By operation of statute, Alaska Native Corporations (ANCs) enjoy preferential treatment in government contracting.  Such firms receive special rights under the Small Business Administration’s (SBA) “8(a)” program.  Under the 8(a) program, ANCs can receive sole source awards, regardless of dollar value, with no upper limit.  In contrast, other 8(a) firms are prohibited from receiving sole source awards valued at more than $3 million.  (See 13 C.F.R. 124.506(b).)  Sole-source procurements to tribes and ANC owned 8(a) firms may not be protested, because there is no injured party.  Moreover, a DOD contractor that subcontracts with an ANC is entitled to receive a “bonus” equal to 5 percent of the value of the subcontract award.

As one analysis notes—

The Justice Department has determined that tribal and ANC-owned 8(a) firms are not subject to the U. S. Supreme Court’s ruling in the Adarand case. As set out in the Justice Department’s proposed policy, issued in the May 23, 1996 Federal Register, any limitations that may end up being imposed on the SDB and 8(a) programs as a result of Adarand will not be applicable to tribal and ANC-owned 8(a) firms. This is because the tribes and ANC are included in the 8(a) and the SDB programs as a result of their unique government to-government relationship with the United States, not because of race or national origin factors.

As can be seen from the foregoing, in the competitive world of Federal contracting, being an ANC is a huge competitive advantage—so much so, that observers began to grow concerned that the ANCs had too much of an advantage.  For example, as this article reported that “No-bid contracts awarded to ANCs ballooned from $508.4 million in 2000 to $5.2 billion in 2008....”  It also noted that a 2006 GAO report “called the ANC loophole ‘an open checkbook’ for the companies.”  The article also discussed the “complex business partnerships” that ANCs sometimes form with other “firms that have no ties to the SBA program or Alaska” in order to perform the contracts they win.  Finally, the article quotes Senator Claire McCaskill (D-MO) as saying, “Nobody begrudges giving small, disadvantaged businesses a chance to win federal contracts.  But the Alaska Native Corporations have used their special preference to bust the door down.”

Recently, the SBA Inspector General has questioned the bona fides of one ANC, Alaska Native Technologies LLC (ANT), suggesting that  the company (a participant in the 8(a) program) “is not owned and controlled by its disadvantaged owner, and that ANT non-disadvantaged business owner has other business interests that conflict with his managerial duties at ANT.”  The SBA OIG report can be found here.

The OIG report discusses the formation of ANT, and stated—

ANT was formed in January 2003 by Patrick Simpson, a non-disadvantaged individual, as a spin-off division of his research and development company (Scientific Fishery Systems, Inc.) for his defense contract business. ANT is 51-percent owned by the Native Village of Eyak through its holding company, Alaska Native General Services, LLC (ANGS) and 49-percent owned by Skookum Technologies, Inc.-another business for which Mr. Simpson is the majority owner.

Our review identified irregularities regarding the formation of ANT, indicating that Patrick Simpson, the non-disadvantaged owner of Skookum, may be controlling ANT and operating it for the benefit of his defense contract business. Mr. Simpson also entered into multiple business arrangements that allowed him to capitalize on the firm's 8(a) status and to profit through services performed for ANT by other companies that he owned. Further, Mr. Simpson was involved in managing the day-to-day activities of ANT and, through management services performed by Skookum for ANT, had control over the payment of invoices that were billed to ANT by other companies he owned. Consequently, DCAA identified irregularities in fees invoiced and paid by Skookum.

As usual, Robert Brodsky at GovExec.com was all over the issue, nicely summarizing some of the OIG’s findings.  Some of those findings included—

• ANT was formed with no tangible assets and with no cash on its books. Instead, the firm was established with … goodwill that was transferred to ANT by Skookum and ANGS. Annual audited financial statements for ANT prepared from October 2003 to September 2008 do not reflect the … goodwill used to establish ANT.

• Although ANGS purchased … goodwill from Skookum that it then transferred to ANT, the purchase was made without any exchange of funds. Instead, ANGS agreed to pay Skookum … from its share of the future profits of ANT. Skookum provisionally forgave ANGS' debt on the same day that the … debt was incurred. The two parties agreed that if ANT was dissolved with any amount of … debt outstanding, ANGS would not owe Skookum anything further, regardless of the actual debt balance.

