House Hearing, 111TH Congress - Full Committee Hearing On Oversight of The Small Business Administration and Its Programs

FULL COMMITTEE HEARING ON
OVERSIGHT OF THE SMALL BUSINESS

ADMINISTRATION AND ITS PROGRAMS
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS

UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
HEARING HELD
JULY 28, 2010
Small Business Committee Document Number 111-076

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HOUSE COMMITTEE ON SMALL BUSINESS

ZQUEZ, New York, Chairwoman
NYDIA M. VELA
DENNIS MOORE, Kansas
HEATH SHULER, North Carolina
KATHY DAHLKEMPER, Pennsylvania
KURT SCHRADER, Oregon
ANN KIRKPATRICK, Arizona
GLENN NYE, Virginia
MARK CRITZ, Pennsylvania
MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
DAN LIPINSKI, Illinois
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
BRAD ELLSWORTH, Indiana
JOE SESTAK, Pennsylvania
BOBBY BRIGHT, Alabama
DEBORAH HALVORSON, Illinois
SAM GRAVES, Missouri, Ranking Member
ROSCOE G. BARTLETT, Maryland
W. TODD AKIN, Missouri
STEVE KING, Iowa
LYNN A. WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
BLAINE LUETKEMEYER, Missouri
AARON SCHOCK, Illinois
GLENN THOMPSON, Pennsylvania
MIKE COFFMAN, Colorado
MICHAEL DAY, Majority Staff Director
ADAM MINEHARDT, Deputy Staff Director
TIM SLATTERY, Chief Counsel
KAREN HAAS, Minority Staff Director
(II)
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STANDING SUBCOMMITTEES
Subcommittee on Contracting and Technology

GLENN NYE, Virginia, Chairman
KURT SCHRADER, Oregon
AARON SCHOCK, Illinois, Ranking

ROSCOE BARTLETT, Maryland
MARY FALLIN, Oklahoma
Subcommittee on Finance and Tax

KURT SCHRADER, Oregon, Chairman
DENNIS MOORE, Kansas
GLENN NYE, Virginia
VERN BUCHANAN, Florida, Ranking

STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
Subcommittee on Investigations and Oversight

JASON ALTMIRE, Pennsylvania, Chairman
HEATH SHULER, North Carolina
MARY FALLIN, Oklahoma, Ranking

LOUIE GOHMERT, Texas
(III)
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Subcommittee on Regulations and Healthcare

KATHY DAHLKEMPER, Pennsylvania, Chairwoman
LYNN WESTMORELAND, Georgia, Ranking
STEVE KING, Iowa
VERN BUCHANAN, Florida
DAN LIPINSKI, Illinois

JASON ALTMIRE, Pennsylvania
Subcommittee on Rural Development, Entrepreneurship and Trade

HEATH SHULER, North Carolina, Chairman
KATHY DAHLKEMPER, Pennsylvania
BLAINE LUETKEMEYER, Missouri, Ranking

STEVE KING, Iowa
AARON SCHOCK, Illinois
(IV)
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CONTENTS
OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M. .......................................................................................

Graves, Hon. Sam ....................................................................................................
1
2
WITNESSES
Mills, Hon. Karen, Administrator, U.S. Small Business Administration ...........
Kutz, Managing Director, Forensics Audits & Special Investigations, U.S.
Government Accountability Office ......................................................................
3
4
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M. .......................................................................................

Graves, Hon. Sam ....................................................................................................
Mills, Hon. Karen, Administrator, U.S. Small Business Administration ...........
Kutz, Managing Director, Forensics Audits & Special Investigations, U.S.
Government Accountability Office ......................................................................
26
28
30
32
Statements for the Record:
Clarke, Hon. Yvette .................................................................................................

GAO Report: Undercover Tests Show HUBZone Program Remains Vulnerable
to Fraud and Abuse .............................................................................................
45
47
(V)
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FULL COMMITTEE HEARING ON

OVERSIGHT OF THE SMALL BUSINESS
ADMINISTRATION AND ITS PROGRAMS
Wednesday, July 28, 2010
U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room 2360
Rayburn House Office Building, Hon. Nydia Velazquez [chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Moore, Dahlkemper,
Schrader, Nye, Critz, Bean, Altmire, Bright, Graves, Luetkemeyer.
Chairwoman VELA ZQUEZ. Good afternoon. This hearing is now
called to order. House Resolution 40, which was passed at the beginning of this Congress, amended Clause 2(n) of House Rule XI
by requiring that committees undertake intensive and regular examination of executive branch activities. Such actions are necessary to not only safeguard taxpayer dollars, but to also improve
the operations of federal agencies.
This Committee has taken this role very seriously. We have exceeded the quarterly requirement and held ten hearings on the
Small Business Administration and its programs. This has included four GAO investigations, all of which were requested by this
Committee.
With 3,500 employees, 84 district and regional offices, and a
broad range of programs, congressional oversight is essential to the
operation of the SBA. This ensures that resources are directed
more efficiently and effectively to small businesses.
We have examined every area of the agency, including its access
to capital, entrepreneurial development, and contracting initiatives.
The Committee has convened hearings on the agencys lending programs and how they are meeting the needs of small firms in todays economy. In addition, we worked with the GAO to oversee the
disaster program so that businesses are better able to secure the
funds they need to rebuild after a catastrophe.
A main focus of the Committees oversight work has been the
agencys procurement programs. With large businesses receiving
small business contracts and fraud regularly being uncovered, it is
critical that the Committee examine these programs. We will continue our investigations until the agency fully resolves these issues.
Finally, the Committee has held hearings about the agencys entrepreneurial development and innovation programs. This has included testimony from a wide range of experts that allowed us to
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2
consider how the agencys resources can be improved without unnecessarily increasing taxpayer expense.
Todays hearing continues the Committees strong commitment to
thorough oversight. Doing so provides a basis for not only taxpayer
savings, but also the long-term modernization of the agency. This
is critical because small businesses are counting on the SBA, its
staff, and its programs more than at any other time in the past
decade.
The agency has risen to the task before and I know with all
of the resources it has at its disposalthat it will again. And I
would like to take this opportunity to applaud your efforts to hold
the free fall of small business lending. By doing so, we will allow
entrepreneurs to do what they do best, create the ideas and the
jobs that our economy needs to move forward.
I want to take also this opportunity to thank the witnesses for
your presence here this afternoon. And I now recognize Ranking
Member Graves for his opening statement.
Mr. GRAVES. Thank you, Madam Chair, and thank you for holding this important hearing today regarding the oversight of the
Small Business Administration and its programs and I look forward to hearing from the Administrator and the GAO on some very
important issues concerning the management of the agency and
particularly its inability to root out fraud and abuse in the government contract programs.
Since Ive been on this Committee, the challenges facing the
agency have never been resolved, nor do they seem to change.
When I first joined the Committee, the SBAs contracting databases
were riddled with inaccuracies and today their same contracting
databases remain full of errors concerning the eligibility of firms
for the agencys government contracting programs. Even before I
was elected to Congress, there were problems with the loan management accounting system and here it is a decade later and those
problems still exist.
Five years ago, there was an obvious lack of coordination in responding to disasters. And today, there appears to be an absence
of coordination between SBA and BP concerning the compensation
to victims of the oil spill in the Gulf. Quite frankly, the litany of
problems facing the SBA does not involve rocket science.
The SBA does not seem to take an aggressive approach to fixing
the problems identified by Congress, by the GAO, and the Inspector
General. Instead, it spends scarce resources studying these problems. For example, the agency issued a contract that examined,
among other things, what value-added benefits the agency will obtain from moving to a new loan management accounting system.
The SBA doesnt need any more studies. It needs action. And if it
is incapable of taking necessary corrective action, then it might be
time to examine whether a complete overhaul of the SBA is needed
to separate its regulatory functions from its mission to promote
small businesses.
Congress cannot tolerate and the taxpayer can ill afford the status quo at the SBA.
Again, I want to thank you, Madam Chair, for holding this important hearing and I look forward to the recommendations from
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the witnesses of actions that the agency is going to take to move
in the right direction. I appreciate it.
Chairwoman VELA ZQUEZ. And it is my pleasure to welcome the
Honorable Karen Mills who was sworn in April 6, 2009 as the
twenty-third Administrator of the U.S. Small Business Administration. The SBA helps small business owners and entrepreneurs secure financing, technical assistance, training, and fill our contracts.
Welcome.
STATEMENT OF THE HONORABLE KAREN MILLS,
ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION
Ms. MILLS. Thank you very much Chairwoman Velazquez, Ranking Member Graves, Members of the Committee. Its an honor to
be with you again. Thank you for working closely with us to improve oversight and reduce risk, while removing fraud, waste, and
abuse.
The SBA has a three-pronged risk-management framework for
our contracting and business development programs: upfront certification, robust monitoring, and pursuing and removing ineligible
firms.
HUBZone is a great example.
First, we have reengineered our certification process, requiring
more stringent documentation. We now require a statement under
penalty of perjury that both applicants and renewing firms are eligible.
Second, we dramatically increased monitoring: from less than
100 site visits in 2008, to over 800 in 2009, to more than 1,000 slated for this year.
Third, were removing ineligible firms. For example, we investigated the 29 firms the GAO identified. After reviewing the facts,
16 were decertified, 8 voluntarily decertified, and 5, in fact, remained eligible for HUBZone.
Were also pursuing HUBZone fraud cases with the Department
of Justice and the Inspector General, and we continue to suspend
and debar firms suspected of fraud. In fact, just yesterday we suspended four more firms and two individuals.
An environment of integrity across all of our contracting programs is crucial.
The President included more funds in SBAs proposed budget exactly for this purpose. He also created an Interagency Task Force,
led by OMB, SBA and Commerce. Well soon provide formal recommendations, including some that will help equip our agency
partners with tools they need to help in the shared mission of reducing fraud, waste and abuse.At the same time, were committed
to working more closely with Congress to make sure small businesses can continue to grow and create the jobs we need now.
Two examples: This Administration supports parity, or equal
treatment, through small business contracting and business development programs: 8(a), HUBZone, service-disabled veterans, and
women-owned. But a recent court decision interpreted the law to
give a preference to HUBZone. Without clarity on this issue, billions of dollars could be redirected away from programs like 8(a),
which help thousands of minority-owned small businesses.
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Already, we fear that the current confusion is causing a chilling
effect in small business contracting.
We support bipartisan legislation co-sponsored by 12 Members of
this Committee to provide a fix for this problem at this crucial
time.
Second, theres still a credit gap. Too many good small businesses
still cant find access to capital. The increased guarantee and reduced fees from the Recovery Act have put more than $30 billion
in the hands of small businesses at a cost of only about $680 million. Taxpayers got a big bang for the buck, but we ran out of funds
two months ago. As a result, SBA lending has plummeted down 60
percent.
Yesterday, I was at a service-disabled-veteran and minorityowned small business in Jacksonville. Andy Harold got a Recovery
Act loan to support a contract for electronics work on a simulator
that trains our troops whose vehicles get flipped over on the battlefield. He hired 10 people because of that loan.
Now is not the time to pull back. We need to continue helping
firms like Andys that create jobs and so much more.Overall, we
will continue to be vigilant in reducing fraud, waste, and abuse in
all of our programs. To do that, we are committed to transparency
and a strong, ongoing partnership with GAO, our IG, and this
Committee.
I welcome any questions and comments about our efforts in any
of the areas Ive mentioned today. Thank you.
[The statement of Ms. Mills is included in the appendix.]
Chairwoman VELA ZQUEZ. Thank you. Its now my pleasure to
welcome back Mr. Gregory Kutz. Hes the Managing Director of Forensic Audits and Special Investigations at GAO. FSAI Unit investigates waste, fraud, and abuse related to government programs
and taxpayers dollars. FSAI has investigated abuses of Hurricane
Katrina relief dollars, border security and overtime and minimum
wage complaints, among other topics.
Welcome.
STATEMENT OF GREGORY KUTZ, MANAGING DIRECTOR,
FORENSICS AUDITS AND SPECIAL INVESTIGATIONS, U.S.
GENERAL ACCOUNTABILITY OFFICE
Mr. KUTZ. Madam Chairwoman and Members of the Committee,

