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Small Business Administration program aided sham firms, investigators charge

The SBA's lax oversight of a program for companies in poor areas led to millions of dollars in federal contracts going to ineligible businesses, according to a General Accountability Office report.

March 25, 2009|Associated Press

WASHINGTON — Because of lax oversight, undeserving firms collected millions in federal contracts from an $8-billion government program designated for small businesses in poor neighborhoods, congressional investigators charge.

The Small Business Administration repeatedly failed to verify paperwork and conduct audits to weed out sham firms claiming to have main offices in economically distressed areas, the Government Accountability Office said in a report to be released today, raising questions about an agency seeking to take a greater role in helping firms stave off job losses.

In some cases, the business owners freely admitted diverting the lucrative work to large firms or ineligible businesses.

"When you starve an agency of resources and put in place the wrong people, this is the result: Fraud goes undetected and dishonest companies see skirting the rules as 'business as usual,' " said Rep. Nydia Velazquez (D-N.Y.), who chairs the House Small Business Committee. The committee is holding a hearing today on fraud and waste in SBA programs.

The agency generally agreed with the GAO's recommendations that urged stronger checks, unannounced site visits and stiffer punishment for firms found to be ineligible.

The GAO report examined SBA's Historically Underutilized Business Zone, or HUBZone, which was created in 1997 to help thousands of small firms in distressed areas.

To be eligible, a company affirms that its principal office -- where the greatest number of employees work -- is in a designated HUBZone and that at least 35% of the firm's full-time employees live in that area. HUBZone firms also must spend at least 50% of a contract's personnel costs on its own employees.

The GAO and the SBA inspector general have highlighted problems in the awarding of HUBZone contracts dating to 2003, with spot checks that found that tens of millions of dollars in federal contracts were improperly awarded. However, no systematic review has been conducted to determine what percentage of the roughly $8 billion in HUBZone contracts awarded each year might be questionable.

In the report, investigators found 19 ineligible firms in San Diego, Dallas, San Antonio and Huntsville, Ala., that received nearly $30 million in Pentagon and Housing and Urban Development contracts designated for HUBZone businesses.

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