DOJ’s Recent Small Business Administration FCA Settlement Highlights Risks for Contractors

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The settlement arrives as the SBA is simultaneously overhauling the eligibility standards for its 8(a) Business Development Program, moving away from race-based presumptions of social disadvantage toward a new, discrimination-based test. Together, these developments underscore why businesses participating in SBA set-aside programs must stay current on evolving eligibility rules and ensure their certifications are well-documented to avoid inadvertent misrepresentations that could expose them to FCA liability.

Quick Hits

• The DOJ announced a $21.3 million False Claims Act (FCA) settlement with two government contractors and their executives who allegedly used service-disabled veteran-owned small businesses (SDVOSBs) as pass-through entities to obtain federal set-aside contracts.
• The settlement illustrates the DOJ’s aggressive enforcement posture against businesses that misrepresent or manipulate SBA eligibility criteria across small business set-aside programs.
• Meanwhile, SBA eligibility criteria are themselves in flux. The SBA continues to redefine who qualifies for set-aside programs, having moved to eliminate the race-based presumption of social disadvantage under the 8(a) Business Development Program in favor of a discrimination-based eligibility test.
• Businesses in SBA set-aside programs should track these evolving standards and keep eligibility documentation current and supportable to avoid inadvertent misrepresentations that could trigger FCA liability.

The DOJ’s Set-Aside Fraud Enforcement

On June 9, 2026, the DOJ announced that two government contractors, along with two of their executives, had agreed to pay $21.3 million to resolve FCA allegations that they had used purported SDVOSBs and other small businesses as pass-through entities to improperly obtain federal set-aside contracts. The settlement resolved a qui tam action, United States ex rel. Welch, et al. v. American First Contracting Inc., et al., No. 5:23-cv-0525 (N.D.N.Y.); the two whistleblowers will receive approximately $3.67 million as their relators’ share under 31 U.S.C. Section 3730(d). According to the settlement agreement, the companies identified opportunities, prepared and priced bids, and controlled contract execution and finances, while the purported SDVOSBs served as prime contractors in name only, receiving a fixed percentage of the contract value regardless of work performed. The arrangements took the form of teaming agreements, joint ventures, and mentor-protege relationships. At least one SDVOSB owner raised compliance concerns, but the defendants made no material changes in response, and neither company independently qualified as a “small business concern” under SBA regulations.

In a press release announcing the settlement, Assistant Attorney General Brett A. Shumate stated that the DOJ would “hold accountable those who fraudulently obtain, or assist others in fraudulently obtaining, these set-aside contracts.” The case reflects the DOJ’s enforcement focus on SBA set-aside programs and indicates the DOJ’s view that misrepresenting or manipulating SBA eligibility criteria, whether for SDVOSB, 8(a), HUBZone, Women-Owned Small Business, or other set-aside categories, is an enforcement priority. The $21.3 million settlement, including $4 million and $225,000, respectively, in individual liability from the two executives, is notable for its scale and confirms that the DOJ will pursue substantial recoveries in set-aside fraud cases. The whistleblowers/relators’ $3.67 million share (17.25 percent of the recovery) underscores the financial incentive for insiders and competitors to file qui tam actions.

Notably, although the original qui tam complaint was filed against both the large and the pass-through small businesses, the government intervened only against the larger entities and settled only with them—which could signal an intensified enforcement focus on the companies at the top of pass-through arrangements.

While this settlement specifically involved SDVOSB status, the SBA is simultaneously redefining eligibility for other set-aside programs, particularly the 8(a) Business Development Program. As we discussed in our February 5, 2026, article, “New SBA 8(a) Guidance Signals Shift in Interpretation of Who Is ‘Socially and Economically Disadvantaged,’” the SBA moved in January 2026 to a strictly race-neutral, fact-specific standard for establishing social disadvantage, eliminating reliance on group-based presumptions. As we discussed in more detail in our June 17, 2026, article, “SBA’s Proposed 8(a) Rule Flips the Script: DEI Programs Could Now Be Evidence of Social Disadvantage,” the SBA has since proposed to formalize that shift by amending 13 C.F.R. Section 124.103. The proposed rule, published in the Federal Register on June 11, 2026, would replace the existing tests for social disadvantage under Section 8(a) of the Small Business Act (15 U.S.C. Section 637(a)(5)) with a new, sole eligibility standard that would:

• formally remove the rebuttable presumption of social disadvantage for members of certain racial and ethnic groups;
• require a showing that a governmental or private entity discriminated against, or favored a group to the exclusion of, the applicant’s group, causing “material harm” (broadly defined as loss of access to or diminished opportunities related to economic advancement);
• allow applicants to self-certify group membership and material harm, without requiring proof that the discrimination directly affected entry into or advancement in business; and
• treat unlawful DEI programs, affirmative action policies, and race-based quotas or set-asides as qualifying evidence, potentially including corporate DEI program materials.

The proposed rule would also eliminate the prior non-presumptive test and the process for adding groups to the presumption list. The comment period closed on July 13, 2026, with 132 comments submitted.

The SBA has not approved a new 8(a) application since August 2025, and active firms have fallen below 3,000, so the rule primarily affects the pipeline of new applicants, though current participants should expect heightened oversight as well.

Evolving Eligibility Rules May Increase FCA Risk

This settlement and the SBA’s evolving 8(a) eligibility framework are two sides of the same coin for businesses operating in federal small business contracting.

The DOJ is actively using the FCA to enforce compliance with SBA set-aside categories. Whether the program at issue is SDVOSB, 8(a), or another socioeconomic classification, the DOJ is likely to pursue substantial recoveries against businesses that misrepresent their qualifying status, and qui tam whistleblowers have a strong financial incentive to bring these cases. At the same time, the SBA is fundamentally changing the rules that define who qualifies.

The elimination of the race-based presumption and the adoption of a discrimination-based test mean businesses can no longer rely on legacy assumptions about eligibility, and documentation adequate under the prior “social disadvantage narrative” approach may not satisfy the new standard. This combination of aggressive enforcement and shifting rules increases the risk of inadvertent misrepresentation. Certifying eligibility based on outdated criteria or legacy structures that no longer satisfy current requirements may be viewed as a false statement to the government, and under the FCA’s “knowing” standard, even a failure to keep pace with evolving rules can support liability.

What This Means for Businesses

Businesses should consider the following compliance steps in light of this settlement and the SBA’s ongoing regulatory changes:

• Audit ownership and control arrangements. Evaluate whether the certified small business in any teaming, joint venture, or mentor-protege structure genuinely owns, controls, and performs a commensurate share of the work.
• Monitor evolving 8(a) and other socioeconomic eligibility standards. Track the SBA’s final rulemaking on 13 C.F.R. Section 124.103, since the 8(a) presumption is being eliminated in favor of a discrimination-based test.
• Keep documentation current. Ensure eligibility documentation, whether addressing social disadvantage under 8(a), veteran ownership and control under SDVOSB rules, or size standards under 13 C.F.R. Part 121, reflects requirements as they exist today, not legacy standards.
• Take whistleblower risk and internal red flags seriously. The relators in this case received a $3.67 million share, and ignoring credible compliance concerns, as occurred here, can support a finding of “deliberate ignorance” or “reckless disregard” under the FCA.

Looking Ahead

The convergence of aggressive FCA enforcement and shifting SBA eligibility rules demands continuous attention. This settlement signals that the DOJ will pursue substantial recoveries against businesses that misrepresent their eligibility, and the evolving 8(a) standard means the definition of “eligible” is itself a moving target.

Ogletree Deakins’ Diversity, Equity, and Inclusion Compliance, Government Contracting and Compliance, and Workforce Analytics and Compliance practice groups will continue to monitor developments and will provide updates on the Construction, Diversity, Equity, and Inclusion Compliance, Ethics/Whistleblower, Government Contracting and Compliance, and Workforce Analytics and Compliance blogs as additional information becomes available.

This article and more information on how the Trump administration’s actions impact employers can be found on Ogletree Deakins’ Administration Resource Hub.

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