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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actions, as detailed in the reports, and have anv significant actions been taken to
prevent further violations? While most of our audits did not encompass contacting
contracting officers at other agencies, those we did contact generally were not aware
that their actions were incorrect. In one audit, we recommended that the District Office



118



counsel the contracting officers at an offending procuring agency, and the District Office
reported to us they didso. Procuring agencies' contracting officers are required to be
aware of the 8(a) regulations and the Federal Procurement Regulations which contain
the procedures they must follow.

Madam Chair that concludes my formal remarks. My colleagues and I will be
happy to entertain any questions you and the Committee members may have.



119



United Slates General Accounting Office



GAO



Testimony



Before the Committee on Small Business. House of
Representatives



For Release on
Delivery Expected
at 9:30 a.m.. EST
Wednesday
December 13. 1995



SMALL BUSINESS
ADMINISTRATION



Case Studies Illustrate 8(a)
Program and Contractor Abuse



Statement of

Donald J. Wheeler, Acting Director

Office of Special Investigations




GAO/T-OSI-96-1



120



Madam Chair and Members of the Committee:

We are pleased to be here today to discuss our September 1995
report 1 concerning case studies of two firms that participated in
the Small Business Administration's (SBA) 8(a) business development
program. The program is designed to promote the development of
small businesses that are owned and controlled by socially and
economically disadvantaged individuals. Our September report built
on earlier work on SBA/8(a) weaknesses. 2 These included the high
concentration of contract dollars among a very small percentage of
participating 8(a) firms and a large percentage of 8(a) firms that
received no contracts at all. Our report focused, through case
studies, on whether individuals or firms had exploited these and
other program weaknesses to participate in and benefit from the
program. Today we will discuss program and contractor abuses
involving 2 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. During the application
process, both firms provided information that gave rise to



'Small Business administration.; 8(a) Is Vulnerable to Program and

Contractor Abuse (GAO/OSI-95-15 , Sept. 7, 1995).

2 Small Business: Status of SBA ' s 8(a) Minority Business

Development Program (GAO/T-RCED-95-149 , Apr. 4, 1995); Small

Business; Status of SBA's 8(a) Minority Business Development

Program (GAO/T-RCED-95-122 , Mar. 6, 1995); and Small Business:
Problems Continue With SBA's Min ority Business Development Program
(GAO/RCED-93-145, Sept. 17, 1993).

1 GAO/T-OSI-96-1



121



questions about their eligibility to participate in the 8(a)
program, but SBA did not fully resolve those questions before
admitting the firms to the program. Further, one firm
misrepresented its qualifications to enter and remain 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. With regard to 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 classification code to one for
which the firm qualified and altered the contract's minimum value
to direct an Indefinite Delivery Indefinite Quantity (IDIQ) 3
contract to the firm, avoiding federal competition requirements.

The two high technology firms that were the focus of our
investigation were I-NET, Inc. of Bethesda, Maryland, and TAMSCO of
Calverton, Maryland. 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



; IDIQ contracts are used when agencies do not know the precise
quantity of supplies or services to be provided and consequently
are able only to estimate a minimum value. For purposes of IDIQ
contracts, SBA regulations previously required competition whenever
the guaranteed minimum value exceeded $3 million. SBA recently
amended its 8(a) regulations to eliminate the potential abuse of
IDIQ contracts to avoid competition. 13 C.F.R. § 124.311(a)(2)
(1995) requires agencies to competitively award any contract whose
total value exceeds $3 million for service contracts and $5 million
for manufacturing contracts. Effective Aug. 7, 1995, the
applicable threshold amount is the agency's estimate of the
contract's total value, including all options. The minimum value
of the contract is no longer used.

2 GAO/T-OSI-96-1



122



participants received about 22 percent of the total 8(a) contract
dollars. For the almost 10 years that both were in the 8(a)
program, they were awarded over $864 million in 8(a) contracts for
computer systems and support services. 4

SBA QUESTIONED 8(a) PROGRAM ELIGIBIL ITY ON ISSUE OF CONTROL

SBA regulations state that an 8(a) program applicant must
unconditionally own at least 51 percent of the firm and control its
operations. In 1984, SBA officials recommended that both I-NET and
TAMSCO be denied acceptance into the 8(a) program because of
eligibility issues 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 continue to benefit from contracts they
received in the 8(a) program. Based on our review of SBA
documentation and our interviews with SBA and other officials, we
questioned SBA's justification for accepting I-NET and TAMSCO into
the program.



J For fiscal year 1992, I-NET received over $65 million in 8(a)
contract awards. During its nearly 10-year (Sept. 20, 1984, to
June 16, 1994) program participation, I-NET obtained 145 8(a)
contracts totaling at least $508 million. At least 126 of the 145
contracts were awarded noncompetitively .

