Understanding the Nonprocurement Suspension Process

Last week, U.S. Small Business Administration (SBA) Administrator Kelly Loeffler announced that the SBA had suspended nearly 7,000 borrowers approved in the state of Minnesota for "suspected fraudulent activity." Noting that these borrowers were previously approved for 7,900 Paycheck Protection Program loans and Economic Injury Disaster Loans worth $400 million, Loeffler said the borrowers "will be banned from all SBA loan programs, including disaster loans, going forward" and that the SBA will "refer every case, where appropriate, to federal law enforcement for prosecution and repayment."

Loeffler's announcement comes on the heels of a flood of allegations of widespread fraud within Minnesota daycare centers and other businesses. Thus far, federal prosecutors have charged nearly 100 people with fraudulent activity related to Minnesota's social programs, and the U.S. Department of Health and Human Services (HHS) has paused all childcare payments to the state.

Federal suspension and debarment actions – whether in the procurement or nonprocurement context – carry significant and often immediate consequences for companies and individuals that rely on federal funding. Though procurement suspension and debarment are widely understood within the government contracts community, nonprocurement suspension and debarment, which impact grants, cooperative agreements and other forms of financial assistance, are less well known but just as consequential.

This Holland & Knight alert explains the effects of a nonprocurement suspension, outlines an entity's rights and obligations when responding to a federal agency's notice of suspension, and provides practical guidance to entities who are facing suspension.

General Overview of Suspension and Debarment

The federal government's suspension and debarment system is a long-standing administrative framework designed to protect the government – not punish contractors. Its origins trace back to early procurement integrity principles first announced in the late 1980s in Executive Order Nos. 12549 and 12689 (1989)¹ and were later formalized in the Federal Acquisition Regulation (FAR) for procurement contracts and Title 2, Part 180 of the Code of Federal Regulations (CFR) for nonprocurement activities such as grants, cooperative agreements and federal assistance programs. Together, these regimes reflect the federal government's unified policy objective to do business only with "responsible" partners.

At the core of these regulatory regimes is the concept of "present responsibility," a term that is undefined in both the FAR and CFR but is a central standard to the government's suspension and debarment process. The lack of a concrete definition means that its interpretation can vary significantly between federal agencies and individual debarment officials, creating challenges for entities trying to align their conduct with the standard. However, at bottom, the fundamental inquiry is whether an entity can be trusted, at the time of the government's decision, to conduct business with honesty and integrity. (The FAR also outlines general standards for determining if a prospective contractor is "responsible" at FAR Subpart 9.1, such as whether a contractor has adequate financial resources to perform the contract or the ability to obtain them, has a satisfactory performance record, and has a satisfactory record of integrity and business ethics – among others.)

Suspension and debarment are two administrative tools the federal government uses to prevent entities from receiving federal funding, whether from contract awards or nonprocurement sources. Suspension is temporary, generally not exceeding 12 months, while debarment is more permanent, often lasting three years or more. These exclusions are forward-looking remedies that assess whether an entity's past misconduct – such as fraud, criminal convictions, false statements or serious regulatory violations – renders it to be an untrustworthy and unreliable steward of public funds.

What Is a Nonprocurement Suspension, and What Are the Grounds for a Suspension?

A nonprocurement suspension is a temporary action taken by a federal agency to immediately exclude an entity from participating in federal nonprocurement programs. Nonprocurement transactions are defined in 2 C.F.R. § 180.970 and include grants, cooperative agreements, loans, subsidies and other forms of federal financial assistance. These programs are governed by 2 C.F.R. Part 180, the governmentwide nonprocurement suspension and debarment rules promulgated by the Office of Management and Budget (OMB).

2 C.F.R. § 180.700(a) states that a suspension is appropriate only when there is "an indictment for" or "adequate evidence to suspect" that there has been:

• commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a public or private agreement or transaction
• violation of federal or state antitrust statutes, including those proscribing price fixing between competitors, allocation of customers between competitors and bid rigging
• commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, violating federal criminal tax laws, receiving stolen property, making false claims or obstruction of justice, or
• commission of any other offense indicating a lack of business integrity or business honesty that seriously and directly affects an entity's present responsibility²

A criminal conviction or civil judgment for the above notably provides grounds for debarment.

