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Witness Testimony of Mr. Thomas J. Leney, Executive Director, Office of Small and Disadvantaged Business Utilization, U.S. Department of Veterans Affairs

Chairman Johnson, Chairman Stutzman, Ranking Member Donnelly, Ranking Member Braley, and Members of the Subcommittees, thank you for inviting me to testify on the status of VA’s Veteran-owned small business (VOSB) Verification Program and on VA’s response to the Government Accountability Office (GAO) report GAO-12-697, “Service-Disabled Veteran-Owned Small Business Program: Vulnerability to Fraud and Abuse Remains.” 

Overview

VA has made substantial progress in improving the VA VOSB Verification Program.  These improvements have reduced the potential for ineligible firms to take improper advantage of the “Veterans First” program, while making it easier and faster for legitimate VOSBs and service-disabled Veteran-owned small businesses (SDVOSBs) to gain greater access to VA procurement opportunities. 

VA has addressed the issues raised in the GAO report, and believes the current VOSB verification process provides a high level of assurance that only eligible firms are verified.  We have improved our quality control and become more aggressive in referring firms that we suspect are misrepresenting their status.  In FY 2011 we referred 25 firms to the Office of Inspector General (OIG) for investigation as possible misrepresentation.  So far in FY 2012, we have referred 59 firms.  In FY 2011, all referrals were made to OIG with the expectation that if OIG declined to investigate, that the referral would forward on to the 8127 Debarment Committee.  The Center for Veterans Enterprise (CVE) has established a formal process for referring misrepresentation to the VA 8127 Debarment Committee that has resulted in improvement, going from no referrals in FY2011 to 28 referrals so far this year.  The 8127 Debarment Committee has debarred 8 firms and 7 individuals and there are 9 firms and 20 individuals pending a decision from the committee.

At the same time we have taken action to improve the process, in order to enable eligible firms to be verified quickly and efficiently.  By regulation, VA has 90 days from the time it receives a complete verification application to make a decision.  When I appeared before you in July 2011, it took more than 130 days on average to process an initial verification application.  CVE has now improved upon that time.  A year ago, only 41 percent of initial applications were approved.  In the past two months, due to our increased efforts to educate potential applicants on how to become compliant with the regulation, more than 70 percent of initial applications were approved.

Need to balance efforts addressed by GAO with enabling firms to get verified

The recent GAO report states that the government-wide SDVOSB self-representation program is still vulnerable to fraud and abuse.  While acknowledging progress made by the VA VOSB Verification program, the report states that our program remains vulnerable due to an inconsistent approach to prioritizing the verification of firms and the inability of the CVE to accurately track the status of its efforts.  VA believes this GAO finding is inaccurate, as the CVE knows how many firms have been verified, and is able to track its inventory of firms that have been verified or are currently in the application process.  CVE tracks its inventory of firms in VIP using the Verification Master Inventory List due to limitations in the capabilities of our Verification Case Management System (VCMS).  As of July 12, 2012, there are 6,079 firms in the Vendor Information Pages (VIP) and all of these firms have been verified under the requirements established by Section 502 of Public Law 109-461 in 2006.  Of that total, 2,355 were verified prior to the enactment of Section 104 of P.L. 111-275 in 2010 and 3,724 were verified using the processes implemented after  by that legislation. No firm appears in VIP as eligible for award unless it has been verified as owned and controlled by a Veteran or service-disabled Veteran.  There are 1,449 firms listed in VIP whose verification has expired.  These firms are annotated as in “reverification” status and they are not eligible to receive awards without undergoing reverification using the post-2010 Act process.  These companies’ two-year eligibility term has expired, but they previously submitted a reverification application.  This “reverification” status allows them the opportunity to continue to pursue VA “Veterans First” set-aside contracts, but ensures that they will not receive an award until reverified under the current process.  

VA has utilized a consistent approach to prioritization that is based on the regulation, fundamental principles of fairness, and availability of resources.  Our specific priorities have evolved as appropriate in response to situational changes and resources.

In May 2011, the priorities were as follows:

(1) Verification of new applications for firms that had previously only self-represented in VIP (i.e., firms that had not been reviewed under processes created for the 2006 Act or 2010 Act);

(2) Verification of new firms that had initially applied for verification after the 2010 Act;

(3) Requests for Reconsideration from firms denied verification; and

(4) Reverification of firms initially verified in VIP under the process implemented prior to the 2010 Act.

“Unverified” firms were listed in VIP as “pending” but were not eligible for award of contracts.  They were eligible to submit proposals and those that were pending award received top priority for verification as part of “fast track” program. VA committed to eliminating all unverified firms in VIP no later than December 31, 2011.   By September 4, 2011, CVE completed that mission and since that time only those firms who have gone through the verification process are listed in VIP.  CVE reinstituted the “fast track” program in May 2012 for those companies identified as being in “reverification” who are identified by the VA Contracting Officer as the apparently successful offeror for a VA Veterans First set-aside contract.