For fiscal year 1992, TAMSCO was awarded over $30 million in 8(a)
contracts. During its program participation from May 14, 1984,
until Sept. 18, 1993, TAMSCO obtained 108 8(a) contracts totaling
at least $356 million. At least 82 of the 108 contracts were
awarded noncompetitively.

3 GAO/T-OSI-96-1



123



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 and recommended I-NET's
acceptance. He did so in a memorandum described by other SBA
senior officials as using "circular reasoning" and "double talk."

SBA district officials had determined that I-NET's owner and
president, Mrs. Kavelle Bajaj, lacked the knowledge and experience
to run a high technology computer firm. They had further
determined that Kuljit (Ken) Bajaj, Mrs. Bajaj 's husband and a
recognized expert in the field, would actually control and run the
firm's operations. SBA had determined that Mr. Bajaj did not
qualify for the 8(a) program because of his employment at a large
computer firm. Furthermore, a former I-NET vice president told us
that Mrs. Bajaj lacked the technical and managerial skills needed
to run a computer company and that Mr. Bajaj had hired him in
January 1985 to help start and run the firm and to "teach" Mrs.
Bajaj how to run a business. Further, in 1988, Mr. Bajaj was
appointed I-NET's Executive Vice President, replacing the
previously mentioned vice president. Mr. Bajaj formally became I-
NET's president after its 1994 exit from the 8(a) program. In
addition, on the resume he submitted to SBA's Office of Inspector
General (OIG) during its 1992 I-NET audit, Mr. Bajaj stated that he
was "responsible for day-to-day operations" of I-NET. Mrs. Bajaj
was adamant with us that she unconditionally owned and controlled
the firm. However, she provided us no explanation when asked how
she controlled I-NET while, at the same time, her husband

4 GAO/T-OSI-96-1



124



represented that he had the day-to-day responsibilities for the
firm's operations.

With regard to 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. SBA
officials knew that Mr. Bilawa had previously held supervisory
positions over Mr. Innerbichler , Mr. Bilawa had had a higher salary
than did Mr. Innerbichler, and the firm was initially based in
Mr. Bilawa' s residence. In addition, 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 .

Further, a former TAMSCO official told us that the two owners were

"codependent " and functioned as equals. On his part,

Mr. Innerbichler told us that (1) despite his previous relationship

with Mr. Bilawa, TAMSCO's ownership was structured so that it would

be eligible for 8(a) contracts and (2) it was agreed that he

(Mr. Innerbichler) would maintain control of the firm's operations.

The senior SBA official who overturned the two recommended denials

had no explanation as to why he had done so.



GAO/T-OSI-96-1



125



T-NET MISREPRESENTED ITS OWNERSHIP AND QUALIFICATIONS

Although SBA, under its regulations, could have terminated I-NET's
8(a) participation or suspended its contracts when it learned of
misrepresentations by I-NET, SBA took no such action. I-NET had
misrepresented its ownership status and qualifications to enter and
remain in the 8(a) program: Mrs. Bajaj had submitted false and
misleading information about the true equity ownership in I-NET,
her educational credentials, and her citizenship status. Further,
by the time that SBA learned of the misrepresentations, it knew
that I-NET had exceeded 8 (a) -program size restrictions for certain
contracts. SBA could have terminated I-NET's participation or
suspended these contracts for exceeding size restrictions but did
neither .

Mrs. Bajaj failed to disclose to SBA, as required, that she had
provided 24.5-percent ownership interests to each of two persons.
Subsequently, 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's stock was unissued when
a 24.5-percent ownership was still outstanding with one of the
persons .

Mrs. Bajaj falsely certified on a resume submitted to SBA with her
8(a) application that she held an Associate of Arts degree in
computer science and technology. SBA did not suspend I-NET's
contracts or terminate its participation in the 8(a) program after

6 GAO/T-OSI-96-1



126



learning that Mrs. Bajaj had provided false information about her
educational credentials. Mrs. Bajaj also misrepresented her U.S.
citizenship status on her initial application, stating she was a
citizen when at the time she was a resident alien.

SBA FAILED TO RECOGNIZE I-NET'S MISLEADING FINANCIAL INFORMATION

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
from I-NET that served to misrepresent I-NET's size. I-NET
submitted financial statements to SBA from 1988 through 1990 that
excluded certain revenues from its total sales. I-NET explained
the exclusion in notes to the audited financial statements; but SBA
did not notice or act on the information in these notes until 1992.
These exclusions enabled I-NET to obtain at least 11 contracts for
which it was otherwise ineligible. However, I-NET included those
revenues in its yearly total sales figures submitted to an
investment firm when it was seeking private investors.

