GAO Finds Fraud and Abuse by Companies Claiming to be Service-Disabled Veteran-Owned Small Businesses

11.20.2009 - Posted in E&B Alerts – Government Contracts

Yesterday, the United States Government Accountability Office ("GAO") publicly released a report revealing that fraud and abuse have resulted in millions of dollars being paid to ineligible firms under the Service-Disabled Veteran-Owned Small Business (SDVOSB) Program. The report summarized a GAO investigation into whether (1) cases of fraud and abuse exist within the SDVOSB program, and (2) effective fraud-prevention controls are in place. The investigation was performed at the request of the Chairwoman of the Committee on Small Business, the Honorable Nydia M. Velazquez.

To qualify as a SDVOSB, a company must be "majority owned" by service-disabled veterans who manage and control daily business operations. To meet the requirement that the business be "majority owned," 51% or more of the stock of the company must be held by one or more service-disabled veterans. A "veteran" for purposes of the SDVOSB definition is an individual who served in the active military, naval, or air service and was discharged or released on conditions other than dishonorable. "Service-disabled" means that the individual suffered a disability while in the line of duty or aggravated a pre-existing disability while in the line of duty. The current system permits the business to self-certify as an SDVOSB by attesting that it meets the above-stated criteria.

In the report, the GAO identified ten examples of firms that failed to meet the SDVOSB eligibility requirements, yet still received contracts set aside for such businesses. In total, these firms collected almost $100 million under contracts that were set aside for small businesses owned by disabled veterans. The GAO identified a number of ways in which companies violated the SDVOSB requirements, including: (i) a firm whose owner was not a service-disabled veteran; (ii) a firm whose owner, while a service-disabled veteran, did not control the day-to-day operations of the business; and (iii) firms that served as "pass-throughs" by which non-veterans perform or manage all work under the contract. The report notes that there is currently no requirement to terminate contracts when businesses are found to be ineligible, and that "the SDVOSB program has no preventative controls in place to prevent fraud and abuse." (emphasis added). Based on these findings, the GAO report includes the following recommendations: (1) coordination of government agencies to create an expanded database of eligible SDVOSB firms, and (2) requiring all contractors found to have misrepresented their status as a SDVOSB to be debarred.

A copy of the GAO report is available here: www.gao.gov/new.items/d10108.pdf. For additional information, please contact Tim Connelly at [email protected] or (612) 236-0160.