thank you for the opportunity to discuss theHUBZone program. Todays testimony highlights the results of our most recent investigation.
My testimony has two parts. First, I will discuss the results of
our undercover testing, and second, I will discuss the actions SBA
has taken against the 29 firms identified in our past investigations.
First, the HUBZone program remains vulnerable to fraud and
abuse. Specifically, SBAs validation controls failed as three of our
four bogus firms were certified. As you know, to qualify for this
program, a firms principal office must be located in a HUBZone.
Our past investigations show that fraud and abuse related to the
principal office were a significant problem.
The monitor shows a picture of the address of our first bogus
company, Crocket and Associates. You may recognize the site of our
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principal office. This is the Alamo in San Antonio. Madam Chairwoman, we thought that SBA would catch this one. In fact, at your
hearing in June of 2008 on HUBZone, SBA represented that they
were going to be using Internet searches to validate the principal
office.
The next picture on the monitor shows what a Google search
using the address from our bogus company shows. These links lead
you to the next picture on the monitor which as you can see again
is the Alamo. It took us seven months and the submission of numerous counterfeit documents to be certified for this bogus company. However, these pictures clearly show that a one or two
minute Internet search would have at least raised suspicions about
the validity of this application.
For our second application, we used the address of a rental storage unit in Florida as our principal office. The certification of this
company took about 14 months.
For our third application, we used a city hall in Texas as our
principal office. The certification of this firm took seven months.
We decided to abandon our fourth application, but only after SBA
lost the documentation that we submitted several times.
To go to my second point, SBA has taken action on some of the
29 firms identified in our first two investigations. As the Administrator said, 16 were decertified, 8 voluntarily withdrew from the
program, and 5 were determined to be in compliance with the program. For those five, we continue to believe at the time we looked
at them that they were not in compliance.
Since our March 2009 report, 17 of these firms have received $66
million of new government contracts. Of the 29 companies before
yesterday, and theres been more suspensions, only 1 was currently
suspended and proposed for debarment, which brings me to the importance again of the consequences for fraud and abuse. And Im
going to use Case Study 2 from our current report to make that
point.
In my June 2008 testimony, we determined that this construction firm fraudulently received $4 million of HUBZone contracts.
Madam Chairwoman, this firm also fraudulently received $48 million of 8(a) set-aside contracts. Because this firm was not suspended or debarred in 2008, they received $10 million of new stimulus contracts. We understand that in March of this year, this firm
was suspended and proposed for debarment.
In addition, the SBA IG has taken some of the 29 cases to U.S.
Attorneys. We understand that in certain instances, U.S. Attorneys
are declining these cases because they believe there is no loss to
the government. We believe when a firm fraudulently receives one
of these contracts that the entire amount of that contract is fraud
and the victims are not only the taxpayers, but the legitimate
HUBZone firms.
In conclusion, our work continues to show that SBA is not very
good at fraud prevention and enforcement. We understand its very
difficult to be an advocate for small business and at the same time
to be the enforcer. However, to be an effective advocate you need
to have an effective fraud prevention system and make examples
of the bad actors.
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I believe that fraud and abuse in small business programs such
as HUBZone, 8(a) and service-disabled-veteran contracting is widespread. I encourage this Committee to continue making oversight
of program integrity a priority.
Madam Chairman, that ends my statement and I look forward
to your questions.
[The statement of Mr. Kutz is included in the appendix.]
Chairwoman VELA ZQUEZ. Thank you. Mr. Kutz, Crocket and Associates at the Alamo; what are you going to try next, Franklin and
Sons at Independence Hall?
Could you please outline for the Committee what type of sophisticated method GAO employed to bypass all of the SBAs new security controls?
Mr. KUTZ. As we do in all of our testing, we use publicly-available hardware, software, and materials. In this particular case, we
set up websites for these companies. We had computers, email, and
we stole the address, as you see, effectively. We used addresses of
companies or the Alamo in the one case to really test this. So I
would say it was not a highly-sophisticated operation, basic software and computers, emails, and back-up phone numbers.
Chairwoman VELA ZQUEZ. Administrator Mills, SBA has come before this Committee several times in the past years and said that
there is either no problem or its been fixed. Let me take a minute
to read to you some of the SBA responses over the years.
On March 25, 2009, Acting Administrator Darrel Hairston testified that SBA has undertaken aggressive procedures. They are undergoing right now business process reengineering where they are
looking at all of the elements of the program and theyre establishing the necessary corrections.
Administrator Mills, on July 29, 2009, you testified that we
have tightened it up. We require more documentation already, but
we are also going to do a business process reengineering of it. We
did the extra 600 visits.
Administrator Mills, on November 18, 2009, testified, We actually have changed our certification process. We now ask for extensive documentation and are working through how to make sure we
get the right documentation up front.
And finally, Administrator Mills, on April 20, 2010, were working to ensure that only legitimate, eligible firms are benefiting from
the HUBZone program.
So as you can see, there is a web of double talk here. SBA comes
before the Committee and says that theyre doing one thing, but
GAO is finding that youre doing another. So what are you going
to do differently this time to make sure that we are not having the
same conversation three months from now?
Ms. MILLS. Well, thank you, Madam Chair, for raising this issue
because these are shared goals. We agree with the GAO and with
this Committee that its very difficult to have integrity in the program when firms that are ineligible are getting into it.
So we perceive this as a process of continuous improvement. This
has been a program that, as you point out, has had many of these
issues over time. As I described, we have developed a threepronged approach. The four firms that the GAO just described real-
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ly fall into the first category which is the issue is certification. Why
can a firm which is not an eligible firm get into the program? And
that is something that we have, as I described earlier, created a
new set of criteria that had not existed before where we are asking
our companies to submit extensive documentation. And we actually, I think, distributed to the Committee in our report to Congress, exactly what that documentation includes.
I can talk about some of it, if its of interest. But we are taking
that specific documentation now in a much more rigorous oversight
process.
We have not yet seen the GAO report with the details of how
this got through the process. But what
Chairwoman VELA ZQUEZ. How do you think that Crocket what
is the nameand Associates at the Alamo.
Ms. MILLS. Exactly. Were going to find out. And were going to
find the facts.
Chairwoman VELA ZQUEZ. Last time you said you would be using
Google Earth, right? You said do an Internet search and that you
will use any kind of tools to validate HUBZone addresses.
Ms. MILLS. Right.
Chairwoman VELA ZQUEZ. Here, you have this one, not only for
so last time you said this is just so simple, do you know how many
firms are participating in the HUBZone program right now? Nine
thousand. How much will it take to Google the address of30 seconds. So it will take at least 77.5 hours of man hours to determine
whether or not those are bogus addresses.
Ms. MILLS. In fact, we are currently using tools such as Google
Earth to find out the addresses and principal locations of the workers who are reported to be in the HUBZone.
One of the suggestions, I believe, that Mr. Kutz may suggest is
that we use Google Maps to Google these addresses. And in fact,
weve already discussed this recommendation given these preliminary findings.
Chairwoman VELA ZQUEZ. Okay. Im going to switch to another
topic and that is the oil spill.
Recently, Kenneth Feinberg testified before our Committeeand
another time I understand that he and the SBA have now talked.
Now, I understand that that has changed. And my question concerns how SBA treats BP claim payments for those seeking disaster loans? To this point, it is important that the SBA recognize
BP claims payment as income, not as compensation for losses. Are
you taking steps to ensure that this will happen?
Ms. MILLS. Thank you for your interest and your help with the
BP claims process coordinating with the SBA. In fact, as you and
I talked, we did make contact right after that hearing with Ken
Feinberg. He called in return to my phone call. We had several conversations and meetings and consultations because what the people
in the Gulf need is a BP claims process that works.
We are currently in the Gulf in 27 locations. We have 178 people,
but we believe and we are givingwe are doing two things. Were
giving economic injury disaster loans and we are deferring existing
disaster loans because sometimes thats all a small business needs
is to defer it.
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Chairwoman VELA ZQUEZ. I hear all that, but I would like for you
to answer my question and that is if SBA is going to recognize BP
claims payment as income, not as compensation for losses, and are
you taking steps to ensure that this will happen?
Ms. MILLS. Well, thats actually a very good question and Im
going to get back to you on whether we are. Because at the moment, the primary focus is to have people get their first claim from
BP. So in our actual claim places, we are helping people fill out BP
paperwork, referring them to the proper BP claims place, because
