In explaining why GAO did the report, it says, "DOD generally accounts for about two-thirds of federal contracting activity. Some companies doing business with DOD may have an opaque ownership structure that conceals other entities or individuals who own, control, or financially benefit from the company. Opaque ownership could be used to facilitate fraud and other unlawful activity." GAO describes "opague" in the context: opaque ownership is a structure of business form or governance that may conceal or obfuscate entities or individuals who own, control, or benefit financially from a business. (See also, e.g., in other contexts, this and this and this.)
The report recalled the impetus for the report came out of "the committee report on the National Defense Authorization Act for fiscal year 2018,[in which] the House Armed Services Committee expressed concerns that DOD contractors may disguise their identities and cost structures from procurement officers, in effect acting as hidden monopolies with unreasonable prices or establishing opaque ownership structures for benefits that are contrary to the government’s interest. The committee report included a provision that GAO examine DOD’s processes to identify contractors’ ownership structures and the risks posed to DOD by contractors with opaque ownership structures. As a general finding in this GAO report, GAO noted, "DOD has also begun a department-wide fraud risk management program, but it has neither assessed risks of contractor ownership across the department nor identified risks posed by contractor ownership as a specific area for assessment."
In undertaking the study leading to this report, GAO "reviewed GAO bid-protest decisions to identify cases in which contractors may have failed to disclose foreign ownership or concealed beneficial-owner information to obtain contracts that they were not eligible to receive"; also studying cases where there appeared "the risk that contractors could be disguising their ownership to create the appearance of competition.
Paraphrasing, GAO explains that real ownership of an entity includes the ostensible ownership disclosed to regulators and the beneficial ownership by the persons who directly or indirectly pull the levers of control and management or reap the substantial rewards of ownership of the entity. The more layers of ownership there are, the difficult it is to determine who really owns the entity. This is compounded by the observation that "In the United States, no centralized information source or national registry maintains company ownership information. In 2014, the National Association of Secretaries of State found that most states collect minimal ownership data. ... During both the entity-formation process and in annual or periodic reporting, the association found that very few states collect some form of entity ownership or control information from limited liability companies or corporations." It conceded that "the Securities and Exchange Commission collects some ownership information on publicly traded companies"; that is, the relatively few, but relatively large, businesses in the USA. The Securities and Exchange Commission collects [only] some ownership information on publicly traded companies.
This limited view from the business world has implications for procurement.
"The FAR contains several provisions governing the selection of an offeror. Provisions such as price and past performance of the offeror are generally applicable in determining which offeror should win a contract. ... A prospective contractor must affirmatively demonstrate its responsibility, including, when necessary, the responsibility of its proposed subcontractors. Contracting officers must then determine the responsibility of prospective contractors, including whether prospective contractors can perform the terms of a contract. To be determined responsible, a prospective contractor must have adequate financial resources to perform the contract (or the ability to obtain them); be able to comply with the required delivery or performance schedule; have a satisfactory performance, integrity, and ethics record; have the necessary organization, experience, accounting and operational controls, and facilities to carry out the contract (or the ability to obtain them); and be otherwise qualified and eligible to receive an award under applicable laws and regulations.There is much more to the report, and the need for knowledge about the person or entity with who the government is, or may be, engaging in business. But this post is concentrating on the responsibility factor, and that is only part of the report. I really want to encourage you to read the whole report and how entity information is critical to matters national security and the mitigation of fraud.
Before awarding a contract over the simplified acquisition threshold, a contracting officer must review the prospective contractor’s performance and integrity information available in the Federal Awardee Performance and Integrity Information System (FAPIIS). FAPIIS is a federal government-wide database designed to assist contracting officers with making a responsibility determination by providing integrity and performance information of covered federal agency contractors and grantees. FAPIIS provides a prospective contractor “Report Card” that includes information pertaining to the prospective contractor’s past performance (if applicable), such as any administrative agreements, contract terminations, nonresponsibility determinations, and exclusions, among other things. It also includes the ability to view the company relationship information, which details the ownership information that prospective contractors are required to report in SAM. [The System for Award Management, or SAM, is a government-wide portal that is consolidating the capabilities of multiple systems and information sources used by the Federal government in conducting acquisitions. In order to contract with the federal government businesses and agencies must complete the required registration with SAM.] When making a responsibility determination, the contracting officer must consider all the information available through FAPIIS with regard to the prospective contractor and any immediate owner, predecessor (an entity that the prospective contractor replaced by acquiring assets and carrying out affairs under a new name), or subsidiary identified for that prospective contractor in FAPIIS. The contracting officer must document in the contract file how the information in FAPIIS was considered in any responsibility determination, as well as the action that was taken as a result of the information.
