This is Part II of an article written to address key “size” related issues in federal SBA contracting.  Part I  provided an introduction to SBA contracting for “small” and “other than small” government contractors, focusing on “size” determinations and related SBA regulations.  This concluding installment will address the serious risks – including civil and criminal penalties – facing contractors who fail to adhere to the SBA’s numerous regulations related to “size.”  In addition, this article will explore certain recent government investigations uncovering rampant fraud within SBA contracting programs.  In light of these investigatory findings, federal contractors should appreciate and anticipate the SBA’s resolve to curb such abuse through increased oversight and enforcement efforts.  As noted in Part I of this article, contractors seeking to reap the benefits of the SBA’s contracting programs should institute stringent internal controls to avoid unintended violations of the SBA’s regulations.

Discovery Of Fraud And Abuse In SBA Federal Contracting

The SBA and its contracting programs have come under severe scrutiny in the last few years.  For instance, in June 2008, the Government Accountability Office (“GAO”) published a report concluding that the SBA did not have effective fraud prevention controls in place with respect to its Historically Underutilized Business Zone (“HUBZone”) program.  The HUBZone program was established to provide federal contracting opportunities to small business firms located in economically distressed areas.  The GAO investigation found, among other violations, that several HUBZone certified businesses in the Washington, D.C. area did not meet the HUBZone eligibility criteria.  Indeed, the GAO discovered that since 2006, federal agencies had obligated more than $105 million to 10 improperly certified firms for performance as prime contractors on federal contracts.

Subsequent GAO reports continued to highlight inadequacies in the SBA’s efforts to guard against fraud and abuse in the HUBZone program.  For example, in 2009, the GAO reported that it had identified 19 firms in Texas, Alabama and California participating in the HUBZone program that clearly did not meet the program requirements and that these 19 ineligible firms had received $187 million in federal contracts for fiscal years 2006 and 2007 alone.  Likewise, in 2010, the GAO reported that 17 of the 29 contractors that the GAO had identified as ineligible back in 2008 and 2009 had received new federal contracts worth more than $66 million.  Further, because the SBA had failed to promptly debar one firm from federal contracting, that firm was able to fraudulently receive an additional $600,000 in noncompetitive 8(a) federal contracts subsequent to the GAO’s 2009 report.  Quite simply, the SBA was suffering from a glaring problem – namely, the failure to ensure that procurement violations (and outright fraud) carried serious consequences for the offending party.

The GAO’s 2010 report noted a similar lack of regulatory enforcement with respect to the SBA’s Section 8(a) program.  In that regard, after conducting a fifteen-month investigation, the GAO reported that fourteen ineligible firms had received approximately $325 million in sole-source and set-aside contracts earmarked for socially and economically disadvantaged small businesses.  The GAO also found numerous instances in which 8(a) firm presidents made false statements with respect to their ethnicity, income, or assets, as well as several instances of “other than small” companies using certified 8(a) firms as pass-throughs.  Not surprisingly, the GAO was sharply critical of the SBA’s inattentiveness, noting that even where the SBA was aware of some of the fraudulent acts and/or misrepresentations mentioned above, the SBA failed to take any action.  In its 2010 report, the GAO emphasized the need for improved monitoring of eligible firms already in the program and implementation of real consequences for fraud and abuse.  Again, the GAO recommended the development of a consistent enforcement strategy, to include suspension and debarment of contractors who knowingly misrepresent their size and/or status.

Penalties For Misrepresenting Size Or Status And The SBA’s Renewed Commitment To Contracting Oversight

Armed with the GAO’s findings, Congress passed the Small Business Jobs Act of 2010 (the “Jobs Act”).  In addition to providing additional opportunities for small business contractors, the Jobs Act contains provisions that address the significant fraud and abuse in the small business contracting programs.  Shortly thereafter, the SBA published its revisions to its small business contracting program regulations, many of which concerned 8(a) contracting.  With these developments in mind, federal small business contractors will most assuredly be subjected to increased scrutiny in their efforts to benefit from the SBA’s various contracting programs, including the 8(a) program.

