The subcommittees met, pursuant to notice, at 10:07 a.m., in Room 334, Cannon House Office Building, Hon. Bill Johnson [chairman of the subcommittee] presiding.

Present from Subcommittee on Oversight and Investigations:  Representatives Johnson, Donnelly, and Barrow.

Present from Subcommittee on Economic Opportunity: Representatives Stutzman, Bilirakis, Amodei, and Walz.

OPENING STATEMENT OF CHAIRMAN JOHNSON, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

Mr. JOHNSON.  Well, good morning.  This hearing will come to order.

I want to welcome everyone to today’s follow-up hearing on the VA’s service-disabled veteran-owned small business certification process. 

I thank the Members of the Subcommittee on Economic Opportunity for their participation today and their efforts in improving the process for veteran-owned and service-disabled veteran-owned small businesses to do business with the VA.

 In July, we held a hearing on this certification process.  And at that time, Mr. Tom Leney was relatively new to his position as the executive director of Small and Veteran Business Programs at VA’s Office of Small and Disadvantaged Business Utilization commonly referred to as the OSDBU.

At that hearing, we promised a follow-up discussion with Mr. Leney to see how his planned improvements for the process and certifying veteran-owned small businesses had been implemented after several months.

Today is that follow-up.  I look forward to hearing of the progress made toward achieving these goals and how much longer it will be until the goals are finally realized.

I also have concerns regarding recent actions taken by the VA’s senior procurement executive in response to the recent GAO Aldevra decision which states that the VA should make efforts to contract with veteran-owned small businesses when feasible and in accordance with the Veterans First Contracting Program.

GAO recently upheld a bid protest filed by the Aldevra business on a VA contract and recommended that VA rebid that contract.  Despite clear legislative and committee report language outlining the intent of the Veterans First Contracting Program, the VA decided that GAO’s decision would not apply to its contracting operations and that it would continue as it pleased, doing away with the preference for VOSBs and SDVOSBs in much of its contracting.

The VA has made it clear in correspondence and meetings following the Aldevra decision that it has no intention of attempting to clear up its own questions about Veterans First.  Despite acknowledging the problem, the VA is not trying to solve the problem nor did it even ask Congress or this committee those questions that needed to be answered years ago.

Even after the Aldevra decision and the VA’s response, efforts by these two subcommittees to help explain parts of the new law that the VA had trouble understanding several years after its passage were met with a lack of cooperation on the VA’s part.

Instead the VA is determined to run this through the court system eliminating key opportunities for VOSBs to contract with the Federal Government.

When the VA cannot or chooses not to implement clearly written legislation, we have a problem.  This is not rocket science.  The Veterans First Contracting Program exists to help the VA set the standard in Federal Government contracting with VOSBs and SDVOSBs.

With Congress and the Administration sharing a goal of increasing contracting with VOSBs and SDVOSBs, the Veterans First language facilitated the achievement of that goal.

The law contains clear wording on how the VA can achieve that goal while simultaneously helping our veterans do business and not hindering the VA in its contracting efforts.

With straightforward language such as the secretary shall give priority to a small business concern owned and controlled by veterans, it is difficult to understand the VA’s failure to correctly interpret this law which also provides reasonable accommodations when a VOSB or SDVOSB cannot fill the need.

We need to get this right.  The certification process must ensure that VOSBs and SDVOSBs are efficiently processed and certified.  We then must ensure that these same businesses are able to compete for the appropriate contracts.  Otherwise, there is no point in having these businesses in the system if the VA is going to ignore them.

I look forward to today’s testimony on improvements made in the certification process since our last hearing and the further improvements we can look forward to in the near future.  I also look forward to discussion on how we can make the actual contracting system with VOSBs and SDVOSBs work as it is intended.

I am, however, disappointed that the VA’s testimony barely touches on the Aldevra topic despite knowing for 30 days that it would be a part of this hearing.  This is no surprise to anyone.

And since the VA’s October meeting with committee staff, we have seen no great effort on the VA’s part to improve this situation.

I now yield to the acting ranking member, Mr. Walz, for an opening statement.

OPENING STATEMENT OF HON. WALZ, DEMOCRATIC MEMBER, SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

Mr. WALZ.  Well, thank you, Mr. Chairman, and to our witnesses for coming today, for holding this joint hearing.  I believe this follow-up hearing deserves this Committee’s full attention. 

And because small business concerns do overlap into the jurisdiction of Oversight and Investigation, we are certainly happy to work with the Economic Opportunity Subcommittee to ensure proper oversight.

The tough economic times that we are in make it as important as ever to properly address transparency, programmatic policy concerns, and thoroughly review the service-disabled veteran-owned small business or SDVOSB certification process.  Providing contracting opportunities to our deserving veterans through this process is important.

But when you have a successful program such as the VA’s Small Business Contracting Program and you are awarding millions of dollars, it potentially attracts unqualified businesses whose intentions are unfortunately to commit fraud.  This is why it is as important as ever for the VA to implement and enforce fraud prevention measures.

During this joint hearing, I look forward to look at the following things:  An overview of the VA’s preventative measures and monitoring controls to minimize vulnerability or fraud; VA’s disbarment procedures; staff training to identify and monitor potential fraud; VA’s verification process such as how they verify SDVOSBs; and the process of conducting announced site visits.

These are just some of the items I have on today’s agenda.  I believe that unless we remedy these concerns, the same problems that have haunted this really important program and the problems with verification will remain.

I want to thank you, Mr. Chairman, for your leadership and I yield back.

Mr. JOHNSON.  I thank the gentleman for yielding back.

I now yield to the chairman of the Subcommittee on Economic Opportunity, Chairman Stutzman, for his opening comment.

OPENING STATEMENT OF HON. STUTZMAN, CHAIRMAN, SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

Mr. STUTZMAN.  Thank you, Chairman Johnson.

First, let me express my appreciation for offering to join forces on enabling service-disabled veteran-owned small businesses to compete for contracts with the Department of Veterans Affairs.

Let me begin by adding some context to why we are here today.  In 1999, the President signed legislation that became Public Law 106-50 which established a government-wide goal for all federal agencies to award three percent of their contract dollars to small businesses owned and controlled by service-disabled veterans.

Until that time, there was no goal for service-disabled veteran-owned small businesses or SDVOSBs.  Since then, there have been several laws and an executive order that made it clear that federal agencies are to make every effort to award at least three percent of their acquisition dollars to service-disabled veteran-owned small businesses.

This legislative effort has continued with the passage of two laws that established and reinforced Section 8127 of Title 38 to provide VA with special tools and priorities to meet and hopefully exceed the three percent goal.

By most indicators, the intent of Section 8127 has been met.  But meeting the three percent goal is not the sole intent of Section 8127.  Another goal is to establish a database of validated veteran and service-disabled veteran-owned small businesses that any government agency can access as part of their efforts to meet the three percent goal.  And that is why there are still significant problems.

Today, VA data shows contract awards exceeding 20 percent and I congratulate them for that effort.  However, the process in achieving those numbers has been painful at best.  Until recently, implementation of the database of validated veteran and service-disabled veteran-owned small businesses required by Public Law 109-461 has been less than professional to put it kindly.

The VA is still recovering from its initial reluctance to implement the law.  Its policy of allowing self-certification of ownership and control status instead of actively performing the validation function prescribed in the law was frankly a disaster.

As a result, as we will hear today, millions of contract dollars went to businesses that did not meet the veteran or disabled veteran-owned and controlled status.

I also find VA’s recent decision to ignore GAO’s finding in favor of a protest by Aldevra, a service-disabled veteran-owned small business, as evidence of a continuing reluctance to fully embrace the clear requirements of Section 8127.

The law does not require VA to set aside all contracts for SDVOSBs or award all contracts to SDVOSBs.  More importantly, nowhere in Section 8127 is there a provision exempting acquisitions using the federal supply schedule.

If nothing else, setting aside contracts using the FSS will provide VA contracting officers additional flexibility in meeting the SDVOSB goals.

Let’s assume for the moment that those who believe the provisions of Section 8127 go too far and that they give too much advantage to SDVOSBs are correct.  To those, I would point out the literally dozens of federal agencies who continue to fail miserably to meet even the three percent goal.

For example, DoD, the largest department in the Federal Government, awarded only 1.82 percent to SDVOSBs in fiscal year 2010.  I suspect DoD could do better if they limited janitorial awards to those SDVOSBs in that business.  So if VA is picking up part of the slack for the rest of the Federal Government, so be it.

Finally, my staff and I have been hearing with increasing frequency that many legitimate SDVOSBs are having an extremely difficult time being validated and several have even had to close down as a result.

While I understand that verification rules must be enforced to ensure non-SDVOSBs are kept out, there must be a balance.  I am interested to hear from Mr. Leney about how he can better strike this balance and expedite reconsideration for many of these small businesses.

I am also concerned about what happens to the very dubious arbitrary decisions to deny status to businesses by contractors hired to validate the ownership and control status.  And I suggest that may be as a result of a lack of clear regulations on things like survivorship and conflicts with state laws.

Thank you, Mr. Chairman, and I will yield back.

Mr. JOHNSON.  Thank you, Mr. Chairman, for being here.

I thought we were going to have a statement from your ranking member from your subcommittee, but I think he is not--

Mr. JOHNSON.  Yeah.

Mr. JOHNSON.  Okay.  Well, thank you both, for both subcommittees’ participation.

And I now invite the first panel to the witness table.  On this panel, we will hear today from Mr. Tom Leney, the executive director of Small and Veteran Business Programs at VA’s Office of Small and Disadvantaged Business Utilization.

Mr. Leney, your complete written statement will be made a part of the hearing record and you are now recognized for five minutes.

STATEMENT OF THOMAS J. LENEY, EXECUTIVE DIRECTOR, SMALL AND VETERAN BUSINESS PROGRAMS, OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION, U.S. DEPARTMENT OF VETERANS AFFAIRS ACCOMPANIED BY JOHN H. “JACK” THOMPSON, DEPUTY GENERAL COUNSEL, OFFICE OF GENERAL COUNSEL, U.S. DEPARTMENT OF VETERANS AFFAIRS

     Mr. LENEY.  Thank you, Chairman Johnson, Chairman Stutzman, Ranking Member Walz, and Members of the subcommittees. 

I want to thank you for inviting me to testify on the VA’s implementation of veteran-owned small business provisions in the Veterans Benefits Healthcare Information Technology Act of 2006 and the Veterans Benefit Act of 2010.

I would like to briefly summarize my statement for the record so we can address your questions and concerns.

