[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
CONSISTENTLY INCONSISTENT: CHALLENGES FOR SERVICE-DISABLED VETERAN-
OWNED SMALL BUSINESSES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
COMMITTEE ON SMALL BUSINESS
joint with the
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
COMMITTEE ON VETERANS' AFFAIRS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MARCH 19, 2013
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 113-006
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
COMMITTEE ON VETERANS' AFFAIRS
JEFF MILLER, Florida, Chairman
DOUG LAMBORN, Colorado
GUS M. BILIRAKIS, Florida
DAVID P. ROE, Tennessee
BILL FLORES, Texas
JEFF DENHAM, California
JON RUNYAN, New Jersey
DAN BENISHEK, Michigan
TIM HUELSKAMP, Kansas
MARK AMODEI, Nevada
MIKE COFFMAN, Colorado
BRAD WENSTRUP, Ohio
PAUL COOK, California
JACKIE WALORSKI, Indiana
MICHAEL MICHAUD, Maine
CORRINE BROWN, Florida
MARK TAKANO, California
JULIA BROWNLEY, California
DINA TITUS, Nevada
ANN KIRKPATRICK, Arizona
RAUL RUIZ, California
GLORIA NEGRETE McLEOD, California
ANN McLANE KUSTER, New Hampshire
BETO O'ROURKE, Texas
TIM WALZ, Minnesota
Helen W. Tolar, Staff Director and Chief Counsel
Nancy Dolan, Democratic Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Richard Hanna............................................... 1
Hon. Mike Coffman................................................ 2
Hon. Grace Meng.................................................. 3
Hon. Ann Kirkpatrick............................................. 4
WITNESSES
Mr. Joseph Wynn, Special Advisor, VET-Force, Washington, DC...... 6
Mr. Davy Leghorn, Assistant Director, National Economic Division,
American Legion, Washington, DC................................ 7
Mr. Marc Goldschmitt, PMP, CEO, Goldschmitt and Associates, LLC,
Reston, Virginia............................................... 9
Mr. Jonathan T. Williams, Partner, PilieroMazza, PLLC,
Washington, DC................................................. 10
Mr. William Shear, Director, Financial Markets and Community
Investment, U.S. Government Accountability Office, Washington,
DC............................................................. 18
Mr. A. John Shoraka, Associate Administrator, Office of
Government Contracting and Business Development, U.S. Small
Business Administration, Washington, DC........................ 19
Mr. Tom Leney, Executive Director, Veterans and Small Business
Programs, U.S. Department of Veterans Affairs, Washington, DC.. 21
APPENDIX
Prepared Statements:
Mr. Joseph Wynn, Special Advisor, VET-Force, Washington, DC.. 34
Mr. Davy Leghorn, Assistant Director, National Economic
Division, American Legion, Washington, DC.................. 48
Mr. Marc Goldschmitt, PMP, CEO, Goldschmitt and Associates,
LLC, Reston, Virginia...................................... 58
Mr. Jonathan T. Williams, Partner, PilieroMazza, PLLC,
Washington, DC............................................. 70
Mr. William Shear, Director, Financial Markets and Community
Investment, U.S. Government Accountability Office,
Washington, DC............................................. 79
Mr. A. John Shoraka, Associate Administrator, Office of
Government Contracting and Business Development, U.S. Small
Business Administration, Washington, DC.................... 91
Mr. Tom Leney, Executive Director, Veterans and Small
Business Programs, U.S. Department of Veterans Affairs,
Washington, DC............................................. 95
Questions and Answers for the Record:
Joe Wynn, VET-Force.......................................... 102
Davy Leghorn, The American Legion............................ 110
Marc Goldschmitt............................................. 119
Jonathan Williams, PilieroMazza.............................. 132
William B. Shear, Director................................... 140
John Shoraka, Associate Administrator........................ 145
Tom Leney, Department of Veterans' Affairs................... 160
Additional Material for the Record:
Congresswoman Herrera Beutler................................ 177
The American Legion.......................................... 179
Chairman Mike Coffman........................................ 181
Hon. Jackie Walorski......................................... 183
CONSISTENTLY INCONSISTENT: CHALLENGES FOR SERVICE-DISABLED VETERAN-
OWNED SMALL BUSINESSES
----------
TUESDAY, MARCH 19, 2013
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Workforce,
Joint with the
Committee on Veterans' Affairs,
Subcommittee on Oversight and Investigations,
Washington, DC.
The Subcommittees met, pursuant to call, at 2:00 p.m., in
Room 2360, Rayburn House Office Building. Hon. Richard Hanna
[chairman of the subcommittee on Contracting and Workforce]
presiding.
Present from Subcommittee on Contracting and Workforce:
Representatives Hanna, Tipton, Bentivolio, Herrera Beutler,
Meng, Clarke, and Chu.
Present from Subcommittee on Oversight and Investigations:
Coffman, Roe, Kirkpatrick, Takano, and Walz.
Chairman HANNA. The hearing will come to order. I want to
thank Chairman Coffman for working with me today on this joint
hearing, and thank you all for being with us today.
Additionally, several of our witnesses today are veterans, and
I want to thank you all for your service and for taking the
time out of your busy schedules to be here.
The federal government has a goal of awarding 3 percent of
all prime contracts to service-disabled veterans who own small
businesses. Last year, this meant over $12 billion in prime
contracts went to those firms. In helping agencies meet the 3
percent goal, Congress created two contracting programs, one
specifically for the Department of Veteran Affairs and
government-wide programs run by the Small Business
Administration.
Whenever we have small business contracting programs, the
government faces certain tensions. First, we have an obligation
to ensure that only qualifying firms are receiving and
performing on these contracts. Second, we must ensure that the
programs themselves do not become so burdensome that they keep
small businesses from participating. The contracting programs
for service-disabled veteran-owned small businesses highlight
this tension.
The SBA program has not done enough to discourage fraud,
while the VA program has itself become the problem for some of
these firms. In some of cases, the differences between the two
programs have led to opportunities for fraud and bureaucratic
impediments to small business generation. For example, the
surviving spouses of service-disabled veterans are allowed to
maintain the business status for a period of time at the VA,
but not at the SBA. In contrast, under the VA regulation, a
service-disabled veteran in a community property state must
convince their spouse to renounce any interest in the business
in order to prove that the veteran controls the firm. SBA does
not apply this restriction; instead, simply requiring that a
firm updates its status when its ownership changes.
The bottom-line is a legitimate firm may qualify under one
program but not under another. If we really want to help these
firms, we need to give them one clear set of rules to live by.
Recent GAO reports have highlighted the problems with both the
VA and the SBA, and many believe that legislation is required
to create programs that have clear requirements, efficient
processes, and transparent appellate processes.
Over the course of this Congress, I plan to work alongside
my colleagues on the Veterans Affairs Committee and with the
representatives of service-disabled veterans on a solution that
will improve the current processes by which both agencies
operate. Small businesses have enough on their plate, and I
hope today's hearing will provide some insight on how to best
help disabled veterans owning small businesses deal with these
additional burdens.
Again, I want to thank our witnesses for being here today
and look forward to your testimony. I now yield to the chairman
of the Subcommittee on Oversight and Investigations for
Veterans Affairs, Mr. Coffman, for his opening remarks.
Chairman COFFMAN. Thank you, Chairman Hanna for yielding.
And thank you also to your Subcommittee for holding this joint
hearing.
The problems with VA's service-disabled veteran-owned small
businesses, the certification program, sadly, these are not
new. The Veterans' Affairs Committee had several Subcommittee
hearings during the last Congress on the issue, but
improvements within the program seem to be slow in coming. My
Subcommittee continues to frequently hear from SDVOSBs and
their advocates regarding what should be a straightforward
process for veterans attempting to do business with the VA.
While the verification process at CVE has improved and
helped weed out some bad actors, it is abundantly clear that
there is still a long road ahead. One topic discussed at length
in the 112th Congress was VA's definition of ownership and
control of the small businesses. Despite the Committee's
bringing this problem to VA's attention, VA's definitions
retain some key differences from the Small Business
Administration, and the effect of these differences has been a
self-induced backlog of legitimate companies attempting to get
certified through CVE and do business with the VA.
The fact the VA has a different interpretation of what
constitutes ownership means that an individual could be
recognized as a veteran small business owner with one
government agency but not with the VA, and this should raise
everyone's eyebrows. However, that is the reality that some
veterans face today, including service-disabled veterans. SBA
has had common sense requirements for what constitutes an
SDVOSB in place for a long time.
While VA's intent may be in the right place, its regulatory
and interpretative actions have put many eligible veterans at a
disadvantage. We still need to get this right if we are going
to enable our veterans, who sacrificed for this country, to do
business with the Federal government. And if the VA is going to
set the standard for recognizing the commitment of these same
veterans, then a straightforward common sense process needs to
be in place. It is my sincere hope that down the road we are
not still discussing the same issues. The time for conversation
has passed, and it is time to take action, fix the problem, and
move on.
I understand that the system will never be perfect, nor is
there one simple answer. However, after all the years that have
passed since this program has been set up and the resources
that have been added to CVE, it is reasonable to expect that we
should be further along than we are today.
Mr. Chairman, I yield back.
Chairman HANNA. And I yield to our ranking member, Ms.
Meng, for her opening statement.
Ms. MENG. Thank you, Chairman Hanna. Thank you to our
witnesses for appearing before our Subcommittees today. And
thank you to all the veterans, especially the ones in this room
today for your wonderful service to our country.
Over the last century, brave Americans have fought in
Afghanistan, Iraq, Vietnam, Korea, and Europe, for not only our
freedom but for the freedom of others. Over 635,000 men and
women have died in these and many other wars. The surviving 22
million veterans include 5.5 million who were disabled while in
the service. These courageous individuals deserve not only our
enduring gratitude but also the opportunity to build a new life
after their many years of military service.
One of the most important tools we have to accomplish this
mission is the Service-Disabled Veteran-Owned Small Business
Procurement Program. In 2011, this initiative awarded more than
100,000 contracts worth over 11 billion to SDV small firms.
However, these awards have accounted for only about 2.6 percent
of all federal contracts, below the 3 percent statutory goal.
Efforts have been made to increase this level but challenges
still remain. Among the most pressing issues are the ongoing
problems in verifying firms participating in this SDV program.
Previously, GAO has found that non-SDV firms have won SDV
contracts. This included front companies posing as veterans,
pass-throughs, and outright fraud. As a result, millions of
dollars were diverted away from legitimate service-disabled
veteran-owned small businesses. To prevent these abuses, GAO
recommended that a verification system be implemented, but
given the overlapping roles of both the SBA and the VA in
administrating this program, this reality has been slow to
materialize. Regardless, we have to continue to make every
effort to ensure that non-SDV firms cannot continue to steal
these opportunities from service-disabled veteran firms.
Given the recent sequester, it is now more important than
ever to correct these flaws. This across-the-board cut will
cause SDVs to lose out on more than 7,500 contracts worth more
than $1 billion, making it critical that only eligible firms
compete for the remaining opportunities. Addressing these
failings and ensuring SDV procurement programs work as intended
is long past due. With an unemployment rate of more than 11
percent for veterans of the wars in Iraq and Afghanistan, it is
essential that all veterans' resources are properly managed and
overseen. Given that entrepreneurship remains a viable career
path for many of our men and women, programs like the one this
hearing is on today are critical to reduce the high
unemployment rate.
I think I can speak for all of our Subcommittee members
here today in saying that we will do whatever it takes to help
service-disabled veterans overcome the challenges they face in
today's economy. As a result, I am glad that in addition to the
federal agencies here with us today that we are hearing
directly from our veterans' community. Thank you, and I yield
back my time.
Chairman HANNA. Thank you.
I now yield to Ranking Member Ms. Kirkpatrick for her
opening statement.
Ms. KIRKPATRICK. Thank you, Chairman Hanna. And I want to
thank all of the veterans who are here today because you have
already paid the price. We now must fight for you with all our
might, and I want you to know that we know that and we
appreciate your being here today.
In 1999, Congress required the Small Business
administration to establish programs and services to help
veterans make the transition from service member to small
business owner by increasing federal contracting and
subcontracting opportunities for veterans. As more veterans
return home from Iraq and Afghanistan, our nation has the
responsibility to help them re-enter civilian life. Some
veterans may choose to go to school, work in the private and
public sector, while others may choose to begin their business.
Veterans bring with them self-discipline and a strong work
ethic from their military service that we know will help them
to succeed in any business.
As we encourage veterans to enter into business with the
Federal government, we must have the right elements in place.
It should not be overly difficult to do business with the
Federal government, but it should not be so easy that fraud is
rampant and these opportunities that are set aside for veterans
are lost. In 2010, the VA alone improperly awarded veteran set
aside contracts valued at $500 million to ineligible
businesses. The VA inspector general stated that it expects VA
to improperly award $2.5 billion in contracts over the next
five years unless oversight and verification procedures are
strengthened. In the end, what we should seek is a good balance
of providing smart and worthwhile verification, but we should
not make it so difficult as to prevent veterans from doing
business with the VA and the rest of the Federal government.
Today's hearing will build upon the hearings from the last
Congress as we seek to ensure that federal contracting is being
done effectively and efficiently by the Small Business
Administration and the Department of Veteran Affairs,
particularly for service-disabled veterans small business
owners. As we explore what the definition of ownership and
control form VA and SBA, along with other concerns, we should
not lose sight that each business is the life of a veteran and
the opportunity for a quality life for his or her family.
I look forward to the testimony this morning, and I want to
thank all the witnesses for being here. And I yield back, Mr.
Chairman.
Chairman HANNA. Thank you.
If additional members have any opening statements prepared
I ask that they be submitted for the record. I would also like
to take a moment to explain the timing to you. Five minutes.
Four minutes, the yellow light comes on. Then the red light.
But we will be lenient as possible. If you could try to respect
that time limit as best as possible. But we do want to hear
what you have to say.
With that, we have votes. I am going to adjourn this I
would say for 20 minutes. We should be about that long and we
will be right back and we will continue. Thank you.
[Recess]
Chairman HANNA. The Committee will reconvene.
In the interest of time I will read the witnesses and their
short bios.
Our first witness today is Joe Wynn, who is testifying on
behalf of VET-Force, a coalition of over 200 organizations and
affiliates representing veterans nationwide. In addition to his
work on Executive Committee of VET-Force, Mr. Wynn is the
president of Vets Group, Inc., a nonprofit organization that
provides entrepreneurial education, federal procurement
training, employment assistance, and other supportive services
primarily for veterans and people with disabilities or persons
of limited means. He is also director and legislative liaison
for the National Association for Black Veterans. A veteran
himself, Mr. Wynn proudly served in the United States Air
Force, and we thank you for your service, sir.
Our second witness today is Davy Leghorn, the assistant
director for the Economic Division of American Legion. The
American Legion Economic Division aims to ensure that veterans
receive several opportunities for success upon exiting the
military. Mr. Leghorn is a veteran, having proudly served in
the United States Military. We thank you for your service and
for being here today, Mr. Leghorn.
Our third witness is Mr. Marc Goldschmitt, founder and CEO
of Goldschmitt and Associates, LLC, a service-disabled veteran-
owned small business who has been involved with the CVE
verification issue since its inception. Mr. Goldschmitt proudly
served in the United States Navy. We thank you for your service
and we thank you for your time today, Mr. Goldschmitt.
Ms. MENG. It is my pleasure to introduce Mr. Jonathan
Williams. Mr. Williams is a partner with PilieroMazza here in
D.C. where he counsels businesses on a range of federal
contracting issues, including the various small and minority
business procurement programs. He has successfully tried cases
at both the GAO and the Court of Federal Claims. Additionally,
Mr. Williams has brought and defended numerous SBA protests and
appeals pertaining to program eligibility.
Welcome, Mr. Williams.
Chairman HANNA. You may begin, Mr. Wynn.
STATEMENTS OF JOSEPH WYNN, SPECIAL ADVISOR, VET-FORCE; DAVY
LEGHORN, ASSISTANT DIRECTOR, ECONOMIC DIVISION, THE AMERICAN
LEGION; MARC GOLDSCHMITT, PMP, CEO, GOLDSCHMITT AND ASSOCIATES,
LLC; JONATHAN T. WILLIAMS, PARTNER, PILIEROMAZZA, PLLC
STATEMENT OF JOSEPH WYNN
Mr. WYNN. Thank you. Good afternoon, Chairman Hanna,
Chairman Coffman, Ranking Members and Subcommittee Members,
fellow veterans, and guests. On behalf of VBA National
President, John Rowan, its officers and members, and thousands
of veteran business owners we represent, I thank you for taking
the time to convene this very important hearing.
In a recent report from the President's Interagency Task
Force on Veterans Small Business Development, it was stated
that ``Two of America's greatest assets are the service of our
returning veterans and the economic dynamism of our small
businesses.'' We recognize that entrepreneurs and small
businesses are the engines of American innovation and economic
prosperity, but now that we have fallen over the ``fiscal
cliff'' due to sequestration, federal agencies will be faced
with significant budget cuts which will also impact the hiring
of new employees, so we will have to turn to small businesses
and corporate sectors to pick up the slack.
Veterans own about 2.4 million businesses or 9 percent of
all of America's businesses. These businesses generate about
1.2 trillion in receipts and employ nearly 5.8 million
Americans. As highly trained professionals and leaders with
experience in challenging environments, veterans' potential for
success for entrepreneurship and small business ownership will
not be fully achieved if the VA's regulations for verifying
them as veteran business owners is allowed to become the
standard throughout the federal marketplace.
You would not think that the federal agency, the Department
of Veterans Affairs, the very one created for ``those who have
borne the battle, their widows and their orphans,'' would be
the very agency that creates the greatest barriers and
obstacles for thousands of veterans and business owners. Since
the end of the Vietnam War, the VA has wrongfully denied
thousands of veterans their claims for compensation for their
service-connected injuries, and now since 2008, the VA has once
again been denying thousands of veteran business owners
contracting opportunities due to their ``consistently
inconsistent'' interpretation of VA and SBA contracting
regulations.
Over the past two years, the VA has reported more than
20,000 veteran business owners have applied for verification.
Just over 6,000 are now approved. First, many veteran service-
disabled veteran business owners do not fully understand how
they can be legally allowed to do business with other federal
agencies but not with the VA.
Second, some applicants have problems with the CVE
verification process, and that does not mean that they are
ignorant. I help support veterans and work with veterans,
business owners in going through the process, and it is still
very lengthy to get through.
Third, veterans are subjected to multiple contracting
program rules. Veterans, there is a self-certifying rule within
the federal marketplace where some of those same businesses
when it comes to doing business with the VA they may be denied.
Fourth, an applicant may still be denied by the CVE
reviewer based on their interpretation of sections of the
regulations and/or the documents submitted by the application.
Here are some of the main reasons: unconditional ownership,
quorum restrictions, right of first refusal, community property
laws, weighted voting requirement, dependence with other
entities, control of strategic policy, higher officer position,
day-to-day management, managerial experience. Basically, a
veteran must be the majority owner, majority board member,
majority stockholder, highest paid, hold the highest office,
have the experience to manage the daily operations, make all
the long-term decisions, must devote full-time to the business,
offer no right of first refusal, do not lease your office space
or make loans from a non-vet, and by all means, do not live in
a community property state.
Without absolutely proof of any one of these things, the
veteran will likely be denied. In addition, not all veteran
business owners are socially and economically disadvantaged,
and definitely not all of them are women. So those two programs
are statutorily different than the service-disabled vet
program.
In concluding, I just would recommend that Congress should
amend the regulation in such a way as to eliminate multiple
interpretations of any sections. Congress should require that
VA develop an appeals process that is independent of the same
office that issued the denial. Congress should not consider
extending the provisions to all federal agencies until a survey
or study has been done, and Congress should direct that study
on how many legitimate businesses would also be denied if they
used the existing CVE interpretation.
This concludes my statement and I look forward to answering
any questions.
Chairman HANNA. Thank you.
Mr. Leghorn.
STATEMENT OF DAVY LEGHORN
Mr. LEGHORN. A few months ago, 20 full-time employees were
laid off in Wisconsin when a service-disabled veteran-owned
construction firm lost $1.7 million worth of work and the
ability to bid on future contracts. This was due to VA's
lengthy verification process. This is a real shame because the
whole point of VA verification is to make these businesses
eligible to compete for VA contracts.
Chairman Hanna, Chairman Coffman, Ranking Member Meng, and
Members of the Subcommittees, on behalf of our national
commander Jim Koutz, and the 2.4 million members of The
American Legion, we thank you for this opportunity to testify
at this joint hearing on the challenges facing veteran-owned
and service-disabled veteran-owned small businesses.
The bottom-line is this. Many veterans find this process to
be overly burdensome, distracting, and not worth the effort.
The American Legion wants these businesses to be successful,
not hand strung, which is why we passed an American Legion
resolution titled Support Etherification Improvements for
Veterans' Businesses with the Department of Affairs.
To be clear, The American Legion supports verification.
Government contracting officers are risk-averse. They like
certifications and they like it when a firm has been verified.
The American Legion has been involved with VA verification
since the program's inception. We participate in VA's
Verification Assistance Counseling Program and we have worked
with plenty of small business owners who have been denied
verification. All too often we see businesses lose vital
contracting opportunities due to the lengthy verification
process. In some cases, businesses lose previously awarded
contracts resulting in layoffs and furloughs of their
employees.
The American Legion cannot stress enough how detrimental
the current process can be to these veterans who lives and
family incomes are tied to their small businesses. The main
challenge with the verification program seems to be VA's
inability to strike the appropriate balance between the
requisite government oversight to protect the integrity of the
program and the impact and costs to veteran small businesses.
Currently, to root out bad actors who maliciously seek to
defraud the Federal government, VA places a series of
overzealous, bright-line rules to evaluate the applications.
Most of these bright-line rules apply to unconditional
ownership and control requirements, and VA has formulated
extreme interpretations that are unrealistic.
The American Legion agrees with the U.S. Court of Federal
Claims and their February 14, 2013 Miles ruling where the court
applied the bankruptcy court's pragmatic definition that did
not burden the veteran's ownership interest. We urge VA to
adopt this pragmatic approach to evaluate ownership and control
as practiced by the bankruptcy courts. Neglecting to adopt this
approach, VA will continue to make this process punitive and
burdensome to the majority of the firms seeking verification.
The current backlog of initial applications and appeals will
not diminish and veteran business owners will continue wasting
large sums of money on attorney fees.
One of the unintended consequences of VA's overzealous
verification process is that established small businesses are
choosing not to participate because the process is too
burdensome and diverts their focus from running their
businesses. So what you end up with are nascent businesses
getting verified because it is easier for them to contort their
operating agreements and bylaws to suit the current
requirements for verification. VA then complains that they end
up with too many inexperienced veteran businesses to draw from.
On the other hand, we identify an unfair advantage with the
larger small businesses who have the personnel and resources to
dedicate to the verification process. Should VA continue to
deny the vast majority of the firms based on these control
issues and permit the backlog to grow, The American Legion
would certainly support a comprehensive and cooperative
relationship between VA and SBA whereby SBA would be the final
arbiter of appeals. Finally, as highlighted within our written
testimony, we are adamantly opposed to the six-month penalty
wait time.
In closing, The American Legion will continue to work with
the SBA and VA to improve the verification process and to
continue providing counseling service to our veteran
entrepreneurs. I thank you again for the opportunity to bring
the voice of veterans to this Committee, and I am happy to
answer any questions you might have.
Chairman HANNA. Thank you, Mr. Leghorn.
Mr. Goldschmitt.
STATEMENT OF MARC GOLDSCHMITT
Mr. GOLDSCHMITT. Thank you. I wish to thank the
Subcommittee Chairmen and the Ranking Members for holding this
hearing today to address the statutory, regulatory, and
interpretative differences between SBA's Service-Disabled
Veteran-Owned Small Business Program and VA's Service-Disabled
Veteran-Owned Small Business Program.
As a verification assistance counselor and the subject
matter expert for VET-Force and the National Veterans Small
Business Coalition, I have gained significant insights into
CVE's issues. As a small business owner, I have tried to
translate these issues into the cost and impact that they have
on the veteran-owned business community.
As a small business providing services to the Federal
government, the current environment provides significant
challenges to profitability, growth, and survival. CVE's
interpretations add additional arbitrary and unpredictable
hurdles that make it more difficult for me to plan, finance,
market, and operate my small business. These CVE
interpretations tend to be more minimizing business reality and
addressing more the extremes.
In business risk management, the fact that an event can
happen is always accompanied by the probability of the
occurrence and the impact of the occurrence, be it profit,
growth, cost, or schedule. For CVE, these impacts represent
ownership and control. When CVE theorizes that an event might
happen, they do a disservice to the veteran community, to the
VA and to the taxpayers, by failing to ask a very simple
question, ``So what?'' The net impact of those interpretations
is as follows:
Congress, through its laws passed for veterans, has had the
intent to increase veteran business opportunities, is not
served by depriving vets of everyday business practices and
therefore putting them at competitive disadvantage. CVE's Risk
Avoidance Program or approach has crippled legitimate veteran-
owned businesses while doing little to prevent fraud. On VA's
website, they have four businesses, one of which pled guilty,
three of which were indictments over a two-year period. During
that same two-year period I estimate about 4,500 companies were
denied, which represents more than an average of 10 for each of
your districts that were legitimate businesses that were
denied.
The CVE verification program is becoming a de facto
standard for other agencies. When I go to other agencies and I
talk to them about small business, one of the first things they
ask is, ``Are you CVE verified?'' When I say yes, it's, ``Tell
me more.'' When I watch businesses that say no, the almost
immediate response is the body language that says, ``How do I
get out of this conversation and get onto somebody that I want
to talk to?''
Lastly, the documentation required by CVE is often
considered excessive. Sometimes it is incomplete, and it is
potentially subject to compromise. There are additional
examples in my written testimony.
I would like to illustrate now from some examples CVE's
findings that undermine business building and create veteran
paranoia and distrust with the VA. These are recent cases. Some
of the ones that I have in my testimony have been resolved.
For example, Bravo 1-9 Construction is a New Jersey-based
construction business. The owner is a combat-wounded veteran
rated 100 percent by the VA. On his 0877 application, he
indicated that he was a veteran, not a service-disabled
veteran, yet with his package he submitted his letter from VA
of a determination and a rating. In spite of having clear proof
that the individual was a service-disabled veteran, VA issued
him with a veteran approval.
Clauss Construction. Clauss is a California-based
remediation services company. They do large building
demolition, including explosive building implosion and
collapse, which requires a variety of NAICS codes to
demonstrate compliance with environmental and other issues.
Clauss is a small business with less than 100 employees. Its
primary business NAICS code is a 500 employee standard. CVE
denied Clauss based upon a separate NAICS code, which was
arbitrarily picked as the primary NAICS code in the SAM was
their 500 employee NAICS code. When this error was pointed out
to CVE, who by the way had the payroll from the company and
could have counted the number of employees, their response was
to refer the company to SBA for a formal size determination.
As we look at these and other examples from my written
testimony, we see that major corrective actions are
interpretive and therefore can be immediately implemented. This
will result in fewer denials and a significant reduction in
effort and cost for both CVE and the veteran community. I
provided some statutory, regulatory, and interpretive
suggestions in my written testimony.
That concludes my oral testimony, and I look forward to
questions.
Chairman HANNA. Thank you, Mr. Goldschmitt.
Mr. Williams.
STATEMENT OF JONATHAN T. WILLIAMS
Mr. WILLIAMS. Good afternoon, Chairman Coffman, Chairman
Hanna, other Distinguished Members of the Subcommittees. My
name is Jonathan Williams. I am a partner with the law firm,
PilieroMazza, which represents veterans in their dealings with
the Small Business Administration and the VA. It is an honor to
be here today to share my experiences representing SDVOSBs.
I am a strong proponent of the SDVOSB programs administered
by the SBA and the VA, and I have seen firsthand how these
programs have benefitted many veterans. However, I have also
seen many veterans struggle to obtain the benefits of the
programs for a variety of preventable reasons. My testimony
will address those problems, which I believe stem from two
primary causes.
First, the VA's application process is too long and
cumbersome. Second, the rules governing the two SDVOSB programs
are confusing and inconsistent.
Regarding the application process at the VA, the VA
generally takes a ``deny first, ask questions later'' approach.
As a result, most veterans do not learn of problems with their
application until they receive a denial letter. This approach
forces veterans to fix the application errors and then file a
request for reconsideration. Of the requests for
reconsideration we have handled, more than half could have been
avoided if the VA had notified the veteran of minor issues
before denying the application. Not surprisingly, the VA has
struggled to process requests for reconsideration due to
volume.
The VA has acknowledged that the process needs improvement,
and recently proposed an initial screening stage to help
veterans address simple issues before their application is
denied. The initial screening stage is a step in the right
direction.
The VA could improve the application process further by
providing all bases for denial in the initial denial letter. We
have worked with a number of veterans who were initially denied
for one reason, addressed that issue on reconsideration, only
to then be denied again for new reasons the VA had not
previously identified. Requiring veterans to endure multiple
rounds of reconsideration is frustrating, not to mention very
costly and time-consuming.
