Contractors caught gaming the system avoid punishment

Nearly eight months after a watchdog report found extensive fraud in a contracting program designed to help injured veterans launch a second career, the government has yet to suspend or debar any companies, according to witnesses at a hearing on Thursday.

In November, the Government Accountability Office reported that 10 ineligible companies had improperly received $100 million in set-aside and sole-source contracts that were reserved for service-disabled veteran-owed small business firms.

Five of the agencies cited in the report testified before the House Small Business Subcommittee on Contracting and Technology on Thursday, saying they have made process-oriented changes that will better equip them to catch fraud and malfeasance in the future.

As for punishing the 10 companies GAO named, agency officials were generally silent, citing ongoing investigations or a lack of evidence necessary to call for a suspension.

The lack of action frustrated subcommittee Chairman Glenn Nye, D-Va. "The only way that our veteran business owners can be confident that the program we have set out to provide them with tools to improve their lives; to show them that we care about their service to our country, is if you find instances of fraud and take action to root them out," he said.

Nye has sponsored legislation that would institute fines and criminal penalties for companies caught gaming the service-disabled veteran-owned small business program. The bill, introduced in the House in November, also would require the Small Business Administration to dedicate more resources to program outreach.

The GAO report found various types of fraud. One company owner was not a service-disabled veteran. Another was owned by a service-disabled veteran who did not control the firm's daily operations. Several reportedly acted as a conduit to pass-through the majority of the work to larger companies, or in the case of an Air Force contractor, to a firm where the veteran's wife works.

The Air Force never disputed GAO's findings, but on Thursday the Pentagon's top small business contracting official told the panel the allegations were overstated and generally incorrect.

Linda Oliver, acting director of the Office of Small Business Programs at the Defense Department, attributed the $900,000 contract to "ignorance" on the part of the company and some inadvertent miscommunication by the contracting officer, whom she said took a "spanking" by the department for the mistake.

"There's another side to explain all this," said Oliver. She later told Nye that it's too soon to know whether the issues GAO cited were indicative of a larger problem at Defense. "This may be the tip of the iceberg," Oliver said. "I just don't know."

Lawmakers have said one problem is the program allows companies to self-certify as a service-disabled veteran-owned small business. Agencies then are reliant, because of a lack of resources and accurate data, on legitimate service-disabled entrepreneurs to spotlight instances of fraud.

"We rely on other small businesses to cry foul," said Rep. Aaron Schock, R-Ill., the subcommittee's ranking member. "Perhaps the agencies that are awarding the contracts to these small business set-aside preferences should be the ones to follow up and verify that; in fact, it's small business people that are doing the work."

Agencies argued they are taking steps to proactively and reactively respond to cases of fraud. For example, FEMA is exploring working with the Veterans Affairs Department to use its VetBiz database to validate the eligibility of some contractors. And VA is preparing to launch a Suspension and Debarment Committee for non-Federal Acquisition Regulation debarment actions.

"If there is actual fraud, we need to get into a debarring mode," said Timothy Foreman, executive director of the Office of Small and Disadvantaged Business Utilization at VA and chairman of the new committee.

In fiscal 2008 -- the last year for which data is available -- agencies awarded nearly $10 billion, or roughly 1.5 percent of all contracts, to service-disabled veteran-owned companies. The federal statutory goal is 3 percent.

Joseph Jordan, SBA associate administrator of government contracting and business development, said he expects those numbers to rise, spurred in part by nearly $1.5 billion in Recovery Act awards to program contractors. "Overall, we've made progress over the past year, but as the GAO reminded us last year, there is more we can do," Jordan said.

While lawmakers were pleased with the progress, some remain skeptical about the number's legitimacy. "When the GAO report shows that some significant portion of that contracting pool is fraudulent," Nye said, "there is a big asterisk next to that number for me."