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Bids for Work Falsified, GAO Reports
$100 Million in Contracts for Distressed Zones Go to Firms Operating Elsewhere

By Anita Huslin
Washington Post Staff Writer
Friday, July 18, 2008; D04

Over the past two years, at least 10 Washington area companies have won more than $100 million in prime government contracts set aside for small businesses in economically distressed areas by claiming they had residency in those communities.

A Government Accountability Office report released yesterday challenged those claims and said the agency plans to ask the Small Business Administration‘s inspector general to investigate.

The GAO said it reviewed records for 17 Washington area companies participating in the program and found that 10 allegedly failed to meet SBA requirements that their primary offices be based in an economically distressed zone and that at least 35 percent of their employees live in one.

In one instance, a roofing contractor with a $4.1 million Air Force contract listed his business as being in a Landover distressed zone. When government investigators visited, the office was in half of a duplex and a person who identified himself as a vice president said no employees worked there. According to payroll records, only 12 percent of the company’s employees lived in the zone, the GAO said.

In another, an engineering company listed its primary address as the second floor of a house in Northeast Washington that had been converted into a dentist’s office, but its Web site locates the company in McLean and employees answer the phone there. Audrey Price, president of the company, Quantum Dynamics, said she has an open-ended arrangement with the dentist for the space above his office. Her company is planning to move soon from McLean to Macon, Ga.

“We are preparing a complete response to the SBA and expect to be exonerated as far what the GAO is saying,” she said by telephone.

In another case, investigators went to the address of CSI Engineering (DC/PC) in Greenbelt and found the office locked and several days of mail piled outside the door. The company president said he has two companies with similar names; one is in Greenbelt and another in Beltsville, which is not in an economically distressed zone.

“We do all of the engineering in Greenbelt every day,” said CSI Engineering president Dave Ghosal, who works in Beltsville. “There’s a lot of turnover in people, but if you call, there are people there” in Greenbelt. “The names, I think, are a little confusing.”

The GAO discussed its findings yesterday during a hearing before the House Committee on Small Business. The report found fault with the SBA’s oversight.

As a test of the program’s screening process, investigators created fictitious companies and submitted applications for the Historically Underutilized Business Zone program. Four of them won certification, even though one listed a Starbucks as its company address and the employee and company information was fabricated on all the applications, GAO investigators told committee members.

“We created the bogus companies to test fraud controls, the gateway to the money,” said Gregory Kutz, managing director of forensic audits and special investigations for the GAO. “That miserably failed.”

The GAO said the program relies on limited documentation and there is little follow-up by the SBA. As a result, some companies rent space in a HUB zone to win certification, but then move elsewhere, investigators said.

After the hearing, SBA officials released a statement outlining steps they will take to correct problems and said they have already moved to rectify problems such as program maps that incorrectly designate HUB zones. Bad maps have resulted in ineligible small businesses participating in the program and in eligible businesses being blocked out, the GAO report said.

SBA officials said they would work on their internal systems to improve the verification process. Last year, administration officials quashed legislation that would have required on-site visits of applicants and other measures to ensure businesses’ eligibility, calling them “burdensome or undesirable.”

Under federal contracting rules, agencies are to award 3 percent of their annual contracts to qualified companies in HUB zones. In 2003 to 2006, the percentage of prime contracting dollars fell about 33 percent short of the statutory goal in 2006, according to the GAO.