The Vet First Program enables the VA to provide preferences to veteran small businesses.  VA has used this program to lead the Federal Government in contracting with veteran small businesses.

In the last fiscal year, the VA awarded more than $3 billion to veteran firms.  The VA far exceeded the procurement goals of three percent for SDVOSBs.  We also exceeded the higher VA goals of 12 percent for veteran small businesses overall, providing nearly 22 percent of our total procurement to veterans.

This is real money in the hands of veteran small businesses and it establishes the VA as a leader in this arena.

At the same time, the VA has actively implemented the statutory verification provisions that you have given us in Public Law 109-461 so that procurement preferences go only to legitimate firms.

I would like to update you on the progress VA has made to improve the verification program and our plans to continue improving it so that legitimate veteran businesses have greater access to VA procurement opportunities.

As promised, we have completed the removal of all non-verified firms from the vendor information pages three months ahead of schedule. 

When I last met with you in July, it took an average of 127 days to process an initial verification application.  We have now reduced that to 75 days.

In April, some applicants had waited months to receive word that there was an issue with their veteran or service-disabled, service-connected disability status.  Veterans now receive their status within 48 hours.

In response to valid complaints regarding lack of information on status of initial applications, we have established a policy that applicants receive updates at all key points in the process and the current standard for the CVE help desk to provide a response is one business day.

In addition, applicants can now receive an update on demand via vetbus.gov. 

Along with more frequent correspondence, we have launched our Verification Assistance Program to clarify the regulatory requirements and to explain the most frequent reasons for denial.

This program enables applicants to eliminate common errors up front and helps legitimate firms to receive favorable decisions more quickly.

In July, the GAO followed up its May 2010 evaluation of CVE verification and identified some challenges and vulnerabilities that the VA has since overcome.

Among the issues identified were training, use of site visits, and debarment of ineligible firms.

In addition to expanded internal training, CVE has initiated a program to train all of its staff members as certified fraud examiners. 

We reduced the potential for ineligible firms to become verified by creating a Risk Mitigation Program that requires high-risk firms to undergo a site visit in addition to a document review.

We have increased the number of site visits nearly ten-fold from calendar year 2010 to calendar year 2011.

We have also increased training of the acquisition staff.  In the past six months, we provided training to more than a thousand contracting officers.

The VA is serious about debarring companies who misrepresent their status.  VA has developed and formalized specific processes and criteria related to debarment.  They can be found on the VA Debarment Committee website.

It is important to note, however, that most firms that we find to be ineligible are not intentionally misrepresenting their status and are not committing fraud.

Those firms that do provide false information or material information are referred to the VA’s Office of Inspector General.

Mr. Chairman, we were also asked to address the October GAO decision upholding a bid protest by an SDVOSB.  My statement for the record addresses the VA acquisition policy position on the Aldevra decision.  And Jack Thompson, the VA’s deputy general counsel, is with me today to answer any questions you may have on that issue.

In conclusion, the VA Verification Program has made significant progress in the last six months.  We have overcome many of the challenges and vulnerabilities that were raised by the GAO and OIG reports.

And I am confident that we are protecting the integrity of the Verification Program.  We are not satisfied and we are not done improving the process.

Mr. Chairman and Members of the subcommittee, that concludes my statement.  I am pleased to answer any questions you may have.

[The statement of Thomas J. Leney appears in the Appendix.]

Mr. JOHNSON.  I thank you for your testimony.  And we will begin questions at this point.  And I begin with myself.

Mr. Leney, you state that VA has consistently interpreted the Vet First Program as VOSBs having priority over any other class of small businesses when VA is conducting full and open competition procurements.

In 2009 testimony, Jan Frye stated that the Vet First provisions are preferences in open-market contracting for veteran entrepreneurs. 

Can you outline for us the purchasing priority hierarchy at VA and explain where these VOSBs fall in the hierarchy?

Mr. LENEY.  Sir, there is hierarchy for procurement within the VA and within the Federal Government.  Vets have priority within all open-market purchases.

Mr. JOHNSON.  What priority?  Where do they fall in the hierarchy?

Mr. LENEY.  On the open-market purchases, they fall first.  They are first priority.

Mr. JOHNSON.  No, open market is like the eighth category in the priority.  Where do the VOSBs fall in VA’s hierarchy?  You are saying it is all the way down in open market?

Mr. LENEY.  Veteran-owned small businesses do not receive priority under FAR Part 18 purchases.  The acquisition policy related to these issues is--

Mr. JOHNSON.  Let me help you a little bit because I am not sure.  You are having trouble crafting your answer here.

In June 19^th of 2007 as written in VA’s information letter, VA expressed that Public Law 109-461 changes the priorities for contracting preferences within VA placing SDVOSBs and VOSBs first and second respectively in satisfying VA’s acquisition requirements.

On August 20^th, 2008 in the Federal Register, VA again noted that Public Law 109-461 requires the secretary to give priority to a small business concern owned and controlled by veterans.

If we go back to the June 20^th, 2007 testimony, this approach changes the small business hierarchy within VA placing service-disabled veteran-owned small businesses and veteran-owned small businesses first and second respectively in satisfying VA’s acquisition requirements.

And the Veterans Benefits Act, if we look at October 26, 2010, the United States Court of Federal Claims, the ANGELICA decision stated that in part the Veterans Benefits Act is a specific mandate to the department and only to the department to grant first priority to SDVOSBs and VOSBs in the awarding of contracts.

So let me ask you again.  Where do VOSBs and SDVOSBs fall in your current practice of priority within the Veterans Administration for contracting opportunities?

Mr. LENEY.  Mr. Chairman, the VA has an obligation to balance a number of objectives that you have provided.

Mr. JOHNSON.  Where Mr. Leney, I want a straightforward answer.  Where in the priority scheme do VOSBs and SDVOSBs fall? 

You said there is a priority and a hierarchy.  Putting them in open source which is the eighth category down is not first and second as previously identified in VA acknowledgment of the Title 38 requirements.

So straightforward answer.  Where do they fall?

Mr. LENEY.  Well, I appreciate the opportunity to become engaged in acquisition policy issues.  I am not the right person to answer that question directly.

Mr. JOHNSON.  Who is the right person?

Mr. LENEY.  It would be our chief of acquisition policy.  As an advocate for small businesses within the VA and my focus has been on helping small businesses by promoting the verification process and--

Mr. JOHNSON.  Well, you know, we started asking these questions 30 days ago.  And we were told that the people appearing before this subcommittee today would be able to answer those specific questions.

So, Mr. Thompson, you were the one that was identified as being able to answer those specifics.

Mr. THOMPSON.  Well, I--

Mr. JOHNSON.  Where do VOSBs and SDVOSBs fall in that priority?

Mr. THOMPSON.  Within department set-asides, service-disabled veteran-owned small businesses are number one.  Other veteran-owned--

Mr. JOHNSON.  That is not what Title 38 says.  It does not say for VA set-asides.  It says in the contracting acquisition process, they were to be placed as number one and number two.  And that has been acknowledged by the VA in the past.

Mr. THOMPSON.  Sir, I respectfully disagree.  VA has always been of the opinion that the correct interpretation of those Veterans First provisions is that within all set-asides, service-disabled veteran-owned businesses stay on top.

Mr. JOHNSON.  Well, Mr. Thompson, I would submit to you that that is contrary to what the GAO says. 

Where are you getting your authorization?  Where in the law does it say that it is based on set-asides and not the overall contracting requirements and provisions?  Give me a reference.  Where is the law?  Where in the law does it say that it is set-asides?

Mr. THOMPSON.  I believe you are referring to the issue in the Aldevra decision.

Mr. JOHNSON.  Partly.

Mr. THOMPSON.  And the reason VA attorneys, the principal reason VA attorneys are not persuaded by GAO’s Aldevra decision is because it does not contain analysis of all of the words of that statute.

The set-aside law provides that for purposes of meeting the secretary’s annual goals for contracting with VOSBs and SDVOSBs, the department shall set aside contracts for them if certain conditions are met.

I respectfully disagree that Congress said we are to use this set-aside authority in all cases, but rather as a tool for meeting the secretary’s goals.

GAO’s opinion did not discuss this important qualifier that Congress placed on this set-aside authority, that is it was to be used for purposes of meeting the secretary’s contracting goals.

As Mr. Leney noted in his opening statement, VA has more than met, it is surpassing the secretary’s small business contracting goals and, therefore, in our opinion, VA is meeting both the letter and the spirit of that Public Law.

Mr. JOHNSON.  Mr. Thompson, we are not so concerned about percentages as we are about process.  And the process according to the law and according to the GAO opinion is that SDVOSBs and VOSBs are not being considered in the right priority.  And how the VA can simply choose to ignore what the GAO is recommending, I would commend to the VA that that deserves much more scrutiny.

We have seen only a few examples in previous administrations where GAO findings were ignored or not followed.  And I can assure you that we have got lots of concerns about this.

The clock is now running, gentlemen, so I am not sure how long I have got, but I am going to yield to the ranking member for his questions.  We are going to have multiple rounds.  I have got lots of them, so we are going to be coming around again.

Mr. DONNELLY.  Mr. Leney, the SDVOSB contract accounting for $3.2 billion in government-wide contracts during fiscal year 2010, we verified the eligibility of 5,000 SDVOSB firms.

How many firms are in the queue that you are reviewing right now to become eligible?

Mr. LENEY.  Sir, we now have about 8,000 firms verified--

Mr. DONNELLY.  Okay.

Mr. LENEY.  --within the VIP.  And we have approximately 1,700 firms in the queue.

Mr. DONNELLY.  What has to be done to get those additional 1,700 firms certified and what is the time line that you are using on those?

Mr. LENEY.  Right now the time line for initial verification is on average, we are able to verify firms within 75 days which is a considerable reduction in time required.  About 95 percent of all firms are receiving an initial determination within the 90 day goal. 

So it is really a case of continuing the process and continuing to refine and improve the process.  We have applied additional resources to the verification process to ensure that we can meet those objectives.

Mr. DONNELLY.  In fiscal year 2011, the prime contracting goal for VOSB was 12 percent.  For SDVOSB, it was approximately 10 percent.

What is the impediment, if there is any, on bringing those numbers higher and to ensuring that our VOSBs have the opportunity to become even more a part of our contracting processes?

Mr. LENEY.  Well, the good news is with regard to those goals is we have substantially exceeded them.  In 2011, we gave more than 19 percent of our procurement dollars to SDVOSBs and almost 22 percent to VOSBs.  And even in our federal supply schedules, we gave 13 percent of our federal supply schedule dollars to veteran-owned firms. 

