This is the accessible text file for GAO report number GAO-10-920T 
entitled 'Small Business Administration: Undercover Tests Show HUBZone 
Program Remains Vulnerable to Fraud and Abuse' which was released on 
July 28, 2010. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 


Before the Committee on Small Business, House of Representatives: 

United States Government Accountability Office: 

For Release on Delivery: 
Expected at 1:00 p.m. EDT:
Wednesday, July 28, 2010: 

Small Business Administration: 

Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud and 

Statement of Gregory Kutz, Managing Director: 
Forensic Audits and Special Investigations: 


Madam Chairwoman and Members of the Committee: 

Thank you for the opportunity to discuss the results of our 
investigation of the Small Business Administration's (SBA) 
Historically Underutilized Business Zone (HUBZone) program. In fiscal 
year 2009, federal agencies obligated nearly $3 billion in sole source 
or set-aside contracts to firms participating in the HUBZone program. 
Created in 1997, the program provides federal contracting assistance 
to small businesses located in HUBZones--economically distressed areas 
with low income levels or high unemployment rates. Qualified 
businesses in these areas are eligible to bid on federal prime 
contracts and subcontracts available exclusively to program 
participants, in addition to benefiting from other contracting 
preferences. The SBA must certify that a small business meets the 
following criteria to qualify for the program: the firm must be owned 
and controlled by one or more U.S. citizens; at least 35 percent of 
full-time employees must live in a HUBZone; and the principal office, 
where most qualifying employees work, must be in a HUBZone. According 
to the SBA's Dynamic Small Business Web site, as of July 2010, 9,300 
firms were participating in the program. 

Over the last 2 years, we have reported on fraud and abuse and other 
concerns with the HUBZone program.[Footnote 1] In July 2008, we 
testified that the SBA's lack of an effective fraud prevention program 
meant its application process could not provide reasonable assurance 
that only eligible firms were being certified to participate in the 
program. Using fictitious employee and owner information and 
fabricated documentation, we easily obtained HUBZone certification for 
four bogus firms. We also identified 10 firms from the Washington, 
D.C., metro area that participated in the program even though they did 
not meet eligibility criteria. In March 2009, we reported on 19 
additional HUBZone firms from Alabama, California, and Texas that were 
not eligible for the program. 

My statement today summarizes our most recent report, which we are 
releasing today, regarding the HUBZone program.[Footnote 2] Our report 
and my statement responds to your request that we (1) perform 
additional proactive testing of the SBA's HUBZone certification 
process and (2) determine what actions, if any, the SBA has taken 
against the 29 case study firms we identified in our prior work. In 
conducting our work, we proactively tested SBA's application process 
by applying for HUBZone certification for four bogus businesses with 
fictitious owners and employees. For all four bogus businesses, we 
used publicly available resources to fabricate documents. To determine 
what actions, if any, the SBA has taken against the 29 case study 
firms, we made inquiries with SBA officials. We also analyzed data 
from the Federal Procurement Data System-Next Generation. We did not 
attempt to project the extent of fraud and abuse in the program nor 
systematically assess HUBZone program controls. Our work was done in 
accordance with quality standards for investigations as set forth by 
the Council of the Inspectors General on Integrity and Efficiency. 

SBA's HUBZone Certification Process Remains Vulnerable to Fraud and 

The SBA continues to struggle with reducing fraud risks in its HUBZone 
certification process, although SBA has taken steps to bolster SBA's 
controls. In our previous investigations, we found that many of the 
firms in the 29 cases fraudulently used "virtual offices" and fake 
business locations as their principal offices to qualify for HUBZone 
status. Our testing revealed that the SBA still does not adequately 
authenticate self-reported information--especially principal office 
locations--to ensure program eligibility. Specifically, the agency 
certified three of our four bogus firms based on fraudulent 
information. We used fabricated explanations, fraudulent 
documentation, and borrowed addresses or principal offices, including 
the Alamo, a public storage facility in Florida, and a city hall in 
Texas. The SBA lost application materials for our fourth firm on 
multiple occasions, forcing us to abandon our application. The SBA's 
failure to verify principal office locations--even through a simple 
Internet search--leaves the program vulnerable to firms 
misrepresenting their eligibility, preventing program benefits from 
going to intended targets. 

As we stated in our March 2009 report, SBA began to take actions 
intended to strengthen the program's internal controls.[Footnote 3] 
However, we were still able to obtain certification for our bogus 
firms, and the certification process became considerably longer. The 
SBA took at least 7 months to process each of the three applications 
that it certified from our bogus companies. In our previous test, the 
SBA certified our firms in as little as 2 weeks, though this occurred 
with minimal requests for documentary evidence. SBA's increased 
processing times failed to prevent our bogus firms from becoming 

In response to our proactive testing, SBA officials stated that it was 
unreasonable to expect them to have identified our fictitious firms 
because of the bogus documentation that we included in our 
applications. For example, SBA officials stated that the submission of 
false affidavits would subject an applicant to prosecution. However, 
while the threat of prosecution is an important deterrent, it does not 
help to identify firms that attempt to commit fraud, as our testing 
shows. SBA officials also stated that competitors may identify 
fraudulent firms and likely protest if those firms were awarded a 
HUBZone contract. While competitors may identify some ineligible firms 
that were awarded contracts, SBA is responsible for ensuring that only 
eligible firms participate in the HUBZone program. 