Today, the priorities are as follows: 

(1) Fast Track verification of firms in “Reverification” status that are pending award;

(2) Simplified reverification of firms verified using post-P.L. 111-275 procedures;

(3) Verification of new firms using the post- P.L. 111-275 procedures;

(4) Requests for Reconsideration from firms denied verification; and

(5) Reverification of applications for expired firms initially verified in VIP under pre-P.L. 111-275 procedures.

CVE primarily initiates reverification of firms verified prior to P.L. 111-275 when their eligibility expires.  This is in accordance with 38 CFR § 74.15 (c) that otherwise only authorizes CVE to initiate a verification examination “whenever it receives credible information calling into question a participant’s eligibility as a VOSB.”

To ensure that it verifies only eligible firms, CVE has made a number of improvements, to include:

•         Established a Quality Control (QC) Review Program to address potential errors.  An integral  feature of the QC Program is a legal review of CVE’s work product performed by staff attorneys within the Office of General Counsel (OGC) when requested by CVE;

•         Improved records management/document control;

•         Strengthened review of Requests for Reconsideration by adding OGC review of all Requests for Reconsideration;

•         Established risk management program;

•         Established formal OIG referral process; and

•         Established a Standard Operating Procedure process for referral of cases to the 8127 Debarment Committee in compliance with P.L. 109-461 requirement

While we believe that these improvements significantly reduce the risk of ineligible firms being verified, we continue to refine and improve the system.  At last month’s National Veterans Small Business Conference in Detroit, Secretary Shinseki announced an interim final rule change that modified the eligibility term from one year to two years.  This change had an immediate effect on 2,424 businesses whose eligibility would have expired, but retained their eligibility for another year.  CVE will reverify these firms using the more robust verification process established post-P.L. 111-275, when their eligibility expires.   

 As stated at the National Veterans Small Business Conference in Detroit, VA is fully prepared to adjust the standards based on the lessons learned from the implementation of the verification regulation.  To this end, the OSDBU is in the process of seeking input from stakeholders in order to draft a significant change to 38 Code of Federal Regulations (CFR) Part 74.  We will be using this feedback to draft proposed rule changes governing VA VOSB Verification.  The rulemaking process is not quick. VA intends to be thorough in identifying and analyzing proposed changes to the regulation that will streamline the process without compromising the integrity of the examination.

The Committee has asked VA to address how often a business should be recertified.  SBA’s HUBZone program is a three year recertification, while their 8(a) business development program requires annual recertification.  We believe that the recent extension of the verification eligibility from one to two years is on balance the right decision.  VA welcomes the Committee’s input on any possible regulation changes.

Small Business Administration Comparison

In close collaboration with the SBA, we compared the regulation that governs VA verification, 38 CFR Part 74, and the regulation that covers the government-wide SDVOSB program, 13 CFR Part 125 as well as 13 CFR Part 124 that governs the SBA 8(a) business development program.  We have worked closely with cognizant SBA staff to examine the regulations and the existing case law on SDVOSB status eligibility.  While we found that 38 CFR Part 74 is more detailed in its explicit requirements for ownership and control, there are very few substantive differences between the three regulations.  Indeed, the VA requirements for ownership and control are nearly “word for word” the same as SBA’s requirements for their 8(a) business development program.  The regulation that covers the SBA SDVOSB program, 13 CFR 125, is mostly silent in terms of ownership and control, and was written specifically for a self-representation program.  VA and SBA have recently completed an informal crosswalk of the regulations for the VA VOSB Verification program (38 CFR Part 74), the SBA SDVOSB program (13 CFR Part 125) and the 8(a) business development program (13 CFR Part 124) in order to determine if there are material discrepancies between the regulations.  With respect to the government-wide SDVOSB program, SBA case law indicates that the places where 13 CFR Part 125 is silent, SBA follows the 8(a) regulation.  This is borne out by case law from the SBA Office of Hearings and Appeals (OHA) as early as 2005 in SBA No. VET-102.

Apart from the obvious difference that VA’s program also addresses Veteran-owned small businesses in addition to service-disabled Veteran-owned small business, VA and SBA determined that there was only one main discrepancy between the SBA regulations and interpretations and the VA regulation.  This is due to the provision of P.L. 109-461 for a surviving spouse exception that is unique to VA. Both VA and SBA will be posting a comparison document to their Web sites to illustrate the consistency between the regulations.

We also examined the document requirements for each regulation and again did not find substantial differences.  Based on this review we do not believe that there is a need to modify the document requirements in order to avoid major discrepancies between programs. The documents required by each program are listed in the table below.

VA Document Requirements

SBA Document Requirements

General

Business and/or personal professional, industry, and/or other licenses, permits or accreditations

Copies of licenses and agreements required for the operation of the business (e.g. franchise, license, and or similar contractual agreements with other concerns)

Resumes of all owners, directors, partners, officers and other key personnel

Names, addresses and resumes for all officers, directors, managing partners, and/or managers of the firm (the resumes should include the names of current and former employers and dates of employment)

Approval letters for businesses with Sensitive Compartmented Information Facility (SCIF) or  “Vault

Date and state in which the firm was established or incorporated

 

Name and address of the firm's owners, general partners, members, and principal shareholders/stockholders

Financial

IRS Federal tax form 1040 and the attached Schedule C for the past three years 

Copies of the business concern's two most recent Federal tax returns

IRS Federal Tax Form 1065 and corresponding K-1 for past three years.   

