recent years, and I often take the opportunity to
voice my concern regarding fraud in the HUBZone program. I
would like to take a minute to read to you some of the most
recent responses I have had from your agency.
The first response, and I quote, "I am not aware of any
fraud involved in the program," Anthony Martoccia, Associate
Deputy Administrator, Office of Government Contracting and
Business Development, March 30, 2006.
Another response, and I quote, "We have recognized the
flaws. We have actually taken the position we are going to
implement, if not 90 percent, approximately 100 percent of the
SBA IG recommendations to address problems in the HUBZone
program," Jovita Carranza, Deputy Administrator, September 19,
2007.
Another response, "We have taken many actions that we think
significantly tighten up the process around HUBZones. And I
should also mention that we have met with our IG, and we are in
concurrence and acting on every single one of those
recommendations," Steven Preston, Administrator, October 4,
2007.
And finally, I most recently asked Mr. Preston on February
7, 2008, the following question, just 5 months ago: "I want to
ask you--and I want a 'yes' or 'no' answer--do you believe that
the HUBZone program has sufficient internal controls to prevent
fraud?" He replied, "I think we have sufficient internal
resources to address this issue."
So, Ms. Carranza, when you say that you will solve these
problems, I cannot help but think that we have heard this
before, and yet clearly nothing has changed.
How is today any different from the last four times that I
have asked the SBA about the program and we were told that it
was under control? Why should this Committee believe that you
will actually do something this time, rather than just give us
lip service?
Ms. Carranza. Chairwoman Velazquez, it has gone beyond
speculation or an assumption. There is hard data from the GAO
assessment of the vulnerabilities that we have. I am just as
frustrated, and I was shocked to learn the depth of the issues
that we have, both on data accuracy with the mapping a weak
maintenance or management of our contractor.
As a result of that, we have reassigned management
personnel. We are recruiting additional staff with different
skill-sets who will be totally focused on the reform agenda
that we have for the Government Contracting Office. We have
made significant progress in various divisions in Government
contracting. Not only are we addressing resources that are in
play as we speak, but we are also identifying the contractors'
problem areas and we have developed a new contract agreement
with stringent timelines, with deliverables within 30 and 60
days.
So there is tangible evidence of the changes that we have
instituted, with timelines that we are prepared to report to
your office, as well as to work closely with Bill and his
staff.
Chairwoman Velazquez. You will?
Ms. Carranza. Yes.
Chairwoman Velazquez. Thank you.
Mr. Kutz, GAO was four out of four in gaining fraudulent
access to the HUBZone program. Without getting into specifics
of other GAO investigations, can you tell us how susceptible
the HUBZone program is to fraud, as compared to other programs
GAO has reviewed for similar programs?
Mr. Kutz. Clearly, it is very susceptible to fraud. There
is no question about that. They do not really have, from what
we saw, a fraud-prevention program, which has many elements to
it.
And it is interesting, one of the charts you have put up
there, that they have tightened their controls, well, what we
tested was the tightened controls, obviously. So I would hate
to see what they were before that.
But, clearly, this opens the door to billions of dollars of
contracts. That is why people will lie to get into a program
like this, because there is a lot of money at stake.
Chairwoman Velazquez. Let me ask you, how does the
potential for fraud in the HUBZone program compare to what you
saw in Katrina-related disaster payments?
Mr. Kutz. It is substantially worse. We looked at the
individual assistance program, which has eligibility controls.
To get individual payments for Katrina, people had to actually
live in the disaster area at the time that Katrina or Rita hit.
And so FEMA did not have effective fraud-prevention controls in
that program, although they did have some validation. Here we
saw little or none, so this is as bad or worse.
Chairwoman Velazquez. In your estimation, do you believe
that self-policing is a valuable policy for reducing fraud in
the program?
Mr. Kutz. Not in and of itself, certainly. If you look at a
broad fraud-prevention program, it is an element of it, but it
is, by far, one of the less significant elements, in my view.
Chairwoman Velazquez. What makes the program so susceptible
to fraud?
Mr. Kutz. Well, again, the lack of fraud-prevention
controls. I would say this, if you are going to put your money
into anything for this program, it has to be at the application
process. Here you have a situation where anybody can get in,
basically, that wants to. And, again, hopefully, most people
are honest.
But you not only have that problem now and you want to cut
them off at the beginning, I have heard in your questioning
here, but you also have the bigger problem of 10,000 or more
companies already in there and how you deal with that situation
at this point.
Chairwoman Velazquez. Let me ask you a final question here.
What potential actions would you recommend or suggest to SBA to
rectify this problem?
Mr. Kutz. Well, a fraud-prevention program consists of
three things: people, processes and technology. They need to
have the right people, the right training, the right outlook.
They need to have strong processes, for example, random,
unannounced site visits, with technology behind that, where,
before they do the site visit, they have the research tools to
determine whether or not people own the businesses, whether
they were renting them, or whatever the case may be.
So it is a combination of those three areas.
Chairwoman Velazquez. Thank you.
And I recognize Mr. Chabot.
And I have tons of other questions. We will stay here until
I am able to get all those questions out.
Mr. Chabot?
Mr. Chabot. Thank you, Madam Chair.
Mr. Kutz, let me ask you, first of all, if I can, of the
firms that received contracts through the HUBZone program in
the DC metropolitan area that you referred to this morning, how
did you select the 17 for detailed investigation?
Mr. Kutz. We did data-mining. It was not a random sample,
so we cannot project this to the population. So we used data-
mining for various types of characteristics of a company.
And even the 17 is not all. We looked at the virtual
offices. I don't know if you saw part of this, too. We data-
mined, in that case, for people where there was a suite with 10
HUBZone companies using the same suite, which is a high
indicator of fraud. So, various characteristics like that.
Mr. Chabot. Thank you. So there are indications that
indicate that there may be problems, there may be a reason to
go further.
Mr. Kutz. That is correct. And those are some of the tools
that we would recommend SBA consider as part of a fraud-
prevention program.
Mr. Chabot. How many was that out of, approximately, in
that particular HUBZone area? How many firms are we talking
about?
Mr. Causseaux. In DC, I think there are about 280-some, but
we also looked in suburban Maryland and northern Virginia. The
actual 17 we looked at, HUBZone companies that had received a
HUBZone sole source set-aside or price-preference award, not
just that they were a HUBZone company. We selected companies
that had received, with only one exception, at least $450,000
in those HUBZone-specific contracts in 2006 and 2007,
obligations on those contracts.
Mr. Chabot. Thank you.
Now, of those where you did determine that there is clear
evidence of fraud, will you turn this over to another agency in
order to pursue this criminally?
Mr. Causseaux. We have referred the 10 case examples to the
SBA IG for further investigation, yes, sir.
Mr. Chabot. And, Ms. Carranza, is that what your agency
will do?
Ms. Carranza. Congressman Chabot, we have also assigned
what we call a suspension and debarment official who will
address the 10 companies once we have a list of them and assess
whether we should suspend or debar, and up to and including
prosecution, as we have done so successfully in Kentucky with
the support of Department of Justice.
So there are memorandums that are out already for public
review. We believe not only in detection, because, as GAO staff
has informed me, detection is just one part of the solution. We
need to look at deterrence.
There is reference to the application and the validation of
information. I am here not to deny that it was lax. I am here
to compel you to learn adequately, concisely, that we are now
expanding not only the validation and verification but also the
search engines that were not previously utilized to verify the
information on the application. And that is all to prevent
fraud or misrepresentation of information.
Mr. Chabot. It is my understanding that back some years
ago, maybe it was 2002-2003 approximately, that the SBA's
Inspector General did an inspection, I believe it was in Idaho,
and I think they found two-thirds or so of those that were on
the rolls were ineligible, as well.
I see some nodding of heads. Would anybody want to touch on
that?
Mr. Shear. Yes. Over the years, the IG has done a number of
examinations looking at control issues. And while ours was more
current and might have been more expansive, we basically come
to a very similar place in that there is a very big problem up
front with the certification process and the problem is also
there for the recertification process, that there isn't
validation. This is where the biggest problems occur, through
the front door.
