United States. Congress. House. Committee on Small.

The abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 online

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THE ABUSES IN THE SBA's 8(a) PROCUREMENT

PROGRAM



Y4.SM 1:104-5?



Tie Abuses in the SBA's 8(a) Procur.

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION



WASHINGTON, DC, DECEMBER 13, 1995



Printed for the use of the Committee on Small Business



Serial No. 104-59



OfPOSITOfiy '
AUG 1 g j 996



^Z^'L^ry



21-817 CC



U.S. GOVERNMENT PRINTING
WASHINGTON : 1996



r^«o»iw?«



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For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-052831-3




THE ABUSES IN THE SBA's 8(a) PROCUREMENT

PROGRAM



Y4.SM 1:104-59

Tie Abuses in the SBA's 8(a) Procur.

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION



WASHINGTON, DC, DECEMBER 13, 1995



Printed for the use of the Committee on Small Business



Serial No. 104-59






DEPOSITOR^

AUG 1 9 , 998



U.S. GOVERNMENT nTTTTTITTr ill I II |l "\Jl



WASHINGTON : 1996



For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-052831-3



COMMITTEE ON SMALL BUSINESS
JAN MEYERS, Kansas, Chair



JOEL HEFLEY, Colorado

WILLIAM H. ZELIFF, JR., New Hampshire

JAMES M. TALENT, Missouri

DONALD A. MANZULLO, Illinois

PETER G. TORKILDSEN, Massachusetts

ROSCOE G. BARTLETT, Maryland

LINDA SMITH, Washington

FRANK A. LOBIONDO, New Jersey

ZACH WAMP, Tennessee

SUE W. KELLY, New York

DICK CHRYSLER, Michigan

JAMES B. LONGLEY, Jr., Maine

WALTER B. JONES, Jr., North Carolina

MATT SALMON, Arizona

VAN HILLEARY, Tennessee

MARK E. SOUDER, Indiana

SAM BROWNBACK Kansas

STEVEN J. CHABOT, Ohio

SUE MYRICK North Carolina

DAVID FUNDERBURK, North Carolina

JACK METCALF, Washington

STEVEN C. LaTOURETTE, Ohio



JOHN J. LaFALCE, New York
IKE SKELTON, Missouri
RON WYDEN, Oregon
NORMAN SISISKY, Virginia
KWEISI MFUME, Maryland
FLOYD H. FLAKE, New York
GLENN POSHARD, Illinois
EVA M. CLAYTON, North Carolina
MARTIN T. MEEHAN, Massachusetts
NYDIA M. VELAZQUEZ, New York
CLEO FIELDS, Louisiana
WALTER R. TUCKER III, California
EARL F. HILLIARD, Alabama
DOUGLAS "PETE" PETERSON, Florida
BENNIE G. THOMPSON, Mississippi
CHAKA FATTAH, Pennsylvania
KEN BENTSEN, Texas
WILLIAM P. LUTHER, Minnesota
JOHN ELIAS BALDACCI, Maine



JENIFER LOON, Staff Director
JEANNE M. ROSLANOWICK, Minority Staff Director



(ID



CONTENTS



Page

Hearing held on December 13, 1995 1

WITNESSES
Wednesday, December 13, 1995

Campbell, William, Chief Financial Officer, U.S. Coast Guard 11

Innerbichler, Nicholas R., CEO, TAMSCO 12

Jenkins, Calvin, Associate Administrator, Minority Small Business and Cap-
ital Ownership Development, U.S. Small Business Administration 8

Lee, Karen S., Deputy Inspector General, U.S. Small Business Administra-
tion 6

Wheeler, Donald J., Director, Office of Special Investigations, U.S. General

Accounting Office 4

APPENDDC

Opening statements:

Clayton, Hon. Eva 41

Flake, Hon. Floyd H 43

Hilliard, Hon. Earl F 46

LaFalce, Hon. John 48

Manzullo, Hon. Donald A 50

Meyers, Hon. Jan 60

Mfume, Hon. Kweisi 65

Prepared statements:

Innerbichler, Nicholas R 66

Jenkins, Calvin 75

Lee, Karen S 100

Wheeler, Donald J 119

Additional material:

GAO Report: 8(a) Is Vulnerable to Program and Contractor Abuse 129

Questions and answers to Chair Meyers from GAO 155

Questions and answers to Chair Meyers from SBA 180

Questions and answers to Chair Meyers from Coast Guard 198

Questions and answers to Chair Meyers from TAMSCO 215

Questions and answers to Chair Meyers from I-NET 221

(III)



THE ABUSES IN THE SBA's 8(a)
PROCUREMENT PROGRAM



WEDNESDAY, DECEMBER 13, 1995

House of Representatives,
Committee on Small Business,

Washington, DC.

