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07.19.21

What is a HUBZone? 

"HUBZones," or "historically underutilized business zones," are the result of a program administered by the Small Business Administration ("SBA") that seeks to provide employment opportunities and economic development in areas that need it most. In order to qualify as a HUBZone business, companies must meet the following criteria:

  • Be a small business per SBA criteria: "Most manufacturing companies with 500 employees or fewer, and most non-manufacturing businesses with average annual receipts under $7.5 million, will qualify as a small business."
  • Be at least 51% owned and controlled by U.S. Citizens, a community development corporation, an agricultural cooperative, a Native Hawaiian organization, or an Indian tribe
  • Have its main office located in a HUBZone
  • Have at least 35% of its employees live in a HUBZone

The federal government’s annual goal is to award at least 3% of all federal spending on prime contracts to HUBZone certified companies. In FY 2019, the government came short of this goal, but still awarded $11.4 billion to HUBZone certified businesses. 

HUBZone Fraud and the False Claims Act

Using deceptive practices during the HUBZone certification process can lead to False Claims Act violations. Per the SBA, the federal government’s intent in administering the HUBZone program is to "limit competition for certain contracts to businesses in historically underutilized business zones." By helping HUBZone firms obtain federal contracts, the government is able to funnel federal spending into areas that demonstrate the greatest need for expanded employment opportunities and overall economic development. However, when a firm misrepresents its HUBZone eligibility in order to secure one of the designated federal contracts, it deceives the government into awarding funds to a firm that does not advance the purpose of the HUBZone program. 

What are some recent changes to the HUBZone program? 

On December 26, 2019, the Small Business Administration introduced new HUBZone program guidelines that make the certification process less burdensome for small businesses. Some highlights of these changes include:

  • Because it is difficult for companies to ensure that 35% of employees to live in a HUBZone, the SBA granted some flexibility by allowing employees who resided in a HUBZone for some time before and after certification, but then moved out of a HUBZone, to still count towards the 35%. 
  • Instead of being updated annually, HUBZone maps will stay constant for 5 years so that companies have greater certainty about the future of their HUBZone status. Currently, all HUBZone maps are frozen until the end of 2021. 
  • If a company is HUBZone certified at the start of the contract’s work, they will be considered a HUBZone firm for the remainder of the work on that contract. 

What does HUBZone fraud typically entail?

The Government Accountability Office ("GAO") reports that recently, there has been heightened congressional interest in HUBZone fraud, as there have been many instances of non-HUBZone firms misrepresenting eligibility in order to obtain the designated contracts. This fraud hurts the integrity of the program while also depriving qualified firms of opportunities for economic advancement. 

2008 GAO case study of 10 firms in the Washington, D.C. metropolitan area provides examples of how firms misrepresent HUBZone eligibility. Some firms listed the address of an office space in a HUBZone as its principal office, but conducting the majority of its operations in an office in a non-HUBZone. In one instance, the GAO visited a firm's "principal address" during business hours and found no employees – just a computer and a filing cabinet. 

Other firms listed the address of a virtual office in a HUBZone as the principal office, but with lease terms that clearly do not meet principal office requirements. For instance, one firm's virtual office lease agreement was only for mail-forwarding services. Five firms had virtual office lease agreements for just 10 hours of conference room usage per month.

These examples are just a few of the ways a firm can fraudulently obtain HUBZone-designated contracts, which can lead to False Claims Act violations. 

How does the False Claims Act apply to HUBZone fraud?

Any time the federal government spends money on contracts, there is potential for False Claims Act violations. When a firm obtains a HUBZone-designated government contract using a fraudulent certification, the firm fraudulently induces the government into awarding them the contract. This means the firm is not entitled to the contract and therefore is not entitled to the government funds that accompany the contract. In other words, if the government knew about the fraud at the time they awarded the contract, they would not have awarded the contract to that firm. Thus, the firm submitted false claims to the government. 

Recent Example of HUBZone Fraud: 

In May 2020, construction company Northland Associates agreed to pay $4.47 million to resolve False Claims Act allegations involving HUBZone fraud. Northland Associates created a shell company, called Diverse, to obtain $57 million in government contracts designated for HUBZone certified businesses or for Service-Disabled Veteran-Owned Small Businesses (SDVOSB). 

In a fraudulent arrangement that exploited the HUBZone and SDVOSB programs, Diverse obtained the designated government contracts and Northland fulfilled them. Diverse’s offices were in a HUBZone, but the company was operated entirely by Northland out of their non-HUBZone offices. According to the Department of Justice (“DOJ”) press release, "Witnesses recounted moving boxes of files from Northland’s Liverpool, New York office (which was not located in a HUBZone) to Diverse’s office in Plessis, New York (which was located in a HUBZone), to make the Plessis office appear operational for government inspections." Furthermore, Diverse was 51% owned by a service-disabled veteran and 49% owned by Northland, but Northland controlled 100% of the operations. The relator’s Amended Complaint stated that the "Defendant’s false certifications [HUBZone and SDVOSBC] fraudulently induced the Government to award the tens of millions of dollars of contracts to Diverse," thus violating the False Claims Act.1

What should you do if you encounter HUBZone fraud?

If you observe fraud pertaining to the HUBZone certification process or other fraudulent arrangements involving HUBZone designated contracts, you can file a qui tam lawsuit. Whistleblowers who sue on behalf of the government may receive between 15 to 30 percent of the money recovered by the government if the suit is successful.

The whistleblower attorneys at Goldberg Kohn are familiar with cases involving HUBZone fraud. If you are aware of fraudulent HUBZone practices, call Goldberg Kohn at 312-284-3258 or contact us online. We are always willing to provide you with a free, confidential consultation to discuss a potential case.

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1 Amended Complaint at 11, United States of America, ex rel. James Hagan v. Northland Associates, Inc., et al., No. 5:17-cv-00036-GTS-TWD (N.D.N.Y.).