Disadvantage Business Enterprises (DBE)

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Last week, I posted about how whistleblowers continue to receive large settlements related to DBE fraud. A somewhat recent case from the federal court in Maryland shows how whistleblowers are ferreting out DBE fraud on construction projects receiving any form of federal funding.

The Case

The case involves a bridge painting project in Maryland that was let by the Maryland State Highway Administration. The contract required the prime contractor to meet a 15% DBE participation goal.  The prime contractor submitted a bid stating it would have 15.12% DBE participation.  After it was awarded the contract, the prime contractor – as is typical – submitted additional forms certifying to the MSHA that 15.12% of its contract price would be performed by a DBE firm.  The prime contractor indicated that one DBE subcontractor, Northeast Work and Safety Boats, LLC (“NWSB”), would perform the 15.12% of the work.

Continue Reading District Court Allows DBE False Claims Act Case to Proceed

It has been awhile since I last blogged about fraud involving the Department of Transportation’s disadvantaged business enterprise (DBE) program.  Trust me, the problem has not gone away. If anything, prosecutions and civil claims filed under the False Claims Act alleging DBE fraud have become so frequent, I could not write a blog post about each one.  The biggest winners in 2016 may have been the whistleblowers that brought the DBE fraud to the attention of the Department of Justice, who were awarded millions of dollars for doing their part to ferret out fraud.  Recent whistleblower settlements include:

Continue Reading Whistleblowers Continue to Receive Large Settlements in DBE Fraud Cases

Yesterday, the House of Representatives – by a wide margin-  passed the “Fairness to Veterans for Infrastructure Investment Act of 2015.” Simply put, the Bill amends the DOT DBE regulations to include veteran owned small businesses (VOSB) within the definition of disadvantaged businesses.  If this Bill is signed into law, this means that VOSB’s could be used towards a prime contractors DBE hiring goal on projects receiving any form of DOT funding assistance.

This change in the law is something I have long petitioned for.  This Bill opens the door to lucrative subcontracts to veteran owned businesses.  By creating a new pool of eligible firms, the Bill also helps prime contractors, who often struggle to meet qualified minority and women owned firms, in meeting their DBE subcontractor goals.

While the federal government has long maintained rules giving preference to veteran owned firms, the breadth of those rules was limited mainly to construction projects owned by the Veteran’s Administration.  This Bill gives veteran owned firms preference on any project receiving some form of funding through the DOT.  These project include airports, transmit systems, and highway projects.

A few weeks ago, I posted about a spat of DBE fraud cases that the Department of Justice announced in June. That post mentioned the trend among prosecutors to use the civil false claims act to combat DBE fraud. Yesterday, the United States Attorney for the Northern District of New York announced yet another DBE fraud case involving the civil false claims act.  A copy of the DOJ’s press release can be found here.

The case involves the HD Supply Waterworks, who the DOJ claims is the nation’s largest supplier of water, sewer, storm drain, and fire protection products.  According to the press release,  Waterworks arranged to have a certified DBE act as a pass through for prime contractors working on DOT and EPA projects.  (As I have blogged about previously, the classic DBE pass through scheme involves a prime contractor utilizing a certified DBE on paper only.  The DBE does not actually perform any work – or “commercially useful function” in DBE regulation parlance.  Instead, the work is actually performed by a non-DBE firm.  For allowing its certification to be used, the certified DBE receives a commission from the non-DBE firm or the prime contractor.) Waterworks agreed to a nearly $5,000,000 settlement with the government.  However, Waterworks may have gotten off easy because, as we have seen in other cases, many DBE fraud cases involve jail time for construction company executives.

Interestingly, the press release makes clear that the prime contractors were complicit in the scheme.  This would expose those prime contractors to criminal and civil penalties and disbarment from bidding on federal projects. We will have to see if additional indictments and guilt pleas follow.

Recent announcements from the Department of Transportation’s Inspector General show that authorities’ appetite for DBE fraud cases is not letting up.  On July 7, 2015, the IG announced it had reached a settlement with a certified DBE firm in Georgia that submitted false claims on a DOT funded highway project.  And, on June 30, 2015, the IG announced it had reached an agreement with a Washington contractor that submitted payment applications showing work was done by a DBE firm when it was actually performed by a non-DBE firm.

Prosecutors’ Shifting Focus

In both cases, prosecutors brought claims under the civil false claims act.  Unlike mail and wire fraud claims, which are two of the most common criminal claims brought in DBE fraud cases, prosecutors do not have to prove actual knowledge to show a violation of the civil false claims act.  Under the false claims act, proof of specific intent to defraud the government is not required.  Prosecutors can prove a false claims act violation by showing that a contractor acted with “deliberate ignorance” or “reckless disregard.”  Therefore, the burden of proof in such claims is often lower and demonstrating liability easier.

Both cases demonstrate the need for a strong DBE compliance program designed to identify potential issues before authorities due.  For more information about DBE fraud and DBE compliance, download our free webinar.

I have previously posted and spoken about the increasing prevalence of DBE fraud investigations and prosecutions.  Usually those investigation are started by the Department of Transportation’s Inspector General’s Office and may lead to the unsealing of an indictment by the Department of Justice.  I have also warned of the growing threat of whistleblower lawsuits related to alleged fraud in the DBE program which sometime lead to a federally directed civil lawsuit against a firm. However, until recently, I have never heard of a whistleblower DBE fraud lawsuit leading to an FBI raid.

Earlier this week, it was reported that the FBI recently raided the offices of a large Tennessee based heavy highway firm after one of its former employees filed a whistleblower lawsuit regarding alleged DBE fraud.  This should be concerning to prime contractors operating under the DOT’s DBE regulations for several reasons.