Many veterans perceive the application process at the VA to
be adversarial. These veterans believe the VA personnel are
looking for a reason to keep them out, rather than trying to
help them to get in. Given that the VA's program was enacted to
assist veterans in the transition from active duty to civilian
life, making veterans feel more welcomed into the program
should be a priority.
Turning to the second root cause of the challenges veterans
have faced, the two SDVOSB programs are often inconsistent. The
inconsistencies stem from the separate rules used by the SBA
and the VA. Though similar, the two sets of rules differ in
many respects and this has caused a lot of confusion amongst
veterans, as well as government personnel.
For example, both agencies have interpreted their rules to
prohibit restrictions on the transfers of the veteran's
ownership in his company. Recently, the Court of Federal Claims
rejected the VA's interpretation and held that the VA's rules
permit commercially reasonable transfer restrictions. This was
an important, business-friendly ruling because transfer
restrictions make it easier for veterans to attract investors.
However, the court's ruling only applies to the VA's program.
The SBA should revisit its position on transfer restrictions to
avoid inconsistency between the two agencies on this issue.
The two programs are also inconsistent regarding joint
ventures. Joint ventures are a valuable tool through which
small businesses can work together to access contracts they
would not have been able to perform on their own. The SBA's
rules make it easier for veterans to take advantage of joint
ventures. The VA, on the other hand, requires veterans to go
through a second application process for the joint venture.
This practice requires additional time and resources that many
veterans do not have, and it is arguably contrary to the VA's
rules. If the VA handled joint ventures similar to the SBA,
joint ventures would be a much more useful tool for veterans
who work with the VA.
Another point of confusion is over which agency should
decide small business status. The VA's statute indicates the
definition of a small business comes from the Small Business
Act, which the SBA is entrusted to implement. Furthermore, the
VA's Acquisition Regulation recognizes that all protests
pertaining to the size of SDVOSBs should be sent to the SBA.
Yet, the VA's rules permit the VA to deny an applicant based on
size and affiliation concerns, even if the SBA has not been
consulted. This trend should be stopped because it is
inconsistent with the VA's statutory mandate and in-fringes on
the SBA's role as the arbiter of small business status.
To solve some of the regulatory inconsistencies in the
short term, the VA and the SBA could change their
interpretations of the existing rules. However, the best long-
term solution would be to consolidate the two programs into
one, with one set of rules and one agency to interpret those
rules. Though by no means an easy task, consolidation of the
two programs would be much simpler and more efficient for
veterans and the government.
That concludes my testimony. Thank you for the opportunity
to appear before you here today.
Chairman HANNA. Thank you.
I understand that the VA appellate process takes about 147
days and is not heard by administrative judges, whereas the
SBA's appeal process takes roughly 15 days and does result in a
published decision from an administrative judge. Knowing that
and knowing what we have heard today, and I know your opinion,
Mr. Williams, I will ask the question that Mr. Williams just
gave his opinion on. Do you believe that this should be
consolidated into one program? And do you believe, all three of
you, that that should be the SBA or do you have something else
in mind?
Mr. GOLDSCHMITT. One of the recommendations I made is that
the programs use a common adjudication of SBA's OHA to get a
common set of rules or at least a common set of adjudication
and case law that can be worked from. So yes, I would agree
with that.
Mr. LEGHORN. The American Legion is a resolution-based
organization. We currently do not have a resolution on this
matter, but our resolution does state that we would like to
streamline the process. And if it does take interference from
SBA to be the final arbiter, we can get behind this.
Mr. WYNN. Just a follow-up comment on that. It is our
opinion, too, that it is getting to the point where it seems
like SBA would probably have more experience in handling the
appeals process. There seems to be no real appeals process at
the VA. As I mentioned in my testimony, the same folks that are
doing the denial are also the ones you have to go back to if
you have a problem. So an independent body, and perhaps with
the SBA that may be the solution. Thank you.
Chairman HANNA. Thank you. Mr. Coffman?
Chairman COFFMAN. Thank you. Mr. Goldschmitt, VA says that
they do $3 billion in veteran-owned small business contracts,
so why should they care about these issues?
Mr. GOLDSCHMITT. Mr. Coffman, I think that there are
several reasons they should look at that. The issues that we
are looking at that are the adjudications by CVE create
inefficiencies that cause a lot of cost, a lot of heartache to
some of the small businesses. The impact of that is that there
are fewer small businesses that can compete for business within
the VA. Recently, they have had a number of denials of apparent
awardees for contracts. These are the folk that made it through
the contract program and were picked as the best, the best
value to the government. And because of typically the rules
that were discussed by Mr. Wynn and Mr. Leghorn about some of
the simple things that could have been changed, they lost
opportunities and VA lost the best of the best in those
opportunities.
The other is a number of successful businesses, because of
the hurdles that are there by VA, choose to do business in
other locations or other agencies within the government. So
consequently, the VA does not necessarily get all of the best.
So they are artificially limiting competition within VA, not
getting the results in some cases based upon their evaluations.
Chairman COFFMAN. Thank you.
Mr. Leghorn, given The Legion's own review of some of the
issues regarding regulations, can you speak to CVE's lack of
the use of 13 CFR 121 and its impact on their decisions?
Mr. LEGHORN. Currently, I think VA has not adopted or
reconciled 38 CFR 74 with 13 CFR 121. If VA is going to move
forward and make determinations on size eligibility, then they
should adopt that section.
Chairman COFFMAN. Thank you.
Mr. Wynn, what are your recommendations for striking a
balance between preventing continuing fraud and loosening the
restrictions so SDVOSBs are not overburdened in the
verification process?
Mr. WYNN. Well, we do not want a program that is going to
allow companies that misrepresent themselves to participate in
that program. We definitely do not agree with that. But again,
we still do not want a program that is so overly burdensome and
complex that it screens out thousands of legitimate owned
businesses. So it may be necessary to be more vigilant on the
backend. That means after a company is admitted into the
program, to provide more oversight and monitoring on a constant
basis. We have had reports where companies that have been
identified as misrepresenting themselves were allowed to still
get additional contracts later. So hopefully more could be done
after companies are in the program as opposed to doing so much
more to screen them out from getting in.
Chairman COFFMAN. Thank you. I yield back.
Chairman HANNA. Ms. Meng. Ranking Member Meng.
Ms. MENG. Mr. Leghorn, in your testimony you discuss how VA
has said that 98 percent of businesses who are denied
certification are not maliciously trying to defraud the
government but rather there is an ignorance of the law. Do you
believe that VA is doing enough to educate the businesses on
the requirements for CVE verification? And how can the VA do a
better job?
Mr. LEGHORN. Well, I think actually VA does a very good job
with the counseling program and everything that they have on
their website to get the information out. But it is just a
matter of outreach. That has to be ramped up a lot more in
order to get the veteran entrepreneurs to know about the common
pitfalls and how they can avoid them.
Ms. MENG. Thank you. I yield back.
Chairman HANNA. Mr. Takano. Do you have any questions?
Mr. TAKANO. Thank you, Mr. Chairman.
Mr. Williams, I want to just review some of your testimony.
You stated that there is a ``deny first, ask questions later''
policy that apparently is used by this VA program. And you are
saying also that veteran business owners do not often know how
to correct their applications if they were told in advance and
then even after they make the correction they often find new
reasons. How often does this occur? I mean, I want to get a
sense of how widespread.
Mr. WILLIAMS. We see it very frequently. The ``deny first,
ask questions later'' approach has been pretty consistent for
the last year-and-a-half or so since the number of applications
really shot up in mid-2011. I would say the vast majority of
cases there was little or no dialogue between the VA and the
applicant before the denial was issued. Now, we have seen some
improvement in 2012, particularly with respect to requests for
reconsideration, and some of those are handled by the VA's
Office of General Counsel. And we have had good success with
those folks in dialoguing and having a back-and-forth about
issues and trying to reach a common ground. But, for the most
part, when a firm comes to us and they have been denied, they
have not had any exchange with the VA to that point, so they
are having to confront this issue for the first time having
already been denied from the program.
And the second point you raised is that they do not
necessarily have to tell you every reason they are denying you
in that initial denial letter. So what we have started to do is
to ask the veteran to send us all of their documents, the
entire application, even if it was denied for one needle in the
haystack, we ask them to send us everything. And then we do a
full review to see what else they might be denied for three
months from now, six months from now. And you can imagine that
is a very time-consuming and costly exercise for veterans to go
through, many of whom cannot afford to go through it. But that
is a symptom of the fact that they do not have to tell you
every reason upfront, and they will often times cite different
reasons three or four months after you correct the initial
reason.
Mr. TAKANO. None of you may be able to answer this question
but I am trying to understand what might be the explanation for
this stance. I mean, was there something in the history of the
VA in this program where there were cases of fraud that may
have caused this overly cautious behavior? I mean, is there any
speculation?
Mr. WILLIAMS. I do not know if it is overly cautious so
much as it is that they are not looking at everything before
they issue the denial. I suspect that a lot of times what
happens is you get to the first document and you see a problem
and you put it in the ``no'' pile. And then they come back and
they fix that but then you start to look at the rest of the
application and you realize that there are other problems. I do
not know that that is happening but I suspect that may have
been part of the issue.
Mr. TAKANO. Is it a staffing issue or a staff training
issue? Or is it just kind of a philosophy?
Mr. WILLIAMS. I do not know. I would imagine certainly
there must be a resources or a staffing component to that that
you look for the quickest way to move through some of the
applications, and if it can be denied based on one issue that
you spot right off the bat, you go ahead and get it moving
through the system.
The VA has recently indicated that they plan to institute
an initial screening stage, so they will try to screen
applications for these issues in corporate records that tend to
trip people up and give the applicants an opportunity to
correct those issues before their application is denied. And
that is a really positive step. It is something that we have
been hoping that they would do. You know, the proof will be the
pudding in terms of how that works and whether or not it just
becomes another hoop that the veterans have to jump through.
But that should reduce the number of reconsideration requests
and the amount of time it takes to get through the
reconsideration process.
Mr. TAKANO. Mr. Chairman, I yield back. Thank you, Mr.
Williams.
Chairman HANNA. The gentleman yields back.
Mr. Bentivolio.
Mr. BENTIVOLIO. Thank you, Chairman Hanna and Chairman
Coffman. And thank you, witnesses, for being here today.
This holds some personal significance for me. I am a small
business owner, or was before I came to Congress, and I am also
a service-disabled veteran. So the policy we are discussing
today affects me directly. And that said, of course, I come
with no selfish intent but rather to serve the interests of my
2 million fellow service disabled veterans and their families.
I am also a member of The American Legion and a life member of
the VFW.
But I just recently got this this morning, so I have dealt
with the VA. And this is the first time I have heard that the
VA actually will help a small businessman. I am maybe naive,
and I have since this morning become very acquainted with this
and some of the questions we are going to ask and some of your
testimony I have read over. But help me walk through this
system because I have dealt with the VA as a Vietnam veteran. I
never wanted to go back. And then as a veteran from Iraq I
found it was a whole different thing.
So I would like to ask you a question. Can you walk me
through this as how I would go about or a fellow veteran in my
district who wants to start his own business, his first step to
going to VA, does he have to put together a business plan or is
the application process similar to that in the format?
Mr. GOLDSCHMITT. The business plan is not a requirement of
verification, but the business documentation that addresses
governance, ownership, et cetera, is part of that process. So
the documentation that I would put together if I am going
through as a small business coming into the government would be
all of the small business steps of registering with Dunn &
Bradstreet, registering in SAM, putting my information in. And
from a VA perspective I would be putting together my paperwork
that addresses my service disability, which they probably have
in their system, but I would be putting together all of the
paperwork on my company, including all of the registration with
the state; my operating agreement or bylaws; a variety of
information, including licenses.
Mr. BENTIVOLIO. So let me see if I understand this. If I
was a veteran I would not have to come in, give you a business
plan or a marketing plan addendum to that or give you what I
project my next three years of income is or my expenditures;
how I am going to do this business? I do not have to do that?
Mr. GOLDSCHMITT. No.
Mr. BENTIVOLIO. Okay. So the next thing is who are those
people who actually review my application? Do they have any
business experience or are they government clerks that
determine that?
Mr. GOLDSCHMITT. I do not know what business experience
they have but it is a mix of government and contractors. I
think that would be a better question for Mr. Leney to talk
about. But in my experience they have not been business owners
or business managers.
Mr. BENTIVOLIO. Interesting. Okay. I yield back my time.
Thank you very much.
Chairman HANNA. The gentleman yields back.
Mr. Walz.
Mr. WALZ. Thank you, Mr. Chairman. And thank you all for
coming and helping us understand this.
These are important programs, and when they work I think
they are important and they do work. When they do not, they are
incredibly frustrating. This might give a heads up for that
panel that is sitting behind you. I am going to get a little
bit parochial here on this, but this is a letter I got last
night. I am just going to ask you as you listen to this
paragraph, do you think this is typical or an anomaly?
``We went through the recertification process last summer
and sat through the six-week outage on the registration side.
We then submitted the final documents immediately after the
outage ended and we got notification that we had reached the
determination stage. Then within a few short weeks we were
shown on the website as certified SDVOSB. Problem solved. Then
last Wednesday, we got the attached letter saying our
certification expired and we are out of the program. At this
point it appears they lost our materials and pushed us out of
the database.''
Typical or anomaly in your opinion as you see this?
Mr. GOLDSCHMITT. I would not call that typical, but I would
not call that an anomaly because I am seeing that with an
increasing frequency.
Mr. WALZ. Have you heard of these types of things
happening?
Mr. GOLDSCHMITT. Yes.
Mr. WALZ. Now, keep in mind, this is a 20-year-old business
that has gone through this, been all there. Why are we wasting
time on this? Nothing has changed. They went through the
process. They followed it. They did it. And then you told them
and they went ahead forward. It was the folks sitting behind
you who are going to hear this. Why would they? This is the
frustration I feel. I mean, if the process was working and they
got certified, we should have been able to move on and now we
are going to deal with this one. Do you hear these stories?
Mr. WILLIAMS. Yes, we do a lot. That e-mail sounded very
similar.
Mr. WALZ. Yeah. In your opinion, why did this happen?
Mr. WILLIAMS. Well, they did have technological issues with
the system last summer. We heard from a lot of folk who
disappeared out of the Vet Biz database last year.
Mr. WALZ. Well, the folks sitting behind, I am going to
come back after these votes. It is Windsor Software. Somebody
might get on the phone. That would be good. But yeah. So we
hear that?
Mr. WILLIAMS. Mm-hmm.
Mr. WALZ. So now I have a veteran small business service-
disabled veteran following the rules, doing it, proud to have a
symbol up on their website doing these things and they got
booted out. What is their recourse now other than writing to me
before they knew there was a hearing? What was their recourse
to go back through and get back on again?
Mr. WILLIAMS. There is an appeal process. If their
eligibility is rescinded, they could file an appeal with the
Agency, with the VA. Ultimately, they could go to federal
court.
Mr. WALZ. For a small business?
Mr. WILLIAMS. Right.
Mr. WALZ. Who was already certified?
Mr. WILLIAMS. Correct.
Mr. WALZ. Told they were. Kicked off.
So it seems to me, and I will yield back to the chairman
here in just a second, it seems to me that I heard you, Mr.
Goldschmitt, you made this point about it is, is that we do
this all too often. That the proof always lays on the veteran.
The assumption is they are wrong. We process it from that point
of view and we ask them to prove they are right. So now I have
got a small business doing everything right, going to have to
go back through this process to prove that they have been
certified 19 times in a row, and have to get recertified.
So the way to fix this? Anybody got a suggestion?
Mr. WILLIAMS. Well, they extended the amount of time that
you are eligible from before you have to re-verify from one
year to two years, so I am not sure where this particular
company fell in that spectrum, but perhaps extending it
further.
Mr. WALZ. Okay. Anybody else?
Mr. WYNN. I would just like to say there are far too many
businesses that have been denied for various reasons, and the
thing about it, as you mentioned a 20-year business, a company
that had been doing business for 20 years, we have seen a
number of businesses that are out here doing business with
federal agencies, perfectly legitimate businesses, only to get
denied to do business at the VA.
Mr. WALZ. Statistically, what is the chance that this is a
fraudulent claim versus an error that was made on them? The
chances are that this was an error. Am I correct? It could be a
fraudulent claim. I do not know. I am going to find out from
the folk behind you. But statistically, so everybody gets
kicked out. Now they have to go back and prove that they are
legitimate?
Mr. WYNN. Well, it has been stated by the VA Small Business
director and even in some of the GAO reports that less than 2
percent of those companies that were denied were denied for
reasons of fraud.
Mr. WALZ. Okay. I yield back. I will wait for ht next
panel, Mr. Chairman.
Chairman HANNA. The gentleman yields back.
If there are no further questions from any members of this
panel, unfortunately, we have to go vote. So I will dismiss
this panel. When we come back, Mr. Coffman will take over the
gavel and handle the second panel.
So we are going to have votes. I will reconvene in probably
20 minutes. Thank you.
[Recess]
Chairman COFFMAN. The Committee is now called back to
order.
Our first witness on the second panel is Bill Shear,
director of the Financial Markets and Community Investment Team
of the Government Accountability Office. Mr. Shear frequently
comes before both Committees, and we look forward to hearing
your testimony again today. You are now recognized for five
minutes.
STATEMENTS OF BILL SHEAR, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT; A. JOHN SHORAKA, ASSOCIATE ADMINISTRATOR,
OFFICE OF GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S.
SMALL BUSINESS ADMINISTRATION; THOMAS J. LENEY, EXECUTIVE
DIRECTOR, OFFICE OF SMALL AND DISADVANTAGED BUSINESS
UTILIZATION, DEPARTMENT OF VETERANS AFFAIRS
STATEMENT OF BILL SHEAR
Mr. SHEAR. Chairmen Coffman and Hanna, Ranking Members Meng
and Kirkpatrick, and Members of the Subcommittees.
I am pleased to be here this afternoon to discuss the
Department of Veterans Affairs' efforts to verify the
eligibility of veteran-owned small businesses, including
service-disabled veteran-owned small businesses to receive
contracting preferences under VA's Veterans First Contracting
program. This statement is based on our January 2013 report on
VA's Verification Program.
Given the status of VA's verification procedures and
operations, our work focused on issues related to planning for
and designing the verification program, and on changes in the
program's management and operations. My testimony today
addresses first the progress that VA has made in ensuring that
its program verifies eligibility on a timely and consistent
basis, and second, key operational and policy issues that VA
will have to address if its verification program is expanded to
support the government-wide Service-Disabled Veteran-Owned
Small Business Contracting Program.
In summary, the two key findings from our January 2013
report are:
First, VA has instituted a number of significant changes to
its verification processes to improve and address program
weaknesses but it continues to face challenges in its efforts
to establish a stable and efficient program to verify firms on
a timely and consistent basis. These challenges are directly
related to shortcomings in strategic planning and data systems
for the verification program.
Second, expanding VA's Verification Program to support the
government-wide Service Disabled Veteran-Owned Small Business
Contracting Program would require VA to improve its
verification process and address a number of operational and
policy issues.
To improve the management and oversight of VA's
verification program, our January 2013 report made two
recommendations addressing strategic planning and data system
needs. VA concurred with the two recommendations and stated
that it had actions underway that would address them.
Chairmen Hanna and Coffman and Ranking Members Meng and
Kirkpatrick, this concludes my prepared statement. I would be
happy to answer any questions you may have.
Chairman COFFMAN. Our next witness is John Shoraka,
administer of Government Contracting and Business Development
at the Small Business Administration. In this capacity, he is
responsible for ensuring maximum participation by small firms
across the federal marketplace and overseeing all government
contract programs benefitting small businesses. Thank you for
being with us today, and you are now recognized.
STATEMENT OF A. JOHN SHORAKA
Mr. SHORAKA. Thank you, Chairman.
Chairmen Coffman and Hanna, Ranking Members Kirkpatrick and
Meng, and Members of the Subcommittees, thank you for inviting
me to testify before you today. The SBA plays a pivotal role in
helping veteran-owned small businesses and service-disabled
veteran-owned small businesses or SDVOs obtain access to
federal contracts.
As you know, veteran-owned businesses are an integral part
of our nation's economy and its ongoing recovery. Veterans own
2.4 million, or 9 percent, of U.S. businesses. These businesses
generate about 1.2 trillion in receipts and employ nearly 6
million Americans. One key sector of the veterans small
business economy is government contracting, where SBA and its
SDVO program play a critical role.
Our SDVO provides Federal procuring agencies with the
authority to set acquisitions aside for exclusive competition
by SDVOs. The program also gives procuring agencies the
authority to make sole source awards to SDVOs if certain
conditions are met.
SBA's government-wide program, along with the VA's Veterans
First contracting program, are intended to assist the Federal
government in meeting the statutorily-established annual
agency-wide goal of awarding at least 3 percent of the total
value of contract dollars to SDVOs. In fiscal year 2011, over
$11.8 billion in contracts went to SDVOs, up by 3.8 percent
over the previous year.
To qualify as an SDVO under SBA statutory guidelines, a
firm must meet four conditions through a self-certification
process. First, the firm must be at least 51 percent owned by
one or more service-disabled veterans. Second, the firm's
management must be controlled by one or more service-disabled
veterans, or in the case of a veteran with a permanent and
severe disability, by the spouse or the permanent caregiver of
the disabled veteran. Third, the first must meet the small
business size standard for any federal contract they bid on.
And fourth, the firm must self-represent their disabled veteran
status.
Currently, there are approximately 12,000 self-certified
SDVOs in the System for Award Management, which is the
government-wide contracting database.
In terms of a participant's status as a veteran with a
service-connected disability, the owner-operator of an SDVO
must be able to produce official documentation that he or she
has a service-connected disability in the event of a
``protest.'' A protest occurs when a competing bidder or other
interested party challenges the winning firm's eligibility as
an SDVO. The initial decision on a protest is made by my
office. The determination of a protest may be appealed to SBA's
Office of Hearings and Appeals (OHA).
OHA provides independent administrative appellate review of
SBA program determinations, including the initial SDVO
determinations made by my office. OHA decisions, in turn, may
be appealed to the Federal courts. Currently, OHA is staffed by
eight full-time employees, including two administrative judges,
who decide appeals of the Office of Government Contracting's
initial SDVO determinations. In fiscal year 2012, OHA decided
eight SDVO appeals, roughly 20 percent of GCBD's 41 initial
determinations that year.
We use the protest process to help root out fraud, waste,
and abuse in our small business programs by referring
questionable firms to our General Counsel Debarment Official or
SBA's Inspector General for further investigation. In fiscal
year 2012, SBA suspended, proposed for debarment, or debarred
30 firms or individuals involved in procurement-related
misconduct.
The SBA and VA mutually recognize the importance of the
SDVO communities to the American economy. SBA and VA have
collaborated to compare our programs in an effort to bring them
into closer alignment and provide better service to the
veterans' community. While there are similarities, there are
also key differences. For instance, VA's Veteran First program
is a certification program very similar to SBA's 8(a) Business
Development Program, while the government-wide SDVO program
uses self-certification. In order to meet the requirements of a
certification program, a firm must provide more initial
information and work through the certification process to meet
eligibility requirements.
Another difference between the SBA and VA programs is in
the timing of requests for documentation and review of
documentation to demonstrate program eligibility. In a protest-
based self-certification program, the requests for additional
documentations are submitted in response to a protest that is
filed after a firm has been identified as an apparent
successful offeror. Once the documentation is received, a
determination of eligibility is made. The VA certification
process requires that documentation be submitted and a
determination be made before an offer can be submitted or a
contract be awarded.
Our collaboration with the VA has been productive in
identifying other areas of potential coordination and best
practice sharing. I would be happy to discuss these efforts or
any of the topics the Subcommittees wish to explore during the
question-and-answer portion of the hearing today.
Thank you once again for your support of our work in this
area and for the opportunity for me to appear in front of you
today.
Chairman COFFMAN. Our final witness is Tom Leney, executive
director for Small and Veteran Business Programs within the
Office of Small and Disadvantaged Business Utilization at the
Department of Veterans Affairs. In this capacity he is
responsible for promoting small business participation at VA
with a particular focus on service-disabled veteran-owned small
businesses and veteran-owned small disabled businesses. As we
have noted several times today, many of our distinguished
witnesses are veterans, including Mr. Leney, who proudly served
in the United States Army. We thank you for your service and
look forward to your testimony. You are now recognized for five
minutes.
STATEMENT OF THOMAS J. LENEY
Mr. LENEY. Thank you, Mr. Chairman and Chairman Coffman,
Members of the Subcommittee. Thank you for inviting me to
testify.
Last year, the VA Veterans First Program enabled veteran-
owned small businesses to receive contract awards totaling more
than $3.8 billion from the VA. Since its inception, the VA
Verification Program has faced challenges balancing the need to
prevent ineligible firms from taking improper advantage of the
Veterans First program with our desire to make the process
easier and faster for legitimate veteran-owned small
businesses. The VA has made substantial progress on both
fronts.
In the aftermath of reports in 2011 from the VA Inspector
General and the Government Accountability Office, our
imperative was to ensure that all firms in the program have
been properly verified as meeting the standards laid out in 38
CFR 74. We have addressed all the recommendations in these
reports. Indeed, in its latest report the GAO acknowledged, as
Bill did here today, Mr. Shear did here today, improvements. As
we improve the verification process, however, we realize that
many of the remaining issues are associated with the rules
themselves. Although the regulation that governs VA's
Verification Program was derived from the SBA regulations that
cover the government-wide SDVOSB program and the Section 8(a)
Business Development Program, there has existed in the
stakeholder community a widespread misconception that there are
major differences between the VA and the SBA regulations.
To understand what differences truly exist, VA collaborated
with the SBA over the last several months to conduct a thorough
comparison of the ownership and control portions of our
respective regulations. Our analysis revealed two statutory
differences and two regulatory differences. We also compared
VA's interpretation of the regulation to the SBA
interpretations as reflected in the SBA status protests and in
the OHA decisions over the past two years and found a single
instance where our interpretation differed from the SBA's and
we are changing our interpretation to match theirs.
Although VA seeks to align its interpretation with the SBA,
we have determined that transfer restrictions on ownership that
are part of normal commercial dealings, such as the right of
first refusal, do not materially affect the ability of a
veteran to unconditionally own or control the business.
Therefore, VA will no longer interpret the current regulation
to mean that such restrictions constitute a reason for denying
eligibility.
Since many rule issues cannot be resolved by
reinterpretation, VA has initiated a formal process to consider
changes based on lessons learned and outreach to a broad range
of veteran stakeholders. We received a number of
recommendations worthy of consideration. However, in view of
the current alignment with SBA rules, any consideration of
changes to the VA Verification Program will involve
coordination with the SBA. Our goal is to increase
opportunities for veteran businesses. Our analysis has revealed
that most applicants fail because they do not fully understand
the regulations. To address this problem we will expand our
Verification Assistance Program by adding pre-application
workshops to the three existing elements, which consist of an
online self-assessment tool that walks the veteran through
every element of the regulation, verification assistance
briefs, 11 of which are on our website and cover about 85
percent of the reasons for denial, and partnerships to provide
counseling services to applicants. Three of our counselors were
present in the first panel. Only one was not a counselor, we do
not allow for-profit organizations to partner with us on
counseling.
In May, we will adopt a practice of contacting an applicant
with preliminary findings where there are issues of
noncompliance that can be easily and quickly corrected. We will
allow applicants to make corrections prior to initial
determination. We are currently running some limited pilots to
validate the process and to train the CVE staff.
The most recent GAO report found that the management
information system supporting verification is woefully
inadequate for our purposes. To solve this problem, VA has a
Next Generation System under development. We expect to award a
contract for the new system in May with an initial operational
capability in October 2013.
In conclusion, we have overcome many of the challenges and
vulnerabilities that were raised by the GAO and OIG reports and
improved processes have reduced the average time to initial
determination from more than 130 days during the summer of 2011
to fewer than 40 days for those applications that were
completed last month. We continue to improve our processes and
will revise our regulation in coordination with the SBA to
achieve a program that enables real veterans to gain expanded
access to real opportunities with the Department of Veteran
Affairs.
Mr. Chairman, members of the Subcommittees, this concludes
my statement. I am pleased to answer any questions you may
have.
Chairman COFFMAN. Thank you.
Mr. Shoraka, how could the Veterans Administration better
apply the interpretive standards of 121 to ensure they are in
sync with the Small Business Administration?
Mr. SHORAKA. With regards to size, the SBA is the agency
that makes determinations on size on any given one contract, on
contract-specific determinations. So when there is a protest at
a time when there is a contract being awarded, the SBA is the
agency that will make that determination. What we often find
that happens, since the determination at the VA is made during
the certification process, the primary NAICS code for that
entity is used to determine size and their eligibility to the
program. However, if it is contract specific, the contract
NAICS code will be used and that is where you will have a
divergence in an entity being found small at certification and
potentially other than small in a protest situation.