And then what we see is that, in those instances where SBA
looks very closely at all, asks for verification of
information, you see a large number of decertifications, which
is, rather than saying that shows that they are on top of the
situation, because they are only looking at a few firms
closely, it shows that when there is a close look, there is a
problem.
So our results are very consistent with what the IG has
found over time.
Mr. Chabot. And for the record, Ms. Carranza, if you are
aware, or whoever is, approximately how many HUBZones are there
nationwide? I don't need an exact number but just
approximately.
Ms. Carranza. There are approximately 14,000.
Mr. Chabot. 14,000 HUBZones. Now, the one that is at issue
today and then the one that I mentioned in Idaho are just two
of literally 14,000. Is it reasonable to assume, if you have
looked very closely at these and found real problems, that it
is reasonable to assume that there are problems in other areas
throughout the country?
Ms. Carranza. I would like to answer that question on the
affirmative. And that is why we have taken some very aggressive
measures to train the district personnel who are currently
performing site visits to physically go out and perform the
site visits.
And Chairwoman Velazquez had mentioned that at one of our
previous hearings, and we went back and looked at assessing how
many we could accomplish. And we referred to the IG audit,
where we came to an agreement that if we could adequately
perform 5 percent, that that would be a good measure for us to
detect any issues. It is quite evident that we did not comply
effectively to that commitment.
Mr. Chabot. And obviously one of the reasons that this is
so disturbing is that the HUBZone goal of the program is to
help areas that are economically challenged, whether they are
in an urban area--I have many of those types of areas in my
district, in the city of Cincinnati, and there are also rural
areas that have these same challenges. And there are limited
tax dollars available to help start up and grow small
businesses to hopefully improve those communities and create
jobs for people. And if those dollars are being essentially
ripped off by those participating in these fraudulent
situations, certainly that is unacceptable.
And so I would be pleased to join the chairwoman in
reforming and improving this program so that it is doing what
its intended purposes were.
Let me just conclude by, one more time, Ms. Carranza, when
did you receive the report?
Ms. Carranza. Last Thursday.
Mr. Chabot. Just last Thursday.
Ms. Carranza. Yes. And it was a verbal report, not a
written report, Congressman.
Mr. Chabot. All right. So it would probably be unrealistic
to expect to you have a whole list of things that have already
been implemented and a timetable and that sort of thing. But I
would assume that this would be a high priority, in reforming
the program and making sure that these things are dealt with
very quickly and very thoroughly.
And, again, I would be pleased to--
Chairwoman Velazquez. Would the gentleman yield?
Mr. Chabot. I would be happy to yield.
Chairwoman Velazquez. Ms. Carranza, isn't it a fact that
you had a draft of the report months ago from the GAO?
Ms. Carranza. The first time that was--
Chairwoman Velazquez. From Mr. Shear's report.
Ms. Carranza. The first time that we sat down and reviewed
the particulars of the fraud investigation with Mr. Shear and
Mr. Causseaux was on Thursday, was given an overview, one-on-
one with a couple of the staff members. At that time, I knew
the depth and breadth of the issues.
Chairwoman Velazquez. Mr. Shear, for the record, when did
you provide a draft to the SBA?
Mr. Shear. It was, I believe, during the month of May that
we gave a draft report. And, as you will see in the report that
is released today, that SBA's comment letter is included. I
think the comment letter was from the first week in June,
responding to the recommendations of our program audit.
Chairwoman Velazquez. I yield back.
Mr. Chabot. All right. Thank you very much, Madam Chairman,
for clearing that up.
So then would you, just once again--I am not asking for a
long, detailed report--but tell us what has occurred since that
time and where you intend to head with this in the future?
Ms. Carranza. The time that I learned the details of the
exposures or problems, serious problems with the program, was
last week. I immediately assembled the top management in the
agency. At that point, I was quite determined to fix the
problem immediately and address contractors who could deal with
improving and correcting and updating the data, the map data.
They had already started a couple months prior, but we put some
very strict guidelines and timelines. So, by August 29th, that
should be completed.
We identified a couple of other contractors; first one to
look at the overall HUBZone processes, so that they can assess
not only the impact that the program has on economic
development and job creation but also the overall impact of our
procedures, which either we failed to comply with, adhere, or
are insufficient to ensure the impact of the HUBZone program.
In addition to the resources and developing some
accountability tools, we also have looked at new enforcement
rules so from new leadership to new processes, including more
compelling enforcement on any discrepancies that we may find
either in the eligibility or the recertification process which
would involve up to and including suspension and debarment, as
well as, subject to legal grounds, prosecution.
Mr. Chabot. Thank you.
Madam Chair, I yield back.
Chairwoman Velazquez. Thank you.
Mr. Ellsworth?
Mr. Ellsworth. Thank you, Madam Chairwoman.
Thank you all for being here.
Mr. Shear, whose request--was it this Committee's request
to do this audit, go in and do this study or this operation?
Mr. Shear. We began our--I am making a distinction between
the program audit and the investigation--we began this program
audit at the request of Chairwoman Velazquez.
Mr. Ellsworth. And to your knowledge, is this the first
time this type of an audit has been done of this, the HUBZone
program?
Mr. Shear. I am not quite sure what you mean by "this type
of audit," because, as I responded to Mr. Chabot, the IG has
done, some work evaluating the HUBZone program. We have,
further back in the beginning years of the program, before my
time doing small-business work, there were some evaluations of
the HUBZone program.
So I think that there have been evaluations. It is just a
question of, what we did is more recent, and we looked at a
different set of questions than what some of the other
evaluations did.
Mr. Ellsworth. Do you think that these methods of
defrauding our Government and our people, are they anything
new? Are using a different storefront, doing it online, are
these all just brand-new things that you all, in your
experience, have never seen before or the IG may have seen? Or
is this--I mean, that is not a rocket-science way of doing this
new technology of being a criminal, I don't think.
Mr. Kutz. No, there is not a whole lot of sophistication
necessary to beat this program, at this point. I mean, it just
isn't really significant.
Mr. Ellsworth. So, Ms. Carranza, in your experience--and I
know you came from UPS.
Ms. Carranza. Yes.
Mr. Ellsworth. And thank you. And I know that company is a
wonderful company. But I also know they build in--they pay so
much attention to detail. I was visiting a hub not too long
ago, and they even talked about they don't take left turns to
build efficiencies and check their system to reduce accidents
and to cut down on time. So I know their security system is
also very sophisticated.
Was there a time in your--and I know your tenure is short
as the director--was there a time when you brought these or
anyone brought concerns to the previous director?
And I would go back to this. It seems like the heads of
agencies change about maybe every 8 or 9 months, and then there
is always that, "I have only been here this long." And I am not
accusing you of that, because I respect what you did, and I
think we can always borrow from the private agency.
But were there times when you brought these concerns to
your predecessor and they fell on deaf ears? And I saw the
testimony of Chairwoman Velazquez about the previous answers,
that you were frustrated because you didn't get cooperation on
these things.
Ms. Carranza. I would like to address that question about
my previous experience of the attention to detail. And you can
appreciate why I was so frustrated to learn from Mr. Shear and
others that the attention to detail, the management of not only
data but procedures, was not adhered to in the HUBZone program
office.
We spoke adamantly, I believe, Mr. Shear, about how this
could actually occur with very senior management in play and
very highly automated systems where you can capture a lot of
data.
What I believe has occurred is that we have a combination
of factors that caused this problem. One, the management became
totally reliant on technology to perform their tasks. Second,
for the validation of information, since it is a self-
certifying process, they took the applicants on full face
value. Based on a couple of documents to validate certain
information, that was sufficient to get into the program.
Thirdly, the site visits were desktop visits in the
district offices which is not sufficient to capture what we
have just seen on screen. You do an onsite, you verify.
I cannot sit here and tell you that none of those have
occurred, because I just met with the region administrators
this week, yesterday, along with the district directors. It is
an advisory field group that we have. And I challenged them on
the procedure or process that they manage on these site visits
and learned very quickly that they did desktops, but when they
had an inclination or a flag that they should pursue an onsite
visit, they would perform that too.