its better for them to get their proper compensation.
Chairwoman VELA ZQUEZ. I would like to share with you that the
chair of the Senate Committee agreed with me that BP claims payment should be considered income and not as compensation for
losses.
Administrator Mills, in 2003, Diamond Ventures brought a lawsuit against the SBA alleging racial discrimination in the SBIC
program. Earlier this year, a federal judge denied SBAs motion for
a summary judgment and subsequently ordered mediation in this
case.
I understand that the court-ordered mediation recently came to
a close without a settlement. Why havent you been able to resolve
this issue?
Ms. MILLS. I will get back to you on that issue and well see why.
Chairwoman VELA ZQUEZ. Well, I just want to make clear that
your own statistics, SBAs own statistics show that less that four
percent of all SBIC investment dollars went to minority-owned
firms and less than 1.5 percent went to women-owned business.
And at the time of Diamonds lawsuit, there were only a handful
of minority investment firms in the program. So I hope that youre
paying attention to that, because I dont think that it needs for
someone to bring a lawsuit for you to realize that this disparity is
taking place among SBIC companies.
Ms. MILLS. Thank you. We agree. Ill look at it, too.
Chairwoman VELA ZQUEZ. Mr. Kutz. In your opinion, are the enforcement mechanisms implemented by SBA to punish those that
violate eligibility standards for the HUBZone sufficient?
Mr. KUTZ. I would say no. I think were better off than we were
two years ago, because as youve heard, 24 of the 29 firms we
looked at are no longer in the program. We validated that theyre
no longer in the system. Theyre not in the system. They cannot get
HUBZone contracts. And it sounds like theres been additional suspension. Sobut are we where we need to be? No. I believe more
quick, aggressive action. I think the example I used in my opening
statement of the firm that committed 8(a) fraud also and they received $10 million of stimulus contracts, its still never too late.
They still get suspended. Its never too late to make it right, protect
the government, but it should have been done earlier.
So I think its still, on a scale of 1 to 10, maybe a 3 is where we
are at this point.
Chairwoman VELA ZQUEZ. Administrator Mills, what kind of message do you think this sends to individuals looking to game the system that only 1 out of 29 with exception of the 4 that you just mentioned that happened yesterday maybe because we were having
this hearing today?
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Ms. MILLS. Madam Chair, youre exactly right. If we dont punish
the bad actors, people will not be deterred. So we have, as our third
prong, made a concerted change in terms of going after bad actors.
So to that extent we actually have a whole series of tools that
were employing: suspension, debarment, collaboration with the Inspector General, civil fraud actions with the Department of Justice,
and false claims actions with the Department of Justice.
In addition, now when you sign the HUBZone contract, its under
penalty of perjury and it has to be notarized. So all of these activities should give us more basis to do what you so rightly urge us
to do which is to go after bad actors.
Chairwoman VELA ZQUEZ. Mr. Kutz, you have been working at
the HUBZone program for a number of years now. Why is this program so vulnerable to fraud?
Mr. KUTZ. I think its a combination of the inherent nature of
maintaining the 35 percent, perhaps. In some areas like Washington, where youve got slivers of HUBZone locations and those
places its difficult to perhaps police and look over. So its the inherent nature and in addition to that just some of the lack of fraud
prevention controls and consequences in the past.
I mean most companies look at this and say, hey, if I cheat, I
get to keep the contract. If I get caught, I might get decertified.
Chances of going to jail are zero and I might not get suspended or
debarred.
Now thats changing here, hopefully. And I appreciate the oversight here and the efforts SBA is making. So we need to move more
aggressively to get where we need to be.
Chairwoman VELA ZQUEZ. Okay. Mr. Graves.
Mr. GRAVES. Thank you, Madam Chair. How important do you
think it is, Mr. Kutz, as far as how important a role is the possibility of punishment play in a good anti-fraud program? And weve
kind of danced around that, but a strong punishment program has
to beit has to be out there.
Mr. KUTZ. I think its enormous. I mean if you look across the
government, we look at programs across the government, those programs that there are no consequences and no one is ever held accountable through prosecution or in suspension debarment, those
are the ones that are most vulnerable to something happening. So
I believe its critical.
Mr. GRAVES. What steps would you take to ensure that only
qualified applicants, I mean beyond what some of the things weve
already talked about?
Mr. KUTZ. I think that the Internet searches were talking about
as the Chairwoman said, if you did it for all several thousand,
thats an achievable thing. They take several minutes. It may not
catch everything, but certain obvious indicators would come out.
And Im a proponent of at least unannounced site visits to these
locations. I think thats a good practice. Our experience is when
you show up unannounced, you get a very different view than when
you tell them youre coming. So those are my two primary prevention techniques here.
Mr. GRAVES. And you may have already answered this, but given
your background, how would you rate the SBAs aggressiveness in
suspending federal debarment?
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Mr. KUTZ. I think it was at zero before we started this and I
think its moved towards two and today it may be threesuspended firms and two more individuals, maybe three. But its not
quite where we need to be.
Mr. GRAVES. Its a long ways where we need to be.
Chairwoman VELA ZQUEZ. Mr. Critz?
Mr. CRITZ. I just have one question. Thank you, Madam Chair.
You know, we talk about that its been a while since weor since
your audit showed that there were problems and Im just curious
to hear from the Administrator, how aggressively you are addressing these issues.
Is this a training issue? Is it that the staff that exists dont have
the training that they need to follow through on this? And Im just
curious to hear what the plan is going forward.
Ms. MILLS. Thank you. I think Mr. Critz spoke earlier and we
have aggressively added staff to the HUBZone oversight function.
And we have re-engineered it.
So he is correct, that we were starting at a place that was about
zero, that there was not firm action against bad actors and there
was no plan or program for how we went after oversight on this
program and getting rid of fraud, waste, and abuse.
And in fact, there was not even a statement that we would not
tolerate fraud, waste and abuse. Now we have a position and specific actions that have been implemented. On the front end, we did
the certifications. In the middle end, we increased the site visits.
There were seven in the six months before I came. There will be
a thousand this year, the majority of which will be unannounced.
In the back end, were working very hard, making progress on
going after the bad actors. And once again, were using a lot of
tools in the tool kit, including going after them with the Department of Justice on multiple fronts.
Chairwoman VELA ZQUEZ. Mr. Critz, will you yield for a second?
How many of the 29 firms that were ineligible continue to receive
federal contracts?
Ms. MILLS. This is one of the most troubling findings of the GAO.
And we have not
Chairwoman VELA ZQUEZ. Mr. Kutz, do you know?
Mr. KUTZ. Seventeen.
Chairwoman VELA ZQUEZ. Seventeen.
Ms. MILLS. Seventeen. Thank you.
Chairwoman VELA ZQUEZ. Do you know the total amount of
money?
Mr. KUTZ. The total amount is $200 million. The amount of new
contracts is $66 million since your last hearing in 2009 on
HUBZone.
Chairwoman VELA ZQUEZ. Thank you. Thank you for yielding.
Mr. CRITZ. I appreciate your answer and Im from a school of
thought that theres benchmarks, theres goals, theres timing.
I would like to hear an answer from both of you as to is this
something that you feel that the staffing level that you have or the
plan for staffing, the training level that you have and the plan for
training that this is something that will be resolved within six
months that youll be at some artificial number, 95 percent assurance that HUBZone, 8(a), and small business or the veteran classi-
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fications will be running at a level that you feel comfortable that
youre really catching all the bad actors?
Ms. MILLS. At this time, we are making significant progress in
each of the pieces. But as I said, its really in the continuous improvement. And we think that weve got now a good partnership
with the GAO. We have a lot of ways that people have in the past
been able to come into this program that have been ineligible.
Weve blocked up some of the holes. Weve got some more work to
do. And this involved a complete reengineering of our department
and the addition of enormous resources. In the Presidents budget,
there are additional resources for us which will be very valuable.
Mr. KUTZ. I would say theres progress, certainly. Theres a long
ways to go, but when you consider where we were two years ago
when the first hearing was held, I think that what theyve done
and the oversight youve done here have made a difference.
With respect to people, its interesting. Its two pieces to it. Its
not only the number of people, its the type of people and I think
you know weve seen SBA has been in traditionally more of an advocacy organization than enforcement. Thats a difficult transition.
And I mentioned that in my opening statement.
I think the Ranking Member mentioned the same thing. Thats
an important aspect to make sure that they have the right people
doing this.
Mr. CRITZ. I appreciate your answer and from my perspective,
Im looking at the numbers that $680 million worth of investment
yield $30 billion worth of loans or activity economically. And certainly, these kind of backwards movements, its hard to measure
what the true impact is, but I appreciate your testimony and I
yield back.
Chairwoman VELA ZQUEZ. Mr. Luetkemeyer.
Mr. LUETKEMEYER. Thank you, Madam Chair.
Ms. Mills and Mr. Kutz, as Ive sat here over the last year and
a half and watched this play out, are there any tools that you
need? You mentioned tools a minute ago to be able to do your job.
Are there any additional tools or things that you need that we
