WASHINGTON, D.C. – Federal watchdogs and members of Congress are pursuing “pass-through” fraud within Small Business Administration (SBA) diversity programs, many of which expanded significantly during the Biden administration’s “equity in procurement” strategy.
A major accountability effort is unfolding across federal contracting. Evidence suggests widespread deception and misuse within the SBA’s primary diversity, equity, and inclusion (DEI) initiatives. These programs saw rapid expansion under the previous administration’s focus on equitable procurement.
The central issue in the emerging controversy surrounds the 8(a) Business Development Program. This decades-old initiative aims to provide federal contract preferences to firms owned by people considered “socially and economically disadvantaged.”
Lawmakers and investigators assert that the program, which granted over $40 billion in contracts in Fiscal Year 2024, became a way for large, unqualified corporations to misuse taxpayer money. They allegedly used small, disadvantaged businesses as facades.
Fraud Becomes Widespread
SBA Administrator Kelly Loeffler suggested the current issue worsened due to the Biden administration’s “aggressive priority for DEI over merit in federal contracting.” This crisis follows several years of warnings from the SBA’s Inspector General and the Government Accountability Office (GAO).
The situation escalated after two recent, highly publicized incidents provided strong evidence for critics.
The first was a U.S. Department of Justice (DOJ) investigation in June. It revealed an alleged $550 million bribery plan spanning a decade. The scheme involved a former U.S. Agency for International Development (USAID) contracting officer and three company owners who took advantage of the 8(a) program.
This was followed in October by an undercover video. The footage reportedly showed a senior official from a large 8(a) firm, ATI Government Solutions, admitting to defrauding the program to obtain multi-million dollar, sole-source contracts.
The SBA subsequently suspended ATI, a Native-owned enterprise, from receiving new federal contracts. The firm faced allegations that it operated as a “pass-through,” subcontracting almost all of its work while keeping a minor fee.
This action clearly violated the rules meant to protect the program’s integrity. Treasury Secretary Scott Bessent immediately ordered the suspension and cancellation of all Treasury contracts with ATI Government Solutions, which totaled more than $253 million.
Treasury and SBA Begin Broad Audits
The new Trump administration quickly ramped up its enforcement efforts.
Treasury Secretary Bessent announced a comprehensive, department-wide audit. The review targets approximately $9 billion in contracts awarded through preference-based programs. Bessent stated the department “will not tolerate fraudulent misuse of federal contracting programs.” According to the Treasury, many of these contracts were granted during the Biden administration’s equity push.
In a related move, SBA Administrator Kelly Loeffler ordered a full review of all 8(a) contracts across every federal agency. Loeffler has already directed the agency to reduce its contracting goal for disadvantaged businesses to the legal minimum of 5 percent, down from the Biden-era high of 15 percent.
Loeffler said, “Evidence indicates that the 8(a) Program, initially designed for ‘socially and economically disadvantaged’ businesses, has become a pass-through vehicle for rampant abuse.”
In an unparalleled action, the SBA sent letters in early December to all 4,300 current 8(a) participants. The letters demand that firms submit extensive financial records by January 5, 2026, or risk being removed from the program. This massive request for documentation signals the administration’s strict policy against widespread program misuse.
Congress Calls for Immediate Business Program Suspension
Congressional reaction to the alleged waste of taxpayer funds has been immediate and strongly critical across both parties.
Senator Joni Ernst (R-Iowa), the Chair of the Senate Committee on Small Business and Entrepreneurship, is leading the legislative response. Just this week, Ernst sent letters to 22 federal agency heads. She pushed them to voluntarily cease all sole-source 8(a) contracting. She also urged them to conduct detailed reviews of all sole-source and set-aside 8(a) contracts dating back to Fiscal Year 2020.
“Despite concerns with the 8(a) program, Joe Biden opened the floodgates to fraud,” Ernst told reporters. “I have found evidence of alarming, potentially fraudulent 8(a) awards made across government that need to be investigated. The program must be halted at every agency while a thorough review is conducted to ensure taxpayers are not being ripped off by con artists.”
Ernst criticized the “sloppy oversight and weak enforcement measures.” She claimed these failures permitted “8(a) participants to act as pass-through entities, snagging unlimited no-bid deals with little transparency.”
Constitutional Hurdle Approaches
Beyond the extensive fraud allegations, the legal standing of the DEI-based contracting programs themselves faces a serious constitutional challenge.
A new major lawsuit, filed by the Wisconsin Institute for Law & Liberty (WILL) and the Center for Individual Rights (CIR), seeks to invalidate a core SBA regulation. This rule creates a “rebuttable presumption of social disadvantage” for people belonging to specific racial and ethnic groups. Plaintiffs argue this mechanism, which was adopted across dozens of Biden-era programs, is a “code word for race discrimination.” They contend it violates the Constitution’s Equal Protection Clause.
Federal courts have already ruled against using this presumption in several federal programs, including parts of the 8(a) program. Under the new administration, the DOJ formally informed Congress that it will no longer defend the presumption in certain Department of Transportation programs. This suggests a major policy shift that could end race-based preferences throughout the federal government.
The convergence of massive fraud accusations and a growing constitutional crisis has made the SBA’s diversity programs a central focus of the administration’s commitment. This commitment is to eliminate what it calls “radical and wasteful” DEI-based contracting and to root out waste. The sheer number of contracts now under examination, along with the threat of legal action for firms that fail to comply, suggests this cleanup operation is just beginning.