After determining that the excluded revenue should be included in
assessing I-NET's size, in early 1993 SBA considered terminating
certain I-NET contracts. I-NET responded that the firm had
difficulty maintaining adequate capital and credit and was "at
risk." However, SBA determined, among other financial indicators,
that I-NET had a $25-million line of credit with its bank and was
not at risk. Mrs. Bajaj told us, in defense of this apparent

7 GAO/T-OSI-96-1



127



contradiction, that in her view $25 million was not sufficient
credit. However, in another apparent contradiction, during the
same period when I-NET was seeking outside investment, I-NET
described itself as having a backlog of over $580 million in
contracts and projected income through 1997 of about $1.3 billion.
Yet, in a written response to us concerning the risk issue, I-NET
stated that at the time it was seeking outside investment, I-NET
"... had severe cash flow problems and was having difficulty
securing credit."

Further, SBA allowed I-NET to stay in the 8(a) program for almost 2
additional years after I-NET had exceeded its size limits and SBA
officials had first recommended its early "graduation" from the
program. Indeed, in January 1993, the SBA-OIG provided a draft
audit report to the SBA office responsible for I-NET, recommending
that no further contracts be awarded to I-NET because it had
exceeded its size standards and had provided incorrect information
to SBA for its annual size-standard determinations. However, until
I-NET left the program in June 1994, SBA awarded I-NET additional
contracts totaling at least $62 million.

U.S. COAST GUARD USED IDIO CONTRACT. AVOIDING COMPETITION
REQUIREMENTS

As to the U.S. Coast Guard contract with TAMSCO, we determined that
Coast Guard contracting officials had directed a noncompetitive
8(a) contract to TAMSCO, using the IDIQ contracting option and

8 GAO/T-OSI-96-1



128



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 officials told us that
the Coast Guard viewed competition of contracts as a hindrance to
its mission and that it was always their intention to award the
contract to TAMSCO. Thus, Coast Guard officials (1) changed the
contract's original Standard Industrial Classification code, which
TAMSCO had outgrown, to one for which TAMSCO qualified and (2)
lowered the contract's original labor hours by 46 percent, to avoid
the $3 -million threshold required for competitive IDIQ service
contracts. This allowed the Coast Guard to award a noncompetitive
IDIQ contract to TAMSCO.



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



(600396)

9 GAO/T-OSI-96-1



129



United States General Accounting Office



(Tl AO Report to the Ranking Minority Member,

Permanent Subcommittee on



Investigations, Committee on
Governmental Affairs, U.S. Senate



September 1995



SMALL BUSINESS
ADMINISTRATION

8(a) Is Vulnerable to
Program and
Contractor Abuse




GAO/OSI-95-15



130



GAO



United States

General Accounting Office

Washington, D.C. 20548



Office of Special Investigations

B-261485

September 7, 1995

The Honorable Sam Nunn

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

Dear Senator Nunn:

On October 5, 1994, you requested that we determine whether the Small
Business Administration's (sba) 8(a) program is being exploited by
individuals or corporations that have used illegal or improper means to
participate in and benefit from the program, sba's 8(a) program is designed
to develop and promote businesses that are owned and controlled by
socially and economically disadvantaged individuals. You were concerned
that weaknesses in program management and administration identified in
our September 1993 1 report may make the 8(a) program vulnerable to
abusive activities.

You asked us to determine, within the context of case studies, whether
abuses such as the following have occurred in the 8(a) program.

Has the improper participation of 8(a) firms resulted in their being
awarded contracts for which they were otherwise ineligible, and have 8(a)
firms misrepresented themselves to enter and/or stay in the program?
Have any 8(a) contracts been inappropriately awarded to firms that were
ineligible because they exceeded size standard restrictions? Has SBA
allowed firms to remain in the program after their increased size indicated
that they should be graduated?

Have federal contracting authorities improperly used the Indefinite
Delivery Indefinite Quantity (idiq) 2 contracting option to noncompetdtively
steer 8(a) contracts that should have been competitive?



' Small Business: Problems Continue With SBA's Minority Business Development Program
(GAO/RCED-93-145, Sept. 17, 1993).

2 IDIQ contracts are used when agencies do not know the precise quantity of supplies or services to be
provided and consequently are able only to estimate a minimum value. For purposes of IDIQ contracts,
the guaranteed minimum value was $3 million for service contracts and $5 million for manufacturing
contracts SBA recently amended its 8(a) regulations to eliminate the potential abuse of IDIQ contracts
to avoid competition. 13 C.F.R. § 124.311(a)(2) (1995) requires agencies to competitively award any
contract whose total value exceeds $3 million for service contracts and $5 million for manufactunnu »
contracts Effective August 7, 1995, the applicable threshold amount will be applied io the agency's
estimate of the contract's total value, including all options. The minimum value of the contract will no
longer be used.