Additionally, 2 C.F.R. § 180.700(b) provides that a suspension is also justified where there is "adequate evidence to suspect" that any of the following causes for debarment has occurred:

• violation of the terms of a public agreement or transaction so serious as to affect the integrity of a federal agency program³
• knowingly doing business with an excluded (suspended/debarred) person
• failure to pay a debt owed to a federal agency; violation of a material provision of a voluntary exclusion agreement
• violation of the Drug-Free Workplace Act of 1988, or
• the catchall "any other cause that is so serious or compelling in nature that it affects [one's] present responsibility"⁴

Notably, in addition to finding that there is an indictment for or other "adequate evidence to suspect" one of the above offenses has occurred under 2 C.F.R. § 180.700(a) and (b), the federal agency's suspending official must also determine that suspension is "necessary to protect the public interest" pursuant to 2 C.F.R. § 180.700(c).⁵

Immediate Effects of a Nonprocurement Suspension

A suspension has immediate, governmentwide effect. Once imposed by a single federal agency, the suspended entity is immediately barred from participating in all federal nonprocurement programs, such as grants and loans, and is reciprocally excluded from receiving procurement contracts. Furthermore, the suspension is publicly listed on the System for Award Management (SAM.gov), which can damage the entity's ability to obtain funding from state, local and commercial sources. These effects are discussed in turn below.

1. The Entity Is Excluded from All Federal Nonprocurement Programs and Procurement Contracts: Unless the suspension is expressly limited in the suspension notice, suspended entities are prohibited from participating in all "covered transactions," which includes grants, cooperative agreements, scholarships, fellowships, loans, loan guarantees and other forms of federal assistance.⁶ A suspension imposed by one agency applies governmentwide.⁷
   
   Notably, an exclusion under the nonprocurement system includes reciprocal effects with the governmentwide debarment and suspension system for procurement. In other words, if an entity is suspended from nonprocurement-covered transactions, that entity is excluded from procurement contracts as well.⁸ This reciprocity applies both ways, meaning that an entity suspending from receiving federal contracts will also be excluded from federal grants.
   
   Bear in mind that grant recipients and prime contractors are also prohibited from issuing subawards and subcontracts to excluded entities.

2. The Suspension Is Publicly Listed on SAM.gov, Which Can Impact Revenue from State, Local and Commercial Entities: Pursuant to 2 C.F.R. § 180.520, suspended entities are added to the SAM.gov exclusion list. This list is publicly available on SAM.gov. Notably, state and local governments generally prohibit contractors listed as excluded in SAM.gov from receiving new awards. Furthermore, private businesses often search SAM.gov when entering into commercial transactions. Thus, a suspension not only prevents an entity from receiving federal dollars – it can often damage its ability to obtain contracts or other funds from state, local and commercial entities.
3. The Suspension May Extend to Affiliates: Agencies may also extend a suspension to affiliates if the suspending official names the affiliate in the notice and gives the affiliate an opportunity to contest the action.⁹ Otherwise, a suspension is limited to the entity that received notice, which of course includes all divisions and other organizational elements within the corporate structure.

The Process for Contesting a Nonprocurement Suspension

Although a nonprocurement suspension has immediate effect, entities are not without recourse. Meaningful procedural protections are provided in 2 C.F.R. Part 180.

1. The Notice of Suspension: The suspending official is required to "promptly" issue a Notice of Suspension (Notice) that includes the factual basis for the action and instructions for responding.¹⁰ For example, the Minnesota borrowers referenced by Administrator Loeffler must receive a Notice informing them that they have been suspended, the basis for that suspension, temporary term of the suspension and scope of the suspension.
2. Right to Respond: Entities have 30 days from receipt of the Notice to contest the suspension, which can be done either by making arrangements to appear in front of the suspending official or, more commonly, submitting a written response.¹¹
3. Required and Recommended Content of Response: It is highly recommended that an entity consult with experienced counsel before submitting a response, as there are specific regulatory requirements and missteps in a response may lead to additional administrative action as well as civil or criminal actions.
   
