The Subcontractor’s Shadow: Pass-Through Fraud and the Quiet Drift of Accountability

I. Myth vs. Reality of the Central Term

In public life, fraud tends to arrive in costume. It appears as the rogue contractor, the stuffed invoice, the bribed official caught on tape. We imagine the villain because it simplifies the story. It allows the system to remain blameless.

“Pass-through fraud” resists that simplicity.

In its most basic description, pass-through fraud occurs when a government contractor adds little or no value to a contract yet collects a fee for merely funneling work to another entity. The practice can take many forms. In some cases, a prime contractor wins a contract by presenting itself as the primary performer but subcontracts nearly all the substantive work while retaining a margin. In other cases, an intermediary is used to satisfy statutory requirements, such as small business participation, while the actual work is directed and controlled by a larger firm.

Not every pass-through arrangement is unlawful. Federal acquisition rules recognize legitimate subcontracting as essential to complex procurement. The line is crossed when the intermediary performs no commercially useful function and serves only as a nominal participant to extract profit or evade regulatory constraints.

That line is legal, not moral. It is defined by statutes, regulations, and case law.

Under U.S. federal law, for example, the False Claims Act can apply if a contractor knowingly submits false certifications about compliance with subcontracting or small business requirements. The Small Business Act and related regulations impose “limitations on subcontracting” that require certain small businesses to perform a specified percentage of the work. Violations can lead to civil penalties, debarment, and, in some cases, criminal charges.

But most of the public does not encounter these nuances. Instead, the term “pass-through” becomes shorthand for corruption. It is used in press conferences, in legislative hearings, and in audit reports. The word suggests emptiness, a hollow conduit siphoning public funds.

The reality is more complex and, in some ways, more troubling.

Pass-through arrangements often operate in gray zones. They can emerge from administrative habit rather than criminal intent. They can be structured by lawyers who interpret regulations narrowly. They can be tolerated by agencies eager to obligate funds before fiscal deadlines. They can be justified as efficient risk allocation. And they can persist because they are difficult to disprove.

In other words, the myth is that pass-through fraud is a deviation from the system. The reality is that it can be a byproduct of the system’s incentives.

Fraud, when proven in court, is a crime. But before it becomes a charge, it is often a pattern. Before it becomes a pattern, it is an accommodation. And before it becomes an accommodation, it is a design choice.

If we are to examine pass-through fraud seriously, we must look not only for villains but for architecture.

II. Ecosystem of Enablement

Government contracting is not a single transaction. It is an ecosystem: agencies, prime contractors, subcontractors, consultants, compliance officers, auditors, inspectors general, congressional overseers, and, ultimately, taxpayers.

Within that ecosystem, certain conditions make pass-through behavior more likely to occur, and more likely to persist.

1. Structural Incentives

Large government contracts are often awarded to prime contractors with the capacity to manage complex projects. These primes are expected to oversee performance, manage risk, and ensure compliance. In return, they receive overhead, profit, and, in some cases, award fees tied to performance metrics.

Yet the structure creates a predictable temptation: maximize margin while minimizing operational exposure. Subcontracting can shift risk downstream. If the prime can retain a percentage while delegating nearly all substantive work, the financial calculus favors intermediation.

This does not constitute fraud by itself. It becomes problematic when representations to the government about the nature of performance are inaccurate or misleading.

For small business set-aside contracts, the stakes are different but equally significant. Congress created these programs to foster economic participation by small and disadvantaged firms. Regulations typically require that the small business perform a minimum share of the work. The aim is to prevent the small firm from acting as a mere front for a larger enterprise.

When that minimum share is not met, or when control effectively rests with a larger entity, the integrity of the program is compromised. Investigations by inspectors general and the Government Accountability Office have, over the years, documented instances in which small businesses were nominal participants while larger firms performed the bulk of the work. Some of these cases have resulted in civil settlements or criminal convictions. Others have led to administrative findings and corrective action without litigation.

The pattern reveals a tension between policy aspiration and market reality.

2. Procurement Complexity

Federal acquisition regulations fill volumes. They govern bidding procedures, cost allowability, performance requirements, subcontracting plans, and reporting obligations. Complexity is meant to ensure fairness and accountability. It also creates room for interpretation.

