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Witness Testimony of Mr. Scott Denniston, Executive Director, National Veteran Small Business Coalition

Chairman Johnson, Chairman Stutzman, Ranking Member Donnelly, Ranking Member Braley, Members of the Committee and Staff.  Thank you for the opportunity to submit this statement for the record and thank you for holding this vital hearing on an issue so important to the health and welfare of veteran and service disabled veteran owned small businesses in the United States. 

My name is Scott Denniston and I am the Executive Director of the National Veterans Small Business Coalition (NVSBC).  The NVSBC is a 501(c) (6) not for profit trade association registered in the District of Columbia. We are over 100 members strong with 6 corporate sponsors.  There are three requirements to become a member of the NVSBC: 1) must be a veteran 2) must own and control a small business, and 3) the Federal market must be your primary market.  In operation for two years now, we established the Coalition for the purpose of being the “honest broker” between Federal agencies, large business prime contractors and the veteran small business community.  Our mission is to transition veterans into business owners servicing the federal government.  Our vision is to ensure that veteran businesses are given first consideration for federal prime and subcontracting procurement opportunities because these owners continue to serve their country, putting the security of the United States above all else.

As way of background, I had the honor and privilege of serving as the VA’s Director of Small Business Programs for 20 years retiring in January 2009. In January 2001, after the passage of PL 106-50, VA formed the Center for Veterans Enterprise (CVE) with 6 incredibly dedicated and knowledgeable employees. The CVE office was dedicated to assisting veteran owned small businesses break into the Federal market.  Between the enactment of Public Law (PL) 106-50 in August 1999, whose purpose was to expand existing and establish new assistance programs for veterans who own and operate small businesses, to enactment of PL 109-461 in December 2006, which established the provision requiring the Secretary of the VA to “verify” veteran and service connected disabled veteran firms for ownership and control, the Center for Veterans Enterprises’ mission has changed significantly.  Once the go to organization within VA for a veteran-owned small business to seek support and assistance in obtaining contracts, it has now been conflicted with the job of fraud prevention control through the establishment of a different mission.  As you know, VA’s Office of Small Business Programs, including the CVE is funded by VA’s Supply Fund. Prior to my departure a plan was presented and approved to more than double the funding for CVE, including contractor support to manage the new requirements placed on CVE by PL 109-461. Unfortunately it was more than 2 years after my departure before CVE was able to implement the plan.

This hearing is entitled the “Odyssey of the CVE”.  Figuratively, an odyssey is any difficult, prolonged journey.  The CVE is truly an odyssey as evidenced by events which have occurred since the passage of PL109-41, six years ago.  CVE has had a turnover of leadership 3 times; been fraught with fostering too many verification approvals resulting in a high percentage of fraud; is now considered to be too restrictive where ‘denials’ are their first response; where IT systems have been inadequate and unreliable; is now dealing with large volumes of backlog; is responding to GAO Audits, Interagency Task Forces established through the President’s Executive Order 13450, and other such directives.   All of these challenges inject risk into the success of any program and we need to stop, identify risk mitigation strategies and then implement them, keeping in mind that none of them should detract from the Small Business Program of helping veterans who own and operate small businesses do business with the federal government. 

As an organization for which we pride ourselves on being the veterans advocate and mediator between small businesses and the government, we’d like to start by identifying a few of CVE’s successes since its inception.  CVE continues to solicit for additional resources to support the program and have increased their staff (both federal employees and contractor support) significantly.  The CVE’s actions have resulted in fewer misrepresented VOSB or SDVOSB firms being awarded contracts due to their small business status and those that are found have disciplinary action taken up to and including debarment.  The CVE has verified 6,124 VOSB and SDVOSB firms as of July 29, 2012 according to their Vendor Information page.

Unfortunately, the complaints from the veteran community have now shifted from contract awards going to misrepresented firms to the onerous and unpredictable verification process itself.  We believe this is a fundamentally flawed process when half of all veterans are denied by an organization whose mission is “to care for him whom bore the battle”.  We have seen firsthand the consequences of CVE’s actions on veteran business owners including the loss of contracts and businesses closing their doors as a result of failure to obtain CVE verification. 

In December 2011, the Executive Director of Small Business Programs at VA approached the NVSBC to become a “partner” in the verification process. His vision was to identify not for profit organizations to be trained by CVE and then to assist veterans become verified.  The Board of NVSBC was not fully supportive of this idea due to the lack of verification consistency by CVE in the veteran small business community. After much deliberation and believing the process to be so onerous to veterans and our mission of making veteran small business owners successful in the Federal marketplace, we accepted CVE’s offer. We did however make certain requests which we believed critical to our success in helping veterans:

1.      Training of NVSBC representatives and CVE and contractor staff involved in the process.

2.      A specific CVE staff member to be available to answer questions regarding the process, regulations, interpretations and status of applicants we assisted.

3.      Ability to be recognized as a representative for applicants.

4.      Advanced notice of pending denials of applicants we assisted.

5.      Priority processing of applicants we assisted.

6.      Names of all firms rejected in the past year.

7.      Regular meetings with CVE staff to discuss improvements to the process.

NVSBC believes the greatest weakness in the CVE verification process is the lack of communications with veteran applicants. When the provisions of PL 111-275 were implemented in January 2011 there was no communications with the veteran small business community that the requirements had changed. Once veterans submit their applications there is no communication as to the status or process or whether the application is complete. Veterans have no idea whether a VA employee or contractor are reviewing their application.  The first communication from VA in many instances is the letter of denial. Many times the reasons for denial could be corrected with a simple email or phone call to the veteran giving them an opportunity to correct the issue. If the veteran is denied then the process starts anew with the request for reconsideration.