And I asked, what resulted from your interaction? And they
indicated, typically it resulted in decertification.
Mr. Ellsworth. Mr. Shear, Mr. Kutz, from what you heard of
Ms. Carranza's original 5-minute testimony, will the plan that
she intended to implement solve some of these things?
And let me go on.
And then, Mr. Kutz, would you explain your background
before you went to GAO; and would it then not be prudent for
possibly SBA to hire people that maybe are of an investigative
background, maybe that are a little more suspicious minded? Not
that we don't trust people, but that could look into these
things on a full-time basis, as opposed to when a committee has
to call for an investigation?
So will what she says works, work? And why do we have to
wait so long for these things to get investigated?
Mr. Kutz. Well, it is too early to tell whether it is going
to work.
And I don't want to minimize the problem. This problem
developed potentially over a long period of time. And so you
have again the issue of preventing new people from getting in
the program that shouldn't be. And how do you clean up the mess
you have got with maybe hundreds or thousands in there now that
shouldn't be, who are taking business away from legitimate
HUBZone companies?
My background is, everybody in my unit is a certified fraud
examiner. I am a Certified Public Accountant. We have criminal
investigators with 20, 30, 40 years of law enforcement
experience from around the executive branch. We have tremendous
data, analysis, and technology tools available; and we use
many, many processes, including covert testing which we do for
many congressional committees, which gives you an inside look
at what is really happening with a program like the HUBZone
program. Because how else can you get that unless you actually
go out and try to commit the fraud yourself?
And so, again, the first question would be, do they have
the right people to put an effective fraud prevention program
in place? That is doubtful at this point. That requires people
with certain types of skill sets.
Again, could they do better than they can with the people
they have got? Probably. Do they need different types of
people? Possibly. And additional training? I expect so.
Mr. Ellsworth. I would steal him, Ms. Carranza.
Chairwoman Velazquez. Mr. Akin.
Mr. Akin. Thank you, Madam Chair.
I guess the first thing that occurred to me, and I listened
to your audit on what happened after Katrina, and I was mad for
about 3 weeks afterwards--particularly one of your closing
comments.
I said, Of all these different people outlined, there are
tens of thousands of people that have defrauded the government
and my taxpayers. I said, What is going to happen to them? And
you said, Candidly, you really want to know? And I said, Yeah.
And you said, Nothing.
And in this situation, I assume that what happens is that
you have got somebody over in the Department of Justice that
has prosecutors. The prosecutors are going after people that
are shopping cocaine and doing all these other sort of high-
tech, more spectacular things. And the guys that are just
ripping off the taxpayer on a daily basis, making an honest
living ripping off taxpayers, are probably going to be ignored
just the same as they were in Katrina.
So I guess my first question is, does that suggest that you
would almost put some law enforcement people in the SBA, or
something, so that you have at least a dedicated resource of
people going out? Because if you let all these people know that
if you lie, you get busted, that is going to clean up an awful
lot of stuff right there.
I have always thought we should do that on voter fraud.
Nobody ever gets prosecuted for that, and it gets worse and
worse, or at least it stays bad.
Is that something? That is my first question. Let me start
with that.
Mr. Kutz. Well, certainly investigators and forensic
auditors and things like that would be best in this type of
environment.
And it is interesting, the experience on Katrina; and that
is even the best case. We set up a Katrina fraud task force, as
you may be aware, we referred 22,000 cases to them of potential
fraud. And that is what we identified, and as you said, it is
probably tens of thousands more.
Mr. Akin. Those are just the dumb people that photocopied
their drivers license living in Minnesota saying they got hit
by Katrina. These aren't really bright criminals exactly.
Mr. Kutz. Exactly. And out of 22,000, at least 50 or 60 of
them have been indicted. So that is not a high percentage, and
that is kind of predicted, what probably would happen.
So here, though, I do think it is important that there are
consequences to people who do lie about this program and who
take away business from legitimate HUBZone companies. So we
would certainly support SBA and anything this committee can do
to help them--working with U.S. Attorneys, for example, on
making some examples of these. Because I would predict, if you
make examples of people and you publicize it, you will have a
lot of people coming forth during an amnesty program that are
going to decertify themselves before they get a chance to lose
all their other government business.
Mr. Akin. From a structural point of view, would it just
mess everything up to have a couple prosecutor types attached
specifically to a program like this?
Maybe I don't understand the structure of the
administration, but do you have anybody that you can go to, Ms.
Carranza, where they are going to work on your cases for you
and make sure people get busted? Or are you at the mercy of the
Justice Department?
Ms. Carranza. Congressman Akin, we have a couple of avenues
that we have addressed already. One is working closely with the
IG. They have the appropriate skill sets to support us, and we
can partner in that aspect.
Mr. Akin. Do you have the resources there, though, to go
after some of these people?
Ms. Carranza. Yes. I believe, as you stated earlier, that
if we make an example of one or two, or follow through with the
suspension--
Mr. Akin. I understood that. But can you get the people to
get on these things and start dealing with it or not? Do you
have the power in your position? Or do you know yet?
Ms. Carranza. Yes, I have the authority. I have already
deployed not only IG support, but also the district directors;
and they are knowledgeable of the need to do more, and things
better on the site visits and the recertifications process.
Mr. Akin. So you do think you have the resources to do
that--
Ms. Carranza. Oh, yes.
Mr. Akin. --to make sure people, if somebody breaks the
law, you can both criminally prosecute them and debar them from
government contracts?
Ms. Carranza. Yes. We have an attorney who is actually our
suspension and debarment officer.
Mr. Akin. Let me just cross-examine then.
What is your sense, Mr. Kutz? Does she have the resources
to go after some of these people, do you think? Or not? Because
you have been around longer than she has.
Mr. Kutz. Well, I don't know. I haven't looked at her human
capital. But I suspect she doesn't necessarily have the right
people. She may have people, but they may not be the right
people. I don't know.
I think the other issue of actually prosecuting and
something is not an easy issue. If you look at suspension and
debarment in the government, typically people don't get
suspended and debarred unless they are proven to be guilty of a
crime. But the law says you can actually suspend or potentially
debar without having to prove someone is criminally
responsible.
So if they can prove some of these cases, that people are
the in the program inappropriately, they can still potentially
suspend and debar without going through the prosecution, I
believe.
Mr. Akin. I guess the other question I have--a couple of
them--and that is, my understanding is, working in the
administration is even more frustrating than being in Congress.
And our job is like watching glacier races many days.
But do you--because of all of the different union things
with government employees, if you have got a bunch of
incompetent people who are currently working for you, can you
get rid of them and move people around? Or does it take you a
year and a half to build a case to get rid of somebody who is
basically some toad that is doing nothing?
Ms. Carranza. I will address that from an operator's
perspective, because I have 30 years as an operations manager,
working with thousands of employees. Recognizing many times
that you didn't have top performers, you have an A team, B
team, C team, you look at their strengths or capacity.
What we have done in the agency, because we have employees
with limited capacity or lack of focus or perhaps not the skill
sets, we have trained in the past 2 years over 1,500 employees
to look at the quality controls, quality improvements. We look
at metrics, we look at employee relations, and we also look at
the importance of auditing.
Chairwoman Velazquez. Time has expired.
Mr. Akin. Thank you, Madam Chairwoman.
Chairwoman Velazquez. Mr. Shuler.
Mr. Shuler. Thank you, Madam Chair.
Mr. Kutz and the gentleman from the GAO, I want to commend
you for your work.
Mr. Kutz, in your testimony you talked about the firms who
had gained fraudulent access to the HUBZones. When you had the
conversation and confronted them, what was their response?
Mr. Kutz. I will let Mr. Causseaux answer that.
Mr. Causseaux. In many cases, they were sort of, well, this
is how the game is played. They didn't seem to have any fear,
if you will, of any consequences, whether it was prosecution or
suspension or debarment. It was: It is easy to get in the
program, there is lots of money that is out there, and nobody
is going to come after me.
