Service-Disabled Veteran-Owned Small Business Program:

Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts

GAO-10-108: Published: Oct 23, 2009. Publicly Released: Nov 19, 2009.

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The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2007, the Small Business Administration (SBA) reported $4 billion in governmentwide sole source and set aside SDVOSB contract awards. Given the amount of federal contract dollars being awarded to SDVOSB firms, GAO was asked to determine (1) whether cases of fraud and abuse exist within the SDVOSB program, and (2) whether the program has effective fraud-prevention controls in place. To identify whether cases exist, GAO reviewed SDVOSB contract awards and protests since 2003, and complaints sent to our fraud hotline. GAO defined a case as one or more affiliated firms who were awarded one or more SDVOSB contracts. To assess fraud-prevention controls, GAO reviewed laws and regulations and conducted interviews with SBA and Department of Veterans Affairs (VA) officials. GAO did not attempt to project the extent of fraud and abuse in the program.

GAO found that the SDVOSB program is vulnerable to fraud and abuse, which could result in legitimate service-disabled veterans' firms losing contracts to ineligible firms. The 10 case-study firms identified in this report received approximately $100 million from SDVOSB contracts through fraud or abuse of the program, or both. For example, contracts for Hurricane Katrina trailer maintenance were awarded to a firm whose owner was not a service-disabled veteran. GAO also found SDVOSB companies used as a pass-through for large, sometimes multinational corporations. In another case a full-time federal contract employee at MacDill Air Force Base set up a SDVOSB company that passed a $900,000 furniture contract on to a company where his wife worked, which passed the work to a furniture manufacturer that actually delivered and installed the furniture. GAO found that the government does not have effective fraud-prevention controls in place for the SDVOSB program. Specifically, SBA and agencies awarding SDVOSB contracts do not have processes in place to validate a firm's eligibility for the program prior to bid submission. SBA and contracting agencies also currently do not have a database of individuals that are service-disabled veterans, a key eligibility requirement for the program. According to VA, it is developing a database, called VetBiz, of validated SDVOSBs, but currently it is only used for contracting by the VA. SBA's bid-protest process is the only governmentwide control over the SDVOSB program. However, although ineligible firms have been identified through bid protests, firms found ineligible do not face real consequences, can be allowed to complete the contracts received, and are not suspended or debarred.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Consistent with the intent of our report, the U.S. Senate introduced a bill in May 2014 that would revise the Department of Veteran Affairs' (VA) definition of a small business concern owned and controlled by veterans to be the same as the Small Business Administration's (SBA) definition, making the eligibility requirements for participating in the Service-Disabled Veteran-Owned Small Business (SDVOSB) program consistent for both SBA and VA. In addition, the bill would require us to evaluate whether it is practicable for the SBA or VA to have governmentwide responsibility for verifying whether an entity purporting to be a small business concern owned and controlled by service-disabled veterans qualifies as an SDVOSB. Although this legislation had not become law as of September 3, 2014, Congress has taken action by introducing a bill related to exploring the possibility of expanding VA's SDVOSB eligibility verification process governmentwide. By introducing this bill, Congress has demonstrated interest in reducing SDVOSB program governmentwide vulnerabilities.

    Matter: Our work documents numerous cases where the current governmentwide self-certification system over the SDVOSB program has allowed ineligible firms to receive millions of dollars in federal contracts. However, through the Veterans Benefits, Health Care, and Information Technology Act of 2007, Congress required VA to maintain a database of SDVOSBs, determine whether SDVOSBs are indeed owned and controlled by service-disabled veterans, and required VA set-aside and sole-source awards be made only to firms that have had their eligibility verified. Currently, the only efforts to put fraud prevention controls in place are at VA through their VetBiz program, which applies only to VA contracts. Given that outside of VA there is no verification program in place for SDVOSB contracting, Congress may wish to consider providing VA with the authority and resources necessary to expand its SDVOSB eligibility verification process to all contractors seeking to bid on SDVOSB contracts governmentwide.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Small Business Administration (SBA) explored the feasibility of expanding the use of the VetBiz database governmentwide, as we recommended, but noted that legislative changes are needed. Specifically, in February 2011, the SBA, Department of Veterans Affairs (VA), Office of Federal Procurement Policy (OFPP), and other agencies that are part of an Interagency Task Force on Veterans Small Business Development met in an effort to coordinate Service-Disabled Veteran-Owned Small Business (SDVOSB) program improvements, including the different SDVOSB policies between SBA and VA. In March 2011, SBA and VA officials noted that legislative changes would be necessary in order for federal agencies to change the governmentwide SDVOSB program from a self-certification process into a VA VetBiz verification program. SBA reiterated this position in September 2014. Regarding the second part of our recommendation, in January 2011, SBA said that it had assembled a Suspension and Debarment Task Force to develop a strategic framework for suspension and debarment of firms that use fraud or other wrongful practices to gain improper access to programs intended to benefit small business. According to SBA, the task force is to work closely with the SBA Inspector General and program offices to identify, pursue, and expel "bad actors" from further government business. While SBA has not told us whether SBA specifically discussed the feasibility of requiring all contractors who knowingly misrepresent their status as an SDVOSB be debarred for a reasonable period of time, as we recommended, SBA has taken steps to address the intent of the recommendation.