can help you with that you see right now?
Ms. MILLS. To be honest with you, this oversight is actually extremely helpful. And we see this as a partnership. Its difficult to
make progress, but we have changed the view I think now in partnership, that this is a valid concern, that we do do oversight and
that we dont tolerate fraud, waste, and abuse and that we have
to have integrity in the programs.
We are trying to use our resources as effectively as possible. We
do appreciate the help that many have given us in terms of going
after bad actors.
Mr. LUETKEMEYER. Okay. Do you need anything else? Have you
got what you need?
Ms. MILLS. Yes, I think we would very much like to have the
budget
Mr. LUETKEMEYER. I apologize for cutting you off. Ive just got
five minutes.
Mr. Kutz?
Mr. KUTZ. Two things. There may be some software or other law
enforcement-type tools they dont have access to what we have, in
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some cases other law enforcement that they could use. But I think
the big one here is getting the Department of Justice and U.S. Attorneys interested in taking these cases. Because if you dont get
U.S. Attorneys interested in taking the cases, youre going to get
a declination as I mentioned in my opening statement.
So this Committee perhaps could work with the Department of
Justice and SBA and the whole IG investigative community to try
to make at least a couple examples a year of these firms and
maybe each program, 8(a), service-disabled-veterans, HUBZone,
etcetera. Because if the U.S. Attorney wont take the case, youre
out of luck. If they say this isnt interesting, theres no loss to the
government by these frauds, then theyre not going to do anything.
And you wont get any prosecutions.
Mr. LUETKEMEYER. That is always a problem with law. We can
make all the laws here in the world, all the great laws, but if
theres no enforcement of them weve just wasted our time and
wasted a lot of trees. So think enforcement is a key provision here.
The next question of you, Mr. Kutz, are you working with SBA
with recommendations regularly in your oversight to explain to
them what you see, where weaknesses are, what your recommendations are, instead of playing a game of gotcha?
Mr. KUTZ. Right. After the undercover, under our protocols, we
have to first of all brief the requestor, which is the Chairwoman.
And then we brief the Agency on what weve done. And weve provided past recommendations.
I dont know if weve had any new recommendations. Just some
of the things like using the Internet tools. I think the Administrator said theyve staffed up to 20 people. I dont know how welltrained they are, but the training and type of backgrounds they
have are important. And so were always available.
And two years ago, or a year and a half ago, I sat down for an
hour, an hour and a half with their consultant and kind of did a
brain dump of everything we could think of that they could do. So
we have and will always be available to help them.
Mr. LUETKEMEYER. Ms. Mills, with regards to that, can you give
me a percentage of the stuff theyve given you that youve implemented at this point?
Ms. MILLS. Well, in the past recommendations, particularly on
8(a) they gave us 12 distinct recommendations. They were really
excellent. They were like a roadmap. And weve done all 12.
Were in the process of doing the last five, but weve accepted all
12 and weve implemented the majority.
Mr. LUETKEMEYER. Okay, Mr. Kutz, with regards to other programs that SBA has implemented, how much oversighthow much
investigation have you done in those and are there problems in
other areas?
Mr. KUTZ. 8(a) definitely. We issued a report to the Chairwoman
on that and we found 14 firms with $325 million of fraud and as
she mentioned, theres been some recommendations and certainly
progress. The one thats probably the most troubling, I think Representative Nye and I had a field hearing I attended on service-disabled veteran-owned small business and thats a joint effort with
SBA and VA. Thats very troubling. We continue to get dozens and
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dozens of allegations of fraud in that program. I believe that there
is significant fraud still.
Mr. LUETKEMEYER. One of the problems that I see is the fact
that youIve served in the private sector and Ive also served in
the public sector.
In the public sector, youre dealing with lifetime bureaucrats.
And its difficult with their mindset to sometimes change which is
what youre trying to do, to change them to become a different type
of organization, to look at things in a different light. This is the
way theyve done it for the lifetime. Theyve been there 20 to 30
years. Youre not going to tell me anything different. Im going to
outlast you, because youre going to be gone with the next administration. All Ive got to do is bide my time and well deal with the
next Administrator. Thats a problem.
And I think in fairness to you, Ms. Mills, I think that the inherent problem with bureaucracy and trying to change their attitudes
is a difficult thing. And I admireI certainly understand your
task, although obviously weve got to do it. Weve got to change it
because obviously weve got some problems here that weve been
looking at for a long, long time.
With that, I yield back, Madam Chair.
Chairwoman VELA ZQUEZ. Thank you. Ms. Bean.
Ms. BEAN. Thank you, Madam Chairwoman. And thank you to
both of our witnesses for your testimony here today.
A couple questions for Administrator Mills. Welcome back. My
first question is just in follow up to whats going on relative to contracts being awarded to some of those who shouldnt have been eligible in the first place, you talked about a new certification process.
Are you in the process of creating a new decertification process to
once and for all take that those bad actors out?
Ms. MILLS. Well, many of those have been decertified. I think our
decertification process at this point works. The question is getting
to it quickly. And then making sure that those who are decertified
dont get back in the system and that they come out of the system.
And thats the place. Were looking forward to working with GAO
on exactly what happened in these cases and then fixing.
Ms. BEAN. My next question is relative to Recovery Act provisions. I think you painted a striking picture of how important it is
to providing many small businesses that you speak to and that we
speak to in our districts in terms of small business lending in the
secondary market.
The recent decline in loan approvals is very disconcerting, having
followed the success that you had had in increasing it so drastically
in helping address the credit gap.
I guess my question is what do you think we need to be doing
further? I have a lot of small business forums in my district with
businesses and I hear from many who shared successes from the
Recovery Act loans that theyve received through the 7(a) or 504
programs. And then Im also hearing from others who may not
have even applied to SBA, but just have access to capital issues
which is so critical.
Obviously, weve passed a number of initiatives through the
House. Were waiting for the Senate to act and I would assume
youd want to see not only an extension of the Recovery Act provi-
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sions that just expired in May and have led to this downfall in
lending, but the small business lending fund, maybe the 504, to address the commercial real estate markets.
What other things would you like to see us act on or the Administration act on in support of access to capital improving to address
that gap?
Ms. MILLS. First of all, I want to thank this Committee and the
House for passing the extensions several times actually, for the Recovery Act. We believe that weve been very effective putting the
$30 billion in. We are very, very, very concerned about the drop off
that occurred when the authority and the money ran out. Were
down 60 percent. Were hearing from small businesses and all over
the country that the freeze is back on.
We have over 600 in the Recovery Act queue, so as soon as that
passes, we can fund them. And this bill is on the floor of the Senate
at this moment and we are very, very hopeful. The Administration,
the President is very clear in urging the Senate to pass this bill.
Ms. BEAN. Were glad to see them to closure which is always a
big feat over there. And I know were helpful that that happens because there is such leverage potential to take that $30 billion and
put essentially $300 billion of lending out into the small business
community.
My last question for you is regarding the recent recovery report
card that showed that 32 percent of the Recovery Act federal contracts went to small businesses. And I commend your efforts and
the Administrations on improving the level of contracts that are
awarded to small businesses.
To what would you attribute that relatively high increase and
what could we learn from it that we could apply to other federal
contracting efforts?
Ms. MILLS. Well, first, in the Recovery Act there actually werent
goals, the Vice President announced that he was going to consider
that all the small business goals did exist. And we beat them all.
And we did that by a joint effort with the Department of Commerce
where we conducted over 300 match-making events to make sure
small businesses and minority-owned businesses and womanowned businesses got access to Recovery Act contracts.
The lessons there were so strong that the President has asked
us to form a task force, and we have, to implement, not just to
study, but to implement the best practices from that Recovery Act
success to make our numbers in our entire program. And we are
in the process of doing that.
Ms. BEAN. Thank you very much, and I yield back.
Chairwoman VELA ZQUEZ. Mr. Bright.
Mr. BRIGHT. Yes, maam. Thank you, Madam Chairman.Let me
thank the witnesses first for being here today and giving us the
testimony.
Administrator Mills, like every member of this Committee, I am
a strong supporter of American small businesses and I believe Congress and the SBA should do everything in their power to support
businesses across the nation.
Hearings like this provide us with an opportunity to evaluate
how that process is working. Ask questions and share any concerns
we may have.
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And I am disappointed to have to say this, but I have serious
concerns about the SBAs ability to carry out some of its most basic
responsibilities.
Far too often I hear complaints from small businesses in my district that are having difficulty working with the SBA. When the
situation calls for it, my office has made efforts to help these businesses navigate the red tape individuals encounter any time they