The consequences of non-compliance with these new requirements can be sharp and severe.  The SBA has an arsenal of means available to penalize federal contractors that engage in intentional or unintentional fraud upon the Government.  For instance, the SBA regulations expressly provide forcriminal penalties for knowingly misrepresenting the size or status of a business in connection with a federal procurement.  See 13 C.F.R. §§ 121.108 and 124.501(i).  In addition, criminal penalties may be imposed for knowingly making false statements or misrepresentations to the SBA.  See 13 C.F.R. §§ 121.108 and 125.29(c).  The SBA or a procuring agency may also initiate suspension or debarmentproceedings against a person or entity for making a false certification regarding size status, as recommended repeatedly by the GAO.  See 13 C.F.R. § 125.29(a).  In addition to these criminal sanctions, a person or entity that knowingly misrepresents a business’s status could also suffer civil penalties, including treble damages, under the False Claims Act and the Program Fraud Civil Remedies Act of 1986 (known as the “Mini False Claims Act”).  See Ab-Tech Constr. v. United States, 31 Fed. Cl. 429, 433 (1994) (finding that misrepresentations of small business status constitute contract fraud that may be redressed under the False Claims Act, but disallowing treble damages because the contractor fully performed the contract it improperly obtained through misrepresentation).

SBA’s Efforts To Increase Ease Of Enforcement

In keeping with its renewed commitment to contracting oversight, on October 7, 2011, the SBA issued a proposed rule implementing certain size and status integrity provisions of the Jobs Act.  76 Fed. Reg. 62313.  The proposed rule adopts the “presumed loss” and “deemed certification” provisions of the Jobs Act – both of which can have important consequences for contractors bidding on federal procurements.

Presumed Loss

The SBA has proposed to amend its regulations to establish that there is an irrefutable presumption of loss equal to the value of the contract or other instrument when a concern willfully seeks and receives an award by misrepresentation.  This amendment would greatly simplify the government’s case in actions involving willful misrepresentation and open the door for potentially staggering civil penalties.

Deemed Certification

Further paving the way for increased prosecutions, the SBA proposes to amend its regulations such that the submission of an offer or application for an award intended for small business concerns may be deemed an “affirmative, willful and intentional” size or status certification or representation in certain circumstances.  This “deemed certification” provision essentially enables prosecution of government contractors for misrepresentation without a showing that the contractor actually intended to mislead the government.

This is a significant step beyond the “implied certification” concept with which some courts have struggled in the wake of the implied certification rule first announced in Ab-Tech Constr., 31 Fed. Cl. at 433.  By way of background, Ab-Tech concerned a plaintiff that had received a government contract to construct a facility for the Army Corps of Engineers under Section 8(a).  The Government required prior approval of subcontracts and the plaintiff was required to submit progress payment vouchers periodically.  The Court of Federal Claims held that the plaintiff’s submission of payment vouchers constituted an “implied certification” of compliance with the requirements of Section 8(a).

Although the courts have often bristled at applying Ab-Tech’s implied certification principle due to its harsh consequences, the SBA’s deemed certification rule would apply that rule going forward.  The “deemed certification” provision proposed by the SBA to become one of its newest regulations, will ensure that courts consistently recognize the Government’s simplified burden of proof and will serve to make prosecutions of federal contractors for potentially unintended violations much easier than in the past.

Conclusion

As set forth above, the SBA has come under intense scrutiny for unchecked fraud resulting in millions of dollars committed to ineligible contractors or contractors serving merely as pass-throughs for ineligible contractors.  This scrutiny has apparently resulted in a renewed commitment to cracking down on contractors that seek to benefit from the SBA programs for small disadvantaged entities.  Contractors should fully expect the SBA to take advantage of the federal laws and regulations providing for significant criminal and civil penalties for any misrepresentation made to the SBA, including misrepresentations regarding size, status and other matters related to entitlement to participate in the small business procurement process.

With a renewed focus on enforcement and with new legislation providing for potentially severe consequences for non-compliance, federal contractors must ensure compliance with the SBA’s regulations throughout the procurement process.  The following are some helpful tips for ensuring compliance with the regulations discussed in Parts I and II of this article:

  • Contractors should conduct internal audits to ensure continuing compliance with SBA program criteria;
  • Contractors should conduct internal audits to ensure compliance with joint venture and mentor/protégé agreements;
  • All joint venture partners should have a code of business ethics and conduct
  • All joint venture partners should seek to review the code of business ethics and conduct of other members to the joint venture;
  • Contractors should develop a separate code of business ethics and conduct for the joint venture;
  • Contractors should develop a specific compliance program and institute specific internal controls for 8(a) joint venture and mentor/protégé contracting or other SBA contracting program; Contractors should have only one mentor or protégé at a time;
  • Contractors should carefully document assistance provided under mentor/protégé agreements;
  • ontractors should obtain advance approval for changes or modifications to and/or deviations from joint venture or mentor/protégé agreements;
  • Contractors should ensure that small business takes lead and plays a significant role in joint venture contracts; and
  • Contractors should document developmental gains to the protégé.