The committee met, pursuant to notice, at 9:30 a.m., in room
2359, Rayburn House Office Building, Hon. Jan Meyers (chair of
the Committee) presiding.

Chair Meyers. The Committee will come to order. We have com-
peting meetings taking place this morning, and I think we will
have more Members here beginning at 10 o'clock, but we will go
ahead and start because I hate to have everybody waiting so long.

Today the Committee on Small Business will conduct an over-
sight hearing into the Small Business Administration's Minority
Enterprise Development, or 8(a) Program, as it is commonly
known. For my colleagues on the Committee and those present
with an interest in this program, it will come as no surprise that

I have had grave concerns about 8(a).

This Committee for years has heard from entities like the U.S.
General Accounting Office about abuses and fraud in the 8(a) Pro-
gram. In fact, ever since I've been here, and I have been here for

II years these reports have been punctuated by the occasional
scandals, some of them resulting in convictions and jail time. In
particular, the WEDTECH scandal prompted a legislative overhaul
of this program in 1988. Once more this Committee is assembled
to hear the same sad GAO and SBA Inspector General reports
about how 8(a) firms, the SBA and contracting agencies have con-
spired to game the system.

The 8(a) Program began as a way of helping to develop small
business owned by socially and economically disadvantaged individ-
uals. The rationale which I do not craw with is that someone who
is socially and economically disadvantaged will have a harder time
than the average small business owner in obtaining access to cap-
ital and credit and in competing with the average business in the
same field owned by a nondisadvantaged individual. However, the
8(a) Program as it is operated today bears almost no resemblance
to this vision. It has become corporate welfare in the worst sense
of the term.

In reading the SBA IG's testimony submitted for today's hearing,
it's clear that 8(a) doesn't just help socially and economically dis-
advantaged individuals get on an equal footing with the average
nondisadvantaged small business. It allows millionaires with big
companies, sometimes with as many as 1,500 employees, to obtain

(1)



sole source contracts under expedited procedures. The SBA IG
looked at 50 larger sized firms in the 8(a) Program and found that
35 of the 50 participant owners were millionaires, but remained
classified as economically disadvantaged. The IG also found that
these firms were doing far better than the average firm in similar
lines of business in terms of business assets, revenue, gross profit,
working capital, and net worth. However, these firms continued to
stay in the program pulling down multimillion dollar sole source
contracts.

Even more galling to me is that the SBA allows these companies
to continue in the program, turning a blind eye to regulatory viola-
tions and abuses. Then when a situation really gets bad and the
SBA decides to get tough, it makes a referral to the Justice Depart-
ment only to be turned down because the SBA has acted as an ac-
complice allowing the situation to occur.

Congressional efforts to fix the program in 1988 have failed and
I believe for two main reasons: First, the legislation was flawed in
some respects creating perverse incentives for SBA employees to
encourage abuse of the program; and second, a mind set seems to
exist at the SBA and among contracting agencies that their mission
is to find loop-holes in the Taw violating the spirit, if not the letter,
of the law governing this program.

The SBA has the tools to graduate firms early from the program
when it's clear they have gotten their leg up and are doing well,
but they rarely do it and when the SBA does notify a firm of its
intent to graduate them early from the program, it takes at least
a year to get it done and the firm loads its plate with huge sole
source contracts.

Given all of these abuses surrounding the sole source authority
in this program, I am going to take this opportunity to call upon
Administrator Lader, who unfortunately is not here today, to place
an immediate moratorium on all sole source contracting through
the 8(a) Program. These abuses must be stopped. He has the au-
thority to do this under current law, and I hope he has the will to
do what is right. I realize my views on this may be harshly criti-
cized by some of my colleagues on this Committee, but I ask them
to think for a moment about the hundreds and perhaps thousands
of socially and economically disadvantaged firms that have gotten
nothing from this program because of the greed of a few.

At this point I recognize the ranking minority member Mr. La-
Falce for an opening statement.

Mr. LaFalce. Thank you very much Madame Chair for conven-
ing this hearing on the Small Business Administration's Minority
Enterprise Development Program, commonly referred to as the 8(a)
Program.

I appreciate the sincerity of your remarks and the intensity of
your conviction, but I'm not sure we should go quite as far as you
have suggested. This program does have a history of problems as
well as a history of achievements.

