Knowledgeable Attorneys for Disadvantaged Business Enterprise Program Fraud Matters

One type of fraud covered by the False Claims Act involves false claims made, or caused to be made, to defraud “Disadvantaged Business Enterprise” (“DBE”) programs of the United States. DBE programs promote diversity as to government contracting by requiring prime contractors who are awarded federal contracts to make reasonable efforts to allocate a percentage of subcontracts on a project to “small” businesses owned by persons from traditionally disadvantaged groups — including minorities, women and service-disabled military veterans.

These percentage-targeted allocations of subcontracts are intended to ameliorate the historical and current effects of discrimination or disadvantages. They are also meant to foster the growth of qualified DBEs by allowing them opportunities to participate in large government-funded contracts.

Employees Are Rewarded for Lawsuits Exposing Abuse of DBE Programs

Unfortunately, the Disadvantaged Business Enterprise programs are sometimes subject to abuse. An unscrupulous contractor uses a “front” company or a “pass through” company whereby a non-DBE, typically a large and successfully established contractor, effectively performs the work on the subcontract and enjoys the bulk of the resulting profits that were designated for the Disadvantaged Business Enterprise. This impetus to cheat stems from the fact that the DBE programs can increase the government’s expense on contracts because DBEs are, by definition, relatively smaller companies that cannot take advantage of certain economies of scale compared to their more well-established, larger competitors.

Nonetheless, the government assumes such increased expense, as a matter of policy, to foster DBE growth. Unscrupulous contractors abuse the DBE program to fraudulently capture government outlays, including the premiums paid by the government under the DBE program. Such unscrupulous contractors thereby defeat the fundamental purpose of the DBE program by taking work away from otherwise truly qualified and truly independent DBEs.

When someone is aware of this kind of cheating, they can speak to an attorney confidentially and bring a lawsuit under the False Claims Act. The Act encourages employees to speak up about fraud against the government by giving employee-whistleblowers a cash award in successful fraud cases. It is a win-win because the government and taxpayers are no longer cheated and the whistleblower is compensated for having the strength to come forward.

Example: Fraud Against the U.S. DOT Disadvantaged Business Enterprise Programs

Although many federal agencies have Disadvantaged Business Enterprise programs, the most notable and largest DBE program is administered by the United States Department of Transportation (“DOT”) for construction projects and maintenance work on federal highways and bridges. The United States DOT established DBE requirements in 1980, which require state departments of transportation to adopt requirements for the benefit of DBEs as a condition of receiving federal funds.

A principal requirement for a company to qualify as a DBE is that the company must be “small” in size. Whether a company qualifies as a “small” business varies by industry under the North American Industry Classification System (“NAICS”). Depending on the industry, a company qualifies as “small” based on one of two factors: number of employees, or annual revenue.

The prime contractor awarded a DOT contract is prohibited from claiming DBE credit for subcontracted work unless the work is actually performed by the DBE’s own independent workforce. Where, in reality, either the prime contractor or another non-DBE effectively performs the work, the prime contractor’s certifications that a DBE performed such work are false and fraudulent. Also, all amounts to be counted towards Disadvantaged Business Enterprise participation must have actually been paid to the DBE—this requirement is violated if payments on the project are merely circulated through the DBE to a non-DBE business.

The rules and regulations regarding DBE usage are designed to prevent the use of “fronts” and/or “pass throughs” to satisfy the DBE requirements. The DBE rules and regulations require that the Disadvantaged Business Enterprise must perform a “commercially useful function” on the project. The DBE cannot function on the project as a shell for either the prime contractor or a non-signatory contractor who would not otherwise qualify for DBE status. The DBE must actually perform, supervise and manage the work allocated to it pursuant to the subcontract.

The Disadvantaged Business Enterprise must determine the quantities and qualities of the materials needed for the work, negotiate for its own supplies and materials, and install the materials itself. A DBE does not perform a commercially useful function if its role is limited to:

• An extra participant in the transaction negotiated by the prime contractor with the government (i.e. a pass through)
• A transaction that is, in effect, a transaction between the prime contractor
• A non-signatory contractor working behind the scenes as to the DBE (i.e. a front)

The minority, woman or disabled veteran identified as the owner of the designated DBE must actually manage both the business and the day-to-day affairs of the designated DBE.

Only a truly independent business may operate as a DBE. An independent DBE must not be dependent on its relationship with another company. Determining and maintaining such independence requires scrutiny of relationships with non-DBE firms in such areas as personnel, facilities, equipment, financial and/or bonding support, and other resources.

Violation of the DBE requirements is a material breach of the relevant DOT construction contracts and subcontracts. If the prime contractor’s certifications of compliance with DBE requirements are false, or are rendered false, due to a behind-the-scenes non-DBE on whom the DBE is dependent, the FCA is violated. Under the “presumption of loss” doctrine within a section of a statute called the Small Business Act, the federal government can seek damages for the entire amount paid on the subcontract to the DBE.

Successful Cases Under the False Claims Act for DBE Fraud

Whistleblowers have brought successful False Claims Act actions to remedy DBE fraud, resulting in substantial awards to the whistleblowers. Read about some of these cases here.

To bring a case, a whistleblower must first file a detailed “disclosure statement” with the United States Department of Justice detailing the fraud and providing either documentary evidence of the fraud and/or specific instructions to government attorneys as to suggested methods of investigating the fraudulent scheme. While the lawsuit is under seal (that is, it is confidential and the whistleblower's identity is protected), the whistleblower assists the government’s attorneys with information and advice to further the government’s investigation of the case pending the government’s decision whether or not to intervene.

Contact an Experienced Kansas City Employment Law Attorney

Located in Kansas City, Brady & Associates represents employees in wage and hour class and collective actions and whistleblower lawsuits, in addition to a wide variety of employment claims such as those involving discrimination and retaliation. Contact us at (913) 696-0925 to learn how we can assist you.