So we continue to attempt to identify maximum practical opportunities for small businesses, particularly veteran small businesses, to do business with the VA. 

Mr. DONNELLY.  What we would like to see is monthly data on the certification statistics and on what percentage is going to our VOSBs and SDVOSBs so we can see that the effort, the service given by our vets is being recognized and rewarded on the contracting portion as well.

Is that going to cause you any difficulty to make sure that we can get those on a monthly basis? 

As just indicated, my numbers were a little behind.  I’m thrilled to hear we are at 8,000, you know, hoping to push it to 9,000 because there are 1,700 in the queue. 

Is that something that you can provide us with, monthly numbers on that?

Mr. LENEY.  Yes.  We can provide reports as required to the committee on the status of verification.  In the last month, we verified an additional 116 firms.

One of the challenges that we are presented with is the reality that applications do not come in a consistent fashion.  And as we attempt to be good stewards of resources and apply our resources effectively--

[The VA subsequently provided the following information:]

  

Mr. DONNELLY.  What do you mean they do not come in a consistent fashion?

Mr. LENEY.  Well, in October, we may get 300 applications.  In November, we may get 20.

Mr. DONNELLY.  Okay.  Well, you know, whatever the number is, the number is, but that enables us to see that there is continual progress on this front.

Mr. LENEY.  We can provide reports as required by the committee.

Mr. DONNELLY.  Thank you very much.

I yield back.

Mr. JOHNSON.  I thank the gentleman for yielding.

I will go to the chairman, Chairman Stutzman, for his questions.

Mr. STUTZMAN.  Thank you, Mr. Chairman.

I would like to go down the road a little bit on understanding how you certify certain businesses.  We have heard from veteran-owned small businesses that they were denied verification because as required by California State law, they had an executive board for their company and it was determined that this showed they did not have ownership and control despite the fact that the veteran held all of the stock.

We have also heard other complaints about the denials based on the existence of a corporate board.

Can you explain CVE’s reasoning for decisions like this and the process that they use in determining who is eligible and who is not?

Mr. LENEY.  Yes, sir.  Our process for determining eligibility is based on 38 CFR 74 of the regulation that promulgates the standards established in Public Law 109-461.

There is no prohibition on a firm being eligible for the Vet First Program based on the fact that they have a board.  There is no prohibition based on the fact that a particular state requires them to have multiple members on the board.

As established in the regulation, however, there is a prohibition on verifying the eligibility of a firm when the veteran does not have full control of the organization.

You can have a board.  If the board has the capacity to out-vote the veteran, based on the regulation, he is not in control of the board.  If the board has the ability to make decisions for the corporation that are binding and legal, even if the owner were to fire the board the next day, because he appointed the board, that firm would not be eligible for verification because a decision could be made that the owner was not in control of.  It would be binding on the firm.

Mr. STUTZMAN.  You are saying it is not a veteran-owned business at that point?

Mr. LENEY.  It is a veteran-owned business, but the regulation requires it to be both veteran owned and controlled.  A very small number of firms, less than five percent, are denied verification based on ownership issues.  More than 90 percent of the denials that occur in the process of verification are a function of control.

Mr. STUTZMAN.  Is that in federal statute?

Mr. LENEY.  Control--

Mr. STUTZMAN.  The federal statute requires ownership--

Mr. LENEY.  Owner controlled?

Mr. STUTZMAN.  --and control?

Mr. LENEY.  Yes, sir.

Mr. STUTZMAN.  Would that be consistent with SBA’s policy?

Mr. LENEY.  The policy that the CVE is responsible for implementing is 38 CFR 74 and that is the regulation that we are focused on implementation.

In my discussions with the SBA, they also require ownership and control and they do a status when they do status verification.

Mr. STUTZMAN.  Okay.  Thank you.

Are veterans with DoD disability discharge eligible for SDVOSB status if they are not included in the VA’s BIRLS database that lists veterans with a VA disability rating?

Mr. LENEY.  A veteran has to have a disability status to be eligible for the SDVOSB Program.  We have made a modification six months ago.  If a person was not in the BIRLS, the veteran was not in the BIRLS database, we rejected their application. 

Currently our policy is if they are not in the BIRLS database, we continue to process their application, but we require them to be in the BIRLS database before making a final verification decision because that is the basis for ensuring that veterans are, in fact, service disabled that we utilize in the VA.

Mr. STUTZMAN.  Okay.  Thank you, Mr. Chairman.  That is all I have right now.

Mr. JOHNSON.  I thank you.

Mr. Leney, you mentioned that the VA exceeded its procurement goals by reaching nearly 20 percent of SDVOSBs and nearly 22 percent of VOSBs.

Are the 20 and 22 percents, are those clean numbers, meaning is there a zero overlap between those two numbers?

Mr. LENEY.  There is overlap between the two numbers, sir.  The 22 percent that go to veteran-owned small businesses includes the nearly 19 percent that go to service-disabled veteran-owned small business.

So as you look at those numbers, the vast majority of our procurements that go to veteran-owned businesses go to service-disabled veterans.

Mr. JOHNSON.  My apologies.  My peripheral vision blanked out on me there.  Mr. Walz, no, please, please continue.  I apologize.

Mr. WALZ.  No, no.  Thank you, Mr. Chairman.

Again, thank you for being here, Mr. Leney.  Thank you for you and for the work you are doing and for your service.    And as you can see, this committee is committed to getting it right.  And sitting behind you are numerous folks, small business owners, veterans, veterans’ advocates, and we all want to get there. 

And I always say at these hearings I am certainly the VA’s staunchest supporter.  But at times, I can be the harshest critic because this is one of those examples.  This is a great program.  It is an important program.  We must get it right.

And I know the battle that you are in and it is that razor’s edge on the fraud, waste, and abuse, at the same time moving resources to the veterans.  It appears like we might be in one of those odd cases where the attempt to fight fraud is actually becoming waste in itself.  And that is a very challenging one for me.

The question I had, and in your testimony, Mr. Leney, you said you are serious about disbarment.  You stood up the committee in September of 2010 and by October of 2011, we have disbarred one business.

According to the GAO’s report is what we are getting, when they spot check, they estimated that there were at least ten businesses that they could verify that were not veteran-owned small businesses in that hundred million.  At the pace we are going, we will have those ten disbarred by 2022.

Now, the question sitting behind us is, that is a problem.  And what we are asking for is, is only thing we want to see on this committee, and I know it is the only thing you want to see is, is qualified veteran-owned small businesses getting the priority to get the contracts, do business, grow their business, and serve the VA and other veterans to the best of their ability.

Do you think it is being portrayed uncharacteristic or unfairly, I should say, that there is a slowness here and that there is a resistence to what the GAO said and there is a resistance to making changes because that is certainly the way it feels to me? 

So I know this is somewhat of a subjective question because I have no doubt that your hundred percent commitment is to delivering the resources to veterans in the best way and shepherding the taxpayer dollars in a responsible manner.

How come it appears like there is a disconnect here?  What are we missing that is making it appear, because I think you are seeing a lot of unanimous agreement that there is a problem here?

Mr. LENEY.  Sir, I absolutely believe that we share the goals that you just stated, not only myself as the director of Small and Veteran Business Program, but the senior leadership at the VA, absolutely sure of those goals.  And I am absolutely confident there is no hesitation to pursue aggressively the goals that were laid in 109-461.  I think the numbers speak for themselves.  In terms of--

Mr. WALZ.  Was my number correct on disbarment?  It was wrong?

Mr. LENEY.  We have actually made seven disbarment decisions at the Debarment Committee and I am happy to provide for the record the details for that.

[The VA subsequently provided the following information:]

    VA Response:  VA is serious about debarring companies who misrepresent their status as a VOSB or SDVOSB, and in September 2010 formed the 8127 Debarment Committee, named after the portion of the U.S. Code that implements the Veteran small business acquisition portions of P.L. 109-461.  VA has developed and formalized specific processes and criteria related to the 8127 Debarment Committee which can be found on the committee’s web site at: (http://www.va.gov/oal/business/8127debarments.asp).  The committee consists of representatives from the Office of Acquisition, Logistics, and Construction (OALC); the Office of Small and Disadvantaged Business Utilization (OSDBU); the Office of General Counsel (OGC); and the Veterans Health Administration (VHA).  The committee will review referrals for debarment and make formal recommendations to the debarring official pursuant to the procedures in VAAR 809.406-3.

    As of December 2011, the committee had debarred seven separate firms and ten individuals associated with those firms.  These firms are:

• Seabreeze Contracting, Inc.
• Triton Services, Inc.
• Chevron Construction Services, LLC
• Mitsubishi Construction Corp.
• KDV, Inc.
• T.E.M. Group, Inc.
• DAVID Construction, Inc.

    Of this seven, one firm has completed the debarment period and is no longer listed in Excluded Parties List System (EPLS) listing.  This firm is:

• DAVID Construction, Inc.

    Of this seven, two have filed a lawsuit against VA in federal district court, and the court directed VA to remove the names of the firms from EPLS pending resolution of the litigation.  These firms are:

• KDV, Inc.
• T.E.M. Group, Inc.

    The remaining four firms are currently debarred and listed in EPLS.   These firms are:

• Seabreeze Contracting, Inc.
• Triton Services, Inc.
• Chevron Construction Services, LLC
• Mitsubishi Construction Corp.

Mr. WALZ.  Okay.

Mr. LENEY.  We have referred over 60 cases in the last 12 months to the Office of Inspector General.  So there is absolutely no resistence within the VA to supporting and maintaining the integrity of the 109-461 Veterans First Verification Program.

The senior leadership of the VA has put resources into it.  The challenges we face is the implementation of resources.  When it comes to hiring, when it comes to contracting, these things do not happen overnight.

I think in the last six months, we have made major strides.  As I said in my opening statement, we are not satisfied.  We are not done.

And I apologize, Mr. Chairman, for my stuttering in response to your question, but these are very important issues of acquisition policy.  And I would like to submit for the record from the VA a response that we can lay out in detail both our Vet First preferences and how they link to FAR Part 18.

Mr. WALZ.  Mr. Leney, if I could ask you.  On some of these firms, it is high risk.  I hear what you are saying.  We want to give you all the tools necessary.  And I think with the GAO and the IG and things, those are all tools to streamline the process.

Do we do unannounced visits to high-risk firms?

Mr. LENEY.  Yes, sir, we do.  One of the things we established about four months ago was a program of unannounced visits.  As part of our Risk Mitigation Program, we now rank firms based on a number of factors in terms of their risk to the VA and the taxpayer.

