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Feds, local government cracking down on minority, women business program fraud

A contractor in Oregon was stripped of its status as a certified women and minority-owned business (M/WBE) and was required to pay a $15,000 fine by the Oregon Department of Justice last week after it was discovered that the company, which used its status to be awarded a contract with the City of Portland, was actually controlled by a white male. And, earlier in March, the FBI raided the offices of a Tennessee M/WBE that may have been used as a "pass-through" by one of the state's largest construction companies.

These cases, however, are not isolated incidents of fraud in local, state, and federal programs intended to help M/WBEs participate in public contracting, nor are they rare cases of enforcement. In fact, authorities at all levels of government across the country are increasingly cracking down on M/WBE program fraud.

In many of the recent instances of M/WBE program fraud, prime contractors set up M/WBE fronts or paid M/WBEs for use of their status - which may be needed to win a contract - but did not actually use them to perform what is termed a "commercially useful function." According to the U.S. Department of Justice, a subcontractor performs a commercially useful function only when it "actually performs, manages, and supervises the work involved."

Some M/WBE program fraud cases brought by the government are civil in nature, while others include criminal charges. In June 2014, the former president and owner of a Pennsylvania construction company was sentenced to seven years in prison and ordered to pay $27,6000 for his role in a 15 year scheme that involved the use of a Connecticut front company with disadvantaged business enterprise (DBE) status, which is a variation of a M/WBE certification. The former owner of the Connecticut DBE, for its part, was sentenced to 33 months imprisonment and ordered to $119 million in restitution, and other co-conspiring executives at the Pennsylvania prime contracting firm received similar sentences.

"Preventing and detecting DBE fraud are priorities for the Secretary of Transportation and the USDOT Office of Inspector General," said the special agent in charge of the Pennsylvania case, which was the biggest in the nation's history. "We will continue to work with the Secretary of Transportation, the Administrators of the Federal Highway and Transit Administrations, and our law enforcement and prosecutorial colleagues to expose and shut down DBE fraud schemes throughout Pennsylvania and the United States."

The USDOT Office of Inspector General is cautioning prime contractors and subcontractors not to engage in fraudulent DBE activity and has even set up a web site at www.oig.dot.gov/hotline where businesses involved in public contracting can print fraud awareness posters for the workspace and fraud can be anonymously reported.