House bill would punish users of front companies

The penalty for misrepresentation would be a fine or jail time, as well as suspension or debarment from government contracting

A new bill introduced in the House would penalize people who set up a company as a front to another business to get a government contract.

The Small Business Contracting Protection Act (H.R. 4420) would elevate the penalties for being a pass-through business to the level of lying about a company’s size and ownership status. Those types of companies get special privileges from the government. The penalty for misrepresentation would be a fine or prison time, as well as suspension or debarment from government contracting.

The bill, introduced by Rep. Joe Sestek (D-Pa.) on Jan. 12, includes a definition of the term "pass-through business" that uses six criteria:

  • The business shares a location with the other business
  • The business shares ordering or personnel systems with the related business
  • An officer, director, principal, stockholder, managing member or key employee of the business participates in the business decisions of the other business
  • The business has equity interest in the business owned by the second business
  • The accounts receivable of the business is directly or indirectly controlled by the other business or
  • The relationship with the business generates more than 50 percent of the income of the related business.

The bill was sent to the Small Business Committee.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

Reader Comments

Fri, Feb 12, 2010

Yes, Sestak is aware of the affiliation rule, but it is loos and needs to be tightened and why this legislation is needed. SBA could do it themselves, but has been unwilling to do. Pass-throughs are becoming common place and hurting real small businesses and only benefitting large corporate players.

Fri, Feb 12, 2010

The Sestak bill does not conflict with the mentor-protege program. He made sure of that. As to the comment of why throw another list at the SBA? Well, SBA has failed to act on this issue, which their IG claims to be a top priority. SBA has ruled on cases like this in the past, but for some reason will not close the loophole. Rep. Sestak's legislation closes the loophole.

Mon, Feb 1, 2010 LimoWreck Washington DC

wait...has this representative ever heard of SBA's existing rules that define and govern affiliation? This criteria is ALREADY part of SBA's size determination.

Thu, Jan 28, 2010 Mike Hagerty Houston, Texas

This bill is well-intended, but throwing yet another list at SBA and saying, "Deal with it." is no solution. Why not remove the temptation to cheat?Eliminate self-certification and put an objective government-supervised small business validation program in place.The VA has a voluntary program for veteran businesses now. No system will ever be perfect, but trying to prevent problems makes sense.

Tue, Jan 26, 2010 K Virginia

Rep. Joe Sestek needs to add a clarification into his bill to ensure that it does not conflict with the Govt Mentor Protege (MP) program. If the rules written into the FAR by this bill that the Rep. Joe Sestek has developed, Will the law come out to say that any of all of these criteria must be set or would it say any one criteria the company cann no longer receive contracts. Under the rules set up by the MP program, a large business may allow the small business space at its location. The large business may be doing technology transfers of its personnel and ordering systems in an effort to bring the Protege up to a standard that the large business requires. The large business may own up to 10% stock in the protege to help the protege capitalize on training programs. The large business may be generating over 50% of the work of the small business until later years. Hopefully the rules will be written to preclude the MP program.

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