We not only do unannounced visits with respect to high-risk firms as a part of the application process, we now have established visits to already verified firms based on their risk category.

We have also included a random element to that.  We have instituted random site visits for verified firms because we realize that verification is a snapshot in time.

Mr. WALZ.  Do you think those things are helpful?  Are those tools helpful?  Is this good best practices in terms of fraud and management?

Mr. LENEY.  Yes, sir, I believe so.  It works for the IRS and it is working for us as well.

Mr. WALZ.  Okay.  I yield back, Mr. Chairman.  Thank you for the time.

Mr. JOHNSON.  I thank you and thank you for your indulgence.  I apologize that I did not scan down.

Mr. Leney or Mr. Thompson, I apologize.  We have got more Members showing up.  I got to get my scan down.  I yield to our colleague from Florida, Mr. Bilirakis.

Mr. BILIRAKIS.  Thank you, Mr. Chairman.  I appreciate it.

I recently had a veteran small business roundtable and the difficulty they have encountered with the verification process is extensive.

I particularly am concerned that the reconsideration process is taking much too long and could inhibit the legitimate veteran small business owners from opportunities to create jobs and keep their doors open.

Specifically one of my constituents, and I would like to discuss this with you, Mr. Leney, but specifically one of my constituents competed in a 17 month VA bid process and was awarded a multiple award task order contract in mid October.

He found out that he had been denied service-disabled veteran-owned small business status and submitted a request for reconsideration.  However, his business needs to be verified by December 6, 2011 to meet the deadline to maintain the multiple award task order contract.

Yet, under the first in, first out methodology, it seems improbable that this time frame will be met which will cost jobs, of course. 

I worry that a process intended to help veterans is hurting them, Mr. Chairman.

What solutions would you suggest to this circumstance?  Would it be feasible to expedite requests for reconsideration pending a documented contract award that will reflect specific deadlines or, in the alternative, would it be possible to maintain a conditional verified status until the reconsideration review is complete?

I am concerned about the lack of due process under the current reconsideration structure and how this lack of due process affects legitimate service-disabled veteran-owned small businesses.

Can you specifically answer those questions and if you can, please, I would like to get them in writing and maybe share with the committee as well? 

Thank you.  Mr. Leney, please.

Mr. LENEY.  Sir, I would be happy to provide for the record information with regard to the specific situation that you referred to.  But I would like to address some of the more general and important issues that you raised.

First, I want to reassure the committee there is an absolute commitment to due process both in our initial verification and our request for reconsideration.  One of the prices we are paying for a commitment to due process is time.

I mentioned in response to Congressman Walz’s question the ebb and flow of applications.  We have received recently a dramatic surge in requests for reconsideration.  And at one point going, almost a thousand requests for reconsideration came in within 45 days.

Our priority has been to ensure that those firms when patiently in line to receive a verification determination get that in a timely way.  Every request for reconsideration it is important to note is those firms have failed to meet the requirements of Public Law 109-461.

I have a difficult time putting those firms in front of firms that have, as far as we know, met all of the criteria and, again, are waiting patiently in line.

We have shifted resources in CVE to put more resources against requests for reconsideration.  I have made a policy decision to not disadvantage those firms who are undergoing initial verification and to avoid sending us over the 90 day limit so that those firms can have some expectation that we will meet our objective and meet our goals in their initial verification.

That has resulted quite frankly in the fact that we are now not meeting our objective in terms of turning around all of our requests for reconsideration within 60 days.  But it is not a capricious process.

In order to ensure that a firm that has been determined to not meet the requirements, that firm is now a higher risk, when they submit a request for reconsideration, we do a complete reevaluation.  All of those firms are referred to our Office of General Counsel to ensure that they do receive due process and that we make an accurate determination.

Many of them receive site visits because their issues are more complex.  And our first priority based on the communications we receive from this body are to ensure the integrity of the process to ensure that when the GAO and the IG come by the next time and they are coming back that they report to you that we have maintained the integrity of the program and that ineligible firms are not being verified.

And, unfortunately, sir, that takes time.

Mr. BILIRAKIS.  Thank you, Mr. Chairman. 

I would like to follow-up with you on this.

Mr. LENEY.  Be happy to do that, sir.

Mr. BILIRAKIS.  And the lack of communication as well and what these folks are doing wrong, what the requirements are.  They need to know these things. 

And, you know, this guy has a contract, Mr. Chairman, and this is creating jobs in my district. 

So I would like to follow-up with you on that.  Thank you, sir.

I yield back.

Mr. JOHNSON.  Thank you.

We are going to go to Mr. Amodei to see if he has questions.

Mr. AMODEI.  Thanks, Mr. Chairman.  I do not at this time.  I yield back.

Mr. JOHNSON.  Okay.  Well, thank you.

Then I would like to follow-up a little bit on yours just quickly.

How does a company get a contract if they have not been verified?

Mr. LENEY.  Sir, they do not--

Mr. JOHNSON.  Well, they did.  That is what you said, right?

Mr. BILIRAKIS.  Absolutely.

Mr. JOHNSON.  Okay.  So how do they get a contract if they have not been verified?

Mr. LENEY.  There are a number of firms that currently have contracts with the VA who were verified under the self-certification process.

Mr. JOHNSON.  This is a new one.  They were awarded the contract in October.  That is recently.  How does that happen?

Mr. Thompson, you got any ideas?

Mr. LENEY.  Sir, I am not aware of any firms--I am not aware of any firms to include that one receiving a contract from the VA that is not verified. 

Mr. JOHNSON.  Okay.  Well, I look forward to hearing some feedback on that further discussion then because it sounds like we have got a dichotomy. 

Mr. LENEY.  If I could clarify.  My understanding, what does occur is we have firms that submit proposals for procurements.  Prior to award, contract officers are required to check the vendor information pages to ensure that firms are, in fact, verified.

At that time, we have had requests by contract officers, hey, I have an apparent awardee and we need them to be verified.

Unfortunately, our response is we are happy to verify firms that have submitted applications and have been through the process, but we do not currently have a program of accelerating the--

Mr. JOHNSON.  Is it typical to even consider?  Why would we consider a firm and entertain a proposal from a firm that is not verified?

Mr. LENEY.  You raise an excellent point, Mr. Chairman.  And we have clarified to the acquisition community that they now check, as part of my training to the thousand contracting officials in the VA, they now check VIP upon receipt of proposals because it is a waste of good government resources.

Mr. JOHNSON.  When did that policy go into effect?

Mr. LENEY.  The policy was always in effect, sir.  We clarified that policy and conducted training because there were instances where contracting officials did consider proposals prior to confirming verification.

Mr. JOHNSON.  Well, it appears somebody is not following the internal rules then if indeed this contractor or this firm was considered.  I am glad you have clarified that and hopefully--

Mr. BILIRAKIS.  Mr. Chairman, will you yield?  I understand that he was certified under the old process.

Mr. JOHNSON.  Okay.

Mr. BILIRAKIS.  He did the recertification and that is what he is waiting for.  And he has secured the contract and he has to be recertified.  And this is a legitimate small business.  I can attest to that.  But he has to be recertified by December 6^th.  Otherwise, he loses the contract. 

Mr. JOHNSON.  How long does it take once a company is certified, how long does it take to get them into system so that they are visible and can compete for contracts?

Mr. LENEY.  Currently that time is measured in hours.  It was--

Mr. JOHNSON.  It is measured in hours?

Mr. LENEY.  --measured in weeks.  Right now upon determination, whether it is a denial or an affirmation, we immediately now post it into the VIP system--

Mr. JOHNSON.  Okay.

Mr. LENEY.  --that same day.

Mr. JOHNSON.  So if a company is verified today, you are saying within hours--

Mr. LENEY.  Yes, sir.

Mr. JOHNSON.  --they would show up in the system?  Are you familiar with a company called Ironclad?

Mr. LENEY.  The name is familiar, sir.  I would hesitate to speak to the details.

Mr. JOHNSON.  They received their congratulatory verification letter on November 7^th.  Any idea why they are not in the system?

Mr. LENEY.  I would have to check, sir, because I would be surprised that they are not in the system given the changes that we have made.  If they received a congratulatory letter on November 7^th, they should have been in the system on the same day.

Mr. JOHNSON.  Well, as of today, they are still not in there.  So I--

Mr. LENEY.  I will be happy to check on that, sir, and provide you a response for the record to find out why not.

Mr. JOHNSON.  Yeah.  I would like some feedback.

Mr. Leney, your testimony specifically mentions the tools to aid veteran entrepreneurs provided in the Vet First Program, yet, as you are aware from the recent Aldevra decision by GAO, VA does not always use these tools according to the VAO analysis.

Do you think VA is fully utilizing the Vet First Program given its stated preference for using the federal supply schedule?

Mr. LENEY.  Sir, while I do not claim to be an expert on acquisition policy, I do believe that the department does have an obligation to balance a number of objectives. 

First we have an obligation to seek best value for the 23 million veterans we support.  We have got an obligation to promote competition and to reduce costs to the Federal Government.  And we have an obligation to help veteran businesses in the federal procurement process.

And as we balance these obligations, I think we have made use of the federal supply schedules in a positive way.  Forty percent of our federal supply schedule dollars go to small businesses.  Across the government, the figure is 20 percent.  Thirteen percent of our federal supply schedule dollars go to veteran businesses.

So I think we are making use of the federal supply schedules.  And it allows us to support veterans.  It allows us to provide opportunities to veteran firms.  It also allows us to be good stewards of the taxpayers’ dollars.

The federal supply schedules are an important tool for all agencies within the government to include the VA.  We use that tool.  We use that tool to get to veteran businesses.   

And so my efforts have been to encourage and to educate veteran small businesses on how to get on these federal supply schedules so we can--

Mr. JOHNSON.  Based on your preference for using the federal supply schedule, where do the VOSBs and SDVOSBs fall in open source, where do they fall on that federal supply schedule?

Mr. LENEY.  You mentioned our preference to use the federal supply schedules.

Mr. JOHNSON.  Yeah.

Mr. LENEY.  Only about 20 percent of our procurement is done through the federal supply schedule.  Eighty percent is done in the full and open marketplace.  Within that 20 percent, we do 13 percent to veterans.  Currently veterans do not, as Mr. Thompson stated, do not have a preference.  Our position is, our understanding of the law is that veterans do not have a preference within the federal supply schedule.

Mr. JOHNSON.  When did your interpretation of the law change, Mr. Leney? 

