Monday, July 7, 2014

Abuse in the SBA's Section 8(a) Program

In what appears to be another in a string of crack-downs on companies abusing Government small business programs, the Department of Justice just announced the sentencing of Mr. Smith who fraudulently received $52 million in contracts under the SBA's 8(a) program; a program designed to assist disadvantaged small businesses. The actual loss to the Government was $7 million and that figure, plus the fact that awards to his company prevented legitimate 8(a) companies from receiving contracts under the program, undoubtedly influenced the 42 month prison sentence handed down by the judge. In addition to jail time, Mr. Smith will be required to pay restitution of $7 million.

Mr. Smith formed a roofing company in 1999. Although he exercised complete (but undisclosed) control over the company with his wife maintaining all of the accounting records, he had installed a figurehead - a minority who ostensibly owned 60 percent of the company (with the title of President) and Mr. Smith's son as Vice President with 40 percent ownership  of the company.

From 1999 until 2013, Mr. Smith and his company began picking off Government contracts that were reserved or set-aside for SBA 8(a) contractors. From 2004 through 2010, Mr. Smith also submitted annual updates to the SBA that fell short of full disclosure. These updates did not disclose that Mr. Smith exercised control over the firm, that Mr. Smith owned another company, that he (a non-disadvantaged individual) received more compensation than the "disadvantaged" President, that a relative owned a sizable portion of the company, among other false and misleading information. Based on these fraudulent applications, the company received more than $52 million in contracts from the federal government under the Section 8(a) program to which it was not entitled. The illicit profit from these contracts was estimated at $6.2 million.

Mr. Smith and his wife lived lavishly on these profits. They transferred millions of dollars from company accounts to their own accounts, to credit card companies for personal expenses, for dental work, for veterinarian services, for luxury cruises and limousine rides, for home improvements, and for casinos. Some of the payments to casinos were mischaracterized as subcontractor payments.

To make matters worse for themselves, the Smiths didn't claim these amounts as income on their tax returns. The impact of these omissions totaled $839 thousand in lost income tax revenues for the federal government.

Over the past three years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants. The Financial Fraud Enforcement Task Force (FFETF) which was created in 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes includes more than 20 federal agencies and 94 U.S. Attorney's offices as well as state and local partners.

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