deal with the Federal Government.
Most of the time we find ourselves sharing the frustration felt by
my constituents. This is particularly troubling because the SBA,
like every other agency, has a constitutional or a congressional affairs staff that helps answer Members inquiries. If a Member cant
get the attention of the SBA, I can only imagine how hard it is for
an average business owner to get answers.
While this has been my experience on a number of complaints
that have been shared with my office, let me remind you of a specific case that has concerned me, one that I brought to your attention the last time we spoke which was about a month ago.
Last year, the Defense Department awarded a contract to build
MI-17 helicopter simulators to a business in Pennsylvania. In November 2009, a company in my district filed a protest that the company that won the bid didnt qualify under the SBA guidelines.
I wrote you a month later asking that the SBA conduct a fair
and rigorous review of that protest. Unfortunately, that didnt happen. SBA ruled that this company met SBA requirements in February of this year. But when it was sent back by your own office
of Appeals and Hearings in May, the Judge in that case found numerous errors in the determination. He wrote a scathing report
and remanded the decision back to SBA to do it over again.
So nearly nine months later, we find ourselves right back at
square one with no review of that evaluation. Now I know the
Judge in this case cant make the determination himself, nor do I
want him to try.
What I do expect, however, is that the SBA should be able to
conduct a fair and rigorous review and get it done in a timely fashion. Instead, my letters on this issue have been returned with nonanswers and my staff has been given the runaround when they ask
for information.
What should have been done months ago remains in SBA limbo
with no assurances from anyone from your office that this would
be done and done soon.
Let me be clear. I can accept this when businesses in my district
dont win a contract. It happens and thats okay. Thats not the
point of my discussion or my comments today. What I cannot accept is a series of errors and potentially allow a business to win
a contract that they are ineligible to receive and I say potentially
because the sad fact is were still waiting on SBA to settle the matter over nine months later. Thats entirely too long. The contract
will be completed by the time the review has been completed by
your office.
So Chairperson, Madam Chairman, Im sorry to have to spend
my time focusing on such a specific issue, but I remain concerned
about the case that I believe is my responsibility to raise the issue
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in whatever venue necessary so that we can get this matter
righted.
So Madam Administrator Mills, I have one question for you and
one question only. Can I get your commitment today, to direct your
folks and your office to take this issue more seriously and try to
come to a conclusion as quickly as possible so we can right a significant wrong out there?
Ms. MILLS. Yes, absolutely. You have my commitment. And we
apologize for this distress that you described.
Mr. BRIGHT. Thank you. I yield back the remainder of my time.
Chairwoman VELA ZQUEZ. Mr. Schrader.
Mr. SCHRADER. Thank you, Madam Chair. I have a question for
Administrator Mills.
Youve obviously made huge strides in what youve done I think
since coming to the office, previous administration, seven site visits, youre up over a thousand, and I think you deserve some congratulations for that.
These are tough questions, but were trying to help you do a little
bit better going forward. But I appreciate your leadership and taking the GAOs counsel to heart.
The question I guess I have is some basic stuff here. Mr. Kutz
talked about the Internet search to come up with some pretty obviousthat the Alamo is not exactly the place where a new business
starts up. And yet at the same time, your organization, some of
your staff members, it was taking like 7 to 14 months to certify
these folks. Why the 7 to 14 months versus a few minutes on the
Internet?
Ms. MILLS. Well, thank you very much for your support. We do
think were making progress.
This is a very tough task and we are getting after it aggressively
and getting some achievements because we have some great people
working on it. Specifically, we created a quite rigorous front-end requirements on HUBZone which had not existed. Appendix Table 1
of our report describes it. Id love to read it, but I wont.
That created a backlog, because when we switched to a much
more rigorous up-front progress, it created a lengthy delay in getting all the applications through until we re-engineered the process
and began to process more applications. We have gone over that
bump and are pushing, making great process in reducing the time,
but it was unacceptably long.
We also brought on new staff, trained new staff. Re-engineered
the process. Greatly enhanced the amount of documentation that
was required so we had to then take it seriously and go over it.
Were now going to also add and continue to refine that set so that
we find the thing that will help us be able to get out the bad actors.
Mr. SCHRADER. I just hope that there will be some prioritization
of obvious things that you would do first, you know, for maximum
value of minimal amount of effort or expenditure of human resources and capital.
I would take Mr. Critz suggestions to heart. Develop some performance metrics. I mean that helps you, when you come before us
show the fact that perhaps you have made substantial progress and
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you do have a target date for 95 percent compliance as opposed to
the other.
If weve got 29 firms with $66 million in new federal contracts,
it probably shouldnt have them or thats 29 out of how many contracts? I mean, unfortunately were talking probably billions and
billions of dollars here.
The other, I guess, concern I have is the one where the documents are actually lost. Mr. Kutz talked about four firms and one
firm, they had to stop pursuing their investigation because the documents are lost. Isnt that sort of unacceptable?
Ms. MILLS. Yes. We are going to look into that when we get the
full report.
Mr. SCHRADER. Would it be advisable to maybe reduce the overall funding for this program down to something where you guys
can kind of match your resources on the enforcement side to the
contracting resources on the other side to show yourselves to advantage?
Ms. MILLS. Im not sure I understand the question.
Mr. SCHRADER. Well, Im concerned that weve got a lot of money
going out the door, but we dont have the personnel in place obviously to make sure that were getting adequate bang for the buck
if you will.
Ms. MILLS. We have a goal to meet of three percent of the contracts. The only cost is in the oversight and the interactions with
the agencies to make sure theres access.
Mr. SCHRADER. Im just suggesting that we want to balance our
resources within the agency. It takes a while to change the culture
of the agency and perhaps less money for the HUBZone program.
We have the Supreme Court decision to deal with. Weve got obvious fraud and abuse thats going on. So Im just a little concerned.
Ms. MILLS. Just to clarify, there is no money, funding for the
HUBZone program except for in the oversight and promotion of the
program.
Mr. SCHRADER. Well, then Im even more concerned a little bit.
Thank you. I yield back.
Chairwoman VELA ZQUEZ. Ms. Dahlkemper.
Ms. DAHLKEMPER. Thank you, Madam Chair. Thank you to the
witnesses.
Ms. Mills, I wanted to ask you about a different subject, a
women-owned small business contracting program. I know youve
been a champion for the implementation of this program and that
the proposed rules for this program were put out earlier this year,
but where do we stand now on putting out the final rule and finally
implementing this program?
Ms. MILLS. As I have mentioned before here, this is one of the
things that we feel very proud of. A rule that came about in the
year 2000 had never been implemented for womens contracting.
We were able to get this rule out for public comment. We received
a thousand public comments that closed on May 3rd. We have dealt
with each and every one of them. Some were extremely helpful and
valuable to rewrite the rules, based on the input. And that rule is
going through final clearance.
We expect to have this program operational by the end of the
year.
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Ms. DAHLKEMPER. Thats great. Thats obviously great news for
many women in my district who have talked to me and I know
some have talked to you about this very important program.
As were looking at some of these other programs and the fraud
that weve seen in these programs, what kind of mechanisms are
being put in place to ensure that fraud that weve seen these other
programs dont occur in this small business program?
Ms. MILLS. Were taking the same three-pronged approach. In
the womens rule, its likely to be both self-certification and external certification. So we need to make sure that we have a process
to make sure that only the qualified people get in.
Then in the middle, we will have oversight which will be program exams, some unannounced. And in the final part, we will
have the same kind of emphasis on enforcement that were trying
to bring at an accelerated level to all of the programs.
Ms. DAHLKEMPER. So this three-pronged approach youre bringing to every program thats coming out of SBA at this point?
Ms. MILLS. Thats correct.
Ms. DAHLKEMPER. Mr. Kutz, can you comment on if you think
this is all adequate as we bring out another new program?
Mr. KUTZ. I did look at the report that they put out yesterday.
I just got it yesterday. And they did talk about something similar
to what we call the fraud prevention model where youve got the
prevention, the monitoring and the enforcement involved. And if
they do some of the things theyre talking about thats certainly a
large step in the right direction.
Ms. DAHLKEMPER. Thank you very much. I yield back, Madam
Chair.
Chairwoman VELA ZQUEZ. Mr. Nye.
Mr. NYE. Thank you, Madam Chair.
Mr. Kutz, you mentioned in an earlier answer to a question that
you had taken part in a field hearing that I held in my district in
Virginia earlier this year in May. That field hearing was a followup on a full Committee hearing that Chairwoman Velazquez held
last November here where we discussed a GAO report on fraud in
the service-disabled-veteran small business program.
You mentioned again in your answer earlier today that you felt
