September 2014

In previous posts, I have discussed how failing to abide by the Department of Transportation’s DBE regulations can lead to the criminal indictment of construction company executives. Now, a case out of the Southern District of New York – a hotbed of DBE fraud prosecutions – should have all employees of a firms that fail to understand the ramifications of failing to follow the DOT’s DBE rules worried.

Last week, the Department of Justice announced the indictment of a regional manager of a general contractor for wire fraud involving the DBE program.  What is unique about this case – and why you should take notice – is that the defendant was not an owner, partner, or executive officer of the general contractor, but rather a regional manager.  Previous indictments of individuals almost always involved executive officers or those with an ownership interest.  In fact, I cannot recall any DBE indictments involving a B/C level manager. Accordingly to the indictment,  the general manager arranged a classic DBE pass-through scheme, which we have previously described on this blog.  Importantly, there is no indictment that the defendant received any form of kickback as a result of the scheme.  He concocted the scheme ostensibly to further his employers interests.

I doubt that the indictments involving this case will end with the regional manager.  But, this case underscores that everyone in your company must know and understand the ramifications of engaging in DBE fraud both for their personal well being an that of your firm.

This blog repeatedly chronicles the ramifications of failing to comply with the Department of Transportation’s Disadvantaged Business Enterprise regulations.  Jail time for executives, disbarment, fines, and bid challenges are real threats to those contractors that run afoul of the DOT’s DBE rules.  Because of the amount of interest in this area, I am pleased to announce that I am now offering a scaled back version of a full DBE audit program for FREE.  My mini-DBE audit covers many of the topics discussed in my popular DBE Compliance Webinar, including:

1.  The importance of documenting good-faith efforts;

2.  Recognizing the red-flags of DBE fraud;

3.  Assuring your contracts are in compliance with federal and state DBE rules.

Interested parties can contact me for more information by email at wally@zimolonglaw.com.

As readers of this blog know, fraud involving the Department of Transportation’s disadvantage business enterprise regulations is a hot topic in the construction industry. One form of DBE fraud involves a front scheme, whereby a certified DBE is not actually owned, operated, and controlled by an disadvantaged individual.  Unfortunately, this type of scheme is not limited to the DBE program.  Fraud involving the Veteran Owned Small Business program is also increasing.

Under the federal government’s Veteran Owned and Service Disabled Veteran Owned Small Business programs, federal agencies are authorized to set aside the award of contracts for only VOSB and SDVOSB entities.  To be eligible for certification as a VOSB or SDVOSB, a veteran or a service disabled veteran must own 51% or more of the entity, must manage the daily operations of the firm, and hold the highest position in the firm.  The certification rules are very similar to those for disadvantaged business enterprises.

Because under the VOSB and SDVOSB programs procurement is limited to those firms, the opportunity exists to obtain lucrative contracts where otherwise the firm may not be able to compete.  As the number of contracts procured under the program has increased, so has fraud related to that procurement.  Nefarious firms have sought to take advantage of the program by falsely claiming to be owned and controlled by a veteran.  Accordingly, authorities are taken notice and have started to crack down.  Recently, the Department of Justice announced that the owner of a fraudulent VOSB had plead guilty to a scheme to falsely claim VOSB status in order to obtain federal contracts.

This indictment is important for two reasons.  First, it is a reminder to those that might try to take advantage of the VOSB and SDVOSB program that federal prosecutors are watching and the penalties are severe.  Second, for those that work with VOSB and DVOSB subcontractors it is important to investigate any claims of fraud.  As I have discussed before, under the False Claims Act, contractors can be subject to significant civil and criminal liability for turning a blind eye to fraud on their projects.