Fraud Involving SBA

Programs

Presentation to the SBA Southern California

8(a) and Small Business Conference

Irvine, CA

April 12, 2017

Office of Inspector General Discover and curb fraud, waste and abuse in

SBA’s Programs and Operations

• Conduct Investigations to prove/disprove allegations of fraud by

contractors, borrowers, sellers, brokers, lenders, outside third parties, and/or employees. o Law Enforcement Officers in same job classification as FBI, USSS, NCIS, etc.

o Take complaints, conduct interviews, serve search and arrest warrants, testify in court, conduct financial and information analyses, etc.

o Seek to deter crime against the SBA, through publicizing prosecutions and improving regulations and procedures.

• Conduct Audits designed to evaluate and make improvements to agency programs and operations, discover and reduce fraud, and achieve recoveries for the agency.

• Review Agency Policies, approve 912’s, make Suspension and Debarment Recommendations, advise agency on various issues, etc. Also determine program weaknesses and recommend improvements.

Western Regional Office Kari Overson, Special Agent-in-Charge,

33400 9th Avenue South, Suite 210, Federal Way, WA 98003,

Tel (253) 835-7988 Fax (253) 835-7989

Email Kari.Overson@sba.gov

Central Regional Office T.J. Gaylor, Special Agent-in-Charge,

Leland Federal Building, 1919 Smith Street, Suite 23066, Houston, TX 77002,

Tel (832) 366-2908 Fax (202) 481-6213

Email Talmadge.Gaylor@sba.gov

Eastern Regional Office Kevin Kupperbusch, Special Agent-in-Charge,

233 Peachtree Street, N.E., Room 1802, Atlanta, GA 30303,

Tel (404) 331-2326 Fax (202) 481-2961

Email Kevin.Kupperbusch@sba.gov

Note: The Western Regional Office also covers Guam, American Samoa, and Saipan. The Eastern Regional Office also covers Puerto Rico and the Virgin

Islands.

SBA Office of Inspector General

Investigations Field Office Territories

Within the United States

Profile of SBA

• Business loan portfolio of $118.8 billion and a disaster

assistance loan portfolio of $5.3 billion as of Fiscal Year

(FY) 2016;

• Administered procurement assistance programs to

help small businesses receive $90.7 billion in U.S.

Government contracts as of FY 2015; and

• Workforce of 1,940 regular employees and 1,162

disaster employees as of FY 2016.

Year

Indictments

Convictions

Recoveries

Total

Investigative

Return

(Including

Asset

Forfeitures)

FY 2016 45 41 $71,707,848 $141,538,695

FY 2015

52

57

$61,002,352

$118,803,452

FY 2014

103

67

$32,426,370

$76,176,095

FY 2013

64

51

$92,917,594

$305,361,070

Investigations Division

Statistical Accomplishments

Categories of Contracting Fraud Schemes

• Pass Through or Front Company oCompany qualifies

o Passes all work to larger or otherwise

unqualified firm

• Unqualified Firm oDoes not meet program requirements

Size Program Small Business Based on NAICS

Annual Receipts or Employees

Size Determinations

Affiliation

Ability to control

If NAICS wrong on the contract, SBA

corrects the NAICS and bases

determination on correct one

Protest – Apply for Determination

Representations in SAM

Representations on bids

Size/Affiliation Case Study: En Pointe Gov., Inc.

• Several companies affiliated

through common ownership

• Subsidiary submitted GovK bids.

8(a) Business Development Program Socially disadvantaged

Economically disadvantaged

At least 51% owned

Initial Application

Annual Recertification/Reviews

Invoices

Verbal/written statements to Gov’t

8(a) Business Development Program

False Statements re: Ownership

Control

Death of NDI

Net worth

Citizenship

Criminal History

8(a) Fraud • Marcon - Idaho case involving an 8(a) applicant

who provided false information showing a reduced

net worth so she could get into the 8(a) Program.

Once in the program, she provided falsified tax

returns that showed her net worth was below the

required limit. If she had disclosed her true assets

and net worth, she would not have been allowed

into the program, nor allowed to stay in the

program from which she obtained over $40 million

in contracts. She received 58 months in prison for

the contract fraud.

8(a) Fraud • Okland Construction, based in Utah, paid the U.S.

Government $928,000 to resolve allegations it made false statements and submitted false claims to the Government.