• The financial statements of ANT do not recognize the shared ownership arrangement between Skookum and ANGS. … Further, ANT's 2007 financial statements reported a related party transaction between ANGS and ANT, which should not have been classified in this manner if ANGS was an owner. According to Generally Accepted Accounting Principles, distributions to owners reduce their respective capital accounts, and therefore, are not treated as related party transactions that are expensed against operations.

• Evidence suggests that the disadvantaged owner, Alaska Native General Services, may no longer exist. … a search of the Alaska State Corporations' website showed that Alaska Native General Services had not made biennial filings with the Alaska Department of Commerce since November 9, 2005. Finally, the Federal Employer Identification Number (FEIN) 02-0653329 provided to SBA for tax verification of Alaska Native Government Services … could not be located in the FEIN database, which contains more than 12 million numbers. The data base contained no records for either Alaska Native Government Services or Alaska Native General Services.
• Although SBA approved a business partner of Mr. Simpson as the General Manager of ANT, it appears that Mr. Simpson was heavily involved in managing the day-to-day activities of ANT. ANT stated that Mr. Simpson was its Director due to company oversight responsibilities passed onto Mr. Simpson by the Village of Eyak. Further, DCAA's review of 1,500 of Mr. Simpson's emails showed that he was involved with employee clearances, timecards, and other operational issues, which are consistent with performing as a Director.  Mr. Simpson obligated ANT to lease payments by signing leases for office space as either its "President," "Director," or "member."  Mr. Simpson signed ANT's tax returns as "President" or "Director."   Although non-disadvantaged individuals are allowed to provide management services to a tribally-owned concern with SBA's approval, such an approval was not sought from or granted by SBA for Mr. Simpson.

• In addition to his Director role at ANT, Mr. Simpson is also the President of Scientific Fishery, and owner of RV Montague, Skookum, PKS Consulting, Inc., P&P Properties, LLC, and 6100 A Street, LLC.  Although members, directors, and officers of a tribally-owned firm are precluded from having other business interests that conflict with the management of the concern, Mr. Simpson entered into business arrangements with ANT on behalf of other companies that he owned. 

• According to ANT's audited financial statements, from October 2003 through September 2008, Mr. Simpson:

o rented equipment to ANT through a company he owned, called P&P Properties, LLC;

o rented office space to ANT through another one of his companies, 6100 A Street;

o provided subcontracting services to ANT through his company, Scientific Fishery;

o provided consulting services to ANT through his company, PKS consulting;

o provided professional services to ANT through his company, Skookum, including the processing of payroll, accounts payable, and accounts receivable;

o According to DCAA, Mr. Simpson also leased the exclusive use of his boat (the Research Vessel Montague) to ANT.

• [A]s majority owner of Skookum, Mr. Simpson was in a position to process invoices sent to ANT by other companies he owned that were performing work for ANT.

• In 2008, DCAA questioned the validity of$124,000 of fees paid to PKS Consulting for consulting services supposedly provided to ANT on one contract. Mr. Simpson's FY 2006 average of 140 hours of consulting services per month on this cost-type contract may have been excessive as Mr. Simpson had little time to perform these services, given his role as ANT Director, President of Scientific Fishery, and as owner of RV Montague and Skookum. DCAA also reported a lack of documentation supporting these fees. Further, Mr. Simpson appeared to be managing the day-to-day activities of ANT that were unrelated to providing ANT with systems engineering expertise.

Based on the foregoing, the SBA OIG concluded that “it appears that ANT’s primary purpose is to benefit Mr. Simpson …”

What might be the outcome if the SBA confirms that ANT did not qualify as a ANC participant in the 8(a) program?  Well, we’re not sure.  But we remember a contractor who was fined for falsely reporting socioeconomic awards, and another contractor who was fined for falsely certifying that it had implemented controls to detect and prevent violations of its business conduct policy.  Consequently, we expect Mr. Simpson to face significant monetary penalties if he is convicted of making false statements with respect to ANC’s qualifications to participate in the 8(a) program.