As has been discussed on this blog, the most common form of fraud involving the Department of Transportation’s disadvantaged business enterprise program, involves a “pass through” entity that performs little or no actual work on the construction project.  Under this common scheme, a general contractor hires a subcontractor that has been certified a DBE and uses the value of the work subcontracted towards the percentage of work it has agreed to perform using DBE firms, however, in reality, the DBE does not perform a “commercially useful function.”  Instead, the work is performed by a non-DBE firm or even the general contractor’s own employees.

Sometimes the fraud is one of willful ignorance of the scheme by the general contractor, who knows the pass through scheme is happening and simply winks, nods, and looks the other way.  Other times the scheme is more blatant and the firm guilty of DBE fraud willfully engages in the pass through scheme, like the one announced yesterday by the U.S. Attorneys Office in North Carolina.  There the U.S. Attorney filed a 29 count indictment against a North Carolina highway construction firm and its executives for taking part in a massive and complex DBE fraud scheme involving a pass through entity.  The case is troubling because of extent of the actions the firm and individuals involved took to try covering up the pass through scheme.

The indictment alleges that Boggs Paving, it’s President, Vice-President, CFO, and Chief Estimator violated federal mail fraud, wire fraud, and money laundering laws, by engaging in a massive scheme to obtain contracts through the North Carolina DOT by using a pass through scheme involving a DBE trucking firm.  (The DBE firm and its principal were also indicted.)

It is not criminal per se to violate the DOT’s DBE program.  What makes the violating the DBE program criminal is that it invariably involves violating federal mail and wire fraud laws.  An individual or corporation commits mail fraud when the U.S. mail is used in furtherance of a fraud scheme.  Likewise, wire fraud occurs when a telephone or the internet (i.e. the wires) are used in a scheme to obtain money from a person or entity through false or fraudulent pretense.  Mail and wire fraud occurs in the context of DBE fraud because mail, telephones, and the internet are used in submitting bids, payment applications, and DBE compliance reports all of which make false statements about the level of participation by DBE firms.  Moreover, because it is the use of the mail and wires that is the violation, firms and individuals can be indicted even though the DBE fraud involved a county or municipal DBE program.  Each mail and wire fraud count carries a maximum sentence of 20 years in federal prison.

Because all the government must show in a mail or wire fraud case is that the mail or wire was used in “furtherance of the scheme,” it is hard to imagine what defense the indicted individuals in this case will have to the government’s claims.  Here, without falsely claiming the level of DBE participation in writing there could be no DBE fraud because the NCDOT would never have paid Boggs for its work.

This case is a reminder that federal authorities are on the lookout for DBE fraud and the consequences for construction firms and their executives violating DBE rules.