The Growing Prosecutorial Interest in DBE Fraud

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.