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02 October 2017
The Department of Justice (DOJ) recently announced a $16 million settlement with Virginia-based government defence contractor ADS Inc to resolve allegations that ADS and its subsidiaries had violated the False Claims Act by submitting claims for payment under fraudulently obtained small-business set-aside contracts. The DOJ reported that the ADS settlement "ranks as one of the largest recoveries involving alleged fraud in connection with small business contracting eligibility".(1)
According to the DOJ's announcement, several ADS-affiliated companies claimed to meet certain eligibility criteria that qualified them to receive contracts set aside for small businesses under the Small Business Administration (SBA) set-aside programmes. The government alleged that ADS and its purported small-business subsidiaries had concealed the smaller entities' affiliation with ADS and knowingly misrepresented their size, ownership structure and other eligibility criteria. The investigation was prompted by a whistleblower, Ameliorate Partners LLP, which will receive approximately $2.9 million from the government's recovery. The settlement also resolved allegations that ADS participated in an illegal bid-rigging scheme that inflated prices charged under certain government contracts.
The ADS settlement follows on the heels of the DOJ's 2016 announcement of its investigation into an alleged scheme to defraud SBA's 8(a) small-business programme, which resulted in multiple criminal pleas and fines. In that matter, the government alleged that an officer of the Far East Construction Corporation, a small business, had conspired to win multiple federal contracts set aside for small disadvantaged businesses under the 8(a) programme. Instead of performing the work itself, Far East had entered into an agreement with an ineligible company, whereby the ineligible company would perform the work and Far East would receive a three perfect fee in exchange for use of its small business status.
Each year, the federal government sets aside billions of dollars in contracts exclusively for small businesses. Companies that qualify as a small business or a small business owned by one or more women, minorities or veterans under the SBA rules may be eligible to compete for lucrative government set-aside contracts. Allegations of fraudulent misrepresentation by both large and small businesses involving government small-business programmes are common. The SBA's Office of Inspector General recently reported that it has "identified numerous instances where firms that do not meet the criteria to be either 'small' or 'disadvantaged' have improperly obtained contracts under SBA contracting programs".(2)
These two cases send a signal that the DOJ may become more proactive in combating small-business contracting fraud. In the ADS settlement announcement, SBA General Counsel Christopher Pilkerton commented that "identifying and aggressively pursuing instances of civil fraud by participants in these procurement programs and other set aside contracting programs, is one of SBA's top priorities". These recent cases underscore the importance of ensuring that small-business eligibility representations are accurate, as the penalties for misrepresentation can be severe.
For further information on this topic please contact Ogechi C Achuko, Marta A Thompson, Rebecca Umhofer or Annie D Vanselow at Hogan Lovells US LLP by telephone (+1 202 637 5600) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
(1) DOJ Press Release 17895 (August 10 2017).
(2) SBA Office of Inspector General, FY 2017 Congressional Budget Justification.
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