August 2012

I received a number of questions regarding my last post about the growing number of federal prosecutions involving fraud in disadvantage business enterprise (“DBE”) programs.

Do the same rules apply to MBE and WBE contractors?

Yes.  MBE’s and WBE’s are both DBE’s.  MBE stands for minority business enterprise.   WBE stands for women (owned) business enterprise.  Therefore, firms working with MBE’s and WBE’s should report any suspected fraud on part of a MBE or WBE and should take caution when certifying monthly reports involving MBE and WBE firms.

What if I only work on state or local projects?

The last post involved the Department of Transportation’s DBE program.  That program applies only to projects involving federal transportation funding.  As a condition of receiving federal transportation money, state transportation agencies are required to implement DBE program that follows the Department of Transportation’s guidelines.  However, many state and local governments have their own DBE programs.   For example, the City of Philadelphia has its own DBE program for all City owned construction projects.

Even if the DBE program is purely a state or local DBE program, you could still find yourself the subject of the ire of federal prosecutors if you knowingly engage in a scheme to defraud the program.  As mentioned in my last post, violating the DBE program’s requirements is not against the law.  What is against the law are the predicate acts that you engage in while violating the program, such as mail fraud and wire fraud.  Therefore, if you are involved with a DBE fraud scheme on a purely state or local job and the mail, phone, or internet is used as part of that scheme, then you could be prosecuted under federal law.  Mail fraud and wire fraud are so broad that there is no wonder they are known as a prosecutor’s best friend.

Additionally, while many state and local projects are administered by a state or local agency, they often involve federal funds.  With federal funds comes the requirement that recipients follows federal law.  Therefore, you need to check your DBE program’s requirements carefully in order to assure that you know which program you are proceeding under.

What if I am asked to do work for a DBE by the general contractor?

Quite a few folks, who are non-DBE firms, advised me – somewhat disturbingly – that they have often been asked by a project’s general contractor during a project to perform work for a DBE firm rather than the party with whom they originally contracted.  While those that asked me were not entirely sure why they were asked to do so, the assumption is that the DBE could not handle the work for which it contracted.  In that scenario, if the non-DBE acquiesced to the general contractor’s request it could unwittingly find itself caught up in a classic DBE pass through fraud scheme.  In a DBE pass through scheme, the general contractor contracts with a DBE and certifies that a DBE is performing a certain percentage of the work.  However, in reality the work is actually being performed by a non-DBE entity.  If you firm was part of the scheme to conduct DBE fraud, it could be subject to charges of conspiracy.  Therefore, if you suspect you are being asked to contract with a DBE and your firm is going to perform all or a substantial portion of that DBE’s work, you should call an attorney before you proceed.

Of course, I invite additional questions on this topic and will reply to them in a future post.


Yesterday, I “attended” an American Bar Association webinar on “Minority Contracting Programs: A Growing Criminal Risk to Corporations.”   The message was clear – federal prosecutions of DBE fraud are on the rise. Indeed, federal prosecution of DBE fraud has occurred in recent years in the following states:  Florida, Illinois, Kansas, Massachusetts, Minnesota, New York, Ohio, Oklahoma, Pennsylvania, and West Virginia.   Moreover, the consequences of running afoul of DBE requirements are dire running the gamut from prison time, multimillion dollar fines, forfeiture of all (not just profits) proceeds from a contract, and debarment or suspension.

Here is a summary of some key points made by the panel:

1.  Personal Liability.  Contractors that engage in DBE fraud can be fined, disbarred, or suspended.  However, individuals within a firm are potentially personal liable for the DBE violation and can be sent to jail.  In fact, one need only look at the Department of Transportation, Office of Inspector General,webpage to see the long list of individuals who were found personally liable for DBE fraud   While violating DBE requirements itself is not a federal crime (yet, may result in administrative suspension or debarment), the acts committed while violating the program’s requirements, such as mail fraud or wire fraud, are.  Under federal mail and wire fraud laws, anyone with knowledge and intent who engages in a scheme to commit mail or wire fraud is potentially liable, not just the contract’s signatory.

2.  Its Not Just the Little Guys.  Think prosecutions are limited to sham or pass through DBE’s or unscrupulous general contractors?  Think again.  Skanska, Schiavone, Bovis Lend Lease, and Perini are a few of the names that have found themselves on the other end of federal DBE investigations resulting in large fines and even jail time for principals engaged in the fraud.

3.  Certified DBE’s Do Not Equal Compliance.   The panel emphasized that the single biggest compliance mistake contractors make is assuming that using certified a DBE equates to compliance.  Simply using certified DBE’s is not enough because virtual every prosecution has involved a certified DBE.  Instead, contractors must make sure they are complying with all of the contracting agency’s DBE program requirements.  In fact, most State and local agency DBE program’s require that a general contractor assume the duty of assuring compliance on its behalf and on behalf of its DBE subcontractors.  For example, here in Pennsylvania, PENNDOT’s DBE program requirements state “[f]ailure by a prime contractor and subcontractors to carry out the DBE requirements constitutes a breach of contract and may result in termination of the contract or action as appropriate.”

4.  If you suspect fraud, report it.  Even if you lack direct knowledge that one of your DBE subcontractors is a fraud, your firm could still wind up in a prosecutor’s cross hairs.  In addition to assuming responsibility for compliance, nearly all DBE programs require prime contractors to submit monthly certifications certifying under oath – and the threat of perjury – that DBE’s performed a portion of the work and/or have been fully paid.  Therefore, contractors need to take the suspicion of DBE fraud by one of their DBE subcontractors very seriously.  In fact, the panel stated that “no decision is more important” than a contractor’s decision to investigate whether its DBE subcontractor is engaging in DBE fraud because  if a contractor decides to look the other way the individuals looking the other way could be personally liable.  Or, at a minimum could find themselves answering serious questions from federal prosecutors.

