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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concern were addressed in terms of the SBA's ultimate decision to
admit Tamsco to the program. We then went to the official that
made that decision and he was not able to explain, in our view,
adequately the decision he had made. In fact, when we asked him
about how he dealt with the concerns and what his rationale was
in terms of the concerns that had been raised, he said he did not
have an explanation. I think that's an important point with respect
to that issue. It's entirely possible that TAMSCO had no way of
knowing that that had occurred.

Chair Meyers. So, your response to Mr. LaFalce is that there
was no civil or criminal problem here, but more a question of pro-
grams that just allow an appearance of something being wrong or
of a criminal nature?

Mr. Wheeler. Well, I think it's twofold. With respect to the issue
of SBA oversight, I think that in that particular instance, the fact
that there's nothing in the file, there's no reason or rationale in
terms of the ultimate decision, nor can the person that made the
decision offer any explanation for how he dealt with these serious
concerns, goes to the issue of effectiveness of SBA's management
oversight of the program.


I think that with respect to the issue of the IDIQ contract award
to TAMSCO, that issue goes more to what we refer to as abuse. I
think that what we're talking about is that given the latitude in
8(a) contracting, and particularly with respect to the IDIQ contract
option, there is lots of room to engage in abuses that don't nec-
essarily violate criminal or civil law, or even necessarily, the regu-
lations. I think that is the reason why there was a change in the
regulations involving IDIQ going from minimums as thresholds to
maximums. That's my point.

Chair Meyers. Mr. Jenkins, let me follow up for just a moment
and then we'll proceed with regular questioning.

Why is there nothing in the file? I mean if there is a change
made, a variance allowed, a disagreement with the recommenda-
tions of both the local and the district office, I mean after all,
they're on the scene and you're not on the scene. Why isn't there
something in the file? Are there no written requirements? You
don't have to document this in any way? You can just say, "well
we'll do this," and you don't have to document it in any way?

Mr. Jenkins. No. That should not be the case. Our requirement
is that there should be documentation in the file. In this case we
are dealing with a file that's over 10 years old. I can't tell you the
condition this file was in.

We're talking about a technical issue here, we're dealing with
control. Mr. Innerbichler, in fact, owned 51 percent of the company,
the issue went to the board of directors. We looked at whether or
not there was negative control by the non disadvantaged member,
that is something that is normally identified to the companies and
they are given an opportunity to correct that on reconsideration.
We feel that, that is a technical error, we don't see any wrong
doing in terms of the company trying to mislead us on that particu-
lar point.

Chair Meyers. Alright. Mr. Fields.

Mr. Fields. Thank you Madame Chair. Ms. Lee, you mention in
your testimony that over the past 3 years you have seen some re-
duction in fraud in the 8(a) Program, about 40 percent, is that not

Ms. Lee. We said that we had seen some reduction for a number
of reasons.

Mr. Fields. Some meaning 40 percent, is that not correct? Ac-
cording to your testimony.

Ms. Lee. I don't recall if I said 40 percent.

Mr. Feelds. Page two of your original testimony.

Ms. Lee. Page two. The 40 percent is not a reduction in fraud,
it is a reduction in the amount of time that our investigations divi-
sion spends on investigations in the 8(a) Program.

The major reason we have reduced the amount of time we're
spending on investigations in the 8(a) Program is the growth of the
business loan and disaster loan portfolios. We feel we have to
spend more time there. A second reason is that we have presented
a number of fraud awareness training programs to SBA employees,
and we do believe that we're getting some positive results out of
that. Finally, in some respects, the reforms that were made in the
1988 legislation reduced some of the openings for fraud to occur.


Mr. Fields. Do you have any additional recommendations you
would like to make?

Ms. Lee. Well one of the major ones I made earlier this morning
is that we think much of the problem that currently exists in the
8(a) Program, could be alleviated by placing a cap on the dollar
amount of contracts that an 8(a) firm could obtain.

If such a cap was incorporated into the requirements, I think you
could alleviate the concentration problem, you could alleviate the
abuse of the SIC codes that are assigned, and you would not have
to worry so much about competitive mix. You would also alleviate
the problems of determining whether or not somebody was still eco-
nomically disadvantaged.

