Every Halloween, the cute traditional images re-emerge from our closets and the attics.  Ghosts, gravestones, plastic pumpkins, and perhaps the most common of all – skeletons.  Given the recent heightened status of Disadvantaged Business Enterprises (DBE) fraud prosecutions, the massive civil penalties, the prevalence of hotlines, and increased incentives for whistle-blowers, any contractor who participates in DBE programs should use Halloween as an annual reminder to take a closer look to see if they have other skeletons in their corporate attics.

According to recent government reports and audits, DBE fraud investigations have been on the rise, in hopes of deterring widespread abuses in the programs.  According to a 2011 report from the DOT, between 2003 and 2008, the Office of Inspector General (OIG) investigations resulted in 49 indictments, 43 convictions, nearly $42 million in recovery and fines, and 419 months of jail sentences.  Moreover, from 2009 and 2010, the number of DOT investigations increased by almost 70 percent.  Based upon the headlines each month, the number of indictments keeps climbing, along with the civil and criminal penalties.

In view of these statistics and trends, one thing should be crystal clear. To the extent that DBE compliance may be a challenge, it is far better to discover the problems sooner, rather than later.  Contrary to common misconceptions – what you don’t know can, and will, hurt you and your company.Unlike Halloween skeletons, the rattling bones of DBE fraud are far from cute – they are real, they are often hidden, and they are truly scary.

Whenever our firm is retained to defend companies accused of DBE fraud, there are three common responses. 

First, the executives react with shock and often declare: “I never thought this would happen to us.” 

Second, when asked about the basis for their prior assumptions of compliance, the leaders often state that their employees are “good people,” and they their company had never had any prior problems like this before.  Unfortunately, this over-confidence reveals outdated notions of criminality, and a failure to appreciate the need to monitor and look carefully at their DBE practices. 

Third, and this often emerges only after enduring months of the high-costs and high-stress of a federal criminal investigation, executives ask:  “Do you know how much we would pay right now to make this nightmare go away?”  All these reactions provide ample guidance and motivations for companies who have not yet been visited by the grim reaper of DBE fraud.

Don’t be afraid  – open the closet and look inside.

Given the harsh civil and criminal consequences of a DBE fraud investigation on your company’s reputation, financial stability, and future contracting status, a DBE compliance program is your best “self-insurance” policy.  Carefully monitor conduct on an on-going basis, and try to spot “red flags” of fraud.  According to the DOT OIG, the following “red flags” often trigger these investigations:

  • Lack of experience or equipment of DBE owner
  • Shifting of employees between payrolls of prime contractor and DBE-owned business
  • “Temporary” business names on equipment and vehicles from paint or magnetic signs
  • Orders and payment for supplies made by people not employed by DBE-owned business
  • Patterns where prime contractors always use the same DBE contractors
  • “Unique” financial arrangements between the prime and DBE contractors
  • Joint bank accounts for the prime and DBE
  • Absence of written contracts

Similar to other areas of corporate compliance, any effective DBE compliance program should have these minimum components:

  • Written Policies
  • Corporate Executive Oversight
  • Background Checks on Employees
  • Due Diligence on Third Parties/Subcontractors
  • Training
  • Monitoring & Auditing
  • Discipline & Incentives
  • Continuous Program Improvements

Even if these preventive activities confirm strong  DBE compliance, the company’s willingness to look closely at its own conduct conveys  a positive corporate culture and builds good-will with regulators.  Since DBE liability often arises from the misconduct of a few “bad apples,” these proactive compliance measures also provide much needed ammunition if an investigation does arise and you need concrete proof that your company was not a “bad orchard.”

So Happy Halloween!  With proper planning, and oversight, you need not fear the DBE skeletons!