# Presentation: 429003

## Disadvantaged Business Enterprise Fraud

***Sharon M. Taegel***

## Economic Impact of DBE Program

**42,100**** **Jobs Created for Each $1 Billion Dollars of Highway Construction
- DBE Firms Contracted or Subcontracted **2.0 **Billion Dollars in Fiscal Year 2000
- DBE Firms Responsible for Creating or Maintaining Over **84,200** Jobs
- Fraud Takes Money From Legitimate Firms & Costs Millions To Monitor, Investigate & Prosecute

## What is Fraud?

**Fraud**
- a:  DECEIT, TRICKERY; *specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right *
*b : an act of deceiving or misrepresenting*

## Fraud in DBE Program

- DBE Certification
**Ownership & Control**
**Falsification of Records**
**Hidden Assets or Income**
**False Affidavits**
- Bidding
**Collusion**
- Commercially Useful Function
**Performance**
- Contract Administration

## Fraud in DBE Certification

**Fraud in**** DBE Certification**

- Misrepresentation of Social & Economic Status
**Failure to Disclose All Assets**
**Transfer of Assets**
- False Statement on Ownership, Control & Independence
- Undisclosed Co-mingling of Assets or Financial Arrangements
**Financing Arrangements With Non-DBE **
**“****Management” Agreements**

## Bidding 

- Contract Goals _*Only*_ When Subcontract Opportunities
_*Not*_ Required on All Contracts
- Contractor Must Make Good Faith Effort
- Failure to Meet Goal or Make Good Effort Results in Administrative Remedies
- MoDOT Uses Liquidated Damages

## Bidding

- Contract Award Subject To:
**Meeting the DBE Goal**
**Good Faith Efforts If Unable to Meet the Goal**
- If Contractor Fails to Make a Good Faith Effort Bid Deemed Non-responsive
- In Missouri, Bidder Forfeits Bid Bond If No Good Faith Efforts

## Bidding

- Economic Incentive To Engage In Collusive Activities
- Agreement Between General & DBE (or Non-DBE) Subcontractors
- Agreement May Be:
**DBE Is Listed To Get Bid But General Performs Work**
**Subcontractor Bids High – General Agrees To Bid High On Another Project**
**General Requires DBE to Accept Alternate Terms After Award**

## Commercially Useful Function

*A DBE Firm Must Be Responsible for Execution of a Contract or a Distinct Element of the Work by Actually Performing, Managing, and Supervising the Work Involved.*

## Commercially Useful Function

- DBE Performs a CUF ***Only*** When Responsible for Execution of the Work of the Contract by Actually Performing, Managing, and Supervising the Work
- DBE Must Be Responsible for Negotiating Price, Determining Quality & Quantity, Paying for & Ordering Material
- DBE Does ***Not*** Perform a CUF If Role Is Limited to That of an Extra Participant in a Transaction Through Which Funds Are Passed in Order to Obtain the Appearance of DBE Participation

## Red Flags

## ManagementRequirements

- The DBE Must Manage the Work
- Management Includes, but Is Not Limited To:
**Scheduling Work Operations**
**Receiving Quotes & Ordering Equipment and Materials**
**Preparing and Submitting Certified Payrolls**
**Hiring and Firing Employees**
**Making All Operational and Managerial Decisions**
**Supervising Daily Operations, Either Personally or With a Full Time, Skilled, and Knowledgeable Superintendent Who Is Under the DBE Owner’s Direct Supervision**

## Management Red Flags

- Mere Performance of Administrative Duties By DBE
- DBE Provides Little or No Supervision of Work
- DBE’s Superintendent Is Not a Regular Employee
- Supervision Is Performed by Personnel Associated With the Prime Contractor or Any Other Firm or Business
- DBE Firm's Owner Is Not Aware of the Status of the Work or the Performance of the Business
- Inquiries by MoDOT or FHWA Are Answered by the Prime Contractor

## EquipmentRequirements

- DBE Firm May Lease Equipment If Consistent With Industry Practices and at Competitive Rates
- A Lease Agreement Is Required and Should Be on Long Term Basis
- A DBE Firm May Lease Equipment on an Ad Hoc Basis From Another Contractor, Excluding the Prime Contractor or Subsidiary, With Approval
- Equipment Leased and Used by the DBE Firm With Payment Deducted From the Prime Contractor's Payment(s) to the DBE Is Not Allowed

