Detecting Small Business Fraud

Small businesses are often approached with proposals to commit fraud—for example, by serving as a financial “pass-through” for a large business while performing very little or none of the work actually required under the contract. Other times, a company might fraudulently obtain certification as a small business to take advantage of special contracting opportunities.

Whistleblowers are essential in identifying, reporting, and stopping fraud in small business contracting programs. Whistleblowers are often employees (or former employees) of a purported small business, with inside information about fraud being committed. Sometimes, employees of legitimate small businesses learn their competitors are cheating the system—this type of information can be equally valuable in detecting and stopping fraud.

Whistleblowers should be on the lookout for several signs of small business fraud:

• Size: A business must meet certain criteria, based on number of employees or annual receipts, to be considered small. Certain subsets of small businesses have additional size requirements. For example, HUBZone businesses must have at least 35% of their employees reside in a HUBZone, and 8(a) businesses have certain income limits for the owner.Companies will often try to skirt these rules by lying about their size. Sometimes, the fraud is simple: for instance, a company says it meets the relevant size criteria when, in reality, it has too many employees or earns too much income to be considered small. Other times, the fraud is more complex: for instance, a HUBZone business manipulates its employee roster to make it seem as though 35% of its employees live in a HUBZone.

• Ownership and control: HUBZone businesses, 8(a) businesses, SDVOSBs, and WOSBs must be owned by a person who meets specific socioeconomic criteria, and the owner must control the day-to-day operations of the business. Sometimes, a person who doesn’t qualify to own one of these businesses partners with someone who does meet the criteria and installs that person as the owner of the company. On paper, it looks like the company meets the ownership rules, but the business is actually operated by someone who doesn’t qualify.

• Affiliation with another business: In determining whether a business is small, the government considers whether it is “affiliated” with any other business. Affiliation generally exists when one business controls or has the power to control another. Sometimes, a large business will pull the strings of a small business behind the scenes, or split itself into multiple businesses that appear small on paper, but are really part of the same operation. These tactics are not allowed under the SBA’s affiliation rules, and companies that use these tactics to secure contracts set aside for small businesses may be committing fraud.

A whistleblower who files a successful complaint under the False Claims Act is entitled to between 15% and 30% of the amount the government recovers. Small business fraud has resulted in several notable recent settlements. In 2019, a whistleblower represented by Baron & Budd helped the government reach the second-largest settlement with an individual in the history of the False Claims Act.

Fraud Harms Small Businesses

Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs while accounting for 44 percent of our country’s economic activity. However, in an ever-changing global economy, small businesses often struggle to compete against much larger rivals. Through the Small Business Act of 1953 and the Small Business Jobs Act of 2010, Congress and the Small Business Administration (“SBA”) have sought to even the playing field by establishing special programs to steer federal contracts to small businesses.

Among these programs are set-aside contracts, which are reserved exclusively for small businesses to bid on. These set-aside contracts relieve small businesses of the enormous burden of challenging much larger businesses with economies of scale that permit them to undercut their smaller competitors.  The federal government also sets a goal of subcontracting 23% of work to small businesses each year and offers monetary incentives for large businesses to enter into such subcontracts.

The government often fails to meet these goals, partially because of widespread fraud. Large businesses, eager to earn lucrative contracts, sometimes self-classify as small businesses for contracting purposes. Prime contractors sometimes subcontract to large businesses that have fraudulently certified themselves as small so they can earn subcontracting incentives.

This fraud is doubly harmful. First, it means that government contracts—and taxpayer dollars—go to businesses that don’t deserve them. Second, it means that legitimate small businesses lose out on contracting opportunities.

Our Team

With more than 30 years of experience, the attorneys on Baron & Budd’s whistleblower representation team have represented dozens of clients in government fraud cases returning over $5.4 billion to federal and state agencies, with whistleblower recovery shares as high as 49%. They are ready to help if you have evidence of small business fraud in government contracts.

Please call (866) 845-2164 or complete our contact form if you would like more information. For more information, see What You Need to Know About Becoming a Whistleblower.  Please understand that contacting us does not mean that you have established an attorney-client relationship with Baron & Budd, P.C.