When news broke in July of alleged widespread fraud involving the HUBZone Empowerment Contracting program—launched by the SBA in 1997 to encourage economic development in historically underutilized business zones—it hit a nerve in the small-business community.
According to a Government Accountability Office report dated July 17, 2008, 10 of the 17 firms the GAO investigated in the Washington, DC, metro area weren't eligible for HUBZone certification but had been awarded obligations from federal agencies amounting to more than $105 million since 2006. As part of its investigation, the GAO created four fictitious firms. Using fabricated leases and other documentation, agents skated around the HUBZone requirements—in some cases, using a Starbucks address or leasing mailboxes from retail postal service centers in HUBZone areas to gain certification. Within weeks, all four firms were HUBZone certified.
The GAO's six-month investigation uncovered a significant problem. The burning question: Who was to blame?
Bruce Causseaux, a senior level specialist with the GAO's Forensic Audit and Special Investigations Unit, describes the situation as a perfect storm. Three main factors worked together to encourage the fraud, he says: the lure of several billion dollars of federal contracting, an SBA control process that largely relied on inadequately verified self-certified information and a clear message that, even if caught, the punishment would not match the crime. "You cannot rely strictly on self-policing," he says. "And you certainly cannot rely on people just being honest—not when there are millions if not billions of dollars at stake."
At the SBA, Fay Ott, associate administrator for the Office of Government Contracting and Business Development, viewed the GAO report as a road map for the HUBZone program to operate more efficiently. But she wasn't ready to accept full responsibility on behalf of the SBA. "There's responsibility on both ends," she says. "I don't think it falls on any one place in particular."
No matter where the blame is placed, the true victims of the fraud were the qualified firms being cheated by others. In 2002, Darrell Green, 47, and Ray Douaire, 57, founded Trusted Solutions Group, which provides services to government agencies and commercial enterprises in industries such as IT, training and construction. Upon founding their now more than $6 million business in Washington, DC, they immediately applied for and received HUBZone certification; they aimed to create real jobs in underserved areas. So when Douaire heard the news about the ineligible firms, he was shocked and disappointed. Says Douaire, "It's unfortunate that they're taking advantage."
So how will the GAO's investigation impact the program? In the weeks following the report, the SBA had ordered an audit of all 14,000 HUBZone firms and was working on new application guidelines, updating the HUBZone map, improving internal controls and making policy changes, says Ott. It also planned to hold additional meetings with the GAO. "These reforms are well under way," says Ott. "We'll have a HUBZone program that is well-managed and much more effective and efficient in getting to the areas it was meant to get to."
Despite his experience, Douaire supports the HUBZone program. He says, "It certainly has helped a lot of people who work for us who wouldn't have been working otherwise."
Causseaux is still skeptical: "When I see one or more entities that show up on the excluded parties list as having been suspended or debarred," he says, "then I'll start to believe action is occurring."
—By Sara Wilson.
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