that that was still a problem area and I agree with you on that.
I wanted to ask you just a couple of quick follow-up questions to
establish kind of a baseline of where we started back in November
and where we are today.
The report came out in November, at least in one of the particular cases, you told us about a firm that was ineligible, you had
discovered, because it didnt perform any of the actual work and it
subcontracted 100 percent of the job to a Denmark-based firm that
had reported over $12 billion in 2008 revenues, so clearly not a
small business.
After the report came out, that firms partner admitted the contract award was improper and they would withdraw as soon as another contractor was found. Can you tell us, if you know, if any action had been taken against that particular firm in that case?
Mr. KUTZ. As of today, they have not been suspended or
debarred, although I know that the SBA IG, the VA IG, and the
FBI are involved in a criminal investigation and that one is such
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a clear case. If we dont get debarment and prosecution for that
one, we may as well give up.
Mr. NYE. I appreciate that answer. What about the other nine
cases that you mentioned in yourthat you had found fraud in the
report that you released last November?Have any of those companies involved in suspension or debarment to your knowledge?
Mr. KUTZ. None as of today. I do believe there are on-going criminal investigations on several. There is even a Grand Jury involved
I believe on one. So there is some hope that well get one of these
first prosecutions hopefully here, but again, theres nothing imminent that Im aware of.
Mr. NYE. Can you tell us about those ten companies if any of
them have received additional contracts subsequent to the report
that you issued back in November of 2009?
Mr. KUTZ. Right, and my data is a little bit old, but theyve got
$5 million of service-disabled sole source and set-aside. Theyve got
$10 million of other contracts and theyve got millions of dollars of
stimulus contracts. Just those.
Mr. NYE. Okay. So thank you for helping us establish what is to
my mind a bleak picture of whats going on in the service-disabledveteran business program.
You came to my district in May where you gave us an update on,
and some of these figures, we talked to some local businesses, service-disabled business owners about their impressions of the program and what they thought about it.
Weve talked a lot today about penalties and how important it is
to have consequences when firms commit fraud in order to deter
other firms from doing exactly the same thing and continuing to
create the same kind of problems that weve already seen revealed.
I held a hearing of my Subcommittee here on July 15th where
we visited with folks from the SBA, but also from a lot of the agencies that had specifically been involved in doing the contracting of
those ten cases that we talked about in your report that had been
found to be fraudulent.
And to be honest, I was very disappointed to hear the responses
from the agencies in terms of what action they have taken since
the nine months have passed since they knew about these particular cases of fraud.
Administrator Mills, I wanted to ask you, you had Associate Administrator Joe Jordan with us at that hearing and he mentioned
that out of those cases that we discussed, only one of them has
been referred to the Inspector General of the SBA for suspension
or debarment. And it was decided at the end of the day not to pursue a debarment or any penalty whatsoever as far as we could tell.
What I wanted to ask you is can you comment on why none of
those cases have gone on to the penalty phase where we have been
able to see at least a suspension that we can show our other veteran firms that were taking action on these things?
Ms. MILLS. Well, first, I want to thank you for your leadership
in this area. This is a shared goal, because as you said, if we dont
have the enforcement action, people wont believe theres a real
consequence to misbehaving.
And, as I understand it, there are nine firms still being investigated by the IG. And we hope that there will be action taken as
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you said. There seems to bewere trying every tool in the tool kit.
Were trying to bring new ones in and were trying to find a way
to do things more quickly for consequences.
And we appreciate your continued focus.
Mr. NYE. One quick follow-up and I note that my time is getting
short, but Associate Administrator Jordan mentioned that the SBA
and the VA have formed a task force on these particular types of
fraud issues. Can you talk about exactly what it is that you foresee
that task force doing and how far along theyve gotten in their
work?
Ms. MILLS. Im happy to tell you about the overall task force. The
President has asked myself and General Shinseki to form a task
force on small business veteran activities.
We have loans, small business veteran loans. We have government contracting and we also have entrepreneurial development
and counseling programs.
And the task force will deal with all of thespecifically in this
area, were working very hard with them on their computer systems to identify small business, small businesses that are owned
by service-disabled veterans. Who is a service-disabled veterans is
something they work in their computer systems. And on any other
specifics, Im happy to have Mr. Jordan come back to you.
Mr. NYE. I would appreciate and as I told the folks that were
participating in my hearing, we intend to continually follow up on
this issue.
Its been nine months since the first report came out. My feeling
is that having talked to a lot of folks representing many different
executive agencies, theres a big focus on process here, task forces
and committees and other things.
But at the end of the day the folks that pay the bills, the taxpayers, want to see some results here, and I think we owe it to
them to show them results. And results mean consequences on the
businesses and so while I appreciate the fact that were making
progress in the sense of setting up procedures, we need to get to
the consequence phase in some way that we can report openly and
honestly to the taxpayers that weve pursued fraud and weve rooted it out.
Theres a reason why I have written a bill that provides for
criminal penalties for those who would defraud this program because I think its important that they see a real result when they
try to defraud our veterans and our taxpayers and were counting
on you and the other agencies to show us some results from your
work as well. Thank you very much.
Chairwoman VELA ZQUEZ. Mr. Moore.
Mr. MOORE. Thank you, Madam Chair. Ms. Mills, I want to ask
a question concerning the question of pass-through fraud which can
occur in the federal contracting process.
As I understand it, a pass-through is an arrangement where a
large corporation sets up a shell company known as a pass through
to obtain federal contracts which are to be set aside for small businesses.
Each year since 2006, the SBAs Inspector General has listed
pass throughs as the top challenge facing your agency. To combat
this problem, some in Congress have suggested passing legislation
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which would direct the SBA to more specifically define pass
throughs and would permit the Agency to penalize pass throughs
with defined prison terms.
Do you agree that some legislation is necessary to combat this
type of fraud. If so, what would you like to see? If not, what other
measures are currently being taken or should be taken in the future to combat pass through fraud?
Ms. MILLS. The issue of a big business masquerading as a small
business with a shell corporation or something else is highly problematic for us. We agree with you, that we want to go after this.
I believe, but Ill get you the details that the 8(a) regulation reform
that went out for public comment and is going to be final does help
address that issue and were happy to get you those details and see
if you have further suggestions.
Mr. MOORE. I would like to see those details because obviously
if the law is not being complied with as a former prosecutor, I want
to see that happen. Thank you very much and Madam Chair, I
yield back my time.
Chairwoman VELA ZQUEZ. Thank you.
Mr. KUTZ. Can I mention one more thing about that, Madam
Chairwoman?
Chairwoman VELA ZQUEZ. Sure.
Mr. KUTZ. The issue of having thisthe numbers you get on
these goaling requirements and stuff, those pass throughs help
misstate those numbers. In other words, if you are given a number,
Congressman Nye and I talked about, there was a pass through to
a company in Denmark with $12 billion of revenue. That was
scored a service-disabled-veteran-owned small business contract in
the reports that you get.
So the other impact of the pass through, is that youre getting
misleading information on how much money is actually going to
small businesses, thats an important point. I just want to make
sure that you all understand.
Chairwoman VELA ZQUEZ. Mr. Graves.
Mr. GRAVES. Thanks, Madam Chair. Administrator Mills, the
data concerning firms that are found to be ineligible for all the special contracting programs, is it being submitted to the new federal
warranty performance and integrity information system?
Ms. MILLS. If I could get back to you on the answer to that, because Im not familiar with the specific system that you just mentioned.
Mr. GRAVES. All right, if you could do that this week, it wold be
great.
Chairwoman VELA ZQUEZ. I do have some more questions.
Ms. Mill, GAO has recommended that SBA conduct unannounced
site visits on HUBZone applicants such as the one at 30 Alamo
Plaza, right?
What percentage of companies do you currently visit, unannounced and in person and how do you decide which firms to visit?
Ms. MILLS. This year, were going to visit a thousand firms.
Chairwoman VELA ZQUEZ. You are?
Ms. MILLS. We have visited so far 711 and by Fiscal Year end
one thousand. My understanding is that the majority of those are
unannounced.
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I dont know
Chairwoman VELA ZQUEZ. Can you corroborate that information
for the Committee?
Ms. MILLS. And well find out how we decide.
Chairwoman VELA ZQUEZ. Mr. Kutz, can you explain to the Committee and the SBA why unannounced visits are different from announced visits and what the value-added for such unannounced visits?
Mr. KUTZ. The element of surprise is always important.
Our unannounced visits have revealed things like mail stuck
under the door and the neighbor saying no one has been there for