Unemployment tax filings for the two quarters prior to offer

Appropriate IRS tax form filed; If filed as Sole Proprietorship (Schedule C), partnership (Federal tax form 1065 and K-1); or S Corporation (1120S and K-1) for the past three years.  

Unemployment tax filings for the current quarter

Federal tax form 1120S and corresponding K-1 for the past three years

List of the firm's current financial obligations to other individuals or entities (e.g. loans, security agreements, guarantees, indemnifications, etc.)

For Joint Ventures, applicable Federal tax returns based on business type (see above) for the last three years for each participant

Breakdown of the firm's sources of revenue indicating total percentage of revenues attributable to individual source

Signature cards authenticated by financial institutions (Banks/Credit Unions/etc.)

List of individuals who have signed or are expected to sign documents to facilitate the ability of the business concern to receive indemnifications or credit guarantees, who are NOT owners, officers, directors, employees, partners, or principal stockholders of the business concern.

Copies of approximately 20 negotiated company checks

 

Management Information

Lease, Management and Services agreements, to include supporting payments 

Copy of lease agreement

Operating Agreement including all amendments

 

Legal Structure

Ownership Agreements or Partnership Agreements (i.e. proxies and voting trust agreements)

Buy/sell agreements

Partnership Agreement, including all amendments

Percentage of voting stock in the firm or business owned by SDVs

Shareholders Agreement, including all amendments

Shareholder agreements

Equity participation or equity plans, restricted stock or ownership interests or options for stock or ownership interest or plans

List of any stock options outstanding and name of person holding option; include agreement

Official Certificate of Formation and Operating Agreement with any amendments

Copies of promissory notes and proof of payment

Minutes of first and most recent stockholder and Board of Directors meetings (Evaluator may request additional minutes, and applicant may supply additional minutes to explain any changes since the establishment of the Operating Agreement)

Copy of the last corporate meeting minutes

All corporate bylaws and all amendments

Copy of corporate bylaws, partnership agreement, or operating agreemen

Articles of Organization for LLC’s, including all amendments

Copies of stock certificates (front and back) for all classes of stock

Articles/certificate of incorporation filed with the Secretary of State including all amendments

Articles of Incorporation

Joint Venture Agreement and current opportunity on which joint venture is bidding

Percentage and description of work under this contract that will be performed by affiliates

Stock registers for Applicant or stock ledgers showing listing all shares of issuance. 

Stock ledger certified by the corporate secretary or president

 

List of stock held by a lender or other party as pledged collateral; include copy of agreement

 

List of stock voted under a proxy agreement, a trust and a copy of such agreement

 

Trust agreements

 

Copy of any and all contracts or agreements between the firm and any affiliates (including joint venture partners)

Other

 

Evidence that the firm's majority owner has been recognized by VA or DoD as service-disabled - written determination

 

Complete copy of proposal

 

List of the firm's affiliates (domestic and foreign)

 

List of all owners, partners, directors, officers or principal shareholders/stockholders that hold a position (paid or unpaid) in another firm

 

List of all owners, officers, directors, supervisors and/or employees that  have ever been employed by or performed work for any affiliate of the firm

 

List of all facilities, equipment, and or personnel shared with other firms at the time of the bid opening

New Process Improvements

In addition to the actions we have taken to strengthen the verification process, we have also made improvements in the process aimed at reducing the time it takes to receive an eligibility determination.   CVE has made a number of process improvements, to include:

•         Online application system;

•         Streamlined review process;

•         Standardized review procedures;

•         On-demand application status check;

•         Customer service help desk with expanded hours; and

•         Determination letters posted online for on-demand retrieval.

The impact of improvements has been limited by the high rejection rate of applications.  In 2011 more than 60 percent of applications were rejected.  Our analysis of this result revealed that most rejections occurred as a result of a lack of understanding of the requirements, not fraudulent applications.  In order to address this problem, we have taken action to help Veterans better understand the requirements.  We developed Verification Assistance Briefs posted on VetBiz that clarified the requirements and explained in plain language what was needed.  We have provided briefings to Veteran businesses on how to meet the standards.  We have developed an on-line Verification Self Assessment Tool that takes a prospective applicant through a detailed review of their business model and its fit to the regulation.  It covers all of the documentation required for their business type and enables them to assess if there is anything in their business model that would increase their risk of denial. 

For those that need more assistance, we have established partnerships with the Procurement Technical Assistance Centers and several Veteran Support Organizations to provide counseling and answer questions for applicants.  The verification counselors are trained with the same materials that are used to train our examiners.  We rolled out the counseling program at the National Veterans Conference in Detroit, where it was extremely well-received. 

Conclusion

VA has made significant progress in its VOSB verification program.  We have overcome many of the challenges and vulnerabilities that were raised by the GAO and OIG reports but we seek continuous improvement.  Mr. Chairmen and Members of the Subcommittees, this concludes my statement.  I am pleased to answer any questions you may have.