Why is the HUBzone program prone to abuse, and how can it be improved?

ByBrian Markovitz July 23rd, 2018

It is no secret that crime occurs disproportionately in areas that are economically underdeveloped. Individuals who have few employment opportunities still need to pay their bills and meet their basic needs, and often stable employment is scarce or nonexistent in those neighborhoods. As a crime-reducing and neighborhood-building initiative, the federal government has sought to encourage the growth of private business and local employment in impoverished areas.

In an attempt to alleviate poverty, the Small Business Administration enacted the Historically Underutilized Business Zone (HUBZone) program. HUBZones form part of a diversity program meant to locate headquarters of small businesses in distressed areas and have them hire residents from those disadvantaged neighborhoods. Ideally, this will spur local economic growth, encourage entrepreneurship, and provide stable employment opportunities for residents. In return, the federal and participating local governments allow HUBZone companies to gain preferential access to government contract opportunities.

Unfortunately, companies often lie to get the bidding advantage and either don’t put the headquarters in the disadvantaged neighborhoods or don’t hire the people from those neighborhoods. The US Government Accountability Office (GAO) reviewed the SBA HUBZone application process and found that it was dangerously prone to abuse. In fact, when they extended their investigation, they found that 10 firms in the Washington D.C. area alone were falsely claiming HUBZone status.

In a national review, the GAO identified 19 additional firms in Texas, Alabama and California that were illegally participating in the HUBZone program. In one notable instance, an Alabama firm gave a false address as its primary headquarters. When federal investigators arrived at the address, they did not find a bustling local business, but a housing unit in a residential trailer park.

The government’s oversight and holes in the HUBZone program resulted in a total value of $187 million worth of federal contracts going to businesses that never intended to benefit underdeveloped communities. In response to rising levels of fraud and on the recommendation of the GAO, the SBA created a Suspension and Debarment Taskforce charged with identifying fraudulently certified companies and expelling them from government business. This program has been moderately successful, but further review and constant vigilance will be necessary to ensure that HUBZone contracts go to areas that will truly benefit from them. If fraud within the program can be reduced, the positive effects on underdeveloped communities could be life-changing for the families that call them home.

The government, however, is looking for people to report this fraudulent activity and catch those companies that cheat to gain taxpayer dollars and rob the people in those area of economic opportunities and can provide a finder’s fee if successful prosecution occurs.  If you know of such companies, please contact me at 240-553-1207.  

Brian Markovitz

Brian Markovitz is a principal in the firm’s Labor and Employment and Civil Litigation practice groups who focuses primarily on helping victims who have suffered severe injustice in the workplace. He represents individuals throughout Maryland, the Washington D.C. area and across the country in complex employment litigation and appellate matters involving wrongful termination, retaliation by employers in response to reporting fraud or misconduct and discrimination on the basis of race, gender, age and sexual orientation. 

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