six months. You would not get that with an announced visit.
We had one where we did an unannounced visit and I showed
this at one of your hearings where the next time we showed up
they had actually nailed in a shiny new mailbox, I dont know if
you recall that, where the next time we came they made it appear
as if they were there.
So thats one of the issues that SBA is waiting six or nine
months to go after the companies we identified. By then, they may
have doctored it up and made it look like it is a qualified firm. So
yes, its very, very important.
Chairwoman VELA ZQUEZ. SBA has previously indicated that they
do not have the resources to perform site visits for all the applications that they receive.
In your opinion, what kind of resources will SBA need to perform
this site visit?
Mr. KUTZ. I think that theyve moved toward 20. Thats the report I read yesterday said, from single digits when what first started this, so thats a large step. You can do a lot with 20 people. My
unit only has 55 people and we do investigations across the government. I think with leveraging technology, the Internet searches,
other vehicles theyve got, whether that means they can do 10 percent or 50 percent site visits I dont know that, but again, the
threat that there is a site visit of these firms, either entering the
program or theyre in the program is an important element of a
control system.
Chairwoman VELA ZQUEZ. The ten percent that SBA is doing
right now, do you think that is adequate?
Mr. KUTZ. It depends. If its done on a risk basis and is done appropriately, its better than what we had before. I would say, again,
I believe, theyre doing it mostlymy understanding is for people
who have already gotten contracts. Its just as important to do it
for people who havent gotten them yet. Because as weve seen
here, once someone has fraudulently gotten a contract, very little
has been done in the past. So I think it should be done on both
and ideally more than ten percent would be better.
Chairwoman VELA ZQUEZ. Mr. Kutz, in your last report, you mentioned that the three parts of a good fraud prevention program are
prevention, monitoring, investigation with consequences.
How does this concept apply to the HUBZone program with respect to prevention, monitoring investigations and prosecution?
Mr. KUTZ. Weve talked about several of the prevention methods
with respect to the unannounced site visits. One of the other things
I would mention is theyre asking for lots of documents now. The
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one thing we didnt see is validation of those documents. In other
words, we sent in utility bills which is one of the things they get
for support, for example, as to whether or not someone is in a
HUBZone. You can doctor those up in about a minute or two. But
maybe randomly calling the utility company and saying yeah, does
this company actually live there or work there, the site visit.
So the front end is the site visits, the Internet research and other
document reviews. The monitoring is what I think they call the recertifications and its important. Were looking at moving from
every three years to every year to do those. That would certainly
be more effective.
And the investigations serve not only as a consequence for people, but actually its a prevention also. When people know theres
a chance of getting caught, theres a better chance theyre not going
to try. So I think weve touched on many of the things.
The key thing we hadnt talked about until your question here
was the validation of documents. They should do some independent
validation of documents in some instances.
Chairwoman VELA ZQUEZ. And have you made those recommendations?
Mr. KUTZ. I dont know if weve done the validation of documents.
I have to go back and look at our recommendations. But the other
ones I think are part of all of our recommendations.
Chairwoman VELA ZQUEZ. Mr. Altmire?
Mr. ALTMIRE. Thank you, Madam Chair. Mr. Kutz, GAO found
in one case that a firm continued to benefit from another SBA program even though it had misrepresented its HUBZone eligibility
and had been decertified. When GAO did further investigation on
this company, it was discovered that the firm had also misrepresented its status in the 8(a) program as well.
So my question is how could this happen and when SBA finds
that a firm is ineligible for one program, do they cross check with
another? Whats the process?
Mr. KUTZ. It doesnt appear that they did in this particular case
until they got our 8(a) report and they found it was with the same
firm we had found in the HUBZone program. So I have to ask the
Administrator. I dont think in that case they did. That is a good
practice. We have definitely suggested to that to them in our corrective action briefings, not just 8(a) but all their other programs.
Because again, if people are inclined to commit fraud, theyre not
going to do it in just one area. We found that with tax cheats and
a lot of other types of places. You dont just do it once. You typically are a repeat offender.
Administrator Mills, do you want to comment on that?
Ms. MILLS. In fact, I dont know if it was a specific recommendation that you have, but its something that has been discussed and
were looking at the computer compatibility because its quite obvious that youd want to do this.
Mr. ALTMIRE. How about sort of the opposite scenario, hypothetically, when one firm that does business with the SBA qualifies
legitimately in one program, but misrepresents itself in another
program, what are the consequences to that? Whats being done to
prevent that? What happens in the program that theyre legitimately qualifying for? So far, we havent seen anything as a con-
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sequence. I dont know if going forward theyre looking at doing
that.
Ms. MILLS. I think thats a good question and one of the issues
is coming down to the facts which is in what way did they get disqualified? Is it a foot fault or is it a fraud?
Mr. ALTMIRE. Right. And for Administrator Mills, as you know,
in the 2008 report, GAO recommended that SBA formalize a specific time frame for decertifying HUBZones. As indicated in the
previous reports, SBA had an informal time frame for decertification of 60 days.
I was wondering, has a formal time frame been implemented yet
and if so, what is that time frame?
Ms. MILLS. Im happy to get back to you about that.
Mr. ALTMIRE. Okay, thank you. Do you know whats being done
at SBA to ensure that those contractors that are in the process of
being decertified are not receiving HUBZone contracts while thats
taking place, while theyre in the process of decertification, that
theyre not still qualifying for HUBZone contracts?
Ms. MILLS. Our process is that we turn them over for investigation. There is a fact finding and as we know, sometimes we have
found that, in fact, they were put up for decertification, but they
are eligible. And so we do presume that theyre innocent until we
find the facts and then we go after them.
Mr. ALTMIRE. My final question for Administrator Mills, GAO
has found that five of the firms that had been decertified were still
continuing to claim on their websites that they were HUBZone certified. What does the SBA do to prevent this type of misrepresentation?
Ms. MILLS. Well, we would not necessarily know whats on their
website. But we do believe that in some areas, for instance, servicedisabled veterans, we are now requiring them to take themselves
off the Federal Register. If they dont take themselves off, we take
them off.
Mr. ALTMIRE. Mr. Kutz?
Mr. KUTZ. Wed be happy to make sureif they dont know who
those ones are that still have HUBZones up, we will let you know
that, so maybe you can send them a little email message.
Ms. MILLS. Id be happy to do that.
Mr. ALTMIRE. So how does that work? Is there someone that
searches to make sure that those people that have been decertified
have not continued to claim or is it something that would have to
be brought to your attention?
Mr. KUTZ. Thats something we did as part of our investigation.
We wanted to see once they were decertified if they still held themselves out as being HUBZone firms.
Mr. ALTMIRE. Is that something that will be done going forward?
Mr. KUTZ. We wouldnt do that. That would be something SBA
could consider certainly.
Mr. ALTMIRE. Maybe give that some consideration. Thank you
both for your testimony.
Chairwoman VELA ZQUEZ. Thank you. Mr. Kutz, this is my last
question for you today. If you were put in charge of the HUBZone
program tomorrow, what is the one thing that you would change
in an effort to prevent fraud, waste, and abuse?
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Mr. KUTZ. Well, normally I would talk aboutand we do fraud
across the government. I always talk about the front end. But in
this particular case, I would probably look at the back end and
really make an effort to get some poster children prosecuted,
debarred, so that the message is out there to people that hey, if you
do something wrong here, were going to be serious about it. Dont
even think about it. You might get caught. And if you get caught,
something serious will happen.
So usually I would say the front end, but given where we are
today, I would say the back end.
Chairwoman VELA ZQUEZ. Administrator Mills, after hearing and
listening to all the questions and comments made, I want to ask
you and I would like a yes or no answer, do you believe that the
HUBZone program has sufficient internal controls to prevent
fraud?
Ms. MILLS. This isI know you want a yes or no answer, but of
course, the answer is its process. Were better than we were, but
were not good enough yet. Were making progress. We need to
make more.
Chairwoman VELA ZQUEZ. So youre not there yet?
Ms. MILLS. Not there yet.
Chairwoman VELA ZQUEZ. Well, I hope that three months from
now we will not come back and hear or find that four bogus companies are still on the certification list or getting contracts. This is
serious business because in the process, not only taxpayers are losing, but those legitimate small businesses who today are suffering
and theyre playing by the rules. So it is up to you to have an oversight process in place, internal controls, to make it happen.
So with that, I want to thank all of you for being here today and
I ask unanimous consent that Members will have five days to submit a statement and supporting materials for the record. Without
objection, so ordered. This hearing is now adjourned.
[Whereupon, at 2:23 p.m., the Committee was adjourned.]
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House Hearing, 111TH Congress - Full Committee Hearing On Oversight of The Small Business Administration and Its Programs