Chairman HANNA. Mr. Shear, why was the Government
Accounting Office able to determine whether the recent changes
have been effective?
Mr. SHEAR. Part of the reason why we stepped back and
looked at strategic planning is that we observed that there was
not a stable process in place where we could do testing and
evaluate how well the process was working. So the progress, or
in this case the lack of progress at VA, affected very much
what our audit work included. One of the things that we have
recommended, which we think is very important going forward for
VA, is that part of the strategic planning should include some
type of a feedback mechanism and performance metrics--that is
developing metrics based on its audits of its own
determinations to see basically how good those verification
determinations were. VA started collecting some information on
the quality of its determinations last fall but really VA needs
a system in place. And VA needs a system in place to try to
test how well its process is working.
Chairman COFFMAN. So you do not have a feel right now as to
whether or not they are working together as the program was
intended?
Mr. SHEAR. We do not have evidence that the process is
working as intended. And among other things, we have heard
similar types of concerns raised by the first panel. We reached
out to these constituencies that represent service-disabled
veterans, and we know there are a lot of concerns out there and
there is a lack of metrics to really evaluate how well VA's
current process is working with the changes that have recently
been made.
Chairman COFFMAN. We will do a second round of questions.
Mr. Shear, I suggest to you that we have plenty of evidence
that it is not working. We had a panel just before that gave us
a litany of examples, and I am sure they have many more.
Mr. Shoraka, in the GAO report you discussed today you
mentioned a statutory, procedural, and interpretive differences
between the SBA and the VA programs. Just so we are all on the
same page, can you explain what these perceived differences are
specifically; the key differences in your interpretation rather
than that more or less subjective phrase?
Mr. SHORAKA. Sure. I mean, when you compare the rules and
the regulations, there are some specific minor differences. And
I think Mr. Leney mentioned, or someone today mentioned with
regards to spouses of deceased service-disabled service members
being able to control and run the company after the passing.
That is one difference. But where we see significant sort of
divergence is not necessarily in the rules themselves but in
the interpretations. The SBA does not have bright-line
determinations or bright-line guidelines with respect to, as an
example, board control. We look at the entirety of the case to
determine where control and ownership resides. If you look at
board control as an example, state by state there's different
rules and regulations around how the board determines quorum,
et cetera. Those have to be taken into consideration to
determine if indeed the veteran-owned small business or the
veteran owns and controls the firm.
Another area I think that was mentioned was rights of
transfer. That is not a bright-line for us. Depending on what
the common business practice is, that has to be evaluated based
on the totality of the circumstances to determine if it indeed
affects ownership and control of the firm.
Chairman HANNA. Thank you.
Mr. Leney, you run the Center for Veterans Enterprise and
the Office of Small and Disadvantaged Business Utilization at
the VA. Given that, section 15(k) of the Small Business act
specifically directs that director of the Office of Small and
Disadvantaged Business Utilization shall carry out exclusively
the duties enumerated in this act and shall, while the
director, not hold any other title, position, or
responsibility, except as necessary to carry out
responsibilities under section 15(k). How do you comply with
that Small Business Act? Can you be the advocate for service-
disabled veteran-owned small business at the same time your
tasked with verification, with all due respect?
Mr. LENEY. Yes, sir. I can do both because the act of
verifying veteran-owned small businesses enabled 5,400 veteran-
owned small businesses to participate in a program that has
distributed more than $3.8 billion in procurement dollars to
veteran-owned small businesses. So I think that this program
that the VA has established has created a gold standard. In the
Federal government, when people know that a firm has been
verified by the VA, they can take it to the bank. And the
results, this is real money to real vets, and it is a program
that benefits veterans. And there are 5,400 firms in this
program that get those benefits. So I personally do not have
any issue with a conflict of interest because we are helping
vets.
Chairman HANNA. Can you show us where in the statute it is
permitted? Maybe you can get back to us.
Mr. LENEY. I think that is an important question and to
give you a complete answer let me provide that for the record.
Chairman HANNA. Sure. I appreciate that.
Mr. Shoraka, has it ever occurred to you that beyond
verification of the veterans you do not need the VA; that you
are perfectly capable as the Small Business Administration of
doing this as you do everywhere in the country?
Mr. SHORAKA. Sure.
Chairman HANNA. Well, I know you do not have the budget for
it but the VA does; right? Thirty million dollars? What do you
think of that.
Mr. SHORAKA. Well, statutorily the AV has an important
program to make sure that a portion of their contracts, their
Vet First contracts go specifically to the service-disabled
community. I think that is an important program that has helped
us meet our goals. Or I should not say meet our goals; get
closer and closer to our goals over the years. As I mentioned,
we had an improvement of 3.8 percent from 2010 to 2011. What I
can say is that our self-certification program for the service-
disabled community for the rest of the Federal government in
our view has been effective in self-policing itself. Over the
last three years we have had more suspensions and debarments
than the previous decade. It has been a system where interested
parties including other vendors or even the contracting officer
can initiate a protest in which case we get involved to make
sure the firm is indeed service-disabled.
Chairman HANNA. It just seems like so many of the problems
are a function of disagreements and interpretation that if
everything went in one place and when you look at the way you
are organized and how much more efficient, relatively efficient
you seem to be, at least historically, I hope you appreciate it
is a fair question.
I yield back, Chairman.
Chairman COFFMAN. Mr. Walz, you have five minutes.
Mr. WALZ. Thank you, Mr. Chairman.
And I would like to first thank both the chairman and the
ranking members on this. It is not often that we combine areas
of jurisdiction together, and we will oftentimes sit in our
Committee and criticize the lack of collaboration between
agencies while we are not collaborating. They did not make that
mistake when they brought you here, and I thank that.
Mr. Leney, I would also like to publicly thank you and your
staff for addressing the concern of my constituent in a timely,
professional manner that allows us to give an answer. And I am
grateful for that. The next time I will just come to you so I
do not have to do it publicly. So I appreciate it and apologize
to you for that, but I am grateful for it.
Mr. Shear, maybe you can help me with this. It is not
incompatible, is it, for us to figure out how to streamline
this process and still keep the checks and balances on fraud in
place? Would it be your opinion we can do both?
Mr. SHEAR. There is a tradeoff and the two have to be
balanced. And I think VA is still searching for a balance in
terms of its policies and procedures. When we look at internal
controls, we look at whether there is reasonable assurance that
only eligible firms will participate. And VA should come up
with rules and procedures that can help to fight fraud while
still allowing legitimate firms to participate in this
marketplace.
Mr. WALZ. I was at that hearing in 2011. We did it. And I
think we should acknowledge progress has been made. But I still
think we are trying to fight this. And I struggle with this one
always, whether it was the Department of Labor and vets jobs
issues with the VA. I am somewhat biased where I tend to fall
on the VA side of things as one stop shopping but I also
recognize the expertise that is here. Does it make sense that
these two agencies should partner in your opinion? Is that the
best way to ensure delivery of services to these veteran-owned
businesses and protect against fraud?
Mr. SHEAR. As to the collaboration and cooperation that we
have observed recently between the two agencies, we view it in
a very positive sense. We view it in a positive sense in the
broader picture that the president has identified a
crosscutting priority goal to serve small businesses and
entrepreneurs. We see it in that framework. We see it in a more
detailed framework in terms of what these agencies can bring to
each other. For example, SBA has been working for roughly the
last two or three years in developing a new data system to
manage its 8(a) and its HUBZone programs. And now there is
starting to be some collaboration between the agencies to see
how could this system could help inform or even directly help
VA deal with what is a very huge challenge. That is, it has to
have a data verification system that really can work for what
its mission is.
Mr. WALZ. Mr. Leney, this is not a turf battle-type of
thing, is it? You are trying to find the best balance on this.
Is that the solution of working together, best practices, the
two agencies? Because I recognize the two of you could go and
do anything else anywhere else. You have chosen to be here for
a reason. You believe in this program. You want to make it
work. And if we do not get it right, the critics will be proven
correct. And that means we can lose programs like this. So are
we moving in the right direction your opinion?
Mr. LENEY. Congressman Walz, there is no turf battle here.
I would be happy if the SBA were to take this burden on. It
would save me about 30 hours a week mostly in the evening. I
talk to veteran business people every night, so if John would
like to take that task on, that's fine.
Mr. WALZ. But they need you, don't they? This idea of one-
stop-shopping is my internal bias towards the VA on veterans
issues I think comes out of practice and effectiveness.
Mr. LENEY. I think it is important to understand,
Congressman, there is a fundamental difference here. Last year,
we made determinations on 5,900 firms. The SBA did 37 status
protests. We did 436 requests for reconsideration. They have
two administrative judges in OHA. And I would note that our
request for reconsideration is not an appeal process. If they
need to appeal, they come to me and say, ``We think a mistake
has been made.'' Our Office of General Counsel makes a
determination was a mistake made?
If we determine that there was no mistake, and in less than
2 percent of the cases was there a mistake, we then allow them
to do what I call a Second Chance Program. Request for
reconsideration is the ability to, if you were found
noncompliant and you were truly noncompliant, you can correct
it. We have worked very closely with the SBA. We are taking a
leaf out of the 8(a) book where we have initiated; we are doing
pilots as we speak. On 1 May we will be initiating the
Predetermination Findings Program where prior to a
determination we will be reaching out to the veteran. We will
be giving them a preliminary finding of all the things we found
wrong. And I will tell you, we try very hard to find it all the
first time. I have eight pages of metrics and statistics. We
track a lot of things. And one of the things we track is how
many times do we have an incomplete determination. Nine
percent. Nine percent of the time is the numbers that we have.
So yes, we try to make those corrections, but we are doing this
predetermination findings process so that we do not have to get
to a denial determination. They get a chance to fix it. We are
doing the same thing the 8(a) program has been doing, learning
their lessons and adopting their best practice. Reaching out,
having the conversation. As many of the people on the first
panel mentioned, there has not been that kind of a dialogue. So
we are trying to take advantage of things that other people are
doing to make the progress better.
And I would note, we did 569 determinations in February.
The average time was 34 days. The regulation gives us 60. In
June of 2011 it was over 130 days. So I think we made some
progress.
Mr. WALZ. And we certainly need to acknowledge it when we
do that. There are a lot of folk working hard to make that
happen. I yield back.
Chairman COFFMAN. Thank you, Mr. Walz.
Ms. Meng, from the State of New York.
Ms. MENG. Thank you, Mr. Chairman.
The VA has indicated that it wishes to collaborate with SBA
in its efforts to develop a new data system. Mr. Shoraka, SBA
has been developing a new data system to manage its 8(a) and
HUBZone program. What attributes of the data system SBA is
currently developing hold the most promise for providing a
model for completion of a VA data system?
Mr. SHORAKA. Thank you, Congresswoman.
As Mr. Leney mentioned, we have been working together to
share best practices, not only around processes and metrics but
on systems as well. We are in the process and we have been over
the last year in implementing what we call One Track, which
will be the system for our 8(a) and our HUBZone program. The
process is well on its way where at this point it would be
difficult to adjust the system to accommodate the specific
necessities or requirements of the veteran program. But what we
have committed to do is share system requirements, to share
statements of work, to make sure that the frontend level of
work that the VA would have to go through in getting a new
system up and running could be minimized as much as possible.
Ms. MENG. Thank you. I yield back.
Chairman COFFMAN. Thank you, Ms. Meng.
Let's see. Mr. Bentivolio.
Mr. BENTIVOLIO. Thank you very much, Mr. Chairman.
Let us see if I understand this correctly. Correct me if I
am wrong. If I want to be certified VA, I go through SBA to get
certified first and then go to him? Or go just to him? Is that
right?
Mr. SHORAKA. So if you are a veteran-owned service-disabled
small business and you want to work with the rest of the
Federal government and not the VA, you can self-certify
yourself in the system for award management.
Now, where the SBA gets involved in that process is if
there is a protest on a specific bid that you may have bid on.
Any interested party can protest that award. The VA system is a
frontend certification program, very similar to our 8(a)
program where the firm goes through a certification and
documentation process which can take a period of time before
any award is made. But that is when the firm is actually
certified into the program. And in the case of the SDVOSB for
the VA, that program is to do contracting with the Veterans
Administration.
Mr. BENTIVOLIO. Okay. So I guess what I am leading to is
when I came home from Iraq I was considering getting a
government job. I eventually got it but it was a different type
than I expected. And the application process was very
expensive. But when I applied for that government job there was
a space where all I had to do was click that I was a veteran.
And then I had to click another spot for the application if I
was a disabled veteran.
Now, it would seem to me that you and you are both looking
for, first of all, qualified contractors to do government work.
You are specifically VA. But you have some of the same criteria
he does except yours is you have to have a DD Form 214 prove
that you are a veteran and I have to have certification that I
have to submit from the VA to, well, to prove that I am a
disabled veteran; correct? I understand there are some
regulation differences, but would it not be simpler for me, as
a veteran, just to come to you and say, hey, I need this
certification; that I am a disabled veteran and I need a DD
Form 214 sent to him, official copy, and you label me as a
disabled veteran that owns a business with the other additional
requirements--51 percent owned, one or more vets. And I missed
number three. I did not understand here and I did not
understand four.
Mr. SHORAKA. With regards to the documentation, in the case
of a protest that documentation, which is either received from
the VA, or the Department of Defense, or in some cases the
Federal government or other agencies, that documentation is
necessary for us as well but only in the case of a protest. Not
on the frontend.
Mr. BENTIVOLIO. But it would seem to be less troublesome if
I just went to the SBA and just handed you my--or you got an
official copy. I mean, does that not make sense or am I missing
something here?
Mr. LENEY. Congressman, it is always less troublesome to
self-certify. It is always more troublesome when somebody
checks. And at the VA, we check.
Mr. BENTIVOLIO. Well, you check that I am a disabled vet;
right?
Mr. LENEY. We do.
Mr. BENTIVOLIO. And you check that I am a veteran. You have
a copy of my DD Form 214; correct?
Mr. LENEY. Yes.
Mr. BENTIVOLIO. All right. So if I was applying for a
government job and I have to verify that I have a college
degree, I have to send an official transcript from my school. I
do not, the school does, to an employer or another school for
instance. Why cannot the same happen from you, a certified copy
from VA goes directly to SBA?
Mr. LENEY. In fact, one of the things that we have been
doing in this collaborative effort is looking at where we can
have a single portal sharing information. As we looked at the
technology platforms that support the 8(a) and the HUBZone
programs and the technology platform that supports our Veterans
First Program, that is one of the things we are looking at. Can
we create a system whereby a person enters his data one time
and it is used by multiple programs?
Mr. BENTIVOLIO. Yeah. And it seems to me that SBA has more
experience in business and VA is more experienced in veterans.
They could simply send over to you official documents to the VA
to meet these other requirements, you verify it, and it is
done. Done deal. It seems rather simple to me.
Mr. SHORAKA. The only thing that I would add is that
obviously statutorily the VA program is a full certification
frontend program that certifies not only the status but also
that the firm is indeed small, where our program, again, is a
self-certification program that under protest we will determine
status and size.
Mr. BENTIVOLIO. I understand. So we need to change the
regulations. Okay, good. I will do what I can.
I yield back. Thank you.
Chairman COFFMAN. Ms. Chu, California. You have five
minutes.
Ms. CHU. Thank you.
Mr. Leney, the GAO report released earlier this month noted
that the VA had not shared their comprehensive long-term
strategic plan with key stakeholders such as veteran-support
organizations and congressional staff and committees. Moving
forward I think there are many of us on the Small Business
Committee that would like to be more engaged on this issue with
the VA. What steps have you taken or are planning to take to
ensure that key stakeholders are involved in the VA
Verification Program's plans and priorities?
Mr. LENEY. That is an excellent question. We have reached
out to many of the stakeholders. In fact, all the people on the
first panel are part of our outreach effort, and I think
particularly with respect to the rules, with respect to a long-
range plan. When I came to the VA the secretary looked at me
and he had a two-word mission statement, ``Fix Verification.''
We had the kind of problems that did not need to be looking
through a five-year crystal ball. The problems were in the
trench with us.
Now that we have cleared many of those problems, we now
have a five-year plan that has gone through a rigorous review
process. The secretary last summer established a SES Review
Taskforce to look at verification. That plan has been briefed
to this taskforce. It will be briefed next month to the Office
of the Secretary and then we will be sharing it with the
stakeholder community and would be happy to share it with the
members of this Committee. We have no secrets.
But when the enemy is in the trench with you, you deal with
the enemy in the trench first because we had a lot of small
businesses that were being tremendously disadvantaged when you
have a process that takes 130 days on average. Now we are at a
process that took 34 days last month, so we are in a position
to think long term.
Ms. CHU. So all this outreach took place since the GAO
report; is that what you are saying?
Mr. LENEY. No, ma'am. We have been conducting outreach
since--I can speak personally--since April 2011.
Ms. CHU. And why is it that the GAO report said that there
had not been the sharing?
Mr. LENEY. What they spoke about has not been the sharing
of a five-year strategic plan. What their report referred to
was a specific document, which is a five-year plan. We had
strategic planning documents. Many of those issues have been
shared with stakeholders, but we did not have a comprehensive
five-year plan. That is what they were referring to.
Ms. CHU. Well, I wanted to ask about the appeal process
next. Mr. Shoraka, the appeal process in the SBA Office of
Hearings and Appeals is about 15 days. Of course, the GAO
report said 130 days but now you are saying 34 days as of last
month. But nonetheless, the appeal process at SBA is still
faster than what it is at the VA. So what more could the VA do
to be similar to the SBA in speeding up the review process?
Mr. SHORAKA. With regard to the process at the SBA, as I
mentioned earlier in my testimony, my office makes the initial
determination with regard to status. The firm or entity has the
opportunity to appeal it to the Office of Hearings and Appeals,
which is an independent body which can make a determination as
to the facts of the case. And that process helps to ensure
consistency in the programs, having that outside review and
determination. But it is an independent process that takes
place at the SBA, separate and apart from my office.
Ms. CHU. Well, some on the earlier panel were suggesting
that the SBA handle the appeals and I am wondering whether the
SBA would have the capability of handling the appeals process
for the VA
Mr. SHORAKA. So, I know that that has been a discussion and
we have heard that discussion. I think obviously it may have
certain impacts that may not have been studied yet. I think the
entirety of the various impacts that initiating an OHA appeal
process for the VA determination or status determination
process, there could be impacts to their program. There could
be impacts to our program. Obviously, I think there is a
resource question. As we have heard here today, they have a
significant number of determinations they make every year. As I
mentioned in my testimony, we are sort of resource-limited in
our Office of Hearings and Appeals, so those types of things,
the impacts and the resources, would certainly have to be
studied before any sort of recommendation I think should be
made.
Ms. CHU. Okay, thank you. I yield back.
Chairman COFFMAN. Thank you, Ms. Chu.
Mr. Leney, CVE's effort to balance verification with fraud
is due in part to our criticism over the past two years. But
you swung hard in the opposite direction. Do you have a long-
term strategic plan to find a balance in verification? GAO says
you do not have a plan.
Mr. LENEY. Yes, sir. We have a long-term strategic plan. We
did swing hard, in part in response to the urging of this panel
and this Committee to make sure that no ineligible firm was
able to take advantage of the program that you created for
veteran-owned small businesses. So our first priority was to
make sure that that did not happen. Our second priority was to
make sure we then streamline the process in order that eligible
firms and legitimate firms could get through the process
quickly, and we have done that. Our third priority was to look
at the rules. We had a mature rule. We had a mature set of
interpretations. And now that we have looked at the process and
we are now looking at the rule and we have made changes. As I
said, as of Friday, transfer restrictions are not an
interpretation that will cause a firm to be ineligible.
But we had to do a lot of fixing. People have made comments
about the staff of CVE. I will note that 60 percent of the
staff of CVE have audit background, 33 percent have IG
experience, 33 percent are lawyers, 53 percent have a business
degree, and 40 percent are former small business owners. So we
have brought a different staff together. That staff is almost
entirely new over the last 14 months to make sure we put
together the kind of expertise that enables us to have a
program that meets the objectives that have been set for us.
Chairman COFFMAN. Mr. Leney, CVE has forgotten how to
fulfill the advocacy role that was mandated. In lieu of
verification, how will you find further balance there?
Mr. LENEY. That role has not been forgotten; as Chairman
Hanna mentioned, it is part of the OSDBU mission that remains
part of my mission. We are pulling in a new program called VE
Transfer, which is about capacity building for budding veteran
entrepreneurs. It is just that the Center for Veteran
Enterprise, its mission has changed. You are correct, sir,
dramatically. Its full-time focus now is to ensure that firms
can gain access to the Veteran First Program and to ensure that
only eligible firms gain access.
Chairman COFFMAN. Mr. Leney, SBA's Office of Hearings and
Appeals noted 14 size appeal decisions in connection with SDVO
set asides that reflected poorly on CVE's determinations. Can
you explain the use of the Office of General Counsel for CVE
approval given this issue?
Mr. LENEY. First, it is important to note that we do not do
size determinations in the VA. Our policy is all size
determinations are referred to the SBA. CFR 121 is about the
determination of size. We do not match up to 121 because we do
not determine size. We defer to the SBA on that subject. I
believe the statistic you are referring to in those cases, the
Office of Hearings and Appeals determined that we should have
made a size request to the SBA and we did not.
We look at ownership and control. If a firm is eligible in
any of its NAICS codes, we do not deny their eligibility. If we
believe the firm is a large business in all of the NAICS codes
that it references, then we refer them to the SBA.
Chairman COFFMAN. Follow-up last question.
All SBA decisions can be appealed to the Office of Hearings
and Appeals, which has independent administrative judges and is
bound by precedent and publishes its decisions, but VA's OGC
handles appeals for CVE. Is it VA's belief that their appeals
process is as complete and transparent as SBA's?
Mr. LENEY. Just a point of fact. The Office of General
Counsel does not handle appeals. The Office of General Counsel,
we utilize in our request for reconsideration. And I want to be
very clear that that is not an appeals process. That is a
second chance process. Actually, appeals come to me. I have no
objection to making the results of those appeals public. We
have not in the past, but the issue that we found, sir, is not
so much the need for appeal; it is the need for speedy action.
Chairman COFFMAN. Speedy action, but I really, boy, not
making those results public, and then instead of calling it an
appeal you call it a second chance, are the two different? I
mean, that is just not a transparent process that could be
deemed objective I think by any standard. Would you commit here
today to make the process public?
Mr. LENEY. I have no objection to making the process
public, sir.
Chairman COFFMAN. Very well. I will watch for that.
Mr. Hanna. Chairman Hanna.
Chairman HANNA. Thank you. It is my understanding that at
one time the SBA and the VA discussed having SBA conduct
verifications on VA's behalf. Where is that going? What have
you done with those negotiations? Are they ongoing?
Mr. LENEY. We have not pursued it because it was too
expensive. They wanted a million dollars to do 40. We do 5,600.
Chairman HANNA. So the 30 million you get would not help.
Mr. LENEY. The 30 million we get, if my multiplication is
correct, would not get us to the 5,400. It would only get me to
1,200.
Chairman HANNA. Thank you. Would you like to comment on
that, Mr. Shoraka?
Mr. SHORAKA. Yes. So I believe those discussions were held
before my time at the agency. I am not necessarily aware of the
quote of a million dollars, but what I will say is that
obviously it is a resource question. Obviously, even when we
talk about the process of OHA as the congresswoman mentioned
with respect to the SBA taking over the OHA responsibilities
for the VA and allowing an appeals process as a resource
question. And as I mentioned again, the impact on the various
programs. Statutorily, it is a full certification program. How
would that impact those requirements and how can we study those
impacts?
Chairman HANNA. Thank you. How much do you spend verifying
the program? The 8(a) program?
Mr. SHORAKA. I do not know if I have the statistics on the
8(a) program. I can tell you that in our certification program,
as you probably know, the 8(a) program is not just a
contracting program. It is a business development program. It
is a nine-year program where the firm receives technical
assistance to be able after the nine years to be competitive on
the free and open market. But what I would mention is that we
have approximately 19 of our staff involved in the
certification process at the SBA. I do not have an exact dollar
number on what those 19 cost, but I can certainly get that
information for you.
Chairman HANNA. We have perhaps as many as a million vets,
many of whom will apply for this. Are you both prepared to
handle that load? And it is going to increase. How is that?
Mr. SHORAKA. So our 8(a) program allows somewhere between
600 and 800 firms into the program annually. Our acceptance
rate is somewhere between 50 and 60 percent. So you can imagine
that we probably review about double that, 1,600-1,800
applications annually. Obviously, I think if you are looking at
a certification frontend program, that has significant resource
allocation questions.
Chairman HANNA. Thank you very much.
No further questions, Chairman.
Chairman COFFMAN. Our thanks to the panel. You are now
excused. I yield to Chairman Hanna for his closing remarks.
Chairman HANNA. I want to join Chairman Coffman in
extending my tanks to all of our witnesses. I think this
hearing has helped us better understand the problems our
service-disabled veterans are facing when they seek to do
business with the Federal government. I look forward to working
with my colleagues on the Veterans Affairs Committee to see how
we can do a better job of serving all those who have served us
so well.
I ask unanimous consent that the members have five
legislative days to submit statements and supporting materials
for the record. Without objection, so ordered.
Thank you. This hearing is now concluded.
[Whereupon, at 5:12 p.m., the Subcommittees were
adjourned.]
A P P E N D I X
[GRAPHIC] [TIFF OMITTED] T0170.000
EXECUTIVE SUMMARY
During these difficult economic times in our Nation, some
of those most impacted have been our military veterans and
their families. The unemployment rate among veterans is high
and among younger veterans and those in the National Guard and
Reserves since 9/11 it's higher than the national average. The
U.S. Veterans Employment Initiative is an aggressive plan to
put veterans back to work.
Over the next 5 years, over one million more service
members are projected to leave the military. The goal of this
initiative is to ensure that work is available, accessible and
in demand for our veterans and that these service members leave
the military with the proper training and preparation they need
to transition back into the civilian workforce. But now that we
have fallen over the `fiscal cliff' due to sequestration,
federal agencies will be faced with significant budget cuts
which will also impact the hiring of new employees. So we will
have to turn to the small business and corporate sectors to
help pick up the slack.
In a recent report from the President's Interagency
Taskforce on Veterans Small Business Development, it was stated
that `Two of America's greatest assets are the service of our
returning veterans and the economic dynamism of our small
businesses.' We recognize that entrepreneurs and small
businesses are the engines of American innovation and economic
prosperity. SBA reports that our nation's 28 million small
firms employ 60 million Americans, or half of the private
sector workforce, and they are responsible for creating 2 out
of 3 net new private sector jobs across the country.
Already, veterans own about 2.4 million businesses or 9
percent of all of America's businesses. These businesses
generate about $1.2 trillion in receipts and employ nearly 5.8
million Americans. As highly trained professionals and leaders
with experience in challenging environments, veterans'
potential for successful entrepreneurship and small business
ownership will not be fully achieved if the VA's regulations
for verifying them as veteran business owners is allowed to
become the standard throughout the federal marketplace.
You would not think that the federal agency, the Department
of Veterans Affairs, the very one created for `those who have
borne the battle, their widows and their orphans,' would be the
very agency that creates the greatest barriers and obstacles
for thousands of veterans and veteran business owners. Since
the end of the Vietnam War, the VA has wrongfully denied
thousands of veterans their claims for compensation for their
service connected injuries and now since 2008, the VA has once
again been denying thousands of veteran business owners
contracting opportunities due to their `Consistently
Inconsistent' interpretations of VA and SBA contracting
regulations.
The Vietnam Veterans of America call on Congress to direct
the VA's Secretary, Deputy Secretary and Chief of Staff to STOP
administering regulations, policies and procedures that are
overly burdensome, far too restrictive, and discriminatory
towards veteran and service disabled veteran business owners.
Our Veterans deserve far better support for their service.
INTRO:
Good morning, Chairman Hanna, (HSBC - SCW), Chairman
Coffman (HVAC - SOI), members of the subcommittees, and fellow
veterans. On behalf of VVA National President John Rowan and
all of our officers and members we thank you for the
opportunity for Vietnam Veterans of America (VVA) to appear
before you today to share our views on the ``Challenges Facing
Small Businesses Owners and Controlled by Service-Disabled
Veterans Seeking Federal Contracts using both the SBA and VA
contracting program.'' I ask that you enter our full statement
in the record, and I will briefly summarize the most important
points of our statement.
Though my time of service was many years ago, as a veteran
of the US Air Force with the 66th Strategic Missile Squadron, I
still have very vivid memories of my military experience. And
having served as an Advisor to the Vietnam Veterans of America
and Legislative Liaison for the National Association for Black
Veterans for the past 12 years, I also remember quite well the
history of the Veterans Federal Small Business Development
Movement in America from 1999 to today.
We all know that Congress passed Public Law (PL) 109-461,
the Veterans Benefits, Health Care, and Information Technology
Act of 2006 which included Title V, Sections 502 and 503 that
authorized a unique ``Veterans First'' approach to VA
contracting. This approach changed the priorities for
contracting preferences within the Department of Veterans
Affairs (VA), by placing Service-Disabled Veteran Owned Small
Businesses (SDVOSBs) and Veteran Owned Small Businesses (VOSBs)
first and second, respectively, in satisfying VA's acquisition
requirements.
