You are never too small to draw DOJ's ire

Some years ago a small federal contractor asked me: “I get it. I need to comply with all those Small Business Administration rules but at the end of the day they’re not going to go after a small company like mine.”

He couldn’t be more wrong.

Here’s a recent example: Earlier this month the Justice Department announced that a Connecticut business and its affiliated companies agreed to pay a $5.2 million fine for misrepresenting its size and women-owned status to various federal agencies that awarded it 22 small business set-aside contracts. According to DOJ, the company committed fraud by improperly obtaining small business set-aside contracts while knowing it wasn’t eligible for the awards.

Now the bad news: The company paid this fine in a settlement with DOJ despite timely disclosing the fraud before the government knew about it and cooperating with the government’s investigation. DOJ merely considered these virtuous (albeit mandated) actions a “credit in the settlement.” Likely that means without the advance disclosure the consequences would have been much worse for this company.

As is usual in these types of actions, the DOJ press release stated that “Government contractors that make false representations to receive contracts for which they are not eligible will be held to account.”

The irony is that this violation should have been triggered earlier. The contractor was purchased by another concern in 2011, which is the reason the contractor was converted from “small” to “other than small” according to SBA regulations. Why the parties (or their lawyers) didn’t receive the memo on properly re-certifying its size status after the acquisition remains a mystery.

This is the just most recent DOJ action against a small contractor for lying about its status. In April, an Idaho woman pleaded guilty to making false certifications in SAM that her company was a small, service-disabled veteran-owned business while receiving $11 million worth of  government set-aside contracts over a five-year period. The government’s investigation found that the woman, who was acting as vice president, was not a veteran and that she, and not the service-disabled veteran owner, actually controlled the company’s operations. The woman is scheduled to be sentenced this month.

I raise these cases because no one should be deceived into thinking that just because a contractor is small that the government won’t investigate and actually prosecute the company and its principals for misrepresenting its size and/or socio-economic status. And if these cases are an example, a monetary fine similar to the Connecticut case would likely be the death knell for a small company.

So, here are some tips to avoid being embroiled in these types of situations:

• Don’t break the law. It’s that simple. The government business is arguably the most regulated business in the U.S. aside from health care. There are a myriad statutes, regulations and agency directives governing the business, to include laws and regulations that make the rules a small business must follow in representing itself as small, or disadvantaged, or women-owned, veteran-owned, HUBZone, etc.  So it’s easy to make mistakes. But fraudulently misrepresenting a business as small may violate the federal False Claims Act, a Civil War-era statute that imposes both criminal and civil penalties for knowingly submitting a false claim to the government. And that’s in addition to the dreaded suspension/debarment proceeding and potentially the default termination of your government contracts.

• Develop an effective ethics compliance program. Under the FAR, one is required for companies, even small businesses, with contracts or subcontracts over $5 million and a period of performance of 120 days or more. At a minimum, such a program must include (1) a written ethics code, (2) making that code available to all employees involved in performing a government contract, (3) exercising due diligence to prevent and detect improper conduct, and (4) promoting an organizational culture that encourages ethical conduct and compliance with the law. Although small businesses are exempt from additional requirements such as training and awareness programs and the ever daunting internal controls for detecting fraud, some form of these steps are recommended depending on the company’s size and structure. But take note that a small business will be exempt from these additional requirements only if all of its contracts are set aside; if one contract is not set aside, then these additional steps are required.

• Draft a code of ethics that doesn’t just sit and collect dust. Sure, you can easily find these documents on line, but the trick here is not just doing a simple cut, paste and edit but rather to design a compliant code that properly fits your company’s size, organization and culture, not to mention your budget. Government agencies, including DOJ, know the difference and may simply consider an off-the-rack code a toothless tiger and not “effective” under governing standards -- and that includes U.S. Sentencing Guidelines.

• If someone in your organization commits a fraud-type crime, then be prepared to timely disclose it to the procuring agency’s office of inspector general and the contracting officer. Such disclosure is mandatory under the FAR.  A knowing failure to disclose may result in separate ground for suspension/debarment.

• Properly re-certify your business as small or eligible for a socio-economic status when required. Generally, under SBA regulations, such re-certification must be made (1) within 30 days of a contract novation; (2) within 30 days of a merger, sale, or acquisition; and (3) prior to the end of the fifth contract year when exceeding five years in duration (including options) and prior to any option being exercised thereafter. It is also required when a contracting officer requests recertification in connection with a specific task or delivery order.

Stay safe.

James C. Fontana is the managing member of Fontana Law Group, PLLC.  He can be reached at jfontana@fontanalawgroup.com.  The firm’s website can be found at www.fontanalawgroup.com.