By Sean Reilly
October 11, 2010
The suspension of GTSI Corp. from future federal business over allegations that it used front companies to circumvent federal acquisition rules is sending shockwaves throughout the contractor community.
Experts are wondering whether this will be the first of many suspensions, whether fines or criminal charges will follow, and whether lawmakers will pass new legislation to curtail set-asides designed to help small, minority-owned, and disadvantaged businesses.
The suspension by the Small Business Administration was the first federal action against a large government contractor since the Environmental Protection Agency suspended IBM in 2008 for allegedly breaching contracting rules.
GTSI won almost $549 million in federal sales in 2009, according to its latest annual report.
"The evidence shows that GTSI was an active participant in a scheme that resulted in contracts set aside for small businesses being awarded to ineligible contractors, and with contracts not being performed in accordance with applicable law, regulations and contract terms," SBA suspension and debarment official Michael Chodos said in an Oct. 1 letter to the company.
GTSI has 30 days to contest the suspension. On its website, the company said it plans to address SBA's concerns, but acknowledged it could face fines or debarment.
SBA's decision came the same day The Washington Post published an article detailing GTSI's long-standing connection to Eyak Corp., an Alaska native corporation that can win contracts without having to compete for them.
In a separate arrangement with another company called MultimaxArray FirstSource, GTSI was in line to receive 99.5 percent of any revenues generated under a 2008 Homeland Security Department contract designated for small businesses even though it was only the subcontractor, the Post article indicated.
Asked whether the Post's story influenced the suspension decision, SBA spokeswoman Hayley Matz said the agency's inquiry has been ongoing.
Matz declined to say whether other firms are under scrutiny for related improprieties.
Last week, Sen. Claire McCaskill, D-Mo., told the Post she would introduce legislation next year to limit the special treatment Alaska native corporations now receive.
This was not GTSI's first brush with federal investigators.
Earlier this decade, the SBA inspector general recommended permanently debarring GTSI from federal work on the grounds that it had misrepresented itself as a small business, according to a December 2006 e-mail from an SBA spokeswoman obtained by the watchdog group, Project on Government Oversight.
But because the alleged fraud did not involve an SBA contract, the agency referred the issue to the Defense Department, which passed it to the Army. There, officials opted not to take action. An Army spokesman was unable last week to provide any more information on the reasons for that decision.
GTSI, which disputed any wrongdoing, continued to win hundreds of millions of dollars in federal business. Last year, federal sales accounted for 72 percent of its revenue, according to the annual report.
Lloyd Chapman, president of the American Small Business League, alleges that numerous large companies improperly take work — either as prime contractors or subcontractors — that is set aside for small businesses or Alaska native corporations.
"GTSI is the tip of the iceberg," he said. Chapman is a sharp critic of SBA for not better enforcing the integrity of small business set-aside programs.
‘Uneven' use of suspensions
The GTSI case is prompting some to ask whether the government's suspension and debarment process works.
It is among the government's most powerful instruments for confronting problem contractors, but officials frequently don't bother using it, people familiar with the process said.
"There's been about 10 agencies that are very active and have a lot of experience," said Robert Meunier, a retired EPA debarring official who made headlines two years ago when he briefly suspended IBM. "There are many that have rules in place; they do not take the action."
Sharing that view is Rep. Edolphus Towns, D-N.Y., chairman of the House Oversight and Government Reform Committee, who has held hearings on the suspension and debarment process.
"We're disappointed with the fact that it has not worked as well as we would like," Towns said in an interview last week. "It is not applied evenly."
In 2008, lawmakers sought to shed light on those disparities by requiring the Interagency Suspension and Debarment Committee, a governmentwide group of debarment officials, to report annually to Congress on what agencies are doing. Two years later, no report has been completed. Committee chairman Dan Blalock, a Navy attorney, attributed the delay to the responsibilities of his regular job and said he hoped to turn in the report by early November.
"The fact that we have not received it makes me wonder whether the oversight is really occurring," Towns said.
The suspension and debarment system is not intended to punish companies, but rather to protect the government's interests. A temporary suspension may follow an indictment or other suspicion of criminal activity; debarment, which typically lasts three years, can result from criminal conviction or civil penalty.
"You have to remember that it is a judgment call," said Richard Bednar, a former Army debarring official now with a firm that helps contractors comply with the law. "It's forward looking; it's not additional punishment for what's already happened."
That call, however, can be shaped by factors that have nothing to do with contractor performance. In some cases, debarring officials — who can be part-timers or political appointees — may not realize the authority they wield, Meunier said.
"The rules grant the debarring official very, very broad powers," he said.
"There's almost nothing they cannot react to." Among the agencies that have been most active in using those powers, he said, are the Army, Navy, Air Force, Defense Logistics Agency, EPA, Housing and Urban Development Department and General Services Administration.
One agency faulted for not using suspensions or debarments enough is the U.S. Agency for International Development. The agency's inspector general said in a report last year that it "has not adequately protected the public interest by responding to contractor impropriety in accordance with federal guidance."
The agency's suspension and debarment official, as well as its evaluation division, were burdened with too many other responsibilities, the report said.
In addition, they relied solely on the IG's office to refer possible suspension and debarment actions.
Likewise, the Government Accountability Office this month found that agencies rarely, if ever, suspend or debar contractors that are among the biggest repeat violators of wage, labor and workplace safety and health laws.