Current federal law mandates a penalty of up to 10 years in prison, a fine of up to $500,000 per occurrence, or both, for firms that misrepresent themselves to receive federal small business contracts.
Under the new policy, large businesses that were discovered committing contracting fraud could avoid any jail time or fines by simply claiming they "acted in good faith."
Although a series of federal investigations and investigative reports in the media have all found rampant fraud in SBA managed programs, the SBA has consistently denied there was any fraud in their programs. The new "safe harbor" policy is significant since it signals the SBA's acknowledgement that a large number of firms currently claiming to be small businesses to receive federal contracts may be doing so fraudulently.
Some law firms have already begun issuing instructions to their clients on how to use the "safe harbor" loophole to avoid facing severe penalties for contracting fraud.
Every year since 2005 the SBA Inspector General has reported the diversion of federal small business contracts to large businesses as the number one problem at the agency. The SBA has refused to adopt policies to halt the fraud. In addition to attempting to protect fraudulent firms that SBA has continued to increase size standards to allow larger and larger firms to quality as small businesses.
The Government Accountability Office (GAO) investigated the SBA and released Report 10-108 that essentially accused the SBA of encouraging fraud among government contractors.
Report 10-108 stated, "By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud."
Critics of the "safe harbor" policy believe the GAO was correct and the SBA is attempting to create a major loophole in federal law that will ultimately encourage fraud. In doing so the SBA can continue to misrepresent the percentage of federal contracts awarded to small businesses by continuing to include thousands of large businesses in their small business contracting statistics.
The American Small Business League (ASBL) has launched a national campaign to block the new "safe harbor" policy from taking effect and has pledged to seek an injunction in Federal District Court in San Francisco if the SBA does adopt the policy protecting fraudulent firms.