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Small business program vulnerable to fraud, federal auditors say

It’s way too easy to get the Small Business Administration to approve fraudulent applications from companies seeking government contracts, federal auditors say.

Fake applications to a program meant for companies in economically distressed areas — including one from a firm claiming as its address the Alamo in Texas — sailed easily through the SBA’s vetting process after they were submitted by investigators, the Government Accounting Office said in a new report.

Moreover, 29 firms identified previously as wrongly participating in the program were awarded $66 million in federal contracts last year, the report said.

“We saw a lot of fraud in the program,” Matt Valenta, the GAO’s assistant director for Forensic Audits and Special Investigations, said Monday.

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SBA officials took issue with that characterization, saying that the agency has implemented new procedures for detecting dishonest applications.

To test the SBA’s anti-fraud measures, Valenta said, his office submitted four fake applications, including one from the company at the Alamo and one at a city hall elsewhere in Texas. It is the third year in a row that the agency has submitted fake applications — and all have been accepted except one, he said, which was lost.

Investigators also took a second look at 29 companies identified in earlier audits as being ineligible for the program. This year’s investigation showed that those companies were still receiving federal contracts, Valenta said.

To qualify for the program, companies must be located in what the government calls a historically underutilized business zone, essentially an economically distressed area.

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They must also meet the federal government’s definition of a small business, which varies from industry to industry, and 35% of their employees must live in the zone. Last year, the federal government entered into contracts worth nearly $3 billion with companies participating in the program.

Joseph Jordan, the SBA’s associate administrator of government contracting and business development, said the agency had worked hard to improve its fraud detection since the GAO first identified problems with it in 2008.

At that time, he said, the application process was conducted online, and companies were not required to prove that the information they sent in was true.

Since then, he said, the agency has begun requiring applicants to send paperwork documenting their eligibility. It has also implemented several other measures, including site visits to see if a firm is really located in a distressed area. Jordan said that by the end of this year, officials will have visited 1,000 of the approximately 10,000 companies participating in the program.

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The GAO’s report was not fair, he said, because the applications submitted for the bogus companies at the Alamo and elsewhere were “expert forgeries.” He said investigators took a “cheap shot” at the SBA by saying that the 29 companies identified in previous audits were still receiving contracts.

Some of those companies were still eligible for the program, and others had received their new contracts before full investigations had been conducted, Jordan said.

Still, he said, the SBA would continue to work to eliminate fraud and abuse in its programs.

The agency’s fraud problems “are not going to be fixed overnight,” he said. “We’re working hard on this.”

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sharon.bernstein@latimes.com


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