We have all heard stories of firms owned and operated by non-minority men, who appear to find a way to obtain contracts that are set-aside for women or minorities. I receive about one or two inquiries a month (more since the Stimulus Act) as to how this can be done. My first question is always, "Why do you want this status?" Every federal, state, local and private owner has its own program with its own rules. My second question is "What are the qualifications of the firm you want to partner with?" This is generally where the problems arise and it is never as easy to qualify as it looks to outsiders.

My frustration typically comes from hearing clients say, "Well, everyone else does it (that is, place their wife/daughter/foreman/neighbor's cousin in charge), so why can't I?" My lawyerly cautioning about all the laws and rules that could be violated seems not to dissuade them, and in times when any new work is hard to come by, the temptation to do just about anything to get work is hard to resist. I was, frankly, relieved to read recent Congressional testimony by Gregory Kutz, managing director of the U.S. Government Accountability Office’s (GAO) Forensic Audits and Special Investigations. On Dec. 16, 2009, he appeared before the House Subcommittee on Oversight and Investigations, Committee on Veterans' Affairs, to report on GAO's ongoing investigation of misuse of Service-Disabled Veteran Owned Small Businesses (SDVOSBs), and his comments should be a warning to everyone who thinks that he or she can bend the rules with impunity (see GAO Publication No. GAO-10-306T).

The reason that GAO has a particular interest in this category is that Congress has set aside a significant number of contracting opportunities for firms which qualify as SDVOSBs. In 2008, SBA reported $6.5 billion in sole-source, set-aside and other SDVOSB contract awards. GAO's investigation was intended to see if fraud was being committed, and it found it — in spades. It uncovered instances such as a $39.4 million award to a firm that was ineligible because a non-SDV managed daily operations, and the SDV owned and was actually running a restaurant in another city 80 miles away at the time; a $5 million award that was subcontracting 100% of work to a non-SDVOSB firm, which reported almost $12 billion in revenue that year; and an $8.1 million contract awarded to a firm whose SDVOSB was at the time a full-time employee of the New Jersey government, and that its 49% non-SDVOSB owner also owned five other construction companies at the same time.

While penalties for violation of the rules exist, including fines, suspension and debarment, GAO's investigation has prompted the VA to start increasing its efforts to prevent awards to non-qualifying firms in the first place — to develop a validation program, increase detection, monitoring, investigation and prosecution. And GAO will be watching and reporting to Congress on the VA's progress.

The problems unearthed by GAO are not new and certainly not unique to SDVOSBs. The lure of dollars has always been just too hard for some to resist. But the downside of violating the law, particularly if it can be proven to be intentional, is very serious. At the federal level, it implicates the False Claims Act, which authorizes civil as well as criminal penalties. Although each program has its own rules, some of the common criteria for qualification are as follows:

- The entity has to be both owned at least 51% by the qualifying firm. This means that the minority, woman, service-disable veteran, etc., not only gets 51% of the net profits, but would be considered the majority owner for many corporate purposes.

- The entity has to be actually run by the qualifying person, so he/she can't have another job; must be paid commensurate with being the CEO; must negotiate and sign contracts; and do whatever the boss normally does. This also means the person has the authority to cash checks or to instruct the customer to send them to a new account, like in the Caymans.

- The qualifying person has to have the background to, well, qualify for the job. A mid-life career switch from hairdressing to plumbing (and yes, there is a court case on this) will be viewed with suspicion.

It is common to hear contractors complain that they can't find enough bona fide candidates to meet all the requirements of these programs, and that governments set unrealistic goals that in the end encourage skirting the rules. Whether it is true or not, it is very much in your interest to make sure that your firms understand just what they are getting into. Even if it is the qualifying person who signs the paperwork attesting to compliance, you can certainly expect to be included in any investigation as a co-conspirator — a status that no one wants.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to smcgreevy@stinson.com.