Federal, state, and local agencies often have rules encouraging businesses to award contracts to disadvantaged business enterprises, women-owned businesses, or minority-owned businesses (referred to as “DBEs” here for convenience). Oftentimes, complying with these regulations depends on who owns the business, who’s doing the work, who’s providing the materials, and more. It is important for businesses to know the rules when using a DBE or representing in a proposal that you will use a DBE.
“DBE fraud can be very subtle, and I’ve had some clients who find themselves in the crosshairs of civil or criminal enforcement simply because they didn’t understand how complicated the rules were or that they were even engaged in an area that required them to be familiar with these rules,” said Michelle R. Peirce, Co-Chair of the Government Enforcement & White Collar Defense Group. Peirce outlines how some of those regulations work and how your company can avoid criminal and civil penalties.
Know the Rules
When bidding on a job involving a DBE and government dollars, you need to know the rules. Read the RFP/bid. Read your contract. Then read them again. This simple advice can save you from years of criminal and civil prosecution and penalties. “You sign off when you submit a bid or sign a contract that you’re going to comply with a 40-page regulation that you may not be familiar with — but the government says you should have been. You need to know all of the facets and regulations in the contract going in to reduce the odds that you run afoul of the rules,” said Peirce.
It’s Easier to Commit Fraud than You Think
In the movies and on the news, fraud is portrayed as something obvious, like a bribe. In reality, fraud can be much more nuanced and you can run into civil or even criminal liability without necessarily realizing it, until it is too late. In these cases, the primary concern is that an actual DBE is doing the work. Even beyond that you must also look at your suppliers, your subcontractors, your equipment, and your employees and ensure your operation complies with the promises you made in your contract and your obligations under the regulations. Any hint that there is what the government calls a “pass-through” (i.e. the DBE is not doing the actual work or is not doing enough of it under the regulations) can be illegal. And, taking payments under one of these contracts, when you have not used a DBE as promised in the contract, is another pitfall.
Demonstrate Good Faith Efforts to Comply
To avoid raising red flags, you should vary the DBEs that you do business with instead of relying on one or two. By becoming too intertwined with a particular DBE, it can give the appearance that the relationship is not legitimate.
Another prudent step is to document your efforts to secure a DBE. If your organization is suspected of DBE fraud, you must show how you attempted and did comply with your contract’s regulations. Documentation is essential. “Designate an individual for each project, someone who clearly knows that they are the one responsible for making and preserving documentation. In the unfortunate event that an agency accuses you of fraud, you are in a good position to show that your intent to comply was there,” said Peirce.
If you think that your organization is at risk of committing fraud or has vulnerabilities that need to be strengthened in your compliance process, the best thing you can do is seek out professional help. Call in counsel to assess the situation and advise you.
For additional information, please contact authors listed above, or any member of our Government Enforcement & White Collar Defense or Construction & Public Contracts Practice Groups.
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