My concern is that there are tradeoffs here. The more com-
plicated the program is to administer, the more discretion there is
in program officials, and the more subjective the criteria, the more
resources are required to administer that program effectively with-
out having fraud and abuse occur. As resources are being cut, we
think it is extraordinarily important to try to make the program
simpler to administer, more objective, and less discretionary.

Mr. Fields. I understand. Of the 5,700 programs that you au-
dited, how many did you find to have problem areas?

Ms. Lee. In most of the 8(a) audits that we have done, we've
found problems. As I recall in rereading the audit reports that
we've done in the last several years, there is only one in which we
found no problems.

Mr. FffiLDS. Mr. Wheeler, let me direct a few questions to you,
relating to your testimony which I find to be somewhat speculative
because you make mention of many accusations as relates to

One that I would like to bring to your attention is, you mention
that one of the Coast Guard contracting officials referred to the
contract as a graduation present. Do you just listen to any and
every comment, and make it a part of your report, I mean, is this
some senior level official? Who makes such an accusation and how
does it get to be such a major part of your report?

Mr. Wheeler. Mr. Fields, this wasn't just one person. Our report
reflects the totality of the work that we did which encompassed
taking a very close look at the formal board of inquiry conducted
by the Coast Guard, taking a look at documents, and interviewing
individuals associated with this particular contract. The issue with
Respect to the graduation present came up early in the discussions
between TAMSCO and the Coast Guard. It came up more than
once, as reflected in notes taken of those participating in the meet-
ings and authenticated by the person that took them.

Mr. Fields. Who took those notes, are you at liberty to tell us
who made — because we have a gentleman, Mr. Campbell who has
represented the Coast Guard, in my opinion quite well. Now are
you at liberty to tell us who these anonymous people are who are
making these accusations, about this company, and about the
Coast Guard's consent?

Mr. Wheeler. Mr. Fields, the individuals that told us this were
not anonymous. In this particular instance, it happened to be one
of the contracting officer's technical representatives who provided
us notes. As a matter of fact, this particular issue came up in the


Coast Guard formal board of inquiry. A TAMSCO employee admit-
ted that he had, in fact, used that term.

Mr. Fields. But let me say this, let me take it a step further.
You admitted that the company did absolutely nothing wrong, is
that correct?

Mr. Wheeler. What we have said is we have not concluded that
there was any violation of any law or regulation here. I think the
kind of conduct and activity that we're talking about, and we char-
acterized it in the report, falls into that area of abuse, in which— —

Mr. Fields. So, are you saying the company abused its — did they
perpetrate any fraud on the Government? I'm talking about

Mr. Wheeler. TAMSCO?

Mr. Fdzlds. TAMSCO.

Mr. Wheeler. No. I have no information that it did that at all.

Mr. Fields. Alright. Now let me deal with the Coast Guard if
you will. What if anything did the Coast Guard do wrong?

Mr. Wheeler. Effectively, from very early on in this activity, and
we have this from more than one person, and these were key indi-
viduals involved

Mr. Fields. Just tell me what, if anything, did they do wrong.

Mr. Wheeler. They decided up front that they were going to as-
sure that TAMSCO received this contract in order to avoid competi-

Mr. Feelds. How do you prove that? You can't prove it based on
the document that I have before me.

Mr. Wheeler. It's the totality of the investigation that we con-
ducted. It's a combination of examining records and documents that
pertain to this particular transaction and interviewing witnesses
that were key individuals associated with this particular award.

Mr. FffiLDS. You've reached that conclusion based upon your find-

Mr. Wheeler. Based upon the totality of the investigation that
we conducted.

Mr. Fields. This report is the totality of your investigation is it
not? Or you have something that's not included in this report.

Mr. Wheeler. Our report shows the results of the investigation
that we conducted. It's laid out as a traditional investigative report.
It is supported by the evidence, the documents, and the interviews.

Mr. Fields. Are any actions going to be taken against the Coast

Mr. Wheeler. GAO is not in a position to take any action
against the Coast Guard.

Mr. Fields. Are you recommending that any action be taken
against the Coast Guard?

