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Changes are coming to the suspension and debarment practices of the Small Business Administration (SBA), and contractors should ready themselves for an uptick in suspension and debarment activity as a result.  That’s the takeaway from a new audit report released last week by the SBA’s Office of the Inspector General (OIG) criticizing aspects of the agency’s suspension and debarment practices.  Although the SBA’s suspending and debarring officials (SDOs) for Financial Assistance Programs (FAP) and All Other Programs (AOP)[1] disputed certain OIG findings about existing practices, the agency was largely receptive to the OIG’s recommendations.  As a result, it appears that the SBA soon will be adopting a series of changes aimed at formalizing its suspension and debarment policies, expediting its processing of debarment referrals, and devoting additional resources to suspension and debarment actions – all of which is likely to drive an increase in exclusion actions.

OIG Audit Findings

The OIG launched its audit in November 2018 with the goal of “determin[ing] whether SBA had sufficient controls in place to prevent suspended or debarred entities from receiving federal contracts through SBA’s preference contracting programs and small business loans.”  The final report contained several findings critical of the operation and effectiveness of the SBA’s suspension & debarment program.
  • The OIG found that the SBA approved $6.7 million in loans to entities without reviewing the System for Award Management (SAM) to confirm the eligibility of loan applicants, including approving a $2.9 million loan to an entity that was listed as an excluded party on SAM. Of the 14 loan files the OIG reviewed, 11 did not have documentation supporting pre-approval SAM review by the lending partners.
  • The OIG identified 15 cases referred for suspension or debarment that had remained open and pending for an average of 620 days each, during which time three of these contractors received an addition $80.3 million in federal awards. The OIG asserted that the “delayed action” of the SDOs “exposed the federal government to potential harm” and “resulted in $80.3 million in contracts to entities who demonstrated causes for debarment.”
  • The OIG identified four cases in which the SDOs declined to impose suspension or debarment in response to a referral arising from a civil judgment and did not document the basis for the declination. The OIG urged the SDOs to document any declinations under such circumstances to “demonstrate consistent application of procedures in their decisions.”

OIG Recommendations & SBA Response

Based on its findings, the OIG issued a number of recommendations to the SBA, including updating internal procedures addressing suspension and debarment, allocating more resources to suspension and debarment activities, and even rescinding contracts awarded without adequate vetting for eligibility issues.

The SBA took issue with certain of the OIG’s findings – most notably, the suggestion that its “delayed action” on debarment referrals resulted in $80.3 million in contract awards to three non-responsible contractors.  (On this point, the agency clarified that it had fully reviewed the referrals concerning the three contractors in question and had elected to forego debarment after determining them to be presently responsible.)  But despite some areas of disagreement, the agency has committed to adopting many of the OIG’s recommended enhancements to its existing suspension and debarment practices, including:

  • Updating the SBA’s SOPs to expressly require lending partners to review SAM listings prior to loan approval;
  • Finalizing internal suspension and debarment policies and revising SOPs to require the timely processing of referrals;
  • Dedicating additional staff and resources to help monitor and process suspension and debarment actions;
  • Developing and deploying a new tracking system for suspension and debarment actions; and
  • Revising the SOPs to require that SDOs document (and retain documentation for) declination decisions.

Key Takeaways

The SBA has long had an active suspension and debarment program.  Indeed, in the latest year for which statistics are available, the SBA instituted more than 70 exclusions and negotiated an additional six administrative agreements.  Yet the OIG’s audit report and the agency’s response likely presage a further emphasis within the SBA on the vigorous pursuit of suspension and debarment.  In this respect, the SBA is not alone: as we discussed earlier this year, the Department of Labor has instituted its own suspension and debarment pilot program aimed at promoting and expediting its suspension and debarment activity.

While contractors cannot be expected to cheer an increased emphasis on suspension and debarment remedies, any concerns about additional scrutiny may be leavened by the promise of increased uniformity, efficiency, and transparency in suspension and debarment actions.  For example, dedicating additional resources to support the timely processing of referrals may well combat any trend of suspension and debarment actions (which are supposed to be based on present responsibility) premised upon stale conduct.  Moreover, by committing to formalize suspension and debarment procedures in its SOPs and document instances of declinations, the SBA is poised to bring a measure of regularity and predictability to a highly discretionary process.

