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Build Your Future for DBEs CONFERENCE . Minority-Owned Business Fraud in Transportation Senior Investigator George F. Sullivan U.S. Department of Transportation Office of Inspector General. Overview. Mission and Priorities Fraud Discovery, Schemes, and Indicators

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Build Your Future for DBEsCONFERENCE

Minority-Owned Business Fraud in Transportation

Senior Investigator

George F. Sullivan

U.S. Department of Transportation

Office of Inspector General


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Overview

  • Mission and Priorities

  • Fraud Discovery, Schemes, and Indicators

  • DBE Fraud and Case Studies

  • Detection and Deterrence of DBE Fraud


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OIG Mission

  • To conduct objective audits and investigations of DOT’s programs and operations

  • To promote economy, effectiveness, and efficiency within DOT

  • To prevent and detect fraud, waste, and abuse in the Department’s programs

  • To review existing and proposed laws or regulations affecting the Department and make recommendations about them

  • To keep the Secretary of Transportation and Congress fully informed about problems in departmental programs and operations


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Investigative

Regions

Cambridge, MA

(617) 494-2701

New York, NY

(212) 337-1250

Washington, DC

(202) 260-8580

Atlanta, GA

(404) 562-3850

Chicago, IL

(312) 353-0106

Ft. Worth, TX

(817) 978-3236

San Francisco, CA

(415) 744-3090


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  • American Recovery & Reinvestment Act

  • February 17, 2009, the President signed into law the American Recovery and Reinvestment Act (ARRA), which designated over $48 billion to the USDOT.

  • According to the Secretary of Transportation, ARRA represents “the largest investment in America’s roads, bridges, transit lines, and rail systems since the creation of the interstate highway system.”

    Key provisions:

    • preserve and create jobs

    • promote economic recovery

    • invest in transportation infrastructure to provide long-term economic benefits


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How to use this money

FHWA: $27.5 Billion

FAA -AIP: $1.1 Billion

FRA : $8 Billion

AMTRAK: $1.3 Billion

FTA: 6.9 Billion

Potential source of revenue for job creation,

Potential source of revenue to promote the needed economic recovery

Potential source of revenue to rehabilitate the nations highway infrastructure

OR

HAVE 10 TO 20% LOST TO

WASTE FRAUD OR ABUSE


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Contract/Grant Fraud

  • Contract Fraud Initiative Is Our Number One Priority

  • Statistics FY-2009 and 2010 combined

    - 35 Indictments

    - 62 Convictions

    - $20 Million in Fines & Restitution, etc. -.


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U.S. Courts

The Process:

Referral-Investigation- Prosecution

OIG - Investigations


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Characteristics of an Administrative/Civil Action

  • Non-compliance with DOT Regulations

  • Inadvertent/Not deliberate

  • Proved by a Preponderance of Evidence

  • Sanctions can include Orders to take Corrective Action, Repayment of funds, Withhold funding, Return of funds


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$1,817,619

WOULD YOUR COMPANY SURVIVE THIS TYPE OF FINANCIAL HIT AT THE END OF A CONTRACT?


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FRAUD

A Generic Term That Embraces All the Ways One Person Can Falsely Represent Something to Another in Order to Induce That Person to Surrender Something of Value.


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Minority-Owned Business Fraud

  • Definition: Contractors misrepresents who performed contract work to limit costs while appearing to be in compliance with contract requirement to use minority/women-owned businesses

  • Example: Prime contractor and minority-owned subcontractor submitted false payroll records and prepared false job-cost records to indicate that a minority-owned business performed specialty painting of highway structures, when in fact a majority-owned subcontractor controlled and supervised the painting work.


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Minority-Owned Business “Red Flag” Indicators

  • Minority owner lacks background, expertise, or equipment to perform subcontract work

  • Employees shuttle back and forth between prime contractor and minority-owned business payrolls

  • Business names on equipment and vehicles are covered with paint or magnetic signs

  • Orders and payment for necessary supplies are made by individuals not employed by minority-owned business


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Minority-Owned Business “Red Flag” Indicators Continued

  • Prime contractor facilitated purchase of minority-owned business

  • Minority-owned business owner never present at job site

  • Prime contractor always uses the same minority-owned business


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Why Employees Do Not Report Fraud

  • According to a 2005 Business Ethics Study, employees do not report fraud because they:

    • Believe nothing will happen.

    • Don’t know who to contact.

    • Think the report will not be kept confidential, so supervisors or co-workers might retaliate.

    • Believe the situation has no personal impact on them.



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Disclaimer

This presentation is intended only to reflect a partial summary of our investigation. It represents only one side of the story based on certain facts discovered through the course of the investigation.

Others may interpret this information, and the facts behind them, in a different manner and come to different conclusions.


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Could this be you?

  • The Justice Department announced today

  • Two Michigan Construction Firms to Pay More Than $1.4 Million to Resolve Alleged False Claims


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John Carlo Inc. and Angelo Iafrate

  • Are alleged to Have Falsely Claimed Using Disadvantaged Business at Detroit Airport

  • – Two Michigan construction companies have agreed to pay the United States $1.407 million to resolve allegations that they knowingly submitted false claims relating to a federally funded construction project


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WASHINGTON

The United States alleges that the companies, John Carlo Inc. and Angelo Iafrate Construction Company, falsely claimed that they had used Disadvantaged Business Enterprises (DBEs) for part of the work on the project when they had not.

In addition to the $1.407 million payment to resolve civil claims, Angelo Iafrate Construction has also entered into a separate administrative agreement with DOT to ensure future compliance with DBE requirements.


