In Part I of this blog series, we identified various government programs that are often the target of fraud. In this blog post, we will examine the types of fraud that are committed against these programs, as well as recent case examples of fraud.
Types of Fraud
Cases alleging violations of the various preference or set-aside programs generally involve misrepresentations about a business’ eligibility to participate in the program. This can involve false certifications about the actual ownership or affiliates of the company or false representations about the amount of work that the small or minority business will perform on a given contract or project.
Fraudulently Formed Businesses
Sometimes companies are fraudulently formed specifically to take advantage of set-aside or preference programs, and other times there was at least a semblance of eligibility but it wasn’t maintained over time. Misrepresentations regarding average annual gross revenue, number of employees, ownership, or other qualifying characteristics to obtain a set-aside contract or preference is subject to a fine up to $500,000, imprisonment up to 10 years, penalties under the Program Fraud Civil Remedies Act of 1986, ineligibility to participate in any program or activity under the Small Business Act for up to three years – and potential liability under the False Claims Act, with its possibility of treble damages and very substantial penalties per false claim or statement.
Large Businesses Fraudulently Aligning With Small Businesses
Also, since there are circumstances in which large and small companies can work together as joint venturers, especially through the SBA Mentor-Protégé project, there are temptations for large businesses to fraudulently align themselves with small qualified entities in order to get those contracts.
Since set percentages of work must actually be done by the small business, the large business is not permitted to usurp the contract and take all of the federal funding. Basically, pursuant to rules promulgated by the SBA, funding must be split according to the percent of work performed, which has to include a set percent done by the qualified entity.
Misrepresenting the Allocation of Work or Profits
Misrepresentations about the allocation of work or profits is a frequent form of fraud in these instances. Just this week, a bill was introduced on the floor of the House, with bipartisan sponsorship, to address this issue concerning the passing-through of contract work to ineligible companies by abusing a program intended to aid veteran-owned small businesses. H.R. 2749, the Protecting Business Opportunities for Veterans Act, would require participants in the VA’s Vets First Contracting Program to certify they are performing the requisite minimum amount of work. The VA would have the ability to refer suspected violators to its Office of Inspector General.
Additionally, false or fraudulent statements or schemes that do not pertain specifically to the special eligibility qualifications of the company can lead to FCA actions, such as misrepresentations about the ability of the company to perform the tasks, tainted bids or falsified billing.
Recent Allegations of Fraud in the Specially-Qualified Arena
In December 2016, Rhode Island-based Rosciti Construction Corporation and Wallace Construction Corporation, and several of the companies’ current and former owners, paid $1 million dollars for FCA violations involving the submission of claims for reimbursement for funding earmarked for minority, women-owned, or small businesses that they were not entitled to receive. The contracts were issued by the Environmental Protection Agency, the United States Department of Education, and the United States Department of Transportation. Each of the contracts contained requirements that subcontractors on these projects must include disadvantaged business enterprises, specifically minority-owned, women-owned, or small businesses. Rosciti Construction was the prime contractor for the projects and joined with subcontractor Wallace Construction, which misrepresented itself as a disadvantaged business enterprise.
Another FCA example involved Hayner Hoyt Corporation, a Syracuse, New York based contractor that agreed to pay more than $5 million to resolve allegations that it intentionally exploited the Service-Disabled Veteran-Owned Small Business (SDVOSB) Program for contracting opportunities.
The government alleged that Hayner Holt officials placed a service-disabled veteran figurehead at the head of the operation, while in fact the responsibilities of the service-disabled veteran were limited to tool inventory and snow removal tasks. The true control and management was handled by non-veteran employees of Hayner Hoyt.
The scheme was allegedly carried out through a front company known as 229 Constructors, which was created and controlled by and subcontracted for Hayner Hoyt and its affiliates. A Hayner Hoyt executive established an email account in the figurehead president’s name and set it up so that all emails received by the veteran were automatically forwarded to him.
In addition to the fact that control and management was by non-veterans, Hayner Hoyt also provided substantial resources to 229 Constructors, giving it a competitive advantage over legitimate service-disabled veteran-owned small businesses that are often small, not well-funded entities.
2017 Fraud Allegations
Two examples from 2017 involve non-FCA cases, but the substance of the frauds was the same. A federal jury in Boston convicted a Chelmsford, Massachusetts man who won over $100 million in federal contracts that gave preference to disabled veteran-owned companies, finding that he lied when he represented that the companies were owned by disabled vets. The government contended that David Gorski recruited two veterans to stand in as the majority owners and top executives of his construction firm so it could win those federal contracts. Gorski was sentenced to 30 months in prison and fined $1 million by the federal court.
A Kansas City veteran and the owner of a construction company were indicted by a federal grand jury in January 2017 for their roles in a “rent-a-vet” scheme to fraudulently obtain more than $13.8 million in federal contracts.
Patriot Company was a pass-through or front company that was allegedly set up using Paul Salavitch’s veteran and service-disabled veteran status in a “rent-a-vet” scheme to bid on at least 20 government contracts and receive approximately $13.8 million to which Patriot Company would not have otherwise been entitled. Although Salavitch is legitimately a service-disabled veteran, he worked full-time as a federal employee with the Department of Defense in Leavenworth, Kansas, and did not work full time for Patriot Company. Jeffrey Wilson, who is not a service-disabled veteran, set Salavitch up as a front man so that Wilson’s non-qualified company could compete for the contracts.
The scheme allegedly included decorating the office rented for the front company with some personal items reflecting Salavitch’s military service. The fraud allegedly involves 20 contracts with the U.S. Department of Veterans Affairs and the U.S. Army.
Be on the lookout for these types of frauds, which seem to be increasing and which funnel money away from the people and enterprises that the government is trying to encourage.