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
|Small Business Administration||1. 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.|
|Small Business Administration||2. 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.|
|Small Business Administration||3. 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.|
|Small Business Administration||4. 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.|
|Small Business Administration||5. 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.|
|Small Business Administration||6. 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.|