We indicated that if the SBA had conducted site visits at the 
addresses of the firms represented in our applications, those 
applications would have been identified as fraudulent. SBA officials 
stated that because of resource constraints, they primarily conduct 
site visits on certified firms that receive large prime HUBZone 
contracts. However, we believe that such reviews are too late in the 
process. We also suggested that the SBA conduct Internet searches on 
the addresses of applicant firms to help validate principal office 
locations. Such searches would have minimal impact on resources. 

SBA Has Taken Some Actions on the 29 HUBZone Firms Previously 
Investigated by GAO: 

As of March 2010, the SBA has reviewed the status of all 29 firms we 
referred to it from our prior HUBZone investigations. Of the 29 firms, 
16 were decertified by the SBA, 8 voluntarily withdrew from the 
HUBZone program, and 5 were found by the agency to be in compliance 
with program requirements and remain certified. We did not attempt to 
verify SBA's work. Although SBA indicated that firms sometimes come in 
and out of compliance while in the program, we maintain that the five 
firms SBA determined to meet HUBZone program requirements were out of 
compliance at the time of our initial review. In addition, we found 
that five decertified firms continued to market themselves, through 
their Web sites, as HUBZone certified even after the SBA removed them 
from the HUBZone program. 

Since our March 2009 report, the 29 firms we identified have received 
more than $66 million in federal obligations for new contracts. Not 
all of these obligations are necessarily improper, and some do not 
relate to HUBZone contracts. For example, one firm continued to 
benefit from another SBA program even though it misrepresented its 
eligibility for the HUBZone program and was decertified by the SBA. 
This firm, a construction firm that was a part of our recent 
investigation into fraud and abuse in the SBA's 8(a) Business 
Development Program,[Footnote 4] also had been 8(a) certified while in 
the HUBZone program.[Footnote 5] During that investigation, we found 
that the firm misrepresented its status as a qualified 8(a) firm 
because it was being controlled by individuals who did not qualify for 
the program. Because SBA did not promptly suspend or debar the firm, 
this firm received nearly $600,000 in additional noncompetitive 8(a) 
contracts since our last report and nearly $10 million in additional 
contracts from the federal government. According to SBA officials, the 
agency has recently proposed debarment for this firm and, as a result, 
the firm is generally ineligible for additional federal government 
contracts at this time. 

Madam Chairwoman, this concludes my statement. I would be pleased to 
answer any questions that you or other members of the committee may 
have at this time. 

Contact and Staff Acknowledgments: 

For further information regarding this testimony, please contact Greg 
Kutz at (202) 512-6722 or In addition, contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this statement. Individuals who made key 
contributions to this testimony are Andy O'Connell, Assistant 
Director; Matthew Valenta, Assistant Director; Lerone Reid, Analyst-In-
Charge; Eric Eskew, Agent-In-Charge; Jason Kelly; Barbara Lewis; Jeff 
McDermott; and Timothy Walker. 

[End of section] 


[1] GAO, Small Business Administration: Additional Actions Are Needed 
to Certify and Monitor HUBZone Businesses and Assess Program Results, 
[hyperlink,] (Washington, 
D.C.: July 17, 2008). GAO, Small Business Administration: Additional 
Actions Are Needed to Certify and Monitor HUBZone Businesses and 
Assess Program Results, [hyperlink,] (Washington, D.C.: June 17, 
2008). GAO, HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink,] (Washington, D.C.: July 17, 
2008). GAO, HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink,] (Washington, D.C.: Mar. 25, 
2009). GAO, HUBZone Program: Fraud and Abuse Identified in Four 
Metropolitan Areas, [hyperlink,] (Washington, D.C.: Mar. 25, 

[2] GAO, Small Business Administration: Undercover Tests Show HUBZone 
Program Remains Vulnerable to Fraud and Abuse, [hyperlink,] (Washington, D.C.: June 25, 

[3] In the March 2009 report, we reported that SBA officials stated 
that they have begun a process of reengineering the HUBZone program. 
SBA officials stated that this process is intended to make 
improvements to the program that are necessary for making the program 
more effective while also minimizing fraud and abuse. 

[4] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325 Million 
in Sole-Source and Set-Aside Contracts, [hyperlink,] (Washington, D.C.: March 2010). 

[5] This firm is represented as GAO case 2 in Table 1 GAO-10-759. 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink,]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink,] 
and select "E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site, 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional 

To Report Fraud, Waste, and Abuse in Federal Programs: 


Web site: [hyperlink,]: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: