With rising frequency, the U.S. Department of Transportation (U.S. DOT) has been aggressive in pressing state and local government recipients of federal funds to dramatically step up their monitoring efforts of Disadvantaged Business Enterprise (DBE) programs in order to better detect and deter fraud in those programs.

Federal regulations impose DBE compliance monitoring obligations on grant recipients, but mounting examples from across the country of allegedly criminal conduct and other abuses of DBE programs, by DBE and non-DBE companies alike, have called into question the effectiveness of grant recipients’ oversight practices. As a result, the federal government’s spotlight increasingly has been trained on the role that poor or non-existent monitoring by these state and local government agencies has played in helping permit DBE wrongdoing to occur. In the latest such example, involving the Oregon Department of Transportation (ODOT), federal regulators have made clear they will not shy away from frank criticism, and threats of remedial action, against recipients of federal funds believed to have dropped the ball on DBE oversight.

Late last month, the Federal Highway Administration (FHWA) issued a report sharply rebuking ODOT for failing to detect fraudulent conduct allegedly committed by DBE program participants on a federally-funded $35 million highway project. The project, the widening of Oregon’s Route 217, was finished in the early part of 2012. Prior to project completion, the Oregon chapter of the National Association of Minority Contractors filed a complaint with FHWA alleging a conspiracy to commit DBE fraud on the part of three companies: the project’s prime contractor, a DBE trucking firm, and a non-DBE trucking firm. FHWA’s investigation of the complaint concluded that the three companies had “contrived a relationship for the purpose of meeting the DBE contract goal” — specifically, that the prime contractor, Emery & Sons Construction, had won the highway contract on a promise to fulfill a DBE requirement by using a certified DBE trucking company called Salt & Pepper Construction Company, then used a non-DBE trucking company instead, yet nonetheless reported to ODOT that Salt & Pepper had done the work. FHWA has referred the matter to U.S. DOT’s Office of the Inspector General and directed ODOT to require Oregon’s certifying agency for women- and minority-owned businesses to initiate de-certification of Salt & Pepper.

The FHWA report thus could lead to serious consequences for the parties who allegedly committed DBE fraud on this project, up to and including the companies’ suspension or debarment from participation in future federal or state contracts and potential criminal prosecution of the individuals involved. But what stands out in this report is the FHWA’s unvarnished criticism of ODOT. The state agency, FHWA found, “failed to exercise effective DBE program oversight pertaining to the trucking operations on the Project” by not only being aware of the non-DBE trucking firm’s involvement in the Route 217 project, but actually delegating oversight of the entire trucking operation to that non-DBE entity. “Since [ODOT] did not independently and effectively monitor the trucking operations on the Project,” FHWA concluded, “ODOT failed to comply with both the DBE program regulations and its own processes and procedures pursuant to its FHWA approved DBE Program Plan.” FHWA then went on to order ODOT to submit a plan of corrective action and a response to the report’s findings by the end of October. It remains to be seen what further steps FHWA might take against ODOT in connection with this matter. That will depend largely on what details the follow-on U.S. DOT Inspector General investigation reveals about ODOT’s level of knowledge of the alleged scheme and just how poor its monitoring efforts were.

Other Recent Cases

This ODOT case follows on the heels of other recent episodes of U.S. DOT or its agencies calling out state and local government agencies for falling down on their DBE oversight responsibilities. Some other prominent recent examples:

  • The Washington state Department of Transportation (WSDOT) came under fire earlier this year when an investigation spearheaded by a Seattle television station reported widespread fraud in the federally-funded state DOT program and a pattern of poor state agency oversight. The agency allegedly ignored multiple instances of companies being allowed to participate in DBE programs even though they never met the eligibility requirements, no longer qualified because they exceeded the maximum net worth requirements, or were DBE’s in name only who did no meaningful work on the WSDOT project work committed to them. The controversy led to the resignation in May 2012 of the director of the state certification agency, the Office of Minority and Women’s Business Enterprises. U.S. DOT, which reportedly is conducting an investigation of the DBE program, had expressed concern to WSDOT back in 2011, based on earlier allegations of non-compliance by program participants. U.S. DOT stated then that its confidence in Washington’s program had been undermined, and reminded the state agency that it “has the responsibility to ensure compliance with all Federal requirements for using Federal-aid on construction contracts regardless of who does contractor certification.” The federal agency also warned that “loss of federal aid” on state highway projects could result if the state “fail[ed] to address [U.S. DOT’s] concerns.” This would be a drastic measure for U.S. DOT to take — and, barring evidence of gross negligence or serious wrongdoing by WSDOT officials, a financial penalty it is unlikely ultimately to impose on the state — but that U.S. DOT even issued the threat shows its intensifying focus on DBE fraud prevention.
  • This past summer the Acting Administrator of the Federal Aviation Administration, Michael Huerta, called upon the nation’s airport authorities to substantially increase their compliance monitoring efforts over their DBE and ACDBE (Airport Concessions DBE) programs. U.S. DOT regulations require state and municipal airports who receive federal funds — essentially all public airports — to have both types of DBE programs, and to monitor the compliance of program participants. “We are accountable to the nation’s taxpayers,” Administrator Huerta said, “and the success and viability of the [DBE] program depends on both its integrity and its credibility.” Huerta’s public push for greater scrutiny by airport authorities over DBE programs came on the heels of a 2012 federal investigation over alleged fraud on the part of a contractor working at Cleveland Hopkins Airport. The contractor, the government alleged, falsely reported a DBE subcontractor had performed the work committed to the DBE under an airport contract when, in fact, the DBE was a mere pass-through that had not performed that work.

DBE Monitoring Obligations for Recipients of Federal Transportation Funds

U.S. DOT regulations set out grant recipients’ monitoring obligations as follows:

What are a recipient's responsibilities for monitoring the performance of other program participants?

  1. You must implement appropriate mechanisms to ensure compliance with the part's requirements by all program participants (e.g., applying legal and contract remedies available under Federal, state and local law). You must set forth these mechanisms in your DBE program.
  2. Your DBE program must also include a monitoring and enforcement mechanism to ensure that work committed to DBEs at contract award is actually performed by DBEs.
  3. This mechanism must provide for a running tally of actual DBE attainments (e.g., payments actually made to DBE firms), including a means of comparing these attainments to commitments. In your reports of DBE participation to the Department, you must display both commitments and attainments.

In 2011, U.S. DOT issued rules requiring recipients of federal transportation funds to certify that they have met their DBE monitoring obligations and that DBEs had done the work for which credit was claimed.

Conclusion

The ODOT case, the full import of which is still evolving, is just the latest example of U.S. DOT and its agencies holding public recipients of federal funds accountable for their compliance monitoring obligations. If instances of DBE fraud continue apace, federal scrutiny of why state or municipal agencies failed to deter or detect the wrongdoing will continue to intensify accordingly. Therefore, these recipients of federal funds should (1) carefully evaluate their compliance monitoring programs and procedures to ensure they are comprehensive and effective; (2) train relevant agency employees, as well as contractors participating in DBE programs, on federal monitoring requirements and the recipient agency’s particular compliance plan; and (3) vigilantly implement and enforce the compliance monitoring plan to ensure it is not just a paper program.