SBA Rule Will Boost Prosecution of Small-Biz Contract Fraud

A Small Business Administration rule finalized Friday says that fraudulently obtained small business contracts provide no value to the federal government, a change that will increase the number of enforcement actions by clearing the government to seek repayment for the entire contract.

The rule implements part of the Small Business Jobs Act of 2010, which says that when a company wins a contract by willfully misrepresenting its small business status, the government’s presumed loss is the value of the contract.

While the law already provided for criminal and civil penalties, including False Claims Act liability, the government had a hard time winning these cases because rulings like the one in Ab-Tech Construction v. United States had made it difficult to establish damages. In that 1994 case, the Court of Federal Claims limited the government’s recoverable damages because the contractor had provided the agreed-on services.

But the SBA regulation, which takes effect Aug. 27, 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.

“I expect to see a substantial uptick in prosecutions,” said Richard Oliver, a partner with McKenna Long & Aldridge LLP. “There have been very few prosecutions for false size certifications over the last 20 years. The only prosecutions we’ve seen have been extremely blatant situations.”

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