Did you know that contractors who obtain construction funding from the government through the fraudulent use of minority or women-owned businesses may find their businesses on financial life support under the weight of hefty civil restitution fines, or their employees even behind bars, for violating federal regulations relating to these businesses?
The Disadvantaged Business Enterprise (“DBE”) program was created by the federal government in the 1980s to increase participation among minority and women-owned businesses in projects administered by the Department of Transportation (“DOT”). The DBE regulations are found at 49 C.F.R. Part 26 which mandates that state and local transportation authorities receiving federal-aid highway funds, federal transit funds, federal airport funds, and all such authorities entering into contracts funded with any DOT financial assistance must have a DBE program in place.
What or who qualifies as a DBE? According to the federal regulations, a DBE is a small, for-profit business that is at least 51 percent owned and controlled by socially and economically disadvantaged individuals (generally women and minorities, but also any additional groups whose members are designated as socially and economically disadvantaged by the Small Business Administration). Additionally, the owner of a DBE must demonstrate that his or her individual net worth is no more than $1.32 million. DBEs must be certified as such by the certifying entity in the state in which the DBE is working (in Florida, DBE designation is handled by the Equal Opportunity Office of the Florida Department of Transportation).
What role do DBEs play? The DOT awards more than $40 billion annually to various state and local highway agencies, airports and transit authorities. Federal regulations require the DOT to ensure that at least 10 percent of its financial assistance is expended on projects involving DBEs. Although there is no prohibition on DBEs acting as general contractors, under most circumstances a general contractor will subcontract work to a DBE in order to receive credit toward the contractor’s DBE participation goals. Under these circumstances, the DBE must perform a “commercially useful function” to have its work counted toward the general contractor’s DBE percentage goals.
While the DBE regulations were intended to red-light contracting inequities faced by historically disadvantaged groups, these regulations have fostered illegal, albeit sometimes creative, conduct in the construction industry. In many instances, general contractors have become dependent on artificial DBEs to be “in the money” on DOT-funded projects. The DOT, once complacent in its oversight of the DBE program, is no longer looking the other way. In the last six years, the DOT, acting through the Office of Inspector General (“OIG”), the Justice Department, and state and local investigative agencies, has actively cracked down on fraudulent DBE arrangements and their participants.
According to the OIG, since January 2011, the OIG’s DBE fraud investigations have resulted in over $245 million in financial recoveries, restitution and forfeitures, 425 months of incarceration, 1,161 months of probation and supervised release, and 1,340 hours of community service. In one recent case, two executives of a bridge contracting firm plead guilty for their actions in setting up a sham DBE to win lucrative government highway contracts. The executives were sentenced to 5 years probation and were held jointly liable for $1 million in restitution to the government. The owner of the sham DBA was sentenced to 3 years probation and ordered to pay restitution in the amount of $336,000. This is just one example of what can happen when the DBE participation rules are violated. And the government’s vigorous pursuit of DBE fraud is not likely to subside; investigations and prosecutions of DBE fraud now account for 35% of the OIG’s active grant and procurement fraud cases.
Contractors looking to avoid an orange jumpsuit or exorbitant fines should be on the lookout for red flags which could indicate DBE fraud. These flags exist where: (1) the DBE owner lacks the background, expertise or equipment to perform the subcontracted work; (2) orders and payment for supplies are made by individuals not employed by the DBE; (3) the DBE owner is never present at the job site; (4) the DBE has a small or non-existent office; (5) the DBE subcontracts an unusual amount of its contracted work to a non-DBE; and (6) irregularities exist in the DBE’s payroll records. Keeping these considerations in mind will help insulate contractors from running afoul of regulations that once lay dormant, but are now being actively enforced.