Mr. Shuler. Ms. Carranza, if you suspend someone or debar
someone, the debarment is, what, a 1-year? A suspension that
could be a 1 year?
Mr. Causseaux. Suspension is typically 12 months; that can
be extended for 6 months and actually can be extended beyond
that for various reasons. They both have the same effect.
Debarment, the typical is 3 years. However, the suspension
and debarment official has the prerogative, based on the
gravity of the circumstances, to make it longer than that.
But the effect of suspension and debarment is the same: It
precludes that entity from doing business with the Federal
Government in contracting, receiving Federal loans, receiving
Federal grants or any other Federal monies.
Mr. Shuler. And that is what I understand that you have
looked at, is doing the suspension and debarments?
Ms. Carranza. Yes.
Mr. Shuler. Will the SBA go after criminal indictment of
these 10 people? Because I have not heard you say anything
about criminal indictment yet. Do they actually go criminally
after these folks?
Ms. Carranza. Congressman Shuler, once we assess the
severity of the issues, our immediate action would be to follow
the same pattern we did with the firm in Kentucky. That was not
only heard in court; it wasn't strictly a suspension or
debarment; it was prosecution, so he will have his day in
court. And that is what we expect to do with not only those 10
companies, but other companies that we may come across. We are
very determined, focused, to work through that as soon as we
have the specific companies.
Mr. Shuler. If we are looking at just these 10 companies,
what was the amount of contracts--dollars?
Mr. Causseaux. In 2006 and 2007, the amount of Federal
contracts received, obligations now, was $105 million. One of
the companies had a $40 million HUBZone set-aside contract. It
is a--that is the ceiling amount. They haven't been--that much
money has not been obligated yet.
We estimated something over $24 million of that $105
million was in actual HUBZone type of contracts. But many, many
companies get a HUBZone certification, and then they may or may
not get a HUBZone prime contract. They may be getting
subcontracts using that certification, or it may make them more
attractive to contracting officers because, as you may know,
companies that have multiple certifications, that receive a
contract, get credit against those--each individual entity--for
the small business goaling requirements.
Mr. Shuler. So, theoretically, we could be talking billions
of dollars in fraud?
Mr. Causseaux. Theoretically, yes.
Mr. Shuler. Those are our tax dollars.
Madam Chair, you know, the SBA, the former director, the
good thing about the SBA, he is no longer with the SBA,
correct? The former administrator?
Ms. Carranza. The administrator has been assigned as
Secretary of HUD.
Mr. Shuler. So he is with HUD now, correct?
Ms. Carranza. Yes.
Mr. Shuler. And with our housing crisis that we have, now
he is administrating HUD. So we are talking about a guy that--
essentially, despite his lack of oversight of billions of
dollars; and is now with HUD with the housing crisis that we
have now.
Madam Chair, I think there needs to be extensive and more
investigation going on because these are our tax dollars. These
are people, their hard-paying tax dollars that are going to
these programs, and we have got a crisis on our hands.
I want to thank you and the ranking member for having this
hearing and the good work that the whole committee and the
staff has done. I yield back.
Chairwoman Velazquez. Thank you.
Mr. Bartlett.
Mr. Bartlett. Thank you very much.
How big was the universe from which these 17 companies were
selected?
Mr. Causseaux. Total HUBZone firms in the United States,
13,000.
Mr. Bartlett. 13,000, 14,000. Did you mine the whole
universe of 14,000 to find?
Mr. Causseaux. No, sir. We focused on the Washington, D.C.,
metropolitan area.
Mr. Bartlett. I understand. But what was the universe from
which these--
Mr. Causseaux. There were several hundred. But, again, we
selected the companies, only those who had received HUBZone
contracts of at least--
Mr. Bartlett. How big is that universe?
See, to get some idea as to how significant these findings
were, we have to know how big the universe was.
Mr. Causseaux. It was at least dozens in the D.C. Metro
area, and then we drilled down.
Mr. Bartlett. If you could make that available to us for
the record, we would be very pleased, because in evaluating the
significance of this, we have to know how big the universe was
from which you chose this.
[The following information was provided to the Committee by
the SBA: "The 17 HUBZone firms discussed in the testimony were
selected from a population of 44 HUBZone firms in the greater
Washington, DC metropolitan area that met certain criteria.
Specifically, with one exception, each of the 44 had
received at least $450,000 in obligations related to HUBZone
set-aside, HUBZone sole source, or 8(a) with HUBZone price
preference contracts in fiscal years 2006 and 2007.
The one exception was a HUBZone firm that was included in
the population and our selection due to allegations received
via the GAO FraudNet."]
Mr. Bartlett. I would like to first say a couple words
about the HUBZone program in general. I have a lot of HUBZones
in my district. One is a whole county.
One of the HUBZone contractors in that county has done two
very admirable things. He has brought jobs to that county where
the base pay is four times the average income of that area.
That obviously is going to be a huge economic lift.
The other thing he has done is a really big benefit to
taxpayers. The same contractor has similar work that--he works
for NSA; that is not in a HUBZone. And he had an employee come
to him, and he had two different positions the employee could
have gone to. One was in Howard County for $100,000, the other
was in Garrett County for $70,000. He wisely chose to go to
Garrett County in my district for $70,000, because you live
better with $70,000 in Garrett County than you do with $100,000
in Howard County.
What this means is that if all of NSA's work was done in
Garrett County, they, for the same amount of money, could hire
50 percent more people.
So the HUBZone program is not only a very good program for
the disadvantaged areas it serves, it is a very good program
for the taxpayer, because you get the work done much more
economically there.
I was disappointed, but not surprised by your results
because I know human nature, I have been watching it for 82
years now. And what the HUBZone program relied on was self-
reporting and self-certification. This requires honest people,
and what it also required was peer policing. And I am
distressed that we have so many dishonest people that took
advantage, that gamed the system.
I am also distressed that the peer policing isn't working
as well as it should, because the companies that have tried
that get punished. And I know one of them, particularly, who
has been punished because he has availed himself of this
opportunity for peer policing.
I think that if you could assure your contractors that they
were not going to be punished for peer policing, that they
would do a better job than you could do, Madam Secretary,
because there are a whole lot of them out there and they are
really smart and they know what is going on in their
communities.
I am distressed that we are going to have to take on more
manpower and spend more money in supervising this program
because there are too many dishonest people out there who want
to game the system, and because we have not made it
advantageous for peers to police the system because when they
police the system, they get punished.
How can we change? We can't change the honesty of people.
How can we change the peer policing so that it works?
Ms. Carranza. Congressman Bartlett, we can and we have and
we will continue improving the controls, the internal stringent
controls that are very necessary and that have been pointed out
by GAO and the IG.
And I want to assure you that it is not the SBA personnel,
strictly, who are going to have oversight in this area. Our
associate administrator of our government contracting office
has already drafted a memorandum to share with the 24 large
agencies, government agencies, so that we can alert them to our
areas of concern and the exposures of this audit.
Also, I have personally spoken to the key government
contracting leaders, in a separate meeting, to share with them
the vulnerabilities of our program and that we are going to
need their support.
So there is a memorandum. I have met with them personally,
and I have plans to continue to communicate so that it is a
contracting community obligation to ensure that the noble
mission of this HUBZone program is kept intact. Because, as was
stated earlier, it is all about job creation and it is all
about economic development in the most challenged areas of our
community.
Mr. Bartlett. When we know of peers being punished for
policing, can we come to you for help?
Ms. Carranza. Absolutely.
Mr. Bartlett. Thank you.
Chairwoman Velazquez. Ms. Carranza, GAO was able to
perpetrate fraud with a photocopier and whiteout.
Why are your internal controls so weak that such an
unsophisticated scam is able to defraud the Federal Government?
I need to understand why.
Ms. Carranza. Chairwoman Velazquez, it has been noted a
couple times that this is a self-certifying process--program.
And so, as noted also, we relied on the integrity of the
applicant. And because we did not have sufficient validation
and verification of the information that is supplied, it
allowed loopholes. As a deterrent, we don't want to continue
with the lax processes that would enable someone to defraud or
misrepresent the information.