5.  Low level individuals usually are the issue.  Many of the DBE cases imposing corporate liability on contractors have involved low level individuals (often in the field) within the firm.  In fact, in many cases the executives and principals of the prime contractor were unaware of the fraudulent activity.

6.  The Constitutionality of a DBE program is not a defense.  DBE programs are controversial and often subject to attacks on constitutional grounds.  However, even if a program is found to be constitutionally invalid, convictions for violating the now invalid DBE program will stand.

7.  Understand the Whole Program An RFP and contract may not set out the complete details of a State’s or agency’s DBE program. Rather, many contain only a boilerplate reference that the contractor agrees to abide by “all federal, state, and local laws,” which would include applicable DBE requirements.  Prosecutors often cite these provisions as evidence that a contractor or individual had knowledge of the specific requirements of the DBE rules.  Therefore, contractors and their employees must familiarize themselves with the individual requirements of each agency’s DBE program, which vary from agency to agency.

Obviously, the consequences of not maintaining a strong DBE compliance program are severe.  Contractors required to comply with a DBE program should make sure they are aware of the program’s specifics.  Moreover, if contractors suspect fraud they should take immediate action to ascertain whether their suspicion has merit.  Otherwise, your firm could wind up facing “bet the company” litigation or individual employees could be facing jail time.


OSHA has announced a “no-notice” “Construction Incident Prevention Initiative” campaign to “curb construction fatalities.”  OSHA will be focusing its compliance inspections on construction sites in the Delaware Valley.

According to OSHA’s Press Release:

“During campaign periods, OSHA sends all of its compliance officers into the field to conduct immediate inspections when unsafe working conditions involving the four leading causes of incidents are observed at construction sites. On-site outreach also is provided to encourage employers to continue good work when it is observed.”

What are the four leading causes of incidents at construction sites?

  1. Falls  (34%)
  2. Electrocutions  (10%)
  3. Struck by Object (8%)
  4. Caught-in/between  (4%)

What are the four most common OSHA standards violations?

  1. Scaffolding, general requirements, construction (29 CFR 1926.451)
  2. Fall protection, construction (29 CFR 1926.501)
  3. Hazard communication standard, general industry (29 CFR 1910.1200)
  4. Respiratory protection, general industry (29 CFR 1910.134)

How should contractors prepare for OSHA’s initiative?

Here, the old adage ‘an ounce of prevention is worth a pound of cure’ aptly applies. Obviously, contractors should self assess their work sites to see if they are in compliance OSHA standards.  If a contractor is unsure if its work site is in compliance with OSHA regulations, it should consider hiring an independent OSHA safety consultant to conduct an OSHA “audit” of the contractors work place and work site.

Additionally, contractors with safety programs and manuals in place should remind employees of the contractor’s safety plan and requirements.  Contractors should make sure employees are following the safety requirements while working especially in the areas of scaffolding, fall protection, hazard communication, and respiratory protection.  Employees seen violating the contractor’s safety plan and requirements should immediately be made to stop working and reminded of the safety obligations.  If appropriate, the contractor should consider reprimanding the employee.  These steps are particularly important because they may provide the basis for an “employee misconduct” defense to an OSHA citation.

What should a contractor due if an OSHA inspector shows up at a job site?

While OSHA inspectors are granted wide authority to inspect a business premises, a contractor can request that an OSHA inspector obtain a warrant before entering a private facility.   If the inspection is part of a programmed inspection, like the Summer Initiative, the OSHA inspector has the authority to inspect the entire job site. If an OSHA inspector shows up, a designated OSHA representative of the contractor, or if the contractors does not have one, a member of the contractors management team, should ask the OSHA inspector the basis for the inspection. During the inspection, a management and employee may accompany the OSHA inspector at all times.  It is recommended that the contractor  representative take photographs and take detailed notes of any conditions noted by the OSHA inspector. This step is particularly important on a multi-employer construction project site as the cited condition may not have been created by the exposing contractor and made provide the basis for a defense to a citation.

OSHA may also interview member of a contractor’s labor force.  “Non-supervisory” employees are entitled to be interviewed privately – that is without the presence of a management representative.  Employees should be reminded that they have the right to be interviewed with a member of management present or in the presence of an attorney.  If an employee is the member of a trade union, the contractor should alert that particular union.  Union members have the right to have a union representative present at the interview.   Union representatives also may be present during the walk through inspection.

Following the inspection, contractors should consider preparing a detailed and dated memorandum outlining the who, what, when, and where of the inspections.

We will keep you abreast if OSHA’s Summer Initiative results in an increased number of OSHA citations at area job sites.

The Obama Administration’s War Against Coal economic impact on the State of West Virginia is well known.  But  has the Obama Administration actually declared war on the entire State of West Virginia?  It certainly seems like it now that the Fish and Wildlife Service has decided to place the “Diamond Darter” on the endangered species list.   Moreover, the Energy Law Blog reports:

The FWS also is considering land use restrictions for the tiny fish, proposing critical habitat designation in an area of West Virginia that has seen increased exploration and production activity during the Marcellus Shale gas boom. If the FWS proposal is finalized, federal agency actions such as issuance of Clean Water Act permits or Federal Highway Administration approvals would require conference or consultation if they may impact species or their habitat.

In other words, it will become harder and more expensive to undertake projects where the habitat of the Diamond Darter may be impacted and, therefore, less attractive for natural gas drilling.  I have never seen a Diamond Darter and would not know one if I saw it, however the picture above which comes from the FWS website it pretty much appears to be a minnow.

We will see what impact this minnow will have on energy development in West Virginia and other areas.