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Fraud Hits the SBA

Much like the Community Redevelopment Act (CRA) for housing, the HUBZone Empowerment Contracting Program was designed to encourage economic development in historically underutilized business zones and, like the CRA, it looked remarkably good on paper. The problem happened when it was put into practice. The story on describes that problem like this:

According to a Government Accountability Office (GAO) report dated July 17, 2008, 10 of the 17 firms the GAO investigated in the Washington, DC, metro area weren't eligible for HUBZone certification but had been awarded obligations from federal agencies amounting to more than $105 million since 2006. As part of its investigation, the GAO created four fictitious firms. Using fabricated leases and other documentation, agents skated around the HUBZone requirements—in some cases, using a Starbucks address or leasing mailboxes from retail postal service centers in HUBZone areas to gain certification. Within weeks, all four firms were HUBZone certified.

Hogging the Government Trough

How does this happen? Shouldn't it be harder to shake the federal money tree and rake in a small fortune? You would think so, but according to Bruce Causseaux, a senior level specialist with the GAO's Forensic Audit and Special Investigations Unit, there are three main factors that encouraged the fraud. In fact, he describes the mixture as a “perfect storm.” These factors are:

  • Billions of dollars in federal money

  • Poor control processes

  • Little punishment for associated misdeeds.

Sound familiar? I wish I could say this was an isolated instance but it isn't. The US Government is throwing money around like a drunk in Vegas and the only check seems to be the gnawing fear growing in Congress of the escalating anger among their constituents. That, however, has to vie against the equally gnawing fear of doing nothing. So, what will they do? More of what didn't work the first time, you can bet on it. Any improvements will not come from the government, but rather from the private sector making changes in an effort to head off government mandates that they calculate will do more harm than good. AIG, for example, is reducing its CEO pay to $1 and rescinding all bonuses. They did that themselves, knowing that whatever Congress decided to do to pacify the public's ill will with them would likely be worse.

Is this the best way to address the crisis? How did the SBA deal with their fraud problem? Again, from

In the weeks following the [GAO] report, the SBA had ordered an audit of all 14,000 HUBZone firms and was working on new application guidelines, updating the HUBZone map, improving internal controls and making policy changes, says Fay Ott, associate administrator for the Office of Government Contracting and Business Development. It also planned to hold additional meetings with the GAO. "These reforms are well under way," says Ott, who sees the report as a road map to improvement. "We'll have a HUBZone program that is well-managed and much more effective and efficient in getting to the areas it was meant to get to."

The Bottom Line

There is a reason why I call the SBA the only government agency without a uniform that you can depend on. Instead of endless debate, politically correct rumination and compromises that take the meaning and the force out of everything, the SBA is intent on solving the problem. They knew they had to do something, so they went ahead and did the right thing.

Let's hope Congress and the new administration can learn from their example.

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