By: Margery Newman
Due to a historical unwillingness to utilize minority and female-owned businesses in the construction industry, public bodies in Illinois have instituted diversity programs. These programs are designed to increase the number of minority and female-owned businesses in the construction industry. For ease of reference, both of these groups will be referred to as Disadvantaged Business Enterprises or DBEs.
In order for a DBE to become certified, it must meet certain requirements. Specifically, a DBE must own at least 51% of its company, manage the day-to-day operations of the company and control the business of the company. It is not, however, sufficient for a DBE to be merely certified in order to avoid certification problems. The certified company must also perform a commercially useful function. A commercially useful function occurs when a DBE 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 in its contract.
Recently, a cottage industry has arisen in the construction industry revolving around allegations that certain DBEs are fronts or are not performing commercially useful functions. Specifically, the False Claim Act (FCA) imposes liability on persons and companies who attempt to defraud the public agencies overseeing DBE programs. People who report such fraud may benefit financially. This cottage industry is made up primarily of current or former disgruntled employees, competitors, or other people who believe they are in possession of information that the DBE is a front or a sham or not performing a commercially useful function. These people, statutorily referred to as Relators, are commonly known as Whistleblowers.
On the Federal side, the FCA is the government’s primary tool in combating fraud because the government is entitled to recover treble damages and civil penalties of not less than $5,000.00 and not more than $10,000.00. When individuals make FCA claims, this is called a qui tam action. As of 2012, over 70% of all FCA actions were initiated by Whistleblowers who stand to receive a percentage (up to 30%) of any damages recovered from the fraudulent DBE.
Illinois promotes Whistleblower actions by financially encouraging Whistleblowers. For example, the Relator/Whistleblower in the recent Perdel Contracting case, United States v. Elizabeth Perino, 11-CR-492 (N.D. Ill, 2017) received $2,000,000.00 as part of a $14,000,000.00 settlement. Perdel Contracting Co. was a certified WBE that specialized in concrete and carpentry. In 2016, Perdel’s owner was found guilty of allowing her company to be claimed as a subcontractor on two City of Chicago construction projects without actually performing any work. The owner’s activities were uncovered following a 2008 Whistleblower lawsuit brought under the False Claims Act by a former Perdel project manager.
What exactly is fraud? There are a number of different definitions, but fraud is largely a deliberate deception to secure an unfair gain. This could be a monetary, contractual or other type of advantage that is unlawful. In the construction industry, there are two common types of fraud; DBE Fraud and Wage and Hour Fraud.
Most criminal prosecutions have involved the use of DBEs as “Fronts” or “Pass Throughs”. The following are red flags for DBE Fraud:
- How much control does the prime exert over the DBE?
- Is the DBE independent?
- Is the DBE actually performing work (CUF) on the project or simply receiving a percentage “fee”?
- What is the added value of DBE’s participation? (Cannot be an extra participant in the transaction).
Additionally, there are a myriad number of laws, rules, regulations and policies that may be used to root out fraud in the construction industry, such as:
- Fraud (Title 18 U.S. Code, Chapter 47)
- Conflict of Interest (Title 18 U.S. Code §208)
- Bribery and Gratuities Statutes (Title 18 U.S. Code §201)
- Civil or Criminal False Claims Acts
- False Statements Act (Title 18 U.S. Code §1001)
- Anti-Kickback Act (Title 18 U.S. Code §1320)
- Forfeiture Statute (Title 18 U.S. Code §901)
- Anti-Trust Acts
- Mail and Wire Fraud (Title 18 U.S. Code §1343)
- Truth in Negotiations Act
- Procurement Integrity Act (Title 18 U.S. Code §423)
- Buy America Act (Title 49 U.S. Code §5323)
- Socioeconomic Acts
There have been several fraud cases prosecuted in Illinois. For example, in 2014, Jesse Brunt, owner of Brunt Brothers Transfer, Inc., was sentenced to 17 months in jail in connection with a scheme to defraud the City of Chicago’s M/WBE program. United States v. Jesse Brunt, 11-CR-0017 (N.D. Ill.) Brunt Brothers Transfer, Inc. was a certified MBE. Brunt supposedly used his company as a minority pass-through for sewer cleaning and videotaping service contracts with the City of Chicago. This case was initiated by the Office of the Inspector General and was conducted jointly with the Federal Bureau of Investigation. Mr. Brunt was indicted on three counts of mail fraud. It was determined that although Brunt Brothers was supposed to be cleaning and videotaping City of Chicago sewers, it did not actually perform the work specified in the contract. Therefore, it was determined that Brunt Brothers was not performing a commercially full function because its work was actually being performed by a non-minority company. Mr. Brunt pleaded guilty to the charged scheme and along with the prison sentence of seventeen months was ordered to pay $533,749.00 in restitution.
As a final note, it must be stressed that simply using a certified DBE on a project does not prevent a False Claims Act lawsuit if the DBE is not performing a commercially useful function. It is no longer sufficient to merely show that a DBE is being used to meet specific diversity goals on a construction project. The DBE must also perform a commercially useful function or the company and any upstream contractor employing that company could very find itself on the front pages of the local newspaper.