So it is a matter of tightening the controls, monitoring
those controls for adherence and compliance, and documenting it
in our SOP. Our SOP, as we speak, is being modified to
incorporate those new procedures.
Chairwoman Velazquez. You are telling us today you are
going to have internal controls in place and you are going to
have oversight?
Ms. Carranza. Better controls and greater oversight, yes.
Chairwoman Velazquez. In trying to understand the magnitude
and if any structural changes are later needed to take place, I
am going to ask you the following question:
Fraud seems to be something you hear mentioned regularly in
conjunction with SBA. Last year, the Department of Justice and
Secret Service uncovered massive fraud in the SBA loan
programs; and now, GAO has found similar, if not greater, fraud
in SBA's contracting programs.
We have also heard about problems with Katrina, a former
Bush administration official being awarded work in the 7j
program, and big businesses getting small businesses'
contracts.
Ms. Carranza, what has occurred over the last few years
that has made your agency so susceptible to fraud?
Ms. Carranza. I can explain very--
Chairwoman Velazquez. Is it the reduced budget, 40 percent
in the last 7 years? Have the agency buyouts forced out more
experienced staff? Is it because there has been high turnover
in the administrative portion? What is it?
Ms. Carranza. Congresswoman Chairman, to delineate every
one of them would take greater than 5 minutes. But I will
explain that we have addressed every one of those areas and
have put in place--I can answer for the past 2 years that I
have been here--with Secretary Preston a reform agenda that not
only looked at simplifying processes, developing the skill sets
of the existing workforce.
We have actually added employees, over 100, since we were
addressing the resource allocation or alignment. We have also
put significant controls in our ODA, Office Disaster
Assistance. In our Office of Capital Access, as you know, we
are addressing oversight.
Chairwoman Velazquez. But we are here today. Thank you Ms.
Carranza.
Ms. Fallin.
Ms. Fallin. Thank you, Madam Chairman.
I appreciate you coming today, all of you, to testify on a
very important subject; and it is certainly very disturbing,
some of the information that we have heard.
And I know, Madam Administrator, you are relatively new to
this job and new to this position, so I appreciate what you are
trying to do with your agency and some of the steps that you
have been taking to identify the challenges, map out an
appropriate course of action to remedy some of these issues
that have been revealed by the various other government
entities.
I want to ask you a question. Do you think the HUBZone
program is worth keeping?
Ms. Carranza. What I can--
Ms. Fallin. Is it beneficial to our economy, beneficial to
small business?
Ms. Carranza. Yes, Congresswoman Fallin. The noble mission
of HUBZone is about job creation and economic development and
in the most challenging areas. As I explained earlier, to
suspend a program that meets the needs of so many - this is not
about a program problem, this is about a program management
problem.
And it is my responsibility to ensure that we put in the
controls and address all those efficiencies so a program such
as HUBZone and others are not negatively impacted by the loose
controls that we have and are then accessible to fraud or
misrepresentation or the eligibility of the applicants.
Ms. Fallin. That is good to hear. And let me ask you
something else.
What would happen, and I will ask maybe all of you, if we
had an announcement--and maybe you have already done this--but
an announcement by all of you that said we are not going to
tolerate fraud and abuse of government taxpayer dollars,
especially as it deals with HUBZones or any other program
within the SBA, and here are some cases we identified that are
going to be prosecuted promptly; we are going to take care of
them, and we are going to give everybody in the Nation a
warning, who may be taking advantage improperly of this
program, that we are going to crack down, and you'd better get
ready?
Ms. Carranza. Congresswoman Fallin, I believe we have
accomplished that already by being named collectively with GAO
and IG on a press release that just went out. That is just the
beginning, because the proof is in the suspensions and the
debarment activity, as well as making sure that we communicate
this in the forums that we participate in.
As you know, we attend government contracting matchmaking
events, summits, conferences, and that is our platform to make
sure that we articulate this stringent observation.
Ms. Fallin. Did you want to say something here?
Mr. Kutz. I think you are on a target.
Advertising that people are being held accountable and
giving people an opportunity under an amnesty program to come
forth and decertify themselves, I think would have an effect.
The suspension and debarment, as Mr. Causseaux said, that
pretty much takes you out of the government business for a
year, 2 years, 3 years; plus, you can't get government grants
and other types of payments.
So that is a real consequence; and if people knew that
their lifeline was at stake, basically, from a business
perspective, they would come forth.
Ms. Fallin. Let me ask you this. After hearing the plan of
action that she has laid forth--and it takes a long time to
change government at times; it is unfortunate, but it just
does. It is hard to work through. People have been in
government for a long time, and even the red tape and the
bureaucracy itself.
But do you feel like the plan that the Administrator has
laid forth with the time lines, with the procedures and what
her agency hopes to do with restructuring and the goals that
they have in place, is moving in the right direction?
Mr. Kutz. Let me talk about fraud, and Mr. Shear can talk
about from a performance standpoint.
But from the fraud standpoint, we haven't seen a fraud
prevention plan yet, so I am not aware of one. They are working
towards one, it sounds like. They just heard from us last week.
When we do covert testing, we don't tell them we are
coming. We don't tell them until we are done. So it is going to
take some time to see.
But you have a mess on your hands, effectively. I mean, you
have got to fix the application process, to put fraud
prevention controls in place.
And then you have to figure out what you are going to do
with 10,000-plus companies in the system. You can't audit all
10,000 of them. So that is why your idea of publicizing some
poster children-type cases could potentially do some of your
work for you in the early stages.
So that is kind of where we are with the fraud side.
Mr. Shear. When we make recommendations to an agency--and
in this case, it is a program where we have what I will call--
we identified "very severe deficiencies" in this program and
recommended corrective action. We are always glad when the
agency agrees with us and states that they are going to take
action.
This is the concern I would raise here for Administrator
Carranza and for this committee, that the response we received
at the beginning of June to our program audit in terms of
agency comments and the response today, I think there might not
be a recognition of the size of the task that is involved.
Some things can be done fairly easily to try to get a
handle on the issue, which could be using data smarter, to try
to identify the virtual offices, the locations where you have
multiple HUBZone firms, and the like. But some of these things,
especially verification of employees, all these other types of
actions we recommended, are more difficult.
So I do have--we have a concern as far as the ability to do
this quickly. At a minimum, we would like to see a process in
place so that it could lead to success down the road.
And as far as the specific plans, such as developing
regulations and policies and procedures around certification
and recertification, it is in the draft stage. It hasn't been
shared with us yet. We would be glad to work constructively
with the agency as they move forward, but we don't know what
the plan is.
Ms. Fallin. Let me ask, are you willing to work with him as
they move forward on these plans?
Ms. Carranza. Last week when we met--to answer your
question, Congresswoman Fallin, 30 days from now. I am not
supposed to give exact dates, but 30 days from now I invited
him back to the office, so we can look at our strategy and
evaluate whether it is sufficient or not.
Chairwoman Velazquez. Mr. Kutz, can you please explain to
this committee, how are taxpayers affected if a company
fraudulently gains access to the program and receives a
contract or a price evaluation preference?
Mr. Kutz. Well, certainly from the standpoint of this whole
issue we are talking about here, they are ripped off from the
standpoint of the wrong areas are being stimulated.
I mentioned McLean, Virginia. McLean doesn't need any
stimulation. McLean is a very wealthy area, as some of you may
know, the Tyson's Corner area where some of these companies
were.
The other thing we haven't talked a lot about here is the
legitimate HUBZone companies, like in Garrett County, Maryland,
for example, may be losing out on business to fraudsters who
are taking the business away from them.
And from a price standpoint, in some cases you might be
paying more because you are limiting the competition, you are
setting aside to a limited number of companies or you are doing
sole-sourcing. So these things.
So there are a number of reasons where taxpayers are not
getting what they paid for.
Chairwoman Velazquez. Thank you.
Ms. Carranza, last year, the House passed H.R. 3867. And in
this legislation, we included a provision to require onsite
verification of HUBZone status prior to the award of a second
contract. The administration voiced their opposition to this
provision, and I quote, "This provision will create a large
burden on the Small Business Administration. The firms are
already required to certify their status prior to award of a
contract."
