SBA Takes Action Following OIG Investigation of Suspension and Debarment Process

On September 18, 2019, SBA’s Office of Inspector General released an Audit Report summarizing a recent audit of SBA’s Suspension and Debarment Process. The purpose of the audit was to determine 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.”

Through its investigation, OIG discovered SBA lent and awarded millions of dollars to businesses otherwise ineligible to receive these funds under SBA’s suspension and debarment guidelines. While SBA disagreed with some of OIG’s findings, SBA did agree to take some steps to address OIG’s findings and recommendations.

Setting the stage, the report noted that “[s]uspension and debarment are tools designed to protect the federal government from potential harm posed by individuals or business entities whose conduct indicates a lack of honesty, integrity, or poor performance.” While often mentioned in tandem, suspension and debarment are two separate remedies available to SBA. Under suspension, an entity is immediately prohibited “from participating in federal procurement and nonprocurement transactions for a temporary period pending completion of an investigation or judicial or administrative proceeding.” Debarment is the prohibition of an entity “from participating in procurement and nonprocurement transactions.” SAM is the central database for identifying suspended and debarred entities.

“According to the FAR, agencies shall create appropriate procedures to implement the debarment, suspension, and ineligibility procedures.” This includes requiring contracting officers to review SAM prior to awarding contracts. “Contractors debarred, suspended, or proposed for debarment are excluded from receiving contracts, and agencies shall not solicit offers from, award contracts to, or consent to subcontracts with these contractors, unless the agency head determines that there is a compelling reason for such action.”

To ensure suspended or debarred entities do not receive contracts, grants, or loans, agencies are required to perform three core functions:

  • Participate in a government-wide system for debarment and suspension from programs and activities involving federal financial and nonfinancial assistance.
  • Issue regulations with government-wide criteria and minimum due process procedures when debarring or suspending participants.
  • Enter debarred and suspended participants’ identifying in SAM.

Within this context, the SBA OIG made three findings and issued six recommendations.

OIG Findings

The first finding was that SBA lending partners approved $6.7 million in loans to entities without reviewing SAM. Of note, one entity received a $2.9 million loan after falsely certifying its eligibility when it had been convicted of a Clean Water Act violation. This information was found in SAM, but either overlooked or not reviewed at all by SBA’s lending partner. SBA lenders also issued another $3.8 million in loans with no “evidence of a review of SAM[.]”

While any violation of procedure should be cause for concern, it is worth nothing that “SBA’s loan portfolio is valued at nearly $132 billion.” In other words, the $6.7 million in loans at issue account for approximately 0.005% of SBA’s total loan portfolio.

The second finding was that delayed action by SBA’s Suspending and Debarring Officials, or SDOs, resulted in award of $80.3 million in contracts to entities who demonstrated cause for debarment. This finding came from a review of “223 cases referred to the SDOs from December 2012 to September 2018[.]” Of these, 15 cases were still open and “had been pending action for an average of 620 days.” During these delays, “federal agencies awarded $80.3 million in contracts to three of the entities involved in these cases.” Each of these entities were 8(a) participants.

As with the first finding, any violation of procedure should be cause for concern. But as added context, reports that contract values for 8(a) contracts in FY2012 through FY2018 totaled approximately $110.8 billion. The $80.3 million at issue in OIG’s report accounts for approximately 0.07% of the $110.8 billion in total 8(a) contract value in the same time period.

The third finding was that SBA’s failure to document suspension and debarment decisions could expose SBA to legal action. “SDO told [OIG] that there was no requirement to document the declination decision.” However, the FAR requires agencies to “establish procedures governing the debarment decision making process that are consistent with principles of fundamental fairness.” OIG’s concern is that “SBA could be exposed to legal actions by entities who believe they are arbitrarily suspended and debarred.

OIG Recommendations

From these findings, OIG made “six recommendations to improve the oversight and management of SBA’s suspension and debarment program to prevent ineligible entities from participating in SBA’s contracting and loan programs.” “SBA management agreed with two of the six recommendations and partially agreed with the other four recommendations.”

First, OIG recommended SBA update its lending partner operating procedures to review SAM for suspensions or debarments and document this review process. SBA management agreed with this recommendation and “plans to complete final action on this recommendation by January 31, 2020.” Based on this response, OIG considered this recommendation resolved.

Second, OIG recommended SBA rescind its loan guaranty on the $2.9 million loan discussed previously. SBA partially agreed with this recommendation in that it would review the loan guaranty at issue to determine if rescission was appropriate. SBA intends to “complete final action on this recommendation by January 31, 2020.” Based on this response, OIG considered this recommendation unresolved pending evidence of SBA’s “review to determine whether to rescind the loan guaranty[.]”

Third, OIG recommended SBA update its guidelines for “timely processing of [SDO] referrals and updating [SAM].” SBA partially agreed with this recommendation in that it would update policies “relative to the [SDO] for All Other Programs” but that existing policies “relative to the [SDO] for Financial Assistance Programs” was adequate. SBA intended to provide these policies by January 31, 2020. OIG considered this recommendation unresolved pending SBA’s providing these policies back to OIG.

Fourth, OIG recommended SBA “[d]edicate resources to monitor and process suspension and debarment officials.” SBA agreed to this recommendation to the extent it hired a paralegal “to oversee many suspension and debarment functions and procedures.” OIG considered this recommendation resolved pending evidence that a new paralegal was hired prior to October 31, 2019.

Fifth, OIG recommended SBA establish internal controls “to ensure the accuracy of reporting on suspension and debarment actions” to the appropriate authorities. SBA agreed to this recommendation and stated it had “already developed and deployed a new tracking system and will continue to make improvements to the system.” OIG will consider this recommendation closed once it receives evidence the new procedures were implemented.

Sixth, OIG recommended SBA “[e]stablish and implement formal policy requiring [SDOs] to document and retain their declination decisions.” SBA agreed to this recommendation and “sent a formal memo to staff implementing the policy to document and retain declination decisions and it will add this requirement [to] their updated SOP.” OIG will consider this recommendation closed when it receives a copy of this updated SOP.

While SBA largely agreed with OIG’s recommendations, they also offered a 5-page response which sought to clarify “some of the findings, analysis and conclusions found in the Audit Report.” For example, one of SBA’s clarifications comes under the $80.3 million in contracts awarded “to entities who demonstrated causes for debarment.” SBA disagreed with this depiction because the investigations at issue were ongoing and therefore SBA could not determine if these entities actually “demonstrated causes for debarment.” To the lay person this may seem like a semantic argument, but there are significant legal issues underscoring SBA’s point: primarily due process concerns ensuring each entity gets a fair review in light of all evidence presented.

This report should serve two reminders for entities dealing with the SBA. First, report any perceived violation to the OIG. While the entities investigated received an extremely small amount of the larger lending and contracting values at play, OIG still investigated the matters and SBA is acting on the findings of that investigation. Second, be on notice that SBA is actively working to make its suspension and debarment process more thorough and efficient.

Regardless of your thoughts on the Audit Report, SBA’s follow-up actions will inevitably change some processes and procedures that affect suspension and debarment compliance for all small business contractors.

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