GAO/OSI-9515 8(a) Vulnerability to Program and Contractor Abuse



131



To develop our case studies, we reviewed sba application, eligibility, and
participation documents of the top 25 8(a) contractors in terms of total
dollars awarded for fiscal year 1992. (See app. II.) We looked for
indicators, or red flags, of potential regulatory violations and criminal
misconduct. We initially selected four firms for investigation based on the
strength of the indicators we found. Due to time constraints and the
destruction of records compiled for one firm as a result of the Oklahoma
City bombing tragedy, we narrowed our investigation to two firms — I-NET,
Inc. of Bethesda, Maryland, and Technical and Management Services
Corporation (TAMSCO) of Calverton, Maryland — for further investigation.



I-NET and TAMSCO:
An Overview



I-NET, Inc. is a high technology corporation that provides federal agencies

with computer systems and support services. For fiscal year 1992, it was

the third largest recipient of 8(a) contract awards, which totaled over

$65 million. During its nearly 10-year (Sept. 20, 1984, to June 16,

1994) program participation, I-NET obtained 145 8(a) contracts totaling at

least $508 million. At least 126 of the 145 contracts were awarded

noncompetitively.

TAMSCO is a high technology corporation that provides computer systems
and support services to federal agencies and large Department of Defense
contractors. For fiscal year 1992, it was the ninth largest recipient of 8(a)
contract awards, totaling over $30 million. During its program
participation from May 14, 1984, until September 18, 1993, TAMSCO
obtained 108 8(a) contracts totaling at least $356 million. At least 82 of the
108 contracts were awarded noncompetitively.



Results in Brief



I-NET and TAMSCO were among the firms that were initially
recommended for nonacceptance into the 8(a) program because of
eligibility questions concerning who actually controlled each firm, sba had
questions that were never fully answered about whether I-NET and
TAMSCO were owned and controlled by socially and economically
disadvantaged individuals, as defined by 8(a) program regulations. Based
on our review of sba documentation and our interviews with sba officials,
we questioned sba's justification to accept I-NET and TAMSCO into the
program.

On at least two occasions after entry into the program, I-NETs owner did
not inform sba about the true equity ownership in the firm, in violation of



GAO/OSI-95-15 8(a) Vulnerability to Program and Contractor Abuse



132



Background



sba regulations. I-NET also misrepresented information to sba about its
owner's personal qualifications: I-NET's owner falsely certified on a
resume submitted to sba with her 8(a) application that she held an
Associate of Arts (aa) degree in computer science and technology, sba
took no action when it learned of these misrepresentations.

I-NET received 8(a) contracts totaling millions of dollars after it had
grown too large for continued 8(a) program participation. To remain
eligible for contracts, I-NET excluded items from its financial statements,
understating its total revenue; and it represented itself as a company at
financial risk, although sba found that I-NET's access to credit was
considerable. Further, sba allowed I-NET to stay in the program and obtain
contracts after it determined that I-NET had achieved the program goals.

In our investigation of TAMSCO, we determined that U.S. Coast Guard
officials had directed a sole source contract to TAMSCO, thus avoiding
federal competition requirements. Coast Guard officials changed the
contract's classification code to one for which TAMSCO qualified and
altered the minimum value of the contract from the original solicitation by
lowering the total number of labor hours by 46 percent. Such changes
allowed the Coast Guard to award a sole source idiq contract to TAMSCO
and offer the company, according to a Coast Guard official's written notes,
a "graduation present."



Previous GAO Findings In March and April 1995, as a part of our continuing work on the 8(a)

program, we testified 3 that the program has continued to experience
problems in achieving its objectives. As the value and number of 8(a)
contracts continue to grow, the distribution of those contracts remains
concentrated among a very small percentage of participating 8(a) firms,
while a large percentage get no awards at all. This is a long-standing
problem. For example, in fiscal year 1990, 50 firms representing fewer than
2 percent of all program participants obtained about 40 percent, or
$1.5 billion, of the total $4 billion awarded. Of additional concern is that, of
the approximately 8,300 8(a) contracts awarded in fiscal 1990 and 1991
combined, 67 contracts were awarded competitively. In fiscal year 1994,

3 Small Business: Status of SB A's 8( a) Minority Business Develop ment Program (GAO


1 2 3 4 5 6 7 8 9 11 13 14 15 16 17 18 19 20

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 11 of 20)