However, other aspects of the OIG’s recommendations are less likely to be warmly received by contractors subject to SBA oversight.  Most notably, a new policy requiring the SDOs to document the basis for any declination could well have a chilling effect and reduce the likelihood of an SDO declining to impose debarment – both because of the scrutiny to which those decisions will be subjected and the increased administrative burden associated with preparing the documentation.

Ultimately, it remains to be seen precisely how the contemplated changes will be implemented in practice.  What is clear, however, is that the SBA is committed to making full use of its suspension and debarment authority.  In such an environment, industry players should be reminded that the small business area is fraught with regulatory peril, and that non-compliance carries a significant risk of triggering suspension and debarment – especially in light of what appears to be an increased emphasis on these remedies with the SBA.  Contractors would be wise to review and refresh existing ethics and compliance programs – both to prevent and detect noncompliance and to better position themselves in the event they become subject to present responsibility scrutiny.

 

[1] The SBA designates two SDOs to process suspension and debarment referrals: one for Financial Assistance Programs, located within the Office of Capital Access, and one for All Other Programs, located within the Office of General Counsel.

 

Photo of Frederic Levy Frederic Levy

Fred Levy is senior counsel in the firm’s Government Contracts and White Collar Defense and Investigations Practice Groups. He is a leading suspension and debarment lawyer, focusing his practice on the resolution of complex compliance and ethics issues. He has successfully represented numerous…

Fred Levy is senior counsel in the firm’s Government Contracts and White Collar Defense and Investigations Practice Groups. He is a leading suspension and debarment lawyer, focusing his practice on the resolution of complex compliance and ethics issues. He has successfully represented numerous high-profile corporations and individuals under investigation by the government in civil and criminal matters, including False Claims Act cases, and in suspension and debarment proceedings to ensure their continued eligibility to participate in federal programs. He has also conducted numerous internal investigations on behalf of corporate clients and advises corporations on voluntary or mandatory disclosures to federal agencies. Fred regularly counsels clients on government contract performance issues, claims and terminations, and litigates matters before the boards of contract appeals and in the Federal Circuit.

Related to his work involving program fraud, Fred counsels clients in the area of contractor “responsibility.” He is involved in the development and implementation of contractor ethics and compliance programs that meet the standards of the Federal Acquisition Regulation, Federal Sentencing Guidelines, and Sarbanes-Oxley, and he regularly conducts ethics and compliance training.

Fred is a principal editor of Guide to the Mandatory Disclosure Rule, and of The Practitioner’s Guide to Suspension and Debarment, 4th Edition. He is a vice-chair of the Debarment and Suspension Committee of the ABA Public Contract Law Section, and a former co-chair of that committee and of the Procurement Fraud Committee. He is a graduate of Columbia College and Columbia Law School.

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Photo of Michael Wagner Michael Wagner

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and…

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and enforcement actions.

Mike regularly represents contractors in federal and state compliance and enforcement matters relating to a range of procurement laws and regulations. He has particular experience handling investigations and litigation brought under the civil False Claims Act, and he routinely counsels government contractors on mandatory and voluntary disclosure considerations under the FAR, DFARS, and related regulatory regimes. He also represents contractors in high-stakes suspension and debarment matters at the federal and state levels, and he has served as Co-Chair of the ABA Suspension & Debarment Committee and is principal editor of the American Bar Association’s Practitioner’s Guide to Suspension & Debarment (4th ed.) (2018).

Mike also has extensive experience representing companies pursuing and negotiating grants, cooperative agreements, and Other Transaction Authority agreements (OTAs). In this regard, he has particular familiarity with the semiconductor and clean energy industries, and he has devoted substantial time in recent years to advising clients on strategic considerations for pursuing opportunities under the CHIPS Act, Inflation Reduction Act, and Bipartisan Infrastructure Law.

In his counseling practice, Mike regularly advises government contractors and suppliers on best practices for managing the rapidly-evolving array of cybersecurity and supply chain security rules and requirements. In particular, he helps companies assess and navigate domestic preference and country-of-origin requirements under the Buy American Act (BAA), Trade Agreements Act (TAA), Berry Amendment, and DOD Specialty Metals regulation. He also assists clients in managing product and information security considerations related to overseas manufacture and development of Information and Communication Technologies & Services (ICTS).

Mike serves on Covington’s Hiring Committee and is Co-Chair of the firm’s Summer Associate Program. He is a frequent writer and speaker on issues relating to procurement fraud and contractor responsibility, and he has served as an adjunct professor at the George Washington University Law School.

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