Given the GAO's investigation and the evidence of
substantial fraud in regard to the HUBZone program, do you
still feel that this will put such a burden on the SBA? And
will you continue to oppose onsite verification?
Ms. Carranza. What I am committing to you, Chairwoman
Velazquez, is to further assess that situation with the new
information that we received up to and including having a
contractor come in and conduct an assessment of what it would
take to ensure that recertification is accomplished.
Chairwoman Velazquez. Let me remind you also that that
legislation passed overwhelmingly, bipartisan support, over 300
votes.
Mr. Kutz, to get a library card from the local library a
person is generally required to bring identification, as well
as a recent bill with a local address on it, to prove
residency.
In your experience, would you say that it is easier to get
into the HUBZone contracting program, making one's company
eligible for millions of dollars of contracts, than to get a
public library card?
Mr. Kutz. I don't have a library card, but given what you
said, and back quite a few decades ago when I actually had a
library card, showing up and having to prove who you are is
more than was required for the HUBZone. So under that scenario,
yes, it would require more diligence to get a library card than
a HUBZone.
And that gets into some of the solutions here. Rather than
this being an entirely Internet/e-mail-driven process, a little
more like the site visits we are talking about would be a good
step.
Chairwoman Velazquez. Ms. Carranza, you spoke about
electronic annual reviews in your testimony.
Can you tell me more about this system?
Ms. Carranza. Yes, Congresswoman Velazquez.
This is a mechanism that allows individuals, anywhere from
the headquarters personnel to the district offices, to perform
reviews, site reviews, firm reviews. And it facilitates and
simplifies the process.
As I indicated earlier, we have reassessed that process
because, again, we have allowed technology to manage the
process versus the other way around.
Chairwoman Velazquez. So it is exactly this sort of
electronic system without verification that has caused the
problems with the HUBZone program.
Let me ask, Mr. Causseaux, while you haven't examined this
program, can you tell us if you will be concerned about the
potential for fraud using this type of annual reviews?
Mr. Causseaux. Any system that is predicated on self-
certified information without verification and validation is
highly susceptible to fraud and abuse, particularly when
millions, if not billions, of Federal dollars are at stake.
We sometimes use the term "faith-based contracting," which
is essentially a process where we kind of simply sit back and
hope and pray that the company we are doing business with isn't
ripping us off too badly. This is a situation where, if you
don't do due diligence and validate that you are getting what
you are paying for, that those you are paying are the ones that
purport themselves to be, you are susceptible to fraud.
So it does take more than the electronic system, yes,
ma'am.
Chairwoman Velazquez. Ms. Carranza, I just would like for
you explain to us what kind of fraud prevention measures will
be put in place to supplement these electronic reviews, annual
electronic reviews. Because it, by itself, will be open to
fraud.
Ms. Carranza. Congresswoman Velazquez, as indicated by Mr.
Causseaux and Mr. Kutz, it is about validating and verifying
the information that is given, that we are now taking a more
stringent and more aggressive manner in doing. If a drivers
license was required, or a utility bill for validation or
verification of address was allowed, now we will ask for copies
of the office lease, now we will ask for much more in-depth and
comprehensive documentation to validate and verify the
information that is electronically shared with us.
Chairwoman Velazquez. You are telling me that you are not
going to rely only on annual electronic reviews?
Ms. Carranza. Exactly.
Mr. Kutz. Chairwoman, could I comment on that?
Chairwoman Velazquez. Of course.
Mr. Kutz. Because verification is more than getting a copy
of something. When we submitted our first application, they
asked us for a copy of our lease. We dummied one up, faxed it
to them, and they bought it. So validation means possibly maybe
calling the lessor or doing something besides taking a piece of
paper and saying, yep, I met the item on the checklist.
So I think when we talk about verify and validate at this
discussion here, it is more than simply requesting a piece of
paper.
Chairwoman Velazquez. And getting the fax machine or e-
mailing.
Mr. Kutz. Especially by fax. A carbon drivers license by
fax looks a lot better. With the holograms on a drivers
license, if you faxed them in, you can't tell if it is a real
license or not.
Chairwoman Velazquez. How would you react to Mr. Kutz's
assessment?
Ms. Carranza. Congresswoman Velazquez, I actually took a
couple of addresses and pursued Google Earth. And I believe you
are very familiar with Google Earth, where it will zoom in and
catch that storefront Starbucks.
This is just one of about nine other types of search
engines that we are expanding to ensure that we narrow down the
focus of the documentation that has been given to us. So these
are going to be expanded search engines, they are going to be
consistently utilized. And, once again, this is just one of
many that will be utilized to verify the information and
validate it.
Chairwoman Velazquez. Mr. Bartlett.
Mr. Bartlett. I was very pleased, Madam Secretary, that you
noted that this was not a program problem, it was a program
management problem.
I would like to again say something about HUBZone programs
generically, because I know they are now under attack. Most of
our other small business programs are very admirable in that
they help people. You can be an 8(a) contractor and you can get
a contract in McLean, Virginia, which doesn't need any economic
help at all. And that is nice that we have programs that will
help these disadvantaged companies no matter where they are.
The HUBZone program is one of those things that
occasionally I note, and such a really creative idea that I say
to myself, gee, why didn't you think of that? Because this is a
program that not only helps people, individual companies, but
it helps whole areas. And we don't have any other program like
that in the Small Business Administration. It is an absolutely
unique program.
The jobs that I mentioned that went to Garrett County,
except for the HUBZone program they would not have gone there.
This contractor inconvenienced himself by going to Garrett
County, and he went there because it was a HUBZone area and
because he knew that he would have some advantage in getting
contracts from NSA because they have a checkoff of whether or
not they are meeting a number of goals of subcontracting, and
this is just one of them.
So I did want to appeal to fixing the problem, not putting
the whole program in jeopardy, because I think this is a really
unique program, a very worthwhile program. As I said, when I
first saw it, I said, gee, why didn't you think of that? It is
such a unique idea.
And the example I mentioned not only helps Garrett County
which, when I came to office, had 14 percent unemployment. And
I went there door-to-door, and I was surprised.
Most places I went door-to-door, it was very easy, because
after I rang the doorbell, I filled out the little door hanger
that said, I was here; and I give the time and the date and I
hang it on the door, and I'm sorry I missed you. And almost
nobody came because they were out working.
When I went to Garrett County, a lot of people came. And
they were senior people that told me that during their working
years they had to go to Pittsburgh or Baltimore to make a
living, but when they would retire, they came back to Garrett
County. I said, gee, this must be a great place to live; too
bad that we have 14 percent unemployment here, that our people
have to go away to Pittsburgh and Baltimore to make a living.
The HUBZone program is now changing that, and there are
really good jobs there. As I mentioned, four times the mean
annual salary is what is paid to these people. And that uplifts
a whole community when you have that kind of salary.
So I just want to make an appeal that we need to be
focusing on fixing this program. And, again, I am very
disappointed that there are so many people out there that
would--and the taxpayer maybe gets value from these contracts,
but what is really hurt is the area that should have gotten the
contract and didn't get the contract.
I think that probably pretty good work is done on these
contracts, but the real tragedy is the area that should have
got the contract, that should have been uplifted by it
economically, missed that because it was fraudulently given
somewhere else.
So I hope that our focus is on, what do we need to do to
fix this program, so that it is really a viable, good program
and not have any hint that the program should be at risk
because of this.
This is just human nature that you have unearthed. And
again, Madam Secretary, we are going to come to you, because we
want to make sure that people who are trying to self-police,
peer policing, that they don't get punished for doing that. And
I know that happens and I know that is a huge detriment to the
success of this program.
So thank you for your invitation to come to your office. We
will be there.
Ms. Carranza. Thank you, Congressman Bartlett. And if you
will allow us to visit your office, as we have done in the
past, we would definitely look forward to giving you a report,
and Congresswoman Velazquez, on the progress of our plan so
that we can keep you updated.
Mr. Bartlett. I would be honored. Thank you.
