Recipe For HUBZone Fraud: Mailbox Plus Computer Congressional investigators found 10 ineligible HUBZone companies had been awarded more than $100 million in contracts. They also signed up four bogus companies for the program, with few questions asked. “Anybody with a computer and a mailbox that’s willing to lie to the SBA can become a HUBZone company,” said Gregory Kutz, head of forensic audits and special investigations for the Government Accountability Office. GAO said SBA exercises little oversight over companies applying for HUBZone certification, leaving the program open to fraud. “It relies too heavily on self-reported information that is not verified, without site visits, too much on self-policing,” said GAO’s William Shear. GAO presented its findings at a July 17 hearing before the House Small Business Committee. “It appears that SBA has virtually no control over who is participating in this program,” said committee Chairwoman Nydia Velazquez, D-NY. Acting SBA Administrator Jovita Carranza said she was “shocked” by the revelations of “serious mismanagement,” and pledged that corrective actions are already underway. But Velazquez said she has heard similar assurances for two years before the latest GAO findings. GAO created four phony companies, with fictitious officers, and submitted HUBZone applications. Two of the companies listed post-office boxes as their addresses; another listed a Starbucks. All were certified to participate in the program within a few weeks. “The entire application was online,” Kutz testified. “We never had to speak to any SBA officials.” GAO spot-checked companies in the Washington, DC, area that had been awarded HUBZone set-aside contracts. Ten of the 17 targeted firms were ineligible. In several cases, investigators found no sign that anybody worked in the offices listed as the companies’ addresses. Two of the firms actually had principal offices in the affluent suburb of McLean, VA, while two others were headquartered in suburban Maryland communities that are not HUBZones. The 10 companies were awarded $105 million in contracts in 2006-2007. When questioned, officers of the companies typically said, “‘This is how the game is played,’” according to Bruce Casseaux, the lead investigator. “They didn’t seem to have any fear of consequences.” The program “clearly is very susceptible to fraud,” Kutz said. “There is no doubt about that.” Ron Newlan, chairman of the HUBZone Contractors National Council, said no one should be surprised to find some “cheaters” in the program. “I would hope we’re going to find ‘em, we’re going to stomp on ‘em, and we’re going to move on, and I think that’s what SBA is going to do,” he told Set-Aside Alert. “There is waste, fraud and abuse in every government program, not just small business contracting programs.” SBA’s Carranza said the agency has taken steps to tighten controls over applications for HUBZone certification. She said she has ordered site visits to approximately 1,000 Washington-area companies that have received HUBZone contracts, to verify their eligibility. She said the agency normally visits the offices of only about 5% of certified companies every three years. She said the ineligible companies identified by GAO will be investigated for possible suspension or debarment. Newlan said SBA’s HUBZone program office has been staffed with no more than six or eight people to monitor 14,000 certified companies. Carranza said staffing will be increased, and the program manager has been replaced. “The biggest problems occur through the front door,” GAO’s Shear said, when SBA does not verify information on the applications. As a result, GAO warned that hundreds or thousands of certified companies may be ineligible. Kutz suggested SBA might offer amnesty to companies that voluntarily give up their certification. The House has approved legislation that would tighten controls over the program, including requiring site visits to all certified companies, but the Bush administration opposes it. The Senate has not considered it. The HUBZone program was designed to create jobs in low-income areas. HUBZone companies are required to have their principal office in a HUBZone, and to have at least 35% of their employees living in a HUBZone. SBA has done no research on whether the program is achieving its goal. A study prepared for SBA’s Office of Advocacy concluded, “The [economic] impact in two-thirds of all HUBZones is nil.” (SAA, 5/30) Although Congress set a goal of awarding 3% of prime contract dollars to HUBZone companies, the government has never come close to that.