House bill would punish users of front companies

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.