The Office of Inspector General (OIG) for the U.S. Department of Transportation (DOT) recently issued its final audit report on the DOT’s administration of its Disadvantaged Business Enterprise (DBE) program. The DBE program, a multi-billion-dollar program, began in 1980 and has three primary objectives: “(1) providing a level playing field so DBEs can fairly compete for DOT-assisted projects, (2) ensuring that only eligible firms become certified as DBEs, and (3) assisting in the development of DBE firms so that they can compete outside the DBE program.” Generally, a DBE is a minority- or women-owned business that serves as a subcontractor to a non-DBE prime contractor, which commits to use a certain percentage of a contract’s funding for DBE work.
The OIG’s report suggests serious problems with the DOT’s administration of the program. As the report explains: “Our audit found that the Department does not provide effective program management for the DBE program. Specifically, the Department has not issued comprehensive, standardized DBE guidance; provided sufficient training to the recipients responsible for implementing the program; or established a single line of accountability for the program. In addition, the Operating Administrations and recipients do not adequately oversee or implement the DBE program.”
Yet despite, or perhaps because of, the DBE program’s poor administration, DBE fraud enforcement has recently been on the rise. In 2010, DBE fraud and abuse cases sharply increased, making up approximately 25 percent of active OIG procurement and grant fraud investigations. To date, investigations have remained at this high level and slightly increased, now making up 29 percent of OIG active procurement and grant fraud investigations. And with the OIG’s recent audit, DOT may now feel forced to apply greater scrutiny to ongoing projects and refer an increased number of cases for investigation.
A prosecution or civil enforcement action for DBE fraud can be costly, even deadly, for a company. Even where there is a legitimate question as to whether a violation has occurred, in order to avoid prosecution, companies may need to pay millions in fines or settlement. Recently, Skanska USA Civil Northeast, Inc., paid $19.6 million to settle a federal investigation into its DBE contracting practices in New York City. And aside from a company’s risk, individual officers and employees also face criminal fines and potential incarceration for their roles in an alleged fraud. The president and vice president of one of Skanska’s DBE subcontractors were indicted for fraud and conspiracy. Further, just last month, the owner of a Staten Island-based construction company was sentenced to two years of federal probation and required to pay a $50,000 forfeiture.
In light of these risks, contractors and their employees must be vigilant in complying with the applicable regulations and their contractual DBE obligations. OIG looks to 10 key indicators, or “red flags,” in determining whether to investigate a contractor for DBE fraud. These red flags include:
- DBE owner lacking background, expertise or equipment to perform subcontract work
- Employees shuttling back and forth between prime contractor and DBE-owned business payrolls
- Business names on equipment and vehicles covered with paint or magnetic signs
- Orders and payment for necessary supplies made by individuals not employed by DBE-owned business
- Prime contractor facilitated purchase of DBE-owned business
- DBE owner never present at job site
- Prime contractor always uses the same DBE
- Financial agreements between prime and DBE contractors
- Joint bank accounts (Prime/DBE)
- Absence of written contracts
One or more of these red flags may be wholly legitimate in many cases. For instance, the absence of a written contract is not unusual for some contractors. In addition, prime contractors often use the same DBE for multiple projects, either because of a scarcity of local DBE contractors in the needed trade or simply because of a trusted business relationship. Unfortunately, by raising these red flags either knowingly or inadvertently, contractors may attract the attention of authorities or a whistleblower, even where the contractor has no intention of abusing the DBE program or deceiving anyone.
As a result, companies should seek to eliminate any appearance of impropriety by removing from their operational structure activities or arrangements that raise the DOT’s red flags. This may involve disentangling some financial intertwinement with a DBE, making extra efforts to use a variety of DBE contractors, or any host of creative solutions.
All prosecutions and enforcement actions begin with an investigation. By meeting their DBE requirements and eliminating red flags for DBE fraud, companies can minimize the risk of an investigation and keep their focus on the business at hand.