• The company entered into a Mentor-Protégé Agreement with Saiz Construction. Okland prepared the bids for the 8(a) contracts and its employees served as project managers, submitted invoices and performed payroll and extensive performance of the contract while misrepresenting to the Government its employees were the small business’ employees.

• Okland also paid Saiz’s attorney fees.

Bribery - Kickback Mountain Two prime contractors in the SBA’s 8(a) Program in San Diego solicited

and received kickbacks from subcontractors in order to award them

subcontracts at Camp Pendleton. One principal received over

$539,000 in kickbacks to himself, his son or his daughter; the other

received over $94,000.

The investigation also uncovered bribery payments to two public

officials.

• The Navy contracting official, self-described as the “godfather of

Camp Pendleton,” accepted over $100,000 in bribes from the two

8(a) contractors, including remodeling work on his property.

• A GSA contracting official demanded $120,000 in exchange for an

8(a) contract. He received $42,000 through controlled and

monitored actions, was arrested and pled guilty to Conspiracy to

Commit Bribery and False Tax Returns.

Worked with FBI, IRS-CI, GSA-OIG, DCIS, NCIS

HUBZone Program Principal place of business Where majority of the work is performed (aside

from contract locations)

Employee residency percentage Don’t dip below 35%

Notify SBA if do – cannot bid on or receive

contracts during this time

Initial Application

Recertification/Reviews

Invoices

Certifications in SAM and to KO

HUBZone Case Study In March 2012, in the U.S. District Court, District of Idaho, two Boise companies pled guilty to fraud relating to the SBA HUBZone program. Michael D. McDonald Sr., president of McDonald Roofing and Construction Inc. (MRC), pled guilty on behalf of MRC to one count of wire fraud. Lisa A. Hatch, president of Construction Service Corporation (CSC), pled guilty on behalf of CSC to one count of wire fraud and one count of false statements pertaining to the GSA’s Surplus Property Program through which SBA 8(a) companies can obtain surplus property. Both companies submitted fraudulent HUBZone applications to the SBA that stated their principal places of business were located in HUBZones and that each had two employees who resided in HUBZones. The investigation revealed that neither of the companies was located in a HUBZone and none of the employees resided in a HUBZone. The companies received a combined total of over $1.6 million in contracts based on the false HUBZone certifications. The investigation also found that CSC obtained over $1million of property (original value) as an SBA certified 8(a) company under the GSA’s Surplus Property Program and immediately sold or transferred that property to a non-8(a) entity.

Worked with DOI-OIG, GSA-OIG, VA-OIG, USDA-OIG, IRS-CI, Army CID

WOSB/EDWOSB Programs

51% Owned by one or more women

Controlled by one or more women

Upload documents into Certify.gov

• Third Party Certification

• KO has to verify documents in Certify.gov

Representations in SAM

Representations on bids

Case Study: UFC Aerospace

• UFC certified to Lockheed/Boeing that it was

Woman-Owned.

• Lockheed/Boeing certified to Air Force that it was

awarding subcontracting dollars to WOSBs

• Qui Tam investigation reveals Doug and John Davis

control Trusts which own UFC

o Power to Remove Wife and Daughter “Owners”

o Emails reveal no control/decision-making by

women

Case Study: UFC Aerospace (continued)

• Violations:

oControl of Firm by non-Woman

Owner

• Result: $20 Million Settlement

(S.D.N.Y.)

• Administrative Agreement

reached

SDVOSB Program Firm must be Small

Owned and Controlled at least 51% by

one or more Service-Disabled Veterans

SDV status determined by VA VA requires

SDV hold highest officer position and have

managerial experience to run the firm

SBA’s Program covers all non-VA contracts

Representations in SAM

Representations on bids

Ownership

Control

Fraudulent SDVOSB Concern

• Several individuals conspired to defraud the

Government to obtain SDVOSB contracts. The owner of

the SDVOSB company made false statements regarding

his SDV status. He was never classified as an SDV. He

was sentenced to 51 months imprisonment and 3 years

of supervised release. He was also ordered to pay a

$30,000 monetary judgment. The majority owner of

another construction firm falsely claimed to have

worked for the SDVOSB company and conspired to use

that company as a pass-through for his own business.

The SDVOSB company obtained more than $6.7 million

in SDVOSB set-aside contracts from the VA and

approximately $748,000 from the DOD before the

scheme unraveled.