   Importantly, an entity must rebut the allegations contained in the Notice in its response. That is, a respondent must identify specific facts that contradict the statements contained in the Notice; general denials are insufficient. This can be done through affidavits, documents and other materials that rebut the allegations.
   
   In addition to any information and argument in opposition, pursuant to 2 C.F.R. § 180.730(a), a respondent must identify the following information:

• all existing, proposed or prior exclusions and all similar actions taken by federal, state or local agencies, including administrative agreements that affect only those agencies
• all criminal and civil proceedings not included in the Notice that grew out of facts relevant to the cause(s) stated in the Notice
• all of the respondent's affiliates¹²

It is extremely important that a respondent provides this required information. Failure to disclose any of these items is an express basis for the federal agency to seek further criminal, civil or administrative action.

Rather than attempt to rebut the allegations contained in the Notice, a respondent may also choose to focus on demonstrating that it is presently responsible, either through the passage of time since the events occurred or through the implementation of remedial measures that prevent the misconduct or violations from occurring again in the future.

4. Opportunity for Additional Proceedings and Final Determination: The agency suspending official may, but is not required to, provide an additional opportunity for the respondent to challenge the facts in the Notice through informal proceedings such as an in‑person meeting or presentation.¹³ In order to obtain these additional proceedings, an entity's response must raise a "genuine dispute over facts material to the suspension."
   
   After reviewing the official record, which includes all information in support of the initial decision to suspend, any further information and argument presented in opposition to the suspension and transcription of any fact-finding proceedings, the suspending official makes a written determination about whether to continue or terminate the suspending. This written determination must be made within 45 days of the closing of the official record.

5. Rights to Appeal a Final Suspension Decision: An entity may further appeal a suspension decision pursuant to the specific federal agency's procedures (to the extent one exists). See, e.g., 2 C.F.R. § 180.25(c)(4) (providing that "[e]ach Federal agency's implementing regulation … [m]ay also, at the Federal agency's option … [s]pecify the Federal agency's procedures, if any, by which a respondent may appeal a suspension or debarment decision").
   
   For SBA suspensions, such as those recently announced by Administrator Loeffler in Minnesota, 2 C.F.R. § 2700.765 provides two appeal mechanisms:

• A respondent can request that the suspending official reconsider the decision for material errors of fact or law.
• Alternatively, a respondent can make a formal request to the SBA Office of Hearings and Appeals (OHA) to review the suspending official's decision. OHA may reverse the suspending official's decision only where there is a clear error of material fact or law or where OHA finds that the suspending official's decision was arbitrary, capricious or an abuse of discretion. A request to OHA must be filed within 30 days of receipt of the suspending official's decision.¹⁴

6. Length of Suspension and Debarment Overview: Suspension is temporary and generally may not exceed 12 months, unless the federal agency subsequently initiates debarment proceedings, in which case the suspension lasts until the conclusion of those proceedings.¹⁵ A nonprocurement debarment is a more permanent version of a suspension. A debarment typically lasts three years, unless the debarring official determines that a longer or shorter period is appropriate based on the circumstances.¹⁶

Recommendations for Responding to a Notice of Suspension

As discussed above, upon receiving a Notice of Suspension, an entity has an opportunity to contest the action, typically within 30 days. Although a response is not mandated by regulation, preparing a strategic and well-organized submission can significantly influence the outcome of the process, particularly given that the ramifications of a suspension can be devastating and wide-reaching. Further, failure to contest the Notice means the entity has accepted the suspension and allegations contained therein.

In the event of responding to a Notice, at the very least, an entity must provide the information required by 2 C.F.R. § 180.730(a). Moreover, a strategic, well‑organized response can significantly influence the outcome of the process. As noted above, the ramifications of a suspension are devastating and wide-reaching.

2 C.F.R. Part 180 does not provide guidance to suspending officials on the burden of proof to apply when making a suspension determination. However, for debarment actions, the federal agency has the initial burden to prove that a cause for debarment exists. Once a cause for debarment is established (the Notice is sent), the respondent has the burden of demonstrating that it is presently responsible.