GAO notes that, although DOD and other agencies have taken some baby steps to shed light on the issue of contractor ownership (e.g., "DOD, GSA, and the National Aeronautics and Space Administration amended the FAR in May 2014 to require prospective contractors to self-report their immediate and highest-level entity owner, but not their beneficial owner, as part of contractors’ annual registration process in SAM), DOD "faces a number of challenges in identifying and verifying" it. Because "the scope and scale of this activity makes DOD procurement inherently susceptible to fraud", GAO recommended "The Office of the Undersecretary of Defense (Comptroller) should include an assessment of risks related to contractor ownership as part of its ongoing efforts to plan and conduct a department-wide fraud risk assessment."
Guam law follows the ABA Model Procurement Code when it comes to issues of responsibility, which is also the framework of the federal government as described above. I also has a (problematic) requirement (5 GCA § 5233) that, in some procurement methods, a bidder, "as a condition of bidding" must disclose "the name and address of any person who has held more than ten percent (10%) of the outstanding interest or shares of [a] partnership, sole proprietorship or corporation at any time during the twelve (12) month period immediately preceding submission of a bid." The "wild wild West" current darling of business entities is an LLC, but this law, written before Guam adopted an LLC law, does not make any disclosure requirement for that form of entity. Nor does it include trusts within the prophylactic disclosure requirement.
It is interesting to know that trusts have also been used to create invisibility in the procurement context. The following article discussing this issue in light of the trend described in the GAO report above.
Trust but Verify: Disclosure of Trust Ownership May Be Required for Family-Owned Government Contractors
Family-owned businesses are often owned and controlled by family trusts. Trusts are used by families for estate planning, tax planning and asset protection. Family-owned government contractors with trust ownership structures should be mindful of ownership
disclosures required by the Federal Acquisition Regulation (FAR). Failure to comply with the required disclosures could result in False Claims Act or false statement allegations, loss of Facility Security Clearances, rejections of bids and proposals, and loss of bid protests.
Under rules adopted in 2014, a government contractor or offeror owned by another entity must disclose its own Commercial and Government Entity (CAGE) code and the CAGE codes of its “immediate owner” and “highest level owner” both in the System for Award Management (SAM) and to the contracting officer before contract award. Under FAR 52.204-17 (Ownership or Control of Offeror), “immediate owners” and “highest-level owners” are required to obtain their own CAGE codes even if they will not be directly contracting with the government. “Immediate owner” means an entity, other than the offeror, that has direct control of the offeror. “Highest-level owner” means the entity that owns or controls the
immediate owner of the offeror, or that owns or controls one or more entities that control an immediate owner of the offeror. No entity owns or exercises control of the highest-level owner.
If an offeror is owned directly by individuals, the offeror does not have an “immediate owner” or a “highest-level owner.” If an offeror is directly owned by another entity, the ownership entity is the “immediate owner” of the offeror. If an offeror’s immediate owner is, in turn, owned by another entity or series of entities, the last entity at the top of the offeror’s organizational chart is the “highest-level owner.” An offeror is required to certify its ownership disclosures in the “Representations and Certifications” section of its registration on SAM.gov.
The term “entity” is not defined in the FAR, [but is described at the Commercial and Government Entity webpage: "In business, an entity is a person, department, corporation, cooperative, partnership, business, manufacturer, organization, or other groups with whom it is possible to conduct business", and a trust can fall within that description.] The Defense Logistics Agency (DLA), the agency responsible for assigning CAGE codes, suggest that trusts are considered entities under the FAR and should have their own CAGE codes and be disclosed on SAM.gov." Trusts are commonly referenced in state business entity statutes. Trusts also have certain characteristics that are similar to other business entities such as corporations and limited liability companies. Namely, trusts can buy, sell and own personal property and real property; own equity in other business entities; and enter into contracts. Trusts may also shield their beneficiaries from the claims of creditors.
The author of that article warns, "In order to avoid possible False Claims Act or false statement allegations, loss of security clearances, rejections of bids and proposals, and adverse bid protest decisions, family-owned government contractors with trust ownership structures should review their SAM.gov registration to ensure that disclosures about their “immediate owner” and “highest-level owner” are accurate."
The interests of the government, be it state, local or federal, in good governance principles of transparency and responsibility are antithetical to the interests of private sector contractors. There may be some giving and taking, but the government must always heed those principles. History has shown there are many other structures that provide the flexibility commerce requires to carry on,but government, and the broader community must stay vigilant to any "Houdini factor" that jeopardizes the foundation of principles which good governance, and good procurement, that our democratic society depends on.
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