SBA Programs Small Business Subcontracting Subcontractor’s self-certification of

status in SAM.gov

Certifications to Primes

Primes certs in invoices, bids to the

Government

Remember earlier example of

UFC Aerospace?

SBIR/STTR Company must be small

U.S. principal place of business

>51% owned by individuals within 2

levels

Maximum 500 employees

Principal Investigator’s primary

employment is with the company (not a university)

Representations in SAM

Representations on proposals

SBIR Fraud Case Study

A firm in Vancouver, WA made false claims

regarding its eligibility for SBIR Contracts. The firm

obtained about $14 million in SBIR contracts over

several years.

The firm was not eligible because it was owned

by a VC firm that was not owned 51% by an

individual(s).

The firm reported its errors when a Dept. of

Energy contracting officer caught the eligibility issue

and denied a contract.

The firm settled civilly with the Government and

paid an agreed upon amount.

Surety Bond Guarantee Program

The SBA’s surety bond program guarantees

70% of the surety company’s losses on

bonded jobs the SBA has guaranteed.

False statements re:

• financial situation

• contracts

• past experience

• paying subs

Mail or Wire Fraud

False Statements to agency working for

Surety Bond Case Study Hawley, owner of PBI Construction made false statements:

• To the owners of the public works contracts by falsely stating

he had paid subcontractors and suppliers when he had not;

• Via U.S. Mail to the surety company that PBI was out of funds,

which forced ICW to pay contract owners on defaulted jobs,

when, in fact, he had diverted and was continuing to divert

contract proceeds of approximately $87,000 to his personal use instead;

• To a federally-insured financial institution for a mortgage loan;

and

• To the SBA to obtain two guarantees on surety bonds by falsely stating that he had not defaulted on prior surety bonds.

The SBA suffered a loss of over $500,000 due to PBI’s defaults

on several contracts.

Surety Bond Case Study

• Charged with 18 USC 1001, False Statements; 18

USC 1014 False Statements on a Loan Application;

and 18 USC 1341, Mail Fraud.

• Hawley was sentenced to 30 days in a residential

reentry center, 90 days home confinement, and 5

years supervised release. He was also ordered to

pay a special assessment of $200.00 and restitution

to the U.S. Small Business Administration of

$197,566.47.

• Hawley and PBI were debarred for a period of three

years from participation in Federal procurement

transactions, and financial and non-financial

assistance programs.

Criminal Statutes • 18 U.S.C. § 286 Conspiracy to Submit False Claims – Entering into an

agreement, combination, or conspiracy to defraud the U.S., or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of false, fictitious or fraudulent claims.

• 18 U.S.C. § 287 False, Fictitious or Fraudulent Claims – Whoever makes or presents to the U.S. Government any claim knowing it to be false, fictitious, or fraudulent.

• 18 U.S.C. § 1001 False Statements: Prohibits false statements to the Government, whether in oral or written form; includes false statements to the investigating agent(s).

• 18 U.S.C. § 1341 Mail Fraud and 1343 Wire Fraud: Prohibit using the mails

and/or interstate wire communications to defraud another of money or property. Includes the use of overnight carriers.

• 18 U.S.C. § 1031 Major Fraud Against the U.S.: Prohibits the use of

fraudulent schemes to obtain over $1,000,000 from the U.S. Applies to grants, contracts, subcontracts, loans, guarantees, subsidies, etc.

Criminal Statutes

18 U.S.C. § 201 Bribery –

Whoever - 1) directly or indirectly gives, offers, or promises anything of value to any public official with intent to

(A) Influence an official act; or

(B) Influence the official to commit or aid in committing or allow fraud; or

(C) Induce the official to do or omit to do any act in violation of the lawful duty of the official

2) being a public official, corruptly demands, seeks, receives, accepts, or agrees to receive or accept anything of value personally or for another, in return for:

(A) being influenced in the performance of any official act;

(B) being influenced to commit or aid in committing, or to collude in, or allow, any fraud, or make opportunity for the commission of any fraud, on the United States; or

(C) being induced to do or omit to do any act in violation of the official duty of such official or person; …

Criminal Statutes

Anti-Kickback Act - Title 41

§ 53. Prohibited conduct (1) to provide, attempt to provide, or offer to provide any kickback;

(2) to solicit, accept, or attempt to accept any kickback; or

(3) to include, directly or indirectly, the amount of any kickback prohibited by clause (1) or (2) in the contract price charged by a subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged by a prime contractor to the United States.