## EquipmentRequirements

- Operation of the Equipment Must Be Subject to the Full Control of the DBE
- DBE Is Expected to Provide the Operator for Equipment and Responsible for All Payroll and Labor Compliance Requirements
- An Operator May Be Provided If the Equipment Is Specialized, Part of the Lease and Subject to Approval by MoDOT

## EquipmentRed Flags

- Equipment Used by DBE Firm Belongs to the Prime Contractor or Another Contractor With No Formal Lease Agreement
- Equipment Signs and Markings Cover Another Owner's Identity, Usually Through the Use of Magnetic Signs
- A DBE Trucking Business Utilizes Trucks Owned by the Prime Contractor

## WorkforceRequirements

- DBE Firms Must Keep a Regular Workforce
- DBE Firms Cannot "Share" Employees With Non-DBE Contractors, Particularly the Prime Contractor or Subsidiary
- DBE Firm Responsible for All Payroll and Labor Compliance Requirements for All Employees Within the Control of the Company
- Direct or Indirect Payments by Any Other Contractor Will Not Be Allowed

## WorkforceRed Flags

- Movement of Employees Between Contractors
- Employee Paid by DBE and Prime
- Employee Working for Prime in Morning and DBE in Afternoon
- Employees Don’t Know Who They Work For When Asked
- Superintendent Or Foreman Don’t Work For DBE Firm

## MaterialsRequirements

- The DBE Be Responsible For:
**Negotiating the Cost**
**Arranging Delivery**
**Taking Ownership & Paying for the Materials & Supplies**
**Preparation of The Estimate**
**Determining Quantity of Material**
**Determining & Ensuring Quality of Materials**

## MaterialsRed Flags

- Materials for the DBE Ordered, or Paid For, by the Prime Contractor
- 2 Party Checks From Prime to DBE Subcontractor and Supplier or Manufacturer
- Materials or Supplies Necessary for the DBE Firm's Performance Are Delivered To, Billed to or Paid by Another Business
- A DBE Prime Contractor Only Purchases Materials While Performing Little or No Work

## PerformanceRequirements

- The DBE Must Be Responsible for the Performance, Management and Supervision of a Distinct Element of the Work, in Accordance With Normal Industry Practice.
- Exception – When Practices Inconsistent With DBE Regulations
- At Least 30% of the Work Must Be Performed by the DBE With Its Own Workforce

## PerformanceRed Flags

- Work Being Done Jointly by DBE Firm & Another Contractor.
- The Work to Be Performed is Outside of the DBE's Known Experience or Capability
- Any Portion of the DBE’s Work is Performed by the Prime Contractor or Any Other Firm
- The DBE Firm Is Working Without a Subcontract Agreement
- A DBE Prime Contractor Subcontracts More Than Customary or Standard Industry Practice

## PerformanceRed Flags

- Agreement Between the Prime and DBE Artificially Inflates the DBE Participation
- Agreement That Erodes the Ownership, Control or Independence of the DBE Subcontractor
- DBE Works for Only One Prime Contractor or a Large Portion of the Firm’s Contracts Are With One Contractor
- The Volume of Work Is Beyond the Capacity of the DBE Firm

## Documentation

**DOCUMENT**
** **
**DOCUMENT **
**DOCUMENT**

## MoDOT Fraud Efforts

## MoDOT Fraud Efforts

- Dedicated Investigative Staff
- Fraud Team
- BAMS – Bid Analysis Management System
- Pro-active Vs. Reactive
- Training – Field Personnel
- Sharing Information Between Investigative Agencies
- Identification of Trends Between Primes & Subs

## Assisting Agencies

**Internal**

**State & Local**

**Federal**

- Audit & Business Analysis
- In-house subject matter  experts
- Information Systems

- Local Law Enforcement
- Capitol Police
- Missouri Dept. of Corrections
- Missouri Dept. of Revenue
- Missouri Highway Patrol

- USDOT Inspector General
- USDOL Inspector General
- U.S. Attorney
- FBI

## Case Studies

## Case Study No. 1

- Caterpillar 777 Haul Truck Leasing Pattern
**	**

**Prime Contractor**

**DBE Hauling Firm**

**Prime Subsidiary**

## Case Study No. 1

**Red Flags:**
- The Work to Be Performed by the DBE Is Outside of the DBE's Known Capability
- A Substantial Portion of the Equipment Used by the DBE Firm Belongs to Another Contractor
- The Ownership of Equipment Is Not Properly Reflected on the Equipment
- Prime Contractor Claimed Damages to Trucking Equipment
- Same Trucking Equipment was Listed as Owned & Used by DBE Trucker on the Project