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Minority-Owned Business Example

  • State DOT decertified DBE company for not being independent of prime

  • Referred to the U.S. DOT/OIG because they suspected that the prime and DBE knowingly and willfully misrepresented compliance with DBE program for purposes of obtaining contracts


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Minority-Owned Business Example

  • An investigation/analysis was conducted

    • Conducted interviews, issued subpoenas, and reviewed project files

    • Prime established a former employee as a DBE and controlled all aspects of DBE business operations

    • DBE contracted exclusively with prime

  • As a result of the investigation/analysis

    • DBE confessed to making false statements and agreed to cooperate

    • Prime acknowledged making false statements and paid $2.5 million fine


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DBE Fraud Schemes

  • Legitimate, DBE certified Cement Company has been in business for 25 years providing curb and gutter work.

  • Owner is approached by non-DBE owned company to “assist in meeting their contract DBE goals.” DBE’s only actual participation on the project was to provide invoice payment services, and payroll services, for a fee.



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AJAX strikes agreement with BORBOLLA on pass-through fee




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Consequences to DBE

  • DBE was not prosecuted due to health issues. However, the DBE Company removed themselves from the DBE program, and closed down their family business.


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DBE Fraud Schemes

False Eligibility

  • The DBE does not belong to one of the recognized socially or economically disadvantaged groups

  • The DBE provides false information concerning size or financial status

  • Hidden assets or false statements concerning origination of capital


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Bribery to Falsify DBE CertificationBackground

  • Daniel Pellicciotti, nephew of a former Philadelphia councilman, is a non-disabled white male who incorporated the contractor Philly-Wide Interiors in 1998.

  • Minority Business Enterprise Council (MBEC) is Philadelphia’s agency responsible for certifying DBE’s.


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Bribery to Falsify DBE CertificationScheme

  • Pellicciotti provided cash and free meals to an MBEC employee to influence his decision to certify Philly-Wide as a DBE owned and controlled by Pellicciotti’s wife, a full-time nurse.

  • Philly-Wide used its DBE certification to obtain a $228K contract in 2001 for demolition and refurbishment work on a transit contract.


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Bribery to Falsify DBE CertificationDisposition

  • Following cooperation and a guilty plea, the MBEC employee was sentenced to pay $1,500 in restitution and probation for 36 months.

  • After pleading guilty, Pellicciotti and Philly-Wide were sentenced to pay more than $135,000 in fines and restitution, plus 8 years probation. Both were debarred from working on Federal-aid contracts for 3 years.


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DBE Fraud Schemes

Conduit Companies

  • DBE firm does not complete any of the contracted work

  • The DBE sells his status to another company who completes the work

  • Usually allows the use of the DBE name on invoices, trucks, equipment


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ANOTHERDBE FRONT ?

  • AGW STEEL PRODUCTS was an Illinois Certified DBE firm.

  • Operated by Mr. & Mrs. Harvey Williams, and an occasional part time employee.

  • Williams claimed he was certified in seventeen states as a DBE steel supplier.

  • In Nebraska, he was certified as a steel manufacturer.




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AGW Projects

  • AGW was identified as the DBE steel supplier on several Kansas highway projects, with a combined value of over two million dollars.

  • Document review disclosed AGW was purchasing from a broker, and reselling the steel products. They were drop shipped to the project site by the mfg., and never received by AGW.

  • The review also disclosed that one of the manufacturer’s representatives used the AGW DBE status as a selling point, to help prime contractors meet the DBE goals.






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Carter Waters

  • Missing Documents

    • PURCHASE ORDER FROM AGW



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No Admission of Guilt But…AGW STEEL, INC.

  • III. TERMS AND CONDITIONS

  • 1. A.G.W. Steel, Incorporated agrees to pay to the United States $50,000.00 (Settlement Amount).

  • They further agreed to be debarred for five years from the date of the settlement.


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IN ADDITION…

  • Two prime contractors and the supplier reached settlement agreements with the U.S. Department of Justice as follows…


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CARTER WATERS INC.

  • III. TERMS AND CONDITIONS

  • 1 Carter-Waters agrees to pay to the United States $176,000.00 (Settlement Amount).

  • 7. Carter-Waters also agrees to all of the terms and conditions of the Corporate Compliance Plan,


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KOSS CONSTRUCTION

  • III. TERMS AND CONDITIONS

  • 1. Koss agrees to cause to be paid to the United States $600,000.00 (Settlement Amount).

  • 7. Koss also agrees to adopt, as a company policy, the terms and conditions of the Koss Construction Company Corporate Compliance Program, attached hereto as Exhibit 1.


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IDEKER INCORPORATED

  • III. TERMS AND CONDITIONS

  • 1. Ideker, Inc. agrees to pay to the United States $22,000.00 (Settlement Amount).

  • 7. Ideker, Inc. also agrees to all of the terms and conditions of the Corporate Compliance Plan, attached hereto as Exhibit 1 and incorporated herein by reference.


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WHERE DID THE MONEY GO?

  • After considerable effort by John Ehmen working with FHWA Headquarters, KDOT has finally been credited with the settlement funds from the DBE fraud case that was completed this year. 

  • Of the $848,000 Koss/CarteWaters/Ideker/AGW settlement, KDOT received $822,560 and the Department of Justice (US Attorney) received $25,440 (3%).


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DOT/OIG Hotline

  • Call: 1-800-424-9071

  • E-Mail:[email protected]

  • Write: U.S. DOT/OIG

    P.O.Box 23178

    Washington, DC 20026-0178


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QUESTIONS

Senior Investigator

George F. Sullivan

U.S. Department of Transportation

Office of Inspector General

312-353-0450

[email protected]


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