Small Business Government Contractors Need to Watch Out for Increasing Criminal and False Claims Act Liability in Small Business Government Contracting Programs
The U.S. Small Business Administration (SBA) preference programs can be vital for small businesses trying to compete in the potentially lucrative world of U.S. government contracting, but participation in these programs is not without risk. Indeed, the programs can be fraught with peril and contain many landmines for those who do not understand and diligently comply with applicable small business program requirements.
Small Business Government Contracting Programs
The SBA works to make sure small businesses get at least 23 percent of all federal contracting dollars each year, primarily through the SBA’s small business and contracting assistance programs. These programs are designed to assist small businesses by limiting competition for certain government contracts or by awarding a certain percentage of contracts to small businesses that participate in the respective programs. The SBA has a variety of such programs, such as the small business set-aside program, 8(a) Business Development (8(a)) Program), the Service-Disabled Veteran-Owned Small Business (SDVOSB) program, the Women-Owned Small Business (WOSB) Program, and the Historically-Underutilized Business Zone (HUBZone) Program, which were created for small businesses owned by socially and economically disadvantaged people or entities, service-disabled veterans, or women or small businesses operating in historically underutilized business zones, respectively.
A few of the small business programs have had their own issues with certifying and monitoring their participants, which has led to executive and legislative scrutiny. For example, in recent years, two separate inspectors general audited the HUBZone and SDVOSB Programs. In 2019, the SBA Office of Inspector General (SBA-OIG) released the results of an audit of 15 of 39 firms that received HUBZone certification and a HUBZone contract between April 1, 2017 and March 31, 2018. The SBA-OIG determined that three of the 15 had been improperly certified to participate in the program and that the SBA had not even made an eligibility determination for four others that were participating in the program. In February 2020, the Department of Defense (DoD) Office of Inspector General (DoD-OIG) issued a report which noted major concerns with how the DoD was confirming eligibility for SDVOSB contract awards. The report described an audit of 29 SDVOSB contractors, 16 of which did not meet SDVOSB requirements. The 16 contractors at issue received 27 contracts, collectively valued at $827.8 million. The report stated that the 16 contractors “did not have a service-disabled veteran as the owner and highest ranking officer of the company or whose publically available information and contract documentation did not support that the contractor met the requirements for SDVOSB status.” The report also noted that DoD did not verify subcontracting limitations for contracts awarded to three of the 16 contractors.
Criminal and Civil Enforcement
Despite the internal program issues that the Inspectors General (IG) identified, or possibly because of the inherent weaknesses in the verification capabilities of the programs, criminal and civil enforcement has increased dramatically since 2019. Within the last year alone, there have been at least four federal indictments or guilty pleas of business owners who willfully misrepresented their status as small businesses, women-owned, service-disabled veteran-owned, or minority-owned. The criminal matters are clear-cut cases of fraud and misrepresentation, such as a recent case from late May 2021, in which the U.S. Department of Justice (DOJ) filed a criminal complaint against a construction company president who allegedly claimed that the business he owned and controlled was a female-owned business so that he could secure millions of dollars of U.S. Department of State construction contracts reserved for women-owned small businesses. Earlier, in March 2021, the DOJ indicted a former construction company owner for allegedly installing a service-disabled veteran as the apparent owner of a general construction company, thereby purportedly qualifying the company as a SDVOSB. In fact, the true owner’s non-service-disabled business partner exercised operational and financial control of the company and the entity was not eligible for SDVOSB awards because it was not owned and controlled by a service-disabled veteran. The construction company obtained $250 million in government contracts set aside for SDVOSBs. This scheme is not novel and is commonly referred to as a “rent a vet” scheme.
