The U.S. Senate passed the Small Business Contracting Fraud Prevention Act of 2011 on September 21, 2011. See S. 633, 112th Cong. (2011). This bill’s expressed goal is to deter fraud committed upon the Small Business Administration by increasing the penalties for misrepresentation of small business status. It also reflects the federal government’s continuing interest in the protection and promotion of small businesses in federal contracting.

The meat of the bill is contained in Section 3, which is titled “Fraud Deterrence at the Small Business Administration.” Under the bill, a person will be subject to penalties for misrepresenting the status of any business or person

as a small business concern, a qualified HUBZone small business concern, a small business concern owned and controlled by socially and economically disadvantaged individuals, a small business concern owned and controlled by women, or a small business concern owned and controlled by service-disabled veterans

in order to obtain certain contracts. Id. Importantly, the misrepresentation need not have been made to obtain a prime contract — it also applies to certain subcontracts, grants and cooperative agreements. Id.

If such a misrepresentation is made, Section 3 provides that the misrepresenting person may be subject to civil remedies available under the False Claims Act (31 U.S.C. 3729 et seq.). This is important because the False Claims Act allows the government to collect three times the fraudulently claimed amount as damages. The Small Business Contracting Fraud Prevention Act also provides that “the amount of the loss to the Federal Government or the damages sustained by the Federal Government, as applicable, shall be an amount equal to the amount that the Federal Government paid to the person that received a contract, grant, or cooperative agreement … .” Id. This provision is particularly interesting. It means that if the government hires Contractor X to perform certain work under a federal contract, and Contractor X does in fact perform the work, then the government receives the benefit of the contract being fully performed. However, if it turns out that Contractor X misrepresented its status as a qualifying small business, the government may obtain damages against Contractor X for the full value of the contract even though Contractor X fully performed. Indeed, the bill states that in certain proceedings, “no credit shall be applied against any loss or damages to the Federal Government for the fair market value of the property or services provided to the Federal Government.” Id.

Section 4 of the bill focuses specifically on “veterans integrity in contracting.” This section indicates that if a contractor “knowingly and willfully” misrepresents itself as a small business owned and controlled by service-disabled veterans, the contractor “may” be debarred or suspended from federal contracting. Needless to say, this potential penalty should deter such conduct.

Section 5 of the bill affects the Section 8(a) small business program, a program that we have written about frequently in this Reporter. In this section, the bill requires that the U.S. Comptroller General evaluate the effectiveness of the section 8(a) program every three years. This mandatory inquiry will require a deeply fact-intensive analysis, and we have no doubt that completion of such a review will consume a fair amount of government resources. The Comptroller General must submit a report on his evaluation to both the Senate Committee on Small Business and Entrepreneurship and the House Committee on Small Business.

The bill also includes other measures, such as provisions aimed at improving the HUBZone program (Section 6), and a section requiring an annual report from the SBA Administrator on the number of suspensions, debarments and prosecutions made each year for violations of the bill. The Administrator must also describe the number of persons that the Administrator declined to debar or suspend after a referral, and the reason behind the decision to decline to debar or suspend each person.

In sum, it is clear that the bill is intended to impose increased requirements on the SBA in monitoring contracts involving small businesses. At the same time, the SBA maintains some discretion in choosing which penalties to inflict on companies that violate the bill’s requirements, but it must also be prepared to justify and explain those decisions to Congress on an annual basis. The bill was referred to the House Committee on Small Business on September 22, 2011.