Companies fraudulently collected at least $100 million in federal contracts from a $4 billion government program designated for disabled military veterans who run small businesses, congressional investigators charge.
The Small Business Administration failed to check if companies were eligible for the no-bid contracts for veterans with service-related injuries, allowing, for example, a contracting employee at a military base in Tampa, Fla., to improperly funnel a $900,000 Air Force contract to his wife's firm.
Moreover, because there are few penalties for companies found ineligible, many were still being handed tens of millions of dollars in government work even after they were found to be flouting the rules, according to the report released Thursday by the Government Accountability Office.
In many cases, small business owners falsely claimed they had a service-related injury to get the federal work such as a $7.5 million FEMA contract for Hurricane Katrina work and were only caught when competitors protested. In other situations, the small veteran-owned businesses were legitimate but then improperly passed the work to large or foreign-based corporations.
"Fraud in this program means that honest veterans who own a small business lose out on projects to impostors who, in many cases, aren't small businesses or even veterans,'' said Rep. Nydia Velazquez, D-N.Y., chairwoman of the House Committee on Small Business, who requested the report.
"Given the sacrifices our veterans have made, we owe them a program that works and helps them compete for their fair share of government contracts," she said.
Responding, the SBA generally agreed with the recommendations but contended it was not obligated to implement fraud controls because it was the contracting officers at the federal agencies who ultimately were responsible for monitoring the contracts.
But in its report, the GAO disagreed, saying federal rules require the SBA to verify a company's eligibility and to impose penalties if a firm misrepresents itself. The GAO also faulted a broader lack of accountability that allowed abuses to continue.
"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the veterans program,'' investigators wrote.
Among the cited abuses, based on the GAO's spot review of cases since 2003:
• A Las Vegas firm falsely claimed it was a veteran-owned small business to compete for $200 million in contracting work to maintain trailers for Katrina victims. After a competitor protested, the misrepresentation was uncovered and work was stopped, but the company had already received $7.5 million. The firm received no other punishments.
• Using veteran-owned businesses as a front, a septic tank company in Austin, Texas, received an Army contract for work at Fort Drum, N.Y., and Fort Irwin, Calif. After its status was challenged last year and it was found to be ineligible, the Austin company was allowed to continue work on the Army contract through 2013 for a total value of up to $1.1 million.
• A contracting employee at MacDill Air Force Base in Tampa, Fla., set up a veteran-owned business and then passed along a $900,000 furniture contract to his wife's non-veteran-owned firm, who in turn gave the work to a furniture manufacturer who actually performed the contract. Contracting officials acknowledged they were aware the employee had little involvement or experience in performing the furniture contract when making the award.
The GAO recommended that the SBA work to develop penalties that would prohibit companies from getting federal work if they are found to knowingly misrepresent their status as veteran-owned businesses. It also urged the Veterans Affairs Department to expand its database of validated veteran-owned small businesses, so that the SBA and contracting officials can access it to verify eligibility.
The findings come as President Barack Obama is expected within the next week to sign an executive order aimed at cracking down on government waste and fraud. Officials say part of that order will seek to impose penalties on contractors, such as suspension, if they fail to report and return improper payments made by the government.