As I reiterated earlier, as early back as October 26 of 2010, the United States Court of Federal Claims, the ANGELICA decision stated that the Veterans Benefit Act is a specific mandate to the department and only to the department to grant first priority to SDVOSBs and VOSBs in the awarding of contracts.

You go even further back than that.  April 28^th of 2010 in a VA information letter, the VA again noted that on December 22^nd, 2006, Public Law 109-461, the Veterans Benefits Healthcare and Information Technology Act of 2006 was signed.  Sections 502 and 503 of the legislation authorized a unique veterans first approach to specific VA contracting implemented as the Veterans First Contracting Program.

And going back to the June 20^th, 2007, this approach changes the small business hierarchy within VA placing service-disabled veteran-owned small businesses and veteran-owned small businesses first and second respectively in satisfying VA’s acquisition requirements.

It does not talk about percentages.  It does not talk about the federal supply schedule or any of that.  It says first and second respectively in satisfying the VA’s acquisition requirements.

When did your interpretation of the law change?

Mr. LENEY.  Our interpretation of the law has not changed.  But in terms of that interpretation, I defer to our deputy general counsel, Mr. Thompson.

Mr. THOMPSON.  Sir, he is correct.  We have always interpreted the Veterans First legislation as it is sometimes called as establishing within the hierarchy of set-asides the primacy of service-disabled veteran-owned small businesses.

Mr. JOHNSON.  Mr. Thompson, nothing in previous VA statements on this issue says anything about VA set-asides.  And the GAO disagrees with your interpretation of the law.

Mr. THOMPSON.  I understand GAO is of a different opinion.

Mr. JOHNSON.  And can you please tell us, tell this committee--

Mr. THOMPSON.  Uh-huh.

Mr. JOHNSON.  --how VA considers itself exempt from the requirements laid out in Title 38, Section 8127 of Public Law 109-461?  You see, the Federal Government cannot be sued for not meeting goals, but the Federal Government can be sued for not adhering to the law.  And that is what this committee is concerned about.

Your department is supposed to be looking out for veteran-owned businesses.  Why is there such reluctance from the department to follow the intent and the spirit of the law as identified by the GAO?

Mr. THOMPSON.  Sir, as I indicated, we have a different interpretation than GAO.  And, you know, our interpretation has consistently been that Public Law 109-461 did several things, among them establishing service-disabled veteran-owned businesses as having primacy within the categories of all set-aside categories.

It also authorized VA and only VA to do restricted competitions that are limited to VOSBs and SDVOSBs for purposes of meeting the secretary’s goals.  And VA has been meeting those goals.  It has complied with the letter and with the spirit of the law in our humble opinion.

Mr. JOHNSON.  I am going to yield to the ranking member to ask some questions.  Just one final follow-up on this issue.

Obviously there is great disagreement with the VA’s interpretation of the law.  The GAO disagrees.  I disagree.

Is there going to be a review to go back and look at this because you have been told by the GAO that your interpretation is wrong?

Mr. THOMPSON.  We have been told by GAO.  GAO recommendations are just that to federal agencies.  This issue is still being discussed with the executive branch.  There has been no final decision as to what position the Administration will take on this issue.  And so as soon as that is resolved, we will certainly be back in touch.

Mr. JOHNSON.  I yield to Mr. Donnelly.

Mr. DONNELLY.  Mr. Leney, with the prime contracting goals at 12 percent for VOSB and 10 percent for SDVOSB, and we exceeded those, why can’t those goals be 25 and 25 or 35 and 35?  Do we have enough contractors to meet those numbers and shouldn’t our efforts in the VA above all--not even above all federal agencies, but as an example to all federal agencies that we not shoot for the lowest number but push hard for higher numbers?  What will hold us back from moving those to a higher percentage?

Mr. LENEY.  I believe that the VA has served as an example in this arena.  We are a leader in this area.  We have exceeded the goals.  We have not attempted to do minimum necessary.  We have not--

Mr. DONNELLY.  I did not say that.  What I am trying to say is how can we move those numbers higher?  And, for instance, what would stop us from doing 25 and 25 this year and 35 and 35 next year?

Mr. LENEY.  You asked a very important question, what are we doing to move those numbers higher, and we are doing a number of things.

First of all, with respect to verification is to promote the number of firms that are being verified while at the same time ensuring that only eligible firms are verified because if we fail in that regard, then we put at risk all of the firms who are receiving the preferences and the benefits of the Vet First Program.

Secondly, we have initiated an aggressive program to directly connect veteran-owned small businesses with procurement decision makers within the VA.

At the national veterans conference back in August, we brought more than 250 procurement decision makers to New Orleans.

Mr. DONNELLY.  So who sets the 12 and 10?

Mr. LENEY.  In this case, the secretary set expanding goals.

Mr. DONNELLY.  Then it would be the Secretary we would go to to say can we make it 25 and 25 for next year?

Mr. LENEY.  Yes, sir.  At the end of the day, the secretary drives the train at the VA.

I would just caution you that as we put more and more of our procurement dollars into a relatively small group of firms that we run the risk of--whenever we limit competition via set-asides, we run the risk of increasing the cost to the government in terms of its procurements.

Mr. DONNELLY.  Well, let me ask you this.  And we run the risk.  If our veterans can match them on price, shouldn’t we be giving it to our veterans?

Mr. LENEY.  If we have veteran-owned businesses that are qualified, if we have veteran-owned businesses that are competitive, absolutely.  And in our program, when we have those situations, we give preference to veterans.

Mr. DONNELLY.  And I understand your concern because you want to be a good steward of the taxpayers’ dollar.  But at the same time, if we can do it at 12 and 10 and we are already pushing way over our number and we look and we say let’s shoot for 25 and 25 and we are able to do it in a taxpayer-funded protected way, wouldn’t that be a good thing?

Mr. LENEY.  I think it is a good thing and I support maximum practical opportunities to small businesses and particularly veteran-owned small businesses.  And that is what we seek to do is to identify maximum practical opportunities and get to those businesses.  I am not able to speak to whether or not 25 is the right number or 22 is the right number.

Mr. DONNELLY.  I am not saying that is the right number.  I am saying why don’t we continue to push our numbers in an effort to continue to try to pay back the people who have put their lives on the line for our country.

I yield back, Mr. Chairman.

Mr. JOHNSON.  I thank the gentleman for yielding back.

Mr. Stutzman.

Mr. STUTZMAN.  Thank you.

And I think that is an excellent point in what Mr. Donnelly is saying is, and if I understood his comments correctly, is what is the harm in trying to pursue more?  I mean, if this is the VA, it should be a priority in finding and contracting to those veteran-owned businesses.

It should not be an obligation.  It should really be at the top of our priority list.  And I think back to the question that the chairman is asking is why not?

And the question here is, why are there fully eligible firms being denied because of state community property laws?  Any comments?  It sounds like there are fully eligible businesses out there that are being denied.

Mr. LENEY.  Mr. Chairman, I am not aware fully eligible businesses are being denied.  We have had an issue with and we have examined the issue of community property laws in a number of different states. 

And we have actually provided some assistance as part of our Veteran Assistance Program, our Verification Assistance Program to clarify how a firm can meet the community property requirements of their state while still meeting the requirement to have ownership and control.

The problem that we encountered in the past was the lack of understanding and how to address both of those issues.  And we provided clarification to applicants on how they--and we are getting applicants who are, in fact, from community property states who are being verified.

Mr. STUTZMAN.  Are they being denied?

Mr. LENEY.  Sir?

Mr. STUTZMAN.  Are they being denied?

Mr. LENEY.  If an applicant has not met the requirements of 38 CFR 74, they are denied.  If they have not taken the action to disassociate and to ensure that they have 51 percent ownership, then they are denied.  And in some cases, applicants primarily through ignorance have not met those requirements.

Mr. STUTZMAN.  Can you give us an interpretation for the 60 percent increase in the last two months on the number of denials that are requesting reconsideration?

Mr. LENEY.  Yes, sir.  That is primarily a function of our efforts to move a larger number of firms through the process.  We have had great success in completing verification decisions on initial applications.  As a result, more decisions have come out.  And when you have more decisions, we are denying almost 50 percent of those applications because they do not meet the requirements of the law.

Mr. STUTZMAN.  And it appears you have hired contractors to assist with verification.  How do you determine whether their employees are qualified to make verification decisions?

Mr. LENEY.  No verification decisions are made by contractors.  All verification decisions are made by government employees.  Without the support of government contractors from SDVOSBs, I would not be able to sit here and demonstrate any progress over the last six months.

Mr. STUTZMAN.  It just sounds to me like our veteran-owned businesses, small businesses are having to scrap and scrap for--I mean, they should not be getting their crumbs.  They should not be the ones that are having to fight so hard.

I mean, is this typical for any other small businesses?

Mr. LENEY.  Sir, I came out of the small business community and I will tell you that I have enormous respect for small businesses because small businesses do scrap.  They have to be scrappy. 

Mr. STUTZMAN.  I agree with that.  I am a small business owner and I agree with that.

Mr. LENEY.  It is not our intent to make it difficult or more difficult for small businesses to be successful.  It is I believe our responsibility as provided by this body to ensure that when we give preferences to veteran-owned businesses that they are eligible to receive those preferences.  And that is what we seek to do and that is what we are working very hard at.

We realized we are also trying to balance the challenge of ensuring that you do not confront us with a failure to ensure that only eligible businesses get verified and to ensure that we do have due process.  Our rules are not capricious.  Our process is not capricious.

Yes, we use contractors to assist us with this process in order to speed up.  We have expanded the number of contractors we use in the process.  Why?  Because I had an imperative to get 127 days to get an initial determination made down to less than our 90 day commitment that we have made to small businesses.  And we have successfully done that.

But we have a process.  Is it as streamlined as I want it to be?  Absolutely not.  Is it a lot better?  Absolutely yes.

Mr. STUTZMAN.  Let me ask you this because I am a nonveteran and I am a small business owner.  And if I am trying to get a contract, is it easier for me to get a contract than it would be for a veteran-owned small business?

Mr. LENEY.  Not in the VA.  Not in the VA because currently in the VA, if you look at our numbers, last year we did 37 percent, actually a little over 36 percent to small businesses.  Twenty-two percent went to vet--two-thirds of our small business dollars go to veterans.

So if you are a small business, my advice to you and my advice to small businesses who are not veterans is the VA is probably not a lucrative market for you because we do give preference to veterans and we have demonstrated that.

Mr. STUTZMAN.  Thank you.

I will yield back.

Mr. JOHNSON.  Thank you for yielding back.