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FULL COMMITTEE HEARING ON

OVERSIGHT OF THE SMALL BUSINESS

COMMITTEE ON SMALL BUSINESS

Small Business Committee Document Number 111-076

U.S. GOVERNMENT PRINTING OFFICE

VerDate Aug 31 2005

16:02 Nov 15, 2010

For sale by the Superintendent of Documents, U.S. Government Printing Office

HOUSE COMMITTEE ON SMALL BUSINESS

VerDate Aug 31 2005

16:02 Nov 15, 2010

Subcommittee on Contracting and Technology

AARON SCHOCK, Illinois, Ranking

Subcommittee on Finance and Tax

VERN BUCHANAN, Florida, Ranking

Subcommittee on Investigations and Oversight

MARY FALLIN, Oklahoma, Ranking

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Subcommittee on Regulations and Healthcare

DAN LIPINSKI, Illinois

Subcommittee on Rural Development, Entrepreneurship and Trade

BLAINE LUETKEMEYER, Missouri, Ranking

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Velazquez, Hon. Nydia M. .......................................................................................

Velazquez, Hon. Nydia M. .......................................................................................

Statements for the Record:

Clarke, Hon. Yvette .................................................................................................

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FULL COMMITTEE HEARING ON

U.S. HOUSE OF REPRESENTATIVES,

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Mr. KUTZ. Madam Chairwoman and Members of the Committee,

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