In such an environment, compliance can become a box-checking exercise. If a contractor can produce documentation showing that subcontracting percentages were met on paper, oversight bodies may lack the resources to examine the operational reality behind the paperwork.

Auditors work within constraints: time, staffing, evidentiary standards. Proving that a contractor performed no commercially useful function is fact-intensive. It requires interviews, financial tracing, contract analysis, and often whistleblower testimony. Many questionable arrangements may never rise to that threshold.

The result is not necessarily lawlessness. It is selective enforcement.

3. Deadline Pressure

Government agencies face fiscal year deadlines. Unspent funds can be rescinded. Program managers are often evaluated on their ability to obligate funds efficiently. When deadlines loom, the priority can shift from perfect compliance to timely execution.

In such contexts, due diligence may narrow. If a prime contractor certifies compliance and has a history of past performance, contracting officers may rely on those certifications absent clear red flags. That reliance is not negligence per se; it is a practical response to workload.

But reliance creates dependency. And dependency can become vulnerability.

4. Professional Distance

One of the more subtle enablers is psychological.

The individuals who draft subcontracting plans, review invoices, or sign certifications often operate at professional remove from the ultimate beneficiary of public funds: the citizen. They see contract line items, not classrooms, hospitals, or roads.

This distance can dilute moral urgency. A pass-through fee may appear as an accepted industry practice rather than a potential diversion of public value.

No single participant may view the arrangement as fraudulent. The prime sees risk management. The subcontractor sees access to markets. The agency sees compliance documents. The auditor sees a file that, at first glance, meets regulatory thresholds.

The ecosystem, taken together, can produce outcomes that none of its parts would independently design.

III. Discipline of Truth

Investigative journalism and legal proceedings share a common burden: the discipline of proof.

It is essential to distinguish between mention, accusation, charge, and conviction.

A report by an inspector general may mention irregularities. A whistleblower may allege that a prime contractor performed little substantive work. A civil complaint may accuse a company of violating the False Claims Act. A prosecutor may bring charges. A court may convict. Or a case may settle without admission of liability.

Each stage carries a different weight.

In past federal enforcement actions, courts have found contractors liable for misrepresenting compliance with subcontracting requirements. In some instances, companies have paid substantial settlements to resolve allegations that they acted as pass-through entities or enabled ineligible firms to access small business contracts. These outcomes demonstrate that the legal system recognizes and can punish such conduct.

At the same time, many allegations do not result in findings of fraud. Investigations may conclude that the evidence does not meet the statutory standard of knowing falsity. Disputes over what constitutes a commercially useful function may hinge on technical interpretations. Administrative errors may be corrected without punitive action.

For journalists and oversight bodies alike, restraint is not weakness. It is integrity.

To describe a pattern of risk factors is not to accuse any specific actor. To analyze systemic incentives is not to declare widespread criminality. To cite past cases is not to imply current guilt.

The discipline of truth requires specificity. It requires naming statutes, identifying documented findings, and clarifying when a matter remains an allegation. It requires acknowledging the possibility of legitimate subcontracting structures even while scrutinizing those that appear hollow.

The public interest is not served by exaggeration. It is served by clarity.

And clarity often reveals something subtler than scandal: it reveals drift.

Drift occurs when compliance degrades gradually, when norms soften, when enforcement becomes sporadic, and when financial incentives quietly reshape behavior. Drift does not announce itself. It accumulates.

Pass-through fraud, when it occurs, may be a crime. But drift is a governance problem.

IV. Institutional Moral Outsourcing

Modern contracting allows institutions to outsource not only work, but responsibility.

Agencies outsource performance to primes. Primes outsource execution to subcontractors. Subcontractors outsource components to vendors. At each layer, a margin is retained, a certification is signed, a compliance function is delegated.

Moral responsibility can become similarly layered.

If a small business is nominally in charge but functionally controlled by a larger firm, who bears responsibility? The small business owner who signs the certification? The larger firm that provides management and technical expertise? The agency that accepted the bid? The lawyers who structured the arrangement? The consultants who advised on compliance?

In formal legal terms, liability attaches where statutes and evidence dictate. Courts determine culpability based on defined elements. That clarity is essential.