Chairwoman Velazquez. Mr. Ellsworth.
Mr. Ellsworth. Thank you again, Madam Chairwoman.
I would associate my comments with Mr. Bartlett's and
agree, this is a good program. It is doing good things.
But knowing some of the people that I know back home in
Indiana, they would rather have no program at all than a
program that is riddled with fraud and abuse, because they are
the taxpayers that are paying these dollars. And so its
incumbent upon us to fix it.
I was just sitting here, thinking out of the box, we want
to keep government spending down. But contracting, if you offer
these areas a stipend, even if it is not your agency, another
Federal agency or even a local agency, to go out and make some
of these spot visits and train them, there are companies that
would love a $30,000 a year stipend to go out and make that
part of their duties. A sheriff's department or police
department or, like I said, a welfare department, they could do
this. And there is nothing in replacement.
Like Mr. Kutz said, you can dummy these things up all day
long with technology and fax in anything you want, and there is
nothing like eye-to-eye contact and eyeball, and asking
questions and seeing who is in and checking a payroll roster.
There is just no substitute for that.
And so I think there is--if we think out of the box a
little bit, we can do that.
Mr. Shear, we talked about self-policing, and I guess this
is along that. Is self-policing, to you or Mr. Kutz, an
effectively tool to monitor HUBZones when--like I said, we just
discussed it, but is it going to be effective, or do we have to
go further?
Mr. Shear. Well, I will address it from the standpoint of
our program audit. And our program audit focused on SBA because
it is the agency that is in charge of administering and
overseeing this program; and we think that agencies that play
that role have a very important responsibility.
As Mr. Kutz said a little bit earlier, self-policing, the
extent to which it occurs among recipients of a program can be
useful. But the idea that SBA officials stated when conducted
our program audit, and reference was made to self-policing in
the program, there is a burden of proof: Is self-policing
working and can it work?
And when we started asking questions about self-policing,
such as self-policing status protest in the HUBZone program, we
started asking questions, how many times are there status
protests? And there aren't that many.
Then when we started asking questions--which is really out
of fairness to the businesses that participate in this program
in that many of these contracts, even though they are small
businesses, they are in HUBZones, they are local businesses
many times, especially with construction, you are talking about
contracts that could be in other HUBZone areas and things of
the like--how is it that a HUBZone concern or somebody with
skin in the game would know enough information?
If SBA doesn't know the information, how are different
participants in a program going to have the information to
really self-police? And that is where we started getting
nonanswers.
So we have a concern about self-policing in this program,
the degree to which it has been used, the degree to which it
has worked.
Now, given our focus on SBA's actions for internal control,
I will say that what we observed in terms of the high level of
firms that apply being certified, and then the large number of
firms that, when anything is looked at very closely and where
verification is asked for by SBA, for those small numbers of
firms, the high numbers that end up being decertified, to us
that is an indication that whatever policing is going on by SBA
and self-policing is not working.
Mr. Ellsworth. Thank you very much. I have got about a
minute left. Any suggestions, as you sit there and think about
the same things that I was thinking about, short of hiring
30,000--how many HUBZones across the country, 30,000?
Ms. Carranza. Fourteen thousand.
Mr. Ellsworth. Short of hiring 14,000 new government
employees, any suggestions that you can say that you have all
been talking around the office and saying, if they would just
do this, they would get that eyeball-to-eyeball check?
You know, let them split. Is there another agency? Have you
all thought of anything?
Ms. Carranza. Thank you, Congressman Ellsworth.
We have not only looked at the density of the need to do
onsite, the density of firms, but we also recognize that we
have other agencies and other resource partners that can be
deployed as well to perform some of those physical onsite
versus site reviews.
In addition to that, we want to be a deterrent up front. So
when we look at the application, we are going to ask for a lot
more information up front and validate that information, and
then take it personally that after that application is
completed and the information validated, we zoom in with all of
the search engines to again verify it, so that no business can
be disruptive, the job creation can be realized and, of course,
economic development.
Chairwoman Velazquez. Would the gentleman yield?
Mr. Ellsworth. Sure.
Chairwoman Velazquez. Ms. Carranza, it caught my attention
that you said that you have other partners, and that you will
use personnel from other agencies to go and do onsite visits.
How is that possible? That is the sole responsibility of
SBA. Are they trained? Who will train them?
Ms. Carranza. Congresswoman Velazquez, when I say other
resources and agencies, we have government contracting
community members, whether it is other agencies that are out in
the field. We also have our resource partners from the
Entrepreneurial Development Office.
We are just looking for other avenues that could
participate in this scrutiny. We have not locked it in yet;
this is still going under assessment. But we have opportunities
to offer the training that is required.
Again, we are going to first manage it from our office
before we branch out and commit those resources, but I believe
that there are other options that we can consider. It may be
premature to say that at this time, because I haven't fully
assessed it.
Chairwoman Velazquez. I hope so. I hope that it is
premature to say. This is too serious. This is fraud. This is
about taxpayers' money. This is about hurting legitimate
companies that are doing their job in our communities.
So to contract out or to give the responsibility due
diligence that is your sole responsibility to other partners
out there who do not have--first, do not understand the
program; two, do not have the training--that really concerns
me. So I hope that you will revisit that.
Ms. Carranza. I will take that under consideration.
Mr. Ellsworth. I yield back.
Chairwoman Velazquez. Thank you.
Mr. Cuellar.
Mr. Cuellar. Thank you, Madam Chair.
Taxpayers expect efficient, effective, and accountable
government. I think that is the basic premise when we talk
about governance. There are different ways of doing this, and I
think the gentleman just mentioned this.
You can go into a policing effort where you go in and say,
we have a thousand places we have to search or we have to hire
a thousand people, and that is hard to do with a budget. Or you
can use more of a red-flag approach, where you look for certain
areas that will say, hey, there is a red flag, so we need to go
in and send somebody in there.
Customs, for example--I am from Laredo, the border area,
one of the largest inland ports. We get thousands of trucks,
actually we get about 10,000 trucks going up and down. If
Customs were to try to stop everybody coming across, they would
stop the traffic coming in, the international trade. So they
use specific methods to do spot-checking to go in and look for
those red flags.
And I assume you all have some sort of model that we can
employ or SBA can employ. I would like to have you all submit
that to us to look at the different models we are looking at,
because you can't send a thousand people out there, but there
are ways that you can red-flag those areas and then send them
in when there is a red flag.
You know, one of the things, for example--a red flag, for
example, as Mr. Kutz, I think you mentioned the virtual offices
in your testimony. Can you elaborate on what that term means
and how that relates specifically to the HUBZone program?
Mr. Kutz. Yes. It is an office that you can rent that could
be a legitimate HUBZone if you were actually having people
working there part-time and onsite part-time. But we also saw
the other end of it where there was actually just a mail
forwarding.
And the indicator you are talking about in this particular
case would be, if 10 companies--and this is a real case here--
10 companies using the same suite at the same address are all
HUBZone companies. Well, that doesn't make much sense. And when
you actually get behind that, you see that that is one of the
ways companies can beat the system here.
So that will be the kind of red flag you are talking about,
looking for virtual offices. And you can investigate all 10 of
them by doing one visit in that particular case.
So that is a way to leverage your resources also. I think
virtual offices is one thing SBA should build into their fraud
prevention program.
Mr. Cuellar. So what does it mean when you have a virtual
office? Does that mean that there is an intent to commit fraud,
or does that mean there is some legitimate? And I know the
answer to that--
Mr. Kutz. It could be either one.
Mr. Cuellar. --but how do we use that red flag so we can
send in individuals to do the personal visits? And how does the
SBA use that model? I want to see models out there because,
again, our resources are limited and we know that for a fact.
But there has to be a system in place to bring in the red
lights and the red flags to come up.
Do you all have a model that could be shared with the SBA?
Could you send that to us, to the committee also?
Mr. Kutz. We don't. But in this case, it was simply sorting
the addresses and looking for multiple hits at the exact same
address; and you can do that with multiple software packages
out there.