## Case Study No. 1

**Findings:**
- Liquidated Damages of $1,487,718.98 Assessed Against the Prime Contractor for the Failure of the DBE Firm to Perform a Commercially Useful Function
- Claim For Damages to Trucks by Prime Denied
- DBE Firm Failed to Re-apply for Certification

## Case Study No. 2

**Allegation:**
- DBE firm was not performing the work set out in contract.  A 3rd Party non-DBE firm was masquerading as the DBE firm through the use of Magnetic Signs, Workforce Sharing, Invoicing Irregularities and Prime Contractor involvement.

## Case Study No. 2

**Red Flags:**
- Magnetic Signs
- Lack of Experience For Project Size & Requirements
- Non-DBE Subcontractor Appearing on Project During Irregular Periods
- Prior to Certification By Specialty – Work Outside of Experience
- No Workforce in Work Type of DBE Subcontract

## Case Study No. 2

**Red Flags:**
- Lack of Management in Type of Work
- Workforce Sharing
- Complaints
- Financial Over-extension of DBE Subcontractor
- Complaints Related to Completion of Other Work of DBE Subcontractor

## Case Study No. 2 

**Findings:**
- Monetary Damages (Approximately 650K) Assessed Against the Prime Contractor by MoDOT for Failure to Perform a Commercially Useful Function
- Referral to FBI
- Search Warrant Executed Against Prime, DBE and Non-DBE Subcontractor Using FBI, USDOT Inspector General, U.S. Marshals, U.S. Attorney
- Investigation Continues by Law Enforcement

## Case Study No. 3

**Allegation:**
- MoDOT received DBE Application, under previous regulations, stating firm was SBA 8(a) Certified based upon the owners ethnicity as a Native American.  However, applicant did not hold themselves out to be a member of the Native American community or culture.

## Case Study No. 3

**Red Flags:**
- Owner Did Not Hold Themselves Out as a Member of Native American Culture
- Brother Called In to Indicate They Were Not Native American
- 8(a) Certification Did No On-Site
- MoDOT Required to Certify Firm
- Complaint to SBA by MoDOT was Ignored & Derogatory Letter About MoDOT Administrator was Sent to Firm

## Case Study No. 3 

**Findings:**
- The SBA Office of Inspector General investigated and found that owner was not Native American.  The firm was prosecuted for Insurance, Mail and SBA 8(a) fraud.  The firm plead guilty on Insurance fraud and surrendered their 8(a) certification.  MoDOT subsequently removed DBE Certification.

## USDOT Office of Inspector General

- Website - _[www.oig.dot.](http://www.oig.dot.gov/)__[gov](http://www.oig.dot.gov/)_
- Top Management Challenges List DBE Fraud
- Fraud Updates Include:
**DBE Fraud is Contract Fraud **
**Fact Patterns**
**Status of Investigation**
**Location**
**Parties**

## USDOT Office of Inspector General

- _[DOT, Office of Inspector General.](file:///DOT,%20Office%20of%20Inspector%20General.htm)__[htm](file:///DOT,%20Office%20of%20Inspector%20General.htm)_
- _[Contract Fraud.](file:///Contract%20Fraud.htm)__[htm](file:///Contract%20Fraud.htm)_
- _[Investigations.](file:///Investigations.htm)__[htm](file:///Investigations.htm)_
- _[DBE 1 Fraud.](file:///DBE%201%20Fraud.htm)__[htm](file:///DBE%201%20Fraud.htm)_
- _[OIG Fraud 1.](file:///OIG%20Fraud%201.htm)__[htm](file:///OIG%20Fraud%201.htm)_
- _[Fraud 2.](file:///Fraud%202.htm)__[htm](file:///Fraud%202.htm)_
- _[Fraud 3.](file:///Fraud%203.htm)__[htm](file:///Fraud%203.htm)_
- _[Fraud 4.](file:///Fraud%204.htm)__[htm](file:///Fraud%204.htm)_
- _[KAJACS.](file:///KAJACS.htm)__[htm](file:///KAJACS.htm)_
- _[KAJACS 2.](file:///KAJACS%202.htm)__[htm](file:///KAJACS%202.htm)_