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Small Biz Group Slams Proposed Contract Fraud Safe Harbor

By Dietrich Knauth
August 18, 2014

Law360, New York (August 18, 2014, 7:47 PM ET) -- The American Small Business League on Monday criticized a proposed safe harbor from fraud penalties for large businesses that inadvertently misrepresent themselves as small businesses, saying that the provision is a loophole that invites ineligible businesses to illegally bid on small business contracts.
The Small Business Administration proposed a new regulation on June 25 that would create a “safe harbor” for ineligible companies that misrepresent themselves as small business contractors due to clerical errors or a misunderstanding of new regulations. The agency has said that the proposal would improve enforcement of tougher small business contracting rules by preventing honest mistakes from triggering newly increased penalties, including criminal sentences of up to 10 years in prison.

But the ASBL said that the SBA's  proposal makes it too easy for large businesses to claim that they acted in good faith when they're caught trying to bend the SBA's eligibility rules.

“Legitimate small businesses could lose billions of dollars a year in federal contracts as the penalties for hijacking federal small business contracts are essentially removed,” the ASBL said. “Every year for a decade the SBA Office of Inspector General has named the diversion of federal small business contracts to large businesses as the number one problem at the SBA. The SBA has consistently refused to adopt any policies to halt the rampant fraud.”

The SBA is still seeking feedback on its proposal, and will accept public comments until Aug. 25.

The proposal aims to enact a January 2013 change to the Small Business Act that eliminates penalties for companies that act in good faith after seeking advisory opinions on their small business status from Small Business Development Centers or Procurement Technical Assistance Centers.

The agency said that it doesn't expect the safe harbor to impact many companies, and that the number of companies fraudulently claiming small business status remains small. In 2010, for example, the SBA found that 150 ineligible firms had represented themselves as being small for purposes of federal procurement.

“Most of these cases did not involve fraud, but instead were the result of errors or misunderstandings of the size regulations,” the SBA said in its June 25 proposal. “To date, SBA is unaware of any firms being penalized … for fraudulently misrepresenting themselves as small business concerns. Therefore, SBA anticipates that the safe harbor provision of the proposed rule will impact very few concern.”

The 2010 Small Business Jobs Act sharply increased penalties for companies that try to defraud the government by seeking to win contracts set aside for small businesses. Under the new regime, when a company wins a contract by willfully misrepresenting its small business status, the government's presumed loss is the value of the contract.

Although the law already provided for criminal and civil penalties, including False Claims Act liability, the government had a hard time winning such because it was difficult for the government to establish damages when the contract was completed by an ineligible company. A 1994 case in the Court of Federal Claims, Ab-Tech Construction v. United States, limited the government's recoverable damages because the contractor had provided the agreed on services, and other cases followed that precedent.

The new regulations, which took effect in August 2013, will allow prosecutors and private relators to pursue fraud much more easily, under the assumption that contracts obtained through misrepresentation have no value to the government. This puts the entire value of the contract at stake in litigation.

To view full article, click here: http://www.law360.com/articles/568462/small-biz-group-slams-proposed-contract-fraud-safe-harbor



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