§ 54. Criminal penalties Any person who knowingly and willfully engages in conduct prohibited by section 3 [41 USC § 53] shall be imprisoned for not more than 10 years or shall be subject to a fine in accordance with title 18, United States Code, or both.

§ 55. Civil actions (1) The United States may, in a civil action, recover a civil penalty from any person who knowingly engages in conduct prohibited by section 3 [41 USC § 53]. The amount of such civil penalty shall be--

(A) twice the amount of each kickback involved in the violation; and

(B) not more than $ 10,000 for each occurrence of prohibited conduct.

(2) The United States may, in a civil action, recover a civil penalty from any person whose employee, subcontractor or subcontractor employee violates section 3 [41 USC § 53] by providing, accepting, or charging a kickback. The amount of such civil penalty shall be the amount of that kickback.

Civil Statutes

31 U.S.C. §§ 3729-3733: False Claims Act (Civil) • $5,000-$11,000 per false claim

• Up to treble damages

SBA Statutes 15 U.S.C. § 645(a): False Statements

Whoever makes any statement knowing it to be false, or for the

purpose of influencing in any way the action of the SBA

–$5,000 fine, two years imprisonment

15 U.S.C. § 645 (d): Misrepresentation of Status as SBC; HUBZone SBC, an SBC owned or controlled by socially and

economically disadvantaged individuals, or an SBC owned and

controlled by women in order to obtain a prime contract or

subcontract.

–$500,000 fine, ten years imprisonment

Rule for Small Business Fraud

Damages “In every contract…which is set aside…for award to small business

concerns, there shall be a presumption of loss to the United States based

on the total amount expended on the contract …whenever it is established that a business concern other than a small

business concern willfully sought and received the award by

misrepresentation.”

Submission of a bid or proposal for a Federal contract set aside for

award to small business concerns; or

Registration on any Federal electronic database (e.g., SAM) for the

purpose of being considered for award of a Federal contract as a small

business concern… “shall be deemed affirmative, willful, and intentional

certifications of small business size and status.”

15 U.S.C. § 632(w), Small Business Jobs Act

Avoiding Problems • Know what you are certifying

• Review all certifications in the FAR Report in SAM prior to submitting

• Correct as soon as you know there is an error and notify the CO/KO

• Ensure only the owner or principal of the business is making the representations (so you know what your company is submitting)

• Keep close watch on your percentage of work and that you are receiving the proper profit

• Keep an eye on subcontractors or JV team members to ensure they’re living up to the agreements

What you can do… • Document important discussions

– If a larger firm is contacting you to consider a Joint Venture, MPA, etc., ensure you document discussions, representations, etc., and get the JV, MPA, or teaming agreement in writing to know what each company will perform. Do your due diligence on the other company.

• Protest contracts if you know/believe the successful offerer is Other Than Small • If protest dates have passed, or in addition to filing a protest, contact law

enforcement authorities.

• Report fraud to the contracting agency’s OIG and/or SBA-OIG

• Report suspected requests for bribes/kickbacks immediately

CONTACT US!

Duty to Disclose

FAR provisions require every contractor to

disclose to an Office of Inspector General

(“OIG”) all “credible evidence” related to a

government contract of:

(1) violations of criminal law involving fraud,

conflict of interest, or bribery;

(2) violations of the civil False Claims Act; or

(3) significant overpayments.

SBA Employees’ Duties

13 C.F.R. § 105.205 Duty to report irregularities.

Every employee shall immediately report to the

SBA Inspector General any acts of malfeasance

or misfeasance or other irregularities, either

actual or suspected, arising in connection with the

performance by SBA of any of its official

functions.

SBA-OIG Contacts SBA-OIG HOTLINE 1-800-767-0385

https://www.sba.gov/oig/hotline

Western Regional Office (covers Regions 8, 9, and 10)

33400 9th Ave. S., #210, Federal Way, WA 98003

fax: (253) 835-7989

Special Agent in Charge Kari Overson

(253) 835-7988; fax to e-mail: (202) 481-2859

kari.overson@sba.gov

Assistant Special Agent in Charge Sandra Mazzoni

(562) 868-3193; fax to e-mail: (202) 481-3358

sandra.mazzoni@sba.gov