Another "Rent-a-Vet" Scheme Settlement

The New York Foundation for Fair Contracting (NYFFC) is a not-for-profit organization established to support, promote and encourage fair contracting by leveling the playing field in public works construction for the benefit of taxpayers, contractors and workers (online source). According to NYFFC, not all construction contractors play by the rules. Unfortunately a number of them skimp on safety, cheat workers out of wages and use shoddy materials. When this happens, the construction industry, the taxpayers and the local economy pay the price. The NYFFC works to ensure that only responsible contractors - contractors that pay the proper wages, perform quality  workmanship and complete projects on-time - are awarded the opportunity to perform wok on public works contracts.

The Foundation just became $450,000 richer. It blew the whistle on a couple of contractors who fraudulently obtained Federal Government contracts that were designated for service-disabled veteran-owned (SDVO) small businesses. The companies involved Zoladz Construction and Arsenal Contracting, and Alliance Contracting (along with the two owners, Zoladz and Lyons) service-disabled veterans and therefore were not eligible for the contracts.

Zoldaz recruited a service-disabled veteran to serve as a figurehead for Arsenal, which purported to be a legitimate SDVO small business but which was, in fact, managed and controlled by Zoladz and Lyons, neither of whom is a service-disabled veteran. The Government determined that Arsenal was a sham company that had scant employees of its own and instead relied on Alliance and Zoldaz employees to function. After receiving numerous SDVO small business contracts, Arsenal then subcontracted nearly all of the work to Alliance (owned by Zoladz and Lyons) and Zoladz (owned by Zoldaz). Neither Alliance nor Zoldaz were eligible to participate in SDVO small business contracting programs.

The principles agreed to pay $3 million to settle the allegations. NYFFC who blew the whistle in this case, will receive $450,000 of that amount. No word on the value of the contracts awarded to Zoladz or Alliance. Presumable, the $3 million was calculated to take away the profits that the companies made as a result of their false statements.

You can read more about this case in the Department of Justice's press release.

Who's Gonna Fill Their Shoes *

The Federal Government has established statutory goals for ensuring that small businesses get their fair share of Government contracts. For example, 23 percent of prime contracts must go to small businesses. Three percent of prime and subcontracts must go to service-disable veteran-owned small businesses. Given the size of Government procurement, that represents a lot of money.

The U.S. Small Business Administration, Office of Advocacy issued a report last month based on data from the U.S. Census Bureau's Survey of Business Owners. The SBA reported that there are 2.5 million businesses were majority owned by veterans but only 442 thousand of them had employees. The other 2.1 million were non-employers. 99.9 percent of the businesses were "small businesses. 7.3 percent of veteran owners had service-connected disabilities.

Veteran business owners are much older than business owners in general. In 2012, 74 percent of veteran business owners were age 55 and over. This is much higher than the national average of 41 percent. But here's the problem as we see it. There are not enough veterans or service-disabled veterans in the pipeline to take over when the current generation  retires.

More than half of all veterans are age 65 and older. 70 percent are 55 and older. Compare that with non-veterans where only 27 percent of the populations is 55 and older. Only 15 percent of veterans are in the age group of 25 - 45 when they are most likely to be starting businesses. This disparity is largely due to the "Viet Nam" bubble but its this View Nam bubble that is running businesses right now.

Many prime contractors are having difficulty meeting their small-business subcontracting goals including the three percent that goes to service-disabled veteran-owned small businesses. This problem will become even more chronic as the numbers of such businesses decline. Perhaps Congress will need to reduce the targets.

In the meantime, there are and will be great business opportunities out there for veteran-owned small business enterprises, especially those owned by service-disabled veterans (SDVOSBs).

* With apologies to George Jones

Another "Rent-a-Vet" Scam Uncovered

In August 2014, a contractor plead guilty for using fronting companies to secure 45 contracts totaling $23 million that were set aside for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). In June 2015, a Grand Jury indicted three people from Puerto Rico for the same kind of scheme - calling it a multi-million dollar fraud. Just last month, the Justice Department announced another similar scheme where a company owner used stolen names and social security numbers to obtain $3 million in contracts that had been set aside for SDVOSBs.

Yesterday, the Justice Department announced another like-minded fraudster. The owner of a "sham Veteran Owned Company" has been sentenced to 30 months in prison and a fine of $1 million for falsely claiming SDVOSB status in securing more than $100 million in Government construction contracts.

In this case (you can read DOJ's full press release here), a fellow set up a construction company after recruiting a disable Korean War veteran to act as the company's "straw owner" for the sole purpose of obtaining federal construction contracts that had been set aside under the SDVOSB program. When the Korean War veteran's health deteriorated so he could no longer function, the true owner went out and hired another disabled veteran to serve as the figurehead owner. Since 2006, the company was able to obtain contracts worth more than $113 million under this ruse.

In 2010, one of the company's competitors challenged a bid on the basis that "it appeared that the true owner, not one of the veterans, was the person running the company. The true owner went out and hired a "large Boston law firm" to assist him, helping him to backdate documents that contained false and misleading information. That fooled the SBA (Small Business Administration) who subsequently denied the bid protest (we wonder what the law firm's culpability is in this matter).

After that scare, the owner started siphoning off money in such a way that it would not look like compensation. He did not want the books to show that he made more than the rented disabled veteran. There was a $900,000 "gift" made to the owner. There were also deposits to private bank accounts totaling $2.5 million.

Somebody, somewhere was working behind the scenes however because it wasn't too long before a grand jury issued subpoenas against the company, its owners, and other witnesses and the scheme began to unravel. The owner was found guilty by a jury last June and sentenced earlier this week to two and a half year in prison.