The federal Veterans Affairs Department every year awards contracts specifically to qualifying small businesses owned by military veterans. But it has gotten tougher for businesses to prove they're eligible for the contracts.
The federal agency is cracking down after an internal audit showed it had paid millions of dollars to firms that weren't actually owned by veterans or were otherwise ineligible.
The audit, conducted last year, was of only 42 small businesses that had been awarded contracts. But it showed that 32 of those businesses— whose contracts were worth a total of nearly $47 million — should not have gotten contracts at all.
"We want to get it cleaned up because there are enough disabled veterans out there that need" the business, said Rich Dryden, executive director of California Disabled Veteran Business Alliance in Sacramento. "We don't need criminals coming in and trying to take away that wonderful opportunity."
The problem is especially relevant to disabled veterans because their businesses get preferential status in the competition for some contracts — not only from Veterans Affairs, but also from other federal and state agencies.
It's not only non-veteran owned businesses that have been abusing the contract award process, according to a Veterans Affairs report released in July. Some veteran-owned firms that won contracts broke the rules by just passing the work to non-veteran-owned businesses for a fee.
"Performance fraud is a serious potential risk to the integrity of the program," Thomas Leney, who oversees the agency's office of small and disadvantaged business utilization, said in prepared remarks for a congressional hearing on the topic last month.
Now, to prove ownership and control claims, small businesses have to send the agency copies of tax returns, payroll ledgers, signature cards for bank accounts and other documentation. Previously, a business simply had to say it had those documents on file.
The businesses even have to send in copies of recent checks drawn from their bank accounts.
And the agency is stepping up site visits, to more than 750 nationwide this year from fewer than 150 last year.
One local small business owned by a service-disabled veteran is already feeling the heat, even though it has yet to win a contract with the agency.
Thomas Abercrombie, who owns and operates EWaste Disposal Inc. in Irvine, applied in January to be added to the Veterans Affairs database of certified small businesses.
To Abercrombie's surprise, an agency auditor flew out for a two-hour site visit.
"He came in and he audited our bank statement and my lease and verified everything that was on the application was accurate," Abercrombie said. "You are not going to bluff your way onto that database."
The businesses that do pass muster will have much less competition for the contracts. Since the eligibility crackdown, which started late last year, the agency has dropped about 8,100 firms from its database because they didn't qualify or didn't respond to requests for new documentation.
That cut the database by slightly more than half. Now there are only about 8,000 businesses listed.
As word gets out about the new scrutiny, it may help protect veteran-owned small businesses from getting harassed by companies that want to get contract funds through the back door.
Linda Clark, who owns a small technology support firm in Studio City, has had to fend off outside firms looking to capitalize on her veteran-owned-business status to access federal contract dollars — not by asking her to be a legal subcontractor, but by trying to use her business as a front.
"I have had people approach me because they thought I was a service-disabled veteran and thought I could possibly get a sole source contract or into a smaller competitive pool," said Clark, managing principal at Langford & Carmichael Inc.
"But when they found out I am not a service-disabled person, and therefore not eligible for those, they went away."