Those 2 sections of the law, which many if not all of our
Veteran Service Organizations (VSOs) advocated for, has been
hailed as a great accomplishment for the veteran community. But
the subsequent regulation (38 CFR 74) that was published to
guide implementation of the law has now adversely affected
thousands of veterans business owners.
Over the past 2 years, the VA has reported that of the more
than 20,000 veteran business owners that have applied for
verification through CVE, only 5,520 are now approved. From
previous Congressional hearings, GAO reports, and statements
from the VA Small Business Director, we have been told that
less than 2% of those denied were for reasons of fraud or
intentional misrepresentation. Instead, the greatest percentage
of denials were due to CVE's narrow interpretation of the
regulation's sections pertaining to ownership and control.
History of the Movement
It was Public Law 106-50, the Veterans Entrepreneurship and
Small Business Development Act of 1999 that laid the foundation
for veterans interested in starting or expanding their own
small businesses to get federal assistance. Congress even
stated in its findings of PL 106-50 that America had not done
nearly enough to `assist veterans, particularly service-
disabled veterans, in playing a greater role in the economy of
the United States by forming and expanding small business
enterprises.'
PL 106-50 called for the creation of new entities and the
restructuring of existing ones in order to assist veterans in
pursuit of entrepreneurship. Under this law, the Office of
Veterans Business Development (under SBA), the Center for
Veterans Enterprise (under VA), and the National Veterans
Business Development Corporation (quasi independent), were
created. It also established a 3% procurement goal for federal
agencies and large Prime contractors to purchase goods and
services from service-disabled veteran owned businesses. But
agencies did not pay much attention until 2003 when Public Law
108-183 made the 3% minimum MANDATORY.
And even then, it took a Presidential Executive Order (13-
360) in October 2004 to really get agencies to carry out the
law. Under the Order, agencies were instructed to designate a
senior-level official to be held accountable for submitting a
strategic plan showing how and when they would achieve the 3%
contracting goal for service-disabled veteran owned businesses.
But with no oversight and penalties associated with non-
compliance, after a few years the effort diminished.
So Congress took another direction in 2006 and passed
Public Law 109-461 which authorized ONLY the VA to implement a
unique ``Veterans First'' approach to VA contracting. This
approach would change the priorities for contracting
preferences within the Department of Veterans Affairs (VA), by
placing Service-Disabled Veteran Owned Small Businesses
(SDVOSBs) and Veteran Owned Small Businesses (VOSBs) first and
second, respectively, in satisfying VA's acquisition
requirements.
Since federal agencies choose not to follow the guidance
provided in EO 13-360, veterans advocates called upon leaders
of the House Veterans Affairs Committee, to use the Dept. of
Veteran Affairs as the model agency to show the rest of the
federal government could really increase contracting
opportunities to Veteran and Service Disabled Veteran Owned
Businesses. Afterall, the VA is the primary federal agency
created to provide support and assistance to veterans.
So Congress passed Public Law (PL) 109-461, the Veterans
Benefits, Health Care, and Information Technology Act of 2006.
While this legislation provided a number of benefits for
veterans; what's of particular importance for the purposes of
this hearing today, is that Title V, Section 502 and 503 of
this legislation, authorized a unique ``Veterans First''
approach to VA contracting. This approach changed the
priorities for contracting preferences within the Department of
Veterans Affairs (VA), by placing Service-Disabled Veteran
Owned Small Businesses (SDVOSBs) and Veteran Owned Small
Businesses (VOSBs) first and second, respectively, in
satisfying VA's acquisition requirements.
Public Law (PL 109-461) was implemented in two regulations:
(1) 48 Code of Federal Regulations (CFR) Parts 802, 804,
808, 810, 813, 815, 817, 819, 828 and 852 amended on December
8, 2009 to define the acquisition rules for the program within
the VA; and
(2) 38 Code of Federal Regulations (CFR) Part 74, published
on February 8, 2010 and clarified on January 19, 2011 to define
the requirements for verification as a Veteran or Service
Disabled Veteran Owned Business.
These regulations require that certain conditions must be
met. All SDVOSBs and VOSBs, must register in the VA's Vendor
Information Pages (VIP), aka Veterans Small Business Database,
available at www.VetBiz.gov, and be `VERIFIED' by the VA's
Center for Veterans Enterprise (CVE), to be eligible for award
of a contract exclusively within the Department of Veterans
Affairs. Once registered in the database, the veterans' status,
ownership, and control would be verified and penalties would be
assessed for misrepresentation.
Unfortunately, it's this regulation 38 CFR 74 and CVE's
subsequent interpretations within their Verification Process
established by the VA that is being used to determine a
Veteran's status, ownership and control of their company that
is literally causing thousands of veteran and service-disabled
veteran business owners to be deprived of millions of dollars
in contracting opportunities that could benefit them, their
families, veterans seeking employment and other members of our
communities.
HERE'S THE MAJOR ISSUES
First many VOBs/SDVOBs do not fully understand how they can
be legally allowed to do business with other federal agencies
but not with the VA. Representatives of the VA have now taken
the position that their VA regulations are nearly identical to
the SBA's regulations. If that in fact is true, then VA's
interpretation of the rules must be much different than SBA's
or either SBA is not doing it right. In the past 3 years, no
other small business preference program participants (8a,
Hubzone, WOSB, SDB) have exhibited public dissatisfaction to
the extent where there have been repeated Congressional
hearings, GAO reports and IG investigations of those programs.
According to SBA regulations, a veteran owned business is
allowed to `Self Certify' as a VOB or SDVOB. However, such
businesses must still be legally formed and the majority
owner(s) must be veteran(s) or service disabled veteran(s).
Owners of such businesses may be required to submit specific
documentation to verify their status and ownership.
Second, some applicants have problems with the CVE
verification process, but that doesn't mean they are ignorant.
As a VA-CVE Volunteer Verification Assistance Counselor, I have
been participating in the verification process training
workshops. And even though CVE has provided a great deal of
information via its website on how to navigate the application
process, it still requires an extensive amount of time to even
review all of the preliminary information and sample scenarios.
It is expected that those applicants who take the time to
review all of the verification information, utilize the
assistance of the veterans verification counselors, and are
willing to make the necessary changes to their organizing
documents are far more likely to be approved after 90 days.
Third, Veterans are Subjected to Multiple Contracting
Program Rules. Both the SBA and the VA operate procurement
programs for SDVOSBs. The SBA program applies to procurements
at all agencies other than VA, whereas the VA program applies
only to VA contracts. While both programs apply nearly
identical statutory definitions of a SDVOSB, the same veteran
business owner may be eligible to compete for contracts at
other federal agencies except the VA. And now some federal
agency departments are denying veteran business owners
contracting opportunities if they have not been verified by the
VA, which is contrary to the PL 108-183.
Fourth, an applicant may still be denied by the CVE
reviewer based on their interpretation of sections of the
regulation (38 CFR 74) and/or of the documents submitted by the
applicant. I will identify the reasons for denial by the VA
that have been most problematic below:
I. The Verification Criteria - Determining Veteran Status,
Ownership and Control
Veterans Status. Verifying the status of the veteran seems
to be the easiest part; particularly since the VA already
maintains or has access to the records of veteran and service
disabled veterans. The documents needed are to verify that the
business owner is a veteran who was discharged under conditions
other than dishonorable or is a service disabled veteran who
possess either a disability rating letter issued by DOD or the
VA.
Additional documents are needed to establish if the
veteran(s) or service disabled veteran(s), or in the case of a
veteran with a permanent or severe disability, the spouse or
permanent caregiver of such veteran, meet the majority
Ownership requirement, and that they have Control of the
company and participate in the Day-to-Day operations.
Verifying Ownership. Verifying Ownership is somewhat more
challenging because CVE must verify if the Ownership is direct
and unconditional (74.3). Not hard to verify if the type of
Ownership is that of a Partnership, Limited Liability Company,
or a Corporation; and if stock is involve, it must verify the
stock options' effect on the Ownership. But there's the matter
of Transfer Restrictions and determining Ownership interests
when an owner resides in any of the community property States
or territories of the United States.
Verifying Control (where the real issues come out).
According to 38 CFR 74.4 Control is not the same as Ownership,
even though both may reside in the same person. Control means
management of the Day-to-Day operations and long-term decision
making authority. CVE must verify that the service disabled
veteran or veteran business owner has both. But where this gets
more involved, is when control is sometimes contingent on who
has the expertise or licenses to run the operation. An owner
who is a computer engineer may not be the best CEO. But
according to CVE's verification requirements, the owner must
hold the highest officer position in the company.
Then there is also the somewhat conflicting view that
owners need not work in the company full-time but must show
sustained and significant time invested in the business. There
is also the requirement that one or more veteran or service
disabled veterans who manage the company must devote full-time
to the business during normal working hours. And even though
the veteran owner has an unexercised right to cause a change in
the management quickly or easily, use of a non-veteran manager
may disqualify the company as being controlled by the majority
veteran owner.
In addition, all of these control issues have to be
verified in the context of the type of company - Partnership,
Limited Liability Company, or Corporation. And it must be
determined to what extent do non-veterans have the power to
influence or control the company - either directly or
indirectly via critical financial or bonding support, Board
actions, office or equipment leases, or private loans, etc.
II. Verification of Only One Company per Owner. A number of
veterans have questioned CVE's position to verify only one
company per veteran business owner. This ruling is not clearly
listed in 38 CFR Part 74. All throughout the Nation, there are
people who own more than one company. It seems to be CVE's view
that verifying only one company per owner would prevent the VA
from potential harm that could be caused by a veteran or
service disabled veteran business under performing or
defaulting on a contract.
III. Misperception of CVE's `VERIFIED' status. Many if not
all federal agency contracting personnel believe that SDVOSBs
and VOSBs must or soon will have to first be registered in the
VA's Veteran Small Business Database and produce a document
stamped with a ``VERIFIED'' seal of approval by CVE in order to
be recognized as a genuine SDVOSB or VOSB. And it's not hard to
determine how this misperception came about.
For several years now, CVE, other organizations, including
the VET-Force, have been encouraging veteran business owners to
register in the Veterans Small Business Database and for
federal agencies and Large Primes to use the Veterans Small
Business Database as the `Authoritative Place' to locate
capable and qualified veteran business owners. However, this
was before PL 111-275 directed the VA through CVE to enhance
their verification standards and procedures.
According to Public Law 108-183, the Veterans Federal
Procurement Program, a veteran is only required to SELF-CERTIFY
as a SDVOSB, in order to do business under this small business
preference group. There is no formal certification by SBA or
any other entity required. However, under Public Law 109-461,
in order to do business with the VA, a veteran or service
disabled veteran owned business must successfully complete VA's
verification process and register in the same database that's
open for use by all federal agencies, Large Primes, and the
public.
IV. Community Property Rights Issue - Section 74.3f
If a veteran business owner resides in any of the community
property states, CVE considers applicable State community
property laws. What this means to CVE is that all property or
income acquired by either spouse during marriage is considered
equally owned by both spouses for purposes of the division of
the property upon death or divorce or for purposes of business
transacted by either spouse. A transfer or relinquishment of
interest by the non-veteran spouse may be necessary in some
cases to establish eligibility.
So according to CVE, in the event of a divorce, a non-
Veteran spouse would be entitled to half of the Veteran owner's
interest in the company. Therefore, the veteran who is the
majority business owner according to the business' organizing
documents cannot pass the test of unconditional ownership.
However, there is a work-around to this dilemma if the non-
veteran spouse will agree to transfer at least 2% of their
property rights to the veteran business owner. This solution is
still contrary to CVE's view that the non-veteran spouse must
transfer all of their property rights.
V. Top 10 Reasons for Denials at VA
While the issues listed above are some of the major ones
creating controversy about the VA's Veterans Verification
Process, there are others considered to be equally as
important. Here's a list of the top 10 Reasons for Denial in
Jan 2013:
1. Quorum Restriction - Unconditional Ownership
2. Transfer Restriction - Unconditional Ownership
a. Right of First Refusal
Right of First Refusal - Should not prevent a veteran
business owner from doing business with the VA. See recent US
Court of Federal Claims recent decision in the case of Miles
Construction wherein the judge found that the current VA rules
do not prohibit transfer restrictions that are a ``normal
commercial practice.''
b. Community Property Laws (see narrative above)
3. Weighted Voting Requirement
4. Dependence with Other Entities
5. Control of Strategic Policy
6. 51% of Annual Distributions
7. Management of Daily Business -
8. Higher Officer Position
9. Day to Day Management
10. Managerial Experience
VI. Not all Veteran Business Owners are Women or Socially
and Economically Disadvantaged
VA has now taken the position that is regulations used for
verifying VOBs/SDVOBs are not much different from SBA's small
business regulations. This appears to be true when looking at
the regulations for SBA's 8(a) business development program and
the Women Owned Small Business Program (WOSB). In fact, many of
the sections of 38CFR74 for VA Veterans Small Business
Verification are nearly identical to sections of SBA's 13CFR124
for Disadvantaged Small Businesses and 13CFR127 for the Women-
Owned Small Business Federal Contract Assistance Procedures.
However, it should be noted that the 8a and WOSB programs have
different statutory purposes than the SDVOSB program
administered by the VA.
VII. 8(a) Business Development Program - Socially
Disadvantaged and Economically Disadvantaged Based on Income
In order to help small, disadvantaged businesses with
limited income compete in the marketplace, the SBA created the
8(a) Business Development Program that offers a broad scope of
assistance to firms that are owned and controlled at least 51%
by socially and economically disadvantaged individuals.
The 8(a) Program is an essential instrument for helping
socially and economically disadvantaged entrepreneurs gain
access to the economic mainstream of American society. The
program helps thousands of aspiring entrepreneurs to gain a
foothold in government contracting.
The 8a Program, uses objective criteria to determine
economic disadvantage based on personal income and total
assets. Applicants to the program must demonstrate economic
disadvantage based on the following criteria:
Adjusted Net Worth must not exceed $250,000 for
initial eligibility or $750,000 for continuing eligibility.
Personal Income must not exceed $250,000 (averaged
over three years) for initial eligibility or $350,000 for
continuing eligibility.
Total Assets must not exceed $4 million for
initial eligibility and $6 million for continued eligibility
(allows for growth during the 9-year term).
Other unique features of the 8a Program: (1) 9-year Limit
of Participation; (2) Certain types of Joint Ventures without
violating the Affiliation Rule; (3) Opportunity to participate
in SBA Mentor-Protege Program.
See comparative language from the 8a and VA's program
regulations below:
Section 124.106: Control is not the same as ownership,
although both may reside in the same person. SBA regards
control as including both the strategic policy setting
exercised by boards of directors and the day-to-day management
and administration of business operations.
Section 74.4: Control is not the same as ownership,
although both may reside in the same person. CVE regards
control as including both the strategic policy setting
exercised by boards of directors and the day-to-day management
and administration of business operations.
Section 124.106: An applicant or Participant's management
and daily business operations must be conducted by one or more
disadvantaged individuals.
Section 74.4: An applicant or Participant's management and
daily business operations must be conducted by one or more
veterans or service disabled veterans.
Section 124.106: Disadvantaged individuals managing the
concern must have managerial experience of the extent and
complexity needed to run the concern.
Section 74.4: Veteran or service disabled veteran
individuals managing the concern must have managerial
experience of the extent and complexity needed to run the
concern.
Section 124.106: A disadvantaged individual need not have
the technical expertise or possess a required license to be
found to control an applicant or Participant if he or she can
demonstrate that he or she has ultimate managerial and
supervisory control over those who possess the required
licenses or technical expertise.
Section 74.4: A veteran or service disabled veteran
individual need not have the technical expertise or possess a
required license to be found to control an applicant or
Participant if he or she can demonstrate that he or she has
ultimate managerial and supervisory control over those who
possess the required licenses or technical expertise.
Section 124.106: However, where a critical license is held
by a non-disadvantaged individual having an equity interest in
the applicant or Participant firm, the non-disadvantaged
individual may be found to control the firm.
Section 74.4: However, where a critical license is held by
a veteran or service disabled veteran individual having an
equity interest in the applicant or Participant firm, the non-
veteran individual may be found to control the firm.
Section 124.106: An applicant or Participant must be
managed on a full-time basis by one or more disadvantaged
individuals who possess requisite management capabilities.
Section 74.4: An applicant or Participant must be managed
on a full-time basis by one or more veteran or service disabled
veteran individuals who possess requisite management
capabilities.
Section 124.106: A disadvantaged full-time manager must
hold the highest officer position (usually President or Chief
Executive Officer) in the applicant or Participant.
Section 74.4: A veteran or service disabled veteran full-
time manager must hold the highest officer position (usually
President or Chief Executive Officer) in the applicant or
Participant.
Section 124.106: One or more disadvantaged individuals who
manage the applicant or Participant must devote full-time to
the business during the normal working hours of firms in the
same or similar line of business. (Note: Any outside employment
will have to be approved by SBA prior to employment.)
Section 74.4: One or more veteran or service disabled
veteran individuals who manage the applicant or Participant
must devote full-time to the business during the normal working
hours of firms in the same or similar line of business. (Note:
Any outside employment will have to be explained and justified
to CVE.)
VIII. Women Owned Small Business Program and Economically
Disadvantaged Women Owned Small Business Program
The WOSB Program is a program that authorizes contracting
officers to specifically limit, or set aside, certain
requirements for competition solely amongst women-owned small
businesses (WOSBs) or economically disadvantaged women-owned
small businesses (EDWOSBs).
IX. Intent of the laws
(PL 109-461)
To increase contracting opportunities for Veteran and
Service Disabled Veteran Owned Businesses within the VA by
granting VA contracting officials the authority to use
contracting mechanisms to meet or exceed the VA Secretary's
established contracting goals for these types of businesses.
It was not intended to discriminate against legitimate,
capable and qualified veteran business owners nor to subject
them to overly burdensome and excessive procedures in an
attempt to prevent the VA from being embarrassed by approving
one or two non-qualified business owners.
(PL 108-183)
PL 108-183 created a program to increase contracting
opportunities for Service Disabled Veteran Owned Businesses
within the federal marketplace by granting federal agency
contracting officials the authority to use contracting
mechanisms to meet or exceed the federal contracting goals for
these types of businesses.
Neither of the laws that created contracting programs for
veteran business owners in the VA nor the Federal Marketplace
called for asset, net worth, or personal income limitations.
X. Recommendations to Address the Major Issues
1. Congress should amend 38CFR74 in such a way that will
eliminate multiple interpretations of any sections. Each
section of the regulation should be explicit.
2. Veterans should not be denied the opportunity to
participate in the Vets First Contracting program based on the
following reasons:
a. Failure to participate in the Day-to-Day
Operations;
b. Failure to devote full-time to the business;
c. Majority owner, married and resident of a
community property state;
d. Failure to be the highest paid employee;
e. Failure to have the requisite managerial
experience;
f. Making substantial loans from non-veterans;
g. Utilizing equipment, property, or office space
from a non-veteran
3. Stick to a verification process only and not
certification. Verify Veteran Status Only and continue Self-
Certification of Ownership as allowed under Public Laws 106-50
and PL 108-183. Once the status has been verified, it does not
have to be re-verified ever. The status will likely not change.
4. Verification of Control should only be to the extent
necessary to support the Ownership and to ensure that the
company is not being used as a `Rent-A-Vet' or a pass through
company.
5. Allow the verification of more than one company owned by
the same veteran(s). Entrepreneurship should not be stifled for
the sake of convenience. Each company should be evaluated and
verified on its own merit. Any agency will always have the
right to determine the select criteria to satisfy contract
requirements.
6. Immediately direct the SBA and the VA to conduct
promotional campaigns to inform all federal agencies, including
all military departments, Large Primes, and the public about
the VA's Verification Process being exclusively for contracting
with the VA.
7. Congress should not consider extending the provisions of
38CFR74 to all Federal agencies and the DOD military
departments until a thorough comparative analysis has been done
between all SBA small business certified programs, i.e. 8a,
Hubzone, SDB, WOSB.
8. Congress should direct the VA to stop discriminating
against Veteran Business Owners by imposing a different set of
criteria on veteran owned businesses than is used to verify
other types of small business owners. After determining the
status of the owner as 8a, Hubzone, WOSB, SDB, etc, the rules
regarding control should be applied the same to all small
businesses.
9. Congress should direct a study to determine how many
legitimate small businesses would be denied if they were all
verified using CVE's interpretations of control as referenced
in 38CFR74.
10. Congress should direct the VA to revise its overly
burdensome and intrusive verification process.
This concludes my statement.
VIETNAM VETERANS OF AMERICA
Funding Statement
March 7, 2013
The national organization Vietnam Veterans of America (VVA)
is a non-profit veterans' membership organization registered as
a 501(c)(19) with the Internal Revenue Service. VVA is also
appropriately registered with the Secretary of the Senate and
the Clerk of the House of Representatives in compliance with
the Lobbying Disclosure Act of 1995.
VVA is not currently in receipt of any federal grant or
contract, other than the routine allocation of office space and
associated resources in VA Regional Offices for outreach and
direct services through its Veterans Benefits Program (Service
Representatives). This is also true of the previous two fiscal
year.
For Further Information, Contact:
Executive Director for Policy and Government Affairs
(301) 585-4000 extension 127
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8STATEMENT OF THOMAS J. LENEY
EXECUTIVE DIRECTOR
OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION (OSDBU)
DEPARTMENT OF VETERANS AFFAIRS
BEFORE THE
HOUSE COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON CONTRACTING AND THE WORKFORCE and
HOUSE COMMITTEE ON VETERANS' AFFAIRS
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
MARCH 19, 2013
Chairman Hanna, Chairman Coffman, Ranking Member Meng,
Ranking Member Kirkpatrick, and Members of the Subcommittees,
thank you for inviting me to testify on statutory, regulatory
and interpretive differences between the Small Business
Administration (SBA) and Department of Veterans Affairs (VA)
contracting programs for small businesses owned and controlled
by service-disabled Veterans.
Overview
Since its inception, the VA Verification program has faced
challenges balancing the need to prevent ineligible firms from
taking improper advantage of VA's ``Veterans First'' program,
while making it easier and faster for legitimate Veteran-owned
small businesses (VOSB) and service-disabled Veteran-owned
small businesses (SDVOSB) to gain greater access to VA
procurement opportunities. VA has made substantial progress on
both fronts in our effort to implement 38 Code of Federal
Regulations (CFR) Part 74, the regulation governing
verification. As we improved the verification process we
realized that most of the remaining issues were associated with
the rule itself. To better understand the regulatory issues, VA
reached out to stakeholders and as a result of their feedback,
VA has initiated a formal rule change process in accordance
with the Regulatory Flexibility Act and Executive Order 13272
(Proper Consideration of Small Entities in Agency Rulemaking).
In the aftermath of both VA's Office of the Inspector
General (OIG) report dated July 25, 2011, and the Government
Accountability Office (GAO) report dated October 26, 2011, our
imperative was to ensure all firms listed as eligible in the VA
program had been properly verified as meeting the standards
laid out in 38 CFR Part 74. Both VA OIG and GAO made
recommendations for improvement. We have addressed all of the
recommendations identified in the 2011 reports. In its latest
report, GAO-13-95 Planning and Data System for VA's
Verification Program Need Improvement, January 14, 2013, GAO
acknowledges improvement by stating: ``Since December 2011, VA
has instituted a number of significant operational changes,
including revising standard operating procedures and enhancing
quality assurance protocols.'' Based on the report
recommendations, VA made changes to its verification processes
and policies. These changes include increased fraud awareness
training for all VA Center for Veterans Enterprise (CVE) staff
as well as support contractors, the development of better
education tools to help applicants through our Verification
Assistance Program, and reduction of fraud risk through a post-
verification audit process.
CVE initiated the post-verification audit process to ensure
that verified companies continued to be in compliance with
program eligibility rules throughout the tenure of their two-
year verification term. This process chooses firms based on
both random and risk basis. This process was launched in May
2012; CVE has performed 158 random audits and 112 risk-based
audits in the fiscal year 2013 to date, resulting in ten
cancellations.
Comparison of Rules Governing Verification Program
We believe the most significant difference between VA and
SBA's programs lies in the volume of status determinations made
by each program. By statute, a VOSB and an SDVOSB must provide
documentation to VA to demonstrate its status and VA must
verify this information before the firm can do business with VA
as an SDVOSB. As SBA notes, this process is inherently more
labor-intensive than a protest-based self-certification
program. This statutory requirement resulted in VA making more
than 4,500 status determinations in FY 2012 alone. Because SBA
only determines SDVOSB status and only when a protest is filed,
the SBA made only 40 status determinations over the past two
fiscal years.
Despite this statutorily-driven difference in the way the
programs are run, there has existed in the stakeholder
community a widespread concern that there are major differences
between the VA and SBA regulations, even though the regulation
that governs VA's Verification program, 38 CFR Part 74, was
derived in large part from the ownership and control portions
of the SBA regulations that cover the Government-wide SDVOSB
program in 13 CFR Part 125, as well as the regulation that
covers the section 8(a) business development program, 13 CFR
Part 124. In response to that concern, VA, in collaboration
with SBA, conducted a thorough comparison of the ownership and
control portions of the regulations. In addition to comparing
regulatory language, we also looked at every SDVOSB status
protest considered by SBA and all of the SBA Office of Hearings
and Appeals decisions on SDVOSB cases for the last two fiscal
years to identify any differences in interpretation.
While we are in the process of discussing our findings with
SBA, our tentative conclusion is that there are only a few
differences in the regulation and interpretation of them and we
are fully committed to working with SBA and conducting
stakeholder outreach to help address these differences.
There are two statutory differences between the programs
due to the provisions of Public Law (P.L.) 109-461, as codified
in 38 United States Code (U.S.C.) Sections 8127 and 8128. The
two statutory differences are:
1. Application to Veteran-Owned Small Businesses:
Section 8127(f) states: ``Database of Veteran-Owned
Businesses. - (1) Subject to paragraphs (2) through
(6), the Secretary shall maintain a database of small
business concerns owned and controlled by veterans and
the veteran owners of such business concerns.'' VA's
authority includes both SDVOSBs and VOSBs; whereas the
government-wide SBA program only addresses SDVOSBs.
2. Surviving Spouse: Section 8127(h): ``Treatment of
Businesses After Death of Veteran-Owner. - (1) Subject
to paragraph (3), if the death of a veteran causes a
small business concern to be less than 51 percent owned
by one or more veterans, the surviving spouse of such
veteran who acquires ownership rights in such small
business concern shall, for the period described in
paragraph (2), be treated as if the surviving spouse
were that veteran for the purpose of maintaining the
status of the small business concern as a small
business concern owned and controlled by veterans.''
This currently applies to Veterans that were 100
percent service-disabled or who died as a result of a
service-connected disability. SBA's program has no
surviving spouse exception.
Since there were only two major statutory differences. VA
derived its regulation mainly from 13 CFR Part 125, which
implements the government-wide SDVOSB set-aside program
established by 15 U.S.C. 657f, and 13 CFR Part 124.105 and
124.106. Where 13 CFR Part 125 was silent, VA considered
language from 13 CFR Part 124. In addition, in our examination
of SBA status protest decisions and SBA Office of Hearings and
Appeals (OHA) decisions, as well as discussions directly with
representatives from SBA, we found that in most cases where
SBA's SDVOSB regulation is silent, SBA applies the provisions
of the 8(a) regulation. For example, in its decision SBA No.
VET-102 (2005), SBA OHA's decision states: ``OHA has recognized
that the regulations regarding control of 8(a) Business
Development and Small Disadvantaged Business program
participants can provide guidance in interpreting the control
requirement of SDVO SBC eligibility.''
Our comparison of the regulations revealed three
differences between VA's Verification regulation and SBA's
SDVOSB regulation.
1. VA added a requirement for a VOSB to notify the
CVE of a change of ownership in 38 CFR 74.3(e).
Although this requirement is noted in 13 CFR
124.105(i), this requirement is moot in the SBA SDVOSB
regulation due to the self-certification nature of the
program.
2. VA added a provision when the final rule was
published, based on public comments, which is specific
to Employee Stock Ownership Plans (ESOP) that does not
appear in either the SDVOSB or the 8(a) regulations. VA
included a provision that would consider certain ESOP's
to meet the requirements of direct ownership by the
Veteran(s).
Differences in Interpretation
Once we determined what actual language differences existed
between the regulations, we looked for differences in the
interpretation of the rules. We compared VA's interpretations
to the SBA status protests and OHA decisions rendered over the
last two fiscal years to see where any differences occurred.
While VA is not bound by the SBA decisions, due to the
similarities of the SDVOSB programs, VA finds the SBA case law
can be persuasive authority. We could find only two clear cases
where the VA interpretation differed from the SBA
interpretation.
