Earlier this month, the Department of Justice (DOJ) announced a $5.2 million civil settlement agreement to resolve small business set-aside fraud allegations against an aerospace contractor.

While the $5+ million settlement figure could justifiably give you sticker shock — the real story here is that things could have ended much worse for the contractor. The contractor self-disclosed the violation under the False Claims Act (FCA) and cooperated during the ensuing investigation. That self-disclosure and cooperation led to the contractor receiving (in DOJ’s own terms) “credit in the settlement.”

The question presented by this violation is not whether the contractor did the right thing by self-disclosing (it did). The focus should be on the contractor’s compliance program and how to stop small business contracting fraud before it happens.

Anatomy of a Violation

The alleged FCA violation arose out of a very common scenario — the small business was acquired by another business through a stock ownership transaction. By virtue of that acquisition, the small business gained new affiliates (through common ownership) and lost its size status (i.e., the business went from “small” to “other than small” for purposes of the Small Business Administration (SBA)).

Nevertheless, for a period of about five years, the formerly small business bid on and was awarded 22 small business set-aside contracts and continued to hold itself out as a woman-owned small business. The DOJ and SBA call that small business contracting fraud.

Several years later, the company uncovered evidence of the fraud and voluntarily disclosed to the government facts concerning its affiliation and ill-gotten set-aside contracts. If not for that self-disclosure, the consequences for the contractor could have been much more severe. A federal contractor that misrepresents its size status faces exposure for three times its total contract proceeds under the Presumed Loss Rule, plus other damages. This is true even if the contractor performed the contract to the government’s full satisfaction.

Practical Advice – The Good, Bad, and Ugly of the Contractor’s Self-Disclosure

While the contractor’s self-disclosure in this case certainly seemed to have saved it some pain, the $5 million price tag shows it obviously was not good enough.

In a perfect world, this violation obviously does not happen. The initial acquisition should have triggered questions about the acquired business’s new size standard and whether (or not) it remained eligible for set-aside contracting opportunities. This is a key question for every small business to ask when acquiring another business or being acquired itself.

But even if the issue was not flagged during the acquisition, nearly a decade passed between the initial transaction and the ultimate disclosure. A functioning compliance program should have flagged this issue during each of the 22 set-aside awards (not the mentioned the untold number of contracts that the contractor bid for but did not receive). If nothing else, routine updates to the business’s SAM.gov registration should have at least prompted a question.

How long has it been since your business’s last compliance check up? Are you missing out on opportunities? Or running the risk of small business contracting fraud?

Nick Solosky is a Partner in Fox Rothschild’s Government Contracts Practice Group.  You can reach Nick directly at NSolosky@FoxRothschild.com or 202-696-1460.