Auditors Uncover Fraud in 8(a) Contracting Fourteen companies in the mid-Atlantic region received $325 million in 8(a) contracts through fraud and abuse, according to an investigation by the Government Accountability Office. The report is the third in GAO’s audits of small business contracting programs. Earlier investigations found much wider evidence of fraud in the HUBZone and service-disabled veteran-owned programs. GAO said the findings “show that weaknesses exist in SBA’s controls for preventing, detecting, monitoring, and investigating fraud and abuse in the 8(a) program.” However, when GAO tried to certify four bogus companies as 8(a)’s, SBA rejected three of the four. The investigators found company executives misrepresented their net worth, served as pass-throughs for non-8(a) firms or used minority executives as fronts for white owners. Among examples cited in the report: •Auditors said one business owner who claimed to be economically disadvantaged owned a $2.5 million house in Miami, a $450,000 yacht and a $200,000 Lamborghini. •A New Jersey construction company’s president had a net worth at least triple the $250,000 limit for business owners entering the 8(a) program. The firm received $11.2 million in 8(a) contracts. After GAO began asking questions, the company withdrew from the program. •A New Jersey landscaping and janitorial firm was found to be an extension of another company that had graduated from the program. The two companies were owned by the same father-son team and shared offices, employees and equipment. “We determined that the current 8(a) firm is operating as the graduated 8(a) firm with little more than a name change,” the auditors said. The fraudulent 8(a) company received $13.8 million in 8(a) contracts. The company declined to provide information to the auditors, grounds for termination from the program. It has not been terminated. •A Hyattsville, MD, construction company was a pass-through for a graduated 8(a) company. GAO said the company is controlled by two white men, with an African American as the nominal president. The company has received $48.3 million in 8(a) contracts. The 8(a) company was also HUBZone certified, but it was expelled from the HUBZone program after an earlier GAO investigation found its office was not in a HUBZone. Auditors said they found evidence that the same owners controlled a firm that was listed as woman-owned. •A Fort Dix, NJ, construction firm was found to be a front for a large company. The 8(a) firm subcontracted all its work on $2.2 million in contracts, in violation of program rules. •A graduated 8(a) firm in Weirton, WV, controlled three companies currently in the 8(a) program. All four companies shared office space and workers. GAO said the owners appeared to be two white men who had never claimed to be disadvantaged. They were paid more than twice as much as the black presidents of the three 8(a) companies. The firms had received $70.8 million in 8(a) construction contracts. •After the president of an 8(a) company died, his widow continued to submit documents in his name for SBA’s annual reviews. It took two years before the agency caught on and moved to terminate the company from the program. In several instances the auditors alerted SBA that firms should be terminated, but SBA took no action. One company continued receiving 8(a) contracts for 21 months after SBA determined that it was ineligible. “By failing to hold firms accountable, SBA has sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the 8(a) program,” GAO said. Using one of its favorite investigative tools, GAO created four fictitious companies and tried to have them certified as 8(a)’s. Three of the companies’ histories were deliberately designed so they did not meet the criteria for certification. SBA rejected all of them. The fourth company’s application contained no obvious red flags, but SBA failed to verify many of the false claims regarding ownership and business history. “If SBA had verified any of the information in the documents that we submitted for this waiver, it would have discovered that none of it was true,” GAO said. SBA certified the company after five months of correspondence and phone conversations. The results are in sharp contrast to GAO’s 2008 investigation of the HUBZone program. Auditors were able to gain certification for four phony companies with few, if any, questions asked. (SAA, 7/25/08) GAO made a number of recommendations for tightening controls. SBA agreed with most of them. SBA’s associate administrator for government contracting and business development, Joseph Jordan, said new controls on net worth and income will be included in a revision of 8(a) rules that is now awaiting final action.