The second area of weakness in the CVE verification process is the restrictive rules implemented by VA as a result of PL 111-275. We understand the need as identified by GAO and VA’s IG to insure only eligible veterans receive the benefits of the “Veterans First” contracting program but we strongly disagree with VA’s punishing legitimate veteran small business owners. It does not appear to us that VA had anyone involved in writing the rules who understands how small businesses operate in the digital age. How does one define “full time”? Why must a veteran be physically present 8 hours, 5 days a week to “manage” a small business?  We also disagree with denying a veteran for something that may happen in the future such as “rights of first refusal” and issues in community property states.  If ownership changes happen the veteran is obligated to notify VA immediately and may no longer be eligible.

The next issue we have is VA’s inconsistent interpretation of the rules. Many veterans because of their service to their country, lack years of business experience and consequently are denied as CVE opines they do not have the background to control their business. As we review cases we can find no set standard as to what constitutes adequate experience to control a business. CVE staff says this is a subjective decision.

Another serious issue is CVE staff not understanding basic business principles and what questions to ask or how to ask these questions.  In the last week we have heard from several veterans who own and control corporations with Articles of Incorporation, By-Laws, Stock Ledgers, etc. Even though most states do not require operating agreements each of the veterans we heard from tell us that CVE requires “Operating Agreements” in order to be verified and if the operating agreement is not provided, the verification process will be halted and the veteran will have his/her application withdrawn.

38CFR 44 defines control as the day-to-day management of the company.  In the definitions, 38CFR clearly defines day-today management as “Day-to-day management means supervising the executive team, formulating sound policies and setting strategic direction”.  The definition of Day-to-day operations is also clear; “Day-to-day operations means the marketing, production, sales, and administrative functions of the firm”. CVE staff does not appear to understand functions/duties of officers/directors of small businesses and how they relate to issues of control versus issues of operations.  Consequently CVE many times asks for documentation from veterans that are not relevant to the control of the business or that are excessively and/or inappropriately intrusive into the veteran’s personal life.

The CVE verification process is not beyond repair and we believe vitally necessary to ensure veterans receive the benefits of our economic system they fought to defend.  We believe the following recommendations if implemented, would significantly improve the CVE verification process:

1.      In-depth development of standard operating procedures by which verification will be conducted by business entity (e.g. S-corp, C-corp, LLC., etc.) training of CVE and contractor staffs on basic business management principals.  It is vital for CVE and contractor staff to understand business basics, provide guidance to veterans, and understand what’s necessary to have a robust verification application and program.

2.      Open lines of communications with veteran applicants thru emails, phone calls and hands on collaborative philosophy.  CVE too often treats the veteran as the enemy rather than as a client.

3.      Assign a case worker to every application and inform the veteran as to who that person is and their responsibilities.

4.      Establish a “Management Review Board” to :

a.      Vet all applications prior to denial and

b.      Review requests for additional documentation to assure there is a statutory or regulatory basis for the request, that is relevant to determining control or ownership and that it is not burdensome to veterans.

5.      Provide veteran applicants an opportunity to take corrective action before issuing a denial letter.

6.      At the recent veteran business conference in Detroit Secretary Shinseki announced a committee to review and determine how the verification rules could be improved.  VA should invite veteran small business owners and stakeholders to be part of the process.

7.      Establish a VA Veteran Business Advisory Committee to review processes, procedures, rules, policies and their implementation as it relates to “Veterans First” to make recommendations to the Secretary for improvements.

8.      Institute a “Grace Period” whereby firms who have been previously verified as veteran or service disabled veteran owned and controlled remain “verified” until such time as CVE has an opportunity to perform an in-depth review so legitimate veteran or service disabled veteran owned are not denied pending contract opportunities while in a state of uncertainty.

Section 101 of Public Law 106-50, the foundation for all we are addressing today says: “ the United States has done too little to assist veterans, particularly service disabled veterans, in playing a greater role in the economy of the United States by forming and expanding small business enterprises” and further states “The United States must provide additional assistance and support to veterans to better equip them to form and expand small businesses, thereby enabling them to realize the American dream they fought to protect.”   It seems VA and particularly CVE have forgotten this charge through restrictive and inconsistent rules and interpretations, lack of communications with veterans, and disregarding the fact our livelihoods and basic wellbeing rest on their decisions.

 In your letter of invitation for this hearing you asked NVSBC to include our opinion on whether VA should use the Small Business Administration’s regulations defining ownership and control of a small business, what documents should be required for certification, and how often a business should be re-certified.  The advantage of SBA’s regulations is a body of case law and decisions which allow veterans and their advocates to understand the basis of decisions. What is more important is SBA regulations are   consistent and provide a basis for clear implementation which is lacking at VA today.  A process that requires most veteran to seek assistance and pay upwards of $10,000 to submit an application is erroneous and burdensome, particularly when half of all veterans are denied verification.  We suggest a committee, including knowledge business experts address the issue of required documentation. As VA’s regulations require notification anytime a change in ownership or control takes place certification/verification should be good for at least 3 years. VA has the ability and capacity to do spot checks of at risk businesses if necessary.