Widespread Abuse Found in SBA's HUBZone Program

Anthony Wright founded Platinum One Contracting, a Washington, D.C., general contracting and roofing firm in 1999. Not long after, the Small Business Administration certified that the company could participate in the SBA's innovative HUBZone program, designed to funnel government contracts to small businesses located in economically distressed parts of the country.

Under the program, Platinum One received a $12 million contract from the U.S. Air Force for general construction work. But the company never met any of the program’s requirements, nor did the SBA ever bother to check up on the firm. The company is 1 of 10 that have been spotlighted in a new Government Accountability Office (GAO) investigation, which officials are characterizing as "widespread abuse" of the SBA program. According to a copy of the report, the companies collected $105 million from various government agencies based on false claims about their status.

The findings are yet another example of the SBA’s rampant "Cookie Jar Capitalism," a term that has come to represent the agency’s seemingly inability to prevent fraud that cheats small businesses out of hundreds of millions of dollars annually.

The SBA’s bumbling and incompetence extends from the fiasco involving Hurricane Katrina relief  to a $76 million scam involving one of the SBA’s politically connected lenders in its flagship 7(a) loan program. On top of that, the SBA has been unable or unwilling to weed out an untold number of Fortune 500 corporations that rake in hundreds of millions of dollars a year in contracts earmarked for small firms. All of this, of course, has gone on in the face of dozens of government investigations pointing out weaknesses in the SBA’s oversight and accountability.

In this case, 13,000 firms nationwide are HUBZone-certified, yet investigators found that more than 4,600 have never been monitored by the SBA. The GAO probe focused on 17 of those firms in the Washington, D.C., area. Of those, 6 were found to have set up "virtual offices" in HUBZone areas to qualify for contracts, and 4 others did not have the requisite number of employees living in the zone to qualify for the program.

"We found that all 10 of these case-study firms continued to represent themselves 'as eligible to participate in the HUBZone program,'" the report states. "Because the 10 case-study examples clearly are not eligible, we consider each firm’s continued representation indicative of fraud."

One company, Quantum Dynamics, used its certification to win a $40 million U.S. Army contract. But its HUBZone "headquarters" was found to be nothing more than a small room above a dentist’s office, which contained a lone computer and a filing cabinet and was too small to accommodate more than two people. The real company headquarters is located in a posh office park in McLean, Va., a wealthy Washington, D.C., suburb.

To test the SBA’s oversight and monitoring capability, the GAO set up four fictitious companies and applied for HUBZone authorization. The SBA certified all four firms, even though one of them gave a local Starbucks coffee shop as the address of its principal office. "If SBA had performed a simple Internet search on the address, it would have been alerted to this fact," the report states. In fact, no one at the SBA bothered.

Two of the other GAO applications used leased mailboxes at retail postal centers as their principal office addresses. In one instance, the SBA did ask for documentation, but investigators said they simply forged the papers using commonly available office equipment and supplies. "Using fictitious employee information and bogus documentation, we easily obtained HUBZone certification," according to Gregory D. Kutz, managing director of the GAO’s Forensic Audits and Special Investigations unit. Kutz is scheduled to present the report Thursday, July 17, before the House Small Business Committee.

While Kutz notes that the investigation was not intended to identify all fraudulent activity in the HUBZone program, it showed "substantial vulnerabilities" in the SBA’s application and monitoring process, "clearly demonstrating that the HUBZone program is vulnerable to fraud."

Indeed, committee staffers believe the firms uncovered by the investigation represent the tip of the iceberg in a program that is likely riddled with fraud. "The program is meant to help poor communities, but it’s very easy for fraudulent firms to cheat their way in and stay in the program," a staffer said.

Like many of the SBA’s mismanaged programs, the report’s findings come as no surprise to lawmakers. House Small Business Committee Chairman Nydia Velazquez, D-N.Y., has raised concerns about the program in the past. Last year the committee sponsored legislation that included a provision requiring site visits. But the Bush administration effectively blocked its passage. Afterward, Velazquez asked the GAO to investigate the program.

In response to the report, the SBA said it generally agreed with GAO's findings and would suspend any company that falsely represented its HUBZone eligibility. The agency said it would also adopt new guidelines for handling paperwork and conducting on-site visits and would hire more staff to help conduct checks.

As for Platinum One contracting, the company’s principal HUBZone office turned out to be half a residential duplex. Investigators were unable to find any employees there during normal business hours. The company’s real main office is outside the zone. The firm has yet to remove its claim to be "HUBZone certified" from its Web site. The GAO said it is referring the 10 firms it uncovered to the SBA for further investigation. They could face criminal penalties, the report noted.

"The GAO found that it is incredibly easy to game the system, even if your company is headquartered in McLean or Beverly Hills," according to the report. "You can access billions of dollars in preferential federal HUBZone contracts. A lot of these firms did just that."

In other words, the cookie jar is still wide open.