8(a) Program:

Fourteen Ineligible Firms Received $325 Million in Sole-Source and Set-Aside Contracts

GAO-10-425: Published: Mar 30, 2010. Publicly Released: Apr 29, 2010.

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The Small Business Administration (SBA) helps socially and economically disadvantaged small businesses gain access to federal contracting opportunities through its 8(a) program. To participate, firms must be at least 51 percent owned and controlled by an individual who meets SBA's criteria of socially and economically disadvantaged. The firm must also qualify as a small business. Once certified, 8(a) firms are eligible to receive sole-source and set-aside contracts for up to 9 years. GAO was asked to (1) determine whether ineligible firms are participating in the 8(a) program, (2) proactively test SBA's controls over the 8(a) application process, and (3) determine what vulnerabilities, if any, exist in SBA's fraud prevention system. To identify cases, GAO reviewed SBA data and complaints to GAO's fraud hotline. To perform its proactive testing, GAO created four bogus businesses and applied for 8(a) certification. GAO did not attempt to project the extent of fraud and abuse in the program.

GAO identified $325 million in set-aside and sole-source contracts given to firms not eligible for the 8(a) program. Most were obtained through fraudulent schemes. In the 14 cases GAO investigated, numerous instances were found where 8(a) firm presidents made false statements, such as underreporting income or assets, to either qualify for the program or retain certification. For example, one firm president who is not socially disadvantaged misrepresented her ethnicity to SBA. GAO also found cases where ineligible companies used certified firms to secure 8(a) work. For instance, a West Virginia company that graduated from the program in 2001 used a series of three certified companies as pass-throughs to continue obtaining set-aside and sole-source contracts. In some cases, SBA did not detect the false statements and misrepresentations made by certified firms. In others, SBA became aware of the firms' ineligibility but failed to take action. GAO's proactive testing found several strengths in SBA's 8(a) application process that helped prevent three bogus applicants from being certified for the program. Examples of the strengths included validation of data with third-party credit bureaus and the Excluded Parties List System. These controls and effective review appropriately raised questions about income and assets of GAO's bogus applicants that would have made them ineligible. However, GAO obtained 8(a) certification for one bogus firm using fabricated documentation and owner information. Certification of GAO's bogus firm shows vulnerabilities in the process such as the lack of any face to face contact that could allow ineligible individuals or pass through companies to enter the program. Although we were unable to determine whether all 14 cases were ineligible at application, these cases show substantial vulnerabilities in SBA's monitoring of eligibility for individuals and firms already in the program. The lack of a consistent enforcement strategy or any real consequences for fraud and abuse is a further weakness in SBA's fraud prevention program.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, the Small Business Administration (SBA) told us in April 2011 that the Office of Field Operations conducted an assessment of the workload of Business Opportunity Specialists (BOS) through its District Director Working Group. That group established the optimum number of firms to be assigned to each BOS, revised the position descriptions for each BOS to clarify expectations of the position, and established new performance standards for each BOS. As we recommended, SBA's Office of Business Development evaluated the feasibility of using third party data and implemented the use of a new independent verification tool. In addition, while SBA is still in the process of finalizing new standard operating procedures for the 8(a) program, guidelines for risk-based reviews and unannounced site visits, as we recommended, will be included. These activities will help minimize the potential for fraud and abuse in the 8(a) program.

    Recommendation: In order to minimize the potential for fraud and abuse in the 8(a) program, the Administrator of SBA should, as part of implementing our previous recommendation to assess the workload of business development specialists, evaluate the feasibility of using additional third-party data sources and unannounced site visits, based on random or risk-based criteria, to allow more independent verification of firm-reported data during both initial certification and subsequent annual reviews.

    Agency Affected: Small Business Administration

  2. Status: Closed - Implemented

    Comments: In December 2010, SBA began using fraud detection software tools and data-mining techniques to assist in obtaining in-depth information about 8(a) program participants. In June 2011, SBA conducted a series of financial and analytical training seminars on fraud detection to educate its business opportunity specialists.

