WASHINGTON (AP) – Because of lax oversight, undeserving companies collected millions in federal contracts from an $8 billion government program designated for small businesses in poor neighborhoods, congressional investigators charge.

The Small Business Administration repeatedly failed to verify paperwork and conduct audits to weed out sham firms claiming to have main offices in economically distressed areas, the Government Accountability Office said Wednesday, raising questions about an agency seeking to take a greater role in helping business owners stave off job losses.

In some cases, the business owners freely admitted diverting the lucrative work to large companies or ineligible businesses.

“When you starve an agency of resources and put in place the wrong people, this is the result: Fraud goes undetected and dishonest companies see skirting the rules as ‘business as usual,”‘ said Rep. Nydia Velazquez, D-N.Y., who chairs the House Small Business Committee. “You can’t come to any other conclusion than this is a program that needs to be shut down.”

Responding, the SBA in the report generally agreed with the GAO’s recommendations that urged stronger checks, unannounced site visits and stiffer punishment for companies found to be ineligible.

he SBA is currently headed by an acting administrator while Obama’s choice to lead the agency, venture capitalist Karen Mills of Brunswick, Maine, awaits confirmation by the Senate.

The GAO report, released Wednesday, examined SBA’s Historically Underutilized Business Zone, or HUBZone, which was created in 1997 to help thousands of small firms in distressed areas.

To be eligible, companies affirm that their principal office – where the greatest number of employees work – is in a designated HUBZone and that at least 35 percent of the firm’s full-time employees live in that area. HUBZone firms also must spend at least 50 percent of a contract’s personnel costs on its own employees.

The GAO and SBA inspector general have highlighted problems in the awarding of HUBZone contracts dating back to 2003, with spot checks that founds tens of millions of dollars in federal contracts were improperly awarded. However, no systematic review has been conducted to determine what percentage of the roughly $8 billion in HUBZone contracts awarded each year might be questionable.

In the report, investigators found 19 ineligible firms in Dallas, Huntsville, Ala., San Antonio and San Diego that received nearly $30 million in Pentagon and Housing and Urban Development contracts for environmental consulting, medical support and information technology designated for HUBZone businesses.

In one case, a Jacksonville, Ala., maintenance company touted a suite of offices in their address, which actually belonged to a trailer in a residential park, whose sole occupant had nothing to do with the company. Meanwhile, the head of a Fort Worth, Texas, firm acknowledged she subcontracted 71 to 89 percent of her environmental consulting work to large firms and other businesses, explaining that large firms typically used HUBZone companies as “contract vehicles.”

“Our work demonstrates that SBA’s fraud controls lack important elements needed to screen and monitor firms,” GAO investigators wrote. “By subcontracting the majority of its HUBZone work to non-HUBZone firms, this firm is clearly abusing its HUBZone designation and undermining the HUBZone program’s stated purpose of stimulating small business development in economically distressed areas.”

A report last July found similar problems in the Washington D.C., area, noting that the SBA conducted few site visits and only asked for supporting evidence of a firm’s eligibility claims about one-third of the time. Because the SBA was slow to suspend or otherwise punish them, several ineligible firms continued to receive more than $7 million in government contracts, the GAO said.

“There’s just not any oversight over this program,” Marco Giamberardino, a senior director for the Associated General Contractors of America, whose members are predominantly small businesses, said Tuesday. “It’s of utmost importance to help build communities that are supposed to be severely challenged, but contractors who have been working under this program find it’s not living to its potential.”

The GAO report comes as both President Barack Obama and his Republican critics are citing small businesses as critical to stimulating growth in the current recession. As part of his spending blueprint, Obama is freeing up billions of dollars to boost SBA lending to struggling small businesses, although some watchdogs worry it could create wasteful incentives for banks to rush credit out the door.

Velazquez blamed program flaws and mismanagement by the Bush administration for the SBA’s HUBZone woes. She is urging that $1.5 million in the 2010 budget be used to give small business participants transitional aid as the program is shut down.

“It is clear from this latest report that the HUBZone program is serving as a breeding ground for waste and fraud,” Velazquez said.

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