Avoid Getting Caught in the Middle of Disadvantaged Business Enterprise Fraud
Construction contractors and material suppliers who sell services or materials to disadvantaged business enterprises for federal or state construction projects need to pay close attention to ensure they do not get caught in the middle of a business enterprise fraud case.
The federal government and many state and local governments have developed programs to provide opportunities for minority-owned and woman-owned businesses (commonly called DBEs, short for disadvantaged business enterprises) to obtain government contracts, especially in the construction industry. Under these programs, government contracting agencies are required to establish a percentage of the work on each construction project to be performed by DBEs.
These DBE programs are intended to increase the participation of DBEs in industries in which they have been historically underrepresented. By establishing minimum participation requirements on such government construction projects, the government hopes to furnish socially and economically-disadvantaged persons with the opportunity to start their own businesses and to grow and prosper and eventually compete outside the DBE programs.
The public policy underlying these programs requires the actual participation by the DBEs in the construction projects, so the disadvantaged enterprises gain real hands-on experience in government contracting and can develop into independent, financially-strong government contractors.
In order to promote these important public policy goals, a body of laws, rules, and regulations has developed which require that DBEs actually perform a “commercially useful function” before their participation in a construction project can be applied to help satisfy these minimum DBE requirements for the job.
These laws, rules, and regulations are designed to ensure that the DBEs are actively involved in providing services and furnishing materials for the project, thus gaining the important experience that facilitates their future growth and development.
These laws, rules, and regulations do not permit a DBE to merely be an extra participant on a construction job through which funds are passed to create the superficial appearance of DBE participation. For their participation to be counted, they must perform a “commercially useful function” and not act as a mere “pass through.”
To minimize the improper use of DBE programs, U.S. Attorneys over the last few years are increasingly bringing civil and criminal claims under federal mail or wire fraud statutes or under the Federal False Claims Act against contractors and material suppliers and their executives and employees involved in DBE fraud involving “pass through” DBEs. These claims can result in large multi-million-dollar penalties and lengthy prison terms.
In addition, the Federal False Claims Act allows private citizens to act as whistleblowers and file DBE fraud suits on behalf of the government. In one recent such case, the project manager of a subcontractor was awarded more than $2 million for bringing a successful whistleblower DBE fraud suit relating to the job he managed for a subcontractor on the job. There are law firms out there actively soliciting such whistleblower claims, advertising on the internet and using aggressive pitches to potential whistle blowers.
To avoid such claims and to protect yourself, if you are selling services or materials to a DBE on a government project, make a detailed inquiry of the DBE, asking them focused questions to determine if the DBE is performing a commercially useful function and is not acting as a mere “pass through.” If in doubt, contact our law firm for guidance in avoiding the potentially severe penalties that can arise if you find yourself in the middle of a DBE fraud.