The Defense Department inspector general is urging DOD to require verification of service-disabled veteran-owned businesses after auditors determined that $342 million in contracts had been awarded to companies that appeared to be ineligible for the SDV program.

The director of DOD’s Office of Small Business Programs, Andre Gudger, disagrees with the IG recommendation.

By law, all agencies except the Department of Veterans Affairs are allowed to accept a company’s self-certification of SDV eligibility. But the IG declared, “Without a verification process, the SDVOSB program remains susceptible to fraud, waste, and abuse, and deserving SDVOSBs could miss opportunities that would have otherwise been afforded to them.”

Several members of Congress and the Government Accountability Office have recommended making verification of eligibility a governmentwide policy. In a 2009 report, GAO said many firms that self-certified as SDV-owned actually were not eligible or were fronts for non-veteran-owned businesses.

The IG found that 12 defense contracts, valued at about $11.5 million, were awarded to six contractors who had been denied SDV status by the VA’s Center for Veterans Enterprise. Seven contracts, valued at about $9.8 million, went to five companies whose eligibility could not be verified by VA. Eight contracts, worth $319 million, went to seven contractors who may have misrepresented their eligibility.

The largest of those contracts was an SDV set-aside worth up to $200 million awarded by the Naval Facilities Engineering Command Northwest. The IG said the company, identified only as Contractor C, listed six owners as equal partners, only one of whom was a service-disabled veteran. Investigators said that individual lived in Alaska, 2,000 miles away from where the contract was awarded. SDV program rules require the SDV business owner to own 51% of the company and manage its day-to-day activities.

DOD components awarded six sole-source contracts, worth $1.9 million, to companies without checking their eligibility in the Central Contractor Registration or Online Representations and Certifications databases.

“SDVOSB set-aside and sole-source contract awards to contractors who misstate their status will continue until the Director [of small business programs], establishes adequate policies and procedures to properly verify contractor status,” the IG concluded. “If the DOD [Office of Small Business Programs] does not establish adequate procedures, it will continue to convey the message that assisting service-disabled veterans is not a priority.”

Gudger, the head of the small business office, rejected the recommendation. “Many veterans have indicated that the VA’s verification system is harmful to them,” he wrote in response to the IG report. He said VA’s verification process was slow and difficult, causing many veterans to miss opportunities. Besides, he added, Congress clearly intended to establish one set of rules for VA and different rules for all other agencies.

Last year VA began verifying the status of all companies that self-certified in its Vendor Information Pages database. Thousands of companies were rejected when their eligibility could not be proved. That made them ineligible for VA contracts, but still eligible for SDV set-asides by other agencies.

The report is DODIG-2012-059, available at www.dodig.mil.