So one of our fake companies was in a virtual office, and
we were there in the same office with nine other companies. So
the other companies there were suspicious.
So that is a basic software. We don't have a model in this
particular case that would apply to the SBA situation
necessarily.
Mr. Cuellar. Should we have a model?
Mr. Causseaux. Clearly, the easiest tool in that situation
is when a company makes an application for HUBZone
certification, if that address happens to be one that another
firm or firms is at, that ought to send a flag. In fact, it is
a fairly clear indicator.
As we said, in Rockville, Maryland, there is a very small
HUBZone. There are 17 HUBZone firms in that particular sliver;
10 of those 17 firms are in the same suite in the same building
in that one location.
Mr. Cuellar. So shouldn't that have alerted somebody right
there? I mean, that is what I am saying. There has got to be
some sort of systematic approach to addressing this.
Ms. Carranza, I would ask you. A lot of times people look
at GAO or any auditing firm as the enemy, but I have always
looked at it, how do we improve the information that GAO
provides? How do we use that?
Instead of saying, oh, my God, they found some weaknesses
in the program and therefore that is negative. I would ask you
to just work with them and look for--I am a big believer. I did
my dissertation on performance-based budgeting. There are
models that you can set up; there really are models.
So I would ask GAO to work with Ms. Carranza and look for--
especially in these virtual offices. There should be a system
in place for your employees to say, there is a problem right
here; we have got an office and there are 17 different
companies in the same place.
Mr. Kutz. If you look at the monitor, that is what Mr.
Causseaux was talking about. That is the building that has the
suite.
Chairwoman Velazquez. How big was the suite?
Mr. Causseaux. It was about 30 offices that are in this
suite. It is a shared office arrangement. Some of the firms--or
at least one of the firms paid $50 a month strictly for mail
forwarding; and they could rent an office or a conference room
on an a la carte hourly basis.
Some firms rented, they paid a couple hundred a month, and
they received up to 4 hours or 6 hours use of an office on a
scheduled basis. And there were two firms, I believe, that
actually had a full-time office there.
But of the 10 offices, or the 10 HUBZone firms that were
there, seven of them were on a virtual office situation; and
those seven had another office that was not in a HUBZone area,
one of which was in one of the larger--one of our case example
firms was in McLean, another one in McLean.
Chairwoman Velazquez. Mr. Kutz, I am so lucky I don't
suffer from high blood pressure.
Mr. Causseaux. Me, too.
Chairwoman Velazquez. Time has expired.
Mr. Bartlett, do you have any other questions?
Mr. Bartlett. I just want to verify what I thought I heard
emphasized in the discussion, is that the two major sins that
are committed by these people, one is not having the major
headquarters of the company in the district, and the other is
not having 35 percent of the people live in the district.
These are the two main things?
Mr. Causseaux. That is correct. There are four attributes
for being a HUBZone: You have to be a small business; you have
to be 51 percent owned and controlled by U.S. citizens; 35
percent of your employees have to live in a HUBZone; and the
principal office where the majority of employees, essentially,
work has to be in a HUBZone.
We tested the 35 percent and the principal office
attributes for our case examples.
Mr. Bartlett. Well, at least three of those are pretty
obvious, if you are in the community, aren't they?
Mr. Causseaux. Yes, sir.
Mr. Bartlett. Yeah, which would lead me to believe that
pure policing, if we encouraged it, really would work. Because
there has to be other HUBZone businesses in that area which are
really mad when the contract goes to somebody who is cheating.
Isn't that true?
Mr. Causseaux. If I could answer that question, I believe
that is true. However, the problem with the peer policing is
that it is based on a protest mode. And in order to protest,
first of all, you have to have been a competitor for that
particular award or that particular--
Mr. Bartlett. But can't we change that, sir?
Mr. Causseaux. I can't. But perhaps you certainly can, yes.
Mr. Bartlett. Well, if we need to change that, if the
regulators can't change it, then we need to change it, Madam
Chairman. We need to not limit who can say, "Gee, that guy is
cheating." And as far as I am concerned, it can even be
anonymous. You know, I like a suggestion box, an anonymous
suggestion box, outside my door.
I remember a very interesting case when General Shinseki
wanted to have berets made for all his soldiers. And he was
enormously embarrassed when he learned that they were going to
be made in China. And I suggested that he maybe ought to have a
suggestion box outside his door, because lots of people in that
line of command knew they were being made in China but nobody
dared tell the top guy that.
You know, you just need to be able to get this information.
This isn't rocket science. These three things are really easy
to discern. And I would think that if we made it easier and we
didn't punish these people who were protesting--and it
shouldn't be just the--if the only person who can signal this
is the guy who was involved in the bidding process, then you
really, really have limited--
Chairwoman Velazquez. Time has expired, Mr. Bartlett.
Mr. Bartlett. Yeah.
Can you do something to change that, or do we have to do
it?
Ms. Carranza. Congressman Bartlett, at this time, I don't
believe that we need additional legislation. What we need to do
is adhere to the procedures we have in place.
We have referred to flags, red flags. I have a three-page
description of, when red flags occur, the following should take
place. And I mentioned earlier, it is program management and
adherence and comply to procedures.
Chairwoman Velazquez. The time has expired.
Mr. Bartlett. Thank you.
Chairwoman Velazquez. We are ready to wrap up. But before,
I need to ask three questions for the record to reflect.
Mr. Shear, we hear talk about the economic benefits of the
HUBZone program and how good they are. So do you have or saw
any ways where the benefits are quantifiable? Do you think that
we can measure the benefits of the program?
Mr. Shear. We make recommendations in our report for SBA to
come up with measurement and an evaluative approach to
determine the benefits of the program. Because, to date, we see
the benefits of the program tend to be on indicators that don't
work very well. The indicators SBA has now, it is based on
anecdotal information, which, while it can be very valuable to
provide some insight, it isn't systematic looking more broadly
at benefits.
Chairwoman Velazquez. Thank you.
Mr. Shear. And this is a program where we think that such
an evaluation to guide the Congress and the SBA is very
important.
Chairwoman Velazquez. Ms. Carranza, in your testimony you
mentioned that you are undertaking several projects--hiring
more staff, requiring site visits to firms that have received
HUBZone contracts.
All this is going to cost money. How much was the mapping
contract?
Ms. Carranza. I don't have that information, but I would be
glad to supply that information to you.
Chairwoman Velazquez. Okay. How much was the contract to
add additional employees to clear the backlog of
recertifications?
Ms. Carranza. We have had a contractor for a couple of
months. I don't have the exact dollar amount. However, we are
realigning our workforce because of other backlogs that we have
worked through so that we can reallocate the resources. So we
should not be adding additional personnel.
Oh, the mapping cost is about $30,000.
Chairwoman Velazquez. $30,000.
Ms. Carranza. Yes.
Chairwoman Velazquez. Okay. And I am asking all these
questions because we know that putting together the plan that
you lay out is going to cost money. And my concern now is that,
in trying to fix the fraud issue with a HUBZone program, that
we might create other problems with other programs, because we
are going to rob Peter to pay Paul, since the budget of the
agency for the last 8 years had been reduced by 40 percent.
So my question to you is, would you request a supplemental
appropriation to pay for all these measures?
Ms. Carranza. Congresswoman Velazquez, at this point we
have the resources in place and space in the contracts that we
are in--currently. If it required, then we would revisit and
come back to you. But, at this point, I am not in a position to
give a dollar amount or if we need additional funds. But we
would consider that.
Chairwoman Velazquez. It just brings memories back when we
all witnessed in our Nation the Katrina debacle, disaster. And
the Administrator came before us, and I kept asking him, "Do
you have the resources?" Eighteen months later, we saw that
people were still waiting for assistance.
So I hope that, months from now, you don't have to come
before our committee because some of the other programs are
having the same concerns and the same issues that we are
discussing today.
So, with that, I want to thank all of you for being here.
I ask unanimous consent that members would have 5 days to
submit a statement and supporting material for the record.
Without objection, so ordered.
This hearing is now adjourned. Thank you.
[Whereupon, at 12:06 p.m., the Committee was adjourned.]