In the problems category, the Small Business Committee has
worked hard in an attempt to reform 8(a) by legislating tighter
company performance requirements and more responsive and rigor-
ous Agency implementation and oversight of the program. I believe



that effort has been worthwhile, although there are many more ef-
forts still needed.

Some of the problems routinely heard about in the mid-1980's
have been corrected. To give but one example, a few years ago the
processing time for 8(a) applications was outrageously long and
was indicative of poor program management. Today applications
are processed on average within roughly 90 days which is the tar-
get this Committee set. If that sounds like a small problem and an
easy fix, let me assure all it was a nationwide and deeply en-
trenched flaw in the program. It was fixed. The number of persist-
ent problems has been diminishing. Agency awareness of current
problems is high, and the intention and commitment to remedy
them is strong.

On the achievement side of the ledger there are hundreds of
firms that did get their start in the 8(a) Program that are now es-
tablished and providing jobs and generating tax revenue. We are
quick enough to criticize other countries whose economic and social
structures and policies keep down their minority groups. We should
be proud that our Government provides at least this opportunity to
economically and socially disadvantaged individuals in this coun-
try. What if we didn't?

In 1994, according to data provided by the Small Business Ad-
ministration, 6.2 percent of all Federal contract dollars went to
small disadvantaged firms, but without the 8(a) Program that fig-
ure would plummet to 3 percent of Federal contract dollars. It
would be more than cut in half, suggesting to me that without a
program such as 8(a) Federal contracting dollars and contracting
opportunities would not, on their own, find their way to small dis-
advantaged firms.

The General Accounting Office Report, which is the principal
subject of today's hearing, has investigated two firms. I believe
there are approximately 5,700 firms currently participating in the
program and these two firms had indications of possible regulatory
or criminal violations. It could be considered quite an illogical leap
to interpret GAO's findings on these two companies as necessarily
representative of all 8(a) firms. Of course, these findings should,
however, make us increasingly vigilant and vigorous in our over-
sight.

The 8(a) Program is well-intentioned, it's ambitious, it's complex,
and the problem it attempts to deal with, the problem of enormous
past discrimination, is very widespread and very complex. So, we
cannot minimize the problems facing the program, nor should we
run away from them. I think we should await recommendations
from the Department of Justice regarding possible changes in the
program, await those recommendations eagerly, and attempt to
deal with their recommendations expeditiously. I think we should
work with the SBA in making and in fact requiring a better pro-
gram, but I don't think we should launch a broadside attack or con-
demnation of the entirety of the program because there are in fact
some cheats in it.

The challenge is to move responsibly. To do much more to keep
those people out, but surely not to let them be our excuse for giving
up. I thank the chair, I'd ask unanimous consent to include in the
record a statement from Mr. Earl Hilliard.



Chair Meyers. Without objection. Thank you Mr. LaFalce.

Our first witness will be Mr. Donald Wheeler, Director of the Of-
fice of Special Investigations of the U.S. General Accounting Office,
Mr. Wheeler.

[Mr. Milliard's statement may be found in the appendix.]

TESTIMONY OF DONALD J. WHEELER, DD2ECTOR, OFFICE OF
SPECIAL INVESTIGATIONS, U.S. GENERAL ACCOUNTING OF-
FICE

Mr. Wheeler. Madame Chair and members of the Committee,
we are pleased to be here today to discuss our September 1995 re-
port concerning case studies of two firms that participated in the
8(a) Minority Business Development Program.

I will summarize our prepared testimony and ask that you in-
clude the complete statement in the record.

Chair Meyers. Without objection, it will be done.

Mr. Wheeler. The 8(a) Program is to promote the development
of small businesses owned and controlled by socially and economi-
cally disadvantaged individuals. Today we will discuss program
and contractor abuses involving two of the top 25 8(a) contractors
in terms of total dollars awarded in fiscal year 1992.

In summary, our investigation revealed 8(a) Program abuse and
ineffective SBA oversight of the two firms. We questioned SBA's
justification for accepting the firms into the program.

During the application process both firms provided information
that gave rise to questions about their eligibility to participate in
the 8(a) Program, but SBA never fully resolved those questions.
Further, one firm misrepresented its qualifications to enter and re-
main in the program, however, SBA's 8(a) Program office did not
act to suspend the firm's contracts or remove it from the program
after learning of the misrepresentations.

