# Presentation: 662097

## Disadvantaged Business Enterprise Fraud

**2002 National Fraud Conference**

## 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

## Disadvantaged Business Enterprise Program

- USDOT Program to Assist Disadvantaged, Minority & Female Owned Businesses
- Commonly Referred to As “DBE” Program
- Intended to Create a Level Playing Field
- Remove Barriers to Participation by DBE Firms

## Social & Economic Disadvantage

- $750,000 Personal Net Worth Cap for Owner Claiming Disadvantaged Status
- Affidavit of Social Disadvantage Is Required
- Must Hold Themselves Out to Be and Are Identified As a Member of a Disadvantaged Group
- There Are “Presumptive” Groups That Meet the Definition of Social Disadvantage

## Presumptive Groups

- African Americans
- Native Americans
- Hispanic Americans
- Asian Pacific Americans
- Subcontinent Asian Americans
- Women

## Fraud in Certification

- Misrepresentation of Social & Economic Status
- False Statement on Ownership, Control & Independence
- Undisclosed Co-mingling of Assets or Financial Arrangements

## Contract Administration

## Contract Goals 

- 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

## Good Faith Efforts

- 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
- Goal Can Be Adjusted If Good Faith Efforts Demonstrated

## 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

## MoDOT CUF Accomplishments

- MoDOT 2001 CUF Accomplishments
- 9 CUF Investigations
**5 Completed and 4 Pending**
- 3 Resulted in Assessment of Liquidated Damages of $2,370,443.19

## Red Flags

## Management

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

## Management Red Flags

- Supervision of DBE Employees by Other Contractor
- 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

- 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 of MoDOT
- 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

- 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

- 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

## Materials

- The DBE Must Negotiate the Cost, Arrange Delivery, Take Ownership and Pay for the Materials and Supplies for the Project
- The DBE Must Prepare the Estimate, Quantity of Material, and Be Responsible for the 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, With MoDOT Approved Exceptions
- 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

- 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 Outside of the DBE's Known Experience or Capability
- Any Portion of the Work 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

- Office of Inspector General
- 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**

**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