Mr. Wheeler. No. We have made no recommendations.

Mr. Fields. Has the Coast Guard done anything wrong?

Mr. Wheeler. We believe that the Coast Guard abused the IDIQ
contracting option.

Mr. Fields. So, if they did, you're not going to suggest that any
action be taken against it?

Mr. Wheeler. I have no information that there were any laws,
rules, or regulations violated.


Mr. Fields. So, no laws, rules or regulations — I'll be happy to
yield to the Chair.

Chair Meyers. Yes.

Mr. Fields. If no laws were violated, there's evidence you can't
bring any charges if there are no laws violated, is that not correct?
So what are we here for?

Chair Meyers. Well, if the gentleman would yield.

Mr. FffiLDS. I'll be happy to.

Chair Meyers. Can I ask a question to follow up on that. It
seems to me that we did a lot of tinkering with the size standard
and the decision is supposed to be made by the Coast Guard, but
instead, they sent that decision over to the business opportunity
specialist whose ratings improve, the more 8(a) contracts he brings
in. Now what is he going to decide? He is going to decide that gosh,
this size standard is OK.

Now, maybe that's all right with you Mr. Fields, but it sounds
like fraud, collusion and all sorts of wrong things to me and a lot
what we have heard about this program in the last 11 years has
sounded just like that, but when you start asking questions you
really have a hard time pinning anything down. I think it's a dis-

Mr. Fields. My time is out, but when you start accusing people
of violating laws that they have not violated and then say that
there are no laws violated. I just think that we have to be very
careful when we make these kinds of accusations, people's reputa-
tions are on the line.

Now this gentleman has already stated, Mr. Wheeler, that nei-
ther the company nor did the Coast Guard violate any rules or reg-
ulations, is that not correct?

You're here to tell us that we need to improve SBA, I agree with
you 100 percent, we can tighten up the rules and regulations in the
SBA, that's one thing, but to put the reputation and this gentleman
and the character of his company on the line here is unfair to the
Coast Guard and it's certainly unfair to this minority contractor,
and this report firmly says that. I mean when you say that the
Coast Guard has given this guy a Christmas gift or a graduation
gift, I mean you question this person's integrity, now if you don't
call that a question of the integrity of the Coast Guard, then what

Now if the Coast Guard has not violated any rules and regula-
tions, and if the gentleman has not either, then I would just sug-
gest to you, just as a member of this Committee, don't put those
kinds of accusations in books. I mean, let's deal with rules and reg-
ulations, and facts, and I would conclude my remarks by saying
that, I have a great problem with this report because I mean with
this report, I'm ready to go in and have somebody investigated even
further, maybe even have them put in jail, but you're not giving me
anything at all to do any of that.

Chair Meyers. Thank you Mr. Fields. Mr. Flake.

Mr. Flake. Thank you very much Madame Chair. My question
is to Mr. Wheeler also. This booklet is titled, "8(a) Is Vulnerable
to Contractor and Program Abuse," and as you know I've sat
through this entire hearing this morning and to hear you say that


you took two firms out of 5,700 and out of a possible, perhaps half
of that number who actually received 8(a) contracts.

It seems to me that the title itself suggests that the entire pro-
gram is one that is fraught with such abuse and we hear words
like fraud and so forth, when in fact one could not in any way con-
sider this to be a legitimate study if you only used two samples out
of a potential base of 5,700.

Do you honestly believe that this sample is a representative sam-
ple of which you can draw the conclusions that you draw in this
particular document? When, in fact, even if you use a sample of 2
of the top 25 companies in 8(a) that does not in my opinion suggest
that the program is necessarily fraught with abuses, and I'm just
having a difficult time because I'm a former educator. One thing
I don't think as an educator I would ever agree with is that this
would be considered a reasonable sample in terms of trying to
make a determination on the quality or lack thereof of any particu-
lar program. So, if you will comment on that I would be most ap-

Mr. Wheeler. Mr. Flake, I would agree with you. This is not a
sample, it was an investigation of two particular companies and
SBA's involvement with them. It is not possible to take our re-
ported findings with respect to these two matters and project them
to the larger universe of active 8(a) participating companies. I
would agree with you on that entirely.