In both 38 CFR 74.4(f) and 13 CFR 125.10(e)(1), the
regulations state ``[n]o single veteran owns 51 percent of all
voting stock but multiple veterans in combination do own at
least 51 percent of all voting stock, each such veteran is on
the board of directors, no supermajority voting requirements
exist, and the veteran shareholders can demonstrate that they
have made enforceable arrangements to permit one of them to
vote the stock of all as a block without a shareholder meeting.
Where the concern has supermajority voting requirements, the
Veteran shareholders must own at least that percentage of
voting stock needed to overcome any such supermajority
ownership requirements.''
If we look at a sample situation where two Veterans own at
least 51 percent of the voting stock of a company and a non-
Veteran also owns voting stock, VA interprets this language
that a non-Veteran has the power to control the decision of the
board of directors if the Veteran shareholders split their vote
and the non-Veteran casts the deciding vote. The SBA
interpretation of this situation is that the non-Veteran must
vote with a Veteran to win the decision. VA is prepared to
alter its interpretation to align with SBA in this case.
Although VA seeks to align its interpretations with SBA,
based on stakeholder discussions and feedback, we have
determined that transfer restrictions that are part of normal
commercial dealings, such as the right of first refusal, do not
materially affect the ability of a Veteran to unconditionally
own or control the business. Therefore, effective March 6,
2013, VA will no longer interpret the current regulation to
mean that such restrictions constitute a reason for denying
eligibility.
Potential Rule Change
VA has initiated stakeholder outreach as part of a process
to identify potential changes to the rules based on the lessons
learned from the implementation of the current verification
regulation. We have reached out informally to a broad range of
stakeholders as part of this process, and received a number of
recommendations worthy of consideration. As part of this
process we expect to publish an Advanced Notice of Proposed
Rule Making in the Federal Register that will provide all
stakeholders a formal method of providing feedback and input
that will be used to draft proposed rule changes governing VA
VOSB Verification.
Given the current alignment with the SBA's programs, any
consideration of changes to VA verification rules will involve
discussion with the SBA as we week to keep the two programs
aligned.
Process
In view of the long history of small business certification
programs in the SBA, VA also reviewed the processes and metrics
used in the SBA 8(a) certification program to determine lessons
learned and best practices that we could apply to the VA
verification program. As a result of this review, we have
adopted two practices:
1. We noted that when SBA contacts an applicant, it
uses emails followed up by a phone call to confirm
receipt of the communication. CVE has added a phone
call to confirm that an applicant received email
communications where any type of documentation is
requested, or if a firm receiving a Preliminary
Findings letter has not responded to CVE within 48
hours.
2. We also noted that SBA followed a practice of
contacting an applicant with preliminary findings where
there are issues of non-compliance that can easily and
quickly be corrected and allowing them to correct those
issues prior to a determination. Through an analysis of
the most frequent reasons for which firms are being
denied, CVE identified a set of issues that will not
require a full re-evaluation and can be quickly
corrected. These issues occur in more than 50 percent
of our current denials. Applicants that could be denied
for these issues will be provided a Preliminary
Findings letter extending the opportunity to make
correction or withdraw, prior to a determination. For
more complicated issues that would require a full re-
evaluation, firms will be notified and will have the
option to withdraw their application and re-submit
without receiving a determination.
We are currently running a series of limited pilots to
validate this proposed process and train CVE staff on
procedures for engagement with applicants. The program is
targeted for a full launch on May 1, 2013.
Program Improvements
One of the major findings of the recent GAO report was that
the Management Information System that supports verification is
woefully inadequate for our purposes. VA agrees that our
current information system is the biggest obstacle to meeting
our verification objectives, and we have taken steps to fix it.
The next generation Verification Case Management System (VCMS)
is currently under development, and we expect to award a
contract for a new system in May 2013. This will be a phased
program with initial operational capability expected in October
2013.
While we have been aggressively pursuing the development of
a new system, we discovered that SBA is also developing a new
system for their 8(a) program. We have reached out to SBA to
compare technical requirements. We are currently determining if
the new SBA system, which is further along in its development,
could be applied to both programs.
GAO acknowledged that VA has made improvements to the
program, and as a result of a number of process improvements,
we have reduced the average time to initial determination from
more than 130 days during the summer of 2011 to an average of
46 days for those applications completed last month. We still
have a challenge in reducing the time for achieving final
determinations in response to requests for reconsideration, a
process that offers a ``second chance'' to firms found to be
non-compliant. The process of reaching a final determination
took an average of 128 days for firms receiving decisions in
February 2013. While we are working to reduce the time
required, we recognize that the best method to do so is to
reduce the number of applications that are declared ineligible.
Our analysis of initial denials revealed that most denials
occur because the applicant does not understand the regulation
or how it applies to their business model.
As a result, our efforts to reduce the time and difficulty
of achieving eligibility have focused on educating applicants
regarding the application of the regulation and helping them
understand what their business model needs to be to fit the
requirements of the program. Our Verification Assistance
Program currently consists of three elements:
1. An online self assessment tool that takes a
Veteran through each section of the regulation and all
the required documents and explains how they relate to
the regulation.
2. A series of 17 Verification Assistance Briefs that
explain the requirements and give examples of why firms
are denied. These briefs address issues that cause more
than 70 percent of all denials.
3. Realizing some applicants need extra assistance,
we established a counseling program in partnership with
non-profit organizations to provide counseling services
to Veterans preparing to apply for verification. The
program was piloted in June 2012, and we continue to
develop and improve it. All counselors now receive the
exact same qualification training that our examiners,
evaluators, and site visitors receive. To ensure
transparency and consistency in interpretation, we have
integrated our counselors into the same qualification
training and testing that our examiners, evaluators and
site visitors receive.
In addition to the current program elements we will launch
a fourth dimension to the program with the pilot of our first
Pre-Application workshop for Veterans on March 13, 2013, at an
event hosted by the SDVOSB Council in Virginia. This workshop
will outline what a Veteran needs to know and do to put
together a successful verification application.
Conclusion
In conclusion, VA has made significant progress in its VOSB
verification program. We have overcome many of the challenges
and vulnerabilities that were raised by the GAO and OIG reports
but we week continuous improvement, and in coordination with
SBA, we seek to revise our regulation to achieve balanced
objectives.
Mr. Chairman and Members of the Subcommittees, this
concludes my statement. I am pleased to answer any questions
you may have.
Subcommittee on Contracting and Workforce, Committee on
Small Business
Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs
Hearing: ``Consistently Inconsistent: Challenges for
Service-Disabled Veteran-owned Small Businesses,'' March 19,
2013.
Questions for the Record - Joe Wynn, VET-Force
1. If you had to provide one particularly egregious example
of VA failing to certify a firm, what would it be?
Answer 1. I spoke with a veteran business owner who
reported that he was denied because of his age. He was told by
a reviewer at CVE that he could not possibly manage the company
because he was 92 years old. The veteran had to obtain a letter
from his physician stating that he was in excellent health and
fully aware of his faculties; and reference letters from staff
and associates attesting to the fact that the veteran despite
his age was fully in charge of commanding the operations of the
company.
2. What suggestions for aligning regulations between VA and
SBA are most necessary?
Answer 2. In my view, it appears that the regulations
between the VA and SBA are nearly identical. I would also
include in both, VA's rule on the surviving spouse of a service
disabled veteran taking over the business. But what appears to
be more of a concern is the apparent differences in how SBA and
VA are interpreting the regulations when much of the wording is
the same.
3. Do you think that VA should be relying, in part, on
SBA's 8(a) regulations as the basis for it verification
program?
Answer 3. I do not think that the VA should be relying on
SBA's 8(a) regulations because not all VOBs and SDVOBs are
socially and economically disadvantaged. While some veteran
owned businesses may be just starting out in business and are
struggling to increase capacity and gain contracting
experience; may have been in business for years and some are
even successful graduates of the 8a program.
By regulating all VOBs and SDVOBs from the perspective of
the 8a program profile CVE reviewers tend to make the
assumption that a veteran business owner does not possess the
requisite skills and capabilities to do contracting on the
federal level without supportive assistance.
4. One statutory difference between the VA and SBA program
deals with the treatment of surviving spouses. If we were to
try to reconcile these programs, how do you think we should
address surviving spouses of service-disabled veterans?
Answer 4. Because under the SBA program the status of the
veteran owned business ends when the veteran business owner
dies, there may not be sufficient time to develop an
appropriate exit strategy that will prevent the other owners,
staff and/or family members from suffering a severe adverse
economic impact as a result. But under the VA program, the
surviving spouse of a service disabled veteran business owner
may continue the operation of the business for up to 10 years
if the veteran owner was 100% service disabled and died as a
result of their service connected condition.
The SBA rule should be the same as the VA rule. In
addition, under both programs, the rule should be revised to
allow 3 to 5 years of continual operations by the surviving
spouse, caregiver, or next majority owner thereby giving
sufficient time for the orderly termination of the business.
I think that we should be mindful of the fact that these
preference programs for SDVOBs are a means to benefit not only
the veteran, but the veterans family and their community. So we
should not want to abruptly end the veterans family when the
veteran dies.
5. I understand that being verified by VA is increasingly
important--not only is it required for VA contracts, but other
agencies seem to be placing importance on verification, even
though the statute doesn't require it. For example, FAA's
regulations now require VA verification, and an Air Force
contract recently required VA verification. I understand that
other agencies see it as a credential, and that prime
contractors and states are now also requiring VA verification.
Please address the challenge that poses to firms that operate
under SBA's governmentwide program?
Answer 5. Veterans operating businesses in the federal
marketplace are now facing unlawful discrimination as a result
of the misperception by many agencies and large Primes that a
veteran owned business is not legitimate if they have not been
verified by the VA. Over the past few years, we are seeing more
evidence of this occurrence. As a result, because of CVE's
interpretation of the rules, many legitimate veteran owned
businesses are being denied the opportunity to do business at
the VA and with other agencies and/or large Primes as well.
In addition, CVE's interpretation and application of the
rules places an additional burden on veteran business owners
that is not placed on other non-veteran small business owners.
6. During the March 19 hearing, Tom Leney stated ``I think
that this program that the VA has established has created a
gold standard.'' Do you believe this is correct? If not, in
what sense is it incorrect?
Answer 6. The VA's program for verifying veteran small
business owners should not be the gold standard because far too
many legitimate veteran owned businesses are being denied. Just
recently 60% of the firms applying for verification were
denied. And Tom Leney, himself has admitted on several
occasions that less than 2% of the denials were based on fraud
or misrepresentation by the veteran business owner.
7. At the same time, Mr. Leney stated ``In the federal
government, when people know that a firm has been verified by
the VA, they can take it to the bank. And the results, this is
real money to real vets, and it is a program that benefits
veterans.'' This seems to suggest that VA expects its
certification to be given deference at agencies other than VA,
despite the fact that the government-wide program does not
require VA certification. Is VA doing enough to make it clear
to other agencies that the VA certification is to be used for
VA contracts only?
Answer 7. Despite statements from VA and CVE personnel that
its veteran small business verification program only applies to
veterans seeking to do business with the VA, it's obvious that
not enough is being done to dissuade other agencies and large
Primes from thinking otherwise. And when the VA OSDBU makes
public states that the VA's verification program for veteran
small businesses is the Gold Standard for small business
verification it only leads other agencies and large Primes to
believe that they can do less due diligence of veteran business
owners by simply relying on VA's results.
Unfortunately, contracting officers from other agencies
have also been pushed in the direction of relying on VA's `good
seal of approval' of veteran businesses because of recent GAO
and VA IG reports that identified some business owners in the
federal marketplace who had misrepresented themselves as
legitimate veteran business owners. Thus, agencies are looking
for some other agency they can point to should they award a
contract to an inappropriate veteran owned business.
8. What effect does the lengthy and inadequate appeals
process currently in place at VA have on small businesses'
ability to compete for contracts?
Answer 8. We are often hearing from veteran business owners
who have stated that during the period of time (6 months to a
year) that they have waited for VA approval that they have lost
opportunities to do contracting with the VA. This delay also
causes some veteran business owners to miss opportunities with
other agencies too because some agencies look for veteran
business owners to first be certified by the VA.
Actually, there is no fair and objective appeals process
with the VA. When an applicant is denied, they have to wait a
minimum of 6 months before they can reapply. In order to
dispute the denial, a veteran business owner may only have the
option to request reconsideration or to request a review from
the VA or CVE Director. There is no independent body that
handles appeals from veterans who have issues with their being
denied by VA.
9. VA's request for reconsideration takes 147 days and
isn't heard by administrative judges, whereas SBA's appeals
process takes 15 days and does result in a published decision
from an administrative judge. The following questions relate to
that disparity:
a. How do you think the appellate process should
function?
b. Would published decisions be an improvement?
c. Is there a reason to use administrative judges who
are independent of the verification process?
Answer 9. Because of the very reasons I referenced in my
answer to questions #8, there needs to be an appellate process.
That process could be handled by administrative judges and
those decisions should be published.
10. If 48 percent of VA's requests for reconsideration are
granted, does that indicate a problem with the initial
determination process?
Answer 10. In the past year or two, it has been reported
that over 60% of all veterans applying for VA business
verification were denied. So even if 48% of VA's requests for
reconsideration are being granted, its still shows that far too
many veterans are having to undergo additional reviews in order
to obtain approval. CVE has reported that there are 10 major
reasons why applications are denied. Hopefully, now under CVE's
new pilot program to make a pre-determination of the
applicant's information prior to the completion of the process
will reduce the need for so many requests for reconsideration
and reduce the number of denials.
11. When VA published the current rule governing
verification, it stated ``VA estimates the cost to an
individual business to be less than $100.00 for 70-75 percent
of the businesses seeking verification, and the average cost to
the entire population of veterans seeking to become verified is
less than $325.00 on average.'' 76 Fed. Reg. 3022 (2011). Does
that comport with your experience?
Answer 11. I'm not sure how the VA has determined the cost
to an individual business to be less than $100 to go through
the verification process. I have received reports from business
owners stating that the cost has been up to several thousands
of dollars. While I'm sure that it does not cost that much for
most businesses, it would surely cost more than $100 if you
just factored in the hourly rate for someone in the company to
put together all of the required information.
12. VA recently announced that it would add a pilot pre-
determination program that would occur before the initial
verification program. While few would disagree that the program
could stand streamlining, some have suggested that this will
simply add a third hoop for our veterans to jump through. Is
this a reasonable concern?
Answer 12. The pre-determination process does raise some
concerns. At present, it has not been made clear as to how that
process will be conducted differently from the initial review
process. The only difference that I can see at the moment, is
that after the initial review, items in the application that
raise red flags or could lead to denial, will be sent back to
the applicant so that they can make changes, additions and/or
deletions to the information and resubmit.
The veteran, once notified of the preliminary findings by
the CVE reviewer, will have only 5 days to resubmit corrected
information. So depending on the extent of the changes
required, it could take more than 5 days. If the applicant does
not submit the new or additional information in 5 days, CVE
will issue a determination letter which will probably be a
denial. At that point, the applicant can request
reconsideration and then we are right back where we started
with a 147 days or more wait time for the new information to be
reviewed.
13. Each time VA reorganizes its verification process, it
seems to add employees and spend more money, with little
improvement for our veterans. Please provide your thoughts on
what the pre-determination program will mean in terms of costs
and staff.
Answer 13. Not sure if the pre-determination program will
mean more staff and more costs. I'm sure it will create more
processing time, more workload, and probably more confusion
among staff and applicants.
14. There is consensus that contract intended for service-
disabled veteran-owned small businesses should go only to
service-disabled veteran-owned small businesses. The following
questions address the prevention of fraud.
a. VA has said that of the firms found not to
qualify; only about 2% are turned down for reasons of
fraud. That means 98% are turned down for structural
reasons. What does that say about the program?
b. SBA's self-certification model has been criticized
for leaving the door open to fraud. Is that the case,
and how can we improve that process?
c. Does the timing of VA's verification pose
challenges? Specifically, since VA's program looks
primarily at a company before the company is bidding on
a contract, does it leave open the door to a verified
company getting a contract, and then just passing the
work through to another company?
Answer 14. If 98% of the firms are denied for structural
reasons then it says to me that the requirements are far to
strict. In an attempt to screen out fraud and
misrepresentation, too many legitimate business owners are
being denied. SBA's self certification model is obviously a
more open process but its the law. However, if businesses are
required to attest to their legal status as a legitimate
veteran or service disabled veteran owned business, and are
later found to be fraudulent, then they should be prosecuted to
the full extent of the law, penalized, and not be allowed to
participate in the program again. With proper oversight and due
diligence on the part of contracting officers, SBA, and other
agency officials, firms committing fraud in any program will be
detected.
For those firms that successfully complete the verification
process must then market themselves to the VA for contracts. VA
verified firms are not automatically awarded contracts simply
because they have been verified. But for those that do received
contracts, agencies should still provide oversight and due
diligence to ensure that a firm remains eligible for the
program it was selected to participate in and that it does not
violate any of the small business rules.
15. In your testimony you listed seven reasons you thought
VA should stop using to deny companies verification. One of
those was the instance where the service-disabled veteran isn't
involved in the day to day operations. In such cases, how do we
make sure that this isn't just a case of ``rent-a-vet''?
Answer 15. The VA verification requirements should not be
so stringent that legitimate veterans business owners are
denied based solely on a business' profile and the assumption
that they will be used as a `rent-a-vet'. Owners that are not
working full time in the business or participating in the day
to day operations should be allowed to present sufficient
documentation to demonstrate that they are in control of the
company. Meeting minutes, organization charts, management
reports, CEO memos and directives, are just some of the
examples which can be used to demonstrate that the owner
controls the company.
A veteran business owner should not be denied solely on the
basis that they have others in the company with more experience
than them or because they have partnerships with other
companies that have more experience in the marketplace. VA -
CVE should utilize some of its resources for oversight and
follow up of veteran owned businesses where there is a
perceived view that the firm is being overly reliant on non-
veteran support. This in addition to unscheduled visits to the
owners principal place of business and a review of contract
actions of the business will help to identify companies that
are misrepresenting themselves or abusing the program or
breaking the law.
16. One of the biggest obstacles with VA's certification
process is that it is ever changing. So much so that on this
Tuesday March 5th, two days before this hearing was originally
scheduled to take place, VA again changed its process. I have a
few questions in regards to that.
a. With these latest changes, even in reading them
the process seems cumbersome while certain parts
discuss business days, other sections merely say hours.
You'll be able to stop the clock, but need to get them
know within 48 hours. If that 48 hours or 48 hours of
business days. I foresee a lot of complications with
this process; but as someone whose dealt with it
before. What are your overall thoughts?
b. The letter changing the policy indicates that this
will be a pilot run of a pre-determination process, and
be fully initiated on May 1, 2013. Based on your
experiences, how likely do you think VA is to keep this
process intact?
c. More broadly, how often does VA make these sort of
changes?
d. How do these changes affect service-disabled
veteran small business owners ability to understand the
process?
Answer 16. Please refer to my response to Question #12. In
addition, I will say that the pre-determination process is
something we have asked the VA to do for the past 2 years. What
I do have a problem with is that (1) they practically had to be
forced to do it; but (2) they are not allowing sufficient time
for the applicant to resubmit the corrected information; (3)
its probably still going to be difficult for an applicant to
get a live person to assist them within that 5 day period; (4)
to avoid getting caught up in the 5 day limit a veteran will
have to withdraw their application and resubmit at a later
time, thus going through the process again; and (5) this new
process has already led to confusion because more applicant's
are now asking more questions about how to navigate the entire
process.
There have been a number of changes to this VA - CVE
verification process over the years. Another recent change is
the allowance of transfer restrictions. That only came about
after the recent court ruling in the Miles case. Other process
changes have led to confusion and more time in the processing.
Then there is still that part of the process which calls
for a visit to the applicant's principal place of business.
From reports I have received, this part of the process is not
consistent.
17. I understand that you and many others volunteer to help
service-disabled veterans navigate the VA processes. While I
thank you for your service, are you aware of any other
contracting programs that require this level of outside
assistance before a firm can be compete for contracts?
Answer 17. A few months ago, VA - CVE started a Veterans
Assistance Partner Program whereby representatives from other
organizations are supposed to be trained as VA Verification
Counselors. At present, there are only a few organizations who
volunteer their time assisting veterans with the verification
process. I am one of them. But now the VA is directing more and
more veterans to the volunteer counselors in order to reduce
VA's workload. Some veterans now are being told that they must
consult with a counselor first. As a result, some counselors
are now charging a fee for their services and since some
counselors are attorney's they are likely to charge fees as
well.
VA - CVE adopted this model from the VA's use of Veteran
Service Officers from Veteran Service Organizations to assist
veterans with filing claims with the VA for compensation for
service connected disabilities. This model has been in use for
at least 20 years and has proven to be helpful for thousands of
veterans. However, while its a good model to use for the VA
verification assistance, it will take several years to perfect
it for use on a national level.
18. Mr. Wynn, how should Congress amend 38 CFR Sec. 74 to
provide for clearer interpretation of the sections you find
most convoluted?
Answer 18. At this time, I don't want to present myself as
the expert on these matters and tell Congress what they should
do. But what I will suggest, is that you or the House Small
Business Committee convene a roundtable either formally or
informally to discuss amendments to 38 CFR 74. I think it would
be helpful as a follow up to the hearing to have some open
discussion and brainstorming to try and come up with what may
or may not work. I would like to participate in such a
discussion and hope that the other witnesses from the hearing
would be invited as well. However, I'm not sure if the VA's
representatives are willing to offer recommendations for
changes to the existing regulation.
I think the SBA should be a part of that discussion, and
selected staffers from the House Veterans Affairs Subcommittee
on Economic Opportunity. A comparative analysis should be made
between SBA's and VA's interpretations of the regulations that
use the same language yet produce different results.
Conclusion:
I hope that I have provided useful responses to all of your
questions. And please do not hesitate to contact me if you
require additional information regarding this matter.
Joe Wynn
Nabvets Legislative Liaison
VVA Special Advisor
Member of VET-Force
202 365-0482
Davy Leghorn's Responses to Questions for the Record from
Subcommittee on Contracting and Workforce, Committee on
Small Business
Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs
Hearing: ``Consistently Inconsistent: Challenges for
Serivce-Disabled Veteran-Owned
Small Businesses,'' March 19, 2013.
Submitted April 9, 2013.
1. If you had to provide one particularly egregious example
of VA failing to certify a firm, what would it be?
VA's stripping of SDVOSB status from the firm KWV Inc. has
been the most egregious case by far. This was a clear example
of how VA used an SBA OHA ruling set it as a brightline rule
without looking at a totality of circumstances. The US Court of
Federal Claims ruled in favor of KWV and VA restored the firm's
status. The Court ruled that VA shall extend KWV's eligibility
by 72 days to account for the days it was wrongfully removed.
Hardly accounting for the awards and contracts they lost during
that time.
2. What suggestions for aligning regulations between VA and
SBA are most necessary?
Mr. Leney was right that there are few differences between
38 CFR 74 and 13 CFR 125. However, most of the differences come
down to interpretive differences. Where VA sets bright line
rulings and uses them to preclude companies; SBA looks at a
totality of circumstances.
Mr. Leney was incorrect when he said VA was not making size
determinations. We believe that when VA refers a case over to
the SBA for a size determination and drops the firm in question
from the vet-biz vendor list, they are making a size
determination. When VA precludes a company from the Vet First
program based off of a size restriction based off a firm's
NAICS codes, they are in essence making a size determination as
well. If VA is going to make these round-a-about size
determinations, then they need to adopt 13 CFR 121 to give them
the regulatory authority to do so correctly.
3. Do you think that VA should be relying, in part, on
SBA's 8(a) regulations as the basis for it verification
program?
No, the 8(a) program is a business development program, VA
Verification is a certification program (closer to SBA's
HubZone program). VA's partial adaptation of the 8(a) program
is how they came up with a punitive 6 month waiting period. We
know of not statutory requirements that forces VA to enforce
this. SBA's 8(a) program is the only other place where we see
this; SBA enforces a 12 month waiting period for reapplication
on firms that have been denied. 13 CFR 121 and 13 CFR 125 are
the only regulations VA needs to align 38 CFR 74 with.
4. One statutory difference between the VA and SBA programs
deals with the treatment of surviving spouses. If we were to
try to reconcile these programs, how do you think we should
address surviving spouses of service-disabled veterans?
The American Legion has a resolution on this specific
issue. The American Legion advocates for regulatory changes
that would in effect make it so that if any disabled veteran
who owns a certified service-disabled veteran-owned business
dies, (regardless of his/her disability at the time), their
business inherited by their spouse/dependent will retain the
service-disabled veteran-owned business status in conjunction
with Public Law 109-461.
The American Legion supports that if any servicemember, to
include those who were in the National Guard or Reserve, is
killed in action and owns at least 51 percent of a business
prior to his/her death, the business bequeathed to their
spouse/dependents must be granted service-disabled veteran-
owned business status for reason of preference in federal
contracts.
The American Legion supports any administrative or
legislative effort that will improve and increase the benefits
bequeathed to the veteran's spouses or dependents upon a
veteran business owner's death.
Attached is a copy of our resolution.
5. I understand that being verified by VA is increasingly
important--not only is it required for VA contracts, but other
agencies seem to be placing importance on verification, even
though the statute doesn't require it. For example, FAA's
regulations now require VA verification, and an Air Force
contract recently required VA verification. I understand that
other agencies see it as a credential, and that prime
contractors and states are now also requiring VA verification.
Please address the challenge that poses to firms that operate
under SBA's government-wide program?
Because of the self-certifying nature of SBA's SDVOSB
program, contracting officers from the various agencies are
wary of awarding contracts to self-proclaimed SDVOSB. Entrance
into the 8(a) program requires documentation of ownership and
control on the front end, hence in the contracting officer's
mind, there is less change that an 8(a) certified firm is a
fraudulent firm. VA verification program was to provide this
certification and assurance for the contracting officers. There
are not enough resources at SBA for them to check first like VA
is doing, but SBA's SDVOSB self-certification program is self
policing though status protests. In the past, DOD and VA have
been scrutinized by Congress and the press for the number of
fraudulent SDVOSB firms they awarded contracts to, this is why
with the advent of VA verification, agencies are starting
asking if firms are verified by CVE.
6. During the March 19 hearing, Tom Leney stated ``I think
that this program that the VA has established has created a
gold standard.'' Do you believe this is correct? If not, in
what sense is it incorrect?
While The American Legion does not believe VA verification
is the ``gold standard'' we understand why other agencies do.
Contracting officers are risk averse, their jobs are to award
contracts to the lowest bidder with the capabilities to finish
the job and meet SBA's small business goaling. When they give a
fraudulent firm a contract, they have not done their jobs. A
firm having gone though the verification process adds a level
of security for the contracting officer. This is why and how
the VA verification program has become a ``gold standard.''
7. At the same time, Mr. Leney stated ``In the federal
government, when people know that a firm has been verified by
the VA, they can take it to the bank. And the results, this is
real money to real vets, and it is a program that benefits
veterans.'' This seems to suggest that VA expects its
certification to be given deference at agencies other than VA,
despite the fact that the governmentwide program does not
require VA certification. Is VA doing enough to make it clear
to other agencies that the VA certification is to be used for
VA contracts only?
This is a common misconception held by many in the small
business community that has been exacerbated by contracting
officers in other agencies who ask if SDVOSB firms are VA
verified. VA verification is not for ALL VA contracts,
technically, VA verification are for those firms who are
seeking to participate in VA's Vet First Program. A self-
certified SDVOSB can still do business with VA outside of the
Vet First Program.
VA is definitely not doing enough to let the agencies know
about this. Two years ago at an American Legion Small Business
Training Program, Mr. Leney stated that he authorized a
memorandum telling the agencies not to require VA verification
in SDVOSB set asides. Afterwards, when our SDVOSBs continue to
run into the same problems with the agencies, we reached out to
CVE for a copy of this memorandum so our SDVOSBs can provide a
copy to the contracting officers. CVE refused to produce or
share this memorandum and further refused to be quoted.
8. What effect does the lengthy and inadequate appeals
process currently in place at VA have on small businesses'
ability to compete for contracts?
Many times, VA comes in contact with SDVOSBs when they are
subcontractors and identify them as small businesses that have
the requisite experience and are likely candidates for set-
aside contracts. The firms are encouraged to enter the
verification process while simultaneously bidding for VA
contracts. The lengthy process is most damaging for these firms
who know they can walk onto some lucrative contract if only the
timing was right and to firms that have their status stripped
after an inspection. During the period that they are removed
from the vetbiz vendor list, they cannot be awarded set-aside
contracts, bid on set-aside contracts. If they attempt to do
business with another agency, they'd have to explain how their
status is in arbitration, which of course would be a cause of
concern for any diligent contracting officer.