Regarding the second firm, we questioned the practices of the
contracting Agency, the Coast Guard. In a contract with the second
firm, Coast Guard officials changed the contract's original classi-
fication code to one for which the firm qualified and altered the
contract's minimum value to direct an Indefinite Delivery Indefi-
nite Quantity (IDIQ) contract to the firm avoiding Federal competi-
tion requirements.

The two high technology firms on which we focused were I-NET,
Inc. and TAMSCO. They were the third and ninth largest 8(a)
firms, respectively, in terms of total dollars awarded for fiscal year
1992, a year when the top 25 of over 4,400 active 8(a) Program par-
ticipants received about 22 percent of the total 8(a) contract dol-
lars. For the almost 10 years that they were in the 8(a) Program,
they were awarded over $864 million in 8(a) contracts.

SBA regulations state that an 8(a) Program applicant must un-
conditionally own at least 51 percent of the firm and control its op-
erations. In 1984 SBA officials recommended that both I-NET and
TAMSCO be denied acceptance into the program because of ques-
tions regarding who controlled the firms. However, although SBA
never fully resolved the questions about control of the firms, both
were allowed entry into and remained in the program. In addition,
both continued to benefit from contracts they received in the 8(a)
Program.



SBA district officials four times recommended that I-NET not be
admitted to the 8(a) Program. However, a regional SBA official
overturned district officials objections. SBA district officials had de-
termined that I-NETs owner and president, Mrs. Kavelle Bajaj,
lacked the knowledge and experience to run a high technology com-
puter firm.

They had further determined that Kuljit (Ken) Bajaj, Mrs. Bajaj'
husband and a recognized expert in the field who did not qualify
for the program, would actually control and run the firm's oper-
ations. In fact, a former I-NET vice president told us that Mr.
Bajaj had hired him in January 1985 to help start and run the
business and to "teach" Mrs. Bajaj how to run a business. In addi-
tion, on the resme he submitted to SBA's Office of Inspector Gen-
eral, Mr. Bajaj stated that he was "responsible for day-to-day oper-
ations" of I-NET.

Regarding TAMSCO, SBA district officials twice recommended
that the firm's application for admittance to the 8(a) Program be
denied, but were overruled. They were concerned that TAMSCO's
nondisadvantaged vice president and 49-percent owner, William
Bilawa, would improperly benefit from the 8(a) Program and that
the disadvantaged president and 51 percent owner, Nicholas
Innerbichler, would not exercise complete control. SBA officials
knew, for example, that contrary to SBA regulations, TAMSCO's
board of directors was initially structured so that its only two
members, Mr. Innerbichler and Mr. Bilawa, had equal voting
power.

SBA, under its regulations, could have terminated I-NET's 8(a)
participation or suspended its contracts when it learned of mis-
representations by I-NET and when it learned that I-NET had ex-
ceeded size standard. However, SBA took no such action. Mrs.
Bajaj failed to disclose to SBA, as required, that she had provided
24.5 percent ownership interest to each of two persons. Subse-
quently, Mrs. Bajaj submitted false statements to SBA that did not
reflect these transactions.

In 1986 and 1988 she falsely reported to SBA that 49 percent of
I-NET stock was unissued, when a 24.5 percent ownership was
still outstanding with one of the persons. She falsely certified on
a resume submitted to SBA that she held an Associate of Arts De-
gree in computer science and technology.

Additionally, SBA regulations require it to verify that an 8(a)
firm is a small business for each contract it receives. However, for
several years SBA did not recognize or react to misleading financial
statements that served to misrepresent I-NETs size.

I-NET submitted financial statements to SBA from 1988 through
1990 that excluded certain revenues from its total sales, explaining
the exclusion in notes to the statements. But SBA did not notice
or act on the information in these notes until 1992. These exclu-
sions enabled I-NET to obtain at least 11 contracts for which it
was otherwise ineligible.

SBA allowed I-NET to stay in the 8(a) Program for almost 2 ad-
ditional years after I-NET had exceeded its size limits and SBA of-
ficials had first recommended its early "graduation" from the pro-
gram. Indeed, SBA awarded I-NET at least $62 million in addi-



tional contracts after SBA-OIG recommended that it receive no
more 8(a) contracts because of its excessive size.

As to the Coast Guard contract with TAMSCO, we determined
Coast Guard contracting officials had directed a noncompetitive
8(a) contract to TAMSCO using the IDIQ contracting option and
avoiding competition. They awarded the contract with a potential
maximum value of $14 million 1 day before TAMSCO's term in the
8(a) Program expired in September 1993.