An entity that receives a Notice of Suspension should consider the following actions and strategic considerations.

1. Engage Experienced Counsel: The process of contesting a suspension (or debarment) action involves complex regulatory and strategic planning and considerations. If an entity is reliant on receiving funds from nonprocurement programs or revenue from federal contracts, retaining qualified counsel is a must. Attorneys who practice in the area of federal grants and contracts bring relevant experience with these matters, including familiarity with the process and standards for demonstrating present responsibility, as well as established relationships with agency counsel.
2. Immediate Internal Assessment and Investigation: A critical early step is to conduct an internal assessment to understand the basis of the allegations outlined in the Notice. Upon receiving a notice, the entity should preserve documents, conduct a privileged internal review and assess the accuracy of the allegations. Oftentimes, it is helpful to engage outside counsel to conduct an internal investigation into the allegations contained in the Notice. The findings and conclusions of such an investigation are privileged since the investigation is conducted by counsel but can be shared with the agency (at the entity's discretion) if they prove favorable. In addition to being privileged, investigations by outside counsel are far more likely to be viewed as credible and trustworthy by an agency than an entity's own internal investigation.
3. Request the Administrative Record Through Counsel and Additional Time to Respond (if Necessary): To prepare a thorough response, entities often request a copy of the administrative record through counsel from the agency, which contains the evidence and information upon which the suspension is based. Additionally, an entity may request additional time to submit its response to the Notice of Suspension, although an agency is not required to provide it. Such requests are typically made promptly if additional time is necessary.
4. Develop a Comprehensive Written Submission: The written submission is generally the primary vehicle for contesting the suspension. A comprehensive response generally addresses each allegation in the notice, provides factual rebuttals, describes the entity's compliance infrastructure and highlights any relevant corrective actions. It must also meet all regulatory response requirements.
5. Implement and Document Remediation: Demonstrating remediation is a key component of establishing present responsibility. Agencies place significant weight on remediation, including disciplinary actions, enhanced controls, independent audits and training programs. These factors are recognized as mitigating considerations under 2 C.F.R. § 180.860.

Conclusion

Nonprocurement suspension and debarment actions can have sweeping consequences for entities that rely on federal assistance or federal contracting opportunities. A suspension immediately halts participation in federal nonprocurement programs and can quickly escalate to a debarment if not addressed strategically. Entities have the right to respond, but the window is short and the stakes are high.

Understanding the regulatory framework – and engaging early with experienced counsel – can make the difference between a temporary disruption and a long‑term exclusion that affects both nonprocurement and procurement eligibility.

For more information or questions, please contact the authors.

Notes

¹ 51 Fed. Reg. 6370; 54 Fed. Reg. 34131.

² 2 C.F.R. §§ 180.700(a); 180.800(a).

³ 2 C.F.R. § 180.800(b) sets forth the following examples of a "violation of the terms of a public agreement or transaction so serious as to affect the integrity of a Federal agency program": 1) a willful failure to perform in accordance with the terms of one or more public agreements or transactions, 2) a history of failure to perform or of unsatisfactory performance of one or more public agreements or transactions, or 3) a willful violation of a statutory or regulatory provision or requirement applicable to a public agreement or transaction.

⁴ 2 C.F.R. §§ 180.700(b); 180.800(b) through (d).

⁵ 2 C.F.R. § 180.700(c).

⁶ 2 C.F.R. §§ 180.200–180.220.

⁷ 2 C.F.R. § 180.130.

⁸ 2 C.F.R. § 180.140.

⁹ 2 C.F.R. § 180.625(b).

¹⁰ 2 C.F.R. § 180.715.

¹¹ 2 C.F.R. §§ 180.720-180.725.

¹² 2 C.F.R. §§ 180.730.

¹³ 2 C.F.R. §§ 180.735-180.740.

¹⁴ 2 C.F.R. § 2700.765(a).

¹⁵ 2 C.F.R. § 180.760.

¹⁶ 2 C.F.R. § 180.865.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.