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Whistleblowers Protect the Integrity of Government Contracting: Understanding Set-Aside Contracting Fraud

Date Published
Dec 04, 2023

Did you know that set-aside contracting fraud can result in serious legal consequences? Recently, Jonathan Walker, a former defense contractor in Tomah, WI was sentenced to 15 months in prison, to pay $72,000 in restitution, and fined $10,000 for wire fraud in connection with defrauding the U.S. Department of Defense (DoD) on two contracts. Walker falsely claimed that his business was a service-disabled veteran-owned small business (SDVOSB) in order to receive government contracts, when he had no military service whatsoever. Unfortunately, Walker’s case is not an isolated incident. Set-aside contracting fraud continues to be a concern in government procurement. In this blog post, we will delve deeper into what set-aside contracting fraud is, how the False Claims Act applies to whistleblowers, and the importance of service-disabled veteran-owned small businesses in government contracting. We will also discuss the consequences for fraudulent practices and share some steps you can take to ensure compliance with regulations and avoid set-aside contracting fraud.

What is a set-aside in small business contracting?

Set-aside programs in government contracting are designed to help small businesses generally, and in some cases small businesses owned by socially and economically disadvantaged individuals, such as women, minorities, and service-disabled veterans. These programs reserve contracts for eligible businesses and can include a certain percentage of total contract dollars. In other words, the government “sets aside” a portion of the contracts for those businesses. The ultimate goal is to create a more equitable playing field for small businesses and increase their participation in government procurement. Examples of these programs include set-asides or contracting assistance programs for the following types of small businesses: women-owned, service-disabled veteran-owned, 8(a) business development, those located in historically underutilized business zones (HUBZone), and others.

The federal government has set goals to support and empower small businesses in the contracting arena. Here are some key objectives. The government is committed to ensuring that small businesses receive a minimum of 23% of all federal contracting dollars. To foster inclusive growth, the government strives to award a specific percentage of federal prime contracting dollars to small businesses that meet certain socio-economic conditions. These include 5% to women-owned small businesses, 12% to small disadvantaged businesses, 3% to service-disabled veteran-owned small businesses, and 3% to small businesses in HUBZones.

The benefits of small business set-asides in government contracting

Small business set-asides provide opportunities for businesses that may not have otherwise been able to participate in government contracting. These opportunities can lead to greater revenue and growth, which in turn can create more jobs and contribute to the overall economic health of the country. The use of set-asides also provides the government with access to a diverse pool of contractors, which can bring new and innovative solutions to complex problems.

Understanding service-disabled veteran set-aside federal contracting programs

One of the set-aside programs that has garnered significant attention, both from honest contractors and fraudsters, is the service-disabled veteran-owned small business (SDVOSB) program. This program provides set-aside contracts to businesses that are at least 51% owned and controlled by a service-disabled veteran. The program seeks to support these veterans by providing them with opportunities to participate in government contracts. For a business to be eligible for the SDVOSB program, it must be verified as such by the Department of Veterans Affairs (VA). The VA maintains a database of verified SDVOSBs, which is accessible to federal agencies and prime contractors.

How the False Claims Act applies to contracting fraud whistleblowers

The False Claims Act (FCA) is a federal law that allows individuals or whistleblowers to file a lawsuit on behalf of the government if they believe that a business has defrauded the government. The FCA applies to cases of set-aside contracting fraud because businesses that falsely claim eligibility for set-aside programs are making false claims to the government. Under the FCA, whistleblowers can receive a percentage of the recovery, between 15-30%, if their lawsuit is successful.

Consequences of fraudulent practices in government contracting

The consequences of fraudulent practices in government contracting can be severe. The government can take legal action against businesses that engage in such practices, including fines and imprisonment. Additionally, businesses that engage in fraudulent practices can be debarred from future government contracting opportunities, which can severely impact their ability to do business. When businesses contracting with the government violate the False Claims Act, they will be subject to penalties for each violation of the false claims act, plus treble damages.

In the case we discussed at the beginning of this blog, the contractor who perpetrated the fraud scheme was fined $10,000, ordered to pay $72,000 in restitution, and also to serve 15 months in prison for wire fraud. This same conduct that landed this contractor in jail would also be a violation of the False Claims Act, actionable by a whistleblower.

Notable Set Aside Contracting Fraud Cases

Here are some recent set-aside contracting fraud cases.

$7.8 Million Settlement in 8(a) Small Business Fraud Scheme: Contractor HX5 LLC, its CEO, and affiliated joint venture HX5 Sierra LLC agreed to pay the United States $7.7 million to resolve allegations that they knowingly misrepresented their business to the Small Business Administration to participate in the 8(a) business development program. A corporate whistleblower, Vantage Systems, Inc., uncovered the fraudulent activity and received $1,357,964 or 17.5% of the settlement as compensation.

$8 Million Settlement in SDVOSB Contracting Fraud Scheme: Apparel manufacturers VE Source LLC and Vertical Source, Inc, falsely claimed to be service-disabled veteran-owned small businesses in order to win contracts with the U.S. Department of Agriculture and the U.S. Defense Logistics Agency. The contractors involved paid almost $8 million as part of the settlement agreement. According to the complaint filed by the government, the co-owners of the organizations were aware that in order to qualify as an SDVOSB, 51% ownership and controlling activity had to be held by a qualified service-disabled veteran – which was not met in this case – as set-aside contracts aim to financially reward economically disadvantaged companies for providing services to the government.

$48.5 Million Settlement in “Largest-ever False Claims Act recovery based on allegations of small business fraud”: On April 21, 2022, the Department of Justice settled a case against a foodservice and restaurant equipment supplier for $48.5 million; an executive was fined an additional $100,000. The qui tam relator, Fox Unlimited Enterprises, reaped 22.5% sum of the settlement ($10.9 million) as reward for reporting government contracting fraud. Three related foodservice companies worked with four economically-disadvantaged businesses to access contracts set aside for service-disabled veteran-owned businesses and concealed their involvement in the process.

Protections for Set Aside Contracting Fraud Whistleblowers

Whistleblowers reporting set-aside contracting fraud have protections from retaliation, discrimination, and harassment under the False Claims Act. Examples of prohibited retaliatory activities include: firing, demotion, reduction in pay or hours, and changes to employment status. In the event of a retaliation, whistleblowers may be able to pursue legal action against an employer for double back pay, reinstatement, possible front pay and legal fees.

Ask our Government Contracting Fraud Attorneys About How to Report Fraud

In conclusion, set-aside contracting fraud is a serious issue that can have legal and financial consequences for businesses that engage in it. It is important to follow all regulations and guidelines related to government contracting and to be honest and transparent about business qualifications. Service-disabled veteran-owned small businesses play an important role in government contracting and should be supported and encouraged. Whistleblowers can help protect the integrity of government procurement and ensure that legitimate small businesses have opportunities to thrive. If you have insider knowledge that a company is defrauding the government via its contracting practices, contact the government contracting fraud attorneys at Tycko & Zavareei LLP. In a free consultation, you can learn how you can protect yourself as a whistleblower and get rewarded for reporting fraud.

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