The notes of one Coast Guard contracting official referred to this
contract as a "graduation present" to TAMSCO. Coast Guard offi-
cials told us that the Coast Guard viewed competition of contracts
as a hindrance to its mission. Thus, to award the contract to
TAMSCO, Coast Guard officials; one, changed the contract's origi-
nal Standard Industrial Classification Code, which TAMSCO had
outgrown, to one for which TAMSCO qualified; and two, lowered
the contract's original labor hours by 46 percent, to avoid the $3
million threshold required for competitive IDIQ service contracts.

This concludes my prepared statement. I would be happy to re-
spond to any questions that you may have.

Chair Meyers. Thank you Mr. Wheeler. Our next witness will be
Ms. Karen Lee, Deputy Inspector General, U.S. Small Business Ad-
ministration.

[Mr. Wheeler's statement may be found in the appendix.]

TESTIMONY OF KAREN S. LEE, DEPUTY INSPECTOR GENERAL,
U.S. SMALL BUSINESS ADMINISTRATION

Ms. Lee. Thank you Madame Chair and members of the Commit-
tee. I have submitted a written statement

Chair Meyers. Would you use the microphone please, and
they're very directional

Ms. Lee. OK

Chair Meyers. If you would speak directly into it, otherwise
those in the back of the room can't hear.

Ms. Lee. I've submitted a written statement, which I would ask
be included in the record, and I will summarize that.

Since Mr. Wheeler has testified on the details of I-NET and we
have not done any work on TAMSCO, I will address my remarks
to the major systemic problems we have discovered in our audits
and investigations and some solutions for the problems. At the out-
set I would like to emphasize that the current management of the
8(a) Program recognizes these problems and is working on develop-
ing solutions to them.

Our investigative resource commitment to the 8(a) Program has
declined for reasons I have outlined in the written statement.
Nonetheless, over the past 3 years we have obtained 26 indict-
ments, 25 convictions, and approximately $60 million in financial
recoveries.

Employee corruption has been a problem with eight employees
convicted since 1987. In most of these cases higher level officials
were lax in their oversight. We believe, however, that the convic-
tion and sentencing to prison terms of two assistant directors has
deterred such activity over the past 2 years.

In cases of participant fraud, due diligence on the part of respon-
sible SBA employees would frequently have prevented the fraud or



would have contributed to discovery sooner. In some instances, the
abuse of discretionary authority by SBA employees has resulted in
fraud referrals being declined by trie Department of Justice because
the Agency knowingly permitted violations of its own policies and
regulations.

In the audit area, our work has identified three major systemic
problems which we refer to as eligibility, competition, and
brokering.

Individuals are eligible for the 8(a) Program if they are socially
and economically disadvantaged. In 199—495 we audited the con-
tinuing eligibility review process and evaluated the adequacy of
procedures for assuring that 8(a) participants continue to meet the
requirements.

We reviewed 50 larger companies serviced by five offices around
the country. The audit concluded that participants remained in the
program even though they had accumulated substantial wealth or
had overcome impediments to obtain access to financial markets
and resources. Specific findings include the following.

Six individuals had overcome their economic disadvantage, but
remained in the program because they understated their personal
net worth or SBA employees made errors in calculating the individ-
ual's personal net worth. Personal annual income was not consid-
ered when economic disadvantage assessments were made. For ex-
ample, 17 participants had compensation ranging from $500,000 to
$2.5 million over a 2 year period.

Continuing eligibility reviews did not include comparisons of 8(a)
firms with others in the same or similar lines of business. For ex-
ample, 32 companies exceeded the average business assets, reve-
nue, gross profit, working capital, and net worth of other compa-
nies in a similar line of business.

Wealthy individuals remained eligible because equity in their
companies and primary residences and their spouses assets are not
considered in determining net worth. In our sample, 35 of the 50
were millionaires.

Program officials agreed with the majority of our audit rec-
ommendations, and they have initiated steps to analyze continuing
eligibility more carefully.

Unfortunately, the economic disadvantage aspect of eligibility is
extremely complex, it is time consuming to properly administer,
and it relies on the self certification by participants. It also re-
quires accounting knowledge and financial analysis experience to
determine net worth and the continued existence of economic dis-
advantage.

There is a corollary issue related to the lack of enforcement of
economic criteria. The failure to graduate those 8(a) companies that
are successful is a contributing factor to the concentration in the
award of contracts. Based on a computer run of 8(a) companies
with active contracts as of December 1995, the largest 200 compa-


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Online LibraryUnited States. Congress. House. Committee on SmallThe abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 → online text (page 1 of 20)