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In August 2011, the General Accounting Office (GAO) issued a report which concluded that many agency suspension and debarment programs were inadequate.  The report took a look at the suspension and debarment activity of ten agencies with contract obligations in excess of $2 billion during a four year period, 2006 – 2010.  The report found that, of all suspensions and debarments during that period, 47% involved grants and other types of assistance and 53% involved FAR noncompliance and/or procurements.   The most notable aspect of the report was GAO’s finding that three of the ten agencies reviewed did not report any suspension or debarments during the four year period, including the Department of Commerce, which had over $14 billion in contract obligations during that time.  Five agencies did not have any suspension or debarment actions related to FAR/procurement issues, including the Department of Health and Human Services, which had over $80 billion in contract obligations over the four-year period.

Hearings were held on the report and there were many calls to action by Congress.  OMB responded last week by issuing a memorandum to federal agencies in which it directed each agency to: (1) appoint a senior “accountable” official who will assess the agency’s suspension and debarment program; (2) review internal policies and procedures to ensure that the agency is “effectively using suspension and debarment, when appropriate”; (3) ensure contracting officers review “relevant databases and other information sources” before making contract awards; and (4) take prompt corrective action when the agency determines it improperly made a contract award to a suspended or debarred entity.

In of itself, the OMB directive is not surprising, particularly given the GAO report.  This Administration has been very vocal about rooting out fraud, waste and abuse in federal contracting.  Agency fraud, waste and abuse is also an easy rallying call for a Republican Congress adverse to federal spending.  These themes, furthermore, are not new and tend to be cyclical.  What’s important is recognizing that the pendulum has definitely swung towards enforcement and may have reached its farthest point yet.  In fact, the day after Lew issued its directive, the Homeland Security and Governmental Affairs Committee held hearings on a proposal to make suspensions and debarments mandatory in the case of a criminal conviction or indictment related to a federal contract.  Similarly, the fiscal 2012 Defense Department Appropriations Act (H.R. 2219) has a prohibition that would prohibit DoD from awarding a contract to a company that had been convicted of a felony criminal violation in the previous two years.

This pendulum swing has grave implications for the contracting community, particularly small businesses.  A number of factors are making this push towards enforcement troublesome.  Everyone agrees that rapists and other criminals should be put behind bars.   The more difficult task is defining the process by which a society identifies and prosecutes criminals.  The same is true in federal procurement.  Everyone agrees fraud, waste and abuse in federal contracting should be identified and eliminated.  Defining and implementing the process for doing so is the issue.

The GAO report on suspension and debarment noted that those agencies that had the most suspensions and debarments within the four-year period (Defense Logistics Agency, Department of the Navy, General Services Administration and U.S.  Immigration and Enforcement) had common characteristics.  These characteristics include a dedicated suspension and debarment program with full-time staff, detailed policies and procedures, and practices that encourage referrals on potential abusers.  A reasonable take away from the report is that for proper enforcement to occur, all agencies should demonstrate these characteristics.  However, that is not likely to occur in today’s fiscal environment, at least not in a cohesive fashion.  For example, nearly all agency budgets were reduced last year.  SBA’s was as well, although the agency emphasized that it allocated a greater portion of its budget to hiring enforcement staff.  If an agency can’t hire additional personnel (likely, given that many agencies are in the process of offering buyouts and the Administration has committed to an overall reduction of the federal workforce in the next two years), they might engage in training.  But having an adequate number of personnel with little training or not enough trained personnel does not a good suspension and debarment process make.

The sharpness of the pendulum swing, combined with inadequate agency resources, disproportionately impacts small businesses.  Smaller businesses generally have less resources with which to educate or defend themselves.  However, the environment for small businesses is particularly dangerous now given passage of the Small Business Jobs Act last fall.  The Small Business Jobs Act made two significant changes in the law: it established strict liability or a presumption of liability standard for false size and status certifications (as opposed to the general presumption of innocence on which our criminal justice system is based) and it rewarded the Government for pursuing these types of claims.  Specifically, as a general matter, a prosecutor attempting to prove an individual committed a crime must demonstrate that the individual knew he was committing a crime or that he intended to commit the criminal act.  With respect to certifications, however, a contractor will be presumed to have knowingly and willfully miscertified to its size and status – the element of knowledge or intent does not have to be proved.  Furthermore, in the past federal prosecutors were reluctant to pursue claims of false certification because it often was hard to demonstrate or prove, in dollars, the extent of damage suffered by the Government as a result of the false certification.  Under the Small Business Jobs Act, however, damage will be presumed to be the full contract amount – giving federal prosecutors the justification needed for pursuing miscertification claims.

Add to the mix the fact that nearly every small business contracting program has been criticized by the GAO, sometimes more than once, for failing to detect fraud and abuse.  Because of these reports, SBA and the VA began using the suspension and debarment process as a way to attack the fraud that GAO stated pervaded these programs.  However, in the SBA’s and the VA’s hands, and in other agency hands as well, I suspect, the suspension is a very blunt instrument for eliminating fraud.  As noted above, agencies do not have adequate budgets to properly staff and train staff regarding suspension and debarments laws and procedures.  The “enforcers,” therefore, are not equipped to act consistently or correctly in implementing the process.  On the other hand, these agencies must show “progress” eliminating fraud and racking up suspension and debarment cases is the easiest way to demonstrate this – especially when the law, through the Small Business Jobs Act, gives you the tools.  Finally, it is important to remember that the suspension and debarment remedy for fraud, waste and abuse encouraged by the Administration and Congress is akin to capitol punishment, and will be the death knell for those contractors determined to be guilty.  There is no rehabilitation here.

Undoubtedly, there is a percentage of suspension and debarment cases that are shocking and clearly warranted.  But as anyone involved in federal procurement knows, there’s plenty of gray in the FAR.  The landscape is even foggier with respect to small business issues such as “size” and “status.”  In fact, two of my last six blog posts have addressed the nuances of the “control” element of SDVOSB/VOSB status.  Issues such as “affiliation,” “control,” “average annual revenues” and “number of employees” are not black and white.  Attorneys, like me, spend their careers hashing these issues out with the Government on a regular basis.  In fact, last year I handled the VA’s first debarment case against two businesses and four individuals based on miscertification claims made by VA after an adverse status protest decision issued by SBA.

The FAR expressly states that the suspension and debarment process should not be used as a punitive measure.  The FAR also states that the focus should be on a company’s “present responsibility,” not its past acts.  But combine the provisions of the Small Business Jobs Act with the GAO reports on fraud in small business contracting programs with the GAO finding that agencies do not use the suspension and debarment process effectively with OMB’s recent directive with insufficient or overworked and underpaid agency personnel and you have a witch hunt in the making.  I’m just sayin.