Most government contractors are aware that violating government contracting provisions can cause the loss of a contract or have other negative ramifications. What they don’t realize, however, is that violating SBA regulations could land them in jail.

Recently, we heard of a government contractor who appears to be learning this lesson the hard way. The Small Business Administration learned that a company was purportedly circumventing SBA 8(a) regulations by using 8(a) companies as a shell to win 8(a) set-aside contracts, and keeping 95% of the money for his non-8(a) company. As a result, the Justice Department sent him a criminal subpoena and indicted him for violating the federal mail and wire fraud statutes. This government contractor not only will be facing a debarment and other civil penalties, but may likely be criminally indicted.

According to the SBA’s website, the “8(a) Business Development Program is a business assistance program for small disadvantaged businesses. The 8(a) Program offers a broad scope of assistance to firms that are owned and controlled at least 51 percent by socially and economically disadvantaged individuals.” Certain contract awards are reserved for companies in the 8(a) program, known as “set-asides,” and participants in the 8(a) program can receive sole source contracts that are awarded directly to them without competition. As with other SBA programs, the 8(a) business must generally perform at least 50% of the work associated with any 8(a) contract.

Unfortunately, it is not uncommon for some individuals to try to take short cuts and use 8(a) businesses as shells or front companies to win the 8(a) work, funneling most of the money and work to their businesses rather than to the 8(a).

What Allegedly Happened

In the situation we heard about, the company allegedly engaged on one of the most common forms of procurement fraud–a kickback scheme. The allegation is that he used legitimately disadvantaged businesses as shells or fronts to obtain set-aside contracts for his non-disadvantaged business.

In order to attract complicit businesses, this gentlemen allegedly posted advertisements on Craigslist seeking service disabled veterans and socially and economically disadvantaged individuals that were eligible to apply to participate in the SBA 8(a) program. Once a company was certified as 8(a), he would work with them to obtain set-aside and sole source 8(a) contracts. After an 8(a) contract was awarded, he would kick-back a small finder’s fee to the disadvantaged business, and keep 95% of the money and work for himself.

In case alarms are not going off yet, let me make this really clear–if true, this is fraud, plain and simple. And, although it is not unusual for an 8(a) to team with a larger, more experienced company that does much of the heavy lifting on a procurement (aka “pass throughs”), the 50% ratio of work flowing to the 8(a) company must be followed.

This fraud, however, and the potential prosecution of this government contractor, will be governed by the mail and wire fraud statutes, which essentially means that the mail system, a phone, or the internet was used to further the illegal scheme.  Unfortunately for this government contractor, there  were numerous emails between him and his complicit 8(a) friends regarding the kick-back scheme.  Accordingly, the Justice Department has a relatively easy case to prove wire fraud and, each violation can be 5 years imprisonment and a $250,000.00 fine (and, keep in mind, each email or telephone call is a separate violation).

PRACTICAL COUNSEL: What should you do to protect your business?

Considering the convoluted rules of government contracting–including the SBA rules governing small businesses, the FAR, and the DFAR–a well-intentioned business owner can get caught up in potentially fraudulent practices at the federal level merely by employing business practices that might be considered ordinary in the non-government context.  What one mom and pop store might consider a “referral,” might be considered a kickback by the Federal Government.

So, first of all, anytime you are entering a contract involving a SBA or VA program, make sure you are in full compliance with the program requirements.  Second, kickbacks are expressly prohibited by Federal statutes and regulations, and are specifically covered by the Federal wire and mail fraud statutes.  The lesson–don’t take sort cuts. Cross every t and dot every i.  Your best bet to avoid these pitfalls–other than not engaging in blatant fraud–is to have a relationship with attorneys who have a thorough understanding of government contracts law. Before embarking on any new course of action, it is always a good idea to consult with your knowledgeable advisor to make sure you are in compliance with applicable rules and regulations. Failure to do so could lead to significant consequences.