By: Christopher W. Morog and Robert T. Ferguson, Jr.

As you know, there are various mechanisms at the federal and state levels aimed to increase the participation of various minority groups in construction projects. On the federal side, the term “disadvantaged business enterprise” (“DBE”) is used to refer to certain small businesses in which “socially and economically disadvantaged” individuals have at least a 51% ownership interest. Under the federal DBE scheme, African Americans, Hispanics, Asian-Pacific and Subcontinent Asian Americans, and women are generally presumed to be “socially and economically disadvantaged.”

Massachusetts uses different terminology, but many of the underlying goals and principles are similar to the federal scheme. For example, the Commonwealth defines a “minority business enterprise” as a business “owned and controlled” by one or more “socially or economically disadvantaged persons,” including without limitation “African Americans, Cape Verdeans, Western Hemisphere Hispanics, Asians, American Indians, Eskimos, and Aleuts.” Massachusetts has also established statutory definitions for: disability-owned business enterprises (“DOBEs”); lesbian, gay, bisexual and transgender business enterprises (“LGBTBEs”); service-disabled veteran-owned business enterprises (“SDVOBE”); veteran business enterprises (“VBEs”); and women business enterprises (“WBEs”).

Unfortunately – and despite lawmakers’ best intentions – “DBE Fraud” is a pervasive issue in the construction industry. There have been many examples where a person that does not fall within a recognized minority or disadvantaged group “teams up” with another person that does fall within a recognized group in an attempt to profit from the federal or state participation programs. In January of 2022, a federal court in Kansas laid down hefty punishments in one such scheme.

The case arose out of so-called “rent-a-vet”/“rent-a-minority” scheme in which a 45-year old constructive executive formed a new contracting company with an African-American service-disabled veteran. The company held itself out as a DBE, but in reality, the constructive executive (along with two others) owned, operated, and controlled the business. For almost a decade, the company received 199 federal contracts along with $355 million in government payments. As the company outgrew the small business program, the three alleged fraudsters turned to a Native American employee to form yet another purported DBE.

Beyond the fact that a scheme like this violates applicable laws, it harms the very communities that government participation programs are designed to protect and support by depriving them of opportunities to gain government contracts. Ultimately, the court sentenced the construction executive to more than two years in prison without parole and required him to forfeit more than $5.5 million. The government’s enforcement efforts have not stopped there. One of the other alleged coconspirators has pleaded guilty to various types of fraud while the other has since passed away. As for the minority “owners”: they have both pleaded guilty to making false statements to government agencies. Sentences have not yet been issued for these three other surviving participants.

Like many fraud cases, it may be easy to think: “This can never happen to me; I would never do something like that.” However, there are instances in which individuals can lawfully team up to form a bona fide DBE and enjoy success. To do so requires extremely careful planning and execution. Otherwise, it can become all too-easy for well-intentioned persons to become mixed up in what the government might view as another DBE fraud scheme in the construction industry.

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