Mr. Flake. But you have done that, you have done that. The
very title of this particular report says 8(a), it does not speak spe-
cific to I-NET or TAMSCO. It says 8(a) is vulnerable to program
and contractor abuse. This does not speak to any particular ele-
ment or any particular entity, as in those two that you inves-
tigated. This basically suggests that the entire program, wouldn't
you agree with that, I mean, if you read this title and you did not
read any further in this report, would you not conclude that this
basically states that the entire program is vulnerable to contractor

Mr. Wheeler. Mr. Flake, it was our intention in laying out our
methodology and in introducing the contents of the report to make
it very clear that our findings were based on investigation of these
two matters, and that was our intention in terms of issuing the
findings in response to a Senate Subcommittee.

Mr. Flake. But it does not. I mean it paints such a broad brush
on the whole program and I think you know the attitude in this
place at the moment is one that anything that even suggests that
there is abuse, anything that suggests that there is fraud, is sub-
ject to have a level of scrutiny that in most instances suggests that
the program need not exist. Are you suggesting that the program
need not exist, that the program does not serve any useful pur-

Mr. Wheeler. No, Mr. Flake, not at all. In fact we report the
facts, as we were asked to do. We made no recommendation what-
ever, and I would not want to suggest that one way or another.

Mr. Flake. You made those recommendations based on two of
the contracting entities within a program of 5,700 potential enti-


Mr. Wheeler. Mr. Flake, we made no recommendations at all.
We reported the facts, the results of our investigation of these two

Mr. Flake. Alright. To Mr. Jenkins, as it relates to the overall
8(a) Program, and your analysis having seen this particular study,
what improvements could you make in relationship to the issues
that are raised therein, or have those improvements been made?

Mr. Jenkins. Yes. One of the major points in that report talks
about the IDIQ contract. As I testified earlier, SBA thought it could
rely on a certification by a U.S. Government Contracting Official,
we could not. We changed the IDIQ portion of our program. We felt
we should not have done that, but we went ahead and changed
that. I mean, it's a legitimate part of Government procurement, but
for the 8(a) Program, we changed that this past summer.

Mr. Flake. Did you make those changes based on the GAO study
or did you make those changes based on an internal decision on the
basis of your own analysis that it was time for such changes to
take place?

Mr. Jenkins. Well, we based it in part on the GAO study. I don't
think at the time our changes occurred that the final report had
not come out, but in looking at that and looking at some of our in-
ternal IG reports, we based our decisions on some of those same

Mr. Flake. Ms. Lee, you've seen the report and analyzed it. Are
there issues in this particular report that you would consider to be
punishable by crime. Are there issues here that suggest that there
are criminal activities which the IG's office needs to follow up on?

Ms. Lee. As to TAMSCO, we have never done any auditing work,
so I cannot address the TAMSCO situation with any validity.

In the I-NET situation, at the time we completed the audit, we
did have some concerns that there were instances of fraud and
false statements made to the SBA. We referred the matter to the
Justice Department for possible prosecution. The Justice Depart-
ment determined that because the Agency, in some instances, did
not follow its own policies, procedures, and regulations, it was not
a viable case for the Justice Department to pursue further. At that
point it was dropped.

Mr. Flake. Would you consider this to be a fair study based on
the fact that it is not a random sample but rather filled with two
particular companies as opposed to a random sampling of a number
of companies within the 8(a) Program?

Ms. Lee. as Mr. Wheeler suggested earlier and as I also sug-
gested, neither GAO nor we have done a completely random sample
of the universe such that we could take the results of that random
sample and project it to apply to the entire universe.

Mr. Flake. Madame Chairman would it be in order for us to re-
quest a study that is more conclusive based on the number of com-
panies that are within the 8(a) Program so that we might have a
better chance or an opportunity for really doing an analysis based
on fact rather than trying to determine what changes need to be
made in the program based on this limited approach that has been
taken by GAO in this instance.

21-817 - 96 - 2


Chair Meyers. To respond to your question, let me ask how
many GAO studies have been performed on the SBA and the 8(a)
Program in the last 11 years?

