House bill would punish users of front companies

The penalty for misrepresentation would be a fine or jail time, as well as suspension or debarment from government contracting

A new bill introduced in the House would penalize people who set up a company as a front to another business to get a government contract.

The Small Business Contracting Protection Act (H.R. 4420) would elevate the penalties for being a pass-through business to the level of lying about a company’s size and ownership status. Those types of companies get special privileges from the government. The penalty for misrepresentation would be a fine or prison time, as well as suspension or debarment from government contracting.

The bill, introduced by Rep. Joe Sestek (D-Pa.) on Jan. 12, includes a definition of the term "pass-through business" that uses six criteria:

  • The business shares a location with the other business
  • The business shares ordering or personnel systems with the related business
  • An officer, director, principal, stockholder, managing member or key employee of the business participates in the business decisions of the other business
  • The business has equity interest in the business owned by the second business
  • The accounts receivable of the business is directly or indirectly controlled by the other business or
  • The relationship with the business generates more than 50 percent of the income of the related business.

The bill was sent to the Small Business Committee.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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