9. VA's request for reconsideration takes 147 days and
isn't heard by administrative judges, whereas SBA's appeals
process takes 15 days and does result in a published decision
from an administrative judge. The following questions relate to
that disparity:
a. How do you think the appellate process should
function?
b. Would published decisions be an improvement?
c. Is there a reason to use administrative judges who
are independent of the verification process?
a) With any federal appellate process, there should be an
unbiased body separate from the office that conducted the
initial examination. Take Veterans' Benefits Administration's
appellate process for example, a claim for benefits denied at
the Regional Office is appealed to the Board of Veterans
Appeals, where VA attorneys and Veterans Law Judges (VLJs)
removed from the Regional Office make decisions based off a de
novo review of the evidence of record. Right now, the same
entity that conducts the examination also handles the R4R
process. Again, we reiterate, we know R4R is not a formal
appeal process, however, absent a real appeals process, this is
as close as we get. So ideally, the model of VA's BVA is the
way an administrative appellate process should function. We see
SBA's OHA as a comparable body to VA's BVA. OHA has an
outstanding track record, they have the expertise and their
decisions are based off their case laws.
b) Published decisions hold the agency accountable. When
decisions are made behind closed doors, the stakeholders have
no oversight over the process or legal reasoning that went
behind a denial. Published decisions at the administrative
level are not precedence setting and decisions are made by a
case-by-case basis, but having access to published decisions
allows the stakeholders to better assist applicants and
preemptively address issues the administrative Judges will
latch on to.
c) Yes, an appellate process should require a de novo
review of the evidence of record, having the same entity review
their colleague's work defeats the purpose of a de novo review.
10. If 48 percent of VA's requests for reconsideration are
granted, does that indicate a problem with the initial
determination process?
The course of our testimony outlines what we believe to be
wrong with the initial application process. The high percentage
of grants from the R4R stems from the fact that veteran owners
can still provide additional records and alter the evidence of
record. The veteran is more willing to alter the business plan
when he is faced with a six month bar from reapplication when
he is forced to accept the denial at the end of R4R. R4R is not
a formal appeals process; we merely refer to it as such because
it is as close as VA got to having an actual appeals process.
We believe the high initial denial rate is a better indicator
of problems with the initial determination process.
11. When VA published the current rule governing
verification, it stated ``VA estimates the cost to an
individual business to be less than $100.00 for 70-75 percent
of the businesses seeking verification, and the average cost to
the entire population of veterans seeking to become verified is
less than $325.00 on average.'' 76 Fed. Reg. 3022 (2011). Does
that comport with your experience?
From experience, it takes any given firm a minimum of 3-4
hours to collect the paperwork, save it and proceed with up
loading documents on the Vetbiz website. Business executives
that would be responsible for completing this process,
according to the Bureau of Labor Statistics, earn at least $95/
hr. The American Legion fails to see how VA can claim that it
takes less than $100 for a firm to get verified unless the CEOs
are earning $25/hr on average.
The American Legion has not kept track of the general cost
of veterans seeking to become verified. However, the veterans
that we've had worked with that needed to have their bylaws
scanned by a lawyer usually spends $1200 (this is on the lower
end). Again this is the price when a counselor has sat down and
made most of the changes already and has submitted it back to
the veteran and the veteran goes and seeks legal counsel for
good measure. Many of the mid to large cap businesses we work
with usually have legal counsel on retention. There's no way we
can accurately capture how much is being spent on verification
for firms with legal counsel on retention. We can only state
that for the small capacity business that have been denied and
are going through a R4R or resubmitting their application, it
is much more then what VA reports when legal fees are factored
in. Further, The American Legion does not charge for
verification counseling, but some of the other counselors do
and they do charge more than $100 to review documents.
12. VA recently announced that it would add a pilot pre-
determination program that would occur before the initial
verification program. While few would disagree that the program
could stand streamlining, some have suggested that this will
simply add a third hoop for our veterans to jump through. Is
this a reasonable concern?
The American Legion and other VSOs have always advocated
for more human interaction in the application process. VA has
always responded that they do not have the staff and resources
to contact every veteran if a problem occurs. So in the past
we've used a ``letter of explanation'' system to provide the
contextualization or human element in a process that is so
document driven. However, as CVE continued to grow, they now
have resources they can allocate for this interaction. We
recognize that adding this may be a delay from getting an
application through to the examination phase; however, this is
one of those processes that has always been needed, there was
just not enough resources in the past. By adding this process
to the front end, we can hopefully alleviate some of the
processes on the back end when a veteran decides to undergo a
request for reconsideration.
13. Each time VA reorganizes its verification process, it
seems to add employees and spend more money, with little
improvement for our veterans. Please provide your thoughts on
what the pre-determination program will mean in terms of costs
and staff.
As previously stated we advocated for more human
interaction. A significant amount of flexibility is necessary
to allow entrepreneurship to occur. It is our hopes that
veterans can explain and contextualize documents so their
application can progress through the process without stoppages.
What would really be helpful is if the person that is working
with the veteran is the examiner or at least on the examination
team as well that way they can mitigate some of the
miscommunication problems with documentation and transferring
of the veteran's intent from one team to the next. There is
great hope in this new program to do what it intends to do.
While we understand that direct communication could be a time
consuming task, we're not sure what cost or whether new staff
is necessary to accomplish this.
14. There is consensus that contracts intended for service-
disabled veteran-owned small businesses should go only to
service-disabled veteran-owned small businesses. The following
questions address the prevention of fraud.
a. VA has said that of the firms found not to
qualify; only about 2% are turned down for reasons of
fraud. That means 98% are turned down for structural
reasons. What does that say about the program?
b. SBA's self-certification model has been criticized
for leaving the door open to fraud. Is that the case,
and how can we improve that process?
c. Does the timing of VA's verification pose
challenges? Specifically, since VA's program looks
primarily at a company before the company is bidding on
a contract, does it leave open the door to a verified
company getting a contract, and then just passing the
work through to another company?
a) The fact that 98 percent of the firms are turned down
for structural reasons means that the requirements are too
stringent. Why is it that general legal documents that make
good business sense that you can pull off of the a website is
not good enough for VA? It's because VA's regulatory control
requirements do not make ``good business sense'' but this is
the price for admittance into VA's Vet First Program. The large
cap small businesses have legal counsel and contracting experts
on hand to adjust their documents to get past the VA examiners,
they go through the process swimmingly because they have the
resources to obfuscate their real business model from VA
examiners. The small cap small businesses who can't afford
legal staff and pull their business documents off the web are
the ones being denied. For the most part, these folks don't
even understand quorums, board of directors or voting
requirements.
b) SBA's self certification program does open the door to
fraud but so does VA's document driven process as we previously
mentioned. The veterans' small business community is very
active and is self-policing via status protests. Though a
fraudulent firm might abscond with a contract one time, it
would be nearly impossible for them to do it again.
c) VA does not just look at a company before the company
bids on a contract. There are scheduled and unannounced site-
visits that should make a firm conform to the business model
they submitted for verification purposes. In the coming year,
VA will toe a hard line against those who fail inspection and
who are currently on VA contracts and refer them for
disbarment. CVE may not have the resources to conduct as many
site-visits as they would like, but it is with the hope that
the threat of site-visits will hold the firms in the vendor
pages in check.
15. Mr. Leghorn, I was interested to read in your testimony
that you take issue with the six month waiting period required
before a service-disabled veteran can reapply for verification
at VA. Do you think this waiting period is intended to prevent
fraud, or does it serve another purpose?
There are no statutory provisions that require a punitive
waiting period after a denial. The only place we see this is in
the 8(a) program. We believe this is VA trying to create a
hybrid using SBA's SDVOSB and 8(a) program. A 12 month waiting
period was instituted in the 8(a) program because a company
must be afforded a reasonable amount of time to restructure
their business to resubmit their application. 12 months was set
as an appropriate amount of time for non-compliant companies to
work with counselors at the SBDCs to become compliant and stay
in the 8(a) program. Again we believe VA should not be taking
anything from 8(a) programs except the underlining attitude in
the way the 8(a) program is administered. If 98 percent of the
veterans trying to get in the Vet First Program are not
malicious and are just ignorant of VA's stringent requirements,
then we should not be punishing them with a 6 month penalty for
corrections or deletions in their bylaws that takes a merely a
day to accomplish. VA should allow these firms to resubmit as
many times as they want until they get their business models
right.
We understand that there is the R4R process that allows the
owner to submit additional evidence and many do get verified
after going through this process. However, the owner is faced
with an 147 day wait to get through the R4R or he can accept
the denial and wait 6 months (180 days). As it stands, there is
no ways of maneuvering around a substantial waiting period
created by VA. If the 6 month penalty is removed, then perhaps
fewer applications will enter the R4R process, thereby
relieving the backlog on the back end.
16. Mr. Leghorn, your testimony also raised an interesting
point about VA taking SBA decisions and turning them into
bright line rules. Can you expound on that issue?
VA has undergone a tremendous effort to root out fraud.
They've reviewed OHA's decisions and set brightline rulings
based off of OHA's denials. However, SBA's rulings incorporate
into them a review of the totality of circumstances. VA claims
that they do this but recent Federal Court of Claims decisions
do not reflect that they do. Take KWV Inc. v United States for
instance, VA ruled that a veteran owner removed from his
business 6 months a year could not control his business. OHA
had a similar case that set the precedence. However, in the OHA
case, time zones and the fact that the owner had two other
businesses came into play. OHA went out of their way to discuss
that distance alone was not the deciding factor. Again, SBA
made their ruling based off of a totality of circumstances;
whereas VA honed in on OHA's reason for denial but not the
circumstances in their ruling against KWV. The veteran owner of
KWV was able to demonstrate that he kept in constant
communication with his project managers and that because he was
in the same time zone he was able to communication during
business hours. The Federal Court overturned VA's decision and
restored KWV's status.
17. Mr. Leghorn, I understand that The American Legion is
concerned with the growth of the Center for Veterans
Entrepreneurship at VA. Would you give us some additional
background on this, and talk about whether this has translated
into better service for our veterans?
The American Legion is very concerned with the growth of
yet another VA claims process. As federal agencies, state
government and even those in the private sector start asking
for VA verification status, more and more small businesses are
submitting applications to CVE. We do not want to see more
internal processes grow out of the agency's guise of being more
``thorough'' or ``streamlining the process.'' Good intentions
can sometimes cause multiple lines where applications can get
backlogged. The American Legion has seen this first hand with
other VA claims processes. We do not wish this to happen to CVE
and the verification process.
18. As Congresswoman Herrera Beutler mentioned her opening
statement, a copy of which is attached, there is a veteran
business owner in her district who has been attempting to get
certified with VA for almost four years. He has a ratings
letter issued by the VA indicating he has a service connected
disability, but is still not officially recognized by the
Department of Veteran Affairs as a SDVOB. Then, after years of
sending in information, he received a letter in January
requesting more information on his operating agreement. The
letter, in a very vague way, indicated the operating agreement
between him and his partner was an issue, but gave no
suggestions or guidance on how to correct the problem. I
understand the VA has said of the firms founds not to qualify,
only about 2% are turned down for reasons of fraud. That means
98% are turned down for structural reasons. What does that say
about the program? Are you satisfied with the effectiveness,
efficiency, and accuracy of the VA's certification process?
While The American Legion understands that this is
absolutely frustrating, we have to look at this from the
Agency's perspective as well. There are major legal issues
associated with employees of CVE give legal advice. They can
alert veterans to where there might be problems, but they
cannot be liable for giving legal advice. This is why VA began
the verification assistance program which includes verification
counseling from a third party. The American Legion has a
counselor on staff, whose information is listed on the Vetbiz
website, who can help veterans amend their bylaws to get them
compliant to the current interpretation of the regulations. The
veterans should have been referred to a counselor.
Marc Goldschmitt Responses to Questions for the Record from
Subcommittee on Contracting and Workforce, Committee on Small Business
Subcommittee on Oversight and Investigations, Committee on Veterans'
Affairs
Hearing: ``Consistently Inconsistent: Challenges for Service-Disabled
Veteran-Owned
Small Businesses,'' March 19, 2013.
Submitted April 6, 2013
Questions for the Record - Marc Goldschmitt
If you had to provide one particulary egregious example of
VA failing to certify a firm, what would it be?
Picking the most egregious example of VA failing to
verify a firm requires evaluation and weighting of
factors including:
The emotional cost to the veteran
and family members
The financial cost to the veteran
and family members
The financial cost, including lost
opportunities, to the veteran's business
The precedence and impact of the
decision, action or lack of action on the
veteran community and businesses.
My written testimony contained eight (8) examples of
companies that, for different reasons, could qualify for this
distinction. Of those eight, I consider XSIG the most
egregious. XSIG's experience with the verification process
included lost documentation, incomplete documentation review
and, most significantly, a threat of prosecution.
XSIG is a Maryland based security company. Organized as a
``C-Corporation,'' XSIG has compliant By Laws as evidenced by
its 8(a) certification. At the time of initial verification
application, XSIG had a non-veteran minority owner. CVE
demanded that XSIG submit an Operating Agreement which was
neither required nor appropriate. After prolonged discussions,
the owner downloaded an Operating Agreement from the internet,
which he submitted. Prior to CVE evaluation, the minority owner
resigned all corporate offices and relinquished all ownership
making the SDV a 100% owner. CVE was property notified of the
changes. CVE denied XSIG based upon the Operating Agreement
even though the findings were no longer relevant based upon the
ownership change. The owner sought CVE help in correcting this
error and was told that he had to admit that the Operating
Agreement that he submitted was incorrect. The owner was later
notified, in writing, that he was lucky that he was not being
prosecuted because he had submitted false information.
2. What suggestions for aligning regulations between VA and
SBA are most necessary?
SBA interpretations recognize that many, if not all,
standard have shades of gray. CVE is searching for a bright
line for all standards where they can say there is a black and
white yes or no. CVE's ``bright line for everything'' approach
is unrealistic and ignores business reality, case law and
unique ``fact patterns'' that differentiate and define a
business' true ownership and control metrics. VA must accept a
``shades of gray'' approach and work collaboratively with SBA
to minimize the band where there are shades of gray and to
provide objective metrics and standards that are predictable
and repeatable. This will provide a basis to realistically
evaluate and align SBA and VA regulations.
3. Do you think that VA should be relying, in part, on
SBA's 8(a) regulations as the basis for it verification
program?
No. VA should rely on SBA's SDVOSB regulations as the basis
for its verification program. The 8(a) program is a business
development program and has requirements well beyond the scope
of ownership and control. VA should eliminate the adjudicative
costs incurred for reviewing the non-applicable sections of the
8(a) regulation and bring the verification program into a more
affordable range for veterans and the taxpayers.
4. One statutory difference between the VA and SBA programs
deals with the treatment of surviving spouses. If we were to
try to reconcile these programs, how do you think we should
address surviving spouses of service-disabled veterans?
A more generalized approach of business continuity should
be addressed. The veteran's family and employees--frequently
veterans themselves--should not be further traumatized by
rendering the business unable to continue or compete. A
reasonable period of between 3 and 5 years should be provided
for the survivors to transition the business for sale,
dissolution or continuance as a small business. This should
include exercising of current contract options and continuation
of veteran or service disabled veteran owned small business
status.
5. I understand that being verified by VA is increasingly
important--not only is it required for VA contracts, but other
agencies seem to be placing importance on verification, even
though the statute doesn't require it. For example, FAA's
regeulations now require VA verification, and an Air Force
contract recently required VA verification. I understand that
other agencies see it as a credential, and that prime
contractors and states are now also requiring VA verification.
Please address the challenge that poses to firms that operate
under SBA's governmentwide program?
When VA began verification, firms that were verified
received lapel pins and were authorized to display the Verified
Logo. These firms began using verification as a differentiator
Government-wide. This encouraged other Government agencies and
large prime contractors to give unwarranted deference to VA
verifications as a means of due diligence. The result has been
that real veterans are unfairly being denied opportunities at
other agencies as both prime and subcontractors.
6. During the March 19 hearing, Tom Leney stated ``I think
that this program that the VA has established has created a
gold standard.'' Do you believe this is correct? If not, in
what sense is it incorrect?
That is not correct. A gold standard is a model of
excellence; a paragon. It is the supreme example of something
against which others are judged or measured. Key metrics for
establishing a gold standard for an adjudication process would
include timeliness, trust, confidence, cost effectiveness,
program effectiveness, predictability, repeatability, risk
management, risk mitigation and emulation by similar
organizations. A ``gold standard'' program would be envied and
copied by other organizations and should be a declaration by
stakeholders and other organizations performing similar
adjudication functions, not a self-certification process.
7. At the same time, Mr. Leney stated ``In the federal
government, when people know that a firm has been verified by
the VA, they can take it to the bank. And the results, this is
real money to real vets, and it is a program that benefits
veterans.'' This seems to suggest that VA expects its
certification to be given deference at agencies other than VA,
despite the fact that the government-wide program does not
require VA certification. Is VA doing enough to make it clear
to other agencies that the VA certification is to be used for
VA contracts only?
No. VA is not doing enough to make it clear to other
agencies that verifications are for VA acquisitions only. As
noted in question 5, real veterans needlessly suffer real
economic losses and impact. By continuing to use language such
as ``Gold Standard'' and ``Take it to the bank,'' in public
statements and forums, VA actively promotes and encourages the
use of verification by outside agencies and prime contractors.
When VA began verification, firms that were verified
received lapel pins and were authorized to display the Verified
Logo. These firms began using verification as a differentiator
Government-wide. This encouraged other Government agencies and
large prime contractors to give unwarranted deference to VA
verifications as a means of due diligence. The result has been
that real veterans are unfairly being denied opportunities at
other agencies as both prime and subcontractors.
8. What effect does the lengthy and inadequate appeals
process currently in place at VA have on small businesses'
ability to compete for contracts?
The lengthy appeals process delays the small
businesses' ability to bid and win proposals. This has
several lasting impacts:
For small businesses with limited
operating capital, the owner(s) may not have
the economic capacity to continue operations.
While the specific impact will vary by company
this always means loss of jobs and income.
Time to market will be delayed. This
is a very subtle but major impact on the small
business. As the business gains capacity and
capability to bid, win and perform contract
work, it achieves growth. Delaying the start of
this process results in significant reductions
in total revenue. Due to Federal buying cycles,
a 6 month delay can be the equivalent of moving
out one fiscal year. Consequently a company
that has successive years' revenues of $100k,
$500K and $1 Million would have total revenues
of $1.6 Million. A 6-12 month delay would
result in total revenue over the sam eperiod of
only $600K--a $1 Million dollar reduction. This
revenue is un-recoverable and the company will
see continued significant revenue reductions
over the subsequent years. This is illustrated
in the following graphic. The darker area (red)
represents cumulative revenues after a 1 year
delay. The lighter (blue) area represents the
significant ($1 Million) in increased revenue
achieved with zero delay. It also represents
lost revenue due to the delay in ``Time to
Market.''
[GRAPHIC] [TIFF OMITTED] T0170.004
99. VA's request for reconsideration takes 147 days and
isn't heard by administrative judges, whereas SBA's appeals
process takes 15 days and does result in a published decision
from an administrative judge. The following questions relate to
that disparity:
a. How do you think the appellate process should
function?
The appellate process should review the
verification case file for errors in law or
fact as adjudicated by VA. As noted in recent
Court of Federal Claims cases, this would
require that the administrative judge assure
that VA findings are traceable to and properly
reference regulation and that those
interpretations are consistent with case law
and published VA standards.
b. Would published decisions be an improvement?
Yes. Published decisions are essential. The Veteran
community and stakeholders deserve the baseline of authority,
traceability and acceptability of published decisions.
Traceability of findings to regulation and law is
essential. Published decisions from Administrative Law Judges
would provide that traceability and increase the veteran
stakeholders' acceptance of and confidence in VA's verification
program.
Currently, VA publishes ``Verification Assistance Briefs
(VAB)'' that contain excerpts from denial letters. There are
problems with some of these VABs. For example in the Joint
Venture VAB, the first excerpt from a denial letter references
terms in the findings that are not included in either 38 CFR 74
or 13 CFR 121 regarding SDVOSB JVs. One VAB introduces the new
term ``Full time Control'' which does not have any regulatory
reference or definition.
A disclaimer included in CVE's Verification Assistance
Briefs further highlights the need for published administrative
law decisions. This disclaimer is ``This information has been
provided by CVE for general informational purposes and should
not be construed as providing legal advice. You should contact
your attorney to obtain advice with respect to any particular
issue or problem. In addition, CVE makes no representation as
to the accuracy or whether the above information is currently
up-to-date. (emphasis added) All applicants must read the
applicable regulations and determine how best to meet these
requirements. The VAB's do not constitute legal notice or
replace the regulations.''
c. Is there a reason to use administrative judges who
are independent of the verification process?
Yes. The current process has unpredictable
outcomes. Administrative judges who are
independent of the verification process are
essential to assuring that the verification
standards and processes converge to repeatable,
predictable outcomes that are consistent with
statute and regulation(s).
10. If 48 percent of VA's requests for reconsideration are
granted, does that indicate a problem with the initial
determination process?
A 48 percent R4R approval rate indicates that there may be
significant benefit to implementing and expanding the planned
pre-determination process.
Of greater significance is the 52% denial rate of denial
for R4R applicants. As described in question 14, the extremely
low rate of fradulent companies means that annually between
1200 and 1500 legitimate companies are being denied. VA should
take on a proactive advocate role and redirect funds and effort
to providing earlier assistance to companies seeking
verification.
Currently non-profit Verification Assistance Partners
(VAPs) support some of the efforts to assist companies prepare
documentation for the verification process. Verification
Assistance Counselors providing this assistance are doing so as
a collateral duty. This limits the availability of support.
Providing grant funding to the non-profits currently engaged as
Verification Assistance Partners will allow those organizations
to deploy full time verification assistance counselors which
will result in higher initial verification rates, a
significantly reduced CVE budget requirement and faster
verification cycle times.
11. When VA published the current rule governing
verification, it stated ``VA estimates the cost to an
individual business to be less than $100.00 for 70-75 percent
of the businesses seeking verification, and the average cost to
the entire population of veterans seeking to become verified is
less than $325.00 on average.'' 76 Fed. Reg. 3022 (2011). Does
that comport with your experience?
That does not comport with my experience. Prior to
implementation of PL 11-275, average costs for initial
verification exceeded $5,000.00 and $7,500 if the company
appealed. My experience is that, post PL 111-275 implementation
that the costs to small businesses to prepare and submit
verification paperwork is in the thousands or tens of thousands
of dollars and that these costs are increasing. In addition the
verification program has significant indirect and hidden costs
to veteran businesses.
All small businesses working with the Federal Government
face significant challenges for start-up, growth and, often,
sustainment. Congress' intent to increase opportunities for
veteran businesses is undermined when excessive business
resources are expended on non-value added exercises.
From the verification program's inception, costs were
frequently anecdotal. Identifying the true costs and benefits
to businesses of VA's verification program is important for
Congress and the veteran community to measure the success of
the Veterans First program. Quantification of true costs and
benefits is also essential to determine how effectively VA is
allocating resources for their verification processes. Question
15 addresses this issue in more detail.
In early CY 2011, Bob Hesser and I, for the VET Force,
conducted a survey that included cost estimates from businesses
that had completed the verification process. The survey sought
to quantify costs that companies incurred in preparing and
submitting documentation required by VA. Companies reported a
wide variance of costs from under $1000 to over $50,000. We
reviewed ``outliers'' such as the $50,000 claim and determined
them to be valid. These costs only included direct costs such
as labor and legal fees. The average direct cost was in excess
of $5,000. For companies that requested reconsideration, the
average cost was in excess of $7,500.
Costs to the veteran community and VA for verification
processing are rapidly increasing. Additional information is
needed to quantify the efficacy of the evolving verification
processes and provide feedback to VA to eliminate, or at least
minimize, non-value added activites.
Since the VET Force survey, the
intensity and complexity of the verification
process have grown significantly, which can
dramatically increase the direct costs for
verification and Requests for Reconsideration.
I expect these average costs to more than
double with potential increases of an order of
magnitude for many companies.
Since implementation of PL 111-275
the lengthy verification processes have
precluded companies from competing for Veterans
First opportunities. This has associated direct
and indirect cost implications.
The ``Fast Track'' program had
erroneous and/or avoidable denials that cost
real veteran businesses, real dollars for real
programs where they were the best value to the
VA. The avoidable denials refer to businesses
that had received incomplete findings and/or
had been in the CVE ``black hole'' for as long
as two years or more, during which time
deficiencies could have been fully corrected.
The most significant costs, however, are the costs of lost
revenue due to ``Time to Market'' impacts as discussed in my
response to question 8.
12. VA recently announced that it would add a pilot pre-
determination program that would occur before the initial
verification program. While few would disagree that the program
could stand streamlining, some have suggested that this will
simply add a third hoop for our veterans to jump through. Is
this a reasonable concern?
The pre-determination program moves the hoop for some
companies that would otherwise be denied. For those companies,
it replaces a 147 day Request for Reconsideration period with a
five day process that will allow these companies to receive
their verification decisions four to six months earlier. In
these cases, companies that benefit from the pre-determination
process will realize significant increased revenue potential
due to the ``Time to Market'' impact addressed in responses to
questions 8 and 12. This will ultimately result in significant
benefit the veteran community.
The overall impact to verification outcomes where
approximately 20% to 25% of applicant companies are ultimately
denied is unclear. These companies are provided a 30 day
``second chance'' window but are not successful in overcoming
VA identified deficiencies. This low success rate in a 30 day
window raises concerns for how effective the pre-determination
process will be with its five day window.
Recent changes in VA interpretations such as Transfer
Restrictions will skew statistics making it difficult to
distinguish between improvements due to pre-determination and
changes in interpretations. As VA moves forward with its pilot
pre-determination, it will be beneficial to identify if pre-
determination activities could be moved earlier in the process
and if additional items could be included in the pre-
determination process. More importantly, the pilot pre-
determination program could provide important information for
the value of shifting VA's verification program from an
adversarial ``Gotcha'' philosophy to a more collaborative ``Get
to Yes'' approach.
13. Each time VA reorganizes its verification process, it
seems to add employees and spend more money, with little
improvement for our veterans. Please provide your thoughts on
what the pre-determination program will mean in terms of costs
and staff.
The pre-determination program will increase workloan
demands and will therefore increase costs and staff
requirements required for initial verifications. VA states that
Requests for Reconsiderations (R4R) are handled through VA's
Office of General Counsel, therefore, I assume, the probable
decrease in the number of R4R's will have little or no impact
on CVE costs and staffing. I estimate that CVE cost and
staffing will increase by 5% to 10%. This presumes a continued
rate of 5,900 cases per year with approximately 20% (1200
cases) eligible for pre-determination and use of CVE's current
multiple level review processes for the pre-determination
reviews. Using historical denial and final denial rates, this
also means that each year, the veteran community will continue
to experience final denials for approximately 1200 legitimate
companies. Hopefully, the pilot pre-determination effort will
demonstrate that structured dialog with applicant companies
will result in:
better understanding of the
requirements,
better understanding of the
standards,
fewer initial and final denials and
evidence that earlier, more frequent
dialogue and collaborative efforts will result
in dramatically lower program costs and
significantly improved outcomes.
14. There is consensus that contracts intended for service-
disabled veteran-owned small businesses should go only to
service-disabled veteran-owned small businesses. The following
questions address the prevention of fraud.
a. VA has said that of the firms found not to
qualify; only about 2% are turned down for reasons of
fraud. That means 98% are turned down for structural
reasons. What does that say about the program?
The 2% appears to be too high by several
orders of magnitude. This implies that the
program is using arbitrary statistics in an
attempt to justify its significant program
costs and extreme interpretations. According to
recent testimony, in FY 2012, VA adjudicated
5,900 companies. An unspecified number of cases
are referred to the Office of Inspector General
(OIG) and VA has not provided statistics on the
number of referred companies or the number of
companies investigated and found to be
fraudulent. The only available reference is
from VA's website which lists only four
identified cases that cover a two year period.
This represents a statistic that is closer to
0.02% (two one hundredth's of one percent).
b. SBA's self-certification model has been criticized
for leaving the door open to fraud. Is that the case,
and how can we improve that process?
Where there is money involved, there will be
fraud. The Veteran Community has been ``self-
policing'' since the beginning of the program
and this has resulted in numerous successful
protests, indictments and convictions. Many of
these ``bad actors'' continue to self-certify
and may receive continued contract wins.
A simple solution is to have the ``Service
Disabled Veteran Owned Small Business''
declaration field in the System for Awards
Management (SAM) managed by SBA. Any firm found
to be ``Other than SDVOSB'' by SBA would have
its SDVOSB designation changed by SBA until the
company could demonstrate that it is fully
compliant with 13 CFR 125. This would capture
the benefits of self-certification while
eliminating many of the objections to self-
certification.
c. Does the timing of VA's verification pose
challenges? Specifically, since VA's program looks
primarily at a company before the company is bidding on
a contract, does it leave open the door to a verified
company getting a contract, and then just passing the
work through to another company?
The timing of VA's verification may pose
minor challenges. Typically, successful small
businesses will invest resources in developing
customer relationships at the Prime and Agency
levels. This provides strategic visibility to
the Agency and prime requirements, which would
include sufficient lead-time to prepare for and
receive VA verification.
Some businesses new to the Government space
or new to VA may be in a position to
participate in teams bidding near term
opportunities. If the prime needs specific,
unique corporate capabilities, the small
business can still participate in the bid as a
small business.