Mr. Walz.

Mr. WALZ.  Thank you, Mr. Chairman.

Thank you, Mr. Leney. 

We are trying to get at this and I cannot help but think this is somewhat of a microcosm of what goes on in the country, that we are polarized.  We have the either/ors.  We are all in here together working on the same cause.  We have the private sector.  We have the government sector. 

But I also am certainly not going to defend what we are not moving quickly enough.

I was going to ask and not facetiously or whatever, how many of those contractors helping on the contractor verification process were veteran businesses?

Mr. LENEY.  Every contractor that we used in the verification process is a veteran-owned business.

Mr. WALZ.  That is great.

Mr. LENEY.  Every company.

Mr. WALZ.  And how did you come to that?  How did you do that?  How did you fill that or how did you succeed at a hundred percent in that because the question I think that has been very important asked today is, if the VA is not going to give the highest veteran preferences, who then?  Who then?     There is nobody else to do it.  I argue that with our offices that we have a hiring preference and my last hire comes right back from Iraq and gets hired.  We have to live by our own rules.  I am just curious on that.  That is good.

How did you get that done?  So you got a hundred percent of these contractors that are helping with verification are veteran-owned small businesses that is great and that is a positive story.  How did we get to that?

Mr. LENEY.  Well, we took advantage of the tool that you provided us which is 109-461 and opted into the Vet First Program.  We were able to reach out to service-disabled veteran-owned small businesses who are fully qualified and fully competitive.

And I am fully satisfied that we have received quality work at a competitive price from these firms.  And there are many, many service-disabled veteran-owned small businesses and veteran-owned small businesses that fall in that category.

My focus is to ensure that we enhance the opportunities for those business and that is why we have undertaken a major effort within the VA to enhance their ability to deal directly with program decision makers.

Mr. WALZ.  And this is where I am going to be your staunchest supporter on this.  I want to tell that story.  That is good.  You have got some folks behind you that have I do not think been overly appreciative.  I think they are glad to hear that.

My question is, is part of this equation that we are talking some carrot and doing some of this?  Is the stick to be there? 

What I want to know is, if you are a business and you are applying fraudulently on the backs of veterans, I think we should smoke you in the public like you have never been smoked because I tell you whether there is a legal precedence, the public’s perception of that business trying to scam off veterans will be enough to keep people away from it.

Can we give more tools to make sure that that hammer that drops, you better think twice about signing that paper?  If you do not have the DD214 and you are not going to be in there working the number of hours doing this, there is going to be hell to pay because what you are doing is not just defrauding the taxpayers, you are cheating a veteran who is coming back from serving this Nation.

Is that a part that can help?  Is that part of the equation that would strengthen your ability to cut down on these because it just seems like you are being bombarded with these? 

And I am asking the staff up here who has the audacity to put in a false claim as a veteran-owned business knowing you are taking away from a deserving veteran?  Is that a place where we can help you?

Mr. LENEY.  I want to assure you of a couple things.  One, we agree that we are also opposed to any fraudulent business doing business with the VA or any part of the Federal Government.

I think it is important to note that a very, very small percentage of those firms that we deem to be ineligible to participate in Vets First are intentionally misrepresenting or are pursuing a fraudulent endeavor.

All of those that we believe to be in that category, we refer to the IG for action.  As I said, we have referred over 60 firms.

However, that is 60 firms out of over 2,000 that we have denied verification.  There is--

Mr. WALZ.  Are the rules so unclear that people do not know?  Is that what is happening here, the rules on what a veteran-owned small business? 

I was just asking here.  The colonel was sitting here.  If he and I as both veterans decided we wanted to do this, how would you verify us?  I got a 214.  He has got a 214.  We are going to invest some money.  We are going to hire our kids to work in the company or whatever.  Would we get a contract?  What would stop us from getting a contract?

Mr. LENEY.  Less than one percent of the denials are a function of the owner not being a veteran.  There are very few instances that I have seen in the last--

Mr. WALZ.  Okay.

Mr. LENEY.  --six months, very few where the person who asserts that I am a veteran is, in fact, not.  That is the outlier.  That is the extreme outlier.

Mr. WALZ.  The reason for getting thrown is control of the company--

Mr. LENEY.  Yes, sir.

Mr. WALZ.  --and the rules?

Mr. LENEY.  Yes, sir.  And the rules within 38 CFR 74 that came out of 109-461 are rigorous.  And we believe--

Mr. WALZ.  Are they too rigorous because you are telling me these are real veterans really applying, but they are getting thrown out? 

Now, some of them you want to be thrown out if they are a firm that does not have the capacity to fill the contract.  I certainly do not expect you to award them the contract.  But if they have the capability, what is throwing them out?

Mr. LENEY.  Well, let me address I think the core of your question.  I believe that the current policy is designed to ensure only legitimate businesses, veteran-owned businesses are verified as eligible for Vet First.

And I really welcome and I have reached out to veterans service organizations and a large number of veteran-owned businesspeople to engage in policy discussions on where should we and how should we and is it appropriate to change the policy.

And I was surprised at the lack of consensus over what policy changes should be made.  And while I have initiated these conversations, given the diversity of viewpoints that I have run into, it is going to require considerable discussion and consideration by the VA and by this body.

And I will confess my focus over the last six months has been to improve the process because I am painfully aware having come out of that community of what it means to a small business and its ability to do business with the VA.

So I have been focused on making sure that we communicate and that we implement the policy that exists rather than focusing on how to change that policy.  But there are those who would argue for changes and I confront those who would argue that it should not be changed.

Mr. WALZ.  No.  I thank you.  That is helpful to me.  This is one of those things, if the Chairman would indulge me for just a minute, I always like myself to know the exact process that goes through this. 

I would be curious, and I certainly do not want to take up your time on a hypothetical or whatever, but I would be curious to see what it would be like for myself.

Do you know if there are any Members of Congress who are veterans that have used this program who would have firsthand experience of what these small business owners are frustrated about?

Mr. LENEY.  I am not aware that there has been any Member of Congress.  I will check and respond.

Mr. WALZ.  I am just curious because I think it would probably be for me to go back again and look at every single one of those forms, look at every single verification, look at the potential because this is--I was hopeful that it would not be a whole bunch of people fraudulently claiming to be veterans.  And you are telling me that is the absolute anomaly.

But I am curious now and maybe even a little more concerned of these veterans that are saying I am a veteran, I still got thrown out.  It made no difference.  That is the part that I am a little more concerned about.

Mr. LENEY.  If I could respond to that, Mr. Chairman.

Mr. WALZ.  Sorry.

Mr. LENEY.  The major issue is about control of the firm.  And as I say, I believe the current policy is designed to ensure that veterans are, in fact, in control of the firm, that veterans are not used as passers, veterans are not used as fronts.

We have had instances where that has happened.  And I do not think it is the intent of this body to allow that to go forward.  The nature of the rules is such that it does make it difficult sometimes for a veteran to do business like he would like to or he or she would like to do business and still meet the requirements of 109-461.

I will give you one clear example that has an adverse effect on small businesses.  And I am not making a statement about whether I support the policy or do not support the policy.  I support the VA policy on this.  I support 38 CFR 74. 

But 109-461 makes it very difficult for a veteran-owned small business owner to get equity financing.  Why?  Because, sir, if you were providing me with a million dollars to my business and I am the veteran and you are not a veteran, are you going to give me 100 percent control of that organization?  Are you going to allow me to sell that business out from under you and you receive 49 percent of the million dollars I get for the business and I receive 51 percent of that million dollars when I put in not a nickel and you put in a million dollars?  I do not think--

Mr. WALZ.  Does it have to be a hundred percent then?  We were just asking that question.  This hypothetical could be real, though, this--

Mr. LENEY.  It is very real to a lot of firms.  That is how it works.

Mr. WALZ.  Well, that is very helpful.  I do not want to--

Mr. LENEY.  The current requirement is for 100 percent control.  Right now the regulation says I could sell the business in which you have invested a million dollars tomorrow for $500,000 and walk away with 51 percent of the sale price and give you 49 percent of that sale price.

Mr. WALZ.  Thank you, Mr. Chairman, for indulging me.

Mr. JOHNSON.  I thank you for your line of questioning.

We are going to have to wrap this up because we have got a second panel that we want to hear from today.

But did I understand you correctly that the law currently says in your interpretation that the veteran has to own 100 percent of the company?

Mr. LENEY.  Absolutely not.  The veteran has to own 51 percent of the company.

Mr. JOHNSON.  Okay.

Mr. LENEY.  But the veteran must be in control of the company.

Mr. JOHNSON.  Okay.

Mr. LENEY.  One hundred percent in control.

Mr. JOHNSON.  Isn’t 51 percent in control of the company?

Mr. LENEY.  No, sir, it is not.

Mr. JOHNSON.  On the outside, if you have got two partners and one partner is at 51 percent and one partner is at 49 percent, the 51 percent makes the decision.  That is who is in control of the company, right?

Mr. LENEY.  Unless your operating agreement authorizes the board that may and is often comprised of or includes nonveterans.

Mr. JOHNSON.  Okay.  All right.  Well, obviously there are some details that we do not have time to get into here today.  That is helpful.  And, you know, I do not want to come across as berating. 

I know that what the intent of your department is, but I think you can see from the questions and the concerns from this subcommittee and our other Subcommittee on Economic Opportunity, we have got some real concerns whether veterans and disadvantaged veterans, disabled veterans’ businesses are getting the fair shake that was intended in the law. 

The GAO has validated our concerns.  We have expressed those concerns to you folks.  We are going to continue to address this issue until we feel that we have got an adequate answer and a response and a process that is going to ensure that our veterans are getting the shake that they are supposed to.

With that, I want to thank you for your testimony.

Mr. LENEY.  Thank you, sir.

Mr. JOHNSON.  And you are now excused.

I will call the second panel.  On our second panel today, we will hear from Mr. Greg Kutz and Mr. Ralph White from the U.S. Government Accountability Office.

Mr. Kutz and Mr. White, your complete written statements will be made a part of the hearing record.

Mr. Kutz, you are now recognized for five minutes.

STATEMENTS OF GREGORY D. KUTZ, FORENSIC AUDITS AND INVESTIGATIVE SERVICE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; RALPH O. WHITE, MANAGING ASSOCIATE GENERAL COUNSEL FOR PROCUREMENT LAW, OFFICE OF GENERAL COUNSEL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

  STATEMENT OF MR. KUTZ

Mr. KUTZ.  Chairman and Members of the subcommittees, thank you for the opportunity to discuss the Service-Disabled Veteran-Owned Small Business Program.

