Fake firms rip off SBA set-aside program for $100M

10 fake service-disabled, veteran-owned small businesses received roughly $100 million in Small Business Administration set-aside contracts

• By Matthew Weigelt
• Nov 20, 2009

At least 10 fake service-disabled veteran-owned small businesses (SDVOSBs) swindled roughly $100 million from the Small Business Administration's set-aside contracts by defrauding and abusing the program, an official of the Government Accountability Office has told the House Small Business Committee.

Overall, SDVOSBs received $6.5 billion in federal contracts in fiscal 2008, up from $4 billion in fiscal 2007, according to a GAO report also released Nov. 19.

In an investigation, GAO found a company subcontracting 100 percent of a contract’s work to a large company in another country. It also found another company defrauding the government because its majority owner was not a service-disabled veteran.

One major problem is that SBA and other contracting departments currently don’t have a database of individuals that are service-disabled veterans, a key eligibility requirement for the program, said Gregory Kutz, managing director for forensic audits and special investigations at GAO.

They don’t require documentation to confirm a company’s eligibility for the program or an application process associated with the SDVOSB program, unlike other small business contracting programs. The only process in place to detect fraud involves a formal bid protest for an awarded contract.

“This lack of controls substantially increases the risk for fraud and abuse in the SDVOSB program,” Kutz testified.

However, the possibility of being caught and punished can help to persuade perpetrators from swindling the government, Kutz said. and , the government has no consequences for companies that abuse the system.

Rep. Nydia Velázquez (D-N.Y.), the committee' chairwoman, said, "This sort of abuse is more than a simple injustice. It is criminal, and it needs to be addressed immediately, not weeks or months down the road,”

SBA Administrator Karen Mills told Velazquez that her agency is working with the Veterans Affairs Department to set up a process to verify the participants in the SDVOSB program. SBA will check whether the company is an actual small business, and the VA will check on whether the firm’s owner is actually a service-disabled veteran, she said.

“We are committed to making sure we hold everyone accountable,” Mills said, adding that SBA will debar companies that do not comply with the program’s rules.

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