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If you are a federal official who wants to hand a big government contract to your friends — say, your former employer — you can’t legally do it, unless you know the DEI loophole.
And if you are a revolving-door lobbyist who wants to rake in federal dollars, the best tactic may be to find a veteran, an Indian tribe, or a black business owner to be your frontman, and thus get yourself a minority set-aside.
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This is the lucrative world created by the Small Business Administration’s “Minority Small Business and Capital Ownership Development Program,” most commonly known inside the Beltway by the section of the Small Business Act that created it: 8(a).
Abuse and corruption has plagued 8(a) for decades, which is why Defense Secretary Pete Hegseth just announced he is “taking a sledgehammer” to the program, which he described as “the oldest DEI program in the federal government.
All the problems of DEI are present in 8(a):
The 8(a) program is explicitly and intentionally discriminatory. Its defenders say this is a correction to implicit bias and prior discrimination that leaves tribes and racial minorities at a disadvantage.
The 8(a) program likely lowers the quality of government contracts by replacing merit with irrelevant characteristics such as race.
Finally, the 8(a) program invites abuse and corruption. Hegseth aptly calls it “a breeding ground for fraud.”
Set-asides and no-compete contracts
Congress created the Small Business Administration in 1958, and in 1978 created the current framework by which a small business can get preferences in federal contracting if it is “owned and controlled by one or more socially and economically disadvantaged individuals.”
This originally included black-owned business, and the program was expanded in 1986 to include Indian tribes and Alaska Native Corporations — federally charted corporations whose shareholders are members of Alaska native tribes.
Section 8(a) provides special training for these privileged companies to navigate the often-byzantine regulations and rules of federal contracting. But also, 8(a) companies get special privileges when it comes to winning government contracts.
Ordinarily, federal agencies must put a contract up for competitive bids. This is a basic anti-corruption measure to prevent politicians or bureaucrats from handing contracts to their friends.
The 8(a) law was written to circumvent those basic anti-corruption measures. Companies privileged by 8(a) can win contracts without any competition — these are called “sole source” contracts.
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In Fiscal Year 2025, $18 billion in new federal contracts were awarded to 8(a) recipients according to a search of USAspending.gov. The largest of those contracts was $146 million to Bering Straits Global Innovations “For Waterway Debris Removal for Ashe County” in North Carolina after Hurricane Helen.
BSGI is a subsidiary of the Bering Straits Native Corporation which reported $799 million in gross revenues in 2024. How does this company qualify for special small-business treatment, when $40 million in annual revenue is usually the upper limit? Alaska Native Corporations are exempted from the size limits on 8(a) contracts.
As a result, much of the 8(a) money goes to very large ANCs.
The largest new 8(a) contract in Fiscal Year 2024 was a $237 million Veterans Affairs contract for a company called IT Solutions, Inc. This company (now called Kentro) gets its special status because the company owner, founder, and CEO is a minority and a veteran. Pinakin Patel was an Air Force officer for four years before going to work for Booz Allen Hamilton and Northrup Grumman.
The second largest 8(a) contract ($223 million) in 2024 was a DOD contract for “sampling and monitoring for hazardous materials, management of stormwater, removal of fire-related debris.” This was a “set-aside” contract, which meant there was no competition for it. Hui Huliau Technology Services, a Native Hawaiian company, was the only contractor considered.
Sole-source, no-compete arrangements are not unheard-of in federal contracting, but their prevalence in 8(a) contracting has made the program susceptible to abuse.
Abuses
In the HBO drama The Wire, corrupt State Senator Clay Davis informs drug kingpin Avon Barksdale, “You are now a minority contractor for light bulb supply to the Board of Education, City of Baltimore.”
Bell responds incredulously, “What the f*** I know about light bulbs?”
“Come on, man, relax, white guy’s doing all the work,” says Davis. “You’re just his beard for the Empowerment grant.”
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The real-life model for this fictional plot point may have been the 8(a) program. Throughout the program’s history, many of the minority-owned businesses that have won contracts appeared to be mere pass-through or shell entities for some well-established, politically connected, white-owned business or corporation.
“In many, many instances, these ‘socially disadvantaged’ business, they don’t even do work,” Hegseth said. “They take a 10%, 20%, sometimes 50% fee off the top, and then pass the contract off to a giant consulting firm commonly known as Beltway Bandits.”
Recently, Sen. Joni Ernst (R-IA) described this sort of fraud taking place involving a native-owned tech company called ATI. In a secretly-recorded conversation, an ATI contract manager described her employer as a mere “pass-through” that wins contracts, takes a cut, and passes along the real work to other companies that couldn’t get the contract on such favorable terms.
More generally, the purpose of 8(a) is to create no-bid contracts, which tees up opportunities for cronyism.
In June 2025, four men pleaded guilty to fraud and bribery charges over their abuse of 8(a). Roderick Watson was a contracting officer for USAID, who was accused of accepting about $1 million worth of bribes from two small businessmen. Watson directed sole-source federal contracts to one, who subcontracted out to the other. When the first business aged out of 8(a), the two companies switched places. Both business owners paid Watson bribes.
Alaska Native Corporations, while ultimately owned by natives, often mostly enrich the non-native executives, lobbyists, and consultants, many of whom are revolving-door former staffers for Alaska lawmakers.
In 2009, Sen. Claire McCaskill (D-MO) issued a report contending that very little of the money ever trickled down to the natives. She pointed to $20 billion in contracts for the biggest ANCs over a decade, and then an average of $615.
Investigative reporter Luke Roziak recently documented how white, non-native DC-insiders enrich themselves on these ANC 8(a) contracts.
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Hegseth will have plenty of allies in his efforts to “take a sledgehammer” to the program, but there’s no telling what that means. Will the administration lean on Congress to abolish it? Will DOD do a thorough investigation that results in disqualification or prosecution for abusers?
Or will the Beltway Bandits and their 8(a) friends win the day and prevent any reform?