Today’s testimony highlights the results of our assessment of the Department of Veterans Affairs’ fraud prevention controls.

My testimony has two parts.  First, I will discuss progress made in the Verification Program and, second, I will discuss our recommendations.

     [Chart]

Mr. KUTZ.  As you can see on the monitor, this shows GAO’s fraud prevention framework which we use to assess VA’s controls.  On the left is prevention which includes steps to keep ineligible firms from entering the program.

In the middle is monitoring which is making sure that verified firms remain eligible.  And on the right is investigation and consequences for fraud and abuse.

Let me start by saying that VA has made the most progress in the area of prevention.  This is evident with progress and enhanced staffing, as Mr. Leney mentioned, and stronger verification of firms and individuals.

According to VA, these steps have helped the agency deny the applications of 1,800 ineligible firms.  They also led to the rejection of our applications for two bogus firms that used fictitious individuals that were not service-disabled veterans.

Overall, there has been less progress in the areas of monitoring and consequences.  However, with respect to monitoring, VA is doing random announced site visits for verified firms to ensure that they remain eligible.

They have also with respect to consequences established a Debarment Committee and, as Mr. Leney said, taken several debarment actions.  They have also, as was mentioned, referred 70 is what we understand firms to the VA Inspector General for further investigation.

Moving on to my second point, we are making 13 recommendations to address a number of remaining vulnerabilities.  VA generally has concurred with these recommendations and is taking action on most of them.

We will work with Mr. Leney and his staff to determine which of these 13 recommendations has been fully implemented and report our results back to you.

There are three areas in particular that VA should focus on starting with human capital.  For this program to succeed, VA needs expert staff dedicated to maintaining program integrity.

Mr. Leney has shown strong leadership and very good progress in a short period of time.  However, VA needs to develop a deep bench of expert staff to sustain progress made and to perhaps build on it in the near future.

Second, unannounced site visits are an important tool that we use in our own investigations.  For example, the monitor shows what we found during an unannounced site visit to Fort Irwin in California as part of a past investigation.

The portable toilet and hand wash stations that you see belong to an ineligible pass-through firm that was actually performing the work.  We recommended VA use unannounced site visits like this as part of their application process and as part of re-verification with a particular focus, as Mr. Leney said, on high-risk firms.

Third, historically the vast majority of fraud and abuse in this program was not identified and the bad actors face absolutely no consequence. 

For example, the front firm for the portable toilet case again that you see on the monitor was highlighted not only in our investigation but was found to be ineligible by the SBA during a protest.  This firm was not debarred by SBA and got to keep the contracts that they won through fraud and abuse.

We recommend that VA strengthen its Debarment Committee established in September of 2010 to prevent known bad actors like this from entering the program.

In conclusion, stealing money from legitimate service-disabled veterans should not be tolerated.  That is why we are here today and that is why this is so important.

I look forward to continuing to work with both subcommittees and VA to help protect the rights of legitimate service-disabled veteran entrepreneurs.

Mr. Chairman, that ends my statement and I look forward to your questions.

[The statement of Gregory D. Kutz appears in the Appendix.]

Mr. JOHNSON.  Thank you for your testimony.

Mr. White, you are now recognized for five minutes.

 STATEMENT OF RALPH O. WHITE

Mr. WHITE.  Thank you, Mr. Chairman.

Chairman Johnson, Chairman Stutzman, ranking members, and Members of the subcommittees, my name is Ralph White and I am the head of the Bid Protest Unit at GAO.

Thank you for asking for us to come today and talk about GAO’s recent bid protest decision, sustaining a protest filed by a service-disabled veteran-owed small business named Aldevra.

Mr. Chairman, for more than 80 years, GAO has provided disappointed bidders with an objective, independent, and impartial forum for the resolution of disputes concerning the award of Federal Government contracts.

In 1984, Congress provided a statutory basis for these protests with the passage of the Competition in Contracting Act.

Under this statute, any business participating in a federal procurement can challenge the award or the solicitation for a government contract provided it acts within a very short time. 

When a protest is filed within this short time, executive branch agencies are required by the law in most instances to wait for GAO’s decision.  In return, GAO is required to produce its decision within 100 days.

The standard of review set by Congress is simply whether the award or planned award violates procurement law regulation.  Unlike GAO’s audit function, we do not consider issues of whether the agency is properly managing a program or buying the right mix of goods or services.

In the case called Aldevra, which has been discussed a fair amount here, we were given a protest that involved two VA solicitations seeking to buy industrial kitchen equipment using the federal supply schedule.

As you know, the federal supply schedule is administered by the GSA available for us by all executive branch agencies and open to businesses of all sizes.

Aldevra appearing before us without the benefit of a lawyer argued that the VA’s use of the federal supply schedule violated a statute passed by this committee, the Veterans Benefits Healthcare and Information Technology Act of 2006.

Aldevra argued that under the 2006 act, the VA first had to consider whether this equipment could be purchased using a competition between two or more service-disabled veteran-owned small businesses.  In our October 11 decision, we agree with Aldevra.

In short, our decision applied the plain meaning of the 2006 act.  The act sets up a two-step priority first for service-disabled veteran-owned small businesses, then followed by veteran-owned small businesses, and it then states that the VA shall set aside contracts for these businesses whenever, one, there are two or more of them capable of performing the work and, two, they can do the work at a fair and reasonable price.  If these conditions are not met, the VA is free to procure in any manner appropriate. 

In conclusion, just a few observations.  First, the 2006 act applies only to the VA.  It is different from the 2003 act which applies to the entire executive branch.

Second, the 2006 act does not always require set-asides.  It only operates when there are two or more veteran-owned small businesses capable of doing the work at a fair market price.

Thus, Congress directed the VA to rely upon the power of competition and the power of the free market, but if the competition and the marketplace permit, give first priority to veteran-owned small businesses.

Third, because GAO is a legislative branch agency, we cannot compel the VA to follow our recommendations.  GAO’s statute gives the VA 60 days to decide whether to follow the recommendation and five more days to advise us of their decision.

If the VA elects not to follow the recommendation, GAO is required to notify the Congress of the agency’s decision.  The due date for the VA to respond to GAO is December 15^th.

Finally, I just would like to also mention that the owner of Aldevra and his family are in the audience here today. 

Mr. Chairman, with that, that is the end of my prepared statement and I would be happy to answer any questions that you might have.

[The statement of Ralph O. White appears in the Appendix.]

Mr. JOHNSON.  Well, thank you, gentlemen.  Thank you both.

We will start with the questioning.  Mr. White, how many bid protests are filed with the GAO each year?  Do you have an idea of what number would be?

Mr. WHITE.  I do.  We have been seeing an increase in protests in recent years and we had just over 2,300 in fiscal year 2011.

Mr. JOHNSON.  Okay.  How many get sustained?

Mr. WHITE.  Actually, a good number of our decisions do not go all the way to a decision.  Agencies voluntarily pull back a number of procurements.  But of the cases that go to a decision, that was 417 of them, we sustained 67.

Mr. JOHNSON.  Okay.  Is it safe to say then that the remainder get denied?

Mr. WHITE.  Yes, the 417 minus 67.  The percentages, Mr. Chairman, just to put it in perspective, we deny about 84 percent of protests.  We sustain 16 percent of the ones we decided on the merits.

Mr. JOHNSON.  Okay.  How many protests are there of VA procurements?

Mr. WHITE.  Actually, we have not quite topped 200 in VA procurements.  I have the numbers for the last few years.  I think it was about 180 in fiscal year 2011.  If I could, I would like to provide you for the record both the total number of VA protests and denies and sustains for the record.

Mr. JOHNSON.  Okay.  All right.  I would appreciate that.

You have heard in previous testimony this morning that the VA does not interpret the law the same way that GAO does.

Would you care to comment on that, either of you?

Mr. WHITE.  Well, first, I just would not mind mentioning that we view our obligation is to in thinking about legislative history to look at the plain meaning of the statute.  And if we can decide a question based on the plain meaning, that is really where we stop. 

And the plain meaning of this statute led us to conclude that Congress used the word shall.  It did not include any exceptions.  And we could not see nor did the VA provide any explanation of how they could justify going elsewhere.

Mr. JOHNSON.  Just a good distinction.  The word shall has a very, very explicit meaning in government contracting, right?  What does the word shall mean?

Mr. WHITE.  It certainly does not mean may.

Mr. JOHNSON.  That is right.  It does not leave much to interpretation.  Is that safe to say?

Mr. WHITE.  Yes, sir.

Mr. JOHNSON.  Okay.  All right.  In dealing with the certification process, of your 13 recommendations, several relate to the need for VA to enhance its staff capabilities.  You have noted that there is enhanced staffing at VA, but that more needs to be done in this area.

How important is the staffing or the human capital element of the VA employees to the overall success of the Verification Program?

Mr. KUTZ.  Well, it is very important.  You have got the human capital element, processes, uses of technology, but none of it works unless you have got strong expert government employees running the operation.  That is really very important.

As Mr. Leney and some of you mentioned, there are a lot of contractors involved in this process, so contract management and oversight is also important.  But I really believe that the human capital is probably central to the success of this Verification Program, not only the quality of the people but the right number of people. 

Mr. JOHNSON.  Okay.  Has the VA taken steps to evaluate the sufficiency of the number of staff and the training and qualifications of the staff that are overseeing this program?

Mr. KUTZ.  Yeah.  They have taken steps and there are two parts to it.  Again, there is the government employee group which is between 10 and 20.  I do not know what the current number is.  And then there is the contracting group which is larger.

And so it is a combination of both.  And I think at this point, they have got good people, but I think that they may not always be trained in the right areas.  Mr. Leney has talked about having them trained in the area of certified fraud examination, for example.

So I believe they are doing an assessment and looking to see ways to upgrade their own staff and perhaps the contract staff also.

Mr. JOHNSON.  Okay.  In regards to debarments, how do you explain the gap between 1,800 ineligible firms, 70 firms referred by VA to the IG, and only a few debarment actions?

Mr. KUTZ.  Well, I think it is difficult.  I mean, the way the law was written, it said misrepresentation, but I think we all could agree that the interpretation would be willful misrepresentation. 

I do not think we want to debar people who are making mistakes necessarily.  But there is a large gap between what has been done so far and perhaps the people that should have been debarred.  And I think what it creates is a situation where people are going to be able to get into the system that perhaps should not and stay in the system. 