Mr. Wheeler. Madame Chair, I don't have that number now. I
certainly will get that number to you.

Chair Meyers. Would it be 10 or 5?

Mr. Wheeler. I would venture probably in the neighborhood of
four to five, but I really don't know, I would have to get back to
you on that.

Chair Meyers. As I recall, there have been four or five and they
were more in the nature of sort of a general look at the program.
This was an attempt to look at two problems in depth or some pro-
grams in depth and I don't think the point of it was to try to get
at criminal investigations.

Now if what you are asking for, Mr. Flake, is a GAO investiga-
tion that would look at 2,500 programs, I think that's rather

Mr. Flake. No, I asked for a random sample that you would do
in any study. I mean I don't know any study where you do not col-
lect data from enough, in this instance companies, that would give
you a clearer indication in what is happening in the overall 8(a)
Program, you cannot get that with any two programs.

I think a random sampling would probably require their looking
at probably a hundred or so companies or some percent if they de-
cided 10 percent, 5 percent or 3 percent. But there must be some
scientific methodology that says this is the method we're using, this
is what we're looking for, and then make a determination from that
random sampling that we find throughout the program. We looked
at the top 25, we looked at the lower 25, we looked at the top 50,
the lower 50 and then we worked to a center point where you get
a medium so that you can have a sense of what the program has
to do with.

Chair Meyers. Well I think you have also heard Ms. Lee say
that they looked at 50 and they have looked at a number of pro-
gram participants in past years and they have found maybe one
program participant that had absolutely no questions involved in
it at all.

Mr. Flake. Well I think if we do a GAO on the whole Govern-
ment, we're going to find that problem, so I don't think the basis
of trying to determine it on whether you have some problems,
you're going, in this kind of program you re going to have problems.
I can't imagine in any program that the Federal Government has
that if we do a random sample, you're not going to have some prob-
lems with some programs by perhaps our definition.

But all of us understand, even as you heard the testimony of Mr.
Innerbichler, the reality is that you cannot submit an application
to the bank for a loan without the bank coming back and saying
look at this particular category of things, we need more information
on them. That's a standard business procedure, that's a standard
business practice, so that you're definitely going to have that but
that does not necessarily conclude that a program is wrought with
fraud or that that program needs to be eliminated. It's simply a
matter of getting the proper information and documentation.

Chair Meyers. The gentleman's time has expired.

Mr. FLAKE. Thank you very much.


Chair Meyers. Mr. Chrysler.

Mr. Chrysler. Madame Chairman, I apologize for arriving a lit-
tle bit late, I'm just catching up on some of this information. It
seems to me that we're talking about the third and ninth largest
award out of some 4,400 awards in this program and that receive
about 22 percent of the total dollars. It seems like these are good
examples to be looking at and when one looks at the volume that
they consume as compared to the rest of the program.

Chair Meyers. No questions at this time? Thank you. Let's see,
Ms. Clayton.

Ms. Clayton. Thank you Madame Chair. A couple of observa-
tions. Well let me just, my understanding is that this GAO audit
was requested by Senator Nunn. Was the procedure for you to —
how did you select these two? Did they come from the Inspector
General or did they come from SBA itself?

Mr. Wheeler. The two companies were selected — based on our
judgment — from a list of the top 25 companies for 1992.

Ms. Clayton. So, you took out of the top 25 who were receiving
contracts, you just arbitrarily selected, or are they

Mr. Wheeler. We went through the eligibility and application
files for each of the 25 and we selected two. Actually, we initially
selected four, but because of time and resource limitations and the
fact that the Committee asked us to report out our work, we re-
ported out on the two. Our decision was based on the strength of
indicators that we found when we went through the eligibility and
application files, but it was a judgment selection on our part.

Ms. Clayton. Now which Committee actually were put on the

Mr. Wheeler. It was the permanent Subcommittee on Investiga-
tions, Senate Committee on Governmental Affairs.

Ms. Clayton. You have submitted this to Senator Nunn right?

Mr. Wheeler. Yes, we have, Mrs. Clayton.

Ms. Clayton. As a result of your — it submitting back to the
Committee, they warrant this sufficient to have a hearing on?

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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 4 of 20)