Lawmakers say VA contracting rule squeezing out vet-owned firms

Friday - 8/3/2012, 7:35pm EDT

Ruben Gomez, reporter, Federal News Radio

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This story was updated at 9:20 a.m. Aug. 6 to include more details from the hearing.

By Esther Carey, Ruben Gomez and Jared Serbu
Federal News Radio

Lawmakers questioned whether a Veterans Affairs Department process to keep ineligible companies from winning service-disabled veteran-owned small business (SDVOSB) contracts goes too far and squeezes out legitimate firms.

Members of the House Veterans Affairs Subcommittees on Oversight and Investigations and Economic Opportunity Thursday zeroed in on the requirement that veterans maintain 100 percent control over their companies' decision-making. Legislators said the rule is too strict and discourages companies from participating in the set-aside program.

VA implemented the provision to create a "bright line" and remove subjectivity from the process examiners use when deciding whether a business qualifies for the SDVOSB set-aside program, said Thomas Leney, executive director of VA's Office of Small and Disadvantaged Business Utilization.

"The definition of 100 percent control is that you can do anything you want with that business, make any decision concerning that business, to include selling that business for a dollar, and no one else in that business — no other minority owners — can do anything to prevent you from doing so," Leney said.

Some lawmakers want looser standards

Rep. Phil Roe (R-Tenn.) said he thinks VA should loosen the standard. Roe said 51 percent ownership of a firm should be sufficient to prove a veteran controls the firm.

"If I come in as a veteran-owned small business," he said, "and I say to you, 'I've got 51 percent of this company, I've got veto power over everything in my company, but I've got other investors,' that means I can't get a veterans owned small business contract?"

VA is the only agency required by law to verify that firms applying for the SDVOSB program are eligible. Department leaders have decided ensuring veterans control all business decisions is key to the verification process, Leney said.

The rule aims to address concerns by the VA Inspector General and the Government Accountability Office, both of which have warned that not requiring verification of eligibility may allow nonveteran firms to fraudulently take advantage of the set- aside contracts.

But still, because of the requirement of 100 percent control, VA rejects a significant number of firms applying to be SDVOB and then compete for set-aside contracts, Leney said. In fact, it is the most common reason companies are turned away.

Rep. Bill Johnson (R-Ohio) said the requirement is too onerous.

"Then you're excluding a lot of veterans' businesses that are not [organized that way] ," he said.

Firms disqualified based on control standard

Leney said for the vast majority of firms VA has disqualified, it's because they didn't meet VA's interpretation of those standards, particularly with regard to control of their companies, not because they were trying to commit fraud.

"Some of it they're ignorant of the fact that their business model does not comply with the regulation or they don't like the fact that their business model does not comply with the regulation," he said. Leney said VA is currently rejecting around 60 percent of initial applications from firms seeking certification under the SDVOSB standards. The most common reason for VA refusing to certify a business is that they do not meet the department's interpretation of full control of a company, he said.

"There has been criticism of the process that it's capricious or subjective, and so what we've tried to do in the regulation is draw bright lines and make it clear whether or not the veteran meets the control requirements," he said. "In ownership, it's very straightforward: it's whether you have 51 percent or more of ownership. In control, the standard is a veteran has to be able to do anything he or she wants with that company, and none of the owners or partners can keep he or she from doing so."

Leney said VA is revisiting the standard in that regulation, but many members of Congress believe it's keeping legitimately qualified veterans from getting contracts, because no investor in their right mind would give the majority owner complete carte blanche over their investment.

VA has taken other steps to make it easier for legitimate veteran-owned firms to compete, such as requiring recertification every two years instead of annually and providing a self-assessment tool that vets can use to determine their eligibility on VA's website, Leney said.

Control standard too stringent?

But Richard Weidman, the policy director for Vietnam Veterans of America, said the ownership standard is ridiculous on its face. He said VA's strict approach to the control requirement would exclude even most sole proprietorships.

"To think that I could make a decision about my company without consulting with my spouse about the income that supports our family is ludicrous," he said.

Weidman said the high rejection rate among veteran-owned firms seeking SDVOSB status is evidence in and of itself that VA's regulation was poorly-designed.

"If you're a teacher and 60 percent of the students are flunking the test, you either have a real bad test or a real bad teacher or both. That's a failing school," he said. "It has not been clear what are these criteria. The way in which VA is doing is not in statute, it makes no sense operationally, and it's not weeding out the real crooks. What is the purpose of this whole thing? Is it to see how many angels can dance on the head [of a regulation], or is it to weed out people who are not eligible for the program?"

Leney said VA currently believes only around 5 percent of firms who try to get into the VIP database are truly fraudulent, but the department is seriously concerned about fraud and has now gone through the process of screening each of the more than 6,000 companies in the database to ensure they're not trying to get contracts they're not entitled to under set-aside and sole-source contracts.

"I can say with confidence that no firm appears in VIP as eligible for an award unless it has been verified as owned and controlled by a veteran," he said.

Identifying fraud

But Richard Hillman, the managing director of GAO's forensic audits and investigative service, said there's a problem with that statement.

"What he fails to acknowledge is the differences between the quality of the two verification processes for the firms that are in VetBiz," Hillman said.

GAO determined the new procedures VA put in place in response to the 2010 law are effective at making sure people who aren't service disabled veterans don't get set-asides that are meant for vets. But auditors found the pre-2010 procedures were highly inadequate, and that 38 percent of the companies who are now in the database got there under the old rules.

GAO's findings are based in part on a VA Inspector General's report, which examined some of the firms that were added to the database under the older procedures and found that 70 percent of them should have been rejected.

"That causes us significant pause. We need to immediately ensure that the more rigorous process is being followed by all of those within the VetBiz program," he said.

James O'Neill, VA's assistant inspector general for investigations said his office views it as akin to stolen valor when an ineligible vendor gets a contract meant for a disabled veteran.

He said the VA OIG has had more successful investigations of contractors falsely claiming to be disabled vets recently, but that most of them aren't even close calls: the perpetrator often is either not disabled or not a veteran at all. The IG has opened 144 SDVOSB investigations so far, issuing 419 subpoenas and executing 26 search warrants along the way. The investigations have led to the indictments of 14 people and six convictions so far, O'Neill said.

Ninety-six of the cases remain open, representing a contract value of $908 million.

O'Neill said federal prosecutors have taken a new interest in prosecuting the SDVOSB contract fraud cases, in part because a recent opinion by the Justice Department turned the calculus of damages to the government in such cases on its head.

Previously, assistant U.S. attorneys were reluctant to spend time on cases of non- eligible firms performing work under set-aside contracts under the theory that since the work was performed in the end anyway, the government never really suffered any ill effects from the fraud.

But an October 2011 opinion by the DOJ's Executive Office for U.S. Attorneys told prosecutors that "main Justice" believed a 2010 law requires courts to presume that the full value of any SDVOSB contract given to an ineligible firm is a loss to the treasury.

"Consequently, I expect many others to be prosecuted," O'Neill said. "And if sentencing trends continue, defendants face a very unpleasant future."

Hillman of GAO said while his audit found VA's certification procedures are off the mark, at least VA is checking. In contracts awarded by most of the rest of the federal government, firms use something closer to an honor system to verify that their owners are legitimately service disabled veterans before accepting their designated set-asides.

Agencies operating under those "self-certifying" standards represent around 70 percent of all SDVOSB contracts awarded by the government.

Esther Carey is an intern at Federal News Radio.

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