They may even be kicked out here or denied, but then they go do work with DoD or NASA or someone else because keep in mind you are looking at $3.2 billion or so out of $10 or $11 billion government-wide in service-disabled contracting.  So I think that it is a matter of--right now all the staff as we understand are part time on the Debarment Committee, so it is a matter of perhaps resources and how many can you actually do.  A debarment is very difficult, time-consuming process.

Mr. JOHNSON.  Okay.  All right.  Thank you.

I will yield to Mr. Walz for his questions.

Mr. WALZ.  Well, thank you both for being here.  It is good that we are having both these panels.  Obviously we want to hear the whole thing.  It seems like there is a bit of a disconnect.

How often does it happen, if you can help me with this, where a GAO’s recommendation, and we heard from the last panel that they are just interpreting it differently, do you have an idea how often that happens in your experience?

Mr. WHITE.  That happens very rarely, Mr. Walz.  In fact, I think I can think of fewer than five times in the last decade.

Mr. WALZ.  Okay.

Mr. WHITE.  We had about 2,000 cases.

Mr. WALZ.  And I am also curious and I am a stickler for getting the details right.  I mentioned the one disbarment.  We got that from the GAO, from you guys, was the number that we were using.

I want to be very clear.  The VA says it is seven now.  Is that just the lag time in reporting it is happening there?

Mr. KUTZ.  Well, you are talking about the ten cases that we identified in our first report.  None of those have been debarred by VA.  The ones that they have debarred have come through their own processes.

In fact, one of those ten in--

Mr. WALZ.  My scenario of 20, 22 is actually optimistic on those ten cases.

Mr. KUTZ.  Yeah.  I do not think it is going to happen at VA probably, but one of the ten recently this month was indicted on 15 counts of wire fraud and other fraud.  So as you may be aware of that, that was one of our original cases, and--

Mr. WALZ.  And they are still not disbarred?  Now, I want to give due process.  They were indicted.  They were convicted.

Mr. KUTZ.  They were indicted and I believe the individual and not the firm right now is debarred which that is questionable.  And we are going to look at that. 

Part of our follow-up work for both subcommittees here is to report back to you the details of what happened to those ten firms.  And I believe SBA did debar or suspended a couple of them.  And now this is the first indictment out of the ten and there a couple of others that are still under investigation.

Mr. WALZ.  I am curious about this.  You know, I mentioned one.  They said, no, it is seven.  And we have a disconnect here.

Are those still small numbers?  I know it is the statistics here type of thing.  I finished seventh in my class which was great, but there were only 25 of us.  So that is a little different. 

So is this is a case of this--yeah, they know it is Congress.  Do you know what I am saying?  It seems like an inordinately small number, but maybe the problem is not as great in the ineligibles. 

I am trying to get at this of where--I just get a feeling and maybe I will take this one step further to you, Mr. White.  This is a very unusual disconnect between GAO and an agency since I have been here.  I am feeling that.  And I have to say your initial statement mentioning Aldevra being here seemed highly unusual to me.

Do you feel that strongly that that is why you mentioned that?  I am glad they are here and it is an open public hearing, but for the GAO to mention that they are here and their statement seems to me to show--maybe I am misinterpreting here--that you feel very strongly about this.

Mr. WHITE.  I actually noticed they were here and I thought it was a nice gesture.

Mr. WALZ.  Okay.  Well, good.  And I do not want to read anything into it.  I want to be very clear on that.  You know, and I think it is great for the citizens.  I think what we are seeing is a great example of how the checks and balances can work. 

What I am trying to figure out is, is how we use what you have given us, how we apply that to improve which is, as I said again, an incredibly good organization, the VA, an incredibly good program that is serving veterans.  We just want to make it even better and get these out.

Do you get the feeling they are implementing your suggestions at a pace that can be done, Mr. Kutz?  Do you think they are?

Mr. KUTZ.  With respect to the 13 recommendations--

Mr. WALZ.  Yes.

Mr. KUTZ.  --they are taking action on most of those and, as I mentioned, I believe that the prevention area is where they are the strongest and perhaps the debarment is the area where they are the weakest. 

And I wanted to mention that firm that I showed you on the monitors is one of our original firms and they were never debarred by SBA.  They got to keep the contracts, millions of dollars of contracts they got through fraud and abuse, and now they are vet bus verified today.

Now, I am not going to blame VA on that necessarily because they may look good today, but the point is that protecting the government interest was not done in the first place through a firm in this case that misrepresented their status and our belief intentionally and committed fraud.

Mr. WALZ.  So this is one of the egregious ones here probably.

Mr. KUTZ.  Yes, this is an egregious case.  And, again, it just shows the impact of not debarring someone, that they are able to continue to exist and move around the government and stay in programs and keep doing business.  And if they are going to lie about this, what else are they going to lie about?

Mr. WALZ.  I am always very careful and I think the group up here tends to be that way.  Is this a case where we can clarify or tweak--I know this gets people nervous--the original law to make the intent very clear that our spirit and letter of the law converge very clearly as with shall and may and some of those?  Is that your interpretation?  Would that help you make the case?

Mr. KUTZ.  Well, not on debarment.  I mean, I think debarment--

Mr. WALZ.  Just in general on the whole program.

Mr. KUTZ.  On the whole program, no.  I think the framework you have set up for the VIP--I mean, the bigger issue here, we are--I am just here to talk to you about VA.

Mr. WALZ.  Right.

Mr. KUTZ.  The bigger issue is you have not addressed, no one has addressed what happens outside of VA.  So you still have the ability of firms--it is still a self-certification program for service-disabled vets outside of VA. 

Now, granted, some of the agencies I think are using the VIP pages, but it is not necessarily happening across the government.  And so you still have a little bit bigger problem.  Even if VA gets it tight here for their $3 or $4 billion worth of service disabled, you have got the other $7 billion or so happening outside of that that is still self-certification basically.

Mr. WALZ.  Very good.  Well, I thank you for your time.  That is very helpful.

Mr. JOHNSON.  Mr. Stutzman.

Mr. STUTZMAN.  Thank you, Mr. Chairman.

How often do executive branch agencies refuse to follow the recommendation--I think maybe, Mr. White, you kind of  touched on that--in a GAO bid protest?

Mr. WHITE.  Very rarely.  This would be the first time this year.  It happened last about two years ago.  And it happened involving a very similar statute where the word shall in one statute versus may in some others.  And it was a difficult situation because different Members of Congress felt that the different statutes should have had priority in that situation.

And could I say just one other thing about that?  We do not get invested in which of the statutes sets a priority.  We simply try to interpret the statutes that Congress passes.

Mr. STUTZMAN.  Sure.  What will happen if the VA refuses to follow the recommendation in the Aldevra decision?

Mr. WHITE.  Under the statute that governs the bid protest process, the comptroller general is required to notify the Congress, the committees involved, that would be this committee, and then it would be a matter between the executive branch and the legislative branch.

Mr. STUTZMAN.  Has the VA in recent past refused any other?  Has there been any other GAO reports to the VA?

Mr. WHITE.  I am not aware that there has ever been an instance where the VA has not followed a GAO bid protest recommendation.

Mr. STUTZMAN.  Why on this one?

Mr. WHITE.  Why?  I do not really understand why.  Could I speak factually about a couple of things that I think they are mistaken about?

In the testimony earlier, they mentioned that they will get back to the committee on where this is laid out in the Federal Acquisition Regulation Part 19 which governs small businesses and set-aside programs.

Well, I can tell you that there is only one subpart of Part 19 that addresses service-disabled veteran-owned small business contracting preferences.  And it has a preamble and in its preamble, it expressly states that it is implementing the 2003 Veterans Benefits Act that applies government-wide and is codified in Title 15.

It was not written to implement the 2006 Veterans Benefits Act that is specific to the VA and codified in Title 38.

Mr. STUTZMAN.  And I agree with Mr. Walz’s statements earlier that if there is somebody out there that is taking advantage of this particular program, I mean that the hammer should come down.  But at the same time, we do not want to overreact and make it so difficult for businesses that are legitimate.

And I guess would there be an appropriate way to have appeals reviewed by a third party like SBA’s Office of Hearings and Appeals?  Is there something we could add to the process that would make it more fair or make the appeal process legitimate for a business that would be denied?

Mr. WHITE.  And do you mean other than the federal courts?

Mr. STUTZMAN.  Yes.

Mr. WHITE.  I know that there have been exchanges between the VA and the SBA about whether or not SBA would review the VA’s decisions in this area.  And I think the SBA has taken the view that it will not.  So I do not know why they took that position.  I imagine they have reasons for their views.

Mr. STUTZMAN.  But doesn’t it seem inappropriate to have SVE reviewing their own decisions when it comes to verification?

Mr. WHITE.  I can understand that they may view it that Congress did not anticipate anyone else doing that kind of review other than the courts, but--

Mr. STUTZMAN.  Okay.  Thank you, Mr. Chairman.  I yield back.

Mr. JOHNSON.  I thank the gentleman for yielding back.

I think that is all the questions that we have.  You have certainly enlightened us here. 

We talk about the word shall.  We talk about Title 38 versus Title 15.  I am very concerned with the VA’s refusal to accept the GAO’s response to this particular bid protest.

I am looking forward to see their response.

What did you say again the deadline is?

Mr. WHITE.  The deadline works out to be December 15^th.

Mr. JOHNSON.  Okay.  All right.  Well, gentlemen, I appreciate your being here.  Our thanks to you today and you are now excused.

In closing, improvements in the SDVOSB verification process are obviously a good thing, but I believe we all know and we have seen from today that the work is far from over.

I look forward to the VA’s continued reporting to this committee on progress made in this effort, not only in approving those eligible companies, but also in taking prompt action against those that seek to defraud the government and take business away from our deserving veterans.

Our concerns regarding the Aldevra decision are fairly clear as well.  Knowing that for the last 30 days that it would come up at this hearing, the testimony provided was disappointing at best. 

There is a prime opportunity for the VA to solve this issue without the added time and expense of forcing it into the court system.  Our veterans serve this country with pride and we should be proud to do business with them when they return to the workforce.  The VA can maintain leadership in this arena, but instead it is choosing to only do so when it is convenient.  That is not the treatment our veteran small business owners deserve.

With that, I ask unanimous consent that all Members have five legislative days to revise and extend their remarks and include extraneous material.  Without objection, so ordered.

I want to thank all Members and witnesses for their participation today, especially to Chairman Stutzman in today’s hearing and the ranking members from both the subcommittees for being here today.

With that, this hearing is now adjourned.

[Whereupon, at 11:53 a.m., the subcommittees were adjourned.]