Challenges arise when Prime contractors are
assembling teams 12-18 months before
anticipated RFP release. Frequently, these
primes will only accept companies that have
already received verification and will solidify
the team before an applicant can go through the
verification process.
15. In your testimony, you refer to VA's approach as risk-
avoidance. Can you explain what you mean? If VA were to back
away from this approach, it could mean that potentially
unqualified firms would be verified. When do you consider this
an acceptable risk?
It is an acceptable risk now.
Risk avoidance is a risk management technique that seeks to
eliminate any possibility of risk through hazard prevention, or
the discontinuation of activities determined to entail any
level of risk. It is often used in extreme situations where the
risk exposure creates an extraordinary liability potential.
In the context of VA verification, risk avoidance means
that VA is willing to preclude any possibility of a non-veteran
company at the potential expense of excluding many legitimate
businesses. This carries a high cost to VA perform
verification, a high cost to industry to prepare for
verification, a high cost to industry in lost revenue and
opportunities. The current verification process has not
identified sufficient numbers of fraudulent companies to
justify the additional cost. This VA business model is not
sustainable or affordable for either VA or industry.
Veteran community self-policing and penalties for
misrepresentation will help reduce and minimize this risk. VA
stakeholder feedback is required to validate the acceptability
of this risk.
16. As a verification assistance counselor who helps aid
service-disabled veteran small business owners through the VA
verification process, can you explain the process to becoming a
verification assistance counselor and why they are needed?
No. As a verification counselor, I review the company
profile, ownership, governance, management and operations with
business owners. The processes and rational for the processes
is evolving and are not relevant to the role that the
verification assistance counselor plays. A verification
assistance counselor assists a company in preparing and
evaluating documentation required for submission to CVE. This
requires that the verification assistance counselor be
knowledgeable of the standards and criteria that CVE uses to
examine and evaluate documentation and address governance
issues in the documentation that may not meet either regulatory
requirements or CVE interpretations.
17. Further, in light of your training, you've become
intimately acquainted with why the VA requires certain
materials in order to get certified and your testimony brings
out concerns you have with this, specifically that some of it
may be unprotected or excessive. Can you elaborate on these
concerns?
Excessive
VA training for counselors focuses on the process steps and
describes how documentation goes through multiple levels of
review. The training does not discuss in sufficient detail how
or why specific documents are required or used. Training
briefly reviews how documentation is stored and accessed for
review.
Training material refers to the documentation that is
required. This information is published on the VA/CVE website
at https://www.vip.vetbiz.gov/Public/Register/
DocumentList.aspx. On this page, users can view CVE
documentation requirements for six different types of business
organizations. These lists contain excess documentation
requirements. In addition, several of these lists are
incorrect. Areas where the lists are incorrect overlap
excessive documentation requests.
Examples of excessive requests
Limited Liability Companies, Sole
Proprietorships, Limited Liability Partnerships
and General partnerships
are precluded by state laws from
issuing stock, yet CVE lists stock
certificates and stock registers as
requirements for documentation
submission.
Do not have By Laws, they have
Operating Agreements, yet CVE requires
both Operating Agreements and ByLaws
Cannot have shareholders and
therefore cannot have shareholder
agreements, yet CVE requires
submission.
Personal income taxes including 1040
and K-1's are redundant and invasive.
Information required for determination of
corporate distributions, an indicator of
relative ownership percentages, is contained in
the corporate return with its K-1's. For a sole
proprietorship, all distributions are on
Schedule C of the 1040 which by default would
indicate that the veteran owns 100%. For
purposes of determination and ownerhsip
Affiliation documentation.
Affiliation is a size determination issue which
is outside of the authority of PL 109-461. When
CVE finds a possible ``affiliation'' CVE
requires corporate income taxes and personal
income tax documentation from all owners of all
``affiliated compares. Affiliation through
common ownership or management requires taht an
entity--in this case the veteran--control both
companies. Lack of understanding of these SBA
regulations and misapplication of the
terminology and concept of affiliation has
created excessive demands for documentation
Examples of data protection issues
Continued concerns of lost
documentation
Lack of ``Need to Know''
Traceability to who accessed a
document and how it was used.
Availability of Payroll data. As we
look at
18. Your testimony illuminates concerns that other
agencies, although they are not supposed to; have begun using
CVE certification as a standard. How often have you seen this
occurring?
I have directly observed this at several small business
conferences and matchmaking events. Daily, I read one or more
postings on social collaboration sites and forums that address
this concern.
19. Mr. Goldschmitt, you recommended have the Office of
Hearings and Appeals hear all service-disabled veteran appeals.
What do you think are the advantages of unifying the appeals
process?
Unifying the appeals process will provide checks and
balances similar to the separation of powers within the
Executive, Legislative and Judicial branches. A unified appeals
process will facilitate the convergence of interpretations of
common SBA SDVOSB and VA verification requirements. It will
provide an opportunity to utilize SBA's history of case law and
the subtleties that occur with different ``fact patterns.'' It
will assist the Veteran Community is establishing viable
business models that allow common business practices that
support practical governance, investment, financing, human
resources and other factors that foster growth and
profitability.
20 Mr. Goldschmitt, you recommended aligning the
regulations that SBA and VA rely upon. Even if we use exactly
the same words, how would we insure that we have the same
interpretations?
Interpretations are based upon statute, regulation, policy,
knowledge and experience. The training and experience of VA
adjudicators and SBA adjudicators will vary between agencies as
well as within agencies. Using the same words, will provide a
basis for establishing consistent interpretations. Common
training and case law will facilitate the convergence of
interpretations and provide an understanding of the nuances
associates with different fact patterns.
Subcommittee on Contracting and Workforce, Committee on
Small Business
Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs
Hearing: ``Consistently Inconsistent: Challenges for
Service-Disabled Veteran-Owned Small Businesses,'' March 19,
2013.
Questions for the Record - Jonathan Williams
1. If you had to provide one particularly egregious example
of the VA failing to certify a firm, what would it be?
We had one case that involved multiple rounds of denials,
reconsideration requests, and back-and-forth with the VA OGC.
The issues were not particularly complex, but it took over one
year to resolve and several thousand dollars for the company.
2. What suggestions for aligning regulations between the VA
and the SBA are most necessary?
The VA and the SBA should permit reasonable
transfer restrictions on veteran ownership
The VA should not require SDVOSB joint
ventures to be separately verified by the CVE--perhaps
simply review the joint venture agreement within a
certain amount of time prior to contract award, similar
to how the SBA handles approval of 8(a) joint ventures.
8(a) firms do not have to go through a second 8(a)
application process for the joint venture. They just
submit the joint venture approval paperwork within 20
days of when the award is expected to be made.
The VA's rules should be scrubbed to remove
rights to decide affiliation/size issues without going
to the SBA, and to remove the provision that allows the
VA to use the principal of control through affiliation
to find that a veteran does not control his business.
The SBA's OHA found in its Dooley Mack decision that
control in the context of affiliation is different than
veteran control, and OHA specifically rejected the
SBA's use of the precise language that is in the VA's
regulations that mixes the two control concepts.
The VA's regulations require the veteran to
be the highest compensated, while the SBA's SDVOSB
rules do not. The same is true for the VA's requirement
to have a veteran as the full-time manager of the
company, which is not found in the SBA's rules.
The SBA has published its standard operating
procedures (``SOP'') for the 8(a) Program, which is a
useful tool for firms and practitioners to understand
the inner workings of the 8(a) Program. A similar SOP
for the VA's SDVOSB program would help to lessen the
confusion many firms experience in seeking to
understand and use the program.
The VA could offer an appeal process similar
to what is currently available through the SBA, or the
VA could simply use the SBA's appeal process as is
envisioned in the VA's rules but has not been realized
due to the lack of the interagency agreement
The VA could specify a certain time period
during which contract awards will not be terminated
while the veteran has an opportunity to challenge an
adverse finding as to his SDVOSB eligibility.
3. Do you think that the VA should be relying, in part, on
the SBA's 8(a) regulations as the basis for its verification
program?
I don't think it is necessarily wrong for the VA to pattern
its rules after some of the 8(a) rules if the agency believes
this is the best way to establish and enforce its views on
program eligibility. I do not see a statutory conflict with the
VA doing this. However, from a practical standpoint, the VA's
cherry-picking of some regulations from the SBA's SDVOSB rules,
and others from the SBA's 8(a) rules, has created a lot of
confusion because it gives veterans two sets of similar, but
different, rules with which to comply.
4. One statutory difference between the VA and the SBA
programs deals with the treatment of surviving spouses. If we
were to try to reconcile these programs, how do you think we
should address surviving spouses of service-disabled veterans?
This seems like a nice benefit or advantage of the VA
program, but I am not sure how often it is used. I never have
seen it used.
5. I understand that being verified by the VA is
increasingly important--not only is it required for VA
contracts, but other agencies seem to be placing importance on
verification, even though the statute doesn't require it. For
example, FAA's regulations now require VA verification, and an
Air Force contract recently required VA verification. I
understand that other agencies see it as a credential, and that
prime contractors and states are now also requiring VA
verification. Please address the challenge that poses to firms
that operate under the SBA's government-wide program.
Firms are forced to protest when these regulations are
mistakenly put into RFPs, which costs them money, slows down
the procurement process, and clogs the protest system. In
addition, firms may lose out on work with primes that require
CVE certification, when the primes could rely on self-
certification.
6. During the March 19 hearing, Tom Leney stated ``I think
that this program that the VA has established has created a
gold standard.'' Do you believe this is correct? If not, in
what sense is it incorrect?
No, I do not believe this is correct. As our testimony and
answers reflect, and as Mr. Leney acknowledged during his
testimony, there continue to be a number of shortcomings in the
program that are making it too difficult for legitimate SDVOSBs
to benefit from the program as intended.
7. At the same time, Mr. Leney stated ``In the federal
government, when people know that a firm has been verified by
the VA, they can take it to the bank. And the results, this is
real money to real vets, and it is a program that benefits
veterans.'' This seems to suggest that the VA expects its
certification to be given deference at agencies other than the
VA, despite the fact that the government-wide program does not
require VA certification. Is the VA doing enough to make it
clear to other agencies that VA certification is to be used for
VA contracts only?
I do not know what the VA is doing in this regard, but the
anecdotal evidence from my fellow panel members and my clients
suggests that the VA is not doing enough. Many other agencies
and prime contractors believe CVE verification is necessary
when it is, in fact, inapplicable.
8. What effect does the lengthy and inadequate appeals
process currently in place at the VA have on small businesses'
ability to compete for contracts?
While in limbo, small businesses lose or cannot win
contracts, so this has a big impact. Many firms have lost
contracts because of easily correctable issues in their
corporate records or because of administrative errors.
Currently, VA contracting officers are not required to wait for
a decision on a pending reconsideration request or appeal
before moving on from an initial award decision. Some SDVOSBs
have been successful in preserving a contract award after an
adverse eligibility ruling because they had the resources to
file for an injunction or the contacts with the right people
within the VA. But for too many SDVOSBs, the contract is lost.
9. The VA's request for reconsideration takes 147 days and
isn't heard by administrative judges, whereas the SBA's appeals
process takes 15 days and does result in a published decision
from an administrative judge. The following questions relate to
that disparity:
a. How do you think the appellate process should
function?
The appellate process should function similar to
OHA--quicker, with a review by an Administrative Judge,
and a public decision.
b. Would published decisions be an improvement?
Yes. Currently, in terms of the legal effect of the
VA's decisions, there is no precedential value to the
VA's rulings. And because the VA's decisions are not
publicized, there is no informational or instructive
value, either. Conversely, OHA decisions can set
precedent for the SBA and are instructive for firms in
understanding how the SBA is applying its rules and how
to maintain eligibility. If the VA published its
decisions, veterans and their representatives would be
much more knowledgeable about the VA's interpretations,
regulations, precedent, and guideposts.
c. Is there a reason to use administrative judges who
are independent of the verification process?
Yes, the review is independent so, if nothing else,
it gives the appearance of being unbiased and a fresh
perspective.
10. If 48 percent of the VA's requests for reconsideration
are granted, does that indicate a problem with the initial
determination process?
Yes. This is a symptom of the ``deny first, ask questions
later'' approach. Since 2011, over 60% of our reconsiderations
were based on easily correctable issues in the veterans'
corporate records.
11. When the VA published the current rule governing
verification, it stated ``VA estimates the cost to an
individual business to be less than $100.00 for 70-75 percent
of the businesses seeking verification, and the average cost to
the entire population of veterans seeking to become verified is
less than $325.00 on average.'' 76 Fed. Reg. 3022 (2011). Does
that comport with your experience?
No. The cost for an attorney to prepare the corporate
records required to go through the VA's certification will vary
depending on the complexity of the corporation, the number of
owners, and what they are trying to accomplish. But in almost
all cases, you are talking about an amount in the thousands of
dollars, not hundreds.
12. The VA recently announced that it would add a pilot
pre-determination program that would occur before the initial
verification program. While few would disagree that the program
could stand streamlining, some have suggested that this will
simply add a third hoop for our veterans to jump through. Is
this a reasonable concern?
This is a legitimate concern, and proof will be in the
pudding, but on balance I like the idea of the pre-
determination program because it has the potential to avoid
unnecessary reconsideration requests, which should in turn
speed up the reconsideration process. The sooner veterans can
cut to the chase about perceived issues in the application and
have change to correct them, the better.
13. Each time the VA reorganizes its verification process,
it seems to add employees and spend more money, with little
improvement for our veterans. Please provide your thoughts on
what the pre-determination program will mean in terms of costs
and staff.
I do not have any insights on this, other than I would
imagine that to do it right, the pre-determination stage will
require some additional costs. But I would think the VA could
accomplish this with its existing workforce by having them
devote more time upfront to flagging these issues.
14. There is consensus that contracts intended for service-
disabled veteran-owned small businesses should go only to
service-disabled veteran-owned small businesses. The following
questions address the prevention fraud.
a. The VA has said that, of the firms found not to
qualify, only about 2% are turned down for reasons of
fraud. That means 98% are turned down for structural
reasons. What does that say about the program?
That the pendulum has swung too far in the direction
of creating barriers to entry, and we are too focused
on keeping veterans out at the expense of trying to
help them get in.
b. The SBA's self-certification model has been
criticized for leaving the door open to fraud. Is that
the case, and how can we improve the process?
That is the perception, but I am not sure it is
reality. I am not sure a flawed application process is
any better than self-certification at preventing fraud.
Perhaps something like the WOSB program would be a more
manageable middle ground. The WOSB program is neither a
complete self-certification nor upfront verification
program.
c. Does the timing of the VA's verification pose
challenges? Specifically, since the VA's program looks
primarily at a company before the company is bidding on
a contract, does it leave open the door to a verified
company getting a contract, and then just passing the
work through to another company?
VAAR 852.219-10 specifies subcontract limitations
similar to FAR/SBA rules. This is the mechanism through
which the VA should hold firms accountable for
performance of work requirements. Once the firm is
verified, I think the focus shifts to the contracting
departments since compliance with the limitations on
subcontracting is a matter of contract administration.
I have seen more performance of work audits on our
clients' contracts, but this remains an area that
generally does not seem to get much focus, at the VA
and other agencies.
15. The following questions relate to the recent Court of
Federal Claims decision in Miles Construction, LLC v. United
States, No. 12-597C (Fed. Cl. 2013). As I understand it, before
Miles, the VA had a blanket prohibition on transfer
restrictions, while the SBA's Office of Hearings and Appeals
prohibited some transfer restrictions and allowed others
depending on the wording of the agreements. When Miles
challenged the VA's rule, the VA tried to argue the Office of
Hearings and Appeals' cases, and the court rejected this
argument. Now we have a case where the VA will have a blanket
rule permitting transfer restrictions, while the SBA will still
have its case-by-case basis for assessing these agreements.
a. First, can you think of cases where transfer
restrictions should be found to lead to the loss of
control?
Yes, such as when the transfer restrictions give the
minority partner too much control or are onerous or
non-customary (e.g., the transfer restrictions at issue
in the OHA decision, International Logistics, which
gave the minority owners the right of first refusal to
buy the veteran's stock at a price well below fair
market value).
b. Second, since the SBA's rules on transfer
restrictions also apply to whether a firm is a small
business, aren't we risking a situation where the VA
will find that a firm qualifies, only to potentially
have the SBA find that the firm is no longer small?
That seems like a somewhat remote possibility, but in
theory, yes, you could have the SBA find affiliation
based on a transfer restriction that gives a minority
owner negative control, yet the VA would apparently no
longer care about the transfer restriction in terms of
SDVOSB eligibility.
c. Third, does the Court of Federal Claims' decision
illustrate the problem of using different statutory and
regulatory schemes for these two programs?
Yes, absolutely! Two inconsistent results.
d. Finally, I believe the Miles case also speaks to
the lack of due process provided to service-disabled
veteran businesses under the Administrative Procedures
Act. Could you address that as well?
The VA's protest rules are very bare-bonded and I do
not think they were intended to last this long. They
clearly envision that the SBA would handle all size and
SDVOSB appeals, once an interagency agreement was
reached. But we are still waiting for the interagency
agreement. In the meantime, the VA's rules provide some
basic provisions for handling SDVOSB eligibility
protests, but they are not as well thought out as the
SBA's rules. So, there are gaps such as the one that
the judge discussed in Miles that led to due process
concerns. If the VA is not going to turn over the
protest handling to the SBA under the interagency
agreement as envisioned, the VA's protest rules should
be improved.
16. In your testimony, you recommend that the SBA handle
all size and affiliation inquires. I think if you ask the VA,
it will say that it is already deferring to the SBA on these
issues. Do you think that is the case?
Net in my experience, no. Their rules allow them to deny
applications for size issues and to find the veteran does not
control based on affiliation. A VA rule allows the CVE to deny
an application if the CVE determines that a concern does not
qualify as small, even if the SBA has not issues a size ruling
for that firm (38 C.F.R. Sec. 74.13(d)). Under this rule, a
firm whose application is denied because of a size ruling by
the CVE may subsequently request a formal size determination
from the SBA, but the firm would have to file a new application
with the CVE after receiving a size determination from the SBA.
In this way, the CVE is able to perform size analyses that
should be left to the SBA.
In fact, OHA has found that the standard for veteran
control under the SBA's SDVOSB regulations is not the same as
the standard for control under the SBA's small business
affiliation rules. In DooleyMack Gov't Contracting, LLC, SBA
No. VET-159 (2009), the SBA had concluded that a veteran did
not control his company because ``business relationships exist
which cause such dependence that [the veteran] cannot exercise
independent business judgment without economic risk.'' This SBA
conclusion, which OHA rejected, is nearly identical to the VA's
regulation at 38 C.F.R. Sec. 74.4(i)(4). OHA overturned the
SBA's analysis because the judge found that the SBA had
confused the affiliation control principles under 13 C.F.R.
Sec. 121.103 with the veteran control principles under 13
C.F.R. Sec. 125.10. That same confusion is evidenced in 38
C.F.R. Sec. 74.4(i)(4), which ostensibly addresses veteran
control but reads like an SBA affiliation rule from 13 C.F.R.
Sec. 121.103.
17. You also mentioned that the SBA and the VA treat joint
ventures differently. Can you explain how that plays out, and
why it matters?
The SBA does not require approval of the joint venture,
while the VA requires the joint venture to go through its own
verification process. Joint ventures are not supposed to be
ongoing entities; they are supposed to be limited ventures
formed for a particular contract. This is almost impossible to
do when you have to get the joint venture verified through the
CVE since the process usually takes several months. By the time
you get your joint venture through the CVE, the contract
opportunity would have already come and gone. As a result, we
have only ever handled one or two SDVOSB joint ventures at the
VA, and in one case it was for an ongoing joint venture. The
VA's approach forces firms to have ongoing joint ventures that
are a potential ground for affiliation under the SBA's rules.
And the VA's approach makes it too difficult to use a joint
venture, so many veterans are missing out on this useful tool.
18. In your testimony, you recommend consolidating the two
regulatory schemes into one with regulations and appeal process
similar to that which is currently available at the SBA. How
would you envision that happening?
I think you would look to merge the two sets of rules into
one, keeping some parts of both, but using the SBA's rules as
the starting point. The CVE could continue to verify firms
using the new consolidated rules, at least until it could be
figured out how to get the entire program under one roof. By
using the SBA's rules as the starting point, there would be a
clear appellate process for veterans.
19. Mr. Williams, how can the VA streamline the application
process through the Center for Veterans Enterprise (CVE) to
make it less burdensome and duplicative for veterans?
Try to issue only one denial letter covering all reasons
for denial, so firms will not have to endure multiple rounds of
reconsideration. Work more with veterans through steps like the
new initial screening stage to allow the veterans to fix issues
and become eligible without having to go back to square one.
Figure out a better way to ensure that correspondence reaches
veterans so they do not get terminated from the program without
having an opportunity to respond. Extend the re-verification
timeline by another year, or consider eliminating it all
together. Once a firm gets into the 8(a) program, it must make
some annual showings, but it is not required to essentially re-
apply every year or two years like the VA's re-verification
process. Firms are obligated to notify the VA about changes, so
it is unclear why the VA forces firms to basically reapply
every couple of years. Also, counsel the onsite investigators
and the CVE reviewers not to make veterans feel like they are
guilty until proven innocent.
20. Mr. Williams, in your testimony you state how the VA
uses a ``deny first and ask questions later'' approach to the
application process. In your experience, how many veterans
would you say, approximately, become dejected and simply cease
their pursuit of contracts they should rightfully have the
opportunity to pursue?
I worked with one firm that gave up on the process, one
firm that almost gave up when their reconsideration requests
dragged on for over one year, and I am currently working with a
firm that is close to giving up based on some very poor
experiences with an onsite investigator. Given these anecdotal
experiences, I would have to assume there are a significant
number of veterans who have abandoned the program and contract
opportunities because it is too difficult to get into and stay
in the program.
[GRAPHIC] [TIFF OMITTED] T0170.005
0Enclosure
Subcommittee on Contracting and Workforce, Committee on
Small Business
Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs
Hearing: ``Consistently Inconsistent: Challenges for
Service-Disabled Veteran-Owned Small Businesses,'' March 19,
2013
Responses to Questions for the Record
William B. Shear, Director
Financial Markets and Community Investment,
Government Accountability Office
1. Your written statement focused on your January 14th
report on the VA verification program. However, it's my
understanding that the scope of this report changed over time.
Can you tell us about that evolution, and why it was necessary?
When we began our work in February 2012, we initially
considered reviewing a sample of applications for verification
to assess how consistently the Department of Veterans Affairs
(VA) applied its guidelines and the timeliness of the
verification process. However, because VA introduced
significant changes to its procedures and operations in 2012,
we determined that evaluating VA's compliance with its past
procedures would be of limited value and that testing the
effectiveness of verification procedures that were still
evolving would be premature. We also found that the
verification program's data system did not provide the
information that we would need to analyze the timeliness of the
verification process. As a result, we focused instead on issues
related to planning for and designing the verification program
and on changes in the program's management and operations.
2. GAO stated that VA had 28 employees and 174 contractors
assigned to verification. What have been the resulting
challenges from relying so heavily on contractors?
While we did not look specifically at the challenges from
relying so heavily on contractors, our work identified three
key issues facing the verification program related to its use
of contractors. First, we reported in January 2013 that the
verification program's data system did not meet VA's needs for
assigning and monitoring the progress of applications.\1\ As a
result, the contractor that initially examines applications
relied on a separate workflow management system, which is
inefficient and increases the risk that data will not be
completely or accurately recorded across systems. Second, VA
initially did not have a standardized approach to training
verification program employees and contractors. To help address
this challenge, VA began taking steps in December 2011 to
improve training, such as hiring the first training officer for
the verification program and revising the training program.
VA's initial strategic plan for the verification program
identified improving training as an ongoing focus for 2013.
Third, while VA began taking some steps in 2012 to improve its
oversight of the quality of the work produced by some its
contractors, the agency lacked metrics that it could use to
monitor the quality and consistency of work produced by the
contractors that perform examinations and site visits.
---------------------------------------------------------------------------
\1\ GAO, Veteran-Owned Small Businesses: Planning and Data System
for VA's Verification Program Need Improvement, GAO-13-95 (Jan. 14,
2013).
3. GAO staTed that VA had made a number of changes intended
to improve the verification program since December 2011. But it
also stated that before VA could expand operations for a
government-wide program, it would need to demonstrate that the
recent changes have resulted in operational improvements and
that its new efforts to educate applicants have been effective.
Why weren't you able to determine whether the recent changes
---------------------------------------------------------------------------
have been effective?
During the period of our study--February 2012 to January
2013--the changes that VA introduced beginning in December 2011
were still being implemented or had not been in place long
enough for us to evaluate their results. However, as we
reported in January 2013, VA could strengthen its efforts to
improve its management and oversight of its verification
program by taking additional actions.\2\ First, in its initial
strategic plan, VA had not established quality and outcome
measures that it could use to assess the verification program's
performance over time. Second, the program's data system lacked
data fields and reporting capabilities that VA needed to
monitor program trends and staff performance. By developing
performance measures and addressing the shortcomings in its
data system, VA would be in a better position to assess the
effectiveness of its recent changes to the verification process
and to determine whether additional actions are needed.
---------------------------------------------------------------------------
\2\ GAO-13-95.
4. GAO has done previous reports on both SBA's and VA's
certification and verification programs, and both indicated
problems with fraud. Could you tell us more about the
---------------------------------------------------------------------------
challenges you found?
The Small Business Administration (SBA) and VA have taken
various actions in response to deficiencies we identified in
their certification and verification programs, but both
continue to face challenges in establishing internal controls
that provide reasonable assurance against program fraud and
abuse. For example, in June 2008, we reported that the
mechanisms SBA used to certify and monitor HUBZone frims
provided limited assurance that only eligible firms participate
in the program.\3\ We found that SBA verified information
reported by firms at application or during recertification only
in limited instances. We also found that SBA was not following
its policy of recertifying all firms every 3 years. In a
subsequent report, we noted that weaknesses in SBA's
eligibility review process for the HUBZone program allowed
bogus firms to be certified based on fradulent information.\4\
Specifically, our testing revealed that SBA did not adequately
authenticate self-reported information--especially as it
pertained to information regarding whether a firm's principal
office location met program requirements.
---------------------------------------------------------------------------
\3\ GAO, Small Business Administration: Additional Actions Are
Needed to Certify and Monitor HUBZone Businesses and Assess Program
Results, GAO-08-643 (Washington, D.C.: June 17, 2008).
\4\ GAO, Small Business Administration: Undercover Tests Show
HUBZone Program Remains Vulnerable to Fraud and Abuse, GAO-10-759
(Washington, D.C.: June 25, 2010).
We also identified weakenesses in SBA's 8(a) program and
VA's service-disabled veteran-owned small business program that
allowed ineligible firms to participate in those programs.\5\
For example, we found that SBA relied heavily on self-reported
information from 8(a) program applicants during the initial
certification and annual reviews, particularly in evaluating an
individual's adjusted net worth and total assets, with limited
data validation performed after firms entered the program. As I
noted in my March 2013 statement, VA has instituted a number of
significant changes to its verificationn process to improve and
address program weakenesses but continues to face challenges in
its efforts to establish a stable and efficient program to
verify firms on a timely and consistent basis.\6\ These
challenges are directly related to shortcomings in strategic
planning and data systems for the verification program. One of
the fundamental challenges that both SBA and VA face is
balancing the inherent tension between the need to establish
effective internal controls to prevent ineligible firms from
participating in their programs and the goal of facilitating
access to federal contracting opportunities for the intended
targets of these programs.
---------------------------------------------------------------------------
\5\ See, for example, GAO, 8(a) Program: Fourteen Ineligible Firms
Received $325 Million in Sole-Source and Set-Aside Contracts, GAO-10-
425 (Washington, D.C.: Mar. 30, 2010) and GAO, Service-Disabled
Veteran-Owned Small Business Program: Fraud Prevention Controls Needed
to Improve Program Integrity, GAO-10-740T (Washington, D.C.; May 24,
2010).
\6\ GAO, Veteran-Owned Small Businesses: Planning and Data System
for VA's Verification Program Need Improvement, GAO-13-425T (Mar. 19,
2013).
5. Mr. Shear, as we go forward, what aspects do you
---------------------------------------------------------------------------
consider crucial to a successful verification program?
Based on our evaluation of VA's verification program, we
recommended that VA (1) continue to develop, refine, and
implement a formal strategic plan to provide a comprehensive
framework to guid, integrate, and monitor the verification
program's activities over time (including incorporating longer-
term goals, objectives, and outcome measures for the
verification program and sharing the plan with key
stakeholders); and (2) integrate its efforts to modify or
replace the verification program's data system with the broader
strategic planning effort to ensure that the new system not
only addresses the short-term needs of the program but also can
be readilky adapted to meet long-term needs. In both our audit
work and our recommendations, we focused on strategic planning
because VA did not have a stable process in place that would
have enabled the agency or us to test how well the process was
working. Therefore, beyond taking actions to put a stable
process in place--such as actions needed to obtain an effective
data system, which is a major challenge itself--VA needs to
develop effective ways to monitor the verification program's
activities over time. In particular, VA will need to collect
information that reflects the quality of verifications carried
out by its staff and contractors so it can test how well a new
process is working. In doing so, VA would put itself in a
better position to manage any tradeoffs between providing
reasonable assurance that only eligible firms are verified and
that all eligible firms are verified on a timely and consistent
basis.
