DBE and MBE Fraud in Federal Government Construction Contracts - Federal Lawyer

DBE and MBE Fraud in Federal Government Construction Contracts

Federal government construction contractors that utilize DBE and MBE subcontractors must be careful to avoid arrangements that appear to position these companies as “pass-through” entities. Failure to do so can lead to civil or criminal enforcement action and the potential for fines, loss of government contract eligibility, and even federal imprisonment.

In the construction contracting realm, including disadvantaged business enterprise (DBE) and minority business enterprise (MBE) subcontractors in proposals can be critical to securing lucrative government contracts and satisfying regulatory affirmative action goals and requirements. However, in order to satisfy federal legal and regulatory goals and requirements, DBEs and MBEs that are designated as subcontractors must be more than “additional parties.”

In litigation under the False Claims Act and other federal statutes, federal authorities will often allege that contractors have fraudulently utilized DBEs as “pass-through” entities rather than engaging them as true suppliers or service providers. In these types of cases, both the contractor and the DBE or MBE can face civil or criminal enforcement action – and their owners and executives can potentially face prosecution as well.

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When is a DBE or MBE Considered Merely a “Pass-Through” Entity in a Government Construction Contract?

A DBE or MBE will be considered a “pass-through” entity if it does not actually supply products or perform services under the government construction contract. In a typical scenario, a non-DBE/MBE performs under the subcontract and receives nearly all of the financial benefit; and, in exchange for the use of its certification, the DBE or MBE receives a small percentage of the subcontractor’s fee. In many cases, the DBE is incapable of performing the subcontracted work because it lacks the necessary expertise, labor, equipment and funds. As a result, it is unable to perform a “commercially useful function” as required under the federal government contracting regulations pertaining to DBE/MBE certification, thus giving rise to allegations of federal government contract fraud.

However, not all federal investigations target intentional schemes intended to thwart the federal government’s affirmative action efforts. In many cases, construction contractors can face allegations of utilizing DBEs and MBEs as pass-through entities despite making good-faith efforts to comply with the federal contracting laws and regulations. In these scenarios, contractors will have defenses available; but, in order to assert these defenses effectively, they must engage experienced federal defense counsel at the first sign of a government investigation.

A Closer Look: The U.S. Department of Transportation (DOT) DBE Program

To illustrate, we’ll examine some of the key provisions of the U.S. Department of Transportation (DOT) DBE program. The DOT is one of the busiest federal agencies when it comes to awarding construction contracts, and its DBE program provisions are instructive for contractors and DBEs involved in a broad range of federal government construction projects.

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Joanne Fine DeLena

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Joe Brown

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Amanda Marshall

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Aaron L. Wiley
Aaron L. Wiley

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Roger Bach
Roger Bach

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Gamal Abdel-Hafiz
Gamal Abdel-Hafiz

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

1. Stated Objectives of the DOT’s DBE Program

The DOT’s DBE program is designed to remedy ongoing discrimination and the continuing effects of past discrimination in federally-assisted highway, transit, airport, and highway safety projects and programs. The primary remedial goal of the DOT’s DBE program is to level the playing field by providing small businesses owned and controlled by socially and economically disadvantaged individuals a fair opportunity to compete for federally-funded transportation contracts. Under the Fixing America’s Surface Transportation Act (the ‘‘FAST Act”), except to the extent the Secretary of Transportation determines otherwise, not less than 10% of the amounts made available through federal transportation contracts are to be expended with DBEs.

2. General Contractor Compliance Standards Regarding DBE Subcontracting

In order to meet the DOT’s stated objectives, construction companies awarded DOT contracts must develop and implement DBE programs that conform to the standards set forth in the applicable federal regulations. Examples of DOT construction contractors’ compliance obligations include:

  • Attribution of Contract Work and Supply Costs to DBEs – “Count the entire amount of that portion of a construction contract . . . that is performed by the DBE’s own forces. Include the cost of supplies and materials obtained by the DBE for the work of the contract, including supplies purchased or equipment leased by the DBE (except supplies and equipment the DBE subcontractor purchases or leases from the prime contractor or its affiliate).”
  • Calculation of DBE Fees and Commissions for Goal Purposes – “Count the entire amount of fees or commissions charged by a DBE . . . for providing a bona fide service, such as professional, technical, consultant, or managerial services, or for providing bonds or insurance specifically required for the performance of a DOT-assisted contract, toward DBE goals, provided . . . the fee [is] reasonable and not excessive as compared with fees customarily allowed for similar services.”
  • Subcontracting by DBEs – “When a DBE subcontracts part of the work of its contract to another firm, the value of the subcontracted work may be counted toward DBE goals only if the DBE’s subcontractor is itself a DBE. Work that a DBE subcontracts to a non-DBE firm does not count toward DBE goals.”
  • Attribution to DBEs Involved in Joint Ventures – “When a DBE performs as a participant in a joint venture, count a portion of the total dollar value of the contract equal to the distinct, clearly defined portion of the work of the contract that the DBE performs with its own forces toward DBE goals.”
  • Determining if a DBE is Performing a “Commercially Useful Function” – “Count expenditures to a DBE contractor toward DBE goals only if the DBE is performing a commercially useful function on that contract. . . . A DBE performs a commercially useful function when it is responsible for execution of the work of the contract and is carrying out its responsibilities by actually performing, managing, and supervising the work involved. To perform a commercially useful function, the DBE must also be responsible, with respect to materials and supplies used on the contract, for negotiating price, determining quality and quantity, ordering the material, and installing (where applicable) and paying for the material itself.”

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4 Common Allegations in DBE and MBE Government Contract Fraud Investigations

With these considerations in mind, what types of practices (both intentional and unintentional) have the potential to expose general contractors, DBEs, and MBEs to allegations of federal government contract fraud? Some of the most-common types of allegations in these cases include:

1. The Contractor Knew (or Should have Known) that a Subcontractor or Third Party Did Not Meet DBE or MBE Requirements

In many cases, federal authorities will allege that a contractor knew a subcontractor or a third party working either with or for a subcontractor did not actually meet the applicable DBE or MBE standards. Alternatively, the authorities will allege that, at the very least, the contractor should have known that there was an issue.

When designating subcontractors as DBEs and MBEs on federal government construction contracts, general contractors have an obligation to make accurate representations. This obligation continues throughout the duration of contract performance. They cannot make representations regarding subcontractors’ DBE or MBE qualifications blindly, and they cannot be willfully ignorant to the possibility that a subcontractor (or a third party being utilized by the subcontractor) does not qualify for DBE or MBE status.

2. The Contractor Did Not Actually Pay a DBE or MBE Subcontractor

Utilizing DBEs and MBEs as financial intermediaries is a clear example of the type of “pass through” treatment that is prohibited under federal law. Making it appear as though payments are going to DBEs and MBEs by using them as payment processors is not permitted, even if the DBE or MBE receives a percentage of the true subcontractor’s fee as a commission for its intermediary services.

3. The DBE or MBE Did Not Actually Perform Under the Subcontract

Allegations of misrepresenting DBEs and MBEs as subcontractors under federal government construction contracts can arise in a variety of different ways. For example, in addition to utilizing DBEs and MBEs as financial intermediaries as discussed above, another practice that can get companies into trouble is utilizing their own employees to perform work on a subcontracted DBE’s or MBE’s behalf. The same goes for supplying equipment, supplies, and financial support to DBE and MBE subcontractors. In order to meet federal government goals and requirements, the DBE or MBE must independently perform under its subcontract.

4. The DBE or MBE Subcontractor Hired a Non-DBE or MBE Sub-Subcontractor

Similar issues can arise when a DBE or MBE sub-subcontracts its contractual obligations to a non-DBE or MBE entity. This could be the general contractor as in the case discussed above, or an independent third party. In either scenario, the DBE or MBE is not actually performing the contracted work; and, as a result, its involvement in the contract is not sufficient to avoid scrutiny for federal government contract fraud.

Is Your Company Under Investigation for Federal Construction Contract Fraud?

If your company is under investigation for allegedly using a DBE or MBE as a “pass-through” entity under a federal construction contract, it is important that you engage experienced federal defense counsel immediately. At Oberheiden, P.C., our federal defense lawyers and former federal agents have centuries of combined experience in federal civil and criminal investigations. To discuss your company’s situation in confidence, call us at 888-680-1745 or tell us how to reach you and one of ou

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