But in institutional life, responsibility can diffuse before it crystallizes into liability.

This diffusion is not necessarily intentional. It is embedded in organizational design. Compliance departments ensure that required forms are filed. Internal audits confirm that documentation exists. External auditors test samples. Each actor may conclude that their role has been fulfilled.

The result can be a system in which no one feels personally accountable for whether the intermediary actually adds value commensurate with its fee.

Institutional moral outsourcing occurs when organizations rely on procedural compliance to substitute for substantive inquiry. If the percentages are met on paper, the deeper question of value may go unasked.

In the realm of small business contracting, this outsourcing has particular moral weight. Programs designed to expand economic opportunity can become vehicles for rent extraction if intermediaries siphon value without building capacity.

It is important to note that many contractors and agencies take these responsibilities seriously. There are documented examples of agencies strengthening oversight, clarifying limitations on subcontracting, and pursuing enforcement actions when warranted. Many firms invest heavily in compliance and internal controls.

The point is not to impugn the field wholesale. It is to recognize that structural incentives can undermine even good intentions.

Institutions are adept at protecting themselves from scandal. They are less adept at protecting themselves from slow erosion.

V. Accountability Beyond Disclosure

Transparency is often proposed as the cure. Publish subcontracting data. Disclose ownership structures. Report performance percentages. Expand public databases.

These measures matter. They enable watchdog groups, journalists, and competitors to scrutinize patterns. They deter overt misrepresentation. They create a record.

But disclosure alone does not correct misaligned incentives.

If a prime contractor can lawfully retain a significant margin while performing minimal substantive work, disclosure does not alter the underlying calculus. If small businesses are financially dependent on larger partners who effectively control operations, transparency may illuminate the arrangement without changing it.

Accountability requires alignment.

1. Clarifying Standards.
Ambiguity around what constitutes a commercially useful function invites creative interpretation. Clearer regulatory guidance, supported by consistent enforcement, reduces gray zones.

2. Strengthening Verification.
Randomized, in-depth audits of subcontracting performance, rather than reliance solely on self-certification, can shift risk assessments. The possibility of rigorous review changes behavior even when most audits do not result in penalties.

3. Incentive Realignment.
If program managers are evaluated primarily on obligation rates and cost control, compliance may become secondary. Performance metrics that incorporate integrity indicators can rebalance priorities.

4. Protecting Whistleblowers.
Some of the most significant enforcement actions under the False Claims Act have originated with whistleblowers. Ensuring robust protection against retaliation encourages reporting of genuine misconduct while allowing allegations to be tested through established legal processes.

5. Capacity Building.
In small business programs, investing in the genuine development of small firms reduces dependence on larger entities. When small businesses have the capital, technical expertise, and managerial capacity to perform substantial work independently, the space for nominal arrangements narrows.

None of these reforms promise elimination. Government contracting will always involve complexity. Markets will always search for margin. Regulations will always be tested at their edges.

The question is not whether pass-through fraud can be eradicated. The question is whether public institutions are willing to examine the incentives that make it plausible.

Conclusion: The Mirror

Investigating pass-through fraud is not an exercise in cynicism. It is an exercise in civic maintenance.

The temptation is to search for villains, to demand a name, a face, a headline. Sometimes those are warranted. Courts convict. Settlements are paid. Officials are disciplined.

But the deeper work lies elsewhere.

It lies in asking why certain arrangements recur. Why oversight falters under pressure. Why documentation substitutes for verification. Why margins accrue in layers while public value thins.

Exposure, at its best, is not spectacle. It is a mirror.

When we hold that mirror to government contracting, we do not see only contractors. We see lawmakers who design programs, agencies that administer them, auditors who review them, journalists who report on them, and citizens who fund them.

If pass-through fraud exists, it exists within that collective frame.

The discipline of truth requires that we distinguish allegation from proof. The discipline of citizenship requires that we distinguish comfort from accountability.

In the end, the question is not simply whether someone passed funds through an empty conduit. It is whether we are willing to examine the conduits we have built.

To expose systemic vulnerability is not to indict a nation. It is to honor it.

Public money is public trust. To follow it carefully, without exaggeration and without fear, is not an act of hostility. It is an act of care.

And care, in a republic, is a civic obligation.