Albion Monitor /News

Privileged Exploit Program for Minorities, Poor

by Jeff Elliott

Billions going to firms with questionable need

A federal program intended to help the poor and minorities create start-up businesses appears to be frequently defrauded by whites and the wealthy, sometimes with the help government agencies, according to a new GAO report.

Examining the 1992 top 25 companies participating in the program available through the Small Business Administration (SBA), investigators found hundreds of millions of dollars going to firms that either never qualified for the benefits or had long since grown too large to participate.

GAO found that the SBA had initially rejected 15 of these 25 firms because the applicants did not meet eligibility standards. These rejections were overruled, in some cases by high-level SBA officials, despite the fact that some of the firms had been turned down up to three times previously for the same reasons. The total dollar value of contracts awarded to these firms is at least $2.9 billion, about 60 percent of the money spent in the entire program.

Corporation falsified its application to hide true ownership and filed financial statements understating its worth

Inspectors initially flagged four of these 25 companies in the "section 8(a)" program as strongly suspected of regulatory violations and criminal misconduct, but the GAO found that the SBA records for one firm were destroyed in the Oklahoma City bombing. The GAO was continuing its investigation of another company when the report was released.

Of the two companies described in the GAO report, both were among the firms initially rejected because of ineligibility. Together, the firms received almost a billion dollars in contracts under the program.

One company with dubious qualifications was I-NET, Inc., a Bethesda, Maryland high tech corporation that provides federal agencies with computer systems and support services. During its nearly 10-year program participation, I-NET obtained contracts worth at least $508 million.

The GAO found that the corporation had falsified its application to hide true ownership and filed financial statements understating the worth of the company and credit available. The SBA took no action when it learned of these misrepresentations.

In four separate instances, SBA officials recommended rejecting I-NET for the program, but other SBA officials overruled these decisions. One concern was because SBA officials had determined that I-NET's owner and president, Mrs. Kavelle Bajaj, lacked the technical and managerial experience to run a high technology computer firm. They also determined that her husband, a recognized expert in the field, would actually control and run the firm's operations.

Mrs. Bajaj also falsely claimed that she had an AA degree in Computer Science and Technology from a Rockville, Maryland college, when she actually had a Bachelor of Science degree in Home Economics from the University of Delhi, India.

I-NET submitted other false statements to SBA about ownership changes and the company's net worth. As late as 1993, the company claimed that bankers had labeled I-NET "in a negative way" and that "...maintaining adequate capital and credit are a constant challenge which leaves the company at risk." In fact, the company had a $25-million line of credit with its bank, had obtained loans and financings exceeding $2 million, and had sales approaching $100 million per year. When asked about this apparent contradiction, Mrs. Bajaj told investigators that it was her view that $25 million was not sufficient credit.

Although the SBA knew of these and other violations, the company continued to receive contracts from the agency. Even after I-NET left the program in 1994, SBA awarded them at least $62 million in additional contracts.

SBA questioned the control that TAMSCO's white owner exercised over his Hispanic partner

The other company described in the GAO report was also a Maryland high technology corporation. TAMSCO provides computer systems and support services to federal agencies and large defense contractors. Like I-NET, the company was originally declared ineligible for the set-aside program.

From the outset, SBA questioned the control that TAMSCO's white owner exercised over his Hispanic partner. Although the Hispanic man owned 51 percent of the business as required to qualify, the company was operated from the white owner's home, and the white owner had a higher salary than his Hispanic partner. The white partner previously had been the supervisor of the Hispanic man.

The SBA official who overturned two recommendations for denial had no answers or explanations for the GAO as to why he had accepted TAMSCO into the program over prior objections about who actually controlled the business.

GAO investigators also found the Coast Guard steered a contract to TAMSCO one day before the company left the SBA program. By changing a code number and improperly lowering the estimate of labor required, the Coast Guard awarded the contract worth up to $14 million to TAMSCO without competitive bidding.

During its program participation from 1984 to 1993, TAMSCO obtained 108 contracts through the SBA program worth about $356 million. At least 82 of its 108 contracts under the program were awarded noncompetitively.

The so-called "section 8(a)" program was intended to promote the development of small businesses owned by socially and economically disadvantaged individuals so that they could develop into viable companies. To be eligible for the program, a small business must be 51 percent unconditionally owned and controlled by one or more qualified individuals. The company must also meet size standards established by the SBA. Firms in the program are also eligible for financial, technical, and management assistance from SBA to aid their development. Participating firms can stay in the program for up to 9 years.

Other SBA programs have not been without their problems. In 1993, the GAO found congressional concerns were justified about potential fraud and a lack of oversight of the Small Business Development Center program. Investigators found the SBA lacked objective criteria for evaluating the services provided to its customers.

[Editor's note: Comments by Senator Bond (R-Missouri) and commentary on the 8(a) program can be found elsewhere in this issue.]

Albion Monitor November 14, 1995 (

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