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Ethics Corner 

Small Business Compliance Issues Receive Increased Scrutiny 

2,012 

By David T. Hickey 

Fraud. Waste. Abuse. Three words repeated as often in Washington as “my good friend” or “lapse of judgment.”

The president and his administration, lawmakers, prosecutors, inspectors general, auditors, reporters, whistleblowers, company compliance officers, and industry watchdogs all seek to identify and eliminate fraud, waste and abuse from federal programs.

Recent attention aimed at fraud and abuse in small business contracting has resulted in increased prosecutions, congressional oversight, investigations, suspension, debarment and negative press.

The defense community — public and private sector participants alike — must therefore allocate compliance resources — training, monitoring, auditing  — toward this high-risk area. Small and large businesses must monitor current legislative, regulatory and enforcement activity in small business contracting to verify that adequate measures exist to ensure compliance and, if necessary, identify and report suspected violations of small business rules.

Excessive subcontracting, where small businesses pass through disproportionate work and profits to large businesses, has been specifically targeted for increased scrutiny and enforcement. For instance, a former top-50 federal contractor continues to recover from a devastating suspension by the Small Business Administration. This was the result of a Washington Post investigation that focused on the large contractor teaming with 8(a) companies for set-aside contracts and performing most of the work and receiving a large proportion of the contract revenue.

On Capitol Hill, the House Small Business Committee recently introduced the Subcontracting Transparency and Reliability (STAR) Act that would bar small businesses from subcontracting more than 50 percent of the amount paid under a service or supply contract to a large business. FAR contract clauses require that small businesses perform at least 50 percent of the personnel costs with their own employees on service contracts and at least 50 percent of all manufacturing costs on supply contracts. Whether or not the STAR Act is passed, increased enforcement of the subcontracting limitations is here and will require increased attention on compliance.

Another area of scrutiny in small business contracting is size certifications. Small Businesses promotion is one of the few bipartisan issues that has resulted in legislation. In April of this year, the president signed the Jumpstart Our Business Startups (JOBS) Act, a small business bill that received broad support from both parties and both houses.  Earlier in this administration, Congress passed the Small Business JOBS Act, which included many anti-fraud provisions aimed at small business contracting with the federal government.

It is designed to ensure that only “small” businesses can be awarded set asides. That law presumes a “deemed certification” of size status, which is an “affirmative, willful, and intentional” representation of small size status in certain circumstances. For example, “deemed certification” would occur where a contractor competes for a small business set aside contract but does not affirmatively represent itself as a small business in its offer.

Another circumstance of “deemed certification” is registration in a federal electronic database for the purpose of being considered for award of a federal contract as a small business concern. These provisions increase the compliance risk for small businesses, particularly those reaching size standard limits or engaged in merger and acquisition activity. The JOBS Act also contained a statutory presumption of government loss equal to the total value of the contract resulting from a misrepresentation. This, coupled with potential damages and penalties under the False Claims Act, raises the stakes considerably for large and small businesses.

Small Business Administration implementing regulations are forthcoming to further refine this issue and provide guidance. In the meantime, companies should review their reporting and certification activities to prevent major compliance headaches.

The Department of Veterans Affairs has also been active recently in addressing fraud and abuse in its small business programs, particularly the Service Disabled Veteran Owned Small Business (SDVO SB) program. According to SBA statistics, in 2010, more than $10.8 billion in federal contracts were awarded to self-certified SDVO SBs. The department accounted for about 30 percent of those fiscal year 2010 dollars. A Government Accountability Office audit last year demonstrates the types of activities that agencies, including Veterans Affairs, will use to address fraud and abuse. Previously, the primary detection mechanism for exposing misrepresentations of size status at the department was the SBA’s formal size status protest mechanism where competitors would protest if they believed that a firm misrepresented its small-business size or SDVO SB eligibility.

Now, in addition to a protest mechanism, Veterans Affairs maintains databases and verifies firm eligibility (VetBiz.gov). Increased audit activities, inspector general investigations, and the more robust verification activities are leading to more proposed suspensions and debarments and Department of Justice prosecutions. Earlier this year, Justice obtained a federal grand jury indictment against a construction company for fraud and making false statements to federal officials about its status.

These cases are becoming increasingly common. While the size of regulations, associated affiliation rules, self-certification and recertification requirements, subcontracting reporting, limitations on subcontracting, and verification activities associated with small business regulations are not always clear, contractors — large and small — must draw clear lines they will not cross.

Compliance mechanisms aimed at validating size and other status and frequent reanalysis should be established at the time of initial eligibility, at the time online representations and certifications are made, at the time offers or bids are submitted, at the time of eligibility determination, each year including tax time, whenever major growth occurs, whenever a merger or acquisition is considered, and whenever events demand review.

Heightened security in this area and shrinking procurement dollars render a robust compliance program in the small business contracting area an asset.

David T. Hickey is a shareholder at Greenberg Traurig LLP. The views expressed are solely those of the author.


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