Subcommittee on Contracting and Workforce, Committee on Small Business
Subcommittee on Oversight and Investigations, Committee on Veterans'
Affairs
Hearing: ``Consistently Inconsistent: Challenges for Service-Disabled
Veteran-Owned Small Businesses,'' March 19, 2013.
Questions for the Record - John Shoraka, Associate
Administrator, Government Contracting and Business Development,
U.S. Small Business Administration
1. In the letter from Mr. Shoraka included on page 56 of
the Government Accountability Office (GAO) Report, Veteran-
Owned Small Businesses: Planning and Data System for VA's
Verification Program Need Improvement (2013) (GAO-13-95), Mr.
Shoraka states that there are statutory, procedural and
interpretive differences between the Small Business
Administration (SBA) government wide contracting program for
service-disabled veteran-owned small businesses (SDVOSBs) and
the Department of Veterans Affairs (VA) SDVOSB program.
Specifically, the letter cites the disparate treatment of
surviving spouses as the statutory difference between the
program; the protest process as the procedural difference
between the programs; and concludes that ``while it is true
that the wording of the regulations is similar, there are some
key differences in interpretations.'' Please enumerate and
explain:
a. Any other statutory differences between the
programs;
A key statutory difference between the VA program and
the SBA program is that the VA program is a statutorily
required verification program, whereas the SBA program
permits self-certification. Additional statutory
differences include the VA allows eligibility for firms
owned and controlled by surviving spouses and the VA
has a VetFirst contracting preference.
b. Any differences between 13 C.F.R. Sec. Sec. 125.8-
125.29 and 38 C.F.R. Sec. 74;
The differences between the rules are outlined in the
attached chart.
c. Any differences between 13 C.F.R. Sec. 124 and 38
C.F.R. Sec. 74;
See above referenced chart.
d. Any interpretative differences between the VA and
SBA programs, including which differences SBA considers
key.
It is difficult to summarize the interpretive
differences between the VA and SBA programs because we
are not aware of situations where the exact same firm
was found to be eligible under one program and not
eligible under the other program. Each case is
different. An example of a known difference in
interpretation is how the VA handles restrictions on
sale and transfer of ownership. Prior to the Miles
decision, the VA appeared to not allow any restrictions
on sale or transfer. As a result of Miles, the VA may
now allow any and all restrictions on sale and
transfer. In contrast, SBA examines restrictions on
sale and transfer as one component of control
eligibility requirements, along with other factors. SBA
makes a determination as to whether the Veteran owns
and controls the firm based on a review of the totality
of circumstances for the applicant firm. It is
difficult to say which restrictions are allowed and
which are not, because restrictions vary from case to
case. Over time, SBA's decisions are reviewed on appeal
and SBA has published appeal decisions that the public
can use as guidance.
2. GAO was told by SBA officials that there were not any
major differences in the VA and SBA regulatory eligibility
requirements or the interpretation of these regulations.
However, in SBA's official comments, Mr. Shoraka stated that
there were key differences in how the agencies interpreted the
regulations. Does this highlight a disconnect between what is
happening on the ground and what management sees as policy?
The key difference between the SBA program and the VA
program is the fact that the SBA program is a protest-based
self-certification program and the VA program is a front-end
certification program. This difference is significant from the
perspective of the public, as the timing of documentation
requests, eligibility process, and options for recourse are
very different when the VA and SBA programs are compared.
However, the regulations for each program are very similar. As
we have already highlighted above, there are statutory
differences (e.g., surviving spouse) and differences in
interpretation in specific fact scenarios (e.g., restrictions
on sale and transfer). Procedurally, at SBA a protest decision
may be appealed to another office where an Administrative Judge
reviews the decision on a clear error of fact or law standard.
3. How could collaboration between SBA and VA prior to the
implementation of VA's program aided the process and prevented
the problems that currently exist?
I cannot speak to the degree of collaboration between SBA
and VA during the period VA was developing their program, as
the program was established prior to my time at SBA. There can
be differences in interpretation within the same agency.
Certainly, there can be differences in interpretation between
two agencies. The purpose of both programs is to ensure that
the benefits of the programs flows to the intended
beneficiaries.
4. What does SBA believe are the advantages of SBA's appeal
process to the Office of Hearings and Appeals?
Key advantages of an independent appellate review process
include: published opinions; established precedent; and a
transparent process overseen by an impartial third party. These
benefits lend credibility not only to the appeal decision, but
also the original decision.
5. In his written testimony, Mr. Shoraka emphasized that
SBA's cases are made on a case-by-case, fact-specific basis, so
there is rarely one factor contributing to a firm's denial.
What do you see as the advantages of such a system? Do you
think VA is attempting to adopt ``bright line'' tests? Do you
think such tests are in keeping with the SBA's rules and
regulations interpreting the Small Business Act?
The goal of both programs is to determine whether the
Veteran owns and controls the firm. Making these determinations
involves a thorough process that may require the analysis of
voluminous documentation, which may include articles of
incorporation, bylaws, tax returns, bank statements, loan
arrangements, leases, financial statements, resumes, licenses,
etc. It is difficult to draft rules to address each specific
ownership and control scenario, which is SBA's basis for a
case-by-case approach for determinations.
6. What role did SBA play in the preparation and issuance
of VA's VAB ``Applicant Must Meet Small Business Definition?''
I am not aware of any role as the program was established
before my time at SBA. However, the VA recognizes that only SBA
can determine size in connection with a specific government
contract. SBA has authority to render size determinations in
connection with another agency's programs (13 CFR 121.901).
7. Both statutes state that a firm's status as a service-
disabled veteran is to be determined by VA's definitions, but
that whether a firm is a small business should be based on the
Small Business Act. Thus, if the VA is applying SBA's rules
differently than SBA, isn't VA usurping SBA's authority?
Only SBA can determine size, absent specific statutory
authority to the contrary. The VA recognizes that only SBA can
determine size for a specific government contract. Only the VA
can address whether it is issuing size decisions and denying
access to its program based on size.
8. What is the educational or professional background of
the SBA employees who perform the program certification for the
8(a) program?
The skills required to perform program certifications for
the 8(a) program are broad based and include such abilities as
critical thinking, financial analysis capability, strategic
thinking, understanding of organizational structures,
government contracts etc. These skills can be obtained in a
variety of professions and are commonly found in business
curriculums and legal curriculums at the higher education
level, therefore the SBA employees that perform this function
largely have legal and graduate level business backgrounds.
9. In VA's verification program, the ratio of federal
employees to contractors is as high as 1 to 24. How does VA's
reliance on contractors compare with SBA's approach to
verification in other programs?
HUBZone: SBA does not currently rely on contractor support
for the purposes related to the HUBZone certification process.
SBA currently has a staff of 20 Federal employees that are
responsible for initial certification and continuing
eligibility reviews of HUBZone firms.
The HUBZone office had contractor support prior to FY2013.
It is difficult to make comparisons of ratios of contractor
staff to federal staff between the HUBZone program and the VA
program, as we do not fully know the ways the VA contractor
staff support the VA federal staff.
During the period of contractor support of the HUBZone
office, the contractors specifically managed complex
administrative functions and staffed a HelpDesk. In 2009,
following a critical change in the business process of
reviewing HUBZone initial applications, the HUBZone program
hired contractors to assist with the processing of initial
applications. These contractors were hired to supplement the
existing federal staff in performing a more rigorous level of
eligibility review to include full documentation. Additionally,
the HUBZone program underwent a reengineering of their
certification process. After the application process
transitioned to the new workflow, the program discontinued use
of contractors. In FY 2013, the HUBZone office increased the
total number of Federal staff to 20 engaged in the review
process. This was a direct result of cost savings analysis and
in-source justification performed by the agency based on the
use of contractors from 2009-2011.
8(a) Business Development: SBA does not rely on contractor
support for the purposes related to the 8(a) eligibility review
process. SBA currently has a staff of eighteen employees that
are responsible for certification of new applicants into the
8(a) program.
10. In order to reduce fraud and abuse in the system,
Administrator Mills has previously testified that SBA would
work with the VA to get an SDVOSB certification process in
place for SBA's program. However, we have yet to see any
concrete steps taken towards this goal. What steps the SBA has
taken in process and when we can expect to see a credible
certification process in place this program?
In previous testimony, Administrator Mills referenced the
collaboration between SBA and VA in several areas to improve
alignment of the SBA and VA programs. The SBA has collaborated
with VA to help identify best practices in mitigating fraud,
waste and abuse in government contracting programs. We have
provided VA with insight into our processes and procedures for
mitigating fraud, waste, and abuse and have shared insight into
the development of data systems that support programmatic
efficiency.
11. What steps has SBA taken to educate agencies
government-wide about the differences between the VA's and
SBA's programs, specifically the difference of eligibility
requirements for contract award?
Contracting officers should understand that the SBA SDVOSB
Program is intended for government-wide procurement from
SDVOSBs, whereas the VA Program is intended for firms seeking
to do business with the VA. SBA is collaborating with the
Office of Federal Procurement Policy to issue reminders via an
acquisition alert regarding the differences in the requirements
of the programs. Additionally, SBA has created modules for
contracting officers at SBA's online government contracting
learning portal, the Government Contracting Classroom
(www.sba.gov/gcclassroom). We are seeking to cross post or
incorporate these courses into the courses available to
contracting officers via the Federal Acquisition Institute
(FAI) and Defense Acquisition University (DAU).
12. What steps has SBA taken to ensure that SDVOSB's are
not prevented from competing on an SDVOSB contract outside of
the VA solely because they are not certified through the CVE
program?
When SBA is alerted to this scenario, we inform the
contracting officer that CVE certification is not required in
order to compete for an SDVO set-aside under the Small Business
Act. There are published OHA decisions which we share with
agencies. The Federal Acquisition Regulation (FAR) is clear
that the SDVO program is a self-certification program. See FAR
19.1307, 19.1403, 52.219-1, 52.219-27.
13. If the underlying statutory differences between the SBA
and VA program were resolved, would the program be able to
function using the same regulations for eligibility purposes?
Yes, but that does not mean the VA or SBA would not apply
those regulations differently to a specific fact situation.
14. At the hearing, Mr. Leney stated that SBA would charge
VA $1 million to verify 40 SDVOSBs. What was the basis of these
numbers? Based on the costs of running the 8(a) Business
Development Program and the HUBZone Program, what does SBA
estimate it would cost to manage VA's verification program?
I cannot speak for the basis of Mr. Leney's numbers, but
negotiations between the SBA and VA focused on SBA processing
protests and appeals, not certification. We would need
additional information such as SBVOSBs application volume,
recertification efforts and program size to forecast the cost
to manage VA's verification program.
15. At one time, SBA and VA negotiated to have SBA manage
VA's verification process. What became of those negotiations?
SBA and the VA entered into discussions pertaining to
processing protests and appeals, not certification. The
agencies were unable to reach agreement on compensation, and no
further discussions are scheduled.
16. VA's procurement regulations (48 C.F.R. Sec. 819.307)
state that ``For acquisitions under the authority of subpart
819.70, upon execution of an interagency agreement between VA
and the SBA pursuant to the Economy Act (31 U.S.C. 1535),
regarding service-disabled veteran-owned or veteran-owned small
business status, contracting officers shall forward all status
protests to the Director, Office of Government Contracting (D/
GC), U.S. Small Business Administration (ATTN: VAAR Part 819
SDVOSB/VOSB Small Business Status Protests), 409 3rd Street,
SW., Washington, DC 20416, for disposition.'' This regulation
was promulgated December 8, 2009. However, it is clear based
upon the recent Court of Federal Claims decisions that no such
interagency agreement has been executed. What is the status of
this interagency agreement?
See above response to question 15.
17. Likewise, 48 C.F.R. Sec. 819.307 states that ``Except
for ownership and control issues to be determined in accordance
with 38 CFR part 74, protests shall follow the procedures set
forth in FAR 19.307 for both service-disabled veteran-owned and
veteran-owned small business status.'' However, pursuant to
Section 3(a)(1) of the Small Business Act, ownership and
control are two of the three statutory requirements for
qualifying as a small business (``a small business concern . .
. shall be deemed to be one which is independently owned and
operated and which is not dominant in its field of
operation''). As Section 3(a)(2) states, standards and
interpretations of these factors are vested in the
Administrator for purposes of the Small Business Act or any
other Act. Therefore, how is VA permitted to make independent
determinations regarding ownership and control?
Ownership and control for size is different than ownership
and control for status. When SBA conducts a formal size
determination it is trying to determine whether a firm is
affiliated with another firm and if that affiliation would
render the firm in question other than small. When SBA reviews
a firm for SDVO status, it is seeking to determine whether the
Veteran owns and controls the firm. Consequently, a firm may be
found to be ineligible under one program but eligible under the
other.
18. When SBA admits a firm to the 8(a) program, SBA has
verified that the firm is a small business owned and controlled
by a socially and economically disadvantaged individual. In
making that determination, does SBA look at whether the firm is
itself a small business, or only whether the ownership and
control of the firm is by a qualifying individual?
When making a determination of 8(a) BD program eligibility,
SBA evaluates an applicant pursuant to the relevant provisions
set forth in 13 CFR Sec. 124. These regulations stipulate that
to be eligible to participate in the 8(a) BD program the
applicant concern must be small and must be at least 51%
unconditionally owned and controlled by a socially and
economically disadvantaged individual or individuals.
Therefore, in conducting its eligibility analysis SBA
determines whether the applicant concern is a small business in
the primary industry in which it is seeking certification and
whether the concern is at least 51% unconditionally owned and
controlled by socially and economically disadvantaged
individuals. Additionally, an 8(a) participant's size can
always be protested in connection with any competitive 8(a)
set-aside or other competitive set-aside procurement.
19. SBA's SDVOSB self-certification process has been
criticized as leaving the door open for fraud. Please comment
on this criticism, and on the relative merits of contract-
specific protests versus general certifications. Is the SBA
undertaking efforts to put additional checks and balances in
place to make the SBA's SDVOB certification less vulnerable to
fraud?
There is a risk of fraud in any government contracting
program, including those where certification is required. There
are significant costs to certifying all firms that may be
interested in winning a government contract versus reviewing
the limited number of firms that have been awarded a government
contract on a protest basis. This trade-off must be considered
when making a determination as to whether funds and resources
will be made available for a full certification program. Firms
and individuals that misrepresent their status may be subject
to civil and criminal penalties, as well as debarment and
suspension from government contracting. SBA has debarred or
suspended more firms from government contracting in the past 4
years than it did in the previous 10 years, and individuals
have been convicted and sentenced to prison for
misrepresentations in connection with SBA's programs.
20. Please describe SBA's interactions with VA regarding
SDVOSB verifications, and assess of how much the agency has
contributed to progress made by VA in developing processes and
a data system for verification.
SBA and the VA have met to discuss the regulations for the
various programs, and the differences in interpretation. SBA
and the VA have also met to discuss the 8(a) Business
Development Program's business processes, regulations and
information about IT requirements. Most recently SBA involved
VA in usability testing of some of the workflows supporting
business processes associated with the 8(a) and HubZone
programs.
21. Please provide information on the staffing levels,
costs, and caseloads associated with each of SBA's
certification programs.
HUBZone:
FY13 HZ = 20 FTEs - of these 11 are 100% dedicated
to evaluating initial and continuing eligibility
actions; 2 provide Admin Support to the initial and
continuing unit; 3 dedicate 75% of their time towards
evaluations; and 1 provides 25% management support
towards the evaluation unit. 3 provide program
management and leadership guidance and to include
various infrastructure elements such as website, maps,
marketing, etc.
Annual case load averages approx. 5,000 actions
(includes: initial apps, material changes, re-
certifications, program examinations, protests,
proposed decertification, and decertification actions)
8(a) Business Development
FY13 BD = 27 Headquarter FTEs - of these 14 are
100% dedicated to evaluating initial and continuing
eligibility determinations; 5 provide Admin Support and
perform screenings for the initial application unit and
the continuing eligibility unit; and 5 provide 100%
management support, program management and leadership
guidance to include various infrastructure elements
such as website, marketing, etc. District Office staff
are leveraged to perform annual reviews of program
participants consistent with the Small Business Act.
Annual case load averages approx. 11,500 actions
(includes: initial apps, continuing eligibility
reviews, early graduations, voluntary withdrawals,
terminations, changes of ownership etc.)
22. SBA uses a 3 year recertification cycle for HUBZone
firms. How did SBA decide that three years was the appropriate
time frame?
In 2004, SBA amended 13 CFR 126.500 concerning continued
eligibility in the HUBZone program. Before 2004, a qualified
HUBZone SBC recertified annually. SBA believed that such an
annual recertification was burdensome to SBCs and changed the
timeframe to every three years. SBA considered that the program
examination process and protest mechanism effectively eliminate
concerns that SBCs are not eligible. SBA also believed that
three years was a reasonable period of time to give effect to a
HUBZone certification.
Additionally, HUBZone regulations and the FAR require that
a firm must be a qualified HUBZone SBC both at the time of its
initial offer and at the time of award in order to be eligible
for a HUBZone contract. The HUBZone offeror must provide to the
Contracting Officer a copy of notice required by 13 CFR 126.501
if material changes occur before contract award that could
affect its HUBZone eligibility. In other words, the offeror for
a HUBZone contract is required to notify the Contracting
Officer if it is not in compliance with HUBZone eligibility
criteria. The HUBZone regulations also provide a protest
mechanism in connection with awards of HUBZone contracts (13
CFR Subpart H - Protests). Through a robust recertification
process, requirements of notification of material changes, and
the protest process. the HUBZone program mitigates instances of
firms misrepresenting their status.
23. Please explain the differences in the application
process for the 8(a) program and the VA's SDVOSB program, with
special emphasis on factors only required for one program or
the other.
While the processes for both certification programs are
somewhat similar there are some noteworthy differences. The
application process for VA's SDVOSB is comprised of five
distinct phases, Initiation, Examination, Evaluation,
Determination, and Reconsideration, while the SBA process has
three phases, Screening, Processing and Reconsideration. The
three phased approach by SBA is driven by statute. During the
SBA's process applicants are allowed to provide additional
supporting documents and/or explanations as the process is
considered iterative while the SDVOSB application once
submitted cannot be changed. When a reconsideration request is
submitted as a part of the SDVOSB application process new
information can be submitted by the applicant at that time. The
8(a) program incorporates administrative procedures where
applicants can request review by an Administrative Law Judge
when declined under certain conditions while the SDVOSB does
not.
24. While the recent Court of Federal Claims decision in
Miles Construction, LLC v. United States, No. 12-597C (Fed. Cl.
2013) is not binding on SBA, it does speak to the SBA's
position on transfer restrictions. Does SBA anticipate
revisiting its regulations or policies in light of the Miles
decision?
Decisions of the Court of Federal Claims apply to the facts
of those cases and do not bind other Judges on the Court of
Federal Claims. While the Court discussed some of SBA's
decisions, it did not rule on the merits of those decisions.
The facts in the SBA decisions that the Court discussed are
distinguishable from the facts in the Miles decision. SBA will
continue to review each specific factual scenario when making
its decisions, and does not intend to change its regulations
based on Miles.
25. Are the SBA and VA planning to align their
certification processes to eliminate confusion for veterans
when certifying as a SDVOB?
Congress created two separate programs: a government-wide
self-certification protest-based program based on the Small
Business Act, and a VetFirst program specific to the VA that
requires certification by the VA. The VA has tried to align its
regulations to SBA's regulations to the extent possible. There
will always be the potential for differences of interpretation
based on specific factual scenarios, but both agencies attempt
to ensure that the benefits of the programs flow to the
intended beneficiaries.
26. Mr. Shoraka, based upon your experience, what would you
say the VA needs to do to improve the way it certifies veteran
businesses?
I believe that the VA's recent announcement of a screening
process to assist applicants when they first submit materials
will help veterans develop a better understanding of the VA
verification process. Additionally, a transparent and
independent appellate review process would provide firms with a
clear path for recourse.
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3Opening Statement of Congresswoman Herrera Beutler
Consistently Inconsistent: Challenges for Service-Disabled
Veteran-Owned Small Businesses
Tuesday, March 19
Statement
I think we all agree we need to prevent contracts intended
for service-disabled veteran-owned small businesses (SDVOSB)
from going to firms that don't qualify for the program.
However, both the VA and SBA SDVOSB certification processes are
flawed. SBA's self-certification is quick and has the advantage
of allowing nearly 13,000 SDVOSBs to almost immediately begin
competing for contracts. It also provides for a timely and
transparent process for stakeholders to protest if they believe
the firm does not qualify for the program. While it is an
efficient program, it may not be as effective as the VA at
preventing fraudulent companies from taking advantage of the
program.
On the other hand, VA's verification process takes an
average of 85 days for the initial verification process and 147
days on appeal. In addition, VA's SDVOSB program has 4,102
SDVOSB currently certified, but VA uses over 200 FTEs and
spends $33 million per year to run the program. It's not clear
that adding more employees and providing additional funding are
the answers--but it's clear that a fix is needed.
Unfortunately, both of these programs are vulnerable to
fraud. This is a shame, because our nation needs this program
to assist our veteran business owners. I am pleased this
hearing is addressing this important issue today.
I have heard from a number of Service-Disabled Veteran
Owned Small Businesses in my district on this issue. They are
frustrated with the overly-burdensome VA certification process.
Some are also confused by the inconsistency between the two
program; they are certified as a SDVOSB through SBA, but not
through VA. Often, it is not until they are interested in
competing for a VA contract, they realize they are ineligible.
What complicates this matter is that small businesses are
working with limited resources. One veteran owned business in
my district began the process to get certified by VA almost
four years ago. He has completed many transactions while
growing this business--he's taken out many loans, a million
dollar credit line, 5 to 10 million in bonding aggregate, etc.
Never before has he had to go through the time- and resource-
consuming process of providing this level of detail about his
financial status and personal information. He has been forced
to start the entire registration process over multiple times to
address minor problems, and has repeatedly been forced to
provide additional information. There is no leeway on timing
and if he has questions, he's received little to no guidance or
assistance.
I am very pleased VA is taking a real serious stance in
order to stop companies from illegally obtaining contracts by
falsely claiming the SDVOB status. I support accountability
measures and hope there are severe repercussions for those who
are caught abusing the system. On the other hand, however, the
process for certifying with the VA must be streamlined and
shortened. While the process should be effectively keeping out
fraudulent applicants, unfortunately in its current form it is
keeping out legitimate Service-Disabled Veteran Owned Small
Businesses. This needs to change.
NINETY-FOURTH NATIONAL CONVENTION
OF
THE AMERICAN LEGION
Indianapolis, Indiana
August 28, 29, 30, 2012
Resolution No. 323: The Status of Service-Disabled Veteran-Owned
Business after the Death of the Veteran Owner
Origin: Convention Committee on Other Economic
Matters
Submitted by: Convention Committee on Other Economic
Matters
WHEREAS, Public Law No. 109-461 passed in December 2006
created additional benefits for surviving spouses who inherit
service-disabled veteran-owned businesses; and
WHEREAS, The intent of the law was to ensure that a
business owned by a veteran that received contracts based on
the service-disabled veteran-owned business status did not
suffer because the veteran died; and
WHEREAS, Spouses are able to retain the service-disabled
veteran-owned business status for up to 10 years if the veteran
owned at least 51 percent of the company before their death;
and
WHEREAS, The law passed in December 2006 only took into
account the veteran who returned disabled; consequently, it
left a large gap in those servicemembers who owned businesses
who were killed in the line of duty; and
WHEREAS, Public Law 109-461, in its treatment of businesses
after death of veteran-owner, neglected to take into account
Reservists and National Guard members who owned businesses
before their activation; and
WHEREAS, Public Law 109-461 only transfers service-disabled
veteran-owned business status to the surviving spouse of a
veteran who acquires ownership rights in a small business if
the death of a veteran causes a small business to be less than
51 percent-owned by one or more veterans; and
WHEREAS, The transfer of status in the period beginning on
the date on which the veteran dies, only applies to a surviving
spouse of a veteran with a service-connected disability rated
as 100 percent disabling or a surviving spouse of a veteran who
dies as a result of a service-connected disability; now,
therefore, be it
RESOLVED, By The American Legion in National Convention
assembled in Indianapolis, Indiana, August 28, 29, 30, 2012,
That The American Legion support amending Public Law 109-461 to
read that if any disabled veteran who owns a certified service-
disabled veteran-owned business dies, (regardless of his/her
disability at the time), their business inherited by their
spouse/dependent will retain the service-disabled veteran-owned
business status in conjunction with Public Law 109-461; and, be
it further
RESOLVED, That The American Legion supports that if any
servicemember, to include those who were mobilized in the
National Guard or Reserve, is killed in action and owns at
least 51 percent of a business prior to his/her death, the
business bequeathed to their spouses/dependents must be granted
service-disabled veteran-owned business status for reason of
preference in federal contracts; and, be it finally
RESOLVED, That The American Legion supports any
administrative or legislative effort that will improve and
increase the benefits bequeathed to the veteran's spouses or
dependents upon a veteran business owner's death.
Opening Statement
Chairman Mike Coffman
Subcommittee on Oversight and Investigations
``Consistently Inconsistent: Challenges for Service-Disabled Veteran-
Owned Small Businesses''
March 19, 2013
Thank You, Chairman Hanna, for yielding, and thank you also
to your subcommittee for holding this joint hearing.
The problems with VA's SDVOSB certification program are,
sadly, not new ones. The Veterans' Affairs Committee had
several subcommittee hearings during the last Congress on the
issue, but improvements within the program seem to be slow in
coming.
My subcommittee continues to frequently hear from SDVOSBs
and their advocates regarding what should be a straightforward
process for veterans attempting to do business with VA. While
the verification process at CVE has improved and helped weed
out some bad actors, it is abundantly clear that there's still
a long road ahead.
One topic discussed at length in the 112th Congress was
VA's definition of ownership and control of a small business.
Despite the Committee's bringing this problem to VA's
attention, VA's definitions retain some key differences from
the Small Business Administration, and the effect of these
differences has been a self-induced backlog of legitimate
companies attempting to get certified through CVE and do
business with VA.
The fact that VA's different interpretations of what
constitutes ownership mean that an individual could be
recognized as a veteran small business owner with one
government agency but not with VA should raise everyone's
eyebrows. However, that's the reality that some veterans face
today, including service-disabled veterans. SBA has had
commonsense requirements for what constitutes an SDVOSB in
place for a long time. While VA's intent may be in the right
place, its regulatory and interpretive actions have put many
eligible veterans at a disadvantage.
We still need to get this right. If we are going to enable
our veterans who sacrificed for this country to do business
with the federal government, and if VA is going to set the
standard for recognizing the commitment of these same veterans,
then a straightforward, common-sense process needs to be in
place.
It is my sincere hope that, down the road, we are not still
discussing the same issues. The time for conversation is past,
and it is time to take action, fix the problems, and move on. I
understand that the system will never be perfect, nor is there
one simple answer. However, after all the years that have
passed since this program was set up, and the resources that
have been added to CVE, it is reasonable to expect that we
would be further along than we are today.
I yield back.
Honorable Jackie Walorski
HVAC ONI Hearing - ``Consistently Inconsistent: Challenges
for Service-Disabled Veteran-Owned Small Businesses''
Mr. Chairman, it's an honor to serve on this committee.
I thank you for holding this hearing on such an important
issue for our veterans. As our service members transition into
civilian life, we must remain steadfast in our commitment to
provide these soldiers with the necessary skills for
employment. For the entrepreneurial-minded soldiers, we must
work to remove redundant and archaic bureaucratic barriers.
Members of the military are disciplined, determined, and
are known for their ability to lead. These attributes are
critical in the world of business, and, as a result, it is not
surprising that veterans operated over 2.4 million nonfarm
businesses accounting for 9.0 percent of all nonfarm businesses
in the United States in 2007.\1\ Hoosier veterans owned
approximately 46,000 firms in this same period.\2\
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\1\ U.S. Small Business Administration, 2007 Survey of Business
Owners - Veteran-Owned Firms, http://www.census.gov/econ/sbo/
getsof.html?07veteran
\2\ U.S. Small Business Administration, Summary Statistics for
Veteran-Owned Firms by State: 2007, http://www2.census.gov/econ/sbo/07/
final/tables/vet--table1.pdf
We know what veterans are capable of, but that is not why
we are here today. The Veterans Administration has done great
work in improving its ability to assist and equip veterans in
terms of establishing and growing a business; however, there is
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still room for improvement.
I look forward to working with my colleagues and our
panelists, today, to identify the issues which confront
service-disabled veteran-owned small businesses.
Thank you.