GAO finds $325M awarded to ineligible firms under SBA program

The president of a federal contracting firm owned a $450,000 yacht, a $200,000 Lamborghini and a $2.5 million home but still qualified for Small Business Administration incentives for the disadvantaged — one of 14 cases of fraud and other misuses of the program outlined in a new report from the Government Accountability Office.

The GAO investigation found that federal agencies improperly awarded $325 million in small-business set-aside and sole-source contracts to firms not eligible for the small-business designation.

Most of the ineligible firms engaged in fraud to obtain the contracts under the SBA's 8(a) program, states the GAO report released April 29.

The 8(a) program assists firms that are at least 51 percent owned and controlled by an individual who meets criteria for being socially and economically disadvantaged. The firm also must qualify as a small business. Once certified, 8(a) firms are eligible to receive sole-source and set-aside contracts for up to nine years

In the 14 cases investigated by the GAO, firms made false statements to quality for the 8(a) program or to retain their certification.

In the case of the business owner who owned a yacht and a Lamborghini, the owner fraudulently represented assets used for purchasing his home, the GAO said. The owner’s IT consulting firm in Bethesda, Md., received $12.6 million in contracts from the Agriculture, Interior, Transportation and Veterans Affairs departments before graduating from the SBA program in March 2010.

In another case, a company that had grown too large for the 8(a) program used a series of smaller companies as fronts to continue getting contracts. The company won $48.3 million in contracts from the Agriculture, Commerce, Defense and Interior departments as well as the EPA, General Services Administration, and Social Security Administration, the GAO said.

Also, a firm that received $11.2 million in Defense and Homeland Security department small-business set-aside contracts was ineligible because its owner had a net worth that was greater than allowed, the GAO said. The president of the company fraudulently reported his adjusted net worth to be about 73 percent less than the actual amount, the report said.

“In some cases, SBA did not detect the false statements and misrepresentations made by certified firms. In others, SBA became aware of the firms’ ineligibility but failed to take action,” the GAO added.

“These cases show substantial vulnerabilities in SBA’s monitoring of eligibility for individuals and firms already in the program,” the watchdog agency concluded. “The lack of a consistent enforcement strategy or any real consequences for fraud and abuse is a further weakness in SBA’s fraud prevention program.”

The GAO made six recommendations for improvements, and SBA officials agreed with five of the six and were evaluating the sixth.