While these criminal enforcement matters allege willful fraudulent conduct, the government has another tool, the False Claims Act (31 U.S.C. §§ 3729 – 3733), to pursue knowing violations by contractors who certify that they are in compliance with program requirements when, in fact, they are not. A key aspect of the FCA is its whistleblower or “qui tam” provisions, which allow for whistleblowers who first report suspected violations to obtain a percentage of the government’s recovery from a successful resolution of the matter. The FCA is a civil enforcement statute that does not require specific intent to defraud, such as in most criminal fraud statutes. This lowered knowledge requirement, along with the potential for incredibly hefty fines and treble damages, are part of the reason that it has become the federal government’s main tool to combat fraud involving government funds and property in a multitude of government operations and functions. In 2020, the DOJ recovered over $2.2 billion from FCA cases. The reach of the FCA is broad and liability can extend to affiliates and business partners of purported small businesses that contract with the federal government. Indeed, in light of the trillions of dollars that Congress appropriated for COVID relief, a bipartisan group of senators, led by Sen. Chuck Grassley (R-Iowa), introduced amendments in late July 2021 to augment the FCA by clarifying certain provisions and expanding the reach of other provisions.
Since the February 2020 DoD-OIG report highlighting problems with the SDVOSB program, there have been at least eight key FCA settlements, rulings, and filings regarding various small business fraud scheme allegations, with five settlements in 2021 alone. Most recently in late July, a Virginia-based consulting group and its president and majority owner agreed to a $4.8 million settlement regarding FCA allegations that they paid kickbacks to companies certified by the SBA as 8(a) small businesses to obtain 8(a) set-aside contracts and that they falsely represented to government agencies that the 8(a) certified companies would be performing at least 51% of the work on the government contracts, when in fact, the non-8(a) consulting group performed 100% of the work. In another matter the month before, a multinational telecommunications and internet service provider agreed to pay over $12.7 million to settle FCA allegations involving kickbacks from subcontractors, improperly obtaining competitive bid information, and misstating compliance with WOSB subcontracting requirements. The telecommunications company is alleged to have falsely represented to the Department of Homeland Security that one of its subcontractors qualified as a WOSB to satisfy contractual obligations to award a certain portion of work to a WOSB, despite knowing that the subcontractor was owned and controlled by a male, and that the work was performed by a different subcontractor. Earlier in the same month, yet another contractor, this time a remediation company, agreed to pay more than $3 million to resolve FCA allegations that it falsely represented that subcontract awards to two companies were to HUBZone businesses, when in fact it knew that the subcontractors did not have HUBZone status during the time period of the subcontracts. The remediation company’s contract required that it confirm the HUBZone status of subcontractors proposed to be used in its Small Business Subcontracting Plan and ensure that its plan was accurate in its representations of subcontractors’ socio-economic status.
The recent increased civil enforcement activity should be a warning sign to small business government contractors that inspectors general and the DOJ are no longer just focusing on the “low hanging” and egregious criminal violations that make the news, but now are increasingly pursuing contractors who merely knew or should have known that their conduct was in violation of small business contracting rules. This is a marked shift in enforcement priorities and an important reason why contractors should verify and ensure that they and their subcontractors currently meet the qualifications for participating in their respective small business or set aside programs.
Small business contractors who are seeking to be compliant with their respective small business and set-aside program requirements can substantially mitigate their risk of becoming the target of an IG or DOJ investigation or from giving a whistleblower an opportunity to bring an FCA action by following some key guidelines:
- Establish a culture of compliance in your company, starting with the top, and ensure that management and staff understand the applicable rules and actually execute the compliance function instead of merely maintaining a program “on paper.”
- Work with professional advisors (e.g., attorneys, accountants) with subject matter experience and expertise to keep appropriate personnel informed of any program or agency rule, regulatory, or legal changes and their potential implications.
- Continuously verify your eligibility in the program, particularly if your company has experienced rapid growth or has been the subject of any mergers or acquisitions.
- Proactively assess the eligibility of any subcontractors or affiliates and ensure they are fulfilling their respective functions.
- Periodically perform a comprehensive and thorough compliance risk assessment.
If small business contractors can follow these basic but critical guidelines, they should be able to participate in their respective small business programs and focus on their business lines instead of devoting additional resources to contend with any increase in criminal, civil, and regulatory enforcement.
Contact Habib Ilahi for more information.