    Recommendation: In order to minimize the potential for fraud and abuse in the 8(a) program, the Administrator of SBA should evaluate the use of fraud detection tools, such as the use of data-mining techniques (e.g., matching addresses of applicants and previous participants), and evaluate the use of financial and analytical training for business opportunity specialists.

    Agency Affected: Small Business Administration

  3. Status: Closed - Implemented

    Comments: On March 14, 2011, SBA issued regulations to revise and update eligibility requirements for participation in the 8(a) business development program. In relation to this recommendation, the regulations address the disadvantage factor, with respect to a participant's income and asset levels, by establishing specific thresholds on personal income and assets for determining program eligibility, both at the time of application and annual recertification review of 8(a) program participants.

    Recommendation: In order to minimize the potential for fraud and abuse in the 8(a) program, the Administrator of SBA should enact proposed regulation changes that would specify economic disadvantage with respect to participant's income and asset levels at the time of application and annual recertification.

    Agency Affected: Small Business Administration

  4. Status: Closed - Implemented

    Comments: For purposes of determining economic disadvantage for 8(a) program eligibility, regulations issued by the SBA in March 2011 specify that a spouse's financial condition must be considered when a spouse has a role in the business or has lent money to, provided credit support to, or guaranteed a loan of the business, both at the time of application and annual review.

    Recommendation: In order to minimize the potential for fraud and abuse in the 8(a) program, the Administrator of SBA should evaluate changing program regulations to require adjusted net worth or total asset calculations to include assets held by the spouses of 8(a) participants.

    Agency Affected: Small Business Administration

  5. Status: Closed - Implemented

    Comments: In March 2011, SBA issued regulations to revise and update eligibility requirements for participation in the 8(a) business development program. Related to this recommendation, the regulations now limit new individuals/firms from participating in the 8(a) program if an immediate family is or has been an 8(a) participant in the same line of work.

    Recommendation: In order to minimize the potential for fraud and abuse in the 8(a) program, the Administrator of SBA should enact proposed regulation changes that would limit new firms from participating in the 8(a) program if an immediate family member is, or has been, an 8(a) participant in the same line of work.

    Agency Affected: Small Business Administration

  6. Status: Closed - Implemented

    Comments: In response to our recommendation, in March 2011 the Small Business Administration (SBA) published new regulations addressing the 8(a) program. The changes to the regulations include clarification of the requirements for continuing eligibility and measures whereby SBA may terminate, suspend or debar 8(a) Business Development (BD) program participants. As of April 2011, SBA's Office of General Counsel had been delegated the functions of the Debarment and Suspension Official. According to SBA, the office established procedures for the Agency pertaining to the suspension and debarment process. In addition, in April 2012 SBA told us that training had been provided to staff in the Division of Program and Certification and Eligibility who review 8(a) applications, and to field business opportunity specialists (BOS) who perform continuing eligibility reviews. SBA officials stated that referrals come from District Offices at all levels of the review chain including District Directors, District Counsel, and individual BOSs for suspension actions. Also, according to SBA officials, by October 2012 the Office of Business Development had created a Business Forensic Analyst position to facilitate development and implementation of policies, processes, and procedures to mitigate fraud, waste, and abuse in the 8(a) program. These activities should help minimize the potential for fraud and abuse in the 8(a) program by helping ensure that SBA has a more consistent enforcement strategy regarding the suspension or debarment of contractors who knowingly misrepresent themselves to qualify for the 8(a) program.

    Recommendation: In order to minimize the potential for fraud and abuse in the 8(a) program, the Administrator of SBA should develop a more consistent enforcement strategy, to include the suspension or debarment of contractors who knowingly misrepresent themselves to qualify for the 8(a) program.

    Agency Affected: Small Business Administration

 

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