    Recommendation: In an effort to minimize the potential for fraud and abuse in the Service-Disabled Veteran-Owned Small Business (SDVOSB) program and to assure that legitimate service-disabled veterans and their firms reap the benefits of this program, the Administrator of the Small Business Administration (SBA) and the Secretary of the Veterans Affairs (VA) should coordinate with the Office of Federal Procurement Policy (OFPP) to explore the feasibility of (1) expanding the use of the VA VetBiz "verified" database governmentwide for purposes of validating all SDVOSB eligible firms for contracting and, (2) requiring that all contractors who knowingly misrepresent their status as an SDVOSB be debarred for a reasonable period of time.

    Agency Affected: Small Business Administration

  2. Status: Closed - Implemented

    Comments: The Department of Veterans Affairs (VA) explored the feasibility of expanding the use of the VetBiz database governmentwide, as we recommended. In February 2011, the Small Business Administration (SBA), VA, the Office of Federal Procurement Policy (OFPP), and other agencies that are part of an Interagency Task Force on Veterans Small Business Development met in an effort to coordinate Service-Disabled Veteran-Owned Small Business (SDVOSB) program improvements, including the different SDVOSB policies between SBA and VA. In March 2011, SBA and VA officials noted that legislative changes would be necessary in order for federal agencies to change the governmentwide SDVOSB program from a self-certification process into a VA VetBiz verification program. In addition, in September 2014, VA officials told us that they had met with SBA staff to discuss differences between respective regulations and proposed changes in handling appeals. Regarding the second part of our recommendation, VA did not directly respond to our requests for information regarding the agency's consideration to require contractors who knowingly misrepresent their status as an SDVOSB be debarred. However, according to law, firms that misrepresent SDVOSB status are required to be debarred from contracting with VA for a reasonable period of time, as determined by VA. We reported in August 2012 that VA had not developed and implemented specific processes and criteria for its Debarment Committee on compliance with the requirement to debar, for a reasonable period, firms and related parties that misrepresent their SDVOSB status. According to VA, its Debarment Committee relies on procedures outlined in the Federal Acquisition Regulation and the VA Acquisition Regulations to determine the length of debarments.

    Recommendation: In an effort to minimize the potential for fraud and abuse in the Service-Disabled Veteran-Owned Small Business (SDVOSB) program and to assure that legitimate service-disabled veterans and their firms reap the benefits of this program, the Administrator of the Small Business Administration (SBA) and the Secretary of the Veterans Affairs (VA) should coordinate with the Office of Federal Procurement Policy (OFPP) to explore the feasibility of (1) expanding the use of the VA VetBiz "verified" database governmentwide for purposes of validating all SDVOSB eligible firms for contracting and, (2) requiring that all contractors who knowingly misrepresent their status as an SDVOSB be debarred for a reasonable period of time.

    Agency Affected: Department of Veterans Affairs

  3. Status: Closed - Implemented

    Comments: In response to our recommendation, according to the Small Business Administration (SBA), it has placed an emphasis on referring cases of fraudulent misrepresentation to the SBA Office of Inspector General (OIG). Specifically, in September 2014, SBA said it has provided training to the Office of Government Contracting, including employees working in the Service-Disabled Veteran-Owned Small Business (SDVOSB) program, on the procedures for referrals and guidance on identifying possible fraudulent conduct. In addition, SBA noted that since 2009, the Office of Government Contracting and SBA's Suspension and Debarment Official reviewed all protest decisions. SBA also noted that a website was developed to enhance supervision and enforcement actions. The website provides a list of the number of suspensions and debarments by year. According to the SBA website, the proposed debarments for procurement has increased between 2009 through 2013. By emphasizing the importance of referring fraudulent misrepresentation cases to the SBA OIG, SBA may help deter fraud in the SDVOSB program.

    Recommendation: The Administrator of SBA should refer all SDVOSB firms that submit misrepresentations of their status to SBA's Office of Inspector General for review and further investigation.

    Agency Affected: Small Business Administration

 

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