First, as I predicted, DBE fraud prosecutions, which first  became en vogue in the Southern District of New York, are a growing trend nationally. The story out of Tennessee comes on the heals of recent DBE fraud investigations in North Carolina and Utah, among other jurisdictions. Prosecutors nationwide are focusing on ferreting out DBE fraud.

Second, the raid shows that the risks of a whistleblower lawsuit are both civil and criminal.  I have talked about how whistleblower lawsuits have caused contractors to incur significant damages under the federal False Claims Act for violating the DOT’s DBE rules.  However, in those cases, the damage was almost exclusively monetary.  Now, the risks of a whistleblower lawsuit could include a criminal investigation.

Third, typically a firm being investigated for DBE fraud has some form of advance warning of the investigation.  The warning could be in the form of a letter from the Inspector General’s Office advising the contractor of the investigation, the service of a whistleblower lawsuit on the company, or target letter from the Department of Justice.  However, when the FBI serves a warrant, you do not receive any warning (indeed it would defeat the purpose of the search).  Therefore, failure to follow the DOT’s DBE rules could result in the FBI showing up at your office unannounced and carting off boxes of documents and computers.

With the recent changes in the DOT’s DBE rules and the increased scrutiny of the program by federal authorities, now more than ever construction firms need to be paying attention to DBE compliance.

Over two years ago, the Department of Transportation published notice that it intended to make changes to the federal regulations governing the DOT’s Disadvantaged Business Enterprise program.  After an extended comment period, today, October 2, 2014, the DOT issued the final DBE rule changes. These changes become effective November 3, 2014.  The changes impact five areas of the DBE program:  certification standards and procedures, goal setting, good-faith efforts and documentation, counting, and contract administration. Here is a look at some of the highlights of the changes as they impact prime contractors.

1.  Good Faith Effort Documentation.

The DOT has made changes to the DBE rules related to the submission of information regarding DBE participation.  The good news is that the changes do not go as far as the DOT intended to go when it issued its proposed rule.  Under the proposed rule change, the DOT would have required prime contractors to submit supporting documentation concerning DBE participation that was being used towards meeting or exceeding the DBE goal at the time of bidding and as a matter of bid responsiveness.  Prime contractors, major trade subcontractors, and trade organizations such as the American Road & Transportation Builders Association (ARTBA) and the AGC all loudly objected to the proposal.  Their objections appear to be at least somewhat successful.

Under the new rule, an apparent low bidder is mandated to submit DBE information to the transportation agency within seven days after bid opening.  Failure to submit this information within the seven day time period may result in the bid being rejected.  (Readers of this blog will note that the Commonwealth of Pennsylvania recently issued a similar rule on 100% state funded projects.)   However, at the description of the transportation agency, this information may be required at the time of bidding.  Bottom line: review your bid specifications carefully.

2.  Good Faith Efforts When Replacing a Terminated DBE

It has long been the rule that when terminating a DBE subcontractor, the prime contract must (a) get the permission of the transportation agency, and (b) engage in good faith efforts to subcontract the same percentage of work of the terminated DBE to other DBE firms.  The rules now extend the documentation efforts required after bid opening to replacement of terminated DBE firms.

Under the new rules, within seven days of terminating a DBE firm, the terminating contractor must submit documentation to the transportation agency of its good-faith efforts to replace the terminated DBE with a DBE.  Because the time period begins to run once approval of termination is given by the agency, contractors need to begin documenting replacement efforts well in advance of the request for termination.

3.  DBE Regular Dealers

The counting of DBE material suppliers as part of a prime contractor’s DBE goal has been an area of consternation for prime contractors ever since the DOT issued guidance in 2011 on DBE acting as a regular dealer v. brokers.  Under that guidance, a supplier qualified as a “regular dealer” of items on one project would not necessarily qualify as a regular dealer on a different project. In the guidance, the DOT provided the following example: “a firm that acts as a regular dealer on Contract #1 may act simply as a “transaction expediter” or “broker” on Contract #2. It would receive DBE credit for 60 percent of the value of the goods supplied on Contract #1 while only receiving DBE credit for its fee or commission on Contract #2.”  In other words, the DOT required prime contractors to address the regular dealer issue on a contract by contract basis.

Under the new rules, that guidance is now codified.  The significance of this is an issue of legal precedent.  Courts give greater deference to codified rules than they do agency guidance.

4.  DBE Trucking.

The counting of DBE trucking services has always received special treatment under the rules. Under the old rules, a DBE trucking firm could lease trucks from a non-DBE firm and receive credit for the value of the services leased from the non-DBE firm in an amount equal to the value of the services the DBE is self performing.  The example the old regulations gave was as follows:

“DBE Firm X uses two of its own trucks on a contract. It leases two trucks from DBE Firm Y and six trucks from non–DBE Firm Z. DBE credit would be awarded for the total value of transportation services provided by Firm X and Firm Y, and may also be awarded for the total value of transportation services provided by four of the six trucks provided by Firm Z. In all, full credit would be allowed for the participation of eight trucks. With respect to the other two trucks provided by Firm Z, DBE credit could be awarded only for the fees or commissions pertaining to those trucks Firm X receives as a result of the lease with Firm Z.”

Under the new rules, in addition to the above scenario, if the trucks are leased from a non-DBE firm but operated by employees of the DBE firm then full value for the leased transportation services may be counted to towards the goal without regard to the ration scenario.

5.  DBE Rules Administration

Many state agencies, including PennDOT, include language in a prime contractors contract that require it to administer its contract and subcontracts according to the DBE rules and that makes a failure to do so a material breach of contract.  The new rules require that all agencies adopt similar language in their prime contracts.

Prime contractors now have even more incentive to know and understand the DOT’s DBE rules.

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.